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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 27, 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
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EAGLE FAMILY FOODS HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3983598
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
EAGLE FAMILY FOODS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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)
REGISTRANTS' TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 631-3100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
N/A REGISTERED
N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
TITLE OF CLASS
N/A
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants' knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates. N/A.
As of September 21, 1998, there were 971,839 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
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I
Item 1. Business................................................... 2
Item 2. Properties................................................. 6
Item 3. Legal Proceedings.......................................... 6
Item 4. Submission of Matters to a Vote of the Security Holders.... 6
PART II
Item 5. Market for the Company's Common Stock and Related
Stockholder Matters........................................ 7
Item 6. Selected Financial Data.................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 9
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk....................................................... 13
Item 8. Financial Statements and Supplementary Data................ 13
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 13
PART III
Item 10. Directors and Executive Officers of the Company............ 14
Item 11. Executive Compensation..................................... 16
Item 12. Security Ownership and Beneficial Owners................... 18
Item 13. Certain Relationships and Related Transactions............. 20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................... 21
</TABLE>
1
<PAGE>
PART I
ITEM 1: BUSINESS
BUSINESS HISTORY
On January 23, 1998 (the "Acquisition Closing"), Eagle Family Foods, Inc.
("Eagle Family Foods") acquired certain assets of Borden Foods Corporation
("BFC"), BFC Investments, L.P. ("BFC Investments") and certain of their
affiliates for an aggregate purchase price of $376.8 million (the
"Acquisition"). The assets acquired include, among other things: (i) four
manufacturing facilities located in Wellsboro, Pennsylvania; Starkville,
Mississippi; Waterloo, New York; and Chester, South Carolina; (ii) all
machinery and equipment located at these facilities; (iii) the trademarks
Eagle; Eagle Brand, the Dessert Maker; ReaLemon; ReaLime; Cremora; Kava; None
Such and certain other trademarks in North America and in certain foreign
territories; and (iv) a non-compete and non-solicitation agreement from BFC
and certain of its affiliates. Eagle Family Foods is a wholly owned subsidiary
of Eagle Family Foods Holdings, Inc. ("Holdings"). Eagle Family Foods and
Holdings are collectively referred to as the "Company", unless the content
indicates otherwise.
Financing for the Acquisition and related fees and expenses consisted of (i)
the $82.5 million equity contribution from Holdings (which was financed by
Holdings' issuance of preferred and common stock in that amount to GE
Investment Private Placement Partners II, a Limited Partnership ("GEI") and
Warburg, Pincus Ventures, L.P. ("Warburg" and together with GEI, the "Equity
Sponsors"), and certain members of the Company's management, including William
A. Lynch and John O'C. Nugent (the "Management Investors"), who contributed
approximately $1.7 million of such amount) (the "Equity Contribution"); (ii)
the issuance of $115.0 million of 8 3/4 senior subordinated notes due 2008
(the "Senior Subordinated Notes"); and (iii) senior secured credit facilities
(the "Senior Credit Facilities") in an aggregate principal amount of $245.0
million, consisting of a $175.0 million term loan facility (the "Term Loan
Facility") and a $70.0 million revolving credit facility (the "Revolving
Credit Facility"), under which $16.5 million was drawn at the time of the
Acquisition Closing. The Senior Credit Facilities, the Offering and the Equity
Contribution are referred to herein as the "Financing Transactions."
Borden, Inc. was incorporated in 1889 and has engaged in the manufacture and
distribution of a broad range of products, including dairy products,
industrial chemicals, decorative products and a wide variety of food products,
such as the food products currently manufactured by the Company. In December
1994, investors led by affiliates of Kohlberg Kravis Roberts & Co. purchased
Borden, Inc. and the business was operated through BFC and BFC Investments
until the Acquisition.
PRODUCTS AND MARKETS
The Company manufactures and markets a portfolio of leading dry-grocery food
products with widely recognized and established brands, including Eagle Brand,
ReaLemon and Cremora. In their defined markets within the United States, three
of the Company's six principal brands maintain the number one position, two
brands are the only products available and one brand holds the number two
position. The retail grocery channel is the Company's primary distribution
channel, with additional sales to mass merchandisers, food service customers,
the U.S. military and industrial and private label businesses. The Company's
U.S. food business is complemented by a strong presence in Canada and Puerto
Rico.
The following table sets forth sales data for each of the Company's product
lines for the one hundred fifty-five day period ended June 27, 1998:
<TABLE>
<CAPTION>
PERCENTAGE
PRODUCT LINE COMPANY'S PRINCIPAL BRANDS 1998 SALES OF SALES
------------ -------------------------- ---------- ----------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Sweetened condensed milk Eagle Brand $25.4 37.2%
Lemon and lime juice ReaLemon and ReaLime 23.8 34.9
Non-dairy creamer Cremora 17.1 25.1
Shelf-stable egg nog Borden Egg Nog 0.2 0.3
Mincement pie filling None Such 0.1 0.1
Acid neutralized coffee Kava 1.6 2.4
----- -----
Total $68.2 100.0%
===== =====
</TABLE>
2
<PAGE>
The Company's three largest product lines, Eagle Brand, ReaLemon and
Cremora, accounted for approximately 97% of the Company's 1998 sales. Eagle
Brand and the Company's other sweetened condensed milk products are
collectively the market leader in the U.S. sweetened condensed milk category.
In 1998, the Company's sweetened condensed milk products accounted for 37% of
the Company's sales. The Company's ReaLemon product lines are the market
leaders in the lemon and lime juice category and are the only nationally
distributed branded products in the category. In 1998, the ReaLemon product
lines accounted for 35% of the Company's sales. Cremora is the number two-
branded powdered non-dairy creamer in the U.S. In 1998, the Company's powdered
non-dairy creamer product lines accounted for 25% of the Company's sales. The
Company's other three brands accounted for 3% of the Company's 1998 sales and
include None Such, the leading brand of mincemeat pie filling Borden Egg Nog,
the only shelf-stable egg nog, and Kava, the only acid-neutralized coffee.
The Company's marketing programs consist of media advertising, consumer
promotions, trade promotion and co-promotion of certain products as
ingredients in recipes. Media advertising, including television, print and
radio advertising, is employed for Eagle Brand, ReaLemon and Cremora in an
effort to continuously build brand equity and awareness. Since many of the
Company's brands are purchased primarily as ingredients for recipes, the
Company frequently promotes recipes incorporating its brands and has co-
promoted these brands with other food companies, such as Tyson Foods, Inc. and
Keebler Corporation, whose products are also incorporated into these recipes.
The Company also promotes its seasonal brands, None Such and Borden EggNog,
with recipe promotions during the holiday season.
The Company sells its retail products in the U.S. through over 60
independent food brokers who represent the Company to the retail grocery
trade. The Company also sells its products to non-grocery channels directly
and through brokers, depending on the size and needs of the customer.
Eagle Brand. The Company manufactures and markets Eagle Brand and additional
sweetened condensed milk products. In addition to classic Eagle Brand
sweetened condensed milk, the Company's other branded sweetened condensed milk
products include Magnolia and Meadow Gold, Eagle Brand low fat and fat free
products, and Eagle Brand Creamy Chocolate flavor, which the Company began
shipping in September 1997. The Company's Eagle Brand products carry the
Borden and Elsie trademarks.
Retail channels, including grocery and mass merchandisers, are the primary
outlet for the Company's sweetened condensed milk products and accounted for
approximately 82% of the Company's sweetened condensed milk sales for the one
hundred fifty-five day period ended June 27, 1998. The balance of the
Company's sweetened condensed milk sales are made through other channels,
including food service customers, and export markets.
ReaLemon. The Company manufactures and markets ReaLemon lemon juice and
ReaLime lime juice from concentrate. In addition, the Company currently has a
licensing arrangement with Brach & Brock Confections, Inc. to manufacture
"ReaLemon" candies.
Retail channels, including grocery and mass merchandisers, are the primary
outlet for the Company's ReaLemon product lines and accounted for
approximately 75% of ReaLemon sales in the one hundred fifty-five day period
ended June 27, 1998. The Company also markets the ReaLemon product lines to
food service customers, export markets and the U.S. military.
Cremora. The Company manufactures and markets powdered non-dairy creamer
under the Cremora brand name and also manufactures powdered non-dairy creamer
for private label and industrial customers. Branded Cremora is sold primarily
through retail channels and accounted for 62% of the Company's 1998 powdered
non-dairy creamer sales. Private label sales accounted for 26% of sales, with
the balance primarily attributable to bulk sales to industrial customers (who
use non-dairy creamer in producing other food products).
3
<PAGE>
Borden EggNog. Borden EggNog is marketed by the Company and supplied by a
third party through a seasonal purchase order arrangement. Borden EggNog is
the only shelf-stable eggnog available in the market and competes with
refrigerated eggnog. Eggnog is generally consumed during the holidays as a
beverage or mixed with liquors as a cocktail. As such, sales of Borden EggNog
are highly seasonal, with approximately 90% of sales occurring in the last six
months of the year. Borden EggNog is distributed through the retail grocery
channel.
None Such. The Company manufactures and markets two flavors of None Such:
Regular and Brandy & Rum. None Such mincemeat is used in pies, cookies and
pastries, and is consumed primarily during the holiday season. None Such has a
heritage dating back to 1885. None Such is distributed through the retail
grocery channel.
Kava. Kava is marketed by the Company and co-packed by a third party
pursuant to the Kava Co-Pack Agreement. Kava is a unique instant coffee,
differentiated as the only brand that is "90% acid-neutralized." Management
believes that Kava's customer loyalty is significantly higher than that of
most other instant coffee brands, and is well positioned to remain high given
the brand's unique position as an acid-neutralized product.
INDUSTRY OVERVIEW
The U.S. food industry is characterized by relatively stable annual growth
based on modest price and population increases. Over the last ten years,
management believes the industry has experienced consolidation as competitors
have shed non-core business lines and made strategic acquisitions to
strengthen category positions, generate economies of scale in distribution,
production and raw material sourcing and create leverage relative to the
retail grocery trade through better service and broader market presence.
Grocery retailers have also utilized mergers and acquisitions to consolidate
within their industry. Growth in the mass merchandiser channel has outpaced
growth in the retail grocery channel, and mass merchandisers have consequently
increased their share of food sales relative to the retail grocery and drug
store channels. Furthermore, the convenience store channel has maintained a
constant presence within the total grocery industry. To expand their potential
markets, management believes that food companies are broadening their
distribution channels to include greater focus on mass merchandisers and other
alternative distribution channels. In the opinion of management another growth
opportunity in the U.S. for branded food companies is the food service
distribution channel, which supplies restaurants, hospitals, schools and other
institutions. In addition to the U.S. market, management believes that certain
international markets with above average population growth and expanding
economies offer significant growth opportunities for U.S. companies. These
international markets include Latin America, Central Europe, Russia and the
Pacific Rim.
The Company only competes in the dry grocery products segment of the food
industry.
SEASONALITY
The Company's 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. As a result of this
seasonality, the Company's working capital needs have historically increased
throughout the year, peaking in October, which will require the Company to
draw additional amounts on its Revolving Credit Facility.
RAW MATERIALS AND SUPPLIERS
The primary raw materials used in the Company's operations include milk,
sugar, lemon and lime juice concentrate, vegetable oil, corn syrup and
packaging materials. The Company purchases its raw materials, all of which are
widely available, from numerous independent suppliers. Acid-neutralized coffee
and egg nog are obtained in final product from co-packers.
4
<PAGE>
COMPETITION
The food industry is highly competitive. Numerous brands and products
compete for shelf-space and sales, with competition based primarily on price
and quality. The Company competes with a significant number of competitors of
varying sizes, including divisions or subsidiaries of larger companies. The
most significant branded competition encountered by the Company is Nestle's
Coffee-mate, which competes with Cremora. However, most of the competition
encountered by the Company is from private label brands. A number of these
branded and private label competitors have broader product lines as well as
substantially greater financial and other resources available to them.
TRADEMARKS, COPYRIGHTS AND PATENTS
The Company owns a number of trademarks, licenses and patents. The Company's
principal trademarks include Eagle; Eagle Brand, the Dessert Maker; ReaLemon;
ReaLime; Cremora; and None Such which the Company has registered in the United
States and various foreign countries. The Company holds a perpetual, exclusive
and royalty-free license to use the Borden and Elsie trademarks on products on
which they are currently used in the BBNA Business (as defined below),
together with certain product extensions. The Borden and Elsie trademarks are
currently used on (i) the entire line of Eagle Brand products including
condensed or evaporated milk, and (ii) shelf-stable egg nog. The Borden
trademark is also currently used on Cremora non-dairy creamer. The Company
also holds a perpetual, exclusive and royalty-free license to use the Borden
trademark on None Such mincemeat, Magnolia condensed or evaporated milk, and
Kava acid-neutralized coffee. In addition, as assignee from BFC, the Company
holds an exclusive and royalty-free license from Southern Foods Group, L.P. to
use the Meadow Gold trademark on sweetened condensed milk in the United States
for a five year term, which is renewable automatically for subsequent five
year terms and terminable at the option of the Company upon one year's notice
and, under certain limited circumstances, by the licensor. Such brand names
are considered to be of fundamental importance to the business of the Company
due to their brand identification and ability to maintain brand loyalty. The
Company has granted BFC an exclusive, perpetual, royalty-free license to use
the ReaLemon and ReaLime trademarks in certain foreign markets including
Europe, the Middle East and Hong Kong. A third party owns the Cremora
trademark in Africa and the Middle East. The Company also owns various patents
and copyrights associated with the business.
EMPLOYEES
As of June 27, 1998, the Company employed approximately 335 people,
including 179 hourly and 156 salaried employees. The Wellsboro, Pennsylvania
and Starkville, Mississippi plants are the only unionized Company plants.
Union employees represent approximately 28% of the Company's total work force.
At Wellsboro, the United Food and Commercial Workers Union-Local 174 has a
contract expiring in February 2000 and at Starkville, the Teamsters Local 984
has a contract expiring on January 31, 2001. Management believes that
relations with the Company's employees and unions are generally good.
CERTAIN LEGAL AND REGULATORY MATTERS
Public Health. The Company is subject to the Federal Food, Drug and Cosmetic
Act and regulations promulgated thereunder by the Food and Drug
Administration. This comprehensive regulatory program governs, among other
things, the manufacturing, composition and ingredients, labeling, packaging
and safety of food. In addition, the Nutrition Labeling and Education Act of
1990, as amended, prescribes the format and content of certain information
required to appear on the labels of food products. The Company is also subject
to regulation by certain other governmental agencies.
The operations and the products of the Company are also subject to state and
local regulation through such measures as licensing of plants, enforcement by
state health agencies of various state standards and inspection of facilities.
Enforcement actions for violations of federal, state and local regulations may
include seizure and condemnation of violative products, cease and desist
orders, injunctions and/or monetary penalties. Management believes that the
Company's facilities and practices are in compliance with applicable
government regulations in all material respects.
5
<PAGE>
The Company is subject to certain health and safety regulations, including
regulations issued pursuant to the Occupational Safety and Health Act. These
regulations require the Company to comply with certain manufacturing, health
and safety standards to protect its employees from accidents.
Environmental Matters. The Company believes that it is substantially in
compliance with all applicable laws and regulations for the protection of the
environment and the health and safety of its employees. The Company's
operations and properties are subject to a wide variety of increasingly
complex and stringent federal, state and local environmental regulations
governing the storage, handling, generation, treatment, emission, and disposal
of certain substances and wastes, the remediation of contaminated soil and
groundwater, and the health and safety of employees. As such, the nature of
the Company's operations exposes it to the risk of claims with respect to
environmental matters. Based upon its experience to date, the Company believes
that the future cost of compliance with existing environmental laws and
regulations and liability for known environmental claims will not have a
material adverse effect on the Company's business or financial position. In
connection with the Acquisition, the Company assumed all past and future
environmental liabilities related to the acquired business. The Company will
be indemnified, however, by BFC and BFC Investments with respect to certain
environmental liabilities occurring prior to the Acquisition Closing. This
indemnification is limited in time and amount, and there can be no assurance
that material environmental liabilities will not be incurred after the
indemnification period or in excess of the indemnified amount or that the
Company will be able to pursue successfully any indemnification claims against
BFC. In addition, future events, such as changes in existing laws and
regulations or their interpretation, and more vigorous enforcement policies of
regulatory agencies, may give rise to additional expenditures or liabilities
that could be material.
ITEM 2: PROPERTIES
Except for Kava and sweetened condensed milk in Canada, which are produced
under co-pack agreements, and Borden EggNog, which the Company obtains under a
seasonal purchase order, the Company produces all of its products in four
Company-owned manufacturing facilities, as described in the following table.
Management believes that the Company's manufacturing plants have sufficient
capacity to accommodate the Company's needs for the foreseeable future.
<TABLE>
<CAPTION>
LOCATION SQUARE FEET PRODUCTS MANUFACTURED
-------- ----------- ---------------------
<S> <C> <C>
Wellsboro, PA........... 119,000 Sweetened condensed milk, mincemeat pie filling
Starkville, MS.......... 49,000 Sweetened condensed milk
Waterloo, NY............ 102,100 Lemon juice and lime juice
Chester, SC............. 77,300 Powdered non-dairy creamer
</TABLE>
In addition to the owned manufacturing facilities described above, the
Company leases 9,792 square feet of office space in Tarrytown, New York,
leases 17,452 square feet of office and laboratory space in Columbus, Ohio,
leases 34,000 square feet of warehouse space in Chester, South Carolina,
leases 1,723 square feet of office space in Wellsboro, Pennsylvania and uses
public warehouse space in numerous locations in variable amounts as needed.
ITEM 3: LEGAL PROCEEDINGS
The Company is subject to litigation in the ordinary course of its business.
The Company is not a party to any lawsuit or proceeding which, in the opinion
of management, is likely to have a material adverse effect on the Company's
financial condition or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
Not applicable.
6
<PAGE>
PART II
ITEM 5: MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the common stock of
Holdings or Eagle Family Foods. As of September 21, 1998, Holdings was the
only holder of Eagle Family Foods common stock. As of September 21, 1998,
there were approximately 15 holders of Holdings' common stock.
No cash dividends on common stock have been declared by either registrant
since respective incorporations. Holdings and Eagle Family Foods are
restricted from declaring dividends on their common stock by the Senior Credit
Facilities. See Note 6 of the Notes to the Financial Statements of Holdings
and Eagle Family Foods included elsewhere in this Annual Report on Form 10-K.
On January 23, 1998, the Equity Sponsors and the Management Investors
subscribed to purchase 816,750 share of Series A Non-Voting Preferred Stock,
par value $.01 per share, of Holdings (the "Series A Preferred Stock") at $100
per share and 825,000 shares of Common Stock, par value $.01 per share, of
Holdings (the "Common Stock") at $1.00 per share. The securities were sold
pursuant to Regulation D Section 506 of the Securities Act of 1933. 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 Series A Preferred
Stock and 13,250 shares of Common Stock. Notes aggregating $825,000 were
received from the two officers as a partial consideration for the
subscription. See "Certain Relationships and Related Transactions."
