EXHIBIT 99.2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of International Home Foods, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of International Home
Foods, Inc. and its subsidiaries at December 31, 1999, and the results of their
operations and their cash flows for the year ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 11, 2000
36
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands, Except Per Share and Share Amounts) Year Ended December 31,
------------------------
1999
------------
Net sales $ 2,144,420
Cost of sales 1,139,702
------------
Gross profit 1,004,718
Marketing expenses 448,788
Selling, general and administrative expenses 268,103
Stock option compensation expense 264
------------
Income from operations 287,563
Interest expense 100,935
Gain on sale of business (15,779)
Other expense (income), net (606)
------------
Income before provision for income taxes 203,013
Provision for income taxes 99,583
------------
Net income $ 103,430
============
Basic earnings per share: 1.41
Shares used in computing basic earnings per share 73,538,693
============
Diluted earnings per share: $ 1.36
============
Shares used in computing diluted earnings per share 76,059,224
============
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands, Except Per Share and Share Amounts) December 31,
------------
1999
-----------
ASSETS
Current Assets:
Cash and cash equivalents $ 14,310
Accounts receivable, net of allowances 180,671
Inventories 282,911
Prepaid expenses and other current assets 34,345
Deferred income taxes 16,113
-----------
Total current assets 528,350
Property, plant and equipment, net 306,042
Intangible assets, net 432,732
Deferred income taxes 262,563
Other assets 19,686
-----------
Total assets $ 1,549,373
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Due to banks $ 22,457
Current portion of long-term debt 73,084
Revolving credit facility 78,536
Accounts payable 69,669
Accrued salaries, wages and benefits 22,288
Accrued advertising and promotion 39,550
Accrued interest 10,278
Other accrued liabilities 38,967
-----------
Total current liabilities 354,829
Long-term debt 1,024,378
Post-retirement benefits obligation 27,216
Other non-current liabilities 898
-----------
Total liabilities 1,407,321
-----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock - par value $.01 per share; authorized,
100,000,000 shares; no shares issued or outstanding $ --
Common stock - par value $.01 per share; authorized,
300,000,000 shares; issued 78,218,034 shares 782
Additional paid-in capital 62,475
Treasury stock, at cost: 4,400,000 shares (57,200)
Retained earnings 137,927
Accumulated other comprehensive loss (1,932)
-----------
Total stockholders' equity 142,052
-----------
Total liabilities and stockholders' equity $ 1,549,373
===========
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Treasury Stock Accumulated
Common Stock Additional ----------------- Other
-------------- Paid-In Amount Retained Comprehensive
(Amounts in Thousands) Shares Amount Capital Shares at Cost Earnings Loss Total
------ ------ ---------- ------ -------- --------- -------------- ---------
Balance at December 31, 1998 77,585 $776 $ 56,051 (4,400) $(57,200) $ 34,497 $(4,220) $ 29,904
Comprehensive Income:
Net income 103,430 103,430
Foreign currency translation, net of tax
expense of $42 2,068 2,068
Minimum pension liability 220 220
---------
Total comprehensive income 105,718
---------
Sale of shares under benefit plans,
including tax benefits 633 6 5,460 5,466
Stock option compensation 264 264
Other 700 700
------ ---- --------- ------ -------- -------- ------- ---------
Balance at December 31, 1999 78,218 $782 $ 62,475 (4,400) $(57,200) $137,927 $(1,932) $ 142,052
====== ==== ========= ====== ======== ======== ======= =========
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
-----------------------
(Dollars in Thousands) 1999
---------
OPERATING ACTIVITIES
Net income $ 103,430
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 42,715
Deferred income taxes 71,591
Gain on sale of business (15,779)
Stock option compensation expense 264
Changes in assets and liabilities (net of acquisitions
and divestiture)
Increase in accounts receivable (22,508)
Increase in inventories (24,247)
Increase in other current assets (16,633)
Increase in accounts payable 20,675
Decrease in accrued liabilities (7,543)
Increase in non-current assets (3,129)
Increase in non-current liabilities 3,370
---------
Net cash provided by operating activities 152,206
---------
INVESTING ACTIVITIES
Purchases of plant and equipment, net (44,690)
Purchase of businesses, net of cash acquired (107,890)
Proceeds from sale of business 30,000
---------
Net cash used in investing activities (122,580)
---------
FINANCING ACTIVITIES
Increase in due to banks 4,987
Repayment of long-term bank debt (57,062)
Borrowings from revolving credit facility 200,081
Repayment of borrowings from revolving credit facility (186,054)
Proceeds from exercise of stock options 5,466
---------
Net cash (used in) financing activities (32,582)
---------
Effect of exchange rate changes on cash 65
---------
Decrease in cash and cash equivalents (2,891)
Cash and cash equivalents at beginning of year 17,201
---------
Cash and cash equivalents at end of year $ 14,310
=========
Cash paid during the year for:
Interest, net of capitalized amounts $ 103,044
Income taxes $ 21,947
=========
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts and where noted in Millions)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the operations of the
subsidiaries of International Home Foods, Inc., all of which are wholly-owned.
All significant intercompany balances and transactions have been eliminated in
the consolidated financial statements.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles and necessarily include amounts based
on judgments and estimates made by management. Actual results could differ from
these estimates. Estimates are used when accounting for potential bad debts,
inventory obsolescence and spoilage, trade and promotion allowances, coupon
redemptions, depreciation and amortization, stock option compensation, deferred
income taxes and tax valuation allowances, pension and post-retirement benefits,
restructuring charges and contingencies, among other items.
CASH AND CASH EQUIVALENTS
All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents. The Company's cash and cash
equivalents at December 31, 1999 and 1998 consist of cash in banks and
investments in money market funds.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
on a first-in, first-out basis. Raw fish inventories are stated at specifically
identified cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Normal maintenance and
repairs are expensed. Additions and improvements to provide necessary capacity,
improve the efficiency of production or to modernize facilities are capitalized.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the related assets, generally 40 years for buildings, 15 years
for machinery and equipment and 5-20 years for furniture and fixtures. Leasehold
improvements are amortized over the remaining lives of the respective leases.
