<PAGE>
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UNITED STATES
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 (NO FEE REQUIRED)
For the quarterly period ended September 26, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______ to _____
Commission file numbers 333-50305 and 333-50305-01
----------------
Eagle Family Foods Holdings, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 13-3983598
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
</TABLE>
Eagle Family Foods, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 13-3982757
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
220 White Plains Road 10591
Tarrytown, NY (Zip Code)
(Address of principal executive office)
</TABLE>
Registrants' telephone number, including area code: (914) 631-3100
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 9, 1998, there were 970,880 shares of Common Stock, par value
$.01 per share, of Eagle Family Foods Holdings, Inc. and 10,000 shares of Common
Stock, par value $.01 per share, of Eagle Family Foods, Inc. outstanding,
respectively.
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<PAGE>
TABLE OF CONTENTS
Part I. Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
--------
Eagle Family Foods, Inc.
<S> <C>
Eagle Family Foods, Inc. Statements of Operations for the three months
ended September 26, 1998 and September 27, 1997..................................................... 2
Eagle Family Foods, Inc. Balance Sheets, as of September 26, 1998 and June 27, 1998......................... 3
Eagle Family Foods, Inc. Statements of Cash Flows for the three months
ended September 26, 1998 and September 27, 1997..................................................... 4
Eagle Family Foods Holdings, Inc.
Eagle Family Foods Holdings, Inc. Consolidated Statements of Operations for the three months
ended September 26, 1998 and September 27, 1997......................................................... 5
Eagle Family Foods Holdings, Inc. Consolidated Balance Sheets, as of September 26, 1998 and
September 27, 1997...................................................................................... 6
Eagle Family Foods Holdings, Inc. Consolidated Statements of Cash Flows for the three months
ended September 26, 1998 and September 27, 1997..................................................... 7
Notes to the Financial Statements........................................................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................................................... 14
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
EAGLE FAMILY FOODS, INC.
Statements of Operations
For the Three Months Ended September 26, 1998
and September 27, 1997
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 26, September 27,
1998 1997
------------- -------------
<S> <C> <C>
Net sales......................................................................... $50,957 $52,833
Cost of goods sold................................................................ 22,558 25,290
------------- -------------
Gross profit...................................................................... 28,399 27,543
Distribution expense.............................................................. 2,978 4,231
Marketing expense................................................................. 12,587 12,646
General and administrative expense................................................ 2,596 3,644
Amortization of intangibles....................................................... 7,113 731
------------- -------------
Operating income.................................................................. 3,125 6,291
Interest expense, net............................................................. 6,976 -
------------- -------------
Income (loss) before income taxes................................................. (3,851) 6,291
Income tax expense (benefit)...................................................... (1,350) 2,615
------------- -------------
Net income (loss)................................................................. $(2,501) $ 3,676
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
EAGLE FAMILY FOODS, INC.
Balance Sheets
As of September 26, 1998 and June 27, 1998
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
September 26, June 27,
1998 1998
-------------- --------------
Assets (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.............................................................. $ 2,258 $ 1,812
Accounts receivable, net............................................................... 16,046 12,368
Inventories (Note 3).................................................................. 34,684 32,001
Other current assets................................................................... 3,030 261
-------------- --------------
Total Current Assets................................................................ 56,018 46,442
Property and Equipment, Net (Note 4)..................................................... 27,274 24,791
Notes Receivable from Related Parties (Note 7)........................................... 825 825
Intangibles, Net (Note 5)............................................................... 296,841 303,950
Deferred Income Taxes.................................................................... 15,626 14,246
Other Noncurrent Assets.................................................................. 8,761 8,986
-------------- --------------
Total Assets............................................................................. $405,345 $399,240
============== ==============
Liabilities and Stockholder's Equity
Current Liabilities:
Current portion of long-term debt (Note 6)............................................. $ 1,250 $ 1,250
Accounts payable....................................................................... 9,008 9,665
Other accrued liabilities.............................................................. 11,791 8,122
Accrued interest....................................................................... 4,816 7,209
-------------- --------------
Total Current Liabilities................................................................ 26,865 26,246
-------------- --------------
Long-Term Debt (Note 6).................................................................. 325,250 317,000
-------------- --------------
Commitments and Contingencies
Stockholder's Equity:
Common stock, $0.1 par value, 250,000 shares authorized, 10,000 shares
issued and outstanding.............................................................. 1 1
Additional paid-in capital............................................................. 82,500 82,500
Accumulated deficit.................................................................... (28,945) (26,444)
Accumulated translation adjustment..................................................... (326) (63)
-------------- --------------
Total Stockholder's Equity.......................................................... 53,230 55,994
-------------- --------------
Total Liabilities and Stockholder's Equity............................................... $405,345 $399,240
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
EAGLE FAMILY FOODS, INC.
