Item 1: Business
Business History
On January 23, 1998 (the "Acquisition Closing"), Eagle Family Foods, Inc. ("Eagle") acquired certain assets of Borden Foods Corporation ("BFC"), BFC Investments, L.P. ("BFC Investments") and certain of their affiliates for an aggregate purchase price of $376.8 million (the "Acquisition"). The assets acquired include, among other things: (i) four manufacturing facilities located in Wellsboro, Pennsylvania; Starkville, Mississippi; Waterloo, New York; and Chester, South Carolina; (ii) all machinery and equipment located at these facilities; (iii) the trademarks Eagle; ReaLemon; ReaLime; Cremora; Kava; None Such and certain other trademarks in North America and in certain foreign territories; and (iv) a non-compete and non-solicitation agreement from BFC and certain of its affiliates. Eagle is a wholly owned subsidiary of Eagle Family Foods Holdings, Inc. ("Holdings"). Eagle and Holdings are collectively referred to as the "Company", unless the context indicates otherwise. Eagle and Holdings were incorporated in Delaware in 1997.
Financing for the Acquisition and related fees and expenses consisted of (i) $82.5 million of equity contribution from Holdings (which was financed by Holdings' issuance of preferred and common stock in that amount to GE Investment Private Placement Partners II, a Limited Partnership ("GEI") and Warburg, Pincus Ventures, L.P. ("Warburg" and together with GEI, the "Equity Sponsors"), and certain members of the Company's management, (the "Management Investors"), who contributed approximately $1.7 million of such amount (the "Equity Contribution"); (ii) the issuance of $115.0 million of 8.75% senior subordinated notes due 2008 (the "Senior Subordinated Notes"); and (iii) senior secured credit facilities (the "Senior Credit Facilities") in an aggregate principal amount of $245.0 million, consisting of a $175.0 million term loan facility (the "Term Loan Facility") and a $70.0 million revolving credit facility (the "Revolving Credit Facility"). The Senior Credit Facilities, the Senior Subordinated Notes and the Equity Contribution are referred to herein as the "Financing Transactions."
Since the Acquisition Closing, the Company nationally launched Cremora Royale powdered non-dairy creamer, the Star and Magnolia Hispanic brands of sweetened condensed milk and ReaLemonade lemonade liquid concentrate.
In September 1999, the Equity Sponsors contributed an aggregate of $10.0 million to Holdings in exchange for shares of a new series of Holdings preferred stock and Holdings common stock. This contribution was made to finance the marketing investment made by the Company in launching Cremora Royale and ReaLemonade during its fiscal year ended July 3, 1999.
On August 13, 2001 Eagle and Holdings entered into an Asset Purchase Agreement with Mott's Inc. and Cadbury Beverages Delaware, Inc. for the sale of Eagle's business of developing, manufacturing, marketing, distributing and selling shelf-stable juice sold under the ReaLemon and ReaLime brand names and related assets for $128.4 million (subject to adjustment as provided therein) (the "ReaLemon Sale"). Regulatory approval has been obtained for the transaction and it is anticipated to be completed in September 2001.
In July 2001, the Company began implementing a plan to reorganize the management and operations of the Company as a result of the pending ReaLemon Sale, which is expected to reduce the sales and operating base of the Company.
The reorganization is expected to include the following:
As of July 15, 2001, John O'C. Nugent resigned as Chief Executive Officer and President of the Company and Craig A. Steinke was appointed as Chief Executive Officer and President in addition to continuing to serve as Chief Financial Officer of the Company. Other executive officers of the Company have also resigned their positions.
The Company is in the process of closing its corporate office in Tarrytown, New York and its research and development office in Columbus, Ohio.
The number of corporate and administrative employees of the Company will be reduced by 64% to approximately 38 employees during the two quarters ending December 29, 2001, with the majority of the reductions occurring in the quarter ending September 29, 2001.
In addition, the Company's overall administrative cost structure is being reduced by renegotiation of annual service contracts with third party vendors, elimination of office leases and related costs and reductions in travel, entertainment and other administrative expenses.
Products and Markets
The Company manufactures and markets a portfolio of leading dry-grocery food products with widely recognized and established brands, including Eagle Brand sweetened condensed milk, ReaLemon lemon juice from concentrate and Cremora powdered non-dairy creamer. The Company's primary distribution channel is the retail grocery channel, but also has presence within mass merchandisers, club stores, foodservice, the U.S. military, industrial and private label businesses. The Company's U.S. food business is complemented by a strong presence in Canada and Puerto Rico.
The Company sells its products in the U.S. to the retail grocery trade through 24 independent food brokers and a national brokerage company with 39 brokerage houses. The Company also sells its products to non-grocery channels and to international markets. These sales are generated through brokers, distributors, or directly, depending on the size and needs of the customers.
The Company's marketing programs consist of various combinations of media advertising, consumer promotions, trade promotion and co-promotion of certain products such as ingredients in recipes. Since many of the Company's brands are purchased primarily as ingredients for recipes, the Company frequently promotes recipes incorporating its brands. The Company utilizes Internet sites to promote recipes containing the Company's products. The Company also promotes its seasonal brands, None Such mincemeat pie filling and Borden eggnog, with recipe promotions during the holiday season.
Sweetened condensed milk. The Company manufactures and markets Eagle Brand and additional sweetened condensed milk products. In addition to classic Eagle Brand sweetened condensed milk, the Company's other branded sweetened condensed milk products include Eagle Brand low fat and fat free products, Meadow Gold, and Star and Magnolia Hispanic brands. The Company's Eagle brand products carry the Borden and Elsie trademarks. The Company also manufactures sweetened condensed milk under several labels for a customer who distributes and markets these products to certain ethnic markets. In its fifty-two week period ended June 30, 2001 ("fiscal year 2001"), its fifty-two week period ended July 1, 2000 ("fiscal year 2000") and its fifty-three week period ended July 3, 1999 ("fiscal year 1999"), respectively, the Company's sweetened condensed milk products accounted for 50%, 48% and 47% of the Company's net sales.
Retail channels, including grocery and mass merchandisers, are the primary outlet for the Company's sweetened condensed milk products and accounted for approximately 82%, 84% and 83% of the Company's sweetened condensed milk net sales for fiscal year 2001, fiscal year 2000 and fiscal year 1999, respectively. The balance of the Company's sweetened condensed milk net sales is made through other channels, including foodservice customers, industrial customers and export markets.
Lemon and lime juice. The Company manufactures and markets ReaLemon lemon juice from concentrate and ReaLime lime juice from concentrate. In fiscal year 2001, fiscal year 2000 and fiscal year 1999, respectively, the Company's lemon and lime juice products accounted for 29%, 28% and 25% of the Company's net sales.
Retail channels, including grocery and mass merchandisers, are the primary outlet for the Company's ReaLemon and ReaLime products and accounted for approximately 73%, 74% and 74% of ReaLemon and ReaLime net sales in fiscal year 2001, fiscal year 2000 and fiscal year 1999, respectively. The Company also markets the ReaLemon and ReaLime products to foodservice customers, industrial customers and export markets.
As discussed above, the Company anticipates completing the ReaLemon Sale in September 2001.
Powdered non-dairy creamers. The Company manufactures and markets powdered non-dairy creamer under the Cremora and Cremora Royale brand names and also manufactures powdered non-dairy creamer for private label and industrial customers. In fiscal year 2001, fiscal year 2000 and fiscal year 1999, the Company's powdered non-dairy creamer products accounted for 16%, 17% and 17% of the Company's net sales, respectively.
Branded Cremora and Cremora Royale are sold primarily through retail channels and accounted for 73%, 71% and 71% of the Company's fiscal year 2001, fiscal year 2000, and fiscal year 1999 powdered non-dairy creamer net sales, respectively. Private label net sales accounted for 9%, 16% and 14% of the Company's net sales for fiscal year 2001, fiscal year 2000 and fiscal year 1999, respectively, with the balance primarily attributable to export net sales and to bulk net sales to industrial customers (who use non-dairy creamer in producing other food products).
Niche Brand Products. The Company's niche brand products include eggnog, mincemeat pie filling and instant coffee.
Borden eggnog is manufactured by a third party through a seasonal purchase order agreement. Borden eggnog is the only shelf-stable eggnog available in the market and competes with refrigerated eggnog. Borden eggnog is distributed through the retail grocery channel. Eggnog is generally consumed during the November and December holiday season as a beverage or mixed with liquor as a cocktail.
The Company manufactures and markets two flavors of None Such mincemeat pie filling: Regular and Brandy & Rum. None Such mincemeat is used in pies, cookies and pastries, and is consumed primarily during the November and December holiday season. None Such is distributed through the retail grocery channel.
Kava is marketed by the Company and manufactured by a third party independent manufacturer pursuant to a co-packing agreement. Kava is a unique instant coffee, differentiated as the only coffee that is "90% acid-neutralized." Management believes that Kava's customer loyalty is significantly higher than that of most other instant coffee brands, and is well positioned to remain high given the brand's unique position as an acid-neutralized product.
Industry Overview
The U.S. food industry is characterized by relatively stable annual growth based on modest price and population increases. Over the last ten years, management believes the industry has experienced consolidation as competitors have shed non-core business lines and made strategic acquisitions to strengthen category positions, generate economies of scale in distribution, production and raw material sourcing and create leverage relative to the retail grocery trade through better service and broader market presence.
Grocery retailers have also utilized mergers and acquisitions to consolidate within their industry. Growth in the mass merchandiser channel has outpaced growth in the retail grocery channel, and mass merchandisers have consequently increased their share of food sales relative to the retail grocery and drug store channels. Furthermore, the convenience store channel has maintained a constant presence within the total grocery industry. To expand their potential markets, management believes that food companies are broadening their distribution channels to include greater focus on mass merchandisers and other alternative distribution channels. In the opinion of management, another growth opportunity in the U.S. for branded food companies is the foodservice channel, which supplies restaurants, hospitals, schools and other institutions. In addition to the U.S. market, management believes that certain international markets with above average population growth and expanding economies offer significant growth opportunities for U.S. companies. These international markets include Latin America and the Pacific Rim.
Seasonality
The Company's net sales, operating income and cash flows are affected by a seasonal bias toward the second quarter of the fiscal year due to increased sales during the holiday season. Three of the Company's six major product lines (Eagle Brand and the Company's other brands of sweetened condensed milk products, Borden eggnog and None Such mincemeat pie filling) are consumed primarily during the November and December holiday season. In recent years, approximately 43% of the Company's net sales have occurred in the second quarter of the fiscal year. As a result of this seasonality, the Company's working capital needs have historically increased throughout the year, normally peaking in the September/October period, which requires the Company to draw additional amounts on its Revolving Credit Facility in that period.
Raw Materials and Suppliers
The primary raw materials used in the Company's operations include milk, sugar, lemon and lime juice concentrate, vegetable oil, corn syrup, and packaging materials. The Company purchases many of its raw materials from numerous independent suppliers. Milk is purchased through one cooperative at each of its manufacturing plants. Kava instant coffee and Borden eggnog are obtained in final product form from third party manufacturers, traditionally referred to as co-packers.
Competition
The food industry is highly competitive. Numerous brands and products compete for shelf-space and sales, with competition based primarily on price and quality. The Company competes with a significant number of competitors of varying sizes, including divisions or subsidiaries of larger companies. The most significant branded competition encountered by the Company is Nestle's Coffee-mate, which competes with Cremora and Cremora Royale. However, most of the competition encountered by the Company is from private label brands. A number of these branded and private label competitors have broader product lines as well as substantially greater financial and other resources available to them compared to the Company.
Trademarks, Copyrights and Patents
The Company owns a number of trademarks, licenses and patents. After the ReaLemon Sale, the Company's principal trademarks will include Eagle Brand; Cremora; and None Such which the Company has registered in the United States and various foreign countries. The Company holds a perpetual, exclusive and royalty-free license to use the Borden and Elsie trademarks on products on which they were historically used in the BBNA Business (as defined below), together with certain product extensions. The Borden and Elsie trademarks are currently used on (i) the entire line of Eagle Brand products, including condensed or evaporated milk, (ii) shelf-stable egg nog, and (iii) Cremora non-dairy creamer. The Borden trademark is also currently used on Magnolia sweetened condensed milk. The Company also holds a perpetual, exclusive and royalty-free license to use the Borden trademark on None Such mincemeat, Magnolia condensed or evaporated milk, and Kava acid-neutralized coffee. In addition, as assignee from BFC, the Company holds an exclusive and royalty-free license from Southern Foods Group, L.P. to use the Meadow Gold trademark on sweetened condensed milk in the United States for a five year term, which is renewable automatically for subsequent five year terms and terminable at the option of the Company upon one year's notice and, under certain limited circumstances, by the licensor. Such brand names are considered to be of fundamental importance to the business of the Company due to their brand identification and ability to maintain brand loyalty. The Company has granted BFC an exclusive, perpetual, royalty-free license to use the ReaLemon and ReaLime trademarks in certain foreign markets including Europe, the Middle East and Hong Kong. A third party owns the Cremora trademark in Africa and the Middle East. The Company also owns various patents and copyrights associated with the business.
