<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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 NUMBER 33-36374-01
DEL MONTE FOODS COMPANY
(Exact name of registrant as specified in its charter)
Maryland 13-3542950
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
ONE MARKET, SAN FRANCISCO, CALIFORNIA 94105
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (415) 247-3000
Indicate by check mark whether 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 [X] No [ ]
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
As of March 31, 1998, 182,431 shares of Common Stock, par value
$.01 per share, were outstanding.
<PAGE> 2
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1998 and June 30, 1997 1
Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997
Nine Months Ended March 31, 1998 and 1997 2
Consolidated Statements of Cash Flows
Nine Months Ended March 31, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, March 31,
1997 1998
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(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5 $ 4
Trade accounts receivable, net of allowance 67 104
Other receivables 2 5
Inventories 339 467
Prepaid expenses and other current assets 9 10
------ ------
TOTAL CURRENT ASSETS 422 590
Property, plant and equipment, net 222 298
Intangible assets, net 16
Other assets 23 24
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TOTAL ASSETS $ 667 $ 928
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 222 $ 280
Short-term borrowings 82 68
Current portion of long-term debt 2 24
------ ------
TOTAL CURRENT LIABILITIES 306 372
Long-term debt 526 678
Other noncurrent liabilities 215 212
Redeemable preferred stock ($.01 par value per share, 1,000,000 shares authorized;
issued and outstanding: 37,254 at March 31, 1998, aggregate liquidation
preference: $40; and 35,000 at June 30, 1997, aggregate liquidation preference: $35) 32 32
Stockholders' equity (deficit):
Common stock ($.01 par value per share, 1,000,000 shares authorized;
issued and outstanding: 182,431 at March 31, 1998 and 140,000 at
June 30, 1997)
Paid-in capital 129 173
Retained earnings (deficit) (541) (539)
------ ------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (412) (366)
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 667 $ 928
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE> 4
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31, March 31,
--------------------------- ---------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 308 $ 348 $ 936 $ 968
Cost of products sold 202 240 632 653
---------- ---------- ---------- ----------
Gross profit 106 108 304 315
Selling, advertising, administrative and general expense 79 87 235 249
---------- ---------- ---------- ----------
OPERATING INCOME 27 21 69 66
Interest expense 11 22 37 58
Loss on sale of divested assets 5
Other expense 6
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 16 (1) 27 2
Provision for income taxes 2
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 16 (1) 25 2
Extraordinary loss from the early retirement of debt 4
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 16 $ (1) $ 21 $ 2
========== ========== ========== ==========
Net loss attributable to common shares $ (8) $ (2) $ (49) $ (2)
========== ========== ========== ==========
Weighted average number of shares outstanding 382,854 182,121 382,854 158,658
========== ========== ========== ==========
Loss per common share:
Loss before extraordinary item and
cumulative effect of accounting change $ (20.47) $ (12.93) $ (117.36) $ (10.03)
Extraordinary loss from early debt retirement (9.77)
---------- ---------- ---------- ----------
Net loss per common share $ (20.47) $ (12.93) $ (127.13) $ (10.03)
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 5
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------
1997 1998
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 21 $ 2
Adjustments to reconcile net income to net cash flows provided by
operating activities:
Depreciation and amortization 22 23
Extraordinary loss from the early retirement of debt 4
Gain on sale of assets 1
Loss on sale of divested assets 5
Other 2
Changes in operating assets and liabilities:
Accounts receivable 7 (40)
Inventories (90) (24)
Prepaid expenses, other current assets 7 3
Intangibles and other assets (1)
Accounts payable and accrued expenses 44 46
Other non-current liabilities 6 (3)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 26 9
INVESTING ACTIVITIES:
Capital expenditures (12) (15)
Proceeds from the sale of operations and assets 51 5
Acquisition of businesses (195)
------ ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 39 (205)
FINANCING ACTIVITIES:
Short-term borrowings 929 261
Payments on short-term borrowings (930) (275)
Proceeds from long-term borrowings 55 176
Principal payments on long-term borrowings (140) (2)
Deferred debt issuance costs (7) (7)
Issuance of stock 42
Specific Proceeds Collateral Account 28
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (65) 195
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS -- (1)
Cash and cash equivalents at beginning of period 6 5
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6 $ 4
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 6
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(IN MILLIONS, EXCEPT SHARE DATA)
NOTE A - BASIS OF FINANCIAL STATEMENTS
Basis of Presentation: The accompanying consolidated financial
statements at March 31, 1998 and for the three-month and nine-month periods
ended March 31, 1997 and 1998, are unaudited, but are prepared in accordance
with generally accepted accounting principles for interim financial information
and include all adjustments (consisting only of normal recurring entries) which,
in the opinion of management, are necessary for a fair presentation of financial
position, results of operations and cash flows. These unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements as of and for the year ended June 30, 1997, and notes
thereto, included in the Annual Report on Form 10-K.