Statements of Cash Flows
For the Three Months Ended September 26, 1998
and September 27, 1997
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 26, September 27,
1998 1997
-------------- -------------
Cash Flows Used In Operating Activities:
<S> <C> <C>
Net income (loss)............................................................................... $(2,501) $ 8,929
Adjustments to reconcile net income (loss) to net cash from (used in) operating activities
Depreciation and amortization................................................................ 8,047 4,577
Deferred taxes............................................................................... (1,380) -
Net change in current assets and liabilities
Accounts receivable........................................................................ (3,678) 1,527
Inventories................................................................................ (2,683) (19,740)
Accounts payable........................................................................... (657) (1,038)
Other assets............................................................................... (2,769) -
Other liabilities.......................................................................... 1,078 (4,329)
-------------- -------------
Cash used in operating activities............................................................... (4,543) (10,074)
-------------- -------------
Cash Used In Investing Activities:
Capital expenditures............................................................................ (3,261) (2,390)
-------------- -------------
Cash used in investing activities............................................................... (3,261) (2,390)
-------------- -------------
Cash From Financing Activities:
Proceeds from long-term debt.................................................................... 8,500 -
Payment of long-term debt....................................................................... (250) -
Net increase in intercompany investment......................................................... - 12,435
-------------- -------------
Cash from financing activities.................................................................. 8,250 12,435
-------------- -------------
Increase (decrease) in cash and cash equivalents.................................................. 446 (29)
Cash and cash equivalents at beginning of period.................................................. 1,812 33
-------------- -------------
Cash and cash equivalents at end of period........................................................ $ 2,258 $ 4
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
EAGLE FAMILY FOODS HOLDINGS, INC.
Consolidated Statements of Operations
For the Three Months Ended September 26, 1998
and September 27, 1997
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 26, September 27,
1998 1997
------------- -------------
<S> <C> <C>
Net sales................................................................................... $50,957 $52,833
Cost of goods sold.......................................................................... 22,558 25,290
------------- -------------
Gross profit................................................................................ 28,399 27,543
Distribution expense........................................................................ 2,978 4,231
Marketing expense........................................................................... 12,587 12,646
General and administrative expense.......................................................... 2,603 3,644
Amortization of intangibles................................................................. 7,113 731
------------- -------------
Operating income............................................................................ 3,118 6,291
Interest expense, net....................................................................... 6,976 -
------------- -------------
Income (loss) before income taxes........................................................... (3,858) 6,291
Income tax expense (benefit)................................................................ (1,350) 2,615
------------- -------------
Net income (loss)........................................................................... $(2,508) $ 3,676
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
EAGLE FAMILY FOODS HOLDINGS, INC.
