<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number ____________________________________________________
FAVORITE BRANDS INTERNATIONAL, INC.
and the Guarantors identified in Footnote (1) below
(Exact name of registrant specified in its charter)
Delaware 75-2608980
- -------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
Identification No.) or organization)
2121 Waukegan Road
Bannockburn, IL 60015
Registrant's telephone number, including area code (847) 405-5800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ( ) No (X)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common stock, $0.01 par value per share--1,000 shares authorized, issued and
outstanding December 26, 1998.
(1) The following domestic direct subsidiaries of Favorite Brands
International, Inc. are Guarantors of the Company's Senior Notes and are
Co-Registrants, each of which is incorporated in the jurisdiction and has
the I.R.S. Employer Identification Number indicated: Trolli Inc., a
Delaware corporation (52-1716800) and Sather Trucking Corp., a Delaware
corporation (41-1849044).
<PAGE>
Favorite Brands International, Inc. and Subsidiaries
(A Wholly-Owned Subsidiary of Favorite Brands International Holding Corp.)
Quarterly Report On Form 10-Q
For The Quarter Ended December 26, 1998
Index
PART I -- FINANCIAL INFORMATION
PAGE
ITEM I -- CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Operations for the thirteen
and twenty-six weeks ended December 26, 1998 and
December 27, 1997
Consolidated Balance Sheets as of December 26, 1998 and
June 27, 1998
Consolidated Statements of Changes in Stockholder's
Equity for the twenty-six weeks ended December 26, 1998
and December 27, 1997
Consolidated Statements of Cash Flows for the twenty-six
weeks ended December 26, 1998 and December 27, 1997
Notes to Consolidated Financial Statements
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II -- OTHER INFORMATION
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Favorite Brands International Holding Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
------------------------------ ------------------------------
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales.................................................... $ 191,796 $ 198,382 $ 388,436 $ 401,952
Costs and expenses:
Cost of sales.......................................... 117,611 116,628 241,119 246,035
Selling, marketing and administrative.................. 72,685 63,338 141,689 117,165
Amortization of intangible assets...................... 4,483 4,369 8,955 8,952
Restructuring and business integration costs........... 1,143 2,839 2,190 6,284
------------ ------------ ------------ ------------
195,922 187,174 393,953 378,436
Income (loss) from operations................................ (4,126) 11,208 (5,517) 23,516
Nonoperating expenses:
Interest expense....................................... 15,653 13,286 30,230 26,031
------------ ------------ ------------ ------------
Loss before income taxes, extraordinary charge and
cumulative effect of change in accounting principle....... (19,779) (2,078) (35,747) (2,515)
Benefit from income taxes.............................. (7,362) (560) (13,305) (261)
------------ ------------ ------------ ------------
Loss before extraordinary charge and cumulative
effect of change in accounting principle.................. (12,417) (1,518) (22,442) (2,254)
------------ ------------ ------------ ------------
Extraordinary charge--early debt extinguishment,
net of income tax benefit............................. - 40 - 4,194
Cumulative effect of change in accounting principle,
net of income tax benefit............................. - - 2,503 -
------------ ------------ ------------ ------------
Net loss..................................................... $ (12,417) $ (1,558) $ (24,945) $ (6,448)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Favorite Brands International Holding Corp.)
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
December 26, June 27,
ASSETS 1998 1998
------ ------------ --------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents..................... $ 1,587 $ 6,440
Accounts receivable, less allowance of
$20,911 and $14,600 at December 26,
1998 and June 27, 1998, respectively........ 50,182 48,999
Inventories................................... 100,034 98,232
Deferred income taxes......................... 17,846 17,846
Prepaid expenses and other current assets..... 2,926 3,363
--------- --------
Total current assets.......................... 172,575 174,880
--------- --------
Property, Plant and Equipment, at Cost:
Land.......................................... 5,200 5,200
Buildings..................................... 67,152 67,123
Machinery and equipment....................... 199,680 200,145
Construction in progress...................... 30,745 15,561
--------- --------
302,777 288,029
Less accumulated depreciation................. 62,968 49,129
--------- --------
239,809 238,900
--------- --------
Other Assets:
Intangible assets, net........................ 344,585 355,617
Prepaid expenses and other assets............. 1,686 1,619
Deferred income taxes......................... 46,823 31,845
--------- --------
393,094 389,081
--------- --------
$ 805,478 $802,861
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Favorite Brands International Holding Corp.)
