Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended March 28, 2010

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 (State or other jurisdiction of incorporation or organization)		20-8720036 (I.R.S. Employer Identification No.)
1 Old Bloomfield Avenue Mt. Lakes, New Jersey (Address of Principal Executive Offices)		07046 (Zip Code)

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

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   þ

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

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer   þ    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   þ

As of May 12, 2010, there were outstanding 100 shares of common stock, par value $0.01 per share, of the Registrant.

 

 

 

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Table of Contents

TABLE OF CONTENTS

FORM 10-Q

 

						Page No.
PART I – FINANCIAL INFORMATION						1
ITEM 1:				FINANCIAL STATEMENTS		1
		CONSOLIDATED STATEMENTS OF OPERATIONS				2
		CONSOLIDATED BALANCE SHEETS				3
		CONSOLIDATED STATEMENTS OF CASH FLOWS				4
		CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY				5
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS				6
		1.		Summary of Business Activities		6
		2.		Interim Financial Statements		6
		3.		Acquisition		7
		4.		Fair Value Measurements		9
		5.		Other Expense (Income), net		11
		6.		Inventories		11
		7.		Goodwill and Other Assets		12
		8.		Restructuring Charges		14
		9.		Debt and Interest Expense		14
		10.		Pension and Retirement Plans		19
		11.		Financial Instruments		21
		12.		Commitments and Contingencies		27
		13.		Related Party Transactions		27
		14.		Segments		28
		15.		Income Taxes		29
		16.		Recently Issued Accounting Pronouncements		30
		17.		Guarantor and Nonguarantor Statements		31
ITEM 2:				MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		38
		RESULTS OF OPERATIONS				41
		LIQUIDITY AND CAPITAL RESOURCES				47
		INFLATION				55
		RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS				55
ITEM 3:				QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK		56
ITEM 4:				CONTROLS AND PROCEDURES		62
PART II – OTHER INFORMATION						63
ITEM 1:				LEGAL PROCEEDINGS		63
ITEM 1A:				RISK FACTORS		63
ITEM 2:				UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		63
ITEM 3:				DEFAULTS UPON SENIOR SECURITIES		63
ITEM 4:				RESERVED TO THE NEW VOTING REPORTING RULES		63
ITEM 5:				OTHER INFORMATION		63
ITEM 6:				EXHIBITS		63
SIGNATURES						69

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PART I – FINANCIAL INFORMATION

 

ITEM 1:

FINANCIAL STATEMENTS

Unaudited consolidated financial statements begin on the following page

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(thousands of dollars)

 

		Three months ended
		March 28, 2010			March 29, 2009
Net sales		$	656,436		$	427,408
Cost of products sold			500,706			339,993
Gross profit			155,730			87,415
Operating expenses
Marketing and selling expenses			52,837			34,355
Administrative expenses			33,930			13,529
Research and development expenses			2,346			1,010
Other expense (income), net			4,523			4,197
Total operating expenses			93,636			53,091
Earnings before interest and taxes			62,094			34,324
Interest expense			55,211			29,610
Interest income			87			4
Earnings before income taxes			6,970			4,718
Provision for income taxes			3,040			6,818
Net earnings (loss)		$	3,930		$	(2,100	)

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (unaudited)

(thousands of dollars)

 

		March 28, 2010				December 27, 2009
Current assets:
Cash and cash equivalents		$	126,482			$	73,874
Accounts receivable, net			193,927				158,004
Inventories, net			319,034				389,967
Other current assets			28,208				26,960
Deferred tax assets			41,186				25,670
Total current assets			708,837				674,475
Plant assets, net			411,994				412,208
Tradenames			1,658,812				1,658,812
Other assets, net			225,910				233,823
Goodwill			1,559,180				1,559,180
Total assets		$	4,564,733			$	4,538,498
Current liabilities:
Short-term borrowings		$	1,103			$	1,232
Current portion of long-term obligations			2,054				38,228
Accounts payable			119,626				130,360
Accrued trade marketing expense			53,371				49,048
Accrued liabilities			174,362				130,035
Accrued income taxes			5,394				455
Total current liabilities			355,910				349,358
Long-term debt (includes $111,238 and $109,237 owed to related parties)			2,856,472				2,849,251
Pension and other postretirement benefits			83,551				82,437
Other long-term liabilities			40,373				39,383
Deferred tax liabilities			352,326				343,716
Total liabilities			3,688,632				3,664,145
Commitments and contingencies
Shareholder’s equity:
Pinnacle Common stock: par value $.01 per share, 100 shares authorized, issued 100 shares			—				—
Additional paid-in-capital			693,394				693,196
Notes receivable from officers			—				(565	)
Retained earnings			229,243				225,313
Accumulated other comprehensive (loss) income			(46,536	)			(43,591	)
Total shareholder’s equity			876,101				874,353
Total liabilities and shareholder’s equity		$	4,564,733			$	4,538,498

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(thousands of dollars)

 

		Three months ended
		March 28, 2010				March 29, 2009
Cash flows from operating activities
Net earnings (loss) from operations		$	3,930			$	(2,100	)
Non-cash charges (credits) to net earnings (loss)
Depreciation and amortization			19,879				14,587
Amortization of debt acquisition costs			3,537				1,184
Amortization of deferred mark-to-market adjustment on terminated swaps			1,033				1,312
Amortization of discount on term loan			688				—
Change in value of financial instruments			(8	)			697
Stock-based compensation charge			205				227
Postretirement healthcare benefits			24				(6	)
Pension expense			811				740
Other long-term assets			18				(1,350	)
Other long-term liabilities			1,778				1,360
Deferred income taxes			(3,967	)			7,486
Changes in working capital
Accounts receivable			(35,817	)			(22,747	)
Inventories			71,100				24,011
Accrued trade marketing expense			4,261				(866	)
Accounts payable			(5,758	)			17,118
Accrued liabilities			41,489				6,790
Other current assets			(985	)			(2,323	)
Net cash provided by operating activities			102,218				46,120
Cash flows from investing activities
Capital expenditures			(14,534	)			(12,858	)
Net cash used in investing activities			(14,534	)			(12,858	)
Cash flows from financing activities
Change in bank overdrafts			(5,140	)			—
Repayment of capital lease obligations			(322	)			(61	)
Repayment of notes receivable from officers			565				—
Reductions of equity contributions			(8	)			—
Debt acquisition costs			(17	)			—
Borrowings under revolving credit facility			—				12,584
Repayments of revolving credit facility			—				(38,584	)
Proceeds from short-term borrowing			497				—
Repayments of short-term borrowing			(626	)			(130	)
Repayments of long term obligations			(30,143	)			(3,125	)
Net cash used in financing activities			(35,194	)			(29,316	)
Effect of exchange rate changes on cash			118				(24	)
Net change in cash and cash equivalents			52,608				3,922
Cash and cash equivalents - beginning of period			73,874				4,261
Cash and cash equivalents - end of period		$	126,482			$	8,183
Supplemental disclosures of cash flow information:
Interest paid		$	25,413			$	23,316
Interest received			87				4
Income taxes paid			8				201
Non-cash investing activity:
Capital lease additions			(822	)			—

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY (unaudited)

(thousands of dollars, except share amounts)

 

							Additional Paid In Capital				Notes Receivable From Officers				Retained earnings (Accumulated Deficit)				Accumulated Other Comprehensive (Loss) Income				Total Shareholder’s Equity
		Common Stock
		Shares		Amount
Balance at December 28, 2008		100		$	—		$	427,323			$	—			$	(77,290	)		$	(42,460	)		$	307,573
Equity related compensation								227																227
Comprehensive income:
Net loss																(2,100	)							(2,100	)
Swap mark to market adjustments																				(5,819	)			(5,819	)
Amortization of deferred mark-to-market adjustment on terminated swaps																				1,312				1,312
Foreign currency translation																				(740	)			(740	)
Total comprehensive loss																								(7,347	)
Balance at March 29, 2009		100		$	—		$	427,550			$	—			$	(79,390	)		$	(47,707	)		$	300,453
Balance at December 27, 2009		100		$	—		$	693,196			$	(565	)		$	225,313			$	(43,591	)		$	874,353
Equity contribution:
Cash								—																—
Reduction in equity contributions								(7	)															(7	)
Equity related compensation								205																205
Notes receivable from officers												565												565
Comprehensive income:
Net loss																3,930								3,930
Swap mark to market adjustments																				(4,182	)			(4,182	)
Amortization of deferred mark-to-market adjustment on terminated swaps																				1,033				1,033
Foreign currency translation																				204				204
Total comprehensive loss																								985
Balance at March 28, 2010		100		$	—		$	693,394			$	—			$	229,243			$	(46,536	)		$	876,101

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(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 are managed and reported in three operating segments: (i) Birds Eye Frozen, (ii) Duncan Hines Grocery and (iii) Specialty Foods. Our United States retail frozen vegetables (Birds Eye^®), single-serve frozen dinners and entrées (Hungry-Man^®, Swanson^®), multi-serve frozen dinners and entrées (Birds Eye Voila!^®), frozen seafood (Van de Kamp’s^®, Mrs. Paul’s^®), frozen breakfast (Aunt Jemima^®), bagels (Lender’s^®), and frozen pizza (Celeste^®) will be reported in the Birds Eye Frozen Division. Our baking mixes and frostings (Duncan Hines^®), shelf-stable pickles, peppers and relish (Vlasic^®), barbeque sauces (Open Pit^®), pie fillings (Comstock^®, Wilderness^®), syrups (Mrs. Butterworth’s^® and Log Cabin^®), salad dressing (Bernstein’s^®), canned meat (Armour^®, Nalley^®, Brooks^®) and all Canadian Operations will be reported in the Duncan Hines Grocery Division. The Specialty Foods Division will consist of snack products (Tim’s Cascade^® and Snyder of Berlin^®) and our food service and private label businesses.

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 $2,160.2 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. 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 the Merger, CHC became a wholly-owned subsidiary of Peak Holdings. This transaction closed on April 2, 2007 (the “Blackstone Transaction”).

On December 23, 2009 Pinnacle Foods Group LLC (“PFG LLC”), formerly known as PFGI, a subsidiary of PFF, purchased all of the outstanding common stock of Birds Eye Foods, Inc. (“Birds Eye”) (the “Birds Eye Acquisition”). See Note 3, for a full description of the transaction and brands of Birds Eye.

 

2.	Interim Financial Statements

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s financial position as of March 28, 2010, the results of operations for the three months ended March 28, 2010 and March 29, 2009, and the cash flows for the three months ended March 28, 2010 and March 29, 2009. The results of operations are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 27, 2009.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

3.	Acquisition

Acquisition of Birds Eye Foods, Inc.

On December 23, 2009, our wholly owned subsidiary, Pinnacle Foods Group LLC acquired all of the common stock of Birds Eye. 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 foods which are highly-complimentary to Pinnacle’s existing product offerings. Frozen products are marketed under the Birds Eye brand name. 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 family-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 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.

The authoritative guidance for business combinations and goodwill and other intangible assets which established accounting and reporting for business combinations requires that all business combinations be accounted for using the purchase method of accounting. The guidance for goodwill and other intangible assets provides that goodwill and other intangible assets with indefinite lives not to be amortized, but tested for impairment on an annual basis.

In December 2007, the FASB updated the authoritative guidance for business combinations. The guidance required business combinations to still be accounted for using the purchase method of accounting, but changed the method of applying the 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 Birds Eye Acquisition has been accounted for in accordance with these standards.

The cost of the Birds Eye Acquisition consisted of:

 

Stated purchase price		$	670,000
Net repayment of Birds Eye’s debt			670,383
Total cost of acquisition		$	1,340,383

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

The following table summarizes the allocation of the total cost of the Birds Eye Acquisition to the assets acquired and liabilities assumed:

 

Assets acquired:
Cash and cash equivalents		$	25,637
Account receivable			67,697
Inventories			212,612
Other current assets			2,806
Assets held for sale			7,402
Deferred tax assets			797
Plant assets			146,813
Tradenames			750,000
Distributor relationships and license agreements			52,875
Goodwill			565,013
Other assets			53
Fair value of assets acquired			1,831,705
Liabilities assumed
Accounts payable			78,652
Accrued liabilities			59,455
Pension and post retirement benefit plans			49,307
Capital leases			1,657
Other long-term liabilities			14,520
Deferred tax liabilities			287,731
Total cost of acquisition		$	1,340,383

Based upon the allocation, the value assigned to intangible assets and goodwill totaled $1,367.9 million. Of the total intangible assets, $48.0 million has been assigned to distributor relationships. Distributor relationships are being amortized on an accelerated basis over 30 years, which life was based on an attrition rate based on industry experience which management believes is appropriate in the Company’s circumstances. The Company has also assigned $750.0 million to the value of the tradenames acquired, of which $624.0 million is allocated to the Birds Eye Frozen segment, $90.0 million is allocated to the Duncan Hines Grocery segment and $36.0 million is allocated to the Specialty Foods segment. The values of the tradenames are not subject to amortization but are reviewed annually for impairment. Goodwill, which is also not subject to amortization, totaled $565.0 million, of which $304.6 million is allocated to the Birds Eye Frozen segment, $107.2 million is allocated to the Duncan Hines Grocery segment and $153.2 million is allocated to the Specialty Foods segment. No new tax-deductible goodwill or intangible assets were created as a result of the Birds Eye Acquisition, but historical tax-deductible goodwill and intangible assets in the amount of $79.4 million existed as of the closing of the Birds Eye Acquisition.

In accordance with the requirements of the purchase method of accounting for acquisitions, inventories obtained in the Birds Eye Acquisition were required to be valued at fair value (net realizable value, which is defined as estimated selling prices less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of the acquiring entity), which is $37.6 million higher than historical manufacturing cost. Cost of products sold for the three months ended March 28, 2010 and the fiscal year ended December 27, 2009 includes pre-tax charges of $17.3 million and $0.5 million, respectively, related to the finished products at December 23, 2009, which were subsequently sold. The remaining $19.8 million will be recognized principally in the second and third quarters of 2010.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

The Birds Eye Acquisition was financed through borrowings of $850.0 million in term loans (“the Tranche C Term Loans”), $300.0 million of 9  ¹/4 Senior Notes due 2015 (the “Senior Notes”), a $260.0 million equity contribution from The Blackstone Group L.P., a $3.1 million investment from members of the board and management, less transaction costs of $0.2 million and $24.1 million in the three months ended March 28, 2010 and fiscal year ended December 27, 2009, respectively, and deferred financing costs of $40.2 million. Included in the transaction costs of $0.2 million for the three months ended March 28, 2010 are primarily legal, accounting and other professional fees. Included in the transaction costs of $24.1 million for the fiscal year ended December 27, 2009 are: $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. The Company also incurred $11.8 million in original issue discount, in connection with the Tranche C Term Loans. This is recorded in Long-term debt on the Consolidated Balance Sheet and is being amortized over the life of the loan using the effective interest method which is consistent with the authoritative guidance for debt with conversion and other options

Pro forma Information

The following schedule includes consolidated statements of operations data for the unaudited pro forma results for the three months ended March 29, 2009 as if the Birds Eye Acquisition had occurred as of the beginning of fiscal 2009. The pro forma information includes the actual results with pro forma adjustments for the change in interest expense related to the Birds Eye Acquisition, purchase accounting adjustments related to fixed assets, intangible assets, pension and other post-employment benefit liabilities, and related adjustments to the provision for income taxes.

