SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from
_________ To ___________
Commission File Numbers 333-23893; 333-23893-01; 333-23893-02; 333-23893-03
--------------------------------------
<TABLE>
<CAPTION>
CFP HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<S> <C> <C>
Delaware 2013 95-4413619
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
CFP GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2013 95-4616486
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
CUSTOM FOOD PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
California 2013 95-3760291
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
QF ACQUISITION CORP.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2013 22-3174301
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
------------------------------------
1117 West Olympic Blvd.
Montebello, CA 90640
(Address, Including Zip Code of Registrant's Principal Executive Offices)
213-727-0900
(Registrant's telephone number, including area code)
------------------------------------
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 shorter period that the registrant was required
to file such reports), and (2) has been subject to filing requirements for the
past 90 days.
[ x ] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
----- ----------------------------
Voting Common Stock - Class A, $.01 par value 14,705
Non-voting common Stock - Class A, $.01 par value 11,241
Non-voting common Stock - Class B $.01 par value 3,059
<PAGE>
CFP Group, Inc. and Subsidiaries
FORM 10-Q
INDEX
Part I Financial Information Page #
------
Item 1. Financial Statements
Consolidated Balance Sheets - 1
March 31, 1998 and June 30, 1998
Consolidated Statements of Operations - 2
Three months ended June 30, 1998 & 1997
Consolidated Statements of Cash Flows 3
Three months ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 10
Signatures
Exhibit Index
<PAGE>
Part I Financial Information
Item 1. Financial Statements
CFP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
March 31, June 30,
1998 1998
--------- ---------
(in thousands)
Current assets: $ 1,344 $ 1,332
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful
accounts of $115,000 and $153,000 at March 31,
1998 and June 30, 1998, respectively 12,007 11,104
Inventories 15,718 16,872
Prepaid expenses and other current assets 890 1,144
--------- ---------
Total current assets 29,959 30,452
Property and equipment, net 27,004 27,418
Costs in excess of net assets acquired, net 68,608 67,755
Intangible and other assets, net 7,508 6,758
--------- ---------
Total $ 133,079 $ 132,383
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term debt $ 2,232 $ 732
Accounts payable 6,816 6,416
Accrued expenses and other current liabilities 5,404 8,235
--------- ---------
Total current liabilities 14,452 15,383
--------- ---------
Long term debt 141,267 141,835
--------- ---------
Commitments and contingencies
Redeemable common stock 2,319 2,319
--------- ---------
Stockholders' equity (deficiency):
Preferred stock, $.01 par value; 6,472 shares
authorized, none issued and outstanding
Voting common stock - Class A, $.01 par value;
100,000 shares authorized, 14,705 shares
issued and outstanding 3,196 3,196
Nonvoting common stock - Class A, $.01 par value;
25,000 shares authorized, 11,241 (inclusive of
3,011 shares classified as redeemable
common stock) shares issued and outstanding 2,204 2,204
Nonvoting common stock - Class B, $.01 par value;
25,000 shares authorized, 3,059 shares (inclusive
of 2,162 shares classified as redeemable common
stock) issued and outstanding 623 623
Stockholders' notes receivable (203) (203)
Accumulated deficit (30,779) (32,974)
--------- ---------
Total stockholders' deficiency (24,959) (27,154)
--------- ---------
Total $ 133,079 $ 132,383
========= =========
See accompanying notes to consolidated financial statements.
1
<PAGE>
CFP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30, June 30,
1997 1998
-------- --------
(in thousands)
Sales $ 44,755 $ 44,276
Cost of Sales 37,283 36,103
-------- --------
Gross Profit 7,472 8,173
Selling, general and administrative expenses 4,126 4,716
Terminated transaction related costs 256
-------- --------
Income from operations 3,346 3,201
Interest expense 4,150 4,343
-------- --------
Loss before income taxes and extraordinary item (804) (1,142)
Provision for income taxes 50
-------- --------
Net loss before extraordinary item (804) (1,192)
Extraordinary loss on early extinguishment of debt (1,003)
-------- --------
Net loss $ (804) $ (2,195)
======== ========
See accompanying notes to consolidated financial statements.