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
December 26, June 27,
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1998
------------------------------------- ------------ ---------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued liabilities.............. $ 103,453 $ 110,485
Current portion of long-term debt..................... 2,000 2,440
Other current liabilities............................. 1,715 916
------------ ---------
Total current liabilities........................... 107,168 113,841
------------ ---------
Noncurrent Liabilities:
Long-term debt........................................ 589,500 554,950
Other long-term liabilities........................... 2,278 3,020
------------ ---------
Total noncurrent liabilities........................ 591,778 557,970
------------ ---------
Commitments and Contingencies...........................
Stockholder's Equity:
Common Stock, $.01 par value; 1,000 shares
authorized, issued and outstanding.................. - -
Additional paid-in capital............................ 195,751 195,324
Accumulated deficit................................... (89,219) (64,274)
------------ ---------
Total stockholder's equity.......................... 106,532 131,050
------------ ---------
$ 805,478 $ 802,861
============ =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
(A Wholly-Owned Subsidiary of Favorite Brands International Holding Corp.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional Total
Number of Paid-In Accumulated Stockholder's
Shares Amount Capital Deficit Equity
--------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 28, 1997 1,000 $ - $ 179,058 $ (5,189) $ 173,869
Net Loss - - - (6,448) (6,448)
--------- ------ ---------- ----------- -------------
Balance at December 27, 1997 1,000 - 179,058 (11,637) 167,421
Capital contribution - - 16,266 - 16,266
Net Loss - - - (52,637) (52,637)
--------- ------ ---------- ----------- -------------
Balance at June 27, 1998 1,000 - 195,324 (64,274) 131,050
Capital contribution - - 427 - 427
Net Loss - - - (24,945) (24,945)
--------- ------ ---------- ----------- -------------
Balance at December 26, 1998 1,000 $ - $ 195,751 $ (89,219) $ 106,532
========= ====== ========== =========== =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Favorite Brands International Holding Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
------------------------------------
December 26, December 27,
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss................................................................................. $(24,945) $ (6,448)
Adjustments:
Depreciation and amortization.......................................................... 23,001 22,487
Loss on disposition of property, plant & equipment..................................... 134 --
Deferred income taxes.................................................................. (13,305) (261)
Extraordinary charge................................................................... -- 4,194
Cumulative effect of change in accounting principle ................................... 2,503 --
Changes in operating assets and liabilities, net of effects from purchase of
confections businesses:
Accounts receivable.................................................................. (1,183) 1,239
Inventories.......................................................................... (1,802) (6,338)
Prepaid expenses and other assets.................................................... (832) (12,295)
Accounts payable and accrued liabilities............................................. (6,605) 548
Income taxes payable................................................................. 35 (344)
Other liabilities.................................................................... 22 (234)
-------- ---------
Net cash provided by (used in) operating activities................................. (22,977) 2,548
-------- ---------
Cash Flows from Investing Activities:
Purchase of confections businesses, net of cash acquired................................. -- (85)
Proceeds on the sale of assets........................................................... 44 --
Capital expenditures..................................................................... (15,133) (11,916)
-------- ---------
Net cash used in investing activities............................................... (15,089) (12,001)
-------- ---------
Cash Flows from Financing Activities:
Net borrowings (repayments) on revolving credit loans.................................... 18,050 4,236
Proceeds from loans...................................................................... 17,000 195,000
Repayments of term loan.................................................................. (500) (190,909)
Payments for debt issuance costs......................................................... (897) --
Repayment of other long-term debt........................................................ (440) (440)
-------- ---------
Net cash provided by financing activities........................................... 33,213 7,887
-------- ---------
Decrease in cash and cash equivalents..................................................... (4,853) (1,566)
Cash and cash equivalents, beginning of period............................................ 6,440 3,177
-------- ---------
Cash and cash equivalents, end of period.................................................. $ 1,587 $ 1,611
======== =========
Supplemental Cash Flow Information:
Income taxes paid........................................................................ $ -- $ 395
======== =========
Interest paid............................................................................ $ 29,263 $ 14,392
======== =========
Purchase of confections businesses, net of cash acquired:
Assets acquired....... .................................................................. $ -- $ (1,040)
Liabilities assumed...................................................................... -- 955
Capital contribution..................................................................... -- --
-------- ---------
Cash consideration....................................................................... $ -- $ (85)
======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Favorite Brands International, Inc. and Subsidiaries
(A Wholly-Owned Subsidiary of Favorite Brands International Holding Corp.)
