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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Fiscal Year Ended December 31, 1998 Commission File Number: 001-13537
INTERNATIONAL HOME FOODS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3377322
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
1633 LITTLETON ROAD
PARSIPPANY, N.J. 07054
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (973-359-9920)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange where registered
---------------------- --------------------------------------
Common Stock par value New York Stock Exchange
$0.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to its Form 10-K [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Aggregate market value
Outstanding at held by non-affiliates at
Class February 28, 1999 February 28, 1999
----- ----------------- -----------------
<S> <C> <C>
Common stock, par value $0.01 73,334,727 $444,936,719
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of registrant's Annual Report to Stockholders for the year
ended December 31, 1998 are incorporated into Part II.
2. Portions of the registrant's Proxy Statement to be furnished in
connection with the 1999 Annual Meeting of Stockholders are
incorporated into Part III.
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TABLE OF CONTENTS
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<CAPTION>
PART I Page Number
<S> <C> <C>
Item 1. Business 1
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders 19
Matters
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition and 19
Results of Operations
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting and 19
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions 20
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 20
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
THE COMPANY
The Company is a leading North American manufacturer and marketer of a
diversified, well-established portfolio of shelf-stable food products with
popular brand names. Prior to November 1, 1996, the Company was an indirect
wholly-owned subsidiary of American Home Products Corporation ("American Home
Products"). Effective on November 1, 1996, an affiliate of Hicks, Muse, Tate &
Furst, Incorporated ("Hicks Muse") acquired 80% of the outstanding capital stock
of the Company from American Home Products for approximately $1,225.6 million in
cash in a transaction treated as a recapitalization for financial accounting
purposes. Also effective on November 1, 1996, the Company acquired all of the
outstanding capital stock of Heritage Brands Holdings, Inc. ("Heritage") from an
affiliate of Hicks Muse for approximately $70.8 million in cash in a transaction
treated as a purchase for financial accounting purposes. Heritage manufactures
and markets the Company's Campfire branded products. In connection with these
transactions, the Company incurred approximately $1,070.0 million of
indebtedness, consisting of $670.0 million of borrowings under the Company's
senior secured credit facilities ("the Senior Bank Facilities") and the issuance
of $400.0 million principal amount of the Senior Subordinated Notes due 2006
("Senior Subordinated Notes").
On July 1, 1997, the Company consummated the acquisition of substantially all of
the assets of Bumble Bee Seafoods, Inc. and its operating subsidiaries ("Bumble
Bee Seafoods") for approximately $163.1 million in cash, including fees, and the
assumption of certain liabilities, including trade payables and certain accrued
liabilities. Bumble Bee(R) is one of the leading brands of premium canned
seafood in the U.S. and the leading brand of canned white meat tuna and canned
salmon in the U.S. The assets acquired consisted primarily of inventory,
accounts receivable, property, plant and equipment and trademarks used by the
Bumble Bee Business for the processing and marketing of the Company's Bumble Bee
canned seafood products. Prior to this transaction, Bumble Bee Seafoods was
highly leveraged and had capital constraints which limited Bumble Bee Seafoods'
ability to source raw materials and most effectively market its products. To
facilitate the purchase of the Bumble Bee Business by the Company free and clear
of existing liens, Bumble Bee Seafoods filed for bankruptcy. In connection with
the transaction, the Company increased its borrowings under the Senior Bank
Facilities by $110.0 million. The remainder of the purchase price was provided
from the Company's available cash on hand.
On October 1, 1997 the Company acquired Productos Del Monte S.A. de C.V.
("Productos Del Monte") from an affiliate of Hicks Muse for 3,127,415 shares of
Common Stock. Productos Del Monte is a leading manufacturer and marketer of
branded catsup, canned vegetables and bottled salsa in Mexico. The acquisition
of Productos Del Monte was treated as a combination of entities under common
control. Accordingly, the historical accounting values of Productos Del Monte
were carried over for financial accounting purposes.
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THE COMPANY (Continued)
On October 1, 1997, the Company acquired Creative Products, Inc. of Rossville
("Creative Products") for approximately $52.0 million in cash. The acquisition
was funded through borrowings under the Company's Senior Bank Facilities.
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. The acquisition of Creative
Products was treated as a purchase for financial accounting purposes.
On November 21, 1997, the Company acquired substantially all of the assets of
Orleans Seafood, Inc. ("Orleans") for $26.9 million, including transaction
fees. Orleans(R) is a specialty canned seafood manufacturer and marketer. The
acquisition was funded through borrowings under the Company's Senior Bank
Facilities.
On March 9, 1998, the Company, through its Canadian subsidiary, International
Home Foods (Canada), Inc., purchased certain assets relating to the Puritan(R)
stews and canned meats business ("Puritan") from Unilever's T. J. Lipton Canada
division for a total purchase price of approximately $41.0 million, including
transaction fees. The acquisition was funded with borrowings under the Company's
Senior Bank Facilities. 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 $112.8 million, including transaction fees. The
Company financed the acquisition with borrowings under its Senior Bank
Facilities. Grist Mill(R) 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, the Spreadable(R)and Broadcast(R) brands, and the Trenton, Missouri
manufacturing facility for those products ("Libby's"), from Nestle USA, Inc. for
approximately $129.4 million, including transaction fees. The Company, through a
fifteen year license agreement with Nestle will continue to use the Libby's
trademark. In addition, the Company and Nestle have entered into a long-term
supply agreement through December 31, 2002, with three additional one-year terms
at the option of Nestle, under which the Company will continue to manufacture
Nestle food service products at the facility in Trenton, Missouri. This supply
agreement provides that the Company is reimbursed for the variable cost per
case, as defined, for all product which has been produced and packaged by the
Company and shipped on behalf of Nestle, plus an amount paid quarterly which
approximates the Company's fixed costs for such period. The Company financed the
acquisition of the Libby's canned meat business with borrowings under its Senior
Bank Facilities. Libby's is a leading domestic manufacturer, importer and global
marketer of canned meat products, including Vienna sausages, corned beef,
salmon, hash and chili.
On January 19, 1999, the Company, through its subsidiary Bumble Bee Seafoods
acquired the canned seafood brands (Clover Leaf(R) and Paramount(R) and
business of British Columbia Packers from George Weston, Ltd. of Canada for a
total purchase price of approximately $38.0 million including transaction fees.
The acquisition was funded through borrowings under the Company's Senior Bank
Facilities.
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THE COMPANY (Continued)
The Company's well-established portfolio of shelf-stable food products includes
Chef Boyardee(R) prepared foods, Bumble Bee premium canned seafood, Libby's
canned meats, Pam(R) cooking spray and Gulden's(R) mustard. In the United
States, 12 of the Company's 16 principal branded product lines command the
number one position in their defined markets during 1998. Many of the Company's
brands also command leading market positions in Canada, Mexico and Puerto Rico.
The Company's portfolio of leading brands provides the Company with a strong
presence in the United States as well as an attractive platform for continued
international expansion. The Company's brand name business is complemented by
growing food service and private label businesses and sales to the U.S.
military.
PRODUCTS AND MARKETS
The Company has three reportable business segments - Branded Products,
Seafood, and Private Label and Foodservice. Branded Products is defined as U.S.
grocery sales for the following products: Chef Boyardee, Libby's brand of canned
meats, Southwest brands (Luck's(R), Ro*Tel(R), Dennison's(R) and Ranch Style(R)
Brands), Specialty brands (PAM, Polaner(R), Gulden's, Maypo(R), Wheatena(R),
Maltex(R), and G. Washington's(R) and Snack brands (Crunch'n Munch(R), Jiffy
Pop(R) and Campfire(R)). Seafood includes all grocery, private label and food
service sales for the Bumble Bee, Orleans and Libby's brands of canned seafood
products. The Paramount and Clover Leaf brands acquired in January 1999 will be
reported in the Seafood segment. Private Label and Foodservice includes all
private label canned pasta, cooking spray, fruit snacks, ready-to-eat cereals,
wholesome snack bars, pie crust, personal care products and sales to foodservice
distributors. The All Other category is comprised of sales to the military and
the International division which includes branded, private label and foodservice
sales in Canada, Mexico, Puerto Rico, as well as export sales.
The Company sells the products in each of its segments primarily to grocery
wholesalers and distributors, grocery stores and supermarkets, convenience
stores, drug and mass merchants and warehouse clubs.
Additional financial information about the Company's business segments is
incorporated by reference from Note 24 of the Notes to Consolidated Financial
Statements on pages 51 and 52 of the 1998 Annual Report.
References to market, category, segment sales, market share percentages and
market positions reflect grocery sales dollars for the 52-week period ended
January 16, 1999, as gathered by A.C. Nielsen for United States markets.
BRANDED PRODUCTS
CHEF BOYARDEE. The Chef Boyardee product line consists of canned pasta,
microwave pasta, pizza kits, dry dinners, pizza and spaghetti sauces and private
label canned pasta. Management believes that Chef Boyardee products appeal to
families with children because they are generally convenient, nutritionally
sound and inexpensive relative to other quick meal and snacking alternatives.
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BRANDED PRODUCTS, (Continued)
The Company separates the canned pasta product line into two categories:
"All Family" and "Kids". The "All Family" category represents canned pasta
products primarily consumed by children over the age of six as well as adults.
The "Kids" category represents canned pasta products typically consumed by
children age six and under. The Company's "All Family" canned pasta line
consists primarily of Beef Ravioli, Overstuffed Ravioli and Mini-Ravioli, in
both regular and 99% fat-free product offerings, as well as Spaghetti &
Meatballs and Beefaroni. The Company's "Kids" canned pasta line features the
Chef Jr. line which includes shapes such as ABC's, 123's, aliens and dinosaurs
and is specially formulated to appeal to younger children.
As the table below indicates, Chef Boyardee is the leading brand in the
canned pasta category with a 55% market share in 1998, followed by the Campbell
Soup Company's Franco American brand at 36%. The remaining nine percent of this
category is fragmented, with private label accounting for approximately seven
percent.
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<CAPTION>
1998 Market Share
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Chef Franco
Categories Size Boyardee American Other
(Dollars in millions)
<S> <C> <C> <C> <C>
"All Family" $310 78% 12% 10%
"Kids" 201 20% 73% 7%
----
Total Canned Pasta $511 55% 36% 9%
====
</TABLE>
As indicated in the table above, Chef Boyardee holds a dominant position in
its core "All Family" category while Franco American products have the number
one position in the "Kids" category. Management believes that its "All Family"
products compete primarily within the broader category of prepared or quick
meals.
Management intends to continue to build Chef Boyardee's brand equity
through strong advertising support and packaging that aggressively promote the
Chef Boyardee brand name. In addition, management believes that sales of Chef
Boyardee products can be enhanced by (i) leveraging the Company's dominant
position in the "All Family" category by targeting advertising campaigns toward
moms and children ages 9 to 13, the older segment of the brand's traditional
consumer base, (ii) encouraging greater use of Chef Boyardee products,
particularly as an after-school snack, (iii) the introduction of new products
that appeal to older children and adults, and (iv) promoting the nutritional
benefits of Chef Boyardee, including its 99% fat-free products, versus other
quick meal alternatives.
LIBBY'S CANNED MEATS. The Libby's product line includes Vienna sausages,
corned beef, potted meat, hash and chili. Libby's is the second leading brand in
the $224.6 million canned meat category, with a 25% market share. Armour is the
market leader with a 33% market share. Libby's is the leader in the corned beef
segment with a 37.0% market share and is second in the Vienna sausage and corned
beef hash segments with a 25.8% and 19.5% market share, respectively. Similar to
the Company's other canned product lines, the Company believes that Libby's
products appeal to consumers because they are convenient to prepare and provide
nutritional benefits at an affordable price.
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BRANDED PRODUCTS, (Continued)
SOUTHWEST BRANDS. The Company offers products in the growing southwestern
cuisine market on a national basis with tomato-based items and on a regional
basis with beans and chili. Canned beans and chili were $964.6 million and
$317.6 million categories in 1998, respectively, with the Western and Southern
regions representing approximately 73% of total U.S. chili volume. Tomatoes with
green chilies was a $45.6 million category in 1998, within the $490.2 million
canned tomato category, with the Southern region representing approximately 62%
of total U.S. volume.
Ro*Tel. The Company's Ro*Tel brand is primarily sold in the Southern and
Western regions of the U.S. On a national basis, Ro*Tel has a 7% share of
canned tomatoes and 80% share of tomatoes with green chilies. The Company
competes with Hunt's and Del Monte products in these categories. The Company
plans to expand the brand through product line extensions and geographical
expansion. The brand is known as a zesty, robust and flavorful tomato
ingredient used primarily in combination with processed cheese as a dip for
tortilla chips. The Company's marketing strategy for Ro*Tel has primarily
consisted of only print advertising campaigns and on-package recipes. In 1998
the Company began its first televised advertising campaign, in combination with
the print advertising, which features Ro*Tel as the secret ingredient that can
be used to enhance traditional dishes.
Ranch Style. The Ranch Style product line consists of pork `n beans, baked
beans, refried beans, ingredient beans, chili and beef-stew. The brand is
marketed primarily in the southwestern United States where it led the region
with a 21% share of the miscellaneous canned bean market in 1998 and a 40% share
of the pork and beans market in 1998. With ingredients that are low in fat and
high in protein, Ranch Style products are positioned to satisfy the growing
trend toward healthy eating. The Company expanded the line offerings by
introducing four new baked bean items in 1997 and a line of refried beans in
1998, as well as beans with sweet onions. Ranch Style has had a presence in
Mexico for over five years and management believes that sales of the brand can
be expanded in this market. On a combined basis, Ranch Style led the canned bean
category in the Southwest with a 26% market share in 1998.
Luck's. Luck's is the leader in the $63.8 million miscellaneous bean market
in the Southeast with a 32% market share in 1998. The Luck's product line
primarily includes bean products known for their traditional southern-style
flavor. In March 1998, the Company launched it's first entry into the baked
beans category and supported it with television advertising, coupons and in-
store demos. The successful launch has given Luck's a 5.9% share of the baked
beans category in the Southeast.
Dennison's. Dennison offers a complete line of chili including con carne
with and without beans, extra hot chili, reduced fat, turkey and vegetarian
chili. These products are marketed as the "Stand-Up" chili with a distinctly
extra thick and hearty profile. The brand has traditionally been marketed in the
West where it had a 17% share of the region's $124.9 million chili market in
1998.
SPECIALTY BRANDS. The Company's specialty brands include PAM cooking spray,
Gulden's mustard, Polaner fruit spreads, Maypo, Wheatena and Maltex hot
cereals, and G. Washington's dry seasonings and broths.
PAM. The Company's PAM products include Original, Butter and Olive Oil
non-stick cooking sprays. The Company's advertising and marketing strategy for
PAM emphasizes that it is the only all-natural cooking spray for healthy,
low-fat cooking. As a result of PAM's image and performance, the brand enjoys a
loyal customer base and a premium price.
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SPECIALTY BRANDS, (Continued)
In grocery outlets, the non-stick cooking spray category has grown at a
compound annual rate of approximately 8% from 1993 to 1998. Management believes
that this rapid sales growth has been driven by a trend toward healthier eating
and cooking. Several well known chefs and numerous cookbook and magazine recipes
have advocated cooking sprays in lieu of fattier oils and spreads. PAM is the
market leader in the $168.6 million non-stick cooking spray category with 49% ,
while CPC International, Inc's Mazola, Proctor & Gamble's Crisco and Unilever's
Shedd's had market shares of 14%, 4% and 2%, respectively. Private label
accounts for most of the remaining market share with approximately 22%, of which
Creative Products (acquired by the Company in 1997) produced the majority.
Management intends to capitalize on PAM's premium image and the trend
toward healthier eating by identifying and promoting new usage occasions through
print and television advertising campaigns and on-package and in-store recipe
suggestions. In 1998, the Company introduced two new flavors, garlic and lemon,
which currently have approximately a 5% market share in total. In addition,
the company has begun to distribute PAM in Mexico.
Gulden's. Gulden's mustard is the leader in the brown mustard segment with
a 47% market share in 1998, followed by French's Deli Style with a 24% market
share. Brown mustard is a $43.2 million segment of the $292.6 million mustard
category. The brown mustard grocery segment grew at a compound annual rate of 8%
between 1993 and 1998. The Company continued to build its presence within the
category with the introduction of Gulden's zesty honey mustard in July 1998.
Polaner. The Polaner brand is comprised of a broad array of products
competing within the general fruit spread (including jams, jellies, preserves
and fruit-juice-sweetened spreads) and wet spices markets. The Company sold
Polaner in February 1999 for $30.0 million.
Other. A number of smaller brands complete the Company's specialty brands
portfolio, including Maypo, Wheatena and Maltex hot cereals and G. Washington's
dry seasonings and broths.
SNACK BRANDS. In the snack food category, the Company's brands include
Crunch 'n Munch glazed popcorn and pretzels, Campfire marshmallows and
marshmallow crisp rice bars and Jiffy Pop unpopped popcorn.
Crunch 'n Munch. Crunch 'n Munch, a combination of popcorn and fresh dry
roasted peanuts coated with a butter toffee glaze, is offered in four flavors
(Buttery Toffee, Caramel, Almond Supreme and Fat Free Buttery Toffee). Crunch 'n
Munch is positioned as a snack to satisfy the salty and sweet cravings of
consumers. The Company believes that the brand's new contemporary package
design, as well as further product line extensions such as the 1997 introduction
of its fat-free product and the 1998 introduction of Crunch 'n Munch Glazed
Pretzels, will allow it to increase its consumer base. Moreover, management
believes that the brand can achieve significantly higher levels of sales with
increased marketing support.
Glazed popcorn was a $60.7 million category in 1998. Glazed popcorn
products are purchased by consumers of all ages. Younger households are more
likely to purchase Borden, Inc.'s Cracker Jack brand due to its appeal to kids,
while older households are more likely to purchase Crunch 'n Munch due to its
appeal to adults. During 1998, Crunch 'n Munch commanded a 41% market share,
followed by Cracker Jack at 33%. No other competitor accounts for more than 10%
of the market.
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SNACK BRANDS, (Continued)
Campfire marshmallows. The Campfire brand name is the oldest brand name in
the marshmallows category. Campfire marshmallow is the second leading brand in
the $108.1 million grocery marshmallow market with a 10% market share in 1998.
Favorite Brands, Inc.'s Jet Puff brand is the market leader with a 46% market
share, with private label accounting for the balance of the market.
SEAFOOD
Seafood includes all grocery, private label and foodservice sales for the
Bumble Bee, Orleans and Libby's brands of canned seafood products. Bumble Bee is
one of the leading brands of premium canned seafood products in the U.S. The
Bumble Bee product line consists principally of canned white meat tuna, canned
light meat tuna and canned salmon. Bumble Bee holds a number one share of the
canned white meat tuna market and the canned salmon market and is the third
leading brand in the canned light meat tuna market. Similar to the Company's
Chef Boyardee product line, management believes that Bumble Bee products appeal
to consumers because they are convenient to prepare and more nutritious relative
to other quick meal and snacking alternatives. In 1998, the Company acquired the
Libby's brand of canned salmon.
The 1998 canned tuna market in the U.S. is approximately $1.2 billion and
is generally segmented into two main categories, white meat ($487.5 million) and
light meat ($656.0 million). White meat tuna is processed from albacore tuna and
has a superior quality image and premium price compared to light meat tuna
(which is processed from skipjack and yellowfin tuna) due to its milder flavor,
lighter color and firmer texture. The Company's canned white meat tuna product
line has significantly higher gross margins than the Company's light meat tuna
products.
As the table below indicates, Bumble Bee is the market leader in the white
meat canned tuna segment with a 40% market share in 1998, followed by H. J.
Heinz Company's Starkist brand and Chicken of the Sea International's, Chicken
of the Sea brand. In the light meat canned tuna segment, Bumble Bee is the third
leading brand with a 15% market share in 1998. Private label represents 6% and
16% of the canned white meat market and canned light meat tuna market,
respectively. In addition to Bumble Bee's leading market positions in canned
tuna, Bumble Bee is also the market leader in canned salmon with a 20% market
share in 1998.
<TABLE>
<CAPTION>
1998 Market Share
---------------------------------------------------
Categories Size Bumble Bee Starkist Chicken of the Sea Other
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Canned White Meat Tuna $487 40% 33% 15% 12%
Canned Light Meat Tuna $656 15% 50% 17% 18%
</TABLE>
Prior to the acquisition of Bumble Bee Seafoods by the Company, sales of
Bumble Bee products suffered as a result of being owned by a financially
troubled company that was highly leveraged and had capital constraints which
limited Bumble Bee Seafoods' ability to source raw fish and effectively market
its products. To help stimulate sales of Bumble Bee products,
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SEAFOOD, (Continued)
management is (i) introducing complementary products under the Bumble Bee brand
name that emphasize the convenience and nutritional benefits of canned seafood,
(ii) broadening the distribution of Bumble Bee products to include alternative
markets such as food service operators and (iii) aggressively sourcing albacore
tuna for Bumble Bee canned white meat tuna.
PRIVATE LABEL AND FOODSERVICE
Private Label and Foodservice includes all private label canned pasta,
cooking spray, fruit snacks, ready-to-eat cereals, wholesome snack bars, pie
crust, personal care products and sales to foodservice distributors. Private
label sales totaled $200.4 million in 1998. The Company has become the leading
private label manufacturer of fruit snacks, ready-to-eat cereals and wholesome
snack bars with the acquisition of Grist Mill in 1998. The Company is also the
leading manufacturer of private label cooking spray with its 1997 acquisition of
Creative Products.
The Company also supplies many of its products to restaurants,
institutions, schools, ballparks, the vending trade, distributors and chain
accounts. In 1998, this accounted for sales of $49.5 million. In addition, the
Company has implemented a number of initiatives to expand the penetration of its
branded products in the food service industry, including broadening its product
lines to meet the specialized needs of the food service industry and increasing
its marketing and sales efforts. Management believes that opportunities exist
for additional growth in food service sales.
ALL OTHER
The Company's Branded Products, Seafood, Private Label and Foodservice
business segments in the United States are complemented by sales to the military
and a strong international presence in Canada, Mexico and Puerto Rico.
Canada. The Company manufacturers and markets Chef Boyardee canned pasta,
PAM cooking spray, Crunch 'n Munch glazed popcorn, Puritan stews and canned
meats and certain other products in Canada. The Company commands the number one
market share position in canned pasta, stews and meatballs and cooking spray
sales in Canada, with Chef Boyardee canned pasta, Puritan and PAM.
Mexico and Puerto Rico. Through the Company's subsidiary, Productos Del
Monte, the Company is a leading manufacturer and marketer of branded catsup,
canned vegetables and bottled salsa in Mexico. The Company intends to expand
sales of its U.S. products in Mexico, initially targeting PAM and Ranch Style,
and plans to use Productos Del Monte's sales and distribution capabilities to
achieve this strategy. In addition, the Company markets Chef Boyardee canned
pasta, Crunch 'n Munch and Jiffy Pop in Puerto Rico.
Military. The Company sells many of its products to military bases both in
the U.S. and internationally. Products sold to the military totaled $21.5
million in 1998 and include Chef Boyardee canned pasta, PAM cooking spray,
Crunch 'n Munch glazed popcorn, Polaner fruit spreads and Ranch Style beans.
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The Company's recognizable portfolio of leading brands provides a critical
mass of brand name sales that (i) allows the Company to realize synergies in
manufacturing, marketing, distribution and raw material sourcing, (ii) creates a
position of strength with retailers that is critical in maintaining and securing
valuable retail shelf space for existing and new brands and (iii) provides a
strong platform for introducing product line extensions and new products.
See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 23 through 29 of the Company's 1998 Annual
Report, which is incorporated herein by reference.
INDUSTRY
The U.S. food industry is characterized by relatively stable growth based
on modest price and population increases. Over the last ten years, the industry
has experienced consolidation as competitors have shed non-core business lines
and made strategic acquisitions to complement category positions, maximize
economies of scale in raw material sourcing and production and expand retail
distribution. The importance of sustaining strong relationships with retailers
has become a critical success factor for food companies and is driving many
initiatives such as category management and continuous replenishment programs.
Food companies with category leadership positions and strong retail
relationships have increasingly benefited from these initiatives as a way to
maintain shelf space and maximize distribution efficiencies.
MARKETING
The Company's marketing programs consist of advertising, consumer
promotions and trade promotions. The Company's advertising program is comprised
of television, radio, newspaper and magazine advertising aimed at increasing
consumer awareness of the Company's brands and building consumer loyalty.
Consumer promotions include targeted coupons and on-package offers designed to
generate trial usage and increase purchase frequency. The Company's trade
promotions focus on obtaining retail display support, achieving key price points
and securing retail shelf space.
RAW MATERIAL
The primary raw materials used in the Company's operations include tin
cans, flour, meat, tomatoes, tuna, salmon, corn, beans and peanuts. All of the
Company's raw materials are widely available from numerous suppliers, other than
white albacore tuna processed by Bumble Bee, for which there is limited
worldwide supply and a limited number of suppliers.
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TRADEMARKS
The Company owns a number of registered trademarks, including Chef
Boyardee, Bumble Bee, PAM, Franklin Crunch 'n Munch, Spreadables, Gulden's,
Jiffy Pop, Dennison's, Luck's, Ranch Style, Ro*Tel, Campfire, Marshmallow
Munchie, Puritan, Fraser Farms, Orleans, Clover Leaf, Paramount, Harris,
Broadcast, Wheatena, Maypo, Maltex and G. Washington's. Libby's canned meats are
registered trademarks licensed to the Company. Registration of the Chef Jr.
trademark is pending. Management is not aware of any fact that would have a
materially adverse impact on the continuing use of these trademarks.
COMPETITION
The food products business is highly competitive. Numerous brands and
products compete for shelf space and sales, with competition based primarily on
brand recognition and loyalty, price, quality and convenience. The Company
competes with a significant number of companies of varying sizes, including
divisions or subsidiaries of larger companies. A number of these competitors
have broader product lines as well as substantially greater financial and other
resources available to them.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 5,637 people.
Approximately 38% of the Company's employees are unionized. Approximately 66% of
the unionized employees are represented by the United Food & Commercial Workers
International Union (part of the AFL-CIO) and have collective bargaining
agreements which extend into the year 2001. Approximately 18% of the unionized
employees are represented by the American Federation of Grain Millers ("AFGM")
whose contract expired in February 1999. The Company and AFGM are renegotiating
a collective bargaining agreement. Approximately 10% of the unionized employees
are represented by the National Syndication of Workers from the Refrigeration
Industry and Packers of Food Products whose contract expires in December 1999.
Approximately 4% of the unionized employees are represented by the Teamsters
Union, whose contract expires in March 2001. Approximately 2% of the unionized
employees are represented by the Bakery Confectionary and Tobacco Workers
International Union whose contract expires December 2001.
CERTAIN LEGAL AND REGULATORY MATTERS
Food Safety and Labeling. The Company is subject to the Food, Drug and
Cosmetic Act and regulations promulgated thereunder by the Food and Drug
Administration (FDA). This comprehensive regulatory program governs, among other
things, the manufacturing, composition and ingredients, labeling, packaging and
safety of food. In addition, the Nutrition Labeling and Education Act of 1990
prescribes the format and content of certain information required to appear on
the labels of food products. The Company is subject to regulation by certain
other governmental agencies, including the U.S. Department of Agriculture.
Although the Company has voluntarily recalled products from time to time in the
past, no such recall has had a material effect on the Company's results of
operations.
A private interest group in California has sent notice to the Company
maintaining that Bumble Bee Seafood, and others, are not in compliance with
certain warning requirements of Proposition 65. Proposition 65 requires that
products sold in California which contain certain chemicals listed by the State
as being carcinogens above certain safety levels, must be labeled with a
warning.
10
<PAGE> 13
CERTAIN LEGAL AND REGULATORY MATTERS, (Continued)
Specifically, the notice alleges that the Company and others have exposed
members of the public to mercury, methyl mercury and/or other mercury compounds,
without first giving warning to such persons in accordance with California
Health and Safety Code Section 25249.6. The Company is presently evaluating the
merits of the claims underlying the notice. Should the Company be required to
comply with the labeling requirements of Proposition 65, sales of tuna products
only in California may be adversely effected.
The operations and products of the Company are also subject to state and
local regulation through such measures as licensing of plants, enforcement by
state health agencies of various state standards and inspection of facilities.
Enforcement actions for violations of federal, state and local regulations may
include seizure and condemnation of products, cease and desist orders,
injunctions or monetary penalties. Management believes that the Company's
facilities and practices are sufficient to maintain compliance with applicable
government regulations, although there can be no assurances in this regard.
Federal Trade Commission. The Company is subject to certain regulations by
the Federal Trade Commission (FTC). Advertising of the Company's products is
subject to regulation by the FTC pursuant to the Federal Trade Commission Act
and the regulations promulgated thereunder.
Employee Safety Regulations. The Company is subject to certain health and
safety regulations, including regulations issued pursuant to the Occupational
Safety and Health Act. These regulations require the Company to comply with
certain manufacturing, health and safety standards to protect its employees from
accidents.
Environmental. The Company's operations and properties are subject to a
wide variety of increasingly complex and stringent federal, state and local laws
and regulations governing the use, storage, handling, generation, treatment,
emission, release, discharge and disposal of certain materials, substances and
wastes, the remediation of contaminated soil and groundwater, and the health and
safety of employees. As such, the nature of the Company's operations exposes it
to the risk of claims with respect to environmental matters.
The Company has responsibility for environmental, safety, and cleanup
obligations under various local, state and federal laws, including the
Comprehensive Environmental Response, Compensation and Liability Act, commonly
known as Superfund. Based upon its experience to date, the Company believes that
the future cost of compliance with existing environmental laws, regulations
and decrees and liability for known environmental claims, will not have a
material adverse effect on the Company's financial 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.
Insurance. The Company maintains general liability, product liability,
property, workers' compensation and other insurance in amounts and on terms that
it believes are customary for companies similarly situated.
