-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OH6RguTyRxDo6/hxlhy8DUFcObbACNqwR1fNwnRa8+vtnLt9eM8pc1UQSJIcFi45 YcVxZOC6YAmEuhBAVEYXXQ== 0000950103-02-001292.txt : 20021204 0000950103-02-001292.hdr.sgml : 20021204 20021204163647 ACCESSION NUMBER: 0000950103-02-001292 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20021204 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEINZ H J CO CENTRAL INDEX KEY: 0000046640 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FROZEN & PRESERVED FRUIT, VEG & FOOD SPECIALTIES [2030] IRS NUMBER: 250542520 STATE OF INCORPORATION: PA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-85064-01 FILM NUMBER: 02848933 BUSINESS ADDRESS: STREET 1: 600 GRANT ST CITY: PITTSBURGH STATE: PA ZIP: 15219 BUSINESS PHONE: 4124565700 MAIL ADDRESS: STREET 1: P O BOX 57 STREET 2: P O BOX 57 CITY: PITTSBURGH STATE: PA ZIP: 15230 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEINZ HJ FINANCE CO CENTRAL INDEX KEY: 0001169077 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FROZEN & PRESERVED FRUIT, VEG & FOOD SPECIALTIES [2030] IRS NUMBER: 820382406 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-85064 FILM NUMBER: 02848932 BUSINESS ADDRESS: STREET 1: 600 GRANT ST CITY: PITTSBURGH STATE: PA ZIP: 15219 BUSINESS PHONE: 4124565700 MAIL ADDRESS: STREET 1: P.O BOX 57 CITY: PITTSBURGH STATE: PA ZIP: 15230-0057 S-4/A 1 nov2502_s4a.txt As filed with the Securities and Exchange Commission on December 4, 2002 Registration No. 333-85064 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- AMENDMENT NO. 1 to FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 H. J. Heinz Finance Company (Exact Name of Registrant as Specified in Its Charter) Delaware 2030 82-0382406 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
600 Grant Street Pittsburgh, Pennsylvania 15219 (412) 456-5700 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ----------------------- Leonard A. Cullo, Jr. President 600 Grant Street Pittsburgh, Pennsylvania 15219 (412) 456-5700 (Name, address, including zip code, and telephone number, including area code, of agent for service) ----------------------- Copies to: Michael E. Hooton, Esq. Sarah J. Beshar, Esq. Associate General Counsel Davis Polk & Wardwell H. J. Heinz Company 450 Lexington Avenue 600 Grant Street New York, New York 10017 Pittsburgh, Pennsylvania 15219 (212) 450-4000 (412) 456-5700 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If the securities being registered on this form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. |_| If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering.|_| If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.|_| ----------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. =============================================================================== State or other jurisdiction of IRS Employer Exact Name of incorporation or Identification Address of Registrant Registrant Guarantor organization Number Guarantor's Executive Offices - -------------------- ---------------- -------------- ----------------------------- H. J. Heinz Company Pennsylvania 25-0542520 600 Grant Street Pittsburgh, Pennsylvania, 15219 (412) 456-5700
EXPLANATORY NOTE This registration statement contains: o a prospectus to be used by H. J. Heinz Finance Company in connection with its exchange offer for its 6.625% Guaranteed Notes Due 2011; and o a prospectus to be used by H. J. Heinz Finance Company in connection with its exchange offer for its 6.00% Guaranteed Notes Due 2012 and its 6.75% Guaranteed Notes Due 2032. 3 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THIS PROSPECTUS IS NOT AN OFFER TO ACQUIRE THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO ACQUIRE THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER, EXCHANGE OR SALE IS NOT PERMITTED. Subject to Completion, dated December 4, 2002 POSPECTUS , 2002 [H. J. Heinz Company LOGO] H. J. Heinz Finance Company Offer to Exchange $750,000,000 6.625% Guaranteed Notes due 2011 for $750,000,000 6.625% New Guaranteed Notes due 2011 unconditionally and irrevocably guaranteed by H. J. Heinz Company ----------------------- We are offering to exchange up to $750,000,000 of our 6.625% guaranteed notes due 2011 (the "New Notes") which will be registered under the Securities Act of 1933, as amended, for up to $750,000,000 of our issued and outstanding 6.625% guaranteed notes due 2011 (the "Old Notes"). We are offering to issue the New Notes to satisfy our obligations contained in the exchange and registration rights agreement we entered into when the Old Notes were sold in transactions in reliance on Rule 144A and Regulation S under the Securities Act. The New Notes are unconditionally and irrevocably guaranteed by H. J. Heinz Company, "Heinz" or the "Guarantor." Concurrently with the offer to exchange the Old Notes for the New Notes, we will conduct an offer to exchange our outstanding 6.00% Guaranteed Notes due 2012 and 6.75% Guaranteed Notes due 2032 for corresponding notes registered under the Securities Act of 1933. The completion of the offer to exchange under this prospectus is not conditioned on the success or completion of the offer to exchange our other notes. Please refer to "The Exchange Offer--Concurrent Exchange Offer" for a further discussion of the offers to exchange. The terms of the New Notes are identical in all material respects to the terms of the Old Notes, except that the transfer restrictions, registration rights and additional interest provisions relating to the Old Notes do not apply to the New Notes. The exchange offer and withdrawal rights will expire at 5:00 p.m., New York City time, on o , 2002 unless extended. You should carefully review the risk factors on page o of this prospectus. ----------------------- To exchange your Old Notes for New Notes of the same series: o You must complete and send the letter of transmittal that accompanies this prospectus to the exchange agent by 5:00 p.m., New York City time, on o , 2002. o If your Old Notes are held in book-entry form at The Depository Trust Company, "DTC," you must instruct DTC, through your signed letter of transmittal, that you want to exchange your Old Notes for New Notes. When the exchange offer closes, your DTC account will be changed to reflect your exchange of Old Notes for New Notes. o You should read the section called "The Exchange Offer" for additional information on how to exchange your Old Notes for New Notes. ----------------------- The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ----------------------- TABLE OF CONTENTS ----------------------- Page ---- Summary........................................................................3 Risk Factors...................................................................8 Where You Can Find More Information...........................................10 Incorporation of Certain Documents by Reference...............................10 No Cash Proceeds..............................................................11 Ratio of Earnings to Fixed Charges............................................11 Overview of Entity Structure, Reorganization and Financial Statement Presentation...................................................12 Heinz Finance Selected Historical Consolidated and Combined Financial Data...........................................................15 Heinz Finance Selected Unaudited Pro Forma Consolidated and Combined Financial Data..................................................17 H. J. Heinz Company...........................................................18 Heinz Selected Consolidated Financial Data....................................18 Heinz Selected Unaudited Pro Forma Consolidated Financial Data................21 Management's Discussion and Analysis of Financial Condition and Results of Operation.................................................22 Business......................................................................41 Related Party Transactions ...................................................49 Management....................................................................50 Description of the New Notes..................................................56 The Exchange Offer............................................................66 Taxation......................................................................74 Plan of Distribution..........................................................75 Notice to Investors...........................................................76 Validity of the New Notes.....................................................76 Experts.......................................................................77 Forward-Looking Statements....................................................77 Index to Consolidated and Combined Financial Statements of H. J. Heinz Finance Company and H. J. Heinz Company.....................F-1 --------------------------- 2 SUMMARY The following summary contains basic information about us, Heinz, the New Notes and this exchange offer. It may not contain all the information that is important to you in making your investment decision. More detailed information appears elsewhere in this prospectus and in our consolidated and combined financial statements and accompanying notes and in Heinz's consolidated financial statements and accompanying notes that we incorporate by reference. "The Exchange Offer" and the "Description of the New Notes" sections of this prospectus contain more detailed information regarding the terms and conditions of the exchange offer and the New Notes. References in this prospectus to the terms "we," "us," "our," "Heinz Finance" or the "Issuer" refer to H. J. Heinz Finance Company and its consolidated subsidiaries and to the terms "Heinz" or the "Guarantor" refer to H. J. Heinz Company. H. J. Heinz Company (The Guarantor) H. J. Heinz Company was incorporated under the laws of the Commonwealth of Pennsylvania on July 27, 1900. In 1905, it succeeded to the business of a partnership operating under the same name that had developed from a food business founded in 1869 at Sharpsburg, Pennsylvania by Henry J. Heinz. The principal products of Heinz include ketchup, condiments and sauces, frozen food, pet food, soups, beans and pasta meals, tuna and other seafood products, infant food and other processed food products. The principal executive offices of Heinz are located at 600 Grant Street, Pittsburgh, Pennsylvania, 15219 (telephone number (412) 456-5700). H. J. Heinz Finance Company (The Issuer) We are engaged in the business of acquiring, holding and financing equity and debt investments in subsidiaries that own and operate the U.S. businesses historically operated by Heinz. Heinz Finance has been, directly or indirectly, a wholly-owned subsidiary of Heinz since 1983 and had no significant operating history until Heinz completed a reorganization of its corporate organization in the United States on May 3, 2001. As a result of the reorganization, all of the U.S. business operations that had historically been conducted by Heinz through its Heinz USA division and eight subsidiary corporations, are now conducted by Heinz Finance. Our principal executive offices are located at 600 Grant Street, Pittsburgh, Pennsylvania, 15219 (telephone number (412) 456-5700). Recent Developments On June 13, 2002, Heinz announced that it will transfer to a wholly-owned subsidiary ("Spinco") certain assets and liabilities, including our U.S. and Heinz's Canadian pet food and pet snacks, our U.S. tuna, U.S. retail private label soup and private label gravy, College Inn broths and our U.S. infant feeding businesses, which in Fiscal Year 2002 together generated approximately $1.4 billion of our annual revenues. The common stock of Spinco will be distributed on a pro rata basis to Heinz's shareholders. Immediately thereafter, Spinco will merge with a wholly- owned subsidiary of Del Monte Foods Company, whereby Spinco will become a wholly-owned subsidiary of Del Monte Foods Company. In connection with the merger, each share of Spinco common stock will be automatically converted into shares of Del Monte common stock that will result in the fully diluted Del Monte common stock at the effective time of the merger to be held approximately 74.5% by Heinz shareholders and approximately 25.5% by the Del Monte shareholders. As a result of the transaction, Heinz Finance will receive from Heinz approximately $1.1 billion in cash that will be used to retire debt. The transaction, which is subject to various conditions, is expected to be completed in late calendar year 2002 or early calendar year 2003. However, we cannot assure you of the timing or that the transaction will be consummated. 3 The Exchange Offer Issuer............................................... H. J. Heinz Finance Company New Notes............................................ Up to $750,000,000 aggregate principal amount of our new 6.625% guaranteed notes due 2011. The Exchange Offer................................... We are offering to issue the New Notes in exchange for a like principal amount of outstanding Old Notes that we issued on July 6, 2001. We are conducting this exchange offer to satisfy our obligations contained in the exchange and registration rights agreement we entered into when we sold the Old Notes in transactions pursuant to Rule 144A and Regulation S under the Securities Act. The Old Notes were subject to transfer restrictions that will not apply to the New Notes so long as you are acquiring the New Notes in the ordinary course of your business, you are not participating in a distribution of the New Notes and you are not an affiliate of ours. Maturity............................................. The New Notes will mature on July 15, 2011. Interest Payment Dates............................... January 15 and July 15 of each year commencing from the most recent date to which interest has been paid on the Old Notes or, if no interest has been paid, from July 6, 2001. Redemption........................................... The Issuer may choose to redeem some or all of the New Notes at any time. If the Issuer chooses to do so, it will mail a notice of redemption to the holders of the New Notes not less than 30 days and not more than 60 days before the redemption occurs. Payment of Additional Amounts........................ The Issuer shall pay all stamp and other duties, if any, which may be imposed by the United States or the United Kingdom or any political subdivision thereof or taxing authority thereof or therein with respect to the issuance, transfer, exchange or conversion of the New Notes. The Issuer will not be required to make any payment with respect to any other tax, assessment or governmental charge imposed by any government or any political subdivision thereof or taxing authority therein. Ranking.............................................. The New Notes will be unsecured and will rank equally with all our other unsecured indebtedness and other obligations. Guarantee............................................ The New Notes will be unconditionally and irrevocably guaranteed by Heinz. No Cash Proceeds..................................... We will not receive any proceeds from the issuance of the New Notes. 4 Form of the New Notes................................ The New Notes will be issued in the form of one or more global securities which will be deposited with, or on behalf of, DTC and registered in the name of Cede & Co., DTC's nominee. Beneficial interests in the global securities will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Governing Law........................................ The New Notes, the guarantee and the indenture will be governed by New York law. Tenders, Expiration Date, Withdrawal................. The exchange offer will expire at 5:00 p.m., New York City time, on o , 2002 unless it is extended. To tender your Old Notes you must follow the detailed procedures described under the heading "The Exchange Offer--Procedures for Tendering" including special procedures for certain beneficial owners and broker- dealers. If you decide to exchange your Old Notes for New Notes, you must acknowledge that you do not intend to engage in and have no arrangement with any person to participate in a distribution of the New Notes. If you decide to tender your Old Notes pursuant to the exchange offer, you may withdraw them at any time prior to 5:00 p.m., New York City time, on the expiration date. Federal Income Tax Consequences...................... Your exchange of Old Notes for New Notes pursuant to the exchange offer will not result in a gain or loss to you. Exchange Agent....................................... Bank One Trust Company is the exchange agent for the exchange offer. Failure to Exchange Your Old Notes................... If you fail to exchange your Old Notes for New Notes in the exchange offer, your Old Notes will continue to be subject to transfer restrictions and you will not have any further registration rights under the exchange and registration rights agreement. Trading Market....................................... To the extent that Old Notes are tendered and accepted in the exchange offer, your ability to sell untendered, and tendered but unaccepted, Old Notes could be adversely affected. There may be no trading market for the Old Notes. There can be no assurance that an active public market for the New Notes will develop or as to the liquidity of any market that may develop for the New Notes, the ability of holders to sell the New Notes, or the price at which holders would be able to sell the New Notes. For more details, see the section called "Notice to Investors." 5 General Indenture Provisions Applicable to the New Notes and the Old Notes Indenture............................................ The New Notes will be issued under the same indenture as the Old Notes. No Limit on Debt..................................... The indenture does not limit the amount of debt that we may issue or provide holders any protection should we be involved in a highly leveraged transaction. Restrictions on Secured Debt......................... If the Guarantor or any Restricted Subsidiary shall after the date of the Indenture incur or guarantee any Debt secured by a Mortgage on any Principal Property of the Guarantor or any Restricted Subsidiary, or on any share of stock or Debt of any Restricted Subsidiary, the Guarantor will secure or cause such Restricted Subsidiary to secure the Notes, equally and ratably with (or, at the option of the Guarantor, prior to) such secured Debt, unless the aggregate amount of all such secured Debt would not exceed 10% of Consolidated Net Assets. These restrictions will not apply in some circumstances. (All terms are defined under "Description of the New Notes - Certain Definitions.") Events of Default.................................... Each of the following is an event of default with respect to the Notes under the indenture: o default in the payment of any installment of interest for 30 days after becoming due; o default in the payment of principal when due; o default in the deposit of any sinking fund payment when due; o default by Heinz Finance or the Guarantor in the performance or breach of any other covenant or warranty in the Notes or the Indenture for 90 days after notice; o certain events of bankruptcy, insolvency or reorganization with respect to Heinz Finance or the Guarantor; or o the Guarantor contests the validity or enforceability of the Guarantee or related obligations.
6 Ratio of Earnings to Fixed Charges(1) Three Months Ended Years Ended --------- ------------------------- -------------------------------------- April 28, April 29, July 31, May 1, 2002 May 2, 2001 May 3, 2000 1999 1998 2002 (52 weeks) (52 weeks) (53 weeks) (52 weeks) (52 weeks) -------- ----------- ----------- ----------- ---------- ---------- H. J. Heinz Company........ 4.48 4.88 2.79 5.83 3.88 5.29 H. J. Heinz Finance Company(2).............. 2.40 3.58 22.36 46.75 49.76 44.04
- ------------------- (1) The ratios of earnings to fixed charges were calculated by dividing earnings by fixed charges. Earnings were calculated by adding income before income taxes, interest expense (including amortization of debt expense and any discount or premium relating to indebtedness), the interest component of rental expense and the amortization of capitalized interest. Fixed charges were calculated by adding interest expense (including amortization of debt expense and any discount or premium relating to indebtedness), capitalized interest and the interest component of rental expense. (2) The ratios of earnings to fixed charges for the periods prior to May 1, 2002 relate to the U.S. Group and are not representative of the expected ratio of earnings to fixed charges for Heinz Finance as debt was not allocated to the U.S. Group prior to the reorganization discussed in this prospectus. 7 RISK FACTORS In addition to the information set forth elsewhere in this prospectus, you should consider carefully the factors set forth below before exchanging your Old Notes for New Notes. Our and Heinz's Business Is Subject to Numerous Risks We produce a broad range of food products and we acquire, hold and finance equity and debt investments in subsidiaries that own and operate the U.S. business of Heinz. Accordingly, the results of operations and financial condition of our business and of the business of Heinz are subject to certain risks and uncertainties, including: o Changes in laws and regulations, including changes in food and drug laws, accounting standards, taxation requirements (including tax rate changes, new tax laws and revised tax law interpretations) and environmental laws in domestic and foreign jurisdictions; o Competitive product and pricing pressures and the ability to gain or maintain share of sales in the global market as a result of actions by competitors and others; o Fluctuations in the cost and availability of raw materials, including tuna, and the ability to maintain favorable supplier arrangements and relationships; o The impact of higher energy costs and other factors on the cost of producing, transporting and distributing products; o The ability to generate sufficient cash flows to support capital expenditures, share repurchase programs, debt repayment and general operating activities; o The inherent risks in the marketplace associated with new product or packaging introductions, including uncertainties about trade and consumer acceptance; o The ability to achieve sales and earnings forecasts, which are based on assumptions about sales volume, product mix and other items; o The ability to integrate acquisitions and joint ventures into existing operations and the availability of new acquisition and joint venture opportunities and the success of divestitures and other business combinations; o The ability to achieve cost savings objectives, including any restructuring programs and our working capital initiative; o The impact of unforeseen economic and political changes in the markets where we compete, such as currency exchange rates (notably with respect to the euro and pound sterling), inflation rates, recession, foreign ownership restrictions and other external factors over which we have no control; o Interest rate fluctuations and other capital market conditions; o The effectiveness of our advertising, marketing and promotional programs; o Weather conditions, which could impact demand for our products and the supply and cost of raw materials; o The impact of e-commerce and e-procurement, supply chain efficiency and cash flow initiatives; 8 o The impact of global industry conditions, including the effect of the economic downturn in the food industry and the food service business in particular; o The ability to maintain our profit margin in the face of a consolidating retail environment; o The ability to offset the reduction in volume and revenue resulting from participation in categories experiencing declining consumption rates; o With respect to the proposed spin-off and merger between our U.S. and Heinz's Canadian pet food and pet snacks, our U.S. tuna, U.S. retail private label soup and gravy, College Inn broth and our U.S. infant feeding businesses, and a wholly-owned subsidiary of Del Monte, the ability to obtain required third party consents and Del Monte shareholders' approval and the success of business integration in a timely and cost effective manner; and o With respect to future dividends on Heinz stock, meeting certain legal requirements at the time of declaration. We Have No Operating History, and Therefore Are Subject to the Risk of Inconsistent Results, Policies and Strategies Prior to May 2001, Heinz Finance was an inactive subsidiary of Heinz and had no relevant operating history. Since May 2001, Heinz Finance has operated the historical U.S. business of Heinz. Although the U.S. business of Heinz consisted of business entities with established operations, these businesses have no operating history as a combined entity. As a result, because the current organizational structure of Heinz Finance and its subsidiaries was created in May 2001, the future results of operations or financial condition of Heinz Finance may vary from the results previously realized by the U.S. business of Heinz, which contained similar constituent businesses. Also, amendments or changes to our bylaws, and changes in our operating policies and strategies, may be made from time to time at the discretion of the board of directors and, in the case of the bylaws, by the holders of capital stock of Heinz Finance entitled to vote generally in the election of directors. We Depend Upon Our Subsidiaries to Service Our Debt We are a holding company and derive all of our operating income from our subsidiaries. Our primary source of cash to pay principal of and interest on the New Notes is from cash distributions, dividends and other payments from our subsidiaries. The payment of dividends by our subsidiaries is subject to the declaration of dividends by those subsidiaries' boards of directors, and our subsidiaries are not obligated to pay dividends. The distribution of cash by H. J. Heinz Company, LP, "Heinz LP," is subject to the discretion of the general partner of Heinz LP (Heinz Management Company, "HMC," a wholly owned subsidiary of the Guarantor). Our subsidiaries' ability to make such payments may also be restricted by, among other things, applicable state laws and other laws and regulations. In addition, our right and the rights of our creditors, including holders of the New Notes, to participate in the assets of any subsidiary upon its liquidation or recapitalization would be subject to the prior claims of such subsidiary's creditors, except to the extent that we may ourselves be a creditor with recognized claims against such subsidiary. An Active Trading Market For Our New Notes May Not Develop and May Affect the Price Received Upon a Sale of the New Notes There is no established trading market for the New Notes since they are a new issue of securities. We do not intend to apply for the listing of any New Notes on a national securities exchange. Accordingly, without an active trading market or exchange listing, it may be difficult to obtain a selling price that would prevail if the New Notes were more widely traded or listed on an exchange. An active public market may never exist for the New Notes and if one develops it may not continue. If an active public market does not develop or continue, your ability to sell the New Notes may be adversely affected. 9 WHERE YOU CAN FIND MORE INFORMATION This prospectus is part of a registration statement on Form S-4 that we have filed with the Securities and Exchange Commission, the "Commission," under the Securities Act of 1933, as amended, the "Securities Act." This prospectus does not contain all of the information set forth in the registration statement. For further information about us and the New Notes, you should refer to the registration statement. This prospectus summarizes material provisions of contracts and other documents to which we refer you. Since this prospectus may not contain all of the information that you may find important, you should review the full text of these documents. We have filed these documents as exhibits to our registration statement. After the effectiveness of the registration statement, we will become subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and will file reports and other information with the Commission. You may read and copy any reports and information statements and other information we file at the public reference facilities of the Securities and Exchange Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain copies of those materials from the Commission by mail at prescribed rates. You should direct requests to Securities and Exchange Commission's Public Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission maintains a website (www.sec.gov) that will contain reports and other information filed by us. In addition, for so long as any of the Old Notes remain outstanding, we have agreed to make available to any holder or purchaser of the Old Notes or the New Notes in connection with any sale thereof the information required by Rule 144A(d) (4) under the Securities Act. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE Heinz is subject to the informational requirements of the Exchange Act. In accordance with the Exchange Act, Heinz files reports, proxy statements and other information with the Commission. Those reports, proxy statements and other information can be inspected and copied at the public reference facilities that the Commission maintains at the above mentioned address. Please call the Commission at 1-800-SEC-0330 for further information on its public reference rooms. Copies of these materials can be obtained at prescribed rates from the Public Reference Section of the Commission at its principal offices referred to above, or over the Internet at the Commission's web site at the above mentioned web address. The following documents filed with the Commission are incorporated by reference in and made a part of this prospectus: Heinz's Annual Report on Form 10-K for the fiscal year ended May 1, 2002, Quarterly Report on Form 10-Q for the three months ended July 31, 2002 and its Current Report on Form 8-K dated June 12, 2002 and August 14, 2002. Any statement contained in a document all or a portion of which is incorporated by reference herein shall be deemed to be modified or superseded for purposes of this prospectus to the extent that a statement contained herein modifies or supersedes such statement. Any statement so modified or superseded, except as so modified or superseded, shall not be deemed to constitute a part of this prospectus. We will provide without charge to each person to whom this prospectus has been delivered, upon such person's written or oral request, a copy of any document referenced in or incorporated by reference into this prospectus. Requests for such copies should be directed to the Corporate Affairs Department, H. J. Heinz Company, P.O. Box 57, Pittsburgh, Pennsylvania 15230-0057; telephone number (412) 456-6000. To obtain timely delivery, you must request the information no later than o, 2002, or five business days prior to the expiration date of the exchange offer if the exchange offer is extended. You should rely only on the information contained in this prospectus or that we have referred you to. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer of the New Notes in any state where 10 the offer is not permitted. You should assume that the information appearing in this prospectus, as well as information Heinz has previously filed with the Commission and are incorporating by reference, is accurate only as of the date on the front cover of this prospectus. Our and Heinz's business, financial condition, results of operations and prospects may have changed since that date. NO CASH PROCEEDS This exchange offer is intended to satisfy certain of our obligations under the exchange and registration rights agreement. We will not receive any proceeds from the issuance of the New Notes and have agreed to pay the expenses of the exchange offer. In consideration for issuing the New Notes as contemplated in the registration statement, of which this prospectus is a part, we will receive in exchange Old Notes in like principal amount. The form and terms of the New Notes are identical in all material respects to the form and terms of the Old Notes, except as otherwise described herein under "The Exchange Offer--Terms of the Exchange Offer." The Old Notes surrendered in exchange for the New Notes will be retired and canceled and cannot be reissued. Accordingly, issuance of the New Notes will not result in any increase in our outstanding debt. The net proceeds of the issuance of the Old Notes were used to retire commercial paper, finance acquisitions and provide funds for our ongoing operations. RATIO OF EARNINGS TO FIXED CHARGES(1) Three Months Ended Years Ended --------- ------------------------- -------------------------------------- April 28, April 29, July 31, May 1, 2002 May 2, 2001 May 3, 2000 1999 1998 2002 (52 weeks) (52 weeks) (53 weeks) (52 weeks) (52 weeks) -------- ----------- ----------- ----------- ---------- ---------- H. J. Heinz Company........ 4.48 4.88 2.79 5.83 3.88 5.29 H. J. Heinz Finance Company(2).............. 2.40 3.58 22.36 46.75 49.76 44.04
- ------------------- (1) The ratios of earnings to fixed charges were calculated by dividing earnings by fixed charges. Earnings were calculated by adding income before income taxes, interest expense (including amortization of debt expense and any discount or premium relating to indebtedness), the interest component of rental expense and the amortization of capitalized interest. Fixed charges were calculated by adding interest expense (including amortization of debt expense and any discount or premium relating to indebtedness), capitalized interest and the interest component of rental expense. (2) The ratios of earnings to fixed charges for the periods prior to May 1, 2002 relate to the U.S. Group and are not representative of the expected ratio of earnings to fixed charges for Heinz Finance as debt was not allocated to the U.S. Group prior to the reorganization discussed in this prospectus. 11 OVERVIEW OF ENTITY STRUCTURE, REORGANIZATION AND FINANCIAL STATEMENT PRESENTATION Reorganization On the first day of Fiscal Year 2002 (May 3, 2001) Heinz reorganized the structure of its U.S. business as follows: o Operations. All of the U.S. treasury and business operations, formerly conducted through eight subsidiaries and a division of Heinz were consolidated into Heinz LP. Heinz Management Company ("HMC"), a wholly-owned subsidiary of Heinz, is the general partner of Heinz LP and holds a 1% partnership interest. The limited partner interests in Heinz LP consist of "Class A" and "Class B" interests as described below under "--Heinz LP." Heinz owns all of the Class A interests. Heinz Finance owns all of the Class B interests. o Treasury. U.S. cash management and treasury activities were transferred to Heinz Finance. On the day of the reorganization, Heinz Finance assumed then outstanding term debt obligations of Heinz in the amount of $2.57 billion and $258 million of the commercial paper obligations of Heinz. Since the reorganization, Heinz Finance has issued term debt and commercial paper in its own name as described under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Financial Position." All of the debt of Heinz Finance is unconditionally guaranteed by Heinz and is included on the consolidated balance sheet of Heinz. On July 6, 2001, Heinz Finance issued $325 million of preferred stock to outside investors. The preferred shares are entitled to elect 25% of the directors of Heinz Finance and, if declared, are entitled to receive dividends at a rate of 6.226% per annum. o Trademarks. Substantially all of the trademarks used in the U.S. businesses (including "Heinz," "StarKist," "Ore-Ida," "Smart Ones," "9-Lives" and "Kibbles 'n Bits"), are owned by Promark International Inc., an indirect subsidiary of Heinz, and are licensed to us. We believe that the reorganization served the following business purposes: o Reduced the number of legal entities conducting active business in the U.S. from nine to two (Heinz LP and HMC), leading to a reduction of accounting, legal, administrative and tax compliance costs. This initiative complements Heinz's previous U.S. consolidation efforts, which over the past three years have included: o consolidation of its frozen businesses into Heinz Frozen Food Company and relocation of the new business to Pittsburgh; o relocation of the StarKist Seafood and Heinz Pet Products divisions to Pittsburgh; and o consolidation of Heinz U.S.A., StarKist, Heinz Pet Products and Heinz Sales Company into Heinz North America. o Consolidated all U.S. trademarks in Promark, supporting the reduction of our state income tax expense. On June 13, 2002, Heinz announced that it will transfer to a wholly-owned subsidiary certain assets and liabilities, including our U.S. pet food and pet snacks, our U.S. tuna, U.S. retail private label soup and private label gravy, College Inn broths and our U.S. infant feeding businesses, which in Fiscal Year 2002 together generated approximately $1.4 billion of our annual revenues. The common stock of the subsidiary will be distributed on a pro rata basis to Heinz's shareholders. Immediately thereafter, the subsidiary will merge with a wholly-owned subsidiary of Del Monte Foods Company, whereby the subsidiary will become a wholly-owned subsidiary of Del Monte Foods Company. In connection with the merger, each share of Spinco common stock will be automatically converted into 12 shares of Del Monte common stock that will result in the fully diluted Del Monte common stock at the effective time of the merger to be held approximately 74.5% by Heinz shareholders and approximately 25.5% by the Del Monte shareholders. As a result of the transaction, Heinz Finance will receive from Heinz approximately $1.1 billion in cash that will be used to retire debt. The transaction, which is subject to various conditions, is expected to be completed in late calendar year 2002 or early calendar year 2003. Heinz LP The ownership interests in Heinz LP consist of the general partner interest and the Class A and Class B limited partner interests. The material terms of the Second Amended and Restated Partnership Agreement are described below. o The general partner interest is held by HMC. The general partner has a 1% interest in cash distributions and partnership income. As of May 1, 2002, the general partner's interest in partnership capital was approximately .004%. o The Class A limited partnership interests are held by Heinz and two wholly-owned subsidiaries. The Class B limited partnership interests are held by Heinz Finance and one wholly-owned subsidiary. There is no overlap in ownership of the two classes of interests. o The Class A and Class B limited partners participate in distributions of cash and income on a basis that affords the Class B limited partner a preferred, but limited return. The mechanism is structured as follows: o The Class B limited partner is credited with a notional capital account equal to the fair market value (as determined by independent appraisals) of the assets contributed to Heinz LP. This capital balance is increased for the fair market value of subsequent asset contributions and decreased for extraordinary cash distributions resulting from sales of assets by Heinz LP and other transactions not in the ordinary course of business. o A LIBOR based index rate (reset quarterly) multiplied by the average balance of Class B capital equals the Class B preferred return for a quarter. The Class B preferred return plus interest thereon accumulates during any fiscal year. The preferred return resets to zero at the beginning of each year. o Distributions of operating cash flow of Heinz LP each year are applied as follows: o 95% to Class B limited partner, 4% to Class A limited partners and 1% to the general partner until the Class B limited partner has received 80% of the preferred return for the year. o 25% to Class B limited partner, 74% to Class A limited partners and 1% to the general partner until the Class B limited partner has received the remaining 20% of the preferred return for the year. o After the Class B limited partner has received 100% of the preferred return for the year, cash is distributed 5% to Class B limited partner, 94% to Class A limited partners and 1% to the general partner. o As of May 1, 2002, the fair market value of the partnership capital was $12.4 billion and the Class A limited partners' interest in partnership capital of Heinz LP was approximately 65.6% and the Class B limited partner's interest in partnership capital of Heinz LP was approximately 34.4%. 13 The following diagram provides a summary overview of the ownership structure and significant affiliate relationships of Heinz Finance and Heinz. [A graphic appears here depicting the basic corporate structure of H. J. Heinz Finance Company. The graphic shows H. J. Heinz Company as the owner of the common stock of Heinz Finance, and unrelated investors as the owners of the preferred stock of Heinz Finance. Heinz Finance is shown as the owner of the Class B interests in H. J. Heinz Company, LP, and Heinz is shown as the owner of the Class A and General Partner inerests in H. J. Heinz Company, LP.] Financial Statement Presentation For all Heinz financial reporting and disclosure purposes, Heinz Finance and its subsidiaries (including Heinz LP) are treated as fully consolidated subsidiaries. All of the assets, liabilities, results of operations and cash flows of these entities are included in the Heinz consolidated financial statements. All of the intercompany transactions and accounts are eliminated within the Heinz consolidated financial statements. The preferred shares issued by Heinz Finance are shown as minority interest in the Heinz consolidated financial statements. Heinz Finance's consolidated financial statements include the assets and liabilities, results of operations and cash flows of Heinz LP and all other subsidiaries of Heinz Finance. Under the partnership agreement, Heinz Finance has the power to control the general partner through majority membership on Heinz LP's management board. In the Heinz Finance consolidated statements, the general partner and Class A interests in Heinz LP, that are held by Heinz, are reflected as minority interest. The financial statements and the related management's discussion and analysis of financial condition and results of operations included herein for periods ending on or before May 2, 2001 relate to the U.S. businesses that were contributed to Heinz Finance on May 3, 2001. Results for these periods have been prepared using "carve-out" and "push-down" accounting methods. With respect to periods ending on or before May 2, 2001, the corporations and businesses described above are referred to as the "U.S. Group." For a more complete discussion of the presentation of the Heinz financial statements, please refer to the consolidated financial statements and accompanying notes included in Heinz's 2002 Annual Report on Form 10-K, which is incorporated herein by reference. 14 HEINZ FINANCE SELECTED HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL DATA The following table presents selected historical financial data of Heinz Finance and its predecessor. The following data, insofar as it relates to the fiscal year ended April 29, 1998, has been derived from annual financial statements of Heinz and was prepared utilizing the domestic segment information in the Heinz annual report and removing those items that are not part of the U.S. Group's operations. The data for the fiscal years ended May 1, 2002, May 2, 2001, May 3, 2000 and April 28, 1999 (Fiscal Year 2002, Fiscal Year 2001, Fiscal Year 2000 and Fiscal Year 1999, respectively) has been derived from financial statements audited by PricewaterhouseCoopers LLP, independent accountants. Consolidated and combined balance sheets at May 1, 2002 and May 2, 2001 and the related consolidated and combined statements of income and of cash flows for the three years ended May 1, 2002 and notes thereto appear elsewhere in this prospectus. The unaudited income statement data for the three months ended July 31, 2002 and August 1, 2001 and the unaudited balance sheet data as of July 31, 2002 have been derived from Heinz Finance's condensed consolidated financial statements for the three months ended July 31, 2002 and August 1, 2001 also appearing elsewhere in this prospectus. The balance sheet data as of August 1, 2001 was derived from Heinz Finance's unaudited condensed consolidated financial statements as of August 1, 2001, but not incorporated by reference in this prospectus. In the opinion of Heinz Finance management, such unaudited income statement and balance sheet data include all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of results of operations for those interim periods on a basis substantially consistent with that of the audited financial statements. Three Months Ended Fiscal Year ended -------------------------- -------------------------------------------------------------- July 31, August 1, May 1, May 2, May 3, April 28, April 29, 2002 2001 2002 2001 2000 1999 1998 ------------- ---------- ---------- ---------- ---------- --------- --------- (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (In thousands) Sales....................$ 1,038,374 $ 492,261 $4,191,230 $4,550,391 $4,469,324 $4,687,123 $4,542,948 Operating income ......... 115,121 79,243 616,755 438,069 609,337 578,398 664,858 Interest expense ......... 50,542 52,173 206,578 10,278 7,138 6,266 7,621 Net income ............... 4,254 15,907 73,717 306,898 448,295 432,757 -- Short-term debt with related parties and current portion of long-term debt ........ 817,545 303,201 538,539 29,833 2,998 51,384 12,421 Long-term debt ........... 3,973,334 3,705,999 3,936,025 23,932 33,071 25,594 47,063 Preferred stock .......... 325,000 325,000 325,000 -- -- -- -- Total assets ............. 7,792,554 6,773,914 7,484,449 5,601,491 5,068,456 4,588,108 4,730,030
Sales for 2002, 2001 and 2000 reflect the Fiscal Year 2002 adoption of the new Emerging Issues Task Force ("EITF") guidelines relating to the classification of consideration from a vendor's products including both customer and consumers. Amounts previously reported for fiscal years ended 2001 and 2000 were $4,938,197 and $4,789,188, respectively, and for the three months ended August 1, 2001 were $556,739. Sales for fiscal years 1999 and earlier have not been adjusted to reflect the new EITF reclassification as it is impracticable to do so. The 2002 results include net restructuring and implementation benefits of $3.6 million pretax related to the Streamline initiative (as defined below). The 2001 results include restructuring and implementation costs of $84.7 million pretax relating to Streamline and net restructuring and implementation costs of $173.3 million pretax for Operation Excel (as defined below). Results also include a loss of $94.6 million on the sale of The All American Gourmet business and attempted acquisition cost of $18.5 million pretax. The 2000 results include net restructuring and implementation costs of $175.8 million pretax for Operation Excel. 15 The 1999 results include net restructuring and implementation costs of $156.1 million pretax for Operation Excel and costs of $9.4 million pretax related to the implementation of Project Millennia (as defined below), offset by the reversal of unutilized Project Millennia accruals for severance and exit costs of $16.6 million pretax. The 1998 results include costs of $30.2 million pretax related to the implementation of Project Millennia. Project Millennia was a reorganization and restructuring program commencing in the fourth quarter of the fiscal year ended April 30, 1997, which was designed to strengthen the U.S. Group's core businesses and improve profitability and global growth. Key initiatives focused on process changes and product line rationalizations. Operation Excel was a growth and restructuring initiative that commenced in the fiscal year ended April 28, 1999, which created manufacturing centers of excellence, focused the product portfolio, realigned management teams and invested in growth activities. In the fourth quarter of Fiscal Year 2001, Heinz announced a restructuring initiative named "Streamline." This initiative includes organization restructuring aimed at reducing overhead costs and the consolidation of the canned pet food production to Bloomsburg, Pennsylvania. 16 HEINZ FINANCE SELECTED UNAUDITED PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL DATA The following table presents selected unaudited pro forma financial data of Heinz Finance and its predecessor for the three months ended July 31, 2002 and August 1, 2001 and for Fiscal Year 2002, Fiscal Year 2001 and Fiscal Year 2000. Such pro forma financial statements adjust the historical statements to give pro forma effect of the following: o The transfer of certain assets and liabilities of our U.S. tuna, U.S. pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses to a wholly-owned subsidiary of Heinz ("Spinco"). o The repayment of $1.1 billion of debt with the cash Heinz Finance will receive as a result of the merger of Spinco, immediately following the transfer, with a wholly-owned subsidiary of Del Monte Foods Company ("Del Monte"). See Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the agreement between Heinz and Del Monte. The unaudited pro forma consolidated balance sheet has been prepared as if the transaction occurred as of July 31, 2002. The unaudited pro forma consolidated and combined statements of income have been prepared as if the transaction occurred as of the earliest periods presented. This information should be read in conjunction with the historical and pro forma financial statements and related notes included elsewhere in this prospectus. Three Months Ended Fiscal Year ended --------------------- ------------------------------------ July 31, August 1, May 1, May 2, May 3, 2002 2001 2002 2001 2000 ---------- ---------- --------- ----------- ----------- (52 Weeks) (52 Weeks) (53 Weeks) (In thousands) Sales .......................................... $ 689,279 $ 401,306 $2,833,517 $2,806,020 $2,526,238 Operating income ............................... 91,462 56,624 447,826 439,511 493,663 Interest expense ............................... 33,305 36,188 142,920 20,712 5,027 Net income from continuing operations .......... 6,773 25,335 109,421 273,685 331,350 Short-term debt with related parties and current portion of long-term debt ....... 367,520 Long-term debt.................................. 3,323,234 Preferred stock ................................ 325,000 Total assets ................................... 5,336,202
17 H. J. HEINZ COMPANY H. J. Heinz Company was incorporated under the laws of the Commonwealth of Pennsylvania on July 27, 1900. In 1905, it succeeded to the business of a partnership operating under the same name that had developed from a food business founded in 1869 at Sharpsburg, Pennsylvania by Henry J. Heinz. The principal products of Heinz include ketchup, condiments and sauces, frozen food, pet products, soups, beans and pasta meals, tuna and other seafood products, infant food and other processed food products. The principal executive offices of Heinz are located at 600 Grant Street, Pittsburgh, Pennsylvania 15219. HEINZ SELECTED CONSOLIDATED FINANCIAL DATA The following tables contain selected financial data for H. J. Heinz Company and its consolidated subsidiaries. The income statement data for the fiscal years ended May 1, 2002 (Fiscal Year 2002), May 2, 2001 (Fiscal Year 2001) and May 3, 2000 (Fiscal Year 2000), and the balance sheet data as of May 1, 2002 and May 2, 2001 are derived from the consolidated financial statements included in the Heinz's 2002 Annual Report on Form 10-K, which is incorporated herein by reference, and which were audited by PricewaterhouseCoopers LLP, whose reports also appear in the Annual Report. The income statement data for the fiscal years ended April 28, 1999 (Fiscal Year 1999) and April 29, 1998 (Fiscal Year 1998) and the balance sheet data as of May 3, 2000, April 28, 1999 and April 29, 1998 are derived from consolidated financial statements audited by PricewaterhouseCoopers LLP, but not incorporated by reference in this prospectus. The unaudited income statement data for the three months ended July 31, 2002 and August 1, 2001 and the unaudited balance sheet data as of July 31, 2002 are derived from Heinz's unaudited condensed consolidated financial statements for the three months ended July 31, 2002 and August 1, 2001 included in Heinz's Quarterly Report on Form 10-Q for the three months ended July 31, 2002, which is incorporated herein by reference. The balance sheet data as of August 1, 2001 was derived from Heinz's unaudited condensed consolidated financial statements as of August 1, 2001, but not incorporated by reference in this prospectus. In the opinion of Heinz management, such unaudited income statement and balance sheet data include all adjustments, consisting of those of a normal and recurring nature, necessary for a fair statement of results of operations for those interim periods on a basis substantially consistent with that of the audited financial statements. For all Heinz financial reporting and disclosure purposes, Heinz Finance and its subsidiaries (including Heinz LP) are treated as fully consolidated subsidiaries. All of the assets and liabilities, results of operations and cash flows of these entities are included in the Heinz consolidated financial statements. All of the intercompany transactions and accounts are eliminated within the Heinz consolidated financial statements. The preferred shares issued by Heinz Finance are shown as minority interest in the Heinz consolidated financial statements. Three months ended Fiscal Year Ended ------------------------- ------------------------------------------------------------------- July 31, August 1, May 1, May 2, May 3, April 28, April 29, 2002 2001 2002 2001 2000 1999 1998 ----------- ----------- ----------- ----------- ----------- ------------ ----------- (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (In thousands, except per share amounts) Sales ....................... $ 2,203,645 $ 2,077,295 $ 9,431,000 $ 8,820,884 $ 8,939,416 $ 9,299,610 $ 9,209,284 Operating income ............ 345,132 384,154 1,590,471 982,354 1,733,099 1,109,312 1,520,330 Interest expense ............ 69,090 75,547 294,269 332,957 269,748 258,813 258,616 Net income .................. 177,795 200,474 833,889 478,012 890,553 474,341 801,566 Net income per share-diluted .50 .57 2.36 1.36 2.47 1.29 2.15 Net income per share-basic... .51 .57 2.38 1.37 2.51 1.31 2.19 Short-term debt and current portion of long-term debt 723,128 539,478 702,645 1,870,834 176,575 904,207 339,626 Long-term debt, exclusive of current portion .......... 4,695,433 4,429,002 4,642,968 3,014,853 3,935,826 2,472,206 2,768,277 Total assets ................ 10,431,616 9,335,237 10,278,354 9,035,150 8,850,657 8,053,634 8,023,421 Cash dividends per common share .................... .4050 .3925 1.6075 1.5450 1.4450 1.3425 1.2350
18 Sales for 2002, 2001 and 2000 reflect the Fiscal Year 2002 adoption of the new EITF guidelines relating to the classification of consideration from a vendor's products, including both customer and consumers. Amounts previously reported for fiscal years ended 2001 and 2000 were $9,430,422 and $9,407,949, respectively, and for the three months ended August 1, 2001 were $2,185,479. Sales for fiscal years 1999 and earlier have not been adjusted to reflect the new EITF reclassifications as it is impracticable to do so. In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests in accordance with the new Statements. Other intangible assets continue to be amortized over their estimated useful lives. Heinz applied these new rules of accounting for goodwill and other intangible assets beginning in the first quarter of Fiscal Year 2003. The effects of adopting the new standards on net income for Fiscal Year 2002, Fiscal Year 2001 and Fiscal Year 2000 follows: Net Income Diluted EPS ------------------------------ ------------------------------ Fiscal Year Fiscal Year ------------------------------ ------------------------------ 2002 2001 2000 2002 2001 2000 -------- -------- -------- -------- -------- -------- Net income $833,889 $478,012 $890,553 $ 2.36 $ 1.36 $ 2.47 Add: Goodwill amortization 53,775 44,902 41,021 0.16 0.13 0.12 Trademark amortization 8,520 8,332 8,522 0.02 0.02 0.02 -------- -------- -------- -------- -------- -------- Net income excluding goodwill and trademark amortization $896,184 $531,246 $940,096 $ 2.54 $ 1.51 $ 2.61 ======== ======== ======== ======== ======== ========
The results for the three months ended July 31, 2002 include Del Monte transaction related costs and costs to reduce overhead of the remaining core businesses of $18.4 million pretax. The results for the three months ended August 1, 2001 include net restructuring charges and implementation costs of $16.1 million pretax for the Streamline initiative. The 2002 results include net restructuring and implementation costs of $17.9 million pretax for the Streamline initiative. The 2001 results include restructuring and implementation costs of $298.8 million pretax for the Streamline initiative, net restructuring and implementation costs of $288.5 million pretax for Operation Excel, a benefit of $93.2 million from tax planning and new tax legislation in Italy, a loss of $94.6 million pretax on the sale of The All American Gourmet business, attempted acquisition costs of $18.5 million pretax, a loss of $5.6 million pretax which represents Heinz's equity loss associated with The Hain Celestial Group's fourth quarter results which included charges for its merger with Celestial Seasonings and the after-tax impact of adopting SAB No. 101 and SFAS No. 133 of $16.9 million. The 2000 results include net restructuring and implementation costs of $392.7 million pretax for Operation Excel, a pretax contribution of $30.0 million to the H. J. Heinz Company Foundation, costs related to Heinz's Ecuador tuna processing facility of $20.0 million pretax, a gain of $464.6 million pretax on the sale of the Weight Watchers classroom business and a gain of $18.2 million pretax on the sale of an office building in the United Kingdom. The 1999 results include restructuring and implementation costs of $552.8 million pretax for Operation Excel and costs of $22.3 million pretax related to the implementation of Project Millennia, offset by the reversal of unutilized Project Millennia accruals for severance and exit costs of $25.7 million pretax and a gain of $5.7 million pretax on the sale of the bakery products units. 19 Results recorded in 1998 include costs of $84.1 million pretax related to the implementation of Project Millennia, offset by the gain on the sale of the Ore-Ida frozen foodservice business, $96.6 million pretax. 20 HEINZ SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The following table presents selected unaudited pro forma financial data of Heinz for the three months ended July 31, 2002 and August 1, 2001 and for Fiscal Year 2002, Fiscal Year 2001 and Fiscal Year 2000. Such pro forma financial statements adjust the historical statements to give pro forma effect of the following: o The transfer of certain assets and liabilities of Heinz's U.S. tuna, U.S. and Canadian pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses to Spinco. o The repayment of $1.1 billion of debt with the cash Heinz will receive as a result of the merger of Spinco, immediately following the transfer, with a wholly-owned subsidiary of Del Monte. See Heinz's Management's Discussion and Analysis of Financial Condition and Results of Operations in its Quarterly Report on Form 10-Q for the quarter ended July 31, 2002 for further discussion of the agreement between Heinz and Del Monte. The unaudited pro forma consolidated balance sheet has been prepared as if the transaction occurred as of July 31, 2002. The unaudited pro forma consolidated statements of income have been prepared as if the transaction occurred as of the earliest periods presented. This information should be read in conjunction with Heinz's historical and pro forma financial statements and related notes included elsewhere in this prospectus. Three Months Ended Fiscal Year ended ----------------------- ------------------------------------- July 31, August 1, May 1, May 2, May 3, 2002 2001 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- (52 Weeks) (52 Weeks) (53 Weeks) (In thousands) Sales .......................................... $1,839,314 $1,675,541 $7,614,036 $6,987,698 $6,892,807 Operating income ............................... 295,897 315,806 1,299,872 988,959 1,489,222 Interest expense ............................... 51,853 59,793 230,611 262,488 206,996 Net income from continuing operations .......... 154,372 166,566 675,181 548,650 780,145 Short-term debt and current portion of long-term debt ............................ 273,128 Long-term debt ................................. 4,045,433 Total shareholders' equity ..................... 1,336,404 Total assets ................................... 8,538,911
21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion in conjunction with the audited consolidated and combined financial statements and the notes to our audited consolidated and combined financial statements included elsewhere in this prospectus. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. Please see "Forward-Looking Statements" and "Risk Factors" for a discussion of the uncertainties, risks and assumptions associated with these statements. Overview Reorganization On the first day of Fiscal Year 2002 (May 3, 2001), Heinz reorganized the structure of its U.S. business as we describe in "Overview of Entity Structure, Reorganization and Financial Statement Presentation." The reorganization of our operations, treasury and trademark activities is summarized below. o Operations. All of the U.S. treasury and business operations, formerly conducted through eight subsidiaries and a division of Heinz were consolidated into Heinz LP. Heinz Management Company, a wholly-owned subsidiary of Heinz, is the general partner of Heinz LP and holds a 1% interest. The limited partner interests in Heinz LP consist of "Class A" and "Class B" interests as described under "Overview of Entity Structure, Reorganization and Financial Statement Presentation--Reorganization--Heinz LP." Heinz owns all of the Class A interests. H. J. Heinz Finance Company owns all of the Class B interests. o Treasury. U.S. cash management and treasury activities were transferred to Heinz Finance. On the day of the reorganization, Heinz Finance assumed all of the then outstanding term debt obligations of Heinz in the amount of $2.57 billion and $258 million of the commercial paper obligations of Heinz. Since the reorganization, Heinz Finance has issued term debt and commercial paper in its own name as described under "--Liquidity and Financial Position." All of the debt of Heinz Finance is unconditionally guaranteed by Heinz and is included on the consolidated balance sheet of Heinz. On July 6, 2001, Heinz Finance issued $325 million of preferred stock to outside investors. The preferred shares are entitled to elect 25% of the directors of Heinz Finance and, if declared, are entitled to receive dividends at a rate of 6.226% per annum. o Trademarks. Substantially all of the trademarks used in the U.S. businesses (including "Heinz," "StarKist," "Ore-Ida," "Smart Ones," "9-Lives" and "Kibbles 'n Bits"), are owned by Promark International Inc., an indirect subsidiary of Heinz, and are licensed to us. Financial Statement Presentation For all Heinz financial reporting and disclosure purposes, Heinz Finance and its subsidiaries (including Heinz LP) are treated as fully consolidated subsidiaries. All of the assets, liabilities, results of operations and cash flows of these entities are included in the Heinz consolidated financial statements. All intercompany transactions and accounts are eliminated within the Heinz consolidated financial statements. The preferred shares issued by Heinz Finance are shown as minority interest in the Heinz consolidated financial statements. Heinz Finance's consolidated financial statements included the assets and liabilities, results of operations and cash flows of Heinz LP, as under the partnership agreement, Heinz Finance has the power to control the general partner through majority membership on Heinz LP's management board, and all other subsidiaries of Heinz Finance. In the Heinz Finance consolidated statements, the general partner and Class A interests in Heinz LP, that are held by Heinz, are reflected as minority interest. 22 The financial statements and the related management's discussion and analysis of financial condition and results of operations included herein for periods ending on or before May 2, 2001 related to the U.S. businesses that were contributed to Heinz Finance on May 3, 2001. Results of these periods have been prepared using "carve-out" and "push-down" accounting methods. With respect to periods ending on or before May 2, 2001, the corporations and businesses described above are referred to as the "U.S. Group." Substantially all assets and liabilities of the U.S. Group which are included in the Fiscal Year 2001 "carve out" balance sheet, except finished goods inventories of approximately $407 million, which were retained by Heinz, were contributed to Heinz Finance. These retained inventories resulted in reduced sales in Fiscal Year 2002 when compared to Fiscal Years 2001 and 2000. The sales and operating results related to the retained inventories were recorded on the consolidated financial statements of Heinz. Segment Data We report our business in three segments as follows: o Heinz North America -- This segment manufactures, markets and sells ketchup, condiments, sauces, soups, pasta meals and infant foods to the grocery and foodservice channels. o U.S. Pet Products and Seafood -- This segment manufactures, markets and sells dry and canned pet food, pet snacks, tuna and other seafood. o U.S. Frozen -- This segment manufactures, markets and sells frozen potatoes, entrees, snacks and appetizers. Special Items Agreement between H. J. Heinz Company and Del Monte Foods Company On June 13, 2002, Heinz announced that it will transfer to a wholly-owned subsidiary ("Spinco") certain assets and liabilities of our U.S. pet food and pet snacks, U.S. tuna, U.S. retail private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which are owned by Heinz Finance, and distribute all of the shares of Spinco common stock on a pro rata basis to its shareholders. Immediately thereafter, Spinco will merge with a wholly-owned subsidiary of Del Monte Foods Company ("Del Monte"), resulting in Spinco becoming a wholly-owned subsidiary of Del Monte ("the Merger"). In connection with the Merger, each share of Spinco common stock will be automatically converted into shares of Del Monte common stock that will result in the fully diluted Del Monte common stock at the effective time of the Merger being held approximately 74.5% by Heinz shareholders and approximately 25.5% by the Del Monte shareholders. As a result of the transaction, Heinz Finance will receive from Heinz approximately $1.1 billion in cash that will be used to retire debt. Included in the transaction will be the following brands: StarKist, 9-Lives, Kibbles 'n Bits, Pup-Peroni, Snausages, Nawsomes, Heinz Nature's Goodness baby food and College Inn broths. The following is a summary of the Fiscal Year 2003 and Fiscal Year 2002 first quarter operating results of the businesses to be spun off. The significant increase in the revenue amounts between these two periods is a result of the finished goods inventories which were not contributed to Heinz Finance on May 3, 2001 as discussed previously in "--Overview--Financial Statement Presentation." First Quarter Ended ----------------------------- July 31, 2002 August 1, 2001 ------------- -------------- Revenues...........................................$ 349,095 $ 90,955 Operating income................................... 23,659 17,216 The Merger, which has been approved by the Boards of Directors of Heinz and Del Monte, is subject to the approval by the shareholders of Del Monte. Heinz received on November 21, 2002, a private letter ruling from the Internal Revenue Service that the 23 contribution of the assets and liabilities to Spinco and the distribution of the shares of common stock of Spinco to Heinz shareholders will be tax-free to Heinz, Spinco and the shareholders of Heinz. The Merger is also subject to customary closing conditions. The transaction is not expected to close until late calendar year 2002 or early in calendar year 2003. During the first quarter of Fiscal Year 2003, Heinz Management Company recognized transaction related costs and costs to reduce overhead of the remaining core businesses totaling $6.3 million pretax. These costs were then charged to Heinz Finance through the management fee charged to Heinz Finance by Heinz Management Company for all salaried employee costs. Heinz Finance anticipates transaction related and restructuring costs of approximately $160 million after tax to be incurred in Fiscal Year 2003. Streamline In the fourth quarter of Fiscal Year 2001, Heinz announced a restructuring initiative named "Streamline" which includes an organizational restructuring aimed at reducing overhead costs and the consolidation of Heinz Finance's canned pet food production to Bloomsburg, Pennsylvania (which resulted in ceasing canned pet food production at Heinz Finance's Terminal Island, California facility). Pretax savings generated from Streamline were approximately $10 million in Fiscal Year 2002 and are projected to grow to an estimated $15 million a year beginning in Fiscal Year 2003. Non-cash savings are expected to be less than $3 million per year. The total cost of this initiative will be approximately $80 million. During the first quarter of Fiscal Year 2002, Heinz Finance recognized implementation costs totaling $1.2 million pretax. In the fourth quarter of Fiscal Year 2002, Heinz Finance recorded a benefit of $4.7 million pretax to reflect revisions in original cost estimates. This benefit was primarily the result of lower than expected contract exit costs associated with Heinz Finance's Terminal Island, California facility. Total Fiscal Year 2002 pretax charges of $1.1 million were classified as cost of products sold and a pretax benefit of $4.6 million is classified as selling, general and administrative expense ("SG&A"). In addition, HMC assumed $4.4 million of the Heinz Finance's restructuring liability as a result of the realignment that occurred on May 3, 2001. During Fiscal Year 2001, Heinz Finance recognized restructuring charges and implementation costs totaling $84.7 million pretax. Pretax charges of $65.3 million were classified as cost of products sold and $19.4 million as SG&A. Implementation costs were recognized as incurred in Fiscal Year 2002 ($1.2 million pretax) and Fiscal Year 2001 ($11.8 million pretax) and consist of incremental costs directly related to the implementation of the Streamline initiative. These costs include idle facility costs, consulting fees, cost premiums related to production transfers and relocation costs. In Fiscal Year 2001, Heinz Finance ceased production of canned pet food in its Terminal Island, California facility. In Fiscal Year 2002, Heinz Finance continued and substantially completed its overhead reduction plan. These actions resulted in a net reduction of Heinz Finance's workforce of approximately 200 employees. Operation Excel In Fiscal Year 1999, Heinz announced a growth and restructuring initiative, named "Operation Excel." This initiative was a multi-year, multi-faceted program which established manufacturing centers of excellence, focused the product portfolio, realigned Heinz Finance's management teams and invested in growth initiatives. As part of Operation Excel, Heinz Finance established manufacturing centers of excellence that resulted in significant changes to Heinz Finance's manufacturing footprint. In addition, Heinz Finance focused its portfolio of product lines on six core food categories: ketchup, condiments and sauces; frozen foods; tuna; soup, beans and pasta meals; infant foods; and pet products. A consequence of this focus on the core categories was the sale of two smaller businesses, which had combined annual revenues of approximately $15 million. 24 A major element of Operation Excel was the realignment of Heinz Finance's management teams to provide processing and product expertise. Growth initiatives included relaunching many of our core brands and additional investments in marketing and pricing programs for our core businesses, particularly in ketchup, condiments and sauces, frozen foods, infant foods and tuna. The pretax savings generated from Operation Excel initiatives were approximately $40 million in Fiscal Year 2000, $70 million in Fiscal Year 2001 and $85 million in Fiscal Year 2002 and are projected to grow to approximately $95 million in Fiscal Year 2003 and thereafter. Heinz Finance substantially completed Operation Excel. During Fiscal Year 2002, HMC assumed $11.1 million of the Heinz Finance's restructuring liability as a result of the realignment that occurred on May 3, 2001. During Fiscal Year 2001, Heinz Finance recognized restructuring charges of $44.8 million pretax. These charges were associated with exiting Heinz Finance's can making operations, which were sold during Fiscal Year 2001, and higher than originally expected severance costs associated with creating the single U.S. Grocery & Foodservice headquarters in Pittsburgh, Pennsylvania. This charge was recorded in cost of products sold ($36.3 million) and SG&A ($8.5 million). This charge was offset by reversals of unutilized Operation Excel accruals and asset write-downs of $21.0 million pretax. These reversals were recorded in cost of products sold ($8.2 million) and SG&A ($12.7 million) and were primarily the result of revisions in estimates of fair values of assets which were disposed of as part of Operation Excel and Heinz Finance's decision not to exit certain warehouses due to higher than expected volume growth. Implementation costs of $149.5 million pretax were also recognized in Fiscal Year 2001. These costs were classified as costs of products sold ($62.2 million) and SG&A ($87.3 million). During Fiscal Year 2000, Heinz Finance recognized restructuring charges of $95.3 million pretax. Pretax charges of $53.5 million were classified as cost of products sold and $41.8 million as SG&A. Also during Fiscal Year 2000, Heinz Finance recorded a reversal of $16.4 million pretax in cost of products sold of Fiscal Year 1999 restructuring accruals and asset write-downs, primarily for the closure of the West Chester, Pennsylvania facility, which remains in operation as a result of the sale of the Bloomsburg frozen pasta facility in Fiscal Year 2000. Implementation costs of $96.9 million pretax were classified as cost of products sold ($33.7 million) and SG&A ($63.2 million). During Fiscal Year 1999, Heinz Finance recognized restructuring charges and implementation costs totaling $156.1 million pretax. Pretax charges of $94.3 million were classified as cost of products sold and $61.8 million as SG&A. Implementation costs were recognized as incurred and consisted of incremental costs directly related to the implementation of Operation Excel, including consulting fees, employee training and relocation costs, unaccruable severance costs associated with terminated employees, equipment relocation costs and commissioning costs. Heinz Finance has closed or exited all of the five factories that were scheduled for closure. In addition, Heinz Finance also exited its can making operations. Operation Excel impacted approximately 1,700 employees with a net reduction in the workforce of approximately 1,400 after expansion of certain facilities. The exit of Heinz Finance's can making operations resulted in a reduction of the workforce of approximately 500 employees. During Fiscal Year 2001, Fiscal Year 2000 and Fiscal Year 1999, Heinz Finance's workforce had a net reduction of approximately 700 employees, 500 employees and 200 employees, respectively. Acquisitions and Divestitures The following acquisitions were made by Heinz Finance or its predecessor: 25 Fiscal Year 2002 o Borden Food Corporation's pasta sauce, dry bouillon and soup businesses - In this transaction, we acquired such brands as Classico pasta sauces, Aunt Millie's pasta sauce, Mrs. Grass Recipe soups and Wyler's bouillons and soups. o Anchor Food Products branded retail business - In this transaction, we acquired the Popper's brand of retail appetizer lines and licensing rights to the T.G.I.. Friday's brand of frozen snacks and appetizers. o Delimex Holdings, Inc. - Delimex is a producer of frozen taquitos, tightly rolled fried corn and flour tortillas with fillings such as beef, chicken or cheese. Delimex also makes quesadillas, tamales and rice bowls. o Heinz Finance also made other smaller acquisitions. Fiscal Year 2001 o Cornucopia, Inc. and Central Commissary - Two privately held U.S. foodservice companies which make and market refrigerated and frozen reciped food products. o IDF Holdings, Inc., the parent of International DiverseFoods Inc. - A manufacturer of customized dressings, sauces, mixes and condiments for restaurant chains and foodservice distributors. o Alden Merrell Corporation - A manufacturer of high-quality, premium-priced frozen desserts for casual dining restaurants and foodservice distributors. o Additional investment in The Hain Celestial Group, Inc. ("Hain") restoring our ownership interest to approximately 19.5% of the outstanding stock. Fiscal Year 2000 o Quality Chef Foods - A manufacturer of frozen heat-and-serve soups, entrees and sauces. o Yoshida - A line of Asian sauces marketed in the U.S. o Thermo Pac, Inc. - A U.S. provider of single-serve condiments. o A strategic alliance with and investment in Hain for the global production and marketing of natural and organic foods and soy-based beverages. During Fiscal Year 2001, the U.S. Group divested the All American Gourmet business and its Budget Gourmet and Budget Gourmet Value Classics brands of frozen entrees. Results of Operations During the fourth quarter of Fiscal Year 2002, Heinz Finance adopted EITF statements relating to the classification of vendor consideration and certain sales incentives. The adoption of these EITF statements has no impact on operating income or net income; however, revenues were reduced by approximately $65 million for the three months ended August 1, 2001, $437 million in Fiscal Year 2002, $388 million in Fiscal Year 2001 and $320 million in Fiscal Year 2000. Prior period data has been reclassified to conform with current year presentation. 26 Three Months Ended July 31, 2002 versus Three Months Ended August 1, 2001 Sales For the three months ended July 31, 2002, sales increased $546.1 million, or 110.9%, to $1,038.4 million from $492.3 million last year. Sales were favorably impacted by acquisitions (15.5%) and pricing (2.9%). The favorable impact of acquisitions is primarily related to the prior year acquisitions in the Heinz North American and U.S. Frozen segments. Sales were also positively impacted by favorable volumes of 93.6%. This volume increase is a result of the finished goods inventories which were not contributed to Heinz Finance on May 3, 2001 as previously discussed in "--Overview--Financial Statement Presentation" ($520.7 million) partially offset by volume decreases from the current year strategic shift from trade promotional spending to consumer focused promotional and marketing programs. This strategic shift has caused a realignment of promotional timing. Additionally, Heinz Finance is increasing its focus on trade spending efficiency and effectiveness. Divestitures reduced sales 1.1%. Sales of the Heinz North America segment increased $204.6 million, or 70.4%. Acquisitions, net of divestitures, increased sales 6.5%, due primarily to the prior year acquisitions of Classico and Aunt Millie's pasta sauce, Mrs. Grass Recipe soups and Wyler's bouillons and soups. Higher pricing increased sales 4.5%, due mainly to foodservice, private label soup and reduced trade promotions on retail ketchup and baby food. Sales volume increased 59.4%, primarily due to the finished goods inventories which were retained by Heinz and volume increases in specialty sauces and private label soup partially offset by decreases in retail ketchup and infant feeding. Shipments of retail ketchup are down due to the ongoing trade initiatives to reduce inventory levels. Sales of the U.S. Pet Products and Seafood segment increased $206.3 million, or 231.4%. Sales volume increased 241.5% primarily due to the finished goods inventories which were retained by Heinz and volume increases in tuna partially offset by decreases in pet snacks, canned cat food and dry dog food. Lower pricing decreased sales 10.1%, primarily in tuna partially offset by lower trade promotions and higher pricing of pet food. Pet volume and pricing was impacted by the current year strategic shift from trade promotional spending to consumer focused promotional and marketing programs and the timing of these promotional programs. U.S. Frozen's sales increased $135.2 million, or 120.1%. Acquisitions, net of divestitures, increased sales 46.4%, due primarily to the prior year acquisitions of Delimex frozen Mexican foods, Anchor's Poppers retail frozen appetizers and licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers. Higher pricing increased sales 9.0%, primarily due to Smart Ones frozen entrees and a reduction in trade promotions related to the launch of Hot Bites in the prior year. Sales volume increased 64.8% driven by the finished goods inventories retained by Heinz partially offset by volume decreases in Bagel Bites/Hot Bites, Boston Market HomeStyle Meals and frozen potatoes as well as volume decreases resulting from the rationalization of the Hot Bites product lines with increased focus on the base Bagel Bites business and the timing of promotional and marketing programs across the segment. Gross profit Gross profit increased $178.9 million, or 104.0%, to $350.7 million from $171.9 million and the gross profit margin decreased to 33.8% from 34.9%. Gross profit across all of our segments was favorably impacted as a result of the retention of finished goods inventories by Heinz on May 3, 2001 as discussed above. In addition, this increase is a result of the current year benefit of approximately $9.2 million related to the non-amortization of intangible assets with indefinite lives. Heinz North America's gross profit increased $76.8 million, or 75.2%, due primarily to inventories retained by Heinz, acquisitions, pricing and the benefit of reduced amortization expense of intangible assets, partially offset by unfavorable sales mix. U.S. Seafood and Pet Product's gross profit increased $40.8 million, or 123.0% primarily due to inventories retained by Heinz, reduced trade promotion spending in tuna and the benefit of reduced amortization expense of intangible assets partially offset by lower pricing and higher tuna costs and lower volume of pet snacks. 27 U.S. Frozen's gross profit increased $61.2 million, or 165.3%, due primarily to inventories retained by Heinz and acquisitions partially offset by the volume decreases discussed above. SG&A SG&A increased $121.1 million, or 174.0%, to $190.7 million from $69.6 million and increased as a percentage of sales to 18.4% from 14.1%. This increase is primarily attributable to the increase in sales, increased marketing spend across all segments and increased general and administrative expenses ("G&A") in the Heinz North America segment. Operating income Operating income increased $35.9 million, or 45.3%, to $115.1 million from $79.2 million and decreased as a percentage of sales 11.1% from 16.1%, primarily related to the change in gross profit partially offset by the increase in SG&A discussed above and a $21.8 million increase in royalty expense to related parties resulting from the finished goods inventories retained by Heinz. Heinz North America's operating income increased $18.2 million, or 40.7%, to $62.9 million from $44.7 million, due primarily to acquisitions and the change in gross profit partially offset by increased marketing, higher G&A and higher royalty expense to related parties resulting from the finished goods inventories retained by Heinz. U.S. Seafood and Pet Product's operating income decreased $0.5 million, or 3.5% to $13.6 million from $14.1 million, due to increases in SG&A and royalty expense to related parties resulting from the finished goods inventories retained by Heinz offset by the increase in gross profit. U.S. Frozen's operating income increased $17.8 million, or 83.0%, to $39.1 million from $21.4 million primarily due to inventories retained by Heinz partially offset by increased marketing and selling and distribution expenses. Other items Net interest expense increased $3.5 million to $44.0 million from $40.4 million last year, driven primarily by decreased interest income resulting from lower net short term notes receivable with related parties partially offset by lower interest expense due to lower interest rates over the past year. A currency loss of $22.1 million in the current year and a gain of $2.4 million in the prior year was recognized related to the mark-to-market adjustment on Euro- denominated long-term debt. Other expense decreased $0.8 million to $3.0 million from $2.2 million. The effective tax rate for the current quarter was 3.1% compared to 12.0% last year. This decrease is primarily a result of the elimination of goodwill amortization due to the adoption of SFAS No. 142 in the current quarter and the increased minority interest in Heinz LP balance in the current quarter, which is nontaxable. Net income in the current quarter decreased $11.7 million, or 73.3%, to $4.3 million compared to $15.9 million last year. Fiscal Year 2002 versus Fiscal Year 2001 Sales Sales for Fiscal Year 2002 decreased $359.2 million, or 7.9%, to $4.19 billion from $4.55 billion in Fiscal Year 2001. Acquisitions increased sales by $511.9 million, or 11.2%. Offsetting this improvement were decreases from lower pricing of $78.8 million, or 1.7%, divestitures of $100.3 million, or 2.2%, and volume decreases of $691.9 million, or 15.2%. The majority of the volume decrease ($666.2 million) is a result of the finished goods inventories which were not contributed to Heinz Finance as previously discussed. 28 The favorable impact of acquisitions is primarily related to Classico and Aunt Millie's pasta sauces, Mrs. Grass Recipe soups and Wyler's bouillons and soups in the North American segment, and Delimex frozen Mexican foods, Anchor's Poppers retail frozen appetizers and licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers in the U.S. Frozen segment. Sales of the Heinz North America segment decreased $142.0 million, or 6.6%. Acquisitions, net of divestitures, increased sales 10.9%. Lower pricing decreased sales 3.1%, primarily related to increased marketing spend across all major brands and to foodservice ketchup. Sales volume decreased 14.5%, primarily due to the finished goods inventories which were not contributed to Heinz Finance as well as decreases in the foodservice business, steak sauces and infant feeding, partially offset by volume increases in soups and grilling sauces. Sales of the U.S. Pet Products and Seafood segment decreased $313.0 million, or 21.8%. Unfavorable pricing decreased sales 0.2%, primarily in pet food and pet snacks, partially offset by higher pricing of tuna. Sales volume decreased 21.4%, primarily due to the finished goods inventories which were not contributed to Heinz Finance, as well as decreases in pet food, partially offset by volume increases in pet snacks and tuna. Divestitures decreased sales 0.3%. U.S. Frozen's sales increased $95.9 million, or 9.9%. Acquisitions increased sales 26.5%. Sales volume decreased 7.7% due primarily to the finished goods inventories which were not contributed to Heinz Finance as well as decreases in frozen potatoes partially offset by volume increases in Smart Ones frozen entrees, Boston Market HomeStyle Meals and Bagel Bites snacks. Lower pricing decreased sales 1.0%, primarily due to increased marketing spend across all major brands and lower pricing in Boston Market HomeStyle Meals, partially offset by higher pricing of Smart Ones frozen entrees and frozen potatoes. Divestitures reduced sales by 7.9% due to the sale of Budget Gourmet. Special Items Fiscal Year 2002's results were positively impacted by a net Streamline restructuring and implementation benefit totaling $3.6 million pretax. Pretax charges of $1.1 million were classified as cost of products sold and a pretax benefit of $4.6 million is classified as SG&A. Fiscal Year 2001's results were negatively impacted by special items which net to $251.0 million after-tax. The following tables provide a comparison of Heinz Finance's reported results and the results excluding special items for Fiscal Year 2002 and Fiscal Year 2001. Fiscal Year (52 Weeks) Ended May 1, 2002 ---------------------------------------------- Operating (Dollars in millions) Net Sales Gross Profit Income Net Income --------- ------------ ------ ---------- Reported results ......................................... $ 4,191.2 $ 1,446.9 $ 616.8 $ 73.7 Revisions to restructuring accruals and asset write-downs- Fourth Quarter 2002 ................................... -- -- (4.7) (4.1) Streamline implementation costs........................... -- 1.1 1.2 1.0 ---------- ---------- -------- ------- Results excluding special items .......................... $ 4,191.2 $ 1,448.0 $ 613.2 $ 70.6 ========== ========== ======== =======
