FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended: 12/31/98 Commission file number: 0-22818
THE HAIN FOOD GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3240619
------------------------------ ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Charles Lindbergh Boulevard, Uniondale, New York 11553
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 237-6200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to
such filing requirement for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
13,655,340 shares of Common Stock $.01 par value, as of February 12, 1999.
<PAGE>
THE HAIN FOOD GROUP, INC.
INDEX
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1998
(unaudited) and June 30, 1998
Consolidated Statements of Income - Three months and
six months ended December 31, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows - Six months
ended December 31, 1998 and 1997 (unaudited)
Consolidated Statement of Stockholders' Equity - Six
months ended December 31, 1998 (unaudited)
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II Other Information
Items 1 to 3 are not applicable
Item 4 - Submission of Matter to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
Signatures
<PAGE>
<TABLE>
PART I - ITEM 1. - FINANCIAL INFORMATION
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31 June 30
1998 1998
(Unaudited) (Note)
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash $471,000 $495,000
Trade accounts receivable,
less allowance for doubtful
accounts of $475,000 and $325,000 18,714,000 13,614,000
Inventories 18,691,000 13,278,000
Other current assets 3,024,000 1,830,000
---------- ----------
Total current assets 40,900,000 29,217,000
Property and equipment, net
of accumulated depreciation
of $1,145,000 and $834,000 7,601,000 1,065,000
Goodwill and other intangible assets,
net of accumulated amortization
of $5,022,000 and $3,320,000 130,043,000 54,253,000
Deferred financing costs, net of
accumulated amortization
of $1,218,000 and $1,055,000 1,790,000 1,502,000
Other assets 3,711,000 2,254,000
----------- ----------
Total assets $184,045,000 $88,291,000
=========== ==========
<FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $15,807,000 $9,715,000
Current portion of long-term debt 9,267,000 4,554,000
Income taxes payable 1,122,000 410,000
---------- ----------
Total current liabilities 26,196,000 14,679,000
Long-term debt, less current portion 55,630,000 16,561,000
Other liabilities 2,742,000 2,628,000
Deferred income taxes 1,221,000 1,176,000
---------- ----------
Total liabilities 85,789,000 35,044,000
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value;
authorized 5,000,000 shares,
no shares issued
Common stock - $.01 par value,
authorized 40,000,000 shares, issued
13,628,640 and 11,656,299 shares 136,000 117,000
Additional paid-in capital 85,793,000 45,122,000
Retained earnings 12,602,000 8,283,000
---------- ----------
98,531,000 53,522,000
Less: 100,000 shares of treasury
Stock, at cost 275,000 275,000
---------- ----------
Total stockholders' equity 98,256,000 53,247,000
----------- ----------
Total liabilities and
stockholders' equity $184,045,000 $88,291,000
=========== ==========
<FN>
Note - The balance sheet at June 30, 1998 has been derived from
the audited financial statements at that date.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
1998 1997 1998 1997
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales $50,602,000 $28,676,000 $94,098,000 $45,012,000
Cost of sales 30,359,000 17,050,000 57,080,000 26,912,000
---------- ---------- ---------- ----------
Gross profit 20,243,000 11,626,000 37,018,000 18,100,000
---------- ---------- ---------- ----------
Selling, general and
administrative expenses 13,438,000 8,488,000 24,783,000 13,325,000
Depreciation of property
and equipment 162,000 66,000 314,000 114,000
Amortization of goodwill
and other intangible
assets 855,000 325,000 1,702,000 535,000
---------- --------- ---------- ----------
14,455,000 8,879,000 26,799,000 13,974,000
---------- --------- ---------- ----------
Operating income 5,788,000 2,747,000 10,219,000 4,126,000
Interest expense, net 1,169,000 759,000 2,412,000 1,179,000
Amortization of deferred
financing costs 82,000 143,000 163,000 274,000
