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 September 30, 1998
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: (973) 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
per share, at September 30, 1998 was 77,463,970.
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INTERNATIONAL HOME FOODS, INC.
INDEX TO FORM 10-Q
PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Income 3
Three Months Ended September 30, 1998 and 1997
Nine Months Ended September 30, 1998 and 1997
Condensed Consolidated Balance Sheets 4
September 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Cash Flows 5
Nine Months Ended September 30, 1998 and 1997
Condensed Consolidated Statements of 6
Comprehensive Income
Three Months Ended September 30, 1998 and 1997
Nine Months Ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 18
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
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INTERNATIONAL HOME FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
Net sales $ 439,744 $ 349,511 $ 1,230,686 $ 843,933
Cost of sales 231,234 182,156 642,488 412,950
------------- ------------- ------------- -------------
Gross profit 208,510 167,355 588,198 430,983
Marketing expenses 84,654 69,140 244,084 178,394
Selling, general, and administrative expenses 56,253 43,922 162,712 119,941
Restructuring charge 118,087 -- 118,087 --
Stock compensation expense 260 44,763 946 44,763
------------- ------------- ------------- -------------
(Loss)/income from operations (50,744) 9,530 62,369 87,885
------------- ------------- ------------- -------------
Interest expense 24,196 27,470 70,790 79,235
Interest income and other, net (549) 103 (314) 1,674
------------- ------------- ------------- -------------
Income before (benefit)/provision for
income taxes (75,489) (17,837) (8,735) 10,324
(Benefit)/provision for income taxes (26,518) (7,031) (151) 4,233
------------- ------------- ------------- -------------
Net (loss)/income $ (48,971) $ (10,806) $ (8,584) $ 6,091
============= ============= ============= =============
Basic earnings per share (1):
Net (loss)/income $ (0.63) $ (0.17) $ (0.11) $ 0.10
------------- ------------- ------------- -------------
Shares used in computing basic earnings
per share 77,449,186 61,922,990 77,351,764 61,922,990
------------- ------------- ------------- -------------
Diluted earnings per share (1):
Net (loss)/income $ (0.63)* $ (0.17)* $ (0.11)* $ 0.10
------------- ------------- ------------- -------------
Shares used in computing diluted earnings
per share 80,460,848 66,198,090 80,832,342 63,347,912
------------- ------------- ------------- -------------
(1) Per share and share amounts are restated to give effect to the 5.3292 for
one reverse stock split on November 17, 1997.
* Effect of incremental shares is antidilutive.
See accompanying notes to condensed consolidated financial statements.
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INTERNATIONAL HOME FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
September 30, December 31,
ASSETS 1998 1997
--------------- ---------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 11,289 $ 11,872
Accounts receivable, net of allowances 149,666 108,132
Inventories 264,103 220,565
Prepaid expenses and other current assets 22,222 16,661
Deferred income taxes 20,808 21,102
--------------- ---------------
Total current assets 468,088 378,332
Property, plant and equipment, net 249,361 210,195
Intangible assets, net 405,172 308,846
Deferred income taxes 344,447 338,611
Other assets 26,536 26,066
--------------- ---------------
Total assets $ 1,493,604 $ 1,262,050
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Due to banks $ 16,889 $ 12,228
Current portion of long-term debt 51,484 27,400
Revolving credit facility 51,504 40,000
Accounts payable 56,563 38,871
Accrued salaries, wages and benefits 18,469 16,591
Accrued advertising and promotion 48,241 50,308
Accrued interest 18,123 7,844
Other accrued liabilities 45,314 36,954
--------------- ---------------
Total current liabilities 306,587 230,196
Long-term debt 1,097,463 942,600
Postretirement benefits obligation 23,737 19,545
Other noncurrent liabilities 6,219 2,079
--------------- ---------------
Total liabilities 1,434,006 1,194,420
--------------- ---------------
Commitments and contingencies
STOCKHOLDERS' EQUITY (1)
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 and outstanding
77,463,970 and 77,155,550 shares 775 772
Additional paid-in capital 54,097 52,202
Retained earnings 9,450 18,034
Accumulated other comprehensive income (loss) (4,724) (3,378)
--------------- ---------------
Total stockholders' equity 59,598 67,630
--------------- ---------------
Total liabilities and stockholders' equity $ 1,493,604 $ 1,262,050
=============== ===============
(1) Per share and share amounts are restated to give effect to the 5.3292 for
one reverse stock split on November 17, 1997.
See accompanying notes to condensed consolidated financial statements.
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INTERNATIONAL HOME FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Nine Months Ended
September 30,
1998 1997
---- ----
(unaudited)
OPERATING ACTIVITIES:
Net (loss)/income $ (8,584) $ 6,091
Adjustments to reconcile net (loss)/income to net cash provided by operating
activities:
Depreciation and amortization 29,834 21,921
Deferred income taxes (5,543) 2,944
Stock option compensation 946 44,763
Restructuring charge 117,519 --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (33,585) (712)
Inventories (12,727) (7,289)
Other current assets 3,017 1,324
Accounts payable 13,392 6,284
Accrued liabilities (1,137) 26,933
Other (3,202) (15,427)
------------ ------------
Net cash provided by operating activities 99,930 86,832
------------ ------------
INVESTING ACTIVITIES:
Purchases of plant and equipment, net (20,442) (8,609)
Purchase of businesses, net of cash acquired (277,773) (163,058)
------------ ------------
Net cash used in investing activities (298,215) (171,667)
------------ ------------
FINANCING ACTIVITIES:
Increase/(decrease) in due to banks 4,661 (2,151)
Issuance of long-term debt 210,000 80,000
Payment of debt issuance costs (1,707) --
Repayment of long-term debt (31,141) (29,500)
Borrowings from revolving credit facility 316,000 86,000
Repayment of borrowings from revolving credit facility (302,984) (15,000)
Payment to minority stockholder -- (16,556)
Proceeds from exercise of stock options 1,971 --
------------ ------------
Net cash provided by financing activities 196,800 102,793
------------ ------------
Effect of exchange rate changes on cash 902 (97)
(Decrease)/increase in cash and cash equivalents (583) 17,861
Cash and cash equivalents at beginning of period 11,872 45,859
------------ ------------
Cash and cash equivalents at end of period $ 11,289 $ 63,720
============ ============
Cash paid during the period for:
Interest $ 57,882 $ 63,449
Income taxes $ 11,043 $ 432
See accompanying notes to condensed consolidated financial statements.