The unaudited pro forma information is provided for illustrative purposes only. It does not purport to represent what the consolidated results of operations would have been had the Birds Eye Acquisition occurred on the date indicated above, nor does it purport to project the consolidated results of operations for any future period or as of any future date.

 

		Three Months ended March 29, 2009 (unaudited)
Net sales		$	655,794
Earnings before interest and taxes		$	62,929
Net earnings		$	429

 

4.	Fair Value Measurements

In January of 2010, the FASB updated the authoritative guidance for fair value disclosure. The updated guidance requires new disclosures for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and activity within Level 3 of the fair value hierarchy. The update provides amendments to the level of disaggregation that an entity should provide in each class of assets and liabilities, as well as disclosures about the inputs and valuation techniques used to measure fair value.

In the first quarter of 2009, the Company adopted the authoritative guidance for fair value disclosure as it relates to nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on at least an annual basis. The guidance for nonfinancial assets and nonfinancial liabilities defines fair value, establishes a framework for fair value disclosure in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this guidance apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. The adoption of the authoritative guidance for fair value disclosure, as it relates to nonfinancial assets and nonfinancial liabilities, had no impact on the Company’s consolidated financial statements. The provisions of the authoritative guidance for fair value disclosure will be applied at such time a fair value measurement of a nonfinancial asset or nonfinancial liability is required, which may result in a fair value that is materially different than would have been calculated prior to the adoption of the guidance.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

The guidance for financial assets and liabilities discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

Level 1:		Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:		Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3:		Unobservable inputs that reflect the Company’s assumptions.

The Company’s population of financial assets and liabilities subject to recurring fair value measurements and the required disclosures are as follows:

 

		Fair Value As of March 28, 2010			Fair Value Measurements Using Fair Value Hierarchy											Fair Value As of December 27, 2009			Fair Value Measurements Using Fair Value Hierarchy
					Level 1			Level 2			Level 3								Level 1			Level 2			Level 3
Assets
Interest rate derivatives		$	1		$	—		$	1		$	—				$	165		$	—		$	165		$	—
Foreign currency derivatives			—			—			—			—					—			—			—			—
Heating oil derivatives			—			—			—			—					25			—			25			—
Diesel fuel derivatives			1,237			—			1,237			—					902			—			902			—
Total assets at fair value		$	1,238		$	—		$	1,238		$	—				$	1,092		$	—		$	1,092		$	—
Liabilities
Interest rate derivatives		$	27,178		$	—		$	27,178		$	—				$	21,145		$	—		$	21,145		$	—
Foreign currency derivatives			3,021			—			3,021			—					2,522			—			2,522			—
Natural gas derivatives			374			—			374			—					57			—			57			—
Total liabilities at fair value		$	30,573		$	—		$	30,573		$	—				$	23,724		$	—		$	23,724		$	—

The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its 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.

Below are descriptions of the techniques used to estimate the fair value of financial instruments on the Company’s financial statements as of March 28, 2010.

The valuations of these instruments are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of the authoritative guidance for fair value disclosure, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. The Company had no fair value measurements based upon significant unobservable inputs (Level 3) as of March 28, 2010 or December 27, 2009.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

5.	Other Expense (Income), net

 

		Three months ended
		March 28, 2010			March 29, 2009
Other expense (income), net consists of:
Amortization of intangibles/other assets		$	4,291		$	4,197
Birds Eye Acquisition merger-related costs			232			—
Total other expense (income), net		$	4,523		$	4,197

Birds Eye Acquisition merger-related costs. In connection with the Birds Eye Acquisition, as described in Note 3, the Company incurred costs of $232 in the three months ended March 28, 2010. These costs relate primarily to legal, accounting and other professional fees.

 

6.	Inventories

 

		March 28, 2010				December 27, 2009
Raw materials, containers and supplies		$	43,618			$	41,523
Finished product			279,254				350,424
			322,872				391,947
Reserves			(3,838	)			(1,980	)
Total		$	319,034			$	389,967

Reserves represent amounts necessary to adjust the carrying value of inventories to the lower of cost or net realizable value, including any costs to sell or dispose.

The Company has various purchase commitments for raw materials, containers, supplies and certain finished products incident to the ordinary course of business. Such commitments are not at prices in excess of current market.

In the fourth quarter of 2009, in connection with the Birds Eye Acquisition, inventories were required to be valued at fair value, which is $37.6 million higher than historical manufacturing cost. Cost of products sold for the three months ended March 28, 2010 and the fiscal year ended December 27, 2009 includes pre-tax charges of $17.3 million and $0.5 million, respectively, related to the finished products at December 23, 2009, which were subsequently sold. The remaining $19.8 million will be recognized principally in the second and third quarters of 2010.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

7.	Goodwill and Other Assets

Goodwill by segment is as follows:

 

		Birds Eye Frozen			Duncan Hines Grocery			Specialty Foods			Total
Balance, December 27, 2009		$	606,512		$	708,922		$	243,746		$	1,559,180
Balance, March 28, 2010		$	606,512		$	708,922		$	243,746		$	1,559,180

The authoritative guidance for business combinations requires that all business combinations be accounted for at fair value under the acquisition method of accounting. The authoritative guidance for goodwill and other intangible assets provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment on an annual basis or more often when events indicate.

The Blackstone Transaction was accounted for in accordance with the authoritative guidance for business combinations and resulted in $996,546 in goodwill for PFF, as of April 2, 2007.

The Birds Eye Acquisition was accounted for in accordance the authoritative guidance for business combinations and resulted in $565,013 in goodwill, as of December 27, 2009.

In the first quarter of 2010, we implemented a reorganization of the Company’s products into three operating segments: Birds Eye Frozen, Duncan Hines Grocery and Specialty Foods. Our United States retail frozen vegetables (Birds Eye^®), single-serve frozen dinners and entrées (Hungry-Man^®, Swanson^®), multi-serve frozen dinners and entrées (Birds Eye Voila!^®), frozen seafood (Van de Kamp’s^®, Mrs. Paul’s^®), frozen breakfast (Aunt Jemima^®), bagels (Lender’s^®), and frozen pizza (Celeste^®) will be reported in the Birds Eye Frozen Division. Our baking mixes and frostings (Duncan Hines^®), shelf-stable pickles, peppers and relish (Vlasic^®), barbeque sauces (Open Pit^®), pie fillings (Comstock^®, Wilderness^®), syrups (Mrs. Butterworth’s^® and Log Cabin^®), salad dressing (Bernstein’s^®), canned meat (Armour^®, Nalley^®, Brooks^®) and all Canadian Operations will be reported in the Duncan Hines Grocery Division. The Specialty Foods Division will consist of snack products (Tim’s Cascade^® and Snyder of Berlin^®) and our food service and private label businesses.

As a result of the reorganization, the goodwill reallocation by segment resulted in $606,512 allocated to the Birds Eye Frozen segment, $708,922 allocated to the Duncan Hines Grocery segment and $243,746 allocated to the Specialty Foods segment.

The authoritative guidance for accounting for goodwill states that impairment is to be tested on an annual basis, unless an event occurs that could potentially reduce the fair value of a reporting unit below its book value. The Company’s reorganization into new segments constituted such a change and goodwill was tested for impairment which resulted in no impairment charges.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

Other Assets, net

 

		March 28, 2010			December 27, 2009
Amortizable intangibles, net of accumulated amortization of $56,939 and $52,648, respectively		$	171,548		$	175,698
Deferred financing costs, net of accumulated amortization of $27,369 and $23,833, respectively			53,377			56,897
Foreign currency swap (See Note 14)			80			165
Notes receivable - Roskam Baking			843			1,009
Other			62			54
Total		$	225,910		$	233,823

In fiscal 2007, the Blackstone Transaction was accounted for in accordance with the authoritative guidance for business combinations and resulted in $175,471 in amortizable intangibles for PFF; $52,810 was allocated to recipes with a life of ten years and $122,661 was allocated to customer relationships with useful lives ranging between 7 and 40 years.

In fiscal 2009, the Birds Eye Acquisition was accounted for in accordance with the authoritative guidance for business combinations and resulted in $53,016 in amortizable intangibles: $48,141 in distributor relationship and $4,875 in license agreement. The distributor relationships have a useful life of 30 years. The license agreement has a useful life of 6.5 years.

Amortization during the three months ended March 28, 2010 and March 29, 2009 was $4,291 and $4,197, respectively. Estimated amortization expense for each of the next five years and thereafter is as follows: remainder of 2010 - $12,877, 2011 - $16,167, 2012 - $15,808, 2013 - $15,471, 2014 - $12,188 and thereafter - $99,037.

Deferred financing costs, which relate to the Senior Secured Credit Facility, Senior Notes and Senior Subordinated Notes entered into in connection with the Blackstone Transaction, amounted to $40,567. Deferred financing costs in connection with the Birds Eye Acquisition, amounted to $40,179. Amortization of the deferred financing costs during the three months ended March 28, 2010 and March 29, 2009 was $3,536 and $1,184, respectively.

In February 2009, the Company entered into an agreement with Roskam Baking, which began co-packing certain Duncan Hines products in April 2009. This agreement included a provision to loan Roskam $1,900. As of March 28, 2010 the balance of the notes receivable is $1,393, of which $550 is recorded on the Consolidated Balance Sheet in Other Current Assets and $843 is recorded in Other Assets, net. This loan is being paid back to the Company based on cases produced and will be paid back in no longer than 5 years.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

8.	Restructuring Charges

Rochester, NY Office

The Rochester, NY office is the former headquarters of Birds Eye Foods, Inc. which was acquired by PFG on December 23, 2009, as described in Note 3. In connection with the consolidation of activities into PFG’s New Jersey offices, the Rochester office will be closed. Notification letters under the Worker Adjustment and Retraining Notification (WARN) Act of 1988 were issued in the first quarter of 2010. Activities related to the closure of the Rochester office will begin in the 2nd quarter of 2010 and will result in the elimination of approximately 200 positions.

In accordance with the authoritative guidance with respect to accounting for costs associated with exit or disposal activities, the full cost of termination benefits of $7,587 related to employees who will not be retained beyond the minimum retention period were recorded in the first quarter and the full cost of termination benefits of $5,360 related to employees who will be retained beyond the minimum retention period will be recorded in the future service periods. Of the $5,360, $1,146 was recorded in the first quarter, and $2,455, $1,486 and $273 is expected to be recorded in the 2nd quarter, 3rd quarter and 4th quarter, respectively.

The total cost of termination benefits recorded in the first quarter of 2010 was $8,733 and was recorded in the segments as follows: Birds Eye Frozen segment $6,172, Duncan Hines Grocery segment $1,591 and Specialty Foods segment $970.

The following table summarizes restructuring charges accrued as of March 28, 2010. These amounts are recorded in our Consolidated Balance Sheets, of which $6,654 is recorded in Accrued liabilities and $2,079 is recorded in Other long-term liabilities.

 

Description		Balance at March 27, 2010
Employee severance		$	8,733
Total		$	8,733

 

9.	Debt and Interest Expense

 

		March 28, 2010				December 27, 2009
Short-term borrowings
- Revolving Credit Facility		$	—			$	—
- Notes payable			1,103				1,232
Total short-term borrowings			1,103				1,232
Long-term debt
- Senior secured credit facility - term loans		$	1,199,422			$	1,221,875
- Senior secured credit facility - Tranche C term loans			842,310				850,000
- 9.25% Senior notes			625,000				625,000
- 10.625% Senior subordinated notes			199,000				199,000
- Unamortized discount on long term debt			(11,034	)			(11,722	)
- Capital lease obligations			3,827				3,326
			2,858,525				2,887,479
Less: current portion of long-term obligations			2,053				38,228
Total long-term debt		$	2,856,472			$	2,849,251

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

Interest expense

 

		Three months ended
		March 28, 2010			March 29, 2009
Third party interest expense		$	45,704		$	22,934
Related party interest expense			527			634
Amortization of debt acquisition costs			3,536			1,184
Amortization of deferred mark-to-market adjustment on terminated swap (Note 11)			1,033			1,312
Interest rate swap (gains) losses (Note 11)			4,411			3,546
Total interest expense		$	55,211		$	29,610

As part of the Blackstone Transaction as described in Note 1, Peak Finance LLC 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”). Peak Finance LLC merged with and into PFF on April 2, 2007 at the closing of the Blackstone Transaction. 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, the Company 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 the amount of $25.0 million, bringing our total revolving credit commitment to $150.0 million. In connection with the Tranche C Term Loans, the Company also incurred $11.8 million in original issue discount fees. These fees are 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 March 28, 2010 and December 27, 2009.

The total amount of the Term Loans and the Tranche C Term Loans that were owed to affiliates of the Blackstone Group as of March 28, 2010 and December 27, 2009, was $111,238 and $109,237, respectively.

The Company’s 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 the Company’s Senior Secured Credit Facility vary from time to time in accordance with the terms thereof and agreed upon pricing grids based on the Company’s 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 Facilty 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%

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

The obligations under the Senior Secured Credit Facility are unconditionally and irrevocably guaranteed by each of the Company’s 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 direct or indirect domestic subsidiary of the Company and 65% of the capital stock of, or other equity interests in, each direct foreign subsidiaries of the Company, or any of its domestic subsidiaries and (ii) certain tangible and intangible assets of the Company 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 three months ended March 28, 2010 and March 29, 2009, the weighted average interest rate on the term loan was 4.87% and 3.33%, respectively. For the three months March 29, 2009, the weighted average interest rate on the Revolving Credit Facility was 3.29%. As of March 28, 2010 and March 29, 2009, the Eurodollar interest rate on the term loan facility was 4.78% and 3.25%, respectively.

