<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 1, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _____
Commission file numbers 333-50305 and 333-50305-01
--------------
Eagle Family Foods Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3983598
(State or other jurisdiction (IRS Employer
of 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 offices)
Registrants' telephone number, including area code: (914) 631-3100
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes [X] No
As of February 9, 2000, there were 1,126,585 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>
Part I - Financial Information
Item 1. Financial Statements Page
------
Eagle Family Foods, Inc.
<S> <C>
Eagle Family Foods, Inc. Statements of Operations and Comprehensive Income for the thirteen and twenty-six
week periods ended January 1, 2000 and the fourteen and twenty-seven week periods ended January 2, 1999............ 3
Eagle Family Foods, Inc. Balance Sheets as of January 1, 2000 and July 3, 1999.................................... 4
Eagle Family Foods, Inc. Statements of Cash Flows for the twenty-six week period ended January 1, 2000
and the twenty-seven week period ended January 2, 1999............................................................. 5
Eagle Family Foods, Inc. Statement of Changes in Stockholder's Equity for the twenty-six week period
ended January 1, 2000.............................................................................................. 6
Eagle Family Foods Holdings, Inc.
Eagle Family Foods Holdings, Inc. Consolidated Statements of Operations and Comprehensive Income for the
thirteen and twenty-six week periods ended January 1, 2000 and the fourteen and twenty-seven week periods 7
ended January 2, 1999..............................................................................................
Eagle Family Foods Holdings, Inc. Consolidated Balance Sheets as of January 1, 2000 and July 3, 1999.............. 8
Eagle Family Foods Holdings, Inc. Consolidated Statements of Cash Flows for the twenty-six week period
ended January 1, 2000 and the twenty-seven week period ended January 2, 1999...................................... 9
Eagle Family Foods Holdings, Inc. Consolidated Statement of Changes in Stockholders' Deficit for the
twenty-six week period ended January 1, 2000....................................................................... 10
Notes to the Financial Statements.................................................................................. 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................ 23
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 24
</TABLE>
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
EAGLE FAMILY FOODS, INC.
Statements of Operations and Comprehensive Income
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Fourteen Twenty-Six Twenty-Seven
Week Period Week Period Week Period Week Period
Ended Ended Ended Ended
January 1, January 2, January 1, January 2,
2000 1999 2000 1999
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales................................................ $ 98,361 $ 100,929 $ 153,518 $ 151,886
Cost of goods sold....................................... 41,362 45,914 70,798 68,472
------------- ------------- ------------- -------------
Gross margin.......................................... 56,999 55,015 82,720 83,414
Distribution expense..................................... 3,876 3,740 7,470 6,718
Marketing expense........................................ 25,324 23,904 42,756 36,491
General and administrative expense....................... 2,990 3,526 6,318 6,122
Other operating income................................... 503 -- 503 --
Amortization of intangibles.............................. 2,788 7,116 5,578 14,229
------------- ------------- ------------- -------------
Operating income...................................... 22,524 16,729 21,101 19,854
Interest expense, net.................................... 8,083 7,243 16,059 14,219
------------- ------------- ------------- -------------
Income before income taxes............................ 14,441 9,486 5,042 5,635
Income tax expense....................................... 5,066 3,317 1,785 1,967
------------- ------------- ------------- -------------
Net income............................................ $ 9,375 $ 6,169 $ 3,257 $ 3,668
============= ============= ============= =============
Other comprehensive income (loss):
Foreign translation adjustment........................ (113) 47 (211) (216)
------------- ------------- ------------- -------------
Comprehensive income.................................. $ 9,262 $ 6,216 $ 3,046 $ 3,452
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
EAGLE FAMILY FOODS, INC.
Balance Sheets
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
January 1, July 3,
2000 1999
--------------- --------------
Assets (Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents............................................................... $ 2,236 $ 972
Accounts receivable..................................................................... 26,312 21,825
Inventories, net........................................................................ 16,215 41,757
Other current assets.................................................................... 2,699 5,269
--------------- -------------
Total current assets................................................................... 47,462 69,823
Property and equipment, net.............................................................. 32,680 33,798
Notes receivable from related parties.................................................... 759 728
Intangibles, net......................................................................... 277,309 282,880
Deferred income taxes.................................................................... 20,245 22,006
Other noncurrent assets.................................................................. 8,136 8,051
--------------- -------------
Total assets............................................................................. $ 386,591 $ 417,286
=============== =============
Liabilities and Stockholder's Equity
Current liabilities
Current portion of long-term debt....................................................... $ 1,000 $ 1,000
Accounts payable........................................................................ 9,265 16,070
Other accrued liabilities............................................................... 13,826 12,793
Accrued interest........................................................................ 8,659 8,128
--------------- -------------
Total current liabilities.............................................................. 32,750 37,991
Long-term debt........................................................................... 299,000 337,500
Commitments and contingencies
Stockholder's equity
Common stock, $0.01 par value, 250,000 shares authorized, 10,000 shares
issued and outstanding................................................................. 1 1
Additional paid-in capital............................................................... 92,500 82,500
Accumulated deficit...................................................................... (37,672) (40,929)
Accumulated other comprehensive income................................................... 12 223
--------------- -------------
Total stockholder's equity............................................................. 54,841 41,795
--------------- -------------
Total liabilities and stockholder's equity............................................... $ 386,591 $ 417,286
=============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
EAGLE FAMILY FOODS, INC.
Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Six Twenty-Seven
Week Period Week Period
Ended Ended
January 1, January 2,
2000 1999
------------- --------------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income.................................................................................. $ 3,257 $ 3,668
Adjustments to reconcile net income to net cash from (used in) operating activities:
Depreciation and amortization.............................................................. 8,900 15,852
Amortization of deferred financing costs................................................... 892 459
Loss on retirement of fixed assets......................................................... 31 --
Deferred taxes............................................................................. 1,761 1,931
Net change in assets and liabilities
Accounts receivable........................................................................ (4,487) (8,048)
Inventories, net........................................................................... 25,542 17,343
Accounts payable........................................................................... (6,805) 91
Other assets............................................................................... 2,414 (3,384)
Other liabilities.......................................................................... 1,320 5,772
------------- --------------
Cash from operating activities............................................................... 32,825 33,684
Cash used in investing activities:
Capital expenditures........................................................................ (2,202) (7,639)
Acquisition costs........................................................................... -- (135)
------------- --------------
Cash used in investing activities........................................................... (2,202) (7,774)
Cash from (used in) financing activities:
Payments under term loan facility........................................................... (500) (750)
Borrowings under revolving credit facility.................................................. 20,200 20,500
Payments under revolving credit facility.................................................... (58,200) (47,300)
Debt amendment costs........................................................................ (859) --
Capital contribution........................................................................ 10,000 --
------------- --------------
Cash used in financing activities........................................................... (29,359) (27,550)
Increase (decrease) in cash and cash equivalents............................................. 1,264 (1,640)
Cash and cash equivalents at beginning of period............................................. 972 1,812
------------- --------------
Cash and cash equivalents at end of period................................................... $ 2,236 $ 172
============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
EAGLE FAMILY FOODS, INC.