7
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997 and as
of January 23, 1998 and June 27, 1998 and the one hundred fifty-five day
period ended June 27, 1998 and for the twenty-three day period ended January
23, 1998 and the six-month period ended June 28, 1997 are derived from the
audited and unaudited financial statements included elsewhere herein. The
selected financial data set forth below as of December 31, 1995, 1994 and 1993
and for each of the two years in the period ended December 1, 1994 are derived
from the financial statements not included elsewhere herein. The predecessor
data represents the financial results related to Eagle Brand, ReaLemon,
Cremora, NoneSuch, Borden EggNog and Kava brands (the "BBNA Business")
acquired by the Company for periods prior to the Acquisition. For periods
prior to January 1, 1995 and the December 1994 acquisition of all the common
stock of Borden, Inc. by Kohlberg Kravis Roberts & Co. (the "KKR
Acquisition"), the BBNA Business was not managed, and its financial results
were not reported, as a separate business. For periods subsequent to December
31, 1994, the financial data includes purchase accounting adjustments related
to the KKR Acquisition. As a result, the financial data reported for the 1993
and 1994 periods are not comparable in certain respects with subsequent
periods. In addition, the BBNA Business units were organized in multiple
divisions and co-mingled with other businesses which were sold, closed or
reorganized during 1993 and 1994. Determining the appropriate allocations of
shared costs make the inclusion of 1993 and 1994 data for other than sales,
cost of goods sold and gross profit, in management's opinion, not practicable
and, because of the extent of allocations, potentially misleading. The BBNA
Business shared sales force as well as promotional, advertising and
administrative costs with other food businesses that were sold during 1993 and
1994. This would require an allocation of charges which may not, in
management's opinion, produce a reliable reflection of financial results.
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------------------------------------------------
ONE
TWENTY HUNDRED
THREE DAY SIX FIFTY-FIVE
PERIOD MONTHS DAY PERIOD
YEAR ENDED DECEMBER 31 ENDED ENDED ENDED
-------------------------------------------- JANUARY 23, JUNE 28, JUNE 27,
1993 1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- -------- ----------- ----------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Sales................... $229,822 $231,203 $225,263 $230,384 $229,370 $7,693 $75,507 $ 68,183
Cost of goods sold...... 96,038 102,148 102,712 110,357 107,674 5,154 37,034 38,376(e)
-------- -------- -------- -------- -------- ------ ------- --------
Gross Profit............ 133,784 129,055 122,551 120,027 121,696 2,539 38,467 29,807
Distribution Expense.... NA NA 15,691 14,640 13,464 303 5,279 4,550
Marketing Expense....... NA NA 63,804 62,705 55,074 2,095 17,630 15,048
General and
Administrative
Expense................ NA NA 13,289 13,483 13,184 1,010 6,448 39,446(d)
-------- -------- -------- -------- -------- ------ ------- --------
Operating Income........ NA NA $ 29,767 $ 29,199 $ 39,974 $ (869) $ 9,110 $(29,237)
OTHER FINANCIAL DATA:
Depreciation and
Amortization........... NA NA $ 6,010 $ 5,937 $ 6,174 $ 512 $ 3,026 $ 13,755
Capital Expenditures.... NA NA 2,079 3,726 3,154 87 1,365 2,578
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF AS OF
--------------------------------------- JANUARY 23, JUNE 27,
1993 1994 1995 1996 1997 1998(c) 1998
---- ------- -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Inventories............. NA $12,053 $ 13,317 $ 13,239 $ 15,820 $ 20,100 $ 32,001
Net property and
equipment.............. NA 13,613 16,044 16,649 16,070 23,950 24,791
Total assets............ NA 55,765 160,586 157,857 153,786 380,047 399,240
Total debt, including
current maturities..... NA -- -- -- -- 306,500 318,250
Stockholder's equity.... NA -- -- -- -- 67,803(b) 55,994
</TABLE>
- -------
(a) The information set forth above as of January 23, 1998, June 27, 1998 and
for the one hundred fifty-five day period ended June 27, 1998 reflects the
financial position and results of operations of Eagle Family Foods, Inc.
With the exception of stockholders's equity and redeemable preferred
stock, this information is substantially consistent with that of Holdings.
The following represents stockholders' equity and redeemable preferred
stock of Holdings:
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 27, JANUARY 23,
1998 1998
-------- -----------
<S> <C> <C>
Stockholders' equity (deficit)...................... $(29,159) $(13,881)
Redeemable preferred stock.......................... 84,327 80,858
</TABLE>
(b) Reflects initial Equity Contribution of $82.5 million less an after tax
write-off of in-process research and development.
(c) Reflects the Acquisition and Financing Transactions resulting in a new
basis of accounting.
(d) Reflects the nonrecurring in-process research and development write-off of
$23.9 million.
(e) Reflects the nonrecurring charge of $5.2 million of additional cost of
sales related to the expensing of inventories stated at fair market value.
8
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Set forth below is a discussion of the financial condition and results of
operations of the BBNA Business for the six months ended June 28, 1997, the
fiscal years ended December 31, 1995, 1996 and 1997. The six months ended June
27, 1998 includes the twenty-three day period ended January 23, 1998 managed
by the BBNA Business and the one hundred fifty-five day period ended June 27,
1998 managed by Eagle Family Foods. The following discussion should be read in
conjunction with the Combined Financial Statements of the Company and the
notes thereto included elsewhere in the Annual Report on Form 10-K. References
herein to 1995, 1996 and 1997 refer to the fiscal years ended December 31,
1995, 1996 and 1997, respectively, unless the context otherwise requires.
RESULTS OF OPERATIONS
Six months Ended June 27, 1998 and Six months Ended June 28, 1997
The six months ended June 27, 1998 consists of the twenty-three day period
ended January 23, 1998 managed by the BBNA Business and the one hundred fifty-
five day period ended June 27, 1998 managed by Eagle Family Foods.
Sales. Sales increased 0.5% to $75.9 million for the six months ended June
27, 1998 as compared to $75.5 million for the six months ended June 28, 1997.
Sales in part were over prior year due to increases in sales to foodservice
customers partially offset by the loss of two private label non-dairy creamer
customers representing $2.6 million of sales when compared against the six
months ended June 28, 1997.
Cost of sales. Cost of sales, expressed as a percentage of sales, increased
to 57.4% in the six months ended June 27, 1998 as compared to 49.1% in the six
months ended June 28, 1997. The increase was primarily attributable to
recording a non-cash charge of $5.2 million of additional cost of sales
related to the expensing of inventories stated at fair market value. On
January 23, 1998, inventories were valued at fair market value (representing
cost) using the purchase accounting method, and the valuation exceeded the
predecessor's manufacturing cost by approximately $5.2 million. This inventory
was sold in the six months ended June 27, 1998 increasing cost of sales.
Inventories are stated at the lower of cost or market at June 27, 1998.
Marketing Expense. Marketing expense was $2.1 million, or 27.2%, when
expressed as a percentage of sales, for the twenty-three day period ended
January 23, 1998. Marketing expense was $15.0 million, or 22.1%, when
expressed as a percentage of sales, for the one hundred fifty-five day period
ended June 27, 1998. Advertising and promotional programs are being redesigned
and refocused with spending budgets allocated to subsequent periods in 1998.
Marketing expense was $17.6 million, or 23.3%, when expressed a percentage
of sales, for the six months ended June 28, 1997.
General and Administrative ("G&A") Expense. Total G&A expense was $1.0
million in the twenty-three day period ended January 23, 1998 and $39.4
million in the one hundred fifty-five day period ended June 27, 1998. The
significant amount reflected in the one hundred fifty-five day period ended
June 27, 1998 is attributable to the Company taking a non-recurring pre-tax
charge of $23.9 million for investments in research and development that was
in-process and deemed by management to have no alternative use and
amortization of intangibles of $11.9 million.
Total G&A expense was $6.4 million in the six months ended June 28, 1997.
Interest Expense. There was no interest expense in the twenty-three day
period ended January 23, 1998 and interest expense was $11.5 million in the
one hundred fifty-five day period ended June 27, 1998. The Company's interest
expense in the one hundred fifty-five day period ended June 27, 1998 results
from the new debt structure established in connection with the Acquisition.
9
<PAGE>
There was no interest expense in the six months ended June 28, 1997.
Income Taxes. The Company recorded an income tax benefit of $0.3 million for
the twenty-three day period ended January 23, 1998 and an income tax benefit
of $14.2 million for the one hundred fifty-five day period ended June 27,
1998. The Company anticipates sufficient future taxable income to realize
deferred tax assets recorded at June 27, 1998.
The Company recorded a tax provision of $3.9 million for the six months
ended June 28, 1997.
The following table sets forth the results of operations as a percentage of
sales for the years ended 1995, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Sales................................................ 100.0% 100.0% 100.0%
Cost of goods sold................................... 45.6 47.9 46.9
------- ------- -------
Gross profit......................................... 54.4 52.1 53.1
Distribution expense................................. 7.0 6.4 5.9
Marketing expense.................................... 28.3 27.2 24.0
General & administrative expense..................... 5.9 5.9 5.7
------- ------- -------
Operating Income..................................... 13.2% 12.6% 17.4%
======= ======= =======
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Sales. The Company's sales were $229.3 million for the year ended December
31, 1997, as compared to $230.4 million in 1996, a decrease of $1.1 million,
or 0.5%. The decrease reflected an increase of $4.1 million in sales of
sweetened condensed milk, offset by decreases of $0.4 million in ReaLemon
product line sales, $3.9 million in non-dairy creamer sales and $1.0 million
in Borden Egg Nog sales.
Cost of Goods Sold. Cost of goods sold was $107.7 million for the year ended
December 31, 1997, as compared to $110.4 million in 1996, a decrease of $2.7
million, or 2.4%. Expressed as a percentage of sales, cost of goods sold in
1997 decreased 1% from the prior year, to 46.9%, primarily as a result of milk
prices returning to normal levels.
Distribution Expense. Distribution expense was $13.5 million for the year
ended December 31, 1997, as compared to $14.6 million in 1996, a decrease of
$1.1 million, or 7.5%. Expressed as a percentage of sales, distribution
expense decreased to 5.9% in 1997 from 6.4% in the prior year. The decrease in
distribution expense was primarily the result of the realization of
efficiencies within the distribution system, thereby lowering overall
distribution expense.
Marketing Expense. Marketing expense was $55.1 million for the year ended
December 31, 1997, as compared to $62.7 million in 1996, a decrease of $7.6
million, or 12.1%. Expressed as a percentage of sales, marketing expense
decreased to 24.0% in 1997 from 27.2% in 1996. Trade promotion expenses in the
1997 period decreased 9.6%, or $2.1 million, primarily as the result of the
elimination of off-season trade promotions and a lower level of new product
introduction activity. Advertising and consumer promotion expenses in the 1997
period decreased 12.3%, or $2.5 million, primarily as the result of a
reduction in higher advertising and consumer promotion expenses incurred in
1996 to support line extensions introduced in that year. Other marketing
expenses (advertising and promotion management, variable sales, field
sales/sales support and market research) declined $3.0 million primarily as
the result of sales force reductions and a decrease in market research
expense.
General and Administrative Expense. Total G&A expense was $13.2 million for
the year ended December 31, 1997, as compared to $13.5 million for the prior
year, a decrease of $0.3 million, or 2.2%. Expressed as a percentage of sales,
G&A expense decreased to 5.7% in 1997 from 5.9% in the prior year.
10
<PAGE>
Operating Income. As a result of the factors discussed above, the Company's
operating income was $40.0 million for the year ended December 31, 1997, as
compared to $29.2 million in the prior period, an increase of $10.8 million,
or 37.0%.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Sales. The Company's sales were $230.4 million for the year ended December
31, 1996, as compared to $225.3 million in 1995, an increase of $5.1 million,
or 2.3%. The increase was primarily due to a $2.5 million increase in sales of
non-dairy creamer products and a $2.3 million increase in ReaLemon product
lines sales. Non-dairy creamer sales increased primarily due to higher prices
for private label, increased industrial sales and increased sales of branded
Cremora as the Company abandoned its previous "every day low price" strategy
and replaced it with a strategy focused on couponing and advertising Cremora's
premium taste. ReaLemon sales increased primarily due to the introduction of
the 15 oz. squeeze bottle.
Cost of Goods Sold. Cost of goods sold was $110.4 million for the year ended
December 31, 1996, as compared to $102.7 million in 1995, an increase of $7.7
million, or 7.5%. Expressed as a percentage of sales, cost of goods sold
increased to 47.9% in 1996 from 45.6% in 1995. The increase in cost of goods
sold as a percentage of sales was primarily the result of increased milk and
lemon concentrate prices in the period. Milk prices reached historic highs in
1996 and lemon and lime concentrate prices rose in 1996 relative to 1995.
Distribution Expense. Distribution expense was $14.6 million for the year
ended December 31, 1996, as compared to $15.7 million in 1995, a decrease of
$1.1 million, or 7.0%. Expressed as a percentage of sales, distribution
expense decreased to 6.4% in 1996 from 7.0% in 1995. The decrease in
distribution expense was primarily the result of the rationalization of the
distribution system through the closure of two warehouses.
Marketing Expense. Marketing expense was $62.7 million for the year ended
December 31, 1996, as compared to $63.8 million in 1995, a decrease of $1.1
million, or 1.7%. Expressed as a percentage of sales, marketing expense
decreased to 27.2% in 1996 from 28.3% in 1995. Trade promotion expenses in
1996 decreased 17.8%, or $4.7 million, compared to 1995, primarily as the
result of BFC management's de-emphasis of "push" marketing tactics. As a
result of the Company's new strategy, advertising and consumer promotion
expenses increased 11.6%, or $2.1 million, in 1996, as compared to 1995.
Market research expense increased $1.2 million, or 39.0%, in 1996 to support
the Company's line extensions and new product development efforts. Other
selling expenses increased 2.5%, or $0.4 million.
General & Administrative Expense. Total G&A expense was $13.5 million for
the year ended December 31, 1996, as compared to $13.3 million in 1995, an
increase of $0.2 million, or 1.5%. Expressed as a percentage of sales, G&A
expense was 5.9% in 1996 and 1995.
Operating Income. As a result of the factors discussed above, the Company's
operating income was $29.2 million for the year ended December 31, 1996, as
compared to $29.8 million in 1995, a decrease of $0.6 million, or 2.0%.
Liquidity and Capital Resources
Interest payments on the Senior Subordinated 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. Borrowings under the Senior Credit Facilities at June 27, 1998
consist of the $174.75 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 $28.5 million was outstanding at
June 27, 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 $12.0 million on
capital projects in 1998 to fund management information systems
11
<PAGE>
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 one hundred fifty-five day
period ended June 27, 1998 was $8.3 million.
Cash provided by financing activities in the one hundred fifty-five day
period ended June 27, 1998 was $11.8 million of which proceeds of $12 million
represented borrowings under the Revolving Credit Facility which were used in
part to fund remaining acquisition costs 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 or to issue equity securities.
SEASONALITY
The Company's 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. As a result of this
seasonality, the Company's working capital needs have historically increased
throughout the year, peaking in October, which will require the Company to
draw additional amounts on its Revolving Credit Facility.
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
Historically, the Company has relied upon affiliates of Borden, Inc. for its
management information systems 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.
Management expects the development and installation of this system to be
substantially completed and the system to be operational during the first half
of 1999. However, if the new information systems are not implemented on a
timely basis and if modifications to existing systems cannot be accomplished
on a timely basis, there would be adverse financial and operational effects on
the Company. The amount of these effects cannot be ascertained at this time.
The Company has budgeted capital expenditures in 1998 and 1999 of $3.8 million
to fund the acquisition of hardware and software for this project and $6.6
million for nonrecurring development expenses to fund anticipated information
technology consulting and other related costs. 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 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 timely
converted, 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.
12
<PAGE>
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This table presents descriptions of the financial instruments and derivative
instruments that are held by the Company at June 27, 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 debt, the table represents principal cash flows that exist by
maturity date and the related average interest rate. For the swaps, 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>
<CAPTION>
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 $116,000
Average Interest Rate.. 8.750% 8.750%
Variable Rate.......... $ 1,250 $ 1,000 $ 750 $ 1,000 $ 3,250 $196,000 $203,250 $203,250
Average Interest Rate.. 7.875% 7.875% 7.875% 7.875% 7.875% 7.839% 7.840%
INTEREST-RATE
DERIVATIVES
Variable to fixed:
Notional amount........ $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $ (551)
Average pay rate....... 5.943% 5.943% 5.943% 5.955% 5.955% 5.947%
Average receive rate... 5.688% 5.688% 5.688% 5.688% 5.688% 5.688%
</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 percent. These swap
agreements commence on July 23, 1998 and fix the LIBOR rate at 5.955 percent
on $75 million and 5.905 percent on $25 million of the $175 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.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See Item 14 "Exhibits, Financial Statement Schedules and Reports on Form 8-
K."
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
13
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors of Holdings and the Company and executive officers of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William A. Lynch............... 50 Chairman of the Board of Directors and
Chief
Operating Officer*
John O'C. Nugent............... 56 Chief Executive Officer, President and
Director*
Craig A. Steinke............... 41 Chief Financial Officer, Vice President and
Treasurer*
Jonathan F. Rich............... 51 Vice President, General Counsel and
Secretary*
Tamar K. Bernbaum.............. 47 Vice President, Marketing
James A. Byrne................. 53 Vice President, Human Resources
Virginia Cappello.............. 46 Vice President, Market Research
Frederick M. Dale, Jr. ........ 42 Vice President, Manufacturing
Paul F. Keida.................. 48 Vice President, Technology
Richard A. Lumpp............... 51 Vice President, Sales
A.L. Stanley................... 54 Vice President, Food Service &
International
Andreas T. Hildebrand.......... 30 Director
Kewsong Lee.................... 33 Director
Howard H. Newman............... 51 Director
Donald W. Torey................ 41 Director
Paul W. Van Orden.............. 71 Director
</TABLE>
- --------
* Messrs, Lynch, Nugent, Steinke and Rich hold these same positions at
Holdings and are the executive officers of Holdings.
WILLIAM A. LYNCH has served as Chairman of the Board of Directors of
Holdings and the Company and Chief Operating Officer of Holdings and the
Company since their respective dates of formation. In the past ten years, Mr.
Lynch founded, owned, and acted as Chief Executive Officer of a number of
entrepreneurial ventures including Group 1 Capital, Ltd. (founded in 1990),
Audio One, Inc. (founded in 1989), and Consumer Products, Inc. (founded in
1986). Mr. Lynch possesses extensive experience in the consumer products
industry, having served, prior to 1985, in a variety of management positions
for Bristol-Myers Squibb Co., Borden, Inc., Calgon Consumer Products Company
and The Procter & Gamble Company.
JOHN O'C. NUGENT has served as a Director of Holdings and the Company and
Chief Executive Officer and President of Holdings and the Company since their
respective dates of formation. From 1993 through 1996, he served as the
President of Johnson & Johnson Consumer Products, Inc., where he was
responsible for the consumer business and pharmaceutical products division.
Prior to that, Mr. Nugent spent eight years with Unilever occupying a series
of marketing and general management positions. Most recently, he served as
Senior Vice President (General Manager) of the Van den Bergh Consumer Products
Division in the U.S. prior to an assignment in the United Kingdom where he was
Director (COO position) of Van den Bergh, Ltd. Mr. Nugent's background in
consumer products extends over thirty years, with experience at Borden, Inc.,
Calgon Consumer Products Company and The Procter & Gamble Company, where he
held a variety of marketing and management positions. His present service as a
director includes membership on the board of Small Planet Foods. His past
service as a director includes membership on the boards of the Association of
National Advertisers, Cosmetics Toiletries and Fragrance Association and the
National Association of Margarine Manufacturers.
CRAIG A. STEINKE has served as Chief Financial Officer, Vice President and
Treasurer of Holdings and the Company since January 1998. From 1996 through
1998, Mr. Steinke has served as Senior Vice President and Group General
Manager of BHP Copper, a business group of Broken Hill Proprietary Co., Ltd
("BHP"). From 1992 through 1996, Mr. Steinke held President, Vice President
and Controller positions at the Metals Division of Magma Copper Co. Prior to
1992, Mr. Steinke held a variety of positions at Arthur Andersen LLP.
