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
December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SEURITIES 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 (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification
Organization) Code Number) Number)
CFP GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2013 95-4616486
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification
Organization) Code Number) Number)
CUSTOM FOOD PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
California 2013 95-3760291
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification
Organization) Code Number) Number)
QFAC, LLC
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2013 23-2999998
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification
Organization) Code Number) 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.
<TABLE>
<CAPTION>
Class Outstanding at December 31, 1999
----- --------------------------------
<S> <C>
Voting Common Stock - Class A, $.01 par value 14,705
Non-voting common Stock - Class A, $.01 par value 11,675
Non-voting common Stock - Class B $.01 par value 3,865
</TABLE>
<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, 1999 and December 31, 1999
Consolidated Statements of Operations - 2
Three months and nine months ended
December 31, 1999 and 1998
Consolidated Statements of Cash Flows - 3
Nine months ended December 31, 1999 and 1998
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 10
about Market Risk
Item 4. Subsequent Events and Disclosure 11
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures
Exhibit Index
<PAGE>
Part I Financial Information
Item 1. Financial Statements
<TABLE>
CFP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except share data)
(UNAUDITED)
ASSETS
<CAPTION>
March 31, December 31,
1999 1999
------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,820 $ 1,275
Accounts receivable, net of allowance for doubtful accounts of $369,000 and
$434,000 at March 31, 1999 and December 31, 1999, respectively 15,448 18,429
Inventories 16,839 20,129
Prepaid expenses and other current assets 692 924
------------------- -------------------
Total current assets 34,799 40,757
Property and equipment, net 29,922 32,073
Costs in excess of net assets acquired, net 65,195 62,733
Intangible and other assets, net 6,488 4,477
------------------- -------------------
Total $ 136,404 $ 140,040
=================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 1,113 $ 816
Accounts payable 8,904 8,007
Accrued expensed and other current liabilities 6,689 9,239
------------------- -------------------
Total current liabilities 16,706 18,062
------------------- -------------------
Long term debt 145,895 147,641
------------------- -------------------
Commitments and contingencies
Redeemable common stock 2,319 2,319
------------------- -------------------
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,
14,705 shares issued and outstanding 3,196 3,196
Nonvoting common stock - Class A, $.01 par value; 25,000 shares
authorized, 11,241 and 11,675 (inclusive of 3,011 shares classified as
redeemable common stock) shares issued and outstanding at March 31,
1999 and December 31, 1999, respectively 2,204 2,330
Nonvoting common stock - Class B, $.01 par value; 25,000 shares
authorized, 3,059 and 3,865 shares (inclusive of 2,162 shares classified
as redeemable common stock) issued and outstanding as March 31, 1999
and December 31, 1999, respectively 623 912
Stockholders' notes receivable (203) (637)
Accumulated deficit (34,336) (33,783)
------------------- -------------------
Total stockholders' deficiency (28,516) (27,982)
------------------- -------------------
Total $ 136,404 $ 140,040
=================== ===================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
1
<PAGE>
<TABLE>
CFP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
December 31, December 31, December 31, December 31,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 46,137 $ 57,312 $ 135,483 $ 155,991
Cost of Sales 37,376 48,131 109,441 128,163
--------- --------- --------- ---------
Gross Profit 8,761 9,181 26,042 27,828
Selling, general and administrative expenses 4,848 5,004 14,398 13,956
Terminated transaction related costs 256
--------- --------- --------- ---------
Income from operations 3,913 4,177 11,388 13,872
Interest expense 4,306 4,434 13,002 13,256
--------- --------- --------- ---------
(Loss) Income before income taxes and extraordinary (393) (257) (1,614) 616
item
(Benefit) Provision for income taxes (14) 231 63
--------- --------- --------- ---------
Net (loss) income before extraordinary item (393) (243) (1,845) 553
Extraordinary loss on early extinguishment of debt 1,003
