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: 03/31/00 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.
18,411,655 shares of Common Stock $.01 par value, as of May 8, 2000.
<PAGE>
THE HAIN FOOD GROUP, INC.
INDEX
Page
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2000
(unaudited) and June 30, 1999 2
Consolidated Statements of Income - Three months and
nine months ended March 31, 2000 and 1999 (unaudited) 3
Consolidated Statements of Cash Flows - Nine months
ended March 31, 2000 and 1999 (unaudited) 4
Consolidated Statement of Stockholders' Equity - Nine
months ended March 31, 2000 (unaudited) 5
Notes to Consolidated Financial Statements 6 to 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 to 19
Part II Other Information
Items 1 and 3 to 5 are not applicable
Item 2 - Change in Securities 20
Item 6 - Exhibits and Reports on Form 8-K 20
Signatures 21
1
<PAGE>
PART I - ITEM 1 - FINANCIAL INFORMATION
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
------ -----
(Unaudited) (Note)
ASSETS
Current assets:
<S> <C> <C>
Cash $ 208,000 $ 510,000
Trade accounts receivable, less allowance
for doubtful accounts of $522,000 and $560,000 29,336,000 24,278,000
Inventories 35,241,000 29,208,000
Recoverable income taxes - 387,000
Other current assets 2,755,000 4,965,000
------------ -----------
Total Current Assets 67,540,000 59,348,000
Property and equipment, net of accumulated
depreciation of $3,778,000 and $1,601,000 17,660,000 17,947,000
Goodwill and other intangible assets, net of
accumulated amortization of $11,003,000 and
$6,884,000 212,869,000 193,398,000
Deferred financing cost, net of accumulated
amortization of $573,000 and $107,000 3,165,000 3,605,000
Deferred income taxes 3,431,000 884,000
Other assets 3,181,000 6,640,000
------------ ------------
Total Assets $307,846,000 $281,822,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 23,442,000 $ 30,029,000
Current portion of long-term debt 14,319,000 10,442,000
Income taxes payable 7,076,000 -
------------ ------------
Total current liabilities 44,837,000 40,471,000
Long-term debt, less current portion 33,531,000 130,683,000
Other liabilities - 667,000
------------ ------------
Total liabilities 78,368,000 171,821,000
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 18,411,205 and
14,119,640 shares 184,000 141,000
Additional paid-in capital 201,519,000 90,822,000
Retained earnings 28,050,000 19,313,000
------------ ------------
229,753,000 110,276,000
Less: 100,000 shares of treasury stock, at cost 275,000 275,000
------------ ------------
Total stockholders' equity 229,478,000 110,001,000
------------ ------------
Total liabilities and stockholders' equity $307,846,000 $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 Nine Months Ended
March 31, March 31,
------------------------------------- ---------------------------
2000 1999 2000 1999
------------------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net sales $77,037,000 $50,833,000 $226,123,000 $144,931,000
Cost of Goods Sold 45,655,000 30,494,000 133,559,000 87,574,000
------------------------------ -------------------------------
Gross profit 31,382,000 20,339,000 92,564,000 57,357,000
Selling, general & adminstrative expenses 20,675,000 12,655,000 61,950,000 37,752,000
Amortization of goodwill and other 1,422,000 863,000 4,119,000 2,565,000
intangible assets
------------------------------ -------------------------------
Operating income 9,285,000 6,821,000 26,495,000 17,040,000
Other income, net 619,000 - 1,372,000 -
Interest expense, net (1,016,000) (1,088,000) (4,691,000) (3,500,000)
Amortization of deferred financing costs (156,000) (81,000) (466,000) (244,000)
------------------------------ -------------------------------
Income before income taxes and cumulative 8,732,000 5,652,000 22,710,000 13,296,000
change in accounting principle
Provision for income taxes 3,929,000 2,459,000 10,219,000 5,784,000
------------------------------ -------------------------------
Income before cumulative change in 4,803,000 3,193,000 12,491,000 7,512,000
accounting principle
Cumulative change in accounting principle - - (3,754,000) -
------------------------------ -------------------------------
Net income $ 4,803,000 $ 3,193,000 $ 8,737,000 $7,512,000
============================== ===============================
Basic earnings per common shares:
Income before cumulative change in $ 0.26 $ 0.23 $ 0.74 $ 0.56
accounting principle
Cumulative change in accounting principle - - $ (0.22) -
------------------------------ -------------------------------
Net income $ 0.26 $ 0.23 $ 0.52 $ 0.56
============================== ===============================
Diluted earnings per common share:
