SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Under Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For The Fiscal Year Ended June 30, 1996
Commission File No. 0-22818
THE HAIN FOOD GROUP, INC.
(Name of small business issuer in its charter)
Delaware 22-3240619
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Charles Lindbergh Boulevard
Uniondale, New York 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 237-6200
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of Each Class
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year: $68,606,000.
State the aggregate market value of the voting stock held by non-affiliates,
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
Class of Voting Stock and Number Market Value Held
of Shares Held by Non-Affiliates by Non-affiliates*
5,787,715 shares of Common Stock $21,342,000
* Based on the last reported sale price for the Common Stock on
NASDAQ on September 9, 1996
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
Common Stock, par value $.01 per share, 8,866,899 shares
outstanding as of September 9, 1996.
Document Incorporated by Reference
Part of the Form 10-KSB
Document into which Incorporated
The Hain Food Group, Inc. Definitive Part III
Proxy Statement for the Annual Meeting
of Stockholders to be Held December 3, 1996
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Description of Business
General
Industry Overview
Products
Manufacturing
New Product Development
Marketing and Distribution
Trademarks
Competition
Government Regulation
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters
Item 6. Management's Discussion and Analysis
or Plan of Operations
Item 7. Financial Statements
Index to Financial Statements of The Hain
Food Group, Inc. and Consolidated Subsidiaries
Item 8. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section
16(a) of Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership and Certain Beneficial
Owners and Management
Item 12. Certain Relationships and Related Transactions
PART IV
Item 13. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I
THE HAIN FOOD GROUP, INC.
Item 1. Description of Business.
General
The Hain Food Group, Inc., a Delaware corporation, and its subsidiaries (the
"Company") sell, market and distribute a full line of natural foods under
the "Hain" and "Farm Foods" brand names, cooking oils and certain other
products under the "Hollywood" brand name, sugar-free, medically directed
snack foods under the "Estee" brand name, low sodium food products under the
"Featherweight" brand name and kosher food products under the "Kineret" and
"Kosherific" brand names. Kineret Foods Corporation ("Kineret") and Farm Foods
Corporation ("Farm Foods") were acquired by the Company in November 1993.
In April 1994, the Company acquired Hain Pure Food Co., Inc. ("Hain") from
Pet, Incorporated, which acquisition included the Hollywood product line.
In April 1994, Farm Foods was merged into the Company. In November 1995, the
Company purchased substantially all of the business of The Estee Corporation
("Estee"). Consequently, at the current time, Hain and Kineret constitute the
Company's only subsidiaries.
The Company's products are marketed nationally to supermarkets, natural food
stores, food service distributors, specialty groceries, mass merchandisers,
drug stores and other independent retailers by third-party food brokers and
distributors and by the Company's in-house sales personnel. The Company's
products are produced by independent unaffiliated food processors
("co-packers") using specifications and formulations provided by the Company.
See "Manufacturing".
The Company's strategy is to be a leading specialty niche food marketer by
integrating all of its brands under one management with a uniform marketing,
sales and distribution program. The Company's business strategy is to
capitalize on the brand equity and the distribution previously obtained by
each of the Company's product lines and to enhance revenues by strategic
introductions of new product lines that complement existing products. The
foundation of this strategy has been established through the acquisitions
referred to above and the introduction of a number of new products during the
past two years. The Company believes that by integrating its various
specialty food groups, it will achieve efficiencies of scale and enhanced
market penetration. The Company considers the acquisition of specialty food
companies and product lines as an integral part of its business strategy.
To that end, the Company from time to time reviews and conducts preliminary
discussions with acquisition candidates. No assurance can be given, however
that any such acquisition will be consummated.
As of June 30, 1996, the Company employed a total of 43 full-time employees.
The Company's employees are not represented by any labor union. The Company
believes that its relations with its employees are good.
<PAGE>
Industry Overview
Natural Food Products
The Company's Hain and Farm Foods businesses market and distribute a full
line of natural food products. Natural foods are defined as foods which are
minimally processed, largely or completely free of artificial ingredients,
preservatives, and other non-naturally occurring chemicals, and are as near
to their whole natural state as possible.
Sugar-free and Low Sodium Products
The Company's Estee and Featherweight businesses market and distribute a full
line of sugar-free and low sodium products targeted towards diabetic and
health conscious consumers and persons on medically-directed diets.
Specialty Cooking Oils
The Company's Hollywood business markets a line of specialty cooking oils
which are enhanced with Vitamin E to maintain freshness and quality. The
Hollywood product line also includes carrot juice, mayonnaise and margarine.
Hollywood products are primarily sold directly to supermarkets and other mass
merchandisers.
Frozen Kosher Foods
The Company's Kineret business markets and distributes a line of frozen kosher
food products. Kosher foods are products which are prepared in a manner
consistent with Jewish dietary laws. The core target markets for Kineret Foods
products are (i) people who observe Jewish dietary laws, (ii) a significant
number of Muslims in the United States who frequently seek out foods with
kosher certification, (iii) Seventh-Day Adventists who tend to purchase
kosher food products, and (iv) other people who perceive kosher products as
being of higher quality. These target markets are located in or around major
metropolitan areas, primarily the greater New York City metropolitan area.
Products
The Hain line of products consists of approximately 175 branded natural food
products which are distributed nationwide to natural food stores, supermarkets,
food service distributors, specialty groceries, mass merchandisers, drug stores
and other merchants. Through Hain, the Company offers a full line of natural
food products including rice cakes (which accounts for approximately 30% of
total Company sales volume), cooking oils, soups, crackers, condiments and
snacks. The Hain brand name has been a prominent name in the natural food
industry since Hain's inception in 1926. Hain offers one of the broadest lines
of natural foods. The Company believes this prominence attracts both natural
food distributors and retailers.
<PAGE>
The Company acquired the Hollywood trademark and brand name in the acquisition
of Hain in April 1994. Hollywood branded products, which have been marketed
since 1955, consist of approximately 15 products sold principally through the
supermarket distribution channel. The flagship products are its safflower,
canola, and peanut oils, and carrot juice. Hollywood was the first
manufacturer of cooking oil to enhance its products with Vitamin E, thereby
distinguishing Hollywood cooking oils from the competition.
The Estee and Featherweight line of products consists of approximately 110
food products which are distributed nationwide to supermarkets, food service
distributors, specialty groceries, mass merchandisers, drug stores and other
merchants.
Kineret offers a line of kosher frozen food products under the Kineret and
Kosherific labels. The Kineret products include fish products, potato
pancakes, blintzes, challah bread, pastry dough, and assorted other frozen
food products.
