UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-Q Equivalent
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
BIRDS EYE FOODS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 16-0845824
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
90 Linden Oaks, PO Box 20670, Rochester, NY 14602-6070
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (585) 383-1850
AGRILINK FOODS, INC.
(Former name if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES____ NO_____
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES____ NO_____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. As of May 13, 2003.
Common Stock: 11,000
* This Form 10-Q Equivalent is only being filed pursuant to a requirement
contained in the indenture governing Birds Eye Foods, Inc.'s 11-7/8 Percent
Senior Subordinated Notes Due 2008.
Page 1 of 37
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Birds Eye Foods, Inc.
Consolidated Statements of Operations, Accumulated Earnings/(Deficit), and Comprehensive Income
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
--------------------------------
Three Months Ended Successor | Predecessor Predecessor
------------------------------ |
Successor | Predecessor August 19, 2002-|June 30, 2002- Nine Months Ended
March 29, 2003| March 30, 2002 March 29, 2003 |August 18,2002 March 30, 2002
--------------| -------------- --------------- |-------------- -----------------
| |
Net sales $ 220,536 | $ 240,697 $ 601,356 | $ 101,664 $ 774,471
Cost of sales (172,766) | (185,694) (457,412) | (78,116) (601,054)
--------- | ---------- ----------- | --------- ---------
Gross profit 47,770 | 55,003 143,944 | 23,548 173,417
Selling, administrative, and general expense (29,092) | (30,907) (80,241) | (15,434) (94,315)
Restructuring 0 | 0 0 | 0 (2,622)
Gain from pension curtailment 0 | 0 0 | 0 2,472
Income from Great Lakes Kraut Company, LLC 391 | 627 1,770 | 277 1,825
--------- | ---------- ----------- | --------- ---------
Operating income before dividing with Pro-Fac 19,069 | 24,723 65,473 | 8,391 80,777
Interest expense (12,651) | (15,657) (31,336) | (7,747) (50,683)
--------- | ---------- ----------- | --------- ---------
Pretax income from continuing operations and before | |
dividing with Pro-Fac 6,418 | 9,066 34,137 | 644 30,094
Pro-Fac share of income 0 | (3,798) 0 | 0 (12,860)
--------- | ---------- ----------- | -------- ---------
Pretax income from continuing operations 6,418 | 5,268 34,137 | 644 17,234
Tax provision (2,568) | (2,059) (13,654) | (264) (7,325)
--------- | ---------- ----------- | -------- ---------
Income before discontinued operations 3,850 | 3,209 20,483 | 380 9,909
Discontinued operations, net of a tax benefit (1) | (891) (1,572) | (295) (2,515)
--------- | ---------- ----------- | -------- ---------
Net income 3,849 | 2,318 18,911 | 85 7,394
| |
Accumulated earnings/(deficit) at beginning of period 15,062 | 9,147 0 | (126,623) 4,071
--------- | ---------- ----------- | --------- ---------
Accumulated earnings/(deficit) at end of period $ 18,911 | $ 11,465 $ 18,911 | $(126,538) $ 11,465
========= | =========== =========== | ========= =========
| |
Net income $ 3,849 | $ 2,318 $ 18,911 | $ 85 $ 7,394
Other comprehensive (loss)/income: | |
Unrealized gain/(loss) on hedging activity, | |
net of taxes 216 | (16) 149 | 0 $ (390)
--------- | ---------- ----------- | --------- ---------
Comprehensive income $ 4,065 | $ 2,302 $ 19,060 | $ 85 $ 7,004
========= | ========== =========== | ========= =========
Accumulated other comprehensive (loss)/income | |
at beginning of period $ (67) | $ (329) $ 0 | $ (367) $ 45
Unrealized gain/(loss) on hedging activity, | |
net of taxes 216 | (16) 149 | 0 (390)
--------- | ---------- ----------- | --------- ---------
Accumulated other comprehensive income/(loss) | |
at end of period $ 149 | $ (345) $ 149 | $ (367) $ (345)
========= | ========== =========== | ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
Birds Eye Foods, Inc.
Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
Successor | Predecessor
March 29, | June 29,
2003 | 2002
------------ | -----------
|
ASSETS |
|
Current assets: |
Cash and cash equivalents $ 76,385 | $ 14,686
Accounts receivable trade, net of allowances for doubtful accounts 67,773 | 68,419
Accounts receivable, other 2,967 | 7,581
Inventories, net 258,137 | 291,745
Current net investment in CoBank 3,285 | 3,347
Prepaid manufacturing expense 6,806 | 19,168
Prepaid expenses and other current assets 13,251 | 18,770
Assets held for sale 5,971 | 8,746
Due from Pro-Fac Cooperative, Inc. 0 | 11,730
Current deferred tax asset 11,372 | 2,923
---------- | ----------
Total current assets 445,947 | 447,115
Investment in CoBank 3,038 | 6,294
Investment in and advances to Great Lakes Kraut Company, LLC 0 | 14,586
Property, plant and equipment, net 216,188 | 285,834
Goodwill 27,944 | 56,210
Intangible assets, net 210,443 | 11,305
Other assets 30,820 | 22,160
Note receivable due from Pro-Fac Cooperative, Inc. 100 | 9,400
Non-current deferred tax asset 0 | 4,837
---------- | ----------
Total assets $ 934,480 | $ 857,741
========== | ==========
|
LIABILITIES AND SHAREHOLDER'S EQUITY |
Current liabilities: |
Current portion of obligations under capital leases $ 781 | $ 821
Current portion of long-term debt 6,521 | 14,916
Current portion of Termination and Transitional Services Agreements with |
Pro-Fac Cooperative, Inc. 9,339 | 0
Accounts payable 39,443 | 71,198
Income taxes payable 11,358 | 879
Accrued interest 10,928 | 6,255
Accrued employee compensation 7,442 | 8,000
Other accrued expenses 51,694 | 40,154
Growers payable due to Pro-Fac Cooperative, Inc. 11,424 | 0
---------- | ----------
Total current liabilities 148,930 | 142,223
Obligations under capital leases 2,141 | 2,528
Long-term debt 474,080 | 623,057
Long-term portion of Termination and Transitional Services Agreements with |
Pro-Fac Cooperative, Inc. 25,299 | 0
Other non-current liabilities 44,855 | 28,918
Non-current deferred tax liability 18,418 | 0
---------- | ----------
Total liabilities 713,723 | 796,726
---------- | ----------
Commitments and contingencies |
Shareholder's Equity: |
Common stock, par value $.01; 11,000 shares |
authorized, issued and outstanding 0 | 0
Additional paid-in capital 201,697 | 188,005
Accumulated earnings/(deficit) 18,911 | (126,623)
Accumulated other comprehensive income/(loss): |
Unrealized gain on hedging activity 149 | 206
Minimum pension liability adjustment 0 | (573)
---------- | ----------
Total shareholder's equity 220,757 | 61,015
---------- | ----------
Total liabilities and shareholder's equity $ 934,480 | $ 857,741
========== | ==========
The accompanying notes are an integral part of the consolidated financial
statements.
Birds Eye Foods, Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
Successor | Predecessor Predecessor
August 19, 2002 - | June 30, 2002 - Nine Months Ended
March 29, 2003 | August 18, 2002 March 30, 2002
---------------- | --------------- -----------------
Cash Flows From Operating Activities: |
Net income $ 18,911 | $ 85 $ 7,394
Adjustments to reconcile net income to net cash provided |
by/(used in operating activities- |
Depreciation 15,216 | 3,833 22,887
Amortization of certain intangible assets 718 | 144 862
Amortization of debt issue costs, amendment costs, |
debt discounts and premiums, and interest in-kind 7,421 | 1,201 5,098
Equity in undistributed earnings of Great Lakes Kraut |
Company, LLC (1,109) | (277) (1,067)
Transitional Services Agreement with Pro-Fac |
Cooperative, Inc. (323) | 0 0
Change in assets and liabilities: |
Accounts receivable 3,558 | 1,818 3,607
Inventories and prepaid manufacturing expense 72,256 | (33,170) (11,863)
Income taxes refundable/(payable) 10,554 | (75) 4,148
Accounts payable and other accrued expenses (18,404) | (10,972) (93,392)
Due to/(from) Pro-Fac Cooperative, Inc., net (12,733) | 8,649 1,747
Other assets and liabilities, net 2,774 | 909 741
---------- | -------- ---------
Net cash provided by/(used in) operating activities 98,839 | (27,855) (59,838)
---------- | -------- ---------
|
Cash Flows From Investing Activities: |
Purchase of property, plant and equipment (9,330) | (2,187) (10,537)
Proceeds from disposals 407 | 0 52
Repayments from/(advances to) Great Lakes Kraut Company, LLC 6,169 | (1,512) 1,784
Proceeds from investment in CoBank 2,203 | 1,115 3,998
Proceeds from Great Lakes Kraut Company, LLC Transaction 13,900 | 0 0
---------- | -------- ---------
Net cash provided by/(used in) investing activities 13,349 | (2,584) (4,703)
---------- | -------- ---------
|
Cash Flows From Financing Activities: |
Proceeds from issuance of long-term debt 270,000 | 0 0
Birds Eye Holdings, Inc. investment 175,597 | 0 0
Adjustment of Subordinated Promissory Note (25,000) | 0 0
Net (payments)/proceeds on prior revolving credit facility (22,000) | 22,000 75,400
Payments on long-term debt (401,799) | (292) (9,072)
Payments on Termination Agreement with Pro-Fac |
Cooperative, Inc. (8,000) | 0 0
Payments on capital lease (316) | (38) (111)
Cash paid for debt issuance costs (24,202) | 0 0
Cash paid for transaction fees (6,000) | 0 0
Cash paid in conjunction with debt amendment 0 | 0 (1,694)
---------- | -------- ---------
Net cash provided by/(used in) financing activities (41,720) | 21,670 64,523
---------- | -------- ---------
Net change in cash and cash equivalents 70,468 | (8,769) (18)
Cash and cash equivalents at beginning of period 5,917 | 14,686 7,656
---------- | -------- ---------
Cash and cash equivalents at end of period $ 76,385 | $ 5,917 $ 7,638
========== | ======== =========
|
Supplemental Schedule of Non-Cash Financing Activities: |
Birds Eye Holdings, Inc. investment $ 32,100 | $ 0 $ 0
========== | ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
BIRDS EYE FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING
POLICIES
The Company: Birds Eye Foods, Inc., formerly Agrilink Foods, Inc., (the
"Company" or "Birds Eye Foods"), incorporated in 1961, is a producer and
marketer of processed food products. The Company has four primary product lines
including: vegetables, fruits, snacks, and canned meals. The majority of each of
the product lines' net sales is within the United States. In addition, all of
the Company's operating facilities, excluding one in Mexico, are within the
United States.
The Change in Control (the "Transaction"): On August 19, 2002 (the "Closing
Date"), pursuant to the terms of the Unit Purchase Agreement dated as of June
20, 2002 (the "Unit Purchase Agreement"), by and among Pro-Fac Cooperative,
Inc., a New York agricultural cooperative ("Pro-Fac"), Birds Eye Foods, at the
time a New York corporation and a wholly-owned subsidiary of Pro-Fac and
Vestar/Agrilink Holdings LLC, a Delaware limited liability company
("Vestar/Agrilink Holdings"), Vestar/Agrilink Holdings and its affiliates
indirectly acquired control of the Company. See NOTE 2 to the "Notes to
Consolidated Financial Statements" for additional disclosures regarding the
Transaction.
The term "successor" refers to Birds Eye Foods and all of its subsidiaries
following the Transaction. The term "predecessor" refers to Birds Eye Foods
prior to the change in control on August 19, 2002.
Basis of Presentation: The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") for interim financial
information and with the requirements of Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information required by GAAP
for complete financial statement presentation. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations, and cash
flows have been included. Operating results for the period from June 30, 2002 to
August 18, 2002 or the period from August 19, 2002 through March 29, 2003 are
not necessarily the results to be expected for other interim periods or the full
year. These financial statements should be read in conjunction with the
financial statements and accompanying notes contained in the Company's Form 10-K
Equivalent for the fiscal year ended June 29, 2002.
Consolidation: The consolidated financial statements include the Company and its
wholly-owned subsidiaries after elimination of intercompany transactions and
balances. Investments in affiliates owned more than 20 percent but not in excess
of 50 percent are recorded under the equity method of accounting.
Reclassification: Certain items for fiscal 2002 have been reclassified to
conform with the current period presentation.
New Accounting Pronouncements: In August 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets." Effective June 30, 2002, Birds Eye Foods adopted SFAS No. 144 which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The statement requires an impairment loss be recognized if
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flow and that the impairment loss be recognized as the
difference between the carrying amount and fair value of the asset. Under SFAS
No. 144, assets held for sale that are a component of an entity will be included
in discontinued operations if the operations and cash flows will be or have been
eliminated from the ongoing operations of the entity, and the entity will not
have any significant continuing involvement in the operations prospectively. The
adoption of SFAS No. 144 did not impact the Company's profitability. See NOTE 3
to the "Notes to Consolidated Financial Statements" for additional disclosures
regarding discontinued operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supercedes
Emerging Issues Task Force ("EITF") Issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. EITF 94-3 requires a liability for
exit costs be recognized at the date of an entity's commitment to an exit plan.
The provisions of SFAS No. 146 must be adopted for exit or disposal activities
that are initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Others" ("FIN 45"). FIN 45 requires that a liability be recorded on the
guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45
requires disclosures about the guarantees that an entity has issued. The Company
will apply the recognition provisions of FIN 45 prospectively to guarantees
issued after December 31, 2002. The disclosure and recognition provisions of FIN
45 have been adopted in this report and did not have a material effect on its
consolidated financial statements.
See NOTE 10 to the "Notes to Consolidated Financial Statements" for additional
disclosures regarding FIN 45.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company does not expect FIN 46 to have a
material effect on its consolidated financial statements.
Trade Accounts Receivable: The Company accounts for trade receivables at
outstanding billed amounts, net of allowances for doubtful accounts. The Company
estimates its allowance for doubtful accounts as a percentage of receivables
overdue. Also included in the allowance in their entirety are those accounts
that have filed for bankruptcy, been sent to collections, and any other accounts
management believes are not collectible based on historical losses. The Company
periodically reviews the accounts included in the allowance to determine those
to be written off. Generally, after a period of one year, or through legal
counsel's advice, accounts are written off. It is not Company policy to accrue
or collect interest on past due accounts.
The Company's allowance for doubtful accounts is approximately $1.6 million at
March 29, 2003, and $0.7 million at June 29, 2002.
