424B4 1 d261388d424b4.htm 424 (B) (4) 424 (b) (4)
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-178270

5,000,000 Shares

 

LOGO

Annie’s, Inc.

Common Stock

 

 

This is the initial public offering of shares of common stock of Annie’s, Inc.

We are selling 950,000 shares of common stock, and the selling stockholders identified in this prospectus are selling 4,050,000 shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders.

Prior to this offering, there has been no public market for our common stock. Our common stock has been approved for listing on the New York Stock Exchange under the symbol “BNNY,” subject to official notice of issuance.

The underwriters have an option to purchase a maximum of 750,000 additional shares from certain selling stockholders to cover overallotments of shares.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 12.

 

      

Price to Public

    

Underwriting
Discounts and
Commissions

    

Proceeds to
Annie’s, Inc.

    

Proceeds to
the Selling
Stockholders

Per Share

     $19.00      $1.33      $17.67      $17.67

Total

     $95,000,000      $6,650,000      $16,786,500      $71,563,500

Delivery of the shares of common stock will be made on or about April 2, 2012.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

Credit Suisse     J.P. Morgan
William Blair & Company   RBC Capital Markets   Stifel Nicolaus Weisel
  Canaccord Genuity  

The date of this prospectus is March 27, 2012.


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LOGO

 

Annie’s

RABBIT OF APPROVAL

Mission

Our mission is to cultivate a healthier, happier world by spreading goodness through nourishing foods, honest words and conduct that is considerate and forever kind to the planet.

Values

Annie’s is real, authentic and trusted by consumers. As a company, we strive to build upon this legacy with every decision we make.

Annie’s makes products that taste great and delight our consumers.

Annie’s uses simple, natural and organic ingredients.

Annie’s sources from places and people we trust, with an emphasis on quality and environmental sustainability.

Annie’s is socially responsible, and we spread awareness and act as a positive role model for consumers and other businesses.

Annie’s team treats consumers, customers, suppliers, stockholders and each other with the same high degree of respect, fairness and honesty that we expect of others.


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LOGO

 

WELCOME TO THE

Real and Authentic Roots

In 1989, Annie Withey co-founded Annie’s Homegrown with the goal of giving families healthy and delicious macaroni and cheese and to show by example that a successful business can also be socially responsible. Annie chose Bernie, her pet rabbit, to be the brand’s “Rabbit of Approval.” She put her address and phone number on the original boxes to encourage consumers to connect with her. Today, we continue to value direct and honest communication with our consumers.

Natural and Organic Ingredients.

We have long-standing relationships with key suppliers of natural and organic ingredients. We source only ingredients stated to be free of genetically-modified organisms and strive to use ingredients that are as near to their whole, natural state as possible. In fiscal 2011, we estimate that over 80% of our net sales were generated by products certified as organic or made with organic ingredients.

Great Tasting Products with Broad Appeal

We sell premium products made from high-quality natural and organic ingredients at affordable prices. Our products appeal to health-conscious consumers who seek to avoid the artificial flavors, synthetic colors and preservatives used in many conventional packaged foods. Our commitment to high-quality and great-tasting products has made us a successful crossover brand with mainstream appeal.

Today, we offer over 125 products and are present in over 25,000 retail locations in the U.S. and Canada.

Organic Macaroni and Cheese

Deluxe Macaroni and Cheese

1989 1998 2003 2004 2005 2006

Annie’s Homegrown Founded

Chedder Bunnies

Bunny Grahams Dressings (via acquisition)


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LOGO

 

World of Annie’s

Socially Responsible Practices

We believe we have a responsibility to the planet and its people. We have a commitment to minimizing our environmental impact, which we refer to as reducing our bunny footprint. We engage in a number of programs and partnerships supporting our communities by encouraging sustainability and providing financial and in-kind support to organizations committed to the organic industry, healthy food and environmental sustainability.

Strong Consumer Loyalty

Many of our consumers are loyal and enthusiastic brand advocates. This loyal and growing consumer following has enabled us to migrate from our natural and organic roots to a brand sold across mainstream grocery, mass merchandise and natural retailer channels.

We believe that consumer enthusiasm for our brand inspires repeat purchases, attracts new consumers and generates interest in our new products.

Product Timeline

Organic Cheddar Bunnies

Organic Snack Mix

Organic Bunny Fruit Snacks

Organic Orchard Fruit Bites

Organic Bunny Fruit Snacks

Organic Granola Bars And Pretzels

Organic Rising Crust Pizza

2007 2008 2009 2010 2011 2012


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TABLE OF CONTENTS

 

    Page  

PROSPECTUS SUMMARY

    1   

RISK FACTORS

    12   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

    28   

USE OF PROCEEDS

    29   

DIVIDEND POLICY

    30   

CAPITALIZATION

    31   

DILUTION

    33   

SELECTED CONSOLIDATED FINANCIAL DATA

    35   

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    39   

BUSINESS

    58   

MANAGEMENT

    68   

COMPENSATION DISCUSSION AND
ANALYSIS

    77   

CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS

    100   

PRINCIPAL AND SELLING STOCKHOLDERS

    102   

DESCRIPTION OF CAPITAL STOCK

    104   

SHARES ELIGIBLE FOR FUTURE SALE

    107   

MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK

    109   

UNDERWRITING (CONFLICTS OF INTEREST)

    112   

LEGAL MATTERS

    116   

EXPERTS

    116   

WHERE YOU CAN FIND MORE INFORMATION

    116   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

    F-1   

 

 

You should rely only on the information contained in this document or to which we have referred you. Neither we, the selling stockholders nor the underwriters have authorized anyone to provide you with information that is different from that contained in this prospectus or any free-writing prospectus prepared by us or on our behalf. We do not, and the selling stockholders and the underwriters do not, take any responsibility for, and can provide no assurances as to, the reliability of any information that others provide to you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.

Until April 21, 2012 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Statements made in this prospectus regarding our #1 natural and organic market position in four product lines are based on data that, although obtained from a leading industry source, does not account for all the retailers that carry natural and organic products, some of which are major retailers with whom we do business. However, we believe this industry source is the best available source for this kind of data, and, although not all major retailers are covered by this research, we do not have any reason to believe that including more retailers would materially change the results.

In addition, statements in this prospectus that our consumers “spend more on food and buy higher margin items than the average consumer” and that our products “attract new customers to the categories in which we compete,” “are profitable and attractive to retailers” and “offer better profitability for retailers compared to conventional packaged foods” are based on commissioned studies that utilize surveys of consumers of our macaroni and cheese products. Such macaroni and cheese products make up our largest product line, and many of our macaroni and cheese consumers also purchase other Annie’s products. In addition, while these studies did not incorporate surveys from consumers of our other products, we believe the studies’ methodologies and analyses provide valuable information about our consumers’ characteristics, their views of our brand and how they make

 

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purchasing decisions. We use this information internally and with our customers to make decisions about business strategy and marketing, among other things, across our product lines. Although it is possible that a broader sampling of our customers could lead to different results, we do not have any reason to believe that a broader sampling would lead to materially different conclusions.

Finally, statements made in this prospectus regarding our presence in over 25,000 retail locations and the increase in number of retail locations over the past three years in which our products can be found are based on all-commodity volume data, which is based on a representative sample of retailers and reflects the percentage of sales volume across participating grocery and natural food retailers in the U.S. that is attributable to stores in which our products are sold. When multiplied by the total number of food retailers in the U.S., this data, although not a direct measure of retail locations, is generally regarded within our industry as the best approximation of such information, and we do not have any reason to believe that any other measure or survey of retailer penetration would materially change the results.

 

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before deciding to invest in our common stock. You should read the entire prospectus carefully, including “Risk Factors” and our consolidated financial statements included elsewhere in this prospectus, before making an investment decision. In this prospectus, the terms “Annie’s,” “we,” “us,” “our” and “the company” refer to Annie’s, Inc. and our consolidated subsidiaries, and all references to a “fiscal year” refer to a year beginning on April 1 of the previous year and ending on March 31 of such year (for example, “fiscal 2011” refers to the year from April 1, 2010 to March 31, 2011).

Our Company

Annie’s, Inc. is a rapidly growing natural and organic food company with a widely recognized brand, offering consumers great-tasting products in large packaged food categories. We sell premium products made from high-quality ingredients at affordable prices. Our products appeal to health-conscious consumers who seek to avoid artificial flavors, synthetic colors and preservatives that are used in many conventional packaged foods. We have the #1 natural and organic market position in four product lines: macaroni and cheese, snack crackers, fruit snacks and graham crackers.

Our loyal and growing consumer following has enabled us to migrate from our natural and organic roots to a brand sold across the mainstream grocery, mass merchandiser and natural retailer channels. Today, we offer over 125 products and are present in over 25,000 retail locations in the United States and Canada. Over the past three years, we have significantly increased both the number of retail locations where our products can be found and the number of our products found in individual stores. We expect that increasing penetration of the mainstream grocery and mass merchandiser channels, combined with greater brand awareness, new product introductions, line extensions and favorable consumer trends, will continue to fuel sales growth in all channels.

Innovation, including new product development, is a key component of our growth strategy. We invest significant resources to understand our consumers and develop products that address their desire for natural and organic alternatives to conventional packaged foods. We have a demonstrated track record of extending our product offerings into large food categories, such as fruit snacks and snack mix, and introducing products in existing categories with new sizes, flavors and ingredients. In order to quickly and economically introduce our new products to market, we partner with contract manufacturers that make our products according to our formulas and specifications.

Our brand and premium products appeal to our consumers, who tend to be better-educated and more health-conscious than the average consumer. In addition, we believe that many of our consumers spend more on food and buy higher margin items than the average consumer. We believe that our products attract new consumers to the categories in which we compete, and that our products are profitable and attractive to retailers. As a result, we believe we can continue to expand in the mainstream grocery and mass merchandiser channels, while continuing to innovate and grow our sales in the natural retailer channel.

We are committed to operating in a socially responsible and environmentally sustainable manner, with an open and honest corporate culture. Our mission is to cultivate a healthier, happier world by spreading goodness through nourishing foods, honest words and conduct that is considerate and forever kind to the planet. Our corporate culture embodies these values and, as a result, we enjoy a highly motivated and skilled work force that is committed to our business and our mission. Our colorful, informative and whimsical packaging featuring our iconic mascot, Bernie, the “Rabbit of Approval,” conveys these values. We believe our consumers connect with us because they love our products and relate to our values, resulting in loyal and trusting relationships.

 

 

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We have experienced strong sales and profit growth over the past few years. We increased our net sales from $65.6 million in fiscal 2007 to $117.6 million in fiscal 2011, representing a 15.7% compound annual growth rate. Over the same period, our income from operations increased from a loss of $3.9 million in fiscal 2007 to income of $15.1 million in fiscal 2011.

Industry Overview

According to a leading industry source, the U.S. is the world’s largest organic food market, with sales of natural and organic foods exceeding $40 billion in 2010. From 2000 to 2010, the U.S. natural and organic food market grew at a compound annual growth rate of approximately 12% and is projected by the same industry source to grow at a compound annual growth rate of approximately 8% from 2010 to 2013. We believe growth rates for the U.S. natural and organic food market have been, and will continue to be, higher than those for the overall U.S. food market.

We believe growth in the natural and organic food market is driven by various factors, including heightened awareness of the role that food and nutrition play in long-term health and wellness. Many consumers prefer natural and organic products due to increasing concerns over the purity and safety of food. The development and implementation of U.S. Department of Agriculture, or USDA, standards for organic certification has increased consumer awareness of, and confidence in, products labeled as organic. According to a well regarded consumer research firm, 75% of adults in the U.S. purchased natural or organic foods in 2010, with 33% of consumers using organic products at least once a month as compared to 22% ten years before.

Historically, natural and organic foods were primarily available at independent organic retailers or natural and organic retail chains. Mainstream grocery stores and mass merchandisers have expanded their natural and organic product offerings because of increasing consumer demand for natural and organic products, which command a higher margin for the retailer. The percentage of natural and organic food sales has been rising, and, according to an industry source, in 2010 73% of consumers purchased organic products at grocery stores as compared to 25% at natural food stores. We believe the emergence of strong natural and organic brands, driven by a loyal and growing consumer base, will act as an additional catalyst for higher penetration in the mainstream grocery and mass merchandiser channels.

We believe Annie’s is well positioned to benefit from these market trends and preferences in the coming years.

Our Competitive Strengths

We believe that the following strengths differentiate our company and create the foundation for continued sales and profit growth:

Leading natural and organic brand. We are a market-leading premium natural and organic brand with proven success in large categories across multiple channels. We have the #1 natural and organic market position in four product lines: macaroni and cheese, snack crackers, fruit snacks and graham crackers. Our brand is reinforced by distinctive packaging that communicates the fun and whimsical nature of the brand with bright colors and our iconic mascot, Bernie, the “Rabbit of Approval.”

Strong consumer loyalty. Many of our consumers are loyal and enthusiastic brand advocates. Our consumers trust us to deliver great-tasting products made with natural and organic ingredients. We believe that consumer enthusiasm for our brand inspires repeat purchases, attracts new consumers and generates interest in our new products.

Track record of innovation. Since the introduction of our original macaroni and cheese products in 1989, we have successfully extended our brand into a number of large product lines, such as snack crackers,

 

 

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graham crackers, fruit snacks and granola bars, and introduced extensions of our existing product lines. Our most recent new product is frozen organic rising crust pizza, which we introduced in January 2012. We maintain an active new product pipeline, and our relationships with our ingredient suppliers and manufacturing partners enable us to efficiently introduce new products. In fiscal 2011, we estimate that 19% of our net sales were generated by products introduced since the beginning of fiscal 2009.

Strategic and valuable brand for retailers. Retailers carry our products to satisfy consumer demand for premium natural and organic products. We believe many of our consumers spend more on food and buy higher margin items on average than typical consumers. Also, we believe that our products offer better profitability for retailers compared to conventional packaged foods. As a result, the Annie’s brand is valuable to retailers in the mainstream grocery, mass merchandiser and natural retailer channels.

Core competency in organic sourcing. We have long-standing strategic relationships with key suppliers of organic ingredients. We have significant knowledge and experience sourcing these ingredients and, for some key ingredients, our supply chain relationships extend to farmers and farmer cooperatives. We consider our sourcing relationships and our knowledge of the complex organic supply chain to be a competitive advantage and barrier to entry.

Experienced management team. We have a proven and experienced senior management team. Our Chief Executive Officer, John M. Foraker, has been with us since 1999 and has significant experience in the natural and organic food industry. The members of our senior management team have extensive experience in the food industry and with leading consumer brands.

Our Business Strategy

Pursue top line growth. We are pursuing three growth strategies as we continue to build our business:

Expand distribution and improve placement. We intend to increase sales by expanding the number of stores that sell our products in the mainstream grocery and mass merchandiser channels and by securing placements adjacent to conventional products in the mainstream aisle. We believe increased distribution and enhanced shelf placement will lead more consumers to purchase our products and will expand our market share.

Expand household penetration and consumer base. We intend to increase the number of consumers who buy our products by using grassroots marketing, social media tools and advertising. We believe these efforts will educate consumers about our brand and the benefits of natural and organic food, create demand for our products and, ultimately, expand our consumer base.

Continue innovation and brand extensions. Our market studies, analyses and consumer testing enable us to identify attractive product opportunities. We intend to continue to introduce products in both existing and new product lines that appeal to the whole family.

Remain authentic: stay true to our values. We believe authentic brands are brands that win. We are a mission-driven business with long-standing core values. We strive to operate in an honest, socially responsible and environmentally sustainable manner because it is the right thing to do and it is good for business. We believe our authenticity better enables us to build loyalty and trust with current consumers and helps us attract new ones.

Invest in infrastructure and capabilities. We invest in our people, supply chain and systems to ensure that our business is scalable and profitable. We expect to add new employees to our sales, marketing, operations and finance teams. We actively seek opportunities to invest in the specific capabilities of our supply chain partners to reduce costs, increase manufacturing efficiencies and improve quality. Additionally, we continue to invest in our systems and technology, including an enterprise resource planning system, to support growth and increase efficiency.

 

 

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Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described in “Risk Factors” before making a decision to invest in our common stock. If any of these risks actually occurs, our business, financial condition and results of operations would likely be materially adversely affected. In such case, the trading price of our common stock would likely decline, and you may lose part or all of your investment. Below is a summary of some of the principal risks we face:

 

   

we may not be able to successfully implement our growth strategy;

 

   

we may fail to develop and maintain our brand;

 

   

our brand may be diminished if we encounter quality or health concerns about our food products;

 

   

we are vulnerable to economic conditions and consumer preferences that may change;

 

   

we may not have the resources to compete successfully in our highly competitive markets;

 

   

we may not be able to improve our existing products or develop and introduce new products that appeal to consumer preferences;

 

   

ingredient and packaging costs are volatile and may rise significantly;

 

   

we rely on a small number of third-party suppliers and contract manufacturers to produce our products and we have limited control over them; and

 

   

seasonal fluctuations and changes in our promotional activities may impact our financial performance and quarterly results of operations.

Our Sponsor

Solera Capital, LLC is a private equity firm based in New York City that provides growth capital to entrepreneurial companies poised to take advantage of changing industry dynamics. Through disciplined research, Solera seeks to develop forward-thinking ideas to identify companies that can become leaders in rapidly growing markets. Solera typically acquires strategic or controlling stakes and takes an active, hands-on role in the development of these businesses. Solera has invested over $235 million of equity capital in companies in natural and organic food, specialty retail, consumer healthcare, Latin-focused media and green lifestyle. Molly F. Ashby has been Chairman and Chief Executive Officer and the controlling member of Solera since the firm was founded in 1999. Following Solera’s investment in 2002, Ms. Ashby joined the board of directors of Annie’s Homegrown and has been the Chairman of our board of directors since 2004. Solera’s investment and business practices are driven by core values that include a commitment to diversity, integrity, mentorship and collaboration and social and environmental responsibility. We sometimes refer to Solera Capital, LLC and its affiliates as Solera in this prospectus.

Upon the consummation of this offering, Solera will continue to hold a controlling interest in us and have significant influence over us and decisions made by our stockholders. Solera may have interests that conflict with those of our other stockholders. We do not intend to take advantage of the “controlled company” exemption from certain of the corporate governance listing standards of the New York Stock Exchange. See “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock” and “Principal and Selling Stockholders.”

Conflicts of Interest

This offering is being conducted in accordance with the applicable provisions of Rule 5121, or Rule 5121, of the Financial Industry Regulatory Authority, Inc., or FINRA. An affiliate of J.P. Morgan Securities LLC, one of the underwriters, has an approximately 10% ownership stake in Solera Partners, L.P., which is a selling stockholder in this offering, and, as such, may receive 5% or more of the net proceeds in this offering. Rule 5121 requires that the initial public offering price of the shares of common stock not be higher than that recommended

 

 

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by a “qualified independent underwriter” meeting certain standards. Accordingly, Credit Suisse Securities (USA) LLC is assuming the responsibilities of acting as the qualified independent underwriter in pricing the offering and conducting due diligence. See “Underwriting (Conflicts of Interest).”

Our Corporate Information

Annie’s, Inc. is a Delaware corporation and our principal executive offices are located at 1610 Fifth Street, Berkeley, CA 94710. Our telephone number is (510) 558-7500. Our website address is www.annies.com. The information contained on or accessible through our website is not part of this prospectus or the registration statement of which this prospectus forms a part, and potential investors should not rely on such information in making a decision to purchase our common stock in this offering.

 

 

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The Offering

 

Common Stock Offered by Us

950,000 shares

 

Common Stock Offered by the Selling Stockholders

4,050,000 shares

 

Common Stock to be Outstanding Immediately after this Offering

16,646,002 shares

 

Overallotment Option

The underwriters have an option to purchase a maximum of 750,000 additional shares of our common stock from certain selling stockholders to cover overallotments. The underwriters could exercise this option at any time within 30 days from the date of this prospectus.

 

Use of Proceeds

We estimate that the net proceeds to us from this offering, after deducting the underwriting discount and estimated expenses, will be approximately $11.6 million.

 

  We will not receive any proceeds from the sale of shares by the selling stockholders.

 

  We intend to use the net proceeds from this offering to pay $1.3 million to Solera in connection with the termination of its advisory services agreement with us and repay a portion of our indebtedness outstanding under our credit facility. See “Use of Proceeds.”

 

Dividend Policy

We expect to retain future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. See “Dividend Policy.”

 

Risk Factors

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 12 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Symbol for Trading on the New York Stock Exchange

“BNNY”

Following this offering, 16,646,002 shares of our common stock will be outstanding, consisting of 15,696,002 shares of our common stock outstanding as of March 23, 2012, including 15,221,571 shares of our common stock to be issued upon the conversion of all shares of our Series A 2002 convertible preferred stock, Series A 2004 convertible preferred stock and Series A 2005 convertible preferred stock immediately prior to the consummation of this offering, but excluding:

 

   

80,560 shares of our common stock issuable upon the exercise of an outstanding warrant at an exercise price of $8.07 per share;

 

   

1,509,702 shares of our common stock issuable upon the exercise of options outstanding as of March 23, 2012 under our Amended and Restated 2004 Stock Option Plan, or 2004 Plan, and certain non-plan options, with a weighted average exercise price of $7.89 per share; and

 

 

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867,570 shares of our common stock reserved for future issuance under our Omnibus Incentive Plan, which will be effective upon the consummation of this offering.

Unless otherwise indicated, the information in this prospectus assumes:

 

   

the conversion of all shares of our Series A 2002 convertible preferred stock, Series A 2004 convertible preferred stock and Series A 2005 convertible preferred stock into shares of our common stock immediately prior to the consummation of this offering, and the corresponding conversion of our outstanding preferred stock warrant into a common stock warrant;

 

   

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, which will occur immediately prior to the consummation of this offering;

 

   

no exercise of outstanding options or warrant since March 23, 2012; and

 

   

no exercise by the underwriters of their option to purchase additional shares of our common stock from the selling stockholders to cover overallotments.

On March 7, 2012, we declared a stock split effected as a stock dividend of 0.239385 shares for each share of our common stock to our common stockholders of record on that date. Pursuant to the terms of our convertible preferred stock, the conversion ratio of each series of our convertible preferred stock has been proportionately adjusted to reflect this stock dividend. Accordingly, all share and per share amounts presented in this prospectus, including the consolidated financial statements and notes thereto, have been adjusted, where applicable, to reflect this stock dividend and adjustment of the preferred stock conversion ratio.

 

 

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Summary Consolidated Financial Data

The following table presents summary consolidated financial data for the periods and at the dates indicated. The summary consolidated financial data for each of the years ended March 31, 2009, 2010 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data for the nine months ended December 31, 2010 and 2011 and the summary actual consolidated balance sheet data as of December 31, 2011 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements were prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all adjustments that we consider necessary for a fair statement of the financial information. You should read the following financial information together with the information under “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of results to be expected for any future period.

 

    Year ended March 31,     Nine months ended
December 31,
 
    2009     2010     2011     2010     2011  
    (in thousands, except share and per share amounts)  

Consolidated Statements of Operations Data:

         

Net sales

  $ 93,643      $ 96,015      $ 117,616      $ 81,021      $ 98,320   

Cost of sales

    64,855        63,083        71,804        50,269        60,034   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    28,788        32,932        45,812        30,752        38,286   

Selling, general and administrative expenses

    25,693        25,323        30,674        20,957        25,206   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    3,095        7,609        15,138        9,795        13,080   

Interest expense

    (1,279     (1,207     (885     (881     (66

Other income (expense), net

    (289     21        155        128        (428
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for (benefit from) income taxes

    1,527        6,423        14,408        9,042        12,586   

Provision for (benefit from) income taxes

    56        400        (5,747     (5,964     4,926   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    1,471        6,023        20,155        15,006        7,660   

Loss from discontinued operations(1)

    (579     —          —          —          —     

Loss from sale of discontinued operations(1)

    (1,865     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (973   $ 6,023      $ 20,155      $ 15,006      $ 7,660   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stockholders from continuing operations(2)

  $ 43      $ 177      $ 596      $ 442      $ 233   

Net loss attributable to common stockholders from discontinued operations(2)

    (72     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders(2)

  $ (29   $ 177      $ 596      $ 442      $ 233   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders—Basic(3)

         

Continuing operations

  $ 0.09      $ 0.38      $ 1.29      $ 0.96      $ 0.50   

Discontinued operations

    (0.16     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total basic net income (loss) per share attributable to common stockholders

  $ (0.07   $ 0.38      $ 1.29      $ 0.96      $ 0.50   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders—Diluted(3)

         

Continuing operations

  $ 0.06      $ 0.20      $ 0.50      $ 0.38      $ 0.24   

Discontinued operations

    (0.16     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total diluted net income (loss) per share attributable to common stockholders

  $ (0.10   $ 0.20      $ 0.50      $ 0.38      $ 0.24   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing net income (loss) per share attributable to common stockholders

         

Basic

    461,154        461,248        461,884        461,768        467,206   

Diluted

    766,290        899,539        1,201,125        1,158,577        988,915   

 

 

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Year ended

March 31,

    Nine months ended
December 31,
 
    2011     2011  

Pro Forma Earnings per Share Data:

   

Pro forma net income per share (unaudited)(3)

   

Basic

  $ 1.29      $ 0.52   
 

 

 

   

 

 

 

Diluted

  $ 1.23      $ 0.51   
 

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing the pro forma net income per share (unaudited)

   

Basic

    15,683,455        15,688,777   
 

 

 

   

 

 

 

Diluted

    16,422,696        16,210,486   
 

 

 

   

 

 

 

Supplemental Pro Forma Earnings per Share Data:

   

Supplemental pro forma net income per share (unaudited)(4)

   

Basic

  $ 1.22      $ 0.50   
 

 

 

   

 

 

 

Diluted

  $ 1.17      $ 0.48   
 

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing the supplemental pro forma net income per share (unaudited)

   

Basic

    16,536,410        16,541,732   
 

 

 

   

 

 

 

Diluted

    17,275,651        17,063,441   
 

 

 

   

 

 

 

 

     Year ended March 31,      Nine months  ended
December 31,
 
     2009      2010      2011      2010      2011  
     (in thousands)  

Other Financial Data:

              

EBITDA(5)

   $ 728       $ 7,975       $ 15,787       $ 10,292       $ 13,230   

Adjusted EBITDA(5)

     4,407         9,277         16,560         10,871         14,608   

 

     As of December 31, 2011  
     Actual     Pro Forma(6)      Pro Forma
as adjusted(7)
 
     (in thousands)  

Consolidated Balance Sheet Data:

       

Cash

   $ 2,414      $ 2,414       $ 2,414   

Working capital

     16,943        16,943         16,943   

Total assets

     68,218        68,218         68,218   

Total debt

     13,302        13,302         3,020 (8) 

Convertible preferred stock warrant liability

     969        —           —     

Convertible preferred stock

     81,373        —           —     

Total stockholders’ equity (deficit)

     (36,634     45,708         57,290   

 

(1) In November 2008, we sold Fantastic Foods, Inc., or Fantastic, a manufacturer of instant soups and packaged meals, to an unrelated third party for $1.7 million, net of working capital adjustments. We considered Fantastic a business component, and thus, the results of operations of Fantastic are separately reported as discontinued operations in fiscal 2009. The loss on the sale of Fantastic is reported as a loss on sale of discontinued operations in fiscal 2009.
(2)

Net income (loss) attributable to common stockholders was allocated using the two-class method since our capital structure includes common stock and convertible preferred stock with participating rights. Under the

 

 

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two-class method, we reduced income from continuing operations by (i) the dividends paid to convertible preferred stockholders and (ii) the rights of the convertible preferred stockholders in any undistributed earnings based on the relative percentage of weighted average shares of outstanding convertible preferred stock to the total number of weighted average shares of outstanding common and convertible preferred stock. Under the two-class method, during any period in which we had a loss from continuing operations, the loss from the continuing operations and the loss from the discontinued operations were attributed only to the common stockholders. However, during any period in which we had income from continuing operations, the income from continuing operations and the loss from discontinued operations were allocated between the common and preferred stockholders under the two-class method.

