SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
to
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
April 27, 1999
THE HAIN FOOD GROUP, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-22818 22-3240619
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) 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
<PAGE>
Item 2. Acquisition or Disposition of Assets.
(a) On May 18, 1999, Hain Acquisition Corp., a Delaware corporation ("Hain
Acquisition") and wholly-owned subsidiary of The Hain Food Group, Inc. ("Hain"),
pursuant to the Agreement and Plan of Merger, dated April 6, 1999, by and among
Hain, Hain Acquisition and Natural Nutrition Group, Inc. ("NNG") (the "Merger
Agreement"), Hain Acquisition merged with and into NNG with NNG as the surviving
corporation (the "Merger").
As provided in the Merger Agreement,
(i) each outstanding share of the common stock, par value $.01 per
share, of NNG ("NNG Common Stock") was converted into the right to receive
a combination of (i) cash and (ii) a 7% subordinated convertible note due
2004 (collectively, the "Notes");
(ii) each outstanding share of preferred stock was converted into the
right to receive cash; and
(iii) certain options were converted into the right to receive a
combination of cash and a Note and certain other options were converted
into the right to receive cash.
The Notes are convertible into shares of Hain common stock, par value $.01
per share ("Hain Common Stock"). The number of shares of Hain Common Stock to be
issued upon conversion of each Note will be based upon the conversion price
equal to the average of the closing prices of Hain Common Stock for the ten
trading days prior to any conversion of that Note.
Hain has filed a Registration Statement (the "Registration Statement") on
Form S-3 to register up to 991,736 shares of Hain Common Stock to be issued to
holders of the Notes upon their conversion.
In connection with the Merger, Hain entered into a Credit Agreement with
IBJ Whitehall Bank & Trust Company, as issuer and administrative agent for the
lenders named therein, and Fleet Bank, N.A., as syndication agent (the "Credit
Facility"). Under the Credit Facility, the term loan portion is $130 million and
the revolving line of credit is $30.0 million.
Hain funded the cash consideration paid to holders of NNG Common Stock
through borrowings under the Credit Facility.
(b) Assets constituting plant, equipment or other physical property
acquired by Hain (through its wholly-owned subsidiary Hain Acquisition) in the
Merger were used by NNG and
<PAGE>
its subsidiaries in manufacturing. At the present time, Hain intends to use
these assets in the same manner in which they were used prior to the Merger.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of business acquired .
(i) The audited consolidated balance sheets of NNG and its subsidiaries as
of December 31, 1997 and 1998, and the related audited consolidated statements
of operations, stockholders' deficit and cash flows for each of the three years
in the period ended December 31, 1998, and the related reports of independent
auditors, which were filed with the initial filing of our Current Report on Form
8-K on April 27, 1999, are included on pages F-1 through F-22.
(ii) The unaudited consolidated balance sheets of NNG and its subsidiaries
as of March 31, 1999 and December 31, 1998, and the related unaudited
consolidated statements of operations and cash flows for each of the three month
periods ended March 31, 1998 and 1999 are included on pages F-23 through F-32.
(b) Pro forma financial information.
The unaudited pro forma combined consolidated balance sheets of Hain as of
March 31, 1999 and the unaudited pro forma combined consolidated statements of
operations for the year ended June 30, 1998 and the nine months ended March 31,
1999 are included in pages F- 33 through F- 45.
<PAGE>
(c) Exhibits.
Exhibit No. Description
(2.1)* Agreement and Plan of Merger by and among The Hain
Food Group, Inc., Hain Acquisition Corp. and Natural
Nutrition Group, Inc. dated April 6, 1999.
(4.1)* Form of Note.
(20.1)** Press release dated May 19, 1999.
- ----------
* Previously filed with the initial filing of our Current Report on Form 8-K
filed on April 27, 1999 which was filed in connection with the filing of
the Registration Statement on Form S-3 relating to the Merger (the "April
1999 8-K").
** Previously filed with Amendment No. 1 to the April 1999 8-K.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Consolidated balance sheets of NNG and Subsidiaries as of December 31, 1997 and
1998 and the related consolidated statements of operations, stockholders'
deficit and cash flows for each of the three years in the period ended December
31, 1998 (audited)
Independent Auditor's Report.........................................F-1
Consolidated balance sheets..........................................F-2
Consolidated statements of operations................................F-4
Consolidated statements of stockholders'
deficit........................................................F-5
Consolidated statements of cash flows................................F-6
Notes to consolidated financial statements...........................F-8
Consolidated unaudited balance sheets of NNG and Subsidiaries as of December 31,
1998 and March 31, 1999 and the related consolidated unaudited statements of
operations and cash flows for each of the three month periods ended March 31,
1998 and 1999
Consolidated balance sheets.........................................F-23
Consolidated statements of operations...............................F-25
Consolidated statements of cash flows...............................F-26
Notes to consolidated financial statements..........................F-27
Pro Forma Combined Consolidated Financial Information (unaudited)
Pro forma combined consolidated balance sheets as of
March 31, 1999....................................................F-34
Pro forma combined consolidated statement of operations for
the year ended June 30, 1998......................................F-38
Pro forma combined consolidated statement of operations for
the nine months ended March 31, 1999 .............................F-42
Notes to pro forma combined consolidated financial information......F-43
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Natural Nutrition Group, Inc. and subsidiaries
(formerly known as Intrepid Food Holdings, Inc.)
We have audited the accompanying balance sheets of Natural Nutrition Group, Inc.
and subsidiaries (formerly known as Intrepid Food Holdings, Inc.) (the Company)
as of December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Natural Nutrition Group, Inc. and
subsidiaries (formerly known as Intrepid Food Holdings, Inc.) as of December 31,
1997 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 18, 1999, except for Note 7,
as to which the date is March 30, 1999
F-1
<PAGE>
NATURAL NUTRITION GROUP, INC. AND SUBSIDIARIES
(formerly known as Intrepid Food Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
- -------------------------------------------------------------------------------
(Dollars in thousands, except share data)
1997 1998
ASSETS
CURRENT ASSETS:
Cash $ 1 $ 7
Accounts receivable, net of allowance
for doubtful accounts of
$75 (1997) and $60 (1998) 4,009 3,117
Other receivables 187 66
Inventories (Note 4) 5,278 5,870
Deferred income taxes (Note 3) 2,188 --
Prepaid expenses and other current assets 376 869
------ ------
Total current assets 12,039 9,929
PLANT AND EQUIPMENT, net (Note 5) 23,358 16,908
INTANGIBLE AND OTHER ASSETS, net (Note 6) 14,815 14,760
------ ------
$50,212 $41,597
======= =======
F-2
<PAGE>
NATURAL NUTRITION GROUP, INC. AND SUBSIDIARIES
(formerly known as Intrepid Food Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998 (Continued)
- -------------------------------------------------------------------------------
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1997 1998
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
<S> <C> <C>
Bank overdraft $1,315 $ 452
Accounts payable 1,474 5,635
Accrued liabilities (Note 13) 3,878 6,386
Current portion of long-term debt (Note 7) 3,025 1,943
------ ------
Total current liabilities 9,692 14,416
LONG-TERM LIABILITIES:
Long-term debt, net of current portion (Note 7)
18,835 17,131
Deferred income taxes (Note 3) 1,048 -
Other accrued expenses 251 63
------ ------
Total long-term liabilities 20,134 17,194
COMMITMENTS AND CONTINGENCIES (Note 8)
MANDATORY REDEMPTION SERIES A PREFERRED STOCK at redemption value including
cumulative dividends in arrears of $3,412 and $5,710 in December 31, 1997 and
1998, respectively; 19,567 shares outstanding in December 31, 1997 and 1998,
respectively (Note 9) 22,979 25,277
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value, 2,000,000 shares authorized, no
shares issued and outstanding
Common stock, $.001 par value; 65,000 shares authorized at December 31, 1997 and
50,000,000 shares authorized at December 31, 1998; 4,156,664 shares issued
and outstanding at December 31, 1997 and 1998, respectively 4 4
Additional paid-in-capital 1,429 1,429
Accumulated deficit (4,026) (16,723)
------- -------
Total stockholders' deficit (2,593) (15,290)
------- -------
$50,212 $41,597
======= =======
</TABLE>
F-3
<PAGE>
NATURAL NUTRITION GROUP, INC. AND SUBSIDIARIES
(formerly known as Intrepid Food Holdings, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
- -------------------------------------------------------------------------------
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
NET SALES $39,942 $67,898 $67,420
COST OF SALES:
Recurring 27,180 42,370 42,293
Restructuring -- -- 376
------- ------- -------
GROSS PROFIT 12,762 25,528 24,751
OPERATING EXPENSES:
Marketing, selling, and
distribution 7,177 17,366 19,116
General and administrative 5,148 5,759 5,352
Restructuring and other charges (Note 10) -- -- 7,673
------- ------- -------
Total operating expenses 12,325 23,125 32,141
------ ------ ------
OPERATING INCOME (LOSS) 437 2,403 (7,390)
INTEREST EXPENSE 1,052 1,911 1,733
------ ------ ------
(LOSS) INCOME BEFORE INCOME TAX PROVISION
(615) 492 (9,123)
INCOME TAX PROVISION (Note 3) 13 387 1,276
------- ------- -------
NET (LOSS) INCOME $ (628) $ 105 $(10,399)
======== ======= ========
</TABLE>
F-4
<PAGE>
NATURAL NUTRITION GROUP, INC. AND SUBSIDIARIES
(formerly known as Intrepid Food Holdings, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