Income before cumulative change in $ 0.25 $ 0.21 $ 0.68 $ 0.49
accounting principle
Cumulative change in accounting principle - - $ (0.20) -
------------------------------ -------------------------------
Net income $ 0.25 $ 0.21 $ 0.48 $ 0.49
============================== ===============================
Weighted average common shares outstanding
Basic 18,230,000 13,690,000 16,866,000 13,516,000
============================== ===============================
Diluted 19,507,000 15,562,000 18,392,000 15,392,000
============================== ===============================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------
2000 1999
------ -----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 8,737,000 $ 7,512,000
Adjustments to reconcile net income to net cash
provided by operating activities
Cumulative change in accounting principle 3,754,000 -
Gain on sale of assets held for sale (706,000) -
Depreciation of property and equipment 2,177,000 520,000
Amortization of goodwill and other intangible
assets 4,119,000 2,565,000
Amortization of deferred financing costs 466,000 244,000
Provision for doubtful accounts 178,000 35,000
Other 35,000 35,000
Increase (decrease) in cash attributable to
changes in assets and liabilities, net of amounts
applicable to acquired businesses:
Accounts receivable (5,236,000) (3,617,000)
Inventories (6,033,000) 1,159,000
Other current assets 299,000 (1,992,000)
Other assets (2,110,000) (2,631,000)
Accounts payable and accrued expenses (7,621,000) (1,320,000)
Income taxes payable 7,463,000 3,084,000
----------- -----------
Net cash provided by operating
activities 5,522,000 5,594,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (4,673,000) (24,952,000)
Acquisition of property and equipment (2,333,000) (668,000)
Proceeds from sale of assets 1,149,000 -
----------- ----------
Net cash used in investing activities (5,857,000) (25,620,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank revolving credit facility, net 2,150,000 250,000
Proceeds from term loan - 60,000,000
Payments on term loan (85,256,000) (20,350,000)
Costs in connection with bank financing (26,000) (750,000)
Proceeds from private equity stock offering, net
of related expenses 80,589,000 -
Proceeds from exercise of warrants and options,
net of related expenses 2,768,000 1,817,000
Payment of debt from acquired company - (20,678,000)
Payment of other long-term debt (192,000) -
Other - net - (316,000)
----------- -----------
Net cash provided by financing activities 33,000 19,973,000
----------- ------------
Net decrease in cash (302,000) (53,000)
Cash at beginning of period 510,000 495,000
----------- ------------
Cash at end of period $ 208,000 $ 442,000
=========== ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2000
<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 shares to Heinz,
net of related expenses 3,507,577 35,000 97,925,000 97,960,000
Conversion of promissory notes 442,538 4,000 9,973,000 9,977,000
Exercise of Common Stock
warrants, net of related
expenses 150,000 2,000 711,000 713,000
Exercise of stock options 191,450 2,000 2,053,000 2,055,000
Non-cash compensation charge 35,000 35,000
Net income for the period 8,737,000 8,737,000
------------ ------------- ------------- ------------- ---------- ----------- --------------
Balance at March 31, 2000 18,411,205 $ 184,000 $201,519,000 $28,050,000 100,000 $(275,000) $229,478,000
============ ============= ============= ============= ========== =========== ==============
</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), Terra
Chips (natural vegetable chips), Boston Popcorn and Garden of Eatin' (snack
products) and Nile Spice (dry soup products). 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) and Kineret (kosher foods 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 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.
6
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. STOCKHOLDERS' EQUITY:
In September 1999, the Company entered into a global strategic alliance
with H.J. Heinz Company ("Heinz") related to the production and distribution of
natural products domestically and internationally, and purchased from Heinz the
trademarks of its Earth's Best baby food line of products. 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 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"). This purchase agreement
terminates a license agreement dated April 1, 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. With the acquisition of these trademarks, 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. 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 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.