(3) For the calculation of basic and diluted income (loss) per share and pro forma basic and diluted net income per share, see notes 2 and 14 to our consolidated financial statements included elsewhere in this prospectus.
(4) For the calculation of supplemental pro forma basic and diluted net income per share, see note 14 to our consolidated financial statements included elsewhere in this prospectus.
(5) EBITDA and Adjusted EBITDA are not financial measures prepared in accordance with U.S. generally accepted accounting principles, or GAAP. As used herein, EBITDA represents net income (loss) plus interest expense, provision for (benefit from) income taxes and depreciation and amortization. As used herein, Adjusted EBITDA represents EBITDA plus loss from discontinued operations, loss from sale of discontinued operations, management fees, stock-based compensation and change in fair value of convertible preferred stock warrant liability.

We present EBITDA and Adjusted EBITDA because we believe each of these measures provides an additional metric to evaluate our operations and, when considered with both our GAAP results and the reconciliation to net income (loss) set forth below, provides a more complete understanding of our business than could be obtained absent this disclosure. We use EBITDA and Adjusted EBITDA, together with financial measures prepared in accordance with GAAP, such as sales and cash flows from operations, to assess our historical and prospective operating performance, to provide meaningful comparisons of operating performance across periods, to enhance our understanding of our core operating performance and to compare our performance to that of our peers and competitors.

EBITDA and Adjusted EBITDA are presented because we believe they are useful to investors in assessing the operating performance of our business without the effect of non-cash depreciation and amortization expenses and, in the case of Adjusted EBITDA, the adjustments described above.

EBITDA and Adjusted EBITDA should not be considered in isolation or as alternatives to net income (loss), income from operations or any other measure of financial performance calculated and presented in accordance with GAAP. Neither EBITDA nor Adjusted EBITDA should be considered as a measure of discretionary cash available to us to invest in the growth of our business. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner as we do. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from that term or by unusual or non-recurring items. We recognize that both EBITDA and Adjusted EBITDA have limitations as analytical financial measures. For example, neither EBITDA nor Adjusted EBITDA reflects:

 

   

our capital expenditures or future requirements for capital expenditures;

 

   

the interest expense, or the cash requirements necessary to service interest or principal payments, associated with indebtedness;

 

   

depreciation and amortization, which are non-cash charges, although the assets being depreciated and amortized will likely have to be replaced in the future, nor does EBITDA or Adjusted EBITDA reflect any cash requirements for such replacements; and

 

   

changes in, or cash requirements for, our working capital needs.

 

 

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The following table provides a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), which is the most directly comparable financial measure presented in accordance with GAAP:

 

    Year ended March 31,     Nine months  ended
December 31,
 
    2009     2010     2011     2010     2011  
    (in thousands)  

Net income (loss)

  $ (973   $ 6,023      $ 20,155      $ 15,006      $ 7,660   

Interest expense

    1,279        1,207        885        881        66   

Provision for (benefit from) income taxes

    56        400        (5,747     (5,964     4,926   

Depreciation and amortization

    366        345        494        369        578   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    728        7,975        15,787        10,292        13,230   

Loss from discontinued operations

    579        —          —          —          —     

Loss from sale of discontinued operations

    1,865        —          —          —          —     

Management fees(a)

    400        400        400        300        450   

Stock-based compensation(b)

    835        902        373        279        390   

Change in fair value of convertible preferred stock warrant liability(c)

    —          —          —          —          538   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 4,407      $ 9,277      $ 16,560      $ 10,871      $ 14,608   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  (a) Represents management fees payable to Solera pursuant to an agreement that will terminate upon the consummation of this offering in exchange for a payment of $1.3 million.
  (b) Represents non-cash, stock-based compensation expense.
  (c) Represents the remeasurement to fair value of a warrant to purchase 65,000 shares of our convertible preferred stock. See note 9 to our consolidated financial statements included elsewhere in this prospectus.

 

(6) The pro forma balance sheet data gives effect to (i) the conversion of all shares of our Series A 2002 convertible preferred stock, Series A 2004 convertible preferred stock and Series A 2005 convertible preferred stock into shares of our common stock immediately prior to the consummation of this offering and (ii) the conversion of our warrant for Series A 2005 convertible preferred stock into a warrant for common stock and the resulting reclassification of the convertible preferred stock warrant liability to additional paid-in capital.
(7) The pro forma as adjusted balance sheet data gives effect to the sale of shares of common stock by us in this offering, after deducting the underwriting discount and estimated offering expenses payable by us and the application of the net proceeds of this offering by us as described under “Use of Proceeds.”
(8) Since December 31, 2011, the balance outstanding under our credit facility has been reduced and certain offering expenses have been paid by us, which are deducted in determining net proceeds to us. As of March 22, 2012, the balance outstanding under our credit facility was $11.2 million. We intend to pay the outstanding balance under our credit facility using cash on hand following the closing of this offering.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. The most significant risks include those described below; however, additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business operations. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. If any of the following risks actually occurs, our business, results of operations and financial condition could be materially adversely affected. In this case, the trading price of our common stock would likely decline and you might lose part or all of your investment in our common stock.

Risks Related to Our Business and Industry

We may not be able to implement successfully our growth strategy on a timely basis or at all.

Our future success depends, in large part, on our ability to implement our growth strategy of expanding distribution and improving placement of our products, attracting new consumers to our brand and introducing new product lines and product extensions. Our ability to implement this growth strategy depends, among other things, on our ability to:

 

   

enter into distribution and other strategic arrangements with third-party retailers and other potential distributors of our products;

 

   

continue to compete in conventional grocery and mass merchandiser retail channels in addition to the natural and organic channel;

 

   

secure shelf space in mainstream aisles;

 

   

increase our brand recognition;

 

   

expand and maintain brand loyalty; and

 

   

develop new product lines and extensions.

We may not be able to implement our growth strategy successfully. Our sales and operating results will be adversely affected if we fail to implement our growth strategy or if we invest resources in a growth strategy that ultimately proves unsuccessful.

If we fail to develop and maintain our brand, our business could suffer.

We believe that developing and maintaining our brand is critical to our success. The importance of our brand recognition may become greater as competitors offer more products similar to ours. Our brand-building activities involve increasing awareness of our brand, creating and maintaining brand loyalty and increasing the availability of our products. If our brand-building activities are unsuccessful, we may never recover the expenses incurred in connection with these efforts, and we may be unable to implement our business strategy and increase our future sales.

Our brand and reputation may be diminished due to real or perceived quality or health issues with our products, which could have an adverse effect on our business and operating results.

We believe our consumers rely on us to provide them with high-quality natural and organic food products. Concerns regarding the ingredients used in our products or the safety or quality of our products or our supply chain may cause consumers to stop purchasing our products, even if the basis for the concern is unfounded, has been addressed or is outside of our control. Although we believe we have a rigorous quality control process, there can be no assurance that our products will always comply with the standards set for our products. For example, although we strive to keep our products free of genetically modified organisms, they may not be easily detected

 

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and contamination can occur through cross-pollination. Also, we use epoxy linings that contain bisphenol-A, commonly called BPA, as part of the protective barrier between the metal can and food contents in our canned pasta meals. Although the Food and Drug Administration, or FDA, currently allows the use of BPA in food packaging materials and has not approved a BPA-free can for use with our type of products, public reports and concerns regarding the potential hazards of BPA could contribute to a perceived safety risk for products packaged using BPA. Adverse publicity about the quality or safety of our products, whether or not ultimately based on fact, may discourage consumers from buying our products and have an adverse effect on our brand, reputation and operating results.

We have no control over our products once purchased by consumers. Accordingly, consumers may prepare our products in a manner that is inconsistent with our directions or store our products for long periods of time, which may adversely affect the quality of our products. If consumers do not perceive our products to be of high quality, then the value of our brand would be diminished, and our business, results of operations and financial condition would be adversely affected.

Any loss of confidence on the part of consumers in the ingredients used in our products or in the safety and quality of our products would be difficult and costly to overcome. Any such adverse effect could be exacerbated by our position in the market as a purveyor of high-quality natural and organic food products and may significantly reduce our brand value. Issues regarding the safety of any of our products, regardless of the cause, may have a substantial and adverse effect on our brand, reputation and operating results.

We may be subject to significant liability if the consumption of any of our products causes illness or physical harm.

The sale of food products for human consumption involves the risk of injury or illness to consumers. Such injuries or illness may result from inadvertent mislabeling, tampering or product contamination or spoilage. Under certain circumstances, we may be required to recall or withdraw products, which may have a material adverse effect on our business. For example, in 2008, we carried out an FDA Class 1 recall for approximately 680 cases of our salad dressing due to ingredient mislabeling. Even if a situation does not necessitate a recall or market withdrawal, product liability claims may be asserted against us. If the consumption of any of our products causes, or is alleged to have caused, a health-related illness, we may become subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful, the negative publicity surrounding any assertion that our products caused illness or physical harm could adversely affect our reputation with existing and potential distributors, retailers and consumers and our corporate image and brand equity. Moreover, claims or liabilities of this sort might not be covered by insurance or by any rights of indemnity or contribution that we may have against others. A product liability judgment against us or a product recall or market withdrawal could have a material adverse effect on our business, reputation and operating results.

Disruptions in the worldwide economy may adversely affect our business, results of operations and financial condition.

Adverse and uncertain economic conditions may impact distributor, retailer and consumer demand for our products. In addition, our ability to manage normal commercial relationships with our suppliers, contract manufacturers, distributors, retailers, consumers and creditors may suffer. Consumers may shift purchases to lower-priced or other perceived value offerings during economic downturns. In particular, consumers may reduce the amount of natural and organic products that they purchase where there are conventional offerings, which generally have lower retail prices. In addition, consumers may choose to purchase private label products rather than branded products because they are generally less expensive. Distributors and retailers may become more conservative in response to these conditions and seek to reduce their inventories. For example, during the economic downturn from 2007 through 2009, distributors and retailers significantly reduced their inventories, and inventory levels have not returned to, and are not expected to return to, pre-downturn levels. Our results of operations depend upon, among other things, our ability to maintain and increase sales volume with our existing

 

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distributors and retailers, to attract new consumers and to provide products that appeal to consumers at prices they are willing and able to pay. Prolonged unfavorable economic conditions may have an adverse effect on our sales and profitability.

Consumer preferences for our products are difficult to predict and may change, and, if we are unable to respond quickly to new trends, our business may be adversely affected.

Our business is focused on the development, manufacture, marketing and distribution of a line of branded natural and organic food products. If consumer demand for our products decreased, our business would suffer. In addition, sales of natural and organic products are subject to evolving consumer preferences. Consumer trends that we believe favor sales of our products could change based on a number of possible factors, including a shift in preference from organic to non-organic and from natural to non-natural products, economic factors and social trends. A significant shift in consumer demand away from our products could reduce our sales or the prestige of our brand, which would harm our business.

We may not have the resources to compete successfully in our highly competitive markets.

We operate in a highly competitive market. Numerous brands and products compete for limited retailer shelf space and consumers. In our market, competition is based on, among other things, product quality and taste, brand recognition and loyalty, product variety, interesting or unique product names, product packaging and package design, shelf space, reputation, price, advertising, promotion and nutritional claims.

The packaged food industry is dominated by multinational corporations with substantially greater resources and operations than us. We cannot be certain that we will successfully compete with larger competitors that have greater financial, sales and technical resources. Conventional food companies, including Kraft Foods Inc., General Mills, Inc., Campbell Soup Company, PepsiCo, Inc., Nestle S.A. and Kellogg Company, may be able to use their resources and scale to respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities, among other things. We also compete with other natural and organic packaged food brands and companies, including The Hain Celestial Group, Inc., Newman’s Own, Inc., Nature’s Path Foods, Inc., Clif Bar & Company and Amy’s Kitchen, and with smaller companies, which may be more innovative and able to bring new products to market faster and to more quickly exploit and serve niche markets. Retailers also market competitive products under their own private labels, which are generally sold at lower prices and compete with some of our products. As a result of competition, we may need to increase our marketing, advertising and promotional spending to protect our existing market share, which may adversely impact our profitability. We may not have the financial resources to increase such spending when necessary.

Failure to introduce new products or improve existing products successfully would adversely affect our ability to continue to grow.

A key element of our growth strategy depends on our ability to develop and market new products and improvements to our existing products that meet our standards for quality and appeal to consumer preferences. The success of our innovation and product development efforts is affected by our ability to anticipate changes in consumer preferences, the technical capability of our product development staff in developing and testing product prototypes, including complying with governmental regulations, and the success of our management and sales team in introducing and marketing new products. Failure to develop and market new products that appeal to consumers may lead to a decrease in our growth, sales and profitability.

Additionally, the development and introduction of new products requires substantial research, development and marketing expenditures, which we may be unable to recoup if the new products do not gain widespread market acceptance. If we are unsuccessful in meeting our objectives with respect to new or improved products, our business could be harmed. For example, our breakfast cereals line of products has not met our growth objectives, and we are in the process of discontinuing it. Additionally, we cannot assure you that our most recent new product, frozen organic rising crust pizza, will gain widespread market acceptance or be successful.

 

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Ingredient and packaging costs are volatile and may rise significantly, which may negatively impact the profitability of our business.

We purchase large quantities of raw materials, including ingredients such as wheat and flour, dairy products, oils and sugar. In addition, we purchase and use significant quantities of cardboard, film and glass to package our products. Costs of ingredients and packaging are volatile and can fluctuate due to conditions that are difficult to predict, including global competition for resources, weather conditions, consumer demand and changes in governmental trade and agricultural programs. In fiscal 2012, our ingredient costs are higher than in fiscal 2011, and we expect that the cost of certain of our key ingredients will continue to increase. Continued volatility in the prices of raw materials and other supplies we purchase could increase our cost of sales and reduce our profitability. Moreover, we may not be able to implement price increases for our products to cover any increased costs, and any price increases we do implement may result in lower sales volumes. If we are not successful in managing our ingredient and packaging costs, if we are unable to increase our prices to cover increased costs or if such price increases reduce our sales volumes, then such increases in costs will adversely affect our business, results of operations and financial condition.

Our future business, results of operations and financial condition may be adversely affected by reduced availability of organic ingredients.

Our ability to ensure a continuing supply of organic ingredients at competitive prices depends on many factors beyond our control, such as the number and size of farms that grow organic crops or raise organic livestock, the vagaries of these farming businesses (including poor harvests), changes in national and world economic conditions and our ability to forecast our ingredient requirements. The organic ingredients used in many of our products are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, frosts, earthquakes, hurricanes and pestilences. Adverse weather conditions and natural disasters can lower crop yields and reduce crop size and quality, which in turn could reduce the available supply of, or increase the price of, organic ingredients. For example, in fiscal 2011, organic wheat and sunflower oil were in shorter supply than we expected. In addition, we purchase some ingredients offshore, and the availability of such ingredients may be affected by events in other countries, including Colombia, Paraguay, Thailand and Brazil. In addition, we compete with other food producers in the procurement of organic ingredients, which are often less plentiful in the open market than conventional ingredients. This competition may increase in the future if consumer demand for organic products increases. If supplies of organic ingredients are reduced or there is greater demand for such ingredients from us and others, we may not be able to obtain sufficient supply on favorable terms, or at all, which could impact our ability to supply products to distributors and retailers and may adversely affect our business, results of operations and financial condition.

We rely on sales to a limited number of distributors and retailers for the substantial majority of our sales, and the loss of one or more significant distributors or retailers may harm our business.

A substantial majority of our sales are generated from a limited number of distributors and retailers. For fiscal 2011, sales to our principal distributor and largest customer, UNFI, represented approximately 28% of our net sales, and sales to our top two retailers, Target and Costco, represented an aggregate of approximately 24% of our net sales. Although the composition of our significant distributors and retailers will vary from period to period, we expect that most of our sales will continue to come from a relatively small number of distributors and retailers for the foreseeable future. We do not have commitments or minimum volumes that ensure future sales of our products. Consequently, our financial results may fluctuate significantly from period to period based on the actions of one or more significant distributors or retailers. For example, in fiscal 2010 sales to Costco were $3.2 million lower than in fiscal 2009, which contributed to lower sales growth. A distributor or retailer may take actions that affect us for reasons that we cannot always anticipate or control, such as their financial condition, changes in their business strategy or operations, the introduction of competing products or the perceived quality of our products. In addition, despite operating in different channels, our retailers sometimes compete for the same consumers. As a result of actual or perceived conflicts resulting from this competition, retailers may take actions that negatively affect us. Our agreements with our distributors and retailers may be canceled if we materially

 

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breach the agreements or for other reasons, including reasons outside of our control. In addition, our distributors and retailers may seek to renegotiate the terms of current agreements or renewals. The loss of, or a reduction in sales or anticipated sales to, one or more of our most significant distributors or retailers may have a material adverse effect on our business, results of operation and financial condition.

Loss of one or more of our contract manufacturers or our failure to identify timely new contract manufacturers could harm our business and impede our growth.

We derive all of our sales from products manufactured at manufacturing facilities owned and operated by our contract manufacturers. During fiscal 2011, we paid $45.0 million in the aggregate to our top three contract manufacturers. We do not have written manufacturing contracts with all of our contract manufacturers, including Lucerne Foods, one of our top three contract manufacturers that manufactures several of our top selling products. Any of our contract manufacturers could seek to alter its relationship with us. If we need to replace a contract manufacturer, there can be no assurance that additional capacity will be available when required on acceptable terms, or at all.

An interruption in, or the loss of operations at, one or more of our contract manufacturing facilities, which may be caused by work stoppages, disease outbreaks or pandemics, acts of war, terrorism, fire, earthquakes, flooding or other natural disasters at one or more of these facilities, could delay or postpone production of our products, which could have a material adverse effect on our business, results of operations and financial condition until such time as such interruption is resolved or an alternate source of production is secured.

The success of our business depends, in part, on maintaining a strong manufacturing platform. We believe there are a limited number of competent, high-quality contract manufacturers in the industry that meet our strict standards, and if we were required to obtain additional or alternative contract manufacturing arrangements in the future, there can be no assurance that we would be able to do so on satisfactory terms, in a timely manner or at all. Therefore, the loss of one or more contract manufacturers, any disruption or delay at a contract manufacturer or any failure to identify and engage contract manufacturers for new products could delay or postpone production of our products, which could have a material adverse effect on our business, results of operations and financial condition. For example, in the past, changing the contract manufacturer for one of our product lines took approximately six months to implement. At present, we do not have back-up contract manufacturers identified for certain of our product lines, and the loss of contract manufacturers for any of these product lines would result in our inability to produce and deliver the products to our customers until we could identify and retain an alternative contract manufacturer and until that contract manufacturer was able to produce the products to our specifications.

Because we rely on a limited number of third-party suppliers, we may not be able to obtain raw materials on a timely basis or in sufficient quantities to produce our products.

We rely on a limited number of vendors to supply us with raw materials. Our financial performance depends in large part on our ability to arrange for the purchase of raw materials in sufficient quantities at competitive prices. We are not assured of continued supply, pricing or exclusive access to raw materials from these sources. Any of our suppliers could discontinue or seek to alter their relationship with us. For example, we may be adversely affected if they raise their prices, stop selling to us or our contract manufacturers or enter into arrangements that impair their ability provide raw materials for us.

We have a single supplier for the cheese powders used in our products, including macaroni and cheese, cheddar crackers and snack mix. During fiscal 2011, products that contain these cheese powders represented approximately half of our net sales. Any disruption in these supplier relationships would have a material adverse effect on our business.

Events that adversely affect our suppliers could impair our ability to obtain raw material inventory in the quantities that we desire. Such events include problems with our suppliers’ businesses, finances, labor relations, ability to import raw materials, costs, production, insurance and reputation, as well as natural disasters or other catastrophic occurrences.

 

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If we experience significant increased demand for our products, or need to replace an existing supplier, there can be no assurance that additional supplies of raw materials will be available when required on acceptable terms, or at all, or that any supplier would allocate sufficient capacity to us in order to meet our requirements, fill our orders in a timely manner or meet our strict quality standards. Even if our existing suppliers are able to expand their capacity to meet our needs or we are able to find new sources of raw materials, we may encounter delays in production, inconsistencies in quality and added costs. Any delays or interruption in, or increased costs of, our supply of raw materials could have an adverse effect on our ability to meet consumer demand for our products and result in lower net sales and profitability both in the short and long term.

We may not be able to protect our intellectual property adequately, which may harm the value of our brand.

We believe that our intellectual property has substantial value and has contributed significantly to the success of our business. Our trademarks, including our “Annie’s®,” “Annie’s Homegrown®,” “Annie’s Naturals®” and “Bernie Rabbit of Approval®” marks, are valuable assets that reinforce our brand and consumers’ favorable perception of our products. We also rely on unpatented proprietary expertise, recipes and formulations and other trade secrets and copyright protection to develop and maintain our competitive position. Our continued success depends, to a significant degree, upon our ability to protect and preserve our intellectual property, including our trademarks, trade dress, trade secrets and copyrights. We rely on confidentiality agreements and trademark, trade secret and copyright law to protect our intellectual property rights.

Our confidentiality agreements with our employees, and certain of our consultants, suppliers and independent contractors, including some of our contract manufacturers who use our recipes to manufacture our products, generally require that all information made known to them be kept strictly confidential. Nevertheless, trade secrets are difficult to protect. Although we attempt to protect our trade secrets, our confidentiality agreements may not effectively prevent disclosure of our proprietary information and may not provide an adequate remedy in the event of unauthorized disclosure of such information. In addition, others may independently discover our trade secrets, in which case we would not be able to assert trade secret rights against such parties. Further, some of our recipes and ingredient formulations have been developed by or with our suppliers and contract manufacturers and are not exclusive to us. Finally, we do not have written confidentiality agreements with all of our contract manufacturers. As a result, we may not be able to prevent others from using our recipes or formulations.

From time to time, third parties have used names or packaging similar to ours, have applied to register trademarks similar to ours and, we believe, have infringed or misappropriated our intellectual property rights. We respond to these actions on a case-by-case basis, including, where appropriate, by sending cease and desist letters and commencing opposition actions and litigation. For example, we recently filed an opposition to a federal trademark registration with the U.S. Patent and Trademark Office that is currently before the Trademark Trial and Appeal Board.

We cannot assure you that the steps we have taken to protect our intellectual property rights are adequate, that our intellectual property rights can be successfully defended and asserted in the future or that third parties will not infringe upon or misappropriate any such rights. In addition, our trademark rights and related registrations may be challenged in the future and could be canceled or narrowed. Failure to protect our trademark rights could prevent us in the future from challenging third parties who use names and logos similar to our trademarks, which may in turn cause consumer confusion or negatively affect consumers’ perception of our brand and products. In addition, if we do not keep our trade secrets confidential, others may produce products with our recipes or formulations. Moreover, intellectual property disputes and proceedings and infringement claims may result in a significant distraction for management and significant expense, which may not be recoverable regardless of whether we are successful. Such proceedings may be protracted with no certainty of success, and an adverse outcome could subject us to liabilities, force us to cease use of certain trademarks or other intellectual property or force us to enter into licenses with others. Any one of these occurrences may have a material adverse affect on our business, results of operations and financial condition.

 

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Failure by our suppliers of raw materials or contract manufacturers to comply with food safety, environmental or other laws and regulations may disrupt our supply of products and adversely affect our business.

If our suppliers or contract manufacturers fail to comply with food safety, environmental or other laws and regulations, or face allegations of non-compliance, their operations may be disrupted. For example, the USDA requires that our certified organic products be free of genetically modified organisms, but unavoidable cross-pollination at one of our suppliers may result in genetically modified organisms in our supply chain. In the event of actual or alleged non-compliance, we might be forced to find an alternative supplier or contract manufacturer. As a result, our supply of raw materials or finished inventory could be disrupted or our costs could increase, which would adversely affect our business, results of operations and financial condition. Additionally, actions we may take to mitigate the impact of any such disruption or potential disruption, including increasing inventory in anticipation of a potential supply or production interruption, may adversely affect our business, results of operations and financial condition.

Changes in existing regulations and the adoption of new regulations may increase our costs and otherwise adversely affect our business, results of operations and financial condition.

The manufacture and marketing of food products is highly regulated. We and our suppliers and contract manufacturers are subject to a variety of laws and regulations. These laws and regulations apply to many aspects of our business, including the manufacture, packaging, labeling, distribution, advertising, sale, quality and safety of our products, as well as the health and safety of our employees and the protection of the environment.

