Hain Celestial - 10-Q quarterly report FY

Washington, D.C. 20549

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

|_| Transition Report pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the transition period from ______ to _______.

 

 

(Exact name of registrant as specified in its charter)

 

Registrant’s telephone number, including area code: (631) 730-2200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X|       No |_|

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes |_| No |X|

 

As of February 5, 2007 there were 39,442,908 shares outstanding of the registrant’s Common Stock, par value $.01 per share.

Part I Financial Information

Part II Other Information

 

 

 

THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

See notes to condensed consolidated financial statements.

We operate in one business segment: the sale of natural and organic food and personal care products. In our 2006 fiscal year, approximately 47% of our revenues were derived from products that were manufactured within our own facilities with 53% produced by various co-packers.

 

All dollar amounts in our condensed consolidated financial statements and tables have been rounded to the nearest thousand dollars, except per share amounts. Share amounts in the notes to condensed consolidated financial statements are presented in thousands.

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States. The condensed consolidated financial statements reflect all normal recurring adjustments which, in management’s opinion, are necessary for a fair presentation for interim periods. Operating results for the three months and six months ended December 31, 2006 are not necessarily indicative of the results that may be expected for the year ending June 30, 2007. Please refer to the footnotes to our consolidated financial statements as of June 30, 2006 and for the year then ended included in our Annual Report on Form 10-K, for information not included in these condensed footnotes.

Results previously reported for the three months and six months ended December 31, 2005 have been adjusted to reflect charges in connection with the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) requires that contractual commitments to issue stock options be recorded as compensation cost whether or not the options have been granted. The Company’s employment agreement with its Chief Executive Officer (“CEO”) contains such a commitment; however the options which were to be awarded in July 2005 and July 2006 have not been granted, principally due to an insufficient number of shares available under the Company’s Long Term Incentive and Stock Award Plans. Under SFAS No. 123(R), regardless of whether the options are ever granted, either currently or in the future, a non-cash accounting expense is required to be recorded during the year leading up to the anticipated grant date under the contract. This period is defined in SFAS No. 123(R) as the “requisite service period.” The requisite service period related to the July 2006 un-granted options was completed during the fiscal year ended June 30, 2006. These options remain un-granted at February 9, 2007. Results for the three months ended December 31, 2005 have been reduced from those previously reported by $0.5 million ($0.3 million net of tax) or $0.01 per diluted share. Results for the six months ended December 31, 2005 have been reduced from those previously reported by $1.3 million ($0.8 million net of tax) or $.02 per diluted share. The requisite service period related to the July 2005 un-granted options was completed on June 30, 2005, which was prior to the required implementation of SFAS No. 123(R) and, therefore, no expense has been recorded for the July 2005 options. The Company will incur a charge to earnings at such time as those options are granted. Until such time as the July 2006 options are granted, the Company will be required to revalue (mark-to-market based on Black-Scholes value) the un-granted options at the end of each quarter, with the change in value charged or credited to compensation expense, included in selling, general and administrative expenses.

We report basic and diluted earnings per share in accordance with SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). Basic earnings per share excludes the dilutive effects of options and warrants. Diluted earnings per share includes only the dilutive effects of common stock equivalents such as stock options and warrants.

The following table sets forth the computation of basic and diluted earnings per share pursuant to SFAS No. 128:

Options totaling 204 for the three months and 808 for the six months ended December 31, 2006 and 2,596 for the three months and 2,805 for the six months ended December 31, 2005 were excluded from our earnings per share calculations as their effects would have been anti-dilutive.

 

 

Goodwill and indefinite-life intangible assets must be tested for impairment at least annually. We perform a test for impairment during the fourth quarter of our fiscal year. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we have evaluated the fair value of our goodwill and indefinite-life intangible assets and, based on such evaluations, no impairment existed through June 30, 2006. Amounts assigned to indefinite-life intangible assets primarily represent the values of trademarks.

