SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Under Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For The Fiscal Year Ended June 30, 1997
Commission File No. 0-22818
THE HAIN FOOD GROUP, INC.
(Exact name of registrant as specified 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 Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to
Form 10-K. [X]
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*
- -------------------------------- ------------------
6,776,487 shares Common Stock $71,153,000
* Based on the last reported sale price for the Common Stock on NASDAQ on
September 12, 1997
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, 8,781,899 shares outstanding as of
September 12, 1997
Documents Incorporated by Reference
Part of the Form 10-K
Document into which Incorporated
- ------------------------------------- -----------------------
The Hain Food Group, Inc. Definitive Part III
Proxy Statement for the Annual Meeting
of Stockholders to be Held December 9, 1997
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business
General
Industry Overview
Product
Manufacturing
New Product Development
Marketing and Distribution
Trademarks
Competition
Government Regulation
Note Regarding Forward Looking Information
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership and Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
Signatures
<PAGE>
PART I
THE HAIN FOOD GROUP, INC.
Item 1. 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, snacks and cheese and mayonnaise products under the
"Weight Watchers" brand name, kosher food products under the "Kineret" and
"Kosherific" brand names, snack products under the Boston Popcorn brand name,
and dry milk products under the Alba brand name. 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 November 1995, the Company purchased substantially
all of the business of The Estee Corporation ("Estee"). In March 1997, the
Company entered into a license agreement with Weight Watchers Gourmet Food
Corporation (a wholly-owned subsidiary of H. J. Heinz Company) whereby the
Company will manufacture, market and sell Weight Watchers dry and refrigerated
products. In May 1997, the Company purchased substantially all of the business
of The Boston Popcorn Company ("Boston"). In July 1997, the Company acquired
the Alba brand from H. J. Heinz Company. At the current time, Hain and Kineret
constitute the Company's only subsidiaries; the other brands are operated as
divisions of the Company.
On September 11, 1997, the Company executed a definitive merger agreement with
Westbrae Natural, Inc. ("Westbrae"), a publicly-owned company, pursuant to
which the Company commenced a tender offer on September 12, 1997 for all of the
outstanding common shares of Westbrae for $3.625 per share in cash. Pursuant
to the definitive merger agreement, certain shareholders of Westbrae who own an
aggregate of approximately 69% of the outstanding shares of Westbrae have
agreed to tender their shares at the offer price. The aggregate purchase price
for all of the outstanding shares of Westbrae and shares under option (assuming
all of Westbrae's shares are tendered) is approximately $23.5 million. In
connection therewith, the Company has obtained a financing commitment from its
lender for a credit facility of $40 million, consisting of a $30 million term
loan and a $10 million revolving line of credit. The proceeds of the term loan
will be used to fund the total cost of the acquisition and to repay certain
existing debt of the Company and Westbrae. This transaction, which is subject
to the satisfactory completion of the Company's due diligence investigation and
receipt of financing, is expected to close by late October 1997.
<PAGE>
Westbrae (formerly known as Vestro Natural Foods, Inc.) is headquartered in
Carson, California and is a leading formulator and marketer of high quality
natural and organic foods sold under the brand names Westbrae Natural, Westsoy,
Little Bear and Bearitos, encompassing 300 food items such as non-dairy
beverages, chips, snacks, beans and soups. For its fiscal year ended
December 31, 1996, Westbrae reported net sales of $32,583,000 and net income
of $1,203,000. For the six months ended June 30, 1997, Westbrae reported net
sales of $17,502,000 (unaudited) and net income of $708,000 (unaudited). The
Company believes that the acquisition of Westbrae follows its strategy of
acquiring specialty food businesses that fit well with its other brands while
offering opportunities for cost efficiencies in management and operations.
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 overall 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 achieved 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. 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.
Other than as set forth herein, no discussions are currently ongoing.
As of June 30, 1997, the Company employed a total of 54 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.
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.
<PAGE>
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.
Weight Watchers
Under a license agreement, the Company manufactures, markets and sells
approximately 60 Weight Watchers dry and refrigerated products.
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.
Snack Foods
The Boston Popcorn Company markets and distributes a line of popcorn and chip
products, principally in the New England and New York City metropolitan areas.
Products
The Hain line of products consists of approximately 180 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 in
fiscal 1997, accounted for approximately 17% of total Company sales volume as
compared with 30% in fiscal 1996), 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".
Boston Popcorn products consist of 20 items comprised of varieties of popcorn,
potato chips and other snack food items.
The Company continuously evaluates its existing products for taste, nutritional
value and cost and makes improvements where possible. The Company will
discontinue products or stock keeping units when sales volume of those items
do not warrant further production.
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. 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.
<PAGE>
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.
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.
Boston Popcorn Company's products are manufactured principally by three
co-packers.
The Company believes that alternative sources of supply are available if
co-packing arrangements with its suppliers were to be terminated by the Company
or the co-packers. However, 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.
