424B4 1 d374596d424b4.htm 424(B)(4) 424(b)(4)
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-182706

 

 

3,173,892 Shares

 

LOGO

Annie’s, Inc.

Common Stock

 

 

This is a public offering of shares of common stock of Annie’s, Inc. The shares of common stock are being sold by the selling stockholders identified in this prospectus, some of whom are our affiliates. We will not receive any proceeds from the sale of shares by the selling stockholders.

Our common stock is listed on the New York Stock Exchange under the symbol BNNY. On July 31, 2012, the last sale price of our common stock on the New York Stock Exchange was $40.75 per share.

The underwriters have an option to purchase a maximum of 476,084 additional shares from the selling stockholders to cover overallotments of shares. We will not receive any proceeds from the exercise of the underwriters’ option to purchase additional shares.

We are an “emerging growth company,” as defined in the Jumpstart our Business Startups Act of 2012.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 10.

 

       Price to Public      Underwriting
Discounts and
Commissions
    

Proceeds,

before

expenses, to

the Selling
Stockholders

Per Share

     $39.25      $1.86      $37.39

Total

     $124,575,261      $5,917,325      $118,657,936

Delivery of the shares of common stock will be made on or about August 6, 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   RBC Capital Markets   Stifel Nicolaus Weisel
  Canaccord Genuity  

The date of this prospectus is July 31, 2012.


Table of Contents

 

TABLE OF CONTENTS

 

    Page  

PROSPECTUS SUMMARY

    1   

RISK FACTORS

    10   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

    26   

USE OF PROCEEDS

    27   

PRICE RANGE OF OUR COMMON STOCK

    28   

DIVIDEND POLICY

    29   

CAPITALIZATION

    30   

SELECTED CONSOLIDATED FINANCIAL DATA

    31   

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    35   

BUSINESS

    57   

MANAGEMENT

    68   

COMPENSATION DISCUSSION AND ANALYSIS

    77   

CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS

    95   

PRINCIPAL AND SELLING STOCKHOLDERS

    97   

DESCRIPTION OF CAPITAL STOCK

    99   

SHARES ELIGIBLE FOR FUTURE SALE

    102   

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

    104   

UNDERWRITING (CONFLICTS OF INTEREST)

    107   

LEGAL MATTERS

    111   

EXPERTS

    111   

WHERE YOU CAN FIND MORE INFORMATION

    111   

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. 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.

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 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

 

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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 2012” refers to the year from April 1, 2011 to March 31, 2012).

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 $76.8 million in fiscal 2008 to $141.3 million in fiscal 2012, representing a 16.5% compound annual growth rate. Over the same period, our income from operations increased from $1.4 million in fiscal 2008 to $17.9 million in fiscal 2012.

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 2012, we estimate that 19% of our net sales were generated by products introduced since the beginning of fiscal 2010.

Strategic and valuable brand for retailers. Our brand is valuable to retailers in the mainstream grocery, mass merchandiser and natural retailer channels. We believe retailers carry our products for several reasons, including that our products satisfy consumer demand for premium natural and organic products and many of our consumers spend more on food and buy higher margin items than average consumers. Further, we believe our products offer better profitability for retailers compared to conventional packaged foods.

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 as necessary to support our growth. 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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Recent Developments

New Frozen Pizza Products—In January 2012, we shipped our first frozen product, certified organic rising crust pizza, which is being distributed on a national basis through a major industry-leading natural retailer. In March 2012, we announced a pizza product line extension, rising crust frozen pizza “made with organic” ingredients, which we shipped to our first customer in late June. We expect to ship to a number of additional customers starting this quarter. We also expect to develop additional frozen products over the coming years.

Initial Public OfferingOn April 2, 2012, we closed our initial public offering, or IPO, in which we sold 950,000 shares and certain stockholders sold 4,800,000 shares of common stock at a price to the public of $19.00 per share. The shares sold by such stockholders included 750,000 additional shares purchased by the underwriters from certain of these stockholders pursuant to an option the underwriters held to cover overallotments of shares. We did not receive any proceeds from the sale of shares by the stockholders. We raised approximately $11.1 million in net proceeds after deducting underwriting discounts and commissions of $1.3 million and other offering expenses of $5.6 million.

Larger Warehouse FacilityIn April 2012, we moved to a larger warehouse facility in the Chicago, Illinois area. The move to the larger warehouse facility will allow us to support our growing operations, reduce costs and facilitate order fulfillment.

New Enterprise Resource Planning SystemIn July 2012, we completed the implementation of our new enterprise resource planning, or ERP, system. Our new ERP system will support growth and increase efficiency. It provides for greater depth and breadth of functionality and allows us to more effectively manage our business data, communications, supply chain, order entry and fulfillment, inventory and warehouse management and other business processes. The implementation of our new ERP system is part of our strategy to invest in infrastructure and capabilities designed to ensure that our business is scalable and profitable.

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.

 

 

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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 have significant influence over us and decisions made by our stockholders. Solera may have interests that conflict with those of our other stockholders. 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, will receive 5% or more of the net proceeds in this offering. Pursuant to Rule 5121, the appointment of a qualified independent underwriter is not necessary in connection with this offering, as the offering is of a class of equity securities for which a “bona fide public market,” as defined by FINRA Rule 5121(f)(3), exists. 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 the Selling Stockholders

3,173,892 shares

 

Common Stock to be Outstanding Immediately after this Offering

17,070,027 shares

 

Overallotment Option

The underwriters have an option to purchase a maximum of 476,084 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

The selling stockholders will receive all the proceeds from the sale of shares in this offering. We will not receive any proceeds from the sale of shares in this offering. 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 10 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

As of July 1, 2012, 17,060,111 shares of our common stock are outstanding, excluding:

 

   

1,417,301 shares of our common stock issuable upon the exercise of options outstanding under our Amended and Restated 2004 Stock Option Plan, or 2004 Plan, our Omnibus Incentive Plan and certain non-plan options, with a weighted average exercise price of $10.67 per share;

 

   

537,081 shares of our common stock available for future issuance under our Omnibus Incentive Plan;

 

   

16,200 shares of our common stock issuable pursuant to outstanding restricted stock units under our Omnibus Incentive Plan; and

 

   

50,163 shares of our common stock (subject to adjustment from zero shares to 75,251 shares based on achievement of specified percentage of targeted cumulative compounded earnings per share growth rate of the Company) issuable pursuant to outstanding performance share units under our Omnibus Incentive Plan.

Unless otherwise indicated, the information in this prospectus assumes:

 

   

no exercise of outstanding options since July 1, 2012 (except as otherwise disclosed in “Principal and Selling Stockholders”); and

 

   

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

 

 

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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 as of March 31, 2012 and for each of the three years then ended have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data for the three months ended June 30, 2011 and 2012 and the summary consolidated balance sheet data as of June 30, 2012 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited condensed 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.

 

     Fiscal Year Ended March 31,    

Three Months Ended June 30,

 
     2010     2011     2012     2011     2012  
     (in thousands, except share and per share amounts)  

Consolidated Statements of Operations Data:

          

Net sales

   $ 96,015      $ 117,616      $ 141,304      $ 28,610      $ 34,293   

Cost of sales

     63,083        71,804        85,877        17,022        20,486   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     32,932        45,812        55,427        11,588        13,807   

Operating expenses:

          

Selling, general and administrative expenses

     25,323        30,674        36,195        8,303        10,211   

Advisory agreement termination fee

     —          —          1,300        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     25,323        30,674        37,495        8,303        10,211   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     7,609        15,138        17,932        3,285        3,596   

Interest expense

     (1,207     (885     (161     (18     (40

Other income (expense), net

     21        155        (1,594     (484     49   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for (benefit from) income taxes

     6,423        14,408        16,177        2,783        3,605   

Provision for (benefit from) income taxes

     400        (5,747     6,588        971        1,474   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 6,023      $ 20,155      $ 9,589      $ 1,812      $ 2,131   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stockholders(1)

   $ 177      $ 596      $ 290      $ 54      $ 2,131   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to common stockholders—Basic(2)