29 Fiscal Year (52 Weeks) Ended May 2, 2001 ------------------------------------------ Operating Net Sales Gross Profit Income Net Income --------- ------------ ------ ---------- (Dollars in millions) Reported results .............................. $ 4,550.4 $ 1,465.1 $ 438.1 $ 312.1* Operation Excel restructuring .............. -- 36.3 44.8 28.0 Operation Excel implementation costs ....... -- 62.2 149.5 94.4 Operation Excel reversal ................... -- (8.2) (21.0) (13.3) Streamline restructuring ................... -- 58.2 72.9 45.9 Streamline implementation costs ............ -- 7.1 11.8 9.3 Loss on the sale of The All American Gourmet -- -- 94.6 66.2 Equity loss on investment of Hain .......... -- -- -- 3.5 Acquisition costs -- -- 18.5 11.7 ---------- ---------- -------- -------- Results excluding special items ............... $ 4,550.4 $ 1,620.7 $ 809.2 $ 557.9 ========== ========== ======== ========
*Before cumulative effect of accounting changes (Note: Totals may not add due to rounding.) Gross Profit Gross profit decreased $18.2 million, or 1.2%, to $1.45 billion from $1.47 billion, and the gross profit margin increased to 34.5% from 32.2%. Gross profit across all of our segments was unfavorably impacted as a result of the retention of finished goods inventories by Heinz as discussed above. Excluding the special items identified above, gross profit decreased $172.7 million, or 10.7%, to $1.45 billion from $1.62 billion, and the gross profit margin decreased to 34.5% from 35.6%. Excluding special items noted above, gross profit for the Heinz North America segment decreased $108.2 million, or 12.6%, due primarily to inventories retained by Heinz, lower pricing and a decrease in the foodservice business partially offset by the favorable impact of acquisitions. Excluding special items noted above, the U.S. Pet Products and Seafood segment's gross profit decreased $99.3 million, or 24.3% primarily due to inventories retained by Heinz, price decreases in pet food and pet snacks, increased ingredient and manufacturing costs and a shift to less profitable, larger-size products. Pet food ingredient costs also increased as a result of reformulating recipes to improve palatability. Excluding special items noted above, U.S. Frozen's gross profit increased $36.1 million, or 10.2%, due primarily to acquisitions partially offset by retained inventories by Heinz. SG&A SG&A decreased $247.0 million, or 27.5%, to $650.9 million from $898.0 million and decreased as a percentage of sales to 15.5% from 19.7%. Excluding the special items noted above, SG&A decreased $26.7 million, or 3.9%, to $655.7 million from $682.4 million and increased as a percentage of sales to 15.6% from 15.0%. This decrease is primarily attributable to the finished goods inventories which were retained by Heinz partially offset by acquisitions and increased selling and distribution costs. Operating Income Operating income increased $178.7 million, or 40.8%, to $616.8 million from $438.1 million and increased as a percentage of sales to 14.7% from 9.6%. Excluding the special items noted above, operating income decreased $196.0 million, or 24.2%, to $613.2 million from $809.2 million and decreased as a percentage of sales to 14.6% from 17.8%. The Heinz North America segment's operating income decreased $88.8 million, or 19.7%, to $362.6 million from $451.5 million. Excluding the special items noted above, operating income decreased $192.0 million, or 34.7%, to $361.5 million from $553.6 million, due primarily to the decrease in gross profit discussed above and higher selling and distribution costs, partially offset by the favorable impact of acquisitions. 30 The U.S. Pet Products and Seafood segment's operating income increased $126.4 million to $91.3 million from a loss of $35.1 million. Excluding the special items noted above, operating income decreased $27.1 million, or 23.4% to $88.9 million from $116.0 million, due to the decrease in gross profit. The U.S. Frozen segment's operating income increased $142.2 million to $165.5 million from $23.3 million. Excluding the special items noted above, operating income increased $24.3 million, or 17.2%, to $165.5 million from $141.2 million as the favorable impact of acquisitions was partially offset by the impact of retained inventories and increased selling and distribution costs and the divestiture of Budget Gourmet. Other Items Interest expense increased $196.3 million to $206.6 million from $10.3 million last year, due primarily to the assumption of approximately $2.9 billion of Heinz's outstanding U.S. debt by Heinz Finance on May 3, 2001 as well as increased borrowings partially offset by lower interest rates. Interest income decreased $74.8 million to $36.2 million from $111.0 million last year due primarily to the exchange of related party notes receivable for $1.9 billion of non-voting 6.5% cumulative participating preferred stock of PM Holding during the fourth quarter of Fiscal Year 2001. This decrease was offset by an increase due to Heinz Finance's new short-term notes receivables with related parties. Other expense decreased $9.9 million to $11.4 million from $21.3 million primarily related to a reduction in accounts receivable factoring discount expense partially offset by increased amortization of debt issuance costs. The effective tax rate for Fiscal Year 2002 was 8.2% compared to 39.7% last year. Excluding the special items identified above, the effective tax rate was 8.1% for Fiscal Year 2002 compared to 37.6% last year. This decrease is primarily the result of Heinz Finance's nontaxable minority interest in Heinz LP in Fiscal Year 2002. Net Income Net income decreased $233.2 million to $73.7 million from $306.9 million last year. The majority of this decrease is due to the minority interest in Heinz LP. In Fiscal Year 2001, Heinz Finance changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" (see Note 2 to the Consolidated and Combined Financial Statements). The cumulative effect of adopting SAB No. 101 was $4.8 million in Fiscal Year 2001. Excluding the special items noted above and the prescribed accounting change, net income decreased 87.3% to $70.6 million from $557.9 million last year. Fiscal Year 2001 versus Fiscal Year 2000 Sales Sales for Fiscal Year 2001 increased $81.1 million, or 1.8%, to $4.55 billion from $4.47 billion in Fiscal Year 2000. Volume increased sales by $126.3 million, or 2.8%, and acquisitions increased sales by $109.8 million, or 2.5%. Divestitures reduced sales by $45.7 million, or 1.0% and lower pricing reduced sales by $109.3 million, or 2.4%. Sales of the Heinz North America segment increased $196.4 million, or 10.1%. Sales volume increased 5.8%, due to increases in ketchup, condiments and sauces, foodservice, gravy and canned soups. Acquisitions, net of divestitures, increased sales 4.7%. Slightly lower pricing decreased sales 0.4%. Sales of the U.S. Pet Products and Seafood segment decreased $202.2 million, or 12.4%. Lower pricing decreased sales 7.1%, primarily in light meat tuna, dry dog food and cat snacks. Sales volume decreased 4.6%, primarily in tuna and canned pet food. Divestitures decreased sales 0.6%. The U.S. Frozen segment's sales increased $86.9 million, or 9.8%. Sales volume increased 10.1%, driven by Smart Ones frozen entrees, Boston Market HomeStyle Meals, Bagel Bites snacks and frozen potatoes, partially 31 offset by a decrease in The Budget Gourmet line of frozen entrees and frozen pasta. Higher pricing increased sales by 1.8% driven by Smart Ones frozen entrees and frozen potatoes, partially offset by increased promotions. Divestitures reduced sales 2.1% mainly due to the sale of The All American Gourmet business and its Budget Gourmet and Budget Gourmet Value Classics brands of frozen entrees. Special Items Fiscal Year 2001 was impacted by a number of special items which are summarized in the tables below. These include Operation Excel implementation costs of $149.5 million pretax, additional Operation Excel restructuring charges of $44.8 million pretax and reversals of $21.0 million pretax of restructuring accruals and asset write-downs. Fiscal Year 2001 results also include Streamline restructuring charges of $72.9 million pretax and related implementation costs of $11.8 million pretax. During the fourth quarter of Fiscal Year 2001, the U.S. Group completed the sale of The All American Gourmet business that resulted in a pretax loss of $94.6 million. The Fiscal Year 2001 results also include pretax costs of $18.5 million related to attempted acquisitions and a loss of $5.6 million pretax which represents the U.S. Group's equity loss associated with Hain's fourth quarter results which include charges for its merger with Celestial Seasonings. Fiscal Year 2000 results include Operation Excel restructuring charges of $95.3 million pretax, Operation Excel implementation costs of $96.9 million pretax, and reversals of $16.4 million pretax of Fiscal Year 1999 restructuring accruals and asset write-downs. The following tables provide a comparison of the U.S. Group's reported results and the results excluding special items for Fiscal Year 2001 and Fiscal Year 2000. Fiscal Year (52 Weeks) Ended May 2, 2001 ------------------------------------------------------ Operating Net Sales Gross Profit Income Net Income ---------- ------------ --------- ---------- (Dollars in millions) Reported results ................................. $ 4,550.4 $ 1,465.1 $ 438.1 $ 312.1* Operation Excel restructuring .................. -- 36.3 44.8 28.0 Operation Excel implementation costs ........... -- 62.2 149.5 94.4 Operation Excel reversal ....................... -- (8.2) (21.0) (13.3) Streamline restructuring ....................... -- 58.2 72.9 45.9 Streamline implementation costs ................ -- 7.1 11.8 9.3 Loss on the sale of The All American Gourmet ... -- -- 94.6 66.2 Equity loss on investment in Hain .............. -- -- -- 3.5 Acquisition costs .............................. -- -- 18.5 11.7 ---------- ---------- -------- -------- Results excluding special items ................ $ 4,550.4 $ 1,620.7 $ 809.2 $ 557.9 ========== ========== ======== ========
* Before cumulative effect of accounting changes Fiscal Year (52 Weeks) Ended May 3, 2000 -------------------------------------------------------- Operating Net Sales Gross Profit Income Net Income --------- ------------ ------------ ---------- (Dollars in millions) Reported results ................................. $ 4,469.3 $ 1,455.8 $ 609.3 $ 448.3 Operation Excel restructuring .................. -- 53.4 95.3 61.5 Operation Excel implementation costs ........... -- 33.7 96.9 61.0 Operation Excel reversal ....................... -- (16.4) (16.4) (11.8) ---------- ---------- -------- -------- Results excluding special items .................. $ 4,469.3 $ 1,526.5 $ 785.1 $ 559.0 ========== ========== ======== ========
(Note: Totals may not add due to rounding.) 32 Gross Profit Gross profit increased $9.4 million, or 0.6%, to $1.47 billion from $1.46 billion in Fiscal Year 2000. The gross profit margin decreased to 32.2% from 32.6%. Excluding the special items identified above, gross profit increased $94.2 million, or 6.2%, to $1.62 billion from $1.53 billion and the gross profit margin increased to 35.6% from 34.2%. Gross profit across all major segments, was favorably impacted by savings from Operation Excel. Excluding special items noted above, gross profit for the Heinz North America segment increased $104.5 million, or 14.1%, due primarily to acquisitions and increased sales volume of ketchup partially offset by higher energy costs. Excluding special items noted above, the U.S. Pet Products and Seafood segment's gross profit decreased $111.7 million, or 28.4%, primarily due to increased promotions and lower volume of tuna and canned pet food. Excluding special items noted above, the U.S. Frozen's gross profit increased $16.6 million, or 5.2%, due to increased sales volume mainly attributable to Boston Market HomeStyle Meals and higher selling prices, partially offset by higher energy costs and increased promotions. SG&A SG&A increased $145.9 million to $898.0 million from $752.1 million and increased as a percentage of sales to 19.7% from 16.8%. Excluding the special items identified above, SG&A increased $35.3 million to $682.4 million from $647.0 million and increased as a percentage of sales to 15.0% from 14.5%. Selling and distribution expenses increased $66.0 million to $387.3 million from $321.2 million, or 20.6%, primarily due to acquisitions and increased fuel costs. Marketing decreased $4.7 million, or 3.3%. Operating Income Operating income decreased $171.3 million, or 28.1%, to $438.1 million from $609.3 million in Fiscal Year 2000. Excluding the special items identified above, operating income increased $24.1 million, or 3.1%, to $809.2 million from $785.1 million in Fiscal Year 2000. Operating income, across all major segments, was favorably impacted by savings from Operation Excel. The Heinz North America segment's operating income increased $22.3 million to $451.5 million from $429.1 million in Fiscal Year 2000. Excluding the special items noted above, operating income increased $30.6 million, or 5.8%, to $553.6 million from $523.0 million in Fiscal Year 2000 due to the strong performance of ketchup, condiments and sauces, and the acquisitions of Quality Chef, Yoshida and IDF Holding, Inc., partially offset by higher energy costs. The U.S. Pet Products and Seafood segment's operating income decreased $119.2 million to a loss of $35.1 million from income of $84.1 million in Fiscal Year 2000. Excluding the special items noted above, operating income decreased $22.7 million, or 16.4% to $116.0 million from $138.7 million due to lower tuna and canned pet food sales volumes, a significant decrease in the selling price of tuna and higher energy costs, partially offset by the strong performance of pet snacks. The U.S. Frozen segment's operating income decreased $73.6 million to $23.3 million from $96.9 million in Fiscal Year 2000. Excluding the special items noted above, operating income increased $17.1 million, or 13.7%, to $141.2 million from $124.1 million in Fiscal Year 2000. This increase is attributable to increased sales of Smart Ones frozen entrees, Boston Market frozen meals and Bagel Bites snacks, partially offset by marketing spending behind the national rollouts of Boston Market products, the new Ore-Ida potato packaging and higher energy costs. Other Items Other income, net totaled $79.4 million compared to $91.2 million in Fiscal Year 2000 primarily due to a reduction in interest income from the transfer of notes receivable with related parties from the U.S. Group to PM Holdings, Inc. The effective tax rate for Fiscal Year 2001 was 39.7% compared to 36.0% in Fiscal Year 2000. The 33 current year rate is negatively impacted by a lower tax basis in dispositions. Excluding the special items identified in the tables above, the effective tax rate was 37.6% for Fiscal Year 2001 compared to 36.2% in Fiscal Year 2000. Net Income Net income decreased $141.4 million to $306.9 million from $448.3 million in Fiscal Year 2000. In Fiscal Year 2001, the U.S. Group changed its method of accounting for revenue recognition in accordance with SAB No. 101, "Revenue Recognition in Financial Statements." See Note 2 to the Consolidated and Combined Financial Statements included in this prospectus. The cumulative effect of adopting SAB No. 101 was $4.8 million. Excluding the special items noted above and the prescribed accounting change, net income decreased 0.2% to $557.9 million from $559.0 million in Fiscal Year 2000. Liquidity and Financial Position Cash flows from operating activities Operating activities for the three months ended July 31, 2002 provided cash of $340.8 million compared to using cash of $128.0 million in the same period last year. The increase is primarily due to decreased trade receivables and the building of inventory levels in the first quarter of Fiscal Year 2002 as a result of all finished goods inventories of the U.S. Group being retained by Heinz on May 3, 2001. Operating activities required cash of $32.9 million in Fiscal Year 2002, compared to providing cash of $77.5 million in Fiscal Year 2001. The decrease in Fiscal Year 2002 versus Fiscal Year 2001 is primarily due to Heinz Finance's build of inventory levels in Fiscal Year 2002 as a result of all finished goods inventories of the U.S. Group being retained by Heinz on May 3, 2001 as well as the termination of Heinz Finance's accounts receivable factoring contract with Receivables Servicing Company, a fully consolidated Heinz affiliate, in Fiscal Year 2002. Cash flows from investing activities Cash used for investing activities for the three months ended July 31, 2002 was $6.4 million compared to $313.7 million in the same period last year. There were no acquisitions in the current quarter and acquisitions in the prior year required $290.2 million, primarily related to the purchase of Borden Food Corporation's pasta and dry bouillon and soup businesses. Capital expenditures in the current quarter required $16.6 million compared to $2.6 million last year. Cash used for investing activities was $874.8 million in Fiscal Year 2002 compared to $232.0 million in Fiscal Year 2001. Acquisitions in the current year required $809.4 million, due primarily to the purchase of Borden Food Corporation's pasta and dry bouillon and soup businesses, Delimex Holdings, Inc. and Anchor Food Products branded retail business and licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers. Acquisitions in the prior year required $229.9 million, due primarily to International DiverseFoods Inc., Alden Merrell Corporation and two privately held U.S. foodservice companies, Cornucopia Inc. and Central Commissary. (See Note 3 to the Consolidated and Combined Financial Statements.) Also, during the prior year, Heinz Finance exercised its preemptive right to purchase additional equity in Hain to restore Heinz Finance's investment level to approximately 19.5% of the outstanding stock of Hain for $79.7 million. Divestitures provided $96.5 million in Fiscal Year 2001 from the sale of The All American Gourmet business and can making assets. Capital expenditures totaled $77.2 million in Fiscal Year 2002 compared to $183.5 million in Fiscal Year 2001. The decrease is attributable to a reduction in Operation Excel-related capital expenditures. In Fiscal Year 2003, Heinz Finance expects capital expenditures to be consistent with Fiscal Year 2002. Proceeds from disposals of property, plant and equipment were $3.3 million in Fiscal Year 2002 compared to $165.5 million in Fiscal Year 2001. The prior year was primarily due to the sale of equipment that was then utilized under operating lease arrangements. 34 Cash flows from financing activities Financing activities for the three months ended July 31, 2002 used $329.9 million compared to providing $449.3 million in the same period in the prior year. There were no proceeds from long-term debt in the current quarter and proceeds from long-term debt were $749.0 million last year. There were no payments on long-term debt in the current quarter and payments on long-term debt required $7.2 million last year. Net payments on commercial paper and short-term borrowings required $260.9 million compared to $618.0 million last year. In addition, $325.0 million was provided during the three months ended August 1, 2001 by the issuance of Preferred Stock. Dividend payments to preferred shareholders totaled $5.1 million in the current quarter. In addition, distributions to Class A partners were $64.8 million in the current quarter. In Fiscal Year 2002, financing activities provided $904.5 million compared to $152.6 million in the prior year. Proceeds from long-term debt were $1.99 billion in Fiscal Year 2002. Payments on long-term debt required $309.9 million in Fiscal Year 2002 compared to $12.2 million in Fiscal Year 2001. Net payments on commercial paper and short-term borrowings required $957.7 million in Fiscal Year 2002. In addition, $325.0 million was provided during Fiscal Year 2002 via the issuance of preferred stock, (see below). Dividend payments to preferred shareholders totaled $15.7 million compared to dividend payments to Heinz of $350.6 million last year. Cash requirements of Project Streamline and Operation Excel In the first quarter of Fiscal Year 2003, the cash requirements of Streamline were $1.0 million, relating to severance costs. In Fiscal Year 2002, the cash requirements of Streamline were $16.5 million, consisting of spending for severance and exit costs ($12.9 million), capital expenditures ($2.5 million) and implementation costs ($1.2 million). In Fiscal Year 2001, the cash requirements of Streamline were $14.3 million, consisting of spending for severance and exit costs ($2.3 million), capital expenditures ($0.3 million) and implementation costs ($11.8 million). In Fiscal Year 2001, the cash requirements of Operation Excel were $231.9 million, consisting of spending for severance and exit costs ($21.6 million), capital expenditures ($60.8 million) and implementation costs ($149.5 million). In Fiscal Year 2000, the cash requirements of Operation Excel were $199.9 million, consisting of spending for severance and exit costs ($20.3 million), capital expenditures ($82.7 million) and implementation costs ($96.9 million). In Fiscal Year 2003, Heinz Finance expects the cash requirements of Streamline to be approximately $4.4 million, consisting of severance and exit costs (all of the $4.4 million accrued as of May 1, 2002). Heinz Finance financed the cash requirements of these programs through operations, proceeds from the sale of non-strategic assets and with short-term and long-term borrowings from Heinz. The cash requirements of these programs have not had and are not expected to have a material adverse impact on Heinz Finance's liquidity or financial position. Other Financial and Liquidity Matters Pretax return on average invested capital ("ROIC") was 15.6% in Fiscal Year 2002, 9.3% in Fiscal Year 2001 and 14.5% in Fiscal Year 2000. Excluding the special items identified above, ROIC was 15.6% in Fiscal Year 2002, 17.7% in Fiscal Year 2001 and 18.8% in Fiscal Year 2000. In connection with the reorganization, we assumed as co-obligor the responsibility to pay Heinz debt issues totaling $2.57 billion in principal amount, plus accrued interest thereon. We also assumed as co-obligor the obligation to pay approximately $258 million of commercial paper issued by Heinz. Since May 3, 2001, we have issued commercial paper to refinance the commercial paper obligations assumed by us in the reorganization, to make loans to Heinz and to fund our ongoing operations. For further discussion of our liquidity and financing arrangements with Heinz, please see "Related Party Transactions" in this prospectus. 35 On July 6, 2001, Heinz Finance raised $325 million via the issuance of Voting Cumulative Preferred Stock, Series A with a liquidation preference of $100,000 per share. The Series A Preferred shares are entitled to receive quarterly dividends at a rate of 6.226% per annum and are required to be redeemed for cash on July 15, 2008. In addition, Heinz Finance issued $750 million of 6.625% Guaranteed Notes due July 15, 2011. The proceeds were used for general corporate purposes, including retiring commercial paper borrowings and financing acquisitions and ongoing operations. Beginning on June 1, 2002, to but excluding July 17, 2002, interest accrued on the Notes due 2011 at the annual rate of 6.875%. Beginning on July 17, 2002, interest accrued on the Notes due 2011, and will accrue to but excluding the date the exchange offer is completed, at the annual rate of 7.125%. On September 6, 2001, Heinz Finance, Heinz and a group of domestic and international banks entered into a $1.50 billion credit agreement which expires in September 2006 and an $800 million credit agreement which expires in September 2002. These credit agreements, which support Heinz Finance's and Heinz's commercial paper programs, replaced the $2.30 billion credit agreement which expired on September 6, 2001. As of May 1, 2002, $89.1 million of domestic commercial paper is classified as long-term debt due to the long-term nature of the supporting credit agreement. In January 2002, Moody's Investor Service changed the credit ratings on Heinz's debt to A-3 for long-term debt and P-1 for short-term debt. The previous ratings were A-2 and P-1, respectively. The change in Heinz's credit rating by Moody's has not had, and is not expected to have, a material adverse impact on Heinz Finance's liquidity or borrowing costs. In connection with the announcement of the Del Monte transaction, Moody's changed Heinz's "A3" senior unsecured debt ratings outlook from negative to stable. Heinz's long-term and short-term debt ratings by Standard & Poor's remained at A and A-1, respectively. On August 16, 2002, Fitch Ratings initiated coverage of Heinz assigning an A rating to Heinz's senior unsecured debt and a F1 rating to Heinz's commercial paper. Fitch indicated that the ratings outlook was stable. On March 7, 2002, Heinz Finance issued $700 million of 6.00% Guaranteed Notes due March 15, 2012 and $550 million of 6.75% Guaranteed Notes due March 15, 2032, which are guaranteed by Heinz. The proceeds were used to retire commercial paper borrowings, as Heinz Finance made the strategic decision to increase long-term debt and reduce short-term debt to enhance its liquidity profile. Beginning on September 4, 2002, to but excluding October 19, 2002, interest accrued on the Notes due 2012 at the annual rate of 6.25% and on the Notes due 2032 at the annual rate of 7.00%. Beginning on October 19, 2002, interest accrued on the Notes due 2012 and on the Notes due 2032, and will accrue to but excluding the date the exchange offer is completed, at the annual rates of 6.50% and 7.25%, respectively. Heinz Finance has $1.0 billion of remarketable securities due November 2020 with a coupon rate of 6.82%. The securities are subject to mandatory tender by all holders to the remarketing dealer on each November 15, and the interest rate will be reset on such dates. If the remarketing dealer does not elect to exercise its right to a mandatory tender of the securities or otherwise does not purchase all of the securities on a remarketing date, then Heinz Finance is required to repurchase all of the securities on the remarketing date at 100% of the principal amount plus accrued interest. Heinz Finance received a premium from the remarketing dealer for the right to require the mandatory tender of the securities. The amortization of the premium resulted in an effective interest rate of 5.82% through November 15, 2001. On November 15, 2002, the remarketing dealer exercised its right to a mandatory tender of the securities and purchased all of the securities and remarketed the securities at an effective yield to Heinz Finance of 6.5607% through November 15, 2003. Because the remarketable securities may be refinanced by the $1.5 billion credit agreement discussed above, they are classified as long-term debt. On September 5, 2002, Heinz Finance, Heinz and a group of domestic and international banks renewed an $800 million credit 364-day agreement. That credit agreement and the $1.5 billion credit agreement that expires in September 2006 support Heinz Finance's and Heinz's commercial paper programs. Aggregate domestic commercial paper had a weighted-average interest rate during Fiscal Year 2002 of 2.9% and at year-end 2002 of 2.0%. Based upon the amount of commercial paper outstanding at May 1, 2002, a variance of 1/8% in the related interest rate would cause annual interest expense to change by approximately $0.1 million. 36 As previously discussed under "--Overview--Reorganization," Heinz Finance assumed $2.83 billion of debt of Heinz. While this debt was not on the historical balance sheet of the U.S. Group, it was nevertheless serviced and supported by the cash flow and assets of the U.S. Group. The transfer of this debt to Heinz Finance as a part of the reorganization, all of which is guaranteed by Heinz, does not adversely impact the financial position, results of operations and liquidity in the future periods of Heinz and Heinz Finance taken as a whole. The following table lists the Heinz debt assumed by Heinz Finance as co-obligor as part of the reorganization, and the debt issued directly by Heinz Finance. Maturity Date Description Amount Coupon Date - ------- --------------------- ----------------- ------ -------- 1/27/93 U.S. Note*+ US$200,000,000 6.875% 1/15/03 2/3/98 Eurobond*+ US$250,000,000 5.75% 2/3/03 3/25/98 U.S. Note*+ US$300,000,000 6.00% 3/15/08 7/15/98 U.S. Note*+ US$250,000,000 6.375% 7/15/28 1/5/00 Eurobond*+ Euro300,000,000 5.00% 1/5/05 US$297,810,000** 11/6/00 Dealer Remarketable Securities*+ US$1,000,000,000 6.82% 11/15/20 7/6/01 U.S. Note* US$750,000,000 6.625% 7/15/11 3/7/02 U.S. Note* US$700,000,000 6.00% 3/15/12 3/7/02 U.S. Note* US$550,000,000 6.75% 3/15/32 + Heinz Finance and Heinz as co-obligors * Heinz Finance as issuer, Heinz as guarantor ** Converted using the exchange rate of .9927 (USD) to 1(EUR) on December 2, 2002. Heinz Finance's financial position continues to remain strong, enabling it to meet cash requirements for operations, capital expansion programs and debt service during the next twelve months and the foreseeable future. Commitments and Contingencies Heinz Finance is obligated to make future payments under various contracts such as debt agreements, lease agreements and unconditional purchase obligations. The following table represents the significant contractual cash obligations of Heinz Finance as of May 1, 2002, which has not materially changed during the three months ended July 31, 2002. Contractual Cash Due in Due in Due in Due in Due in Due Obligations (In millions) Total 2003 2004 2005 2006 2007 Thereafter ----- ---- ---- ---- ---- ---- ---------- Long-term debt (including capital leases of $9.9 million) ................ $4,387 $ 451 $ 2 $ 273 $ 1 $ 90 $3,570 Operating leases ........ 212 16 17 16 13 133* 17 ------ ------ ------ ------ ------ ------ ------ Total contractual cash obligations ........ $4,599 $ 467 $ 19 $ 289 $ 14 $ 223 $3,587 ====== ====== ====== ====== ====== ====== ======
* Includes the purchase option related to certain warehouses and equipment currently utilized under existing synthetic leases. Heinz Finance has purchase commitments for materials, supplies, services and property, plant and equipment as part of the ordinary conduct of business. A few of these commitments are long-term and are based on minimum purchase requirements. In the aggregate, such commitments are not at prices in excess of current markets. Due to the proprietary nature of some of Heinz Finance's materials and processes, certain supply contracts contain penalty provisions for early terminations. Heinz Finance does not believe a material amount of penalties is reasonably likely to be incurred under these contracts based upon historical experience and current expectations. 37 Heinz Finance does not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect liquidity. See Note 9 of the Condensed Consolidated Financial Statements for the three months ended July 31, 2002 and August 1, 2001 for disclosure of all significant related party items. Market Risk Factors The following discussion about Heinz Finance's risk-management activities as of May 1, 2002 includes "forward-looking" statements that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. There have been no material changes in Heinz Finance's market risk during the three months ended July 31, 2002. Heinz Finance is exposed to market risks from adverse changes in interest rates, commodity prices and production costs (including energy). As a policy, Heinz Finance does not engage in speculative or leveraged transactions, nor does Heinz Finance hold or issue financial instruments for trading purposes. Interest Rate Sensitivity Heinz Finance is exposed to changes in interest rates primarily as a result of its borrowing and investing activities used to maintain liquidity and fund business operations. Heinz Finance continues to utilize commercial paper to fund working capital requirements. The nature and amount of Heinz Finance's long-term and short-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. Heinz Finance utilizes interest rate swap agreements to manage interest rate exposure. The following table summarizes Heinz Finance's debt obligations at May 1, 2002. The interest rates represent weighted-average rates, with the period-end rate used for the floating rate debt obligations. The fair value of the debt obligations approximated the recorded value as of May 1, 2002. Expected Fiscal Year of Maturity -------------------------------------------------------------------------------------------- (In thousands) 2003 2004 2005 2006 2007 Thereafter Total --------- ------- --------- -------- ---------- ------------- ---------- Fixed rate .......... $ 451,375 $ 1,588 $ 272,568 $ 517 $ 517 $ 3,565,251 $4,291,816 Average interest rate............... 6.42% 6.28% 5.05% 6.86% 6.86% 6.47% Floating rate ....... $ -- $ -- $ -- $ -- $ 89,142 $ 6,442 $ 95,584 Average interest rate............... --% --% --% --% 2.94% 3.39%
In Fiscal Year 2002, Heinz Finance entered into interest rate swaps in order to convert certain fixed-rate debt to floating. These swaps have an aggregate notional value of $2.05 billion and an average maturity of 16.4 years. The weighted-average fixed rate of the associated debt is 6.45%; however, the effective rate after taking into account the swaps is 3.14%. As of May 1, 2002, the potential gain or loss in the fair value of Heinz Finance's interest rate swaps, assuming a hypothetical 10% fluctuation in the swap rates, would be approximately $120 million. However, it should be noted that any change in the fair value of the swaps, real or hypothetical, would be offset by an inverse change in the fair value of the related debt. Based on the amount of fixed-rate debt converted to floating as of May 1, 2002, a variance of 1/8% in the related interest rate would cause annual interest expense related to this debt to change by approximately $2.6 million. Commodity Price Hedging Heinz Finance is the purchaser of certain commodities such as corn, wheat and soybean meal and oil. Heinz Finance generally purchases these commodities based upon market prices that are established with the vendor as part of the purchase process. Heinz Finance enters into commodity future or option contracts, as deemed appropriate, to reduce the effect of price fluctuations on anticipated purchases. Such contracts are accounted for as hedges, if they meet certain qualifying criteria, with the effective portion of gains and losses recognized as part of cost of products sold, and generally have a term of less than one year. As of May 1, 2002, unrealized gains and losses related to commodity contracts held by Heinz Finance were not material nor would they be given a hypothetical 10% 38 fluctuation in market prices. It should be noted that any change in the value of the contracts, real or hypothetical, would be significantly offset by an inverse change in the value of the underlying hedged items. See Note 12 to the Condensed Consolidated Financial Statements for the three months ended July 31, 2002 and August 1, 2001. Inflation In general, costs are affected by inflation and the effects of inflation may be experienced by Heinz Finance in future periods. We believe, however, that such effects have not been material to us during the past three years. Recently Adopted Accounting Standards Heinz Finance adopted Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations," which requires that the purchase method of accounting be applied to all business combinations after June 30, 2001. SFAS No. 141 also established criteria for recognition of intangible assets and goodwill. Effective May 2, 2002, Heinz Finance adopted SFAS No. 142 "Goodwill and Other Intangible Assets." Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized. This standard also requires, at a minimum, an annual assessment of the carrying value of goodwill and intangibles with indefinite useful lives. Heinz Finance has completed its evaluation of the impact of adopting SFAS No. 142 on the consolidated financial statements. The reassessment of intangible assets, including the ongoing impact of amortization, was completed during the first quarter of Fiscal Year 2003. The assignment of goodwill to reporting units, along with transitional goodwill impairment tests, was completed during the second quarter of Fiscal Year 2003. No impairment issues were identified as a result of completing these transitional impairment tests. Net income for the quarter ended August 1, 2001 and fiscal years ended May 1, 2002, May 2, 2001 and May 3, 2000, would have been $16.2 million, $75.1 million, $338.1 million and $476.0 million, respectively, had the provision of the new standards been applied as of May 3, 2001. Effective May 2, 2002, Heinz Finance adopted SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." This statement provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discontinued operation to include a component of an entity and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. The adoption of this new standard did not have a material impact on Heinz Finance's financial position, results of operations or cash flows for the three months ended July 31, 2002. During the fourth quarter of Fiscal Year 2002, Heinz Finance adopted Emerging Issues Task Force ("EITF") statements relating to the classification of vendor consideration and certain sales incentives. The adoption of these EITF statements has no impact on operating income or net income; however, revenues and gross profit were reduced by approximately $64.5 million in the first quarter of Fiscal Year 2002 and $436.7 million, $387.8 million and $319.9 million in the fiscal years ended 2002, 2001 and 2000, respectively. Prior period data has been reclassified to conform with current year presentation. Recently Issued Accounting Standards In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. This standard is effective for Heinz Finance in Fiscal Year 2004. Heinz Finance does not expect that the adoption of this standard will have a significant impact on the consolidated financial statements. In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting costs associated with exit or disposal activities. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This Statement also establishes that fair value is the objective for initial measurement 39 of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. Management is currently assessing the details of this Standard. Discussion of Critical Accounting Policies In the ordinary course of business, Heinz Finance has a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Our actual results could differ significantly from those estimates under different assumptions and conditions. We believe the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results and require management's most difficult, subjective and complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Marketing costs In order to support Heinz Finance's products, we offer various marketing programs to our customers and/or consumers which reimburse them for a portion or all of their promotional activities related to our products. We regularly review and revise, when deemed necessary, estimates of our costs for these marketing programs based on estimates of what has been earned by our customers and/or consumers. Actual costs may differ significantly if factors such as the level and success of the programs or other conditions differ from expectations. Inventories Inventories are stated at the lower of cost or market. Cost is determined principally under the average cost method. We record adjustments to the carrying value of inventory based upon our forecasted plans to sell our inventories. The physical condition (e.g., age and quality) of the inventories is also considered in establishing our valuation. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from our expectations. Property, Plant and Equipment Land, buildings and equipment are recorded at cost and are depreciated on a straight-line method over the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to our business model or changes in our capital strategy could result in the actual useful lives differing from our estimates. In those cases where we determine that the useful life of buildings and equipment should be shortened, we would depreciate the net book value in excess of the salvage value over its revised remaining useful life, thereby increasing depreciation expense. Factors such as changes in the planned use of fixtures or software or closing of facilities could result in shortened useful lives. Long-Lived Assets Long-lived assets, including fixed assets and intangibles, are evaluated periodically by Heinz Finance for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. If the sum of the undiscounted cash flows is less than the carrying value, Heinz Finance recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance. Our estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions, changes to our business model or changes in our operating performance. 40 BUSINESS General We have been a direct or indirect subsidiary of Heinz since 1983. Heinz Finance had no significant operating history until Heinz completed a corporate reorganization in the United States on May 3, 2001. The reorganization was designed to simplify Heinz's U.S. corporate structure, consolidate operations and establish centers of excellence for the management of the U.S. trademarks and for U.S. treasury functions. As a result of the reorganization, all of the U.S. business operations that had historically been conducted by Heinz through its Heinz USA division and eight subsidiary corporations are now conducted by Heinz Finance. Please refer to "Overview of Entity Structure, Reorganization and Financial Statement Presentation--Reorganization" for a detailed discussion of our reorganization. Since May 3, 2001, we have been engaged in the business of acquiring, holding and financing equity and debt investments in subsidiaries that own and operate Heinz's historical U.S. businesses, which manufacture, market, distribute and sell food and pet food products in the United States. Our most significant asset is our ownership interests in Heinz LP, a Delaware limited partnership formed on October 9, 2000. Heinz LP has two classes of limited partnership interests. As further described under "Overview of Entity Structure, Reorganization, and Financial Statement Presentation--Reorganization--Heinz LP," Heinz, directly and through wholly-owned subsidiaries, owns the Class A interests in Heinz LP. Heinz Finance directly and indirectly owns the Class B interests in Heinz LP. HMC is the managing general partner of Heinz LP and employs its salaried personnel. Heinz LP reimburses HMC for all its management costs. We participated in the growth of the U.S. businesses over Fiscal Year 2002 through the financing of the acquisition of the assets of the retail business of Anchor Food Products and the purchase of the stock of Delimex Holdings, Inc. Both of these acquisitions expanded our participation in the frozen appetizer and hand held food products category with the addition of T.G.I. Friday's frozen appetizers and Delimex taquitos. In addition, we financed the acquisition of certain assets of the sauce, soup and bouillon business of Borden Foods Corporation and its affiliates. Through this transaction, we acquired the Classico pasta sauce line of products. Description of the Business We conduct our food business through three segments, Heinz North America, U.S. Pet Products and Seafood and U.S. Frozen. The Heinz North America segment manufactures, markets and sells ketchup, condiments, sauces, soups, pasta meals and infant foods to the grocery and foodservice channels in the United States. For the three months ended July 31, 2002, Heinz North America accounted for $495.1 million, or 47.7% of our revenue. The U.S. Pet Products and Seafood segment manufactures, markets and sells dry and canned pet food, pet snacks, tuna and other seafood. For the three months ended July 31, 2002, this segment accounted for $295.5 million or 28.5% of our revenue. The U.S. Frozen segment manufactures, markets and sells frozen potatoes, entrees, snacks and appetizers, and accounted for $247.7 million or 23.9% of our revenue for the three months ended July 31, 2002. Recent Developments On June 13, 2002, Heinz announced that it will transfer to a wholly-owned subsidiary, referred to as "Spinco," certain assets and liabilities of our U.S. pet food and pet snacks, our U.S. tuna, U.S. retail private label soup and private label gravy, College Inn broths and our U.S. infant feeding businesses and distribute all of the shares of Spinco common stock on a pro rata basis to Heinz's shareholders. This transaction will affect businesses in the Heinz North America and U.S. Pet Products and Seafood segments. 41 Immediately following the distribution, Spinco will merge with a wholly-owned subsidiary of Del Monte resulting in Spinco becoming a wholly-owned subsidiary of Del Monte, the "Merger." In connection with the Merger, each share of Spinco common stock will be automatically converted into shares of Del Monte common stock that will result in the fully diluted Del Monte common stock at the effective time of the Merger being held approximately 74.5% by Heinz shareholders and approximately 25.5% by the Del Monte shareholders. As a result of the transaction, Heinz Finance will receive from Heinz approximately $1.1 billion in cash that will be used to retire debt. The Spinco businesses, which in Fiscal Year 2002 together generated approximately $1.4 billion of Heinz Finance's annual revenues (or approximately 35% of our annual revenues), include the following brands: StarKist, 9-Lives, Kibbles 'n Bits, Pup-Peroni, Snausages, Nawsomes, Heinz Nature's Goodness baby food and College Inn broths. The Spinco businesses also include factories in Bloomsburg, Pennsylvania, Lawrence, Kansas, Pittsburgh, Pennsylvania, Terminal Island, California and Topeka, Kansas. The Company and Heinz believe that this transformative initiative will make us a more focused and faster-growing business, leveraging two strategic platforms of Meal Enhancers (ketchup, condiments and sauces) and Meals & Snacks (frozen and ambient). In addition to the approximate $1.1 billion reduction in debt as a result of the Merger, we are targeting additional debt reduction by the end of Fiscal Year 2005. The Company expects that Fiscal Year 2003 will be a transition year, as the Merger is not expected to close until late calendar year 2002 or early in calendar year 2003. The Merger, which has been approved by the boards of directors of Heinz and Del Monte, is subject to approval by the shareholders of Del Monte. Heinz received on November 21, 2002, a private letter ruling from the Internal Revenue Service that the contribution of the assets and liabilities to Spinco and the distribution of the shares of common stock of Spinco to Heinz shareholders will be tax-free to Heinz, Spinco and the shareholders of Heinz. The Merger is also subject to customary closing conditions. Products and Markets Our products are manufactured and packaged to provide safe, wholesome foods for consumers, foodservice and institutional customers. Many products are prepared from recipes developed in our research laboratories and experimental kitchens. Ingredients are carefully selected, washed, trimmed, inspected and passed on to modern factory kitchens where they are processed, after which the finished product is filled automatically into containers of glass, metal, plastic, paper or fiberboard which are then closed, processed, labeled and cased for market. Finished products are processed by sterilization, homogenization, chilling, freezing, pickling, drying, freeze drying, baking or extruding. Certain finished products and seasonal raw materials are aseptically packed into sterile containers after in-line sterilization. Although crops constituting some of our raw food ingredients are harvested on a seasonal basis, most of our products are produced throughout the year. The primary brands and products marketed and sold by us include, by segment, the following: Heinz North America Heinz tomato ketchup, mustard and sauces Chef Francisco soups Heinz Nature's Goodness baby food Classico pasta sauce College Inn broth Yoshida sauces Wyler's bouillon and soups U.S. Frozen Ore-Ida potato products Bagel Bites Boston Market HomeStyle meals Smart Ones meals Rosetto pasta Delimex snacks Poppers appetizers 42 T.G.I. Friday's appetizers U.S. Pet Products & Seafood StarKist tuna 9-Lives cat food Kibbles 'n Bits dog food Gravy Train and Nature's Recipe dog food Jerky Treats, Meaty Bone, Pup-Peroni and Snausages dog treats Pounce cat treats The Heinz brand is our flagship and largest single brand. We believe that its strength derives from over 130 years of devotion to the idea of quality. Heinz ketchup is our signature product. It is the most popular brand of ketchup in the United States in terms of market share as described below. Along with the Heinz brand, we have many other powerful brands that lead in their respective categories. Heinz North America Heinz Ketchup #1 brand with an approximate 60% dollar share of the over $460 million U.S. ketchup market Heinz Baby Food #2 brand with an approximate 14% volume share of the $900 million U.S. baby food market Classico Pasta Sauce #1 brand premium pasta sauce with an approximate 39% dollar share of the $402 million U.S. premium pasta sauce market U.S. Frozen Ore-Ida Potatoes #1 brand with an approximate 48% dollar share of the $1 billion U.S. frozen potato market U.S. Pet Products and Seafood StarKist Tuna #1 brand with an approximate 41% dollar share of the over $1 billion U.S. tuna market The brand and market share data were sourced from AC Nielsen and reflect grocery stores, drug stores and mass merchandisers (excluding Wal-Mart) for the 52-week period ended November 2, 2002. The market share data does not include all retail outlets. Competitive Strengths Innovation We believe that our large number of new products and our creative marketing efforts make us one of the most innovative companies in the food industry in the United States. One of our key strategies is to continue innovation in products and packaging. We believe this will allow us to address consumer trends in taste, convenience and on-the-go eating. We have had a number of recent innovations, some of which include: 43 o Heinz Easy Squeeze! In 2002, we launched Heinz Easy Squeeze! ketchup in the No Wait, No Mess, upside-down bottle. We believe the patented silicone valve and ergonomically designed bottle will give customers more control when squirting, which will result in a neater more convenient experience. o Heinz EZ Squirt Kids' Condiment This product has driven overall volume growth for Heinz ketchup during the past year while helping to establish new market share records. o Ketchup Kick'Rs This flavored ketchup is designed to appeal to adult appetites for bold and spicy flavors. o Jack Daniel's and Mr. Yoshida's Grilling Sauces o Boston Market HomeStyle Meals Our combined retail sales of this business reached approximately $150 million in Fiscal Year 2001, making Boston Market HomeStyle Meals the most successful new product launch in the history of Heinz. o Hot Bites frozen snacks o StarKist pouch tuna This value-added, premium-priced product and packaging breakthrough achieved retail sales of $100 million in Fiscal Year 2002. o Pup-Peroni NawSomes! dog snacks Acquisitions Over the past few years we have focused on improving our portfolio of products. As part of that strategy, we have made acquisitions that expand on our capabilities, build on our core competencies and open new markets for us. Some of our recent acquisitions include: o Classico, a premium pasta sauce and a perfect fit with our tomato expertise and heritage; o Alden Merrell, a maker of high-quality, premium-priced frozen desserts for casual dining restaurants and foodservice distributors; o Delimex frozen hand-held Mexican foods, which allow us to compete in what we believe is one of the fastest-growing segments of the food business, ethnic foods; o Ethnic Gourmet frozen meals, a line of premium quality all-natural Indian and Thai meals and wraps; and o Anchor Foods, a rapidly growing producer of frozen snacks under the Poppers and T.G.I. Friday's brand names. 44 Consumer Marketing and Advertising Since 2000, we have implemented a major new focus on sports marketing, which we believe is beginning to generate momentum. Sports marketing is now a significant part of our overall marketing strategy and seeks to leverage the popularity of legendary athletes. We know that our business significantly benefitted from our associations with Tony Hawk for Bagel Bites, and we believe that the use of Larry Bird for Boston Market and now Kristi Yamaguchi for Smart Ones will benefit those businesses. Each of these celebrities reaches a specific audience and represents the brand in a highly targeted way. For example, o NBA basketball great Larry Bird is the focus of the ironic "Eat Like a Bird" advertising campaign that resulted in increased sales of Boston Market HomeStyle Meals among adult males. o Fitness-conscious consumers can identify with Smart Ones brand's spokesperson, Olympic and World Champion figure skater Kristi Yamaguchi. o Teenagers view Tony Hawk as being fun, irreverent and on the edge, which are characteristics that we seek to identify with our Bagel Bites and Hot Bites frozen snacks. In 2001, we also introduced a new color of EZ Squirt Kids' Condiment - "Funky Purple." The launch of this product generated more than 1,000 television news reports and hundreds more newspaper and magazine articles around the world. This marketing impact more than doubled the extensive media coverage of the introduction of our Blastin' Green "kids ketchup" in 2000. We believe that the naming rights to Heinz Field in Pittsburgh created another powerful and unique sports marketing opportunity. We believe that our media exposure, both direct and indirect, through Heinz Field has created an effective marketing tool among the millions of weekly television viewers of NFL Football and related programming. Millions more listen to the games on radio or read about them in a myriad of newspapers and sports publications. This audience represents an opportunity to further extend Heinz brand awareness. Competition Our products are sold under highly competitive conditions, with many large and small competitors. We regard our principal competition to be other manufacturers of processed foods, including branded, retail products, foodservice products and private label products, that compete with us for consumer preference, distribution, shelf space and merchandising support. We compete primarily on the basis of product quality, brand recognition, brand loyalty and consumer value. Customers Our products are sold through our own sales force and through independent brokers, agents and distributors to chain, wholesale, cooperative and independent grocery accounts, pharmacies, mass merchants, club stores, pet stores, foodservice distributors and institutions, including hotels, restaurants and certain government agencies. Our retail sales force consists of approximately 300 employees and seven teams that are dedicated to our key customers. We use two national brokers in connection with our retail sales efforts. In addition, we have a dedicated direct sales force for most of our large foodservice customers and service smaller ones through distributors. The following were our top ten U.S. customers based on revenue in Fiscal Year 2002: o Albertson's, Inc. o Safeway Inc. o C&S Wholesale o SuperValu, Inc. o Costco Wholesale Corp o SYSCO/SYGMA o Fleming Companies, Inc. o U.S. Foodservice o Kroger Co. o Wal-Mart Stores, Inc. 45 For Fiscal Year 2002, one customer, Wal-Mart Stores, Inc., represented more than 10% of our sales, and the top ten customers represented over 30% of our sales. We closely monitor the credit risk associated with these customers and to date have never experienced significant losses. Properties We operate the following factories, distribution centers and other properties involved in manufacturing our products: Company/Location Owned Leased Primary Products ---------------- ----- ------ ---------------- Pittsburgh, PA x soup, baby food Fremont, OH x condiments Holland, MI x pickles, vinegar, soup Muscatine, IA x soup, sauces Stockton, CA x tomato paste, sauces and condiments Mason, OH x sauces and condiments Dallas, TX x x sauces and condiments Escalon, CA x tomato products King of Prussia, PA x frozen soup Chatsworth, CA x sauces and condiments Jacksonville, FL x sauces and condiments Stone Mountain, GA x sauces and condiments Cedar Rapids, IA x soup Nashville, TN x sauces Industry, CA x sauces Newburyport, MA x frozen desserts Le Center, MN x frozen desserts Phoenix, AZ x sauces and condiments Irvine, CA x sauces and condiments San Diego, CA x frozen appetizers Northbrook, IL x dry soup, bouillon Pennsauken, NJ x sauces Ontario, OR x frozen potatoes West Chester, PA x frozen filled pasta Ft. Myers, FL x frozen appetizers Massilon, OH x frozen meals Pocatello, ID x frozen meals Bloomsburg, PA x canned pet food Topeka, KS x dry pet food Lawrence, KS x dry pet food We also own or lease office space, warehouses, distribution centers and research and other facilities. Our food processing plants and principal properties are in good condition and are satisfactory for the purposes for which they are being utilized. Trademarks, Patents and Licenses We own or license the following trademarks from related and unrelated parties: 46 Major Trademarks Heinz North America Heinz, College Inn, Classico, Quality Chef, Yoshida, Jack Daniels*, Bell 'Orto, Bella Rosa, Chef Francisco, Domani, Wyler's, E-Z Squirt U.S. Frozen Ore-Ida, Bagel Bites, Rosetto, Weight Watchers*, Boston Market*, Smart Ones, T.G.I. Friday's*, Hot Bites, Poppers, Delimex U.S. Pet Products and Seafood StarKist, 9-Lives, Pounce, Kibbles n' Bits, Ken-L-Ration, Reward, Gravy Train, Skippy, Nature's Recipe, Pounce, Snausages, Jerky Treats, Pup-Peroni, Wagwells, Meaty Bone, Scooby* ------------------------------------ *Used under license from unrelated parties Our most significant trademarks are "Heinz," "Ore-Ida" and "StarKist," all of which we license from a related party. The trademarks that we license from unrelated parties are under long-term contracts and are important to our business although are individually immaterial. We have participated in the development of certain food processing equipment, some of which is patented. We regard these patents as important but do not consider any one or group of them to be materially important to our business as a whole. Employees On a full-time basis, as of May 1, 2002, approximately 13,000 people were employed as part of our business, and of those employees, approximately 6,000 are represented by labor unions. Approximately 3,000 are salaried employees and approximately 10,000 are hourly employees. Almost all of the employees are full-time workers. We believe that we have good relations with our employees. Regulatory Compliance with the provisions of national, state and local environmental laws and regulations has not had a material effect upon our capital expenditures, earnings or competitive position. Our estimated capital expenditures for environmental control facilities for the remainder of Fiscal Year 2002 and the succeeding fiscal year are not material and will not materially affect either our earnings or competitive position. The Marine Mammal Protection Act of 1972, as amended, the "Act," and regulations thereunder, the "Regulations," regulate the incidental taking of dolphin in the course of fishing for yellowfin tuna in the eastern tropical Pacific Ocean, where a portion of our light-meat tuna is caught. In 1990, Heinz voluntarily adopted a worldwide policy of refusal to purchase tuna caught in the eastern tropical Pacific Ocean through the intentional encirclement of dolphin by purse seine nets and reaffirmed its policy of not purchasing tuna caught anywhere using gill nets or drift nets. Also in 1990, the Dolphin Protection Consumer Information Act the "Dolphin Information Act, " was enacted which regulates the labeling of tuna products as "dolphin safe" and bans the importation of tuna caught using high seas drift nets. The Act was amended in 1992 to further regulate tuna fishing methods which involve marine mammals. Compliance with the Act, the Regulations, the Dolphin Information Act, and Heinz's voluntary policy and the 1992 amendments has not had, and is not expected to have, a material adverse effect on our operations. Congress passed the International dolphin Conservation Program Act, "IDCPA," on August 15, 1997. It modified the regulation of the incidental taking of dolphins in the course of fishing for yellowfin tuna in the eastern tropical Pacific Ocean and revised the definition of "dolphin safe." Revision of the definition of "dolphin safe" and modification of the regulation of the incidental taking of dolphins in the course of fishing for yellowfin tuna in the eastern tropical Pacific Ocean have not had and are not expected to have a material adverse effect on our operations. 47 Our factories are subject to inspections by various governmental agencies, including the United States Department of Agriculture and the Occupational Safety and Health Administration, and our products must comply with all the applicable laws, including food and drug laws, such as the Federal Food and Cosmetic Act of 1938, as amended, and the Federal Fair Packaging or Labeling Act of 1966, as amended, of the jurisdictions in which they are manufactured and marketed. Legal Proceedings Certain suits and claims have been filed against Heinz Finance and have not been finally adjudicated. These suits and claims when finally concluded and determined, in the opinion of management, based upon the information that it presently possesses, will not have a material adverse effect on Heinz Finance's consolidated and combined financial position, results of operations or liquidity. 48 RELATED PARTY TRANSACTIONS Heinz Finance and Heinz have entered into agreements that provide for financial support, administrative and other services, reimbursement for employee services and intellectual property. This section describes those agreements between Heinz Finance and Heinz. Operational Agreements Heinz Finance has entered into a services agreement with Heinz pursuant to which Heinz will provide certain accounting, legal, tax and other support services and facilities to us. Under the services agreement, we will reimburse Heinz for services provided by Heinz thereunder. In addition, some of the officers and employees of Heinz Finance are officers or employees of Heinz or its affiliates. In particular, Heinz Management Company employs the salaried people who conduct the business of Heinz LP, and the costs and expenses of those employees are reimbursed by Heinz LP. If any individual provides more than de minimis services to both Heinz and Heinz Finance, the compensation of that individual will be apportioned between the two groups on terms no less favorable to us than we could obtain from unaffiliated entities. We pay a royalty to Promark International, Inc., for use of trademarks historically used in Heinz's U.S. business. Guarantee Facility Agreement; Liquidity Agreement Heinz Finance has also entered into a guarantee facility agreement with Heinz, pursuant to which Heinz agrees to guarantee our payment of third-party obligations we have issued or owe. We will pay Heinz fees equal to 10 basis points per year of the sum of the highest balance of the debt obligations with respect to which Heinz is a guarantor and the highest balance of the debt obligations with respect to which Heinz is a co-obligor. Under the terms of a liquidity agreement between Heinz and Heinz Finance, Heinz has agreed to provide or make available to us from time to time loans in an aggregate principal amount of up to $400 million outstanding at any one time, with normal and customary conditions to disbursement for each loan made. Each loan under the liquidity agreement will bear interest at a floating rate per annum equal to the then applicable LIBOR plus 100 basis points. We will pay Heinz a fee of 25 basis points per annum of the amount of loans available but not drawn. Other Agreements In addition, Heinz Finance sells and purchases products from other Heinz affiliates. Also, Heinz affiliates sold certain accounts receivables to other Heinz fully consolidated affiliates under a contract which was terminated in December 2001. For further information regarding related party transactions, see Note 9 of Heinz Finance's Condensed Consolidated Financial Statements for the three months ended July 31, 2002 and August 1, 2001 and Note 6 of Heinz Finance's Consolidated and Combined Financial Statements for the Fiscal Years ended May 1, 2002 and May 2, 2001 included in this prospectus. 49 MANAGEMENT Directors and Executive Officers Our Board of Directors is composed of four members, one of whom is an Independent Director. An "Independent Director" is a director who is not a current officer or employee of Heinz Finance, Heinz or any affiliate of Heinz or of any other person or persons that, in the, aggregate, own or owns more than 50% of the outstanding common stock of Heinz Finance and who is elected by holders of Heinz Finance's outstanding Series A Preferred Shares and the holders of any Heinz Finance stock expressly being designated by us as being at parity with the Series A Preferred Shares, "Parity Securities," with like voting rights, collectively, the "Voting Parity Securities." Andrew L. Stidd, the initial Independent Director, was named in the Certificate of Designation for the Series A Preferred Shares. Our directors will serve until resignation or removal. There is no current intention to alter the number of directors comprising the Board of Directors, and our Bylaws provide that the Board of Directors may not comprise more than nine members. Our directors and executive officers are: Positions and offices held with the Company and principal occupations or Other Name Age Director Since employment during the past five years Directorships - ---- --- -------------- ------------------------------------- ------------- Leonard A. Cullo............ 44 September 14, 2000 Director; President since June 14, 2001. Treasurer of Heinz since August 2000, attorney at Heinz from 1991 to August 2000, last serving as Assistant General Counsel. Laura Stein ................ 40 September 14, 2000 Vice President and Secretary since June 17, Nash Finch Co. 2001. Senior Vice President and General Counsel of Heinz since January 2000; attorney at The Clorox Company (manufactures and markets household products) from 1992 to December 1999, last serving as Assistant General Counsel -- Regulatory Affairs. Andrew L. Stidd ............ 44 July 6, 2001 Director, President and Chief Operating Officer of Global Securitization Services, LLC (owns and administers special purpose vehicles established in connection with structured finance transactions) since December 1996. Arthur Winkleblack ......... 45 January 8, 2002 Director, Vice President, Chief Financial and Accounting Officer since January 8, 2002. Executive Vice President and Chief Financial Officer of Heinz since January 7, 2002; executive of Indigo Capital (provides financing for early stage technology companies) from July 1999 to December 2001; Executive Vice President and Chief Financial Officer of C. Dean Metropoulos & Co. (provides management services for consumer product investments of Hicks, Muse, Tate and Furst) from August 1998 to July 1999; Chief Financial Officer of Six Flags Entertainment Corporation (regional theme park company) January 1996 to April 1998.
