Attached files
file | filename |
---|---|
8-K - FORM 8-K - TreeHouse Foods, Inc. | c56185e8vk.htm |
EX-23.1 - EX-23.1 - TreeHouse Foods, Inc. | c56185exv23w1.htm |
EX-99.2 - EX-99.2 - TreeHouse Foods, Inc. | c56185exv99w2.htm |
EX-99.3 - EX-99.3 - TreeHouse Foods, Inc. | c56185exv99w3.htm |
Exhibit 99.1
Financial Statements and Report of Independent Certified
Public Accountants
Sturm Foods, Inc.
March 31, 2009 and 2008
Contents
Page | ||
Report of Independent Certified Public Accountants |
3 | |
Balance Sheets |
4 | |
Statements of Income |
6 | |
Statements of Stockholders Deficit |
7 | |
Statements of Cash Flows |
8 | |
Notes to Financial Statements |
10 |
Report of Independent Certified Public Accountants
Board of Directors
Sturm Foods, Inc.
Sturm Foods, Inc.
We have audited the accompanying balance sheets of Sturm Foods, Inc. as of March 31, 2009
and 2008, and the related statements of income, stockholders deficit and cash flows for
the years then ended. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the
United States of America as established by the American Institute of Certified Public
Accountants. Those standards 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 consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Sturm Foods, Inc. as of March 31, 2009 and 2008,
and the results of its operations and its cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Appleton, Wisconsin
June 18, 2009
Appleton, Wisconsin
June 18, 2009
This
page intentionally left blank.
STURM
FOODS, INC.
BALANCE SHEETS
March 31,
BALANCE SHEETS
March 31,
2009 | 2008 | |||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 27,720,983 | $ | 23,821,854 | ||||
Accounts receivable, less allowance for
doubtful accounts, sales returns and cash discounts
of $658,033 and $593,750 at March 31, 2009 and 2008 |
36,773,465 | 30,062,428 | ||||||
Inventories |
43,915,526 | 33,087,566 | ||||||
Other current assets |
1,510,385 | 776,470 | ||||||
Deferred income taxes |
1,028,767 | 577,081 | ||||||
Total current assets |
110,949,126 | 88,325,399 | ||||||
PROPERTY, PLANT AND EQUIPMENT |
||||||||
Land |
1,422,643 | 1,422,643 | ||||||
Land improvements |
1,886,343 | 1,839,773 | ||||||
Buildings |
34,529,765 | 34,418,251 | ||||||
Machinery and equipment |
72,447,008 | 70,115,136 | ||||||
Office equipment |
3,660,515 | 2,698,598 | ||||||
Vehicles |
658,870 | 485,159 | ||||||
Equipment under capital leases |
389,988 | 280,207 | ||||||
Construction in progress |
3,693,978 | 1,119,142 | ||||||
118,689,110 | 112,378,909 | |||||||
Less accumulated depreciation |
(46,036,234 | ) | (37,634,691 | ) | ||||
Net property, plant and equipment |
72,652,876 | 74,744,218 | ||||||
OTHER ASSETS |
||||||||
Intangible assets |
12,490,402 | | ||||||
Deferred financing costs, net of accumulated amortization
of $2,643,728 and $1,423,546 at March 31, 2009 and 2008 |
6,058,697 | 7,278,879 | ||||||
$ | 202,151,101 | $ | 170,348,496 | |||||
The accompanying notes are an integral part of these statements.
4
2009 | 2008 | |||||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
CURRENT LIABILITIES |
||||||||
Current maturities of long-term debt |
$ | 3,900,000 | $ | 3,900,000 | ||||
Current maturities of capital lease
obligations |
77,998 | 48,029 | ||||||
Accounts payable |
25,971,377 | 18,939,384 | ||||||
Accrued profit sharing |
4,102,854 | 1,591,598 | ||||||
Accrued interest |
6,380,412 | 6,522,534 | ||||||
Accrued taxes |
1,381,127 | 2,101,350 | ||||||
Accrued salaries, vacation, bonus |
3,221,484 | 1,161,349 | ||||||
Accrued brokerage & customer promotions |
2,276,143 | 470,127 | ||||||
Other accrued expenses |
3,820,176 | 2,799,182 | ||||||
Total current liabilities |
51,131,571 | 37,533,553 | ||||||
ACCRUED POSTRETIREMENT HEALTH AND
BENEFIT OBLIGATION |
797,112 | 700,277 | ||||||
DEFERRED INCOME TAXES |
2,229,779 | 455,802 | ||||||
LONG-TERM DEBT, less current maturities |
528,300,000 | 532,200,000 | ||||||
CAPITAL LEASE OBLIGATIONS, less
current maturities |
265,127 | | ||||||
INTEREST RATE SWAP |
10,440,720 | 12,206,738 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
STOCKHOLDERS DEFICIT |
||||||||
Common stock |
1,842,428 | 1,841,868 | ||||||
Additional paid-in capital (APIC) |
18,220,154 | 17,250,385 | ||||||
Accumulated other comprehensive income |
263,832 | 256,715 | ||||||
Accumulated deficit |
(411,339,622 | ) | (432,096,842 | ) | ||||
(391,013,208 | ) | (412,747,874 | ) | |||||
$ | 202,151,101 | $ | 170,348,496 | |||||
5
STURM
FOODS, INC.
