<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 December 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)
<TABLE>
<S> <C>
DELAWARE 13-3542950
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
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 February 10, 1999, 52,163,943 shares of Common Stock, par value $.01
per share, were outstanding.
<PAGE> 2
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
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<CAPTION>
Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets June 30, 1998 and December 31, 1998 1
Consolidated Statements of Operations Three and Six Months Ended
December 31, 1997 and 1998 2
Consolidated Statements of Cash Flows Six Months Ended December 31,
1997 and 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
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, December 31,
1998 1998
-------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7 $ 5
Trade accounts receivable, net of allowance 108 128
Other receivables 6 5
Inventories 366 565
Prepaid expenses and other current assets 14 8
----- ------
TOTAL CURRENT ASSETS 501 711
Property, plant and equipment, net 305 290
Intangible assets, net 16 44
Other assets 23 21
----- ------
TOTAL ASSETS $845 $1,066
==== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $259 $333
Short-term borrowings -- 163
Current portion of long-term debt 32 35
----- ------
TOTAL CURRENT LIABILITIES 291 531
Long-term debt 677 665
Other noncurrent liabilities 194 188
Redeemable preferred stock ($.01 par value per share, 1,000,000 shares authorized;
37,253 issued and outstanding; aggregate liquidation preference: $41 at
June 30, 1998 and $44 at December 31, 1998) 33 33
Stockholders' equity (deficit):
Common stock ($.01 par value per share, 500,000,000 shares
authorized; issued and outstanding: 35,495,058 at June 30, 1998 and
35,496,943 at December 31, 1998)
Paid-in capital 172 172
Retained earnings (deficit) (522) (523)
----- ------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (350) (351)
===== ======
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $845 $1,066
===== ======
</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 Six Months
Ended Ended
December 31, December 31,
------------- ------------
1997 1998 1997 1998
----- ----- ------ ------
<S> <C> <C> <C> <C>
Net sales $ 369 $ 427 $ 620 $ 745
Cost of products sold 242 282 414 500
Selling, administrative and general expense 100 108 162 188
Special charges related to plant consolidation -- 5 -- 12
Acquisition expense 7 -- 7 1
----- ----- ------ ------
OPERATING INCOME 20 32 37 44
Interest expense 19 22 36 43
Other (income) expense (1) -- (1) 2
----- ----- ------ ------
INCOME (LOSS) BEFORE INOME TAXES 2 10 2 (1)
Provision for income taxes -- -- -- --
----- ----- ------ ------
NET INCOME (LOSS) $ 2 $ 10 $ 2 $ (1)
===== ===== ====== ======
Basic net income (loss) per common share $0.05 0.24 $(0.01) $(0.10)
===== ===== ====== ======
Diluted net income (loss) per common share $0.05 $0.24 $(0.01) $(0.10)
===== ===== ====== ======
</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>
Six Months Ended
December 31,
---------------
1997 1998
----- -----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 2 $ (1)
Adjustments to reconcile net income (loss) to net cash flows
used in operating activities:
Depreciation and amortization 15 26
(Gain) loss on disposal of assets (1) 4
Changes in operating assets and liabilities:
Accounts receivable (21) (19)
Inventories (156) (196)
Prepaid expenses and other current assets 5 6
Accounts payable and accrued expenses 80 74
Other non-current liabilities 1 2
----- -----
NET CASH USED IN OPERATING ACTIVITIES (75) (104)
----- -----
INVESTING ACTIVITIES:
Capital expenditures (6) (11)
Proceeds from the sale of assets 5 --
Acquisition of business (197) (32)
----- -----
NET CASH USED IN INVESTING ACTIVITIES (198) (43)
----- -----
FINANCING ACTIVITIES:
Short-term borrowings 228 324
Payments on short-term borrowings (157) (161)
Proceeds from long-term borrowings 176 --
Principal payments on long-term borrowings (1) (18)
Deferred debt issuance costs (7) --
Issuance of stock 41 --
----- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES 280 145
----- -----
NET CHANGE IN CASH AND CASH EQUIVALENTS 7 (2)
Cash and cash equivalents at beginning of period 5 7
----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $12 $5
===== =====
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 6
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(In Millions, Except Share Data)
NOTE 1 -- BASIS OF FINANCIAL STATEMENTS
Basis of Presentation. The accompanying consolidated financial statements
at December 31, 1998 and for the three-and six-month periods ended December 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, 1998, and notes thereto,
included in the Annual Report on Form 10-K.