--------- --------- --------- ---------
Net (loss) income $ (393) $ (243) $ (2,848) $ 553
========= ========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
CFP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
<CAPTION>
Nine Months Ended
Dec. 31, Dec. 31,
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (2,848) $ 553
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation and amortization 4,850 5,627
Amortization of deferred financing costs and original issue discount 898 896
Extraordinary loss on early extinguishment of debt 1,003
Changes in assets and liabilities:
Accounts receivable 339 (2,981)
Inventories 1,387 (3,290)
Prepaid expensed and other current assets (113) (232)
Accounts payable (1,720) (897)
Accrued expenses and other current liabilities 3,850 2,550
-------- --------
Net cash provided by operating activities 7,646 2,226
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (4,385) (5,218)
Other assets (583) 1,017
-------- --------
Net cash used in investing activities (4,968) (4,201)
-------- --------
Cash flows from financing activities:
Borrowings under revolving loan facility 9,144 81,373
Repayment of revolving loan facilities (10,500) (79,279)
Proceeds from issuance of long-term debt 14,127
Repayment of long-term debt and capitalized lease obligations (14,495) (645)
Deferred financing costs (615)
Shareholder notes receivable (434)
Sale of common stock 415
-------- --------
Net cash (used in) provided by financing activities (2,339) 1,430
-------- --------
Net increase (decrease) in cash 339 (545)
Cash, beginning of period 1,344 1,820
-------- --------
Cash, end of period $ 1,683 $ 1,275
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 9,139 $ 8,949
Income taxes $ 131 $ 415
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
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 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, 1999.
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 December 31, 1999 and 1998 were 13 weeks in duration. The
Company's nine month periods ended on the Saturday nearest December 31, 1999 and
1998 were 39 weeks in duration. For simplicity of presentation, the Company has
described the interim periods and year end period herein as ending on December
31 and March 31, respectively.
NOTE 2: INVENTORIES
Inventories consisted of the following:
March 31, December 31
1999 1999
------------------ ------------------
(In Thousands) (In Thousands)
Raw materials $ 5,820 $ 7,680
Work-in-process 3,773 3,893
Finished goods 7,918 8,785
------------------ ------------------
Total 17,511 20,358
Reserve (672) (229)
------------------ ------------------
Inventories, Net $ 16,839 $ 20,129
================== ==================
4
<PAGE>
<TABLE>
NOTE 3: LONG-TERM OBLIGATIONS
<CAPTION>
March 31, Dec. 31,
1999 1999
----------------- --------------
(In Thousands)
<S> <C> <C>
Long-term obligations consisted of the following:
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 (8.50% at December 31,
1999) or Eurodollar rate (5.83% at December 31, 1999) 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 (8.50% at December
31, 1999) or Eurodollar rate (5.83% at December 31, 1999) plus 2.25%, interest
payable monthly, expires May 1, 2002 5,763 7,857
Term note payable to a bank, interest at a reference rate (8.50% at December 31,
1999) or Eurodollar rate (5.83% at December 31, 1999) plus 2.25% interest
payable monthly, principal quarterly at $89,285.72, principal payable January
through February 2006 2,500 2,312
Revenue bond payable to a government financing authority, interest at a reference
rate (5.45% at December 31, 1999) not to exceed 18% payable monthly,
principal payable annually at $100,000 increasing to $400,000 through
December 2014 4,100 4,100
Notes payable to a government agency, interest at 2%, payable monthly through April
April 2012, collateralized in a second position on the Company's Philadelphia
facility 1,545 1,476
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. 678 650
Notes payable to a government agency, interest at 2%, payable with principal
monthly through April 2001 206 138
Capital lease obligations payable in varying monthly installments through 2021,
collateralized by buildings and equipment with a net book value of $5,787,000
at March 31, 1999 and $5,474,000 at December 31, 1999 6,216 5,915
----------------- --------------
Total 147,008 148,457
Less current portion (1,113) (816)
----------------- --------------
Long-term debt $ 145,895 $ 147,641
================= ==============
</TABLE>
5
<PAGE>
NOTE 4: SEGMENT INFORMATION
<TABLE>
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 which present information related to each operating segment
included in internal management reports.