NOTE 2. THE TRANSACTION
On June 20, 2002, Pro-Fac Cooperative, Inc., a New York agricultural
cooperative, Birds Eye Foods, at the time a New York corporation and a
wholly-owned subsidiary of Pro-Fac and Vestar/Agrilink Holdings LLC, a Delaware
limited liability company, entered into a Unit Purchase Agreement. The
transactions contemplated in and consummated pursuant to the Unit Purchase
Agreement, are referred to herein collectively as the "Transaction." On August
19, 2002, pursuant to the Unit Purchase Agreement:
(i) Pro-Fac contributed to the capital of Agrilink Holdings LLC, a Delaware
limited liability company ("Holdings LLC"), all of the shares of Birds Eye
Foods' common stock owned by Pro-Fac, constituting 100 percent of the issued and
outstanding shares of Birds Eye Foods' capital stock, in consideration for Class
B common units of Holdings LLC, representing a 40.72 percent common equity
ownership; and
(ii) Vestar/Agrilink Holdings and certain co-investors (collectively, "Vestar")
contributed cash in the aggregate amount of $175.0 million to the capital of
Holdings LLC, in consideration for preferred units, Class A common units, and
warrants which were immediately exercised to acquire additional Class A common
units. After exercising the warrants, Vestar owns 56.24 percent of the common
equity of Holdings LLC. The co-investors are either under common control with,
or have delivered an unconditional voting proxy to, Vestar/Agrilink Holdings.
The Class A common units entitle the owner thereof - Vestar - to two votes for
each Class A common unit held. All other Holdings LLC common units entitle the
holder(s) thereof to one vote for each common unit held. Accordingly, Vestar has
a voting majority of all common units.
(iii) Immediately following Pro-Fac's contribution of its Birds Eye Foods common
stock to Holdings LLC, Holdings LLC contributed those shares valued at $32.1
million to Birds Eye Holdings Inc., formerly Agrilink Holdings Inc., ("Holdings
Inc."), a Delaware corporation and a direct, wholly-owned subsidiary of Holdings
LLC, and Birds Eye Foods became an indirect, wholly-owned subsidiary of Holdings
LLC.
(iv) As part of the Transaction, executive officers of Birds Eye Foods, and
certain other members of Birds Eye Foods' management, entered into subscription
agreements with Holdings LLC to acquire, with a combination of cash and
promissory notes issued to Holdings LLC, an aggregate of approximately $1.3
million of Class C common units and Class D common units of Holdings LLC,
representing approximately 3.04 percent of the common equity ownership. As of
March 29, 2003, an additional approximately $0.5 million of Class C common units
and Class D common units, representing less than 1 percent of the common equity
ownership, remained unissued. The foregoing individuals are also parties to the
Securityholders Agreement and the Limited Liability Agreement.
Prior to the Transaction, certain amounts owed by Pro-Fac to Birds Eye Foods
were forgiven. The amounts forgiven were approximately $36.5 million and
represented both borrowings for the working capital needs of Pro-Fac and a $9.4
million demand receivable.
The Transaction was accounted for under the purchase method of accounting in
accordance with SFAS No. 141, "Business Combinations." Under purchase
accounting, tangible and identifiable intangible assets acquired and liabilities
assumed will be recorded at their respective fair values. The valuations and
other studies which will provide the basis for such an allocation have not
progressed to a stage where there is sufficient information to make a final
allocation in the accompanying financial statements. Accordingly, the purchase
accounting adjustments made in the accompanying financial statements are
preliminary. Once a final allocation is determined, in accordance with
accounting principles generally accepted in the United States, any remaining
excess of the investment over identifiable net assets acquired will be adjusted
through goodwill.
Holdings Inc. has pushed down its purchase accounting to Birds Eye Foods. The
preliminary excess investment made by Holdings Inc. over the preliminary
estimates of the fair value of the identifiable assets and liabilities of the
Company as of the Closing Date was approximately $27.9 million and is reflected
as goodwill in the accompanying unaudited consolidated balance sheet as of March
29, 2003.
As of August 19, 2002, management has begun to assess and formulate a plan to
exit certain portions of its business. In connection with the Transaction,
management determined that initially approximately 171 employees will be
terminated and has announced the benefit arrangements to those employees. These
activities surround the Company's decision to exit the popcorn and applesauce
businesses and complete the relocation of its marketing function to Rochester,
New York. As a result, approximately $1.9 million in severance costs and other
related exit costs have been accrued for in purchase accounting in accordance
with Emerging Issues Task Force ("EITF") 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination." Approximately $0.7 million has
been liquidated as of March 29, 2003.
In February 2003, also in connection with the Transaction, the Company announced
that it would be closing and downsizing six vegetable processing facilities and
consolidating production over the next 4 to 15 months to create more efficient
facilities. The announcement was in furtherance of the final formulation of the
exit plan. The facilities impacted include those in Barker, New York;
Bridgeville, Delaware; Green Bay, Wisconsin; Oxnard, California; Uvalde, Texas
and the fresh production operation at Montezuma, Georgia. Subsequent to closure,
the Company intends to dispose of these properties. In connection with these
closings, 257 full time production employees have been notified of termination
and their benefit arrangements. Additional costs to complete the exit plan
include facility closure costs, lease penalties, and contractual cancellation
and termination fees. The following table reflects the amount recorded as a
liability for the exit plan to downsize six vegetable processing facilities as
well as costs recorded against the liability as of March 29, 2003:
Contractual Severance
Penalties and and
Other Costs Related Costs
-------------- -------------
Initial liability $ 6.2 $ 2.3
Utilization (0.8) 0.0
------ ------
Balance at March 29, 2003 $ 5.4 $ 2.3
====== ======
Management has not yet completed the exit plan, and as a result, the outline of
the exit plan is considered preliminary. Accordingly, upon completion and
execution of the plan, certain assets may be sold or impaired and certain
liabilities may be incurred which could result in additional adjustments to the
values assigned to such items in purchase accounting. Management anticipates the
final formulation of the plan will be completed within the next three months.
The following unaudited pro forma financial information presents a summary of
consolidated results of operations of the Company as if the Transaction had
occurred at the beginning of the periods presented.
(Dollars in Thousands)
Predecessor Predecessor Predecessor
June 30, 2002 - Three Months Ended Nine Months Ended
August 18, 2002 March 30, 2002 March 30, 2002
---------------- ------------------ ------------------
Net Sales $ 101,664 $ 240,697 $ 774,471
Income before discontinued operations 778 8,534 25,765
Net Income 483 7,643 23,250
These unaudited pro forma results have been prepared for comparative purposes
only and primarily include adjustments for interest expense, taxes,
depreciation, the fair values of operating leases, income from the Transitional
Services Agreement with Pro-Fac and the elimination of the historical share of
income or loss that has been recorded. Included in pro forma net income for the
nine months ended March 30, 2002 are items of approximately $2.6 million related
to restructuring expense and a $2.5 million gain from pension curtailment. These
results do not purport to be indicative of the results of operations which
actually would have resulted had the Transaction occurred at the beginning of
the 2002 fiscal year, or of the future operations of the successor company.
NOTE 3. DISCONTINUED OPERATIONS
As of August 19, 2002, the Company committed to a plan to sell the popcorn and
applesauce operations previously reported in the snack and fruit segments,
respectively, and completed these transactions in the third quarter of fiscal
2003. The implementation of SFAS No. 144 resulted in the classification and
separate financial presentation of those businesses as discontinued operations
and their operations are, therefore, excluded from continuing operations. All
prior periods have been reclassified to reflect the discontinuance of these
operations.
In addition, having met the criteria outlined in SFAS No. 144, the Company
reclassified certain assets relating to the popcorn and applesauce businesses to
assets held for sale, and, in accordance with SFAS No. 144, the Company
reclassified the prior period balances. Also, included in assets held for sale
are facilities located in Alamo, Texas; Enumclaw, Washington; Sodus, Michigan;
Hortonville, Wisconsin; and Alton, New York which are being actively marketed
for sale within the fiscal year.
The major classes of discontinued assets included in the Consolidated Balance
Sheets as assets held for sale at net realizable value are as follows:
Successor Predecessor
(Dollars in Thousands) March 29, 2003 June 29, 2002
-------------- -------------
Inventories $ 221 $ 2,570
Property, plant and equipment, net 5,750 6,176
--------- --------
Total $ 5,971 $ 8,746
========= ========
The operating results of those businesses identified as held for sale have been
classified as discontinued operations in the accompanying financial statements
and are summarized as follows:
Nine Months Ended
Three Months Ended ------------------------------------
-------------------------------- Successor Predecessor Predecessor
Successor Predecessor August 19, 2002 - June 30, 2002 - Nine Months Ended
March 29, 2003 March 30, 2002 March 29, 2003 August 18, 2002 March 30, 2002
-------------- -------------- ---------------- ---------------- -----------------
Net Sales $ 2,716 $ 4,189 $ 8,333 $ 2,063 $ 14,196
======= ======= ======== ======= ========
Loss before income taxes $ (2) $(1,461) $ (2,620) $ (500) $ (4,374)
Income tax benefit 1 570 1,048 205 1,859
------- ------- -------- ------- --------
Discontinued operations,
net of a tax benefit $ (1) $ (891) $ (1,572) $ (295) $ (2,515)
======= ======= ======== ======= ========
NOTE 4. GREAT LAKES KRAUT COMPANY, LLC TRANSACTION
Birds Eye Foods owned a 50 percent interest in Great Lakes Kraut Company, LLC
("GLK") and reached an agreement with Flanagan Brothers, Inc. ("Flanagan
Brothers") to effect a transfer of the operating business of GLK to a
newly-formed subsidiary of Flanagan Brothers the other 50 percent owner of GLK,
pursuant to certain "buy-sell" provisions of the limited liability company
agreement of GLK (the "GLK Transaction"). In the GLK Transaction, a newly-formed
subsidiary of Birds Eye Foods, GLK Holdings, Inc., invested $11.1 million in
GLK, which was used to reduce the debt of GLK. Flanagan Brothers exchanged its
interest in GLK in return for a transfer to a newly-formed subsidiary of
Flanagan Brothers of all of the operating assets of GLK and the assumption of
all liabilities relating to the business of GLK. At the closing, GLK repaid $5.2
million to Birds Eye Foods for certain working capital loans made to GLK by
Birds Eye Foods. After the GLK Transaction, Birds Eye Foods and GLK Holdings
Inc. own 100 percent of GLK which has been renamed GLK, LLC and will continue to
own the subordinated promissory note of Birds Eye Foods and certain operating
assets or subsidiaries of Birds Eye Foods to be transferred. The GLK Transaction
closed effective March 2, 2003. As a result of the GLK Transaction, the
Subordinated Promissory Note of Birds Eye Foods, the Company's investment in
GLK, and all working capital advances to GLK were eliminated.
NOTE 5. AGREEMENTS WITH PRO-FAC
In connection with the Transaction, Birds Eye Foods and Pro-Fac entered into
several agreements effective as of the Closing Date, including the following:
(i) Termination Agreement. Pro-Fac and Birds Eye Foods entered into a letter
agreement dated as of the Closing Date (the "Termination Agreement"), pursuant
to which, among other things, the marketing and facilitation agreement between
Pro-Fac and Birds Eye Foods (the "Old Marketing and Facilitation Agreement")
which, until the Closing Date, governed the crop supply and purchase
relationship between Birds Eye Foods and Pro-Fac, has been terminated. In
consideration of such termination, Birds Eye Foods will pay Pro-Fac a
termination fee of $10.0 million per year for five years, provided that certain
ongoing conditions are met, including maintaining grower membership levels
sufficient to generate certain minimum crop supply. The $10.0 million payment
will be paid in quarterly installments as follows: $4.0 million on each July 1,
and $2.0 million each on October 1, January 1, and April 1. The Termination
Agreement outlined that the first payment in the amount of $4.0 million was to
be paid on the Closing Date and the next payment to be made by October 1, 2002
and quarterly thereafter as outlined. The liability for the Termination
Agreement has been reflected at fair value utilizing a discount rate of 11 1/2
percent. The amount of the obligation under the Termination Agreement was $33.9
million as of March 29, 2003.
(ii) Amended and Restated Marketing and Facilitation Agreement. Pro-Fac and
Birds Eye Foods entered into an amended and restated marketing and facilitation
agreement dated as of the Closing Date (the "Amended and Restated Marketing and
Facilitation Agreement"). The Amended and Restated Marketing and Facilitation
Agreement replaces the Old Marketing and Facilitation Agreement and provides
that, among other things, Pro-Fac will be Birds Eye Foods' preferred supplier of
crops. Birds Eye Foods will continue to pay the commercial market value ("CMV")
of crops supplied by Pro-Fac, in installments corresponding to the dates of
payment by Pro-Fac to its members for crops delivered. CMV is defined as the
weighted average price paid by other commercial processors for similar crops
sold under preseason contracts and in the open market in the same or competing
market areas. The processes for determining CMV under the Amended and Restated
Marketing and Facilitation Agreement are substantially the same as the processes
used under the Old Marketing and Facilitation Agreement. Birds Eye Foods will
make payments to Pro-Fac of an estimated CMV for a particular crop year, subject
to adjustments to reflect the actual CMV following the end of such year.
Commodity committees of Pro-Fac will meet with Birds Eye Foods management to
establish CMV guidelines, review calculations, and report to a joint CMV
committee of Pro-Fac and Birds Eye Foods. Amounts paid by Birds Eye Foods to
Pro-Fac for the CMV of crops supplied for the nine months ended March 29, 2003
and March 30, 2002 were $56.1 million and $70.1 million, respectively.
Unlike the Old Marketing and Facilitation Agreement, the Amended and Restated
Marketing and Facilitation Agreement does not permit Birds Eye Foods to offset
its losses from products supplied by Pro-Fac or require it to share with Pro-Fac
its profits and it does not require Pro-Fac to reinvest in Birds Eye Foods any
part of Pro-Fac's patronage income. Under the Old Marketing and Facilitation
Agreement, in any year in which the Company had earnings on products which were
processed from crops supplied by Pro-Fac, the Company paid to Pro-Fac, as
additional patronage income, 90 percent of such earnings, but in no case more
than 50 percent of all pretax earnings of the Company (before dividing with
Pro-Fac). In years in which the Company had losses on crops supplied by Pro-Fac,
the Company reduced the CMV it would otherwise pay to Pro-Fac by 90 percent of
such losses, but in no case by more than 50 percent of all pretax losses of the
Company (before dividing with Pro-Fac). Additional patronage income was paid to
Pro-Fac for services provided to Birds Eye Foods, including the provision of a
long term, stable crop supply, favorable payment terms for crops, and the
sharing of risks of losses of certain operations of the business. Earnings and
losses were determined at the end of the fiscal year, but were accrued on an
estimated basis during the year. For the three and nine months ended March 30,
2002, Pro-Fac's share of income was $3.8 million and $12.9 million,
respectively.
The Amended and Restated Marketing and Facilitation Agreement also provides that
Birds Eye Foods will continue to provide to Pro-Fac services relating to
planning, consulting, sourcing and harvesting crops from Pro-Fac members in a
manner consistent with past practices. In addition, for a period of five years
from the Closing Date, Birds Eye Foods may provide Pro-Fac with services related
to the expansion of the market for the agricultural products of Pro-Fac members
(at no cost to Pro-Fac other than reimbursement of Birds Eye Foods' incremental
and out-of-pocket expenses related to providing such services as agreed to by
Pro-Fac and Birds Eye Foods).