INTANGIBLE AND OTHER ASSETS
As of December 31, 1999, the Company's intangible and other assets include
goodwill and trademarks for the acquisition of Heritage which are amortized over
20 years and have a net book value of $6.1 million, goodwill for the
acquisitions of Ranch Style, Ro*Tel, Bumble Bee Seafoods, Inc., Productos Del
Monte ("PDM"), Creative Products, Inc., Orleans Seafoods, Inc., Puritan, Grist
Mill Co., Libby's, Clover Leaf /Paramount and Louis Kemp, all of which are
amortized over 40 years with a net book value of $330.9 million, tradenames for
Bumble Bee, Libby's and Louis Kemp which are amortized over 40 years with a net
book value of $68.0 million, Libby's trademarks which are amortized over 15
years with a net book value of $22.8 million and other intangible assets with a
net book value of $1.4 million, which are amortized over ten years. Intangible
assets of $3.5 million acquired prior to 1971 are not amortized.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company continually reviews intangible assets to evaluate whether
changes have occurred that would suggest that they may be impaired based on the
estimated undiscounted cash flows and operating profit of the business acquired
over the remaining amortization period. If this review indicates that the
remaining estimated useful life of goodwill requires revision or that goodwill
is not recoverable, the carrying amount of the goodwill is reduced by the
estimated shortfall of cash flows on a discounted basis.
Other assets are primarily comprised of deferred financing costs incurred
in connection with the agreements for bank and other indebtedness, which are
being amortized over the terms of the financings using the interest method.
Amortization of deferred financing costs is included in interest expense.
REVENUE RECOGNITION
The Company recognizes revenue from product sales upon shipment to
customers.
CONCENTRATION OF CREDIT RISK
The Company sells primarily to customers in the retail trade, grocery
wholesalers and distributors, grocery stores and supermarkets, mass
merchandisers, drug stores, foodservice distributors, convenience stores,
warehouse clubs and other channels of distribution. These customers are located
primarily in North America (United States, Canada and Mexico). The Company
conducts business based on periodic evaluations of its customers' financial
condition. While continuing consolidation and competitiveness in the retail
industry presents an inherent uncertainty, the Company does not believe a
significant risk of loss from a concentration of credit exists.
RESEARCH AND DEVELOPMENT
Research and Development costs are charged to expense as incurred and
amounted to $2,620 for the year ended December 31, 1999.
ADVERTISING
Advertising costs are charged to expense as incurred. Advertising costs
amounted to $53,399 for the year ended December 31, 1999.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates. Translation gains and losses are not
included in determining net income, but are recorded in Accumulated Other
Comprehensive Income as a separate component of stockholders' equity. For the
Company's Ecuadorian subsidiaries, which operated in a highly inflationary
economy in 1999, the U.S. dollar is the functional currency and translation
gains and losses are included in determining net income in those years. Foreign
currency transaction gains and losses are included in determining net income.
FINANCIAL INSTRUMENTS
The acquisition cost of interest rate instruments is amortized as interest
expense over the terms of the related agreements. Interest expense is adjusted,
if required, to reflect the interest rates included in the agreements.
INCOME TAXES
The Company's income tax provision has been prepared with deferred income
taxes provided for differences in the financial statement and tax bases of
assets and liabilities. The Company intends to permanently reinvest the
undistributed earnings of its Canadian operations; accordingly, deferred income
taxes, which would not be significant, have not been provided for the
repatriation of such undistributed earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IMPACT OF RECENT ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standards ("SFAS") 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued to
establish standards for accounting for derivatives and hedging activities and
supersedes and amends a number of existing standards. This statement requires
all derivatives to be recognized in the statement of financial position as
either assets or liabilities and measured at fair value. In addition, all
hedging relationships must be designated, reassessed and documented pursuant to
the provisions of SFAS 133. SFAS 133, as amended by SFAS 137, "Deferral of the
Effective Date of SFAS 133," is effective for fiscal years beginning after June
15, 2000. The Company is currently evaluating the effect this statement will
have on its financial statements.
2 INVENTORIES
Inventories are as follows:
December 31,
------------
1999
--------
Raw materials $ 65,483
Work in progress 8,841
Finished goods 208,587
--------
Total $282,911
========
3 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are as follows:
December 31,
------------
1999
--------
Land $ 22,188
Buildings and leasehold improvements 126,113
Machinery and equipment 307,608
Furniture and fixtures 31,393
--------
487,302
Less: accumulated depreciation 181,260
--------
Total $306,042
========
Depreciation expense totaled $25,989 for the year ended December 31, 1999.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4 INTANGIBLE AND OTHER ASSETS
Intangible assets are as follows:
December 31,
------------
1999
--------
Goodwill, tradenames and trademarks $474,638
Less: accumulated amortization 41,906
--------
Intangible assets, net $432,732
========
Amortization of intangibles totaled $12,467 for the year ended December 31,
1999. All fully amortized intangibles have been retired.
Other assets include deferred financing costs, net of amortization, in
connection with the Company's issuance of long-term debt. At December 31, 1999,
net deferred financing costs were $18,300. Amortization expense for the year
ended December 31, 1999 amounted to $4,259.
5 ACQUISITIONS
On July 19, 1999, the Company, through its subsidiary Bumble Bee Seafoods,
Inc., acquired the manufacturing, sales distribution and marketing operations of
Louis Kemp from Tyson Foods, Inc. for $68,784, including transaction fees. The
Company financed this acquisition with borrowings under its Senior Bank
Facilities (See Note 11). Louis Kemp manufactures and sells refrigerated and
frozen surimi products. Surimi-based products are made from North Pacific ocean
pollack and whiting fish meats. These products are primarily sold under the
tradename Louis Kemp and other tradenames such as Captain Jac, SeaFest and
Pacific Mate.
