SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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
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(Exact name of registrant as specified in its charter)
Delaware 0-22818 22-3240619
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
50 Charles Lindbergh Boulevard
Uniondale, New York 11553
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 237-6200
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Item 5. Other Events
On April 6, 1999, The Hain Food Group, Inc. (the "Company") announced that
it had executed a merger agreement pursuant to which the Company would acquire
the stock of privately held Natural Nutrition Group, Inc. ("NNG"), a
manufacturer and marketer of premium natural and organic food products sold
under the Health Valley(R), Breadshop's(R) and Casbah(R) brands.
Under the terms of the merger agreement, the purchase price consists of $70
million in cash and a $10 million convertible note. Consummation of the
acquisition is subject to certain conditions, including satisfaction of the
applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of business acquired or to be acquired.
(i) The audited consolidated balance sheets of NNG and Subsidiaries
(formerly known as Intrepid Food Holdings, Inc.) 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 (ii) the related reports of independent auditors are
included on pages F-1 and F-23.
(b) Pro forma financial information.
The unaudited pro forma combined consolidated balance sheets of the Company
as of December 31, 1998 and the unaudited pro forma combined consolidated
statements of operations for the year ended June 30, 1998 and the six months
ended December 31, 1998 are included in pages F-24 through F-35.
(c) Exhibits.
(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 Convertible Note.
INDEX TO FINANCIAL STATEMENTS
Consolidated balance sheets of NNG and Subsidiaries (formerly known as Intrepid
Food Holdings, Inc.) 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
Pro Forma Combined Consolidated Financial Information (unaudited)
Pro forma combined consolidated balance sheets as of
December 31, 1998 ..............................................F-25
Pro forma combined consolidated statement of operations for the
year ended June 30, 1998 .......................................F-28
Pro forma combined consolidated statement of operations for the
six months ended December 31, 1998 .............................F-32
Notes to pro forma combined consolidated financial information....F-33
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
February 18, 1999, except for Note 7,
as to which the date is March 30, 1999
F-1
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
See accompanying notes to
consolidated financial statements.
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)
1997 998
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
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
======= =======
F-3
See accompanying notes to
consolidated financial statements.
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)
1996 1997 1998
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)
======== ======= ========
F-4
See accompanying notes to
consolidated financial statements.
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)
Additional Total
paid-in Accumulated stockholders'
Common Stock capital deficit deficit
Shares Amount
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)
========= ====== ========= ======== ========
F-5
See accompanying notes to
consolidated financial statements.
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)
1996 1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
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
Noncash 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 -
------ -------- -------
F-6
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 (Continued)
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share data)
1996 1997 1998
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
========
F-7
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
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)
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
F-9
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)
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,
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
F-10
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)
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 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.
F-11
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)
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 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:
F-12
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)
Revenue $45,969
Net loss $ (779)
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
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)
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 carryforwards 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
F-14
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)
income will not be generated to realize these temporary differences.
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
Com-
F-15
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)
pany recorded approximately $476 to adjust the carrying values of these
assets to estimated net realizable values (Note 1).
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
F-16
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)
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.
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
F-17
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)
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.
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 prac-
F-18
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)
tices 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 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 com-
F-19
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)
prised 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 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 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.
F-20
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)
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 $6,386
====== ======
14. STOCK OPTIONS
In January 1997, the Company amended the Management Option Agreement
(Option Agreement) with its Chairman and President. The Option Agreement
granted options to purchase 96,570 common shares at increasing option
prices in excess of the fair value ($.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.
