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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Pinnacle Foods Finance LLCdex311.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Pinnacle Foods Finance LLCdex322.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Pinnacle Foods Finance LLCdex312.htm
EX-12.1 - COMPUTATION OF RATIOS - Pinnacle Foods Finance LLCdex121.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Pinnacle Foods Finance LLCdex321.htm
EX-10.39 - EMPLOYMENT OFFER LETTER - Pinnacle Foods Finance LLCdex1039.htm
EX-10.38 - EMPLOYMENT OFFER LETTER - Pinnacle Foods Finance LLCdex1038.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 27, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 333-148297

 

 

Pinnacle Foods Finance LLC

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-8720036

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1 Old Bloomfield Avenue

Mt. Lakes, New Jersey

  07046
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (973) 541-6620

 

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to section 12(g) of the Act: None

(Title of class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  x    No  ¨

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

(The Registrant believes it is a voluntary filer and it has filed all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check One):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).*    Yes  ¨    No  ¨

 

* The registrant has not yet been phased into the interactive data requirements

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  ¨    No  x

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter.

Not applicable.

As of March 23, 2010, there were outstanding 100 shares of common stock, par value $0.01 per share, of the Registrant.

Documents incorporated by reference

None

 

 

 


Table of Contents

TABLE OF CONTENTS

FORM 10-K

 

              Page
No.
PART I    2
  ITEM 1.    BUSINESS    2
  ITEM 1A.    RISK FACTORS    14
  ITEM 1B.    UNRESOLVED STAFF COMMENTS    22
  ITEM 2.    PROPERTIES    22
  ITEM 3.    LEGAL PROCEEDINGS    23
  ITEM 4.    RESERVED TO THE NEW VOTING REPORTING RULES    23
PART II    24
  ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES    24
  ITEM 6.    SELECTED FINANCIAL DATA    25
  ITEM 7:    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    27
  ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    58
  ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA    62
 

  CONSOLIDATED STATEMENTS OF OPERATIONS

   65
 

  CONSOLIDATED BALANCE SHEETS

   66
 

   CONSOLIDATED STATEMENTS OF CASH FLOWS

   67
 

   CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

   68
 

   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   69
  1.       Summary of Business Activities    69
  2.       Summary of Significant Accounting Policies    73
  3.       Acquisition    79
  4.       Lehman Brothers Holdings, Inc. Bankruptcy and Related Events    82
  5.       Fair Value Measurements    82
  6.       Shareholder’s Equity and Stock-Based Compensation Expense    84
  7.       Restructuring and Impairment Charges    89
  8.       Other Expense (Income), net    90
  9.       Balance Sheet Information    91
  10.       Goodwill, Tradenames and Other Assets    94
  11.       Debt and Interest Expense    97
  12.       Pension and Retirement Plans    102
  13.       Taxes on Earnings    113
  14.       Financial Instruments    118
  15.       Commitments and Contingencies    122
  16.       Related Party Transactions    123
  17.       Segments    125
  18.       Quarterly Results (Unaudited)    127
  19.       Guarantor and Nonguarantor Statements    128
  ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE    139
  ITEM 9A.    CONTROLS AND PROCEDURES    139
  ITEM 9B.    OTHER INFORMATION    140
PART III    141
  ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT    141
  ITEM 11.    EXECUTIVE COMPENSATION    147
  ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT    160
  ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE    161
  ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES    167
PART IV    168
  ITEM 15.    EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES    168


Table of Contents

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information. When used in this annual report on Form 10-K, the words “estimates,” “expects,” “contemplates”, “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “may,” “should” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, management’s examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this annual report. Such risks, uncertainties and other important factors include, among others, the risks, uncertainties and factors set forth below under “Item 1A: Risk Factors,” other matters discussed from time to time in subsequent filings with the Securities and Exchange Commission, and the following risks, uncertainties and factors:

 

   

general economic and business conditions;

 

   

industry trends;

 

   

changes in our leverage;

 

   

interest rate changes;

 

   

the funding of our defined benefit pension plan;

 

   

future impairments of our goodwill and intangible assets

 

   

changes in our ownership structure;

 

   

competition;

 

   

the loss of any of our major customers or suppliers;

 

   

changes in demand for our products;

 

   

changes in distribution channels or competitive conditions in the markets where we operate;

 

   

costs and timeliness of integrating future acquisitions;

 

   

loss or litigation;

 

   

loss of our intellectual property rights;

 

   

our ability to achieve cost savings;

 

   

fluctuations in price and supply of raw materials;

 

   

seasonality;

 

   

changes in our collective bargaining agreements or shifts in union policy;

 

   

difficulty in the hiring or the retention of key management personnel;

 

   

restrictions imposed on our business by the terms of our indebtedness;

 

   

our reliance on co-packers to meet our manufacturing needs;

 

   

availability of qualified personnel; and

 

   

changes in the cost of compliance with laws and regulations, including environmental laws and regulations.

There may be other factors that may cause our actual results to differ materially from the forward-looking statements.

All forward-looking statements in this Form 10-K apply only as of the date of this annual report on Form 10-K and are expressly qualified in their entirety by the cautionary statements included in this annual report on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances.

EXPLANATORY NOTE

Unless the context requires otherwise, in this Form 10-K, “Pinnacle,” the “Company,” “we,” “us” and “our” refers to Pinnacle Foods Finance LLC, or “PFF”, and the entities that are its consolidated subsidiaries (including Pinnacle Foods Group LLC, or “PFG LLC”, formerly known as Pinnacle Foods Group Inc. or “PFGI”), which includes all of Pinnacle’s existing operations. In addition, where the context so requires, we use the term “Predecessor” to refer to the historical financial results and operations of PFG LLC and its subsidiaries prior to the consummation of the Blackstone Transaction described herein and the term “Successor” to refer to the historical financial results and operations of PFF and its subsidiaries after the consummation of the Blackstone Transaction described herein.

 

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PART I

 

ITEM 1. BUSINESS

General Information

We are a leading manufacturer, marketer, and distributor of branded, high-quality dry and frozen packaged food products in North America. Our major brands hold leading market positions in their respective retail categories and enjoy high consumer awareness. Our products are sold through a combination of a national sales broker, regional sales brokers, and a direct sales force that reaches supermarkets, grocery wholesalers and distributors, mass merchandisers, super centers, convenience stores, dollar stores, drug stores, warehouse clubs, foodservice, and other alternative channels in the United States and Canada. We also distribute a selection of our products in Mexico, the Caribbean, and Latin America. The combination of new product innovation, core product renovation, effective consumer marketing, and strategic acquisitions have helped us create and grow our diverse brand portfolio. The address of our website is www.pinnaclefoods.com. The information on our website is not incorporated by reference into this report.

On December 23, 2009, we acquired all of the common stock of Birds Eye Foods, Inc. (“Birds Eye”) (the “Birds Eye Acquisition”). Birds Eye’s product offering includes an expanding platform of healthy, high-quality frozen vegetables and frozen meals and a portfolio of primarily branded specialty dry foods which are well-aligned with our existing dry foods segment. Frozen food products are marketed under the Birds Eye brand name, which holds the #1 market share in frozen vegetables and the #1 market share in the value sub-segment of complete bagged meals. Birds Eye markets traditional boxed and bagged frozen vegetables, as well as steamed vegetables using innovative steam-in-packaging technology, under the Birds Eye and Birds Eye Steamfresh brands. Birds Eye’s complete bagged meals, marketed primarily under the value-oriented Birds Eye Voila! brand, offer consumers value-added meal solutions that include a protein, starch, and vegetables in one convenient package. Birds Eye’s branded specialty dry food products hold leading market share positions in their core geographic markets, and include Comstock and Wilderness fruit pie fillings and toppings, Brooks and Nalley chili and chili ingredients, and snack foods by Tim’s Cascade and Snyder of Berlin.

Historically, Pinnacle’s products and operations were managed and reported in two operating segments: dry foods and frozen foods. Birds Eye’s results for the five days in fiscal 2009 are reported in a third operating segment “Birds Eye foods”. The dry foods segment consists primarily of Duncan Hines baking mixes and frostings, Vlasic shelf-stable pickles, peppers, and relish, Mrs. Butterworth’s and Log Cabin table syrups, and Armour canned meats. The frozen foods segment consists primarily of Hungry-Man and Swanson frozen dinners and entrées, Mrs. Paul’s and Van de Kamp’s frozen seafood, Aunt Jemima frozen breakfasts, Lender’s bagels, and Celeste frozen pizza-for-one.

Throughout this Form 10-K, we use a combination of data provided by Information Resources, Inc. (“IRI”) and The Nielsen Company (“Nielsen”). Unless we indicate otherwise, retail sales, market share, category and other industry data used throughout this Form 10-K for all categories and segments are: for U.S. brands, IRI data for the 52-week period ended December 27, 2009; and for brands in Canada, Nielsen data for the 52-week period ended December 19, 2009. This data includes retail sales in supermarkets with at least $2 million in total annual sales but exclude sales in mass merchandiser, club, drug, convenience or dollar stores. Retail sales are dollar sales estimated by IRI and Nielsen and represent the value of units sold through supermarket cash registers for the relevant period.

 

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We view the baking mixes and frostings category as consisting of the following segments: cake mix, brownie mix, ready-to-serve frostings, muffin mix, cookie mix, bar mix, frosting mix, quick bread, dessert kits, all other baking mix and all other frosting. We view the shelf-stable pickles, peppers, and relish category as consisting of shelf-stable pickles, peppers, and relish segments. We view the canned meat category as consisting primarily of the canned chili, chunk meat, luncheon meat, sloppy joe, Vienna sausages, and stew segments, as well as several smaller segments. We view the frozen vegetables category as consisting of the steamed and nonsteamed segments. We view the frozen prepared seafood category as consisting of breaded, marinated, and seasoned “fin products,” such as pollock and salmon, and “non-fin products,” primarily shrimp. We view the single-serve frozen dinners and entrées category as consisting of single-serve full-calorie dinners and entrées and single-serve diet dinners and entrées. We view the multi-serve frozen dinner and entrées category as consisting of multi-serve meals and complete bagged meals, which we further segment into value and premium sub-segments. We view the frozen breakfast category as primarily consisting of the grain segment, which includes frozen waffles, pancakes, and French toast, and the protein segment, which includes frozen breakfast entrées and savory breakfast handhelds. References to the bagel category are to scannable bagels (pre-packaged), consisting of the frozen, refrigerated, and shelf-stable segments. We view table syrup and frozen pizza-for-one as distinct categories. When we refer to the core market of our Open Pit brand of barbecue sauce, such core market consists of the major metropolitan areas surveyed by IRI in Illinois, Indiana, Michigan, Ohio, western Pennsylvania, and Wisconsin. Unless we indicate otherwise, all references to percentage changes reflect the comparison to the same period in the prior year.

Although we believe that this information is reliable, we cannot guarantee its accuracy and completeness, nor have we independently verified it. Where we so indicate, we obtain certain other market share and industry data from internal company surveys and management estimates based on these surveys and on our management’s knowledge of the industry. While we believe such internal company surveys and management estimates are reliable, no independent sources have verified such surveys and estimates. Although we are not aware of any misstatements regarding the industry data that we present in this Form 10-K, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Disclosure regarding forward-looking statements” and “Item 1A: Risk Factors.”

Industry overview

The U.S. packaged food manufacturing industry has historically been characterized by relatively stable sales growth, driven primarily by population growth and modest sales price increases. Given the non-discretionary nature of food consumption, our industry historically has demonstrated stability during periods of economic recession. In recent years, our industry has been characterized by a number of broad trends, including:

 

   

Changing Consumer Lifestyles. Food manufacturers are highly attuned to changing consumer preferences and needs, and have responded to consumers’ increasingly busy lifestyles and greater focus on health and nutrition by introducing a variety of convenient, high-quality, and healthy food products and meal solutions. Industry participants seek to gain a competitive advantage by addressing consumer needs through new product introductions, core product renovations, and marketing. Pinnacle continues to expand and refine its brands and offerings so they remain relevant and continue to be preferred by consumers.

 

   

Channel Shifting. Consumers are increasingly purchasing food products at outlets other than traditional grocery retailers. Mass merchandisers, club stores, dollar stores, and other alternative channels are gaining share versus traditional grocery stores, though at a slower rate than at the peak of the recession. Pinnacle is well positioned in grocery and alternative channels, maintaining strong customer relationships across key retailers in each segment.

 

   

Return to Eating at Home. Historically, U.S. consumers had been increasing the proportion of their food consumption at restaurants and other food service venues. Recently, however, this trend has reversed with more consumers eating at home, which we believe has been driven by consumers’ increased desire to spend time with family in the home, the growing popularity of cooking as a leisure activity, and consumers’ renewed focus on managing their personal finances prudently given the economic environment. We are taking advantage of these trends through increased targeted marketing and new product introductions.

 

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Increase in Private Label. Private label and store brands represent approximately 20% of total packaged food purchases at grocery retail, up from 18.5% a year ago. We believe the recent rise in private label share has been driven by consumers’ increased focus on product costs, certain retailers’ support of store brands, and the improved quality of some private label offerings. However, we believe that brands with well established equities, strong awareness, and consumer preference that continue to differentiate themselves and provide value to the consumer are well positioned to withstand private label competition. In addition there is significant private label penetration in only four of the thirteen categories in which we compete. Therefore, we do not believe the increase in private label presents significant risk for us.

The packaged food industry is comprised of numerous product categories, each with their own unique competitive dynamics. Pinnacle competes in the following categories within the food industry:

Dry Foods

Baking mixes and frostings. The baking mixes and frostings category, which has historically exhibited stable consumption, had $1.4 billion in retail sales, an increase of 4.9% compared to the prior year period. The baking mixes and frostings category primarily consists of the following five key product segments, with corresponding share of total category retail sales: cake mix (24.3%), ready-to-serve frostings (18.1%), brownie mix (17.8%), muffin mix (14.0%), and cookie mix (5.4%). Pinnacle’s Duncan Hines brand competes in all five of these segments. The remaining 20.4% of category retail sales is in smaller product segments such as dessert mixes, quick breads, and specialty mixes.

Shelf-stable pickles, peppers and relish. The shelf-stable pickles, peppers and relish category had $970 million of retail sales, an increase of 4.7% from the prior year period. Shelf-stable pickles are the largest segment of the category, with $519 million in retail sales, followed by peppers, with $331 million, and relish, with $120 million. Pinnacle’s Vlasic brand competes in all three of these segments. Of shelf-stable pickle segment retail sales, approximately 74.1% represented sales of branded pickles, and the remaining 25.9% represented sales of private label pickles.

Table syrup. The table syrup category had $484 million in retail sales, representing a 4.0% increase compared to the prior year period. The table syrup category consists of four major brands: Aunt Jemima, Mrs. Butterworth’s (Pinnacle’s brand), Log Cabin (Pinnacle’s brand) and Eggo, as well as numerous private label and regional brands. Of table syrup category retail sales, approximately 78.8% represents sales of branded table syrup, and the remaining 21.2% represents sales of private label table syrup.

Canned meat. The canned meat category had $1.2 billion in retail sales, an increase of 2.8% over the prior year period. The category primarily includes the following key product segments, with corresponding share of total category retail sales: canned chili (33.3%), chunk meat (16.1%), luncheon meat (9.1%), sloppy joe (8.3%), Vienna sausages (8.1%), and stew (5.7%). The remaining 19.4% of category retail sales is in smaller segments such as hash, potted meat, sliced dried beef, meat spreads, chicken and dumplings, corned and roast beef, sausage meats, and other canned meat. Pinnacle’s Armour brand competes in twelve of the fifteen segments within the canned meat category, with a particular focus on Vienna sausages, potted meat, and sliced dried beef.

Barbecue sauce. We market a complete line of barbecue sauce products under the Open Pit brand, which was introduced in 1955. Open Pit is a regional brand that competes primarily in the Midwest markets.

Frozen Foods

Single-serve frozen dinners and entrées. The single-serve frozen dinners and entrées category generated retail sales of $3.6 billion. The category is divided into two primary segments: full-calorie meals and diet meals. Single-serve full-calorie frozen dinners and entrées have declined approximately 2.7% over the prior year period. Pinnacle competes in the $2.0 billion single-serve full-calorie dinner and entrée segment with its Hungry-Man and Swanson Dinners brands.

Frozen prepared seafood. The frozen prepared seafood category had $609 million in retail sales, an increase of 5.2% from the prior year period. The category consists of breaded, marinated, and seasoned “fin products,” such as pollock and salmon, and “non-fin products,” primarily shrimp. Pinnacle’s Mrs. Paul’s and Van de Kamp’s brands compete in this category.

 

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Frozen breakfast. The frozen breakfast category had $1.5 billion in retail sales, an increase of 2.5% over the prior year period, driven primarily by an increased focus on new product innovation. The frozen breakfast category has the following two key segments with corresponding category retail sales: the grain segment ($705 million) includes frozen waffles, pancakes, and French toast; and the protein segment ($489 million) includes frozen breakfast entrées and savory breakfast handhelds. The balance of the category includes sweet handhelds and stuffed bagels. Pinnacle competes in both of the key segments of this category through its Aunt Jemima brand.

Bagels. The scannable (pre-packaged) bagel category had retail sales of $652 million, an increase of 1.3% over the prior year period. The scannable (pre-packaged) bagel category consists of the frozen bagels, refrigerated bagels and fresh bagels segments, comprising 6.0%, 9.2% and 84.9% of the category, respectively. Pinnacle’s Lender’s brand competes in all three segments. Refrigerated and fresh bagel market sales have increased 2.6% and 1.9% respectively, while the frozen bagel market sales have decreased 8.3%. The decline in frozen bagel sales is driven by consumers replacing frozen bagel purchases with purchases of fresh bagels and other, more innovative frozen breakfast products.

Frozen pizza-for-one. The frozen pizza category had $3.0 billion in retail sales, an increase of 6.5% from the prior year period. Pinnacle’s Celeste brand competes in the $696 million pizza-for-one (excluding French bread pizza) segment, which grew 8.1% over the prior year period.

Birds Eye Foods

Frozen vegetables. The frozen vegetables category had $2.3 billion in retail sales, an increase of 2.3% over the prior year period. The category is divided between steamed and non-steamed segments. The steamed segment represents approximately 27% of the overall frozen vegetables category and the non-steamed segment comprises 73% of the category. The steamed segment has grown to a $623 million segment. Birds Eye competes in both the steamed and non-steamed frozen vegetables segments. The U.S. market for vegetables and produce has increased faster than the rate of population growth in recent years, supported by ongoing trends including greater consumer demand for healthy and convenient foods. Over the last twenty years, consumption of vegetables has increased by 39 pounds per capita according to the U.S. Department of Agriculture (“USDA”); however, U.S. consumers still consume less than one serving of vegetables per day versus the USDA’s recommended 3 to 5 servings per day. In addition, frozen vegetables have been gaining share of overall vegetable purchases given their convenience and reduced waste versus fresh vegetables, and greater nutritional content versus canned vegetables. Branded products account for 61% of U.S. frozen vegetables retail sales and private label products comprise the remaining 39%. Private label share of the total category has declined marginally over the past five years.

Multi-serve frozen dinners and entrées. The multi-serve frozen dinners and entrées category generates retail sales of $1.3 billion and is divided into two primary segments: multi-serve meals and complete bagged meals. The multi-serve frozen dinners and entrées category grew 2.9% over the prior year period. The complete bagged meal segment of the frozen dinners and entrées category generated retail sales of approximately $600 million, an increase of 6.9% over the prior year period. The complete bagged meals segment includes both a premium sub-segment ($5.99 and above) and a value sub-segment ($3.99 and under). Birds Eye Foods competes in the value sub-segment of complete bagged meals with its Birds Eye Voila! brand and in the premium sub-segment with its Birds Eye Steamfresh brand. Beginning in mid-2010, the Steamfresh complete bagged meals will no longer be offered.

Our products

Our product portfolio consists of a diverse mix of product lines and leading, well-recognized brands. Our major brands hold leading market positions in their respective retail markets and enjoy high consumer awareness. Through our managed broker network, our products reach all traditional classes of trade, including grocery wholesalers and distributors, grocery stores and supermarkets, convenience stores, mass and drug merchandisers and warehouse clubs. We also distribute a select assortment of our products through foodservice and private label channels.

 

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Dry Foods

Baking mixes and frostings. Our baking mixes and frostings include Duncan Hines cake mixes, ready-to-serve frostings, brownie mixes, muffin mixes, and cookie mixes. Duncan Hines was introduced as a national brand in 1956 when Duncan Hines, a renowned restaurant critic and gourmet, launched the brand as part of his efforts to bring restaurant-quality food to American homes. Duncan Hines has been gaining share in a growing category, driven by successful new product launches (such as Decadent Carrot Cake Mix in 2008 and Duncan Hines Whole Grain Muffins in 2009), increased and more effective consumer marketing via both traditional and non-traditional media, and distribution gains in retail and alternative channels. Duncan Hines is the #2 brand with a 17.8% market share of the $1.4 billion baking mixes and frostings category. We also distribute Duncan Hines in Canada, where it is the #2 brand with a 29.5% market share of the $82 million CAD baking mixes and frostings category. All Duncan Hines products are produced by contract manufacturers.

Shelf-stable pickles, peppers, and relish. We offer a complete line of shelf-stable pickle, pepper, and relish products that we market and distribute nationally, primarily under the Vlasic brand, and regionally under the Milwaukee’s and Wiejske Wyroby brands. Our Vlasic brand, represented by its trademark Vlasic stork, was introduced over 65 years ago and has the highest consumer awareness and quality ratings in the pickle category. Vlasic is the #1 brand in the $970 million shelf-stable pickles, peppers, and relish category, with an 18.9% share of the overall category and a 30.0% share of the $519 million shelf-stable pickle segment. Vlasic is also distributed in Canada, where it is the #2 brand in the category, and in the foodservice channel.

Table syrups. Our table syrups primarily include products marketed under the Log Cabin and Mrs. Butterworth’s brands. Log Cabin was introduced in 1888 and, with its cabin-shaped bottle and distinct maple flavor, appeals to a broad consumer base. In 2009, we converted our Log Cabin regular and lite recipes to a natural sugar formula, becoming the only national table syrup brand to offer a product without high-fructose corn syrup. Mrs. Butterworth’s was introduced in 1962 and, with its distinctive grandmother-shaped bottle and thick, rich, and buttery flavor, appeals to families with children. Earlier in 2009, the brand sponsored a contest to guess Mrs. Butterworth’s first name, and received extensive media coverage, reflecting the brand’s iconic status and highly-engaged consumer franchise. Both of our table syrup brands are available in original, lite, and sugarfree varieties. In the $484 million table-syrup category, Mrs. Butterworth’s and Log Cabin hold the number two (9.2%) and number three (8.8%) market share positions, respectively, among branded syrups. We also distribute these products through the foodservice channel.

Canned meat. Our canned meat products are marketed primarily under the Armour brand. Armour was introduced in 1868 by Philip Danforth Armour for California gold miners. Armour is the #3 brand in the $1.2 billion canned meat category, with a 7.4% market share, and is the #1 brand in the Vienna sausage, potted meat, and sliced dried beef segments. Armour Vienna sausage has particularly high penetration in the southeastern United States, where it is an important and high-volume product for retailers. Armour has a broad product line which also includes stews, chilis, and hashes. We also manufacture private label products and produce canned meat under certain co-pack arrangements.

Barbecue sauce. We market a complete line of barbecue sauce products under the Open Pit brand, which was introduced in 1955. Open Pit is a regional brand that competes primarily in Midwest markets, where it has a leading market share.

Frozen Foods

Single-serve frozen dinners and entrées. Our single-serve frozen dinners and entrées consist primarily of products sold in the United States and Canada under the Hungry-Man and Swanson brands. Hungry-Man is a highly differentiated brand with strong brand awareness and is uniquely positioned to male consumers. This distinctive position has been increasingly valuable to our retail customers as the percentage of food shopping done by men has grown. Swanson, The Original TV Dinner, was launched in 1953 and enjoys a strong brand heritage and high awareness. Our Hungry-Man and Swanson brands collectively are the #4 participant in the $2.0 billion single-serve full-calorie dinners and entrées segment and hold the #3 position in Canada in the $288 million CAD single-serve full-calorie dinners and entrées segment.

 

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Frozen prepared seafood. Our frozen prepared seafood products, marketed under the Mrs. Paul’s and Van de Kamp’s brands, include breaded and battered fish sticks and fish fillets, lightly breaded fish, breaded shrimp, and some specialty seafood items. The Van de Kamp’s brand started in Los Angeles and dates back to 1915, and the Mrs. Paul’s brand started in Philadelphia and dates back to the mid-1940s. We utilize a dual-brand strategy to capitalize on the well-developed regional positions of the Van de Kamp’s and Mrs. Paul’s brands. In 2009, our brands dramatically upgraded product quality based on consumer preference, resulting in year-to-date growth in retail sales of 28.2% and market share gain of 3.3 percentage points. Van de Kamp’s and Mrs. Paul’s hold the number two (10.9%) and the number four (7.4%) market share positions among branded participants, respectively, in the $609 million frozen prepared seafood category.

Frozen breakfast. Our frozen breakfast products are marketed under the Aunt Jemima brand and include waffles, pancakes, French toast, breakfast entrées, and savory breakfast handhelds. The Aunt Jemima brand was established over a century ago and enjoys high brand awareness and quality rankings. Aunt Jemima is positioned to families as a warm, wholesome breakfast for busy mornings. The Aunt Jemima brand is currently the #4 brand in the $1.5 billion frozen breakfast category with a 9.1% market share. Aunt Jemima is the #2 brand in both the $705 million grain segment, which includes frozen waffles, pancakes and French toast, and the $489 million protein segment, which includes frozen breakfast entrées and savory breakfast handhelds.

Bagels. Our bagel products primarily consist of Lender’s packaged bagels, which are distributed among all scannable (pre-packaged) sections of the grocery store (i.e., the frozen, refrigerated, and fresh bread aisles). Founded in 1927, Lender’s ranks #3 with an 8.9% market share of the $652 million pre-packaged bagel category. The brand has the leading market share in both refrigerated and frozen bagel segments. We also distribute these products through the foodservice channel.