   $ 0.38      $ 1.29      $ 0.62      $ 0.12      $ 0.13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to common stockholders—Diluted(2)

   $ 0.20      $ 0.50      $ 0.26      $ 0.04      $ 0.12   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

          

Basic

     461,248        461,884        469,089        464,994        16,936,007   

Diluted

     899,539        1,201,125        1,111,088        1,236,410        17,600,908   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share

   $ 0.22      $ 0.80      $ 0.86      $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Fiscal Year Ended March 31,      Three Months
Ended June 30,
 
     2010      2011      2012      2011      2012  
     (in thousands)  

Other Financial Data:

              

EBITDA(3)

   $ 7,975       $ 15,787       $ 17,183       $ 2,953       $ 3,845   

Adjusted EBITDA(3)

     9,277         16,560         21,315         3,727         4,074   

 

 

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     As of June 30,
2012
 
     (in thousands)  

Consolidated Balance Sheet Data:

  

Cash

   $ 5,102   

Working capital

     28,066   

Total assets

     75,020   

Total stockholders’ equity

     68,575   

 

(1) Net income attributable to common stockholders was allocated using the two-class method for the periods presented, except for the three-month period ended June 30, 2012, since our capital structure included common stock and convertible preferred stock with participating rights. Under the two-class method, we reduced income from 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.
(2) For the calculation of basic and diluted income per share, see notes 2 and 14 to our consolidated financial statements and notes 2 and 11 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus.
(3) 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 plus interest expense, provision for (benefit from) income taxes and depreciation and amortization. As used herein, Adjusted EBITDA represents EBITDA plus management fees, advisory agreement termination fee, 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 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, 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;

 

 

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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.

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

 

    Fiscal Year Ended March 31,     

Three Months Ended June 30,

 
    2010     2011     2012      2011      2012  

Net income

  $ 6,023      $ 20,155      $ 9,589       $ 1,812       $ 2,131   

Interest expense

    1,207        885        161         18         40   

Provision for (benefit from) income taxes

    400        (5,747     6,588         971         1,474   

Depreciation and amortization

    345        494        845         152         200   
 

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

EBITDA

    7,975        15,787        17,183         2,953         3,845   

Management fees(a)

    400        400        600         150         —     

Advisory agreement termination fee(a)

    —          —          1,300         —           —     

Stock-based compensation(b)

    902        373        506         106         216   

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

    —          —          1,726         518         13   
 

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

  $ 9,277      $ 16,560      $ 21,315       $ 3,727       $ 4,074   
 

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 
  (a) Represents management fees and advisory agreement termination fee paid to Solera. The advisory agreement was terminated upon the consummation of our IPO in exchange for a payment of $1.3 million.
  (b) Represents non-cash, stock-based compensation expense.
  (c) Represents non-cash charge due to the increase in fair value of a warrant to purchase 80,560 shares of our common stock. See note 9 to our consolidated financial statements and note 7 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus.

 

 

 

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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 successfully implement 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 successfully implement our growth strategy. 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, a loss of confidence by consumers in what constitutes “organic,” 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 did not meet our growth objectives, and we discontinued it in fiscal 2012. Additionally, we cannot assure you that our most recent new product line, frozen 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 and the three months ended June 30, 2012, our ingredient costs were higher than in the corresponding prior periods, 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 2012 and the three months ended June 30, 2012, sales to our principal distributor and largest customer, UNFI, represented approximately 25% and 28% of our net sales, and sales to our top two retailers, Target and Costco, represented an aggregate of approximately 26% and 19% 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

 

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agreements with our distributors and retailers may be canceled if we materially 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 2012, we paid $62.4 million in the aggregate to our top three contract manufacturers. We do not have written 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 to provide raw materials for us.

Although we have multiple suppliers for cheese, we have a single manufacturer for the cheese powders used in our products, including macaroni and cheese, cheddar crackers and snack mix. During fiscal 2012 and the three-month period ended June 30, 2012, products that contain these cheese powders represented a significant portion of our net sales. Any disruption in the manufacturing of cheese powders 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.

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 of defending against any such claims could be significant. Any loss of confidence on the part of consumers in the

 

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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.

 

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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.

 

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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.

Problems in transitioning to, or a failure of, our new ERP 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 have recently implemented a new ERP 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. 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 ERP 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. The risks associated with this transition to our new ERP system are 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 43% and 41% of our total assets as of March 31, 2012 and June 30, 2012, respectively. 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 first assess qualitative factors to determine whether it is more likely than not that the fair value of our sole 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, which we perform 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 adversely 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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Risks Related to this Offering and Ownership of Our Common Stock

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

The market price for our common stock is likely to be volatile, in part because our shares have only been traded publicly since March 28, 2012, 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.

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. See “Shares Eligible for Future Sale.”

On April 30, 2012, we filed an S-8 Registration Statement registering 2,362,850 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. Such shares are now eligible for sale in the public market, subject to certain legal and contractual limitations. Moreover, pursuant to the Amended and Restated Registration Rights

 

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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 of 1933, as amended, or 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, certain of our executive officers and the selling stockholders 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 90 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 significantly influenced 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 40.9% of our voting power, or 38.3% 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 a significant percentage of the voting power of our common stock, Solera will have significant power to influence 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 influence over our management and 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. In addition, Solera will hold in excess of 50% of our voting power as of the record date of our 2012 annual meeting of stockholders. As a result, Solera will have control over all matters requiring stockholder approval at such meeting. See also “—If you purchase shares of our common stock in this offering, you will not be a record holder for purposes of our 2012 annual meeting of 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 are 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 are also 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 fiscal 2012, we corrected an error in the measurement of our

 

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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.

However, for as long as we remain an “emerging growth company,” or EGC, as defined in the Jumpstart our Business Startups Act of 2012, or JOBS Act, we may, and we intend to, take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act. We may, and we intend to, take advantage of these reporting exemptions until we are no longer an EGC. We will cease to be an EGC at the earliest of (A) the last day of the fiscal year in which we have total annual gross revenues of $1,000,000,000 (as indexed for inflation in the manner set forth in the Jobs Act) or more; (B) the last day of the fiscal year in which the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement under the Securities Act occurs; (C) the date on which we have, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or (D) the date on which we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 under the Exchange Act or any successor thereto.

Once we cease to be an EGC, as of each fiscal year end thereafter, 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.

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.

Until March 27, 2012, the effective date of our IPO registration statement on Form S-1, we operated as a private company. Upon effectiveness, we became a public company. As a public company, we will incur additional legal, accounting, compliance and other expenses that we had not previously incurred as a private company. We are 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,

 

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we are subject to other reporting and corporate governance requirements, including certain requirements of the New York Stock Exchange, which 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 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. However, for so long as we qualify as an EGC under the JOBS Act, we may decide to make certain elections that would lessen such obligations. See “—We are an emerging growth company, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.” Nonetheless, 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.

We are an emerging growth company, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an EGC, as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.

Although, the JOBS Act permits an EGC such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies, we are choosing to “opt out” of this provision, and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

If you purchase shares of our common stock in this offering, you will not be a record holder for the purposes of our 2012 annual meeting of stockholders.

The record date for the purposes of our 2012 annual meeting of stockholders is July 13, 2012. As a result, if you purchase shares of our common stock in this offering, you will not be a record holder for such purposes and will not be entitled to attend or vote on any proposals presented at our 2012 annual meeting of stockholders. See “—We will continue to be significantly influenced by our sponsor, whose interests may conflict with those of our other stockholders.”

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 is 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

 

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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.

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 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 are 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

 

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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.”

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 is listed on the New York Stock Exchange. We are utilizing the phase-in provisions afforded new public companies under the New York Stock Exchange rules with respect to certain 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,” “foreseeable” 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

The selling stockholders are selling all of the shares of our common stock being sold in this offering, including any shares that may be sold in connection with the exercise of the underwriters’ overallotment option. See “Principal and Selling Stockholders.” Accordingly, we will not receive any proceeds from the sale of shares of our common stock in this offering. We will bear all costs, fees and expenses in connection with this offering, except that the selling stockholders will pay all underwriting commissions and discounts.

