<TABLE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
<CAPTION>
<S> <C> <C> <C>
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended
September 30, 2000
[ ] 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
-------------------------
CFP HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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)
QFAC, LLC
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2013 23-2999998
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
-------------------------
5501 Tabor Road
Philadelphia, PA 19120
(Address, Including Zip Code of Registrant's Principal Executive Offices)
215-288-0888
(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 September 30, 2000
----- ---------------------------------
Voting Common Stock - Class A, $.01 par value 14,705
Non-voting common Stock - Class A, $.01 par value 9,859
Non-voting common Stock - Class B $.01 par value 3,886
</TABLE>
<PAGE>
<TABLE>
CFP Group, Inc. and Subsidiaries
FORM 10-Q
INDEX
<CAPTION>
Part I. Financial Information Page #
------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - 3
March 31, 2000 and September 30, 2000
Consolidated Statements of Operations - 4
Three months ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows - 5
Three months ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about market risk 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index
</TABLE>
2
<PAGE>
Part I Financial Information
Item 1. Financial Statements
<TABLE>
CFP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousand, Except Share Data)
(UNAUDITED)
ASSETS
<CAPTION>
March 31, September 30,
2000 2000
------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 606 $ 1,052
Accounts receivable, net of allowance for doubtful accounts of $782,000 and
$269,000 at March 31, 2000 and September 30, 2000, respectively 23,578 18,817
Inventories 23,897 22,601
Prepaid expenses and other current assets 412 1,478
------------------------------------
Total current assets 48,493 43,948
Property and equipment, net 33,465 32,828
Costs in excess of net assets acquired, net 62,022 60,309
Intangible and other assets, net 4,172 3,586
------------------------------------
Total $ 148,152 $ 140,671
====================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 1,043 $ 1,507
Accounts payable 11,923 10,157
Accrued expenses and other current liabilities 5,291 5,175
------------------------------------
Total current liabilities 18,257 16,839
------------------------------------
Long term debt 156,890 164,875
------------------------------------
Commitments and contingencies
Redeemable common stock 1,839 1,839
------------------------------------
Stockholders' 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, 3,196 3,196
14,705 shares issued and outstanding
Nonvoting common stock - Class A, $.01 par value; 25,000 shares authorized, 2,330 2,280
9,959 and 9,859 (inclusive of 1,350 shares classified as redeemable
common stock) shares issued and outstanding at March 31, 2000 and
September 30, 2000, respectively
Nonvoting common stock - Class B, $.01 par value; 25,000 shares authorized, 912 918
3,865 and 3,886 shares (inclusive of 2,162 shares classified as
redeemable common stock) shares issued and outstanding at March 31, 2000
and September 30, 2000, respectively
Stockholders' notes receivable (637) (635)
Accumulated deficit (34,635) (48,641)
------------------------------------
Total stockholders' deficiency (28,834) (42,882)
------------------------------------
Total $ 148,152 $ 140,671
====================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
CFP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
September 30, September 30, September 30, September 30,
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 51,206 $ 51,765 $ 98,679 $ 102,141
Cost of sales 41,730 52,241 80,032 97,012
------------- ----------- ------------ -----------
Gross profit (loss) 9,476 (2,476) 18,647 5,129
Selling, general and administrative expenses 4,357 5,045 8,952 9,524
------------- ----------- ------------ -----------
Income (loss) from operations 5,119 (7,521) 9,695 (4,395)
Interest expense 4,484 4,724 8,822 9,529
------------- ----------- ------------ -----------
Income (loss) before provision for income taxes 635 (12,245) 873 (13,934)
Provision for income taxes 55 6 77 82
------------- ----------- ------------ -----------
Net income (loss) $ 580 $ (12,251) $ 796 $ (14,006)
============= =========== ============ ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
CFP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
<CAPTION>
Six Months Ended
Sept. 30, Sept. 30,
1999 2000
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 796 $(14,006)
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation and amortization 3,663 4,313
Amortization of deferred financing costs and original issue discount 597 592
Changes in assets and liabilities:
Accounts receivable (1,180) 4,761
Inventories (5,546) 1,296
Prepaid expenses and other current assets (439) (1,067)
Accounts payable (1,935) (1,768)
Accrued expenses and other current liabilities (2,151) (114)
------------- -------------
Net cash provided by (used in) operating activities (6,195) (5,993)
------------- -------------
Cash flows from investing activities:
Acquisition of property and equipment (3,870) (1,962)
Other assets 1,021 (5)
------------- -------------
Net cash used in investing activities (2,849) (1,967)
------------- -------------
Cash flows from financing activities:
Borrowings under revolving loan facility 34,515 112,322
Repayment of revolving loan facilities (25,985) (105,596)
Proceeds from issuance of long-term debt - 2,603
Repayment of long-term debt and capitalized lease obligations (497) (881)
Proceeds from sale of common stock - 6
Collection of shareholder notes receivable 98 2
Purchase of common stock (193) (50)
------------- -------------
Net cash provided by financing activities 7,938 8,406
------------- -------------
Net increase (decrease) in cash (1,106) 446
Cash, beginning of period 1,820 606
------------- -------------
Cash, end of period $ 714 $ 1,052
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 8,245 $ 8,910
Income taxes $ 401 $ 96
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
5
<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, including variances identified in the
tracking of inventory at both internal and outside locations. (See Note 7)
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 QFAC, LLC.