Employees
As of June 30, 2001, the Company employed approximately 362 people, including 202 hourly and 160 salaried employees. The Wellsboro, Pennsylvania and Starkville, Mississippi plants are the only unionized Company plants. As of June 30, 2001, union employees represented approximately 25% of the Company's total work force. At Starkville, the Teamsters Local 984 has a contract expiring on January 31, 2005 and at Wellsboro, the United Food
and Commercial Workers Union-Local 174 has a contract expiring on February 5, 2005. Management believes that relations with the Company's employees and unions are generally good.
Certain Legal and Regulatory Matters
Public Health. The Company is subject to the Federal Food, Drug and Cosmetic Act and regulations promulgated thereunder by the Food and Drug Administration. This comprehensive regulatory program governs, among other things, the manufacturing, composition and ingredients, labeling, packaging and safety of food. In addition, the Nutrition Labeling and Education Act of 1990, as amended, prescribes the format and content of certain information required to appear on the labels of food products. The Company is also subject to regulation by certain other governmental agencies.
The operations and the products of the Company are also subject to state and local regulation through such measures as licensing of plants, enforcement by state health agencies of various state standards and inspection of facilities. Enforcement actions for violations of federal, state and local regulations may include seizure and condemnation of volatile products, cease and desist orders, injunctions and/or monetary penalties. Management believes that the Company's facilities and practices are in compliance with applicable government regulations in all material respects.
The Company is subject to certain health and safety regulations, including regulations issued pursuant to the Occupational Safety and Health Act. These regulations require the Company to comply with certain manufacturing, health and safety standards to protect its employees from accidents.
Environmental Matters. The Company believes that it is substantially in compliance with all applicable laws and regulations for the protection of the environment and the health and safety of its employees. The Company's operations and properties are subject to a wide variety of increasingly complex and stringent federal, state and local environmental regulations governing the storage, handling, generation, treatment, emission, and disposal of certain substances and wastes, the remediation of contaminated soil and groundwater, and the health and safety of employees. As such, the nature of the Company's operations exposes it to the risk of claims with respect to environmental matters. Based upon its experience to date, the Company believes that the future cost of compliance with existing environmental laws and regulations and liability for known environmental claims will not have a material adverse effect on the Company's business or financial position. In connection with the Acquisition, the Company assumed all past and future environmental liabilities related to the acquired business. The Company will be indemnified, however, by BFC and BFC Investments with respect to certain environmental liabilities occurring prior to the Acquisition Closing. This indemnification is limited in time and amount, and there can be no assurance that material environmental liabilities will not be incurred after the indemnification period or in excess of the indemnified amount or that the Company will be able to pursue successfully any indemnification claims against BFC. In addition, future events, such as changes in existing laws and regulations or their interpretation, and more vigorous enforcement policies of regulatory agencies, may give rise to additional expenditures or liabilities that could be material.
Item 2:
Item 2: Properties
Except for Kava instant coffee and sweetened condensed milk in Canada, which are produced under co-pack agreements, and Borden eggnog, which the Company obtains under a seasonal purchase order, the Company produces all of its products in four Company-owned manufacturing facilities, as described in the following table. Management believes that the Company's manufacturing plants have sufficient capacity to accommodate the Company's needs for the foreseeable future.
Location Square Feet Products Manufactured -------- ----------- --------------------- Wellsboro, PA.... 119,000 Sweetened condensed milk, mincemeat pie filling Starkville, MS... 49,000 Sweetened condensed milk Waterloo, NY..... 112,000 Lemon juice and lime juice Chester, SC...... 77,300 Powdered non-dairy creamer
In addition to the owned manufacturing facilities described above, as of June 30, 2001, the Company leased 13,605 square feet of office space in Tarrytown, New York, 28,589 square feet of office and laboratory space in Columbus, Ohio, and uses public warehouse space in numerous locations in variable amounts as needed.
Item 3:
Item 3: Legal Proceedings
The Company is subject to litigation in the ordinary course of its business. The Company is not a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on the Company's financial condition or results of operations.
Item 4:
Item 4: Submission of Matters to a Vote of the Security Holders
Not applicable.
PART II
Item 5:
Item 5: Market for Registrants' Common Equity and Related Stockholder Matters
There is no established public trading market for the common stock of Holdings or Eagle. As of September 12, 2001, Holdings was the only holder of Eagle common stock. As of September 12, 2001, there were approximately 30 holders of Holdings' common stock.
No cash dividends on common stock have been declared by either registrant since their respective incorporations. Holdings and Eagle are restricted from declaring dividends on their common stock by the Senior Credit Facilities. See Note 6 of the Notes to the Financial Statements of Holdings and Eagle included elsewhere in this Annual Report on Form 10-K.
Item 6:
Item 6: Selected Financial Data
The selected financial data set forth below (dollars in thousands) as of June 30, 2001 and July 1, 2000, and the fifty-two week periods ended June 30, 2001 and July 1, 2000 and the fifty-three week period ended July 3, 1999 are derived from audited financial statements included elsewhere herein. The selected financial data set forth below as of December 31, 1997, December 31, 1996, January 23, 1998, June 27, 1998 and July 3, 1999, and the fiscal years ended December 1996 and 1997, six months ended December 31, 1997, the twenty-three day period ended January 23, 1998 and the one hundred fifty-five day period ended June 27, 1998 are derived from the financial statements not included elsewhere herein. The predecessor data represents the financial results related to Eagle Brand and other sweetened condensed milk products, ReaLemon and ReaLime juice from concentrate, Cremora powdered non-dairy creamer, None Such pie filling, Borden eggnog and Kava instant coffee brands (the "BBNA Business") acquired by the Company for periods prior to the Acquisition.
(a) The statement of operations data set forth above for the one hundred fifty-five day period ended June 27, 1998, the fifty-three week period ended July 3, 1999 and the fifty-two week periods ended July 1, 2000 and June 30, 2001, and the balance sheet data set forth above as of January 23, 1998, June 27, 1998, July 3, 1999, July 1, 2000, and June 30, 2001 reflects the financial position and results of operations of Eagle. With the exception of stockholder's equity, Series A Non-Voting Preferred Stock ("Series A Preferred Stock") and the Series B Non-Voting Preferred Stock (the "Series B Preferred Stock," together with Series A Preferred Stock, "Redeemable Preferred Stock"), this information is substantially consistent with that of Holdings. The following represents stockholders' deficit and Redeemable Preferred Stock of Holdings:
(b) Includes the nonrecurring charge of $5.2 million of additional cost of sales related to the expensing of inventories stated at fair market value. (c) Includes the amortization of debt issuance cost of $371, $920, $1,823 and $2,322 for the one hundred fifty-five day period ended June 27, 1998, the fifty-three week period ended July 3, 1999, and the fifty-two week periods ended July 1, 2000 and June 30, 2001, respectively. (d) Reflects the Acquisition and the Financing Transactions resulting in a new basis of accounting. (e) Reflects initial Equity Contribution of $82.5 million less an after tax write-off of in-process research and development.
Item 7:
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations
General
Set forth below is a discussion of the financial condition and results of operations for the fifty-two week periods ended June 30, 2001 and July 1, 2000 and the fifty-three week period ended July 3, 1999. The following discussion should be read in conjunction with the financial statements of the Company and the notes thereto included elsewhere in this Annual Report on Form 10-K. The following table sets forth the results of operations as a percentage of net sales for the fifty-two week periods ended June 30, 2001 and July 1, 2000 and the fifty-three week period ended July 3, 1999:
The Company entered the lemonade liquid concentrate market with the launch of ReaLemonade in fiscal year 1999. While an intensive marketing program drove ReaLemonade to strong performance in its launch year relative to other shelf-stable juice concentrates, sales in the second summer season did not meet expectations. The Company determined that it could not achieve the necessary return on the ReaLemonade product line and, therefore, discontinued sales in the retail channel after the calendar year 2000 summer selling season. The following table sets forth the results of operations as a percentage of net sales for the fifty-two week periods ended June 30, 2001 and July 1, 2000 and the fifty-three week period ended Ju1y 3, 1999 excluding the retail channel ReaLemonade product line for each of the periods presented.
Results of Operations
Fifty-Two Week Periods Ended June 30, 2001 and July 1, 2000.
Net Sales. The Company's net sales for fiscal year 2001 were $220.6 million as compared to $224.7 million for fiscal year 2000, a decrease of $4.1 million, or 1.8%. The table below sets forth the Company's net sales data for each of the Company's product lines for fiscal year 2001 and fiscal year 2000 (dollars in millions):
The decrease in net sales was primarily due to $4.8 million in lower net sales resulting from the discontinued retail ReaLemonade product line as discussed above. Offsetting this decrease, net sales increased by $1.7 million due to greater sweetened condensed milk sales and $1.6 million due to greater lemon and lime juice sales. The Company's sweetened condensed milk product line experienced U.S. retail consumer consumption growth, primarily in the Hispanic brands as the Company responded to the diverse consumer base, and in private label brands. Lemon and lime juice sales increased partially due to growth in sales to mass merchandisers and club stores and to higher volume of sales of the ReaLemon shapes in the U.S. retail channel.
Non-dairy creamer sales decreased by $2.2 million from fiscal year 2000 to fiscal year 2001 primarily due to a sales volume decline to certain private label customers.
Net sales for the Company's niche brand products decreased by $0.4 million from fiscal year 2000 to fiscal year 2001 primarily due to lower sales volume of acid-neutralized instant coffee.
The Company has not included tables setting forth the Company's net sales by channel as provided in previous filings by the Company with the Securities and Exchange Commission because the Company has shifted the focus of its sales management to product line growth.
Cost of Goods Sold. Cost of goods sold was $102.7 million for fiscal year 2001 as compared to $111.1 million for fiscal year 2000, a decrease of $8.4 million, or 7.6%. Expressed as a percentage of net sales, cost of goods sold for fiscal year 2001 decreased to 46.5% from 49.4% for fiscal year 2000. Cost of goods sold, as a percentage of net sales was higher in fiscal year 2000 primarily due to a non-recurring charge in fiscal year 2000 to reserve for obsolescence of ReaLemonade inventories related to inventory expiration. Excluding the results of retail ReaLemonade for fiscal year 2001 and fiscal year 2000, cost of goods sold was $102.5 million for fiscal year 2001 as compared to $100.2 million for fiscal year 2000, an increase of $2.3 million, or 2.2%. Expressed as a percentage of net sales, excluding the results of retail ReaLemonade for both periods, cost of goods sold for fiscal year 2001 increased to 46.4% from 45.5% for fiscal year 2000 due to higher raw material costs, principally lemon concentrate used in production of lemon juice products.
Distribution Expense. Distribution expense was $13.8 million for fiscal year 2001 as compared to $14.0 million for fiscal year 2000, a decrease of $0.2 million, or 1.4%. Expressed as a percentage of net sales, distribution expense was 6.2% for fiscal year 2001 and fiscal year 2000. The decrease of $0.2 million was partially due to reduced warehousing costs as levels of inventory were lower between years, primarily from reduced retail ReaLemonade inventory.
Marketing Expense. Marketing expense was $54.4 million for fiscal year 2001 as compared to $64.7 million for fiscal year 2000, a decrease of $10.3 million, or 15.9%. Expressed as a percentage of net sales, marketing expense for fiscal year 2001 decreased to 24.6% from 28.8% for fiscal year 2000. The decrease was primarily driven by $9.8 million decrease in advertising, trade and consumer support from the discontinued retail ReaLemonade product line.
General & Administrative ("G&A") Expense. G&A expense was $13.4 million for fiscal year 2001 as compared to $13.6 million for fiscal year 2000, a decrease of $0.2 million, or 1.5%. Expressed as a percentage of net sales, G&A expense was 6.1% and 6.0% for fiscal year 2001 and fiscal year 2000, respectively.
Other Operating Income. Other operating income for fiscal year 2000 was $1.2 million, of which $0.5 million related to a product diversion lawsuit settlement against a wholesale customer and $0.6 million for settlement from a supplier for defective packaging materials. There was no other operating income for fiscal year 2001.
Amortization of Intangibles. Amortization of intangibles was $11.2 million for both fiscal year 2001 and fiscal year 2000.
Operating Income. Operating income was $25.3 million for fiscal year 2001 as compared to $11.3 million for fiscal year 2000, an increase of $14.0 million, or 123.9%. Expressed as a percentage of net sales, operating income for fiscal year 2001 increased to 11.5% from 5.1% for fiscal year 2000. Together with other factors discussed above, the increase in operating income was primarily due to a reduction of investment in ReaLemonade.
Interest Expense. Net interest expense was $33.2 million for fiscal year 2001 as compared to net interest expense of $31.7 million for fiscal year 2000, an increase of $1.5 million. The increase was primarily due to higher average interest rates for fiscal year 2001 compared to fiscal year 2000.
Income Taxes. The Company recorded an income tax benefit of $2.9 million for fiscal year 2001 as compared to a $8.7 million income tax benefit for fiscal year 2000. The decrease of $5.8 million is due to the lower net loss in fiscal year 2001.