 

Changes in the carrying amount of goodwill for the six months ended December 31, 2006 were as follows:

 

 

 

During the quarter ended December 31, 2006, based on the results of an independent appraisal, we reallocated approximately $17.0 million preliminarily allocated to goodwill related to the acquisition of Spectrum Organic Products, Inc. to other intangibles, predominantly non-amortized trademarks. Included in translation and other adjustments during the six months ended December 31, 2006 are the impacts of changes in foreign currency exchange rates on goodwill and adjustments to our estimates of fair value of net assets acquired. We are continuing to evaluate the initial purchase price allocations of certain other acquisitions and will adjust the allocations as additional information relative to the fair values of the assets and liabilities of the acquired businesses becomes known. Accordingly, management has used its best estimate in the initial purchase price allocation as of the date of these financial statements.

 

 

 

 

 

 

Amortization of amortized intangible assets amounted to $0.6 million in the six months ended December 31, 2006, and these intangibles are expected to be completely amortized over the next five years.

 

 

On December 18, 2006, we reached agreement to acquire Avalon Natural Products, Inc., a leader in the natural products category in the areas of skin care, hair care, bath and body and sun care, for approximately $120 million in cash. The acquisition closed on January 11, 2007. See Note 13, Subsequent Event.

In fiscal 2006, our acquisitions included Spectrum Organic Products, Inc., a California-based leading manufacturer and marketer of natural and organic culinary oils, vinegars, condiments and butter substitutes under the Spectrum Naturals® brand and essential fatty acid nutritional supplements under the Spectrum Essentials® brand; the business and assets of Para Laboratories, Inc., including the Queen Helene®, Batherapy®, Shower Therapy® and Footherapy® brands of skin care, hair care, and body care products; and the fresh prepared foods business based in Luton, England, and the Linda McCartney® brand (under license) of frozen meat-free products, including its manufacturing facility, based in Fakenham, England, both acquired from the H. J. Heinz Company. As of December 31, 2006, the purchase accounting for all of these acquisitions, except for Spectrum, are still subject to final adjustment for valuations and certain pre-acquisition contingencies.

 

 

 

The following table presents unaudited pro forma information about sales and net income had the operations of the above described acquisitions been combined with our business as of the first day of the period shown. This information has not been adjusted to reflect any changes in the operations of these businesses subsequent to their acquisition by us. Changes in operations of these acquired businesses include, but are not limited to, discontinuation of products (including discontinuation resulting from the integration of acquired and existing brands with similar products, and discontinuation of sales of private label products), changes in trade practices, application of our credit policies, changes in manufacturing processes or locations, changes in marketing and advertising programs and integration of systems and personnel. Had any of these changes been implemented by the former management of the businesses acquired prior to acquisition by us, the sales and net income information might have been materially different than the actual results achieved and from the pro forma information provided below. Further, the pro forma sales and net income information for the prior periods has not been adjusted to reflect, among other things, brands which have been disposed of or licensed to others, or items no longer sold by us as the result of the 2005 SKU Rationalization Program (sales of rationalized SKUs continued throughout fiscal 2006). As a result, sales as presented for the prior periods appear higher than what would have been presented had these adjustments been reflected.

 

In management’s opinion, the unaudited pro forma results of operations are not indicative of the actual results that would have occurred had the above acquisitions been consummated at the beginning of the periods presented or of future operations of the combined companies under our management.

 

On August 31, 2006, we completed the sale of Biomarché, our Belgium-based provider of fresh organic fruits and vegetables, to Pro Natura, a French company specializing in the distribution of organic produce. Biomarché generated approximately $18.0 million in sales for the fiscal year ended June 30, 2006. Total consideration received was €6.5 million (approximately $8.3 million), plus a contingent additional payment of up to approximately €0.7 million based on sales, all subject to an adjustment for working capital and other items. We recognized a pretax gain of $2.5 million, net of a $3.3 million charge for allocated goodwill ($1.1 million after tax) in connection with the sale, which is included in “Interest and other expenses, net” in the accompanying condensed consolidated statement of income. The results of operations and cash flows for Biomarché for the two months ended August 31, 2006, which were not material, are included in the condensed consolidated statements of income and of cash flows, respectively.