On January 19, 1999, the Company, through its subsidiary Bumble Bee
Seafoods, Inc., acquired the Clover Leaf and Paramount canned seafood brands and
business of British Columbia Packers ("Clover Leaf/Paramount brands") from
George Weston Ltd. of Canada for a total purchase price of $40,394, including
transaction fees. The acquisition was funded with borrowings under the Company's
Senior Bank Facilities and cash on hand.
The excess of cost over fair value of net assets acquired for the above
acquisitions will be amortized over 15 to 40 years (Note 1). These acquisitions
have been accounted for using the purchase method of accounting and the
operating results of the acquired companies have been included in the
consolidated financial statements from the dates of acquisition. The information
below includes non-cash investing and financing activities supplemental to the
consolidated statements of cash flows. A summary of the excess of cost over fair
value of net assets acquired resulting from purchase price allocations for the
1999 acquisitions is as follows:
1999
-----------------------
Clover Leaf/
Louis Paramount
Kemp Brands
-------- ------------
Cost of acquisition, including transaction fees $ 68,784 $ 40,394
Less: acquired assets
Current assets 10,470 38,962
Property, plant and equipment 18,111 1,180
Other assets
Add: liabilities assumed 570 9,411
-------- --------
Excess of cost over net assets acquired,
including identifiable intangibles $ 40,773 $ 9,663
======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following unaudited pro forma consolidated results of operations have
been prepared as if the acquisitions and divestiture had occurred as of the
beginning of 1999, and reflect pro forma adjustments for goodwill, interest
expense and tax expense:
1999
-----------------------------------------
IHF(1) Acquisitions(2) Total
---------- --------------- ----------
Net sales $2,139,429 $ 67,499 $2,206,928
Operating income $ 287,274 $ 508 $ 287,782
Net income/(loss) $ 93,516 $ (1,316) $ 92,200
Earnings per share:
Basic $ 1.27 $ (0.02) $ 1.25
Diluted $ 1.23 $ (0.02) $ 1.21
(1) Excludes operations and gain on sale of Polaner (See Note 6).
(2) Amounts include Louis Kemp and Clover Leaf/Paramount brands.
The unaudited pro forma consolidated results do not purport to be
indicative of results that would have occurred had the acquisitions been in
effect for the period presented, nor do they purport to be indicative of the
results that will be obtained in the future.
6 SALE OF BUSINESS
On February 5, 1999 the Company sold its Polaner fruit spreads and spices
business to B&G Foods, Inc. for approximately $30.0 million in cash resulting in
a gain of $15.8 million ($9.6 million, net of tax, or $0.13 per diluted share).
7 RESTRUCTURING
In September 1998, in conjunction with management's plan to reduce costs
and improve operational efficiencies, the Company recorded a restructuring
charge of $118.1 million ($75.3 million after tax, or $0.94 per diluted share).
The principal actions in the restructuring plan involved the closure of the
Vacaville, California and Clearfield, Utah production facilities and the related
impact of the transfer of production to other facilities, mainly Milton,
Pennsylvania, and the write-down of goodwill associated with the Campfire crisp
rice snack bar brand ($47.7 million) and the Polaner fruit spreads brand ($29.7
million).
The Vacaville, California production facility ceased operations in December
1998, while the adjacent distribution center and the Clearfield, Utah facility
closed in the second quarter of 1999. The total closure costs of approximately
$40.6 million represent $29.5 million of non-cash charges, primarily for the
write-down of property, plant and equipment to net realizable value, cash
charges of $9.0 million for severance and related benefit costs for affected
employees, and $2.1 million in facility closure costs. The severance and related
costs relate to the termination of approximately 600 employees, which includes
seasonal employees not eligible for severance, of which 572 had been terminated
as of December 31, 1999.
With the exception of outsourced products, the Company has moved all of the
products that were manufactured at the Vacaville facility to other facilities,
mainly Milton, Pennsylvania. Production of tomato paste used in Chef Boyardee
canned pasta products and of Ro*Tel diced tomatoes, both of which were
manufactured at the Vacaville facility prior to its closure, have been
outsourced. The manufacturing of the Campfire products has been transferred from
Clearfield, Utah to the Company's Lakeville, Minnesota facility. The Company
incurs non-capitalizable expenses as the transfer and installation of the
relocated equipment from these facilities occurs. The Company incurred
approximately $2.7 million of such non-capitalizable costs in 1999,which are
reflected in the Company's selling, general and administrative expenses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1999, $3.2 million of restructuring charges remained in
other accrued liabilities. This amount is primarily comprised of multi-employer
pension plan settlements and certain other employee benefit related costs.
Payments totaling $7.9 million have been made to date, primarily for severance,
related benefit costs and facility closure costs, including $4.6 million in
1999.
8 BUSINESS SEGMENT INFORMATION
The Company manufactures and markets a diversified portfolio of
shelf-stable food products including entrees, side dishes, snacks, canned fish,
canned meats and refrigerated surimi. The Company sells its products primarily
in the United States, Canada and Mexico, and is not dependent on any single or
major group of customers for its sales.
The Company has three reportable business segments - Branded Products,
Seafood, and Private Label and Foodservice. Branded Products is defined as U.S.
grocery sales for the following brands: Chef Boyardee, Libby's canned meats,
Southwest brands (Luck's, Ro*Tel, Dennison's and Ranch Style), Specialty brands
(PAM, Gulden's, Maypo, Wheatena, Maltex and G. Washington's) and Snack brands
(Crunch 'n Munch, Jiffy pop and Campfire). Seafood includes all sales for the
Bumble Bee, Orleans, Libby's, Clover Leaf, Paramount and Louis Kemp brands of
seafood products as well as private label and foodservice seafood sales. Private
Label and Foodservice includes all private label canned pasta, cooking spray,
fruit snacks, ready-to-eat cereals, wholesome snack bars, pie crust and personal
care products and the sales to foodservice distributors. The All Other category
is comprised of sales of Polaner products, sales to the military, contract sales
to Nestle and international sales, which includes branded, private label and
foodservice sales in Canada, Mexico, Puerto Rico and other export sales.
