UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 June 30, 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 1-2944
STOKELY-VAN CAMP, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-0690290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Quaker Tower
P.O. Box 049001 Chicago, Illinois 60604-9001
(Address of principal executive office) (Zip Code)
(312) 222-7111
(Registrant's telephone number, including area code)
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 XX NO ___
The registrant had 2,989,371 shares of Common Stock outstanding on July 31,
1998, all of which were held by The Quaker Oats Company.
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Income
and Reinvested Earnings for the Six and Three
Months Ended June 30, 1998 and 1997 3-4
Condensed Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 5
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended
June 30, 1998 and 1997 6
Notes to the Condensed Consolidated Financial
Statements 7-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security
Holders 14
SIGNATURES 15
<2>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND REINVESTED EARNINGS
(UNAUDITED)
Six Months Ended
Dollars in Millions June 30,
1998 1997
Net sales $ 718.6 $ 649.6
Cost of goods sold 331.3 299.6
Gross profit 387.3 350.0
Selling, general and administrative expenses 247.7 227.4
Interest income -- net (22.8) (22.1)
Income before income taxes 162.4 144.7
Provision for income taxes 65.9 59.4
Net Income 96.5 85.3
Dividends on preference and preferred stock (0.4) (0.4)
Reinvested Earnings -- Beginning Balance 942.1 811.8
Reinvested Earnings -- Ending Balance $ 1,038.2 $ 896.7
See accompanying notes to the condensed consolidated financial statements.
<3>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND REINVESTED EARNINGS
(UNAUDITED)
Three Months Ended
Dollars in Millions June 30,
1998 1997
Net sales $ 505.7 $ 433.7
Cost of goods sold 224.4 192.4
Gross profit 281.3 241.3
Selling, general and administrative expenses 160.0 151.4
Interest income -- net (11.2) (10.4)
Income before income taxes 132.5 100.3
Provision for income taxes 53.6 41.2
Net Income 78.9 59.1
Dividends on preference and preferred stock (0.2) (0.2)
Reinvested Earnings -- Beginning Balance 959.5 837.8
Reinvested Earnings -- Ending Balance $ 1,038.2 $ 896.7
See accompanying notes to the condensed consolidated financial statements.
<4>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
Dollars in Millions 1998 1997
ASSETS
Current Assets:
Cash and cash equivalents $ 4.7 $ 7.3
Due from The Quaker Oats Company 887.5 778.7
Trade accounts receivable -- net of allowances 129.1 28.7
Inventories:
Finished goods 48.5 27.1
Materials and supplies 15.2 7.6
Total inventories 63.7 34.7
Other current assets 56.3 55.6
Total Current Assets 1,141.3 905.0
Other assets 2.6 1.4
Property, plant and equipment 342.0 329.0
Less: accumulated depreciation 97.7 86.8
Property -- net 244.3 242.2
Total Assets $ 1,388.2 $ 1,148.6
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 61.0 $ 18.4
Accrued payroll, benefits and bonus 12.3 10.9
Accrued advertising and merchandising 41.8 16.4
Income taxes payable 82.4 20.6
Other current liabilities 28.8 18.2
Total Current Liabilities 226.3 84.5
Long-term debt 1.5 1.5
Other liabilities 46.6 46.6
Deferred income taxes 8.9 7.2
Redeemable Preference and Preferred Stock 15.3 15.3
Common Shareholders' Equity:
Common stock, $1 par value, authorized 10
million shares; issued 3,591,381 shares 3.6 3.6
Additional paid-in capital 68.7 68.7
Reinvested earnings 1,038.2 942.1
Treasury common stock, at cost, 602,010 shares (20.9) (20.9)
Total Common Shareholders' Equity 1,089.6 993.5
Total Liabilities and Shareholders' Equity $ 1,388.2 $ 1,148.6
See accompanying notes to the condensed consolidated financial statements.
<5>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
Dollars in Millions June 30,
1998 1997
Cash Flows from Operating Activities:
Net income $ 96.5 $ 85.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 12.0 9.8
Deferred income taxes 1.7 2.4
Loss on disposition of property and
equipment 0.4 5.3
Increase in trade accounts receivable (100.4) (84.3)
Increase in inventories (29.0) (35.9)
(Increase) decrease in other current assets (0.7) 1.7
Increase in trade accounts payable 42.6 28.5
Increase in income taxes payable 61.8 52.2
Increase in other current liabilities 37.4 35.4
Other items (1.1) 4.9
Net Cash Provided by Operating Activities 121.2 105.3
Cash Flows from Investing Activities:
Additions to property, plant and equipment (15.2) (21.5)
Proceeds on the sale of property, plant
and equipment 0.6 --
Net Cash Used in Investing Activities (14.6) (21.5)
Cash Flows from Financing Activities:
Change in amount due from The Quaker Oats Company (108.8) (84.4)
Cash dividends (0.4) (0.4)
Net Cash Used in Financing Activities (109.2) (84.8)
Net Decrease in Cash and Cash Equivalents (2.6) (1.0)
Cash and Cash Equivalents -- Beginning of Period 7.3 5.3
Cash and Cash Equivalents -- End of Period $ 4.7 $ 4.3
See accompanying notes to the condensed consolidated financial statements.