Fifty-Two Week Period Ended July 1, 2000 and Fifty-Three Week Period Ended July 3, 1999.
Net Sales. The Company's net sales for fiscal year 2000 were $224.7 million as compared to $239.7 million for fiscal year 1999, a decrease of $15.0 million, or 6.3%. The table below sets forth the Company's net sales data for each of the Company's product lines for fiscal year 2000 and fiscal year 1999 (dollars in millions):
Of the $5.0 million decrease in net sales for sweetened condensed milk from fiscal year 1999 to fiscal year 2000, $2.0 million was due to lower net sales of the discontinued Eagle Brand chocolate flavored sweetened condensed milk, $2.5 million to lower net sales of lower margin private label sweetened condensed milk and $0.7 million to higher sweetened condensed milk products returned to reclamation centers. Higher returns to reclamation centers were primarily due to customers returning outdated chocolate flavored sweetened condensed milk, as well as removing products labeled with the predecessor's manufacturing code and replacing with product labeled with the Company's new manufacturing codes.
Net sales for ReaLemon and ReaLime increased by $1.0 million from fiscal year 1999 to fiscal year 2000, while ReaLemonade lemonade liquid concentrate net sales decreased by $6.5 million in that same period. As mentioned above, the Company entered the lemonade liquid concentrate market with the launch of ReaLemonade in fiscal year 1999. While an intensive marketing program and the higher shipments to customers representing an initial one-time build of customer warehouse and retail shelf inventories drove ReaLemonade to strong performance in its launch year relative to other shelf-stable juice concentrates, sales in the second summer season did not meet expectations. The Company determined that it could not achieve the necessary return on marketing investment on the ReaLemonade product line and, therefore, discontinued sales in the retail channel after the calendar year 2000 summer selling season. The Company will continue to market ReaLemonade in the U.S. foodservice channel.
Non-dairy creamer net sales decreased by $2.8 million from fiscal year 1999 to fiscal year 2000. The decrease was partially due to $1.9 million in lower net sales of Cremora and Cremora Royale. Cremora and Cremora Royale net sales were higher in fiscal year 1999 as a result of significant trial-generating marketing efforts, including the issuance of coupons, in-store demonstrations, and television and print advertising. In fiscal year 2000, the Company reduced its marketing investment to a level appropriate for on-going support of the brands. Also, a temporary disruption in non-dairy creamer production due to a June 2, 1999 fire at the Company's Chester, South Carolina manufacturing plant resulted in a decrease of $1.6 million in industrial net sales from fiscal year 1999 to fiscal year 2000, primarily because certain industrial products could not be outsourced during the production downtime. Production was resumed in mid-October 1999. Non-dairy creamer net sales decreases were partially offset by $0.9 million from growth in the private label non-dairy creamer business.
Net sales for the Company's niche brand products decreased $1.7 million from fiscal year 1999 to fiscal year 2000. This decrease was partially due to the elimination of low margin eggnog "special packs" and the introduction of a smaller case size of mincemeat pie filling. The smaller case size was introduced to reduce seasonal returns of this product.
Cost of Goods Sold. Cost of goods sold was $111.1 million for fiscal year 2000 as compared to $111.0 million for fiscal year 1999, an increase of $0.1 million, or 0.1%. Excluding the results of ReaLemonade, cost of goods sold was $100.2 million for fiscal year 2000 as compared to $106.6 million for fiscal year 1999, a decrease of $6.4 million, or 6.0%. Expressed as a percentage of net sales, excluding the results of ReaLemonade for both periods, cost of goods sold for fiscal year 2000 decreased to 45.5% from 46.6% for fiscal year 1999. The decrease in cost of goods sold as a percentage of net sales was significantly affected by lower raw material costs for the sweetened condensed milk and lemon and lime juice product lines.
Cost of goods sold for ReaLemonade was $10.9 million for fiscal year 2000 as compared to $4.5 million for fiscal year 1999, an increase of $6.4 million. The increase was primarily due to charges to write off obsolete ReaLemonade finished goods inventories and raw material inventories and other costs associated with discontinuing the product in the U.S. retail sales channel.
Distribution Expense. Distribution expense was $14.0 million for fiscal year 2000 as compared to $13.4 million for fiscal year 1999, an increase of $0.6 million, or 4.5%. Expressed as a percentage of net sales, distribution expense for fiscal year 2000 increased to 6.2% from 5.6% for fiscal year 1999. The increase was driven partially by $0.2 million of higher warehousing costs in fiscal year 2000 primarily associated with the level of inventory maintained to support the launch of ReaLemonade and $0.5 million for costs reclassified from marketing expense to distribution expense in fiscal year 2000 as a result of the change in the distribution network for certain U.S. foodservice sales.
Marketing Expense. Marketing expense was $64.7 million for fiscal year 2000 as compared to $76.0 million for fiscal year 1999, a decrease of $11.3 million, or 14.9%. Expressed as a percentage of net sales, marketing expense for fiscal year 2000 decreased to 28.8% from 31.7% for fiscal year 1999. The decrease was partially due to $3.1 million and $6.0 million of lower advertising, trade and consumer support for ReaLemonade and Cremora Royale, respectively, which were launched in fiscal year 1999. In fiscal year 2000, the Company reduced its marketing investment in these products to a level appropriate for on-going support of the brands.
G&A Expense. Total G&A expense was $13.6 million for fiscal year 2000 as compared to $12.4 million for fiscal year 1999, an increase of $1.2 million, or 9.7%. Expressed as a percentage of net sales, G&A expense for fiscal year 2000 increased to 6.0% from 5.2% for fiscal year 1999. The increase was primarily due to $1.2 million of higher depreciation expense associated with the start up of the Company's computer systems in January 1999.
Other Operating Income. Other operating income was $1.2 million for fiscal year 2000, of which $0.5 million related to a product diversion lawsuit settlement against a wholesale customer and $0.6 million for settlement from a supplier for defective packaging materials.
Amortization of Intangibles. Amortization of intangibles was $11.2 million for fiscal year 2000, as compared to $21.2 million for fiscal year 1999, a decrease of $10.0 million, or 47.2%. The decrease was due to the expiration of the one year master customer services agreement entered into between the Company and BFC in connection with the Acquisition.
Operating Income. Operating income was $11.3 million for fiscal year 2000 as compared to $5.6 million for fiscal year 1999, an increase of $5.7 million, or 101.7%. Excluding the impact of $11.2 million and $21.2 million of amortization expense for intangibles for fiscal year 2000 and fiscal year 1999, respectively, and the impact of the loss of $17.5 million and $7.8 million for the ReaLemonade business initiative for fiscal year 2000 and fiscal year 1999, respectively, operating income was $40.0 million for fiscal year 2000 as compared to $34.6 million for fiscal year 1999, an increase of $5.4 million, or 15.6%. Together with other factors discussed above, the significant factors improving the Company's operating income, excluding ReaLemonade results, were lower raw material costs for the sweetened condensed milk and lemon and lime juice product lines and the reduced marketing investment in Cremora Royale.
Interest Expense. Net interest expense was $31.7 million for fiscal year 2000 as compared to net interest expense of $27.8 million for fiscal year 1999, an increase of $3.9 million. The increase was primarily due to $0.4 million of interest as a result of an increase in the average outstanding balance of the Revolving Credit Facility, $2.6
million from higher interest rates during fiscal year 2000 compared to fiscal year 1999, and $0.9 million of other miscellaneous financing costs.
Income Taxes. The Company recorded an income tax benefit of $8.7 million for fiscal year 2000 as compared to a $7.7 million income tax benefit for fiscal year 1999. The increase of $1.0 million is primarily due to a revision in estimates of state net operating loss carryforwards.
Liquidity and Capital Resources
Borrowings under the Term Loan Facility were $172.5 million and $173.5 million at June 30, 2001 and July 1, 2000, respectively. The Term Loan Facility matures $0.8 million, $3.2 million, $27.5 million, $80.0 million and $60.0 million in the fiscal years 2002 through 2006, respectively. In addition, the $60.0 million Revolving Credit Facility that includes a $10.0 million swingline loan matures in fiscal year 2005. Borrowings under the Revolving Credit Facility were $46.0 million and $40.0 million at June 30, 2001 and July 1, 2000, respectively.
Interest payments on the Senior Subordinated Notes and interest and principal payments under the Term Loan Facility and the Revolving Credit Facility represent significant cash requirements for the Company. Borrowings under the Term Loan Facility and the Revolving Credit Facility bear interest at floating rates and require interest payments on varying dates. Interest rate swap agreements, which fixed the interest rates on $100 million of the Term Note Facility, were sold in November 2000 for fair market gains of $0.9 million.
The Company's remaining liquidity needs are for capital expenditures and increases in working capital. The Company spent $3.6 million on capital projects in fiscal year 2001 to fund expenditures at existing facilities. The Company expects to spend approximately $2.0 million on capital projects in the fiscal year ending June 28, 2002 to fund expenditures at existing facilities. The Company's primary sources of liquidity are cash flows from operations and available borrowings under the Revolving Credit Facility.
Net cash used in operating activities for fiscal year 2001 was $1.8 million, and net cash provided from operating activities for fiscal year 2000 was $10.6 million. At the beginning of fiscal year 2000, the Company had substantially high accounts receivable and inventory levels relative to ReaLemonade that provided cash flow into fiscal year 2000 that was not present in fiscal year 2001.
Cash provided from financing activities in fiscal year 2001 was $5.3 million, and cash used in financing activities for fiscal year 2000 was $3.4 million. In fiscal year 2001, the Company's borrowing on the Revolving Credit Facility was consistent with its seasonal build of inventory, primarily with sweetened condensed milk and is more comparable to the business than was experienced in fiscal year 2000. The borrowings in fiscal year 2000 were minimized with the infusion of $10.0 million received by Holdings from GEI and Warburg in exchange for shares of a series of Holdings preferred stock and Holdings common stock.
Management believes that cash generated from operations and borrowings under the Term Loan Facility and the Revolving Credit Facility will be sufficient to satisfy working capital requirements and required capital expenditures. The Company expects to reduce the Term Loan Facility substantially during the fiscal year ending June 28, 2002 with proceeds from the ReaLemon Sale. As discussed above, the Company entered into an asset purchase agreement with Mott's Inc. and Cadbury Beverages Delaware, Inc. for the sale of Eagle's ReaLemon and ReaLime brand names and related assets for $128.4 million, subject to adjustments as provided therein. Further expansion of the business through acquisitions may require the Company to incur additional indebtedness or to issue additional equity securities.
The Company was advised by GEI and Warburg, Holdings' principal stockholders, that as of September 10, 2001, each owned $14.0 million in aggregate principal amount of Notes.
Senior Credit Facilities Amendment
The Company amended its Senior Credit Facilities pursuant to an amendment dated August 10, 2001 (the "Amendment") which will become effective as of the completion of the ReaLemon Sale. The Company received consent from the lenders for the proposed ReaLemon Sale, and waived compliance with leverage ratio and
consolidated cash interest expense coverage ratio financial covenants for periods commencing on and including September 29, 2001 and ending on and including December 28, 2002. The Amendment includes restrictions on the carrying balance of the Revolving Credit Facility for a period of thirty consecutive days commencing on a date not earlier than December 1 of any year and ending not later than March 31 of the following year. The Amendment also sets forth minimum requirements for consolidated earnings before interest, income tax, depreciation and amortization.
The interest rate on the Term Loan Facility, as amended, is LIBOR plus 4.00%. The interest rate on the Revolving Credit Facility, as amended, is LIBOR plus 4.00% with the swingline loan portion bearing interest at Prime plus 3.00%.
Change in Accounting Method
In the fourth quarter of fiscal year 2001, the Company changed its method of accounting for revenue, as clarified in the Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 101, from recognition of revenue at point of shipment to recognition of revenue at point the title, ownership and risk of loss transfers to the customer. The Company recorded a cumulative effect of accounting change of $361,000, net of tax. The change in accounting method would not have had a material effect on the Consolidated Statements of Operation for the fifty-two week period ended July 1, 2000 and the fifty-three week period ended July 3, 1999, if adopted in those periods.
Adoption of Financial Accounting Standard
The Company enters into derivative financial instrument transactions in order to manage or reduce market risk for interest rates and commodity prices. The Company's interest rate risk management strategy uses derivative instruments to minimize earnings fluctuations caused by interest rate volatility associated with the Company's variable rate debt. Its commodity price risk management strategy uses derivative instruments to minimize earnings fluctuations caused by commodity price volatility associated with purchases of milk, a key ingredient in the production of sweetened condensed milk.
Effective July 2, 2000, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The estimated fair value of the interest rate swap agreements upon initial adoption of SFAS 133 was $2.0 million, and in accordance with the transition provisions of SFAS 133, the Company recorded a net of tax cumulative effect type adjustment of $1.3 million in accumulated other comprehensive income to recognize at fair value the interest rate swap derivatives designated as cash flow hedging instruments. On November 9, 2000 the Company sold its interest rate swap positions for fair market gains of $0.9 million. Pursuant to SFAS 133, the gains on the interest rate swap agreements will remain in other comprehensive income and be reclassified as interest expense over the original terms of the interest rate swap agreements. The interest income in other comprehensive income as of December 30, 2000 will be amortized through the period ending December 31, 2002.