The Company sold its Polaner fruit spreads and spices business on February
5, 1999 (Note 6). For comparative purposes, the Company has reclassified the
Polaner sales, operating income and depreciation and amortization from the
Branded Products and Private Label and Foodservice segments, where it was
reported in the Company's 1998 Annual Report, to the All Other category for
1999. The Company has also reclassified certain Libby's sales, operating income
and depreciation and amortization from the Branded Products segment, where it
was reported in the 1998 Annual Report, to Private Label and Foodservice and All
Other to better reflect management's monitoring of the business.
The Company sells its products in each of its segments primarily to grocery
wholesalers and distributors, grocery stores and supermarkets, convenience
stores, drug and mass merchants and warehouse clubs.
The Company evaluates segment performance based upon segment operating
income (earnings before interest expense, net other [income] expense, and income
taxes excluding unusual or infrequently occurring items, restructuring charges
and stock compensation expense [income]). Certain centrally incurred costs
(Corporate), are not allocated to the operating segments. Asset and long-lived
expenditure information is not available at the segment level, is not reviewed
by the chief operating decision maker, and is therefore not disclosed.
The Company allocates certain charges, including depreciation,
amortization, agent and broker commissions, storage, packing and shipping
charges, and administrative costs for salaries, insurance and employee benefits,
to its Branded Products segment, and to its Private Label and Foodservice
segment based on a percentage of net sales.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Private Total
Branded Label and Reportable All
Products Seafood Foodservice Segments Other Total
---------- ---------- ----------- ---------- ---------- ----------
1999
Net sales $ 859,761 $ 678,989 $ 305,966 $1,844,716 $ 299,704 $2,144,420
Segment operating income 190,523 43,662 39,831 274,016 34,239 308,255
Depreciation and amortization 16,611 7,503 8,269 32,383 6,073 38,456(1)
Reconciliation to Consolidated Results: 1999
----------
Segment operating income $ 308,255
Less:
Stock compensation expense 264
Corporate 20,428
----------
Total consolidated income from operations $ 287,563
==========
(1) Excludes amortization of deferred financing costs of $4,259 in 1999.
OTHER INFORMATION
Geographic Information: 1999
----------
Net sales:
United States $1,792,662
Foreign 351,758
----------
Consolidated $2,144,420
==========
Long-lived assets:
United States $ 269,516
Foreign 36,526
----------
Consolidated $ 306,042
==========
Foreign revenues represent sales by the Company's foreign subsidiaries and
export sales from the United States.
9 INCOME TAXES
Income before provision for income taxes is as follows:
For Year Ended December 31,
---------------------------
1999
--------
Domestic $173,416
Foreign 29,597
--------
Total $203,013
========
The provision for income taxes is as follows:
For Year Ended December 31,
---------------------------
1999
-------
Federal $49,781
Foreign 10,469
State 39,333
-------
Total $99,583
=======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation between the Company's effective tax rate and U.S.
statutory rate is as follows:
For Year Ended December 31,
---------------------------
1999
----
U.S. statutory rate 35.0%
State tax, net of federal benefit 2.8
Non-deductible goodwill 0.4
Foreign income taxes (benefit) 0.4
Tax restructuring 10.1
Other 0.4
----
Effective tax rate 49.1%
====
The current and deferred provision for income taxes is as follows:
For Year Ended December 31,
---------------------------
1999
--------
Current:
Federal $ 23,702
Foreign 4,536
State 3,981
--------
32,219
Deferred:
Federal 26,079
Foreign 5,933
State 35,352
--------
67,364
--------
Total $ 99,583
========
The Company adopted a tax restructuring program, which resulted in a
one-time, non-cash tax charge of $20.6 million, or $0.27 per diluted share, in
the third quarter ended September 30, 1999 to reduce deferred tax assets that
had been recorded in prior years. This program was substantially implemented by
December 31, 1999.
Effective on November 1, 1996, an affiliate of Hicks Muse acquired 80% of
the outstanding capital stock of the Company in a transaction treated as a
recapitalization for financial accounting purposes ("IHF Acquisition"). For
federal and state income tax purposes, the IHF Acquisition was a taxable
business combination and was a qualified stock purchase.
The buyer and seller have elected jointly to treat the IHF Acquisition as
an asset acquisition under Section 338(h)(10) of the Internal Revenue Code of
1986, as amended. An allocation of the purchase price to the tax bases of assets
and liabilities based on their respective estimated fair values at November 1,
1996 was made for income tax purposes. The assets and liabilities remained at
their historical bases for financial reporting purposes.
In connection with the IHF Acquisition, the Company recorded a deferred tax
asset of approximately $368,000 at November 1, 1996 related to future tax
deductions for the net excess of the tax bases of the assets and liabilities
over the financial statement carrying amounts with a corresponding credit to
additional paid-in capital.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Historically, the Company has generated operating income and realization of
the deferred tax assets is dependent upon the Company's ability to generate
sufficient future taxable income which management believes is more likely than
not. The Company anticipates future taxable income sufficient to realize the
recorded deferred tax assets. Future taxable income is based on management's
forecasts of the operating results of the Company and there can be no assurance
that such results will be achieved.
Management continually reviews such forecasts in comparison with actual
results and expected trends. In the event management determines that sufficient
future taxable income may not be generated to fully realize the deferred tax
assets, the Company will provide a valuation allowance by a charge to income tax
expense in the period of such determination.