Statement of Changes in Stockholder's Equity
For the Twenty-Six Week Period Ended January 1, 2000
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid Accumulated Comprehensive
Stock in Capital Deficit Income (Loss) Total
----------- ------------ ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, July 3, 1999............... $ 1 $ 82,500 $ (40,929) $ 223 $ 41,795
Net income.......................... -- -- 3,257 -- 3,257
Capital contribution................ -- 10,000 -- -- 10,000
Other comprehensive loss:
Foreign translation adjustment.... -- -- -- (211) (211)
----------- ------------ ------------- --------------- -------------
Balance, January 1, 2000............ $ 1 $ 92,500 $ (37,672) $ 12 $ 54,841
=========== ============ ============= =============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
EAGLE FAMILY FOODS HOLDINGS, INC.
Consolidated Statements of Operations and Comprehensive Income
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Fourteen Twenty-Six Twenty-Seven
Week Period Week Period Week Period Week Period
Ended Ended Ended Ended
January 1, January 2, January 1, January 2,
2000 1999 2000 1999
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales.......................................... $ 98,361 $ 100,929 $ 153,518 $ 151,886
Cost of goods sold................................. 41,362 45,914 70,798 68,472
------------- ------------ ------------ ------------
Gross margin.................................... 56,999 55,015 82,720 83,414
Distribution expense............................... 3,876 3,740 7,470 6,718
Marketing expense.................................. 25,324 23,904 42,756 36,491
General and administrative expense................. 2,998 3,534 6,333 6,137
Other operating income............................. 503 -- 503 --
Amortization of intangibles........................ 2,788 7,116 5,578 14,229
------------- ------------ ------------ ------------
Operating income................................ 22,516 16,721 21,086 19,839
Interest expense, net.............................. 8,083 7,243 16,059 14,219
------------- ------------ ------------ ------------
Income before income taxes...................... 14,433 9,478 5,027 5,620
Income tax expense................................. 5,066 3,317 1,785 1,967
------------- ------------ ------------ ------------
Net income...................................... $ 9,367 $ 6,161 $ 3,242 $ 3,653
============= ============ ============ ============
Other comprehensive income (loss):
Foreign translation adjustment.................. (113) 47 (211) (216)
------------- ------------ ------------ ------------
Comprehensive income............................ $ 9,254 $ 6,208 $ 3,031 $ 3,437
============= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
EAGLE FAMILY FOODS HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
January 1, July 3,
2000 1999
-------------- --------------
Assets (unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents............................................................... $ 2,236 $ 972
Accounts receivable..................................................................... 26,312 21,825
Inventories, net........................................................................ 16,215 41,757
Other current assets.................................................................... 2,699 5,269
-------------- --------------
Total current assets................................................................... 47,462 69,823
Property and equipment, net.............................................................. 32,680 33,798
Intangibles, net......................................................................... 277,309 282,880
Deferred income taxes.................................................................... 20,245 22,006
Other noncurrent assets.................................................................. 8,136 8,051
-------------- --------------
Total assets............................................................................. $ 385,832 $ 416,558
============== ==============
Liabilities and Stockholders' Deficit
Current liabilities
Current portion of long-term debt....................................................... $ 1,000 $ 1,000
Accounts payable........................................................................ 9,265 16,070
Other accrued liabilities............................................................... 13,826 12,793
Accrued interest........................................................................ 8,659 8,128
-------------- --------------
Total current liabilities.............................................................. 32,750 37,991
Long-term debt........................................................................... 299,000 337,500
Commitments and contingencies
Redeemable preferred stock, 1,000,000 shares authorized:
Series A preferred stock, $100 stated value, 816,750 shares issued and
outstanding, at redemption value....................................................... 98,706 94,023
Subscription receivable................................................................. (749) (721)
-------------- --------------
97,957 93,302
Series B preferred stock, $100,000 stated value, 99 shares issued and
outstanding, at redemption value....................................................... 10,160 --
-------------- --------------
Total redeemable preferred stock....................................................... 108,117 93,302
Stockholders' deficit
Common stock $0.01 par value, 1,200,000 shares authorized, 1,074,085 and
975,980 shares issued and outstanding, respectively.................................... 11 10
Additional paid-in capital.............................................................. 1,063 966
Unearned compensation................................................................... (92) (109)
Accumulated deficit..................................................................... (55,019) (53,318)
Subscription receivable................................................................. (10) (7)
Accumulated other comprehensive income.................................................. 12 223
-------------- --------------
Total stockholders' deficit............................................................ (54,035) (52,235)
-------------- --------------
Total liabilities and stockholders' deficit.............................................. $ 385,832 $ 416,558
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
EAGLE FAMILY FOODS HOLDINGS, INC.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Six Twenty-Seven
Week Period Week Period
Ended Ended
January 1, January 2,
2000 1999
------------- --------------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income................................................................................. $ 3,242 $ 3,653
Adjustments to reconcile net income to net cash from (used in) operating activities:
Depreciation and amortization............................................................. 8,915 15,867
Amortization of deferred financing costs.................................................. 892 459
Loss on retirement of fixed assets........................................................ 31 --
Deferred taxes............................................................................ 1,761 1,931
Net change in assets and liabilities
Accounts receivable....................................................................... (4,487) (8,048)
Inventories, net.......................................................................... 25,542 17,343
Accounts payable.......................................................................... (6,805) 91
Other assets.............................................................................. 2,414 (3,384)
Other liabilities......................................................................... 1,320 5,772
------------- --------------
Cash from operating activities............................................................. 32,825 33,684
Cash used in investing activities:
Capital expenditures....................................................................... (2,202) (7,639)
Acquisition costs.......................................................................... -- (135)
------------- --------------
Cash used in investing activities.......................................................... (2,202) (7,774)
Cash from (used in) financing activities:
Payments under term loan facility.......................................................... (500) (750)
Borrowings under revolving credit facility................................................. 20,200 20,500
Payments under revolving credit facility................................................... (58,200) (47,300)
Debt amendment costs....................................................................... (859) --
Issuance of Series B Preferred Stock and Common Stock...................................... 10,000 --
------------- --------------
Cash used in financing activities.......................................................... (29,359) (27,550)
Increase (decrease) in cash and cash equivalents............................................ 1,264 (1,640)
Cash and cash equivalents at beginning of period............................................ 972 1,812
------------- --------------
Cash and cash equivalents at end of period.................................................. $ 2,236 $ 172
============= ==============
Supplemental disclosure:
Non-cash financing activities included dividends accrued on redeemable
preferred stock........................................................................... $ 4,943 $ 4,184
============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE>
EAGLE FAMILY FOODS HOLDINGS, INC.