Litigation. The Company, in the ordinary course of business, is involved in
various legal proceedings. The Company does not believe the outcome of these
proceedings will have a material adverse effect on the Company's financial
position, results of operations or cash flows.
11
<PAGE> 14
RISK ASSOCIATED WITH BUSINESS ACTIVITIES
Substantial Leverage. The Company is highly leveraged. At December 31,
1998, the Company had outstanding indebtedness of $1,217.1 million including
$811.5 million under the Senior Bank Facilities, $400.0 million of the Company's
Senior Subordinated Notes and a $5.6 million term loan related to it's Grist
Mill facility. A substantial portion of the cash flow from the Company's
operations will be applied to service the Company's obligations in respect of
its indebtedness for the foreseeable future. In addition to periodic interest
payments, the Company is required to make semiannual repayments of the term
loans under its Senior Bank Facilities and is further required to apply a
portion of its excess cash flow to repay the loans thereunder.
The Company's high degree of leverage could have important consequences to
the holders of the Common Stock, including but not limited to the following: (i)
the Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate purposes or other purposes
may be impaired in the future, (ii) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of principal and interest
on its indebtedness, thereby reducing the funds available to the Company for
other purposes, (iii) certain of the Company's borrowings are at variable rates
of interest (including borrowings under the Senior Bank Facilities), which
expose the Company to the risk of increased interest rates, (iv) the Company may
be substantially more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage and (v) the Company's substantial
degree of leverage may limit its flexibility to implement its business strategy
and adjust to changing market conditions, reduce its ability to withstand
competitive pressures and make it more vulnerable to a downturn in general
economic conditions or its business.
The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness will depend on its financial and
operating performance, which in turn will be subject to prevailing economic
conditions and to certain financial, business and other factors beyond its
control. If the Company's cash flow and capital resources are insufficient to
fund its debt service obligations, the Company may be forced to reduce or delay
planned expansion and capital expenditures, sell assets, obtain additional
equity capital or restructure its debt. There can be no assurance that the
Company's operating results, cash flow and capital resources will be sufficient
for payment of its indebtedness in the future. In the absence of such operating
results and resources, the Company could face substantial liquidity problems and
might be required to dispose of material assets or operations to meet its debt
service and other obligations, and there can be no assurance as to the timing of
such sales or the proceeds that the Company could realize therefrom.
Restrictive Debt Covenants. The Senior Bank Facilities and the indenture
related to the Senior Subordinated Notes (the "Indenture") contain a number of
significant covenants that, among other things, restrict the ability of the
Company and its subsidiaries to dispose of assets, incur additional
indebtedness, incur guarantee obligations, repay other indebtedness or amend
other debt instruments, pay dividends, create liens on assets, enter into
leases, make investments, loans or advances, make acquisitions, engage in
mergers or consolidations, make capital expenditures, engage in certain
transactions with subsidiaries and affiliates and otherwise restrict corporate
activities. In addition, the Company is required to comply with specified
financial ratios and satisfy certain financial condition tests. The Company's
ability to
12
<PAGE> 15
RISK ASSOCIATED WITH BUSINESS ACTIVITIES (Continued)
comply with such agreements may be affected by events beyond its control,
including prevailing economic, financial and industry conditions. The breach of
any of such covenants or restrictions could result in a default under the
Seniors Bank Facilities or the Indenture, which would permit the senior lenders
or the holders of the Senior Subordinated Notes, as the case may be, to declare
all amounts borrowed thereunder to be due and payable, together with accrued and
unpaid interest. If the Company were unable to repay its indebtedness to its
senior lenders, such lenders could proceed against the collateral securing such
indebtedness. If the indebtedness under the Senior Bank Facilities or the Senior
Subordinated Notes were to be accelerated, there can be no assurance that the
assets of the Company would be sufficient to repay in full such indebtedness and
the other indebtedness of the Company.
General Risks of Food Industry. The food products manufacturing industry is
subject to the risk of adverse changes in general economic conditions; the
effects of retail consolidation; adverse changes in local markets resulting in
greater risks inherent in the limited shelf life of food products in case of
oversupply; lack of attractiveness of a particular food product line after its
novelty has worn off; evolving consumer preferences and nutritional and
health-related concerns; federal, state and local food processing controls;
consumer product liability claims; the risk of product tampering; and the
availability and expense of insurance.
Dependence on Raw Materials. The primary raw materials used in the
Company's operations include tin cans, flour, meat, tuna, salmon, tomatoes,
corn, beans and peanuts. All of the Company's raw materials are generally
available from numerous suppliers, other than white albacore tuna processed by
the Bumble Bee Business, for which there is limited worldwide supply and a
limited number of suppliers. The prices of many of these raw materials are
affected by, among other things, agricultural policies of the United States
government and weather conditions. Movement in the price level of these raw
materials can have a corresponding impact on finished product costs, and hence,
gross margins. The ability of the Company to pass through increases in costs of
raw materials to its customers is dependent upon competitive conditions and
pricing methodologies employed in the various markets in which the Company
operates.
Implementation of Business Strategy; Strategic Acquisitions. The Company
intends to pursue a business strategy of increasing sales and earnings in its
business through growing sales of existing brands and achieving cost savings. No
assurance can be given that the Company will be successful in implementing this
strategy.
The Company also intends to pursue a business strategy of growth through
strategic acquisitions. The Company cannot predict whether it will be successful
in pursuing any acquisition opportunities or what the consequences of any
acquisitions would be. No assurance can be given that any strategic acquisition
will be consummated or that, if consummated, it will be successful. The
Company's acquisition strategy involves numerous risks, including difficulties
in the integration of the operations, systems and management of acquired
businesses and the diversion of management's attention from other business
concerns. Under the terms of the Senior Bank Facilities, the Company may be
required to obtain the consent of the lenders in order to consummate
acquisitions in certain circumstances. There can be no assurance as to whether,
or the terms on which, the lenders would grant any such consent. Moreover,
depending on the nature, size and timing of future acquisitions, the Company may
be required to raise additional financing. There can be no assurance that the
Senior Bank Facilities, the Indenture or any other loan agreement to which the
Company may become a party will permit such additional financing, and there can
be no assurance that any additional financing will be available on terms
acceptable to the Company, or at all.
13
<PAGE> 16
RISK ASSOCIATED WITH BUSINESS ACTIVITIES (Continued)
Competition. The food products business is highly competitive. Numerous
brands and other products compete for shelf space and sales, with competition
based primarily on brand recognition and loyalty, price, quality and
convenience. The Company competes with a significant number of companies of
varying sizes, including divisions or subsidiaries of larger companies. A number
of these competitors have broader product lines as well as substantially greater
financial and other resources available to them and lower fixed costs, and there
can be no assurance that the Company can compete successfully with such other
companies. In addition, many of the Company's competitors may be substantially
less leveraged. Competitive pressures or other factors could cause the Company's
products to lose market share or result in significant price erosion, which
could have a material adverse effect on the Company.
CONTROL BY PRINCIPAL STOCKHOLDER; RELATIONSHIP WITH PRINCIPAL STOCKHOLDER AND
MANAGEMENT.
Hicks Muse and certain of its officers, employees and affiliates own or
control a majority of the outstanding shares of Common Stock and, accordingly,
will be able to (i) direct the election of a majority of the members of the
Board of Directors of the Company and therefore direct the management and
policies of the Company, (ii) practically determine the outcome of any corporate
or other matter submitted to the Company's stockholders for approval, including
any merger, consolidation, sale of all or substantially all of the Company's
assets or "going private" transaction and (iii) prevent or cause a change of
control of the Company. The interests of Hicks Muse may conflict with those of
other stockholders of the Company. In addition, certain officers and directors
of the Company also serve as officers or directors of other portfolio companies
of Hicks Muse. Service as a director or officer of both the Company and another
company (other than a subsidiary of the Company) could create or appear to
create potential conflicts of interest when the director or officer is faced
with decisions that could have different implications for the Company and such
other company. A conflict of interest could also exist with respect to
allocation of the time and attention of persons who are officers of both the
Company and one or more other companies. Under Delaware law, directors and
officers have a fiduciary duty to act in good faith and in what they believe to
be in the best interests of the corporation and its stockholders. Such duties
include the duty to refrain from impermissible self-dealing and to deal fairly
with respect to transactions in which such directors or officers, or other
companies with which they are affiliated, have an interest.
Neither Hicks Muse nor Mr. Metropoulos, the Chief Executive Officer, is
restricted from acquiring or managing other companies in the food business,
including companies that may be competitive with the Company. Hicks Muse has
publicly stated that it expects to commit significant amounts of equity capital
to acquire food and other branded consumer product companies in North America
and Latin America that Mr. Metropoulos will help manage. There is no agreement
requiring that any such acquisition opportunities be pursued through the
Company. As a result, conflicts may exist between the Company on the one hand
and Hicks Muse and Mr. Metropoulos on the other hand with respect to the
allocation of corporate opportunities, including acquisition opportunities. No
assurance can be given that any such conflicts will be resolved in favor of the
Company.
14
<PAGE> 17
GOVERNMENT REGULATION
The Company's operations are subject to extensive regulation by the United
States Food and Drug Administration (FDA), the United States Department of
Agriculture and other state and local authorities regarding the processing,
packaging, storage, distribution, advertising and labeling of the Company's
products and environmental compliance. The Company's manufacturing facilities
and products are subject to periodic inspection by federal, state and local
authorities. The Company's advertising is subject to regulation by the Federal
Trade Commission (FTC) pursuant to the Federal Trade Commission Act and
regulations issued thereunder. In addition, the Company is subject to similar
laws in foreign jurisdictions in which it conducts operations. The Company
believes that it is currently in compliance with all material governmental laws
and regulations and maintains all material permits and licenses relating to its
operations. Nevertheless, there can be no assurance that the Company is in
compliance with such laws and regulations or that it will be able to comply with
any future laws and regulations. Failure by the Company to comply with
applicable laws and regulations could subject the Company to civil remedies,
including fines, injunctions, recalls or seizures, as well as potential criminal
sanctions, which could have a material adverse effect on the Company.
ENVIRONMENTAL MATTERS
The past and present business operations of the Company and the past and
present ownership and operation of real property by the Company are subject to
extensive and changing federal, state, local and foreign environmental laws and
regulations pertaining to the discharge of materials into the environment and
the handling and disposition of wastes (including solid and hazardous wastes) or
otherwise relating to protection of the environment. Compliance with such laws
and regulations is not expected to have a material impact on the Company's
capital expenditures, earnings or competitive position. No assurance can be
given, however, that additional environmental issues relating to presently known
matters or identified sites or to other matters or sites will not require
additional, currently unanticipated investigations, assessments or expenditures.
TRADEMARKS
The Company believes that its trademarks and other proprietary rights are
important to its success and its competitive position. Accordingly, the Company
devotes substantial resources to the establishment and protection of its
trademarks on a worldwide basis. There can be no assurance that the actions
taken by the Company to establish and protect its trademarks and other
proprietary rights will be adequate to prevent imitation of its products by
others or to prevent others from seeking to block sales of the Company's
products as violative of the trademarks and proprietary rights of others.
Moreover, no assurance can be given that others will not assert rights in, or
ownership of, trademarks and other proprietary rights of the Company or that the
Company will be able to successfully resolve such conflicts. In additions, the
laws of certain foreign countries may not protect proprietary rights to the same
extent as do the laws of the United States.
15
<PAGE> 18
PRODUCT LIABILITY; PRODUCT RECALLS
The Company may be subject to significant liability should the consumption
of any of its products cause injury, illness or death and may be required to
recall certain of its products in the event of contamination or damage to the
products. There can be no assurance that product liability claims will not be
asserted against the Company or that the Company will not be obligated to recall
its products. The Company has not historically incurred material expenditures in
respect of product liability claims and maintains insurance against such
liabilities. A product liability judgment against the Company or a product
recall could have a material adverse effect on the Company's financial position,
results of operations or cash flows.
16
<PAGE> 19
ITEM 2. PROPERTIES
The Company operates the manufacturing plants described in the following table.
All of these plants are owned by the Company, other than the Utah facility,
which the Company leases under an operating lease with an initial term that
expires in 1999 and contains a renewal option for an additional five year term
for which the Company will not renew and the 55,300 square foot Manta, Ecuador
facility. Management believes that the Company's manufacturing plants have
sufficient capacity to accommodate the Company's planned growth over the next
five years.
<TABLE>
<CAPTION>
LOCATION SQUARE FEET PRODUCTS MANUFACTURED
<S> <C> <C>
Milton, Pennsylvania 895,400 Canned pasta, microwave products, mustard, glazed
popcorn, pizza kits, dinner kits and sauces
Vacaville, California (1) 354,800 Canned pasta, microwave products, tomatoes with
green chilies, chili and tomato paste
Trenton, Missouri 335,200 Vienna sausages, hash, potted meat, sandwich spreads,
and sausage and gravy.
Lakeville, Minnesota 244,000 Cereals, granola bars, fruit filled cereal bars,
marshmallows, and marshmallow crisp rice bars
Mayaguez, Puerto Rico 222,000 Canned tuna
Irapuato, Mexico 212,000 Catsup, canned vegetables and bottled salsa
Clearfield, Utah (2) 210,000 Marshmallows and marshmallow crisp rice bars
Fort Worth, Texas 204,800 Beans and chili
Seagrove, North Carolina 198,000 Beans, vegetables, fruit and popcorn
Rossville, Illinois 193,000 Cooking spray and health and beauty aids
Niagara Falls, Canada 165,500 Canned pasta, pizza kits, dinner kits, sauces, glazed
popcorn, stews and meatballs
Santa Fe Springs, California 122,000 Canned tuna
Danville, Illinois 120,000 Fruit Snacks
Manta, Ecuador 66,000 Canned tuna and tuna loins for processing in the
Company's Santa Fe Springs facility
Manta, Ecuador 55,300 Canned tuna
Violet, Louisiana 41,000 Canned shrimp, crab and mackerel
Highspire, Pennsylvania 29,000 Cereals
</TABLE>
In addition, the Company owns a 30% interest in a water treatment plant adjacent
to its Puerto Rico processing plant.
(1) The Vacaville facility was closed in 1998 and all products manufactured
there have been either outsourced or moved to other facilities.
(2) The Clearfield facility is expected to close in the second quarter of
1999 and products manufactured there will be transferred to the
Lakeville, Minnesota facility.
The Company distributes its products in the United States through sixteen
distribution points, eight of which are owned by the Company and eight of which
are leased. The Company's distribution system uses a combination of common
carrier trucking, Company trucks and inter-modal rail transport. In Canada, the
Company operates seven distribution points, one of which is Company-owned. In
Mexico, Productos Del Monte operates nine distribution centers, one of which is
Company-owned. Management believes that the Company's sales and distribution
network has the capacity to support substantial increases in volume.
The Company leases office space in Parsippany, New Jersey, Manta, Ecuador, San
Diego, California and Greenwich, Connecticut under operating leases expiring in
January 2007, June 2001, April 2002 and October 2004, respectively.
17
<PAGE> 20
ITEM 3. LEGAL PROCEEDINGS
The Company, in the ordinary course of business, is involved in various legal
proceedings. The Company does not believe the outcome of these proceedings will
have a material adverse effect on the Company's financial position, results of
operations or cash flows.
A private interest group in California has sent notice to the Company
maintaining that Bumble Bee Seafood, and others, are not in compliance with
certain warning requirements of Proposition 65. Proposition 65 requires that
products sold in California which contain certain chemicals listed by the State
as being carcinogens above certain safety levels, must be labeled with a
warning. Specifically, the notice alleges that the Company and others have
exposed members of the public to mercury, methyl mercury and/or other mercury
compounds, without first giving warning to such persons in accordance with
California Health and Safety Code Section 25249.6. The Company is presently
evaluating the merits of the claims underlying the notice. Should the Company be
required to comply with the labeling requirements of Proposition 65, sales of
tuna products only in California may be adversely effected.
The Company has responsibility for environmental, safety, and cleanup
obligations under various local, state and federal laws, including the
Comprehensive Environmental Response, Compensation and Liability Act, commonly
known as Superfund. Based upon its experience to date, the Company believes
that the future cost of compliance with existing environmental laws,
regulations and decrees, and liability for known environmental claims, will not
have a material adverse effect on the Company's financial 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.
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. Although the outcome of any legal proceeding
cannot be predicted with certainty, management believes through its discussions
with counsel that its liability arising from or the resolution of any pending
or threatened litigation or claims, in the aggregate will not have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
18
<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Information regarding the Company's common stock and market price for the period
from November 19, 1997 through December 31, 1998 is set forth on page 53 and on
the inside back cover of the 1998 Annual Report and is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 1998 is set forth
on page 54 of the 1998 Annual Report and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations of the Company for the three years ended December 31, 1998 is set
forth on pages 23 through 29 of the 1998 Annual Report and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements comprising the consolidated balance sheets at December
31, 1998 and 1997, and the consolidated statements of income, stockholders'
equity (deficit), and cash flows, and notes to financial statements for each of
the years in the three year period ended December 31, 1998 are set forth on
pages 31 through 54 of the 1998 Annual Report and is incorporated herein by
reference.
Selected unaudited quarterly financial data for the years ended December 31,
1998 and 1997 is set forth on page 53 of the 1998 Annual Report and is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
19
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors and executive officers is set
forth on pages 3 through 5 of the Company's Proxy Statement for the 1999 Annual
Meeting of Stockholders, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is set forth on pages 6 and 7 of
the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders, and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is set forth on pages 13 and 14 of the Company's Proxy Statement for
the 1999 Annual Meeting of Stockholders, and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is set
forth on pages 14 and 15 of the Company's Proxy Statement for the 1999 Annual
Meeting of Stockholders, and is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Report of Independent Accountants for years ended December 31, 1998
and 1997.
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996.
Consolidated Statement of Stockholders' Equity (Deficit) for the
years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
The foregoing Financial Statements are included in Part II, Item 8 of this
Report and are set forth on pages 31 through 54 of the 1998 Annual Report and
are incorporated herein by reference.
20
<PAGE> 23
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
2. Financial Statement Schedules are omitted, as they are not
required or are not applicable, or the required information is
shown in the financial statements or notes thereto.
3. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1* -- Agreement of Sale and Plan of Merger (the "Merger Agreement")
entered into among AHP subsidiary Holding Corporation, American
Home Food Products, Inc., AHFP Holding Corporation and AHFP
Acquisition Corporation dated as of September 5, 1996+
2.2* -- First Amendment to Agreement of Sale and Plan of Merger dated as of
October 31, 1996+
3.1*** -- Amended and Restated Certificate of Incorporation
3.2*** -- Bylaws of International Home Foods, Inc.
4.1* -- Registration Rights Agreement made as of November 1, 1996 by and
among International Home Foods, Inc. (formerly American Home Food
Products, Inc.), AHP Subsidiary Holding Corporation and AHFP
Holding Corporation
4.2* -- Indenture dated as of November 1, 1996 between the Company and
United States Trust Company of New York
10.1* -- Transitional Services Agreement dated as of November 1, 1996
between American Home Products Corporation and International Home
Foods, Inc.
10.2* -- Financial Advisory Agreement dated as of November 1, 1996 by and
between International Home Foods, Inc. and Hicks, Muse & Company
Partners, L.P. ("HMCo")
10.3*** -- International Home Foods, Inc. 1997 Stock Option Plan
10.4* -- Nonqualified Stock Option Agreement dated November 1, 1996 by and
between International Home Foods, Inc. and C. Dean Metropoulos
10.5**** -- Agreement and Plan of Merger dated March 10, 1998, by and among the
Company, IHF/GM Acquisition Corporation, IHF/GM Holding Corporation
and Grist Mill Co.
10.6* -- Nonqualified Stock Option Agreement dated November 12, 1996 by and
between International Home Foods, Inc. and M. L. Lowenkron
10.7* -- Nonqualified Stock Agreement dated November 12, 1996 by and between
International Home Foods, Inc. and Roger T. Staubach
10.8* -- Indemnification Agreement dated November 1, 1996 between
International Home Foods, Inc. and C. Dean Metropoulos, together
with a schedule identifying substantially identical documents and
setting forth the material details in which those documents differ
from the foregoing documents
10.9* -- Transition Services Agreement dated November 1, 1996 by and between
the Company and American Home Products Corporation
10.10* -- Monitoring and Oversight Agreement dated as of November 1, 1996 by
and between International Home Foods, Inc. and Hicks, Muse &
Company Partners, L.P.
10.11* -- Nonqualified Stock Option Agreement dated January 3, 1997, by and
between International Home Foods, Inc. and L. Hollis Jones
10.12* -- Financial Advisory Agreement dated November 1, 1996 by and between
the Company and Hicks, Muse & Company Partners, L.P.
10.13*** -- Nonqualified Stock Option Agreement by and between the Company and
John H. Bess
10.14 -- Not Used
10.15*** -- Agreement and Plan of Reorganization, dated October 1, 1997,
between the Company and AHFP Holding Corporation
10.16*** -- Amended and Restated Jams Manufacturing Agreement, dated March 3,
1997, between Roseland Manufacturing, Inc. and the Company
10.17*** -- Asset Purchase and Sale Agreement, dated May 1, 1997, by and among
Bumble Bee Seafoods, Inc., Bumble Bee International, Inc., Commerce
Distributing Company, Santa Fe Springs Holding Company, the Company
and Bumble Bee Acquisition Corporation.
10.18****-- Credit Agreement, dated November 1, 1996, amended and restated
September 16, 1998, by and among the Company and the banks'
signatory thereto.
10.19** -- Employment Agreement, dated February 22, 1999 by and between the
Company and C. D. Metropoulos
21
<PAGE> 24
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
10.20** -- Nonqualified Stock Option Agreement, dated December 2, 1998 between
the Company and C. D. Metropoulos
10.21** -- Employment Agreement, dated October 23, 1998 by and between the
Company and N. Michael Dion
12.1** -- Computation of Consolidated Ratio of Earnings to Fixed Charges
13.1** -- Annual Report
21.1** -- Subsidiaries of the Company
23.1** -- Consent of PricewaterhouseCoopers LLP, Independent Accountants
27.1** -- Financial Data Schedule
* Incorporated by reference to the Company's Registration Statement on
Form S-4, dated February 19, 1997, File No. 333-18859
** Filed herewith
*** Incorporated by reference to the Company's Registration Statement on
Form S-1, dated September 24, 1997, File No. 333-36249
**** Incorporated by reference to the Company's Schedule 14D-1 and 13D dated
March 17, 1996
22
<PAGE> 25
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
(b) Reports on Form 8-K. No reports on Form 8-K have been filed by the
Company during the last quarter of the period covered by this report.
23
<PAGE> 26
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Parsippany,
State of New Jersey.
INTERNATIONAL HOME FOODS, INC.
March 30, 1999 By: /s/ C. Dean Metropoulos
-------------- --------------------------------------------
Date C. Dean Metropoulos, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ C. Dean Metropoulos Chairman of the Board and Chief Executive March 30, 1999
- ------------------------- Officer (Principal Executive Officer)
C. Dean Metropoulos
/s/ N. Michael Dion Chief Financial Officer March 30, 1999
- ------------------------- (Principal Financial and Accounting Officer)
N. Michael Dion
/s/ L. Hollis Jones Director March 30, 1999
- -------------------------
L. Hollis Jones
/s/ Thomas O. Hicks Director March 30, 1999
- -------------------------
Thomas O. Hicks
/s/ Charles W. Tate Director March 30, 1999
- -------------------------
Charles W. Tate
/s/ Michael J. Cramer Director March 30, 1999
- -------------------------
Michael J. Cramer
/s/ Michael J. Levitt Director March 30, 1999
- -------------------------
Michael J. Levitt
/s/ M. L. Lowenkron Director March 30, 1999
- -------------------------
M. L. Lowenkron
/s/ Roger T. Staubach Director March 30, 1999
- -------------------------
Roger T. Staubach
/s/ John R. Muse Director March 30, 1999
- -------------------------
John R. Muse
</TABLE>
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1* -- Agreement of Sale and Plan of Merger (the "Merger Agreement")
entered into among AHP subsidiary Holding Corporation, American
Home Food Products, Inc., AHFP Holding Corporation and AHFP
Acquisition Corporation dated as of September 5, 1996+
2.2* -- First Amendment to Agreement of Sale and Plan of Merger dated as of
October 31, 1996+
3.1*** -- Amended and Restated Certificate of Incorporation
3.2*** -- Bylaws of International Home Foods, Inc.
4.1* -- Registration Rights Agreement made as of November 1, 1996 by and
among International Home Foods, Inc. (formerly American Home Food
Products, Inc.), AHP Subsidiary Holding Corporation and AHFP
Holding Corporation
4.2* -- Indenture dated as of November 1, 1996 between the Company and
United States Trust Company of New York
10.1* -- Transitional Services Agreement dated as of November 1, 1996
between American Home Products Corporation and International Home
Foods, Inc.
10.2* -- Financial Advisory Agreement dated as of November 1, 1996 by and
between International Home Foods, Inc. and Hicks, Muse & Company
Partners, L.P. ("HMCo")
10.3*** -- International Home Foods, Inc. 1997 Stock Option Plan
10.4* -- Nonqualified Stock Option Agreement dated November 1, 1996 by and
between International Home Foods, Inc. and C. Dean Metropoulos
10.5**** -- Agreement and Plan of Merger dated March 10, 1998, by and among the
Company, IHF/GM Acquisition Corporation, IHF/GM Holding Corporation
and Grist Mill Co.
10.6* -- Nonqualified Stock Option Agreement dated November 12, 1996 by and
between International Home Foods, Inc. and M. L. Lowenkron
10.7* -- Nonqualified Stock Agreement dated November 12, 1996 by and between
International Home Foods, Inc. and Roger T. Staubach
10.8* -- Indemnification Agreement dated November 1, 1996 between
International Home Foods, Inc. and C. Dean Metropoulos, together
with a schedule identifying substantially identical documents and
setting forth the material details in which those documents differ
from the foregoing documents
10.9* -- Transition Services Agreement dated November 1, 1996 by and between
the Company and American Home Products Corporation
10.10* -- Monitoring and Oversight Agreement dated as of November 1, 1996 by
and between International Home Foods, Inc. and Hicks, Muse &
Company Partners, L.P.
</TABLE>
<PAGE> 28
<TABLE>
<S> <C>
10.11* -- Nonqualified Stock Option Agreement dated January 3, 1997, by and
between International Home Foods, Inc. and L. Hollis Jones
10.12* -- Financial Advisory Agreement dated November 1, 1996 by and between
the Company and Hicks, Muse & Company Partners, L.P.
10.13*** -- Nonqualified Stock Option Agreement by and between the Company and
John H. Bess
10.14 -- Not Used
10.15*** -- Agreement and Plan of Reorganization, dated October 1, 1997,
between the Company and AHFP Holding Corporation
10.16*** -- Amended and Restated Jams Manufacturing Agreement, dated March 3,
1997, between Roseland Manufacturing, Inc. and the Company
10.17*** -- Asset Purchase and Sale Agreement, dated May 1, 1997, by and among
Bumble Bee Seafoods, Inc., Bumble Bee International, Inc., Commerce
Distributing Company, Santa Fe Springs Holding Company, the Company
and Bumble Bee Acquisition Corporation.
10.18****-- Credit Agreement, dated November 1, 1996, amended and restated
September 16, 1998, by and among the Company and the banks'
signatory thereto.
10.19** -- Employment Agreement, dated February 22, 1999 by and between the
Company and C. D. Metropoulos
10.20** -- Nonqualified Stock Option Agreement, dated December 2, 1998 between
the Company and C. D. Metropoulos
10.21** -- Employment Agreement, dated October 23, 1998 by and between the
Company and N. Michael Dion
12.1** -- Computation of Consolidated Ratio of Earnings to Fixed Charges
13.1** -- Annual Report
21.1** -- Subsidiaries of the Company
23.1** -- Consent of PricewaterhouseCoopers LLP, Independent Accountants
27.1** -- Financial Data Schedule
</TABLE>
* Incorporated by reference to the Company's Registration Statement on
Form S-4, dated February 19, 1997, File No. 333-18859
** Filed herewith
*** Incorporated by reference to the Company's Registration Statement on
Form S-1, dated September 24, 1997, File No. 333-36249
**** Incorporated by reference to the Company's Schedule 14D-1 and 13D dated
March 17, 1996
<PAGE> 1
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
BY AND BETWEEN
INTERNATIONAL HOME FOODS, INC.
AND
C. DEAN METROPOULOS
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of this
22nd day of February, 1999 (the "Effective Date"), by and between INTERNATIONAL
HOME FOODS, INC., a Delaware corporation (the "Company"), and C. Dean
Metropoulos (the "Executive").
RECITALS
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that it is in the best interest of the Company and its stockholders
to assure that the Company will have the continued dedication of Executive; and
WHEREAS, the Company and Executive desire to enter into a compensation
arrangement to assure retention of Executive in the future.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, including the
mutual covenants herein, the parties hereto agree as follows:
1. Employment Period. Subject to Section 3, the Company hereby agrees
to continue Executive in its employ, and Executive hereby agrees to remain in
the employ of the Company, in accordance with the terms and provisions of this
Agreement, during the period (the "Employment Period") commencing on the date of
this Agreement (the "Effective Date") and ending on the third anniversary of the
Effective Date. On the first day of the third year of the Employment Period (the
"Notification Date"), the Board shall notify Executive in writing if it does not
intend to continue Executive's employment with the Company following the
Employment Period. In such event, in lieu of any Severance Amount that may be
payable pursuant to Section 3(c)(ii)(C), the Company shall pay to Executive upon
his termination of employment an amount equal to one and one half (1 1/2) times
the aggregate amount of Annual Base Compensation at the time of termination less
the amount of Annual Base Compensation earned from the Notification Date through
the date of termination.