Under the Amended and Restated Marketing and Facilitation Agreement, Birds Eye
Foods determines the amount of crops which Birds Eye Foods will acquire from
Pro-Fac for each crop year. If the amount to be purchased by Birds Eye Foods
during a particular crop year does not meet (i) a defined crop amount and (ii) a
defined target percentage of Birds Eye's needs for each particular crop, then
certain shortfall payments are made by Birds Eye Foods to Pro-Fac. The defined
crop amounts and targeted percentages are set based upon the needs of Birds Eye
Foods in the 2001 crop year (fiscal 2002). The shortfall payment provisions of
the agreement include a maximum shortfall payment, determined for each crop,
that can be paid over the term of the Amended and Restated Marketing and
Facilitation Agreement. The aggregate shortfall payment amounts for all crops
covered under the agreement cannot exceed $20.0 million over the term of the
agreement.
The Amended and Restated Marketing and Facilitation Agreement may be terminated
by Birds Eye Foods in connection with certain change in control transactions
affecting Birds Eye Foods or Holdings Inc.; provided, however, that in the event
that any such change in control occurs during the first three years after the
Closing Date, Birds Eye Foods must pay to Pro-Fac a termination fee of $20.0
million (less the total amount of any shortfall payments previously paid to
Pro-Fac under the Amended and Restated Marketing and Facilitation Agreement).
Also, if, during the first three years after the Closing Date, Birds Eye Foods
sells one or more portions of its business, and if the purchaser does not
continue to purchase the crops previously purchased by Birds Eye Foods with
respect to the transferred business, then such failure will be taken into
consideration when determining if Birds Eye Foods is required to make any
shortfall payments to Pro-Fac. After such three-year period, Birds Eye Foods may
sell portions of its business and the volumes of crop purchases previously made
by Birds Eye Foods with respect to such transferred business will be disregarded
for purposes of determining shortfall payments.
(iii) Transitional Services Agreement. Pro-Fac and Birds Eye Foods entered into
a transitional services agreement (the "Transitional Services Agreement") dated
as of the Closing Date, pursuant to which Birds Eye Foods will provide Pro-Fac
certain administrative and other services for a period of 24 months from the
Closing Date. Birds Eye Foods will generally provide such services at no charge
to Pro-Fac, other than reimbursement of the incremental and out-of-pocket costs
associated with performing those services for Pro-Fac. The value of the services
to be provided to Pro-Fac has been estimated at approximately $1.1 million. The
amount of the obligation outstanding under the Transitional Services Agreement
as of March 29, 2003 was $0.7 million. This obligation will be reduced on a
straight-line basis over the term of the agreement and as services are provided.
Also pursuant to the Transitional Services Agreement, the general manager of
Pro-Fac may also be an employee of Birds Eye Foods, in which case he will report
to the chief executive officer of Birds Eye Foods with respect to his duties for
Birds Eye Foods, and to the Pro-Fac board of directors with respect to duties
performed by him for Pro-Fac. All other individuals performing services under
the Transitional Services Agreement report only to the chief executive officer
(or other representatives) of Birds Eye Foods.
(iv) Credit Agreement. Birds Eye Foods and Pro-Fac have entered into a Credit
Agreement, dated August 19, 2002 (the "Credit Agreement"), pursuant to which
Birds Eye Foods has agreed to make available to Pro-Fac loans in an aggregate
principal amount of up to $5.0 million (the "Credit Facility"). Pro-Fac is
permitted to draw down up to $1.0 million per year under the Credit Facility,
unless Birds Eye Foods is prohibited from making such advances under the terms
of certain third party indebtedness of Birds Eye Foods. The amount of the Credit
Facility will be reduced, on a dollar-for-dollar basis, to the extent of certain
distributions made by Holdings LLC to Pro-Fac in respect of its ownership in
Holdings LLC. Pro-Fac has pledged all of its Class B Common Units in Holdings
LLC as security for advances under the Credit Facility. The Credit Facility
bears interest at the rate of 10 percent per annum. As of March 29, 2003, there
was $0.1 million outstanding under this Credit Agreement.
In addition, prior to the Transaction, certain amounts totaling $36.5 million
owed by Pro-Fac to Birds Eye Foods were forgiven, including both borrowings for
the working capital needs of Pro-Fac and a $9.4 million demand receivable.
NOTE 6. INVENTORIES
The major classes of inventories are as follows:
(Dollars in Thousands)
Successor Predecessor
March 29, June 29,
2003 2002
---------- -----------
Finished goods $ 236,836 $ 264,770
Raw materials and supplies 21,301 26,975
---------- ----------
Total inventories $ 258,137 $ 291,745
========== ==========
NOTE 7. ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 requires that goodwill not be amortized, but instead be
tested at least annually for impairment and expensed against earnings when its
implied fair value is less than its carrying amount.
As of March 29, 2003 the amounts assigned to goodwill and intangibles are
preliminary as not all valuations, exit plans, and other studies, which will
provide the basis for the allocation of fair value to assets and liabilities
have progressed to a stage where there is sufficient information to make a final
allocation in the accompanying financial statements. In addition, the amount
assigned to goodwill has not yet been allocated to the Company's operating
segments due to the preliminary nature of this information.
As outlined in SFAS No. 142, certain intangibles with a finite life, however,
are required to continue to be amortized. These intangibles are being amortized
on a straight-line basis over approximately 1 to 14 years. The following
schedule sets forth the major classes of intangible assets held by the Company:
(Dollars in Thousands)
Successor Predecessor
March 29, June 29,
2003 2002
--------- ----------
Amortized intangibles:
Covenants not to compete $ 754 $ 2,478
Other 10,406 12,000
Less: accumulated amortization (717) (3,173)
-------- --------
Amortized intangibles, net 10,443 11,305
Unamortized intangibles:
Trademarks 200,000 0
-------- --------
Total intangible assets, net $210,443 $ 11,305
======== ========
The aggregate amortization expense associated with intangible assets was
approximately $0.3 million for the successor period for the three months ended
March 29, 2003, and $0.7 million for the successor period August 19, 2002
through March 29, 2003. The aggregate amortization expense was $0.1 million for
the predecessor period June 30, 2002 through August 18, 2002, and $0.3 million
and $0.9 million for the predecessor three months and nine months ended March
30, 2002, respectively. The aggregate amortization expense for each of the five
succeeding fiscal years is estimated as follows:
(Dollars in Thousands)
Aggregate
Annual
Fiscal Amortization
Year Expense
- ------ ------------
2004 $ 915
2005 891
2006 891
2007 760
2008 752
NOTE 8. DEBT
Summary of Long-Term Debt:
(Dollars in Thousands)
Successor Predecessor
March 29, June 29,
2003 2002
----------- ------------
Revolving Credit Facility $ 0 $ 0
Term Loan Facility 269,325 400,800
Senior Subordinated Notes 207,431 200,015
Subordinated Promissory Note (net of discount) 0 32,696
Other 3,845 4,462
---------- ---------
Total debt 480,601 637,973
Less current portion (6,521) (14,916)
---------- ---------
Total long-term debt $ 474,080 $ 623,057
========== =========
Bank Debt: In connection with the Transaction, Birds Eye Foods and certain of
its subsidiaries entered into a senior secured credit facility (the "Senior
Credit Facility") in the amount of $470.0 million with a syndicate of banks and
other lenders arranged by JPMorgan Chase Bank ("JPMorgan Chase Bank"), as
administrative and collateral agent. The Senior Credit Facility is comprised of
(i) a $200.0 million senior secured revolving credit facility (the "Revolving
Credit Facility") and (ii) a $270.0 million senior secured B term loan (the
"Term Loan Facility"). The Revolving Credit Facility has a maturity of five
years and allows up to $40.0 million to be available in the form of letters of
credit. The Term Loan Facility has a maturity of six years.
The Senior Credit Facility bears interest at the Company's option, at a base
rate or LIBOR plus, in each case, an applicable percentage. The appropriate
applicable percentage corresponds to the Company's Consolidated Leverage Ratio,
as defined by the senior credit agreement (the "Senior Credit Agreement"), and
is adjusted quarterly based on the calculation of the Consolidated Leverage
Ratio. As of March 29, 2003, the Senior Credit Facility bears interest in the
case of base rate loans at the base rate plus (i) 1.25 percent for loans under
the Revolving Credit Facility, and (ii) 1.75 percent for loans under the Term
Loan Facility or in the case of LIBOR loans at LIBOR plus (i) 2.25 percent for
loans under the Revolving Credit Facility and (ii) 2.75 percent for loans under
the Term Loan Facility. The initial unused commitment fee is 0.375 percent on
the daily average unused commitment under the Revolving Credit Facility and
varies based on the Company's Consolidated Leverage Ratio, as defined.
Commencing December 31, 2002, the Term Loan Facility requires payments in equal
quarterly installments in the amount of $675,000 until its final maturity in
August 2008 upon which the balance will be due. The Term Loan Facility is also
subject to mandatory prepayments under various scenarios as defined in the
Senior Credit Agreement. Provisions of the Senior Credit Agreement require that
annual payments, within 105 days after the end of each fiscal year, in the
amount of "excess cash flow" be utilized to prepay the commitment at an
applicable percentage that corresponds to the Company's Consolidated Leverage
Ratio.
The Senior Credit Facility contains customary covenants and restrictions on the
Company's activities, including but not limited to: (i) limitations on the
incurrence of indebtedness; (ii) limitations on sale-leaseback transactions,
liens, investments, loans, advances, guarantees, acquisitions, asset sales, and
certain hedging agreements; and (iii) limitations on transactions with
affiliates and other distributions. The Senior Credit Facility also contains
financial covenants which provide for a maximum average debt to EBITDA ratio, a
maximum average senior debt to EBITDA ratio, and a minimum EBITDA to interest
expense ratio. The Company is in compliance with all covenants, restrictions,
and requirements under the terms of the Senior Credit Facility. The proceeds of
the Term Loan Facility and borrowings under the Revolving Credit Facility,
together with Vestar's $175.0 million investment, were used to repay and
terminate Birds Eye Foods' indebtedness under its senior credit facilities with
Harris Trust and Savings Bank and the lenders thereunder, to consummate the
Transaction, and to pay related fees and expenses incurred in the Transaction.
Senior Subordinated Notes: Birds Eye Foods has outstanding $200.0 million of
11-7/8 percent Senior Subordinated Notes (the "Notes"), due 2008. In connection
with the Transaction, the Company recorded the Notes at estimated fair value,
$208.2 million. The $8.2 million premium is being amortized against interest
expense over the life of the Notes.
Subordinated Promissory Note: The Subordinated Promissory Note balance at June
29, 2002 represents debt to GLK, originally a joint venture between the Company
and Flanagan Brothers. Birds Eye Foods owned a 50 percent interest in GLK and
reached an agreement with Flanagan Brothers to effect a transfer of the
operating business of GLK to a newly-formed subsidiary of Flanagan Brothers, the
other 50 percent owner of GLK, pursuant to certain "buy-sell" provisions of the
limited liability company agreement of GLK. In the GLK Transaction, a
newly-formed subsidiary of Birds Eye Foods, GLK Holdings, Inc., invested $11.1
million in GLK, which was used to reduce the debt of GLK. Flanagan Brothers
exchanged its interest in GLK in return for a transfer to a newly formed
subsidiary of Flanagan Brothers of all of the operating assets of GLK and the
assumption of all liabilities relating to the business of GLK. At the closing,
GLK repaid $5.2 million to Birds Eye Foods for certain working capital loans
made to GLK by Birds Eye Foods. After the GLK Transaction, Birds Eye Foods and
GLK Holdings Inc. own 100 percent of GLK, which has been renamed GLK, LLC and
will continue to own the Subordinated Promissory Note of Birds Eye Foods and
certain operating assets or subsidiaries of Birds Eye Foods to be transferred.
The GLK Transaction closed effective March 2, 2003. As a result of the GLK
Transaction, the Subordinated Promissory Note, the Company's investment in GLK
and all working capital advances to GLK were eliminated.
NOTE 9. OPERATING SEGMENTS
The Company is organized by product line for management reporting. The
Company's four primary operating segments are as follows: vegetables, fruits,
snacks, and canned meals.
The vegetable product line consists of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable
category include Birds Eye, Birds Eye Voila!, Birds Eye Simply Grillin', Birds
Eye Hearty Spoonfuls, Veg-All, Freshlike, McKenzies, and Brooks Chili Beans. The
fruit product line consists of canned and frozen fruits including fruit fillings
and toppings. Branded products within the fruit category include Comstock and
Wilderness. The snack product line consists of potato chips and other corn-based
snack items. Branded products within the snack category include Tim's Cascade
Chips, Snyder of Berlin, Husman, La Restaurante, Erin's, and Flavor
Destinations. The canned meal product line includes canned meat products such as
chilies, stew, soups, and various other ready-to-eat prepared meals. Branded
products within the canned meal category include Nalley. The Company's other
product lines primarily represent salad dressings. Branded products within the
other category include Bernstein's and Nalley.
The following table illustrates the Company's operating segment information:
(Dollars in Millions)
Nine Months Ended
Three Months Ended ---------------------------------
------------------------------- Successor Predecessor Predecessor
Successor Predecessor August 19, 2002- June 30, 2002- Nine Months Ended
March 29, 2003 March 30, 2002 March 29, 2003 August 18, 2002 March 30, 2002
-------------- -------------- ----------------- --------------- -----------------
Net Sales:
Vegetables $ 162.2 $ 180.8 $ 435.5 $ 69.5 $ 568.1
Fruits 18.3 19.5 67.3 12.2 83.6
Snacks 19.0 18.5 47.8 10.6 58.1
Canned Meals 13.1 12.7 31.9 4.5 37.0
Other 7.9 9.2 18.9 4.9 27.6
-------- -------- --------- -------- --------
Total continuing segments $ 220.5 $ 240.7 $ 601.4 $ 101.7 $ 774.4
======== ======== ========= ======== ========
Operating income:
Vegetables $ 12.2 $ 16.8 $ 35.1 $ 3.8 $ 48.9
Fruits 3.8 3.4 20.0 2.4 17.1
Snacks 1.5 1.7 5.6 1.5 6.9
Canned Meals 0.7 1.6 2.6 0.3 5.5
Other 0.9 1.2 2.1 0.4 2.5
Corporate charges* 0.0 0.0 0.0 0.0 (2.7)
-------- -------- --------- -------- --------
Operating income before nonrecurring items 19.1 24.7 65.4 8.4 78.2
Gain from pension curtailment 0.0 0.0 0.0 0.0 2.5
-------- -------- --------- -------- --------
Operating income before dividing with Pro-Fac 19.1 24.7 65.4 8.4 80.7
Interest expense (12.7) (15.7) (31.3) (7.8) (50.7)
-------- -------- --------- -------- --------
Pretax income from continuing operations
and before dividing with Pro-Fac $ 6.4 $ 9.0 $ 34.1 $ 0.6 $ 30.0
======== ======== ========= ======== ========
* Corporate charges represent restructuring expenses which are not allocated
to individual segments. See NOTE 11 to the "Notes to Consolidated Financial
Statements."
