SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
{X} Annual Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For The Fiscal Year Ended June 30, 1998
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*
- - -------------------------------- -----------------
11,643,273 shares of Common Stock $183,382,000
* Based on the last reported sale price for the Common Stock on Nasdaq National
Market on September 11, 1998
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date.
Common Stock, par value $.01 per share, 13,365,140 shares outstanding as of
September 11, 1998
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 8, 1998
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business
General
Product Overview
Products
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") market, distribute and sell natural and specialty food products
under brand names which are sold as "better for you" products. The product
categories encompass natural and organic foods, medically-directed foods,
weight management and portion control foods, snack foods and kosher foods.
These products are sold primarily to specialty and natural food distributors
and are marketed nationally to supermarkets, natural food stores, and other
retail classes of trade. Except with respect to the product lines of Arrowhead
Mills, Inc. ("Arrowhead Mills") and Dana Alexander, Inc. ("Terra Chips"),
which were acquired on July 1, 1998, the Company's products are produced by
independent food processors ("co-packers") using proprietary specifications
controlled by the Company.
The Company was organized in May 1993 to acquire specialty food brands. Since
its formation, the Company has completed a number of acquisitions of companies
or brands. The principal companies or brands acquired are as follows:
Kineret Foods Corporation (kosher foods) acquired in November 1993
Hain Pure Food Co., Inc. (natural food products) acquired in April 1994.
Hollywood Foods (cooking oils, condiments and vegetable juice) acquired as
part of the acquisition of Hain Pure Food Co., Inc. in April 1994.
The Estee Company (sugar-free, medically directed food products) acquired
in November 1995.
Weight Watchers dry and refrigerated products sold pursuant to a license
from H.J. Heinz Company acquired in March 1997.
Boston Better Snacks (snack foods) acquired in May 1997.
Westbrae Natural, Inc. (natural foods sold under the Westbrae, Westsoy,
Little Bear and Bearitos labels) acquired in October 1997.
Earth's Best natural baby foods products sold pursuant to a license from
H.J. Heinz Company acquired in May 1998.
<PAGE>
In addition, at June 30, 1998, the Company owned the Farm Foods, Harry's
Premium Snacks, Featherweight, and Alba Foods brands.
On July 1, 1998, the Company acquired the following businesses and brands from
The Shansby Group and other investors:
Arrowhead Mills (natural foods).
DeBoles Nutritional Foods, Inc. ("DeBoles" -natural pasta products).
Terra Chips (natural vegetable chips)
Garden of Eatin', Inc. ("Garden of Eatin'"- natural snack products).
The aggregate purchase price (excluding closing costs) for these businesses was
$80 million. The purchase price was paid by the issuance of 1,716,000 shares
of the Company's common stock with a market value of $40 million and $40
million in cash from the proceeds of an amended and restated credit agreement
with the Company's banks.
The Company's brand names are well recognized in the various market categories
they serve. Hain has acquired all of these brands over the past five years
and will seek future growth through internal expansion, as well as the
acquisition of complementary brands.
Presently, Hain Pure Food Co., Inc., Kineret Foods Corporation, Westbrae
Natural, Inc. and subsidiaries and Arrowhead Mills, Inc. and subsidiaries are
the Company's only subsidiaries. Garden of Eatin' was merged into Arrowhead
Mills in July 1, 1998. The other brands are operated as divisions of the
Company.
The Company's overall strategy is to be a leading "better for you" specialty
niche food marketer by integrating all of its brands under one management team
and employing 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 brand groups, it will achieve efficiencies of scale and enhanced market
penetration. The Company considers the acquisition of "better for you" 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.
<PAGE>
As of June 30, 1998, the Company employed a total of 110 full-time employees.
As a result of the acquisitions completed on July 1, 1998, the number of
employees increased to approximately 350. The Company intends to substantially
integrate the operations and management of the acquired businesses, and it is
anticipated that the number of employees will be substantially reduced over the
course of the fiscal year ending June 30, 1999. The Company's employees are
not represented by any labor union. The Company believes that its relations
with its employees are good.
Product Overview
Natural Food Products
The Company's Hain, Westbrae, Westsoy, Little Bear, Bearitos, Arrowhead Mills,
Terra Chips, DeBoles, Garden of Eatin', Earth's Best, Harry's Premium Snacks
and Farm Foods businesses market and distribute a full line of natural food
products. The Company is a leader in many of the top 15 natural food
categories. 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 Foods business markets a line of specialty cooking oils
that 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
market 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 that are prepared in a manner
consistent with Kosher dietary laws.
<PAGE>
Snack Foods
The Company markets and sells popcorn and potato chip and tortilla chips under
the Boston Popcorn and Harry's Original names, principally in the New England
and New York City metropolitan areas.
Products
The Company's natural food product lines consist of approximately 550 branded
items and include non-dairy drinks (soy and rice milk), popcorn cakes, soups,
crackers, flour and baking mixes, hot and cold cereals, pasta, baby food,
condiments, cooking oils, gourmet vegetable chips, tortilla chips, and potato
chips. For fiscal 1998, non-dairy drinks were approximately 19% of total
sales.
The Company's Hollywood brand products consist of approximately 15 products
sold principally through the supermarket distribution channel. Principal
products are safflower, canola, and peanut oils, and carrot juice. Hollywood
cooking oils are enhanced with Vitamin E.
The Estee 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.
Boston Popcorn and Harry's products consist of 40 items comprised of varieties
of popcorn, potato chips, tortilla chips and other snack food items.
Arrowhead Mills and Deboles produce over 360 food products in ready-to-eat
cereals, hot cereals, pastas, flour, baking mixes, soups and chilis, packaged
grain, nut butters and nutritional oils.
Terra Chips natural food products consist of approximately 48 items comprised
of varieties of potato chips, sweet potato chips and other vegetable chips.
Garden of Eatin' natural food products substantially consist of a variety of
tortilla chip products.
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 of those items do not
warrant further production.
<PAGE>
Manufacturing
As at June 30, 1998, all of the Company's products were 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 and popcorn cakes from two suppliers, all of
its non-dairy drinks from two suppliers, principally all of its tortilla chips
from one supplier and all of its Hollywood cooking oils from one supplier.
H.J. Heinz Company manufactures the Earth's Best baby food products.
Boston Popcorn products are manufactured principally by three co-packers.
Pursuant to its co-packing arrangements, the Company purchases substantially
all of its products as finished goods.