Frozen pizza-for-one. We market frozen pizza under the Celeste brand, which dates back to the 1940s. Celeste is the #2 brand in the $696 million frozen pizza-for-one category, with a 10.3% market share. Its sales are concentrated in the Northeast, Chicago, Florida, and California markets. Celeste is positioned as a high quality meal at an affordable price.

Birds Eye Foods

Frozen vegetables. Birds Eye is the largest brand in the $2.3 billion frozen vegetables category. Collectively, our steamed and non-steamed product offerings hold the #1 position with a 26.6% market share. With the launch of Birds Eye Steamfresh vegetables in January 2006, Birds Eye was the first company to capture a nationwide market share with a product that enables consumers to conveniently steam vegetables in microwaveable packaging. The steamed segment has since grown to $623 million in retail sales, and has been a major contributor to the growth in the total frozen vegetables category, which increased 2.3% over the prior year period. The steamed segment represents approximately 27% of the overall category, and Birds Eye holds a 53.1% market share of the steamed segment. The non-steamed segment comprises 73% of the overall category, and Birds Eye holds a 16.9% market share of the non-steamed segment.

Frozen multi-serve dinners and entrées. Birds Eye competes in the frozen complete bagged meals segment of the multi-serve dinners and entrées category with its Birds Eye Voila! brand in the value sub-segment and its Birds Eye Steamfresh brand in the premium sub-segment. Birds Eye’s complete bagged meals product portfolio is the #2 competitor in the $600 million complete bagged meals segment, with a combined 23.8% market share. Birds Eye Voila! and Birds Eye Steamfresh complete bagged meals offer consumers value-added meal solutions that include a protein, starch, and vegetables in one convenient package. Beginning in mid-2010, the Steamfresh complete bagged meals will no longer be offered. With its Birds Eye Voila! brand, Birds Eye holds the #1 position in the value sub-segment of complete bagged meals.

Specialty foods. Birds Eye offers a variety of shelf-stable specialty food products, including Comstock and Wilderness fruit pie fillings and toppings, Brooks and Nalley chili and chili ingredients, and snack items by Tim’s Cascade and Snyder of Berlin. These dry foods brands have strong local awareness and hold leading market share positions in their core geographic markets.

 

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History

Pinnacle Foods Group Inc., (“PFGI”) was incorporated under Delaware law on June 19, 1998. Pinnacle Foods Finance LLC and Pinnacle Foods Finance Corp. were formed under Delaware law on March 5, 2007 and February 28, 2007, respectively. Our principal executive offices are located at 1 Old Bloomfield Avenue, Mountain Lakes, New Jersey 07046. Our telephone number is (973) 541-6620.

Armour Acquisition

On March 1, 2006, PFGI acquired certain assets and assumed certain liabilities of the food products business (the “Armour Business”) of The Dial Corporation for $189.2 million in cash, including transaction expenses. The Armour Business is a leading manufacturer, distributor, and marketer of products in the $1.2 billion canned meat category. The Armour Business offers products in twelve of the fifteen segments within the canned meat category and maintains the leading market position in the Vienna sausage, potted meat, and sliced beef categories. The business also includes meat spreads, chili, luncheon meat, corned and roast beef hash, and beef stew. The majority of the products are produced at the manufacturing facility located in Ft. Madison, Iowa, which was acquired in the transaction. Products are sold under the Armour brand name as well as through certain private label and co-pack arrangements.

Blackstone Transaction

On February 10, 2007, Crunch Holding Corp. (“CHC”), a Delaware corporation and the parent company of PFGI, entered into an Agreement and Plan of Merger with Peak Holdings LLC (“Peak Holdings”), a Delaware limited liability company controlled by affiliates of The Blackstone Group L.P. (“Blackstone”), Peak Acquisition Corp. (“Peak Acquisition”), a wholly-owned subsidiary of Peak Holdings, and Peak Finance LLC (“Peak Finance”), an indirect wholly-owned subsidiary of Peak Acquisition, providing for the acquisition of CHC. Under the terms of the Agreement and Plan of Merger, the purchase price for CHC was $2,162.5 million in cash less the amount of indebtedness (including capital lease obligations) of CHC and its subsidiaries outstanding immediately prior to the closing and certain transaction costs, subject to purchase price adjustments based on the balance of working capital and indebtedness as of the closing. Pursuant to the Agreement and Plan of Merger, immediately prior to the closing, CHC contributed all of the outstanding shares of capital stock of its wholly-owned subsidiary PFGI to a newly-formed Delaware limited liability company, PFF. At the closing, Peak Acquisition merged with and into CHC, with CHC as the surviving corporation, and Peak Finance merged with and into PFF, with PFF as the surviving entity. As a result of this transaction, CHC became a wholly-owned subsidiary of Peak Holdings. This transaction (the “Blackstone Transaction”) closed on April 2, 2007.

Reorganization of Subsidiaries

In order to simplify administrative matters and financial reporting and to place both frozen foods and dry foods under one entity, we consummated a reorganization of our subsidiaries in September 2007 (the “Reorganization”) whereby we formed Pinnacle Foods International Corp., a Delaware corporation (“PF International”) on September 26, 2007, as a subsidiary to Pinnacle Foods Corporation (“PFC”). In connection with the Reorganization, PFC contributed all of the issued and outstanding shares of Pinnacle Foods Canada Corp. (“PF Canada”) to PF International making PF International the parent of PF Canada. As a further step to our Reorganization, on September 30, 2007, two of our domestic operating subsidiaries, Pinnacle Foods Management Corporation (“PF Management”) and PFC, merged with and into PFGI. As a final step to the Reorganization, PFGI was converted from a Delaware corporation into a Delaware limited liability company under Delaware law on October 1, 2007 under the name Pinnacle Foods Group LLC.

 

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Birds Eye Acquisition

On November 18, 2009, PFG LLC entered into the Stock Purchase Agreement with Birds Eye Holdings and Birds Eye Foods, Inc. pursuant to which PFG LLC will acquire all of the issued and outstanding common stock of Birds Eye Foods, Inc. from Birds Eye Holdings. PFG LLC is controlled by Blackstone. At the closing of the Birds Eye Acquisition on December 23, 2009, PFG LLC purchased all of the outstanding shares of Birds Eye’s common stock, par value $0.01 per share, for a purchase price of $670.0 million in cash. In connection with the closing, all the existing indebtedness of Birds Eye outstanding as of the date of closing of the Birds Eye Acquisition was repaid, including accrued interest.

The following chart illustrates our growth:

 

Date

  

Event

  

Selected Brands Acquired

2001

  

•     Pinnacle Foods Holding Corporation formed by Hicks, Muse, Tate & Furst Incorporated and CDM Investor Group LLC to acquire the North American business of Vlasic Foods International Inc.

  

•     Hungry-Man and Swanson (1)

•     Vlasic

•     Open Pit

2003

  

•     Crunch Holding Corp., indirectly owned by J.P. Morgan Partners LLC, J.W. Childs Associates, L.P. and CDM Investor Group LLC acquire Pinnacle Foods Holding Corporation

  

2004

  

•     Merger of Pinnacle Foods Holding Corporation with Aurora completed and surviving company renamed Pinnacle Foods Group Inc.

  

•     Duncan Hines

•     Van de Kamp’s and Mrs. Paul’s

•     Log Cabin and Mrs. Butterworth’s

•     Lender’s

•     Celeste

•     Aunt Jemima (frozen breakfast products) (1)

2006

  

•     Acquired Armour Business from the Dial Corporation

  

•     Armour (1)

2007

  

•     Crunch Holding Corp. acquired by The Blackstone Group

  

2009

  

•     Birds Eye Foods, Inc. acquired by Pinnacle Foods Group LLC

  

•     Birds Eye

•     Birds Eye Steamfresh

•     Birds Eye Voila!

•     Comstock

•     Wilderness

•     Brooks

•     Nalley

•     Tim’s Cascade

•     Snyder of Berlin

 

(1) We manufacture and market these products under licenses granted by Campbell Soup Company (Swanson), the Quaker Oats Company (Aunt Jemima) and Smithfield Foods (Armour). These licenses are discussed further in the section titled “Trademarks and Patents”.

Marketing, sales and distribution

Our marketing programs consist of consumer advertising, consumer promotions, trade promotions, direct marketing, and public relations. Our advertising consists of television, newspaper, magazine, and web advertising aimed at increasing consumer preference and usage of our brands. Consumer promotions include free trial offers, targeted coupons, and on-package offers to generate trial usage and increase purchase frequency. Our trade promotions focus on obtaining retail feature and display support, achieving optimum retail product prices, and securing retail shelf space. We continue to shift our marketing efforts toward building long-term brand equity through increased consumer marketing.

 

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We sell a majority of our products in the United States through one national broker with whom we have a long-term working relationship. In Canada, we use one national broker to distribute the majority of our products. We employ other brokers for the foodservice and club channels. Through this sales broker network, our products reach all traditional classes of trade, including supermarkets, grocery wholesalers and distributors, mass merchandisers, super centers, convenience stores, drug stores, warehouse clubs, foodservice, and other alternative channels.

Due to the different demands of distribution for frozen and shelf-stable products, we maintain separate distribution systems. Our frozen product warehouse and distribution network consists of 18 locations. Frozen products are distributed by means of six owned and operated warehouses at our Fayetteville, Arkansas, Mattoon, Illinois, Waseca, Minnesota, Fulton, New York, Jackson, Tennessee and Darien, Wisconsin plants. In addition, we utilize ten distribution centers in the United States and two distribution centers in Canada, all of which are owned and operated by third-party logistics providers. Our dry product warehouse and distribution network consists of 15 locations. Dry foods products are distributed through a system of fourteen distribution sites in the United States, which include six warehouses that are owned and operated by us at our plants in Millsboro, Delaware, St. Elmo, Illinois, Ft. Madison, Iowa. Fennville, Michigan, Imlay City, Michigan and Tacoma, Washington, as well as eight other locations which are owned and operated by third-party logistics providers. We also distribute dry products from one leased distribution center in Canada. In each third party operated location, the provider receives handles and stores products. Our distribution system uses a combination of common carrier trucking and inter-modal rail transport. In addition to these locations, our snack products primarily distributed through a direct store delivery (“DSD”) network in the Midwest, Mid-Atlantic, and Pacific Northwest, a portion of which is owned and operated by Pinnacle and a portion of which utilizes third-party providers. We believe that our sales and distribution network is scalable and has the capacity to support substantial increases in volume.

Ingredients and packaging

We believe that the ingredients and packaging used to produce our products are readily available through multiple sources. Our ingredients typically account for approximately 44% of our annual cost of products sold, and primarily include sugar, cucumbers, flour (wheat), vegetables, fruits, poultry, seafood, proteins, vegetable oils, shortening, meat, corn syrup, and other agricultural products. Certain vegetables and fruits are purchased under dedicated acreage supply contracts from a number of growers prior to each growing season, while a smaller portion is sourced directly from third parties. Our packaging costs, primarily for aluminum, glass jars, plastic trays, corrugated fiberboard, polyfilm, and plastic packaging materials, typically account for approximately 20% of our annual cost of products sold.

Research and development

Pinnacle’s Product Development and Technical Services team based in Cherry Hill, New Jersey currently consists of 28 full-time employees focused on product-quality improvements, product creation, package development, regulatory compliance, quality assurance, and consumer affairs. We also operate a technical center located in Green Bay, Wisconsin for new product development and brand extensions for our Birds Eye products. Approximately 30 full-time employees are currently employed at the Green Bay facility. Pinnacle’s internal research and development expenditures totaled $4.6 million, $3.5 million, and $4.4 million for fiscal years 2009, 2008, and 2007, respectively.

Customers

We have several large customers that account for a significant portion of our net sales. Wal-Mart and its affiliates is our largest customer and represented approximately 25%, 23%, and 24% of our consolidated net sales in fiscal 2009, 2008 and 2007, respectively. Cumulatively, including Wal-Mart, our top ten customers accounted for approximately 58% in fiscal 2009 and 57% of our net sales in each of the fiscal years 2008 and 2007.

Competition

We face competition in each of our respective product lines. Although we operate in a highly competitive industry, we believe that the strength of our brands has resulted in strong respective competitive positions. We compete with producers of similar products on the basis of, among other things, product quality, brand recognition and loyalty, price, customer service, effective consumer marketing and promotional activities, and the ability to identify and satisfy emerging consumer preferences.

 

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Our most significant competitors for our products are:

 

Our Products

  

Competitor

Single-serve frozen dinners, and entrées    Nestle, ConAgra and Heinz
Multi-serve frozen dinners and entrées    Unilever, Contessa, Nestle, and ConAgra
Shelf-stable pickles, peppers, and relishes.    Kraft, B&G Foods, Inc. , Mt. Olive and private label
Baking mixes, pie fillings and frostings    General Mills, Knouse Fruit and J.M. Smucker Co.
Table syrups    Pepsi Co, Kellogg’s and private label
Frozen vegetables    General Mills and private label
Frozen prepared seafood    Gorton’s and Seapak
Frozen breakfast    Kellogg’s, General Mills and Sara Lee
Bagels    Weston, Sara Lee and private label
Canned meat    ConAgra and Hormel
Frozen pizza-for-one    General Mills, Schwan’s and private label
Snacks    PepsiCo, and private label

Trademarks and patents

We own a number of registered trademarks in the United States, Canada and other countries, including Appian Way®, Birds Eye®, Bernstein’s®, Brooks®, C&W®, Casa Regina®, Celeste®, Chocolate Lovers®, Comstock®, Country Kitchen®, Duncan Hines®, Freshlike®, Fun Frosters®, Grabwich®, Great Starts®, Hawaiian Style Bowls®, Hearty Bowls®, Hearty Hero®, Hungry-Man®, Hungry-Man Sports Grill®, Hungry-Man Steakhouse®, Husman’s®, It’s Good to be Full®, Lender’s®, Log Cabin®, Lunch Bucket®, Magic Mini’s®, McKenzie’s®, Milwaukee’s®, Moist Deluxe®, Mrs. Butterworth’s®, Mrs. Paul’s®, Nalley®, Open Pit®, Oval’s®, Signature Desserts®, Simply Classic®, Snack’mms®, Stackers®, Snyder of Berlin®, Steamfresh®, Taste the Juicy Crunch®, The Original TV Dinner®, Tim’s Cascade®, Treet®, Van de Kamp’s®, Vlasic® and Wilderness®. We also have applications pending with the United States Patent and Trademark Office for a number of trademarks, including So Rich, So Moist, So Very Duncan Hines™, So Moist, So Delicious and So Much More™, Just Add the Warmth™ and That’s the Tastiest Crunch I Ever Heard™. We own the trademark Snyder of Berlin while a third party owns the trademark Snyder of Hanover. Per a court order, the use of the trademark must include the word “Snyder” in combination with the words “of Berlin.” We protect our trademarks by obtaining registrations where appropriate and opposing any infringement in key markets. We also own a design trademark in the United States, Canada, and other countries on the Vlasic stork. We manufacture and market certain of our frozen food products under the Swanson brand pursuant to two royalty-free, exclusive and perpetual trademark licenses granted by Campbell Soup Company. The licenses give us the right to use certain Swanson trademarks both inside and outside of the United States in connection with the manufacture, distribution, marketing, advertising, and promotion of frozen foods and beverages of any type except for frozen soup or broth. The licenses require us to obtain the prior written approval of Campbell Soup Company for the visual appearance and labeling of all packaging, advertising materials, and promotions bearing the Swanson trademark. The licenses contain standard provisions, including those dealing with quality control and termination by Campbell Soup Company as well as assignment and consent. If we were to breach any material term of the licenses and not timely cure such breach, Campbell Soup Company could terminate the licenses.

We manufacture and market certain of our frozen breakfast products under the Aunt Jemima brand pursuant to a royalty-free, exclusive (as to frozen breakfast products only) and perpetual license granted by The Quaker Oats Company. The license gives us the right to use certain Aunt Jemima trademarks both inside and outside the United States in connection with the manufacture and sale of waffles, pancakes, French toast, pancake batter, biscuits, muffins, strudel, croissants, and all other frozen breakfast products, excluding frozen cereal. The license requires us to obtain the approval of The Quaker Oats Company for any labels, packaging, advertising, and promotional materials bearing the Aunt Jemima trademark. The license contains standard provisions, including those dealing with quality control and termination by The Quaker Oats Company as well as assignment and consent. If we were to breach any material term of the license and not timely cure such breach, The Quaker Oats Company could terminate the license.

 

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In addition, as part of our acquisition of the Armour Business from The Dial Corporation, we received the assignment of a license agreement granting us an exclusive, royalty bearing, perpetual license to use certain Armour trademarks. Under the license agreement, Smithfield Foods, as successor to ConAgra, Inc., the licensor, grants us a license for the use of various Armour-related trademarks in conjunction with shelf-stable products within the United States. The shelf-stable products must be manufactured according to approved formulas and specifications, and new specifications must be approved by the licensor, with such approval not to be unreasonably withheld or delayed. Proposed labels, packaging, advertising, and promotional materials must first be submitted to the licensor for approval, with such approval not to be unreasonably withheld or delayed. We are required to make annual royalty payments to the licensor equal to the greater of $250,000 or a percentage royalty based upon our annual net sales of the approved shelf-stable products. If we were to materially breach the license agreement, Smithfield Foods could terminate the license. We maintain Armour-related registrations in many other countries.

We also manufacture complete bagged meals under the The Voila! trademark which is subject to an exclusive license agreement with a third party and limited to use in connection with meat and vegetable products.

Although we own a number of patents covering manufacturing processes, we do not believe that our business depends on any one of these patents to a material extent.

Employees

We employ approximately 4,600 people with approximately 60% of our employees unionized. In 2008, the hourly workers in our Mattoon, Illinois, facility (Lender’s Bagels) elected to join the United Food and Commercial Workers Union and we are currently working to negotiate a contract with these workers. We are also currently negotiating an initial collective bargaining agreement for the route sales group in our snacks business located in Berlin, Pennsylvania (Snyder of Berlin). New collective bargaining agreements for our facilities located in Darien, Wisconsin (Birds Eye brands), with 303 employees, and Waseca, Minnesota (Birds Eye brands), with 90 employees, were completed in December 2009 and January 2010, respectively. A new collective bargaining agreement for our facility located in Imlay City, Michigan (Vlasic brands), with approximately 270 employees, was ratified by the union on March 11, 2010. The collective bargaining agreement with the production group at our snacks business located in Berlin, Pennsylvania (Snyder of Berlin), covering approximately 100 employees, will expire on April 11, 2010; and the collective bargaining agreement with the seasonal employees at our Darien, Wisconsin facility (Birds Eye brands), with approximately 190 employees, will expire on December 1, 2010.

Governmental, legal and regulatory matters

Food Safety and Labeling

We are subject to the Food, Drug and Cosmetic Act and regulations promulgated thereunder by the Food and Drug Administration. This comprehensive and evolving regulatory program governs, among other things, the manufacturing, composition and ingredients, labeling, packaging, and safety of food. In addition, the Nutrition Labeling and Education Act of 1990 prescribes the format and content of certain information required to appear on the labels of food products. We are also subject to regulation by certain other governmental agencies, including the U.S. Department of Agriculture.

Our operations and products are also subject to state and local regulation, including the registration and licensing of plants, enforcement by state health agencies of various state standards, and the registration and inspection of facilities. Enforcement actions for violations of federal, state, and local regulations may include seizure and condemnation of products, cease and desist orders, injunctions, or monetary penalties. We believe that our practices are sufficient to maintain compliance with applicable government regulations, although there can be no assurances in this regard.

Federal Trade Commission

We are subject to certain regulations by the Federal Trade Commission. Advertising of our products is subject to such regulation pursuant to the Federal Trade Commission Act and the regulations promulgated thereunder.

Employee Safety Regulations

We are subject to certain health and safety regulations, including regulations issued pursuant to the Occupational Safety and Health Act. These regulations require us to comply with certain manufacturing, health, and safety standards to protect our employees from accidents.

 

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Environmental Regulation

We are subject to a number of federal, state, and local laws and other requirements relating to the protection of the environment and the safety and health of personnel and the public. These requirements relate to a broad range of our activities, including:

 

   

the discharge of pollutants into the air and water;

 

   

the identification, generation, storage, handling, transportation, disposal, record-keeping, labeling, and reporting of, and emergency response in connection with, hazardous materials (including asbestos) associated with our operations;

 

   

noise emissions from our facilities; and

 

   

safety and health standards, practices, and procedures that apply to the workplace and the operation of our facilities.

In order to comply with these requirements, we may need to spend substantial amounts of money and other resources from time to time to (i) construct or acquire new equipment, (ii) acquire or amend permits to authorize facility operations, (iii) modify, upgrade, or replace existing and proposed equipment and (iv) clean up or decommission our facilities or other locations to which our wastes have been sent. For example, some of our baking facilities are required to obtain air emissions permits and to install bag filters. Many of our facilities discharge wastewater into municipal treatment works, and may be required to pre-treat the wastewater and/or to pay surcharges. Some of our facilities use and store in tanks large quantities of materials, such as sodium chloride and ammonia, that could cause environmental damage if accidentally released. We use some hazardous materials in our operations, and we generate and dispose of hazardous wastes as a conditionally exempt small quantity generator. Our capital and operating budgets include costs and expenses associated with complying with these laws. If we do not comply with environmental requirements that apply to our operations, regulatory agencies could seek to impose civil, administrative, and/or criminal liabilities, as well as seek to curtail our operations. Under some circumstances, private parties could also seek to impose civil fines or penalties for violations of environmental laws or recover monetary damages, including those relating to property damage or personal injury.

Many of our plants were in operation before current environmental laws and regulations were enacted. Our predecessors have in the past had to remediate soil and/or groundwater contamination at a number of locations, including petroleum contamination caused by leaking underground storage tanks which they removed, and we may be required to do so again in the future. We have sold a number of plants where we have discontinued operations, and it is possible that future renovations or redevelopment at these facilities might reveal additional contamination that may need to be addressed. Although the remediation of contamination that was undertaken in the past by our predecessors has been routine, we cannot assure you that future remediation costs will not be material. The presence of hazardous materials at our facilities or at other locations to which we have sent hazardous wastes for treatment or disposal, may expose us to potential liabilities associated with the cleanup of contaminated soil and groundwater under federal or state “Superfund” statutes. Under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”), owners and operators of facilities from which there has been a release or threatened release of hazardous materials, together with those who have transported or arranged for the transportation or disposal of those materials, are liable for (i) the costs of responding to and remediating that release and (ii) the restoration of natural resources damaged by any such release. Under CERCLA and similar state statutes, liability for the entire cost of cleaning up the contaminated site can, subject to certain exceptions, be imposed upon any such party regardless of the lawfulness of the activities that led to the contamination.

We have not incurred, nor do we anticipate incurring, material expenditures made in order to comply with current environmental laws or regulations. We are not aware of any environmental liabilities that we would expect to have a material adverse effect on our business. However, discovery of additional contamination for which we are responsible, the enactment of new laws and regulations, or changes in how existing requirements are enforced could require us to incur additional costs for compliance or subject us to unexpected liabilities.

 

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Seasonality

Our sales and cash flows are affected by seasonal cyclicality. Sales of frozen foods, including seafood, frozen vegetables, and complete bagged meals tend to be marginally higher during the winter months. Sales of pickles, relishes, barbecue sauces, potato chips and salad dressings tend to be higher in the spring and summer months, and demand for Duncan Hines products, Birds Eye vegetables and our fruit fillings tend to be higher around the Easter, Thanksgiving, and Christmas holidays. We pack the majority of our pickles during a season extending from May through September, and also increase our Duncan Hines inventories at that time, in advance of the selling season. Since many of the raw materials we process under the Birds Eye brand are agricultural crops, production of these products is predominantly seasonal, occurring during and immediately following the purchase of such crops. As a result, our inventory levels tend to be higher during August, September, and October, and thus we require more working capital during these months. We are a seasonal net user of cash in the third quarter of the calendar year.

Insurance

We maintain general liability and product liability, property, worker’s compensation, director and officer and other insurance in amounts and on terms that we believe are customary for companies similarly situated. In addition, we maintain excess insurance where we reasonably believe it is cost effective.

Additional information

Additional information pertaining to our businesses, including operating segments, is set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations and Related Information” under Item 7 of this Form 10-K and in Note 17 of the Notes to Consolidated Financial Statements, “Segments”, which is included under Item 8 of this Form 10-K.

Our reports on Form 10-K, along with all other reports and amendments, are filed with or furnished to the SEC. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C., 20549. Please call 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Our filings are also available to the public from commercial document retrieval services and at the web site maintained by the SEC at http://www.sec.gov. We also make available through our internet website under the heading “Investors,” our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports after we electronically file any such materials with the SEC.

 

ITEM 1A. RISK FACTORS

RISK FACTORS

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt, and prevent us from meeting our obligations under our notes.

We are highly leveraged. As of December 27, 2009, our total indebtedness was $2.9 billion. Our high degree of leverage could have important consequences, including:

 

   

requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities;

 

   

exposing us to the risk of increased interest rates because certain of our borrowings, including certain borrowings under our senior secured credit facilities, are at variable rates;

 

   

making it more difficult for us to make payments on our notes;

 

   

increasing our vulnerability to general economic and industry conditions;

 

   

restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

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limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and

 

   

placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.

We may not be able to successfully integrate Birds Eye, or other businesses we may acquire in the future, with PFG LLC, and we may not be able to realize anticipated cost savings, revenue enhancements, or other synergies from such acquisitions.

Our ability to successfully implement our business plan and achieve targeted financial results is dependent on our ability to successfully integrate Birds Eye, or other businesses we may acquire in the future, with PFG LLC. The process of integrating Birds Eye, or any other acquired businesses, involves risks. These risks include, but are not limited to:

 

   

demands on management related to the significant increase in the size of our business;

 

   

diversion of management’s attention from the management of daily operations;

 

   

difficulties in the assimilation of different corporate cultures and business practices;

 

   

difficulties in conforming the acquired company’s accounting policies to ours;

 

   

retaining the loyalty and business of the customers of acquired businesses;

 

   

retaining employees that may be vital to the integration of acquired businesses or to the future prospects of the combined businesses;

 

   

difficulties and unanticipated expenses related to the integration of departments, information technology systems, including accounting systems, technologies, books and records, and procedures, and maintaining uniform standards, such as internal accounting controls, procedures, and policies; and

 

   

costs and expenses associated with any undisclosed or potential liabilities.