2. Terms of Employment.
(a) Positions and Duties. During the term of Executive's
employment with the Company, Executive shall serve as Chief Executive Officer
(or such other position or positions as Executive and the Board shall mutually
agree) and, in so doing, shall report to the
<PAGE> 2
Board. Executive shall have supervision and control over, and responsibility
for, the day to day management and operational functions of the Company. During
the term of Executive's employment with the Company (excluding any periods of
vacation and sick leave), Executive shall devote sufficient time to the business
and affairs of the Company necessary to discharge the responsibilities assigned
to Executive hereunder. The Company recognizes and acknowledges that Executive
is involved in other activities, including the management of other businesses,
and it shall not be a violation of this Agreement for the Executive to (i) serve
on corporate, civic or charitable boards or committees, (ii) deliver lectures or
fulfill speaking engagements or (iii) manage other businesses or personal
investments, so long as such activities do not significantly interfere with the
performance of Executive's responsibilities as an employee of the Company in
accordance with this Agreement.
(b) Compensation, Benefits and Expenses.
(i) Annual Base Compensation. During the term of
Executive's employment with the Company, Executive shall receive an annual base
salary of not less than $2,600,000 ("Annual Base Salary"). In addition,
Executive shall be entitled to receive an annual bonus ("Annual Bonus") of not
less than $1,000,000 upon the achievement of performance criteria as shall be
established by the Board.
(ii) Investment Benefit Plans. During the term of
Executive's employment with the Company, Executive shall be entitled to
participate in all incentive, savings and retirement plans, practices, policies
and programs applicable generally to other executives of the Company
("Investment Plans").
(iii) Welfare Benefit Plans. During the term of
Executive's employment with the Company, Executive and his family shall be
eligible for participation in, and shall receive all benefits under, welfare
benefit plans, practices, policies and programs applicable generally to other
executives of the Company ("Welfare Plans").
(iv) Expenses. During the term of Executive's
employment with the Company, Executive shall be entitled to receive prompt
reimbursement for all reasonable employment related expenses incurred by
Executive.
(v) Automobile Allowance. During the term of
Executive's employment with the Company, the Company shall provide Executive
full use of an automobile of Executive's choice.
3. Termination of Employment.
(a) Reasons for Termination. Executive's employment with the
Company may be terminated during the Employment Period (i) by the Company with
or without Cause, (ii) by Executive with or without Good Reason, or (iii) by
either the Company or Executive upon
2
<PAGE> 3
Executive's Disability. Executive's employment with the Company shall
automatically terminate upon Executive's death.
(b) Definitions. The following terms shall have the following
meanings for purposes of this Agreement.
(i) "Annual Base Compensation" shall mean, at any
given time, the aggregate amount of (i) the Annual Base Salary and (ii) the then
budgeted Annual Bonus for Executive; provided that in no event shall Annual Base
Compensation be less than $3,600,000. Calculations required herein based upon
Annual Base Compensation shall be determined as if the Annual Base Compensation
is earned evenly throughout the year based upon a 365-day year.
(ii) "Cause" shall mean (A) fraud on the part of
Executive that has caused demonstrable and serious injury to the Company or (B)
conviction of, or plea of nolo contendre to, a felony; provided, however, that
no act or omission shall constitute "Cause" for purposes of this Agreement
unless the Board provides Executive (a) written notice clearly and fully
describing the particular acts or omissions which the Board reasonably believes
in good faith constitutes "Cause" and (b) an opportunity, within 30 days
following his receipt of such notice, to meet in person with the Board to
explain or defend the alleged acts or omissions relied upon by the Board and, to
the extent practicable, to cure such acts or omissions. Further, no act or
omission shall constitute fraud if Executive reasonably believed such act or
omission was in the best interests of the Company. Executive shall have the
right to contest a determination of Cause by the Company by requesting
arbitration in accordance with the terms of Section 6.1 hereof.
(iii) "Change in Control" shall mean (A) any "person"
(as such term is used in Section 13(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) other than Hicks, Muse, Tate & Furst
Incorporated and/or its affiliates ("Hicks Muse") becoming the direct or
indirect "beneficial owner" (as determined pursuant to Rule 13d-3 under the
Exchange Act) of securities of the Company representing 30% or more of the
combined voting power of the Company's then outstanding securities, (B)
individuals who at the Effective Date constitute the members of the Board and
any new director, whose election to the Board or nomination for election to the
Board by the Company's stockholders was approved by a vote of at least
two-thirds of the directors then in office who either were directors at the
Effective Date or whose election or nomination for election was previously so
approved, ceasing for any reason to constitute a majority of the Board, (C) the
Company merging with or consolidating into any other entity, or the stockholders
of the Company and the holders of voting securities of any other entity
participating in a securities exchange (other than a merger, consolidation or
exchange which (1) would result in the holders (and/or their affiliates) of the
voting securities of the Company outstanding immediately prior thereto holding
immediately thereafter securities representing more than 70% of the combined
voting power of the voting securities of the surviving entity outstanding
immediately after such merger, consolidation or exchange and (2) would result in
Executive being the chief executive officer of such surviving entity), or (D)
the stockholders of the Company approving a plan of complete liquidation of the
Company or an
3
<PAGE> 4
agreement or agreements for the sale or disposition by the Company (in one or a
series of related transactions) of all or substantially all of the Company's
assets, or such a plan commencing other than in connection with a merger,
consolidation or exchange which does not constitute a Change in Control under
the preceding clause (C).
(iv) "Disability" means (A) Executive's incapacity
due to a permanent mental or physical illness that prevents Executive from
performing his duties or (B) a physical condition that renders the performance
by Executive of his duties hereunder a serious threat to the health and well
being of Executive. Disability shall be determined by a physician acceptable to
Executive (or his legal representative).
(v) "Good Reason" means (A) the assignment to
Executive of any duties inconsistent with Executive's position (including
status, offices, titles and reporting requirements), authority, duties or
responsibilities or any other action by the Company which results in a
diminution in such position, authority, duties or responsibilities, excluding
for this purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by the Company promptly after receipt of notice
thereof, (B) a material breach by the Company of this Agreement or any stock
option agreement between the Company and Executive, (C) the occurrence of a
Change in Control, (D) a reduction, without the consent of Executive, in the
amount of annual bonus paid to Executive by the Company in any given year as
compared to the immediately preceding year (other than as a result of the
Company's failure to achieve bonus criteria established by the Board), or (E)
any removal of Executive, or any failure to reelect Executive, as a director of
the Company.
(c) Obligations of the Company upon Termination.
(i) With Cause; Without Good Reason. If, during the
term of Executive's employment with the Company, the Company shall terminate
Executive's employment with the Company for Cause, or Executive shall terminate
his employment with the Company without Good Reason, then:
(A) the Company shall pay to Executive in
cash within 10 days after the date of such termination the sum of (x) any Annual
Base Compensation earned through the date of termination to the extent not
theretofore paid by the Company, (y) any compensation previously deferred by
Executive and (z) any vacation pay earned through the date of termination not
theretofore paid by the Company (in the aggregate, the "Accrued Obligation");
and
(B) the Company shall pay to Executive any
amounts arising from Executive's participation in, or benefits under, any
Investment Plans (the "Accrued Investments"), which amounts shall be payable in
accordance with the terms and conditions of the Investment Plans.
(ii) Without Cause; With Good Reason; Death;
Disability. If, during the term of Executive's employment with the Company, the
Company shall terminate
4
<PAGE> 5
Executive's employment with the Company without Cause, Executive shall terminate
his employment with the Company with Good Reason, or Executive's employment with
the Company shall terminate due to Executive's death or Disability, then:
(A) the Company shall pay to Executive in
cash within 10 days after the date of such termination the amount of the Accrued
Obligation;
(B) the Company shall pay to Executive the
Accrued Investments in accordance with the terms and conditions of the
Investment Plans;
(C) the Company shall pay to Executive in
cash within 10 days after the date of such termination an amount (the "Severance
Amount") that is equal to the greater of (i) the aggregate amount of Annual Base
Compensation that would have been earned by Executive from the date of such
termination through the end of the Employment Period had Executive's employment
with the Company not been so terminated and (ii) one and one half (1 1/2) times
the aggregate amount of Annual Base Compensation at the time of termination. If
the termination occurs following the third anniversary of this Agreement, the
Severance Amount shall equal one and one half (1 1/2) times the aggregate amount
of Annual Base Compensation at the time of termination;
(D) any and all options to purchase shares
of the Company's common stock, par value $.01 per share, granted by the Company
to the Executive (including, without limitation, options granted under the
Company's 1997 Stock Option Plan) shall automatically become fully vested and
immediately exercisable in full. The provisions of this Section 3(c)(ii)(D)
shall not apply in the event of a termination of the Executive's employment with
the Company by the Executive for Good Reason if the Good Reason arises from the
occurrence of a Change in Control; and
(E) for the remainder of the Employment
Period (or such longer period as the welfare Plans may provide), the Company
shall continue benefits provided under the Welfare Plans to Executive and his
family at least equal to those that would have been provided had Executive's
employment with the Company not been terminated (the "Welfare Benefit
Continuation"); provided, however, that if Executive becomes employed with
another employer and is eligible to receive similar benefits under that
employer's plans, the benefits described in this paragraph (E) shall be
secondary to and not duplicative of those similar benefits.
(d) Effect on Benefit Plans. The foregoing payments and
benefits shall be in addition to and not in lieu of any payments or benefits to
which Executive and his dependents may otherwise be entitled to under the
Company's compensation and employee benefit plans, programs, policies or
practices. Nothing herein shall restrict the Company's right to amend any plan,
practice, policy or program in a manner generally applicable to similarly
situated active executives, in which event Executive shall be entitled to
participate on the same basis (including payment of applicable contributions) as
similarly situated active executives of the Company.
5
<PAGE> 6
(e) No Mitigation. Executive shall not be obligated to seek
new employment or take any other action to mitigate the benefits to which
Executive is entitled hereunder. Except as contemplated by Section 3(c)(ii)(E)
with respect to the Welfare Benefit Continuation, such benefits shall not be
reduced whether or not Executive obtains new employment.
4. Mutual Release. Payment of the Severance Amount shall be conditioned
upon the execution by Executive and the Company of a valid mutual release, to be
prepared by the Company, in which Executive and the Company mutually release the
other, to the maximum extent permitted by law, from any and all claims either
may have against the other that relate to or arise out of Executive's employment
or termination of employment, except such claims arising under this Agreement,
any employee benefit plan or any other written plan or agreement.
5. Excise Taxes.
(a) Determination and Payment. If it is determined that any
payment, distribution or other benefit to Executive, whether pursuant to this
Agreement or otherwise (a "Payment"), would be subject to any tax (e.g. excise
tax under Section 4999 of the Internal Revenue Code of 1986) other than income
tax (such tax, together with any interest and penalties related thereto are
hereinafter collectively referred to as an "Excise Tax"), then the Company shall
promptly pay to Executive an additional payment ("Gross-Up Payment") in an
amount such that Executive retains, after payment of all taxes, and all interest
and penalties with respect thereto (including, without limitation, income tax
and Excise Tax imposed upon the Gross-Up Payment), an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payment. The determination of
the amount of any Gross-Up Payment shall be made by a certified public
accounting firm selected jointly by the Company and Executive (the "Accounting
Firm"), the fees and expenses of which shall be paid by the Company.
(b) Contesting. Executive shall promptly notify the Company of
any claim that, if successful, would require the payment of the Gross-Up
Payment. Without the consent of the Company, Executive shall not pay such claim
prior to the date that the payment of taxes with respect to such claim is due.
If the Company notifies Executive in writing prior to such due date that it
desires to contest the claim, Executive shall take all actions in connection
with contesting the claim reasonably requested by the Company (including
accepting legal representation with respect to such claim by an attorney
reasonably selected by the Company); provided, however, that the Company shall
pay all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold Executive
harmless, on an after-tax basis, from any tax (including interest and penalties
with respect thereto) imposed as a result thereof.
6. Claims.
(a) Arbitration of Claims. Executive shall settle by
arbitration any dispute or controversy arising in connection with this
Agreement, whether or not such dispute involves a plan subject to the Employee
Retirement Income Security of 1974, as amended. Such arbitration
Page 43
<PAGE> 7
shall be conducted in accordance with the rules of the American Arbitration
Association before a panel of three arbitrators sitting in Dallas, Texas. The
award of the arbitrators shall be final and nonappealable, and judgment may be
entered on the award of the arbitrators in any court having proper jurisdiction.
All expenses of such arbitration shall be borne by the Company.
(b) Payment of Legal Fees and Costs. The Company agrees to pay
as incurred, to the full extent permitted by law, all legal fees and expenses
which Executive may reasonably incur as a result of any contest (regardless of
the outcome thereof) by the Company, Executive or others of any action taken
pursuant to the terms of this Agreement, or of the validity or enforceability
of, or liability under, any provision of this Agreement, or any guarantee of
performance thereof (including as a result of any contest by Executive about the
amount of payment pursuant to this Agreement), plus in each case interest on any
delayed payment at the rate of 8% per annum.
(c) Agent for Service of Legal Process. Service of legal
process upon the Company with respect to a claim under this Agreement shall be
made upon the General Counsel of the Company.
7. Tax Withholding. All payments to the Executive under this Agreement
will be subject to the withholding of all applicable employment and income
taxes.
8. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
9. Successors. This Agreement shall be binding upon and inure to the
benefit of the Company and any successor of the Company. The Company will
require any successor to all or substantially all of the business and/or assets
of the Company to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
if no succession had taken place.
10. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof. This
Agreement may not be modified in any manner except by a written instrument
signed by both the Company and Executive.
11. Notices. Any notice required under this Agreement shall be in
writing and shall be delivered by certified mail return receipt requested to
each of the parties as follows:
To Executive:
C. Dean Metropoulos
550 Round Hill Road
Greenwich, CT 06830
7
<PAGE> 8
To the Company:
INTERNATIONAL HOME FOODS, INC.
1633 Littleton Road
Parsippany, NJ 07054
Attention: General Counsel
12. Validity. If any provision of this Agreement is held to be illegal,
invalid or unenforceable, such provision shall be fully severable, this
Agreement shall be construed and enforced as if the illegal, invalid or
unenforceable provision had never comprised a portion of this Agreement, and the
remaining provisions of this Agreement shall remain in full force and effect.
Furthermore, in lieu of such illegal, invalid or unenforceable provision there
shall be added automatically as part of this Agreement a provision as similar in
terms as may be possible and be legal, valid and enforceable.
13. Non-Competition. In the event that Executive's employment with the
Company is terminated (other than a termination in connection with the
occurrence of a Change-in-Control) and Executive receives payment of the
Severance Amount, for the remainder of the Employment Period Executive shall not
engage in or promote any business within the United States that is principally
engaged in the business of manufacturing and marketing canned name brand food
products in the same categories as the core products of the Company at the time
of termination; provided that the foregoing shall not prohibit Executive from
owning less than 10% of the voting securities of any publicly traded company so
long as Executive does not otherwise engage in or promote the activities of that
company.
14. Governing Law. The provisions of this Agreement shall be construed
in accordance of the laws of the state of New Jersey, without giving effect to
that states choice of law provisions.
8
<PAGE> 9
IN WITNESS WHEREOF, the Executive and the Company have executed this
Agreement as of the date and year first above written.
INTERNATIONAL HOME FOODS, INC.
By:
-----------------------------------------
Charles W. Tate
Member of the Board of Directors
EXECUTIVE
--------------------------------------------
C. Dean Metropoulos
9
<PAGE> 1
THE SHARES ISSUABLE PURSUANT TO THIS AGREEMENT ARE SUBJECT TO THE PROVISIONS OF
THE COMPANY'S 1997 STOCK OPTION PLAN. A COPY OF SUCH PLAN IS AVAILABLE UPON
WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES.
INTERNATIONAL HOME FOODS, INC.
1997 STOCK OPTION PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
FOR KEY EMPLOYEES AND ELIGIBLE NON-EMPLOYEES
December 2, 1998
Re: Grant of Stock Option
Dear C. Dean Metropoulos:
The Board of Directors of International Home Foods, Inc. (the
"Company") has adopted the Company's 1997 Stock Option Plan (the "Plan") for
certain individuals, directors and key employees of the Company and its Related
Entities. A copy of the Plan is being furnished to you concurrently with the
execution of this Option Agreement and shall be deemed a part of this Option
Agreement as if fully set forth herein. Unless the context otherwise requires or
otherwise defined herein, all terms defined in the Plan shall have the same
meaning when used herein.
1. THE GRANT.
Subject to the conditions set forth below, the Company hereby grants to
you, effective as of December 2, 1998 (the "Grant Date"), as a matter of
separate inducement and not in lieu of any compensation for your services, the
right and option to purchase (the "Option"), in accordance with the terms and
conditions set forth herein and in the Plan, an aggregate of 1,000,000 shares
(the "Option Shares") of common stock, par value $.01 per share ("Common
Stock"), of the Company at the Exercise Price (as hereinafter defined). As used
herein, the term "Exercise Price" shall mean a price equal to $20.00 per share,
subject to the adjustments and limitations set forth herein and in the Plan. The
Option granted hereunder is intended to constitute a Non-Qualified Option within
the meaning of the Plan. You should consult with your tax advisor concerning the
proper reporting of any federal or state tax liability that may arise as a
result of the grant or exercise of the Option.
1
<PAGE> 2
2. EXERCISE.
For purposes of this Option Agreement, Option Shares shall be deemed
"Non-Vested Shares" unless and until they have become "Vested Shares" as set
forth herein. So long as you remain an employee or director of the Company, the
Option Shares shall become Vested Shares in three increments as follows:
a. 333,333 Option Shares shall become Vested Shares upon the first day
following the Grant Date at which the per-share Market Value of the Common Stock
exceeds the greater of (i) $24.00 or (ii) the Target Price.
b. 333,333 additional Option Shares shall become Vested Shares upon the
first day following the one-year anniversary of the Grant Date at which the
per-share Market Value of the Common Stock exceeds the greater of (i) $28.80 or
(ii) the Target Price.
c. 333,334 additional Option Shares shall become Vested Shares upon the
first day following the two-year anniversary of the Grant Date at which the
per-share Market Value of the Common Stock exceeds $35.00.
Vesting shall in all cases cease upon your ceasing to be an employee or
director of the Company or a Related Entity.
As used in this Agreement, Target Price, at any point in time, shall
equal the Exercise Price compounded at an annual rate of 20% for the period from
the Grant Date through the end of the calendar month immediately preceeding the
point in time at which the Target Price is being calculated; provided that in no
event shall the Target Price exceed $35.00
As used in this Agreement, Market Value of the Common Stock shall mean,
as of the date of determination, the average of the following for the 15 trading
days immediately preceding such date of determination: (i) if the Common Stock
is then admitted to listing or trading on any securities exchange registered
under the Securities Exchange Act of 1934, as amended, the closing price per
share of the Common Stock on such day or, if no sale takes place on any such
day, the average of the closing bid and ask price on such day, or (ii) if the
Common Stock is not listed or traded on any such securities exchange, the last
sale price per share of the Common Stock on such day or, if no sale takes place
on any such day, the average of the high bid and low asked prices on such day,
in each case as reported by a reputable quotation source designated by the
Company. If the Common Stock is not listed or traded on such a securities
exchange and is not quoted by a reputable source, then the Market Value levels
set forth in the preceding sub-sections a, b and c of this Section 2 shall be
deemed satisfied.
2
<PAGE> 3
You may exercise the Option to purchase all or a portion of the Vested
Shares at any time prior to the termination of the Option pursuant to the
following paragraph. In no event shall you be entitled to exercise the Option
for a fraction of a share. The unexercised portion of the Option Shares, if any,
will automatically, and without notice, terminate and become null and void upon
the expiration of five (5) years from the Grant Date.
Any exercise by you of the Option shall be in writing addressed to the
Secretary of the Company at its principal place of business (a copy of the form
of exercise to be used will be available upon written request to the Secretary),
and shall be accompanied by a certified or bank check payable to the order of
the Company in the full amount of the Exercise Price of the shares so purchased,
or in such other manner as described in the Plan and approved by the Committee.
3. TERMINATION OF RELATIONSHIP.
Upon the termination of your relationship with the Company or any
Related Entity, you may exercise the Option with respect to all or any part of
the Vested Shares not previously exercised until the expiration of the Option in
accordance with its terms. In the case of termination of your relationship with
the Company or any Related Entity due to death, your estate (or any Person who
acquired the right to exercise such Option by bequest or inheritance or
otherwise by reason of your death) may exercise the Option with respect to all
or any part of the Vested Shares until the expiration of the Option in
accordance with its terms. In the case of termination of your relationship with
the Company or any Related Entity due to Disability, you or your legal
representative may exercise the Option with respect to all or any part of the
Vested Shares until the expiration of the Option in accordance with its terms.
4. CHANGE IN CONTROL.
Notwithstanding the terms of Section 2, all of the Option Shares shall
become Vested Shares immediately prior to any Change in Control; provided that
in connection with a Change in Control following the third anniversary of the
Grant Date that also constitutes a Sale of the Company, the Option Shares shall
become Vested Shares only if the value of the per-share cash and/or securities
received by the stockholders of the Company pursuant thereto exceeds the Target
Price at the time of the Sale of the Company.
As used in this Agreement, Change in Control shall mean (A) any
"person" (as such term is used in Section 13(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) other than Hicks, Muse, Tate & Furst
Incorporated and/or its affiliates ("Hicks Muse") becoming the direct or
indirect "beneficial owner" (as determined pursuant to Rule 13d-3 under the
Exchange Act) of securities of the Company representing 30% or more of the
combined voting power of the Company's then outstanding securities, (B)
individuals who at the Grant Date constitute the members of the Board and any
new director, whose election to the Board or nomination for election to the
Board by the Company's stockholders was approved by a vote of at least
two-thirds of the directors then in office who either were directors at the
Grant Date or whose election
3
<PAGE> 4
or nomination for election was previously so approved, ceasing for any reason to
constitute a majority of the Board, (C) the Company merging with or
consolidating into any other entity, or the stockholders of the Company and the
holders of voting securities of any other entity participating in a securities
exchange (other than a merger, consolidation or exchange which (1) would result
in the holders (and/or their affiliates) of the voting securities of the Company
outstanding immediately prior thereto holding immediately thereafter securities
representing more than 70% of the combined voting power of the voting securities
of the surviving entity outstanding immediately after such merger, consolidation
or exchange and (2) would result in the Executive being the chief executive
officer of such surviving entity), or (D) the stockholders of the Company
approving a plan of complete liquidation of the Company or an agreement or
agreements for the sale or disposition by the Company (in one or a series of
related transactions) of all or substantially all of the Company's assets, or
such a plan commencing other than in connection with a merger, consolidation or
exchange which does not constitute a Change in Control under the preceding
clause (C).
As used in this Agreement, Sale of the Company shall mean a Change in
Control pursuant to which the stockholders of the Company receive cash or
securities that may be traded on a national securities exchange or in the over
the counter market, or any combination thereof, for each share of Common Stock
held by that stockholder.
5. TRANSFERABILITY.
The Option and any rights or interests therein are not assignable or
transferable by you except by will or the laws of descent and distribution, and
during your lifetime, the Option shall be exercisable only by you or, in the
event that a legal representative has been appointed in connection with your
Disability, such legal representative, provided, however, that you may transfer
all or any portion of the Option, at any time and from time to time, to the Evan
D. Metropoulos Irrevocable Trust, the J. Daren Metropoulos Irrevocable Trust or
any other trust which may, from time to time, be established for the benefit of
persons who are natural objects of your bounty (the "Trusts"), which transfer(s)
shall only become effective upon the Company's receipt of a written instrument
evidencing such transfer, which instrument shall be executed by a duly
authorized representative of the Trust(s), pursuant to which the Trust(s) shall
agree, for the benefit of the Company (a) to take and hold the Option subject to
the provisions, and upon the conditions, specified in this Non-Qualified Stock
Option Agreement and in the Plan, and (b) that the Option may only be exercised
by such Trust upon the delivery to the Company of evidence reasonably
satisfactory to the Company (which, in the discretion of the Company, may
include the opinion of counsel satisfactory to the Company) that such Trust is,
at the time of such exercise, an "Accredited Investor" (as defined in Rule
501(a) of Regulation D promulgated under the Securities Act), or that the
exercise by such Trust of this Option, at the time of exercise, will not violate
the Securities Act or any applicable securities laws.
4
<PAGE> 5
6. WITHHOLDING TAXES.
By acceptance hereof, you hereby (i) agree to reimburse the Company or
any Related Entity by which you are employed for any federal, state or local
taxes required by any government to be withheld or otherwise deducted by such
corporation in respect of your exercise of all or a portion of the Option; (ii)
authorize the Company or any Related Entity by which you are employed to
withhold from any cash compensation paid to you, or on your behalf, an amount
sufficient to discharge any federal, state and local taxes imposed on the
Company, or the Related Entity by which you are employed, and which otherwise
has not been reimbursed by you, in respect of your exercise of all or a portion
of the Option; and (iii) agree that the Company may, in its discretion, hold the
stock certificate to which you are entitled upon exercise of the Option as
security for the payment of the aforementioned withholding tax liability, until
cash sufficient to pay that liability has been accumulated, and may, in its
discretion, effect such withholding by retaining shares issuable upon the
exercise of the Option having a Fair Market Value on the date of exercise which
is equal to the amount to be withheld.
7. CONSENT TO APPROVED SALE.
If the Board and the holders of a majority of the Common Stock then
outstanding approve the sale of the Company to an independent third party (the
"Approved Sale"), you shall, in your capacity as a holder of this Option,
consent to and raise no objections against the Approved Sale. If the Approved
Sale is structured as a sale of capital stock, you shall agree to sell your
rights to acquire Option Shares hereunder on the terms and conditions approved
by the Board of Directors and the holders of a majority of the Common Stock then
outstanding, provided that you receive as consideration for the right to acquire
each Vested Share an amount equal to the Fair Market Value of the Common Stock
less the Exercise Price. In furtherance of the foregoing, you shall take all
necessary and desirable actions in connection with the consummation of the
Approved Sale reasonably requested by the Committee. For purposes of this
Section 7, an "independent third party" is any person who does not own in excess
of 5% of the Common Stock on a fully-diluted basis, who is not controlling,
controlled by or under common control with any such 5% owner of the Common Stock
and who is not the spouse, ancestor or descendant (by birth or adoption) of a
grandparent of any such 5% owner of the Common Stock. If the Company or the
holders of the Company's securities enter into any negotiation or transaction
for which Rule 506 (or any similar rule then in effect) promulgated pursuant to
the Securities Act may be available with respect to such negotiation or
transaction (including a merger, consolidation or other reorganization), you
shall, at the reasonable request of the Company, appoint a purchaser
representative (as such term is defined in Rule 501 promulgated pursuant to the
Securities Act) reasonably acceptable to the Company. If you appoint the
purchaser representative designated by the Company, the Company will pay the
fees of such purchaser representative, but if you decline to appoint the
purchaser representative designated by the Company you shall appoint another
purchaser representative (reasonably acceptable to the Company), and you shall
be responsible for the fees of the purchaser representative so appointed.
5
<PAGE> 6
8. ADJUSTMENTS.
In the event that, by reason of any merger, consolidation, combination,
liquidation, reorganization, recapitalization, stock dividend, stock split,
split-up, split-off, combination of shares, exchange of shares or other like
change in capital structure of the Company (collectively, a "Reorganization"),
the Common Stock is substituted, combined, or changed into any cash, property,
or other securities, or the shares of Common Stock are changed into a greater or
lesser number of shares of Common Stock, then the number and/or kind of shares
and/or interests subject to an Option, the per share price or value thereof and
the Target Price and other vesting target levels set forth in Section 2 shall be
appropriately adjusted by the Committee to give appropriate effect to such
Reorganization, such that the Option shall thereafter vest and be exercisable
for such securities, cash, and/or other property as would have been received in
respect of the Option Shares subject to the Option had the Option been exercised
in full immediately prior to such event and upon comparable terms as existed
prior to such event. Any fractional shares or interests resulting from such
adjustment shall be eliminated.
9. MISCELLANEOUS.
This Option Agreement is subject to all the terms, conditions,
limitations and restrictions contained in the Plan. In the event of any conflict
or inconsistency between the terms hereof and the terms of the Plan, the terms
of the Plan shall be controlling.
This Option Agreement is not a contract of employment and the terms of
your employment shall not be affected by, or construed to be affected by, this
Option Agreement, except to the extent specifically provided herein. Nothing
herein shall impose, or be construed as imposing, any obligation (i) on the part
of the Company or any Related Entity to continue your employment, or (ii) on
your part to remain in the employ of the Company or any Related Entity.
This Option Agreement may be amended as provided in Section 19 of the
Plan.
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<PAGE> 7
Please indicate your acceptance of all the terms and conditions of the
Option and the Plan by signing and returning a copy of this Option Agreement.
Very truly yours,
INTERNATIONAL HOME FOODS, INC.
By:
--------------------------------------
Michael Kelley Maggs
Senior Vice President
ACCEPTED:
- ------------------------------
C. Dean Metropoulos
<PAGE> 1
EXHIBIT 10.21
EMPLOYMENT AGREEMENT
BY AND BETWEEN
INTERNATIONAL HOME FOODS, INC.
AND
N. MICHAEL DION
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of this
23rd day of October, 1998 (the "Effective Date"), by and between INTERNATIONAL
HOME FOODS, INC., a Delaware corporation (the "Company"), and N.
Michael Dion (the "Executive").
RECITALS
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that it is in the best interest of the Company and its stockholders
to assure that the Company will have the continued dedication of Executive; and
WHEREAS, the Company and Executive desire to enter into a compensation
arrangement to assure retention of Executive in the future.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, including the
mutual covenants herein, the parties hereto agree as follows:
1. Employment Period. Subject to Section 3, the Company hereby
agrees to continue Executive in its employ, and Executive hereby agrees to
remain in the employ of the Company, in accordance with the terms and provisions
of this Agreement, during the period commencing on the date of this Agreement
(the "Effective Date") and ending on the fifth anniversary of the Effective Date
(the "Employment Period").
2. Terms of Employment.
(a) Positions and Duties. During the term of Executive's
employment with the Company, Executive shall serve as Chief Financial Officer
and, in so doing, shall report to the President and/or Chief Executive Officer
of the Company. During the term of Executive's employment with the Company
(excluding any periods of vacation and sick leave), Executive shall devote full
business time to the business and affairs of the Company. Notwithstanding the
foregoing, it shall not be a violation of this Agreement for the Executive to
(i) serve on civic or charitable boards or committees, (ii) deliver lectures or
fulfill speaking engagements or (iii) manage personal investments.