F-21
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)
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
F-22
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)
risk-free rate of 5.5% in 1998 and 6.68% in 1997; expected life of three
years in 1997 and 1998. Volatility 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-23
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 anticipated 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 December 31, 1998. 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
six months ended December 31, 1998 assumes that the NNG Acquisition had
been consummated at July 1, 1998. 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 six months ended December 31, 1998
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-24
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
December 31, 1998
(in thousands)
(Unaudited)
Pro
Sahara Forma Pro Forma Pro Forma
Acquisition NNG as Adjusted as Adjusted
Historical Pro Forma Sahara for Companies for NNG
Hain NNG Sahara Adjustments Combined Acquired Acquisition
------------ ------------- -------- ------------- --------- -------------- -------------
(Note 1) (Note 2)
ASSETS
Current assets:
Cash..................... $ 471 $ 7 $ 43 $2,500(a) $2,550 $(2,500)(b) $ 521
Trade accounts receivable,
net.................... 18,714 3,183 497 3,680 22,394
Inventories.............. 18,691 5,870 722 6,592 25,283
Other current assets..... 3,024 869 25 894 3,918
------------ ------------- -------- ------------- --------- -------------- -------------
Total current assets... 40,900 9,929 1,287 2,500 13,716 (2,500) 52,116
Property and equipment, net 7,601 16,908 247 17,155 24,756
Goodwill and other intangible
assets, net ............. 130,043 8,381 6,140(c) 14,521 (14,521)(a) 188,451
58,408 (a)
Deferred financing costs, net 1,790 302 200(b) 502 (502)(b) 3,790
2,000 (b)
Other assets............... 3,711 6,077 30 150(d) 6,257 9,986
------------ ------------- -------- ------------- --------- -------------- -------------
Total assets........... $184,045 $41,597 $1,564 $8,990 $52,151 $42,885 $279,081
============ ============= ======== ============= ========= ============== =============
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued $15,807 $12,473 $652 $ 200(a) $13,325 $2,500 (c) $31,632
expenses...............
Current portion of
long-term 9,267 1,943 1,943 (11,043)(b) 167
debt...................
Revolving credit facility 3,728 (b) 3,728
Income taxes payable..... 1,122 1,122
------------ ------------- -------- ------------- --------- -------------- -------------
Total current liabilities 26,196 14,416 652 200 15,268 (4,815) 36,649
Long-term debt, less current
portion.................. 55,630 17,131 152 2,500(a) 19,783 (75,413)(b)
Term Loan A.............. 75,000 (b) 75,000
Term Loan B................ 55,000 (b) 55,000
Seller Notes............... 1,200(a) 1,200 10,000 (a) 10,000
(1,200)(b)
Other liabilities.......... 2,742 63 150(d) 213 2,955
Deferred income taxes...... 1,221 1,221
------------- -------------- -------------
------------ ------------- -------- ---------
Total liabilities...... 85,789 31,610 804 4,050 36,464 58,572 180,825
------------ ------------- -------- ------------- --------- -------------- -------------
Commitments and contingencies
Mandatory Redemption Series A
Preferred Stock.......... 25,777 25,277 (25,277)(b)
Stockholders' equity:
Preferred stock - no shares
issued
(19)(a)
Common stock............ 136 4 19 6 (a) 10 (29)(b) 136
Additional paid-in capital 85,793 1,429 5,694 (a) 7,123 (7,123)(b) 85,793
Retained earnings........ 12,602 (16,723) 741 (741)(a) (16,723) 16,742 (b) 12,602
------------ ------------- -------- ------------- --------- -------------- -------------
98,531 (15,290) 760 4,940 (9,590) 9,590 98,531
Less: treasury stock, at
cost.................... 275 275
------------ ------------- -------- ------------- --------- -------------- -------------
Total stockholders' 98,256 (15,290) 760 4,940 (9,590) 9,590 98,256
equity................
------------ ------------- -------- ------------- --------- -------------- -------------
Total liabilities and
stockholders' equity.. $184,045 $41,597 $1,564 $8,990 $52,151 $42,885 $279,081
See notes to unaudited pro forma combined consolidated financial information.
F-25
Pro Forma Balance Sheet Adjustments
Note 1 - Sahara Acquisition
(a) On January 12, 1999, NNG acquired all of the common stock of Sahara in a
business combination accounted for as a purchase. The purchase price
consisted of $5.5 million in cash (of which $.3 million was paid in
December 1998), plus $.2 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 $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.