In the U.S., we are subject to regulation by various government agencies, including the FDA, USDA, Federal Trade Commission, or FTC, Occupational Safety and Health Administration and the Environmental Protection Agency, as well as various state and local agencies. We are also regulated outside the United States by the Canadian Food Inspection Agency, as well as Canadian provincial and local agencies. In addition, we are subject to review by voluntary organizations, such as the Council of Better Business Bureaus’ National Advertising Division and the Children’s Food and Beverage Advertising Initiative. We could incur costs, including fines, penalties and third-party claims, as a result of any violations of, or liabilities under, such requirements. For example, in connection with the marketing and advertisement of our products, we could be the target of claims relating to false or deceptive advertising, including under the auspices of the FTC and the consumer protection statutes of some states.

Any change in manufacturing, labeling or packaging requirements for our products may lead to an increase in costs or interruptions in production, either of which could adversely affect our operations and financial condition. New or revised government laws and regulations, such as the U.S. Food Safety Modernization Act passed in January 2011, which grants the FDA greater authority over the safety of the national food supply, as well as increased enforcement by government agencies, could result in additional compliance costs and civil remedies, including fines, injunctions, withdrawals, recalls or seizures and confiscations, as well as potential criminal sanctions, any of which may adversely affect our business, results of operations and financial condition.

Our brand and reputation may suffer from real or perceived issues involving the labeling and marketing of our products as “natural.”

Although the FDA and USDA have each issued statements regarding the appropriate use of the word “natural,” there is no single, U.S. government-regulated definition of the term “natural” for use in the food industry. The resulting uncertainty has led to consumer confusion, distrust and legal challenges. Plaintiffs have commenced legal actions against a number of food companies that market “natural” products, asserting false, misleading and deceptive advertising and labeling claims. Should we become subject to similar claims, consumers may avoid purchasing products from us or seek alternatives, even if the basis for the claim is unfounded. Adverse publicity about these matters may discourage consumers from buying our products. The cost

 

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of defending against any such claims could be significant. Any loss of confidence on the part of consumers in the truthfulness of our labeling or ingredient claims would be difficult and costly to overcome and may significantly reduce our brand value. Uncertainty as to the ingredients used in our products, regardless of the cause, may have a substantial and adverse effect on our brand and our business, results of operations and financial condition.

We use annatto as a color additive in certain of our products. Although annatto is a natural substance derived from achiote trees, in policy statements the FDA takes the position that annatto is an artificial color additive because it adds a color not normally found in the foods to which it is added. Although we have not received one, the FDA has issued warning letters to some companies selling products labeled as natural that contain annatto stating the labels are false and misleading. If we were forced by the FDA to cease the use of annatto in our products, consumers who demand orange-colored products, particularly macaroni and cheese, could stop buying our products, which would adversely affect our sales.

The loss of independent certification on which we rely for a number of our products could harm our business.

We rely on independent certification of our organic products and must comply with the requirements of independent organizations or certification authorities in order to label our products as such. Certain of our products could lose their “organic” certification if a contract manufacturing plant becomes contaminated with non-organic materials or if it is not properly cleaned after a production run. The loss of any independent certifications, including for reasons outside of our control, could harm our business.

Failure by our transportation providers to deliver our products on time or at all could result in lost sales.

We currently rely upon third-party transportation providers for a significant portion of our product shipments. Our utilization of delivery services for shipments is subject to risks, including increases in fuel prices, which would increase our shipping costs, and employee strikes and inclement weather, which may impact the ability of providers to provide delivery services that adequately meet our shipping needs. We periodically change shipping companies, and we could face logistical difficulties that could adversely affect deliveries. In addition, we could incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those we receive from the third-party transportation providers that we currently use, which in turn would increase our costs and thereby adversely affect our operating results.

If we do not manage our supply chain effectively, including inventory levels, our operating results may be adversely affected.

The inability of any supplier, independent contract manufacturer, third-party distributor or transportation provider to deliver or perform for us in a timely or cost-effective manner could cause our operating costs to increase and our profit margins to decrease. We must continuously monitor our inventory and product mix against forecasted demand or risk having inadequate supplies to meet consumer demand as well as having too much inventory on hand that may reach its expiration date and become unsaleable. If we are unable to manage our supply chain effectively and ensure that our products are available to meet consumer demand, our operating costs could increase and our profit margins could decrease.

Virtually all of our finished goods inventory is located in one warehouse facility. Any damage or disruption at this facility would have an adverse effect on our business, results of operations and financial condition.

Virtually all of our finished goods inventory is located in one warehouse facility owned and operated by a third party. A natural disaster, fire, power interruption, work stoppage or other unanticipated catastrophic event at this facility would significantly disrupt our ability to deliver our products and operate our business. If any material amount of our inventory were damaged, we would be unable to meet our contractual obligations and, as a result, our business, results of operations and financial condition would suffer. Additionally, we will be moving to a larger warehouse facility in April 2012 owned and operated by the same third party. Any complications relating to this move may disrupt our ability to deliver our products and could have an adverse effect on our business, results of operations and financial condition.

 

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Fluctuations in our results of operations for our second and fourth fiscal quarters and changes in our promotional activities may impact, and may have a disproportionate effect on, our overall financial condition and results of operations.

Our business is subject to seasonal fluctuations that may have a disproportionate effect on our results of operations. Historically, we have realized a higher portion of our net sales, net income and operating cash flows in our second and fourth fiscal quarters due to our customers’ merchandising and promotional activities around the back-to-school and spring seasons. Any factors that harm our second and fourth fiscal quarter operating results, including disruptions in our supply chain, adverse weather or unfavorable economic conditions, may have a disproportionate effect on our results of operations for the entire fiscal year.

In order to prepare for our peak seasons, we must order and maintain higher quantities of inventory than we would carry at other times of the year. As a result, our working capital requirements also fluctuate during the year, increasing in our first and third fiscal quarters in anticipation of our second and fourth fiscal quarters, respectively. Any unanticipated decline in demand for our products during our peak seasons could require us to sell excess inventory at a substantial markdown or write-off goods we are unable to sell, which could diminish our brand and adversely affect our results of operations.

In addition, we offer a variety of sales and promotion incentives to our customers and to consumers, such as price discounts, consumer coupons, volume rebates, cooperative marketing programs, slotting fees and in-store displays. Our net sales are periodically influenced by the introduction and discontinuance of sales and promotion incentives. Reductions in overall sales and promotion incentives could impact our net sales and affect our results of operations in any particular fiscal quarter.

Historical quarter-to-quarter and period-over-period comparisons of our sales and operating results are not necessarily indicative of future fiscal quarter-to-fiscal quarter and period-over-period results. You should not rely on the results of a single fiscal quarter or period as an indication of our annual results or our future performance.

Failure to retain our senior management may adversely affect our operations.

Our success is substantially dependent on the continued service of certain members of our senior management, including John M. Foraker, our Chief Executive Officer, or CEO. These executives have been primarily responsible for determining the strategic direction of our business and for executing our growth strategy and are integral to our brand and culture, and the reputation we enjoy with suppliers, contract manufacturers, distributors, retailers and consumers. The loss of the services of any of these executives could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace them on a timely basis, if at all. In addition, any such departure could be viewed in a negative light by investors and analysts, which may cause the price of our common stock to decline. We do not have employment agreements with our senior executives, other than our CEO, nor do we carry key-person life insurance on them.

If we are unable to attract, train and retain employees, we may not be able to grow or successfully operate our business.

Our success depends in part upon our ability to attract, train and retain a sufficient number of employees who understand and appreciate our culture and are able to represent our brand effectively and establish credibility with our business partners and consumers. If we are unable to hire and retain employees capable of meeting our business needs and expectations, our business and brand image may be impaired. Any failure to meet our staffing needs or any material increase in turnover rates of our employees may adversely affect our business, results of operations and financial condition.

We have shifted our personnel from being employed by a professional employer organization to being directly employed by us.

Effective February 1, 2012, our personnel became our direct employees. Prior to that date, a professional employer organization, or PEO, administered our human resources, payroll and employee benefits functions and

 

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each person was an employee of record of the PEO. This change requires management to focus on human resource administration, in addition to its other duties, which it did not have to do previously. This new function may distract management from focusing on operations and profitability and could negatively affect our business and results of operations.

We rely on information technology systems and any inadequacy, failure, interruption or security breach of those systems may harm our ability to effectively operate our business.

We are dependent on various information technology systems, including, but not limited to, networks, applications and outsourced services in connection with the operation of our business. A failure of our information technology systems to perform as we anticipate could disrupt our business and result in transaction errors, processing inefficiencies and loss of sales, causing our business to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, systems failures, viruses and security breaches. Any such damage or interruption could have a material adverse effect on our business.

In addition, we sell our products over the internet through third-party websites, including those operated by Alice.com and Amazon.com. The website operations of such third parties may be affected by reliance on third-party hardware and software providers, technology changes, risks related to the failure of computer systems through which these website operations are conducted, telecommunications failures, electronic break-ins and similar disruptions. Furthermore, the ability of our third-party partners to conduct these website operations may be affected by liability for online content and state and federal privacy laws.

Failure to successfully implement our new enterprise resource planning system could impact our ability to operate our business, lead to internal control and reporting weaknesses and adversely affect our results of operations and financial condition.

We are in the process of implementing a new enterprise resource planning information management system to provide for greater depth and breadth of functionality and effectively manage our business data, communications, supply chain, order entry and fulfillment, inventory and warehouse management and other business processes. A delay in such implementation, problems with transitioning to our upgraded system or a failure of our new system to perform as we anticipate may result in transaction errors, processing inefficiencies and the loss of sales, may otherwise disrupt our operations and materially and adversely affect our business, results of operations and financial condition and may harm our ability to accurately forecast sales demand, manage our supply chain and production facilities, fulfill customer orders and report financial and management information on a timely and accurate basis. In addition, due to the systemic internal control features within enterprise resource planning systems, we may experience difficulties that may affect our internal control over financial reporting, which may create a significant deficiency or material weakness in our overall internal controls. We expect to complete the initial implementation of this new system in April 2012. The risks associated with implementation will be greater for us as a newly public company.

An impairment of goodwill could materially adversely affect our results of operations.

We have significant goodwill related to previous acquisitions, which amounted to 45% of our total assets as of December 31, 2011. Goodwill represents the excess of the purchase price over the fair value of the assets acquired and the liabilities assumed. In accordance with GAAP, we test goodwill for impairment annually in the fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Future events that may trigger impairment include, but are not limited to, significant adverse change in customer demand, the business climate or a significant decrease in expected cash flows. When impaired, the carrying value of goodwill is written down to fair value. In the event an impairment to goodwill is identified, an immediate charge to earnings would be recorded, which would adversly affect our operating results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Goodwill.”

 

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A major earthquake, tsunami or other natural disaster could seriously disrupt our entire business.

Our corporate offices are located in Berkeley, California, which is traversed by the Hayward Fault, a major branch of the San Andreas Fault, and on the eastern shores of San Francisco Bay. The impact of a major earthquake or tsunami, or both, or other natural disasters in the San Francisco Bay area on our facilities and overall operations is difficult to predict, but such a natural disaster could seriously disrupt our entire business. Our insurance may not adequately cover our losses and expenses in the event of such a natural disaster. As a result, a major earthquake, tsunami or other natural disaster in the San Francisco Bay area could lead to substantial losses.

Risks Related to this Offering and Ownership of Our Common Stock

No market currently exists for our common stock, and we cannot assure you that an active trading market will develop for our stock.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market on the New York Stock Exchange or otherwise or how liquid that market might become. If an active market does not develop, you may have difficulty selling any shares of our common stock that you purchase in this offering. Additionally, because we will have a limited number of shares of common stock in our public float, the market for such shares may be illiquid, sporadic and volatile. As a result, there may be extreme fluctuations in the price of shares of our common stock. The initial public offering price for the shares of our common stock was determined by negotiations among us, Solera and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering.

Our stock price may be volatile or may decline regardless of our operating performance, and you may lose part or all of your investment.

After this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly, and such volatility may be exacerbated by our relatively small public float. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

 

   

market conditions or trends in the natural and organic packaged food sales industry or in the economy as a whole;

 

   

seasonal fluctuations;

 

   

actions by competitors;

 

   

actual or anticipated growth rates relative to our competitors;

 

   

the public’s response to press releases or other public announcements by us or third parties, including our filings with the Securities and Exchange Commission, or SEC;

 

   

economic, legal and regulatory factors unrelated to our performance;

 

   

any future guidance we may provide to the public, any changes in such guidance or any difference between our guidance and actual results;

 

   

changes in financial estimates or recommendations by any securities analysts who follow our common stock;

 

   

speculation by the press or investment community regarding our business;

 

   

litigation;

 

   

changes in key personnel; and

 

   

future sales of our common stock by our officers, directors and significant stockholders.

 

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In addition, the stock markets, including the New York Stock Exchange, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

The market price of our common stock could decline significantly as a result of sales of a large number of shares of our common stock in the market after this offering. These sales, or the perception that these sales might occur, could depress the market price of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Upon the consummation of this offering, we will have 16,646,002 shares of common stock outstanding. The shares of common stock offered in this offering will be freely tradable without restriction under the Securities Act of 1933, as amended, or the Securities Act, except for any shares of common stock that may be held or acquired by our directors, executive officers and other affiliates, the sale of which will be restricted under the Securities Act. In addition, shares subject to outstanding options under our 2004 Plan and pursuant to certain non-plan options and shares reserved for future issuance under our Omnibus Incentive Plan will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. Moreover, pursuant to the Amended and Restated Registration Rights Agreement among us, Solera and certain of our other stockholders, dated as of November 14, 2005, some of our stockholders, including Solera, have the right to require us to register under the Securities Act any shares in our company not sold by such stockholders in this offering. See “Certain Relationships and Related-Party Transactions—Registration Rights Agreement.” If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.

In connection with this offering, we, our directors and executive officers, the selling stockholders and certain other holders of our outstanding common stock and options have each agreed to certain lock-up restrictions. We and they and their permitted transferees will not be permitted to sell any shares of our common stock for 180 days (subject to extension) after the date of this prospectus, except as discussed in “Shares Eligible for Future Sale,” without the prior consent of Credit Suisse Securities (USA) LLC and J.P. Morgan Securities LLC. Credit Suisse Securities (USA) LLC and J.P. Morgan Securities LLC may, in their sole discretion, release all or any portion of the shares of our common stock from the restrictions in any of the lock-up agreements described above. See “Underwriting (Conflicts of Interest).”

Also, in the future, we may issue shares of our common stock in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock.

We will continue to be controlled by our sponsor, whose interests may conflict with those of our other stockholders.

Upon the consummation of this offering, funds advised by Solera will hold approximately 63.3% of our voting power, or 59.1% if the underwriters exercise their overallotment option in full. So long as such funds continue to hold, directly or indirectly, shares of common stock representing more than 50% of the voting power of our common stock, Solera will be able to exercise control over all matters requiring stockholder approval, including the election of directors, amendment of our amended and restated certificate of incorporation and approval of significant corporate transactions, and will have significant control over our management and

 

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policies. Solera’s control may have the effect of delaying or preventing a change in control of our company or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. These actions may be taken even if other stockholders oppose them. The interests of Solera may not always coincide with the interests of other stockholders, and Solera may act in a manner that advances its best interests and not necessarily those of our other stockholders.

Any material weaknesses in our internal controls may impede our ability to produce timely and accurate financial statements, which could cause us to fail to file our periodic reports timely, result in inaccurate financial reporting or restatements of our financial statements, subject our stock to delisting and materially harm our business, results of operations, financial condition and stock price.

As a public company, we will be required to file annual and quarterly periodic reports containing our financial statements with the SEC within prescribed time periods. As part of the New York Stock Exchange listing requirements, we will also be required to provide our periodic reports, or make them available, to our stockholders within prescribed time periods. We may not be able to produce reliable financial statements or file these financial statements as part of a periodic report in a timely manner with the SEC or comply with the New York Stock Exchange listing requirements. In addition, we could make errors in our financial statements that could require us to restate our financial statements. During the nine months ended December 31, 2011, we corrected an error in the measurement of our convertible preferred stock warrant liability, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Out-of-Period Adjustment.” Upon assessing the impact of this error, management determined that a restatement of our financial statements was not required. If we are required to restate our financial statements in the future for any reason, any specific adjustment may be adverse and may cause our results of operations and financial condition, as restated, to be materially adversely impacted. As a result, we or members of our management could be the subject of adverse publicity, stockholder lawsuits and investigations and sanctions by regulatory authorities, such as the SEC. Any of the above consequences could cause our stock price to decline and could impose significant unanticipated costs on us.

As of each fiscal year end, commencing with the first fiscal year beginning after the effective date of this offering, our management will be required to evaluate our internal controls over financial reporting and to provide to our stockholders in our Annual Report on Form 10-K its assessment of our internal controls over financial reporting. At the same time, our independent registered public accounting firm will be required to evaluate and report on our internal controls over financial reporting in the event we become an accelerated filer or large accelerated filer. To the extent we find material weaknesses or other deficiencies in our internal controls, we may determine that we have ineffective internal controls over financial reporting as of any particular fiscal year end, and we may receive an adverse assessment of our internal controls over financial reporting from our independent registered public accounting firm. Moreover, any material weaknesses or other deficiencies in our internal controls may delay the conclusion of an annual audit or a review of our quarterly financial results. For example, our assessment of the error in the measurement of the convertible preferred stock warrant liability discussed above, a non-cash charge, led to the identification of a significant deficiency in our internal controls. This determination, however, did not result in the finding of a material weakness in our internal controls.

If we are not able to issue our financial statements in a timely manner, or if we are not able to obtain the required audit or review of our financial statements by our independent registered public accounting firm in a timely manner, we will not be able to comply with the periodic reporting requirements of the SEC and the listing requirements of the New York Stock Exchange. If these events occur, our common stock listing on the New York Stock Exchange could be suspended or terminated and our stock price could materially suffer. In addition, we or members of our management could be subject to investigation and sanction by the SEC and other regulatory authorities and to stockholder lawsuits, which could impose significant additional costs on us, divert management attention and materially harm our business, results of operations, financial condition and stock price.

 

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Some of our operating expenses will increase significantly as a result of operating as a public company, and our management will be required to devote substantial time to complying with public company regulations.

We have operated as a private company. As a public company, we will incur additional legal, accounting, compliance and other expenses that we have not incurred as a private company. After this offering, we will become obligated to file annual and quarterly information and other reports with the SEC as required by the Securities Exchange Act of 1934, as amended, or the Exchange Act, and applicable SEC rules. In addition, we will also become subject to other reporting and corporate governance requirements, including certain requirements of the New York Stock Exchange, which will impose significant compliance obligations upon us. We will need to institute a comprehensive compliance function, establish internal policies, ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis, utilize outside counsel and accountants in the above activities and establish an investor relations function.

The Sarbanes-Oxley Act of 2002 and the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, have imposed increased regulation and disclosure obligations and have required enhanced corporate governance practices of public companies. Our efforts to comply with evolving laws, regulations and standards are likely to result in increased administrative expenses and a diversion of management’s time and attention from sales-generating activities. These changes will require a significant commitment of additional resources. We may not be successful in implementing these requirements, and implementing them could materially adversely affect our business, results of operations and financial condition. If we do not implement or comply with such requirements in a timely manner, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the New York Stock Exchange. Any such action could harm our reputation and the confidence of investors and customers in our company and could materially adversely affect our business and cause our stock price to decline.

If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if our operating results do not meet the expectations of the investor community, one or more of the analysts who cover our company may change their recommendations regarding our company, and our stock price could decline.

If you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution.

The offering price of our common stock is substantially higher than the net tangible book value per share of our common stock, which on a pro forma basis was $0.72 per share of our common stock as of December 31, 2011. As a result, you will incur immediate and substantial dilution in net tangible book value when you buy our common stock in this offering. This means that you will pay a higher price per share than the amount of our total tangible assets, less our total liabilities, divided by the number of shares of common stock outstanding. In addition, you may also experience additional dilution if options or other rights to purchase our common stock that are outstanding or that we may issue in the future are exercised or converted or we issue additional shares of our common stock at prices lower than our net tangible book value at such time. See “Dilution.”

 

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Certain provisions of our corporate governance documents and Delaware law could discourage, delay or prevent a merger or acquisition at a premium price.

Our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These include provisions that:

 

   

authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include voting, approval, dividend or other rights or preferences superior to the rights of the holders of our common stock;

 

   

classify our board of directors into three separate classes with staggered terms;

 

   

provide that once Solera ceases to own shares representing more than 50% of our total voting power, directors can only be removed for cause or by vote of shares representing 66 2/3% or more of our total voting power;

 

   

prohibit stockholders from acting by written consent once Solera ceases to beneficially own shares representing more than 50% of our total voting power;

 

   

provide that our board of directors is expressly authorized to make, alter or repeal our amended and restated bylaws;

 

   

provide that once Solera ceases to own shares representing more than 50% of our total voting power, the stockholders can only adopt, amend or repeal our amended and restated bylaws with the affirmative vote of 66 2/3% or more of our total voting power;

 

   

establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings;

 

   

prohibit stockholders from calling special meetings, except that Solera may call a special meeting until such time as Solera ceases to beneficially own shares representing 35% or more of our total voting power; and

 

   

provide our board of directors with the sole power to set the size of our board of directors and fill vacancies.

These and other provisions of our amended and restated certificate of incorporation and amended and restated bylaws could delay, defer or prevent us from experiencing a change of control or changes in our board of directors and management and may adversely affect our stockholders’ voting and other rights.

In addition, we will be subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with a stockholder owning 15% or more of such corporation’s outstanding voting stock for a period of three years following the date on which such stockholder became an “interested” stockholder. In order for us to consummate a business combination with an “interested” stockholder within three years of the date on which the stockholder became “interested,” either (1) the business combination or the transaction that resulted in the stockholder becoming “interested” must be approved by our board of directors prior to the date the stockholder became “interested,” (2) the “interested” stockholder must own at least 85% of our outstanding voting stock at the time the transaction commences (excluding voting stock owned by directors who are also officers and certain employee stock plans) or (3) the business combination must be approved by our board of directors and authorized by at least two-thirds of our stockholders (excluding the “interested” stockholder). This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders. Any delay or prevention of a change of control transaction or changes in our board of directors and management could deter potential acquirers or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares of our common stock. See “Description of Capital Stock—Delaware Anti-Takeover Statute” and “Description of Capital Stock—Anti-Takeover Effects of Certain Provisions of our Amended and Restated Certificate of Incorporation and Bylaws.”

 

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If we cannot satisfy or continue to satisfy the New York Stock Exchange’s independent committee requirements, our common stock may be delisted, which would negatively impact the price of our common stock and your ability to sell our common stock.

Our common stock has been approved for listing on the New York Stock Exchange, subject to official notice of issuance. We plan to utilize the phase-in provisions afforded new public companies under the New York Stock Exchange rules with respect to the independent committee requirements of the New York Stock Exchange. During the phase-in period, there will be times when we will not have fully independent board committees, which will leave us subject to the control of our existing non-independent directors. Moreover, if we are unable to comply with the independent committee requirements in the time period provided, we could be delisted from the New York Stock Exchange and face significant consequences, including:

 

   

limited availability for market quotations for our common stock;

 

   

reduced liquidity with respect to our common stock;

 

   

limited amount of news and analyst coverage; and

 

   

a decreased ability to issue additional securities or obtain additional financing in the future.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements in addition to historical information. These forward-looking statements are included throughout this prospectus, including in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We have used the words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “future,” “will,” “seek” and similar terms and phrases to identify forward-looking statements in this prospectus.

The forward-looking statements contained in this prospectus are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. We believe that these factors include those described in “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements. Any forward-looking statement made by us in this prospectus speaks only as of the date of this prospectus. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $11.6 million after deducting the underwriting discount and estimated offering expenses payable by us.

We intend to use a portion of the net proceeds to us from this offering to pay $1.3 million to Solera in connection with the termination of its advisory services agreement with us. See “Certain Relationships and Related-Party Transactions—Advisory Services Agreement.” We intend to use the balance of the net proceeds to us from this offering to repay a portion of our indebtedness outstanding under our credit facility. As of December 31, 2011, we had $13.3 million of indebtedness under our credit facility, which was used to fund dividends paid in fiscal 2012. See “Dividend Policy.” Since December 31, 2011, the balance outstanding under our credit facility has been reduced and certain offering expenses have been paid by us, which are deducted in determining net proceeds to us. As of March 22, 2012, the balance outstanding under our credit facility was $11.2 million. Borrowings under our credit facility bear interest, at our option, at (i) LIBOR (as defined in the credit agreement governing our credit facility) plus 1.5%, (ii) IBOR (as defined in such credit agreement) plus 1.5% or (iii) Prime Rate (as defined in such credit agreement). Although we intend to repay a portion of our indebtedness outstanding under our credit facility with a portion of the net proceeds to us from this offering, our $20.0 million credit facility remains available to us for future borrowings through August 2014 and we may borrow amounts from our credit facility.

We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders, including any shares that may be sold by the selling stockholders in connection with the exercise of the underwriters’ overallotment option.

 

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DIVIDEND POLICY

During fiscal 2010, we paid cash dividends on our capital stock of $1,961,329 ($0.125 per share) in November 2009 and $1,518,449 ($0.097 per share) in March 2010. During fiscal 2011, we paid cash dividends on our capital stock of $3,037,017 ($0.194 per share) in December 2010 and $9,492,554 ($0.605 per share) in March 2011. Since April 1, 2011, we have paid cash dividends on our capital stock of $1,518,809 ($0.097 per share) in August 2011, $2,279,518 ($0.145 per share) in November 2011 and $9,751,271 ($0.621 per share) in December 2011.

Although we have paid cash dividends on our capital stock from time to time in the past, we currently expect to retain all future earnings for use in the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. The declaration and payment of any dividends in the future will be determined by our board of directors, in its discretion, and will depend on a number of factors, including our earnings, capital requirements, overall financial condition and contractual restrictions, including under our revolving credit facility and other indebtedness we may incur.

 

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CAPITALIZATION

The following table sets forth our cash and capitalization as of December 31, 2011 on:

 

   

an actual basis;

 

   

a pro forma basis to give effect to (i) the conversion of all shares of our Series A 2002 convertible preferred stock, Series A 2004 convertible preferred stock and Series A 2005 convertible preferred stock into shares of our common stock immediately prior to the consummation of this offering and (ii) the conversion of our warrant for Series A 2005 convertible preferred stock into a warrant for common stock and the resulting reclassification of the convertible preferred stock warrant liability to additional paid-in capital; and

 

   

a pro forma as adjusted basis to give further effect to the sale of shares of common stock by us in this offering, after deducting the underwriting discount and estimated offering expenses payable by us, and the application of the net proceeds of this offering by us as described under “Use of Proceeds.”

