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: 09/30/99 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.
18,048,848 shares of Common Stock $.01 par value, as of November 8, 1999.
<PAGE>
THE HAIN FOOD GROUP, INC.
INDEX
PAGE
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1999
(unaudited) and June 30, 1999 2
Consolidated Statements of Income - Three months
ended September 30, 1999 and 1998 (unaudited) 3
Consolidated Statements of Cash Flows - Three months
ended September 30, 1999 and 1998 (unaudited) 4
Consolidated Statement of Stockholders' Equity -
Three months ended September 30, 1999 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6 to 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 to 17
Part II Other Information
Items 1 to 5 are not applicable
Item 6 - Exhibits and Reports on Form 8-K 18
Signatures 19
1
<PAGE>
PART I - ITEM 1 - FINANCIAL INFORMATION
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
(Unaudited) (Note)
ASSETS
Current assets:
<S> <C> <C>
Cash $ 529,000 $ 510,000
Trade accounts receivable, less allowance
for doubtful accounts of $473,000 and $560,000 25,532,000 24,278,000
Inventories 29,182,000 29,208,000
Recoverable income taxes - 387,000
Other current assets 2,150,000 4,965,000
------------ -----------
Total Current Assets 57,393,000 59,348,000
Property and equipment, net of accumulated
depreciation of $2,308,000 and $1,601,000 17,580,000 17,947,000
Goodwill and other intangible assets, net of
accumulated amortization of $8,161,000 and
$6,884,000 215,410,000 193,398,000
Deferred financing costs, net of accumulated
amortization of $262,000 and $107,000 3,457,000 3,605,000
Deferred income taxes 3,431,000 884,000
Other assets 1,880,000 6,640,000
------------ ------------
Total Assets $299,151,000 $281,822,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 26,394,000 $ 30,029,000
Current portion of long-term debt 12,341,000 10,442,000
Income taxes payable 1,266,000 -
------------ -------
Total current liabilities 40,001,000 40,471,000
Long-term debt, less current portion 42,727,000 130,683,000
Other liabilities - 667,000
------------ ------------
Total liabilities 82,728,000 171,821,000
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 18,087,924 and
14,119,640 shares 181,000 141,000
Additional paid-in capital 198,237,000 90,822,000
Retained earnings 18,280,000 19,313,000
------------ ------------
216,698,000 110,276,000
Less: 100,000 shares of treasury stock, at cost 275,000 275,000
------------ ------------
Total stockholders' equity 216,423,000 110,001,000
------------ ------------
Total liabilities and stockholders' equity $299,151,000 $281,822,000
============ ============
</TABLE>
Note - The balance sheet at June 30, 1999 has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements.
2
<PAGE>
THE HAIN FOOD GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30
-------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 68,064,000 $ 43,496,000
Cost of sales 40,054,000 26,721,000
------------ ------------
Gross profit 28,010,000 16,775,000
------------ ------------
Selling, general and administrative expenses 19,027,000 11,497,000
Amortization of goodwill and other
intangible assets 1,277,000 847,000
------------ ------------
20,304,000 12,344,000
------------ ------------
Operating income 7,706,000 4,431,000
------------ ------------
Interest expense, net 2,603,000 1,243,000
Amortization of deferred financing costs 155,000 81,000
------------ ------------
2,758,000 1,324,000
------------ ------------
Income before income taxes and cumulative
change in accounting principle 4,948,000 3,107,000
Provision for income taxes 2,227,000 1,352,000
------------ ------------
Income before cumulative change in
accounting principle 2,721,000 1,755,000
------------ ------------
Cumulative change in accounting principle,
net of tax benefit of $2,547,000 (3,754,000) --
------------ ------------
Net (loss)/income $ (1,033,000) $ 1,755,000
============ ============
Basic (loss)/earnings per common share:
Income before cumulative change in
accounting principle $ 0.19 $ 0.13
Cumulative change in accounting principle (0.26) --
------------ ------------
Net (loss)/income $ (0.07) $ 0.13
============ ============
Diluted (loss)/earnings per common share:
Income before cumulative change in
accounting principle $ 0.17 $ 0.12
Cumulative change in accounting principle (0.23) --
------------ ------------