In connection with Hain's pending acquisition of NNG, all indebtedness,
including that described above, will be paid at closing by NNG.
(b) Represents the financing costs associated with the increase in term loan of
$2.5 million.
(c) Represents the adjustment to record the excess of the estimated purchase
price over the net assets acquired in connection with this acquisition
amounting to $6.14 million.
(d) Represents the value assigned to the noncompete agreement entered into with
the former owner of Sahara.
F-26
Note 2 - NNG Acquisition
(a) Adjustment to record the excess of the estimated purchase price over the
net assets acquired in connection with this acquisition of $58.4 million,
after elimination of NNG's pro forma goodwill of $15.02 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 $25.3 million
mandatory redemption Series A preferred stock) of NNG of $15.7 million, the
NNG debt of $22.9 million (including $.5 million of debt issuance costs)
not assumed by Hain, and elimination of the Company's existing current and
long term debt of $64.9 million. Adjustment to record the proceeds used
under the Company's $160 million Senior Secured loan facility, net of
available excess cash. The Company incurred approximately $2.0 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-27
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-29) (from page F-31) (note 4)
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.... 6,943 6,943
Selling, general and administrative expenses.. 48,340 25,796 74,136
Depreciation of property and equipment........ 565 861 1,426
$(365) (18) (365)
Amortization of goodwill and other intangibles 3,276 616 1,460 (19) 5,352
----------------- -------------- ------------ ----- ----------------
52,181 34,216 1,095 87,492
----------------- -------------- ------------ ----- ----------------
Operating income (loss)....................... 15,555 (5,869) (1,095) 8,591
----------------- -------------- ------------ ----- ----------------
(7,740) (20)
Interest expense.............................. 5,658 2,082 11,219 (21) 11,219
Amortization of deferred financing costs......
469 88 312 (22) 869
----------------- -------------- ------------ ----- ----------------
6,127 2,170 3,791 12,088
----------------- -------------- ------------ ----- ----------------
Income(loss) before income taxes.............. 9,428 (8,039) (4,886) (3,497)
0
Provision for income taxes.................... 4,148 (2,580) (1,219) (23) 349
----------------- -------------- ------------ ----- ----------------
Income (loss) from continuing
operations................................. $5,280 $(5,459) $(3,667) $(3,846)
================= ============== ============ ===== ================
Earnings (loss) per common share from
continuing operations
Basic..................................... $0.44 ($0.32)
================= ================
Diluted................................... $0.39 (a)
================= ================
Common equivalent shares weighted:
Basic...................................... 11,985 11,895
Diluted.................................... 13,609
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-28
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
Pro Forma Companies as Adjusted
as Adjusted Companies Acquired for
for Acquired July 1, 1998 Companies
Westbrae July 1, 1998 Pro Forma Acquired
Acquisition Historical Adjustments July 1, 1998
(from page F-30) (note 2) (to page F-28)
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)(7)
Selling, general and administrative
expenses................................... 33,822 14,518 48,340
Depreciation of property and equipment........ 257 1,333 (1,025)(8) 565
(138)(9)
Amortization of goodwill and other intangibles 1,393 139 1,882(10) 3,276
----------------- ---------------- ---------------- ----------------
35,472 17,469 (760) 52,181
----------------- ---------------- ---------------- ----------------
Operating income.............................. 11,377 3,418 760 15,555
----------------- ---------------- ---------------- ----------------
(1,518)(11)
Interest expense.............................. 2,606 1,518 3,052 (12) 5,658
Write-off of deferred loan
financing fees............................. 560 (560)(13)
Amortization of deferred financing costs... 469 469
----------------- ---------------- ---------------- ----------------
3,075 2,078 974 6,127
----------------- ---------------- ---------------- ----------------
Income(loss) before income taxes.............. 8,302 1,340 (214) 9,428
Provision for income taxes.................... 3,427 979 (258)(14) 4,148
----------------- ---------------- ---------------- ----------------
Income from continuing
operations................................. $4,875 $361 $44 $5,280
================= ================ ================ ================
Earnings per common share from
continuing operations
Basic..................................... $0.47 $0.44
================= ================
Diluted................................... $0.41 $0.39
================= ================
Common equivalent shares weighted:
Basic...................................... 10,269 11,985
Diluted.................................... 11,893 13,609
See notes to unaudited pro forma combined consolidated
financial information.