2
<PAGE>
CFP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
June 30, June 30,
1997 1998
-------- --------
(in thousands)
Cash flows from operating activities: $ (804) $ (2,195)
Net loss
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 1,639 1,584
Amortization of deferred financing costs and
original issue discount 308 300
Extraordinary loss on early extinguishment of debt 1,003
Changes in assets and liabilities:
Accounts receivable (39) 903
Inventories (2,913) (1,154)
Prepaid expenses and other current liabilities 419 (256)
Income taxes receivable/payable 50
Accounts payable 1,920 (401)
Accrued expenses and other current liabilities 3,711 2,782
-------- --------
Net cash provided by operating activities 4,241 2,616
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (613) (1,145)
Other assets (245) (43)
-------- --------
Net cash used in investing activities (858) (1,188)
-------- --------
Cash flows from financing activities:
Borrowings under revolving loan facility 1,119
Repayment of revolving loan facilities (500) (2,000)
Proceeds from issuance of long term-debt 14,127
Repayment of long-term debt and capitalized lease
obligations (144) (14,177)
Deferred financing costs (2) (509)
-------- --------
Net cash used in financing activities (646) (1,440)
-------- --------
Net increase (decrease) in cash 2,737 (12)
Cash, beginning of period 2,139 1,344
-------- --------
Cash, end of period $ 4,876 $ 1,332
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 612 $ 900
See accompanying notes to consolidated financial statements.
3
<PAGE>
CFP GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of CFP Group,
Inc. and its wholly-owned subsidiaries (the "Company") have been prepared in
accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the period are not
necessarily indicative of the results that may be expected for the full fiscal
year. The accompanying financial statements include the results of CFP Group,
Inc. ("CFP Group") and its wholly-owned subsidiary CFP Holdings, Inc. ("CFP
Holdings"), and CFP Holdings' wholly-owned subsidiaries Custom Food Products,
Inc. ("Custom Foods") and QF Acquisition Corp. ("Quality Foods"). The
consolidated financial statements as presented herein should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1998.
The Company's fiscal year is the 52 or 53 week period ending on the
Saturday nearest to March 31. The Company's three month periods ended on the
Saturday nearest June 30, 1998 and 1997 were 13 weeks in duration. For
simplicity of presentation, the Company has described the interim periods and
year end period herein as ending on June 30 and March 31 respectively.
NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131"), which requires disclosure of certain
information about operating segments, geographic areas in which the Company
operates, major customers, and products and services. The Company will evaluate
the effect that this new standard has on the Company's financial statement
presentation, and the required information will be reflected in the financial
statements for the year ended March 31, 1999.
NOTE 3: LOAN AND SECURITY AGREEMENT
On May 5, 1998, the Company entered into a $40.0 million loan and security
agreement (the "Loan and Security Agreement") with a financial institution
providing for revolving credit loans (the "Revolver") and term loan and
equipment loan options. Maximum borrowings under the Revolver cannot exceed
$40.0 million, subject to a borrowing base and other limitations including
amounts outstanding under the term loans, letters of credit and other borrowing
instruments under the Loan and Security Agreement. Borrowings under the Loan and
Security Agreement bear interest at varying rates as disclosed in Note 5. All
amounts outstanding under the Loan and Security Agreement become due and payable
in May 2002.
4
<PAGE>
Loans under the Loan and Security Agreement are secured by substantially
all of the Company's assets, including a pledge of all the stock of Quality
Foods and Custom Foods, are guaranteed by the Company's subsidiaries, which
guarantees are secured by substantially all of the assets of the Company's
subsidiaries, and are further secured by a pledge of all the stock of CFP
Holdings, Inc. The Loan and Security Agreement and the indenture contain
numerous restrictive covenants, which limit the discretion of the management of
the Company with respect to certain business matters. These covenants place
significant restrictions on, among other things, the ability of the Company to
incur additional indebtedness, to create liens or other encumbrances, to pay
dividends or make other restricted payments, to make investments, to make
capital expenditures, loans and guarantees and to sell or otherwise dispose of a
substantial portion of assets to, or merge or consolidate with, another entity.
The Company used proceeds from new borrowings under the Loan and Security
Agreement to repay all amounts outstanding under its prior credit agreement
consisting of a $10.0 million term loan and $4.1 million advanced under the
Revolver. In connection with these repayments, an extraordinary loss on the
extinguishment of debt of approximately one million dollars was recorded. This
amount principally consisted of unamortized deferred financing costs.