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INTERNATIONAL HOME FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
Net (loss)/income $ (48,971) $ (10,806) $ (8,584) $ 6,091
Other comprehensive income/(loss), net of tax:
Foreign currency translation 231 6 (1,346) (96)
---------- ---------- ---------- ----------
Total other comprehensive income/(loss) 231 6 (1,346) (96)
---------- ---------- ---------- ----------
Comprehensive (loss)/income $ (48,740) $ (10,800) $ (9,930) $ 5,995
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED 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 condensed consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary
to present fairly the Company's financial position as of September 30,
1998, results of operations for the three and nine months ended
September 30, 1998 and 1997 and the cash flows for the nine months
ended September 30, 1998 and 1997. The results of operations for the
three and nine month periods are not necessarily indicative of the
results to be expected for the full year. The accompanying condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's 1997 Annual Report on Form 10-K/A.
Use of Estimates
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, restructuring charges, and
contingencies, among other items.
2. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Background and Basis of Presentation
The Company was previously an indirect wholly-owned subsidiary of
American Home Products Corporation ("American Home Products"). On
September 5, 1996, American Home Products entered into an agreement
pursuant to which an affiliate ("Hicks Muse Holding") of Hicks, Muse,
Tate & Furst Equity Fund III, L.P. ("Hicks Muse") acquired (the "IHF
Acquisition") an 80% interest in the Company. The IHF Acquisition was
consummated on November 1, 1996.
The IHF Acquisition was accounted for as a leveraged recapitalization.
Accordingly, the Company's assets and liabilities retained their
historical bases for financial reporting purposes. For tax purposes,
the IHF Acquisition was treated as a taxable business combination
resulting in a "step-up" in the tax bases of the Company's assets and
liabilities.
Business
The Company operates in a single industry which manufactures and
markets a diversified portfolio of shelf-stable food products including
entrees, side dishes, spreadable fruit products, snacks, canned fish
and canned meats, among others. The Company sells its products
primarily in the United States, Puerto Rico, Canada and Mexico, and is
not dependent on any single or major group of customers for its sales.
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
3. ACQUISITIONS
Effective July 1, 1997, 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
(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, the Company and its wholly-owned subsidiary,
Bumble Bee Acquisition Corporation. The aggregate consideration paid
for the Assets was approximately $163,100, including transaction fees.
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 financed the purchase of the Assets with approximately
$110,000 borrowings under its Senior Bank Facilities and the balance of
the purchase price from the Company's available cash balances as of the
date of the closing.
On October 1, 1997, the Company acquired Productos Del Monte (PDM) from
an affiliate of Hicks Muse for 3,127,415 shares of Common Stock. The
shares issued for PDM were valued at their estimated fair value of
approximately $40,000, which approximated the purchase price that the
Hicks Muse affiliate paid for PDM in 1996. PDM is a leading
manufacturer and marketer of branded catsup, canned vegetables and
bottled salsa in Mexico. The acquisition of PDM was treated as a
combination of entities under common control. Accordingly, the
historical accounting values of PDM were carried over for financial
accounting purposes. In February 1998, the Company settled a dispute
between the Hicks Muse affiliate and PDM's former owners. The
settlement has been recorded as a reduction of the purchase price paid
by the Hicks Muse affiliate, resulting in a reduction of goodwill
recorded by the Company.
On October 1, 1997, the Company acquired all of the stock of Creative
Products, Inc. of Rossville ("Creative Products") for approximately
$52,000 in cash. Creative Products is the leading manufacturer of
cooking spray sold to private label customers and food service
operators. In addition, Creative Products manufactures on a contract
basis a number of health and beauty aid products, including hair
mousses, hair sprays and deodorants.
On November 21, 1997 the Company acquired substantially all of the
assets of Orleans Seafood, Inc. for $26,900, including transaction
fees. The acquisition was funded through borrowings under the Company's
Senior Bank Facilities. Orleans is a specialty canned seafood
manufacturer and marketer.
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Acquisitions, (Continued)
On March 9, 1998, the Company, through its Canadian subsidiary,
International Home Foods (Canada), Inc., purchased certain assets
relating to the Puritan stews and canned meats business from Unilever's
T. J. Lipton Canada division for a total purchase price of
approximately $40,950, including transaction fees. The acquisition was
funded with borrowings under the Company's Revolving Credit Facility.
Puritan is the largest processor and marketer of canned stews and meats
in Canada, with products marketed under the Puritan and Fraser Farms
brand names.
On April 14, 1998, the Company acquired all of the stock of Grist Mill
Co. (Grist Mill) for approximately $112,765, including transaction
fees. The Company financed the acquisition with borrowings under its
Revolving Credit Facility. Grist Mill is a manufacturer and distributor
of store brand and value-priced branded food products including
ready-to-eat cereals, fruit snacks, granola bars, fruit-filled cereal
bars, crisp rice marshmallow bars and preformed pie crusts.
On September 8, 1998 the Company, through its subsidiary Trenton Home
Foods, Inc., acquired the Libby's(R) brand of retail and international
canned meat products, and the Trenton, Missouri manufacturing facility
for those products from Nestle USA, Inc. for approximately $128,206,
including transaction fees. The Company, through a fifteen year license
agreement with Nestle, will continue to use the Libby's(R) trademark.