STATEMENTS OF INCOME
Years ended March 31,
STATEMENTS OF INCOME
Years ended March 31,
2009 | 2008 | |||||||
Net sales |
$ | 330,817,003 | $ | 295,305,593 | ||||
Cost of sales (includes $46,564 and
$24,887 of stock based compensation for
the years ended March 31, 2009 and 2008) |
231,070,429 | 202,754,186 | ||||||
Gross profit |
99,746,574 | 92,551,407 | ||||||
Operating expenses |
||||||||
General and administrative (includes
$918,165 and $73,453 of stock based
compensation for the years ended March
31,
2009 and 2008) |
17,484,725 | 14,520,224 | ||||||
Selling and marketing |
9,670,196 | 10,426,783 | ||||||
Transaction costs |
1,128,402 | 2,522,784 | ||||||
28,283,323 | 27,469,791 | |||||||
Operating income |
71,463,251 | 65,081,616 | ||||||
Other expense |
||||||||
Interest expense, net |
37,432,309 | 56,753,011 | ||||||
Amortization of deferred financing costs |
1,220,182 | 1,220,182 | ||||||
Other expense, net |
114,610 | 27,672 | ||||||
38,767,101 | 58,000,865 | |||||||
Income before provision for income taxes |
32,696,150 | 7,080,751 | ||||||
Provision for income taxes |
11,938,930 | 2,298,485 | ||||||
NET INCOME |
$ | 20,757,220 | $ | 4,782,266 | ||||
The accompanying notes are an integral part of these statements.
6
STURM FOODS, INC.
STATEMENTS OF STOCKHOLDERS DEFICIT
Years ended March 31, 2009 and 2008
STATEMENTS OF STOCKHOLDERS DEFICIT
Years ended March 31, 2009 and 2008
Common stock | Accumulated other | |||||||||||||||||||||||
Issued | comprehensive | Accumulated | ||||||||||||||||||||||
shares | Amount | APIC | income | deficit | Total | |||||||||||||||||||
Balance, April 1, 2007 |
184,186,702 | $ | 1,841,868 | $ | 16,977,969 | $ | | $ | (436,705,032 | ) | $ | (417,885,195 | ) | |||||||||||
Stock based compensation |
| | 98,340 | | | 98,340 | ||||||||||||||||||
Recapitalize equity accounts |
| | 174,076 | | (174,076 | ) | | |||||||||||||||||
Adjustments to initially
adopt SFAS 158 (net of tax
of $171,144) |
||||||||||||||||||||||||
Prior service credit |
| | | 53,556 | | 53,556 | ||||||||||||||||||
Net gains |
| | | 203,159 | | 203,159 | ||||||||||||||||||
Net income |
| | | | 4,782,266 | 4,782,266 | ||||||||||||||||||
Balance, March 31, 2008 |
184,186,702 | 1,841,868 | 17,250,385 | 256,715 | (432,096,842 | ) | (412,747,874 | ) | ||||||||||||||||
Stock based compensation |
| | 964,729 | | | 964,729 | ||||||||||||||||||
Exercise of stock options |
56,000 | 560 | 5,040 | | | 5,600 | ||||||||||||||||||
Net actuarial gains on
defined benefit plan (net
of tax of $4,744) |
| | | 7,117 | | 7,117 | ||||||||||||||||||
Net income |
| | | | 20,757,220 | 20,757,220 | ||||||||||||||||||
Balance, March 31, 2009 |
184,242,702 | $ | 1,842,428 | $ | 18,220,154 | $ | 263,832 | $ | (411,339,622 | ) | $ | (391,013,208 | ) | |||||||||||
The accompanying notes are an integral part of these statements.
7
STURM FOODS, INC.
STATEMENTS OF CASH FLOWS
Years ended March 31,
STATEMENTS OF CASH FLOWS
Years ended March 31,
2009 | 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 20,757,220 | $ | 4,782,266 | ||||
Adjustments to reconcile net income to net cash and cash
equivalents provided by operating activities: |
||||||||
Depreciation |
8,693,916 | 6,247,368 | ||||||
Amortization |
1,220,182 | 1,220,182 | ||||||
Interest rate swap |
(1,766,018 | ) | 12,441,492 | |||||
Stock based compensation |
964,729 | 98,340 | ||||||
Deferred income taxes |
1,322,291 | (3,515,211 | ) | |||||
Gain on sale of property, plant and equipment |
(570 | ) | | |||||
Change in operating assets and liabilities resulting in an increase
(decrease) of cash and cash equivalents, net of effects of acquisition |
||||||||
Accounts receivable |
(6,711,037 | ) | (6,203,811 | ) | ||||
Inventories |
(9,147,874 | ) | 2,291,434 | |||||
Other current assets |
(733,915 | ) | 315,335 | |||||
Income tax refund receivable |
| 219,000 | ||||||
Accrued postretirement health and benefit obligation |
103,952 | 34,801 | ||||||
Accounts payable |
7,031,993 | 8,543,645 | ||||||
Accrued profit sharing |
2,511,256 | (581,455 | ) | |||||
Accrued interest |
(142,122 | ) | (1,143,542 | ) | ||||
Other accrued expenses |
2,916,922 | (1,946,973 | ) | |||||
Net cash and cash equivalents provided by operating activities |
27,020,925 | 22,802,871 | ||||||
Cash flows from investing activities: |
||||||||
Purchase of property, plant and equipment |
(6,338,016 | ) | (21,444,345 | ) | ||||
Proceeds from sale of property, plant and equipment |
126,000 | | ||||||
Acquisition of McCanns |
(12,920,488 | ) | | |||||
Net cash and cash equivalents used in investing activities |
(19,132,504 | ) | (21,444,345 | ) |
8
STURM FOODS, INC.
