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: 03/31/99 Commission file number: 0-22818
---------- -------
THE HAIN FOOD GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3240619
_______________________________ _____________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Charles Lindbergh Boulevard, Uniondale, New York 11553
_______________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 237-6200
_________________
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.
13,970,790 shares of Common Stock $.01 par value, as of May 11, 1999.
THE HAIN FOOD GROUP, INC.
INDEX
Page
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1999
(unaudited) and June 30, 1998 2
Consolidated Statements of Income - Three months and
nine months ended March 31, 1999 and 1998 (unaudited) 3
Consolidated Statements of Cash Flows - Nine months
ended March 31, 1999 and 1998 (unaudited) 4
Consolidated Statement of Stockholders' Equity - Nine
months ended March 31, 1999 (unaudited) 5
Notes to Consolidated Financial Statements 6 to 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 to 15
Part II Other Information
Items 1 to 5 are not applicable
Item 6 - Exhibits and Reports on Form 8-K 16
Signatures 17
<TABLE>
PART I - ITEM 1 - FINANCIAL INFORMATION
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<S> <C> <C>
March 31, June 30,
1999 1998
---------- ----------
(Unaudited) (Note)
ASSETS
Current assets:
Cash $ 442,000 $ 495,000
Trade accounts receivable, less
allowance for doubtful accounts
of $486,000 and $325,000 22,245,000 13,614,000
Inventories 18,417,000 13,278,000
Other current assets 3,865,000 1,830,000
----------- ----------
Total Current Assets 44,969,000 29,217,000
Property and equipment, net of
accumulated depreciation of
$1,346,000 and $834,000 7,798,000 1,065,000
Goodwill and other intangible assets,
net of accumulated amortization of
$5,885,000 and $3,320,000 129,219,000 54,253,000
Deferred financing costs, net of
accumulated amortization of
$1,299,000 and $1,055,000 2,008,000 1,502,000
Other assets 4,885,000 2,254,000
------------ -----------
Total Assets $188,879,000 $88,291,000
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 17,882,000 $ 9,715,000
Current portion of long-term debt 6,765,000 4,554,000
Income taxes payable 3,493,000 410,000
------------ -----------
Total current liabilities 28,140,000 14,679,000
Long-term debt, less current portion 54,456,000 16,561,000
Other liabilities 2,700,000 2,628,000
Deferred income taxes 1,222,000 1,176,000
------------ -----------
Total liabilities 86,518,000 35,044,000
------------ -----------
Commitments and contingencies
Stockholder's 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 13,820,640 and 11,656,299
shares 138,000 117,000
Additional paid-in capital 86,703,000 45,122,000
Retained earnings 15,795,000 8,283,000
----------- ----------
102,636,000 53,522,000
Less: 100,000 shares of treasury stock,
at cost 275,000 275,000
----------- ----------
Total stockholder's equity 102,361,000 53,247,000
----------- ----------
Total liabilities and stockholder's
equity $188,879,000 $88,291,000
============ ===========
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>
THE HAIN FOOD GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
March 31 March 31
------------------ -----------------
1999 1998 1999 1998
---------- --------- -------- --------
Net sales $50,833,000 $28,212,000 $144,931,000 $73,224,000
Cost of Sales 30,494,000 16,692,000 87,574,000 43,604,000
----------- ----------- ------------- ----------
Gross profit 20,339,000 11,520,000 57,357,000 29,620,000
----------- ----------- ------------ ----------
Selling, general and
administrative
expenses 12,449,000 8,039,000 37,232,000 21,364,000
Depreciation of
property and
equipment 206,000 69,000 520,000 183,000
Amortization of
goodwill and other
intangible assets 863,000 392,000 2,565,000 927,000
----------- --------- ---------- ----------
13,518,000 8,500,000 40,317,000 22,474,000
----------- --------- ---------- ----------
Operating income 6,821,000 3,020,000 17,040,000 7,146,000
----------- ---------- ---------- ----------
Interest expense, net 1,088,000 527,000 3,500,000 1,706,000
Amortization of
deferred financing
costs 81,000 122,000 244,000 396,000
----------- --------- --------- ---------
1,169,000 649,000 3,744,000 2,102,000
Income before
income taxes 5,652,000 2,371,000 13,296,000 5,044,000
Provision for
income taxes 2,459,000 982,000 5,784,000 2,118,000
----------- --------- ---------- ----------
Net income $ 3,193,000 $ 1,389,000 $ 7,512,000 $2,926,000
=========== =========== =========== ==========
Earnings Per
Common Share:
Basic $ 0.23 $ 0.12 $ 0.56 $ 0.30
=========== =========== =========== ==========
Diluted $ 0.21 $ 0.11 $ 0.49 $ 0.26
=========== =========== =========== ==========
Common equivalent
shares:
Basic 13,690,000 11,482,000 13,516,000 9,862,000
=========== =========== =========== ==========
Diluted 15,562,000 13,167,000 15,392,000 11,352,000