("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, 2000. (the "Form 10-K")
The Company's fiscal year is the 52 or 53-week period ending on the Saturday
nearest to March 31. For simplicity of presentation, the Company has described
the interim periods-end and year-end herein as September 30 and March 31,
respectively.
NOTE 2: DEBT COVENANT
The Company incurred substantial indebtedness in connection with the financing
of the acquisition of Quality Foods and is highly leveraged. As of September 30,
2000 the Company had total consolidated indebtedness (including capitalized
lease obligations) of approximately $166.4 million and a stockholders'
deficiency of $42.5 million. The outstanding debt primarily relates to $115.0
million outstanding principal amount of 11.625% Senior Notes due 2004 (the
"Senior Notes") and borrowings under a $45.0 million loan and security agreement
(the "Credit Facility"), referenced in the Form 10-K. During the quarter ended
September 30, 2000, the Company was not in compliance with respect to leverage,
availability and certain other covenants associated with the Credit Facility. In
addition, the Company is in violation with respect to covenants associated with
its Capital Lease Agreement with CIT (Capital Lease Agreement.) Company is
required to make an interest payment on the Senior Notes of $6.7 million in
January and July each year. The Company is
6
<PAGE>
currently in discussions with its lenders and equity partners regarding
future cash requirements and current covenant violations. Based on discussions
with the leaders under its Senior Credit Facility and lenders under its Capital
Lease Agreement, the Company has been granted a temporary waiver. The Company
continues to work with its lenders to finalize and execute documentation for
long term waivers of non-compliance. Failure to resolve liquidity issues could
have a material adverse effect on the future operational results of the Company.
The Company's ability to make scheduled payments of interest or to refinance its
indebtedness will depend on its future operating performance and cash flows,
which are subject to prevailing economic conditions, prevailing interest rate
levels, and financial, competitive, business and other factors, many of which
are beyond its control, as well as the availability of borrowings under the
Credit Facility or successor facilities. If the Company is unable to generate
sufficient cash flows from operations in the future to service its indebtedness,
it will be required to refinance all or a portion of its existing indebtedness,
or to obtain additional financing, or to obtain further waivers of
non-compliance with its existing lenders, or obtain additional equity
investment. There can be no assurance that any such refinancing would be
possible or that any additional debt or equity financing could be obtained. The
inability to make scheduled interest payments, refinance its debt, or obtain
additional financing would have a material adverse effect on the Company.
NOTE 3: NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." As amended by SFAS No. 137 and
SFAS No. 138, SFAS No. 133 is effective for financial statements issued for all
fiscal years beginning after June 15, 2000. SFAS No. 133 requires all
derivatives to be recorded on the balance sheet at fair value. The Company is in
the process of evaluating the effect that this new standard will have on its
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin ("SAB") No. 101, which provides the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. In March 2000, the SEC released SAB No. 101A, which delayed
for one quarter the implementation date of SAB No. 101 for registrants with
fiscal years beginning between December 16, 1999 and March 15, 2000. In June
2000, the SEC released SAB No. 101B, which delayed the implementation date of
SAB No. 101 until no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. The Company is evaluating what impact, if
any, SAB No. 101 may have on its consolidated financial statements.