NOTE B - INVENTORIES
The major classes of inventory are as follows:
<TABLE>
<CAPTION>
June 30, March 31,
1997 1998
-------- ---------
<S> <C> <C>
Finished product $239 $390
Raw materials and supplies 13 12
Other, principally packaging material 87 65
---- ----
$339 $467
==== ====
</TABLE>
During the twelve months ended June 30, 1997 and the three months and
nine months ended March 31, 1997 and 1998, respectively, inflation had a minimal
impact on production costs. As a result, the effect of accounting for these
inventories by the LIFO method has had no material effect on inventories at June
30, 1997 and March 31, 1998 or on results of operations for the three-months and
nine-months ended March 31, 1997 and 1998, respectively.
NOTE C - STOCKHOLDERS' EQUITY
Preferred Stock
On October 13, 1997, the Company authorized a new series of cumulative
redeemable preferred stock, Series C, and issuance of shares of such new series
of preferred stock in exchange for all of the issued and outstanding shares of
cumulative redeemable preferred stock, Series A and B, currently held by
preferred stock shareholders. The Series A and B preferred stock were retired
upon completion of this exchange.
The terms of the Series C preferred stock are substantially identical
to those of the Series A and B stock with the exception of a call premium and
right of holders to require redemption upon a change in control. The Series C
preferred stock will be redeemable at the option of the Company at a redemption
price ranging from 103% of the liquidation preference, if redeemed prior to
October 1998, to 100% of the liquidation preference, if redeemed after October
2000. The Series A and B preferred stock was redeemable by the Company at par.
In the event of a change of control of the Company, the holders of the Series C
preferred stock will have the right to require the Company to repurchase shares
of such stock at 101% of the liquidation preference. Under the terms of the
Series A and B preferred stock, shares of such stock were mandatorily redeemable
(i.e., the holder did not have the option of continuing to hold such shares) at
101% of the liquidation preference.
On January 16, 1998, TPG Partners, L.P. ("TPG") and certain of its
affiliates sold approximately 93% of their Preferred Stock holdings to
unaffiliated investors.
4
<PAGE> 7
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
(IN MILLIONS, EXCEPT SHARE DATA)
Employee Stock Purchase Plan
Effective August 4, 1997, the Del Monte Foods Company Employee Stock
Purchase Plan was established under which certain key employees are eligible to
participate. A total of 5,000 shares of Common Stock of the Company are reserved
for issuance under the Employee Stock Purchase Plan. As of March 31, 1998, 2,371
shares of the Company's Common Stock were purchased by and issued to eligible
employees.
Stock Option Plan
On August 4, 1997, the Company adopted the 1997 Stock Incentive Plan
which allows the granting of options to certain key employees of the Company.
Options may be granted to eligible participants representing 9,319 shares of the
Company's Common Stock. Options may be granted as incentive stock options or as
non-qualified options for purposes of the Internal Revenue Code. Options
terminate ten years from the date of grant. Two different vesting schedules have
been approved under the 1997 Stock Incentive Plan. The first provides for annual
vesting on a proportionate basis over five years and the second provides for
monthly vesting on a proportionate basis over four years. Pursuant to this plan,
options for 9,066 shares have been granted to eligible employees with 8,824
remaining outstanding at March 31, 1998. The per share exercise price of the
options granted was $1,000. In addition, on February 24, 1998, the Company
adopted the Del Monte Foods Company Non-Employee Director and Independent
Contractor 1997 Stock Option Plan. Under the plan, 777 options were granted.