<6>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
Note 1 - Basis of Presentation
The condensed consolidated financial statements include Stokely-Van Camp, Inc.
(a wholly-owned subsidiary of The Quaker Oats Company, or Quaker) and its
subsidiaries (the Company or Stokely). The condensed consolidated statements of
income and reinvested earnings for the six and three months ended June 30, 1998
and 1997, the condensed consolidated balance sheet as of June 30, 1998, and the
condensed consolidated statements of cash flows for the six months ended June
30, 1998 and 1997, have been prepared by the Company without audit. In the
opinion of management, these financial statements include all adjustments
necessary to present fairly the financial position, results of operations and
cash flows as of June 30, 1998, and for all periods presented. All adjustments
made have been of a normal recurring nature. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles (GAAP) have been condensed or
omitted. The Company believes that the disclosures included are adequate and
provide a fair presentation of interim period results. Interim financial
statements are not necessarily indicative of the financial position or
operating results for an entire year. It is suggested that these interim
financial statements be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Form 10-K for the
year ended December 31, 1997.
Note 2 - Redeemable Preference and Preferred Stock
5% Cumulative Convertible Second Preferred Stock
As of June 30, 1998, authorized shares were 500,000 and issued and outstanding
shares were 9,131. The voting 5% Cumulative Convertible Second Preferred Stock
($20 par value) is convertible at the holder's option, on a share-for-share
basis, into non-voting 5% Cumulative Prior Preference Stock ($20 par value).
5% Cumulative Prior Preference Stock
As of June 30, 1998, authorized shares were 1,500,000, issued shares were
755,013 and outstanding shares were 754,680.
Both issues are redeemable at the Company's option for $21 per share.
<7>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
Note 3 - Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Note 4 - Current and Pending Accounting Changes
In July 1997, the Financial Accounting Standards Board (FASB) issued
Statement #131, "Disclosures about Segments of an Enterprise and Related
Information." This Statement expands certain reporting and disclosure
requirements for segments from current standards. In February 1998, the FASB
issued Statement #132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This Statement revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. The Company is not required to
adopt these Statements until December 1998 and does not expect the adoption of
these standards to result in material changes to previously reported amounts.
In January 1998, Statement of Position (SOP) #98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," was issued. This
SOP provides guidance on the accounting for computer software costs. In April
1998, SOP #98-5, "Reporting on the Costs of Start-Up Activities," was issued.
This SOP provides guidance on accounting for the cost of start-up activities.
The Company is not required to adopt these Statements until January 1999 and
does not expect the adoption of these standards to result in material changes
to previously reported amounts or disclosures.
In June 1998, the FASB issued Statement #133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that all derivative instruments (including
certain derivative instruments embedded in other contracts) be reflected in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the instrument's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. The
accounting provisions for qualifying hedges allow an instrument's gains and
losses to offset related results on the hedged item in the income statement,
and requires that the Company must formally document, designate, and assess the
effectiveness of transactions that qualify for hedge accounting. The Company
is not required to adopt this Statement until January 2000. The Company has
not determined its method or timing of adopting this statement or the impact on
its financial statements.
<8>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
Note 5 - Derivative Commodity Instruments
The Company actively monitors its exposure to risk from changes in commodity
prices and occasionally uses futures and options to manage price exposure on
purchased or anticipated purchases of corn sweetener. The Company uses
derivatives only for purposes of managing risk associated with underlying
exposures. The Company does not trade or use instruments with the
objective of earning financial gains on the commodity price fluctuations alone,
nor does it use instruments where there are not underlying exposures. Complex
instruments involving leverage or multipliers are not used. Management
believes that its use of these instruments to manage risk is in the Company's
best interest. The Company does not use derivative foreign exchange or
interest rate instruments because underlying exposures are not material.