 

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PRICE RANGE OF OUR COMMON STOCK

Our common stock has been listed on the NYSE under the symbol BNNY since March 28, 2012. Prior to that date, there was no established public trading market for our common stock. The following table sets forth the range of high and low sales prices on the NYSE of our common stock for the periods indicated, as reported by the NYSE. Such quotations represent inter dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.

 

Fiscal quarter 2012

   High      Low  

Fourth quarter (March 28-31, 2012)

   $ 40.00       $ 31.00   

Fiscal quarter 2013

   High      Low  

First quarter

   $ 45.00       $ 32.66   

Second quarter (through July 31, 2012)

     44.68         35.50   

On July 31, 2012, the closing price per share of our common stock on the NYSE was $40.75. As of July 1, 2012, there were 17 stockholders of record. A substantially greater number of stockholders are beneficial holders of our common stock in “street name” through banks, brokers and other financial institutions that are the record holders.

 

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DIVIDEND POLICY

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. During fiscal 2012, we 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. During fiscal 2013, we have not paid any cash dividends to date.

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 June 30, 2012.

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 unaudited condensed consolidated financial statements included elsewhere in this prospectus.

 

     As of
June 30, 2012
 
     (in thousands)  

Cash

   $ 5,102   
  

 

 

 

Credit facility

   $ —     
  

 

 

 

Common stock, par value $0.001 per share, 30,000,000 shares authorized, 17,060,111 shares issued and outstanding

     17   

Additional paid-in capital

     105,256   

Accumulated deficit

     (36,698)   
  

 

 

 

Total stockholders’ equity

   $ 68,575   
  

 

 

 

Total capitalization

   $ 68,575   
  

 

 

 

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statements of operations data for the years ended March 31, 2010, 2011 and 2012 and the consolidated balance sheet data as of March 31, 2011 and 2012 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, 2008 and 2009 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, 2008, 2009 and 2010 has been derived from our audited financial statements that do not appear in this prospectus. The consolidated statements of operations data for the three months ended June 30, 2011 and 2012 and the consolidated balance sheet data as of June 30, 2012 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited condensed 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. 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.

 

    Fiscal Year Ended March 31,     Three Months
Ended June 30,
 
    2008     2009     2010     2011     2012     2011     2012  
    (in thousands, except share and per share amounts)  

Consolidated Statements of Operations Data:

             

Net sales

  $ 76,751      $ 93,643      $ 96,015      $ 117,616      $ 141,304      $ 28,610      $ 34,293   

Cost of sales

    51,217        64,855        63,083        71,804        85,877        17,022        20,486   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    25,534        28,788        32,932        45,812        55,427        11,588        13,807   

Operating expenses:

             

Selling, general and administrative expenses

    24,153        25,693        25,323        30,674        36,195        8,303        10,211   

Advisory agreement termination fee

    —          —          —          —          1,300        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    24,153        25,693        25,323        30,674        37,495        8,303        10,211   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    1,381        3,095        7,609        15,138        17,932        3,285        3,596   

Interest expense

    (809     (1,279     (1,207     (885     (161     (18     (40

Other income (expense), net

    112        (289     21        155        (1,594     (484     49   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for (benefit from) income taxes

    684        1,527        6,423        14,408        16,177        2,783        3,605   

Provision for (benefit from) income taxes

    10        56        400        (5,747     6,588        971        1,474   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    674        1,471        6,023        20,155        9,589        1,812        2,131   

Loss from discontinued operations(1)

    (930     (579     —          —          —          —          —     

Loss from sale of discontinued operations(1)

    —          (1,865     —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (256   $ (973   $ 6,023      $ 20,155      $ 9,589      $ 1,812      $ 2,131   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 18      $ 43      $ 177      $ 596      $ 290      $ 54      $ 2,131   

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

    (25     (72     —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (7   $ (29   $ 177      $ 596      $ 290      $ 54      $ 2,131   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

             

Continuing operations

  $ 0.04      $ 0.09      $ 0.38      $ 1.29      $ 0.62      $ 0.12      $ 0.13   

Discontinued operations

    (0.06     (0.16     —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (0.02   $ (0.07   $ 0.38      $ 1.29      $ 0.62      $ 0.12      $ 0.13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

             

Continuing operations

  $ 0.03      $ 0.06      $ 0.20      $ 0.50      $ 0.26      $ 0.04      $ 0.12   

Discontinued operations

    (0.06     (0.16     —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Fiscal Year Ended March 31,      Three Months Ended
June 30,
 
     2008     2009     2010      2011      2012      2011      2012  
     (in thousands, except share and per share amounts)  

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

   $ (0.03   $ (0.10   $ 0.20       $ 0.50       $ 0.26       $ 0.04       $ 0.12   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

     424,699        461,154        461,248         461,884         469,089         464,994         16,936,007   

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

     676,188        766,290        899,539         1,201,125         1,111,088         1,236,410         17,600,908   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Dividends per common share

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

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fiscal Year Ended March 31,      Three Months
Ended June 30,
 
     2008      2009      2010      2011      2012      2011      2012  
     (in thousands)  

Other Financial Data:

                    

EBITDA(4)

   $ 815       $ 728       $ 7,975       $ 15,787       $ 17,183       $ 2,953       $ 3,845   

Adjusted EBITDA(4)

     2,710         4,407         9,277         16,560         21,315         3,727         4,074   

 

     March 31,     June 30,  
      2008     2009     2010     2011     2012     2012  
     (in thousands)  

Consolidated Balance Sheet Data:

            

Cash

   $ 3,131      $ 3,693      $ 8,550      $ 7,333      $ 562      $ 5,102   

Working capital

     9,137        13,195        16,538        13,035        16,427        28,066   

Total assets

     60,914        53,612        58,794        67,261        72,429        75,020   

Total debt(5)

     10,516        5,713        5,856        —          12,796        —     

Convertible preferred stock warrant liability

     —          —          —          —          2,157        —     

Convertible preferred stock

     81,373        81,373        81,373        81,373        81,373        —     

Total stockholders’ equity (deficit)

     (41,481     (41,620     (38,173     (30,148     (34,436     68,575   

 

(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 2009 and 2008. The loss on 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 for the periods presented, except for the three-month period ended June 30, 2012 since our capital structure included 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

 

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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 and notes 2 and 11 to our unaudited condensed 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, advisory agreement termination fee, 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:

 

     Fiscal Year Ended March 31,     

Three Months
Ended June 30,

 
     2008     2009     2010      2011     2012      2011      2012  
     (in thousands)                

Net income (loss)

   $ (256   $ (973   $ 6,023       $ 20,155      $ 9,589       $ 1,812       $ 2,131   

Interest expense

     809        1,279        1,207         885        161         18         40   

Provision for (benefit from) income taxes

     10        56        400         (5,747     6,588         971         1,474   

Depreciation and amortization

     252        366        345         494        845         152         200   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

EBITDA

     815        728        7,975         15,787        17,183         2,953         3,845   

Loss from discontinued operations

     930        579        —           —          —           —           —     

Loss from sale of discontinued operations

     —          1,865        —           —          —           —           —     

Management fees(a)

     300        400        400         400        600         150         —     

Advisory agreement termination fee(a)

     —          —          —           —          1,300         —           —     

Stock-based compensation(b)

     665        835        902         373        506         106         216   

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

     —          —          —           —          1,726         518         13   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 2,710      $ 4,407      $ 9,277       $ 16,560      $ 21,315       $ 3,727       $ 4,074   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

  (a) Represents management fees and advisory agreement termination fee paid to Solera. The advisory agreement was terminated upon the consummation of our IPO in exchange for a payment of $1.3 million.
  (b) Represents non-cash, stock-based compensation expense.
  (c) Represents non-cash charge due to the increase in fair value of a warrant to purchase 80,560 shares of our common stock. See note 9 to our consolidated financial statements and note 7 to our unaudited condensed 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. 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, and, in the fourth quarter of fiscal 2012, discontinued our cereal line, resulting in no growth in those categories. Sales are reported net of estimated sales and promotion incentives, slotting, customer discounts and spoils.