Each director, other than the Independent Director, is an officer or employee of Heinz or an affiliate of Heinz. 50 Compensation of Directors We intend to pay fees to our Independent Director for his service as a director. The Independent Director (and any subsequent additional Independent Director) is entitled to receive annual compensation of $3,500 plus reimbursement of expenses for attendance at each meeting of the Board of Directors. We do not intend to pay fees to directors who are not Independent Directors. Executive Compensation The following table sets forth information concerning the total compensation paid by us (except as discussed below for executive officers Cullo, Winkleblack, Stein, Johnson and Renne) to our executive officers for the periods set forth below. SUMMARY COMPENSATION TABLE Long-Term Compensation ---------------------- Annual Compensation Awards (2) Payouts --------------------------------------------- ---------- ------- Securities Underlying Other Options Annual /SARs Long-term All Other Compensation (No. Incentive Compensation Name and Principal Position Year Salary ($) Bonus ($) ($) Awarded) Payouts ($)(3) - --------------------------- ---- ---------- --------- ------------ -------- ------- ------------ Leonard A. Cullo(1) 2002 152,472 23,737 -- 13,000 - 0 - 21,685 President 2001 139,320 62,195 -- 15,000 - 0 - 25,132 Arthur Winkleblack(4) 2002 138,308 160,000 -- 100,000 - 0 - 13,831 Vice President, Chief Financial and Accounting Officer Paul F. Renne(5) 2002 315,000 86,512 -- - 0 - - 0 - 107,181 Vice President 2001 315,000 218,259 -- 50,000 - 0 - 143,506 2000 289,594 537,253 -- -- - 0 - 61,170 Laura Stein(6) 2002 325,000 73,893 68,090 (7) 50,000 - 0 - 37,485 Vice President and Secretary 2001 300,000 186,418 62,187 50,000 - 0 - 34,742 2000 90,000 153,000 50,000 - 0 - 13,186 William R. Johnson(8) 2002 1,050,000 367,500 105,218 (9) 500,000 - 0 - 279,076 (10) Chairman, President and Chief 2001 920,000 721,851 -- 500,000 - 0 - 384,526 (10) Executive Officer of Heinz 2000 900,000 1,776,864 -- - 0 - - 0 - 402,911
- ------------------- (1) Executive officer Cullo is also employed by Heinz and receives a portion of his compensation from Heinz and the remainder from Heinz Finance. (2) No awards of restricted stock were made by Heinz to the executive officers employed by Heinz during the period covered by the Summary Compensation Table. (3) Includes for Messrs. Johnson, Winkleblack, Renne and Cullo and Ms. Stein, respectively, the following: (i) amounts contributed by Heinz under the Employees and Retirement and Savings Plan, $200,904, $13,831, $73,816, $19,113 and $31,275; (ii) amounts attributable to "split dollar" life insurance provided by Heinz, $61,007, $0, $14,212, $2,572 and $6,210; and (iii) the portion of interest accrued (but not currently paid or payable) on deferred compensation above 120% of the applicable federal long-term rate, $11,936, $0, $19,153, $0 and $0. (4) Mr. Winkleblack became an officer of Heinz Finance on January 8, 2002. (5) Mr. Renne resigned from his position at Heinz Finance on January 8, 2002. During the time Mr. Renne held a position at Heinz Finance, he received no direct compensation from Heinz Finance. The annual base salary and annual bonus opportunity for Mr. Renne was determined by the Heinz Management Development and Compensation Committee. Because Mr. Renne was also an executive officer of Heinz and his compensation from Heinz was previously required to be disclosed, his compensation received from Heinz is included for the Heinz fiscal years ended May 2, 2001 and May 3, 2000. 51 (6) Executive officer Stein is also employed by Heinz, and Ms. Stein receives no direct compensation from Heinz Finance. The annual base salary and annual bonus opportunity for Ms. Stein was determined by the Heinz Management Development and Compensation Committee. Ms. Stein became an executive officer of Heinz on January 10, 2000. Because Ms. Stein is an executive officer of Heinz and her compensation from Heinz was previously required to be disclosed, her compensation received from Heinz is included for the Heinz fiscal years ended May 2, 2001 and May 3, 2000. (7) Includes $45,717 in transition expenses for temporary housing rental and travel. (8) Mr. Johnson was not employed by Heinz Finance, but has been included because of his position at Heinz, which pays all of his compensation. The annual base salary and annual bonus opportunity for Mr. Johnson is determined by the Heinz Management Development and Compensation Committee. Because Mr. Johnson is an executive officer of Heinz and his compensation from Heinz was previously required to be disclosed, his compensation received from Heinz is included for the Heinz fiscal years ended May 2, 2001 and May 3, 2000. (9) Includes $45,665 for personal financial counseling for Mr. Johnson. (10) "All Other Compensation" for Fiscal Years 2001 and 2002 includes $1,745 and $5,229, respectively, in imputed income relating to a split dollar survivorship life insurance retention policy insuring Mr. Johnson and his spouse that was purchased in connection with Mr. Johnson's becoming Chairman of Heinz in September 2000. In December 2001, Mr. Johnson and his spouse relinquished their rights under the life insurance policy and the Heinz paid death benefit, and the life insurance policy was surrendered for its cash value with Heinz receiving all of the proceeds. Option Grants by Heinz in Fiscal Year 2002 Grant Date Individual Grants Value --------------------------------------------------------------------- ------------- Number of Percent of Shares Total Options Underlying Granted to Grant Date Options Granted Employees Exercise Price Expiration Present Value Name (#) (1) in Fiscal Year ($/Share) Date ($) (2) - ---- --------------- -------------- --------- ---------- ------------- Leonard A. Cullo 13,000 0.28% $43.28 9/20/11 109,330 Arthur Winkleblack(3) 100,000 2.12% $40.16 1/7/12 815,000 Paul F. Renne -- -- -- -- -- Laura Stein 50,000 1.06% $43.28 9/20/11 420,500 William R. Johnson 500,000 10.61% $43.28 9/20/11 4,205,000
- ------------------- (1) All options were granted on September 20, 2001 or January 7, 2002, pursuant to the terms of Heinz's 2000 Stock Option Plan, relate to Heinz shares and have identical terms. All options vest on September 20, 2004 or January 7, 2005. (2) The estimated grant date present value reflected in the above table is determined using the Black-Scholes model. The material assumptions and adjustments incorporated in the Black-Scholes model in estimating the value of the option grants reflected in the above table include the following: (i) exercise price on the options ($43.28 or $40.16) equal to the fair market value of the underlying stock on the date of grant; (ii) expected option term of 6.5 years; (iii) dividend yield of 3.9%; (iv) risk-free interest rate of 4.53%; and (v) volatility of 23.23%. The ultimate values of the options will depend on the future market price of Heinz's common stock, which cannot be forecast with reasonable accuracy. The actual value, if any, an optionee will realize upon exercise of an option will depend on the excess of the market value of Heinz's common stock over the exercise price on the date the option is exercised. (3) Mr. Winkleblack became an officer of Heinz Finance on January 8, 2002 and became an executive officer of Heinz on January 7, 2002. 52 Aggregated Option/SAR Exercises in Fiscal Year 2002 and Fiscal Year-End Option/SAR Value (1) Number of Securities Underlying Unexercised Value of Unexercised Options/SARs In-the-Money Options/SARs at Fiscal Year-End at Fiscal Year-End ($) (3) --------------------------- -------------------------- Shares Acquired on Value Name Exercise (#) Realized ($)(2) Exercisable Unexercisable Exercisable Unexercisable - ---- ------------ --------------- ----------- ------------- ----------- ------------- Leonard A. Cullo -0- -0- 20,834 29,666 89,000 86,063 Arthur Winkleblack(4) -0- -0- -0- 100,000 -0- 264,000 Paul F. Renne 102,500 2,171,826 460,834 216,666 965,333 286,875 Laura Stein -0- -0- -0- 150,000 -0- 517,500 William R. Johnson 175,000 3,397,392 1,750,000 1,600,000 15,820,850 2,868,750
- ------------------- (1) All options are denominated in shares of Heinz. (2) The "Value Realized" is equal to the fair market value of a Heinz share on the date of exercise, less the exercise price, times the number of shares acquired. No Heinz SARs were exercised during the last fiscal year. (3) The "Value of Unexercised In-the-Money Options at Fiscal Year-End" is equal to the fair market value of each Heinz share underlying the options at May 1, 2002 less the exercise price, times the number of options. (4) Mr. Winkleblack became an officer of Heinz Finance on January 8, 2002 and became an executive officer of Heinz on January 7, 2002. Retirement Benefits Most full-time salaried employees in the United States who were hired before January 1, 1993 are entitled to retirement benefits from Plan A of the H. J. Heinz Company Employees' Retirement System, "Plan A." Benefits are based on credited service and five-year average eligible compensation through December 31, 1992, the date on which Plan A was frozen. Heinz has a Supplemental Executive Retirement Plan, the "SERP," which provides additional retirement benefits for eligible executives, including the executive officers Cullo, Winkleblack, Renne and Stein and Mr. Johnson. The SERP was adopted in order to attract and retain executives, and to compensate them for reductions in benefits due to limitations imposed by the Internal Revenue Code. The SERP benefit is a lump sum equal to a multiple of the employee's final average eligible compensation during any five of the last ten years prior to retirement. It is reduced by (i) the lump sum value of the Plan A benefit (if any), and (ii) the value of the employee's Age-Related Company Contribution Account under the Heinz Employees Retirement and Savings Plan and the Heinz Employees Retirement and Savings Excess Plan. The following table entitled "Table I - U.S. Retirement Plans" shows the estimated maximum retirement benefit from all sources described above, at various combinations of pay and service, stated as an annual pension equivalent beginning at age 65. The pay included in the earnings base is the executive's base salary and annual bonus. On May 6, 2002, the Board of Directors of Heinz approved an enhancement to Mr. Johnson's SERP. This enhancement provides for an additional accrual equal to 3.85% of final average earnings per each additional year of service from the date of the SERP enhancement. This benefit is subject to a maximum enhancement of 26.95% at 7 additional years of service. The enhancement is further limited to a total annual benefit (from all of Heinz's retirement arrangements) of 60% of final average earnings at retirement on or after the age of 60. This enhanced benefit would vest 100% upon the fifth anniversary of the adoption of the benefit and Mr. Johnson's continued employment. If Mr. Johnson is involuntarily terminated from his position for a reason other than for cause, the benefit will fully vest; his accrual however, would be based on years served as of the date of termination. 53 The following table entitled "Table II - Retirement Plans for Mr. Johnson" shows the estimated maximum retirement benefit from all sources described above for Mr. Johnson, at various combinations of pay and service, stated as an annual pension equivalent beginning at age 65. The pay included in the earnings base is Mr. Johnson's base salary and annual bonus. As of May 1, 2002, the years of service for executive officers Cullo, Winkleblack, Renne, Stein and Mr. Johnson were, as rounded to the nearest full year, 11, 1, 28, 2 and 20, respectively. Table I--U.S. Retirement Plans Years of Service -------------------------------------------------------------- Average Earnings High Five of Last Ten Years Prior to Retirement 15 20 25 30 35 ----------------- ---------- ---------- ---------- ---------- ---------- $ 200,000 $ 52,452 $ 61,194 $ 69,936 $ 78,678 $ 87,420 400,000 104,904 122,388 139,872 157,356 174,840 450,000 118,017 137,687 157,356 177,026 196,696 500,000 131,130 152,985 174,840 196,696 218,551 600,000 157,356 183,582 209,809 236,035 262,261 700,000 183,582 214,180 244,777 275,374 305,971 800,000 209,809 244,777 279,745 314,713 349,681 900,000 236,035 275,374 314,713 354,052 393,391 1,000,000 262,261 305,971 349,681 393,391 437,101 1,200,000 314,713 367,165 419,617 472,069 524,521 1,400,000 367,165 428,359 489,553 550,747 611,942 1,600,000 419,617 489,553 559,489 629,426 699,362 2,000,000 524,521 611,942 699,362 786,782 874,202 2,500,000 655,652 764,927 874,202 983,478 1,092,753 3,000,000 786,782 917,912 1,049,043 1,180,173 1,311,303
Table II--Retirement Plans for Mr. Johnson Years of Service ---------------------------------------------------- Average Earnings High Five of Last Ten Years Prior to Retirement 20 25 30 35 ------------- ---------- ---------- ---------- ---------- $ 950,000 $ 274,748 $ 496,873 $ 570,000 $ 570,000 1,000,000 289,208 523,024 600,000 600,000 1,100,000 318,129 575,326 660,000 660,000 1,200,000 347,050 627,629 720,000 720,000 1,400,000 404,892 732,233 840,000 840,000 1,600,000 462,733 836,838 960,000 960,000 1,800,000 520,575 941,443 1,080,000 1,080,000 2,000,000 578,417 1,046,048 1,200,000 1,200,000 2,200,000 636,258 1,150,653 1,320,000 1,320,000 2,400,000 694,100 1,255,257 1,440,000 1,440,000 2,600,000 751,942 1,359,862 1,560,000 1,560,000 2,800,000 809,784 1,464,467 1,680,000 1,680,000 2,900,000 838,704 1,516,769 1,740,000 1,740,000 3,000,000 867,625 1,569,072 1,800,000 1,800,000 Executive Deferred Compensation Plan Heinz has an Executive Deferred Compensation Plan, "Deferred Compensation Plan," under which contingent retention bonuses may be awarded. During Fiscal Year 2002, Heinz granted awards under the Deferred Compensation Plan to certain executives. Vesting of the awards will occur on the third anniversary following the date of the award, so long as the executive has not prior to that date voluntarily terminated employment with Heinz 54 or been terminated for cause. Vested awards will be paid in cash following the fifth anniversary date of the award, or, in the case of certain named executive officers, upon retirement. Awards under the Deferred Compensation Plan for Fiscal Year 2002 include the award described in footnote 3 of the Summary Compensation Table above for Mr. Johnson (subsequently waived as noted below), and $250,000 for Ms. Stein. Messrs. Cullo, Renne and Winkleblack did not participate in this plan. In connection with the split-dollar life insurance arrangement with Mr. Johnson described in footnote 3 of the Summary Compensation Table, Mr. Johnson waived the right to receive the award granted to him during Fiscal Year 2001 under the Deferred Compensation Plan plus interest in exchange for Heinz's payment of the premium to purchase a split-dollar survivorship insurance policy insuring Mr. Johnson and his spouse as set forth in footnote 3 to the Summary Compensation Table above. In December 2001, Mr. Johnson and his spouse agreed to relinquish their rights in that insurance policy in exchange for Heinz providing $5,080,000 to a trust established by Mr. Johnson to purchase a life insurance policy under Heinz's Executive Estate Life Insurance Program as described below. Executive Estate Life Insurance Program In December 2001, Heinz adopted an executive estate life insurance program("EELIP") for certain eligible executives. Under the EELIP, eligible executives may relinquish compensation, including existing deferred compensation balances under Heinz's Executive Deferred Compensation Plan, in exchange for Heinz's funding of a split-dollar life insurance policy purchased by the executive's family trust. The amount funded by Heinz is equal to approximately 150% of the compensation relinquished by the executive, which was designed to achieve cost neutrality for Heinz when compared to the cost to Heinz of the relinquished deferred compensation benefit. Consistent with tax regulations, the premium payments are accomplished through split-dollar insurance loans which will be automatically repaid, with interest to Heinz upon payment under the policy. All amounts paid to the trust must be used by the trust to pay the premium on the life insurance policy on the life of the executive (or a survivorship policy on the life of the executive and the executive's spouse). Under the EELIP, Heinz will recover all amounts so funded plus interest thereon from the proceeds of the policy after the participant's and/or participant's spouse's death, and these amounts also are recoverable immediately in the event the participant terminates employment or is terminated for cause prior to any vesting date applicable to the compensation which was relinquished to fund the policy. In January 2001, Heinz had purchased a split-dollar life insurance policy for Mr. Johnson in exchange for Mr. Johnson relinquishing a deferred compensation award (in the aggregate amount of $3,385,249, including interest) originally granted to him in September 2000 under the Executive Deferred Compensation Plan, each with a vesting date of September 2003. In December 2001, Mr. Johnson agreed to relinquish his entire interest in that split-dollar policy and the previous deferred compensation award in exchange for Heinz providing under the EELIP $5,080,000 to his insurance trust to purchase a survivorship life insurance policy insuring Mr. Johnson and his spouse, with a vesting date of September 2003. The new insurance arrangement was substituted for the prior split-dollar policy for greater estate planning efficiency and in order to participate in the EELIP. In Fiscal Year 2002, Heinz funded insurance trusts established under the EELIP to certain other executive officers of Heinz, in exchange for their agreement to relinquish deferred compensation awards previously granted to them, each with vesting dates of June 2003. Severance Arrangements Heinz maintains severance agreements with Ms. Stein and Messrs. Johnson and Winkleblack. If an executive's employment is terminated involuntarily other than for cause, or voluntarily for good reason, within two years after a change in control of Heinz, the agreements provide for the lifting of restrictions on outstanding incentive awards, continuation of medical, life insurance and disability coverage for a three-year period, and a lump sum payment equal to three times the sum of the annual salary and bonus of the executive plus a benefit determined by taking into account an additional three years of age and service for purposes of calculating retirement benefits. The agreements also provide that Heinz will reimburse the executive for the impact of excise taxes, if any, which may be imposed under the Internal Revenue Code with respect to certain payments contingent on a change in control. 55 DESCRIPTION OF THE NEW NOTES The Old Notes and the New Notes constitute a separate series of debt securities issued under an Indenture, dated as of July 6, 2001 (the Indenture), among Heinz Finance, as Issuer, Heinz, as Guarantor and Bank One, National Association, as Trustee (the Trustee) and are collectively the notes under the indenture. The following summary of the material terms of the Indenture is subject to, and is qualified in its entirety by the reference to, the complete provisions of the New Notes and the Indenture. The form of the New Notes is included in the Indenture, which is filed as an exhibit to the registration statement of which this prospectus is a part and is available from us upon request. General The New Notes will be unsecured obligations of Heinz Finance and will be limited to up to $750,000,000 in aggregate principal amount. The New Notes will be unconditionally and irrevocably guaranteed as to the payment of interest and principal by the Guarantor. The New Notes will accrue interest at the rate of 6.625% per annum from the date on which the exchange offer is completed. Interest on the New Notes is payable semi-annually in arrears on January 15 and July 15 of each year to the persons in whose names the notes are registered at the close of business on the applicable regular record date, and the initial interest payment on the New Notes will be based on the applicable interest rates accruing from the most recent date to which interest has been paid on the Old Notes. Principal on the notes will be payable and the notes will be transferable at the corporate trust office of the Trustee in New York, N.Y. Unless other arrangements are made, interest will be paid by check mailed to the address of the person entitled thereto as it appears in the security register. The New Notes will be issued only in fully registrable form, without coupons, in denominations of $1,000 and any integral multiple thereof. For so long as the New Notes are held solely in book-entry form through the facilities of Depositary Trust Company ("DTC"), the only registered holder of the New Notes will be Cede & Co., as nominee for DTC. It is expected that beneficial interests in the New Notes issued and sold in the United States will trade in the Settlement System of DTC and that beneficial interests in the Notes issued sold outside of the United States will trade through the facilities of the Euroclear system, "Euroclear," and Clearstream Banking, societe anonyme, Luxembourg, "Clearstream, Luxembourg," and secondary market transactions in such beneficial interests will be effected in the Settlement System of DTC. See "Form and Denomination," "Transfer and Exchange," and "Depository Procedures with Respect to Global Notes." Form and Denomination The New Notes will initially be represented by one or more global notes in fully registered form without interest coupons, collectively, the "global note." The New Notes will be issued in denominations of $1,000 and integral multiples thereof. The global note will be deposited with the Trustee as custodian for DTC and registered in the name of DTC or a nominee of DTC. Owners of beneficial interests in any global note will hold such interests pursuant to the procedures and practices of DTC and must exercise any rights in respect of their interests in accordance with those procedures and practices. Such beneficial owners will not be holders, and will not be entitled to any rights under any New Note or the Indenture, with respect to any global note, and Heinz Finance, the Guarantor and the Trustee, and any of their respective agents, may treat DTC as the holder and owner of any global note. See "Depository Procedures with Respect to Global Notes." 56 Except as set forth below, the global notes may be transferred, in whole but not in part, only to another nominee of DTC or to a successor of DTC or its nominee. The New Notes are issuable in bearer form. For a description of the depository procedures with respect to the global notes, see "Depository Procedures with Respect to Global Notes." Optional Redemption Heinz Finance may choose to redeem some or all of the New Notes at any time. If Heinz Finance chooses to do so, it will mail a notice of redemption to the holders of the New Notes not less than 30 days and not more than 60 days before the redemption occurs. The redemption price will be equal to the greater of: o 100% of the principal amount of the New Notes to be redeemed plus accrued interest to the date of redemption, or o the sum of the present values of the Remaining Scheduled Payments on the Notes being redeemed, discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 15 basis points. If Heinz Finance is redeeming less than all of the New Notes, the Trustee will select the particular New Notes to be redeemed by lot or by another method the Trustee deems fair and appropriate. Unless Heinz Finance defaults in payment of the redemption price, on and after the redemption date, interest will cease to accrue on the New Notes or portions thereof called for redemption. Except as described above, the New Notes will not be redeemable by Heinz Finance prior to maturity and will not be entitled to the benefit of any sinking fund. For purposes of calculating the redemption price, the following terms have the meanings set forth below: "Treasury Rate" means the rate per annum equal to the semiannual equivalent yield to maturity (computed as of the second business day immediately preceding the redemption date) of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for the redemption date. "Comparable Treasury Issue" means the U.S. treasury security selected by an Independent Investment Banker that would be used, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Notes. "Independent Investment Banker" means one of the Reference Treasury Dealers that Heinz Finance appoints. "Comparable Treasury Price" means: o the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) as of the third business day preceding the redemption date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or o if that release (or any successor release) is not published or does not contain such prices on that business day, (1) the average of the Reference Treasury Dealer Quotations for the redemption date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations or (2) if the Trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all quotations obtained. 57 "Reference Treasury Dealer" means each of Goldman, Sachs & Co. (and each of its successors) and three other nationally recognized investment banking firms that are primary U.S. Government securities dealers specified from time to time by Heinz Finance. If, however, any of them ceases to be a primary U.S. Government securities dealer, we will substitute another nationally recognized investment banking firm that is such a dealer. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount and in each case for settlement on the next business day) quoted in writing to the Trustee by such reference treasury dealer as of 3:30 p.m., New York time, on the third business day preceding the redemption date. "Remaining Scheduled Payments" means the remaining scheduled payments of the principal and interest (excluding any interest accrued and paid as of the date of redemption) on each New Note to be redeemed that would be due after the related redemption date but for such redemption. Certain Definitions "Consolidated Net Assets" means total assets after deducting therefrom all current liabilities as set forth on the most recent balance sheet of the Guarantor and its consolidated Subsidiaries and computed in accordance with generally accepted accounting principles. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Principal Property" means any manufacturing or processing plant or warehouse owned at the date hereof or hereafter acquired by the Guarantor or any Restricted Subsidiary which is located within the United States and the gross book value (including related land and improvements thereon and all machinery and equipment included therein without deduction of any depreciation reserves) of which on the date as of which the determination is being made exceeds 2% of Consolidated Net Assets other than: (i) any such manufacturing or processing plant or warehouse or any portion thereof (together with the land on which it is erected and fixtures comprising a part thereof) which is financed by industrial development bonds which are tax exempt pursuant to Section 103 of the Internal Revenue Code (or which receive similar tax treatment under any subsequent amendments thereto or any successor laws thereof or under any other similar statute of the United States), (ii) any property which in the opinion of the board of directors is not of material importance to the total business conducted by the Guarantor as an entirety or (iii) any portion of a particular property which is similarly found not to be of material importance to the use or operation of such property. "Restricted Subsidiary" means a Subsidiary of the Guarantor (i) substantially all the property of which is located, or substantially all the business of which is carried on, within the United States and (ii) which owns a Principal Property. "Subsidiary" means any corporation or limited partnership more than 50% of the outstanding Voting Stock of which, or any limited partnership interests in which, at the time of determination is owned, directly or indirectly, by the Guarantor and/or by one or more other Subsidiaries. "Voting Stock" means capital stock of a corporation of the class or classes having general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of such corporation (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power upon the occurrence of any contingency). 58 Restrictions on Secured Debt If the Guarantor or any Restricted Subsidiary shall after the date of the Indenture incur or guarantee any evidence of indebtedness for money borrowed, "Debt," secured by a mortgage, pledge or lien, referred to as a "Mortgage," on any Principal Property of the Guarantor or any Restricted Subsidiary, or on any share of stock or Debt of any Restricted Subsidiary, the Guarantor will secure or cause such Restricted Subsidiary to secure the Notes, other than any series of Notes established by or pursuant to a Board Resolution or in one or more supplemental indentures which specifically provide otherwise, equally and ratably with (or, at the option of the Guarantor, prior to) such secured Debt, unless the aggregate amount of all such secured Debt would not exceed 10% of Consolidated Net Assets. The above restrictions will not apply to, and there will be excluded from secured Debt in any computation under such restrictions, Debt secured by: (i) Mortgages on property of, or on any shares of stock of or Debt of, any corporation existing at the time such corporation becomes a Restricted Subsidiary, (ii) Mortgages in favor of the Guarantor or a Restricted Subsidiary, (iii) Mortgages in favor of governmental bodies to secure progress, advance or other payments pursuant to any contract or provisions of any statute, (iv) Mortgages on property, shares of capital stock or Debt existing at the time of acquisition thereof (including acquisition through merger or consolidation) and purchase money and construction Mortgages which are entered into within time limits specified in the Indenture, (v) Mortgages securing industrial revenue bonds, pollution control bonds or other similar tax-exempt bonds, (vi) mechanics' and similar liens arising in the ordinary course of business in respect of obligations not due or being contested in good faith, (vii) Mortgages arising from deposits with or the giving of any form of security to any government agency required as a condition to the transaction of business or to the exercise of any privilege, franchise or license, (viii) Mortgages for taxes, assessments or governmental charges or levies which are not then due or, if delinquent, are being contested in good faith, (ix) Mortgages (including judgment liens) arising from legal proceedings being contested in good faith, (x) Mortgages existing at the date of the Indenture, and (xi) any extension, renewal or refunding of any Mortgage referred to in the foregoing clauses (i) through (x) inclusive. Merger and Consolidation Each of Heinz Finance and the Guarantor covenants that it will not merge or sell, convey, transfer or lease all or substantially all of its assets unless we are the successor Person or the successor entity is another Person organized under the laws of the United States (including any state thereof and the District of Columbia) which assumes its obligations on the debt securities and under the Indenture and, after giving effect to such transaction, Heinz Finance, the Guarantor or the successor Person would not be in default under the Indenture. 59 Events of Default The Indenture defines "Events of Default" with respect to the debt securities of any series as being one of the following events: (i) default in the payment of any installment of interest on that series for 30 days after becoming due; (ii) default in the payment of principal on that series when due; (iii) default in the deposit of any sinking fund payment when due; (iv) default by Heinz Finance or the Guarantor in the performance or breach of any other covenant or warranty in the Notes of that series or the Indenture (other than a covenant included in the Indenture solely for the benefit of any series of Notes other than that series) for 90 days after notice; (v) the commencement of a voluntary, or the issuing of a decree by a court of an involuntary, bankruptcy, insolvency or reorganization proceeding under federal or state law with respect to Heinz Finance or the Guarantor; (vi) any other Event of Default provided with respect to Notes of that series; or (vii) the Guarantor contests the validity or enforceability of the Guarantee or any obligation under the Guarantee shall not be (or is claimed by the Guarantor not to be) in full force and effect. No sinking fund is provided for the New Notes, and no other Event of Default (as described in paragraph (vi) above) has been provided with respect to the Notes. If an Event of Default shall occur and be continuing with respect to the debt securities of any series, either the Trustee or the holders of at least 25% in principal amount of the debt securities then outstanding of that series may declare the principal (or such portion thereof as may be specified in an offering memorandum relating to such series) of the debt securities of such series to be due and payable. Under certain conditions, such a declaration may be annulled. The Indenture provides that the Trustee shall, within 90 days after the occurrence of a default known to it, give the holders of debt securities notice of all uncured defaults known to it (the term "default" to mean the events specified above without grace periods); provided, however, that, except in the case of default in the payment of principal of or interest on any Debt Security, the Trustee shall be protected in withholding such notice if it in good faith determines the withholding of such notice is in the interest of the holders of debt securities. Heinz Finance will be required to furnish to the Trustee annually a statement by certain officers of Heinz Finance to the effect that to the best of their knowledge Heinz Finance has complied with all of its conditions and covenants under the Indenture or, if Heinz Finance has not so complied, specifying each such default. The holders of a majority in principal amount of the outstanding debt securities of any series will have the right, subject to certain limitations, to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to the debt securities of such series, and to waive certain defaults with respect thereto. The Indenture provides that in case an Event of Default shall occur and be continuing, the Trustee shall exercise such of its rights and powers under the Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any of the holders of debt securities unless they shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request. 60 Modification of the Indenture With certain exceptions, the Indenture may be modified or amended with the consent of the holders of not less than a majority in principal amount of the outstanding debt securities of each series affected by the modification; provided, however, that no such modification or amendment may be made, without the consent of the holder of each debt security affected, which would: (i) reduce the principal amount of or the interest on any debt security, change the stated maturity of the principal of, or any installment of principal of or interest on, any debt security, or the other terms of payment thereof, or (ii) reduce the above-stated percentage of debt securities, the consent of the holders of which is required to modify or amend the Indenture, or the percentage of debt securities of any series, the consent of the holders of which is required to waive compliance with certain provisions of the Indenture or to waive certain past defaults. Defeasance and Discharge The New Notes will be subject to defeasance and discharge and to defeasance of certain obligations as described below. The Indenture provides that Heinz Finance may elect, with respect to the debt securities of any series, either: (i) to terminate (and be deemed to have satisfied) any and all obligations in respect of such debt securities (except for certain obligations to register the transfer or exchange of debt securities, to replace stolen, lost or mutilated debt securities, to maintain paying agencies and hold monies for payment in trust and, if so specified with respect to the debt securities of a certain series, to pay the principal of (and premium, if any) and interest, if any, on such specified debt securities); or (ii) to be released from its obligations with respect to such debt securities under Section 1004 of the Indenture (being the restrictions described above under "Restrictions on Secured Debt"); in either case on the 91st day after the deposit with the Trustee, in trust, of money and/or U.S. Government Obligations (as defined) which through the payment of interest and principal thereof in accordance with their terms will provide money in an amount sufficient to pay any installment of principal (and premium, if any) and interest, if any, on and any mandatory sinking fund payments in respect of such debt securities on the stated maturity of such payments in accordance with the terms of the Indenture and such debt securities. Such a trust may be established only if, among other things, Heinz Finance has delivered to the Trustee an Opinion of Counsel (who may be counsel to Heinz Finance) to the effect that, based upon applicable Federal income tax law or a ruling published by the United States Internal Revenue Service, such a defeasance and discharge will not be deemed, or result in, a taxable event with respect to holders of such debt securities. If so specified with respect to the Notes of a series, such a trust may be established only if establishment of the trust would not cause the debt securities of any such series listed on any nationally recognized securities exchange to be de-listed as a result thereof. Concerning the Trustee Bank One, National Association, is the Trustee under the Indenture and has been appointed by Heinz Finance as initial security registrar with regard to the New Notes. Heinz Finance currently does, and from time to time in the future may, maintain lines of credit and have customary banking relationships with the Trustee. The Trustee currently serves as trustee for certain debt securities of the Guarantor and Heinz Finance, including the Old Notes. In addition, the Trustee may serve as Trustee for other debt securities issued by Heinz Finance from time to time. 61 Guarantees The New Notes are guaranteed by Heinz. Heinz will unconditionally and irrevocably guarantee the due and punctual payment of principal of and interest, including any additional amounts, on the New Notes when the same shall become due and payable whether at maturity, by declaration of acceleration or otherwise. Transfer and Exchange At the option of the holder upon written request, and subject to the terms of the Indenture, any New Note will be exchangeable at any time into an equal aggregate principal amount of New Notes of different authorized denominations provided that any applicable transfer restrictions are satisfied. New Notes may be presented for registration of transfer (with the form of transfer endorsed thereon duly executed) or exchange, at the office of any transfer agent, the "security registrar," without service charge, but, in the case of a transfer, upon payment of any taxes and other governmental charges as described in the Indenture. Any registration of transfer or exchange will be effected upon the transfer agent or the security registrar, as the case may be, being satisfied with the documents of title and identity of the person making the request, and subject to such reasonable regulations as Heinz Finance may from time to time agree upon with the transfer agents and the security registrar, all as described in the Indenture. Subject to the applicable transfer restrictions, Notes may be transferred in whole or in part in authorized denominations. Heinz Finance has initially appointed the Trustee as security registrar and transfer agent, acting through its Corporate Trust Office in the Borough of Manhattan, The City of New York. Heinz Finance reserves the right to vary or terminate the appointment of the security registrar or of any transfer agent or to appoint additional or other transfer agents or to approve any change in the office through which any security registrar of any transfer agent acts, provided that there will at all times be a security registrar in and a transfer agent in the Borough of Manhattan, The City of New York. Purchase and Cancellation Heinz Finance, the Guarantor or any subsidiary may at any time and from time to time purchase New Notes at any price in the open market or otherwise. All securities surrendered for payment, redemption, repurchase, registration of transfer or exchange or conversion shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee. All securities so delivered to the Trustee shall be cancelled promptly by the Trustee. No securities shall be authenticated in lieu of or in exchange for any securities cancelled as provided in the Indenture. Title With respect to any New Note, Heinz Finance, the Guarantor, the Trustee, the paying agent and any other agent of Heinz Finance, the Guarantor or the Trustee may treat the Person in whose name such New Note is registered as the owner thereof for the purpose of receiving payment thereof and for all other purposes whatsoever. Notices Notices to holders of New Notes will be given by mail to the addresses of such holders as they appear in the Security Register. Such notices will be deemed to have been given when mailed. Replacement of Notes New Notes that become mutilated, destroyed, stolen or lost will be replaced by Heinz Finance at the expense of the holder upon delivery to the Trustee of the mutilated Notes or evidence of the loss, theft or destruction thereof satisfactory to Heinz Finance and the Trustee. In the case of a lost, stolen or destroyed New Note, indemnity 62 satisfactory to the Trustee and Heinz Finance may be required at the expense of the holder of such New Note before a replacement New Note will be issued. Payment of Stamp and Other Taxes Heinz Finance shall pay all stamp and other duties, if any, which may be imposed by the United States or the United Kingdom or any political subdivision thereof or taxing authority thereof or therein with respect to the issuance, transfer, exchange or conversion of the New Notes. Heinz Finance will not be required to make any payment with respect to any other tax, assessment or governmental charge imposed by any government or any political subdivision thereof or taxing authority therein. Depository Procedures with Respect to Global Notes With respect to the global notes, DTC has advised Heinz Finance as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code, as amended, and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participating organizations (collectively, the "Participants") and to facilitate the clearance and settlement of transactions in those securities between Participants through electronic book-entry changes in accounts of its Participants. The Participants include securities brokers and dealers (including the Initial Purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (collectively, the "Indirect Participants"). Persons who are not Participants may beneficially own securities held by or on behalf of DTC only through the Participants or the Indirect Participants. The ownership interest and transfer of ownership interest of each actual purchaser of each security held by or on behalf of DTC are recorded on the records of the Participants and Indirect Participants. DTC has also advised Heinz Finance that pursuant to procedures established by it, o (i) upon deposit of the global notes, DTC will credit the accounts of Participants designated by the Purchasers with portions of the principal amount of the global notes and o (ii) ownership of such interests in the global notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the Participants) or by the Participants and the Indirect Participants (with respect to other owners of beneficial interests in the global notes). Investors in the global note within the United States may hold their interests therein directly through DTC, if they are Participants in such system, or indirectly through organizations (including Euroclear and Clearstream, Luxembourg) that are Participants in such system. Investors in the global notes, outside of the United States, may hold interests therein through Euroclear or Clearstream, Luxembourg or organizations other than Euroclear and Clearstream, Luxembourg that are Participants in the DTC system. Euroclear and Clearstream, Luxembourg will hold interests in the any global note on behalf of their Participants through customers' securities accounts in their respective names on the books of their respective depositories. The depositories, in turn, will hold such interests in such global note in customers' securities accounts in the depositaries' names on the books of DTC. All interests in a global note, including those held through Euroclear or Clearstream, Luxembourg, may be subject to the procedures and requirements of DTC. Those interests held through Euroclear or Clearstream, Luxembourg may also be subject to the procedures and requirements of such system. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a global note to such persons may be limited to that extent. Because DTC can act only on behalf of its Participants, which in turn act on behalf of Indirect Participants and certain banks, the ability of a person having beneficial interests in a global note to pledge such 63 interests to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. Except as described above under "-Transfer and Exchange," owners of Interests in the Registered global notes will not have Notes registered in their names, will not receive physical delivery of Notes in certificated form and will not be considered the registered owners or holders thereof under the Indenture for any purpose. DTC has advised Heinz Finance that its current practice, upon receipt of any payment in respect of interests in securities such as the global notes (including principal and interest) held by it or its nominee, is to credit the accounts of the relevant Participants with the payment on the payment date, in amounts proportionate to their respective holdings in principal amount of beneficial interests in the relevant security such as the global notes as shown on the records of DTC unless DTC has reason to believe it will not receive payment on such payment date. Payments by the Participants and the Indirect Participants to the beneficial owners of New Notes will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers registered in "street name." Such payments will be the responsibility of the Participants or the Indirect Participants and will not be the responsibility of DTC, the Trustee, Heinz Finance or the Guarantor. Neither Heinz Finance, the Guarantor nor the Trustee will be liable for any delay by DTC or any of its Participants in identifying the beneficial owners of the New Notes, and Heinz Finance, the Guarantor and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee as the registered owner of the global notes for all purposes. Transfers of beneficial interests in the global note between Participants in DTC will be effected in accordance with DTC's procedures, and such beneficial interests will trade in DTC's Settlement System; and consequently, secondary market trading activity in such interests will settle in immediately available funds. Transfers of beneficial interests in the global notes between participants in Euroclear and Clearstream, Luxembourg will be effected in the ordinary way in accordance with their respective rules and operating procedures, whereas cross-market transfers of such interests (including by DTC Participants other than Euroclear and Clearstream, Luxembourg) will be subject to considerations described below. Cross-market transfers with respect to the global notes between the Participants in DTC, on the one hand, and Euroclear or Clearstream, Luxembourg participants, on the other hand, will be effected through DTC in accordance with DTC's rules on behalf of Euroclear or Clearstream, Luxembourg, as the case may be, by its respective depository; however, such cross-market transactions will require delivery of instructions to Euroclear or Clearstream, Luxembourg, as the case may be, by the counterparts in such system. Euroclear or Clearstream, Luxembourg, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depository to take action to effect final settlement on its behalf by delivering or receiving interests in the relevant global note in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Euroclear participants and Clearstream, Luxembourg participants may not deliver instructions directly to the depositories for Euroclear or Clearstream, Luxembourg. Because of time zone differences, the securities account of a Euroclear or Clearstream, Luxembourg participant purchasing an interest in a global note from a Participant in DTC will be credited, and any such crediting will be reported to the relevant Euroclear or Clearstream, Luxembourg participant, during the securities settlement processing day (which must be a business day for Euroclear and Clearstream, Luxembourg) immediately following the settlement date of DTC. Cash received in Euroclear or Clearstream, Luxembourg as a result of sales of interests in a global note by or through a Euroclear or Clearstream, Luxembourg participant to a Participant in DTC will be received with value on the settlement date of DTC but will be available in the relevant Euroclear or Clearstream, Luxembourg cash account only as of the business day for Euroclear or Clearstream, Luxembourg following DTC's settlement date. DTC has advised Heinz Finance that it will take any action permitted to be taken by a holder of New Notes only at the direction of one or more Participants to whose account with DTC interests in the global notes are credited and only in respect of such portion of the aggregate principal amount of the New Notes as to which such 64 Participant or Participants has or have given such direction. However, if there is an Event of Default under the New Notes, DTC reserves the right to exchange the global notes for New Notes in certificated form, and to distribute such Notes to its Participants. Although DTC has agreed to the foregoing procedures in order to facilitate transfers of beneficial ownership interests in the global notes among Participants of DTC, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. None of Heinz Finance, the Guarantor, the Trustee nor any of their respective agents will have any responsibility for the performance by DTC, its Participants or Indirect Participants of their respective obligations under the rules and procedures governing their operations, including maintaining, supervising or reviewing the records relating to, or payments made on account of, beneficial ownership interests in global notes. Governing Law The Indenture is, and the New Notes will be, governed by and construed in accordance with the laws of the State of New York. 65 THE EXCHANGE OFFER Purpose of the Exchange Offer The Old Notes were delivered by us on July 6, 2001 to the initial purchasers pursuant to a purchase agreement dated June 27, 2001 between us, Heinz and the initial purchasers. The initial purchasers subsequently sold the Old Notes to "qualified institutional buyers," as defined in Rule 144A under the Securities Act, in reliance on Rule 144A and outside the United States in accordance with Regulation S under the Securities Act. As a condition to the initial sale of the Old Notes, we, Heinz and the initial purchasers entered into the exchange and registration rights agreement. Pursuant to the exchange and registration rights agreement, we agreed that we would: o file with the Commission within 270 days after the Old Notes closing date, which is the date we delivered the Old Notes to the initial purchasers, a registration statement under the Securities Act relating to a registered exchange offer; o use our reasonable best efforts to cause such registration statement to become effective under the Securities Act within 330 days after the Old Notes closing date; and o keep the exchange offer open for at least 30 days, and use our reasonable best efforts to commence and complete the exchange offer no later than 45 days after the registration statement becoming effective. During this period, Heinz Finance agrees to exchange the Old Notes for all New Notes properly surrendered and not withdrawn before the expiration date of this period. If Commission interpretations are changed on or before the exchange offer such that the Notes received by each holder, except for certain restricted holders, are not or would not be transferable without restriction, and the exchange offer has not been completed within 375 days after the sale of the Old Notes or the exchange offer is not available to any holder of Notes, Heinz Finance will file a shelf registration statement for resale of the Notes within at least 30 days of such obligation arising. Heinz Finance will use its reasonable best efforts to cause the shelf registration statement to become effective no later than 60 days after filing and to keep the registration effective for up to two years after the shelf registration statement becomes effective. Heinz Finance will provide to the holders of the Old Notes copies of a prospectus, notify such holders when the resale registration for the Old Notes has become effective and take certain other actions as are required to permit unrestricted sales of the Old Notes. A holder of the Old Notes that sells such Old Notes pursuant to the resale registration generally would be required to be named as a selling securityholder in the related prospectus and to deliver a prospectus to the purchaser, will be subject to certain of the civil liability provisions of the Securities Act in connection with such sales and will be bound by the provisions of the exchange and registration rights agreement that are applicable to such holder (including certain indemnification obligations). If within the time required by the exchange and registration rights agreements, Heinz Finance does not complete this exchange offer or, if applicable, does not register the Old Notes for shelf resale, Heinz Finance will generally be deemed to be in registration default. Holders of Old Notes will accrue special additional interest for the period in which Heinz Finance is deemed to be in default. This special interest will accrue as follows; if, within a period of 330 days following the date of original issuance of the Old Notes, the registration statement with regard to the New Notes is not declared effective by the Commission, this special interest will accrue at an annual rate of 0.25% from and including the first day following the end of this period and will cease to accrue on the date on which the registration statement is declared effective by the Commission. Additionally, if, within a period of 45 days following the date the registration statement is declared effective, Heinz Finance does not complete the exchange offer, special interest will accrue at an annual rate of 0.25% from and including the first day following the end of this period and will cease to accrue on the date on which the exchange offer is completed. At no time will the aggregate of any such special interest described above accrue at an annual rate in excess of 0.50%. Beginning on June 1, 2002, to but excluding July 17, 2002, interest accrued on the Old Notes at the annual rate of 6.875%. Beginning on July 17, 2002, interest accrued on the Old Notes and will accrue to but excluding the date the exchange offer is completed, at the annual rate of 7.15%. 66 Terms of the Exchange Offer For each of the Old Notes properly surrendered and not withdrawn before the expiration date, Heinz Finance will issue a New Note having a principal amount equal to that of the surrendered Old Note. The form and terms of the New Notes will be the same as the form and terms of the Old Notes except that the New Notes will be registered for the exchange offer under the Securities Act and, therefore, the New Notes will not bear legends restricting the transfer of the New Notes; and holders of the New Notes will not be entitled to any of the registration rights of the holders of Old Notes under the exchange and registration rights agreement, which will terminate upon the consummation of the exchange offer. The New Notes will evidence the same indebtedness as the Old Notes, which they replace, and will be issued under, and be entitled to the benefits of, the same indenture, which authorized the issuance of the Old Notes. As a result, both series of notes will be treated as a single class of notes under the Indenture. Heinz Finance intends to conduct the exchange offer in accordance with the provisions of the exchange and registration rights agreement and the applicable requirements of the Exchange Act and the related Commission rules and regulations. Under existing Commission interpretations, the New Notes would generally be freely transferable after the exchange offer without further registration under the Securities Act, except that broker-dealers receiving the New Notes in the exchange offer will be subject to a prospectus delivery requirement with respect to resale of those New Notes. Heinz Finance bases its view on interpretations by the staff of the Commission set forth in certain no-action letters issued to third parties. Heinz Finance has not, however, asked the Commission to consider this particular exchange offer in the context of a no-action letter. Therefore, holders of Old Notes cannot be sure that the Commission will treat the exchange offer in the same way it has treated other exchange offers in the past. A broker-dealer that has bought Old Notes for market-marking or other trading activities has to deliver a prospectus in order to resell any New Notes it has received for its own account in the exchange. The prospectus may be used by a broker-dealer to resell any of its New Notes. Heinz Finance has agreed in the exchange and registration rights agreement to send a prospectus to any broker-dealer that requests copies in the notice and questionnaire for a period of up to 180 days after the registration statement relating to this exchange offer is declared effective. Expiration Date; Extensions; Amendments The term "expiration date" shall mean 5:00 p.m., New York City time, on o , 2002, unless we, in our sole discretion, extend the exchange offer, in which case the term "expiration date" shall mean the latest date and time to which the exchange offer is extended. If we determine to extend the exchange offer, we will, prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date: o notify the exchange agent of any extension by oral or written notice; and o issue a press release or other public announcement which shall include disclosure of the approximate number of Old Notes deposited to date. We reserve the right, in our sole discretion: o to delay accepting any Old Notes; o to extend the exchange offer; or o if, in the opinion of our counsel, the consummation of the exchange offer would violate any applicable law, rule or regulation or any applicable interpretation of the staff of the Commission, to terminate or 67 amend the exchange offer by giving oral or written notice of such delay, extension, termination or amendment to the exchange agent. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by a press release or other public announcement thereof. If the exchange offer is amended in a manner determined by us to constitute a material change, we will promptly disclose such amendment by means of a prospectus supplement that will be distributed to the registered holders of the Old Notes, and we will extend the exchange offer for a period of five to ten business days, depending upon the significance of the amendment and the manner of disclosure to the holders, if the exchange offer would otherwise expire during such five to ten business day period. Without limiting the manner in which we may choose to make a public announcement of any delay, extension, amendment or termination of the exchange offer, we shall have no obligation to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely release to an appropriate news agency. Concurrent Exchange Offer Concurrently with the exchange offer of the Old Notes for the New Notes, we will conduct an offer to exchange up to $700,000,000 in aggregate principal amount of our outstanding 6.00% Guaranteed Notes due 2012 and up to $550,000,000 in aggregate principal amount of our outstanding 6.75% Guaranteed Notes due 2032, both issued on March 7, 2002, for up to $700,000,000 in aggregate principal amount of our 6.00% New Guaranteed Notes due 2012 and $550,000,000 in aggregate principal amount of our 6.75% New Guaranteed Notes due 2032. The completion or success of the concurrent exchange offer is not a condition to the completion of the exchange offer of the Old Notes for the New Notes. Interest on the New Notes Interest will accrue at the rate of 6.625% per annum for the notes due 2011 from the date on which the exchange offer is completed. Interest will be payable semi-annually in arrears on January 15 and July 15 of each year, and the initial interest payment on the New Notes will be based on the applicable interest rates for the notes accruing from the most recent date to which interest has been paid on the corresponding Old Notes. Resale of the New Notes With respect to the New Notes, based upon interpretations by the staff of the Commission set forth in certain no-action letters issued to third parties, we believe that a holder who exchanges Old Notes for New Notes in the ordinary course of business, who is not participating, does not intend to participate, and has no arrangement or understanding with any person to participate in a distribution of the New Notes, and who is not an "affiliate" of ours within the meaning of Rule 405 of the Securities Act, will be allowed to resell New Notes to the public without further registration under the Securities Act and without delivering to the purchasers of the New Notes a prospectus that satisfies the requirements of Section 10 of the Securities Act. If any holder acquires New Notes in the exchange offer for the purpose of distributing or participating in the distribution of the New Notes, such holder: o cannot rely on the position of the staff of the Commission enumerated in such no-action letters issued to third parties; and o must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction, unless an exemption from registration is otherwise available. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes acquired by such broker-dealer as a result of market-making or other trading activities must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented 68 from time to time, may be used by a broker-dealer in connection with resales of any New Notes received in exchange for Old Notes acquired by such broker-dealer as a result of market-making or other trading activities. We will make this prospectus, as it may be amended or supplemented from time to time, available to any such broker- dealer that requests copies of such prospectus in the letter of transmittal for use in connection with any such resale for a period of up to 180 days after the expiration date. See "Plan of Distribution." Procedures for Tendering To tender in the exchange offer, a holder of Old Notes must either: o complete, sign and date the letter of transmittal or facsimile thereof, have the signatures thereon guaranteed if required by the letter of transmittal, and mail or otherwise deliver such letter of transmittal or such facsimile to the exchange agent; or o if such Old Notes are tendered pursuant to the procedures for book-entry transfer set forth below, a holder tendering Old Notes may transmit an agent's message (as defined below) to the exchange agent in lieu of the letter of transmittal, in either case for receipt on or prior to the expiration date. In addition: o certificates for such Old Notes must be received by the exchange agent along with the letter of transmittal; o a timely confirmation of a book-entry transfer (a "book-entry confirmation") of such Old Notes into the exchange agent's account at DTC pursuant to the procedure for book-entry transfer described below, along with the letter of transmittal or an agent's message, as the case may be, must be received by the exchange agent on or prior to the expiration date; or o the holder must comply with the guaranteed delivery procedures described below. The term "agent's message" means a message, transmitted to the exchange agent's account at DTC and received by the exchange agent and forming a part of the book-entry confirmation, which states that such account has received an express acknowledgment from the tendering participant that such participant has received and agrees to be bound by the letter of transmittal and that Heinz Finance may enforce the letter of transmittal against such participant. To be tendered effectively, the letter of transmittal and other required documents, or an agent's message in lieu thereof, must be received by the exchange agent at the address set forth below under "--Exchange Agent" prior to 5:00 p.m., New York City time, on the expiration date. The tender by a holder that is not withdrawn prior to the expiration date will constitute an agreement between such holder and us in accordance with the terms and subject to the conditions set forth herein and in the letter of transmittal. The method of delivery of Old Notes, the letter of transmittal and all other required documents to the exchange agent is at the election and risk of the holder. Instead of delivery by mail, it is recommended that holders use an overnight or hand delivery service, properly insured. In all cases, sufficient time should be allowed to assure delivery to the exchange agent before the expiration date. Do not send the letter of transmittal or any Old Notes to us. Holders may request their respective brokers, dealers, commercial banks, trust companies or nominees to effect the above transactions for such holders. Any beneficial owner(s) of the Old Notes whose Old Notes are held through a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such intermediary promptly and instruct such intermediary to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on its own behalf, such owner must, prior to completing and executing the letter of transmittal and delivering such owner's Old Notes: 69 o make appropriate arrangements to register ownership of the Old Notes in such owner's name; or o obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Signatures on a letter of transmittal or a notice of withdrawal described below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed by an eligible institution unless the Old Notes tendered pursuant thereto are tendered: o by a registered holder who has not completed either the box entitled "Special Issuance Instructions" or the box entitled "Special Delivery Instructions" on the letter of transmittal; or o for the account of an eligible institution. In the event that signatures on a letter of transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be made by an eligible institution, which is a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States, or an "eligible guarantor institution" (within the meaning of Rule 17Ad-15 under the Exchange Act) which is a member of one of the recognized signature guarantee programs identified in the letter of transmittal. If the letter of transmittal is signed by a person other than the registered holder of any Old Notes listed therein, such Old Notes must be endorsed or accompanied by a properly completed bond power, signed by such registered holder exactly as such registered holder's name appears on such Old Notes. In connection with any tender of Old Notes in definitive certificated form, if the letter of transmittal or any Old Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by us, evidence satisfactory to us of their authority to so act must be submitted with the letter of transmittal. The exchange agent and DTC have confirmed that any financial institution that is a participant in DTC's system may utilize DTC's Automated Tender Offer Program to tender Old Notes. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Old Notes will be determined by us in our sole discretion, which determination will be final and binding. We reserve the absolute right: o to reject any and all Old Notes not properly tendered and any Old Notes our acceptance of which would, in the opinion of our counsel, be unlawful; and o to waive any defects, irregularities or conditions of tender as to particular Old Notes. Our interpretation of the terms and conditions of the exchange offer (including the instructions in the letter of transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as we shall determine. Although we intend to notify holders of defects or irregularities in connection with tenders of Old Notes, neither we, the exchange agent nor any other person shall incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. While we have no present plan to acquire any Old Notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any Old Notes that are not tendered pursuant to the exchange offer, we reserve the right in our sole discretion to purchase or make offers for any Old Notes that remain outstanding subsequent to the expiration date and, to the extent permitted by applicable law, purchase Old Notes in the open 70 market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers could differ from the terms of the exchange offer. By tendering Old Notes pursuant to the exchange offer, each holder of Old Notes will represent to us that, among other things: o the New Notes to be acquired by such holder of Old Notes in connection with the exchange offer are being acquired by such holder in the ordinary course of business of such holder; o such holder is not participating, does not intend to participate, and has no arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of the New Notes; o such holder acknowledges and agrees that any person who is participating in the exchange offer for the purpose of distributing the New Notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale of the New Notes acquired by such person and cannot rely on the position of the staff of the Commission set forth in certain no-action letters; and o such holder is not an "affiliate", as defined in Rule 405 under the Securities Act, of ours. If the holder is a broker-dealer that will receive New Notes for such holder's own account in exchange for Old Notes that were acquired as a result of market-making activities or other trading activities, such holder will be required to acknowledge in the letter of transmittal that such holder will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, such holder will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Return of Old Notes In all cases, issuance of New Notes for Old Notes that are accepted for exchange pursuant to the exchange offer will be made only after timely receipt by the exchange agent of: o Old Notes or a timely book-entry confirmation of such Old Notes into the exchange agent's account at DTC; and o a properly completed and duly executed letter of transmittal and all other required documents, or an agent's message in lieu thereof. If any tendered Old Notes are not accepted for any reason set forth in the terms and conditions of the exchange offer or if Old Notes are withdrawn or are submitted for a greater principal amount than the holders desire to exchange, such unaccepted, withdrawn or otherwise non-exchanged Old Notes will be returned without expense to the tendering holder thereof (or, in the case of Old Notes tendered by book-entry transfer into the exchange agent's account at DTC pursuant to the book-entry transfer procedures described below, such Old Notes will be credited to an account maintained with DTC) as promptly as practicable. Book-Entry Transfer The exchange agent will make a request to establish an account with respect to the Old Notes at DTC for purposes of the exchange offer within two business days after the date of this prospectus, and any financial institution that is a participant in DTC may make book-entry delivery of Old Notes by causing DTC to transfer such Old Notes into the exchange agent's account at DTC in accordance with DTC's procedures for transfer. However, although delivery of Old Notes may be effected through book-entry transfer at DTC, the letter of transmittal or facsimile thereof, with any required signature guarantees and any other required documents, or an agent's message in lieu of a letter of transmittal, must, in any case, be transmitted to and received by the exchange agent at the 71 address set forth below under "--Exchange Agent" on or prior to the expiration date or pursuant to the guaranteed delivery procedures described below. Guaranteed Delivery Procedures If a holder of the Old Notes desires to tender such Old Notes and the Old Notes are not immediately available or the holder cannot deliver its Old Notes (or complete the procedures for book-entry transfer), the letter of transmittal or any other required documents to the exchange agent prior to the expiration date, a holder may effect a tender if: o the tender is made through an eligible institution; o prior to the expiration date, the exchange agent receives from such eligible institution (by facsimile transmission, mail or hand delivery) a properly completed and duly executed Notice of Guaranteed Delivery substantially in the form provided by us setting forth the name and address of the holder, the certificate number(s) of such Old Notes (if applicable) and the principal amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the expiration date: (i) the letter of transmittal (or a facsimile thereof), or an agent's message in lieu thereof, (ii) the certificate(s) representing the Old Notes in proper form for transfer or a book-entry confirmation, as the case may be, and (iii) any other documents required by the letter of transmittal, will be deposited by the eligible institution with the exchange agent; and o such properly executed letter of transmittal (or facsimile thereof), or an agent's message in lieu thereof, as well as the certificate(s) representing all tendered Old Notes in proper form for transfer or a book-entry confirmation, as the case may be, and all other documents required by the letter of transmittal, are received by the exchange agent within three New York Stock Exchange trading days after the expiration date. Upon request to the exchange agent, a form of Notice of Guaranteed Delivery will be sent to holders who wish to tender their Old Notes according to the guaranteed delivery procedures set forth above. Withdrawal of Tenders Except as otherwise provided herein, tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration date. To withdraw a tender of Old Notes in the exchange offer, a written or facsimile transmission notice of withdrawal must be received by the exchange agent at its address set forth herein prior to the expiration date. Any such notice of withdrawal must: o specify the name of the person having deposited the Old Notes to be withdrawn; o identify the Old Notes to be withdrawn (including the certificate number or numbers, if applicable, and principal amount of such Old Notes or, in the case of Old Notes transferred by a book-entry transfer, the name and number of the account at DTC to be credited); and 72 o be signed by the holder in the same manner as the original signature on the letter of transmittal by which such Old Notes were tendered (including any required signature guarantees or, in the case of Old Notes transferred by book-entry transfer, be transmitted by DTC and received by the exchange agent in the same manner as the agent's message transferring the Old Notes). If Old Notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn Old Notes and otherwise comply with the procedures of DTC. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by us, in our sole discretion, which determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for purposes of the exchange offer, and no New Notes will be issued with respect thereto, unless the Old Notes so withdrawn are validly retendered. Properly withdrawn Old Notes may be retendered by following one of the procedures described above under "--Procedures for Tendering" at any time prior to the expiration date. Exchange Agent Bank One Trust Company has been appointed as exchange agent for the exchange offer. Questions and requests for assistance, requests for additional copies of this prospectus or the letter of transmittal and requests for a copy of the Notice of Guaranteed Delivery should be directed to the exchange agent addressed as follows: By Mail or Hand/Overnight Delivery: By Facsimile: Bank One Trust Company 312-407-8853 One North State Street Chicago, Illinois 60602 Confirm by Telephone: Attention: Exchanges 800-524-9472 Bank One Trust Company is an affiliate of the trustee under the Indenture. Fees and Expenses The expenses of soliciting tenders will be borne by us. The principal solicitation is being made by mail. Additional solicitation may be made by facsimile transmission, telephone or other electronic means or in person by our officers and regular employees or those of our affiliates. We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to brokers, dealers or others soliciting acceptances of the exchange offer. We, however, will pay the exchange agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The expenses to be incurred in connection with the exchange offer, including registration fees, fees and expenses of the exchange agent and the trustee, accounting and legal fees, and printing costs, will be paid by us. We will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the exchange offer. If, however, a transfer tax is imposed for any reason other than the exchange of the Old Notes pursuant to the exchange offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. 73 Consequence of Failure to Exchange Participation in the exchange offer is voluntary. Holders of the Old Notes are urged to consult their financial and tax advisors in making their own decisions on what action to take. Old Notes that are not exchanged for the New Notes pursuant to the exchange offer will remain "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act. Accordingly, such Old Notes may not be offered, sold, pledged or otherwise transferred except: o to a person whom the seller reasonably believes is a "qualified institutional buyer" within the meaning of Rule 144A purchasing for its own account or for the account of a qualified institutional buyer in a transaction meeting the requirements of Rule 144A; o in an offshore transaction complying with Rule 903 or Rule 904 of Regulation S under the Securities Act; o pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available); o pursuant to an effective registration statement under the Securities Act; or o pursuant to another available exemption from the registration requirements of the Securities Act, and, in each case, in accordance with all other applicable securities laws. TAXATION In the opinion of Davis Polk & Wardwell, the exchange of Old Notes for New Notes in the exchange offer will not constitute a taxable transaction for United States federal income tax purposes and the New Notes will be treated as a continuation of the investment in the Old Notes. The holder will not recognize taxable gain or loss as a result of the exchange and will have the same basis in the New Notes as in the Old Notes immediately before the exchange. Concerning the tax consequences arising under state, local or foreign laws of the exchange of Old Notes for New Notes, we encourage holders to consult their own tax advisors. 74 PLAN OF DISTRIBUTION Each broker-dealer that receives New Notes for its own account in exchange for Old Notes acquired by the broker-dealer as a result of market-making or other trading activities must acknowledge that it will deliver a prospectus in connection with any resale of those New Notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a participating broker-dealer in connection with resales of New Notes received in exchange for such Old Notes. For a period of up to 180 days after the expiration date, we will make this prospectus, as amended or supplemented, available to any such broker-dealer that requests copies of this prospectus in the letter of transmittal for use in connection with any such resale. We will not receive any proceeds from any sale of New Notes by broker-dealers or any other persons. New Notes received by participating broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions or through the writing of options on the New Notes, or a combination of these methods of resale, at market prices prevailing at the time of resale or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such participating broker-dealer that resells the New Notes that were received by it for its own account pursuant to the exchange offer. Any broker or dealer that participates in a distribution of New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New Notes and any commissions or concessions received by these persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker- dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. 75 NOTICE TO INVESTORS Based on interpretations of the staff of the Commission set forth in no-action letters issued to third parties, we believe that New Notes issued pursuant to the exchange offer in exchange for Old Notes may be offered for resale, resold, and otherwise transferred by a holder (other than broker-dealers, as set forth below, and any holder that is an "affiliate" of Heinz Finance within the meaning of Rule 405 under the Securities Act) without further registration under the Securities Act and without delivery to prospective purchasers of a prospectus pursuant to the provisions of the Securities Act, provided that the holder is acquiring the New Notes in the ordinary course of its business, is not participating and has no arrangement or understanding with any person to participate in the distribution of the New Notes. Eligible holders wishing to accept the exchange offer must represent to us in the letter of transmittal that these conditions have been met. See "The Exchange Offer--Procedures for Tendering." Each broker-dealer who holds Old Notes acquired for its own account as a result of market-making or other trading activities and who receives New Notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of New Notes. The letter of transmittal states that by acknowledging and delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with the resales of New Notes received for the broker-dealer's own account in exchange for Old Notes where Old Notes were acquired by the broker-dealer as a result of market- making activities or other trading activities. For a period of up to 180 days after the expiration date, we will make this prospectus available to those broker-dealers (if they so request in the letter of transmittal) for use in connection with those resales. See "Plan of Distribution." The New Notes constitute new issues of securities with no established public trading market. We do not intend to apply for listing of the New Notes on any securities exchange or for inclusion of the New Notes in any automated quotation system. There can be no assurance that an active public market for the New Notes will develop or as to the liquidity of any market that may develop for the New Notes, the ability of holders to sell the New Notes, or the price at which holders would be able to sell the New Notes. Future trading prices of the New Notes will depend on many factors, including among other things, prevailing interest rates, our operating results and the market for similar securities. Any Old Notes not tendered or accepted in the exchange offer will remain outstanding. To the extent that Old Notes are tendered and accepted in the exchange offer, your ability to sell untendered, and tendered but unaccepted, Old Notes could be adversely affected. Following consummation of the exchange offer, the holders of Old Notes will continue to be subject to the existing restrictions on transfer thereof and we will have no further obligation to those holders, under the exchange and registration rights agreement, to provide for the registration under the Securities Act of the Old Notes. There may be no trading market for the Old Notes. We will not receive any proceeds from, and have agreed to bear the expenses of, the exchange offer. No underwriter is being used in connection with the exchange offer. The exchange offer is not being made to, nor will we accept surrenders for exchange from, holders of Old Notes in any jurisdiction in which the exchange offer or the acceptance thereof would not be in compliance with the securities or blue sky laws of those jurisdictions. VALIDITY OF THE NEW NOTES The validity of the New Notes will be passed upon for us by Davis Polk & Wardwell, New York, New York. 76 EXPERTS The consolidated and combined financial statements of Heinz Finance and Heinz as of May 1, 2002 and May 2, 2001 and for each of the three fiscal years ended May 1, 2002, either included or incorporated herein by reference to Heinz's Annual Report on Form 10-K for the fiscal year ended May 1, 2002 have been so either included or incorporated by reference in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. FORWARD-LOOKING STATEMENTS This prospectus (including the information incorporated by reference in this prospectus) contains statements that constitute forward-looking statements. These statements appear in a number of places in this prospectus or the documents incorporated by reference and include statements regarding the intent, belief or current expectations of, and with respect to, Heinz or its officers with respect to future events or the results of operations and financial condition of Heinz and its subsidiaries and involve known and unknown risks, uncertainties and other factors. In some cases, you can identify forward-looking statements in this document by words such as "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "potential," "should" or the negative of those terms or similar expressions. Such statements reflect the current views of Heinz with respect to future events and are subject to certain risks, uncertainties and assumptions. The following is a non-exclusive list of important factors which may affect the business and results of operations of Heinz. o Changes in laws and regulations, including changes in food and drug laws, accounting standards, taxation requirements (including tax rate changes, new tax laws and revised tax law interpretations) and environmental laws in domestic and foreign jurisdictions; o Competitive product and pricing pressures and Heinz's ability to gain or maintain share of sales in the global market as a result of actions by competitors and others; o Fluctuations in the cost and availability of raw materials, including tuna, and the ability to maintain favorable supplier arrangements and relationships; o The impact of higher energy costs and other factors on the cost of producing, transporting and distributing Heinz's products; o Heinz's ability to generate sufficient cash flows to support capital expenditures, share repurchase programs, debt repayment and general operating activities; o The inherent risks in the marketplace associated with new product or packaging introductions, including uncertainties about trade and consumer acceptance; o Heinz's ability to achieve sales and earnings forecasts, which are based on assumptions about sales volume, product mix and other items; o Heinz's ability to integrate acquisitions and joint ventures into existing operations and the availability of new acquisition opportunities and the success of divestitures and other business combinations; o Heinz's ability to achieve cost savings objectives, including any restructuring programs and our working capital initiative; o The impact of unforeseen economic and political changes in markets where we compete, such as currency exchange rates (notably with respect to the euro and pound sterling), inflation rates, recession, foreign ownership restrictions and other external factors over which Heinz has no control; 77 o Interest rate fluctuations and other capital market conditions; o The effectiveness of Heinz's advertising, marketing and promotional programs; o Weather conditions, which could impact demand for Heinz's products and the supply and cost of raw materials; o The impact of e-commerce and e-procurement, supply chain efficiency and cash flow initiatives; o The impact of global industry conditions, including the effect of the economic downturn in the food industry and the food service business in particular; o Heinz's ability to maintain our profit margin in the face of a consolidating retail environment; o Heinz's ability to offset the reduction in volume and revenue resulting from participation in categories experiencing declining consumption rates; o With respect to the proposed spin-off and merger between our U.S. and Heinz's Canadian pet food and pet snacks, our U.S. tuna, U.S. retail private label soup and gravy, College Inn broth and our U.S. infant feeding businesses, and a wholly-owned subsidiary of Del Monte, the ability to obtain required third party consents and Del Monte shareholders' approval and the success of business integration in a timely and cost effective manner; and o With respect to future dividends on Heinz stock, meeting certain legal requirements at the time of declaration. Such forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and actual results may differ from those in such forward-looking statements as a result of various factors. The information in this prospectus identifies important factors that could cause such differences. See also the factors described in "Cautionary Statement Relevant to Forward-Looking Information" in Heinz's Annual Report on Form 10-K for the fiscal year ended May 1, 2002 and "Where You Can Find More Information" and "Risk Factors" both in this prospectus. 78 INDEX TO FINANCIAL STATEMENTS OF H. J. HEINZ FINANCE COMPANY AND H. J. HEINZ COMPANY CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS OF H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES Page ---- Report of Independent Accountants.................................................................... F-2 Consolidated and Combined Statements of Income for the three years ended May 1, 2002................. F-3 Consolidated and Combined Balance Sheets as of May 1, 2002 and May 2, 2001........................... F-4 Consolidated Statement of Shareholders' Equity for the year ended May 1, 2002........................ F-5 Consolidated and Combined Statements of Cash Flows for the three years ended May 1, 2002............. F-6 Notes to Consolidated and Combined Financial Statements for the three years ended May 1, 2002........ F-7 Consolidated Statements of Income for the three months ended July 31, 2002 and August 1, 2001 (unaudited).......................................................................................... F-26 Condensed Consolidated Balance Sheets as of July 31, 2002 (unaudited) and May 1, 2002................ F-27 Condensed Consolidated Statements of Cash Flows for the three months ended July 31, 2002 and August 1, 2001 (unaudited)........................................................................... F-28 Notes to Condensed Consolidated Financial Statements for the three months ended July 31, 2002 and August 1, 2001 (unaudited)........................................................................... F-29 PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS OF H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES (UNAUDITED) Introduction to the Pro Forma Consolidated and Combined Financial Statements (unaudited)............. F-37 Pro Forma Consolidated Statement of Income for the year ended May 1, 2002 (unaudited)................ F-38 Pro Forma Combined Statement of Income for the year ended May 2, 2001 (unaudited).................... F-40 Pro Forma Combined Statement of Income for the year ended May 3, 2000 (unaudited).................... F-42 Pro Forma Consolidated Statement of Income for the three months ended July 31, 2002 (unaudited)...... F-44 Pro Forma Consolidated Statement of Income for the three months ended August 1, 2001 (unaudited)..... F-46 Pro Forma Consolidated Balance Sheet as of July 31, 2002 (unaudited)................................. F-48 PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS OF H. J. HEINZ COMPANY (UNAUDITED) Introduction to the Pro Forma Consolidated Financial Statements (unaudited).......................... F-50 Pro Forma Consolidated Statement of Income for the year ended May 1, 2002 (unaudited)................ F-51 Pro Forma Combined Statement of Income for the year ended May 2, 2001 (unaudited).................... F-53 Pro Forma Combined Statement of Income for the year ended May 3, 2000 (unaudited).................... F-55 Pro Forma Consolidated Statement of Income for the three months ended July 31, 2002 (unaudited)...... F-57 Pro Forma Consolidated Statement of Income for the three months ended August 1, 2001 (unaudited)..... F-59 Pro Forma Consolidated Balance Sheet as of July 31, 2002 (unaudited)................................. F-61
F-1 Report of Independent Accountants To the Board of Directors and Shareholders of H. J. Heinz Finance Company In our opinion, the accompanying consolidated and combined balance sheets and the related consolidated and combined statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of H. J. Heinz Finance Company (the "Company") and its subsidiaries at May 1, 2002 and May 2, 2001, and the results of their operations and their cash flows for each of the three years in the period ended May 1, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Pittsburgh, Pennsylvania July 2, 2002 F-2 H. J. Heinz Finance Company and Subsidiaries Consolidated and Combined Statements of Income Fiscal Years ended May 1, 2002, May 2, 2001 and May 3, 2000 Fiscal Year Ended ----------------------------------------- May 1, 2002 May 2, 2001 May 3, 2000 (52 Weeks) (52 Weeks) (53 Weeks) ----------- ----------- ----------- (Dollars in thousands) Sales........................................................... $ 4,191,230 $ 4,550,391 $ 4,469,324 Cost of products sold............................................ 2,744,344 3,085,270 3,013,574 ----------- ----------- ----------- Gross profit..................................................... 1,446,886 1,465,121 1,455,750 Selling, general and administrative expenses..................... 650,933 897,950 752,066 Royalty expense to related parties............................... 179,198 129,102 94,347 ----------- ----------- ----------- Operating income................................................. 616,755 438,069 609,337 Interest income.................................................. 36,175 110,979 126,236 Interest expense................................................. 206,578 10,278 7,138 Dividends from related parties................................... 130,720 - - Other expenses, net.............................................. 11,397 21,303 27,896 ----------- ----------- ----------- Income before income taxes, minority interest and cumulative effect of accounting changes.................................. 565,675 517,467 700,539 Provision for income taxes....................................... 46,251 205,358 252,244 ----------- ----------- ----------- Income before minority interest and cumulative effect of accounting changes............................................ 519,424 312,109 448,295 Minority interest................................................ (445,707) - - ----------- ----------- ----------- Income before cumulative effect of accounting changes............ 73,717 312,109 448,295 Cumulative effect of accounting changes.......................... - (5,211) - ----------- ----------- ----------- Net income....................................................... $ 73,717 $ 306,898 $ 448,295 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 H. J. Heinz Finance Company and Subsidiaries Consolidated and Combined Balance Sheets Fiscal Years Ended May 1, 2002 and May 2, 2001 May 1, 2002 May 1, 2001 -------------- --------------- (Dollars in thousands) Assets Current assets: Cash and cash equivalents............................................................. $ 6,924 $ 393 Receivables (net of allowances: 2002--$2,596; 2001--$2,606).......................... 732,714 506,447 Due from related parties........................................................... 72,762 75,429 Short-term notes receivable from related parties................................... 921,014 -- Inventories: Finished goods and work-in-process.............................................. 567,482 515,315 Packaging material and ingredients.............................................. 142,785 139,855 Prepaid expenses and other current assets.......................................... 61,439 99,470 -------------- -------------- Total current assets.......................................................... 2,505,120 1,336,909 Property, plant and equipment: Land............................................................................... 16,525 18,684 Buildings and leasehold improvements............................................... 313,979 399,802 Equipment, furniture and other..................................................... 1,185,861 1,190,028 Less accumulated depreciation...................................................... (661,429) (738,731) -------------- -------------- Total property, plant and equipment, net...................................... 854,936 869,783 Other noncurrent assets: Long-term notes receivable from related parties.................................... 35,000 35,000 Investments in related parties..................................................... 1,895,245 1,895,245 Goodwill (net of amortization: 2002--$262,439; 2001--$226,085)....................... 1,650,488 1,108,898 Other intangible assets (net of amortization: 2002--$153,425; 2001--$143,375)........ 276,102 99,396 Other noncurrent assets............................................................... 267,558 256,260 -------------- -------------- Total other noncurrent assets................................................. 4,124,393 3,394,799 -------------- -------------- Total assets.................................................................. $ 7,484,449 $ 5,601,491 ============== ============== Liabilities and Shareholders' Equity Current liabilities: Short-term debt with related parties............................................... $ 132,164 $ - Portion of long-term debt within one year.......................................... 451,375 29,833 Accounts payable................................................................... 256,372 321,222 Accounts payable to related parties................................................ 153,968 96,221 Accrued marketing.................................................................. 46,603 60,292 Accrued interest................................................................... 79,442 7,159 Accrued restructuring costs........................................................ 4,956 42,405 Other accrued liabilities.......................................................... 94,651 114,528 -------------- -------------- Total current liabilities....................................................... 1,219,531 671,660 Long-term debt........................................................................ 3,936,025 23,932 Deferred income taxes................................................................. 23,059 205,134 Other liabilities..................................................................... 36,431 42,368 -------------- -------------- Total long-term debt and other liabilities...................................... 3,995,515 271,434 Minority interest..................................................................... 1,758,476 - Mandatorily Redeemable Series A Preferred shares...................................... 325,000 - Shareholders' equity: Common stock, 1,001,000 shares authorized, 10,560 shares issued, $1.00 par value... 11 - Additional capital................................................................. 128,050 - Retained earnings.................................................................. 58,035 - Accumulated other comprehensive (loss)............................................. (169) - Parent company's investment........................................................ - 4,658,397 -------------- -------------- Total shareholders' equity...................................................... 185,927 4,658,397 -------------- -------------- Total liabilities and shareholders' equity...................................... $ 7,484,449 $ 5,601,491 ============== ==============
The accompanying notes are an integral part of these financial statements. F-4 H. J. Heinz Finance Company and Subsidiaries Consolidated Statement of Shareholders' Equity Fiscal Year Ended May 1, 2002 Accumulated Common Stock Other Total Comprehensive --------------- Additional Retained Comprehensive Shareholders' Income Shares Dollars Capital Earnings (Loss) Equity ------------- ------ ------- ---------- -------- ------------- ------------- Original contribution of net assets..................... - 10,560 $ 11 $ 135,386 - $ (261) $ 135,136 Net income - 2002............. $ 73,717 - - - $ 73,717 - 73,717 Other comprehensive income (loss), net of tax: Net change in fair value of cash flow hedges........ 252 - - - - 252 252 Net hedging losses reclassified into earnings................ (160) - - - - (160) (160) ---------- Comprehensive income.......... $ 73,809 ========== Dividends paid to preferred shareholders............... - - - (15,682) - (15,682) Adjustment to original net assets contributed......... - - (7,336) - - (7,336) ------ ----- ----------- -------- --------- ----------- Balance at May 1, 2002........ 10,560 $ 11 $ 128,050 $ 58,035 $ (169) $ 185,927 ====== ===== =========== ======== ========= ===========
The accompanying notes are an integral part of these financial statements. F-5 H. J. Heinz Finance Company and Subsidiaries Consolidated and Combined Statements of Cash Flows Fiscal Years ended May 1, 2002, May 2, 2001 and May 3, 2000 Fiscal Year Ended ------------------------------------------------- May 1, 2002 May 2, 2001 May 3, 2000 (52 Weeks) (52 Weeks) (52 Weeks) --------------- --------------- --------------- (Dollars in thousands) Operating activities: Net income......................................................... $ 73,717 $ 306,898 $ 448,295 Adjustments to reconcile net income to cash provided by operating activities: Depreciation.................................................... 67,639 70,277 90,219 Amortization.................................................... 39,499 51,464 49,467 Deferred tax provision.......................................... 14,467 29,417 13,250 Loss on sale of The All American Gourmet business............... -- 94,600 -- Minority interest............................................... 445,707 -- -- Provision for restructuring..................................... (3,561) 257,983 175,737 Deferred income................................................. 1,646 22,162 (570) Other items, net................................................ (3,165) (11,605) 9,763 Changes in current assets and liabilities, excluding effects of acquisitions and divestitures: Receivables.................................................. (215,473) (158,331) (52,916) Inventories................................................. (466,937) 73,329 (100,548) Due from/to related parties.................................. 142,651 (413,346) (52,773) Accounts payable............................................ (82,632) 10,094 16,341 Accrued liabilities.......................................... (46,396) (230,964) (163,654) Other....................................................... (50) (24,456) 1,275 --------------- --------------- -------------- Cash (used for) provided by operating activities........... (32,888) 77,522 433,886 --------------- --------------- -------------- Investing activities: Capital expenditures........................................... (77,205) (183,494) (215,404) Proceeds from disposals of property, plant and equipment ....... 3,274 165,450 4,781 Acquisitions, net of cash acquired.............................. (809,390) (229,916) (73,923) Proceeds from divestitures...................................... -- 96,524 25,000 Investment in The Hain Celestial Group, Inc..................... -- (79,743) (99,764) Other items, net................................................ 8,544 (827) (34,847) --------------- --------------- -------------- Cash used for investing activities......................... (874,777) (232,006) (394,157) --------------- --------------- -------------- Financing activities: Payments on long-term debt...................................... (309,900) (12,160) (52,110) Proceeds from long-term debt.................................... 1,992,792 -- 4,344 Payments on commercial paper and short-term borrowings, net..... (957,702) -- -- Payments of dividends to related parties........................ -- (350,648) (306,244) Distributions to Class A partners............................... (108,856) -- -- Dividends on preferred shares................................... (15,682) -- -- Proceeds from mandatorily redeemable Series A preferred shares....................................................... 325,000 -- -- Net parent advances............................................. -- 515,363 313,689 Other items, net................................................ (21,190) -- -- --------------- --------------- -------------- Cash provided by (used for) financing activities............. 904,462 152,555 (40,321) --------------- --------------- -------------- Net decrease in cash and cash equivalents.......................... (3,203) (1,929) (592) Cash and cash equivalents, beginning of year....................... 10,127 2,322 2,914 --------------- --------------- -------------- Cash and cash equivalents, end of year............................. $ 6,924 $ 393 $ 2,322 =============== =============== ===============
The accompanying notes are an integral part of these financial statements. F-6 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 1. Basis of Presentation On May 3, 2001, H. J. Heinz Company ("Heinz") reorganized its U.S. corporate structure and established two primary companies for the management of U.S. trademarks and for U.S. treasury functions. As a result, all of the U.S. treasury and business operations of Heinz's domestic operations ("the U.S. Group") are now being conducted by H. J. Heinz Finance Company and its wholly-owned subsidiaries, and H. J. Heinz Company, L.P. ("Heinz LP") collectively referred to as "Heinz Finance" in the accompanying notes. H. J. Heinz Finance Company has limited partnership interests in Heinz LP. As part of the reorganization, substantially all assets and liabilities of the U.S. Group, except for finished goods inventories, which were retained by Heinz, were contributed to Heinz LP by Heinz. In addition, certain assets and liabilities that related to the U.S. Group were assumed by Heinz during Fiscal Year 2001. H. J. Heinz Finance Company also assumed primary liability for approximately $2.9 billion of Heinz's outstanding senior unsecured debt and accrued interest by becoming co-obligor with Heinz. Heinz LP owns or leases the operating assets involved in manufacturing throughout the United States which were contributed by Heinz and its subsidiaries, together with other assets and liabilities, to Heinz LP and manages the business. Heinz LP has two classes of limited partnership interests, Class A and Class B, that are allocated varying income and cash distributions in accordance with the Heinz LP agreement. H. J. Heinz Finance Company, directly and through wholly-owned subsidiaries, owns the Class B interests. Heinz, directly and through wholly-owned subsidiaries, owns the Class A interests. Heinz Management Company, a wholly-owned subsidiary of Heinz, is the managing General Partner of Heinz LP and employs the salaried personnel of the U.S. Group. Under the partnership agreement, Heinz Finance has the power to control the general partner through majority membership on Heinz LP's management board. The minority interest amounts on the May 1, 2002 balance sheet represents the Class A and General Partner limited partnership interest in Heinz LP, and has been adjusted for the minority partners' share of income and cash distributions. The preparation of the May 2, 2001 and May 3, 2000 combined financial statements include the use of "carve out" and "push down" accounting procedures wherein assets, liabilities and expenses historically recorded or incurred at the parent company level or an affiliate of Heinz, which related to or were incurred on behalf of the U.S. Group, have been identified and allocated or pushed down as appropriate to reflect results of the U.S. Group for the periods presented. See Note (6), for a further discussion regarding the allocation of Heinz parent company costs. 2. Significant Accounting Policies Fiscal Year Heinz Finance operates on a 52- or 53-week fiscal year ending the Wednesday nearest April 30. Fiscal years for the financial statements included herein ended May 1, 2002, May 2, 2001 and May 3, 2000. Principles of Consolidation and Combination The consolidated and combined financial statements include the accounts of Heinz Finance. All intercompany accounts and transactions have been eliminated. Investments owned less than 50%, where significant influence exists, are accounted for on an equity basis. Certain prior-year amounts have been reclassified in order to conform with the Fiscal Year 2002 presentation. The accounting policies of Heinz Finance and the U.S. Group are the same. Use of Estimates The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. F-7 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Cash Equivalents Cash equivalents are defined as highly liquid investments with original maturities of 90 days or less. Inventories Inventories are stated at the lower of cost or market. Cost is determined principally under the average cost method. Property, Plant and Equipment Land, buildings and equipment are recorded at cost. For financial reporting purposes, depreciation is provided on the straight-line method over the estimated useful lives of the assets. Accelerated depreciation methods are generally used for income tax purposes. Expenditures for new facilities and improvements that substantially extend the capacity or useful life of an asset are capitalized. Ordinary repairs and maintenance are expensed as incurred. When property is retired or otherwise disposed, the cost and related depreciation are removed from the accounts and any related gains or losses are included in income. Intangibles Goodwill, trademarks and other intangibles arising from acquisitions are being amortized on a straight-line basis over periods ranging from seven to 40 years. The carrying value of intangibles is evaluated periodically in relation to the operating performance and future undiscounted cash flows of the underlying businesses. Adjustments are made if the sum of expected future net cash flows is less than book value. See Recently Adopted Accounting Standards regarding the accounting for goodwill and intangibles amortization effective May 2, 2002. Parent Company's Investment Heinz's investment for Fiscal years 2001 and 2000 represents the original investment by Heinz plus accumulated net income, less dividends, capital contributions, certain intercompany accounts and current federal and state income taxes payable. Revenue Recognition Heinz Finance recognizes revenue when title, ownership and risk of loss pass to the customer. See Recently Adopted Accounting Standards for additional information. Advertising Expenses Advertising costs are expensed in the year in which the advertising first takes place. Income Taxes Until July 6, 2001, Heinz Finance joined with Heinz in the filing of a consolidated U.S. income tax return and state income tax returns. After July 6, 2001, H. J. Heinz Finance Company began filing its own consolidated U.S. income tax return. U.S. tax expense for all periods prior to July 7, 2001, and state tax expense for all years includes the effect of certain tax sharing agreements Heinz Finance has with Heinz regarding these consolidated filings. Specifically, Heinz charged (refunded) Heinz Finance at the U.S. statutory rate for its actual taxable income (loss). In addition, Heinz charges Heinz Finance for its share of consolidated state tax expense based on Heinz Finance's share of the state allocation factors. F-8 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Deferred income taxes result primarily from temporary differences between financial and tax reporting. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. Financial Instruments Heinz Finance uses derivative financial instruments for the purpose of hedging interest rate and price exposures which exist as part of ongoing business operations. As a policy, Heinz Finance does not engage in speculative or leveraged transactions, nor does Heinz Finance hold or issue financial instruments for trading purposes. The cash flows related to financial instruments are classified in the consolidated and combined statements of cash flows in a manner consistent with those of the transactions being hedged. Recently Adopted Accounting Standards In September 2000, the FASB Emerging Issues Task Force ("EITF") issued new guidelines entitled, "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products." In addition, during May 2000, the EITF issued new guidelines entitled "Accounting for Certain Sales Incentives." Both of these issues provide guidance primarily on income statement classification of consideration from a vendor to a purchaser of the vendor's products, including both customers and consumers. Generally, cash consideration is to be classified as a reduction of revenue, unless specific criteria are met regarding goods or services that the vendor may receive in return for this consideration. In the fourth quarter of Fiscal Year 2002, Heinz Finance adopted these new EITF guidelines. The adoption of these EITF guidelines resulted in a reduction of revenues of approximately $437 million in Fiscal Year 2002, $388 million in Fiscal Year 2001 and $320 million in Fiscal Year 2000. Selling, general and administrative expense ("SG&A") was correspondingly reduced such that net income was not affected. Prior periods presented have been reclassified to conform with the current year presentation. In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." These standards require that all business combinations be accounted for using the purchase method and that goodwill and intangible assets with indefinite useful lives should not be amortized but should be tested for impairment at least annually, and they provide guidelines for new disclosure requirements. These standards outline the criteria for initial recognition and measurement of intangibles, assignment of assets and liabilities including goodwill to reporting units and goodwill impairment testing. Heinz Finance has adopted the provisions of SFAS Nos. 141 and 142 for all business combinations after June 30, 2001. Effective May 2, 2002, Heinz Finance will adopt SFAS No. 142 for existing goodwill and other intangible assets. The reassessment of intangible assets, including the ongoing impact of amortization, was completed during the first quarter of Fiscal Year 2003. The assignment of goodwill to reporting units, along with completion of the first step of the transitional goodwill impairment tests, was completed during the first six months of Fiscal Year 2003. The effects of adopting SFAS No. 141 and 142 on net income for Fiscal Year 2002, Fiscal Year 2001 and Fiscal Year 2000 follows: F-9 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Fiscal Year ------------------------------------------ 2002 2001 2000 --------------- ------------ ------------ Net income.................................................................$ 73,717 $ 306,898 $ 448,295 Add: Goodwill amortization, net of tax and minority interest............... 1,362 29,112 25,538 Trademark amortization, net of tax and minority interest................... - 2,138 2,134 -------------- ------------ ------------ Net income excluding goodwill and trademark amortization...................$ 75,079 $ 338,148 $ 475,967 ============== ============ ============
In Fiscal Year 2001, Heinz Finance changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." Under the new accounting method, adopted retroactive to May 4, 2000, Heinz Finance recognizes revenue upon the passage of title, ownership and risk of loss to the customer. The cumulative effect of the change on prior years resulted in a charge to income of $4.8 million (net of income taxes of $2.8 million), which has been included in net income for the year ended May 3, 2000. The change did not have a significant effect on revenue or results of operations for the year ended May 2, 2001. The pro forma amounts, assuming that the new revenue recognition method had been applied retroactively to prior periods, were not materially different from the amounts shown in the combined statements of income for the year ended May 3, 2000. In addition, in Fiscal Year 2001, Heinz Finance adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which resulted in a cumulative effect of an accounting change that reduced net income by $0.4 million. Recently Issued Accounting Standards In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. This standard is effective for fiscal years beginning after June 15, 2002. Heinz Finance does not expect that the adoption of this standard will have a significant impact on the consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." SFAS No. 144 clarifies and revises existing guidance on accounting for impairment of property, plant and equipment, amortized intangibles, and other long-lived assets not specifically addressed in other accounting literature. This standard will be effective for Heinz Finance beginning in Fiscal Year 2003. Heinz Finance does not expect the adoption of this standard to have a significant impact on the consolidated financial statements. 3. Acquisitions All of the following acquisitions have been accounted for as purchases and, accordingly, the respective purchase prices have been allocated to the respective assets and liabilities based upon their estimated fair values as of the acquisition date. Operating results of businesses acquired have been included in the consolidated and combined statements of income from the respective acquisition dates forward. Pro forma results of Heinz Finance, assuming all of the following acquisitions had been made at the beginning of each period presented, would not be materially different from the results reported. There are no significant contingent payments, options or commitments associated with any of the acquisitions. Fiscal Year 2002 Heinz Finance acquired the following businesses for a total of $813.9 million, which was paid primarily in cash, including obligations to sellers of $2.5 million: F-10 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 o In July 2001, Heinz Finance completed the acquisition of Borden Food Corporation's pasta sauce, dry bouillon and soup businesses including such brands as Classico pasta sauces, Aunt Millie's pasta sauce, Mrs. Grass Recipe soups and Wyler's bouillons and soups. o In August 2001, Heinz Finance completed the acquisition of Delimex Holdings, Inc., a leading maker of frozen Mexican food products such as taquitos, quesadillas, tamales and rice bowls. o In September 2001, Heinz Finance completed the acquisition of Anchor Food Products branded retail business, which includes the retail licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers and the Popper's brand of retail appetizer lines. o Heinz Finance also made other smaller acquisitions. The preliminary allocation of the purchase price resulted in goodwill of $571.2 million, which was assigned to the U.S. Frozen segment ($375.3 million) and Heinz North America segment ($195.9 million). Of that amount, $367.8 million is expected to be deductible for tax purposes. In addition, $186.0 million of intangible assets were acquired, of which $91.1 million was assigned to brands and trademarks that are not subject to amortization. The remaining $94.9 million of acquired intangible assets has a weighted-average useful life of approximately 27 years. The intangible assets that make up that amount include brands and trademarks of $39.1 million (38-year weighted-average useful life), licensing agreements of $45.8 million (20-year weighted-average useful life) and patents of $10.0 million (18-year weighted-average useful life). Fiscal Year 2001 Heinz Finance acquired businesses for a total of $234.0 million, including obligations to sellers of $4.1 million. The allocations of the purchase price resulted in goodwill of $186.5 million and trademarks and other intangible assets of $0.1 million, which are being amortized on a straight-line basis over periods not exceeding 40 years. On March 1, 2001, Heinz Finance acquired two privately held U.S. foodservice companies: Cornucopia, Inc. of Irvine, California, and Central Commissary, Inc. of Phoenix, Arizona. Both companies make and market refrigerated and frozen reciped food products. Also during Fiscal Year 2001, Heinz Finance completed the acquisitions of IDF Holdings, Inc., the parent of International DiverseFoods Inc., a leading manufacturer of customized dressings, sauces, mixes and condiments for restaurant chains and foodservice distributors, and Alden Merrell Corporation, a manufacturer of high-quality, premium-priced frozen desserts for casual dining restaurants and foodservice distributors. On June 19, 2000, Heinz Finance exercised its preemptive right to purchase an additional 2,582,774 shares of The Hain Celestial Group, Inc. ("Hain") for $79.7 million, or $30.88 per share. The transaction restored Heinz Finance's ownership interest in Hain to 19.5%. Heinz Finance's ownership was diluted as a result of Hain's stock-for-stock merger with Celestial Seasonings on May 30, 2000. Fiscal Year 2000 Heinz Finance acquired businesses for a total of $84.4 million, including obligations to sellers of $10.4 million. The allocations of the purchase price resulted in goodwill of $56.5 million, which is being amortized on a straight-line basis over periods not exceeding 40 years. During Fiscal Year 2000, Heinz Finance completed the acquisition of Quality Chef Foods, a leading manufacturer of frozen heat-and-serve soups, entrees and sauces; Yoshida, a line of Asian sauces marketed in the U.S.; and Thermo Pac, Inc., a U.S. leader in single-serve condiments. F-11 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 On September 27, 1999, Heinz Finance and Hain announced an agreement to form a strategic alliance for the global production and marketing of natural and organic foods and soy-based beverages. Heinz Finance's investment of $99.8 million gave it a 19.5% interest in Hain. Heinz Finance will provide procurement, manufacturing and logistic expertise while Hain will provide marketing, sales and distribution services. Additionally, Hain acquired from Heinz Finance the trademark for Earth's Best organic baby foods. Heinz Finance's investment in Hain is recorded in other noncurrent assets in the accompanying consolidated and combined balance sheets and equity income/loss is recorded in other expenses in the accompanying consolidated and combined statements of income. 4. Divestitures On February 9, 2001, Heinz Finance announced it had sold The All American Gourmet business and it Budget Gourmet and Budget Gourmet Value Classics brands of frozen entrees for $55.0 million. The transaction resulted in a pretax loss of $94.6 million. The All American Gourmet business contributed approximately $141.4 million in sales for Fiscal Year 2000. Pro forma results of Heinz Finance, assuming the above divestiture had been made at the beginning of each period presented, would not be materially different from the results reported. 5. Restructuring Charges Streamline In the fourth quarter of Fiscal Year 2001, Heinz announced a restructuring initiative named "Streamline" which includes an organizational restructuring aimed at reducing overhead costs and the consolidation of Heinz Finance's canned pet food production to Bloomsburg, Pennsylvania (which results in ceasing canned pet food production at Heinz Finance's Terminal Island, California facility). During the first quarter of Fiscal Year 2002, Heinz Finance recognized implementation costs totaling $1.2 million pretax. In the fourth quarter of Fiscal Year 2002, Heinz Finance recorded a benefit of $4.7 million pretax to reflect revisions in original cost estimates. This benefit was primarily the result of lower than expected contract exit costs associated with Heinz Finance's Terminal Island, California facility. Total Fiscal Year 2002 pretax charges of $1.1 million were classified as cost of products sold and a pretax benefit of $4.6 million is classified as SG&A. In addition, Heinz Management Company, a wholly-owned subsidiary of Heinz, assumed a portion of the Heinz Finance's restructuring liability as a result of the realignment that occurred on May 3, 2001. During Fiscal Year 2001, Heinz Finance recognized restructuring charges and implementation costs totaling $84.7 million pretax. Pretax charges of $65.3 million were classified as cost of products sold and $19.4 million as SG&A. The major components of the net restructuring charge and implementation costs and the remaining accrual balance as of May 1, 2002 and May 2, 2001 were as follows: F-12 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Employee Termination Noncash Asset and Severance Accrued Exit Implementation Write-Downs Costs Costs Costs Total ------------- ------------- ------------ -------------- ------------ (In Millions) Restructuring and implementation costs - Fiscal Year 2001......................... $ 34.7 $ 15.4 $ 22.8 $ 11.8 $ 84.7 Amounts utilized - Fiscal Year 2001......... (34.7) (5.8) (1.7) (11.8) (54.0) -------------- ----------- ------------- ------------- ------------ Accrued restructuring costs - May 2, 2001... - 9.6 21.1 - 30.7 Implementation costs - Fiscal Year 2002..... - - - 1.2 1.2 Revisions to accruals and asset write-downs- Fiscal Year 2002......................... 4.3 (3.1) (5.9) - (4.7) Amounts utilized - Fiscal Year 2002......... (4.3) (2.5) (10.4) (1.2) (18.4) Liability assumed by related party - Fiscal Year 2002......................... - (3.8) (0.6) - (4.4) -------------- ----------- ------------- ------------- ------------ Accrued restructuring costs - May 1, 2002... $ - $ 0.2 $ 4.2 $ - $ 4.4 ============= =========== ============= ============ ============
During Fiscal Year 2002, Heinz Finance utilized $12.9 million of severance and exit cost accruals, principally for ceasing canned pet food production in its Terminal Island, California facility, and its overhead reduction plan. Non-cash asset write-downs consisted primarily of long-term asset impairments that were recorded as a direct result of Heinz Finance's decision to consolidate its canned pet food production operations. Non-cash asset write- downs totaled $39.0 million and related to property, plant and equipment ($30.6 million) and current assets ($8.4 million). Long-term asset write-downs were based on third-party appraisals, contracted sales prices or management's estimate of salvage value. Current asset write-downs included inventory and packaging material, prepaids and other current assets and were determined based on management's estimate of net realizable value. Employee termination and severance costs are primarily related to involuntary terminations and represent cash termination payments to be paid to affected employees as a direct result of the restructuring program. Non-cash pension and postretirement benefit charges related to the approved projects are also included as a component of total severance costs ($5.3 million). Exit costs are primarily contractual obligations incurred as result of Heinz Finance's decision to exit these facilities. Implementation costs were recognized as incurred in Fiscal Year 2002 ($1.2 million pretax) and Fiscal Year 2001 ($11.8 million pretax) and consist of incremental costs directly related to the implementation of the Streamline initiative. These include cost premiums related to production transfers, idle facility costs, consulting costs and relocation costs. In Fiscal Year 2001, Heinz Finance ceased production of canned pet food in its Terminal Island, California facility. In Fiscal Year 2002, Heinz Finance continued and substantially completed its overhead reduction plan. These actions resulted in a net reduction of Heinz Finance's workforce of approximately 200 employees. Operation Excel In Fiscal Year 1999, Heinz announced a growth and restructuring initiative, named "Operation Excel." This initiative was a multi-year, multi-faceted program which established manufacturing centers of excellence, focused the product portfolio, realigned Heinz Finance's management teams and invested in growth initiatives. F-13 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Creating manufacturing centers of excellence resulted in significant changes to Heinz Finance's manufacturing footprint including the following initiatives: focused the Pittsburgh, Pennsylvania factory on soup and baby food production and shifted other production to existing facilities, downsized the Pocatello, Idaho factory by shifting Bagel Bites production to the Ft. Myers, Florida factory, and shifted certain Smart Ones entree production to the Massillon, Ohio factory, closed the El Paso, Texas pet treat facility and transferred production to the Topeka, Kansas factory and to co-packers, and disposed of the Bloomsburg, Pennsylvania frozen pasta factory. As part of Operation Excel, Heinz Finance focused the portfolio of product lines on six core food categories: ketchup, condiments and sauces; frozen foods; tuna; soup, beans and pasta meals; infant foods; and pet products. Realigning Heinz Finance's management teams provided processing and product expertise. Specifically, Operation Excel established a single frozen food headquarters, resulting in the closure of Heinz Finance's Ore-Ida head office in Boise, Idaho and established a single U.S. Grocery & Foodservice headquarters in Pittsburgh, Pennsylvania, resulting in the relocation of Heinz Finance's seafood and pet food headquarters from Newport, Kentucky. Heinz Finance substantially completed Operation Excel. During Fiscal Year 2002, Heinz Management Company, a wholly-owned subsidiary of Heinz, assumed a portion of the Heinz Finance's restructuring liability as a result of the realignment that occurred on May 3, 2001. During Fiscal Year 2001, Heinz Finance recognized restructuring charges of $44.8 million pretax. These charges were associated with exiting Heinz Finance's can making operations, which were sold during Fiscal Year 2001, and higher than originally expected severance costs associated with creating the single U.S. Grocery & Foodservice headquarters in Pittsburgh, Pennsylvania. This charge was recorded in cost of products sold ($36.3 million) and SG&A ($8.5 million). This charge was offset by reversals of unutilized Operation Excel accruals and asset write-downs of $21.0 million pretax. These reversals were recorded in cost of products sold ($8.2 million) and SG&A ($12.7 million) and were primarily the result of revisions in estimates of fair values of assets which were disposed of as part of Operation Excel and Heinz Finance's decision not to exit certain warehouses due to higher than expected volume growth. Implementation costs of $149.5 million pretax were also recognized in Fiscal Year 2001. These costs were classified as costs of products sold ($62.2 million) and SG&A ($87.3 million). During Fiscal Year 2000, Heinz Finance recognized restructuring charges of $95.3 million pretax. Pretax charges of $53.5 million were classified as cost of products sold and $41.8 million as SG&A. Also during Fiscal Year 2000, Heinz Finance recorded a reversal of $16.4 million pretax of Fiscal Year 1999 restructuring accruals and asset write-downs, primarily for the closure of the West Chester, Pennsylvania facility, which remains in operation as a result of the sale of the Bloomsburg frozen pasta facility in Fiscal Year 2000. Implementation costs of $96.9 million pretax were classified as cost of products sold ($33.7 million) and SG&A ($63.2 million). During Fiscal Year 1999, Heinz Finance recognized restructuring charges and implementation costs totaling $156.1 million pretax. Pretax charges of $94.3 million were classified as cost of products sold and $61.8 million as SG&A. Implementation costs were recognized as incurred and consisted of incremental costs directly related to the implementation of Operation Excel, including consulting fees, employee training and relocation costs, unaccruable severance costs associated with terminated employees, equipment relocation costs and commissioning costs. The major components of the restructuring charges and implementation costs and the remaining accrual balances as of May 1, 2002, May 2, 2001 and May 3, 2000 were as follows: F-14 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Employee Termination Noncash Asset and Severance Accrued Exit Implementation Write-Downs Costs Costs Costs Total ------------- ------------- ------------ -------------- ------------ (In Millions) Accrued restructuring costs - April 28, 1999 $ -- $ 8.4 $ 15.7 $ -- $ 24.1 Restructuring and implementation costs - 2000..................................... 50.2 37.4 7.6 96.9 192.1 Accrual reversal - Fiscal Year 2000......... (15.4) (0.6) (0.4) -- (16.4) Amounts utilized - Fiscal Year 2000......... (34.8) (27.0) (6.9) (96.9) (165.6) ------------- ------------ ----------- -------------- ----------- Accrued restructuring costs - May 3, 2000... -- 18.2 16.0 -- 34.2 Restructuring and implementation costs - 2001..................................... 33.1 5.2 6.5 149.5 194.3 Accrual reversal - Fiscal Year 2001......... (7.9) (5.1) (8.0) -- (21.0) Amounts utilized - Fiscal Year 2001......... (25.2) (13.7) (7.4) (149.5) (195.5) ------------- ------------ ----------- -------------- ----------- Accrued restructuring costs - May 2, 2001... -- 4.6 7.1 -- 11.7 Liability assumed by related party - Fiscal Year 2002......................... -- (4.6) (6.5) -- (11.1) ------------- ------------ ----------- -------------- ----------- Accrued restructuring costs - May 1, 2002... $ -- $ -- $ 0.6 $ -- $ 0.6 ============= ============ ============ ============== ===========