Consolidated Statement of Changes in Stockholders' Deficit
For the Twenty-Six Week Period Ended January 1, 2000
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid Unearned Accumulated Subscription Comprehensive
Stock In Capital Compensation Deficit Receivable Income (Loss) Total
------- ---------- ------------ ----------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 3, 1999......... $ 10 $ 966 $ (109) $ (53,318) $ (7) $ 223 $ (52,235)
Net income.................... -- -- -- 3,242 -- -- 3,242
Preferred stock dividend...... -- -- -- (4,943) -- -- (4,943)
Subscription receivable:
Interest income.............. -- -- -- -- (3) -- (3)
Infusion of capital........... 1 99 -- -- -- -- 100
Cancellation of restricted
common stock grants.......... -- (2) 2 -- -- -- --
Amortization of unearned
compensation................. -- -- 15 -- -- -- 15
Other comprehensive loss:
Foreign translation -- -- -- -- -- (211) (211)
adjustment
-------- ---------- ----------- ----------- ----------- ------------- ---------
Balance, January 1, 2000...... $ 11 $ 1,063 $ (92) $ (55,019) $ (10) $ 12 $ (54,035)
======== ========== =========== =========== =========== ============= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
10
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
Notes to the Financial Statements
(Unaudited)
1. Basis of Presentation:
The accompanying financial statements present the financial position, results
of operations and cash flows of Eagle Family Foods, Inc. ("Eagle") and the
consolidated financial position, results of operations and cash flows of Eagle
Family Foods Holdings, Inc. ("Holdings") and its wholly-owned subsidiary, Eagle.
Eagle and Holdings are collectively referred to as the "Company," unless the
context indicates otherwise. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain prior year amounts
have been reclassified to conform with the current year's presentation.
The financial statements as of January 1, 2000 and January 2, 1999 and for the
thirteen and twenty-six week periods ended January 1, 2000 and the fourteen and
twenty-seven week periods ended January 2, 1999 are unaudited and are presented
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, these financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Annual Report on Form
10-K of Holdings and Eagle for the year ended July 3, 1999. In the opinion of
management, the accompanying financial statements reflect all adjustments (which
are of a normal recurring nature) necessary to present fairly the financial
position and results of operations and cash flows for the interim periods, but
are not necessarily indicative of the results of operations for a full fiscal
year.
2. Inventories:
Inventories are stated at the lower of cost or market at January 1, 2000 and
July 3, 1999 and consisted of the following (in thousands):
<TABLE>
<CAPTION>
January 1, July 3,
2000 1999
----------- -----------
<S> <C> <C>
Finished goods....................................... $ 11,285 $ 36,886
Raw materials........................................ 4,930 4,871
----------- -----------
Total inventories................................ $ 16,215 $ 41,757
=========== ===========
</TABLE>
Included in the amount at January 1, 2000 is a reserve of $2.3 million
representing a reserve for ReaLemonade inventories.
3. Property and Equipment:
Property and equipment is recorded at cost at January 1, 2000 and July 3, 1999
and consisted of the following (in thousands):
<TABLE>
<CAPTION>
January 1, July 3,
2000 1999
----------- -----------
<S> <C> <C>
Land................................................. $ 470 $ 470
Buildings and improvements........................... 7,409 6,653
Machinery and equipment.............................. 21,656 19,907
Computers............................................ 11,103 10,531
Construction in progress............................. 1,032 1,913
----------- -----------
Total property and equipment..................... 41,670 39,474
Accumulated depreciation............................. (8,990) (5,676)
----------- -----------
Property and equipment, net...................... $ 32,680 $ 33,798
=========== ===========
</TABLE>
11
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
Notes to the Financial Statements
(Unaudited)
4. Intangible Assets:
Intangible assets are amortized on a straight-line basis over their estimated
useful lives and consisted of the following (in thousands):
<TABLE>
January 1, July 3, Estimated
2000 1999 Useful Lives
-------------- -------------- -------------
<S> <C> <C> <C>
Tradenames........................................................ $ 141,000 $ 141,000 40 years
Goodwill.......................................................... 136,664 136,664 40 years
Covenant not to compete........................................... 21,000 21,000 5 years
Master customer services agreement................................ -- 17,300 1 year
------------------ --------------
Total intangible assets....................................... 298,664 315,964
Accumulated amortization.......................................... (21,355) (33,084)
-------------- --------------
Intangible assets, net........................................ $ 277,309 $ 282,880
============== ==============
</TABLE>
5. Debt Obligations:
Debt obligations consisted of the following (in thousands):
<TABLE>
<CAPTION>
January 1, July 3,
2000 1999
-------------- --------------
<S> <C> <C>
Term loan facility due December 31, 2005.......................... $ 173,000 $ 173,500
Senior subordinated notes due January 15, 2008.................... 115,000 115,000
Revolving credit facility due December 31, 2004................... 12,000 50,000
-------------- --------------
Total debt obligations........................................ 300,000 338,500
Less current portion of long-term debt............................ (1,000) (1,000)
-------------- --------------
Long-term debt obligations.................................... $ 299,000 $ 337,500
============== ==============
</TABLE>
Senior Credit Facilities
Eagle received senior bank financing from a group of lenders in an aggregate
principal amount of up to $245.0 million (the "Senior Credit Facilities") on
January 23, 1998. The Senior Credit Facilities consist of (i) a $70.0 million
seven-year revolving credit facility including a $10.0 million swingline loan
(the "Revolving Credit Facility") and (ii) a $175.0 million eight-year term loan
(the "Term Loan Facility"). The Revolving Credit Facility bears interest at
LIBOR plus 3.25%, with the swingline loan portion bearing interest at Prime plus
2.25%. The Term Loan Facility bears interest at LIBOR plus 3.50%. The Senior
Credit Facilities are guaranteed by Holdings and all future domestic
subsidiaries of the Company.
The obligations of Eagle under the Senior Credit Facilities are collateralized
by (i) 100% of the capital stock of Eagle and each of its subsidiaries and (ii)
a first priority collateral interest in substantially all assets and properties
of Eagle and its future domestic subsidiaries. The fair market value of the
Senior Credit Facilities at January 1, 2000 approximated 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. These
swap agreements commenced on July 23, 1998 and fixed the LIBOR rate at 5.905% on
$25.0 million and 5.955% on $75.0 million of the $175.0 million Term Loan
Facility. These swap agreements expire on December 29, 2000 and December 31,
2002, respectively. The estimated benefit to cancel the interest rate swap
agreements at January 1, 2000 was approximately $1.8 million based on current
interest rates for similar instruments.
12
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
Notes to the Financial Statements
(Unaudited)
In July, 1999, the Company paid an amendment fee of one quarter of one percent
on the total amount outstanding as of July 13, 1999 on the Term Loan Facility
and the Revolving Credit Facility.