These options terminate 10 years from the date of grant and vest monthly on a
proportionate basis over four years.
The Del Monte Foods Company 1998 Stock Option Plan (the "1998 Stock
Option Plan") was approved on April 24, 1998. Under the 1998 Stock Option Plan,
grants of incentive and nonqualified stock options ("Options"), stock
appreciation rights ("SARs") and stock bonuses (together with Options and SARs,
"Awards") representing 16,000 shares of Common Stock may be made to key
employees of the Company. The term of any Option or SAR is not to be more than
ten years from the date of its grant. No Awards have been made under the 1998
Stock Option Plan.
Total compensation expense recognized in connection with all stock
plans for the nine months ended March 31, 1998 was $2.
NOTE D - CONTADINA ACQUISITION
On December 19, 1997, the Company acquired the Contadina canned tomato
businesses, including the Contadina trademark worldwide, capital assets and
inventory (the "Contadina Acquisition") from Nestle USA, Inc. ("Nestle") and
Contadina Services, Inc. for a total purchase price of $197, comprised of a base
price of $177 and an estimated net working capital adjustment of $20. The
consideration was paid solely in cash. The purchase price was subject to
adjustment based on the final calculation of net working capital as of the
closing date. Nestle provided its calculation of the net working capital which
resulted in a payment to the Company of $2, and therefore a reduction in the
purchase price to a total purchase price of $195. The Contadina Acquisition also
included the assumption of certain liabilities of approximately $2, consisting
primarily of liabilities in respect of reusable packaging materials and accrued
vacation. In connection with the Contadina Acquisition, approximately $7 of
indirect expenses were incurred.
The Company funded the Contadina Acquisition through the issuance of
$230 of 12 1/2% senior discount notes (the "DMFC Notes") and received proceeds
of $126. The DMFC Notes accrue on each June 15 and December 15, which will be
accreted through December 15, 2002, after which time interest will be paid in
cash until maturity. The DMFC Notes mature on December 15, 2007. These DMFC
Notes are redeemable in whole or in part at the option of the Company on or
after December 15, 2002 at a price that initially is 106.250% of par and that
decreases to par, if redeemed, on December 15, 2005 or thereafter. On or prior
to December 15, 2000, the Company may, at its option, redeem up to 35% of the
aggregate principal amount at maturity of the DMFC Notes with the net cash
proceeds of one or more public equity offerings, at a redemption price of
112.50% of the accreted value to the date of redemption. The DMFC Notes were
issued with registration rights requiring the Company to (i) file, within 75
days of the consummation of the Contadina Acquisition, a registration statement
under the Securities Act of 1933, as amended, to exchange the DMFC Notes for new
registered notes with terms substantially identical to the DMFC Notes and, (ii)
to use its best efforts to effect that registration within 150 days after the
consummation of the Contadina Acquisition. A registration statement was filed to
this effect on March 4, 1998. If the Company does not comply with its
obligations under the Registration Rights Agreement, the Company will be
required to pay an additional 0.5% interest on the accreted value of the DMFC
Notes. In connection with the financing related to the Contadina Acquisition, $7
of deferred debt issuance costs were capitalized.
5
<PAGE> 8
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
(IN MILLIONS, EXCEPT SHARE DATA)
An additional source of funding was provided through an equity
contribution of $40 from the Company's majority shareholder, TPG and certain
other investors. Also, the Company amended its bank financing agreements to
permit additional funding which was drawn in an amount of $50. Amortization of
the additional Term B loan amount is incremental to the scheduled amortization
of the existing Term B loan. Such additional amortization will begin on a
quarterly basis in the second quarter of fiscal 1999 in the amount of $0.5 on an
annual basis with such amortization increasing in the fourth quarter of fiscal
2004, through the third quarter of fiscal 2005, to approximately $12 per
quarter. These debt agreements contain restrictive covenants, the most
restrictive of which currently is minimum EBITDA (as defined in the debt
agreements).