Net (loss)/income $ (0.06) $ 0.12
============ ============
Weighted average common shares outstanding:
Basic 14,327,000 13,384,000
============ ============
Diluted 16,343,000 15,177,000
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
SEPTEMBER 30
-------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net (loss)/income $ (1,033,000) $ 1,755,000
Adjustments to reconcile net (loss)/income to
net cash provided by operating activities
Cumulative change in accounting principle 3,754,000 --
Depreciation of property and equipment 707,000 152,000
Amortization of goodwill and other
intangible assets 1,277,000 847,000
Amortization of deferred financing costs 155,000 81,000
Provision for doubtful accounts 117,000 7,000
Other 12,000 11,000
Increase (decrease) in cash attributable to
changes in assets and liabilities, net of
amounts applicable to acquired businesses:
Accounts receivable (1,371,000) 644,000
Inventories 26,000 (870,000)
Other current assets 1,024,000 (227,000)
Other assets (810,000) (289,000)
Accounts payable and accrued expenses (4,535,000) (1,980,000)
Income taxes payable 1,653,000 268,000
------------ ------------
Net cash provided by operating activities 976,000 399,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (4,625,000) (20,439,000)
Acquisition of property and equipment (552,000) (76,000)
PROCEEDS FROM ASSETS HELD FOR SALE 212,000 --
------------ ------------
Net cash used in investing activities (4,965,000) (20,515,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayments) from/of bank revolving
credit facility, net 1,500,000 (650,000)
Proceeds from term loan -- 60,000,000
Payments on term loan (78,300,000) (18,600,000)
Costs in connection with bank financing (7,000) (435,000)
Proceeds from private equity offering, net of
related expenses 80,589,000 --
Proceeds from exercise of warrants and options,
net of related expenses 312,000 311,000
Payment of debt from acquired company -- (20,678,000)
Payment of other long-term debt (86,000) --
Other - net -- (39,000)
------------ ------------
Net cash provided by financing activities 4,008,000 19,909,000
------------ ------------
Net increase (decrease) in cash 19,000 (207,000)
Cash at beginning of period 510,000 495,000
------------ ------------
Cash at end of period $ 529,000 $ 288,000
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
-------------------- --------------------
Additional
Amount Paid-in Retained
Shares at $.01 Capital Earnings Shares Amount Total
----------- ----------- ------------ ----------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 14,119,640 $ 141,000 $ 90,822,000 $19,313,000 100,000 $(275,000) $110,001,000
Issuance of 670,234
shares in connection with the
acquisition of trademarks 670,234 7,000 19,055,000 19,062,000
Issuance of 2,837,343 shares in
connection with private equity
offering, net of related
expenses 2,837,343 28,000 78,870,000 78,898,000
Conversion of promissory notes 409,507 4,000 9,167,000 9,171,000
Exercise of Common Stock
warrants, net of related
expenses 50,000 1,000 299,000 300,000
Exercise of stock options 1,200 12,000 12,000
Non-cash compensation charge 12,000 12,000
Net loss for the period (1,033,000) (1,033,000)
----------- ----------- ------------ ----------- ------- --------- ------------
Balance at September 30, 1999 18,087,924 $ 181,000 $198,237,000 $18,280,000 100,000 $(275,000) $216,423,000
=========== =========== ============ =========== ======= ========= ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL:
The Company and its subsidiaries operate in one business segment: the
sale of natural, organic and other food products. Beginning with fiscal 1999,
approximately 75% (100% in prior years) of the Company's revenues are derived
from products which are manufactured by various co- packers. There were no
co-packers who manufactured 10% or more of our products.
The Company's natural food product lines consist of Hain Pure Foods,
Westbrae Natural, Arrowhead Mills, DeBoles Nutritional Foods, Health Valley
Foods, Sahara Natural Foods, Breadshop's Foods, Earth's Best (baby foods), and
Garden of Eatin'. Other product lines include Hollywood Foods (principally
healthy cooking oils), Weight Watchers (weight-loss and portion controlled dry
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).
Certain reclassifications have been made in the financial statements to
conform to current year's presentation.