Notes To Consolidated Financial Statements
(Unaudited)
December 26, 1998
(Dollars in Thousands)
1. Basis of the Presentation
The accompanying unaudited consolidated financial statements of Favorite
Brands International, Inc. (the "Company") a wholly-owned subsidiary of
Favorite Brands International Holding Corp. ("Holdings"), include the
accounts of the Company and all majority-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated. In the opinion
of the Company, all material adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the following
unaudited condensed consolidated financial statements have been included
herein. Certain information and footnote disclosures normally included in
financial statements have been omitted. These unaudited consolidated
financial statements should be read in conjunction with the Company's 1998
Consolidated Financial Statements included on Form S-4. The results of
operations for the period ended December 26, 1998 are not necessarily
indicative of the operating results for the full year.
2. Inventories
Inventories consist of:
<TABLE>
<CAPTION>
December 26, June 27,
1998 1998
------------ --------
<S> <C> <C>
Raw materials $ 22,787 $22,748
Work-in-process 14,018 19,521
Finished goods 63,229 55,963
-------- -------
$100,034 $98,232
======== =======
</TABLE>
3. Restructuring and Business Integration Costs
The Company recorded the following changes to its restructuring and
business integration accruals during the twenty-six weeks ended December
26, 1998:
<TABLE>
<S> <C>
June 27, 1998 Accrual $12,405
Additional Charges 2,190
Reductions (9,160)
-------
December 26, 1998 Accrual $ 5,435
=======
</TABLE>
<PAGE>
4. Equity Transaction
During the first half of fiscal 1999, a consulting firm was issued 4,722
shares of Holding's common stock in lieu of a $427,000 cash payment by the
Company. The Company reflected this transaction as an increase in
additional paid in capital and a decrease in accruals.
5. Supplemental Guarantor Information
Sather Trucking Corp. and Trolli, Inc. (collectively, the "Guarantors"),
wholly-owned subsidiaries of the Company, have unconditionally guaranteed,
jointly and severally, the payment of principal, interest, and premium, if
any, on the Senior Notes, Senior Subordinated Notes, and all other
obligations under the respective Indentures. Separate financial statements
of the guaranteeing subsidiaries are not included because the guaranteeing
subsidiaries are jointly and severally liable and because the separate
financial statements and other disclosures concerning the guaranteeing
subsidiaries are not deemed material to investors. Selected summarized
financial information for the Guarantors is presented below.
<TABLE>
<CAPTION>
13 Weeks 13 Weeks 26 Weeks 26 Weeks
Ended Ended Ended Ended
12/26/98 12/27/97 12/26/98 12/27/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 28,941 $ 24,121 $ 63,253 $ 53,034
Income from operations 3,758 1,254 7,464 5,476
Net income (loss) 359 1,970 851 (1,353)
12/26/98 6/27/98
--------- --------
Current assets $ 47,572 $ 38,605
Property, plant and equipment, net 44,441 38,289
Other assets 84,870 85,888
--------- --------
Total assets $ 176,883 $162,782
========= ========
Current liabilities $ 55,446 $ 42,195
Noncurrent liabilities 104,577 104,578
--------- --------
Total liabilities 160,023 146,773
Stockholder's equity 16,860 16,009
--------- --------
Total liabilities and stockholder's equity $ 176,883 $162,782
========= ========
</TABLE>
6. Revised Fiscal 1998 Financial Statements
In fiscal 1996, the Company determined that the goodwill resulting from the
acquisition of a certain confections manufacturer and distributor had a
useful life of 15 years. During fiscal 1997, the Company revised the
amortization period of goodwill prospectively using 40 years to determine
the related amortization expense in fiscal 1997 and 1998.
