1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-18859
---------------
INTERNATIONAL HOME FOODS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3377322
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1633 LITTLETON ROAD, PARSIPPANY, N.J. 07054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 359-9920
---------------
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 requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of registrant's Common Stock, par value $0.01
par share, at June 30, 1997 was 330,000,000.
1
2
INTERNATIONAL HOME FOODS, INC.
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Statements of Income 3
Three Months Ended June 30, 1997 and 1996
Six Months Ended June 30, 1997 and 1996
Consolidated Balance Sheets 4
June 30, 1997 and December 31, 1996
Consolidated Statements of Cash Flows 5
Six Months Ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of the 16
Results of Operations and Financial Condition
PART II OTHER INFORMATION
Signatures 23
Exhibit 12. Computation of Consolidated Ratio of 25
Earnings to Fixed Charges
Exhibit 27. Financial Data Schedule 26
2
3
INTERNATIONAL HOME FOODS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
Net sales $249,872 $222,039 $494,422 $449,298
Cost of sales 115,135 103,715 230,794 214,185
-------- -------- -------- --------
Gross profit 134,737 118,324 263,628 235,113
Marketing expenses 56,479 42,434 109,254 93,078
Selling, general, and
administrative expenses 37,351 33,105 76,020 71,578
-------- -------- -------- --------
Income from operations 40,907 42,785 78,354 70,457
-------- -------- -------- --------
Interest expense 25,858 -- 51,765 --
Other income (expense), net 820 (27) 1,572 (86)
-------- -------- -------- --------
Income before taxes 15,869 42,758 28,161 70,371
Provision for income taxes 6,518 16,273 11,264 26,784
-------- -------- -------- --------
Net income $ 9,351 $ 26,485 $ 16,897 $ 43,587
======== ======== ======== ========
Net income per common
share (330,000,000 shares
outstanding) $ 0.03 $ 0.05
======== ========
See accompanying notes to consolidated financial statements.
3
4
INTERNATIONAL HOME FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
June 30, December 31,
ASSETS 1997 1996
---------- -----------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 74,549 $ 45,859
Accounts receivable, net of allowances 50,533 48,801
Inventories 111,710 129,205
Prepaid expenses and other current assets 4,841 8,197
Deferred income taxes 13,389 11,571
---------- ----------
Total current assets $ 255,022 243,633
Property, plant and equipment, net 185,398 186,002
Intangible assets, net 151,040 153,938
Deferred income taxes 341,211 353,034
Other assets 29,620 31,664
---------- ----------
Total assets $ 962,291 $ 968,271
LIABILITIES
CURRENT LIABILITIES:
Due to banks $ 6,883 $ 9,278
Current portion of long-term debt 28,500 26,000
Amount payable to minority stockholder -- 16,556
Accounts payable 21,047 18,679
Accrued salaries, wages, and benefits 13,262 14,379
Accrued advertising and promotion 45,522 38,127
Accrued interest 11,290 10,843
Other accrued liabilities 36,648 28,151
---------- ----------
Total current liabilities $ 163,152 $ 162,013
Long-term debt 1,028,500 $1,044,000
Postretirement benefits obligation 18,039 16,689
Other noncurrent liabilities -- 9,764
---------- ----------
Total liabilities $1,209,691 $1,232,466
Commitments and contingencies
STOCKHOLDERS' DEFICIENCY
Preferred stock - par value $.01 per share; authorized,
100,000,000 shares; non shares issued or outstanding $ -- --
Common stock - par value $.01 per share; authorized,
1,900,000,000 shares; issued and outstanding
330,000,000 shares 3,300 3,300
Additional paid-in capital (263,999) (263,999)
Retained earnings (Accumulated deficit) 15,299 (1,598)
Foreign currency translation adjustment (2,000) (1,898)
---------- ----------
Total stockholders' deficiency $ (247,400) $ (264,195)
---------- ----------
Total liabilities and stockholders' deficiency $ 962,291 $ 968,271
========== ==========
See accompanying notes to consolidated financial statements.