STATEMENTS OF CASH FLOWS CONTINUED
Years ended March 31,
STATEMENTS OF CASH FLOWS CONTINUED
Years ended March 31,
2009 | 2008 | |||||||
Cash flows from financing activities: |
||||||||
Payments on long-term debt |
$ | (3,900,000 | ) | $ | (3,900,000 | ) | ||
Payments on capital lease obligations |
(94,892 | ) | (55,892 | ) | ||||
Proceeds from issuance of common stock |
5,600 | | ||||||
Net cash and cash equivalents used in
financing activities |
(3,989,292 | ) | (3,955,892 | ) | ||||
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS |
3,899,129 | (2,597,366 | ) | |||||
Cash and cash equivalents, beginning of year |
23,821,854 | 26,419,220 | ||||||
Cash and cash equivalents, end of year |
$ | 27,720,983 | $ | 23,821,854 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid
during the year for: |
||||||||
Interest |
$ | 39,585,019 | $ | 45,977,301 | ||||
Income taxes |
$ | 11,439,965 | $ | 3,592,287 |
Non-cash operating and financing activities:
During fiscal year 2009, the Company acquired machinery and equipment through a capital lease
payable of $389,988.
As discussed in Note F, the Company adopted SFAS 158 on March 31, 2008 and accordingly
decreased the long-term benefit obligation by $427,859 and increased deferred tax liabilities by
$171,144 and comprehensive income by $256,715.
The accompanying notes are an integral part of these statements.
9
STURM
FOODS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS
March 31, 2009 and 2008
NOTE A NATURE OF OPERATIONS
Sturm Foods, Inc. (the Company) is a processor and packager of store brand and branded sugar
and sugar free drink mixes, various hot cereal products, non-fat dry milk, hot cocoa mixes and
other dry products for distribution throughout the United States and Canada. The manufacturing
facilities and corporate office of the Company are located in Manawa, Wisconsin.
The Companys primary customers are large retail grocery and mass merchant stores. For the
years ended March 31, 2009 and 2008, the largest two customers totaled 52% and 57% of net sales. The
Companys top ten customers account for approximately 74% and 77% of the Companys net sales for
the years ended March 31, 2009 and 2008.
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1.
Basis of Presentation
These financial statements include the accounts of the Company prepared in accordance with
accounting principles generally accepted in the United States of America.
2.
Acquisition
In September 2008, the Company acquired the McCann Irish Oatmeal (McCann) product line for
$12,920,488, including acquisition costs of $481,802. The Company acquired McCanns to strengthen
the Companys oatmeal product offering. The acquisition was accounted for as a business combination
in accordance with Statement of Financial Accounting Standards (SFAS) No. 141 Business
Combinations. The purchase price was allocated as follows:
Inventory |
$ | 1,680,086 | ||
Tradename |
12,490,402 | |||
Commission settlement liability |
(1,250,000 | ) | ||
$ | 12,920,488 | |||
3.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
4.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original maturities of three
months or less at the date of acquisition. Cash equivalents are stated at cost which approximates
fair market value. The Company maintains its cash balances at one financial institution and is
secured by the Federal Deposit Insurance Corporation up to federally insured limits. The
Company has not experienced any losses in such accounts and believes it is not exposed to any
significant credit risk.
10
STURM
FOODS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
5.
Accounts Receivable
The majority of the Companys accounts receivable are due from regional and national retail
customers. Credit is extended based on an evaluation of customers financial conditions. The
allowance for doubtful accounts represents estimates of amounts considered uncollectible and is
determined on an account-by-account basis. Payments subsequently received on accounts written off
are credited to bad debt expense. Expense for such uncollectible amounts was $24,323 and $1,166 for
the years ended March 31, 2009 and 2008.
6.
Inventories
Inventories are stated at the lower of cost or market, with cost determined on the first-in,
first-out (FIFO) method. Inventory costs include material, labor and factory overhead. The
Company has recorded a reserve for obsolete and excess inventories.