<PAGE> 2
(b) Compensation, Benefits and Expenses.
(i) Annual Base Compensation. During the term
of Executive's employment with the Company, Executive shall receive an annual
base salary of not less than $240,000 ("Annual Base Salary"). In addition,
Executive shall be entitled to receive an annual bonus ("Annual Bonus") in an
amount to be determined by the Company consistent with its practices for
executive officers.
(ii) Investment Benefit Plans. During the term
of Executive's employment with the Company, Executive shall be entitled to
participate in all incentive, savings and retirement plans, practices, policies
and programs applicable generally to other executives of the Company
("Investment Plans").
(iii) Welfare Benefit Plans. During the term of
Executive's employment with the Company, Executive and his family shall be
eligible for participation in, and shall receive all benefits under, welfare
benefit plans, practices, policies and programs applicable generally to other
executives of the Company ("Welfare Plans").
(iv) Expenses. During the term of Executive's
employment with the Company, Executive shall be entitled to receive prompt
reimbursement for all reasonable employment related expenses incurred by
Executive.
3. Termination of Employment.
(a) Reasons for Termination. Executive's employment with
the Company may be terminated during the Employment Period (i) by the Company
with or without Cause, (ii) by Executive with or without Good Reason, or (iii)
by either the Company or Executive upon Executive's Disability. Executive's
employment with the Company shall automatically terminate upon Executive's
death.
(b) Definitions. The following terms shall have the
following meanings for purposes of this Agreement.
(i) "Annual Base Compensation" shall mean, at
any given time, the aggregate amount of (i) the Annual Base Salary and (ii) the
average of the Annual Bonus paid to Executive by the Company in connection with
the prior two fiscal years or, if Executive was not an employee of the Company
during all of the prior two fiscal years, then the amount of the prior fiscal
year's bonus. Calculations required herein based upon Annual Base Compensation
shall be determined as if the Annual Base Compensation is earned evenly
throughout the year based upon a 365-day year.
(ii) "Cause" shall mean (A) the willful and
intentional misconduct in the performance of, or willful neglect of, the
Executive's duties, which has caused demonstrable and serious injury (monetary
or otherwise) to the Company, (B) conviction of, or plea of nolo
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<PAGE> 3
contendre to, a felony, or (C) misappropriation of corporate funds; provided,
however, that no act or omission shall constitute "Cause" for purposes of this
Agreement unless the Board provides Executive (a) written notice clearly and
fully describing the particular acts or omissions which the Board reasonably
believes in good faith constitutes "Cause" and (b) an opportunity, within 30
days following his receipt of such notice, to meet in person with the Board to
explain or defend the alleged acts or omissions relied upon by the Board and, to
the extent practicable, to cure such acts or omissions. Further, no act or
omission shall constitute fraud if Executive reasonably believed such act or
omission was in the best interests of the Company. Executive shall have the
right to contest a determination of Cause by the Company by requesting
arbitration in accordance with the terms of Section 6 hereof.
(iii) "Change in Control" shall mean (A) any
"person" (as such term is used in Section 13(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) becoming the direct or indirect
"beneficial owner" (as determined pursuant to Rule 13d-3 under the Exchange Act)
of securities of the Company representing 30% or more of the combined voting
power of the Company's then outstanding securities, (B) individuals who at the
Effective Date constitute the members of the Board and any new director, whose
election to the Board or nomination for election to the Board by the Company's
stockholders was approved by a vote of at least two-thirds of the directors then
in office who either were directors at the Effective Date or whose election or
nomination for election was previously so approved, ceasing for any reason to
constitute a majority of the Board, (C) the Company merging with or
consolidating into any other entity, or the stockholders of the Company and the
holders of voting securities of any other entity participating in a securities
exchange (other than a merger, consolidation or exchange which would result in
the holders (and/or their affiliates) of the voting securities of the Company
outstanding immediately prior thereto holding immediately thereafter securities
representing more than 70% of the combined voting power of the voting securities
of the surviving entity outstanding immediately after such merger, consolidation
or exchange), or (D) the stockholders of the Company approving a plan of
complete liquidation of the Company or an agreement or agreements for the sale
or disposition by the Company (in one or a series of related transactions) of
all or substantially all of the Company's assets, or such a plan commencing.
(iv) "Disability" means (A) Executive's
incapacity due to a permanent mental or physical illness that prevents Executive
from performing his duties or (B) a physical condition that renders the
performance by Executive of his duties hereunder a serious threat to the health
and well being of Executive. Disability shall be determined by a physician
acceptable to Executive (or his legal representative).
(v) "Good Reason" means (A) the assignment to
Executive of any duties inconsistent with Executive's position (including
status, offices, titles and reporting requirements), authority, duties or
responsibilities or any other action by the Company which results in a
diminution in such position, authority, duties or responsibilities, excluding
for this purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by the Company promptly after receipt of notice
thereof, (B) a material breach by the
3
<PAGE> 4
Company of this Agreement or any stock option agreement between the Company and
Executive, or (C) the occurrence of a Change in Control.
(c) Obligations of the Company upon Termination.
(i) With Cause; Without Good Reason. If, during
the Employment Period, the Company shall terminate Executive's employment with
the Company for Cause, or Executive shall terminate his employment with the
Company without Good Reason, then:
(A) the Company shall pay to Executive
in cash within 10 days after the date of such termination the sum of (x) any
Annual Base Compensation earned through the date of termination to the extent
not theretofore paid by the Company, (y) any compensation previously deferred by
Executive and (z) any vacation pay earned through the date of termination not
theretofore paid by the Company (in the aggregate, the "Accrued Obligation");
and
(B) the Company shall pay to Executive
any amounts arising from Executive's participation in, or benefits under, any
Investment Plans (the "Accrued Investments"), which amounts shall be payable in
accordance with the terms and conditions of the Investment Plans.
(ii) Without Cause; With Good Reason. If, during
the Employment Period, the Company shall terminate Executive's employment with
the Company without Cause, or Executive shall terminate his employment with the
Company with Good Reason, then:
(A) the Company shall pay to Executive
in cash within 10 days after the date of such termination the amount of the
Accrued Obligation;
(B) the Company shall pay to Executive
the Accrued Investments in accordance with the terms and conditions of the
Investment Plans;
(C) the Company shall pay to Executive
in cash within 10 days after the date of such termination an amount (the
"Severance Amount") equal to one and one half times Executive's Annual Base
Compensation.
(D) for the remainder of the Employment
Period (or such longer period as the Welfare Plans may provide), the Company
shall continue benefits provided under the Welfare Plans to Executive and his
family at least equal to those that would have been provided had Executive's
employment with the Company not been terminated (the "Welfare Benefit
Continuation"); provided, however, that if Executive becomes employed with
another employer and is eligible to receive similar benefits under that
employer's plans, the benefits described in this paragraph (D) (hereinafter
referred to as the "Welfare Benefit Continuation") shall be secondary to and not
duplicative of those similar benefits.
4
<PAGE> 5
(iii) Death or Disability. If, during the
Employment Period, the Company or Executive shall terminate Executive's
employment with the Company because of Executive's Disability, or Executive's
employment with the Company shall terminate upon Executive's death, then:
(A) the Company shall pay to Executive
(or his representative or estate) in cash within 10 days after the date of such
termination the amount of the Accrued Obligation;
(B) the Company shall pay to Executive
(or his representative or estate) the Accrued Investments in accordance with the
terms and conditions of the Investment Plans; and
(C) the Company shall provide to
Executive the Welfare Benefit Continuation.
(d) Effect on Benefit Plans. The foregoing payments and
benefits shall be in addition to and not in lieu of any payments or benefits to
which Executive and his dependents may otherwise be entitled to under the
Company's compensation and employee benefit plans, programs, policies or
practices. Nothing herein shall restrict the Company's right to amend any plan,
practice, policy or program in a manner generally applicable to similarly
situated active executives, in which event Executive shall be entitled to
participate on the same basis (including payment of applicable contributions) as
similarly situated active executives of the Company.
(e) No Mitigation. Executive shall not be obligated to seek new
employment or take any other action to mitigate the benefits to which Executive
is entitled hereunder. Except as contemplated by Section 3(c)(ii)(E) with
respect to the Welfare Benefit Continuation, such benefits shall not be reduced
whether or not Executive obtains new employment.
4. Mutual Release. Payment of the Severance Amount shall be
conditioned upon the execution by Executive and the Company of a valid mutual
release, to be prepared by the Company, in which Executive and the Company
mutually release the other, to the maximum extent permitted by law, from any and
all claims either may have against the other that relate to or arise out of
Executive's employment or termination of employment, except such claims arising
under this Agreement, any employee benefit plan or any other written plan or
agreement.
5. Excise Taxes.
(a) Determination and Payment. If it is determined that any
payment, distribution or other benefit to Executive, whether pursuant to this
Agreement or otherwise (a "Payment"), would be subject to any tax (e.g. excise
tax under Section 4999 of the Internal Revenue Code of 1986) other than income
tax (such tax, together with any interest and penalties related thereto are
hereinafter collectively referred to as an "Excise Tax"), then the Company shall
promptly pay to Executive an additional payment ("Gross-Up Payment") in an
amount such
5
<PAGE> 6
that Executive retains, after payment of all taxes, and all interest and
penalties with respect thereto (including, without limitation, income tax and
Excise Tax imposed upon the Gross-Up Payment), an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payment. The determination of the
amount of any Gross-Up Payment shall be made by a certified public accounting
firm selected jointly by the Company and Executive (the "Accounting Firm"), the
fees and expenses of which shall be paid by the Company.
(b) Contesting. Executive shall promptly notify the Company of
any claim that, if successful, would require the payment of the Gross-Up
Payment. Without the consent of the Company, Executive shall not pay such claim
prior to the date that the payment of taxes with respect to such claim is due.
If the Company notifies Executive in writing prior to such due date that it
desires to contest the claim, Executive shall take all actions in connection
with contesting the claim reasonably requested by the Company (including
accepting legal representation with respect to such claim by an attorney
reasonably selected by the Company); provided, however, that the Company shall
pay all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold Executive
harmless, on an after-tax basis, from any tax (including interest and penalties
with respect thereto) imposed as a result thereof.
6. Claims.
(a) Arbitration of Claims. Executive shall settle by arbitration
any dispute or controversy arising in connection with this Agreement, whether or
not such dispute involves a plan subject to the Employee Retirement Income
Security of 1974, as amended. Such arbitration shall be conducted in accordance
with the rules of the American Arbitration Association before a panel of three
arbitrators sitting in Dallas, Texas. The award of the arbitrators shall be
final and nonappealable, and judgment may be entered on the award of the
arbitrators in any court having proper jurisdiction. All expenses of such
arbitration shall be borne by the Company.
(b) Payment of Legal Fees and Costs. The Company agrees to pay
as incurred, to the full extent permitted by law, all legal fees and expenses
which Executive may reasonably incur as a result of any contest (regardless of
the outcome thereof) by the Company, Executive or others of any action taken
pursuant to the terms of this Agreement, or of the validity or enforceability
of, or liability under, any provision of this Agreement, or any guarantee of
performance thereof (including as a result of any contest by Executive about the
amount of payment pursuant to this Agreement), plus in each case interest on any
delayed payment at the rate of 8% per annum.
(c) Agent for Service of Legal Process. Service of legal process
upon the Company with respect to a claim under this Agreement shall be made upon
the General Counsel of the Company.
7. Tax Withholding. All payments to the Executive under this
Agreement will be subject to the withholding of all applicable employment and
income taxes.
6
<PAGE> 7
8. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
9. Successors. This Agreement shall be binding upon and inure to the
benefit of the Company and any successor of the Company. The Company will
require any successor to all or substantially all of the business and/or assets
of the Company to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
if no succession had taken place.
10. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof. This
Agreement may not be modified in any manner except by a written instrument
signed by both the Company and Executive.
11. Notices. Any notice required under this Agreement shall be in
writing and shall be delivered by certified mail return receipt requested to
each of the parties as follows:
To Executive:
N. Michael Dion
1 Brandywine Ct.
Randolph, NJ 07869
To the Company:
INTERNATIONAL HOME FOODS, INC.
1633 Littleton Road
Parsippany, NJ 07054
Attention: General Counsel
12. Validity. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, such provision shall be fully severable, this
Agreement shall be construed and enforced as if the illegal, invalid or
unenforceable provision had never comprised a portion of this Agreement, and the
remaining provisions of this Agreement shall remain in full force and effect.
Furthermore, in lieu of such illegal, invalid or unenforceable provision there
shall be added automatically as part of this Agreement a provision as similar in
terms as may be possible and be legal, valid and enforceable.
13. Governing Law. The provisions of this Agreement shall be
construed in accordance of the laws of the state of New Jersey, without giving
effect to that states choice of law provisions.
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<PAGE> 8
IN WITNESS WHEREOF, the Executive and the Company have executed this
Agreement as of the date and year first above written.
INTERNATIONAL HOME FOODS, INC.
---------------------------------------
Member of the Board of Directors
EXECUTIVE
---------------------------------------
N. Michael Dion
8
<PAGE> 1
EXHIBIT 12.1 - COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(000's) (000's) (000's) (000's) (000's)
<S> <C> <C> <C> <C> <C>
Income before provision for income taxes $ 32,322 $ 39,763 $136,280 $ 68,607 $159,216
Add:
Interest on term loans and notes, net of
interest capitalized 92,920 100,192 16,411 -- --
Amortization of debt costs 3,067 4,741 661 -- --
Portion of rents representative of interest 2,629 1,394 628 1,988 1,735
-------- -------- -------- -------- --------
Income as adjusted $130,938 $146,090 $153,980 $ 70,595 $160,951
Fixed Charges:
Interest on term loans and notes $ 93,639 $100,192 $ 16,411 $ -- $ --
Amortization of debt costs 3,067 4,741 661 -- --
Portion of rents representative of interest 2,629 1,394 628 1,988 1,735
-------- -------- -------- -------- --------
Total fixed charges $ 99,335 $106,327 $ 17,700 $ 1,988 $ 1,735
Ratio of Consolidated Earnings to Fixed Charges 1.32 1.37 8.70 35.5 92.8
======== ======== ======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 13.1
WHEN WE SAY "CAPITALIZING ON OUR POTENTIAL" WE MEAN...
WE'RE GROWING OUR BRANDS AND BUILDING SHAREHOLDER VALUE
INTERNATIONAL HOME FOODS, INC.
ANNUAL REPORT 1998
<PAGE> 2
International Home Foods, Inc. (IHF), headquartered in Parsippany, New Jersey,
manufactures a diversified and well-established portfolio of shelf-stable, high
quality, nutritious food products. Through our divisions and wholly-owned
subsidiaries, we offer the following well-known brands:
[PHOTO]
CHEF BOYARDEE
[PHOTO]
BUMBLE BEE
[PHOTO]
SPECIALTY
<PAGE> 3
[PHOTO]
SNACKS
[PHOTO]
SOUTHWEST
[PHOTO]
LIBBY'S
<PAGE> 4
CAPITALIZING ON OUR POTENTIAL
Contents
2 To Our Shareholders, Customers, and Consumers
4 Leverage Leading Brands
8 Refocus Marketing Efforts
12 Expand into Foodservice, Private Label, and International
16 Complete Strategic Acquisitions
20 Continue to Achieve Cost Savings
23 Financial Information
<PAGE> 5
Deciding which way a company will go - developing a growth strategy - is a
vital first step for any business. Making that strategy work is what
distinguishes the best companies from their competitors. At International Home
Foods, we have designed a strategic platform to grow our brands and build
shareholder value. Our five strategies are: Leverage Leading Brands; Refocus
Marketing Efforts; Expand Into Foodservice, Private Label, and International;
Complete Strategic Acquisitions; and Continue to Achieve Cost Savings. In the
pages that follow, we'll demonstrate how our adherence to these strategic
initiatives is having a positive impact on everything we do and every brand we
own.
1 International Home Foods
<PAGE> 6
TO OUR SHAREHOLDERS,CUSTOMERS, AND CONSUMERS
On behalf of International Home Foods and its employees, I am very pleased to
report that 1998 was another exciting and strategically important year at our
company. In the two short years since the company's recapitalization in 1996,
we have completed the restructuring and repositioning of our business in
several key ways that will support strong long-term profitable growth, and will
enable us to continue to achieve superior financial performance.
The following is a brief review of IHF's major accomplishments in 1998 and
since its recapitalization (excluding the 1998 restructuring charge and the
1997 non-cash stock compensation and extraordinary charges):
o In 1998, earnings per share increased 47 percent to $1.15.
o Overall, 1998 sales were $1.7 billion, a 39 percent increase from 1997
reported sales. Since the 1996 recapitalization, our sales have
increased in excess of 80 percent. We repositioned the core business
that existed in 1996 by eliminating certain unprofitable sales in our
export markets, discontinuing marginal SKUs in the US markets, and
implementing an important change in our marketing strategy. We feel
confident that this core business is healthy across all channels of
distribution and that it will respond well to the numerous new products
and strong consumer marketing efforts that will be aggressively
launched in 1999.
o In addition to nearly doubling our sales, IHF's EBITDA (earnings before
interest, taxes, depreciation and amortization) increased 64 percent
from $172 million in 1996 to $282 million in 1998.
o During 1998, we funded $283 million in acquisitions, $31 million in
capital expenditures and repurchased treasury stock for $57 million.
These items in aggregate consumed $371 million in cash, yet our total
debt during the year only increased $207 million-a testament to our
strong cash flow.
At the same time that IHF achieved these impressive financial results,
we have also taken several strategically important steps to prepare the
company to meet the opportunities of the new century:
1. We completed the installation of a management information system that
will become the platform for our acquisitions. In addition, the system
has the ability to link up with our customers' replenishment systems,
thereby generating improvements in service levels and reductions in
overall inventories.
2. We significantly invested in improving our products and contemporizing
their packaging. Moreover, we will continue to focus our research and
development efforts on creating new products that respond to consumer
trends and preferences.
3. We addressed several inequities in past marketing programs that created
conflicts within our different channels of trade and did not
effectively support the ever-challenging pursuit of proper
merchandising and display execution at the store level. These
transitions, while having a short-term negative impact on our 1998
sales, were critical for maximizing the performance of our future
marketing investments.
International Home Foods 2
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[C. DEAN METROPOULOS PHOTO]
4. Our 1998 marketing investment was $338 million, and we feel we are
taking the appropriate steps to efficiently utilize these funds. We
expect this effort to continue and expand rapidly in 1999 and beyond as
we put greater focus on new products and reaching new consumers.
5. We have streamlined our operations not only to generate important cost
and working capital efficiencies, but also to improve the service
levels to our customers.
6. We completed three acquisitions in 1998, making a total of seven since
the end of 1996. These acquisitions were accretive and expanded our
strategic presence in each of our basic business categories. Equally
important for our customers, our management team has demonstrated the
ability to integrate these acquisitions almost seamlessly. Our
acquisitions have not only increased our shareholder value, but their
consolidation into our infrastructure will also lead to increased
efficiencies and, ultimately, lower supply chain costs for our
customers.
The current buzzwords in our industry are "retail consolidation." In our
view, this trend among retailers presents marketers and manufacturers of food
products with significant opportunities. Generally, consolidation leads to
improved efficiencies for everyone involved in the process. The retailer seeks
improved efficiencies in dealing with its customers and suppliers just as we
do. We are confident that our common search for efficiency is not necessarily
an adversarial one. We are absolutely committed to finding improved ways to
generate common savings: through better category management, continuous
replenishment systems, supply chain improvements, and other innovations. These
in turn will lead to closer and more efficient partnerships with our retailers.
Therefore, we strongly believe that our organization is well poised to meet the
challenges and demands that the retail consolidation presents for food
manufacturers and marketers.
As we approach the new millennium, we are confident that our products and
their long tradition with consumers, coupled with higher emphasis on marketing,
research and development and guided by our committed management team, will
allow us to successfully respond to the emerging consumer trends of the coming
century.
/s/ C. DEAN METROPOULOS
C. Dean Metropoulos
Chairman of the Board, Chief Executive Officer
3 International Home Foods
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[PHOTO]
International Home Foods 4
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WHEN WE SAY "LEVERAGE LEADING BRANDS" WE MEAN...
INTRODUCING NEW PRODUCTS THAT BUILD ON THE STRENGTH OF OUR TRUSTED AND
WELL-KNOWN BRAND NAMES
5 International Home Foods
<PAGE> 10
LEVERAGE LEADING BRANDS
OUR PORTFOLIO OF BRANDS FEATURES SUCH WELL-RECOGNIZED NAMES AS CHEF
BOYARDEE(R), BUMBLE BEE(R), PAM(R), CRUNCH 'N MUNCH(R), GULDEN'S(R), AND ONE OF
THE MORE RECENT ADDITIONS TO OUR ROSTER, LIBBY'S(R) CANNED MEATS. WE CONSIDER
OUR BRANDS TO BE OUR MOST PRIZED ASSETS AND OUR SPRINGBOARD FOR GROWTH, BOTH BY
BUILDING THE EXISTING FLAGSHIP BRANDS AND BY USING OUR STRENGTH TO SUPPORT LINE
EXTENSIONS. OUR LINEUP OF ESTABLISHED BRANDS AND THEIR NUMBER ONE MARKET
POSITIONS ALSO GIVES US THE OPPORTUNITY TO SECURE SHELF SPACE FOR NEW PRODUCTS
WHICH ARE CRITICAL TO OUR GROWTH STRATEGY. HERE ARE SOME EXAMPLES OF STRATEGIC
ADDITIONS TO OUR PORTFOLIO IN 1998.
OVERSTUFFED(TM)
Chef Boyardee is the undisputed leader in the $511 million canned
pasta category. Our core consumer group is kids under 12. Retaining
them as they get older represents an important growth opportunity.
Therefore, we began developing value-added, distinctive tasting new
products that appeal to an older palate. So, in 1998, we introduced
Chef Boyardee Overstuffed Ravioli. Stuffed with nearly twice as much
filling as regular raviolis, Overstuffed is made from top-quality
ingredients, including enriched pasta, sun-ripened tomatoes, special
herbs and spices, and premium beef. With a heartier flavor profile than
the original Chef Boyardee Beef Ravioli, Overstuffed appeals to older
kids, helping us keep them as loyal consumers as they grow up.
In Canada, where Chef Boyardee had its second straight year of
double-digit growth, we unveiled two additions to our Special
Recipe(R) line, Ravioli Primavera and Rotini Calabrese. Like
Overstuffed, Special Recipe extends our consumer reach, with research
showing that nearly half of our canned pasta purchasers in Canada live
in households without children.
[PHOTO]
AMERICA'S FAVORITE
When it comes to our solid white albacore tuna, we're dealing from
a position of strength because Bumble Bee is already a category leader.
Last year, we invested in our albacore product by improving its overall
quality. Survey results showed consumers significantly preferred the
improved solid white albacore over its major competitor.
Combining our category strength with Orleans(R) specialty seafood
products, we introduced into key markets new products under the Bumble
Bee name, including Louisiana shrimp, white and lump crab meat, whole
and smoked oysters, and whole baby clams.
[PHOTO]
International Home Foods 6
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[PHOTO]
CATEGORY CAPTAINCY
Ranch Style(R) Brand beans offer another good example of the way that we
can leverage-and strengthen-our leading brands. Canned beans is a billion dollar
category, and Ranch Style, with the introduction of a complete line of baked
beans in 1997 and refried beans in 1998, is the only brand in the southwest
region to compete in every segment-pork and bean, baked, refried, and
ingredient. As a result of our breadth and ability to provide one-stop shopping
for beans, we have "category captaincy" with the trade and we get the
all-important shelf space we need when we move into new markets.
TOFFEE PRETZELS
Our popular Crunch 'n Munch glazed popcorn gives us a solid platform for
building the Crunch 'n Munch brand by launching new products into the snack
world, and last year we introduced our first non-popcorn extension, Crunch 'n
Munch Toffee Pretzels. Since flavored pretzels are one of the fastest growing
snack segments, we combined Crunch 'n Munch's popular toffee flavor with a
bite-size pretzel that has only 1.5 grams of fat per serving. The new pretzels
are being supported by a powerful marketing initiative, including in-store
sampling, promotional events, and national TV advertising.
[PHOTO]
7 International Home Foods
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"REFOCUS MARKETING EFFORTS" IS ANOTHER WAY OF SAYING...
CAPTURING THE CONSUMER'S ATTENTION WITH A NEW LOOK AND ATTITUDE
International Home Foods 8
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[PHOTO]
9 International Home Foods
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REFOCUS MARKETING EFFORTS
WITH TODAY'S MEDIA CLUTTER, IT'S HARD TO CAPTURE THE CONSUMER'S ATTENTION. TO
SUCCEED, WE NEED TO BE INNOVATIVE, BUT WE ALSO HAVE TO TARGET EVERY DOLLAR
SPENT WITH PINPOINT ACCURACY. BEFORE WE ACQUIRED THEM, SOME OF OUR BRANDS WERE
UNDERMARKETED. TO REVITALIZE OUR ESTABLISHED BRAND NAMES, AND TO RESPOND TO
CHANGING RETAIL AND CONSUMER DYNAMICS, WE HAVE REFOCUSED OUR MARKETING AND
PACKAGING EFFORTS. NOW, WE'RE "REDIRECTING" OUR MARKETING DOLLARS TO BETTER
TARGET THE CONSUMER AND TO BUILD A HEALTHY LONG-TERM BRAND PROFILE THROUGH AD
CAMPAIGNS, IN-STORE PROMOTIONS AND CO-PROMOTIONS, AND NEW PACKAGING.
IT'S OK TO SPRAY
PAM is widely known as the all-natural, no-stick cooking spray.
But we also want the consumer to recognize PAM as an all-natural
ingredient that can be sprayed directly on food. This new positioning
has been built around the July 1998 introduction of two new PAM
flavors, lemon and garlic. A breakthrough ad campaign-"It's OK to
Spray"-supported the extensions and PAM's base business through TV and
print promotions, sampling, coupons, and in-store merchandising. The
flavors were also promoted at a series of public relations events for
local food and nutrition professionals showcasing fat-free cooking with
PAM.
THE LATEST BUZZZ
Bumble Bee has maintained a category leadership position despite
the fact that its last national ad campaign was in 1987. That all
changed last year with "It's Gotta Be Bumble Bee," a comprehensive
campaign that included TV, radio, and print advertising; new product
packaging; and promotions. As part of the campaign, recipes on cans and
in ads encouraged consumers to "Bee Gourmet," "Bee Healthy," and "Bee
Choosy."
[PHOTO]
International Home Foods 10
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We also supported the brand with a contemporary version of the "Yum Yum Bumble
Bee" jingle; a regional campaign with Bill "The Big Tuna" Parcells, coach of
the New York Jets; and The Latest Buzzz, an in-store magazine with recipes,
health news, and games for kids.
[PHOTO]
STAND-UP CHILI(TM)
Dennison's(R) is known as the original "Stand-Up Chili" because it's so
thick you can stand a fork in it. In 1998, we capitalized on that concept in our
California heartland with in-store promotions featuring stand up comedians who
told jokes and gave out samples with coupons. We also sponsored "Dennison's
Comedy Nights" at local comedy clubs where customers got in free with a can of
Dennison's that was then donated to food banks. The reaction from both consumers
and retailers was overwhelmingly positive, leading to double-digit growth for
Dennison's in its core markets.
PROMOTIONS AND PACKAGING
We are directing our marketing dollar at the consumer with innovative
"retailtainment" tactics. Each year, we only get so many chances to set our
products apart at the store level, so we have equipped our people with a
"toolbox" full of promotional ideas. To help drive store traffic for our retail
customers, we're staging innovative events such as "Cook Up a Little Magic,"
which promoted Chef, PAM, and Crunch 'n Munch with in-store magicians, a
take-home recipe video, and recipe cards.
Our Campfire(R) marshmallow brand was the growth leader in the
marshmallow category last year thanks to a consumer-oriented approach that
included seasonal displays and co-promotions. Joining with Hershey's(R), for
example, we developed customized displays and signage for S'mores on Memorial
Day, the Fourth of July, and Labor Day.
[PHOTO]
Across our brands, we also introduced new packaging, using brighter
graphics and more vibrant colors to create a more contemporary look and feel
that heightens the shelf impact of our products.
(Hershey's is a registered trademark of Hershey Foods Corporation)
11 International Home Foods
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WHEN WE SAY "EXPAND INTO FOODSERVICE, PRIVATE LABEL, AND
OUR POWERFUL
[PHOTO]
International Home Foods 12
<PAGE> 17
INTERNATIONAL" WE MEAN...
BRANDS ARE GAINING GROUND IN SOME OF OUR INDUSTRY'S FASTEST GROWING MARKETS
13 International Home Foods
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EXPAND INTO FOODSERVICE, PRIVATE LABEL, AND INTERNATIONAL
THREE FAST-GROWING SECTORS FOR IHF-FOODSERVICE, PRIVATE LABEL, AND
INTERNATIONAL MARKETS-PRESENT AN IMPORTANT OPPORTUNITY TO GROW OUTSIDE OUR
TRADITIONAL CHANNELS. IN EACH CASE, IHF IS A MORE COMPETITIVE CONTENDER BECAUSE
OF OUR BRAND STRENGTH, MANUFACTURING FLEXIBILITY, DISTRIBUTION NETWORK, AND
FOCUSED LEADERSHIP.
FOODSERVICE
The foodservice industry, supplying restaurants, schools,
hospitals, hotels, and airlines, represents over half of every American
food dollar now being spent on food prepared away from home. We have
begun to capitalize on this opportunity with our targeted marketing and
our brand strength. While sales for the US foodservice market have
historically grown at about 2 percent a year, IHF's sales were up 18
percent in 1998. Our objective is to triple our foodservice business
over the next three years. That growth will be the result of
overhauling our foodservice business, and in 1998, as part of that
ongoing plan, we created a dedicated sales and marketing support group.