4
5
INTERNATIONAL HOME FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Six Months Ended
June 30,
1997 1996
-------- --------
(unaudited)
Net income $ 16,897 $ 43,587
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,678 9,178
Deferred income taxes 10,005 --
Changes in assets and liabilities:
Accounts receivable (1,732) (2,257)
Inventories 17,495 23,822
Other current assets 3,356 237
Accounts payable 2,368 287
Accrued liabilities 15,222 5,397
Other (8,682) 178
-------- --------
Net cash provided by operating activities $ 68,607 $ 80,429
-------- --------
INVESTING ACTIVITIES:
Purchases of plant and equipment, net (7,966) (4,896)
-------- --------
Net cash used in investing activities $ (7,966) $ (4,896)
-------- --------
FINANCING ACTIVITIES:
Decrease in due to banks (2,395) --
Change in former parent company's investment
and advances, net -- (75,528)
Repayment of long-term debt (13,000) --
Payment to minority stockholder (16,556) --
-------- --------
Net cash used in financing activities $(31,951) $(75,528)
-------- --------
Effect of exchange rate changes on cash -- (5)
Increase in cash and cash equivalents 28,690 --
Cash and cash equivalents at beginning of period 45,859 --
-------- --------
Cash and cash equivalents at end of period $ 74,549 $ --
======== ========
See accompanying notes to consolidated financial statements.
5
6
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. ACCOUNTING POLICIES
Interim Financial Statements
In the opinion of International Home Foods, Inc. ("the Company"), the
accompanying consolidated financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary to present
fairly the Company's financial position as of June 30, 1997, the results of
operations and cash flows for the three months and six months ended June
30, 1997 and 1996. Certain reclassifications have been made in the
financial statements from amounts previously reported. The results of
operations for the three and six month periods are not necessarily
indicative of the results to be expected for the full year. The
accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1996 Annual Report on Form 10-K.
2. DESCRIPTION OF BUSINESS, MERGER, AND ACQUISITION
Background and Basis of Presentation
On September 5, 1996, American Home Products Corporation ("AHP" or "Former
Parent") and AHP Subsidiary Holding Corporation and other parties entered
into an agreement ("Agreement") pursuant to which an affiliate ("Parent")
of Hicks, Muse, Tate & Furst Equity Fund III, L.P. ("HM") acquired,
effective November 1, 1996, an 80 percent interest in American Home Food
Products, Inc. ("AHFP") and its subsidiary, M. Polaner, Inc., for
approximately $1,226,000. In connection with the merger transaction
("Transaction"), AHP contributed all of its other food products businesses
into AHFP. Effective November 1, 1996, these entities and businesses
constitute International Home Foods, Inc. and subsidiaries ("Company"). In
connection with the Agreement, AHFP received $264,000 of equity financing
and incurred indebtedness of $1,070,000. Approximately $962,000 was used to
redeem shares of common stock of AHFP which were indirectly held by AHP and
$264,000 was distributed to AHP. At December 31, 1996, the Company had a
liability to AHP of $16,556 for the unpaid redemption amount. As a result
of the redemption, AHP continues to beneficially own approximately 20
percent of the Company. The Transaction has been accounted for as a
leveraged recapitalization such that the Company's assets and liabilities
remain at their historical bases for financial reporting purposes; for
income tax purposes, the transaction has been treated as a taxable business
combination such that the consolidated financial statements reflect a
"step-up" in tax basis.
6
7
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Background and Basis of Presentation (Continued)
Earnings, advances, withdrawals, dividends, foreign currency translation
adjustments, and other transactions between the Company and AHP for periods
prior to November 1, 1996 are reflected in Former Parent Company's
Investment and Advances in the accompanying financial statements which are
presented on a combined basis prior to November 1, 1996 and on a
consolidated basis from November 1, 1996 to December 31, 1996. The
combined financial statements for the periods prior to October 31, 1996
reflect the financial position, results of operations, and cash flows of
the Company as if the Company was a stand-alone entity. The Company began
presenting retained earnings (accumulated deficit) as a separate component
of stockholders' deficiency effective November 1, 1996.
The effects of the Transaction are summarized as follows:
Redemption and distribution to AHP Subsidiary Holding Corporation $(1,225,556)
Issuance of common stock 264,000
Fees (21,256)
Recognition of postretirement benefits obligation (16,207)
Deferred income taxes 368,358
----------
$ (630,661)
==========
Pro forma unaudited net income for the three months and six months
ended June 30, 1996 assuming the Transaction had occurred at the beginning
of 1996, would have been $10,507 ($0.03 per common share) and $11,775
($0.04 per common share) respectively. Decreases to reported net income
result from increased pro forma interest expense and the related tax
effects. The unaudited pro forma amounts do not purport to be indicative
of what the Company's actual results of operations would have been had the
Transaction been consummated on January 1, 1996 or to project the Company's
results of operations for any future period.
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,
deferred income taxes and tax valuation allowances, restructuring charges,
and contingencies, among other items.