14
<PAGE>
JONATHAN F. RICH has served as Vice President, General Counsel and Secretary
of Holdings and the Company since their respective dates of formation. From
1990 through 1996, Mr. Rich served as Vice President and General Counsel of
Nabisco International, a $1.6 billion operating unit of Nabisco, Inc. Prior to
that, he served two years as the Associate General Counsel for Del Monte Foods
Company. Mr. Rich is a member of the New York Bar. His past service as a
director includes membership on the board of Grupo Gamesa, S.A. de C.V., one
of Mexico's largest food manufacturers.
TAMAR K. BERNBAUM has served as Vice President, Marketing of the Company
since January 1998. From 1991 through 1997, Ms. Bernbaum held Director of
Trade Marketing and Category Manager for Trade Marketing positions at
Unilever's Van Den Bergh Foods division. From 1983 through 1991, Ms. Bernbaum
served as Senior Product Manager and Product Manager at Unilever's Ragu Foods
Company division. Prior to 1983, Ms. Bernbaum held a variety of management
positions at Colgate-Palmolive Company and Nestle Inc.
JAMES A. BYRNE has served as Vice President, Human Resources of the Company
since its formation in November 1997. From 1990 through 1995, Mr. Byrne served
as the Director of Human Resources for Wyeth-Lederle Vaccines and Pediatrics &
Lederle Consumer Health Products. Prior to that, Mr. Byrne spent 22 years at
American Cyanamid Co. in a variety of human resources management positions.
VIRGINIA CAPPELLO has served as Vice President, Market Research of the
Company since January 1998. From 1997 through January 1998, Ms. Cappello
served as Director of International Research for MasterCard International Inc.
From 1987 through 1997, she served as Group Market Research Manager of
Unilever's Van Den Bergh Foods division. From 1980 through 1987, Ms. Cappello
held Group Market Research Manager and Senior Market Research Manager
positions serving both the domestic and international operations of
International Playtex, Inc. Prior to 1980, Ms. Cappello held management
positions at Evaluative Criteria, Inc., Lebhar Friedman Research, Erdos &
Morgan, Inc. and O'Brian Sherwood Associated, Inc.
FREDERICK M. DALE, JR. has served as Vice President, Manufacturing of the
Company since December 1997. From 1996 through 1997, Mr. Dale served as
Director of Operations for BFC. From 1993 until 1996, Mr. Dale was Plant
Manager of Borden, Inc.'s Wellsboro, Pennsylvania sweetened condensed milk
manufacturing plant. Prior to 1993, Mr. Dale held management positions with
Borden, Inc., PepsiCo, Inc. and Cadbury Schweppes plc.
PAUL F. KEIDA has served as Vice President, Technology of the Company since
December 1997. From 1995 through 1997, Mr. Keida served as Vice President of
Research and Development of Borden, Inc. For 19 years prior to 1995, Mr. Keida
held a variety of management positions at Borden, Inc. in the technology
research and development areas.
RICHARD A. LUMPP has served as Vice President, Sales of the Company since
December 1997. From 1996 through 1997, Mr. Lumpp served as Senior Vice
President of Neo, Inc., an Information Resources, Inc. affiliate. Between 1995
and 1996, Mr. Lumpp served as a Principal at CSC Weston Group. Between 1993
and 1995, Mr. Lumpp held Senior Vice President of Client Service and Vice
President of Sales positions with Information Resources, Inc. Prior to 1993,
Mr. Lumpp held a variety of management positions at Unilever's Van den Bergh
Foods and Ragu Foods Company divisions, The Gillette Company and Johnson &
Johnson.
A.L. STANLEY has served as Vice President, Food Service & International of
the Company since December 1997. From 1994 through 1997, Mr. Stanley served as
Vice President, Sales of BFC where he was responsible for the marketing of
BBNA Business products as well as several other products. From 1981 through
1994, Mr. Stanley held several Vice President and management positions at
James River Corporation. Prior to 1981, Mr. Stanley held a variety of
management positions at American Can Company.
ANDREAS T. HILDEBRAND has served as a Director of Holdings and the Company
since their respective dates of formation. Mr. Hildebrand has served as a Vice
President in the Private Equity Group of General Electric Investment
Corporation ("GEIC") since May 1997, and as an Investment Manager and Senior
Financial Analyst since 1993. Prior to joining GEIC, Mr. Hildebrand was an
Economic Analyst in the office of Massachusetts Governor William Weld. Mr.
Hildebrand presently serves as a director of several privately held companies.
15
<PAGE>
KEWSONG LEE has served as a Director of Holdings and the Company since their
respective dates of formation. Mr. Lee has served as a Member and Managing
Director of EMW LLC and a general partner of Warburg, Pincus & Co. ("WP")
since January 1, 1997. Mr. Lee served as a Vice President of WPV from January
1995 to December 1996, and as an associate at E.M. Warburg, Pincus & Co., Inc.
("EMW") from 1992 until December 1994. Prior to joining EMW, Mr. Lee was a
consultant at McKinsey & Company, Inc., a management consulting company from
1990 to 1992. His present service as a director includes membership on the
boards of Knoll, Inc., RenaissanceRe Holdings Ltd. and several privately held
companies.
HOWARD H. NEWMAN has served as a Director of Holdings and the Company since
their respective dates of formation. Mr. Newman has served as a Member and
Managing Director of EMW LLC (and its predecessor) and a general partner of WP
since 1987. Prior to joining EMW LLC's predecessor in 1984 he was a Principal
with Morgan Stanley & Co., Incorporated. His present service as a director
includes membership on the boards of ADVO, Inc., Newfield Exploration Company,
Cox Insurance Holdings Plc, Comcast UK Cable Partners Limited, RenaissanceRe
Holdings Ltd. and several privately held companies.
DONALD W. TOREY has served as a Director of Holdings and the Company since
their respective dates of formation. Mr. Torey has served as Executive Vice
President of GEIC and GE Investment Management Incorporated ("GEIM" and,
together with GEIC, "GE Investments") with responsibility for GE Investments'
Private Equity and Real Estate groups since January 1997. From 1993 through
1996, Mr. Torey served as Chief Financial Officer of GE Investments. Prior to
that, Mr. Torey served as Manager of Mergers and Acquisition Finance for
General Electric Company ("GE"). Mr. Torey currently serves as a Trustee for
the General Electric Pension Trust ("GEPT") and as a director of a privately
held company.
PAUL W. VAN ORDEN has served as a Director of Holdings and the Company since
April 1998. Mr. Van Orden has been a Special Student at the Yale Divinity
School since 1997. From 1991 through 1996, he was the Executive-In-Residence,
the Executive Director of the Chazen Institute for International Business and
a Visiting Professor at the Columbia University Graduate School of Business.
Prior to that, Mr. Van Orden was an Executive Vice President at GE. He
currently serves as a director of a privately held company.
ITEM 11: EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following summary compensation table provides information concerning
compensation for the Company's chief executive officer and the four other most
highly compensated executive officers of the Company (collectively, the "Named
Executive Officers") for the fiscal year ending June 27, 1998.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION(3)
----------------------------------------------- ------------------
NAME AND PRINCIPAL FISCAL OTHER RESTRICTED
POSITION YEAR SALARY($) BONUS($)(1) COMPENSATION($)(2) STOCK AWARDS($)(4)
------------------ ------ --------- ----------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
William A. Lynch........ 1998 $130,682 $ 0 $2,500 58,230
Chairman of the Board
and
Chief Operating Officer
John O'C. Nugent........ 1998 130,682 0 2,000 58,230
Chief Executive Officer
and President
Craig A. Steinke........ 1998 78,750 0 2,363 4,835
Chief Financial
Officer,
Vice President and
Treasurer
Richard A. Lumpp........ 1998 80,492 0 39,655(5) 4,835
Vice President, Sales
Tamar K. Bernbaum....... 1998 70,455 0 1,938 4,835
Vice President,
Marketing
</TABLE>
16
<PAGE>
- --------
(1) Each executive is entitled to receive a bonus during the Company's first
full calendar year of up to 100% of his or her base salary if certain
performance targets are met. It is anticipated that each executive will
earn all or a portion of his or her bonus at the conclusion of the first
full year of operations, however, no bonus is earned as of the fiscal year
ending June 27, 1998.
(2) Other compensation includes matching and profit sharing contributions made
by the Company on behalf of each Named Executive Officer pursuant to the
Eagle Family Foods, Inc. 401k Savings and Retirement Plan.
(3) The Company has not awarded any stock options or stock appreciation rights
to the Named Executive Officers.
(4) Represents the approximate value of awards of restricted Common Stock (the
"Restricted Shares") issued to the Named Executive Officers on January 16,
1998. The Restricted Shares will vest in equal installments over five
years (the "Vesting Period"), beginning on the first anniversary of the
date of issuance provided that such grantee is employed by the Company on
such date. Upon the consummation of an initial public offering of Common
Stock of Holdings registered under the Securities Act of 1933 meeting
certain thresholds prior to the end of the Vesting Periods, 20% of the
Restricted Shares will vest. Any remaining unvested Restricted Shares
would then vest in equal installments over the time remaining in the
Vesting Period. The Board of Directors of Holdings may also establish
certain performance criteria that could result in accelerated vesting of
the Restricted Shares. As of June 27, 1998, the approximate value of each
such award was $58,230, $4,635, $4,835, and $4,835 for Messers. Lynch,
Nugent, Steinke, Lumpp and Ms. Bernbaum, respectively.
(5) Includes $34,020 related to a signing bonus.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Matters of compensation are reviewed and acted upon by the full Board of
Directors, consisting of William A. Lynch, John O'C. Nugent, Andreas T.
Hildebrand, Edward A. Johnson, Kewsong Lee, Howard H. Newman, Donald W. Torey
and Paul W. Van Orden at June 27, 1998. Messrs. Lynch and Nugent are both
executive officers of Holdings and the Company. See "Certain Relationships and
Related Transactions."
DIRECTOR COMPENSATION
The Directors of Holdings and the Company have not received, and are not
expected in the future to receive, compensation for their service as
directors. Directors are entitled to reasonable out-of-pocket expenses in
connection with their travel to and attendance at meetings of the Boards of
Directors or committees thereof, except that directors who are employees of
Holdings, the Company or a stockholder of Holdings shall not be entitled to
such reimbursement.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Mr. William
A. Lynch and Mr. John O'C. Nugent, pursuant to which Mr. Lynch serves as
Chairman of the Company and Chief Operating Officer and Mr. Nugent serves as
Chief Executive Officer and President of the Company. The initial annual base
salaries under such agreements for each of Mr. Lynch and Mr. Nugent are
$300,000. Increases in the base salary are determined by the Board of
Directors. In addition, Mr. Lynch and Mr. Nugent are each entitled to receive
a bonus during the Company's first full year of up to 100% of their base
salaries if certain performance targets are met. Bonuses for future periods
are to be based on targets to be established by the Board of Directors. Each
agreement has a term of two years, with automatic annual renewals. In the
event either employment agreement is terminated by the Company without "cause"
(as defined in such employment agreement), Mr. Lynch or Mr. Nugent, as the
case may be, are entitled to receive severance payments equal to the base
salary then in effect for the greater of the next 12 months or the remainder
of the employment term. The agreements provide for customary non-competition
and non-solicitation provisions. The Company entered into similar arrangements
with its other executive officers.
17
<PAGE>
ITEM 12: SECURITY OWNERSHIP AND BENEFICIAL OWNERS
All of the issued and outstanding shares of common stock of Eagle Family
Foods as of September 21, 1998 are beneficially owned by Holdings. There are
two classes of capital stock of Holdings authorized and outstanding: the
Common Stock, which has full voting rights, and Series A Preferred Stock,
which has limited voting rights. The following table sets forth, as of
September 21, 1998, certain information regarding the beneficial ownership of
Common Stock and the Series A Preferred Stock, as determined in accordance
with Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), with respect to (i) each person known by the Company to be
the beneficial owner of more than five percent of any class of Holdings'
voting securities, (ii) each of the directors and certain executive officers
of Holdings and (iii) all directors and executive officers of Holdings, as a
group:
<TABLE>
<CAPTION>
COMMON STOCK SERIES A PREFERRED STOCK
-------------------- ---------------------------
NAME AND ADDRESS OF NUMBER OF NUMBER OF
BENEFICIAL OWNER (1) SHARES PERCENTAGE SHARES PERCENTAGE
-------------------- --------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
GE Investment Private
Placement Partners II,
a Limited Partnership
3003 Summer Street
Stamford, CT 06905(2)....... 404,075 41.3 400,034 49.0
Warburg, Pincus Ventures,
L.P.
466 Lexington Avenue
New York, NY 10017(3)....... 404,075 41.3 400,034 49.0
William A. Lynch(4).......... 66,480 6.8 8,168 1.0
John O'C. Nugent(4).......... 63,230 6.5 4,950 *
Craig A. Steinke(5).......... 5,835 * 990 *
Tamar K. Bernbaum(5)......... 4,835 * -- --
Richard A. Lumpp(5).......... 5,835 * 990 *
Andreas T. Hildebrand(2)(6).. -- -- -- --
Kewsong Lee(3)............... 404,075 41.3 400,034 49.0
Howard H. Newman(3).......... 404,075 41.3 400,034 49.0
Donald W. Torey(2)(6)........ -- -- -- --
Paul W. Van Orden(6)......... -- -- -- --
All directors and executive
officers as a
group (17 persons)(7)....... 564,730 57.7 416,716 51.0
</TABLE>
- --------
* Less than 1%
(1) Pursuant to the rules of the Securities and Exchange Commission, shares
are deemed to be "beneficially owned" by a person if such person directly
or indirectly has or shares (i) the power to vote or dispose of such
shares, whether or not such person has any pecuniary interest in such
shares, or (ii) the right to acquire the power to vote or dispose of such
shares within 60 days, including any right to acquire through the exercise
of any option, warrant or right.
(2) Does not include any shares indirectly held by Trustees of GEPT by virtue
of GEPT's limited partnership interest in Warburg. GEPT is also a limited
partner in GEI. GEIM is the general partner of GEI and a wholly owned
subsidiary of GE. As a result, each of GEIM and GE may be deemed to be the
beneficial owner of the shares owned by GEI.
(3) The sole general partner of Warburg is WP, a New York general partnership.
EMW LLC, a New York limited liability company, manages Warburg. The
members of EMW LLC are substantially the same as the partners of WP.
Lionel I. Pincus is the managing partner of WP and the managing member of
EMW LLC. WP, as the sole general partner of Warburg, has a 15% interest in
the profits of Warburg. Messrs. Kewsong Lee and Howard H. Newman,
directors of Holdings, are Managing Directors and members of EMW LLC and
general partners of WP. As such, Messrs. Lee and Newman may be deemed to
have an indirect pecuniary interest (within the meaning of Rule 16a-1
under the Exchange Act) in an indeterminate portion of the shares
beneficially owned by Warburg and WP.
(4) Includes 58,230 shares of restricted stock, subject to certain vesting and
forfeiture requirements, issued to each of Messrs. Lynch and Nugent upon
consummation of the Acquisition.
(5) Includes 4,835 shares of restricted stock, subject to certain vesting and
for future requirements, issued to each of Messrs. Steinke and Lumpp and
Ms. Bernbaum.
(6) Excludes 404,075 shares of Common Stock and 400,034 shares of Series A
Preferred Stock beneficially owned by GEI and GEIM. As an executive
officer and director of GEIM, Mr. Torey has shared voting and investment
power with respect to the shares held by GEI, and therefore, may be deemed
to be the beneficial owner of such shares. Messrs. Torey, Hildebrand and
Paul W. Van Orden disclaim beneficial ownership of all such shares owned
by GEI and GEIM.
(7) Includes 404,075 shares of Common Stock and 400,034 shares of Series A
Preferred Stock beneficially owned by Warburg. Excludes 404,075 shares of
Common Stock and 400,034 shares of Series A Preferred Stock beneficially
owned by GEI. Includes 1,600 shares of Common Stock and 1,584 shares of
Series A Preferred Stock held by executive officers not identified in the
table and 143,805 shares of restricted stock, subject to certain vesting
and forfeiture requirements, issued to executive officers upon
consummation of the Acquisition.
18
<PAGE>
THE HOLDINGS STOCKHOLDERS AGREEMENT
The relations among the Equity Sponsors and the Management Investors
(collectively, the "Investors"), and Holdings are governed by a Stockholders
Agreement, dated as of the Acquisition Closing (the "Holdings Stockholders
Agreement"). The following summary of certain provisions of the Holdings
Stockholders Agreement does not purport to be complete and is qualified in its
entirety by reference to all the provisions of the Holdings Stockholders
Agreement.
Board of Directors. Holdings is managed by the Board of Directors which is
comprised of nine members, three of whom are designated by GEI and three of
whom are designated by Warburg. For so long as GEI beneficially owns at least
20% of the Common Stock outstanding on a fully diluted basis, GEI has the
right to designate three directors to the Board of Directors. For so long as
GEI beneficially owns at least 15% of the Common Stock outstanding on a fully
diluted basis, GEI has the right to designate two directors to the Board of
Directors. For so long as GEI beneficially owns at least 10% of the Common
Stock outstanding on a fully diluted basis, GEI has the right to designate one
director to the Board of Directors. For so long as Warburg beneficially owns
at least 20% of the Common Stock outstanding on a fully diluted basis, Warburg
has the right to designate three directors to the Board of Directors. For so
long as Warburg beneficially owns at least 15% of the Common Stock outstanding
on a fully diluted basis, Warburg has the right to designate two directors to
the Board of Directors. For so long as Warburg beneficially owns at least 10%
of the Common Stock outstanding on a fully diluted basis, Warburg has the
right to designate one director to the Board of Directors. Mr. Lynch and Mr.
Nugent will be entitled to serve as directors for so long as they remain
executive officers of the Company. In addition, as long as the Equity Sponsors
in the aggregate beneficially own more than 50% of the Common Stock
outstanding on a fully diluted basis, the Equity Sponsors have the right to
designate a majority of the directors to the Board of Directors. The Board of
Directors will have at least one director who is not an officer or employee of
Holdings, the Company, or the Equity Sponsors, appointed by unanimous approval
of the Board of Directors. The Holdings Stockholders Agreement provides that
the Board of Directors of the Company is identical to that of Holdings.
The consent of a majority of the Board of Directors which includes at least
one of the directors designated by GEI and one of the directors designated by
Warburg is required for the approval of (i) the Company's or Holdings' annual
operating budget; (ii) capital expenditures or investments not approved in the
annual budget in amounts greater than $500,000; (iii) any merger or
consolidation involving the Company or Holdings; (iv) any acquisition by the
Company or Holdings of any assets or stock, other than acquisitions of assets
in the ordinary course of business; (v) any divestiture of assets in excess of
$500,000 by the Company or Holdings, other than sales of inventory in the
ordinary course of business; (vi) any liquidation, dissolution or winding up,
or any consent to a bankruptcy or insolvency or related proceeding involving,
the Company or Holdings; (vii) the issuance or sale of any debt or equity
securities for cash; (viii) any expansion into new lines of business; (ix) any
joint venture or strategic alliance; (x) the repurchase or redemption of any
outstanding shares of capital stock or the declaration or payment of any
dividends on any shares of capital stock of the Company or Holdings; (xi) the
amendment or modification of the certificate of incorporation or bylaws of the
Company or Holdings; (xii) the amendment, modification or termination of any
employment agreement with any executive officer of the Company or Holdings;
(xiii) the grant of any stock options or other equity-based compensation;
(xiv) the hiring or firing of any executive officer; (xv) any related party
transactions; (xvi) any loans or guarantees by the Company or Holdings outside
of the ordinary course of business; (xvii) any agreement having a duration in
excess of one year or cumulative obligations in excess of $1 million; (xviii)
the amendment, modification or termination of any agreement with any union;
(xix) the approval or adoption, amendment, modification or termination of
certain employee benefit plans; and (xx) any agreement to do any of the
foregoing.