The information below is illustrative only and our cash and capitalization following the consummation of this offering will be based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included elsewhere in this prospectus.

 

     As of December 31, 2011  
     Actual     Pro Forma     Pro Forma
as Adjusted
 
     (in thousands)  

Cash

   $ 2,414      $ 2,414      $ 2,414   
  

 

 

   

 

 

   

 

 

 

Credit facility(1)

   $ 13,302      $ 13,302      $ 3,020   
  

 

 

   

 

 

   

 

 

 

Convertible preferred stock warrant liability

     969        —          —     
  

 

 

   

 

 

   

 

 

 

Series A 2002 convertible preferred stock, par value $0.001 per share, 3,802,086 shares authorized, 3,802,084 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     23,374        —          —     

Series A 2004 convertible preferred stock, par value $0.001 per share, 4,806,000 shares authorized, 4,806,000 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     30,999        —          —     

Series A 2005 convertible preferred stock, par value $0.001 per share, 3,738,469 shares authorized, 3,673,469 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     27,000        —          —     

Preferred stock, par value $0.001 per share, 6,455,531 shares authorized, 6,455,531 shares available for issuance, actual; 5,000,000 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted

     —          —          —     
  

 

 

   

 

 

   

 

 

 
     81,373        —          —     
  

 

 

   

 

 

   

 

 

 

Common stock, par value $0.001 per share, 24,000,000 shares authorized, 473,979 shares issued and outstanding, actual; 30,000,000 shares authorized, 15,695,550 shares issued and outstanding, pro forma; 30,000,000 shares authorized, 16,645,550 shares issued and outstanding, pro forma as adjusted

     1       16        17   

Additional paid-in capital

     4,123        86,450        98,031   

Accumulated deficit

     (40,758 )     (40,758     (40,758
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (36,634     45,708        57,290   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 59,010      $ 59,010      $ 60,310   
  

 

 

   

 

 

   

 

 

 

 

(1) Since December 31, 2011, the balance outstanding under our credit facility has been reduced and certain offering expenses have been paid by us, which are deducted in determining net proceeds to us. As of March 22, 2012, the balance outstanding under our credit facility was $11.2 million. We intend to repay the outstanding balance under our credit facility using cash on hand following the closing of this offering.

 

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The number of shares of our common stock outstanding set forth in the table above excludes:

 

   

80,560 shares of our common stock issuable upon the exercise of an outstanding warrant at an exercise price of $8.07 per share;

 

   

1,509,702 shares of our common stock issuable upon the exercise of options outstanding as of March 23, 2012 under our 2004 Plan and certain non-plan options, with a weighted average exercise price of $7.89 per share; and

 

   

867,570 shares of our common stock reserved for future issuance under our Omnibus Incentive Plan, which will be effective upon the consummation of this offering.

 

 

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DILUTION

Consolidated net tangible book value per share is determined by dividing (i) our total assets less our goodwill, intangible assets, deferred initial public offering costs, total liabilities and convertible preferred stock by (ii) the number of shares of our common stock outstanding. As of December 31, 2011, we had a negative consolidated net tangible book value of approximately $71.1 million, or $150.00 per share. Our pro forma consolidated net tangible book value as of December 31, 2011 would have been $11.2 million, or $0.72 per share, based on the total number of shares of our common stock outstanding as of December 31, 2011, after giving effect to (i) the conversion of all shares of our Series A 2002 convertible preferred stock, Series A 2004 convertible preferred stock and Series A 2005 convertible preferred stock into shares of our common stock and (ii) the conversion of our warrant for Series A 2005 convertible preferred stock into a warrant for common stock and the resulting reclassification of the convertible preferred stock warrant liability to additional paid-in capital immediately prior to the consummation of this offering. Following the sale by us of the 950,000 shares of common stock in this offering after deducting the underwriting discount and estimated offering expenses payable by us and applying the net proceeds as set forth in “Use of Proceeds,” our pro forma as adjusted consolidated net tangible book value at December 31, 2011 would have been $25.3 million, or $1.52 per share. This represents an immediate increase in pro forma consolidated net tangible book value to existing stockholders of $0.80 per share and an immediate dilution to new investors of $17.48 per share. Dilution per share represents the difference between the price per share to be paid by new investors for the shares of common stock sold in this offering and the pro forma consolidated net tangible book value per share immediately after this offering. The following table illustrates this dilution on a per share basis:

 

Initial public offering price per share

     $ 19.00   

Net tangible book value per share as of December 31, 2011

   $ (150.00  

Increase per share attributable to conversion of preferred stock

     150.72     
  

 

 

   

Pro forma consolidated net tangible book value per share as of December 31, 2011

     0.72     

Increase in pro forma net tangible book value per share attributable to new investors

     0.80     
  

 

 

   

Pro forma consolidated net tangible book value per share, as adjusted for this offering

       1.52   
    

 

 

 

Dilution per share to new investors

     $ 17.48   
    

 

 

 

The following table sets forth the number of shares of common stock purchased, the total consideration paid, or to be paid to us, and the average price per share paid, or to be paid, by existing stockholders and by the new investors, before deducting the underwriting discount and estimated offering expenses payable by us (dollars in thousands, except per share data):

 

     Shares Purchased     Total Consideration     Average
Price
Per
Share
 
     Number      Percent     Amount      Percent    

Existing stockholders(1)

     15,696,002         94.3   $ 82,659         82.1   $ 5.27   

New investors in this offering(1)

     950,000         5.7        18,050         17.9      $ 19.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     16,646,002         100.0   $ 100,709         100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

(1) The number of shares purchased by existing stockholders includes shares being sold by the selling stockholders in this offering. The number of shares purchased by new investors does not include shares being sold by the selling stockholders in this offering.

 

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Sales by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to 11,646,002 shares, or approximately 70.0% (10,896,002 shares, or approximately 65.5%, if the underwriters exercise their overallotment option in full), and will increase the number of shares to be purchased by new investors to 5,000,000 shares, or approximately 30.0% (5,750,000 shares, or approximately 34.5%, if the underwriters exercise their overallotment option in full), of the total common stock outstanding after this offering.

The foregoing tables exclude (i) 80,560 shares of our common stock issuable upon the exercise of a warrant at an exercise price of $8.07 per share, (ii) 1,509,702 shares of our common stock issuable upon the exercise of options outstanding as of March 23, 2012 under our 2004 Plan and pursuant to certain non-plan options, with a weighted average exercise price of $7.89 per share, and (iii) 867,570 shares of our common stock reserved for future issuance under our Omnibus Incentive Plan, which will be effective upon the consummation of this offering. To the extent this warrant or these options are exercised, there will be further dilution to new investors.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statements of operations data for the years ended March 31, 2009, 2010 and 2011 and the consolidated balance sheet data as of March 31, 2010 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the years ended March 31, 2007 and 2008 have been derived from our audited financial statements that do not appear in this prospectus. The selected consolidated balance sheet data as of March 31, 2007, 2008 and 2009 has been derived from our audited financial statements that do not appear in this prospectus. The consolidated statements of operations data for the nine months ended December 31, 2010 and 2011 and the consolidated balance sheet data as of December 31, 2011 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements were prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all adjustments that we consider necessary for a fair statement of the financial information. The historical results are not necessarily indicative of the results to be expected for any future periods, and the results for the nine months ended December 31, 2011 should not be considered indicative of results expected for fiscal 2012. You should read the following financial information together with the information under “Capitalization” and “Management’s Discussions and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included elsewhere in this prospectus.

 

    Year ended March 31,     Nine months  ended
December 31,
 
    2007     2008     2009     2010     2011     2010     2011  
    (in thousands, except share and per share amounts)  

Consolidated Statements of Operations Data:

             

Net sales

  $ 65,563      $ 76,751      $ 93,643      $ 96,015      $ 117,616      $ 81,021      $ 98,320   

Cost of sales

    44,648        51,217        64,855        63,083        71,804        50,269        60,034   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    20,915        25,534        28,788        32,932        45,812        30,752        38,286   

Selling, general and administrative expenses

    24,863        24,153        25,693        25,323        30,674        20,957        25,206   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (3,948     1,381        3,095        7,609        15,138        9,795        13,080   

Interest expense

    (724     (809     (1,279     (1,207     (885     (881     (66

Other income (expense), net

    138        112        (289     21        155        128        (428
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes

    (4,534     684        1,527        6,423        14,408        9,042        12,586   

Provision for (benefit from) income taxes

    11        10        56        400        (5,747     (5,964     4,926   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (4,545     674        1,471        6,023        20,155        15,006        7,660   

Loss from discontinued operations(1)

    (11,426     (930     (579     —          —          —          —     

Loss from sale of discontinued operations(1)

    —          —          (1,865     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (15,971   $ (256   $ (973   $ 6,023      $ 20,155      $ 15,006      $ 7,660   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders from continuing operations(2)

  $ (4,545   $ 18      $ 43      $ 177      $ 596      $ 442      $ 233   

Net loss attributable to common stockholders from discontinued operations(2)

    (11,426     (25     (72     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders(2)

  $ (15,971   $ (7   $ (29   $ 177      $ 596      $ 442      $ 233   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders—Basic(3)

             

Continuing operations

  $ (10.77   $ 0.04      $ 0.09      $ 0.38      $ 1.29      $ 0.96      $ 0.50   

Discontinued operations

    (27.08     (0.06     (0.16     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total basic net income (loss) per share attributable to common stockholders

  $ (37.85   $ (0.02   $ (0.07   $ 0.38      $ 1.29      $ 0.96      $ 0.50   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Year ended March 31,     Nine months ended
December 31,
 
    2007     2008     2009     2010     2011     2010     2011  
    (in thousands, except share and per share amounts)  

Net income (loss) per share attributable to common stockholders—Diluted(3)

             

Continuing operations

  $ (10.77   $ 0.03      $ 0.06      $ 0.20      $ 0.50      $ 0.38      $ 0.24   

Discontinued operations

    (27.08     (0.06     (0.16     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total diluted net income (loss) per share attributable to common stockholders

  $ (37.85   $ (0.03   $ (0.10   $ 0.20      $ 0.50      $ 0.38      $ 0.24   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing net income (loss) per share attributable to common stockholders—Basic

    421,990        424,699        461,154        461,248        461,884        461,768        467,206   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing net income (loss) per share attributable to common stockholders—Diluted

    421,990        676,188        766,290        899,539        1,201,125        1,158,577        988,915   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share

  $ —        $ —        $ —        $ 0.22      $ 0.80      $ 0.19      $ 0.86   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Year ended March 31,      Nine months  ended
December 31,
 
     2007     2008      2009      2010      2011      2010      2011  
     (in thousands)  

Other Financial Data:

                   

EBITDA(4)

   $ (14,969   $ 815       $ 728       $ 7,975       $ 15,787       $ 10,292       $ 13,230   

Adjusted EBITDA(4)

     (3,024     2,710         4,407         9,277         16,560         10,871         14,608   

 

     As of March 31,     As of
December 31,
2011
 
     2007     2008     2009     2010     2011    
     (in thousands)  

Consolidated Balance Sheet Data:

            

Cash

   $ 2,468      $ 3,131      $ 3,693      $ 8,550      $ 7,333      $ 2,414   

Working capital

     5,425        9,137        13,195        16,538        13,035        16,943   

Total assets

     54,573        60,914        53,612        58,794        67,261        68,218   

Total debt(5)

     5,954        10,516        5,713        5,856        —          13,302  

Convertible preferred stock warrant liability

     —          —          —          —          —          969   

Convertible preferred stock

     81,373        81,373        81,373       81,373       81,373       81,373  

Total stockholders’ deficit

     (42,530     (41,481     (41,620     (38,173     (30,148     (36,634 )

 

(1) In November 2008, we sold Fantastic, a manufacturer of instant soups and packaged meals, to an unrelated third party for $1.7 million, net of working capital adjustments. We considered Fantastic a business component, and thus, the results of operations of Fantastic are separately reported as discontinued operations in fiscal 2007, 2008 and 2009. The loss on sale of Fantastic is reported as a loss on sale of discontinued operations in fiscal 2009. We account for goodwill, which represents the excess of purchase price over fair value of net assets acquired, and test for impairment at least annually. The results of our fiscal 2007 annual impairment test resulted in an impairment charge of $10.8 million to reduce the carrying value of Fantastic. The impairment charge recorded in fiscal 2007 is included within the loss from discontinued operations.

 

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(2) Net income (loss) attributable to common stockholders was allocated using the two-class method since our capital structure includes common stock and convertible preferred stock with participating rights. Under the two-class method, we reduced income from continuing operations by (i) the dividends paid to convertible preferred stockholders and (ii) the rights of the convertible preferred stockholders in any undistributed earnings based on the relative percentage of weighted average shares of outstanding convertible preferred stock to the total number of weighted average shares of outstanding common and convertible preferred stock. Under the two-class method, during any period in which we had a loss from continuing operations, the loss from the continuing operations and the loss from the discontinued operations were attributed only to the common stockholders. However, during any period in which we had income from continuing operations, the income from continuing operations and the loss from discontinued operations were allocated between the common and preferred stockholders under the two-class method.
(3) For the calculation of basic and diluted income (loss) per share see notes 2 and 14 to our consolidated financial statements included elsewhere in this prospectus.
(4) EBITDA and Adjusted EBITDA are not financial measures prepared in accordance with GAAP. As used herein, EBITDA represents net income (loss) plus interest expense, provision for (benefit from) income taxes and depreciation and amortization. As used herein, Adjusted EBITDA represents EBITDA plus loss from discontinued operations, loss from sale of discontinued operations, management fees, stock-based compensation and change in fair value of convertible preferred stock warrant liability.

We present EBITDA and Adjusted EBITDA because we believe each of these measures provides an additional metric to evaluate our operations and, when considered with both our GAAP results and the reconciliation to net income (loss) set forth below, provides a more complete understanding of our business than could be obtained absent this disclosure. We use EBITDA and Adjusted EBITDA, together with financial measures prepared in accordance with GAAP, such as sales and cash flows from operations, to assess our historical and prospective operating performance, to provide meaningful comparisons of operating performance across periods, to enhance our understanding of our core operating performance and to compare our performance to that of our peers and competitors.

EBITDA and Adjusted EBITDA are presented because we believe they are useful to investors in assessing the operating performance of our business without the effect of non-cash depreciation and amortization expenses and, in the case of Adjusted EBITDA, the adjustments described above.

EBITDA and Adjusted EBITDA should not be considered in isolation or as alternatives to net income (loss), income from operations or any other measure of financial performance calculated and presented in accordance with GAAP. Neither EBITDA nor Adjusted EBITDA should be considered as a measure of

discretionary cash available to us to invest in the growth of our business. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner as we do. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from that term or by unusual or non-recurring items. We recognize that both EBITDA and Adjusted EBITDA have limitations as analytical financial measures. For example, neither EBITDA nor Adjusted EBITDA reflects:

 

   

our capital expenditures or future requirements for capital expenditures;

 

   

the interest expense, or the cash requirements necessary to service interest or principal payments, associated with indebtedness;

 

   

depreciation and amortization, which are non-cash charges, although the assets being depreciated and amortized will likely have to be replaced in the future, nor does EBITDA or Adjusted EBITDA reflect any cash requirements for such replacements; and

 

   

changes in, or cash requirements for, our working capital needs.

 

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The following table provides a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), which is the most directly comparable financial measure presented in accordance with GAAP.

 

    Year ended March 31,     Nine months  ended
December 31,
 
    2007     2008     2009     2010     2011     2010     2011  
    (in thousands)  

Net income (loss)

  $ (15,971   $ (256   $ (973   $ 6,023      $ 20,155      $ 15,006      $ 7,660   

Interest expense

    724        809        1,279        1,207        885        881        66   

Provision for (benefit from) income taxes

    11        10        56        400        (5,747     (5,964     4,926   

Depreciation and amortization

    267        252        366        345        494        369        578   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    (14,969     815        728        7,975        15,787        10,292        13,230   

Loss from discontinued operations

    11,426        930        579        —          —          —          —     

Loss from sale of discontinued operations

    —          —          1,865        —          —          —          —     

Management fee(a)

    200        300        400        400        400        300        450   

Stock-based compensation(b)

    319        665        835        902        373        279        390   

Change in fair value of convertible preferred stock warrant liability(c)

    —          —          —          —          —          —          538   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ (3,024   $ 2,710      $ 4,407      $ 9,277      $ 16,560      $ 10,871      $ 14,608   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Represents management fees payable to Solera pursuant to an agreement that will terminate upon the consummation of this offering in exchange for a payment of $1.3 million.
  (b) Represents non-cash, stock-based compensation expense.
  (c) Represents the remeasurement to fair value of a warrant to purchase 65,000 shares of our convertible preferred stock. See note 9 to our consolidated financial statements included elsewhere in this prospectus.
(5) Total debt includes the outstanding principal balance of our term loan and outstanding borrowings on our revolving credit facility.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements included elsewhere in this prospectus, as well as the information presented under “Selected Consolidated Financial Data.”

Overview

Annie’s, Inc. is a rapidly growing natural and organic food company with a widely recognized brand, offering consumers great-tasting products in large packaged foods categories. We sell premium products made from high-quality ingredients at affordable prices. We have the #1 natural and organic market position in four product lines: macaroni and cheese, snack crackers, fruit snacks and graham crackers.

Our loyal and growing consumer following has enabled us to migrate from our natural and organic roots to a brand sold across the mainstream grocery, mass merchandiser and natural retailer channels. Today, we offer over 125 products and are present in over 25,000 retail locations in the United States and Canada.

Our net sales are derived primarily from the sale of meals, snacks, dressings, condiments and other products under the Annie’s Homegrown and Annie’s Naturals brand names. We have experienced strong growth, driven by our meals and snacks categories, resulting from our focus on supporting our best-selling items and the introduction of new products in these categories. We have reduced our offerings in our dressings and condiments lines, which has resulted in lower sales in that category. Sales are reported net of estimated product returns, spoils, slotting and sales and promotion incentives.

Gross profit is net of cost of sales, which consists of the costs of ingredients in the manufacture of products, contract manufacturing fees, packaging costs and in-bound freight charges. Ingredients account for the largest portion of the cost of sales followed by contract manufacturing fees and packaging.

Our selling, general and administrative expenses consist primarily of marketing and advertising expenses, freight and warehousing, wages, related payroll and employee benefit expenses, including stock-based compensation, commissions to outside sales representatives, legal and professional fees, travel expenses, other facility related costs, such as rent and depreciation, and consulting expenses. The primary components of our marketing and advertising expenses include trade advertising, in-store promotions, consumer promotions, display fixtures, sales data, consumer research and search engine and digital advertising.

Trends and Other Factors Affecting Our Business

Net Sales

The following trends in our business have driven top-line growth over the past three years:

 

   

our increased penetration of the mainstream grocery and mass merchandiser channels;

 

   

our continued innovation, including adding new flavors and sizes to existing lines and introducing new product lines, including organic fruit snacks and organic snack mix in fiscal 2009 and organic granola bars and pretzels in fiscal 2011; and

 

   

greater consumer demand for natural and organic food products and increasing awareness of the Annie’s brand and our offerings.

 

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Over the past three years, we have significantly increased both the number of retail locations where our products can be found and the number of our products found in individual stores. From time to time, we review our product lines to remove items not meeting our sales or profitability expectations and to make room for new products. We expect that increasing penetration of the mainstream grocery and mass merchandiser channels, combined with greater brand awareness, new product introductions and line extensions and favorable consumer trends, will continue to fuel our sales growth in all channels.

In addition, we have historically sold our products both direct to retailers and through distributors. Over the past three years, the percentage of sales made direct to retailers has increased, primarily driven by increased volume with mass merchandisers such as Target and Costco.

We offer a variety of sales and promotion incentives to our customers and to consumers, such as price discounts, consumer coupons, volume rebates, cooperative marketing programs, slotting fees and in-store displays. Our net sales are periodically influenced by the introduction and discontinuance of sales and promotion incentives. We anticipate that promotional activities will continue to impact our net sales and that changes in such activities will continue to impact period-over-period results.

For example, we had a strong fourth quarter in fiscal 2011, with a net sales increase of 25% over the comparable period in the prior year, aided in part by some significant promotional incentives. Given the substantial fourth quarter we had last year, we expect our increase in net sales in the fourth quarter of fiscal 2012 will not keep pace with the net sales growth in the prior three quarters.

Gross Profit

Over the past three years, despite increasing volatility in commodity prices, we have successfully increased our gross margin each year through a combination of commodity management practices, productivity improvements, cost reductions in our supply chain and price increases.

We purchase finished products from our contract manufacturers. With an industry-wide commodity cost escalation starting in fiscal 2008, we became more directly involved in the sourcing of the ingredients for our products. This allowed us to consolidate ingredient sourcing across contract manufacturers in order to negotiate more favorable pricing on ingredients and, in some cases, to lock in ingredient pricing for typically six to nine months through forward price contracts. We have increased the percentage of our cost of sales represented by these contracted ingredients from an estimated 5% in fiscal 2008 to an estimated 25% in fiscal 2012. These efforts mitigated the impact of volatile and increasing commodity costs on our business. We plan to continue to expand our portfolio of contracted ingredients and utilize forward price contracts to allow us sufficient time to respond to changes in our ingredient costs over time.

Over the past three years, we have invested significant time and energy to improve gross margins and achieve permanent cost reductions and productivity improvements in our supply chain. These efficiency projects have focused on selecting more cost-effective contract manufacturers, negotiating lower tolling fees, consolidating in-bound freight, leveraging warehouse expense and reducing ingredient and packaging costs through increased volume buys, contract consolidation and price negotiation. To further drive these initiatives, we plan to selectively invest capital for the purchase of equipment to be used by certain of our contract manufacturers to drive down costs, improve throughput and improve product quality. We expect to invest approximately $2.0 to $2.5 million annually over the next few years to support these initiatives, which will drive capital expenditures significantly above historical levels.

Our gross margins have also benefited from the impact of price increases taken over the past three years. We typically effect new pricing to our customers annually or semi-annually. We consider many factors when evaluating pricing action, including cost of sales increases, competitive pricing strategy and the price-value equation to our consumers. We have demonstrated our ability to execute price increases to cover increasing ingredient costs, driven by our strong brand loyalty and our perceived value relative to competitive products.

 

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Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of net sales has decreased slightly over the past three years driven by lower freight and warehousing costs, offset by increasing general and administrative expenses. Selling and marketing expenses have remained relatively flat as a percentage of net sales but are expected to increase in the future as we invest to support new product releases and drive greater brand awareness, attract new customers and increase household penetration.

Over the past three years, we have significantly reduced our freight and warehousing costs as a percentage of net sales, which are reflected in our selling, general and administrative expenses. This has been primarily due to an increase in the proportion of orders that are picked up by customers from our warehouse at their expense. The freight charges for such pickups reduce net sales with a corresponding reduction in our freight expense recorded in selling, general and administrative expenses. We have also reduced our warehouse costs due to labor savings driven by productivity improvements in our third-party warehouse.

We continue to increase headcount, particularly in the sales, marketing and finance departments, to support growth. We continue to invest in product development to support innovation and fuel sales growth and in information technology, including our new enterprise resource planning system that we expect to complete the initial implementation of in April 2012, to support our growth. We expect our selling, general and administrative expenses to continue to increase in absolute dollars as we incur increased costs related to the growth of our business and our operation as a public company, which could impact our future operating profitability. After this offering, we expect to incur incremental annual costs related to operating as a public company in the range of $1.5 to $2.0 million.

Discontinued Operations

Our consolidated financial statements of operations account for Fantastic as discontinued operations for fiscal 2009. Unless otherwise indicated, the management discussion and analysis of financial condition and results of operations relate solely to the discussion of our continuing operations.

Results of Operations

The following table sets forth selected items in our statements of operations in dollars and as a percentage of net sales for the periods presented:

 

    Year ended March 31,     Nine months ended December 31,  
    2009     2010     2011     2010     2011  
    (dollars in thousands)  

Net sales

  $ 93,643        100.0 %   $ 96,015        100.0 %   $ 117,616        100.0 %   $ 81,021        100.0 %   $ 98,320        100.0 %

Cost of sales

    64,855        69.3        63,083        65.7        71,804        61.0        50,269        62.0        60,034        61.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    28,788        30.7        32,932        34.3        45,812        39.0        30,752        38.0        38,286        38.9   

Selling, general and administrative expenses

    25,693        27.4        25,323        26.4        30,674        26.1        20,957        25.9        25,206        25.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    3,095        3.3        7,609        7.9        15,138        12.9        9,795        12.1        13,080        13.3   

Interest expense

    (1,279     (1.4     (1,207     (1.3     (885     (0.8     (881     (1.1     (66     (0.1

Other income (expense), net

    (289     (0.3 )     21        0.0        155        0.1        128        0.2        (428     (0.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for (benefit from) income taxes

    1,527        1.6        6,423        6.7        14,408        12.2        9,042        11.2        12,586        12.8   

Provision for (benefit from) income taxes

    56        0.0        400        0.4        (5,747 )     (4.9 )     (5,964 )     (7.4 )     4,926        5.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

    1,471        1.6       6,023       6.3       20,155       17.1       15,006       18.5       7,660        7.8   

Loss from discontinued operations

    (579 )     (0.6     —          —          —          —          —          —          —          —     

Loss on sale of discontinued operations

    (1,865     (2.0     —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (973 )     (1.0 )%   $ 6,023        6.3 %   $ 20,155        17.1 %   $ 15,006        18.5 %   $ 7,660        7.8 %
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth net sales by product category in dollars and as a percentage of net sales:

 

    Year ended March 31,     Nine months ended December 31,  
    2009     2010     2011     2010     2011  
    (dollars in thousands)  

Product Categories:

                   

Meals

  $ 42,327        45 %   $ 43,838        46   $ 49,168        42   $ 33,868        41   $ 41,411        42

Snacks

    21,757        23        27,252        28        44,687        38        30,827        38        40,461        41   

Dressings, condiments and other

    29,559        32        24,925        26        23,761        20        16,326        21        16,448        17   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 93,643        100 %   $ 96,015        100 %   $ 117,616        100 %   $ 81,021        100 %   $ 98,320        100 %
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended December 31, 2011 Compared to Nine Months Ended December 31, 2010

Net Sales

Net sales increased $17.3 million, or 21.4%, to $98.3 million for the nine months ended December 31, 2011, from $81.0 million for the nine months ended December 31, 2010. This increase reflects a $9.6 million, $7.5 million and $0.1 million increase in net sales of snacks, meals and dressings, condiments and other, respectively. The increase in snacks was attributed primarily to growth in fruit snacks, granola bars and snack mixes, which generated an estimated increase in net sales of $4.2 million, $2.2 million and $1.8 million, respectively. The increase in meals was driven by strong growth in the macaroni and cheese product line. Distribution gains also contributed to net sales growth, primarily in the mainstream grocery and mass merchandiser channels. Net sales increased an estimated $9.1 million, $6.0 million and $2.2 million for the nine months ended December 31, 2011 in the mass merchandiser, mainstream grocery and natural channels, respectively. The net sales increase was primarily driven by volume combined with slightly higher average selling prices to offset rising commodity costs.