In addition, the Company and Nestle have entered into a long-term
supply agreement under which the Company will continue to manufacture
Nestle foodservice products at the facility in Trenton, Missouri. The
Company financed the acquisition of the Libby's(R) canned meat business
with borrowings under its Revolving Credit Facility. Libby's(R) is a
leading domestic manufacturer, importer and global marketer of canned
meat products, including Vienna sausages, corned beef, salmon, hash and
chili, and the Spreadables(R) and Broadcast(R) brands.
The excess of cost over fair value of net assets acquired for the above
acquisitions will be amortized generally over 40 years. The information
below includes non-cash investing and financing activities supplemental
to the consolidated statements of cash flows. 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. A
summary of the excess of cost over fair value of net assets acquired
resulting from preliminary purchase price allocations for the 1998
acquisitions is as follows:
Trenton
Puritan Grist Mill Home Foods
------------ ------------ ------------
Cost of acquisition, including
transaction fees $ 40,950 $ 112,765 $ 128,206
Less: acquired assets
Current assets 4,620 23,275 18,250
Property, plant and equipment 6,473 30,323 25,001
Other assets -- 717 --
Add: liabilities assumed -- 4,986 5,428
------------ ------------ ------------
Excess of cost over net assets
acquired $ 29,857 $ 63,436 $ 90,383
============ ============ ============
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Acquisitions, (Continued)
The following unaudited proforma consolidated results of operations have been
prepared as if the acquisitions of Bumble Bee and the Other Acquisitions (PDM,
Creative Products, Orleans Seafood, Puritan, Grist Mill and Trenton Home Foods)
had occurred as of the beginning of 1997, and reflect proforma adjustments for
goodwill, interest expense and tax expense:
For the Nine Months Ended For the Nine Months Ended
September 30, 1998 September 30, 1997
---------------------------------------- ---------------------------------------------------
Other Other
IHF Acquisitions(1) Total IHF Bumble Bee Acquisitions(2) Total
---------------------------------------- ---------------------------------------------------
Net sales $ 1,230,686 $ 166,906 $1,397,592 $ 843,933 $ 183,888 $ 307,838 $ 1,335,659
Operating income/(loss) $ 62,369 $ 10,823 $ 73,192 $ 87,885 $ (7,831) $ 18,559 $ 98,613
Net (loss)/income $ (8,584) $ 1,043 $ (7,541) $ 6,091 $ (7,085) $ (512) $ (1,506)
Earnings per share:
Basic $ (0.11) $ 0.01 $ (0.10) $ 0.10 $ (0.11) $ (0.01) $ (0.02)
Diluted $ (0.11) $ 0.01 $ (0.10)* $ 0.10 $ (0.11) $ (0.01) $ (0.02)
(1) Amounts include Puritan, Grist Mill and Trenton Home Foods.
(2) Amounts include PDM, Creative Products, Orleans Seafood, Puritan, Grist
Mill and Trenton Home Foods.
* Effect of incremental shares is antidilutive.
The proforma 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.
4. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following amounts are included in Accumulated other comprehensive
income (loss) at September 30, 1998 and December 31, 1997:
September 30, December 31,
1998 1997
--------------- ---------------
Foreign currency translation $ (4,724) $ (3,378)
--------------- ---------------
Accumulated other comprehensive
income (loss) $ (4,724) $ (3,378)
=============== ===============
The changes in other comprehensive income (loss), and the related tax effects,
are as follows:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
Foreign currency translation
Amount before taxes $ 672 $ 6 $ (1,532) $ (96)
Income tax (expense)/benefit (441) -- 186 --
------------ ------------ ------------ ------------
Amount net of taxes 231 6 (1,346) (96)
------------ ------------ ------------ ------------
Total other comprehensive
income (loss) $ 231 $ 6 $ (1,346) $ (96)
============ ============ ============ ============
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
5. INVENTORIES
Inventories consist of: September 30, December 31,
1998 1997
------------- -------------
Raw materials $ 66,083 $ 46,127
Work in progress 20,142 20,770
Finished goods 177,878 153,668
------------- -------------
Total $ 264,103 $ 220,565
============= =============
6. INCOME TAXES
Historically, the Company has generated operating income and
realization of 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.
7. RESTRUCTURING CHARGE
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). The
principal actions in the restructuring plan involve 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 and the Polaner fruit
spreads brand.
The Vacaville, California production facility is expected to close in
December 1998, while the adjacent distribution center and the
Clearfield, Utah facility are expected to close in the first quarter of
1999. The total closure costs of approximately $40.6 million represents
$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 525
employees.
Production of a majority of the products currently manufactured at the
Vacaville facility will be shifted to other facilities, mainly Milton,
Pennsylvania. The Company will outsource the production of tomato paste
and will enter into a third-party manufacturing agreement for the
production of Ro*Tel diced tomatoes, both of which are currently
manufactured at the Vacaville facility. The manufacturing of the
Campfire products will
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Restructuring Charge, (Continued)
be transferred to the Lakeville, Minnesota facility that was recently
acquired as part of the Grist Mill acquisition. The Company anticipates
that it will incur approximately $3.0 million of additional
non-capitalizable expenses as the transfer and installation of the
relocated equipment occurs. It is expected that the entire process will
be completed by the end of 1999.
The Campfire and Polaner brands have been impacted by continued retail
category sales declines, which have further deteriorated in recent
months. The current and projected sales trends and the resulting impact
on the brands' future profitability have impaired the valuation of
their long-lived assets, necessitating a write-down to each brand's
fair value. The write-down of goodwill is $47.7 million and $29.7
million for the Campfire crisp rice snack bar brand and for the Polaner
fruit spreads brand, respectively.