Restrictions on Transfer of Stock. Securities held by the Management
Investors, including any shares of Common Stock or Series A Preferred Stock
and any options to acquire shares of Common Stock, may only be sold or
otherwise transferred with the consent of the Board of Directors of Holdings.
Tag-Along Rights. The Holdings Stockholders Agreement provides that in the
event any Investor chooses to sell or otherwise transfer more than 20% of its
shares of Common Stock or Series A Preferred Stock to a
19
<PAGE>
proposed transferee, the selling Investor must offer to each of the other
Investors the right to participate in such sale on a pro rata basis based on
ownership of the shares being sold.
Subscription Rights. With certain exceptions, the Holdings Stockholders
Agreement provides each Investor with subscription rights in connection with
any issuance of equity securities by Holdings for cash whereby each Investor
shall have the right to purchase a pro rata portion of such equity securities.
Certain Covenants. The Holdings Stockholders Agreement requires Holdings to
(i) provide certain financial and other information to the Investors
concerning Holdings and its subsidiaries, (ii) comply with applicable law and
(iii) maintain insurance.
Termination. The tag-along rights and subscription rights described above
will terminate upon the completion of an initial public offering of Common
Stock.
THE REGISTRATION RIGHTS AGREEMENT
Holdings and the Investors entered into a Registration Rights Agreement,
dated as of the Acquisition Closing (the "Registration Rights Agreement").
Pursuant to the Registration Rights Agreement, each of the Equity Sponsors has
two demand registration rights for each of its Preferred Stock and Common
Stock. In addition, the Equity Sponsors have unlimited Form S-3 registration
rights and unlimited piggyback rights. The Management Investors also have
piggyback registration rights. All expenses related to these registrations
(other than underwriting discounts and commissions) will be borne by Holdings.
Holdings is required to use its best efforts to effect such registrations,
subject to certain conditions and limitations. Holdings has agreed to
indemnify the Investors for certain liabilities arising out of such
registrations, including liabilities under the Securities Act.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Holdings and the Investors entered into Subscription Agreements, dated as of
the Acquisition Closing (collectively, the "Subscription Agreements"),
pursuant to which, among other things, Holdings agreed to issue shares of
Common Stock and Series A Preferred Stock. See "Security Ownership and
Beneficial Owners."
In connection with the portion of the Equity Contribution to Holdings made
by Mr. Lynch and Mr. Nugent, the Company lent an aggregate of $575,000 to Mr.
Lynch and $250,000 to Mr. Nugent in exchange for full recourse notes bearing
interest at a floating rate, set semi-annually, at The Chase Manhattan Bank's
then applicable prime rate, in effect for six month periods, plus 0.5%. Each
note matures on the fifth anniversary of the Acquisition Closing and is
secured by a pledge in favor of the Company of all of the shares of Common
Stock and Series A Preferred Stock owned by such Management Investor.
All future transactions between the Company and its officers, directors,
principal stockholders or their respective affiliates, will be on terms no
less favorable to the Company than can be obtained from unaffiliated third
parties.
20
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS OF THE COMPANY
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Eagle Family Foods, Inc. and Eagle Family Foods Holdings, Inc.
Report of Independent Accountants..................................... 26
Eagle Family Foods, Inc. Statement of Operations for the One Hundred
Fifty-Five Day Period ended June 27, 1998............................ 27
Eagle Family Foods, Inc. Balance Sheets, as of June 27, 1998 and
January 23, 1998..................................................... 28
Eagle Family Foods, Inc. Statement of Cash Flows for the One Hundred
Fifty-Five Day Period ended June 27, 1998............................ 29
Eagle Family Foods, Inc. Statement of Changes in Stockholder's Equity
for the One Hundred Fifty-Five Day Period ended June 27, 1998........ 30
Eagle Family Foods Holdings, Inc. Consolidated Statement of Operations
for the One Hundred Fifty-Five Day Period ended June 27, 1998........ 31
Eagle Family Foods Holdings, Inc. Consolidated Balance Sheets, as of
June 27, 1998 and January 23, 1998................................... 32
Eagle Family Foods Holdings, Inc. Consolidated Statement of Cash Flows
for the One Hundred Fifty-Five Day Period ended June 27, 1998........ 33
Eagle Family Foods Holdings, Inc. Consolidated Statement of Changes in
Stockholders' Equity (Deficit) for the One Hundred Fifty-Five Day
Period ended June 27, 1998........................................... 34
Notes to the Financial Statements..................................... 35
(B)(1) FINANCIAL STATEMENTS OF THE PREDECESSOR
Borden Brands North America
Independent Auditors' Report.......................................... 46
Combined Statements of Operations of the Predecessor Company, for the
six months ended June 28, 1997 (unaudited), the twenty-three day
period ended January 23, 1998 and for the years ended December 31,
1997, 1996 and 1995.................................................. 47
Combined Balance Sheets of the Predecessor Company, as of December 31,
1997 and 1996........................................................ 48
Combined Statements of Cash Flows of the Predecessor Company, for the
six months ended June 28, 1997 (unaudited), the twenty-three day
period ended January 23, 1998 and for the years ended December 31,
1997, 1996 and 1995.................................................. 49
Combined Statements of Owner's Investment of the Predecessor Company,
for the twenty-three day period ended January 23, 1998 and for the
years ended December 31, 1997, 1996 and 1995......................... 50
Notes to Combined Financial Statements of the Predecessor Company..... 51
(A)(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because the required information is either
presented in the financial statements or notes thereto, or is not
applicable, required or material.
</TABLE>
21
<PAGE>
(A)(3) EXHIBITS
<TABLE>
<C> <S> <C>
2.1 Asset Purchase Agreement, dated as of November 24, 1997, as amended
as of December 9, 1997 and January 15, 1998, by and among Borden
Foods Corporation, BFC Investments, L.P., and the Company
(Incorporated by reference to Exhibit 2.1 to the Registration
Statement on Form S-4 of Eagle Family Foods and Holdings filed on
June 17, 1998 (the "S-4"))
3.1 Restated Certificate of Incorporation of Holdings (Incorporated by
reference to Exhibit 3.1 of the S-4)
3.2 Bylaws of Holdings (Incorporated by reference to Exhibit 3.2 of the
S-4)
3.3 Restated Certificate of Incorporation, dated November 19, 1997
(Incorporated by reference to Exhibit 3.3 of the S-4)
3.4 Bylaws of the Company (Incorporated by reference to Exhibit 3.4 of
the S-4)
4.1 Purchase Agreement, dated January 16, 1998, by and among Holdings,
the Company, Chase Securities Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated (Incorporated by reference to Exhibit
4.1 of the S-4)
4.2 Indenture, dated January 23, 1998, among Holdings, the Company and
IBJ Schroder Bank & Trust Company (including Specimen Certificates
of 8 3/4% Series Senior Subordinated Notes due 2008 and 8 3/4%
Series B Senior Subordinated Notes due 2008) (Incorporated by
reference to Exhibit 4.2 of the S-4)
4.3 Registration Rights Agreement, dated January 23, 1998, by and among
Holdings, the Company, Chase Securities Inc. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated (Incorporated by reference to
Exhibit 4.3 of the S-4)
4.4 Credit Agreement, dated January 23, 1998, by and among the Company,
Holdings, The Chase Manhattan Bank, Merrill Lynch Capital
Corporation, Chase Securities Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated (Incorporated by reference to Exhibit
4.4 of the S-4)
4.5 Stockholders Agreement, dated as of January 23, 1998, by and among
Holdings and certain stockholders of Holdings named therein
(Incorporated by reference to Exhibit 4.5 of the S-4)
4.6 Exchange and Registration Rights Agreement, dated as of January 23,
1998, by and among Holdings and certain stockholders of Holdings
named therein (Incorporated by reference to Exhibit 4.6 of the S-4)
4.7 Subscription Rights Agreement, dated as of January 23, 1998, by and
among Holdings, GE Investment Private Placement Partners II, a
Limited Partnership and Warburg, Pincus Ventures, L.P.
(Incorporated by reference to Exhibit 4.7 of the S-4)
10.1 Master Customer Services Agreement, dated as of January 23, 1998,
by and between the Company and Borden Foods Corporation
(Incorporated by reference to Exhibit 10.1 of the S-4)
10.2 License Agreement dated January 23, 1998 by and among BDH Two,
Inc., Borden, Inc. and the Company (Incorporated by reference to
Exhibit 10.2 of the S-4)
10.3 Assignment of Trademark License Agreement dated January 23, 1998,
by and between BFC and the Company of BFC's License Agreement,
dated as of September 4, 1997, by and between BFC and Southern
Foods Group, L.P. (Incorporated by reference to Exhibit 10.3 of the
S-4)
10.4 License Agreement, dated January 23, 1998, by and between BFC and
the Company (Incorporated by reference to Exhibit 10.4 of the S-4)
10.5 The 1998 Stock Incentive Plan of Holdings (Incorporated by
reference to Exhibit 10.5 of the S-4)
10.6 Employment Agreement, dated January 23 1998, by and between John
O'C. Nugent and the Company (Incorporated by reference to Exhibit
10.6 of the S-4)
10.7 Employment Agreement, dated January 23, 1998, by and between
William A. Lynch and the Company (Incorporated by reference to
Exhibit 10.7 of the S-4)
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
10.8 Employment Agreement, dated January 23, 1998, by and between Craig
A. Steinke and the Company (Incorporated by reference to Exhibit
10.8 of the S-4)
10.9 Employment Agreement, dated January 23, 1998, by and between Tamar
K. Bernbaum and the Company (Incorporated by reference to Exhibit
10.9 of the S-4)
10.10 Employment Agreement, dated January 23, 1998, by and between
Richard A. Lumpp and the Company (Incorporated by reference to
Exhibit 10.10 of the S-4)
10.11 Pledge Agreement, dated January 23, 1998, by and between William
A. Lynch and the Company (Incorporated by reference to Exhibit
10.11 of the S-4)
10.12 Pledge Agreement, dated January 23, 1998, by and between John O'C.
Nugent and the Company (Incorporated by reference to Exhibit 10.12
of the S-4)
10.13 Secured Recourse Promissory Note, dated January 23, 1998, from
William A. Lynch to the Company (Incorporated by reference to
Exhibit 10.13 of the S-4)
10.14 Secured Recourse Promissory Note, dated January 23, 1998, from
John O'C. Nugent to the Company (Incorporated by reference to
Exhibit 10.14 of the S-4)
12.1 Eagle Family Foods Holdings, Inc. Ratio of Earnings to Fixed
Charges (Incorporated by reference to Exhibit 12.1 of the S-4)
12.2 Eagle Family Foods, Inc. Ratio of Earnings to Fixed Charges
(Incorporated by reference to Exhibit 12.2 of the S-4)
12.3 Eagle Family Foods Holdings, Inc. Ratio of Earnings to Fixed
Charges
12.4 Eagle Family Foods, Inc. Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule of Eagle Family Foods Holdings, Inc.
27.2 Financial Data Schedule of Eagle Family Foods, Inc.
</TABLE>
(B) REPORTS ON FORM 8-K
None.
23
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
By: /s/ John O'C. Nugent
---------------------------------
JOHN O'C. NUGENT
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Eagle Family Foods, Inc.
By: /s/ John O'C. Nugent
---------------------------------
JOHN O'C. NUGENT
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANTS AND IN THEIR CAPACITIES INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ John O'C. Nugent President, Chief September 23, 1998
- ------------------------------------- Executive Officer
JOHN O'C. NUGENT and Director
(principal
executive officer)
/s/ William A. Lynch Chairman of the September 23, 1998
- ------------------------------------- Board, Chief
WILLIAM A. LYNCH Operating Officer
and Director
/s/ Craig A. Steinke Chief Financial September 23, 1998
- ------------------------------------- Officer (principal
CRAIG A. STEINKE financial and
accounting officer)
/s/ Andreas T. Hildebrand Director September 23, 1998
- -------------------------------------
ANDREAS T. HILDEBRAND
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Kewsong Lee Director September 23, 1998
- -------------------------------------
KEWSONG LEE
/s/ Howard H. Newman Director September 23, 1998
- -------------------------------------
HOWARD H. NEWMAN
/s/ Donald W. Torey Director September 23, 1998
- -------------------------------------
DONALD W. TOREY
/s/ Paul W. Van Orden Director September 23, 1998
- -------------------------------------
PAUL W. VAN ORDEN
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Eagle Family Foods Holdings, Inc. and
Eagle Family Foods, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows of Eagle Family Foods Holdings, Inc. and the accompanying balance sheets
and the related statements of operations, of stockholder's equity and of cash
flows of Eagle Family Foods, Inc. present fairly, in all material respects,
the financial position of Eagle Family Foods Holdings, Inc. and Eagle Family
Foods, Inc. at June 27, 1998 and January 23, 1998, and the results of their
operations and their cash flows for the one hundred fifty-five day period
ended June 27, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
companies' managements; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Columbus, Ohio
September 4, 1998
26
<PAGE>
EAGLE FAMILY FOODS, INC.
STATEMENT OF OPERATIONS
FOR THE ONE HUNDRED FIFTY-FIVE DAY PERIOD ENDED JUNE 27, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Net sales............................................................ $ 68,183
Cost of goods sold................................................... 38,376
--------
Gross margin......................................................... 29,807
Distribution expense................................................. 4,550
Marketing expense.................................................... 15,048
General and administrative expense................................... 3,691
Amortization of intangibles.......................................... 11,855
In-process research and development write-off........................ 23,900
--------
Operating loss....................................................... (29,237)
Interest expense, net................................................ 11,453
--------
Loss before income taxes............................................. (40,690)
Income tax benefit................................................... 14,246
--------
Net loss............................................................. $(26,444)
========
</TABLE>
The accompanying Notes are an integral part of the financial statements.
27
<PAGE>
EAGLE FAMILY FOODS, INC.
BALANCE SHEETS
AS OF JUNE 27, 1998 AND JANUARY 23, 1998
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 27, JANUARY 23,
1998 1998
-------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................. $ 1,812 $ 3,798
Account receivable, net............................... 12,368 --
Inventories........................................... 32,001 20,100
Other current assets.................................. 261 51
-------- --------
Total Current Assets................................ 46,442 23,949
Property and Equipment, Net............................. 24,791 23,950
Notes Receivable from Related Parties................... 825 825
Intangibles, Net........................................ 303,950 312,758
Deferred Income Taxes................................... 14,246 9,202
Other Non-Current Assets................................ 8,986 9,363
-------- --------
Total Assets............................................ $399,240 $380,047
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Current portion of long-term debt..................... $ 1,250 $ 1,000
Accounts payable...................................... 9,665 --
Other accrued liabilities............................. 8,122 5,744
Accrued interest...................................... 7,209 --
-------- --------
Total Current Liabilities........................... 26,246 6,744
Long-Term Debt.......................................... 317,000 305,500
Commitments and Contingencies (Note 11)
Stockholder's Equity
Common stock, $.01 par value, 250,000 shares
authorized, 10,000 shares issued and outstanding..... 1 1
Additional paid-in capital............................ 82,500 82,500
Accumulated deficit................................... (26,444) (14,698)
Accumulated translation adjustment.................... (63) --
-------- --------
Total Stockholder's Equity.......................... 55,994 67,803
-------- --------
Total Liabilities and Stockholder's Equity.......... $399,240 $380,047
======== ========
</TABLE>
The accompanying Notes are an integral part of the financial statements.
28
<PAGE>
EAGLE FAMILY FOODS, INC.
STATEMENT OF CASH FLOWS
FOR THE ONE HUNDRED FIFTY-FIVE DAY PERIOD ENDED JUNE 27, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash Flows From (Used In) Operating Activities
Net loss........................................................... $(26,444)
Adjustments to reconcile net loss to net cash from (used in)
operating activities
Depreciation and amortization.................................... 13,755
In-process research and development write-off.................... 23,900
Deferred taxes................................................... (14,246)
Net change in current assets and liabilities
Accounts receivable.............................................. (12,368)
Inventories...................................................... (11,901)
Accounts payable................................................. 9,665
Other assets..................................................... (210)
Other liabilities................................................ 9,552
--------
Cash used in operating activities.................................. (8,297)
--------
Cash Used In Investing Activities
Capital expenditures............................................... (2,578)
Proceeds from the sale of assets................................... 180
Acquisition costs.................................................. (3,041)
--------
Cash used in investing activities.................................. (5,439)
--------
Cash From Financing Activities
Proceeds from long-term debt....................................... 12,000
Payment of long-term debt.......................................... (250)
--------
Cash provided by financing activities.............................. 11,750
--------
Decrease in cash and cash equivalents................................ (1,986)
Cash and cash equivalents at beginning of period..................... 3,798
--------
Cash and cash equivalents at end of period........................... $ 1,812
========
Supplemental disclosure:
Interest paid...................................................... $ 3,991
========
</TABLE>
The accompanying Notes are an integral part of the financial statements.
29
<PAGE>
EAGLE FAMILY FOODS, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE ONE HUNDRED FIFTY-FIVE DAY PERIOD ENDED JUNE 27, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED
COMMON PAID ACCUMULATED TRANSLATION
STOCK IN CAPITAL DEFICIT ADJUSTMENT TOTAL
------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
Balance, January 23,
1998................... $ 1 $82,500 $(14,698) $-- $ 67,803
Adjustment to
stockholder's equity at
January 23, 1998 for
write-off of in-process
research and
development, net of
taxes (Note 5)......... -- -- 14,698 -- 14,698
--- ------- -------- ---- --------
Balance, January 23,
1998, as adjusted...... 1 82,500 -- -- 82,501
Net loss................ -- -- (26,444) -- (26,444)
Accumulated translation
adjustment............. -- -- -- (63) (63)
--- ------- -------- ---- --------
Balance, June 27, 1998.. $ 1 $82,500 $(26,444) $(63) $ 55,994
=== ======= ======== ==== ========
</TABLE>
The accompanying Notes are an integral part of the financial statements.
30
<PAGE>
EAGLE FAMILY FOODS HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE ONE HUNDRED FIFTY-FIVE DAY PERIOD ENDED JUNE 27, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Net sales............................................................ $ 68,183
Cost of goods sold................................................... 38,376
--------
Gross margin......................................................... 29,807
Distribution expense................................................. 4,550
Marketing expense.................................................... 15,048
General and administrative expense................................... 3,703
Amortization of intangibles.......................................... 11,855
In-process research and development write-off........................ 23,900
--------
Operating loss....................................................... (29,249)
Interest expense, net................................................ 11,453
--------
Loss before income taxes............................................. (40,702)
Income tax benefit................................................... 14,246
--------
Net loss............................................................. $(26,456)
========
</TABLE>
The accompanying Notes are an integral part of the consolidated financial
statements.