=========== =========== =========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<S> <C> <C>
Nine Months Ended
March 31
------------------
1999 1998
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $7,512,000 $ 2,926,000
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities
Depreciation of property and goodwill 520,000 183,000
Amortization of goodwill and other
intangible assets 2,565,000 927,000
Amortization of deferred financing costs 244,000 396,000
Provision for doubtful accounts 35,000 76,000
Increase (decrease) in cash attributable
to changes in assets and liabilities,
net of amounts applicable to acquired
businesses:
Accounts receivable (3,617,000) (1,856,000)
Inventories 1,159,000 (1,267,000)
Other current assets (1,992,000) (450,000)
Other assets (2,631,000) (534,000)
Accounts payable and accrued expenses (1,320,000) (3,626,000)
Income taxes payable 3,084,000 1,454,000
----------- -----------
Net cash provided by (used in)
operating activities 5,559,000 (1,771,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses,
net of cash acquired (24,952,000) (28,837,000)
Acquisition of property and equipment (668,000) (205,000)
------------ ------------
Net cash used in investing activities (25,620,000) (24,042,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank revolving credit
facility, net 250,000 1,250,000
Proceeds from senior term loan 60,000,000 30,000,000
Payment of senior term loan (20,350,000) (25,342,000)
Costs in connection with bank financing (750,000) (785,000)
Proceeds from public stock offering,
net of related expenses 20,852,000
Proceeds from exercise of warrants and
options, net of related expenses 1,817,000 2,070,000
Payment of debt from acquired company (20,678,000) (2,103,000)
Collections of receivables from
equipment sales 303,000
Payment of other long-term debt (165,000)
Other - net (281,000) (191,000)
------------ -----------
Net cash provided by financing
activities 20,008,000 25,889,000
------------ -----------
Net (decrease) increase in cash (53,000) 76,000
Cash at beginning of period 495,000 219,000
------------ -----------
Cash at end of period $ 442,000 $ 295,000
============ ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stock Treasury Stock
----------------- -------------------
Additional
Amount Paid -in Retained
Shares at $.01 Capital Earnings Shares Amount Total
-------- ------- ----------- -------- ------- ------- ------
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 acquisition
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 357,300 3,000 1,725,000 1,728,000
Non-cash compensation
charge 35,000 35,000
Net income for the period 7,512,000 7,512,000
---------- -------- ----------- ----------- -------- ---------- ------------
Balance at March 31, 1999 13,820,640 $138,000 $86,703,000 $15,795,000 100,000 $(275,000) $102,361,000
========== ======== =========== =========== ======== ========== ============
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.
Start-up activities are defined broadly as those one-time activities related to
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customer or commencing some new
operations. 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 nine month period ended March 31, 1999, income before income taxes would
have been reduced by approximately $3,200,000.
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.
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 nine months ended March 31, 1998, assuming the above
acquisitions, excluding Nile Spice which is not material, had occurred as of
July 1, 1997 are as follows:
Nine Months Ended
March 31, 1998
-----------------
Net sales $126,175
Net income 3,895
Net income per share (diluted) $ .30
The pro forma operating results shown above are not necessarily indicative of
operations in the periods following acquisition.
<PAGE>
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.
6. INVENTORIES:
March 31, 1999 June 30, 1998
-------------- -------------
Finished goods $12,105,000 $10,006,000
Raw materials and packaging 6,312,000 3,272,000
----------- -----------
$18,417,000 $13,278,000
=========== ===========
7. LONG-TERM DEBT:
March 31, 1999 June 30, 1998
-------------- -------------
Senior Term Loan $58,250,000 $18,600,000
Revolving Credit 2,600,000 2,350,000
Notes payable to sellers in
connection with acquisition
of companies and other
long-term debt 371,000 165,000
----------- -----------
61,221,000 21,115,000
Current portion 6,765,000 4,554,000
----------- -----------
$54,456,000 $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.
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 March 31, 1999, $12.4 million was available under the Company's
revolving credit line.
<PAGE>
8. EARNINGS PER SHARE:
The Company reports basic and diluted earnings per share in accordance with FASB
Statement No. 128, "Earnings Per Share" ("FAS 128"). Basic earnings per share
excludes any dilutive effects of options and warrants. Diluted earnings per
share includes all dilutive common stock equivalents such as stock options and
warrants.