Failure to successfully integrate Birds Eye, or any other acquired businesses, may result in reduced levels of revenue, earnings, or operating efficiency than might have been achieved if we had not acquired such businesses.

In addition, the Birds Eye Acquisition has resulted, and any future acquisitions could result, in the incurrence of additional debt and related interest expense, contingent liabilities, and amortization expenses related to intangible assets, which could have a material adverse effect on our financial condition, operating results, and cash flow.

We may not be able to achieve the estimated future cost savings expected to be realized as a result of the Birds Eye Acquisition or other future acquisitions. Failure to achieve such estimated future cost savings could have an adverse effect on our financial condition and results of operations.

We may not be able to realize anticipated cost savings, revenue enhancements, or other synergies from the Birds Eye Acquisition or other future acquisitions, either in the amount or within the time frame that we expect. In addition, the costs of achieving these benefits may be higher than, and the timing may differ from, what we expect. Our ability to realize anticipated cost savings, synergies, and revenue enhancements may be affected by a number of factors, including, but not limited to, the following:

 

   

the use of more cash or other financial resources on integration and implementation activities than we expect;

 

   

increases in other expenses unrelated to the acquisition, which may offset the cost savings and other synergies from the acquisition;

 

   

our ability to eliminate duplicative back office overhead and redundant selling, general, and administrative functions, obtain procurement related savings, rationalize our distribution and warehousing networks, rationalize manufacturing capacity and shift production to more economical facilities; and

 

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our ability to avoid labor disruptions in connection with any integration, particularly in connection with any headcount reduction.

Specifically, we expect the acquisition of Birds Eye to create significant opportunities to reduce our operating costs. However, these anticipated cost savings reflect estimates and assumptions made by our management as to the benefits and associated expenses and capital spending with respect to our cost savings initiatives, and it is possible that these estimates and assumptions may not ultimately reflect actual results. In addition, these estimated cost savings may not actually be achieved in the timeframe anticipated or at all.

If we fail to realize anticipated cost savings, synergies, or revenue enhancements, our financial results may be adversely affected, and we may not generate the cash flow from operations that we anticipate.

We may not be able to achieve all of our estimated future cost savings which are expected to be realized as a result of initiatives we have taken or expect to take.

We have identified significant potential annual cost savings that are reflected in Adjusted EBITDA and in the financial ratios based thereon as discussed in the Liquidity section of the Management Discussion and Analysis. We cannot assure you, however, that we will continue to realize cost savings relating to efficiency measures we have already implemented, that we will be able to achieve our other expected cost savings opportunities, that any identified savings will be achieved in a timely manner, or that other unexpected costs will not offset any savings we do achieve. The “potential annual cost savings” provision of the Adjusted EBITDA calculation expires at the end of March, 2010.

Our failure to achieve our expected annual cost savings could have a material adverse effect on our financial condition and results of operations.

We face significant competition in our industry.

The food products business is highly competitive. Numerous brands and products compete for shelf space and sales, with competition based primarily on product quality, brand recognition and loyalty, price, trade promotion, consumer promotion, customer service, and the ability to identify and satisfy emerging consumer preferences. We compete with a significant number of companies of varying sizes, including divisions, subdivisions, or subsidiaries of larger companies. Many of these competitors have multiple product lines, substantially greater financial and other resources available to them, and may be substantially less leveraged than we are. In addition, private label is a significant competitor in the frozen vegetables, shelf-stable pickles, peppers, and relish, and table syrup categories. We cannot guarantee that we will be able to compete successfully with these companies and private label. Competitive pressures or other factors could cause us to lose market share, which may require us to lower prices, increase marketing and advertising expenditures, or increase the use of discounting or promotional campaigns, each of which would adversely affect our margins and could result in a decrease in our operating results and profitability.

Sales of our products are subject to changing consumer preferences, and our success depends upon our ability to predict, identify, and interpret changes in consumer preferences and develop and offer new products rapidly enough to meet those changes.

Our success depends on our ability to predict, identify, and interpret the tastes and dietary habits of consumers and to offer products that appeal to those preferences. There are inherent marketplace risks associated with new product or packaging introductions, including uncertainties about trade and consumer acceptance. If we do not succeed in offering products that consumers want to buy, our sales and market share will decrease, resulting in reduced profitability. A significant challenge for us is distinguishing among fads, mid-term trends, and lasting changes in our consumer environment. If we are unable to accurately predict which shifts in consumer preferences will be long-lasting, or to introduce new and improved products to satisfy those preferences, our sales will decline. In addition, given the variety of backgrounds and identities of consumers in our consumer base, we must offer a sufficient array of products to satisfy the broad spectrum of consumer preferences. As such, we must be successful in developing innovative products across a multitude of product categories. Finally, if we fail to rapidly develop products in faster-growing and more profitable categories, we could experience reduced demand for our products.

 

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If we lose one or more of our major customers, or if any of our major customers experience significant business interruption, our results of operations and our ability to service our indebtedness could be adversely affected.

Pinnacle is dependent upon a limited number of large customers for a significant percentage of its sales. Wal-Mart Stores, Inc. (“Wal-Mart”) and its affiliates are Pinnacle’s largest customer and represented approximately 25%, 23%, and 24% of our consolidated net sales in fiscal 2009, 2008 and 2007, respectively. Cumulatively, including Wal-Mart, our top ten customers accounted for approximately 58% in fiscal 2009 and 57% of our net sales in each of the fiscal years 2008 and 2007.

We do not have long-term supply contracts with any of our major customers. The loss of one or more major customers, a material reduction in sales to these customers as a result of competition from other food manufacturers, or the occurrence of a significant business interruption of our customers’ operations would result in a decrease in our revenues, operating results, and earnings and could adversely affect our ability to service our indebtedness.

Termination of our material licenses would have a material adverse effect on our business.

We manufacture and market certain of our frozen food products under the Swanson brand pursuant to two royalty-free, exclusive and perpetual trademark licenses granted by Campbell Soup Company. The licenses give us the right to use certain Swanson trademarks both inside and outside of the United States in connection with the manufacture, distribution, marketing, advertising, and promotion of frozen foods and beverages of any type except for frozen soup or broth. The licenses require us to obtain the prior written approval of Campbell Soup Company for the visual appearance and labeling of all packaging, advertising materials, and promotions bearing the Swanson trademark. The licenses contain standard provisions, including those dealing with quality control and termination by Campbell Soup Company as well as assignment and consent. If we were to breach any material term of the licenses and not timely cure such breach, Campbell Soup Company could terminate the licenses.

We manufacture and market certain of our frozen breakfast products under the Aunt Jemima brand pursuant to a royalty-free, exclusive (as to frozen breakfast products only) and perpetual license granted by The Quaker Oats Company. The license gives us the right to use certain Aunt Jemima trademarks both inside and outside the United States in connection with the manufacture and sale of frozen waffles, pancakes, French toast, pancake batter, biscuits, muffins, strudel, croissants, and all other frozen breakfast products, excluding frozen cereal. The license requires us to obtain the approval of The Quaker Oats Company for any labels, packaging, advertising, and promotional materials bearing the Aunt Jemima trademark. The license contains standard provisions, including those dealing with quality control and termination by The Quaker Oats Company as well as assignment and consent. If we were to breach any material term of the license and not timely cure such breach, The Quaker Oats Company could terminate the license.

In addition, as part of our acquisition of the Armour Business from The Dial Corporation, we received the assignment of a license agreement granting us an exclusive, royalty-bearing, perpetual license to use certain Armour trademarks. Under the license agreement, Smithfield Foods, as successor to ConAgra, Inc., the licensor, grants a license for the use of various Armour-related trademarks in conjunction with shelf-stable products within the United States. The shelf-stable products must be manufactured according to approved formulas and specifications, and new specifications must be approved by the licensor, with such approval not to be unreasonably withheld or delayed. Proposed labels, packaging, advertising, and promotional materials must first be submitted to the licensor for approval, with such approval not to be unreasonably withheld or delayed. We are required to make annual royalty payments to the licensor equal to the greater of $250,000 or a percentage royalty based upon our annual net sales of the approved shelf-stable products. If we were to materially breach the license agreement, Smithfield Foods could terminate the license.

We also manufacture complete bagged meals under the The Voila! trademark which is subject to an exclusive license agreement with a third party and limited to use in connection with meat and vegetable products.

The loss of any of these licenses would have a material adverse effect on our business.

 

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For many of our products, we primarily rely on a single source manufacturing system where a significant disruption in a facility could affect our business, financial condition, and results of operations.

With the exception of our pickles, peppers, and relish products that are produced in two facilities (Imlay City, Michigan and Millsboro, Delaware), Birds Eye’s frozen vegetables products which are produced in three facilities (Fulton, New York, Waseca, Minnesota, and Darien, Wisconsin) and Birds Eye’s frozen complete bagged meals products, which are produced in two facilities (Fulton, New York, and Darien, Wisconsin), no other of our products are produced in significant amounts at multiple manufacturing facilities or co-packers. Significant unscheduled downtime at any of our facilities or co-packers due to equipment breakdowns, power failures, natural disasters, or any other cause could adversely affect our ability to provide products to our customers, which would affect our sales, financial condition, and results of operations.

We are vulnerable to fluctuations in the price and supply of food ingredients, packaging materials, and freight.

The prices of the food ingredients, packaging materials, and freight we use are subject to fluctuations in price attributable to, among other things, changes in supply and demand of crops or other commodities, fuel prices, and government-sponsored agricultural and livestock programs. The sales prices to our customers are a delivered price. Therefore, changes in our input costs could impact our gross margins. Our ability to pass along higher costs through price increases to our customers is dependent upon competitive conditions and pricing methodologies employed in the various markets in which we compete.

We use significant quantities of sugar, cucumbers, broccoli, corn, peas, green beans, flour (wheat), poultry, seafood, vegetable oils, shortening, meat, corn syrup and other agricultural products as well as aluminum, glass jars, plastic trays, corrugated fiberboard, and plastic packaging materials provided by third-party suppliers. We buy from a variety of producers and manufacturers, and alternate sources of supply are generally available. However, the supply and price are subject to market conditions and are influenced by other factors beyond our control, such as general economic conditions, unanticipated demand, problems in production or distribution, natural disasters, weather conditions during the growing and harvesting seasons, insects, plant diseases, and fungi.

Many of our packaging materials are purchased on the open market or from multiple suppliers; however, packaging used for Birds Eye Steamfresh vegetables and meals is purchased pursuant to an exclusive U.S. license and supply agreement that expires in 2013. The loss of this supplier or any significant interruption in the supply of packaging used for Birds Eye Steamfresh vegetables and meals, such as manufacturing problems or shipping delays, could have an adverse effect on our business.

We do not have long-term contracts with many of our suppliers, and, as a result, they could increase prices or fail to deliver. The occurrence of any of the foregoing could increase our costs and disrupt our operations.

Loss of any of our current co-packing arrangements could decrease our sales and earnings and put us at a competitive disadvantage.

We rely upon co-packers for our Duncan Hines cake mixes, brownie mixes, specialty mixes, and frosting products, and a limited portion of our other manufacturing needs. We believe that there are a limited number of competent, high-quality co-packers in the industry, and if we were required to obtain additional or alternative co-packing agreements or arrangements in the future, we cannot assure you we will be able to do so on satisfactory terms or in a timely manner.

We may be subject to product liability claims should the consumption of any of our products cause injury, illness, or death.

We sell food products for human consumption, which involves risks such as product contamination or spoilage, misbranding, product tampering, and other adulteration of food products. Consumption of a misbranded, adulterated, contaminated, or spoiled product may result in personal illness or injury. We could be subject to claims or lawsuits relating to an actual or alleged illness or injury, and we could incur liabilities that are not insured or exceed our insurance coverages. Even if product liability claims against us are not successful or fully pursued, these claims could be costly and time consuming and may require our management to spend time defending the claims rather than operating our business.

A product that has been actually or allegedly misbranded or becomes adulterated could result in product withdrawals or recalls, destruction of product inventory, negative publicity, temporary plant closings, and substantial costs of compliance or remediation. Any of these events, including a significant product liability judgment against us, could result in a loss of demand for our food products, which could have an adverse effect on our financial condition, results of operations or cash flows.

 

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Due to the seasonality of the business, our revenue and operating results may vary quarter to quarter.

Our sales and cash flows are affected by seasonal cyclicality. Sales of frozen foods, including seafood, frozen vegetables, and complete bagged meals tend to be marginally higher during the winter months. Sales of pickles, relishes, barbecue sauces, potato chips and salad dressings tend to be higher in the spring and summer months, and demand for Duncan Hines products, Birds Eye vegetables and our fruit fillings tend to be higher around the Easter, Thanksgiving, and Christmas holidays. We pack the majority of our pickles during a season extending from May through September, and also increase our Duncan Hines inventories at that time, in advance of the selling season. Since many of the raw materials we processes under the Birds Eye brand are agricultural crops, production of these products is predominantly seasonal, occurring during and immediately following the purchase of such crops. As a result, our inventory levels tend to be higher during August, September, and October, and thus we require more working capital during these months. We are a seasonal net user of cash in the third quarter of the calendar year.

For these reasons, sequential quarterly comparisons are not a good indication of our performance or how we may perform in the future.

If we are unable to obtain access to working capital or if seasonal fluctuations are greater than anticipated, there could be an adverse effect on our financial condition, results of operations or cash flows.

The deterioration of the credit and capital markets may adversely affect our access to sources of funding.

We rely on our revolving credit facilities to fund a portion of our seasonal working capital needs and other general corporate purposes. If any of the banks in the syndicates backing these facilities were unable to perform on its commitments, our liquidity could be impacted, which could adversely affect funding of seasonal working capital requirements. In addition, global capital markets have experienced volatility that has tightened access to capital markets and other sources of funding. In the event that we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time, if at all. Our inability to obtain financing on terms and within a time acceptable to us could have an adverse impact on our operations, financial condition, and liquidity.

We face risks associated with certain pension obligations.

We hold investments in equity and debt securities in our qualified defined benefit pension plans. Deterioration in the value of plan assets, resulting from the general financial downturn or otherwise, could cause an increase in the underfunded status of our defined benefit pension plans, thereby increasing our obligation to make contributions to the plans. For example, from December 2007 to December 2008, the underfunding in the Pinnacle Foods Pension Plan For Employees Covered By Collective Bargaining Agreements (“Pinnacle Foods Pension Plan”) increased from $7.4 million to $36.5 million. This was primarily caused by the economic downturn in the US in the fourth quarter of 2008. In 2009, the US economy rebounded slightly. The underfunding in our Pinnacle Foods Pension Plan as of December 27, 2009 was $32.8 million.

We also maintain a defined benefit plan acquired in connection with the Birds Eye Acquisition (“Birds Eye Foods Pension Plan”). Although Birds Eye had frozen benefits under its defined benefit pension plans for many employees, we remain obligated to ensure that the plan is funded in accordance with applicable regulations. Subsequent to December 27, 2009, benefits of certain hourly employees were frozen. The curtailment gain which will be recorded in the first quarter of fiscal 2010 is less than $0.1 million. The Birds Eye Foods Pension Plan was underfunded by approximately $47.2 million as of December 27, 2009. Our obligation to make contributions to the pension plans could reduce the cash available for working capital and other corporate uses, and may have an adverse impact on our operations, financial condition, and liquidity.

 

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Our financial well-being could be jeopardized by unforeseen changes in our employees’ collective bargaining agreements or shifts in union policy.

We employ approximately 4,600 people with approximately 60% of our employees unionized. In 2008, the hourly workers in our Mattoon, Illinois, facility (Lender’s Bagels) elected to join the United Food and Commercial Workers Union and we are currently working to negotiate a contract with these workers. We are also currently negotiating an initial collective bargaining agreement for the route sales group in our snacks business located in Berlin, Pennsylvania (Snyder of Berlin). New collective bargaining agreements for our facilities located in Darien, Wisconsin (Birds Eye brands), with 303 employees, and Waseca, Minnesota (Birds Eye brands), with 90 employees, were completed in December 2009 and January 2010, respectively. A new collective bargaining agreement for our facility located in Imlay City, Michigan (Vlasic brands), with approximately 270 employees, was ratified by the union on March 11, 2010. The collective bargaining agreement with the production group at our snacks business located in Berlin, Pennsylvania (Snyder of Berlin), covering approximately 100 employees, will expire on April 11, 2010; and the collective bargaining agreement with the seasonal employees at our Darien, Wisconsin facility (Birds Eye brands), with approximately 190 employees, will expire on December 1, 2010.

Although we consider our employee relations to generally be good, failure to extend or renew our collective bargaining agreements or a prolonged work stoppage or strike at any facility with union employees could have a material adverse effect on our business, financial condition, or results of operations. In addition, we cannot assure you that upon the expiration of our existing collective bargaining agreements, new agreements will be reached without any union action, if at all, or that any such new agreements will be on terms satisfactory to us.

Our strategy of evaluating targeted acquisition opportunities may not be successful.

We may not be able to identify and complete acquisitions in the future, and our failure to identify and complete acquisitions could limit our ability to grow our business beyond our existing brands. In addition, we may require additional debt or equity financing for future acquisitions. Our strategy of evaluating targeted acquisition opportunities involves a number of risks, including the following:

 

   

we may not be able to find suitable businesses to acquire at affordable valuations or on other acceptable terms;

 

   

our acquisition of suitable businesses could be prohibited by U.S. or foreign antitrust laws; and

 

   

we may have to incur additional debt to finance future acquisitions, and no assurance can be given as to whether, and on what terms, such additional debt will be available.

We are subject to laws and regulations relating to protection of the environment, worker health, and workplace safety. Costs to comply with these laws and regulations, or claims with respect to environmental, health and safety matters, could have a significant negative impact on our business.

Our operations are subject to various federal, state and local laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of solid and hazardous materials and wastes, employee exposure to hazards in the workplace and the cleanup of contaminated sites. We are required to obtain and comply with environmental permits for many of our operations, and sometimes we are required to install pollution control equipment or to implement operational changes to limit air emissions or wastewater discharges and/or decrease the likelihood of accidental releases of hazardous materials. We could incur substantial costs, including cleanup costs, civil or criminal fines or penalties, and third-party claims for property damage or personal injury as a result of any violations of environmental laws and regulations, noncompliance with environmental permit conditions or contamination for which we may be responsible that is identified or that may occur in the future. Such costs may be material.

Under federal and state environmental laws, we may be liable for the costs of investigation, removal or remediation of certain hazardous or toxic substances, as well as related costs of investigation and damage to natural resources, at various properties, including our current and former properties and the former properties of our predecessors, as well as offsite waste handling or disposal sites that we, or that our predecessors have used. Liability may be imposed upon us without regard to whether we knew of or caused the presence of such hazardous or toxic substances. There can be no assurances that any such locations, or locations that we may acquire in the future, will not result in liability to us under such laws or expose us to third party actions such as tort suits based on alleged conduct or environmental conditions. In addition, we may be liable if hazardous or toxic substances migrate from properties for which we may be responsible to other properties.

 

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We cannot predict what environmental or health and safety legislation or regulations will be enacted in the future or how existing or future laws or regulations will be enforced, administered or interpreted. We also cannot predict the amount of future expenditures that may be required in order to comply with such environmental or health and safety laws or regulations or to respond to environmental claims.

Our operations are subject to FDA and USDA governmental regulation, and there is no assurance that we will be in compliance with all regulations.

Our operations are subject to extensive regulation by the U.S. Food and Drug Administration, the U.S. Department of Agriculture and other national, state, and local authorities. Specifically, we are subject to the Food, Drug and Cosmetic Act and regulations promulgated thereunder by the FDA. This comprehensive regulatory program governs, among other things, the manufacturing, composition and ingredients, packaging, and safety of food. Under this program, the FDA regulates manufacturing practices for foods through its current “good manufacturing practices” regulations and specifies the recipes for certain foods. Our processing facilities and products are subject to periodic inspection by federal, state, and local authorities. In addition, we must comply with similar laws in Canada. We seek to comply with applicable regulations through a combination of employing internal personnel to ensure quality-assurance compliance (for example, assuring that food packages contain only ingredients as specified on the package labeling) and contracting with third-party laboratories that conduct analyses of products for the nutritional-labeling requirements.

Failure to comply with applicable laws and regulations or maintain permits and licenses relating to our operations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could result in increased operating costs resulting in a material adverse effect on our operating results and business.

We have a significant amount of goodwill and intangible assets on our consolidated balance sheet that is subject to impairment based upon future adverse changes in our business and the overall economic environment.

At December 27, 2009, the carrying value of goodwill and tradenames was $1,559.2 million and $1,658.8 million, respectively. We evaluate the carrying amount of goodwill and intangible assets for impairment on an annual basis, in December, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. We have recorded impairment charges in recent years, including in 2009. The value of goodwill and intangible assets will be derived from our business operating plans and is susceptible to an adverse change in demand, input costs, general changes in the business, or changes in the overall economic environment and could require an impairment charge in the future.

Litigation regarding our trademarks and any other proprietary rights may have a significant, negative impact on our business.

We rely upon a combination of copyright, trademark and patent laws as well as, where appropriate, contractual arrangements, including licensing agreements to establish and protect our intellectual property rights. Although we devote resources to the establishment and protection of our intellectual property rights, we cannot assure you that the actions we have taken or will take in the future will be adequate to prevent violation of our trademark and proprietary rights by others or prevent others from seeking to block sales of our products as an alleged violation of their trademarks or other proprietary rights. There can be no assurance that litigation by or against us will not be necessary to enforce our trademark or proprietary rights or to defend ourselves against claimed infringement, or other claimed violation of the rights of others. Any ongoing or future litigation of this type could result in adverse determinations that could have a material adverse effect on our business, financial condition or results of operations. Our inability to use our trademarks and other proprietary rights, including via temporary or permanent injunctions directed against such rights in ongoing or future litigations, could also harm our business and sales through reduced demand for our products and reduced revenues.

Although we have rights to the Birds Eye and Steamfresh trademarks in the United States and certain other jurisdictions, unaffiliated third parties own rights to the Birds Eye and Steamfresh trademarks in many other countries. These third-party trademark rights may impose legal barriers on our use of these trademarks in those and other jurisdictions and may therefore limit the expansion of the business conducted under these trademarks into these jurisdictions. However, any negative publicity surrounding third-party products, such as product recalls and product liability claims, with respect to the Birds Eye or Steamfresh trademarks in these jurisdictions could nonetheless adversely affect our reputation and the value of our trademarks.

 

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If we are unable to retain our key management personnel, our future performance may be impaired and our financial condition could suffer as a result.

Our success depends to a significant degree upon the continued contributions of senior management, certain of whom would be difficult to replace. Departure by certain of our executive officers could have a material adverse effect on our business, financial condition, or results of operations. We do not maintain key-man life insurance on any of our executive officers. We cannot assure you that the services of such personnel will continue to be available to us.

We may not be able to utilize all of our net operating loss carryforwards.

If there is an unfavorable adjustment from an IRS examination (whether as a result of a change in law or IRS policy or otherwise) that reduces any of our net operating loss carryforwards (“NOLs”), cash taxes may increase and impact our ability to make interest payments on our indebtedness, including the notes. As of December 27, 2009, we had NOLs for U.S. federal income tax purposes of $1.1 billion. Certain of these NOLs are subject to annual limitations under Section 382 of the Internal Revenue Code of 1986 (“the Code”). These limitations and/or our failure to generate sufficient taxable income may result in the expiration of the NOLs before they are utilized.

Blackstone controls Pinnacle and may have conflicts of interest with us or you in the future.

Investment funds associated with or designated by Blackstone own substantially all of our capital stock. Blackstone has control over our decisions to enter into any corporate transaction and has the ability to prevent any transaction that requires the approval of unit holders regardless of whether noteholders believe that any such transactions are in their interests. For example, Blackstone could collectively cause us to make acquisitions that increase our amount of indebtedness, including secured indebtedness, or to sell assets, which may impair our ability to make payments under the notes.

Additionally, Blackstone is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Blackstone may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as investment funds associated with or designated by Blackstone collectively continue to indirectly own a significant amount of our capital stock, even if such amount is less than 50%, Blackstone will continue to be able to influence or effectively control our decisions.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

 

ITEM 2. PROPERTIES

We own and operate the following thirteen manufacturing and warehouse facilities:

 

Facility location

  

Principal products

  

Facility size

Darien, Wisconsin    Frozen vegetables and complete bagged meals    551,600 square feet
Millsboro, Delaware    Pickles, peppers, relish    460,000 square feet
Ft. Madison, Iowa    Canned meat    450,000 square feet
Imlay City, Michigan    Pickles, peppers, relish    344,000 square feet
Fayetteville, Arkansas    Frozen dinners and entrees    335,000 square feet
Fennville, Michigan    Fruit toppings and fillings    329,866 square feet
Jackson, Tennessee    Frozen breakfast, frozen pizza, frozen prepared seafood    302,000 square feet
Tacoma, Washington    Chili and chili ingredients, dressings    286,468 square feet
Waseca, Minnesota    Frozen vegetables    258,475 square feet
Fulton, New York    Frozen vegetables and complete bagged meals; repack only    254,856 square feet
St. Elmo, Illinois    Syrup, barbecue sauce    250,000 square feet
Mattoon, Illinois    Bagels, frozen breakfast    215,000 square feet
Berlin, Pennsylvania    Snack foods    183,500 square feet

 

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We have entered into co-packing (third-party manufacturing) agreements with several manufacturers for certain of our finished products. Our co-packed finished products include our Duncan Hines product line, Aunt Jemima breakfast sandwich product line, and certain seafood products. All of our Duncan Hines cake mix, brownie mix, specialty mix and frosting production equipment, including co-milling, blending and packaging equipment, is located at the contract manufacturers’ facilities. The most significant Duncan Hines co-packing agreement will expire in June 2015. We believe that our manufacturing facilities, together with our co-packing agreements, provide us with sufficient capacity to accommodate our planned internal growth.

We also lease a manufacturing plant, warehouse and distribution center in Algona, Washington, warehouses in Darien, Wisconsin and Waseca, Minnesota.

We also lease office space under operating leases (expiring) in Mountain Lakes, New Jersey (November 2013); Cherry Hill, New Jersey (May 2011); Rochester, New York (December 2011); Lewisburg, Pennsylvania (Month to Month); Fayetteville, Arkansas (Month to Month); Mississauga, Ontario (August 2015) and Green Bay, Wisconsin (June 2012).