Stock Split. On July 22, 1998, the Company declared, by way of a stock
dividend effective July 24, 1998, a 191.542-for-one stock split of all of the
Company's outstanding shares of Common Stock (the "Stock Split"). Accordingly,
all share and per share amounts for all prior periods presented herein have been
retroactively adjusted to give effect to the Stock Split.
Depreciation and amortization. Depreciation of plant and equipment and
leasehold amortization was $7 and $11 for the three months ended December 31,
1997 and 1998 and $13 and $23 for the six months ended December 31, 1997 and
1998. For the three months and six months ended December 31, 1998, $3 and $7 of
depreciation is related to acceleration of depreciation resulting from the
effects of adjusting the assets' remaining useful lives to match the period of
use prior to plant closure. (This accelerated depreciation is included in the
caption "Special charges related to plant consolidation" in the Consolidated
Statements of Operations.) Depreciation and amortization also includes $2 of
amortization of deferred debt issuance costs for both six-month periods ended
December 31, 1997 and 1998 and $1 million of amortization of intangible assets
for the six-month period ended December 31, 1998.
NOTE 2 -- INVENTORIES
The major classes of inventory are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1998
-------- ------------
<S> <C> <C>
Finished product $237 $506
Raw materials and supplies 19 11
Other, principally packaging material 110 48
---- ----
$366 $565
==== ====
</TABLE>
During the twelve months ended June 30, 1998 and the three and six months
ended December 31, 1997 and 1998, 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, 1998 and December
31, 1998 or on results of operations for the three and six months ended December
31, 1997 and 1998.
4
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DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998
(In Millions, Except Share Data)
NOTE 3 -- STOCK INCENTIVE PLAN
The Del Monte Foods Company 1998 Stock Incentive Plan (the "1998 Stock
Incentive Plan") was adopted initially by the Board of Directors on April 24,
1998 and was modified on September 23, 1998. Under the 1998 Stock Incentive
Plan, grants of incentive and nonqualified stock options ("Options"), stock
appreciation rights ("SARs") and stock bonuses (together with Options and SARs,
"Awards") representing 3,195,687 shares of common stock may be made to certain
employees of the Company. The term of any Option or SAR may not be more than ten
years from the date of its grant. Subject to certain limitations, the
Compensation Committee has authority to grant Awards under the 1998 Stock
Incentive Plan and to set the terms of any Awards. The Chief Executive Officer
also has limited authority to grant Awards. On December 4, 1998, Options for
1,824,433 shares were granted under the 1998 Stock Incentive Plan at an exercise
price of $13.00 per share, which was determined to be fair value at that time.
For each of these grants, 50% of the option shares vest annually on a
proportionate basis over a four-year period and 50% of the option shares vest
annually on a proportionate basis over a five-year period.
NOTE 4 -- EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- ----------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Numerator:
Income (loss) $ 2 $ $ 10 $ 2 $ (1)
Preferred stock dividends (1) (2) (2) (3)
---------- ---------- ---------- ----------
Numerator for basic loss per share --
loss attributable to common shares $ 1 $ 8 $ -- $ (4)
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share --
weighted average shares 26,469,375 35,496,943 28,142,628 35,496,313
Basic income (loss) per common share $ 0.05 $ $ 0.24 $ (0.01) $ (0.10)
DILUTED EARNINGS PER SHARE
Numerator:
Income (loss) $ 2 $ 10 $ 2 $ (1)
Preferred stock dividends (1) (2) (2) (3)
---------- ---------- ---------- ----------
Numerator for diluted income (loss) per share --
loss attributable to common shares $ 1 $ 8 $ -- $ (4)
========== ========= =========== ==========
Denominator:
Denominator for diluted earnings per share --
weighted average shares 30,016,611 36,595,880 28,689,863 36,597,507
Diluted income (loss) per common share $ 0.05 $ 0.24 $ (0.01) $ (0.10)
</TABLE>
5
<PAGE> 8
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998
(In Millions, Except Share Data)
NOTE 5 -- ACQUISITIONS
On August 28, 1998, the Company reacquired rights to the Del Monte brand in
South America from Nabisco, Inc. and purchased Nabisco's canned fruit and
vegetable business in Venezuela, including a food processing plant in Venezuela,
for a cash purchase price of $32 (the "South America Acquisition"). In
connection with the South America Acquisition, approximately $1 of
acquisition-related expenses were incurred which included a transaction advisory
fee to a designee of Texas Pacific Group, which owns a controlling interest in
the Company. Nabisco had retained ownership of the Del Monte brand in South
America and the Venezuela Del Monte business when it sold other Del Monte
businesses in 1990.