New Product Development
The Company intends to continue its policy of introducing new products or
product line extensions that complement its existing products. New products
and product line extensions over the last three fiscal years included
mini-munchie rice cakes, low fat baked crisps, Estee sugar-free rice cakes,
graham crackers, rice snack bars, rice cake "ringers", cookie jar bits and a
new line of 15 ounce soups.
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
generally made in their sole discretion.
<PAGE>
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 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, Boston Popcorn
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.
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 (see page 1), 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. Boston Popcorn competes with a variety of popcorn and chip
manufacturers.
<PAGE>
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.
Note Regarding Forward Looking Information
Certain statements contained in this Annual Report constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and
Sections 21E of the Exchange Act. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, levels of activity, performance or achievements of the Company,
or industry results, to be materially different from any future results, levels
of activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; the ability of the Company to
implement its business and acquisition strategy; the ability of the Company to
obtain financing for general corporate purposes; competition; availability of
key personnel; and changes in, or the failure to comply with government
regulations. As a result of the foregoing and other factors, no assurance can
be given as to the future results, levels of activity and achievements and
neither the Company nor any person assumes responsibility for the accuracy and
completeness of these statements.
<PAGE>
Item 2. Properties.
The Company's corporate headquarters are located in 10,000 square feet of
leased office space located at 50 Charles Lindbergh Boulevard, Uniondale,
New York. This lease commenced on August 15, 1994 and, during 1997, was
extended to February 2002. The current annual rental is approximately
$231,000. 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 $40,000, was renewed during
1997 and expires in August 1999. The Company's Boston Popcorn 10,000 square
foot warehouse and distribution center is located in Foxboro, Massachusetts.
This lease is for a three-year term and commenced on June 1, 1997. The current
annual rental is approximately $73,000. Approximately 4,000 square feet of
this space is sub-leased to a major distributor of the Company's Boston Popcorn
business for the same three-year term at a current annual rental of $31,000.
The Company warehouses its products (other than Boston Popcorn and 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, 1997.
<PAGE>
PART II
Item 5. Market for Registrant's 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. The following table sets forth the reported
high and low closing prices for the Common Stock and the Warrants for each
fiscal quarter from July 1, 1995 through September 12, 1997.
Common Stock
-------------------------------------
1997 1996
High Low High Low
------ ------- ------ -------
First Quarter $4 $3 1/16 $4 1/2 $3 1/2
Second Quarter 4 3 1/4 3 3/4 2 15/16
Third Quarter 5 3/4 3 3/8 3 11/16 2 15/16
Fourth Quarter 5 5/16 4 1/8 4 1/8 3 1/16
July 1 - September 12, 1997 10 1/2 4 27/32
As at September 12, 1997, there were 79 holders of record of the Company's
Common Stock.
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.
<PAGE>
Item 6. Selected Financial Data.
The following information has been summarized from the Company's financial
statements and should be read in conjunction with such financial statements
and related notes thereto (in thousands, except per share amounts):
April 1, 1993
(Date
Operations
Year Ended June 30 Commenced)
------------------------------------- to June 30
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Operating Results:
Net sales $65,353 $68,606 $58,076 $14,963 $137
Net income (loss) 1,069 2,134 2,365 (502) (75)
Net income (loss) per
common share .12 .24 .28 (.19) (.08)
Financial Position:
Total Assets $48,895 $47,442 $34,921 $31,739 $449
Long-term debt 10,756 12,105 7,277 13,450 0
Stockholders' Equity 25,059 24,424 22,290 11,501 78
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.
General
The Company was formed in 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, 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 to date.
<PAGE>
On November 3, 1995, the Company purchased substantially all of the assets
and business, subject to certain liabilities of The Estee Corporation, a
manufacturer and marketer of sugar-free and low sodium products targeted
towards diabetic and health conscious consumers.
On May 23, 1997, the Company purchased substantially all of the assets and
business, subject to certain liabilities of The Boston Popcorn Company, a
manufacturer and marketer of popcorn and chip products principally in the
New England and New York City metropolitan areas.
On July 15, 1997, the Company acquired the brand Alba Foods from Heinz USA,
a division of H.J. Heinz Company.
On November 19, 1993, the Company completed an initial public offering from
which it received net proceeds of approximately $2.9 million.
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.
On March 31, 1997, the Company entered into a license agreement with Weight
Watchers Gourmet Food Company (a wholly-owned subsidiary of H. J. Heinz
Company) to manufacture, market and sell 60 Weight Watcher dry and refrigerated
products.