--------- --------- --------- ---------
1,251,000 902,000 2,575,000 1,453,000
--------- --------- --------- ---------
Income before income
taxes 4,537,000 1,845,000 7,644,000 2,673,000
Provision for income
taxes 1,973,000 784,000 3,325,000 1,136,000
--------- --------- --------- ---------
Net income $2,564,000 $1,061,000 $4,319,000 $1,537,000
========= ========= ========= =========
Earnings Per Common Share:
Basic $0.19 $0.11 $0.32 $0.17
==== ==== ==== ====
Diluted $0.17 $0.10 $0.28 $0.15
==== ==== ==== ====
Common equivalent shares:
Basic 13,475,000 9,454,000 13,429,000 9,051,000
========== ========= ========== =========
Diluted 15,437,000 10,925,000 15,402,000 10,445,000
========== ========== ========== ==========
<FN>
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Six Months Ended
December 31
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $4,319,000 $476,000
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation of property and equipment 314,000 48,000
Amortization of goodwill
and other intangible assets 1,702,000 210,000
Amortization of deferred financing costs 163,000 131,000
Provision for doubtful accounts (3,000)
Other 19,000
Increase (decrease) in cash attributable
to changes in assets and liabilities,
net of amounts applicable to acquired
businesses:
Accounts receivable (48,000) 296,000
Inventories 885,000 (790,000)
Other current assets (1,151,000) (172,000)
Other assets (1,457,000) 30,000
Accounts payable and accrued expenses (3,395,000) (1,471,000)
Income taxes payable 712,000 293,000
--------- -------
Net cash provided by (used in)
operating activities 2,060,000 (949,000)
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash
acquired (24,913,000) (37,000)
Acquisition of property and equipment (297,000) (20,000)
---------- ------
Net cash used in investing activities (25,210,000) (57,000)
---------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank revolving credit facility 3,000,000 1,550,000
Proceeds from senior term loan 60,000,000
Payment of senior term loan (19,475,000) (1,509,000)
Costs in connection with bank financing (451,000) (251,000)
Proceeds from exercise of warrants and options,
net of related expenses 917,000 1,293,000
Payment of debt of acquired company (20,678,000)
Other - net (187,000) (112,000)
---------- --------
Net cash provided by financing activities 23,126,000 971,000
---------- -------
Net (decrease) in cash (24,000) (35,000)
Cash at beginning of period 495,000 219,000
------- -------
Cash at end of period $471,000 $184,000
======= =======
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
<CAPTION>
Common Stock Additional
Amount Paid-in Retained Treasury Stock
Shares at $.01 Capital Earnings Shares Amount Total
---------- ------- ---------- --------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 11,656,299 $117,000 $45,122,000 $8,283,000 100,000 ($275,000) $53,247,000
Issuance of 1,716,111
shares in connection
with the acquisitions
of businesses 1,716,111 17,000 39,733,000 39,750,000
Exercise of Common Stock
warrants, net of
related expenses 90,930 1,000 88,000 89,000
Exercise of stock options 165,300 1,000 827,000 828,000
Non-cash compensation charge 23,000 23,000
Net income for the period 4,319,000 4,319,000
---------- ------- ---------- ---------- ------- ------- ----------
Balance at
December 31, 1998 13,628,640 $136,000 $85,793,000 $12,602,000 100,000 ($275,000) $98,256,000
========== ======= ========== ========== ======= ======= ==========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL:
The Company and its subsidiaries operate as one business segment: the sale
of natural and other food products. A substantial portion of the products
are manufactured by various co-packers.
The Company's natural food product lines consist of Hain Pure Foods,
Westbrae Natural, Arrowhead Mills, DeBoles Nutritional Foods, Earth's Best
(baby foods), and Garden of Eatin'. Other product lines include Hollywood
Foods (principally healthy cooking oils), Weight Watchers (dry and
refrigerated products), Estee (sugar-free, medically directed foods),
Kineret (kosher foods), Terra Chips (natural vegetable chips), Boston
Popcorn (snack products) and Nile Spice (dry soup products).