31
<PAGE>
EAGLE FAMILY FOODS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 27, 1998 AND JANUARY 23, 1998
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 27, 1998 JANUARY 23, 1998
------------- ----------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents..................... $ 1,812 $ 3,798
Accounts receivable, net...................... 12,368 --
Inventories................................... 32,001 20,100
Other current assets.......................... 261 50
-------- --------
Total Current Assets........................ 46,442 23,948
Property and Equipment, Net..................... 24,791 23,950
Intangibles, Net................................ 303,950 312,758
Deferred Income Taxes........................... 14,246 9,202
Other Non-Current Assets........................ 8,986 9,363
-------- --------
Total Assets.................................... $398,415 $379,221
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Current portion of long-term debt............. $ 1,250 $ 1,000
Accounts payable.............................. 9,666 --
Other accrued liabilities..................... 8,122 5,744
Accrued interest.............................. 7,209 --
-------- --------
Total Current Liabilities................... 26,247 6,744
Long-Term Debt.................................. 317,000 305,500
Commitments and Contingencies (Note 11)
Redeemable Preferred Stock
Series A preferred stock, $100 stated value,
1,000,000 shares authorized, 816,750 shares
issued and outstanding, at redemption value.. 85,144 81,675
Subscription receivable....................... (817) (817)
-------- --------
84,327 80,858
Stockholders' Equity (Deficit)
Common stock $0.01 par value, 1,200,000 shares
authorized, 971,839 shares issued and
outstanding.................................. 10 10
Additional paid-in capital.................... 962 962
Unearned compensation......................... (135) (147)
Accumulated deficit........................... (29,925) (14,698)
Subscription receivable....................... (8) (8)
Accumulated translation adjustment............ (63) --
-------- --------
Total Stockholders' Equity (Deficit)........ (29,159) (13,881)
-------- --------
Total Liabilities and Stockholders' Equity
(Deficit)...................................... $398,415 $379,221
======== ========
</TABLE>
The accompanying Notes are an integral part of the consolidated financial
statements.
32
<PAGE>
EAGLE FAMILY FOODS HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE ONE HUNDRED FIFTY-FIVE DAY PERIOD ENDED JUNE 27, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash Flows From (Used In) Operating Activities
Net loss........................................................... $(26,456)
Adjustments to reconcile net loss to net cash from (used in)
operating activities
Depreciation and amortization.................................... 13,767
In-process research and development write-off.................... 23,900
Deferred taxes................................................... (14,246)
Net change in current assets and liabilities
Accounts receivable.............................................. (12,368)
Inventories...................................................... (11,901)
Accounts payable................................................. 9,666
Other assets..................................................... (211)
Other liabilities................................................ 9,552
--------
Cash used in operating activities.................................. (8,297)
--------
Cash Used In Investing Activities
Capital expenditures............................................... (2,578)
Proceeds from sale of assets....................................... 180
Acquisition costs.................................................. (3,041)
--------
Cash used in investing activities.................................. (5,439)
--------
Cash From Financing Activities
Proceeds from long-term debt....................................... 12,000
Payment of long-term debt.......................................... (250)
--------
Cash from financing activities..................................... 11,750
--------
Decrease in cash and cash equivalents................................ (1,986)
Cash and cash equivalents at beginning of period..................... 3,798
--------
Cash and cash equivalents at end of period........................... $ 1,812
========
Supplemental disclosure:
Interest paid...................................................... $ 3,991
========
Non-Cash financing activities included dividends accrued on
Redeemable Preferred Stock........................................ $ 3,469
========
</TABLE>
The accompanying Notes are an integral part of the consolidated financial
statements.
33
<PAGE>
EAGLE FAMILY FOODS HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE ONE HUNDRED FIFTY-FIVE DAY PERIOD ENDED JUNE 27, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED
COMMON PAID UNEARNED ACCUMULATED SUBSCRIPTION TRANSLATION
STOCK IN CAPITAL COMPENSATION DEFICIT RECEIVABLE ADJUSTMENT TOTAL
------ ---------- ------------ ----------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 23,
1998................... $10 $962 $(147) $(14,698) $(8) $ -- $(13,881)
Adjustment to
stockholders' equity at
January 23, 1998 for
write-off of in-process
research and
development, net of
taxes (Note 5)......... -- -- -- 14,698 -- -- 14,698
--- ---- ----- -------- --- ----- --------
Balance, January 23,
1998, as adjusted...... 10 962 (147) -- (8) -- 817
Net loss................ -- -- -- (26,456) -- -- (26,456)
Preferred stock
dividend............... -- -- -- (3,469) -- -- (3,469)
Amortization of unearned
compensation........... -- -- 12 -- -- -- 12
Accumulated translation
adjustment............. -- -- -- -- -- (63) (63)
--- ---- ----- -------- --- ----- --------
Balance, June 27, 1998.. $10 $962 $(135) $(29,925) $(8) $ (63) $(29,159)
=== ==== ===== ======== === ===== ========
</TABLE>
The accompanying Notes are an integral part of the consolidated financial
statements.
34
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS
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. All significant intercompany balances and
transactions have been eliminated in consolidation. The Company's and
Holdings' fiscal year end is the Saturday closest to June 30. Fiscal years are
designated in the financial statements and notes by the calendar year in which
the fiscal year ends.
EFFI was incorporated on November 14, 1997 and Holdings was incorporated on
December 22, 1997. On December 30, 1997, EFFI issued 10,000 shares of common
stock, par value $.01 per share, for $1,000 to Holdings. Holdings and EFFI did
not realize any income or incur any expenses until commencement of operations
on January 23, 1998. On January 23, 1998, Holdings received $82.5 million from
GE Investment Private Placement Partners II ("GEI"), Warburg, Pincus Ventures,
L.P. ("Warburg") and certain members of management in exchange for 825,000
shares of common stock and 816,750 shares of Series A preferred stock. On
January 23, 1998, EFFI acquired certain assets of Borden Foods Corporation
("BFC") and certain of their affiliates for $376.8 million. Financing for the
acquisition and related fees consisted of (i) $82.5 million equity
contribution from Holdings, (ii) $115.0 million of 8 3/4% senior subordinated
notes and (iii) senior secured credit facilities in the aggregate principal
amount of $245.0 million, consisting of a $175.0 million term loan facility
and a $70.0 million revolving credit facility, under which $16.5 million was
drawn at the time of the acquisition closing. (See Note 6.)
The acquisition was reflected in the financial statements using the purchase
method of accounting. The purchase price was allocated to the assets of EFFI
on the basis of their fair values. The fair values of assets were determined
based on independent appraisals and management estimates.
EFFI operates in a single segment which manufactures and markets a portfolio
of leading dry-grocery food products with widely recognized and established
brands, primarily in the United States with limited sales and manufacturing in
Canada. The Company's portfolio of products includes "Eagle Brand" sweetened
condensed milk, "ReaLemon" reconstituted lemon and lime juice, "Nonesuch"
mincemeat, "Cremora" non-dairy creamer, "Kava" acid-neutralized coffee and
"Borden" egg nog.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
Revenues are recognized when products are shipped. Liabilities are
established for estimated returns, allowances, consumer and certain trade
promotions and discounts when revenues are recognized.
Research and Development
Research and development costs are charged to general and administrative
expense when incurred. Research and development costs amounted to $845,000 for
the period ended June 27, 1998. Also see Note 5.
Advertising and Promotion
Production costs of future media advertising and consumer promotion events
are deferred until the advertising or promotion first occurs. All other
advertising and promotion costs are expensed when incurred. Advertising and
promotional expenses were $9,679,000 for the period ended June 27, 1998.
Cash and Cash Equivalents
The Company considers all liquid investments purchased with a term to
maturity of three months or less when purchased to be cash equivalents.
35
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS--CONTINUED
Inventories
Inventories are stated at fair value (representing cost) at January 23, 1998
and the lower of cost or market at June 27, 1998 with cost of goods sold
principally being determined using the first-in, first-out method.
Property and Equipment
Property and equipment is stated at fair value (representing cost) at
January 23, 1998 and at cost at June 27, 1998. Depreciation of property and
equipment is calculated for financial reporting purposes on a straight-line
method using estimated service lives ranging principally from 8-20 years for
buildings and improvements and 3-10 years for other property and equipment.
When assets are sold, retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the accounts and any related gain or
loss is recorded in the statement of operations. Normal maintenance and
repairs are expensed as incurred, while major renewals and betterments which
extend service lives are capitalized.
Capitalized Software Development Costs
Certain external costs and internal payroll and payroll related costs
incurred during the application development and implementation stages of a
software project are capitalized and amortized on a straight-line basis over
the useful life of the software. Costs incurred during the preliminary project
and post-implementation stages are expensed as incurred. At June 27, 1998,
capitalized software costs, net of accumulated amortization, amounted to
$748,100.
Intangibles
Intangibles are stated at fair value (representing cost) at January 23, 1998
and are being amortized on a straight-line basis over their estimated useful
lives. Goodwill represents the excess of purchase price over fair value of
identifiable assets and liabilities acquired.
Impairment
Long-lived assets including goodwill are reviewed for impairment whenever
events or changes indicate that full recoverability is questionable. Factors
used in the valuation include, but are not limited to, management's plans for
future operations, recent operating results and projected undiscounted cash
flows.
Other Non-current Assets
Other non-current assets at June 27, 1998 and January 23, 1998 consists
primarily of net deferred financing costs amounting to approximately
$8,920,000 and $8,530,000, respectively. Such costs are amortized over the
term of the related debt using the interest method.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," which requires the use of the liability method. Under this method,
deferred tax assets and liabilities are recognized based on the difference
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect in the years in
which those temporary differences are expected to reverse. Under SFAS No. 109,
the effect on deferred taxes of a change in tax rates is recognized in income
in the period that includes the enactment date.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results may differ from those estimates.
36
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS--CONTINUED
Foreign Currency Translation
All assets and liabilities of Canadian operations are translated into U.S.
dollars using the rate at the end of the fiscal period. Income and expense
items are translated at average exchange rates prevailing during the fiscal
period. Foreign currency assets, liabilities, income and expenses were not
significant to the Company's financial position or results of operations.
Fair Value of Financial Instruments
The carrying value of cash equivalents, accounts receivable, accounts
payable and accrued expenses as stated on the balance sheets approximates
their fair market values because of their short maturities. The fair value of
the Company's debt is estimated based on the current rates offered to the
Company for debt of the same remaining maturities. The fair value of the
Company's derivatives are estimated based on dealer quotes for those
instruments.
Hedging
The Company enters into derivative financial instrument transactions in
order to manage or reduce market risk. The Company's current policy is to
recognize differences between the amount of interest to be paid and the amount
of interest to be received under interest rate swap agreements as an
adjustment to interest expense over the life of the swap agreement.
Comprehensive Income
A reconciliation of comprehensive loss for the one hundred fifty-five day
period ended June 27, 1998 consists of:
<TABLE>
<CAPTION>
EAGLE FAMILY EAGLE FAMILY
FOODS HOLDINGS, INC. FOODS, INC.
-------------------- ------------
<S> <C> <C>
Net loss................................... $(26,456) $(26,444)
Foreign currency translation............... (63) (63)
-------- --------
Comprehensive Loss......................... $(26,519) $(26,507)
======== ========
</TABLE>
As the effect of the other comprehensive income item was not material, a
separate statement of comprehensive income has not been presented.
Environmental Matters
The Company, like others in similar businesses, is subject to extensive
Federal, state and local environmental laws and regulations. Although the
Company's environmental policies and practices are designed to ensure
compliance with these laws and regulations, future developments and
increasingly stringent regulations could require the Company to incur
additional unforeseen environmental expenditures. Environmental remediation
costs are accrued when environmental assessments and/or remedial efforts are
probable and the cost or a reasonable range can be estimated. Environmental
expenditures which improve the condition of the property are capitalized and
amortized over their estimated useful life. Management is not aware of any
environmental liabilities that will have a material adverse effect on the
Company's financial position, results of operations or liquidity.
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 as 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.
37
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS--CONTINUED
3. INVENTORIES:
Inventories are stated at lower of cost or market at June 27, 1998 and at
fair value (representing cost) at January 23, 1998 and consisted of the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 27, JANUARY 23,
1998 1998
-------- -----------
<S> <C> <C>
Finished goods.......................................... $29,717 $18,000
Raw material............................................ 2,284 2,100
------- -------
$32,001 $20,100
======= =======
</TABLE>
The fair value of inventories exceeded the predecessor's manufacturing cost
by approximately $5.2 million at January 23, 1998.
4. PROPERTY AND EQUIPMENT:
Property and equipment is recorded at cost on June 27, 1998 and at fair
value (representing cost) on January 23, 1998, and consisted of the following
(in thousands):
<TABLE>
<CAPTION>
JUNE 27, JANUARY 23,
1998 1998
-------- -----------
<S> <C> <C>
Land................................................. $ 470 $ 470
Buildings and improvements........................... 6,185 6,161
Machinery and equipment.............................. 18,159 17,319
Construction in progress............................. 1,505 --
------- -------
Total property and equipment......................... 26,319 23,950
Accumulated depreciation............................. (1,528) --
------- -------
Net property and equipment........................... $24,791 $23,950
======= =======
</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>
JUNE 27, JANUARY 23, ESTIMATED USEFUL
1998 1998 LIVES
-------- ----------- ----------------
<S> <C> <C> <C>
Tradenames........................... $141,000 $141,000 40 years
Goodwill............................. 136,505 133,458 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.............. 315,805 312,758
Accumulated amortization............. (11,855) --
-------- --------
Net intangible assets.............. $303,950 $312,758
======== ========
</TABLE>
Pursuant to the acquisition, the Company and BFC entered into a master
customer services agreement ("Services Agreement") whereby BFC and its
affiliates provide various trade marketing, distribution, transactions
processing, information systems and accounting services for a period of up to
18 months after the acquisition closing based on predetermined below market
rates. The fair value of the Services Agreement was determined by an
independent appraisal and was based primarily on the value provided through
the below market terms and the value provided because the arrangement allows
the Company to continue to do business as it builds an infrastructure which
will allow it to operate on a stand alone basis. The Services Agreement is
being amortized on a straight-line basis over one year from the acquisition
closing based on management's estimate of the
38
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS--CONTINUED
timeframe for establishing its own infrastructure. In connection with the
acquisition, the Company entered into agreements with a Canadian affiliate of
BFC pursuant to which BFC's Canadian affiliate manufactures and packages,
warehouses, transports and sells the Company's sweetened condensed milk
products in Canada. Compensation to BFC's Canadian affiliate is based upon
actual costs and upon commission rates customary in the Canadian food industry
and the agreements are terminable upon notice of 90 days or less. Accordingly,
no value has been assigned to these agreements. In connection with the
acquisition, the Company entered into an agreement with a Puerto Rican
affiliate of BFC pursuant to which BFC's Puerto Rico affiliate purchases
products from the Company for distribution in Puerto Rico. Sales pursuant to
the agreement were made at prices which were subject to mutual agreement and
the agreement terminated automatically six months after the acquisition
closing. Accordingly, no value has been assigned to this agreement.
The Company allocated $23.9 million of purchase price to acquired in-process
research and development reflecting the fair market value of certain products
currently in development. These products have not reached technological
feasibility and have no alternative future use. Concurrent with the
acquisition on January 23, 1998, the Company recorded a non-recurring pre-tax
charge of $23.9 million to write-off the aforementioned acquired in-process
research and development. At January 23, 1998, the charge has been reflected
in accumulated deficit, net of related taxes, as the Company views the
purchase price allocation and subsequent write-off as a contemporaneous
transaction. Additionally, this charge has been reflected in the Statement of
Operations for the period ended June 27, 1998 as a write-off that occurred
contemporaneously with the acquisition and financing transactions. A
reconciliation is set forth in the Statement of Changes in Stockholders'
Equity (Deficit).
6. DEBT OBLIGATIONS:
Debt obligations consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 27, JANUARY 23,
1998 1998
-------- -----------
<S> <C> <C>
7 7/8% term loan facility due December 31, 2005.......... $174,750 $175,000
8 3/4% senior subordinated notes due January 15, 2009.... 115,000 115,000
7 5/8% revolving credit facility due December 31, 2004... 28,500 16,500
-------- --------
Total debt obligations................................. 318,250 306,500
Less:
Current portion of long-term debt...................... (1,250) (1,000)
-------- --------
Long-term debt obligations............................. $317,000 $305,500
======== ========
</TABLE>
Senior Credit Facilities
EFFI received senior bank financing from a group of lenders in an aggregate
principal amount of up to $245 million (the "Senior Credit Facilities"). The
Senior Credit Facilities consist of (i) a $70 million seven-year revolving
credit facility (the "Revolving Credit Facility") and (ii) a $175 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. As of January 23, 1998, the Company had drawn from the Revolving
Credit Facility in the amount of $16.5 million and the proceeds of the Term
Loan were fully drawn to fund a portion of the acquisition.
Indebtedness under the Revolving Credit Facility bears interest at the
Company's option at LIBOR plus a 2% premium or at a base rate plus a 1%
premium. Interest payment terms are determined at the time each draw is made
under the Revolving Credit Facility. Indebtedness under the Term Loan Facility
bears interest at the Company's option at LIBOR plus a 2.25% premium or at a
base rate plus a 1.25% premium. These rates are
39
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS--CONTINUED
subject to performance pricing step-downs based on the Company's leverage
ratio. The Revolving Credit Facility matures on December 31, 2004. The Term
Loan requires principal payments in quarterly installments commencing in the
quarter ending March 28, 1998 with a $250,000 principal payment.
The Senior Credit Facilities contain certain financial covenants which
require the Company to meet certain financial tests including debt coverage
and interest expense coverage requirements. In addition, the Senior Credit
Facilities contain covenants including limitations on additional indebtedness,
liens, asset sales, capital expenditures, sale and leaseback transactions,
dividends, loans and investments, modification of material agreements,
transactions with affiliates, acquisitions, mergers and consolidations and
prepayment of subordinated indebtedness. The Senior Credit Facilities
agreement provides that neither EFFI or Holdings will, nor will they permit
any subsidiary of EFFI to, declare or make, or agree to pay or make, directly
or indirectly, any Restricted Payment, as defined, except primarily (i)
Holdings may declare and pay dividends with respect to its capital stock
payable solely in additional shares of its capital stock (other than
redeemable preferred stock) and (ii) subsidiaries of EFFI may declare and pay
dividends ratably with respect to their capital stock. The Senior Credit
Facilities agreement also requires the Company to pledge assets acquired after
the acquisition closing, including stock of after-acquired or formed
subsidiaries, to deliver guarantees by wholly owned domestic subsidiaries and
to maintain insurance. The Senior Credit Facilities contain customary events
of default, including certain changes of control of the Company.
The obligations of EFFI under the Senior Credit Facilities are
collateralized by (i) 100% of the capital stock of the Company and each of its
subsidiaries and (ii) a first priority collateral interest in substantially
all assets and properties of the Company and its future domestic subsidiaries.
The fair market value of the senior credit facilities at June 27, 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 2.25 percent. These swap
agreements commenced on July 23, 1998 and fix the LIBOR rate at 5.955 percent
on $75 million and 5.905 percent on $25 million of the $175 million Term Loan
Facility. These swap agreements expire on December 29, 2000 and December 31,
2002, respectively. The fair value of the interest rate swaps at June 27, 1998
totaled approximately $(551,000).
Senior Subordinated Notes
EFFI issued $115 million of senior subordinated notes (the "Notes") and
received cash proceeds of approximately $112 million net of underwriting
discount. The Notes are due January 15, 2008 and bear interest of 8 3/4% per
annum payable on January 15 and July 15, commencing July 15, 1998.
The Notes are unconditionally guaranteed by Holdings (the "Parent
Guarantee") and by each future Domestic Subsidiary of the Company (each, a
"Domestic Subsidiary Guarantee" and, collectively, the "Domestic Subsidiary
Guarantees") and the Company will cause each such future Domestic Subsidiary
of the Company to enter into a supplemental indenture providing for such
Domestic Subsidiary to guarantee payment of the Notes as required in the
indenture. The Company currently has no domestic subsidiaries and therefore
none which guarantee the Notes. The Parent Guarantee and the Domestic
Subsidiary Guarantees are joint and several as well as full and unconditional.