NOTE 4: INVENTORIES
Inventories consisted of the following:
March 31, September 30,
2000 2000
(In Thousands)
-------------------------------------
Raw materials $ 8,279 $ 8,152
Work-in-process 5,602 3,936
Finished goods 10,384 12,982
----------------- -------------------
Total 24,265 25,070
Reserve (368) (2,469)
----------------- -------------------
Inventories, net $ 23,897 $ 22,601
================= ===================
7
<PAGE>
NOTE 5: LONG-TERM OBLIGATIONS
<TABLE>
Long-term obligations consisted of the following:
<CAPTION>
March 31, September 30,
2000 2000
------------------------------------
(In Thousands)
<S> <C> <C>
Senior notes payable, interest at 11.625% payable semiannually, principal due $ 115,000 $ 115,000
January 2004
Term note payable to a bank, interest at a reference rate (9.25% at September
30, 2000) or Eurodollar rate (6.44% at September 30, 2000) plus 2.25%,
interest payable monthly, principal payable on May 1, 2002 10,000 10,000
Revolving loan payable to a bank, interest at a reference rate (9.25% at
September 30, 2000) or Eurodollar rate (6.44% at September 30, 2000) plus
2.25%, interest payable monthly, expires May 1, 2002 17,815 24,541
Term note payable to a bank, interest at a reference rate (9.25% at September
30, 2000) or Eurodollar rate (6.44% at September 30, 2000) plus 2.25%,
interest payable monthly, principal quarterly at $89,285.72, principal
payable January through February 2006 2,143 1,571
Revenue bond payable to a government financing authority, interest at a
reference rate (6.75% at September 30, 2000) not to exceed 18% payable
monthly, principal payable annually at $100,000 increasing to $400,000
through December 2014 3,952 3,952
Notes payable to a government agency, interest at 2%, payable monthly
through April 2012, collateralized in a second position on the Company's
Philadelphia facility 1,433 1,396
Note payable to a government agency, interest at 0.5% payable monthly
beginning February 1999 through July 2005, principal and interest payable
in equal monthly installments from August 2005 through January 2012,
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 March 2012, collateralized in a shared first position on
the Company's Philadelphia facility. 640 620
Notes payable to a government agency, interest at 2%, payable with principal
monthly through April 2001 104 61
Capital lease obligations payable in varying monthly installments through 2021,
collateralized by buildings and equipment. 5,846 8,240
----------------- ------------------
Total 157,933 166,382
Less current portion (1,043) (1,507)
----------------- ------------------
Long-term debt $ 156,890 $ 164,875
================= ==================
</TABLE>
NOTE 6: SEGMENT INFORMATION
The Company does not maintain separate stand-alone financial statements
prepared in accordance with generally accepted accounting principles for each of
its operating segments. In accordance with SFAS 131, the Company has prepared
the following tables that present information related to each operating segment
included in internal management reports.