Inventories consist of the following at March 31:
2009 | 2008 | |||||||
Raw materials |
$ | 8,338,518 | $ | 4,724,113 | ||||
Work-in-process |
10,241,055 | 8,246,873 | ||||||
Finished goods |
16,822,218 | 14,506,068 | ||||||
Packaging supplies |
9,545,228 | 6,563,200 | ||||||
44,947,019 | 34,040,254 | |||||||
Less inventory reserve |
(1,031,493 | ) | (952,688 | ) | ||||
$ | 43,915,526 | $ | 33,087,566 | |||||
7.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Maintenance and repair costs are charged to
expense as incurred. Improvements and betterments that substantially increase the value or extend
the useful life of the asset are capitalized at cost. The Company capitalizes interest expense
incurred on long-term construction type projects in accordance with SFAS No. 34 Capitalization of
Interest Costs. Interest capitalized approximated $68,000 and $368,000 for the years ended March
31, 2009 and 2008, respectively.
Depreciation of property, plant and equipment is calculated on a straight-line basis over the
assets estimated useful life. Accelerated methods are used for income tax purposes. The following
estimated lives are used in calculating depreciation:
Years | ||||
Land improvements |
15-20 | |||
Buildings |
15-40 | |||
Machinery and equipment
(includes equipment under
capital lease) |
5-15 | |||
Office equipment |
2-5 | |||
Vehicles |
3-7 |
11
STURM FOODS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
7. Property, Plant and Equipment continued
The Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment recognized is measured by the amount by which the
carrying amounts of the assets exceed their respective fair values.
8. Intangible Assets
The Company accounts for intangible assets in accordance with SFAS No. 142 Goodwill and Other
Intangible Assets (SFAS 142). Intangible assets, which are comprised of tradenames acquired in the
McCann acquisition, are considered indefinite-lived intangible assets and are not subject to
amortization. SFAS 142 requires that the indefinite-lived intangible assets be tested for
impairment at least annually, or more often if warranted by events and changes in circumstances
indicating that the carrying value may exceed its fair value, and written down to fair value if
impaired. The Company has determined that no impairment exists as of
March 31, 2009.
9. Fair Value of Financial Instruments
Cash and cash equivalents and accounts receivable are financial instruments with carrying values
that approximate fair value. Accounts payable, accrued liabilities, interest rate swap and
long-term debt are financial instruments with carrying values that approximate fair value. Interest
rates currently available for debt with similar terms and remaining maturities are used to estimate
fair value of existing debt.
10. Deferred Financing Costs
The Company capitalizes fees incurred in connection with securing long-term financing. Amortization
of deferred financing costs is provided using the straight-line method over the term of the related
debt agreement. Amortization expense for these financing costs for
the years ended March 31, 2009
and 2008 was $1,220,182.
Future
amortization of deferred financing costs at March 31, 2009 are as follows:
Year | Amount | |||
2010 |
$ | 1,220,182 | ||
2011 |
1,220,182 | |||
2012 |
1,220,182 | |||
2013 |
1,220,182 | |||
2014 |
1,177,969 | |||
$ | 6,058,697 | |||
12
STURM FOODS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
11. Accrued Promotion Expenses
Accrued promotion expenses represent discounts, allowances and volume bonuses awarded to customers
but not paid as of year end. These programs are most often based on sales volume measured in
dollars or pounds and are expensed when products are shipped. Managements best estimate of the
amounts earned which remain unpaid at March 31, 2009 and 2008 are $1,835,535 and $326,329, and are
included in other accrued expenses in the accompanying balance sheets. These estimates were based
upon all outstanding approved programs, sales volumes by customer during the applicable period and
estimated sales volumes for future periods covered by each program. Promotion related expense for
the years ended March 31, 2009 and 2008 was $8,050,504 and $8,748,302, respectively, and was
recorded as an offset to net sales.
12. Revenue Recognition
The Company recognizes revenue, net of sales incentives and including shipping charges billed
to customers, upon shipment to customers which is when risk of loss passes.
13. Classification of Shipping Costs
Shipping costs incurred by the Company are included within cost of sales on the statements of
income.
14. Advertising
The Company expenses advertising costs as the promotions occur. Advertising expense for the years
ended March 31, 2009 and 2008 was $2,079,877 and $4,872,372, respectively. These expenses were
classified within selling and marketing expense on the statements of income.
15. Research and Development Costs
The Company expenses research and development costs as they occur. Research and development expense
for the years ended March 31, 2009 and 2008 was $1,223,586 and $906,645, respectively. These
expenses were classified within general and administrative expense on the statements of income.
16. Income Taxes
Income taxes are accounted for in accordance with Financial Accounting Standards Board (FASB)
Statement No. 109, Accounting for lncome taxes, which required the use of the asset
and liability method. Under this method, deferred tax assets and liabilities are determined based
upon the differences between the financial reporting and the tax bases of assets and liabilities
and are measured using enacted tax rules and laws that are anticipated to be in effect when the
differences are expected to reverse. A valuation allowance is established when management
determines that it is more likely than not that all or a portion of a deferred tax asset will not
be realized
13
STURM FOODS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
16. Income Taxes continued
In July 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an lnterpretation of FASB Statement No. 109 (FIN 48).
FIN 48, which clarified SFAS 109, established the criterion that an individual tax position has to
meet for some or all of the benefits of that position to be recognized in the Companys financial
statements. In December 2008, the Financial Accounting Standards Board Issued FASB Staff Position
(FSP) FIN 48-3, Effective Date of FA SB Interpretation N0. 48 for Certain Nonpublic Enterprises.