Farm Foods products consist of non-dairy frozen dessert products, frozen
entrees, and a soy-based pizza, marketed under the trademarks "Ice Bean",
"Pita Classics" and "Pizsoy".
Manufacturing
All of the Company's products are manufactured at non-affiliated co-packers.
The Company has selectively consolidated its co-packing arrangements for its
products. The Company presently obtains all of its requirements for Hain rice
cakes from two suppliers, and all of its Hollywood cooking oils from one
supplier. The Company believes that alternative sources of supply are
available if co-packing arrangements with these suppliers were to be terminated
by the Company or the co-packers. There can be no assurance that alternative
sources of supply would be able to meet the requirements of the Company, and if
the Company were unable to arrange for alternative sources of supply in a
timely manner, such failure could have a material adverse effect on the
Company's business, operating results and financial condition. Pursuant to its
co-packing arrangements, the Company purchases substantially all of its
products as finished goods. Accordingly, the Company's inventories of raw
materials are not significant.
In January and February 1996, the Company sold the wafer, chocolate and hard
candy, liquid packaged products and dry packaged products manufacturing
equipment acquired in the acquisition of Estee to separate non-affiliated
co-packers for aggregate proceeds of $2,075,000, of which $1,450,000 was
payable at the time of closing and the balance of which is payable over 5
years. The Company has entered into five to seven year agreements with the
co-packers who purchased such equipment. Such co-packers currently produce
approximately 50% of Estee's total product requirements.
Kineret's products are primarily processed under the supervision of the
Orthodox Union which certifies a product as kosher. Before the Orthodox
Union will permit its certification, evidenced by its symbol, to be placed
on a product, the Orthodox Union must approve both the ingredients contained
in the product and the facility manufacturing or processing the product.
The ability of the Company to continue Kineret's business of developing,
marketing and distributing kosher food products is therefore dependent on its
continued compliance with the requirements of the certification procedures
of the Orthodox Union.
<PAGE>
The co-packers which produce, supply or package Kineret's products must comply
with strict ingredient and processing standards established by Kineret Foods.
Kineret management visits each facility periodically to ensure that all
products bearing Kineret labels are manufactured to Kineret's standards and to
ensure maintenance of quality control and compliance with the certification
standards of the Orthodox Union.
New Product Development
During the fiscal year ended June 30, 1996, Hain introduced several new
product lines. These included mini-munchies rice snack bars, low fat baked
crisps, and soy/rice milk. More recently Estee has introduced a line of
sugar-free rice cakes. During the fiscal year ended June 30, 1995, Hain
introduced nine new products lines. These included a new line of rice cakes
("mini-munchies") and graham crackers. In addition, the Company revised its
existing line of 10.5 ounce and 19 ounce canned soups into one line of 15
ounce soups with modified ingredients and formulations and new packaging.
The Company introduced various extensions to its Kineret product line during
the fiscal year ended June 30, 1995.
The Company continuously evaluates its existing products for taste,
nutritional value and cost thereby seeking to make improvements where
possible. The Company will discontinue products or stock keeping units
when sales volume of those items do not warrant further production.
Marketing and Distribution
Generally, all products marketed by the Company are sold either through
independent unaffiliated food brokers or distributors. Food brokers act as
agents for the Company within designated territories or for specific
supermarket or related chain stores, usually on a non-exclusive basis, and
receive commissions, which average 4% of sales. Food distributors purchase
products from the Company for resale to retailers. Because food distributors
take title to the products upon purchase, product pricing decisions are made
in their sole discretion.
The Company utilizes retail-in-store events such as product demonstrations and
product sampling, and point of sale displays. The Company also sponsors and
participates in local distributor and retailer "events", distributes coupons,
and conducts both retailer and distributor advertising using print in trade
magazines and distributor catalogues.
The Company's customer base for its products consists principally of mass
market merchandisers, natural food distributors, grocery wholesalers and
kosher food distributors. No single customer accounts for more than 10% of
revenues. Foreign sales are not significant.
Trademarks
The Hain, Hollywood, Estee, Featherweight, Kineret, Kosherific, and Farm Foods
trademarks and related trademarks and brand names are registered in the United
States and a number of foreign countries. The Company believes that its
trademarks and trade names are significant to the marketing and sale of the
Company's products and that the inability to utilize one or more of these
names could have a material adverse effect on the Company's business, results
of operations and financial condition.
<PAGE>
Competition
The Company faces significant competition in the marketing of all of its
product lines, and competes with many larger companies, including divisions
of a number of multi-national food manufacturers, all of which have
substantially greater marketing, distribution and capital resources. Hain
rice cakes compete with Quaker Oats and other rice cake manufacturers.
Quaker Oats is the dominant supplier of rice cakes and the Company estimates
that Quaker Oats has more than a two-thirds share of the total rice cake
market. Hain's other products, including cooking oils, soups, crackers, etc.
compete against items produced by other specialty natural foods companies,
including Health Valley, Spectrum Company, Arrowhead Mills and Westbrae, and
indirectly against major food companies. Hollywood canola, safflower and
peanut oils compete against similar products manufactured by Proctor & Gamble
(Puritan/Crisco), ConAgra (Wesson) and RJR Nabisco (Planters) as well as with
certain products produced by other companies. Estee's major competitor is
Fifty-Fifty. Kineret competes with a number of companies, including Rokeach,
Wilton Foods Corp. and Old Fashioned Kitchens, Inc., which are engaged in the
manufacture, sale and distribution of products similar to those sold by
Kineret.
Government Regulation
The manufacture, distribution and sale of the Company's products are subject
to various federal, state and local laws governing the production, sale,
advertising, labeling and ingredients of food products. Although the Company
believes it and its distributors and co-packers are currently in compliance
with all material federal, state and local governmental laws and regulations,
there can be no assurance that the Company, its distributors and co-packers
will be able to comply with such laws and regulations in the future or that
new governmental laws and regulations will not be introduced which would
prevent or temporarily inhibit the development, distribution and sale of the
Company's products to consumers. If any of the Company's distributors or
co-packers were to violate any such law or regulation, it could result in
fines, recalls, seizure or confiscation of products marketed by the Company.
The Company has, to its knowledge, complied with all current food labeling
and packaging requirements, including significant labeling requirements that
became effective during 1994.
Kineret, as a marketer of kosher food products, is subject to additional
state and local regulation and inspection.