2. BASIS OF PRESENTATION:
All amounts in the financial statements have been rounded to the
nearest thousand dollars, except share and per share amounts.
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information 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, 1999 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. CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE:
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
was adopted by the Company effective July 1, 1999, and requires 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
6
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
a new territory, conducting business with a new class of customer or commencing
some new operations. In accordance with SOP 98-5, the Company recorded a
one-time non-cash charge in the first quarter of fiscal 2000 reflecting the
cumulative effect of a change in accounting principle, in the amount of $3.8
million, net of tax benefit, representing start-up costs capitalized as of the
beginning of fiscal year 2000.
4. STOCKHOLDERS' EQUITY:
On September 27, 1999, the Company announced that it had entered into a
global strategic alliance with H.J. Heinz Company ("Heinz") related to the
production and distribution of natural products domestically and
internationally. In connection with the alliance, the Company issued 2,837,343
shares (the "Investment Shares") of its common stock, par value $.01 per share
(the "Common Stock") to Earth's Best, Inc. ("Earth's Best"), a wholly owned
subsidiary of Heinz, for an aggregate purchase price of $82,383,843 under a
Securities Purchase Agreement dated September 24, 1999 between the Company and
Earth's Best. The Company used $75 million of the proceeds from this private
equity offering to reduce its borrowings under its debt facility. The remainder
of the proceeds were used to pay transaction costs and for general working
capital purposes.
In addition, in a separate transaction, the Company announced on
September 27, 1999 that it had purchased the trademarks of Earth's Best (the
"Acquisition") under a Purchase and Sale Agreement dated September 24, 1999
among the Company, Earth's Best and Heinz (the "Acquisition Agreement"). In
consideration for the trademarks, the Company paid a combination of $4,620,000
in cash and 670,234 shares of Common Stock, valued at $17,380,000 (the
"Acquisition Shares" and together with the Investment Shares, the "Shares").
Earth's Best has agreed to change its name following the consummation of the
Acquisition. This purchase agreement terminates a license agreement dated April
6, 1999 between the Company and Heinz whereby the Company was granted exclusive
sale and distribution rights of the Earth's Best baby food products into the
United States retail grocery and natural food channel. Under the Acquisition,
the Company will be able to sell, market and distribute the Earth's Best
products both domestically and internationally and have a more efficient means
to develop new products.
For accounting purposes, the two separate transactions mentioned above,
were required to be accounted for using a blended stock price value of $28.44.
Accordingly, the blended rate purchase price of the Earth's Best trademark from
Heinz amounted to approximately $22 million, net of transaction costs.
In connection with the issuance of the Shares, the Company and Earth's
Best have entered into an Investor's Agreement dated September 24, 1999 that
sets forth certain restrictions and obligations of the
7
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Company and Earth's Best and its affiliates relating to the Shares, including
restrictions and obligations relating to (1) the appointment by the Company of
one member to its board of directors nominated by Earth's Best and one member
jointly nominated by Earth's Best and the Company, (2) an 18-month standstill
period during which Earth's Best and its affiliates may not purchase or sell
shares of Common Stock, subject to certain exceptions, (3) a right of first
offer granted to the Company by Heinz and its affiliates to the Company upon the
sale of Shares by Earth's Best and its affiliates following the standstill
period, (4) preemptive rights granted to Earth's Best and its affiliates
relating to the future issuance by the Company of shares of capital stock and
(5) confidentiality.
In addition, the Company and Earth's Best have entered into a
Registration Rights Agreement dated September 24, 1999 that provides Earth's
Best and its affiliates customary registration rights relating to the Shares,
including two demand registration rights and "piggy-back"
registration rights.
5. ACQUISITIONS:
On May 18, 1999, the Company acquired Natural Nutrition Group, Inc.
("NNG"). NNG is a manufacturer and marketer of premium natural and organic food
products primarily under its Health Valley, Breadshop's and Sahara brands. The
aggregate purchase price, including acquisition costs, amounted to approximately
$82 million. The purchase price was paid by approximately $72 million in cash
and the issuance of $10 million in convertible promissory notes. To finance the
cash portion of the acquisition, among other things, the Company entered into a
$160 million senior secured loan which provided for a $30 million revolving
credit facility and $130 million in term loans. The aggregate purchase price
paid in excess of net assets acquired amounted to $61.4 million. The purchase
price allocations have been made on a preliminary basis, subject to adjustment.