- -------------------------------------------------------------------------------
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Additional Total
paid-in Accumulated stockholders'
Common Stock capital deficit deficit
Shares Amount
<S> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1995 1,450,000 $2 $498 $(91) $ 409
Issuance of common stock on April
12, 1996 2,416,664 2 831 833
Preferred dividend (Note 9) - - - (1,330) (1,330)
Net Loss - - - (628) (628)
--------- ------ ------- -------- ---------
BALANCE,
December 31, 1996 3,866,664 4 1,329 (2,049) (716)
Issuance of common stock on January
28, 1997 290,000 - 100 - 100
Preferred dividend (Note 9) (2,082) (2,082)
Net Income - - - 105 105
--------- ------ ------- ------- --------
BALANCE
December 31, 1997 4,156,664 4 1,429 (4,026) (2,593)
Preferred dividend (Note 9) - - - (2,298) (2,298)
Net loss - - - (10,399) (10,399)
--------- ------ ------- ------- ---------
BALANCE
December 31, 1998 4,156,664 $4 $1,429 $(16,723) $(15,290)
========= ====== ========= ======== ========
</TABLE>
F-5
<PAGE>
NATURAL NUTRITION GROUP, INC. AND SUBSIDIARIES
(formerly known as Intrepid Food Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
- ------------------------------------------------------------------------------
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1996 1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net (loss) income $ (628) $ 105 $(10,399)
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Depreciation and amortization 2,344 3,445 3,541
Write-off of plant and equipment -- -- 4,179
Write-off of inventories -- -- 376
Litigation settlement -- -- 2,029
Deferred income taxes (187) 499 1,140
Gain on sale of plant and equipment (31) (24) (32)
Effect on cash of changes in
operating assets and liabilities:
Accounts receivable, net 634 (243) 892
Inventories, net (333) (292) (968)
Prepaid expenses and other
current assets 972 224 (372)
Accounts payable (1,061) (610) 3,298
Accrued liabilities 602 (2,836) 291
------- --------- ------
Net cash provided by operating
activities 2,312 268 3,975
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment (62) (446) (618)
Acquisitions, net of cash
acquired (43,592) - -
Proceeds from sale of plant and equipment 31 390 110
Decrease (increase) in intangible
and other assets 424 (801) (675)
------- -------- --------
Net cash used in investing activities (43,199) (857) (1,183)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of
credit 2,356 3,250 239
Proceeds from long-term debt 19,012 - -
Principal payments on long-term debt (690) (3,448) (3,025)
Issuance of common stock 833 51 -
Issuance of mandatory redemption
preferred stock 18,667 424 -
------ -------- -------
</TABLE>
F-6
<PAGE>
NATURAL NUTRITION GROUP, INC. AND SUBSIDIARIES
(formerly known as Intrepid Food Holdings, Inc.)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (Continued)
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share data)
1996 1997 1998
<S> <C> <C> <C>
Net cash provided by (used in) financing
activities 40,178 277 (2,786)
------ -------- --------
NET (DECREASE) INCREASE IN CASH (709) (312) 6
CASH, beginning of period $ 1,022 $ 313 $ 1
-------- -------- -------
CASH, end of period $ 313 $ 1 $ 7
======== ======== =======
SUPPLEMENTAL INFORMATION -
Cash paid during the year for:
Interest $ 1,886 $ 978 $ 1,651
======== ======== =======
Income taxes $ 406 $ 4 $ 4
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of preferred and common stock in exchange for debt
$ - $ 525 $ -
======== ======== =======
Mandatory accrued preferred dividends $ 1,330 $ 2,082 $ 2,298
======== ======== =======
Purchase of acquisitions, net of cash acquired:
April 15, 1996 acquisition of Health Valley Company:
Fair value of assets $ 43,462
Goodwill 4,902
Liabilities assumed (14,025)
Net cash used to acquire business 34,339
October 31, 1996 acquisition of The Breadshop:
Fair value of assets 2,472
Trademarks 5,493
Goodwill 3,519
Liabilities assumed (2,231)
Net cash used to acquire business 9,253
--------
Net cash used to acquire businesses $ 43,592
========
</TABLE>
F-7
<PAGE>
NATURAL NUTRITION GROUP, INC. AND SUBSIDIARIES
(Formerly known as Intrepid Food Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
- -------------------------------------------------------------------------------
(Dollars in thousands, except share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Natural Nutritional Group, Inc. (formerly known as Intrepid
Food Holdings, Inc.) (NNG) was incorporated in the State of Delaware in
October 1995 to acquire and develop natural and organic food companies. In
April 1996, NNG acquired the outstanding capital stock of Health Valley
Foods, Inc. and Health Valley Manufacturing Company (Predecessor Company).
In October 1996, NNG acquired The Breadshop, Inc. (Breadshop) (Note 2).
NNG is a manufacturer and marketer of premium natural and organic food
products in the United States. NNG markets (i) breakfast cereals and
granolas, (ii) granola bars, cereal bars, cookies, crackers and other baked
goods and (iii) canned and instant soups and chilies, as well as other food
products, primarily under its Health Valley(R) and Breadshop(R) brands.
Basis of Presentation - The accompanying consolidated statements of
operations and cash flow include the combined activities of NNG and its
subsidiaries from the dates of acquisition. Certain amounts in the 1996
financial statements have been reclassified to conform with the 1997 and
1998 presentations.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts and operations of NNG and its subsidiaries
(the Company). All material intercompany balances and transactions have
been eliminated.
Stock Split - During 1998, the Company effected a 290-for-1 stock split of
its common stock in connection with an initial public offering which did
not become effective. All share and per share amounts included in the
accompanying consolidated financial statements and footnotes have been
restated to reflect the stock split.
Inventories - Inventories are valued at the lower of first-in, first-out
cost (FIFO) or market value.
F-8
<PAGE>
Plant and Equipment - Plant and equipment, including capitalized lease
assets, are stated at cost. Depreciation is provided for on the
straight-line method over the estimated useful lives of the assets.
Amortization of leasehold improvements is based on the lesser of their
estimated useful lives or the terms of the related leases and is calculated
using the straight-line method. Useful lives are as follows:
Machinery and equipment 3 to 20 years
Furniture and fixtures 3 to 14 years
Leasehold improvements 5 to 10 years
Repairs and maintenance are expensed as incurred, whereas significant
improvements, which materially increase values or extend useful lives, are
capitalized and depreciated over the estimated useful lives of the related
assets. The cost of assets retired or otherwise disposed of and the related
accumulated depreciation are eliminated from the accounts in the year of
disposal. Gains or losses resulting from the disposal of assets are charged
or credited to operations as incurred.
Fair Value of Financial Instruments - The carrying values of accounts
receivable and accounts payable approximate fair value due to the short
maturities of such instruments. The carrying values of term loans
approximate fair value due to the fact that they are based on variable
interest rates.
Revenue Recognition - The Company records revenue at the time the related
products are shipped to the customer.
Customer Concentration - The Company had significant sales to a significant
distributor who accounted for 14% of revenue for the fiscal year ended
December 31, 1996. The Company also had significant sales to two individual
distributors who accounted for 14% and 13% of revenue for the fiscal year
ended December 31, 1997, and 17% and 22% of revenue for the fiscal year
ended December 31, 1998. Given the significant amount of revenues derived
from certain customers, collectibility issues arising from financial
difficulties of any of these customers or the loss of any such customers
could have a material adverse effect on the Company's business.
Vendor Concentration - The Company also utilizes a single contract
manufacturer for the production of canned soups and chilis, which accounted
for approximately 25% of revenues for each of the two years ended December
31, 1996 and 1997 and 23% of revenues for the year ending December 31,
F-9
<PAGE>
1998. The inability of the contract manufacturer to supply the Company with
sufficient product quantities in a timely manner could have a material
adverse effect until alternate sources could be identified or developed.
Use of Estimates - The preparation of the 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 the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Long-Lived Assets - In accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, the Company
periodically evaluates the recoverability of the net carrying value of
plant and equipment and intangible assets using current and anticipated net
income and undiscounted cash flows, and, if necessary, an impairment is
recorded. During 1998, the Company recorded $1,656 to reflect the
impairments of plant and equipment and $476 to writedown the values of
assets held for sale to net realizable values. These charges are included
in restructuring and other charges in the accompanying consolidated
financial statements. The carrying values of the assets written down to net
realizable values were approximately $2,545 at December 31, 1998. The
Company also wrote off $2,047 of leasehold improvements related to vacated
warehouse facilities (Notes 5 and 10).
Intangible and Other Assets - The excess of purchase price over the fair
value of net assets acquired, as well as trademarks related to the
Breadshop acquisition, are included in intangible and other assets and are
being amortized on a straight-line basis over a 40-year period. Accumulated
amortization of intangibles amounted to $113, $499 and $1,229 at December
31, 1996, 1997 and 1998, respectively.
In 1997, the Company undertook a program to update its packaging designs.
Costs of $420 and $782, associated with development of new packaging
designs, were capitalized during 1997 and 1998, respectively, and are being
amortized over three years, beginning with related product shipments.