F-29
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-29)
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 $(286)(1) 33,822
Depreciation of property and equipment........
257 257
(54)(2)
Amortization of goodwill and other intangibles 1,311 136 (3) 1,393
--------------- ------------------- ---------------- ---------------
31,970 3,706 (204) 35,472
--------------- ------------------- ---------------- ---------------
Operating income.............................. 10,486 687 204 11,377
--------------- ------------------- ---------------- ---------------
Interest expense.............................. 2,128 31 447 (4) 2,606
Amortization of deferred financing costs...... 474 (5)(5) 469
--------------- ------------------- ---------------- ---------------
2,602 31 442 3,075
--------------- ------------------- ---------------- ---------------
Income(loss) before income taxes.............. 7,884 656 (238) 8,302
Provision for income taxes.................... 3,250 31 146 (6) 3,427
--------------- ------------------- ---------------- ---------------
Income (loss) from continuing
operations................................. $4,634 $625 $(384) $4,875
=============== =================== ================ ===============
Earnings per common share from
continuing operations
Basic..................................... $0.45 $0.47
===============
===============
Diluted................................... $0.39 $0.41
=============== ===============
Common equivalent shares weighted:
Basic...................................... 10,269 10,269
Diluted.................................... 11,893 11,893
See notes to unaudited pro forma combined consolidated
financial information.
F-30
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 Sahara Pro Forma Sahara
Historical Historical Acquisitions Acquisitions
(note 3) (to page F-28)
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 $154 (15) 616
---------------- --------------- ----------------- ----------------
31,618 2,444 154 34,216
---------------- --------------- ----------------- ----------------
Operating income (loss)....................... (5,681) (34) (154) (5,869)
---------------- --------------- ----------------- ----------------
Interest expense.............................. 1,789 293 (16) 2,082
Amortization of deferred financing costs...... 48 40 (17) 88
---------------- --------------- ----------------- ----------------
1,837 333 2,170
---------------- --------------- ----------------- ----------------
Loss before income taxes...................... (7,518) (34) (487) (8,039)
Provision for income taxes.................... (2,580) (2,580)
---------------- --------------- ----------------- ----------------
Loss from continuing operations............... $(4,938) $(34) $(487) $(5,459)
================ =============== ================= ================
See notes to unaudited pro forma combined consolidated
financial information.
F-31
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
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 Sahara Adjustments Acquisition Adjustments Acquisitions
(note 3) (note 4)
Net sales............. $94,098 $34,592 $3,110 $37,702 $131,800
Cost of sales......... 57,080 21,859 1,856 23,715 80,795
------------- ------------- ---------- -------------- -------------- ----------------- --------------
Gross profit.......... 37,018 12,733 1,254 13,987 51,005
------------- ------------- ---------- -------------- -------------- ----------------- --------------
Selling, general and
administrative
expenses........... 24,783 11,691 1,325 13,016 37,799
Depreciation of
property and
equipment.......... 314 421 10 431 745
Amortization of
goodwill and other $ (192)(18) (192)
intangible assets.. 1,702 384 77(15) 461 730 (19) 2,893
Restructuring and
Other charges...... 730 730 730
------------- ------------- ---------- -------------- -------------- ----------------- --------------
26,799 13,226 1,335 77 538 41,975
------------- ------------- ---------- -------------- -------------- ----------------- --------------
Operating income
(loss)............. 10,219 (493) (81) (77) (651) (538) 9,030
------------- ------------- ---------- -------------- -------------- ----------------- --------------
Interest expense, net. 2,412 815 147(16) 962 5,610 (21) 5,487
Amortization of
deferred financing
costs.............. 163 24 20(17) 44 156 (22) 363
------------- ------------- ---------- -------------- -------------- ----------------- --------------
2,575 839 167 1,006 2,269 5,850
------------- ------------- ---------- -------------- -------------- ----------------- --------------
Income(loss) before 7,644 (1,332) (81) (244) (1,657) (2,807) 3,180
income taxes.......