Consolidated Balance Sheets
As of September 26, 1998 and June 27, 1998
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
September 26, June 27,
1998 1998
-------------- --------------
Assets (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.............................................................. $ 2,258 $ 1,812
Accounts receivable, net............................................................... 16,046 12,368
Inventories (Note 3).................................................................. 34,684 32,001
Other current assets................................................................... 3,030 261
-------------- --------------
Total Current Assets................................................................ 56,018 46,442
Property and Equipment, Net (Note 4)..................................................... 27,274 24,791
Intangibles, Net (Note 5)............................................................... 296,841 303,950
Deferred Income Taxes.................................................................... 15,626 14,246
Other Noncurrent Assets.................................................................. 8,761 8,986
-------------- --------------
Total Assets............................................................................. $404,520 $398,415
============== ==============
Liabilities and Stockholders' Deficit
Current Liabilities:
Current portion of long-term debt (Note 6)............................................. $ 1,250 $ 1,250
Accounts payable....................................................................... 9,009 9,666
Other accrued liabilities.............................................................. 11,791 8,122
Accrued interest....................................................................... 4,816 7,209
-------------- --------------
Total Current Liabilities........................................................... 26,866 26,247
-------------- --------------
Long-Term Debt (Note 6).................................................................. 325,250 317,000
-------------- --------------
Commitments and Contingencies
Redeemable Preferred Stock:
Series A preferred stock, $100 stated value, 1,000,000 shares authorized,
816,750 shares issued and outstanding, at redemption value........................... 87,180 85,144
Subscription receivable (Note 7)....................................................... (817) (817)
-------------- --------------
86,363 84,327
-------------- --------------
Stockholders' Deficit:
Common stock $0.01 par value, 1,200,000 shares authorized, 970,880
shares issued and outstanding........................................................ 10 10
Additional paid-in capital............................................................. 962 962
Unearned compensation.................................................................. (128) (135)
Accumulated deficit.................................................................... (34,469) (29,925)
Subscription receivable (Note 7)....................................................... (8) (8)
Accumulated translation adjustment..................................................... (326) (63)
-------------- --------------
Total Stockholders' Deficit......................................................... (33,959) (29,159)
-------------- --------------
Total Liabilities and Stockholders' Deficit.............................................. $404,520 $398,415
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
EAGLE FAMILY FOODS HOLDINGS, INC.
Consolidated Statements of Cash Flows
For the Three Months Ended September 26, 1998
and September 27, 1997
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 26, September 27,
1998 1997
-------------- -------------
Cash Flows Used In Operating Activities:
<S> <C> <C>
Net income (loss)............................................................................... $(2,508) $ 8,929
Adjustments to reconcile net income (loss) to net cash from (used in) operating activities
Depreciation and amortization................................................................ 8,054 4,577
Deferred taxes............................................................................... (1,380) -
Net change in current assets and liabilities
Accounts receivable........................................................................ (3,678) 1,527
Inventories................................................................................ (2,683) (19,740)
Accounts payable........................................................................... (657) (1,038)
Other assets............................................................................... (2,769) -
Other liabilities.......................................................................... 1,078 (4,329)
-------------- -------------
Cash used in operating activities............................................................... (4,543) (10,074)
-------------- -------------
Cash Used In Investing Activities:
Capital expenditures............................................................................ (3,261) (2,390)
-------------- -------------
Cash used in investing activities............................................................... (3,261) (2,390)
-------------- -------------
Cash From Financing Activities:
Proceeds from long-term debt.................................................................... 8,500 -
Payment of long-term debt....................................................................... (250) -
Net increase in intercompany investment......................................................... - 12,435
-------------- -------------
Cash from financing activities.................................................................. 8,250 12,435
-------------- -------------
Increase (decrease) in cash and cash equivalents.................................................. 446 (29)
Cash and cash equivalents at beginning of period.................................................. 1,812 33
-------------- -------------
Cash and cash equivalents at end of period........................................................ $ 2,258 $ 4
============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
Notes to the Financial Statements
(Unaudited)
1. Basis of Presentation:
The accompanying financial statements present the financial position, results
of operations and cash flows of Eagle Family Foods, Inc. ("EFFI" or the
"Company") and the consolidated financial position, results of operations and
cash flows of Eagle Family Foods Holdings, Inc. ("Holdings") and its wholly
owned subsidiary, EFFI. EFFI and Holdings are collectively referred to as the
"Company," unless the context indicates otherwise. All significant
intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements as of September 26, 1998 and September
27, 1997 and for the three month periods ended September 26, 1998 and September
27, 1997 are unaudited and are presented pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, these consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Annual Report on Form
10-K of Holdings and EFFI for the year ended June 27, 1998. In the opinion of
management, the accompanying consolidated financial statements reflect all
adjustments (which are of a normal recurring nature) necessary to present fairly
the financial position and results of operations and cash flows for the interim
periods, but are not necessarily indicative of the results of operations for a
full fiscal year.