NOTE 10. GUARANTEES AND INDEMNIFICATIONS
In certain instances when Birds Eye Foods sells businesses or assets, the
Company may retain certain liabilities for known exposures and provide
indemnification to the buyer with respect to future claims for certain unknown
liabilities existing, or arising from events occurring, prior to the sale date,
including liabilities for taxes, legal matters, environmental exposures, labor
contingencies, product liability, and other obligations. The terms of the
indemnifications vary in duration, from one to three years for certain types of
indemnities, to terms for tax indemnifications that are generally aligned to the
applicable statute of limitations for the jurisdiction in which the tax is
imposed, and to terms for certain liabilities (i.e., warranties of title and
environmental liabilities) that typically do not expire. The maximum potential
future payments that the Company could be required to make under these
indemnifications are either contractually limited to a specified amount or
unlimited. The maximum potential future payments that the Company could be
required to make under these indemnifications are not determinable at this time,
as any future payments would be dependent on the type and extent of the related
claims, and all relevant defenses, which are not estimable. Historically, costs
incurred to resolve claims related to these indemnifications have not been
material to the Company's financial position, results of operations or cash
flows.
The Company enters into agreements with indemnification provisions in the
ordinary course of business with its customers, suppliers, service providers and
business partners. In such instances, the Company usually indemnifies, holds
harmless and agrees to reimburse the indemnified party for claims, actions,
liabilities, losses and expenses in connection with any Birds Eye Foods
infringement of third party intellectual property or proprietary rights, or when
applicable, in connection with any personal injuries or property damage
resulting from any Birds Eye Foods' products sold or services provided.
Additionally, the Company may from time to time agree to indemnify and hold
harmless its providers of services from claims, actions, liabilities, losses and
expenses relating to their services to Birds Eye Foods, except to the extent
finally determined to have resulted from the fault of the provider of services
relating to such services. The level of conduct constituting fault of the
service provider will vary from agreement to agreement and may include conduct
which is defined in terms of negligence, gross negligence, willful misconduct,
omissions or other culpable behavior. The term of these indemnification
provisions are generally not limited. The maximum potential future payments that
the Company could be required to make under these indemnification provisions are
unlimited. The maximum potential future payments that the Company could be
required to make under these indemnification provisions are not determinable at
this time, as any future payments would be dependent on the type and extent of
the related claims, and all relevant defenses to the claims, which are not
estimable. Historically, costs incurred to resolve claims related to these
indemnification provisions have not been material to the Company's financial
position, results of operations or cash flows.
The Company has by-laws, policies, and agreements under which it indemnifies its
directors and officers from liability for certain events or occurrences while
the directors or officers are, or were, serving at Birds Eye Foods' request in
such capacities. Furthermore, the Company is incorporated in the state of
Delaware, which requires corporations to indemnify their officers and directors
under certain circumstances. The term of the indemnification period is for the
director's or officer's lifetime. The maximum potential amount of future
payments that the Company could be required to make under these indemnification
provisions is unlimited, but would be affected by all relevant defenses to the
claims.
Birds Eye Foods entered into an agreement to provide a guarantee in September
1995 on behalf of the City of Montezuma to renovate a sewage treatment plant
operated in Montezuma, Georgia. Birds Eye Foods issued a guarantee of the loan
in an original amount of approximately $3.3 million including interest. The
guarantee expires in 2015 and requires payment upon the occurrence of a
shortfall in third-party revenue from the utilization of the sewage treatment
plant. In the event of such shortfall, Birds Eye Foods would be required to pay
the remainder of the loan for the City of Montezuma. As of March 29, 2003, the
outstanding loan amount, including interest, was $2.1 million. In connection
with the exit plan described in NOTE 2 to the "Notes to Consolidated Financial
Statements," a liability of approximately $1.4 million has been recorded to
reflect that portion associated with the fresh production operations of
Montezuma, Georgia.
Subsidiary Guarantors: Kennedy Endeavors, Incorporated, GLK Holdings, Inc., and
Linden Oaks Corporation, wholly-owned subsidiaries of the Company ("Subsidiary
Guarantors"), and Pro-Fac (Pro-Fac files periodic reports under the Security
Exchange Act of 1934, Commission File Number 0-20539) have jointly and
severally, fully and unconditionally guaranteed, on a senior subordinated basis,
the obligations of the Company with respect to the Company's 11-7/8 percent
Senior Subordinated Notes due 2008 (the "Notes"). In addition, the Subsidiary
Guarantors have jointly and severally, fully and unconditionally guaranteed the
obligations of the Company with respect to the Company's Senior Credit Facility.
The covenants in the Notes and the Senior Credit Facility do not restrict the
ability of the Subsidiary Guarantors to make cash distributions to the Company.
Presented below is condensed consolidating financial information for (i) Birds
Eye Foods, (ii) the subsidiary guarantors, and (iii) non-guarantor subsidiaries.
The condensed consolidating financial information has been presented to show the
nature of assets held, results of operations, and cash flows of the Company and
its Subsidiary Guarantors and non-guarantor subsidiaries in accordance with
Securities and Exchange Commission Financial Reporting Release No. 55.
Successor
Statement of Operations
Three Months Ended March 29, 2003
------------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- -------------
(Dollars in Thousands)
Net sales $ 215,825 $ 4,711 $ 4,865 $ (4,865) $ 220,536
Cost of sales (169,570) (3,196) (4,536) 4,536 (172,766)
--------- ---------- -------- -------- ---------
Gross profit/(loss) 46,255 1,515 329 (329) 47,770
Selling, administrative, and general expenses (28,230) (862) 0 0 (29,092)
Other (expense)/income (11,407) 11,407 213 (213) 0
Income from former joint venture and subsidiaries 867 211 0 (687) 391
--------- ---------- -------- -------- ---------
Operating income/(loss) before discontinued
operations 7,485 12,271 542 (1,229) 19,069
Interest (expense)/income (15,581) 2,454 476 0 (12,651)
--------- ---------- -------- -------- ---------
Pretax (loss)/income before discontinued operations (8,096) 14,725 1,018 (1,229) 6,418
Tax benefit/(provision) 2,850 (5,293) (125) 0 (2,568)
--------- ---------- -------- -------- ---------
Net (loss)/income before discontinued operations (5,246) 9,432 893 (1,229) 3,850
Discontinued operations (net of a tax benefit
of $1) (1) 0 0 0 (1)
--------- ---------- -------- -------- ---------
Net (loss)/income $ (5,247) $ 9,432 $ 893 $ (1,229) $ 3,849
========= ========== ======== ======== =========
Successor
Statement of Operations
August 19, 2002 - March 29, 2003
------------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net sales $ 590,521 $ 10,835 $ 10,437 $ (10,437) $ 601,356
Cost of sales (450,336) (7,076) (9,074) 9,074 (457,412)
--------- -------- ---------- --------- ----------
Gross profit/(loss) 140,185 3,759 1,363 (1,363) 143,944
Selling, administrative, and general expenses (78,195) (2,046) 0 0 (80,241)
Other (expense)/income (31,453) 31,453 345 (345) 0
Income from former joint venture and subsidiaries 2,246 211 0 (687) 1,770
--------- -------- ---------- --------- ----------
Operating income/(loss) before discontinued
operations 32,783 33,377 1,708 (2,395) 65,473
Interest (expense)/income (37,857) 6,045 476 0 (31,336)
--------- -------- ---------- --------- ----------
Pretax (loss)/income before discontinued operations (5,074) 39,422 2,184 (2,395) 34,137
Tax benefit/(provision) 845 (14,147) (352) 0 (13,654)
--------- -------- ---------- --------- ----------
Net (loss)/income before discontinued operations (4,229) 25,275 1,832 (2,395) 20,483
Discontinued operations (net of a tax benefit
of $1,048) (1,572) 0 0 0 (1,572)
--------- -------- ---------- --------- ----------
Net (loss)/income $ (5,801) $ 25,275 $ 1,832 $ (2,395) $ 18,911
========= ======== ========== ========= ==========
Predecessor
Statement of Operations
June 30, 2002 - August 18, 2002
-----------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net sales $ 99,188 $ 2,476 $ 1,069 $ (1,069) $ 101,664
Cost of sales (76,505) (1,611) (1,432) 1,432 (78,116)
--------- ------- --------- --------- ---------
Gross profit/(loss) 22,683 865 (363) 363 23,548
Selling, administrative, and general expenses (14,946) (488) 0 0 (15,434)
Other (expense)/income (5,507) 5,507 41 (41) 0
Income from former joint venture and subsidiaries 277 0 0 0 277
--------- ------- -------- -------- ---------
Operating income/(loss) before
discontinued operations 2,507 5,884 (322) 322 8,391
Interest (expense)/income (9,069) 1,322 0 0 (7,747)
--------- ------- -------- -------- ---------
Pretax (loss)/income before discontinued operations (6,562) 7,206 (322) 322 644
Tax benefit/(provision) 2,354 (2,572) (46) 0 (264)
--------- ------- -------- -------- ---------
Net (loss)/income before discontinued operations (4,208) 4,634 (368) 322 380
Discontinued operations (net of a tax benefit of $205) (295) 0 0 0 (295)
--------- ------- -------- -------- ---------
Net (loss)/income $ (4,503) $ 4,634 $ (368) $ 322 $ 85
========= ======= ======== ======== =========
Successor
Balance Sheet
March 29, 2003
------------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Assets
Cash and cash equivalents $ 75,422 $ 246 $ 717 $ 0 $ 76,385
Accounts receivable, net 67,636 2,983 121 0 70,740
Inventories -
Finished goods 236,414 387 35 0 236,836
Raw materials and supplies 20,788 421 92 0 21,301
---------- ------- ------- --------- ----------
Total inventories 257,202 808 127 0 258,137
Other current assets 39,934 62 689 0 40,685
---------- ------- ------- --------- ----------
Total current assets 440,194 4,099 1,654 0 445,947
Property, plant and equipment, net 208,761 3,973 3,454 0 216,188
Investment in subsidiaries 347,475 11,311 0 (358,786) 0
Goodwill and other intangible assets, net 28,449 209,938 0 0 238,387
Other assets 33,658 104,400 25,476 (129,576) 33,958
---------- -------- -------- --------- ---------
Total assets $1,058,537 $333,721 $ 30,584 $(488,362) $ 934,480
========== ======== ======== ========= =========
Liabilities and Shareholder's Equity
Current portion of long-term debt $ 6,521 $ 0 $ 0 $ 0 $ 6,521
Current portion of Termination and Transitional
Services Agreements with Pro-Fac
Cooperative, Inc. 9,339 0 0 0 9,339
Accounts payable 38,636 612 195 0 39,443
Accrued interest 10,928 0 0 0 10,928
Intercompany loans 2,198 (2,198) 0 0 0
Other current liabilities 75,789 5,752 1,158 0 82,699
---------- --------- ------- --------- ----------
Total current liabilities 143,411 4,166 1,353 0 148,930
Long-term debt 499,556 0 0 (25,476) 474,080
Long-term portion of Termination and
Transitional Services Agreements
with Pro-Fac Cooperative, Inc. 25,299 0 0 0 25,299
Other non-current liabilities 169,514 0 0 (104,100) 65,414
---------- --------- ------- --------- ----------
Total liabilities 837,780 4,166 1,353 (129,576) 713,723
Shareholder's equity 220,757 329,555 29,231 (358,786) 220,757
---------- --------- ------- --------- ----------
Total liabilities and shareholder's equity $1,058,537 $ 333,721 $ 30,584 $ (488,362) $ 934,480
========== ========= ======== ========= =========
Successor
Statement of Cash Flows
August 19, 2002 - March 29, 2003
------------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Cash Flows From Operating Activities:
Net (loss)/income $ (5,801) $ 25,275 $ 1,832 $ (2,395) $ 18,911
Adjustments to reconcile net (loss)/income to cash
provided by/(used in) operating activities -
Depreciation 14,777 258 181 0 15,216
Amortization of certain intangible assets 249 469 0 0 718
Amortization of debt issue costs, amendment costs,
debt discounts and premiums, and interest in-kind 7,897 0 (476) 0 7,421
Transitional Services Agreement with
Pro-Fac Cooperative, Inc. (323) 0 0 0 (323)
Equity in undistributed earnings of former joint
venture and subsidiaries (1,585) (211) 0 687 (1,109)
Change in working capital 63,442 (5,323) (1,822) 1,708 58,005
--------- -------- -------- -------- ---------
Net cash provided by/(used in) operating activities 78,656 20,468 (285) 0 98,839
Cash Flows From Investing Activities:
Purchase of property, plant, and equipment (9,104) 0 (226) 0 (9,330)
Proceeds from disposal 402 0 5 0 407
Repayments from joint venture 6,169 0 0 0 6,169
Proceeds from investment in CoBank 2,203 0 0 0 2,203
Proceeds from the GLK Transaction 13,900 0 0 0 13,900
Investment in GLK, LLC 0 (11,100) 0 11,100 0
Dividends received 20,280 0 0 (20,280) 0
--------- -------- -------- -------- ---------
Net cash provided by/(used in) investing activities 33,850 (11,100) (221) (9,180) 13,349
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt 270,000 0 0 0 270,000
Birds Eye Holdings Inc. investment 175,597 0 0 0 175,597
Adjustment of Subordinated Promissory Note (25,000) 0 0 0 (25,000)
Payments on prior revolving credit facility (22,000) 0 0 0 (22,000)
Payments on long-term debt (401,799) 0 0 0 (401,799)
Payments on Termination Agreement with
Pro-Fac Cooperative, Inc. (8,000) 0 0 0 (8,000)
Payments on capital lease (316) 0 0 0 (316)
Cash paid for debt issuance costs (24,202) 0 0 0 (24,202)
Cash paid for transaction fees (6,000) 0 0 0 (6,000)
Dividends paid 0 (20,280) 0 20,280 0
Birds Eye Foods, Inc. investment 0 11,100 0 (11,100) 0
--------- -------- -------- -------- ---------
Net cash used in financing activities (41,720) (9,180) 0 9,180 (41,720)
Net change in cash and cash equivalents 70,786 188 (506) 0 70,468
Cash and cash equivalents at beginning of period 4,636 58 1,223 0 5,917
--------- -------- -------- -------- ---------
Cash and cash equivalents at end of period $ 75,422 $ 246 $ 717 $ 0 $ 76,385
========= ========= ======== ======== =========
Predecessor
Statement of Cash Flows
June 30, 2002 - August 18, 2002
------------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Cash Flows From Operating Activities:
Net (loss)/income $ (4,503) $ 4,634 $ (368) $ 322 $ 85
Adjustments to reconcile net (loss)/income to net
cash (used in)/provided by operating activities -
Depreciation 3,741 69 23 0 3,833
Amortization of certain intangible assets 50 94 0 0 144
Amortization of debt issue costs, amendment costs,
debt discounts and premiums, and interest in-kind 1,201 0 0 0 1,201
Equity in undistributed earnings of Great
Lakes Kraut Company, LLC (277) 0 0 0 (277)
Change in working capital (37,661) 3,890 1,252 (322) (32,841)
--------- -------- -------- ------- --------