The following table sets forth the computation of basic and diluted earnings per
share pursuant to FAS 128.
Three Months Ended Nine Months Ended
March 31 March 31
------------ ------------
1999 1998 1999 1998
---------- ----------- ---------- ----------
Numerator:
Net income - numerator
for basic and diluted
earnings per share $ 3,193,000 $ 1,389,000 $ 7,512,000 $ 2,926,000
=========== =========== =========== ===========
Denominator:
Denominator for basic
earnings per share -
weighted average
shares outstanding
during the period (a) 13,690,000 11,482,000 13,516,000 9,862,000
------------ ----------- ----------- ----------
Effect of dilutive
securities:
Stock options 1,098,000 1,002,000 1,109,000 928,000
Warrants 774,000 683,000 767,000 562,000
----------- ---------- --------- ---------
1,872,000 1,685,000 1,876,000 1,490,000
----------- ---------- --------- ---------
Denominator for
diluted earnings per
share -
adjusted weighted
average shares and
assumed conversions 15,562,000 13,167,000 15,392,000 11,352,000
=========== =========== =========== ==========
Basic earnings per
share $ 0.23 $ 0.12 $ 0.56 $ 0.30
=========== =========== ========== ==========
Diluted earnings per
share $ 0.21 $ 0.11 $ 0.49 $ 0.26
=========== =========== ========== ==========
(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.
<PAGE>
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.
10. SUBSEQUENT EVENT:
On April 6, 1999, the Company announced an agreement to acquire 100% of the
equity of privately held Natural Nutrition Group, Inc. ("NNG"), a leading
manufacturer and marketer of premium natural and organic food products in the
United States sold under the Health Valley, Breadshops, and Casbah brands. The
purchase price consists of $70 million in cash and a five year $10 million
convertible note. The acquisition is expected to close on or about May 18,
1999. sales from NNG, on a pro forma basis, including their previous acquisition
for the year ended December 31, 1998, amounted to $72 million.
In addition, the Company announced that it has arranged a committed $160 million
senior secured loan facility with IBJ Whitehall Bank & Trust Company, as
administrative agent and arranger, and Fleet Bank, N.A., as syndication agent
and co-arranger, which provides for a $30 million revolving credit facility
and $130 million of term loans. This facility will be used to complete the NNG
acquisition, refinance the Company's existing indebtedness and provide for
ongoing working capital needs. It is expected that the closing of this credit
facility will coincide with the closing of NNG.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
The Company made the following acquisitions over the past eighteen month period
ended March 31, 1999:
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. On April 6, 1999 this licensing
agreement was modified with H.J. Heinz to include the sale and distribution of
the Earth's Best baby food line into the United States retail grocery and
natural food channels.
Sales for the current quarter increased by $22.6 million (80%) as compared to
the 1998 quarter. A substantial amount of the increase was attributable to the
acquisitions.
Gross profit increased by $8.8 million compared with the 1998 quarter,
principally because of increased sales volume. Gross profit percentage for the
quarter amounted to 40%, compared to 40.8% achieved in the corresponding 1998
quarter. 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. Gross profit percentage, however, is comparable to the
fiscal 1999 second quarter.
Selling, general and administrative expenses increased by $4.4 million compared
with the 1998 quarter. A substantial portion of the increase was attributable
to the acquisitions. Such expenses, as a percentage of net sales, amounted to
24.5% in the current quarter compared with 28.5% in the 1998 quarter. The
improvement of 4.0% 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
as yet been integrated. The Company is in the process of reevaluating its
remaining integration plans in light of the pending acquisition of NNG. It is
expected that the integration process may not be completed until well into
fiscal 2000. During the three months ended March 31, 1999, the Company continued
to promote awareness of its new brands and newly acquired products in an effort
to expand product distribution into existing and new market channels. Prior to
their acquisition by the Company, these brands and certain market channels were
not aggressively promoted or pursued. The Company plans to continue to invest
in consumer spending and to enhance brand equity while closely monitoring its
trade spending; however, the Company believes that certain trade spending
categories will increase in the next two to three fiscal quarters which may
increase selling, general and administrative expenses to the level experienced
in the first two fiscal quarters. 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 $.5 million
compared with the 1998 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 1.4% in the 1998 quarter.
Operating income increased by $3.8 million compared to the 1998 quarter. A
substantial portion of the increase relates to the significantly higher sales
volume due to the acquisitions. Operating income, as a percentage of net sales,
amounted to 13.4%, an increase of 2.7% over the 1998 quarter. This resulted
principally from lower selling, general and administrative expenses as a
percentage of net sales, offset by a slightly lower gross profit percentage and
higher goodwill amortization resulting from the acquisitions.