The Company has not experienced any regulatory problems in the past and
has not been subject to any fines or penalties. No assurance can be
given, however, that future changes in applicable law, regulations or the
interpretation thereof will not necessitate significant expenditures or
otherwise have a material adverse impact on the Company, particularly if the
Company alters its strategy and directly manufactures its own products.
<PAGE>
Item 2. Description of Property.
The Company's corporate headquarters are located in 7,500 square feet of
leased office space located at 50 Charles Lindbergh Boulevard, Uniondale,
New York. This lease commenced on August 15, 1994 and expires on September
30, 1999. The current annual rental is approximately $165,000. The Company's
Kineret Foods 7,000 square foot warehouse and distribution center is located
in East Hills, New York. This lease, which provides for annual net rental of
approximately $37,000, expires in August 1997.
The Company warehouses its products (other than Kineret products) in bonded
public warehouses from which it makes deliveries to customers.
Item 3. Legal Proceedings.
The Company is from time to time involved in incidental litigation relating to
the conduct of its business. The Company is not currently a party to any
litigation, which in the opinion of management, is likely to have a material
adverse effect on the Company's business, results of operations or financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1996.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters.
The outstanding shares of Common Stock, par value $.01 per share, of the
Company are traded on NASDAQ and since March 1995 have been traded through
NASDAQ's National Market System. In November 1994, holders of the Company's
Class A Warrants ("Warrants") exercised approximately 99% of such Warrants,
with the balance being redeemed by the Company in accordance with their terms.
Prior to such exercise, the Warrants were also traded on NASDAQ. The
following table sets forth the reported high and low closing prices for the
Common Stock and the Warrants for each calendar quarter from July 1, 1994
through September 9, 1996.
Common Stock Class A Warrants*
Period High Low High Low
Year Ended June 30, 1995
07/01/94-09/30/94 $5 9/16 $4 5/16 $2 1/8 $11/16
10/1/94-12/31/94 5 1/16 4 1/2 2 1/16 11/2
01/1/95-03/31/95 5 1/2 4 1/2
04/1/95-06/30/95 5 3 3/8
Common Stock
Period High Low
Year Ended June 30, 1996
07/1/95- 09/30/95 $4 1/2 $3 1/2
10/1/95-12/31/95 3 3/4 2 15/16
01/1/96-03/31/96 3 11/16 2 15/16
04/1/96-06/30/96 4 1/8 3 1/16
07/1/96- 09/09/96 3 7/8 3 1/8
* Through date warrants exercised or redeemed.
As at September 9, 1996, there were 83 holders of record of the Company's
Common Stock.
<PAGE>
The Company has not paid any dividends on its Common Stock to date. The
Company intends to retain all future earnings for use in the development
of its business and does not anticipate declaring or paying any dividends
in the foreseeable future. The payment of all dividends will be at the
discretion of the Company's Board of Directors and will depend on, among
other things, future earnings, operations, capital requirements, contractual
restrictions, the general financial condition of the Company and general
business conditions. The ability of the Company to pay dividends is
currently restricted by covenants contained in its Credit Agreement with its
bank and its subordinated debentures.
Item 6. Management's Discussion and Analysis or Plan of
Operation.
General
The Company was formed in May 1993 to acquire, develop and market a line of
branded specialty food products. The Company's strategy is to capitalize on
brand awareness and to consolidate all product lines under one centralized
management team. See "Industry Overview" for a description of the Company's
product lines.
The Company made the following acquisitions since inception (see Note 3 of
the Notes to Consolidated Financial Statements for further details):
In August 1993, the Company acquired the Pizsoy trademark for use in
connection with a soy-based pizza product line.
In November 1993, the Company acquired Kineret, a marketer of kosher
frozen food products.
In November 1993, the Company acquired certain net assets of Barricini
Foods, Inc., relating to frozen natural food products. The Company
operates this product line under the Farm Foods name.
On April 14, 1994, the Company acquired from Pet, Incorporated, the
Hain Pure Food Co, Inc., a natural foods products company which also
operates the Hollywood Foods Division which principally sells healthy
cooking oils. Hain was acquired from Pet, Incorporated and is a
significantly larger company than the other acquired entities.
On November 3, 1995, the Company purchased substantially all of the
assets and business, subject to certain liabilities of The Estee
Corporation. Estee is a manufacturer and marketer of sugar-free and low
sodium products targeted towards diabetic and health conscious consumers.
On November 19, 1993, the Company completed an initial public offering from
which it received net proceeds of approximately $2.9 million.
<PAGE>
On October 4, 1994, the Company called for redemption all of its Class A
Warrants ("Warrants"), issued in conjunction with the initial public
offering, at a redemption price of $.10 per Warrant. As a result, holders
of an aggregate of 2,450,342 Warrants (98.9%) exercised their rights to
acquire 2,450,342 shares of the Company's Common Stock. The net proceeds
from the exercise of the Warrants amounted to approximately $7.6 million,
and substantially all of the net proceeds were used to retire the Company's
Senior Term Loan from a bank.
In addition, in late 1994, the Underwriter for the Company's initial public
offering exercised its warrants and acquired approximately 323,000 shares
of the Company's common stock. The proceeds of exercise amounted to
approximately $800,000, which were utilized for working capital purposes.
Results of Operations
A summary of results of operations for 1996 compared with 1995 is
set forth below.
(in thousands)
1996 1995
-------------- -------------
Net sales $68,606 100.0% $58,076 100.0%
Gross profit 27,722 40.4% 21,856 37.6%
Selling, general and
administrative expenses,
depreciation and
amortization 21,740 31.7% 15,966 27.5%
Operating income 5,982 8.7% 5,890 10.1%
Interest and financing
costs 2,218 3.2% 1,770 3.0%
Income before income taxes 3,764 5.5% 4,120 7.1%
Income taxes 1,630 2.4% 1,755 3.0%
Net income $ 2,134 3.1% $ 2,365 4.1%
The increase in net sales in 1996 as compared with 1995 is essentially all
attributable to the acquisition of Estee in November 1995. Gross margin
percentage increased by approximately 2.8% in 1996 compared with 1995,
principally because of a sales price increase on one of the Company's major
product lines and more efficient production by co-packers. Gross margin
percentages achieved throughout 1996 were fairly stable.
<PAGE>
Operating expenses (as a percentage of net sales) during 1996 were
approximately 4% higher than in 1995, principally due to increased
promotional activity in connection with the introduction of new products.
It should be noted that the integration of Estee did not result in any
significant increases in the Company's general and administrative expenses.