Subsequently, the Company determined that the change of the estimated life
of goodwill to 40 years was inappropriate. Accordingly, the Company has
revised the amortization expense for the twenty-six weeks ended December
27, 1997 by $3.0 million resulting in a $1.8 million increase in the net
loss. The change in the amortization expense for fiscal year 1998 did not
impact cash flows.
<PAGE>
7. Recent Accounting Pronouncements
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
131, "Disclosure about segments of an enterprise and related information,"
which requires adoption in fiscal 1999. Statement 131 requires companies to
report segment information based on how management disaggregates its
business for evaluating performance and making operating decisions. The
Company has reviewed Statement 131 and has determined that it will report
as a single segment after adoption of such statement.
In 1998, the FASB issued Statement 133, "Accounting for derivative
instruments and hedging activities," which requires adoption by fiscal
2000. Statement 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Company believes
that the adoption of Statement 133 will not have a material impact on its
financial reporting.
8. Subsequent Event
In May 1998, the Company issued $200 million of Senior Notes in a private
placement. Pursuant to the terms of an Exchange and Registration Rights
Agreement entered into in connection with such private placement, the
Company is obligated to exchange the original notes for registered notes
with substantially identical terms. On February 4, 1999, the Company's
Registration Statement relating to this exchange offer was declared
effective and the exchange offer was commenced.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The discussions set forth in this Form 10-Q should be read in conjunction
with the financial information included herein and in the Company's Form S-4 for
the year ended June 27, 1998. Certain statements in this Quarterly Report are
"forward looking statements" as defined by the Private Securities Litigation
Reform Law of 1995. These statements, which may be indicated by words such as
"expects", "intends", "believes", "forecasts", or other words of similar
meaning, involve certain risks and uncertainties that may cause actual results
to differ materially from expectations as of the date of this Quarterly Report.
Factors that could cause the Company's actual results in future periods to
differ materially include, but are not limited to, those which may be discussed
herein, as well as those discussed or identified in the Company's Form S-4
filing with the Commission.
OVERVIEW
The Company was formed in September 1995 to acquire the marshmallow and
caramel business of Kraft Foods, Inc., a subsidiary of Philip Morris Companies,
Inc. The Company has grown primarily through five subsequent acquisitions and is
the fourth largest confections company in the United States. The Company
competes primarily in the marshmallow, fruit snack and non-chocolate candy
categories of the confections market with a broad portfolio of products.
The Company believes that Adjusted EBITDA provides useful information
regarding the ability of the Company to meet its future debt service, capital
expenditure and working capital requirements. In addition, the Company
understands that such information is considered by some investors to be an
additional basis for evaluating the Company's ability to pay interest and repay
debt. Adjusted EBITDA is defined as income (loss) from operations before
depreciation, amortization of goodwill and other intangibles, and restructuring
and business integration costs. Adjusted EBITDA does not, however, represent
cash flow from operations as defined by generally accepted accounting principles
and should not be considered as a substitute for net income as an indicator of
the Company's operating performance or cash flow as a measure of liquidity.
Because Adjusted EBITDA is not calculated identically by all companies, the
presentation herein may not be comparable to other similarly titled measures of
other companies.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, net sales by
product category, adjusted EBITDA and the percentage relationship to net sales
of certain financial information of the Company for such periods.