Senior Subordinated Notes
Eagle issued $115.0 million of senior subordinated notes (the "Notes") and
received cash proceeds of approximately $112.0 million net of underwriting
discount on January 23, 1998. The Notes are due January 15, 2008 and bear
interest of 8.75% per annum payable on January 15 and July 15. The fair market
value of the Notes was approximately $87.4 million at January 1, 2000.
6. Redeemable Preferred Stock
On September 24, 1999, the issuance of 99 shares of newly designated Series B
Non-Voting Preferred Stock (the "Series B Preferred Stock") was authorized by
Holdings at a stated value of $100,000 per share (the "Series B Stated
Value"). The Series B Preferred Stock ranks as to dividends and on liquidation
on parity with the already outstanding Series A Non-Voting Preferred Stock (the
"Series A Preferred Stock", and together with the Series B Preferred Stock, the
"Preferred Stock") of Holdings at a stated value of $100 per share (the "Series
A Stated Value" and together with the Series B Stated Value, the "Stated
Value"). The Preferred Stock provides for preferential cumulative dividends at
the rate of 10% per share per annum of the Stated Value for each series of
Preferred Stock. 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 of Holdings, par value $0.01 per share (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 for each series of Preferred Stock 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.
7. Stockholders and Registration Rights Agreements
The Stockholders Agreement, dated as of January 23, 1998, by and among
Holdings and the stockholders named therein (the "Stockholders Agreement") and
the Registration Rights Agreement, dated as of January 23, 1998, by and among
Holdings and the investors named therein (the "Registration Rights Agreement")
were each amended as of September 27, 1999, to reflect a Subscription Agreement
with GE Investment Private Placement Partners II, a Limited Partnership ("GEI")
and Warburg, Pincus Ventures, L.P. ("Warburg") (as described in Footnote 8) for
the offer and sale of a total of 99 shares of Series B Preferred Stock and a
total of 100,000 shares of newly issued Common Stock with accompanying warrants
to purchase a total of 22,013 shares of Common Stock (the "Warrants")
(collectively, the "Offered Securities"). As a result of such amendments, all
covenants and agreements set forth in the initial Stockholders Agreement and
Registration Rights Agreement will apply to the newly issued Series B Preferred
Stock, Common Stock and Common Stock issuable upon exercise of the Warrants.
13
<PAGE>
EAGLE FAMILY FOODS, INC.
EAGLE FAMILY FOODS HOLDINGS, INC.
Notes to the Financial Statements
(Unaudited)
8. Subscription Agreement
On September 27, 1999, GEI and Warburg subscribed to purchase a total of 99
shares of newly issued Series B Preferred Stock at $100,000 per share and a
total of 100,000 shares of Common Stock at $1 per share with accompanying
Warrants to purchase up to 22,013 additional shares of Common Stock. The
Warrants may be exercised for a purchase price of $1 per share of Common Stock
(subject to certain adjustments) and only upon failure of the Company to achieve
certain financial targets for the fiscal year ending July 1, 2000. The Warrants
automatically terminate if the Company achieves certain financial targets for
fiscal year ending July 1, 2000. Otherwise, the Warrants expire on September
27, 2004. Holdings received $10.0 million in exchange for the Offered
Securities. In connection with the issuance of the Offered Securities, Holdings
made a $10.0 million capital contribution to Eagle.
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Set forth below is a discussion of the financial condition and results of
operations. The following discussion should be read in conjunction with the
financial statements of the Company and the notes thereto included elsewhere in
this Quarterly Report on Form 10-Q. The following table sets forth the results
of operations as a percentage of net sales for the thirteen and twenty-six week
periods ended January 1, 2000 and fourteen and twenty-seven week periods ended
January 2, 1999:
<TABLE>
<CAPTION>
Thirteen Fourteen Twenty-Six Twenty-Seven
Week Period Week Period Week Period Week Period
Ended Ended Ended Ended
January 1, January 2, January 1, January 2,
2000 1999 2000 1999
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 42.1 45.5 46.1 45.1
----------- ------------ ----------- ------------
Gross margin 57.9 54.5 53.9 54.9
Distribution expense 3.9 3.7 4.9 4.4
Marketing expense 25.7 23.7 27.9 24.0
General and administrative expense 3.0 3.5 4.1 4.0
Other operating income 0.5 -- 0.3 --
Amortization of intangibles 2.8 7.1 3.6 9.4
----------- ------------ ----------- ------------
Operating income 23.0% 16.5% 13.7% 13.1%
============ ============= ============= ==============
</TABLE>
Thirteen Week Period ended January 1, 2000 ("second quarter 2000") and Fourteen
Week Period ended January 2, 1999 ("second quarter 1999") (Unaudited)
Net Sales. The Company's net sales for second quarter 2000 were $98.3 million
as compared to $100.9 million for second quarter 1999, a decrease of $2.6
million, or 2.6%. The decrease was partially due to $2.4 million in lower net
sales from the discontinued Eagle Brand chocolate flavored sweetened condensed
milk, and $0.9 million in lower net sales of None Such pie filling and Borden
eggnog. The decreases were partially offset by an increase of $1.1 million in
net sales within the lemon and lime juice product lines.
The table below sets forth the Company's net sales data for each of the
Company's product lines for second quarter 2000 and second quarter 1999 (dollars
in millions):
<TABLE>
<CAPTION>
Net Sales Percentage Net Sales Percentage
Second of Second of
Quarter Total Quarter Total
Product Lines Company's Principal Brands 2000 Net Sales 2000 Net Sales
- --------------------------- -------------------------- ------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Sweetened condensed milk Eagle Brand, Meadow Gold, $ 58.8 59.8% $ 61.5 60.9%
Magnolia, Star and other
Lemon and lime juices ReaLemon and ReaLime 18.0 18.3 16.9 16.7
Lemonade liquid concentrate ReaLemonade............... .2 .2 -- --
Non-dairy creamer Cremora, Cremora Royale
and other................. 12.7 12.9 12.7 12.6
Shelf-stable eggnog Borden.................... 3.9 4.0 4.2 4.2
Mincemeat pie filling None Such................. 3.7 3.8 4.3 4.3
Acid neutralized coffee Kava...................... 1.0 1.0 1.3 1.3
------- ------- -------- -------
Total..................... $ 98.3 100.0% $ 100.9 100.0%
======= ======= ======== =======
</TABLE>
15
<PAGE>
The U.S. Retail net sales were $87.8 million for second quarter 2000 as
compared to $87.9 for second quarter 1999, a decrease of $0.1 million, or 0.1%.