<CAPTION>
Three Months Ended December 31, 1999
(In Thousands)
Custom Quality Corporate
Foods Foods and Other Eliminations Total
----- ----- --------- ------------ -----
<S> <C> <C> <C> <C> <C>
Net sales to external customers $ 26,863 $ 30,449 $ 57,312
Interest expense 82 120 4,232 4,434
Depreciation and amortization expense 489 1,402 73 1,964
Segment profit (loss) from operations 2,618 1,725 (166) 4,177
Long-lived assets 26,685 85,918 109,414 (122,734) 99,283
Total segments assets 42,113 110,984 109,677 (122,734) 140,040
Capital expenditures 183 1,169 1,352
Three Months Ended December 31, 1998
(In Thousands)
Custom Quality Corporate
Foods Foods and Other Eliminations Total
----- ----- --------- ------------ -----
Net sales to external customers $ 22,238 $ 23,899 $ 46,137
Interest expense 232 76 3,998 4,306
Depreciation and amortization expense 407 1,164 73 1,644
Segment profit (loss) from operations 3,255 4,702 (4,044) 3,913
Long-lived assets 27,467 87,122 121,211 (133,848) 101,952
Total segments assets 39,447 103,813 121,225 (133,848) 130,637
Capital expenditures 7 1,139 1,146
Nine Months Ended December 31, 1999
(In Thousands)
Custom Quality Corporate
Foods Foods and Other Eliminations Total
----- ----- --------- ------------ -----
Net sales to external customers $72,025 $ 83,966 $ 155,991
Interest expense 538 368 12,350 13,256
Depreciation and amortization expense 1,211 4,203 213 5,627
Segment profit (loss) from operations 8,824 5,539 (491) 13,872
Long-lived assets 26,685 85,918 109,414 (122,734) 99,283
Total segments assets 42,113 110,984 109,677 (122,734) 140,040
Capital expenditures 636 3,565 4,201
Nine Months Ended December 31, 1998
(In Thousands)
Custom Quality Corporate
Foods Foods and Other Eliminations Total
----- ----- --------- ------------ -----
Net sales to external customers $ 65,522 $ 69,961 $ 135,483
Interest expense 718 261 12,023 13,002
Depreciation and amortization expense 1,140 3,497 213 4,850
Extraordinary item 1,003 1,003
Segment profit (loss) from operations 8,136 4,078 (826) 11,388
Long-lived assets 27,467 87,122 121,211 (133,848) 101,952
Total segments assets 39,447 103,813 121,225 (133,848) 130,637
Capital expenditures 855 4,113 4,968
</TABLE>
6
<PAGE>
NOTE 5: SUBSEQUENT EVENTS AND DISCLOSURE
Stock Repurchase
On January 3, 2000, the Company entered into an agreement with a shareholder to
purchase 1,716 shares of common stock and 1,124 option shares on or before June
30, 2000 for a gross price of $500 per share. On January 4, 2000, the Company
paid $858,000 for the 1,716 shares of common stock and recorded a liability of
$237,000 to account for the planned purchase of the 1,124 option shares. The
Company expects to purchase the 1,124 option shares during the Company's first
fiscal quarter of Fiscal Year 2001
New California Manufacturing Facility
On January 27, 2000, the Company signed a letter of intent with Cold Supplychain
Integrated, Inc. (CSI) to construct a new 60,000 square foot facility in La
Habra, California. The Company intends to lease the facility for a minimum of 10
years and will guarantee a minimum level of cold storage volume to CSI over the
lease term. The Company plans to relocate all of its operations from its
existing Montebello and Vernon locations to the newly built facility which is
expected to be completed on or about March 2001.
Customer Bankruptcy Filing
On February 3, 2000, the Company was notified that its customer, Ameriserve Food
Distribution, Inc., which is a primary distributor to Arby's, Inc., filed
Chapter 11 Bankruptcy proceedings. The Company has approximately $600,000 of
accounts receivable outstanding from this customer as of February 3, 2000.