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, organic granola bars and pretzels in fiscal 2011 and organic rising crust frozen pizza in fiscal 2012; 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. We have also benefitted from improved placement in the mainstream grocery channel, which we believe has resulted in more consumers purchasing our products. 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.

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 12 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 approximately 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. In fiscal 2012, we invested approximately $1.2 million in manufacturing equipment, which is located at the facilities of our contract manufacturers and remains our property. 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.

To support our growth, we continue to increase headcount, particularly in the sales, marketing and finance departments. We also continue to invest in product development to support innovation and fuel sales growth and in information technology. Despite these additional investments described above, our selling, general and administrative expenses have remained relatively flat as a percentage of net sales. 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. We expect to incur incremental annual costs of approximately $2.0 million related to operating as a public company.

Results of Operations

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

 

     Three Months Ended
June  30,
    % of Net Sales  
      2011     2012     2011     2012  
     (in thousands, except for percentages)  

Net sales

   $ 28,610      $ 34,293        100.0     100.0

Cost of sales

     17,022        20,486        59.5        59.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     11,588        13,807        40.5        40.3   

Operating expenses:

        

Selling, general and administrative expenses

     8,303        10,211        29.0        29.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     8,303        10,211        29.0        29.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     3,285        3,596        11.5        10.5   

Interest expense

     (18     (40     (0.1     (0.1

Other income (expense), net

     (484     49        (1.7     0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     2,783        3,605        9.7        10.5   

Provision for income taxes

     971        1,474        3.4        4.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 1,812      $ 2,131        6.3     6.2
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
      Fiscal Year Ended March 31,     % of Net Sales  
     2010     2011     2012     2010     2011     2012  
     (in thousands, except for percentages)  

Net sales

   $ 96,015      $ 117,616      $ 141,304        100.0     100.0     100.0

Cost of sales

     63,083        71,804        85,877        65.7        61.0        60.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     32,932        45,812        55,427        34.3        39.0        39.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Selling, general and administrative expenses

     25,323        30,674        36,195        26.4        26.1        25.6   

Advisory agreement termination fee

     —          —          1,300        —          —          0.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     25,323        30,674        37,495        26.4        26.1        26.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     7,609        15,138        17,932        7.9        12.9        12.7   

Interest expense

     (1,207     (885     (161     (1.3     (0.8     (0.1

Other income (expense), net

     21        155        (1,594     0.0        0.1        (1.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for (benefit from) income taxes

     6,423        14,408        16,177        6.7        12.3        11.4   

Provision for (benefit from) income taxes

     400        (5,747     6,588        0.4        (4.9     4.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 6,023      $ 20,155      $ 9,589        6.3     17.1     6.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Fiscal Year Ended
March 31,
     % of Net Sales     Three Months Ended
June  30,
     % of Net Sales  
      2010      2011      2012      2010     2011     2012     2011      2012      2011     2012  
     (in thousands, except for percentages)  

Product Categories:

                         

Meals

   $ 43,838       $ 49,168       $ 60,624         46     42     43   $ 10,452       $ 14,667         36.5     42.8

Snacks

     27,252         44,687         56,789         28        38        40        11,898         13,463         41.6        39.2   

Dressings, condiments and other

     24,925         23,761         23,891         26        20        17        6,260         6,163         21.9        18.0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 96,015       $ 117,616       $ 141,304         100     100     100   $ 28,610       $ 34,293         100.0     100.0
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Net Sales

 

      Three Months Ended
June  30,
     Change  
     2011      2012      $     %  
     (in thousands, except for percentages  

Meals

   $ 10,452       $ 14,667       $ 4,215        40.3

Snacks

     11,898         13,463         1,565        13.2   

Dressings, condiments and other

     6,260         6,163         (97     (1.5
  

 

 

    

 

 

    

 

 

   

Net sales

   $ 28,610       $ 34,293       $ 5,683        19.9
  

 

 

    

 

 

    

 

 

   

Net sales increased $5.7 million, or 19.9%, to $34.3 million during the three months ended June 30, 2012 compared to $28.6 million during the three months ended June 30, 2011. This increase reflects an increase in net sales of meals and snacks of $4.2 million and $1.6 million, respectively, offset by a slight decrease in dressings, condiments and other of $0.1 million. The increase in meals was predominantly driven by strong growth in the macaroni and cheese product line with a modest increase from organic frozen pizza, which we first shipped in January 2012. We experienced growth across all of our snack product lines. The growth in snack was more modest relative to prior quarters because of channel mix. The slight decrease in dressings, condiments and other

 

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was attributable to the discontinuation of cereal. Excluding cereal, the dressings, condiments and other category grew by $0.5 million. Distribution gains and our mainline placement initiatives also contributed to net sales growth, primarily in the mainstream grocery channel. The net sales increase was primarily driven by volume with slightly higher average selling prices adding modest growth.

Gross Profit

 

      Three Months Ended
June  30,
    Change  
     2011     2012     $      %  
     (in thousands, except for percentages)  

Cost of sales

   $ 17,022      $ 20,486      $ 3,464         20.4
  

 

 

   

 

 

   

 

 

    

Gross profit

   $ 11,588      $ 13,807      $ 2,219         19.1
  

 

 

   

 

 

   

 

 

    

Gross margin %

     40.5     40.3     
  

 

 

   

 

 

      

Gross profit increased $2.2 million, or 19.1%, to $13.8 million for the three months ended June 30, 2012 from $11.6 million for the three months ended June 30, 2011. Gross margin decreased 0.2 percentage points to 40.3% from 40.5% during the three months ended June 30, 2012 compared to the three months ended June 30, 2011. The increase in gross profit was primarily driven by the increase in net sales. The slight decrease in gross margin resulted from higher commodity costs, which were partially offset by price increases and cost reduction initiatives.

Operating Expenses

 

      Three Months Ended
June  30,
     Change  
     2011      2012      $      %  
     (in thousands, except for percentages)  

Operating expenses:

           

Selling, general and administrative expenses

   $ 8,303       $ 10,211       $ 1,908         23.0
  

 

 

    

 

 

    

 

 

    

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1.9 million, or 23.0%, to $10.2 million during the three months ended June 30, 2012 from $8.3 million during the three months ended June 30, 2011. This increase was due primarily to an increase in payroll expense resulting from increased headcount to support our growth and operating as a public company. In addition, during the three months ended June 30, 2012, we made additional investments in research and development to support our innovation pipeline compared with the three months ended June 30, 2011. Additionally, public company related expenses impacted selling, general and administrative expenses during the three months ended June 30, 2012 compared with the three months ended June 30, 2011. As a percentage of net sales, selling, general and administrative expenses increased 0.8 percentage points to 29.8% during the three months ended June 30, 2012 from 29.0% during the three months ended June 30, 2011.

Income from Operations

 

      Three Months Ended
June  30,
    Change  
     2011     2012     $      %  
     (in thousands, except for percentages)  

Income from operations

   $ 3,285      $ 3,596      $ 311         9.5
  

 

 

   

 

 

   

 

 

    

Income from operations as a percentage of net sales

     11.5     10.5     
  

 

 

   

 

 

      

 

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As a result of the factors above, income from operations increased $0.3 million, or 9.5%, to $3.6 million during the three months ended June 30, 2012, from $3.3 million during the three months ended June 30, 2011. Income from operations as a percentage of net sales decreased 1.0 percentage point to 10.5% in the three months ended June 30, 2012, from 11.5% in the three months ended June 30, 2011.

Interest Expense

 

      Three Months Ended
June  30,
    Change  
     2011     2012     $     %  
     (in thousands, except for percentages)  

Interest Expense

   $ (18   $ (40   $ (22     nm   
  

 

 

   

 

 

   

 

 

   

Interest expense increased slightly during the three months ended June 30, 2012 compared to the three months ended June 30, 2011 due to non-cash imputed interest expense related to financing of product formulas intangible asset acquired in fiscal 2012.