Seasonality
The Company's net sales, net income and cash flows are affected by a seasonal bias toward the second quarter of the fiscal year due to increased sales during the holiday season. Three of the Company's six major product lines (Eagle Brand and other sweetened condensed milk products, Borden eggnog and None Such mincemeat pie filling) are consumed primarily during the November and December holiday season. In recent years, approximately 43% of the Company's net sales have occurred in the last quarter of the calendar year. As a result of this seasonality, the Company's working capital needs have historically increased throughout the year, normally peaking in the September period, requiring the Company to draw additional amounts on its Revolving Credit Facility during this period.
Recently Issued Accounting Statements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141"). SFAS 141 addresses financial accounting and reporting for business combinations. The statement requires all business combinations to be accounted for under the purchase method and establishes criteria for the separate recognition of intangible assets acquired in a business combination. The provisions of this pronouncement apply to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The Company is evaluating this pronouncement and has not yet determined its impact on future financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets at acquisition and for periods subsequent to acquisition. The Company is evaluating this pronouncement and has not yet determined its impact on future financial statements. The pronouncement will be adopted during the first quarter of the fiscal year ending June 28, 2003.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is evaluating the pronouncement and has not yet determined its impact on future financial statements. This pronouncement will be adopted during the fourth quarter of the fiscal year ending June 29, 2002.
In May 2000, the FASB Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-14, "Accounting for Certain Sales Incentives" ("Issue 00-14"). Issue 00-14 addresses the recognition, measurement, and income statement classification for sales incentives including point of sale coupons, rebates and free merchandise in connection with a single exchange transaction. Upon the adoption of Issue 00-14, the Company will reclassify coupon redemption costs from marketing expense to net sales, resulting in no impact to net income. The coupon redemption costs for the fifty-two week periods ended June 30, 2001 and July 1, 2000 were $3.4 million and $5.3 million, respectively, and for the fifty-three week period ended July 3, 1999 were $7.8 million. The EITF deferred the effective date of Issue 00-14 to the quarter beginning after December 15, 2001. The Company will adopt the pronouncement during the third quarter of the fiscal year ending June 29, 2002.
In September 2000, the EITF issued EITF Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products" ("Issue 00-25"). Issue 00-25 addresses the income statement classification of certain considerations from a vendor to a retailer in connection with the retailer's purchase of the vendor's product. Such considerations include, but are not limited to slotting fees, cooperative advertising programs, and buy down programs. Upon the adoption of Issue 00-25, the Company will reclassify these expenses from marketing expense to net sales, resulting in no impact to net income. Issue 00-25 is effective for the quarter beginning after December 15, 2001. The Company will adopt the pronouncement during the third quarter of the fiscal year ending June 29, 2002.
Item 7A:
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Interest Rates
The following table presents a description of the financial instruments that were held by the Company at June 30, 2001 and which were sensitive to changes in interest rates. In the ordinary course of business the Company enters into derivative financial instrument transactions in order to manage or reduce market risk. The Company does not enter into derivative financial instrument transactions for speculative purposes. For the liabilities, the table represents principal fiscal year cash flows that exist by maturity date and the related average interest rate. The variable rates are estimated based upon the six month forward LIBOR rate.
All amounts are reflected in U.S. dollars (in thousands).
Milk Hedging
The Company uses milk as a major ingredient in its sweetened condensed milk product line and is subject to the risk of rising milk prices that increase manufacturing costs and erode profit margins. By purchasing futures contracts, however, the Company establishes a known price for future milk purchases in order to protect against fluctuating milk prices. As of June 30, 2001, the Company had purchased 370 milk futures contracts which settles during various months through June 2002 with an aggregate market value of $(0.4) million.
Item 8:
Item 8: Financial Statements and Supplementary Data
See Item 14 "Exhibits, Financial Statement Schedules and Reports on Form 8- K."
Item 9:
Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10:
Item 10: Directors and Executive Officers of the Registrants
The directors of the Company and executive officers of Holdings and Eagle are as follows:
- -------------- * Messrs. Steinke, Greatrex, Rich, Conti and Ms. Snowden hold these same positions at Holdings and are the executive officers of Holdings.
Craig A. Steinke has served as a Director, Chief Executive Officer and President of Holdings and Eagle since July 2001. Since January 1998, Mr. Steinke has held the positions of Chief Financial Officer, Vice President, Treasurer and Senior Vice President of Operations of Holdings and Eagle. From 1996 through 1998, Mr. Steinke served as Senior Vice President and Group General Manager of BHP Copper, a $3.0 billion business group of Broken Hill Proprietary Co., Ltd. From 1992 through 1996, Mr. Steinke held President, Vice President and Controller positions at the Metals, a $1.0 billion wholly owned subsidiary of Magma Copper Co. Prior to 1992, Mr. Steinke held a variety of positions at Arthur Andersen LLP.
Mark J. Greatrex has served as Senior Vice President of Marketing and Sales of Holdings and Eagle since April 2000. From 1998 to 2000, Mr. Greatrex served as the Vice President/General Manager of the Lipton Tea business and as a board member of the Lipton Company, a wholly owned subsidiary of Unilever PLC. From 1995 to 1998, Mr. Greatrex served as Vice President of Brand Marketing for FRALIB, a consumer products subsidiary of Unilever based in Paris, France. During this period, he also provided marketing leadership for one of Unilever's International Innovation Centers. Prior to 1995, Mr. Greatrex held a variety of marketing positions in several product categories at Van den Bergh Foods, a consumer products division of Unilever, USA. His service as a director includes past membership on the boards of the Pepsi Lipton Tea Partnership (a joint venture) and the U.S. Tea Association. His present service as a director includes membership on the board of Vision Associates Holdings, Inc.
Jonathan F. Rich has served as Vice President and General Counsel of Holdings and Eagle since their respective dates of formation. From 1990 through 1996, Mr. Rich served as Vice President and General Counsel of Nabisco International. Mr. Rich is a member of the New York Bar.
Lori S. Snowden has served as Secretary of Holdings and Eagle since August 2001. Since April 1999, Ms. Snowden has served as Financial Controller for Eagle. Ms. Snowden joined Eagle as Assistant Controller in January 1998. From 1990 to 1998, Ms. Snowden held various managerial accounting positions with BFC and Borden, Inc. Prior to September 1990, Ms. Snowden held a variety of financial and accounting positions with Lancaster Colony Corporation.
Michael P. Conti has served as Vice President, Finance of Holdings and Eagle since August 2001. Mr. Conti joined Eagle in August 1998 and has held Director of Financial Planning and Analysis and Financial Manager
positions. From April 1996 through August 1998, Mr. Conti served as Controller of the Hamilton Watch, a division of The Swatch Watch Group. Prior to that, he held a variety of accounting positions at Arriflex Corporation.
Kelly J. Crouse has served as Vice President, Marketing of Eagle since August 2001. From 1998 through August 2001, Mr. Crouse served as Director of Customer Marketing and as Area Vice President of Sales at Eagle. Between 1994 and 1998, Mr. Crouse served as a National Trade Marketing Manager and Midwest Regional Sales Manager with BFC's, Pasta/Sauce Division. Between 1988 and 1993, Mr. Crouse held a variety of management positions at Kraft General Foods Frozen Products Division and Kraft Inc. Dairy Division.
Ronald E. Hord, Jr. has served as Vice President, Supply Chain of Eagle since August 2001 as an executive officer. From March 2000 to August 2001 Mr. Hord served in that position in a non-executive officer capacity. Mr. Hord joined Eagle as the Director of Logistics in January 1998. From March 1994 through January 1998, Mr. Hord held a position in logistics with BFC and Borden, Inc., working on numerous food brands including the six brands that Eagle acquired. From 1986 to 1994, Mr. Hord held various logistics positions with the Nabisco Foods Group.
Harold G. M. Strunk has served as Vice President, Sales of Eagle since August 2001 and from 1998 through August 2001 Mr. Strunk held positions of Director of Sales Support and Vice President of International Sales of Eagle. Between 1986 and 1998, Mr. Strunk held positions of Regional Sales Manager, Area Sales Manager, Director of Sales Planning, Director of Trade Marketing and Director of Process Improvement within BFC and Borden, Inc. Prior to 1986 Mr. Strunk held several sales and sales management positions with Lever Brothers, a U.S. division of Unilever.
Andreas T. Hildebrand has served as a Director of Holdings and Eagle since their respective dates of formation. Mr. Hildebrand has served as Managing Director of the Private Equity Group of General Electric Asset Management ("GEAM") since July 2000, Vice President of GEAM since May 1997, and as an Investment Manager and Senior Financial Analyst since 1993. Prior to joining GEAM, Mr. Hildebrand was an Economic Analyst in the office of Massachusetts Governor William Weld. Mr. Hildebrand presently serves as a director of several privately held companies.
Kewsong Lee has served as a Director of Holdings and Eagle since their respective dates of formation. Mr. Lee has served as a Member and Managing Director of E.M. Warburg, Pincus & Co., LLC ("EMW LLC") and a general partner of Warburg, Pincus & Co. ( "WP ") since January 1, 1997. Mr. Lee served as a Vice President of Warburg, Pincus Ventures, Inc. ("WPV") from January 1995 to December 1996, and as an associate at E.M. Warburg, Pincus & Co., Inc. ( "EMW ") from 1992 until December 1994. Prior to joining EMW, Mr. Lee was a consultant at McKinsey & Company, Inc., a management consulting company from 1990 to 1992. His present service as a director includes membership on the boards of Knoll, Inc., RenaissanceRe Holdings Ltd. and several privately held companies.
David A. Barr has served as a Director of Holdings and Eagle since August 13, 2001. Mr. Barr has served as a Member and Managing Director of EMW LLC and a general partner of WP since January 1, 2001. Prior to joining EMW LLC, Mr. Barr was a Managing Director at Butler Capital Corp., a private investment firm focused on middle market management buyouts.
Donald W. Torey has served as a Director of Holdings and Eagle since their respective dates of formation. Mr. Torey has served as Executive Vice President of GEAM and GE Investment Management Incorporated ("GEIM" and, together with GEAM, "GE Investments") with responsibility for GE Investments' Private Equity and Real Estate groups since January 1997. From 1993 through 1996, Mr. Torey served as Chief Financial Officer of GE Investments. Prior to that, Mr. Torey served as Manager of Mergers and Acquisition Finance for General Electric Company ("GE"). Mr. Torey currently serves as a Trustee for the General Electric Pension Trust ("GEPT") and as a director of a privately held company.
Paul W. Van Orden has served as a Director of Holdings and Eagle since April 1998. Mr. Van Orden has been a Special Student at the Yale Divinity School since 1997. From 1991 through 1996, he was the Executive-In-Residence, the Executive Director of the Chazen Institute for International Business and a Visiting Professor at the Columbia University Graduate School of Business. Prior to that, Mr. Van Orden was an Executive Vice President at GE. He currently serves as a director of a privately held company.
Item 11:
Item 11: Executive Compensation
Summary Compensation Table
The following summary compensation table provides information concerning compensation for the Company's chief executive officer and the four other most highly compensated executive officers of Eagle (collectively, the "Named Executive Officers") for the fiscal years ended June 30, 2001, July 1, 2000 and July 3, 1999.
_______________ (1) The bonus represents the amount earned and paid to the Named Executive Officer for the Company's fiscal year for which each executive could earn up to 100% of his base salary if certain performance targets were met. (2) Other compensation includes matching and profit sharing contributions made by the Company on behalf of each Named Executive Officer pursuant to the Eagle Family Foods, Inc. 401k Savings and Retirement Plan. (3) The Company has not awarded any stock options or stock appreciation rights to the Named Executive Officers. (4) The restricted stock awards for fiscal year 2000 represent the approximate value of award of restricted Common Stock issued to the Named Executive Officers. The Restricted Shares will vest in equal installments over five years (the "Vesting Period"), beginning on the first anniversary of the date of issuance provided that such grantee is employed by the Company on such date. Upon the consummation of an initial public offering of Common Stock of Holdings registered under the Securities Act of 1933 meeting certain thresholds prior to the end of the Vesting Period, 20% of the Restricted Shares will vest. Any remaining unvested Restricted Shares would then vest in equal installments over the time remaining in the Vesting Period. The Board of Directors of Holdings may also establish certain performance criteria that could result in accelerated vesting of the Restricted Shares. As of June 30, 2001, the approximate value of each such award was $350, $275 and $175 for Messrs. Steinke, Greatrex and Rich, respectively. (5) Mr. Nugent resigned his positions effective July 15, 2001. (6) Mr. Steinke became Chief Executive Officer and President in addition to serving as Chief Financial Officer and Treasurer in July 2001. (7) Mr. Lumpp resigned his position effective July 31, 2001.