7
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. ACQUISITION AND PENDING MERGER:
Acquisition of Natural Nutrition Group
On May 18, 1999, the Company acquired Natural Nutrition Group, Inc. and
its wholly-owned subsidiaries ("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 $61.5 million. The purchase price allocations have been made on a
preliminary basis, subject to adjustment.
Unaudited pro forma results of operations (in thousands, except per
share amounts) for the nine months ended March 31, 1999, assuming the NNG
acquisition had occurred as of July 1, 1998 are as follows:
Nine Months Ended
March 31, 1999
--------------
Net sales $ 199,789
=========
Net income $ 2,995
=========
Net income per share:
Basic $ 0.22
=========
Diluted $ 0.19
=========
The pro forma operating results shown above are not necessarily
indicative of operations in the periods following acquisition.
The above acquisition has been accounted for as a purchase and,
therefore, operating results have been included in the accompanying financial
statements from the date of acquisition. Goodwill arising from the acquisition
is being amortized on a straight-line basis over 40 years.
Pending Merger
On March 6, 2000 the Company and Celestial Seasonings, Inc.
("Celestial") jointly announced that they had executed an agreement pursuant to
which the Company would acquire the stock of publicly traded Celestial (the
"Merger").
Under the terms of the agreement, 1.265 shares of the Company's common
stock will be exchanged for each outstanding share of Celestial common stock.
The Merger is intended to qualify as a tax-free reorganization for federal
income tax purposes and as a "pooling of interests" for accounting purposes.
The Company will record all merger related expenses upon consummation of the
8
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Merger as "merger related charges" within its Consolidated Statements of Income
at June 30, 2000. Consummation of the acquisition is subject to certain
conditions, including the approval of the stockholders of both the Company and
Celestial. The Merger is expected to close on May 30, 2000, the date of the
Stockholder's Meeting. In addition to this Merger, stockholders will be asked to
vote on, among other items, to: change the Company's corporate name to The Hain
Celestial Group, Inc.; amend the Company's certificate of incorporation to
increase the authorized number of shares of the Company's common stock from 40
million to 100 million and increase the number of shares available for grant
under the Company's employee stock option plan and adopt a new directors stock
plan.
6. INVENTORIES:
Inventories consist of the following:
March 31, 2000 June 30, 1999
-------------- -------------
Finished goods $ 21,743,000 $18,750,000
Raw materials and packaging 13,498,000 10,458,000
------------ ----------
$ 35,241,000 $29,208,000
============ ===========
7. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
March 31, June 30,
2000 1999
---------- ---------
Land $ 118,000 -
Building and improvements 1,162,000 -
Machinery & equipment 13,308,000 $ 8,974,000
Assets held for sale 295,000 4,703,000
Furniture and fixtures 1,487,000 1,314,000
Leasehold improvements 5,068,000 4,557,000
------------ -----------
21,438,000 19,548,000
Less:
Accumulated depreciation and
amortization 3,778,000 1,601,000
------------ -----------
$ 17,660,000 $17,947,000
============ ===========
Assets held for sale were acquired from prior business acquisitions and
have been recorded at their respective fair values on the dates of acquisition.
During the quarter, the Company sold equipment with a book value of
approximately $440,000 for $1.1 million. The resulting gain is included in the
Consolidated Statement of Income in the caption "other income, net". During
fiscal 2000, the Company has transferred approximately $4 million from assets
held for sale to their respective categories as management determined that those
assets were utilizable to the Company. Management intends to dispose of the
remaining assets held for sale in calendar 2000.
9
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. LONG-TERM DEBT:
Long-term debt consists of the following:
March 31, June 30,
2000 1999
----------- ----------
Senior Term Loans (A) $ 44,746,000 $130,000,000
Revolving Credit (A) 2,150,000 -
Convertible Promissory Notes (B) 23,000 10,000,000
Notes payable to sellers in
connection with acquisitions of
businesses, and other long-term
debt(C) 931,000 1,125,000
------------- ------------
47,850,000 141,125,000
Current portion 14,319,000 10,442,000
------------- ------------
$ 33,531,000 $130,683,000
============= ============
(A) Senior Term Loans and Revolving Credit
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 revolving 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 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 March 31, 2000, $27.9 million was available under
the Company's revolving credit facility.
