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 September 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 October 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 Nine and Three Months
Ended September 30, 1998 and 1997 3-4
Condensed Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 5
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended
September 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 14
SIGNATURES 15
<2>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND REINVESTED EARNINGS
(UNAUDITED)
Nine Months Ended
Dollars in Millions September 30,
1998 1997
Net sales $ 1,191.6 $ 1,051.7
Cost of goods sold 547.0 484.8
Gross profit 644.6 566.9
Selling, general and administrative
expenses 394.4 361.5
Interest income - net (35.9) (32.8)
Income before income taxes 286.1 238.2
Provision for income taxes 114.9 97.8
Net Income 171.2 140.4
Dividends on preference and preferred
stock (0.6) (0.6)
Reinvested Earnings - Beginning Balance 942.1 811.8
Reinvested Earnings - Ending Balance $ 1,112.7 $ 951.6
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 September 30,
1998 1997
Net sales $ 473.0 $ 402.1
Cost of goods sold 215.7 185.2
Gross profit 257.3 216.9
Selling, general and administrative
expenses 146.7 134.1
Interest income - net (13.1) (10.7)
Income before income taxes 123.7 93.5
Provision for income taxes 49.0 38.4
Net Income 74.7 55.1
Dividends on preference and preferred
stock (0.2) (0.2)
Reinvested Earnings - Beginning Balance 1,038.2 896.7
Reinvested Earnings - Ending Balance $ 1,112.7 $ 951.6
See accompanying notes to the condensed consolidated financial statements.
<4>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
Dollars in Millions 1998 1997
ASSETS
Current Assets:
Cash and cash equivalents $ 6.4 $ 7.3
Due from The Quaker Oats Company 989.3 778.7
Trade accounts receivable - net of allowances 75.2 28.7
Inventories:
Finished goods 41.8 27.1
Materials and supplies 8.0 7.6
Total inventories 49.8 34.7
Other current assets 51.6 55.6
Total Current Assets 1,172.3 905.0
Other assets 15.0 1.4
Property, plant and equipment 354.0 329.0
Less: accumulated depreciation 103.1 86.8
Property - net 250.9 242.2
Total Assets $ 1,438.2 $ 1,148.6
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 36.9 $ 18.4
Accrued payroll, benefits and bonus 12.5 10.9
Accrued advertising and merchandising 41.6 16.4
Income taxes payable 84.4 20.6
Other current liabilities 24.9 18.2
Total Current Liabilities 200.3 84.5
Long-term debt 1.5 1.5
Other liabilities 46.6 46.6
Deferred income taxes 10.4 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 1,112.7 942.1
Treasury common stock, at cost, 602,010 shares (20.9) (20.9)
Total Common Shareholders' Equity 1,164.1 993.5
Total Liabilities and Shareholders' Equity $ 1,438.2 $ 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)
Nine Months Ended
Dollars in Millions September 30,
1998 1997
Cash Flows from Operating Activities:
Net income $ 171.2 $ 140.4
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 18.6 15.8
Deferred income taxes 3.2 2.6
Loss on disposition of property and
equipment 2.5 10.5
Increase in trade accounts receivable (46.5) (38.1)
Increase in inventories (15.1) (5.9)
Decrease in other current assets 4.0 0.2
Increase in trade accounts payable 18.5 3.0
Increase in income taxes payable 63.8 52.2
Increase in other current liabilities 33.5 18.3
Other items (13.5) (1.7)
Net Cash Provided by Operating Activities 240.2 197.3
Cash Flows from Investing Activities:
Additions to property, plant and equipment (30.5) (35.0)
Proceeds on the sale of property, plant and
equipment 0.6 --
Net Cash Used in Investing Activities (29.9) (35.0)
Cash Flows from Financing Activities:
Change in amount due from The Quaker Oats
Company (210.6) (161.8)
Cash dividends (0.6) (0.6)
Reduction of long-term debt -- (0.1)
Net Cash Used in Financing Activities (211.2) (162.5)
Net Decrease in Cash and Cash Equivalents (0.9) (0.2)
Cash and Cash Equivalents - Beginning of Period 7.3 5.3
Cash and Cash Equivalents - End of Period $ 6.4 $ 5.1
See accompanying notes to the condensed consolidated financial statements.
<6>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 nine and three months ended September
30, 1998 and 1997, the condensed consolidated balance sheet as of September 30,
1998, and the condensed consolidated statements of cash flows for the nine
months ended September 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 September 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 September 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 September 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.
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.
<7>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
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 derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. The
accounting provisions for qualifying hedges allow a derivative'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. However, when adopted this Statement could increase
volatility in reported earnings and other comprehensive income of the Company.