 

ITEM 3. LEGAL PROCEEDINGS

From time to time, we are parties to, or targets of, lawsuits, claims, investigations, and proceedings, which are being handled and defended in the ordinary course of business. Although the outcome of such items cannot be determined with certainty, our general counsel and management are of the opinion that the final outcome of these matters should not have a material effect on the financial condition, results of operations or cash flows.

No single item individually is, nor are all of them in the aggregate, material.

 

ITEM 4. RESERVED TO THE NEW VOTING REPORTING RULES

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

There is no established trading market for our common stock. As of December 27, 2009, one hundred percent of our common stock was held by our parent, Crunch Holding Corp. We did not pay any dividends in respect to our common stock in fiscal 2009.

Our senior secured credit facilities, the indenture governing our 9.25% Senior Notes due 2015 (the “Senior Notes Indenture”) and the indentures governing our 10.625% Senior Subordinated Notes due 2017 (the “Senior Subordinated Notes Indenture” and together with the Senior Notes Indenture, the “Indentures”) each contain covenants that limit our ability to pay dividends and take on additional indebtedness. The indentures contain a limitation on restricted payments, including dividends, that is described in greater detail in footnotes (3) and (4) to the last table in “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt—Covenant Compliance” included elsewhere in this Form 10-K. The senior secured credit facilities also limit our ability to make restricted payments, including dividends, subject to exceptions, including an exception that permits restricted payments up to an aggregate amount of (together with certain other amounts) the greater of $50 million and 2% of our consolidated total assets, so long as no default has occurred and is continuing and our pro forma Senior Secured Leverage Ratio would be no greater than 4.25 to 1.00. For the description of our Senior Secured Leverage Ratio and its level as of the last balance sheet date, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Debt Covenant Compliance.” In addition, the senior secured credit facilities and the indentures contain exceptions from the limitation on restricted payments that would allow dividends on common stock following the first public offering, if any, of our common stock in an amount up to 6% per year of the net proceeds received by or contributed to our company in or from such public offering, subject to exceptions.

 

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ITEM 6. SELECTED FINANCIAL DATA

PFG LLC is referred to as the “Predecessor” for the period prior to the consummation of the Blackstone Transaction and PFF is referred to as the “Successor” subsequent to the consummation of the Blackstone Transaction.

The following table sets forth selected historical consolidated financial and other operating data for the following periods:

 

   

for Successor and its subsidiaries as of and for the fiscal years ended December 27, 2009 and December 28, 2008, and the 39 weeks ended December 30, 2007;

 

   

for Predecessor and its subsidiaries for the period from January 1, 2007 to April 2, 2007, immediately prior to the consummation of the Blackstone Transaction, as of and for the fiscal years ended December 31, 2006 and December 25, 2005.

The selected financial data of the Successor as of and for the fiscal years ended December 27, 2009 and December 28, 2008, and the 39 weeks ended December 30, 2007, and the selected financial data of the Predecessor for the period from January 1, 2007 to April 2, 2007, immediately prior to the consummation of the Blackstone Transaction have been derived from the audited consolidated financial statements included elsewhere in this Form 10-K. The fiscal years ended December 31, 2006 and December 25, 2005 have been derived from the audited consolidated financial statements of the Predecessor.

The selected financial data presented below should be read in conjunction with our consolidated financial statements and the notes to those statements and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K.

 

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     Successor           Predecessor  

($ in Thousands)

   Fiscal Year
ended
December 27,
2009
    Fiscal Year
ended
December 28,
2008
    39 weeks
ended
December 30,
2007
          13 weeks
ended
April 2,
2007
    Fiscal Year
ended
December 31,
2006
    Fiscal Year
ended
December 25,
2005
 

Statement of operations data:

                 

Net sales

   $ 1,642,931      $ 1,556,408      $ 1,137,898           $ 376,587      $ 1,442,256      $ 1,255,735   

Cost of products sold

     1,263,627        1,217,929        895,306             293,191        1,122,646        997,198   
                                                     

Gross profit

     379,304        338,479        242,592             83,396        319,610        258,537   

Operating expenses

                 

Marketing and selling expenses

     123,833        111,372        87,409             34,975        103,550        101,159   

Administrative expenses

     62,737        47,832        40,715             17,714        52,447        40,242   

Research and development expenses

     4,562        3,496        2,928             1,437        4,037        3,625   

Goodwill impairment charges

     —          —          —               —          —          54,757   

Other expense (income), net

     42,214        24,363        12,028             51,042        14,186        31,836   
                                                     

Total operating expenses

     233,346        187,063        143,080             105,168        174,220        231,619   
                                                     

Earnings (loss) before interest and taxes

     145,958        151,416        99,512             (21,772     145,390        26,918   

Interest expense

     121,167        153,280        124,504             39,079        86,615        71,104   

Interest income

     89        319        1,029             486        1,247        584   
                                                     

Earnings (loss) before income taxes

     24,880        (1,545     (23,963          (60,365     60,022        (43,602

Provision (benefit) for income taxes

     (277,723     27,036        24,746             6,284        26,098        (426
                                                     

Net earnings (loss)

   $ 302,603      $ (28,581   $ (48,709        $ (66,649   $ 33,924      $ (43,176
                                                     
 

Other financial data:

                 

Net cash provided by operating activities

   $ 116,243      $ 16,759      $ 60,139           $ 55,684      $ 161,563      $ 64,747   

Net cash used in investing activities

     (1,366,776     (32,598     (1,340,353          (5,027     (213,657     (28,775

Net cash provided by (used in) financing activities

     1,319,828        14,239        1,286,062             (46,293     63,912        (37,688

Depreciation and amortization

     65,468        62,509        45,671             10,163        42,187        39,088   

Capital expenditures

     52,030        32,598        22,935             5,027        26,202        30,931   

Ratio of earnings to fixed charges (1)

     1.20x        NM        NM             NM        1.68x        NM   
 

Balance sheet data:

                 

Cash and cash equivalents

   $ 73,874      $ 4,261      $ 5,999           $ —        $ 12,337      $ 519   

Working capital (2)

     364,577        131,234        80,556             —          105,569        84,517   

Total assets (3)

     4,538,498        2,632,200        2,667,079             —          1,792,081        1,636,494   

Total debt (4)

     2,888,711        1,785,352        1,770,171             —          920,963        888,648   

Total liabilities

     3,664,145        2,324,627        2,307,464             —          1,353,726        1,279,970   

Shareholders’ equity

     874,353        307,573        359,615             —          438,355        356,524   

 

(1) For purposes of computing the ratio of earnings to fixed charges, earnings consist of earnings (loss) before income taxes and fixed charges. Fixed charges consist of (i) interest expense, including amortization of debt acquisition costs and (ii) one-third of rent expense, which management believes to be representative of the interest factor thereon. The Successor’s earnings for the fiscal years ending 2008 and the 39 weeks ending December 30, 2007 were insufficient to cover fixed charges by $1.5 million and $24.0 million, respectively. The Predecessor’s earnings for the 13 weeks ending April 2, 2007 and fiscal 2005 were insufficient to cover fixed charges by $60.3 million and $43.6 million, respectively.
(2) Working capital excludes notes payable, revolving debt facility and current portion of long term debt.
(3) Total assets are impacted in 2007 by the Blackstone Transaction and in 2009 by the Birds Eye Acquisition.
(4) Total debt includes notes payable, revolving debt facility and current portion of long term debt.

 

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ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(dollars in millions, except where noted)

The following discussion and analysis of our results of operations and financial condition covers periods prior to the consummation of the Blackstone Transaction and periods subsequent to the consummation of the Blackstone Transaction. The discussion and analysis of historical periods prior to the consummation of the Blackstone Transaction does not reflect the significant impact that the Blackstone Transaction had on us, including significantly increased leverage and liquidity requirements, new costs, as well as cost savings initiatives (and related costs) to be implemented in connection with the Blackstone Transaction. You should read the following discussion of our results of operations and financial condition with the “Selected Financial Data” and the audited consolidated financial statements appearing elsewhere in this Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Item 1A: Risk Factors” section of this Form 10-K. Actual results may differ materially from those contained in any forward-looking statements.

Information presented for the fiscal years ended December 27, 2009 and December 28, 2008 is derived from our audited consolidated financial statements for those periods. Information presented for the fiscal year 2007 was derived from the combination of the audited 39 weeks ended December 30, 2007 and the audited 13 weeks ended April 2, 2007, immediately prior to the consummation of the Blackstone Transaction. This combination represents what we believe is the most meaningful basis for comparison of the fiscal year ended December 27, 2009, December 28, 2008 and the 52 weeks ended December 30, 2007, although the presentation of the 52-week period ended December 30, 2007 is not in accordance with GAAP. We believe that these are the most meaningful bases for comparison because the customer base, products, manufacturing facilities and types of marketing programs were the same under the Predecessor as they are under the Successor. Also, the results for the fiscal year ended December 27, 2009 include the results of operations of Birds Eye Foods, Inc. from the date of acquisition on December 23, 2009.

Where the context so requires, we use the term “Predecessor” to refer to the historical financial results and operations of PFG LLC and its subsidiaries prior to the consummation of the Blackstone Transaction described herein and the term “Successor” to refer to the historical financial results and operations of PFF and its subsidiaries after the consummation of the Blackstone Transaction described herein.

Overview

On December 23, 2009, we acquired all of the common stock of Birds Eye Foods, Inc. (“Birds Eye”) or (the “Birds Eye Acquisition”). Birds Eye’s product offering includes an expanding platform of healthy, high-quality frozen vegetables and frozen meals and a portfolio of primarily branded specialty dry foods which are well-aligned with our existing dry foods segment. Frozen food products are marketed under the Birds Eye brand name, which holds the #1 market share in frozen vegetables and the #1 market share in the value sub-segment of complete bagged meals. Birds Eye markets traditional boxed and bagged frozen vegetables, as well as steamed vegetables using innovative steam-in-packaging technology, under the Birds Eye and Birds Eye Steamfresh brands. Birds Eye’s complete bagged meals, marketed primarily under the value-oriented Birds Eye Voila! brand, offer consumers value-added meal solutions that include a protein, starch, and vegetables in one convenient package. Birds Eye’s branded specialty dry food products hold leading market share positions in their core geographic markets, and include Comstock and Wilderness fruit pie fillings and toppings, Brooks and Nalley chili and chili ingredients, and snack foods by Tim’s Cascade and Snyder of Berlin.

We are a leading producer, marketer and distributor of high quality, branded food products. Historically, Pinnacle’s products and operating results were managed and reported in two operating segments: dry foods and frozen foods. Birds Eye’s results for the 5 days in fiscal 2009 are reported in the Birds Eye foods segment. The dry foods segment consists of the following product lines (brands): baking (Duncan Hines®), condiments (Vlasic®, Open Pit®), syrup (Mrs. Butterworth’s® and Log Cabin®) and canned meat (Armour®). The frozen foods segment consists of the following product lines (brands): frozen dinners (Hungry-Man®, Swanson®), frozen prepared seafood (Mrs. Paul’s®, Van de Kamp’s®), frozen breakfast (Aunt Jemima®), bagels (Lender’s®) and frozen pizza (Celeste®).

 

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As previously disclosed on a Form 8-K, on July 13, 2009, we issued a press release announcing that Jeffrey P. Ansell left his position as Chief Executive Officer and as a Director of the Company to pursue other interests, effective July 10, 2009. The press release also announced that Robert J. Gamgort has been appointed as Chief Executive Officer and a Director, commencing on July 13, 2009. As a result of the change, we recorded a provision for severance in the amount of $2.4 million in Administrative expenses in the Consolidated Statements of Operations for the fiscal year ended December 27, 2009.

We also announced that, effective July 13, 2009, Roger K. Deromedi, who served as our Executive Chairman of the Board of Directors, will become Non-Executive Chairman.

Business Drivers and Measures

In operating our business and monitoring its performance, we pay attention to trends in the food manufacturing industry and a number of performance measures and operational factors. This discussion includes forward-looking statements that are based on our current expectations.

Industry Factors

Our industry is characterized by the following general trends:

 

   

Industry Growth. Growth in our industry is driven primarily by population and modest product selling price increases; however, price increases which accelerated in 2008 were offset by increased commodity costs. Incremental growth is principally driven by product, packaging and process innovation.

 

   

Competition. The food products business is competitive. Numerous brands and products compete for shelf space and sales, with competition based primarily on product quality, convenience, price, trade promotion, consumer promotion, brand recognition and loyalty, customer service and the ability to identify and satisfy emerging consumer preferences. In order to maintain and grow our business, we must be able to react to these competitive pressures.

 

   

Consumer Tastes and Trends. Consumer trends, such as changing health trends and focus on convenience and products tailored for busy lifestyles, present both opportunities and challenges for our business. In order to maintain and grow our business, we must react to these trends by offering products that respond to evolving consumer needs. In the current economic climate, consumer behavior has shifted toward an increase in food consumption at home. Additionally, consumers are looking for value alternatives, which have caused a shifting from traditional retail grocery to mass merchandisers and the value channel.

 

   

Customer Consolidation. In recent years, our industry had been characterized by consolidation in the retail grocery and food service industries, with mass merchandisers gaining market share. This trend could increase customer concentration within the industry.

Revenue Factors

Our net sales are driven principally by the following factors:

 

   

Shipments, which change as a function of changes in volume and in price; and

 

   

the costs that we deduct from shipments to reach net sales, which consist of:

 

   

Trade marketing expenses, which include the cost of temporary price reductions (“on sale” prices), promotional displays and advertising space in store circulars.

 

   

Slotting expenses, which are the costs of having certain retailers stock a new product, including amounts retailers charge for updating their warehousing systems, allocating shelf space and in-store systems set-up, among other things.

 

   

Consumer coupon redemption expenses, which are costs from the redemption of coupons we circulate as part of our marketing efforts.

We give detailed information on these factors below under “—Results of Operations.”

Cost Factors

Our important costs include the following:

 

   

Raw materials, such as sugar, cucumbers, broccoli, corn, peas, green beans, flour (wheat), poultry, seafood, vegetable oils, shortening, meat and corn syrup, among others, are available from numerous independent suppliers but are subject to price fluctuations due to a number of factors, including changes in crop size, federal and state agricultural programs, export demand, weather conditions and insects, among others. We experienced a significant increase in inflation in 2008, particularly in wheat, corn and edible oils.

 

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Packaging costs. Our broad array of products entails significant costs for packaging and is subject to fluctuations in the price of aluminum, glass jars, plastic trays, corrugated fiberboard, and plastic packaging materials.

 

   

Freight and distribution. We use a combination of common carriers and inter-modal rail to transport our products from our manufacturing facilities to distribution centers and to deliver products to retailers from both those centers and directly from our manufacturing plants. Our freight and distribution costs are influenced by fuel costs.

 

   

Advertising and other marketing expenses. We record expenses related to advertising and other consumer and trade-oriented marketing programs under “Marketing and selling expenses” in our consolidated financial statements. A key strategy is to continue to invest in marketing that builds our iconic brands, and in 2009 we increased marketing spending versus 2008.

We give detailed information on these factors below under “—Results of Operations.”

Working Capital

Our working capital is primarily driven by accounts receivable and inventories, which fluctuate throughout the year due to seasonality in both sales and production, as described below in “—Seasonality.” We will continue to focus on reducing our working capital requirements while simultaneously maintaining our customer service levels and production needs. We have historically relied on internally generated cash flows and temporary borrowings under our revolving credit facility to satisfy our working capital requirements.

Other Factors

Other factors that have influenced our results of operations and may do so in the future include:

 

   

Interest Expense. As a result of the Blackstone Transaction and Birds Eye Acquisition, we have significant indebtedness. Although we expect to reduce our leverage over time, we expect interest expense to continue to be a significant component of our expenses. See “Liquidity and Capital Resources.”

 

   

Cash Taxes. We have significant tax-deductible intangible asset amortization and federal and state net operating losses, which resulted in minimal federal and state cash taxes in recent years. We expect to continue to realize significant reductions in federal and state cash taxes in the future attributable to amortization of intangible assets and realization of net operating losses.

 

   

Acquisitions and Consolidations. We believe we have the expertise to identify and integrate value-enhancing acquisitions to further grow our business. In recent years we have successfully integrated acquisitions. We have, however, incurred significant costs in connection with integrating these businesses and streamlining our operations.

 

   

Impairment of Goodwill and Long-Lived Assets. We test our goodwill and intangible assets annually or more frequently (if necessary) for impairment and have recorded impairment charges in recent years as well as 2009. The value of goodwill and intangibles from the allocation of purchase price from the Blackstone Transaction and Birds Eye Acquisition is derived from our business operating plans at that time and is therefore susceptible to an adverse change that could require an impairment charge.

We give detailed information on these factors below under “—Results of Operations.”

Seasonality

Our sales and cash flows are affected by seasonal cyclicality. Sales of frozen foods, including seafood, frozen vegetables, and complete bagged meals tend to be marginally higher during the winter months. Sales of pickles, relishes, barbecue sauces, potato chips and salad dressings tend to be higher in the spring and summer months, and demand for Duncan Hines products, Birds Eye vegetables and our fruit fillings tend to be higher around the Easter, Thanksgiving, and Christmas holidays. We pack the majority of our pickles during a season extending from May through September, and also increase our Duncan Hines inventories at that time, in advance of the selling season. Since many of the raw materials we processes under the Birds Eye brand are agricultural crops, production of these products is predominantly seasonal, occurring during and immediately following the purchase of such crops. As a result, our inventory levels tend to be higher during August, September, and October, and thus we require more working capital during these months. We are a seasonal net user of cash in the third quarter of the calendar year.

 

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Recent Transactions

On February 10, 2007, Crunch Holding Corp. (“Crunch Holding”), our parent company, entered into an Agreement and Plan of Merger with Peak Holdings LLC (“Peak Holdings”), a Delaware limited liability company controlled by affiliates of The Blackstone Group, Peak Acquisition Corp (“Peak Acquisition”), a wholly-owned subsidiary of Peak Holdings, and Peak Finance LLC, providing for the acquisition of Crunch Holding. Under the terms of Agreement and Plan of Merger, the purchase price for Crunch Holding was $2,162.5 million in cash plus an amount equal to the aggregate exercise prices of vested options less the amount of indebtedness of Crunch Holding and its subsidiaries outstanding immediately prior to the closing and certain transaction costs, subject to purchase price adjustments based on the amount of our working capital and indebtedness as of the closing. At the closing, on April 2, 2007, Peak Acquisition merged with and into Crunch Holding, with Crunch Holding as the surviving corporation (the “Merger”), and Peak Finance LLC merged with and into Pinnacle Foods Finance LLC, with Pinnacle Foods Finance LLC as the surviving entity. As a result of the Merger, Crunch Holding became a wholly owned subsidiary of Peak Holdings. In connection with the Merger, we repaid the indebtedness under the Predecessor’s senior secured credit facilities, repurchased the Predecessor’s outstanding 8.25% senior subordinated notes due 2013 pursuant to a tender offer and consent solicitation and paid related fees and expenses.

On December 23, 2009, Pinnacle Foods Group LLC acquired the common stock of Birds Eye Foods, Inc. (the “Birds Eye Acquisition”) for $1.34 billion. In connection with the acquisition, Pinnacle purchased all of the issued and outstanding capital stock of Birds Eye Foods, Inc. from Holdings for a purchase price of $670.0 million in cash. In accordance with the Stock Purchase Agreement, Pinnacle funded approximately $670.4 million to pay off Birds Eye Foods Inc.’s remaining indebtedness and other obligations. Birds Eye Foods, Inc., along with its subsidiaries, is now a direct, wholly-owned subsidiary of Pinnacle.

Plant Consolidation

Omaha, Nebraska Production Facility

On April 7, 2004, PFGI made and announced its decision to permanently close our Omaha, Nebraska production facility, as part of its plan of consolidating and streamlining production activities after the Aurora Merger. Production from the Omaha plant, which manufactured Swanson frozen entree retail products and frozen foodservice products, ceased in December 2004 and has been relocated to the Fayetteville, Arkansas and Jackson, Tennessee production facilities.

Activities related to the closure of the plant were completed in the first quarter of 2005 and resulted in the elimination of 411 positions. From the announcement in April 2004 through the second quarter of 2007, PFGI recorded restructuring charges totaling $19.6 million, pertaining to its decision to permanently close the Omaha, Nebraska production facility. The charges incurred have been included in Other expense (income), net line in the Consolidated Statements of Operations. All such charges are reported under the frozen foods business segment. During the second quarter of 2007, the plant and remaining assets were sold for $2.2 million.

Impairment of Goodwill and Other Long-Lived Assets

In fiscal 2007, we experienced declines in net sales of our Open Pit branded products. Upon reassessing the long-term growth rates of the brand, we recorded an impairment of the tradename asset in the amount of $1.2 million. The charge is recorded in the Other expense (income), net line in the Consolidated Statements of Operations and is reported in the dry foods segment.

In 2008, the Company recorded impairment charges for its Van de Kamp’s ($8.0 million), Mrs. Paul’s ($5.6 million), Lenders ($0.9 million) and Open Pit tradenames ($0.6 million). The charges are the result of the Company reassessing the long-term growth rates for its branded products. The charges are recorded in the Other expense (income), net line on the Consolidated Statements of Operations and are reported in the dry foods ($0.6 million) and frozen foods ($14.5 million) segments.

In fiscal 2009, we experienced declines in net sales of our Swanson branded products. Upon reassessing the long-term growth rates of the brand, we recorded an impairment charge of the tradename asset in the amount of $1.3 million. The charge is recorded in the Other expense (income), net line in the Consolidated Statements of Operations and is reported in the frozen foods segment.

 

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Items Affecting Comparability

During fiscal 2007, our earnings (loss) before interest and taxes were impacted by certain items. These items included:

 

   

On April 2, 2007, immediately prior to the consummation of the Blackstone Transaction, we incurred $49.1 million of merger-related costs relating to the Blackstone Transaction, which are recorded in the Other expense (income), net line of the Consolidated Statements of Operations. The costs included $35.5 million related to the cash tender offer for the Predecessor’s 8.25% senior subordinated notes, $12.9 million related to the termination of certain of the Predecessor’s contracts, and $0.7 million related to payroll taxes.

 

   

Also on April 2, 2007, immediately prior to the consummation of the Blackstone Transaction, all of the Predecessor’s outstanding stock options vested, and we exercised our option to purchase at fair value all of the shares of common stock to be acquired by exercise of options held by employees pursuant to our Stock Option Plan. As a result, we incurred a charge of $8.4 million for stock compensation expense.

 

   

In fiscal 2007, we recorded a charge of $40.2 million related to the flow through of the increase in the fair market value of inventories acquired in the Blackstone Transaction.

 

   

In December 2007, we recorded a reduction to cost of products sold of $9.0 million related to the renegotiation of the Ft. Madison labor contract. Post retirement medical benefits (“OPEB”) are no longer granted as part of the contract; thus we no longer had this post-retirement liability.

 

   

In December 2007, the Company repurchased a total of $51.0 million of our 10.625% Senior Subordinated Notes at a discount price of $44.2 million. The gain was $5.7 million and is recorded in the Other expense (income), net line of the Consolidated Statements of Operations.

 

   

In December 2007, we recorded an impairment charge on our Open Pit tradename. The charge was the result of declines in sales of the Open Pit branded products.

During fiscal 2008, our earnings (loss) before interest and taxes were impacted by certain items. These items included:

 

   

In April of 2008, the Company settled a lawsuit with R2 Top Hat, Ltd., relating to its claim against Aurora Foods Inc., which merged with the Company in March 2004. Under the settlement, the Company paid R2 Top Hat, Ltd. $10 million in full payment of the excess leverage fees related to the Aurora prepetition bank facility, all related interest and all other out-of-pocket costs. After this settlement, there are no remaining contingencies related to the excess leverage fees under the Aurora prepetition bank facility. Accordingly, the remaining $10.0 million accrued liability assumed in the merger with Aurora and recorded at fair value of $20.1 million in the purchase price allocation for the Blackstone Transaction was reduced to $0 and the related credit, net of related expenses, was recorded in Other expense (income), net in the Consolidated Statements of Operations.

 

   

In December 2008, the Company recorded impairment charges for its Van de Kamp’s ($8.0 million), Mrs. Paul’s ($5.6 million), Lenders ($0.9 million) and Open Pit tradenames ($0.6 million). The charges are the result of the Company reassessing the long-term growth rates for its branded products and are recorded in Other expense (income), net in the Consolidated Statements of Operations.

During fiscal 2009, our earnings (loss) before interest and taxes were impacted by certain items. These items included:

 

   

In July of 2009, Jeffrey P. Ansell left his position as Chief Executive Officer and as a Director of the Company to pursue other interests, effective July 10, 2009. As a result of the change, we recorded a provision for severance in the amount of $2.4 million in Administrative expenses in the Consolidated Statements of Operations.

 

   

In December 2009, the Company recorded an impairment charge of $1.3 million for its Swanson tradename. The charge is the result of the Company’s reassessment of the long-term growth rates for its branded products and is recorded in Other expense (income), net in the Consolidated Statements of Operations.

 

   

In December 2009, in connection with the Birds Eye Foods Acquisition, the Company incurred merger related cost of $24.1 million. These costs include $19.3 million in merger, acquisition and advisory fees, $4.0 million in legal, accounting and other professional fees and $0.8 million in other costs. The costs are recorded in Other expense (income), net in the Consolidated Statements of Operations.

In addition, during fiscal 2009, our net earnings were impacted by:

 

   

We recorded a $315.6 million benefit to income taxes related to the reversal of the valuation allowance, as we concluded that it is more likely than not that certain of our US deferred tax assets will be recognized in future years. Prior to the realization of these deferred tax assets we maintained a full valuation allowance against net deferred tax assets excluding indefinite lived intangible assets.

 

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Results of Operations

The discussion below for each of the comparative periods is based upon net sales. We determine net sales in accordance with generally accepted accounting principles, or “GAAP”. We calculate our net sales by deducting trade marketing, slotting and consumer coupon redemption expenses from shipments. “Shipments” means gross sales less cash discounts, returns and “non-marketing” allowances. We calculate gross sales by multiplying the published list price of each product by the number of units of that product sold.