As a result of the acquisitions of Arrowhead Mills, DeBoles and Terra Chips
on July 1, 1998, the Company is currently the manufacturer of a substantial
portion of the items sold by those companies, although third party co-packers
are also used for various products. One co-packer manufactures substantially
all of the Garden of Eatin' products. The Company intends to continue the
manufacture of Terra Chips at its facility in Brooklyn, New York for the
foreseeable future. The Company has not as yet made a decision as to whether
it will continue to manufacture Arrowhead Mills and DeBoles products at the
Company's plants located in Hereford, Texas and Shreveport, Louisiana,
respectively, or whether it will engage third party co-packers for the
manufacture of such products.
Kineret products are primarily processed under the supervision of the Orthodox
Union which certifies a product as kosher. The Orthodox Union must approve
both the ingredients contained in the product and the facility manufacturing
or processing the product.
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. The Company
introduced a substantial number of new products in various categories over
the last three fiscal years.
<PAGE>
Marketing and Distribution
A majority of the products marketed by the Company are sold through independent
distributors. Most sales orders are received from third-party food brokers.
The Company has recently been increasing its direct sales force for natural
food products and reducing its reliance on food brokers. Food brokers act as
agents for the Company within designated territories, usually on a
non-exclusive basis, and receive commissions. 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, although the Company may participate
in product pricing during promotional periods.
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 utilizes advertising in trade magazines and distributor catalogues.
The Company's customer base consists principally of mass-market merchandisers,
natural food distributors, supermarkets, drug store chains and grocery
wholesalers. During the year ended June 30, 1998, sales to United Naturals,
Inc. and Tree of Life (natural food distributors) accounted for approximately
20% and 12%, respectively of the Company's sales. Foreign sales are not
significant.
Trademarks
The Company's trademarks and brand names for the product lines referred to
herein are registered in the United States and a number of foreign countries.
The Company sells the Earth's Best and Weight Watchers products pursuant to
licenses from H.J. Heinz Company. 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 certain of these names could have
a material adverse effect on the Company's business, results of operations
and financial condition.
Competition
The Company faces competition in the marketing of all of its brands and
competes with small specialty food companies in specific categories and with
many large grocery product companies and suppliers of private label products.
The Company's natural food product lines compete with a number of other
natural food companies, including Health Valley and Spectrum. Hain rice and
popcorn cakes compete with Quaker Oats and Orville Redenbacher. Hollywood
competes with other mainstream oils. Estee has one major competitor, which
markets largely duplicative products, and also faces strong competition in
sugar-free candy, which is marketed outside the medically directed section of
supermarkets. Weight Watchers competes for its share of consumer spending
with the many companies offering reduced fat foods. Kineret competes with
other frozen food companies. Boston Better Snacks faces competition
from 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, safety,
advertising, labeling and ingredients of food products. In addition, as set
forth above, Hain's kosher food products are subject to additional regulation
and inspection. 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.
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 to effectively
integrate its acquisitions; 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 approximately 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 Company is currently in the process of
leasing an additional 7,000 square feet of office space in the same building
for a five-year period. When the aforementioned new space lease is executed,
the current annual rental on all 17,000 square feet will approximate $415,000.
The Company recently leased 100,000 square feet of space in a building located
in Compton, CA., consisting of 90,000 square feet of warehouse space and 10,000
square feet of office space. The term of the lease is five years and provides
for a current annual rental of approximately $396,000. This facility will
serve as the Company's West Coast distribution center for principally all of
the Company's product lines.
The Company operates a 7,000 square foot warehouse and distribution center
located in East Hills, New York which it utilizes to distribute its frozen
kosher food products. This lease, which provides for annual net rental of
approximately $40,000, 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 expiring on May 31, 2000. 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.
In addition to the foregoing distribution facilities operated by the Company,
the Company also utilizes a large bonded public warehouse on the East Coast
from which it makes deliveries to customers in the Eastern part of the country.
Item 3. Legal Proceedings.
A former financial advisor to Westbrae has made a demand for payment of fees
and expenses in the amount of approximately $1.0 million relating to the sale
of Westbrae to the Company in October 1997, and submitted the matter to
arbitration. The Company believes, based on correspondence and representations
provided by former management of Westbrae, that the fee agreement expired and
terminated prior to the sale of Westbrae and that no fees are payable. The
Company is also from time to time involved in incidental litigation relating
to the conduct of its business. In the opinion of management, disposition of
pending litigation will not have a material adverse effect on the Company's
business, results of operations or financial condition.
<PAGE>
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, 1998.
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's National Market System. The following table
sets forth the reported high and low closing prices for the Common Stock for
each fiscal quarter from July 1, 1996 through September 11, 1998.
Common Stock
--------------------------------------
1998 1997
High Low High Low
-------- ------- ------ ------
First Quarter $11 15/16 $4 27/32 $4 $3 1/16
Second Quarter 12 3/4 8 5/8 4 3 1/4
Third Quarter 19 13/16 9 1/16 5 3/4 3 3/8
Fourth Quarter 27 1/4 17 11/16 5 5/16 4 1/8
July 1 - September 11, 1998 27 3/4 14 7/8
As at September 11, 1998, there were 96 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.
<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):
Year Ended June 30
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Operating results:
Net sales $104,253 $65,353 $68,606 $58,076 $14,963
Income (loss) before
extraordinary charge $4,634 $1,069 $2,134 $2,365 $(502)
Extraordinary charge (1,342)
----- ----- ----- ----- ---
Net income (loss) $3,292 $1,069 $2,134 $2,365 $(502)
Basic earnings per
common share:
Income (loss) before
extraordinary charge $ .45 $ .12 $ .24 $ .28 $ (.19)
Extraordinary charge (.13)
-- -- -- -- --
Net income (loss) $ .32 $ .12 $ .24 $ .28 $ (.19)
Diluted earnings per
common share:
Income (loss) before
extraordinary charge $ .39 $ .12 $ .24 $ .28 $ (.19)
Extraordinary charge (.11)
-- -- -- -- --
Net income (loss) $ .28 $ .12 $ .24 $ .28 $ (.19)
Financial Position:
Working Capital $14,538 $4,482 $6,540 $8,883 $4,473
Total Assets 88,291 48,895 47,442 34,921 31,739
Long-term Debt 16,561 10,756 12,105 7,277 13,450
Stockholders' Equity 53,247 25,059 24,424 22,290 11,501
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.
General
The Company made the following acquisitions during the three years ended
June 30, 1998:
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 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 Weight Watchers dry and refrigerated
products.
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 New
England and the New York City metropolitan areas.
On July 15, 1997, the Company acquired Alba Foods from Heinz USA, a division
of H.J. Heinz Company.