The Company pays 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 $50,000 as of March 24, 2010 (previously $25,000). As of March 28, 2010 and December 27, 2009, the Company had utilized $24,791 and $22,072, respectively of the Revolving Credit Facility for letters of credit. As of March 28, 2010, were no borrowings under the Revolving Credit Facility, therefore, of the $150,000 Revolving Credit Facility available, the Company had an unused balance of $125,209 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 $150,000 Revolving Credit Facility available, the Company had an unused balance of $127,928 available for future borrowing and letters of credit. The remaining amount that can be used for letters of credit as of March 28, 2010 and December 27, 2009 was $25,209 and $2,928, respectively. As of December 27, 2009, the Company was unable to use the Revolving Credit Facility for a $9,175 letter of credit and instead had to deposit cash collateral for that amount. The cash collateral deposit also existed at March 28, 2010. Total letters of credit as of March 28, 2010 and December 27, 2009 were $33,966 and $31,247, respectively.

In accordance with the “Excess Cash Flow” requirements of the Senior Secured Credit Facility the Company made a mandatory prepayment of the Term Loans of $27.0 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 March 28, 2010 are no payment in 2010, $2.5 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 no payment in 2010, $7.2 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, the Company 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, 2009, as part of the Birds Eye Acquisition described in Note 3, the Company 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 the Company, effectively subordinated in right of payment to all existing and future senior secured indebtedness of the Company and guaranteed on a full, unconditional, joint and several basis by the Company’s wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company. The Senior Subordinated Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness of the Company and guaranteed on a full, unconditional, joint and several basis by the Company’s wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company. See Note 17 of the Consolidated Financial Statements for Guarantor and Nonguarantor Financial Statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

The Company 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.

The Company 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 1^st 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	%

In addition, until April 1, 2010, the Company 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 the Company 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, the Company repurchased $51.0 million in aggregate principal amount of the 10.625% Senior Subordinated Notes at a discount price of $44.2 million. The Company currently has outstanding $199.0 million in aggregate principal amount of Senior Subordinated Notes.

As market conditions warrant, the Company and its subsidiaries, affiliates or significant shareholders (including The Blackstone Group L.P. and its affiliates) may from time to time, in their sole discretion, purchase, repay, redeem or retire any of the Company’s 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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

The estimated fair value of the Company’s long-term debt, including the current portion, as of March 28, 2010, is as follows:

 

		March 28, 2010
Issue		Recorded Amount			Fair Value
Senior Secured Credit Facility - Term Loans		$	1,199,422		$	1,157,442
Senior Secured Credit Facility - Tranche C Term Loans			842,310			850,733
9.25% Senior Notes			625,000			645,313
10.625% Senior Subordinated Notes			199,000			210,940
		$	2,865,732		$	2,864,428

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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

10.	Pension and Retirement Plans

Pinnacle Foods Pension Plan

The Company maintains a noncontributory defined benefit pension plan (“Pinnacle Foods Pension Plan”) that covers eligible union employees and provides benefits generally based on years of service and employees’ compensation. The Pinnacle Foods Pension Plan is funded in conformity with the funding requirements of applicable government regulations. Plan assets consist principally of cash equivalent, equity and fixed income common collective trusts. Plan assets do not include any of the Company’s own equity or debt securities. In fiscal 2010, the Company expects to make contributions of $5.6 million to the Pinnacle Foods Pension Plan, of which $0.6 million was made in the first quarter of 2010. The Company made contributions to the pension plan totaling $2.8 million in fiscal 2009, of which $0.4 million was made in the first quarter of 2009.

The following represents the components of net periodic benefit costs:

Pension Benefits

 

		Pinnacle Foods Pension Plan Pension Benefits Three months ended
		March 28, 2010				March 29, 2009
Service cost		$	477			$	451
Interest cost			1,142				1,111
Expected return on assets			(870	)			(774	)
Amortization of:
prior service cost			35				35
loss			222				344
Net periodic benefit cost		$	1,006			$	1,167

Birds Eye Foods Pension Plan

The Company’s Birds Eye Foods Pension Plan (“Birds Eye Foods Pension Plan”) consists of hourly and salaried employees and has primarily noncontributory defined-benefit schedules. In September 2001, this plan was amended to freeze benefit accruals for salaried employees effective September 28, 2001. Salaried participants who, on that date, were actively employed and who had attained age 40, completed 5 years of vesting service, and whose sum of age and vesting services was 50 or more, were grandfathered. Grandfathered participants were entitled to continue to earn benefit service in accordance with the provisions of the plan with respect to periods of employment after September 28, 2001 but in no event beyond September 28, 2006. In the first quarter of 2010, benefits of certain hourly employees were frozen. The curtailment gain recorded in the first quarter was $64.

The Company maintains an Excess Benefit Retirement Plan which serves to provide employees with the same retirement benefit they would have received from the Company’s retirement plan under the career average base pay formula, but for changes required under the 1986 Tax Reform Act and the compensation limitation under Section 401(a)(17) of the Internal Revenue Code having been revised in the 1992 Omnibus Budget Reform Act. This plan was amended to freeze benefit accruals effective September 28, 2001. Participants who, on that date, were actively employed and who had attained age 40, completed 5 years of vesting service, and whose sum of age and vesting services was 50 or more, were grandfathered. Grandfathered participants were entitled to continue to earn benefit service in accordance with the provisions of the plan with respect to periods of employment after September 28, 2001 but in no event beyond September 28, 2006.

For purposes of this disclosure, all defined-benefit pension plans acquired with Birds Eye Foods have been combined. The benefits for these plans are based primarily on years of service and employees’ pay near retirement. The Company’s funding policy is consistent with the funding requirements of Federal laws and regulations. Plan assets consist principally of common stocks, corporate bonds and US government obligations. Plan assets do not include any of the Company’s own equity or debt securities.

In fiscal 2010, the Company expects to make contributions of $2.7 million to the Birds Eye Foods Pension Plan. No contributions were made for the Birds Eye Foods Pension Plan in the three months ended March 28, 2010.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

Pension Benefits

 

		Birds Eye Foods Pension Plan Pension Benefits Three months ended March 28, 2010
Service cost		$	530
Interest cost			2,099
Expected return on assets			(2,021	)
Amortization of:
curtailment gain			(64	)
Net periodic benefit cost		$	544

Pinnacle Foods Other Postretirement Benefits Plan

The Company maintains a postretirement benefits plan (“Pinnacle Foods Other Postretirement Benefits Plan”) that provides health care and life insurance benefits to eligible retirees, covers certain U.S. employees and their dependents and is self-funded. Employees who have 10 years of service after the age of 45 and retire are eligible to participate in the postretirement benefit plan.

 

		Pinnacle Foods Other Postretirement Benefits Plan Three months ended
		March 28, 2010				March 29, 2009
Interest cost		$	5			$	5
Amortization of:
Net actuarial gain			(11	)			(11	)
Net periodic benefit cost		$	(6	)		$	(6	)

Birds Eye Foods Other Postretirement Benefits Plan

The Company sponsors benefit plans that provide postretirement medical and life insurance benefits for certain current and former employees. For the most part, current employees are not eligible for the postretirement medical coverage. Generally, other than pensions, the Company does not pay retirees’ benefit costs. Various exceptions exist, which have evolved from union negotiations, early retirement incentives and existing retiree commitments from acquired companies.

The Company has not prefunded any of its retiree medical or life insurance liabilities. Consequently there are no plan assets held in a trust, and there is no expected long-term rate of return assumption for purposes of determining the annual expense.

 

		Birds Eye Foods Other Postretirement Benefits Plan Three months ended March 28, 2010
Interest cost		$	44
Amortization of:
Net actuarial gain			—
Net periodic benefit cost		$	44

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

11.	Financial Instruments

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its 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, the Company enters 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.

The Company manages interest rate risk based on the varying circumstances of anticipated borrowings and existing variable and fixed rate debt, including the Company’s 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 the Company’s foreign operations in Canada expose the Company to fluctuations in foreign exchange rates. The Company’s goal is to reduce its exposure to such foreign exchange risks on its 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. The Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency, the U.S. dollar.

The Company purchases raw materials in quantities expected to be used in a reasonable period of time in the normal course of business. The Company generally enters 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 the Company’s manufacturing process.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its 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 the Company 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 March 28, 2010, the Company 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

$945,925

1.43% - 3.33%

USD-LIBOR-BBA

Oct 2008 - Mar 2009

Jan 2011 - July 2012

Interest Rate Swaps with Floors

4

—   (1)

2.96% - 3.58%

USD-LIBOR-BBA

Jan 2010

Jan 2012 - Jul 2012

Interest Rate Caps

2

800,000

2.50%

USD-LIBOR-BBA

Dec 2009

Jan 2011

 

(1)	Interest rate swaps with floors are hedging the same debt as the interest rate caps and become effective after the interest rate caps mature. At that point, in January 2011 they will have a notional value of $300,000.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

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 three months ended March 28, 2010 and March 29, 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 three months ended March 28, 2010 and March 29, 2009.

Amounts reported in AOCI related to derivatives will be reclassified to Interest expense as interest payments are made on the Company’s variable-rate debt. Due to the counterparty bank declaring bankruptcy in October 2008, the Company discontinued prospectively the hedge accounting on its 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. The Company terminated these positions during the fourth quarter of 2008. The Company continues 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 three months ended March 28 2010, $1,033 was reclassified as an increase to Interest expense relating to the terminated hedges. For the three months ended March 29 2009, $1,312 was reclassified as an increase to Interest expense relating to the terminated hedges. During the next twelve months, the Company estimates that an additional $18,659 will be reclassified as an increase to Interest expense relating to both active and terminated hedges.

Cash Flow Hedges of Foreign Exchange Risk

The Company’s operations in Canada have exposed the Company to changes in the US Dollar – Canadian Dollar (USD-CAD) foreign exchange rate. From time to time, the Company’s Canadian subsidiary purchases inventory denominated in US Dollars (USD), a currency other than its functional currency. The subsidiary sells that inventory in Canadian dollars. The subsidiary uses currency forward and collar agreements to manage its 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 March 28, 2010, the Company 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

39

$57,305 CAD

$52,986 USD

1.038-1.177

May 2009 - Mar 2010

Apr 2010 - Dec 2011

CAD Collar

9

$9,000 CAD

$7,965 USD

1.13

May 2009

Apr 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 $19 gain in the three months ended March 28, 2010. No hedge ineffectiveness on foreign exchange cash flow hedges was recognized in the three months ended March 29, 2009.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

Non-designated Hedges of Commodity Risk

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to commodity price risk but do not meet the authoritative guidance for derivative and hedge accounting. From time to time, the Company enters into commodity forward contracts to fix the price of natural gas and diesel fuel 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 March 28, 2010, the Company had the following natural gas swaps (in aggregate) and diesel fuel 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		3		366,497 MMBTU’s		$5.20 - $6.05 per MMBTU		Mar 2009 - Feb 2010		Apr 2010 - Oct 2010
Diesel Fuel Swap		3		4,391,947 Gallons		$2.46 - $2.96 per Gallon		Feb 2009 - Mar 2010		Jun 2010 - Dec 2010

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

The tables below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of March 28, 2010 and December 27, 2009.

 

		Tabular Disclosure of Fair Values of Derivative Instruments
		Asset Derivatives					Liability Derivatives
		Balance Sheet Location		Fair Value As of March 28, 2010			Balance Sheet Location		Fair Value As of March 28, 2010
Derivatives designated as hedging instruments
Interest Rate Contracts		Other current assets		$	1		Accrued liabilities		$	3,222
					—		Other long-term liabilities			23,956
Foreign Exchange Contracts					—		Accrued liabilities			2,841
					—		Other long-term liabilities			180
Total derivatives designated as hedging instruments				$	1				$	30,199
Derivatives not designated as hedging instruments
Natural Gas Contracts				$	—		Accrued liabilities		$	374
Diesel Fuel Contracts		Other current assets			1,237					—
Total derivatives not designated as hedging instruments				$	1,237				$	374
		Balance Sheet Location		Fair Value As of December 27, 2009			Balance Sheet Location		Fair Value As of December 27, 2009
Derivatives designated as hedging instruments
Interest Rate Contracts		Other assets, net		$	165		Other long-term liabilities		$	21,145
Foreign Exchange Contracts					—		Accrued liabilities			2,522
Total derivatives designated as hedging instruments				$	165				$	23,667
Derivatives not designated as hedging instruments
Natural Gas Contracts				$	—		Accrued liabilities		$	57
Heating Oil Contracts		Other current assets			25					—
Diesel Fuel Contracts		Other current assets			902					—
Total derivatives not designated as hedging instruments				$	927				$	57

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

The table below present the effect of our derivative financial instruments on the Consolidated Statements of Operations and Accumulated other comprehensive (loss) income as of the three months ending March 28, 2010 and March 29, 2009.

Tabular Disclosure of the Effect of Derivative Instruments

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		$	(10,608	)		Interest expense		$	(5,444	)		Interest expense		$	—
Foreign Exchange Contracts			(1,092	)		Cost of products sold			(593	)		Cost of products sold			19
Three months ended March 28, 2010		$	(11,700	)				$	(6,037	)				$	19
Interest Rate Contracts		$	(8,599	)		Interest expense		$	(4,857	)		Interest expense		$	—
Foreign Exchange Contracts			378			Cost of products sold			1,143			Cost of products sold			—
Three months ended March 29, 2009		$	(8,221	)				$	(3,714	)				$	—

 

Derivatives Not Designated as Hedging Instruments		Recognized in Earnings on:		Recognized in Earnings on Derivative
Natural Gas Contracts		Cost of products sold		$	(441	)
Diesel Contracts		Cost of products sold			335
Three months ended March 28, 2010				$	(106	)
Natural Gas Contracts		Cost of products sold		$	(1,088	)
Heating Oil Swaps		Cost of products sold			(33	)
Three months ended March 29, 2009				$	(1,121	)

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

Credit-risk-related Contingent Features

The Company has an agreement with Barclays that contains a provision whereby the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. As of March 28, 2010, the fair value of interest rate contracts in a net liability position related to these agreements was $27,190, which includes accrued interest of $1,328 but excludes any adjustment for nonperformance risk of $884. For the same counterparty, the fair value of foreign exchange derivative contracts in a net liability position related to these agreements was $3,101 which excludes any adjustment for nonperformance risk of $80. For the same counterparty, the fair value of natural gas contracts in a net liability position related to these agreements was $374. For the same counterparty, the fair value of diesel contracts in a net asset position related to these agreements was $680. If the Company breached any of these provisions, it could be required to settle its obligations under the agreements at their termination value of $29,985. As of March 28, 2010, the Company has not posted any collateral related to these agreements. As of December 27, 2009, the fair value of interest rate contracts in a net liability position related to these agreements was $23,089, which includes accrued interest of $1,044 but excludes any adjustment for nonperformance risk of $983. For the same counterparty, the fair value of foreign exchange derivative contracts in a net liability position related to these agreements was $2,599, which excludes any adjustment for nonperformance risk of $77. For the same counterparty, the fair value of natural gas contracts in a net liability position related to these agreements was $57. For the same counterparty, the fair value of heating oil contracts in a net asset position related to these agreements was $25. If the Company breached any of these provisions, it could be required to settle its obligations under the agreements at their termination value of $25,720. As of December 27, 2009, the Company has not posted any collateral related to these agreements.