2. Summary of Significant Accounting Policies:
Comprehensive Income
A reconciliation of comprehensive loss for the three months ended September
26, 1998 consists of (in thousands):
<TABLE>
<CAPTION>
Eagle Family
Foods Holdings, Eagle Family
Inc. Foods, Inc.
------------------ ------------------
<S> <C> <C>
Net loss.............................................................. $(2,508) $(2,501)
Foreign currency translation.......................................... (263) (263)
------------------ ------------------
Comprehensive Loss.................................................. $(2,771) $(2,764)
================== ==================
</TABLE>
As the effect of the other comprehensive income item was not material, a
separate statement of comprehensive income has not been presented.
3. Inventories:
Inventories are stated at lower of cost or market at September 26, 1998 and at
June 27, 1998 and consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 26, June 27,
1998 1998
-------------------- -------------------
<S> <C> <C>
Finished goods....................................................................... $32,191 $29,717
Raw material......................................................................... 2,493 2,284
-------------------- -------------------
Total inventories................................................................ $34,684 $32,001
==================== ===================
</TABLE>
8
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
Notes to the Financial Statements - continued
(Unaudited)
4. Property and Equipment:
Property and equipment is recorded at cost on September 26, 1998 and June 27,
1998, and consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 26, June 27,
1998 1998
------------ --------
<S> <C> <C>
Land................................................................................ $ 470 $ 470
Buildings and improvements.......................................................... 6,279 6,185
Machinery and equipment............................................................. 18,316 18,159
Construction in progress............................................................ 4,444 1,505
------------- --------
Total property and equipment...................................................... 29,509 26,319
Accumulated depreciation............................................................ (2,235) (1,528)
-------------- --------
Net property and equipment........................................................ $27,274 $24,791
============= =======
</TABLE>
5. Intangible Assets:
Intangible assets are amortized on a straight-line basis over their estimated
useful lives and consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 26, June 27, Estimated Useful
1998 1998 Lives
------------- -------- ----------------
<S> <C> <C> <C>
Tradenames.......................................................... $141,000 $141,000 40 years
Goodwill............................................................ 136,499 136,505 40 years
Covenant not to compete............................................. 21,000 21,000 5 years
Master customer services agreement.................................. 17,300 17,300 1 year
------------- --------
Total intangible assets.......................................... 315,799 315,805
Accumulated amortization............................................ (18,958) (11,855)
------------- --------
Net intangible assets............................................ $296,841 $303,950
============= ========
</TABLE>
6. Debt Obligations:
Debt obligations consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 26, June 27,
1998 1998
----------------- -----------------
<S> <C> <C>
7.875% term loan facility due December 31, 2005 ..................................... $174,500 $174,750
8.750% senior subordinated notes due January 15, 2008 ............................... 115,000 115,000
7.625% revolving credit facility due December 31, 2004 .............................. 37,000 28,500
----------------- -----------------
Total debt obligations ............................................................ 326,500 318,250
Less current portion of long-term debt .......................................... (1,250) (1,250)
----------------- -----------------
Long-term debt obligations ........................................................ $325,250 $317,000
================= =================
</TABLE>
9
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
Notes to the Financial Statements - continued
(Unaudited)
Senior Credit Facilities
EFFI received senior bank financing from a group of lenders in an aggregate
principal amount of up to $245.0 million (the "Senior Credit Facilities"). The
Senior Credit Facilities consist of (i) a $70.0 million seven-year revolving
credit facility (the "Revolving Credit Facility") and (ii) a $175.0 million
eight-year term loan (the "Term Loan Facility"). The Senior Credit Facilities
are guaranteed by Holdings and all future domestic subsidiaries of the Company.
The obligations of EFFI under the Senior Credit Facilities are collateralized
by (i) 100% of the capital stock of EFFI and each of its subsidiaries and (ii) a
first priority collateral interest in substantially all assets and properties of
EFFI and its future domestic subsidiaries. The fair market value of the senior
credit facilities at September 26, 1998 approximates the carrying value.