10
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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 nine months
ended March 31, 2000, holders of $9,977,000 in Notes have converted such Notes
into 442,538 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 (8.5% at March 31, 2000), was issued to the
seller. This promissory note requires payment of principal in installments
through December 31, 2002.
11
<PAGE>
THE HAIN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
9. 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
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
---------- ---------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted
earnings per share -
Income before cumulative change
in accounting principle $ 4,803,000 $ 3,193,000 $12,491,000 $ 7,512,000
Cumulative change in accounting
principle - - (3,754,000) -
----------- ----------- ----------- -----------
Net income $ 4,803,000 $ 3,193,000 $ 8,737,000 $ 7,512,000
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings
per share - weighted average
shares outstanding during the
period 18,230,000 13,690,000 16,866,000 13,516,000
----------- ----------- ----------- -----------
Effect of dilutive securities:
Stock options 949,000 1,098,000 1,086,000 1,109,000
Warrants 328,000 774,000 440,000 767,000
----------- ----------- ----------- -----------
1,277,000 1,872,000 1,526,000 1,876,000
----------- ----------- ----------- -----------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 19,507,000 15,562,000 18,392,000 15,392,000
=========== =========== =========== ===========
Basic earnings per share:
Income before cumulative change
in accounting principle $ 0.26 $ 0.23 $ 0.74 $ 0.56
Cumulative change in accounting
principle - - (0.22) -
----------- ----------- ---------- -----------
Net income $ 0.26 $ 0.23 $ 0.52 $ 0.56
=========== =========== ========== ===========
Diluted earnings per share:
Income before cumulative change
in accounting principle $ 0.25 $ 0.21 $ 0.68 $ 0.49
Cumulative change in accounting
principle - - (0.20) -
----------- ----------- ---------- -----------
Net income $ 0.25 $ 0.21 $ 0.48 $ 0.49
=========== =========== ========== ===========
</TABLE>
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 since March 31, 1999:
On April 1, 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 1, 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 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. The NNG acquisition ("the acquisition" or
"acquired business") has been accounted for as a purchase. Consequently, the
operations of NNG are included in the results of operations from the respective
date of acquisition.
Results of Operations
Three months ended March 31, 2000
Net sales for the three months ended March 31, 2000 were $77.0 million,
an increase of 51.6% over net sales of $50.8 million in the quarter ended March
31, 1999. The strong 51.6% growth was impeded by production capacity issues,
specifically within certain Earth's Best baby foods ingredients and Terra
snacks, which the Company anticipates will be remedied over the next three to
six months. 76.7% of the increase was derived from revenues of businesses
acquired since March 1999.
Gross profit for the three months ended March 31, 2000 increased by
approximately $11.0 million to $31.4 million (40.7% of net sales) as compared to
$20.3 million (40.0% of net sales) in the corresponding 1999 period. The
increase in gross profit dollars was a direct result of the increased sales
level in 2000. The improvement in gross profit percentage of .7% percentage
points is due to a combination of sales mix, integration of certain manufactured
product lines resulting in improved gross profit percentage yields and certain
acquired businesses producing higher gross profit percentages than existing
businesses.
Selling, general and administrative expenses increased by $8.0 million
to $20.7 million for the three months ended March 31, 2000 as compared to $12.7
million in the March 31, 1999 quarter. Such expenses as a percentage of net
sales amounted to 26.8% for the three months ended March 31, 2000 compared with
24.9% in the March 31, 1999 quarter. This increase is primarily attributable to
a 4.1% increase in trade and consumer spending campaigns offset by a favorable
2.2% decrease in other selling, general and administrative expense components.
The improvement of 2.2% 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. To date, a substantial portion of
acquired businesses operations have been
13
<PAGE>
integrated within the Company and it is expected that the integration process
will be completed by the end of calendar 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 $.6
million from the March 1999 period to the March 2000 period. All of this
increase was attributable to amortization of goodwill and other intangible
assets acquired in connection with the acquisitions since March 1999.