Currently, the Company anticipates collecting substantially all of the
outstanding balance. Also, the Company has received written assurance from
ARCOP, Inc., Arby's purchasing cooperative, that any credit loss resulting from
the aforementioned filing will be recouped at a future time. Therefore, the
Company believes that it will not be negatively impacted as a result of this
filing.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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 December 31, 1999 compared to Three months ended December 31,
1998.
Net Sales. Net sales increased by $11.2 million or 24.2% to $57.3
million for the quarter ended December 31, 1999 from $46.1 million for the
quarter ended December 31, 1998. Total pounds sold by the Company increased by
25.9% to 35.0 million pounds for the quarter ended December 31, 1999 from 27.8
million pounds for the quarter ended December 31, 1998. The increase in sales
was a result of increases in sales at both the Quality Foods and Custom Foods
divisions of the Company. Sales of the Company's higher margin value added
products increased by 30.7% and 17.9%, respectively, for the Quality Foods and
Custom Foods divisions. In addition, sales at the Company's Custom Foods
division were bolstered by increased sales to Arby's. The net sales price, on a
per pound basis, decreased to $1.64 from $1.66.
Gross Profit. Gross Profit increased to $9.2 million for the quarter
ended December 31, 1999 from $8.8 million for the quarter ended December 31,
1998. This $.4 million increase was due to the increase in sales. The gross
margin decreased to 16.0% for the quarter ended December 31, 1999 from 19.0% for
the quarter ended December 31, 1998 due to higher meat costs, lower average
sales prices, higher fixed operating costs and higher depreciation expense. The
lower relative margin is also a result of the increased sales to Arby's, which
are priced on a "cost plus" basis and provide lower margins than the Company's
other value added products.
7
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $5.0 million for the quarter ended December 31,
1999 and $4.8 million for the quarter ended December 31, 1998. This $.2 million
increase was due to an increase in professional fees and bad debt reserves and
was reduced by the Company capitalizing certain personnel costs directly related
to the implementation of a new enterprise wide system.
Income from Operations. As a result of the foregoing items, income from
operations increased to $4.2 million for the quarter ended December 31, 1999
from $3.9 million for the quarter ended December 31, 1998.
Interest Expense. Interest expense increased minimally to $4.4 million
for the quarter ended December 31, 1999 from $4.3 million for the quarter ended
December 31, 1998 primarily as a result of increased borrowings under the
Company's revolving credit facility.
Provision for Income Taxes. Provision for income taxes decreased to
$(14,000) for the quarter ended December 31, 1999 from $0 for the quarter ended
December 31, 1998.
Net Income (Loss). Net loss of $243,000 was realized for the quarter
ended December 31, 1999 versus a net loss of $393,000 for the quarter ended
December 31, 1998 due to the net impact of the foregoing items.
Nine months ended December 31, 1999 compared to Nine months ended December 31,
1998.
Net Sales. Net sales increased by $20.5 million or 15.1% to $156.0
million for the nine month period ended December 31, 1999 from $135.5 million
for the nine month period ended December 31, 1998. Total pounds sold by the
Company increased by 18.5% to 94.3 million pounds for the nine months ended
December 31, 1999 from 79.6 million pounds for the nine months ended December
31, 1998. The increase in sales was a result of increases at both the Quality
Foods and Custom Foods divisions of the Company. Sales of the Company's higher
margin value added products increased by 22% and 13.5%, respectively, for the
Quality Foods and Custom Foods divisions. In addition, sales at the Company's
Custom Foods Division were bolstered by increased sales to Arby's. The net sales
price, on a per pound basis, decreased to $1.65 from $1.70 primarily as a result
of passing lower raw materials prices to customers of our Custom Foods division
who are charged on a "cost plus" basis, primarily Arby's, and lower average
sales prices related to sales to Chef America.
Gross Profit. Gross Profit increased to $27.8 million for the nine
months ended December 31, 1999 from $26.0 million for the nine months ended
December 31, 1998. This $1.8 million increase was due to the increase in sales.