The Notes are unsecured and subordinated in right of payment to all existing
and future senior indebtedness of the Company. The Notes include certain
covenants including limitations on indebtedness, dividends and other payment
restrictions affecting subsidiaries, subordinated liens, sale and leaseback
transactions, sale or issuance of capital stock of subsidiaries, merger,
consolidation or sale of assets, transactions with affiliates and layering
debt. The indenture provides that the Company will not, and will not permit
any of its subsidiaries, directly or indirectly, to declare or pay any
dividend or make any distribution on or in respect of its capital stock except
dividends or distributions payable solely in its capital stock (other
40
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS--CONTINUED
than redeemable stock) and except dividends or distributions payable solely to
the Company or any wholly-owned subsidiary of the Company. Furthermore,
Holdings' ability to obtain funds from its subsidiaries is restricted by the
Notes because (i) Holdings may not hold assets other than Company capital
stock and other minimal assets related to the business of holding such stock
and (ii) Holdings may not incur any additional liabilities other than in the
ordinary course of business. The fair market value of the senior subordinated
notes was approximately $116 million at June 27, 1998.
On April 16, 1998, the Company and Holdings filed a Registration Statement
on Form S-4 to offer to exchange (the "Exchange Offer") up to $115,000,000 of
its 8 3/4% Series B Senior Subordinated Notes due 2008 (the "Exchange Notes")
for up to $115,000,000 of its outstanding 8 3/4% Senior Subordinated Notes due
2008 (the "Original Notes").
Upon consummation of the Exchange Offer, the terms of the Exchange Notes
were substantially identical in all respects to the term of the Original
Notes. The Exchange Notes are unconditionally guaranteed on a senior
subordinated and unsecured basis by Holdings and all future Domestic
Subsidiaries.
Annual principal payments for the next five years and thereafter consist of
the following (dollars in thousands):
<TABLE>
<S> <C>
1999............................................................. $ 1,250
2000............................................................. 1,000
2001............................................................. 750
2002............................................................. 1,000
2003............................................................. 3,250
Thereafter....................................................... 311,000
--------
$318,250
========
</TABLE>
7. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," which requires the use of the liability method. Under this method,
deferred tax assets and liabilities are recognized based on the difference
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect in the years in
which those temporary differences are expected to reverse. Under SFAS No. 109,
the effect on deferred taxes of a change in tax rates is recognized in income
in the period that includes the enactment date.
The temporary difference which gave rise to a deferred tax asset at January
23, 1998 resulted from purchased in-process research and development written
off concurrent with the acquisition and totaled approximately $9.2 million.
At June 27, 1998, the Company had $40.7 million of net operating losses for
financial statement purposes and $12.3 million of net operating loss
carryforwards for tax reporting purposes. The tax net operating losses expire,
if unused, in 2018. The Company believes that these carryforwards will be
available to reduce future federal income tax liabilities and has recorded the
benefit of these carryforwards as a noncurrent deferred tax asset. The
Company's net operating loss carryforwards for state and foreign purposes are
not material.
The income tax benefit for the period ended June 27, 1998 amounted to $14.2
million and consists of deferred federal tax benefits.
41
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS--CONTINUED
The income tax benefit of $14.2 million approximated the federal statutory
tax rate.
Deferred tax assets and liabilities at June 27, 1998 resulted from (in
thousands):
<TABLE>
<CAPTION>
ASSETS LIABILITIES TOTAL
------- ----------- -------
<S> <C> <C> <C>
Fixed assets.................................... $ 117 $ -- $ 117
Intangible assets............................... 9,066 -- 9,066
Other........................................... 1,259 (405) 854
Net operating loss carryforward................. 4,209 -- 4,209
------- ----- -------
Total deferred income taxes................... $14,651 $(405) $14,246
======= ===== =======
</TABLE>
8. REDEEMABLE PREFERRED STOCK
On January 23, 1998, 816,750 shares of Series A Non-Voting Preferred Stock
("Preferred Stock") were issued by Holdings at a stated value of $100 per
share (the "Stated Value"). The Preferred Stock provides for preferential
cumulative dividends at the rate of 10% per share per annum of the Stated
Value. Dividends are payable as declared by the Holdings Board of Directors
and shall be paid before any dividends shall be set apart for or paid upon the
Common Stock. In the event of liquidation, dissolution or winding up, the
holders of shares of Preferred Stock are entitled to be paid out of the assets
of Holdings available for distribution to its stockholders before any payment
is made to the holders of stock junior to the Preferred Stock. Holders of
Preferred Stock are not entitled to vote on any matters presented to the
stockholders of Holdings. However, the affirmative vote or written consent of
the holders of at least two-thirds of the then outstanding shares of Preferred
Stock is required to amend, alter or repeal the preferences, special rights or
other powers of the Preferred Stock. The Preferred Stock is subject to
mandatory redemption at a price per share equal to the Stated Value plus all
dividends accrued and unpaid thereon upon (1) the closing of a public offering
pursuant to an effective registration statement under the Securities Act of
1933, (2) the sale of all or substantially all of the assets of Holdings or
the merger or consolidation of Holdings with or into any other corporation or
other entity in which the holders of Holdings' outstanding shares before the
merger or consolidation do not retain a majority of the voting power of the
surviving corporation or other entity or (3) the acquisition by any person of
shares of Common Stock representing a majority of the issued and outstanding
shares of Common Stock then outstanding. At June 27, 1998, cumulative accrued
dividends totaled $3,469,000 and are classified with Redeemable Preferred
Stock in the consolidated balance sheet of Holdings.
9. STOCKHOLDERS AND REGISTRATION RIGHTS AGREEMENTS
The Holdings Stockholders Agreement
The relations among the Equity Sponsors and the Management Investors
(collectively, the "Investors"), and Holdings are governed by a Stockholders
Agreement, dated as of January 23, 1998 ("the Acquisition Closing") (the
"Holdings Stockholders Agreement").
Board of Directors. Holdings is managed by the Board of Directors which is
comprised of nine members, three of whom are designated by GEI and three of
whom are designated by Warburg. For so long as GEI beneficially owns at least
20% of the Common Stock outstanding on a fully diluted basis, GEI has the
right to designate three directors to the Board of Directors. For so long as
GEI beneficially owns at least 15% of the Common Stock outstanding on a fully
diluted basis, GEI has the right to designate two directors to the Board of
Directors. For so long as GEI beneficially owns at least 10% of the Common
Stock outstanding on a fully diluted basis, GEI has the right to designate one
director to the Board of Directors. For so long as Warburg beneficially owns
at least 20% of the Common Stock outstanding on a fully diluted basis, Warburg
has the right to designate
42
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS--CONTINUED
three directors to the Board of Directors. For so long as Warburg beneficially
owns at least 15% of the Common Stock outstanding on a fully diluted basis,
Warburg has the right to designate two directors to the Board of Directors.
For so long as Warburg beneficially owns at least 10% of the Common Stock
outstanding on a fully diluted basis, Warburg has the right to designate one
director to the Board of Directors. Two named members of executive management
will be entitled to serve as directors for so long as they remain executive
officers of the Company. In addition, as long as the Equity Sponsors in the
aggregate beneficially own more than 50% of the Common Stock outstanding on a
fully diluted basis, the Equity Sponsors have the right to designate a
majority of the directors to the Board of Directors. The Board of Directors
will have at least one director who is not an officer or employee of Holdings,
the Company, or the Equity Sponsors, appointed by unanimous approval of the
Board of Directors. The Holdings Stockholders Agreement provides that the
Board of Directors of the Company is identical to that of Holdings. The
consent of a majority of the Board of Directors which includes at least one of
the directors designated by GEI and one of the directors designated by Warburg
is required for the approval of certain enumerated actions by the Company and
Holdings.
Restrictions on Transfer of Stock. Securities held by the Management
Investors, including any shares of Common Stock or Series A Preferred Stock
and any options to acquire shares of Common Stock, may only be sold or
otherwise transferred with the consent of the Board of Directors of Holdings.
Tag-Along Rights. The Holdings Stockholders Agreement provides that in the
event any Investor chooses to sell or otherwise transfer more than 20% of its
shares of Common Stock or Series A Preferred Stock to a proposed transferee,
the selling Investor must offer to each of the other Investors the right to
participate in such sale on a pro rata basis based on ownership of the shares
being sold.
Subscription Rights. With certain exceptions, the Holdings Stockholders
Agreement provides each Investor with subscription rights in connection with
any issuance of equity securities by Holdings for cash whereby each Investor
shall have the right to purchase a pro rata portion of such equity securities.
Termination. The tag-along rights and subscription rights described above
will terminate upon the completion of an initial public offering of Common
Stock.
The Registration Rights Agreement
Holdings and the Investors have entered into a Registration Rights
Agreement, dated as of the Acquisition Closing (the "Registration Rights
Agreement"). Pursuant to the Registration Rights Agreement, each of the Equity
Sponsors has two demand registration rights for each of its Series A Preferred
Stock and Common Stock and unlimited Form S-3 registration rights and
unlimited piggyback rights. The Management Investors also have piggyback
registration rights. All expenses related to these registrations (other than
underwriting discounts and commissions) will be borne by Holdings.
10. 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
43
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS--CONTINUED
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.
11. COMMITMENTS AND CONTINGENCIES
Commitments. The Company has entered into long-term contracts for the
purchase of certain raw materials. Minimum purchase commitments, at current
prices, is approximately $6.0 million at June 27, 1998.
Employment Agreements. The Company has entered into two-year employment
agreements with certain key executives. Such agreements provide for annual
salaries and bonuses and include non-compete and non-solicitation provisions.
12. STOCK OPTIONS AND RESTRICTED STOCK
On January 14, 1998, Holdings' Board of Directors adopted the 1998 Stock
Incentive Plan (the "Plan"). The Plan provides for the grant to officers, key
employees, directors and consultants of the Company of incentive stock
options, non-qualified stock options, and restricted stock. A total of 153,650
shares of common stock may be awarded under the Plan, subject to certain
adjustments reflecting changes in Holdings' capitalization.
Grants of options and the periods during which such options can be exercised
are at the discretion of a committee of the Board of Directors. As of June 27,
1998, the committee has not granted any stock options.
Under the Plan, grants of restricted stock and the periods during which such
grants become unrestricted and vest are at the discretion of the committee.
On January 16, 1998, the committee granted and issued 146,839 shares of
restricted stock to Holdings' officers and other key employees. The restricted
stock vests in installments of 20% per year on each of the first five
anniversaries of the issue date, provided that the recipient is employed by
Holdings as of each such date.
44
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS--CONCLUDED
The fair market value of the shares at the date of grant totaled $146,839.
Unearned compensation was charged for the fair value of the restricted shares
granted and issued in accordance with the Plan. The unearned compensation is
shown as a reduction of stockholders' equity (deficit) in the accompanying
Consolidated Balance Sheet. Unearned compensation will be amortized ratably
over the restricted period.
Holders of the restricted stock are not entitled to receive dividends until
such shares vest or to vote their respective shares during the restricted
period. Additionally, the sale, transfer, pledge, exchange or disposal of
restricted shares during the restricted period is not permitted except as
otherwise allowed by the stockholders agreement.
13. RETIREMENT PLAN
The Company sponsors a defined contribution 401(k) retirement plan.
Participation in this plan is available to all employees who have completed
certain minimum service requirements. Company contributions to this plan are
based on a percentage of employees' annual compensation. The cost of this plan
was $178,000 for the period ended June 27, 1998.
14. PRODUCT REVENUES
The following table sets forth sales data for each of the Company's product
lines for the One Hundred Fifty-Five day period ended June 27, 1998:
<TABLE>
<CAPTION>
PERCENTAGE
PRODUCT LINE COMPANY'S PRINCIPAL BRANDS 1998 SALES OF SALES
------------ -------------------------- ---------- ----------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Sweetened condensed milk Eagle Brand $25.4 37.2%
Lemon and lime juice Realemon and Realime 23.8 34.9
Non-dairy creamer Cremora 17.1 25.1
Shelf-stable egg nog Borden Egg Nog 0.2 0.3
Mincement pie filling None Such 0.1 0.1
Acid neutralized coffee Kava 1.6 2.4
----- -----
Total $68.2 100.0%
===== =====
</TABLE>
45
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders of
Borden Foods Corporation
We have audited the accompanying combined balance sheets of Borden Brands
North America ("BBNA"), which comprises certain operating businesses of Borden
Foods Corporation and affiliates, as of December 31, 1997 and 1996, and the
related combined statements of operations, owner's investment and cash flows
for the twenty-three day period ended January 23, 1998 and for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of Borden Food's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined financial position of BBNA at December 31, 1997 and
1996, and the combined results of their operations and their combined cash
flows for the twenty-three day period ended January 23, 1998 and for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
May 22, 1998
Columbus, Ohio
46
<PAGE>
BORDEN BRANDS NORTH AMERICA
(PREDECESSOR COMPANY)
COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 28, 1997,
FOR THE TWENTY-THREE DAY PERIOD ENDED JANUARY 23, 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
TWENTY-THREE
SIX MONTHS DAY PERIOD YEAR ENDED DECEMBER 31,
ENDED ENDED --------------------------
JUNE 28, 1997 JANUARY 23, 1998 1997 1996 1995
------------- ---------------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Sales............... $75,501 $7,693 $229,370 $230,384 $225,263
Cost of goods sold...... 37,034 5,154 107,674 110,357 102,712
------- ------ -------- -------- --------
Gross margin............ 38,467 2,539 121,696 120,027 122,551
Distribution expense.... 5,279 303 13,464 14,640 15,691
Marketing expense....... 17,630 2,095 55,074 62,705 63,804
General & administrative
expense................ 6,448 1,010 13,184 13,483 13,289
------- ------ -------- -------- --------
Operating income
(loss)................. 9,110 (869) 39,974 29,199 29,767
Other income............ 23 -- 79 38 --
------- ------ -------- -------- --------
Income (loss) before
income taxes........... 9,133 (869) 40,053 29,237 29,767
Income tax expense
(benefit).............. 3,880 (287) 16,236 12,034 12,235
------- ------ -------- -------- --------
Net income (loss)....... $ 5,253 $ (582) $ 23,817 $ 17,203 $ 17,532
======= ====== ======== ======== ========
</TABLE>
See Notes to Combined Financial Statements
47
<PAGE>
BORDEN BRANDS NORTH AMERICA
(PREDECESSOR COMPANY)
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets
Cash............................................... $ 6 $ 33
Accounts receivable (less allowance for doubtful
accounts of $268 and $238, respectively).......... 12,862 15,953
Inventories:
Finished and in-process goods.................... 13,292 11,277
Raw materials and supplies....................... 2,528 1,962
Other current assets............................... 879 903
-------- --------
Total Current Assets............................. 29,567 30,128
Property and Equipment
Land............................................... 325 374
Buildings.......................................... 3,669 3,712
Machinery and equipment............................ 20,462 18,403
-------- --------
24,456 22,489
Less accumulated depreciation...................... (8,386) (5,840)
-------- --------
Net Property and Equipment....................... 16,070 16,649
Intangibles, Net..................................... 108,122 111,047
Other Non-Current Assets............................. 27 33
-------- --------
Total Assets..................................... $153,786 $157,857
======== ========
LIABILITIES AND OWNER'S INVESTMENT
Current Liabilities
Accounts payable................................... $ 7,774 $ 8,230
Other current liabilities.......................... 25,347 25,045
-------- --------
Total current liabilities........................ 33,121 33,275
Other non-current liabilities........................ 2,527 2,492
Commitments and Contingencies (Notes 3 and 9)........ -- --
Owner's Investment................................... 118,138 122,090
-------- --------
Total Liabilities and Owner's Investment......... $153,786 $157,857
======== ========
</TABLE>
See Notes to Combined Financial Statements
48
<PAGE>
BORDEN BRANDS NORTH AMERICA
(PREDECESSOR COMPANY)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 28, 1997,
FOR THE TWENTY-THREE DAY PERIOD ENDED JANUARY 23, 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
TWENTY-THREE
SIX MONTHS DAY
ENDED PERIOD ENDED YEAR ENDED DECEMBER 31,
JUNE 28, JANUARY 23, ----------------------------
1997 1998 1997 1996 1995
----------- ------------ -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED
IN) OPERATING
ACTIVITIES
Net income (loss)..... $ 5,253 $ (582) $ 23,817 $ 17,203 $ 17,532
Adjustments to
reconcile net income
to net cash from
operating activities
Depreciation and
amortization....... 3,026 512 6,174 5,937 6,010
Loss on sale of
fixed assets....... 312
Net change in assets
and liabilities
Accounts
receivable......... 5,255 6,630 3,091 (286) 2,145
Inventories......... (26,910) 610 (2,581) 78 (1,615)
Accounts payable.... (1,136) (3,282) (456) (2,231) 1,396
Other assets........ 290 183 30 755 1,225
Other liabilities... (4,188) (2,350) 509 3,022 (3,586)
-------- ------- -------- -------- --------
Cash flows (used in)
from operating
activities........... (18,410) 1,721 30,896 24,478 23,107
CASH FLOWS USED IN
INVESTING ACTIVITIES
Capital expenditures.. (1,365) (87) (3,154) (3,726) (2,079)
CASH FLOWS USED IN
FINANCING ACTIVITIES
Net increase
(decrease) in
intercompany
investment........... 19,746 (1,616) (27,769) (20,723) (21,028)
-------- ------- -------- -------- --------
(Decrease) increase in
cash................... (29) 18 (27) 29 --
Cash at beginning of
period................. 33 6 33 4 4
-------- ------- -------- -------- --------
Cash at end of period... $ 4 $ 24 $ 6 $ 33 $ 4
======== ======= ======== ======== ========
</TABLE>
See Notes to Combined Financial Statements
49
<PAGE>
BORDEN BRANDS NORTH AMERICA
(PREDECESSOR COMPANY)
COMBINED STATEMENTS OF OWNER'S INVESTMENT
FOR THE TWENTY-THREE DAY PERIOD ENDED JANUARY 23, 1998
AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
RETAINED INTERCOMPANY
EARNINGS INVESTMENT TOTAL
-------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, January 1, 1995...................... $ -- $ 129,106 $ 129,106
Net income.................................... 17,532 17,532
Cash collected on behalf of BBNA.............. (227,985) (227,985)
Cash disbursed on behalf of BBNA.............. 207,571 207,571
Translation adjustments and other............. (614) (614)
------- --------- ---------
Balance, December 31, 1995.................... 17,532 108,078 125,610
Net income.................................... 17,203 17,203
Cash collected on behalf of BBNA.............. (233,610) (233,610)
Cash disbursed on behalf of BBNA.............. 212,464 212,464
Translation adjustments and other............. 423 423
------- --------- ---------
Balance, December 31, 1996.................... 34,735 87,355 122,090
Net income.................................... 23,817 23,817
Cash collected on behalf of BBNA.............. (232,052) (232,052)
Cash disbursed on behalf of BBNA.............. 204,585 204,585
Translation adjustments and other............. (302) (302)
------- --------- ---------
Balance, December 31, 1997.................... 58,552 59,586 118,138
Net loss...................................... (582) (582)
Cash collected on behalf of BBNA.............. (14,164) (14,164)
Cash disbursed on behalf of BBNA.............. 12,550 12,550
Translation adjustments and other............. (2) (2)
------- --------- ---------
Balance, January 23, 1998..................... $57,970 $ 57,970 $ 115,940
======= ========= =========
</TABLE>
See Notes to Combined Financial Statements
50
<PAGE>
BORDEN BRANDS NORTH AMERICA
(PREDECESSOR COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
Nature of Operations and Basis of Presentation. The accompanying combined
financial statements present the financial position, results of operations,
cash flows and owner's investment of Borden Brands North America of Borden
Foods Corporation ("BBNA" or the "Company"). These financial statements have
been prepared on a purchase accounting basis which reflects an allocation of a
portion of the acquisition cost relating to the 1994 acquisition by an
affiliate of Kohlberg Kravis Roberts ("KKR") of Borden, Inc. ("Borden") to
BBNA. The purchase price has been allocated to tangible and intangible assets
and liabilities of BBNA based on independent appraisals and management
estimates.