Interest and financing costs for the current year were $448,000 higher than
1995, principally because of debt incurred in connection with the acquisition
of Estee in November 1995. The increase was offset, in part, by the early
retirement of a term loan in November 1994, with the proceeds from the
exercise of the warrants and lower interest rates.
Income before income taxes, as a percentage of net sales, decreased in 1996
as compared to 1995 by 1.6% as a result of the aforementioned increases in
operating expenses and interest and financing costs, offset to some extent
by increases in gross margin.
Income taxes as a percentage of pre-tax income amounted to 43.3% in 1996 as
compared to 42.6% in 1995. This percentage is deemed representative of the
Company's ongoing effective income tax rate.
Liquidity and Capital Resources
In November 1995, the Company purchased substantially all of the business of
The Estee Corporation. In connection with the acquisition, the Company and
its bank entered into an $18 million Amended and Restated Credit Facility
("Facility") providing for a $9 million senior term loan and a $9 million
revolving credit line. The Facility replaced the Company's existing $6
million revolving credit line with the same bank. Borrowings under the
facility bear interest at rates ranging from 1/2% to 1% over the bank's base
rate. The senior term loan is repayable in quarterly principal installments,
commencing March 31, 1996 through maturity of the Facility on June 30, 2000.
Pursuant to the revolving credit line, the Company may borrow up to 85% of
eligible trade receivables and 60% of eligible inventories. Amounts
outstanding under the Facility are collateralized by principally all of the
Company's assets. The Facility also contains certain financial and other
restrictive covenants. The Company borrowed the full $9 million senior term
loan and $2 million under the revolving credit line to fund the cash purchase
price of the acquisition of Estee at date of acquisition. Subsequent thereto,
the Company repaid approximately $4 million of such borrowings, principally
from the proceeds of sale of equipment acquired in the Estee acquisition and
operating cash flow.
The Company's 12.5% Subordinated Debentures ("Debentures") mature on April 14,
2004 and require principal payments of $1,943,000 on October 14, 2000, and of
$2,307,000, $2,125,000, and $2,125,000, respectively on April 14 of 2002, 2003
and 2004.
Of the $9 million available under the Company's revolving credit line, $1.4
million was outstanding at June 30, 1996. From time to time, because of
inventory requirements, the Company may utilize a portion of the revolving
credit line.
<PAGE>
The aggregate long-term debt service requirements for the year ending June 30,
1997 are approximately $4.6 million, which includes the optional redemption of
a $1.75 million subordinated note issued to the seller (the "Estee Note") in
connection with the acquisition of Estee and proceeds from collections of
certain receivables from the sale of equipment, which are required to be
utilized for pre-payments of the senior term loan. The Company presently
intends to redeem the Estee Note on April 30, 1997 for $1,312,500. The
Company anticipates that cash flow from operations will be sufficient to meet
all of its debt service and operating requirements.
Working capital at June 30, 1996 amounted to approximately $6.5 million, which
is adequate to serve the Company's operational needs. The Company purchases
its products from independent co-packers and does not intend to invest in
plant or equipment relating to the manufacture of products for sale.
Consequently, additions to property and equipment are not expected to be
material in future periods. The Company's Facility and Debentures impose
limitations on the incurrence of additional indebtedness and require that the
Company comply with certain financial tests and restrictive covenants. As at
June 30, 1996, the Company was in compliance with such covenants.
Seasonality
Sales of food products consumed in the home generally decline to some degree
during the Summer vacation months. However, the Company believes that such
seasonality has a limited effect on operations.
Inflation
The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented.
Item 7. Financial Statements
The following consolidated financial statements of The Hain Food Group, Inc.
are included in Item 7:
Consolidated Balance Sheets - June 30, 1996 and 1995
Consolidated Statements of Income - Years ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended June 30, 1996 and 1995
Consolidated Statement of Stockholders' Equity - Years ended June 30, 1996
and 1995
Notes to Consolidated Financial Statements
<PAGE>
ERNST & YOUNG LLP 395 North Service Road Phone 516 752-6100
Melville, New York 11747
Report of Independent Auditors
The Stockholders and Board of Directors
The Hain Food Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of The Hain Food
Group, Inc. and Subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of The Hain Food Group, Inc. and Subsidiaries at June 30, 1996 and 1995, and
the consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
August 23, 1996
<PAGE>
<TABLE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30
1996 1995
---------- ----------
<C> <C>
ASSETS
Current assets:
Cash $ 306,000 $ 187,000
Trade accounts receivable,
less allowance for doubtful
accounts of $58,000 and $120,000 8,069,000 6,763,000
Inventories 7,346,000 6,029,000
Receivables from sale of
equipment - current portion 632,000 521,000
Other current assets 639,000 312,000
---------- ----------
Total current assets 16,992,000 13,812,000
Property and equipment, net
of accumulated depreciation
of $399,000 and $215,000 685,000 654,000
Receivables from sale of
equipment - non-current portion 310,000 357,000
Goodwill and other intangible
assets, net of accumulated
amortization 27,140,000 17,626,000
Deferred financing costs,
net of accumulated amortization
of $706,000 and $374,000 1,312,000 1,388,000
Other assets 1,003,000 1,084,000
---------- ----------
Total assets $47,442,000 $34,921,000
========== ==========
<FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and
accrued expenses $ 5,560,000 $ 3,206,000
Current portion of long-term debt 4,619,000 427,000
Income taxes payable 273,000 1,296,000
---------- ---------
Total current liabilities 10,452,000 4,929,000
Long-term debt, less current portion 12,105,000 7,277,000
Deferred income taxes 461,000 425,000
---------- ----------
Total liabilities 23,018,000 12,631,000
---------- ----------
Stockholders' equity:
Preferred stock - $.01 par value;
authorized 5,000,000 shares,
no shares issued
Common stock - $.01 par value,
authorized 40,000,000 shares,
issued and outstanding 8,866,899
shares 89,000 89,000
Additional paid-in capital 20,413,000 20,413,000
Retained earnings 3,922,000 1,788,000
---------- ----------
Total stockholders' equity 24,424,000 22,290,000
---------- ----------
Total liabilities and
stockholders' equity $47,442,000 $34,921,000
========== ==========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended June 30,
1996 1995
---------- ----------
<S> <C> <C>
Net sales $68,606,000 $58,076,000
Cost of sales 40,884,000 36,220,000
Gross profit 27,722,000 21,856,000
Selling, general and administrative
expenses 20,905,000 15,334,000
Depreciation of property and equipment 184,000 158,000
Amortization of goodwill and other
intangible assets 651,000 474,000
---------- ----------
21,740,000 15,966,000
---------- ----------
Operating income 5,982,000 5,890,000
Interest expense, net 1,745,000 1,351,000