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 condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. 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. Reference is made to the footnotes to the audited consolidated
financial statements of the Company and subsidiaries as at June 30, 1998
and for the year then ended included in the Company's Annual Report on
Form 10-K for information not included in these condensed footnotes.
3. START UP COSTS:
In April 1998, the American Institute of Certified Public Accountants issued
SOP 98-5, "Reporting Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5
is effective beginning on July 1, 1999, and requires the start-up costs
capitalized prior to such date be written-off as a cumulative effect of an
accounting change as of July 1, 1999 and any future start-up costs to be
expensed as incurred. It is not practicable to estimate what effect this
change will have on fiscal 2000 earnings, however, had SOP 98-5 been adopted
at the beginning of the six month period ended December 31, 1998, income
before income taxes would have been reduced by approximately $1,851,000.
4. COMPREHENSIVE INCOME:
On July 1, 1998, the Company adopted Financial Accounting Standards Board
Statement of Financial Accounting Standard Statement No. 130 ("FAS 130")
"Reporting Comprehensive Income." FAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of FAS 130 had no impact on the Company's net income or
stockholders' equity.
<PAGE>
5. ACQUISITIONS:
On December 8, 1998, the Company acquired the Nile Spice Soup and Meal
Cup ("Nile Spice") business from The Quaker Oats Company. The Nile Spice
product line includes premium soups and meals packaged in cups that are sold
under the Nile Spice and Near East brands. The cash purchase price amounted
to approximately $4.3 million. In addition, the Company assumed certain
liabilities directly related to the acquired business. The Company used
its revolving credit facility to fund the purchase price. Pro forma
disclosure was not required in connection with the acquisition.
On July 1, 1998, the Company acquired the following businesses and brands
from The Shansby Group and other investors: Arrowhead Mills (natural foods),
DeBoles Nutritional Foods (natural pasta products), Terra Chips (natural
vegetable chips) and Garden of Eatin', Inc. (natural snack products). The
aggregate purchase price, including acquisition costs, for these businesses
amounted to approximately $61.5 million. The purchase price was paid by the
issuance of 1,716,111 shares of the Company's common stock with a market
value of $39.75 million and approximately $21.7 million in cash. In
addition, the Company repaid approximately $20.8 million of outstanding debt
of the acquired businesses. To finance the acquisition, the Company entered
into a $75 million credit facility with its bank providing for a $60 million
Term Loan and a $15 million revolving credit line.
On October 14, 1997, the Company completed a tender offer for all of the
shares of Westbrae Natural, Inc. ("Westbrae), a publicly-owned company, for
$3.625 per share of common stock. The aggregate cash purchase price,
including acquisition costs, amounted to approximately $24 million. In
addition, the Company repaid approximately $2.1 million of outstanding
Westbrae debt. Westbrae (formerly known as Vestro Natural Foods, Inc.) is
a leading formulator and marketer of high quality natural and organic foods
sold under the brand names Westbrae Natural, Westsoy, Little Bear and
Bearitos, encompassing 300 food items such as non-dairy beverages, chips,
snacks, beans and soups.
Unaudited pro forma results of operations (in thousands, except per share
amounts) for the six months ended December 31, 1997, assuming the above
acquisitions, excluding Nile Spice, had occurred as of July 1, 1997 are
as follows:
1997
------
Net sales $83,515
Net income 2,513
Net income per share (diluted) $0.21
The pro forma operating results shown above are not necessarily indicative
of operations in the periods following acquisition.
The above acquisitions have been accounted for as purchases and,
therefore, operating results have been included in the accompanying
financial statements from the respective dates of acquisition. Goodwill
arising from the acquisitions is being amortized on a straight-line basis
over 40 years.