The Company also has an agreement with Credit Suisse Group that contains a provision whereby the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. As of March 28, 2010, the fair value of interest rate contracts in a net liability position related to these agreements was $934, which excludes any adjustment for nonperformance risk of $64. As of December 27, 2009, the fair value of interest rate contracts in a net liability position related to these agreements was $83, which does not include any adjustment for nonperformance risk.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

12.	Commitments and Contingencies

General

From time to time, the Company and its operations 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, the Company’s general counsel and management are of the opinion that the final outcome of these matters should not have a material effect on the Company’s financial condition, results of operations or cash flows.

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

 

13.	Related Party Transactions

At the closing of the Blackstone Transaction, the Company entered into an advisory agreement with an affiliate of The Blackstone Group pursuant to which such entity or its affiliates provide certain strategic and structuring advice and assistance to us. In addition, under this agreement, affiliates of The Blackstone Group provide certain monitoring, advisory and consulting services to the Company for an aggregate annual management fee equal to the greater of $2,500 or 1.0% of Consolidated EBITDA (as defined in the credit agreement governing the Company’s Senior Secured Credit Facility). Affiliates of Blackstone also receive reimbursement for out-of-pocket expenses. Expenses relating to the management fee were $1,125 in the three months ended March 28, 2010 and $625 in the three months ended March 29, 2009. In addition, the Company reimbursed the Blackstone group out-of-pocket expenses totaling $55 and $20 in the three months ended March 28, 2010 and March 29, 2009.

Supplier Costs

Graham Packaging, which is owned by affiliates of The Blackstone Group, supplies packaging for some of the Company’s products. Purchases from Graham Packaging were $1,776 and $1,715 for the three months ended March 28, 2010 and March 29, 2009, respectively.

Customer Purchases

Performance Food Group, which is owned by affiliates of The Blackstone Group, is a food service supplier that purchases products from the Company. Sales to Performance Food Group were $1,569 and $1,395 in the three months ended March 28, 2010 and March 29, 2009, respectively.

Interest Expense

For the three months ended March 28, 2010 and March 29, 2009, fees and interest expense recognized in the Consolidated Statement of Operations for debt to the related party Blackstone Advisors L.P. totaled $527 and $634, respectively.

Notes receivable from officers

In connection with the capital contributions at the time of the Birds Eye Acquisition on December 23, 2009, certain members of the Board of Directors and management purchased ownership units of our ultimate parent Peak Holdings LLC. To fund these purchases, certain members of management signed 30 day notes receivable at a market interest rate. The total of the notes receivable were $565 and were fully paid in January 2010.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

14.

Segments

In the first quarter of 2010, we implemented a reorganization of the Company’s products into three operating segments: Birds Eye Frozen, Duncan Hines Grocery and Specialty Foods. Our United States retail frozen vegetables (Birds Eye^®), single-serve frozen dinners and entrées (Hungry-Man^®, Swanson^®), multi-serve frozen dinners and entrées (Birds Eye Voila!^®), frozen seafood (Van de Kamp’s^®, Mrs. Paul’s^®), frozen breakfast (Aunt Jemima^®), bagels (Lender’s^®), and frozen pizza (Celeste^®) will be reported in the Birds Eye Frozen segment. Our baking mixes and frostings (Duncan Hines^®), shelf-stable pickles, peppers and relish (Vlasic^®), barbeque sauces (Open Pit^®), pie fillings (Comstock^®, Wilderness^®), syrups (Mrs. Butterworth’s^® and Log Cabin^®), salad dressing (Bernstein’s^®), canned meat (Armour^®, Nalley^®, Brooks^®) and all Canadian Operations will be reported in the Duncan Hines Grocery segment. The Specialty Foods segment will consist of snack products (Tim’s Cascade^® and Snyder of Berlin^®) and our food service and private label businesses. Segment performance is evaluated by the Company’s Chief Operating Decision Maker and is based on earnings before interest and taxes. Transfers between segments and geographic areas are recorded at cost plus markup or at market. Identifiable assets are those assets which are identified with the operations in each segment or geographic region. Corporate assets consist of prepaid and deferred tax assets and assets held for sale. Unallocated corporate expenses consist of corporate overhead such as executive management, finance and legal functions and the costs to integrate the Birds Eye Foods Acquisition. Prior period amounts have been reclassified for consistent presentation.

 

		Three months ended
		March 28, 2010				March 29, 2009
SEGMENT INFORMATION
Net sales
Birds Eye Frozen		$	324,400			$	146,346
Duncan Hines Grocery			226,140				196,394
Specialty Foods			105,896				84,668
Total		$	656,436			$	427,408
Earnings (loss) before interest and taxes
Birds Eye Frozen		$	29,411			$	9,154
Duncan Hines Grocery			36,884				28,400
Specialty Foods			5,458				361
Unallocated corporate expenses			(9,659	)			(3,591	)
Total		$	62,094			$	34,324
Depreciation and amortization
Birds Eye Frozen		$	9,161			$	4,898
Duncan Hines Grocery			5,861				5,071
Specialty Foods			4,857				4,618
Total		$	19,879			$	14,587
Capital expenditures
Birds Eye Frozen		$	9,433			$	8,099
Duncan Hines Grocery			3,852				4,251
Specialty Foods			2,071				508
Total		$	15,356			$	12,858
GEOGRAPHIC INFORMATION
Net sales
United States		$	651,335			$	424,751
Canada			16,249				15,262
Intercompany			(11,148	)			(12,605	)
Total		$	656,436			$	427,408

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

		March 28, 2010			December 27, 2009
SEGMENT INFORMATION
Total assets
Birds Eye Frozen		$	2,043,023		$	2,068,569
Duncan Hines Grocery			1,975,476			1,952,399
Specialty Foods			499,197			485,975
Corporate			47,037			31,555
Total		$	4,564,733		$	4,538,498
GEOGRAPHIC INFORMATION
Long-lived assets
United States		$	411,960		$	412,171
Canada			34			37
Total		$	411,994		$	412,208

 

15.	Income Taxes

The Company’s liability for unrecognized tax benefits (“UTB”) as of March 28, 2010 is $3,450. The amount, if recognized, that would impact the effective tax rate as of March 28, 2010 was $2,416. The amount of the liability for UTB classified as a long-term liability on the Consolidated Balance Sheet was $2,416. Certain statutes of limitation may expire within the next twelve months and that could cause a decrease of $413 in the UTB liability and a benefit to the provision for income taxes.

Income taxes are accounted for in accordance with the authoritative guidance for accounting for income taxes under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.

The Company reviews its 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 the Company’s tax provision in the period of change

Based on a review of both the positive and negative evidence as of December 27, 2009, it was determined that the Company had sufficient positive evidence to outweigh any negative evidence and support that it is more likely that not that substantially all of deferred tax assets will be realized.

For the three month period ended March 28, 2010 we maintained a valuation allowance for certain state net operating loss carryovers, state tax credit carryovers, and foreign loss carryovers. For the three-month period ended March 29, 2009 we maintained a full valuation allowance against net federal and state deferred tax assets excluding indefinite lived intangible assets

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

16.	Recently Issued Accounting Pronouncements

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. The Company adopted this guidance in the first quarter of 2010 and it did not have a material impact on the Company’s consolidated financial position or results of operations.

In January of 2010, the FASB updated the authoritative guidance for fair value disclosure. The updated guidance requires new disclosures for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and activity within Level 3 of the fair value hierarchy. The update provides amendments to the level of disaggregation that an entity should provide in each class of assets and liabilities, as well as disclosures about the inputs and valuation techniques used to measure fair value. The updated guidance is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company adopted this guidance in the first quarter of 2010 and it did not have a material impact on the Company’s consolidated financial position or results of operations.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

17.	Guarantor and Nonguarantor Statements

In connection with the Blackstone Transaction described in Note 1 and as a part of the related financings, the Company issued $325 million of 9.25% Senior Notes and $250 million ($199 million outstanding as of December 27, 2009) of 10.625% Senior Subordinated Notes in private placements pursuant to Rule 144A and Regulation S. An additional $300 million of Senior Notes were issued on December 23, 2009 in connection with the Birds Eye Acquisition.

The Senior Notes are general unsecured obligations of the Company, effectively subordinated in right of payment to all existing and future senior secured indebtedness of the Company and guaranteed on a full, unconditional, joint and several basis by the Company’s wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company.

The Senior Subordinated Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness of the Company and guaranteed on a full, unconditional, joint and several basis by the Company’s wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company.

The following consolidating financial information presents:

 

(1)

(a) Consolidating balance sheets as of March 28, 2010 and December 27, 2009.

(b) The related consolidating statements of operations for the Company, all guarantor subsidiaries and the non- guarantor subsidiary for the following:

 

i.

Three months ended March 28, 2010.

 

ii.

Three months ended March 29, 2009.

(c) The related consolidating statements of cash flows for the Company, all guarantor subsidiaries and the non-guarantor subsidiary for the following:

 

i.

Three months ended March 28, 2010.

 

ii.

Three months ended March 29, 2009.

 

(2)

Elimination entries necessary to consolidate the Company with its guarantor subsidiaries and non-guarantor subsidiaries.

Investments in subsidiaries are accounted for by the parent using the equity method of accounting. The guarantor subsidiaries are presented on a combined basis. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions and include a reclassification entry of net non-current deferred tax assets to non-current deferred tax liabilities.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

Pinnacle Foods Finance LLC

Consolidating Balance Sheet

March 28, 2010

 

		Pinnacle Foods Finance LLC				Guarantor Subsidiaries				Nonguarantor Subsidiaries				Eliminations and Reclassifications				Consolidated Total
Current assets:
Cash and cash equivalents		$	—			$	121,394			$	5,088			$	—			$	126,482
Accounts receivable, net			—				188,195				5,732				—				193,927
Intercompany accounts receivable			—				47,012				—				(47,012	)			—
Inventories, net			—				313,576				5,458				—				319,034
Other current assets			11,159				16,409				640				—				28,208
Deferred tax assets			—				40,169				1,017				—				41,186
Total current assets			11,159				726,755				17,935				(47,012	)			708,837
Plant assets, net			—				411,960				34				—				411,994
Investment in subsidiaries			1,662,293				4,707				—				(1,667,000	)			—
Intercompany note receivable			1,994,769				—				—				(1,994,769	)			—
Tradenames			—				1,658,812				—				—				1,658,812
Other assets, net			53,457				172,453				—				—				225,910
Deferred tax assets			128,220				—				—				(128,220	)			—
Goodwill			—				1,559,180				—				—				1,559,180
Total assets		$	3,849,898			$	4,533,867			$	17,969			$	(3,837,001	)		$	4,564,733
Current liabilities:
Short-term borrowings		$	—			$	1,103			$	—			$	—			$	1,103
Current portion of long-term obligations			810				1,244				—				—				2,054
Accounts payable			—				118,278				1,348				—				119,626
Intercompany accounts payable			38,986				—				8,026				(47,012	)			—
Accrued trade marketing expense			—				50,087				3,284				—				53,371
Accrued liabilities			55,497				118,261				604				—				174,362
Accrued income taxes			480				4,914				—				—				5,394
Total current liabilities			95,773				293,887				13,262				(47,012	)			355,910
Long-term debt			2,853,888				2,584				—				—				2,856,472
Intercompany note payable			—				1,994,769				—				(1,994,769	)			—
Pension and other postretirement benefits			—				83,551				—				—				83,551
Other long-term liabilities			24,136				16,237				—				—				40,373
Deferred tax liabilities			—				480,546				—				(128,220	)			352,326
Total liabilities			2,973,797				2,871,574				13,262				(2,170,001	)			3,688,632
Commitments and contingencies			—				—				—				—				—
Shareholder’s equity:
Pinnacle Common Stock, $.01 par value		$	—			$	—			$	—			$	—				—
Additional paid-in-capital			693,394				1,284,155				2,324				(1,286,479	)			693,394
Retained earnings			229,243				398,512				5,512				(404,024	)			229,243
Accumulated other comprehensive (loss) income			(46,536	)			(20,374	)			(3,129	)			23,503				(46,536	)
Total shareholder’s equity			876,101				1,662,293				4,707				(1,667,000	)			876,101
Total liabilities and shareholder’s equity		$	3,849,898			$	4,533,867			$	17,969			$	(3,837,001	)		$	4,564,733

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

Pinnacle Foods Finance LLC

Consolidating Balance Sheet

December 27, 2009

 

		Pinnacle Foods Finance LLC				Guarantor Subsidiaries				Nonguarantor Subsidiaries				Eliminations and Reclassifications				Consolidated Total
Current assets:
Cash and cash equivalents		$	—			$	68,249			$	5,625			$	—			$	73,874
Accounts receivable, net			—				152,961				5,043				—				158,004
Intercompany accounts receivable			—				68,227				—				(68,227	)			—
Inventories, net			—				384,787				5,180				—				389,967
Other current assets			9,200				17,060				700				—				26,960
Deferred tax assets			—				24,839				831				—				25,670
Total current assets			9,200				716,123				17,379				(68,227	)			674,475
Plant assets, net			—				412,171				37				—				412,208
Investment in subsidiaries			1,642,385				4,695				—				(1,647,080	)			—
Intercompany note receivable			2,044,797				—				—				(2,044,797	)			—
Tradenames			—				1,658,812				—				—				1,658,812
Other assets, net			57,062				176,761				—				—				233,823
Deferred tax assets			115,733				—				—				(115,733	)			—
Goodwill			—				1,559,180				—				—				1,559,180
Total assets		$	3,869,177			$	4,527,742			$	17,416			$	(3,875,837	)		$	4,538,498
Current liabilities:
Short-term borrowings		$	—			$	1,232			$	—			$	—			$	1,232
Current portion of long-term obligations			37,170				1,058				—				—				38,228
Accounts payable			—				129,142				1,218				—				130,360
Intercompany accounts payable			60,376				—				7,851				(68,227	)			—
Accrued trade marketing expense			—				46,067				2,981				—				49,048
Accrued liabilities			29,150				100,214				671				—				130,035
Accrued income taxes			—				455				—				—				455
Total current liabilities			126,696				278,168				12,721				(68,227	)			349,358
Long-term debt			2,846,983				2,268				—				—				2,849,251
Intercompany note payable			—				2,044,797				—				(2,044,797	)			—
Pension and other postretirement benefits			—				82,437				—				—				82,437
Other long-term liabilities			21,145				18,238				—				—				39,383
Deferred tax liabilities			—				459,449				—				(115,733	)			343,716
Total liabilities			2,994,824				2,885,357				12,721				(2,228,757	)			3,664,145
Commitments and contingencies			—				—				—				—				—
Shareholder’s equity:
Pinnacle Common Stock, $.01 par value		$	—			$	—			$	—			$	—				—
Additional paid-in-capital			693,196				1,284,155				2,324				(1,286,479	)			693,196
Notes receivable from officers			(565	)			—				—				—				(565	)
Retained earnings			225,313				378,809				5,341				(384,150	)			225,313
Accumulated other comprehensive (loss) income			(43,591	)			(20,579	)			(2,970	)			23,549				(43,591	)
Total shareholder’s equity			874,353				1,642,385				4,695				(1,647,080	)			874,353
Total liabilities and shareholder’s equity		$	3,869,177			$	4,527,742			$	17,416			$	(3,875,837	)		$	4,538,498