On October 14, 1997, the Company acquired all of the capital stock of Westbrae
Natural, Inc. ("Westbrae").
On May 31, 1998, the Company acquired Harry's Premium Snacks.
On June 1, 1998, the Company entered into a license agreement with H. J. Heinz
Company to market and sell Earth's Best baby food products to natural food
stores.
Results of Operations
The following discussion does not give effect to the acquisitions of Arrowhead
Mills, DeBoles, Terra Chips and Garden of Eatin, Inc. (the "Acquisitions"), all
of which occurred on July 1, 1998 after the close of the Company's fiscal year.
The Acquisitions will be accounted for as purchases. Accordingly, the results
of operations of the acquired businesses will be included in the Company's
results of operations commencing July 1, 1998.
Fiscal 1998 Compared to Fiscal 1997:
<PAGE>
Net sales for 1998 increased by approximately $38.9 million to $104.3 million
as compared with $65.4 million in 1997. Sales of Westbrae accounted for a
substantial portion of the increase.
Gross profit for 1998 increased by approximately $17.9 million to $42.5 million
(40.7% of sales) as compared to $24.6 million (37.6% of sales) in 1997. The
increase in gross profit dollars was attributable largely to the increased
sales level in 1998. The increase in the gross margin percentage was
attributable principally to a reduction in warehousing and delivery costs as
a percentage of sales and the effect of the Westbrae acquisition.
Selling, general and administrative expenses increased by $10.8 million to
$30.4 million (29.2% of sales) in 1998 as compared with $19.7 million (30.1%
of sales) in 1997. Substantially all of the dollar increase was attributable
to the acquisition of Westbrae. The 0.9% reduction in such costs as a
percentage of sales was attributable principally to higher sales levels which
have the impact of better absorption of general operating costs.
Depreciation and amortization costs increased to $1.6 million in 1998 from $0.9
million in 1997. The principal factor contributing to in the increase was
amortization of goodwill acquired in connection with the acquisition of
Westbrae and the other businesses during the past three fiscal years.
Interest and financing costs for 1998 amounted to $2.6 million in 1998 as
compared with $2.1 million in 1997. In October 1997, the Company acquired
Westbrae principally with the proceeds of bank borrowings. In December 1997,
the Company issued 2.5 million shares of common stock in a public offering,
the proceeds of which were used to pay down a substantial portion of the debt
incurred in connection with the Westbrae acquisition. Accordingly, between
October 14, 1997 and December 9, 1997 there was a higher level of debt which
accounted for most of the increase in interest expense.
In April 1998, the Company prepaid $8.5 million of its 12.5% subordinated
debentures with the proceeds of less costly bank borrowings. This prepayment
will result in lower interest costs subsequent to the prepayment.
Income before income taxes and extraordinary charge for 1998 increased to $7.9
million (7.6% of sales) from $1.9 million (2.8% of sales) in 1997. This
significant improvement in profitability was attributable to the aforementioned
increase in sales, the improvement in gross profit margins, lower selling,
general and administrative expenses as a percentage of sales, offset by the
increase in amortization of goodwill and interest costs.
Income taxes increased to $3.3 million in 1998, compared with $0.8 million in
1997. The effective tax rate was 41.2% in 1998, compared with 42.4% in 1997.
The decrease in the effective tax rate was attributable to a higher level of
income in 1998 that mitigated the effect of the non-deductibility of goodwill
amortization. In connection with the Acquisitions on July 1, 1998 referred to
above, the Company acquired a very substantial amount of goodwill attributable
to the brand equity and earnings of the acquired businesses. Inasmuch as
the amortization of such goodwill will not be deductible for tax reporting
purposes, the Company anticipates that its effective income tax rate in the
fiscal year ending June 30, 1999 will approximate 44%.
<PAGE>
Extraordinary Charge:
In connection with the prepayment of its 12.5% subordinated debentures,
the Company paid prepayment fees and also wrote off unamortized financing
costs associated therewith. This resulted in an extraordinary charge of
approximately $2.1 million before related income tax benefits of approximately
$0.8 million.
Fiscal 1997 Compared to Fiscal 1996:
Net sales for 1997 decreased by approximately $3.3 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 has reacted by continuing to introduce
new products in a variety of categories, and continues to make acquisitions
that will diversify its product mix and reduce reliance on sales of specific
categories.
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 $0.1 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 was principally a result
of the aforementioned decrease in gross profit offset in part by the decrease
in sales promotional costs.
Income taxes decreased to $0.8 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>
Liquidity and Capital Resources
In October 1997, in connection with the acquisition of Westbrae, the Company
entered into an Amended and Restated Credit Facility ("Facility") with its bank
providing for a $30 million senior term loan and a $10 million revolving credit
line. The Facility replaced the Company's existing facility with the same
bank. In December 1997, the Company issued 2.5 million shares of common stock
in a public offering, which raised approximately $20.9 million, which was used
to pay down the senior term loan. In April 1998, the Company re-borrowed
approximately $9 million under the senior term loan to prepay the Company's
$8.5 million subordinated debentures. At June 30, 1998, $18.6 million was
outstanding under the senior term loan and $2.4 million was outstanding under
the revolving credit line.
On July 1, 1998, in connection with the Acquisitions, the Facility was further
amended to provide for a $60 million senior term loan and a $15 million
revolving credit line. The entire senior term loan was borrowed on that date
to pay the cash portion of the purchase price of the Acquisitions, fund closing
costs, and to repay the then existing balance on the Facility. Accordingly,
the Company's debt structure will be significantly different in the fiscal
year commencing July 1, 1998 from that in prior years. However, the Company
believes that operating cash flow generated by its business will be more than
adequate to service the aforementioned debt.
The interest rate on the Facility is based partially on the ratio of
outstanding debt to operating cash flow (as defined). The Company may elect
to pay interest based on the bank's base rate or the LIBOR rate. Borrowings
on a base rate basis may range from 0.50% below the bank's base rate to 1.00%
above the bank's base rate. Borrowings on a LIBOR basis may range from 1.75%
to 3.00% over the LIBOR rate. The entire senior term loan is currently
borrowed on a LIBOR basis. The senior term loan is repayable in quarterly
principal installments (the first principal payment commences on December 31,
1998) through maturity of the Facility on September 30, 2005. Pursuant to
the Facility, the Company may borrow under its revolving credit line 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. As of August 31, 1998, $13 million was available
under the Company's revolving credit line. Utilization of the revolving credit
line varies over the course of the year based on inventory requirements.