On April 22, 1998, the Company entered into interest rate swap agreements in
order to fix the interest rate on a portion of the Term Loan Facility. The Term
Loan Facility bears interest at LIBOR plus 2.250%. These swap agreements
commenced on July 23, 1998 and fixed the LIBOR rate at 5.955% on $75.0 million
and 5.905% on $25.0 million of the $175.0 million Term Loan Facility. These swap
agreements expire on December 29, 2000 and December 31, 2002, respectively. The
estimated cost to cancel the interest rate swap agreements at September 26, 1998
was approximately $3.5 million based on current interest rates for similar
instruments.
Senior Subordinated Notes
EFFI issued $115.0 million of senior subordinated notes (the "Notes") and
received cash proceeds of approximately $112.0 million net of underwriting
discount. The Notes are due January 15, 2008 and bear interest of 8.75% per
annum payable on January 15 and July 15, which commenced July 15, 1998. The
fair market value of the senior subordinated notes was approximately $104.0
million at September 26, 1998.
Annual principal payments for the next five calendar years and thereafter
consist of the following (in thousands):
<TABLE>
<S> <C>
1999....................................................................................................... $ 1,000
2000....................................................................................................... 1,000
2001....................................................................................................... 1,000
2002....................................................................................................... 1,000
2003....................................................................................................... 10,000
Thereafter................................................................................................. 312,500
-------------
$326,500
=============
</TABLE>
7. Stock Subscription Agreement
On January 23, 1998, GEI, Warburg, and several officers of Holdings
subscribed to purchase a combined 816,750 shares of preferred stock at $100 per
share and 825,000 shares of common stock at $1 per share. Full payment for the
stock was received from all but two of the officers, who subscribed to purchase
an aggregate of 13,117.5 shares of preferred stock and 13,250 shares of common
stock. Notes aggregating $825,000 were received from the two officers as partial
consideration for the subscription. These notes are collateralized by the shares
issued. They have a stated interest rate of prime (as defined) plus .5%, with a
maturity date of January 23, 2003. The notes have been assigned between common
and preferred stock in accordance with the management subscription agreements.
Accordingly, notes related to common stock have been presented in the
consolidated balance sheet as a reduction of Stockholders' Equity while notes
related to the preferred stock have been presented as a reduction of redeemable
preferred stock.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The discussion set forth below of the financial condition and results of
operations for the three months ended September 27, 1997 is related to the
business of the Eagle Brand, ReaLemon, Cremora, None Such, Borden EggNog and
Kava brands prior to its acquisition by the Company from Borden Foods
Corporation, BFC Investments, L.P. and certain of their affiliates for an
aggregate purchase price of $376.8 million in January 1998 (the "Acquisition").
The following discussion should be read in conjunction with the Combined
Financial Statements of the Company and the notes thereto included elsewhere in
this Quarterly Report on Form 10-Q. Certain statements under this caption
constitute forward-looking statements which involve known and unknown risks and
uncertainties. The Company's actual results, performance or achievements in the
future could differ significantly from the results, performance or achievements
discussed or implied in such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, the
effect on financial performance of increased competition in the dry-grocery food
industry, potential future competition, competitive pricing for products,
general economic and business conditions, industry trends, raw material costs,
dependence on the Company's labor force, the success of new product innovations
and changes in, or the failure or inability to comply with, government rules and
regulations, including, without limitation, Food and Drug Administration and
environmental rules and regulations.
Results of Operations
Three Months Ended September 26, 1998 and Three Months Ended September 27, 1997
(Unaudited)
Net Sales. The Company's net sales for the three months ended September
26, 1998 were $51.0 million as compared to $52.8 million for the three months
ended September 27, 1997, a decrease of $1.8 million, or 3.4%. The decrease
reflected $1.1 million in lower net sales of ReaLemon due to a shift in the
timing of promotional events and $2.2 million in lower net sales of non-dairy
creamer primarily due to the loss of two private label customers at the end of
calendar year 1997. Lower private label non-dairy creamer net sales were
partially offset by increased branded non-dairy creamer net sales of $0.6
million resulting from the launch of new Cremora Royale. There were also net
sales increases of $0.3 million in sweetened condensed milk, an increase of $0.4
million in net sales of None Such pie fillings and an increase of $0.2 million
in net sales of Borden Egg Nog during the quarter.