Comprehensive Income - The Company adopted SFAS No. 130, Reporting
Comprehensive Income, on January 1, 1998. SFAS
F-10
<PAGE>
No. 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company does not have any comprehensive income
components requiring separate disclosure.
Stock-Based Compensation - The Financial Accounting Standards Board's SFAS
No. 123, Accounting for Stock-Based Compensation, requires expanded
disclosures of stock-based compensation arrangements with employees. The
standard defines a fair value method of accounting for stock options and
other equity instruments. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period. As
permitted by the SFAS No. 123, the Company has elected to continue to
account for such transactions under Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and discloses, in
a note to the financial statements, pro forma net income and earnings per
share as if the Company had applied the fair value method of accounting.
The Company will continue to use APB Opinion No. 25 for measurement and
recognition of employee stock-based transactions.
2. ACQUISITIONS
On April 15, 1996, pursuant to a stock purchase agreement, NNG acquired all
of the outstanding capital stock of the Predecessor Company for $34,339, in
cash, including $2,339 in transaction costs. Additionally, pursuant to the
stock purchase agreement, the former owner was granted an option to
purchase 100 shares of common stock of Health Valley at $22,222.22 per
share. During 1997, this option was terminated and a new option was issued.
The new option enables the former owner to purchase 406,000 shares of NNG
common stock at $.34 per share, and up to an unspecified number of shares
of Series A preferred stock at $1,000 per share to be determined based on
the number of shares of Series A preferred stock redeemed prior to the
exercise of such option.
The acquisition was accounted for using the purchase method. Accordingly,
the purchase price was allocated to assets acquired based on their
estimated fair values. This treatment resulted in approximately $4,903 of
cost in excess of the fair value of net assets acquired. This goodwill is
being amortized on a straight-line basis over 40 years. Health Valley
results of operations have been
F-11
<PAGE>
included in the accompanying financial statements from the date of
acquisition.
On October 31, 1996, the Company completed its acquisition of all of the
outstanding capital stock of Breadshop for $9,253 in cash, including $502
in transaction costs. The acquisition was accounted for using the purchase
method. Accordingly, the purchase price was allocated to assets acquired
based on their estimated fair values. This treatment resulted in
approximately $3,519 of cost in excess of the fair value of net assets
acquired as of October 31, 1996, and a trademark valuation of $5,493. These
amounts are being amortized on a straight-line basis over 40 years.
Breadshop's results have been included in the accompanying consolidated
financial statements from the date of acquisition. The results of the
Company, had Breadshop been acquired as of April 15, 1996 and included in
the accompanying financial statements, would be as follows:
Revenue $45,969
=======
Net loss $ (779)
=======
F-12
<PAGE>
3. INCOME TAXES
In accordance with SFAS No. 109, Accounting for Income Taxes, deferred tax
assets and deferred tax liabilities reflect the tax consequences in future
years of differences between the income tax bases of assets and liabilities
and the corresponding bases used for financial reporting purposes.
Measurement of the deferred items is based on enacted tax laws. In the
event the future consequences of differences between financial reporting
bases and tax bases of the Company's assets and liabilities result in a
deferred tax asset, SFAS No. 109 requires an evaluation of the probability
of being able to realize the future benefits indicated by such asset. A
valuation allowance related to a deferred tax asset is recorded when it is
more likely than not that some portion or all of the deferred tax asset
will not be realized. The Predecessor Company's income tax benefit for the
period January 1, 1996 to April 15, 1996 reflects the future income tax
benefit expected to be realized.
Components of the income tax expense are as follows at December 31:
1996 1997 1998
Current:
Federal $ 86 $ - $ 131
State 11 3 5
Other - (115)
-------- ------ -------
97 (112) 136
Deferred:
Federal (225) 535 (3,413)
State 141 (36) (333)
-------- ------ -------
(84) 499 (3,746)
Change in valuation
allowance - - 4,886
-------- ------ -------
$ 13 $ 387 $ 1,276
======== ====== =======
F-13
<PAGE>
Major components of the Company's net deferred taxes at December 31, 1997
and 1998 are as follows:
1997 1998
Net operating loss
carryforwards $2,172 $6,126
Accruals 197 1,320
Reserves 359 760
Basis difference in
acquired assets (1,198) (1,477)
Depreciation and
amortization (787) (2,007)
AMT credit and car-
ryforwards 80 84
Capitalization of
inventory costs 63 80
Other, including
state taxes 254 -
------ ------
1,140 4,886
Valuation allowance - (4,886)
------- ------
Net deferred tax
asset (liability) $1,140 $ -
====== =======
At December 31, 1998, the Company has available net operating loss (NOL)
carryforwards of approximately $15,150 and $9,313, for federal and
California income taxes, respectively. These NOLs will begin to expire in
the Years 2010 and 2000, respectively. The Internal Revenue Code of 1986,
as amended, contains provisions that may limit the Company's utilization of
its NOL carryforward because of the change in ownership of the Company's
stock. The limitation, if any, applies to NOL generated prior to the change
in ownership (prior to April 15, 1996). Management believes that the
limitations, if any, do not have a material impact on the Company's ability
to utilize such net operating losses to offset future earnings.
Based on the Company's assessment of future realizability of its deferred
tax assets, a valuation allowance has been provided, primarily related to
net operating loss carryforwards, as it is more likely than not that
sufficient taxable income will not be generated to realize these temporary
differences.
F-14
<PAGE>
In connection with the acquisition of the Predecessor Company and Breadshop
by the Company, a tax liability was recorded to reflect the increase in
book basis over tax basis for tax basis for such net assets acquired. Such
amount is included in noncurrent deferred liabilities in 1997.
4. INVENTORIES
Inventories consist of the following:
1997 1998
Raw materials $2,457 $2,622
Work-in-progress 237 167
Finished goods 2,584 3,081
------ ------
$5,278 $5,870
====== ======
5. PLANT AND EQUIPMENT
Plant and equipment consists of the following:
1997 1998
Machinery and equipment $15,135 $13,715
Leasehold improvements 8,994 6,521
Furniture and fixtures 2,074 2,211
Assets not in use 2,437 2,006
------- -------
28,640 24,453
Less accumulated depreciation (5,282) (7,545)
-------- --------
$23,358 $16,908
======= =======
Equipment held for sale as of December 31, 1997 and 1998, is included in
assets not in use. These properties are classified as noncurrent assets and
are carried at the lower of cost or net realizable values of $1,821 and
$1,345 at December 31, 1997 and 1998, respectively. During 1998, the
Company recorded approximately $476 to adjust the carrying values of these
assets to estimated net realizable values (Note 1).
F-15
<PAGE>
6. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
1997 1998
Goodwill $8,881 $8,881
Trademarks 5,493 5,493
Other 940 1,615
------ ------
15,314 15,989
Less accumulated amortization (499) (1,229)
------ ------
$14,815 $14,760
======= =======
7. LONG-TERM DEBT
Debt consists of the following at December 31:
1997 1998
Revolving line of credit $4,732 $4,971
Term Loan A 10,700 9,050
Term Loan B 5,930 4,910
Other 498 143
------ ------
21,860 19,074
Less current portion (3,025) (1,943)
------ ------
$18,835 $17,131
======= =======
As of December 31, 1998, the Company's bank credit agreement consisted of a
$6,500 revolving line of credit facility, and two term loan facilities. All
of the borrowings were collateralized by substantially all of the assets of
the Company's wholly owned subsidiary. Effective December 31, 1998, the
interest rate on the revolving line of credit was 8%, the interest rate on
Term Loan A was 7.81%, and the interest rate on Term Loan B was 7.76%. The
revolving line of credit facility limited the Company's borrowing, based on
eligible balances of receivables and inventories. The maximum credit
available was $3,680, $4,844 and $5,231 as of December 31, 1996, 1997 and
1998, respectively. At December 31, 1998, the Company was in violation of
certain ratio covenants, and on March 30, 1999, obtained a waiver from the
lender through April 30, 1999.
F-16
<PAGE>
On January 12, 1999, in conjunction with the acquisition of Sahara Natural
Foods, Inc. (Note 15), the Company's bank agreement was amended. The
amended agreement included the establishment of a single-term loan, the
principal amount of which was increased by $2,500 to $16,460 and, the
availability on the revolving credit facility was increased by $1,000 to
$7,500.
The new term loan matures January 15, 2004 and the amended revolving credit
facility matures January 15, 2002. The new term loan requires quarterly
principal payments, which commence on March 31, 1999, and end December 31,
2003, in increasing amounts, beginning at $450 and ending at $1,018. All of
these borrowings are collateralized by substantially all of the assets of
the Company's wholly owned subsidiary.
Interest on the borrowings under these agreements are at varying rates
based, at the Company's option, on the bank's prime rate plus .25% per
annum, or the London Interbank Offered Rate (LIBOR) plus 2.5% per annum.
The borrowings at prime rates have daily terms, while the LIBOR borrowings
have terms of one to six months. Interest payments are made at the end of
each quarter for prime rate borrowings, and the end of each respective
period for LIBOR borrowings. The Company pays an annual commitment fee of
.375% on the unused portion of the revolving credit facility.
The long-term debt agreement contains various restrictive covenants which
include a prohibition on payment of dividends, specified minimum net worth
and current ratio levels, and specific limitations on leverage ratios and
capital expenditure amounts. The agreement also contains a mandatory
requirement to make accelerated payments on the term debt in the event of
(i) a significant sale or disposition of fixed assets or (ii) of excess
cash flow (as defined) being generated in a fiscal year. The revolving line
of credit facility limits the Company's borrowing, based on eligible
balances of receivables and inventories.