Other Income (Expense), Net

 

      Three Months Ended
June  30,
     Change  
     2011     2012      $      %  
     (in thousands, except for percentages)  

Other income (expense), net

   $ (484   $ 49       $ 533         nm   
  

 

 

   

 

 

    

 

 

    

Other income (expense), net during the three months ended June 30, 2012 primarily reflects royalty income partially offset by non-cash charge related to the increase in fair value of the convertible preferred stock warrant on April 2, 2012, prior to its conversion into a common stock warrant. Other income (expense), net during the three months ended June 30, 2011 primarily reflects a non-recurring, non-cash out-of-period charge of $0.5 million related to the increase in the fair value of our convertible preferred stock warrant liability offset by royalty income.

Provision for Income Taxes

 

      Three Months Ended
June  30,
    Change  
     2011     2012     $      %  
     (in thousands, except for
percentages)
 

Provision for income taxes

   $ 971      $ 1,474      $ 503         nm   
  

 

 

   

 

 

   

 

 

    

Effective tax rate

     34.9 %      40.9 %      

Our estimated effective tax rate was 40.9% for the three months ended June 30, 2012, compared to 34.9% in the same period last year. The effective tax rate is based on a projection of our annual fiscal year results. Our effective tax rate for the three months ended June 20, 2012 was higher than the effective tax rate for the three months ended June 30, 2011 largely due to a tax benefit recorded during the three months ended June 30, 2011 related to an increase in the tax rate for deferred tax assets due to an increase in the federal and state tax rates.

In addition, during the three months ended June 30, 2012, we recognized $11.8 million of tax deductions associated with stock option exercises. As of June 30, 2012, $11.4 million of these tax deductions are considered “excess” stock compensation related deductions, resulting in a reduction in taxes payable of $1.3 million, recording a tax refund receivable of $2.9 million, with a corresponding increase in additional paid in capital of

 

40


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$4.2 million. We will recognize the remaining $0.4 million of stock compensation related deductions as a reduction in taxes payable in future periods as we generate state taxable income.

Net Income

 

      Three Months Ended
June  30,
     Change  
     2011      2012      $      %  
     (in thousands, except for percentages)  

Net income

   $ 1,812       $ 2,131       $ 319         17.6
  

 

 

    

 

 

    

 

 

    

As a result of the factors above, net income increased $0.3 million, or 17.6%, to $2.1 million for the three months ended June 30, 2012 from $1.8 million for the three months ended June 30, 2011.

Fiscal Year Ended March 31, 2012 Compared to Fiscal Year Ended March 31, 2011

Net Sales

 

     Fiscal Year Ended
March  31,
     Change  
     2011      2012      $      %  
     (in thousands, except for percentages)  

Meals

   $ 49,168       $ 60,624       $ 11,456         23.3

Snacks

     44,687         56,789         12,102         27.1   

Dressings, condiments and other

     23,761         23,891         130         0.5   
  

 

 

    

 

 

    

 

 

    

Net sales

   $ 117,616       $ 141,304       $ 23,688         20.1
  

 

 

    

 

 

    

 

 

    

Net sales increased $23.7 million, or 20.1%, to $141.3 million in fiscal 2012 compared to $117.6 million in fiscal 2011. This increase primarily reflects a $12.1 million and an $11.5 million increase in net sales of snacks and meals, respectively. The increase in snacks was driven by growth across all of our snack product lines. The increase in meals was driven by strong growth in the macaroni and cheese product line partially offset by lower sales of pasta meals due to reduced offerings. The dressings, condiments and other held relatively flat across each category. Distribution gains also contributed to net sales growth, primarily in the mainstream grocery and mass merchandiser/other channels. The net sales increase was primarily driven by volume combined with slightly higher average selling prices to offset rising commodity costs.

Gross Profit

 

     Fiscal Year Ended
March  31,
    Change  
     2011     2012     $      %  
     (in thousands, except for percentages)  

Cost of sales

   $ 71,804      $ 85,877      $ 14,073         19.6
  

 

 

   

 

 

   

 

 

    

Gross profit

   $ 45,812      $ 55,427      $ 9,615         21.0
  

 

 

   

 

 

   

 

 

    

Gross margin %

     39.0     39.2     
  

 

 

   

 

 

      

Gross profit increased $9.6 million, or 21.0%, to $55.4 million in fiscal 2012 from $45.8 million in fiscal 2011. Gross margin increased 0.2 percentage points to 39.2% in fiscal 2012, from 39.0% in fiscal 2011. 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

 

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other cost of sales were offset by price increases and cost reduction initiatives, primarily the negotiation of lower tolling fees from a key contract manufacturer.

Operating Expenses

 

     Fiscal Year Ended
March 31,
     Change  
     2011      2012      $      %  
     (in thousands, except for percentages)  

Operating expenses:

           

Selling, general and administrative expenses

   $ 30,674       $ 36,195       $ 5,521         18.0

Advisory agreement termination fee

     —           1,300         1,300         nm   
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 30,674       $ 37,495       $ 6,821         22.2
  

 

 

    

 

 

    

 

 

    

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $5.5 million, or 18.0%, to $36.2 million in fiscal 2012, from $30.7 million in fiscal 2011. This increase was due primarily to a $1.6 million increase in wages and salary expense, due to increasing headcount to support our growth, and a $1.1 million increase in professional services due to increased spending on legal, accounting and auditing services in connection with our preparation to become a public company. As a percentage of net sales, selling, general and administrative expenses decreased 0.5 percentage points to 25.6% in fiscal 2012, from 26.1% in fiscal 2011.

Advisory Agreement Termination Fee

We paid a one-time fee of $1.3 million to Solera upon consummation of our IPO in connection with the termination of its advisory services agreement with us.

Income from Operations

 

     Fiscal Year Ended
March 31,
    Change  
     2011     2012     $      %  
     (in thousands, except for percentages)  

Income from operations

   $ 15,138      $ 17,932      $ 2,794         18.5
  

 

 

   

 

 

   

 

 

    

Income from operations as a percentage of net sales

     12.9     12.7     
  

 

 

   

 

 

      

As a result of the factors above, income from operations increased $2.8 million, or 18.5%, to $17.9 million in fiscal 2012, from $15.1 million in fiscal 2011. Income from operations as a percentage of net sales decreased 0.2 percentage points to 12.7% in fiscal 2012, from 12.9% in fiscal 2011.

Interest Expense

 

     Fiscal Year
Ended March 31,
    Change  
     2011     2012     $      %  
    

(in thousands, except for percentages)

 

Interest expense

   $ (885   $ (161   $ 724             nm   
  

 

 

   

 

 

   

 

 

    

 

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Interest expense decreased $0.7 million to $0.2 million in fiscal 2012 from $0.9 million in fiscal 2011. The decrease in interest expense was primarily due to lower interest expense resulting from repayment of the term loan in August 2010 and decreased average borrowings on our credit facility during fiscal 2012 offset by higher interest rates in fiscal 2012.

Other Income (Expense), Net

 

     Fiscal Year Ended
March 31,
    Change  
     2011      2012     $     %  
    

(in thousands, except for percentages)

 

Other income (expense), net

   $ 155       $ (1,594   $ (1,749         nm   
  

 

 

    

 

 

   

 

 

   

Other income (expense), net increased $1.7 million to $1.6 million in expense in fiscal 2012 from $0.2 million in income in fiscal 2011. Other income (expense), net primarily reflects a non-recurring, non-cash charge of $1.7 million related to the increase in the fair value of our convertible preferred stock warrant liability offset by royalty income.

Provision for (Benefit from) Income Taxes

 

     Fiscal Year Ended
March 31,
    Change  
     2011     2012     $      %  
     (in thousands, except for percentages)  

Provision for (benefit from) income taxes

   $ (5,747   $ 6,588      $ 12,335             nm   
  

 

 

   

 

 

   

 

 

    

Effective tax rate

     (39.9 )%      40.7     

Our provision for income taxes was $6.6 million in fiscal 2012 compared to a benefit of $5.7 million in fiscal 2011. The benefit in fiscal 2011 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, 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 fiscal 2011.