Non-cash asset write-downs consisted primarily of asset impairments that were recorded as a direct result of Heinz Finance's decision to exit facilities. Net non-cash asset write-downs totaled $25.2 million in Fiscal Year 2001 and related to property, plant and equipment ($14.9 million) and other current assets ($10.3 million). In Fiscal Year 2000, non-cash asset write-downs totaled $34.8 million and related to property, plant and equipment ($27.0 million) and current assets ($7.8 million). In Fiscal Year 1999, non-cash asset write-downs totaled $96.7 million and consisted of property, plant and equipment ($68.2 million), goodwill and other intangibles ($18.7 million) and current assets ($9.8 million). Long-term asset write-downs were based on third-party appraisals, contracted sales prices or management's estimate of salvage value. The carrying value of these long-term assets was approximately $2.4 million at May 3, 2000 and $8.1 million at April 28, 1999. These assets were sold or removed from service by the end of Fiscal Year 2001. The results of operations, related to these assets, including the effect of reduced depreciation were not material. Current asset write-downs included inventory and packaging material, prepaids and other current assets and were determined based on management's estimate of net realizable value. Severance charges are primarily related to involuntary terminations and represent cash termination payments to be paid to affected employees as a direct result of the restructuring program. Non-cash pension and postretirement benefit charges related to the approved projects are also included as a component of total severance costs ($13.6 million and $14.0 million in Fiscal Year 2000 and Fiscal Year 1999, respectively). Exit costs are primarily related to contract and lease termination costs ($23.8 million of the total $25.7 million net exit costs). Heinz Finance has closed or exited all of the five factories that were scheduled for closure. In addition, Heinz Finance also exited its can making operations. Operation Excel impacted approximately 1,700 employees with a net reduction in the workforce of approximately 1,400 after expansion of certain facilities. The exit of Heinz Finance's F-15 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 can making operations resulted in a reduction of the workforce of approximately 500 employees. During Fiscal 2001, Fiscal Year 2000 and Fiscal Year 1999, Heinz Finance's workforce had a net reduction of approximately 700 employees, 500 employees and 200 employees, respectively. 6. Related Party Transactions Employee Costs Certain of Heinz's general and administrative expenses are allocated to Heinz Finance. In Fiscal Year 2001 and 2000, total costs allocated, which included charges for salaries of corporate officers and staff and other Heinz corporate overhead, were based on a percent of revenue which represents a reasonable allocation in the opinion of management. In Fiscal Year 2002, these costs primarily include a management charge of all salaried employee costs from the Heinz Management Company. Total costs charged to Heinz Finance for these services were $334.8 million, $28.4 million and $28.7 million for Fiscal years 2002, 2001 and 2000, respectively. These costs are recorded as cost of products sold and SG&A expense in the accompanying consolidated and combined statements of income. Heinz charges Heinz Finance for its share of group health insurance costs for eligible company employees based upon location-specific costs, overall insurance costs and loss experience incurred during a calendar year. In addition, various other insurance coverages are also provided to Heinz Finance through Heinz's corporate programs. Workers compensation, auto, property, product liability and other insurance coverages are charged directly based on Heinz Finance's loss experience. Amounts charged to Heinz Finance for insurance costs were $65.2 million, $80.3 million and $73.7 million for Fiscal years 2002, 2001 and 2000, respectively, and are recorded in SG&A expense in the accompanying consolidated and combined statements of income. Pension costs and postretirement costs are also charged to Heinz Finance based upon eligible employees participating in the Plans. See Note (12). Cash Management In Fiscal Year 2001, the U.S. Group maintained a cash management arrangement with Heinz. On a daily basis, all available cash was deposited and disbursements were withdrawn. Heinz charged (credited) the U.S. Group interest on the average daily balance maintained in the resulting intercompany account. Net interest expense (income) related to this arrangement, included in the combined statements of income was $3.3 million and ($4.7) million in Fiscal years 2001 and 2000, respectively. The interest rate charged to or received by the U.S. Group was 6.73% and 6.57% in Fiscal years 2001 and 2000, respectively. Beginning in Fiscal Year 2002, Heinz Finance became the treasury center for cash management and debt financing for all of Heinz's domestic operations resulting in the $788.9 million of net short-term notes receivable with related parties on the Fiscal Year 2002 consolidated balance sheet. An average interest rate of 2.99% was charged on these notes resulting in $34.2 million of interest income for Fiscal Year 2002. Product Sales and Purchases Heinz Finance sells and purchases products and services to and from other Heinz affiliates. The result of related party transactions is the $72.8 million and $75.4 million balances due from related parties in fiscal years 2002 and 2001, respectively, and the $154.0 million and $96.2 million balances for accounts payable to related parties in fiscal years 2002 and 2001, respectively. Product sales to related parties were $55.9 million, $61.1 million and $53.8 million in Fiscal years 2002, 2001 and 2000, respectively, and purchases from related parties were $399.6 million, $421.4 million and $543.8 million in Fiscal years 2002, 2001 and 2000, respectively. F-16 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Other Related Party Items Heinz Finance sold undivided interests in certain accounts receivable to a Heinz affiliate, Receivables Servicing Company ("RSC"). Heinz Finance sold $619.2 million and $1,291.0 million of receivables net of discount expense of $2.8 million and $9.4 million in Fiscal years 2002 and 2001, respectively, to RSC. At the fiscal years ending 2002 and 2001, respectively, Heinz Finance had $0 and $126.9 million of receivables sold to RSC. These sales were reflected as reductions of trade accounts receivable. Heinz Finance's contract with RSC terminated in December 2001. Until the fourth quarter of Fiscal Year 2001, Heinz Finance had outstanding notes receivable from Heinz affiliates which were used for working capital purposes and to fund acquisitions. The short-term notes had interest rates ranging from 6.50% to 7.00%. The long-term notes had interest rates ranging from 6.75% to 7.50% with a maturity of May 2003. Interest income earned by Heinz Finance related to these receivables was $104.3 million and $115.9 million in Fiscal years 2001 and 2000, respectively. In the fourth quarter of Fiscal Year 2001, these notes receivable from related parties were exchanged by Heinz Finance with a subsidiary of Heinz, PM Holding, Inc. ("PM Holding"), for $1.9 billion of non-voting, 6.5% cumulative non-participating preferred stock of PM Holding. This dividend amounted to $130.7 million for Fiscal Year 2002. This preferred stock investment is recorded in the Investments in related parties balance on the consolidated and combined balance sheets as of May 1, 2002 and May 2, 2001. Heinz Finance paid royalties of $179.2 million, $129.1 million and $94.3 million in Fiscal years 2002, 2001 and 2000, respectively, to Promark International, Inc., a wholly-owned subsidiary of Heinz, for the use of certain trademarks. The $35.0 million long-term note receivable from related parties recorded on the accompanying consolidated and combined balance sheets for fiscal years 2002 and 2001 relates to a receivable from Heinz that was contributed to Heinz Finance in exchange for common stock of Heinz Finance. The common stock balance on the statement of shareholders' equity reflects a 4-for-1 common stock split which occurred in Fiscal Year 2002. The portion of long-term debt due within one year on the May 2, 2001 combined balance sheet includes a $21.0 million interest-bearing loan with a 6.00% interest rate to a related party, Caribbean Fishing Company. In addition, the long-term debt balance on the May 2, 2001 combined balance sheet includes a $5.4 million non-interest bearing loan to another related party, Boise Associates, Inc. Heinz Finance received an administrative fee from Heinz for acting as the agent in the sale of the retained inventory discussed in Note (1). This fee is $10.9 million for Fiscal Year 2002, which is recorded as income in SG&A expense in the accompanying consolidated statement of income. 7. Income Taxes The following table summarizes the provision for U.S. federal and state taxes on income: F-17 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 2002 2001 2002 --------- ---------- --------- (In thousands) Current: U.S. federal...................... $ 28,173 $ 176,776 $ 227,632 State............................. 3,611 (835) 11,362 --------- ---------- --------- 31,784 175,941 238,994 Deferred: U.S. federal...................... 13,851 25,759 12,929 State............................. 616 3,658 321 --------- ---------- --------- 14,467 29,417 13,250 --------- ---------- --------- Total tax provision............ $ 46,251 $ 205,358 $ 252,244 ========= ========== ========= The differences between the U.S. federal statutory tax rate and Heinz Finance's combined effective tax rate are as follows: 2002 2001 2002 --------- ---------- --------- U.S. federal statutory tax rate ............ 35.0% 35.0% 35.0% State income taxes (net of federal benefit). 0.7 0.6 1.1 Goodwill amortization....................... 0.4 1.2 0.9 Nontaxable minority interest in Heinz LP.... (27.6) - - Other....................................... (0.3) 2.9 (1.0) ---- ---- ---- Effective tax rate.......................... 8.2% 39.7% 36.0% ==== ==== ==== The deferred tax (assets) and deferred tax liabilities recorded on the balance sheet as of May 1, 2002 and May 2, 2001 are as follows: 2002 2001 ---------- ----------- (In thousands) Depreciation/amortization....................... $ 20,310 $ 242,023 Investment in limited partnership............... 5,751 - Other........................................... 258 21,669 ---------- ----------- 26,319 263,692 Provision for estimated expenses................ - (39,788) Operating loss carryforwards.................... (1,158) (3,171) Promotions and advertising...................... - (3,436) Other........................................... (2,609) (62,205) ---------- ----------- (3,767) (108,600) ---------- ----------- Net deferred tax liabilities.................... $ 22,552 $ 155,092 ========== =========== At the end of 2002, net operating loss carryforwards totaled $3.3 million and expire through 2021. The U.S. income tax returns of Heinz have been audited by the Internal Revenue Service for all years through 1994. F-18 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 8. Debt and Preferred Stock On September 6, 2001, Heinz Finance, Heinz and a group of domestic and international banks entered into a $1.50 billion credit agreement which expires in September 2006 and an $800 million credit agreement which expires in September 2002. These credit agreements, which support Heinz Finance's commercial paper program, replaced the $2.30 billion credit agreement which expired on September 6, 2001. As of May 1, 2002, $89.1 million of domestic commercial paper is classified as long-term debt due to the long-term nature of the supporting credit agreement. Aggregate domestic commercial paper had a weighted-average interest rate during Fiscal Year 2002 of 2.9% and at year-end of 2.0%. Maturity Range of Interest (Fiscal Year) 2002 2001 ----------------- ------------- -------------- ----------- (In Thousands) Long-term Commercial paper........................... Variable 2007 $ 89,142 $ - Senior unsecured notes and debentures...... 6.00-7.00% 2003-2032 2,756,305 - Eurodollar notes........................... 5.05-5.95 2003-2005 521,845 - Revenue bonds.............................. 3.39 2027 6,442 12,392 Promissory notes........................... 3.25-6.00 2003-2017 3,296 5,081 Remarketable securities.................... 6.49 2021 1,000,000 - Other...................................... 6.50-7.925 2002-2034 10,370 36,292 -------------- ----------- Total long-term debt.................... 4,387,400 53,765 Less portion due within one year 451,375 29,833 -------------- ----------- $ 3,936,025 $ 23,932 ============== ===========
The amount of long-term debt that matures in each of the four years succeeding 2003 is: $1.6 million in 2004, $272.6 million in 2005, $0.5 million in 2006 and $89.7 million in 2007. On March 7, 2002, Heinz Finance issued $700 million of 6.00% Guaranteed Notes due March 15, 2012 and $550 million of 6.75% Guaranteed Notes due March 15, 2032, which are guaranteed by Heinz. The proceeds were used to retire commercial paper borrowings. The $1.0 billion of remarketable securities due November 2020 have a coupon rate of 6.82%. The securities are subject to mandatory tender by all holders to the remarketing dealer on each November 15, and the interest rate will be reset on such dates. If the remarketing dealer does not elect to exercise its right to a mandatory tender of the securities or otherwise does not purchase all of the securities on a remarketing date, then Heinz Finance is required to repurchase all of the securities on the remarketing date at 100% of the principal amount plus accrued interest. Heinz Finance received a premium from the remarketing dealer for the right to require the mandatory tender of the securities. The amortization of the premium resulted in an effective interest rate of 5.82% through November 15, 2001. On November 15, 2001, the remarketing dealer exercised its right to a mandatory tender of the securities and purchased all of the securities and remarketed the securities at an effective yield to Heinz Finance of 6.49% through November 15, 2002. Because the remarketable securities may be refinanced by the $1.5 billion credit agreement discussed above, they are classified as long-term debt. On July 6, 2001, Heinz Finance issued $750 million of 6.625% Guaranteed Notes due July 15, 2011. The proceeds were used for general corporate purposes, including retiring commercial paper borrowings and financing acquisitions and ongoing operations. In addition, Heinz Finance raised $325 million via the issuance of Voting F-19 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Cumulative Preferred Stock, Series A with a liquidation preference of $100,000 per share. The Series A Preferred shares are entitled to receive quarterly dividends at a rate of 6.226% per annum and are required to be redeemed for cash on July 15, 2008. In Fiscal Year 2002, Heinz Finance entered into interest rate swaps in order to convert certain fixed-rate debt to floating. These swaps have an aggregate notional value of $2.05 billion and an average maturity of 16.4 years. The weighted-average fixed rate of the associated debt is 6.45%; however, the effective rate after taking into account the swaps is 3.14%. 9. Parent Company Investment The components of the investment by Heinz as of May 2, 2001 and May 3, 2000 are as follows: 2001 2000 ------------ ------------ (In thousands) Parent company investment, beginning of year........$ 4,198,271 $ 3,742,531 Net income.......................................... 306,898 448,295 Dividends paid to related parties................... (350,648) (306,244) Net parent advances................................. 515,363 313,689 Transfer of investment balance...................... (11,487) - ------------ ------------ Parent company investment, end of year..............$ 4,658,397 $ 4,198,271 ============ ============ 10. Supplemental Cash Flow Information Net cash paid during the year for: 2002 2001 2000 --------- --------- --------- (In thousands) Interest expense........................... $ 182,202 $ 1,569 $ 1,907 ========= ========= ========= Income taxes............................... $ 32,602 $ - $ - ========= ========= ========= Details of acquisitions: Fair value of assets....................... $ 863,771 $ 247,270 $ 108,229 Liabilities (1)......................... 52,393 17,354 32,047 --------- --------- --------- Cash paid............................... 811,378 29,916 76,182 Less cash acquired...................... 1,988 - 2,259 --------- --------- --------- Net cash paid for acquisitions............. $ 809,390 $ 229,916 $ 73,923 ========= ========= ========= - --------- (1) Includes obligations to sellers of $2.5 million, $4.1 million and $10.4 million in 2002, 2001 and 2000, respectively. F-20 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 11. Management Incentive Plan Heinz's management incentive plan covers officers and other key employees. Participants may elect to be paid on a current or deferred basis. The aggregate amount of all awards may not exceed certain limits in any year. In Fiscal Year 2002, all of Heinz Finance's compensation under the management incentive plan was recorded on the Heinz Management Company and subsequently charged back to Heinz Finance (see Note 6). Compensation under the management incentive plan was $4.6 million in 2001 and $15.4 million in 2000. 12. Employee Retirement Benefits Employees participate in certain defined benefit pension plans, certain defined contribution plans, and certain stock option plans, all of which are sponsored by Heinz. Heinz Finance also provides post-retirement health care and life insurance benefits for employees who meet the eligibility requirements of the Heinz plans. Retirees share in the cost of these benefits based on age and years of service. Heinz allocates costs for the defined benefit plans to Heinz Finance as determined by actuarial valuations. Company contributions to the defined contribution plans amount to a qualified age-related contribution, a matching of employee's contributions up to a specified amount, and for certain employees, supplemental contributions. The following (income) expense was included in the Heinz Finance's statements of income: 2002 2001 2000 --------- ---------- -------- (In Thousands) Defined Benefit Pension Plans..................$ (3,279) $ (15,311) $ (8,968) Defined Benefit Postretirement Medical.........$ 5,918 $ 9,697 $ 7,705 Defined Contribution Plans.....................$ 3,782 $ 17,677 $ 15,972 Employees also participate in the Employee Stock Ownership Plan ("ESOP") and the Global Stock Purchase Plan ("GSPP"). Heinz established the ESOP in 1990 to replace in full or in part Heinz Finance's cash-matching contributions to the H. J. Heinz Company Employees Retirement and Saving Plan, a 401(k) plan for salaried employees. The GSPP gives employees an option to acquire stock at the lower of 85% of the fair market value of Heinz's stock on the first or last day of a purchase period. 13. Financial Instruments Commodity Price Hedging Heinz Finance uses commodity futures and options in order to reduce price risk associated with anticipated purchases of raw materials such as corn, soybean oil and soybean meal. Commodity price risk arises due to factors such as weather conditions, government regulations, economic climate and other unforeseen circumstances. Hedges of anticipated commodity purchases which meet the criteria for hedge accounting are designated as cash flow hedges. Interest Rate Hedging Heinz Finance uses interest rate swaps to manage interest rate exposure. These derivatives are designated as cash flow hedges or fair value hedges depending on the nature of the risk being hedged. During Fiscal Year 2002, Heinz Finance entered into interest rate swaps with a notional amount of $2.05 billion to swap fixed-rate debt to floating (see Note 8). These swaps were designated as fair value hedges. F-21 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Hedge Ineffectiveness During Fiscal Year 2002, hedge ineffectiveness related to cash flow hedges, which is reported in the consolidated statement of income, was not significant. Deferred Hedging Gains and Losses As of May 1, 2002, Heinz Finance is hedging forecasted transactions for periods not exceeding 12 months, and expects $0.2 million of net deferred loss reported in accumulated other comprehensive income to be reclassified to earnings within that time frame. During Fiscal Year 2002, the net deferred losses reclassified to earnings because the hedged transaction was no longer expected to occur were not significant. Concentrations of Credit Risk For Fiscal Year 2002, one customer represented more than 10% of Heinz Finance's sales and the top ten customers represented over 30% of Heinz Finance's sales. Heinz Finance closely monitors the credit risk associated with these customers and has never experienced significant losses. Counterparties to interest rate derivatives consist of large major international financial institutions. Heinz Finance continually monitors its positions and the credit ratings of the counterparties involved and, by policy, limits the amount of credit exposure to any one party. While Heinz Finance may be exposed to potential losses due to the credit risk of non-performance by these counterparties, losses are not anticipated. 14. Segment Data Descriptions of Heinz Finance's reportable segments are as follows: o Heinz North America -- This segment manufactures, markets and sells ketchup, condiments, sauces, soups, pasta meals and infant foods to the grocery and foodservice channels. o U.S. Pet Products and Seafood -- This segment manufactures, markets and sells dry and canned pet food, pet snacks, tuna and other seafood. o U.S. Frozen -- This segment manufactures, markets and sells frozen potatoes, entrees, snacks and appetizers. Heinz Finance's management evaluates performance based on several factors including net sales and the use of capital resources; however, the primary measurement focus is operating income excluding unusual costs and gains. Intersegment sales are accounted for at current market values. Items below the operating income line of the consolidated and combined statements of income are not presented by segment, since they are excluded from the measure of segment profitability reviewed by Heinz Finance's management. As a result of an internal reorganization, the reportable segments have changed. Accordingly, corresponding items of segment information for earlier periods have been restated to conform with the current year presentation. F-22 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 The following table presents information about Heinz Finance's reportable segments: Fiscal Year Ended May 1, 2002 May 1, 2002 May 2, 2001 May 3, 2000 May 2, 2001 May 3, 2000 (In Thousands) (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) ----------- ----------- ----------- ----------- ----------- ----------- Net External Sales (a) Intersegment Sales --------------------------------------- --------------------------------------- Heinz North America...... $ 2,005,008 $ 2,147,044 $ 1,950,649 $ 280 $ 2,870 $ 3,533 U.S. Pet Products and Seafood............... 1,121,103 1,434,123 1,636,343 -- 1,136 3,086 U.S. Frozen.............. 1,065,119 969,224 882,332 28 -- -- ----------- ----------- ----------- ----------- ----------- ----------- Consolidated and combined totals....... $ 4,191,230 $ 4,550,391 $ 4,469,324 $ 308 $ 4,006 $ 6,619 =========== =========== =========== =========== =========== =========== Operating Income (Loss) Operating Income (Loss) Excluding Special Items (b) --------------------------------------- ---------------------------------------- Heinz North America...... $ 362,631 $ 451,469 $ 429,125 $ 361,537 $ 553,569 $ 522,995 U.S. Pet Products and Seafood............... 91,349 (35,077) 84,092 88,882 116,018 138,725 U.S. Frozen.............. 165,484 23,257 96,892 165,484 141,180 124,126 Nonoperating (d)......... (2,709) (1,580) (772) (2,709) (1,580) (772) ----------- ----------- ----------- ----------- ----------- ----------- Consolidated and combined totals....... $ 616,755 $ 438,069 $ 609,337 $ 613,194 $ 809,187 $ 785,074 =========== =========== =========== =========== =========== =========== Depreciation and Amortization Expense Capital Expenditures (c) --------------------------------------- --------------------------------------- Total.................... $ 107,138 $ 121,741 $ 139,686 $ 77,205 $ 183,494 $ 215,404 =========== =========== =========== =========== =========== =========== Identifiable Assets --------------------------------------- Total North America...... $ 6,195,915 $ 3,190,835 $ 3,376,874 Nonoperating (d) 1,288,534 2,410,656 1,691,582 ----------- ----------- ----------- Consolidated and combined totals....... $ 7,484,449 $ 5,601,491 $ 5,068,456 =========== =========== ===========
- --------- (a) Sales for 2002, 2001 and 2000 reflect the adoption of the new EITF guidelines relating to the classification of consideration from a vendor to a purchaser of a vendor's products, including both customers and consumers. Total net external sales previously reported for Fiscal years ended May 2, 2001 and May 3, 2000 were $4,938,197 and $4,789,188. (b) Fiscal year ended May 1, 2002-- Excludes net restructuring and implementation benefits of the Streamline initiative as follows: Heinz North America $1.1 million and U.S. Pet Products and Seafood $2.5 million. Fiscal year ended May 2, 2001 -- Excludes net restructuring and implementation costs of Operation Excel as follows: Heinz North America $68.2 million, U.S. Pet Products and Seafood $81.8 million and U.S. Frozen $23.3 million. Excludes restructuring and implementation costs of the Streamline initiative as follows: Heinz North America $15.3 million and U.S. Pet Products and Seafood $69.3 million. Excludes the loss on the sale of The All American Gourmet in U.S. Frozen of $94.6 million. Excludes acquisition costs in Heinz North America $18.5 million. Fiscal year ended May 3, 2000 -- Excludes net restructuring and implementation costs of Operation Excel as follows: Heinz North America $93.9 million, U.S. Pet Products and Seafood $54.6 million and U.S. Frozen $27.2 million. (c) Excludes property, plant and equipment obtained through acquisitions. (d) Includes charges/assets not directly attributable to operating segments. F-23 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 15. Commitments and Contingencies Legal Matters Certain suits and claims have been filed against Heinz Finance and have not been finally adjudicated. These suits and claims when finally concluded and determined, in the opinion of management, based upon the information that it presently possesses, will not have a material adverse effect on Heinz Finance's consolidated and combined financial position, results of operations or liquidity. Lease Commitments Operating lease rentals for warehouses, production, office facilities and equipment amounted to $38.2 million in 2002, $35.4 million in 2001 and $24.6 million in 2000. Future lease payments for noncancellable operating leases as of May 1, 2002 totaled $211.8 million (2003 - $16.1 million, 2004 - $16.8 million, 2005 - $15.5 million, 2006 - $13.3 million, 2007 - $133.0 million and thereafter - $17.1 million). Purchase Commitments Heinz Finance entered into an agreement on August 14, 2000 with Impress Metal Packaging Holdings, B.V. ("Impress") to purchase from Impress metal cans and ends annually of approximately $96 million for a ten-year term. 16. Advertising Costs Advertising costs for Fiscal years 2002, 2001 and 2000 were $252.8 million, $211.0 million and $189.1 million, respectively and are recorded either as a reduction of revenue or as a component of SG&A. 17. Subsequent Events On June 13, 2002, Heinz announced that it will transfer to a wholly-owned subsidiary ("Spinco") certain assets and liabilities of its U.S. pet food and pet snacks, U.S. tuna, U.S. retail private label soup, College Inn broth and U.S. infant feeding businesses, all of which are owned by Heinz Finance, and distribute all of the shares of Spinco common stock on a pro rata basis to its shareholders. Immediately thereafter, Spinco will merge with a wholly- owned subsidiary of Del Monte Foods Company ("Del Monte") resulting in Spinco becoming a wholly-owned subsidiary of Del Monte ("the Merger"). In connection with the Merger, each share of Spinco common stock will be automatically converted into shares of Del Monte common stock that will result in the fully diluted Del Monte common stock at the effective time of the Merger being held approximately 74.5% by Heinz shareholders and approximately 25.5% by the Del Monte shareholders. As a result of the transaction, Heinz Finance will receive approximately $1.1 billion in cash that will be used to retire debt. Included in the transaction will be the following brands: StarKist(R), 9-Lives(R), Kibbles 'n Bits(R), Pup-Peroni(R), Snausages(R), Nawsomes(R), Heinz Nature's Goodness(R) baby food and College Inn(R) broths. The following is a summary of the operating results of the businesses to be spun off over the past years: Fiscal 2002 Fiscal 2001 Fiscal 2000 ----------- ----------- ----------- (In thousands) Revenues....................................... $ 1,357,713 $ 1,744,371 $ 1,943,086 Operating income/(loss)........................ $ 148,917 $ (9,190) $ 107,425 Operating income excluding special items....... $ 146,450 $ 196,372 $ 215,789
F-24 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 The Merger, which has been approved by the Board of Directors of Heinz and Del Monte, is subject to the approval by the shareholders of Del Monte and receipt of a ruling from the Internal Revenue Service that the contribution of the assets and liabilities to Spinco and the distribution of the shares of common stock of Spinco to Heinz shareholders will be tax-free to Heinz, Spinco and the shareholders of Heinz. The Merger is also subject to receipt of applicable governmental approvals and the satisfaction of other customary closing conditions. Heinz expects that the transaction will close late in calendar year 2002 or early in calendar year 2003. F-25 H. J. Heinz Finance Company and Subsidiaries Consolidated Statements of Income Three months ended July 31, 2002 and August 1, 2001 Three Months Ended ------------------------------ July 31, 2002 August 1, 2001* FY 2003 FY 2002 ------------- --------------- (Unaudited) (in thousands) Sales.................................................. $ 1,038,374 $ 492,261 Cost of products sold.................................. 687,643 320,320 ------------- -------------- Gross profit........................................... 350,731 171,941 Selling, general and administrative expenses........... 190,674 69,600 Royalty expense to related parties..................... 44,936 23,098 ------------- -------------- Operating income....................................... 115,121 79,243 Interest income........................................ 6,592 11,763 Interest expense....................................... 50,542 52,173 Dividends from related parties......................... 30,798 38,519 Currency (loss)/gain................................... (22,105) 2,431 Other expense.......................................... 3,008 2,229 ------------- -------------- Income before income taxes and minority interest....... 76,856 77,554 Provision for income taxes............................. 2,389 9,342 ------------- -------------- Income before minority interest........................ 74,467 68,212 Minority interest...................................... (70,213) (52,305) ------------- -------------- Net income............................................. $ 4,254 $ 15,907 ============= ==============
- --------- * Reclassified, see Note 7. See Notes to Condensed Consolidated Financial Statements. F-26 H. J. Heinz Finance Company and Subsidiaries Condensed Consolidated Balance Sheets July 31, 2002 and May 1, 2002 July 31, 2002 May 1, 2002* FY 2003 FY 2002 ------------- --------------- (Unaudited) (in thousands) ASSETS Current assets: Cash and cash equivalents.................................... $ 11,347 $ 6,924 Receivables, net............................................. 484,711 732,714 Due from related parties..................................... 57,529 72,762 Short-term notes receivable from related parties............. 1,337,703 921,014 Inventories.................................................. 747,699 710,267 Prepaid expenses and other current assets.................... 140,448 61,439 -------------- -------------- Total current assets...................................... 2,779,437 2,505,120 Property, plant and equipment................................... 1,490,244 1,516,365 Less accumulated depreciation................................... 677,167 661,429 -------------- -------------- Total property, plant and equipment, net.................. 813,077 854,936 Long-term notes receivable from related parties................. 35,000 35,000 Investments in related parties.................................. 1,895,245 1,895,245 Intangible assets, net.......................................... 1,925,675 1,926,590 Other noncurrent assets......................................... 344,120 267,558 -------------- -------------- Total other noncurrent assets............................. 4,200,040 4,124,393 -------------- -------------- Total assets.............................................. $ 7,792,554 $ 7,484,449 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt with related parties......................... $ 365,660 $ 132,164 Portion of long-term debt due within one year................ 451,885 451,375 Accounts payable............................................. 245,493 256,372 Accounts payable to related parties.......................... 177,129 153,968 Accrued interest............................................. 107,647 79,442 Other accrued liabilities.................................... 144,813 146,210 -------------- -------------- Total current liabilities 1,492,627 1,219,531 Long-term debt.................................................. 3,973,334 3,936,025 Deferred income taxes........................................... 20,488 23,059 Other liabilities............................................... 29,401 36,431 -------------- -------------- Total long-term debt and other liabilities................ 4,023,223 3,995,515 Minority interest............................................... 1,763,845 1,758,476 Mandatorily Redeemable Series A Preferred shares................ 325,000 325,000 Shareholders' equity: Common stock................................................. 11 11 Additional capital........................................... 128,050 128,050 Retained earnings............................................ 57,231 58,035 Accumulated other comprehensive gain/(loss).................. 2,567 (169) -------------- -------------- Total shareholders' equity................................ 187,859 185,927 -------------- -------------- Total liabilities and shareholders' equity................ $ 7,792,554 $ 7,484,449 ============== ==============
- --------- * Summarized from audited Fiscal Year 2002 balance sheet. See Notes to Condensed Consolidated Financial Statements. F-27 H. J. Heinz Finance Company and Subsidiaries Condensed Consolidated Statements of Cash Flows Three months ended July 31, 2002 and August 1, 2001 Three Months Ended -------------------------------- July 31, 2002 August 1, 2001 FY 2003 FY 2002 --------------- -------------- (Unaudited) (in thousands) Cash provided by (used for) Operating Activities.................................... $ 340,776 $ (128,005) ------------- ------------ Cash Flows from Investing Activities: Capital expenditures............................................................. (16,559) (2,556) Acquisitions, net of cash acquired............................................... -- (290,200) Other items, net................................................................. 10,136 (20,978) ------------- ------------ Cash used for investing activities............................................... (6,423) (313,734) ------------- ------------ Cash Flows from Financing Activities: Payments on long-term debt....................................................... -- (7,167) Proceeds from long-term debt..................................................... -- 748,959 Payments on commercial paper and short-term borrowings, net...................... (260,933) (617,998) Distributions to Class A partners................................................ (64,844) -- Dividends on preferred shares.................................................... (5,058) -- Proceeds from mandatorily redeemable Series A preferred shares................... -- 325,000 Other items, net................................................................. 905 500 ------------- ------------ Cash (used for) provided by financing activities.............................. (329,930) 449,294 ------------- ------------ Net increase in cash and cash equivalents........................................... 4,423 7,555 Cash and cash equivalents, beginning of period...................................... 6,924 10,127 ------------- ------------ Cash and cash equivalents, end of period............................................ $ 11,347 $ 17,682 ============= ============
See Notes to Condensed Consolidated Financial Statements. F-28 H. J. Heinz Finance Company and Subsidiaries Notes to Condensed Consolidated Financial Statements Three months ended July 31, 2002 and August 1, 2001 (Unaudited) 1. On May 3, 2001, H. J. Heinz Company ("Heinz") reorganized its U.S. corporate structure and established centers of excellence for the management of U.S. trademarks and for U.S. treasury functions. As result, all of the U.S. treasury and business operations of Heinz's domestic operations ("the U.S. Group") are now being conducted by H. J. Heinz Finance Company and its wholly-owned subsidiaries, and H. J. Heinz Company, L.P. ("Heinz LP") collectively referred to as "Heinz Finance" in the accompanying notes. H. J. Heinz Finance Company has limited partnership interests in Heinz LP. As part of the reorganization, substantially all assets and liabilities of the U.S. Group, except for finished good inventories, which were retained by Heinz, were contributed to Heinz LP by Heinz. In addition, certain assets and liabilities that related to the U.S. Group were assumed by Heinz Finance during Fiscal Year 2002. H. J. Heinz Finance Company assumed primary liability for approximately $2.9 billion of Heinz's outstanding senior unsecured debt and accrued interest by becoming co-obligor with Heinz. Heinz LP owns or leases the operating assets involved in manufacturing throughout the United States which were contributed by Heinz and its subsidiaries, together with other assets and liabilities, to Heinz LP and manages the business. Heinz LP has two classes of limited partnership interests, Class A and Class B, that are allocated varying income and cash distributions in accordance with the Heinz LP agreement. H. J. Heinz Finance Company, directly and through wholly-owned subsidiaries, owns the Class B interests. Heinz, directly and through wholly- owned subsidiaries, owns the Class A interests. Heinz Management Company, a wholly-owned subsidiary of Heinz, is the managing General Partner of Heinz LP and employs the salaried personnel of the U.S. Group. Under the partnership agreement, Heinz Finance has the power to control the general partner through majority membership on Heinz LP's management board. The minority interest amounts on the July 31, 2002 and May 1, 2002 balance sheets represent the Class A and General Partner limited partnership interest in Heinz LP, and have been adjusted for the minority partners' share of income and cash distributions. 2. The interim condensed consolidated financial statements of Heinz Finance are unaudited. In the opinion of management, all adjustments which are of a normal and recurring nature, necessary for a fair statement of the results of operations of these interim periods have been included. The results for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year due to the seasonal nature of the business of Heinz Finance. Certain prior year amounts have been reclassified in order to conform with the Fiscal Year 2003 presentation. These statements should be read in conjunction with Heinz Finance's consolidated and combined financial statements and related notes which appear in Heinz's Form 10-K for the year ended May 1, 2002. 3. Agreement between H. J. Heinz Company and Del Monte Foods Company On June 13, 2002, Heinz announced that it will transfer to a wholly-owned subsidiary ("Spinco") certain assets and liabilities of its U.S. pet food and pet snacks, U.S. tuna, U.S. retail private label soup and private label gravy, College Inn(R) broths and U.S. infant feeding businesses, all of which are owned by Heinz Finance, and distribute all of the shares of Spinco common stock on a pro rata basis to its shareholders. Immediately thereafter, Spinco will merge with a wholly-owned subsidiary of Del Monte Foods Company ("Del Monte") resulting in Spinco becoming a wholly-owned subsidiary of Del Monte ("the Merger"). In connection with the Merger, each share of Spinco common stock will be automatically converted into shares of Del Monte common stock that will result in the fully diluted Del Monte common stock at the effective time of the Merger being held approximately 74.5% by Heinz shareholders and approximately 25.5% by the Del Monte shareholders. As a result of the transaction, Heinz Finance will receive approximately $1.1 billion in cash that will be used to retire debt. Included in the transaction will be the following brands: StarKist,(R) 9-Lives(R), Kibbles 'n Bits(R), Pup-Peroni(R), Snausages(R), Nawsomes(R), Heinz Nature's Goodness(R) baby food and College Inn(R) broths. The following is a summary of the operating results of the business to be spun off: F-29 Three Months Ended ----------------------------- July 31, 2002 August 1, 2001 ------------- -------------- (in thousands) Revenues..................................... $ 349,095 $ 90,955 Operating income............................. 23,659 17,216 The Merger, which has been approved by the Boards of Directors of Heinz and Del Monte, is subject to the approval by the shareholders of Del Monte. Heinz received on November 21, 2002, a private letter ruling form the Internal Revenue Service that the contribution of the assets and liabilities to Spinco and the distribution of the shares of common stock of Spinco to Heinz shareholders will be tax-free to Heinz, Spinco and the shareholders of Heinz. The Merger is also subject to customary closing conditions. Heinz expects that the transaction will close late in calendar year 2002 or early in calendar year 2003. 4. Inventories The composition of inventories at the balance sheet dates was as follows: July 31, 2002 August 1, 2001 ------------- -------------- (in thousands) Finished goods and work-in progress.......... $ 600,318 $ 567,482 Packaging material and ingredients........... 147,381 142,785 ---------- ---------- $ 747,699 $ 710,267 ========== ========== 5. Taxes The provision for income taxes consists of provisions for federal and state income taxes. The low effective tax rate for Heinz Finance for the first quarters of Fiscal Years 2003 and 2002 is a result of Heinz Finance's nontaxable minority interest in Heinz LP. 6. Restructuring In the fourth quarter of Fiscal Year 2001, Heinz announced a restructuring initiative named "Streamline" which includes an organizational restructuring aimed at reducing overhead costs and the consolidation of Heinz Finance's canned pet food production to Bloomsburg, Pennsylvania (which resulted in ceasing canned pet food production at Heinz Finance's Terminal Island, California facility). The major components of the restructuring charge and implementation costs and the remaining accrual balances as of July 31, 2002 were as follows: F-30 Employee Termination Noncash Asset and Severance Accrued Exit Implementation Write-Downs Costs Costs Costs Total ------------- ------------- ------------ -------------- ------------ (In Millions) Restructuring and implementation costs--Fiscal Year 2001............... $ 34.7 $ 15.4 $ 22.8 $ 11.8 $ 84.7 Amounts utilized--Fiscal Year 2001....... (34.7) (5.8) (1.7) (11.8) (54.0) ----------- --------- ---------- -------- ------- Accrued restructuring costs--May 2, 2001................................. -- $ 9.6 $ 21.1 -- $ 30.7 Implementation Costs--Fiscal Year 2002................................. -- -- -- 1.2 1.2 Revisions to accruals and asset write-downs--Fiscal Year 2002......... 4.3 (3.1) (5.9) -- (4.7) Amounts utilized--Fiscal Year 2002....... (4.3) (2.5) (10.4) (1.2) (18.4) Liability assumed by related party--Fiscal Year 2002............... -- (3.8) (0.6) -- (4.4) ----------- --------- ---------- -------- ------- Accrued restructuring costs--May 1, 2002................................. -- 0.2 4.2 -- 4.4 Amounts utilized--Fiscal Year 2003....... -- (0.1) (0.9) -- (1.0) ----------- --------- --------- -------- ------- Accrued restructuring costs--July 31, 2002............................. $ -- $ 0.1 $ 3.3 $ -- $ 3.4 =========== ========= ========= ======== =======
During the first quarter of Fiscal Year 2003, Heinz Finance utilized $1.0 million of severance and exit cost accruals, principally related to its overhead reduction plan. 7. Recently Adopted Accounting Standards During the fourth quarter of Fiscal Year 2002, Heinz Finance adopted Emerging Issues Task Force ("EITF") statements relating to the classification of vendor consideration and certain sales incentives. The adoption of these EITF statements has no impact on operating income or net earnings; however, revenues and gross profit were reduced by approximately $64.5 million in the first quarter of Fiscal Year 2002. Prior period data has been reclassified to conform to the current year presentation. Heinz Finance adopted Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" which requires that the purchase method of accounting be applied to all business combinations after June 30, 2001. SFAS No. 141 also established criteria for recognition of intangible assets and goodwill. Effective May 2, 2002, Heinz Finance adopted SFAS No. 142 "Goodwill and Other Intangible Assets." Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized, but are tested at least annually for impairment. Heinz Finance completed its evaluation of the impact of adopting SFAS No. 142 on the consolidated financial statements. The reassessment of intangible assets, including the ongoing impact of amortization, was completed during the first quarter of Fiscal Year 2003. The assignment of goodwill to reporting units, along with transitional goodwill impairment tests, was completed during the second quarter of Fiscal Year 2003. No impairment issues were identified as a result of completing these transitional impairment tests. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized. A discounted cash flow is being used to determine the fair value of Heinz Finance's businesses for purposes of testing goodwill for impairment. The discount rate being used is based on a risk-adjusted weighted average cost of capital for the business. The effects of adopting the new standards on net income for the three-month periods ended July 31, 2002 and August 1, 2001 follow. F-31 Net Income ------------------- 2003 2002 -------- --------- Net income..........................................................$ 4,254 $ 15,907 Add: Goodwill amortization, net of tax and minority interest........ -- 268 -------- --------- Net income excluding goodwill amortization..........................$ 4,254 $ 16,175 ======== =========
Net income for the quarter ended August 1, 2001 would have been $16,175 and net income for Fiscal Year 2002 would have been $75,079 had the provisions of the new standards been applied as of May 3, 2001. Changes in the carrying amount of goodwill for the three months ended by July 31, 2002, by operating segment are as follows: U.S. Pet Heinz North Products America and Seafood U.S. Frozen Total ----------- ----------- ----------- ------------ Balance at May 1, 2002................................ $ 615,772 $ 564,335 $ 470,381 $ 1,650,488 Adjustments........................................... 597 16 15 628 ---------- ---------- ---------- ------------ Balance at July 31, 2002.............................. $ 616,369 $ 564,351 $ 470,396 $ 1,651,116 ========== ========== ========== ============
Trademarks and other intangible assets at July 31, 2002 and May 1, 2002, subject to amortization expense, are as follows: July 31, 2002 May 1, 2002 ------------------------------------- ------------------------------------- Accumulated Accumulated Gross Amortization Net Gross Amortization Net ---------- ------------- ---------- ---------- ------------- ---------- Trademarks..........$ 39,103 $ (1,129) $ 37,974 $ 39,103 $ (835) $ 38,268 Licenses............ 208,186 (112,617) 95,569 208,186 (106,730) 101,456 Other............... 92,120 (42,204) 49,916 91,138 (45,860) 45,278 ---------- ----------- ----------- ----------- ----------- ----------- $ 339,409 $ (155,950) $ 183,459 $ 338,427 $ (153,425) $ 185,002 ========== =========== =========== =========== =========== ===========
Amortization expense for trademarks and other intangible assets subject to amortization was $2.5 million for three months ended July 31, 2002. Based upon the amortizable intangible assets recorded on the balance sheet at July 31, 2002, amortization expense for each of the next five years is estimated to be approximately $10.0 million. Intangible assets not subject to amortization at July 31, 2002 and May 1, 2002, were $91.1 million and consisted solely of trademarks. Effective May 2, 2002, Heinz Finance adopted SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." This statement provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discounted operation to include a component of an entity and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. The adoption of this new standard did not have a material impact on Heinz Finance's financial position, results of operations or cash flows for the three months ended July 31, 2002. 8. Recently Issued Accounting Standards In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143, addresses accounting for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. This standard is effective for Heinz Finance in Fiscal Year 2004. Heinz Finance does not expect that the adoption of this standard will have a significant impact on the consolidated financial statements. F-32 In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This Statement also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. Management is currently assessing the details of this Standard. 9. Related Party Transactions Employee Costs Certain of Heinz's general and administrative expenses are charged to Heinz Finance. These costs primarily include a management charge of all salaried employee costs from the Heinz Management Company. Total costs charged to Heinz Finance for these services were $86.9 million and $82.0 million for the three months ended July 31, 2002 and August 1, 2001, respectively. These costs are recorded as cost of products sold and SG&A expense in the accompanying consolidated statements of income. Heinz charges Heinz Finance for its share of group health insurance costs for eligible company employees based upon location-specific costs, overall insurance costs and loss experience incurred during a calendar year. In addition, various other insurance coverages are also provided to Heinz Finance through Heinz's consolidated programs. Workers compensation, auto, property, product liability and other insurance coverages are charged directly based on Heinz Finance's loss experience. Amounts charged to Heinz Finance for insurance costs were $18.3 million and $15.4 million for the three months ended July 31, 2002 and August 1, 2001, respectively, and are recorded in SG&A expense in the accompanying consolidated statements of income. Pension costs and postretirement costs are also charged to Heinz Finance based upon eligible employees participating in the plans. Cash Management Beginning in Fiscal Year 2002, Heinz Finance became the treasury center for cash management and debt financing for all of Heinz's domestic operations. In addition, in the first quarter of Fiscal Year 2003, Heinz Finance entered into a short-term note payable with Heinz Europe Limited, a wholly-owned subsidiary of Heinz, for $213.4 million. These two events resulted in the $972.0 million and $788.9 million of net short-term notes receivable with related parties on the July 31, 2002 and May 1, 2002, respectively, condensed consolidated balance sheets. An average interest rate of 1.95% and 3.93% was charged on these notes resulting in $6.2 million and $11.0 million of interest income recorded on the July 31, 2002 and August 1, 2001, respectively, consolidated statements of income. Product Sales and Purchases Heinz Finance sells and purchases products and services to and from other Heinz affiliates. The result of related party transactions is the $57.5 million and $72.8 million balances due from related parties as of July 31, 2002 and May 1, 2002, respectively, and the $177.1 million and $154.0 million balances for accounts payable to related parties as of July 31, 2002 and May 1, 2002, respectively. Product sales to related parties were $12.5 million and $12.3 million in the three months ended July 31, 2002 and August 1, 2001, respectively, and purchases from related parties were $120.1 million and $70.8 million in the three months ended July 31, 2002 and August 1, 2001, respectively. Other Related Party Items Heinz Finance sold undivided interests in certain accounts receivable to a Heinz affiliate, Receivables Servicing Company ("RSC"). Heinz Finance sold $619.2 million of receivables net of discount expense of $2.8 million for the year ended May 1, 2002, to RSC. These sales were reflected as reductions of trade accounts receivable. Heinz Finance's contract with RSC terminated in December 2001. F-33 Heinz Finance holds $1.9 billion of non-voting, 6.5% cumulative non-participating preferred stock of PM Holding, Inc. ("PM Holding"), a subsidiary of Heinz. This dividend amounted to $30.8 million and $38.5 million for the three months ended July 31, 2002 and August 1, 2001, respectively. This preferred stock investment is recorded in the Investments in related parties balance on the consolidated balance sheets as of July 31, 2002 and May 1, 2002. Heinz Finance paid royalties of $44.9 million and $23.1 million as of July 31, 2002 and August 1, 2001, respectively, to Promark International, Inc., an indirect subsidiary of Heinz, for the use of certain trademarks. The $35.0 million long-term note receivable from related parties recorded on the accompanying condensed consolidated balance sheets as of July 31, 2002 and May 1, 2002, relates to a receivable from Heinz that was contributed to Heinz Finance in exchange for common stock of Heinz Finance. Heinz Finance received an administrative fee from Heinz for acting as the agent in the sale of the retained inventory discussed in Note (1). This fee was $8.4 million for the three months ended August 1, 2001, which is recorded as income in SG&A expense in the accompanying consolidated statement of income. 10. Descriptions of Heinz Finance's reportable segments are as follows: o Heinz North America -- This segment manufactures, markets and sells ketchup, condiments, sauces, soups, pasta meals and infant foods to the grocery foodservice channels. o U.S. Pet Products and Seafood -- This segment manufactures, markets and sells dry and canned pet food, pet snacks, tuna and other seafood. o U.S. Frozen -- This segment manufactures, markets and sells frozen potatoes, entrees, snacks and appetizers. Heinz Finance's managements evaluates performance based on several factors including net sales and the use of capital resources; however, the primary measurement focus is operating income excluding unusual costs and gains. Intersegment sales are accounted for at current market values. Items below the operating income line of the consolidated statements of income are not presented by segment, since they are excluded from the measure of segment profitability reviewed by Heinz Finance's management. F-34 The following table presents information about Heinz Finance's reportable segments: Net External Sales Intersegment Sales ----------------------------- ------------------------------ Three Months Ended ------------------------------------------------------------- (in thousands) July 31, 2002 August 1, 2001 July 31, 2002 August 1, 2001 FY 2003 FY 2002 FY 2003 FY 2002 ------------------------------------------------------------- Heinz North America..................................... $ 495,132 $ 290,553 $ 18 $ 90 U.S. Pet Products and Seafood........................... 295,531 89,186 -- -- U.S. Frozen............................................. 247,711 112,522 9 17 ------------- -------------- ------------- -------------- Consolidated totals.................................. $ 1,038,374 $ 492,261 $ 27 $ 107 ============= ============== ============= ==============
Operating Income --------------------------------- Three Months Ended --------------------------------- July 31, 2002 August 1, 2001 FY 2003 FY 2002 ------------- -------------- (in thousands) Heinz North America..........................$ 62,870 $ 44,695 U.S. Pet Products and Seafood................ 13,573 14,062 U.S. Frozen.................................. 39,145 21,390 Non-Operating(a)............................. (467) (904) ------------- -------------- Consolidated totals.......................$ 115,121 $ 79,243 ============= ============== - --------- (a) Includes charges not directly attributable to operating segments. 11. Comprehensive Income Three Months Ended --------------------------------- July 31, 2002 August 1, 2001 FY 2003 FY 2002 ------------- -------------- (in thousands) Net income...................................$ 4,254 $ 15,907 Deferred gain/(losses) on derivatives:....... Net change from periodic revaluations..... 15,773 1,643 Net amount reclassified to earnings....... (13,206) 138 ------------- -------------- Comprehensive income.........................$ 6,821 $ 17,688 ============= ============== 12. Financial Instruments Heinz Finance utilizes certain financial instruments to manage its foreign currency, commodity price and interest rate exposures. Foreign Currency Hedging Heinz Finance may hedge specific foreign currency cash flows associated with foreign-currency-denominated financial assets and liabilities. These hedges are accounted for as cash flow hedges. Commodity Price Hedging Heinz Finance uses commodity futures and options in order to reduce price risk associated with anticipated purchases of raw materials such as corn, soybean oil and soybean meal. Commodity price risk arises due to factors such as weather conditions, government regulations, economic climate and other unforeseen circumstances. Hedges of anticipated commodity purchases which meet the criteria for hedge accounting are designated as cash flow F-35 hedges. When using a commodity option as a hedging instrument, Heinz Finance excludes the time value of the option from the assessment of hedge effectiveness. Interest Rate Hedging Heinz Finance uses interest rate swaps to manage interest rate exposure. These derivatives are designated as cash flow hedges or fair value hedges depending on the nature of the particular risk being hedged. Hedge Ineffectiveness During the quarter ended July 31, 2002, hedge ineffectiveness related to cash flow hedges was a net loss of $0.3 million which is reported in the consolidated statements of income as other expenses. Deferred Hedging Gains and Losses As of July 31, 2002, Heinz Finance is hedging forecasted transactions for periods not exceeding 12 months, and expects $2.6 million of net deferred gain reported in accumulated other comprehensive income to be reclassified to earnings within that time frame. 13. Subsequent Event On September 5, 2002, Heinz Finance, Heinz and a group of domestic and international banks renewed an $800 million credit 364-day agreement. That credit agreement and the $1.5 billion credit agreement that expires in September 2006 supports Heinz Finance's and Heinz's commercial paper programs. F-36 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Consolidated and Combined Financial Statements The following unaudited pro forma consolidated and combined financial statements of Heinz Finance adjust the historical financial statements of Heinz Finance to give pro forma effect of the following: o The transfer of certain assets and liabilities of Heinz Finance's U.S. tuna, U.S. pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant-feeding businesses to a wholly-owned subsidiary of Heinz ("Spinco"). o The repayment of $1.1 billion of debt with the cash Heinz Finance will receive as a result of the transfer of certain assets and liabilities to Spinco. The unaudited pro forma consolidated balance sheet has been prepared as if the transaction occurred as of July 31, 2002. The unaudited pro forma consolidated and combined statements of income have been prepared as if the transaction occurred as of the beginning of the periods presented. The unaudited pro forma statements for the periods presented do not purport to represent what Heinz Finance's results of operations or financial position would actually have been had the transaction occurred on the dates noted above, or to project Heinz Finance's results of operations for any future periods. The unaudited pro forma results do not include any synergies that may be realized as a result of the transaction. The pro forma adjustments are based upon available information and upon certain assumptions that Heinz Finance management believes are reasonable under the circumstances. The adjustments are directly attributable to the transaction and are expected to have a continuing impact on the financial position and results of operations of Heinz Finance. The unaudited pro forma consolidated and combined financial statements should be read in conjunction with the historical financial statements and related notes included in this prospectus. F-37 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Consolidated Statement of Income Fiscal Year ended May 1, 2002 Adjustments for the Historical Transactions Pro Forma ---------- ------------ --------- (in thousands) Sales............................................. $ 4,191,230 $ (1,357,713)(a) $ 2,833,517 Cost of products sold............................. 2,744,344 (954,756)(b) 1,789,588 ------------ ------------- ------------ Gross profit...................................... 1,446,886 (402,957) 1,043,929 Selling, general and administrative expenses...... 650,933 (194,180)(b) 456,753 Royalty expense to related parties................ 179,198 (39,848)(c) 139,350 ------------ ------------- ------------ Operating income.................................. 616,755 (168,929) 447,826 Interest income................................... 36,175 (502)(d) 35,673 Interest expense.................................. 206,578 (63,658)(e) 142,920 Dividends from related parties.................... 130,720 -- 130,720 Other expenses, net............................... 11,397 (2,786)(f) 8,611 ------------ ------------- ------------ Income before income taxes and minority interest.. 565,675 (102,987) 462,688 Provision for income taxes........................ 46,251 19,621 (g) 65,872 ------------ ------------- ------------ Net income before minority interest............... 519,424 (122,608) 396,816 Minority interest................................. (445,707) 158,312 (h) (287,395) ------------ ------------- ------------ Net income from continuing operations............. $ 73,717 $ 35,704 $ 109,421 ============ ============= ============
F-38 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Consolidated Statement of Income Fiscal year ended May 1, 2002 (a) Represents the revenues of the U.S. tuna, U.S. pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the royalty expense associated with specific products in certain of the businesses that will be transferred to Spinco as a result of the transaction. (d) Represents the interest income directly attributable to the businesses being transferred to Spinco as a result of the transaction. (e) Represents the interest expense on $1.1 billion of debt which will be repaid as a result of the transaction. Given a fluctuation in variable interest rates of 1/8%, interest expense would fluctuate approximately $0.1 million annually. (f) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (g) Represents the tax provision associated with the income before taxes and minority interest which will be transferred to Spinco as a result of the transaction. (h) Represents the necessary adjustment to the income allocated to the minority interest holders, the Class A and General Partners, in accordance with the Heinz LP agreement (as described in the prospectus under "Overview of Entity Structure, Reorganization and Financial Statement Presentation -- Heinz LP") as a result of the transaction. F-39 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Combined Statement of Income Fiscal Year ended May 2, 2001 Adjustments for the Historical Transactions Pro Forma ---------- ------------ --------- (in thousands) Sales............................................... $ 4,550,391 $ (1,744,371) (a) $ 2,806,020 Cost of products sold............................... 3,085,270 (1,345,250) (b) 1,740,020 ----------- ------------- ------------- Gross profit........................................ 1,465,121 (399,121) 1,066,000 Selling, general and administrative expenses........ 897,950 (356,476) (b) 541,474 Royalty expense to related parties.................. 129,102 (44,087) (c) 85,015 ----------- ------------- ------------- Operating income.................................... 438,069 1,442 439,511 Interest income..................................... 110,979 (67,582) (d) 43,397 Interest expense.................................... 10,278 10,434 (d) 20,712 Other expenses, net................................. 21,303 (3,262) (e) 18,041 ----------- ------------- ------------- Income before income taxes and cumulative effect of accounting changes............................... 517,467 (73,312) 444,155 Provision for income taxes.......................... 205,358 (38,474) (f) 166,884 ----------- ------------- ------------- Income before cumulative effect of accounting changes............................................. 312,109 (34,838) 277,271 Cumulative effect of accounting changes ............ (5,211) 1,625 (g) (3,586) ----------- ------------- ------------- Net Income from continuing operations............... $ 306,898 $ (33,213) $ 273,685 =========== ============= =============
F-40 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Combined Statement of Income Fiscal year ended May 2, 2001 (a) Represents the revenues of the U. S. tuna, U. S. pet food and pet snacks, U. S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the royalty expense associated with specific products in certain of the businesses that will be transferred to Spinco as a result of the transaction. (d) Represents the interest income and expense directly attributable to the businesses being transferred to Spinco as a result of the transaction. (e) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (f) Represents the tax provision associated with the income before taxes which will be transferred to Spinco as a result of the transaction. (g) Represents the cumulative effect on prior years from the adoption of Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" attributable to the businesses being transferred to Spinco as a result of the transaction. F-41 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Combined Statement of Income Fiscal Year ended May 3, 2000 Adjustments for the Historical Transactions Pro Forma ---------- ------------ --------- (in thousands) Sales............................................... $ 4,469,324 $ (1,943,086) (a) $ 2,526,238 Cost of products sold............................... 3,013,574 (1,426,742) (b) 1,586,832 ----------- ------------ ------------ Gross profit........................................ 1,455,750 (516,344) 939,406 Selling, general and administrative expenses........ 752,066 (356,295) (b) 395,771 Royalty expense to related parties.................. 94,347 (44,375) (c) 49,972 ----------- ------------ ------------ Operating income.................................... 609,337 (115,674) 493,663 Interest income..................................... 126,236 (82,161) (d) 44,075 Interest expense.................................... 7,138 (2,111) (d) 5,027 Other expenses, net................................. 27,896 (7,033) (e) 20,863 ----------- ------------ ------------ Income before income taxes.......................... 700,539 (188,691) 511,848 Provision for income taxes.......................... 252,244 (71,746) (f) 180,498 ----------- ------------ ------------ Net Income from continuing operations............... $ 448,295 $ (116,945) $ 331,350 =========== ============ ============
F-42 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Combined Statement of Income Fiscal year ended May 3, 2000 (a) Represents the revenues of the U.S. tuna, U.S. pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the royalty expense associated with specific products in certain of the businesses that will be transferred to Spinco as a result of the transaction. (d) Represents the interest income and expense directly attributable to the businesses being transferred to Spinco as a result of the transaction. (e) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (f) Represents the tax provision associated with the income before taxes which will be transferred to Spinco as a result of the transaction. F-43 Heinz Finance Company and Subsidiaries Unaudited Pro Forma Consolidated Statement of Income Three months ended July 31, 2002 Adjustments for the Historical Transactions Pro Forma ---------- ------------ --------- (in thousands) Sales............................................... $ 1,038,374 $ (349,095) (a) $ 689,279 Cost of products sold............................... 687,643 (253,430) (b) 434,213 ----------- ----------- --------------- Gross profit........................................ 350,731 (95,665) 255,066 Selling, general and administrative expenses........ 190,674 (61,542) (b) 129,132 Royalty expense to related parties.................. 44,936 (10,464) (c) 34,472 ----------- ----------- --------------- Operating income.................................... 115,121 (23,659) 91,462 Interest income..................................... 6,592 (148) (d) 6,444 Interest expense.................................... 50,542 (17,237) (e) 33,305 Dividends from related parties...................... 30,798 - 30,798 Currency loss....................................... 22,105 - 22,105 Other expenses, net................................. 3,008 1,229 (f) 4,237 ----------- ----------- --------------- Income before income taxes and minority interest.... 76,856 (7,799) 69,057 Provision for income taxes.......................... 2,389 1,697 (g) 4,086 ----------- ----------- --------------- Income before minority interest..................... 74,467 (9,496) 64,971 Minority interest................................... (70,213) 12,015 (h) (58,198) ----------- ----------- --------------- Net Income from continuing operations............... $ 4,254 $ 2,519 $ 6,773 =========== =========== ===============
F-44 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Consolidated Statement of Income Three months ended July 31, 2002 (a) Represents the revenues of the U.S. tuna, U.S. pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the royalty expense associated with specific products in certain of the businesses that will be transferred to Spinco as a result of the transaction. (d) Represents the interest income directly attributable to the businesses being transferred to Spinco as a result of the transaction. (e) Represents the interest expense on $1.1 billion of debt which will be repaid as a result of the transaction. Given a fluctuation in variable interest rates of 1/8%, interest expense would fluctuate by an insignificant amount annually. (f) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (g) Represents the tax provision associated with the income before taxes and minority interest which will be transferred to Spinco as a result of the transaction. (h) Represents the necessary adjustment to the income allocated to the minority interest holders, the Class A and General Partners, in accordance with the Heinz LP agreement (as described in the prospectus under "Overview of Entity Structure, Reorganization and Financial Statement Presentation -- Heinz LP") as a result of the transaction. F-45 Heinz Finance Company and Subsidiaries Unaudited Pro Forma Consolidated Statement of Income Three months ended August 1, 2001 Adjustments for the Historical Transactions Pro Forma ---------- ------------ --------- (in thousands) Sales............................................... $ 492,261 $ (90,955) (a) $ 401,306 Cost of products sold............................... 320,320 (58,160) (b) 262,160 ---------- ----------- --------------- Gross profit........................................ 171,941 (32,795) 139,146 Selling, general and administrative expenses........ 69,600 (7,291) (b) 62,309 Royalty expense to related parties.................. 23,098 (2,885) (c) 20,213 ---------- ----------- --------------- Operating income.................................... 79,243 (22,619) 56,624 Interest income..................................... 11,763 (181) (d) 11,582 Interest expense.................................... 52,173 (15,985) (e) 36,188 Dividends from related parties...................... 38,519 - 38,519 Currency gain....................................... 2,431 - 2,431 Other expenses...................................... 2,229 (308) (f) 1,921 ---------- ----------- --------------- Income before income taxes and minority interest.... 77,554 (6,507) 71,047 Provision for income taxes.......................... 9,342 5,212 (g) 14,554 ---------- ----------- --------------- Income before minority interest..................... 68,212 (11,719) 56,493 Minority interest................................... (52,305) 21,147 (h) (31,158) ---------- ----------- --------------- Net Income from continuing operations............... $ 15,907 $ 9,428 $ 25,335 ========== =========== ===============