Other debt includes notes payable to a financing company, with underlying
fixed assets as collateral, payable in monthly installments ranging from $2
to $8, bearing interest rates of 9.64% to 11.81%, and maturing at various
dates through July 2000.
F-17
<PAGE>
The scheduled repayments of debt, incorporating the amended credit
agreement are as follows:
1999 $ 1,943
2000 2,800
2001 3,820
2002 8,941
2003 4,070
-------
$21,574
=======
8. COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company leases its facilities under the terms of
operating leases. These leases are for terms of five years. During 1998,
the Company exercised its option to renew the lease for a five-year term
commencing October 1, 1998. However, the monthly rental amount is currently
being determined in accordance with the terms of the lease. Currently, the
Company is paying a monthly rental of $75. Rent expense related to these
leases amounted to $812, $1,147, and $1,132 for the years ended December
31, 1996, 1997 and 1998, respectively.
Contingencies - The Company is a party to various legal proceedings arising
from the normal course of operations, including litigation relating to
claims alleging misrepresentation in connection with the Predecessor
Company's practices regarding the packaging of certain of its canned
products. During 1998, the Company reached a tentative settlement relating
to the packaging claims. At December 31, 1998, approximately $2,415 is
accrued for the packaging litigation based on the terms of a settlement
agreement. Although the ultimate disposition of other proceedings is not
determinable, management, based on advice of legal counsel, does not
believe that adverse determinations in any or all of such proceedings will
have a material adverse effect on the Company's financial position, results
of operations, and cash flows.
9. MANDATORY REDEMPTION 10% PREFERRED STOCK
The Company's Series A preferred stock has a mandatory redemption value of
$9,783 on each of the seventh and eighth anniversary dates from the
original issuance or April 12, 2003 and 2004, respectively, plus any
accrued but unpaid dividends. Dividends on the Series A preferred stock are
cumulative and accrue at a 10% annual rate based on a redemption value of
$1,000 per share. In the event of liquidation, dissolution, qualifying
sale, or merger of the Company, each holder of Series A preferred stock has
a
F-18
<PAGE>
liquidation preference equal to $1,000 per share plus any accrued but
unpaid dividends. Subject to certain limitations, the Company, at its
option, may redeem all or part of the outstanding shares of Series A
preferred stock at the redemption value plus all accrued but unpaid
dividends. During fiscal year 1997, the Company issued 900 shares of Series
A preferred stock, liquidation value of $1,000 per share, as repayment for
$900 of debt. As the Series A preferred stock has characteristics similar
to debt instruments, the balance of preferred shares have been classified
above shareholders' equity in the financial statements.
10. RESTRUCTURING AND OTHER CHARGES
During 1998, the Company recorded a $8,049 charge to operations reflecting
its decision to restructure certain operations of the Company in light of
revisions in its business strategies, and for other nonrecurring charges.
Approximately $4,814 was recorded as a restructuring charge comprised of
the following components (i) a $2,047 noncash charge for the write-off of
the leasehold improvements in the Company's distribution warehouse as a
result of the Company's decision to outsource this function and not renew
the lease on the warehouse, (ii) a $1,656 noncash charge for the writedown
to net realizable value (determined based upon the expected discounted cash
flows) of certain manufacturing assets whose values have been impaired by
the Company's revised product offering and (iii) a $1,111 charge for the
writedown and buyback of inventories resulting from the Company's decision
to accelerate the introduction of new products and packaging. Other
nonrecurring charges of $3,235 consists of (iv) a $476 noncash charge for
the writedown to net realizable value of certain assets which the Company
is holding for sale, (v) approximately $730 of costs incurred by the
Company for an initial public offering which did not become effective and,
(vi) net litigation settlement expenses of $2,029 (Note 8).
11. RETIREMENT PLANS
The Company maintains a defined contribution retirement plan (401(k)
Savings Plan) (the Plan) that covers all eligible employees who elect to
participate. Employees may contribute between 1% and 15% of their earnings
under the Plan, subject to annual limits set by the Internal Revenue
Service. The Company matches 50% of the participant's contributions, up to
3% of each participant's earnings. In addition, the Company is able to make
additional discretionary contributions. The Company's contributions for
F-19
<PAGE>
the periods ended December 31, 1996, 1997 and 1998, were $103, $110 and
$120, respectively.
12. RELATED-PARTY TRANSACTIONS
Frontenac Company, a private equity firm and the general partner of
Frontenac VI Limited Partnership, provides consulting and financial
services to the Company. Such services include, but are not limited to,
addressing issues related to strategic direction, long-term growth,
acquisitions and divestitures, executive recruitment, and new financings.
Two directors of the Company are affiliates of Frontenac Company.
Fees paid by the Company to Frontenac Company in 1996 include a $395
transaction fee related to the Health Valley acquisition and a $100
transaction fee related to the Breadshop acquisition. During 1996, in
conjunction with the Breadshop acquisition, the Company entered into a 10%
Convertible Promissory note in the amount of $1,000 which was due to
Frontenac VI Limited Partnership. This note and the related interest was
satisfied on January 31, 1997, through a cash payment of $500 and an
issuance of stock valued at $525. Expenses incurred by the Company from
Frontenac Company for the years ended December 31, 1996, 1997 and 1998
include Board of Directors fees of $83, $88 and $41, respectively.
Management believes that the charges incurred in these transactions were
substantially the same as charges which would have been incurred had
similar services been provided by unrelated parties.
13. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
1997 1998
Accrued salaries, vacation, and
related benefits $ 897 $1,038
-
Accrued packaging litigation (Note 8) 412 2,415
Accrued acquisition expenses 1,348 615
Other accrued liabilities 1,221 2,318
------ ------
$3,878 $6,386
====== ======
14. STOCK OPTIONS
In January 1997, the Company amended the Management Option Agreement
(Option Agreement) with its Chairman and President. The Option
Agreement granted options to purchase
F-20
<PAGE>
96,570 common shares at increasing option prices in excess of the fair
value ($.34 per share) of the stock at the grant date. The options become
fully vested and exercisable on the earlier of: (1) a qualified public
offering or approved sale or (2) on the third anniversary from the date of
grant. The Option Agreement also contains certain antidilution provisions.
In March 1997, the Company adopted the 1997 Stock Option Plan (the Option
Plan) to provide for and formalize the grant of stock options to key
employees. In connection with the adoption of the Option Plan, the Company
formalized the grant of options for 212,280 shares at $.34 per share to key
employees. These options vest one third on the first anniversary date of
employment subsequent to the date of grant and one-third on each of the two
subsequent anniversary dates. Options granted under the Plan will become
fully vested in the event of a fundamental change or stock sale (as defined
within the Plan) of the Company.
At December 31, 1998, 129,920 options were vested and exercisable having a
weighted average exercise price of $.34 per share. During fiscal year 1998,
10,150 options were granted, no options were exercised and 9,280 options
were forfeited.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for the Plan. No
compensation cost has been recognized for the Plan. Had compensation cost
for the Company's plan been determined based on the fair value at the grant
date for awards under those plans consistent with the method of SFAS No.
123, the Company's net income would have decreased by the pro forma amounts
indicated below:
December 31,
1997 1998
Net income (loss):
As reported $ 105 $(10,399)
Pro forma $ 101 $(10,403)
The fair value of stock options formalized in 1997 and 1998 had a weighted
average fair value of $.34 per share at December 31, 1998. The fair value
of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model, with the following assumptions used for
grants in 1997 and 1998; dividend yield of 0% for all grants risk-free rate
of 5.5% in 1998 and 6.68% in 1997; expected life of three years in 1997 and
1998. Volatility
F-21
<PAGE>
of 0% was used (as the Company is not a public entity). Forfeitures are
recognized as they occur.
15. SUBSEQUENT EVENTS (UNAUDITED)
Acquisition - On January 12, 1999, the Company acquired Sahara Natural
Foods, Inc. (Sahara) a California corporation engaged in the manufacture
and distribution of natural and organic food products. Under the terms of
the acquisition, to be accounted for as a purchase, the Company acquired
all of Sahara's common stock for an initial purchase price of $6,700,
consisting of a combination of cash and a $400 convertible and an $800
nonconvertible promissory note. The purchase price is subject to a
post-closing adjustment based on working capital.
Amendment of Certificate of Incorporation and By-Laws - In February 1999,
the Company approved a third amendment (the third amendment) to its
Certificate of Incorporation and approved a reverse 1-for-290 split of each
outstanding share of common stock. Effective upon the filing of the third
amendment, the Company will have the authority to issue 65,000 shares of
common stock at a $.001 per share par value and 35,000 shares of preferred
stock at a $.001 per share par value. The 35,000 shares of the preferred
stock will be designated "Series A preferred stock."