The gross margin decreased to 17.8% for the nine months ended December 31, 1999
from 19.2% for the nine months ended December 31, 1998 due to higher meat costs,
primarily at the Company's Quality Foods division, lower average sales prices,
higher fixed operating costs, and higher depreciation expense.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $14.0 million for the nine months ended
December 31, 1999 from $14.4 million for the nine months ended December 31,
1998. This $.4 million decrease is due primarily to lower expenses reflecting
the Company's capitalization of certain personnel costs directly related to the
implementation of a new enterprise wide system, lower bonus accrual, and a
continued focus on reducing costs.
Terminated Transaction Related Costs. In the nine months ended December
31, 1998, the Company expensed $256,000 in transactions costs associated with a
potential acquisition which was terminated.
Income from Operations. As a result of the foregoing items, income from
operations increased to $13.9 million for the nine month period ended December
31, 1999 from $11.4 million for the period ended December 31, 1998.
Interest Expense. Interest expense increased minimally to $13.3 million
for the nine month period ended December 31, 1999 from $13.0 million for the
nine month period ended December 31, 1998 primarily as a result of increased
borrowings under the Company's revolving credit facility.
8
<PAGE>
Provision for Income Taxes. Provision for income taxes decreased to
$63,000 for the nine month period ended December 31, 1999 from $231,000 for the
nine month period ended December 31, 1998.
Extraordinary Loss. In the first quarter of fiscal 1999, the Company
used proceeds from new borrowings under its 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 $1.0 million was recorded for the nine months ended December 31,
1998. This amount principally consisted of unamortized deferred financing costs.
Net Income (Loss). Net income of $553,000 was realized for the nine
months ended December 31, 1999 versus a net loss of $2.8 million for the nine
months ended December 31, 1998 due to the net impact of the foregoing items.
Year 2000 Issue
Introduction: The term "Year 2000 issue" is a general term used to
describe the various problems that may result from the improper processing of
dates and date sensitive calculations by computers and other machinery as the
Year 2000 is approached and reached. These problems generally arise in cases
where 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.
State of Readiness: The Company's Year 2000 readiness program included
implementing a new Year 2000 compliant Enterprise Wide System which was
successfully implemented at the end of calendar 1999 in the Company's Quality
Foods Division. The Company is in the process of implementing the system in the
Company's Custom Foods Division, whose prior system was already Year 2000
compliant. The Company has also completed a review of its computer systems and
applications and has made required corrections; this includes packaged software
used by the Company, which will not be addressed by the new system. The Company
has completed performing tests and addressing both potential and actual issues
that have been identified with no problems encountered. As part of the Year 2000
program, the Company initiated 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 have been 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 has taken steps
to reduce the likelihood that such failures could affect the Company's systems
through any electronic communications. Since the beginning of the Year 2000, the
Company has not experienced any Year 2000 problems internally or with any third
parties.
Costs to Address the Year 2000 Issue: The Company does not expect that
the review and modifications of the Company's current enterprise systems as
described above, excluding the cost of implementing the new system, will require
material expenditures. The Company's net total expenditures on the Ross System
implementation through December 31, 1999 are $1,293,000. The Company currently
estimates the aggregate cost of its new system (Ross) is approximately
$1,300,000, although the amount could be greater. The cost estimate includes
expenditures incurred pursuant to the Company's technology upgrade and business
process reengineering programs occurring concurrently but not directly related
to Year 2000 issues. In addition, a portion of the estimated total costs of the
Ross System implementation will be funded by reallocation of existing resources
rather than incurring incremental costs. This reallocation of resources is not
expected to have a significant impact on the day-to-day operations of the
Company. The Company's aggregate cost estimate does not include costs that may
be incurred by the Company as a result of the failure of any third parties,
including suppliers, to become Year 2000 ready or costs to implement any
contingency plans. Such costs may be material.