Cost of Goods Sold. Cost of goods sold was $22.6 million for the three
months ended September 26, 1998 as compared to $25.3 million for the three
months ended September 27, 1997, a decrease of $2.7 million, or 10.7%. Expressed
as a percentage of net sales, cost of goods sold for the three months ended
September 26, 1998 decreased to 44.3% from 47.9% for the three months ended
September 27, 1997. The decrease is primarily driven by lower production costs.
Distribution Expense. Distribution expense was $3.0 million for the three
months ended September 26, 1998 as compared to $4.2 million for the three months
ended September 27, 1997, a decrease of $1.2 million, or 28.6%. Expressed as a
percentage of net sales, distribution expense for the three months ended
September 26, 1998 decreased to 5.9% from 8.0% for the three months ended
September 27, 1997. The decrease is primarily driven by a change in the
distribution network for U.S foodservice sales and Canadian sales as the cost of
distribution shifts away from third-party warehouse distribution costs paid by
the Company to a distributor based system with the cost of distribution included
in distributor trade spending allowances and net sales.
Marketing Expense. Marketing expense for the three months ended September
26, 1998 remained unchanged from the same period in 1997 at $12.6 million.
General and Administrative ("G&A") Expense. Total G&A expense was $2.6
million for the three months ended September 26, 1998, as compared to $3.6
million for the three months ended September 27, 1997, a decrease of $1.0
million, or 27.8%. Expressed as a percentage of net sales, G&A expense for the
three months ended September 26, 1998 decreased to 5.1% from 6.8% for the three
months ended September 27, 1997.
Amortization of Intangibles. Amortization of intangibles was $7.1 million
for the three months ended September 26, 1998, as compared to $0.7 million for
the three months ended September 27, 1997, an increase of $6.4 million. The
increase is due to amortization of intangibles attributable to the Acquisition.
Interest Expense. Interest expense was $7.0 million for the three months
ended September 26, 1998. The Company's interest expense resulted from the new
debt structure established in connection with the Acquisition. There was no
interest expense in the three months ended September 27, 1997.
11
<PAGE>
On April 22, 1998, the Company entered into interest rate swap agreements in
order to fix the interest rate on a portion of the Term Loan Facility. The Term
Loan Facility bears interest at LIBOR plus 2.250% . These swap agreements
commenced on July 23, 1998 and fixed the LIBOR rate at 5.955% on $75.0 million
and 5.905% on $25.0 million of the $175.0 million Term Loan Facility. These swap
agreements expire on December 29, 2000 and December 31, 2002, respectively. The
estimated cost to cancel the interest rate swap agreements at September 26, 1998
was approximately $3.5 million based on current interest rates for similar
instruments.
Income Taxes. The Company recorded an income tax benefit of $1.4 million
for the three months ended September 26, 1998. The Company anticipates
sufficient future taxable income to realize existing deferred tax assets. The
Company recorded a $2.6 million tax provision for the three months ended
September 27, 1997.
Liquidity and Capital Resources
Interest payments on the Notes and interest and principal payments under the
Senior Credit Facilities represent significant cash requirements for the
Company. Borrowings under the Senior Credit Facilities bear interest at floating
rates and require interest payments on varying dates. However, on April 22,
1998 the Company entered into interest rate swap agreements in order to fix the
interest rate on $100.0 million of the Term Loan Facility. These swap
agreements commenced on July 23, 1998. Borrowings under the Senior Credit
Facilities at September 26, 1998 consist of the $174.5 million Term Loan
Facility maturing in 2005. In addition, the Senior Credit Facilities include the
$70.0 million Revolving Credit Facility maturing in 2004, of which $37.0 million
was outstanding at September 26, 1998. The Term Loan Facility amortizes $1.0
million in each of the calendar years 1998 through 2002, and $10.0 million,
$40.0 million and $120.0 million in the years 2003, 2004 and 2005, respectively.