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 brand. In addition, the Company entered into a licensing agreement to
sell products under the Near East brand through December 2000. 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.
8
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Unaudited pro forma results of operations (in thousands, except per
share amounts) for the three months ended September 30, 1998, assuming the above
acquisition, excluding Nile Spice which is not material, had occurred as of July
1, 1998 are as follows:
Three Months Ended
September 30, 1998
-----------------
Net sales $ 60,618
Income before cumulative change in
accounting principle 18
==========
Net loss $ (3,736)
==========
Income before cumulative change in
accounting principle per share:
Basic and diluted $ 0.00
==========
Net loss per share:
Basic $ (0.28)
Diluted (a)
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.
(a) Pro forma diluted loss per common share is not shown for the three months
ended September 30, 1998, as the results would be antidilutive.
6. INVENTORIES:
Inventories consist of the following:
September 30, 1999 June 30, 1999
------------------ -------------
Finished goods $ 19,231,000 $18,750,000
Raw materials and packaging 9,951,000 10,458,000
------------ ----------
$ 29,182,000 $29,208,000
============ ===========
9
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
September 30, June 30,
1999 1999
-------------- -------------
Machinery & equipment $ 8,633,000 $ 8,429,000
Assets held for sale 4,984,000 5,248,000
Furniture and fixtures 1,355,000 1,314,000
Leasehold improvements 4,916,000 4,557,000
----------- ----------
19,888,000 19,548,000
Less:
Accumulated depreciation and
amortization 2,308,000 1,601,000
----------- -----------
$17,580,000 $17,947,000
=========== ===========
Assets held for sale were acquired in business acquisitions during the
year ended June 30, 1999 and have been recorded at their respective fair values
on the dates of acquisition. Management intends to dispose of these assets in
fiscal 2000.
8. LONG-TERM DEBT:
Long-term debt consists of the following:
September 30, June 30,
1999 1999
------------ ------------
Senior Term Loans (A) $ 51,700,000 $130,000,000
Revolving Credit (A) 1,500,000 -
Convertible Promissory Notes (B) 829,000 10,000,000
Notes payable to sellers in
connection with acquisitions of
businesses, and other long-term
debt (C) 1,039,000 1,125,000
------------ ------------
55,068,000 141,125,000
Current portion 12,341,000 10,442,000
------------ ------------
$ 42,727,000 $130,683,000
============ ============
(A) Senior Term Loans
On May 18, 1999, in connection with the acquisition of NNG, the Company
arranged for a $160 million senior secured loan facility ("Amended Facility"),
which provided for a $30 million credit facility and $130 million of term loans.
This Amended Facility was used to complete the acquisition of NNG, refinance the
Company's then existing indebtedness, ($57.3 million) and provide for ongoing
working capital needs. Under the Amended Facility, the term loans consist of a
$75 million Tranche I loan and a $55 million Tranche II loan. The Tranche
10
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
I loan requires principal quarterly installments starting September 30, 1999
through June 30, 2004. The Tranche II loan has similar repayment features, but
matures June 30, 2006. 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. Both Tranche
loans were borrowed on a LIBOR basis.
In connection with the strategic alliance with Heinz, and proceeds from
the issuance of Investment Shares, $75 million of the Tranche I and II loans
were repaid, on a pro rata basis, on September 27, 1999.
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 Amended Facility are collateralized by principally all of
the Company's assets. The Amended Facility contains certain financial and other
restrictive covenants, as amended, 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 September 30, 1999, $28.5 million was available
under the Company's revolving credit facility.
(B) Convertible Promissory Notes
In connection with the acquisition of NNG, the Company issued $10
million of convertible promissory notes (the "Notes") bearing interest at 7%,
payable quarterly commencing September 30, 1999. The Notes are convertible into
shares of the Company's Common Stock. The number of shares of Common Stock to be
issued upon conversion of each Note is based upon the conversion price equal to
the average of the closing prices of the Company's Common Stock for the ten
trading days prior to the date of conversion of the Note. During the three
months ended September 30, 1999, holders of approximately $9.2 million in Notes
have converted such Notes into 409,507 shares of the Company's Common Stock.