The Contadina Acquisition was accounted for using the purchase method
of accounting. The allocation of purchase price to the assets acquired and
liabilities assumed has been made using estimated fair values which include
values based on independent appraisals and management estimates. These estimates
may be subject to adjustment to actual amounts, primarily in the area of accrued
liabilities. Any subsequent adjustments are expected to occur by fiscal year end
and are not expected to be material. Allocation of the $195 purchase price is as
follows: inventory $104, prepaid expenses $5, property, plant and equipment $84,
intangibles $16 and accrued liabilities $14(assumed of $2 and other of $12).
The Contadina Acquisition has been reflected in the balance sheet at
March 31, 1998. Results of operations of the Contadina Acquisition are included
in the Consolidated Statement of Operations for March 31, 1998 since the
acquisition date. The following unaudited pro forma information has been
prepared assuming the Contadina Acquisition had taken place on July 1, 1996:
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
---------------------------
1997 1998
-------- --------
<S> <C> <C>
Net sales $ 1,064 $ 1,060
Operating income 66 62
Net income (loss) before extraordinary item 6 (14)
Net income (loss) $ 2 $ (14)
======== ========
Net loss attributable to common shares $ (68) $ (18)
======== ========
Loss per share $(177.23) $ (99.03)
======== ========
</TABLE>
These pro forma results have been prepared for comparative purposes only
and do not purport to represent what the Company's results of operations
actually would have been if the Contadina Acquisition had occurred as of the
date indicated.
The Company filed a Current Report on Form 8-K on January 5, 1998
reporting this acquisition. An amendment to the Form 8-K was filed on March 4,
1998 with an additional amendment filed on March 19, 1998 which contained the
financial information required by Rule 3-05 of Regulation S-X.
<PAGE> 9
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
(IN MILLIONS, EXCEPT SHARE DATA)
NOTE E - PUBLIC OFFERING
The Company has filed a registration statement on Form S-1 with the SEC
for the purpose of making an initial public offering (the "Offering") which is
expected to occur during the fourth quarter of fiscal 1998. The Company intends
to use the net proceeds of the Offering to (i) repay a portion of its borrowings
outstanding under its Term Loan Facility; (ii) repay a portion of its senior
discount notes; (iii) redeem a portion of its senior subordinated notes; and
(iv) redeem all of its outstanding redeemable preferred stock, including
accreted dividends. In connection with the Offering, the Company expects to pay
TPG approximately $4 as compensation for its services as financial advisor in
the Offering. In conjunction with the Offering, the Company intends to amend its
bank financing agreements and related debt covenants, among other things, to
increase the available revolving loans from an aggregate amount of $350 to $400,
to decrease the term loans from an aggregate amount of $429 to $300 and to
change certain provisions and definitions to reflect changes resulting from the
consummation of the Offering.
7
<PAGE> 10
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED MARCH 31, 1997 AND 1998
Divested Operations. During the first half of fiscal 1997, the Company
sold its interest in Del Monte Latin America. At the end of fiscal 1997, a
distribution agreement under which the Company sold certain products at cost for
Yorkshire Dried Fruit & Nuts, Inc. expired. These events are collectively
referred to as the "Divested Operations".
Contadina Acquisition. On December 19, 1997, the Company purchased the
Contadina canned tomato business, including the Contadina trademark worldwide,
capital assets and inventory for a total of $197 million, comprised of a base
price of $177 million and an estimated net working capital adjustment of $20
million. The consideration was paid solely in cash. The purchase price was
subject to adjustment based on the final calculation of net working capital as
of the closing date. Nestle provided its calculation of the net working capital
which resulted in a payment to the Company of $2 million, and therefore a
reduction in the purchase price to a total purchase price of $195 million. The
Contadina Acquisition also included the assumption of certain liabilities of
approximately $2 million, primarily consisting of liabilities in respect of
reusable packaging materials and accrued vacation. The acquisition was accounted
for using the purchase method of accounting.