The discussion below for the 52 weeks ended December 30, 2007 is based on the combination of the Predecessor’s consolidated financial results for the 13 weeks ended April 2, 2007 and the Successor’s consolidated financial results for the 39 weeks ended December 30, 2007. This combination represents what we believe is the most meaningful basis for comparison of fiscal 2008 with the corresponding period of fiscal 2007, although the combination is not in accordance with GAAP. We believe that this is the most meaningful basis for comparison because the customer base, products, manufacturing facilities and types of marketing programs were the same under the Predecessor as they are under Successor.

Shipments is a non-GAAP financial measure. We include it in our management’s discussion and analysis because we believe that it is a relevant financial performance indicator for our Company as it measures the increase or decrease in our revenues caused by shipping more or less physical case volume multiplied by our published list prices. It is also a measure used by our management to evaluate our revenue performance. This measure is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. Using only this non-GAAP financial measure to analyze our performance would have material limitations because the calculation is based on the subjective determination of management regarding the nature and classification of events and circumstances that investors may find significant. Management compensates for these limitations by presenting both the GAAP and non-GAAP measures of these results.

 

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The following table reconciles shipments to net sales for the total company, the dry foods segment, the frozen foods segment and the Birds Eye foods segment for fiscal 2009, fiscal 2008 and fiscal 2007.

For the fiscal year ended:

 

     Dry Foods
     Fiscal
2009
   Fiscal
2008
   Fiscal
2007

Shipments

   $ 1,260.6    $ 1,162.8    $ 1,130.0

Less: Aggregate trade marketing and consumer coupon redemption expenses

     265.9      244.6      260.3

Less: Slotting expense

     7.1      2.9      5.8
                    

Net sales

   $ 987.6    $ 915.3    $ 863.9
                    
     Frozen Foods
     Fiscal
2009
   Fiscal
2008
   Fiscal
2007

Shipments

   $ 892.6    $ 867.7    $ 884.4

Less: Aggregate trade marketing and consumer coupon redemption expenses

     236.9      218.9      223.4

Less: Slotting expense

     3.3      7.7      10.4
                    

Net sales

   $ 652.4    $ 641.1    $ 650.6
                    
     Birds Eye Foods
     Fiscal
2009
   Fiscal
2008
   Fiscal
2007

Shipments

   $ 3.7    $ —      $ —  

Less: Aggregate trade marketing and consumer coupon redemption expenses

     0.7      —        —  

Less: Slotting expense

     —        —        —  
                    

Net sales

   $ 3.0    $ —      $ —  
                    
     Total
     Fiscal
2009
   Fiscal
2008
   Fiscal
2007

Shipments

   $ 2,156.9    $ 2,030.5    $ 2,014.4

Less: Aggregate trade marketing and consumer coupon redemption expenses

     503.5      463.5      483.7

Less: Slotting expense

     10.4      10.6      16.2
                    

Net sales

   $ 1,643.0    $ 1,556.4    $ 1,514.5
                    

 

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Consolidated Statements of Operations

The following tables set forth statement of operations data expressed in dollars and as a percentage of net sales. In accordance with GAAP, the results for fiscal 2009 only include the results of operations of the Birds Eye business from the date of the acquisition, December 23, 2009, through December 27, 2009, the end of the fiscal year.

 

     Fiscal 2009     Fiscal 2008     Combined
Fiscal 2007
 

Net sales

   $ 1,643.0    100.0   $ 1,556.4    100.0   $ 1,514.5    100.0

Cost of products sold

     1,263.7    76.9     1,217.9    78.3     1,188.5    78.5
                           

Gross profit

     379.3    23.1     338.5    21.7     326.0    21.5

Operating expenses

               

Marketing and selling expenses

     123.8    7.5     111.4    7.2     122.4    8.1

Administrative expenses

     62.7    3.8     47.8    3.1     58.4    3.9

Research and development expenses

     4.6    0.3     3.5    0.2     4.4    0.3

Other expense (income), net

     42.2    2.6     24.4    1.6     63.1    4.2
                           

Total operating expenses

     233.3    14.2     187.1    12.0     248.3    16.4
                           

Earnings before interest and taxes

   $ 146.0    8.9   $ 151.4    9.7   $ 77.7    5.1
                           

 

     Fiscal
2009
    Fiscal
2008
    Combined
Fiscal 2007
 

Net sales:

      

Dry foods

   $ 987.5      $ 915.3      $ 863.9   

Frozen foods

     652.4        641.1        650.6   

Birds Eye foods

     3.0        —          —     
                        

Total

   $ 1,642.9      $ 1,556.4      $ 1,514.5   
                        

Earnings (loss) before interest and taxes

      

Dry foods

   $ 158.7      $ 133.3      $ 105.1   

Frozen foods

     32.9        21.2        34.2   

Birds Eye foods

     (0.3     —          —     

Unallocated corporate expenses

     (45.3     (3.1     (61.6
                        

Total

   $ 146.0      $ 151.4      $ 77.7   
                        

Depreciation and amortization

      

Dry foods

   $ 31.7      $ 30.8      $ 27.7   

Frozen foods

     33.6        31.7        28.1   

Birds Eye foods

     0.2        —          —     
                        

Total

   $ 65.5      $ 62.5      $ 55.8   
                        

 

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Fiscal year ended December 27, 2009 (52 weeks) compared to fiscal year ended December 28, 2008 (52 weeks)

Net sales. Shipments in the twelve months ended December 27, 2009 were $2,156.8 million, an increase of $126.3 million, compared to shipments in the twelve months ended December 28, 2008 of $2,030.5 million. The acquisition of Birds Eye Foods, Inc. resulted in $3.6 million of increased shipments, which covered the five day period December 23, 2009 to December 27, 2009. All other businesses increased $122.7 million, which includes a 4.1% weighted average selling price increase. Net sales in the twelve months ended December 27, 2009 were $1,643.0 million, an increase of $86.6 million, compared to net sales in the twelve months ended December 28, 2008 of $1,556.4 million. The acquisition of Birds Eye Foods, Inc. resulted in $3.0 million of increased net sales. Net sales for all other businesses increased $83.6 million, the result of an increase in shipments of $122.7 million and a $39.1 million increase in aggregate trade marketing and consumer coupon redemption expenses. The 4.1% weighted average selling price increase combined with the higher rate of trade marketing and consumer coupon redemption expenses results in an effective 3.4% weighted average net selling price increase. The stronger U.S. dollar versus the Canadian dollar reduced net sales by 0.3%.

Dry foods: Shipments in the twelve months ended December 27, 2009 were $1,260.6 million, an increase of $97.8 million. The increase was due to increases in sales by our Duncan Hines, Vlasic, and private label businesses. The $97.8 million increase in shipments includes a 5.0% weighted average selling price increase. Aggregate trade marketing and consumer coupon redemption expenses and slotting expenses increased $25.5 million. As a result, dry foods net sales increased $72.3 million, or 7.9%, for the twelve months ended December 27, 2009. The 5.0% weighted average selling price increase combined with the higher rate of trade marketing and consumer coupon redemption expenses and slotting expenses resulted in an effective 4.9% weighted average net selling price increase.

Frozen foods: Shipments in the twelve months ended December 27, 2009 were $892.6 million, an increase of $24.9 million. The $24.9 million increase in shipments is inclusive of a 2.9% weighted average selling price increase. The change was mainly driven by an increase in sales in our seafood business. Aggregate trade and consumer coupon redemption expenses increased $13.6 million in the twelve months ended December 27, 2009. As a result, frozen foods net sales increased $11.3 million, or 1.8% for the year ended December 27, 2009. The 2.9% weighted average selling price increase combined with the higher rate of trade marketing and consumer coupon redemption expenses resulted in an effective 1.0% weighted average net selling price increase.

Birds Eye Foods, Inc.: Shipments in the twelve months ended December 27, 2009 were $3.6 million, which covered the five day period December 23, 2009 to December 27, 2009. Aggregate trade marketing and consumer coupon redemption expenses were $0.6 million. As a result, Birds Eye Foods, Inc. net sales were $3.0 million.

Gross profit. Gross profit was $379.3 million, or 23.1% of net sales in the twelve months ended December 27, 2009, versus gross profit of $338.5 million, or 21.7% of net sales in the twelve months ended December 28, 2008. The post acquisition operations of Birds Eye Foods, Inc. resulted in $0.5 million of gross profit. Included in the gross profit of Birds Eye Foods, Inc. was a $0.5 million charge related to the sales of inventories written up to fair value at the date of the acquisition. For the remaining businesses, gross profit for the twelve months ending December 27, 2009 was $378.8 million, or 23.1% of net sales, a 1.4% percentage point increase versus the remaining businesses gross profit for the twelve months ending December 28, 2008 of $338.5 million, or 21.7% of net sales. The principal driver of the increased gross profit as a percent of net sales rate was reduced freight and distribution expenses accounting for a 1.5 percentage point improvement. In addition, selling price increases in excess of raw material commodity cost (principally wheat, corn, edible oils, and to a lesser extent, dairy) and conversion cost increases, improved gross margin by 0.4 percentage points. Partially offsetting these improvements was the impact of the higher rate of aggregate trade marketing and consumer coupon redemption expenses which reduced the gross profit percentage in 2009 by 0.5 percentage points.

Marketing and selling expenses. Marketing and selling expenses were $123.8 million, or 7.5% of net sales, in the twelve months ended December 27, 2009 compared to $111.4 million, or 7.2% of net sales, in the twelve months ended December 28, 2008. The acquisition of Birds Eye Foods, Inc. contributed $0.3 million of the increase for the year ended December 27, 2009. The remaining change was due to higher advertising expense of $5.3 million, primarily in our seafood and Duncan Hines businesses, higher management incentive and equity related compensation accruals, and increased market research expense.

 

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Administrative expenses. Administrative expenses were $62.7 million, or 3.8% of net sales, in the twelve months ended December 27, 2009 compared to $47.8 million, or 3.1% of net sales, in the twelve months ended December 28, 2008. The acquisition of Birds Eye Foods, Inc. contributed $0.5 million of the increase for the year ended December 27, 2009. The balance of the increase was principally related to higher management incentive and equity related compensation accruals, higher severance and recruiting provisions, principally related to the change in the CEO, and spending on additional capabilities, both in terms of headcount and outside services.

Research and development expenses. Research and development expenses were $4.6 million, or 0.3% of net sales, in the twelve months ended December 27, 2009 compared with $3.5 million, or 0.2% of net sales, in the twelve months ended December 28, 2008.

Other expense (income), net. The following table shows other expense (income), net:

 

     Twelve Months Ended  
     December 27,
2009
   December 28,
2008
 
     In Thousands  

Other expense (income), net consists of:

  

Amortization of intangibles/other assets

   $ 16,824    $ 19,245   

Restructuring and impairment charges

     1,300      15,100   

Birds Eye Acquisition transaction costs

     24,090      —     

Gain on litigation settlement

     —        (9,988

Royalty expense (income), net and other, net

     —        6   
               

Total other expense (income), net

   $ 42,214    $ 24,363   
               

For the year ended December 27, 2009, transaction costs associated with the acquisition of Birds Eye Foods, Inc. totaled $24.1 million, consisting of $19.3 million in merger, acquisition and advisory fees, $4.0 million in legal, accounting and other professional fees and $0.8 million in other costs. For the year ended December 27, 2009, impairment charges totaled $1.3 million, related to a trade name impairment charge on our Swanson brand. For the year ended December 28, 2008, trade name impairment charges totaled $15.1 million, consisting of $8.0 million on our Van de Kamp brand, $5.6 million on our Mrs. Paul’s brand, $0.9 million on our Lenders brand, and $0.6 million on our Open Pit brand. Amortization was $16.8 million in the year ended December 27, 2009 as compared to $19.2 million in the year ended December 28, 2008. In the year ended December 28, 2008, we recorded the impact of the final settlement of litigation related to excess leverage fees incurred by Aurora under its credit agreement prior to its acquisition by us in 2004, resulting in a reduction of the accrued liability and a gain on litigation settlement of $10.0 million.

Earnings before interest and taxes. Earnings before interest and taxes (EBIT) decreased $5.4 million to $146.0 million in the twelve months ended December 27, 2009 from $151.4 million in EBIT in the twelve months ended December 28, 2008. This decrease in EBIT resulted from a $42.2 million increase in unallocated corporate expenses and a $0.3 million loss in Birds Eye Foods, Inc, partially offset by a $25.4 million increase in dry foods EBIT and a $11.7 million increase in frozen foods EBIT. Unallocated corporate expenses increased due to the transaction costs associated with the acquisition of Birds Eye Foods, Inc. of $24.1 million in fiscal 2009, the $10.0 million gain on litigation settlement in fiscal 2008 as described in other expense (income) above, and in 2009, higher management incentive and equity related compensation accruals, and higher severance and recruiting provisions, principally related to the change in the CEO.

Dry foods: Dry foods EBIT increased $25.4 million in the twelve months ended December 27, 2009, to $158.7 million from $133.3 million in the twelve months ended December 28, 2008. The year ended December 28, 2008 included a tradename impairment charge of $0.6 million related to our Open Pit brand. The balance of the dry foods EBIT increased $24.8 million and was principally driven a 7.9% increase in net sales, which includes an effective 4.9% weighted average net selling price increase on some of our products. Additionally, reduced freight and distribution expenses and lower consumer promotion expense contributed to the EBIT increase. These improvements were partially offset by higher overhead expense, principally related to higher management incentive and equity related compensation accruals

Frozen foods: Frozen foods EBIT increased by $11.7 million in the twelve months ended December 27, 2009, to $32.9 million from $21.2 million in the twelve months ended December 28, 2008. For the year ended December 27, 2009, impairment charges totaled $1.3 million, related to a trade name impairment charge on our Swanson brand. For the year ended December 28, 2008, trade name impairment charges totaled $14.5 million, consisting of $8.0

 

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million on our Van de Kamp brand, $5.6 million on our Mrs. Paul’s brand, and $0.9 million on our Lenders brand. The balance of the frozen foods EBIT decreased $1.5 million and was principally driven by higher raw material commodity costs and conversion costs in excess of selling price increases, increased overhead expense related to higher management incentive and equity related compensation accruals, and by increased market research expense. These declines to EBIT were partially offset by a 1.8% increase in net sales, which includes an effective 1.0% weighted average net selling price increase on some of our brands, and reduced freight and distribution expenses.

Birds Eye Foods, Inc.: Birds Eye Foods, Inc. EBIT was a ($0.3) million loss for the five day period December 23, 2009 to December 27, 2009, and includes a $0.5 million charge related to the sales of inventories written up to fair value at the date of the acquisition.

Interest expense, net. Interest expense, net was $121.1 million in the twelve months ended December 27, 2009, compared to $153.0 million in the twelve months ended December 28, 2008.

Included in interest expense, net, was $4.4 million and $1.3 million for the twelve months ended December 27, 2009 and the twelve months ended December 28, 2008 respectively, for the amortization of the cumulative mark to market adjustment for an interest rate swap that was de-designated for swap accounting in the fourth quarter of 2008 and subsequently terminated. The counterparty to the interest rate swap was Lehman Brothers Special Financing (LBSF), a subsidiary of Lehman Brothers, and the hedge was de-designated for swap accounting at the time of LBSF’s bankruptcy filing. At the time of de-designation, the cumulative mark to market adjustment was $11.5 million. As of December 27, 2009, the remaining unamortized balance is $5.9 million. In addition, in the twelve months ended December 28, 2008 interest expense includes a mark to market adjustment of $5.5 million for the period from the de-designation date of October 3, 2008 to the date we terminated the interest rate hedges on October 24, 2008.

Excluding the impact of the items in the previous paragraph, the decrease in interest expense, net, was $29.5 million, of which $34.2 million was attributable to lower interest rates on our bank borrowings, and $0.1 million of the decline was attributed to lower average bank debt levels, partially offset by $5.5 million of amortization of the bridge financing costs related to the Birds Eye Acquisition, $0.3 million of higher bond debt levels, $0.2 million in lower interest income, and $0.8 million of other items.

Also, included in the interest expense, net, amount was $14.2 million and $16.2 million for the twelve months ended December 27, 2009 and the twelve months ended December 28, 2008 respectively, recorded from losses on interest rate swap agreements, a net change of $2.0 million. We utilize interest rate swap agreements to reduce the potential exposure to interest rate movements and to achieve a desired proportion of variable versus fixed rate debt. Any gains or losses realized on the interest rate swap agreements are recorded as an adjustment to interest expense.

Provision for income taxes. The effective tax rate was (1,116.3%) in the twelve months ended December 27, 2009, compared to (1,749.9%) in the twelve months ended December 28, 2008. The effective rate difference is primarily due to the change in the valuation allowance for the twelve-month period. We recorded a benefit of $315.6 million related to the reversal of the valuation allowance as we concluded that it is more likely than not that certain of our US deferred tax assets will be recognized in future years. Prior to the realization of these deferred tax assets the Company maintained a full valuation allowance against net deferred tax assets excluding indefinite lived intangible assets. Deferred tax liabilities were recognized for the differences between the book and tax bases of certain goodwill and indefinite lived intangible assets.

Under Internal Revenue Code Section 382, the Company is a loss corporation. Section 382 of the Code places limitations on our ability to use Aurora’s net operating loss carry-forward to offset our income. The annual net operating loss limitation is approximately $14 to 18 million subject to other rules and restrictions. Our net operating loss carryovers and certain other tax attributes may not be utilized to offset Birds Eye income from recognized built in gains pursuant to Section 384 of the Code. See Note 13 to the consolidated financial statements.

 

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Fiscal year ended December 28, 2008 (52 weeks) compared to fiscal year ended December 30, 2007 (52 weeks)

Net sales. Shipments in the twelve months ended December 28, 2008 were $2,030.5 million, an increase of $16.1 million, compared to shipments in the twelve months ended December 30, 2007 of $2,014.4 million. The $16.1 million increase in shipments includes a 3.5% weighted average selling price increase. Net sales in the twelve months ended December 28, 2008 were $1,556.4 million, an increase of $41.9 million, compared to net sales in the twelve months ended December 30, 2007 of $1,514.5 million. The increase in net sales was the result of an increase in shipments of $16.1 million and a $25.8 million decrease in aggregate trade marketing and consumer coupon redemption expenses and slotting expenses. The 3.5% weighted average selling price increase combined with the lower rate of trade marketing and consumer coupon redemption expenses and slotting expenses results in an effective 5.5% weighted average net selling price increase.

Dry foods: Shipments in the twelve months ended December 28, 2008 were $1,162.8 million, an increase of $32.8 million. The $32.8 million increase in shipments includes a 3.3% weighted average selling price increase. The increase was due to increases in sales by our private label, Armour, and syrups businesses. Aggregate trade marketing and consumer coupon redemption expenses decreased $18.6 million. As a result, dry foods net sales increased $51.4 million, or 6.0%, for the twelve months ended December 28, 2008. The 3.3% weighted average selling price increase combined with the lower rate of trade marketing and consumer coupon redemption expenses and slotting expenses resulted in an effective 6.3% weighted average net selling price increase.

Frozen foods: Shipments in the twelve months ended December 28, 2008 were $867.7 million, a decrease of $16.7 million. The $16.7 million decrease in shipments is net of a 3.8% weighted average selling price increase. The change was mainly driven by declines in sales by our seafood and Hungry-Man businesses. Aggregate trade and consumer coupon redemption expenses decreased $7.2 million in the twelve months ended December 28, 2008. As a result, frozen foods net sales decreased $9.5 million, again principally resulting from the seafood and Hungry-Man businesses. The 3.8% weighted average selling price increase combined with the lower rate of trade marketing and consumer coupon redemption expenses and slotting expenses resulted in an effective 4.2% weighted average net selling price increase.

Gross profit. Gross profit was $338.5 million, or 21.7% of net sales in the twelve months ended December 28, 2008, versus gross profit of $326.0 million, or 21.5% of net sales in the twelve months ended December 30, 2007. Included in the gross profit for the twelve months ended December 30, 2007 was a charge of $40.2 million related to post-acquisition sales of inventories written up to fair value at the date of the Blackstone Transaction and $1.2 million of stock compensation expense also related to the Blackstone Transaction. The gross profit for the twelve months ending December 28, 2008 was $338.5 million, or 21.7% of net sales, a 2.5% percentage point decline versus the balance of the gross profit (excluding the aforementioned charges) for the twelve months ending December 30, 2007 of $367.4 million, or 24.2% of net sales. The principal driver of the decreased gross profit as a percent of net sales was higher raw material commodity costs (principally wheat, corn, edible oils, and to a lesser extent dairy products), in excess of selling price increases, which reduced gross margin by 4.8 percentage points. Somewhat offsetting this 4.8 percentage point decrease was reduced aggregate trade marketing (including slotting) and consumer coupon redemption expenses that are classified as reductions to net sales. The change in these costs accounted for 1.5 percentage points of higher gross profit in 2008. Additionally, reduced freight and distribution expenses accounted for a 0.8 percentage point improvement.

Marketing and selling expenses. Marketing and selling expenses were $111.4 million, or 7.2% of net sales, in the twelve months ended December 28, 2008 compared to $122.4 million, or 8.1% of net sales, in the twelve months ended December 30, 2007. Included in the expenses for the twelve months ended December 30, 2007 was $2.9 million of stock compensation expense related to the acceleration of the vesting in the Predecessor’s stock options as a result of the Blackstone Transaction. The remaining change was due to lower advertising expense of $6.7 million, primarily in our seafood and Vlasic businesses, and decreased selling overhead expense.

Administrative expenses. Administrative expenses were $47.8 million, or 3.1% of net sales, in the twelve months ended December 28, 2008 compared to $58.4 million, or 3.9% of net sales, in the twelve months ended December 30, 2007. Included in the expenses for the twelve months ended December 30, 2007 was $3.9 million of stock compensation expense related to the acceleration of the vesting in the Predecessor’s stock options as a result of the Blackstone Transaction. The balance of the decrease was principally related to lower management bonus accruals and the elimination of certain expenses of the former Chairman, partially offset by additional headcount to build capability.

 

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Research and development expenses. Research and development expenses were $3.5 million, or 0.2% of net sales, in the twelve months ended December 28, 2008 compared with $4.4 million, or 0.3% of net sales, in the twelve months ended December 30, 2007. Included in the expenses for the twelve months ended December 30, 2007 was $0.3 million of stock compensation expense related to the acceleration of the vesting in the Predecessor’s stock options as a result of the Blackstone Transaction.

Other expense (income), net. The following table shows other expense (income), net:

 

     Twelve Months Ended  
     December 28,
2008
    December 30,
2007
 
     In Thousands  

Other expense (income), net consists of:

  

Restructuring and impairment charges

   $ 15,100      $ 1,246   

Gain on litigation settlement

     (9,988     —     

Amortization of intangibles/other assets

     19,245        18,490   

Merger related costs

     —          49,129   

Gain on extinguishment of subordinate notes

       (5,670

Royalty expense (income), net and other, net

     6        (125
                

Total other expense (income), net

   $ 24,363      $ 63,070   
                

For the year ended December 28, 2008, trade name impairment charges totaled $15.1 million, consisting of $8.0 million on our Van de Kamp brand, $5.6 million on our Mrs. Paul’s brand, $0.9 million on our Lenders brand, and $0.6 million on our Open Pit brand. For the year ended December 30, 2007, restructuring and impairment charges totaled $1.2 million, principally due to a $1.2 million trade name impairment charge on our Open Pit brand. In the twelve months ended December 28, 2008, we recorded the impact of the final settlement of litigation related to excess leverage fees incurred by Aurora under its credit agreement prior to its acquisition by us in 2004, resulting in a reduction of the accrued liability and a gain on litigation settlement of $10.0 million. Amortization was $19.2 million in the twelve months ended December 28, 2008 as compared to $18.5 million in the twelve months ended December 30, 2007. The 2008 expense includes additional amortization related to the increase in value of the definite-lived intangible assets as a result of the purchase price allocation of the Blackstone Transaction. Included in the expense for the twelve months ended December 30, 2007 was $49.1 million of merger costs related to the Blackstone Transaction (see Note 8 to the Consolidated Financial Statements). These costs included $35.5 million related to the cash tender offer for the Predecessor’s 8.25% Senior Subordinated Notes, $12.9 million related to the termination of certain of the Predecessor’s contracts, and $0.7 million related to payroll taxes. In addition, the year ended December 30, 2007 includes a $5.7 million gain on the extinguishment of subordinated notes which we redeemed in December 2007.

Earnings before interest and taxes. Earnings before interest and taxes (EBIT) increased $73.7 million to $151.4 million in the twelve months ended December 28, 2008 from $77.7 million in EBIT in the twelve months ended December 30, 2007. The year ended December 28, 2008 included trade name impairment charges totaled $15.1 million and the year ended December 30, 2007 included restructuring and impairment charges totaled $1.2 million, as described in other expense (income) above. For the twelve months ended December 28, 2008, the unallocated corporate expenses include the $10.0 million gain on litigation settlement as described in other expense (income) above. Included in the twelve months ended December 30, 2007 is $8.4 million of stock compensation expense and $49.1 million of merger costs as described in the other expense (income) paragraph above (see Note 8 to the Consolidated Financial Statements), both related to the Blackstone Transaction. The merger costs of $49.1 million are included in unallocated corporate expenses. Also included in the twelve months ended December 30, 2007 , are costs of products sold related to the post-acquisition sales of inventories written up to fair value at the date of the Blackstone Transaction of $40.2 million. In addition, the year ended December 30, 2007 includes a $5.7 million gain on the extinguishment of subordinated notes which we redeemed in December 2007, which is included in the unallocated corporate expenses. This increase in EBIT resulted from a $58.5 million decrease in unallocated corporate expenses, a $28.2 million increase in dry foods EBIT, and a $13.0 million decrease in frozen foods EBIT.

 

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Dry foods: Dry foods EBIT increased $28.2 million in the twelve months ended December 28, 2008, to $133.3 million from $105.1 million in the twelve months ended December 30, 2007. The year ended December 28, 2008 includes a trade name impairment charge of $0.6 million related to our Open Pit brand. The year ended December 30, 2007 also included a tradename impairment charge of $1.2 million related to our Open Pit brand. The twelve months ended December 30, 2007 included a $28.5 million charge related to post-acquisition sales of inventories written up to fair value at the date of the Blackstone Transaction and $5.0 million of stock compensation expense also related to the Blackstone Transaction. In addition, the year ended December 30, 2007 included a $9.0 million reduction in cost resulting from the elimination of OPEB obligation associated with a new labor contract at our Ft. Madison facility. The balance of the dry foods EBIT increased $3.1 million and was principally driven a 6.0% increase in net sales, which includes a $37.5 million impact of selling price increases on some of our products, and the impact of lower slotting and coupon expense, both of which are recorded as reductions from net sales, and lower advertising expense, principally in our Vlasic and Armour businesses. Somewhat offsetting these increases were the impact of higher commodity cost expense effecting cost of products sold.