<PAGE>
6. INVENTORIES:
Dec. 31 June 30
1998 1998
---------- ----------
Finished goods $12,385,000 $10,006,000
Raw materials and packaging 6,306,000 3,272,000
---------- ----------
$18,691,000 $13,278,000
========== ==========
7. LONG-TERM DEBT:
Dec. 31 June 30
1998 1998
------- -------
Senior Term Loan $59,125,000 $18,600,000
Revolving Credit 5,350,000 2,350,000
Notes payable to sellers in
connection with acquisition
of companies and other
long-term debt 422,000 165,000
---------- ----------
64,897,000 21,115,000
Current portion 9,267,000 4,554,000
---------- ----------
$55,630,000 $16,561,000
========== ==========
On July 1, 1998, in connection with the acquisitions of businesses from The
Shansby Group, the Company and its bank entered into a $75 million Amended
and Restated Credit Facility ("Facility") providing for a $60 million senior
term loan and a $15 million revolving credit line. The entire senior term
loan was borrowed on that date to pay the cash portion of the purchase price
of the acquisitions, fund closing costs, repay debt of the acquired
businesses, and to repay the then existing balance ($18.6 million) on the
Facility. The interest rate on the Facility is based partially on the ratio
of outstanding debt to operating cash flow (as defined). The Company may
elect to pay interest based on the bank's base rate or the LIBOR rate.
Borrowings on a base rate basis may range from 0.50% below the bank's base
rate to 1.00% above the bank's base rate. Borrowings on a LIBOR basis may
range from 1.75% to 3.00% over the LIBOR rate. The entire senior term loan
is currently borrowed on a LIBOR basis. The senior term loan is repayable
in quarterly principal installments which commenced on December 31, 1998
through maturity of the Facility on September 30, 2005.
<PAGE>
Pursuant to the revolving credit line, the Company may borrow up to 85% of
eligible trade receivables and 60% of eligible inventories. Amounts
outstanding under the Facility are collateralized by principally all of the
Company's assets. The Facility contains certain financial and other
restrictive covenants, which, among other matters, restrict the payment of
dividends and the incurrence of additional indebtedness. The Company is also
required to maintain various financial ratios, including minimum working
capital and interest and fixed charge coverage ratios and is required to
achieve certain earnings levels. As of December 31, 1998, $9.65 million was
available under the Company's revolving credit line.
8. EARNINGS PER SHARE:
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share"
("FAS 128"). FAS 128 replaced the previous reporting of primary and fully
diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options and warrants. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share.
All earnings per share amounts for all periods have been presented, and
where necessary restated, to conform to FAS 128 requirements.
The following table sets forth the computation of basic and diluted earnings
per share pursuant to FAS 128.
Three Months Ended Six Months Ended
December 31 December 31
1998 1997 1998 1997
--------- --------- --------- ---------
Numerator:
Net income - numerator
for basic and diluted
earnings per share $2,564,000 $1,061,000 $4,319,000 $1,537,000
========= ========= ========= =========
Denominator:
Denominator for basic
earnings per share -
weighted average shares
outstanding during the
period (a) 13,475,000 9,454,000 13,429,000 9,051,000
---------- --------- ---------- ---------
Effect of dilutive
securities (b):
Stock options 1,202,000 539,000 1,211,000 503,000
Warrants 760,000 932,000 762,000 891,000
--------- --------- --------- ---------
1,962,000 1,471,000 1,973,000 1,394,000
--------- --------- --------- ---------
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions 15,437,000 10,925,000 15,402,000 10,445,000
========== ========== ========== ==========
<PAGE>
Basic earnings
per share $0.19 $0.11 $0.32 $0.17
==== ==== ==== ====
Diluted earnings
per share $0.17 $0.10 $0.28 $0.15
==== ==== ==== ====
(a) On December 8, 1997, the Company issued 2,500,000 shares of common
stock in connection with a public offering. On July 1, 1998, the
Company issued 1,716,111 shares in connection with the acquisition
of four companies.
(b) The increase in the amount of dilutive potential shares in the 1998
periods was substantially attributable to an increase in the market
price of the Company's common stock over the year earlier period.