F-22
<PAGE>
NATURAL NUTRITION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998
AND MARCH 31, 1999
- -------------------------------------------------------------------------------
(Dollars in thousands)
(UNAUDITED)
December 31, March 31,
1998 1999
---- ----
ASSETS
CURRENT ASSETS:
Cash $7 $27
Accounts receivable, net 3,117 3,613
Other receivables 66 66
Inventories 5,870 6,471
Prepaid expenses and other current assets
869 619
------- -------
Total current assets 9,929 10,796
PLANT AND EQUIPMENT, net 16,908 16,452
INTANGIBLE AND OTHER ASSETS, net 14,760 20,948
------ ------
$41,597 $48,196
======= =======
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
NATURAL NUTRITION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND MARCH 31, 1999(Continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands, except share data)
(UNAUDITED)
December 31, March 31,
1998 1999
---- ----
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
<S> <C> <C>
Bank overdraft $ 452 $ 665
Accounts payable 5,635 3,770
Accrued liabilities 6,386 6,293
Current portion of long-term debt 1,943 2,244
Total current liabilities 14,416 12,972
------ ------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 17,131 19,331
Other accrued expenses 63 100
------ ------
Total long-term liabilities 17,194 19,431
COMMITMENTS AND CONTINGENCIES
MANDATORY REDEMPTION SERIES A PREFERRED STOCK at redemption value
including cumulative dividends in arrears of $5,710 and $6,333 in
December 31, 1998 and March 31, 1999, respectively; 19,567 shares
outstanding in December 31, 1998 and March 31, 1999, respectively 25,277 25,900
------ ------
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value, 2,000,000 shares authorized at
December 31, 1998 and 35,000 shares authorized at March 31, 1999,
no shares issued and outstanding
Common stock, $.001 par value; 50,000,000 shares authorized at
December 31, 1998 and 65,000 shares authorized at March 31, 1999;
4,156,664 shares and 19,099 shares issued and outstanding at
December 31, 1998 and March 31, 1999, respectively 4 --
Additional paid-in-capital 1,429 7,242
Accumulated deficit (16,723) (17,349)
------ ------
Total stockholders' deficit (15,290) (10,107)
------ ------
$41,597 $48,196
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
NATURAL NUTRITION GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 (UNAUDITED)
- -------------------------------------------------------------------------------
(Dollars in thousands)
Three Months ended
March 31,
1998 1999
---- ----
<S> <C> <C>
NET SALES $17,568 $17,156
COST OF SALES 10,960 10,751
------ ------
GROSS PROFIT 6,608 6,405
OPERATING EXPENSES:
Marketing, selling, and distribution 4,891 4,200
General and administrative 1,292 1,527
Merger-related and other charges 442
------ ------
Total operating expenses 6,183 6,169
------ ------
OPERATING INCOME 425 236
INTEREST EXPENSE 458 435
------ ------
LOSS BEFORE INCOME TAX PROVISION (33) (199)
INCOME TAX BENEFIT (25) (194)
------ ------
NET LOSS $ (8) $ (5)
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
F-25
<PAGE>
NATURAL NUTRITION GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 (UNAUDITED)
- -------------------------------------------------------------------------------
(Dollars in thousands)
Three Months ended
March 31,
1998 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (8) $ (5)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization 917 958
Deferred income taxes -- (106)
Effect on cash of changes in operating assets and liabilities:
Accounts receivable, net 680 178
Inventories, net 280 179
Prepaid expenses and other current
assets 225 379
Accounts payable 687 (2,511)
Accrued liabilities (262) (333)
-------- ------
Net cash provided by (used in) operating activities 2,519 (1,260)
-------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment (60) (8)
Acquisitions, net of cash acquired -- (5,627)
Proceeds from sale of plant and equipment 50 --
Increase in intangible and other assets (196) (464)
Net cash used in investing activities (206) (6,099)
-------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit/ bank overdraft (1,464) (494)
-------- ------
Proceeds from long-term debt, net -- 2,460
Principal payments on long-term debt (894) (450)
Issuance of common stock -- 5,808
Net cash (used in) provided by financing activities (2,313) 7,324
-------- ------
NET DECREASE IN CASH -- $ (35)
-------- ------
CASH, beginning of period $ 1 $ 62
-------- ------
CASH, end of period $ 1 $ 27
======== ======
See accompanying notes to consolidated financial statements.
</TABLE>
F-26
<PAGE>
NATURAL NUTRITION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
(Dollars in thousands, except share data)
1. GENERAL:
Natural Nutritional Group, Inc. (NNG) was incorporated in the State of
Delaware in October 1995 to acquire and develop natural and organic food
companies. In April 1996, NNG acquired the outstanding capital stock of
Health Valley Foods, Inc. and Health Valley Manufacturing Company
(Predecessor Company). In October 1996, NNG acquired The Breadshop, Inc.
(Breadshop). In January 1999, NNG acquired Sahara Natural Foods, Inc.
(Sahara) (Note 3).
NNG is a manufacturer and marketer of premium natural and organic food
products in the United States. NNG markets (i) breakfast cereals and
granolas, (ii) granola bars, cereal bars, cookies, crackers and other baked
goods and (iii) canned and instant soups and chilies, (iv) dinner entrees,
pastas and side dishes, as well as other food products, primarily under its
Health Valley(R), Breadshop(R) and Casbah(R) brands.
In February 1999, the Company approved a third amendment (the third
amendment) to its Certificate of Incorporation and approved a reverse
1-for-290 split of each outstanding share of common stock. Effective upon
the filing of the third amendment, the Company had the authority to issue
65,000 shares of common stock at a $.001 per share par value and 35,000
shares of preferred stock at a $.001 per share par value. The 35,000 shares
of the preferred stock are designated "Series A preferred stock."
2. BASIS OF PRESENTATION:
All amounts in the financial statements have been rounded to the nearest
thousand dollars, except share and per share amounts.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (including normal
recurring accruals) considered necessary for a fair presentation have been
included.
F-27
<PAGE>
3. ACQUISITIONS:
On January 12, 1999, the Company completed its acquisition of all of the
outstanding capital stock of Sahara Natural Foods, Inc. for an initial
purchase price of $6,800, including $100 in transaction costs, consisting
of a combination of cash and a $400 convertible and an $800 nonconvertible
promissory note. The acquisition was accounted for using the purchase
method. Accordingly, the adjustment to record the excess of the purchase
price over the net assets acquired amounted to $6,090. This goodwill is
being amortized on a straight-line basis over 40 years. The purchase price
is subject to a post-closing adjustment based on working capital as of
December 31, 1998. Sahara's results have been included in the accompanying
consolidated financial statements from the date of acquisition. Unaudited
pro forma results of operations (in thousands) for the three months ended
March 31, 1998 and 1999, assuming the above acquisition had occurred as of
January 1, 1998 are as follows:
March 31,
1998 1999
------------------------
Revenue $18,803 $17,303
======= =======
Net loss $ 89 $ 31
======= =======
4. INVENTORIES:
Inventories consist of the following:
December 31, March 31,
1998 1999
---- ----
Raw materials $ 2,622 $ 3,372
Work-in-progress 167 315
Finished goods 3,091 2,784
----- -----
$ 5,870 $ 6,471
========= =========
F-28
<PAGE>
5. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets consist of the following:
December 31, March 31,
1998 1999
---- ----
Goodwill $ 8,881 $ 14,971
Trademarks 5,493 5,493
Other 1,615 1,998
----- -----
15,989 22,462
Less accumulated amortization (1,229) (1,514)
------ ------
$ 14,760 $ 20,948
======== =========
6. LONG-TERM DEBT:
Debt consists of the following:
December 31, March 31,
1998 1999
---- ----
Revolving line of credit $ 4,971 $ 4,262
Term Loans 13,960 16,010
Notes Payable -- 1,200
Other 143 103
------- -------
19,074 21,575
------- -------
Less current portion (1,943) (2,244)
$17,131 $19,331
======= =======
On January 12, 1999, in conjunction with the acquisition of Sahara Natural
Foods, Inc. (Note 3), the Company's bank agreement was amended. The amended
agreement included the establishment of a single-term loan, the principal
amount of which was increased by $2,500 to $6,460 and, the availability on
the revolving credit facility was increased by $1,000 to $7,500.
The new term loan matures January 15, 2004 and the amended revolving credit
facility matures January 15, 2002. The new term loan requires quarterly
principal payments, which commenced on March 31, 1999, and end December 31,
2003, in increasing amounts, beginning at $450 and ending at $1,018. All of
these borrowings are collateralized by
F-29
<PAGE>
substantially all of the assets of the Company's wholly owned subsidiary.
Interest on the borrowings under these agreements are at varying rates
based, at the Company's option, on the bank's prime rate, plus .25% per
annum, or the London Interbank Offered Rate (LIBOR) plus 2.5% per annum.
The borrowings at prime rates have daily terms, while the LIBOR borrowings
have terms of one to six months. Interest payments are made at the end of
the each quarter for prime rate borrowings, and the end of each respective
period for LIBOR borrowings. The Company pays an annual commitment fee of
.375% on the unused portion of the revolving credit facility.
The long-term debt agreement contains various restrictive covenants which
include a prohibition on payment of dividends, specified minimum net worth
and current ratio levels, and specific limitations on leverage ratios and
capital expenditure amounts. The agreement also contains a mandatory
requirement to make accelerated payments on the term debt in the event of
(i) a significant sale or disposition of fixed assets or (h) of excess cash
flow (as defined) being generated in a fiscal year. The revolving line of
credit facility limits the Company's borrowing, based on eligible balances
of receivables and inventories.