F-46 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Consolidated Statement of Income Three months ended August 1, 2001 (a) Represents the revenues of the U.S. tuna, U.S. pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the royalty expense associated with specific products in certain of the businesses that will be transferred to Spinco as a result of the transaction. (d) Represents the interest income directly attributable to the businesses being transferred to Spinco as a result of the transaction. (e) Represents the interest expense on $1.1 billion of debt which will be repaid as a result of the transaction. Given a fluctuation in variable interest rates of 1/8%, interest expense would fluctuate approximately $0.2 million annually. (f) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (g) Represents the tax provision associated with the income before taxes and minority interest which will be transferred to Spinco as a result of the transaction. (h) Represents the necessary adjustment to the income allocated to the minority interest holders, the Class A and General Partners, in accordance with the Heinz LP agreement (as described in the prospectus under "Overview of Entity Structure, Reorganization and Financial Statement Presentation -- Heinz LP") as a result of the transaction. F-47 Heinz Finance Unaudited Pro Forma Consolidated Balance Sheet July 31, 2002 Adjustments for the Historical Transactions Pro Forma ---------- ------------ --------- (in thousands) Assets Current assets: Cash and cash equivalents........................$ 11,347 $ (215)(a) $ 11,132 1,100,000 (b) (1,100,000)(c) Receivables...................................... 484,711 (141,755)(a) 342,956 Due from related parties......................... 57,529 (27,168)(a) 30,361 Short-term notes receivable from related parties 1,337,703 (1,100,000)(b) 237,703 Inventories...................................... 747,699 (281,026)(a) 466,673 Prepaid expenses and other current assets ...... 140,448 (42,344)(a) 98,104 ------------ ------------- ----------------- Total current assets........................... 2,779,437 (1,592,508) 1,186,929 Property, plant and equipment.......................... 1,490,244 (331,502)(a) 1,158,742 Less accumulated depreciation.......................... 677,167 (155,437)(a) 521,730 ------------ ------------- ----------------- Total property, plant and equipment, net....... 813,077 (176,065) 637,012 Other noncurrent assets: Long-term notes receivable from related parties.. 35,000 -- 35,000 Investments in related parties................... 1,895,245 -- 1,895,245 Intangible assets, net........................... 1,925,675 (664,244)(a) 1,261,431 Other noncurrent assets.......................... 344,120 (23,535)(a) 320,585 ------------ ------------- ----------------- Total other noncurrent assets.................. 4,200,040 (687,779) 3,512,261 ------------ ------------- ----------------- Total assets...................................$ 7,792,554 $ (2,456,352) $ 5,336,202 ============ ============= ================ Liabilities and Shareholders' Equity Current liabilities: Short term debt with related parties.............$ 365,660 $ -- $ 365,660 Portion of long-term due within one year......... 451,885 (25)(a) 1,860 (450,000)(c) Accounts payable................................. 245,493 (3,690)(a) 241,803 Accounts payable to related parties.............. 177,129 (43,704)(a) 133,425 Accrued interest................................. 107,647 -- 107,647 Other accrued liabilities........................ 144,813 (38,154)(a) 106,659 ------------ ------------- ----------------- Total current liabilities...................... 1,492,627 (535,573) 957,054 Long-term debt......................................... 3,973,334 (100)(a) 3,323,234 (650,000)(c) Deferred income taxes.................................. 20,488 (2,735)(a) 17,753 Other liabilities...................................... 29,401 (20,597)(a) 8,804 ------------ ------------- ----------------- Total long-term debt and other liabilities..... 4,023,223 (673,432) 3,349,791 Minority interest...................................... 1,763,845 1,245,836)(d) 518,009 Mandatorily Redeemable Series A Preferred Shares....... 325,000 -- 325,000 Shareholders' equity: Common stock..................................... 11 -- 11 Additional capital............................... 128,050 -- 128,050 Retained earnings................................ 57,231 -- 57,231 Accumulated other comprehensive gain............. 2,567 (1,511)(a) 1,056 ------------ ------------- ----------------- Total shareholders' equity..................... 187,859 (1,511) 186,348 ------------ ------------- ----------------- Total liabilities and shareholders' equity.....$ 7,792,554 $ (2,456,352) $ 5,336,202 ============ ============= =================
F-48 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Consolidated Balance Sheet July 31, 2002 (a) Represents the assets and liabilities directly attributable to the businesses being transferred to Spinco. (b) Represents the short-term notes receivable with Heinz that will be repaid upon Heinz's receipt of $1.1 billion of cash from Del Monte as a result of the transaction. (c) The repayment of $1.1 billion of debt with the cash received by Heinz Finance from Heinz as noted in footnote (b) above. (d) Represents the adjustment to the minority interest holders', the Class A and General Partners', limited partnership interest in Heinz LP, in accordance with the Heinz LP Partnership Agreement, as a result of the net assets being transferred to Spinco as a result of the transaction. F-49 H. J. Heinz Company Unaudited Pro Forma Consolidated Financial Statements The following unaudited pro forma consolidated financial statements of Heinz adjust the historical financial statements of Heinz to give pro forma effect of the following: o The transfer of certain assets and liabilities of Heinz's U.S. tuna, U.S. and Canadian pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant-feeding businesses to Spinco. o The repayment of $1.1 billion of debt with the cash Heinz will receive as a result of the merger of Spinco, immediately following the transfer, with a wholly-owned subsidiary of Del Monte. The unaudited pro forma consolidated balance sheet has been prepared as if the transaction occurred as of July 31, 2002. The unaudited pro forma consolidated statements of income have been prepared as if the transaction occurred as of the beginning of the periods presented. The unaudited pro forma statements for the periods presented do not purport to represent what Heinz's results of operations or financial position would actually have been had the transaction occurred on the dates noted above, or to project Heinz's results of operations for any future periods. The unaudited pro forma results do not include any synergies that may be realized as a result of the transaction. The pro forma adjustments are based upon available information and upon certain assumptions that Heinz management believes are reasonable under the circumstances. The adjustments are directly attributable to the transaction and are expected to have a continuing impact on the financial position and results of operations of Heinz. The unaudited pro forma consolidated financial statements should be read in conjunction with the historical financial statements and related notes included in this prospectus. F-50 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Fiscal Year ended May 1, 2002 Adjustments for the Historical Transactions Pro Forma ---------- ------------ --------- (in thousands) Sales.................................................. $ 9,431,000 $ (1,816,964)(a) $ 7,614,036 Cost of products sold.................................. 6,093,827 (1,235,740)(b) 4,858,087 ------------ ------------- --------------- Gross profit........................................... 3,337,173 (581,224) 2,755,949 Selling, general and administrative expenses........... 1,746,702 (290,625)(b) 1,456,077 ------------ ------------- --------------- Operating income....................................... 1,590,471 (290,599) 1,299,872 Interest income........................................ 27,445 (1,248)(c) 26,197 Interest expense....................................... 294,269 (63,658)(d) 230,611 Other expenses, net.................................... 45,057 (119)(e) 44,938 ------------ ------------- ---------------- Income before income taxes............................. 1,278,590 (228,070) 1,050,520 Provision for income taxes............................. 444,701 (69,362)(f) 375,339 ------------ ------------- ---------------- Net income............................................. $ 833,889 $ (158,708) $ 675,181 ============ ============= ================
F-51 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Fiscal year ended May 1, 2002 (a) Represents the revenues of Heinz's U.S. tuna, U.S. and Canadian pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses being transferred to Spinco as a result of the transaction. (c) Represents the interest income directly attributable to the businesses being transferred to Spinco as a result of the transaction. (d) Represents the interest expense on $1.1 billion of debt that will be repaid as a result of the transaction. Given a fluctuation in variable interest rates of 1/8%, interest expense would fluctuate approximately $0.1 million annually. (e) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (f) Represents the tax provision associated with the income before taxes that will be transferred to Spinco as a result of the transaction. F-52 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Fiscal Year ended May 2, 2001 Adjustments for the Historical Transactions Pro Forma ---------- ------------ --------- (in thousands) Sales...................................................$ 8,820,884 $ (1,833,186)(a) $ 6,987,698 Cost of products sold................................... 5,883,618 (1,476,351)(b) 4,407,267 ----------- ------------ ----------- Gross profit............................................ 2,937,266 (356,835) 2,580,431 Selling, general and administrative expenses............ 1,954,912 (363,440)(b) 1,591,472 ----------- ------------ ----------- Operating income........................................ 982,354 6,605 988,959 Interest income......................................... 22,692 (95)(c) 22,597 Interest expense........................................ 332,957 (70,469)(d) 262,488 Other income, net....................................... 969 4,389 (e) 5,358 ----------- ------------ ----------- Income before income taxes and cumulative effect of accounting changes................................... 673,058 81,368 754,426 Provision for income taxes.............................. 178,140 12,355 (f) 190,495 ----------- ------------ ----------- Income before cumulative effect of accounting change.... 494,918 69,013 563,931 Cumulative effect of accounting change.................. (16,906) 1,625 (g) (15,281) ----------- ------------ ----------- Net income..............................................$ 478,012 $ 70,638 $ 548,650 =========== ============ ===========
F-53 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Fiscal year ended May 2, 2001 (a) Represents the revenues of Heinz's U.S. tuna, U.S. and Canadian pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the interest income directly attributable to the businesses being transferred to Spinco as a result of the transaction. (d) Represents the interest expense on $1.1 billion of debt that will be repaid as a result of the transaction. Given a fluctuation in variable interest rates of 1/8%, interest expense would fluctuate approximately $1.4 million annually. (e) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (f) Represents the tax provision associated with the income before taxes that will be transferred to Spinco as a result of the transaction. (g) Represents the cumulative effect on prior years from the adoption of Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" attributable to the businesses being transferred to Spinco as a result of the transaction. F-54 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Fiscal Year ended May 3, 2000 Adjustments for the Historical Transactions Pro Forma ---------- ------------ --------- (in thousands) Sales...................................................$ 8,939,416 $ (2,046,609)(a) $ 6,892,807 Cost of products sold................................... 5,788,525 (1,428,560)(b) 4,359,965 ----------- ------------ ------------ Gross profit............................................ 3,150,891 (618,049) 2,532,842 Selling, general and administrative expenses............ 1,882,409 (374,172)(b) 1,508,237 Gain on sale of Weight Watchers ........................ 464,617 - 464,617 ----------- ------------ ------------ Operating income........................................ 1,733,099 (243,877) 1,489,222 Interest income......................................... 25,330 (149)(c) 25,181 Interest expense........................................ 269,748 (62,752)(d) 206,996 Other expenses, net..................................... 25,005 (6,289)(e) 18,716 ----------- ------------ ------------ Income before income taxes.............................. 1,463,676 (174,985) 1,288,691 Provision for income taxes.............................. 573,123 (64,577)(f) 508,546 ----------- ------------ ------------ Net income..............................................$ 890,553 $ (110,408) $ 780,145 =========== ============ ============
F-55 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Fiscal year ended May 3, 2000 (a) Represents the revenues of Heinz's U.S. tuna, U.S. and Canadian pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the interest income directly attributable to the businesses being transferred to Spinco as a result of the transaction. (d) Represents the interest expense on $1.1 billion of debt that will be repaid as a result of the transaction. Given a fluctuation in variable interest rates of 1/8%, interest expense would fluctuate approximately $1.4 million annually. (e) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (f) Represents the tax provision associated with the income before taxes that will be transferred to Spinco as a result of the transaction. F-56 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Three Months ended July 31, 2002 Adjustments for the Historical Transactions Pro Forma ---------- ------------ --------- (in thousands) Sales.................................................. $ 2,203,645 $ (364,331)(a) $ 1,839,314 Cost of products sold.................................. 1,416,732 (250,097)(b) 1,166,635 ----------- ------------ ------------ Gross profit........................................... 786,913 (114,234) 672,679 Selling, general and administrative expenses........... 441,781 (64,999)(b) 376,782 ----------- ------------ ------------ Operating income....................................... 345,132 (49,235) 295,897 Interest income........................................ 6,405 (182)(c) 6,223 Interest expense....................................... 69,090 (17,237)(d) 51,853 Other expenses, net.................................... 11,701 1,484 (e) 13,185 ----------- ------------ ------------ Income before income taxes............................. 270,746 (33,664) 237,082 Provision for income taxes............................. 92,951 (10,241)(f) 82,710 ----------- ------------ ------------ Net income............................................. $ 177,795 $ (23,423) $ 154,372 =========== ============ ============
F-57 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Three months ended July 31, 2002 (a) Represents the revenues of Heinz's U.S. tuna, U.S. and Canadian pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the interest income directly attributable to the businesses being transferred to Spinco as a result of the transaction. (d) Represents the interest expense on $1.1 billion of debt that will be repaid as a result of the transaction. Given a fluctuation in variable interest rates of 1/8%, interest expense would fluctuate by an insignificant amount annually. (e) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (f) Represents the tax provision associated with the income before taxes that will be transferred to Spinco as a result of the transaction. F-58 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Three Months ended August 1, 2001 Adjustments for the Historical Transactions Pro Forma ---------- ------------ --------- (in thousands) Sales....................................................$ 2,077,295 $ (401,754) $ 1,675,541 Cost of products sold.................................... 1,315,016 (272,720)(b) 1,042,296 ----------- ----------- ------------ Gross profit............................................. 762,279 (129,034) 633,245 Selling, general and administrative expenses............. 378,125 (62,319)(b) 315,806 ----------- ----------- ------------ Operating income......................................... 384,154 (66,715) 317,439 Interest income.......................................... 5,358 (181)(c) 5,177 Interest expense......................................... 75,547 (15,754)(d) 59,793 Other expenses, net...................................... 1,758 906 (e) 2,664 ----------- ----------- ------------ Income before income taxes............................... 312,207 (52,048) 260,159 Provision for income taxes............................... 111,733 (18,140)(f) 93,593 ----------- ----------- ------------ Net income...............................................$ 200,474 $ (33,908) $ 166,566 =========== =========== ============
F-59 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Three months ended August 1, 2001 (a) Represents the revenues of Heinz's U.S. tuna, U.S. and Canadian pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the interest income directly attributable to the businesses being transferred to Spinco as a result of the transaction. (d) Represents the interest expense on $1.1 billion of debt that will be repaid as a result of the transaction. Given a fluctuation in variable interest rates of 1/8%, interest expense would fluctuate approximately $0.2 million annually. (e) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (f) Represents the tax provision associated with the income before taxes that will be transferred to Spinco as a result of the transaction. F-60 H. J. Heinz Company Unaudited Pro Forma Consolidated Balance Sheet July 31, 2002 Adjustments for the Historical Transactions Pro Forma ---------- ------------ --------- (in thousands) Assets Current assets: Cash and cash equivalents.............................$ 197,919 $ (6,001)(a) $ 191,918 Short-term investments, at cost which approximates market ............................................. 2,461 - 2,461 Receivables, net...................................... 1,132,782 (153,313)(a) 979,469 Inventories........................................... 1,633,440 (323,740)(a) 1,309,700 Prepaid expenses and other current assets ........... 339,582 (58,252)(a) 281,330 ------------ ------------ -------------- Total current assets............................ 3,306,184 (541,306) 2,764,878 Property, plant and equipment............................. 3,979,124 (672,118)(a) 3,307,006 Less accumulated depreciation............................. 1,703,834 (333,826)(a) 1,370,008 ------------ ------------ -------------- Total property, plant and equipment, net........ 2,275,290 (338,292) 1,936,998 Other noncurrent assets: Goodwill, net......................................... 2,557,924 (706,496)(a) 1,851,428 Trademarks, net....................................... 852,732 (258,517)(a) 594,215 Intangible assets, net................................ 152,170 (9,909)(a) 142,261 Other noncurrent assets............................... 1,287,316 (38,185)(a) 1,249,131 ------------ ------------ -------------- Total other noncurrent assets................... 4,850,142 (1,013,107) 3,837,035 ------------ ------------ -------------- Total assets....................................$ 10,431,616 $ (1,892,705) $ 8,538,911 ============ ============ ============== Liabilities and Shareholders' Equity Current liabilities: Short term debt.......................................$ 265,243 $ - $ 265,243 Portion of long-term due within one year.............. 457,885 (450,000)(b) 7,885 Accounts payable...................................... 872,069 (32,215)(a) 839,854 Salaries and wages.................................... 45,810 - 45,810 Accrued marketing..................................... 177,659 (15,458)(a) 162,201 Other accrued liabilities............................. 437,293 (34,020)(a) 403,273 Income taxes.......................................... 216,403 (102)(a) 216,301 ------------ ------------ -------------- Total current liabilities....................... 2,472,362 (531,795) 1,940,567 Long-term debt............................................ 4,695,433 (650,000)(b) 4,045,433 Deferred income taxes..................................... 385,696 (130,166)(a) 255,530 Non-pension postretirement benefits....................... 209,636 - 209,636 Other liabilities......................................... 797,374 (46,033)(a) 751,341 ------------ ------------ -------------- Total long-term debt and other liabilities...... 6,088,139 (826,199) 5,261,940 Shareholders' equity: Capital stock......................................... 107,883 - 107,883 Additional capital.................................... 348,627 - 348,627 Retained earnings..................................... 5,004,196 (533,200)(c) 4,470,996 Less: Treasury stock at cost................................ 2,889,275 - 2,889,275 Accumulated other comprehensive loss.................. 700,316 1,511 (a) 701,827 ------------ ------------ -------------- Total shareholders' equity...................... 1,871,115 (534,711) 1,336,404 ------------ ------------ -------------- Total liabilities and shareholders' equity................$ 10,431,616 $ (1,892,705) $ 8,538,911 ============ ============ ==============
F-61 H. J. Heinz Company Unaudited Pro Forma Consolidated Balance Sheet July 31, 2002 (a) Represents the assets and liabilities directly attributable to the businesses being transferred to Spinco as a result of the transaction. (b) The repayment of $1.1 billion of debt with the cash received from Del Monte as a result of the transaction. (c) Represents the adjustment to retained earnings as a result of the net assets being transferred to Spinco as a result of the transaction. F-62 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THIS PROSPECTUS IS NOT AN OFFER TO ACQUIRE THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO ACQUIRE THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER, EXCHANGE OR SALE IS NOT PERMITTED. Subject to Completion, dated December 4, 2002 PROSPECTUS , 2002 [H. J. Heinz Company LOGO] H. J. Heinz Finance Company Offer to Exchange $700,000,000 6.00% Guaranteed Notes due 2012 $550,000,000 6.75% Guaranteed Notes due 2032 for $700,000,000 6.00% New Guaranteed Notes due 2012 $550,000,000 6.75% New Guaranteed Notes due 2032 both unconditionally and irrevocably guaranteed by H. J. Heinz Company ----------------------- We are offering to exchange up to $700,000,000 of our 6.00% guaranteed notes due 2012 and $550,000,000 of our 6.75% guaranteed notes due 2032 (collectively, the "New Notes") which will be registered under the Securities Act of 1933, as amended, for up to $700,000,000 of our issued and outstanding 6.00% guaranteed notes due 2012 and $550,000,000 of our issued and outstanding 6.75% guaranteed notes due 2032 (collectively, the "Old Notes"). We are offering to issue the New Notes to satisfy our obligations contained in the exchange and registration rights agreement we entered into when the Old Notes were sold in transactions in reliance on Rule 144A and Regulation S under the Securities Act. The New Notes are unconditionally and irrevocably guaranteed by H. J. Heinz Company, "Heinz" or the "Guarantor." Concurrently with the offer to exchange the Old Notes for the New Notes, we will conduct an offer to exchange our outstanding 6.625% Guaranteed Notes due 2011 for corresponding notes registered under the Securities Act of 1933. The completion of the offer to exchange under this prospectus is not conditioned on the success or completion of the offer to exchange our other notes. Please refer to "The Exchange Offer-Concurrent Exchange Offer" for a further discussion of the offers to exchange. The terms of the New Notes are identical in all material respects to the terms of the Old Notes, except that the transfer restrictions, registration rights and additional interest provisions relating to the Old Notes do not apply to the New Notes. The exchange offer and withdrawal rights will expire at 5:00 p.m., New York City time, on o , 2002 unless extended. You should carefully review the risk factors on page o of this prospectus. ----------------------- To exchange your Old Notes for New Notes of the same series: o You must complete and send the letter of transmittal that accompanies this prospectus to the exchange agent by 5:00 p.m., New York City time, on o , 2002. o If your Old Notes are held in book-entry form at The Depository Trust Company, "DTC," you must instruct DTC, through your signed letter of transmittal, that you want to exchange your Old Notes for New Notes. When the exchange offer closes, your DTC account will be changed to reflect your exchange of Old Notes for New Notes. o You should read the section called "The Exchange Offer" for additional information on how to exchange your Old Notes for New Notes. ----------------------- The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ----------------------- TABLE OF CONTENTS ----------------------- Page ----- Summary........................................................................3 Risk Factors...................................................................8 Where You Can Find More Information...........................................10 Incorporation of Certain Documents by Reference...............................10 No Cash Proceeds..............................................................11 Ratio of Earnings to Fixed Charges............................................11 Overview of Entity Structure, Reorganization and Financial Statement Presentation.............................................................12 Heinz Finance Selected Historical Consolidated and Combined Financial Data....15 Heinz Finance Selected Unaudited Pro Forma Consolidated and Combined Financial Data...........................................................17 H. J. Heinz Company...........................................................18 Heinz Selected Consolidated Financial Data....................................18 Heinz Selected Unaudited Pro Forma Consolidated Financial Data................21 Management's Discussion and Analysis of Financial Condition and Results of Operation................................................................22 Business......................................................................41 Related Party Transactions ...................................................49 Management....................................................................50 Description of the New Notes..................................................56 The Exchange Offer............................................................66 Taxation......................................................................74 Plan of Distribution..........................................................75 Notice to Investors...........................................................76 Validity of the New Notes.....................................................76 Experts.......................................................................77 Forward-Looking Statements....................................................77 Index to Consolidated and Combined Financial Statements of H. J. Heinz Finance Company and H. J. Heinz Company.................................F-1 --------------------------- 2 SUMMARY The following summary contains basic information about us, Heinz, the New Notes and this exchange offer. It may not contain all the information that is important to you in making your investment decision. More detailed information appears elsewhere in this prospectus and in our consolidated and combined financial statements and accompanying notes and in Heinz's consolidated financial statements and accompanying notes that we incorporate by reference. "The Exchange Offer" and the "Description of the New Notes" sections of this prospectus contain more detailed information regarding the terms and conditions of the exchange offer and the New Notes. References in this prospectus to the terms "we," "us," "our," "Heinz Finance" or the "Issuer" refer to H. J. Heinz Finance Company and its consolidated subsidiaries and to the terms "Heinz" or the "Guarantor" refer to H. J. Heinz Company. H. J. Heinz Company (The Guarantor) H. J. Heinz Company was incorporated under the laws of the Commonwealth of Pennsylvania on July 27, 1900. In 1905, it succeeded to the business of a partnership operating under the same name that had developed from a food business founded in 1869 at Sharpsburg, Pennsylvania by Henry J. Heinz. The principal products of Heinz include ketchup, condiments and sauces, frozen food, pet food, soups, beans and pasta meals, tuna and other seafood products, infant food and other processed food products. The principal executive offices of Heinz are located at 600 Grant Street, Pittsburgh, Pennsylvania, 15219 (telephone number (412) 456-5700). H. J. Heinz Finance Company (The Issuer) We are engaged in the business of acquiring, holding and financing equity and debt investments in subsidiaries that own and operate the U.S. businesses historically operated by Heinz. Heinz Finance has been, directly or indirectly, a wholly-owned subsidiary of Heinz since 1983 and had no significant operating history until Heinz completed a reorganization of its corporate organization in the United States on May 3, 2001. As a result of the reorganization, all of the U.S. business operations that had historically been conducted by Heinz through its Heinz USA division and eight subsidiary corporations, are now conducted by Heinz Finance. Our principal executive offices are located at 600 Grant Street, Pittsburgh, Pennsylvania, 15219 (telephone number (412) 456-5700). Recent Developments On June 13, 2002, Heinz announced that it will transfer to a wholly-owned subsidiary ("Spinco") certain assets and liabilities, including our U.S. and Heinz's Canadian pet food and pet snacks, our U.S. tuna, U.S. retail private label soup and private label gravy, College Inn broths and our U.S. infant feeding businesses, which in Fiscal Year 2002 together generated approximately $1.4 billion of our annual revenues. The common stock of Spinco will be distributed on a pro rata basis to Heinz's shareholders. Immediately thereafter, Spinco will merge with a wholly- owned subsidiary of Del Monte Foods Company, whereby Spinco will become a wholly-owned subsidiary of Del Monte Foods Company. In connection with the merger, each share of Spinco common stock will be automatically converted into shares of Del Monte common stock that will result in the fully diluted Del Monte common stock at the effective time of the merger to be held approximately 74.5% by Heinz shareholders and approximately 25.5% by the Del Monte shareholders. As a result of the transaction, Heinz Finance will receive from Heinz approximately $1.1 billion in cash that will be used to retire debt. The transaction, which is subject to various conditions, is expected to be completed in late calendar year 2002 or early calendar year 2003. However, we cannot assure you of the timing or that the transaction will be consummated. 3 The Exchange Offer Issuer................................ H. J. Heinz Finance Company New Notes............................. Up to $700,000,000 aggregate principal amount of our new 6.00% guaranteed notes due 2012 and up to $550,000,000 aggregate principal amount of our new 6.75% guaranteed notes due 2032. The Exchange Offer.................... We are offering to issue the New Notes in exchange for a like principal amount of outstanding Old Notes that we issued on March 7, 2002. We are conducting this exchange offer to satisfy our obligations contained in the exchange and registration rights agreement we entered into when we sold the Old Notes in transactions pursuant to Rule 144A and Regulation S under the Securities Act. The Old Notes were subject to transfer restrictions that will not apply to the New Notes so long as you are acquiring the New Notes in the ordinary course of your business, you are not participating in a distribution of the New Notes and you are not an affiliate of ours. Maturity.............................. The notes due 2012 will mature on March 15, 2012 and the notes due 2032 will mature on March 15, 2032. Interest Payment Dates................ March 15 and September 15 of each year commencing from the most recent date to which interest has been paid on the Old Notes or, if no interest has been paid, from March 7, 2002. Redemption............................ The Issuer may choose to redeem some or all of the New Notes at any time. If the Issuer chooses to do so, it will mail a notice of redemption to the holders of the New Notes not less than 30 days and not more than 60 days before the redemption occurs. Payment of Additional Amounts......... The Issuer shall pay all stamp and other duties, if any, which may be imposed by the United States or the United Kingdom or any political subdivision thereof or taxing authority thereof or therein with respect to the issuance, transfer, exchange or conversion of the New Notes. The Issuer will not be required to make any payment with respect to any other tax, assessment or governmental charge imposed by any government or any political subdivision thereof or taxing authority therein. Ranking............................... The New Notes will be unsecured and will rank equally with all our other unsecured indebtedness and other obligations. Guarantee............................. The New Notes will be unconditionally and irrevocably guaranteed by Heinz. 4 No Cash Proceeds...................... We will not receive any proceeds from the issuance of the New Notes. Form of the New Notes................. The New Notes will be issued in the form of one or more global securities which will be deposited with, or on behalf of, DTC and registered in the name of Cede & Co., DTC's nominee. Beneficial interests in the global securities will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Governing Law......................... The New Notes, the guarantee and the indenture will be governed by New York law. Tenders, Expiration Date, Withdrawal.. The exchange offer will expire at 5:00 p.m., New York City time, on o , 2002 unless it is extended. To tender your Old Notes you must follow the detailed procedures described under the heading "The Exchange Offer--Procedures for Tendering" including special procedures for certain beneficial owners and broker- dealers. If you decide to exchange your Old Notes for New Notes, you must acknowledge that you do not intend to engage in and have no arrangement with any person to participate in a distribution of the New Notes. If you decide to tender your Old Notes pursuant to the exchange offer, you may withdraw them at any time prior to 5:00 p.m., New York City time, on the expiration date. Federal Income Tax Consequences....... Your exchange of Old Notes for New Notes pursuant to the exchange offer will not result in a gain or loss to you. Exchange Agent........................ Bank One Trust Company is the exchange agent for the exchange offer. Failure to Exchange Your Old Notes. If you fail to exchange your Old Notes for New Notes in the exchange offer, your Old Notes will continue to be subject to transfer restrictions and you will not have any further registration rights under the exchange and registration rights agreement. Trading Market........................ To the extent that Old Notes are tendered and accepted in the exchange offer, your ability to sell untendered, and tendered but unaccepted, Old Notes could be adversely affected. There may be no trading market for the Old Notes. There can be no assurance that an active public market for the New Notes will develop or as to the liquidity of any market that may develop for the New Notes, the ability of holders to sell the New Notes, or the price at which holders would be able to sell the New Notes. For more details, see the section called "Notice to Investors." 5 General Indenture Provisions Applicable to the New Notes and the Old Notes Indenture............................. The New Notes will be issued under the same indenture as the Old Notes. No Limit on Debt...................... The indenture does not limit the amount of debt that we may issue or provide holders any protection should we be involved in a highly leveraged transaction. Restrictions on Secured Debt.......... If the Guarantor or any Restricted Subsidiary shall after the date of the Indenture incur or guarantee any Debt secured by a Mortgage on any Principal Property of the Guarantor or any Restricted Subsidiary, or on any share of stock or Debt of any Restricted Subsidiary, the Guarantor will secure or cause such Restricted Subsidiary to secure the Notes, equally and ratably with (or, at the option of the Guarantor, prior to) such secured Debt, unless the aggregate amount of all such secured Debt would not exceed 10% of Consolidated Net Assets. These restrictions will not apply in some circumstances. (All terms are defined under "Description of the New Notes - Certain Definitions.") Events of Default..................... Each of the following is an event of default with respect to the Notes under the indenture: o default in the payment of any installment of interest for 30 days after becoming due; o default in the payment of principal when due; o default in the deposit of any sinking fund payment when due; o default by Heinz Finance or the Guarantor in the performance or breach of any other covenant or warranty in the Notes or the Indenture for 90 days after notice; o certain events of bankruptcy, insolvency or reorganization with respect to Heinz Finance or the Guarantor; or o the Guarantor contests the validity or enforceability of the Guarantee or related obligations. 6 Ratio of Earnings to Fixed Charges(1) Three Months Ended Year Ended ---------------------------------------------------------------------------------------- May 1, 2002 May 2, 2001 May 3, 2000 April 28, 1999 April 29, 1998 July 31, 2002 (52 weeks) (52 weeks) (52 weeks) (52 weeks) (52 weeks) ----------------------------------------------------------------------------------------- H. J. Heinz Company..... 4.48 4.88 2.79 5.83 3.88 5.29 H. J. Heinz Finance Company(2)........... 2.40 3.58 22.36 46.75 49.76 44.04
- ------------------- (1) The ratios of earnings to fixed charges were calculated by dividing earnings by fixed charges. Earnings were calculated by adding income before income taxes, interest expense (including amortization of debt expense and any discount or premium relating to indebtedness), the interest component of rental expense and the amortization of capitalized interest. Fixed charges were calculated by adding interest expense (including amortization of debt expense and any discount or premium relating to indebtedness), capitalized interest and the interest component of rental expense. (2) The ratios of earnings to fixed charges for the periods prior to May 1, 2002 relate to the U.S. Group and are not representative of the expected ratio of earnings to fixed charges for Heinz Finance as debt was not allocated to the U.S. Group prior to the reorganization discussed in this prospectus. 7 RISK FACTORS In addition to the information set forth elsewhere in this prospectus, you should consider carefully the factors set forth below before exchanging your Old Notes for New Notes. Our and Heinz's Business Is Subject to Numerous Risks We produce a broad range of food products and we acquire, hold and finance equity and debt investments in subsidiaries that own and operate the U.S. business of Heinz. Accordingly, the results of operations and financial condition of our business and of the business of Heinz are subject to certain risks and uncertainties, including: o Changes in laws and regulations, including changes in food and drug laws, accounting standards, taxation requirements (including tax rate changes, new tax laws and revised tax law interpretations) and environmental laws in domestic and foreign jurisdictions; o Competitive product and pricing pressures and the ability to gain or maintain share of sales in the global market as a result of actions by competitors and others; o Fluctuations in the cost and availability of raw materials, including tuna, and the ability to maintain favorable supplier arrangements and relationships; o The impact of higher energy costs and other factors on the cost of producing, transporting and distributing products; o The ability to generate sufficient cash flows to support capital expenditures, share repurchase programs, debt repayment and general operating activities; o The inherent risks in the marketplace associated with new product or packaging introductions, including uncertainties about trade and consumer acceptance; o The ability to achieve sales and earnings forecasts, which are based on assumptions about sales volume, product mix and other items; o The ability to integrate acquisitions and joint ventures into existing operations and the availability of new acquisition and joint venture opportunities and the success of divestitures and other business combinations; o The ability to achieve cost savings objectives, including any restructuring programs and our working capital initiative; o The impact of unforeseen economic and political changes in the markets where we compete, such as currency exchange rates (notably with respect to the euro and pound sterling), inflation rates, recession, foreign ownership restrictions and other external factors over which we have no control; o Interest rate fluctuations and other capital market conditions; o The effectiveness of our advertising, marketing and promotional programs; o Weather conditions, which could impact demand for our products and the supply and cost of raw materials; o The impact of e-commerce and e-procurement, supply chain efficiency and cash flow initiatives; 8 o The impact of global industry conditions, including the effect of the economic downturn in the food industry and the food service business in particular; o The ability to maintain our profit margin in the face of a consolidating retail environment; o The ability to offset the reduction in volume and revenue resulting from participation in categories experiencing declining consumption rates; o With respect to the proposed spin-off and merger between our U.S. and Heinz's Canadian pet food and pet snacks, our U.S. tuna, U.S. retail private label soup and gravy, College Inn broth and our U.S. infant feeding businesses, and a wholly-owned subsidiary of Del Monte, the ability to obtain required third party consents and Del Monte shareholders' approval and the success of business integration in a timely and cost effective manner; and o With respect to future dividends on Heinz stock, meeting certain legal requirements at the time of declaration. We Have No Operating History, and Therefore Are Subject to the Risk of Inconsistent Results, Policies and Strategies Prior to May 2001, Heinz Finance was an inactive subsidiary of Heinz and had no relevant operating history. Since May 2001, Heinz Finance has operated the historical U.S. business of Heinz. Although the U.S. business of Heinz consisted of business entities with established operations, these businesses have no operating history as a combined entity. As a result, because the current organizational structure of Heinz Finance and its subsidiaries was created in May 2001, the future results of operations or financial condition of Heinz Finance may vary from the results previously realized by the U.S. business of Heinz, which contained similar constituent businesses. Also, amendments or changes to our bylaws, and changes in our operating policies and strategies, may be made from time to time at the discretion of the board of directors and, in the case of the bylaws, by the holders of capital stock of Heinz Finance entitled to vote generally in the election of directors. We Depend Upon Our Subsidiaries to Service Our Debt We are a holding company and derive all of our operating income from our subsidiaries. Our primary source of cash to pay principal of and interest on the New Notes is from cash distributions, dividends and other payments from our subsidiaries. The payment of dividends by our subsidiaries is subject to the declaration of dividends by those subsidiaries' boards of directors, and our subsidiaries are not obligated to pay dividends. The distribution of cash by H. J. Heinz Company, LP, "Heinz LP," is subject to the discretion of the general partner of Heinz LP (Heinz Management Company, "HMC," a wholly owned subsidiary of the Guarantor). Our subsidiaries' ability to make such payments may also be restricted by, among other things, applicable state laws and other laws and regulations. In addition, our right and the rights of our creditors, including holders of the New Notes, to participate in the assets of any subsidiary upon its liquidation or recapitalization would be subject to the prior claims of such subsidiary's creditors, except to the extent that we may ourselves be a creditor with recognized claims against such subsidiary. An Active Trading Market For Our New Notes May Not Develop and May Affect the Price Received Upon a Sale of the New Notes There is no established trading market for the New Notes since they are a new issue of securities. We do not intend to apply for the listing of any New Notes on a national securities exchange. Accordingly, without an active trading market or exchange listing, it may be difficult to obtain a selling price that would prevail if the New Notes were more widely traded or listed on an exchange. An active public market may never exist for the New Notes and if one develops it may not continue. If an active public market does not develop or continue, your ability to sell the New Notes may be adversely affected. 9 WHERE YOU CAN FIND MORE INFORMATION This prospectus is part of a registration statement on Form S-4 that we have filed with the Securities and Exchange Commission, the "Commission," under the Securities Act of 1933, as amended, the "Securities Act." This prospectus does not contain all of the information set forth in the registration statement. For further information about us and the New Notes, you should refer to the registration statement. This prospectus summarizes material provisions of contracts and other documents to which we refer you. Since this prospectus may not contain all of the information that you may find important, you should review the full text of these documents. We have filed these documents as exhibits to our registration statement. After the effectiveness of the registration statement, we will become subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and will file reports and other information with the Commission. You may read and copy any reports and information statements and other information we file at the public reference facilities of the Securities and Exchange Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain copies of those materials from the Commission by mail at prescribed rates. You should direct requests to Securities and Exchange Commission's Public Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission maintains a website (www.sec.gov) that will contain reports and other information filed by us. In addition, for so long as any of the Old Notes remain outstanding, we have agreed to make available to any holder or purchaser of the Old Notes or the New Notes in connection with any sale thereof the information required by Rule 144A(d) (4) under the Securities Act. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE Heinz is subject to the informational requirements of the Exchange Act. In accordance with the Exchange Act, Heinz files reports, proxy statements and other information with the Commission. Those reports, proxy statements and other information can be inspected and copied at the public reference facilities that the Commission maintains at the above mentioned address. Please call the Commission at 1-800-SEC-0330 for further information on its public reference rooms. Copies of these materials can be obtained at prescribed rates from the Public Reference Section of the Commission at its principal offices referred to above, or over the Internet at the Commission's web site at the above mentioned web address. The following documents filed with the Commission are incorporated by reference in and made a part of this prospectus: Heinz's Annual Report on Form 10-K for the fiscal year ended May 1, 2002, Quarterly Report on Form 10-Q for the three months ended July 31, 2002 and its Current Report on Form 8-K dated June 12, 2002 and August 14, 2002. Any statement contained in a document all or a portion of which is incorporated by reference herein shall be deemed to be modified or superseded for purposes of this prospectus to the extent that a statement contained herein modifies or supersedes such statement. Any statement so modified or superseded, except as so modified or superseded, shall not be deemed to constitute a part of this prospectus. We will provide without charge to each person to whom this prospectus has been delivered, upon such person's written or oral request, a copy of any document referenced in or incorporated by reference into this prospectus. Requests for such copies should be directed to the Corporate Affairs Department, H. J. Heinz Company, P.O. Box 57, Pittsburgh, Pennsylvania 15230-0057; telephone number (412) 456-6000. To obtain timely delivery, you must request the information no later than o, 2002, or five business days prior to the expiration date of the exchange offer if the exchange offer is extended. You should rely only on the information contained in this prospectus or that we have referred you to. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer of the New Notes in any state where 10 the offer is not permitted. You should assume that the information appearing in this prospectus, as well as information Heinz has previously filed with the Commission and are incorporating by reference, is accurate only as of the date on the front cover of this prospectus. Our and Heinz's business, financial condition, results of operations and prospects may have changed since that date. NO CASH PROCEEDS This exchange offer is intended to satisfy certain of our obligations under the exchange and registration rights agreement. We will not receive any proceeds from the issuance of the New Notes and have agreed to pay the expenses of the exchange offer. In consideration for issuing the New Notes as contemplated in the registration statement, of which this prospectus is a part, we will receive in exchange Old Notes in like principal amount. The form and terms of the New Notes are identical in all material respects to the form and terms of the Old Notes, except as otherwise described herein under "The Exchange Offer--Terms of the Exchange Offer." The Old Notes surrendered in exchange for the New Notes will be retired and canceled and cannot be reissued. Accordingly, issuance of the New Notes will not result in any increase in our outstanding debt. The net proceeds of the issuance of the Old Notes were used to retire commercial paper. RATIO OF EARNINGS TO FIXED CHARGES(1) Three Months Ended Year Ended ---------------------------------------------------------------------------------------- May 1, 2002 May 2, 2001 May 3, 2000 April 28, 1999 April 29, 1998 July 31, 2002 (52 weeks) (52 weeks) (52 weeks) (52 weeks) (52 weeks) ----------------------------------------------------------------------------------------- H. J. Heinz Company..... 4.48 4.88 2.79 5.83 3.88 5.29 H. J. Heinz Finance Company(2)........... 2.40 3.58 22.36 46.75 49.76 44.04
- ------------------- (1) The ratios of earnings to fixed charges were calculated by dividing earnings by fixed charges. Earnings were calculated by adding income before income taxes, interest expense (including amortization of debt expense and any discount or premium relating to indebtedness), the interest component of rental expense and the amortization of capitalized interest. Fixed charges were calculated by adding interest expense (including amortization of debt expense and any discount or premium relating to indebtedness), capitalized interest and the interest component of rental expense. (2) The ratios of earnings to fixed charges for the periods prior to May 1, 2002 relate to the U.S. Group and are not representative of the expected ratio of earnings to fixed charges for Heinz Finance as debt was not allocated to the U.S. Group prior to the reorganization discussed in this prospectus. 11 OVERVIEW OF ENTITY STRUCTURE, REORGANIZATION AND FINANCIAL STATEMENT PRESENTATION Reorganization On the first day of Fiscal Year 2002 (May 3, 2001) Heinz reorganized the structure of its U.S. business as follows: o Operations. All of the U.S. treasury and business operations, formerly conducted through eight subsidiaries and a division of Heinz were consolidated into Heinz LP. Heinz Management Company ("HMC"), a wholly-owned subsidiary of Heinz, is the general partner of Heinz LP and holds a 1% partnership interest. The limited partner interests in Heinz LP consist of "Class A" and "Class B" interests as described below under "--Heinz LP." Heinz owns all of the Class A interests. Heinz Finance owns all of the Class B interests. o Treasury. U.S. cash management and treasury activities were transferred to Heinz Finance. On the day of the reorganization, Heinz Finance assumed then outstanding term debt obligations of Heinz in the amount of $2.57 billion and $258 million of the commercial paper obligations of Heinz. Since the reorganization, Heinz Finance has issued term debt and commercial paper in its own name as described under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Financial Position." All of the debt of Heinz Finance is unconditionally guaranteed by Heinz and is included on the consolidated balance sheet of Heinz. On July 6, 2001, Heinz Finance issued $325 million of preferred stock to outside investors. The preferred shares are entitled to elect 25% of the directors of Heinz Finance and, if declared, are entitled to receive dividends at a rate of 6.226% per annum. o Trademarks. Substantially all of the trademarks used in the U.S. businesses (including "Heinz," "StarKist," "Ore-Ida," "Smart Ones," "9-Lives" and "Kibbles 'n Bits"), are owned by Promark International Inc., an indirect subsidiary of Heinz, and are licensed to us. We believe that the reorganization served the following business purposes: o Reduced the number of legal entities conducting active business in the U.S. from nine to two (Heinz LP and HMC), leading to a reduction of accounting, legal, administrative and tax compliance costs. This initiative complements Heinz's previous U.S. consolidation efforts, which over the past three years have included: o consolidation of its frozen businesses into Heinz Frozen Food Company and relocation of the new business to Pittsburgh; o relocation of the StarKist Seafood and Heinz Pet Products divisions to Pittsburgh; and o consolidation of Heinz U.S.A., StarKist, Heinz Pet Products and Heinz Sales Company into Heinz North America. o Consolidated all U.S. trademarks in Promark, supporting the reduction of our state income tax expense. On June 13, 2002, Heinz announced that it will transfer to a wholly-owned subsidiary certain assets and liabilities, including our U.S. pet food and pet snacks, our U.S. tuna, U.S. retail private label soup and private label gravy, College Inn broths and our U.S. infant feeding businesses, which in Fiscal Year 2002 together generated approximately $1.4 billion of our annual revenues. The common stock of the subsidiary will be distributed on a pro rata basis to Heinz's shareholders. Immediately thereafter, the subsidiary will merge with a wholly-owned subsidiary of Del Monte Foods Company, whereby the subsidiary will become a wholly-owned subsidiary of Del Monte Foods Company. In connection with the merger, each share of Spinco common stock will be automatically converted into 12 shares of Del Monte common stock that will result in the fully diluted Del Monte common stock at the effective time of the merger to be held approximately 74.5% by Heinz shareholders and approximately 25.5% by the Del Monte shareholders. As a result of the transaction, Heinz Finance will receive from Heinz approximately $1.1 billion in cash that will be used to retire debt. The transaction, which is subject to various conditions, is expected to be completed in late calendar year 2002 or early calendar year 2003. Heinz LP The ownership interests in Heinz LP consist of the general partner interest and the Class A and Class B limited partner interests. The material terms of the Second Amended and Restated Partnership Agreement are described below. o The general partner interest is held by HMC. The general partner has a 1% interest in cash distributions and partnership income. As of May 1, 2002, the general partner's interest in partnership capital was approximately .004%. o The Class A limited partnership interests are held by Heinz and two wholly-owned subsidiaries. The Class B limited partnership interests are held by Heinz Finance and one wholly-owned subsidiary. There is no overlap in ownership of the two classes of interests. o The Class A and Class B limited partners participate in distributions of cash and income on a basis that affords the Class B limited partner a preferred, but limited return. The mechanism is structured as follows: o The Class B limited partner is credited with a notional capital account equal to the fair market value (as determined by independent appraisals) of the assets contributed to Heinz LP. This capital balance is increased for the fair market value of subsequent asset contributions and decreased for extraordinary cash distributions resulting from sales of assets by Heinz LP and other transactions not in the ordinary course of business. o A LIBOR based index rate (reset quarterly) multiplied by the average balance of Class B capital equals the Class B preferred return for a quarter. The Class B preferred return plus interest thereon accumulates during any fiscal year. The preferred return resets to zero at the beginning of each year. o Distributions of operating cash flow of Heinz LP each year are applied as follows: o 95% to Class B limited partner, 4% to Class A limited partners and 1% to the general partner until the Class B limited partner has received 80% of the preferred return for the year. o 25% to Class B limited partner, 74% to Class A limited partners and 1% to the general partner until the Class B limited partner has received the remaining 20% of the preferred return for the year. o After the Class B limited partner has received 100% of the preferred return for the year, cash is distributed 5% to Class B limited partner, 94% to Class A limited partners and 1% to the general partner. o As of May 1, 2002, the fair market value of the partnership capital was $12.4 billion and the Class A limited partners' interest in partnership capital of Heinz LP was approximately 65.6% and the Class B limited partner's interest in partnership capital of Heinz LP was approximately 34.4%. The following diagram provides a summary overview of the ownership structure and significant affiliate relationships of Heinz Finance and Heinz. 13 [A graphic appears here depicting the basic corporate structure of H. J. Heinz Finance Company. The graphic shows H. J. Heinz Company as the owner of the common stock of Heinz Finance, and unrelated investors as the owners of the preferred stock of Heinz Finance. Heinz Finance is shown as the owner of the Class B interests in H. J. Heinz Company, LP, and Heinz is shown as the owner of the Class A and General Partner inerests in H. J. Heinz Company, LP.] Financial Statement Presentation For all Heinz financial reporting and disclosure purposes, Heinz Finance and its subsidiaries (including Heinz LP) are treated as fully consolidated subsidiaries. All of the assets, liabilities, results of operations and cash flows of these entities are included in the Heinz consolidated financial statements. All of the intercompany transactions and accounts are eliminated within the Heinz consolidated financial statements. The preferred shares issued by Heinz Finance are shown as minority interest in the Heinz consolidated financial statements. Heinz Finance's consolidated financial statements include the assets and liabilities, results of operations and cash flows of Heinz LP and all other subsidiaries of Heinz Finance. Under the partnership agreement, Heinz Finance has the power to control the general partner through majority membership on Heinz LP's management board. In the Heinz Finance consolidated statements, the general partner and Class A interests in Heinz LP, that are held by Heinz, are reflected as minority interest. The financial statements and the related management's discussion and analysis of financial condition and results of operations included herein for periods ending on or before May 2, 2001 relate to the U.S. businesses that were contributed to Heinz Finance on May 3, 2001. Results for these periods have been prepared using "carve-out" and "push-down" accounting methods. With respect to periods ending on or before May 2, 2001, the corporations and businesses described above are referred to as the "U.S. Group." For a more complete discussion of the presentation of the Heinz financial statements, please refer to the consolidated financial statements and accompanying notes included in Heinz's 2002 Annual Report on Form 10-K, which is incorporated herein by reference. 14 HEINZ FINANCE SELECTED HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL DATA The following table presents selected historical financial data of Heinz Finance and its predecessor. The following data, insofar as it relates to the fiscal year ended April 29, 1998, has been derived from annual financial statements of Heinz and was prepared utilizing the domestic segment information in the Heinz annual report and removing those items that are not part of the U.S. Group's operations. The data for the fiscal years ended May 1, 2002, May 2, 2001, May 3, 2000 and April 28, 1999 (Fiscal Year 2002, Fiscal Year 2001, Fiscal Year 2000 and Fiscal Year 1999, respectively) has been derived from financial statements audited by PricewaterhouseCoopers LLP, independent accountants. Consolidated and combined balance sheets at May 1, 2002 and May 2, 2001 and the related consolidated and combined statements of income and of cash flows for the three years ended May 1, 2002 and notes thereto appear elsewhere in this prospectus. The unaudited income statement data for the three months ended July 31, 2002 and August 1, 2001 and the unaudited balance sheet data as of July 31, 2002 have been derived from Heinz Finance's condensed consolidated financial statements for the three months ended July 31, 2002 and August 1, 2001 also appearing elsewhere in this prospectus. The balance sheet data as of August 1, 2001 was derived from Heinz Finance's unaudited condensed consolidated financial statements as of August 1, 2001, but not incorporated by reference in this prospectus. In the opinion of Heinz Finance management, such unaudited income statement and balance sheet data include all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of results of operations for those interim periods on a basis substantially consistent with that of the audited financial statements. Three Months Ended Fiscal Year ended ---------------------- ----------------------------------------------------------------- July 31, August 1, May 1, May 2, May 3, April 28, April 29, 2002 2001 2002 2001 2000 1999 1998 -------- --------- ------ ------ ------ --------- --------- (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (In thousands) Sales.................... $1,038,374 $ 492,261 $4,191,230 $4,550,391 $ 4,469,324 $ 4,687,123 $ 4,542,948 Operating income......... 115,121 79,243 616,755 438,069 609,337 578,398 664,858 Interest expense......... 50,542 52,173 206,578 10,278 7,138 6,266 7,621 Net income............... 4,254 15,907 73,717 306,898 448,295 432,757 -- Short-term debt with related parties and current portion of long-term debt........ 817,545 303,201 538,539 29,833 2,998 51,384 12,421 Long-term debt........... 3,973,334 3,705,999 3,936,025 23,932 33,071 25,594 47,063 Preferred stock.......... 325,000 325,000 325,000 -- -- -- -- Total assets............. 7,792,554 6,773,914 7,484,449 5,601,491 5,068,456 4,588,108 4,730,030
Sales for 2002, 2001 and 2000 reflect the Fiscal Year 2002 adoption of the new Emerging Issues Task Force ("EITF") guidelines relating to the classification of consideration from a vendor's products including both customer and consumers. Amounts previously reported for fiscal years ended 2001 and 2000 were $4,938,197 and $4,789,188, respectively, and for the three months ended August 1, 2001 were $556,739. Sales for fiscal years 1999 and earlier have not been adjusted to reflect the new EITF reclassification as it is impracticable to do so. The 2002 results include net restructuring and implementation benefits of $3.6 million pretax related to the Streamline initiative (as defined below). The 2001 results include restructuring and implementation costs of $84.7 million pretax relating to Streamline and net restructuring and implementation costs of $173.3 million pretax for Operation Excel (as defined below). Results also include a loss of $94.6 million on the sale of The All American Gourmet business and attempted acquisition cost of $18.5 million pretax. The 2000 results include net restructuring and implementation costs of $175.8 million pretax for Operation Excel. 15 The 1999 results include net restructuring and implementation costs of $156.1 million pretax for Operation Excel and costs of $9.4 million pretax related to the implementation of Project Millennia (as defined below), offset by the reversal of unutilized Project Millennia accruals for severance and exit costs of $16.6 million pretax. The 1998 results include costs of $30.2 million pretax related to the implementation of Project Millennia. Project Millennia was a reorganization and restructuring program commencing in the fourth quarter of the fiscal year ended April 30, 1997, which was designed to strengthen the U.S. Group's core businesses and improve profitability and global growth. Key initiatives focused on process changes and product line rationalizations. Operation Excel was a growth and restructuring initiative that commenced in the fiscal year ended April 28, 1999, which created manufacturing centers of excellence, focused the product portfolio, realigned management teams and invested in growth activities. In the fourth quarter of Fiscal Year 2001, Heinz announced a restructuring initiative named "Streamline." This initiative includes organization restructuring aimed at reducing overhead costs and the consolidation of the canned pet food production to Bloomsburg, Pennsylvania. 16 HEINZ FINANCE SELECTED UNAUDITED PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL DATA The following table presents selected unaudited pro forma financial data of Heinz Finance and its predecessor for the three months ended July 31, 2002 and August 1, 2001 and for Fiscal Year 2002, Fiscal Year 2001 and Fiscal Year 2000. Such pro forma financial statements adjust the historical statements to give pro forma effect of the following: o The transfer of certain assets and liabilities of our U.S. tuna, U.S. pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses to a wholly-owned subsidiary of Heinz ("Spinco"). o The repayment of $1.1 billion of debt with the cash Heinz Finance will receive as a result of the merger of Spinco, immediately following the transfer, with a wholly-owned subsidiary of Del Monte Foods Company ("Del Monte"). See Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the agreement between Heinz and Del Monte. The unaudited pro forma consolidated balance sheet has been prepared as if the transaction occurred as of July 31, 2002. The unaudited pro forma consolidated and combined statements of income have been prepared as if the transaction occurred as of the earliest periods presented. This information should be read in conjunction with the historical and pro forma financial statements and related notes included elsewhere in this prospectus. Three Months Ended Fiscal Year ended ---------------------- ------------------------------------ July 31, August 1, May 1, May 2, May 3, 2002 2001 2002 2001 2000 -------- --------- ---------- ---------- ---------- (52 Weeks) (52 Weeks) (53 Weeks) (in thousands) Sales.......................................................... $ 689,279 $401,306 $2,833,517 $2,806,020 $2,526,238 Operating income............................................... 91,462 56,624 447,826 439,511 493,663 Interest expense............................................... 33,305 36,188 142,920 20,712 5,027 Net income from continuing operations.......................... 6,773 25,335 109,421 273,685 331,350 Short-term debt with related parties and current portion of long-term debt.............................................. 367,520 Long-term debt................................................. 3,323,234 Preferred stock................................................ 325,000 Total assets................................................... 5,336,202