Our effective tax rate for fiscal 2012 was 40.7% and differs from the federal statutory rate primarily due to state income taxes and the impact of a significant permanent tax difference resulting from a $1.7 million non-cash charge in fiscal 2012 due to an increase in the fair value of our convertible preferred stock warrant liability. The effective tax rate for fiscal 2012 is not comparable to the rate for fiscal 2011 primarily due to the valuation allowance reversal recorded in fiscal 2011.

Net Income

 

     Fiscal Year Ended
March 31,
     Change  
     2011      2012      $     %  
     (in thousands, except for percentages)  

Net income

   $ 20,155       $ 9,589       $ (10,566     (52.4 )% 
  

 

 

    

 

 

    

 

 

   

As a result of the factors above, net income decreased $10.6 million, or 52.4%, to $9.6 million in fiscal 2012 from $20.2 million in fiscal 2011.

 

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Table of Contents

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

Net Sales

 

     Fiscal Year Ended
March 31,
     Change  
     2010      2011      $     %  
     (in thousands, except for percentages)  

Meals

   $ 43,838       $ 49,168       $ 5,330        12.2

Snacks

     27,252         44,687         17,435        64.0   

Dressings, condiments and other

     24,925         23,761         (1,164     (4.7
  

 

 

    

 

 

    

 

 

   

Net sales

   $ 96,015       $ 117,616       $ 21,601        22.5
  

 

 

    

 

 

    

 

 

   

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/other 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.

Gross Profit

 

     Fiscal Year Ended
March  31,
    Change  
     2010     2011     $      %  
     (in thousands, except for percentages)  

Cost of sales

   $ 63,083      $ 71,804      $ 8,721         13.8
  

 

 

   

 

 

   

 

 

    

Gross profit

   $ 32,932      $ 45,812      $ 12,880         39.1
  

 

 

   

 

 

   

 

 

    

Gross margin %

     34.3     39.0     
  

 

 

   

 

 

      

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

 

     Fiscal Year Ended
March 31,
     Change  
     2010      2011      $      %  
     (in thousands, except for percentages)  

Operating expenses:

           

Selling, general and administrative expenses

   $ 25,323       $ 30,674       $ 5,351         21.1
  

 

 

    

 

 

    

 

 

    

 

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Table of Contents

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

 

     Fiscal Year Ended
March 31,
    Change  
     2010     2011     $      %  
     (in thousands, except for percentages)  

Income from operations

   $ 7,609      $ 15,138      $ 7,529         98.9
  

 

 

   

 

 

   

 

 

    

Income from operations as a percentage of net sales

     7.9     12.9     
  

 

 

   

 

 

      

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

 

     Fiscal Year Ended
March 31,
    Change  
     2010     2011     $      %  
    

(in thousands, except for percentages)

 

Interest expense

   $ (1,207   $ (885   $ 322             nm   
  

 

 

   

 

 

   

 

 

    

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

 

     Fiscal Year Ended
March 31,
     Change  
     2010      2011      $      %  
    

(in thousands, except for percentages)

 

Other income (expense), net

   $ 21       $ 155       $ 134             nm   
  

 

 

    

 

 

    

 

 

    

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.

 

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Table of Contents

Provision for Income Taxes

 

     Fiscal Year Ended
March 31,
    Change  
     2010     2011     $     %  
    

(in thousands, except for percentages)

 

Provision for income taxes

   $ 400      $ 5,548      $ 5,148            nm   

Less: Valuation allowance

     —          (11,295     (11,295         nm   
  

 

 

   

 

 

   

 

 

   

Provision for (benefit from) income taxes

   $ 400      $ (5,747   $ (6,147         nm   
  

 

 

   

 

 

   

 

 

   

Effective tax rate

     6.2     (39.9 )%     

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

 

     Fiscal Year Ended
March 31,
     Change  
     2010      2011      $      %  
     (in thousands, except for percentages)  

Net income

   $ 6,023       $ 20,155       $ 14,132         234.6
  

 

 

    

 

 

    

 

 

    

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.

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 2012, 27.5% and 30.4% of our net sales, 25.5% and 30.9% of our gross profit and 33.9% and 27.1% 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.

Quarterly Results

The following unaudited quarterly consolidated statement of operations data for the eight quarters ended June 30, 2012 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.

 

46


Table of Contents
    Quarter Ended  
    FY2011     FY2012     FY2013  
    Sept. 30,
2010
    Dec. 31,
2010
    Mar. 31,
2011
    June 30,
2011
    Sept. 30,
2011
    Dec. 31,
2011
    Mar. 31,
2012
    June 30,
2012
 
    (in thousands, except for share and per share amounts)  

Net sales

  $ 32,315      $ 24,653      $ 36,594      $ 28,610      $ 38,872      $ 30,838      $ 42,984      $ 34,293   

Cost of sales

    19,914        15,296        21,535        17,022        24,737        18,275        25,843        20,486   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    12,401        9,357        15,059        11,588        14,135        12,563        17,141        13,807   

Selling, general and administrative expenses

    7,583        7,214        9,717        8,303        8,056        8,847        12,289        10,211   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    4,818        2,143        5,342        3,285        6,079        3,716        4,852        3,596   

Interest expense

    (547     (8 )     (4 )     (18     (23     (25     (95     (40

Other income (expense), net

    57        30        27        (484     13        43        (1,166     49   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for (benefit from) income taxes

    4,328        2,165        5,365        2,783        6,069        3,734        3,591        3,605   

Provision for (benefit from) income taxes

    (6,183 )     116        216        971        2,453        1,502        1,662        1,474   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 10,511      $ 2,049      $ 5,149      $ 1,812      $ 3,616      $ 2,232      $ 1,929      $ 2,131   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stockholders

  $ 310      $ 61      $ 153      $ 54      $ 107      $ 69      $ 58      $ 2,131   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to common stockholders—Basic

  $ 0.67      $ 0.14      $ 0.33      $ 0.12      $ 0.23      $ 0.15      $ 0.12      $ 0.13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to common stockholders—Diluted

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    461,896        461,896        462,240        464,994        465,045        471,554        474,781        16,936,007   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    1,149,322        1,231,411        1,279,815        1,236,410        1,018,359        1,037,657        1,160,185        17,600,908   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

 

     March 31,      June 30,
2012
 
     2011      2012     
    

(in thousands)

 

Cash

   $ 7,333       $ 562       $ 5,102   

Accounts receivable, net

     9,128         11,870         7,388   

Accounts payable, related-party payable and accrued liabilities

     16,036         9,618         5,489   

Working capital(1)

     13,035         16,427         28,066   

 

  (1) Working capital consists of total current assets less total current liabilities.

In fiscal 2012, we invested approximately $3.5 million in property and equipment including $1.2 million in manufacturing equipment, which is located at the facilities of our contract manufacturers and remains our property, and $1.6 million in the implementation of our new ERP system.

 

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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:

 

     Fiscal Year Ended March 31,     Three Months Ended
June 30,
 
     2010     2011     2012     2011     2012  
     (in thousands)  

Cash at beginning of period

   $ 3,693      $ 8,550      $ 7,333      $ 7,333      $ 562   

Net cash provided by (used in) operating activities

     9,127        18,238        1,291       
(6,675

    950   

Net cash (used in) investing activities

     (502     (886     (3,538     (380     (735

Net cash (used in) provided by financing activities

     (3,768     (18,569     (4,524     2,822        4,325   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash at end of period

   $ 8,550      $ 7,333      $ 562      $ 3,100      $
5,102
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 increased by $4.5 million during the three months ended June 30, 2012. Our working capital was $28.1 million at June 30, 2012, an increase of $11.7 million from $16.4 million at the end of fiscal 2012. The increase was primarily due to a $4.4 million increase in inventory, a $3.1 million decrease in accrued liabilities, a $2.7 million increase in income tax receivable and a $1.3 million decrease in related-party payable, offset by a $4.5 million decrease in accounts receivable.

Our cash balance decreased by $6.8 million during fiscal 2012. Our working capital was $16.4 million at March 31, 2012, an increase of $3.4 million from $13.0 million at the end of fiscal 2011. The increase was due principally to a $9.6 million decrease in accounts payable, a $2.7 million increase in accounts receivable, net, a $0.5 million increase in inventory and a $0.4 million increase in current deferred tax assets, offset by a $1.9 million increase in accrued liabilities and a $1.3 million increase in related-party payable.