The components of deferred tax assets at December 31, 1999 are as follows:
December 31,
------------
1999
---------
Current deferred tax assets:
Allowance for doubtful accounts $ 1,030
Inventory reserves 2,602
Trade accruals 4,633
Restructuring 4,380
Accrued expenses 3,468
---------
Current deferred tax assets 16,113
Non-current deferred tax assets:
Tradenames 144,634
Goodwill and intangible assets 108,366
Stock options 16,074
Post-retirement benefits 10,126
Net operating loss carryforwards 4,752
Valuation allowance (3,050)
---------
Non-current deferred tax assets 280,902
---------
Non-current deferred tax liabilities:
Property, plant and equipment (9,384)
Unremitted foreign earnings (2,993)
Foreign inventory (5,962)
---------
Non-current deferred tax liabilities (18,339)
---------
Net non-current deferred tax assets 262,563
---------
Net deferred tax assets $ 278,676
=========
At December 31, 1999, the Company had net operating loss carryforwards
subject to the utilization restrictions for federal income tax purposes of
approximately $2,880, which expire in years ending through 2010. The Company had
state income tax and foreign tax loss carryforwards of approximately $24,000 and
$7,000, respectively, at December 31, 1999, which expire in years ending through
2013 and 2010, respectively. The Company has established a valuation allowance
at December 31, 1999 of $3,050 related to foreign and state net operating loss
carryforwards and the realization of certain deferred tax assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10 LEASES
The Company leases certain facilities and equipment under operating leases.
Rental expenses totaled $5,709 for the year ended December 31, 1999. Future
minimum lease payments under non-cancellable operating leases at December 31,
1999 are as follows:
2000 $ 4,761
2001 3,538
2002 2,921
2003 2,316
2004 and later years 3,998
-------
$17,534
=======
11 LONG-TERM DEBT
Long-term debt at December 31, 1999 is as follows:
December 31,
------------
1999
----------
Senior Bank Facilities:
Tranche A $ 448,522
Tranche B 149,200
Tranche B-1 99,740
Revolving credit facility 78,536
----------
775,998
Senior Subordinated Notes 400,000
----------
Total debt 1,175,998
Less: Current portion 73,084
Revolving credit facility 78,536
----------
Long-term debt $1,024,378
==========
The aggregate maturities of all long-term debt during each of the next five
years are $73,084, $93,414, $104,849, $116,285 and $83,990 for 2000, 2001, 2002,
2003, 2004, respectively, and $625,840 thereafter.
In connection with the IHF Acquisition, the Company entered into a $770,000
Credit Agreement ("Senior Bank Facilities") with Chase Manhattan Bank, Bankers
Trust Company and Morgan Stanley Senior Funding, Inc. and issued $400,000 of
10.375% Senior Subordinated Notes ("Notes"). The Senior Bank Facilities provided
for term loans in three tranches aggregating $670,000 and a revolving credit
loan facility of $100,000.
The Company amended its Senior Bank Facilities as of September 16, 1998.
The Senior Bank Facilities are comprised of:
(i) a $516,500 Tranche A term loan facility of which $448,522 is
outstanding at December 31, 1999. This tranche matures in 2004 with mandatory
semiannual repayments aggregating $72,424, $92,754, $104,189 and $115,625 in the
years 2000 through 2003, respectively, and the remaining $63,530 on May 31,
2004;
(ii) a $149,800 Tranche B term loan facility of which $149,200 is
outstanding at December 31, 1999. This tranche matures in 2005 with mandatory
semiannual repayments aggregating $400 in each of the years 2000 through 2003,
$20,200 in 2004, and the remaining $127,400 in 2005;
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(iii) a $100,000 Tranche B-1 term loan facility of which $99,740 is
outstanding at December 31, 1999. This tranche matures in 2006 with mandatory
semiannual repayments aggregating $260 in each of the years 2000 through 2005,
and the remaining $98,180 in 2006;
(iv) a $230,000 revolving credit facility (the revolving credit facility),
which includes a Canadian facility of $50,000, maturing in 2004, or earlier upon
repayment of the Tranche A term loans. At December 31, 1999, $78,536 is
outstanding under this facility and is separately disclosed on the balance
sheet.
In addition to scheduled periodic repayments, the Company is also required
to make mandatory repayments of the loans under the Senior Bank Facilities with
a portion of its excess cash flow, as defined.
Borrowings under the amended Senior Bank Facilities bear interest based on
the Eurodollar Rate or an Alternate Base Rate, as defined, plus applicable
margins. The Canadian portion of the revolving credit facility bears interest at
the Canadian Prime Rate, or the Canadian Bankers' Acceptance Rate, as defined,
plus applicable margins. As of December 31, 1999 margins ranged from 0.25% to
1.75%. The weighted average interest rate for 1999, including the Notes, was
8.46%. At December 31, 1999, interest rates in effect for Tranches A, B, B-1 and
the revolving credit facility were 7.38%, 7.63%, 7.95% and 7.12%, respectively.
The obligations of the Company under the Senior Bank Facilities are
unconditionally and irrevocably guaranteed by each of the Company's direct or
indirect domestic subsidiaries (collectively, the "Guarantors"). In addition,
the Senior Bank Facilities are secured by first priority or equivalent security
interests in (i) all the capital stock of, or other equity interests in, each
direct or indirect domestic subsidiary of the Company and 65% of the capital
stock of, or other equity interests in, each direct foreign subsidiary of the
Company, or any of its domestic subsidiaries and (ii) all tangible and
intangible assets (including, without limitation, intellectual property and
owned real property) of the Company and the Guarantors (subject to certain
exceptions and qualifications).
The Senior Bank Facilities also contain a number of significant covenants
that, among other things, restrict the ability of the Company to dispose of
assets, incur additional indebtedness, repay other indebtedness or amend other
debt instruments, pay dividends, create liens on assets, make investments or
acquisitions, engage in mergers or consolidations, make capital expenditures,
engage in certain transactions with affiliates, amend the Notes and otherwise
restrict corporate activities. In addition, under the Senior Bank Facilities the
Company is required to comply with specified minimum interest coverage, maximum
leverage and minimum fixed charge coverage ratios.