7
8
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Acquisition
Immediately after the Transaction and effective November 1, 1996, the
Company acquired Heritage Brands Holdings, Inc. and subsidiaries
("Heritage") for approximately $70,800, including the assumption of
approximately $40,800 of debt, in a transaction accounted for using the
purchase method of accounting. The excess of the purchase price of
Heritage over the fair value of assets acquired and liabilities assumed
resulted in goodwill and other intangible assets of approximately $59,100
(an increase of approximately $25,000 over the amount of Heritage's
unamortized goodwill and intangible assets prior to the acquisition) which
are being amortized over 20 years. The acquisition was not significant
and, accordingly, pro forma financial information has not been provided.
The results of operations and cash flows of Heritage have been included in
the accompanying consolidated financial statements of the Company since
November 1, 1996.
Business
The Company operates in one business segment which manufactures and markets
a diversified portfolio of shelf-stable food products including entrees,
side dishes, spreadable fruit products, and snacks, among others. The
Company sells its products primarily in the United States and Canada and is
not dependent on any single or major group of customers for its sales.
3. INVENTORIES
Inventories consist of: June 30, December 31,
1997 1996
-------- ------------
Raw Materials $ 29,874 $ 29,932
Work-in-Progress 16,481 26,790
Finished Goods 65,355 72,483
-------- --------
Total $111,710 $129,205
======== ========
4. INCOME TAXES
For federal and state income tax purposes, the Transaction (see Note 2) is
a taxable business combination and is a qualified stock purchase. The
buyer and seller have elected jointly to treat the Transaction as an asset
acquisition under Section 338(h)(10) of the Internal Revenue Code of 1986,
as amended. A preliminary 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
8
9
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
INCOME TAXES (CONTINUED)
and will be finalized during 1997. In connection with the Transaction, 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.
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 after debt service and
adjusting for the effects of the Transaction and acquisition discussed in
Note 1 sufficient to realize the deferred tax assets existing at June 30,
1997. 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 Company's consolidated financial statements for periods prior to
November 1, 1996 do not reflect deferred income taxes as all such taxes
were provided for by AHP. Deferred tax assets and liabilities existing
prior to the Transaction and those established as a result of the
Transaction and the purchase of Heritage were reflected on the accompanying
consolidated balance sheet, effective November 1, 1996, as an adjustment to
the Former Parent Company's Investment and Advances account or goodwill, as
appropriate.
The Company's operations were included in the consolidated income tax
returns of AHP through October 31, 1996. The Company was charged by AHP
based on the statutory tax rates adjusted for permanent differences, but
without regard for temporary differences. Deferred tax assets and
liabilities prior to the Transaction would have reflected temporary
differences between assets and liabilities for financial reporting purposes
and income tax purposes. Such temporary differences were primarily
attributable to depreciation, allowances for doubtful accounts, and
nondeductible reserves and were not significant through October 31, 1996.
The income tax provision on a stand-alone basis for periods prior to
November 1, 1996 would not differ materially from the income tax provision
reflected in the accompanying consolidated financial statements.
9
10
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
INCOME TAXES (CONTINUED)
Effective November 1, 1996 the Company's operations were included in the
consolidated federal income tax returns of its Parent. For the period
November 1, 1996 to December 31, 1996, the company's income tax provision
was prepared on a separate return basis, with deferred income taxes
provided for differences in the financial statement and tax bases of assets
and liabilities. The tax effects of the temporary differences which
resulted from the "step-up" in tax basis (see Note 2) have been reflected
in stockholders' deficiency as of November 1, 1996. The Company intends to
permanently reinvest its undistributed Canadian earnings in the Canadian
operations; accordingly, deferred income taxes, which would not be
significant, have not been provided for the repatriation of such
undistributed earnings.
5. COMMITMENTS AND CONTINGENCIES
The Company has ongoing royalty arrangements with several parties,
primarily representing licensing agreements for its wet spices business and
for the use of characters in the Company's canned pasta business. Royalty
costs for the three months ending June 30, 1997 and 1996 amounted to $507
for both periods. The accompanying consolidated statement of income include
royalty costs which amounted to $1,035 and $1,043 for the six months ended
June 30, 1997 and 1996, respectively.
There is also a royalty obligation related to the Company's licensing
agreement for its cereals business entered into in 1988. The agreement
includes a minimum annual royalty of $750, payable in quarterly
installments, as well as a $10,250 balloon payment payable in January,
1998. As of June 30, 1997 and December 31, 1996, $10,297 and $10,155,
respectively, has been accrued towards the annual minimum royalty for the
period and the appropriate share of the balloon obligation. There are no
minimum royalty requirements after December 31, 1997; however, an ongoing
royalty of ten percent of net cereal sales will continue.