9. STOCKHOLDERS' EQUITY:
In connection with the Westbrae acquisition, the Company issued a warrant
to its bank in October 1997 to purchase 114,294 shares of the Company's
common stock at an exercise price of $12.294. The value ascribed to this
warrant of approximately $377,000 is being amortized over 6 years. In July
1998, in a cashless exercise of the warrant, the Company issued 63,647 shares
to the bank.
In July 1998, warrants for 27,283 shares of the Company's common stock
were exercised for aggregate proceeds of approximately $89,000. These
warrants were issued in fiscal 1994 to an affiliate of the Company's former
investment banking firm at a price of $3.25 per share.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended December 31, 1998
The Company made the following acquisitions during the fifteen-month period
ended December 31, 1998:
Date of Acquisition Business Acquired
------------------- -----------------
October 14, 1997 Westbrae Natural, Inc.
July 1, 1998 Arrowhead Mills, Inc.
July 1, 1998 Dana Alexander, Inc. ("Terra Chips")
July 1, 1998 Garden of Eatin', Inc.
July 1, 1998 DeBoles Nutritional Foods, Inc.
December 8, 1998 Nile Spice
All of the foregoing acquisitions ("the acquisitions" or "acquired businesses")
have been accounted for as purchases. Consequently, the operations of the
acquired businesses are included in the results of operations from their
respective dates of acquisition. Each of the acquired businesses markets and
sells natural food products. In addition, on June 1, 1998, the Company entered
into a license agreement with H.J. Heinz Company to market and sell Earth's
Best baby food products to natural food stores.
Sales for the current quarter increased by $21.9 million (76%) as compared to
the 1997 quarter. A substantial amount of the increase was attributable to the
acquisitions.
Gross profit increased by $8.6 million compared with the 1997 quarter,
principally because of increased sales volume. Gross profit percentage for the
quarter amounted to 40.0%, which is comparable to 40.5% achieved in the
corresponding 1997 quarter. Gross profit percentage, however, increased by
1.4% (40.0% vs. 38.6%) over the fiscal 1999 first quarter ended September 30,
1998 due to economies of scale and integration of businesses acquired.
Selling, general and administrative expenses increased by $4.95 million
compared with the 1997 quarter. A substantial portion of the increase was
attributable to the acquisitions. Such expenses, as a percentage of net sales,
amounted to 26.6% in the current quarter compared with 29.6% in the 1997
quarter. The improvement of 3.0% results from certain of the acquired
businesses having lower selling expenses than the Company's other product
lines, and the realization of reduced administrative expenses from integration
of certain operations of the acquired businesses within the Company's existing
infrastructure. Not all of the administrative functions of the businesses
acquired on July 1, 1998 have been integrated yet. In addition, selling, general
and administrative expenses increased from 26.1%, as a percentage of net sales
in the September 30, 1998 quarter to 26.6% in the current quarter, primarily as
a result of initiatives to promote awareness of our new brands in an effort to
expand product distribution. In the past, under prior management, these brands
were not aggressively promoted. The Company plans to continue to invest in
consumer spending and to enhance brand equity while closely monitoring its
trade spending. During this initiative, there is no guarantee that these
investments will be successful and as the Company attempts to reduce its trade
spending and increase consumer awareness, there may be a period of overlap.
<PAGE>
Amortization of goodwill and other assets increased by approximately $530,000
compared with the 1997 quarter. Substantially all of the increase was
attributable to amortization of goodwill acquired in connection with the
acquisitions. Amortization of goodwill and other intangible assets amounted
to 1.7% of net sales, compared with 1.1% in the 1997 quarter.
Operating income increased by $3.0 million compared to the 1997 quarter. A
substantial portion of the increase relates to the significantly higher sales
volume. Operating income, as a percentage of net sales, amounted to 11.4%, an
increase of 1.8% over the 1997 quarter. This resulted principally from lower
selling, general and administrative expenses as a percentage of net sales,
offset by slightly lower gross margin percentage and higher goodwill
amortization resulting from the acquisitions.
