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 March 31, 1999
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 for 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 April 30,
1999, 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 Three Months
Ended March 31, 1999 and 1998 3
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended
March 31, 1999 and 1998 5
Notes to the Condensed Consolidated Financial
Statements 6-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
PART II - OTHER INFORMATION 13
SIGNATURES 14
<2>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND REINVESTED EARNINGS
(UNAUDITED)
Three Months Ended
Dollars in Millions March 31,
1999 1998
Net sales $ 270.0 $ 212.9
Cost of goods sold 132.1 106.9
Gross profit 137.9 106.0
Selling, general and administrative expenses 107.9 87.7
Interest income - net (15.1) (11.6)
Income before income taxes 45.1 29.9
Provision for income taxes 17.8 12.3
Net income 27.3 17.6
Dividends on preference and preferred stock (0.2) (0.2)
Reinvested Earnings - Beginning Balance 1,105.7 942.1
Reinvested Earnings - Ending Balance $ 1,132.8 $ 959.5
See accompanying notes to the condensed consolidated financial statements.
<3>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
Dollars in Millions 1999 1998
ASSETS
Current Assets:
Cash and cash equivalents $ 2.5 $ 6.3
Due from The Quaker Oats Company 913.7 924.0
Trade accounts receivable - net of allowances 82.0 36.3
Inventories:
Finished goods 85.0 48.1
Materials and supplies 11.5 8.9
Total inventories 96.5 57.0
Other current assets 63.1 60.5
Total Current Assets 1,157.8 1,084.1
Other assets 8.8 9.7
Property, plant and equipment 376.5 368.1
Less: accumulated depreciation 107.9 102.7
Property - net 268.6 265.4
Total Assets $ 1,435.2 $ 1,359.2
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 47.3 $ 22.5
Accrued payroll, benefits and bonus 22.1 19.8
Accrued advertising and merchandising 36.1 27.8
Income taxes payable 51.3 43.3
Other current liabilities 27.9 22.3
Total Current Liabilities 184.7 135.7
Long-term debt 1.3 1.4
Other liabilities 46.1 46.1
Deferred income taxes 3.6 3.6
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 1,132.8 1,105.7
Treasury common stock, at cost, 602,010 shares (20.9) (20.9)
Total Common Shareholders' Equity 1,184.2 1,157.1
Total Liabilities and Shareholders' Equity $ 1,435.2 $ 1,359.2
See accompanying notes to the condensed consolidated financial statements.
<4>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
Dollars in Millions March 31,
1999 1998
Cash Flows from Operating Activities:
Net income $ 27.3 $ 17.6
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6.9 5.7
Loss on disposition of property and equipment 0.9 0.5
Increase in trade accounts receivable (45.7) (34.7)
Increase in inventories (39.5) (31.5)
Increase in other current assets (2.6) (5.2)
Increase in trade accounts payable 24.8 16.8
Increase in income taxes payable 8.0 13.0
Increase in other current liabilities 16.2 11.5
Other items 0.9 (3.5)
Net Cash Used in Operating Activities (2.8) (9.8)
Cash Flows from Investing Activities:
Additions to property, plant and equipment (11.5) (6.7)
Proceeds on the sale of property, plant and equipment 0.5 0.5
Net Cash Used in Investing Activities (11.0) (6.2)
Cash Flows from Financing Activities:
Change in amount due from The Quaker Oats Company 10.3 11.5
Cash dividends (0.2) (0.2)
Reduction of long-term debt (0.1) --
Net Cash Provided by Financing Activities 10.0 11.3
Net Decrease in Cash and Cash Equivalents (3.8) (4.7)
Cash and Cash Equivalents - Beginning of Year 6.3 7.3
Cash and Cash Equivalents - End of Quarter $ 2.5 $ 2.6
See accompanying notes to the condensed consolidated financial statements.
<5>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
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 three months ended March 31, 1999 and
1998, the condensed consolidated balance sheet as of March 31, 1999, and the
condensed consolidated statements of cash flows for the three months ended
March 31, 1999 and 1998, 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 March 31, 1999, and for all periods presented. All
adjustments made have been of a normal and 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, 1998.
Note 2 - Redeemable Preference and Preferred Stock
5% Cumulative Convertible Second Preferred Stock
As of March 31, 1999, 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 March 31, 1999, 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.