The aggregate principal payments on the senior term loan for the year ending
June 30, 1999 are approximately $2.6 million. The Company anticipates that
cash flow from operations will be sufficient to meet all of its debt service
and operating requirements.
<PAGE>
Working capital at June 30, 1998 amounted to approximately $14.5 million.
Working capital increased by approximately $4 million on July 1, 1998 as a
result of the Acquisitions, and this new level of working capital is deemed
adequate to serve the Company's operational needs. Prior to the Acquisitions,
the Company purchased all of its products from independent co-packers and did
not invest in plant or equipment relating to the manufacture of products for
sale. The Company has not as yet determined whether it will continue
production at the plants acquired in the Acquisitions or will delegate such
production to independent co-packers. Consequently, there may be some level
of capital expenditures in connection with the operation of those plants,
but the amount is not considered material in relation to the Company's
operations.
The Facility imposes limitations on the incurrence of additional indebtedness
and requires that the Company comply with certain financial tests and
restrictive covenants. As at June 30, 1998, the Company was in compliance
with such covenants.
Year 2000
The "Year 2000" issue is the result of computer systems that were programmed in
prior years using a two digit representation for the year. Consequently, in
the Year 2000, date sensitive computer programs may interpret the date "00" as
1900 rather than 2000. The Company has completed an assessment of its system
affected by the Year 2000 issue and have found only minor issues to be
addressed. The business operation computer programs/systems are Year 2000
compliant.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues. While the Company believes that the Year 2000
issue will not have a material adverse effect on the Company's financial
position, liquidity or results of operations, there is no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted and would not have an adverse effect on the Company's systems.
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.
<PAGE>
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, 1998 and 1997
Consolidated Statements of Income - Years ended June 30, 1998, 1997
and 1996
Consolidated Statements of Cash Flows - Years ended June 30, 1998,
1997 and 1996
Consolidated Statement of Stockholders' Equity - Years ended
June 30, 1998, 1997 and 1996
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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, 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 10, 1998
<PAGE>
<TABLE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30
1998 1997
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash $495,000 $219,000
Trade accounts receivable,
less allowance for doubtful
accounts of $325,000 and $265,000 13,614,000 8,447,000
Inventories 13,278,000 6,635,000
Other current assets 1,830,000 1,226,000
---------- ----------
Total current assets 29,217,000 16,527,000
Property and equipment,
net of accumulated depreciation
of $834,000 and $577,000 1,065,000 743,000
Goodwill and other intangible assets,
net of accumulated amortization
of $3,320,000 and $2,074,000 54,253,000 29,188,000
Deferred financing costs,
net of accumulated amortization
of $1,055,000 and $1,049,000 1,502,000 975,000
Other assets 2,254,000 1,462,000
---------- ----------
Total assets $88,291,000 $48,895,000
========== ==========
<FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $9,715,000 $7,568,000
Current portion of long-term debt 4,554,000 4,178,000
Income taxes payable 410,000 299,000
---------- ----------
Total current liabilities 14,679,000 12,045,000
Long-term debt, less current portion 16,561,000 10,756,000
Other liabilities 2,628,000 483,000
Deferred income taxes 1,176,000 552,000
---------- ----------
Total liabilities 35,044,000 23,836,000
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 11,656,299 and 8,881,899 shares 117,000 89,000
Additional paid-in capital 45,122,000 20,804,000
Retained earnings 8,283,000 4,991,000
---------- ----------
53,522,000 25,884,000
Less: 100,000 and 300,000 shares
of treasury stock, at cost 275,000 825,000
---------- ----------
Total stockholders' equity 53,247,000 25,059,000
---------- ----------
Total liabilities and
stockholders' equity $88,291,000 $48,895,000
========== ==========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $104,253,000 $65,353,000 $68,606,000
Cost of sales 61,797,000 40,781,000 40,884,000
---------- ---------- ----------
Gross profit 42,456,000 24,572,000 27,722,000
---------- ---------- ----------
Selling, general and
administrative expenses 30,402,000 19,651,000 20,905,000
Depreciation of property
and equipment 257,000 178,000 184,000
Amortization of goodwill and
other intangible assets 1,311,000 740,000 651,000
---------- ---------- ----------
31,970,000 20,569,000 21,740,000
Operating income 10,486,000 4,003,000 5,982,000
---------- --------- ---------
Interest expense, net 2,128,000 1,639,000 1,745,000
Amortization of deferred
financing costs and discounts 474,000 509,000 473,000
--------- --------- ---------
2,602,000 2,148,000 2,218,000
--------- --------- ---------
Income before income taxes
and extraordinary charge 7,884,000 1,855,000 3,764,000
Provision for income taxes 3,250,000 786,000 1,630,000
--------- --------- ---------
Income before extraordinary charge 4,634,000 1,069,000 2,134,000
Extraordinary charge - costs in
connection with prepayment of
debentures, net of income tax
benefit of $791,000 (1,342,000)
--------- --------- ---------
Net income $3,292,000 $1,069,000 $2,134,000
========= ========= =========
Basic Earnings Per Common Share:
Income before extraordinary charge $0.45 $0.12 $0.24
Extraordinary charge (0.13)
---- ---- ----
Net income $0.32 $0.12 $0.24
==== ==== ====
Diluted Earnings Per Common Share:
Income before extraordinary charge $0.39 $0.12 $0.24
Extraordinary charge (0.11)
---- ---- ----
Net income $0.28 $0.12 $0.24
==== ==== ====
Common equivalent shares:
Basic 10,269,000 8,694,000 8,887,000
========== ========= =========
Diluted 11,893,000 8,993,000 8,964,000
========== ========= =========
<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
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $3,292,000 $1,069,000 $2,134,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Extraordinary charge 1,342,000
Depreciation of property
and equipment 257,000 178,000 184,000
Amortization of goodwill and
other intangible assets 1,311,000 740,000 651,000
Amortization of deferred
financing costs 474,000 509,000 473,000
Provision for doubtful accounts 70,000 290,000 123,000
Other 77,000 (34,000)
Deferred income taxes 624,000 91,000 36,000
Increase (decrease) in cash
attributable to changes in assets and
liabilities, net of amounts
applicable to acquired businesses:
Accounts receivable (2,385,000) (383,000) (218,000)
Inventories (2,193,000) 899,000 1,172,000
Other current assets (414,000) (347,000) (166,000)
Other assets (882,000) (309,000) 81,000
Accounts payable and
accrued expenses (2,767,000) 276,000 (2,153,000)
Income taxes payable 1,810,000 26,000 (1,023,000)
--------- --------- ---------