At September 30, 1998, $10.6 million of restructuring charges remained
in Other accrued liabilities. This amount is comprised of severance and
related costs and facility closure costs. Payments in the amount of
$0.6 million were made in September 1998.
8. LONG-TERM DEBT
The Company amended its Senior Secured Bank Credit Facilities (Senior
Bank Facilities) as of September 16, 1998. The Senior Bank Facilities
now comprise (i) a $516.5 million Tranche A term loan facility,
maturing in 2004 with mandatory semiannual repayments commencing
September 30,1998 and aggregating $17.2 million, $50.8 million, $72.4
million, $92.8 million, $104.2 million and $115.6 million in the years
1998 through 2003, respectively, and the remaining $63.5 million on May
31, 2004; (ii) a $149.8 million Tranche B term loan facility, maturing
in 2005 with mandatory semiannual repayments commencing September 30,
1998 aggregating $0.2 million in 1998, $0.4 million in years 1999
through 2003, $20.2 million in 2004, and the remaining $127.4 million
in 2005; (iii) a $100.0 million Tranche B-1 term loan facility,
maturing in 2006 with mandatory semiannual repayments commencing March
31, 1999 aggregating approximately $0.3 million in each of the years
1999 through 2005, and the remaining $98.2 million in 2006; (iv) a $230
million revolving credit facility (the Revolving Credit Facility),
which includes a Canadian facility of $30 million, maturing in 2004, or
earlier upon repayment of the Tranche A term loans.
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. Margins
range from 0.5% to 2.00%. At September 30, 1998, interest rates in
effect for Tranches A, B, B-1 and the Revolving Credit Facility were
7.04%, 7.29%, 7.60% and 7.40%, respectively.
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
9. GUARANTOR FINANCIAL DATA
The Company's 10 3/8% Senior Subordinated Notes due 2006 (the 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
Senior Subordinated Notes. Presented below is summarized combined
financial information of the subsidiary guarantors:
September 30, 1998 December 31, 1997
------------------ ------------------
(unaudited)
Current assets $ 331,334 $ 262,531
Noncurrent assets 600,551 426,396
Current liabilities 140,633 80,108
Noncurrent liabilities 147,090 269,591
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
Net sales $ 218,585 $ 129,273 $ 588,723 $ 197,842
Gross profit 78,670 42,703 213,872 72,785
Net (loss)/income (55,498)(1) 2,377 (42,276)(1) 3,208
Net cash provided by
operating activities 28,856 22,678
Net cash used in
investing activities (188,426) (5,404)
Net cash provided by (used in)
financing activities 158,530 (14,464)
(1) Includes restructuring charge of $61.3 million (net of $33.8
million tax benefit).
10. FINANCIAL INSTRUMENTS
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 is subject to either fixed interest rates or
interest rate protection through December 1998.
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INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Financial Instruments, (Continued)
The Company has entered into interest rate swap, cap and collar
agreements to reduce the impact of changes in interest rates on its
floating rate debt. The swap agreements are contracts to exchange
floating interest rate payments for fixed interest rate payments as
well as fixed interest rate payments for floating interest rate
payments periodically over the life of the agreements without the
exchange of the underlying notional 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.
For interest rate instruments that effectively hedge interest rate
exposures, the net cash amounts paid or received on the agreements are
accrued and recognized as an adjustment to interest expense.
As of September 30, 1998, the Company had the following interest rate
instruments in effect (notional amounts are in millions; the collar and
swap rates are based on three-month and six-month LIBOR):
Notional Strike
Amount Rate Period
-------- ------ ------------
Interest Rate Collar $135 8.00% 9/97 - 12/98
5.25%
Interest Rate Swaps $200 9.72% 8/98 - 11/01
600 5.43% 8/98 - 8/03
The Company has also entered into interest rate cap and interest rate
collar agreements that became effective on October 2, 1998 as follows
(notional amounts are in millions; rates are based on six-month LIBOR):
Notional Strike
Amount Rate Period
-------- ------ -------------
Interest Rate Cap $225 6.75% 10/98 - 10/99
Interest Rate Collar $150 5.75% 10/98 - 10/01
3.76%
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the interest rate instruments are the estimated
amounts that the Company would receive or pay to terminate the
agreements at the reporting date, taking into account current interest
rates and the current creditworthiness of the counterparties. At
September 30, 1998, the Company estimates it would have to pay $18.5
million to terminate the agreements.
14
15
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
12. RELATED PARTY TRANSACTIONS
Effective November 1, 1996, the Company entered into a 10-year
monitoring and oversight agreement with an affiliate of its majority
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.
The Company incurred monitoring and oversight fees of $400 and $250 for
the three months ended September 30, 1998 and 1997 and $1,200 and $750
for the nine months ended September 30, 1998 and 1997, respectively. In
addition, the Company incurred financial advisory fees of $1,890 and
$2,445 for the three months ended September 30, 1998 and 1997 and
$3,967 and $2,445 for the nine months ended September 30, 1998 and
1997, respectively.
13. 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.
In the ordinary course of business, the Company enters into contracts
for the purchase of certain of its raw materials.
Based upon its experience to date, the Company believes that the future
cost of compliance with existing environmental laws, regulations and
decrees, including the Comprehensive Environmental Response,
Compensation and Liability Act, and liability for known environmental
claims, will not have a material adverse effect on the Company's
financial statements as a whole. 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.
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 that any 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 operations or cash
flows of the Company.
15
16
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
14. EARNINGS PER SHARE
Basic Earnings Per Share ("EPS") is based upon the weighted average
number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that would occur if options to issue
common stock are assumed to be exercised or converted into common
stock.