Frozen foods: Frozen foods EBIT decreased by $13.0 million in the twelve months ended December 28, 2008, to $21.2 million from $34.2 million in the twelve months ended December 30, 2007. For the year ended December 28, 2008, trade name impairment charges totaled $14.5 million, consisting of $8.0 million on our Van de Kamp brand, $5.6 million on our Mrs. Paul’s brand, and $0.9 million on our Lenders brand. The twelve months ended December 30, 2007 included a $11.7 million charge related to post-acquisition sales of inventories written up to fair value at the date of the Blackstone Transaction and $3.3 million of stock compensation expense also related to the Blackstone Transaction. The balance of the frozen foods EBIT decreased $13.5 million and was principally driven by commodity cost increases and a $9.5 million decline in net sales, which includes a $33.7 million impact of selling price increases on some of our products. Somewhat offsetting these declines was the impact of lower slotting and coupon expense, both of which are recorded as reductions from net sales, and lower advertising expense, principally in the seafood business.

Interest expense, net. Interest expense, net was $153.0 million in the twelve months ended December 28, 2008, compared to $162.1 million in the twelve months ended December 30, 2007.

The comparison of interest expense, net, for 2008 versus 2007 is impacted by the following non-cash items: the 2008 de-designation and termination of the our 2007 interest rate hedges, and, in 2007, the charge off of unamortized debt issue costs and premium related to the redemption of the Predecessors debt and the amortization of the Blackstone Transaction bridge financing costs.

Impacting interest expense in the fourth quarter of 2008 were two occurrences related to the 2007 interest rate swap agreements we had with Lehman Brothers Special Financing (LBSF), a subsidiary of Lehman Brothers. One: on October 3, 2008, LBSF filed for bankruptcy protection which resulted in the interest rate hedges being de-designated as effective hedges. At that time, the cumulative mark to market adjustment in Other Comprehensive Income related to these interest rate hedges was $11.5 million which is being amortized into interest expense over the remaining original contract life of the hedges, of which $1.3 million was amortized in 2008. Two: interest expense includes a mark to market adjustment of $5.5 million for the period from the de-designation date of October 3, 2008 to the date we terminated the interest rate hedges on October 24, 2008.

The decrease in interest expense, net, in 2008 compared to 2007 is substantially impacted by a charge of $24.1 million in the twelve months ended December 30, 2007 for the unamortized portion of the deferred financing costs, partially offset by a credit of $5.2 million for the unamortized portion of the original issue premium, both related to the redemption of the Predecessor’s debt and $4.2 million of amortization of the Blackstone Transaction bridge financing costs in 2007.

The remaining $7.2 million increase in interest expense, net, was the result of $13.5 million attributed to higher average bank debt levels, $2.1 million attributed to higher bond debt interest rates, $1.2 million in lower interest income, and $0.8 million of other items, partially offset by $8.4 million attributed to lower interest rates on our bank borrowings, $1.2 million attributed to lower bond debt levels, and $0.8 million of lower amortization of debt issue costs.

Included in the interest expense, net, amount was $16.2 million (which includes the $5.5 million mark to market adjustment discussed above) and ($2.1) million for the twelve months ended December 28, 2008 and the twelve months ended December 30, 2007 respectively, recorded from losses and (gains) on interest rate swap agreements occurring in the normal course. We utilize interest rate swap agreements to reduce the potential exposure to interest rate movements and to achieve a desired proportion of variable versus fixed rate debt. Any gains and losses realized on the interest rate swap agreements are recorded as an adjustment to interest expense.

 

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Additionally, later in 2008 we entered into new interest rate hedges. Our interest swap agreements that we entered into during the later part of 2008 are designated as hedges under SFAS No. 133, and included in Accumulated Other Comprehensive Income in the twelve months ended December 28, 2008 was a $12.6 million loss resulting from the mark-to-market of these swaps

Provision for income taxes. The effective tax rate was (1,749.9%) in the twelve months ended December 28, 2008, compared to (36.8%) in the twelve months ended December 30, 2007. We maintain a full valuation allowance against net deferred tax assets excluding indefinite lived intangible assets, and the effective rate difference is primarily due to the change in the valuation allowance for the twelve-month period. Deferred tax liabilities are recognized for the differences between the book and tax bases of certain goodwill and indefinite lived intangible assets.

Under Internal Revenue Code Section 382, the Company is a loss corporation. Section 382 of the Code places limitations on our ability to use Aurora’s net operating loss carry-forward to offset our income. The annual net operating loss limitation is approximately $14 to 18 million subject to other rules and restrictions. See note 13 to our audited consolidated financial statements.

 

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LIQUIDITY AND CAPITAL RESOURCES

Historical

Overview. Our cash flows are very seasonal. Typically we are a net user of cash in the third quarter of the calendar year (i.e., the quarter ending in September) and a net generator of cash over the balance of the year.

Our principal liquidity requirements have been, and we expect will be, for working capital and general corporate purposes, including capital expenditures and debt service. Capital expenditures are expected to be approximately $86 million in 2010. We have historically satisfied our liquidity requirements with internally generated cash flows and availability under our revolving credit facilities.

Statements of Cash Flows for the Fiscal Year Ended December 27, 2009 Compared to the Fiscal Year Ended December 28, 2008

Net cash provided by operating activities was $116.2 million for fiscal 2009, which consisted of net earnings excluding non-cash charges of $111.5 million, and a decrease in working capital of $4.7 million. The decrease in working capital was principally due to a concerted effort to reduce inventories while, at the same time, improving customer service levels. Inventories were reduced by $12.8 million. Also, accounts receivable declined by $2.7 million due to the timing of sales. Working capital was also decreased by a $19.8 million increase in accrued liabilities, principally driven by a $12.2 million increase in performance-based incentive plan accruals. Offsetting these reductions in working capital were a $13.4 million reduction in accounts payable principally driven by year on year changes in the timing of production, a $12.4 million increase in other current assets, principally related to a letter-of-credit cash collateral deposit of $9.2 million subsequent to the acquisition of Birds Eye Foods, Inc., and accrued trade marketing expense decreased $4.8 million as a result of the timing of when the trade marketing payments were made.

Net cash provided by operating activities was $16.8 million for fiscal 2008, which consisted of net earnings excluding non-cash charges of $72.6 million, $17.0 million paid to terminate early interest rate derivatives and an increase in working capital of $38.8 million. The increase in working capital was primarily the result of a $25.5 million increase in inventories that was primarily done in order to better service our customers going forward, as well as caused by higher commodity costs, and a decline of $29.5 million in accrued liabilities (a result of the legal settlement with R2 Top Hat, Ltd., the payment of the 2007 performance bonus and an decrease in accrued interest), partially offset by a $6.7 million decline in accounts receivable and a $4.9 million increase in accrued trade marketing. All other working capital accounts generated $4.6 million in cash.

Net cash used in investing activities for fiscal 2009 totaled $1,366.8 million and included $1,314.8 million for the acquisition of Birds Eye Foods, Inc., net of cash acquired of $25.6 million, as well as $52.0 million for capital expenditures. Net cash used in investing activities for fiscal 2008 was $32.6 million and consisted entirely of capital expenditures. The principal reason for the increase in fiscal 2009 capital expenditures compared to fiscal 2008 is improvements to the pizza production process at our Jackson, TN facility.

Net cash provided by financing activities was $1,319.8 million for fiscal 2009. This primarily related to the funding of the acquisition of Birds Eye Foods, Inc., which included $838.3 million, net of original issue discount, from an $850.0 million term loan borrowing under the Senior Secured Credit Facility, $300.0 million of Senior Notes, and $262.1 million in net equity contributions, reduced by debt acquisition costs of $40.2 million. Other significant cash flows from financing activities were net payments on the Revolving Credit Facility of $26.0 million and payments of the Term Loan of $12.5 million and a reduction in bank overdrafts of $2.6 million. Net cash provided by financing activities was $14.2 million for fiscal 2008. Borrowings under the Revolving Credit Facility of $26.0 million were primarily offset with $9.4 million repayments of the term loan and $1.5 million in net repayments of our short-term borrowings.

 

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Statements of Cash Flows for the Fiscal Year Ended December 28, 2008 Compared to the Fiscal Year Ended December 30, 2007

Net cash provided by operating activities was $16.8 million for fiscal 2008, which consisted of net earnings excluding non-cash charges of $72.6 million, $17.0 million paid to terminate early interest rate derivatives, and an increase in working capital of $38.8 million. The increase in working capital was primarily the result of a $25.5 million increase in inventories that was primarily done in order to better service our customers going forward, as well as caused by higher commodity costs, and a decline of $29.6 million in accrued liabilities (a result of the legal settlement with R2 Top Hat, Ltd., the payment of the 2007 performance bonus and an decrease in accrued interest), partially offset by a $6.7 million decline in accounts receivable and a $4.9 million increase in accrued trade marketing. All other working capital accounts generated $4.6 million in cash.

Net cash provided by operating activities for the Successor was $60.1 million for the period from April 2, 2007 to December 30, 2007, which was the result of our net loss excluding non-cash charges of $16.8 million and a decrease in working capital of $43.3 million. The decrease in working capital is primarily driven by a decrease in inventory resulting from the $40.2 million charge related to the write up of inventories to the fair value as of the date of the Blackstone Transaction offset by the normal seasonality of inventories of $7.5 million when comparing December to April. Also benefiting working capital is an increase in accrued liabilities of $23.8 million as a result of higher accrued interest expense and higher accrued management incentive compensation, which is generally disbursed in the first quarter of the fiscal year. Offsetting these decreases in working capital from inventory and accrued liabilities is a decline of $11.4 million in accrued trade marketing expense, which is a result of lower trade spending and a change in the timing of when payments are occurring. All other working capital charges, net reduced cash by $1.8 million.

Net cash provided by operating activities for the Predecessor was $55.7 million for the period from January 1, 2007 to April 2, 2007, which was the result of net loss excluding non-cash charges of $16.3 million and a decrease in working capital of $72.0 million. The decrease in working capital was primarily the result of (a) a $53.4 million increase in accrued liabilities, mostly as a result of the accrual of $49.1 million of merger expenses related to the Blackstone Transaction, (b) a $20.0 million decrease in inventories that was due to the seasonal sell-down from December 2006 and (c) a $14.3 million increase in accounts payable. The increase in accounts payable at the end of the period primarily related to the normal seasonal slowdown at our production facilities in December 2006 as well as optimizing our freight payment system. The increase in accrued liabilities and accounts payable and the decrease in inventories were offset by an $18.3 million increase in accounts receivable that relates to higher sales as well as the timing of when those sales occurred. The aging of accounts receivable has remained unchanged from December. All other working capital accounts generated $2.6 million of cash, primarily the result of higher accrued trade marketing.

Net cash used in investing activities for fiscal 2008 was $32.6 million and consisted entirely of capital expenditures. Net cash used in investing activities for fiscal 2007 totaled $1,345.4 million and included $1,319.6 million for the Blackstone Transaction as well as $28.0 million for capital expenditures ($5.0 million for the Predecessor and $23.0 million for the Successor). Additionally, the Successor received $2.2 million from the sale of the Omaha, Nebraska facility.

Net cash provided by financing activities was $14.2 million for fiscal 2008. Borrowings under the revolving credit facility of $26.0 million were primarily offset with $9.4 million repayments of the term loan and $1.5 million in net repayments of our short-term borrowings. Net cash provided by financing activities was $1,239.8 million for fiscal 2007. This primarily related to the funding for the Blackstone Transaction, which included $1,250.0 million under the term loan under the Senior Secured Credit Facilities, $575.0 million for the Senior Notes and Senior Subordinated Notes, and $420.3 million in net equity contributions. These funds were offset by repayments of the Predecessor’s long-term debt totaling $915.2 million, repayments and repurchases of the Successor’s long-term debt of $50.4 million and Successor’s debt acquisition costs of $39.8 million.

 

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Debt

Successor – As part of the Blackstone Transaction as described in Note 1, we entered into a $1,375.0 million credit agreement (the “Senior Secured Credit Facility”) in the form of (i) term loans in an initial aggregate amount of $1,250.0 million (the “Term Loans”) and (ii) revolving credit commitments in the initial aggregate amount of $125.0 million (the “Revolving Credit Facility”). The term loan matures April 2, 2014. The Revolving Credit Facility matures April 2, 2013.

As part of the Birds Eye Acquisition on December 23, 2009, as described in Note 3, we entered into an amendment to the Senior Secured Credit Facility in the form of (i) incremental term loans in the amount of $850.0 million (the “Tranche C Term Loans”) and (ii) an incremental revolving credit facility in the amount of $25.0 million, bringing our total revolving credit commitment to $150.0 million. In connection with the Tranche C Term Loans, we also incurred $11.8 million in original issue discount. This is recorded in Long-term debt on the Consolidated Balance Sheet and will be amortized over the life of the loan using the effective interest method.

There were no borrowings outstanding under the Revolving Credit Facility as of December 27, 2009. Borrowings outstanding under the Revolving Credit Facility as of December 28, 2008 totaled $26.0 million.

The total amount of the Term Loans and the Tranche C Term Loans that were owed to affiliates of the Blackstone Group as of December 27, 2009 and December 28, 2008, was $109.2 million and $34.6 million, respectively.

Our borrowings under the Senior Secured Credit Facility, as amended, bear interest at a floating rate and are maintained as base rate loans or as Eurodollar loans. Base rate loans bear interest at the base rate plus the applicable base rate margin, as defined in the Senior Secured Credit Facility. The base rate is defined as the higher of (i) the prime rate and (ii) the Federal Reserve reported overnight funds rate plus 1/2 of 1%. Eurodollar loans bear interest at the adjusted Eurodollar rate, as described in the Senior Secured Credit Facility, plus the applicable Eurodollar rate margin. Solely with respect to Tranche C Term Loans, the Eurocurrency rate shall be no less than 2.50% per annum. Solely with respect to Tranche C Term Loans, the base rate shall be no less than 3.50% per annum.

The applicable margins with respect to our Senior Secured Credit Facility vary from time to time in accordance with the terms thereof and agreed upon pricing grids based on our leverage ratio as defined in the credit agreement. The applicable margins with respect to the Senior Secured Credit Facility are currently:

 

Applicable Margin (per annum)

Revolving Credit Facility and Letters of Credit

 

Term Loans

 

Tranche C Term Loans

Eurocurrency

Rate for

Revolving Loans

and Letter of

Credit Fees

 

Base Rate for

Revolving Loans

 

Commitment

Fees Rate

 

Eurocurrency

Rate for Term

Loans

 

Base Rate for

Term Loans

 

Eurocurrency

Rate for -

Term Loan C

 

Base Rate for -

Term Loan C

2.75%

  1.75%   0.50%   2.75%   1.75%   5.00%   4.00%

The obligations under the Senior Secured Credit Facility are unconditionally and irrevocably guaranteed by each of our direct or indirect domestic subsidiaries (collectively, the “Guarantors”). In addition, the Senior Secured Credit Facility is collateralized by first priority or equivalent security interests in (i) all the capital stock of, or other equity interests in, each of our direct or indirect domestic subsidiaries and 65% of the capital stock of, or other equity interests in, our direct foreign subsidiaries, or any of its domestic subsidiaries and (ii) certain of our tangible and intangible assets and those of the Guarantors (subject to certain exceptions and qualifications).

A commitment fee of 0.50% per annum is applied to the unused portion of the Revolving Credit Facility. For the fiscal years ended December 27, 2009, December 28, 2008 and December 30, 2007, the weighted average interest rate on the Term Loans was 3.13%, 6.21% and 8.05%, respectively. For the fiscal years ended December 27, 2009 and December 28, 2008, the weighted average interest rate on the Revolving Credit Facility was 3.19% and 5.45%, respectively. As of December 27, 2009 and December 28, 2008, the Eurodollar interest rate on the Term Loans was 4.84% and 6.52%, respectively. As of December 28, 2008, the Eurodollar interest rate on the Revolving Credit Facility was 3.21%.

 

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We pay a fee for all outstanding letters of credit drawn against the Revolving Credit Facility at an annual rate equivalent to the Applicable Margin then in effect with respect to Eurodollar loans under the Revolving Credit Facility, less the fronting fee payable in respect of the applicable letter of credit. The fronting fee is equal to 0.125% per annum of the daily maximum amount then available to be drawn under such letter of credit. The fronting fees are computed on a quarterly basis in arrears. Total letters of credit issued under the Revolving Credit Facility cannot exceed $25.0 million. As of December 27, 2009 and December 28, 2008, we had utilized $22.1 million and $15.2 million, respectively of the Revolving Credit Facility for letters of credit. As of December 28, 2008, borrowings under the Revolving Credit Facility totaled $26.0 million, therefore, of the $99.0 million Revolving Credit Facility available, we had an unused balance of $83.8 million available for future borrowing and letters of credit. As of December 27, 2009, there were no borrowings under the Revolving Credit Facility, therefore, of the $150.0 million Revolving Credit Facility available, we had an unused balance of $127.9 million available for future borrowing and letters of credit. The remaining amount that can be used for letters of credit as of December 27, 2009 and December 28, 2008 was $2.9 million and $9.8 million, respectively. As of December 27, 2009, we were unable to use the Revolving Credit Facility for a $9.2 million letter of credit and we instead had to deposit cash collateral for that amount. Our total letters of credit as of December 27, 2009 were $31.3 million.

In accordance with the “Excess Cash Flow” requirements of the Senior Secured Credit Facility, we will be required to make a mandatory prepayment of the Term Loans of $34.0 million in March 2010.

The Term Loans mature in quarterly 0.25% installments from September 2007 to December 2013 with the remaining balance due in April 2014. The aggregate maturities of the term loan outstanding as of December 27, 2009 are $23.2 million in 2010, $1.8 million in 2011, $12.5 million in 2012, $12.5 million in 2013 and $1,171.9 million in 2014. The Tranche C Term Loans matures in quarterly 0.25% installments from January 2010 to December 2013 with the remaining balance due in April 2014. The aggregate maturities of the Tranche C Term Loans outstanding as of December 27, 2009 are $14.0 million in 2010, $0.9 million in 2011, $8.5 million in 2012, $8.5 million in 2013 and $818.1 million in 2014.

On April 2, 2007, as part of the Blackstone Transaction described in Note 1, we issued $325.0 million of 9.25% Senior Notes (the “Senior Notes”) due 2015, and $250.0 million of 10.625% Senior Subordinated Notes (the “Senior Subordinated Notes”) due 2017. On December 23, 2007, as part of the Birds Eye Acquisition described in Note 3, we issued an additional $300 million of 9.25% Senior Notes due in 2015 (the “Additional Senior Notes”). The Senior Notes and the Additional Senior Notes are collectively referred to herein as Senior Notes. The Senior Notes are general unsecured obligations of ours, effectively subordinated in right of payment to all of our existing and future senior secured indebtedness and guaranteed on a full, unconditional, joint and several basis by our wholly-owned domestic subsidiaries that guarantee our other indebtedness. The Senior Subordinated Notes are general unsecured obligations of ours, subordinated in right of payment to all of our existing and future senior indebtedness and guaranteed on a full, unconditional, joint and several basis by our wholly-owned domestic subsidiaries that guarantee our other indebtedness. See Note 19 of the Consolidated Financial Statements for Guarantor and Nonguarantor Financial Statements.

We may redeem some or all of the Senior Notes at any time prior to April 1, 2011, and some or all of the Senior Subordinated Notes at any time prior to April 1, 2012, in each case at a price equal to 100% of the principal amount of notes redeemed plus the Applicable Premium as of, and accrued and unpaid interest to, the redemption date, subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date. The “Applicable Premium” is defined as the greater of (1) 1.0% of the principal amount of such note and (2) the excess, if any, of (a) the present value at such redemption date of (i) the redemption price of such Senior Note at April 1, 2011 or Senior Subordinated Note at April 1, 2012, plus (ii) all required interest payments due on such Senior Note through April 1, 2011 or Senior Subordinated Note through April 1, 2012 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the Treasury Rate plus 50 basis points over (b) the principal amount of such note.

We may redeem the Senior Notes or the Senior Subordinated Notes at the redemption prices listed below, if redeemed during the twelve-month period beginning on April 1st of each of the years indicated below:

 

Senior Notes

 

Year

   Percentage  

2011

   104.625

2012

   102.313

2013 and thereafter

   100.000

Senior Subordinated Notes

 

Year

   Percentage  

2012

   105.313

2013

   103.542

2014

   101.771

2015 and thereafter

   100.000

 

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In addition, until April 1, 2010, we may redeem up to 35% of the aggregate principal amount of Senior Notes or Senior Subordinated Notes at a redemption price equal to 100% of the aggregate principal amount thereof, plus a premium equal to the rate per annum on the Senior Notes or Senior Subordinated Notes, as the case may be, plus accrued and unpaid interest and Additional Interest, if any, to the redemption date, subject to the right of holders of Senior Notes or Senior Subordinated Notes of record on the relevant record date to receive interest due on the relevant interest payment date, with the net cash proceeds received by us from one or more equity offerings; provided that (i) at least 50% of the aggregate principal amount of Senior Notes or Senior Subordinated Notes, as the case may be, originally issued under the applicable indenture remains outstanding immediately after the occurrence of each such redemption and (ii) each such redemption occurs within 90 days of the date of closing of each such equity offering.

In December 2007, we repurchased $51.0 million in aggregate principal amount of the 10.625% Senior Subordinated Notes at a discount price of $44.2 million. We currently have outstanding $199.0 million in aggregate principal amount of Senior Subordinated Notes.

As market conditions warrant, we and our subsidiaries, affiliates or significant shareholders (including The Blackstone Group L.P. and its affiliates) may from time to time, in our or their sole discretion, purchase, repay, redeem or retire any of our outstanding debt or equity securities (including any publicly issued debt or equity securities), in privately negotiated or open market transactions, by tender offer or otherwise.

The estimated fair value of our long-term debt, including the current portion, as of December 27, 2009, is as follows:

 

(million $)    December 27, 2009

Issue

   Recorded
Amount
   Fair
Value

Senior Secured Credit Facility - Term Loans

   $ 1,221.9    $ 1,134.3

Senior Secured Credit Facility - Tranche C Term Loans

     850.0      853.5

9.25% Senior notes

     625.0      628.9

10.625% Senior subordinated notes

     199.0      206.2
             
   $ 2,895.9    $ 2,822.9
             

The fair value is based on the quoted market price for such notes and borrowing rates currently available to us for loans with similar terms and maturities.

 

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Predecessor- In November 2003, the Predecessor entered into a $675.0 million Credit Agreement (“Predecessor Senior Secured Credit Facilities”) with JPMorgan Chase Bank (a related party of JPMorgan Partners, LLC as noted in Note 16) and other financial institutions as lenders, which provided for a $545.0 million seven-year term loan B facility, of which $120.0 million was made available on November 25, 2003 and $425.0 million was made available as a delayed draw term loan on the closing date of the Aurora Merger on March 19, 2004. Concurrently with the acquisition of the Armour Business but effective as of February 14, 2006, the Predecessor entered into an Amendment No. 4 and Agreement to the Predecessor Senior Secured Credit Facilities (“Amendment No. 4”). Among other things, Amendment No. 4 approved the Armour acquisition and provided for the making of $143.0 million of additional tack-on term loans to fund a portion of the acquisition. The Predecessor Senior Secured Credit Facilities also provided for a six-year $130.0 million revolving credit facility, of which up to $65.0 million was made available on November 25, 2003, and the remaining $65.0 million was made available on the closing date of the Aurora Merger on March 19, 2004.

A commitment fee of 0.50% per annum was applied to the unused portion of the revolving credit facility. There were no borrowings under the revolving credit facility during 2007 for the Predecessor. For the 13 weeks ended April 2, 2007, the weighted average interest rate on the term loan was 7.36%.

In connection with the Blackstone Transaction described in Note 1, the Predecessor Senior Secured Credit Facilities were paid in full.

In November 2003 and February 2004, the Predecessor issued $200.0 million and $194.0 million, respectively, 8.25% senior subordinated notes. The February 2004 notes resulted in gross proceeds of $201.0 million, including premium. The terms of the February 2004 notes were the same as the November 2003 notes and were issued under the same indenture.

On March 8, 2007, the Predecessor commenced a cash tender offer to purchase any and all of the outstanding 8.25% Senior Subordinated Notes due 2013 of the Predecessor (the “Predecessor Notes”), and a related consent solicitation to amend the indenture pursuant to which the Predecessor Notes were issued. The tender offer and consent solicitation were made in connection with the Blackstone Transaction. The tender offer and consent solicitation were made upon the terms and conditions set forth in an Offer to Purchase and Consent Solicitation Statement dated March 8, 2007 and the related Consent and Letter of Transmittal. The total cost of the cash tender offer for the Predecessor Notes was $35.5 million and was recorded as a charge in the Other expense (income), net line of the Consolidated Statements of Operations of the Predecessor immediately before the Blackstone Transaction.

Covenant Compliance

The following is a discussion of the financial covenants contained in our debt agreements.

Senior Secured Credit Facility

Our Senior Secured Credit Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:

 

   

incur additional indebtedness and make guarantees;

 

   

create liens on assets;

 

   

engage in mergers or consolidations;

 

   

sell assets;

 

   

pay dividends and distributions or repurchase our capital stock;

 

   

make investments, loans and advances, including acquisitions;

 

   

repay the Senior Subordinated Notes or enter into certain amendments thereof; and

 

   

engage in certain transactions with affiliates.

The Senior Secured Credit Facility also contains certain customary affirmative covenants and events of default.

 

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Senior Notes and Senior Subordinated Notes

Additionally, on April 2, 2007, we issued the Senior Notes and the Senior Subordinated Notes. On December 23, 2009, we issued additional Senior Notes. The Senior Notes are general unsecured obligations, effectively subordinated in right of payment to all of our existing and future senior secured indebtedness, and guaranteed on a full, unconditional, joint and several basis by our wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company. The Senior Subordinated Notes are general unsecured obligations, subordinated in right of payment to all of our existing and future senior indebtedness, and guaranteed on a full, unconditional, joint and several basis by our wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company.