In the ordinary course of business, the Company enters into contracts for
the purchase of certain of its raw materials and is involved in various
pending or threatened litigation and claims. 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. The Company has been identified as a potentially responsible
party at two Superfund sites. Although the outcome of any legal proceeding
cannot be predicted with certainty, management believes through its
discussions with counsel and the United States Environmental Protection
Agency that its proportionate share of any liability arising from such
matters, or the resolution of any other pending or threatened litigation or
claims, in the aggregate will not have a material adverse effect on the
consolidated financial position, results of operations, or cash flows of
the Company.
10
11
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
6. RELATED PARTY TRANSACTIONS
The consolidated statement of income for the period ended June 30, 1996
included the cost of certain administrative and other services provided by
AHP. These services included treasury, tax, personnel, legal,
environmental, safety, public relations, audit, and other related costs.
The charges to the Company for corporate administration for the three
months and the six months ended June 30, 1996 approximated $735 and $1,470,
respectively. Such charges are representative of costs which would have
been incurred by the Company on a stand alone basis.
AHP also charged the Company for its share of group insurance costs
(medical, dental, basic life, etc.) based on AHP's historical claim
experience and current claim trends and the ratio of the Company's
employees to total AHP domestic employees. The charges, which are reflected
in the accompanying consolidated statement of income, amounted to $2,682
and $5,523 for the three months and six months ended June 30, 1996,
respectively.
The Company purchased advertising through a wholly-owned subsidiary of AHP
through 1996. The rates at which the company purchased advertising
reflected the rates obtained by the consolidated purchasing of AHP. The
charges, which are reflected in the accompanying consolidated statement of
income for the three months and the six months ended June 30, 1996 amounted
to $12,554 and $23,295, respectively.
Effective November 1, 1996, the Company entered into a ten year monitoring
and oversight agreement with an affiliate of its indirect majority
stockholder, HM. The agreement provides for an annual fee of the greater
of $1,000 or 0.1 percent of the budgeted consolidated net sales of the
Company for the current year and certain operating expenses related to
their oversight activities. 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 percent of the
transaction value, as defined, for each add-on transaction, as defined.
There were no fees incurred as a result of the financial advisory agreement
during the six months ended June 30, 1997.
11
12
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
7. GUARANTOR FINANCIAL DATA
The Company's Senior Subordinated Notes are fully and unconditionally
guaranteed by each of the Company's subsidiaries, 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 Notes. Presented below is summarized combined financial
information of the subsidiary guarantors:
June 30, 1997 December 31, 1996
------------- ------------------
Current Assets $ 86,978 $ 91,835
Noncurrent Assets 256,274 254,729
Current Liabilities 44,456 46,354
Noncurrent Liabilities 235,793 248,052
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
Net Sales $31,206 $29,469 $ 68,569 $62,663
Gross Profit 14,450 14,131 30,082 28,873
Net Income/(Loss) 760 (641) 831 (801)
Net cash provided by 17,660 17,611
operating activities
Net cash used in (5,060) (3,876)
investing activities
Net cash used in (11,299) (13,735)
financing activities
8. NEW ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants issued Statement of
Position 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") in
October 1996. SOP 96-1 provides authoritative guidance on specific
accounting issues in connection with recognizing, measuring and disclosing
environmental cleanup liabilities. The Company adopted this SOP during the
first quarter of 1997; there was no impact on the Company's results of
operations or financial position upon adoption.
12
13
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
New Accounting Standards (Continued)
In June 1996, Statement of Financial Accounting Standards No. 125 (SFAS
125), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", was issued to provide accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. This statement became effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. The Company does not
anticipate that the adoption of this Statement will have a material effect
on the financial statements.
In June 1997, SFAS 130, "Reporting Comprehensive Income", was issued to
establish standards for reporting and displaying of comprehensive income
and its components in a full set of general-purpose financial statements.
This statement requires disclosure of the components of comprehensive
income including, among other things, foreign currency translation
adjustments, minimum pension liability items and unrealized gains and
losses on certain investments in debt and equity securities. The Company
would be required to show components of comprehensive income in a financial
statement displayed as prominently as the other required financial
statements. The statement is effective for fiscal years beginning after
December 15, 1997. The Company anticipates compliance with this Statement
in 1998.