Amortization of deferred
financing costs 473,000 419,000
--------- ---------
2,218,000 1,770,000
--------- ---------
Income before income taxes 3,764,000 4,120,000
Provision for income taxes 1,630,000 1,755,000
--------- ---------
Net income $2,134,000 $2,365,000
========= =========
Net income per common share and
common share equivalents $0.24 $0.28
==== ====
Weighted average number of common shares
and common share equivalents 8,964,000 8,597,000
========= =========
<FN>
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended June 30
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $2,134,000 $2,365,000
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation of property and
equipment 184,000 158,000
Amortization of goodwill and
other intangible assets 651,000 474,000
Amortization of deferred financing
costs 473,000 419,000
Provision for doubtful accounts (103,000) 44,000
Deferred income taxes 36,000 198,000
Increase (decrease) in cash
attributable to changes liabilities,
net of amounts applicable to acquired
businesses:
Accounts receivable 8,000 (2,775,000)
Inventories 1,172,000 (499,000)
Other current assets (166,000) (255,000)
Other assets 81,000 (974,000)
Accounts payable and accrued
expenses (2,153,000) (1,413,000)
Income taxes payable (1,023,000) 1,058,000
--------- ---------
Net cash provided by (used in)
operating activities 1,294,000 (1,200,000)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business, net of
long-term debt issued (9,758,000)
Acquisition of property and equipment (215,000) (429,000)
--------- --------
Net cash used in investing activities (9,973,000) (429,000)
--------- -------
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from senior term loan 9,000,000
Proceeds from bank revolving
credit facility 1,100,000 300,000
Costs in connection with bank
financing (256,000) (20,000)
Payment of senior term loan (2,919,000) (8,015,000)
Proceeds from exercise of warrants
and options, net of related expenses 8,424,000
Collections of receivables from
equipment sales 2,011,000 582,000
Payment of other long-term debt (138,000) (127,000)
--------- ---------
Net cash provided by financing
activities 8,798,000 1,144,000
Net increase (decrease) in cash 119,000 (485,000)
Cash at beginning of year 187,000 672,000
------- -------
Cash at end of year $306,000 $187,000
======= =======
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1995 AND 1996
<CAPTION>
Common Stock Additional Retained
Amount Paid-in Earnings
Shares at $.01 Capital (Deficit) Total
--------- ------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance at
June 30, 1994 5,933,478 $59,000 $12,019,000 ($577,000) $11,501,000
Proceeds from
exercise of
Common Stock
warrants and
other stock
issuances, net
of related
expenses 2,933,421 30,000 8,394,000 8,424,000
Net income for
the year ended
June 30, 1995 2,365,000 2,365,000
Balance at
June 30, 1995 8,866,899 89,000 20,413,000 1,788,000 22,290,000
Net income for
the year ended
June 30, 1996 2,134,000 2,134,000
Balance at
June 30, 1996 8,866,899 $89,000 $20,413,000 $3,922,000 $24,424,000
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
The Company and its subsidiaries operate in one business segment: the sale
of specialty food products which are manufactured by various co-packers.
The Company's principal product lines consist of Hain Pure Foods (natural
foods), Hollywood Foods (principally healthy cooking oils), Estee (sugar-
free, medically directed snacks) Featherweight (low sodium food products),
Kineret Foods (frozen kosher foods) and Farm Foods (frozen natural foods).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
All amounts in the financial statements have been rounded to the nearest
thousand dollars, except shares and per share amounts.
Consolidation Policy:
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries, all of which are wholly-owned.
Material intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates:
The preparation of financial statements in conformity of generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition:
Sales are recognized upon the shipment of finished goods to customers.
Allowances for cash discounts and trade promotions are recorded in the
period in which the related sale is recognized.
Advertising Costs:
Advertising costs, which are included in selling, general and
administrative expenses, were not significant for 1996 and 1995.
Such costs are expensed as incurred.
Income Taxes:
The Company follows the liability method of accounting for income taxes.
Under the liability method, deferred taxes are determined based on the
differences between the financial statement and tax bases of assets and
liabilities at enacted rates in effect in the years in which the
differences are expected to reverse.
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Concentration of Credit Risk:
Substantially all of the Company's trade accounts receivable are due from
food distributors and food retailers located throughout the United States.
The Company performs credit evaluations of its customers and generally
does not require collateral. Credit losses are provided for in the
consolidated financial statements and consistently have been within
management's expectations.
Inventories:
Inventories consist principally of finished goods, raw materials and
packaging materials, and are stated at the lower of cost (first-in,
first-out basis) or market.
Fair Values of Financial Instruments:
As at June 30, 1996 and 1995, the Company had no cash equivalents. The
carrying amount of the receivables from sale of equipment approximates
their fair value. The Company believes that the interest rates set forth
in the Company's debt instruments approximate current borrowing rates
and, accordingly, the carrying amounts of such debt at June 30, 1996 and
1995 approximate fair value.
Property and Equipment:
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided under the straight-line method over the estimated
useful lives of the related assets.
Goodwill and Other Intangible Assets:
Goodwill consists of the excess of the cost of acquired businesses over
the fair value of the assets and liabilities acquired or assumed, and is
being amortized over a period of 40 years from date of acquisition (see
Note 6). The carrying value of such costs are reviewed by management to
determine whether an impairment may have occurred. If this review
indicates that such costs, or a portion thereof, will not be recovered,
as determined based on the undiscounted cash flows (income before
depreciation, amortization, interest expense and income taxes) of the
businesses acquired over the remaining amortization period, the carrying
amount of these costs will be reduced by the estimated shortfall of cash
flows.
Other intangible assets, which are not significant in the aggregate, are
being amortized over their respective applicable lives.
<PAGE>
THE HAIN FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Deferred Financing Costs:
Costs associated with obtaining debt financing are capitalized and
amortized over the related lives of the applicable debt instruments. The
unamortized deferred financing costs at June 30, 1996 and 1995 relates to
the bank Credit Facility and Subordinated Debentures (see Note 7).
Earnings Per Common Share:
Net income per share for 1996 and 1995 is based on the weighted average
number of common shares and dilutive common equivalent shares.
Supplemental Earnings Common Per Share:
In November 1995, the Company used the proceeds of the exercise of the
Company's Class A Warrants ("Warrants") to repay its Senior Term Loan.