Net cash (used in)/provided by operating activities (37,449) 8,687 907 0 (27,855)
Cash Flows From Investing Activities:
Purchase of property, plant, and equipment (2,181) 0 (6) 0 (2,187)
Advances to Great Lakes Kraut Company, LLC (1,512) 0 0 0 (1,512)
Proceeds from investment in CoBank 1,115 0 0 0 1,115
Dividends received 8,750 0 0 (8,750) 0
--------- -------- -------- ------- --------
Net cash used in investing activities 6,172 0 (6) (8,750) (2,584)
Cash Flows From Financing Activities:
Net proceeds from old revolving credit facility 22,000 0 0 0 22,000
Payments on long-term debt (292) 0 0 0 (292)
Payments on capital leases (38) 0 0 0 (38)
Dividends paid 0 (8,750) 0 8,750 0
--------- -------- -------- ------- --------
Net cash provided by financing activities 21,670 (8,750) 0 8,750 21,670
Net change in cash and cash equivalents (9,607) (63) 901 0 (8,769)
Cash and cash equivalents at beginning of period 14,243 121 322 0 14,686
--------- -------- -------- ------- --------
Cash and cash equivalents at end of period $ 4,636 $ 58 $ 1,223 $ 0 $ 5,917
========= ======== ======== ======= ========
Predecessor
Statement of Operations
Three Months Ended March 30, 2002
------------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net sales $ 237,320 $ 3,377 $ 6,834 $ (6834) $ 240,697
Cost of sales (183,164) (2,530) (6,475) 6,475 (185,694)
Gross profit 54,156 847 359 (359) 55,003
Other (expense)/income (11,081) 11,081 368 (368) 0
Selling, administrative, and general expenses (30,044) (863) 0 0 (30,907)
Income from Great Lakes Kraut Company, LLC 627 0 0 0 627
---------- -------- -------- -------- ---------
Operating income/(loss) before dividing with Pro-Fac 13,658 11,065 727 (727) 24,723
Interest (expense)/income (18,322) 2,665 0 0 (15,657)
---------- -------- -------- -------- ---------
Pretax (loss)/income before dividing with Pro-Fac (4,664) 13,730 727 (727) 9,066
Pro-Fac share of income (3,798) 0 0 0 (3,798)
---------- -------- -------- -------- ---------
Pretax (loss)/income before discontinued operations (8,462) 13,730 727 (727) 5,268
Tax benefit/(provision) 2,988 (4,899) (148) 0 (2,059)
---------- -------- -------- -------- ---------
Net (loss)/income before discontinued operations (5,474) 8,831 579 (727) 3,209
Discontinued operations (net of a tax benefit of $570) (891) 0 0 0 (891)
---------- -------- -------- -------- ---------
Net (loss)/income $ (6,365) $ 8,831 $ 579 $ (727) $ 2,318
========== ======== ======== ======== =========
Predecessor
Statement of Operations
Nine Months Ended March 30, 2002
------------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net sales $ 763,074 $ 11,397 $ 14,655 $(14,655) $ 774,471
Cost of sales (593,046) (8,008) (14,106) 14,106 (601,054)
--------- --------- --------- -------- ---------
Gross profit 170,028 3,389 549 (549) 173,417
Other (expense)/income (43,193) 43,043 582 (582) (150)
Selling, administrative, and general expenses (91,671) (2,644) 0 0 (94,315)
Income from Great Lakes Kraut Company, LLC 1,825 0 0 0 1,825
--------- --------- --------- -------- ---------
Operating income/(loss) before dividing with Pro-Fac 36,989 43,788 1,131 (1,131) 80,777
Interest (expense)/income (58,632) 7,949 0 0 (50,683)
--------- --------- --------- -------- ---------
Pretax (loss)/income before dividing with Pro-Fac (21,643) 51,737 1,131 (1,131) 30,094
Pro-Fac share of income (12,860) 0 0 0 (12,860)
--------- --------- --------- -------- ---------
Pretax (loss)/income before discontinued operations (34,503) 51,737 1,131 (1,131) 17,234
Tax benefit/(provision) 11,478 (18,402) (401) 0 (7,325)
--------- --------- --------- -------- ---------
Net (loss)/income before discontinued operations (23,025) 33,335 730 (1,131) 9,909
Discontinued operations (net of a tax benefit
of $1,859) (2,515) 0 0 0 (2,515)
--------- --------- --------- -------- ---------
Net (loss)/income $ (25,540) $ 33,335 $ 730 $ (1,131) $ 7,394
========= ========= ========= ======== =========
Predecessor
Balance Sheet
June 29, 2002
------------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Assets
Current assets:
Cash and cash equivalents $ 14,243 $ 121 $ 322 $ 0 $ 14,686
Accounts receivable, net 73,055 2,945 0 0 76,000
Inventories -
Finished goods 264,411 223 136 0 264,770
Raw materials and supplies 26,193 623 159 0 26,975
--------- -------- -------- ---------- ----------
Total inventories 290,604 846 295 0 291,745
Other current assets 64,585 (158) 257 0 64,684
--------- -------- -------- ---------- ----------
Total current assets 442,487 3,754 874 0 447,115
Property, plant and equipment, net 278,510 3,883 3,441 0 285,834
Investment in subsidiaries 163,093 0 0 (163,093) 0
Goodwill and other intangible assets, net 12,406 55,109 0 0 67,515
Other assets 57,031 103,655 0 (103,409) 57,277
-------- -------- -------- ---------- ----------
Total assets $953,527 $166,401 $ 4,315 $ (266,502) $ 857,741
======== ======== ======== ========== ==========
Liabilities and Shareholder's Equity
Current liabilities:
Current portion of long-term debt $ 14,916 $ 0 $ 0 $ 0 $ 14,916
Accounts payable 70,225 836 137 0 71,198
Accrued interest 6,255 0 0 0 6,255
Intercompany loans (115) 275 (160) 0 0
Other current liabilities 43,319 5,712 823 0 49,854
-------- -------- -------- ---------- ----------
Total current liabilities 134,600 6,823 800 0 142,223
Long-term debt 623,057 0 0 0 623,057
Other non-current liabilities 134,855 0 0 (103,409) 31,446
-------- -------- -------- ---------- -----------
Total liabilities 892,512 6,823 800 (103,409) 796,726
Shareholder's equity 61,015 159,578 3,515 (163,093) 61,015
-------- -------- -------- ---------- -----------
Total liabilities and shareholder's equity $953,527 $166,401 $ 4,315 $ (266,502) $ 857,741
======== ======== ======== ========== ==========
Predecessor
Statement of Cash Flows
Nine Months Ended March 30, 2002
------------------------------------------------------------------------
Agrilink Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Cash Flows From Operating Activities:
Net (loss)/income $ (25,540) $ 33,335 $ 730 $ (1,131) $ 7,394
Adjustments to reconcile net (loss)/income to net
cash (used in)/provided by operating activities -
Depreciation 22,261 405 221 0 22,887
Amortization of certain intangible assets 299 563 0 0 862
Amortization of debt issue costs, amendment costs,
debt discounts and premiums, and interest in-kind 5,098 0 0 0 5,098
Equity in undistributed earnings of
Great Lakes Kraut Company, LLC (1,067) 0 0 0 (1,067)
Change in working capital (96,892) 404 345 1,131 (95,012)
----------- -------- -------- --------- ---------
Net cash (used in)/provided by operating activities (95,841) 34,707 1,296 0 (59,838)
Cash Flows From Investing Activities:
Purchase of property, plant, and equipment (10,521) 0 (16) 0 (10,537)
Proceeds from disposals 52 0 0 0 52
Repayments from Great Lakes Kraut Company, LLC 1,784 0 0 0 1,784
Proceeds from investment in CoBank 3,998 0 0 0 3,998
Dividends received 33,925 0 0 (33,925) 0
----------- -------- -------- --------- ---------
Net cash used in investing activities 29,238 0 (16) (33,925) (4,703)
Cash Flows From Financing Activities:
Net proceeds on prior revolving credit facility 75,400 0 0 0 75,400
Payments on long-term debt (9,072) 0 0 0 (9,072)
Payments on capital leases (111) 0 0 0 (111)
Cash paid for in conjunction with debt amendment (1,694) 0 0 0 (1,694)
Dividends paid 0 (33,925) 0 33,925 0
----------- -------- -------- --------- ---------
Net cash provided by financing activities 64,523 (33,925) 0 33,925 64,523
Net change in cash and cash equivalents (2,080) 782 1,280 0 (18)
Cash and cash equivalents at beginning of period 7,624 21 11 0 7,656
----------- -------- -------- --------- ---------
Cash and cash equivalents at end of period $ 5,544 $ 803 $ 1,291 $ 0 $ 7,638
=========== ======== ======== ========= ==========
NOTE 11. OTHER MATTERS
Restructuring: On June 23, 2000, the Company sold its pickle business to Dean
Pickle and Specialty Product Company. As part of the transaction, Birds Eye
Foods agreed to contract pack Nalley and Farman's pickle products for a period
of two years, ending June 2002. In anticipation of the completion of this
co-pack contract, the Company initiated restructuring activities for
approximately 140 employees in its facility located in Tacoma, Washington during
the first quarter of fiscal 2002. The total restructuring charge amounted to
$1.1 million and was primarily comprised of employee termination benefits. This
amount has been liquidated as of December 28, 2002.
In addition, on October 12, 2001, the Company announced a further reduction of
approximately 7 percent of its nationwide workforce, for a total of
approximately 300 positions. The reductions were part of an ongoing focus on
low-cost operations and included both salaried and hourly positions. In
conjunction with the reductions, the Company recorded a charge against earnings
of approximately $1.6 million in the second quarter of fiscal 2002, primarily
consisting of employee termination benefits. This amount has been liquidated as
of December 28, 2002.
Gain from Pension Curtailment: In September 2001, the Company made the decision
to freeze benefits provided under its Master Salaried Retirement Plan. Under the
provisions of SFAS No. 88, "Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits," these benefit
changes resulted in the recognition of a $2.5 million net curtailment gain.
Legal Proceedings: On September 25, 2001, in the circuit court of Multnomah
County, Oregon, Blue Line Farms commenced a class action suit ("Blue Line Farms
litigation") against the Company, Pro-Fac Cooperative, Inc., Mr. Mike Shelby,
and "Does" 1-50, representing directors, officers, and agents of the corporate
defendants, alleging various claims related to the operation of PF Acquisition
II, Inc., a former subsidiary of Pro-Fac that conducted business under the name
AgriFrozen Foods ("AgriFrozen"). The complaint was subsequently amended to
eliminate "Does" 1- 50 as parties. The relief sought included a demand for
damages of $50.0 million. On December 23, 2002, Pro-Fac, Birds Eye Foods, and
the other defendants reached an agreement in principle as to the terms of a
settlement of the Blue Line Farms litigation, as well as of related claims under
Oregon's grower lien statute pending in the United States Bankruptcy Court for
the District of Oregon, known as the Seifer Trust litigation. The Seifer Trust
litigation also named Pro-Fac and Birds Eye Foods among its named defendants.
The parties in the Blue Line Farms litigation negotiated a settlement agreement
which has been approved by the Multnomah County Circuit Court. Other conditions
of the settlement were satisfied on or before April 14, 2003. In conjunction
with the settlement of the Blue Line Farms litigation and Seifer Trust
litigation, Birds Eye Foods has recorded a liability in purchase accounting for
approximately $1.9 million, including legal costs, for this pre-acquisition
contingency. In April 2003, payment of the settlement amounts was made in
accordance with the settlement agreement.
The Unit Purchase Agreement for the Transaction contains specific provisions
concerning the Blue Line Farms matter and other AgriFrozen related litigation of
Birds Eye Foods. These provisions address the sharing of defense costs, as well
as judgment and settlement costs, between Birds Eye Foods and Pro-Fac. On an
annual basis, Birds Eye Foods has agreed to bear responsibility for the first
$300,000 of defense costs. In addition, Birds Eye Foods agreed to bear
responsibility for one-half of defense costs in excess of $300,000 and for
one-half of judgment and settlement costs, subject to an aggregate cap of $3.0
million after which Pro-Fac is responsible for all costs. These provisions
regarding a sharing of costs apply specifically to the Blue Line Farms
litigation and the Seifer Trust litigation. These provisions do not apply to
other AgriFrozen related litigation, the responsibility for which is entirely
with Pro-Fac.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, the Company makes oral and written statements that may
constitute "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995 (the "Act") or by the Securities and Exchange
Commission ("SEC") in its rules, regulations, and releases. The Company desires
to take advantage of the "safe harbor" provisions in the Act for forward-looking
statements made from time to time, including, but not limited to, the
forward-looking information contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations and other statements made in this
Form 10-Q Equivalent and in other filings with the SEC. The Company cautions
readers that any such forward-looking statements made by or on behalf of the
Company are based on management's current expectations and beliefs but are not
guarantees of future performance. Actual results could differ materially from
those expressed or implied in the forward-looking statements. Among the factors
that could impact the Company include:
|X| the impact of strong competition in the food industry, including
competitive pricing;
|X| the impact of changes in consumer demand;
|X| the impact of weather on the volume and quality of raw product;
|X| the inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer acceptance;
|X| the continuation of the Company's success in integrating operations
(including the realization of anticipated synergies in operations and the
timing of any such synergies), and the availability of acquisition and
alliance opportunities;
|X| the Company's ability to achieve gains in productivity and improvements in
capacity utilization;
|X| the Company's ability to service debt;
|X| interest rate fluctuations; and
|X| effectiveness of marketing and shifts in market demand.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to outline the significant reasons for changes
in the Unaudited Consolidated Statement of Operations in the third quarter and
first nine months of fiscal 2003 versus such periods in fiscal 2002.
The unaudited consolidated financial statements include the results of Birds Eye
Foods, Inc. ("Birds Eye Foods" or the "Company"). On August 19, 2002, a majority
share of Birds Eye Foods was indirectly acquired by Vestar/Agrilink Holdings LLC
and its affiliates (the "Transaction" - see NOTE 2 to the "Notes to Consolidated
Financial Statements"). In accordance with the guidelines for accounting for
business combinations, the investment by Vestar/Agrilink Holdings LLC and its
affiliates plus related purchase accounting adjustments have been "pushed down"
and recorded in Birds Eye Foods' financial statements for the period subsequent
to August 18, 2002, resulting in a new basis of accounting for the "successor"
period. Information for the "predecessor" period prior to the transaction date
is presented on the Company's historical basis of accounting.
In order to provide a meaningful basis of comparing the Company's results of
operations, the results of operations for the "predecessor" period (June 30,
2002 to August 18, 2002) have been combined with the results of operations for
the "successor" period (August 19, 2002 to March 29, 2003). These combined
Company results have been compared to the comparable period in fiscal 2002.
Birds Eye Foods has four primary product lines: vegetables, fruits, snacks and
canned meals. The majority of each of the product lines' net sales are within
the United States. In addition, the Company's operating facilities, excluding
one in Mexico, are within the United States.