Effective March 31, 1999, the interest rate on the revolving line of credit
was 7.47% and the interest rate on the term loan was 7.48%. The maximum
credit available on the revolving line of credit facility was $4,577. At
March 31, 1999, the Company was in violation of certain ratio covenants,
and on March 30, 1999, obtained a waiver from the lender through April 30,
1999. On May 18, 1999, in connection with the acquisition of the Company by
The Hain Food Group, Inc. (Note 10), all outstanding indebtedness under the
term loan and revolving credit facility was repaid by the Company.
Notes payable reflect a $400 convertible and an $800 nonconvertible
promissory note payable to the former owner of Sahara related to the
acquisition of Sahara (Note 1). The notes require semi-annual principal and
interest payments, which commence on June 30, 1999 and end December 31,
2003, in increasing amounts, beginning at $50 and ending at $175. Interest
is payable quarterly in arrears at the Company's bank's prime rate. The
notes payable are subordinated to the revolving credit facility and the
term loan.
F-30
<PAGE>
7. CONTINGENCIES:
The Company is a party to various legal proceedings arising from the normal
course of operations, including litigation relating to claims alleging
misrepresentation in connection with the Predecessor Company's practices
regarding the packaging of certain of its canned products. The Company
reached a settlement relating to the packaging claims during the second
quarter of 1998. At March 31, 1999, approximately $2,019 is accrued for the
packaging litigation based on the terms of a settlement agreement. Although
the ultimate disposition of other proceedings is not determinable,
management, based on advice of legal counsel, does not believe that adverse
determinations in any or all of such proceedings will have a material
adverse effect on the Company's financial position, results of operations,
and cash flows.
8. MANDATORY REDEMPTION 10% PREFERRED STOCK:
The Company's Series A preferred stock has a mandatory redemption value of
$9,783 on each of the seventh and eighth anniversary dates from the
original issuance or April 12, 2003 and 2004, respectively, plus any
accrued but unpaid dividends. Dividends on the Series A preferred stock are
cumulative and accrue at a 10% annual rate based on a redemption value of
$1,000 per share. In the event of liquidation, dissolution, qualifying
sale, or merger of the Company, each holder of Series A preferred stock has
a liquidation preference equal to $ 1,000 per share plus any accrued but
unpaid dividends. Subject to certain limitations, the Company, at its
option, may redeem all or part of the outstanding shares of Series A
preferred stock at the redemption value plus all accrued but unpaid
dividends. As the Series A preferred stock has characteristics similar to
debt instruments, the balance of preferred shares have been classified
above shareholders' equity in the financial statements.
In connection with the acquisition of the Company by The Hain Food Group,
Inc., (Note 10), all of the outstanding Series A preferred stock was
redeemed by the Company.
9. MERGER-RELATED AND OTHER CHARGES:
During the second and fourth quarters of 1998, the Company recorded a
$8,049 charge to operations reflecting its decision to restructure certain
operations of the Company in light of revisions in its business strategies,
and for other nonrecurring charges. Approximately $4,814 was recorded as a
restructuring charge comprised of the follow-
F-31
<PAGE>
ing components (i) a $2,047 noncash charge for the write-off of the
leasehold improvements in the Company's distribution warehouse as a result
of the Company's decision to outsource this function and not renew the
lease on the warehouse, (ii) a $1,656 noncash charge for the writedown to
net realizable value of certain manufacturing assets whose values have been
impaired by the Company's revised product offering and (iii) a $1,111
charge for the writedown and buyback of inventories resulting from the
Company's decision to accelerate the introduction of new products and
packaging. Other nonrecurring charges of $3,235 consists of (iv) a $476
noncash charge for the writedown to net realizable value of certain assets
which the Company is holding for sale, (v) approximately $730 of costs
incurred by the Company for an initial public offering in August 1998,
which did not become effective and, (vi) net litigation settlement expenses
of $2,029 (Note 7).
During the period ending March 31, 1999, the Company incurred additional
costs of approximately $62 related to the initial public offering which did
not become effective. In addition, the Company incurred $380 of transaction
costs related to the acquisition of the Company by Hain Food Group, Inc.
(Note 10).
10. SUBSEQUENT EVENT:
On May 18, 1999, The Hain Food Group, Inc., a leading marketer of natural,
specialty and snack food products, purchased the outstanding common stock
of the Company. The purchase price consists of $70 million in cash and a
five year $10 million convertible note.
* * * * * *
F-32
<PAGE>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma combined consolidated financial
statements are presented to give effect to the purchase agreement and the
acquisition of Natural Nutrition Group, Inc. ("NNG") under the purchase
method of accounting. In addition, the pro forma combined consolidated
financial statements are presented to also include the historical and pro
forma adjusted information of Sahara Natural Foods, Inc. ("Sahara"), which
NNG acquired on January 12, 1999 under the purchase method of accounting.
(collectively, the Company's acquisition of NNG and the NNG acquisition of
Sahara, are referred to as the "NNG Acquisition"). The balance sheet
assumes that the NNG Acquisition had been consummated on March 31, 1999.
The statement of operations for the year ended June 30, 1998, assumes that
the NNG Acquisition, the July 1, 1998 acquisition of Arrowhead, Terra and
Garden of Eatin' (collectively, the "Acquired Companies") and the October
14, 1997 acquisition of Westbrae Natural, Inc. ("Westbrae") had been
consummated on July 1, 1997. The statement of operations for the nine
months ended March 31, 1999 assumes that the NNG Acquisition had been
consummated on July 1, 1997. Hain management anticipates that it will be
able to achieve significant cost synergies and savings as a result of the
NNG Acquisition. However, in accordance with the rules for presentation of
pro forma financial information, no effect to such cost savings has been
included herein. In addition, the NNG historical results include certain
restructuring and other nonrecurring charges for the year ended June 30,
1998 and nine months ended March 31, 1999 that are not expected to continue
following the NNG Acquisition. The pro forma financial statements are not
necessarily indicative of the results of operations or the financial
position which would have occurred had the NNG Acquisition, the Acquired
Companies acquisition and the Westbrae acquisition been consummated at such
times, nor are they necessarily indicative of future results of operations
or financial position. The unaudited pro forma combined consolidated
financial statements should be read in conjunction with the historical
consolidated financial statements of Hain, including the notes thereto,
incorporated by reference herein and the financial statements of NNG,
included herein, and the Acquired Companies, incorporated by reference
herein, including the notes thereto.
F-33
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, 1999
(in thousands)
(Unaudited)
Pro Forma Pro Forma
Adjustments as Adjusted
Historical for NNG for NNG
Hain NNG Acquisition Acquisition
(Note 1)
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash................................... $ 442 $ 27 $ 469
Trade accounts receivable, net......... 22,245 3,679 25,924
Inventories............................ 18,417 6,471 24,888
Other current assets................... 3,865 619 - 4,484
--------- -------- ----------- -----------
Total current assets................... 44,969 10,796 55,765
Property and equipment, net............ 7,798 16,452 24,250
Goodwill and other intangible assets,
net.................................. 129,219 14,366 $(14,366(1) 189,517
60,298 (a)
Deferred financing costs, net.......... 2,008 259 (259)(b) 4,008
2,000 (b)
Other assets........................... 4,885 6,323 - 11,208
--------- -------- ----------- -----------
Total assets........................... $188,879 $48,196 $47,673 $284,748
========= ======== =========== ===========
- ------------------------------------------
</TABLE>
F-34
<PAGE>
<TABLE>
<CAPTION>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
March 31, 1999
(in thousands)
(Unaudited)
(Continued)
Pro Forma Pro Forma
Adjustments as Adjusted
Historical for NNG for NNG
Hain NNG Acquisition Acquisition
(Note 1)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.. $17,882 $10,828 $2,500 (c) $31,210
Current portion of long-term debt...... 6,765 2,244 (1,194)(b) 7,815
Revolving credit facility.............. 2,591 (b) 2,591
Income taxes payable................... 3,493 3,493
-------- ------- ----------- -------
Total current liabilities.............. 28,140 13,072 3,897 45,109
Long-term debt, less current portion... 54,456 19,331 (73,581)(b) 206
Term Loan A............................ 67,500 (b) 67,500
Term Loan B............................ 54,850 (b) 54,850
Seller Notes........................... 10,000 (a) 10,800
800 (b)
Other liabilities...................... 2,700 2,700
Deferred income taxes.................. 1,222 1,222
-------- ------- ----------- -------
Total liabilities...................... 86,518 32,403 63,466 182,387
-------- ------- ----------- -------
Commitments and
contingencies
Mandatory Redemption Series A
Preferred Stock..................... 25,900 (25,900)(b)
Stockholders' equity:
Preferred stock - no shares issued
Common stock.......................... 138 138
Additional paid-in capital............. 86,703 7,242 (7,242)(b) 86,703
Retained earnings...................... 15,795 (17,349) 17,349 (b) 15,795
-------- ------- ----------- -------
102,636 (10,107) 10,107 102,636
Less: treasury stock, at cost......... 275 275
-------- ------- ----------- -------
Total stockholders' equity............. 102,361 (10,107) 10,107 102,361
-------- ------- ----------- -------
Total liabilities and
stockholders' equity........... $188,879 $48,196 $47,673 $284,748
======== ======= =========== ========
See notes to unaudited pro forma combined consolidated
financial information.