<PAGE>
Results of Operations
Fiscal 1997 Compared to Fiscal 1996
Net sales for 1997 decreased by approximately $3.2 million to $65.4 million as
compared with $68.6 million in 1996. The sales decrease was principally
attributable to a $10.5 million decrease in sales of rice cake products, offset
in part by a full year of sales of the Estee division, which was acquired in
November 1995 and sales of Weight Watchers products in the fourth quarter of
fiscal 1997. The rice cake product category for the Company, as well as other
sellers of the product (including Quaker Oats), has been under recent pressure
from the growing market acceptance of other snack products and from increased
competition. The Company is reacting by continuing to introduce new products
in a variety of categories, with a goal of reducing reliance on rice cakes and
generating a more diversified product sales mix. In addition, the Company
believes that its recent license arrangement with respect to the Weight
Watchers dry and refrigerated product lines and the acquisition of Boston
Popcorn Company (see Notes 3 and 4 of the Notes to Consolidated Financial
Statements) will ultimately more than offset reduced rice cake sales.
Gross profit for 1997 decreased by approximately $3.1 million to $24.6 million
as compared to $27.7 million in 1996. Gross margin percentage decreased by
approximately 2.8% in 1997 compared with 1996, principally due to a change in
product mix and an increase in warehousing and delivery costs.
Selling, general and administrative expenses decreased by $1.3 million to $19.7
million in 1997 as compared to $20.9 million in 1996, principally as a result
of lower sales promotional costs on lower sales levels. Such expenses, as a
percentage of net sales, were at the same approximate level in both years.
Interest and financing costs for 1997 decreased by $.1 million to $2.1 million
as compared to $2.2 million for 1996.
Income before income taxes for 1997 was approximately $1.9 million as compared
to $3.8 million in 1996. The decrease of $1.9 million is principally a result
of the aforementioned decrease in gross profit offset in part by the decrease
in sales promotional costs.
Income taxes decreased to $.8 million in 1997 from $1.6 million in 1996. The
decrease in income taxes is substantially attributable to the decrease in
income before taxes. Income taxes as a percentage of pre-tax income amounted
to 42.4% in 1997 as compared to 43.3% in 1996.
<PAGE>
Fiscal 1996 Compared to Fiscal 1995
Net sales for 1996 increased by approximately $10.5 million to $68.6 million as
compared with $58.1 million in 1995. The sales increase was essentially all
attributable to the acquisition of Estee in November 1995.
Gross profit for 1996 increased by approximately $5.8 million to $27.7 million
as compared to $21.9 million in 1995, principally as a result of increased
sales. Gross profit 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.
Selling, general and administrative expenses increased by $5.6 million to
$20.9 million in 1996 as compared to $15.3 million in 1995, principally as a
result of increased promotional activity in connection with the introduction of
new products. Such expenses, as a percentage of net sales, were 4.1% higher
than in 1995, reflecting the aforementioned increased promotional activity.
The integration of Estee did not result in any significant increases in the
Company's general and administrative expenses.
Interest and financing costs for 1996 increased by $.4 million to $2.2 million
as compared to $1.8 million for 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 for 1996 was $3.8 million as compared to $4.1
million in 1995. The decrease of $.4 million is principally a result of the
aforementioned increase in the level of promotional spending offset in part
by the increase in gross profit based on higher net sales in 1996.
Income taxes decreased to $1.6 million in 1996 from $1.8 million in 1995. The
decrease in income taxes is substantially attributable to the decrease in
income before taxes.
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. Of
the $9 million available under the Company's revolving credit line, $2.25
million was outstanding at June 30, 1997. From time to time, because of
inventory requirements, the Company may utilize a portion of the revolving
credit line.
<PAGE>
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.
The aggregate long-term debt service requirements for the year ending
June 30, 1998 are approximately $4.2 million, which includes 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
anticipates that cash flow from operations will be sufficient to meet all of
its debt service and operating requirements.
Working capital at June 30, 1997 amounted to approximately $4.5 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, 1997, the
Company was in compliance with such covenants.
On September 11, 1997, the Company executed a definitive merger agreement with
Westbrae pursuant to which the Company commenced a tender offer on September
12, 1997 for all of the outstanding shares of Westbrae for $3.625 per share of
common stock in cash. Pursuant to the definitive merger agreement, certain
shareholders of Westbrae who own an aggregate of approximately 69% of the
outstanding shares of Westbrae have agreed to tender their shares at the offer
price. The aggregate purchase price for all of the outstanding shares of
Westbrae and shares under option (assuming all of Westbrae's shares are
tendered) is approximately $23.5 million. In connection therewith, the Company
has obtained a financing commitment from its lender for a Credit Facility of
$40 million, consisting of a $30 million term loan and a $10 million line of
revolving credit. The proceeds of the term loan will be used to fund the total
cost of the acquisition and to repay certain existing debt of the Company and
Westbrae. In addition, the Company requires the consent of the holders of its
subordinated debentures before completing the Westbrae acquisition.
Notwithstanding the significant cash demands created by the Westbrae
acquisition, the Company believes that cash provided by operations and
amounts available under the Credit Facility will be sufficient for the
foreseeable future to finance its operations, service interest payments on
its debt and fund capital expenditures.
<PAGE>
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 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable, except as reported on in Item 7.