Risks Presented by the Year 2000 Issue: If the company is unable to
address all identified system issues, the Company believes risks are minimal
with little or no material adverse impact on the operations and financial
results and conditions of the Company. However if any third parties who provide
goods and services that are critical to the Company's business activities fail
to appropriately address their Year 2000 issues, there could be a material
9
<PAGE>
adverse effect on the Company's financial condition and results of operations.
Responses from material third parties ("External Parties") also indicate a
greater degree of Year 2000 compliance than anticipated. At this time, the
Company believes that the most reasonably likely "worst-case" scenario relating
to Year 2000 involves potential disruptions in areas in which the Company's
operations must rely on third parties, such as suppliers, whose systems may not
work properly after January 1, 2000. While such system failures could either
directly or indirectly affect important operations of the Company and its
subsidiaries in a significant manner, the Company cannot at present estimate
either the likelihood or the potential cost of such failure. Since the beginning
of the Year 2000, the Company has not experienced any Year 2000 problems
internally or with any third parties.
Contingency Plans: Based on the assessment efforts to date, the Company
does not believe that the Year 2000 issue will have a material adverse effect on
its financial condition or results of operations. The Company will develop
appropriate contingency plans in the event that a significant exposure is
identified.
Readers are cautioned that forward-looking statements contained under
this "Year 2000" caption should be read in conjunction with the Company's
disclosures under the heading "Forward-Looking Statements" below. Additionally,
these statements are Year 2000 Readiness Disclosure in conformance with the Year
2000 Information and Readiness Disclosure Act of 1998 (Public law 105-271, 112
Stat. 2386) enacted on October 19,1998.
Liquidity and Financial Resources
The Company's total consolidated indebtedness was $148.5 million at
December 31, 1999. Interest payments on the 11.625% Senior Notes and anticipated
interest and principal payments under the Loan and Security Agreement represent
significant obligations of the Company. The 11.625% 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 revolving credit portion of
the Loan and Security Agreement (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. The Revolver provides for
borrowings up to $40.0 million, subject to a borrowing base and other
limitations, including amounts outstanding under term loans, letters of credit
and other borrowing instruments. At December 31, 1999 approximately $13.3
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.
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, 1999.
10
<PAGE>
Item 4. Subsequent Events and Disclosure
Stock Repurchase
On January 3, 2000, the Company entered into an agreement with a shareholder to
purchase 1,716 shares of common stock and 1,124 option shares on or before June
30, 2000 for a gross price of $500 per share. On January 4, 2000, the Company
paid $858,000 for the 1,716 shares of common stock and recorded a liability of
$237,000 to account for the planned purchase of the 1,124 option shares. The
Company expects to purchase the 1,124 option shares during the Company's first
fiscal quarter of Fiscal Year 2001
New California Manufacturing Facility
On January 27, 2000, the Company signed a letter of intent with Cold Supplychain
Integrated, Inc. (CSI) to construct a new 60,000 square foot facility in La
Habra, California. The Company intends to lease the facility for a minimum of 10
years and will guarantee a minimum level of cold storage volume to CSI over the
lease term. The Company plans to relocate all of its operations from its
existing Montebello and Vernon locations to the newly built facility which is
expected to be completed on or about March 2001.
Customer Bankruptcy Filing
On February 3, 2000, the Company was notified that its customer, Ameriserve Food
Distribution, Inc., which is a primary distributor to Arby's, Inc., filed
Chapter 11 Bankruptcy proceedings. The Company has approximately $600,000 of
accounts receivable outstanding from this customer as of February 3, 2000.
Currently, the Company anticipates collecting substantially all of the
outstanding balance. Also, the Company has received written assurance from
ARCOP, Inc., Arby's purchasing cooperative, that any credit loss resulting from
the aforementioned filing will be recouped at a future time. Therefore, the
Company believes that it will not be negatively impacted as a result of this
filing.
11
<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
December 31, 1999. 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
12
<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.
QFAC, LLC
February ___, 1999
---------------------------------------
Eric W. Ek
Senior Vice President,
Chief Financial Officer and
Secretary of CFP Group, Inc.
and CFP Holdings, Inc. and
its subsidiaries
13
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