The vegetable product line consists of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable product
line include Birds Eye, Birds Eye Voila!, Birds Eye Simply Grillin', Birds Eye
Hearty Spoonfuls, Freshlike, Veg-All, McKenzies, and Brooks Chili Beans. The
fruit product line consists of canned and frozen fruits including fruit fillings
and toppings. Branded products within the fruit category include Comstock and
Wilderness. The snack product line consists of potato chips and other corn-based
snack items. Branded products within the snack category include Tim's Cascade
Chips, Snyder of Berlin, Husman, La Restaurante, Erin's, and Flavor
Destinations. The canned meal product line includes canned meat products such as
chilies, stews, soups, and various other ready-to-eat prepared meals. Branded
products within the canned meal category include Nalley. The Company's other
product line primarily represents salad dressings. Branded products within this
category include Bernstein's and Nalley.
Reclassifications have been made to the segment presentation below for the prior
year to reflect an allocation of fixed costs associated with discontinued
operations. Management is currently focusing efforts on eliminating such costs.
The following tables illustrate the results of operations by product line for
the three- and nine-month periods ended March 29, 2003 and March 30, 2002:
Net Sales
(Dollars in Millions)
Three Months Ended Nine Months Ended
------------------------------------------- ------------------------------------------
March 29, March 30, March 29, March 30,
2003 2002 2003 2002
------------------- -------------------- ------------------- -------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
--------- ----- -------- ----- ------- ------- ------ ------
Vegetables $ 162.2 73.6% $ 180.8 75.1% $ 505.0 71.8% $ 568.1 73.3%
Fruits 18.3 8.3 19.5 8.1 79.5 11.3 83.6 10.8
Snacks 19.0 8.6 18.5 7.7 58.4 8.3 58.1 7.5
Canned Meals 13.1 5.9 12.7 5.3 36.4 5.2 37.0 4.8
Other 7.9 3.6 9.2 3.8 23.8 3.4 27.6 3.6
-------- ----- -------- ------- ------- ------ ------- ------
Total $ 220.5 100.0% $ 240.7 100.0% $ 703.1 100.0% $ 774.4 100.0%
======== ===== ======== ======= ======= ====== ======= ======
Operating Income
(Dollars in Millions)
Three Months Ended Nine Months Ended
------------------------------------------- ------------------------------------------
March 29, March 30, March 29, March 30,
2003 2002 2003 2002
------------------- -------------------- ------------------- -------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
--------- ----- -------- ----- ------- ------- ------ ------
Vegetables $ 12.2 63.9% $ 16.8 68.0% $ 38.9 52.7% $ 48.9 60.6%
Fruits 3.8 19.9 3.4 13.8 22.4 30.4 17.1 21.2
Snacks 1.5 7.8 1.7 6.9 7.1 9.6 6.9 8.6
Canned Meals 0.7 3.7 1.6 6.5 2.9 3.9 5.5 6.8
Other 0.9 4.7 1.2 4.8 2.5 3.4 2.5 3.0
Corporate charges1 0.0 0.0 0.0 0.0 0.0 0.0 (2.7) (3.3)
-------- ----- ------- ------ ------- ------ ------ -------
Continuing segment operating income2 19.1 100.0 24.7 100.0 73.8 100.0 78.2 96.9
Gain from pension curtailment 0.0 0.0 0.0 0.0 0.0 0.0 2.5 3.1
-------- ----- ------- ------ ------- ------ ------ -------
Operating income before dividing
with Pro-Fac $ 19.1 100.0% $ 24.7 100.0% $ 73.8 100.0% $ 80.7 100.0%
======== ===== ======= ===== ======= ====== ====== =======
1 Represents restructuring expenses which are not allocated to individual
segments. See NOTE 11 to the "Notes to Consolidated Financial Statements."
2 The gain from pension curtailment is excluded from continuing segment
operating income as management believes the gain is non-recurring.
EBITDA1
(Dollars in Millions)
The following table sets forth EBITDA (defined as operating income before
dividing with Pro-Fac, depreciation and amortization) for the three and nine
months ended March 29, 2003 and March 30, 2002, respectively. The Company
believes that EBITDA is an appropriate measure of evaluating the operating
performance of its segments, and it is a primary measure used internally by
management to manage the business. EBITDA is also a primary measure used
externally by the Company's investors and analysts to ensure consistent
comparability. In conjunction with the Transaction, net assets have, on a
preliminary basis, been adjusted to fair value and debt was reduced. In
addition, changes in the Company's operating structure no longer require it to
share its profits with Pro-Fac Cooperative, Inc. Accordingly, depreciation,
interest expense, and Pro-Fac share of income have decreased making
period-to-period comparisons of operating income and net income difficult to
analyze. Therefore, management believes EBITDA is a measurement that allows the
operations of the business to be compared in a consistent manner. However,
EBITDA should be considered in addition to, not as a substitute for or superior
to operating income, net income, cash flows, and other measures of financial
performance prepared in accordance with GAAP. As EBITDA is not a measure of
performance calculated in accordance with GAAP, this measure may not be
comparable to similarly titled measures employed by other companies.
Three Months Ended Nine Months Ended
------------------------------------------- ------------------------------------------
March 29, March 30, March 29, March 30,
2003 2002 2003 2002
------------------- -------------------- ------------------- -------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
--------- ----- -------- ----- ------- ------- ------ ------
Vegetables $ 15.6 66.4% $ 22.8 71.0% $ 54.3 58.2% $ 66.3 65.8%
Fruits 4.0 17.0 3.9 12.2 23.9 25.6 19.3 19.1
Snacks 2.0 8.5 2.1 6.5 8.4 9.0 8.4 8.3
Canned Meals 0.8 3.4 1.9 5.9 3.6 3.9 6.2 6.2
Other 1.1 4.7 1.4 4.4 3.1 3.3 3.3 3.3
Corporate charges2 0.0 0.0 0.0 0.0 0.0 0.0 (2.7) (2.7)
-------- ----- ------- ------- ------- ------ ------- ------
Continuing segment EBITDA 23.5 100.0% 32.1 100.0% 93.3 100.0% 100.8 100.0%
===== ===== ===== =====
Reconciliation of EBITDA to
Operating Income:
Gain from pension curtailment 0.0 0.0 0.0 2.5
Depreciation and amortization (4.4) (7.4) (19.5) (22.6)
-------- ------- ------- -------
Operating income before
dividing with Pro-Fac $ 19.1 $ 24.7 $ 73.8 $ 80.7
======== ======= ======= =======
1 Earnings before interest, taxes, depreciation, and amortization ("EBITDA") is
defined as the sum of operating income before dividing with Pro-Fac,
depreciation and amortization.
2 Represents restructuring expenses which are not allocated to individual
segments. See NOTE 11 to the "Notes to Consolidated Financial Statements."
CHANGES FROM THIRD QUARTER FISCAL 2002 TO THIRD QUARTER FISCAL 2003
Net Sales: Net sales from continuing operations for the fiscal 2003 period were
$220.5 million, a decrease of $20.2 million, or 8.4 percent, as compared to net
sales of $240.7 million in the fiscal 2002 period. This decrease is primarily
due to a decline in vegetable net sales of $18.6 million, of which $5.1 million
resulted from the expiration of two co-pack contracts and $4.5 million resulted
from the Company's decision to rationalize certain product offerings. The
Company also experienced a $4.7 million decline within its Birds Eye Voila!
product line resulting from continuing category declines and competitive
pressures. See the "Segment Review" below for further detail.
Gross Profit: Gross profit in the fiscal 2003 period decreased $7.2 million to
$47.8 as compared to $55.0 million for the fiscal 2002 period. The Company's
gross profit margin decreased to 21.7 percent from 22.9 percent in the prior
year period. The decrease in gross margin is primarily the result of an increase
in production costs due to lower production volumes in the Company's facilities
as a result of both management's efforts to reduce inventory levels and a lower
than anticipated crop intake resulting from unfavorable weather conditions. The
higher production costs were partially offset by a decrease in warehousing
expense as a result of lower inventory levels. These higher production costs are
anticipated to negatively impact the Company's results through the first quarter
of fiscal 2004.
Selling, Administrative and General Expenses: Selling, administrative and
general expenses in the 2003 period have decreased $1.8 million to $29.1
million, as compared to $30.9 million in the 2002 period. These savings were
primarily associated with headcount reductions initiated in the second quarter
of fiscal 2002 and reductions in various employee incentive programs. These
reductions were offset by marketing expenses associated with the launch of the
Company's new frozen soup offering, Birds Eye Hearty Spoonfuls. In addition,
fiscal 2002 includes a one-time expense of $1.7 million associated with an
arbitrated contract settlement with Dean Pickle and Specialty Products Company
("Dean Pickle"). This settlement resolved all disputes regarding product packed
for Dean Pickle in fiscal 2002.
Continuing Segment Operating Income: Continuing segment operating income for the
2003 period was $19.1 million, a decrease of $5.6 million, or 22.7 percent, as
compared to $24.7 million in the prior year period. This decrease is
attributable to the factors discussed above. Decreases in operating income
within vegetables, snacks, canned meals, and other were $4.6 million, $0.2
million, $0.9 million, and $0.3 million, respectively. Operating income for
fruits increased $0.4 million. Significant variances are highlighted below in
the "Segment Review."
Income from Great Lakes Kraut Company, LLC: This amount represents earnings
received from the investment in Great Lakes Kraut Company LLC ("GLK"), a former
joint venture between Birds Eye Foods and Flanagan Brothers, Inc. Income from
the joint venture for the 2003 period decreased $0.2 million to $0.4 million, as
compared to $0.6 million in the 2002 period. This decrease is a result of the
GLK Transaction completed in March 2003 as described in NOTE 4 to the "Notes to
Consolidated Financial Statements."
Interest Expense: Interest expense for the 2003 period was $12.7 million
compared to $15.7 million in the 2002 period. This decline is attributable to
lower debt levels resulting from the August 19, 2002 Transaction and reduced
interest rates. These reductions were offset by interest expense related to the
Termination Agreement with Pro-Fac and interest adjustments related to fair
market valuation of the Company's debt.
Pro-Fac Share of Income: Historically, the Company's contractual relationship
with Pro-Fac was defined in the marketing and facilitation agreement (the "Old
Marketing and Facilitation Agreement"), which the Company and Pro-Fac entered
into in November 1994. Under the Old Marketing and Facilitation Agreement, in
any year in which the Company had earnings on products which were processed from
crops supplied by Pro-Fac, the Company paid to Pro-Fac, as additional patronage
income, 90 percent of such earnings, but in no case more than 50 percent of all
pretax earnings of the Company. In years in which the Company had losses on
Pro-Fac products, the Company reduced the commercial market value it would
otherwise pay to Pro-Fac by 90 percent of such losses, but in no case by more
than 50 percent of all pretax losses of the Company. Earnings and losses were
determined at the end of the fiscal year, but were accrued on an estimated basis
during the year. The Amended and Restated Marketing and Facilitation Agreement,
entered into on August 19, 2002, in connection with the Transaction, does not
permit Birds Eye Foods to offset its losses against the price paid for Pro-Fac
products or require Birds Eye Foods to share its profits on Pro-Fac products
with Pro-Fac for any period subsequent to the end of Birds Eye Food's fiscal
2002 year.
Tax Provision: Provision for income taxes in the 2003 period was $2.6 million
compared to a tax provision of $2.1 million in the 2002 period. The variance in
the amounts recorded is attributable to the increase in earnings before tax.
Net Income: Net income for the 2003 period was $3.8 million compared to net
income of $2.3 million in the 2002 period due to the factors noted above.
Segment Review
A detailed accounting of the significant reasons for changes in net sales and
EBITDA by product line is outlined below. The Company believes that EBITDA is an
appropriate measure of evaluating the operating performance of its segments, and
it is a primary measure used internally by management to manage the business. In
conjunction with the Transaction, net assets have, on a preliminary basis, been
adjusted to fair value and debt was reduced. In addition, changes in the
Company's operating structure no longer require it to share its profits with
Pro-Fac Cooperative, Inc. Accordingly, depreciation, interest expense, and
Pro-Fac share of income have decreased making period-to-period comparisons of
operating income and net income difficult to analyze. Therefore, management
believes EBITDA is a measurement that allows the operations of the business to
be compared in a consistent manner. However, EBITDA should be considered in
addition to, not as a substitute for, or superior to operating income, net
income, cash flows, and other measures of financial performance prepared in
accordance with generally accepted accounting principles. As EBITDA is not a
measure of performance calculated in accordance with GAAP, this measure may not
be comparable to similarly titled measures employed by other companies.
Vegetables: Vegetable net sales for the fiscal 2003 period were $162.2 million,
a decrease of $18.6 million, or 10.3 percent, as compared to $180.8 million in
the 2002 period. Net sales of the Company's branded vegetables decreased $11.4
million. This decrease was primarily the result of continued category declines
within the Birds Eye Voila! skillet meal category, partially offset by new Birds
Eye Hearty Spoonfuls
frozen soups sales. Non-branded vegetable net sales included a decline primarily
as a result of the expiration of two co-pack contracts that contributed $5.1
million of net sales in the prior year period as well as the Company's decision
to rationalize certain product offerings.
The Company tracks retail sales in many of the categories in which it competes
using data from Information Resources, Inc. ("IRI"). IRI data are limited,
however, as IRI does not capture sales at several of the Company's customers
including Wal-Mart, Costco, and others. IRI also does not track non-branded or
private label retail sales by manufacturer. According to IRI, the frozen
vegetable category on a unit basis declined 8 percent for the 12-week period
ending March 30, 2003. Including management's estimate of the Company's share of
the private label market, the Company believes its overall market share on a
unit basis in the frozen vegetable category (excluding frozen soups) for the
12-week period ending March 30, 2003 was 31.6 percent compared to 31.8 percent
for the 12-weeks ending March 31, 2002. The home replacement skillet meal
category for the 12-week period ending March 30, 2003 declined 4 percent on a
unit basis. Market share on a unit basis for the Company's Birds Eye Voila!
skillet meal product offering for the 12-week period ending March 30, 2003 was
20.1 percent compared to 25.0 percent for the 12-week period ending March 31,
2002.
EBITDA for the vegetable segment in the 2003 period decreased $7.2 million, or
31.6 percent, to $15.6 million, as compared to $22.8 million in the prior year
period. The decrease in EBITDA is attributable to marketing and launch costs
associated with the introduction of Birds Eye Hearty Spoonfuls and declines in
Birds Eye Voila! mentioned above. In addition, the Company experienced increased
production costs due to lower production volumes as a result of management's
efforts to reduce inventory levels and a lower than anticipated crop intake
resulting from unfavorable weather conditions. These higher production costs are
anticipated to negatively impact the Company's results through the first quarter
of fiscal 2004.
Fruit: Fruit net sales for the 2003 period were $18.3 million, a decrease of
$1.2 million or 6.2 percent, as compared to $19.5 million in the 2002 period.
This decrease is primarily attributable to a poor 2002 cherry crop harvest
caused by unusually unfavorable weather. In addition, the loss of a private
label customer contributed to the decrease in fruit sales.
EBITDA for the fruit segment in the 2003 period increased $0.1 million, or 2.6
percent, to $4.0 million, as compared to $3.9 million in the prior year period.
The increase in EBITDA is largely the result of recent price increases taken on
cherry items offset by the volume declines mentioned above.
Snacks: Net sales for the snack segment were $19.0 million an increase of $0.5
million, or 2.7 percent as compared to $18.5 million in the prior year period.