In June 1997, SFAS 131 "Disclosures About Segments of an Enterprise and
Related Information", was issued to establish standards for public business
enterprises reporting information regarding operating segments in annual
and interim financial statements issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is
to be restated. The Company operates in one business segment which
manufactures and markets a diversified portfolio of shelf-stable food
products, and accordingly, does not believe the segment reporting aspect of
this statement will impact their financial statements. The Company is
currently assessing the impact of this Statement.
9. EARNINGS PER SHARE
Net income per common share for the first quarter 1997 based on 330,000
common shares outstanding, as the result of the Transaction, was $0.02 per
common share.
In March, 1997, SFAS 128, "Earnings per Share", was issued to establish
standards for computing and presenting earnings per share ("EPS"). The
Statement applies to entities with publicly held common stock or potential
common stock and excludes entities whose publicly traded securities include
only debt. The Statement is effective for financial statements issued for
periods ending after December 15, 1997; earlier application is not
permitted. The Company anticipates that this Statement, upon adoption, will
eliminate their requirement to disclose EPS data.
13
14
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
10. SUBSEQUENT EVENT
On July 1, 1997, International Home Foods, Inc. (the "Company") consummated
the acquisition of substantially all of the assets (the "Assets") of Bumble
Bee Seafoods, Inc. and its wholly-owned subsidiaries, Bumble Bee
International, Inc., Santa Fe Springs Holding Company and Commerce
Distributing Company (CDC) (collectively, the "Sellers"), pursuant to the
terms of an Asset Purchase and Sale Agreement dated as of May 1, 1997 (the
"Agreement") by and among the Sellers, on the one hand, and the Company and
its wholly-owned subsidiary, Bumble Bee Acquisition Corporation, on the
other hand. The aggregate consideration paid for the assets was
approximately $160 million in cash and the assumption of certain
liabilities of the Sellers, including trade payables and certain accrued
liabilities. The Assets consist primarily of inventory, accounts
receivable, property, plant and equipment and trademarks formerly used by
the Sellers for the processing and marketing of canned seafood products,
principally tuna and salmon, including processing facilities in Puerto
Rico, Ecuador and California. The transaction was approved by an order of
the Federal Bankruptcy Court for the Southern District of California on
June 19, 1997, as part of the bankruptcy proceedings of the Sellers.
The Company intends to maintain the plant and equipment acquired for the
processing and canning of seafood products and to continue the employ of
substantially all of the Seller's former 1700 employees.
The Company filed a Form 8-K, on July 16, 1997, disclosing the purchase of
the Assets indicating that audited financial statements, including pro
forma disclosures, will be filed in a subsequent Form 8-K within the 60 day
extension period.
Concurrent with the acquisition of the Assets, the Company amended and
restated its existing credit agreement with Chase Manhattan Bank as of July
1, 1997. The existing senior secured bank facilities were increased from
$670 million (less a $13 million principal payment made in the first
quarter of 1997) to $737 million and the Company's revolving facility was
increased from $100 million to $140 million. The Company financed the
purchase of the Assets with the $80 million increase in the term facility,
a $30 million draw on the Company's bank revolver, and the balance of the
purchase price from the Company's available cash balances as of the date of
the closing.
14
15
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Subsequent Event (Continued)
The provisions of the new credit agreement provide that borrowings under
Tranches A and B are increased to $367.5 million, and $369.5 million
respectively and the previous Tranche C is included as part of Tranche B.
The final maturity dates of Tranche A, March 31, 2003, and the new
Tranche B, September 30, 2004, remained unchanged. Applicable margins on
borrowings which bear interest based on the London Interbank Offered Rate
as defined, have been changed from 2.5% to 2% on Tranche A and from 3% to
2.25% on Tranche B. The applicable margins under the alternate base rate,
as defined, have been changed from 1.5% to 1%, and 2% to 1.25% on Tranche A
and B, respectively. The new agreement also includes financial covenants
related to consolidated leverage ratio, as defined, consolidated interest
coverage, as defined, consolidated fixed charge coverage ratio, as defined,
and limitations on indebtedness, capital expenditures and payment of
dividends.
15
16
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS - Three and six months ended June 30, 1997 and 1996.
NET SALES - On a consolidated basis, IHF's net sales for the three months ended
June 30, 1997 of $249.9 million increased $27.8 million, or 12.5%, over the
comparable period of the prior year. Approximately $11.9 million of the sales
increase was due to sales of the Company's Campfire marshmallows and crisped
rice snacks. This brand was acquired in November 1996 and the reported sales
for the periods ended June 30, 1996 do not reflect Campfire's sales for the
comparable 1996 periods. The balance of the increase in sales was due
primarily to volume increases in sales of Canned Pasta ($9.3 million, or
10.3%), Snacks ($2.5 million, or 17.2%), Southwest Division, ($2.1 million, or
7.1%), and the Canadian subsidiary's sales increased $2.2 million (19.6%) for
the quarter just ended.