Net cash provided by
operating activities 616,000 3,005,000 1,294,000
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses (24,653,000) (666,000) (9,758,000)
Acquisition of property and equipment (579,000) (146,000) (215,000)
---------- ------- ---------
Net cash used in investing
activities (25,232,000) (812,000) (9,973,000)
---------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank revolving
credit facility 100,000 850,000 1,100,000
Proceeds from senior term loan 39,100,000 9,000,000
Payment of senior term loan (25,347,000) (1,234,000) (2,919,000)
Prepayment of 12.5% Subordinated
debentures (9,112,000)
Purchase of treasury stock (825,000)
Costs in connection with
bank financing (950,000) (6,000) (256,000)
Proceeds from public offering,
net of related expenses 20,852,000
Proceeds from exercise of warrants
and options, net of related expenses 2,226,000 52,000
Collections of receivables from
equipment sales 382,000 552,000 2,011,000
Payment of debt of acquired company (2,103,000) (1,269,000)
Payment of other long-term debt
and other liabilities (256,000) (400,000) (138,000)
---------- --------- ---------
Net cash provided by (used in)
financing activities 24,892,000 (2,280,000) 8,798,000
---------- --------- ---------
Net increase (decrease) in cash 276,000 (87,000) 119,000
Cash at beginning of year 219,000 306,000 187,000
------- ------- -------
Cash at end of year $495,000 $219,000 $306,000
======= ======= =======
<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, 1996, 1997 AND 1998
<CAPTION>
Common Stock Additional
Amount Paid-in Retained Treasury Stock
Shares at $.01 Capital Earnings Shares Amount Total
--------- ------ ---------- --------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Issuance of 2,500,000
shares in public
offering, net of
related expenses 2,500,000 25,000 20,827,000 20,852,000
Exercise of Common
Stock warrants, net
of related expenses 743,000 (200,000) 550,000 1,293,000
Exercise of stock options 274,400 3,000 930,000 933,000
Non-cash compensation
charge 27,000 27,000
Value ascribed to warrants 883,000 883,000
Tax benefit from stock options 908,000 908,000
Net income for the year
ended June 30, 1998 3,292,000 3,292,000
---------- ------- ---------- --------- ------- ------- ----------
Balance at June 30, 1998 11,656,299 $117,000 $45,122,000 $8,283,000 100,000 ($275,000) $53,247,000
========== ======= ========== ========= ======= ======= ==========
<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), Westbrae
Natural (natural foods), Estee (sugar-free, medically directed snacks),
Arrowhead Mills (natural foods). DeBoles Nutritional Foods (natural pasta
products), Terra Chips (natural vegetable chips), Garden of Eatin', Inc.
(natural snack products), Kineret Foods (frozen kosher foods), Weight
Watchers (dry and refrigerated products), Earth's Best (natural baby foods)
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.
Reclassifications:
Certain prior year's balances have been reclassified to conform with the
1998 presentation.
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 amounts 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.
<PAGE>
Segment Reporting:
In June 1997, the FASB issued Statement No. 131, "Disclosure about Segments
of an Enterprise and Related Information" ("FAS 131"), which is effective
for years beginning after December 15, 1997. FAS 131 established standards
for the way the public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures
about products and services, geographical areas, and major customers.
Since FAS 131 is not required to be applied to interim financial statements
in the initial year of adoption, the Company is not required to disclose
segment information in accordance with FAS 131 until the fiscal year ended
June 30, 1999, if applicable. In the Company's first quarter of fiscal
2000 report, and in subsequent quarters, it would present the interim
disclosures required by FAS 131 for both fiscal 2000 and 1999, if
applicable.
The Company is currently evaluating what operating segments of its business
may trigger the disclosure requirements under FAS No. 131.
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 $747,000, $236,000, and $22,000 for
fiscal 1998, 1997 and 1996, respectively. 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>
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. During the year ended June 30, 1998, sales to
two customers approximated 20% and 12%, respectively. At June 30, 1998
and 1997, the two customers accounted for approximately 30.5% and 19.7%,
respectively, of total accounts receivable outstanding.
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, 1998 and 1997, the Company had no cash equivalents. 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, 1998 and 1997 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).
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, 1997. 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.
Start Up Costs:
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting Costs of Start-up Activities" ("SOP 98-5").
SOP 98-5 is effective beginning on July 1, 1999, and requires the start-up
costs capitalized prior to such date be written-off as a cumulative effect
of an accounting change as of July 1, 1999 and any future start-up costs be
expensed as incurred. It is not practicable to estimate what effect this
change will have on fiscal 2000 earnings, however, had SOP 98-5 been
adopted at the beginning of the year ended June 30, 1998, income before
income taxes and extraordinary charge would have been reduced by
approximately $1 million.
Earnings Per Share:
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share"
("FAS 128"). FAS 128 replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options and warrants. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share.
All earnings per share amounts for all periods have been presented, and
where necessary, restated to conform to FAS 128 requirements.
<PAGE>
The following table sets forth the computation of basic and diluted
earnings per share pursuant to FAS 128.
1998 1997 1996
--------- --------- ---------
Numerator:
Income before extraordinary
charge - numerator for basic
and diluted earnings per share $4,634,000 $1,069,000 $2,134,000
Extraordinary charge (1,342,000)
--------- --------- ----------
Net income $3,292,000 $1,069,000 $2,134,000
========= ========= =========
Denominator:
Denominator for basic earnings
per - weighted average shares
outstanding during the period (a) 10,269,000 8,694,000 8,887,000
---------- --------- ---------
Effect of dilutive securities:
Stock options 962,000 182,000 32,000
Warrants 662,000 117,000 45,000
---------- --------- ---------
1,624,000 299,000 77,000
---------- --------- ---------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 11,893,000 8,993,000 8,964,000
========== ========= =========
Basic earnings per share:
Income before extraordinary
charge $ .45 $ .12 $ .24
Extraordinary charge (.13)
-- -- --
Net income $ .32 $ .12 $ .24
== == ==
Diluted earnings per share:
Income before extraordinary charge $ .39 $ .12 $ .24
Extraordinary charge (.11)
-- -- --
Net income $ .28 $ .12 $ .24
== == ==
(a) On December 8, 1997, the Company issued 2,500,000 shares of common
stock in connection with a public offering.