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000
(In Thousands)
Custom Quality Corporate
Foods Foods and Other Eliminations Total
------- -------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C>
Net sales to external customers $24,775 $ 26,990 $ 51,765
Interest expense 225 154 $ 4,345 4,724
Depreciation and amortization expense 368 1,768 71 2,207
Segment income (loss) from operations 2,544 (9,906) (159) (7,521)
Long-lived assets 32,063 76,330 108,458 $(120,129) 96,722
Total segments assets 47,498 104,805 108,497 (120,129) 140,671
Capital expenditures 88 658 746
Three Months Ended September 30, 1999
(In Thousands)
Custom Quality Corporate
Foods Foods and Other Eliminations Total
------- -------- ---------- ------------ -------
Net sales to external customers $23,589 $ 27,617 $ 51,206
Interest expense 223 125 $ 4,136 4,484
Depreciation and amortization expense 358 1,400 69 1,827
Segment income (loss) from operations 3,228 2,058 (167) 5,119
Long-lived assets 27,085 84,203 114,041 $(125,135) 100,194
Total segments assets 41,812 109,753 114,622 (125,135) 141,052
Capital expenditures 227 1,497 1,724
Six Months Ended September 30, 2000
(In Thousands)
Custom Quality Corporate
Foods Foods and Other Eliminations Total
------- -------- ---------- ------------ -------
Net sales to external customers $50,071 $ 52,070 $102,141
Interest expense 505 306 $ 8,718 9,529
Depreciation and amortization expense 674 3,533 142 4,349
Segment income (loss) from operations 5,416 (9,493) (318) (4,395)
Long-lived assets 32,063 76,330 108,458 $(120,129) 96,722
Total segments assets 47,498 104,805 108,497 (120,129) 140,671
Capital expenditures 318 1,644 1,962
Six Months Ended September 30, 1999
(In Thousands)
Custom Quality Corporate
Foods Foods and Other Eliminations Total
------- -------- ---------- ------------ -------
Net sales to external customers $45,162 $ 53,517 $ 98,679
Interest expense 456 248 $ 8,118 8,822
Depreciation and amortization expense 722 2,801 140 3,663
Segment income (loss) from operations 6,206 3,814 (325) 9,695
Long-lived assets 27,085 84,203 114,041 $(125,135) 100,194
Total segments assets 41,812 109,753 114,622 (125,135) 141,052
Capital expenditures 453 2,396 2,849
</TABLE>
9
<PAGE>
Note 7: INVENTORY ADJUSTMENTS
The Company in an effort to increase efficiency in operations continuously
evaluates procedures. As the Company began the implementation of new information
systems, standard testing of system accuracy began to show significant
operational yield differences. Through these processes, the Company identified
differences between its perpetual inventory and physical inventory. The Company
has recorded a $7.5 million one-time charge, comprised of $5.2 million in
perpetual inventory adjustments and a $2.3 million adjustment to inventory
reserves and determined its causes as follows: i) increased usage of raw
material and work in process, due to variations in manufacturing process
specifications, ii) an under reporting of raw material usage resulted in
differences between the perpetual and physical inventories, and iii) improper
handling and rotation of both raw materials and finished goods. In an effort to
contain the situation and reduce the risk of future exposure, the Company
performed complete inventory tests of all facilities, implemented new systems
and controls for daily tracking of inventory, as well as created a new logistics
department separate from operations to control and monitor the process.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and Notes thereto included herein.
With the exception of the reported actual results, the information presented
herein contains predictions, estimates and other forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause actual
results, performance, and achievements of the Company to differ materially from
those expressed or implied by such forward-looking statements. Although the
Company believes its plans, intentions and expectations reflected in such
forward-looking statements are based on reasonable assumptions, it can give no
assurance that such plan, intentions, expectations, objects or goals will be
achieved. Important factors that could cause actual results to differ materially
from those included in the forward-looking statements include but are not
limited to those set forth in the Company's Form 10-K Annual Report for the year
ended March 31, 2000 and Form 10-Q Quarterly Report for the first quarter of
fiscal year 2001.
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.
During the period, the Company identified variances in the tracking of
inventory at both internal and outside locations. The Company recorded a $7.5
million one-time charge and determined its causes as follows: i) increased usage
of raw material and work in process, due to
10
<PAGE>
variations in manufacturing process specifications, ii) an under reporting of
raw material usage resulted in differences between the perpetual and physical
inventories, and iii) improper handling and rotation of both raw materials and
finished goods.
Results of Operations
Three months ended September 30, 2000 compared to three months ended September
30, 1999.
Net Sales. Net sales increased by $.6 million or 1.1% to $51.8 million
for the three-month period ended September 30, 2000 from $51.2 million for the
same period in 1999. The increase in net sales dollars is directly correlated to
the increase in pounds sold. Total pounds sold for the quarter, increased 0.8
million or 2.6% to 31.8 million pounds compared to the prior period of 31.0
million pounds. The increase in pounds sold and consequently sales dollars is
predominately due to growth in the Company's Arby's business line, increasing
1.1 million pounds and $1.5 million in net sales dollars in the current period
versus the same period ended 1999. The Company also has experienced growth in
its pre-cooked product line. In addition, net sales in the quarter ended
September 30, 2000 were reduced by $650,000 of additional sales allowances. The
Company, in evaluating outstanding accounts receivable balances, determined that
reserve balances were not sufficient to support outstanding customer discounts
taken under standard sales terms. The adjustment was taken against sales as the
Company continues to do business with these customers. The Company has
implemented procedures to evaluate customer deductions on an ongoing basis to
reduce the risk of future exposures. The net sales price excluding the
above-mentioned sales adjustment remained constant at an average of $1.65 per
pound in comparing the quarter ended September 30, 2000 versus September 30,
1999. The Company continues to develop new products and formulas in an effort to
better serve customers and remain at the forefront of competition.