The EPS computations are based on the following amounts:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Basic EPS computation:
Net (loss)/income available to
common shares $ (48,971) $ (10,806) $ (8,584) $ 6,091
Average number of shares
outstanding 77,449,186 61,922,990 77,351,764 61,922,990
Basic earnings per share $ (0.63) $ (0.17) $ (0.11) $ 0.10
Diluted EPS computation:
Net (loss)/income available to
common shares $ (48,971) $ (10,806) $ (8,584) $ 6,091
Average number of shares
outstanding 77,449,186 61,922,990 77,351,764 61,922,990
Effect of dilutive stock
options 3,011,662 4,275,100 3,480,578 1,424,922
------------ ------------ ------------ ------------
Total number of shares
outstanding 80,460,848 66,198,090 80,832,342 63,347,912
Diluted earnings per share $ (0.63)* $ (0.17)* $ (0.11)* $ 0.10
* Effect of incremental shares is antidilutive.
15. IMPACT OF RECENT ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standards No. 131
(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 is
currently evaluating the reporting requirements of this statement and
the impact on its existing segment reporting.
In February 1998, SFAS 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits", was issued to standardize employers'
disclosures about pension and other postretirement benefit plans. This
Statement is effective for fiscal years beginning after December 15,
1997.
16
17
INTERNATIONAL HOME FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Impact of Recent Accounting Standards, (Continued)
On March 4, 1998 Statement of Position (SOP) No. 98-1, "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use",
was issued. The SOP was issued to address diversity in practice
regarding whether and under what conditions the costs of internal-use
software should be capitalized. SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. The Company
does not expect future adoption of this Statement in 1999 to have a
material effect on reported results.
In June 1998, 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. This statement is effective for
fiscal years beginning after June 15, 1999. The Company is currently
evaluating the effect this statement will have on its financial
statements.
16. SUBSEQUENT EVENTS
On October 23, 1998, the Company purchased 4.4 million shares of its
common stock, par value $.01 per share, from AHP Subsidiary Holding
Corporation, a subsidiary of American Home Products for approximately
$57,200 ($13.00 per share) and intends to hold the shares in treasury.
The purchase of the common stock was financed by the Company with
borrowings under its Senior Bank Facilities. American Home Products
continues to own approximately 4.4 million shares and continues to have
demand registration rights that it may exercise in the future with
respect to these shares.
17
18
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS - Three and Nine Months Ended September 30, 1998 and 1997.
NET SALES - The Company's net sales were $439.7 million for the three months
ended September 30, 1998 as compared to $349.5 million in the comparable 1997
quarter, an increase of $90.2 million, or 25.8%. Approximately $85.3 million of
the increase related to sales of companies acquired subsequent to September 30,
1997 (Productos Del Monte, Creative Products, Orleans Seafood, Puritan, Grist
Mill and Trenton Home Foods) and therefore were not reflected in the 1997
amounts. Bumble Bee Seafood sales increased $4.8 million to $104.7 million in
the three months ended September 30, 1998. Sales of the Company's other brands
were slightly higher than the comparable 1997 quarter, primarily due to
increases in Chef Boyardee sales, offset by (i) competitive pressures in the
crisp rice snack bars category, (ii) a reduction in sales of Crunch 'n Munch
products to certain mass merchant customers due to reduced promotional activity,
and (iii) continuing lower sales in Polaner All-Fruit.
For the nine months ended September 30, 1998, net sales were $1,230.7 million as
compared to $843.9 million for the comparable 1997 nine months, an increase of
$386.8 million, or 45.8%. Approximately $190.1 million of the increase related
to sales of companies acquired subsequent to September 30, 1997 (Productos Del
Monte, Creative Products, Orleans Seafood, Puritan, Grist Mill and Trenton Home
Foods) and therefore were not reflected in the 1997 amounts. The Bumble Bee
Seafoods sales increase of $210.3 million over the 1997 period reflects sales
for the nine months of 1998 as compared to sales for the three months ended
September 30, 1997 (Bumble Bee Seafoods was acquired on July 1, 1997). Sales of
the Company's other brands decreased by $13.6 million, primarily as a result of
lower volume in the Company's snack food category due to (i) competitive
pressures in the crisp rice snack bars category, (ii) a reduction in sales of
Crunch 'n Munch products to certain mass merchant customers due to reduced
promotional activity, and (iii) continuing lower sales in Polaner All-Fruit.
COST OF GOODS SOLD - Cost of goods sold was $231.2 million for the three months
ended September 30, 1998 as compared to $182.2 million in the comparable 1997
quarter. Expressed as a percentage of net sales, cost of goods sold increased to
52.6% from 52.1% in 1997. This was primarily attributable to the inclusion of
the operations of the companies acquired in the fourth quarter of 1997 and 1998,
which have lower gross margins in comparison with the Company's historical
margins. Cost of goods sold for Bumble Bee Seafoods (acquired on July 1, 1997)
expressed as a percentage of net sales declined to 68.6% from 71.1% in the
comparable 1997 quarter, primarily resulting from a more favorable sales mix.
Cost of goods sold for the Company's historical brands declined to 43.0% of net
sales from 44.5% of net sales in the comparable 1997 quarter. The decline in
cost of goods sold as a percentage of net sales for the historical brands
resulted from the continuing overall reductions in the Company's manufacturing
costs, which reflect management's continuing cost reduction initiatives.
18
19
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Cost of Goods Sold, (Continued)
For the nine months ended September 30, 1998, cost of goods sold as a percentage
of net sales increased to 52.2% from 48.9% for the comparable 1997 period. This
was primarily attributable to the inclusion of the operations of the companies
acquired in the fourth quarter of 1997 and 1998, which have lower gross margins
in comparison to the Company's historical margins. Excluding the 1997 and 1998
acquisitions, cost of goods sold declined to 43.0% of net sales from 46.0% of
net sales for the comparable 1997 period, reflecting management's continuing
cost reduction initiatives and price increases in Chef Boyardee canned pasta in
July, 1997.