Compensation Committee Interlocks and Insider Participation
Matters of compensation are reviewed and acted upon by the full Board of Directors, consisting of David A. Barr, Andreas T. Hildebrand, Kewsong Lee, Craig A. Steinke, Donald W. Torey and Paul W. Van Orden. Mr. Steinke is an executive officer of Holdings and Eagle.
Director Compensation
The Directors of Holdings and Eagle have not received, and are not expected in the future to receive, compensation for their service as directors. Directors are entitled to reasonable out-of-pocket expenses in connection with their travel to and attendance at meetings of the Boards of Directors or committees thereof, except that directors who are employees of Holdings, Eagle, or a stockholder of Holdings shall not be entitled to such reimbursement.
Employment Agreements
On January 23, 1998, the Company entered into an employment agreement with Craig A. Steinke, pursuant to which Mr. Steinke served as Vice President, Chief Financial Officer and Treasurer of the Company. Subsequent to this agreement, Mr. Steinke was appointed Chief Executive Officer and President of the Company. The Company has not entered into a new agreement with Mr. Steinke since his promotion. Pursuant to his employment agreement, his annual base salary for Mr. Steinke was $300,000 as of July 1, 2001 and is subject to increases as determined by the Board of Directors. In addition, pursuant to the agreement, Mr. Steinke is entitled to receive a bonus of up to 100% of his base salary if certain performance targets are met. Bonuses for future periods are to be based on targets to be established by the Board of Directors. The agreement has a term of one year, with automatic annual renewals. In the event the employment agreement is terminated by the Company without "cause" (as defined in such employment agreement), Mr. Steinke is entitled to receive severance payments equal to the base salary then in effect for 12 months. The agreement provides for customary non-competition and non-solicitation provisions.
Effective July 15, 2001, Eagle's and Holdings' Board of Directors accepted the resignation of John O'C. Nugent as a Director, Chief Executive Officer and President (the "Executive"). The separation agreement, dated as of June 25, 2001, between the Company, GEI, Warburg and the Executive ("Separation Agreement") provides termination benefits in accordance with the Executive's employment agreement with the Company, dated January 23, 1998, as well as a cash payment of $25,000. The Separation Agreement provides for certain payments to the Executive upon the consummation of the sale of the Company or portions thereof. Pursuant to the Separation Agreement, the Executive also agreed to transfer 2,475 shares of Series A Non-Voting Preferred Stock to the Company and waive his right to payment therefore in accordance with the terms of his employment agreement. The value of said shares and the accumulated dividends will satisfy as payment in full of the $250,000 principal and accrued interest on the Executive's Secured Recourse Promissory Note with the Company. The Executive also agreed to transfer 2,475 shares of Series A Non-Voting Preferred Stock for a cash purchase price of $250,000 See "Item 13. Certain Relationships and Related Transactions."
Item 12:
Item 12: Security Ownership of Certain Beneficial Owners and Management
All of the issued and outstanding shares of common stock of Eagle as of September 12, 2001 are beneficially owned by Holdings. There are three classes of capital stock of Holdings authorized and outstanding: the Common Stock, which has full voting rights, the Series A Preferred Stock and the Series B Preferred Stock, which each have limited voting rights. The following table sets forth, as of September 12, 2001, certain information regarding the beneficial ownership of Common Stock, Series A Preferred Stock and Series B Preferred Stock, as determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with respect to (i) each person known by the Company to be the beneficial owner of more than five percent of any class of Holdings' voting securities, (ii) each of the directors and executive officers of Holdings and Eagle and (iii) all directors and executive officers of Holdings and Eagle, as a group:
- --------------- * Less than 1%
(1) Pursuant to the rules of the Securities and Exchange Commission, shares are deemed to be "beneficially owned" by a person if such person directly or indirectly has or shares (i) the power to vote or dispose of such shares, whether or not such person has any pecuniary interest in such shares, or (ii) the right to acquire the power to vote or dispose of such shares within 60 days, including any right to acquire through the exercise of any option, warrant or right. Unless otherwise indicated, each person's address is c/o Eagle Family Foods, Inc. 735 Taylor Road, Gahanna, Ohio 43230. Messrs. Lee and Barr have the same address as Warburg. Messrs. Torey, Hildebrand and Van Orden have the same address as GEI. (2) Does not include any shares indirectly held by Trustees of GEPT by virtue of GEPT's limited partnership interest in Warburg. GEPT is also a limited partner in GEI. GEIM is the general partner of GEI and a wholly owned subsidiary of GE. As a result, each of GEIM and GE may be deemed to be the beneficial owner of the shares owned by GEI. (3) The sole general partner of Warburg is WP, a New York general partnership. EMW LLC, a New York limited liability company, manages Warburg. The members of EMW LLC are substantially the same as the partners of WP. Lionel I. Pincus is the managing partner of WP and the managing member of EMW LLC. WP, as the sole general partner of Warburg, has a 15% interest in the profits of Warburg. Messrs. Lee and Barr, directors of Holdings, are Managing Directors and members of EMW LLC and general partners of WP. As such, Messrs. Lee and Barr may be deemed to have an indirect pecuniary interest (within the meaning of Rule 16a-1 under the Exchange Act) in an indeterminate portion of the shares beneficially owned by Warburg and WP. (4) Includes 39,835, 27,500, and 20,730 shares of restricted stock, subject to certain vesting and for future requirements, issued to each of Messrs. Steinke, Greatrex and Rich. (5) Excludes 458,200 shares of Common Stock, 402,399 shares of Series A Preferred Stock and 49.5 shares of Series B Preferred Stock beneficially owned by GEI and GEIM. As an executive officer and director of GEIM, Mr. Torey has shared voting and investment power with respect to the shares held by GEI, and therefore, may be deemed to be the beneficial owner of such shares. Messrs. Torey, Hildebrand and Van Orden disclaim beneficial ownership of all such shares owned by GEI and GEIM. (6) Includes 458,200 shares of Common Stock, 402,399 shares of Series A Preferred Stock and 49.5 shares of Series B Preferred Stock beneficially owned by Warburg. Excludes 458,200 shares of Common Stock, 402,399 shares of Series A Preferred Stock and 49.5 shares of Series B Preferred Stock beneficially owned by GEI. Includes 4,650 shares of restricted stock, subject to certain vesting and forfeiture requirements, issued to executive officers not identified in the table.
The Holdings Stockholders Agreement
The relations among the Equity Sponsors and the Management Investors (collectively, the "Investors"), and Holdings are governed by a Stockholders Agreement, dated as of the Acquisition Closing and as amended (the "Holdings Stockholders Agreement"). The following summary of certain provisions of the Holdings Stockholders Agreement does not purport to be complete and is qualified in its entirety by reference to all the provisions of the Holdings Stockholders Agreement.
Board of Directors. Holdings is managed by a Board of Directors not to exceed nine members, three members of which may be designated by GEI and three members of which may be designated by Warburg. For so long as GEI beneficially owns at least 20% of the Common Stock outstanding on a fully diluted basis, GEI has the right to designate three directors to the Board of Directors. For so long as GEI beneficially owns at least 15% of the Common Stock outstanding on a fully diluted basis, GEI has the right to designate two directors to the Board of Directors. For so long as GEI beneficially owns at least 10% of the Common Stock outstanding on a fully diluted basis, GEI has the right to designate one director to the Board of Directors. For so long as Warburg beneficially owns at least 20% of the Common Stock outstanding on a fully diluted basis, Warburg has the right to designate three directors to the Board of Directors. For so long as Warburg beneficially owns at least 15% of the Common Stock outstanding on a fully diluted basis, Warburg has the right to designate two directors to the Board of Directors. For so long as Warburg beneficially owns at least 10% of the Common Stock outstanding on a fully diluted basis, Warburg has the right to designate one director to the Board of Directors. In addition, as long as the Equity Sponsors in the aggregate beneficially own more than 50% of the Common Stock outstanding on a fully diluted basis, the Equity Sponsors have the right to designate a majority of the directors to the Board of Directors. The Board of Directors will have at least one director who is not an officer or employee of Holdings, the Company, or the Equity Sponsors, appointed by unanimous approval of the Board of Directors. The Holdings Stockholders Agreement provides that the Board of Directors of the Company is identical to that of Holdings.
The consent of a majority of the Board of Directors which includes at least one of the directors designated by GEI and one of the directors designated by Warburg is required for the approval of (i) the Company's or Holdings' annual operating budget; (ii) capital expenditures or investments not approved in the annual budget in amounts greater than $500,000; (iii) any merger or consolidation involving the Company or Holdings; (iv) any acquisition by the Company or Holdings of any assets or stock, other than acquisitions of assets in the ordinary course of business; (v) any divestiture of assets in excess of $500,000 by the Company or Holdings, other than sales of inventory in the ordinary course of business; (vi) any liquidation, dissolution or winding up, or any consent to a bankruptcy or insolvency or related proceeding involving, the Company or Holdings; (vii) the issuance or sale of any debt or equity securities for cash; (viii) any expansion into new lines of business; (ix) any joint venture or strategic alliance; (x) the repurchase or redemption of any outstanding shares of capital stock or the declaration or payment of any dividends on any shares of capital stock of the Company or Holdings; (xi) the amendment or modification of the certificate of incorporation or bylaws of the Company or Holdings; (xii) the amendment, modification or termination of any employment agreement with any executive officer of the Company or Holdings; (xiii) the grant of any stock options or other equity-based compensation; (xiv) the hiring or firing of any executive officer; (xv) any related party transactions; (xvi) any loans or guarantees by the Company or Holdings outside of the ordinary course of business; (xvii) any agreement having a duration in excess of one year or cumulative obligations in excess of $1 million; (xviii) the amendment, modification or termination of any agreement with any union; (xix) the approval or adoption, amendment, modification or termination of certain employee benefit plans; and (xx) any agreement to do any of the foregoing.
Restrictions on Transfer of Stock. Securities held by the Management Investors, including any shares of Common Stock or Redeemable Preferred Stock and any options to acquire shares of Common Stock, may only be sold or otherwise transferred with the consent of the Board of Directors of Holdings.
Tag-Along Rights. The Holdings Stockholders Agreement provides that in the event any Investor chooses to sell or otherwise transfer more than 20% of its shares of Common Stock or Redeemable Preferred Stock to a proposed transferee, the selling Investor must offer to each of the other Investors the right to participate in such sale on a pro rata basis based on ownership of the shares being sold.
Subscription Rights. With certain exceptions, the Holdings Stockholders Agreement provides each Investor with subscription rights in connection with any issuance of equity securities by Holdings for cash whereby each Investor shall have the right to purchase a pro rata portion of such equity securities.
Certain Covenants. The Holdings Stockholders Agreement requires Holdings to (i) provide certain financial and other information to the Investors concerning Holdings and its subsidiaries, (ii) comply with applicable law and (iii) maintain insurance.
Termination. The tag-along rights and subscription rights described above will terminate upon the completion of an initial public offering of Common Stock.
The Registration Rights Agreement
Holdings and the Investors entered into a Registration Rights Agreement, dated as of the Acquisition Closing and as amended (the "Registration Rights Agreement"). Pursuant to the Registration Rights Agreement, each of the Equity Sponsors has two demand registration rights for each of its Redeemable Preferred Stock and Common Stock. In addition, the Equity Sponsors have unlimited Form S-3 registration rights and unlimited piggyback rights. The Management Investors also have piggyback registration rights. All expenses related to these registrations (other than underwriting discounts and commissions) will be borne by Holdings. Holdings is required to use its best efforts to effect such registrations, subject to certain conditions and limitations. Holdings has agreed to indemnify the Investors for certain liabilities arising out of such registrations, including liabilities under the Securities Act.
Item 13:
Item 13: Certain Relationships and Related Transactions
In connection with the portion of the Equity Contribution to Holdings made by Mr. Nugent, the Company lent an aggregate of $250,000 to Mr. Nugent in exchange for full recourse note bearing interest at a floating rate, set semi-annually, at The Chase Manhattan Bank's then applicable prime rate, in effect for six month periods, plus 0.5%. The note matures on the fifth anniversary of the Acquisition Closing and is secured by a pledge in favor of the Company of all of the shares of Common Stock and Series A Preferred Stock owned by such Management Investor. Pursuant to the Separation Agreement, Mr. Nugent has agreed to transfer 2,475 shares of Series A Non-Voting Preferred Stock to the Company and to waive his right to payment therefore in accordance with the terms of his employment agreement, as payment in full and complete satisfaction of principal and interest accrued on this note and 2,475 shares of Series A Non-Voting Preferred Stock for a cash purchase price of $250,000.
On September 27, 1999, pursuant to a subscription agreement, each of Warburg and GEI purchased (i) 50,000 shares of Common Stock and Warrants to purchase 11,006.5 shares of Common Stock for a cash purchase price of $50,000 and (ii) 49.5 shares of Series B Preferred Stock for a cash purchase price of $4,950,000. The Warrants may be exercised (x) for a purchase price of $1 per share of Common Stock (subject to certain adjustments) and (y) only upon the failure of the Company to achieve certain financial targets for fiscal year 2000. The financial targets for fiscal year 2000 were not met. Therefore, the Warrants are exercisable. The Warrants expire on September 27, 2004.