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements of The Hain Food Group, Inc.
and subsidiaries are included in Item 8:
Consolidated Balance Sheets - June 30, 1997 and 1996
Consolidated Statements of Income - Years ended June 30, 1997, 1996
and 1995
Consolidated Statements of Cash Flows - Years ended June 30, 1997,
1996 and 1995
Consolidated Statement of Stockholders' Equity - Years ended
June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
The following consolidated financial statement schedule of The Hain Food Group,
Inc. and subsidiaries are included in Item 14 (a):
Schedule II Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
<PAGE>
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, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1997. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Melville, New York
September 3, 1997
<PAGE>
<TABLE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30
1997 1996
--------- ---------
<C> <C>
ASSETS
Current assets:
Cash $219,000 $306,000
Trade accounts receivable,
less allowance for doubtful
accounts of $265,000 and $58,000 8,447,000 8,069,000
Inventories 6,635,000 7,346,000
Receivables from sale of
equipment - current portion 408,000 632,000
Other current assets 818,000 639,000
---------- ----------
Total current assets 16,527,000 16,992,000
Property and equipment, net
of accumulated depreciation
of $577,000 and $399,000 743,000 685,000
Receivables from sale of
equipment - non-current portion 150,000 310,000
Goodwill and other intangible assets,
net of accumulated amortization
of $2,074,000 and $1,334,000 29,188,000 27,140,000
Deferred financing costs,
net of accumulated amortization
of $1,049,000 and $706,000 975,000 1,312,000
Other assets 1,312,000 1,003,000
---------- ----------
Total assets $48,895,000 $47,442,000
========== ==========
<FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and
accrued expenses $7,568,000 $5,560,000
Current portion of long-term debt 4,178,000 4,619,000
Income taxes payable 299,000 273,000
---------- ----------
Total current liabilities 12,045,000 10,452,000
Long-term debt, less current portion 10,756,000 12,105,000
Other liabilities 483,000
Deferred income taxes 552,000 461,000
---------- ----------
Total liabilities 23,836,000 23,018,000
Commitments and contingencies
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 8,881,899 and 8,866,899 shares 89,000 89,000
Additional paid-in capital 20,804,000 20,413,000
Retained earnings 4,991,000 3,922,000
---------- ----------
25,884,000 24,424,000
Less: 300,000 shares of
treasury stock, at cost 825,000
---------- ----------
Total stockholders 'equity 25,059,000 24,424,000
---------- ----------
Total liabilities and
stockholders' equity $48,895,000 $47,442,000
========== ==========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Year Ended June 30
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $65,353,000 $68,606,000 $58,076,000
Cost of sales 40,781,000 40,884,000 36,220,000
---------- ---------- ----------
Gross profit 24,572,000 27,722,000 21,856,000
---------- ---------- ----------
Selling, general and
administrative expenses 19,651,000 20,905,000 15,334,000
Depreciation of property
and equipment 178,000 184,000 158,000
Amortization of goodwill
and other intangible assets 740,000 651,000 474,000
---------- ---------- ----------
20,569,000 21,740,000 15,966,000
---------- ---------- ----------
Operating income 4,003,000 5,982,000 5,890,000
--------- --------- ---------
Interest expense, net 1,639,000 1,745,000 1,351,000
Amortization of deferred
financing costs 509,000 473,000 419,000
--------- --------- ---------
2,148,000 2,218,000 1,770,000
--------- --------- ---------
Income before income taxes 1,855,000 3,764,000 4,120,000
Provision for income taxes 786,000 1,630,000 1,755,000
--------- --------- ---------
Net income $1,069,000 $2,134,000 $2,365,000
========= ========= ==========
Net income per common and
common equivalent share $0.12 $0.24 $0.28
==== ==== ====
Weighted average number of
common shares and common
share equivalents 8,993,000 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
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,069,000 $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 178,000 184,000 158,000
Amortization of goodwill and
other intangible assets 740,000 651,000 474,000
Amortization of deferred financing
costs 509,000 473,000 419,000
Provision for doubtful accounts 290,000 123,000 44,000
Other (34,000)
Deferred income taxes 91,000 36,000 198,000
Increase (decrease) in cash
attributable to changes in assets
and liabilities, net of amounts
applicable to acquired businesses:
Accounts receivable (383,000) (218,000) (2,775,000)
Inventories 899,000 1,172,000 (499,000)
Other current assets (347,000) (166,000) (255,000)
Other assets (309,000) 81,000 (974,000)
Accounts payable and
accrued expenses 276,000 (2,153,000) (1,413,000)
Income taxes payable 26,000 (1,023,000) 1,058,000
--------- --------- ---------
Net cash provided by (used in)
operating activities 3,005,000 1,294,000 (1,200,000)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of
long-term debt issued to seller (666,000) (9,758,000)
Acquisition of property and equipment (146,000) (215,000) (429,000)
------- --------- -------
Net cash used in investing
activities (812,000) (9,973,000) (429,000)
------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from senior term loan 9,000,000
Proceeds from bank revolving
credit facility 850,000 1,100,000 300,000
Purchase of treasury stock (825,000)
Costs in connection with
bank financing (6,000) (256,000) (20,000)
Payment of senior term loan (1,234,000) (2,919,000) (8,015,000)
Proceeds from exercise of warrants
and options, net of related expenses 52,000 8,424,000
Collections of receivables from