For the six months ended June 30, 1997, net sales were $494.4 million, an
increase of $45.1 million, or 10.0%, over the comparable 1996 period.
Approximately $22.3 million of the six month increase was related to Campfire
sales which are not reflected in the 1996 amounts. The balance of the increase
was due to volume increases in sales of Canned Pasta ($10.9 million, or 5.7%),
and Snacks ($6.6 million, or 26.7%).
COST OF SALES - As a percentage of net sales, cost of sales for the three
months ended June 30, 1997 declined to 46.1% from 46.7% for the comparable 1996
quarter. The improvement in margins was due to a more favorable volume sales
mix and ongoing cost reduction initiatives.
For the six months ended June 30, 1997, cost of sales as a percentage of net
sales declined to 46.7% from 47.7% for the comparable 1996 period. The
improvement came from lower price adjustments in 1997, a more favorable sales
volume mix as well as continuing overall reductions in the Company's
manufacturing costs which are reflective of management's cost reduction
initiatives.
OPERATING EXPENSES - For the three months ended June 30, 1997, operating
expenses as a percent of net sales increased to 37.6% from 34.0% for the
comparable 1996 period. Marketing expenses increased from $42.4 million for the
1996 second quarter to $56.5 million for the comparable 1997 quarter. Of this
$14.1 million increase, approximately $3.0 million was due to higher 1997 sales
levels and $9.3 million due to higher trade and consumer spending rates in 1997
(14.5% of sales) versus 1996 (10.6% of sales). These higher rates are
reflective of increased new distribution expenses, channel mix and increased
volume sales of products that traditionally have higher than normal promotion
rates. Selling, general, and administrative (S, G, & A) expenses for the 1996
and 1997 comparable second quarters increased from $33.1 million to $37.4
million, respectively. The increase in S, G, & A expenses were primarily the
result of the higher sales levels as both quarters' S, G, & A expenses were
14.9% of sales.
16
17
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
OPERATING EXPENSES (CONTINUED) - For the six months ended June 30, 1997,
operating expenses as a percent of net sales increased to 37.5% from 36.6% for
the comparable 1996 period. Marketing expenses increased from $93.1 million
for the 1996 six month period to $109.3 million for the comparable 1997 six
months. Of this $16.2 million increase, $13.1 million was due to higher 1997
second quarter spending as described in the foregoing paragraph. The balance
of $3.1 million represents higher marketing expenditures as a result of higher
1997 first quarter sales ($17.3 million) versus sales for the comparable 1996
quarter. Selling, general, and administrative (S, G, & A) expenses for the
1996 and 1997 comparable second quarters increased from $71.6 million to $76.0
million, respectively. This increase was primarily the result of the higher
1997 sales level. S, G, & A expenses as a percent of net sales decreased from
15.9% in the first six months of 1996 to 15.4% for the comparable 1997 six
month period.
INCOME FROM OPERATIONS - Income from operations for the three months ended
June 30, 1997 was $40.9 million, down from $42.8 million for the comparable
1996 period. This decrease was primarily the result of increased marketing
expenditures in the most recent ended quarter.
For the six months ended June 30, 1997, income from operations increased to
$78.4 million, up $7.9 million, or 11.2%, from the comparable 1996 six month
period. This increase was primarily the result of higher gross profits as the
result of higher sales volume.
INTEREST EXPENSE - Interest expense for the three months ended June 30, 1997
was $25.9 million. This amount represents $10.4 million of interest expense on
the Company's $400.0 million of publicly traded debentures at an annual rate of
10.375%, interest and commitment fees of $14.4 million on $657.0 million the
Company's Bank Debt, which as of June 30, 1997 had an average interest rate of
8.69%, and $1.1 million of amortization of the Company's Deferred Financing
costs.
Interest expense for the six months ended June 30, 1997 was $51.8 million.
This amount represents $20.8 million of interest expense on the Company's
$400.0 million of publicly traded debentures at an annual rate of 10.375%,
interest, interest and commitment fees of $28.7 million on $657.0 million the
Company's Bank Debt, which as of June 30, 1997 had an average interest rate of
8.62%, and $2.3 million of amortization of the Company's Deferred Financing
costs.
There were no interest costs in 1996 as all financing activities of the Company
were funded by the former parent company, American Home Products, Inc., which
did not allocate interest costs to its various subsidiaries.