EBITDA of $2.0 million in the fiscal 2003 period was consistent with the fiscal
2002 period. The results of Tim's Cascade Style Potato Chips were positively
impacted by its expansion into new markets and new product categories. However,
this improvement was offset by declines at Snyder of Berlin associated with
category declines in the regional markets in which it competes.
Canned Meals: Net sales for the canned meals segment were $13.1 million, an
increase of $0.4 million, or 3.1 percent, as compared to $12.7 million in the
2002 period. EBITDA for the canned meals segment in the 2003 period declined
$1.1 million, to $0.8 million, as compared to $1.9 million in the prior year
period. The decline in EBITDA is largely the result of increased promotional
spending.
Other: Net sales for the other segment, which is comprised primarily of salad
dressings, were $7.9 million, a decrease of $1.3 million, or 14.1 percent, as
compared to $9.2 million in the 2002 period. The decrease in net sales is
primarily attributable to the loss of a food service customer. The loss of this
customer is not anticipated to have a significant impact on the Company's
profitability. EBITDA for the other segment for the 2003 period decreased $0.3
million, or 21.4 percent, to $1.1 million, as compared to $1.4 million in the
prior period. The decline in EBITDA is primarily due to the reduction in volume
as well as higher ingredient costs.
CHANGES FROM FIRST NINE MONTHS FISCAL 2002 TO FIRST NINE MONTHS FISCAL 2003
Net Sales: Net sales from continuing operations for the 2003 period were $703.1
million, a decrease of $71.3 million, or 9.2 percent, as compared to net sales
of $774.4 million in the 2002 period. This decrease is primarily due to a
decline in vegetable net sales of $63.1 million of which $29.5 million resulted
from the expiration of two co-pack contracts and $14.5 million resulted from the
Company's decision to rationalize certain product offerings. The Company also
experienced a $13.7 million decline within its Birds Eye Voila! product line as
a result of continued category decline. See the "Segment Review" below for
further detail.
Gross Profit: Gross profit in the 2003 period decreased $5.9 million to $167.5
million, as compared to $173.4 million in the 2002 period. The Company's gross
profit margin increased to 23.8 percent from 22.4 percent in the prior year
period. The increase in gross profit margin is primarily the result of price
increases implemented in the non-branded market during both the current and
prior year and the elimination of co-pack non-branded sales, which typically
carry a lower gross margin. The Company also benefited from reduced warehousing
costs as a
result of management initiatives to reduce the Company's inventory levels. Gross
profit margin was also positively impacted by the Company's headcount reduction
initiated in the second quarter of fiscal 2002 which more than offset higher
production costs due to lower production volumes as a result of both
management's efforts to reduce inventory levels and a lower than anticipated
crop intake from unfavorable weather conditions.
Selling, Administrative and General Expenses: Selling, administrative and
general expenses in the 2003 period have increased $1.4 million to $95.7
million, as compared to $94.3 million in the 2002 period. This increase is
primarily the result of marketing costs associated with the launch of the
Company's new frozen soup offering, Birds Eye Hearty Spoonfuls. These increases
were partially offset by savings associated with the headcount reduction
described below as well as a decrease in brokerage fees associated with lower
volume. In addition, fiscal 2002 includes a one-time expense of $1.7 million
associated with an arbitrated contract settlement with Dean Pickle. This
settlement resolved all disputes regarding product packed for Dean Pickle in
fiscal 2002.
Continuing Segment Operating Income: Continuing segment operating income for the
2003 period was $73.8 million, a decrease of $4.4 million, or 5.6 percent, as
compared to $78.2 million in the prior year period. This decrease is
attributable to the factors discussed above and the restructuring charge in
fiscal 2002 described below. The decrease in operating income within vegetables
and canned meals were $10.0 million and $2.6 million, respectively. Increases in
operating income within fruits and snacks were $5.3 million and $0.2 million,
respectively. Operating income within other was consistent with the 2002 period.
Significant variances are highlighted below in the "Segment Review."
Restructuring: On June 23, 2000, the Company sold its pickle business to Dean
Pickle and Specialty Product Company. As part of that sale agreement, Birds Eye
Foods agreed to contract pack Nalley and Farman's pickle products at its Tacoma,
Washington, facility for a period of two years (through June 2002). Once it
became evident that Dean Pickle and Specialty Product Company would not be
extending this contract packing arrangement beyond its initial two year term,
the Company announced restructuring plans in the first quarter of fiscal 2002
and took a related charge to convert the Tacoma facility for alternate uses. The
restructuring charge was $1.1 million and was primarily comprised of employee
termination benefits. This amount was liquidated as of December 28, 2002.
In addition, on October 12, 2001, the Company announced a further reduction of
approximately 7 percent of its nationwide workforce, for a total of
approximately 300 positions. The reductions were part of an ongoing focus on
low-cost operations and included both salaried and hourly positions. In
conjunction with the reductions, the Company recorded a charge against earnings
of approximately $1.6 million in the second quarter of fiscal 2002, primarily
consisting of employee termination benefits. This amount was liquidated as of
December 28, 2002.
Gain from Pension Curtailment: During September 2001, the Company made the
decision to freeze benefits provided under its Master Salaried Retirement Plan.
Under the provisions of SFAS No. 88, "Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
these benefit changes resulted in the recognition of a $2.5 million net
curtailment gain in the fiscal 2002 period.
Income from Great Lakes Kraut Company, LLC: This amount represents earnings
received from the investment in GLK, a former joint venture between Birds Eye
Foods and Flanagan Brothers, Inc. Income from the joint venture for the 2003
period increased $0.2 million to $2.0 million, as compared to $1.8 million in
the 2002 period. This improvement is primarily the result of pricing initiatives
implemented during the fiscal fourth quarter of 2002. In March 2003, the Company
completed a transaction with GLK. See NOTE 4 to the "Notes to Consolidated
Financial Statements" for a further description.
Interest Expense: Interest expense for the 2003 period was $39.1 million
compared to $50.7 million in the 2002 period. A reduction of $7.7 million is due
to lower debt levels resulting from the August 19, 2002 Transaction and reduced
interest rates. These reductions were offset by interest expense related to the
Termination Agreement with Pro-Fac and various adjustments associated with
derivative instruments entered to minimize exposure to interest rate changes.
Pro-Fac Share of Income: Historically, the Company's contractual relationship
with Pro-Fac was defined in the marketing and facilitation agreement (the "Old
Marketing and Facilitation Agreement"), which the Company and Pro-Fac entered
into in November 1994. Under the Old Marketing and Facilitation Agreement, in
any year in which the Company had earnings on products which were processed from
crops supplied by Pro-Fac, the Company paid to Pro-Fac, as additional patronage
income, 90 percent of such earnings, but in no case more than 50 percent of all
pretax earnings of the Company. In years in which the Company had losses on
Pro-Fac products, the Company reduced the commercial market value it would
otherwise pay to Pro-Fac by 90 percent of such losses, but in no case by more
than 50 percent of all pretax losses of the Company. Earnings and losses were
determined at the end of the fiscal year, but were accrued on an estimated basis
during the year. The Amended and Restated Marketing and Facilitation Agreement,
entered into on August 19, 2002, in connection with the
Transaction, does not permit Birds Eye Foods to offset its losses against the
price paid for Pro-Fac products or require Birds Eye Foods to share its profits
on Pro-Fac products with Pro-Fac for any period subsequent to the end of Birds
Eye Food's fiscal 2002 year.
Tax Provision: Provision for income taxes in the 2003 period was $13.9 million
compared to a tax provision of $7.3 million in the 2002 period. The variance in
the amounts recorded is attributable to the increase in earnings before tax.
Net Income: Net income for the 2003 period was $19.0 million compared to income
of $7.4 million in the 2002 period due to the factors noted above.
Segment Review
Vegetables: Vegetable net sales for the fiscal 2003 period were $505.0 million,
a decrease of $63.1 million, or 11.1 percent, as compared to $568.1 million in
the 2002 period. The Company's branded vegetable net sales decreased $26.2
million. This decrease was primarily the result of continued category declines
within the Birds Eye Voila! skillet meal category and declines in the Company's
regional branded product lines.
Non-branded vegetable net sales decreased $36.9 million as a result of the
expiration of two co-pack contracts that contributed $29.5 million of net sales
in the prior year period as well as the Company's decision to rationalize
certain product offerings.
The Company tracks retail sales in many of the categories in which it competes
using data from Information Resources, Inc. ("IRI"). IRI data are limited,
however, as IRI does not capture sales at several of the Company's customers
including Wal-Mart, Costco, and others. IRI also does not track non-branded or
private label retail sales by manufacturer. According to IRI, the frozen
vegetable category on a unit basis declined 5 percent for the 39-week period
ending March 30, 2003. Including management's estimate of the Company's share of
the private label market, the Company believes its overall market share on a
unit basis in the frozen vegetable category for the 39-week period ending March
30, 2003 was 16.3 percent compared to 16.7 percent for the 39-weeks ending March
31, 2002. The home replacement skillet meal category for the 39-week period
ending March 30, 2003 declined 12 percent on a unit basis. Market share on a
unit basis for the Company's Birds Eye Voila! skillet meal product offering for
the 39-week period ending March 30, 2003 was 22.2 percent compared to 26.7
percent for the 39-week period ending March 31, 2002.
EBITDA for the vegetable segment in the 2003 period decreased $12.0 million, or
18.1 percent, to $54.3 million, as compared to $66.3 million in the prior year
period. The decrease in EBITDA is primarily a result of marketing expenses
associated with the launch of Birds Eye Hearty Spoonfuls and declines in Birds
Eye Voila! mentioned above. In addition, the Company experienced increased
production costs due to lower production volumes as a result of management's
efforts to reduce inventory levels and a lower than anticipated crop intake
resulting from unfavorable weather conditions. These higher production costs are
anticipated to negatively impact the Company's results through the first quarter
of fiscal 2004. Decreases in EBITDA were partially offset by improved
profitability in the food service category as a result of the Company's decision
not to pursue certain food service contracts.
Fruit: Fruit net sales for the 2003 period were $79.5 million, a decrease of
$4.1 million or 4.9 percent, as compared to $83.6 million in the 2002 period.
This decrease is primarily attributable to a poor 2002 cherry crop harvest
caused by unusually unfavorable weather. In addition, the loss of a private
label customer contributed to the decrease in net sales.
EBITDA for the fruit segment in the 2003 period increased $4.6 million, or 23.8
percent, to $23.9 million, as compared to $19.3 million in the prior year
period. The increase in EBITDA is largely the result of price increases taken on
cherry items.
Snacks: Net sales for the snack segment were $58.4 million, an increase of $0.3
million, or 0.5 percent, as compared to $58.1 million in the 2002 period. EBITDA
for the snack segment in the 2003 period was consistent with the prior year
period. The results of Tim's Cascade Style Potato Chips were positively impacted
primarily by an expansion into new markets and new product categories. However,
this improvement was offset by declines at Snyder of Berlin associated with
category declines in the regional markets in which these products compete.
Canned Meals: Net sales for the canned meals segment were $36.4 million, a
decrease of $0.6 million, or 1.6 percent, as compared to $37.0 million in the
2002 period. EBITDA for the canned meals segment in the 2003 period declined
$2.6 million, or 41.9 percent, to $3.6 million, as compared to $6.2 million in
the prior year period. The decline in EBITDA is largely the result of increased
promotional spending.
Other: Net sales for the other segment, which is comprised primarily of salad
dressings, were $23.8 million, a decrease of $3.8 million, or 13.8 percent, as
compared to $27.6 million in the 2002 period. The decrease in net sales is
primarily attributable to the loss of a food service customer. The loss of this
customer is not anticipated to have a significant impact on the Company's
profitability. EBITDA decreased by $0.2 million or 6.1 percent to $3.1 million
as compared to $3.3 million in the prior year period. This decline is primarily
due to the reductions in salad dressing net sales discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the Unaudited
Consolidated Statement of Cash Flows for the nine months ended March 29, 2003
compared to the nine months ended March 30, 2002.
For the nine months ended March 29, 2003, net cash provided by operating
activities was $71.0 million as compared to net cash used in operating
activities of $59.8 million for the nine months ended March 30, 2002. This
represents an increase of $130.8 million, largely the result of a decline in
cash used to fund working capital needs. Net inventories decreased $39.1 million
in the current period as compared with an increase of $11.9 million during the
same period last year. This significant reduction is a result of management
initiatives to reduce the Company's inventory levels and the effects of a
reduced crop in certain commodities during the fall of 2002. Management believes
these crop shortages will not have a negative effect on the Company's ability to
serve its customers. Accounts payable and other accrued expenses decreased by
$29.4 million in the current period as compared with a $93.4 million decline
during the same period last year. Approximately $21.6 million of the prior year
decline in accounts payable and accrued liabilities related to the payment of
the remaining balance on a one-time inventory purchase from AgriFrozen Foods,
Inc., a former subsidiary of Pro-Fac. In addition, the decrease in the use of
cash results from the timing of the liquidation of outstanding balances.
Management will continue to focus its efforts on reducing the Company's working
capital needs.
Net cash provided by investing activities for the 2003 period increased $15.5
million to $10.8 million, as compared to $4.7 million used in investing
activities in the prior year period. This increase was largely the result of the
Transaction with GLK on March 3, 2003. See NOTE 4 to the "Notes to Consolidated
Financial Statements." Capital expenditures were $11.5 million for the 2003
period compared to $10.5 million in the prior year period. The purchase of
property, plant, and equipment was for general operating purposes and is
considered adequate to maintain its facilities in proper working order.
Net cash used in financing activities for the 2003 period was $20.1 million
compared to cash provided by financing activities of $64.5 million in the 2002
period, representing a $84.6 million decline. Much of this decline is due to
reduced borrowing needs driven by a $146.3 million reduction in cash used in
operating activities during the first nine months of fiscal 2003 as compared
with the same period last year as described above. The Company also completed
the Transaction with Pro-Fac Cooperative, Inc. and Vestar/Agrilink Holdings LLC
on August 19, 2002, resulting in a substantial refinancing of, and modification
to, its capital structure. See further discussion below and at NOTE 2, "The
Transaction" to the "Notes to Consolidated Financial Statements" included
herein.
Senior Credit Facility: In connection with the Transaction and on August 19,
2002, Birds Eye Foods and certain of its subsidiaries entered into a senior
secured credit facility (the "Senior Credit Facility") in the amount of $470.0
million with a syndicate of banks and other lenders arranged and managed by
JPMorgan Chase Bank ("JPMorgan Chase Bank"), as administrative and collateral
agent. The Senior Credit Facility is comprised of (i) a $200.0 million senior
secured revolving credit facility (the "Revolving Credit Facility") and (ii) a
$270.0 million senior secured B term loan (the "Term Loan Facility"). The Term
Loan Facility has a maturity of six years. The Revolving Credit Facility has a
maturity of five years and allows up to $40.0 million to be available in the
form of letters of credit.