 

On May 2, 2006, we issued $150 million in aggregate principal amount of senior notes due May 2, 2016 in a private placement. The notes bear interest at 5.98%, payable semi-annually on November 2 and May 2. Also on May 2, 2006, we entered into an Amended and Restated Credit Agreement, providing us with a $250 million credit facility (the “Credit Facility”) expiring in May 2011. The Credit Facility provides for an uncommitted $100 million accordion feature, under which the facility may be increased to $350 million. The Credit Facility and the notes are guaranteed by substantially all of our current and future direct and indirect domestic subsidiaries. Revolving credit loans under the Credit Facility bear interest at a base rate (greater of the applicable prime rate or Federal Funds Rate plus an applicable margin) or, at our option, the reserve adjusted LIBOR rate plus an applicable margin. As of December 31, 2006, $150.0 million was borrowed under the senior notes at an interest rate of 5.98%, and there were no borrowings outstanding under the Credit Facility.

During January 2007 we borrowed $75 million under the Credit Facility to fund a portion of the acquisition of Avalon Natural Products, Inc. (See Note 13, Subsequent Event.) We are required by the terms of the Credit Facility and the notes to comply with customary affirmative and negative covenants for facilities and notes of this nature.

 

On September 6, 2005, the Company and Yeo Hiap Seng Limited (“YHS”), a Singapore based natural food and beverage company listed on the Singapore Exchange, exchanged $2 million in equity investments in each other resulting in the issuance of 100,482 shares of the Company’s common stock to YHS and the issuance of 1,326,938 ordinary shares of YHS (representing less than 1% of the outstanding shares) to the Company. These investments represent the completion of the first stage of an alliance established between the Company and YHS which is expected to result in the pursuit of joint interests in marketing and distribution of food and beverages and product development. The Company’s investment in YHS shares is carried at cost and is included in other assets in the accompanying condensed consolidated balance sheet. The market value of the YHS shares on the Singapore Exchange at December 31, 2006 approximated their carrying value.

 

 

 

Our company is engaged in one business segment: the manufacturing, distribution and marketing of natural and organic food and personal care products. We define business segments as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by our chief operating decision maker.

 

 

Outside the United States, we primarily conduct business in Canada and Europe. Selected information related to our operations by geographic area is as follows:

 

 

THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES

From time to time the Company is involved in litigation incidental to the conduct of its business on a wide range of matters, including, among others, patent suits and employment claims. In the opinion of management, disposition of pending litigation related to these matters is not expected to have a material adverse effect on the Company’s business, results of operations or financial condition.

A second purported shareholder derivative action was filed on October 31, 2006 in the same court, against substantially the same defendants and containing substantially the same allegations as the purported derivative action previously disclosed in our Form 10-Q for the quarterly period ended September 30, 2006, adding a claim of breach of fiduciary duty. The Company became aware of the complaint on November 28, 2006. Although no assurances can be made as to the resolution of these proceedings, the Company believes that both lawsuits are without merit.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute of tax positions taken or expected to be taken on a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for us for the fiscal year ending June 30, 2008. We are currently evaluating the impact FIN No. 48 may have on our consolidated financial statements.

 

In June 2006, the FASB’s Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF No. 06-3”). The scope of EITF No. 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing activity between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes. EITF No. 06-3 requires disclosure of the method of accounting for the applicable assessed taxes and the amount of assessed taxes that are included in revenues if they are accounted for under the gross method. EITF No. 06-3 is effective for interim and annual periods beginning after December 15, 2006. EITF No. 06-3 will not impact the method for recording these taxes in our consolidated financial statements. We currently present these taxes on a net basis and have elected not to change our presentation method.

 

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We have not yet assessed the impact, if any, that the implementation of SFAS No. 157 will have on our consolidated results of operations or financial condition.

 

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”).

SAB No. 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB No. 108 requires registrants to apply the new guidance for the first time that it identifies material errors in existence at the beginning of the first fiscal year ending after November 15, 2006 by correcting those errors through a one-time cumulative effect adjustment to beginning-of-year retained earnings. We are currently evaluating SAB No. 108 and have not yet determined the impact on our consolidated results of operations or financial position.

On January 11, 2007, we acquired Avalon Natural Products, Inc., a leader in the natural products category in the areas of skin care, hair care, bath and body and sun care, for approximately $120 million in cash, plus transaction costs. We believe that the addition of the Avalon Organics® and Alba Botanica® brands provides us with a stronger, broader personal care portfolio that helps solidify our leadership position in the natural and organic personal care category. The acquisition was funded with available cash balances and $75 million of borrowings under our Credit Facility. The operating results of Avalon will be included in the consolidated financial statements from the date of acquisition.