The Company's remaining liquidity needs are for capital expenditures and
increases in working capital. The Company expects to spend approximately $11.6
million on capital projects in 1998 to fund management information systems
initiatives, expenditures in existing facilities and discretionary capital
projects associated with new products. The Company's primary sources of
liquidity will be cash flows from operations and borrowings under the Revolving
Credit Facility.
Net cash used in operating activities for the three months ended September 26,
1998 was $4.5 million.
Net cash provided by financing activities for the three months ended September
26, 1998 was $8.3 million. This consisted of $8.5 million in borrowings under
the Revolving Credit Facility partially offset by $0.2 million in principal
repayment on the Term Loan Facility. This net cash was used to fund capital
expenditures and certain other operating costs.
Management believes that cash generated from operations and borrowings under
the Senior Credit Facilities will be sufficient to satisfy working capital
requirements and required capital expenditures. Further expansion of the
business through acquisitions may require the Company to incur additional
indebtedness.
Seasonality
The Company's net sales, net income and cash flows are affected by a seasonal
bias toward the fourth quarter of the calendar year due to increased sales
during the holiday season. Three of the Company's six major product lines (Eagle
Brand and the Company's other sweetened condensed milk products, Borden Egg Nog
and None Such) are consumed primarily during the November and December holiday
seasons. In recent years, approximately 45% of the Company's sales have occurred
in the last quarter of the calendar year.
Recently Issued Accounting Statements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities and requires an entity to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company expects to adopt this standard in the
first quarter of 2000. The Company is evaluating this pronouncement and has not
yet determined the ultimate impact of this pronouncement on future financial
statements.
Impact of The Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the particular year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
12
<PAGE>
Historically, the Company has relied upon affiliates of Borden, Inc. for its
management information system requirements. The Company, in conjunction with
outside consultants, is in the process of establishing a fully stand-alone
dedicated management information system capable of supporting the business and
it is being designed to incorporate solutions to Year 2000 issues. Management
expects the development and installation of this system to be substantially
completed and the system to be operational during the first quarter of 1999.
However, the Company has contracted for the ability to continue to use the
management information systems of affiliates of Borden, Inc. through June 1999
in the event that the new system is not operational at the expected time. The
Company has budgeted capital expenditures in 1998 and 1999 of $3.8 million to
fund the acquisition of hardware and software and $6.6 million for related
implementation and development costs. A substantial portion of these costs are
expected to be capitalized. The actual costs related to this initiative, as well
as future costs of operation of the system, may differ materially from
management's estimates.
The Company has operating plants at four locations and each plant has its own
independent operating systems. The Company's preliminary review of these
systems has not identified any Year 2000 issues. A more in-depth review is
being completed at this time.
The Company is in the process of initiating formal communications with all of
its significant suppliers and large customers to determine the extent to which
the Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issues, and the Company's current assessments are based on presently
available information. However, there can be no guarantee that the systems of
other companies on which the Company's systems rely will be converted on a
timely basis, or that a 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
This table presents descriptions of the financial instruments and derivative
instruments that are held by the Company at September 26, 1998 and which are
sensitive to changes in interest rates. In the ordinary course of business, the
Company enters into derivative financial instrument transactions in order to
manage or reduce market risk. Under interest rate swaps, the Company agrees with
other parties to exchange, at specified intervals, the difference between fixed-
rate and floating rate interest amounts calculated by reference to an agreed
notional principal amount. The Company does not enter into derivative financial
instrument transactions for speculative purposes.
For the liabilities, the table represents principal calendar year cash flows
that exist by maturity date and the related average interest rate. For the
interest rate derivatives, the table presents the notional amounts and expected
interest rates that exist by contractual dates; the notional amount is used to
calculate the contractual payments to be exchanged under the contract. The
variable rates are estimated based upon the three month forward LIBOR rate.
All amounts are reflected in U.S. Dollars (thousands).