Instruments used as hedges must be effective at reducing the risks associated
with the underlying exposure and must be designated as a hedge at the inception
of the contract. Accordingly, changes in the market value of the instruments
must have a high degree of inverse correlation with changes in market values or
cash flows of the underlying hedged item. The deferral method is used to
account for those instruments which effectively hedge the Company's price
exposures. For hedges of anticipated transactions, the significant
characteristics and terms of the anticipated transaction must be identified,
and the transaction must be probable of occurring to qualify for deferral
method accounting.
Under the deferral method, gains and losses on derivative instruments are
deferred in the condensed consolidated balance sheets as a component of other
current assets (if a loss) or other current liabilities (if a gain) until the
underlying inventory being hedged is sold. As the hedged inventory is sold,
the deferred gains and losses are recognized in the condensed consolidated
statements of income as a component of cost of goods sold. Derivative
instruments that do not meet the above criteria required for deferral treatment
are accounted for under the fair value method with gains and losses recognized
currently in the condensed consolidated statements of income as a component of
cost of goods sold.
<9>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 Compared With
Six Months Ended June 30, 1997
Operating Results
Consolidated net sales for the six months ended June 30, 1998 (current year),
were $718.6 million, up 11 percent from the six months ended June 30, 1997
(prior year). U.S. Gatorade sales comprise over 97 percent of the total
current year sales. Gatorade thirst quencher sales and volume in the United
States increased 10 percent and 14 percent, respectively, driven by new
packaging and flavors, and strong growth outside of the traditional retail
market, along with more favorable weather versus the prior year. Price changes
did not significantly affect the comparison of current year and prior year
sales.
Gross profit margin was 53.9 percent in both years. Selling, general and
administrative (SG&A) expenses increased 9 percent, partly due to an increase
in advertising and merchandising (A&M) expenses. As a percent of sales, A&M
expenses were 23.6 percent in the current year compared to 24.5 percent in the
prior year, reflecting improved efficiency.
Interest and Income Taxes
Net interest income of $22.8 million increased $0.7 million from last year
as a result of higher average amounts due from The Quaker Oats Company.
The effective tax rate for the current and prior year was 40.6 percent and 41.1
percent, respectively.
Three Months Ended June 30, 1998 Compared With
Three Months Ended June 30, 1997
Operating Results
Consolidated net sales for the three months ended June 30, 1998 (current year),
were $505.7 million, an increase of 17 percent from the three months ended June
30, 1997 (prior year). U.S. Gatorade sales comprise over 97 percent of the
total current year sales. Gatorade thirst quencher sales and volume in the
United States increased 17 percent and 22 percent, respectively, driven by new
packaging and flavors, and strong growth outside of the traditional retail
market, along with more favorable weather versus the prior year. Price changes
did not significantly affect the comparison of current and prior year sales.
Gross profit margin was 55.6 percent of sales in both years. SG&A expenses
increased 6 percent partly due to an increase in A&M expenses. As a percent of
sales, A&M expenses were 23.3 percent in the current year compared to 26.3
percent in the prior year, reflecting improved efficiency.
<10>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest and Income Taxes
Net interest income of $11.2 million increased $0.8 million from last year
as a result of higher average amounts due from The Quaker Oats Company.
The effective tax rate for the current year was 40.5 percent versus 41.1
percent in the prior year.
Liquidity and Capital Resources
Net cash provided by operating activities was $121.2 million and $105.3 million
for the six months ended June 30, 1998 and 1997, respectively. The increase in
cash flows was primarily due to higher net income. Capital expenditures for
the six months ended June 30, 1998 and 1997, were $15.2 million and $21.5
million, respectively. Capital expenditures are expected to increase slightly
during the remainder of the current year as Quaker continues its expansion of
production capacity for Gatorade thirst quencher in the United States. The
Company expects that its future capital expenditures and cash dividends will be
financed through cash flows from operating activities.
Derivative Commodity and Financial Instruments
The Company actively monitors its exposure to risk from changes in commodity
prices and occasionally uses futures and options to manage price exposure on
purchased or anticipated purchases of corn sweetener. The Company uses
derivatives only for purposes of managing risk associated with underlying
exposures. The Company does not trade or use instruments with the objective of
earning financial gains on the commodity price fluctuations alone, nor does it
use instruments where there are not underlying exposures. Complex instruments
involving leverage or multipliers are not used. Management believes that its
use of these instruments to manage risk is in the Company's best interest. The
Company does not use derivative foreign exchange or interest rate instruments
because underlying exposures are not material.
The Company has estimated its market risk exposures using sensitivity analyses.