As of March 29, 2003, (i) there were no cash borrowings outstanding under the
Revolving Credit Facility, (ii) there were $20.9 million in letters of credit
outstanding, and (iii) availability under the Revolving Credit Facility, after
taking into account the amount of borrowings and letters of credit outstanding,
was $179.1 million. The Company believes that the cash flow generated by
operations and the amounts available under the Revolving Credit Facility provide
adequate liquidity to fund working capital needs and expenditures.
The Senior Credit Facility bears interest at the Company's option, at a base
rate or LIBOR plus, in each case, an applicable percentage. The appropriate
applicable percentage corresponds to the Company's Consolidated Leverage Ratio,
as defined by the Senior Credit Agreement, and is adjusted quarterly based on
the calculation of the Consolidated Leverage Ratio. As of March 29, 2003, the
Senior Credit Facility bears interest in the case of base rate loans at the base
rate plus (i) 1.25 percent for loans under the Revolving Credit Facility, and
(ii) 1.75 percent for loans under the Term Loan Facility or in the case of LIBOR
loans at LIBOR plus (i) 2.25 percent for loans under the Revolving Credit
Facility and (ii) 2.75 percent for loans under the Term Loan Facility. The
initial unused commitment fee is 0.375 percent on the daily average unused
commitment under the Revolving Credit Facility and varies based on the Company's
Consolidated Leverage Ratio.
The Term Loan Facility requires payments in equal quarterly installments in the
amount of $675,000 until its final maturity in August 2008 upon which the
balance will be due. The Term Loan Facility is also subject to mandatory
prepayments under various scenarios as defined in the Senior Credit Agreement.
Provisions of the Senior Credit Agreement require annual payments, within 105
days after the end of each fiscal year, in the amount of "excess cash flow" be
utilized to prepay the Commitment at an applicable percentage that corresponds
to the Company's leverage ratio.
The Senior Credit Facility contains customary covenants and restrictions on the
Company's activities, including but not limited to: (i) limitations on the
incurrence of indebtedness; (ii) limitations on sale-leaseback transactions,
liens, investments, loans, advances, guarantees, acquisitions, asset sales, and
certain hedging agreements; and (iii) limitations on transactions with
affiliates and other distributions. The Senior Credit Facility also contains
financial covenants requiring the Company to maintain a maximum average debt to
EBITDA ratio, a maximum average senior debt to EBITDA ratio, and a minimum
EBITDA to interest expense ratio. As of March 29, 2003, the Company was in
compliance with all covenants, restrictions, and requirements under the terms of
the Senior Credit Facility.
The Company's obligations under the Senior Credit Facility are guaranteed by
Holdings Inc. and certain of the Company's subsidiaries. See NOTE 10 to the
"Notes to Consolidated Financial Statements" included herein.
The Company, principal shareholders or their affiliates, may, from time to
time, enter the market to purchase or sell Senior Subordinated Notes, in
compliance with any applicable securities laws.
Contractual Obligations: The following is a schedule of Birds Eye Foods' future
obligations under contracts as of March 29, 2003.
(Dollars in Millions)
Payments Due Within
Over 5
Contractual Obligations 1 Year 2 Years 3 Years 4 Years 5 Years Years Total
- ----------------------- -------- ------- ------ ------- -------- --------- -------
Term Loan Facility $ 2.7 $ 2.7 $ 2.7 $ 2.7 $ 66.1 $ 192.4 $ 269.3
Senior Subordinated Notes - 11-7/8 Percent 0.0 0.0 0.0 0.0 0.0 200.0 200.0
Obligations under capital leases 1.0 0.8 0.8 0.7 0.0 0.0 3.3
Operating leases 5.4 5.0 3.8 2.7 1.9 3.6 22.4
Termination Agreement 10.0 10.0 10.0 10.0 2.0 0.0 42.0
Other long-term debt 3.8 0.0 0.0 0.0 0.0 0.0 3.8
------- ------ ------ ------ ------- -------- -------
$ 22.9 $ 18.5 $ 17.3 $ 16.1 $ 70.0 $ 396.0 $ 540.8
======= ====== ====== ====== ======= ======== =======
The Company's Term Loan Facility is guaranteed by Holdings Inc. and certain
subsidiaries. The Company's Senior Subordinated Notes are guaranteed by Pro-Fac
and certain subsidiaries.
The Senior Credit Facility includes the Revolving Credit Facility of $200.0
million which has a maturity of five years. Up to $40.0 million of the Revolving
Credit Facility is available in the forms of letters of credit.
Birds Eye Foods entered into an agreement to provide a guarantee in September
1995 on behalf of the City of Montezuma to renovate a sewage treatment plant
operated in Montezuma, Georgia. Birds Eye Foods issued a guarantee of the loan
in an original amount of approximately $3.3 million including interest. The
guarantee expires in 2015 and requires payment upon the occurrence of a
shortfall in third-party revenue from the utilization of the sewage treatment
plant. In the event of such shortfall, Birds Eye Foods would be required to pay
the remainder of the loan for the City of Montezuma. As of March 29, 2003, the
outstanding loan amount including interest was $2.1 million.
In March 2003, the Company consummated a transaction to effect the transfer of
the assets and liabilities of GLK to Flanagan Brothers, Inc. As a result of this
transaction, the Subordinated Promissory Note was eliminated. See NOTE 4, to the
"Notes to Consolidated Financial Statements" for additional information
regarding this transaction.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts. The estimates and
assumptions are evaluated on a regular basis and are based on historical
experience and on various other factors that are believed to be reasonable.
Estimates and assumptions include, but are not limited to: inventories,
self-insurance programs, promotional activities, and identifiable intangible
assets, long-lived assets, and goodwill.
The following are considered our more critical estimates and assumptions used in
the preparation of the consolidated financial statements, although not
inclusive.
Inventories: Under the FIFO method, the cost of items sold is based upon the
cost of the first such items produced. As a result, the last such items produced
remain in inventory and the cost of these items are used to reflect ending
inventory. The Company prices its inventory at the lower of cost or market value
on the first-in, first-out (FIFO) method.
A reserve is established for the estimated aged surplus, spoiled or damaged
products, and discontinued inventory items and components. The amount of the
reserve is determined by analyzing inventory composition, expected usage,
historical and projected sales information, and other factors. Changes in sales
volume due to unexpected economic or competitive conditions are among the
factors that could result in materially different amounts for this item.
Self-insurance Programs: We record estimates for certain health and welfare and
workers' compensation costs that are self-insured programs. Should a greater
amount of claims occur compared to what was estimated or costs of medical care
increase beyond what was anticipated, reserves recorded may not be sufficient
and additional costs could be incurred.
Promotional Activities: Our promotional activities are conducted either through
the retail trade channel or directly with consumers and involve in-store
displays; feature price discounts on our products; consumer coupons; and similar
activities. The costs of these activities are generally recognized at the time
the related revenue is recorded, which normally precedes the actual cash
expenditure. The recognition of these costs therefore requires management's
judgment regarding the volume of promotional offers that will be redeemed by
either the retail trade channel or consumer. These estimates are made using
various techniques including historical data on performance of similar
promotional programs. Differences between estimated expense and actual
redemptions are normally insignificant and recognized as a change in management
estimate in a subsequent period. However, the likelihood exists of materially
different reported results if different assumptions or conditions were to
prevail.
Identifiable Intangible Assets, Long-Lived Assets, and Goodwill: The Company
assesses the carrying value of its identifiable intangible assets, long-lived
assets, and goodwill whenever events or changes in circumstances indicate that
the carrying amount of the underlying asset may not be recoverable. Certain
factors which may occur and indicate that an impairment exists include, but are
not limited to: significant under performance relative to historical or
projected future operating results; significant changes in the manner of the
Company's use of the underlying assets; and significant adverse industry or
market trends. In the event that the carrying value of assets are determined to
be unrecoverable, the Company would record an adjustment to the respective
carrying value.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of its operating and financing activities, is exposed
to changes in foreign currency exchange rates, certain commodity prices, and
interest rates, which may adversely affect its results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, the Company may enter into derivative contracts.
Foreign Currency: The Company manages its foreign currency related risk
primarily through the use of foreign currency forward contracts. The contracts
held by the Company are denominated in Mexican pesos.
The Company has entered into foreign currency forward contracts that are
designated as cash flow hedges of exchange rate risk related to forecasted
foreign currency-denominated intercompany sales. At March 29, 2003, the Company
had cash flow hedges for the Mexican peso with maturity dates ranging from April
2003 to June 2004. At March 29, 2003, $17,000 is recorded as accumulated other
comprehensive income in shareholder's equity for this swap. Amounts deferred to
accumulated other comprehensive income will be reclassified into cost of goods
sold. During the third quarter and first nine months of fiscal 2003, $0 and $0.1
million, respectively, was reclassified from other comprehensive income to cost
of goods sold. Hedge ineffectiveness was insignificant.
Foreign Currency
Forward Outstanding
-------------------------
Contract amounts 144 million Mexican pesos
Weighted average settlement exchange rate 8.76%
Commodity Prices: The Company is exposed to commodity price risk related to
forecasted purchases of corrugated (unbleached kraftliner) in its manufacturing
process. To mitigate this risk, the Company entered into a swap agreement on
January 8, 2002 designated as a cash flow hedge of its forecasted corrugated
purchases. The swap agreement hedged approximately 65 percent of the Company's
annual corrugated requirements. The fair value, as of March 29, 2003, of the
agreement is an after-tax gain of approximately $0.1 million recorded in other
comprehensive income. During the third quarter and first nine months of fiscal
2003, the fair value of the hedge was reduced by approximately $0.1 and $0.6
million, respectively, (after tax) due to a decline in the floating rate/short
ton for unbleached kraftliner. The termination date for the agreement is June
2003.
Swap
Corrugated Outstanding
(Unbleached Kraftliner)
-------------------------------
Notional amount 6,000 short tons
Average paid rate $400/short ton
Average receive rate Floating rate/short ton - $433
Maturities through June 2003
The Company is also exposed to commodity price risk related to forecasted
purchases of polyethylene in its manufacturing process. To mitigate this risk,
the Company entered into swap agreements designated as cash flow hedges of its
forecasted polyethylene purchases through June 2004. The swaps hedge
approximately 80 percent of the Company's annual polyethylene requirements. The
fair value, as of March 29, 2003, of the agreements is an after-tax gain of
approximately $0.1 million in other comprehensive income. During the third
quarter and first nine months of fiscal 2003, the fair value of the hedge was
increased by $20,000 and $0.1 million, respectively, (after tax) recorded in
accumulated other comprehensive income due to an increase in the floating
rate/pound for polyethylene.
Swaps
Polyethylene Outstanding
---------------------------
Notional amount 6,166,666 pounds
Average paid rate $0.448/pound
Average receive rate Floating rate $0.463/pound
Maturities through June 2004
Interest Rates: The Company is exposed to interest rate risk primarily through
its borrowing activities. The majority of the Company's long-term borrowings are
variable rate instruments. In September 2001, the Company entered into an
interest rate cap agreement with a major financial institution which expires in
October 2003. The Company designates this interest rate cap as a cash flow
hedge.
The Company paid a one-time fee for the cap of approximately $0.6 million. Due
to current borrowing rates available, the fair value of the interest rate cap
was adjusted to zero as of September 28, 2002.
OTHER MATTERS
The vegetable and fruit portions of the business can be positively or negatively
affected by weather conditions nationally and the resulting impact on crop
yields. Favorable weather conditions can produce high crop yields and an
oversupply situation. This results in depressed selling prices and reduced
profitability on the inventory produced from that year's crops. Excessive rain
or drought conditions can produce low crop yields and a shortage situation. This
typically results in higher selling prices and increased profitability. While
the national supply situation controls the pricing, the supply can differ
regionally because of variations in weather.
The cherry crop resulting from the fiscal 2002 growing season was drastically
affected by weather in the prime growing areas in Michigan. These growing
regions experienced early season warm weather followed by a hard freeze that
resulted in an estimated 80 percent reduction in the cherry crop compared to
historic harvest tonnage. As a result, raw and frozen cherry costs have
significantly increased. To offset the cherry cost increase, management
implemented a price increase on cherry items effective June 2002.
For the 2002 crop season, dry weather conditions in the Company's New York and
Midwest growing regions reduced crop intake. While the reduction in crop intake
negatively impacted the efficiency of various production operations, management
initiated cost reduction steps and is actively pursuing additional cost
reduction initiatives in an attempt to mitigate some of the crop-related
production cost increases.
MARKET AND INDUSTRY DATA
Unless otherwise stated herein, industry and market share data used throughout
this discussion was derived from industry sources believed by the Company to be
reliable including information provided by Information Resources, Inc. Such data
was obtained or derived from consultants' reports and industry publications.
Consultants' reports and industry publications generally state that the
information contained therein has been obtained from sources believed to be
reliable, but that the accuracy and completeness of such information is not
guaranteed. The Company has not independently verified such data and makes no
representation to its accuracy.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures, as defined in Rule
15d-14(c) promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"). Within the 90 days prior to the filing date of this report, the Company's
management, including the Company's chief executive officer and chief financial
officer, carried out an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on the
evaluation of these disclosure controls and procedures, the chief executive
officer and chief financial officer concluded that the Company's disclosure
controls and procedures are effective.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
PART II
ITEM 1. LEGAL PROCEEDINGS
Certain of our legal proceedings are reported in our Annual Report on Form 10-K
Equivalent for the year ended June 29, 2002 and our Quarterly Reports on Form
10-Q Equivalent for the quarters ended September 28, 2002 and December 28, 2002,
with material developments since those reports described in NOTE 11, "Other
Matters," to the "Notes to Consolidated Financial Statements," which information
is incorporated by reference in answer to this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
3.1 Certificate of Amendment of the Certificate of
Incorporation of Agrilink Foods, Inc.
4.1 Second Supplemental Indenture dated March 1,
2003 amending the Indenture dated as of
November 18, 1998 between Agrilink Foods, Inc.
now known as Birds Eye Foods, Inc., the
Guarantors named therein, and IBJ Schroder
Bank & Trust Company, Inc. as Trustee.
(b) Reports on Form 8-K:
On January 29, 2003, the Company filed a report on Form 8-K to
report a change in its name from Agrilink Foods, Inc. to Birds Eye
Foods, Inc.
SIGNATURES
The Company has duly caused this 10-Q Equivalent to be signed on its behalf by
the undersigned, thereunto duly authorized.
BIRDS EYE FOODS, INC.
Date: May 13, 2003 By:/s/ Earl L. Powers
------------------ --------------------------------
EARL L. POWERS
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER and
SECRETARY
(On Behalf of the Registrant and as
Principal Financial Officer
and Principal Accounting Officer)
CERTIFICATION
I, Dennis M. Mullen, certify that:
1. I have reviewed this quarterly report on Form 10-Q Equivalent of Birds Eye
Foods, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003 /s/ Dennis M. Mullen
------------- -------------------------------------
DENNIS M. MULLEN
Chairman,
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION
I, Earl L. Powers, certify that:
1. I have reviewed this quarterly report on Form 10-Q Equivalent of Birds Eye
Foods, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003 /s/ Earl L. Powers
------------ --------------------------------------------
EARL L. POWERS
Executive Vice President,
Chief Financial Officer
and Secretary
(Principal Financial Officer)