17 H. J. HEINZ COMPANY H. J. Heinz Company was incorporated under the laws of the Commonwealth of Pennsylvania on July 27, 1900. In 1905, it succeeded to the business of a partnership operating under the same name that had developed from a food business founded in 1869 at Sharpsburg, Pennsylvania by Henry J. Heinz. The principal products of Heinz include ketchup, condiments and sauces, frozen food, pet products, soups, beans and pasta meals, tuna and other seafood products, infant food and other processed food products. The principal executive offices of Heinz are located at 600 Grant Street, Pittsburgh, Pennsylvania 15219. HEINZ SELECTED CONSOLIDATED FINANCIAL DATA The following tables contain selected financial data for H. J. Heinz Company and its consolidated subsidiaries. The income statement data for the fiscal years ended May 1, 2002 (Fiscal Year 2002), May 2, 2001 (Fiscal Year 2001) and May 3, 2000 (Fiscal Year 2000), and the balance sheet data as of May 1, 2002 and May 2, 2001 are derived from the consolidated financial statements included in the Heinz's 2002 Annual Report on Form 10-K, which is incorporated herein by reference, and which were audited by PricewaterhouseCoopers LLP, whose reports also appear in the Annual Report. The income statement data for the fiscal years ended April 28, 1999 (Fiscal Year 1999) and April 29, 1998 (Fiscal Year 1998) and the balance sheet data as of May 3, 2000, April 28, 1999 and April 29, 1998 are derived from consolidated financial statements audited by PricewaterhouseCoopers LLP, but not incorporated by reference in this prospectus. The unaudited income statement data for the three months ended July 31, 2002 and August 1, 2001 and the unaudited balance sheet data as of July 31, 2002 are derived from Heinz's unaudited condensed consolidated financial statements for the three months ended July 31, 2002 and August 1, 2001 included in Heinz's Quarterly Report on Form 10-Q for the three months ended July 31, 2002, which is incorporated herein by reference. The balance sheet data as of August 1, 2001 was derived from Heinz's unaudited condensed consolidated financial statements as of August 1, 2001, but not incorporated by reference in this prospectus. In the opinion of Heinz management, such unaudited income statement and balance sheet data include all adjustments, consisting of those of a normal and recurring nature, necessary for a fair statement of results of operations for those interim periods on a basis substantially consistent with that of the audited financial statements. For all Heinz financial reporting and disclosure purposes, Heinz Finance and its subsidiaries (including Heinz LP) are treated as fully consolidated subsidiaries. All of the assets and liabilities, results of operations and cash flows of these entities are included in the Heinz consolidated financial statements. All of the intercompany transactions and accounts are eliminated within the Heinz consolidated financial statements. The preferred shares issued by Heinz Finance are shown as minority interest in the Heinz consolidated financial statements. Three Months Ended Fiscal Year ended ---------------------- ----------------------------------------------------------------- July 31, August 1, May 1, May 2, May 3, April 28, April 29, 2002 2001 2002 2001 2000 1999 1998 -------- --------- ------ ------ ------ --------- --------- (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (In thousands, except per share amounts) Sales............................ $2,203,645 $2,077,295 $9,431,000 $8,820,884 $8,939,416 $9,299,610 $9,209,284 Operating income................. 345,132 384,154 1,590,471 982,354 1,733,099 1,109,312 1,520,330 Interest expense................. 69,090 75,547 294,269 332,957 269,748 258,813 258,616 Net income....................... 177,795 200,474 833,889 478,012 890,553 474,341 801,566 Net income per share-diluted..... .50 .57 2.36 1.36 2.47 1.29 2.15 Net income per share-basic.... .51 .57 2.38 1.37 2.51 1.31 2.19 Short-term debt and current portion of long-term debt..... 723,128 539,478 702,645 1,870,834 176,575 904,207 339,626 Long-term debt, exclusive of current portion............... 4,695,433 4,429,002 4,642,968 3,014,853 3,935,826 2,472,206 2,768,277 Total assets..................... 10,431,616 9,335,237 10,278,354 9,035,150 8,850,657 8,053,634 8,023,421 Cash dividends per common share.. .4050 .3925 1.6075 1.5450 1.4450 1.3425 1.2350
18 Sales for 2002, 2001 and 2000 reflect the Fiscal Year 2002 adoption of the new EITF guidelines relating to the classification of consideration from a vendor's products, including both customer and consumers. Amounts previously reported for fiscal years ended 2001 and 2000 were $9,430,422 and $9,407,949, respectively, and for the three months ended August 1, 2001 were $2,185,479. Sales for fiscal years 1999 and earlier have not been adjusted to reflect the new EITF reclassifications as it is impracticable to do so. In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests in accordance with the new Statements. Other intangible assets continue to be amortized over their estimated useful lives. Heinz applied these new rules of accounting for goodwill and other intangible assets beginning in the first quarter of Fiscal Year 2003. The effects of adopting the new standards on net income for Fiscal Year 2002, Fiscal Year 2001 and Fiscal Year 2000 follows: Net Income Diluted EPS ------------------------------------- --------------------------- Fiscal Year Fiscal Year ------------------------------------- --------------------------- 2002 2001 2000 2002 2001 2000 -------- -------- -------- ----- ----- ----- Net income............................ $833,889 $478,012 $890,553 $2.36 $1.36 $2.47 Add: Goodwill amortization............ 53,775 44,902 41,021 0.16 0.13 0.12 Trademark amortization............. 8,520 8,332 8,522 0.02 0.02 0.02 -------- -------- -------- ----- ----- ----- Net income excluding goodwill and trademark amortization................ $896,184 $531,246 $940,096 $2.54 $1.51 $2.61 ======== ======== ======== ===== ===== =====
The results for the three months ended July 31, 2002 include Del Monte transaction related costs and costs to reduce overhead of the remaining core businesses of $18.4 million pretax. The results for the three months ended August 1, 2001 include net restructuring charges and implementation costs of $16.1 million pretax for the Streamline initiative. The 2002 results include net restructuring and implementation costs of $17.9 million pretax for the Streamline initiative. The 2001 results include restructuring and implementation costs of $298.8 million pretax for the Streamline initiative, net restructuring and implementation costs of $288.5 million pretax for Operation Excel, a benefit of $93.2 million from tax planning and new tax legislation in Italy, a loss of $94.6 million pretax on the sale of The All American Gourmet business, attempted acquisition costs of $18.5 million pretax, a loss of $5.6 million pretax which represents Heinz's equity loss associated with The Hain Celestial Group's fourth quarter results which included charges for its merger with Celestial Seasonings and the after-tax impact of adopting SAB No. 101 and SFAS No. 133 of $16.9 million. The 2000 results include net restructuring and implementation costs of $392.7 million pretax for Operation Excel, a pretax contribution of $30.0 million to the H. J. Heinz Company Foundation, costs related to Heinz's Ecuador tuna processing facility of $20.0 million pretax, a gain of $464.6 million pretax on the sale of the Weight Watchers classroom business and a gain of $18.2 million pretax on the sale of an office building in the United Kingdom. The 1999 results include restructuring and implementation costs of $552.8 million pretax for Operation Excel and costs of $22.3 million pretax related to the implementation of Project Millennia, offset by the reversal of unutilized Project Millennia accruals for severance and exit costs of $25.7 million pretax and a gain of $5.7 million pretax on the sale of the bakery products units. 19 Results recorded in 1998 include costs of $84.1 million pretax related to the implementation of Project Millennia, offset by the gain on the sale of the Ore-Ida frozen foodservice business, $96.6 million pretax. 20 HEINZ SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The following table presents selected unaudited pro forma financial data of Heinz for the three months ended July 31, 2002 and August 1, 2001 and for Fiscal Year 2002, Fiscal Year 2001 and Fiscal Year 2000. Such pro forma financial statements adjust the historical statements to give pro forma effect of the following: o The transfer of certain assets and liabilities of Heinz's U.S. tuna, U.S. and Canadian pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses to Spinco. o The repayment of $1.1 billion of debt with the cash Heinz will receive as a result of the merger of Spinco, immediately following the transfer, with a wholly-owned subsidiary of Del Monte. See Heinz's Management's Discussion and Analysis of Financial Condition and Results of Operations in its Quarterly Report on Form 10-Q for the quarter ended July 31, 2002 for further discussion of the agreement between Heinz and Del Monte. The unaudited pro forma consolidated balance sheet has been prepared as if the transaction occurred as of July 31, 2002. The unaudited pro forma consolidated statements of income have been prepared as if the transaction occurred as of the earliest periods presented. This information should be read in conjunction with Heinz's historical and pro forma financial statements and related notes included elsewhere in this prospectus. Three Months Ended Fiscal Year ended ---------------------- ------------------------------------ July 31, August 1, May 1, May 2, May 3, 2002 2001 2002 2001 2000 -------- --------- ---------- ---------- ---------- (52 Weeks) (52 Weeks) (53 Weeks) (in thousands) Sales................................................ $1,839,314 $1,675,541 $7,614,036 $6,987,698 $6,892,807 Operating income..................................... 295,897 315,806 1,299,872 988,959 1,489,222 Interest expense..................................... 51,853 59,793 230,611 262,488 206,996 Net income from continuing operations................ 154,372 166,566 675,181 548,650 780,145 Short-term debt and current portion of long-term debt 273,128 Long-term debt....................................... 4,045,433 Total shareholders' equity........................... 1,336,404 Total assets......................................... 8,538,911
21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion in conjunction with the audited consolidated and combined financial statements and the notes to our audited consolidated and combined financial statements included elsewhere in this prospectus. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. Please see "Forward-Looking Statements" and "Risk Factors" for a discussion of the uncertainties, risks and assumptions associated with these statements. Overview Reorganization On the first day of Fiscal Year 2002 (May 3, 2001), Heinz reorganized the structure of its U.S. business as we describe in "Overview of Entity Structure, Reorganization and Financial Statement Presentation." The reorganization of our operations, treasury and trademark activities is summarized below. o Operations. All of the U.S. treasury and business operations, formerly conducted through eight subsidiaries and a division of Heinz were consolidated into Heinz LP. Heinz Management Company, a wholly-owned subsidiary of Heinz, is the general partner of Heinz LP and holds a 1% interest. The limited partner interests in Heinz LP consist of "Class A" and "Class B" interests as described under "Overview of Entity Structure, Reorganization and Financial Statement Presentation--Reorganization--Heinz LP." Heinz owns all of the Class A interests. H. J. Heinz Finance Company owns all of the Class B interests. o Treasury. U.S. cash management and treasury activities were transferred to Heinz Finance. On the day of the reorganization, Heinz Finance assumed all of the then outstanding term debt obligations of Heinz in the amount of $2.57 billion and $258 million of the commercial paper obligations of Heinz. Since the reorganization, Heinz Finance has issued term debt and commercial paper in its own name as described under "--Liquidity and Financial Position." All of the debt of Heinz Finance is unconditionally guaranteed by Heinz and is included on the consolidated balance sheet of Heinz. On July 6, 2001, Heinz Finance issued $325 million of preferred stock to outside investors. The preferred shares are entitled to elect 25% of the directors of Heinz Finance and, if declared, are entitled to receive dividends at a rate of 6.226% per annum. o Trademarks. Substantially all of the trademarks used in the U.S. businesses (including "Heinz," "Star-Kist," "Ore-Ida," "Smart Ones," "9-Lives" and "Kibbles 'n Bits"), are owned by Promark International Inc., an indirect subsidiary of Heinz, and are licensed to us. Financial Statement Presentation For all Heinz financial reporting and disclosure purposes, Heinz Finance and its subsidiaries (including Heinz LP) are treated as fully consolidated subsidiaries. All of the assets, liabilities, results of operations and cash flows of these entities are included in the Heinz consolidated financial statements. All intercompany transactions and accounts are eliminated within the Heinz consolidated financial statements. The preferred shares issued by Heinz Finance are shown as minority interest in the Heinz consolidated financial statements. Heinz Finance's consolidated financial statements included the assets and liabilities, results of operations and cash flows of Heinz LP, as under the partnership agreement, Heinz Finance has the power to control the general partner through majority membership on Heinz LP's management board, and all other subsidiaries of Heinz Finance. In the Heinz Finance consolidated statements, the general partner and Class A interests in Heinz LP, that are held by Heinz, are reflected as minority interest. 22 The financial statements and the related management's discussion and analysis of financial condition and results of operations included herein for periods ending on or before May 2, 2001 related to the U.S. businesses that were contributed to Heinz Finance on May 3, 2001. Results of these periods have been prepared using "carve-out" and "push-down" accounting methods. With respect to periods ending on or before May 2, 2001, the corporations and businesses described above are referred to as the "U.S. Group." Substantially all assets and liabilities of the U.S. Group which are included in the Fiscal Year 2001 "carve out" balance sheet, except finished goods inventories of approximately $407 million, which were retained by Heinz, were contributed to Heinz Finance. These retained inventories resulted in reduced sales in Fiscal Year 2002 when compared to Fiscal Years 2001 and 2000. The sales and operating results related to the retained inventories were recorded on the consolidated financial statements of Heinz. Segment Data We report our business in three segments as follows: o Heinz North America -- This segment manufactures, markets and sells ketchup, condiments, sauces, soups, pasta meals and infant foods to the grocery and foodservice channels. o U.S. Pet Products and Seafood -- This segment manufactures, markets and sells dry and canned pet food, pet snacks, tuna and other seafood. o U.S. Frozen -- This segment manufactures, markets and sells frozen potatoes, entrees, snacks and appetizers. Special Items Agreement between H. J. Heinz Company and Del Monte Foods Company On June 13, 2002, Heinz announced that it will transfer to a wholly-owned subsidiary ("Spinco") certain assets and liabilities of our U.S. pet food and pet snacks, U.S. tuna, U.S. retail private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which are owned by Heinz Finance, and distribute all of the shares of Spinco common stock on a pro rata basis to its shareholders. Immediately thereafter, Spinco will merge with a wholly-owned subsidiary of Del Monte Foods Company ("Del Monte"), resulting in Spinco becoming a wholly-owned subsidiary of Del Monte ("the Merger"). In connection with the Merger, each share of Spinco common stock will be automatically converted into shares of Del Monte common stock that will result in the fully diluted Del Monte common stock at the effective time of the Merger being held approximately 74.5% by Heinz shareholders and approximately 25.5% by the Del Monte shareholders. As a result of the transaction, Heinz Finance will receive from Heinz approximately $1.1 billion in cash that will be used to retire debt. Included in the transaction will be the following brands: StarKist, 9-Lives, Kibbles 'n Bits, Pup-Peroni, Snausages, Nawsomes, Heinz Nature's Goodness baby food and College Inn broths. The following is a summary of the Fiscal Year 2003 and Fiscal Year 2002 first quarter operating results of the businesses to be spun off. The significant increase in the revenue amounts between these two periods is a result of the finished goods inventories which were not contributed to Heinz Finance on May 3, 2001 as discussed previously in "--Overview--Financial Statement Presentation." First Quarter Ended ------------------- July 31, 2002 August 1, 2001 ------------- -------------- Revenues........................... $349,095 $90,955 Operating income................... 23,659 17,216 The Merger, which has been approved by the Boards of Directors of Heinz and Del Monte, is subject to the approval by the shareholders of Del Monte. Heinz received on November 21, 2002, a private letter ruling from the 23 Internal Revenue Service that the contribution of the assets and liabilities to Spinco and the distribution of the shares of common stock of Spinco to Heinz shareholders will be tax-free to Heinz, Spinco and the shareholders of Heinz. The Merger is also subject to customary closing conditions. The transaction is not expected to close until late calendar year 2002 or early in calendar year 2003. During the first quarter of Fiscal Year 2003, Heinz Management Company recognized transaction related costs and costs to reduce overhead of the remaining core businesses totaling $6.3 million pretax. These costs were then charged to Heinz Finance through the management fee charged to Heinz Finance by Heinz Management Company for all salaried employee costs. Heinz Finance anticipates transaction related and restructuring costs of approximately $160 million after tax to be incurred in Fiscal Year 2003. Streamline In the fourth quarter of Fiscal Year 2001, Heinz announced a restructuring initiative named "Streamline" which includes an organizational restructuring aimed at reducing overhead costs and the consolidation of Heinz Finance's canned pet food production to Bloomsburg, Pennsylvania (which resulted in ceasing canned pet food production at Heinz Finance's Terminal Island, California facility). Pretax savings generated from Streamline were approximately $10 million in Fiscal Year 2002 and are projected to grow to an estimated $15 million a year beginning in Fiscal Year 2003. Non-cash savings are expected to be less than $3 million per year. The total cost of this initiative will be approximately $80 million. During the first quarter of Fiscal Year 2002, Heinz Finance recognized implementation costs totaling $1.2 million pretax. In the fourth quarter of Fiscal Year 2002, Heinz Finance recorded a benefit of $4.7 million pretax to reflect revisions in original cost estimates. This benefit was primarily the result of lower than expected contract exit costs associated with Heinz Finance's Terminal Island, California facility. Total Fiscal Year 2002 pretax charges of $1.1 million were classified as cost of products sold and a pretax benefit of $4.6 million is classified as selling, general and administrative expense ("SG&A"). In addition, HMC assumed $4.4 million of the Heinz Finance's restructuring liability as a result of the realignment that occurred on May 3, 2001. During Fiscal Year 2001, Heinz Finance recognized restructuring charges and implementation costs totaling $84.7 million pretax. Pretax charges of $65.3 million were classified as cost of products sold and $19.4 million as SG&A. Implementation costs were recognized as incurred in Fiscal Year 2002 ($1.2 million pretax) and Fiscal Year 2001 ($11.8 million pretax) and consist of incremental costs directly related to the implementation of the Streamline initiative. These costs include idle facility costs, consulting fees, cost premiums related to production transfers and relocation costs. In Fiscal Year 2001, Heinz Finance ceased production of canned pet food in its Terminal Island, California facility. In Fiscal Year 2002, Heinz Finance continued and substantially completed its overhead reduction plan. These actions resulted in a net reduction of Heinz Finance's workforce of approximately 200 employees. Operation Excel In Fiscal Year 1999, Heinz announced a growth and restructuring initiative, named "Operation Excel." This initiative was a multi-year, multi-faceted program which established manufacturing centers of excellence, focused the product portfolio, realigned Heinz Finance's management teams and invested in growth initiatives. As part of Operation Excel, Heinz Finance established manufacturing centers of excellence that resulted in significant changes to Heinz Finance's manufacturing footprint. In addition, Heinz Finance focused its portfolio of product lines on six core food categories: ketchup, condiments and sauces; frozen foods; tuna; soup, beans and pasta meals; infant foods; and pet products. A consequence of this focus on the core categories was the sale of two smaller businesses, which had combined annual revenues of approximately $15 million. 24 A major element of Operation Excel was the realignment of Heinz Finance's management teams to provide processing and product expertise. Growth initiatives included relaunching many of our core brands and additional investments in marketing and pricing programs for our core businesses, particularly in ketchup, condiments and sauces, frozen foods, infant foods and tuna. The pretax savings generated from Operation Excel initiatives were approximately $40 million in Fiscal Year 2000, $70 million in Fiscal Year 2001 and $85 million in Fiscal Year 2002 and are projected to grow to approximately $95 million in Fiscal Year 2003 and thereafter. Heinz Finance substantially completed Operation Excel. During Fiscal Year 2002, HMC assumed $11.1 million of the Heinz Finance's restructuring liability as a result of the realignment that occurred on May 3, 2001. During Fiscal Year 2001, Heinz Finance recognized restructuring charges of $44.8 million pretax. These charges were associated with exiting Heinz Finance's can making operations, which were sold during Fiscal Year 2001, and higher than originally expected severance costs associated with creating the single U.S. Grocery & Foodservice headquarters in Pittsburgh, Pennsylvania. This charge was recorded in cost of products sold ($36.3 million) and SG&A ($8.5 million). This charge was offset by reversals of unutilized Operation Excel accruals and asset write-downs of $21.0 million pretax. These reversals were recorded in cost of products sold ($8.2 million) and SG&A ($12.7 million) and were primarily the result of revisions in estimates of fair values of assets which were disposed of as part of Operation Excel and Heinz Finance's decision not to exit certain warehouses due to higher than expected volume growth. Implementation costs of $149.5 million pretax were also recognized in Fiscal Year 2001. These costs were classified as costs of products sold ($62.2 million) and SG&A ($87.3 million). During Fiscal Year 2000, Heinz Finance recognized restructuring charges of $95.3 million pretax. Pretax charges of $53.5 million were classified as cost of products sold and $41.8 million as SG&A. Also during Fiscal Year 2000, Heinz Finance recorded a reversal of $16.4 million pretax in cost of products sold of Fiscal Year 1999 restructuring accruals and asset write-downs, primarily for the closure of the West Chester, Pennsylvania facility, which remains in operation as a result of the sale of the Bloomsburg frozen pasta facility in Fiscal Year 2000. Implementation costs of $96.9 million pretax were classified as cost of products sold ($33.7 million) and SG&A ($63.2 million). During Fiscal Year 1999, Heinz Finance recognized restructuring charges and implementation costs totaling $156.1 million pretax. Pretax charges of $94.3 million were classified as cost of products sold and $61.8 million as SG&A. Implementation costs were recognized as incurred and consisted of incremental costs directly related to the implementation of Operation Excel, including consulting fees, employee training and relocation costs, unaccruable severance costs associated with terminated employees, equipment relocation costs and commissioning costs. Heinz Finance has closed or exited all of the five factories that were scheduled for closure. In addition, Heinz Finance also exited its can making operations. Operation Excel impacted approximately 1,700 employees with a net reduction in the workforce of approximately 1,400 after expansion of certain facilities. The exit of Heinz Finance's can making operations resulted in a reduction of the workforce of approximately 500 employees. During Fiscal Year 2001, Fiscal Year 2000 and Fiscal Year 1999, Heinz Finance's workforce had a net reduction of approximately 700 employees, 500 employees and 200 employees, respectively. Acquisitions and Divestitures The following acquisitions were made by Heinz Finance or its predecessor: 25 Fiscal Year 2002 o Borden Food Corporation's pasta sauce, dry bouillon and soup businesses - In this transaction, we acquired such brands as Classico pasta sauces, Aunt Millie's pasta sauce, Mrs. Grass Recipe soups and Wyler's bouillons and soups. o Anchor Food Products branded retail business - In this transaction, we acquired the Popper's brand of retail appetizer lines and licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers. o Delimex Holdings, Inc. - Delimex is a producer of frozen taquitos, tightly rolled fried corn and flour tortillas with fillings such as beef, chicken or cheese. Delimex also makes quesadillas, tamales and rice bowls. o Heinz Finance also made other smaller acquisitions. Fiscal Year 2001 o Cornucopia, Inc. and Central Commissary - Two privately held U.S. foodservice companies which make and market refrigerated and frozen reciped food products. o IDF Holdings, Inc., the parent of International DiverseFoods Inc. - A manufacturer of customized dressings, sauces, mixes and condiments for restaurant chains and foodservice distributors. o Alden Merrell Corporation - A manufacturer of high-quality, premium-priced frozen desserts for casual dining restaurants and foodservice distributors. o Additional investment in The Hain Celestial Group, Inc. ("Hain") restoring our ownership interest to approximately 19.5% of the outstanding stock. Fiscal Year 2000 o Quality Chef Foods - A manufacturer of frozen heat-and-serve soups, entrees and sauces. o Yoshida - A line of Asian sauces marketed in the U.S. o Thermo Pac, Inc. - A U.S. provider of single-serve condiments. o A strategic alliance with and investment in Hain for the global production and marketing of natural and organic foods and soy-based beverages. During Fiscal Year 2001, the U.S. Group divested the All American Gourmet business and its Budget Gourmet and Budget Gourmet Value Classics brands of frozen entrees. Results of Operations During the fourth quarter of Fiscal Year 2002, Heinz Finance adopted EITF statements relating to the classification of vendor consideration and certain sales incentives. The adoption of these EITF statements has no impact on operating income or net income; however, revenues were reduced by approximately $65 million for the three months ended August 1, 2001, $437 million in Fiscal Year 2002, $388 million in Fiscal Year 2001 and $320 million in Fiscal Year 2000. Prior period data has been reclassified to conform with current year presentation. 26 Three Months Ended July 31, 2002 versus Three Months Ended August 1, 2001 Sales For the three months ended July 31, 2002, sales increased $546.1 million, or 110.9%, to $1,038.4 million from $492.3 million last year. Sales were favorably impacted by acquisitions (15.5%) and pricing (2.9%). The favorable impact of acquisitions is primarily related to the prior year acquisitions in the Heinz North American and U.S. Frozen segments. Sales were also positively impacted by favorable volumes of 93.6%. This volume increase is a result of the finished goods inventories which were not contributed to Heinz Finance on May 3, 2001 as previously discussed in "--Overview--Financial Statement Presentation" ($520.7 million) partially offset by volume decreases from the current year strategic shift from trade promotional spending to consumer focused promotional and marketing programs. This strategic shift has caused a realignment of promotional timing. Additionally, Heinz Finance is increasing its focus on trade spending efficiency and effectiveness. Divestitures reduced sales 1.1%. Sales of the Heinz North America segment increased $204.6 million, or 70.4%. Acquisitions, net of divestitures, increased sales 6.5%, due primarily to the prior year acquisitions of Classico and Aunt Millie's pasta sauce, Mrs. Grass Recipe soups and Wyler's bouillons and soups. Higher pricing increased sales 4.5%, due mainly to foodservice, private label soup and reduced trade promotions on retail ketchup and baby food. Sales volume increased 59.4%, primarily due to the finished goods inventories which were retained by Heinz and volume increases in specialty sauces and private label soup partially offset by decreases in retail ketchup and infant feeding. Shipments of retail ketchup are down due to the ongoing trade initiatives to reduce inventory levels. Sales of the U.S. Pet Products and Seafood segment increased $206.3 million, or 231.4%. Sales volume increased 241.5% primarily due to the finished goods inventories which were retained by Heinz and volume increases in tuna partially offset by decreases in pet snacks, canned cat food and dry dog food. Lower pricing decreased sales 10.1%, primarily in tuna partially offset by lower trade promotions and higher pricing of pet food. Pet volume and pricing was impacted by the current year strategic shift from trade promotional spending to consumer focused promotional and marketing programs and the timing of these promotional programs. U.S. Frozen's sales increased $135.2 million, or 120.1%. Acquisitions, net of divestitures, increased sales 46.4%, due primarily to the prior year acquisitions of Delimex frozen Mexican foods, Anchor's Poppers retail frozen appetizers and licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers. Higher pricing increased sales 9.0%, primarily due to Smart Ones frozen entrees and a reduction in trade promotions related to the launch of Hot Bites in the prior year. Sales volume increased 64.8% driven by the finished goods inventories retained by Heinz partially offset by volume decreases in Bagel Bites/Hot Bites, Boston Market HomeStyle Meals and frozen potatoes as well as volume decreases resulting from the rationalization of the Hot Bites product lines with increased focus on the base Bagel Bites business and the timing of promotional and marketing programs across the segment. Gross profit Gross profit increased $178.9 million, or 104.0%, to $350.7 million from $171.9 million and the gross profit margin decreased to 33.8% from 34.9%. Gross profit across all of our segments was favorably impacted as a result of the retention of finished goods inventories by Heinz on May 3, 2001 as discussed above. In addition, this increase is a result of the current year benefit of approximately $9.2 million related to the non-amortization of intangible assets with indefinite lives. Heinz North America's gross profit increased $76.8 million, or 75.2%, due primarily to inventories retained by Heinz, acquisitions, pricing and the benefit of reduced amortization expense of intangible assets, partially offset by unfavorable sales mix. U.S. Seafood and Pet Product's gross profit increased $40.8 million, or 123.0% primarily due to inventories retained by Heinz, reduced trade promotion spending in tuna and the benefit of reduced amortization expense of intangible assets partially offset by lower pricing and higher tuna costs and lower volume of pet snacks. 27 U.S. Frozen's gross profit increased $61.2 million, or 165.3%, due primarily to inventories retained by Heinz and acquisitions partially offset by the volume decreases discussed above. SG&A SG&A increased $121.1 million, or 174.0%, to $190.7 million from $69.6 million and increased as a percentage of sales to 18.4% from 14.1%. This increase is primarily attributable to the increase in sales, increased marketing spend across all segments and increased general and administrative expenses ("G&A") in the Heinz North America segment. Operating income Operating income increased $35.9 million, or 45.3%, to $115.1 million from $79.2 million and decreased as a percentage of sales 11.1% from 16.1%, primarily related to the change in gross profit partially offset by the increase in SG&A discussed above and a $21.8 million increase in royalty expense to related parties resulting from the finished goods inventories retained by Heinz. Heinz North America's operating income increased $18.2 million, or 40.7%, to $62.9 million from $44.7 million, due primarily to acquisitions and the change in gross profit partially offset by increased marketing, higher G&A and higher royalty expense to related parties resulting from the finished goods inventories retained by Heinz. U.S. Seafood and Pet Product's operating income decreased $0.5 million, or 3.5% to $13.6 million from $14.1 million, due to increases in SG&A and royalty expense to related parties resulting from the finished goods inventories retained by Heinz offset by the increase in gross profit. U.S. Frozen's operating income increased $17.8 million, or 83.0%, to $39.1 million from $21.4 million primarily due to inventories retained by Heinz partially offset by increased marketing and selling and distribution expenses. Other items Net interest expense increased $3.5 million to $44.0 million from $40.4 million last year, driven primarily by decreased interest income resulting from lower net short term notes receivable with related parties partially offset by lower interest expense due to lower interest rates over the past year. A currency loss of $22.1 million in the current year and a gain of $2.4 million in the prior year was recognized related to the mark-to-market adjustment on Euro- denominated long-term debt. Other expense decreased $0.8 million to $3.0 million from $2.2 million. The effective tax rate for the current quarter was 3.1% compared to 12.0% last year. This decrease is primarily a result of the elimination of goodwill amortization due to the adoption of SFAS No. 142 in the current quarter and the increased minority interest in Heinz LP balance in the current quarter, which is nontaxable. Net income in the current quarter decreased $11.7 million, or 73.3%, to $4.3 million compared to $15.9 million last year. Fiscal Year 2002 versus Fiscal Year 2001 Sales Sales for Fiscal Year 2002 decreased $359.2 million, or 7.9%, to $4.19 billion from $4.55 billion in Fiscal Year 2001. Acquisitions increased sales by $511.9 million, or 11.2%. Offsetting this improvement were decreases from lower pricing of $78.8 million, or 1.7%, divestitures of $100.3 million, or 2.2%, and volume decreases of $691.9 million, or 15.2%. The majority of the volume decrease ($666.2 million) is a result of the finished goods inventories which were not contributed to Heinz Finance as previously discussed. 28 The favorable impact of acquisitions is primarily related to Classico and Aunt Millie's pasta sauces, Mrs. Grass Recipe soups and Wyler's bouillons and soups in the North American segment, and Delimex frozen Mexican foods, Anchor's Poppers retail frozen appetizers and licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers in the U.S. Frozen segment. Sales of the Heinz North America segment decreased $142.0 million, or 6.6%. Acquisitions, net of divestitures, increased sales 10.9%. Lower pricing decreased sales 3.1%, primarily related to increased marketing spend across all major brands and to foodservice ketchup. Sales volume decreased 14.5%, primarily due to the finished goods inventories which were not contributed to Heinz Finance as well as decreases in the foodservice business, steak sauces and infant feeding, partially offset by volume increases in soups and grilling sauces. Sales of the U.S. Pet Products and Seafood segment decreased $313.0 million, or 21.8%. Unfavorable pricing decreased sales 0.2%, primarily in pet food and pet snacks, partially offset by higher pricing of tuna. Sales volume decreased 21.4%, primarily due to the finished goods inventories which were not contributed to Heinz Finance, as well as decreases in pet food, partially offset by volume increases in pet snacks and tuna. Divestitures decreased sales 0.3%. U.S. Frozen's sales increased $95.9 million, or 9.9%. Acquisitions increased sales 26.5%. Sales volume decreased 7.7% due primarily to the finished goods inventories which were not contributed to Heinz Finance as well as decreases in frozen potatoes partially offset by volume increases in Smart Ones frozen entrees, Boston Market HomeStyle Meals and Bagel Bites snacks. Lower pricing decreased sales 1.0%, primarily due to increased marketing spend across all major brands and lower pricing in Boston Market HomeStyle Meals, partially offset by higher pricing of Smart Ones frozen entrees and frozen potatoes. Divestitures reduced sales by 7.9% due to the sale of Budget Gourmet. Special Items Fiscal Year 2002's results were positively impacted by a net Streamline restructuring and implementation benefit totaling $3.6 million pretax. Pretax charges of $1.1 million were classified as cost of products sold and a pretax benefit of $4.6 million is classified as SG&A. Fiscal Year 2001's results were negatively impacted by special items which net to $251.0 million after-tax. The following tables provide a comparison of Heinz Finance's reported results and the results excluding special items for Fiscal Year 2002 and Fiscal Year 2001. Fiscal Year (52 Weeks) Ended May 1, 2002 ------------------------------------------------- Operating Net Net Sales Gross Profit Income Income --------- ------------ ------ ------ (Dollars in millions) Reported results $4,191.2 $1,446.9 $616.8 $73.7 Revisions to restructuring accruals and asset write-downs- Fourth Quarter 2002....................................... - - (4.7) (4.1) Streamline implementation costs.............................. - 1.1 1.2 1.0 -------- -------- ------ ----- Results excluding special items.............................. $4,191.2 $1,448.0 613.2 70.6 ======== ======== ====== =====
29 Fiscal Year (52 Weeks) Ended May 2, 2002 ------------------------------------------------- Operating Net Net Sales Gross Profit Income Income --------- ------------ ------ ------ (Dollars in millions) Reported results............................................. $4,550.4 $1,465.1 $438.1 $312.1* Operation Excel restructuring............................. - 36.3 44.8 28.0 Operation Excel implementation costs...................... - 62.2 149.5 94.4 Operation Excel reversal.................................. - (8.2) (21.0) (13.3) Streamline restructuring.................................. - 58.2 72.9 45.9 Streamline implementation costs........................... - 7.1 11.8 9.3 Loss on the sale of The All American Gourmet.............. - - 94.6 66.2 Equity loss on investment of Hain......................... - - - 3.5 Acquisition costs......................................... - - 18.5 11.7 -------- -------- ------ ------ Results excluding special items.............................. $4,550.4 $1,620.7 $809.2 $557.9 ======== ======== ====== =====
*Before cumulative effect of accounting changes (Note: Totals may not add due to rounding.) Gross Profit Gross profit decreased $18.2 million, or 1.2%, to $1.45 billion from $1.47 billion, and the gross profit margin increased to 34.5% from 32.2%. Gross profit across all of our segments was unfavorably impacted as a result of the retention of finished goods inventories by Heinz as discussed above. Excluding the special items identified above, gross profit decreased $172.7 million, or 10.7%, to $1.45 billion from $1.62 billion, and the gross profit margin decreased to 34.5% from 35.6%. Excluding special items noted above, gross profit for the Heinz North America segment decreased $108.2 million, or 12.6%, due primarily to inventories retained by Heinz, lower pricing and a decrease in the foodservice business partially offset by the favorable impact of acquisitions. Excluding special items noted above, the U.S. Pet Products and Seafood segment's gross profit decreased $99.3 million, or 24.3% primarily due to inventories retained by Heinz, price decreases in pet food and pet snacks, increased ingredient and manufacturing costs and a shift to less profitable, larger-size products. Pet food ingredient costs also increased as a result of reformulating recipes to improve palatability. Excluding special items noted above, U.S. Frozen's gross profit increased $36.1 million, or 10.2%, due primarily to acquisitions partially offset by retained inventories by Heinz. SG&A SG&A decreased $247.0 million, or 27.5%, to $650.9 million from $898.0 million and decreased as a percentage of sales to 15.5% from 19.7%. Excluding the special items noted above, SG&A decreased $26.7 million, or 3.9%, to $655.7 million from $682.4 million and increased as a percentage of sales to 15.6% from 15.0%. This decrease is primarily attributable to the finished goods inventories which were retained by Heinz partially offset by acquisitions and increased selling and distribution costs. Operating Income Operating income increased $178.7 million, or 40.8%, to $616.8 million from $438.1 million and increased as a percentage of sales to 14.7% from 9.6%. Excluding the special items noted above, operating income decreased $196.0 million, or 24.2%, to $613.2 million from $809.2 million and decreased as a percentage of sales to 14.6% from 17.8%. The Heinz North America segment's operating income decreased $88.8 million, or 19.7%, to $362.6 million from $451.5 million. Excluding the special items noted above, operating income decreased $192.0 million, or 34.7%, to $361.5 million from $553.6 million, due primarily to the decrease in gross profit discussed above and higher selling and distribution costs, partially offset by the favorable impact of acquisitions. 30 The U.S. Pet Products and Seafood segment's operating income increased $126.4 million to $91.3 million from a loss of $35.1 million. Excluding the special items noted above, operating income decreased $27.1 million, or 23.4% to $88.9 million from $116.0 million, due to the decrease in gross profit. The U.S. Frozen segment's operating income increased $142.2 million to $165.5 million from $23.3 million. Excluding the special items noted above, operating income increased $24.3 million, or 17.2%, to $165.5 million from $141.2 million as the favorable impact of acquisitions was partially offset by the impact of retained inventories and increased selling and distribution costs and the divestiture of Budget Gourmet. Other Items Interest expense increased $196.3 million to $206.6 million from $10.3 million last year, due primarily to the assumption of approximately $2.9 billion of Heinz's outstanding U.S. debt by Heinz Finance on May 3, 2001 as well as increased borrowings partially offset by lower interest rates. Interest income decreased $74.8 million to $36.2 million from $111.0 million last year due primarily to the exchange of related party notes receivable for $1.9 billion of non-voting 6.5% cumulative participating preferred stock of PM Holding during the fourth quarter of Fiscal Year 2001. This decrease was offset by an increase due to Heinz Finance's new short-term notes receivables with related parties. Other expense decreased $9.9 million to $11.4 million from $21.3 million primarily related to a reduction in accounts receivable factoring discount expense partially offset by increased amortization of debt issuance costs. The effective tax rate for Fiscal Year 2002 was 8.2% compared to 39.7% last year. Excluding the special items identified above, the effective tax rate was 8.1% for Fiscal Year 2002 compared to 37.6% last year. This decrease is primarily the result of Heinz Finance's nontaxable minority interest in Heinz LP in Fiscal Year 2002. Net Income Net income decreased $233.2 million to $73.7 million from $306.9 million last year. The majority of this decrease is due to the minority interest in Heinz LP. In Fiscal Year 2001, Heinz Finance changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" (see Note 2 to the Consolidated and Combined Financial Statements). The cumulative effect of adopting SAB No. 101 was $4.8 million in Fiscal Year 2001. Excluding the special items noted above and the prescribed accounting change, net income decreased 87.3% to $70.6 million from $557.9 million last year. Fiscal Year 2001 versus Fiscal Year 2000 Sales Sales for Fiscal Year 2001 increased $81.1 million, or 1.8%, to $4.55 billion from $4.47 billion in Fiscal Year 2000. Volume increased sales by $126.3 million, or 2.8%, and acquisitions increased sales by $109.8 million, or 2.5%. Divestitures reduced sales by $45.7 million, or 1.0% and lower pricing reduced sales by $109.3 million, or 2.4%. Sales of the Heinz North America segment increased $196.4 million, or 10.1%. Sales volume increased 5.8%, due to increases in ketchup, condiments and sauces, foodservice, gravy and canned soups. Acquisitions, net of divestitures, increased sales 4.7%. Slightly lower pricing decreased sales 0.4%. Sales of the U.S. Pet Products and Seafood segment decreased $202.2 million, or 12.4%. Lower pricing decreased sales 7.1%, primarily in light meat tuna, dry dog food and cat snacks. Sales volume decreased 4.6%, primarily in tuna and canned pet food. Divestitures decreased sales 0.6%. The U.S. Frozen segment's sales increased $86.9 million, or 9.8%. Sales volume increased 10.1%, driven by Smart Ones frozen entrees, Boston Market HomeStyle Meals, Bagel Bites snacks and frozen potatoes, partially 31 offset by a decrease in The Budget Gourmet line of frozen entrees and frozen pasta. Higher pricing increased sales by 1.8% driven by Smart Ones frozen entrees and frozen potatoes, partially offset by increased promotions. Divestitures reduced sales 2.1% mainly due to the sale of The All American Gourmet business and its Budget Gourmet and Budget Gourmet Value Classics brands of frozen entrees. Special Items Fiscal Year 2001 was impacted by a number of special items which are summarized in the tables below. These include Operation Excel implementation costs of $149.5 million pretax, additional Operation Excel restructuring charges of $44.8 million pretax and reversals of $21.0 million pretax of restructuring accruals and asset write-downs. Fiscal Year 2001 results also include Streamline restructuring charges of $72.9 million pretax and related implementation costs of $11.8 million pretax. During the fourth quarter of Fiscal Year 2001, the U.S. Group completed the sale of The All American Gourmet business that resulted in a pretax loss of $94.6 million. The Fiscal Year 2001 results also include pretax costs of $18.5 million related to attempted acquisitions and a loss of $5.6 million pretax which represents the U.S. Group's equity loss associated with Hain's fourth quarter results which include charges for its merger with Celestial Seasonings. Fiscal Year 2000 results include Operation Excel restructuring charges of $95.3 million pretax, Operation Excel implementation costs of $96.9 million pretax, and reversals of $16.4 million pretax of Fiscal Year 1999 restructuring accruals and asset write-downs. The following tables provide a comparison of the U.S. Group's reported results and the results excluding special items for Fiscal Year 2001 and Fiscal Year 2000. Fiscal Year (52 Weeks) Ended May 2, 2002 ------------------------------------------------- Operating Net Net Sales Gross Profit Income Income --------- ------------ ------ ------ (Dollars in millions) Reported results............................................. $4,550.4 1,465.1 438.1 $312.1* Operation Excel restructuring............................. - 36.3 44.8 28.0 Operation Excel implementation costs...................... - 62.2 149.5 94.4 Operation Excel reversal.................................. - (8.2) (21.0) (13.3) Streamline restructuring.................................. - 58.2 72.9 45.9 Streamline implementation costs........................... - 7.1 11.8 9.3 Loss on the sale of The All American Gourmet.............. - - 94.6 66.2 Equity loss on investment in Hain......................... - - - 3.5 Acquisition costs......................................... - - 18.5 11.7 -------- -------- ------ ------ Results excluding special items.............................. $4,550.4 1,620.7 809.2 557.9 ======== ======== ====== ======
* Before cumulative effect of accounting changes Fiscal Year (52 Weeks) Ended May 3, 2002 ------------------------------------------------- Operating Net Net Sales Gross Profit Income Income --------- ------------ ------ ------ (Dollars in millions) Reported results............................................. $4,469.3 1,455.8 609.3 448.3 Operation Excel restructuring............................. - 53.4 95.3 61.5 Operation Excel implementation costs...................... - 33.7 96.9 61.0 Operation Excel reversal.................................. - (16.4) (16.4) (11.8) -------- -------- ------ ------ Results excluding special items.............................. $4,469.3 1,526.5 785.1 559.0 ======== ======== ====== ======
(Note: Totals may not add due to rounding.) 32 Gross Profit Gross profit increased $9.4 million, or 0.6%, to $1.47 billion from $1.46 billion in Fiscal Year 2000. The gross profit margin decreased to 32.2% from 32.6%. Excluding the special items identified above, gross profit increased $94.2 million, or 6.2%, to $1.62 billion from $1.53 billion and the gross profit margin increased to 35.6% from 34.2%. Gross profit across all major segments, was favorably impacted by savings from Operation Excel. Excluding special items noted above, gross profit for the Heinz North America segment increased $104.5 million, or 14.1%, due primarily to acquisitions and increased sales volume of ketchup partially offset by higher energy costs. Excluding special items noted above, the U.S. Pet Products and Seafood segment's gross profit decreased $111.7 million, or 28.4%, primarily due to increased promotions and lower volume of tuna and canned pet food. Excluding special items noted above, the U.S. Frozen's gross profit increased $16.6 million, or 5.2%, due to increased sales volume mainly attributable to Boston Market HomeStyle Meals and higher selling prices, partially offset by higher energy costs and increased promotions. SG&A SG&A increased $145.9 million to $898.0 million from $752.1 million and increased as a percentage of sales to 19.7% from 16.8%. Excluding the special items identified above, SG&A increased $35.3 million to $682.4 million from $647.0 million and increased as a percentage of sales to 15.0% from 14.5%. Selling and distribution expenses increased $66.0 million to $387.3 million from $321.2 million, or 20.6%, primarily due to acquisitions and increased fuel costs. Marketing decreased $4.7 million, or 3.3%. Operating Income Operating income decreased $171.3 million, or 28.1%, to $438.1 million from $609.3 million in Fiscal Year 2000. Excluding the special items identified above, operating income increased $24.1 million, or 3.1%, to $809.2 million from $785.1 million in Fiscal Year 2000. Operating income, across all major segments, was favorably impacted by savings from Operation Excel. The Heinz North America segment's operating income increased $22.3 million to $451.5 million from $429.1 million in Fiscal Year 2000. Excluding the special items noted above, operating income increased $30.6 million, or 5.8%, to $553.6 million from $523.0 million in Fiscal Year 2000 due to the strong performance of ketchup, condiments and sauces, and the acquisitions of Quality Chef, Yoshida and IDF Holding, Inc., partially offset by higher energy costs. The U.S. Pet Products and Seafood segment's operating income decreased $119.2 million to a loss of $35.1 million from income of $84.1 million in Fiscal Year 2000. Excluding the special items noted above, operating income decreased $22.7 million, or 16.4% to $116.0 million from $138.7 million due to lower tuna and canned pet food sales volumes, a significant decrease in the selling price of tuna and higher energy costs, partially offset by the strong performance of pet snacks. The U.S. Frozen segment's operating income decreased $73.6 million to $23.3 million from $96.9 million in Fiscal Year 2000. Excluding the special items noted above, operating income increased $17.1 million, or 13.7%, to $141.2 million from $124.1 million in Fiscal Year 2000. This increase is attributable to increased sales of Smart Ones frozen entrees, Boston Market frozen meals and Bagel Bites snacks, partially offset by marketing spending behind the national rollouts of Boston Market products, the new Ore-Ida potato packaging and higher energy costs. Other Items Other income, net totaled $79.4 million compared to $91.2 million in Fiscal Year 2000 primarily due to a reduction in interest income from the transfer of notes receivable with related parties from the U.S. Group to PM Holdings, Inc. The effective tax rate for Fiscal Year 2001 was 39.7% compared to 36.0% in Fiscal Year 2000. The current year rate is negatively impacted by a lower tax basis in dispositions. Excluding the special items identified in the tables above, the effective tax rate was 37.6% for Fiscal Year 2001 compared to 36.2% in Fiscal Year 2000. 33 Net Income Net income decreased $141.4 million to $306.9 million from $448.3 million in Fiscal Year 2000. In Fiscal Year 2001, the U.S. Group changed its method of accounting for revenue recognition in accordance with SAB No. 101, "Revenue Recognition in Financial Statements." See Note 2 to the Consolidated and Combined Financial Statements included in this prospectus. The cumulative effect of adopting SAB No. 101 was $4.8 million. Excluding the special items noted above and the prescribed accounting change, net income decreased 0.2% to $557.9 million from $559.0 million in Fiscal Year 2000. Liquidity and Financial Position Cash flows from operating activities Operating activities for the three months ended July 31, 2002 provided cash of $340.8 million compared to using cash of $128.0 million in the same period last year. The increase is primarily due to decreased trade receivables and the building of inventory levels in the first quarter of Fiscal Year 2002 as a result of all finished goods inventories of the U.S. Group being retained by Heinz on May 3, 2001. Operating activities required cash of $32.9 million in Fiscal Year 2002, compared to providing cash of $77.5 million in Fiscal Year 2001. The decrease in Fiscal Year 2002 versus Fiscal Year 2001 is primarily due to Heinz Finance's build of inventory levels in Fiscal Year 2002 as a result of all finished goods inventories of the U.S. Group being retained by Heinz on May 3, 2001 as well as the termination of Heinz Finance's accounts receivable factoring contract with Receivables Servicing Company, a fully consolidated Heinz affiliate, in Fiscal Year 2002. Cash flows from investing activities Cash used for investing activities for the three months ended July 31, 2002 was $6.4 million compared to $313.7 million in the same period last year. There were no acquisitions in the current quarter and acquisitions in the prior year required $290.2 million, primarily related to the purchase of Borden Food Corporation's pasta and dry bouillon and soup businesses. Capital expenditures in the current quarter required $16.6 million compared to $2.6 million last year. Cash used for investing activities was $874.8 million in Fiscal Year 2002 compared to $232.0 million in Fiscal Year 2001. Acquisitions in the current year required $809.4 million, due primarily to the purchase of Borden Food Corporation's pasta and dry bouillon and soup businesses, Delimex Holdings, Inc. and Anchor Food Products branded retail business and licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers. Acquisitions in the prior year required $229.9 million, due primarily to International DiverseFoods Inc., Alden Merrell Corporation and two privately held U.S. foodservice companies, Cornucopia Inc. and Central Commissary. (See Note 3 to the Consolidated and Combined Financial Statements.) Also, during the prior year, Heinz Finance exercised its preemptive right to purchase additional equity in Hain to restore Heinz Finance's investment level to approximately 19.5% of the outstanding stock of Hain for $79.7 million. Divestitures provided $96.5 million in Fiscal Year 2001 from the sale of The All American Gourmet business and can making assets. Capital expenditures totaled $77.2 million in Fiscal Year 2002 compared to $183.5 million in Fiscal Year 2001. The decrease is attributable to a reduction in Operation Excel-related capital expenditures. In Fiscal Year 2003, Heinz Finance expects capital expenditures to be consistent with Fiscal Year 2002. Proceeds from disposals of property, plant and equipment were $3.3 million in Fiscal Year 2002 compared to $165.5 million in Fiscal Year 2001. The prior year was primarily due to the sale of equipment that was then utilized under operating lease arrangements. 34 Cash flows from financing activities Financing activities for the three months ended July 31, 2002 used $329.9 million compared to providing $449.3 million in the same period in the prior year. There were no proceeds from long-term debt in the current quarter and proceeds from long-term debt were $749.0 million last year. There were no payments on long-term debt in the current quarter and payments on long-term debt required $7.2 million last year. Net payments on commercial paper and short-term borrowings required $260.9 million compared to $618.0 million last year. In addition, $325.0 million was provided during the three months ended August 1, 2001 by the issuance of Preferred Stock. Dividend payments to preferred shareholders totaled $5.1 million in the current quarter. In addition, distributions to Class A partners were $64.8 million in the current quarter. In Fiscal Year 2002, financing activities provided $904.5 million compared to $152.6 million in the prior year. Proceeds from long-term debt were $1.99 billion in Fiscal Year 2002. Payments on long-term debt required $309.9 million in Fiscal Year 2002 compared to $12.2 million in Fiscal Year 2001. Net payments on commercial paper and short-term borrowings required $957.7 million in Fiscal Year 2002. In addition, $325.0 million was provided during Fiscal Year 2002 via the issuance of preferred stock, (see below). Dividend payments to preferred shareholders totaled $15.7 million compared to dividend payments to Heinz of $350.6 million last year. Cash requirements of Project Streamline and Operation Excel In the first quarter of Fiscal Year 2003, the cash requirements of Streamline were $1.0 million, relating to severance costs. In Fiscal Year 2002, the cash requirements of Streamline were $16.5 million, consisting of spending for severance and exit costs ($12.9 million), capital expenditures ($2.5 million) and implementation costs ($1.2 million). In Fiscal Year 2001, the cash requirements of Streamline were $14.3 million, consisting of spending for severance and exit costs ($2.3 million), capital expenditures ($0.3 million) and implementation costs ($11.8 million). In Fiscal Year 2001, the cash requirements of Operation Excel were $231.9 million, consisting of spending for severance and exit costs ($21.6 million), capital expenditures ($60.8 million) and implementation costs ($149.5 million). In Fiscal Year 2000, the cash requirements of Operation Excel were $199.9 million, consisting of spending for severance and exit costs ($20.3 million), capital expenditures ($82.7 million) and implementation costs ($96.9 million). In Fiscal Year 2003, Heinz Finance expects the cash requirements of Streamline to be approximately $4.4 million, consisting of severance and exit costs (all of the $4.4 million accrued as of May 1, 2002). Heinz Finance financed the cash requirements of these programs through operations, proceeds from the sale of non-strategic assets and with short-term and long-term borrowings from Heinz. The cash requirements of these programs have not had and are not expected to have a material adverse impact on Heinz Finance's liquidity or financial position. Other Financial and Liquidity Matters Pretax return on average invested capital ("ROIC") was 15.6% in Fiscal Year 2002, 9.3% in Fiscal Year 2001 and 14.5% in Fiscal Year 2000. Excluding the special items identified above, ROIC was 15.6% in Fiscal Year 2002, 17.7% in Fiscal Year 2001 and 18.8% in Fiscal Year 2000. In connection with the reorganization, we assumed as co-obligor the responsibility to pay Heinz debt issues totaling $2.57 billion in principal amount, plus accrued interest thereon. We also assumed as co-obligor the obligation to pay approximately $258 million of commercial paper issued by Heinz. Since May 3, 2001, we have issued commercial paper to refinance the commercial paper obligations assumed by us in the reorganization, to make loans to Heinz and to fund our ongoing operations. For further discussion of our liquidity and financing arrangements with Heinz, please see "Related Party Transactions" in this prospectus. 35 On July 6, 2001, Heinz Finance raised $325 million via the issuance of Voting Cumulative Preferred Stock, Series A with a liquidation preference of $100,000 per share. The Series A Preferred shares are entitled to receive quarterly dividends at a rate of 6.226% per annum and are required to be redeemed for cash on July 15, 2008. In addition, Heinz Finance issued $750 million of 6.625% Guaranteed Notes due July 15, 2011. The proceeds were used for general corporate purposes, including retiring commercial paper borrowings and financing acquisitions and ongoing operations. Beginning on June 1, 2002, to but excluding July 17, 2002, interest accrued on the Notes due 2011 at the annual rate of 6.875%. Beginning on July 17, 2002, interest accrued on the Notes due 2011, and will accrue to but excluding the date the exchange offer is completed, at the annual rate of 7.125%. On September 6, 2001, Heinz Finance, Heinz and a group of domestic and international banks entered into a $1.50 billion credit agreement which expires in September 2006 and an $800 million credit agreement which expires in September 2002. These credit agreements, which support Heinz Finance's and Heinz's commercial paper programs, replaced the $2.30 billion credit agreement which expired on September 6, 2001. As of May 1, 2002, $89.1 million of domestic commercial paper is classified as long-term debt due to the long-term nature of the supporting credit agreement. In January 2002, Moody's Investor Service changed the credit ratings on Heinz's debt to A-3 for long-term debt and P-1 for short-term debt. The previous ratings were A-2 and P-1, respectively. The change in Heinz's credit rating by Moody's has not had, and is not expected to have, a material adverse impact on Heinz Finance's liquidity or borrowing costs. In connection with the announcement of the Del Monte transaction, Moody's changed Heinz's "A3" senior unsecured debt ratings outlook from negative to stable. Heinz's long-term and short-term debt ratings by Standard & Poor's remained at A and A-1, respectively. On August 16, 2002, Fitch Ratings initiated coverage of Heinz assigning an A rating to Heinz's senior unsecured debt and a F1 rating to Heinz's commercial paper. Fitch indicated that the ratings outlook was stable. On March 7, 2002, Heinz Finance issued $700 million of 6.00% Guaranteed Notes due March 15, 2012 and $550 million of 6.75% Guaranteed Notes due March 15, 2032, which are guaranteed by Heinz. The proceeds were used to retire commercial paper borrowings, as Heinz Finance made the strategic decision to increase long-term debt and reduce short-term debt to enhance its liquidity profile. Beginning on September 4, 2002, to but excluding October 19, 2002, interest accrued on the Notes due 2012 at the annual rate of 6.25% and on the Notes due 2032 at the annual rate of 7.00%. Beginning on October 19, 2002, interest accrued on the Notes due 2012 and on the Notes due 2032, and will accrue to but excluding the date the exchange offer is completed, at the annual rates of 6.50% and 7.25%, respectively. Heinz Finance has $1.0 billion of remarketable securities due November 2020 with a coupon rate of 6.82%. The securities are subject to mandatory tender by all holders to the remarketing dealer on each November 15, and the interest rate will be reset on such dates. If the remarketing dealer does not elect to exercise its right to a mandatory tender of the securities or otherwise does not purchase all of the securities on a remarketing date, then Heinz Finance is required to repurchase all of the securities on the remarketing date at 100% of the principal amount plus accrued interest. Heinz Finance received a premium from the remarketing dealer for the right to require the mandatory tender of the securities. The amortization of the premium resulted in an effective interest rate of 5.82% through November 15, 2001. On November 15, 2002, the remarketing dealer exercised its right to a mandatory tender of the securities and purchased all of the securities and remarketed the securities at an effective yield to Heinz Finance of 6.5607% through November 15, 2003. Because the remarketable securities may be refinanced by the $1.5 billion credit agreement discussed above, they are classified as long-term debt. On September 5, 2002, Heinz Finance, Heinz and a group of domestic and international banks renewed an $800 million credit 364-day agreement. That credit agreement and the $1.5 billion credit agreement that expires in September 2006 support Heinz Finance's and Heinz's commercial paper programs. Aggregate domestic commercial paper had a weighted-average interest rate during Fiscal Year 2002 of 2.9% and at year-end 2002 of 2.0%. Based upon the amount of commercial paper outstanding at May 1, 2002, a variance of 1/8% in the related interest rate would cause annual interest expense to change by approximately $0.1 million. 36 As previously discussed under "--Overview--Reorganization," Heinz Finance assumed $2.83 billion of debt of Heinz. While this debt was not on the historical balance sheet of the U.S. Group, it was nevertheless serviced and supported by the cash flow and assets of the U.S. Group. The transfer of this debt to Heinz Finance as a part of the reorganization, all of which is guaranteed by Heinz, does not adversely impact the financial position, results of operations and liquidity in the future periods of Heinz and Heinz Finance taken as a whole. The following table lists the Heinz debt assumed by Heinz Finance as co-obligor as part of the reorganization, and the debt issued directly by Heinz Finance. Date Description Amount Coupon Maturity Date ---- ----------- ------ ------ ------------- 1/27/93 U.S. Note*+ US$200,000,000 6.875% 1/15/03 2/3/98 Eurobond*+ US$250,000,000 5.75% 2/3/03 3/25/98 U.S. Note*+ US$300,000,000 6.00% 3/15/08 7/15/98 U.S. Note*+ US$250,000,000 6.375% 7/15/28 1/5/00 Eurobond*+ (euro) 300,000,000 5.00% 1/5/05 US$297,810,000** 11/6/00 Dealer Remarketable Securities*+ US$1,000,000,000 6.82% 11/15/20 7/6/01 U.S. Note* US$750,000,000 6.625% 7/15/11 3/7/02 U.S. Note* US$700,000,000 6.00% 3/15/12 3/7/02 U.S. Note* US$550,000,000 6.75% 3/15/32
+ Heinz Finance and Heinz as co-obligors * Heinz Finance as issuer, Heinz as guarantor ** Converted using the exchange rate of .9927(USD) to 1(EUR) on December 2, 2002. Heinz Finance's financial position continues to remain strong, enabling it to meet cash requirements for operations, capital expansion programs and debt service during the next twelve months and the foreseeable future. Commitments and Contingencies Heinz Finance is obligated to make future payments under various contracts such as debt agreements, lease agreements and unconditional purchase obligations. The following table represents the significant contractual cash obligations of Heinz Finance as of May 1, 2002, which has not materially changed during the three months ended July 31, 2002. Contractual Cash Obligations (In millions) Total Due in 2003 Due in 2004 Due in 2005 Due in 2006 Due in 2007 Due Thereafter - ------------------------- ----- ----------- ----------- ----------- ----------- ----------- -------------- Long-term debt (including capital leases of $9.9 million)............. $4,387 $451 $ 2 $273 $ 1 $ 90 $3,570 Operating leases........ 212 16 17 16 13 133* 17 ------ ---- --- ---- --- ---- ------ Total contractual cash obligations...... $4,599 $467 $19 $289 $14 $223 $3,587 ====== ==== === ==== === ==== ======