Our products are sold primarily to specialty and natural food distributors, supermarkets, natural food stores, and other retail classes of trade including mass-market stores, drug stores, food service channels and club stores.

Our brand names are well recognized in the various market categories they serve. We have acquired numerous brands and we will seek future growth through internal expansion as well as the acquisition of additional complementary brands.

Our overall mission is to be a leading marketer and seller of natural, organic, beverage, snack, specialty food and personal care products by integrating all of our brands under one management team and employing a uniform marketing, sales and distribution program. Our business strategy is to capitalize on the brand equity and the distribution previously achieved by each of our acquired product lines and to enhance revenues by strategic introductions of new product lines that complement existing products.

 

Gross profit for the three months ended December 31, 2006 was $70.6 million, an increase of $12.4 million from last year’s second quarter. Gross profit for the three months ended December 31, 2006 was 30.6% of net sales as compared to 31.2% of net sales for the December 31, 2005 quarter. The decrease in gross profit percentage was principally the result of approximately $0.6 million, or 0.3% of consolidated net sales, of start-up costs associated with a new production line at our West Chester frozen foods facility, now complete, and the impact of the inclusion of our recently acquired United Kingdom operations. In the United Kingdom, we continue to co-pack for the previous owner at one of the facilities under an agreement allowing for a minimal margin and, as a result, during the term of the co-pack arrangement our gross margin generated in the United Kingdom will be depressed even though the arrangement helps absorb what otherwise may be unabsorbed overhead. The effect on our gross profit percentage this quarter was a 110 basis point reduction related to the inclusion of the lower margin business in the United Kingdom. In addition, we have been able to offset the impact of higher costs for ingredients with improvements in manufacturing efficiencies.

Operating income was $25.8 million in the three months ended December 31, 2006 compared to $21.2 million in the December 31, 2005 quarter. The increase in operating income is a result of our increased sales and gross profit. Operating income as a percentage of net sales was 11.2% in the December 31, 2006 quarter compared with 11.4% in the December 31, 2005 quarter. The decrease in operating income as a percentage of net sales resulted from the decrease in our gross profit ratio to net sales.

Interest and other expenses, net were $1.8 million for the three months ended December 31, 2006 compared to $1.3 million for the three months ended December 31, 2005. Interest expense totaled $2.3 million in this year’s second quarter, which was primarily related to the $150 million of 5.98% senior notes we issued in the fourth quarter of last fiscal year and was partially offset by $0.9 million of interest income earned on higher cash balances. Interest expense in last year’s second quarter was approximately $1.3 million, which was partially offset by $0.2 million of interest income.

Income before income taxes for the three months ended December 31, 2006 amounted to $24.0 million compared to $19.9 million in the comparable period of the prior year. This increase was primarily attributable to the increase in operating income.

 

Income tax expense for the three months ended December 31, 2006 was $9.3 million, or an effective income tax rate of 38.6% of pre-tax income, and is based on our estimated annual effective tax rate for fiscal 2007. Income tax expense was $7.5 million for the three months ended December 31, 2005, or 37.9% of pre-tax income.

 

Net income for the three months ended December 31, 2006 was $14.8 million compared to $12.3 million in the December 31, 2005 quarter. The increase of $2.4 million in earnings was primarily attributable to the increase in sales and the resultant increase in gross profit.

 

Gross profit for the six months ended December 31, 2006 was $129.7 million, an increase of $25.7 million from last year’s six-month period. Gross profit for the six months ended December 31, 2006 was 29.4% of net sales as compared to 30.0% of net sales for the December 31, 2005 period. The decrease in gross profit percentage was principally the result of approximately $1.7 million of start-up costs associated with a new production line at our West Chester frozen foods facility (a reduction of 40 basis points) and the inclusion of our recently acquired United Kingdom operations. In the United Kingdom, we continue to co-pack for the previous owner at one of the facilities under an agreement allowing for a minimal margin and, as a result, during the term of the co-pack arrangement our gross margin generated in the United Kingdom will be depressed even though the arrangement helps absorb what otherwise may be unabsorbed overhead. The effect on our gross profit percentage for the six months ended December 31, 2006 was a 102 basis point reduction from the lower margins in the United Kingdom.