<8>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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
Nine Months Ended September 30, 1998 Compared With
Nine Months Ended September 30, 1997
Operating Results
Consolidated net sales for the nine months ended September 30, 1998 (current
year), were $1,191.6 million, up 13.3 percent from the nine months ended
September 30, 1997 (prior year). U.S. Gatorade sales comprise about 97 percent
of the total current year sales. Gatorade thirst quencher sales and volume in
the United States increased 13.2 percent and 17.3 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 increased to 54.1 percent of sales from 53.9 percent in the
prior year. Selling, general and administrative (SG&A) expenses increased 9.1
percent, primarily due to an increase in advertising and merchandising (A&M)
expenses. As a percent of sales, A&M expenses were 22.9 percent in the current
year compared to 24.1 percent in the prior year, reflecting increased
efficiency.
Interest and Income Taxes
Net interest income of $35.9 million increased $3.1 million from the prior 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 40.2 percent and 41.1
percent, respectively.
Three Months Ended September 30, 1998 Compared With
Three Months Ended September 30, 1997
Operating Results
Consolidated net sales for the three months ended September 30, 1998 (current
year), were $473.0 million, an increase of 17.6 percent from the three months
ended September 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 17.6 percent and 22.3 percent,
respectively, driven by new packaging and flavors, strong growth outside of
the traditional retail market and more favorable weather versus the prior
year. Price changes did not significantly affect the comparison of current and
prior year sales.
Gross profit margin increased to 54.4 percent of sales from 53.9 percent in the
prior year. SG&A expenses increased 9.4 percent partly due to an increase in
A&M expenses. As a percent of sales, A&M expenses were 21.7 percent in the
current year compared to 23.7 percent in the prior year, reflecting increased
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 $13.1 million increased $2.4 million from the prior year
as a result of higher average amounts due from The Quaker Oats Company.
The effective tax rate for the current year was 39.6 percent versus 41.1
percent in the prior year.
Liquidity and Capital Resources
Net cash provided by operating activities was $240.2 million and $197.3 million
for the nine months ended September 30, 1998 and 1997, respectively. The
increase in cash flows was primarily due to higher net income. Capital
expenditures for the nine months ended September 30, 1998 and 1997, were $30.5
million and $35.0 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.
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
<11>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 require that the Company 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 business. As such, Stokely,
throughout its business, uses Quaker's software and other related technologies
that will be affected by the date change in year 2000. There are three areas
where year 2000 issues may affect Quaker, including: (1) the computer systems,
both hardware and software, (2) embedded systems, as in computer chips in
machinery and process controls, and (3) third parties with material
relationships with the Company, such as vendors, customers and suppliers.
To address the year 2000 issue, Quaker has developed and is executing a
detailed comprehensive readiness plan. The first phase of the readiness plan,
the assessment of Quaker's internal systems, has been completed. The second
phase involves the remediation, replacement and testing of computer systems and
embedded systems and is scheduled for completion by mid-1999. The third phase
will continue through mid-1999 and includes Quaker taking steps to assess the
year 2000 plans of its material third parties. These steps include contacting
Quaker's major service providers, vendors, suppliers and customers that are
believed to be critical to the business operations after January 1, 2000, to
determine their stage of year 2000 compliance through questionnaires,
<12>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
interviews, on-site visits, testing and other available means. The fourth phase
involves the development of contingency plans in the event of year 2000 non-
compliance and is also expected to be completed by mid-1999.
While Quaker's year 2000 readiness plans are underway, the consequences of non-
compliance by Quaker, its major service providers, its customers or its
suppliers, could have a material adverse impact on Stokely's operations.
Although Quaker does not anticipate any major non-compliance issues, it
currently believes that the greatest risk of disruption in its business exists
in the event of non-compliance by its material third parties. Some of the
possible consequences of non-compliance by Quaker or its material third parties
include, among other things, temporary plant closings, delays in the delivery
and receipt of products and supplies, invoice and collection errors, and
inventory obsolescence. Given this risk, Quaker is developing contingency plans
intended to mitigate the possible disruption in business operations that may
result from year 2000 non-compliance. Contingency plans may include
stockpiling raw and packaging materials, increasing finished goods inventory
levels, securing alternate suppliers, or other appropriate measures.
It is currently estimated that the aggregate cost of Quaker's year 2000
efforts will be approximately $12 million to $15 million, of which
approximately $4 million has been incurred to date. Most of these costs are
being funded through Quaker's operating cash flow. These amounts do not
include any costs associated with the implementation of contingency plans,
which are in the process of being developed.
Quaker's year 2000 readiness plan is an ongoing process and the estimates of
costs and completion dates for various components of the program as described
above are subject to change.
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 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; fluctuations in the cost and availability of supply
chain resources; weather; and the ability of the Company, and its major service
providers, vendors, suppliers and customers, to adequately address the year
2000 issue.
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
All other items in Part II are either inapplicable to the Company during the
quarter ended September 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: November 11, 1998 /s/ Richard M. Gunst
Richard M. Gunst
Vice President and Corporate Controller
<15>
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