TOTAL MARKETING EXPENSES - Total marketing expenses increased to $84.7 million
for the three months ended September 30, 1998 as compared to $69.1 million in
1997. Expressed as a percentage of net sales, total marketing expenses decreased
to 19.3% from 19.8% for the comparable 1997 period. The increase of $15.5
million was attributable to the inclusion of the fourth quarter 1997 and 1998
acquisitions (Productos Del Monte, Creative Products, Orleans Seafood, Puritan,
Grist Mill and Trenton Home Foods), which aggregated $14.0 million, as well as
Bumble Bee Seafoods ($0.3 million) and existing brands ($1.2 million, primarily
resulting from increased media spending).
Total marketing expenses increased to $244.1 million for the nine months ended
September 30, 1998, as compared to $178.4 million for the comparable 1997
period. Expressed as a percentage of net sales, total marketing expenses
decreased to 19.8% from 21.1% for the comparable 1997 nine month period. The
increase of $65.7 million was attributable to the inclusion of the 1997 and 1998
acquisitions (Bumble Bee Seafoods, Productos Del Monte, Creative Products,
Orleans Seafood, Puritan, Grist Mill and Trenton Home Foods), which aggregated
$69.8 million, offset by $4.1 million of lower expenditures on existing brands,
primarily resulting from increased media spending, offset by a reduction in
coupon promotions and improved management of trade promotion spending.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative (SG&A) expenses and other expenses were $174.6 million for the
three months ended September 30, 1998 ($56.3 million excluding the restructuring
charge of $118.1 million and the stock option compensation charge of $0.2
million) as compared to $88.7 million in 1997 ($43.9 million excluding the stock
option compensation charge of $44.8 million). Approximately $11.0 million of the
$12.4 million increase was attributable to the companies acquired in the fourth
quarter 1997 and 1998 (Productos Del Monte, Creative Products, Orleans Seafood,
Puritan, Grist Mill and Trenton Home Foods). The balance of the increase was
attributable to Bumble Bee Seafoods ($0.1 million) and existing brands ($1.3
million). Total SG&A expenses as a percentage of net sales increased to 12.8% in
the three months ended September 30, 1998 from 12.6% in the comparable quarter
(excluding the restructuring charge and the stock option compensation charge in
1998 and the stock option compensation charge in 1997).
SG&A and other expenses increased to $281.7 million for the nine months ended
September 30, 1998 compared to $164.7 million for the comparable 1997 period.
Total SG&A expenses excluding the charges noted above were $162.7 million for
the nine months ended September
19
20
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Selling, General and Administrative Expenses, (Continued)
30, 1998 compared to $119.9 million for the comparable 1997 period.
Approximately $27.3 million of the $42.8 million increase was attributable to
the companies acquired in the fourth quarter 1997 and 1998 (Productos Del Monte,
Creative Products, Orleans Seafood, Puritan, Grist Mill and Trenton Home Foods).
The Bumble Bee Seafoods increase of $12.8 million over the 1997 period reflects
nine months of 1998 as compared to the three months ended September 30, 1997.
The balance of the increase, or $2.7 million, was attributable to the existing
brands. Total SG&A expenses as a percentage of net sales declined to 13.2% for
the nine months ended September 30, 1998 from 14.2% for the comparable 1997
period.
In September 1998, the Company recorded a restructuring charge of $118.1 million
relating to 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 of
the Campfire crisp rice snack bar brand and the Polaner fruit spreads brand.
The Vacaville, California production facility is expected to close in December
1998, while the adjacent distribution center and the Clearfield, Utah facility
are expected to close in the first quarter of 1999. The total closure costs of
approximately $40.6 million represents $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 525 employees.
Production of a majority of the products currently manufactured at the Vacaville
facility will be shifted to other facilities, mainly Milton, Pennsylvania. The
Company will outsource the production of tomato paste and will enter into a
third-party manufacturing agreement for the production of Ro*Tel diced tomatoes,
both of which are currently manufactured at the Vacaville facility. The
manufacturing of the Campfire products will be transferred to the Lakeville,
Minnesota facility that was recently acquired as part of the Grist Mill
acquisition. The Company anticipates that it will incur approximately $3.0
million of additional non-capitalizable expenses as the transfer and
installation of the relocated equipment occurs. It is expected that the entire
process will be completed by the end of 1999.
The Campfire and Polaner brands have been impacted by continued retail category
sales declines, which have further deteriorated in recent months. The current
and projected sales trends and the resulting impact on the brands' future
profitability have impaired the valuation of their long-lived assets,
necessitating a write-down to each brand's fair value. The write-down of
goodwill is $47.7 million and $29.7 million for the Campfire crisp rice snack
bar brand and for the Polaner fruit spreads brand, respectively.
At September 30, 1998, $10.6 million of restructuring charges remained in Other
accrued liabilities. This amount is comprised of severance and related costs
and facility closure costs. Payments in the amount of $0.6 million were made in
September 1998.
In the third quarter of 1997, the Company recorded a non-cash charge aggregating
$44.8 million related to stock option compensation.
20
21
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
INTEREST EXPENSE - Interest expense for the three months ended September 30,
1998 was $24.2 million as compared to $27.5 million for the comparable 1997
period. The decrease in interest expense reflects a lower outstanding debt
balance during the quarter ended September 30, 1998 as compared to the
comparable 1997 quarter as well as a lower weighted average interest rate for
the period.
Interest expense for the nine months ended September 30, 1998 was $70.8 million
as compared to $79.2 million for the comparable 1997 period. The decrease in
interest expense is due to a lower outstanding debt balance during the nine
months ended September 30, 1998 as compared to the comparable 1997 period as
well as a lower weighted average interest rate for the period.