BBNA is engaged in the business of developing, manufacturing, marketing,
distributing and selling certain food products primarily in the United States
with limited sales and manufacturing activity in Canada. The BBNA products
include "Eagle Brand" sweetened condensed milk, "ReaLemon" reconstituted lemon
and lime juice, "Nonesuch" mincemeat, "Cremora" non-dairy creamer, "Kava"
acid-neutralized coffee and "Borden" egg nog.
In 1996, an affiliate of KKR, Borden Foods Holdings, LLC ("Foods Holdings")
formed Borden Foods Corporation ("BFC") for the purposes of acquiring and
operating certain of Borden's food businesses, including BBNA. In addition,
Foods Holdings together with BFC, invested in Borden Foods Investment LP for
the purposes of acquiring and holding certain trademarks associated with BBNA
and the other Borden food businesses. The acquisition from Borden was a
taxable transaction effective October 1, 1996. There was no change in the book
basis of BBNA's assets and liabilities at the time of the sale because the
sale was between related parties and Borden's principal stockholder continues
to control the food businesses.
In March 1997, BFC announced its intention to sell certain businesses from
its current portfolio which were considered not to be aligned with their
ongoing strategy. Among these businesses were the BBNA business, FunCheese and
the Puerto Rican distribution business. Subsequent to December 31, 1997, BBNA
was purchased by Eagle Family Foods, Inc., a newly formed entity sponsored by
GE Investment Private Placement Partners II, a Limited Partnership, and
Warburg, Pincus Ventures, L.P.
BBNA operates as a business unit of BFC which is an affiliate of Borden.
Under this structure, BFC incurs various administrative costs in connection
with the operation of the BBNA business, such as accounting, legal, tax,
credit and information services departments and executive management. In
addition, BBNA utilizes shared sales and administrative resources with other
BFC business units. These costs were allocated to BBNA through intercompany
expense charges and the intercompany liability is accumulated in the owner's
investment account.
Unaudited Interim Results. The accompanying unaudited financial statements
contain all adjustments, consisting only of normal adjustments, which in the
opinion of management are necessary for the fair presentation of operating
results for the interim period. Results for the interim period are subject to
seasonal variations and are not necessarily indicative of the results for the
full year.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The most significant estimates in BBNA financial statements
are the allowance for doubtful accounts, reserve for inventory obsolescence,
accruals for trade promotions and deductions, general and group insurance and
Borden and BFC corporate allocations. Actual results could differ from those
estimates.
51
<PAGE>
BORDEN BRANDS NORTH AMERICA
(PREDECESSOR COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS)
Summary of Significant Accounting Policies. Significant accounting policies
followed by BBNA, as summarized below, are in conformity with generally
accepted accounting principles.
Principles of Combination. The combined financial statements include the
accounts of BBNA after elimination of material inter and intracompany accounts
and transactions.
Revenue Recognition. Revenues are recognized when products are shipped.
Liabilities are established for estimated returns, allowances and consumer and
certain trade promotions and discounts when revenues are recognized.
Research and Development. Research and development costs are charged to
general and administrative expense when incurred. Research and development
costs amounted to $104, $1,781, $2,809 and $1,593 for the twenty-three day
period ended January 23, 1998 and the years ended December 31, 1997, 1996 and
1995, respectively.
Advertising and Promotion Expense. Production costs of future media
advertising are deferred until the advertising first occurs. All other
advertising costs are expensed when incurred. Promotional expenses are
generally expensed ratably over the year in relation to revenues or other
performance measures. Advertising and promotional expenses were $1,389,
$28,245, $37,071 and $44,065 for the twenty-three day period ended January 23,
1998 and the years ended December 31, 1997, 1996 and 1995, respectively.
Cash. BBNA considers all highly liquid investments purchased with a term to
maturity of three months or less when purchased to be cash equivalents.
Inventories. Inventories are stated at the lower of cost or market with cost
principally being determined using the first-in, first-out method.
Property and Equipment. Property and equipment are stated at cost, less a
reserve for accumulated depreciation. Depreciation is recorded on the
straight-line basis over useful lives of 30 years for buildings and 3 to 10
years for equipment.
Major renewals and betterments are capitalized. Maintenance, repairs and
minor renewals are expensed as incurred. When properties are retired or
otherwise disposed of, related cost and accumulated depreciation are removed
from the accounts and any related gain or loss in recorded in the statement of
operations.
Intangibles. Trademarks are amortized on a straight-line basis over the
shorter of forty years or their useful lives; goodwill represents the excess
of purchase price over fair value of identifiable assets of businesses
acquired and is amortized on a straight-line basis over forty years. The
accumulated amortization of intangibles was $8,775 and $5,850 at December 31,
1997 and 1996, respectively.
Impairment. The carrying value of property, equipment and intangibles is
evaluated periodically for recoverability when considered in relation to the
expected future undiscounted cash flows of the business over the estimated
remaining useful life of the asset.
Slotting Allowances. The costs of obtaining shelf space (slotting) are
accrued when committed and amortized over the period of benefit, which is
generally twelve months.
Income Taxes. The results of the domestic and Canadian operations of BBNA
are included in BFC's or Borden Canada Limited's consolidated tax returns. BFC
uses the liability method of accounting for deferred income taxes.
52
<PAGE>
BORDEN BRANDS NORTH AMERICA
(PREDECESSOR COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS)
Deferred income taxes are recorded to recognize the future effects of
temporary differences which arise between financial statement assets and
liabilities and their basis for income tax reporting purposes. For purposes of
these stand-alone financial statements, income taxes are determined as though
BBNA filed separate U.S. federal, Canadian and state corporate income tax
returns. Because all income tax liabilities (current and deferred) are paid to
BBNA's owner such amounts are included as a component of owner's investment in
the accompanying financial statements.
Foreign Currency Translation. All assets and liabilities of Canadian
operations are translated into U.S. dollars using the rate at the end of the
fiscal period. Income and expense items are translated at average exchange
rates prevailing during the fiscal period. The resulting translation
adjustments are considered insignificant and are recorded in owner's
investment.
Concentrations of Credit Risk. Financial instruments which potentially
subject BBNA to concentrations of credit risk consist principally of temporary
cash investments and accounts receivable. The majority of BBNA cash activity
is managed by BFC. BFC and BBNA places its temporary cash investments ($6 at
December 31, 1997 and $33 at December 31, 1996), with high quality
institutions and, by policy, limits the amount of credit exposure to any one
institution. Concentrations of credit risk with respect to accounts receivable
are limited, due to the large number of customers comprising BBNA's customer
base and their dispersion across many different geographies primarily within
North America. BBNA generally does not require collateral or other security to
support customer receivables.
Pension and Retirement Savings Plans. Most of BBNA's employees are covered
under the Borden Employee Retirement Income Plan pension plan. BFC's
cumulative liability associated with the plan is recorded on BFC's balance
sheets. A portion of BFC's total liability has been allocated to BBNA based on
allocations provided by Borden's actuary, which were based on actual employee
census data. BBNA's share of the allocated cost to fund and administer these
plans is recorded in the statements of operations in the year the cost is
incurred.
Substantially all domestic employees of BBNA participate in Borden's
retirement savings plans. BBNA's cost of providing the retirement savings plan
is the amount by which it matches eligible contributions made by participating
employees and is recognized as a charge to income in the year the cost is
incurred.
Non-pension Postemployment and Postretirement Benefits. BFC provides certain
health and life insurance benefits for eligible retirees and their dependents.
The cost of postretirement benefits is accrued during the employees' working
careers. BBNA's cumulative liability associated with these plans is recorded
on BBNA's balance sheet based on allocations provided by Borden's actuary.
BBNA's share of the allocated cost to fund and administer these plans is
recorded in the statements of operations in the year the cost is incurred.
Borden provides certain other postemployment benefits to qualified former or
inactive employees. BBNA's cumulative liability associated with these plans is
recorded on BBNA's balance sheets based on allocations provided by Borden's
actuary. BBNA's share of the cost to fund and administer these plans is
recorded in the statements of operations in the year the cost is incurred.
Fair Value of Financial Instruments. The carrying values of cash, accounts
receivable and payable, other receivables, and accrued and other current
liabilities as stated on the balance sheets approximate their fair market
value.
Group and General Insurance Reserve. BFC is generally self-insured for
losses and liabilities relating to workers' compensation, health and welfare
claims, physical damage to property, business interruption and comprehensive
general, product and vehicle liability. BFC or Borden maintains insurance
policies for certain
53
<PAGE>
BORDEN BRANDS NORTH AMERICA
(PREDECESSOR COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS)
items exceeding deductible limits. Losses are accrued for the estimated
aggregate liability for claims using certain actuarial assumptions followed in
the insurance industry and BFC's experience. An allocation of the liability
associated with BBNA has been included in these financial statements.
Stock Options. The Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, Accounting for Stock-Based Compensation, which was adopted for
disclosure only by BFC, effective January 1, 1996. As permitted by SFAS No.
123, BFC continues to apply its current accounting policy of the intrinsic
value method under Accounting Principles Board Opinion No. 25.
2. RELATED PARTIES AND INTERCOMPANY ALLOCATIONS
BBNA is engaged in various transactions with BFC, Borden and its affiliates
in the ordinary course of business. Certain general and administrative costs,
such as group and general insurance, retirement benefits, and corporate
administrative departments, were allocated to BBNA. A description of the
allocation methods of these costs follows.
For all periods, pension and postemployment and postretirement group
insurance benefits were charged to BBNA based on allocations provided by
Borden's actuary, which were based on actual employee census data. General and
group insurance expenses, which include liability and property damage
insurance, were allocated based on actual claims costs and a pro-rata share of
Borden's catastrophic insurance coverage premiums in 1997 and 1998. For 1996
and 1995, general insurance was allocated based upon actual claims and
percentage of net trade sales, respectively, and group insurance was allocated
based upon a fixed rate per employee. For all periods, corporate information
services and corporate staff department services were allocated based on usage
of resources such as personnel and data processing equipment. For purposes of
these financial statements, certain other administrative expenses incurred by
Borden in 1995 have been allocated to BBNA generally based on a pro-rata share
of Borden's total sales. Subsequent to January 1, 1996, a subsidiary of Borden
provides certain administrative services to BBNA at negotiated fees. These
services include: processing of payroll, active and retiree group insurance
claims administration, administration of workers compensation claims, and
securing insurance coverage for catastrophic claims. BBNA reimburses the
Borden subsidiary for payments made on BBNA's behalf and for services
provided.
Management believes the allocations of these costs for all periods presented
are reasonable based upon the circumstances, however, the allocated amounts
are not necessarily indicative of costs that would have been incurred if BBNA
operated on a stand alone basis since the BBNA business has historically been
operated as a division of BFC and/or Borden. Amounts due to Borden resulting
from these allocations, as well as sales and purchases of products and
materials to or from other operations, are reflected in owner's investment.
BBNA is generally self-insured for general insurance claims and
postemployment benefits other than pensions. The liabilities for these
obligations are included in BBNA's financial statements.
BBNA utilizes the BFC shared sales force for its retail grocery and private
label sales activity. Costs are allocated to BBNA based on the proportion of
the BBNA sales dollars to the total domestic BFC sales.
Customer accounts receivable balances, allowance for doubtful accounts and
accruals for customer allowances and credits are managed by customer in total
for BBNA and certain other BFC food businesses. An allocation of accounts
receivable and the allowance for doubtful accounts has been made to BBNA based
on a proportion of the BBNA sales dollars to the total sales of the group. An
allocation of the accrual for customer
54
<PAGE>
BORDEN BRANDS NORTH AMERICA
(PREDECESSOR COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS)
allowances and credits has been allocated to BBNA based on a proportion of
actual customer deductions taken by BBNA customers to the total deductions
taken by customers of all businesses in the group.
Employee pension benefits are provided under the Borden Employee Retirement
Income Plan to which BBNA contributes. The employees may also participate in
the Borden retirement savings plan. Borden also provides certain health and
life insurance benefits for eligible employees. BBNA has recognized expenses
associated with these benefits, certain of which are determined and allocated
by Borden's actuary. BBNA has assumed an actuarially determined portion of
BFC's U.S. net pension liability.
The following table summarizes the allocation of costs to BBNA in 1995 and
the charges for these costs in 1996, 1997 and 1998:
<TABLE>
<CAPTION>
TWENTY-THREE
DAY PERIOD
ENDED YEAR ENDED DECEMBER 31,
JANUARY 23, -----------------------
1998 1997 1996 1995
------------ ------- ------- -------
<S> <C> <C> <C> <C>
Pension and other employee benefits.... $ 44 $ 524 $ 368 $ 432
Group and general insurance............ 193 2,314 1,416 2,071
Corporate information services......... 265 3,201 3,336 3,043
Shared sales force..................... 196 5,011 6,005 6,318
Executive compensation, corporate
staff, research department services
and division overhead................. 619 8,385 9,526 9,002
</TABLE>
Of the total amounts in 1998, 1997, 1996 and 1995, $220, $2,761, $2,948 and
$4,223 respectively, was included in cost of goods sold and $412, $7,890,
$8,644 and $9,468 respectively, was included in marketing expense, while the
majority of the remaining amount was included in general and administrative
expense.
The benefit related liabilities allocated by Borden to BBNA include the
following (see Note 4 for income tax amounts) as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Net domestic pension liability..................... $ 372 $ 180
Postretirement benefit obligation.................. 1,726 1,794
Postemployment benefit obligation.................. 265 343
Non-qualified plan obligation...................... 164 175
Group and general insurance........................ 1,106 910
</TABLE>
Prior to January 1, 1996, Borden managed disbursements and the net cash
position of BBNA. Subsequent to January 1, 1996, BFC manages disbursements and
the net cash position. Accordingly, both cash generated and required by BBNA's
operations are recorded in owner's investment for such periods. An allocation
of interest was not practical because Borden and BFC had not historically
identified a capital structure comprised of separate elements of debt and
equity applicable to BBNA as a separate entity.
BBNA had sales to affiliates of KKR of $204, $6,678, $7,374 and $6,643 for
the twenty-three day period ended January 23, 1998 and the years ended
December 31, 1997, 1996 and 1995, respectively.
55
<PAGE>
BORDEN BRANDS NORTH AMERICA
(PREDECESSOR COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS)
3. LEASES
BBNA currently leases warehouse space, production facilities and vehicles
under long-term or month-to-month arrangements. Rental expense amounted to
$10, $110, $44 and $34 for the twenty-three day period ended January 23, 1998
and the years ended December 31, 1997, 1996 and 1995, respectively. Future
minimum annual rentals under operating leases at December 31, 1997 are as
follows for calendar years:
<TABLE>
<CAPTION>
MINIMUM RENTALS ON
OPERATING LEASES
------------------
<S> <C>
1998...................................................... $ 68
1999...................................................... 44
2000...................................................... 27
2001...................................................... 24
2002...................................................... 6
----
Total................................................... $169
====
</TABLE>
4. INCOME TAXES
Income tax expense for domestic and foreign operations that file a
consolidated tax return with other entities was calculated utilizing statutory
rates multiplied by pretax income as adjusted for known book to tax
differences. As discussed in Note 1, BBNA tax accounts have been prepared as
though BBNA filed separate income tax returns and may not necessarily
represent the tax position as prepared on a consolidated basis with BFC or
Borden.
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
TWENTY-THREE DAY YEAR ENDED
PERIOD DECEMBER 31,
ENDED -------------------------
JANUARY 23, 1998 1997 1996 1995
---------------- ------- ------- -------
<S> <C> <C> <C> <C>
Current:
Federal......................... $ (79) $13,891 $11,671 $ 9,682
State and local................. (28) 2,551 2,068 1,838
Foreign......................... 27 523 416 641
----- ------- ------- -------
(80) 16,965 14,155 12,161
Deferred:
Federal......................... (185) (656) (1,902) 66
State and local................. (22) (73) (219) 8
----- ------- ------- -------
(207) (729) (2,121) 74
----- ------- ------- -------
$(287) $16,236 $12,034 $12,235
===== ======= ======= =======
</TABLE>
56
<PAGE>
BORDEN BRANDS NORTH AMERICA
(PREDECESSOR COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS)
The following table reconciles the maximum statutory U.S. Federal income tax
rate multiplied by BBNA's income (loss) before taxes to the recorded income
tax expense (benefit):
<TABLE>
<CAPTION>
TWENTY-THREE DAY
PERIOD YEAR ENDED DECEMBER 31,
ENDED -----------------------
JANUARY 23, 1998 1997 1996 1995
---------------- ------- ------- -------
<S> <C> <C> <C> <C>
U.S. Federal income tax (benefit)
at 35%........................... $ (304) $14,019 $10,233 $10,418
State income tax, net of Federal
benefit.......................... (32) 1,610 1,190 1,188
Foreign rate differentials........ 2 41 45 63
Goodwill amortization and other
nondeductible expenses........... 47 566 566 566
------ ------- ------- -------
Provision (credit) for income
taxes............................ $ (287) $16,236 $12,034 $12,235
====== ======= ======= =======
Domestic and foreign components of income (loss) before taxes are as
follows:
<CAPTION>
TWENTY-THREE DAY
PERIOD YEAR ENDED DECEMBER 31,
ENDED -----------------------
JANUARY 23, 1998 1997 1996 1995
---------------- ------- ------- -------
<S> <C> <C> <C> <C>
Domestic.......................... $ (938) $38,676 $28,142 $28,079
Foreign........................... 69 1,377 1,095 1,688
------ ------- ------- -------
$ (869) $40,053 $29,237 $29,767
====== ======= ======= =======
</TABLE>
Deferred income tax assets and liabilities for domestic and Canadian
operations have been included in owner's investment. As stated in Note 1, the
accompanying financial statements reflect the assets of BBNA on a purchase
accounting basis. The tax basis of BBNA's net assets was not affected by the
KKR acquisition. Deferred tax assets and liabilities up to September 30, 1996
reflect the differences between the purchase accounting book basis and the
historical tax basis of BBNA's net assets. As a result of the 1996 purchase of
Borden's food operations by BFC, the tax basis of BBNA's net assets was
increased to reflect an allocated portion of the purchase price less the
assets transferred plus liabilities assumed. The book basis of BBNA's net
assets did not change as a result of the October 1, 1996 transaction, as the
sale was between related parties and Borden's principal stockholder continued
to control BFC. Deferred tax assets and liabilities were adjusted as of
October 1, 1996 to reflect the change in the tax basis.