Market risk exposure has been defined as the change in fair value of a
derivative commodity instrument assuming a hypothetical 10 percent adverse
change in market prices or rates. Fair value was determined using quoted
market prices. Based on the results of the sensitivity analyses, the market
risk exposure in the current year was immaterial. Actual changes in market
prices or rates may differ from hypothetical changes.
<11>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Current and Pending Accounting Changes
In July 1997, the Financial Accounting Standards Board (FASB) issued Statement
#131, "Disclosures about Segments of an Enterprise and Related Information."
This Statement expands certain reporting and disclosure requirements for
segments from current standards. In February 1998, the FASB issued
Statement #132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." This Statement revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans. The Company is not required to adopt these
Statements until December 1998 and does not expect the adoption of these
standards to result in material changes to previously reported amounts.
In January 1998, Statement of Position (SOP) #98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," was issued. This
SOP provides guidance on the accounting for computer software costs. In April
1998, SOP #98-5, "Reporting on the Costs of Start-Up Activities," was issued.
This SOP provides guidance on accounting for the cost of start-up activities.
The Company is not required to adopt these Statements until January 1999 and
does not expect the adoption of these standards to result in material changes
to previously reported amounts or disclosures.
In June 1998, the FASB issued Statement #133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that all derivative instruments (including
certain derivative instruments embedded in other contracts) be reflected in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the instrument's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. The
accounting provisions for qualifying hedges allow an instrument's gains and
losses to offset related results on the hedged item in the income statement,
and requires that the Company must formally document, designate, and assess the
effectiveness of transactions that qualify for hedge accounting. The Company
is not required to adopt this Statement until January 2000. The Company has
not determined its method or timing of adopting this Statement or the impact on
its financial statements.
Year 2000
Stokely, through its parent company, Quaker, conducts the majority of its
operations as an integrated component of Quaker's businesses. As such,
Stokely, throughout its business, uses Quaker's software and other related
technologies that will be affected by the date change in the year 2000.
With Quaker senior management accountability and corporate staff guidance,
the affected Quaker operating units have completed the assessment phase
and are in varying stages of plan implementation to address Quaker's
year 2000 issues. Overall, Quaker has targeted year 2000 compliance
primarily by the end of 1998, with certain Quaker operating units targeting
compliance by no later than mid-1999. While Quaker's plans are underway,
and Quaker does not anticipate such, the consequences of non-compliance by
Quaker, its customers or its suppliers, could have a material adverse impact
on Stokely's operations. Stokely will continue to incur expenses related to
<12>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
these efforts; however, such expenses are not expected to have a material
impact on Stokely's results of operations.
Cautionary Statement on Forward-Looking Statements
Forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, are made throughout this Management's Discussion and
Analysis. The Company's results may differ materially from those in the
forward-looking statements. Forward-looking statements are based on
management's current views and assumptions and involve risks and uncertainties
that could significantly affect expected results. For example, operating
results may be affected by external factors such as: actions of competitors;
changes in laws and regulations, including changes in governmental
interpretations of regulations and changes in accounting standards; customer
demand; effectiveness of spending or programs; and fluctuations in the cost and
availability of supply chain resources.
Continued growth in sales, earnings and cash flows from the Gatorade thirst
quencher operations is dependent on, among other things: the level of
competition from its two key competitors, The Coca-Cola Co. and PepsiCo Inc.;
the ability to obtain increasing points of availability; the projected outcome
of supply chain management programs; capital spending plans; markets for key
commodities, especially PET resins and cardboard; and the efficiency and
effectiveness of A&M programs.
<13>
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Shareholders on May 6,
1998. Represented at the Meeting, either in person or by proxy,
were 2,989,371 voting shares, of a total 2,999,771 voting shares
outstanding. The matters voted upon at the Meeting are described
in (c) below.
(c) To elect three directors to each serve for a one-year term or
until their successors are elected and qualified. All nominees
are named below.
- Susan D. Wellington
Votes for Election - 2,989,371
- John G. Jartz
Votes for Election - 2,989,371
- Janet K. Cooper
Votes for Election - 2,989,371
There were no votes withheld, against, abstentions or
broker non-votes with respect to the election of any
nominee named above.
All other items in Part II are either inapplicable to the Company during the
quarter ended June 30, 1998, the answer is negative or a response has been
previously reported and an additional report of the information need not be
made, pursuant to the instructions to Part II.
<14>
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 as an officer and as chief accounting
officer.
Stokely-Van Camp, Inc.
(Registrant)
Date: August 7, 1998 /s/ Richard M. Gunst
Richard M. Gunst
Vice President and Corporate Controller
<15>
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