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

Pinnacle Foods Finance LLC

Consolidated Statement of Operations

For the three months ended March 28, 2010

 

		Pinnacle Foods Finance LLC				Guarantor Subsidiaries				Nonguarantor Subsidiaries			Eliminations				Consolidated Total
Net sales		$	—			$	651,335			$	16,249		$	(11,148	)		$	656,436
Cost of products sold			(1	)			497,575				14,073			(10,941	)			500,706
Gross profit			1				153,760				2,176			(207	)			155,730
Operating expenses
Marketing and selling expenses			84				51,505				1,248			—				52,837
Administrative expenses			1,295				32,155				480			—				33,930
Research and development expenses			9				2,337				—			—				2,346
Intercompany royalties			—				—				19			(19	)			—
Intercompany technical service fees			—				—				188			(188	)			—
Other expense (income), net			—				4,523				—			—				4,523
Equity in (earnings) loss of investees			(19,703	)			(171	)			—			19,874				—
Total operating expenses			(18,315	)			90,349				1,935			19,667				93,636
Earnings (loss) before interest and taxes			18,316				63,411				241			(19,874	)			62,094
Intercompany interest (income) expense			(31,128	)			31,128				—			—				—
Interest expense			55,068				143				—			—				55,211
Interest income			10				77				—			—				87
Earnings (loss) before income taxes			(5,614	)			32,217				241			(19,874	)			6,970
Provision for income taxes			(9,544	)			12,514				70			—				3,040
Net earnings		$	3,930			$	19,703			$	171		$	(19,874	)		$	3,930

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

Pinnacle Foods Finance LLC

Consolidated Statement of Operations

For the three months ended March 29, 2009

 

		Pinnacle Foods Finance LLC				Guarantor Subsidiaries				Nonguarantor Subsidiary				Eliminations				Consolidated Total
Net sales		$	—			$	424,751			$	15,262			$	(12,605	)		$	427,408
Cost of products sold			35				337,798				14,592				(12,432	)			339,993
Gross profit			(35	)			86,953				670				(173	)			87,415
Operating expenses
Marketing and selling expenses			47				32,431				1,877				—				34,355
Administrative expenses			802				12,233				494				—				13,529
Research and development expenses			5				1,005				—				—				1,010
Intercompany royalties			—				—				15				(15	)			—
Intercompany technical service fees			—				—				158				(158	)			—
Other expense (income), net			—				4,197				—				—				4,197
Equity in (earnings) loss of investees			(21,041	)			1,250				—				19,791				—
Total operating expenses			(20,187	)			51,116				2,544				19,618				53,091
Earnings (loss) before interest and taxes			20,152				35,837				(1,874	)			(19,791	)			34,324
Intercompany interest (income) expense			(7,470	)			7,470				—				—				—
Interest expense			29,722				(112	)			—				—				29,610
Interest income			—				1				3				—				4
Earnings (loss) before income taxes			(2,100	)			28,480				(1,871	)			(19,791	)			4,718
Provision for income taxes			—				7,439				(621	)			—				6,818
Net (loss) earnings		$	(2,100	)		$	21,041			$	(1,250	)		$	(19,791	)		$	(2,100	)

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

Pinnacle Foods Finance LLC

Consolidating Statement of Cash Flows

For the three months ended March 28, 2010

 

		Pinnacle Foods Finance LLC				Guarantor Subsidiaries				Nonguarantor Subsidiaries				Eliminations				Consolidated Total
Cash flows from operating activities
Net earnings from operations		$	3,930			$	19,703			$	171			$	(19,874	)		$	3,930
Non-cash charges (credits) to net earnings
Depreciation and amortization			—				19,876				3				—				19,879
Amortization of debt acquisition costs			3,537				—				—				—				3,537
Amortization of deferred mark-to-market adjustment on terminated swaps			1,033				—				—				—				1,033
Amortization of discount on term loan			688				—				—				—				688
Change in value of financial instruments			(18	)			10				—				—				(8	)
Equity in loss (earnings) of investees			(19,703	)			(171	)			—				19,874				—
Stock-based compensation charges			—				205				—				—				205
Postretirement healthcare benefits			—				24				—				—				24
Pension expense			—				811				—				—				811
Other long-term assets			—				18				—				—				18
Other long-term liabilities			—				1,778				—				—				1,778
Deferred income taxes			(10,024	)			6,057				—				—				(3,967	)
Changes in working capital, net of acquisition
Accounts receivable			—				(35,234	)			(583	)			—				(35,817	)
Intercompany accounts receivable/payable			(33,684	)			34,100				(416	)			—				—
Inventories			—				71,269				(169	)			—				71,100
Accrued trade marketing expense			—				4,021				240				—				4,261
Accounts payable			—				(5,862	)			104				—				(5,758	)
Accrued liabilities			22,489				19,081				(81	)			—				41,489
Other current assets			(1,383	)			323				75				—				(985	)
Net cash provided by operating activities			(33,135	)			136,009				(656	)			—				102,218
Cash flows from investing activities
Capital expenditures			—				(14,534	)			—				—				(14,534	)
Net cash used in investing activities			—				(14,534	)			—				—				(14,534	)
Cash flows from financing activities
Change in bank overdrafts			—				(5,140	)			—				—				(5,140	)
Repayment of capital lease obligations			—				(322	)			—				—				(322	)
Repayments of intercompany loans			62,738				(62,738	)			—				—				—
Repayment of notes receivable from officers			565				—				—				—				565
Reduction of equity contributions			(8	)			—				—				—				(8	)
Debt acquisition costs			(17	)			—				—				—				(17	)
Proceeds from short-term borrowing			—				497				—				—				497
Repayments of short-term borrowing			—				(626	)			—				—				(626	)
Repayments of long term obligations			(30,143	)			—				—				—				(30,143	)
Net cash provided by (used in) financing activities			33,135				(68,329	)			—				—				(35,194	)
Effect of exchange rate changes on cash			—				—				118				—				118
																			—
Net change in cash and cash equivalents			—				53,146				(538	)			—				52,608
Cash and cash equivalents-beginning of period			—				68,249				5,625				—				73,874
Cash and cash equivalents-end of period		$	—			$	121,395			$	5,087			$	—			$	126,482
Supplemental disclosures of cash flow information:
Interest paid		$	25,275			$	138			$	—			$	—			$	25,413
Interest received			9				78				—				—				87
Income taxes paid			—				6				2				—				8
Non-cash investing activity:
Capital lease additions			—				(833	)			—				—				(833	)

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

 

Pinnacle Foods Finance LLC

Consolidating Statement of Cash Flows

For the three months ended March 29, 2009

 

		Pinnacle Foods Finance LLC				Guarantor Subsidiaries				Nonguarantor Subsidiary				Eliminations				Consolidated Total
Cash flows from operating activities
Net (loss) earnings from operations		$	(2,100	)		$	21,041			$	(1,250	)		$	(19,791	)		$	(2,100	)
Non-cash charges (credits) to net (loss)
Depreciation and amortization			—				14,584				3				—				14,587
Amortization of debt acquisition costs			1,184				—				—				—				1,184
Amortization of deferred mark-to-market adjustment on terminated swaps			1,312				—				—				—				1,312
Change in value of financial instruments			—				697				—				—				697
Equity in loss (earnings) of investees			(21,041	)			1,250				—				19,791				—
Stock-based compensation charges			—				227				—				—				227
Postretirement healthcare benefits			—				(6	)			—				—				(6	)
Pension expense			—				740				—				—				740
Other long-term assets			—				(1,350	)			—				—				(1,350	)
Other long-term liabilities			—				1,360				—				—				1,360
Deferred income taxes			—				7,486				—				—				7,486
Changes in working capital, net of acquisition
Accounts receivable			—				(23,075	)			328				—				(22,747	)
Intercompany accounts receivable/payable			(121,419	)			117,986				3,433				—				—
Inventories			—				23,696				315				—				24,011
Accrued trade marketing expense			—				39				(905	)			—				(866	)
Accounts payable			—				14,843				2,275				—				17,118
Accrued liabilities			3,966				4,980				(2,156	)			—				6,790
Other current assets			767				(2,270	)			(820	)			—				(2,323	)
Net cash provided by operating activities			(137,331	)			182,228				1,223				—				46,120
Cash flows from investing activities
Capital expenditures			—				(12,858	)			—				—				(12,858	)
Net cash used in investing activities			—				(12,858	)			—				—				(12,858	)
Cash flows from financing activities
Repayment of capital lease obligations			—				(61	)			—				—				(61	)
Repayments of short-term borrowing			—				(130	)			—				—				(130	)
Repayments of intercompany loans			166,456				(166,456	)			—				—				—
Borrowings under revolving credit facility			12,584				—				—				—				12,584
Repayments of revolving credit facility			(38,584	)			—				—				—				(38,584	)
Repayments of long term obligations			(3,125	)			—				—				—				(3,125	)
Net cash used in financing activities			137,331				(166,647	)			—				—				(29,316	)
Effect of exchange rate changes on cash			—				—				(24	)			—				(24	)
																			—
Net change in cash and cash equivalents			—				2,723				1,199				—				3,922
Cash and cash equivalents-beginning of period			—				2,257				2,004				—				4,261
Cash and cash equivalents-end of period		$	—			$	4,980			$	3,203			$	—			$	8,183
Supplemental disclosures of cash flow information:
Interest paid		$	23,273			$	43			$	—			$	—			$	23,316
Interest received			—				1				3				—				4
Income taxes paid			—				14				187				—				201

 

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ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(dollars in millions, except where noted)

You should read the following discussion of our results of operations and financial condition together with the “Selected Financial Data” and the audited consolidated financial statements appearing in our annual report on Form 10-K for the year ended December 27, 2009. 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 our annual report on Form 10-K for the year ended December 27, 2009. Actual results may differ materially from those contained in any forward-looking statements.

Overview

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 foods which are highly-complimentary to our existing product offerings. Frozen products are marketed under the Birds Eye brand name. 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 family-oriented 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 family-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 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. In the first quarter of 2010, we implemented a reorganization of the Company’s products into three operating segments: Birds Eye Frozen, Duncan Hines Grocery and Specialty Foods. Our United States retail frozen vegetables (Birds Eye^®), single-serve frozen dinners and entrées (Hungry-Man^®, Swanson^®), multi-serve frozen dinners and entrées (Birds Eye Voila!^®), frozen seafood (Van de Kamp’s^®, Mrs. Paul’s^®), frozen breakfast (Aunt Jemima^®), bagels (Lender’s^®), and frozen pizza (Celeste^®) will be reported in the Birds Eye Frozen Division. Our baking mixes and frostings (Duncan Hines^®), shelf-stable pickles, peppers and relish (Vlasic^®), barbeque sauces (Open Pit^®), pie fillings (Comstock^®, Wilderness^®), syrups (Mrs. Butterworth’s^® and Log Cabin^®), salad dressing (Bernstein’s^®), canned meat (Armour^®, Nalley^®, Brooks^®) and all Canadian Operations will be reported in the Duncan Hines Grocery Division. The Specialty Foods Division will consist of snack products (Tim’s Cascade^® and Snyder of Berlin^®) and our food service and private label businesses. Segment performance is evaluated by the Company’s Chief Operating Decision Maker and is based on earnings before interest and taxes. Transfers between segments and geographic areas are recorded at cost plus markup or at market. Identifiable assets are those assets, including goodwill, which are identified with the operations in each segment or geographic region. Corporate assets consist of prepaid and deferred tax assets. Unallocated corporate expenses consist of corporate overhead such as executive management, and finance and legal functions. Prior period amounts have been reclassified for consistent presentation of our segments.

 

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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. 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, the long term trend for food consumption at home is flat and the increase that was experienced during the most severe part of the recession is now moderating. 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.

 

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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.

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. The value of goodwill and intangibles from the allocation of purchase price from the Blackstone Transaction and the 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. In the first quarter of 2010, we tested for impairment due to our reorganization into new segments and it resulted in no impairment charges.

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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Restructuring Charges

Rochester, NY Office

The Rochester, NY office is the former headquarters of Birds Eye Foods, Inc, which we acquired on December 23, 2009, as described in Note 3. In connection with the consolidation of activities into Pinnacle’s New Jersey offices, the Rochester office will be closed. Notification letters under the Worker Adjustment and Retraining Notification (WARN) Act of 1988 were issued in the first quarter of 2010. Activities related to the closure of the Rochester office will begin in the 2nd quarter of 2010, and will result in the elimination of approximately 200 positions.

In accordance with the authoritative guidance with respect to accounting for costs associated with exit or disposal activities, the full cost of termination benefits of $7,587 related to employees who will not be retained beyond the minimum retention period were recorded in the first quarter and the full cost of termination benefits of $5,360 related to employees who will be retained beyond the minimum retention period will be recorded in the future service periods. Of the $5,360, $1,146 was recorded in the first quarter, and $2,455, $1,486 and $273 is expected to be recorded in the 2nd quarter, 3rd quarter and 4th quarter, respectively.

The total cost of termination benefits recorded in the first quarter of 2010 was $8,733 and was recorded in the segments as follows: Birds Eye Frozen segment $6,724, Duncan Hines Grocery segment $961 and Specialty Foods segment $1,048.

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.

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 Birds Eye Frozen, Duncan Hines Grocery and the Specialty Foods segments for the three months ended March 28, 2010 and the three months ended March 29, 2009.