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 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. Given our operating cash flows and the desire to take advantage of discounts available to us, during the fourth quarter of fiscal 2012, we discontinued this practice and as a result our accounts payable decreased by $9.6 million to $0.9 million from $10.5 million at March 31, 2011. This discontinuance significantly decreased cash provided by operating activities for fiscal 2012.

Cash Flows from Operating Activities

Operating activities provided $1.0 million of cash during the three months ended June 30, 2012, primarily due to our net income of $2.1 million, which included net non-cash charges of $0.5 million. Changes in operating asset and liability accounts provided an additional $2.5 million of net cash, which was comprised of a $4.5 million decrease in accounts receivable, a $3.5 million increase in accrued expenses offset by a $4.3 million increase in inventory and a $1.3 million decrease in related party payable, resulting from the termination of our advisory services agreement with Solera effective upon the consummation of our IPO. This increase in cash was offset by the excess tax benefit from stock-based compensation of $4.2 million.

Operating activities used $6.7 million of cash during the three months ended June 30, 2011, primarily due to our net income of $1.8 million, which included net non-cash benefit of $0.2 million. Changes in operating asset and liability accounts used $8.3 million of net cash during the three months ended June 30, 2011.

Our operating activities in fiscal 2012 provided $1.3 million of cash, primarily due to our net income of $9.6 million offset by a decrease in accounts payable of $9.5 million and an increase in accounts receivable, net of $2.9 million. The decrease in accounts payable was a result of paying down outstanding vendor balances that remained unpaid at the end of fiscal 2011. The higher accounts receivable was driven by year-over-year net sales growth. We also had net non-cash charges of $3.7 million, which included $1.7 million due to an increase in the fair value of convertible preferred stock warrant liability.

 

 

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Our operating activities in fiscal 2011 provided $18.2 million of cash, primarily due to our net income of $20.2 million. We also had net non-cash items of $3.3 million, which included a $7.1 million increase in deferred tax assets and a $2.5 million increase in trade discount allowances.

Our operating activities in fiscal 2010 provided $9.1 million of cash, primarily due to our net income of $6.0 million, and an increase in accounts payable of $2.6 million. We also had non-cash charges of $1.9 million, which included non-cash share-based compensation expense of $0.9 million.

Cash Flows from Investing Activities

Cash used in investing activities related to purchases of property and equipment during the three months ended June 30, 2012 and 2011 was $0.7 million and $0.4 million, respectively.

In fiscal 2012 and 2011, cash used in investing activities was $3.5 million and $0.9 million, respectively, related to purchases of property and equipment. In fiscal 2010, cash used in investing activities was $0.5 million and consisted primarily of purchases of property and equipment.

Cash Flows from Financing Activities

Cash provided by financing activities totaled $4.3 million during the three months ended June 30, 2012, comprised of:

 

   

net proceeds of $11.1 million received from common shares issued in the IPO, net of issuance costs;

 

   

excess tax benefit from stock-based compensation of $4.2 million;

 

   

proceeds of $1.8 million received from exercises of stock operations; and

 

   

pay down of the outstanding balance of $12.8 million of our credit facility.

Cash provided by financing activities totaled $2.8 million during the three months ended June 30, 2011 including net proceeds of $3.4 million received from borrowings under our credit facility offset by payments of $0.6 million to repurchase certain stock options.

In fiscal 2012, our financing activities used cash of $4.5 million, which primarily consisted of $13.6 million in dividend payments and $3.4 million in payments of IPO costs partially offset by proceeds of $12.8 million from borrowings under our credit facility.

In fiscal 2011, our financing activities used cash of $18.6 million and consisted primarily of $12.5 million in dividend payments and the $6.0 million term loan repayment.

In fiscal 2010, our financing activities used cash of $3.8 million primarily to pay cash dividend payments of $3.5 million.

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 March 31, 2012, we had $12.8 million of borrowings outstanding and had $7.2 million of availability under the credit facility. Upon consummation of our IPO, we paid down the outstanding

 

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balance of $12.8 million of our credit facility. As of June 30, 2012, the full $20.0 million of the credit facility was available to us and if needed, we may borrow amounts from our credit facility to finance our operations and working capital requirements.

We were in compliance with all covenants under the credit facility as of June 30, 2012 and March 31, 2012. 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 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., or Hercules. 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 was scheduled to expire on the earlier of 10 years from the date of issuance or five years after our initial IPO. Upon the consummation of the IPO, the warrant became a warrant to purchase common stock. Pursuant to the terms of the warrant, the stock dividend we effected altered the number of shares issuable upon the exercise of the warrant and, as a result, 80,560 shares of common stock were issuable upon the exercise of the warrant at an exercise price of $8.07. On April 12, 2012, Hercules exercised the warrant in full using the net issuance method permitted under its terms. As a result, we issued Hercules 63,193 shares of common stock.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of June 30, 2012:

 

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

Rent obligations(1)

   $ 1,964       $ 524       $ 1,440       $       $   

Equipment lease obligations(2)

     44         25         19                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating lease obligations

     2,008         549         1,459                   

Purchase commitments(3)

     13,064         12,792         272                   

Warehousing overheads obligations(4)

     600         200         400                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,672       $ 13,541       $ 2,131       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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. We are working on reconfiguring approximately 6,500 square feet from the sample storage area to additional office space to accommodate our growth.
(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) We have an agreement with our contract warehousing company to pay minimum overhead fees through June 2015.

 

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Off-balance Sheet Arrangements

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

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.

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 June 30, 2012 and March 31, 2012 would have resulted in an increase or decrease to cost of sales of approximately $2.4 million and $2.4 million, respectively. 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 June 30, 2012 and March 31, 2012, we had $20.0 million and $7.2 million, respectively, of 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 2012, 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 to cover these increased costs.

 

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Critical Accounting Policies and Estimates

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.

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 either upon delivery or pick up of products by 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 sales and promotion incentives, slotting, customer discounts and spoils. We have entered into contracts with various retailers granting an allowance for 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 $1.1 million and $1.3 million for the three months ended June 30, 2011 and 2012, respectively, and $4.3 million, $4.7 million and $4.8 million during fiscal 2010, 2011 and 2012, respectively. These costs reflect the costs associated with moving finished products to customers, including costs associated with the 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.

 

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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 2010, 2011 or 2012.

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 a significant decrease in expected cash flows at a reporting unit level. In our annual impairment evaluation, we first assess qualitative factors to determine whether it is more likely than not that the fair value of our 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 goodwill impairment test involves a two-step process and is tested for our sole reporting unit by comparing its carrying amount including goodwill, to its fair value. If the carrying amount exceeds the fair value, the second step of the goodwill impairment test would be performed to measure the amount of impairment loss, if any. When impaired, the carrying value of goodwill is written down to fair value. There was no impairment of goodwill identified for the periods presented.

Stock-Based Compensation

We record stock-based compensation expense for equity-based awards over the required service period by the recipient based on the grant date fair value of the award. The fair value of restricted stock units and performance share units is determined based on the number of units or shares, as applicable, granted and the closing price of the company’s common stock as of the grant date. Stock-based compensation related to performance share units reflects the estimated probable outcome at the end of the performance period. The fair value of options is determined as of the grant date 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:

 

     Fiscal Year Ended March 31,    Three Months
Ended
June 30, 2012
 
     2010     

2011

   2012   

Expected term (in years)

     6.9       N/A    5.2 - 6.9      5.2   

Expected volatility

     42    N/A    41% - 42%      41%   

Risk-free interest rate

     4.6    N/A    1.1% - 3.1%      1.1%   

Dividend yield

     0    N/A    0%      0%   

 

 

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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 had been no public market for our common stock prior to our listing on the NYSE, our board of directors 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.

Under our Omnibus Incentive Plan, the fair value of the shares of common stock underlying the stock options is defined as the closing price of our common stock on the date of the grant.