The U.S. Foodservice/Industrial net sales were $5.9 million for second quarter
2000 as compared to $6.6 million for second quarter 1999, a decrease of $0.7
million, or 10.6%. This decrease was primarily due to $0.6 million in lower
non-dairy creamer net sales, which was impacted by a June 2, 1999 fire at the
Company's Chester, South Carolina manufacturing plant. Once the plant resumed
production of non-dairy creamer powder after the fire, the Company was unable to
fulfill all of the sales demand for certain of its lower margin industrial
products. The International net sales were $4.6 million for second quarter 2000
compared to $6.4 million for second quarter 1999, a decrease of $1.8 million, or
28.1%. This decrease was primarily due to $1.5 million in lower Canadian net
sales. The Company entered into a distribution agreement with a new distributor
for its Canadian sales in August 1998. The distributor purchased product from
the Company in first quarter 1999 and second quarter 1999 in order to establish
a base level of inventory. This is the principle reason International net sales
in second quarter 2000 are significantly below second quarter 1999 net sales.
The table below sets forth the Company's net sales data by sales channel for
second quarter 2000 and second quarter 1999 (dollars in millions):
<TABLE>
<CAPTION>
Net Sales Percentage Net Sales Percentage
Second of Second of
Quarter Total Quarter Total
Product Lines 2000 Net Sales 2000 Net Sales
- -------------------------------------- ------------- --------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Retail
Sweetened condensed milk............. $ 53.0 53.9% $ 54.6 54.1%
Lemon and lime juices................ 14.5 14.8 13.0 12.9
Lemonade liquid concentrate.......... .2 .2 -- --
Branded non-dairy creamer............ 9.2 9.4 9.0 8.9
Other products....................... 8.6 8.7 9.7 9.6
Private label non-dairy creamer...... 2.3 2.3 1.6 1.6
U.S. Foodservice/Industrial........... 5.9 6.0 6.6 6.5
International......................... 4.6 4.7 6.4 6.4
---------- --------- --------- ---------
Total................................ $ 98.3 100.0% $ 100.9 100.0%
========== ========= ========= =========
</TABLE>
Cost of Goods Sold. Cost of goods sold was $41.4 million for second quarter
2000 as compared to $45.9 million for second quarter 1999, a decrease of $4.5
million, or 9.8%. Expressed as a percentage of net sales, cost of goods sold for
second quarter 2000 decreased to 42.1% from 45.5% for second quarter 1999. Cost
of goods sold as a percentage of net sales decreased by 3.4% due to the sales
mix shifting to higher margin products in second quarter 2000 and to lower milk,
lemon concentrate and lime concentrate raw material costs.
Distribution Expense. Distribution expense was $3.8 million for second
quarter 2000 as compared to $3.7 million for second quarter 1999, an increase of
$0.1 million, or 2.7%. Expressed as a percentage of net sales, distribution
expense for second quarter 2000 increased to 3.9% from 3.7% for second quarter
1999. The increase was driven by higher warehousing costs primarily associated
with the level of inventory maintained throughout second quarter 2000 for
ReaLemonade.
Marketing Expense. Marketing expense was $25.3 million for second quarter
2000 as compared to $23.9 million for second quarter 1999, an increase of $1.4
million. Expressed as a percentage of net sales, marketing expense for second
quarter 2000 increased to 25.7% from 23.7% for second quarter 1999. The
increase was primarily driven by $1.2 million in additional trade spending and
amortization of slotting expense related to the launch of ReaLemonade.
General and Administrative ("G&A") Expense. Total G&A expense was $3.0
million for second quarter 2000 as compared to $3.5 million for second quarter
1999, a decrease of $0.5 million, or 14.3%. Expressed as a percentage of net
sales, G&A expense for second quarter 2000 decreased to 3.0% from 3.5% for
second quarter 1999. The decrease was due to a $0.5 million charge in second
quarter 1999 for professional consulting fees associated with the Company's
consideration of various acquisition opportunities and a non-recurring $0.5
million charge in second quarter 1999 for transition services provided by Borden
Foods Corporation ("BFC"). These decreases were partially offset by $0.5
million of higher depreciation expense in second quarter 2000 associated with
the Company's computer systems.
16
<PAGE>
Other Operating Income. The Company recognized $0.5 million for a product
diversion lawsuit settlement against a wholesale customer during second quarter
2000.
Amortization of Intangibles. Amortization of intangibles was $2.8 million for
second quarter 2000 as compared to $7.1 million for second quarter 1999, a
decrease of $4.3 million. The decrease was due to the expiration of the one
year master customer services agreement entered into between the Company and BFC
in connection with the Company's January 23, 1998 acquisition of assets from
BFC.
Operating Income. Operating income was $22.5 million for second quarter 2000
as compared to $16.7 million for second quarter 1999, an increase of $5.8
million. Excluding the impact of $2.8 million and $7.1 million of amortization
expense for intangibles for second quarter 2000 and second quarter 1999,
respectively, operating income was $25.3 million for second quarter 2000 as
compared to $23.8 million for second quarter 1999, an increase of $1.5 million,
or 6.3%. Together with other factors discussed above, the Company's operating
income increased primarily due to lower key commodity costs and G&A, partially
offset by the impact of lower net sales and slotting allowance for ReaLemonade.
Interest Expense. Net interest expense was $8.1 million for second quarter
2000 as compared to net interest expense of $7.2 million for second quarter
1999, an increase of $0.9 million. The increase was primarily due to $0.3
million of higher interest affected by the fluctuation in the outstanding
balance of the Revolving Credit Facility, $0.7 million from higher interest
rates during second quarter 2000 compared to second quarter 1999, and $0.2
million of amortization cost associated with a June 30, 1999 amendment to the
Company's credit agreement with its lenders for the Senior Credit Facilities.
Income Taxes. The Company recorded income tax expense of $5.1 million for
second quarter 2000 as compared to a $3.3 million income tax expense for second
quarter 1999.
17
<PAGE>
Twenty-Six Week Period Ended January 1, 2000 ("first half 2000") and Twenty-
Seven Week Period Ended January 2, 1999 ("first half 1999") (Unaudited)
Net Sales. The Company's net sales for first half 2000 were $153.5 million
as compared to $151.9 million for first half 1999, an increase of $1.6 million,
or 1.1%. The increase was the result of $4.0 million in net sales from the
April 1999 launch of ReaLemonade and $1.8 million in net sales within the lemon
and lime juice product lines. The increases were partially offset by $0.4
million in lower net sales of Borden eggnog and None Such pie filling, $2.0
million in lower net sales from the discontinued Eagle Brand chocolate flavored
sweetened condensed milk, and $0.7 million for sweetened condensed milk products
returned to reclamation centers.
Also offsetting the increase was $1.0 million in lower non-dairy creamer
net sales. Production of non-dairy creamer was temporarily disrupted due to a
June 2, 1999 fire at the Company's Chester, South Carolina manufacturing plant.
While all retail product sales and some industrial product sales were unaffected
by the fire due to the Company's ability to have the products manufactured by a
third party, certain industrial products could not be outsourced during the
production downtime. The Company estimates that total lost sales associated
with the fire were approximately $1.0 million. The Company has replaced the
damaged equipment and resumed production in mid-October 1999.