Deferred income tax assets and liabilities included in owner's investment at
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Assets:
Trademarks and other intangibles.......................... $17,600 $16,662
Customer allowances and credits........................... 5,250 5,630
Coupon accrual............................................ 1,222 1,208
Non-pension postemployment................................ 674 700
General insurance......................................... 322 351
Incentive compensation.................................... 700 450
Property and equipment.................................... 377 468
------- -------
Gross deferred tax assets............................... 26,145 25,469
Liabilities:
Prepaid slotting allowance................................ 278 331
------- -------
Net assets.................................................. $25,867 $25,138
======= =======
</TABLE>
57
<PAGE>
BORDEN BRANDS NORTH AMERICA
(PREDECESSOR COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS)
5. PENSION AND RETIREMENT SAVINGS PLANS
Most employees of BBNA participate in the Borden Employee Retirement Income
Plan. For most salaried employees, benefits under the plan generally are based
on compensation and credited service. For most hourly employees, benefits
under the plan are based on specified amounts per year of credited service. A
portion of Borden's expense for the domestic retirement plan was allocated to
BBNA (see Note 2).
A net pension asset or liability, which approximates the portion of the
total pension assets or liabilities of Borden which relates to the employees
of BBNA, has been reflected in BBNA's stand-alone balance sheets (see Note 2).
For the domestic plan in which the employees of BBNA as well as employees of
other Borden affiliated businesses participate, the gross pension obligation
was allocated to BBNA upon the actuarially determined obligation relating to
BBNA's employees.
The rates used to determine pension expense for the plan shared with other
Borden affiliates were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Discount rate....................... 7.5% 6.8% 8.8%
Rate of increase in future
compensation levels................ 4.5% 4.3% 5.3%
Expected long-term rate of return on
plan assets........................ 8.5% 7.8% 9.8%
</TABLE>
Borden's funding of its pension plans equals or exceeds the minimum funding
requirements imposed by federal laws and regulations. Plan assets consist
primarily of equity securities and corporate obligations. The funded status of
Borden's domestic pension plan on a purchase accounting basis was as follows
(in millions):
<TABLE>
<CAPTION>
ACCUMULATED BENEFITS
EXCEED PLAN ASSETS
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Plan assets at fair value.......................... $ 385.2 $ 393.6
Actuarial present value of:
Vested benefit obligation........................ (333.9) (383.1)
Accumulated benefit obligation................... (342.5) (400.4)
Projected benefit obligation..................... (345.0) (400.4)
---------- ----------
Plan assets greater (less) than projected benefit
obligation........................................ 40.2 (6.8)
Unrecognized prior service cost.................... 2.6 2.9
Unrecognized loss (benefit)........................ (35.7) 2.2
Minimum liability adjustment....................... (5.1)
---------- ----------
Net pension asset (liability)...................... $ 7.1 $ (6.8)
========== ==========
</TABLE>
The weighted average discount rates and rates of increase in future
compensation levels used in determining the projected benefit obligation for
the Borden domestic pension plan were 7.3% and 4.4% respectively, as of
December 31, 1997 and 7.5% and 4.5% respectively as of December 31, 1996.
Eligible salaried and hourly non-bargaining employees may contribute up to
5% of their pay to Borden sponsored retirement savings plans (7% for certain
longer service salaried employees), which was matched 50% by Borden in 1998,
1997, 1996 and 1995.
58
<PAGE>
BORDEN BRANDS NORTH AMERICA
(PREDECESSOR COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS)
6. NON-PENSION POSTEMPLOYMENT AND POSTRETIREMENT BENEFITS
BBNA participates in Borden-sponsored non-pension postemployment and
postretirement benefit plans. The postretirement plans provide certain health
and life insurance benefits for eligible domestic retirees and their
dependents.
Participants who are not eligible for Medicare are provided with the same
medical benefits as active employees, while those who are eligible for
Medicare are provided with supplemental benefits. The postretirement medical
benefits are contributory for retirements after 1983; the postretirement life
insurance benefit is noncontributory.
Prior to January 1, 1996, amounts attributable to postretirement benefits
were commingled in one Borden sponsored plan. Allocation of liabilities for
such benefits was made to BFC based upon the actuarially determined obligation
relating to the Foods domestic employees. Effective January 1, 1996, the
components of postretirement benefit expense and unfunded postretirement
obligation were accounted for separately for BFC. The information provided as
of December 1, 1997 and 1996, represents the status of BFC's segregated plan
(in millions):
<TABLE>
<CAPTION>
BFC BFC
1997 1996
----- ------
<S> <C> <C>
Actuarial present value of accumulated postretirement
benefit obligation:
Retirees................................................. $(7.9) $(10.4)
Fully eligible active plan participants.................. (0.2)
Other active plan participants........................... (0.1) (0.7)
----- ------
(8.0) (11.3)
Unrecognized prior service cost............................
Unrecognized net (benefit) loss............................ (0.7) 0.1
----- ------
Accrued postretirement liability........................... $(8.7) $(11.2)
===== ======
</TABLE>
A liability which approximates the portion of Borden's total postemployment
and postretirement obligation which relates to the domestic employees of BBNA
has been reflected in BBNA's balance sheets (see Note 2). Such allocation was
based upon the actuarially-determined obligation for these benefits relating
to BBNA's domestic employees.
A portion of Borden's expense for postemployment and postretirement benefits
was allocated annually to BBNA (see Note 2). The discount rate used in
determining the accumulated postretirement benefit obligation at December 31,
1997 and 1996 was 7.3% and 7.5%, respectively.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation at December 31, 1997 was 8.8% for 1998,
gradually declining to 5.3% by the year 2004. The comparable assumptions for
the prior year were 9.5% and 5.5%, respectively.
Borden also provides certain postemployment benefits, primarily medical and
life insurance benefits for long-term disabled employees, to qualified former
or inactive employees. The costs of benefits provided to former or inactive
employees after employment, but before retirement, are accrued when it is
probable that a benefit will be provided. The amounts of such charges are not
considered significant.
Management does not believe that these allocations are materially different
from amounts that would be calculated historically for BBNA on a stand-alone
basis.
59
<PAGE>
BORDEN BRANDS NORTH AMERICA
(PREDECESSOR COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS)
7. UNITS AND UNIT APPRECIATION RIGHTS
During 1996, a Unit Incentive Plan was formed which provides for the
granting of options, unit appreciation rights ("UAR's"), units and other unit-
based equity interests in Foods Holdings to key employees of BFC, which
included certain BBNA employees, and associated persons at the discretion of
the Board of Directors of BFC.
During 1996, Foods Holdings sold 1,080,000 Class A units to certain
management employees of BFC under this Unit Incentive Plan. The units are
generally restricted as to transfer and allow for Foods Holdings, at its
discretion, to repurchase the units, upon certain conditions including
termination of the unitholders' employment prior to full vesting after five
years. In 1997, Foods Holdings sold an additional 20,000 Class A units to
management, none of which were sold to BBNA employees, and repurchased 81,000
Class A units from management, of which 10,000 units were repurchased from
BBNA employees. There was no compensation expense attributable to the units
since the repurchase price was equal to or less than the sales price to
employees. Class A units outstanding at December 31, 1997 and 1996 were
1,019,000 and 1,080,000, respectively, of which 65,000 and 75,000 were held by
BBNA employees at December 31, 1997 and 1996, respectively.
Although no options have been issued under the Unit Incentive Plan, BFC has
issued UAR's to unitholders. The UAR entitles the holder to receive an amount
in cash equal to the excess of the market price (as defined in the UAR
agreement) of the Class A unit over the exercise price of the UAR. The UAR's
vest ratably over five years and expire upon certain events, including
termination of the unitholders' employment, but in no case to exceed ten
years. Four UAR's were issued for each unit purchased: one UAR with an
exercise price of $10 per unit and three UAR's with an exercise price of $20
per unit. At December 31, 1997, there were 1,019,000 UAR's outstanding with an
exercise price of $10 and 3,057,000 UAR's outstanding with an exercise price
of $20. For 1997 and 1996, there was no compensation expense attributable to
the UAR's since the exercise price exceeded the underlying value of the UAR's.
As the UAR's are settled in cash, the change in value of the UAR's is
accounted for under the liability method as prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
No. 25). Due to the cash nature of the award, treatment under SFAS No. 123,
Accounting for Stock-Based Compensation, would be synonymous with APB No. 25
and accordingly, no fair-market value disclosures are applicable.
60
<PAGE>
BORDEN BRANDS NORTH AMERICA
(PREDECESSOR COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS--CONCLUDED
(DOLLAR IN THOUSANDS)
8. SUPPLEMENTAL INFORMATION
Intangibles and other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Intangibles:
Trademarks....................................... $ 48,365 $ 49,671
Goodwill......................................... 59,757 61,376
-------- --------
$108,122 $111,047
======== ========
Other current liabilities:
Customer allowances, credits and other........... $ 17,982 $ 19,501
Coupon accrual................................... 3,132 3,097
Employee benefits and compensation............... 2,068 1,225
Broker commissions............................... 991 307
Other............................................ 1,174 915
-------- --------
$ 25,347 $ 25,045
======== ========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
Commitments--BBNA has entered into long-term contracts for the purchase of
certain raw materials. Minimum purchase commitments, at current prices, are
approximately $11.9 million at December 31, 1997.
10. UNAUDITED INTERIM FINANCIAL STATEMENTS
For the unaudited period ended June 28, 1997, related party transactions and
intercompany allocations were consistent with those described in Note 2.
The following table summarizes the allocation of costs to BBNA for the
unaudited six months ended June 28, 1997 (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 28, 1997
-------------
<S> <C>
Pension and other employee benefits.......................... $ 315
Group and general insurance.................................. 937
Corporate information services............................... 1,135
Shared sales force........................................... 2,531
Executive compensation, corporate staff, research department
services and division overhead.............................. 3,512
</TABLE>
Of the total amount in the quarter ended June 28, 1997, $978 was included in
costs of goods sold and $3,334 was included in marketing expense, while the
majority of the remaining amount was included in general and administrative
expense.
BBNA had sales to affiliates of KKR of $1,445 for the six months ended June
28, 1997.
The intercompany investments changed for the quarter ended June 28, 1997, by
$38,208 and $47,863 for cash collected on behalf of BBNA and cash disbursed on
behalf of BBNA, respectively, while the remaining amount represents
translation adjustments and miscellaneous items.
61
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
2.1 Asset Purchase Agreement, dated as of November 24, 1997, as amended as of
December 9, 1997 and January 15, 1998, by and among Borden Foods
Corporation, BFC Investments, L.P., and the Company (Incorporated by
reference to Exhibit 2.1 to the S-4)
3.1 Restated Certificate of Incorporation of Holdings (Incorporated by
reference to Exhibit 3.1 of the S-4)
3.2 Bylaws of Holdings (Incorporated by reference to Exhibit 3.2 of the S-4)
3.3 Restated Certificate of Incorporation, dated November 19, 1997
(Incorporated by reference to Exhibit 3.3 of the S-4)
3.4 Bylaws of the Company (Incorporated by reference to Exhibit 3.4 of the S-
4)
4.1 Purchase Agreement, dated January 16, 1998, by and among Holdings, the
Company, Chase Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (Incorporated by reference to Exhibit 4.1 of the S-4)
4.2 Indenture, dated January 23, 1998, among Holdings, the Company and IBJ
Schroder Bank & Trust Company (including Specimen Certificates of 8 3/4%
Series Senior Subordinated Notes due 2008 and 8 3/4% Series B Senior
Subordinated Notes due 2008) (Incorporated by reference to Exhibit 4.2 of
the S-4)
4.3 Registration Rights Agreement, dated January 23, 1998, by and among
Holdings, the Company, Chase Securities Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated (Incorporated by reference to Exhibit 4.3 of
the S-4)
4.4 Credit Agreement, dated January 23, 1998, by and among the Company,
Holdings, The Chase Manhattan Bank, Merrill Lynch Capital Corporation,
Chase Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (Incorporated by reference to Exhibit 4.4 of the S-4)
4.5 Stockholders Agreement, dated as of January 23, 1998, by and among
Holdings and certain stockholders of Holdings named therein (Incorporated
by reference to Exhibit 4.5 of the S-4)
4.6 Exchange and Registration Rights Agreement, dated as of January 23, 1998,
by and among Holdings and certain stockholders of Holdings named therein
(Incorporated by reference to Exhibit 4.6 of the S-4)
4.7 Subscription Rights Agreement, dated as of January 23, 1998, by and among
Holdings, GE Investment Private Placement Partners II, a Limited
Partnership and Warburg, Pincus Ventures, L.P. (Incorporated by reference
to Exhibit 4.7 of the S-4)
10.1 Master Customer Services Agreement, dated as of January 23, 1998, by and
between the Company and Borden Foods Corporation (Incorporated by
reference to Exhibit 10.1 of the S-4)
10.2 License Agreement dated January 23, 1998 by and among BDH Two, Inc.,
Borden, Inc. and the Company (Incorporated by reference to Exhibit 10.2
of the S-4)
10.3 Assignment of Trademark License Agreement dated January 23, 1998, by and
between BFC and the Company of BFC's License Agreement, dated as of
September 4, 1997, by and between BFC and Southern Foods Group, L.P.
(Incorporated by reference to Exhibit 10.3 of the S-4)
10.4 License Agreement, dated January 23, 1998, by and between BFC and the
Company (Incorporated by reference to Exhibit 10.4 of the S-4)
10.5 The 1998 Stock Incentive Plan of Holdings (Incorporated by reference to
Exhibit 10.5 of the S-4)
10.6 Employment Agreement, dated January 23 1998, by and between John O'C.
Nugent and the Company (Incorporated by reference to Exhibit 10.6 of the
S-4)
10.7 Employment Agreement, dated January 23, 1998, by and between William A.
Lynch and the Company (Incorporated by reference to Exhibit 10.7 of the
S-4)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.8 Employment Agreement, dated January 23, 1998, by and between Craig A. Steinke and the
Company (Incorporated by reference to Exhibit 10.8 of the S-4)
10.9 Employment Agreement, dated January 23, 1998, by and between Tamar K. Bernbaum and the
Company (Incorporated by reference to Exhibit 10.9 of the S-4)
10.10 Employment Agreement, dated January 23, 1998, by and between Richard A. Lumpp and the
Company (Incorporated by reference to Exhibit 10.10 of the S-4)
10.11 Pledge Agreement, dated January 23, 1998, by and between William A. Lynch and the
Company (Incorporated by reference to Exhibit 10.11 of the S-4)
10.12 Pledge Agreement, dated January 23, 1998, by and between John O'C. Nugent and the
Company (Incorporated by reference to Exhibit 10.12 of the S-4)
10.13 Secured Recourse Promissory Note, dated January 23, 1998, from William A. Lynch to the
Company (Incorporated by reference to Exhibit 10.13 of the S-4)
10.14 Secured Recourse Promissory Note, dated January 23, 1998, from John O'C. Nugent to the
Company (Incorporated by reference to Exhibit 10.14 of the S-4)
12.1 Eagle Family Foods Holdings, Inc. Ratio of Earnings to Fixed Charges (Incorporated by
reference to Exhibit 12.1 of the S-4)
12.2 Eagle Family Foods, Inc. Ratio of Earnings to Fixed Charges (Incorporated by reference
to Exhibit 12.2 of the S-4)
12.3 Eagle Family Foods Holdings, Inc. Ratio of Earnings to Fixed Charges
12.4 Eagle Family Foods, Inc. Ratio of Earnings to Fixed Charges
27.1 Financial Data Schedule of Eagle Family Foods Holdings, Inc.
27.2 Financial Data Schedule of Eagle Family Foods, Inc.
</TABLE>
<PAGE>
EXHIBIT 12.3
EAGLE FAMILY FOODS HOLDINGS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(THOUSANDS EXCEPT RATIO AMOUNTS)
<TABLE>
<CAPTION>
ONE HUNDRED
FIFTY-
FIVE DAY
PERIOD ENDED
JUNE 27, 1998
-------------
<S> <C>
ADJUSTED EARNINGS
Income (loss) before income taxes............................... $(40,702)(b)
Portion of rent ($180) representative of interest............... 60
Interest on indebtedness........................................ 11,571
--------
Total earnings (loss) as adjusted........................... $(29,071)
========
FIXED CHARGES
Portion of rent representative of interest...................... 60
Interest on indebtedness........................................ 11,571
--------
Total fixed charges........................................... $ 11,631
========
Deficiency of earnings.......................................... $(40,702)
Ratio of earnings to fixed charges.............................. -- (a)
========
</TABLE>
- --------
(a) As earnings for the one hundred fifty-five day period ended June 27, 1998
were inadequate to cover fixed charges, a ratio of earnings to fixed
charges for the period has not been presented. The deficiency of earnings
to fixed charges was approximately $41.0 million.
(b) Reflects the nonrecurring in-process research and development write-off of
$23.9 million.
<PAGE>
EXHIBIT 12.4
EAGLE FAMILY FOODS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(THOUSANDS EXCEPT RATIO AMOUNTS)
<TABLE>
<CAPTION>
ONE HUNDRED
FIFTY-FIVE DAY
PERIOD ENDED
JUNE 27, 1998
--------------
<S> <C>
ADJUSTED EARNINGS
Income (loss) before income taxes............................... $(40,690)(b)
Portion of rent ($180) representative of interest............... 60
Interest on indebtedness........................................ 11,571
--------
Total earnings (loss) as adjusted............................. $(29,059)
========
FIXED CHARGES
Portion of rent representative of interest...................... 60
Interest on indebtedness........................................ 11,571
--------
Total fixed charges........................................... $ 11,631
========
Deficiency of earnings.......................................... $(40,690)
Ratio of earnings to fixed charges.............................. -- (a)
========
</TABLE>
- --------
(a) As earnings for the one hundred fifty-five day period ended June 27, 1998
were inadequate to cover fixed charges, a ratio of earnings to fixed
charges for the period has not been presented. The deficiency of earnings
to fixed charges was approximately $41.0 million.
(b) Reflects the nonrecurring in-process research and development write-off of
$23.9 million.
<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 one hundred
fifty-five day period ended June 27, 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> JUN-27-1998
<PERIOD-START> JAN-24-1998
<PERIOD-END> JUN-27-1998
<CASH> 1,812
<SECURITIES> 0
<RECEIVABLES> 12,598
<ALLOWANCES> 230
<INVENTORY> 32,001
<CURRENT-ASSETS> 46,442
<PP&E> 26,319
<DEPRECIATION> 1,528
<TOTAL-ASSETS> 398,415
<CURRENT-LIABILITIES> 26,247
<BONDS> 317,000
85,144
0
<COMMON> 10
<OTHER-SE> (29,169)
<TOTAL-LIABILITY-AND-EQUITY> 398,415
<SALES> 68,183
<TOTAL-REVENUES> 68,183
<CGS> 38,376
<TOTAL-COSTS> 38,376
<OTHER-EXPENSES> 59,056
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,453
<INCOME-PRETAX> (40,702)
<INCOME-TAX> (14,246)
<INCOME-CONTINUING> (26,456)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,456)
<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 one hundred fifty-five
day period ended June 27, 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> JUN-27-1998
<PERIOD-START> JAN-24-1998
<PERIOD-END> JUN-27-1998
<CASH> 1,812
<SECURITIES> 0
<RECEIVABLES> 12,598
<ALLOWANCES> 230
<INVENTORY> 32,001
<CURRENT-ASSETS> 46,442
<PP&E> 26,319
<DEPRECIATION> 1,528
<TOTAL-ASSETS> 399,240
<CURRENT-LIABILITIES> 26,246
<BONDS> 317,000
0
0
<COMMON> 1
<OTHER-SE> 55,993
<TOTAL-LIABILITY-AND-EQUITY> 399,240
<SALES> 68,183
<TOTAL-REVENUES> 68,183
<CGS> 38,376
<TOTAL-COSTS> 38,376
<OTHER-EXPENSES> 59,044
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,453
<INCOME-PRETAX> (40,690)
<INCOME-TAX> (14,246)
<INCOME-CONTINUING> (26,444)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,444)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