<6>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
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 January 1998, Statement of Position (SOP) No. 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 No. 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's adoption of these standards in January 1999 did not
materially affect the Company's financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 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 recorded in the
balance sheet as either an asset or a 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 has not determined its method of adopting this Statement, but will
be required to adopt it by January 2000. When adopted, this Statement could
increase volatility in reported earnings and necessitate separate reporting of
comprehensive income.
<7>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
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.
<8>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared With
Three Months Ended March 31, 1998
Operating Results
Consolidated net sales for the three months ended March 31, 1999 (the current
year), were $270.0 million, up 27 percent from the three months ended March 31,
1998 (the prior year). This increase was primarily due to higher Gatorade
thirst quencher sales in the United States, where more than 97 percent of the
total current year sales were generated. U.S. Gatorade volume and sales grew
36 percent and 30 percent, respectively, due to new packaging and flavors and
strong growth outside the traditional retail channel, resulting in category
share gains. The weather in key West Coast and southeastern U.S. markets
improved in the current year compared to the prior year's cool, wet conditions,
which also contributed to the sales increase. The Company expects volume
growth to continue, although not at the same pace as experienced in the first
quarter of 1999. Price changes did not significantly affect sales.
Gross profit margin was 51.1 percent compared to 49.8 percent in the prior
year, reflecting lower raw material costs and supply chain cost-reduction
efforts. Selling, general and administrative (SG&A) expenses increased 23
percent primarily due to a 38 percent increase in advertising and merchandising
(A&M) expenses. A&M in the current year was 26.4 percent of sales, up from
24.2 percent of sales in the prior year, as the Company increased media
spending in the first quarter of 1999 to support the Gatorade brand during its
off-season.
Interest and Income Taxes
Net interest income of $15.1 million in the current year increased $3.5 million
from the prior year as a result of higher average amounts due from The Quaker
Oats Company. The effective tax rate was 39.5 percent and 41.1 percent as of
March 31, 1999 and 1998, respectively. The decrease primarily was due to a
reduction in the effective state tax rates compared to the prior year.
Liquidity and Capital Resources
Net cash used in operating activities was $2.8 million and $9.8 million for the
three months ended March 31, 1999 and 1998, respectively, reflecting higher net
income in the current year. Capital expenditures for the three months ended
March 31, 1999 and 1998, were $11.5 million and $6.7 million, respectively.
Capital expenditures are expected to continue at or above the current rate as
the Company continues to expand its production capacity. The Company expects
that its future capital expenditures and cash dividends will be financed
through cash flow from operating activities.
<9>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. The results of the sensitivity analyses as of March 31, 1999
did not differ materially from the amounts reported as of December 31, 1998.
Actual changes in market prices or rates may differ from hypothetical changes.
Current and Pending Accounting Changes
In January 1998, Statement of Position (SOP) No. 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 No. 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's adoption of these standards in
January 1999 did not materially affect the Company's financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 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 recorded in the
balance sheet as either an asset or a 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 require that the Company must formally document, designate, and
assess the effectiveness of transactions that qualify for hedge accounting.
The Company has not determined its method of adopting this Statement, but will
be required to adopt it by January 2000. When adopted, this Statement could
increase volatility in reported earnings and necessitate separate reporting of
comprehensive income.
<10>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. The three areas where
year 2000 issues may affect Quaker include: (1) 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
Quaker, such as major service providers, vendors, suppliers and customers.
To address the year 2000 issue, Quaker has developed and is executing a
detailed four-phase 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 (95 percent complete) and embedded systems (90 percent
complete) 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,
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 under way, the consequences of non-
compliance by Quaker, its major service providers, vendors, suppliers or
customers, 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 these risks, 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 $13 million, of which approximately $9 million
has been incurred to date. 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.
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.
<11>
STOKELY-VAN CAMP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND 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. Statements that are not historical facts, including statements about
expectations or projected results, are forward-looking statements. 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 Quaker, its major service providers, vendors, suppliers and
customers, to adequately address the year 2000 issue. Forward-looking
statements speak only as of the date they were made, and the Company undertakes
no obligation to publicly update them.
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, corrugated materials and sweeteners; and
the efficiency and effectiveness of A&M programs.
<12>
PART II - OTHER INFORMATION
All other items in Part II are either inapplicable to the Company during the
quarter ended March 31, 1999, 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.
<13>
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: May 7, 1999 /s/ Richard M. Gunst
Richard M. Gunst
Vice President and Corporate Controller
<14>
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