 

		Total
		Three months Ended March 28, 2010			Three months Ended March 29, 2009
Shipments		$	865.4		$	560.9
Less: Aggregate trade marketing and consumer coupon redemption expenses			205.3			130.1
Less: Slotting expense			3.7			3.4
Net sales		$	656.4		$	427.4
		Birds Eye Frozen
		Three months Ended March 28, 2010			Three months Ended March 29, 2009
Shipments		$	450.0		$	210.9
Less: Aggregate trade marketing and consumer coupon redemption expenses			123.4			62.4
Less: Slotting expense			2.3			2.2
Net sales		$	324.3		$	146.3
		Duncan Hines Grocery
		Three months Ended March 28, 2010			Three months Ended March 29, 2009
Shipments		$	299.8		$	259.7
Less: Aggregate trade marketing and consumer coupon redemption expenses			72.4			62.1
Less: Slotting expense			1.2			1.2
Net sales		$	226.2		$	196.4
		Specialty Foods
		Three months Ended March 28, 2010			Three months Ended March 29, 2009
Shipments		$	115.6		$	90.3
Less: Aggregate trade marketing and consumer coupon redemption expenses			9.5			5.6
Less: Slotting expense			0.2			—
Net sales		$	105.9		$	84.7

 

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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.

 

		Three months ended
		March 28, 2010						March 29, 2009
Net sales		$	656.4		100.0	%		$	427.4		100.0	%
Cost of products sold			500.7		76.3	%			340.0		79.6	%
Gross profit			155.7		23.7	%			87.4		20.4	%
Operating expenses:
Marketing and selling expenses			52.8		8.0	%			34.4		8.0	%
Administrative expenses			33.9		5.2	%			13.5		3.2	%
Research and development expenses			2.4		0.4	%			1.0		0.2	%
Other expense (income), net			4.5		0.7	%			4.2		1.0	%
Total operating expenses		$	93.6		14.3	%		$	53.1		12.4	%
Earnings before interest and taxes		$	62.1		9.5	%		$	34.3		8.0	%

 

		Three Months Ended
		March 28, 2010				March 29, 2009
Net sales
Birds Eye Frozen		$	324.4			$	146.3
Duncan Hines Grocery			226.1				196.4
Specialty Foods			105.9				84.7
Total		$	656.4			$	427.4
Earnings (loss) before interest and taxes
Birds Eye Frozen		$	29.4			$	9.1
Duncan Hines Grocery			36.9				28.4
Specialty Foods			5.5				0.4
Unallocated corporate expenses			(9.7	)			(3.6	)
Total		$	62.1			$	34.3
Depreciation and amortization
Birds Eye Frozen		$	9.1			$	4.9
Duncan Hines Grocery			5.9				5.1
Specialty Foods			4.9				4.6
Total		$	19.9			$	14.6

 

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Three months ended March 28, 2010 compared to three months ended March 29, 2009

Net sales. Shipments in the three months ended March 28, 2010 were $865.4 million, an increase of $304.5 million, compared to shipments in the three months ended March 29, 2009 of $560.9 million. The acquisition of Birds Eye Foods, Inc. resulted in $316.4 million of increased shipments. All other businesses decreased $11.9 million. Net sales in the three months ended March 28, 2010 were $656.4 million, an increase of $229.0 million, compared to net sales in the three months ended March 29, 2009 of $427.4 million. The acquisition of Birds Eye Foods, Inc. resulted in $243.0 million of increased net sales. Net sales for all other businesses decreased $14.0 million, as a result of a decrease in shipments of $11.9 million and a $2.1 million increase in aggregate trade marketing and consumer coupon redemption expenses.

Birds Eye Frozen Division: Shipments in the three months ended March 28, 2010 were $450.0 million, an increase of $239.1 million. The acquisition of Birds Eye Foods, Inc. resulted in $244.5 million of increased shipments. All other businesses decreased $5.4 million, and was mainly driven by decrease in sales in our Swanson dinners brand, partially offset by increased sales in our Aunt Jemima brand. For the remaining businesses, aggregate trade and consumer coupon redemption expenses and slotting expenses decreased $2.5 million in the three months ended March 28, 2010. As a result, the remaining businesses net sales decreased $2.9 million, or 2.0%, for the three months ended March 28, 2010.

Duncan Hines Grocery Division: Shipments in the three months ended March 28, 2010 were $299.8 million, an increase of $40.1 million. The acquisition of Birds Eye Foods, Inc. resulted in $33.7 million of increased shipments. All other businesses increased $6.4 million, due to increases in sales of our Vlasic and Duncan Hines brands. For the remaining businesses, aggregate trade marketing and consumer coupon redemption expenses and slotting expenses increased $3.7 million. As a result, the remaining businesses net sales increased $2.7 million, or 1.4%, for the three months ended March 28, 2010.

Specialty Foods Division: Shipments in the three months ended March 28, 2010 were $115.6 million, an increase of $25.3 million. The acquisition of Birds Eye Foods, Inc. resulted in $38.2 million of increased shipments. All other businesses decreased $12.9 million, principally in our private label businesses, in line with our strategic initiative to de-emphasize lower margin foodservice and private label products. For the remaining businesses, aggregate trade marketing and consumer coupon redemption expenses increased $0.9 million. As a result, the remaining businesses net sales decreased $13.8 million, or 16.3%, for the three months ended March 28, 2010.

Gross profit. Gross profit was $155.7 million, or 23.7% of net sales in the three months ended March 28, 2010, versus gross profit of $87.4 million, or 20.4% of net sales in the three months ended March 29, 2009. The acquisition of Birds Eye Foods, Inc. resulted in $52.2 million of gross profit. Included in the gross profit of Birds Eye Foods, Inc. was a $17.3 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 three months ended March 28, 2010 was $103.5 million, or 25.0% of net sales, a 4.6% percentage point increase versus the remaining businesses gross profit for the three months ended March 29, 2009 of $87.4 million, or 20.4% of net sales. The principal driver of the increased gross profit as a percent of net sales was lower raw material commodity costs, and to a lesser extent, a lower cost mix, which together increased gross margin by 4.9 percentage points. Additionally, reduced freight and distribution expenses accounted for a 0.6 percentage point improvement. Somewhat offsetting these increases was a higher rate of aggregate trade marketing and consumer coupon redemption expenses that are classified as reductions to net sales. The change in these costs accounted for 0.9 percentage points of lower gross profit in 2010.

Marketing and selling expenses. Marketing and selling expenses were $52.8 million, or 8.0% of net sales, in the three months ended March 28, 2010 compared to $34.4 million, or 8.0% of net sales, in the three months ended March 29, 2009. The acquisition of Birds Eye Foods, Inc. contributed $19.4 million of the increase for the three months ended March 28, 2010. The remaining change, a decrease of $1.0 million, was related to the timing of consumer promotion spending.

Administrative expenses. Administrative expenses were $33.9 million, or 5.2% of net sales, in the three months ended March 28, 2010 compared to $13.5 million, or 3.2% of net sales, in the three months ended March 29, 2009, an increase of $20.4 million. The acquisition and integration of Birds Eye Foods, Inc. resulted in $19.2 million of the increase for the three months ended March 28, 2010, and included charges of $8.7 million for the termination benefits related to the announced closure of the Rochester, N.Y. office and $2.8 million of integration related expenses. Excluding these charges and expenses, administrative expenses were 3.4% of net sales in the three months ended March 28, 2010.

 

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Research and development expenses. Research and development expenses were $2.4 million, or 0.4% of net sales, in the three months ended March 28, 2010 compared with $1.0 million, or 0.2% of net sales, in the three months ended March 29, 2009. The acquisition of Birds Eye Foods, Inc. contributed $1.1 million of the increase for the three months ended March 28, 2010.

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

 

		Three Months Ended
In Thousands		March 28, 2010			March 29, 2009
Other expense (income), net consists of:
Amortization of intangibles/other assets		$	4,291		$	4,197
Birds Eye Acquisition transaction costs			232			—
Total other expense (income), net		$	4,523		$	4,197

Amortization was $4.3 million in the three months ended March 28, 2010 as compared to $4.2 million in the three months ended March 29, 2009, including $1.0 million of amortization expense related to Birds Eye Foods, Inc. for the three months ended March 28, 2010.

Earnings before interest and taxes. Earnings before interest and taxes (EBIT) increased $27.8 million to $62.1 million in the three months ended March 28, 2010 from $34.3 million in EBIT in the three months ended March 29, 2009. The acquisition of Birds Eye Foods, Inc. contributed $14.3 million of EBIT for the three months ended March 28, 2010. The remaining increase in EBIT resulted from a $7.1 million increase in the Birds Eye Frozen Division, a $6.5 million increase in the Duncan Hines Grocery Division, a $4.3 million increase in the Specialty Foods Division, partially offset by a $4.3 million increase in unallocated corporate expenses. Included in the unallocated corporate expenses for the three months ended March 28, 2010 are integration and transaction costs associated with the acquisition of Birds Eye Foods, Inc. of $3.0 million.

Birds Eye Frozen Division: EBIT increased by $20.3 million in the three months ended March 28, 2010, to $29.4 million from $9.1 million in the three months ended March 29, 2009. The acquisition of Birds Eye Foods, Inc. contributed $13.2 million of EBIT for the three months ended March 28, 2010. The remaining increase of $7.1 million was principally driven by lower raw material commodity costs and to a lesser extent reduced freight and distribution expenses. In addition, advertising expense was $1.2 million lower, principally driven by our Swanson and Aunt Jemima brands. These increases to EBIT were partially offset by a 2.0% decrease in net sales, principally driven by our Swanson dinners brand.

Duncan Hines Grocery Division: EBIT increased by $8.5 million in the three months ended March 28, 2010, to $36.9 million from $28.4 million in the three months ended March 29, 2009. The acquisition of Birds Eye Foods, Inc. contributed $2.0 million of EBIT for the three months ended March 28, 2010. The remaining increase of $6.5 million was principally driven by lower raw material commodity costs and to a lesser extent reduced freight and distribution expenses. In addition, net sales increased 1.4%, principally due to increased sales in our Vlasic pickles brand. These increases to EBIT were partially offset by increased advertising expense of $1.3 million, principally in our Duncan Hines brand.

Specialty Foods Division: EBIT increased by $5.1 million in the three months ended March 28, 2010, to $5.5 million from $0.4 million in the three months ended March 29, 2009. The acquisition of Birds Eye Foods, Inc. contributed $0.8 million of EBIT for the three months ended March 28, 2010. The remaining increase of $4.3 million was principally driven by lower raw material commodity costs, a lower cost mix, and to a lesser extent reduced freight and distribution expenses. These increases to EBIT were partially offset by a 16.3% decrease in net sales, in line with our strategic initiative to de-emphasize lower margin foodservice and private label products.

Interest expense, net. Interest expense, net was $55.1 million in the three months ended March 28, 2010, compared to $29.6 million in the three months ended March 29, 2009, principally related to borrowings to fund the Birds Eye Foods, Inc. acquisition as detailed below.

 

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Included in interest expense, net, was $1.0 million and $1.3 million for the three months ended March 28, 2010 and the three months ended March 29, 2009 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-designed for swap accounting at the time of LBSF’s bankruptcy filing. At that time of de-designation, the cumulative mark to market adjustment was $11.5 million. As of March 28, 2010, the remaining unamortized balance is $4.8 million.

Excluding the impact of the item in the previous paragraph, the increase in interest expense, net, was $25.8 million, of which $16.4 million was attributable to higher bank debt interest principally related to the new Tranche C Term Loan borrowings to partially fund the Birds Eye Acquisition, somewhat offset by lower debt levels on the existing term loans and lower average revolver borrowings, $6.9 million of higher bond debt levels which also partially funded the Birds Eye Foods, Inc. acquisition, $2.4 million of higher amortization of debt issue costs, and $0.1 million of other items. Included in the interest expense, net, amount was $4.4 million and $3.5 million for the three months ended March 28, 2010 and the three months ended March 29, 2009 respectively, recorded from losses on interest rate swap agreements, a net change of $0.9 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, excluding the Accumulated other comprehensive (loss) income (“AOCI”) portion, are recorded as an adjustment to interest expense.

Provision for income taxes. The effective tax rate was 43.6 % in the three months ended March 28, 2010, compared to 144.5% in the three months ended March 29, 2009. The effective rate difference is primarily due to the change in assessment of the realization of deferred tax assets. For the three months ended March 28, 2010 we maintained a valuation allowance for certain state net operating loss carryovers, state tax credit carryovers, and foreign loss carryovers. For the three-month period ended March 29, 2009 we maintained a full valuation allowance against net deferred tax assets excluding indefinite lived intangible assets. See Note 15 of the Consolidated Financial Statements for Income Taxes.

Under Internal Revenue Code Section 382, we are 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.

 

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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 Facility.

Statements of cash flows for the three months ended March 28, 2010 compared to three months ended March 29, 2009

Cash flows in the three months ended March 28, 2010 were impacted by the Birds Eye Acquisition which occurred on December 23, 2009. Net cash provided by operating activities was $102.2 million in the three months ended March 28, 2010 and was the result of net earnings excluding non-cash charges of $27.9 million and a decrease in working capital of $74.3 million. Net earnings was reduced and the decrease in working capital was made larger by the following items: a $17.3 million charge related to the write up of Birds Eye inventories to fair value at the date of acquisitions, a $8.7 million termination benefits charge related to the announced closing of the Rochester, NY office and $2.5 million in acquisition integration charges. Excluding the impact of those items, working capital decreased by $45.8 million principally driven by the seasonal sell-down of inventories of $53.8 million, somewhat offset by the related increase in accounts receivable of $35.8 million, higher accrued interest of $24.4 million due to timing of semi-annual bond interest payments, and higher accrued income taxes of $6.0 million.

Net cash provided by operating activities was $46.1 million for the three months ended March 29, 2009 and was the result of net earnings, excluding non-cash charges and credits, of $24.2 million and a decrease in working capital of $21.9 million. The decrease in working capital was primarily the result of a $24.0 million decrease in inventories that was due to the sell-down of the seasonal build from December 2008 and a $17.1 million seasonal increase in accounts payable. The decrease in inventories and increase in accounts payable were offset by a $22.7 million increase in accounts receivable that related to higher sales as well as the timing of when those sales occurred. All other working capital accounts generated $3.6 million in cash.

Net cash used in investing activities was $14.5 million and $12.9 million for the three months ended March 28, 2010 and March 29, 2009, respectively, and related entirely to capital expenditures.

Net cash used by financing activities was $35.2 million during the three months ended March 28, 2010. The usage primarily related to the March 2010 $27.0 million “Excess Cash Flow” payment against our term loans as required by the Senior Secured Credit Facility. We also made the January 2010 quarterly payment of $3.1 million on the term loan and reduced bank overdrafts by $5.1 million. Net cash used by financing activities was $29.3 million during the three months ended March 29, 2009. The usage primarily related to $26.0 million in net repayments of our revolving credit facility and $3.1 million in repayments of the term loan.