5
<PAGE>
NOTE 4: INVENTORIES
Inventories consisted of the following:
March 31, June 30,
1998 1998
---------------- ----------------
Raw materials $ 5,655 $ 6,202
Work-in-process 3,470 3,929
Finished goods 6,593 6,741
---------------- ----------------
Total $ 15,718 $ 16,872
================ ================
NOTE 5: LONG-TERM OBLIGATIONS
March 31, June 30,
1998 1998
--------- ---------
Long -term obligations consisted of the following:
Senior notes payable, interest at 11 5/8% payable
semiannually, principal due January 2004. $115,000 $115,000
Term note payable to a bank, interest at a reference
rate (8.5% at March 31, 1998) plus 2% or Eurodollar
rate (5.7% at March 31, 1998) plus 3% payable
semiannually, principal payable quarterly at
$1.0 million increasing to $2.2 million with the
remaining balance due in June 2002. 9,000
Term note payable to a financial institution, interest
at a reference rate (8.5% at June 30, 1998) or
Eurodollar rate (5.8% at June 30, 1998) plus 2.25%,
entire principal balance due in May 2002. 10,000
Revolving loan payable to a bank, interest at a reference
rate (8.5% at March 31, 1998) plus 1.25% or Eurodollar
rate (5.7% at March 31, 1998) plus 2.5% payable
quarterly, expires June 2002. 5,000
Revolving loan payable to a financial institution, interest
at a reference rate (8.5% at June 30, 1998) or Eurodollar
rate (5.8% at June 30, 1998) plus 2.25%, expires May 2002. 3,246
Debt assumed in connection with the acquisition of
Quality Foods:
Revenue bond payable to a government financing
authority, interest at a reference rate (5.8% at
June 30, 1998) not to exceed 18% payable monthly,
principal payable annually at $100,000 increasing
to $400,000 through December 2014. 4,200 4,200
Notes Payable to a government agency, interest at
2%, payable with principal monthly through
April 2012, collateralized in a second
position on the Company's Philadelphia facility. 1,955 1,904
Note payable to a government agency, interest at 0.5%
payable monthly beginning April 1999 through
October 2005, principal and interest payable in
equal monthly installments from November 2005
through April 2010, collateralized in a shared third
position on the Company's Philadelphia facility. 1,000 1,000
Notes payable to a government agency, interest at 5.25%
payable monthly with principal through February 2012,
collateralized in a shared third position on the
Company's Philadelphia facility. 710 710
Capital lease obligations payable in varying monthly
installments through 2021, collateralized by buildings
and equipment with a net book value of $6,317,000 and
$6,184,000, at March 31, 1998, and
June 30, 1998 respectively. 6,634 6,510
-------- --------
Total 143,499 142,567
Less current portion (2,232) (732)
-------- --------
Long-term debt $141,267 $141,835
======== ========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
6
<PAGE>
of Operations.
General
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial position and
operating results during the periods included in the accompanying consolidated
financial statements.
Results of Operations
Three months ended June 30, 1998 compared to three months ended June 30, 1997.
Net Sales. Net sales decreased by 1% to $44.3 million for the three month
period ended June 30, 1998 from $44.8 million for the period ended June 30,
1997. Total pounds sold by the company decreased by 2% to 25.6 million pounds
for the three months ended June 30, 1998 from 26.0 million pounds for the three
months ended June 30, 1997. The small quarterly decrease in net sales was
primarily due to a decrease in non value added product sales. Sales of the
Company's higher margin value added products were virtually unchanged as a
decline in sales to one of the Company's largest customers were offset by
increases in sales to other value added product customers. The net sales price
increased to $1.73 per pound from $1.72 per pound primarily as a result of sales
mix variations.
Gross Profit. Gross profit increased to $8.2 million for the three months
ended June 30, 1998 from $7.5 million for the three months ended June 30, 1997.
This $0.7 million increase was primarily due to efficiencies in operations as
well as favorable raw material prices. The gross margin increased to 18.5% for
the three months ended June 30, 1998 from 16.7% for the three months ended June
30, 1997 for the same reasons.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $4.7 million for the three months ended
June 30, 1998 from $4.1 million for the three months ended June 30, 1997,
primarily due to strategic staffing additions.
Terminated Transaction Related Costs. In the three months ended June 30,
1998, the Company expensed $256,000 in transaction costs associated with a
potential acquisition which has been terminated.
Income from Operations. Income from operations decreased minimally to $3.2
million for the three months ended June 30, 1998 from $3.3 million for the three
months ended June 30, 1997.
Interest Expense. Interest expense increased minimally to $4.3 million for
the three months ended June 30, 1998 compared to $4.2 million for the three
months ended June 30, 1997.
7
<PAGE>
Provision for Income Taxes. Provision for income taxes increased to $50,000
for the three months ended June 30, 1998 from zero for the three months ended
June 30, 1997, to provide for various state income taxes. For the three months
ended June 30, 1998 the expected income tax benefit based on the statutory rate
was reduced to zero because the company provided a valuation allowance related
to the net operating loss carry forward.
Extraordinary Loss. The Company used proceeds from new borrowings under the
Loan and Security Agreement to repay all amounts outstanding under its prior
credit agreement. In connection with these repayments, an extraordinary loss on
the extinguishment of debt of approximately one million dollars was recorded.