All future transactions between the Company and its officers, directors, principal stockholders or their respective affiliates, will be on terms no less favorable to the Company than can be obtained from unaffiliated third parties.
PART IV
Item 14:
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements of the Company
(a)(2) Financial Statement Schedules
All schedules are omitted because the required information is either presented in the financial statements or notes thereto, or is not applicable, required or material.
2.1 Asset Purchase Agreement, dated as of November 24, 1997, as amended as of December 9, 1997 and January 15, 1998, by and among Borden Foods Corporation, BFC Investments, L.P., and the Company (Incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-4 of Eagle and Holdings filed on June 17, 1998 (the "S-4"))
3.1 Restated Certificate of Incorporation of Holdings (Incorporated by reference to Exhibit 3.1 of the S-4)
3.2 Amended Bylaws of Holdings (Incorporated by reference to Exhibit 3.1 of the Report on Form 10-Q, filed by Holdings and Eagle on May 14, 1999)
3.3 Restated Certificate of Incorporation, dated November 19, 1997 (Incorporated by reference to Exhibit 3.3 of the S-4)
3.4 Amended Bylaws of Eagle (Incorporated by reference to Exhibit 3.2 of the Report on Form 10-Q, filed by Holdings and Eagle on May 14, 1999)
3.5 Certificate of Designation, Number, Voting Powers, Preferences and Rights of Series B Non-Voting Preferred Stock of Eagle Family Foods Holdings, Inc. dated September 24, 1999 (Incorporated by reference to Exhibit 3.1 of the Report on Form 10-Q, filed by Holdings and Eagle on October 27, 1999)
4.1 Credit Agreement, dated January 23, 1998, by and among Holdings, Eagle, The Chase Manhattan Bank, Merrill Lynch Capital Corporation, Chase Securities, Inc., and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as amended by Amendment No. 1, dated August 12, 1998, as amended by Amendment No. 2, dated November 30, 1998, as amended by Amendment No. 3, dated June 30, 1999, as amended by Amendment No. 4 dated June 29, 2000, as amended by Amendment No. 5 dated January 26, 2001, and as amended by Amendment No. 6 dated August 10, 2001.
4.2 Purchase Agreement, dated January 16, 1998, by and among Holdings, Eagle, Chase Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (Incorporated by reference to Exhibit 4.1 of the S-4)
4.3 Indenture, dated January 23, 1998, among Holdings, Eagle and IBJ Schroder Bank & Trust Company (including Specimen Certificates of 8 3/4% Series Senior Subordinated Notes due 2008 and 8 3/4% Series B Senior Subordinated Notes due 2008) (Incorporated by reference to Exhibit 4.2 of the S-4)
4.4 Registration Rights Agreement, dated January 23, 1998, by and among Holdings, Eagle, Chase Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (Incorporated by reference to Exhibit 4.3 of the S-4)
4.5 Stockholders Agreement, dated as of January 23, 1998, by and among Holdings and certain stockholders of Holdings named therein (Incorporated by reference to Exhibit 4.5 of the S-4)
4.6 Exchange and Registration Rights Agreement, dated as of January 23, 1998, by and among Holdings and certain stockholders of Holdings named therein (Incorporated by reference to Exhibit 4.6 of the S-4)
4.7 Subscription Rights Agreement, dated as of January 23, 1998, by and among Holdings, GEI and Warburg (Incorporated by reference to Exhibit 4.7 of the S-4)
4.8 First Amendment to Registration Rights Agreement, dated September 27, 1999, by and among Holdings and certain investors named therein (Incorporated by reference to Exhibit 4.1 of the 10-Q, filed on October 27, 1999)
4.9 First Amendment to Stockholders Agreement, dated September 27, 1999, by and among Holdings and certain stockholders of Holdings named therein (Incorporated by reference to Exhibit 4.2 of the Report on Form 10-Q, filed by Holdings and Eagle on October 27, 1999)
4.10 Subscription Agreement, dated September 27, 1999, by and among Holdings, GE Investment Private Placement Partners, II, a Limited Partnership and Warburg, Pincus Ventures, L. P. (Incorporated by reference to Exhibit 4.3 of the Report on Form 10-Q, filed by Holdings and Eagle on October 27, 1999)
10.1 Employment Agreement, dated March 31, 2000, by and between Mark J. Greatrex and the Company
10.2 Employment Agreement, dated January 23, 1998, by and between Jonathan F. Rich and the Company (Incorporated by referance to Exhibit 10.1 of the Report on Form 10-K, filed by Holdings and Eagle on September 6, 2000)
10.3 Master Customer Services Agreement, dated as of January 23, 1998, by and between the Company and Borden Foods Corporation (Incorporated by reference to Exhibit 10.1 of the S-4)
10.4 License Agreement dated January 23, 1998 by and among BDH Two, Inc., Borden, Inc. and the Company (Incorporated by reference to Exhibit 10.2 of the S-4)
10.5 Assignment of Trademark License Agreement dated January 23, 1998, by and between BFC and the Company of BFC's License Agreement, dated as of September 4, 1997, by and between BFC and Southern Foods Group, L.P. (Incorporated by reference to Exhibit 10.3 of the S-4)
10.6 License Agreement, dated January 23, 1998, by and between BFC and the Company (Incorporated by reference to Exhibit 10.4 of the S-4)
10.7 The 1998 Stock Incentive Plan of Holdings (Incorporated by reference to Exhibit 10.5 of the S-4)
10.8 Employment Agreement, dated January 23 1998, by and between John O'C. Nugent and the Company (Incorporated by reference to Exhibit 10.6 of the S-4)
10.9 Employment Agreement, dated January 23, 1998, by and between Craig A. Steinke and the Company (Incorporated by reference to Exhibit 10.8 of the S-4)
10.10 Employment Agreement, dated January 23, 1998, by and between Richard A. Lumpp and the Company (Incorporated by reference to Exhibit 10.10 of the S-4)
10.11 Pledge Agreement, dated January 23, 1998, by and between John O'C. Nugent and the Company (Incorporated by reference to Exhibit 10.12 of the S-4)
10.12 Secured Recourse Promissory Note, dated January 23, 1998, from John O'C. Nugent to the Company (Incorporated by reference to Exhibit 10.14 of the S-4)
10.13 Amendment No. 1 to the Eagle Family Foods Holdings, Inc. 1998 Stock Incentive Plan, effective January 5, 2000 (Incorporated by reference to Exhibit 10.1 of the Report on Form 10-Q, filed by Holdings and Eagle on May 10, 2000)
12.1 Eagle Family Foods Holdings, Inc. Ratio of Earnings to Fixed Charges
12.2 Eagle Family Foods, Inc. Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K
A report on Form 8-K, dated August 13, 2001, was filed by the registrants disclosing (i) the execution of the Asset Purchase Agreement with Mott's Inc. and Cadbury Beverages Delaware, Inc. for the ReaLemon Sale and the press release related thereto and (ii) the appointment of David A. Barr to serve as a director on each of the Boards of Directors of the registrants and (iii) the appointment of Craig A. Steinke to serve as a director on each of the Boards of Directors of the registrants and as Chief Executive Officer and President of the registrants.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
Eagle Family Foods Holdings, Inc.
By: /S/ CRAIG A. STEINKE ---------------------------------- Craig A. Steinke President, Chief Executive Officer and Chief Financial Officer
Eagle Family Foods, Inc.
By: /s/ CRAIG A. STEINKE ---------------------------------- Craig A. Steinke President, Chief Executive Officer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in their capacities indicated.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Eagle Family Foods, Inc. and Eagle Family Foods Holdings, Inc.
In our opinion, the accompanying balance sheets and the related statements of operations and comprehensive loss, of cash flows and of stockholder's equity of Eagle Family Foods, Inc. and the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive loss, of cash flows and of stockholders' deficit of Eagle Family Foods Holdings, Inc. present fairly, in all material respects, the financial position of Eagle Family Foods, Inc. and Eagle Family Foods Holdings, Inc. at June 30, 2001 and July 1, 2000, and the results of their operations and their cash flows for the fifty-two week periods ended June 30, 2001 and July 1, 2000, and the fifty-three week period ended July 3, 1999, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Columbus, Ohio
August 13, 2001
EAGLE FAMILY FOODS, INC. Statements of Operations and Comprehensive Loss (Dollars in Thousands)
The accompanying notes are an integral part of the financial statements.
EAGLE FAMILY FOODS, INC. Balance Sheets (Dollars in Thousands Except Share Data)
The accompanying notes are an integral part of the financial statements.
EAGLE FAMILY FOODS, INC. Statements of Cash Flows (Dollars in Thousands)
The accompanying notes are an integral part of the financial statements.
EAGLE FAMILY FOODS, INC. Statements of Changes in Stockholder's Equity For the Fifty-Two Week Period Ended June 30, 2001, Fifty-Two Week Period Ended July 1, 2000, And Fifty-Three Week Period Ended July 3, 1999, (Dollars in Thousands)
The accompanying notes are an integral part of the financial statements.
EAGLE FAMILY FOODS HOLDINGS, INC. Consolidated Statements of Operations and Comprehensive Loss (Dollars in Thousands)
The accompanying notes are an integral part of the consolidated financial statements.
EAGLE FAMILY FOODS HOLDINGS, INC. Consolidated Balance Sheets (Dollars in Thousands Except Share Data)
The accompanying notes are an integral part of the consolidated financial statements.
EAGLE FAMILY FOODS HOLDINGS, INC. Consolidated Statements of Cash Flows (Dollars in Thousands)
The accompanying notes are an integral part of the consolidated financial statements.
EAGLE FAMILY FOODS HOLDINGS, INC. Consolidated Statements of Changes in Stockholders' Equity (Deficit) For the Fifty-Two Week Period Ended June 30, 2001, Fifty-Two Week Period Ended July 1, 2000, And Fifty-Three Week Period Ended July 3, 1999 (Dollars in Thousands)
The accompanying notes are an integral part of the consolidated financial statements.
EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements
1. Basis of Presentation:
The accompanying financial statements as of June 30, 2001 and July 1, 2000 and for the fifty-two week periods ended June 30, 2001 and July 1, 2000 and fifty-three week period ended July 3, 1999 present the financial position, results of operations and cash flows of Eagle Family Foods, Inc. ("Eagle" or the "Company") and the consolidated financial position, results of operations and cash flows of Eagle Family Foods Holdings, Inc. ("Holdings") and its wholly owned subsidiary, Eagle. Eagle and Holdings are collectively referred to as the "Company", unless the context indicates otherwise. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year's presentation. The Company's and Holdings' fiscal year end is the Saturday closest to June 30. Fiscal years are designated in the financial statements and notes by the calendar year in which the fiscal year ends.
Eagle was incorporated on November 14, 1997 and Holdings was incorporated on December 22, 1997. On December 30, 1997, Eagle issued 10,000 shares of common stock, par value $.01 per share, for $1,000 to Holdings. Holdings and Eagle did not realize any income or incur any expenses until commencement of operations on January 23, 1998. On January 23, 1998, Holdings received $82.5 million from GE Investment Private Placement Partners II ("GEI"), Warburg, Pincus Ventures, L.P. ("Warburg") and certain members of management in exchange for 825,000 shares of common stock and 816,750 shares of Series A preferred stock. On January 23, 1998, Eagle acquired certain assets of Borden Foods Corporation ("BFC") and certain of their affiliates for $376.8 million. Financing for the acquisition and related fees consisted of (i) $82.5 million equity contribution from Holdings, (ii) $115.0 million of 8.75% senior subordinated notes and (iii) senior secured credit facilities in the aggregate principal amount of $245.0 million, consisting of a $175.0 million term loan facility and a $70.0 million revolving credit facility, under which $16.5 million was drawn at the time of the acquisition closing.
The acquisition was reflected in the financial statements using the purchase method of accounting. The purchase price was allocated to the assets of Eagle on the basis of their fair values. The fair values of assets were determined based on independent appraisals and management estimates.
Eagle operates in a single segment which manufactures and markets a portfolio of leading dry-grocery food products with widely recognized and established brands in the United States. The Company also has limited sales and manufacturing in Canada. The Company's portfolio of products includes Eagle Brand sweetened condensed milk, ReaLemon and ReaLime lemon and lime juice from concentrate, None Such mincemeat pie filling, Cremora powdered non-dairy creamer, Kava acid-neutralized coffee and Borden eggnog.
2. Summary of Significant Accounting Policies:
Revenue Recognition
Revenues are recognized when title, ownership and risk of loss transfers to the customer. Liabilities are established for estimated returns, allowances, consumer and certain trade promotions and discounts when revenues are recognized. In the fourth quarter of fiscal year 2001, the Company changed its method of accounting for revenue, as clarified in the Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 101. The Company recorded a cumulative effect from this accounting change of $361,000, net of tax.
EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements - continued
Research and Development
Research and development costs are charged to general and administrative expense when incurred. Research and development costs amounted to $1,510,000, $1,718,000 and $2,208,000 for the periods ended June 30, 2001, July 1, 2000 and July 3, 1999.