The table below sets forth the Company's net sales data for each of the
Company's product lines for first half 2000 and first half 1999 (dollars in
millions):
<TABLE>
<CAPTION>
Net Sales Percentage Net Sales Percentage
First of First of
Half Total Half Total
Product Lines Company's Principal Brands 2000 Net Sales 1999 Net Sales
- --------------------------- -------------------------- ------------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Sweetened condensed milk Eagle Brand, Meadow Gold, $ 83.3 54.3% $ 85.9 56.6%
Magnolia, Star and other
Lemon and lime juices ReaLemon and ReaLime 34.3 22.3 32.5 21.4
Lemonade liquid concentrate ReaLemonade............... 4.0 2.6 -- --
Non-dairy creamer Cremora, Cremora Royale
and other................. 20.3 13.2 21.3 14.0
Shelf-stable eggnog Borden.................... 5.0 3.3 4.9 3.2
Mincemeat pie filling None Such................. 4.7 3.1 5.2 3.4
Acid neutralized coffee Kava...................... 1.9 1.2 2.1 1.4
------- ------- -------- -------
Total..................... $ 153.5 100.0% $ 151.9 100.0%
======= ======= ======== =======
</TABLE>
The U.S. Retail net sales were $132.2 million for first half 2000 as compared
to $125.8 million for first half 1999, an increase of $6.4 million, or 5.1%.
The increase was primarily driven by $3.9 million in net sales from the April
1999 launch of ReaLemonade and $2.6 million in additional net sales within the
lemon and lime juice product lines. The U.S. Foodservice/Industrial net sales
were $12.2 million for first half 2000 as compared to $12.9 million for first
half 1999, a decrease of $0.7 million, or 5.4%. This decrease was primarily
impacted by the lower non-dairy creamer net sales, due to the plant fire, as
discussed above. The International net sales were $9.1 million for first half
2000 compared to $13.2 million for first half 1999, a decrease of $4.1 million,
or 31.1%. This decrease was partially due to $3.3 million in lower Canadian net
sales. The Company entered into a distribution agreement with a new distributor
for its Canadian sales in August 1998. The distributor purchased product from
the Company in first half 1999 in order to establish a base level of inventory.
This is the principle reason International net sales in first half 2000 are
significantly below first half 1999 sales.
18
<PAGE>
The table below sets forth the Company's net sales data by sales channel for
first half 2000 and first half 1999 (dollars in millions):
<TABLE>
<CAPTION>
Net Sales Percentage Net Sales Percentage
First of First of
Half Total Half Total
Product Lines 2000 Net Sales 1999 Net Sales
- -------------------------------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Retail
Sweetened condensed milk............. $ 72.4 47.2% $ 72.6 47.8%
Lemon and lime juices................ 26.3 17.1 23.7 15.6
Lemonade liquid concentrate.......... 3.9 2.5 -- --
Branded non-dairy creamer............ 14.8 9.6 14.9 9.8
Other products....................... 11.4 7.4 12.1 8.0
Private label non-dairy creamer...... 3.4 2.2 2.5 1.6
U.S. Foodservice/Industrial........... 12.2 8.0 12.9 8.5
International......................... 9.1 6.0 13.2 8.7
--------- -------- ------- --------
Total................................ $ 153.5 100.0% $ 151.9 100.0%
========= ======== ======= ========
</TABLE>
Cost of Goods Sold. Cost of goods sold was $70.8 million for first half
2000 as compared to $68.5 million for first half 1999, an increase of $2.3
million, or 3.4%. Expressed as a percentage of net sales, cost of goods sold
for first half 2000 increased to 46.1% from 45.1% for first half 1999. The
increase was due to recording a $4.8 million charge to reserve for obsolescence
of ReaLemonade inventories related to inventory expiration. Based on the
Company's forecasted sales volume, the reserve was recorded because the
inventories may expire before anticipated sale dates. Approximately 48.0% of
the inventory has been donated to various organizations or sold at reduced
prices. The increase noted above was partially offset by lower raw material
costs and a shift in the sales mix, as previously discussed.
Distribution Expense. Distribution expense was $7.5 million for first half
2000 as compared to $6.7 million for first half 1999, an increase of $0.8
million, or 11.9%. Expressed as a percentage of net sales, distribution expense
for first half 2000 increased to 4.9% from 4.4% for first half 1999. The
increase was driven by $0.3 million of higher warehousing costs primarily
associated with the level of inventory maintained to support the launch of
ReaLemonade, and $0.5 million for costs reclassified from marketing expense to
distribution costs as a result of the change in the distribution network for
certain U.S. foodservice sales.
Marketing Expense. Marketing expense was $42.8 million for first half 2000
as compared to $36.5 million for first half 1999, an increase of $6.3 million,
or 17.3%. Expressed as a percentage of net sales, marketing expense for first
half 2000 increased to 27.9% from 24.0% for first half 1999. The increase was
driven by $6.7 million in advertising, trade and consumer support related to the
launch of ReaLemonade.
General and Administrative Expense. Total G&A expense was $6.3 million for
first half 2000 as compared to $6.1 million for first half 1999, an increase of
$0.2 million, or 3.3%. Expressed as a percentage of net sales, G&A expense for
first half 2000 increased to 4.1% from 4.0% for first half 1999. The increase
was primarily due to $1.0 million of higher depreciation expense associated with
the Company's computer systems. This increase was partially offset by a $0.5
million charge in first half 1999 for professional consulting fees associated
with the Company's consideration of various acquisition opportunities and a non-
recurring $0.8 million charge in first half 1999 for transition services
provided by BFC.
Other Operating Income. The Company recognized $0.5 million for a product
diversion lawsuit settlement against a wholesale customer during second quarter
2000.
Amortization of Intangibles. Amortization of intangibles was $5.6 million for
first half 2000, as compared to $14.2 million for first half 1999, a decrease of
$8.6 million. The decrease was due to the expiration of the one year master
customer services agreement entered into between the Company and BFC in
connection with the Company's January 23, 1998 acquisition of assets from BFC.
Operating Income. Operating income was $21.1 million for first half 2000 as
compared to $19.9 million for first half 1999, an increase of $1.2 million, or
6.0%. Excluding the impact of $5.6 million and $14.2 million of amortization
expense for intangibles for first half 2000 and first half 1999, respectively,
and a $4.8 million charge to reserve for
19
<PAGE>
ReaLemonade inventories for first quarter 2000, operating income was $31.5
million for first half 2000 as compared to $34.1 million for second quarter
1999, a decrease of $2.6 million, or 7.6%. Together with other factors discussed
above, the Company's operating income was significantly reduced by the marketing
investment in ReaLemonade.