PROVISION FOR INCOME TAXES - The income tax benefit for the three months ended
September 30, 1998 was $26.5 million compared to a tax benefit of $7.0 million
for the comparable 1997 period. The effective tax rate of 35.1% for the three
months ended September 30, 1998 was impacted by the recognition, within the
quarter, of the tax affect of the write-off of non-deductible goodwill, which
was a component of the restructuring charge. Excluding the restructuring charge,
the effective tax rate for the three months ended September 30, 1998 was 38.2%
as compared to 39.4% for the comparable 1997 period.
The income tax benefit for the nine months ended September 30, 1998 was $0.2
million compared to the tax expense of $4.2 million for the comparable 1997
period. The effective tax rate of 1.7% was impacted by the recognition of the
tax affect of the write-off of non-deductible goodwill, as discussed above, and
by the significant reduction of operating income attributable to the
restructuring charge. Excluding the restructuring charge, the effective tax rate
was 39.0% as compared to 41.0% for the comparable 1997 period. The Company
anticipates sufficient future income to realize deferred tax assets recorded at
September 30, 1998. 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 (LOSS)/INCOME - For the three month period ended September 30, 1998, the net
loss was $49.0 million as compared to a net loss of $10.8 million for the
comparable 1997 period for the factors discussed above. Excluding the
restructuring charge and the non-cash stock option compensation charge in 1998
and the non-cash stock option compensation charge in 1997, net income increased
to $26.5 million from $16.3 million, or 62.6%.
For the nine month period ended September 30, 1998, the net loss was $8.6
million as compared to net income of $6.1 million for the comparable 1997 period
for the factors discussed above. Excluding the restructuring charge and the
non-cash stock option compensation charge in 1998 and the non-cash stock option
compensation charge in 1997, net income increased to $67.3 million from $32.5
million, or 107.1%.
21
22
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the nine months ended September
30, 1998 was $99.9 million, or $13.1 million higher than the comparable 1997
period. The increase was attributable to additional depreciation and
amortization ($7.9 million) and the restructuring charge ($117.5 million),
offset by changes in assets and liabilities ($45.3 million), stock option
compensation expense ($43.8 million), deferred income taxes ($8.5 million), and
lower net income ($14.7 million).
Net cash used in investing activities for the nine months ended September 30,
1998 was $298.2 million, or $126.5 million higher than the comparable 1997
period. The Company through its Canadian subsidiary, International Home Foods
(Canada), Inc., purchased substantially all of the assets relating to the
Puritan stews and canned meats business from Unilever's T. J. Lipton Canada
division for approximately $41.0 million. The Company purchased Grist Mill Co.
for approximately $106.6 million, net of cash acquired. In addition, the Company
through its subsidiary Trenton Home Foods, Inc., acquired the Libby's brand of
retail and international canned meat products and the Trenton, Missouri
manufacturing facility for $128.2 million. For the nine months ended September
30, 1998, the Company invested $20.4 million in capital expenditures, an
increase of $11.8 million over the comparable 1997 period, primarily
attributable to expenditures for companies acquired in 1997 and 1998 ($11.3
million).
Cash provided by financing activities was $196.8 million for the nine months
ended September 30, 1998, compared to cash provided by financing activities for
the nine months ended September 30, 1997 of $102.8 million. The Company borrowed
$316.0 million and repaid $303.0 million under the terms of its Revolving Credit
Facility. In addition, the Company borrowed $210.0 million in term loans under
the tranches of its Senior Bank Facilities, and repaid $31.1 million under the
term loans. The net additional borrowings were used to fund the acquisitions of
Puritan, Grist Mill and Trenton Home Foods. The Company incurred $1.7 million of
debt issuance costs and received $2.0 million in proceeds from the exercise of
stock options.
The Company amended its Senior Bank Facilities on September 16, 1998 by adding a
new $100.0 million term loan and used the proceeds to repay a portion of the
outstanding borrowings under its Revolving Credit Facility. At November 6, 1998,
the Company had $114.4 million available under its Revolving Credit Facility.
On October 23, 1998 the Company purchased 4.4 million shares of its common
stock, par value $.01 per share, from AHP Subsidiary Holding Corporation, a
subsidiary of American Home Products for approximately $57,200 ($13.00 per
share) and intends to hold the shares in treasury. The purchase of the common
stock was financed by the Company with borrowings under its Senior Bank
Facilities.
22
23
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources, (Continued)
Management believes that cash generated from operations and borrowings under the
Senior Bank Facilities will be sufficient to satisfy working capital
requirements and required capital expenditures. Further expansion of the
business through acquisitions may require the Company to incur additional
indebtedness or issue equity securities. There can be no assurance that
additional debt or equity will be available to the Company, or if available,
will be on terms acceptable to the Company.
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 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 is subject to either fixed interest rate
or interest rate protection through December 1998.
The Company has entered into interest rate swap, cap and collar agreements to
reduce the impact of changes in interest rates on its floating rate debt. The
swap agreements are contracts to exchange floating interest rate payments for
fixed interest rate payments as well as fixed interest rate payments for
floating interest rate payments periodically over the life of the agreements
without the exchange of the underlying notional 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. For interest rate
instruments that effectively hedge interest rate exposures, the net cash amounts
paid or received on the agreements are accrued and recognized as an adjustment
to interest expense.
As of September 30, 1998, the Company had the following interest rate
instruments in effect (notional amounts are in millions; the collar and swap
rates are based on three-month and six-month LIBOR):
Notional Strike
Amount Rate Period
-------- ------ ------
Interest Rate Collar $ 135 8.00% 9/97 - 12/98
5.25%
Interest Rate Swaps $ 200 9.72% 8/98 - 11/01
600 5.43% 8/98 - 8/03
The Company has also entered into interest rate cap and interest rate collar
agreements that became effective on October 2, 1998 as follows (notional amounts
are in millions; rates are based on six-month LIBOR):
Notional Strike
Amount Rate Period
-------- ------ ------
Interest Rate Cap $ 225 6.75% 10/98 - 10/99
Interest Rate Collar $ 150 5.75% 10/98 - 10/01
3.76%
23
24
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
IMPACT OF RECENT ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standards No. 131 (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 is currently evaluating the
reporting requirements of this statement and the impact on its existing segment
reporting.