Net Sales. Consolidated net sales for the nine months ended March 31,
1998 increased by $32 million, or 3.4%, and increased by $40 million or 13.0%
for the third quarter of fiscal 1998 compared to the same periods of the prior
year. Net sales (after adjusting for the effect of the Divested Operations for
the nine-month period of the prior year) were $968 for the nine months ended
March 31, 1998 as compared to $893 for the nine months ended March 31,1997, an
increase of $75 million, or 8.4%, and by $48 million, or 16.0%, compared to the
prior year quarter. The increase is primarily due to higher sales across all
businesses and the acquisition of Contadina. Fruit volume and net sales
increased slightly for the nine months ended March 31, 1998 as compared to the
nine months ended March 31, 1997, primarily due to an increase in retail fruit
cup sales and sales of flavored fruits, which were introduced in 1997. Due to
competitive pricing pressures in the fruit foodservice market, the gains in
retail fruit sales were partially offset by volume and sales declines in the
foodservice business. The vegetable business experienced an increase of 6.3% and
6.5% in sales volumes and net sales, respectively, for the nine months ended
March 31, 1998 as compared to the nine months ended March 31, 1997. The increase
in sales volumes and net sales for the vegetable business has been affected by
the Company's use of an effective mix of targeted trade and consumer promotions
in addressing competitive discounting by other manufacturers. The tomato
business also experienced an increase in sales volumes and net sales for the
nine months ended March 31, 1998 as compared to the nine months ended March 31,
1997 primarily due to the Contadina Acquisition. On a quarter basis, the
increase in sales of tomato products over the prior year quarter is due to the
Contadina Acquisition offset by a decrease in tomato sauce sales.
Cost of Products Sold and Gross Profit. Gross margin was 32.5% for both
of the nine-month period ended March 31, 1997 and 1998. Gross margin (excluding
the Divested Operations for the nine-month period of the prior year) was 32.5%
and 33.7% for the nine months ended March 31, 1998 and 1997, respectively, and
for the quarter was 31.0% versus 35.3% for the same prior year period. Costs
increased for the nine months ended March 31, 1998 as compared to the prior year
period. However, these increased costs were offset in part by a favorable sales
mix of higher margin products. Increased costs for the nine months ended March
31, 1998 reflect primarily an increase in processing costs caused by a
compressed harvesting season for fruit which resulted in the increased use of
cold storage until processing capacity became available. Also affecting costs
were reduced plantings for some vegetables and lower fruit raw product
recoveries due to adverse weather conditions. Adverse harvesting conditions did
not materially affect the Company's supply of product available for sale,
however, since inventory balances at the end of fiscal 1997 were adequate to
cover shortfalls from the fiscal 1998 production. In addition, $2 million of
inventory step-up resulting from the purchase price allocation related to the
Contadina Acquisition has been included in cost of products sold.
In the winter and spring of 1997-98, certain areas in California,
including some of the Company's growing regions, have experienced substantial
rainfall as a result of the "El Nino" phenomenon. The Company believes that the
1998 California fruit and tomato harvests may be somewhat reduced as a result of
these weather conditions. However, the Company does not believe that such
weather conditions will have a material adverse effect on the Company's results
of operations.
Selling, Advertising, Administrative and General Expense. Selling,
advertising, administrative and general expense as a percentage of net sales
(excluding the Divested Operations for the nine-month period of the prior year)
was 25.7% and 26.0% for the nine months ended March 31, 1998 and 1997,
respectively. Selling, advertising, administrative and general expense for the
nine months ended increased to $249 million
8
<PAGE> 11
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
MARCH 31, 1998
from $235 million for the nine months ended March 31, 1997. The Company
addressed competitive discounting in the marketplace in the vegetable and tomato
businesses by increased spending on an effective mix of targeted trade and
consumer promotions. In addition, in the third quarter of fiscal 1998, the
Company recorded accruals of $7 million for severance and benefit costs of
employees to be terminated in connection with a plant consolidation plan. As
previously disclosed, management has implemented a plan to consolidate the
Company's manufacturing operations.