Had the Warrants been exercised as of July 1, 1994, the net income per
share for the year ended June 30, 1995 (based on interest savings, net
of tax of approximately $144,000 and an assumed issuance of shares in
connection with the exercise of the Warrants as of July 1, 1994), would
have been the same ($.28 per share), as historically reported.
3. ACQUISITION OF ESTEE:
On November 3, 1995, the Company purchased substantially all of the assets
and business, subject to certain liabilities, of The Estee Corporation.
Estee is a manufacturer and marketer of sugar-free and low sodium products
targeted towards diabetic and health conscious consumers. The purchase
price amounted to approximately $11.32 million of which $9.57 million was
paid in cash and $1.75 million by the issuance of a junior subordinated
note, with a maturity date in 2005. In addition, the Company issued a
warrant to purchase 200,000 shares of the Company's common stock at an
exercise price of $6.50. The warrant expires on November 3, 1999.
The above acquisition has been accounted for as a purchase and, therefore,
operating results of the acquired business has been included in the
accompanying financial statements from the date of acquisition.
Unaudited pro forma results of operations for the year ended June 30,
1996, assuming that the Estee acquisition had occurred as of July 1,
1994 are as follows:
1996 1995
---------- ----------
Net sales $75,749,000 $82,835,000
Net income 2,316,000 2,991,000
Net income per share $ .26 $ .35
The pro forma operating results shown above are not necessarily indicative
of operations in the period following acquisition.
<PAGE>
THE HAIN FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RECEIVABLES FROM SALE OF EQUIPMENT:
In connection with the acquisition of Estee, the Company acquired certain
food manufacturing equipment. In January and February 1996, the Company
sold such equipment to co-packers for selling prices equal to the fair
value recorded at date of acquisition. A portion of the selling prices
was received in January and February 1996, and the balance of the
receivables are due in installments over a five year period through 2001.
The proceeds of sale are required to be utilized to pay down the bank
debt referred to in Note 7.
In connection with the acquisition of Hain in 1994, the Company acquired
certain food manufacturing equipment. In June and July 1994, the Company
sold such equipment to two co-packers for selling prices equal to the fair
value recorded at date of acquisition. The receivables from the sale of
equipment are due in installments over a three year period through 1997.
5. INVENTORIES:
Inventories consist of the following:
1996 1995
--------- ---------
Finished goods $6,641,000 $5,772,000
Raw materials and packaging 705,000 257,000
--------- ---------
$7,346,000 $6,029,000
========= =========
6. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill and other intangible assets consist of the following:
1996 1995
---------- ----------
Goodwill $28,209,000 $18,044,000
Other intangible assets 265,000 265,000
---------- ----------
28,474,000 18,309,000
Less: Accumulated amortization 1,334,000 683,000
---------- ----------
$27,140,000 $17,626,000
========== ==========
Substantially all unamortized goodwill relates to the acquisition of
Hain, Estee and Kineret Foods. The entities have been in operation for
many years and are viewed to have an unlimited life. Accordingly, such
goodwill is being amortized over the maximum period (40 years) permitted
by Accounting Principles Board Opinion No. 17. The increase in goodwill
during 1996 is all attributable to the acquisition of Estee and the
increase in 1995 resulted principally from adjustments to the preliminary
estimates of the fair value of the net assets acquired in the acquisition
of Hain in April 1994.
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT:
Long-term Debt consists of the following:
1996 1995
---------- ----------
Senior Term Loan $ 6,081,000
Revolving Credit 1,400,000 $ 300,000
12.5% Subordinated Debentures,
net of unamortized original
issue discount of $1,361,000
and $1,502,000 7,139,000 6,998,000
10% Junior Subordinated Note 1,750,000
Notes payable to sellers in
connection with acquisition
of companies, and other
long-term debt 354,000 406,000
---------- ---------
16,724,000 7,704,000
Current portion 4,619,000 427,000
---------- ---------
$12,105,000 $7,277,000
========== =========
In connection with the acquisition of Estee, the Company and its bank
entered into a $18 million Amended and Restated Credit Facility
("Facility") providing for a $9 million senior term loan and a $9 million
revolving credit line. The Facility replaced the Company's existing $6
million revolving credit line with the same bank. Borrowings under the
facility bear interest at rates ranging from 1/2% to 1% over the bank's
base rate, which was 8.25% at June 30, 1996. The senior term loan is
repayable in quarterly principal installments, commencing March 31, 1996
through maturity of the Facility on June 30, 2000. Pursuant to the
revolving credit line, the Company may borrow up to 85% of eligible trade
receivables and 60% of eligible inventories. Amounts outstanding under
the Facility are collateralized by principally all of the Company's
assets.
The Company borrowed the full $9 million senior term loan and $2 million
under the revolving credit line to fund the cash purchase price and
related closing costs of the acquisition. Subsequent thereto, the Company
repaid approximately $4 million of such borrowings, substantially from the
proceeds of sale of the equipment and operating cash flow.
At June 30, 1996 and 1995, the interest rate on the Credit Facility was
9.25% and 10%, respectively.
<PAGE>
THE HAIN FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT (continued)
The Credit Facility, as amended, contains certain restrictive covenants
which, among other matters, restrict the payment of dividends and the
incurrence of additional indebtedness. The Company is also required to
maintain various financial ratios, including minimum working capital
ratios, the achievement of certain earnings levels, and interest and fixed
charge coverage ratios. The Company was in compliance with all such
covenants at June 30, 1996 and 1995.
The 12.5% Subordinated Debentures ("Debentures") provide for the payment
of interest semi-annually in arrears, and principal payments of $1,943,000
in October 2000, $2,307,000 in April 2002, $2,125,000 in April 2003 and a
final maturity payment of $2,125,000 in April 2004. The agreement
relating to the issuance of the Debentures also contains certain
restrictive covenants which are generally less restrictive than those
contained in the Credit Facility. In connection with the issuance of the
Debentures, the Company also issued 768,229 shares of common stock to the
Debenture holders. Such shares were valued at $1,644,000 and applied as a
discount of the value of the Debentures. The discount is being amortized
using theinterest method over the life of the Debentures. Amortization
expense for the years ended June 30, 1996 and 1995 amounted to $141,000
and $108,000, respectively.
The 10% junior subordinated note ("Estee Note"), which was issued to the
seller in connection with the acquisition of Estee, provides for the
payment of interest semi-annually in arrears and matures in November 2005.