(C) Other Long Term Debt
In connection with an acquisition NNG consummated on January 12, 1999,
prior to the Company's acquisition of NNG, an $800,000 nonconvertible promissory
note bearing interest at prime (8% at June 30, 1999), was issued to the seller.
This promissory note requires payment of principal in installments starting June
30, 1999 through December 31, 2002.
11
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 for the three months ended September 30, 1999 and
1998.
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Numerator:
Income before cumulative change in
accounting principle -
Numerator for basic and diluted earnings per share $ 2,721,000 $ 1,755,000
Cumulative change in accounting principle (3,754,000) --
------------ -----------
Net (loss)/income $ (1,033,000) $ 1,755,000
============ ===========
Denominator:
Denominator for basic earnings per share -
weighted average shares outstanding
during the period(a) 14,327,000 13,384,000
------------ -----------
Effect of dilutive securities (b):
Stock options 1,394,000 1,028,000
Warrants 622,000 765,000
------------ -----------
2,016,000 1,793,000
------------ -----------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 16,343,000 15,177,000
============ ===========
Basic (loss)/earnings per share:
Income before cumulative change in
accounting principle $ 0.19 $ .13
Cumulative change in accounting principle (0.26) --
------------ -----------
Net (loss)/income $ (0.07) $ .13
============ ===========
Diluted (loss)/earnings per share:
Income before cumulative change in
accounting principle $ 0.17 $ .12
Cumulative change in accounting principle (0.23) --
------------ -----------
Net (loss)/income $ (0.06) $ .12
============ ===========
</TABLE>
(a) The issuance of the Investment Shares to Heinz on September 27, 1999 did not
materially affect the weighted average shares computation. The resulting
increase in weighted average shares outstanding is primarily due to
approximately $9.2 million in Notes converted into 409,507 shares of common
stock and, since September 1998, exercises of warrants and stock options into
shares of Common Stock.
(b) The increase in the amount of dilutive potential shares in the 1999 period
was substantially attributable to an increase in the market price of the
Company's Common Stock over the prior year.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company made the following acquisitions or entered into licensing
agreements during the twelve months ended September 30, 1999:
On April 6, 1999, the Company expanded its licensing agreement with
Heinz for Earth's Best baby food products whereby the Company was given the
exclusive sale and distribution rights of the Earth's Best baby food products
into the United States retail grocery and natural food channels. On September
27, 1999, the Company announced it had purchased the trademarks of Earth's Best
from Heinz, which terminated the April 6, 1999 license agreement, which allows
the Company the opportunity to sell Earth's Best both in domestic and
international markets and provides the Company with the ability to develop new
products.
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 Near East brand is sold under a licensing
agreement through December 2000.
On May 18, 1999, the Company acquired NNG. NNG is a manufacturer and
marketer of premium natural and organic food products primarily under its Health
Valley, Breadshop's and Sahara brands.
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
Net sales for the three months ended September 30, 1999 were $68.1
million, an increase of 56% over net sales of $43.5 million in the quarter ended
September 30, 1998. 87% of the increase was derived from revenues of acquired
businesses or revenues resulting from licensing agreements entered into during
fiscal 1999.
Gross profit for the three months ended September 30, 1999 increased by
approximately $11.2 million to $28 million (41.2% of net sales) as compared to
$16.8 million (38.6% of net sales) in the 1998 period. The increase in gross
profit dollars was a direct result of the increased sales level in 1999. The
improvement in gross profit percentage of 2.6% percentage points is due to a
combination of: sales mix, integration of certain manufactured product lines
into our Irwindale manufacturing facility resulting in improved gross profit
percentage yields and certain acquired businesses and/or product lines from
licensing agreements producing higher gross profit percentages than existing
businesses.