Gross Profit

Gross profit increased $7.5 million, or 24.5%, to $38.3 million for the nine months ended December 31, 2011, from $30.8 million for the nine months ended December 31, 2010. Gross profit as a percentage of net sales, or gross margin, increased 0.9 percentage points to 38.9% for the nine months ended December 31, 2011, from 38.0% for the nine months ended December 31, 2010. The increase in net sales was the primary driver of the increase in gross profit. Cost reduction initiatives also contributed to the higher gross profit, although to a lesser extent than higher net sales. Higher commodity and other cost of sales were offset by price increases. The small increase in gross margin was achieved as a result of cost reduction initiatives, primarily the negotiation of lower tolling fees from a key contract manufacturer.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $4.2 million, or 20.3%, to $25.2 million for the nine months ended December 31, 2011, from $21.0 million for the nine months ended December 31, 2010. This increase was due primarily to a $1.6 million increase in wages and salary expense, due to increasing headcount to support our growth, a $0.8 million increase in advertising and marketing expenses, a $0.4 million increase in sales commission expenses resulting from increased net sales and a $0.4 million increase in other expenses. As a percentage of net sales, selling, general and administrative expenses decreased 0.3 percentage points to 25.6% for the nine months ended December 31, 2011, from 25.9% for the nine months ended December 31, 2010.

Income from Operations

As a result of the factors above, income from operations increased $3.3 million, or 33.5%, to $13.1 million for the nine months ended December 31, 2011, from $9.8 million for the nine months ended December 31, 2010. Income from operations as a percentage of net sales increased 1.2 percentage points to 13.3% for the nine months ended December 31, 2011, from 12.1% for the nine months ended December 31, 2010.

 

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Interest Expense

Interest expense for the nine months ended December 31, 2011 decreased to $66,000, from $0.9 million for the nine months ended December 31, 2010. Interest expense in fiscal 2010 consisted of expense related to the term loan that was paid off in August 2010 and expense related to borrowings on our revolving line of credit. Interest expense for the nine months ended December 31, 2011 had a minimal impact on our results because our borrowings under our line of credit occurred towards the end of the third quarter of fiscal 2012.

Other Income (Expense), Net

Other income (expense), net for the nine months ended December 31, 2011 decreased $0.5 million to $0.4 million in expense, from $0.1 million in income for the nine months ended December 31, 2010. Other income (expense), net reflects a loss related to the remeasurement of our convertible preferred stock warrant liability offset by royalty income from the fiscal 2009 sale of Fantastic.

Provision for Income Taxes

Our provision for income taxes was $4.9 million for the nine months ended December 31, 2011 compared to a benefit of $6.0 million for the nine months ended December 31, 2010. The benefit for the nine months ended December 31, 2010 was the result of a reversal of our valuation allowance on net deferred tax assets of $11.3 million net of a provision for income taxes related to earnings for the period.

As of March 31, 2009 and 2010, we recorded a valuation allowance for the full amount of the net deferred tax assets as we had assessed our cumulative loss position and determined that the future benefits were not more likely than not to be realized as of these dates. Due to our profitability during fiscal 2011 and projected operating results, we determined during fiscal 2011 that it was more likely than not that the deferred tax assets would be realized, and we therefore released substantially all of the valuation allowance. This resulted in our recording a tax benefit during the nine months ended December 31, 2010.

Our effective tax rate for the nine months ended December 31, 2011 was 39.1% and differs from the federal statutory rate primarily due to state income taxes. The effective tax rate for the nine months ended December 31, 2011 is not comparable to the rate for the nine months ended December 31, 2010 primarily due to the valuation allowance reversal recorded in the nine months ended December 31, 2010.

Net Income

As a result of the factors above, net income decreased $7.3 million, or 49.0%, to $7.7 million for the nine months ended December 31, 2011 from $15.0 million for the nine months ended December 31, 2010.

Fiscal Year Ended March 31, 2011 Compared to Fiscal Year Ended March 31, 2010

Net Sales

Net sales increased $21.6 million, or 22.5%, to $117.6 million in fiscal 2011 compared to $96.0 million in fiscal 2010. This increase reflects a $17.4 million increase in snacks and a $5.3 million increase in meals, offset by a $1.1 million decrease in dressings, condiments and other. Growth in the snack category was driven by strong growth across all of our snack lines including fruit snacks, snack mix, crackers, grahams and variety snack packs, which generated an estimated increase in net sales of $6.9 million, $2.9 million, $2.7 million, $2.3 million and $1.5 million, respectively. In addition, the introduction of our granola bars and pretzel lines generated an estimated increase in net sales of $1.1 million. Growth in meals was primarily driven by strong performance in our macaroni and cheese product line. We experienced net sales growth in all distribution channels, with estimated growth in the mass merchandiser and mainstream grocery channels of $13.4 million and $6.1 million, respectively. The net sales increase was predominantly driven by volume, with a small amount of the increase due to product mix which drove higher average unit prices.

 

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Gross Profit

Gross profit increased $12.9 million, or 39.1%, to $45.8 million in fiscal 2011 from $32.9 million in fiscal 2010. Gross margin increased 4.7 percentage points to 39.0% in fiscal 2011 from 34.3% in fiscal 2010. The increase in net sales was the primary driver of the increase in gross profit. Lower commodity costs, cost reduction initiatives and product mix also contributed to the higher gross profit but to a lesser extent than the higher net sales. Average selling prices were only marginally higher in fiscal 2011 than in fiscal 2010. The increase in gross margin was driven by the combination of lower commodity costs, cost reduction initiatives and product mix. Cost reduction initiatives included reductions in ingredient, tolling, freight and packaging costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $5.4 million, or 21.1%, to $30.7 million in fiscal 2011 from $25.3 million in fiscal 2010. This increase was due primarily to a $2.3 million increase in payroll expense, due to increasing headcount during the year to support our growth. This increase was also a result of a $1.2 million increase in marketing and advertising expenses, a $0.8 million increase in research and development expense to support product innovation, a $0.7 million increase in sales commission and freight and warehousing expenses resulting from increased net sales and a $0.4 million increase in other expenses. As a percentage of net sales, selling, general and administrative expenses decreased 0.3 percentage points to 26.1% in fiscal 2011, from 26.4% in fiscal 2010.

Income from Operations

As a result of the factors above, income from operations increased $7.5 million, or 98.9%, to $15.1 million in fiscal 2011 from $7.6 million in fiscal 2010. Income from operations as a percentage of net sales increased 5.0 percentage points to 12.9% in fiscal 2011, from 7.9% in fiscal 2010.

Interest Expense

Interest expense decreased $0.3 million to $0.9 million in fiscal 2011 from $1.2 million in fiscal 2010. The decrease in interest expense was primarily due to lower interest expense in fiscal 2011 related to the term loan, combined with decreased borrowings under our credit facility in fiscal 2011.

Other Income (Expense), Net

Other income (expense), net increased to $0.2 million in income in fiscal 2011 from $21,000 in income in fiscal 2010 due to higher royalty income from Fantastic.

Provision for Income Taxes

Our provision for income taxes was a tax benefit of $5.7 million in fiscal 2011 compared to an expense of $0.4 million in fiscal 2010 due to the reversal of the valuation allowance on net deferred tax assets net of a provision for income taxes on period earnings described above. Our effective tax rate for fiscal 2011 and fiscal 2010 was (39.9%) and 6.2%, respectively.

Net Income

As a result of the factors above, net income increased $14.1 million, or 234.6%, to $20.2 million in fiscal 2011 compared to $6.0 million in fiscal 2010.

Fiscal Year Ended March 31, 2010 Compared to Fiscal Year Ended March 31, 2009

Net Sales

Net sales increased $2.4 million, or 2.5%, to $96.0 million in fiscal 2010 from $93.6 million in fiscal 2009. The primary drivers of the slower growth rate in fiscal 2010 were a $3.2 million reduction in net sales to a mass

 

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merchandiser due to our decision to eliminate certain lower-margin programs and the decision of our principal distributor for the natural retailer channel to significantly reduce warehouse inventories on hand. We experienced growth in both snacks and meals, which increased $5.5 million and $1.5 million, respectively. Snack growth was driven by strong growth in the fruit snacks and snack mix lines, which generated an estimated increase in net sales of $4.3 million and $1.0 million, respectively. Net sales in our dressings, condiments and other category decreased by $4.6 million from fiscal 2009 to fiscal 2010 primarily driven by products that were discontinued. We experienced an estimated $4.4 million net sales growth in the mainstream grocery channel, while the natural retailer channel held relatively flat and sales to mass merchandisers decreased. The net sales increase was driven by higher average selling prices and product mix, partially offset by lower volume.

Gross Profit

Gross profit increased $4.1 million, or 14.4%, to $32.9 million in fiscal 2010 from $28.8 million in fiscal 2009. Gross margin increased 3.6 percentage points to 34.3% in fiscal 2010 from 30.7% in fiscal 2009. The primary driver of the increase in gross profit was higher average selling prices. Product mix and cost reduction initiatives also contributed to the increase in gross profit, but to a lesser extent than the higher pricing. While some of our major commodity costs decreased in fiscal 2010, our overall product costs increased slightly, driven primarily by significant cost increases in our dressings and condiments business. The increase in gross margin was a result of the reduction in lower-margin programs for mass merchandisers in fiscal 2010, a reduction in commodity prices in fiscal 2010 and cost reduction initiatives. Higher average selling prices resulted from the annualization of a price increase in fiscal 2009 and a mid-fiscal 2010 price increase to offset higher product costs. Cost reduction initiatives achieved in fiscal 2010 included several changes to reduce contract manufacturing fees and the consolidation and management of in-bound freight.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $0.4 million, or 1.4%, to $25.3 million in fiscal 2010 from $25.7 million in fiscal 2009. This decrease was due primarily to a $1.3 million decrease in freight and warehouse expense, driven by a shift towards customer pickups, combined with a $0.3 million decrease in other expenses, offset by a $0.7 million increase in professional services and a $0.5 million increase in research and development expenses. As a percentage of net sales, selling, general and administrative expenses decreased 1.0 percentage points to 26.4% in fiscal 2010 from 27.4% in fiscal 2009.

Income from Operations

As a result of the factors above, income from operations increased $4.5 million, or 145.9%, to $7.6 million in fiscal 2010 compared to $3.1 million in fiscal 2009. Income from operations as a percentage of net sales increased 4.6 percentage points to 7.9% in fiscal 2010 from 3.3% in fiscal 2009.

Interest Expense

Interest expense in fiscal 2010 was $1.2 million compared to $1.3 million in fiscal 2009, driven by decreased borrowings under our credit facility in fiscal 2010 offset by higher interest expense on our term loan.

Other Income (Expense), Net

Other income (expense), net, increased from other expense of $0.3 million to other income of $21,000 in fiscal 2010 due to higher royalty income from Fantastic.

Provision for Income Taxes

Our provision for income taxes was $0.4 million in fiscal 2010 compared to $0.1 million in fiscal 2009. Our effective tax rate for fiscal 2010 and fiscal 2009 was 6.2% and 3.6% respectively.

 

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Loss from Discontinued Operations and Sale of Discontinued Operations

Loss from discontinued operations and loss from the sale of discontinued operations in fiscal 2009 was $0.6 million and $1.9 million, respectively, as a result of the sale of Fantastic in fiscal 2009. There were no comparable losses in fiscal 2010.

Net Income

As a result of the factors above, net income increased $7.0 million to $6.0 million in fiscal 2010 from a loss of $1.0 million in fiscal 2009.

Seasonality

Historically, we have experienced greater net sales in the second and fourth fiscal quarters than in the first and third fiscal quarters due to our customers’ merchandising and promotional activities around the back-to-school and spring seasons. Concurrently, inventory levels and working capital requirements increase during the first and third fiscal quarters of each fiscal year to support higher levels of net sales in the subsequent quarters. We anticipate that this seasonal impact on our net sales and working capital is likely to continue. In fiscal 2011, 27.5% and 31.1% of our net sales, 27.1% and 32.9% of our gross profit and 31.8% and 35.3% of our operating income were generated in the second and fourth fiscal quarters, respectively. Accordingly, our results of operations for any particular quarter are not indicative of the results we expect for the full year.

 

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Quarterly Results

The following unaudited quarterly consolidated statement of operations data for the nine quarters ended December 31, 2011 has been prepared on a basis consistent with our audited annual consolidated financial statements and includes, in the opinion of management, all normal recurring adjustments necessary for a fair statement of the financial information contained herein. The following quarterly data should be read together with our consolidated financial statements included elsewhere in this prospectus.

 

    Quarter Ended  
    FY2010     FY2011     FY2012  
    Dec. 31,
2009
    Mar. 31,
2010
    June 30,
2010
    Sept. 30,
2010
    Dec. 31,
2010
    Mar. 31,
2011
    June 30,
2011
    Sept. 30,
2011
    Dec. 31,
2011
 
    (in thousands, except for share and per share amounts)        

Net sales

  $ 21,986      $ 29,347      $ 24,053      $ 32,315      $ 24,653      $ 36,594      $ 28,610      $ 38,872      $ 30,838   

Cost of sales

    14,384        18,310        15,059        19,914        15,296        21,535        17,022        24,737        18,275   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    7,602        11,037        8,994        12,401        9,357        15,059        11,588        14,135        12,563   

Selling, general and administrative expenses

    6,596        6,418        6,160        7,583        7,214        9,717        8,303        8,056        8,847   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    1,006        4,619        2,834        4,818        2,143        5,342        3,285        6,079        3,716   

Interest expense

    (302     (335 )     (326     (547     (8 )     (4 )     (18     (23     (25

Other income (expense), net

    15        16       41        57        30        27        (484     13        43   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for (benefit from) income taxes

    719        4,300        2,549        4,328        2,165        5,365        2,783        6,069        3,734   

Provision for (benefit from) income taxes

    45        268        103        (6,183 )     116        216        971        2,453        1,502   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 674      $ 4,032      $ 2,446      $ 10,511      $ 2,049      $ 5,149      $ 1,812      $ 3,616      $ 2,232   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stockholders

  $ 20      $ 119      $ 72      $ 310      $ 61      $ 153      $ 54      $ 107      $ 69   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to common stockholders—Basic

  $ 0.04      $ 0.26      $ 0.16      $ 0.67      $ 0.14      $ 0.33      $ 0.12      $ 0.23      $ 0.15   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to common stockholders—Diluted

  $ 0.02      $ 0.11      $ 0.07      $ 0.27      $ 0.05      $ 0.12      $ 0.04      $ 0.11      $ 0.07   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing net income per share attributable to common stockholders—Basic

    461,277        461,277        461,508        461,896        461,896        462,240        464,994        465,045        471,554   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding used in computing net income per share attributable to common stockholders—Diluted

    904,397        1,038,385        1,067,906        1,149,322        1,231,411        1,279,815        1,236,410        1,018,359        1,037,657   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

Our primary cash needs are working capital and capital expenditures. Historically, we have generally financed these needs with operating cash flows and borrowings under our credit facility.

Our cash balance decreased by $4.9 million during the nine months ended December 31, 2011. Our working capital was $16.9 million at December 31, 2011, an increase of $3.9 million from $13.0 million at the end of fiscal 2011. The increase was due principally to a $8.5 million decrease in accounts payable and a $3.8 million increase in inventory, offset by a $3.3 million decrease in accounts receivable, net, and a $0.7 million increase in accrued liabilities.

We typically take advantage of accelerated payment discounts offered to us by our vendors, usually 1% for net-10 payment. However, in the past we have significantly extended payables terms in February and March in

 

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order to pay down our credit facility and maximize cash balances at fiscal year end, thereby driving up our accounts payable balance at fiscal year end. We would then reduce our accounts payable in the first fiscal quarter of each year to reverse the increase in the prior quarter. This practice increased the use of cash from operating activities for the nine months ended December 31, 2011 and December 31, 2010. Given our operating cash flows and the desire to take advantage of discounts available to us, we plan to discontinue this practice.

The following table sets forth, for the periods indicated, our beginning balance of cash, net cash flows provided by (used in) operating, investing and financing activities and our ending balance of cash:

 

     Year ended March 31,     Nine months ended
December 31,
 
     2009     2010     2011     2010     2011  
     (in thousands)  

Cash at beginning of period

   $ 3,131      $ 3,693      $ 8,550      $ 8,550      $ 7,333   

Net cash provided by (used in) operating activities

     4,204        9,127        18,238        4,314        (771 )

Net cash provided by (used in) investing activities

     1,371        (502 )     (886 )     (409 )     (1,504 )

Net cash used in financing activities

     (5,013 )     (3,768 )     (18,569 )     (9,091 )     (2,644 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash at end of period

   $ 3,693      $ 8,550      $ 7,333      $ 3,364      $ 2,414   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Cash Provided by (Used in) Operating Activities. Cash from operating activities consists primarily of net income adjusted for certain non-cash items (depreciation and amortization, benefit from deferred income taxes, amortization of debt discount, stock-based compensation expense, allowances for trade discounts and other, inventory reserves, loss on disposal of property and equipment, loss on sale of discontinued operations and change in fair value of convertible stock warrant liability and amortization of deferred financing costs) and the effect of changes in working capital and other activities.

For the nine months ended December 31, 2011, net cash used in operating activities was $0.8 million and consisted of net income of $7.7 million plus $0.7 million for non-cash items, less $9.2 million for working capital and other activities. Working capital and other activities consisted primarily of a decrease in accounts payable of $9.2 million, an increase in inventory of $3.8 million and a $0.5 million increase in prepaid expenses and other current and non-current assets, partially offset by a decrease in accounts receivable of $3.7 million and an increase of $0.6 million in accrued expenses and other non-current liabilities. The decrease in accounts payable was a result of paying down outstanding vendor balances that remained unpaid at fiscal year end. The higher accounts receivable was driven by year-over-year net sales growth.

For the nine months ended December 31, 2010, net cash provided by operating activities was $4.3 million and consisted of net income of $15.0 million less $5.3 million for non-cash items, which reflected a $6.3 million increase in deferred tax assets driven by the reversal of our valuation allowance, less $5.4 million for working capital and other activities. Working capital and other activities consisted primarily of a decrease in accounts payable of $6.7 million driven by high fiscal year end vendor balances and an increase in inventory of $5.2 million, partially offset by a decrease in accounts receivable of $5.1 million and an increase of $2.2 million in accrued expenses and other non-current liabilities.

In fiscal 2011, net cash provided by operating activities was $18.2 million and consisted of net income of $20.2 million, less $3.3 million for non-cash items, which included a $7.1 million increase in deferred tax assets and a $2.5 million increase in trade discount allowances, plus $1.3 million for working capital and other activities. Working capital and other activities consisted primarily of increases in accounts payable of $3.7 million and in accrued liabilities of $2.6 million, partially offset by increases in accounts receivable of $3.0 million and in inventory of $1.6 million. Higher accounts receivable was driven by year-over-year sales growth. The increase in inventory was due to higher ingredient costs and finished goods inventory in new snack categories.

 

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In fiscal 2010, net cash provided by operating activities was $9.1 million and consisted of net income of $6.0 million, plus $1.9 million for non-cash items, plus $1.2 million for working capital and other activities. Non-cash items consisted primarily of share-based compensation, depreciation and amortization. Working capital and other activities consisted primarily of an increase in accounts payable of $2.6 million and a decrease in inventory of $0.7 million, partially offset by an increase in accounts receivable of $1.2 million and a decrease in accrued liabilities of $0.8 million.

In fiscal 2009, net cash provided by operating activities was $4.2 million and consisted of net loss of $1.0 million, plus $5.3 million for non-cash items, less $0.1 million for working capital and other activities. Non-cash items consisted primarily of loss on sale of discontinued operations, an increase in allowances for trade discounts and share-based compensation. Working capital and other activities consisted primarily of a decrease in accounts payable of $1.7 million and an increase in accounts receivable of $1.5 million, partially offset by increases in inventory of $1.6 million and accrued liabilities of $1.5 million.

Net Cash Provided by (Used in) Investing Activities. Net cash used in investing activities relates primarily to capital expenditures. Net cash used in investing activities was $1.5 million and $0.4 million for the nine months ended December 31, 2011 and 2010, respectively, and reflected the purchase of property and equipment. Net cash used in investing activities in fiscal 2011 was $0.9 million and reflected the purchase of property and equipment. Net cash used in investing activities in fiscal 2010 was $0.5 million and consisted of $0.4 million in purchases of property and equipment and a $0.2 million purchase of an intangible asset, offset by $0.1 million in restricted cash. Net cash provided by investing activities was $1.4 million in fiscal 2009 and consisted of proceeds from sale of discontinued operations of $1.7 million, partially offset by $0.3 million in capital expenditures.

Net Cash Used in Financing Activities. Net cash used in financing activities was $2.6 million for the nine months ended December 31, 2011, which consisted of $13.6 million in cash dividend payments made to stockholders, $1.8 million in payments of initial public offering costs and a $0.6 million stock option repurchase partially offset by proceeds of $13.3 million from borrowings under our credit facility. Net cash used in financing activities was $9.1 million for the nine months ended December 31, 2010, which consisted primarily of the $6.0 million repayment of a term loan in connection with the August 2010 credit facility refinancing and $3.0 million in cash dividend payments to stockholders. Net cash used in financing activities was $18.6 million, $3.8 million, and $5.0 million in fiscal 2011, 2010 and 2009, respectively. Net cash used in financing activities during fiscal 2011 consisted primarily of $12.5 million in dividend payments and the $6.0 million term loan repayment. Net cash used in financing activities during fiscal 2010 consisted primarily of $3.5 million in dividend payments. Net cash used in financing activities during fiscal 2009 consisted of $6.9 million in credit facility repayments offset by $2.0 million in additional borrowings under our term loan.

We believe that our cash, cash flow from operating activities and available borrowings under our credit facility will be sufficient to meet our capital requirements for at least the next twelve months.

Indebtedness

On August 25, 2010, we entered into an amended and restated bank line of credit agreement, or the credit facility, with Bank of America, N.A., as lender. The credit facility provided for revolving loans of up to $10.0 million and was scheduled to expire on August 20, 2012. In December 2011, we entered into a second amended and restated credit facility with Bank of America that, among other things, provides for an increase in our line of credit to $20.0 million and an extension of the term through August 2014. The credit facility is collateralized by substantially all of our assets. At December 31, 2011, we had $13.3 million of borrowings outstanding and had $6.7 million of availability under the credit facility. We were in compliance with all covenants under the credit facility as of March 31, 2010 and 2011 and December 31, 2011. We may select from three interest rate options for borrowings under the credit facility: (i) LIBOR (as defined in the credit facility) plus 1.5%, (ii) IBOR (as defined in the credit facility) plus 1.5% or (iii) Prime Rate (as defined in the credit facility). We are required to pay a commitment fee on the unused credit facility commitments if the outstanding balance is less than half the

 

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commitment at a quarterly rate of 0.063%. The credit facility includes restrictions on, among other things, our ability to incur additional indebtedness, pay dividends or make other distributions and make investments and loans. The credit facility requires that we maintain Profitability (as defined in the credit facility) on a trailing 12-month basis, that we do not generate two consecutive quarters of Net Losses (as defined in the credit facility), that we maintain a Basic Fixed Charge Coverage Ratio (as defined in the credit facility) of not less than 3.0 to 1.0 and a Total Liabilities to Net Worth Ratio (as defined in the credit facility) of at least 1.75 to 1.0, as measured on a trailing 12-month basis.

In March 2008, we entered into a loan and security agreement for a term loan with Hercules Technology II, L.P. As of March 31, 2010, we had $6.0 million in total borrowings under the term loan. The term loan was repaid in August 2010. In connection with the term loan, we granted to the lender a warrant to purchase 65,000 shares of our Series A 2005 convertible preferred stock at an exercise price of $10.00 per share. The warrant expires on the earlier of 10 years from the date of issuance and five years after this offering and, upon the consummation of this offering, will be exercisable for 65,000 shares of our common stock.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of March 31, 2011:

 

     Payments Due by Period  
     Total      Less Than
One Year
     1-3 Years      3-5 Years      More Than
Five Years
 
     (in thousands)  

Rent obligations(1)

   $ 2,432       $ 336       $ 1,620       $ 476       $  —     

Equipment lease obligations(2)

     74         25         49         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating lease obligations

     2,506         361         1,669         476         —     

Purchase commitments(3)

     14,930         14,930         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(4)(5)(6)

   $  17,436       $  15,291       $    1,669       $       476       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) We lease approximately 33,500 square feet of space that houses our corporate headquarters and a sample warehouse at 1610 Fifth Street, Berkeley, California pursuant to a lease agreement that expires in February 2016. Our lease has escalating rent provisions over the initial term and set rental rates for two option terms through February 2021 based on a percentage of the then fair market rental rate.
(2) We lease equipment under non-cancelable operating leases. These leases expire at various dates through 2016, excluding extensions at our option, and contain provisions for rental adjustments.
(3) We have non-cancelable purchase commitments, directly or through contract manufacturers, to purchase ingredients to be used in the future to manufacture products.
(4) The above table does not include management fees payable to Solera pursuant to an agreement that will terminate upon the consummation of this offering for a payment of $1.3 million.
(5) In September 2011, we entered into an agreement with our contract warehousing company that includes minimum overhead fees of $200,000 annually beginning April 1, 2012 through June 2015. As this obligation was not entered into prior to March 31, 2011, it is not reflected in the table above.
(6) In November 2011, we entered into an agreement with one of our contract manufacturers for the purchase of product formulas for a purchase price of $2.0 million. The agreement requires annual payments of at least $150,000 in each of the first six years of the agreement with the balance of the $2.0 million payment due at the end of the seven-year term in November 2018. As this obligation was not entered into prior to March 31, 2011, it is not reflected in the table above.