</TABLE>
F-35
<PAGE>
Pro Forma Balance Sheet Adjustments
Note 1 - NNG Acquisition
On January 12, 1999, NNG acquired all of the common stock of Sahara in
a business combination accounted for as a purchase. This transaction
has already been included in the NNG historical March 31, 1999 balance
sheet. The purchase price consisted of $5.5 million in cash, plus $.1
million of transaction costs, the issuance of a $.8 million promissory
note (bearing interest at prime, 7.75%) and the issuance of a $.4
million convertible note (bearing interest at prime, 7.75%). The cash
portion of the purchase price was funded by an equity infusion by one
of NNG's principal shareholders immediately prior to the Sahara
transaction. Such equity infusion amounted to approximately $5.7
million in exchange for common stock of NNG. In addition, on January
12, 1999, NNG borrowed $2.5 million from its bank under an amended
term loan agreement. NNG incurred $.2 million of financing costs in
connection with this amendment. In addition, NNG entered into a
noncompete agreement with the former owner of Sahara valued at $.15
million. The adjustment to record the excess of the estimated purchase
price over the net assets acquired in connection with this acquisition
amounting to $6.1 million.
In connection with Hain's acquisition of NNG, all indebtedness,
including that described above except the $.8 million promissory note,
was repaid at closing.
(a) Adjustment to record the excess of the estimated purchase price over
the net assets acquired in connection with Hain's acquisition of NNG
of $60.3 million, after elimination of NNG's pro forma goodwill of
$14.4 million. A portion of the financing for this acquisition was
done through the issuance of a $10 million convertible promissory note
bearing interest at 7%.
(b) Adjustment to record the elimination of the equity (including $25.9
million mandatory redemption Series A preferred stock) of NNG of $15.8
million, the NNG debt of $20.8 million (including $.3 million of debt
issuance costs) not assumed by Hain, and elimination of the Company's
existing current and long term debt of $60.9 million. Adjustment to
record the proceeds used under the Company's
F-36
<PAGE>
$160 million Senior Secured loan facility. The Company incurred
approximately $2 million of financing costs associated with this new
loan facility.
(c) Adjustment for estimated transaction costs (other than financing
costs), including but not limited to, legal and accounting fees, due
diligence services and other costs.
F-37
<PAGE>
<TABLE>
<CAPTION>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended June 30, 1998
Amounts in thousands, except per share amounts.
(Unaudited)
Pro Forma Pro Forma
as Adjusted NNG Pro Forma
for as Adjusted as Adjusted
Companies for NNG for
Acquired Sahara Pro Forma NNG
July 1, 1998 Acquisition Adjustments Acquisitions
(from page F- (from page F- (note 4)
39) 41)
<S> <C> <C> <C>
Net sales..................................... $173,249 $74,043 $247,292
Cost of sales................................. 105,513 45,696 151,209
--------------------------------------------------------------------
Gross profit.................................. 67,736 28,347 96,083
--------------------------------------------------------------------
Management fees and restructuring expenses....
1,479 6,943 8,422
Selling, general and administrative expenses.. 48,626 25,796 74,422
Depreciation of property and equipment........
565 861 1,426
$(381) (16) (381)
Amortization of goodwill and other intangibles 3,276 615 1,507 (17) 5,398
--------------------------------------------------------------------
53,946 34,215 1,126 89,287
--------------------------------------------------------------------
Operating income (loss)....................... 13,790 (5,868) (1,126) 6,796
--------------------------------------------------------------------
(7,678) (18)
Interest expense.............................. 5,658 2,082 11,180 (19) 11,242
Amortization of deferred financing costs...... 469 88 312 (20) 869
--------------------------------------------------------------------
6,127 2,170 3,814 12,111
--------------------------------------------------------------------
Income(loss) before income taxes.............. 7,663 (8,038) (4,940) (5,315)
0
Provision for income taxes.................... 3,372 (2,580) (1,134) (21) (342)
--------------------------------------------------------------------
Income (loss) from continuing
operations................................. $4,291 $(5,458) $(3,806) $(4,973)
====================================================================
Earnings (loss) per common share from
continuing operations
Basic..................................... $0.36 ($0.42)
============== ================
Diluted................................... $0.32 (a)
============== ================
Common equivalent shares weighted:
Basic...................................... 11,985 11,895
Diluted.................................... 13,609
</TABLE>
See notes to unaudited pro forma combined consolidated
financial information.
(a) Diluted loss per common share from continuing operations is not shown as
such would be anti-dilutive.
F-38
<PAGE>
<TABLE>
<CAPTION>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended June 30, 1998
Amounts in thousands, except per share amounts.
(Unaudited)
(continued)
Pro Forma
as Adjusted
Pro Forma Companies for
as Adjusted Companies Acquired Companies
for Acquired July 1, 1998 Acquired
Westbrae July 1, 1998 Pro Forma July 1, 1998
Acquisition Historical Adjustments
(from page F- (note 2) (to page F-
40) 38)
<S> <C> <C> <C>
Net sales..................................... $114,892 $58,357 $173,249
Cost of sales................................. 68,043 37,470 105,513
-----------------------------------------------------------------
Gross profit.................................. 46,849 20,887 67,736
-----------------------------------------------------------------
Management fees and restructuring expenses....
1,479 1,479
Selling, general and administrative expenses.. 34,018 14,518 48,626
Depreciation of property and equipment........ 257 1,333 (1,025)(6) 565
(139)(7)
Amortization of goodwill and other intangibles 1,393 139 1,883(8) 3,276
-----------------------------------------------------------------
35,758 17,469 719 53,946
-----------------------------------------------------------------
Operating income.............................. 11,091 3,418 (719) 13,790
-----------------------------------------------------------------
(1,518)(9)
Interest expense.............................. 2,606 1,518 3,052 (10) 5,658
Write-off of deferred loan
financing fees............................. 560 (560)(11)
Amortization of deferred financing costs... 469 469
-----------------------------------------------------------------
3,075 2,078 974 6,127
-----------------------------------------------------------------
Income(loss) before income taxes.............. 8,016 1,340 (1,693) 7,663
Provision for income taxes.................... 3,432 978 (1,038)(12) 3,372
-----------------------------------------------------------------
Income from continuing
operations................................. $4,584 $362 $(655) $4,291
=================================================================
Earnings per common share from
continuing operations
Basic..................................... $0.45 $0.36
=============== ==============
Diluted................................... $0.39 $0.32
=============== ==============
Common equivalent shares weighted:
Basic...................................... 10,269 11,985
Diluted.................................... 11,893 13,609
See notes to unaudited pro forma combined consolidated
financial information.
</TABLE>
F-39
<PAGE>
<TABLE>
<CAPTION>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended June 30, 1998
Amounts in thousands, except per share amounts.
(Unaudited)
(continued)
Westbrae Pro Forma
July 1, 1997 to as Adjusted
October 13, Westbrae for
Hain 1997 Pro Forma Westbrae
Historical Historical Adjustments Acquisition
(note 1) (to page F-
<S> <C> <C> <C>
Net sales..................................... $104,253 $10,639 $114,892
Cost of sales................................. 61,797 6,246 68,043
------------------------------------------------------------------
Gross profit.................................. 42,456 4,393 46,849
------------------------------------------------------------------
Management fees and restructuring expenses....
Selling, general and administrative
expenses................................... 30,402 3,706 34,108
Depreciation of property and equipment........ 257 257
(54)(1)
Amortization of goodwill and other intangibles 1,311 136 (2) 1,393
------------------------------------------------------------------
31,970 3,706 82 35,758
------------------------------------------------------------------
Operating income.............................. 10,486 687 (82) 11,091
------------------------------------------------------------------
Interest expense.............................. 2,128 31 447 (3) 2,606
Amortization of deferred financing costs...... 474 (5)(4) 469
------------------------------------------------------------------
2,602 31 442 3,075
------------------------------------------------------------------
Income(loss) before income taxes.............. 7,884 656 (524) 8,016
Provision for income taxes.................... 3,250 31 151 (5) 3,432
------------------------------------------------------------------
Income (loss) from continuing
operations................................. $4,634 $625 $(670) $4,584
==================================================================
Earnings per common share from
continuing operations
Basic..................................... $0.45 $0.45
============= ==============
Diluted................................... $0.39 $0.39
============= ==============
Common equivalent shares weighted:
Basic...................................... 10,269 10,269
Diluted.................................... 11,893 11,893
See notes to unaudited pro forma combined consolidated
financial information.
</TABLE>
F-40
<PAGE>
<TABLE>
<CAPTION>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended June 30, 1998
Amounts in thousands, except per share amounts.
(Unaudited)
(continued)
Pro Forma NNG
as Adjusted
Sahara for
NNG(b) Sahara(b) Pro Forma Sahara
Historical Historical Acquisitions Acquisitions
(note 3) (to page F-
38)
<S> <C> <C> <C>
Net sales..................................... $68,660 $5,383 $74,043
Cost of sales................................. 42,723 2,973 45,696
--------------------------------------------------------------
Gross profit.................................. 25,937 2,410 28,347
--------------------------------------------------------------
Management fees and restructuring expenses.... 6,943 6,943
Selling, general and administrative expenses.. 23,362 2,434 25,796
Depreciation of property and equipment........ 851 10 861
Amortization of goodwill and other intangibles 462 $153 (13) 615
--------------------------------------------------------------
31,618 2,444 153 34,215
--------------------------------------------------------------
Operating income (loss)....................... (5,681) (34) (153) (5,868)
--------------------------------------------------------------
Interest expense.............................. 1,789 293 (14) 2,082
Amortization of deferred financing costs...... 48 40 (15) 88
--------------------------------------------------------------
1,837 333 2,170
--------------------------------------------------------------
Loss before income taxes...................... (7,518) (34) (486) (8,038)
Provision for income taxes.................... (2,580) (2,580)
--------------------------------------------------------------
Loss from continuing operations............... $(4,938) $(34) $(486) $(5,458)
==============================================================
</TABLE>
See notes to unaudited pro forma combined consolidated
financial information.