FSP FIN 48-3 permits an entity within its scope to defer the effective date of FIN 48 to its annual
financial statements for fiscal years beginning after
December 15, 2008. The Company has elected to
defer the application of FIN 48 for the year ending March 31, 2009. The Company evaluates its
uncertain tax positions using the provisions of FASB Statement 5, Accounting for Contingencies.
Accordingly, a loss contingency is recognized when it is probable that a liability has been
incurred as of the date of the financial statements and the amount of the loss can be reasonably
estimated. The amount recognized is subject to estimate and management judgment with respect to the
likely outcome of each uncertain tax position. The amount that is ultimately sustained for an
individual uncertain tax position or for all uncertain tax positions in the aggregate could differ
from the amount recognized.
17. Stock Based Compensation
The Company accounts for stock based compensation under SFAS No. 123 (revised 2004),
Share-Based Payment (Statement 123(R)), which requires an entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the grant-date fair value
of the award.
18. Comprehensive Income
The Company reports comprehensive income which is defined as the change in equity from transactions
and other events from non-owner sources. Comprehensive income includes net income and net actuarial
gains on the post-retirement plan.
19. Fair Value Measurements
Effective
April 1, 2008, the Company implemented SFAS No. 157, Fair Value Measurements
(SFAS 157), which defines fair value, establishes a framework for its measurement, and expands
disclosures about fair value measurements. The adoption of SFAS 157 did not have an impact on the
measurement of the Companys financial assets and liabilities, but did result in additional
disclosures.
In 2007, the Financial Accounting Standards Board (FASB) issued FASB Staff Position FAS 157-2
(FSP 157-2), which provided a one year deferral for the implementation of SFAS 157 for
non-financial assets and liabilities measured at fair value that are recorded or disclosed on a
non-recurring basis. The Company elected to apply the FSP 157-2 deferral, and accordingly, will
not apply SFAS 157 to intangibles impairment testing, other long-lived assets, and non-financial
assets or liabilities measured at fair value in business acquisitions, until fiscal 2010. The
Company is still evaluating the financial statement impact of the implementation of SFAS 157 for
non-financial assets and liabilities.
14
STURM FOODS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
19. Fair Value Measurements continued
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability (i.e., exit price) in an orderly transaction between market participants at
the measurement date. SFAS 157 requires disclosures that categorize assets and liabilities
measured at fair value into one of three different levels depending
on the assumptions (i.e.,
inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while
Level 3 generally requires significant management judgment. Financial assets and liabilities are
classified in their entirety based on the lowest level of input significant to the fair value
measurement. The SFAS 157 fair value hierarchy is defined as follows:
Level 1 Valuations are based on unadjusted quoted prices in active markets for identical
assets or liabilities.
Level 2 Valuations are based on quoted prices for similar assets or liabilities in active
markets, or quoted prices in markets that are not active for which significant inputs are
observable, either directly or indirectly.
Level 3 Valuations are based on prices or valuation techniques that require inputs that are
both unobservable and significant to the overall fair value measurement. Inputs reflect
managements best estimate of what market participants would use in valuing the asset or
liability at the measurement date.
The Company does not have any Level 1 or 3 financial assets or liabilities. The interest rate swap
is a financial liability measured on a recurring basis and is recorded at fair market value using
Level 2 inputs as disclosed in Note E.
NOTE C LINE OF CREDIT
The Company has available a $20,000,000 revolving credit line with a consortium of financial
institutions. The line of credit bears interest at the Eurodollar Rate plus an Applicable Margin as
defined in the agreement and is due May 26, 2010. No amounts were outstanding under this
revolving credit line at March 31, 2009 and 2008.
15
STURM FOODS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTE D LONG-TERM DEBT
Long-term debt consists of the following at March 31:
2009 | 2008 | |||||||
Term loan, bearing interest at the Base Rate or the
Eurodollar Rate plus an Applicable Margin as defined in
the agreement (the Company has elected the Eurodollar
Rate option at March 31, 2009 and 2008 3.75% and
5.8125%, respectively) with quarterly principal payments of
$975,000 through January 31, 2014. |
$ | 382,200,000 | $ | 386,100,000 | ||||
Term loan, bearing interest at the Base Rate or the
Eurodollar Rate plus an Applicable Margin as defined in
the agreement (the Company has elected the Eurodollar
Rate option at March 31, 2009 and 2008 7.25% and
9.3125%, respectively) with one lump sum principal
payment due July 31, 2014. |
150,000,000 | 150,000,000 | ||||||
532,200,000 | 536,100,000 | |||||||
Less current maturities |
(3,900,000 | ) | (3,900,000 | ) | ||||
$ | 528,300,000 | $ | 532,200,000 | |||||
The term loans and line of credit are secured by substantially all assets of the Company. Among
other restrictions, the term loans contain certain covenants that provide for the maintenance of
minimum levels of interest expense coverage and maximum levels of total leverage and capital
expenditures. The Company is in compliance with these covenants at
March 31, 2009.