<TABLE>
<CAPTION>
Thirteen Twenty-six
Weeks Ended Weeks Ended
---------------------------- ----------------------------
December 26, December 27, December 26, December 27,
(Dollars in Millions) 1998 1997 1998 1997
------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales by major product category:
Marshmallows $ 54.5 $ 55.8 $ 82.8 $ 90.3
General line candy 88.3 95.7 197.5 215.1
Fruit snacks 28.4 30.5 62.3 57.9
Trolli gummis 18.3 14.1 41.4 33.6
Non-product revenue 2.3 2.3 4.4 5.1
------ ------- ------- -------
Total net sales $191.8 $ 198.4 $ 388.4 $ 402.0
Cost of sales 61.3% 58.8% 62.1% 61.2%
Selling, marketing and administrative 37.9% 31.9% 36.5% 29.1%
Operating income (loss) (2.2)% 5.6% (1.4)% 5.9%
Adjusted EBITDA:
Dollars $8,440 $25,225 $19,674 $52,287
Percentage 4.4% 12.7% 5.1% 13.0%
</TABLE>
Net Sales. Net sales were $191.8 million for the quarter ended December 26,
1998, compared to $198.4 million for the quarter ended December 27, 1997, a
decrease of $6.6 million, or 3.3%. The decline was primarily a result of lower
sales of general line candy products due to withdrawals from certain low margin
business and competitive pressures in the caramel product line. For the twenty-
six weeks ended December 26, 1998 net sales were $388.4 million compared to
$402.0 million for the twenty-six weeks ended December 27, 1997. The decrease in
net sales of $13.6 million, or 3.4%, was due primarily to declines in
marshmallow and general line candy offset by increases in fruit snack and gummi
products during the period. The decline in marshmallow sales coincided with an
overall decline in sales in the retail marshmallow category. The Company
believes that the decline in marshmallow sales also related to the quality
problems and lower customer service levels that occurred in prior periods in
connection with integrating the acquired companies. The decline in general line
candy was partially due to withdrawals from certain low margin business, a
decline in branded caramel sales due to competitive pressure as well as declines
in a number of other product categories.
Cost of Sales. Cost of sales was $117.6 million for the second quarter of
fiscal 1999, compared to $116.6 million for the second quarter of fiscal 1998.
Expressed as a percentage of net sales, cost of sales was 61% for the second
quarter of fiscal 1999 and 59% for the second quarter of fiscal 1998. For the
twenty-six weeks ended December 26, 1998, cost of sales was $241.1 million
compared to $246.0 million for the same period ended December 27, 1997.
Expressed as a percentage of net sales, cost of sales was 62% and 61% for the
first two periods of fiscal 1999 and fiscal 1998, respectively. The increases
primarily relate to costs incurred related to planned plant expansions and
productivity initiatives that are part of the Company's integration process and
costs related to new products and product changes.
<PAGE>
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses were $72.7 million for the second quarter of fiscal
1999, compared to $63.3 million for the second quarter of fiscal 1998, an
increase of $9.4 million. Expressed as a percentage of net sales, these expenses
were 38% for the second quarter of fiscal 1999 and 32% for the second quarter of
fiscal 1998. For the twenty-six weeks ended December 26, 1998, selling,
marketing and administrative expenses were $141.7 million compared to $117.2
million for the same period in fiscal 1998. Expressed as a percentage of net
sales, these expenses were 37% and 29% for the first two periods of fiscal 1999
and fiscal 1998, respectively. The increase in both periods was primarily the
result of increased trade spending and increases in consumer promotions.
Increased administrative expenses relating to building infrastructure for the
integrated Company also contributed to the increased expenses. The Company
expects to continue to experience increased administrative expenses as these
activities continue in fiscal 1999.
Amortization of Intangible Assets. Amortization of intangible assets was
$4.5 million for the thirteen weeks ended December 26, 1998 compared to $4.4
million for the thirteen weeks ended December 27, 1997. For the twenty-six weeks
ended December 26, 1998 and December 27, 1997, amortization expense was $9.0
million in both periods.
Restructuring and Business Integration Costs. Restructuring and business
integration costs were $1.1 million for the second quarter of fiscal 1999,
compared to $2.8 million for the second quarter of fiscal 1998, a decrease of
$1.7 million. For the twenty-six weeks ended December 26, 1998 and the twenty-
six weeks ended December 27, 1997 restructuring and business integration costs
were $2.2 million and $6.3 million, respectively, a decrease of $4.1 million.
The fiscal 1999 charges reflect professional fees associated with trade spending
and integration initiatives and costs associated with opening the Company's new
regional distribution centers, partially offset by the resolution of a
technology license dispute. The fiscal 1998 costs primarily included freight,
distribution and warehousing associated with the consolidation of distribution
centers and manufacturing integration.