Amortization expense in total amounted to 1.8% of net sales for the three months
ended March 31, 2000 and 1.7% of net sales for the three months ended March 31,
1999.
Operating income increased by $2.5 million compared to the 1999 period.
Operating income as a percentage of net sales amounted to 12.1%, compared with
13.4% in the March 1999 quarter. This percentage decrease resulted principally
from higher selling, general, administrative and amortization expenses as a
percentage of net sales off set by higher gross profit margins as a percentage
of net sales.
Other income, net for the three months ended March 2000 amounted to $.6
million. There was no other income in the comparable period. Other income
primarily resulted from gains on proceeds received from assets held for sale.
Interest and financing costs for the three months ended March 31, 2000
amounted to approximately $1.2 million, which is comparable to the corresponding
1999 period. Although amortization of financing costs increased over the prior
year as a result of higher deferred financing costs, interest cost is lower due
to lower average debt levels versus the corresponding 1999 period.
Income before income taxes for the three months ended March 31, 2000
increased to $8.7 million (11.3% of net sales) from $5.7 million (11.1% of net
sales) in the corresponding 1999 period. This $3.0 million improvement in
profitability was attributable to the aforementioned increase in operating
income, as well as the other income generated.
Income taxes increased to $3.9 million for the three months ended March
31, 2000 compared to $2.5 million in the corresponding 1999 period. The
effective tax rate was 45% in the 2000 period compared with 43.5% in the
corresponding 1999 period. The increase in the effective tax rate is largely a
result of the increased amortization of nondeductible goodwill arising from
fiscal year 1999 acquisitions.
Net income for the three months ended March 31, 2000 increased to $4.8
million (6.2% of net sales) from $3.2 million (6.3% of net sales) in the
corresponding 1999 period. This 50% improvement in earnings was attributable to
the aforementioned increase in income before income taxes, partially offset by
higher income taxes.
14
<PAGE>
Nine months ended March 31, 2000
Net sales for the nine months ended March 31, 2000 were $226.1 million,
an increase of 56% over net sales of $144.9 million in the nine months ended
March 31, 1999. 78% of the increase was derived from revenues of acquired
businesses or revenues resulting from licensing agreements entered into since
March 1999.
Gross profit for the nine months ended March 31, 2000 increased by
$35.2 million to $92.6 million (40.9% of net sales) as compared to $57.4 million
(39.6% of net sales) in the corresponding 1999 period. The increase in gross
profit dollars was a direct result of the increased sales level in 2000. The
improvement in gross profit percentage of 1.3% percentage points is due to a
combination of: sales mix, integration of certain manufactured product lines
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.
Selling, general and administrative expenses increased by $24.2 million
to $61.9 million for the nine months ended March 31, 2000 as compared to $37.8
million in the nine months ended March 31, 1999. Such expenses as a percentage
of net sales amounted to 27.4% for the nine months ended March 31, 2000 compared
with 26.0% in the nine months ended March 31, 1999. This increase is primarily
attributable to a 2.6% increase in trade and consumer spending offset by a
favorable 1.2% decrease in other selling, general and administrative expense
components. The improvement of 1.2% 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. To date, a substantial portion of acquired businesses operations
have been integrated within the Company and it is expected that the integration
process will be completed by the end of calendar 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.
Amortization of goodwill and other intangible assets increased by $1.6
million from the nine months ended March 1999 period to the corresponding 2000
period. Most of this increase was attributable to amortization of goodwill and
other intangibles acquired in connection with the acquisitions since March 1999.
Amortization expense in total, amounted to 1.8% of net sales for both the nine
months ended March 31, 2000 and 1999 periods.
Operating income for the nine months ended March 31, 2000 increased by
$9.5 million compared to the corresponding 1999 period. Operating income as a
percentage of net sales amounted to 11.7% and 11.8%, for the nine month periods
ended March 31, 2000 and 1999, respectively. This dollar increase resulted
principally from higher gross profit margins offset by higher selling, general
and administrative expenses.