Segment

We have determined that we operate as one segment: the marketing and distribution of natural and organic food products. Our chief executive officer is considered to be our chief operating decision maker. He reviews our operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance.

 

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Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangements or any holdings in variable interest entities.

Quantitative and Qualitative Disclosure about Market Risk

Ingredient Risk

We purchase ingredients through our contract manufacturers, including wheat and flour, dairy products, sugar, tapioca, canola and sunflower oil, extra-virgin olive oil, natural flavors and colors, spices and packaging materials used in the contract manufacturing of our products. These ingredients are subject to price fluctuations that may create price risk. A hypothetical 10% increase or decrease in the weighted-average cost of our primary ingredients as of December 31, 2011 would have resulted in an increase or decrease to cost of sales of approximately $2.2 million. We seek to mitigate the impact of ingredient cost increases through forward-pricing contracts and taking physical delivery of future ingredient needs. We strive to offset the impact of ingredient cost increases with a combination of cost savings initiatives and efficiencies and price increases to our customers.

Interest Rate Risk

We maintain a credit facility that provides for revolving loans of up to $20.0 million. At December 31, 2011, we had $13.3 million of borrowings and had $6.7 million of additional availability under the credit facility. We currently do not engage in any interest rate hedging activity and currently have no intention to do so in the foreseeable future. Based on the average interest rate on the credit facility during fiscal 2011, and to the extent that borrowings were outstanding, we do not believe that a 10% change in the interest rate would have a material effect on our results of operations or financial condition.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. We have not been exposed nor do we anticipate being exposed to material risks due to a change in interest rates.

Foreign Exchange Risk

Our sales and costs are denominated in U.S. dollars and are not subject to foreign exchange risk. However, to the extent our sourcing strategy changes or we commence generating net sales outside of the U.S. and Canada that are denominated in currencies other than the U.S. dollar, our results of operations could be impacted by changes in exchange rates.

Inflation

Inflationary factors, such as increases in the cost of sales and selling, general and administrative expenses, may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net sales if the selling prices of our products do not increase with these increased costs.

Critical Accounting Policies

Our consolidated financial statements included elsewhere in this prospectus have been prepared in accordance with GAAP. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, sales, costs and expenses. We base our estimates on historical expenses and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are likely to occur from period to period. Actual results could be significantly different from these estimates. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgment and estimates.

 

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Sales Recognition

Sales of our products are recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, ownership and risk of loss have been transferred to the customer, the product has been delivered to the customer and there is a reasonable assurance of collection of the sales proceeds. Generally, we extend credit to our retailers and distributors and do not require collateral. Our payment terms are typically net-30 with a discount for net-10 payment. We recognize sales net of estimated product returns, spoils, slotting and sales and promotion incentives. We have entered into contracts with various retailers granting a conditional right of return allowance with respect to spoils and damaged products. Evaluating these estimated returns and collectability assumptions requires management judgment, and if our assumptions are not correct, our sales, cost of sales and net income would be impacted.

Sales and Promotion Incentives

We offer a variety of sales and promotion incentives to our customers and to consumers, such as price discounts, consumer coupons, volume rebates, cooperative marketing programs, slotting fees and in-store displays. The costs of these activities are recognized at the time the related sales are recorded and are classified as a reduction of sales. The recognition of the costs of these programs involves judgments related to performance and redemption rates, which are made based on historical experience. Actual expenses may differ if redemption rates and performance vary from our estimates. Differences between estimated sales and promotion incentive costs and actual costs have generally been insignificant and are recognized as a change in sales and promotion incentive accrual in a subsequent period.

Shipping and Handling Costs

Shipping and handling costs are included in selling, general and administrative expenses and were $5.6 million, $4.3 million, $4.7 million, $3.3 million and $3.5 million during fiscal 2009, 2010 and 2011 and the nine months ended December 31, 2010 and 2011, respectively. These costs reflect the costs associated with moving finished products to customers, including costs associated with distribution center, route delivery costs and the cost of shipping products to customers through third-party carriers. Shipping and handling charges to customers are recorded in sales.

Inventories

Our inventory is comprised of finished goods, raw materials and work-in-process, and is valued at the lower of the cost and the current estimated market value of the inventory. We regularly review our inventory quantities on hand and adjust inventory values for finished goods expected to be non-saleable due to age. We also make provisions for ingredients and packaging that are slow moving and at risk to become obsolete. Additionally, our estimates of product demand and market value require management judgment that may significantly affect the ending inventory valuation, as well as gross profit.

Impairment of Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and prior to any goodwill impairment test. Management must exercise judgment in assessing whether or not circumstances require a formal evaluation of the recoverability of our long-lived assets. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. These estimates involve inherent uncertainties, and the measurement of the recoverability of the cost of a potentially impaired asset is dependent on the accuracy of the assumptions used in making the estimates and how these estimates compare to our future operating performance. There have been no impairments of long-lived assets in fiscal 2009, 2010 or 2011 or the nine months ended December 31, 2010 or 2011.

 

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Goodwill

For accounting purposes, we have one reporting unit, which is the whole company. Goodwill is tested for impairment annually in the fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, significant adverse change in customer demand or business climate that could affect the value of an asset or significant decrease in expected cash flows at the reporting unit. When impaired, the carrying value of goodwill is written down to fair value. The goodwill impairment test involves a two-step process and is tested at our reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. We estimate the fair value of our reporting unit using a discounted cash flow approach. This evaluation requires use of internal business plans that are based on our judgments and estimates regarding future economic conditions, product demand and pricing, costs, inflation rates and discount rates, among other factors. These judgments and estimates involve inherent uncertainties, and the measurement of the fair value is dependent on the accuracy of the assumptions used in making the estimates and how those estimates compare to our future operating performance.

Stock-Based Compensation

We account for all stock-based compensation awards using a fair-value method. Options are recorded at their estimated fair value using the Black-Scholes option pricing model. We recognize the fair value of each award as an expense on a straight-line basis over the requisite service period, generally the vesting period of the equity grant.

The valuation model for stock compensation expense requires us to make assumptions and judgments about the variables used in the calculation including the expected term (weighted-average period of time that the options granted are expected to be outstanding), the volatility of our common stock, an assumed-risk-free interest rate and the estimated forfeitures of unvested stock options. The following table summarizes the variables used to determine the fair value of stock options:

 

     Year ended March 31,    Nine months ended
December 31,
 
     2009     2010     2011    2010    2011  

Expected term (in years)

     6.5        6.9      N/A    N/A      6.9   

Expected volatility

     55     42   N/A    N/A      42

Risk-free interest rate

     3.9     4.6   N/A    N/A      3.1

Dividend yield

     0     0   N/A    N/A      0

Fair Value of Common Stock

As discussed below, the fair value of the shares of common stock underlying the stock options has historically been determined by our board of directors. Because there has been no public market for our common stock, our board of directors has determined the fair value of our common stock at the time of grant of the option by considering a number of objective and subjective factors, including valuations of comparable companies, sales of our convertible preferred stock to unrelated third parties, our operating and financial performance and general and industry specific economic outlook.

Weighted-average Expected Term

We derived the expected term using the historical data about participant exercise, including upon termination of employment.

Volatility

Since there has been no public market for our common stock and a lack of company-specific historical volatility, we have determined the share price volatility for options granted based on an analysis of the volatility of a group of similar entities, referred to as peer companies. In evaluating similarity, we consider factors such as industry, stage of life cycle and size.

 

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Risk-free Interest Rate

The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for zero-coupon U.S. Treasury notes with remaining terms similar to the expected term of the options.

Dividend Yield

Although we have paid dividends in the past, future dividends are not expected to be available to benefit option holders. Accordingly, we used an expected dividend yield of zero in the valuation model.

We are required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock based compensation expense only for those awards that are expected to vest. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period that the estimates are revised.

The total intrinsic value of share options exercised during the fiscal years ended March 31, 2010 and 2011 was $1,000 and $37,000, respectively. The intrinsic value is calculated as the difference between our common stock valuation on the exercise date and the exercise price of the option shares. As of March 31, 2010 and 2011, our common stock valuation was at $8.88 and $16.94 per share, respectively. As of March 31, 2011, there was approximately $0.4 million of total unrecognized compensation cost related to unvested share-based compensation arrangements. The cost is to be recognized over a weighted-average period of 1.62 years. Approximately $0.3 million is expected to be expensed in fiscal year 2012.

The following table summarizes the amount of stock-based compensation expense recognized in selling, general and administrative expenses in our statements of operations for the periods indicated:

 

     Year ended March 31,      Nine months ended
December 31,
 
     2009      2010      2011          2010              2011      
     (in thousands)  

Total stock-based compensation

   $ 835       $ 902       $ 373       $ 279       $ 390   

If factors change or we employ different assumptions, stock-based compensation expense in future periods may differ significantly from what we have recorded in the past. If there is a difference between the assumptions used in determining stock-based compensation expense and the actual factors that become known over time, we may change the input factors used in determining stock-based compensation expense for future grants. These changes, if any, may materially impact our results of operations in the period such changes are made. We expect to continue to grant stock options in the future, and to the extent that we do, our actual stock-based compensation expense recognized in future periods will likely increase.

Common Stock Valuation

The valuation of our common stock was performed in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In order to value our common stock, we first determined our business enterprise value and then allocated this business enterprise value to our common stock and common stock equivalents. Our business enterprise value was estimated using a combination of two generally accepted approaches: the income approach and the market-based approach. The income approach estimates enterprise value based on the estimated present value of future net cash flows the business is expected to generate over its remaining life. The estimated present value is calculated using a discount rate reflective of the cost of capital associated with an investment in a similar company and risks associated with our cash flow projections. Our discounted cash flow projections are sensitive to highly subjective assumptions that we were required to make each valuation date. The market-based approach measures the value of a business through an analysis of recent sales or offerings of comparable investments or assets, and in

 

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our case, focuses on comparing us to the group of peer companies. In applying this method, valuation multiples are derived from historical operating data of the peer company group. We then apply multiples to our operating data to arrive at a range of indicated values of the company.

For each valuation, we prepared a financial forecast to be used in the computation of the value of invested capital for both the market approach and income approach. The financial forecasts took into account our past results and expected future financial performance. There is inherent uncertainty in these estimates as the assumptions used are highly subjective and subject to changes as a result of new operating data and economic and other conditions that impact our business.

As an additional indicator of fair value, we considered arm’s-length transactions involving sales and purchases of our capital stock occurring near the respective valuation dates. Such a transaction occurred in April 2009 when an existing stockholder sold shares of our Series A 2002 convertible preferred stock at a price of $11.00 per share.

Because there has been no public market for our common stock, the fair value of the common stock that underlies our stock options has historically been determined by our board of directors based upon information available to it at the time of grant including the following:

 

   

the rights, privileges and preferences of our convertible preferred stock;

 

   

our operating and financial performance and future financial projections at the approximate time of the option grant;

 

   

our sales of preferred stock to unrelated third parties;

 

   

the value of companies that we consider peers based on a number of factors, including, but not limited to, similarity to us with respect to industry, business model, stage of growth, profitability, company size, financial risk or other factors;

 

   

an estimated enterprise value determined by applying a multiple calculated based on our peer review to our sales and/or earnings before interest, taxes or EBIT; and

 

   

changes in the business prospects, financial results and general market conditions since the last time the board of directors approved option grants and made a determination of fair value.

There is inherent uncertainty in these estimates and if we had made different assumptions than those used, the amount of our stock-based compensation expense, net income (loss) and net income (loss) per share amounts could have been significantly different.

The following table summarizes, by grant date, the number of stock options granted since April 1, 2010 and the associated per share exercise price.

 

Grant Date

   Number of
Options
Granted(1)
     Exercise
Price
Per
Share of
Common
Stock(1)
     Estimated
Fair Value
Per Share of
Common
Stock(1)
 

April 27, 2011

     49,576       $ 16.94       $ 16.94   

June 29, 2011

     18,591         17.55         17.55 (1)

August 1, 2011

     99,152         17.55         17.55   

 

(1) The increase in the fair value of common stock from $16.94 in April 2011 to $17.55 in June 2011 reflects our slightly improved financial performance. For the last 12 months ended March 31, 2011 as compared to the last 12 months ended June 30, 2011, net sales increased 3.9% and operating income increased 3.0%.

 

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Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are recognized when, based upon available evidence, realization of the assets is more likely than not. Reserves for tax-related uncertainties are established based on estimates when we believe that it is more likely than not that those positions may not be fully sustained upon review by tax authorities. The reserves are adjusted in light of changing facts and circumstances, such as the outcome of an income tax audit.

As of March 31, 2009 and 2010, we recorded a valuation allowance for the full amount of the net deferred tax assets as we had assessed our cumulative loss position and determined that the future benefits were not more likely than not to be realized as of these dates. Due to our profitability during fiscal 2011 and projected operating results, we determined during fiscal 2011 that it was more likely than not that the deferred tax assets would be realized and we therefore released substantially all of the valuation allowance.

We have a $5.0 million deferred tax asset of state capital loss carryforward resulting from the disposition of Fantastic in fiscal 2009, for which a full valuation is established because management believes it is more likely than not that we will not generate a state capital gain needed to be able to offset the state capital loss.

As of March 31, 2011, we had $12.0 million in federal and $6.0 million in state net operating loss, or NOL, carryforwards for tax purposes. These NOL carryforwards are available to offset future federal and state taxable income through 2028. The business acquisitions in fiscal 2005 resulted in a change in stock ownership that, pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, limit the annual NOL carryforwards available to us.

Warrant

We account for the outstanding warrant to purchase shares of our convertible preferred stock as a liability at fair value, because this warrant may be redeemed under certain circumstances, such as a change of control. The warrant is subject to remeasurement to fair value at each balance sheet date, and any change in fair value is recognized in other income (expense), net, in the consolidated statements of operations. See “Out-of-period Adjustment” below. The liability will be adjusted for changes in fair value until the earliest of the exercise, expiration of the convertible preferred stock warrant or conversion to a warrant to purchase common stock.

Out-of-period Adjustment

During the nine months ended December 31, 2011, we corrected an error in the measurement of the convertible preferred stock warrant liability. The correction increased the fair value of the convertible preferred stock warrant liability by $949,000 and decreased additional paid-in capital by $431,000 with a corresponding increase in expense of $518,000, which was recorded in other income (expense), net in the accompanying statement of operations during the nine months ended December 31, 2011. The correction was an accumulation of an error that should have been recorded in prior periods and would have increased net loss for fiscal 2009 by $44,000, increased net income by $79,000 for fiscal 2010 and decreased net income by $553,000 for fiscal 2011. Management has assessed the impact of this error and does not believe that it is material, either individually or in the aggregate, to any prior period financial statements and the impact of the error in the nine months ended December 31, 2011 is not expected to be material to the anticipated financial results for fiscal 2012.

 

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Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board issued updated guidance on testing goodwill for impairment. The guidance simplifies how entities test goodwill for impairment and permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis to determine whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The guidance includes a number of events and circumstances for an entity to consider the qualitative assessment. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 (the fiscal year ending March 31, 2013 for us). Early adoption is permitted. We do not expect the adoption of the guidance to have a material impact on our consolidated financial statements.

 

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BUSINESS

Our Company

Annie’s, Inc. is a rapidly growing natural and organic food company with a widely recognized brand, offering consumers great-tasting products in large packaged food categories. We sell premium products made from high-quality ingredients at affordable prices. Our products appeal to health-conscious consumers who seek to avoid artificial flavors, synthetic colors and preservatives that are used in many conventional packaged foods. We have the #1 natural and organic market position in four product lines: macaroni and cheese, snack crackers, fruit snacks and graham crackers.

Our loyal and growing consumer following has enabled us to migrate from our natural and organic roots to a brand sold across the mainstream grocery, mass merchandiser and natural retailer channels. Today, we offer over 125 products and are present in over 25,000 retail locations in the United States and Canada. Over the past three years, we have significantly increased both the number of retail locations where our products can be found and the number of our products found in individual stores. We expect that increasing penetration of the mainstream grocery and mass merchandiser channels, combined with greater brand awareness, new product introductions, line extensions and favorable consumer trends, will continue to fuel sales growth in all channels.

Innovation, including new product development, is a key component of our growth strategy. We invest significant resources to understand our consumers and develop products that address their desire for natural and organic alternatives to conventional packaged foods. We have a demonstrated track record of extending our product offerings into large food categories, such as fruit snacks and snack mix, and introducing products in existing categories with new sizes, flavors and ingredients. In order to quickly and economically introduce our new products to market, we partner with contract manufacturers that make our products according to our formulas and specifications.

Our brand and premium products appeal to our consumers, who tend to be better-educated and more health-conscious than the average consumer. In addition, we believe that many or our consumers spend more on food and buy higher margin items than the average consumer. We believe that our products attract new consumers to the categories in which we compete, and that our products are profitable and attractive to retailers. As a result, we believe we can continue to expand in the mainstream grocery and mass merchandiser channels, while continuing to innovate and grow our sales in the natural retailer channel.

We are mission-driven and committed to operating in a socially responsible and environmentally sustainable manner, with an open and honest corporate culture. Our corporate culture embodies these values and, as a result, we enjoy a highly motivated and skilled work force that is committed to our business and our mission. Our colorful, informative and whimsical packaging featuring our iconic mascot, Bernie, the “Rabbit of Approval,” conveys these values. We believe our consumers connect with us because they love our products and relate to our values, resulting in loyal and trusting relationships.

We have experienced strong sales and profit growth over the past few years. We increased our net sales from $65.6 million in fiscal 2007 to $117.6 million in fiscal 2011, representing a 15.7% compound annual growth rate. Over the same period, our income from operations increased from a loss of $3.9 million in fiscal 2007 to income of $15.1 million in fiscal 2011.

Our Company History

Annie Withey co-founded Annie’s Homegrown, Inc. with Andrew Martin in 1989 with the goal of giving families healthy and delicious macaroni and cheese and to show by example that a successful business can also be socially responsible. Initially, the company sold natural macaroni and cheese dinners to regional supermarkets and independent natural retailers in New England. Over the next 10 years, Annie’s Homegrown grew by expanding its line of natural macaroni and cheese across a broader national footprint in the mainstream grocery and natural retailer channels.

 

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In December 1999, Homegrown Natural Foods, Inc., which was founded by our CEO, John M. Foraker, made an investment in Annie’s Homegrown and Mr. Foraker joined the board of directors. This investment enabled us to expand distribution in the mainstream grocery channel. At the time of this investment, our annual revenues were approximately $7 million. In December 1999, Mr. Martin left Annie’s Homegrown. Annie Withey continued in her role as our Inspirational President.

From 2002 to 2005, Solera made several significant equity investments in the company, acquiring control and providing capital for internal growth and acquisitions. Under Solera’s ownership, Annie’s Homegrown embarked on a strategy to expand into new food categories, introducing Cheddar Bunnies snack crackers in 2003. In 2004, Solera formed a company later named Annie’s, Inc. to acquire all of the stock of Annie’s Homegrown held by Homegrown Naturals Foods, as well as Fantastic Foods, Inc. and Napa Valley Kitchens, Inc., two of Homegrown Natural Foods’ subsidiaries. We acquired the Annie’s Naturals brand of salad dressings in 2005.

More than 20 years after the company’s founding, our original values still guide our business. Annie Withey remains involved in the business, writing the personal letters printed on the back of our boxes and responding to letters from our consumers. The company remains a mission-driven business grounded in using natural and organic ingredients to make great-tasting products that consumers love.

Our Company Mission

Our mission is to cultivate a healthier, happier world by spreading goodness through nourishing foods, honest words and conduct that is considerate and forever kind to the planet. We have focused on building a successful and growing business in pursuit of our mission. Our corporate motto is Eat Responsibly—Act Responsibly. We offer great-tasting, high-quality natural and organic foods, while striving to act in a socially responsible and environmentally sustainable manner. We are committed to growing our business and profitability, while staying true to our mission and core values.

Our Culture

Our corporate culture is anchored by the following core values:

 

   

Annie’s is real, authentic and trusted by consumers. As a company, we strive to build upon this legacy with every decision we make.

 

   

Annie’s makes products that taste great and delight our consumers.

 

   

Annie’s uses simple, natural and organic ingredients.

 

   

Annie’s sources from places and people we trust, with an emphasis on quality and environmental sustainability.

 

   

Annie’s is socially responsible, and we spread awareness and act as a positive role model for consumers and other businesses.

 

   

Annie’s and its valued employees treat consumers, customers, suppliers, stockholders and each other with the same high degree of respect, fairness and honesty that we expect of others.

These core values are integrally woven into our culture and serve as important guiding principles for our strategies and business decisions. Over many years, our commitment to these core values has helped us build a brand consumers trust. We believe this trust is our most important asset. We believe the more consumers trust us, the more willing they are to support our brand by purchasing our current products, trying our new products and recommending them to their friends and family. We believe that our culture has been, and we expect it will remain, a source of competitive advantage.

 

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Our Commitment to Community

We believe we have a responsibility to the planet and its people. We have a commitment to minimizing our environmental impact, which we refer to as reducing our bunny footprint. To that end, we engage in a number of programs and partnerships supporting our communities by encouraging sustainability and providing financial and in-kind support to organizations committed to healthy foods and environmental sustainability. We believe that our consumers and organic and natural suppliers value the efforts we make in the areas of social responsibility and environmental sustainability, including:

 

   

Grants for Gardens, a program that offers small grants to community gardens, school gardens and other educational programs that educate children about the origins and benefits of healthy food.

 

   

Cases for Causes, one of our oldest grassroots programs, which provides schools and non-profit organizations with free cases of our products.

 

   

Sustainable Agriculture Scholarships, which provide financial assistance to students committed to studying sustainable and organic agriculture.

We also provide financial support to organizations that promote organic farming and advocacy.

Industry Overview

According to a leading industry source, the U.S. is the world’s largest organic food market, with sales of natural and organic foods exceeding $40 billion in 2010. From 2000 to 2010, the U.S. natural and organic food market grew at a compound annual growth rate of approximately 12% and is projected by the same industry source to grow at a compound annual growth rate of approximately 8% from 2010 to 2013. We believe growth rates for the U.S. natural and organic food market have been, and will continue to be, higher than those for the overall U.S. food market.

We believe growth in the natural and organic food market is driven by various factors, including heightened awareness of the role that food and nutrition play in long-term health and wellness. Many consumers prefer natural and organic products due to increasing concerns over the purity and safety of food as a result of the presence of pesticide residues, growth hormones and artificial and genetically engineered ingredients in the foods we eat. The development and implementation of USDA standards for organic certification have increased consumer awareness of, and confidence in, products labeled as organic. According to a well-regarded consumer research firm, 75% of adults in the U.S. purchased natural or organic foods in 2010, with 33% of consumers using organic products at least once a month as compared to 22% ten years before.

Products that are independently certified as organic in accordance with the 2002 USDA Organic Foods Act are made with ingredients free of synthetic pesticides, fertilizers, chemicals and, in the case of dairy products, synthetic growth hormones. The USDA requires that certified organic products need to be composed of at least 95% organic ingredients, while “made with organic” products need to be composed of at least 70% organic ingredients. Although not certified, natural products are generally considered in the industry to be minimally processed and largely or completely free of artificial ingredients, preservatives and other non-naturally occurring chemicals.

We believe growth in the natural and organic food market was historically anchored by a core of informed, health-conscious consumers, who remained committed to buying high-quality products for themselves and their families, even through the recent economic downturn. While the average consumer basket in dedicated organic and natural stores carries a price premium compared to the same basket in mainstream stores, according to a leading national business journal study, that premium is shrinking. As economic conditions improve, and natural and organic products become more readily available in the mainstream grocery and mass merchandiser channels, there is an opportunity for increased demand through expansion of the consumer base.

 

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Historically, natural and organic foods were primarily available at independent organic retailers or natural and organic retail chains. Mainstream grocery stores and mass merchandisers have expanded their natural and organic product offerings because of increasing consumer demand for natural and organic products, which command a higher margin for the retailer. The percentage of natural and organic food sales has been rising, and, according to an industry source, in 2010 73% of consumers purchased organic products at grocery stores as compared to 25% at natural food stores. We believe the emergence of strong natural and organic brands, driven by a loyal and growing consumer base, will act as an additional catalyst for higher penetration in the mainstream grocery and mass merchandiser channels.

Our Competitive Strengths

We believe that the following strengths differentiate our company and create the foundation for continued sales and profit growth:

Leading natural and organic brand. We are a market leading premium natural and organic brand with proven success in large categories across multiple channels. We have the #1 natural and organic market position in four product lines: macaroni and cheese, snack crackers, fruit snacks and graham crackers. Our brand is reinforced by distinctive packaging that communicates the fun and whimsical nature of the brand with bright colors and our iconic mascot, Bernie, the “Rabbit of Approval.” Our commitment to high-quality and great-tasting products has led to proven success in the mainstream grocery, mass merchandiser and natural retailer channels, making us a successful crossover brand.

Strong consumer loyalty. Many of our consumers are loyal and enthusiastic brand advocates. Our consumers trust us to deliver great-tasting products made with natural and organic ingredients. We believe that consumer enthusiasm for our brand inspires repeat purchases, attracts new consumers and generates interest in our new products. We receive hundreds of hand-written letters and messages through social media each month from parents and children, with many telling us they love Annie’s and often asking us to expand our product offerings.

Track record of innovation. Since the introduction of our original macaroni and cheese products in 1989, we have successfully extended our brand into a number of large product lines, such as snack crackers, graham crackers, fruit snacks and granola bars, and introduced extensions of our existing product lines. Our most recent new product is frozen organic rising crust pizza, which we introduced in January 2012. We have made a sustained investment in innovation and regularly validate product concepts with our consumers and customers. We maintain an active new product pipeline, and our relationships with our ingredient suppliers and manufacturing partners enable us to efficiently introduce new products. In fiscal 2011, we estimate that 19% of our net sales were generated by products introduced since the beginning of fiscal 2009.

Strategic and valuable brand for retailers. Retailers carry our products to satisfy consumer demand for premium natural and organic products. We believe many of our consumers spend more on food and buy higher margin items on average than typical consumers. Also, we believe that our products offer better profitability for retailers compared to conventional packaged foods. As a result, the Annie’s brand is valuable to retailers in the mainstream grocery, mass merchandiser and natural retailer channels.