<PAGE>
3. ACQUISITIONS:
On October 14, 1997, the Company completed a tender offer for all of the
shares of Westbrae Natural, Inc. ("Westbrae), a publicly-owned company,
for $3.625 per share of common stock. The aggregate cash purchase price,
including acquisition costs, amounted to approximately $24 million. In
addition, the Company repaid approximately $2.1 million of outstanding
Westbrae debt. To finance the acquisition, the Company entered into a
$40 million credit facility with its bank providing for a $30 million
Senior Term Loan and a $10 million revolving credit line.
Westbrae (formerly known as Vestro Natural Foods, Inc.) 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.
Unaudited pro forma results of operations (in thousands, except per share
amounts) for the years ended June 30, 1998 and 1997, assuming the
acquisition of Westbrae had occurred as of July 1, 1996 are as follows:
1998 1997
------- ------
Net sales $114,892 $98,247
Net income 3,533 1,419
Net income per share (diluted) $ .30 $ .16
The pro forma operating results shown above are not necessarily indicative
of operations in the period following acquisition.
On July 15, 1997, the Company acquired Alba Foods from Heinz USA, a
division of H.J. Heinz Company. On May 31, 1998, the Company acquired
Harry's Premium Snacks. Pro forma information with respect to the
foregoing acquisitions is not significant.
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 New England and the 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.
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.
<PAGE>
4. LICENSE AGREEMENTS:
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.
The agreement is for five years, and is renewable under certain
circumstances. The agreement provides, among other matters, for a royalty
payment to WWGF based on sales of Weight Watchers products and payment of
a share of the pre-tax profits (as defined) from sale of such products.
On June 1, 1998, the Company entered into a license agreement with H. J.
Heinz Company to market and sell Earth's Best baby food products to natural
food stores. The agreement is for five years, and is renewable under
certain circumstances. The agreement provides, among other matters, for
payment of a share of profits (as defined) from sale of such products in
excess of defined amounts.
5. INVENTORIES:
Inventories consist of the following:
1998 1997
---------- ---------
Finished goods $10,006,000 $5,418,000
Raw materials and packaging 3,272,000 1,217,000
---------- ---------
$13,278,000 $6,635,000
========== =========
6. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill and other intangible assets consist of the following:
1998 1997
---------- ----------
Goodwill $56,618,000 $30,645,000
Other intangible assets 955,000 617,000
---------- ----------
57,573,000 31,262,000
Less: Accumulated amortization 3,320,000 2,074,000
---------- ----------
$54,253,000 $29,188,000
========== ==========
<PAGE>
Substantially all unamortized goodwill relates to the acquisition of Hain,
Westbrae, 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 1998 is substantially all attributable to the
acquisition of Westbrae.
7. LONG-TERM DEBT:
Long-term debt consists of the following:
1998 1997
---------- ----------
Senior Term Loan $18,600,000 $ 4,847,000
Revolving Credit 2,350,000 2,250,000
12.5% Subordinated Debentures,
net of unamortized original
issue discount of $1,195,000 7,305,000
Notes payable to sellers in
connection with acquisition
of companies, and other
long-term debt 165,000 532,000
---------- ----------
21,115,000 14,934,000
Current portion 4,554,000 4,178,000
---------- ----------
$16,561,000 $10,756,000
========== ==========
On October 14, 1997, in connection with the acquisition of Westbrae, the
Company and its bank entered into a $40 million Amended and Restated Credit
Facility ("Facility") providing for a $30 million senior term loan and a
$10 million revolving credit line. The Facility replaced the Company's
existing $18 million facility with the same bank. The Company borrowed the
full $30 million senior term loan to fund the cash purchase price and
related closing costs of the acquisition and to repay certain existing
debt of the Company and Westbrae. On December 8, 1997, the Company repaid
approximately $20.9 million of such debt from the proceeds of a public
offering of its common stock. The current portion of long-term debt at
June 30, 1998 is based on the terms of the Facility prior to its
refinancing on July 1, 1998 as set forth below.
At June 30, 1998 and 1997, the interest rate on the Facility was 9.50%.
<PAGE>
On July 1, 1998, in connection with the acquisitions of businesses from The
Shansby Group (see Note 15), the Facility was further amended to provide
for a $60 million senior term loan and a $15 million revolving credit. The
entire senior term loan was borrowed on that date to pay the cash portion
of the purchase price of the acquisitions, fund closing costs, and to repay
the then existing balance ($18.6 million) on the Facility. The interest
rate on the Facility is based partially on the ratio of outstanding debt to
operating cash flow (as defined). The Company may elect to pay interest
based on the bank's base rate or the LIBOR rate. Borrowings on a base rate
basis may range from 0.50% below the bank's base rate to 1.00% above the
bank's base rate. Borrowings on a LIBOR basis may range from 1.75% to
3.00% over the LIBOR rate. The entire senior term loan is currently
borrowed on a LIBOR basis. The senior term loan is repayable in quarterly
principal installments (the first principal payment commences on December
31, 1998) through maturity of the Facility on September 30, 2005. 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 contains certain financial and other 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 and
interest and fixed charge coverage ratios and is required to achieve
certain earnings levels. As of August 31, 1998, $13 million was available
under the Company's revolving credit line. Utilization of the revolving
credit line varies over the course of the year based on inventory
requirements.
The 12.5% Subordinated Debentures ("Debentures") provided for the payment
of interest semi-annually in arrears. 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 was being
amortized using the interest method over the life of the Debentures.
Amortization expense for the years ended June 30, 1998, 1997 and 1996
amounted to $151,000, $166,000 and $141,000, respectively. On April 15,
1998, the Company prepaid all $8.5 million of the Debentures, constituting
the entire outstanding principal amount. The prepayment was funded by an
increase in the Company's senior term loan with its bank, which senior
term loan bears interest at a lower interest rate than the Debentures. In
connection with the prepayment, the Company wrote off the prepayment fee
of $612,000, as well as unamortized original issue discounts and financing
fees for the Debentures. This resulted in an extraordinary charge (net of
income tax effect) of approximately $1.3 million for the year ended
June 30, 1998. The prepayment of the Debentures is expected to result in
reduced continuing interest costs and the elimination of the amortization
of the financing costs with respect to the Debentures.
<PAGE>
Maturities of long-term debt at June 30, 1998 are as follows:
Year Ending
June 30
--------
1999 $ 4,554,000
2000 3,306,000
2001 3,875,000
2002 3,960,000
2003 4,440,000
Thereafter 980,000
----------
Total long-term debt $21,115,000
==========
The above table does not give effect to the refinancing of the Facility
incurred in connection with the acquisitions on July 1, 1998. Maturities
of long-term debt, after giving effect to the such refinancing, amount to
approximately $5.2 million (including the revolving credit facility of $2.4
million) in fiscal year 1999, $4.3 million in fiscal 2000, $7.2 million in
fiscal 2001, $9.5 million in fiscal 2002, $10.8 million in fiscal 2003 and
$25.6 million thereafter.