equipment sales 552,000 2,011,000 582,000
Payment of 10% Junior
Subordinated Note (1,269,000)
Payment of other long-term debt (400,000) (138,000) (127,000)
--------- --------- ---------
Net cash (used in) provided by
financing activities (2,280,000) 8,798,000 1,144,000
--------- --------- ---------
Net (decrease) increase in cash (87,000) 119,000 (485,000)
Cash at beginning of year 306,000 187,000 672,000
------- ------- -------
Cash at end of year $219,000 $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, 1996 AND 1997
<CAPTION>
Common Stock Additional Retained
Amount Paid-in Earnings Treasury Stock
Shares at $.01 Capital (Deficit) Shares Amount Total
--------- ------ ---------- -------- --------- -------- -----------
<S> <C> <C> <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
Acquisition of treasury stock 300,000 ($825,000) (825,000)
Exercise of stock options
and other 15,000 - 79,000 79,000
Value ascribed to warrants 312,000 312,000
Net income for the year
ended June 30, 1997 1,069,000 1,069,000
--------- ------ ---------- --------- ------- -------- ----------
Balance at June 30, 1997 8,881,899 $89,000 $20,804,000 $4,991,000 300,000 ($825,000) $25,059,000
========= ====== ========== ========= ======= ======== ==========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS:
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), Weight Watchers (dry and
refrigerated products), and Boston Popcorn (snacks).
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 with 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 are recorded in the period in which the
related sale is recognized.
Advertising Costs:
Media advertising costs, which are included in selling, general and
administrative expenses, amounted to $236,000, $22,000, and $52,000 for
fiscal 1997, 1996 and 1995, respectively. Such costs are expensed as
incurred.
<PAGE>
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.
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, 1997 and 1996, 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 approximates its current borrowing rate
and, accordingly, the carrying amounts of such debt at June 30, 1997 and
1996 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 7).
Other intangible assets, which are not significant in the aggregate, are
being amortized over their respective applicable lives.
<PAGE>
Amortizable Long-Lived Assets:
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" ("FAS 121"), requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the asset carrying amount. FAS 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company adopted
FAS 121 effective for the fiscal year beginning July 1, 1996. The adoption
did not have an effect on the Company's consolidated results of operations,
cash flows or financial position.
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, 1997 and 1996 relate
to the bank Credit Facility and Subordinated Debentures (see Note 8).
Earnings Per Common Share:
Net income per share for 1997, 1996 and 1995 is based on the weighted
average number of common shares and dilutive common equivalent shares.
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share"
("FAS 128"), which is effective for both interim and annual financial
statements for periods ending after December 15, 1997. At that time, the
Company will be required to change the method currently used to compute
earnings per share and restate all periods. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock options
and warrants will be excluded. The impact of adopting FAS 128 is not
expected to be material.
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.
<PAGE>
3. ACQUISITIONS:
On May 23, 1997, the Company purchased substantially all of the assets and
business, subject to certain liabilities, of The Boston Popcorn Company,
Inc. Boston Popcorn is a manufacturer and marketer of popcorn and chip
snack products, principally in the New England and New York City
metropolitan areas. The purchase price amounted to approximately $870,000
of which $645,000 was paid in cash and $225,000 by the issuance of a note,
with a maturity date in 2002. In addition, the Company assumed certain
liabilities. Pro forma information with respect to the foregoing
acquisition is not significant.
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, after giving effect to the early redemption of the junior
subordinated note referred to below (see Note 8), amounted to approximately
$11.32 million of which $9.75 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. See Note 10.
The above acquisitions have been accounted for as purchases and, therefore,
operating results of the acquired businesses have 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, 1995 are
as follows:
1996
----------
Net sales $75,749,000
Net income 2,316,000
Net income per share $ .26
The pro forma operating results shown above are not necessarily indicative
of operations in the period following acquisition.
<PAGE>
4. LICENSE AGREEMENT:
On March 31, 1997, the Company entered into a license agreement with Weight
Watchers Gourmet Food Company ("WWGF" - a wholly-owned subsidiary of H. J.
Heinz Company). Under the agreement, the Company will manufacture, market
and sell approximately 60 Weight Watcher dry and refrigerated products.
Sales of these products were approximately $17 million (unaudited) for the
12 months ended March 31, 1997. The agreement provides, among other
matters, for a royalty payment to WWGF based on the sales of Weight
Watchers products and payment of a share of the pre-tax profits (as
defined) from sale of the such products. In connection with the license
agreement, the Company purchased approximately $600,000 of inventory,
using borrowings under the Company's revolving credit facility.