The Company pays a commission on the face amount of all outstanding letters
of credit drawn under the Senior Bank Facilities at a per annum rate equal to
the Applicable Margin then in effect with respect to Eurodollar loans under the
Revolving Credit Facility minus the Fronting Fee (as defined). A fronting fee
equal to 1/4% per annum on the face amount of each Letter of Credit is payable
quarterly in arrears to the issuing lender for its own account. At December 31,
1999 the Company has entered into agreements for letters of credit amounting to
$10,500, of which $5,050 relates to the Senior Bank Facilities. The Company also
pays a per annum fee equal to 0.375% on the undrawn portion of the commitments
in respect of the revolving credit facility. As of December 31, 1999, the
Company had an unused revolving credit facility balance of $151,464.
The Notes are due November 1, 2006, and bear interest at a rate of 10.375%,
which is payable semiannually on May 1 and November 1 of each year. The Notes
may be redeemed prior to November 1, 2000 in up to an aggregate principal amount
of $160,000 with the proceeds of one or more equity offerings, as defined, by
the Company under certain conditions at a redemption price of 110.375%. The
Notes may also be redeemed prior to November 1, 2001 at a redemption price of
100% upon the occurrence of a change of control, as defined. The Notes will be
redeemable, in whole or in part, at the Company's option at redemption prices
decreasing from 105.188% at November 1, 2001 to 100% on November 1, 2004 and
thereafter.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Each Subsidiary Guarantor unconditionally guarantees, jointly and
severally, on a senior subordinated basis, the full and prompt payment of
principal and interest on the Notes.
The Notes contain certain restrictive covenants limiting, among other
things (i) the incurrence of additional indebtedness; (ii) the declaration or
payment of dividends or other capital stock distributions or redemptions; (iii)
the redemption of certain subordinated obligations; (iv) investments; (v) sale
of assets; and (vi) consolidations, mergers and transfers of all or
substantially all of the Company's assets.
In connection with the acquisition of Grist Mill, the Company assumed a
$5,700 term loan on its facility which was to mature on June 1, 2000, with a
balloon payment of $5,200. However, the loan was paid in full during 1999.
12 FINANCIAL INSTRUMENTS
The Company's financial instruments recorded on the balance sheet include
cash and cash equivalents, accounts receivable, accounts payable and debt.
Because of their short maturities, the carrying amount of these items, excluding
debt, approximate fair value.
The Company's $400 million Notes at December 31, 1999 had an estimated fair
value of approximately $414 million, based on their publicly quoted rates. The
fair value of the Senior Bank Facilities at December 31, 1999 approximated its
carrying value because the interest rates change with market interest rates.
The Company currently does not use derivative financial instruments for
trading or speculative purposes, nor is the Company a party to leveraged
derivatives. In accordance with the Senior Bank Facilities, the Company is
required to enter into interest rate protection agreements to the extent
necessary to provide that, when combined with the Company's Senior Subordinated
Notes, at least 50% of the Company's aggregate indebtedness, excluding the
revolving credit facility, is subject to either fixed interest rates or interest
rate protection. At December 31, 1999, more than 50% of the Company's aggregate
indebtedness, excluding the revolving credit facility, is subject to such
protection.
Under these agreements the Company agrees to exchange, at specified
intervals, the difference between fixed and floating interest amounts based on
agreed upon notional principal amounts. The notional amounts of interest rate
agreements are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. In accordance with the interest
rate agreements, the measurement of 3 month LIBOR and 6 month LIBOR,
respectively, occurs on the first day of each calculation period. For interest
rate instruments that effectively hedge interest rate exposures, the net cash
amounts paid or received on the agreements are accrued as incurred and
recognized as an adjustment to interest expense.
The Company is exposed to credit loss in the event of non-performance by
the other parties to the interest rate protection agreements. All counterparties
are at least A rated by Moody's and Standard & Poor's. Accordingly, the Company
does not anticipate non-performance by the counterparties.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1999, the Company had the following interest rate
instruments in effect for which the fair value of these instruments is based on
the current settlement cost (dollar amounts are in millions):
Notional amount Fair value Period 3 month LIBOR rate 6 month LIBOR rate Company pays Company receives
--------------- ---------- ------ ------------------ ------------------ ------------ ----------------
$ 600 $ -- 5/99-5/04 4.45% or less N/A 5.55% 3 month LIBOR
>4.45% and <5.55% N/A 3 month LIBOR 3 month LIBOR
5.55% to <6.30% N/A 5.55% 3 month LIBOR
6.30% or greater N/A 3 month LIBOR 3 month LIBOR
$ 200 $ (1.5) 8/98-11/01 N/A 5.20% or less 10.23% 10.375%
N/A >5.20% to <6.23% 6 month LIBOR + 4% 10.375%
N/A 6.23% to <6.75% 10.23% 10.375%
N/A 6.75% or greater 6 month LIBOR + 4% 10.375%
$ 150 $ 0.5 10/98-10/01 <3.76% N/A 3.76% 3 month LIBOR
3.76% to 5.75% N/A 3 month LIBOR 3 month LIBOR
>5.75% N/A 5.75% 3 month LIBOR
$ 225 $ -- 10/99-10/00 N/A <5.30% 5.30% 6 month LIBOR
N/A 5.30% to 8.00% 6 month LIBOR 6 month LIBOR
N/A >8.00% 8.00% 6 month LIBOR
------
$ (1.0)
======
13 GUARANTOR FINANCIAL DATA
The Company's Senior Subordinated Notes are fully and unconditionally guaranteed
by each of the Company's subsidiary guarantors on a joint and several basis. The
Company has not presented separate financial statements and other disclosures
concerning each of the subsidiary guarantors because management has determined
that such information is not material to the holders of the Senior Subordinated
Notes. Presented below is consolidating financial information including
summarized combined financial information of the subsidiary guarantors:
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Consolidated
--------------- --------------- --------------- ---------------
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999
Net sales $ 907,854 $ 1,015,149 $ 221,417 $ 2,144,420
Gross profit 537,221 389,471 78,026 1,004,718
Net income 11,805 90,385(1) 1,240 103,430(1)
Net cash provided by (used in) operating activities 126,512 42,210 (16,516) 152,206
Net cash used in investing activities (3,525) (85,143) (33,912) (122,580)
Net cash (used in) provided by financing activities (41,659) (6,097) 15,174 (32,582)
(1) Includes an after-tax gain of $9.6 million ($15.8 million pre-tax) from
sale of the Polaner fruit spread and spice business.