Interest and financing costs in the current quarter increased by $0.3 million
compared with the 1997 quarter. This increase was largely attributable to
senior bank debt incurred in connection with the acquisitions, offset by
reduced interest costs resulting from the prepayment in April 1998 of the
Company's 12.5% subordinated debentures. The debentures were paid off with the
proceeds of senior bank debt carrying a lower interest rate.
Income taxes, as a percentage of pre-tax income, amounted to 43.5% compared
to 42.5% in the 1997 quarter. The income tax rate utilized for the current
quarter is based on the Company's estimate of the effective income tax rate for
the fiscal year ending June 30, 1999. The higher effective tax rate in the
current period is caused by increased amortization of non-deductible goodwill
from current year acquisitions, offset by the reduced impact on such rate of
amortization of non-deductible goodwill from previous years acquisitions.
Net income in the current quarter increased by approximately $1.5 million, and
amounted to 5.1% of net sales, compared with 3.7% in the 1997 quarter. This
resulted from the higher level of operating income discussed above, less
increased interest costs and a marginally higher effective income tax rate.
Six Months Ended December 31, 1998
Sales for the six months increased by $49.1 million (109%) as compared to the
1997 period. Substantially all of the increase was attributable to the
acquisitions.
Gross profit increased by $18.9 million compared with the 1997 period,
principally because of increased sales volume. Gross profit percentage for the
six months amounted to 39.3%, compared with 40.2% for the 1997 period. The
decrease in gross profit percentage is primarily due to the differences in
margins achieved on the product mix of existing brands and businesses acquired.
Selling, general and administrative expenses increased by $11.5 million,
compared with the 1997 period. A substantial portion of the increase was
attributable to the acquisitions. Such expenses, as a percentage of net sales,
amounted to 26.3% in the current six months compared with 29.6% in the 1997
period. The improvement of 3.3% results from certain of the acquired
businesses having lower selling expenses than the Company's other product
lines, and the realization of reduced administrative expenses from integration
of certain operations of the acquired businesses within the Company's existing
infrastructure. During the second quarter of fiscal 1999 the Company has
started initiatives to promote awareness of our new brands in an effort to
expand product distribution. In the past, under prior management, these brands
were not aggressively promoted. The Company plans to continue to invest in
consumer spending and to enhance brand equity while closely monitoring its
trade spending. During this initiative, there is no guarantee that these
investments will be successful and as the Company attempts to reduce its trade
spending and increase consumer awareness, there may be a period of overlap.
<PAGE>
Amortization of goodwill and other intangible assets increased by approximately
$1.2 million compared with the 1997 period. Substantially all of the increase
was attributable to amortization of goodwill acquired in connection with the
acquisitions. Amortization of goodwill and other intangible assets amounted
to 1.8% of net sales, compared with 1.2% in the 1997 period.
Operating income increased by $6.1 million compared to the 1997 period. A
substantial portion of the increase relates to the significantly higher sales
volume. Operating income, as a percentage of net sales, amounted to 10.9%, an
increase of 1.7% over the 1997 period. This resulted principally from lower
selling, general and administrative expenses as a percentage of net sales,
offset by slightly lower gross margin percentage and higher goodwill
amortization resulting from the acquisitions.
Interest and financing costs in the six months increased by $1.1 million
compared with the 1997 period. This increase was largely attributable to
senior bank debt incurred in connection with the acquisitions, offset by
reduced interest costs resulting from the prepayment in April 1998 of the
Company's 12.5% subordinated debentures. The debentures were paid off with
the proceeds of senior bank debt carrying a lower interest rate.
Income taxes, as a percentage of pre-tax income, amounted to 43.5% compared to
42.5% in the 1997 period. The income tax rate utilized for the current six
months is based on the Company's estimate of the effective income tax rate for
the fiscal year ending June 30, 1999. The higher effective tax rate in the
current period is caused by increased amortization of non-deductible goodwill
from current year acquisitions, offset by the reduced impact on such rate of
amortization of non-deductible goodwill from previous years acquisitions.