At the option of the Company, the Estee Note may be redeemed early at the
following redemption prices:
November 1, 1995 until April 30, 1997 75%
May 1, 1997 until October 31, 1998 85%
November 1, 1998 until October 31, 1999 90%
It is the Company's present intention to redeem the Estee Note on April
30, 1997 for $1,312,500. The discount of $437,500 will be accounted for
as a reduction of the purchase price of Estee, resulting in a reduction of
goodwill by the same amount.
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT (continued):
Maturities of long-term debt at June 30, 1996, including the presumed
redemption of the Estee Note on April 30, 1997, are as follows:
Year Ending
June 30
1997 $ 4,619,000
1998 1,803,000
1999 1,917,000
2000 1,247,000
2001 1,942,000
Thereafter 6,557,000
----------
18,085,000
Less: Unamortized original
issue discount 1,361,000
----------
Total long-term debt $16,724,000
==========
Interest paid during the years ended June 30, 1996 and 1995 amounted to
$1,820,000 and $1,440,000, respectively.
8. INCOME TAXES:
The provision for income taxes for the years ended June 30, 1996 and 1995
are as follows:
1996 1995
--------- ----------
Current:
Federal $1,337,000 $1,262,000
State 257,000 295,000
--------- ---------
1,594,000 1,557,000
Deferred Federal and State 36,000 198,000
--------- ---------
Total $1,630,000 $1,755,000
========= =========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
<PAGE>
THE HAIN FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (continued):
Components of the Company's deferred tax liability for the years ended
June 30, 1996 and 1995 are as follows:
1996 1995
-------- --------
Difference in carrying amount
of receivables from sale
of equipment $ (35,000) $(79,000)
Difference in amortization period
on Estee goodwill (111,000)
Basis difference on property
and equipment (93,000) (88,000)
Basis difference on inventory 67,000
Deferred charges (294,000) (305,000)
Allowance for doubtful accounts 5,000 47,000
------- -------
Net deferred tax (liability) $(461,000) $(425,000)
======= =======
Reconciliations of expected income taxes at the U.S. federal statutory
rateto the Company's provision for income taxes for the years ended
June 30, 1996 and 1995 are as follows:
1996 % 1995 %
--------- ---- --------- ----
Expected U.S. federal income tax
(benefit) at statutory rate $1,280,000 34.0% $1,401,000 34.0%
State income taxes,
net of federal benefit 172,000 4.6 195,000 4.8
Non-deductible expenses 167,000 4.4 154,000 3.7
Other 11,000 .3 5,000 .1
--------- ---- -------- ----
Provision for income taxes $1,630,000 43.3% $1,755,000 42.6%
========= ==== ========= ====
Income taxes paid during the year ended June 30, 1996 and 1995 amounted
to $2,623,000 and $233,000, respectively.
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCKHOLDERS' EQUITY:
Common Stock:
In June 1996, the Board of Directors of the Company adopted a Common
Stock repurchase program authorizing the Company to repurchase up to
$2 million of the Company's common stock. At a current trading price of
approximately $3.50 per share, a repurchase of $2 million of common stock
would amount to approximately 550,000 shares, or approximately 6% of the
8.867 million shares currently outstanding. The purchases may be made,
at management's discretion, through open market purchases and privately
negotiated transactions. Purchases may begin immediately and continue
from time to time. On August 7, 1996, the Company received approval for
the stock repurchase program from its bank lenders.
Preferred Stock:
The Company is authorized to issue "blank check" preferred stock (up to 5
million shares) with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered to issue, without stockholder approval,
preferred stock with dividends, liquidation, conversion, voting, or other
rights which could decrease the amount of earnings and assets available
for distribution to holders of the Company's common stock. As at
June 30, 1996 and 1995, no preferred stock was issued or outstanding.
Class A Warrants:
In connection with the initial public offering of the Company's common
stock in November 1993, the Company issued 2,476,924 Class A Warrants
("Warrants"), entitling the holders to purchase 2,476,924 shares of the
Company's Common Stock at $3.30 per share. The Company had the right,
under certain circumstances, to redeem the Warrants at $.10 per Warrant.
In October 1994, the Company called the Warrants for redemption. As a
result, Warrant holders exercised 2,450,342 (98.9%) of the Warrants and
the Company issued an equivalent number of shares of Common Stock. The
proceeds of exercise, net of related expenses, amounted to approximately
$7.6 million. Substantially all of the net proceeds were used to retire
the remaining balance of the Company's Senior Term Loan with a bank.
Other Warrants:
In November and December 1994, the Company's underwriter for its initial
public offering exercised all of its warrants issued at the time of the
initial public offering. The Company issued 323,079 shares of Common
Stock and received net proceeds of approximately $800,000 which were
utilized for working capital purposes.
<PAGE>
THE HAIN FOOD GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCKHOLDERS' EQUITY (continued):
In December 1994 the Company issued 125,000 shares of Common Stock as a
result of the exercise of a warrant issued by the Company in connection
with the Company's 12.5% Subordinated Debentures. The proceeds from such
exercise were nominal.
In connection with services provided by CIBC Wood Gundy Securities Corp.
("CIBC" - formerly Argosy Group, L.P.), the Company's investment banking
firm (see Note 13), the Company issued in April 1994, to an affiliate of
CIBC, warrants to acquire 550,000 shares of the Company's common stock at
a price of $3.25 per share. The exercise price approximates the fair
market value of the Company's common stock at the time the warrant was
negotiated. None of these warrants have been exercised.
In connection with the acquisition of Estee, the Company issued a warrant
to the seller to purchase 200,000 shares of the Company's common stock at
an exercise price of $6.50. The warrant expires on November 3, 1999.
As at June 30, 1996, there are 2,505,000 shares of Common Stock reserved
for issuance for warrants (750,000) and Employee and Director Stock
Options (1,755,000). See Note 11.
10. LEASES:
The Company's corporate headquarters are located in leased office space in
Uniondale, New York, under a five year lease which expires in September
1999. This lease provides for additional payments of real estate taxes
and other operating expenses over a base period amount. In addition, the
Company leases warehouse space for one of its subsidiaries under a net
lease which expires in August 1997. The aggregate minimum future lease
payments for these operating leases are as follows:
Year Ending
June 30,
1997 $202,000
1998 180,000
1999 179,000
2000 30,000
-------
$591,000
=======
Rent expense charged to operations for the years ended June 30, 1996 and
1995 was $162,000 and $187,000, respectively.