The future scheduled maturities of long-term debt are as follows:
Fiscal year | Amount | |||
2010 |
$ | 3,900,000 | ||
2011 |
3,900,000 | |||
2012 |
3,900,000 | |||
2013 |
3,900,000 | |||
2014 |
366,600,000 | |||
Thereafter |
150,000,000 | |||
$ | 532,200,000 | |||
16
STURM FOODS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTE E INTEREST RATE SWAP AGREEMENT
In January 2008, the Company entered into an interest rate swap agreement which fixes the
interest rates on a portion of the Companys borrowings under the floating rate term loans. The
Company did not designate the interest rate swap agreement as a hedge. As such changes in the
fair value of the interest rate swap agreement are recognized on the statements of income. The
Company has recorded a liability in the amount of $10,440,720 and $12,206,738 to reflect the
fair value of the interest rate swap at March 31, 2009 and 2008, respectively. As changes in the
fair value occur, interest expense will be adjusted. The change to interest expense recorded for
the years ended March 31, 2009 and 2008 due to the agreement was ($1,766,018) and $12,441,492,
respectively. Terms of the agreement are as follows:
Notional Amount
|
$530,000,000 | |||
Effective Date
|
October 31, 2007 | |||
Termination Date
|
October 31, 2009 | |||
Fixed Interest Rate
|
3.735% | |||
Floating Interest Rate
|
90-day LIBOR |
NOTE F POSTRETIREMENT HEALTH AND OTHER BENEFITS
The Company provides certain health care and life insurance benefits for eligible retirees.
These benefits are not funded, but are paid as incurred Eligibility for coverage is based on
certain years of service and retirement age qualifications. These benefits maybe subject to
deductibles, co-payment provisions and other limitations, and the Company has reserved the right
to modify these benefits. As of February 2000, the postretirement plan was frozen and no new
plan participants are allowed Benefit payments for the years ended
March 31, 2009 and 2008 were
$43,875 and $68,951.
In September 2006, the FASB issued SFAS No. 158 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88,106 and l32(R)
(SFAS 158). Part of SFAS 158 was effective for the fiscal year ending
March 31, 2008 for the
Company, and required the Company to recognize the funded status of the plan on the balance
sheet on a prospective basis from the effective date. The funded status of the plan is
determined as of the plans measurement date and represents the difference between the amount of
the obligations owed to participants under the plan and the fair value of the plans assets
dedicated to paying those obligations. To record the funded status of the plan, unrecognized
prior service costs and net actuarial gains or losses experienced by the plan will be recorded
as other comprehensive income or loss. The Company adopted the recognition and disclosure
provisions of SFAS 158 effective March 31, 2008.
Effective
for fiscal years ending after December 15, 2008, SFAS 158 also removes the
existing option to use a plan measurement date that is up to 90 days prior to the date of the
statement of financial position and will require the plan measurement date to coincide with the
Companys fiscal year end in 2009. The Company already uses a March 31 measurement date.
17
STURM FOODS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTE F POSTRETIREMENT HEALTH AND OTHER BENEFITS Continued
Postretirement obligations, expense, and funding status at March 31:
2009 | 2008 | |||||||
Accumulated postretirement health and benefit obligation |
$ | (797,112 | ) | $ | (700,277 | ) | ||
Plan assets, at fair value |
| | ||||||
Funded status |
(797,112 | ) | (700,277 | ) | ||||
Accrued postretirement health and benefit obligation |
$ | (797,112 | ) | $ | (700,277 | ) | ||
Postretirement expense |
$ | 103,952 | $ | 114,188 | ||||
The discount rate used in determining the accumulated postretirement health and benefit
obligation at March 31, 2009 and 2008 was 5.50%. The health care cost trend rate used in measuring
the accumulated postretirement health and benefit obligation was assumed to be 9.50% and 10% for
the years ending March 31, 2009 and 2008, and decreasing gradually to 5.50% over 9 years.