Interest paid during the years ended June 30, 1998, 1997 and 1996 amounted
to $2,376,000, $1,768,000 and $1,820,000, respectively.
8. INCOME TAXES:
The provision for income taxes (excluding the tax benefit applicable to
the extraordinary charge in 1998) for the years ended June 30, 1998, 1997
and 1996 are as follows:
1998 1997 1996
-------- ------- --------
Current:
Federal $2,309,000 $541,000 $1,337,000
State 317,000 154,000 257,000
--------- ------- ---------
2,626,000 695,000 1,594,000
Deferred Federal and State 624,000 91,000 36,000
--------- ------- ---------
Total $3,250,000 $786,000 $1,630,000
========= ======= =========
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 as of June 30, 1998
and 1997 are as follows:
1998 1997
------- -------
Difference in amortization period
on goodwill and intangibles $(428,000) $(186,000)
Basis difference on property and
equipment (95,000) (102,000)
Basis difference on inventory 119,000 134,000
Deferred charges (825,000) (462,000)
Allowance for doubtful accounts 53,000 64,000
--------- -------
Net deferred tax liability $(1,176,000) $(552,000)
========= =======
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,
1998, 1997 and 1996 are as follows:
1998 % 1997 % 1996 %
---------------- ------------- ---------------
Expected U.S. federal
income tax at
statutory rate $2,681,000 34.0% $630,000 34.0% $1,280,000 34.0%
State income taxes,
net of federal
benefit 235,000 3.0 102,000 5.5 172,000 4.6
Non-deductible
expenses 334,000 4.2 169,000 9.1 167,000 4.4
Other (115,000) (6.2) 11,000 .3
--------- ---- ------- ---- --------- ----
Provision for
income taxes $3,250,000 41.2% $786,000 42.4% $1,630,000 43.3%
========= ==== ======= ==== ========= ====
Income taxes paid during the years ended June 30, 1998, 1997 and 1996
amounted to $809,000, $669,000 and $2,623,000, respectively.
9. STOCKHOLDERS' EQUITY:
Common Stock:
<PAGE>
On December 8, 1997, the Company completed a public offering of 2,500,000
shares of its common stock at $9 per share. Proceeds to the Company, net
of expenses of the offering, amounted to approximately $20.9 million, which
was utilized to pay down the Company's credit facility with its bank. In
connection therewith, certain officers of the Company exercised options
for an aggregate of 105,000 shares of common stock which were sold in the
public offering. The Company received aggregate net proceeds of
approximately $340,000 from the exercise of such options.
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, 1998
and 1997, no preferred stock was issued or outstanding.
Warrants:
In connection with the acquisition of Estee in November 1995, 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. The proceeds were used to pay down bank debt.
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 is being amortized
over ten years.
In fiscal 1996 and 1997, 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.
In connection with the acquisition of Westbrae on October 14, 1997 and the
related bank refinancing, the Company issued a warrant to its bank to
acquire 114,294 shares of the Company's common stock at an exercise price
of $12.294. The value ascribed to this warrant of approximately $377,000
is being amortized over six years. In addition, the Company issued a
warrant to Argosy Investment Corp. to acquire 100,000 shares of the
Company's common stock at an exercise price of $12.688. The value ascribed
to this warrant of approximately $426,000 has been included in the costs of
the acquisition of Westbrae.
<PAGE>
As at June 30, 1998, there are 3,025,000 shares of common stock reserved
for issuance of warrants (1,214,000) and Employee and Director Stock
Options (1,811,000).
10. LEASES:
The Company's corporate headquarters are located in leased office space in
Uniondale, New York, under a lease, which expires in March 2002. The
Company is in the process of leasing additional space at the same location.
These leases provide for additional payments of real estate taxes and other
operating expenses over a base period amount. In addition, the Company
leases warehouse space for subsidiaries and a division under net leases
which expire in August 1999, May 2000 and April 2003.
The aggregate minimum future lease payments for these operating leases at
June 30, 1998 are as follows:
Year Ending
June 30
----------
1999 $ 721,000
2000 697,000
2001 670,000
2002 587,000
2003 330,000
---------
$3,005,000
=========
Rent expense charged to operations for the years ended June 30, 1998, 1997
and 1996 was $457,000, $224,000 and $162,000, respectively.
11. 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. On December 9, 1997, the stockholders of the Company
approved an amendment to increase the number of shares issuable under the
1994 Long Term Incentive and Stock Award Plan by 345,000 to 1,200,000
shares. The Plan provides for the granting of incentive stock options to
employees, directors and consultants to purchase 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 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. During 1998,
options to purchase 298,600 shares were granted at prices from $4.50 to
$14.13 per share. At June 30, 1998, 94,000 options are available for
grant.
<PAGE>
The Company's Chief Executive Officer was granted 125,000 of the options
granted in 1998, that had been conditionally granted to him at $4.8125 per
share on the date of grant (June 30, 1997) pending approval of an increase
in the number of shares available for grant (approved by shareholders on
December 9,1997). The Company will incur a straight line non-cash
compensation charge ($27,000 for fiscal 1998) over the 10-year vesting
period based on the excess (approximately $461,000) of the market value
of the stock options ($8.50 per share) on December 9, 1997 compared to
$4.8125 per share market value on the date of grant.
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. During 1998,
options for an aggregate of 67,500 shares were granted at prices of $8.50
and $19.68 per share. At June 30, 1998, 75,000 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, when the exercise price of the
Company's employee stock options at least equals the market price of the
underlying stock on the 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 4.78%
to 6.77%; no dividend yield; volatility factor of the expected market
price of the Company's Common Stock of 40%; and a weighted-average
expected life of the options of five years at June 30, 1998, 1997 and 1996.
<PAGE>
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.