Interest Expense. The 56.8% increase in interest expense for the nine
months ended March 31, 1998 as compared to the nine months ended March 31 was
primarily due to higher outstanding debt balances resulting from the
Recapitalization which occurred in the fourth quarter of fiscal 1997.
Other Expense. Other expense for the current year primarily represents
certain indirect costs associated with the Contadina Acquisition.
Net Income. Net income for the nine months ended March 31, 1998
decreased by $19 million compared to the same period of prior year. Net income
for the third quarter of fiscal 1998 decreased by $17 million compared to third
quarter of fiscal 1997. The decrease in net income is primarily due to the plant
consolidation severance accrual of $7 million and the increase in interest
expense over comparable periods of prior year.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are to fund debt service,
finance seasonal working capital needs and make capital expenditures. Internally
generated funds and amounts available under the Revolving Credit Facility are
the Company's primary sources of liquidity.
In connection with the Contadina Acquisition, the Company issued $230
million of 12-1/2% senior discount notes and received proceeds of $126 million.
These DMFC Notes accrue interest on each June 15 and December 15, which will to
be accreted through December 15, 2002, after which time interest will be paid in
cash until maturity. The DMFC Notes mature on December 15, 2007. These DMFC
Notes are redeemable in whole or in part at the option of the Company on or
after December 15, 2002 at price that initially is 106.250% of par and that
decreases to par, if redeemed, on December 15, 2006 or thereafter. On or prior
to December 15, 2000, the Company may, at its option, redeem up to 35% of the
aggregate principal amount at maturity of the DMFC Notes originally issued with
the net cash proceeds of one or more Public Equity Offerings, at a redemption
price of 112.50% of the accreted value to the date of redemption. The DMFC Notes
were issued with registration rights requiring the Company (i) to file, within
75 days of the consummation of the Contadina Acquisition, a registration
statement under the Securities Act of 1933, as amended, to exchange the DMFC
Notes for new registered notes with terms substantially identical to the DMFC
Notes and, (ii) to use its best efforts to effect that registration within 150
days after the consummation of the Contadina Acquisition. If the Company does
not comply with its obligations under the Registration Rights Agreement, the
Company will be required to pay an addition 0.5% interest on the accreted value
of the DMFC Notes.
In connection with the Contadina Acquisition, the Company also amended
its bank financing agreements and certain related debt covenants to permit
additional funding under the existing Term B loan in an amount of $50 million.
Amortization of such additional Term B loan amount is incremental to the
scheduled amortization of the previously existing Term B loan. Such additional
amortization will begin on a quarterly basis in the second quarter of fiscal
1999 in the amount of $0.5 million on an annual basis with such amortization
increasing in the fourth quarter of fiscal 2004, through the third quarter of
fiscal 2005, to approximately $12 million per quarter.
As of March 31, 1998, the Company's short term borrowings and long term
debt primarily consisted of a revolving credit facility, bank term loans, senior
subordinated notes and senior discount notes (collectively, the "Debt"). The
Debt agreements contain
9
<PAGE> 12
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
MARCH 31, 1998
restrictive covenants, the most restrictive of which currently is minimum EBITDA
(as defined in the debt agreements). The Company is in compliance with all such
covenants for the third quarter of fiscal 1998.
The working capital position of the Company are seasonally affected
by the growing cycle of the vegetables, fruits and tomatoes it processes.
Substantially all inventories are produced during the harvesting and packing
months of June through October and depleted through the remaining seven months.
Accordingly, working capital requirements fluctuate significantly. The increase
in inventories (excluding the acquired Contadina inventory) at March 31, 1998
from June 30, 1997 reflects the seasonal inventory buildup. The increase in
accounts payable and accrued expenses from June 30, 1997 to March 31, 1998
primarily reflects accrued expenses resulting from higher levels of trade and
consumer promotions and accruals remaining from the peak production period.
To finance this seasonal production, the Company relies on its
Revolving Credit Facility, which has a maximum availability of $350 million,
subject to an asset-based borrowing base. As of March 31, 1998, $68 million was
outstanding under the Revolving Credit Facility, compared to $82 million at June
30, 1997.