And each acquisition IHF makes gives us the opportunity to bundle and
sell more products to foodservice distributors. We also adopted a
targeted strategy of identifying our audience by service segment-so we
take Chef to schools, PAM to restaurants, and Gulden's to the ballpark.
In fact, Gulden's will be the official mustard of the World Champion
New York Yankees in 1999.
[PHOTO]
International Home Foods 14
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PRIVATE LABEL
The 1998 acquisition of Grist Mill(R) further expanded our growth platform
in private label, the fastest growing sector in the grocery industry and one
which now accounts for approximately 18 percent of grocery expenditures. Grist
Mill, a leading manufacturer of private label cereal bars and fruit snack
products, extends our presence in these categories. Leveraged along with our
position as the leading supplier of private label canned pasta and cooking
spray, we can now offer retailers a strategic solution to category management
which includes efficient assortment, single-source supply, and consolidated
logistics. With our category management approach to the retail trade, private
label has become a strategic element of our long-term business plan.
[PHOTO]
INTERNATIONAL
We named this company International Home Foods because we felt our brands
had significant opportunities in the global market. In Puerto Rico, Chef
Boyardee is the leading canned pasta. In Mexico, Productos Del Monte(R) , the
leading producer and distributor of branded catsup, canned vegetables, and
bottled salsa, also gives us an excellent platform to expand sales of other IHF
products. Equally important, we are moving into new overseas markets through the
acquisitions of Libby's canned meats in 1998 and the Clover Leaf(R) and
Paramount(R) brands in January 1999. These acquisitions give us a presence in a
number of foreign markets, including South Africa, the United Kingdom, the
Philippines, Japan, and Jamaica, that we can use to launch other IHF products.
In Canada, we manufacture and market Chef Boyardee canned pasta, Puritan(R)
stews and canned meats, PAM cooking spray, and Crunch 'n Munch glazed popcorn.
In 1998, every major brand had substantial volume and revenue growth. Chef
Boyardee, driven by the introduction of two new additions to our Special Recipe
line, had its second straight year of double-digit growth. Significant increases
were also achieved in both private label and foodservice sales.
[PHOTO]
15 International Home Foods
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"COMPLETE STRATEGIC ACQUISITIONS" MEANS...
WE BOOST OUR BOTTOM LINE BY ACQUIRING BUSINESSES THAT ARE A PERFECT FIT
International Home Foods 16
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[PHOTO]
17 International Home Foods
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COMPLETE STRATEGIC ACQUISITIONS
IHF IS AGGRESSIVE IN SEEKING OUT ACQUISITIONS BY TARGETING COMPLEMENTARY
BUSINESSES THAT LET US EXPAND AND PENETRATE NEW MARKETS. MAKING AN ACQUISITION
IS JUST OUR FIRST STEP. BY RAPIDLY INTEGRATING THAT ACQUISITION AND TAKING
ADVANTAGE OF MANUFACTURING, DISTRIBUTION, AND MARKETING SYNERGIES, WE ACHIEVE
SIGNIFICANT COST SAVINGS. IN 1997, WE ACQUIRED BUMBLE BEE, CREATIVE PRODUCTS,
ORLEANS, AND PRODUCTOS DEL MONTE. THIS PAST YEAR, WE ADDED GRIST MILL, LIBBY'S
CANNED MEAT BUSINESS, AND PURITAN TO THE IHF FAMILY. AND, IN JANUARY 1999, WE
PURCHASED THE CLOVER LEAF BRAND FROM BRITISH COLUMBIA PACKERS. ALL OF THESE
BUSINESSES REPRESENTED A NUMBER ONE OR TWO MARKET POSITION IN THEIR CORE
MARKETS, WERE CLOSELY RELATED TO OUR BASE TECHNOLOGY, AND WERE IMMEDIATELY
ACCRETIVE.
[PURITAN LOGO]
PURITAN
Early in 1998, we acquired Puritan, the largest processor and
marketer of canned stews and meatballs in Canada. Puritan had $33
million in annual sales in 1998, substantially increasing our total
sales in Canada. We also took advantage of the opportunity to cut
costs by moving Puritan's sales and distribution into IHF's
infrastructure and leveraging IHF's purchasing power to buy Puritan's
raw materials. In addition, we consolidated Puritan's manufacturing
operation into our Niagara Falls, Ontario, plant, which is closer to
Puritan's core markets. We then reinvested a portion of our cost
savings into product enhancements that, according to consumers,
significantly improved these products.
LIBBY'S
Libby's canned meat business, which posted $148 million in
sales in 1998, is a domestic manufacturer, importer, and global
marketer of canned meat products, including Vienna sausages, corned
beef, and corned beef hash. Domestically, Libby's is the number one
corned beef brand and the number two brand for the entire canned meat
category. Libby's is a great fit for IHF on a number of fronts,
particularly within our operations. Dennison's canned meat products,
for example, previously made at our Vacaville, California, plant, are
now produced in Libby's Trenton, Missouri, manufacturing facility.
Libby's salmon business is now marketed and distributed by Bumble Bee.
[LIBBY LOGO]
International Home Foods 18
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[PHOTO]
GRIST MILL
Grist Mill, based in Lakeville, Minnesota, manufactures and distributes
store brand and value-priced branded food products, including cereal bars, fruit
snacks, and ready-to-eat cereals. With sales of $112 million in 1998, Grist Mill
is the dominant player in the private label wholesome snack bar and fruit snack
businesses. Grist Mill is already benefiting from IHF's broad distribution
network, which includes traditional supermarket chains as well as alternative
channels such as club stores and mass merchants. This acquisition enabled us to
close a plant that was making other snack products and consolidate that
production into the Grist Mill manufacturing facility. Importantly, Grist Mill
becomes an integral part of our platform for the expansion of IHF's private
label business.
CLOVER LEAF AND PARAMOUNT
In January 1999, IHF dramatically expanded both its seafood business and
its presence in Canada with the acquisition of the canned seafood business of
British Columbia Packers, representing approximately $130 million in sales in
1998. The newly acquired Clover Leaf brand is Canada's number one brand in the
tuna and salmon segments. Through private label sales, those products also have
a strong presence in the United Kingdom and South Africa and in Australia they
are sold under the Paramount label. The marketing function for these products
will be integrated into our Bumble Bee seafood business, while our Canadian
operations will provide administrative and distribution support.
[CLOVER LEAF LOGO]
19 International Home Foods
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WHEN WE SAY "CONTINUE TO ACHIEVE COST SAVINGS" WE MEAN...
WE'RE FINDING NEW WAYS TO ADD VALUE ON THE SHELF AND OFF
International Home Foods 20
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NEW WAYS TO UE
[PHOTO]
21 International Home Foods
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CONTINUE TO ACHIEVE COST SAVINGS
TO IMPROVE EFFICIENCY, REDUCE COSTS, AND BUILD SHAREHOLDER VALUE, WE'RE
CONTINUALLY SCRUTINIZING THE WAY WE DO THINGS. WE'RE DOING THAT ON A NUMBER OF
FRONTS AND IN A VARIETY OF WAYS: BY ADOPTING A SINGLE COMPANY- WIDE INFORMATION
MANAGEMENT SYSTEM; BY LEVERAGING OUR BRAND AND PURCHASING POWER; BY
STREAMLINING PRODUCTION, RESEARCH, AND ADMINISTRATIVE FUNCTIONS; BY USING
VENDOR-MANAGED INVENTORY; BY CENTRALIZING DISTRIBUTION; BY REDUCING PACKAGING
EXPENSE; AND BY CONSOLIDATING PLANTS.
LOGISTICS
Across IHF, we have a simplified operations strategy that
encourages employees to partner and plan at every level to improve cash
flow, cut costs, and enhance customer service. One important component
of our strategy is consolidating distribution. We have now reduced our
warehouse network from 42 to 22 locations, representing a more
efficient use of existing space. Similarly, because every acquisition
presents a new challenge from a facility standpoint, we're constantly
reviewing operations to take advantage of space, manufacturing
capability, and distribution synergies.
We can also lower costs and improve cash flow with Continuous
Replenishment Program, or CRP, where we electronically exchange
information from some of our customers' scanners every day, thereby
expediting the ordering process, giving us far better control of
inventory and upgrading customer service.
PURCHASING
Taking advantage of our size and purchasing power to get better
deals with suppliers, we entered into a number of long-term supplier
agreements that affected a significant percent of our products,
including metal and aerosol cans and flexible packaging. We also
adopted a new strategy for buying key commodities, such as meat, flour,
sugar, and beans, that better links central purchasing and our
manufacturing locations.
CUSTOMER SERVICE
We have linked our customer service and our sales organizations
around important growth accounts. By connecting with customers and
learning more about their sales plans and promotions, we have a better
read on what they'll need and when. That, in turn, allows us to
integrate our operations with our sales strategies to positively impact
demand planning and inventory control.
Our goal is to continue to achieve these cost savings while
striving for others. This strategy, when combined with our other
initiatives, should ensure our primary objectives of growing our
brands and building shareholder value.
International Home Foods 22
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
International Home Foods ("IHF" or "the Company") is a leading manufacturer and
marketer of widely-popular quality food brands. The Company sells its products
primarily to grocery wholesalers and distributors, grocery stores and
supermarkets, convenience stores, drug and mass merchants and warehouse clubs.
Sales are reported net of discounts and returns. In general, raw material costs
constitute a majority of cost of goods sold for each of the Company's products.
The other components of cost of goods sold are labor and overhead costs. As is
customary in the industry, the Company incurs substantial marketing expenses.
Marketing expenses primarily include (i) trade promotions, which are directed
at obtaining retail display support, achieving key price points and securing
retail shelf space, (ii) advertising, which is primarily comprised of
television, radio, newspaper and magazine advertising and (iii) consumer
promotions, which include targeted coupons and on-package offers.
1998 Highlights
Net sales for 1998 were $1,699.6 million, an increase of $477.2 million, or
39.0% over 1997. Net income of $16.5 million represents a decrease of $3.1
million from 1997. The year 1998 includes:
o The acquisition of certain assets relating to the Puritan stews and
canned meats business ("Puritan"), Grist Mill Co. and the Libby's(R)
brand of retail and international canned meat products ("Libby's").
o The full year impact of the 1997 acquisitions of Bumble Bee Seafoods,
Productos Del Monte, Creative Products and Orleans Seafood.
o A restructuring charge of $118.1 million ($75.3 million, net of tax,
or $0.94 per diluted share).
Consolidated Statements of Income
The following table sets forth certain items in IHF's consolidated statements
of income as a percentage of net sales for each of 1998, 1997 and 1996:
<TABLE>
<CAPTION>
----------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net Sales ..................................... 100.0% 100.0% 100.0%
----- ----- -----
Cost of sales ................................. 52.6% 50.0% 47.2%
Marketing expenses ............................ 19.7% 20.5% 20.3%
Selling, general and administrative expenses... 13.1% 13.9% 15.8%
Restructuring and other charges ............... 6.9% -- 0.5%
Stock option compensation expense ............. -- 3.8% --
----- ----- -----
Total operating expenses .................. 92.3% 88.2% 83.8%
----- ----- -----
Income from operations ........................ 7.7% 11.8% 16.2%
Interest and other expense (income), net ...... 5.8% 8.5% 1.8%
----- ----- -----
Income before provision
for income taxes ............................ 1.9% 3.3% 14.4%
Provision for income taxes .................... 0.9% 1.3% 5.6%
----- ----- -----
Income before extraordinary item .............. 1.0% 2.0% 8.8%
----- ----- -----
Extraordinary loss ............................ -- 0.4% --
----- ----- -----
Net income .................................... 1.0% 1.6% 8.8%
===== ===== =====
</TABLE>
- ---------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 COMPARED TO
YEAR ENDED DECEMBER 31, 1997
- ---------------------------------------------------
NET SALES-The Company's net sales were $1,699.6 million in 1998 as compared to
$1,222.4 million in 1997, an increase of $477.2 million or 39.0%. Approximately
$274.8 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 Libby's) and therefore a full year's
results were not reflected in the 1997 amounts. Bumble Bee Seafoods 1998 sales
increased $223.8 million over 1997 and reflects sales for calendar year 1998 as
compared to sales for the six months ended December 31, 1997 (Bumble Bee
Seafoods was acquired on July 1, 1997). Sales of the Company's other brands
decreased $21.4 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. (See Results by Segment on pages
26 and 27.)
COST OF GOODS SOLD-Cost of goods sold was $893.4 million in 1998 as compared to
$611.2 million in 1997. Expressed as a percentage of net sales, cost of goods
sold increased to 52.6% from 50.0% in 1997. This was primarily attributable to
the inclusion
23 International Home Foods
<PAGE> 28
MANAGEMENT'S DESCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
of the operations of businesses that were acquired during 1998 and 1997, which
have lower gross margins than the Company's existing products. Excluding
results of these acquired businesses, cost of goods sold expressed as a
percentage of net sales for the Company's existing business decreased to 42.8%
in 1998 from 45.6% in 1997. This improvement primarily reflects management's
continuing cost reduction initiatives. Since the Company's recapitalization in
November 1996, a number of programs have been implemented that have improved
efficiency in the Company's manufacturing processes and its purchasing
activities. The improved gross margin of the Company's existing business (pre
1997 and 1998 acquisitions) in 1998 also reflects the effect of decreases in
some of the Company's commodity prices and price increases in Chef Boyardee
canned pasta implemented in July 1997.
TOTAL MARKETING EXPENSES-Total marketing expenses increased to $335.1 million
in 1998 as compared to $250.7 million in 1997. The increase of $84.4 million
was attributable to the inclusion of the marketing activities of the businesses
acquired in 1998 and 1997, which aggregated $86.5 million, offset by $2.1
million of lower expenditures on existing brands, primarily resulting from a
reduction in coupon promotions and improved management of trade promotion
spending, offset by increased media spending. In late 1998, the Company shifted
the focus of its marketing dollars toward trade promotion funds more directly
behind product performance support at the store level versus automatic
"off-invoice" programs, whereby our products are discounted at the retailer
level without any specific performance requirements. It also began focusing on
consumer marketing and new product development. Expressed as a percentage of
net sales, total marketing expenses decreased to 19.7% in 1998 from 20.5% in
1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES-Selling, General and
Administrative (SG&A) expenses increased to $223.5 million in 1998 as compared
to $170.6 million in 1997. Approximately $47.5 million of the $52.9 million
increase was attributable to the businesses acquired in 1998 and 1997. The
balance of the increase, or $5.4 million, was attributable to existing brands.
Total SG&A expenses as a percentage of net sales declined to 13.1% for 1998 as
compared to 13.9% for 1997. This decrease reflects the more efficient
utilization of the Company's administrative resources as the Company's sales
have grown.
RESTRUCTURING AND OTHER CHARGES-In September 1998, the Company recorded a
pre-tax restructuring charge of $118.1 million relating to the closure of its
Vacaville, California and Clearfield, Utah production facilities and the
related impact of the transfer of production to other facilities, mainly
Milton, Pennsylvania, and to the write-down of goodwill associated with the
Campfire crisp rice snack bar brand and the Polaner fruit spreads brand. These
charges impact the Company's Branded Products segment.
The Vacaville, California production facility was closed in December 1998,
while the adjacent distribution center and the Clearfield, Utah facility are
expected to close in the second quarter of 1999. The total closure costs of
approximately $40.6 million represent $29.5 million of non-cash charges,
primarily for the write-down of property, plant and equipment to net realizable
value, cash charges of $9.0 million for severance and related benefit costs for
affected employees and $2.1 million in facility closure costs. The severance
and related costs relate to the termination of approximately 600 employees,
which includes seasonal employees not eligible for severance, of which 553 had
been terminated as of December 31, 1998.
With the exception of outsourced products, the Company has moved all of the
products that were manufactured at the Vacaville facility to other facilities,
mainly Milton, Pennsylvania. Production of tomato paste used in Chef Boyardee
canned pasta products and of Ro*Tel diced tomatoes, both of which were
manufactured at the Vacaville facility prior to its closure, have been
outsourced. The manufacturing of the Campfire products is being transferred
from Clearfield, Utah to the Company's Lakeville, Minnesota facility. The
Company anticipates that approximately $2.4 million of additional
non-capitalizable expenses will be incurred as the transfer and installation of
the relocated equipment from these facilities occurs. The Company incurred
approximately $0.6 million of such costs in 1998. It is expected that the
entire process will be completed by the end of 1999.
The write-down of goodwill associated with the Campfire and Polaner brands
was $47.7 million and $29.7 million, respectively. These brands have been
impacted by their significant respective retail category sales declines, which
have continued to deteriorate in recent months. The current and projected sales
trends and their resulting impact on these brands' profitability have impaired
their valuation. Goodwill was written down to reflect each brand's fair value.
The Polaner business was subsequently sold in February 1999.
STOCK OPTION COMPENSATION (INCOME) EXPENSE-In 1998, the Company recorded a
benefit of $0.6 million primarily for lapsed stock options that were initially
charged to compensation expense in 1997, offset by the amortization of the
unearned stock compensation charge. In 1997, the Company recorded a $46.4
million non-cash stock option compensation charge relating to the indexed stock
options granted to senior management and other employees, and stock options
granted having exercise prices below the estimated fair market value of the
common stock.
International Home Foods 24
<PAGE> 29
INTEREST EXPENSE-Interest expense for 1998 decreased to $96.0 million as
compared to $104.9 million in 1997, primarily due to lower interest rates,
offset slightly by an increase in overall debt. This amount represents (i)
$41.5 million of interest and commitment fees on the Company's $400.0 million
of Senior Subordinated Notes at an annual interest rate of 10.375%, (ii)
interest and commitment fees of $46.2 million on term loans included in the
Company's Senior Bank Facilities, (iii) $4.9 million of interest expense on the
borrowings under the revolving credit facility included in the Company's Senior
Bank Facilities, (iv) $3.1 million of amortization of deferred financing costs
and (v) $0.3 million of interest on the Grist Mill term loan. The Company
amended its Senior Bank Facilities as of September 16, 1998. The weighted
average interest rate for the Senior Bank Facilities for 1998 was 7.18%.
PROVISION FOR INCOME TAXES-Income taxes increased to $15.9 million in 1998 from
$15.8 million in 1997. The effective tax rate increased to 49.1% in 1998 from
39.7% in 1997 due to the 1998 write-off of non-deductible goodwill, for which
tax benefits were not available. Excluding the restructuring charge, the
effective tax rate was 39.0%. The Company anticipates sufficient future taxable
income to realize deferred tax assets recorded at December 31, 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 INCOME-For the year ended December 31, 1998, net income of $16.5 million
decreased by $3.1 million versus 1997, primarily reflecting the factors
discussed above. Excluding the restructuring charge and the non-cash stock
option compensation benefit in 1998 and the non-cash stock option compensation
charge and extraordinary charge in 1997, net income increased to $91.8 million
from $51.9 million, or 76.9%.
Basic earnings per share were $0.22 and $0.31 for 1998 and 1997,
respectively, and diluted earnings per share were $0.21 and $0.30 for 1998 and
1997, respectively.
- ---------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
COMPARED TO YEAR ENDED DECEMBER 31, 1996
- ---------------------------------------------------
NET SALES-The Company's net sales were $1,222.4 million in 1997 as compared to
$942.8 million in 1996, an increase of $279.6 million or 29.7%. Approximately
$228.3 million of the increase related to sales of companies acquired in 1997
(Bumble Bee Seafoods, Productos Del Monte, Creative Products and Orleans
Seafood), which were not reflected in the 1996 amounts and $40.4 million
relating to a full year of Heritage sales as compared to only two months in
1996. The balance of the increase, or $10.9 million, was primarily due to net
increases in sales of the Company's existing brands.
COST OF GOODS SOLD-Cost of goods sold was $611.2 million in 1997 as compared to
$444.9 million in 1996. Expressed as a percentage of net sales, cost of goods
sold increased to 50.0% from 47.2% in 1996. This was primarily attributable to
the inclusion of the results of the Bumble Bee Seafoods and Orleans Seafood
businesses, which generally have lower gross margins than the Company's other
product lines. The cost of goods sold as a percentage of net sales was 69.8%
for the six month period ended December 31, 1997 in the case of Bumble Bee
Seafoods and 69.6% for the one month period of December 1997 in the case of
Orleans Seafood.
Excluding these seafood businesses, cost of goods sold declined to 46.3% of
net sales from 47.2% of net sales in 1996. This decline in cost of goods sold
as a percentage of net sales primarily resulted from a more favorable sales
volume mix and continuing overall reductions in the Company's manufacturing
costs which reflect management's cost reduction initiatives.
TOTAL MARKETING EXPENSE-Total marketing expenses increased to $250.7 million in
1997 as compared to $191.5 million in 1996. Expressed as a percentage of net
sales, total marketing expenses increased to 20.5% in 1997 from 20.3% in 1996.
The increase was primarily attributable to trade promotion expenses associated
with securing retail shelf space for line extensions of existing products
($14.2 million), as well as the inclusion of the newly acquired Companies in
1997, primarily Bumble Bee Seafoods ($36.3 million), which has higher trade
promotion expenses as a percentage of net sales than the Company's other
products, and Productos Del Monte ($3.0 million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES-Selling, General and
Administrative (SG&A) expenses were $170.6 million in 1997 as compared to
$153.2 million (including a $4.3 million restructuring charge) in 1996. Total
SG&A expenses as a percentage of net sales declined to 13.9% in 1997 from 16.3%
(including the restructuring charge) in 1996, primarily reflecting management's
cost reduction initiatives.
STOCK OPTION COMPENSATION EXPENSE-The non-cash stock option compensation charge
aggregating $46.4 million or $0.42 per share on a diluted basis (net of $18.4
million of related tax benefit) included $44.8 million relating to indexed
stock options granted to senior management and other employees. In addition,
the Company has recorded $4.3 million related to unearned stock option
compensation which will be amortized as the related options vest. The Company
expects to record additional non-cash stock option compensation charges
relating to these options in the years ending December 31, 1998, 1999 and 2000
estimated to be approximately $1.6 million, $1.6 million and $1.1 million,
respectively.
INTEREST EXPENSE-Interest expense for 1997 was $104.9 million. This amount
represents (i) $42.0 million of interest and commitment fees on the Company's
$400.0 million of Senior Subordinated Notes at an annual interest rate of
10.375%, (ii) interest and commitment fees of $56.6 million on term loans
included in the Company's Senior Bank Facilities, (iii) $1.6 million of
interest expense on the borrowings under the revolving credit facilities
included in the Company's Senior Bank Facilities and (iv) $4.7 million of
amortization of deferred financing costs. The weighted average interest rate
for the Senior Bank Facilities for 1997 was 8.16%.
25 International Foods
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Interest expense for 1996 was $17.1 million, reflecting interest on
indebtedness incurred in connection with the IHF Acquisition completed in
November 1996.
PROVISION FOR INCOME TAXES-Income taxes decreased to $15.8 million in 1997 from
$53.3 million in 1996 due to lower income before taxes. The effective tax rate
increased to 39.7% in 1997 from 39.1% in 1996 due to the impact of state and
local taxes.
EXTRAORDINARY ITEM-In November 1997, the Company recognized an
extraordinary after-tax charge of $4.3 million, or $0.06 per share on a diluted
basis (net of $2.9 million of related tax benefit) associated with the write-off
of unamortized deferred financing costs in connection with an amendment to the
Senior Bank Facilities.
NET INCOME-For the year ended December 31, 1997, net
income decreased by $63.3 million versus 1996, primarily reflecting the factors
discussed above.
Basic earnings per share were $0.31 and $1.34 for 1997 and 1996,
respectively, and diluted earnings per share were $0.30 and $1.34 for 1997 and
1996, respectively.
Results By Segment
THE COMPANY HAS THREE REPORTABLE BUSINESS SEGMENTS-Branded Products, Seafood,
and Private Label and Foodservice. Branded Products is defined as U.S. grocery
sales for the following products: Chef Boyardee, Libby's brand of canned meats,
Southwest brands (Luck's(R), Ro*Tel(R), Dennison's and Ranch Style Brands),
Specialty brands (PAM cooking spray, Polaner(R), Gulden's, Maypo(R),
Wheatena(R), Maltex(R) and G. Washington's(R)) and Snack brands (Crunch 'n
Munch, Jiffy Pop(R) and Campfire). Seafood includes all sales for the Bumble
Bee, Orleans and Libby's brands of canned seafood products and private label
and foodservice seafood sales. The Paramount and Clover Leaf brands acquired in
January 1999 will be reported in the Seafood segment. Private Label and
Foodservice includes all private label canned pasta, cooking spray, fruit
snacks, ready-to-eat cereals, wholesome snack bars, pie crust and personal care
products and the sales to foodservice distributors. The All Other category is
comprised of sales to the military and the International division which
includes branded, private label and foodservice sales in Canada, Mexico, Puerto
Rico and other export sales.
The Company sells the products in each of its segments primarily to grocery
wholesalers and distributors, grocery stores and supermarkets, convenience
stores, drug and mass merchants and warehouse clubs.
The following table sets forth certain segment information for the three
year period:
<TABLE>
<CAPTION>
--------------------------------------
(in thousands) 1998 1997 1996
---------- ---------- ------------
<S> <C> <C> <C>
Net Sales:
Branded Products ............... $ 800,248 $ 781,076 $ 749,411
Seafood ........................ 443,229 193,291 --
Private Label and Foodservice... 249,873 116,633 85,112
---------- ---------- ----------
Reportable Segments .......... 1,493,350 1,091,000 834,523
All Other ...................... 206,250 131,434 108,269
---------- ---------- ----------
Total .......................... $1,699,600 $1,222,434 $ 942,792
Segment Operating Income:(1)
Branded Products ............... $ 158,939 $ 151,213 $ 126,306
Seafood ........................ 30,677 9,524 --
Private Label and Foodservice... 35,634 17,185 8,847
---------- ---------- ----------
Reportable Segments .......... 225,250 177,922 135,153
All Other ...................... 31,431 23,449 22,330
---------- ---------- ----------
Total .......................... $ 256,681 $ 201,371 $ 157,483
========== ========== ==========
</TABLE>
(1) Excludes restructuring charge of $118,087 and $4,308 in 1998 and 1996,
respectively, and stock compensation (income) expense of ($594) and $46,366
in 1998 and 1997, respectively.
- ---------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
COMPARED TO YEAR ENDED DECEMBER 31, 1997
- ---------------------------------------------------
BRANDED PRODUCTS-The Branded Products segment net sales increased $19.2 million
in 1998 compared to 1997. This increase is primarily the net result of the
Libby's acquisition, which added $53.2 million in 1998 sales, and increased
sales of Chef Boyardee ($1.6 million) and PAM ($4.5 million) products, offset
by lower sales of Campfire ($16.1 million), Polaner ($8.5 million), Crunch 'n
Munch ($9.1 million), Ranch Style ($4.0 million) and Dennison's ($3.0 million)
products. All other Branded Products sales increased $0.6 million.
Sales of the Company's Chef Boyardee brand were relatively flat in 1998
versus 1997 levels. In terms of the brand's various product lines, canned pasta
sales increased 1% and Microwave sales were up 3%, partially offset by declines
in Pizza Kits and Dinners.
PAM sales increased due to higher category consumption and the introduction
of two new items, PAM Lemon Flavor Seasoning Spray and PAM Garlic Flavor
Seasoning Spray.
The decline in Campfire sales ($17.6 million) largely correlates to a
decline in the crisp rice bar category in general. This decline was partially
offset by stronger sales of Campfire marshmallows during 1998 ($1.5 million).
Similarly, sales of Polaner products decreased during 1998 as the fruit spread
category in
International Home Foods 26
<PAGE> 31
general declined. The Polaner business was subsequently sold by the Company
during February 1999. The decline in Crunch 'n Munch sales ($10.2 million) is
attributable to the loss of sales to certain mass merchants that followed a
reduction by the Company of promotional activity. This decline is partially
offset by an increase in Crunch 'n Munch glazed pretzels ($1.1 million). The
declines in sales of both Ranch Style and Dennison's reflects the change in the
Company's trade promotion activity to reduce the practice of off-invoicing.
Segment operating income of the Branded Products segment increased $7.7
million largely reflecting the factors discussed above. As a percentage of net
sales, segment operating income of the Branded Products segment increased from
19.4% during 1997 to 19.9% during 1998. This increase reflects efficiencies
realized in the Company's manufacturing activities.
SEAFOOD-The Seafood segment net sales and segment operating income reflect a
full year of both Bumble Bee Seafoods and Orleans Seafood as well as
approximately four months of Libby's salmon operations in 1998, as compared to
only six months of Bumble Bee Seafoods and approximately one month of Orleans
Seafood in 1997.
PRIVATE LABEL AND FOODSERVICE-Sales of the Private Label and Foodservice
segment increased $133.2 million due to the acquisition of Grist Mill ($80.1
million), a full year's results of Creative Products cooking sprays and
personal care products acquired October 1, 1997 ($40.8 million), an increase in
private label canned pasta sales ($6.7 million) and an increase in Foodservice
sales ($5.6 million). Segment operating income increased $18.4 million due to
the acquisition of Grist Mill ($6.1 million), private label canned pasta ($2.6
million), a full year's results of Creative Products ($6.1 million) and
Foodservice ($3.6 million).
The All Other net sales increased $74.8 million primarily due to the 1998
acquisition of Puritan ($28.1 million), a full year's results of Productos Del
Monte ("PDM"), which was acquired October 1, 1997 ($46.5 million), increases in
Puerto Rico net sales ($7.4 million) and Canadian net sales ($1.9 million),
offset by a decrease in Export sales ($8.3 million). Segment operating income
increased $8.0 million largely reflecting the factors discussed above.