(b) NNG and Sahara have historically provided financial information under
calendar year end December 31 reporting dates. The information provided
herein is the actual twelve month period ended June 30, 1998 financial
information for each respective entity.
F-41
<PAGE>
<TABLE>
<CAPTION>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999
Amounts in thousands except per Share Amounts.
(Unaudited)
Combined Pro Forma
Pro Forma as Adjusted
Sahara as Adjusted NNG for
Historical Pro-Forma for Sahara Pro Forma NNG
Hain NNG (c) Sahara(c) Adjustments Acquisition Adjustments Acquisitions
<S> <C> <C> <C> <C> <C>
Net sales.......... $144,931 $51,748 $3,110 $54,858 $199,789
Cost of sales........ 87,574 32,610 1,856 34,466 122,040
-------------------------------------------------------------------------------------------------
Gross profit......... 57,357 19,138 1,254 20,392 77,749
-------------------------------------------------------------------------------------------------
Selling, general and
administrative
expenses.......... 37,232 16,930 1,325 18,255 55,487
Depreciation of
property and
equipment......... 520 643 10 653 1,173
Amortization of
goodwill and other
intangible assets. $ (300)(16)
---------
2,565 650 76(13) 726 1,131 (17) 4,122
Restructuring and Other
charges........... 1,172 1,172 1,172
-------------------------------------------------------------------------------------------------
40,317 19,395 1,335 76 20,815 831 61,954
-------------------------------------------------------------------------------------------------
Operating income (loss)
17,040 (257) (81) (76) (414) (831) 15,795
Interest expense, net 147(14) (5,051)(18)
3,500 1,231 1,378 8,385 (19) 8,212
Amortization of
deferred financing
costs............. 244 43 20(15) 63 237 (20) 544
-------------------------------------------------------------------------------------------------
3,744 1,274 167 1,441 3,571 8,756
-------------------------------------------------------------------------------------------------
Income(loss) be-
fore income taxes...... 13,296 (1,531) (81) (243) (1,855) (4,402) 7,039
Provision for income 3,971
taxes............. 5,784 3,942 29 (5,711)(21) 4,044
-------------------------------------------------------------------------------------------------
Net income (loss).... $7,512 $(5,473) $(110) $(243) $(5,826) $1,309 $2,995
=================================================================================================
Earnings Per Common
Share:
Basic............. $0.56 $0.22
============= ===============
Diluted........... $0.49 $0.19
============= ===============
Common equivalent shares weighted:
Basic............. 13,516 13,516
Diluted........... 15,392 15,392
(c) NNG and Sahara have historically provided financial information under
calendar year end December 31 reporting dates. The information provided
herein is the actual nine month period ended March 31, 1999 financial
information for each entity.
</TABLE>
F-42
<PAGE>
Pro Forma Combined Consolidated Financial Information
Pro Forma Statement of Operations Adjustments:
Note 1 - Westbrae Acquisition:
General
On October 14, 1997, the Company completed the acquisition of Westbrae in a
transaction that has been accounted for as a purchase. The cost of the
acquisition (including transaction costs) amounted to approximately $24 million,
plus the repayment of Westbrae debt of $2.1 million. To finance this
acquisition, the Company repaid its existing credit facility with IBJ Whitehall
Bank & Trust Company ("IBJ") with IBJ providing for a then new $30 million
senior term loan and a $10 million revolving credit facility.
Details of the pro forma adjustments relating to this acquisition and the
financing are set forth below.
(1) Elimination of Westbrae historical amortization of goodwill.
(2) Goodwill amortization with respect to goodwill acquired in the acquisition
of Westbrae. Such goodwill is being amortized over a 40 year life.
(3) Increase in interest costs resulting from the financing of the Westbrae
acquisition. The incremental interest adjustment was borrowed at
approximately 8%.
(4) Adjustment of amortization of financing costs resulting from the New Credit
Facility.
(5) Adjustment to historical provision for income taxes to eliminate the effect
of net operating loss carryforwards utilized by Westbrae, the nondeductible
portion of goodwill amortization and to adjust taxes to the expected
effective tax rate following acquisition. The statutory tax rate used was
39%.
Note 2 - Acquired Companies
General
On July 1, 1998, the Company acquired the following businesses and brands
from the Shansby Group and other investors: Arrowhead Mills, Inc., DeBoles
Nutritional Foods, Dana Alexander, Inc. (Terra Chips) and Garden of Eatin', Inc.
("Companies Acquired July 1, 1998") in a transaction that has been accounted for
as a purchase. The purchase price was $80
F-43
<PAGE>
million, less the assumption of approximately $20 million of debt. Approximately
$40 million of the purchase price was paid by the issuance of 1,716 million
shares of the Company's Common Stock. The Company borrowed approximately $40
million under a New Credit Facility with IBJ to fund the cash portion of the
purchase price and to repay the $20 million of existing debt of the Acquired
Companies.
Details of the pro forma adjustments relating to this acquisition and the
financing are set forth below.
(6) Adjustment of depreciation expense based on revaluation of fixed assets of
the Acquired Companies.
(7) Elimination of historical goodwill amortization of the Acquired Companies.
(8) Goodwill amortization arising from the acquisition of the Acquired
Companies. Such goodwill is being amortized over a 40 year life.
(9) Elimination of historical interest expense of the Acquired Companies.
(10) Adjustment of historical interest expense to reflect the additional
long-term debt that will be incurred in connection with the acquisition of
the Acquired Companies. the interest rate on these borrowings was 7.8%.
(11) Elimination of the write-off of deferred financing costs applicable to debt
of the acquired companies paid off at the closing of the acquisition.
(12) Adjustment of income taxes to give effect to the pro forma pretax
adjustments, the nondeductible portion of goodwill and to adjust for the
expected effective income tax rate following acquisition. The statutory tax
rate used was 39%.
Note 3 - Sahara Acquisition
Details of the pro forma adjustments relating to this acquisition and the
financing are set forth below.
(13) Goodwill amortization with respect to goodwill acquired in the acquisition
of Sahara for the year ended June 30, 1998 and nine months ended March 31,
1999. Goodwill is being amortized over a 40 year life.
(14) Increase in interest cost resulting from the increased proceeds of the NNG
term loan (borrowing rate of 8%) and
F-44
<PAGE>
issuance of the promissory notes (both promissory notes earn interest at a
rate of 7.75%) in connection with the acquisition of Sahara for the year
ended June 30, 1998 and nine months ended March 31, 1999.
(15) Reflects the adjustment to record the increased amortization associated
with NNG's financing costs on its increased term loan for the year ended
June 30, 1998 and nine months ended March 31, 1999.
Note 4 - NNG Acquisition
Details of the pro forma adjustments relating to this acquisition and the
financing are set forth below.
(16) Elimination of NNG pro forma combined historical amortization expense of
goodwill for the year ended June 30, 1998 and nine months ended March 31,
1999.
(17) Goodwill amortization arising from the NNG acquisition (assuming a 40 year
life) for the year ended June 30, 1998 and nine months ended March 31,
1999.
(18) Elimination of historical interest expense of all acquired companies for
the year ended June 30, 1998 and for the nine --- months ended March 31,
1999 relating to the retired debt instruments.
(19) Adjustment of historical interest expense to reflect the new revolving
credit facility, long term debt and convertible note issued in connection
with the NNG acquisition for the year ended June 30, 1998 and nine months
ended March 31, 1999. The $75 million term loan A bears interest at 7.8%;
the $50 million term loan B bears interest at 8%; the interest charged on
the revolving credit facility is at 7.8% and the $10 million convertible
seller notes bear interest at 7%.
(20) Reflects the adjustment to record the increased amortization associated
with the Company's financing costs on its new senior secured facility
offset by the elimination of NNG's financing cost amortization for the year
ended June 30, 1998 and nine months ended March 31, 1999.
(21) Adjustment of income taxes to give effect to the pro forma pre-tax
adjustments, the nondeductible portion of goodwill and to adjust for the
expected effective income tax rate following the acquisition for the year
ended June 30, 1998 and for the nine months ended March 31, 1999. The
statutory tax rate used was 39%.
F-45
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE HAIN FOOD GROUP, INC.
Dated: June 4, 1999 By: /s/ Gary M. Jacobs
-------------------------------
Gary M. Jacobs
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Number Description
(2.1)* Agreement and Plan of Merger by and among The Hain Food Group, Inc., Hain
Acquisition Corp. and Natural Nutrition Group, Inc. dated April 6, 1999
(4.1)* Form of Note.
20.1** Press release dated May 19, 1999.
- ----------
* Previously filed with the April 1999 8-K.
** Previously filed with Amendment No. 1 to the April 1999 8-K.