Interest Expense. Interest expense was $15.7 million for the second quarter
of fiscal 1999, compared to $13.3 million for the second quarter of fiscal 1998,
an increase of $2.4 million. For the twenty-six weeks ended December 26, 1998
interest expense was $30.2 million, compared to $26.0 million for the same
period of fiscal 1998, an increase of $4.2 million. These increases were
primarily due to higher average outstanding debt balances during the periods
indicated.
Benefit for Income Taxes. The benefit for income taxes was $7.4 million for
the second quarter of fiscal 1999 and $13.3 million for the first two quarters
of fiscal 1999, as a result of pre-tax losses during those periods.
Extraordinary Charge--Early Debt Extinguishment. The Company incurred a
$4.2 million extraordinary charge, net of $2.7 million in income tax benefits,
during the first half of fiscal 1998 related to the early extinguishment of the
Company's prior senior credit agreement and the senior subordinated notes that
were outstanding at the time.
Cumulative Effect of Change in Accounting Principle. During the first
quarter of fiscal 1999, the Company adopted the provisions of Statement of
Position 98-5 "Reporting on the Costs of Start-Up Activities", which required
the Company to write off unamortized start-up costs of $2.5 million, which
amount is net of $1.7 million in income tax benefits.
<PAGE>
Net Loss. As a result of the factors discussed above, the Company incurred
a net loss of $12.4 million for the second quarter of fiscal 1999, compared to a
net loss of $1.6 million for the second quarter of fiscal 1998. For the twenty-
six weeks ended December 26, 1998, the Company's net loss was $24.9 million
compared to a net loss of $6.4 for the same period in fiscal 1998.
Adjusted EBITDA. Adjusted EBITDA for the second quarter of fiscal 1999 was
$8.4 million compared to $25.2 million in the second quarter of fiscal 1998. For
the twenty-six weeks ended December 26, 1998 adjusted EBITDA was $19.7 million
compared to $52.3 million in the twenty-six weeks ended December 27, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal needs for liquidity were to fund operations,
capital expenditures, seasonal and general working capital requirements and debt
service obligations. Net cash used in operating activities was $23.0 million
during the first six months of fiscal 1999. Net cash provided by operating
activities was $2.5 million during the first six months of fiscal 1998. The
decrease in cash provided by operating activities was primarily due to higher
net losses during the twenty-six weeks ended December 26, 1998 compared to the
same period of fiscal 1998. Capital expenditures for the first two quarters of
fiscal 1999 and the first two quarters of fiscal 1998 were $15.1 million and
$11.9 million, respectively. The Company's earnings were insufficient to cover
fixed charges (defined as interest expense, amortization of deferred financing
costs and the portion of rent expense deemed to be representative of the
interest factor) by $35.7 million in the first two quarters of fiscal 1999 and
by $19.8 million for the 13 weeks ended December 26, 1998. The Company received
net proceeds from financing activities of $33.2 million and $7.9 million during
the first half of fiscal 1999 and fiscal 1998, respectively. During these
periods, the Company's general working capital requirements, capital
expenditures and debt service obligations were primarily funded by obtaining
additional bank and TPG Partners, L.P. borrowings. It is not certain that the
Company will continue to have access to such additional funds in future periods.
If the Company is not able to access such funds or does not improve its
operating results and cash flow, the Company could be forced to reduce capital
and other controllable expenditures and may not be able to meet its debt service
obligations or comply with its debt covenants, all of which could have a
material adverse effect on the Company's financial position, results of
operations and liquidity.
The Company remains highly leveraged. As of December 26, 1998, the
Company's total debt consisted of the following:
<TABLE>
<CAPTION>
Description December 26,
- ----------- 1998
($ In Millions)
---------------
<S> <C>
Senior Secured:
Revolving credit facility.. $ 30.0
Term B..................... 149.5
------
179.5
Senior Notes................... 200.0
Sponsor Loan................... 17.0
Senior Subordinated Notes...... 195.0
------
$591.5
======
</TABLE>
At that date, the Company's stockholder's equity was $106.5 million.