Other income for the nine months ended March 31, 2000 amounted to $1.4
million. There was no other income in the corresponding 1999 period. The other
income is comprised of investment gains of $.75 million on marketable securities
purchased and sold during the fiscal second quarter of 2000 and $.6 million of
gains on proceeds received from sales of assets held for sale during the fiscal
third quarter of 2000.
15
<PAGE>
Interest and financing costs for the nine months ended March 31, 2000
amounted to approximately $5.2 million, an increase of $1.4 million over the
corresponding 1999 period. The increase was due to the debt incurred in
connection with the fiscal year 1999 acquisitions. The $75 million repayment of
loans, as more fully described in Footnote 4 to the consolidated financial
statements, on September 27, 1999, has enabled the Company to achieve interest
cost savings during the period from lower outstanding debt levels.
Income before income taxes and cumulative change in accounting
principle for the nine months ended March 31, 2000 increased to $22.7 million
(10% of net sales) from $13.3 million (9.2% of net sales) in the corresponding
1999 period. This improvement in profitability was attributable to the
aforementioned increase in operating income and other income, offset by higher
interest expense.
Income taxes increased to $10.2 million for the nine months ended March
31, 2000 compared to $5.8 million in the corresponding 1999 period. The
effective tax rate was 45% in the 2000 period compared with 43.5% in the
corresponding 1999 period. The increase in the effective tax rate 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 nine
months ended March 31, 2000 increased to $12.5 million (5.5% of net sales) from
$7.5 million (5.2% of net sales) in the corresponding 1999 period. This
improvement was attributable to the aforementioned increase in income before
income taxes and cumulative change in accounting principal, partially offset by
higher income taxes.
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 and a current ratio of $22.7 million
and 1.51, respectively, at March 31, 2000 compared to $18.9 million and 1.47,
respectively at June 30, 1999. The increase in working capital is primarily due
to cash provided by operations of $5.5 million.
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
16
<PAGE>
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 March 31, 2000. As of March 31, 2000, $27.9 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 March 31, 2000 are $11.875 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 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.
On March 6, 2000 the Company and Celestial Seasonings, Inc.
("Celestial") jointly announced that they had executed an agreement pursuant to
which the Company would acquire the stock of publicly traded Celestial (the
"Merger").
17
<PAGE>
Under the terms of the agreement, 1.265 shares of the Company's common
stock will be exchanged for each outstanding share of Celestial common stock.
The Merger is intended to qualify as a tax-free reorganization for federal
income tax purposes and as a "pooling of interests" for accounting purposes.
Consummation of the acquisition is subject to certain conditions, including the
approval of the stockholders of both the Company and Celestial. The Merger is
expected to close on May 30, 2000, the date of the stockholder's meeting.
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 completed an assessment of
both its information and non-information systems affected by the Year 2000 issue
and found only minor issues that required attention. Since January 1, 2000, the
Company has not experienced any material adverse effects on either its
information or non-information systems, nor any material adverse effects with
its suppliers, customers or other third parties.
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.
Note Regarding Forward Looking Information
Certain statements contained in this Quarterly 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 governments 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.
18
<PAGE>
Part II - OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds
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. In addition, as part of the consideration paid by the Company to Earth's
Best in connection with the Company's acquisition of the Earth's Best
trademarks, the Company issued 670,234 shares of its common stock to Earth's
Best.
The issuance of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of Securities Act for
transactions by an issuer not involving any public offering.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
Financial Data Schedule (Exhibit 27)
(b) Reports on Form 8-K
On March 13, 2000, the Company filed a report on Form 8-K
whereby it jointly announced with Celestial Seasonings, Inc.
("Celestial") that they had executed a definitive agreement
dated March 5, 2000 pursuant to which the Company would
acquire the stock of publicly traded Celestial. No financial
information was required to be filed at this time.
The Company did not file any other reports on Form 8-K during
the three months ended March 31, 2000.
19
<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 12, 2000 /s/ Irwin D. Simon
------------------
Irwin D. Simon,
President and Chief
Executive Officer
Date: May 12, 2000 /s/ Gary M. Jacobs
------------------
Gary M. Jacobs,
Senior Vice President-Finance
and Chief Financial Officer
20
<PAGE>
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