Advertising and Promotion
Production costs of future media advertising and consumer promotion events are deferred until the advertising or promotion first occurs. All other advertising and promotion costs are expensed when incurred. Advertising and promotional expenses were $39,877,000, $49,002,000 and $59,953,000 for the periods ended June 30, 2001, July 1, 2000 and July 3, 1999, respectively.
Cash and Cash Equivalents
The Company considers all liquid investments purchased with an initial term to maturity of three months or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market, with cost of goods sold principally being determined using the first-in, first-out method.
Slotting Allowance
The costs of obtaining shelf space (slotting) are expensed over a period not to exceed twelve months.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and equipment is calculated for financial reporting purposes on a straight-line method using estimated service lives ranging principally from 8-20 years for buildings and improvements and 3-10 years for other property and equipment. When assets are sold, retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any related gain or loss is recorded in the statement of operations. Normal maintenance and repairs are expensed as incurred, while major renewals and betterments which extend service lives are capitalized.
Capitalized Software Development Costs
Certain external costs and internal payroll and payroll related costs incurred during the application development and implementation stages of a software project are capitalized and amortized on a straight-line basis over the useful life of the software. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred. At June 30, 2001 and July 1, 2000, capitalized software costs, net of accumulated amortization, amounted to $4,834,000 and $6,489,000, respectively.
Intangibles
Intangibles are stated at cost and are amortized on a straight-line basis over their estimated useful lives. Goodwill represents the excess of purchase price over fair value of identifiable assets and liabilities acquired.
EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements - continued
Impairment
Long-lived assets including goodwill are reviewed for impairment whenever events or changes indicate that full recoverability is questionable. Factors used in the valuation include, but are not limited to, management's plans for future operations, recent operating results and projected undiscounted cash flows.
Other Non-current Assets
Other non-current assets at June 30, 2001 and July 1, 2000 consisted primarily of net deferred financing costs amounting to approximately $7,447,000 and $8,157,000, respectively. Such costs are amortized over the term of the related debt using the interest method.
Start up Costs
Costs for start up activities are expensed as incurred.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires the use of the liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect in the years in which those temporary differences are expected to reverse. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results may differ from those estimates.
Foreign Currency Translation
All assets and liabilities of Canadian operations are translated into U.S. dollars using the rate at the end of the fiscal period. Income and expense items are translated at average exchange rates prevailing during the fiscal period. Foreign currency assets, liabilities, income and expenses were not significant to the Company's financial position or results of operations.
Fair Value of Financial Instruments
The carrying value of cash equivalents, accounts receivable, accounts payable and accrued expenses as stated on the balance sheets approximated their fair market values because of their short maturities. The fair value of the Company's debt is estimated based on the current rates offered to the Company for debt of the same remaining maturities. The fair value of the Company's derivatives is estimated based on dealer quotes for those instruments.
Hedging
The Company enters into financial derivative instruments to manage or reduce market risk for interest rates and to manage or reduce prices of the milk commodities. The Company accounts for such non-speculative hedging activity in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), as amended, which established accounting and reporting guidelines for derivative instruments and hedging
EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements - continued
activities. SFAS 133 requires that all derivative instruments be recognized as assets and liabilities in the financial statements at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation as a fair value hedge or a cash flow hedge.
Environmental Matters
The Company, like others in similar businesses, is subject to extensive Federal, state and local environmental laws and regulations. Although the Company's environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent regulations could require the Company to incur additional unforeseen environmental expenditures. Environmental remediation costs are accrued when environmental assessments and/or remedial efforts are probable and the cost or a reasonable range can be estimated. Environmental expenditures, which improve the condition of the property, are capitalized and amortized over their estimated useful life.
Recently Issued Accounting Statements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141"). SFAS 141 addresses financial accounting and reporting for business combinations. The statement requires all business combinations to be accounted for under the purchase method and establishes criteria for the separate recognition of intangible assets acquired in a business combination. The provisions of this pronouncement apply to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The Company is evaluating this pronouncement and has not yet determined its impact on future financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets at acquisition and for periods subsequent to acquisition. The Company is evaluating this pronouncement and has not yet determined its impact on future financial statements. The pronouncement will be adopted during the first quarter of the fiscal year ending June 28, 2003.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is evaluating the pronouncement and has not yet determined its impact on future financial statements. This pronouncement will be adopted during the fourth quarter of the fiscal year ending June 29, 2002.
In May 2000, the FASB Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-14, "Accounting for Certain Sales Incentives" ("Issue 00-14"). Issue 00-14 addresses the recognition, measurement, and income statement classification for sales incentives including point of sale coupons, rebates and free merchandise in connection with a single exchange transaction. Upon the adoption of Issue 00-14, the Company will reclassify coupon redemption costs from marketing expense to net sales, resulting in no impact to net income. The coupon redemption costs for the fifty-two week periods ended June 30, 2001 and July 1, 2000 were $3,397,000 and $5,314,000, respectively, and for the fifty-three week period ended July 3, 1999 were $7,751,000. The EITF deferred the effective date of Issue 00-14 to the quarter beginning after December 15, 2001. The Company will adopt the pronouncement during the third quarter of the fiscal year ending June 29, 2002.
In September 2000, the EITF issued EITF Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products" ("Issue 00-25"). Issue 00-25 addresses the income statement classification of certain considerations from a vendor to a retailer in connection with the retailer's purchase of the vendor's product. Such considerations include, but are not limited to slotting fees, cooperative advertising programs, and buy down programs. Upon the adoption of Issue 00-25, the Company will
EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements - continued
reclassify these expenses from marketing expense to net sales, resulting in no impact to net income. Issue 00-25 is effective for the quarter beginning after December 15, 2001. The Company will adopt the pronouncement during the third quarter of the fiscal year ending June 29, 2002.
3. Inventories:
Inventories are stated at lower of cost or market and at June 30, 2001 and July 1, 2000 consisted of the following (in thousands):
June 30, 2001 July 1, 2000 ------------- ------------ Finished goods.................. $ 34,033 $ 30,811 Raw material.................... 2,896 2,969 ------------- ------------
Total inventories...... $ 36,929 $ 33,780 ============= ============
4. Property and Equipment:
Property and equipment is recorded at cost and at June 30, 2001 and July 1, 2000 consisted of the following (in thousands):
5. Intangible Assets:
Intangible assets are amortized on a straight-line basis over their estimated useful lives and consisted of the following (in thousands):
EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements - continued
6. Debt:
Debt consisted of the following (in thousands):
Senior Credit Facilities
The Company is the borrower under a credit agreement, dated as of January 23, 1998, as amended (the "Senior Credit Facilities"), which consists of (i) a $60 million seven-year revolving credit facility (the "Revolving Credit Facility") and (ii) a $175 million eight-year term loan (the "Term Loan Facility"). The Senior Credit Facilities are guaranteed by Holdings and all future domestic subsidiaries of the Company.
The Senior Credit Facilities contain financial covenants, which requires the Company to meet certain financial tests including debt coverage, interest expense coverage and capital expenditure requirements. The Senior Credit Facilities also contain covenants including limitations on additional indebtedness, liens, asset sales, capital expenditures, sale and leaseback transactions, dividends, loans and investment, modification of material agreements, transactions with affiliates, acquisitions, mergers and consolidations and prepayment of subordinated indebtedness. The Senior Credit Facilities agreement provides that neither Holdings or Eagle will, nor will they permit any subsidiary of Eagle to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, as defined, except primarily (i) Holdings may declare and pay dividends with respect to its capital stock payable solely in additional shares of its capital stock (other than redeemable preferred stock) and (ii) subsidiaries of Eagle may declare and pay dividends ratable with respect to their capital stock. The Senior Credit Facilities agreement also requires the Company to pledge assets acquired after the acquisition closing, including stock of after-acquired or formed subsidiaries, to deliver guarantees by wholly owned domestic subsidiaries and to maintain insurance. The Senior Credit Facilities contain customary events of default, including certain changes of control of the Company.
The Company amended its Senior Credit Facilities pursuant to an amendment dated August 10, 2001 (the "Amendment") which will become effective as of the completion of the ReaLemon Sale. The Company received consent from the lenders for the ReaLemon Sale, and waived compliance with leverage ratio and consolidated cash interest expense coverage ratio financial covenants for periods commencing on and including September 29, 2001 and ending on and including December 28, 2002. The Amendment includes restrictions on the carrying balance of the Revolving Credit Facility for a period of thirty consecutive days commencing on and including December 1 of any year and ending on and including March 31 of the following year. The Amendment also sets forth minimum requirements for consolidated earnings before interest, income tax, depreciation and amortization.
The interest rate on the Term Loan Facility, as amended, is LIBOR plus 4.00%. The interest rate on the Revolving Credit Facility, as amended, is LIBOR plus 4.00% with the swingline loan portion bearing interest at Prime plus 3.00%.
The obligations of Eagle under the Senior Credit Facilities are collateralized by (i) 100% of the capital stock of the Company and each of its subsidiaries and (ii) a first priority collateral interest in substantially all assets and properties of the Company and its future domestic subsidiaries. The fair market value of the senior credit facilities at June 30, 2001 approximates the carrying value.
EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements - continued
Senior Subordinated Notes
The Company's senior subordinated notes (the "Notes") are due January 15, 2008 bearing interest of 8.75% per annum, payable on January 15 and July 15, commencing July 15, 1998. The fair market value of the Notes was approximately $66.1 million and $69.0 million at June 30, 2001 and July 1, 2000, respectively.
The Notes are unconditionally guaranteed by Holdings (the "Parent Guarantee") and by each future Domestic Subsidiary of the Company (each, a "Domestic Subsidiary Guarantee" and, collectively, the "Domestic Subsidiary Guarantees"). The Company currently has no domestic subsidiaries and therefore none which guarantee the Notes. The Parent Guarantee and the Domestic Subsidiary Guarantees are joint and several as well as full and unconditional. The Notes are unsecured and subordinated in right of payment to all existing and future senior indebtedness of the Company. The Notes include certain covenants including limitations on indebtedness, dividends and other payment restrictions affecting subsidiaries, subordinated liens, sale and leaseback transactions, sale or issuance of capital stock of subsidiaries, merger, consolidation or sale of assets, transactions with affiliates and layering debt. The indenture provides that the Company will not, and will not permit any of its subsidiaries, directly or indirectly, to declare or pay any dividend or make any distribution on or in respect of its capital stock except dividends or distributions payable solely in its capital stock (other than redeemable stock) and except dividends or distributions payable solely to the Company or any wholly-owned subsidiary of the Company. Furthermore, Holdings' ability to obtain funds from its subsidiaries is restricted by the Notes because (i) Holdings may not hold assets other than Company capital stock and other minimal assets related to the business of holding such stock and (ii) Holdings may not incur any additional liabilities other than in the ordinary course of business.
On April 16, 1998, the Company and Holdings filed a Registration Statement on Form S-4 to offer to exchange (the "Exchange Offer") up to $115 million of its 8.75% Series B Senior Subordinated Notes due 2008 (the "Exchange Notes") for up to $115 million of its outstanding Notes.
Upon consummation of the Exchange Offer, the terms of the Exchange Notes were substantially identical in all respects to the term of the Notes. The Exchange Notes are unconditionally guaranteed on a senior subordinated and unsecured basis by Holdings and all future Domestic Subsidiaries.
Annual principal payments for the next five fiscal years and thereafter consisted of the following (in thousands):
2002.................................................. $ 750 2003.................................................. 3,250 2004.................................................. 27,500 2005.................................................. 127,000 2006.................................................. 60,000 Thereafter............................................ 115,000 ---------- $ 333,500 ==========
7. Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires the use of the liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect in the years in which those temporary differences are expected to reverse. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements - continued
A comparative analysis of the Company's benefit for income taxes from earnings before income taxes and cumulative effect of accounting change consisted of the following (in thousands):
At June 30, 2001, the Company had $91.7 million of accumulated net operating losses for financial statement purposes and $92.0 million of accumulated net operating loss carryforwards for tax reporting purposes. The tax net operating losses expire, if unused, beginning in 2018. The Company believes that these carryforwards will be available to reduce future federal income tax liabilities and has recorded the benefit of these carryforwards as a non-current deferred tax asset. During the period ended July 1, 2000, the Company revised its previous estimates for state net operating loss carryforwards and recorded an accumulated tax benefit for state net operating loss carryforwards of $1.7 million. The Company's net operating loss carryforwards for foreign purposes are not material.
Reconciliation of the differences between income taxes computed at Federal statutory rates and the consolidated benefit for income taxes on earnings before income taxes and cumulative effect of accounting change are as follows (in thousands):
Deferred tax assets and liabilities consisted of the following (in thousands):
8. Supplemental Information
Other accrued liabilities consisted of the following (in thousands):
EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements - continued
9. Other Within Holdings' Stockholders' Deficit
Other within Holdings' Stockholders' Deficit consisted of the following (in thousands):
10. Redeemable Preferred Stock
On September 24, 1999, 99 shares of Series B Non-Voting Preferred Stock (the "Series B Preferred Stock") were issued by Holdings at a stated value of $100,000 per share (the "Series B Stated Value"), and on January 23, 1998, 816,750 shares of Series A Non-Voting Preferred Stock (the "Series A Preferred Stock" and together with the Series B Preferred Stock, the "Preferred Stock") were issued by Holdings at a stated value of $100 per share (the "Series A Stated Value", and together with the Series B Stated Value, the "Stated Value").