- ---------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
COMPARED TO YEAR ENDED DECEMBER 31, 1996
- ---------------------------------------------------
BRANDED PRODUCTS-The Branded Products segment net sales increased $31.7 million
primarily due to increased Chef Boyardee sales ($4.5 million), a full year
impact of Campfire sales in 1997 ($26.7 million, Campfire was acquired in
November 1996), an increase in Southwest brand sales ($7.1 million), an
increase in Crunch 'n Munch sales ($2.4 million) and Glazed Pretzels
introductory sales ($1.5 million), offset by a decrease in Polaner sales ($8.6
million) and PAM sales ($2.7 million). Segment operating income increased $24.9
million primarily due to Chef Boyardee ($17.9 million) and Southwest brands
($4.0 million), both primarily due to an improvement in gross margin in 1997,
offset by increases in media and trade marketing expenses, an increase in PAM
($1.6 million) and an increase in Crunch 'n Munch ($5.6 million), offset by a
decrease in Campfire ($2.5 million), Glazed Pretzels ($1.0 million) and Polaner
($0.7 million).
SEAFOOD-The Seafood segment net sales and segment operating income reflect six
months of Bumble Bee Seafoods and one month of Orleans Seafood operations in
1997.
PRIVATE LABEL AND FOODSERVICE-Sales of the Private Label and Foodservice
segment increased $31.5 million primarily due to a $17.4 million increase in
canned pasta and the October 1997 acquisition of Creative Products ($15.8
million), offset by a decrease in Foodservice ($1.7 million). Segment operating
income increased $8.3 million due to an increase in canned pasta ($4.4
million), the impact of the Creative Products acquisition ($1.9 million) and
Foodservice ($2.0 million).
The All Other net sales increased $23.2 million and segment operating
income increased $1.1 million resulting from the impact of the fourth quarter
1997 acquisition of PDM (sales of $19.3 million and segment operating income of
$1.3 million) as well as increased sales and income from our Canadian
operations.
Liquidity And Capital Resources
CASH FLOWS-For the years ended December 31,
1998, 1997 and 1996, the Company generated $163.3 million, $71.9 million and
$146.0 million of cash flows from operating activities. Net income decreased
$3.1 million in 1998, however non-cash charges related to restructuring in 1998
of $114.8 million contributed to the increased operating cash flow as compared
to 1997. The decrease in 1997 amounts compared to 1996 is primarily attributable
to a full year of interest expense subsequent to the acquisition of the Company
in November 1996.
Comparing 1998 and 1997, cash used for investing activities increased to
$311.4 million from $253.8 million, primarily due to the acquisition of
Libby's, Grist Mill and Puritan for approximately $129.4 million, $112.8
million and $41.0 million, respectively (less cash acquired of $6.1 million),
as well as investing $31.0 million in capital expenditures, an increase of
$17.4 million over 1997. Cash used for investing activities in 1996 was $41.0
million which included $11.9 million for capital expenditures. Capital
expenditures are estimated to be approximately $35.0 million in 1999.
Cash provided by financing activities for 1998 was $151.9 million, compared
to cash provided in 1997 of $149.4 million. In 1998, the Company borrowed
$210.0 million ($650.0 million in 1997) and repaid $31.2 million ($750.0
million in 1997) under the terms of its Senior Bank Facilities and borrowed
$385.0 million ($141.0 million in 1997) and repaid $360.9 million ($101.0
million in 1997) under its revolving credit facility. In addition, the Company
used $57.2 million to purchase 4.4 million shares of its common stock from a
minority stockholder which it presently holds in treasury. In 1997, the Company
received $224.9 million from its issuance of common stock, net of issuance
costs.
The Company is highly leveraged with Senior Bank Facilities that comprise
(i) a $516.5 million Tranche A term loan facility, maturing in 2004, (ii) a
$149.8 million Tranche B term loan facility, maturing in 2005, (iii) a $100.0
million Tranche B-1 term loan facility, maturing in 2006, and (iv) a $230.0
million revolv-
27 International Home Foods
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
ing credit facility, maturing in 2004. As of December 31, 1998, the outstanding
balance of the Senior Bank Facilities was $811.4 million. In addition to
scheduled periodic repayments aggregating $51.5 million in 1999, the Company is
also required to make mandatory repayments of the loans under the Senior Bank
Facilities with a portion of its excess cash flow.
The Company also has outstanding $400.0 million of 103/8% Senior
Subordinated Notes due 2006, without any scheduled repayments of principal
prior to maturity, requiring semi-annual interest payments.
The Company has utilized significant cash flows from operations and
financing activities to implement strategic acquisitions. The Company acquired
Heritage in November 1996, Bumble Bee Seafoods in July 1997, Creative Products
in October 1997, Orleans Seafood in November 1997, Puritan in March 1998, Grist
Mill in April 1998, and Libby's in September 1998, requiring cash outlays of
approximately $70.8 million, $163.1 million, $52.0 million, $26.9 million,
$41.0 million, $112.8 million and $129.4 million, respectively. The acquisition
of Heritage was financed through proceeds from the Senior Subordinated Notes
and term loan borrowings under the Senior Bank Facilities at the time of the
IHF Acquisition. The acquisition of the Bumble Bee Business was financed
through term loan borrowings under the Senior Bank Facilities and cash on hand.
The acquisition of Creative Products was financed through borrowings under the
revolving credit facility. The Company acquired Productos Del Monte in October
1997 for 3,127,415 shares of Common Stock. The acquisitions of Orleans
Seafoods, Puritan, Grist Mill and Libby's were funded through borrowings under
the Senior Bank Facilities.
Both the Senior Bank Facilities and the Senior Subordinated Notes contain a
number of significant covenants that, among other things, restrict the ability
of the Company to dispose of assets, incur additional indebtedness, repay other
indebtedness or amend other debt instruments, pay dividends, create liens on
assets, enter into capital leases, make investments or acquisitions, engage in
mergers or consolidations, make capital expenditures, engage in certain
transactions with affiliates and otherwise restrict corporate activities. In
addition, under the Senior Bank Facilities the Company is required to comply
with specified minimum interest coverage, maximum indebtedness to earnings
before interest, taxes, depreciation and amortization (EBITDA) and minimum
fixed charge coverage ratios.
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.
SEASONALITY AND QUARTERLY RESULTS-The Company's historical inventory levels are
moderately seasonal and affected by the growing season for commodity products
such as tomatoes, fruits, beans and peanuts. As these products are harvested in
August through October, inventory levels tend to grow during this period. This
will primarily impact Ro*Tel in future periods as the outsourcing of tomato
paste resulting from the closing of the Vacaville facility (see Restructuring
and Other Charges), will minimize the seasonality impact on other tomato paste
products. The Company's inventory levels in its seafood businesses are also
affected by the seasonal fishing cycle causing increased inventory levels in
April through May and September through October. The Company's net sales and
results of operations are generally not seasonal.
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 rates or interest
rate protection through September 1999.
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.
The Company is exposed to credit loss in the event of nonperformance by the
other parties to the interest swap agreements. However, the Company does not
anticipate nonperformance by the counterparties.
As of December 31, 1998, the Company had the following interest rate
instruments in effect for which the fair value of these instruments is based on
estimated current settlement cost (notional amounts are in millions):
International Home Foods 28
<PAGE> 33
<TABLE>
<CAPTION>
-------------------------------------------------------------
Notional Strike Fair Rates-
Amount Rate Value Period LIBOR
-------- ------ ------ ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps $200(2) 8.97% $ 6.4 8/98 - 11/01 6-month
600(1) 5.43% (16.1) 8/98 - 8/03 3-month
Interest Rate Caps $225(1) 6.75% -- 10/98 - 10/99 6-month
200(2) 6.75% -- 8/98 - 11/01 6-month
Interest Rate Floor $200(2) 5.20% (6.4) 8/98 - 11/01 6-month
Interest Rate Collar $150(1) 5.75% -- 10/98 - 10/01 3-month
3.76%
------ ---- ------ ------------- -------
$(16.1)
====== ==== ====== ============= =======
</TABLE>
(1) Agreement exchanges floating interest rate payments for fixed interest rate
payments.
(2) Agreement exchanges fixed interest rate payments for floating interest rate
payments.
IMPACT OF RECENT ACCOUNTING STANDARDS-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 disruption in business operations. This Year 2000
issue can arise at any point in the Company's manufacturing, processing,
distribution and financial chains.
A Year 2000 Compliance Project, directed by the Company's 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 the Company's 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. The remediation of
this software for Year 2000 compliance was completed as of November 15, 1998.
This software is generally being/or will be used in all existing operations by
the second quarter of 1999. 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 not expected to be material, excluding
internal costs.
The Company's infrastructure issues have been assessed and a remediation
plan has been completed. Remediation cost estimates are not expected to be
material. All critical manufacturing process control systems are anticipated to
be Year 2000 compliant by May 31, 1999.
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.
SUBSEQUENT EVENTS-On January 19, 1999, the Company through it's subsidiary
Bumble Bee Seafoods, Inc. acquired the canned seafood brands and business of
British Columbia Packers from George Weston Ltd. of Canada for a total purchase
price of approximately $38.0 million ($CN 57.7 million). The acquisition was
funded with borrowings under the Company's Senior Bank Facilities. In connection
with this acquisition, the Company has revised its $230.0 million Revolving
Credit Facility to allocate $37.5 million to the Canadian facility.
On February 5, 1999 the Company sold its Polaner fruit spreads and spices
business to B&G Foods, Inc. for approximately $30.0 million in cash and
anticipates a gain of approximately $17.0 million. The proceeds will be used to
acquire assets useful in the Company's business.
INFORMATION ABOUT FORWARD LOOKING STATEMENTS-The Company may make statements
about the trends, future plans and the Company's prospects. Actual results may
differ from those described in such forward looking statements based on the
risks and uncertainties facing the Company, including but not limited to
changes in the economic conditions and changes in the food products
manufacturing industry, possible acquisitions of assets or businesses and other
factors.
29 International Home Foods
<PAGE> 34
Reports of Management and Independent Accountants
REPORT OF MANAGEMENT
Management is responsible for the preparation of the Company's consolidated
financial statements and related information appearing in this Annual Report.
Management believes that the consolidated financial statements fairly reflect
the form and substance of transactions and that the financial statements
reasonably present the Company's financial position and results of operations
in conformity with generally accepted accounting principles. Management also
has included in the Company's financial statements amounts that are based on
estimates and judgments which it believes are reasonable under the
circumstances.
The independent accountants audit the Company's consolidated financial
statements in accordance with generally accepted auditing standards and provide
an objective, independent review of the fairness of reported operating results
and financial position.
The Board of Directors of the Company has an Audit Committee composed of
four non-management Directors. The Committee meets periodically with financial
management and the independent accountants to review accounting, control,
auditing and financial reporting matters.
/s/ C. DEAN METROPOULOS /s/ N. MICHAEL DION
C. Dean Metropoulos N. Michael Dion
Chairman and Senior Vice President and
Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of International Home Foods, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
International Home Foods, Inc. and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
New York, New York
February 22, 1999
International Home Foods 30
<PAGE> 35
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share and Share Amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 1,699,600 $ 1,222,434 $ 942,792
Cost of sales 893,398 611,153 444,879
----------- ----------- -----------
Gross profit 806,202 611,281 497,913
Marketing expenses 335,118 250,683 191,527
Selling, general and administrative expenses 223,544 170,582 148,903
Restructuring and other charges 118,087 -- 4,308
Stock option compensation (income) expense (594) 46,366 --
----------- ----------- -----------
Income from operations 130,047 143,650 153,175
Interest expense 95,987 104,933 17,072
Other expense (income), net 1,738 (1,046) (177)
----------- ----------- -----------
Income before provision for income taxes 32,322 39,763 136,280
Provision for income taxes 15,859 15,795 53,319
----------- ----------- -----------
Income before extraordinary item 16,463 23,968 82,961
Extraordinary loss, net of tax benefit of $2,863 (Note 20) -- 4,336 --
----------- ----------- -----------
Net income $ 16,463 $ 19,632 $ 82,961
=========== =========== ===========
Basic earnings per share:(1)
Income before extraordinary item $ 0.22 $ 0.38 $ 1.34
Extraordinary item -- (0.07) --
----------- ----------- -----------
Net income $ 0.22 $ 0.31 $ 1.34
=========== =========== ===========
Shares used in computing basic earnings per share 76,551,789 64,020,472 61,922,990
=========== =========== ===========
Diluted earnings per share:(1)
Income before extraordinary item $ 0.21 $ 0.36 $ 1.34
Extraordinary item -- (0.06) --
----------- ----------- -----------
Net income $ 0.21 $ 0.30 $ 1.34
=========== =========== ===========
Shares used in computing diluted earnings per share 79,800,116 66,242,672 61,922,990
=========== =========== ===========
</TABLE>
(1) Per share and share amounts are restated to give effect to the 5.3292 for
one reverse stock split on November 17, 1997.
The accompanying notes are an integral part of the consolidated financial
statements.
31 International Home Foods
<PAGE> 36
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share and Share Amounts)
<TABLE>
<CAPTION>
--------------------------
December 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 17,201 $ 11,872
Accounts receivable, net of allowances 141,422 108,132
Inventories 235,730 220,565
Prepaid expenses and other current assets 17,522 16,661
Deferred income taxes 19,616 21,102
---------- ----------
Total current assets 431,491 378,332
Property, plant and equipment, net 262,771 210,195
Intangible assets, net 396,617 308,846
Deferred income taxes 330,651 338,611
Other assets 24,667 26,066
---------- ----------
Total assets $1,446,197 $1,262,050
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Due to banks $ 17,470 $ 12,228
Current portion of long-term debt 51,694 27,400
Revolving credit facility 62,526 40,000
Accounts payable 44,854 38,871
Accrued salaries, wages and benefits 12,757 16,591
Accrued advertising and promotion 39,102 50,308
Accrued interest 16,311 7,844
Other accrued liabilities 43,401 36,954
---------- ----------
Total current liabilities 288,115 230,196
========== ==========
Long-term debt 1,102,830 942,600
Post retirement benefits obligation 24,487 19,545
Other non-current liabilities 861 2,079
---------- ----------
Total liabilities 1,416,293 1,194,420
---------- ----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock-par value $.01 per share; authorized,
100,000,000 shares; no shares issued or outstanding $ -- $ --
Common stock-par value $.01 per share; authorized,
300,000,000 shares; issued 77,584,348 and 77,155,550 shares 776 772
Additional paid-in capital 56,051 52,202
Treasury stock, at cost: 4,400,000 shares and 0 shares (57,200) --
Retained earnings 34,497 18,034
Accumulated other comprehensive income (loss) (4,220) (3,378)
---------- ----------
Total stockholders' equity 29,904 67,630
---------- ----------
Total liabilities and stockholders' equity $1,446,197 $1,262,050
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
International Home Foods 32
<PAGE> 37
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars and Shares in Thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Treasury Stock Former Parent
Additional ---------------------- Company's Retained
Common Stock Paid-In Amount Investment Earnings
Shares Amount Capital Shares at Cost and Advances (Deficit)
------ --------- ----------- ------ --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ -- $ -- -- $ -- $ 384,997 $ --
Activity prior to merger
(1/1/96-10/31/96):
Net income 84,559
Other activity, net* (101,256)
Effect of merger transaction (630,661)
Issuance of common stock;(1)
transfer to additional
paid-in capital and foreign
currency translation 61,923 619 (261,318) -- -- 262,361 --
------ --------- -------- ------ --------- --------- ----------
Balance at October 31, 1996 61,923 619 (261,318) -- -- -- --
Comprehensive Income
(11/1/96-12/31/96):
Net income (loss) (1,598)
Foreign currency translation
Total comprehensive income (loss)
------ --------- -------- ------ --------- --------- ----------
Balance at December 31, 1996 61,923 619 (261,318) -- -- -- (1,598)
Comprehensive Income:
Net income 19,632
Foreign currency translation
Total comprehensive income
Effect of merger transaction 2,220
Issuance of common stock(1) 15,233 153 224,965
Productos Del Monte (PDM)
acquisition 39,969
Stock option compensation 46,366
------ --------- -------- ------ --------- --------- ----------
Balance at December 31, 1997 77,156 772 52,202 -- -- -- 18,034
Comprehensive Income:
Net income 16,463
Foreign currency translation,
net of tax expense of $204
Minimum pension liability
Total comprehensive income
Sale of shares under benefit
plans, including tax benefits 429 4 4,443
Purchase of treasury stock (4,400) (57,200)
Stock option compensation (594)
------ --------- -------- ------ --------- --------- ----------
Balance at December 31, 1998 77,585 $ 776 $ 56,051 (4,400) $ (57,200) $ -- $ 34,497
====== ========= ======== ====== ========= ========= ==========
<CAPTION>
---------------------------
Accumulated
Other
Comprehensive
Income/(Loss) Total
------------- ---------
<S> <C> <C>
Balance at December 31, 1995 $ -- $ 384,997
Activity prior to merger
(1/1/96-10/31/96):
Net income 84,559
Other activity, net* (101,256)
Effect of merger transaction (630,661)
Issuance of common stock;(1)
transfer to additional
paid-in capital and foreign
currency translation (1,662) --
---------- ---------
Balance at October 31, 1996 (1,662) (262,361)
Comprehensive Income
(11/1/96-12/31/96):
Net income (loss) (1,598)
Foreign currency translation (236) (236)
---------
Total comprehensive income (loss) (1,834)
---------- ---------
Balance at December 31, 1996 (1,898) (264,195)
Comprehensive Income:
Net income 19,632
Foreign currency translation (1,480) (1,480)
---------
Total comprehensive income 18,152
---------
Effect of merger transaction 2,220
Issuance of common stock(1) 225,118
Productos Del Monte (PDM)
acquisition 39,969
Stock option compensation 46,366
---------- ---------
Balance at December 31, 1997 (3,378) 67,630
Comprehensive Income:
Net income 16,463
Foreign currency translation,
net of tax expense of $204 (593) (593)
Minimum pension liability (249) (249)
---------
Total comprehensive income 15,621
---------
Sale of shares under benefit
plans, including tax benefits 4,447
Purchase of treasury stock (57,200)
Stock option compensation (594)
---------- ---------
Balance at December 31, 1998 $ (4,220) $ 29,904
========== =========
</TABLE>
* Consists principally of advances, withdrawals, dividends and foreign
currency translation adjustments.
(1) Share amounts are restated to give effect to the 5.3292 for one reverse
stock split on November 17, 1997.
The accompanying notes are an integral part of the consolidated financial
statements.
33 International Home Foods
<PAGE> 38
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
----------------------------------------------
Years Ended December 31,
----------------------------------------------
1998 1997 1996
-------- --------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 16,463 $ 19,632 $ 82,961
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 39,997 30,080 19,019
Deferred income taxes 4,365 2,584 (1,032)
Restructuring and other charges 114,773 -- 4,308
Stock option compensation (594) 46,366 --
Extraordinary item, net of tax -- 4,336 --
Changes in operating assets and liabilities (net of acquisitions)
(Increase)/decrease in accounts receivable (23,012) (13,249) 1,253
Decrease in inventories 19,092 1,046 14,970
Decrease/(increase) in other current assets 9,079 (3,526) (3,133)
Increase/(decrease) in accounts payable 637 82 (352)
(Decrease)/increase in accrued liabilities (14,865) 3,247 30,298
(Increase) in non-current assets (4,134) (8,175) --
Increase/(decrease) in non-current liabilities 1,521 (10,729) --
Other -- 247 (2,342)
-------- --------- -----------
Net cash provided by operating activities 163,322 71,941 145,950
-------- --------- -----------
INVESTING ACTIVITIES:
Purchases of plant and equipment, net (30,968) (13,563) (11,905)
Purchase of businesses, net of cash acquired (280,443) (240,246) (29,136)
-------- --------- -----------
Net cash used in investing activities (311,411) (253,809) (41,041)
-------- --------- -----------
FINANCING ACTIVITIES:
Increase in due to banks 5,184 2,157 9,278
Issuance of long-term bank debt 210,000 650,000 670,000
Repayment of long-term bank debt (31,193) (750,000) --
Issuance of Senior Subordinated Notes -- -- 400,000
Payment of debt issuance costs (1,841) (1,188) (30,649)
Retirement of Heritage long-term debt and accrued interest -- -- (40,763)
Borrowings from revolving credit facility 385,000 141,000 --
Repayment of borrowings from revolving credit facility (360,911) (101,000) --
Proceeds from exercise of stock options 2,843 -- --
Issuance of common stock, net of issuance costs -- 224,948 242,744
Purchase of treasury stock (57,200) -- --
Dividends paid to American Home Products Corporation -- -- (1,539)
Redemption of common stock of IHF and distribution
to American Home Products Corporation -- -- (1,209,000)
Payment to American Home Products Corporation as
final purchase price adjustment -- (16,556) --
Change in former parent company's investment and advances, net -- -- (99,121)
-------- --------- -----------
Net cash provided by (used in) financing activities 151,882 149,361 (59,050)
-------- --------- -----------
Effect of exchange rate changes on cash 1,536 (1,480) --
-------- --------- -----------
Increase/(Decrease) In Cash And Cash Equivalents 5,329 (33,987) 45,859
Cash and cash equivalents at beginning of year 11,872 45,859 --
-------- --------- -----------
Cash and cash equivalents at end of year $ 17,201 $ 11,872 $ 45,859
======== ========= ===========
Cash paid during the year for:
Interest, net of capitalized amounts $ 83,619 $ 103,199 $ 5,568
Income taxes $ 11,530 $ 1,579 $ 827
======== ========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
International Home Foods 34
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
- -----------------------------------------------------------
1 DESCRIPTION OF BUSINESS, MERGER AND ACQUISITION
- -----------------------------------------------------------
Background and Basis of Presentation
On September 5, 1996, American Home Products Corporation ("American Home
Products" or "AHP"), AHP Subsidiary Holding Corporation and other parties
entered into an agreement ("Agreement") pursuant to which an affiliate ("Hicks
Muse Holding") of Hicks, Muse, Tate & Furst Equity Fund III, L.P. ("Hicks
Muse") acquired, effective November 1, 1996, an 80 percent interest in
International Home Foods, Inc. ("IHF" or "the Company") and its subsidiary, M.
Polaner, Inc., for approximately $1,226,000. In connection with this
transaction (the "IHF Acquisition"), American Home Products contributed all of
its other food products businesses into IHF. Effective November 1, 1996, these
entities and businesses constitute IHF. In connection with the Agreement, IHF
received $264,000 of equity financing and incurred indebtedness of $1,070,000.
Approximately $962,000 of the proceeds was used to redeem shares of common
stock of IHF which were indirectly held by American Home Products and $264,000
was distributed to American Home Products. At December 31, 1996, the Company
had a liability to American Home Products of $16,556 for the unpaid redemption
amount due upon final determination of the purchase price. As a result of the
redemption, American Home Products continued to beneficially own approximately
20 percent of the Company, which declined upon completion of the Company's
initial public offering (Note 14) and subsequent sales of shares by AHP to the
Company (Note 15). The IHF Acquisition was 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 was treated as a taxable business combination such that the
consolidated financial statements reflect a "step-up" in tax basis (Note 10).
Earnings, advances, withdrawals, dividends, foreign currency translation
adjustments and other transactions between the Company and American Home
Products 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 subsequent to November 1, 1996. The combined financial
statements for the periods prior to November 1, 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' equity (deficit)
effective November 1, 1996.
The effects of the IHF Acquisition are summarized as follows:
<TABLE>
<S> <C>
Redemption and distribution to AHP Subsidiary
Holding Corporation $(1,225,556)
Issuance of Common Stock 264,000
Fees (21,256)
Recognition of post retirement benefits obligation (16,207)
Deferred income taxes 368,358
-----------
$ (630,661)
===========
</TABLE>
Pro forma unaudited net income for the year ended December 31, 1996,
assuming the IHF Acquisition had occurred at the beginning of 1996, would have
been $31,241. The decrease in reported net income resulted from increased pro
forma interest expense, partially offset by the related tax effects. The
unaudited pro forma amount does not purport to be indicative of what the
Company's actual results of operations would have been had the IHF Acquisition
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, stock option compensation, deferred
income taxes and tax valuation allowances, restructuring charges and
contingencies, among other items.
Acquisition
Immediately after the IHF Acquisition and effective November 1, 1996, the
Company acquired Heritage Brands Holdings, Inc. and subsidiaries ("Heritage")
from an affiliate of Hicks Muse for approximately $70,800, including the
assumption of approximately $40,800 of debt which was repaid immediately
following consummation of the acquisition, 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 which are being
amortized over 20 years. The acquisition was not significant and, accordingly,
pro forma financial information has not been provided. The
35 International Home Foods
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 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 operates in
three reportable business segments (Note 24). The Company sells its products
primarily in the United States, Canada and Mexico, and is not dependent on any
single or major group of customers for its sales.
- ---------------------------------------------------------
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------
Principles of Combination/Consolidation
For periods through October 31, 1996, the accompanying financial statements
included the operations of the following indirect wholly-owned subsidiaries of
AHP: American Home Food Products, Inc. (now the Company) and its subsidiary M.
Polaner, Inc., American Home Foods, Inc. (now I.H.F.P., Inc.), Luck's
Incorporated, Canadian Home Products Limited (now International Home Foods
(Canada), Inc.), and certain related assets owned by AHP (collectively,
American Home Food Products) and its subsidiaries. The consolidated operations
of the Company include the aforementioned entities and the following
wholly-owned subsidiaries: Heritage (effective November 1, 1996), Bumble Bee
Seafoods, Inc. and Subsidiaries (effective July 1, 1997), Productos Del Monte
("PDM") (effective October 1, 1997), Creative Products, Inc. (effective October
1, 1997), Orleans Seafood, Inc. (effective November 24, 1997), Grist Mill Co.
(effective April 14, 1998) and Trenton Home Foods (which is comprised of the
Libby's(R) brand of retail and international canned meat products ("Libby's"))
(effective September 8, 1998). Effective March 9, 1998, through its Canadian
subsidiary, International Home Foods Canada, Inc., the Company purchased
certain assets relating to the Puritan stews and canned meats business
("Puritan"). All significant intercompany balances and transactions have been
eliminated in the combined and consolidated financial statements. The
accompanying combined and consolidated financial statements are referred to
herein as "consolidated" financial statements.
Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or less
are considered to be cash equivalents. The Company's cash and cash equivalents
at December 31, 1998 and 1997 consist of cash in banks and investments in money
market funds.
Inventories
Inventories are valued at the lower of cost or market, with cost determined on a
first-in, first-out basis. Raw fish inventories are stated at specifically
identified cost.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Normal maintenance and
repairs are expensed. Additions and improvements either to provide necessary
capacity, improve the efficiency of production or to modernize facilities are
capitalized. Depreciation is calculated using the straight-line method over the
estimated useful lives of the related assets, generally 40 years for buildings,
15 years for machinery and equipment and 5-20 years for furniture and fixtures.
Leasehold improvements are amortized over the remaining lives of the respective
leases.
Intangible and Other Assets
As of December 31, 1998, the Company's Intangible and Other Assets include
goodwill and trademarks for Heritage which are amortized over twenty years and
have a net book value of $6.5 million, goodwill for the acquisitions of Ranch,
Ro*Tel, Bumble Bee Seafoods, Inc., PDM, Creative Products, Inc., Orleans
Seafood, Inc., Puritan, Grist Mill Co. and Libby's, all of which are amortized
over forty years with a net book value of $306.0 million, tradenames for Bumble
Bee and Libby's which are amortized over 40 years with a net book value of
$54.6 million, Libby's trademarks which are amortized over fifteen years with a
net book value of $24.5 million and other intangible assets with a net book
value of $1.5 million, which are amortized over eight to ten years. Intangible
assets of $3.5 million acquired prior to 1971 are not amortized.
Deferred financing costs incurred in connection with the agreements for
bank and other indebtedness are being amortized over the terms of the
financings using the interest method. Amortization of deferred financing costs
is included in interest expense.
The Company continually reviews goodwill to evaluate whether changes have
occurred that would suggest that goodwill may be impaired based on the
estimated undiscounted cash flows of the entity acquired over the remaining
amortization period. If this review indicates that the remaining estimated
useful life of
International Home Foods 36
<PAGE> 41
goodwill requires revision or that goodwill is not recoverable,
the carrying amount of the goodwill is reduced by the estimated shortfall of
cash flows on a discounted basis.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to customers.
Research and Development
Research and development costs are charged to expense as incurred and amounted
to $2,796, $1,913 and $3,823 for the years ended December 31, 1998, 1997 and
1996, respectively.
Advertising
Advertising and promotion costs are charged to expense as incurred. Advertising
costs amounted to $64,781, $63,675 and $58,551 for the years ended December 31,
1998, 1997 and 1996, respectively.
Environmental Expenditures
The Company capitalizes expenditures that increase the life or efficiency of
property or that reduce or prevent environmental contamination. The Company
accrues for environmental expenses resulting from existing conditions when the
costs are probable and reasonably estimable.
Former Parent Company's Investment and Advances
Former Parent Company's Investment and Advances includes the stockholders'
equity of the individual AHP subsidiaries as described in Note 2. The equity of
the individual subsidiaries represents the original investment by AHP, plus
accumulated net income and net advances, withdrawals and dividends. For periods
prior to November 1, 1996, cash receipts were transferred to AHP by daily cash
sweeps, and AHP made funds available for operating expenses.
Foreign Currency Translation
The assets and liabilities of International Home Foods Canada, whose functional
currency is the Canadian dollar, are translated at year-end exchange rates.
Translation gains and losses are not included in determining net income, but
are recorded in Accumulated Other Comprehensive Income as a separate component
of stockholders' equity. For the Company's Mexican subsidiary, Productos Del
Monte, operating in a highly inflationary economy in 1998, the U.S. dollar is
the functional currency and translation gains and losses are included in
determining net income. Foreign currency transaction gains and losses are
included in determining net income.
Financial Instruments
The acquisition cost of interest rate instruments is amortized as interest
expense over the terms of the related agreements. Interest expense is adjusted,
if required, to reflect the interest rates included in the agreements.
Income Taxes
The Company's 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. Accordingly, the Company's financial statements for
periods prior to the IHF Acquisition do not reflect deferred tax assets or
liabilities since those amounts were being provided for by AHP. Deferred tax
assets and liabilities prior to the IHF Acquisition would have reflected
temporary differences between assets and liabilities for financial reporting
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.