Amounts are not intended to report results as if the subsidiaries were separate
stand-alone entities.
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
DECEMBER 31, 1999
Current assets $ 132,979 $ 304,110 $ 91,261 $ -- $ 528,350
Non-current assets 1,091,493 670,803 808 (742,081) 1,021,023
Current liabilities 200,671 132,201 21,957 -- 354,829
Non-current liabilities 1,041,449 5,195 33,109 (27,261) 1,052,492
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14 EMPLOYEE BENEFIT PLANS
The Company maintains non-contributory defined benefit pension plans
covering the majority of its employees and retirees, and post-retirement benefit
plans for the majority of its employees and retirees that include health care
benefits and life insurance coverage.
Pension-related benefits are based primarily on compensation levels and
years of service. It is the Company's policy to contribute the amounts necessary
to meet the minimum funding requirements of defined benefit plans under
applicable laws. Plan assets include principally cash equivalents and debt and
equity securities.
The following table summarizes the balance sheet impact, as well as the
benefit obligations, assets, funded status and rate assumptions associated with
the pension and post-retirement benefit plans:
Pension Benefits Post-retirement Benefits
December 31, December 31,
---------------- ------------------------
1999 1999
----------- -----------
Change in benefit obligations
Beginning of year obligations $ 12,341 $ 26,228
Service cost 3,861 1,373
Interest cost 844 1,672
Plan amendments -- 3,069
Actuarial (gains) losses (1,498) (7,162)
Acquisitions 111 --
Benefits paid (1,197) (320)
Other 24 (77)
End of year benefit obligations 14,486 24,783
Change in plans' assets
Beginning of year fair value of plans' assets 10,671 --
Actual return on plans' assets 1,122 --
Acquisitions 161 --
Employer contributions 4,132 320
Benefits paid (1,197) (320)
Other 19 --
----------- -----------
End of year fair value of plans' assets 14,908 --
----------- -----------
Funded status of the plans Benefit obligation (14,486) (24,783)
Fair value of plan assets 14,908 --
Unrecognized transition (benefit) obligation (34) 458
Unamortized prior service cost 330 --
Unrecognized net actuarial (gain) loss (767) (2,891)
----------- -----------
Net amount recognized (49) (27,216)
Amounts recognized in the consolidated balance sheets
Prepaid benefit cost 1,082 --
Accrued benefit liability (1,176) (27,216)
Intangible asset 16 --
Accumulated other comprehensive income 29 --
----------- -----------
Net amount recognized $ (49) $ (27,216)
=========== ===========
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans were $14,486, $12,373 and $14,908,
respectively, as of December 31, 1999.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table shows the components of pension and post-retirement
benefit costs for the periods indicated:
For Year Ended December 31,
---------------------------
1999
--------------
Pension Cost
Service cost $ 3,861
Interest cost 844
Expected return on plans' assets (902)
Recognized net actuarial loss/(gain) 34
Amortization of transition obligation 2
Amortization of prior service cost 48
--------------
Net pension cost $ 3,887
==============
Rate assumptions:
Discount rate 7.5-7.75%
Rate of return on plans' assets 8.0%
Salary increases 3.5-5.0%
--------------
Post-retirement Benefit Cost:
Service cost-benefits earned attributable to service during the period $ 1,373
Interest cost on the accumulated post-retirement benefit obligation 1,672
Recognized net actuarial loss (gain) 37
Amortization of transition obligation 34
--------------
Net post-retirement benefit cost $ 3,116
==============
Rate assumptions:
Discount rate 7.75%
Annual increase in cost of benefits 8.5-10.0%
to 6-6.5% over
3-10 years
Assumed health care cost trend rates have a significant effect on the
amounts reported for the post-retirement medical benefit plans. The effects of a
one percentage point change in the assumed health care cost trend rates would
have the following effects:
1% Point 1% Point
Increase Decrease
------------- ----------
Effect on total of service and interest cost components $ 676 $ (599)
Effect on post-retirement benefit obligation $ 5,037 $ (4,662)
SAVINGS PLANS
The Company sponsors a 401(k) defined contribution plan for employees.
Employer contributions for year ended December 31, 1999 were $1,663.
MULTI-EMPLOYER PLANS
The Company also participates in union-sponsored multi-employer pension,
life insurance and health and welfare plans which provide benefits to union
employees located at the Company's facilities in Vacaville, CA and Danville, IL
(added in 1998). The Company's contributions to these plans were $659 for the
year ended December 31, 1999.
15 STOCK COMPENSATION PLANS
Effective November 1, 1996, the Company adopted the International Home
Foods, Inc. 1996 Stock Option Plan (the "IHF Plan") which provides for the grant
of stock options at fair value on the date of grant. Generally, stock options
have a ten-year term and vest immediately or ratably over three years. Certain
options were granted with an exercise price which increased by 8% per year until
the exercise date. These indexed options were modified during 1997 to reflect a
fixed exercise price. Shares and options have been adjusted for the 5.3292 for
one reverse stock split. The total number of shares of common stock authorized
for grant under the IHF Plan is 8,444,021.
Effective October 23, 1997, the Company amended and restated the IHF Plan.
The amended and restated plan is named the International Home Foods, Inc. 1997
Stock Option Plan (the "Plan"). The option term and vesting provisions, and
number of shares
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
authorized, are consistent with the IHF Plan. Certain options granted have
accelerated vesting provisions based on targeted stock prices. Effective June
12, 1998, the Company amended the Plan to increase the number of shares of
common stock authorized for grant to 13,444,021.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting Principles
Board Opinion No. 25 (APB No. 25) and related interpretations in accounting for
its plans. In 1999, $264 was recorded as compensation expense. As of December
31, 1999, the full amount has been amortized to compensation expense. If the
Company had elected to recognize compensation cost based on the fair value of
the options at the grant dates, consistent with the method prescribed by SFAS
No. 123, net income and per share amounts would have been adjusted to the pro
forma amounts indicated below:
1999
-----------
Net income:
As reported $ 103,430
Pro forma $ 97,783
Basic earnings per share:
As reported $ 1.41
Pro forma $ 1.33
Diluted earnings per share:
As reported $ 1.36
Pro forma $ 1.29
Note: The pro forma disclosures shown above are not representative of the
effects on net income and per share amounts in future years.