<TABLE>
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
-------- -------- -------- -------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Fixed rate......................... $115,000 $115,000 $104,000
Average interest rate.............. 8.750% 8.750%
Variable rate...................... $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 10,000 $197,500 $211,500 $211,500
Average interest rate.............. 7.313% 7.313% 7.313% 7.313% 7.313% 7.374% 7.370%
Interest-Rate Derivatives
Variable to fixed:
Notional amount.................... $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $(3,474)
Average pay rate................... 5.943% 5.943% 5.943% 5.955% 5.955% 5.947%
Average receive rate............... 5.3125% 5.3125% 5.3125% 5.3125% 5.3125% 5.3125%
</TABLE>
On April 22, 1998, the Company entered into interest rate swap agreements in
order to fix the interest rate on a portion of the Term Loan Facility. The Term
Loan Facility bears interest at LIBOR plus 2.25% . These swap agreements
commenced on July 23, 1998 and fixed the LIBOR rate at 5.955% on $75.0 million
and 5.905% on $25.0 million of the $175.0 million Term Loan Facility. These swap
agreements expire on December 29, 2000 and December 31, 2002, respectively and
have been reflected in the table above.
13
<PAGE>
PART II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule of Eagle Family Foods Holdings, Inc.
27.2 Financial Data Schedule of Eagle Family Foods, Inc.
(b) Reports on Form 8-K
None
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by
the undersigned thereunto duly authorized.
EAGLE FAMILY FOODS HOLDINGS, INC.
EAGLE FAMILY FOODS, INC.
By: /s/ John O'C Nugent
-------------------------------------
John O'C Nugent
President and Chief Executive Officer
By: /s/ Craig A. Steinke
--------------------------------------
Craig A. Steinke
Vice President and Chief Financial Officer
Date: November 9, 1998
15
<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule of Eagle Family Foods Holdings, Inc.
27.2 Financial Data Schedule of Eagle Family Foods, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Financial Statements of Eagle Family Foods Holdings, Inc. for the three months
ended September 26, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0001054040
<NAME> EAGLE FAMILY FOODS HOLDINGS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-3-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> SEP-26-1998
<CASH> 2,258
<SECURITIES> 0
<RECEIVABLES> 16,294
<ALLOWANCES> 248
<INVENTORY> 34,684
<CURRENT-ASSETS> 56,018
<PP&E> 29,509
<DEPRECIATION> 2,235
<TOTAL-ASSETS> 404,520
<CURRENT-LIABILITIES> 26,866
<BONDS> 325,250
86,363
0
<COMMON> 10
<OTHER-SE> (33,969)
<TOTAL-LIABILITY-AND-EQUITY> 404,520
<SALES> 50,957
<TOTAL-REVENUES> 50,957
<CGS> 22,558
<TOTAL-COSTS> 22,558
<OTHER-EXPENSES> 25,281
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,976
<INCOME-PRETAX> (3,858)
<INCOME-TAX> (1,350)
<INCOME-CONTINUING> (2,508)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,508)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Financial Statements of Eagle Family Foods, Inc. for the three months ended
September 26, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0001059761
<NAME> EAGLE FAMILY FOODS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-3-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> SEP-26-1998
<CASH> 2,258
<SECURITIES> 0
<RECEIVABLES> 16,294
<ALLOWANCES> 248
<INVENTORY> 34,684
<CURRENT-ASSETS> 56,018
<PP&E> 29,509
<DEPRECIATION> 2,235
<TOTAL-ASSETS> 405,345
<CURRENT-LIABILITIES> 26,865
<BONDS> 325,250
0
0
<COMMON> 1
<OTHER-SE> 53,229
<TOTAL-LIABILITY-AND-EQUITY> 405,345
<SALES> 50,957
<TOTAL-REVENUES> 50,957
<CGS> 22,558
<TOTAL-COSTS> 22,558
<OTHER-EXPENSES> 25,274
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,976
<INCOME-PRETAX> (3,851)
<INCOME-TAX> (1,350)
<INCOME-CONTINUING> (2,501)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,501)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