The indentures governing the Senior Notes and Senior Subordinated Notes limit our (and most or all of our subsidiaries’) ability to, subject to certain exceptions:

 

   

incur additional debt or issue certain preferred shares;

 

   

pay dividends on or make other distributions in respect of our capital stock or make other restricted payments;

 

   

make certain investments;

 

   

sell certain assets;

 

   

create liens on certain assets to secure debt;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

   

enter into certain transactions with our affiliates; and

 

   

designate our subsidiaries as unrestricted subsidiaries.

Subject to certain exceptions, the indentures governing the notes permit us and our restricted subsidiaries to incur additional indebtedness, including secured indebtedness.

Consolidated EBITDA

Pursuant to the terms of the Senior Secured Credit Facility, if at any time there are borrowings outstanding under the revolving credit facility in an aggregate amount greater than $10.0 million, we are required to maintain a ratio of consolidated total senior secured debt to Consolidated EBITDA (defined below) for the most recently concluded four consecutive fiscal quarters (the “Senior Secured Leverage Ratio”) less than a ratio starting at a maximum of 7.00:1 at September 30, 2007 and stepping down over time to 6.50 in 2008, 5.75 in 2009, 5.00 in 2010 and 4.00 in 2011 and thereafter. Consolidated total senior secured debt is defined under the Senior Secured Credit Facility as aggregate consolidated secured indebtedness of the Company less the aggregate amount of all unrestricted cash and cash equivalents. In addition, under the Senior Secured Credit Facility and the indentures governing the Senior Notes and Senior Subordinated Notes, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is tied to the Senior Secured Leverage Ratio, in the case of the Senior Secured Credit Facility, or to the ratio of Consolidated EBITDA to fixed charges for the most recently concluded four consecutive fiscal quarters or the Senior Secured Leverage Ratio, in the case of the Senior Notes and the Senior Subordinated Notes.

Consolidated EBITDA is defined as earnings (loss) before interest expense, taxes, depreciation and amortization (“EBITDA”), further adjusted to exclude non-cash items, non-recurring items and other adjustment items permitted in calculating covenant compliance under the Senior Secured Credit Facility and the indentures governing the Senior Notes and Senior Subordinated Notes. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Consolidated EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our financial covenants.

EBITDA and Consolidated EBITDA do not represent net loss or earnings or cash flow from operations as those terms are defined by Generally Accepted Accounting Principles (“GAAP”) and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. In particular, the definitions of Consolidated EBITDA in the Senior Secured Credit Facility and the indentures allow us to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net loss or earnings. However, these are expenses that may recur, vary greatly and are difficult to predict. While EBITDA and Consolidated EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, they are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation.

 

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Our ability to meet the covenants specified above in future periods will depend on events beyond our control, and we cannot assure you that we will meet those ratios. A breach of any of these covenants in the future could result in a default under, or an inability to undertake certain activities in compliance with, the Senior Secured Credit Facility and the indentures governing the Senior Notes and Senior Subordinated Notes, at which time the lenders could elect to declare all amounts outstanding under the Senior Secured Credit Facility to be immediately due and payable. Any such acceleration would also result in a default under the indentures governing the Senior Notes and Senior Subordinated Notes.

The following table provides a reconciliation from our net (loss) earnings to EBITDA and Consolidated EBITDA for the fiscal years ended December 27, 2009 and December 28, 2008. The terms and related calculations are defined in the Senior Secured Credit Facility and the indentures governing the Senior Notes and Senior Subordinated Notes.

 

     Year Ended
December 27,
2009
    Year Ended
December 28,
2008
 

Net earnings (loss)

   $ 302,603      $ (28,581

Interest expense, net

     121,078        152,961   

Income tax expense

     (277,723     27,036   

Depreciation and amortization expense

     65,468        62,509   
                

EBITDA (unaudited)

   $ 211,426      $ 213,925   
                

Acquired EBITDA - Birds Eye Acquisition (1)

     142,268        —     

Non-cash items (a)

     4,738        3,776   

Non-recurring items (b)

     29,835        2,653   

Other adjustment items (c)

     26,673        2,606   

Net cost savings projected to be realized as a result of initiatives taken (d)

     57,188        9,002   
                

Consolidated EBITDA (unaudited)

   $ 472,128      $ 231,962   
                

 

(1) In accordance with our Senior Secured Credit Facility and the indentures governing the Senior Notes and Senior Subordinated Notes, we have included an adjustment for the Acquired EBITDA for Birds Eye for the period prior to its acquisition, calculated consistent with the definition of Consolidated EBITDA.

(a) Non-cash items are comprised of the following:

 

     Year Ended
December 27,
2009
    Year Ended
December 28,
2008
 

Non-cash compensation charges (1)

   $ 3,190      $ 806   

Unrealized losses or (gains) resulting from hedging activities (2)

     (277     (2,142

Impairment charges or asset write-offs (3)

     1,300        15,100   

Effects of adjustments related to the application of purchase accounting (4)

     525        —     

Non-cash gain on litigation settlement (5)

     —          (9,988
                

Total non-cash items

   $ 4,738      $ 3,776   
                

 

(1) For fiscal 2009 and fiscal 2008, represents non-cash compensation charges related to the granting of equity awards.
(2) For fiscal 2009 and fiscal 2008, represents non-cash gains and losses resulting from mark-to-market adjustments of obligations under natural gas, heating oil, diesel fuel (2009) and foreign exchange swap contacts (2008).
(3) For fiscal 2009, represents an impairment charge for the Swanson tradename. For fiscal 2008, represents impairment charges for the Van de Kamp’s ($8.0 million), Mrs. Paul’s ($5.6 million), Lenders ($0.9 million) and Open Pit tradenames ($0.6 million).
(4) For fiscal 2009, represents expense related to the write-up to fair market value of inventories acquired as a result of the Birds Eye Acquisition.

 

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(5) For 2008, represents the excess of the accrued liability established in purchase accounting over the amount of the cash payment in the litigation settlement described in Note 8 to our consolidated financial statements.

(b) Non-recurring items are comprised of the following:

 

     Year Ended
December 27, 2009
   Year Ended
December 28, 2008

Expenses in connection with an acquisition or other non-recurring merger costs (1)

   $ 25,238    $ 671

Restructuring charges, integration costs and other business optimization expenses (2)

     986      1,015

Employee severance and recruiting (3)

     3,611      967
             

Total non-recurring items

   $ 29,835    $ 2,653
             

 

(1) For fiscal year 2009 primarily represents costs related to the Birds Eye Acquisition as well as other expenses related to due diligence investigations. For fiscal 2008, represents additional costs related to the Blackstone Transaction, primarily legal fees, and other expenses related to due diligence investigations.
(2) For fiscal year 2009, represents consultant expense incurred to execute yield and labor savings in our plants. For fiscal 2008, represents both the configuration of freezer space in our Mattoon warehouse, as well as consultant expense incurred to execute labor and yield savings in our plants.
(3) For fiscal year 2009, principally represents severance and recruiting costs related to the change in the CEO. For fiscal 2008, represents severance costs paid, or to be paid, to terminated employees.

(c) Other adjustment items are comprised of the following:

 

     Year Ended
December 27, 2009
   Year Ended
December 28, 2008

Management, monitoring, consulting and advisory fees (1)

   $ 2,540    $ 2,606

Variable product contribution principally from Steamfresh complete bagged meals no longer being offered (2)

     24,133   
             

Total other adjustments

   $ 26,673    $ 2,606
             

 

(1) For fiscal 2009 and fiscal 2008, represents management/advisory fees and expenses paid to Blackstone.
(2) Represents the variable contribution loss principally from Steamfresh complete bagged meals and others which will no longer be offered by Pinnacle management following the Birds Eye Acquisition and the variable contribution loss applicable to a discontinued contract in the Birds Eye Industrial-Other segment.

(d) Net cost savings projected to be realized as a result of initiatives taken:

 

     Year Ended
December 27, 2009
   Year Ended
December 28, 2008

Productivity initiatives in our manufacturing facilities, freight and distribution systems and purchasing programs (1)

   $ 12,188    $ 9,002

Estimated net cost savings associated with the Birds Eye Acquisition (2)

     45,000   
             

Total net cost savings projected to be realized as a result of initiatives taken

   $ 57,188    $ 9,002
             

 

(1) For fiscal 2009 and fiscal 2008, represents net cost savings projected to be realized as a result of specified actions taken or initiated, net of the amount of actual benefits realized. Such savings primarily relate to productivity initiatives in our manufacturing facilities, our freight and distribution systems, and our purchasing programs.
(2) Represents the estimated reduction in operating costs that we anticipate will result from the combination of Pinnacle and Birds Eye as a result of eliminating duplicate overhead functions and overlapping operating expenses, leveraging supplier relationships and combined purchasing power to obtain procurement savings or raw materials and packaging, and optimizing and rationalizing overlapping frozen warehouse and distribution networks.

 

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Our covenant requirements and actual ratios for the twelve months ended December 27, 2009 are as follows:

 

     Covenant
Requirement
   Actual Ratio

Senior Secured Credit Facility

     

Senior Secured Leverage Ratio (1)

   5.75:1    4.26

Total Leverage Ratio (2)

   Not applicable    6.02

Senior Notes and Senior Subordinated Notes (3)

     

Minimum Consolidated EBITDA to fixed charges ratio required to incur additional debt pursuant to ratio provisions (4)

   2.00:1    2.35

 

(1) Pursuant to the terms of the Senior Secured Credit Facility, if at any time there are borrowings outstanding under the Revolving Credit Facility in an aggregate amount greater than $10.0 million, we are required to maintain a consolidated total senior secured debt to Consolidated EBITDA ratio for the most recently concluded four consecutive fiscal quarters (the “Senior Secured Leverage Ratio”) less than a ratio starting at a maximum of 7.00:1 at September 30, 2007 and stepping down over time to 4.00:1 on March 31, 2011. Consolidated total senior secured debt is defined as our aggregate consolidated secured indebtedness less the aggregate amount of all unrestricted cash and cash equivalents.
(2) The Total Leverage Ratio is not a financial covenant but is used to determine the applicable rate under the Senior Secured Credit Facility. The Total Leverage Ratio is calculated by dividing consolidated total debt less the aggregate amount of all unrestricted cash and cash equivalents by Consolidated EBITDA.
(3) Our ability to incur additional debt and make certain restricted payments under the indentures governing the Senior Notes and Senior Subordinated Notes, subject to specified exceptions, is tied to a Consolidated EBITDA to fixed charges ratio of at least 2.0:1.
(4) Fixed charges is defined in the indentures governing the Senior Notes and Senior Subordinated Notes as (i) consolidated interest expense (excluding specified items) plus consolidated capitalized interest less consolidated interest income, plus (ii) cash dividends and distributions paid on preferred stock or disqualified stock.

 

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Inflation

Prior to 2005, inflation did not have a significant effect on us as we have been successful in mitigating the effects of inflation with cost reduction and productivity programs. Beginning 2005 and continuing into 2008, we experienced higher energy and commodity costs in production and higher fuel surcharges for product delivery. Inflation was less pronounced in 2009. Although we have no such expectation, severe increases in inflation could have an adverse impact on our business, financial condition and results of operations.

Contractual Commitments

The table below provides information on our contractual commitments as of December 27, 2009:

 

     Total    Less Than
1 Year
   1-3 Years    3-5 Years    After
5 Years
     (in thousands)

Long-term debt(1)

   $ 2,895,875    $ 37,170    $ 23,705    $ 2,011,000    $ 824,000

Projected interest payments on long term debt(2)

     1,077,573      195,353      417,333      383,121      81,766

Operating lease obligations

     56,971      12,138      18,185      10,834      15,814

Capital lease obligations

     3,326      1,061      1,784      481      —  

Purchase obligations (3)

     857,711      429,664      176,743      132,477      118,827

Pension and Other

Postretirement benefits(4)

     104,192      13,050      50,260      30,995      9,887
                                  

Total (5)

   $ 4,995,648    $ 688,436    $ 688,010    $ 2,568,908    $ 1,050,294
                                  

 

(1) Long-term debt at face value includes scheduled principal repayments and excludes interest payments.
(2) The total projected interest payments on long-term debt are based upon borrowings and interest rates as of December 27, 2009, including the effect of interest rate swaps in place. The interest rate on variable rate debt is subject to changes beyond our control and may result in actual interest expense and payments differing from the amounts above.
(3) The amounts indicated in this line primarily reflect future contractual payments, including certain take-or-pay arrangements entered into as part of the normal course of business. The amounts do not include obligations related to other contractual purchase obligations that are not take-or-pay arrangements. Such contractual purchase obligations are primarily purchase orders at fair value that are part of normal operations and are reflected in historical operating cash flow trends. Purchase obligations also include trade and consumer promotion and advertising commitments. We do not believe such purchase obligations will adversely affect our liquidity position.
(4) The funding of the defined benefit pension plan is based upon our planned 2010 cash contribution. The future years’ contributions are based upon our expectations taking into consideration the funded status of the plan at December 27, 2009.
(5) The total excludes the liability for uncertain tax positions. We are not able to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. Therefore, the long-term portion of the liability is excluded from the preceding table.

 

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Off-Balance Sheet Arrangements

As of December 27, 2009, we did not have any off-balance sheet obligations.

Accounting Policies and Pronouncements

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires the use of judgment, estimates and assumptions. We make such subjective determinations after careful consideration of our historical performance, management’s experience, current economic trends and events and information from outside sources. Inherent in this process is the possibility that actual results could differ from these estimates and assumptions for any particular period.

Our significant accounting policies are detailed in Note 2 to our consolidated financial statements for the fiscal year ended December 27, 2009. The following areas are the most important and require the most difficult, subjective judgments.

Revenue recognition. Revenue consists of sales of our food products. We recognize revenue from product sales upon shipment to our customers, at which point title and risk of loss are transferred and the selling price is fixed or determinable. Shipment completes the revenue-earning process, as an arrangement exists, delivery has occurred, the price is fixed and collectability is reasonably assured. We estimate discounts and product return allowances based upon our historical performance, management’s experience and current economic trends and record them as a reduction of sales in the same period that the revenue is recognized. Variances between historical estimates and actual results have not been significant.

Trade and consumer promotional expenses. We offer various sales incentive programs to retailers and consumers. We record consumer incentive and trade promotion costs as a reduction of revenues in the year in which we offer these programs. The recognition of expense for these programs involves the exercise of judgment related to performance and redemption estimates that we base on historical experience and other factors. Actual expenses may differ if the level of redemption rates and performance vary from estimates. We also record slotting fees, which refers to payments to retailers to obtain shelf placement for new and existing product introductions. We reduce revenues for the amount of slotting estimated to each customer in full at the time of the first shipment of the new product to that customer.

Inventories. We state inventories at the lower of average cost or market. In determining market value, we provide allowances to adjust the carrying value of our inventories to the lower of cost or net realizable value, including any costs to sell or dispose. Appropriate consideration is given to obsolescence, excessive inventory levels, product deterioration and other factors in evaluating net realizable value. These adjustments are estimates, which could vary significantly from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from expectations.

Goodwill and Indefinite-lived tradenames. We evaluate the carrying amount of goodwill for impairment on an annual basis, in December, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The goodwill impairment review consists of a two-step process of first comparing the fair value of the reporting unit with its carrying value. If this fair value exceeds the carrying value, no further analysis or goodwill impairment charge is required. If the fair value is below the carrying value, the Company would proceed to the next step, which is to measure the amount of the impairment loss. The impairment loss is measured as the difference between the carrying value and implied fair value of goodwill. To measure the implied fair value goodwill we would make a hypothetical allocation of the estimated fair value of the reporting unit to the tangible and intangible assets (other than goodwill) within the respective reporting unit using the same rules for determining fair value and allocation under the authoritative guidance for business combination as we would use if it were an original purchase price allocation. If the implied fair value of the reporting unit’s goodwill is less than its carrying amount the shortfall would be charged to earnings.

In estimating the fair value or our reporting units we primarily use the income approach, which utilizes forecasted discounted cash flows to estimate the fair value. The utilization of the income approach utilizes management’s business plans and projections as the basis for expected future cash flows for five years. In addition, we make significant assumptions including regarding long-term growth rates and discounts rates. In our recent impairment tests, we forecasted cash flows for five years plus a terminal year and assumed a discount rate of 9.0%. Such cash flows for each of the five years and terminal year assume growth rates that generally average between 0% and 3.0%, which are determined based upon our expectations for each of the individual reporting units and are consistent within the industry.

 

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The results of this test indicated that none of the reporting units were impaired. However, the Frozen Breakfast reporting unit, which has $98.5 million of goodwill allocated to it, exceeded its carrying value by only 1%. Management’s assumptions used to forecast the discounted cash flow of the Frozen Breakfast reporting unit included the exit of marginally profitable private label business and the elimination of other low profit retail items in the near term and then modest growth after that (less than 1%). We also projecting a 1% growth factor in the terminal year and that the exit of these lines will result in improved margins. An unfavorable change to any of these assumptions could result in an impairment of the Frozen Business reporting unit goodwill and, in turn, impact our consolidated financial results.

We also evaluate the carrying amount of our tradenames for impairment on an annual basis, in December, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of an intangible asset with its carrying value. If the carrying value of a tradename exceeds its fair value at the time of the evaluation, we would charge the shortfall to earnings.

To estimate the fair value of our tradenames we primarily use an income approach, which utilizes forecasted discounted cash flows to estimate the fair value. The utilization of the income approach requires us to make significant assumptions including long-term growth rates, implied royalty rates and discount rates. In fiscal 2009, the results include a $1.3 million impairment of the Swanson tradename. In fiscal 2008, the results include an impairment of the Van de Kamp’s ($8.0 million), Mrs. Paul’s ($5.6 million), Lenders ($0.9 million) and Open Pit tradenames ($0.6 million). In fiscal 2007, the results include a $1.2 million impairment of the Open Pit tradename.

Pensions and retiree medical benefits. We provide pension and post-retirement benefits to certain employees and retirees. Determining the costs associated with such benefits depends on various actuarial assumptions, including discount rates, expected return on plan assets, compensation increases, turnover rates and health care trend rates. Independent actuaries, in accordance with GAAP, perform the required calculations to determine expense. We generally accumulate actual results that differ from the actuarial assumptions and amortize such results over future periods.

Insurance reserves. We are self-insured and retain liabilities under our worker’s compensation insurance policy. We estimate the outstanding retained-insurance liabilities by projecting incurred losses to their ultimate liability and subtracting amounts paid-to-date to obtain the remaining liabilities. We base actuarial estimates of ultimate liability on actual incurred losses, estimates of incurred but not yet reported losses—based on historical information from both us and the industry—and the projected costs to resolve these losses. Retained-insurance liabilities may differ based on new events or circumstances that might materially impact the ultimate cost to settle these losses.

Income taxes. We record income taxes based on the amounts that are refundable or payable in the current year, and we include results of any difference between generally accepted accounting principles and U.S. tax reporting that we record as deferred tax assets or liabilities. We review our deferred tax assets for recovery. A valuation allowance is established when the Company believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in our tax provision in the period of change. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets and the timing of income tax payments. Actual collections and payments may differ from these estimates as a result of changes in tax laws as well as unanticipated future transactions impacting related income tax balances.

 

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Stock-based compensation. We use the authoritative guidance for stock compensation accounting using the modified prospective transition method to calculate stock-based compensation. The guidance requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense using the straight-line method over the requisite service periods in our Consolidated Statements of Operations.

We currently use the Black-Scholes option-pricing model as our method of valuation for stock-based awards. Since our stock is not publicly traded, the determination of fair value of stock-based payment awards on the date of grant using an option-pricing model is based upon estimates of enterprise value as well as assumptions regarding a number of highly complex and subjective variables. The estimated enterprise value is based upon forecasted cash flows for five years plus a terminal year and an assumed discount rate. The other variables used to determine fair value of stock-based payment awards include, but are not limited to, the expected stock price volatility of a group of industry comparable companies over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable.

Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the existing valuation models may not provide an accurate measure of the fair value of our employee stock-based awards. Although the fair value of employee stock awards is determined in accordance with the authoritative guidance for stock compensation using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

Recently Issued Accounting Pronouncements

In December 2007, the FASB updated the authoritative guidance for business combinations. Under the December 2007 update, all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but the updated guidance changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. The updated guidance for business combinations is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. The authoritative guidance for business combinations amends the authoritative guidance for income tax accounting such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of updated guidance for business combinations (released in December 2007), would also apply the provisions of the updated guidance for business combinations. Early adoption is not permitted. The adoption of the updated authoritative guidance for business combinations will have an impact on our accounting for future business combinations on a prospective basis once adopted; however, the materiality of that impact cannot be determined. The accounting for the Birds Eye Acquisition was performed in accordance with this guidance.

In April 2009, the FASB updated the authoritative guidance for business combinations. The April 2009 update amends and clarifies the authoritative guidance of business combinations to address application issues associated with initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The updated authoritative guidance for business combinations is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The implementation of this standard will have an impact on our accounting for future business combinations on a prospective basis once adopted; however, the materiality of that impact cannot be determined. The accounting for the Birds Eye Acquisition was performed in accordance with this guidance.

 

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In December 2007, the FASB issued the authoritative guidance for noncontrolling interests in consolidated financial statements. This guidance is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008, with earlier adoption prohibited. This guidance requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net earnings attributable to the noncontrolling interest will be included in consolidated net earnings on the face of the statement of operations. It also amends consolidation procedures for consistency with the requirements of the authoritative guidance for business combinations. The guidance for noncontrolling interests in consolidated financial statements also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. This guidance has not had any impact on the reporting of our financial position or the results of operations.

In March 2008, the FASB revised the authoritative guidance for derivative and hedge accounting. The guidance requires enhanced disclosures about derivative and hedging activities. The guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We adopted this guidance in the first quarter of 2009 and have included enhanced disclosure in Note 14.

In April 2009, the FASB updated the authoritative guidance for measuring fair value. The April 2009 update provides additional guidance on factors to consider in estimating fair value when there has been a significant decrease in market activity for a financial asset. The guidance is effective for interim and annual periods ending after June 15, 2009. We adopted the guidance during the quarter ended September 27, 2009 and it did not have a material impact on our consolidated financial position or results of operations.

In November 2008, the FASB updated the authoritative guidance for intangible assets. The November 2008 update provides guidance for accounting for defensive intangible assets subsequent to their acquisition in accordance with the authoritative guidance for business combinations and the authoritative guidance for measuring fair value by including the estimated useful life that should be assigned to such assets. The updated authoritative guidance for intangible assets is effective for intangible assets acquired on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The implementation of this guidance did not have a material impact on our consolidated financial position or results of operations.

In December 2008, the FASB issued authoritative guidance on defined benefit plans. The release provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The guidance is effective for fiscal years ending after December 15, 2009. The implementation of this guidance did not have a material impact on our consolidated financial position or results of operations and the enhanced disclosures have been included for the fiscal year ended December 27, 2009.

In April 2009, the FASB amended the authoritative guidance on financial instruments to require disclosure of the fair value of financial instruments in interim financial statements as well as annual financial statements. The adoption of this guidance will have no impact to us as we already provide these disclosures in our interim financial statements.

In April 2009, the FASB issued authoritative guidance on investment in debt securities. This guidance clarifies the interaction of the impairment factors that should be considered when applied prospectively beginning in the second quarter of 2009. Upon adoption during the quarter ended September 27, 2009, this guidance did not have a material impact on our consolidated financial position or results of operations.

In May 2009, the FASB issued guidance regarding subsequent events, which was subsequently updated in February 2010. This guidance established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this guidance set forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance was effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009, and was therefore adopted by us for the second quarter 2009 reporting. The adoption did not have a significant impact on the subsequent events that we report, either through recognition or disclosure, in the consolidated financial statements. In February 2010, the FASB amended its guidance on subsequent events to remove the requirement to disclose the date through which an entity has evaluated subsequent events, alleviating conflicts with current SEC guidance. This amendment was effective immediately and we therefore removed the disclosure in this Annual Report.

 

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In June 2009, the FASB issued the authoritative guidance for variable interest entities. This guidance clarifies the characteristics that identify a variable interest entity (VIE) and changes how a reporting entity identifies a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards calculation to a qualitative approach based on which variable interest holder has controlling financial interest and the ability to direct the most significant activities that impact the VIE’s economic performance. This guidance requires the primary beneficiary assessment to be performed on a continuous basis. It also requires additional disclosures about an entity’s involvement with VIE, restrictions on the VIE’s assets and liabilities that are included in the reporting entity’s consolidated balance sheet, significant risk exposures due to the entity’s involvement with the VIE, and how its involvement with a VIE impacts the reporting entity’s consolidated financial statements. The authoritative guidance for variable interest entities is effective for fiscal years beginning after November 15, 2009. We anticipate that it will not have a material impact on our consolidated financial position or results of operations.

In June 2009, the FASB updated guidance for generally accepted accounting principles (“GAAP”). The updated guidance establishes only two levels of U.S. GAAP, authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) will become the source of authoritative, nongovernmental GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. The June 2009 updated guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We adopted this guidance in the third quarter of 2009.

In August 2009, the FASB updated the authoritative guidance for measuring the fair value of liabilities. The update provides guidance on the valuation techniques that are used in measuring the fair market value of a liability when quoted price in an active market is not available. The techniques include using the quoted price for identical or similar liabilities. Other techniques include the use of an income approach, such as present value techniques, or a market approach, such as a technique that is based on the amount at the measurement date that a reporting entity would pay to transfer the identical liability or pay to receive the identical liability. The guidance is effective for the first reporting period after issuance. We adopted this guidance in the third quarter 2009 and it did not have a material impact on our consolidated financial position or results of operations.

 

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial Instruments

Risk Management Objective of Using Derivatives

We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposure to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. The primary risks managed by using derivative instruments are interest rate risk, foreign currency exchange risk and commodity price risk. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates, foreign exchange rates or commodity prices.

We manage interest rate risk based on the varying circumstances of anticipated borrowings and existing variable and fixed rate debt, including our revolving line of credit. Examples of interest rate management strategies include capping interest rates using targeted interest cost benchmarks, hedging portions of the total amount of debt, or hedging a period of months and not always hedging to maturity, and at other times locking in rates to fix interests costs.