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTION PLAN:
In December 1994, the Company adopted the 1994 Long-Term Incentive and
Stock Award Plan ("Plan"), which amended and restated the Company's prior
stock option plan. The Plan provides for the granting of incentive stock
options to employees, directors and consultants to purchase up to an
aggregate of 855,000 shares of the Company's common stock. All of the
options granted to date under the Plan have been qualified stock options
providing for exercise prices equivalent to the fair market price at date
of grant, and expire 10 years after date of grant. At the discretion of
the Company, options are exercisable upon grant or over a five year
period. Through June 30, 1994, options for an aggregate of 255,000 shares
had been issued at a price of $3.25 per share. During 1995, 111,500
options were granted at prices from $3.50 to $5.00 per share and 55,000
options were terminated. During 1996, 103,500 options were granted at
prices from $2.94 to $3.25 per share and 15,000 options were terminated.
At June 30, 1996, 400,000 options are outstanding, all of which are
currently exercisable and 455,000 shares are available for grant.
In December 1995, subject to the approval of stockholders at the Annual
Meeting to be held on December 3, 1996, the Company adopted a Directors
Stock Option Plan. The Plan provides for the granting of stock options to
non-employee directors to purchase up to an aggregate of 300,000 shares of
the Company's common stock. During 1996, conditional options for an
aggregate of 90,000 shares were granted at a price of $3.50 per share.
At June 30, 1996, 90,000 options are outstanding and 210,000 are available
for grant.
The Company also has a 1993 Executive Stock Option Plan pursuant to which
it granted Mr. Irwin D. Simon, its founder and Chief Executive Officer,
options to acquire 600,000 shares of the Company's common stock. As a
result of the Company achieving certain sales thresholds, all of such
shares are currently exercisable. The exercise price of options designed
to qualify as incentive options is $3.58 per share and the exercise price
of non-qualified options is $3.25 per share. None of Mr. Simon's options
have been exercised. The options expire in 2003.
The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and,
accordingly, recognizes no compensation for the stock option grants.
12. 401(k) SAVINGS PLAN:
On July 1, 1994, the Company adopted a 401(k) Employee Retirement Plan
("Plan") to provide retirement benefits for eligible employees. All
full-time employees of the Company and its subsidiaries who have attained
the age of 21 are eligible to participate upon completion of 30 days of
service. Participants may elect to make voluntary contributions to the
Plan in amounts not exceeding federal guidelines. On an annual basis,
commencing in January 1995, the Company may, in its sole discretion, make
certain matching contributions. In January 1996 and 1995, the Company
made contributions of $14,900 and $8,600, respectively.
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. QUARTERLY FINANCIAL DATA (UNAUDITED):
Unaudited quarterly financial data (in thousands, except per share amounts)
for 1996 and 1995 is summarized as follows:
Three Months Ended
-----------------------------------------------
September December March June
30, 1995 31, 1995 31,1996 30, 1996
------------------------------------------------
Net sales $13,527 $18,122 $17,218 $19,739
Gross Profit 5,364 7,355 6,812 8,191
Operating income 1,094 1,796 1,489 1,603
Income before
income taxes 736 1,210 855 963
Net income 426 701 504 503
Net income per
common share $ .05 $ .08 $ .06 $ .06
Three Months Ended
----------------------------------------------
September December March June
30, 1994 31, 1994 31, 1995 30, 1995
-----------------------------------------------
Net sales $13,580 $14,785 $14,281 $15,430
Gross Profit 5,109 5,615 5,392 5,740
Operating income 1,806 1,723 1,248 1,113
Income before
income taxes 1,229 1,233 903 755
Net income 697 709 529 430
Net income per
common share $ .09 $ .08 $ .06 $ .05
<PAGE>
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
There were no changes in or disagreements with Accountants on Accounting and
Financial Disclosure.
PART III
Item 9, "Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act", Item 10, "Executive
Compensation", Item 11, "Security Ownership of Certain Beneficial Owners and
Management", and Item 12, "Certain Relationships and Related Transactions",
have been omitted from this report inasmuch as the Company will file with the
Securities and Exchange Commission pursuant to Regulation 14A within 120 days
after the end of the fiscal year covered by this report a definitive Proxy
Statement for the Annual Meeting of Stockholders of the Company to be held on
December 3, 1996, at which meeting the stockholders will vote upon election of
the directors, and the Director Stock Option Plan. This information under the
caption "Election of Directors" in such Proxy Statement is incorporated
herein by reference.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the second
quarter and third quarter of Fiscal 1996:
Form 8-K report, dated November 3, 1995, reporting the following
matters:
(a) The acquisition of substantially all of the assets of The Estee
Corporation.
(b) The $18 million Restated Revolving Credit and Term Loan Agreement,
dated as of November 3, 1995.
(c) Warrant to purchase 200,000 shares of Common Stock issued in
connection with acquisition of The Estee Corporation.
(d) $1,750,000 10% Junior Subordinated Note due November 1, 2005
issued in connection with the acquisition of The Estee Corporation.
In January 1996, Form 8-K/A report was filed and included the
requisite financial statements and pro forma financial information
relating to the acquisition of The Estee Corporation.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
the 19th day of September 1996.
THE HAIN FOOD GROUP, INC.
By: /s/ Irwin D. Simon
Irwin D. Simon
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature Title Date
/s/ Andrew R. Heyer Chairman of the Board September 19, 1996
Andrew R. Heyer of Directors
/s/ Irwin D. Simon President, Chief September 19, 1996
Irwin D. Simon Executive Officer
and Director
/s/ Jack Kaufman Vice President-Chief September 19, 1996
Jack Kaufman Financial Officer
/s/ Beth L. Bronner Director September 19, 1996
Beth L. Bronner
/s/ William P. Carmichael Director September 19, 1996
William P. Carmichael
Director September 19, 1996
John Gildea
/s/ Barry Gordon Director September 19, 1996
Barry Gordon
/s/ Steven S. Schwartzreich Director September 19, 1996
Steven S. Schwartzreich
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 306
<SECURITIES> 0
<RECEIVABLES> 8759
<ALLOWANCES> 58
<INVENTORY> 7346
<CURRENT-ASSETS> 16992
<PP&E> 1084
<DEPRECIATION> 339
<TOTAL-ASSETS> 47442
<CURRENT-LIABILITIES> 10452
<BONDS> 12105
<COMMON> 89
0
0
<OTHER-SE> 24335
<TOTAL-LIABILITY-AND-EQUITY> 47442
<SALES> 68606
<TOTAL-REVENUES> 68606
<CGS> 40884
<TOTAL-COSTS> 62624
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 123
<INTEREST-EXPENSE> 2218
<INCOME-PRETAX> 3764
<INCOME-TAX> 1630
<INCOME-CONTINUING> 2134
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2134
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