The South America Acquisition has been reflected in the balance sheet at
December 31, 1998 and was accounted for using the purchase method of accounting.
The total purchase price has been allocated as $3 to inventory, $1 to property,
plant and equipment, and $28 representing intangible assets. Results of
operations of the acquired business and any other expenses of the transaction
are included in the Consolidated Statements of Operations for the three- and
six-month periods ended December 31, 1998, and did not significantly effect the
results of operations of the Company for these periods.
NOTE 6 -- PLANT CONSOLIDATION
In the third quarter of fiscal 1998, management committed to a plan to
consolidate the Company's tomato and fruit processing operations. In connection
with this plan, the Company established an accrual of $7 in fiscal 1998 relating
to severance and benefit costs for employees to be terminated. At this time,
there have been no significant changes to this plan. As anticipated upon
adoption of the plan, the Company established an accrual of $2 during the second
quarter of fiscal 1999 upon the closure of the Modesto facility to accommodate
reconfiguration of the plant to a fruit processing operation. This accrual
represents direct costs to be incurred to remove and dispose of tomato
processing equipment at Modesto that will not be transferred to the Company's
tomato processing operations at the Hanford facility. Under current accounting
rules, these costs could not be accrued until the Company had the ability to
dispose of the equipment. The Company expects to establish additional accruals
for similar costs at the time of the closure of the San Jose and Stockton
facilities in fiscal 2000 and 2001.
The Company incurred charges representing accelerated depreciation of $3
during the quarter and $7 during the six months ended December 31, 1998. This
acceleration results from the effects of adjusting the tomato and fruit
processing assets' remaining useful lives to match the period of use prior to
the closures of these plants.
In August 1998, management announced its intention to close the Company's
vegetable processing plant located in Arlington, Wisconsin after the summer 1998
pack. Upon completion of this pack, a charge of $3 was taken during the first
quarter of fiscal 1999 representing the write-down to fair value of the assets
held for sale. These assets primarily include building, building improvements,
and machinery and equipment with a carrying value of $4. Fair value was based on
current market values of land and buildings in the area and estimates of market
values of equipment to be disposed of. Based on the level of interest already
demonstrated in the facility by third parties, it is expected that these assets
will be disposed of within a year.
6
<PAGE> 9
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998
(In Millions, Except Share Data)
An analysis of the plant consolidation reserves is as follows:
<TABLE>
<CAPTION>
BALANCE AT
ORIGINAL ADJUSTMENTS TO RESERVES DECEMBER 31,
RESERVES RESERVES UTILIZED 1998
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Severance $ 7 $ -- $ -- $ 7
Property, plant and
equipment 3 -- -- 3
Other costs -- 2 1 1
---- ---- ---- ----
Total $ 10 $ 2 $ 1 $ 11
==== ==== ==== ====
</TABLE>
NOTE 7 -- COMPREHENSIVE INCOME
The Company has no items of other comprehensive income in any period
presented. Therefore, net income (loss) as presented in the Consolidated
Statements of Operations equals comprehensive income.
NOTE 8 -- PUBLIC OFFERING
In fiscal 1998, the Company filed a registration statement on Form S-1 with
the Securities and Exchange Commission for the purpose of making a public
offering of shares of its Common Stock (the "Offering"). The Offering was
withdrawn in July 1998 due to conditions in the equity securities market. During
the second quarter of fiscal 1999, a post-effective amendment to the
registration statement was filed with the SEC for the purpose of reinitiating
the Offering.
On February 10, 1999, the initial public offering of 16,667,000 shares of
Common Stock of the Company and 3,333,000 shares of the Company's Common Stock
sold by certain stockholders of the Company was consummated at an initial
offering price of $15.00 per share. The Company received net proceeds of $230.