The net of all activities resulted in an increase in cash of $52.6 million during the three months ended March 28, 2010 and $3.9 million during the three months ended March 29, 2009.

 

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Debt

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 March 28, 2010 and December 27, 2009.

The total amount of the Term Loans and the Tranche C Term Loans that were owed to affiliates of the Blackstone Group as of March 28, 2010 and December 27, 2009, was $111.2 million and $109.2 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 three months ended March 28, 2010 and March 29, 2009, the weighted average interest rate on the term loan was 4.87% and 3.33%, respectively. For the three months ended March 29, 2009, the weighted average interest rate on the Revolving Credit Facility was and 3.29%. As of March 28, 2010 and March 29, 2009, the Eurodollar interest rate on the term loan facility was 4.78% and 3.25%, respectively.

 

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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 $50.0 million as of March 24, 2010 (previously $25.0 million). As of March 28, 2010 and December 27, 2009, we had utilized $24.8 million and $22.0 million, respectively of the Revolving Credit Facility for letters of credit. As of March 28, 2010, were no borrowings under the Revolving Credit Facility, therefore, of the $150.0 million Revolving Credit Facility available, we had an unused balance of $125.2 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 $128.0 million available for future borrowing and letters of credit. The remaining amount that can be used for letters of credit as of March 28, 2010 and December 27, 2009 was $25.2 million and $3.0 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 instead had to deposit cash collateral for that amount. The cash collateral deposit also existed at March 28, 2010. Total letters of credit as of March 28, 2010 and December 27, 2009 were $34.0 million and $31.2 million, respectively.

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 March 28, 2010 are no payment in 2010, $2.5 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 no payment in 2010, $7.2 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, 2009, 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 17 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.

 

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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 1^st 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	%

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 March 28, 2010, is as follows:

 

(million $)		March 28, 2010
Issue		Recorded Amount			Fair Value
Senior Secured Credit Facility - Term Loans		$	1,199.4		$	1,157.4
Senior Secured Credit Facility - Tranche C Term Loans			842.3			850.7
9.25% Senior Notes			625.0			645.3
10.625% Senior Subordinated Notes			199.0			211.0
		$	2,865.7		$	2,864.4

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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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.

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.

 

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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.

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 earnings (loss) to EBITDA and Consolidated EBITDA for the three month periods ended March 28, 2010 and March 29, 2009 and the year ended December 27, 2009. The terms and related calculations are defined in the Senior Secured Credit Facility and the indentures governing the Senior Notes and Senior Subordinated Notes.

 

		Three Months Ended March 28, 2010			Three Months Ended March 29, 2009				Year Ended December 27, 2009
Net earnings (loss)		$	3,930		$	(2,100	)		$	302,603
Interest expense, net			55,124			29,606				121,078
Income tax expense (benefit)			3,040			6,818				(277,723	)
Depreciation and amortization expense			19,879			14,587				65,468
EBITDA (unaudited)		$	81,973		$	48,911			$	211,426
Acquired EBITDA - Birds Eye Acquisition (1)			—			34,841				142,268
Non-cash items (a)			17,519			924				4,738
Non-recurring items (b)			13,454			512				29,835
Other adjustment items (c)			3,905			9,833				26,673
Net cost savings projected to be realized as a result of initiatives taken (d)			10,610			11,474				57,188
Consolidated EBITDA (unaudited)		$	127,461		$	106,495			$	472,128
Last twelve months Consolidated EBITDA (unaudited)		$	493,094

 

(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.

 

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

 

		Three Months Ended March 28, 2010				Three Months Ended March 29, 2009			Year Ended December 27, 2009
Non-cash compensation charges (1)		$	205			$	227		$	3,190
Unrealized losses or (gains) resulting from hedging activities (2)			(10	)			697			(277	)
Impairment charges or asset write-offs (3)			—				—			1,300
Effects of adjustments related to the application of purchase accounting (4)			17,324				—			525
Total non-cash items		$	17,519			$	924		$	4,738

 

(1)	For fiscal 2009 and the three months ended March 28, 2010 and March 29, 2009, represents non-cash compensation charges related to the granting of equity awards.

 

(2)	For fiscal 2009 and the three months ended March 28, 2010 and March 29, 2009, represents non-cash gains and losses resulting from mark-to-market adjustments of obligations under natural gas and diesel fuel contracts for 2009 and 2010, and heating oil contracts for 2009 only.

 

(3)	For fiscal 2009, represents an impairment charge for the Swanson tradename.

 

(4)	For fiscal 2009 and the three months ended March 28, 2010 represents expense related to the write-up to fair market value of inventories acquired as a result of the Birds Eye Acquisition.

 

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

 

		Three Months Ended March 28, 2010			Three Months Ended March 29, 2009			Year Ended December 27, 2009
Expenses in connection with an acquisition or other non-recurring merger costs (1)		$	232		$	218		$	25,238
Restructuring charges, integration costs and other business optimization expenses (2)			12,274			259			986
Employee severance and recruiting (3)			948			35			3,611
Total non-recurring items		$	13,454		$	512		$	29,835

 

(1)	For fiscal 2009 and the three months ended March 28, 2010 and March 29, 2009, primarily represents costs related to the Birds Eye Acquisition as well as other expenses related to due diligence investigations.

 

(2)

For the three months ended March 28, 2010, primarily represents termination benefits related to the announced closing of the Rochester, NY office ($8,733) and integration costs related to the Birds Eye Acquisition. For fiscal 2009 and March 29, 2009, represents consultant expense incurred to execute yield and labor savings in our plants.

 

(3)	For fiscal year 2009, principally represents severance and recruiting costs related to the change in the CEO. For the three months ended March 28, 2010 and March 29, 2009, represents severance costs paid, or to be paid, to terminated employees.

 

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

 

		Three Months Ended March 28, 2010			Three Months Ended March 29, 2009			Year Ended December 27, 2009
Management, monitoring, consulting and advisory fees (1)		$	1,180		$	644		$	2,540
Variable product contribution principally from Steamfresh complete bagged meals no longer being offered (2)			2,725			9,189			24,133
Total other adjustments		$	3,905		$	9,833		$	26,673

 

(1)	For fiscal 2009 and the three months ended March 28, 2010 and March 29, 2009, represents management/advisory fees and expenses paid to Blackstone.

 

(2)

For fiscal 2009 and the three months ended March 28, 2010 and March 29, 2009, 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.

 

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

 

		Three Months Ended March 28, 2010			Three Months Ended March 29, 2009			Year Ended December 27, 2009
Productivity initiatives in our manufacturing facilities, freight and distribution systems and purchasing programs (1)		$	50		$	224		$	12,188
Estimated net cost savings associated with the Birds Eye Acquisition (2)			10,560			11,250			45,000
Total net cost savings projected to be realized as a result of initiatives taken		$	10,610		$	11,474		$	57,188

 

(1)

For fiscal 2009 and the three months ended March 28, 2010 and March 29, 2009, 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)

For fiscal 2009 and the three months ended March 28, 2010 and March 29, 2009, 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 less what has been realized in the first quarter.

Our covenant requirements and actual ratios for the twelve months ended March 28, 2010 are as follows:

 

		Covenant Requirement		Actual Ratio
Senior Secured Credit Facility
Senior Secured Leverage Ratio (1)		5.00:1		3.90
Total Leverage Ratio (2)		Not applicable		5.58
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		2.46

 

(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 and to date in 2010. Although we have no such expectation, severe increases in inflation could have an adverse impact on our business, financial condition and results of operations.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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 adopted this guidance in the first quarter of 2010 and it did not have a material impact on our consolidated financial position or results of operations.

In January of 2010, the FASB updated the authoritative guidance for fair value disclosure. The updated guidance requires new disclosures for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and activity within Level 3 of the fair value hierarchy. The update provides amendments to the level of disaggregation that an entity should provide in each class of assets and liabilities, as well as disclosures about the inputs and valuation techniques used to measure fair value. The updated guidance is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted this guidance in the first quarter of 2010 and it did not have a material impact on our consolidated financial position or results of operations.

 

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ITEM 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 March 28, 2010 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

945.9 million

1.43% - 3.33%

USD-LIBOR-BBA

Oct 2008 - Mar 2009

Jan 2011 - July 2012

Interest Rate Swaps with Floors

4

—  (1)

2.96% - 3.58%

USD-LIBOR-BBA

Jan 2010

Jan 2012 - Jul 2012

Interest Rate Caps

2

800.0 million

2.50%

USD-LIBOR-BBA

Dec 2009

Jan 2011

 

(1)	Interest rate swaps with floors are hedging the same debt as the interest rate caps and become effective after the interest rate caps mature. At that point, in January 2011 they will have a notional value of $300.0 million.

 

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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 three months ended March 28, 2010 and March 29, 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 three months ended March 28, 2010 and March 29, 2009.

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 three months ended March 28, 2010, $1.0 million was reclassified as an increase to Interest expense relating to the terminated hedges. For the three months ended March 29, 2009, $1.3 million was reclassified as an increase to Interest expense relating to the terminated hedges. During the next twelve months, we estimate that an additional $18.7 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 March 28, 2010, 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

39

$57.3 million CAD

$53.0 million USD

1.038-1.177

May 2009 - Mar 2010

Apr 2010 - Dec 2011

CAD Collar

9

$9.0 million CAD

$8.0 million USD

1.13

5/1/2009

Apr 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 gain of less than $0.1 million in the three months ended March 28, 2010. No hedge ineffectiveness on foreign exchange cash flow hedges was recognized in the three months ended March 29, 2009.

 

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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 March 28, 2010, 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		3		366,497 MMBTU’s		$5.20-$6.05 per MMBTU		Mar 2009 - Feb 2010		Apr 2010 - Oct 2010
Diesel Fuel Swap		3		4,391,947 Gallons		$2.46 - $2.96 per Gallon		Feb 2009 - Mar 2010		Jun 2010 - Dec 2010

 

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The table below presents the fair value of the our derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of March 28, 2010 and December 27, 2009.

 

		Tabular Disclosure of Fair Values of Derivative Instruments
		Asset Derivatives					Liability Derivatives
		Balance Sheet Location		Fair Value As of March 28, 2010			Balance Sheet Location		Fair Value As of March 28, 2010
Derivatives designated as hedging instruments
Interest Rate Contracts		Other current assets		$	—		Accrued liabilities		$	3.2
					—		Other long-term liabilities			24.0
Foreign Exchange Contracts					—		Accrued liabilities			2.8
					—		Other long-term liabilities			0.2
Total derivatives designated as hedging instruments				$	—				$	30.2
Derivatives not designated as hedging instruments
Natural Gas Contracts				$	—		Accrued liabilities		$	0.4
Diesel Fuel Contracts		Other current assets			1.2					—
Total derivatives not designated as hedging instruments				$	1.2				$	0.4
		Balance Sheet Location		Fair Value As of December 27, 2009			Balance Sheet Location		Fair Value As of December 27, 2009
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				$	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				$	0.9				$	0.1

 

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The table below present the effect of our derivative financial instruments on the Consolidated Statements of Operations and Accumulated other comprehensive (loss) income as of the three months ending March 28, 2010 and March 29, 2009.

Tabular Disclosure of the Effect of Derivative Instruments

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		$	(10.6	)		Interest expense		$	(5.4	)		Interest expense		$	—
Foreign Exchange Contracts			(1.1	)		Cost of products sold			(0.6	)		Cost of products sold			—
Three months ended March 28, 2010		$	(11.7	)				$	(6.0	)				$	—
Interest Rate Contracts		$	(8.6	)		Interest expense		$	(4.8	)		Interest expense		$	—
Foreign Exchange Contracts			0.4			Cost of products sold			1.1			Cost of products sold			—
Three months ended March 29, 2009		$	(8.2	)				$	(3.7	)				$	—

 

Derivatives Not Designated as Hedging Instruments		Recognized in Earnings on:		Recognized in Earnings on Derivative
Natural Gas Contracts		Cost of products sold		$	(0.4	)
Diesel Contracts		Cost of products sold			0.3
Three months ended March 28, 2010				$	(0.1	)
Natural Gas Contracts		Cost of products sold		$	(1.1	)
Heating Oil Swaps		Cost of products sold			—
Three months ended March 29, 2009				$	(1.1	)

 

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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 March 28, 2010, the fair value of interest rate contracts in a net liability position related to these agreements was $27.2 million, which includes accrued interest of $1.3 million but excludes any adjustment for nonperformance risk of $0.9 million. For the same counterparty, the fair value of foreign exchange derivative contracts in a net liability position related to these agreements was $3.1 million which excludes any adjustment for nonperformance risk of $0.1 million. For the same counterparty, the fair value of natural gas contracts in a net liability position related to these agreements was $0.4 million. For the same counterparty, the fair value of diesel contracts in a net asset position related to these agreements was $0.7 million. If we breached any of these provisions, we could be required to settle our obligations under the agreements at their termination value of $30.0 million. As of March 28, 2010, we had not posted any collateral related to these agreements. As of December 27, 2009, the fair value of interest rate contracts 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 contracts in a net liability position related to these agreements was $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 had 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 March 28, 2010, the fair value of interest rate contracts in a net liability position related to these agreements was $0.9 million, which excludes any adjustment for nonperformance risk of $0.1 million. As of December 27, 2009, the fair value of interest rate contracts in a net liability position related to these agreements was $0.1 million, which does not include any adjustment for nonperformance risk.

 

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ITEM 4:

CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in our reports that we file or submit under the Exchange Act (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, with the participation of our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 28, 2010. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective at a level of reasonable assurance.

In addition, there was no change in our internal control over financial reporting (as defined in Rule 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended March 28, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1:

LEGAL PROCEEDINGS

There have been no material changes.

 

ITEM 1A:

RISK FACTORS

There have been no material changes from risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 27, 2009.