Weighted-average Expected Term

We derived the expected term using several factors including the ratio of market value to the strike price, volatility, proximity to recent vesting and the remaining option term. In addition, we considered behavioral factors including portfolio diversification, liquidity considerations, risk aversion and tax planning in our model to determine the expected term.

Volatility

Since there had been no public market for our common stock and a lack of company-specific historical volatility, we 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.

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 options exercised during fiscal 2010, 2011, 2012 and three months ended June 30, 2012 was $1,000, $37,000, $635,000 and $11.8 million, respectively. The intrinsic value is calculated as the difference between the exercise price and the fair value of the common stock.

As of June 30, 2012 and March 31, 2012, there was approximately $3.4 million and $3.5 million, respectively, of total unrecognized compensation cost related to unvested share-based compensation arrangements which is expected to be recognized over a weighted average period of 3.5 years and 3.7 years, respectively.

 

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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:

 

     Fiscal Year Ended March 31,      Three Months
Ended
June 30, 2012
 
         2010              2011              2012         
     (in thousands)  

Total stock-based compensation

   $ 902       $ 373       $ 506       $ 216   

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.

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 $5.1 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, 2012, we had $9.9 million in federal and $7.7 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, limits 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 is adjusted for changes in fair value until the earliest of the exercise, expiration

 

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of the convertible preferred stock warrant or conversion to a warrant to purchase common stock. Upon the consummation of the IPO, the warrant became exercisable into shares of our common stock and as such, the related convertible preferred stock liability of $2.2 million as of April 2, 2012, was reclassified to additional-paid in capital. The warrant was exercised on April 12, 2012.

Out-of-period Adjustment

During fiscal 2012, we corrected an error in the measurement of our 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 fiscal 2012. 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 had assessed the impact of this error and did not believe that it was material, either individually or in the aggregate, to any prior period 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 $76.8 million in fiscal 2008 to $141.3 million in fiscal 2012, representing a 16.5% compound annual growth rate. Over the same period, our income from operations increased from $1.4 million in fiscal 2008 to $17.9 million in fiscal 2012.

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

 

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expanding its line of natural macaroni and cheese across a broader national footprint in the mainstream grocery and natural retailer channels.

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.

In connection with our IPO that closed on April 2, 2012, our common stock began trading under the stock symbol BNNY on the New York Stock Exchange, or NYSE, on March 28, 2012. Prior to such date, there was no public market for our common stock. In addition, we are an “emerging growth company” as defined in the JOBS Act.

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.

 

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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.

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 USDA Organic Foods Production Act and its implementing regulations are made with ingredients generally free of synthetic pesticides, fertilizers, chemicals and, in the case of dairy products, synthetic growth hormones. The USDA’s National Organic Program regulations include the National List of Allowed and Prohibited Substances for use in certified organic products, which is amended from time to time based on recommendations from the National Organic Standards Board. 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

 

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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.

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 2012, we estimate that 19% of our net sales were generated by products introduced since the beginning of fiscal 2010.

Strategic and valuable brand for retailers. Our brand is valuable to retailers in the mainstream grocery, mass merchandiser and natural retailer channels. We believe retailers carry our products for several reasons, including that our products satisfy consumer demand for premium natural and organic products and many of our consumers spend more on food and buy higher margin items than average consumers. Further, we believe our products offer better profitability for retailers compared to conventional packaged foods.

 

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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. 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 as necessary to support our growth. 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 ERP 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

 

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ingredients that are as near to their whole, natural state as possible. In fiscal 2012, 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.

We have over 125 products across our product lines in various sizes and flavors. In fiscal 2012, 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 2012, we estimate that 19% of our net sales were generated by products introduced since the beginning of fiscal 2010. In fiscal 2010, 2011 and 2012, we spent $1.3 million, $2.1 million and $2.0 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, which is being distributed on a national basis through a major industry-leading natural retailer. In March 2012, we announced a pizza product line extension, rising crust frozen pizza “made with organic” ingredients, which we shipped to our first customer in late June. We expect to ship to a number of additional customers starting this quarter. We also expect to develop additional frozen products over the coming years.

 

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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 2012, approximately 3% of our net sales were from Canada. We sell our products through three primary channels: mass merchandiser/other mainstream grocery, 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.

 

   

Mass Merchandiser/Other Channels: Our customers in this channel include large national and regional retailers such as Target Stores, Costco Wholesale and Wal-Mart. We also sell a limited number of products through food service, military and e-commerce channels. During fiscal 2012, we estimate that the mass merchandiser channel, including the other channels mentioned above, represented approximately 37% of our net sales.

 

   

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 2012, we estimate that the mainstream grocery channel represented approximately 36% 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 2012, we estimate that the natural retailer channel represented approximately 27% 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 2012, 26% of our net sales were generated from sales to our top two customers, Target (15%) and Costco (11%). 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 2012, 25% 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 2012 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.

 

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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 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 2012 and the quarter ended June 30, 2012, Philadelphia Macaroni Company, Lucerne Foods, Peacock Engineering and Chelten House Products manufactured and/or packaged products accounting for approximately two-thirds of our net sales.

We have invested significant resources to improve operating margins by reducing costs and increasing productivity. Our efficiency initiatives have focused on selecting better and more efficient manufacturers, renegotiating tolling fees with existing manufacturers, managing 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 invested approximately $1.2 million in manufacturing equipment, which is located at the facilities of our contract manufacturers and remains 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, our contracted ingredients represented approximately 48% 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 most 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.

 

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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.

Order Fulfillment

A majority of our customer fulfillment requirements are met by an outside contract warehouse, which is 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 April 2012, in order to support our growing operations, reduce costs and facilitate order fulfillment, we relocated our existing distribution operations to a nearby larger facility owned and operated by the same third party. Concurrent with this move, our new agreement, which was entered into in September 2011, became effective in April 2012 and will remain in effect through June 2015. 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. Under the new agreement, our products are stored and shipped on a cost-plus basis by the third party. In addition to third party distribution, a smaller portion of our products are shipped directly from our contract manufacturers to retailers or distributors.

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. Many 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 March 31, 2012, excluding interns, we had 85 full-time employees and eight part-time employees, including 32 in sales and marketing, 20 in finance, 14 in operations, seven in information technology, five in innovation and 15 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. 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.

 

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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. Further, in accordance with the terms of the lease agreement, we have an option to reconfigure approximately 6,500 square feet from the sample storage area to additional office space to accommodate our growth, subject to the zoning laws and approval from the City of Berkeley. We are working on build-out plans for expansion of our offices as allowed under the terms of our lease. 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. We believe that our current facilities are adequate to meet our needs for the near future and that suitable additional or alternative space will be available on commercially reasonable terms to accommodate our foreseeable future growth.

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 recently implemented an integrated information system called Microsoft AX. This ERP software manages purchasing, planning, inventory tracking, financial information and retailer and distributor ordering. Microsoft AX resides on redundant servers located at our headquarters, with data stored on local storage devices

 

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and streamed to an off-site storage provider for disaster recovery. We are an early adopter of the latest release of this system and worked with a Microsoft AX value-added reseller to support its implementation. This ERP software provides 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 and Directors

The following table sets forth information regarding our executive officers and directors (ages as of July 1, 2012):

 

Name

  

Age

    

Position

John M. Foraker

     49       Chief Executive Officer, Director

Kelly J. Kennedy

     43       Chief Financial Officer and Treasurer

Sarah Bird

     52       Senior Vice President—Marketing and Chief Mom Officer

Robert M. Kaake

     52       Senior Vice President—Chief Innovation Officer

Mark Mortimer

     52       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

     63       Director

Billie Ida Williamson

     59       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

 

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PowerBar, Inc. Ms. Bird received a BA from Wellesley College and an MBA from the Tuck School at Dartmouth College.

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

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 &

 

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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. 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 has been a member of our board of directors since March 2012. Ms. Klapstein has served as a CEO and senior executive of numerous companies in the information technology and healthcare information technology industries. In June 2001, Ms. Klapstein was a founding member 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 June 2001 through March 2012, Ms. Klapstein served as Chief Executive Officer of Availity. Since her retirement as CEO, Ms. Klapstein serves as the Vice Chair of Availity’s board of managers. 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 Div