Interest and financing costs in the current quarter increased by $0.6 million
compared with the 1998 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 retired 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
41.4% in the 1998 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 $1.8 million, and
amounted to 6.3% of net sales, compared with 4.9% in the 1998 quarter. This
resulted from the higher level of operating income discussed above, offset by
higher interest costs and a marginally higher effective income tax rate.
NINE MONTHS ENDED MARCH 31, 1999
Sales for the nine months increased by $71.7 million (98%) as compared to the
1998 period. Substantially all of the increase was attributable to the
acquisitions.
Gross profit increased by $27.7 million compared with the 1998 period,
principally because of increased sales volume. Gross profit percentage for the
nine months amounted to 39.6%, compared with 40.5% for the 1998 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 $15.9 million,
compared with the 1998 period. A substantial portion of the increase was
attributable to the acquisitions. Such expenses, as a percentage of net sales,
amounted to 25.7% in the current nine months compared with 29.2% in the 1998
period. The improvement of 3.5% 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 started
initiatives to promote awareness of our newly acquired brands and products in an
effort to expand product distribution in existing and new market channels.
Prior to their acquisition by the Company, these brands and/or market channels
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 $1.6 million
compared with the 1998 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 1.3% in the 1998 period.
Operating income increased by $9.9 million compared to the 1998 period. A
substantial portion of the increase relates to the significantly higher sales
volume due to the acquisitions. Operating income, as a percentage of net sales,
amounted to 11.8%, an increase of 2% over the 1998 period. This resulted
principally from lower selling, general and administrative expenses as a
percentage of net sales, offset by a slightly lower gross margin percentage and
higher goodwill amortization resulting from the acquisitions.
Interest and financing costs in the nine months increased by $1.6 million
compared with the 1998 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 1998 period. The income tax rate utilized for the current nine
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 nine months increased by $4.6 million, and amounted to
5.2% of net sales, compared with 4% in the 1998 period. This resulted from the
higher level of operating income discussed above, less increased interest costs
and a marginally higher effective income tax rate.
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 raising 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.
<PAGE>
On July 1, 1998, in connection with the acquisitions of businesses from the
Shansby Group, 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 March 31, 1999, $58.3
million was outstanding under the senior term loan and $2.6 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 March 31, 1999, $12.4 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 current senior term loan for the twelve
months ending March 31, 2000 are $4.0 million. The Company anticipates that
cash flow from operations will be sufficient to meet all of its debt service and
operating requirements.
On April 6, 1999, in conjunction with the announcement of the NNG agreement (the
purchase price consists of $70 million in cash and a five year $10 million
convertible note), the Company announced that it has arranged a committed $160
million senior secured loan facility with IBJ Whitehall Bank & Trust Company, as
administrative agent and arranger, and Fleet Bank, N.A., as syndication agent
and co-arranger, which provides for a $30 million revolving credit facility and
$130 million of term loans. This facility will be used to complete this
acquisition, refinance the Company's existing indebtedness and provide for
ongoing working capital needs.
Working capital at March 31, 1999 amounted to approximately $16.8 million,
which management believes is 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,
integrate these manufacturing processes into NNG's manufacturing operations or
delegate such production to independent co-packers. Consequently, there may be
some level of capital expenditure in connection with the operation of those
facilities, 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 March 31, 1999, the Company was in compliance
with such covenants.
<PAGE>
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,
including those of NNG's, 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-
looking statements. Such factors include, among others, the following: general
economic and business conditions; the ability of the Company to implement its
business and acquisition strategy; the ability to effectively integrate its
acquisitions; the ability of the Company to obtain financing for general
corporate purposes; competition; availability of key personnel; and changes in,
or the failure to comply with government regulations. As a result of the
foregoing and other factors, no assurance can be given as to the future results,
levels of activity and achievements and neither the Company nor any person
assumes responsibility for the accuracy and completeness of these statements.
<PAGE>
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Financial Data Schedule (Exhibit 27)
(b) Reports on Form 8-K
There were not reports filed on Form 8-K during the three months
ended March 31, 1999.
<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: May 14, 1999 /s/ Irwin D. Simon
----------------------------
Irwin D. Simon,
President and Chief
Executive Officer
Date: May 14, 1999 /s/Gary M. Jacobs
----------------------------
Gary M. Jacobs,
Senior Vice President-Finance
and Chief Financial Officer
<PAGE>
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