This amount principally consisted of unamortized deferred financing costs.
Net Loss. A net loss of $1.2 million was incurred for the three months
ended June 30, 1998 versus a net loss of $804,000 for the three months ended
June 30, 1997 due to the net impact of the foregoing items.
Year 2000
The Company is in the process of selecting a new Enterprise Wide System and
currently expects to have a new system selected and implemented by July 1999.
The company believes that implementation of the new system will address its
major "year 2000 issues", which arise in cases where the computer systems or any
equipment with computer chips use two-digit fields that recognize dates using
the assumption that the first two digits are "19". On January 1, 2000, any clock
or date recording mechanism including date sensitive software that uses only two
digits to represent the year may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations, causing disruption of operations, including among other things
a temporary inability to process transactions, send invoices or engage in
similar activities.
The Company is currently engaged in a review of its computer systems and
applications, including packaged software used by the Company, that will not be
addressed by the new system. The Company expects to make any modifications
required to resolve year 2000 issues in a timely manner and leave adequate time
to assess and correct any significant issues that may materialize. The Company
is also expecting to initiate formal communications with selected vendors and
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own year 2000 issues. The Company can
give no guarantee that the systems of other companies on which the Company's
systems rely will be converted on time or that failure to convert by another
company or a conversion that is incompatible with the Company's systems would
not have a material adverse effect on the Company. The Company is taking steps
to reduce the likelihood that such failures could affect the Company's systems
through any electronic communications.
The Company does not expect that the review and modifications described
above, excluding the cost of implementing the new system, will require material
expenditures. If the Company is unable to successfully implement the new system
sufficiently in advance
8
<PAGE>
of the year 2000, however, additional expenditures could be required and such
expenditures could be substantial. If modification required to address the
Company's year 2000 issues are not made, or are not timely, the year 2000 issues
could have a material impact on the operations and financial results and
conditions of the Company.
Liquidity and Financial Resources
The Company's total consolidated indebtedness was $142.6 million at June
30, 1998. Interest payments on the 11 5/8% Senior Notes and anticipated interest
and principal payments under the Loan and Security Agreement represent
significant obligations of the Company. The 11 5/8% Senior Notes require
semi-annual interest payments of approximately $6.7 million which commenced in
July 1997. Borrowings under the Loan and Security Agreement bear interest at
floating rates. Approximately $5.0 million of the Revolver is reserved to
provide letters of credit supporting the industrial revenue bond issue with
respect to Quality Foods' Philadelphia facility and other obligations.
The Company's primary sources of liquidity are cash flows from operations
and borrowings under the Revolver. At June 30, 1998 approximately $11.4 million
was available to the Company for borrowings under the Revolver, subject to
inventory and accounts receivable levels. The Company anticipates that its
working capital requirements, capital expenditures and debt service requirements
for the next twelve months will be satisfied through a combination of cash flow
from operations and funds available under the Loan and Security Agreement.
Forward Looking Statements
This report includes "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and section 21E of the Securities
Exchange Act of 1934, as amended. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
Company's expectations are detailed periodically in the Company's SEC filings on
Forms 10-K and 10-Q. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
9
<PAGE>
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended
June 30, 1998. Reference is made to the Company's Annual Report on
Form 10-K and the exhibits filed therewith. The exhibits filed as
part of this form are listed below:
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CFP Group, Inc.
CFP Holdings, Inc.
Custom Food Products, Inc.
QF Acquisition Corp.
/s/ Eric W. Ek
August 7, 1998 -----------------------------------
Eric W. Ek
Vice President,
Chief Financial Officer and
Secretary of CFP Group, Inc.
And CFP Holdings, Inc. and
its subsidiaries
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,332
<SECURITIES> 0
<RECEIVABLES> 11,257
<ALLOWANCES> 153
<INVENTORY> 16,872
<CURRENT-ASSETS> 30,452
<PP&E> 35,197
<DEPRECIATION> 7,779
<TOTAL-ASSETS> 132,383
<CURRENT-LIABILITIES> 15,383
<BONDS> 115,000
0
0
<COMMON> 6,023
<OTHER-SE> (33,177)
<TOTAL-LIABILITY-AND-EQUITY> 132,383
<SALES> 44,276
<TOTAL-REVENUES> 44,276
<CGS> 36,103
<TOTAL-COSTS> 36,103
<OTHER-EXPENSES> 4,972
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,343
<INCOME-PRETAX> (1,142)
<INCOME-TAX> 50
<INCOME-CONTINUING> (1,192)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,003)
<CHANGES> 0
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