Gross Profit/ (Loss). Gross profit decreased to a $2.5 million loss for
the three months ended September 30, 2000 from a gross profit of $9.5 million or
18.5% of net sales for the three months ended September 30, 1999. The loss for
the current period is the result of a one-time adjustment to inventory of $7.5
million comprised of $5.2 million in perpetual inventory adjustments and a $2.3
million adjustment to inventory reserves. During the current quarter, the
Company identified variances in the tracking of inventory at both internal and
outside locations. The Company recorded a total $7.5 million one-time inventory
charge and determined its causes as follows: i) increased usage of raw material
and work in process, due to variations in manufacturing process specifications,
ii) an under reporting of raw material usage resulted in differences between the
perpetual and physical inventories, and iii) improper handling and rotation of
both raw materials and finished goods. In an effort to rectify the situation and
reduce the risk of future exposure, the Company performed complete inventory
tests of all facilities, implemented new systems and controls for daily tracking
of inventory, created a new logistics department separate
11
<PAGE>
from operations to control and monitor the process. In addition, the Company is
currently implementing policies and procedures as a result of work performed by
New York Consulting Partners.
Excluding the inventory adjustment, the decrease in gross profit is a result of
higher raw material costs associated with meat purchases. Anticipating the
increase in raw material cost, the Company instituted sales price increases in
the first quarter of the current fiscal year. Management expects the full
benefit being realized in the 3rd and 4th quarters of the current fiscal year.
The increase in sales of the Arby's product line, a lower margin product, also
reduced gross profit. In conjunction with increased demand for product, the
Company has experienced higher overtime and labor costs, which reduced gross
profit for the current period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $5.0 million for the three months ended
September 30, 2000 from $4.4 million for the three months ended September 30,
1999. The increase is due primarily to $427,000 in professional fees in the
current quarter pertaining to New York Consulting Partners.
Income (Loss) from Operations. Income from operations decreased to a
loss of $7.5 million for the three-month period ended September 30, 2000 from
income from operations of $5.1 million for the three-month period ended
September 30, 1999. The decrease is directly related to the increase in raw
material costs and sales volume mix, coupled with the $7.5 million inventory
adjustment and additional sales allowances of $650,000, and increased
professional fees of $427,000.
Interest Expense. Interest expense increased slightly to $4.7 million
for the three-month period ended September 30, 2000 from $4.5 million for the
three-month period ended September 30, 1999. The increase is primarily due to
increased borrowings under the Company's revolving credit facility.
Provision for Income Taxes. Provision for income taxes remained minimal
at $6,000 for the quarter ended September 30, 2000 compared to $55,000 for the
quarter ended September 30, 1999, relates to state income taxes.
Net (Loss) Income. A net loss of $12.3 million was incurred for the
three months ended September 30, 2000 versus net income of $580,000 for the
three months ended September 30, 1999. The net loss for the period is directly
related to the decrease in gross margin, as a result of inventory and sales
adjustments and higher raw material costs, coupled with the increases in SG&A
and interest costs.
Six months ended September 30, 2000 compared to six months ended September 30,
1999.