13
<PAGE>
Selling, general and administrative expenses increased by $7.5 million
to $19 million for the three months ended September 30, 1999 as compared to
$11.5 million in the September 30, 1998 quarter. Such expenses, as a percentage
of net sales, amounted to 28% for the three months ended September 30, 1999
compared with 26.4% in the September 30, 1998 quarter. Approximately 1.9% of
this increase is a result of higher trade and consumer spending offset by a
favorable .3% decrease in other selling, general and administrative expense
components. The improvement of .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. Not all of the administrative functions of the businesses
acquired during fiscal 1999 have as yet been integrated. It is expected that the
integration process may not be completed until the end of fiscal 2000. The
higher trade and consumer spending is due to the Company aggressively promoting
awareness of its newly acquired brands and products in an effort to expand
product distribution into existing and new market channels and territories.
The Company plans to continue to invest in consumer spending and to
enhance brand equity while closely monitoring its trade spending. These consumer
spending categories include, but are not limited to, consumer advertising using
radio and print, coupons, direct mailing programs, and other forms of
promotions. There is no guarantee that these investments in consumer spending
will be successful, and as the Company attempts to monitor its trade spending
and increase consumer awareness, there may be a period of overlap.
Amortization of goodwill and other intangible assets increased by $.43
million from the September 1998 period to the September 1999 period. All of this
increase was attributable to amortization of goodwill acquired in connection
with the acquisitions during fiscal 1999. Amortization expense in total,
amounted to 1.9% of net sales for both the three months ended September 30, 1999
and September 30, 1998 periods.
Operating income increased by $3.3 million compared to the 1998 period.
Operating income as a percentage of net sales, amounted to 11.3%, an increase of
1.1% over the 1998 period. This resulted principally from higher gross profit
margins as a percentage of net sales offset by higher selling, general and
administrative expenses as a percentage of net sales.
Interest and financing costs for the 1999 period amounted to $2.8
million, an increase of $1.4 million over the 1998 period. The increase was due
to the debt incurred in connection with the fiscal year 1999 acquisitions. The
$75 million repayment of loans, incurred in connection with fiscal 1999
acquisitions, as more fully described in Footnote 4 to the consolidated
financial statements, on September 27, 1999 will enable the Company to achieve
interest cost savings during the remainder of the fiscal year from both lower
interest rates and lower outstanding debt.
14
<PAGE>
Income before income taxes and cumulative change in accounting
principle for the three months ended September 30, 1999 increased to $4.9
million (7.3% of net sales) from $3.1 million (7.1% of net sales) in the 1998
period. This improvement in profitability was attributable to the aforementioned
increase in operating income as a percentage of sales offset by higher interest
expenses, as a percentage of sales.
Income taxes increased to $2.2 million for the three months ended
September 30, 1999 compared to $1.4 million in the 1998 period. The effective
tax rate was 45% in the 1999 period compared with 43.5% in the 1998 period. The
increase is largely a result of the increased amortization of nondeductible
goodwill arising from fiscal year 1999 acquisitions.
Income before cumulative change in accounting principle for the three
months ended September 30, 1999 increased by approximately $1 million over the
corresponding 1998 period and amounted to 4% of net sales, which is comparable
to the 4% achieved in the 1998 period.
Change in Accounting Principle:
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 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. Any future start-up costs are
to be expensed as incurred. Start up activities are broadly defined 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 operation. In accordance with SOP 98- 5, the Company
recorded a one-time non-cash charge in the first quarter of fiscal 2000
reflecting the cumulative effect of a change in accounting principle, in the
amount of $3.8 million, net of tax benefit, representing such start-up costs
capitalized as of the beginning of fiscal year 2000.
Liquidity and Capital Resources
The Company requires liquidity for working capital needs and debt
service requirements.
The Company had working capital of $17.4 million at September 30, 1999
as compared to $18.9 million at June 30, 1999. The decrease in working capital
is primarily attributable to the higher current principal debt service
requirements by $1.9 million at September 30, 1999 when compared to June 30,
1999. However, while the Company's current principal debt service requirements
increased, the Company's ratio of current assets to current liabilities of 1.44
at September 30, 1999 is comparable to the ratio of 1.47 at June 30, 1999. This
stability in the current ratio was primarily a result of higher operating cash
flows of $1 million for the three months ended September 30, 1999 vs $.4 million
for the same period in 1998.