Selling, general and administrative expenses increased by $15.8 million, or 22.3%, to $86.6 million for the six months ended December 31, 2006 as compared to $70.9 million in the December 31, 2005 six-month period. Selling, general and administrative expenses have increased primarily as a result of costs associated with the businesses we acquired in fiscal 2006. We also increased spending in certain advertising and promotional programs in the first quarter of this year. We have been successful in leveraging our existing infrastructure as selling, general and administrative expenses as a percentage of net sales declined to 19.6% in the first six months of fiscal 2007 as compared to 20.4% in the first six months of last year.

Operating income was $43.1 million in the six months ended December 31, 2006 compared to $33.2 million in the December 31, 2005 comparable period. Operating income as a percentage of net sales was 9.8% in the December 31, 2006 period compared with 9.6% in the six months ended December 31, 2005. The increase in operating income is a result of our increased net sales and gross profit. The improvement in operating income as a percentage of net sales resulted from our ability to leverage our selling, general and administrative expenses over the increased sales base.

Interest and other expenses, net were $3.6 million for the six months ended December 31, 2006 compared to $2.2 million for the six months ended December 31, 2005. Interest expense totaled $4.7 million in this year’s first six months, which was primarily related to the $150 million of 5.98% senior notes we issued in the fourth quarter of last fiscal year and was partially offset by $1.4 million of interest income earned. Interest expense in last year’s first six months was approximately $2.5 million and was partially offset by interest income earned of $0.3 million. We also recorded a $2.2 million charge in the first quarter of fiscal 2007 for a value added tax assessment resulting from an unfavorable decision by the German government in connection with our sales of non-dairy beverages in Germany. At the end of August 2006 we sold Biomarché, our Belgium-based provider of fresh organic fruits and vegetables and recognized a gain on the disposal of approximately $2.5 million, net of a $3.3 million charge for allocated goodwill.

Income before income taxes for the six months ended December 31, 2006 amounted to $39.5 million compared to $31.0 million in the comparable period of the prior year. This increase was primarily attributable to the increase in operating income.

Our income tax expense was $15.7 million for the six months ended December 31, 2006, an effective income tax rate of 39.8%, compared to $11.8 million for the six months ended December 31, 2005, an effective income tax rate of 37.9%. The effective tax rate for the first six months of fiscal 2007 was higher than the comparable period in the prior year as a result of the unfavorable impact of the nondeductible goodwill expensed in connection with the sale of Biomarché.

Net income for the six months ended December 31, 2006 was $23.8 million compared to $19.2 million for the six months ended December 31, 2005. The increase of $4.6 million in earnings was primarily attributable to the increase in sales and the resultant increase in gross profit.

We finance our operations and growth primarily with the cash flows we generate from our operations and from both long-term fixed-rate borrowings and borrowings available to us under our Credit Facility.

 

Our cash balance increased $34.2 million to $83.1 million during the six months ended December 31, 2006. Net cash provided by operating activities was $30.7 million for the first six months of fiscal 2007, compared to net cash provided by operating activities of $7.5 million in the six months ended December 31, 2005. The increase in cash provided by operations in 2007 resulted from improved working capital management. Our working capital increased to $214.5 million at December 31, 2006 compared with $174.4 million at June 30, 2006. Accounts receivable increased as a result of our higher sales volume, but our days’ sales in receivables remained at 39 days. Improvements in our days’ sales in inventory and accounts payable from December 31, 2005 resulted in the improved cash flows provided by operating activities in fiscal 2007.

We used $8.8 million of cash in investing activities in the six months ended December 31, 2006. We used $11.2 million of cash in connection with the acquisition of the assets of Haldane Foods in the United Kingdom in December 2006, $6.5 million for capital expenditures and $1.9 million for a loan to an affiliated joint venture. This was partially offset by $8.2 million of proceeds from the sale of Biomarché, our Belgium-based provider of fresh organic fruits and vegetables, and $2.7 million of proceeds from the disposals of fixed assets. In the six months ended December 31, 2005, we used $38.6 million of cash in investing activities, including $32.2 million for the acquisitions of the business that became Hain Pure Protein and for Spectrum Organic Products, Inc. and $6.3 million for the purchase of property, plant and equipment.