For periods after November 1, 1996, the Company's income tax provision has
been prepared with deferred income taxes provided for differences in the
financial statement and tax bases of assets and liabilities. The tax effects of
the temporary differences which resulted from the "step-up" in tax basis (Notes
1 and 10) have been reflected in stockholders' deficiency as of November 1,
1996. The Company intends to permanently reinvest the undistributed earnings of
the Canadian operations; accordingly, deferred income taxes, which would not be
significant, have not been provided for the repatriation of such undistributed
earnings.
Reclassifications
Certain 1997 and 1996 amounts have been reclassified to conform with the 1998
presentation.
- ------------------------------------------------------
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 ("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, 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 consisted 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
37 International Home Foods
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Sellers. The Company financed the purchase of the Assets with approximately
$110,000 of 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 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 was received by the Company
and resulted in a reduction of goodwill recorded by the Company.
On October 1, 1997, the Company acquired all the stock of Creative
Products, Inc. of Rossville ("Creative Products") for approximately $52,000 in
cash. The acquisition was funded through borrowings under the Company's Senior
Bank Facilities. 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. ("Orleans") 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.
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 $41,009, including
transaction fees. The acquisition was funded with borrowings under the
Company's Senior Bank Facilities. 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 $112,813, including transaction fees. The
Company financed the acquisition with borrowings under its Senior Bank
Facilities. Grist Mill is a manufacturer and distributor of private label 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 brand of retail and international canned meat
products, and the Trenton, Missouri manufacturing facility for those products
from Nestle USA, Inc. for approximately $129,409, including transaction fees.
The Company, through a fifteen year license agreement with Nestle, will
continue to use the Libby's trademark. In addition, the Company and Nestle have
entered into a long-term supply agreement through December 31, 2002 with three
additional one-year terms at the option of Nestle under which the Company will
continue to manufacture Nestle foodservice products at the facility in Trenton,
Missouri. This supply agreement provides that the Company is reimbursed for the
variable cost per case, as defined, for all product which has been produced and
packaged by the Company and shipped on behalf of Nestle, plus an amount paid
quarterly which approximates the Company's fixed costs. The Company financed
the acquisition of the Libby's canned meat business with borrowings under its
Senior Bank Facilities. Libby's 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 over 15 to 40 years (Note 2). These acquisitions
have been accounted for using the purchase method of accounting, with the
exception of PDM, and the operating results of the acquired companies have been
included in the consolidated financial statements from the dates of
acquisition. The information below includes non-cash investing and financing
activities supplemental to the consolidated statements of cash flows. A summary
of the excess of cost over fair value of net assets acquired resulting from
preliminary purchase price allocations for the 1998 acquisitions is as follows:
<TABLE>
<CAPTION>
Puritan Grist Mill Libby's
------- ---------- --------
<S> <C> <C> <C>
Cost of acquisition,
including transaction fees $41,009 $112,813 $129,409
Less: acquired assets
Current assets 4,620 19,154 20,218
Property, plant and
equipment 6,473 37,866 25,001
Other assets -- 717 --
Add: liabilities assumed -- 5,016 5,528
------- -------- --------
Excess of cost over
net assets acquired $29,916 $ 60,092 $ 89,718
======= ======== ========
</TABLE>
International Home Foods 38
<PAGE> 43
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, Puritan, Grist Mill and Libby's) had occurred
as of the beginning of 1997, and reflect proforma adjustments for goodwill,
interest expense and tax expense:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- ----------------------------------------------------
IHF Acquisitions(1) Total IHF Bumble Bee Other Acquisitions(2)
---------- --------------- ----------- ----------- ---------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total
Net sales $1,699,600 $ 129,906 $ 1,829,506 $ 1,222,434 $ 183,888 $395,216 $1,801,538
Operating income/(loss) $ 130,047 $ 7,671 $ 137,718 $ 143,650 $ (7,862) $ 24,813 $ 160,601
Income before
extraordinary items $ 16,463 $ (925) $ 15,538 $ 23,968 $ (7,103) $ 302 $ 17,167
Net income/(loss) $ 16,463 $ (925) $ 15,538 $ 19,632 $ (7,103) $ 302 $ 12,831
Income per share before
extraordinary items:
Basic $ 0.22 $ (0.02) $ 0.20 $ 0.38 $ (0.11) $ -- $ 0.27
Diluted $ 0.21 $ (0.02) $ 0.19 $ 0.36 $ (0.11) $ -- $ 0.25
Earnings per share:
Basic $ 0.22 $ (0.02) $ 0.20 $ 0.31 $ (0.11) $ -- $ 0.20
Diluted $ 0.21 $ (0.02) $ 0.19 $ 0.30 $ (0.11) $ -- $ 0.19
========== ========= =========== =========== ========== ======== ==========
</TABLE>
(1) Amounts include Puritan, Grist Mill and Libby's.
(2) Amounts include PDM, Creative Products, Orleans, Puritan, Grist Mill and
Libby's.
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 INVENTORIES
- ---------------------------------------------------------
Inventories are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
-------- --------
<S> <C> <C>
Raw materials $ 47,468 $ 46,127
Work in progress 18,101 20,770
Finished goods 170,161 153,668
-------- --------
Total $235,730 $220,565
======== ========
</TABLE>
- ---------------------------------------------------------
5 PROPERTY, PLANT AND EQUIPMENT
- ---------------------------------------------------------
Property, plant and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Land $ 21,468 $ 19,397
Buildings and
leasehold improvements 124,602 114,919
Machinery and equipment 253,591 204,956
Furniture and fixtures 28,404 25,238
-------- --------
428,065 364,510
Less: accumulated depreciation 165,294 154,315
-------- --------
Total $262,771 $210,195
======== ========
</TABLE>
Depreciation expense aggregated $25,350, $18,333 and $15,683 for the years
ended December 31, 1998, 1997 and 1996, respectively.
- ---------------------------------------------------------
6 INTANGIBLE AND OTHER ASSETS
- ---------------------------------------------------------
Intangible assets are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Goodwill, tradenames and trademarks $426,056 $331,663
Less: accumulated amortization 29,439 22,817
-------- --------
Intangible assets, net $396,617 $308,846
======== ========
</TABLE>
Amortization of intangibles totaled $11,580, $7,006 and $2,675 for the
years ended December 31, 1998, 1997 and 1996, respectively. All fully amortized
intangibles have been retired.
Other assets include deferred financing costs, net of amortization, in
connection with the Company's issuance of long-term debt. At December 31, 1998
and 1997, deferred financing costs, net were $22,475 and $23,701, respectively.
Amortization expense for the years ended December 31, 1998 and 1997, excluding
the write-off due to debt refinancing in 1997 (Note 20), and for the period
from November 1, 1996 (date of debt issuance) to December 31, 1996, amounted to
$3,067, $4,741 and $661, respectively.
39 International Home Foods
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
- ----------------------------------------------------------------------------
7 ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS AND ALLOWANCES
- ----------------------------------------------------------------------------
The allowance for doubtful accounts and sales returns and allowances and their
related activity are as follows:
<TABLE>
<CAPTION>
Write-Offs and
Beginning Charged Reductions, Net Ending
Balance Other* to Expense of Recoveries Balance
--------- ------ ---------- --------------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998 $6,184 $ 177 $ 935 $ (47) $7,343
Year ended December 31, 1997 4,331 1,490 1,357 994 6,184
Year ended December 31, 1996 4,064 -- 563 296 4,331
====== ====== ====== ====== ======
</TABLE>
* Relates to balances assumed of companies acquired in 1998 and 1997.
- ------------------------------------------------------
8 ALLOWANCE FOR OBSOLETE INVENTORIES
- ------------------------------------------------------
The allowance for obsolete inventories and the related activity is as follows:
<TABLE>
<CAPTION>
Write-Offs and
Beginning Charged Reductions, Net Ending
Balance Other* to Expense of Recoveries Balance
--------- ------ ---------- --------------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998 $7,597 $ 685 $1,531 $6,409 $3,404
Year ended December 31, 1997 3,667 1,061 3,984 1,115 7,597
Year ended December 31, 1996 4,150 -- 2,947 3,430 3,667
====== ====== ====== ====== ======
</TABLE>
* Relates to balances assumed of companies acquired in 1998 and 1997.
- -------------------------------------------------------
9 RESTRUCTURING AND OTHER CHARGES
- -------------------------------------------------------
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 its Vacaville, California and
Clearfield, Utah production facilities and the related impact of the transfer
of production to other facilities, mainly Milton, Pennsylvania, and to the
write-down of goodwill associated with the Campfire crisp rice snack bar brand
and the Polaner fruit spreads brand. These charges impact the Branded Products
segment.
The Vacaville, California production facility ceased operations in December
1998, while the adjacent distribution center and the Clearfield, Utah facility
are expected to close in the second quarter of 1999. The total closure costs of
approximately $40.6 million represent $29.5 million of non-cash charges,
primarily for the write-down of property, plant and equipment to net realizable
value, cash charges of $9.0 million for severance and related benefit costs for
affected employees, and $2.1 million in facility closure costs. The severance
and related costs relate to the termination of approximately 600 employees,
which includes seasonal employees not eligible for severance, of which 553 had
been terminated as of December 31, 1998.
With the exception of outsourced products, the Company has moved all of the
products that were manufactured at the Vacaville facility to other facilities,
mainly Milton, Pennsylvania. Production of tomato paste used in Chef Boyardee
canned pasta products and of Ro*Tel diced tomatoes, both of which were
manufactured at the Vacaville facility, prior to its closure, have been
outsourced. The manufacturing of the Campfire products is being transferred
from Clearfield, Utah to the Company's Lakeville, Minnesota facility. The
Company anticipates that approximately $2.4 million of additional
non-capitalizable expenses will be incurred as the transfer and installation of
the relocated equipment from these facilities occurs. The Company incurred
approximately $0.6 million of such costs in 1998. It is expected that the
entire process will be completed by the end of 1999.
The total writedown of goodwill associated with the Campfire and Polaner
brands was $47.7 million and $29.7 million, respectively. These brands have
been impacted by their significant respective retail category sales declines,
which have
International Home Foods 40
<PAGE> 45
continued to deteriorate in recent months. The current and projected sales
trends and the resulting impact on these brands' profitability have impaired
their valuation. Goodwill was written down to reflect each brand's fair value.
The Polaner business was subsequently sold (Note 25).
At December 31, 1998, $7.8 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 $3.3 million were
made in 1998.
In December 1996, a pretax charge was recorded for severance costs of
$3,240 and other charges (principally non-cash) of $1,068. The severance charge
covered both voluntary and involuntary terminations of approximately 125
employees, including management, sales and marketing, technical and
administrative personnel. Employee separations were substantially completed
prior to December 31, 1996. During 1996, cash payments of $437 were charged
against the business restructuring reserve and the remaining amounts were paid
during 1997.
- -------------------------------------------------
10 INCOME TAXES
- -------------------------------------------------
Income before provision for income taxes is as follows:
<TABLE>
<CAPTION>
For Years Ended December 31,
-------------------------------------------
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Domestic $12,661 $29,006 $133,524
Foreign 19,661 10,757 2,756
------- ------- --------
Total $32,322 $39,763 $136,280
======= ======= ========
</TABLE>
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
For Years Ended December 31,
-------------------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Domestic $ 7,963 $11,066 $45,334
Foreign 5,751 2,809 1,193
State 2,145 1,920 6,792
-------- ------- -------
Total $ 15,859 $15,795 $53,319
======== ======= =======
</TABLE>
A reconciliation between the Company's effective tax rate and U.S. statutory
rate is as follows:
<TABLE>
<CAPTION>
For Years Ended December 31,
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. statutory rate 35.0% 35.0% 35.0%
State tax, net of federal benefit 4.3 3.5 4.1
Non deductible goodwill 12.1 0.4 --
Foreign income taxes (3.5%) 0.2 --
Other 1.2 0.6 --
---- ---- ----
Effective tax rate 49.1% 39.7% 39.1%
==== ==== ====
</TABLE>
The current and deferred provision for income taxes for 1998, 1997 and 1996, is
as follows:
<TABLE>
<CAPTION>
For Years Period from Period from
Ended January 1, November 1,
December 31, 1996 to 1996 to
------------------------ October 31, December 31,
1998 1997 1996 1996
------- ------- ----------- ------------
<S> <C> <C> <C> <C>
Current:
Federal $ 6,539 $ 2,239 $46,136 $ -
Foreign 4,350 2,809 1,228 41
State 3,247 772 6,944 2
------- ------- ------- ------
14,136 5,820 54,308 43
Deferred:
Federal 1,424 8,827 -- (802)
Foreign 1,401 -- -- (76)
State (1,102) 1,148 -- (154)
------- ------- ------- ------
1,723 9,975 -- (1,032)
------- ------- ------- ------
$15,859 $15,795 $54,308 $ (989)
======= ======= ======= ======
</TABLE>
For federal and state income tax purposes, the IHF Acquisition (Note 1)
was a taxable business combination and was a qualified stock purchase. The
buyer and seller have elected jointly to treat the IHF Acquisition as an asset
acquisition under Section 338(h)(10) of the Internal Revenue Code of 1986, as
amended. 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. During 1997, finalization of
the purchase price allocation resulted in an increase of $2,220 in additional
paid-in capital. In connection with the IHF Acquisition, the Company recorded a
deferred tax asset of approximately $368,000 at November 1, 1996 related to
future tax deductions for the net excess of the tax bases of the assets and
liabilities over the financial statement carrying amounts with a corresponding
credit to additional paid-in capital.
Historically, the Company has generated operating income and realization
of the deferred tax assets is dependent upon the Company's ability to generate
sufficient future taxable income which management believes is more likely than
not. The Company anticipates future taxable income sufficient to realize the
recorded deferred tax assets. Future taxable income is based on management's
forecasts of the operating results of the Company and there can be no assurance
that such results will be achieved.
Management continually reviews such forecasts in comparison with actual
results and expected trends. In the event management determines that sufficient
future taxable income may not be generated to fully realize the deferred tax
assets, the Company will provide a valuation allowance by a charge to income
tax expense in the period of such determination.
As discussed in Note 2, 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
41 International Home Foods
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
IHF Acquisition and the purchase of Heritage have been reflected on the
accompanying consolidated balance sheets, effective November 1, 1996, as an
adjustment to the former parent company's investment and advances account or
goodwill, as appropriate.
The components of deferred tax assets at December 31, 1998 and December
31, 1997 are as follows:
<TABLE>
<CAPTION>
----------------------------
December 31,
----------------------------
1998 1997
-------- --------
<S> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts $ 899 $ 1,999
Inventory reserves 3,252 4,968
Trade accruals 3,892 7,705
Restructuring 3,658 1,234
Alternative minimum tax 3,107 --
Accrued expenses 4,808 5,196
-------- --------
Net current deferred tax assets $ 19,616 $ 21,102
Non-current deferred tax assets:
Property, plant and equipment -- 146
Tradenames 162,597 174,952
Goodwill and intangible assets 147,271 134,271
Stock options 17,579 18,036
Post-retirement benefit 8,365 7,200
Restructuring 978 --
Alternative minimum tax -- 688
Net operating loss carryforwards 2,017 6,046
Valuation allowance (3,107) (3,000)
Other -- 272
-------- --------
Non-current deferred tax assets 335,700 338,611
Non-current deferred tax liabilities:
Property, plant and equipment (4,709) --
Other (340) --
-------- --------
Non-current deferred tax liabilities (5,049) --
-------- --------
Net non-current deferred tax assets 330,651 338,611
-------- --------
Net deferred tax assets $350,267 $359,713
======== ========
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $2,900, which expire in years
ending through 2010 and an alternative minimum tax credit carryforward of
$3,107 which has an unlimited carryforward period. The Company had state income
tax loss carryforwards of approximately $24,000 at December 31, 1998 which
expire in years ending through 2012. The Company has established a valuation
allowance at December 31, 1998 of $3,107 related to foreign and state net
operating loss carryforwards and the realization of certain deferred tax
assets.
- ---------------------------------------------------
11 LONG-TERM DEBT
- ---------------------------------------------------
In connection with the IHF Acquisition, the Company entered into a $770,000
Credit Agreement ("Senior Bank Facilities") with Chase Manhattan Bank, Bankers
Trust Company and Morgan Stanley Senior Funding, Inc. and issued $400,000 of
10 3/8 percent Senior Subordinated Notes ("Notes"). The Senior Bank Facilities
provided for term loans in three tranches aggregating $670,000 and a revolving
credit loan facility of $100,000. The Company amended its Senior Bank
Facilities as of September 16, 1998. The Senior Bank Facilities are comprised
of (i) a $516.5 million Tranche A term loan facility, maturing in 2004 with
mandatory semiannual repayments aggregating $50.8 million, $72.4 million, $92.8
million, $104.2 million and $115.6 million in the years 1999 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 $0.4 million in
the 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 $230.0 million revolving credit
facility (the Revolving Credit Facility), which includes a Canadian facility of
$50.0 million, for which the initial allocation was $30.0 million, maturing in
2004, or earlier upon repayment of the Tranche A term loans. In addition to
scheduled periodic repayments, the Company is also required to make mandatory
repayments of the loans under the Senior Bank Facilities with a portion of its
excess cash flow, as defined.
Borrowings under the amended Senior Bank Facilities bear interest based on
the Eurodollar Rate or an Alternate Base Rate, as defined, plus applicable
margins. The Canadian portion of the Revolving Credit Facility bears interest
at the Canadian Prime Rate, or the Canadian Bankers' Acceptance Rate, as
defined, plus applicable margins. Margins range from 0.5% to 2.0%. The weighted
average interest rate for 1998 was 7.18%. At December 31, 1998, interest rates
in effect for Tranches A, B, B-1 and the Revolving Credit Facility were 6.47%,
6.72%, 7.16% and 6.70%, respectively.
International Home Foods 42
<PAGE> 47
The obligations of the Company under the Senior Bank Facilities are
unconditionally and irrevocably guaranteed by each of the Company's direct or
indirect domestic subsidiaries (collectively, the "Guarantors"). In addition,
the Senior Bank Facilities are secured by first priority or equivalent security
interests in (i) all the capital stock of, or other equity interests in, each
direct or indirect domestic subsidiary of the Company and 65% of the capital
stock of, or other equity interests in, each direct foreign subsidiary of the
Company, or any of its domestic subsidiaries and (ii) all tangible and
intangible assets (including, without limitation, intellectual property and
owned real property) of the Company and the Guarantors (subject to certain
exceptions and qualifications).
The Senior Bank Facilities also contain a number of significant covenants
that, among other things, restrict the ability of the Company to dispose of
assets, incur additional indebtedness, repay other indebtedness or amend other
debt instruments, pay dividends, create liens on assets, make investments or
acquisitions, engage in mergers or consolidations, make capital expenditures,
or engage in certain transactions with affiliates, amend the Indenture and
otherwise restrict corporate activities. In addition, under the Senior Bank
Facilities the Company is required to comply with specified minimum interest
coverage, maximum leverage and minimum fixed charge coverage ratios.
The Company pays a commission on the face amount of all outstanding
letters of credit drawn under the Senior Bank Facilities at a per annum rate
equal to the Applicable Margin then in effect with respect to Eurodollar loans
under the Revolving Credit Facility minus the Fronting Fee (as defined). A
fronting fee equal to 1/4% per annum on the face amount of each Letter of
Credit is payable quarterly in arrears to the issuing lender for its own
account. The Company has entered into agreements for letters of credit
amounting to $3.9 million at December 31, 1998. The Company also pays a per
annum fee equal to 0.375% on the undrawn portion of the commitments with
respect to the Revolving Credit Facility. As of December 31, 1998 and 1997, the
Company had unused Revolving Credit Facility balances of $163.6 million and
$158.6 million, respectively.
The Notes are due November 1, 2006, and bear interest at a rate of 103/8
percent, which is payable semiannually on May 1 and November 1 of each year.
The Notes may be redeemed prior to November 1, 2000 in up to an aggregate
principal amount of $160.0 million with the proceeds of one or more equity
offerings, as defined, by the Company under certain conditions at a redemption
price of 110.375%. The Notes may also be redeemed prior to November 1, 2001 at
a redemption price of 100% upon the occurrence of a change of control, as
defined. Except as discussed above, the Notes are not redeemable prior to
November 1, 2001. The Notes will be redeemable, in whole or in part, at the
Company's option at redemption prices decreasing from 105.188% at November 1,
2001 to 100% on November 1, 2004 and thereafter.
Each Subsidiary Guarantor unconditionally guarantees, jointly and
severally, on a senior subordinated basis, the full and prompt payment of
principal and interest on the Notes.
The Notes contain certain restrictive covenants limiting, among other
things (i) the incurrence of additional indebtedness; (ii) the declaration or
payment of dividends or other capital stock distributions or redemptions; (iii)
the redemption of certain subordinated obligations; (iv) investments; (v) sale
of assets; and (vi) consolidations, mergers and transfers of all or
substantially all of the Company's assets.
In connection with the acquisition of Grist Mill, the Company assumed a
$5.7 million term loan on its facility. The term loan bears interest at 8.625%
and matures on June 1, 2000, with a balloon payment of $5.2 million.
Long-term debt at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
--------- --------
<S> <C> <C>
Senior bank facilities:
Tranche A $ 499,347 $420,000
Tranche B 149,600 150,000
Tranche B-1 100,000 --
--------- --------
748,947 570,000
Senior Subordinated Notes 400,000 400,000
Grist Mill term loan 5,577 --
--------- --------
1,154,524 970,000
Less: Current portion 51,694 27,400
--------- --------
Long-term debt $1,102,830 $942,600
========== ========
</TABLE>
The aggregate maturities of all long-term debt during each of the next
five years are $51,694, $78,451, $93,414, $104,849 and $116,285 for 1999, 2000,
2001, 2002 and 2003, respectively, and $709,831 thereafter.
- -------------------------------------------------
12 FINANCIAL INSTRUMENTS
- -------------------------------------------------
The Company's financial instruments recorded on the balance sheet include cash
and cash equivalents, accounts receivable, accounts payable and debt. Because
of their short maturity, the carrying amount of these items, excluding debt,
approximates fair value.
The Company's $400.0 million Notes at December 31, 1998 and 1997 had an
estimated fair value of approximately $433 million and $440 million,
respectively, based on their publicly quoted rates. The fair value of the
Senior Bank Facilities at December 31, 1998 and 1997 approximated its carrying
value because the interest rates change with market interest rates.
International Home Funds 44
<PAGE> 48
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 September 1999.
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.
The Company is exposed to credit loss in the event of nonperformance by
the other parties to the interest rate swap agreements. However, the Company
does not anticipate nonperformance by the counterparties.
As of December 31, 1998, the Company had the following interest rate
instruments in effect for which the fair value of these instruments is based on
estimated current settlement cost (notional amounts are in millions):
<TABLE>
<CAPTION>
Notional Strike Fair Rates-
Amount Rate Value Period LIBOR
-------- ------ ------ ------------- -------
<S> <C> <C> <C> <C> <C>
Interest Rate Swaps $200(2) 8.97% $ 6.4 8/98 - 11/01 6-month
600(1) 5.43% (16.1) 8/98 - 8/03 3-month
Interest Rate Caps $225(1) 6.75% -- 10/98 - 10/99 6-month
200(2) 6.75% -- 8/98 - 11/01 6-month
Interest Rate Floor $200(2) 5.20% (6.4) 8/98 - 11/01 6-month
Interest Rate Collar $150(1) 5.75% -- 10/98 - 10/01 3-month
3.76%
---- ---- ------ ------------- -------
$(16.1)
==== ==== ====== ============= =======
</TABLE>
(1) Agreement exchanges floating interest rate payments for fixed interest rate
payments.
(2) Agreement exchanges fixed interest rate payments for floating interest rate
payments.
As of December 31, 1997, the Company had entered into an interest rate
collar transaction that expired in December 1998. The notional amount of the
collar was $135.0 million with the cap set at 8.0% and the floor set at 5.25%
and had an immaterial fair value.
- ------------------------------------------------------
13 GUARANTOR FINANCIAL DATA
- ------------------------------------------------------
The Company's Senior Subordinated Notes are fully 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:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Current assets $281,119 $262,531
Non-current assets 569,830 426,396
Current liabilities 111,632 80,108
Non-current liabilities 49,637 245,491
<CAPTION>
For the Years Ending December 31,
----------------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Net sales $ 844,038 $356,921 $136,873
Gross profit 306,180 128,707 58,382
Net (loss) income (12,965) (1) 32,983 (1,054)
Net cash provided by
operating activities 142,947 33,071 11,540
Net cash used in
investing activities (200,607) (5,876) (11,457)
Net cash provided by (used in)
financing activities 56,351 (21,942) 1,029
========= ======== ========
</TABLE>
(1) Includes restructuring charge of $61.3 million (net of $33.8 million tax
benefit).1997 amounts restated from amounts previously reported. Amounts
are not intended to report results as if the subsidiaries were separate
stand-alone entities.
- ------------------------------------------------
14 INITIAL PUBLIC OFFERING
- ------------------------------------------------
In November 1997, the Company completed the issuance of 12.1 million common
shares through an initial public offering, resulting in net proceeds (after
deducting issuance costs) of $224.9 million. The proceeds of the offering were
used to repay indebtedness under the Senior Bank Facilities.
<PAGE> 49
- ---------------------------------------------
15 STOCK REPURCHASE
- ---------------------------------------------
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) which it presently holds in treasury. The purchase of the common stock
was financed by the Company with borrowings under its Senior Bank Facilities.
- ---------------------------------------------
16 EMPLOYEE BENEFIT PLANS
- ---------------------------------------------
The Company maintains non-contributory defined benefit pension plans covering
the majority of its employees and retirees, and post-retirement benefit plans
for the majority of its employees and retirees that include health care
benefits and life insurance coverage. Prior to November 1, 1996, the Company's
financial statements reflect costs charged to the Company by AHP.
Pension-related benefits are based primarily on compensation levels and years
of service. It is the Company's policy to contribute the amounts necessary to
meet the minimum funding requirements of defined benefit plans under applicable
laws. Plan assets include principally cash equivalents and debt and equity
securities.
The following table summarizes the balance sheet impact, as well as the
benefit obligations, assets, funded status and rate assumptions associated with
the pension and post-retirement benefit plans.
<TABLE>
<CAPTION>
--------------------------------------------------
Pension Benefits Post-retirement Benefits
December 31, December 31,
--------------------------------------------------
1998(2) 1997 1998(3) 1997
-------- --------- -------- -------
<S> <C> <C> <C> <C>
Change in benefit obligations
Beginning of year obligations $ 8,865 $ 5,959 $ 21,798)(3) $17,300
Service cost 3,630 3,177 1,233 1,241
Interest cost 713 234 1,492 1,202
Plan amendments(1) -- -- (3,069) --
Actuarial losses/(gains) 690 180 4,855 (596)
Benefits paid (1,544) (685) (81) (12)
Other (13) -- -- --
-------- --------- -------- -------
End of year benefit obligations 12,341 8,865 26,228 19,135
-------- --------- -------- -------
Change in plans' assets
Beginning of year fair value of plans' assets 4,416 4,359 -- --
Actual return on plans' assets 628 189 -- --
Employer contributions 7,184 553 81 12
Benefits paid (1,544) (685) (81) (12)
Other (13) -- -- --
-------- --------- -------- -------
End of year fair value of plans' assets 10,671 4,416 -- --
-------- --------- -------- -------
Funded status of the plans
Benefit obligation (12,341) (8,865) (26,228) (19,135)
Fair value of plan assets 10,671 4,416 -- --
Unrecognized transition obligation 18 20 (2,576) --
Unamortized prior service cost 378 425 -- --
Unrecognized net actuarial loss/(gain) 983 381 4,317 (410)
-------- --------- -------- -------
Net amount recognized (291) (3,623) (24,487) (19,545)
Amounts recognized in the consolidated balance sheets
Prepaid benefit cost 504 11 -- --
Accrued benefit liability (1,283) (4,052) (24,487) (19,545)
Intangible asset 239 374 -- --
Accumulated other comprehensive income 249 44 -- --
-------- --------- -------- -------
Net amount recognized (291) (3,623) (24,487) (19,545)
======== ========= ======== =======
Rate Assumptions:
Discount rate 7.0% 7.25% 7.0% 7.25%
Rate of return on plans' assets 8.0% 7.0-8.0% 7.0% 7.25%
Salary increases/decreases 3.5-5.0% 3.5-5.0% n/a n/a
Annual increase in cost of benefits n/a n/a 8.5-10.0% 8.5-10%
to 6% over to 6% over
11 years 12 years
======== ========= ======== =======
</TABLE>
(1) Plan amendments relate to a charge in retiree contribution levels and plan
eligibility requirements.
(2) 1998 amounts include Grist Mill covered employees.
(3) 1998 amounts include Grist Mill and Libby's covered employees.
45 International Home Foods
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for pension plans with accumulated benefit
obligations in excess of plan assets were $12,341, $10,825 and $10,671,
respectively, as of December 31, 1998 and $8,865, $7,678 and $4,416,
respectively, as of December 31, 1997.
The following table shows the components of pension and post-retirement
benefit costs for the periods indicated:
<TABLE>
<CAPTION>
For Years Ended December 31,
----------------------------
Pension Cost: 1998 1997
-------- ---------
<S> <C> <C>
Service cost $3,630 $3,176
Interest cost 713 234
(Expected return on plan assets) (578) (394)
Recognized net actuarial loss/(gain) 36 (2)
Amortization of transition obligation 2 2
Amortization of prior service cost 48 50
------ ------
Net pension cost $3,851 $3,066
====== ======
Post-retirement Benefit Cost:
Service cost-benefits earned attributable to service during the period $1,233 $1,241
Interest cost on the accumulated post-retirement benefit obligation 1,492 1,202
Recognized net actuarial (gain) (3) --
Amortization of transition obligation 20 --
------ ------
Net post-retirement benefit cost $2,742 $2,443
====== ======
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the post-retirement medical benefit plans. The effects of a
one percentage point change in the assumed health care cost trend rates would
have the following effects:
<TABLE>
<CAPTION>
1% Point 1% Point
Increase Decrease
-------- --------
<S> <C> <C>
Effect on total of service and interest cost components $ 615 $ (560)
Effect on post-retirement benefit obligation $5,190 $(4,767)
====== =======
</TABLE>
Prior to November 1, 1996, the Company participated in AHP's defined
pension plans, certain defined contribution plans and post-retirement plan
(these charges represented actual retiree benefit costs based on the ratio of
the Company's participants to total AHP participants) for which the Company was
charged $3,188, $955 and $3,239, respectively, for the period January 1, 1996
to October 31, 1996. For the period November 1, 1996 to December 31, 1996, the
Company's defined benefit plan's costs and defined contribution plan's costs,
were insignificant and the post-retirement cost was $482.