Net Sales. Net sales increased by $3.5 million or 3.5% to $102.1
million for the six-month period ended September 30, 2000 from $98.7 million for
the same period in 1999. The increase in net sales dollars is directly
correlated to the increase in pounds sold. Total pounds sold for the six months
increased 3.3 million or 5.5% to 62.6 million pounds compared to the prior
period of 59.3 million pounds. The increase in pounds sold and consequently
sales dollars is predominately due to growth in the Company's Arby's business
line, increasing 3.6 million pounds and $4.9 million in net sales dollars in the
current period versus the same period ended 1999. The Company has also
experienced growth in its pre-cooked product line. The sales volume shift has
resulted in a $0.02 decrease in the average sales price per pound to $1.64 per
12
<PAGE>
pound. The Company has implemented price increases earlier in the fiscal year,
which is expected to have a positive impact on average sales prices through the
fiscal year end. Net sales also reflect the additional sales allowances of
$650,000 as discussed above. The Company, in evaluating outstanding accounts
receivable balances, determined that reserve balances were not sufficient to
support outstanding customer discounts taken under standard sales terms. The
adjustment was taken against sales as the Company continues to do business with
these customers.
Gross Profit/ (Loss). Gross profit decreased $13.5 million to $5.1
million or 5.0% of net sales for the six months ended September 30, 2000 from
$18.6 million or 18.9% of net sales for the six months ended September 30, 1999.
The decreases reflect the effect of an adjustment to inventory of $7.5 million
comprised of $5.2 million in perpetual inventory adjustments and a $2.3 million
adjustment to inventory reserves. During the quarter ended September 30, 2000,
the Company identified variances in the tracking of inventory at both internal
and outside locations. The Company recorded the $7.5 million one-time charge and
determined its causes as follows: i) increased usage of raw material and work in
process, due to variations in manufacturing process specifications, ii) an under
reporting of raw material usage resulted in differences between the perpetual
and physical inventories, and iii) improper handling and rotation of both raw
materials and finished goods. In an effort to rectify the situation and reduce
the risk of future exposure, the Company performed complete inventory tests of
all facilities, implemented new systems and controls for daily tracking of
inventory, and created a new logistics department separate from operations to
control and monitor the process. Additionally, higher raw material costs
associated with meat purchases at the Company's Philadelphia, PA facility added
to cost of sales compared with the prior period. Anticipating the higher raw
material costs, the Company instituted sales price increases in the first
quarter. Management expects the full benefit being realized in the 3rd and 4th
quarters of the current fiscal year. The Company has experienced a shift in
product mix to the Company's Arby's product line which generally, is a lower
margin product. Therefore adding to cost of sales on a percentage basis over
prior year. The Company continues to make operational improvements and continues
to employ lower cost formulization strategies to combat higher raw material
costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $9.5 million for the six months ended
September 30, 2000 from $9.0 million for the six months ended September 30,
1999. The increase is due primarily to $427,000 in professional fees in the
current year pertaining to New York Consulting Partners.
Income (Loss) from Operations. Income from operations decreased to $4.4
million loss for the six-month period ended September 30, 2000 from a $9.7
million gain for the six-month period ended September 30, 1999. The decrease is
directly related to the inventory adjustment of $7.5 million and the $650,000
sales allowance adjustment, coupled with the increase in raw material costs and
sales volume mix.
Interest Expense. Interest expense increased to $9.5 million for the
six-month period ended September 30, 2000 from $8.8 million for the six-month
period ended September 30, 1999. The increase is primarily due to increased
borrowings under the Company's revolving credit facility.
Provision for Income Taxes. Provision for income taxes remained stable
at $82,000 for the six months ended September 30, 2000 compared to $77,000 for
the six months ended September 30, 1999.
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Net (Loss) Income. A net loss of $14.0 million was incurred for the six
months ended September 30, 2000 versus net income of $796,000 for the six months
ended September 30, 1999. The net loss for the period is directly related to the
decrease in gross margin, as a result of higher cost of sales, inclusive of the
$7.5 million inventory adjustment, the $650,000 sales allowances adjustment,
coupled with the increase in SG&A for professional fees and interest costs.
Liquidity and Financial Resources
The Company's total consolidated indebtedness at September 30, 2000 was $166.4
million compared to $157.9 million at September 30, 1999. The increase from
prior year is due primarily to increased borrowings under the Company's $45.0
million Loan and Security Agreement ("Credit Agreement") with a financial
institution providing for revolving credit loans ("Revolver") and term loan
options. Borrowings under the Credit Agreement bear interest at floating rates.
Interest payments on the 11 5/8% Senior Notes represent significant obligations
of the Company. The Senior Notes require semi-annual interest payments of
approximately $6.7 million in January and July of each year.