5. RECEIVABLES FROM SALE OF EQUIPMENT:
In connection with the acquisitions of Hain, Estee and Boston Popcorn, the
Company acquired certain food manufacturing equipment, which has been sold
to co-packers for selling prices equal to the fair value of such equipment
recorded at date of acquisition. The balance of the receivables are due in
various installments over a five year period through 2001. The proceeds of
sale of the Estee equipment are required to be utilized to pay down the
bank debt referred to in Note 8.
6. INVENTORIES:
Inventories consist of the following:
1997 1996
--------- ---------
Finished goods $5,418,000 $6,641,000
Raw materials and packaging 1,217,000 705,000
--------- ---------
$6,635,000 $7,346,000
========= =========
<PAGE>
7. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill and other intangible assets consist of the following:
1997 1996
---------- ----------
Goodwill $30,645,000 $28,209,000
Other intangible assets 617,000 265,000
---------- ----------
31,262,000 28,474,000
Less: Accumulated amortization 2,074,000 1,334,000
---------- ----------
$29,188,000 $27,140,000
========== ==========
Substantially all unamortized goodwill relates to the acquisition of Hain,
Estee, Boston Popcorn 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 1997 is principally attributable to the
acquisition of The Boston Popcorn Company and the increase in 1996 is all
attributable to the acquisition of Estee.
8. LONG-TERM DEBT:
Long-term debt consists of the following:
1997 1996
--------- ---------
Senior Term Loan $ 4,847,000 $ 6,081,000
Revolving Credit 2,250,000 1,400,000
12.5% Subordinated Debentures
net of unamortized original
issue discount of $1,195,000
and $1,361,000 7,305,000 7,139,000
10% Junior Subordinated Note 1,750,000
Notes payable to sellers in
connection with acquisition
of companies, and other
long-term debt 532,000 354,000
---------- ----------
14,934,000 16,724,000
Current portion 4,178,000 4,619,000
---------- ----------
$10,756,000 $12,105,000
========== ==========
<PAGE>
In connection with the acquisition of Estee in November 1995, 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 8.5% and 8.25% at June 30, 1997 and 1996,
respectively. 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.
At June 30, 1997 and 1996, the interest rate on the Credit Facility was
9.50% and 9.25%, respectively.
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, 1997.
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 the
interest method over the life of the Debentures. Amortization expense for
the years ended June 30, 1997, 1996 and 1995 amounted to $166,000, $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, provided for the
payment of interest semi-annually in arrears and a maturity in November
2005. Pursuant to an option contained in the Estee Note, in April 1997
the note was redeemed by the Company for $1,269,000. Substantially all of
the discount of $481,000, resulting from such redemption was applied as a
reduction of the purchase price of Estee, resulting in a reduction of
goodwill.
<PAGE>
Maturities of long-term debt at June 30, 1997, are as follows:
Year Ending
June 30
------
1998 $ 4,178,000
1999 1,993,000
2000 1,372,000
2001 1,988,000
2002 2,348,000
Thereafter 4,250,000
----------
16,129,000
Less: Unamortized original
issue discount 1,195,000
----------
Total long-term debt $14,934,000
==========
Interest paid during the years ended June 30, 1997, 1996 and 1995 amounted
to $1,768,000, $1,820,000 and $1,440,000, respectively
9. INCOME TAXES:
The provision for income taxes for the years ended June 30, 1997, 1996 and
1995 are as follows:
1997 1996 1995
--------- --------- ---------
Current:
Federal $541,000 $1,337,000 $1,262,000
State 154,000 257,000 295,000
------- --------- ---------
695,000 1,594,000 1,557,000
Deferred Federal and State 91,000 36,000 198,000
------- --------- ---------
Total $786,000 $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>
Components of the Company's deferred tax liability for the years ended
June 30, 1997 and 1996 are as follows:
1997 1996
------- --------
Difference in carrying amount
of receivables from sale
of equipment $ (8,000) $ (35,000)
Difference in amortization period
on Estee Goodwill (186,000) (111,000)
Basis difference on property
and equipment (102,000) (93,000)
Basis difference on inventory 134,000 67,000
Deferred charges (462,000) (294,000)
Allowance for doubtful accounts 72,000 5,000
------- -------
Net deferred tax liability $(552,000) $(461,000)
======= =======
Reconciliations of expected income taxes at the U.S. federal statutory rate
to the Company's provision for income taxes for the years ended June 30,
1997, 1996, and 1995 are as follows:
1997 % 1996 % 1995 %
------- ---- --------- ---- --------- ----
Expected U.S. federal
income tax at
statutory rate $630,000 34.0% $1,280,000 34.0% $1,401,000 34.0%
State income taxes,
net of federal
benefit 102,000 5.5 172,000 4.6 195,000 4.8
Non-deductible
expenses 169,000 9.1 167,000 4.4 154,000 3.7
Other (115,000) (6.2) 11,000 .3 5,000 .1
------- ---- --------- ---- --------- ----
Provision for
income taxes $786,000 42.4% $1,630,000 43.3% $1,755,000 42.6%
======= ==== ========= ==== ========= ====
Income taxes paid during the years ended June 30, 1997, 1996 and 1995
amounted to $669,000, $2,623,000 and $233,000, respectively.