The following benefit payments are expected to be paid:
2010 |
$ | 44,000 | ||
2011 |
51,000 | |||
2012 |
52,000 | |||
2013 |
54,000 | |||
2014 |
60,000 | |||
2015-2019 |
318,000 | |||
$ | 579,000 | |||
NOTE G INCOME TAXES
The
provision for income taxes for the years ended March 31, 2009 and 2008 consists of the following
components:
2009 | 2008 | |||||||
Provision for income taxes: |
||||||||
Current |
||||||||
Federal |
$ | 9,366,709 | $ | 4,857,650 | ||||
State |
1,249,930 | 956,046 | ||||||
Deferred |
||||||||
Federal |
1,068,916 | (2,839,412 | ) | |||||
State |
253,375 | (675,799 | ) | |||||
Total provision for income taxes |
$ | 11,938,930 | $ | 2,298,485 | ||||
18
STURM FOODS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTE G INCOME TAXES Continued
The significant differences between the effective tax rate and the statutory tax rates are as
follows:
2009 | 2008 | |||||||
Statutory tax rates |
40.0 | % | 40.0 | % | ||||
State tax deduction |
(1.3 | ) | (4.9 | ) | ||||
Domestic production activities deduction |
(2.0 | ) | (5.0 | ) | ||||
Other |
(0.2 | ) | 2.3 | |||||
Effective tax rate |
36.5 | % | 32.4 | % | ||||
Deferred tax assets and liabilities arise as a result of temporary differences between financial
and income tax reporting. The components of the deferred tax assets and liabilities are as follows:
2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
Accounts receivable allowances |
$ | 263,213 | $ | 237,500 | ||||
Interest rate swap |
4,176,288 | 4,882,695 | ||||||
Post retirement benefits |
318,845 | 280,110 | ||||||
Stock options |
269,279 | | ||||||
UNICAP |
437,855 | 168,503 | ||||||
Inventory reserve |
412,597 | 381,075 | ||||||
Accrued compensation |
493,145 | 51,478 | ||||||
$ | 6,371,222 | $ | 6,001,361 | |||||
Deferred tax liabilities: |
||||||||
Fixed assets |
$ | (6,827,652 | ) | $ | (5,618,607 | ) | ||
Prepaid expense |
(578,043 | ) | (261,475 | ) | ||||
Intangible assets |
(166,539 | ) | | |||||
$ | (7,572,234 | ) | $ | (5,880,082 | ) | |||
Net deferred tax (liabilities) assets |
$ | (1,201,012 | ) | $ | 121,279 | |||
Balances as presented in the balance
sheet: |
||||||||
Current deferred tax asset |
$ | 1,028,767 | $ | 577,081 | ||||
Long-term deferred tax liability |
(2,229,779 | ) | (455,802 | ) | ||||
$ | (1,201,012 | ) | $ | 121,279 | ||||
19
STURM FOODS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTE H STOCKHOLDERS DEFICIT
On
May 26, 2005, the Company amended its Amended and Restated Articles of Incorporation. The
amendment authorized the issuance of 350,000,000 shares of common stock ($.01 par value) and
50,000,000 of preferred stock ($.01 par value).
As
of March 31, 2009 and 2008, 184,242,702 and 184,186,702 shares of common stock, respectively and 0
shares of preferred stock were issued and outstanding.
In November 2005, the stockholders of the Company entered into a 10-year Stockholders Agreement
that imposes certain restrictions and obligations on the stockholders with respect to their stock.
NOTE I STOCK COMPENSATION PLAN
On May 26, 2005, the Company created the Sturm Foods, Inc. 2005 Stock Option Plan (2005
Plan). Under terms of the 2005 Plan, the Company has reserved 16,952,201 shares for issuance to
certain individuals and key employees of the Company. In fiscal 2009, the 2005 Plan was amended to
increase shares available for issuance to 23,352,201. As of
March 31, 2009, 253,190 shares are
available for future option grants. According to the 2005 Plan, no options shall be granted at a
price less than the calculated fair market value of the Companys common stock at the date of grant
as determined by an independent appraisal. Unless dictated otherwise by a specific option
agreement, options vest in five equal annual installments and expire ten years from the date of
grant, or within ninety days after an employee ceases performing services for the Company.
The Company has adopted Statement 123 (revised 2004), Share-Based Payment (Statement 123(R)), which
requires an entity to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award.
Weighted | Weighted | |||||||||||
average | average | |||||||||||
Outstanding | exercise | remaining | ||||||||||
options | price | life (months) | ||||||||||
Outstanding at April 1, 2007 |
2,212,700 | $ | 0.12 | 109 | ||||||||
Granted |
250,000 | 1.34 | 120 | |||||||||
Exercised |
| | | |||||||||
Forfeited |
(336,200 | ) | 0.10 | | ||||||||
Outstanding at March 31, 2008 |
2,126,500 | 0.27 | 99 | |||||||||
Granted |
6,925,000 | 0.46 | 120 | |||||||||
Exercised |
(56,000 | ) | 0.10 | | ||||||||
Forfeited |
(90,750 | ) | 0.10 | | ||||||||
Outstanding at March 31, 2009 |
8,904,750 | $ | 0.44 | 109 | ||||||||
Vested or expected to vest at
March 31, 2009 |
8,904,750 | $ | 0.44 | 109 | ||||||||
Exercisable
at March 31, 2009 |
926,495 | $ | 0.17 | 86 |
20
STURM FOODS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTE I STOCK COMPENSATION PLAN Continued
The fair value of each Company option grant is estimated on the date of grant using the
Black-Scholes option pricing model and the following weighted-average assumptions in 2009 and
2008.
2009 | 2008 | |||||||
Expected term (years) |
6.5 | 6.5 | ||||||
Risk-free interest rate |
1.67% - 3.34 | % | 4.50 | % | ||||
Expected volatility |
36.53% - 43.46 | % | 26.88 | % | ||||
Dividend yield |
| |
Expected Term: The expected term represents the period during which the Companys stock-based
awards are expected to be outstanding. The Company estimated this amount based on historical
experience of similar awards, giving consideration to the contractual terms of the awards, vesting
requirements, and expectations of future employee behavior, including post-vesting terminations.
Risk-Free Interest Rate: The Company bases the risk-free interest rate on the implied yield
currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term.
Expected Volatility: The fair value of stock based payments made were valued using a volatility
factor based on the similar companies that are publicly traded.