Interest Expense. Net interest expense was $16.1 million for first half 2000
as compared to net interest expense of $14.2 million for first half 1999, an
increase of $1.9 million. The increase was primarily due to $0.7 million of
higher interest affected by the fluctuation in the outstanding balance of the
Revolving Credit Facility, $1.0 million from higher interest rates during first
half 2000 compared to first half 1999, and $0.4 million for amortization cost
associated with a June 30, 1999 amendment to the Company's credit agreement with
its lenders for the Senior Credit Facilities.
Income Taxes. The Company recorded income tax expense of $1.8 million for
first half 2000 as compared to a $2.0 million tax income expense for first half
1999.
Liquidity and Capital Resources
Borrowings under the Senior Credit Facilities at January 1, 2000 and July 3,
1999 consisted of $173.0 million and $173.5 million, respectively, for the Term
Loan Facility maturing in 2005. The Term Loan Facility matures $0.5 million in
the remainder of fiscal year 2000 and $1.0 million, $0.8 million, $3.2 million,
$27.5 million, $80.0 million and $60.0 million in the fiscal years 2001, 2002,
2003, 2004, 2005 and 2006, respectively. In addition, the Senior Credit
Facilities included the $70.0 million Revolving Credit Facility maturing in
2004, of which $12.0 million and $50.0 million were outstanding at January 1,
2000 and July 3, 1999, respectively. The decrease in the amount outstanding
under the Revolving Credit Facility was principally impacted by the seasonal
nature of the business, with higher sales occurring in the second quarter of the
Company's fiscal year, and the collection of trade receivables staying current.
On September 27, 1999, GEI and Warburg (collectively, the "Equity Sponsors")
contributed $10.0 million of additional equity for the Offered Securities. The
capital contribution made by the Equity Sponsors was made in connection with the
significant marketing investment made by the Company in launching Cremora Royale
and ReaLemonade during the fiscal year ended July 3, 1999.
Interest payments on the Notes and interest and principal payments under the
Senior Credit Facilities represent significant cash requirements for the
Company. Borrowings under the Senior Credit Facilities bear interest at floating
rates and require interest payments on varying dates. However, on April 22,
1998, the Company entered into interest rate swap agreements in order to fix the
interest rate on $100 million of the Term Note Facility. These swap agreements
commenced on July 23, 1998.
The Company's remaining liquidity needs are for capital expenditures and
operating requirements. The Company spent $2.2 million on capital projects
during the twenty-six week period ended January 1, 2000 to fund expenditures in
existing facilities, management information systems initiatives, and
discretionary capital projects associated with new products. The Company
expects to spend in total approximately $5.0 to $7.0 million on capital projects
in fiscal year 2000 to fund expenditures in existing facilities, information
system initiatives and discretionary capital projects associated with new
products. The Company's primary sources of liquidity are cash flows from
operations and available borrowings under the Revolving Credit Facility.
Net cash provided from operating activities for first half 2000 and first half
1999 was $32.8 million and $33.7 million, respectively. The net cash provided
was due mainly to the sale of inventory in connection with the Company's
seasonal sales.
Cash used by financing activities in first half 2000 and first half 1999 was
$29.4 million and $27.5 million, respectively. Net payments of $38.0 million
and $26.8 million for first half 2000 and first half 1999, respectively, were
applied against the Revolving Credit Facility. Additionally, the Company
received $10.0 million associated with the issuance of the Offered Securities to
the Equity Sponsors.
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 additional equity securities.
20
<PAGE>
Other Information
Plant Fire. On June 2, 1999, a fire destroyed several critical pieces of
equipment at the Chester, South Carolina powdered non-dairy creamer
manufacturing plant. The plant operated at modified levels until production
resumed in mid-October 1999. The Company had temporarily engaged another
manufacturer to produce powdered non-dairy creamer in bulk. The Chester, South
Carolina plant then packaged and shipped the finished product to its customers.
The Company estimates that total lost sales associated with the fire were
approximately $1.0 million.
The Company is in the process of completing its insurance claim for property
damage, other expenses related to the fire and business interruption. The claim
is expected to be approximately $3.5 to $4.0 million. The Company does not
believe that this event will have a material impact on its results of operations
or financial position.
Seasonality
The Company's net sales, net income and cash flows are affected by a seasonal
bias toward the fourth quarter of the calendar year due to increased sales
during the holiday season. Three of the Company's six major product lines (Eagle
Brand and the Company's other sweetened condensed milk products, Borden eggnog
and None Such mincemeat pie filling) are consumed primarily during the November
and December holiday season. In recent years, approximately 45% of the Company's
net 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, normally peaking in the September/October period,
requiring the Company to draw additional amounts on its Revolving Credit
Facility during this period.
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
second quarter of 2001. The Company is evaluating this pronouncement and has not
yet determined the ultimate impact of this pronouncement on future financial
statements.
21
<PAGE>
Impact of the Year 2000 Issue
The Year 2000 issue was the result of computer programs being written using
two digits rather than four to define the particular year. Computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company's efforts to address the 2000 issues were divided into three areas
including: (1) the completed installation of the PeopleSoft enterprise-wide
system for business and accounting systems; (2) the renovation, as required, of
systems not replaced by the enterprise-wide system, including non-information
technology systems such as plant process controls; and (3) assessment of the
Year 2000 readiness of external suppliers and customers. A discussion of each
area of activity follows.
Enterprise-wide system. On January 25, 1999, the Company, in conjunction with
outside consultants, implemented a comprehensive new PeopleSoft enterprise-wide
system. The Company's version of the PeopleSoft enterprise-wide system software
release was developed and warranted by the vendor to be Year 2000 ready. All
other applications installed are new and also warranted by the vendor to be Year
2000 ready. Certain testing was performed against the application on hardware
where the dates were rolled forward to 2000, and no processing issues were
identified. No disruptions were experienced to date.
Systems not replaced by the enterprise-wide system. For the systems not
replaced by the PeopleSoft enterprise-wide system, including plant process
controls, other non-information technology systems, brokerage reporting systems
and telephone and communications systems, the Company determined the areas that
possessed vulnerability to the Year 2000 issue, and identified solutions, such
as upgrades or workarounds. The recommendations and contingency plan(s) were in
place for the year end. No disruptions were experienced to date. Approximately
$80,000 was spent for remediation in this area.
Suppliers and Customers. The Company has assessed and addressed the risks
related to third party suppliers and customers. The Company surveyed its
customers and suppliers regarding their own assessment of Year 2000
vulnerability. The Company developed contingency plans, such as reverting to a
paper based order and invoice system, with its customers and suppliers where
appropriate, and communicated the contingency plans to the appropriate people.
The costs were minimal. The Company has not experienced any disruptions to date,
but can give no assurances that failure of third parties to address the Year
2000 system issues will not have an adverse impact on the Company's business
operations and results.