<PAGE>
10. 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. In a private transaction in November 1996,
the Company acquired 300,000 shares of its common stock for treasury at
$2.75 per share for an aggregate cost of $825,000.
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 30,1997 and 1996, no preferred stock was issued or outstanding.
Warrants:
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, 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 per share. In August and September 1997, the
seller exercised all of the warrants and the Company issued 200,000 shares
of Common Stock out of treasury for aggregate proceeds of $1,300,000.
In connection with the Weight Watchers agreement, the Company issued
warrants on March 31, 1997, to acquire 250,000 shares of the Company's
common stock at prices ranging from $7.00 to $9.00 per share. The value
ascribed to these warrants of approximately $312,000 will be amortized
over ten years.
<PAGE>
During the last three fiscal years, the Company issued a total of 200,000
warrants in connection with services rendered by third party consultants
at prices ranging from $4.13 to $8.00 per share.
As at June 30, 1997, there are 2,940,000 shares of common stock reserved
for issuance of warrants (1,200,000) and Employee and Director Stock
Options (1,740,000). See Note 12.
11. LEASES:
The Company's corporate headquarters are located in leased office space in
Uniondale, New York, under a lease which expires in March 2002. 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 a subsidiary and a division under net leases
which expire in August 1999 and May 2000.
The aggregate minimum future lease payments for these operating leases
are as follows:
Year Ending
June 30
-----------
1998 $ 321,000
1999 325,000
2000 301,000
2001 274,000
2002 191,000
---------
$1,412,000
=========
Rent expense charged to operations for the years ended June 30, 1997, 1996
and 1995 was $224,000, $162,000 and $187,000, respectively.
12. STOCK OPTION PLANS:
In December 1994, the Company adopted the 1994 Long-Term Incentive and
Stock Award Plan ("Plan"), which amended and restated the Company's 1993
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. Vesting terms are
determined at the discretion of the Company. During 1995, options to
purchase 111,500 shares were granted at prices from $3.50 to $5.00 per
share. During 1996, options to purchase 103,500 shares were granted at
prices from $2.94 to $3.25 per share. During 1997, options to purchase
475,000 shares were granted at prices from $3.00 to $4.81 per share. At
June 30, 1997, no options were available for grant.
<PAGE>
In December 1995, 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, options for an aggregate of 90,000 shares were granted
at a price of $3.50 per share. During 1997, options for an aggregate of
67,500 shares were granted at a price of $3.38 per share. At June 30,
1997, 142,500 options 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 has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") and related Interpretations, in accounting
for stock options because, as discussed below, the alternative fair value
accounting provided for under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on date of grant, no compensation expense is recognized.
Pro-forma information regarding net income and net income per share is
required by FAS 123, and has been determined as if the Company has
accounted for its stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date
of grant using a Black-Sholes option pricing model with the following
weighted-average assumptions: risk free interest rates, ranging from 5.26%
to 6.77%; no dividend yield; volatility factor of the expected market
price of the Company's Common Stock at 40%; and a weighted-average
expected life of the options of 5 years at June 30, 1997 and 1996.
The Black-Sholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes
in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee
stock options.
<PAGE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:
1997 1996
--------- ---------
Pro forma net income $747,000 $1,997,000
Pro forma net income per share $ .08 $ .22
The FAS 123 method of accounting has not been applied to options granted
prior to July 1, 1995. As a result, the pro forma compensation cost may
not be representative of that to be expected in future years.
A summary of the transactions pursuant to the Company's stock options
plans for the three years ended June 30, 1997 follows:
1997 1996 1995
----------------- ----------------- -------------------
Weighted Weighted Option
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ----- ------- ------ ------- ----------
Outstanding at
beginning of
year 1,090,000 $3.52 911,500 $3.57 855,000 $3.25-$3.58
Granted 542,000 3.82 193,500 3.25 111,500 3.50- 5.00
Exercised (15,000) 3.50
Terminated (20,000) 4.75 (15,000) 3.25 (55,000) 3.25
--------- --------- -------
Outstanding at
end of year 1,597,000 $3.61 1,090,000 $3.52 911,500 $3.52-$5.00
========= ==== ========= ==== =======
Exercisable at
end of year 1,323,000 1,069,000 885,000
========= ========= =======
Weighted average
fair value of
options granted
during year $1.57 $1.33
==== ====
<PAGE>
The following table summarizes information for stock options outstanding
at June 30, 1997:
Weighted Average
Exercise Options Options Remaining Contractual
Price Outstanding Exercisable Life in Years
------------- ----------- ----------- --------------------
$2.94 - $3.125 92,000 92,000 8.5
3.25 - 3.58 1,255,000 1,055,000 7.3
4.50 - 4.813 250,000 176,000 9.5
--------- --------- ---
1,597,000 1,323,000 7.7
========= ========= ===
13. 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 the 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. For the years ended June 30, 1997, 1996
and 1995, the Company made contributions of $21,000, $15,000 and $9,000,
respectively.