Net income in the current six months increased by approximately $2.8 million,
and amounted to 4.6% of net sales, compared with 3.4% in the 1997 period.
This resulted from the higher level of operating income discussed above, less
increased interest costs and a marginally higher effective income tax rate.
<PAGE>
Liquidity and Capital Resources
In October 1997, in connection with the acquisition of Westbrae, the Company
entered into an amended and restated credit facility with its bank providing
for a $30 million senior term loan and a $10 million revolving credit line.
In December 1997, the Company issued 2.5 million shares of common stock in a
public offering, which raised approximately $20.9 million, which was used to
pay down the senior term loan. In April 1998, the Company re-borrowed
approximately $9 million under the senior term loan to prepay the Company's
$8.5 million 12.5% subordinated debentures.
On July 1, 1998, in connection with the acquisitions on that date described
above, the facility was further amended (as amended, the "Facility") to provide
for a $60 million senior term loan and a $15 million revolving credit line. The
entire senior term loan was borrowed on that date to pay the cash portion of the
purchase price of the acquisitions, fund closing costs, and to repay the then
existing balance on the Facility. At December 31, 1998, $59.125 million was
outstanding under the senior term loan and $5.35 million was outstanding under
the revolving credit line.
The interest rate on the Facility is based partially on the ratio of
outstanding debt to operating cash flow (as defined). The Company may elect to
pay interest based on the bank's base rate or the LIBOR rate. Borrowings on a
base rate basis may range from 0.50% below the bank's base rate to 1.00% above
the bank's base rate. Borrowings on a LIBOR basis may range from 1.75% to
3.00% over the LIBOR rate. The entire senior term loan is currently borrowed
on a LIBOR basis.
The senior term loan is repayable in quarterly principal installments (the
first principal payment commenced on December 31, 1998) through maturity of the
Facility on September 30, 2005. Pursuant to the Facility, the Company may
borrow under its revolving credit line up to 85% of eligible trade receivables
and 60% of eligible inventories.
Amounts outstanding under the Facility are collateralized by principally all of
the Company's assets. The Facility also contains certain financial and other
restrictive covenants. As of December 31, 1998, $9.65 million was available
under the Company's revolving credit line. Utilization of the revolving credit
line varies over the course of the year based on inventory requirements.
The aggregate principal payments on the senior term loan for the twelve months
ending December 31, 1999 are $3.75 million. The Company anticipates that cash
flow from operations will be sufficient to meet all of its debt service and
operating requirements.
<PAGE>
Working capital at December 31, 1998 amounted to approximately $14.7 million,
which is deemed adequate to serve the Company's operational needs. Prior to the
acquisitions, the Company purchased all of its products from independent co-
packers and did not invest in plant or equipment relating to the manufacture of
products for sale. The Company has not as yet determined whether it will
continue production at the plants acquired in the acquisitions or will delegate
such production to independent co-packers. Consequently, there may be some
level of capital expenditures in connection with the operation of those plants,
but the amount is not considered material in relation to the Company's
operations.
The Facility imposes limitations on the incurrence of additional indebtedness
and requires that the Company comply with certain financial tests and
restrictive covenants. As of December 31, 1998, the Company was in compliance
with such covenants.
Year 2000
The "Year 2000" issue is the result of computer systems that were programmed in
prior years using a two digit representation for the year. Consequently, in the
Year 2000, date sensitive computer programs may interpret the date "00" as 1900
rather than 2000. The Company has completed an assessment of its systems
affected by the Year 2000 issue and have found only minor issues to be
addressed. The Company believes its business operations computer
programs/systems are Year 2000 compliant. Certain systems of the acquired
businesses are not Year 2000 compliant; however, the Company will integrate the
computer functions of such businesses prior to the end of 1999. Accordingly, it
is anticipated that Year 2000 issues will not have a material adverse impact of
the Company's financial position, liquidity or results of operations.