17
18
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
OTHER INCOME - The Company earned $0.8 million and $1.6 million on short term
investments of its excess cash during the three and six months, respectively,
ended June 30, 1997. As of June 30, 1997, the Company's short term investments
were $66.3 million and these investments were earning interest at an average
annual rate of 6.0%.
PROVISION FOR INCOME TAXES - For the three months ended June 30, 1997, income
taxes decreased by $9.8 million over the comparable 1996 period due to lower
income before taxes. The effective tax rate increased to 41% in 1997 from 38%
in 1996 primarily due to higher state and local statutory tax rates.
For the six months ended June 30, 1997, income taxes decreased by $15.5 million
over the comparable 1996 period due to lower income before taxes. The
effective tax rate increased to 40% in 1997 from 38% in 1996 due to higher
state and local statutory tax rates.
The Company anticipates sufficient future taxable income to realize deferred tax
assets recorded at June 30, 1997. 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.
NET INCOME - For the three months ended June 30, 1997, net income decreased by
$17.1 million versus the comparable 1996 period. This decrease is primarily
due to interest expense of $25.9 million (none in the comparable 1996 period)
and the decrease in operating income of $1.9 million versus the comparable 1996
period, both net of the related tax impact.
For the six months ended June 30, 1997, net income decreased by $26.7 million
versus the comparable 1996 period. This decrease is primarily due to interest
expense of $51.8 million (none in the comparable 1996 period) partially offset
by the increase in operating income of $7.9 million versus the comparable 1996
period, both net of the related tax impact.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS - Net cash provided by operating activities for the six months ended
June 30, 1997 was $68.6 million versus $80.4 million for the comparable 1996
period due to higher net income. The Company invested $8.0 million in capital
expenditures in the first half of 1997, or an increase of $3.1 million over the
comparable 1996 period.
18
19
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
CAPITAL RESOURCES - The Company reduced its Bank debt by $13.0 million in the
first six months which represented the first mandatory principle repayment.
Also in the first six months, the Company paid $16.6 million to its minority
shareholder, AHP, Inc. This payment represented the final Working Capital
Adjustment as defined in the purchase and sale agreement.
As of June 30, 1997, there were no borrowings under the Company's $100.0
million revolving credit facility or bankers' acceptance facilities. On July
1, 1997, the Company amended and restated its existing credit agreement (see
subsequent events section of Management's Discussion And Analysis of Financial
Condition and Results of Operations).
Management currently believes that cash from operations and available financing
alternatives are adequate to meet anticipated requirements for working capital,
capital expenditures, mandatory principal and interest payments, and other cash
needs.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT STRATEGIES
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 Company's Credit Agreement, 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 is subject to either fixed
interest rate or interest rate protection through December 1998. In order to
comply with required interest rate protection provisions, the Company entered
into an interest rate collar transaction that becomes effective in September
1997 and expires in December 1998. The notional amount of the collar is
$135,000 with the cap set at 8% and the floor set at 5.25%.
SUBSEQUENT EVENT
On July 1, 1997, International Home Foods, Inc. (the "Company") consummated the
acquisition of substantially all of the assets (the "Assets") of Bumble Bee
Seafoods, Inc. and its wholly-owned subsidiaries, Bumble Bee International,
Inc., Santa Fe Springs Holding Company and Commerce Distributing Company (CDC)
(collectively, the "Sellers"), pursuant to the terms of an Asset Purchase and
Sale Agreement dated as of May 1, 1997 (the "Agreement") by and among the
Sellers, on the one hand, and the Company and its wholly-owned subsidiary,
Bumble Bee Acquisition Corporation, on the other hand. The aggregate
consideration paid for the assets was approximately $160,000,000 in cash and
the assumption of certain liabilities of the Sellers, including trade payables
and certain accrued liabilities. The Assets consist primarily of inventory,
accounts receivable, property, plant and equipment and trademarks formerly used
by the Sellers for the processing and marketing of canned seafood
19
20
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Subsequent Event (Continued)
products, principally tuna and salmon, including processing facilities in Puerto
Rico, Ecuador and California. The transaction was approved by an order of the
Federal Bankruptcy Court for the Southern District of California on June 19,
1997, as part of the bankruptcy proceedings of the Sellers.
The Company intends to maintain the plant and equipment acquired for the
processing and canning of seafood products and to continue the employ of
substantially all of the Seller's former 1700 employees.