14. QUARTERLY FINANCIAL DATA (UNAUDITED):
Unaudited quarterly financial data (in thousands, except per share amounts)
for fiscal 1997 and 1996 is summarized as follows:
Three Months Ended
-----------------------------------------
September December March June
30, 1996 31, 1996 31, 1997 30, 1997
-------- -------- -------- ---------
Net sales $15,437 $17,117 $13,623 $19,176
Gross profit 5,729 6,578 5,030 7,235
Operating income 1,170 1,246 600 987
Income before
income taxes 589 752 57 457
Net income 336 428 33 272
Net income per
common share $ .04 $ .05 $ .00 $ .03
<PAGE>
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
15. SUBSEQUENT EVENT:
On September 11, 1997, the Company executed a definitive merger agreement
with Westbrae Natural, Inc. ("Westbrae), a publicly-owned company, pursuant
to which the Company commenced a tender offer on September 12, 1997 for all
of the outstanding shares of Westbrae for $3.625 per share of common stock
in cash. Pursuant to the definitive merger agreement, certain shareholders
of Westbrae who own an aggregate of approximately 69% of the outstanding
shares of Westbrae have agreed to tender their shares at the offer price.
The aggregate purchase price for all of the outstanding shares of Westbrae
and shares under option (assuming all of Westbrae's shares are tendered)
is approximately $23.5 million. In connection therewith, the Company has
obtained a financing commitment from its lender for a Credit Facility of
$40 million, consisting of a $30 million term loan and a $10 million line
of revolving credit. The proceeds of the term loan will be used to fund
the total cost of the acquisition and to repay certain existing debt of
the Company and Westbrae.
The tender offer expires on October 9, 1997 (unless extended), and this
transaction, which is subject to the completion of final diligence
procedures, is expected to close by late October 1997.
Westbrae (formerly known as Vestro Natural Foods, Inc.), headquartered in
Carson, California, is a leading formulator and marketer of high quality
natural and organic foods sold under the brand names Westbrae Natural,
Westsoy, Little Bear and Bearitos, encompassing 300 food items such as
non-dairy beverages, chips, snacks, beans and soups. For its fiscal
year ended December 31, 1996, Westbrae reported net sales of $32,583,000
and net income of $1,203,000. For the six months ended June 30, 1997,
Westbrae reported net sales of $15,502,000 (unaudited) and net income
of $708,000 (unaudited).
<PAGE>
Item 9. 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 10, "Directors and Executive Officers of the Registrant, Item 11,
"Executive Compensation", Item 12, "Security Ownership of Certain Beneficial
Owners and Management", and Item 13, "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 9, 1997, at which meeting the stockholders
will vote upon election of the directors. This information under the caption
"Election of Directors" in such Proxy Statement is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) List of Financial statements
Consolidated Balance Sheets - June 30, 1997 and 1996
Consolidated Statements of Income - Years ended June 30, 1997,
1996 and 1995
Consolidated Statements of Cash Flows - Years ended June 30, 1997,
1996 and 1995
Consolidated Statement of Stockholders' Equity - Years ended
June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) List of Financial Statement Schedules
Valuation and Qualifying Accounts (Schedule II)
(3) List of Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fourth quarter
of Fiscal 1997.
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------------
Additions
----------------
Balance Charged Charged
at to cost to other Balance
beginning and accounts- Deductions end of
of period expenses describe describe period
- -----------------------------------------------------------------------------
Year ended
June 30, 1997
Deducted from asset
accounts:
Allowance for
doubtful accounts 58,000 290,000 66,000 (1) 149,000 (2) 265,000
Year ended
June 30, 1996
Deducted from asset
accounts:
Allowance for
doubtful accounts 120,000 123,000 41,000 (1) 226,000 (2) 58,000
Year ended
June 30, 1995
Deducted form asset
accounts:
Allowance for
doubtful accounts 95,000 44,000 19,000 (2) 120,000
(1) Allowance for doubtful accounts at date of acquisition of acquired
businesses.
(2) Uncollectible accounts written off, net of recoveries.
<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 25th day
of September 1997.
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 below 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 25, 1997
Andrew R. Heyer of Directors
/s/ Irwin D. Simon President, Chief September 25, 1997
Irwin D. Simon Executive Officer
and Director
/s/ Jack Kaufman Vice President-Chief September 25, 1997
Jack Kaufman Financial Officer
/s/ Beth L. Bronner Director September 25, 1997
Beth L. Bronner
William P. Carmichael Director September 25, 1997
/s/ William Fox Director September 25, 1997
William Fox
/s/ Jack Futterman Director September 25, 1997
Jack Futterman
Barry Gordon Director September 25, 1997
/s/ Steven S. Schwartzreich Director September 25, 1997
Steven S. Schwartzreich
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