Together, the Preferred Stock ranks as to dividends and on liquidation on parity. The Preferred Stock provides for preferential cumulative dividends at the rate of 10% per share per annum of the Stated Value for each series of Preferred Stock. Dividends are payable as declared by the Holdings Board of Directors and shall be paid before any dividends shall be set apart for or paid upon the Common Stock of Holdings, par value $0.01 per share (the "Common Stock"). In the event of liquidation, dissolution or winding up, the holders of shares of Preferred Stock are entitled to be paid out of the assets of Holdings available for distribution to its stockholders before any payment is made to the holders of stock junior to the Preferred Stock. Holders of Preferred Stock are not entitled to vote on any matters presented to the stockholders of Holdings. However, the affirmative vote or written consent of the holders of at least two-thirds of the then outstanding shares of Preferred Stock is required to amend, alter or repeal the preferences, special rights or other powers of the Preferred Stock. The Preferred Stock is subject to mandatory redemption at a price per share equal to the Stated Value for each series of Preferred Stock plus all dividends accrued and unpaid thereon up (1) the closing of a public offering pursuant to an effective registration statement under the Securities Act of 1933, (2) the sale of all or substantially all of the assets of Holdings or the merger or consolidation of Holdings with or into any other corporation or other entity in which the holders of Holdings' outstanding shares before the merger or consolidation do not retain a majority of the voting power of the surviving corporation or other entity or (3) the acquisition by any person of shares of Common Stock representing a majority of the issued and outstanding shares of Common Stock then outstanding.
Cumulative accrued dividends totaled $34,343,000 and $22,707,000 at June 30, 2001 and July 1, 2000, respectively. They are classified with Redeemable Preferred Stock in the consolidated balance sheet of Holdings.
11. Stockholders and Registration Rights Agreements
The Stockholders Agreement, dated as of January 23, 1998, by and among Holdings and the stockholders named therein (the "Stockholders Agreement") and the Registration Rights Agreement, dated as of January 23, 1998, by and among Holdings and the investors named therein (the "Registration Rights Agreement") were each amended as of September 27, 1999, to reflect a Subscription Agreement with GEI and Warburg (as described in Note 12) for the offer and sale of a total of 99 shares of Series B Preferred Stock and a total of 100,000 shares of Common Stock with accompanying warrants to purchase a total of 22,013 shares of Common Stock (the "Warrants") . As a result of such amendments, all covenants and agreements set forth in the initial Stockholders Agreement and Registration Rights Agreement will apply to the newly issued Series B Preferred Stock, Common Stock and Common Stock issuable upon exercise of the Warrants.
EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements - continued
12. Stock Subscription Agreement
On September 27, 1999, GEI and Warburg subscribed to purchase a total of 99 shares of Series B Preferred Stock at $100,000 per share and a total of 100,000 shares of Common Stock at $1 per share with accompanying Warrants to purchase up to 22,013 additional shares of Common Stock. The Warrants may be exercised for a purchase price of $1 per share of Common Stock (subject to certain adjustments) and only upon failure of the Company to achieve certain financial targets for the fiscal year ended June 30, 2001. The Warrants would have automatically terminated if the Company had achieved certain financial targets for fiscal year ended June 30, 2001. The Company did not meet the financial targets for fiscal year ended June 30, 2001. Therefore, pursuant to the terms of the Warrants, the Warrants expire on September 27, 2004. Holdings received $10.0 million in exchange for these securities. In connection with the issuance of the securities, Holdings made a $10.0 million capital contribution to Eagle.
On January 23, 1998, GEI, Warburg, and several officers of Holdings subscribed to purchase a combined 816,750 shares of Series A Preferred Stock at $100 per share and 825,000 shares of Common Stock at $1 per share. Full payment for the stock was received from all but two of the officers, who subscribed to purchase an aggregate of 13,117.5 shares of Series A Preferred Stock and 13,250 shares of Common Stock. Notes aggregating $825,000 were received from the two officers as partial consideration for the subscription. These notes are collateralized by the shares issued. They have a stated interest rate of prime (as defined) plus 0.5%, with a maturity date of January 23, 2003. The notes have been assigned between Common and Preferred Stock in accordance with the management subscription agreements. Accordingly, notes related to Common Stock have been presented in the consolidated balance sheet as a reduction of Stockholders' Equity while notes related to the Preferred Stock have been presented as a reduction of Redeemable Preferred Stock.
During the third quarter of fiscal 1999, one officer, in partial satisfaction, made a $200,000 principal and interest payment. Upon resignation of said officer from various positions within Eagle and Holdings effective March 3, 2000, all remaining amounts were satisfied.
On April 10, 2000, in connection with said resignation above, Holdings purchased into treasury 3,438 shares of said officer's Series A Preferred Stock for a value of $423,000.
13. Derivative Instruments and Hedging Activities
The Company enters into derivative instruments to manage or reduce market risk for interest rates and commodity prices. The Company's strategy on utilizing derivative instruments has been to minimize earnings fluctuations caused by interest rate volatility associated with the Company's variable rate debt and commodity price volatility associated with purchases of milk, a key ingredient in the production of sweetened condensed milk. The derivative activities are authorized by the Company's Board of Directors and are executed and monitored by the Company's Chief Financial Officer. The Company limits the interest rate swap agreements to 50% of its outstanding debt and limits the hedging activity for milk to no greater than its annual sweetened condensed milk production.
Effective July 2, 2000, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 138, an amendment to SFAS No. 133, which established new accounting and reporting guidelines for derivative instruments and hedging activities. SFAS No. 133 and SFAS No. 138 are collectively referred to herein as "SFAS 133." SFAS 133 requires that all derivative instruments be recognized as assets and liabilities in the financial statements at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation as a fair value hedge or a cash flow hedge. Designation is established at the inception of a derivative, but redesignation is permitted. For derivatives designated as cash flow hedges, changes in fair value are recognized in other comprehensive income
EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements - continued
until the hedged item is recognized in earnings. Hedging effectiveness is measured at least quarterly based on the relative change in fair value between the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness, as defined by SFAS 133, is recognized immediately in earnings. Upon the Company's assessment of the derivatives and hedging activities as prescribed in SFAS 133, applicable financial derivative instruments include interest rate swap agreements and commodity future contracts and will be designated as cash flow hedges.
The estimated fair value of the interest rate swap agreements upon initial adoption of SFAS 133 was $2,003,000, and in accordance with the transition provisions of SFAS 133, the Company recorded a net of tax cumulative effect type adjustment of $1,262,000 in accumulated other comprehensive income to recognize at fair value the interest rate swap derivatives designated as cash flow hedging instruments, with the corresponding assets for the fair value of the interest rate swap agreements included in their respective classifications of other current assets and other non-current assets. On November 9, 2000, the Company sold its interest rate swap positions for fair market gains of $873,000. Pursuant to SFAS 133, the gains on the interest rate swap agreements will remain in other comprehensive income and be reclassified as interest expense over the original terms of the interest rate swap agreements. The interest income in other comprehensive income as of December 30, 2000 will be amortized through the period ending December 31, 2002.
As of June 30, 2001, the Company had purchased 370 milk futures contracts for various months through June 2002 at an aggregate value of $9,370,000. The fair market value of the contracts as of June 30, 2001 was $405,000.
The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking the hedging transactions. This process includes linking all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to forecasted transactions. An assessment is made at the hedging transaction's inception and on an ongoing basis to determine whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
When it is determined that a derivative is not highly effective or that it has ceased to be a highly effective hedge, the Company will discontinue hedge accounting prospectively. This will occur when (1) offsetting changes in the fair value or cash flows of the hedged items are no longer effective; (2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is redesignated as a hedged instrument, because it is unlikely that a forecasted transaction will occur; or (4) management determines that designation of the derivative as a hedged instrument is no longer appropriate. When hedge accounting is discontinued because an interest rate swap qualifying as a cash flow hedge is liquidated or sold prior to maturity, the gain or loss on the interest rate swap at the time of termination remains in accumulated other comprehensive income and is recognized as an adjustment to interest expense over the original contract term. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will continue to be carried on the balance sheet at its fair value, and gains and losses that were accumulated in other comprehensive income will be recognized immediately in earnings. In all other situations in which hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with changes in its fair value recognized in current period earnings.
EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements - continued
14. Commitments and Contingencies
Commitments. The Company has entered into long-term contracts for the purchase of certain raw materials. Minimum purchase commitments, at current prices, are approximately $13.1 million and $12.2 million at June 30, 2001 and July 1, 2000, respectively.
The Company leases buildings and equipment under various noncancellable lease agreements for periods of one to five years. The lease agreements generally provide that the Company pays taxes, insurance and maintenance expenses related to the leased assets. Rent expense for the periods ended June 30, 2001, July 1, 2000 and July 3, 1999, totaled $1,065,000, $888,000 and $693,000, respectively.
At June 30, 2001, future minimum lease payments were as follows (in thousands):
2002...................................... $ 859 2003...................................... 644 2004...................................... 360 2005...................................... 41 --------- Total minimum lease payments $ 1,904 =========
Employment Agreements. The Company has entered into employment agreements with certain key executives. Such agreements provide for annual salaries and bonuses and include non-compete and non-solicitation provisions.
15. Stock Options and Restricted Stock
On January 14, 1998, Holdings' Board of Directors adopted the 1998 Stock Incentive Plan (the "Plan"). The Plan provides for the granting of incentive stock options, non-qualified stock options, and restricted stock to officers, key employees, directors and consultants of the Company at the discretion of a committee of the Board of Directors. A total of 206,150 shares of common stock, as amended on January 5, 2000, may be awarded under the Plan, subject to certain adjustments reflecting changes in Holdings' capitalization.
Grants of options and the periods during which such options can be exercised, and grants of restricted stock and the periods during which such grants become unrestricted and vest are at the discretion of a committee. As of June 30, 2001, the committee has not granted any stock options.
The committee has granted and issued shares of restricted stock to Holdings' officers and other key employees. Holders of the restricted stock are not entitled to (i) receive dividends until such shares vest or (ii) vote their respective shares during the restricted period. The restricted stock vests in installments of 20% per year on each of the first five anniversaries of the issue date, provided that the recipient is employed by Holdings as of each such date. Additionally, the sale, transfer, pledge, exchange or disposal of restricted shares during the restricted period is not permitted except as otherwise allowed by the Holdings Stockholders Agreement.
EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements - continued
A summary of restricted stock transactions for the fiscal years 2000 and 2001 is as follows:
Unearned compensation is charged for the fair value of the restricted shares granted and issued in accordance with the Plan. The unearned compensation is shown as a reduction of stockholders' equity (deficit) in the accompanying Consolidated Balance Sheets of Holdings. Unearned compensation is amortized ratably over the restricted period.
16. Retirement Plan
The Company sponsors a defined contribution 401(k) retirement plan. Participation in this plan is available to all employees who have completed certain minimum service requirements. Company contributions to this plan are based on a percentage of employees' annual compensation. The costs of this plan were $675,000, $476,000 and $441,000 for the periods ended June 30, 2001, July 1, 2000 and July 3, 1999, respectively.
17. Other Information
The Company was advised by GEI and Warburg, Holdings' principal stockholders, that as of September 10, 2001, each owned $14,000,000 in aggregate principal amount of Notes.
EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements - continued
18. Quarterly Data
During the fourth quarter of 2001, the Company adopted SAB 101. The change was retroactively applied to the first three quarters of 2001. Summarized quarterly financial data follows (in thousands):
19. Subsequent Events
Effective July 15, 2001, Eagle's and Holdings' Board of Directors accepted the resignation of John O'C. Nugent Chief Executive Officer and President ("Executive"). The separation agreement, dated as of June 25, 2001, between the Company, GEI, Warburg and the Executive ("Separation Agreement") provides termination benefits in accordance with the Executive's employment agreement with the Company, dated January 23, 1998, as well as a cash payment of $25,000. The Separation Agreement provides for certain payments to the Executive upon the consummation,, of the sale of the Company or portions thereof. Pursuant to the Separation Agreement, the Executive has agreed to transfer 2,475 shares of Series A Non-Voting Preferred Stock to the Company as payment in full and complete satisfaction of principal and interest accrued on the Executive's Secured Recourse Promissory Note in favor of the Company dated January 23, 1998 and 2,475 shares of Series A Non-Voting Preferred Stock for a cash purchase price of $250,000.
On August 13, 2001 the Company entered into an Asset Purchase Agreement with Mott's Inc. and Cadbury Beverages Delaware, Inc. for the sale of ReaLemon and ReaLime brands and related assets for $128.4 million. This transaction is anticipated to be completed in September 2001.