For IHF options granted in 1999 the following assumptions were used:
1999
-----------
Volatility 35%
Dividend yield 0%
Expected option term 4 years
Weighted avg. risk -
free interest rate 5.76%
Presented below is a summary of the status of the IHF stock options held by
the Company's employees for 1999:
1999
----------------------------
Weighted
Options Average Exercise
(000's) Price Per Share
-------- ----------------
IHF non-indexed options:
Outstanding at beginning of year 8.634 $ 9.88
Granted 3,266 $ 16.19
Exercised (633) $ 6.99
Forfeited (705) $ 14.12
Outstanding at end of year 10,562 $ 11.72
IHF options exercisable at end of year 5,331 $ 7.56
The weighted average fair value of IHF stock options granted during 1999 were
$5.85 per option.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1999, the 10,562,422 stock options outstanding under the
IHF plan have exercise prices ranging from $5.33 to $20.00 and a weighted
average exercise price of $11.72.
Such options have a remaining contractual life of approximately 8.0 years
and 5,331,414 were exercisable at December 31, 1999. The following table
summarizes the status of stock options outstanding and exercisable as of
December 31, 1999, by range of exercise price:
Range Options Weighted Average Weighted Options Weighted Average
of Exercise Outstanding Remaining Average Exercisable Exercise Price on
Price (000's) Contractual Life Exercise Price (000's) Exercisable Options
- ----------- ----------- ---------------- -------------- ----------- -------------------
$5.33-$9.06 4,961 6.9 years $ 6.33 4,530 $ 6.36
$10.66-$15.00 1,339 8.1 years $ 14.42 762 $ 14.07
$15.06-$20.00 4,262 9.4 years $ 17.16 39 $ 19.39
Stock options outstanding at December 31, 1999 which were issued with
exercise prices equal to, less than and more than the market price of the stock
on the grant date are as follows:
Number of Weighted Average Weighted Average
Grants Options Exercise Price Fair Value
- ------ --------- ---------------- ----------------
Exercise price equals market price 4,329 $ 13.74 $ 4.69
Exercise price less than market price 4,210 $ 6.86 $ 11.44
Exercise price more than market price 2,023 $ 17.47 $ 5.95
16 EARNINGS PER SHARE
The table below summarizes the numerator and denominator for the basic and
diluted earnings per share calculations:
For Year Ended December 31,
---------------------------
1999
----------
Numerator:
Net income available
to common shares $ 103,430
Denominator:
Average number of shares
outstanding 73,539
Effect of dilutive stock options 2,520
----------
Total number of shares
outstanding 76,059
Basic earnings per share $ 1.41
Diluted earnings per share $ 1.36
17 RELATED PARTY TRANSACTIONS
Effective November 1, 1996, the Company entered into a 10-year monitoring
and oversight agreement with an affiliate of its largest stockholder. The
agreement provides for an annual fee of the greater of $1,000 or 0.1% of the
budgeted consolidated net sales of the Company for the current year. In
addition, effective November 1, 1996, the Company entered into a financial
advisory agreement with the affiliate under which the affiliate will be entitled
to a fee of 1.5% of the transaction value, as defined, for each add-on
transaction, as defined. In 1999, the Company incurred monitoring and oversight
fees of $1,993 , and financial advisory fees of $1,554.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18 COMMITMENTS AND CONTINGENCIES
The Company has ongoing royalty arrangements with several parties,
primarily representing licensing agreements for the use of characters in the
Company's canned pasta business. The accompanying consolidated statement of
income include royalty costs which amounted to $466 for the year ended December
31, 1999.
The Company has responsibility for environmental, safety and cleanup
obligations under various local, state and federal laws, including the
Comprehensive Environmental Response, Compensation and Liability Act, commonly
known as Superfund. Based upon its experience to date, the Company believes that
the future cost of compliance with existing environmental laws, regulations and
decrees and liability for known environmental claims, will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows. However, future events, such as changes in existing laws and
regulations or their interpretation, and more vigorous enforcement policies of
regulatory agencies, may give rise to additional expenditures or liabilities
that could be material.
In the ordinary course of business, the Company enters into contracts for
the purchase of certain of its raw materials. These contracts do not include any
minimum quantity requirements.
The Company is involved in various pending or threatened litigation and
claims. Although the outcome of any legal proceeding cannot be predicted with
certainty, management believes through its discussions with counsel that its
liability arising from or the resolution of any pending or threatened litigation
or claims, in the aggregate will not have a material adverse effect on the
consolidated financial position, results of operation or cash flows of the
Company.
19 ALLOWANCE FOR DOUBTFUL ACCOUNTS AND CASH DISCOUNTS
The allowance for doubtful accounts and cash discounts and their related
activity are as follows:
Write-Offs and
Beginning Charged Reductions, Net Ending
Balance Other* to Expense of Recoveries Balance
---------- ---------- ---------- --------------- ----------
Year ended December 31, 1999 $ 7,343 $ 277 $ 594 $ 1,343 $ 6,871
* Relates to balances assumed of companies acquired in 1999.
20 ALLOWANCE FOR OBSOLETE INVENTORIES
The allowance for obsolete inventories and the related activity is as
follows:
Write-Offs and
Beginning Charged Reductions, Net Ending
Balance Other* to Expense of Recoveries Balance
---------- ---------- ---------- --------------- ----------
Year ended December 31, 1999 $ 3,347 $ 33 $ 5,040 $ 3,478 $ 4,942
* Relates to balances assumed of companies acquired in 1999.