Core competency in organic sourcing. We have long-standing strategic relationships with key suppliers of organic ingredients. We have significant knowledge and experience sourcing these ingredients and, for some key ingredients, our supply chain relationships extend to farmers and farmer cooperatives. We consider our sourcing relationships and our knowledge of the complex organic supply chain to be a competitive advantage and barrier to entry.

Experienced management team. We have a proven and experienced senior management team. Our Chief Executive Officer, John M. Foraker, has been with us since 1999 and has significant experience in the natural and organic food industry. The members of our senior management team have extensive experience in the food industry and with leading consumer brands.

 

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Our Business Strategy

Pursue top line growth. We are pursuing three growth strategies as we continue to build our business:

Expand distribution and improve placement. We intend to increase sales by expanding the number of stores that sell our products in the mainstream grocery and mass merchandiser channels and by securing placements adjacent to conventional products in the mainstream aisle. We believe increased distribution and enhanced shelf placement will lead more consumers to purchase our products and will expand our market share.

Expand household penetration and consumer base. We intend to increase the number of consumers who buy our products by using grassroots marketing, social media tools and advertising. We believe these efforts will educate consumers about our brand and the benefits of natural and organic food, create demand for our products and, ultimately, expand our consumer base. We intend to broaden our product offerings to appeal to all members of the family at meal and snack times.

Continue innovation and brand extensions. Our market studies, analyses and consumer testing enable us to identify attractive product opportunities. We intend to continue to introduce products in both existing and new product lines that appeal to the whole family.

Remain authentic: stay true to our values. We believe authentic brands are brands that win. We are a mission-driven business with long-standing core values. We strive to operate in an honest, socially responsible and environmentally sustainable manner because it is the right thing to do and it is good for business. We believe our authenticity better enables us to build loyalty and trust with current consumers and helps us attract new ones.

Invest in infrastructure and capabilities. We invest in our people, supply chain and systems to ensure that our business is scalable and profitable. We expect to add new employees to our sales, marketing, operations and finance teams. We actively seek opportunities to invest in the specific capabilities of our supply chain partners to reduce costs, increase manufacturing efficiencies and improve quality. Additionally, we continue to invest in our systems and technology, including an enterprise resource planning system, to support growth and increase efficiency.

Our Products

We sell our products in three primary product categories: meals; snacks; and dressings, condiments and other. Meals are an important family occasion, and we make it easier for families to share wholesome meal solutions, despite time-pressed schedules, without sacrificing quality. Consumers are eating more snacks, and we offer natural and organic alternatives that parents prefer while satisfying the most discriminating snacker in the family. Dressings and condiments are important complements to meals, and we offer natural and organic alternatives to conventional offerings. We are primarily focused on growing and expanding our meals and snacks categories because we believe they provide the greatest opportunities for sales growth.

Our product lines include natural products, products “made with organic” ingredients and certified organic products. We source only ingredients stated to be free of genetically modified organisms and strive to use ingredients that are as near to their whole, natural state as possible. In fiscal 2011, we estimate that over 80% of our net sales were generated by certified organic or products made with organic ingredients.

Within our various product lines, we offer many products suitable for consumers seeking to avoid certain ingredients and attempting to adhere to specialized dietary plans, including gluten-free and vegan products. We continue to develop new products using ingredients that address our consumers’ health and dietary preferences.

 

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We have over 125 products across our product lines in various sizes and flavors. In fiscal 2011, the break-down of our three product categories was as follows:

 

LOGO

Product Innovation

Innovation is a core competency of ours and an important component of our growth strategy. Our innovation strategy is based on market studies, analyses and consumer testing. We identify large, conventional food categories and assess the demand for natural and organic products in each category. Further, we work closely with certain of our customers to identify attractive opportunities based on their insight and market perspectives. Based on our consumer tests and insights, we develop competing natural or organic products. Once developed, we design the appropriate package with Annie’s colors and messaging. Typically, we launch new products in the natural retailer channel and then expand distribution into the mainstream grocery and mass merchandiser channels. We also regularly review our current product offerings and determine if product extensions or reformulations are desirable.

In fiscal 2011, we estimate that 19% of our net sales were generated by products introduced since the beginning of fiscal 2009. In fiscal 2009, 2010 and 2011, we spent $0.8 million, $1.3 million and $2.1 million, respectively, in research and development expenses, which consisted primarily of market studies, consumer research and analyses, product development and employee-related expenses.

In January 2012, we shipped our first frozen product, certified organic rising crust pizza. The initial pizza varieties are being distributed on a national basis through a major industry-leading national retailer. In March 2012, we announced a pizza product line extension, rising crust frozen pizza “made with organic” ingredients, which we intend to introduce later this year. We expect to develop additional frozen products over the coming years.

Customers and Distribution

We market our products throughout the United States and Canada. The vast majority of our sales are in the United States. During fiscal 2011, approximately 3% of our net sales were from Canada. We sell our products through three primary channels: mainstream grocery, mass merchandiser and natural retailer. Because of our brand equity and high-quality products, we believe there are attractive growth prospects for us in each of these channels.

 

   

Mainstream Grocery: Our customers in this channel include large national chains such as Kroger, Ahold and Safeway and regional chains such as Wegmans, Harris Teeter, H-E-B and Raley’s. During fiscal 2011, we estimate that the mainstream grocery channel represented 38% of our net sales.

 

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Mass Merchandiser: Our customers in this channel include large national and regional retailers such as Target Stores, Costco Wholesale and Wal-Mart. During fiscal 2011, we estimate that the mass merchandiser channel represented 30% of our net sales.

 

   

Natural Retailer: Our customers in this channel include large retailers such as Whole Foods Market and Trader Joe’s (where our products are sold under its own store brand), regional natural chains such as Sprouts Farmers Market and Earth Fare and independent natural foods cooperatives. During fiscal 2011, we estimate that the natural retailer channel represented 28% of our net sales.

In addition to our three primary channels, we also sell a limited number of products through food service and military channels. During fiscal 2011, we estimate that such activities in the aggregate represented 4% of our net sales.

We sell our products directly to retailers and through distributors. We use brokers to support our sales efforts.

 

   

Direct Sales. The majority of our products are sold direct to retailers. We sell direct predominantly in the mass merchandiser channel, but we also maintain select direct relationships in the mainstream grocery channel. In fiscal 2011, 24% of our net sales were generated from sales to our top two customers, Target (12%) and Costco (12%). In some cases, we sell products to the same grocery chain using both direct relationships and distributors.

 

   

Distributors. Many of our products are sold through independent food distributors, including the majority sold to the natural retailer channel. Food distributors purchase products from us for resale to retailers, taking title to the products upon purchase. The prices consumers pay for these products are set by our distributors, in their sole discretion, although we may influence the retail price with the use of promotional incentives. In fiscal 2011, 28% of our net sales were generated from sales to our largest distributor, United Natural Foods Inc., or UNFI. We estimate that approximately 24% of our fiscal 2011 sales to UNFI were supplied to the mainstream grocery channel, which percentage we expect to increase based on UNFI’s pursuit of additional grocery business, such as its recently announced supply agreement with Safeway.

Marketing and Advertising

We have built the Annie’s brand using traditional grassroots marketing efforts such as sampling, public relations and participation in community events and festivals. In the early years, Annie Withey’s own home phone number and address were on our box so consumers could reach her directly. We continue to value direct and honest communication with our consumers.

Our current marketing efforts are focused on outreach to a broader audience while holding true to our mission and core values. We believe we have a significant opportunity to grow our business by increasing communications about our brand, product quality, taste and convenience to a wider audience of families seeking healthier alternatives. To accomplish this objective, we will continue to employ social media and other marketing tools that complement long-standing public relations efforts and allow for a personal dialogue with consumers. We work hard to ensure that consumers recognize our message as authentic. We believe that our community programs and partnerships reinforce our brand’s authenticity and fuel loyal and trusting relationships with consumers.

Our Supply Chain

Manufacturing

Independent manufacturers, referred to in our industry as contract manufacturers or co-packers, manufacture all of our products. Utilizing contract manufacturers provides us with the flexibility to produce a large variety of products and the ability to enter new categories quickly and economically. Our contract manufacturers have been selected based on their specific product line expertise, and we expect them to partner with us to improve and

 

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expand our product offerings. We regularly meet with our contract manufacturers to review costs and their performance and to set performance, quality and cost-saving targets. In many cases we enter into long-term contracts with our contract manufacturers. During fiscal 2011, our three largest contract manufacturers were Philadelphia Macaroni Company, Lucerne Foods and Chelten House Products, which manufactured meals, snacks and dressings and condiments, respectively. We estimate that the products manufactured by these three contract manufacturers amounted to approximately 70% of net sales in fiscal 2011.

We have invested significant resources to improve operating margins by reducing costs and increasing productivity. Our efficiency initiatives have focused on selecting better, lower-cost manufacturers, renegotiating tolling fees with existing manufacturers, consolidating in-bound freight, leveraging warehouse expenses and reducing ingredient and packaging costs through increased volume buys, contract consolidation and price negotiation.

As part of our efficiency initiatives, we have begun to look for opportunities to invest capital in equipment to drive down costs, improve throughput and improve product quality at our contract manufacturers. In fiscal 2012, we intend to invest approximately $2 million in equipment, which we expect will remain our property. We expect to continue these investments in the future, as we believe this approach improves efficiency and creates shared cost reductions with our manufacturing partners.

Ingredient and Packaging Suppliers

Our natural and organic ingredients, raw materials and packaging materials are sourced primarily from suppliers in the United States and Canada. We have rigorous standards for food quality and safety. Our raw materials and packaging are mostly purchased through contract manufacturers from suppliers we have approved and based upon our specifications. In order to mitigate commodity cost fluctuations, we enter either directly or through our contract manufacturers into forward-pricing contracts with certain ingredient suppliers. In fiscal 2012, we estimate that our contracted ingredients will represent over 50% of our materials costs and over 25% of our cost of sales.

Quality Control

We take precautions designed to ensure the quality and safety of our products. In addition to routine third-party inspections of our contract manufacturers, we have instituted regular audits to address topics such as allergen control, ingredient, packaging and product specifications and sanitation. Under the FDA Food Modernization Act, each of our contract manufacturers is required to have a hazard analysis critical control points plan that identifies critical pathways for contaminants and mandates control measures that must be used to prevent, eliminate or reduce relevant food-borne hazards.

All of our contract manufacturers are required to be certified in the Safe Quality Food Program or the BRC Global Standard for Food Safety. We expect all of our contract manufacturers to complete their certification in calendar year 2012. These standards are integrated food safety and quality management protocols designed specifically for the food sector and offer a comprehensive methodology to manage food safety and quality simultaneously. Certification provides an independent and external validation that a product, process or service complies with applicable regulations and standards.

We work with suppliers who assure the quality and safety of their ingredients. These assurances are supported by our purchasing contracts or quality assurance specification packets, including affidavits, certificates of analysis and analytical testing, where required. The quality assurance staff of both our contract manufacturers and our own internal operations department conducts periodic on-site routine audits of critical ingredient suppliers. Additionally, our contract manufacturers and our quality assurance and procurement teams periodically visit critical suppliers to certify their facilities and assure quality.

 

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Order Fulfillment

A majority of our customer fulfillment requirements are met by an outside contract warehouse, which is owned and operated by a third party and based in the Chicago, Illinois area. Products are manufactured by our contract manufacturers and typically are shipped to this distribution center. We store and ready products for shipment for the majority of our North American retailers and distributors from this facility. In order to support our growing operations, reduce costs and facilitate order fulfillment, we will relocate our existing distribution operations to a nearby larger facility owned and operated by the same third party. It is anticipated that this new facility will replace the current facility in April 2012. A portion of our products are shipped directly from our contract manufacturers to retailers or distributors. Our relationship with our outside contract warehouse is governed by a written agreement pursuant to which our products are stored and shipped on a cost-plus basis. This agreement expires on March 31, 2012. On September 30, 2011, we entered into a new written agreement that will take effect on April 1, 2012 and continue through June 30, 2015, unless earlier terminated as provided therein. The new agreement will automatically renew for an additional period of two years and two months, unless either party provides proper notice of non-renewal.

Competition

We operate in a highly competitive environment. Our products compete with both very large mainstream conventional packaged foods companies and natural and organic packaged foods companies. Some of these competitors enjoy significantly greater resources. Large mainstream conventional packaged foods competitors include Kraft Foods Inc., General Mills, Inc., Campbell Soup Company, PepsiCo, Inc., Nestle S.A. and Kellogg Company. Natural and organic packaged foods competitors include The Hain Celestial Group, Inc., Newman’s Own, Inc., Nature’s Path Foods, Inc., Clif Bar & Company and Amy’s Kitchen. In addition to these competitors, in each of our categories we compete with many regional and small, local niche brands. Given limited retailer shelf space and merchandising events, competitors actively support their respective brands with marketing, advertising and promotional spending. In addition, most retailers market similar items under their own private label, which compete for the same shelf space.

Competitive factors in the packaged foods industry include product quality and taste, brand awareness and loyalty, product variety, interesting or unique product names, product packaging and package design, shelf space, reputation, price, advertising, promotion and nutritional claims. We believe that we currently compete effectively with respect to each of these factors.

Employees

As of December 31, 2011, excluding interns, we had 79 full-time employees and seven part-time employees, including 28 in sales and marketing, 20 in finance, 12 in operations, eight in information technology, five in innovation and 13 in other departments. None of our employees is represented by a labor union. We have never experienced a labor-related work stoppage. Until February 1, 2012, we operated in a co-employer relationship with TriNet Group Inc., or TriNet, a professional employer organization. Under our previous arrangement with TriNet, TriNet was responsible for paying the salaries and wages of our employees and providing our employees with health, dental and various other types of insurance and benefits. TriNet paid the salaries and wages of our employees directly, and we reimbursed TriNet for those employee-related costs and paid a fee for TriNet’s services. On December 23, 2011, we terminated our agreement with TriNet, effective February 1, 2012, at which time all of the employees covered by the TriNet arrangement became our direct employees.

Properties

We do not own any real property. We lease our headquarters at 1610 Fifth Street, Berkeley, California pursuant to a lease agreement that expires in February 2016. If we are not in breach of the terms of our lease and provide our landlord with required notice, we have an option to extend through February 2019 and a second option to extend through February 2021. The approximately 33,500 square foot space includes our corporate headquarters and our sample storage area. Our lease has escalating rent provisions over the initial term and a set rental rate for the option terms based on a percentage of the then fair market rental rate.

 

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Trademarks and Other Intellectual Property

We believe that our intellectual property has substantial value and has contributed significantly to the success of our business. Our primary trademarks include Annie’s®, Annie’s Homegrown®, Annie’s Naturals® and Bernie Rabbit of Approval®, all of which are registered with the U.S. Patent and Trademark Office. Our trademarks are valuable assets that reinforce the distinctiveness of our brand and our consumers’ favorable perception of our products. We also have multiple trademark registrations or pending applications for products within each of our product categories. Certain of our marks are also registered in Canada. In addition to trademark protection, we own copyright registrations for the artwork depicted on our dressing labels and other product packaging. Our web content and the domain names www.annies.com and www.anniesnaturals.com are owned by us and copyright protected. We also rely on unpatented proprietary expertise, recipes and formulations, continuing innovation and other trade secrets to develop and maintain our competitive position.

Government Regulation

Along with our contract manufacturers, brokers, distributors and ingredients and packaging suppliers, we are subject to extensive laws and regulations in the United States by federal, state and local government authorities. In the United States, the federal agencies governing the manufacture, distribution and advertising of our products include, among others, the FTC, the FDA, the USDA, the United States Environmental Protection Agency and the Occupational Safety and Health Administration. Under various statutes, these agencies, among other things, prescribe the requirements and establish the standards for quality and safety and regulate our marketing and advertising to consumers. Certain of these agencies, in certain circumstances, must not only approve our products, but also review the manufacturing processes and facilities used to produce these products before they can be marketed in the United States. We are also subject to the laws of Canada, including the Canadian Food Inspection Agency, as well as provincial and local regulations.

We are subject to labor and employment laws, laws governing advertising, privacy laws, safety regulations and other laws, including consumer protection regulations that regulate retailers or govern the promotion and sale of merchandise. Our operations, and those of our contract manufacturers, distributors and suppliers, are subject to various laws and regulations relating to environmental protection and worker health and safety matters. We monitor changes in these laws and believe that we are in material compliance with applicable laws.

Management Information Systems

We are in the process of implementing an integrated information system called Microsoft AX. This enterprise resource planning software manages purchasing, planning, inventory tracking, financial information and retailer and distributor ordering. Microsoft AX will reside on redundant servers located at our headquarters, with data stored on local storage devices and streamed to an off-site storage provider for disaster recovery. We will be an early adopter of the latest release of this system and are working with a Microsoft AX value-added reseller to support the implementation of the ERP system, develop a customized interface with our third-party logistics partner and build a customized gateway for our contract manufacturers. We expect that the initial phase of this implementation will be completed by April 2012 and will provide improved visibility into the production, receiving, storage and shipment of our goods.

We use a trade promotion management system called MEI, which functions as our trade planning and management tool. All costs associated with gaining item placement and executing merchandising, including ads, shelf price reductions, coupons and displays, are captured in MEI. Event information is entered into MEI by our sales team and customer deductions are cleared against the specific event information within MEI, typically within 120 days. We evaluate the effectiveness of these trade events by comparing event-level costs in MEI to the retailer sales results, which are measured based on third-party consumption data.

Legal Proceedings

From time to time, we are subject to claims and assessments in the ordinary course of our business. We are not currently a party to any litigation matter that, individually or in the aggregate, is expected to have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

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MANAGEMENT

Executive Officers, Directors and Director Nominee

The following table sets forth information regarding our executive officers, directors and director nominee (ages as of March 23, 2012):

 

Name

  

Age

    

Position

John M. Foraker

     49       Chief Executive Officer, Director

Kelly J. Kennedy

     43       Chief Financial Officer and Treasurer

Sarah Bird

     51       Senior Vice President—Marketing and Chief Mom Officer

Robert M. Kaake

     51       Senior Vice President—Chief Innovation Officer

Mark Mortimer

     51       Senior Vice President—Sales/Chief Customer Officer

Lawrence Waldman

     52       Senior Vice President—Supply Chain and Operations

Molly F. Ashby

     52       Chairman of the Board of Directors

David A. Behnke

     61       Director

Julie D. Klapstein

     57       Director

Bettina M. Whyte

     62       Director

Billie Ida Williamson

     59       Nominee for Director

Executive Officers

John M. Foraker has been our Chief Executive Officer and a member of our board of directors since 2004. For over sixteen years, Mr. Foraker has held various management positions with members of our corporate family. From 1994 until 1998, Mr. Foraker served as President of Napa Valley Kitchens, Inc. and from 1998 until 2004, he served as Chief Executive Officer and a member of the board of directors of Homegrown Natural Foods, Inc. Mr. Foraker holds a BS from the University of California, Davis and an MBA from the University of California, Berkeley. We believe that Mr. Foraker is qualified to serve on our board of directors due to the perspective, experience and operational expertise in our business that he has developed as our Chief Executive Officer.

Kelly J. Kennedy has been our Chief Financial Officer and Treasurer since August 2011. Ms. Kennedy has 20 years experience in management and finance including at some of the country’s top retail and consumer brands, both in private-equity backed start-up ventures and large public companies. Prior to joining us, from October 2010 to July 2011, Ms. Kennedy was Chief Financial Officer at Revolution Foods, Inc., a mission-based company serving fresh, healthy meals to students in six national markets. From September 2009 to October 2010, she served as Chief Financial Officer of Established Brands, Inc., a footwear wholesaler. Ms. Kennedy has served as Chief Financial Officer for several iconic Bay Area brands, including Serena & Lily Inc. and Forklift Brands, Inc. (Boudin Bakeries), each on a part-time basis from March 2009 to September 2009, and Elephant Pharmacy, Inc. from May 2007 to February 2009. On February 10, 2009, Elephant Pharmacy filed for protection under Chapter 7 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of California. Ms. Kennedy also served in various senior finance roles at Williams-Sonoma, Inc. from November 2000 to May 2007, including Corporate Financial Planning Manager, Director, Treasury and Vice President, Treasury and at Dreyer’s Grand Ice Cream Inc. Ms. Kennedy received a BA from Middlebury College and an MBA from Harvard Business School.

Sarah Bird has been with our company since May 1999. Prior to being named our Senior Vice President—Marketing and Chief Mom Officer in October 2011, Ms. Bird served as our Senior Vice President—Marketing from September 2008 to October 2011, and was our Vice President—Marketing from January 2005 to September 2008. Ms. Bird manages all of our brand-building initiatives and, along with Mr. Foraker, serves as liaison with our founder, Annie Withey. She is also Vice Chairman of the Organic Trade Association. Ms. Bird has over 20 years of brand management experience, including marketing roles at Frito-Lay North America, Nestlé S.A. and PowerBar, Inc. Ms. Bird received a BA from Wellesley College and an MBA from the Tuck School at Dartmouth College.

 

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Robert M. Kaake has been with our company since 2005. Prior to becoming our Senior Vice President — Chief Innovation Officer in October 2011, Mr. Kaake served as our Vice President—Innovation from August 2011 to October 2011, and was our Vice President R&D from December 2005 to August 2011. He has over 25 years of experience in food product development and quality. Prior to joining us, from 1995 to 2005 Mr. Kaake led product development at PowerBar, Inc. Mr. Kaake started his career in quality assurance in dressings and sauces with Wilsey Foods, Inc. (now Ventura Foods, LLC) followed by cookies and crackers at Sunshine Biscuits, Inc. (now Kellogg Company’s Keebler division). Mr. Kaake holds a BS in Food Science from Purdue University.

Mark Mortimer has been with our company since 2006. Prior to becoming our Senior Vice President—Sales/Chief Customer Officer in July 2010, Mr. Mortimer was our Senior Vice President—Sales and Brand Marketing from September 2008 to July 2010, and served as our Senior Vice President—Sales from August 2006 to September 2008. He has over 22 years of experience in senior sales and business development executive positions at Fortune 500 consumer products companies, including Del Monte Foods Company, The Clorox Company and PepsiCo, Inc. Before joining us, Mr. Mortimer served as the Vice President of Sales and Business Development for the Grocery Foods Group of ConAgra Foods, Inc. from August 2005 to July 2006. Mr. Mortimer received a BA from University of California, Los Angeles.

Lawrence Waldman has been with our company since 2008, first as our Vice President—Operations from May 2008 to June 2009. Mr. Waldman was elected our Vice President—Supply Chain and Operations in June 2009 and to his current position of Senior Vice President—Supply Chain and Operations in April 2011. For over 20 years, Mr. Waldman has been involved with finance, operations and supply chain, mostly in food manufacturing. Prior to joining our company, he worked at Columbus Manufacturing, Inc., a manufacturer of premium-quality deli meats, leading operations from 2006 to 2008 and manufacturing accounting from 2001 to 2006. Mr. Waldman previously held positions in finance and audit at W.R. Grace & Co. and first moved into operations with Grace Culinary Systems, Inc. in 1988. Mr. Waldman received a BS in Accounting and an MS in Finance from the University of Kentucky.

Directors and Director Nominee

Molly F. Ashby has been a member of our board of directors and Chairman of the Board since 2004 and was a member of the board of directors of Annie’s Homegrown from 2002 to 2004. Ms. Ashby has been Chairman and Chief Executive Officer and the sole owner of Solera Capital, LLC, since she formed it in 1999. She also serves as Chairman of Calypso Christiane Celle Holdings, LLC and The HealthCaring Company, LLC and Vice Chairman of Latina Media Ventures, LLC. Prior to founding Solera Capital, LLC, Ms. Ashby spent 16 years at J.P. Morgan & Co., including leadership roles in the firm’s private equity business, J.P. Morgan Capital Corporation, as Vice Chair of the Investment Committee, Chief Operating Officer, Investment Strategist and member of the board of directors. Ms. Ashby graduated Phi Beta Kappa with a BA from the College of William and Mary and received an MS in Foreign Service, with distinction, from Georgetown University. We believe that Ms. Ashby is qualified to serve on our board of directors because of her extensive experience in guiding and directing growth companies, including her service on the board of directors of other companies and her role guiding the development of Annie’s since 2002.

David A. Behnke has been a member of our board of directors since 2009. Mr. Behnke is Managing Director and Head of U.S. Investments for Najeti Ventures LLC, a position he has held since January 2006. Previously, he worked for J.P. Morgan & Co. for 22 years, where he headed a variety of divisions, including the Private Sale Advisory Group and the Global Power Group. He currently serves on the boards of directors of Direct Fuels (Insight Equity Acquisition Partners, LP), Prestolite Electric Incorporated, Triton Logging Inc., Deep River Snacks and the Washington Art Association. Mr. Behnke is also a principal and founder of Behnke Doherty & Associates LLC and Vice Chairman of the Advisory Council of the Baker Institute of Cornell University. He holds an MBA from the University of Chicago, an MM from Yale University and a BA from Hamilton College.

 

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We believe that Mr. Behnke is qualified to serve on our board of directors because of his background and experience providing guidance and counsel to numerous growing companies as well as his service on the boards of directors of other companies.

Julie D. Klapstein became a member of our board of directors on March 1, 2012. Ms. Klapstein has served as a CEO and senior executive of numerous companies in the information technology and healthcare information technology industries. Since June 2001, she has been the founding Chief Executive Officer of Availity, LLC, which is a joint venture among five of the largest health insurance companies in the United States, including Blue Cross Blue Shield of Florida, Inc., Health Care Services Corporation, Humana, Inc. and WellPoint, Inc. From November 1996 to June 2001, Ms. Klapstein was President and CEO of Phycom Corporation, a medical management healthcare company. She also has held positions as Executive Vice President of Sunquest Information Systems; National Sales, Marketing and Service Manager for SMS’ Turnkey Systems Division (now Siemens Medical Systems); and Vice President and General Manager for GTE Health System. Since April 2011, Ms. Klapstein has served on the board of directors, audit committee and compensation committee of Standard Register. She also has served on the board of directors of various for-profit and not-for-profit companies. She received a BS in Business from Portland State University. We believe that Ms. Klapstein is qualified to serve on our board of directors because of her considerable knowledge and experience in the areas of management, information technology, strategic planning and corporate leadership.