The Company filed a Form 8-K, on July 16, 1997, disclosing the purchase of the
Assets indicating that audited financial statements, including pro forma
disclosures, will be filed in subsequent Form 8-K within the 60 day extension
period.
Concurrent with the acquisition of the Assets, the Company amended and restated
its existing credit agreement with Chase Manhattan Bank as of July 1, 1997.
The existing senior secured bank facilities were increased from $670 million
(less a $13 million principal payment made in the first quarter of 1997) to
$737 million and the Company's revolving facility was increased from $100
million to $140 million. The Company financed the purchase of the Assets with
the $80 million increase in the term facility, a $30 million draw on the
Company's bank revolver, and the balance of the purchase price from the
Company's available cash balances as of the date of the closing.
The provisions of the new credit agreement provide that borrowings under
Tranches A and B are increased to $367.5 million, and $369.5 million
respectively and the previous Tranche C is included as a part of Tranche B. The
final maturity dates of Tranche A, March 31, 2003, and the new Tranche B,
September 30, 2004, remained unchanged. Applicable margins on borrowings which
bear interest based on the London Interbank Offered Rate as defined, have been
changed from 2.5% to 2% on Tranche A and from 3% to 2.25% on Tranche B. The
applicable margins under the alternate base rate, as defined, have been changed
from 1.5% to 1% and 2% to 1.25% on Tranche A and B, respectively. The new
agreement also includes financial covenants related to consolidated leverage
ratio, as defined, consolidated interest coverage, as defined, consolidated
fixed charge coverage ratio, as defined, and limitations on indebtedness,
capital expenditures and payment of dividends.
20
21
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
IMPACT OF RECENT ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants issued Statement of
Position 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") in October
1996. SOP 96-1 provides authoritative guidance on specific accounting issues
in connection with recognizing, measuring and disclosing environmental
cleanup liabilities. The Company adopted this SOP during the first quarter of
1997; there was no impact on the Company's results of operations or financial
position upon adoption.
In June 1996, Statement of Financial Accounting Standards No. 125 (SFAS 125),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", was issued to provide accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
This statement became effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996.
The Company does not anticipate that the adoption of this Statement will have a
material effect on the Financial Statements.
In March, 1997, SFAS 128, "Earnings per Share", was issued to establish
standards for computing and presenting earnings per share ("EPS"). The
Statement applies to entities with publicly held common stock or potential
common stock and excludes entities whose publicly traded securities include
only debt. The Statement is effective for financial statements issued for
periods ending after December 15, 1997; earlier application is not permitted.
The Company anticipates that this Statement, upon adoption, will eliminate
their requirement to disclose EPS data.
In June 1997, SFAS 130, "Reporting Comprehensive Income", was issued to
establish standards for reporting and displaying of comprehensive income and
its components in a full set of general-purpose financial statements. This
statement requires disclosure of the components of comprehensive income
including, among other things, foreign currency translation adjustments,
minimum pension liability items and unrealized gains and losses on certain
investments in debt and equity securities. The Company would be required to
show components of comprehensive income in a financial statement displayed as
prominently as the other required financial statements. The statement is
effective for fiscal years beginning after December 15, 1997. The Company
anticipates compliance with this Statement in 1998.
21
22
Impact of Recent Accounting Standards (Continued)
In June 1997, SFAS 131 "Disclosures About Segments of an Enterprise and Related
Information", was issued to establish standards for public business enterprises
reporting information regarding operating segments in annual and interim
financial statements issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. The Company
operates in one business segment which manufactures and markets a diversified
portfolio of shelf-stable food products, and accordingly, does not believe the
segment reporting aspect of this statement will impact their financial
statements. The Company is currently assessing the impact of this Statement.
22
23
INTERNATIONAL HOME FOODS, INC.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SIGNATURES
Pursuant to the requirement 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.
International Home Foods, Inc.
(Registrant)
/s/ C. DEAN METROPOULOS
Date: August 14, 1997 -----------------------------
C. Dean Metropoulos
Chairman of the Board and
Chief Executive
/s/ N. MICHAEL DION
Date: August 14, 1997 -----------------------------
N. Michael Dion
Senior Vice President and
Chief Financial Officer
23
24
INTERNATIONAL HOME FOODS, INC.
Part 2
EXHIBITS
(12) Statements showing computation of ratio of earnings to fixed charges
based on SEC Regulation S-K, Item 503.
(27) Financial Data Schedule
24
25
INTERNATIONAL HOME FOODS INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
(12) Statements showing computation of ratio of earnings to fixed
charges based on SEC Regulation S-K, Item 503.
(27) Financial Data Schedule