<PAGE>
An amendment to the Company's Bank Facility became effective in October
1998. This amendment reset certain financial covenants through fiscal 2001,
deleted certain other financial covenants, changed certain definitions and
increased the borrowing spread by 0.25 percent. This amendment was obtained to
avoid a future default under the previous covenants. In connection with the
amendment in October 1998, TPG Partners, L.P. loaned the Company $17.0 million
(the "Sponsor Loan"--terms of which are further described below). The proceeds
were used to repay borrowings under the revolving credit facility. Additionally,
the Company paid an amendment fee.
The Sponsor Loan ranks senior unsecured and matures on November 20, 2005.
The Sponsor Loan accrues interest at 10% per annum which is payable on the
maturity date. In connection with the Sponsor Loan, Holdings' controlling
stockholder also received a ten-year warrant to purchase 77,500 shares of
Holdings' Common Stock at $0.01 per share. The Company has estimated the value
of the warrants issued in connection with the Sponsor Loan to be $3.9 million
using the Black-Scholes option valuation model. The Company intends to amortize
this amount over the remaining life of the Sponsor Loan as interest expense.
On October 1, 1998, the interest rate on the Company's $195 million Senior
Subordinated Notes increased by 1.0% (from 10.25% to 11.25%) because the Company
did not obtain a rating on such Notes of at least B- from Standard & Poor's
Ratings Service and B3 from Moody's Investors Service, Inc. The Senior
Subordinated Notes are rated CCC+ from Standard & Poor's Ratings Service and
Caa1 from Moody's Investors Service.
In May 1998, the Company issued $200 million of Senior Notes in a private
placement. Pursuant to the terms of an Exchange and Registration Rights
Agreement entered into in connection with such private placement, the Company is
obligated to exchange the original notes for registered notes with substantially
identical terms. On February 4, 1999, the Company's Registration Statement
relating to this exchange offer was declared effective and the exchange offer
was commenced. However, due to the fact the Company did not complete the
registration process by the required dates, liquidated damages payable to
noteholders aggregating approximately $115,500 have been incurred as of
February 4, 1999.
The Company has two interest rate swap agreements that had a notional
amount of $82.0 million as of December 26, 1998. These agreements expire in
December 1999, requiring the Company to pay a fixed interest rate of 6.26% per
annum and entitling the Company to receive variable interest based upon three
month LIBOR rates (5.29% at December 26, 1998). These agreements are not
expected to materially affect the Company's results of operations or financial
condition.
The Company estimates that capital expenditures for fiscal 1999 will be
approximately $46.0 million. The Company's principal source of liquidity is
borrowings under its revolving credit facility. As of December 26, 1998, the
Company had $42.5 million available for borrowing under this facility. Based on
the Company's current projections of operating results, the Company believes
that cash from operations and amounts available under its revolving credit
facility will be sufficient to meet its planned capital expenditures in fiscal
1999.
Based on the Company's current projections of operating results, the
Company expects to fully utilize its revolving credit facility during most of
the fourth quarter of fiscal 1999 and believes that it will be necessary to seek
additional sources of liquidity in early fiscal 2000. The Company's projections
of operating results involve numerous assumptions about its future sales, trade
spending levels and other operating results. There can be no assurance that
these results will be achieved or that
<PAGE>
the Company will continue to comply with its debt covenants, continue to have
access to the funds that are available under its debt facilities or be
successful in obtaining additional funds. If the Company does not have access to
such funds or is not successful in obtaining additional funds it could have a
material adverse effect on the Company's results of operations and financial
condition.
SEASONALITY AND INFLATION
The Company's sales and earnings are subject to a variety of seasonal
factors, which vary among the Company's product lines. The Company's cash needs
also vary based on seasonal factors, with the second and third fiscal quarters
ordinarily generating the most significant working capital requirements. In
light of the seasonality of the Company's business, results for any interim
period are not necessarily indicative of the results that may be realized for
the full year. The Company's working capital requirements fluctuate throughout
the year as a result of increased inventory levels produced in anticipation of
holiday sales and the Company offering extended terms on seasonal sales.