Net cash of $11.9 million was provided by financing activities for the six months ended December 31, 2006 compared to $24.2 million provided for the six months ended December 31, 2005. The decrease was due principally to our not requiring any new borrowings under our revolving credit facility in the first six months of fiscal 2007 compared to $17.0 million of cash provided by borrowings in the first six months of fiscal 2006. The decrease was partially offset by increased proceeds from exercises of stock options in the first six months of fiscal 2007 to $11.7 million from $7.3 million in fiscal 2006.

We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of December 31, 2006, all of our investments mature in less than three months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk.

On May 2, 2006, we issued $150 million in aggregate principal amount of senior notes due May 2, 2016 in a private placement. The notes bear interest at 5.98%, which is payable semi-annually on November 2 and May 2. Also on May 2, 2006, we entered into an Amended and Restated Credit Agreement, providing us with a $250 million credit facility (the “Credit Facility”) expiring in May 2011. The Credit Facility provides for an uncommitted $100 million accordion feature, under which the facility may be increased to $350 million. The Credit Facility and the senior notes are guaranteed by substantially all of our current and future direct and indirect domestic subsidiaries. Revolving credit loans under the Credit Facility bear interest at a base rate (greater of the applicable prime rate or Federal Funds Rate plus an applicable margin) or, at our option, the reserve adjusted LIBOR rate plus an applicable margin. As of December 31, 2006, $150.0 million was outstanding under the senior notes at an interest rate of 5.98%, and no borrowings were outstanding under the Credit Facility. During January 2007 we borrowed $75 million under the Credit Facility to fund a portion of the acquisition of Avalon Natural Products, Inc. (See Note 13 to the Condensed Consolidated Financial Statements.) We are required by the terms of the Credit Facility and the senior notes to comply with customary affirmative and negative covenants for facilities and notes of this nature.

This access to capital provides us with the flexibility to address our working capital needs in the ordinary course of business, the opportunity to grow our business through acquisitions and the ability to develop our existing infrastructure through capital investment.

We believe that our cash on hand of $83.1 million at December 31, 2006, projected remaining fiscal 2007 cash flows from operations, and availability under our Credit Facility are sufficient to fund our working capital needs, anticipated capital expenditures of approximately $15 million for the current fiscal year, scheduled debt and lease payments of approximately $6 million over the next twelve months. In connection with the acquisition of Avalon Natural Products, Inc., in January 2007, we used approximately $50 million of our available cash on hand to fund a portion of the purchase price.

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The accounting principles we use require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and amounts of income and expenses during the reporting periods presented. We believe in the quality and reasonableness of our critical accounting policies; however, it is likely that materially different amounts would be reported under different conditions or using assumptions different from those that we have consistently applied. The accounting policies that have been identified as critical to our business operations and understanding the results of our operations pertain to revenue recognition and sales incentives, valuation of accounts and chargebacks receivable, inventories, property, plant and equipment, goodwill and intangibles and segments. The application of each of these critical accounting policies and estimates was discussed in Item 7 of our Annual Report on Form 10-K for the year ended June 30, 2006. There have been no significant changes in the application of these critical accounting policies or estimates during fiscal 2007.

There have been no material changes in the reported market risks since the end of the most recent fiscal year.

Our Chief Executive Officer and Chief Financial Officer have reviewed our disclosure controls and procedures as of the end of the period covered by this report. Based upon this review, these officers concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There was no change in our internal control over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

A second purported shareholder derivative action was filed on October 31, 2006 in the same court, against substantially the same defendants and containing substantially the same allegations as the purported derivative action previously disclosed in our Form 10-Q for the quarterly period ended September 30, 2006, adding a claim of breach of fiduciary duty. The Company became aware of the complaint on November 28, 2006. Although no assurances can be made as to the resolution of these proceedings, the Company believes that both lawsuits are without merit.

The Annual Meeting of Stockholders was held on November 30, 2006. The Company submitted the following matters to a vote of security holders:

 

The stockholders elected the persons named below, the Company’s nominees for directors, as directors for the Company, casting votes as shown below:

The stockholders approved the amendment to the Amended and Restated 2002 Long Term Incentive and Stock Award Plan, casting 18,611,258 votes in favor, 10,773,102 votes against, 112,182 abstaining and 6,708,415 not voted.

The stockholders ratified the appointment of Ernst & Young LLP, casting 35,226,515 votes in favor, 948,013 votes against, and 30,429 abstaining.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

20