Total common shares outstanding after the Offering were 52,163,943. The Company
used a portion of the net proceeds from the Offering to redeem $46 of its Series
A Redeemable Preferred Stock, including $2 of unamortized discount, $10 of
accreted dividends and $1 of redemption premium. The Company will use $57 of the
net proceeds to redeem a portion of its senior discount notes, including $1 of
accrued interest and $6 of redemption premium. The Company contributed the
remainder of the net proceeds to Del Monte Corporation, its principal
subsidiary. Del Monte Corporation used the contribution to prepay $63 of its
indebtedness under its bank term loans. Del Monte Corporation will use the
remainder of the proceeds to redeem $62 of its senior subordinated notes,
including $1 of accelerated amortization of original issue discount, $3 of
accrued interest and $7 of redemption premium, and to repay $2 of indebtedness
under the revolving credit facility. In connection with the Offering, the
Company will pay Texas Pacific Group, which owns a controlling interest in the
Company, or its designee, approximately $4 for its financial advisory services.
NOTE 9 -- NEW ACCOUNTING STANDARDS
In March 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position ("SOP") No. 98-1 "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." This SOP provides guidance
with respect to the recognition, measurement and disclosure of costs of computer
software developed or obtained for internal use. SOP 98-1 is required to be
adopted for fiscal years beginning after December 15, 1998. The Company will
adopt this statement in fiscal 2000 and is currently evaluating the impact of
adoption on the Company's financial statements.
The Company will adopt Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
for its 1999 fiscal year. This statement establishes annual and
7
<PAGE> 10
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1998
(In Millions, Except Share Data)
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
The Company is not required to disclose segment information in accordance with
SFAS No. 131 until its fiscal June 30, 1999 year end and for subsequent interim
periods in fiscal 2000 with comparative fiscal 1999 interim disclosures.
Adoption will not impact the Company's consolidated financial position, results
of operations or cash flows, and any effect will be limited to the form and
content of its disclosures.
Effective July 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132
amends only the disclosure requirements with respect to pensions and other
postretirement benefits. Adoption of this statement will not impact the
Company's consolidated financial position, results of operations or cash flows,
and any effect will be limited to the form and content of its disclosures.
In fiscal 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 is required to be adopted for all fiscal quarters and fiscal years beginning
after June 15, 1999 and relates to accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities and measure those instruments at fair value. The
Company is currently reviewing the effect of adoption of this statement on its
financial statements.
8
<PAGE> 11
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 1997 VS. THREE AND SIX MONTHS ENDED
DECEMBER 31, 1998
South America Acquisition. On August 28, 1998, the Company reacquired
rights to the Del Monte brand in South America from Nabisco, Inc. and purchased
Nabisco's canned fruit and vegetable business in Venezuela, including a food
processing plant in Venezuela, for a cash purchase price of $32 million (the
"South America Acquisition"). In connection with the South America Acquisition,
approximately $1 million of acquisition-related expenses were incurred. RJR
Nabisco had retained ownership of the Del Monte brand in South America and the
Venezuela Del Monte business when it sold other Del Monte businesses in 1990.
The South America Acquisition was accounted for using the purchase method of
accounting. The total purchase price has been allocated as $3 million to
inventory, $1 million to property, plant and equipment and $28 million
representing intangible assets.
Net sales. Consolidated net sales increased by $58 million, or 16%, and
$125 million, or 20%, for the three and six months ended December 31, 1998
compared to the same periods of the prior year, primarily due to higher volumes
in the vegetable and fruit businesses and Contadina product sales, which
accounted for $39 million of the increase for the three months ended December
31, 1998 and $74 million of the increase for the six months ended December 31,
1998. Vegetable product sales have increased in the current year quarter due to
increased promotional effectiveness. Fruit product sales have increased in
fiscal 1999 as compared to prior year due to the introduction of new products
(FruitRageous, Fruit Pleasures and Orchard Select), which began national
distribution during the first quarter of fiscal 1999. The Company has announced
price increases, effective during the third quarter of 1999, on certain of its
major fruit products and certain of its tomato products. The Company may, as a
result, lose market share temporarily to its competitors in these categories.
Cost of products sold. Cost of products sold as a percent of net sales
remained relatively flat for the three and six months of fiscal 1999 as compared
to the same periods of the prior year. Manufacturing costs are favorable in the
current year periods as compared to the prior year periods due to cost savings
from capital spending initiatives and increased production levels. These
favorable costs were partially offset by the amortization of $3 million of
inventory step-up during the six months ended December 31, 1998 attributable to
the purchase price allocation related to the acquisition of Contadina and the
South America Acquisition.