Certain parts of our foreign operations in Canada expose us to fluctuations in foreign exchange rates. Our goal is to reduce our exposure to such foreign exchange risks on our foreign currency cash flows and fair value fluctuations on recognized foreign currency denominated assets, liabilities and unrecognized firm commitments to acceptable levels primarily through the use of foreign exchange-related derivative financial instruments. We enter into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of our functional currency, the U.S. dollar.

We purchase raw materials in quantities expected to be used in a reasonable period of time in the normal course of business. We generally enter into agreements for either spot market delivery or forward delivery. The prices paid in the forward delivery contracts are generally fixed, but may also be variable within a capped or collared price range. Forward derivative contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in our manufacturing process.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges in accordance with the authoritative guidance for derivative and hedge accounting involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up front premium.

As of December 27, 2009 we had the following interest rate swaps and caps (in aggregate) that were designated as cash flow hedges of interest rate risk:

 

Product

 

Number of
Instruments

 

Notional Amount

 

Fixed Rate Range

 

Index

 

Trade Dates

 

Maturity Dates

Interest Rate Swaps

  8   $683.3 million   1.43% - 3.33%   USD-LIBOR-BBA  

Oct 2008 -

Mar 2009

 

Jan 2011 -

July 2012

Interest Rate Caps

  2   $800.0 million   2.50%   USD-LIBOR-BBA   Dec 2009   Jan 2011

According to the authoritative guidance for derivative and hedge accounting, the effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated other comprehensive (loss) income (“AOCI”) on the Consolidated Balance Sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the fiscal year ended December 27, 2009, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly as Interest expense in the Consolidated Statements of Operations. There was no hedge ineffectiveness on interest rate cash flow hedges recognized in the fiscal year ended December 27, 2009.

 

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Amounts reported in AOCI related to derivatives will be reclassified to Interest expense as interest payments are made on our variable-rate debt. Due to the counterparty bank declaring bankruptcy in October 2008, we discontinued prospectively the hedge accounting on our interest rate derivatives with Lehman Brothers Specialty Financing on the bankruptcy date as those hedging relationships no longer met the authoritative guidance for derivative and hedge accounting. We terminated these positions during the fourth quarter of 2008. We continue to report the net gain or loss related to the discontinued cash flow hedge in AOCI which is expected to be reclassified into earnings during the original contractual terms of the derivative agreements as the hedged interest payments are expected to occur as forecasted. For the fiscal year ended December 27, 2009, $4.4 million was reclassified as an increase to Interest expense relating to the terminated hedges. During the next twelve months, we estimate that an additional $17.8 million will be reclassified as an increase to Interest expense relating to both active and terminated hedges.

Cash Flow Hedges of Foreign Exchange Risk

Our operations in Canada have exposed us to changes in the US Dollar – Canadian Dollar (USD-CAD) foreign exchange rate. From time to time, our Canadian subsidiary purchases inventory denominated in US Dollars (USD), a currency other than its functional currency. Our subsidiary sells that inventory in Canadian dollars. Our subsidiary uses currency forward and collar agreements to manage our exposure to fluctuations in the USD-CAD exchange rate. Currency forward agreements involve fixing the USD-CAD exchange rate for delivery of a specified amount of foreign currency on a specified date. Currency collar agreements involve the sale of Canadian Dollar (CAD) currency in exchange for receiving US dollars if exchange rates rise above an agreed upon rate and sale of USD currency in exchange for receiving CAD dollars if exchange rates fall below an agreed upon rate at specified dates.

As of December 27, 2009, we had the following foreign currency exchange contracts (in aggregate) that were designated as cash flow hedges of foreign exchange risk:

 

Product

 

Number of
Instruments

 

Notional Sold in
Aggregate

 

Notional Purchased
in Aggregate

 

USD to CAD
Exchange Rates

 

Trade Date

 

Maturity Dates

CAD Forward

  36   $43.0 million CAD   $38.7 million USD   1.086-1.178  

May 2009 -

July 2009

 

Jan 2010 -

Dec 2010

CAD Collar

  12   $12.0 million CAD   $10.6 million USD   1.13   May 2009  

Jan 2010 -

Dec 2010

According to the authoritative guidance for derivative and hedge accounting, the effective portion of changes in the fair value of derivatives designated that qualify as cash flow hedges of foreign exchange risk is recorded in AOCI on the Consolidated Balance Sheet and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portions of the change in fair value of the derivative, as well as amounts excluded from the assessment of hedge effectiveness, are recognized directly in Cost of products sold in the Consolidated Statements of Operations. Hedge ineffectiveness on foreign exchange cash flow hedges amounted to a less than $0.1 million in the fiscal year ended December 27, 2009.

Non-designated Hedges of Commodity Risk

Derivatives not designated as hedges are not speculative and are used to manage our exposure to commodity price risk but do not meet the authoritative guidance for derivative and hedge accounting. From time to time, we enter into commodity forward contracts to fix the price of natural gas, diesel fuel and heating oil purchases at a future delivery date. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in Cost of products sold in the Consolidated Statements of Operations.

As of December 27, 2009, we had the following natural gas swaps (in aggregate), diesel fuel and heating oil swaps (in aggregate) that were not designated in qualifying hedging relationships:

 

Product

 

Number of
Instruments

 

Notional Amount

 

Price

 

Trade Dates

 

Maturity Dates

Natural Gas Swap

  1   127,364 MMBTU’s   $6.05 per MMBTU   Mar 2009   June 2010

Heating Oil Swap

  1   9,000 BBL’s   $45.15 per BBL   Mar 2009   Jan 2010

Diesel Fuel Swap

  1   1,710,000 Gallons   $2.46 per Gallon   Feb 2009   Jun 2010

 

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The table below presents the fair value of our derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of December 27, 2009.

 

(in millions)   

Tabular Disclosure of Fair Values of Derivative Instruments

    

Asset Derivatives

  

Liability Derivatives

    

Balance Sheet Location

   Fair Value   

Balance Sheet Location

   Fair Value

Derivatives designated as hedging instruments

           

Interest Rate Contracts

  

Other assets, net

   $ 0.2   

Other long-term liabilities

   $ 21.2

Foreign Exchange Contracts

        —     

Accrued liabilities

     2.5
                   

Total derivatives designated as hedging instruments as of December 27, 2009

      $ 0.2       $ 23.7
                   

Derivatives not designated as hedging instruments

           

Natural Gas Contracts

      $ —     

Accrued liabilities

   $ 0.1

Heating Oil Contracts

  

Other current assets

     —           —  

Diesel Fuel Contracts

  

Other current assets

     0.9         —  
                   

Total derivatives not designated as hedging instruments as of December 27, 2009

      $ 0.9       $ 0.1
                   

The tables below present the effect of our derivative financial instruments on the Consolidated Statements of Operations and Accumulated other comprehensive (loss) income for the fiscal year ended December 27, 2009.

Tabular Disclosure of the Effect of Derivative Instruments for the Fiscal Year Ended December 27, 2009

(in millions)

Gain/(Loss)

 

Derivatives in Cash Flow Hedging
Relationships

   Recognized
in AOCI on
Derivative
(Effective
Portion)
   

Effective portion

reclassified from

AOCI to:

   Reclassified
from AOCI
into Earnings

(Effective
Portion)
   

Ineffective portion

reclassified from

AOCI to:

   Recognized
in Earnings
on Derivative
(Ineffective
Portion)

Interest Rate Contracts

   $ (23.4  

Interest expense

   $ (18.6  

Interest expense

   $ —  

Foreign Exchange Contracts

     (5.4  

Cost of products sold

     2.5     

Cost of products sold

   $ —  
                            

Fiscal year ended December 27, 2009

   $ (28.8      $ (16.1      $ —  
                            

 

Derivatives Not Designated as Hedging Instruments

  

Recognized in

Earnings on:

   Recognized in
Earnings on
Derivative
 

Natural Gas Contracts

  

Cost of products sold

   $ (1.4

Heating Oil Contracts

  

Cost of products sold

     0.1   
           

Fiscal year ended December 27, 2009

      $ (1.3
           

 

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Credit-risk-related Contingent Features

We have an agreement with Barclays that contains a provision whereby we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of December 27, 2009, the fair value of interest rate swaps and caps in a net liability position related to these agreements was $23.1 million, which includes accrued interest of $1.0 million but excludes any adjustment for nonperformance risk of $1.0 million. For the same counterparty, the fair value of foreign exchange derivative contracts in a net liability position related to these agreements was $2.6 million, which excludes any adjustment for nonperformance risk of $0.1 million. For the same counterparty, the fair value of natural gas swaps in a net liability position related to these agreements was less than $0.1 million. For the same counterparty, the fair value of heating oil contracts in a net asset position related to these agreements was less than $0.1 million. If we breached any of these provisions, we could be required to settle our obligations under the agreements at their termination value of $25.8 million. As of December 27, 2009, we have not posted any collateral related to these agreements.

We also have an agreement with Credit Suisse Group that contains a provision whereby we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of December 27, 2009, we had one interest rate cap with this counterparty in an asset position with a fair value of $0.1 million.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial statements begin on the following page

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholder of

Pinnacle Foods Finance LLC:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, cash flows and shareholder’s equity present fairly, in all material respects, the financial position of Pinnacle Foods Finance LLC and its subsidiaries (successor company) at December 27, 2009 and December 29, 2008, and the results of their operations and their cash flows for each of the fiscal years ended December 27, 2009 and December 28, 2008, respectively, and for the period from April 2, 2007 to December 30, 2007 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 27, 2009 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting, appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our audits (which was an integrated audit in 2009). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Notes 2 and 3 to the consolidated financial statements, the Company changed the manner in which it accounts for business combinations in 2009.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management’s Annual Report on Internal Controls Over Financial Reporting, management has excluded Birds Eye Foods, Inc. from its assessment of internal control over financial reporting as of December 27, 2009 because it was acquired by the Company in a purchase business combination during 2009. We have also excluded Birds Eye Foods, Inc. from our audit of internal control over financial reporting. Birds Eye Foods, Inc. is a wholly-owned subsidiary whose total assets and total net sales represent represented 25.5% and 0.2%, respectively, of the related consolidated financial statement amounts as of and for the fiscal year ended December 27, 2009.

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

March 23, 2010

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholder of

Pinnacle Foods Finance LLC:

In our opinion, the accompanying consolidated statements of operations, cash flows and shareholder’s equity for the period from January 1, 2007 to April 2, 2007 present fairly, in all material respects, the results of operations and cash flows of Pinnacle Foods Group Inc. and its subsidiaries (predecessor company) for the period from January 1, 2007 to April 2, 2007 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

As discussed in Note 13 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertainty in incomes taxes in 2007.

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

March 10, 2008

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(thousands of dollars)

 

 

     Successor          Predecessor  
     Fiscal year
ended
December 27,
2009
    Fiscal year
ended
December 28,
2008
    39 weeks
ended
December 30,
2007
          13 weeks
ended
April 2,
2007
 

Net sales

   $ 1,642,931      $ 1,556,408      $ 1,137,898           $ 376,587   

Cost of products sold

     1,263,627        1,217,929        895,306             293,191   
                                     

Gross profit

     379,304        338,479        242,592             83,396   
 

Operating expenses

             

Marketing and selling expenses

     123,833        111,372        87,409             34,975   

Administrative expenses

     62,737        47,832        40,715             17,714   

Research and development expenses

     4,562        3,496        2,928             1,437   

Other expense (income), net

     42,214        24,363        12,028             51,042   
                                     
 

Total operating expenses

     233,346        187,063        143,080             105,168   
                                     
 

Earnings (loss) before interest and taxes

     145,958        151,416        99,512             (21,772

Interest expense

     121,167        153,280        124,504             39,079   

Interest income

     89        319        1,029             486   
                                     

Earnings (loss) before income taxes

     24,880        (1,545     (23,963          (60,365

Provision (benefit) for income taxes

     (277,723     27,036        24,746             6,284   
                                     

Net earnings (loss)

   $ 302,603      $ (28,581   $ (48,709        $ (66,649
                                     

See accompanying Notes to Consolidated Financial Statements

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(thousands of dollars)

 

 

     December 27,
2009
    December 28,
2008
 

Current assets:

    

Cash and cash equivalents

   $ 73,874      $ 4,261   

Accounts receivable, net

     158,004        92,171   

Inventories, net

     389,967        190,863   

Other current assets

     26,960        9,571   

Deferred tax assets

     25,670        3,644   
                

Total current assets

     674,475        300,510   

Plant assets, net

     412,208        260,798   

Tradenames

     1,658,812        910,112   

Other assets, net

     233,823        166,613   

Goodwill

     1,559,180        994,167   
                

Total assets

   $ 4,538,498      $ 2,632,200   
                

Current liabilities:

    

Short-term borrowings

   $ 1,232      $ 26,163   

Current portion of long-term obligations

     38,228        12,750   

Accounts payable

     130,360        66,951   

Accrued trade marketing expense

     49,048        33,293   

Accrued liabilities

     130,035        69,012   

Accrued income taxes

     455        20   
                

Total current liabilities

     349,358        208,189   

Long-term debt (includes $109,237 and $34,587 owed to related parties)

     2,849,251        1,746,439   

Pension and other postretirement benefits

     82,437        36,869   

Other long-term liabilities

     39,383        14,429   

Deferred tax liabilities

     343,716        318,701   
                

Total liabilities

     3,664,145        2,324,627   

Commitments and contingencies

    

Shareholder’s equity:

    

Pinnacle Common stock: par value $.01 per share, 100 shares authorized, issued 100 shares

     —          —     

Additional paid-in-capital

     693,196        427,323   

Notes receivable from officers

     (565     —     

Retained earnings (Accumulated deficit)

     225,313        (77,290

Accumulated other comprehensive (loss) income

     (43,591     (42,460
                

Total shareholder’s equity

     874,353        307,573   
                

Total liabilities and shareholder’s equity

   $ 4,538,498      $ 2,632,200   
                

See accompanying Notes to Consolidated Financial Statements

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(thousands of dollars)

 

 

     Successor          Predecessor  
     Fiscal year
ended
December 27,
2009
    Fiscal year
ended
December 28,
2008
    39 weeks
ended
December 30,
2007
          13 weeks
ended
April 2,
2007
 

Cash flows from operating activities

             

Net earnings (loss) from operations

   $ 302,603      $ (28,581   $ (48,709        $ (66,649

Non-cash charges (credits) to net earnings (loss)

             

Depreciation and amortization

     65,468        62,509        45,671             10,163   

Restructuring and impairment charges

     1,300        15,100        1,200             —     

Amortization of debt acquisition costs

     10,230        4,714        7,758             26,049   

Amortization of deferred mark-to-market adjustment on terminated swap

     4,429        1,259        —               —     

Amortization of discount on term loan

     28        —          —               —     

Gain on litigation settlement

     —          (9,988     —               —     

Gain on extinguishment of subordinated notes

     —          —          (5,670          —     

Amortization of bond premium

     —          —          —               (5,360

Change in value of financial instruments

     (292     3,347        177             1,247   

Stock-based compensation charges

     3,190        806        2,468             8,778   

Postretirement healthcare benefits

     (25     (25     (8,046          294   

Pension expense

     2,126        (996     41             360   

Other long-term assets

     (1,007     —          —               —     

Other long-term liabilities

     1,160        (320     (236          2,464   

Deferred income taxes

     (277,711     24,757        22,173             6,392   

Termination of derivative contracts

     —          (17,030     —               —     

Changes in working capital, net of acquisitions

             

Accounts receivable

     2,705        6,690        4,827             (18,339

Inventories

     12,786        (25,541     32,701             20,045   

Accrued trade marketing expense

     (4,759     4,888        (11,376          2,754   

Accounts payable

     (13,370     3,419        (7,742          14,286   

Accrued liabilities

     19,785        (29,467     23,812             53,340   

Other current assets

     (12,403     1,218        1,090             (140
                                     

Net cash provided by operating activities

     116,243        16,759        60,139             55,684   
                                     
 

Cash flows from investing activities

             

Payments for business acquisitions, net of cash acquired

     (1,314,746     —          (1,319,618          —     

Capital expenditures

     (52,030     (32,598     (22,935          (5,027

Sale of plant assets

     —          —          2,200             —     
                                     

Net cash used in investing activities

     (1,366,776     (32,598     (1,340,353          (5,027
                                     
 

Cash flows from financing activities

             

Change in bank overdrafts

     (2,602     —          —               (908

Repayment of capital lease obligations

     (345     (238     (227          (55

Equity contributions

     264,325        234        420,664             26   

Reduction of equity contributions

     (2,207     (471     (391          —     

Debt acquisition costs

     (40,162     (704     (39,863          —     

Proceeds from bank term loans

     838,250        —          1,250,000             —     

Proceeds from bond issuances

     300,000        —          575,000             —     

Proceeds from short-term borrowing

     1,921        324        3,438             —     

Repayments of short-term borrowing

     (852     (1,531     (2,068          (210

Borrowings under revolving credit facility

     74,888        101,008        50,000             —     

Repayments of revolving credit facility

     (100,888     (75,008     (50,000          —     

Repurchases of subordinated notes

     —          —          (44,199       

Repayments of Successor’s long term obligations

     (12,500     (9,375     (6,250          —     

Repayments of Predecessor’s long term obligations

     —          —          (870,042          (45,146
                                     

Net cash provided by (used in) financing activities

     1,319,828        14,239        1,286,062             (46,293
                                     
 

Effect of exchange rate changes on cash

     318        (138     151             —     
 

Net change in cash and cash equivalents

     69,613        (1,738     5,999             4,364   

Cash and cash equivalents - beginning of period

     4,261        5,999        —               12,337   
                                     

Cash and cash equivalents - end of period

   $ 73,874      $ 4,261      $ 5,999           $ 16,701   
                                     
 

Supplemental disclosures of cash flow information:

             

Interest paid

   $ 117,468      $ 167,748      $ 101,735           $ 9,135   

Interest received

     89        319        1,029             486   

Income taxes refunded (paid)

     (589     (4,336     159             (103

Non-cash investing activity:

             

Capital lease activity

     (1,200     —          —               (1,129

Non-cash financing activity

             

Equity contribution

     —          —          4,013             —     

See accompanying Notes to Consolidated Financial Statements

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

(thousands of dollars, except share amounts)

 

 

    

 

Common Stock

   Additional
Paid In

Capital
    Notes
Receivable

From Officers
    Retained
earnings
(Accumulated

Deficit)
    Carryover of
2003 Predecessor
basis of

net assets
    Accumulated
Other
Comprehensive

(Loss) Income
    Total
Shareholder’s

Equity
 
     Shares    Amount             

Predecessor

                  
                                                            

Balance at December 31, 2006

   100    $ —      $ 573,403      $ —        $ (117,871   $ (17,338   $ 161      $ 438,355   
                                                            

Effect of initially applying FASB Interpretation No. 48

               (260         (260

Equity contribution:

                  

Cash

           26                26   

Equity related compensation

           8,778                8,778   

Comprehensive income:

                  

Net loss

               (66,649         (66,649

Foreign currency translation

                   (4     (4
                        

Total comprehensive loss

                     (66,653
                                                            

Balance at April 2, 2007

   100    $ —      $ 582,207      $ —        $ (184,780   $ (17,338   $ 157      $ 380,246   
                                                            

Successor

                  
                                                            

Balance at April 2, 2007

   100    $ —      $ 422,192      $ —        $ —        $ —        $ —        $ 422,192   
                                                            

Equity contribution:

                  

Cash

           2,485                2,485   

Reduction in equity contributions

           (391             (391

Equity related compensation

           2,468                2,468   

Comprehensive income:

                  

Net loss

               (48,709         (48,709

Swap mark to market adjustment

                   (23,383     (23,383

Foreign currency translation

                   566        566   

Gain on Pension and OPEB actuarial assumptions

                   4,387        4,387   
                        

Total comprehensive loss

                     (67,139
                                                            

Balance at December 30, 2007

   100    $ —      $ 426,754      $ —        $ (48,709   $ —        $ (18,430   $ 359,615   
                                                            

Equity contribution:

                  

Cash

           234                234   

Reduction in equity contributions

           (471             (471

Equity related compensation

           806                806   

Comprehensive income:

                  

Net loss

               (28,581         (28,581

Swap mark to market adjustment

                   5,292        5,292   

Amortization of deferred mark-to-market adjustment on terminated swap

                   1,259        1,259   

Foreign currency translation

                   (1,070     (1,070

Loss on Pension and OPEB actuarial assumptions

                   (29,511     (29,511
                        

Total comprehensive loss

                     (52,611
                                                            

Balance at December 28, 2008

   100    $ —      $ 427,323      $ —        $ (77,290   $ —        $ (42,460   $ 307,573   
                                                            

Equity contribution:

                  

Cash

           264,890                264,890   

Reduction in equity contributions

           (2,207             (2,207

Equity related compensation

           3,190                3,190   

Notes receivable from officers

             (565           (565

Comprehensive income:

                  

Net loss

               302,603            302,603   

Swap mark to market adjustment

                   (10,610     (10,610

Amortization of deferred mark-to-market adjustment on terminated swap

                   4,429        4,429   

Foreign currency translation

                   (791     (791

Gain on Pension and OPEB actuarial assumptions

                   5,841        5,841   
                        

Total comprehensive earnings

                     301,472   
                                                            

Balance at December 27, 2009

   100    $ —      $ 693,196      $ (565   $ 225,313      $ —        $ (43,591   $ 874,353   
                                                            

See accompanying Notes to Consolidated Financial Statements.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(thousands of dollars, except share amounts and where noted in millions)

 

1. Summary of Business Activities

Business Overview

Pinnacle Foods Finance LLC (hereafter referred to as the “Company” or “PFF”) is a leading manufacturer, marketer and distributor of high quality, branded convenience food products, the products and operations of which were managed and reported in two operating segments: (i) dry foods and (ii) frozen foods. The Company’s dry foods segment consists primarily of Duncan Hines® baking mixes and frostings, Vlasic® pickles, peppers and relish products, Mrs. Butterworth’s® and Log Cabin® syrups and pancake mixes, Armour® canned meats and Open Pit® barbecue sauce, as well as food service and private label products. The Company’s frozen foods segment consists primarily of Hungry-Man® and Swanson® frozen foods products, Mrs. Paul’s® and Van de Kamp’s® frozen seafood, Aunt Jemima® frozen breakfasts, Lender’s® bagels and Celeste® frozen pizza, as well as food service and private label products.

On December 23, 2009 PFG LLC purchased Birds Eye Foods, Inc. See Note 3, for a full description of the transaction, and brands of Birds Eye Foods, Inc. Birds Eye Foods, Inc. will be reported as a third segment in this report.

History and the Blackstone Transaction

On May 22, 2001, Pinnacle Foods Holding Corp. (“PFHC”) acquired certain assets and assumed certain liabilities of the North American business of Vlasic Foods International Inc. (“VFI”). The North American business consisted of the Swanson and Hungry-Man frozen food, Vlasic pickles, peppers and relish and Open Pit barbecue sauce businesses. PFHC was incorporated on March 29, 2001 but had no operations until the acquisition of the North American business of VFI.

Crunch Holding Corp. (“CHC”), a Delaware corporation indirectly owned by J.P. Morgan Partners, LLC, J.W. Childs Associates, L.P. and CDM Investor Group LLC, acquired PFHC on November 25, 2003 (the “Pinnacle Transaction”).

On November 25, 2003, Aurora Foods Inc. (“Aurora”) entered into a definitive agreement with Crunch Equity Holding, LLC, the former parent of CHC. The definitive agreement provided for a comprehensive restructuring transaction in which PFHC was merged with and into Aurora, with Aurora surviving the merger, following the filing and confirmation of a pre-negotiated bankruptcy reorganization case with respect to Aurora under Chapter 11 of the U.S. Bankruptcy Code. On December 8, 2003, Aurora and its subsidiary, Sea Coast Foods, Inc., filed their petitions for reorganization with the Bankruptcy Court. On February 20, 2004, the First Amended Joint Reorganization Plan of Aurora Foods Inc. and Sea Coast Foods, Inc., as modified, dated February 17, 2004, was confirmed by order of the Bankruptcy Court. This restructuring transaction was completed on March 19, 2004, and the surviving company was renamed Pinnacle Foods Group Inc. (“PFGI”) (now known as Pinnacle Foods Group LLC) (the “Aurora Merger”).

On March 1, 2006, PFGI acquired certain assets and assumed certain liabilities of the food products business (the “Armour Business”) of The Dial Corporation for $189.2 million in cash. The acquisition of the Armour Business complemented PFGI’s existing product lines that together provide growth opportunities and scale. The Armour Business is a leading manufacturer, distributor and marketer of products in the $1.1 billion canned meat category. For the year ended December 31, 2005, the Armour Business had net sales of approximately $225 million. The Armour Business offers products in twelve of the fifteen segments within the canned meat category and maintains the leading market position in the Vienna sausage, potted meat and sliced beef categories. The business also includes meat spreads, chili, luncheon meat, corned and roast beef hash and beef stew. The majority of the products are produced at the manufacturing facility located in Ft. Madison, Iowa, which was acquired in the transaction. Products are sold under the Armour brand name as well as private label and certain co-pack arrangements.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

On February 10, 2007, Crunch Holding Corp. (“CHC”), the parent company of Pinnacle Foods Group Inc. (“PFGI”), entered into an Agreement and Plan of Merger with Peak Holdings LLC (“Peak Holdings”), a Delaware limited liability company controlled by affiliates of The Blackstone Group, Peak Acquisition Corp. (“Peak Acquisition”), a wholly owned subsidiary of Peak Holdings, and Peak Finance LLC (“Peak Finance”), an indirect wholly owned subsidiary of Peak Acquisition, providing for the acquisition of CHC. Under the terms of the Agreement and Plan of Merger, the purchase price for CHC was $2,162.5 million in cash less the amount of indebtedness (including capital lease obligations) of CHC and its subsidiaries outstanding immediately prior to the closing and certain transaction costs, subject to purchase price adjustments based on the balance of working capital and indebtedness as of the closing. Pursuant to the Agreement and Plan of Merger, immediately prior to the closing, CHC contributed all of the outstanding shares of capital stock of its wholly owned subsidiary PFGI, to a newly-formed Dela