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:
1998 1997 1996
--------- --------- --------
Pro forma net income $2,297,000 $747,000 $1,997,000
Pro forma diluted net
income per share $ .19 $ .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, 1998 follows:
1998 1997 1996
------------------ ------------------ -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ----- --------- ----- ------- -----
Outstanding at
beginning of
year 1,597,500 $3.61 1,090,000 $3.52 911,500 $3.57
Granted 366,100 7.90 542,500 3.82 193,500 3.25
Exercised (274,400) 3.42 (15,000) 3.50
Terminated (47,800) 4.54 (20,000) 4.75 (15,000) 3.25
--------- ---- --------- ---- --------- ----
Outstanding at
end of year 1,641,400 $4.57 1,597,500 $3.61 1,090,000 $3.52
========= ==== ========= ==== ========= ====
Exercisable at
end of year 1,439,400 1,323,000 1,069,000
========= ========= =========
Weighted average
fair value of
options granted
during year $2.50 $1.57 $1.33
==== ==== ====
<PAGE>
The following table summarizes information for stock options outstanding
at June 30, 1998:
Weighted Average
Exercise Options Options Remaining Contractual
Price Outstanding Exercisable Life in Years
----------- ----------- ----------- ---------------------
$2.94 - $4.813 1,403,300 1,231,700 6.9
8.50 - 10.00 213,100 192,700 9.4
14.125 - 19.69 25,000 15,000 9.7
--------- ---------
1,641,400 1,439,400 7.2
========= =========
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, the
Company may, in its sole discretion, make certain matching contributions.
For the years ended June 30, 1998, 1997 and 1996, the Company made
contributions of $22,000, $21,000 and $15,000, respectively.
13. QUARTERLY FINANCIAL DATA (UNAUDITED):
Unaudited quarterly financial data (in thousands, except per share amounts)
for fiscal 1998 and 1997 is summarized as follows:
Three Months Ended
--------------------------------------------
September December March June
30, 1997 31, 1997 31, 1998 30, 1998
--------- -------- -------- --------
Net sales $16,336 $28,676 $28,212 $31,029
Gross profit 6,474 11,626 11,520 12,836
Operating income 1,379 2,747 3,020 3,340
Income before
income taxes and
extraordinary charge 828 1,845 2,371 2,840
Extraordinary charge (1,342)
Net income 476 1,061 1,389 366
Basic earnings per
common share:
Income before
extraordinary charge $ .05 $ .11 $ .12 $ .15
Extraordinary charge $(.12)
Net income $ .05 $ .11 $ .12 $ .03
Diluted earnings per
common share:
Income before
extraordinary charge $ .05 $ .10 $ .11 $ .13
Extraordinary charge $(.10)
Net income $ .05 $ .10 $ .11 $ .03
<PAGE>
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
Basic income per
common share $ .04 $ .05 $ .00 $ .03
Diluted income per
common share $ .04 $ .05 $ .00 $ .03
14. LITIGATION:
A former financial advisor to Westbrae has made a demand for payment of
fees and expenses in the amount of approximately $1.0 million relating to
the sale of Westbrae to the Company in October 1997, and submitted the
matter to arbitration. The Company believes, based on correspondence and
representations provided by former management of Westbrae, that the fee
agreement expired and terminated prior to the sale of Westbrae and that no
fees are payable. The Company is also from time to time involved in
incidental litigation relating to the conduct of its business. In the
opinion of management, disposition of pending litigation will not have a
material adverse effect on the Company's business, results of operations
or financial condition.
15. SUBSEQUENT EVENT:
On July 1, 1998, the Company acquired the following businesses and brands
from The Shansby Group and other investors;, Arrowhead Mills (natural
foods). DeBoles Nutritional Foods (natural pasta products), Terra Chips
(natural vegetable chips) and Garden of Eatin', Inc. (natural snack
products).
The aggregate purchase price (excluding closing costs) for these businesses
was $80 million. The purchase price was paid by the issuance of 1,716,000
shares of the Company's common stock with a market value of $40 million and
$40 million in cash from the proceeds of an amended and restated credit
agreement with the Company's bank. Sales for these business were
approximately $55 million for the twelve months ended June 30, 1998.
<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 8, 1998, 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, 1998 and 1997
Consolidated Statements of Income - Years ended June 30, 1998, 1997
and 1996
Consolidated Statements of Cash Flows - Years ended June 30, 1998,
1997 and 1996
Consolidated Statement of Stockholders' Equity - Years ended
June 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) List of Financial Statement Schedules
Valuation and Qualifying Accounts (Schedule II)
(3) List of Exhibits
Exhibit 23 - Consent of Independent Auditors
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
On April 24, 1998, the Company filed a report on Form 8-K announcing
the execution of a purchase agreement pursuant to which the Company
would acquire four leading natural food businesses from The Shansby
Group and other owners.
See Note 15 to the Notes to Consolidated Financial Statements for
information on the closing of this transaction on July 1, 1998.
The Company did not file any other reports on Form 8-K during the
three months ended June 30, 1998.
<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
-----------------
Charged
Balance at Charged to to other Balance at
beginning costs and accounts- Deductions end of
of period expenses describe describe period
- - ------------------------------------------------------------------------------
Year ended
June 30, 1998
Deducted from asset
accounts:
Allowance for
doubtful accounts $265,000 $70,000 $94,000 (1) $104,000 (2) $325,000
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
(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.
THE HAIN FOOD GROUP, INC.
25th day of September 1998 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, 1998
Andrew R. Heyer of Directors
/s/ Irwin D. Simon President, Chief September 25, 1998
Irwin D. Simon Executive Officer
and Director
/s/ William Fox Vice Chairman of the September 25, 1998
William Fox Board of Directors
/s/ Jack Kaufman Vice President-Chief September 25, 1998
Jack Kaufman Financial Officer (a)
/s/ Beth L. Bronner Director September 25, 1998
Beth L. Bronner
/s/ William P. Carmichael Director September 25, 1998
William P. Carmichael
/s/ Jack Futterman Director September 25, 1998
Jack Futterman
/s/ James S. Gold Director September 25, 1998
James S. Gold
/s/ Barry Gordon Director September 25, 1998
Barry Gordon
/s/ Steven S. Schwartzreich Director September 25, 1998
Steven S. Schwartzreich
(a) Mr. Kaufman was the Company's Chief Financial Officer through September 7,
1998 and assumed his new role as Senior Vice President-Business Development
on September 8, 1998.
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Post-Effective Amendment
No. 1 to Registration Statement (Form S-8 No. 333-38915) pertaining to The
Hain Food Group, Inc. 1994 Long Term Incentive and Stock Award Plan, and the
Registration Statement (Form S-3 No. 333-59761) of The Hain Food Group, Inc.
and in the related Prospectus of our report dated September 10, 1998, with
respect to the consolidated financial statements and schedule of The Hain Food
Group, Inc. and Subsidiaries included in this Annual Report (Form 10-K) for the
year ended June 30, 1998.
/s/ Ernst & Young LLP
Melville, New York
September 24, 1998
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<EPS-PRIMARY> .32
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</TABLE>