In February 1998, SFAS 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", was issued to standardize employers' disclosures about
pension and other postretirement benefit plans. This Statement is effective for
fiscal years beginning after December 15, 1997.
On March 4, 1998 Statement of Position (SOP) No. 98-1, "Accounting for the Cost
of Computer Software Developed or Obtained for Internal Use", was issued. The
SOP was issued to address diversity in practice regarding whether and under what
conditions the costs of internal-use software should be capitalized. SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998.
The Company does not expect future adoption of this Statement in 1999 to have a
material effect on reported results.
In June 1998, 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. This statement is effective
for fiscal years beginning after June 15, 1999. The Company is currently
evaluating the effect this statement will have on its financial statements.
READINESS FOR YEAR 2000 - Many computer systems and other equipment with
embedded chips or processors use only two digits to represent the year, and as a
result may be unable to accurately process certain data before, during or after
the Year 2000. As a result, entities are at risk for possible miscalculations or
systems failures causing disruptions in business operations. This Year 2000
issue can arise at any point in the Company's supply, manufacturing, processing,
distribution and financial chains.
24
25
INTERNATIONAL HOME FOODS, INC.
Item 2
Management's Discussion And Analysis of
Financial Condition and Results of Operations
Readiness for Year 2000, (Continued)
A Year 2000 Compliance Project, directed by the Vice President of Information
Systems, has been in process at the Company since 1997. The Company's business
systems are either being replaced with newer systems that are Year 2000
compliant or each system that will be retained is being remediated. The internal
project team for manufacturing systems compliance is complemented by a project
control review by an outside consulting firm. The project scope is not limited
to computerized business systems. Infrastructure issues including, but not
limited to, telephone switches, personal computers, data communication network
control software and production process control software, are also being
addressed.
Achieving Year 2000 compliance for our business systems will largely be a
by-product of our corporate initiative to improve access to business information
through a common, integrated computing system across the organization. The
Company has implemented an Enterprise Resource Planning (ERP) System based on
SSA's Business Planning and Control System (BPCS) software. This software is
being used in all existing operations and is/or will be used in recently
acquired operations. It is anticipated that this software will be Year 2000
compliant by December 31, 1998. Other non-Year 2000 compliant business software
is being replaced or upgraded to versions which are Year 2000 compliant. Total
business systems compliance costs are anticipated to not exceed $0.2 million,
excluding internal costs.
The Company's infrastructure issues are currently being assessed and management
anticipates completion of a remediation plan by November 30, 1998. Management
anticipates substantial critical manufacturing process control system compliance
by January 31, 1999. All major manufacturing process control systems are
anticipated to be Year 2000 compliant by May 31, 1999. Remediation cost
estimates are not yet final but are not expected to be material.
The Company is in the process of surveying its business partners, including
customers and vendors, as well as original equipment manufacturers, financial
institutions, and employee benefit providers to determine the status of their
Year 2000 compliance efforts.
The Company will develop contingency plans as it becomes apparent that such
plans are warranted.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. The Company believes that with the completion of the remediation of
the business systems, the possibility of significant interruptions of normal
operations should be reduced. However due to the general uncertainty inherent in
the Year 2000 problem, resulting in part from the inability to ensure readiness
of third parties, the Year 2000 compliance issue could have a material adverse
impact on the Company's results of operations, cash flows and financial
condition. Based upon information available at this time, the Company believes
that the cost of Year 2000 readiness will not have a material adverse effect on
the consolidated financial position, results of operations or cash flows of the
Company. Year 2000 expenditures are being funded through operating cash flow.
25
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INTERNATIONAL HOME FOODS, INC.
PART II
ITEM 5 OTHER INFORMATION
Pursuant to Rule 14a-4(c)(1) of the Exchange Act of 1934, the
Company's management will have discretionary authority with
respect to proxies submitted to the 1999 annual meeting of
stockholders on any matter which the Company does not receive
notice of by no later than sixty days before such meeting or (if
later) ten days after the first public notice of such meeting is
sent to the stockholders of the Company. This rule does not
affect the deadline set forth in Rule 14a-8 of the Exchange Act
of 1934 for including a shareholder proposal in the Board of
Directors' solicitation of proxies. A shareholder proposal must
be received by Lynne Misericordia, Treasurer, 1633 Littleton
Road, Parsippany, New Jersey 07054, on or before December 8,
1998, in order to be included in such proxy materials pursuant
to Rule 14a-8.
ITEM 6 EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits:
(10) Credit Agreement, dated November 1, 1996, amended and
restated as of September 16, 1998, by and among the Company
and the banks signatory thereto.
(12) Statements showing computation of ratio of earnings to
fixed charges based on SEC Regulation S-K, Item 503.
(27) Financial Data Schedule
(b) Reports on Form 8-K:
Dated September 25, 1998, under Item 7 (Financial Statements and
Exhibits).
Dated October 27, 1998, under Item 5 (Other Events) and Item 7
(Financial Statements and Exhibits).
26
27
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)
Date: November 12, 1998 /s/ C. DEAN METROPOULOS
-------------------------
C. Dean Metropoulos
Chairman of the Board and
Chief Executive Officer
Date: November 12, 1998 /s/ N. MICHAEL DION
-------------------------
N. Michael Dion
Senior Vice President and
Chief Financial Officer
27
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INTERNATIONAL HOME FOODS, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBITS
- ------ --------
10 Credit Agreement, dated November 1, 1996, amended and restated as
of September 16, 1998, by and among the Company and the banks
signatory thereto.
12 Computation of Consolidated Ratio of Earnings to Fixed Charges
27 Financial Data Schedule