The impact of inflation on the Company's operations has not been
significant to date. However, there can be no assurance that a high rate of
inflation in the future would not have an adverse effect on the Company's
operating results.
YEAR 2000 COMPLIANCE
As discussed in the Form S-4 filed with the Commission, the Company is
currently assessing and modifying its computer, manufacturing and distribution
systems and business processes to provide for their continued functionality in
the year 2000. The Company's strategy is to remediate non-compliant systems in
most cases through modification or upgrade. In certain circumstances,
replacement will be necessary. The Company is also continuing to assess the
readiness of external parties and coordinating efforts to address the year 2000
issue with those entities.
The Company continues to expect that substantially all system upgrade and
modification efforts will be completed by the end of fiscal 1999. The costs yet
to be incurred for these projects, principally reflecting external labor and
outside service provider costs and limited hardware and software is estimated to
be approximately $2.0 million. These costs will be expensed as incurred, with
the exception of the acquisition of new software and hardware, which will be
capitalized.
The Company's assessment of year 2000 compliance issues is a forward
looking statement subject to risk and uncertainties. No assurance can be given
that the Company will be able to address the Year 2000 issues for all of its
software and applications in a timely manner or that it will not encounter
unexpected difficulties or significant expenses relating to adequately
addressing the Year 2000 issue. If the Company or its major customers, suppliers
or other third parties with whom the Company does business fail to address
adequately the Year 2000 issue, or the Company fails to successfully integrate
or convert its computer systems generally, the Company's business or results of
operations could be materially adversely affected.
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
There has been no change to matters discussed in Certain Legal and Regulatory
Matters in the Company's Form S-4 as filed with the Securities and Exchange
Commission on February 4, 1999.
Item 2 Changes in Securities
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 27--Financial Data Schedule (SEC Use Only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the
quarter ended December 26, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Favorite Brands International, Inc.
Date: February 15, 1999
/s/ Steven F. Kaplan
--------------------------------------
STEVEN F. KAPLAN
President, Chief Operating Officer and
Chief Financial Officer
/s/ Mary K. Sinclair
----------------------------
MARY K. SINCLAIR
Corporate Controller
Principal Accounting Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Trolli, Inc.
Date: February 15, 1999
/s/ Steven F. Kaplan
--------------------------------------
STEVEN F. KAPLAN
President, Chief Operating Officer and
Chief Financial Officer
/s/ Mary K. Sinclair
----------------------------
MARY K. SINCLAIR
Corporate Controller
Principal Accounting Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sather Trucking Corp.
Date: February 15, 1999
/s/ Steven F. Kaplan
--------------------------------------
STEVEN F. KAPLAN
President, Chief Operating Officer and
Chief Financial Officer
/s/ Mary K. Sinclair
----------------------------
MARY K. SINCLAIR
Corporate Controller
Principal Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FAVORITE BRANDS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS FOR THE TWENTY-SIX WEEKS ENDED DECEMBER 26, 1998 INCLUDED IN FORM 10Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001073410
<NAME> FAVORITE BRANDS INTERNATIONAL
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> JUN-28-1998
<PERIOD-END> DEC-26-1998
<CASH> 1,587
<SECURITIES> 0
<RECEIVABLES> 71,093
<ALLOWANCES> (20,911)
<INVENTORY> 100,034
<CURRENT-ASSETS> 172,575
<PP&E> 302,777
<DEPRECIATION> (62,968)
<TOTAL-ASSETS> 805,478
<CURRENT-LIABILITIES> 107,168
<BONDS> 589,500
0
0
<COMMON> 0
<OTHER-SE> 106,532
<TOTAL-LIABILITY-AND-EQUITY> 805,478
<SALES> 388,436
<TOTAL-REVENUES> 388,436
<CGS> 241,119
<TOTAL-COSTS> 241,119
<OTHER-EXPENSES> 152,834
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,230
<INCOME-PRETAX> (35,747)
<INCOME-TAX> (13,305)
<INCOME-CONTINUING> (22,442)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 2,503
<NET-INCOME> (24,945)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