Savings Plans
The Company sponsors a 401(k) defined contribution plan for nonunion employees.
Employer contributions for the years ended December 31, 1998 and 1997 were
$1,373 and $1,638, respectively. Employer contributions for the period from
November 1, 1996 to December 31, 1996 were insignificant.
Multiemployer Plans
The Company also participates in union-sponsored multiemployer pension, life
insurance and health and welfare plans which provide benefits to union
employees located at the Company's facilities in Vacaville, CA and Danville, IL
(Danville, IL plan was added in 1998). The Company's contributions to these
plans were $3,002, $2,778 and $2,993 for the years ended December 31, 1998,
1997 and 1996, respectively.
- -----------------------------------------------------
17 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, effec-
International Home Foods 46
<PAGE> 51
tive November 1, 1996, the Company entered into a financial advisory
agreement with the affiliate under which the affiliate will be entitled to a fee
of 1.5% of the transaction value, as defined, for each add-on transaction, as
defined. In 1998, 1997 and 1996, the Company incurred monitoring and oversight
fees of $1,749, $1,254 and $167, respectively, and financial advisory fees of
$3,967, $3,607 and $19,320, respectively.
The consolidated statements of income for periods through October 31, 1996
included the costs 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, which on an annualized
basis approximated $2,500 for 1996. 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 claims 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 statements of income, amounted to $9,143 for the 10 months ended
October 31, 1996.
The consolidated statements of income include rent for 35,000 square feet
of space in AHP's corporate headquarters. The rent expense related to this
space amounted to $946 for the year ended December 31, 1996. The Company
vacated this space and relocated its corporate headquarters at the end of 1996.
Various self-insurance coverages were provided to the Company through
AHP's consolidated programs through October 31, 1996. Auto, property, product
liability and other insurance coverages provided by AHP were allocated to the
Company based on past claims history, exposure, trends and judgment. The
charges, which are reflected in the accompanying consolidated statements of
income amounted to $346 for the 10 months ended October 31, 1996.
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 statements of income for the
year ended December 31, 1996, amounted to $45,186.
Effective November 1, 1996, the Company entered into a transition services
agreement with AHP under which AHP, until six months after November 1, 1996,
provided to the Company, for a fee, certain facilities and services. In
addition, AHP agreed to assist the Company for 90 days after November 1, 1996
with the administration of welfare benefit plans for payment by the Company to
AHP based on past practices. Charges by AHP to the Company under these
arrangements were insignificant.
Following is an analysis of the activity in the Former Parent Company's
Investment and Advances account for the ten months ended October 31, 1996:
<TABLE>
<CAPTION>
Ten Months
Ended
October 31,
1996
-----------
<S> <C>
Beginning balance
Former parent company's investment and advances $384,997
Net income 84,559
Distribution of net income through parent
company's investment and advances account (84,559)
--------
384,997
--------
Changes in other assets and liabilities
through the accounts:
Depreciation and amortization 15,093
Accounts receivable (6,585)
Inventories 10,903
Prepaid expenses and other current assets (820)
Other non-current assets 34
Accounts payable 1,334
Accrued salaries, wages and benefits 2,248
Accrued advertising and promotion (168)
Other accrued liabilities 672
Other 1,132
Purchases of plant and equipment, net (7,146)
--------
16,697
--------
Effect of merger transaction (630,661)
Issuance of common stock, additional paid-in
capital, and foreign currency translation
adjustment on November 1, 1996 262,361
--------
Ending balance
Parent company's investment and advances $ --
========
</TABLE>
- -----------------------------------------------------
18 STOCK COMPENSATION PLANS
- -----------------------------------------------------
During 1996 and in prior years, certain employees of the Company were granted
stock options under the AHP stock option plans. These options had a ten-year
term and generally vested one year from date of grant. The AHP stock options
awarded to Company employees during 1996 or prior were exercised, canceled or
settled in cash by January 31, 1997, except for options granted to certain
individuals who are now AHP retirees (some of whom are currently employed by
the Company) which must be exercised over a three-year period ending November
1, 1999.
47 International Home Foods
<PAGE> 52
Effective November 1, 1996, the Company adopted the International Home
Foods, Inc. 1996 Stock Option Plan (the IHF Plan) which provides for the grant
of stock options at fair value on the date of grant. Generally, stock options
have a ten-year term and vest immediately or ratably over three years. Certain
options were granted with an exercise price which increased by 8% per year
until the exercise date. These indexed options were modified during 1997 to
reflect a fixed exercise price. Shares and options have been adjusted for the
5.3292 for one reverse stock split. The total number of shares of common stock
authorized for grant under the IHF Plan is 8,444,021.
Effective October 23, 1997, the Company amended and restated the IHF Plan.
The amended and restated plan is named the International Home Foods, Inc. 1997
Stock Option Plan (the Plan). The option term and vesting provisions, and
number of shares authorized, are consistent with the IHF Plan. Certain options
granted vest based on targeted stock prices. Effective June 12, 1998, the
Company amended the Plan to increase the number of shares of common stock
authorized for grant to 13,444,021.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", but applies Accounting Principles
Board Opinion No. 25 (APB No. 25) and related interpretations in accounting for
its plans. No compensation expense was recognized for 1996 or for the first six
months in 1997. In accordance with APB No. 25, during 1997 the Company recorded
a non-cash stock option compensation charge of $46,366 including $44,673 for
indexed options granted to senior management and other employees. In the third
quarter of 1997, the variable exercise price of these options was fixed.
Unearned stock compensation of $474 has been recorded as a reduction of
paid-in-capital. This amount will be amortized to compensation expense as the
related options vest. In 1998, $594 was recorded as a compensation benefit due
to options that lapsed and were initially charged to expense. Estimated charges
for the years 1999 and 2000 as these options vest are $267 and $207,
respectively. If the Company had elected to recognize compensation cost based
on the fair value of the options at the grant dates, consistent with the method
prescribed by SFAS No. 123, net income and per share amounts would have been
adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net income:
As reported $16,463 $19,632 $82,961
Pro forma $12,648 $43,632 $81,793
Basic earnings per share:
As reported $ 0.22 $ 0.31 $ 1.34
Pro forma $ 0.17 $ 0.68 $ 1.32
Diluted earnings per share:
As reported $ 0.21 $ 0.30 $ 1.34
Pro forma $ 0.16 $ 0.66 $ 1.32
======= ======= =======
</TABLE>
Note: The pro forma disclosures shown above are not representative of the
effects on net income and per share amounts in future years.
The fair value of the AHP stock options used to compute pro forma net
income disclosures is the estimated present value at grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Expected volatility 15.0%
Expected term 4 years
Dividend yield 4.3%
Risk-free interest rate 6.4%
======
</TABLE>
1998 and 1997 pro forma net income and pro forma per share amounts are not
impacted by AHP stock options, as there were no AHP options granted in 1998 and
1997.
For IHF options granted in 1998, the following assumptions were used: a
45% volatility, 0% dividend yield, a four year expected term, and a weighted
average risk-free interest rate of 4.79%.
For IHF options granted before and after the date of the Company's initial
filing for its public offering, in 1997, a 0% and a 20% volatility were
assumed, respectively. A 0% dividend yield, expected term of four years, and a
weighted average risk-free interest rate of 6.1% were utilized in 1997.
IHF options granted in November 1996 were valued using the minimum value
method permitted under SFAS No. 123 for companies which do not have publicly
traded equity securities and the following assumptions: expected term of four
years, 0% dividend yield, and 5.9% weighted average risk-free interest rate.
International Home Foods 48
<PAGE> 53
Presented below is a summary of the status of IHF stock options and the
AHP options held by the Company's employees for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996**
------------------------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Exercise Shares Average Exercise Shares Average Exercise
(000's) Price Per Share (000's) Price Per Share (000's) Price Per Share
------- ---------------- ------- --------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
IHF non-indexed options:
Outstanding at beginning of year 7,751 $ 7.74 38 $ 5.33 -- --
Granted 2,427 $16.50 4,162 $ 8.75 38 $ 5.33
Exercised 429 $ 6.63 -- -- -- --
Forfeited 1,115 $10.69 624 $ 5.33 -- --
Other, transfer -- -- 4,175+ $ 6.40 -- --
Outstanding at end of year 8,634 $ 9.88 7,751 $ 7.74 38 $ 5.33
IHF options exercisable at end of year 4,950 $ 7.02 4,387 $ 6.73 38 $ 5.33
------ ------ ------ ------ ------ ------
IHF indexed options:
Outstanding at beginning of year -- -- 4,175 $ 5.38 -- --
Granted -- -- 1,314 $ 5.33 4,175 $ 5.33
Forfeited -- -- 1,314 $ 5.33 -- --
Other, transfer -- -- 4,175+ $ 5.76 -- --
Outstanding at end of year -- -- -- -- 4,175 $ 5.38
IHF options exercisable at end of year -- -- -- -- 4,081 $ 5.38
------ ------ ------ ------ ------ ------
AHP options:++
Outstanding at beginning of year -- -- -- -- 1,394 $33.07
Granted -- -- -- -- 153 $52.97
Exercised -- -- -- -- 758 $32.64
Forfeited/Expired -- -- -- -- 12 $45.11
Settled -- -- -- -- 150 *
Outstanding at end of year -- -- -- -- 627 $33.51
====== ====== ====== ====== ====== ======
</TABLE>
* 150,000 AHP options were settled for $61.19 per option which represents the
stock's fair value at November 1, 1996.
** 1996 amounts have been restated from amounts previously reported.
+ The indexed options originally issued with a grant price of $5.33 were
fixed at $6.40 during 1997 and are included as non-indexed options as of
December 31, 1998 and 1997.
++ Information pertaining to AHP options is not presented due to its
insignificance.
The weighted average fair values of IHF stock options granted during 1998
and 1997 were $7.71 and $3.73 per option, respectively. The weighted average
fair value of AHP stock options granted during 1996 was $7.21 per option. The
weighted average fair value of IHF non-indexed options granted in November 1996
was $5.97 per option. The IHF indexed options, which provided for an 8% per
annum increase in exercise price, had no value under the minimum value method
at December 31, 1996.
As of December 31, 1998, the 8,634 stock options outstanding under the IHF
plan have exercise prices ranging from $5.33 to $20.00 and a weighted average
exercise price of $9.88. Such options have a remaining contractual life of
approximately 8.5 years and 4,950 were exercisable at December 31, 1998. The
following table summarizes the status of stock options outstanding and
exercisable as of December 31, 1998, by range of exercise price:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Range Weighted Average Weighted average
of Exercise Shares Remaining Weighted Average Shares Exercise Price on
Prices Outstanding Contractual Life Exercise Price Exercisable Exercisable Options
- ------ ----------- ---------------- -------------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
$5.33-$9.06 5,612 7.9 years $ 6.32 4,499 $ 6.37
$10.66-$15.00 1,909 9.3 years $14.48 445 $13.44
$17.10-$20.00 1,113 9.9 years $19.94 6 $17.24
============= ===== ========= ====== ===== ======
</TABLE>
49 International Home Foods
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Stock options outstanding at December 31, 1998 which were issued with
exercise prices equal to, less than and more than the market price of the stock
on the grant date are as follows:
<TABLE>
<CAPTION>
Number of Wtd. Ave. Wtd. Ave.
Grants Options Exercise Price Fair Value
------- -------------- ----------
<S> <C> <C> <C>
Exercise price equals
market price 1,647 $ 6.94 $ 1.49
Exercise price less than
market price 4,471 $ 6.93 $11.39
Exercise price more than
market price 2,516 $16.99 $ 5.92
===== ====== ======
</TABLE>
- ----------------------------------------------------------
19 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. The accompanying
condensed consolidated statements of income include royalty costs which
amounted to $539, $1,907 and $2,113 for the years ended December 31, 1998, 1997
and 1996.
The Company has responsibility for environmental, safety and cleanup
obligations under various local, state and federal laws, including the
Comprehensive Environmental Response, Compensation and Liability Act, commonly
known as Superfund. Based upon its experience to date, the Company believes
that the future cost of compliance with existing environmental laws,
regulations and decrees and liability for known environmental claims, will not
have a material adverse effect on the Company's financial 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.
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. Although the outcome of any legal
proceeding cannot be predicted with certainty, management believes through its
discussions with counsel that its liability arising from or the resolution of
any pending or threatened litigation or claims, in the aggregate will not have
a material adverse effect on the consolidated financial position, results of
operations or cash flows of the Company.
- -----------------------------------------------------------
20 EXTRAORDINARY ITEM
- -----------------------------------------------------------
In 1997, the Company recorded an extraordinary after-tax charge of $4.3
million, or $0.06 per share on a diluted basis (net of $2.9 million of related
tax benefit) associated with the write-off of unamortized deferred financing
costs included in other assets in connection with the Senior Bank Facilities
amendment in November 1997.
- -----------------------------------------------------------
21 EARNINGS PER SHARE
- -----------------------------------------------------------
The computation of basic and diluted earnings per share ("EPS") is as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------
(Shares in thousands) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Basic EPS computation:
Net income available to
common shares $16,463 $19,632 $82,961
Average number of
shares outstanding 76,552 64,020 61,923
Basic earnings per share $ 0.22 $ 0.31 $ 1.34
Diluted EPS computation:
Net income available to
common shares $16,463 $19,632 $82,961
Average number of shares
outstanding 76,552 64,020 61,923
Effect of dilutive stock options 3,248 2,223 --
------- ------- -------
Total number of shares outstanding 79,800 66,243 61,923
Diluted earnings per share $ 0.21 $ 0.30 $ 1.34
======= ======= =======
</TABLE>
International Home Foods 50
<PAGE> 55
22 IMPACT OF RECENT ACCOUNTING STANDARDS
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.
23 LEASES
The Company leases certain facilities and equipment under operating leases.
Rental expenses, aggregated $7,886, $4,181 and $1,884 for the years ended
December 31, 1998, 1997 and 1996, respectively. Future minimum lease payments
under noncancelable operating leases at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 5,637
2000 4,647
2001 3,418
2002 2,814
2003 and later years 7,220
-------
$23,736
=======
</TABLE>
24 BUSINESS SEGMENT INFORMATION
The Company has three reportable business segments-Branded Products, Seafood,
and Private Label and Foodservice. Branded Products is defined as U.S. grocery
sales for the following products: Chef Boyardee, Libby's brand of canned meats,
Southwest brands (Luck's, Ro*Tel, Dennison's and Ranch Style Brands), Specialty
brands (PAM cooking spray, Polaner, Gulden's, Maypo, Wheatena, Maltex and G.
Washington's) and Snack brands (Crunch 'n Munch, Jiffy Pop and Campfire).
Seafood includes all sales for the Bumble Bee, Orleans and Libby's brand of
canned seafood products, private label and foodservice seafood sales. Private
Label and Foodservice includes all private label canned pasta, cooking spray,
fruit snacks, ready-to-eat cereals, wholesome snack bars, pie crust and personal
care products and the sales to foodservice distributors. The All Other category
is comprised of sales to the military and the International division which
includes branded, private label and foodservice sales in Canada, Mexico, Puerto
Rico and other export sales.
The Company sells the products in each of its segments primarily to grocery
wholesalers and distributors, grocery stores and supermarkets, convenience
stores, drug and mass merchants and warehouse clubs.
The Company evaluates segment performance based upon segment operating
income (earnings before interest expense, other (income) expense, net and income
taxes excluding unusual or infrequently occurring items, restructuring charge
and stock compensation expense (income)). Certain centrally incurred costs
(Corporate), are not allocated to the operating segments. Asset and long-lived
expenditure information is not available at the segment level, is not reviewed
by the chief operating decision maker, and is therefore not disclosed.
51 International Home Foods
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company allocates certain charges, including depreciation, amortization,
agent and broker commissions, storage, packing and shipping charges, and
administrative costs for salaries, insurance and employee benefits, to its
Branded Products segment, and to its Private Label and Foodservice segment based
on a percentage of net sales.
<TABLE>
<CAPTION>
Private Total
Branded Label and Reportable All
Products Seafood Foodservice Segments Other Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1998
Net sales $ 800,248 $ 443,229 $ 249,873 $1,493,350 $ 206,250 $1,699,600
Segment operating income 158,939 30,677 35,634 225,250 31,431 256,681
Depreciation and amortization 19,960 5,817 7,135 32,912 4,018 36,930
1997
Net sales 781,076 193,291 116,633 1,091,000 131,434 1,222,434
Segment operating income 151,213 9,524 17,185 177,922 23,449 201,371
Depreciation and amortization 19,344 2,355 1,444 23,143 2,196 25,339
1996
Net sales 749,411 -- 85,112 834,523 108,269 942,792
Segment operating income 126,306 -- 8,847 135,153 22,330 157,483
Depreciation and amortization 16,179 -- 942 17,121 1,237 18,358
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Reconciliation to Consolidated Results 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Segment operating income 256,681 201,371 157,483
Less:
Restructuring charge 118,087 -- 4,308
Stock compensation (income) expense (594) 46,366 --
Corporate 9,141 11,355 --
------- ------- -------
Total consolidated income from
operations 130,047 143,650 153,175
======= ======= =======
</TABLE>
In 1998, the Corporate line includes $8,148 of income that was not
specifically allocated to the brands.
OTHER INFORMATION
<TABLE>
<CAPTION>
Geographic Information: 1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Net sales:
United States 1,514,856 1,113,352 855,237
Foreign 184,744 109,082 87,555
--------- --------- -------
Consolidated 1,699,600 1,222,434 942,792
Long-lived assets:
United States 232,210 191,856 180,365
Foreign 30,561 18,339 5,637
--------- --------- -------
Consolidated 262,771 210,195 186,002
========= ========= =======
</TABLE>
25 SUBSEQUENT EVENTS (UNAUDITED)
On January 19, 1999, the Company through it's subsidiary Bumble Bee Seafoods,
Inc. acquired the canned seafood brands and business of British Columbia Packers
from George Weston Ltd. of Canada for a total purchase price of approximately
$38.0 million ($CN 57.7 million). The acquisition was funded with borrowings
under the Company's Senior Bank Facilities. In connection with the acquisition,
the Company has revised the $230.0 million Revolving Credit Facility to allocate
$37.5 million to the Canadian Facility.
On February 5, 1999 the Company sold its Polaner fruit spreads and spices
business to B&G Foods, Inc. for approximately $30.0 million in cash and
anticipates a gain of approximately $17.0 million. The proceeds will be used to
acquire assets useful in the Company's business.
International Home Foods 52
<PAGE> 57
QUARTERLY RESULTS OF OPERATIONS
(Dollars in Millions, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales:
1998 $ 388.5 $ 402.5 $ 439.7 $ 468.9
1997 244.6 249.9 349.5 378.5
Gross profit:
1998 186.7 193.0 208.5 218.0
1997 128.9 134.7 167.4 180.3
Operating income (loss):
1998 54.2 58.9 (50.8)(1) 67.7
1997 37.4 40.9 9.5 (2) 55.8
Income (loss) before extraordinary item:
1998 19.3 21.1 (49.0)(1) 25.1
1997 7.5 9.4 (10.8)(2) 17.9
Basic earnings per share, before extraordinary item:
1998 $ 0.25 $ 0.27 $ (0.63)(1) $ 0.34
1997 $ 0.12 $ 0.15 $ (0.17)(2) $ 0.25
Diluted earnings per share, before extraordinary item:
1998 $ 0.24 $ 0.26 $ (0.63)(1) $ 0.33
1997 0.12 0.15 (0.17)(2) 0.24
Net income (loss):
1998 19.3 21.1 (49.0)(1) 25.1
1997 7.5 9.4 (10.8)(2) 13.5
Basic earnings per share:
1998 $ 0.25 $ 0.27 $ (0.63)(1) $ 0.34
1997 0.12 0.15 (0.17)(2) 0.19
Diluted earnings per share:
1998 $ 0.24 $ 0.26 $ (0.63)(1) $ 0.33
1997 0.12 0.15 (0.17)(2) 0.18
========= ========= ========= =========
</TABLE>
(1) Includes restructuring charge of $118.1 million ($75.3 million, net of
tax).
(2) Includes non-cash stock option compensation expense of $44.8 million ($27.0
million, net of tax).
STOCK MARKET INFORMATION
International Home Foods, Inc. common stock (symbol IHF) is traded on the New
York Stock Exchange. The following table sets forth the range of high and low
closing prices for each period since the Company's initial public offering in
November 1997.
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
High Low High Low
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
First quarter $ 34.50 $ 25.25 -- --
Second quarter 32.13 22.75 -- --
Third quarter 25.63 12.88 -- --
Fourth quarter 20.19 10.38 $ 28.00 $ 22.50
========= ========= ========= =========
</TABLE>
53 International Home Foods
<PAGE> 58
SELECTED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
1998 1997 1996 1995 1994
----------- ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 1,699.6(5) $1,222.4)(3) $ 942.8 $ 818.9 $ 997.3
Gross profit 806.2 611.3 497.9 420.7 534.2
Stock option compensation (income) expense (0.6) 46.4 -- -- --
Restructuring and other charges 118.1 -- 4.3 -- --
Operating income 130.0 143.7 153.2 68.6 159.2
Interest expense 96.0 104.9 17.1(1) -- --
Income before extraordinary item 16.5 23.9 83.0 39.2 95.9
Extraordinary loss, net of tax -- 4.3 -- -- --
Net income 16.5 19.6 83.0 39.2 95.9
Basic earnings per share $ 0.22 $ 0.31 $ 1.34 -- --
Diluted earnings per share $ 0.21 $ 0.30 $ 1.34 -- --
BALANCE SHEET DATA:
Inventories $ 235.7 $ 220.6 $ 129.2 $ 139.9 $ 148.0
Working capital
(excluding current portion of long-term debt) 195.1 175.5 107.6 120.6 197.1
Property, plant and equipment, net 262.8 210.2 186.0 176.8 169.7
Total assets 1,446.2 1,262.1 968.3 463.6 540.5
Long-term debt (including current portion) 1,154.5 970.0 1,070.0(1) -- --
Stockholders' equity (deficit) 29.9(6) 67.6(4) (264.2)(2) 385.0 467.1
OTHER FINANCIAL DATA:
Depreciation and amortization $ 40.0 $ 30.1 $ 19.0 $ 30.2 $ 26.4
Capital expenditures 31.0 13.6 11.9 24.2 31.1
=========== =========== =========== ======== ========
</TABLE>
(1) Effective November 1, 1996, the Company entered into a $770.0 million
credit agreement and issued $400.0 million of 10 3/8 percent Senior
Subordinated Notes in connection with the acquisition. Prior to November 1,
1996, the Company did not maintain a credit facility and accordingly, did
not incur any interest expense.
(2) For the periods 1994 and 1995, and through October 31, 1996 the Selected
Financial Data presented included the operations of the following indirect
wholly-owned subsidiaries of American Home Products, Inc. (AHP): American
Home Food Products, Inc. (now the Company) and its subsidiary M. Polaner,
Inc., American Home Foods, Inc. (now I.H.F.P., Inc.), Luck's Incorporated,
Canadian Home Products Limited (now International Home Foods (Canada),
Inc.), and certain related assets owned by AHP (collectively, American Home
Food Products) and its subsidiaries. Effective November 1, 1996 these
entities and businesses constituted International Home Foods, Inc., which
was acquired through a leveraged recapitalization (See Note 1).
(3) In 1997, the Company acquired Bumble Bee Seafoods, Inc. and Subsidiaries
(effective July 1, 1997), Productos Del Monte (effective October 1, 1997),
Creative Products, Inc. (effective October 1, 1997), and Orleans Seafood,
Inc. (effective November 24, 1997). The 1997 combined net sales of these
acquired companies totaled $228.3 million from their respective dates of
acquisition.
(4) In November 1997, the Company completed the issuance of 12.1 million common
shares, through an initial public offering, resulting in net proceeds of
$224.9 million. (See Note 15.)
(5) In 1998, the Company acquired Puritan (effective March 9, 1998), Grist Mill
Co. (effective April 14, 1998) and Libby's (effective September 8, 1998).
The 1998 combined net sales of these acquired companies totaled $161.4
million from their respective dates of acquisition. The Company also
benefited from a full year of net sales from the companies acquired in
1997.
(6) On October 23, 1998, the Company purchased 4.4 million shares of its common
stock from AHP Subsidiary Holding Corporation for approximately $57.2
million and presently holds the shares in treasury. (See Note 15.)
International Home Foods 54
<PAGE> 59
OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
CORPORATE OFFICERS BOARD OF DIRECTORS TRANSFER AGENT
<S> <C> <C>
C. DEAN METROPOULOS C. DEAN METROPOULOS Bank of New York
Chairman of the Board of Directors Chairman of the Board of Directors 101 Barclay Street
and Chief Executive Officer and Chief Executive Officer, New York, New York 10007
Executive Committee
N. MICHAEL DION ANNUAL MEETING
Senior Vice President and THOMAS O. HICKS May 5, 1999, 2:00pm
Chief Financial Officer Chairman and Chief Executive Officer The Madison Hotel
of Hicks, Muse, Tate & Furst One Convent Road
M. KELLEY MAGGS Morristown, New Jersey 07960
Senior Vice President, Secretary L. HOLLIS JONES
and General Counsel President of Hollis Jones, Inc. CORPORATE HEADQUARTERS
Audit Committee International Home Foods, Inc.
ANDREW S. ROSEN 1633 Littleton Road
Vice President and MICHAEL J. LEVITT Parsippany, New Jersey 07054
Assistant Secretary Managing Director and Principal of 973-359-9920
Hicks, Muse, Tate & Furst
LYNNE M. MISERICORDIA Audit Committee STOCK LISTING
Treasurer International Home Foods, Inc.
M. L. LOWENKRON (ticker symbol IHF) is listed on
Audit Committee, the New York Stock Exchange.
Compensation Committee
Common shares outstanding at
MICHAEL J. CRAMER February 28, 1999: 73,334,727
Chief Operating Officer
Southwest Sports Group, Inc. Approximate number of
stockholders: 4,925
JOHN R. MUSE
Managing Director and Principal STOCK PRICE
of Hicks, Muse, Tate & Furst High: $34.50 March 18, 1998
Low: $10.38 October 13, 1998
ROGER T. STAUBACH
Chairman and Chief Executive Officer The Company has not paid cash dividends on
of The Staubach Company the common stock, has no present plans to do
Audit Committee, Compensation Committee so and is restricted by the Senior Bank
Facilities from paying dividends (Note 11).
CHARLES W. TATE
President of Hicks, Muse, Tate & Furst OTHER REPORTS
Compensation Committee, Copies of the Annual Report on Form 10-K are
Executive Committee available without charge.
Contact:
Investor Relations
International Home Foods, Inc.
1633 Littleton Road
Parsippany, New Jersey 07054
800-639-9865
</TABLE>
<PAGE> 60
[INTERNATIONAL HOME FOODS, INC LOGO]
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
Jurisdiction of
Subsidiary Incorporation or Organization
- ---------- -----------------------------
<S> <C>
I.H.F.P., Inc. Delaware
Trenton Home Foods, Inc. Delaware
Luck's, Incorporated Delaware
M. Polaner, Inc. Delaware
International Home Foods (Canada), Inc. Canada
3423425 Canada Ltd Canada
Heritage Brands Holdings, Inc. Delaware
Heritage Brands, Inc. Delaware
Campfire, Inc. Delaware
Bumble Bee Seafoods, Inc. Delaware
Sociedad Ecuatoriana de Alimentos
Frigorificos Manta C.A. Ecuador
CDC Acquisition Corporation Delaware
SFSHC Acquisition Corporation Delaware
BBII Acquisition Corporation Delaware
Pesquena Manteuse de Alun
Mantatun, S.A. Ecuador
Mayaguez Water Treatment Co., Inc. Puerto Rico
DM US Holding Corp. Delaware
HMTF Mexico Holdings, S.A. de C.V. Mexico
Productos Del Monte, S.A. de C.V. Mexico
Frutas Y Verduras Selectas, S. de R.L. de C.V. Mexico
Del Norte Mexico
Creative Products, Inc. of Rossville Illinois
Orleans Acquisition Corp. Delaware
IHF/GM Holding Corp. Delaware
IHF/GM Acquisition Corp. Delaware
Canadian Seafoods Acquisition Corp. Delaware
Paramount Seafoods, PTY Limited Australia
Finsotec SA Ecuador
BCP Ecuador SA Ecuador
Clover Leaf Seafoods, Inc. Canada
VCSC Acquisition Corp. Delaware
Grist Mill Company Delaware
Grist Mill Confection Delaware
IHF Foreign Sales Corp. Barbados
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (File Nos. 333-43297, 333-62097,333-62099) of
International Home Foods, Inc. of our report dated February 22, 1999, relating
to the consolidated financial statements of International Home Foods, Inc. as of
December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and
1996, which appears in the Annual Report to Stockholders, which is incorporated
in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 17
<SECURITIES> 0
<RECEIVABLES> 148
<ALLOWANCES> (7)
<INVENTORY> 236
<CURRENT-ASSETS> 431
<PP&E> 428
<DEPRECIATION> (165)
<TOTAL-ASSETS> 1,446
<CURRENT-LIABILITIES> 288
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 29
<TOTAL-LIABILITY-AND-EQUITY> 1,446
<SALES> 1,700
<TOTAL-REVENUES> 0
<CGS> 893
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96
<INCOME-PRETAX> 32
<INCOME-TAX> 16
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.21
</TABLE>