Selling, administrative and general expense. Selling, administrative and
general expense increased by $8 million for the three months and $26 million for
the six months ended December 31, 1998 compared to the same periods of the prior
year. This higher spending was due to a combination of promotion costs
associated with higher volumes of product sold (including the increase due to
the acquisition of Contadina) as compared to the same periods of the prior year,
together with costs associated with the introduction of new products.
Special charges related to plant consolidation. Charges of $3 million and
$7 million for the three and six months ended December 31, 1998 resulted from
accelerated depreciation of buildings and machinery and equipment that will no
longer be needed following the consolidation of the operations of two fruit
processing plants and two tomato processing plants. Special charges also
included a $2 million charge, recorded during the three months ended December
31, 1998, representing costs to be incurred for removal of equipment to be
disposed of, as well as $3 million representing the write-down to fair value of
assets held for sale related to the closure of the Arlington, Wisconsin, plant
which was recorded in the first quarter of fiscal 1999.
9
<PAGE> 12
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 1998
Interest expense. Interest expense increased by $3 million and $7 million
for the three and six months ended December 31, 1998 compared to the same
periods of the prior year, primarily due to debt incurred to fund the
acquisition of Contadina and the South America Acquisition.
Other expense. Other expense for the six months ended December 31, 1998
represents expenses of the public equity offering, which was withdrawn in July
1998. The associated expenses were charged to earnings during the first quarter
of fiscal 1999 upon the withdrawal of that offering.
Net income (loss). Net income for the three months ended December 31, 1998
was $10 million compared to net income of $2 million in the same period of the
prior year . Net loss for the six months ended December 31, 1998 was $1 million
as compared to net income of $2 million for the six months ended December 31,
1997. Net sales have increased during the three and six-month periods ended
December 31, 1998. However, the presence of special charges related to plant
consolidation, inventory step-up related to the acquisition of Contadina and the
South America Acquisition, and costs of the withdrawn public equity offering,
combined with higher interest expense, resulted in a net loss for the six-month
period ended December 31, 1998.
YEAR 2000
In the first quarter of fiscal 1998, the Company contracted with its
information services outsourcing provider, Electronic Data Systems Corporation
("EDS"), to assist the Company in implementation of the Company's Year 2000
compliance project. The Company's Year 2000 compliance project was initiated to
address the issue of computer hardware and software that are time-sensitive or
define dates using two digits rather than four. EDS maintains and operates most
of the Company's software applications and also owns and operates a significant
portion of the related hardware under a base service contract. The Company's
compliance project includes both information technology ("IT") systems and
non-IT systems that could be impacted by Year 2000 issues.
The Company expects to complete its project to evaluate, modify and
implement Year 2000 compliant systems (including customer and supplier
assessments) by June 1999, with testing ongoing. Due to the Company's production
cycle, most non-IT equipment will not be in full use until mid-calendar 2000,
and therefore, testing is expected to continue through early calendar 2000 on
this equipment. Overall, the project is proceeding as scheduled and was
estimated to have reached slightly more than 80% completion as of December 31,
1998.
The Company expects costs incremental to the Company's base service
contract with EDS to total under $2 million, which is not material to the
Company's financial position. The Company is funding these costs through
operating cash flow. Approximately $1 million of this $2 million estimate had
been incurred as of December 31, 1998. The Company is expensing all costs
associated with these system changes as the costs are incurred.
The Company is continuing to conduct inquiries regarding the Year 2000
compliance programs of its key suppliers and customers and will continue to
update its understanding of the current status of their Year 2000 programs
throughout calendar 1999. No assurance can be given that the Company's suppliers
and customers will all be Year 2000 compliant. The failure of the Company's
suppliers and customers to address the Year 2000 issue adequately, or the
failure of any material aspect of the Company's Year 2000 compliance project
with respect to its own systems, could result in disruption to the Company's
operations and have a significant adverse impact on its results of operations,
the extent of which the Company cannot yet determine.
The Company has begun developing contingency plans to address internal
system failures, as well as external supplier and customer failures, that may
result from Year 2000 issues. The Company will continue to update these
contingency plans through calendar 1999 as new information becomes known. These
contingency plans will identify
10
<PAGE> 13
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 1998
alternatives for the Company's business operations its believes may be affected,
principally communications with key suppliers and customers and distribution of
finished goods to distribution centers and customer locations, so the Company
will be able to continue to conduct business in the event of material internal
or external Year 2000 system failures. The contingency plans include the
development of risk avoidance action items, such as increasing the Company's
finished goods and materials inventory position before year 2000 to provide
additional supply to carry the Company through any brief period of disruption
that may occur due to either internal or external Year 2000 system failures. The
Company believes that with completion of the project as scheduled and ongoing
monitoring, any significant disruptions of core operations should be reduced.