Provision for income 3,325 4,136 29 4,165 (5,394)(23) 2,096
taxes..............
------------- ------------- ---------- -------------- -------------- ----------------- --------------
Net income (loss)..... $4,319 $(5,468) $(110) $(244) $(5,822) $2,586 $1,083
============= ============= ========== ============== ============== ================= ==============
Earnings Per Common
Share:
Basic.............. $0.32 $0.08
=============
==============
Diluted............ $0.28 $0.07
============= ==============
Common equivalent shares weighted:
Basic.............. 13,429 13,429
Diluted............ 15,402 15,402
F-32
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) Adjustment to give effect to the reduction of certain costs and expenses
associated with the elimination of the principal corporate office of
Westbrae.
(2) Elimination of Westbrae historical amortization of goodwill.
(3) Goodwill amortization with respect to goodwill acquired in the acquisition
of Westbrae.
(4) Increase in interest costs resulting from the financing of the Westbrae
acquisition.
(5) Adjustment of amortization of financing costs resulting from the New Credit
Facility.
(6) Adjustment to historical provision for income taxes to eliminate the effect
of net operating loss carryforwards utilized by Westbrae and to adjust
taxes to the expected effective tax rate following acquisition.
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
F-33
for as a purchase. The purchase price was $80 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.
(7) Elimination of management fees paid to former owners and restructuring
expenses incurred under prior ownership that will not be recurring
following the acquisition.
(8) Adjustment of depreciation expense based on revaluation of fixed assets of
the Acquired Companies.
(9) Elimination of historical goodwill amortization of the Acquired Companies.
(10) Goodwill amortization arising from the acquisition of the Acquired
Companies.
(11) Elimination of historical interest expense of the Acquired Companies.
(12) 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.
(13) Elimination of the write-off of deferred financing costs applicable to debt
of the acquired companies paid off at the closing of the acquisition.
(14) Adjustment of income taxes to give effect to the pro forma pretax
adjustments, and to adjust for the expected effective income tax rate
following acquisition.
Note 3 - Sahara Acquisition
Details of the pro forma adjustments relating to this acquisition and the
financing are set forth below.
(15) Goodwill amortization with respect to goodwill acquired in the acquisition
of Sahara for the year ended June 30, 1998 and six months ended December
31, 1998.
(16) Increase in interest cost resulting from the increased proceeds of the NNG
term loan and issuance of the promissory
F-34
note in connection with the acquisition of Sahara for the year ended June
30, 1998 and six months ended December 31, 1998.
(17) 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 six months ended December 31, 1998.
Note 4 - NNG Acquisition
Details of the pro forma adjustments relating to this acquisition and the
financing are set forth below.
(18) Elimination of NNG pro forma combined historical amortization expense of
goodwill for the year ended June 30, 1998 and six months ended December 31,
1998.
(19) Goodwill amortization arising from the NNG acquisition (assuming a 40 year
life) for the year ended June 30, 1998 and six months ended December 31,
1998.
(20) Elimination of historical interest expense of all acquired companies for
the year ended June 30, 1998 and for the six months ended December 31,
1998.
(21) 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 six months
ended December 31, 1998.
(22) 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 six months ended December 31, 1998.
(23) Adjustment of income taxes to give effect to the pro forma pre-tax
adjustments, and to adjust for the expected effective income tax rate
following the acquisition for the year ended June 30, 1998 and for the six
months ended December 31, 1998.
F-35
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: April 27, 1999 By: /s/ Gary M. Jacobs
--------------------------
Gary M. Jacobs
Chief Financial Officer
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 Convertible Note.