The Company expects that capital expenditures during fiscal 1998 will
be approximately $35 million primarily in connection with a program which is
intended to generate cost savings by introducing equipment that will result in
general production efficiencies. Capital expenditures through March 1998 have
been $15 million. Management believes that cash flow from operations and
availability under the Revolving Credit Facility will provide adequate funds for
the Company's working capital needs, planned capital expenditures and debt
service for at least the next twelve months.
The Company has filed a registration statement on Form S-1 with the SEC
for the purpose of making an initial public offering which is expected to occur
during the fourth quarter of fiscal 1998. The Company intends to use the net
proceeds of the Offering to (i) repay a portion of its borrowings outstanding
under its Term Loan Facility; (ii) repay a portion of its senior discount notes;
(iii) redeem a portion of its senior subordinated notes; and (iv) redeem all of
its outstanding redeemable preferred stock, including accreted dividends. In
connection with the Offering, the Company expects to pay TPG approximately $4 as
compensation for its services as financial advisor for the Offering. In
conjunction with the Offering, the Company intends to amend its bank financing
agreements and related debt covenants, among other things, to increase the
available revolving loans from an aggregate amount of $350 to $400, to decrease
the term loans from an aggregate amount of $429 to $300 and to change certain
provisions and definitions to reflect changes resulting from the consummation of
the Offering.
CERTAIN FORWARD-LOOKING STATEMENTS
Certain statements in this quarterly report under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Financial Statements" and elsewhere constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company, or industry results, to differ
materially from any future results, performances or achievements expressed or
implied by such forward-looking statements. Such risks and uncertainties and
other important factors include among others: general economic and business
conditions; weather conditions; crop yields; competition; raw material costs and
availability; the loss of significant customers; changes in business strategy or
development plans; availability, terms and deployment of capital; availability
of qualified personnel; changes in, or failure or inability to comply with,
governmental regulations, including, without limitation, environmental
regulations; industry trends and capacity and other factors referenced in this
quarterly report. These forward-looking statements speak only as of the date of
the quarterly report. The Company expressly disclaims any obligation or
undertaking to disseminate any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.
10
<PAGE> 13
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In January 1998, the Company reached a settlement of the litigation
described in prior filings entitled HMTF Acquisition Corp., et al vs. Del Monte
Corporation. The settlement resolves all claims and disputes relating to the
sale of the Company's Mexican subsidiary in October 1996, including the purchase
price adjustment contemplated at the time of the sale. The Company's portion of
the settlement was within the amount reserved and thus will not adversely impact
net income of the Company.
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
(27) Financial Data Schedule
(b) Reports on Form 8-K/A was filed on March 19, 1998 which
related to the Contadina Acquisition which occurred on December 19,
1997.
11
<PAGE> 14
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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.
DEL MONTE FOODS COMPANY
By: /s/ RICHARD G. WOLFORD Date: May 14, 1998
----------------------------------------
Richard G. Wolford
Chief Executive Officer
By: /s/ DAVID L. MEYERS Date: May 14, 1998
----------------------------------------
David L. Meyers
Executive Vice President, Administration
and Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE FINANCIAL
STATEMENTS OF DEL MONTE FOODS COMPANY FOR THE QUARTER ENDED MARCH 31, 1998, AS
PRESENTED IN THE COMPANY'S FORM 10-Q FILED FOR SUCH PERIOD, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 4
<SECURITIES> 0
<RECEIVABLES> 105
<ALLOWANCES> 1
<INVENTORY> 467
<CURRENT-ASSETS> 590
<PP&E> 466
<DEPRECIATION> 168
<TOTAL-ASSETS> 928
<CURRENT-LIABILITIES> 372
<BONDS> 0
32
0
<COMMON> 0
<OTHER-SE> (366)
<TOTAL-LIABILITY-AND-EQUITY> 928
<SALES> 968
<TOTAL-REVENUES> 968
<CGS> 653
<TOTAL-COSTS> 653
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 2
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<NET-INCOME> 2
<EPS-PRIMARY> (10.03)
<EPS-DILUTED> (10.03)
</TABLE>