Dividend Yield: The Company has not historically paid any dividends and does not expect to declare
or pay dividends in the future.
Estimated
Pre-vesting Forfeitures: When estimating forfeitures, the Company considers voluntary
termination behavior as well as future workforce reduction programs. Due to the
limited granting of the options, the Company believes no pre-vesting forfeitures will occur.
For the years ended March 31, 2009 and 2008, $964,729 and $98,340, respectively, was expensed
under the 2005 Plan. Expense to be recognized in future years under the 2005 Plan at March 31, 2009
is approximately $2,772,000.
NOTE J PROFIT SHARING PLAN
The Company has a defined contribution profit sharing plan for all employees who meet service
eligibility requirements. Company contributions are at the discretion of the Board of Directors and
are typically 15% of eligible employee compensation. The Companys expense for the years ended
March 31, 2009 and 2008 was $4,174,915 and $2,660,837, respectively. Employees can contribute
pre-tax 401(k) contributions from 1% to 80%, subject to certain limitations of their compensation,
beginning the first day of the quarter following completion of three months of service. In fiscal
2009, the profit sharing plan was amended to allow for contributions to take the form of cash or
Company stock.
21
STURM FOODS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTE K LEASES
The Company leases certain warehouse and manufacturing space and equipment under various operating
lease agreements through March 2012. Total operating lease expense for the years ended March
31, 2009 and 2008 was $536,773 and $633,590, respectively. Noncancelable future minimum lease
payments for operating leases as of March 31, 2009 are as follows:
Fiscal year | Amount | |||
2010 |
$ | 158,076 | ||
2011 |
144,400 | |||
2012 |
74,933 | |||
2013 |
| |||
$ | 377,409 | |||
In addition, the Company has long-term leases for certain equipment which are accounted for as
capital leases. A summary of assets under capital leases at
March 31, 2009 and 2008 is as follows:
2009 | 2008 | |||||||
Capital leases |
$ | 389,988 | $ | 280,207 | ||||
Less accumulated amortization |
(38,999 | ) | (232,178 | ) | ||||
$ | 350,989 | $ | 48,029 | |||||
The Company entered into new capital leases during fiscal 2009 and expire in September 2013.
Future
lease payments relating to the capital leases as of March 31, 2009 are as follows:
Fiscal year | Amount | |||
2010 |
$ | 82,289 | ||
2011 |
82,289 | |||
2012 |
82,289 | |||
2013 |
82,289 | |||
2014 |
34,287 | |||
Total minimum lease payments |
363,443 | |||
Less amount representing interest |
20,318 | |||
Present value of lease payments |
343,125 | |||
Less current portion |
(77,998 | ) | ||
$ | 265,127 | |||
22
STURM FOODS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTE L COMMITMENTS AND CONTINGENCIES
1. Litigation
The Company is the subject of various legal claims that arise from time to time in the ordinary
course of business. These claims may relate to the Companys operations, product liability,
workers compensation and employment matters. The Company is not aware of any litigation that
would materially impact the financial statements.
2. Self-Insurance
The Company maintains a stop-loss major medical insurance policy but is self-funded for the
coverage up to the stop-loss limit of $125,000 per individual per year.
3. Commodity Risk
In the ordinary course of business, the Company is exposed to commodity price risks relating
to the acquisition of raw materials and fuels. From time to time, the Company enters into short
term (1 year or less) supply contracts with vendors to reduce these risks. The Company is not aware
of any commodity positions that would materially impact the financial statements.
4. Property, Plant and Equipment
As
of March 31, 2009, the Company has outstanding commitments on purchases of property, plant and
equipment in the amount of approximately $2.4 million.
NOTE M RELATED PARTY TRANSACTIONS
On
May 26, 2005, the Company entered into a 12-year management agreement with a
stockholder whereby the stockholder provides representation to the Board of Directors of the
Company and various consulting services. A quarterly fee of $430,550 and $500,000 was charged to
the Company for the years ended March 31, 2009 and 2008, respectively and the Company expensed
$1,722,200 and $2,000,000 for the years ended March 31, 2009 and 2008, respectively under this
agreement. Beginning in fiscal 2010, the quarterly fee will increase to $479,575.
In February 2008, the Company entered into an agreement to use an aircraft owned by MEU Holdings.
The agreement calls for payments which are based on the usage of the aircraft ($3,600 per flight
hour plus variable operating expenses). MEU Holdings is owned by the former Chief Executive Officer
of the Company. For the years ended March 31, 2009 and 2008, the Company paid MEU Holdings $748,440
and $1,429,966, respectively. The agreement was terminated effective October 31, 2008.
23
STURM FOODS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTES TO FINANCIAL STATEMENTS CONTINUED
March 31, 2009 and 2008
NOTE N COMPREHENSIVE INCOME
Comprehensive income consisted of the following at March 31:
2009 | 2008 | |||||||
Net income |
$ | 20,757,220 | $ | 4,782,266 | ||||
Net actuarial gains on defined benefit plan,
net of tax |
7,117 | 256,715 | ||||||
Comprehensive income |
$ | 20,764,337 | $ | 5,038,981 | ||||
24