Bettina M. Whyte has been a member of our board of directors since June 16, 2011. In January 2011, Ms. Whyte joined the international consulting firm of Alvarez & Marsal Holdings, LLC as a Managing Director and Senior Advisor. From October 2007 until January 2011, she acted as an independent general business consultant, working on several mediations and as a court appointed expert. From March 2006 to October 2007, Ms. Whyte was a Managing Director and the Head of the Special Situations Group at MBIA Insurance Corporation. Prior to joining MBIA Insurance, Ms. Whyte was a Managing Director of AlixPartners, LLP, a business turnaround management and financial advisory firm, from April 1997 to March 2006. While at AlixPartners, as a result of her experience advising businesses facing operational and financial difficulties, she served in the role of Interim Chief Executive Officer of APS Supply, Inc. and Service Merchandise Co., Inc. and as a General Partner of LJM2 Co-Investment, LP. On September 25, 2002, LJM2 filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas. Service Merchandise filed an involuntary petition for liquidation under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Tennessee on March 15, 1999. On February 2, 1998, APS Supply filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. Ms. Whyte currently serves on the boards of directors of AGL Resources Inc., Rock-Tenn Company and Amerisure Mutual Insurance Company. Ms. Whyte is an Adjunct Professor of Law at Fordham University. She has a BS in Industrial Economics from Purdue University and an MBA from the Kellogg School of Management at Northwestern University. Ms. Whyte also has experience guiding public and private companies on best practices in corporate governance, including developing codes of business conduct and ethics. We believe that Ms. Whyte is qualified to serve on our board of directors because of her experience in corporate governance and financial and operational matters of private and public business, including serving on the board of directors of other companies.

Billie Ida Williamson will become a member of our board of directors upon the consummation of this offering. Ms. Williamson has 33 years of experience auditing public companies as an employee and partner of Ernst & Young LLP. From 1998 until December 2011, Ms. Williamson served Ernst & Young as a Senior Assurance Partner. Ms. Williamson was also Ernst & Young’s Americas Inclusiveness Officer, a member of its Americas Executive Board, which functions as the Board of Directors for Ernst & Young dealing with strategic and operational matters, and a member of the Ernst & Young U.S. Executive Board responsible for partnership matters for the firm. Previously, Ms. Williamson served as Chief Financial Officer of AMX Corporation and as Senior Vice President, Finance and Corporate Controller of Marriott International, Inc. Ms. Williamson currently serves as a member of the board of directors and as a member of the audit committee of Exelis Inc. She

 

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graduated with a BBA, with highest honors, in Accounting from Southern Methodist University, and was granted her CPA Certificate in the State of Texas in 1976. We believe that Ms. Williamson is qualified to serve on our board of directors because of her extensive financial and accounting knowledge and experience, including her service as a principal financial officer, as an independent auditor to numerous Fortune 250 companies and as a member of the board of directors of other companies, as well as her broad experience with SEC reporting and her professional training and standing as a Certified Public Accountant.

Board Composition

Our board of directors currently consists of five directors, one of whom is our Chief Executive Officer and four of whom were designated by Solera pursuant to the board composition provisions of our Third Amended and Restated Stockholders’ Agreement, or Stockholders Agreement, dated as of November 22, 2011 among certain affiliates of Solera and each of our stockholders. Upon the consummation of this offering, these board composition provisions will terminate. See “Certain Relationships and Related-Party Transactions—Stockholders Agreement” and “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock—We will continue to be controlled by our Sponsor whose interests may conflict with those of our other stockholders.” Ms. Billie Ida Williamson has agreed to become a member of the board of directors upon the consummation of this offering.

Director Independence

Our board of directors has determined that each of Mr. Behnke, Ms. Klapstein and Ms. Whyte is, and Ms. Williamson upon her appointment will be, an independent director within the meaning of the applicable rules of the SEC and the New York Stock Exchange, and that each of them is also an independent director under Rule 10A-3 of the Exchange Act for the purpose of audit committee membership. In addition, our board of directors has determined that Ms. Whyte is, and Ms. Williamson will be, an audit committee financial expert within the meaning of the applicable rules of the SEC and the New York Stock Exchange.

Staggered Board

Effective upon the consummation of this offering, our board of directors will be divided into three staggered classes of directors of the same or nearly the same number and each director will be assigned to one of the three classes. At each annual meeting of the stockholders, a class of directors will be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. The terms of the directors will expire upon the election and qualification of successor directors at the annual meeting of stockholders to be held during the years 2012 for Class I directors, 2013 for Class II directors and 2014 for Class III directors.

 

   

Our Class I directors will be Mr. Behnke and Ms. Klapstein;

 

   

Our Class II directors will be Ms. Whyte and Ms. Williamson; and

 

   

Our Class III directors will be Ms. Ashby and Mr. Foraker.

Our amended and restated certificate of incorporation and amended and restated bylaws, which will be effective upon the consummation of this offering, provide that the number of our directors shall be fixed from time to time by a resolution of the majority of our board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class shall consist of one-third of the board of directors.

The division of our board of directors into three classes with staggered three-year terms may delay or prevent stockholder efforts to effect a change of our management or a change in control. See “Description of Capital Stock—Anti-Takeover Effects of Certain Provisions of Our Amended and Restated Certificate of Incorporation and Bylaws” and “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock—Certain provisions of our corporate governance documents and Delaware law could discourage, delay or prevent a merger or acquisition at a premium price.”

 

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Board Leadership Structure and Board’s Role in Risk Oversight

The positions of chairman of the board and chief executive officer are separated. Our board of directors believes that separating these positions allows our chief executive officer to focus on our day-to-day business, while allowing the chairman of the board to lead the board of directors in its fundamental roles of providing advice to and independent oversight of management. Our board of directors recognizes the time, effort and energy that the chief executive officer is required to devote to his position in the current business environment, as well as the commitment required to serve as our chairman. While our amended and restated bylaws and corporate governance guidelines, each of which will be effective upon the consummation of this offering, do not require that our chairman and chief executive officer positions be separate, our board of directors believes that having separate positions is the appropriate leadership structure for us at this time.

Management is responsible for the day-to-day management of risks we face, while our board of directors, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, our board of directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed.

The board of directors’ role in overseeing the management of our risks is conducted primarily through its committees, as discussed in the descriptions of each of the committees below and as specified in each committee’s respective charter. The board of directors (or the appropriate board committee in the case of risks that are under the purview of a particular committee) discusses with management potential risk exposures, their potential impact on our company and the steps we take to manage them. When a board committee is responsible for evaluating and overseeing the management of a particular risk or risks, the chairman of the relevant committee will report on the discussion to the full board of directors. This enables the board of directors and its committees to coordinate the risk oversight role, particularly with respect to risk interrelationships.

Board Committees

Our board of directors has established the following committees: an audit committee and a compensation committee. Our board of directors has also established a nominating/corporate governance committee, which will be constituted upon consummation of this offering. Until such time, our board of directors will continue to carry out the duties and responsibilities normally carried out by this committee. Copies of each committee’s charter will be posted on our website, www.annies.com, upon consummation of this offering. Our board of directors may from time to time establish other committees.

Audit Committee

Our audit committee oversees our corporate accounting and financial reporting processes. Among other matters, our audit committee will:

 

   

be responsible for the appointment, compensation and retention of our independent registered public accounting firm and review and evaluate our independent registered public accounting firm’s qualifications, independence and performance;

 

   

oversee our independent registered public accounting firm’s audit work and review and pre-approve all audit and non-audit services that may be performed by it;

 

   

obtain and review reports by our independent registered public accounting firm describing its internal quality-control procedures, any material issues raised by internal quality control review or that of peer firms or government agencies and all relationships between our independent registered public accounting firm and us;

 

   

review and approve the planned scope of our annual audit;

 

   

monitor the rotation of partners of our independent registered public accounting firm on our engagement team as required by law;

 

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review our financial statements and discuss with management and our independent registered public accounting firm the results of the annual audit and the review of our quarterly financial statements;

 

   

review our critical accounting policies and estimates;

 

   

oversee the adequacy of our accounting and financial controls;

 

   

discuss the process by which management assesses and manages our risks and the steps management has taken to monitor and control such risks;

 

   

review and approve all related-party transactions;

 

   

review with legal counsel any issues regarding compliance with our Code of Business Conduct and Ethics, any transactions that may involve a conflict of interest or any legal matters that may have a material impact on our financial statements;

 

   

establish and oversee procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls or auditing matters; and

 

   

annually review the audit committee charter and the committee’s performance.

Our board of directors has determined that the audit committee will also serve as our qualified legal compliance committee, or QLCC, in accordance with Section 307 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder by the SEC. The QLCC will be responsible for handling reports of a material violation of the securities laws or a breach of a fiduciary duty by us or any of our officers, directors, employees or agents. The QLCC will have the authority and responsibility to inform our chief executive officer and chief legal officer, or principal outside counsel serving in such role, of any violations. The QLCC will determine whether an investigation is necessary and will take appropriate action to address the reports it receives. If an investigation is deemed necessary or appropriate, the QLCC will have the authority to notify our board of directors, initiate an investigation and retain outside experts, as it determines is appropriate.

Upon the consummation of this offering, our audit committee will consist of Mr. Behnke, Ms. Whyte and Ms. Williamson. Ms. Whyte will continue to serve as the chairman of our audit committee. Ms. Whyte and Ms. Williamson will be our audit committee financial experts as currently defined under applicable SEC rules.

Compensation Committee

Our compensation committee reviews, recommends and approves policies relating to compensation and benefits of our officers and directors, administers our stock option and benefit plans and reviews general policy relating to compensation and benefits. The purpose of the compensation committee is to:

 

   

review our compensation programs to determine whether they effectively and appropriately motivate performance consistent with our business goals and tie financial interests of executives to those of our stockholders; and

 

   

ensure the chief executive officer’s annual goals are aligned with our business goals.

Duties of our compensation committee include:

 

   

establishing a compensation philosophy that fairly rewards performance benefitting our stockholders and attracts and retains the human resources necessary to successfully lead and manage our company;

 

   

establishing, reviewing and approving corporate goals relevant to the compensation of the chief executive officer, evaluating the performance of the chief executive officer in pursuit of those goals and determining and approving the compensation level of the chief executive officer based upon such evaluation;

 

   

preparing and reviewing compensation disclosures in our required filings with the SEC;

 

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establishing performance objectives for executive cash incentive and deferred compensation plans and monitoring such plans;

 

   

periodically reviewing our benefits programs;

 

   

reviewing director compensation on at least a bi-annual basis and making corresponding recommendations;

 

   

hiring independent consultants and commissioning special surveys if the committee deems them advisable; and

 

   

reviewing and evaluating, at least annually, the performance of the committee and its members, including committee compliance with its charter.

Upon the consummation of this offering, our compensation committee will consist of Mr. Behnke, Ms. Klapstein and Ms. Williamson, with Ms. Williamson serving as the chairman.

Nominating/Corporate Governance Committee

Our nominating/corporate governance committee will identify individuals qualified to become directors, consider committee member qualifications, appointment and removal, recommend corporate governance guidelines applicable to us and evaluate our chief executive officer.

Duties of our nominating/corporate governance committee related to nominations will include:

 

   

identifying individuals qualified to become members of our board of directors;

 

   

reviewing periodically the memberships of each committee for appropriate board assignments, reassignments or removals of committee members;

 

   

making recommendations to our board of directors regarding the size and composition of our board and developing criteria for the selection of individuals to be considered as candidates for election to our board; and

 

   

evaluating director candidates proposed by stockholders and recommending to our board of directors appropriate action on each such candidate.

Duties of our nominating/corporate governance committee related to corporate governance will include:

 

   

developing, monitoring and recommending appropriate changes to our corporate governance practices;

 

   

reviewing senior management membership on outside boards of directors;

 

   

developing, administering and overseeing procedures regarding the operation of our Code of Business Conduct and Ethics;

 

   

overseeing development of a program of management succession; and

 

   

reviewing and evaluating, at least annually, the performance of the committee and its members, including committee compliance with its charter.

Duties of our nominating/corporate governance committee related to evaluation of our chief executive officer will include:

 

   

conducting an annual review of the chief executive officer’s performance and presenting its findings to our board of directors; and

 

   

considering such annual review in connection with the development, review and approval of management succession planning recommendations.

 

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Our nominating/corporate governance committee will recommend to our board of directors for selection nominees to the board based on, among other things, knowledge, experience, skills, expertise, integrity, diversity, ability to make independent analytical inquiries and understanding of our business environment, all in the context of an assessment of the perceived needs of our board of directors at that time. The committee will be responsible for assessing the appropriate balance of criteria required of board members.

Our nominating/corporate governance committee will consist of Ms. Ashby, Ms. Klapstein and Ms. Whyte, with Ms. Ashby serving as the chairman. The SEC and New York Stock Exchange rules allow an issuer to, among other things, phase-in, in connection with an initial public offering, the number of directors on its nominating/corporate governance committee. Under the initial public offering phase-in, the nominating/corporate governance committee must have at least one independent member on the earliest of the consummation of this offering and five business days after listing, at least a majority of independent members within 90 days after listing and all independent members within one year after listing. We plan to change the membership of our nominating/corporate governance committee in the future to achieve compliance with the applicable phase-in requirements.

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves as a member of the board of directors or compensation committee of any other entity that has one or more executive officers who serve on our board of directors or compensation committee.

Code of Business Conduct and Ethics

We have adopted a code of business conduct and ethics, effective upon consummation of this offering, applicable to all of our employees, officers, directors and consultants, including our principal executive, financial and accounting officers and all persons performing similar functions. A copy of this code will be available on our website at www.annies.com upon the consummation of this offering.

Director Compensation

Prior to this offering, current members of our board of directors, other than Ms. Whyte, have not received or been entitled to receive cash compensation for their services as directors, except for the reimbursement of reasonable and documented costs and expenses incurred by directors in connection with attending any board of director or committee meetings. Pursuant to a letter agreement dated June 9, 2011, Ms. Whyte is entitled to a $25,000 annual cash retainer, payable quarterly in arrears, in connection with her service as a director. Solera, of which Ms. Ashby is the founder, sole owner and Chief Executive Officer, has received fees from us, as well as reimbursement of reasonable out-of-pocket expenses incurred by it, for advisory services performed by Solera Capital, LLC pursuant to a letter agreement, which letter agreement will terminate upon the consummation of this offering. See “Certain Relationships and Related-Party Transactions—Advisory Services Agreement.”

On June 29, 2011, we granted to Ms. Whyte a non-qualified stock option to purchase 18,591 shares of our common stock at an exercise price of $17.55 per share.

After the consummation of this offering, our executive officers who are members of our board of directors and the directors who are not considered independent under the corporate governance rules of the New York Stock Exchange will not receive compensation from us for their service on our board of directors. Accordingly, Mr. Foraker and Ms. Ashby will not receive compensation from us for their service on our board of directors. Only those directors who are considered independent directors under the corporate governance rules of the New York Stock Exchange will be eligible to receive compensation from us for their service on our board of directors. Mr. Behnke, Ms. Klapstein, Ms. Whyte and Ms. Williamson will be paid quarterly in arrears the following amounts:

 

   

a base annual retainer of $35,000 in cash;

 

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an additional annual retainer of $15,000 in cash to the chairman of each of the audit committee and the compensation committee; and

 

   

an additional annual retainer of $10,000 in cash to the chairman of the nominating/corporate governance committee.

In addition, each independent director will be granted a number of restricted stock units under our Omnibus Incentive Plan equal to the number of shares of our common stock having a value of $50,000 (based on the closing market price of our common stock on the date of grant) each year on the date of our annual meeting of stockholders. Also any independent director who becomes a member of the board of directors between annual meetings will receive a grant of restricted stock units prorated for such service. Such restricted stock units will vest over a one-year period, subject to the recipient’s continued service as a director. Any vested restricted stock units will be settled in shares of our common stock (i) 50% on the earlier to occur of (x) two years from the date of grant and (y) six months following the director’s departure from the board of directors, and (ii) 50% six months following a director’s departure from the board of directors. We will also reimburse all of our directors for reasonable expenses incurred to attend board of director or committee meetings.

Director and Officer Indemnification Agreements

Prior to the consummation of this offering, we intend to enter into indemnification agreements with each of our current directors and executive officers. These agreements will require us to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to us, and to advance expenses incurred as a result of any proceeding as to which they could be indemnified. We also intend to enter into indemnification agreements with our future directors and executive officers. Insofar as indemnification for liabilities arising under the Securities Act may be extended to directors, officers or persons controlling us pursuant to the foregoing, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification is against public policy as expressed in the Securities Act and we will be governed by the final adjudication of such issue.

 

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COMPENSATION DISCUSSION AND ANALYSIS

The following discussion describes and analyzes our executive compensation structure and our compensation for our named executive officers, or NEOs, for fiscal 2011. Our NEOs for fiscal 2011 were John M. Foraker, our Chief Executive Officer, or CEO, Steven Jackson, our former Chief Financial Officer and Chief Operating Officer, Sarah Bird, our Senior Vice President—Marketing and Chief Mom Officer, Mark Mortimer, our Senior Vice President—Sales/Chief Customer Officer and Lawrence Waldman, our Senior Vice President—Supply Chain and Operations. Detailed information regarding compensation paid to our NEOs in fiscal 2011 is set forth in the “Summary Compensation Table” below.

Compensation Philosophy and Objectives

Our intent and philosophy in determining compensation packages at the time of hiring new executives has been based in part on providing compensation sufficient to enable us to attract the talent necessary to further develop our business, while at the same time being prudent in the management of our cash and equity in light of the stage of the development of our company. Compensation of our NEOs after the initial period following their hiring has been influenced by the amounts of compensation that we initially agreed to pay them, as well as by our evaluation of their subsequent performance, changes in their levels of responsibility, prevailing market conditions, the financial condition and prospects of our company and our attempt to maintain some level of internal equity in the compensation of existing executives relative to the compensation paid to more recently hired executives.

We compensate our NEOs with a combination of base salary, cash bonuses, long-term equity compensation and benefits generally made available to all of our employees. We think this combination of cash, bonus and equity awards is largely consistent with the forms of compensation provided by other companies with whom we compete for executive talent and, as such, is a package that is consistent with the expectations of our executives and of the market for executive talent. The primary objectives of our executive compensation program are as follows:

 

   

to attract and retain talented and experienced executives in our industry;

 

   

to reward executives whose knowledge, skill and performance are critical to our success;

 

   

to ensure fairness among the executive management team by recognizing the individual contributions each executive officer makes to our success; and

 

   

to align the interests of our executive officers and stockholders by incentivizing executive officers to increase stockholder value and rewarding executive officers when stockholder value increases.

Elements of Compensation

Our current executive compensation program consists of the following key components:

Base Salary

The primary component of compensation of our executive officers has historically been base salary. Base salary represents the most basic, fixed portion of our NEOs’ compensation and is an important element of a compensation program designed to be competitive and to attract and retain talented executive officers. Base salaries are reviewed at the end of each fiscal year by our CEO (other than with respect to his own base salary) and approved by our compensation committee. Base salary increases typically take effect at the beginning of the first quarter of the following fiscal year, unless business circumstances require otherwise.

Cash Bonuses

We offer our executive officers the opportunity to participate in an annual cash bonus plan to align the financial incentives of our executive officers, including our NEOs, with our short-term operating plan and long-term strategic objectives and the interests of our company and our stockholders. Typically, the bonuses for our

 

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executive officers are linked to the achievement of certain of our annual financial objectives. These bonus opportunities allow us to reward our executive officers only if we achieve the goals pre-set by our compensation committee.

Prior to or near the beginning of each fiscal year, our compensation committee, in consultation with our board of directors and with our CEO, determines the financial objectives upon which annual bonuses for the fiscal year will be based, and establishes a target award for each executive officer. After the end of the fiscal year, our compensation committee, in consultation with our CEO (other than with respect to himself), determines the extent to which the financial objectives were met and calculates the formula payout level for each executive officer. In addition, our CEO evaluates each executive officer’s overall individual performance (other than his own) and makes recommendations to our board of directors regarding the formula bonus payout level described above. Our compensation committee takes into account our CEO’s recommendations and determines the final bonus amounts for all of our executive officers.

Long-term Equity Compensation

Our equity program, which we have historically administered primarily through our 2004 Plan, is designed to be sufficiently competitive to allow us to attract and retain talented executives. We have historically used non-qualified stock options as the form of equity award for executives, independent directors and other employees. Because we award stock options with an exercise price equal to the fair market value of our common stock on the date of grant, these options will have value to the grantee only if the market price of our common stock increases after the date of grant.

Prior to fiscal 2011, we made stock option grants under the 2004 Plan typically vesting on the basis of continued service (including cliff vesting and annual vesting). No awards were made during fiscal 2011. Our compensation committee believes that stock option awards align the interests of our NEOs with those of our company and our stockholders because they create the incentive to build stockholder value over time. We have also granted stock options to some of our NEOs outside of the 2004 Plan with change in control and performance-based vesting tied to operating income, cost control targets and Plan EBIT, which is an amount equal to net sales, less the cost of sales, less selling, general and administrative expenses. Our compensation committee believes the service-based and change in control vesting provisions of our equity awards enhance our ability to retain our executives and the performance-based vesting criteria provide incentives to our NEOs to assure that our company meets certain business objectives.

We have historically granted stock options to executive officers in connection with their hiring. The size of the initial stock option award is determined based on the executive’s position with us and takes into consideration the executive’s base salary and other compensation. The initial stock option awards are intended to provide the executive with an incentive to build value in the organization over an extended period of time, typically four to five years. We may also grant additional stock options in connection with a significant change in responsibilities, past performance and anticipated future contributions of the executive officer, taking into consideration the executive’s overall compensation package and the executive’s existing equity holdings. Stock options are granted with an exercise price equal to the fair value of our stock on the applicable date of grant. Following the consummation of this offering, we expect to determine fair value for purposes of stock option pricing based on the most recent closing price of our common stock on the New York Stock Exchange.

Other Compensation

We provide limited executive perquisites to some of our NEOs and also provide all of our NEOs with the same benefits generally provided to our other employees and limited change-in-control benefits as described further under “—Fiscal 2011 Compensation Decisions” below.

 

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Compensation Decision Process

Historic

Prior to this offering, we were a privately held company with a relatively small number of stockholders. As a result, we have not been subject to any stock exchange listing or SEC rules requiring a majority of our board of directors to be independent. Since our formation, our compensation committee or our board of directors has overseen the compensation of our executive officers and our executive compensation programs and initiatives. Our compensation committee and our board of directors have also sought, and received, significant input from our CEO with regard to the performance and compensation of executives other than himself. In addition, certain of our directors prior to this offering had significant experience with private equity-backed companies and the executive compensation practices of such companies and have applied this knowledge and experience to their judgments regarding our compensation decisions.

Post Offering

Following the consummation of this offering, in accordance with its charter, our compensation committee will determine and approve the annual compensation of our CEO and our other executive officers and will regularly report its compensation decisions to our board of directors. Our compensation committee will also administer our equity compensation plans.

In October 2011, as part of our transition to a publicly held company, our compensation committee retained Frederic W. Cook & Co., Inc., or Cook & Co., as its independent compensation consultant to assist in developing our approach to executive compensation. As part of this engagement, we expect that Cook & Co. will assist in the development of an appropriate peer group and provide benchmark compensation data to help establish a competitive compensation program for our executive officers. Based on this information and discussions between Cook & Co. and our compensation committee, we may implement a revised executive compensation program designed to achieve the principles and objectives of our compensation philosophy.

As we gain experience as a public company, we expect that the specific direction, emphasis and components of our executive compensation program will continue to evolve. Accordingly, the compensation paid to our NEOs for fiscal 2012 may not necessarily be indicative of how we may compensate our NEOs following this offering.

Fiscal 2011 Compensation Decisions

Base Salary

In past years, our compensation committee has reviewed the base salaries of our NEOs in the first quarter of each fiscal year, taking into account their general knowledge of the compensation practices within our industry, our CEO’s base salary recommendations (other than with respect to himself), the scope of each NEO’s performance, individual contributions, responsibilities, experience, prior salary level and, in the case of a promotion, current position. As part of this annual review process, our compensation committee approved annual increases in base salary for each of our NEOs effective at the beginning of fiscal 2011. In determining the base salary increases, our compensation committee considered the accomplishments of each individual during the prior fiscal year in relation to the achievement of our business objectives, including the CEO’s evaluation of the performance of the respective business areas managed by his direct reports of our sales, marketing, finance and operations activities. Our board of directors reviewed our CEO’s accomplishments with respect to the achievement of target financial performance goals and strategic leadership in identifying and successfully pursuing opportunities for profitable growth. Specifically, it noted that good progress had been made in all of these areas. In April 2010: Mr. Foraker’s base salary increased from $280,000 to $325,000; Mr. Jackson’s base salary increased from $235,000 to $245,000; Ms. Bird’s base salary increased from $180,000 to $200,000; Mr. Mortimer’s base salary increased from $245,000 to $255,000; and Mr. Waldman’s base salary increased from $195,000 to $204,750.

 

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Effective at the beginning of fiscal 2012, our compensation committee approved annual increases in base salary for each of our currently employed NEOs. These increases took into account accomplishments of each individual during the prior fiscal year. In April 2011: Mr. Foraker’s base salary increased from $325,000 to $335,000; Ms. Bird’s base salary increased from $200,000 to $205,000; Mr. Mortimer’s base salary increased from $255,000 to $265,000; and Mr. Waldman’s base salary increased from $204,750 to $210,000. Effective February 22, 2012, Mr. Foraker’s annual base salary increased from $335,000 to $365,000 pursuant to the terms of his new executive employment agreement described below. See “—Actions Taken Subsequent to Fiscal 2011 —CEO Executive Employment Agreement.” Additionally, effective February 23, 2012, our compensation committee approved an increase in Ms. Bird’s annual base salary from $205,000 to $210,000.

Subsequent to this offering, we expect our compensation committee to conduct an annual review of each NEO’s base salary, with input from our CEO (other than with respect to himself), and to make adjustments.

Cash Bonus

Our compensation committee adopted an annual cash bonus plan for fiscal 2011, or the 2011 Bonus Plan, in order to reward the performance of our executive officers in achieving our financial and strategic objectives. Under the 2011 Bonus Plan, our compensation committee established target bonus amounts for each of our NEOs (expressed as a percentage of base salary) that would become payable upon the achievement of net sales and Plan EBIT targets based upon our fiscal 2011 annual operating plan. Given our minimal capital expenditures and related depreciation, EBIT is not materially different than EBITDA. The following table shows the 2011 Bonus Plan targets as a percentage of each NEO’s base salary:

 

Named Executive Officer

   Plan EBIT
Related Bonus*
    Net Sales
Related Bonus*