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 its revolving credit facility are
the Company's primary sources of liquidity.
As of December 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 restrictive covenants, the most restrictive of which
currently is minimum EBITDA (as defined in the agreements). The Company is in
compliance with all such covenants for the second quarter of fiscal 1999.
On February 10, 1999, the initial public offering of 16,667,000 shares of
Common Stock of the Company and 3,333,000 shares of the Company's Common Stock
sold by certain stockholders of the Company was consummated at an initial
offering price of $15.00 per share. The Company received net proceeds of $230
million. Total common shares outstanding after the Offering were 52,163,943. The
Company used a portion of the net proceeds from the Offering to redeem $46
million of its Series A Redeemable Preferred Stock, including $2 million of
unamortized discount, $10 million of accreted dividends and $1 million of
redemption premium. The Company will use $57 million of the net proceeds to
redeem a portion of its senior discount notes, including $1 million of accrued
interest and $6 million of redemption premium. The Company contributed the
remainder of the net proceeds to Del Monte Corporation, its principal
subsidiary. Del Monte Corporation used the contribution to prepay $63 million of
its indebtedness under its bank term loans. Del Monte Corporation ill use the
remainder of the proceeds to redeem $62 million of its senior subordinated
notes, including $1 million of accelerated amortization of original issue
discount, $3 million of accrued interest and $7 million of redemption premium,
and to repay $2 million of indebtedness under the revolving credit facility. In
connection with the Offering, the Company will pay Texas Pacific Group, which
owns a controlling interest in the Company, or its designee, approximately $4
million for financial advisory services.
The working capital requirements 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 at December 31, 1998 from June 30, 1998 reflects the seasonal
inventory buildup. The increase in accounts payable and accrued expenses from
June 30, 1998 to December 31, 1998 primarily reflects accrued expenses resulting
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 December 31, 1998, $163 million was
outstanding under the revolving credit facility, compared to a zero balance at
June 30, 1998.
The Company has engaged an affiliate of Bank of America, NT & SA to arrange
a proposed $38 million lease to finance the construction of four warehouse
facilities (totaling approximately 1.4 million square feet) adjacent to the
Company's Hanford, Kingsburg and Modesto, California, and Plymouth, Indiana
production plants. While the syndication
11
<PAGE> 14
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 1998
of this financing is not yet complete, land acquisition and construction have
begun at the Hanford and Kingsburg, California sites under funding provided by
the Bank of America. The Company has proposed that the terms of the
fully-syndicated financing will include, in addition to customary lease terms
and conditions, a floating interest rate based on a blended spread of
approximately 325 basis points over three-month LIBOR (which is currently at
approximately 5.0%). Additional proposed terms are an initial lease term of five
years and renewal options under certain circumstances for up to five years. At
the expiration of the lease, the Company will have the option to purchase the
leased facilities for amounts specified in the lease or to sell them on behalf
of the lessor. There can be no assurance, however, that the Company will
complete the lease syndication on the terms proposed.
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, issues arising from addressing year
2000 compliance 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.
12
<PAGE> 15
DEL MONTE FOODS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None
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
No Reports on Form 8-K were filed by the registrant during the quarter
covered by this report.
13
<PAGE> 16
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
Date: February 11, 1999
By: /s/ RICHARD G. WOLFORD
---------------------------------
Richard G. Wolford
Chief Executive Officer
By: /s/ DAVID L. MEYERS Date: February 11, 1999
---------------------------------
David L. Meyers
Executive Vice President,
Administration
and Chief Financial Officer
S-1
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<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 DECEMBER 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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5
<SECURITIES> 0
<RECEIVABLES> 129
<ALLOWANCES> 1
<INVENTORY> 565
<CURRENT-ASSETS> 711
<PP&E> 485
<DEPRECIATION> 195
<TOTAL-ASSETS> 1,066
<CURRENT-LIABILITIES> 531
<BONDS> 0
0
33
<COMMON> 0
<OTHER-SE> (351)
<TOTAL-LIABILITY-AND-EQUITY> 1,066
<SALES> 745
<TOTAL-REVENUES> 745
<CGS> 500
<TOTAL-COSTS> 500
<OTHER-EXPENSES> 7
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> (1)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