The Company has had formal communications with all of its significant suppliers
and large customers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remediate their own
Year 2000 issues. While the Company believes that the Year 2000 issue will not
have a material adverse effect on the Company's financial position, liquidity
or results of operations, there is no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted and
would not have an adverse effect on the Company's systems.
Seasonality
Sales of food products consumed in the home generally decline to some degree
during the Summer vacation months. However, the Company believes that such
seasonality has a limited effect on operations.
Inflation
The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented.
Note Regarding Forward Looking Information
Certain statements contained in this Annual Report constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and
Sections 21E of the Exchange Act. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, levels of activity, performance or achievements of the Company, or
industry results, to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such forward-
ooking statements. Such factors include, among others, the following: general
economic and business conditions; the ability of the Company to implement its
business and acquisition strategy; the ability to effectively integrate its
acquisitions; the ability of the Company to obtain financing for general
corporate purposes; competition; availability of key personnel; and changes in,
or the failure to comply with government regulations. As a result of the
foregoing and other factors, no assurance can be given as to the future results,
levels of activity and achievements and neither the Company nor any person
assumes responsibility for the accuracy and completeness of these statements.
<PAGE>
PART II - OTHER INFORMATION
Item 4. - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on December 8, 1998. The Company
submitted the following matters to a vote of security holders:
(i) To elect a Board of seven directors to serve until the next Annual Meeting
of Stockholders; and
(ii) To approve amendments to the Company's 1994 Long Term Incentive and Stock
Award Plan to (a) increase the number of shares issuable over the term of
the plan by 1,200,000 shares to 2,400,000 in the aggregate and (b)
increase the upper limit of the number of shares for which options or
stock appreciation rights may be granted to any participant under the
plan during any calendar year to 500,000 shares; and
(iii) To approve amendments to the Company's 1996 Directors Stock Option Plan
to increase the number of shares issuable over the term of the plan by
200,000 shares to 500,000 shares in the aggregate and (b) allow for
discretionary option grants thereunder; and
(iv) To ratify the appointment of Ernst & Young LLP as independent auditors
for the fiscal year ending June 30, 1999 (Ernst & Young LLP were the
independent auditors for the fiscal year ended June 30, 1998).
The stockholders elected the persons named below, the Company's nominees
for directors, as directors of the Company, casting approximately
11,230,00 votes in favor of each nominee and withholding approximately
50,000 votes for each nominee:
Andrew R. Heyer
Irwin D. Simon
William J. Fox
Beth L. Bronner
Jack Futterman
James Gold
Kenneth J. Daley
The stockholders approved the amendments to the Company's 1994 Long Term
Incentive and Stock Award Plan casting approximately 2,903,000 votes in favor,
2,205,000 against, 18,000 abstaining and 6,154,000 not voting..
The stockholders approved the amendments to the Company's 1996 Directors Stock
Option Plan casting approximately 4,870,000 votes in favor, 298,000 against,
21,000 abstaining and 6,090,000 not voting.
The stockholders ratified the appointment of Ernst & Young LLP casting
approximately 11,238,000 votes in favor, 18,000 against and 24,000 abstaining.
Item 5. - Other Information
On December 14, 1998, the Company filed Registration Statement on Form S-8
registering 1,745,000 shares of Common Stock reserved for issuance under the
Company's 1994 Long Term Incentive and Stock Award Plan, and 1996 Directors
Stock Option Plan.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
Financial Data Schedule (Exhibit 27)
b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended December 31, 1998.
<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 thereunto duly authorized.
THE HAIN FOOD GROUP, INC.
Date: February 16, 1999 /s/ Irwin D. Simon
Irwin D. Simon,
President and Chief
Executive Officer
Date: February 16, 1999 /s/ Gary M. Jacobs
Gary M. Jacobs,
Senior Vice President-Finance
and Chief Financial Officer
<PAGE>
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