 

ITEM 2:

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

 

ITEM 3:

DEFAULTS UPON SENIOR SECURITIES

None

 

ITEM 4:

RESERVED TO THE NEW VOTING REPORTING RULES

None

 

ITEM 5:

OTHER INFORMATION

None

 

ITEM 6:

EXHIBITS

 

Exhibit Number		Description of exhibit
2.1		Agreement and Plan of Merger, dated as of February 10, 2007, by and among Crunch Holding Corp., Peak Holdings LLC and Peak Acquisition Corp. (previously filed as Exhibit 2.1 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
2.2		Agreement and Plan of Reorganization and Merger, by and between Aurora Foods Inc. and Crunch Equity Holding, LLC, dated as of November 25, 2003 (previously filed as Exhibit 2.1 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference).
2.3		Amendment No. 1, dated January 8, 2004, to the Agreement and Plan of Reorganization and Merger, by and between Aurora Foods Inc. and Crunch Equity Holding, LLC, dated as of November 25, 2003 (previously filed as Exhibit 2.2 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference).
2.4		Agreement and Plan of Merger, dated March 19, 2004, by and between Aurora Foods, Inc. and Pinnacle Foods Holding Corporation (previously filed as Exhibit 2.3 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference).
2.5		Asset Purchase Agreement, dated March 1, 2006, by and between The Dial Corporation and Pinnacle Foods Groups Inc. (previously filed as Exhibit 10.1 to the Current Report on Form 8-K of Pinnacle Foods Group Inc. filed with the SEC on March 1, 2006 (Commission File Number: 333-118390), and incorporated herein by reference).
2.6		Stock Purchase Agreement, dated November 18, 2009, by and between Birds Eye Holdings, LLC, Birds Eye Foods, Inc. and Pinnacle Foods Group LLC (previously filed as Exhibit 2.1 to the Current Report on Form 8-K of Pinnacle Foods Finance LLC filed with the SEC on November 24, 2009 (Commission File Number: 333-118390), and incorporated herein by reference).

 

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3.1		Pinnacle Foods Finance LLC Certificate of Formation (previously filed as Exhibit 3.1 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
3.2		Pinnacle Foods Finance LLC Amended and Restated Limited Liability Company Agreement, dated as of April 2, 2007 (previously filed as Exhibit 3.2 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
3.3		Pinnacle Foods Finance Corp. Certificate of Incorporation (previously filed as Exhibit 3.3 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
3.4		Pinnacle Foods Finance Corp. Bylaws (previously filed as Exhibit 3.4 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
3.5		Pinnacle Foods Group LLC Certificate of Formation (previously filed as Exhibit 3.5 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
3.6		Pinnacle Foods Group LLC Limited Liability Company Agreement (previously filed as Exhibit 3.6 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
3.7		Pinnacle Foods International Corp. Certificate of Incorporation. (previously filed as Exhibit 3.7 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
3.8		Pinnacle Foods International Corp. Bylaws. (previously filed as Exhibit 3.8 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
3.9		State of Delaware Certificate of Conversion, dated September 25, 2007, converting Pinnacle Foods Group Inc. from a Corporation to a Limited Liability Company(previously filed as Exhibit 3.9 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
4.1		Senior Notes Indenture, dated as of April 2, 2007, among the Issuers, the Guarantors and the Trustee (previously filed as Exhibit 4.1 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
4.2		Senior Subordinated Notes Indenture, dated as of April 2, 2007, among the Issuers, the Guarantors and the Trustee (previously filed as Exhibit 4.2 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
4.3		Registrations Rights Agreement, dated as of April 2, 2007, among the Issuers, the Guarantors and Lehman Brothers Inc. and Goldman, Sachs & Co. (previously filed as Exhibit 4.3 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
4.4		Form of Rule 144A Global Note, 9.25% Senior Notes due 2015 (previously filed as Exhibit 4.4 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
4.5		Form of Regulation S Global Note, 9.25% Senior Notes due 2015 (previously filed as Exhibit 4.5 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

 

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4.6		Form of Rule 144A Global Note, 10.625% Senior Subordinated Notes due 2017 (previously filed as Exhibit 4.6 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
4.7		Form of Regulation S Global Note, 10.625% Senior Subordinated Notes due 2017 (previously filed as Exhibit 4.7 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
4.8		Credit Agreement, dated as of April 2, 2007, among Peak Finance LLC (to be merged with and into Pinnacle Foods Finance LLC), Peak Finance Holdings LLC, Lehman Commercial Paper Inc., Goldman Sachs Credit Partners L.P. and other lenders party hereto (previously filed as Exhibit 4.8 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
4.9		Security Agreement, dated as of April 2, 2007, among Peak Finance LLC (to be merged with and into Pinnacle Foods Finance LLC), Peak Finance Holdings LLC, Certain Subsidiaries of Borrower and Holdings identified herein and Lehman Commercial Paper Inc. (previously filed as Exhibit 4.9 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
4.10		Guaranty, dated as of April 2, 2007, among Peak Finance Holdings LLC, Certain Subsidiaries of Borrower and Holdings identified herein and Lehman Commercial Paper Inc. (previously filed as Exhibit 4.10 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
4.11		Intellectual Property Security Agreement, dated as of April 2, 2007, among Peak Finance LLC (to be merged with and into Pinnacle Foods Finance LLC), Peak Finance Holdings LLC, Certain Subsidiaries of Borrower and Holdings identified herein and Lehman Commercial Paper Inc. (previously filed as Exhibit 4.11 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
4.12		Supplemental Senior Notes Indenture, dated as of November 18, 2009, by and among Birds Eye Holdings, Inc., Birds Eye Group, Inc., Kennedy Endeavors Incorporated, Seasonal Employers, Inc., BEMSA Holding, Inc., GLK Holdings, Inc., GLK, LLC, Rochester Holdco, LLC and Wilmington Trust Company, (previously filed as Exhibit 4.1 to the Current Report on Form 8-k of Pinnacle Foods Finance LLC filed with the SEC on December 24, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
4.13		Form of 9  1/4% Senior Notes due 2015 (previously filed as Exhibit 4.2 to the Current Report on Form 8-K of Pinnacle Foods Finance LLC filed with the SEC on December 24, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
4.14		Registrations Rights Agreement, dated as of December 23, 2009, by and among Pinnacle Foods Finance LLC, Pinnacle Foods Finance Corp., the guarantors and Credit Suisse Securities (USA) LLC, Banc of America Securities LLC and Barclays Capital Inc. as the representatives of the initial purchasers (previously filed as Exhibit 4.3 to the Current Report on Form 8-K of Pinnacle Foods Finance LLC filed with the SEC on December 24, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.1		Debt commitment letter entered into by Pinnacle Foods Finance LLC with Bank of America, N.A., Banc of America Bridge LLC, Banc of America Securities LLC, Barclays Capital, the investment banking division of Barclays Bank PLC, Credit Suisse AG, Credit Suisse Securities (USA) LLC, HSBC Bank USA, National Association, HSBC Securities (USA) Inc., MIHI LLC and Macquarie Capital (USA) Inc., dated November 18, 2009 (previously filed as Exhibit 10.1 to the Current Report on Form 8-K of Pinnacle Foods Finance LLC filed with the SEC on November 24, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.3+		Employment Agreement, dated April 2, 2007 (Jeffrey P. Ansell) (previously filed as Exhibit 10.3 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

 

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10.4+		Employment Agreement, dated April 2, 2007 (Craig Steeneck) (previously filed as Exhibit 10.4 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
10.5+		Director Service Agreement, dated April 2, 2007 (Roger Deromedi) (previously filed as Exhibit 10.5 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
10.6		Transaction and Advisory Fee Agreement, dated as of April 2, 2007, between Peak Finance LLC and Blackstone Management Partners V L.L.C. (previously filed as Exhibit 10.6 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
10.7		Trademark License Agreement by and between The Dial Corporation and Conagra, Inc., dated July 1, 1995 (previously filed as Exhibit 10.33 to the Annual Report on Form 10-K of Pinnacle Foods Group Inc. for the fiscal year ended December 25, 2005 (Commission File Number: 333-118390), and incorporated herein by reference).
10.8		Tax Sharing Agreement, dated as of November 25, 2003, by and among Crunch Holding Corp., Pinnacle Foods Holding Corporation, Pinnacle Foods Corporation, Pinnacle Foods Management Corporation, Pinnacle Foods Brands Corporation, PF Sales (N. Central Region) Corp., PF Sales, LLC, PF Distribution, LLC, PF Standards Corporation, Pinnacle Foods International Corp., Peak Finance Holdings LLC, Pinnacle Foods Finance Corp., Pinnacle Foods Finance LLC and Pinnacle Foods Group LLC (previously filed as Exhibit 10.8 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
10.9		Lease, dated May 23, 2001, between Brandywine Operating Partnership, L.P. and Pinnacle Foods Corporation (Cherry Hill, New Jersey) (previously filed as Exhibit 10.25 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference).
10.10		Lease, dated August 10, 2001, between 485 Properties, LLC and Pinnacle Foods Corporation (Mountain Lakes, New Jersey); Amendment No. 1, dated November 23, 2001; Amendment No. 2, dated October 16, 2003 (previously filed as Exhibit 10.26 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference).
10.11		Swanson Trademark License Agreement (U.S.) by and between CSC Brands, Inc. and Vlasic International Brands Inc., dated as of March 24, 1998 (previously filed as Exhibit 10.27 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-1183900), and incorporated herein by reference).
10.12		Swanson Trademark License Agreement (Non-U.S.) by and between Campbell Soup Company and Vlasic International Brands Inc., dated as of March 26, 1998 (previously filed as Exhibit 10.28 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference).
10.13		Technology Sharing Agreement by and between Campbell Soup Company and Vlasic Foods International Inc., dated as of March 26, 1998 (previously filed as Exhibit 10.29 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference).
10.14		Amendment to Lease Agreement, dated February 10, 2007 (previously filed as Exhibit 10.1 to the Current Report on Form 8-K of Pinnacle Foods Group Inc. filed with the SEC on February 15, 2007 (Commission File Number: 333-118390), and incorporated herein by reference).
10.15		Securityholders Agreement, dated as of April 2, 2007, among Peak Holdings LLC and the other parties hereto (previously filed as Exhibit 10.15 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

 

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10.16+		Peak Holdings LLC 2007 Unit Plan, effective as of April 2, 2007 (previously filed as Exhibit 10.16 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
10.17+		Peak Holdings LLC Form of Award Management Unit Subscription Agreement (previously filed as Exhibit 10.17 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
10.18		Securityholders Agreement, dated as of September 21, 2007 among Crunch Holding Corp. and the other parties hereto (previously filed as Exhibit 10.18 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
10.19+		Crunch Holding Corp. 2007 Stock Incentive Plan, effective as of August 8, 2007 (previously filed as Exhibit 10.19 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
10.20+		Crunch Holding Corp. 2007 Stock Incentive Plan Form of Nonqualified Stock Option Agreement (previously filed as Exhibit 10.20 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
10.21		Trademark License Agreement, dated as of July 9, 1996, by and between The Quaker Oats Company, The Quaker Oats Company of Canada Limited and Van de Kamp’s, Inc. (previously filed as Exhibit 10.21 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).
10.22+		Enhanced Target Annual Bonus letter, dated June 11, 2007 (Craig Steeneck) (previously filed as Exhibit 10.22 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.23+		Supplemental Peak Holdings LLC Management Unit Subscription Agreement, dated June 11, 2007 (Craig Steeneck) (previously filed as Exhibit 10.23 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.24+		Modification of the Enhanced Target Annual Bonus letter, dated February 27, 2009 (Craig Steeneck) (previously filed as Exhibit 10.24 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.25+		Modification of the Supplemental Peak Holdings LLC Management Unit Subscription Agreement, dated February 27, 2009 (Craig Steeneck) (previously filed as Exhibit 10.25 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.26+		Modification of the Peak Holdings LLC Form of Award Management Unit Subscription Agreement (previously filed as Exhibit 10.26 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.27+		Modification of the Crunch Holding Corp. 2007 Stock Incentive Plan Form of Nonqualified Stock Option Agreement (previously filed as Exhibit 10.27 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.28+		Employment offer letter, dated December 11, 2003 (Chris L. Kiser) (previously filed as Exhibit 10.28 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.29+		Severance benefit letter, dated October 7, 2008 (Chris L. Kiser) (previously filed as Exhibit 10.29 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.30+		Employment offer letter dated May 25, 2001 (Lynne M. Misericordia) (previously filed as Exhibit 10.30 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

 

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10.31+		Employment offer letter dated May 25, 2001 (M. Kelley Maggs) (previously filed as Exhibit 10.31 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.32+		Separation Agreement, dated July 31, 2009 (Jeffrey P. Ansell). (previously filed as Exhibit 10.32 to the Quarterly Report on Form 10-Q of Pinnacle Foods Finance LLC filed with the SEC on August 12, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.33+		Employment Agreement, dated July 13, 2009 (Robert J. Gamgort). (previously filed as Exhibit 10.33 to the Quarterly Report on Form 10-Q of Pinnacle Foods Finance LLC filed with the SEC on August 12, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.34+		Peak Holdings LLC Management Unit Subscription Agreement, dated July 13, 2009 (Robert J. Gamgort). (previously filed as Exhibit 10.34 to the Quarterly Report on Form 10-Q of Pinnacle Foods Finance LLC filed with the SEC on August 12, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.35+		Amendment to Director Services Agreement, dated July 31, 2009 (Roger Deromedi). (previously filed as Exhibit 10.35 to the Quarterly Report on Form 10-Q of Pinnacle Foods Finance LLC filed with the SEC on August 12, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.36		Second Amendment to the Credit Agreement, dated December 23, 2009, by and among Pinnacle Foods Finance LLC, Peak Finance Holdings LLC, Barclays Bank PLC, the Revolving Commitment Increase Lenders, the Tranche C Term Lenders and the Guarantors. (previously filed as Exhibit 10.2 to the Current Report on Form 8-K of Pinnacle Foods Finance LLC filed with the SEC on December 24, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.37		Amended and Restated Transaction and Advisory Fee Agreement, dated as of November 18, 2009, between Peak Finance LLC and Blackstone Management Partners V L.L.C. (previously filed as Exhibit 10.1 to the Current Report on Form 8-K of Pinnacle Foods Finance LLC filed with the SEC on December 24, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
10.38		Employment offer letter dated November 24, 2008 (Edward L. Sutter) (previously filed as Exhibit 10.38 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 23, 2010 (Commission File Number: 333-148297), and incorporated herein by reference).
10.39		Employment offer letter dated October 28, 2008 (Sally Genster Robling) (previously filed as Exhibit 10.39 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 23, 2010 (Commission File Number: 333-148297), and incorporated herein by reference).
24.1		Power of Attorney (included in signature page) (previously filed as Exhibit 24.1 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (A)
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (A)

 

+	Identifies exhibits that consist of a management contract or compensatory plan or arrangement.

 

(A)

Pursuant to Commission Release No. 33-8212, this certification will be treated as “accompanying” this Form 10-Q and not “filed” as part of such report for purposes of Section 18 of Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

PINNACLE FOODS FINANCE LLC
By:		/s/ CRAIG STEENECK
Name:		Craig Steeneck
Title:		Executive Vice President and Chief Financial Officer (acting in both his capacity as authorized signatory on behalf of the registrant and as principal financial officer)
Date:		May 12, 2010

 

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