Generally, the Company's primary sources of liquidity are cash flows from
operations and borrowings under the Revolver. The Revolver provides for
borrowings up to $45.0 million, subject to a borrowing base and other
limitations, including amounts outstanding under term loans, letters of credit
and other borrowing instruments. The Company anticipates that its working
capital requirements, capital expenditures and debt service requirements will be
satisfied through a combination of cash flows from operations and funds
available under the Credit Facility. During the quarter ended September 30,
2000, the Company was not in compliance with respect to leverage, availability
and certain other covenants associated with the Credit Facility. Specifically,
based on the borrowing base and other limitations, the Company was overdrawn by
$1.5 million under the Revolver at the quarter end September 30, 2000. In
addition, the Company is in violation with respect to covenants associated with
its Capital Lease Agreement with CIT (Capital Lease Agreement.) The Company is
currently working with its lenders and equity sponsors to resolve the default
status. Based on discussions with the lenders under its Senior Credit facility
and lenders under its Capital Lease Agreement, the Company has been granted a
temporary waiver. The Company continues to work with its lenders to finalize and
execute documentation for long term waivers of non-compliance. The Company is in
compliance with the terms of its indenture, for its Senior Notes. The covenants
are measured on a twelve-month rolling basis. Therefore, the Company will need
to obtain waivers of non-compliance from its lenders on a go-forward basis.
Currently the Company's liquidity is a function of the Company's ability to
control cash and to reduce the outstanding Revolver balance. Failure to obtain
waivers could have a material adverse effect on future operating results. The
Company is currently scheduled to make an interest payment on the senior
subordinated notes of $6.7 million in January 2001. The Company expects to solve
liquidity issues, however, no assurance can be given that the Company will be
able to do so on an economic basis. Failure to resolve liquidity issues could
have a material adverse effect on the future operational results of the Company.
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The Company's ability to make scheduled payments of interest or to refinance its
indebtedness will depend on its future operating performance and cash flow,
which are subject to prevailing economic conditions, prevailing interest rate
levels, and financial, competitive, business and other factors, many of which
are beyond its control, as well as the availability of borrowings under the
Credit Facility or successor facilities. If the Company is unable to generate
sufficient cash flow from operations in the future to service its indebtedness,
it will be required to refinance all or a portion of its existing indebtedness,
or to obtain additional financing, or obtain further waivers of non-compliance
with existing lenders, or require additional equity infusion. There can be no
assurance that any such refinancing would be possible or that any additional
debt or equity financing could be obtained. The inability to obtain additional
financing would have a material adverse effect on the Company.
For the six months ended September 30, 2000, cash used in operations totaled
$6.0 million; compared to $6.2 million cash used in operations for the six
months ended September 30, 1999. Cash used in operations is driven by the net
loss of $14.0 million. Depreciation and amortization represented a source of
cash of $4.3 million. Working Capital provided $3.1 million in cash primarily
due to decreases in accounts receivable of $4.8 million and decreases in
inventory of $1.3 million, offset by increases in prepaid accounts and decreases
in accounts payable of $1.1 million and $1.8 million respectively.
Cash used in investing activities was approximately $2.0 million for the six
months ended September 30, 2000, and is a result of additional capital
expenditures, compared to $3.9 million in capital expenditures for the
comparable period ending September 30, 1999.
Cash provided by financing activities totaled $8.4 million for the six months
ended September 30, 2000 compared to $7.9 million for the same period ended
1999. The increase is primarily due to increased borrowings under the Credit
Facility. At September 30 2000, the Company's total debt, net of cash was $165.3
million. Debt levels have increased, driven by an increase in working capital
requirements, and lower earnings as a result of the above-mentioned factors.
Item 3. Quantitative and Qualitative Disclosures about market risk.
Long-term Debt
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's current and future debt obligations, which have not
changed materially from those disclosed in the Company's Form 10-K for the year
ended March 31, 2000.
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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
September 30, 2000. 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
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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.
QFAC, LLC.
November 13, 2000 /s/ Ronald J. Gallo
----------------------------------
Ronald J. Gallo
Senior Vice President and
Chief Financial Officer
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