Risk. The Company has not experienced any disruptions due to the Year 2000
issue, but due to the general uncertainty inherent in the Year 2000 problem,
including the uncertainty associated with suppliers and customer's Year 2000
readiness, which is beyond the Company's control, the potential effect on the
financial results and the condition of the Company cannot be measured.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements within this section may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which involve known and unknown risks and uncertainties. The Company's
actual results, performance or achievements in the future could differ
significantly from the results, performance or achievements discussed or implied
in such forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, the effect on financial
performance of increased competition in the dry-grocery food industry, potential
future competition, competitive pricing for products, general economic and
business conditions, industry trends, raw material costs, dependence on the
Company's labor force, the success of new product innovations and changes in, or
the failure or inability to comply with, government rules and regulations,
including, without limitation, Food and Drug Administration and environmental
rules and regulations.
22
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rates
The following table presents descriptions of the financial instruments and
derivative instruments that are held by the Company at January 1, 2000 and which
are sensitive to changes in interest rates, including interest rate swaps and
debt obligations. In the ordinary course of business, the Company enters into
derivative financial instrument transactions in order to manage or reduce market
risk. Under interest rate swaps, the Company agrees with other parties to
exchange, at specified intervals, the difference between fixed-rate and floating
rate interest amounts calculated by reference to an agreed notional principal
amount. The Company does not enter into derivative financial instrument
transactions for speculative purposes.
For the liabilities, the table represents principal fiscal year cash flows
that exist by maturity date and the related average interest rate. For the
interest rate derivatives, the table presents the notional amounts and expected
interest rates that exist by contractual dates; the notional amount is used to
calculate the contractual payments to be exchanged under the contract. The
variable rates are estimated based upon the six month forward LIBOR rate.
All amounts are reflected in U.S. dollars (in thousands).
<TABLE>
<CAPTION>
Balance at
January 1, Fair
2000 2001 2002 2003 2004 Thereafter 2000 Value
--------- --------- -------- -------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Fixed rate.................. $ 115,000 $ 115,000 $ 87,391
Average interest rate....... 8.75% 8.75%
Variable rate............... $ 500 $ 1,000 $ 750 $ 3,250 $ 27,500 $ 152,000 $ 185,000 $ 185,000
Average interest rate....... 9.631% 9.631% 9.631% 9.631% 9.631% 9.640% 9.638%
Interest-Rate Derivatives
Variable to fixed:
Notional amount at the
beginning of fiscal year... $ 100,000 $ 100,000 $ 75,000 $ 75,000
Maturities.................. 25,000 75,000 $ 100,000 $ 1,797
Average pay rate............ 5.943% 5.943% 5.955% 5.955% 5.948%
Average receive rate........ 6.184% 6.184% 6.184% 6.184% 6.184%
</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 3.50%. These swap agreements
commenced on July 23, 1998 and fixed the LIBOR rate at 5.905% on $25.0 million
and 5.955% on $75.0 million and of the $175.0 million Term Loan Facility. These
swap agreements expire on December 29, 2000 and December 31, 2002, respectively,
and have been reflected in the table above. The estimated benefit to cancel the
interest rate swap agreements at January 1, 2000 was approximately $1.8 million
based on current interest rates for similar instruments.
Milk Hedging
The Company uses milk as a major ingredient in its sweetened condensed milk
product line and is subject to the risk of rising milk prices that increase
manufacturing costs and erode profit margins. By purchasing futures contracts,
however, the Company establishes a known price for future milk purchases in
order to protect against fluctuating milk prices. As of January 27, 2000, the
Company had 314 outstanding milk futures contracts expiring during various
months through June 2000. The Company has successfully hedged a portion of its
future production at an average cost of milk that is below prior year's average
cost of milk. However, the current price for milk has continued to decline and
is now at or near historical lows. The aggregate market value of these
contracts was $7.2 million with an average cost of $8.0 million. The unrealized
loss on these contracts was $0.8 million at January 27, 2000.
The Company realized gains of $0.2 million for futures milk contracts that
expired in the first half 2000. These gains were recorded as an offset to
manufacturing costs and reduced the cost of milk purchases during this period.
23
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule of Eagle Family Foods Holdings, Inc.
27.2 Financial Data Schedule of Eagle Family Foods, Inc.
(b) Reports on Form 8-K
None.
24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by
the undersigned thereunto duly authorized.
EAGLE FAMILY FOODS HOLDINGS, INC.
EAGLE FAMILY FOODS, INC.
By: /s/ John O'C Nugent
-------------------
John O'C Nugent
President and Chief Executive Officer
By: /s/ Craig A. Steinke
--------------------
Craig A. Steinke
Vice President and Chief Financial Officer
Date: February 9, 2000
25
<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule of Eagle Family Foods Holdings, Inc.
27.2 Financial Data Schedule of Eagle Family Foods, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Financial Statements of Eagle Family Foods Holdings, Inc. for the thirteen week
period ended January 1, 2000 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> 3-MOS
<FISCAL-YEAR-END> JUL-1-2000
<PERIOD-START> OCT-3-1999
<PERIOD-END> JAN-1-2000
<CASH> 2,236
<SECURITIES> 0
<RECEIVABLES> 26,540
<ALLOWANCES> 228
<INVENTORY> 16,215
<CURRENT-ASSETS> 47,462
<PP&E> 41,670
<DEPRECIATION> 8,990
<TOTAL-ASSETS> 385,832
<CURRENT-LIABILITIES> 32,750
<BONDS> 299,000
108,117
0
<COMMON> 11
<OTHER-SE> (54,046)
<TOTAL-LIABILITY-AND-EQUITY> 385,832
<SALES> 98,361
<TOTAL-REVENUES> 98,361
<CGS> 41,362
<TOTAL-COSTS> 41,362
<OTHER-EXPENSES> 34,483
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,083
<INCOME-PRETAX> 14,433
<INCOME-TAX> 5,066
<INCOME-CONTINUING> 9,367
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,367
<EPS-BASIC> 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 thirteen week period
ended January 1, 2000 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> 3-MOS
<FISCAL-YEAR-END> JUL-1-2000
<PERIOD-START> OCT-3-1999
<PERIOD-END> JAN-1-2000
<CASH> 2,236
<SECURITIES> 0
<RECEIVABLES> 26,540
<ALLOWANCES> 228
<INVENTORY> 16,215
<CURRENT-ASSETS> 47,462
<PP&E> 41,670
<DEPRECIATION> 8,990
<TOTAL-ASSETS> 386,591
<CURRENT-LIABILITIES> 32,750
<BONDS> 299,000
0
0
<COMMON> 1
<OTHER-SE> 54,840
<TOTAL-LIABILITY-AND-EQUITY> 386,591
<SALES> 98,361
<TOTAL-REVENUES> 98,361
<CGS> 41,362
<TOTAL-COSTS> 41,362
<OTHER-EXPENSES> 34,475
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,083
<INCOME-PRETAX> 14,441
<INCOME-TAX> 5,066
<INCOME-CONTINUING> 9,375
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,375
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