15
<PAGE>
On May 18, 1999, in connection with the acquisition of NNG, the Company
arranged for a $160 million senior secured loan facility ("Amended Facility"),
which provided for a $30 million credit facility and $130 million of term loans.
This Amended Facility was used to complete the acquisition of NNG, refinance the
Company's then existing indebtedness, ($57.3 million) and provide for ongoing
working capital needs. Under the Amended Facility, the term loans consist of a
$75 million Tranche I loan and a $55 million Tranche II loan.
On September 27, 1999, the Company announced that it had entered into a
global strategic alliance with Heinz related to the production and distribution
of natural products domestically and internationally. In connection with the
alliance, the Company issued 2,837,343 shares of its common stock, par value
$.01 per share to Earth's Best, Inc. ("Earth's Best"), a wholly owned subsidiary
of Heinz, for an aggregate purchase price of $82,383,843 under a Securities
Purchase Agreement dated September 24, 1999 between the Company and Earth's
Best. The Company used $75 million of the proceeds from this private equity
offering to reduce its borrowings under its debt facility. The remainder of the
proceeds were used to pay transaction costs.
The interest rate on the Amended 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 Amended Facility term loans were
borrowed on a LIBOR basis during fiscal 2000. The Tranche I loan requires
principal quarterly installments starting September 30, 1999 through June 30,
2004. The Tranche II loan has similar repayment features, but matures June 30,
2006.
Amounts outstanding under the Amended Facility are collateralized by
principally all of the Company's assets. The Amended Facility also contains
certain financial and other restrictive covenants. The Company was in compliance
with such covenants at September 30, 1999. As of September 30, 1999, $28.5
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 and other business transactions.
The aggregate principal payments on the Amended Facility for the twelve
months ending September 30, 2000 are $10.63 million. The Company believes that
projected cash flows generated from its operations and amounts available under
the revolving credit facility should be sufficient to fund its debt service
requirements, working capital needs, anticipated capital expenditures and other
operating expenses for the foreseeable future. The revolving credit facility
provides the Company with available borrowings up to an aggregate principal
amount of $30 million.
The Company's term loans impose certain restrictions, as amended, on
the Company regarding capital expenditures, limit the Company's ability to incur
additional indebtedness, dispose of assets, make
16
<PAGE>
repayments of indebtedness or amendments of debt instruments, pay distributions,
create liens on assets, enter into sale and leaseback transactions, investments,
loans or advances and acquisitions. Such restrictions could limit the Company's
ability to respond to market conditions, to provide for unanticipated capital
investments or to take advantage of business or acquisition opportunities.
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 both its information and non-information 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. NNG's
consumer affairs and telephone voice-mail message system, which are not
considered critical to NNG's operations are not Year 2000 compliant; however,
the Company will integrate or replace these systems 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 communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company has commenced a process of formalizing these communications
through the completion of questionnaires. 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.
In the event that we do not complete our Year 2000 conversion, we will
manually perform those tasks which would otherwise be performed by our non-year
2000 compliant systems until such systems are upgraded or replaced.
SEASONALITY
Sales of food products consumed in the home generally decline to some
degree during the Summer vacation months (the first quarter of the Company's
fiscal year). 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.
17
<PAGE>
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Financial Data Schedule (Exhibit 27)
(b) Reports on Form 8-K
On September 27, 1999, the Company filed reports on Form 8-K
announcing that it had entered into a strategic alliance with
H.J. Heinz Company ("Heinz") resulting in the issuance of
2,837,343 shares of its common stock. In addition, in a
separate transaction, the Company also announced on September
27, 1999, it had purchased the trademarks of Earth's Best (a
Heinz company) under a purchase and sale agreement dated
September 24, 1999. No financial information was required to
be filed in this Form 8-K in accordance with the rules and
regulations of Regulation S-X.
The Company did not file any other reports on Form 8-K during
the three months ended September 30, 1999.
18
<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: November 12, 1999 /S/ IRWIN D. SIMON
-----------------------------
Irwin D. Simon,
President and Chief
Executive Officer
Date: November 12, 1999 /S/GARY M. JACOBS
-----------------------------
Gary M. Jacobs,
Senior Vice President-Finance
and Chief Financial Officer
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