* Includes the purchase option related to certain warehouses and equipment currently utilized under existing synthetic leases. Heinz Finance has purchase commitments for materials, supplies, services and property, plant and equipment as part of the ordinary conduct of business. A few of these commitments are long-term and are based on minimum purchase requirements. In the aggregate, such commitments are not at prices in excess of current markets. Due to the proprietary nature of some of Heinz Finance's materials and processes, certain supply contracts contain penalty provisions for early terminations. Heinz Finance does not believe a material amount of penalties is reasonably likely to be incurred under these contracts based upon historical experience and current expectations. 37 Heinz Finance does not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect liquidity. See Note 9 of the Condensed Consolidated Financial Statements for the three months ended July 31, 2002 and August 1, 2001 for disclosure of all significant related party items. Market Risk Factors The following discussion about Heinz Finance's risk-management activities as of May 1, 2002 includes "forward-looking" statements that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. There have been no material changes in Heinz Finance's market risk during the three months ended July 31, 2002. Heinz Finance is exposed to market risks from adverse changes in interest rates, commodity prices and production costs (including energy). As a policy, Heinz Finance does not engage in speculative or leveraged transactions, nor does Heinz Finance hold or issue financial instruments for trading purposes. Interest Rate Sensitivity Heinz Finance is exposed to changes in interest rates primarily as a result of its borrowing and investing activities used to maintain liquidity and fund business operations. Heinz Finance continues to utilize commercial paper to fund working capital requirements. The nature and amount of Heinz Finance's long-term and short-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. Heinz Finance utilizes interest rate swap agreements to manage interest rate exposure. The following table summarizes Heinz Finance's debt obligations at May 1, 2002. The interest rates represent weighted-average rates, with the period-end rate used for the floating rate debt obligations. The fair value of the debt obligations approximated the recorded value as of May 1, 2002. Expected Fiscal Year of Maturity -------------------------------------------------------------------------------------------- (In thousands) 2003 2004 2005 2006 2007 Thereafter Total - -------------- ---- ---- ---- ---- ---- ---------- ----- Fixed rate $451,375 $1,588 $272,568 $ 517 $ 517 $3,565,251 $4,291,816 Average interest rate 6.42% 6.28% 5.05% 6.86% 6.86% 6.47% Floating rate $ - $ - $ - $ - $89,142 $ 6,442 $ 95,584 Average interest rate -% -% -% -% 2.94% 3.39%
In Fiscal Year 2002, Heinz Finance entered into interest rate swaps in order to convert certain fixed-rate debt to floating. These swaps have an aggregate notional value of $2.05 billion and an average maturity of 16.4 years. The weighted-average fixed rate of the associated debt is 6.45%; however, the effective rate after taking into account the swaps is 3.14%. As of May 1, 2002, the potential gain or loss in the fair value of Heinz Finance's interest rate swaps, assuming a hypothetical 10% fluctuation in the swap rates, would be approximately $120 million. However, it should be noted that any change in the fair value of the swaps, real or hypothetical, would be offset by an inverse change in the fair value of the related debt. Based on the amount of fixed-rate debt converted to floating as of May 1, 2002, a variance of 1/8% in the related interest rate would cause annual interest expense related to this debt to change by approximately $2.6 million. Commodity Price Hedging Heinz Finance is the purchaser of certain commodities such as corn, wheat and soybean meal and oil. Heinz Finance generally purchases these commodities based upon market prices that are established with the vendor as part of the purchase process. Heinz Finance enters into commodity future or option contracts, as deemed appropriate, to reduce the effect of price fluctuations on anticipated purchases. Such contracts are accounted for as hedges, if they meet certain qualifying criteria, with the effective portion of gains and losses recognized as part of cost of products sold, and generally have a term of less than one year. As of May 1, 2002, unrealized gains and losses related to commodity contracts held by Heinz Finance were not material nor would they be given a hypothetical 10% 38 fluctuation in market prices. It should be noted that any change in the value of the contracts, real or hypothetical, would be significantly offset by an inverse change in the value of the underlying hedged items. See Note 12 to the Condensed Consolidated Financial Statements for the three months ended July 31, 2002 and August 1, 2001. Inflation In general, costs are affected by inflation and the effects of inflation may be experienced by Heinz Finance in future periods. We believe, however, that such effects have not been material to us during the past three years. Recently Adopted Accounting Standards Heinz Finance adopted Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations," which requires that the purchase method of accounting be applied to all business combinations after June 30, 2001. SFAS No. 141 also established criteria for recognition of intangible assets and goodwill. Effective May 2, 2002, Heinz Finance adopted SFAS No. 142 "Goodwill and Other Intangible Assets." Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized. This standard also requires, at a minimum, an annual assessment of the carrying value of goodwill and intangibles with indefinite useful lives. Heinz Finance has completed its evaluation of the impact of adopting SFAS No. 142 on the consolidated financial statements. The reassessment of intangible assets, including the ongoing impact of amortization, was completed during the first quarter of Fiscal Year 2003. The assignment of goodwill to reporting units, along with transitional goodwill impairment tests, was completed during the second quarter of Fiscal Year 2003. No impairment issues were identified as a result of completing these transitional impairment tests. Net income for the quarter ended August 1, 2001 and fiscal years ended May 1, 2002, May 2, 2001 and May 3, 2000, would have been $16.2 million, $75.1 million, $338.1 million and $476.0 million, respectively, had the provision of the new standards been applied as of May 3, 2001. Effective May 2, 2002, Heinz Finance adopted SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." This statement provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discontinued operation to include a component of an entity and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. The adoption of this new standard did not have a material impact on Heinz Finance's financial position, results of operations or cash flows for the three months ended July 31, 2002. During the fourth quarter of Fiscal Year 2002, Heinz Finance adopted Emerging Issues Task Force ("EITF") statements relating to the classification of vendor consideration and certain sales incentives. The adoption of these EITF statements has no impact on operating income or net income; however, revenues and gross profit were reduced by approximately $64.5 million in the first quarter of Fiscal Year 2002 and $436.7 million, $387.8 million and $319.9 million in the fiscal years ended 2002, 2001 and 2000, respectively. Prior period data has been reclassified to conform with current year presentation. Recently Issued Accounting Standards In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. This standard is effective for Heinz Finance in Fiscal Year 2004. Heinz Finance does not expect that the adoption of this standard will have a significant impact on the consolidated financial statements. In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting costs associated with exit or disposal activities. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This Statement also establishes that fair value is the objective for initial measurement 39 of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. Management is currently assessing the details of this Standard. Discussion of Critical Accounting Policies In the ordinary course of business, Heinz Finance has a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Our actual results could differ significantly from those estimates under different assumptions and conditions. We believe the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results and require management's most difficult, subjective and complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Marketing costs In order to support Heinz Finance's products, we offer various marketing programs to our customers and/or consumers which reimburse them for a portion or all of their promotional activities related to our products. We regularly review and revise, when deemed necessary, estimates of our costs for these marketing programs based on estimates of what has been earned by our customers and/or consumers. Actual costs may differ significantly if factors such as the level and success of the programs or other conditions differ from expectations. Inventories Inventories are stated at the lower of cost or market. Cost is determined principally under the average cost method. We record adjustments to the carrying value of inventory based upon our forecasted plans to sell our inventories. The physical condition (e.g., age and quality) of the inventories is also considered in establishing our valuation. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from our expectations. Property, Plant and Equipment Land, buildings and equipment are recorded at cost and are depreciated on a straight-line method over the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to our business model or changes in our capital strategy could result in the actual useful lives differing from our estimates. In those cases where we determine that the useful life of buildings and equipment should be shortened, we would depreciate the net book value in excess of the salvage value over its revised remaining useful life, thereby increasing depreciation expense. Factors such as changes in the planned use of fixtures or software or closing of facilities could result in shortened useful lives. Long-Lived Assets Long-lived assets, including fixed assets and intangibles, are evaluated periodically by Heinz Finance for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. If the sum of the undiscounted cash flows is less than the carrying value, Heinz Finance recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance. Our estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions, changes to our business model or changes in our operating performance. 40 BUSINESS General We have been a direct or indirect subsidiary of Heinz since 1983. Heinz Finance had no significant operating history until Heinz completed a corporate reorganization in the United States on May 3, 2001. The reorganization was designed to simplify Heinz's U.S. corporate structure, consolidate operations and establish centers of excellence for the management of the U.S. trademarks and for U.S. treasury functions. As a result of the reorganization, all of the U.S. business operations that had historically been conducted by Heinz through its Heinz USA division and eight subsidiary corporations are now conducted by Heinz Finance. Please refer to "Overview of Entity Structure, Reorganization and Financial Statement Presentation--Reorganization" for a detailed discussion of our reorganization. Since May 3, 2001, we have been engaged in the business of acquiring, holding and financing equity and debt investments in subsidiaries that own and operate Heinz's historical U.S. businesses, which manufacture, market, distribute and sell food and pet food products in the United States. Our most significant asset is our ownership interests in Heinz LP, a Delaware limited partnership formed on October 9, 2000. Heinz LP has two classes of limited partnership interests. As further described under "Overview of Entity Structure, Reorganization, and Financial Statement Presentation--Reorganization--Heinz LP," Heinz, directly and through wholly-owned subsidiaries, owns the Class A interests in Heinz LP. Heinz Finance directly and indirectly owns the Class B interests in Heinz LP. HMC is the managing general partner of Heinz LP and employs its salaried personnel. Heinz LP reimburses HMC for all its management costs. We participated in the growth of the U.S. businesses over Fiscal Year 2002 through the financing of the acquisition of the assets of the retail business of Anchor Food Products and the purchase of the stock of Delimex Holdings, Inc. Both of these acquisitions expanded our participation in the frozen appetizer and hand held food products category with the addition of T.G.I. Friday's frozen appetizers and Delimex taquitos. In addition, we financed the acquisition of certain assets of the sauce, soup and bouillon business of Borden Foods Corporation and its affiliates. Through this transaction, we acquired the Classico pasta sauce line of products. Description of the Business We conduct our food business through three segments, Heinz North America, U.S. Pet Products and Seafood and U.S. Frozen. The Heinz North America segment manufactures, markets and sells ketchup, condiments, sauces, soups, pasta meals and infant foods to the grocery and foodservice channels in the United States. For the three months ended July 31, 2002, Heinz North America accounted for $495.1 million, or 47.7% of our revenue. The U.S. Pet Products and Seafood segment manufactures, markets and sells dry and canned pet food, pet snacks, tuna and other seafood. For the three months ended July 31, 2002, this segment accounted for $295.5 million or 28.5% of our revenue. The U.S. Frozen segment manufactures, markets and sells frozen potatoes, entrees, snacks and appetizers, and accounted for $247.7 million or 23.9% of our revenue for the three months ended July 31, 2002. Recent Developments On June 13, 2002, Heinz announced that it will transfer to a wholly-owned subsidiary, referred to as "Spinco," certain assets and liabilities of our U.S. pet food and pet snacks, our U.S. tuna, U.S. retail private label soup and private label gravy, College Inn broths and our U.S. infant feeding businesses and distribute all of the shares of Spinco common stock on a pro rata basis to Heinz's shareholders. This transaction will affect businesses in the Heinz North America and U.S. Pet Products and Seafood segments. 41 Immediately following the distribution, Spinco will merge with a wholly-owned subsidiary of Del Monte resulting in Spinco becoming a wholly-owned subsidiary of Del Monte, the "Merger." In connection with the Merger, each share of Spinco common stock will be automatically converted into shares of Del Monte common stock that will result in the fully diluted Del Monte common stock at the effective time of the Merger being held approximately 74.5% by Heinz shareholders and approximately 25.5% by the Del Monte shareholders. As a result of the transaction, Heinz Finance will receive from Heinz approximately $1.1 billion in cash that will be used to retire debt. The Spinco businesses, which in Fiscal Year 2002 together generated approximately $1.4 billion of Heinz Finance's annual revenues (or approximately 35% of our annual revenues), include the following brands: StarKist, 9-Lives, Kibbles 'n Bits, Pup-Peroni, Snausages, Nawsomes, Heinz Nature's Goodness baby food and College Inn broths. The Spinco businesses also include factories in Bloomsburg, Pennsylvania, Lawrence, Kansas, Pittsburgh, Pennsylvania, Terminal Island, California and Topeka, Kansas. The Company and Heinz believe that this transformative initiative will make us a more focused and faster-growing business, leveraging two strategic platforms of Meal Enhancers (ketchup, condiments and sauces) and Meals & Snacks (frozen and ambient). In addition to the approximate $1.1 billion reduction in debt as a result of the Merger, we are targeting additional debt reduction by the end of Fiscal Year 2005. The Company expects that Fiscal Year 2003 will be a transition year, as the Merger is not expected to close until late calendar year 2002 or early in calendar year 2003. The Merger, which has been approved by the boards of directors of Heinz and Del Monte, is subject to approval by the shareholders of Del Monte. Heinz received on November 21, 2002, a private letter ruling from the Internal Revenue Service that the contribution of the assets and liabilities to Spinco and the distribution of the shares of common stock of Spinco to Heinz shareholders will be tax-free to Heinz, Spinco and the shareholders of Heinz. The Merger is also subject to customary closing conditions. Products and Markets Our products are manufactured and packaged to provide safe, wholesome foods for consumers, foodservice and institutional customers. Many products are prepared from recipes developed in our research laboratories and experimental kitchens. Ingredients are carefully selected, washed, trimmed, inspected and passed on to modern factory kitchens where they are processed, after which the finished product is filled automatically into containers of glass, metal, plastic, paper or fiberboard which are then closed, processed, labeled and cased for market. Finished products are processed by sterilization, homogenization, chilling, freezing, pickling, drying, freeze drying, baking or extruding. Certain finished products and seasonal raw materials are aseptically packed into sterile containers after in-line sterilization. Although crops constituting some of our raw food ingredients are harvested on a seasonal basis, most of our products are produced throughout the year. The primary brands and products marketed and sold by us include, by segment, the following: Heinz North America Heinz tomato ketchup, mustard and sauces Chef Francisco soups Heinz Nature's Goodness baby food Classico pasta sauce College Inn broth Yoshida sauces Wyler's bouillon and soups U.S. Frozen Ore-Ida potato products Bagel Bites Boston Market HomeStyle meals 42 Smart Ones meals Rosetto pasta Delimex snacks Poppers appetizers T.G.I. Friday's appetizers U.S. Pet Products & Seafood StarKist tuna 9-Lives cat food Kibbles 'n Bits dog food Gravy Train and Nature's Recipe dog food Jerky Treats, Meaty Bone, Pup- Peroni and Snausages dog treats Pounce cat treats The Heinz brand is our flagship and largest single brand. We believe that its strength derives from over 130 years of devotion to the idea of quality. Heinz ketchup is our signature product. It is the most popular brand of ketchup in the United States in terms of market share as described below. Along with the Heinz brand, we have many other powerful brands that lead in their respective categories. Heinz North America Heinz Ketchup #1 brand with an approximate 60% dollar share of the over $460 million U.S. ketchup market Heinz Baby Food #2 brand with an approximate 14% volume share of the $900 million U.S. baby food market Classico Pasta Sauce #1 brand premium pasta sauce with an approximate 39% dollar share of the $402 million U.S. premium pasta sauce market U.S. Frozen Ore-Ida Potatoes #1 brand with an approximate 48% dollar share of the $1 billion U.S. frozen potato market U.S. Pet Products and Seafood StarKist Tuna #1 brand with an approximate 41% dollar share of the over $1 billion U.S. tuna market The brand and market share data were sourced from AC Nielsen and reflect grocery stores, drug stores and mass merchandisers (excluding Wal-Mart) for the 52-week period ended November 2, 2002. The market share data does not include all retail outlets. Competitive Strengths Innovation We believe that our large number of new products and our creative marketing efforts make us one of the most innovative companies in the food industry in the United States. One of our key strategies is to continue innovation in products and packaging. We believe this will allow us to address consumer trends in taste, convenience and on-the-go eating. We have had a number of recent innovations, some of which include: 43 o Heinz Easy Squeeze! In 2002, we launched Heinz Easy Squeeze! ketchup in the No Wait, No Mess, upside-down bottle. We believe the patented silicone valve and ergonomically designed bottle will give customers more control when squirting, which will result in a neater more convenient experience. o Heinz EZ Squirt Kids' Condiment This product has driven overall volume growth for Heinz ketchup during the past year while helping to establish new market share records. o Ketchup Kick'Rs This flavored ketchup is designed to appeal to adult appetites for bold and spicy flavors. o Jack Daniel's and Mr. Yoshida's Grilling Sauces o Boston Market HomeStyle Meals Our combined retail sales of this business reached approximately $150 million in Fiscal Year 2001, making Boston Market HomeStyle Meals the most successful new product launch in the history of Heinz. o Hot Bites frozen snacks o StarKist pouch tuna This value-added, premium-priced product and packaging breakthrough achieved retail sales of $100 million in Fiscal Year 2002. o Pup-Peroni NawSomes! dog snacks Acquisitions Over the past few years we have focused on improving our portfolio of products. As part of that strategy, we have made acquisitions that expand on our capabilities, build on our core competencies and open new markets for us. Some of our recent acquisitions include: o Classico, a premium pasta sauce and a perfect fit with our tomato expertise and heritage; o Alden Merrell, a maker of high-quality, premium-priced frozen desserts for casual dining restaurants and foodservice distributors; o Delimex frozen hand-held Mexican foods, which allow us to compete in what we believe is one of the fastest-growing segments of the food business, ethnic foods; o Ethnic Gourmet frozen meals, a line of premium quality all-natural Indian and Thai meals and wraps; and o Anchor Foods, a rapidly growing producer of frozen snacks under the Poppers and T.G.I. Friday's brand names. 44 Consumer Marketing and Advertising Since 2000, we have implemented a major new focus on sports marketing, which we believe is beginning to generate momentum. Sports marketing is now a significant part of our overall marketing strategy and seeks to leverage the popularity of legendary athletes. We know that our business significantly benefitted from our associations with Tony Hawk for Bagel Bites, and we believe that the use of Larry Bird for Boston Market and now Kristi Yamaguchi for Smart Ones will benefit those businesses. Each of these celebrities reaches a specific audience and represents the brand in a highly targeted way. For example, o NBA basketball great Larry Bird is the focus of the ironic "Eat Like a Bird" advertising campaign that resulted in increased sales of Boston Market HomeStyle Meals among adult males. o Fitness-conscious consumers can identify with Smart Ones brand's spokesperson, Olympic and World Champion figure skater Kristi Yamaguchi. o Teenagers view Tony Hawk as being fun, irreverent and on the edge, which are characteristics that we seek to identify with our Bagel Bites and Hot Bites frozen snacks. In 2001, we also introduced a new color of EZ Squirt Kids' Condiment - "Funky Purple." The launch of this product generated more than 1,000 television news reports and hundreds more newspaper and magazine articles around the world. This marketing impact more than doubled the extensive media coverage of the introduction of our Blastin' Green "kids ketchup" in 2000. We believe that the naming rights to Heinz Field in Pittsburgh created another powerful and unique sports marketing opportunity. We believe that our media exposure, both direct and indirect, through Heinz Field has created an effective marketing tool among the millions of weekly television viewers of NFL Football and related programming. Millions more listen to the games on radio or read about them in a myriad of newspapers and sports publications. This audience represents an opportunity to further extend Heinz brand awareness. Competition Our products are sold under highly competitive conditions, with many large and small competitors. We regard our principal competition to be other manufacturers of processed foods, including branded, retail products, foodservice products and private label products, that compete with us for consumer preference, distribution, shelf space and merchandising support. We compete primarily on the basis of product quality, brand recognition, brand loyalty and consumer value. Customers Our products are sold through our own sales force and through independent brokers, agents and distributors to chain, wholesale, cooperative and independent grocery accounts, pharmacies, mass merchants, club stores, pet stores, foodservice distributors and institutions, including hotels, restaurants and certain government agencies. Our retail sales force consists of approximately 300 employees and seven teams that are dedicated to our key customers. We use two national brokers in connection with our retail sales efforts. In addition, we have a dedicated direct sales force for most of our large foodservice customers and service smaller ones through distributors. The following were our top ten U.S. customers based on revenue in Fiscal Year 2002: o Albertson's, Inc. o Safeway Inc. o C&S Wholesale o SuperValu, Inc. o Costco Wholesale Corp. o SYSCO/SYGMA o Fleming Companies, Inc. o U.S. Foodservice o Kroger Co. o Wal-Mart Stores, Inc. 45 For Fiscal Year 2002, one customer, Wal-Mart Stores, Inc., represented more than 10% of our sales, and the top ten customers represented over 30% of our sales. We closely monitor the credit risk associated with these customers and to date have never experienced significant losses. Properties We operate the following factories, distribution centers and other properties involved in manufacturing our products: Company/Location Owned Leased Primary Products ---------------- ----- ------ ---------------- Pittsburgh, PA x soup, baby food Fremont, OH x condiments Holland, MI x pickles, vinegar, soup Muscatine, IA x soup, sauces Stockton, CA x tomato paste, sauces and condiments Mason, OH x sauces and condiments Dallas, TX x x sauces and condiments Escalon, CA x tomato products King of Prussia, PA x frozen soup Chatsworth, CA x sauces and condiments Jacksonville, FL x sauces and condiments Stone Mountain, GA x sauces and condiments Cedar Rapids, IA x soup Nashville, TN x sauces Industry, CA x sauces Newburyport, MA x frozen desserts Le Center, MN x frozen desserts Phoenix, AZ x sauces and condiments Irvine, CA x sauces and condiments San Diego, CA x frozen appetizers Northbrook, IL x dry soup, bouillon Pennsauken, NJ x sauces Ontario, OR x frozen potatoes West Chester, PA x frozen filled pasta Ft. Myers, FL x frozen appetizers Massilon, OH x frozen meals Pocatello, ID x frozen meals Bloomsburg, PA x canned pet food Topeka, KS x dry pet food Lawrence, KS x dry pet food We also own or lease office space, warehouses, distribution centers and research and other facilities. Our food processing plants and principal properties are in good condition and are satisfactory for the purposes for which they are being utilized. Trademarks, Patents and Licenses We own or license the following trademarks from related and unrelated parties: Major Trademarks Heinz North America Heinz, College Inn, Classico, Quality Chef, Yoshida, Jack Daniels*, Bell 'Orto, Bella Rosa, Chef Francisco, Domani, Wyler's, E-Z Squirt 46 Major Trademarks U.S. Frozen Ore-Ida, Bagel Bites, Rosetto, Weight Watchers*, Boston Market*, Smart Ones, T.G.I. Friday's*, Hot Bites, Poppers, Delimex U.S. Pet Products and Seafood StarKist, 9-Lives, Pounce, Kibbles n' Bits, Ken-L-Ration, Reward, Gravy Train, Skippy, Nature's Recipe, Pounce, Snausages, Jerky Treats, Pup-Peroni, Wagwells, Meaty Bone, Scooby* *Used under license from unrelated parties Our most significant trademarks are "Heinz," "Ore-Ida" and "StarKist," all of which we license from a related party. The trademarks that we license from unrelated parties are under long-term contracts and are important to our business although are individually immaterial. We have participated in the development of certain food processing equipment, some of which is patented. We regard these patents as important but do not consider any one or group of them to be materially important to our business as a whole. Employees On a full-time basis, as of May 1, 2002, approximately 13,000 people were employed as part of our business, and of those employees, approximately 6,000 are represented by labor unions. Approximately 3,000 are salaried employees and approximately 10,000 are hourly employees. Almost all of the employees are full-time workers. We believe that we have good relations with our employees. Regulatory Compliance with the provisions of national, state and local environmental laws and regulations has not had a material effect upon our capital expenditures, earnings or competitive position. Our estimated capital expenditures for environmental control facilities for the remainder of Fiscal Year 2002 and the succeeding fiscal year are not material and will not materially affect either our earnings or competitive position. The Marine Mammal Protection Act of 1972, as amended, the "Act," and regulations thereunder, the "Regulations," regulate the incidental taking of dolphin in the course of fishing for yellowfin tuna in the eastern tropical Pacific Ocean, where a portion of our light-meat tuna is caught. In 1990, Heinz voluntarily adopted a worldwide policy of refusal to purchase tuna caught in the eastern tropical Pacific Ocean through the intentional encirclement of dolphin by purse seine nets and reaffirmed its policy of not purchasing tuna caught anywhere using gill nets or drift nets. Also in 1990, the Dolphin Protection Consumer Information Act the "Dolphin Information Act, " was enacted which regulates the labeling of tuna products as "dolphin safe" and bans the importation of tuna caught using high seas drift nets. The Act was amended in 1992 to further regulate tuna fishing methods which involve marine mammals. Compliance with the Act, the Regulations, the Dolphin Information Act, and Heinz's voluntary policy and the 1992 amendments has not had, and is not expected to have, a material adverse effect on our operations. Congress passed the International dolphin Conservation Program Act, "IDCPA," on August 15, 1997. It modified the regulation of the incidental taking of dolphins in the course of fishing for yellowfin tuna in the eastern tropical Pacific Ocean and revised the definition of "dolphin safe." Revision of the definition of "dolphin safe" and modification of the regulation of the incidental taking of dolphins in the course of fishing for yellowfin tuna in the eastern tropical Pacific Ocean have not had and are not expected to have a material adverse effect on our operations. Our factories are subject to inspections by various governmental agencies, including the United States Department of Agriculture and the Occupational Safety and Health Administration, and our products must comply with all the applicable laws, including food and drug laws, such as the Federal Food and Cosmetic Act of 1938, as amended, and the Federal Fair Packaging or Labeling Act of 1966, as amended, of the jurisdictions in which they are manufactured and marketed. 47 Legal Proceedings Certain suits and claims have been filed against Heinz Finance and have not been finally adjudicated. These suits and claims when finally concluded and determined, in the opinion of management, based upon the information that it presently possesses, will not have a material adverse effect on Heinz Finance's consolidated and combined financial position, results of operations or liquidity. 48 RELATED PARTY TRANSACTIONS Heinz Finance and Heinz have entered into agreements that provide for financial support, administrative and other services, reimbursement for employee services and intellectual property. This section describes those agreements between Heinz Finance and Heinz. Operational Agreements Heinz Finance has entered into a services agreement with Heinz pursuant to which Heinz will provide certain accounting, legal, tax and other support services and facilities to us. Under the services agreement, we will reimburse Heinz for services provided by Heinz thereunder. In addition, some of the officers and employees of Heinz Finance are officers or employees of Heinz or its affiliates. In particular, Heinz Management Company employs the salaried people who conduct the business of Heinz LP, and the costs and expenses of those employees are reimbursed by Heinz LP. If any individual provides more than de minimis services to both Heinz and Heinz Finance, the compensation of that individual will be apportioned between the two groups on terms no less favorable to us than we could obtain from unaffiliated entities. We pay a royalty to Promark International, Inc., for use of trademarks historically used in Heinz's U.S. business. Guarantee Facility Agreement; Liquidity Agreement Heinz Finance has also entered into a guarantee facility agreement with Heinz, pursuant to which Heinz agrees to guarantee our payment of third-party obligations we have issued or owe. We will pay Heinz fees equal to 10 basis points per year of the sum of the highest balance of the debt obligations with respect to which Heinz is a guarantor and the highest balance of the debt obligations with respect to which Heinz is a co-obligor. Under the terms of a liquidity agreement between Heinz and Heinz Finance, Heinz has agreed to provide or make available to us from time to time loans in an aggregate principal amount of up to $400 million outstanding at any one time, with normal and customary conditions to disbursement for each loan made. Each loan under the liquidity agreement will bear interest at a floating rate per annum equal to the then applicable LIBOR plus 100 basis points. We will pay Heinz a fee of 25 basis points per annum of the amount of loans available but not drawn. Other Agreements In addition, Heinz Finance sells and purchases products from other Heinz affiliates. Also, Heinz affiliates sold certain accounts receivables to other Heinz fully consolidated affiliates under a contract which was terminated in December 2001. For further information regarding related party transactions, see Note 9 of Heinz Finance's Condensed Consolidated Financial Statements for the three months ended July 31, 2002 and August 1, 2001 and Note 6 of Heinz Finance's Consolidated and Combined Financial Statements for the Fiscal Years ended May 1, 2002 and May 2, 2001 included in this prospectus. 49 MANAGEMENT Directors and Executive Officers Our Board of Directors is composed of four members, one of whom is an Independent Director. An "Independent Director" is a director who is not a current officer or employee of Heinz Finance, Heinz or any affiliate of Heinz or of any other person or persons that, in the, aggregate, own or owns more than 50% of the outstanding common stock of Heinz Finance and who is elected by holders of Heinz Finance's outstanding Series A Preferred Shares and the holders of any Heinz Finance stock expressly being designated by us as being at parity with the Series A Preferred Shares, "Parity Securities," with like voting rights, collectively, the "Voting Parity Securities." Andrew L. Stidd, the initial Independent Director, was named in the Certificate of Designation for the Series A Preferred Shares. Our directors will serve until resignation or removal. There is no current intention to alter the number of directors comprising the Board of Directors, and our Bylaws provide that the Board of Directors may not comprise more than nine members. Our directors and executive officers are: Positions and offices held with the Company and principal occupations or Other Name Age Director Since employment during the past five years Directorships - ---- --- -------------- ------------------------------------- ------------- Leonard A. Cullo.......... 44 September 14, 2000 Director; President since June 14, 2001. Treasurer of Heinz since August 2000, attorney at Heinz from 1991 to August 2000, last serving as Assistant General Counsel. Laura Stein............... 40 September 14, 2000 Vice President and Secretary since June 17, Nash Finch Co. 2001. Senior Vice President and General Counsel of Heinz since January 2000; attorney at The Clorox Company (manufactures and markets household products) from 1992 to December 1999, last serving as Assistant General Counsel - Regulatory Affairs. Andrew L. Stidd........... 44 July 6, 2001 Director, President and Chief Operating Officer of Global Securitization Services, LLC (owns and administers special purpose vehicles established in connection with structured finance transactions) since December 1996. Arthur Winkleblack........ 45 January 8, 2002 Director, Vice President, Chief Financial and Accounting Officer since January 8, 2002. Executive Vice President and Chief Financial Officer of Heinz since January 7, 2002; executive of Indigo Capital (provides financing for early stage technology companies) from July 1999 to December 2001; Executive Vice President and Chief Financial Officer of C. Dean Metropoulos & Co. (provides management services for consumer product investments of Hicks, Muse, Tate and Furst) from August 1998 to July 1999; Chief Financial Officer of Six Flags Entertainment Corporation (regional theme park company) January 1996 to April 1998.
Each director, other than the Independent Director, is an officer or employee of Heinz or an affiliate of Heinz. 50 Compensation of Directors We intend to pay fees to our Independent Director for his service as a director. The Independent Director (and any subsequent additional Independent Director) is entitled to receive annual compensation of $3,500 plus reimbursement of expenses for attendance at each meeting of the Board of Directors. We do not intend to pay fees to directors who are not Independent Directors. Executive Compensation The following table sets forth information concerning the total compensation paid by us (except as discussed below for executive officers Cullo, Winkleblack, Stein, Johnson and Renne) to our executive officers for the periods set forth below. SUMMARY COMPENSATION TABLE Long-Term Compensation ------------ Annual Compensation Awards (2) Payouts ------------------- ---------- ------- Securities Underlying Other Options Annual /SARs Long-term All Other Compensation (No. Incentive Compensation Name and Principal Position Year Salary($) Bonus ($) ($) Awarded) Payouts ($)(3) - --------------------------- ---- --------- --------- ------------ -------- --------- ------------ Leonard A. Cullo(1) 2002 152,472 23,737 -- 13,000 - 0 - 21,685 President 2001 139,320 62,195 -- 15,000 - 0 - 25,132 Arthur Winkleblack(4) 2002 138,308 160,000 -- 100,000 - 0 - 13,831 Vice President, Chief Financial and Accounting Officer Paul F. Renne(5) 2002 315,000 86,512 -- - 0 - - 0 - 107,181 Vice President 2001 315,000 218,259 -- 50,000 - 0 - 143,506 2000 289,594 537,253 -- -- - 0 - 61,170 Laura Stein(6) 2002 325,000 73,893 68,090(7) 50,000 - 0 - 37,485 Vice President and Secretary 2001 300,000 186,418 62,187 50,000 - 0 - 34,742 2000 90,000 153,000 50,000 - 0 - 13,186 William R. Johnson(8) 2002 1,050,000 367,500 105,218(9) 500,000 - 0 - 279,076(10) Chairman, President and Chief 2001 920,000 721,851 -- 500,000 - 0 - 384,526(10) Executive Officer of Heinz 2000 900,000 1,776,864 -- - 0 - - 0 - 402,911
- ------------------- (1) Executive officer Cullo is also employed by Heinz and receives a portion of his compensation from Heinz and the remainder from Heinz Finance. (2) No awards of restricted stock were made by Heinz to the executive officers employed by Heinz during the period covered by the Summary Compensation Table. (3) Includes for Messrs. Johnson, Winkleblack, Renne and Cullo and Ms. Stein, respectively, the following: (i) amounts contributed by Heinz under the Employees and Retirement and Savings Plan, $200,904, $13,831, $73,816, $19,113 and $31,275; (ii) amounts attributable to "split dollar" life insurance provided by Heinz, $61,007, $0, $14,212, $2,572 and $6,210; and (iii) the portion of interest accrued (but not currently paid or payable) on deferred compensation above 120% of the applicable federal long-term rate, $11,936, $0, $19,153, $0 and $0. (4) Mr. Winkleblack became an officer of Heinz Finance on January 8, 2002. (5) Mr. Renne resigned from his position at Heinz Finance on January 8, 2002. During the time Mr. Renne held a position at Heinz Finance, he received no direct compensation from Heinz Finance. The annual base salary and annual bonus opportunity for Mr. Renne was determined by the Heinz Management Development and Compensation Committee. Because Mr. Renne was also an executive officer of Heinz and his compensation from Heinz was previously required to be 51 disclosed, his compensation received from Heinz is included for the Heinz fiscal years ended May 2, 2001 and May 3, 2000. (6) Executive officer Stein is also employed by Heinz, and Ms. Stein receives no direct compensation from Heinz Finance. The annual base salary and annual bonus opportunity for Ms. Stein was determined by the Heinz Management Development and Compensation Committee. Ms. Stein became an executive officer of Heinz on January 10, 2000. Because Ms. Stein is an executive officer of Heinz and her compensation from Heinz was previously required to be disclosed, her compensation received from Heinz is included for the Heinz fiscal years ended May 2, 2001 and May 3, 2000. (7) Includes $45,717 in transition expenses for temporary housing rental and travel. (8) Mr. Johnson was not employed by Heinz Finance, but has been included because of his position at Heinz, which pays all of his compensation. The annual base salary and annual bonus opportunity for Mr. Johnson is determined by the Heinz Management Development and Compensation Committee. Because Mr. Johnson is an executive officer of Heinz and his compensation from Heinz was previously required to be disclosed, his compensation received from Heinz is included for the Heinz fiscal years ended May 2, 2001 and May 3, 2000. (9) Includes $45,665 for personal financial counseling for Mr. Johnson. (10) "All Other Compensation" for Fiscal Years 2001 and 2002 includes $1,745 and $5,229, respectively, in imputed income relating to a split dollar survivorship life insurance retention policy insuring Mr. Johnson and his spouse that was purchased in connection with Mr. Johnson's becoming Chairman of Heinz in September 2000. In December 2001, Mr. Johnson and his spouse relinquished their rights under the life insurance policy and the Heinz paid death benefit, and the life insurance policy was surrendered for its cash value with Heinz receiving all of the proceeds. Option Grants by Heinz in Fiscal Year 2002 Grant Date Individual Grants Value ---------------------------------------------------------------- ------------- Percent of Number of Total Options Shares Underlying Granted to Grant Date Options Granted Employees Exercise Price Expiration Present Value Name (#) (1) in Fiscal Year ($/Share) Date ($) (2) - ---- --------------- -------------- -------------- ---------- ------------- Leonard A. Cullo 13,000 0.28% $43.28 9/20/11 109,330 Arthur Winkleblack(3) 100,000 2.12% $40.16 1/7/12 815,000 Paul F. Renne - - - - - Laura Stein 50,000 1.06% $43.28 9/20/11 420,500 William R. Johnson 500,000 10.61% $43.28 9/20/11 4,205,000
- ------------------- (1) All options were granted on September 20, 2001 or January 7, 2002, pursuant to the terms of Heinz's 2000 Stock Option Plan, relate to Heinz shares and have identical terms. All options vest on September 20, 2004 or January 7, 2005. (2) The estimated grant date present value reflected in the above table is determined using the Black-Scholes model. The material assumptions and adjustments incorporated in the Black-Scholes model in estimating the value of the option grants reflected in the above table include the following: (i) exercise price on the options ($43.28 or $40.16) equal to the fair market value of the underlying stock on the date of grant; (ii) expected option term of 6.5 years; (iii) dividend yield of 3.9%; (iv) risk-free interest rate of 4.53%; and (v) volatility of 23.23%. The ultimate values of the options will depend on the future market price of Heinz's common stock, which cannot be forecast with reasonable accuracy. The actual value, if any, an optionee will realize upon exercise of an option will depend on the excess of the market value of Heinz's common stock over the exercise price on the date the option is exercised. (3) Mr. Winkleblack became an officer of Heinz Finance on January 8, 2002 and became an executive officer of Heinz on January 7, 2002. 52 Aggregated Option/SAR Exercises in Fiscal Year 2002 and Fiscal Year-End Option/SAR Value (1) Number of Securities Underlying Unexercised Value of Unexercised Options/SARs In-the-Money Options/SARs at Fiscal Year-End at Fiscal Year-End ($) (3) ------------------ -------------------------- Shares Acquired on Value Name Exercise (#) Realized ($)(2) Exercisable Unexercisable Exercisable Unexercisable - ---- ------------ --------------- ----------- ------------- ----------- ------------- Leonard A. Cullo -0- -0- 20,834 29,666 89,000 86,063 Arthur Winkleblack(4) -0- -0- -0- 100,000 -0- 264,000 Paul F. Renne 102,500 2,171,826 460,834 216,666 965,333 286,875 Laura Stein -0- -0- -0- 150,000 -0- 517,500 William R. Johnson 175,000 3,397,392 1,750,000 1,600,000 15,820,850 2,868,750
- ------------------- (1) All options are denominated in shares of Heinz. (2) The "Value Realized" is equal to the fair market value of a Heinz share on the date of exercise, less the exercise price, times the number of shares acquired. No Heinz SARs were exercised during the last fiscal year. (3) The "Value of Unexercised In-the-Money Options at Fiscal Year-End" is equal to the fair market value of each Heinz share underlying the options at May 1, 2002 less the exercise price, times the number of options. (4) Mr. Winkleblack became an officer of Heinz Finance on January 8, 2002 and became an executive officer of Heinz on January 7, 2002. Retirement Benefits Most full-time salaried employees in the United States who were hired before January 1, 1993 are entitled to retirement benefits from Plan A of the H. J. Heinz Company Employees' Retirement System, "Plan A." Benefits are based on credited service and five-year average eligible compensation through December 31, 1992, the date on which Plan A was frozen. Heinz has a Supplemental Executive Retirement Plan, the "SERP," which provides additional retirement benefits for eligible executives, including the executive officers Cullo, Winkleblack, Renne and Stein and Mr. Johnson. The SERP was adopted in order to attract and retain executives, and to compensate them for reductions in benefits due to limitations imposed by the Internal Revenue Code. The SERP benefit is a lump sum equal to a multiple of the employee's final average eligible compensation during any five of the last ten years prior to retirement. It is reduced by (i) the lump sum value of the Plan A benefit (if any), and (ii) the value of the employee's Age-Related Company Contribution Account under the Heinz Employees Retirement and Savings Plan and the Heinz Employees Retirement and Savings Excess Plan. The following table entitled "Table I - U.S. Retirement Plans" shows the estimated maximum retirement benefit from all sources described above, at various combinations of pay and service, stated as an annual pension equivalent beginning at age 65. The pay included in the earnings base is the executive's base salary and annual bonus. On May 6, 2002, the Board of Directors of Heinz approved an enhancement to Mr. Johnson's SERP. This enhancement provides for an additional accrual equal to 3.85% of final average earnings per each additional year of service from the date of the SERP enhancement. This benefit is subject to a maximum enhancement of 26.95% at 7 additional years of service. The enhancement is further limited to a total annual benefit (from all of Heinz's retirement arrangements) of 60% of final average earnings at retirement on or after the age of 60. This enhanced benefit would vest 100% upon the fifth anniversary of the adoption of the benefit and Mr. Johnson's continued employment. If Mr. Johnson is involuntarily terminated from his position for a reason other than for cause, the benefit will fully vest; his accrual however, would be based on years served as of the date of termination. 53 The following table entitled "Table II - Retirement Plans for Mr. Johnson" shows the estimated maximum retirement benefit from all sources described above for Mr. Johnson, at various combinations of pay and service, stated as an annual pension equivalent beginning at age 65. The pay included in the earnings base is Mr. Johnson's base salary and annual bonus. As of May 1, 2002, the years of service for executive officers Cullo, Winkleblack, Renne, Stein and Mr. Johnson were, as rounded to the nearest full year, 11, 1, 28, 2 and 20, respectively. Table I--U.S. Retirement Plans Years of Service ----------------------------------------------------------------- Average Earnings High Five of Last Ten Years Prior to Retirement 15 20 25 30 35 - --------------------- -------- -------- --------- -------- ---------- $ 200,000 $ 52,452 $ 61,194 $ 69,936 $ 78,678 $ 87,420 400,000 104,904 122,388 139,872 157,356 174,840 450,000 118,017 137,687 157,356 177,026 196,696 500,000 131,130 152,985 174,840 196,696 218,551 600,000 157,356 183,582 209,809 236,035 262,261 700,000 183,582 214,180 244,777 275,374 305,971 800,000 209,809 244,777 279,745 314,713 349,681 900,000 236,035 275,374 314,713 354,052 393,391 1,000,000 262,261 305,971 349,681 393,391 437,101 1,200,000 314,713 367,165 419,617 472,069 524,521 1,400,000 367,165 428,359 489,553 550,747 611,942 1,600,000 419,617 489,553 559,489 629,426 699,362 2,000,000 524,521 611,942 699,362 786,782 874,202 2,500,000 655,652 764,927 874,202 983,478 1,092,753 3,000,000 786,782 917,912 1,049,043 1,180,173 1,311,303
Table II--Retirement Plans for Mr. Johnson Years of Service --------------------------------------------------- Average Earnings High Five of Last Ten Years Prior to Retirement 20 25 30 35 - --------------------- ------- ---------- ---------- ---------- $ 950,000 $ 274,748 $ 496,873 $ 570,000 $ 570,000 1,000,000 289,208 523,024 600,000 600,000 1,100,000 318,129 575,326 660,000 660,000 1,200,000 347,050 627,629 720,000 720,000 1,400,000 404,892 732,233 840,000 840,000 1,600,000 462,733 836,838 960,000 960,000 1,800,000 520,575 941,443 1,080,000 1,080,000 2,000,000 578,417 1,046,048 1,200,000 1,200,000 2,200,000 636,258 1,150,653 1,320,000 1,320,000 2,400,000 694,100 1,255,257 1,440,000 1,440,000 2,600,000 751,942 1,359,862 1,560,000 1,560,000 2,800,000 809,784 1,464,467 1,680,000 1,680,000 2,900,000 838,704 1,516,769 1,740,000 1,740,000 3,000,000 867,625 1,569,072 1,800,000 1,800,000 Executive Deferred Compensation Plan Heinz has an Executive Deferred Compensation Plan, "Deferred Compensation Plan," under which contingent retention bonuses may be awarded. During Fiscal Year 2002, Heinz granted awards under the Deferred Compensation Plan to certain executives. Vesting of the awards will occur on the third anniversary following the date of the award, so long as the executive has not prior to that date voluntarily terminated employment with Heinz 54 or been terminated for cause. Vested awards will be paid in cash following the fifth anniversary date of the award, or, in the case of certain named executive officers, upon retirement. Awards under the Deferred Compensation Plan for Fiscal Year 2002 include the award described in footnote 3 of the Summary Compensation Table above for Mr. Johnson (subsequently waived as noted below), and $250,000 for Ms. Stein. Messrs. Cullo, Renne and Winkleblack did not participate in this plan. In connection with the split-dollar life insurance arrangement with Mr. Johnson described in footnote 3 of the Summary Compensation Table, Mr. Johnson waived the right to receive the award granted to him during Fiscal Year 2001 under the Deferred Compensation Plan plus interest in exchange for Heinz's payment of the premium to purchase a split-dollar survivorship insurance policy insuring Mr. Johnson and his spouse as set forth in footnote 3 to the Summary Compensation Table above. In December 2001, Mr. Johnson and his spouse agreed to relinquish their rights in that insurance policy in exchange for Heinz providing $5,080,000 to a trust established by Mr. Johnson to purchase a life insurance policy under Heinz's Executive Estate Life Insurance Program as described below. Executive Estate Life Insurance Program In December 2001, Heinz adopted an executive estate life insurance program("EELIP") for certain eligible executives. Under the EELIP, eligible executives may relinquish compensation, including existing deferred compensation balances under Heinz's Executive Deferred Compensation Plan, in exchange for Heinz's funding of a split-dollar life insurance policy purchased by the executive's family trust. The amount funded by Heinz is equal to approximately 150% of the compensation relinquished by the executive, which was designed to achieve cost neutrality for Heinz when compared to the cost to Heinz of the relinquished deferred compensation benefit. Consistent with tax regulations, the premium payments are accomplished through split-dollar insurance loans which will be automatically repaid, with interest to Heinz upon payment under the policy. All amounts paid to the trust must be used by the trust to pay the premium on the life insurance policy on the life of the executive (or a survivorship policy on the life of the executive and the executive's spouse). Under the EELIP, Heinz will recover all amounts so funded plus interest thereon from the proceeds of the policy after the participant's and/or participant's spouse's death, and these amounts also are recoverable immediately in the event the participant terminates employment or is terminated for cause prior to any vesting date applicable to the compensation which was relinquished to fund the policy. In January 2001, Heinz had purchased a split-dollar life insurance policy for Mr. Johnson in exchange for Mr. Johnson relinquishing a deferred compensation award (in the aggregate amount of $3,385,249, including interest) originally granted to him in September 2000 under the Executive Deferred Compensation Plan, each with a vesting date of September 2003. In December 2001, Mr. Johnson agreed to relinquish his entire interest in that split-dollar policy and the previous deferred compensation award in exchange for Heinz providing under the EELIP $5,080,000 to his insurance trust to purchase a survivorship life insurance policy insuring Mr. Johnson and his spouse, with a vesting date of September 2003. The new insurance arrangement was substituted for the prior split-dollar policy for greater estate planning efficiency and in order to participate in the EELIP. In Fiscal Year 2002, Heinz funded insurance trusts established under the EELIP to certain other executive officers of Heinz, in exchange for their agreement to relinquish deferred compensation awards previously granted to them, each with vesting dates of June 2003. Severance Arrangements Heinz maintains severance agreements with Ms. Stein and Messrs. Johnson and Winkleblack. If an executive's employment is terminated involuntarily other than for cause, or voluntarily for good reason, within two years after a change in control of Heinz, the agreements provide for the lifting of restrictions on outstanding incentive awards, continuation of medical, life insurance and disability coverage for a three-year period, and a lump sum payment equal to three times the sum of the annual salary and bonus of the executive plus a benefit determined by taking into account an additional three years of age and service for purposes of calculating retirement benefits. The agreements also provide that Heinz will reimburse the executive for the impact of excise taxes, if any, which may be imposed under the Internal Revenue Code with respect to certain payments contingent on a change in control. 55 DESCRIPTION OF THE NEW NOTES The Old Notes and the New Notes constitute a separate series of debt securities issued under an Indenture, dated as of July 6, 2001 (the Indenture), among Heinz Finance, as Issuer, Heinz, as Guarantor and Bank One, National Association, as Trustee (the Trustee) and are collectively the notes under the indenture. The following summary of the material terms of the Indenture is subject to, and is qualified in its entirety by the reference to, the complete provisions of the New Notes and the Indenture. The form of the New Notes is included in the Indenture, which is filed as an exhibit to the registration statement of which this prospectus is a part and is available from us upon request. General The New Notes will be unsecured obligations of Heinz Finance and will be limited to up to $700,000,000 in aggregate principal amount in respect of the notes that mature in 2012 and $550,000,000 aggregate principal amount in respect of the notes that mature in 2032. The New Notes will be unconditionally and irrevocably guaranteed as to the payment of interest and principal by the Guarantor. The notes due 2012 will accrue interest at the rate of 6.00% per annum and the notes due 2032 will accrue interest at the rate of 6.75% per annum, both from the date on which the exchange offer is completed. Interest on these notes is payable semi-annually in arrears on March 15 and September 15 of each year to the persons in whose names the notes are registered at the close of business on the applicable regular record date, and the initial interest payment on the New Notes will be based on the applicable interest rates for the notes accruing from the most recent date to which interest has been paid on the corresponding Old Notes. Principal on the notes will be payable and the notes will be transferable at the corporate trust office of the Trustee in New York, N.Y. Unless other arrangements are made, interest will be paid by check mailed to the address of the person entitled thereto as it appears in the security register. The New Notes will be issued only in fully registrable form, without coupons, in denominations of $1,000 and any integral multiple thereof. For so long as the New Notes are held solely in book-entry form through the facilities of Depositary Trust Company ("DTC"), the only registered holder of the New Notes will be Cede & Co., as nominee for DTC. It is expected that beneficial interests in the New Notes issued and sold in the United States will trade in the Settlement System of DTC and that beneficial interests in the Notes issued sold outside of the United States will trade through the facilities of the Euroclear system, "Euroclear," and Clearstream Banking, societe anonyme, Luxembourg, "Clearstream, Luxembourg," and secondary market transactions in such beneficial interests will be effected in the Settlement System of DTC. See "Form and Denomination," "Transfer and Exchange," and "Depository Procedures with Respect to Global Notes." Form and Denomination The New Notes will initially be represented by one or more global notes in fully registered form without interest coupons, collectively, the "global note." The New Notes will be issued in denominations of $1,000 and integral multiples thereof. The global note will be deposited with the Trustee as custodian for DTC and registered in the name of DTC or a nominee of DTC. Owners of beneficial interests in any global note will hold such interests pursuant to the procedures and practices of DTC and must exercise any rights in respect of their interests in accordance with those procedures and practices. Such beneficial owners will not be holders, and will not be entitled to any rights under any New Note or the Indenture, with respect to any global note, and Heinz Finance, the Guarantor and the Trustee, and any of their respective agents, may treat DTC as the holder and owner of any global note. See "Depository Procedures with Respect to Global Notes." 56 Except as set forth below, the global notes may be transferred, in whole but not in part, only to another nominee of DTC or to a successor of DTC or its nominee. The New Notes are issuable in bearer form. For a description of the depository procedures with respect to the global notes, see "Depository Procedures with Respect to Global Notes." Optional Redemption Heinz Finance may choose to redeem some or all of the New Notes at any time. If Heinz Finance chooses to do so, it will mail a notice of redemption to the holders of the New Notes not less than 30 days and not more than 60 days before the redemption occurs. The redemption price will be equal to the greater of: o 100% of the principal amount of the New Notes to be redeemed plus accrued interest to the date of redemption, or o the sum of the present values of the Remaining Scheduled Payments on the Notes being redeemed, discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 15 basis points for the notes due 2012 or 20 basis points for the notes due 2032, plus in each case accrued and unpaid interest thereon to the date of redemption. If Heinz Finance is redeeming less than all of the New Notes, the Trustee will select the particular New Notes to be redeemed by lot or by another method the Trustee deems fair and appropriate. Unless Heinz Finance defaults in payment of the redemption price, on and after the redemption date, interest will cease to accrue on the New Notes or portions thereof called for redemption. Except as described above, the New Notes will not be redeemable by Heinz Finance prior to maturity and will not be entitled to the benefit of any sinking fund. For purposes of calculating the redemption price, the following terms have the meanings set forth below: "Treasury Rate" means the rate per annum equal to the semiannual equivalent yield to maturity (computed as of the second business day immediately preceding the redemption date) of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for the redemption date. "Comparable Treasury Issue" means the U.S. treasury security selected by an Independent Investment Banker that would be used, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Notes. "Independent Investment Banker" means one of the Reference Treasury Dealers that Heinz Finance appoints. "Comparable Treasury Price" means: o the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) as of the third business day preceding the redemption date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or o if that release (or any successor release) is not published or does not contain such prices on that business day, (1) the average of the Reference Treasury Dealer Quotations for the redemption date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations or (2) if the Trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all quotations obtained. 57 "Reference Treasury Dealer" means each of J.P. Morgan Securities, Inc., Bank of America Securities LLC, UBS Warburg LLC (and their successors) and one other nationally recognized investment banking firm that is a primary U.S. Government securities dealer specified from time to time by Heinz Finance. If, however, any of them ceases to be a primary U.S. Government securities dealer, we will substitute another nationally recognized investment banking firm that is such a dealer. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount and in each case for settlement on the next business day) quoted in writing to the Trustee by such reference treasury dealer as of 3:30 p.m., New York time, on the third business day preceding the redemption date. "Remaining Scheduled Payments" means the remaining scheduled payments of the principal and interest (excluding any interest accrued and paid as of the date of redemption) on each New Note to be redeemed that would be due after the related redemption date but for such redemption. Certain Definitions "Consolidated Net Assets" means total assets after deducting therefrom all current liabilities as set forth on the most recent balance sheet of the Guarantor and its consolidated Subsidiaries and computed in accordance with generally accepted accounting principles. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Principal Property" means any manufacturing or processing plant or warehouse owned at the date hereof or hereafter acquired by the Guarantor or any Restricted Subsidiary which is located within the United States and the gross book value (including related land and improvements thereon and all machinery and equipment included therein without deduction of any depreciation reserves) of which on the date as of which the determination is being made exceeds 2% of Consolidated Net Assets other than: (i) any such manufacturing or processing plant or warehouse or any portion thereof (together with the land on which it is erected and fixtures comprising a part thereof) which is financed by industrial development bonds which are tax exempt pursuant to Section 103 of the Internal Revenue Code (or which receive similar tax treatment under any subsequent amendments thereto or any successor laws thereof or under any other similar statute of the United States), (ii) any property which in the opinion of the board of directors is not of material importance to the total business conducted by the Guarantor as an entirety or (iii) any portion of a particular property which is similarly found not to be of material importance to the use or operation of such property. "Restricted Subsidiary" means a Subsidiary of the Guarantor (i) substantially all the property of which is located, or substantially all the business of which is carried on, within the United States and (ii) which owns a Principal Property. "Subsidiary" means any corporation or limited partnership more than 50% of the outstanding Voting Stock of which, or any limited partnership interests in which, at the time of determination is owned, directly or indirectly, by the Guarantor and/or by one or more other Subsidiaries. "Voting Stock" means capital stock of a corporation of the class or classes having general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of such corporation 58 (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power upon the occurrence of any contingency). Restrictions on Secured Debt If the Guarantor or any Restricted Subsidiary shall after the date of the Indenture incur or guarantee any evidence of indebtedness for money borrowed, "Debt," secured by a mortgage, pledge or lien, referred to as a "Mortgage," on any Principal Property of the Guarantor or any Restricted Subsidiary, or on any share of stock or Debt of any Restricted Subsidiary, the Guarantor will secure or cause such Restricted Subsidiary to secure the Notes, other than any series of Notes established by or pursuant to a Board Resolution or in one or more supplemental indentures which specifically provide otherwise, equally and ratably with (or, at the option of the Guarantor, prior to) such secured Debt, unless the aggregate amount of all such secured Debt would not exceed 10% of Consolidated Net Assets. The above restrictions will not apply to, and there will be excluded from secured Debt in any computation under such restrictions, Debt secured by: (i) Mortgages on property of, or on any shares of stock of or Debt of, any corporation existing at the time such corporation becomes a Restricted Subsidiary, (ii) Mortgages in favor of the Guarantor or a Restricted Subsidiary, (iii) Mortgages in favor of governmental bodies to secure progress, advance or other payments pursuant to any contract or provisions of any statute, (iv) Mortgages on property, shares of capital stock or Debt existing at the time of acquisition thereof (including acquisition through merger or consolidation) and purchase money and construction Mortgages which are entered into within time limits specified in the Indenture, (v) Mortgages securing industrial revenue bonds, pollution control bonds or other similar tax-exempt bonds, (vi) mechanics' and similar liens arising in the ordinary course of business in respect of obligations not due or being contested in good faith, (vii) Mortgages arising from deposits with or the giving of any form of security to any government agency required as a condition to the transaction of business or to the exercise of any privilege, franchise or license, (viii) Mortgages for taxes, assessments or governmental charges or levies which are not then due or, if delinquent, are being contested in good faith, (ix) Mortgages (including judgment liens) arising from legal proceedings being contested in good faith, (x) Mortgages existing at the date of the Indenture, and (xi) any extension, renewal or refunding of any Mortgage referred to in the foregoing clauses (i) through (x) inclusive. Merger and Consolidation Each of Heinz Finance and the Guarantor covenants that it will not merge or sell, convey, transfer or lease all or substantially all of its assets unless we are the successor Person or the successor entity is another Person organized under the laws of the United States (including any state thereof and the District of Columbia) which 59 assumes its obligations on the debt securities and under the Indenture and, after giving effect to such transaction, Heinz Finance, the Guarantor or the successor Person would not be in default under the Indenture. Events of Default The Indenture defines "Events of Default" with respect to the debt securities of any series as being one of the following events: (i) default in the payment of any installment of interest on that series for 30 days after becoming due; (ii) default in the payment of principal on that series when due; (iii) default in the deposit of any sinking fund payment when due; (iv) default by Heinz Finance or the Guarantor in the performance or breach of any other covenant or warranty in the Notes of that series or the Indenture (other than a covenant included in the Indenture solely for the benefit of any series of Notes other than that series) for 90 days after notice; (v) the commencement of a voluntary, or the issuing of a decree by a court of an involuntary, bankruptcy, insolvency or reorganization proceeding under federal or state law with respect to Heinz Finance or the Guarantor; (vi) any other Event of Default provided with respect to Notes of that series; or (vii) the Guarantor contests the validity or enforceability of the Guarantee or any obligation under the Guarantee shall not be (or is claimed by the Guarantor not to be) in full force and effect. No sinking fund is provided for the New Notes, and no other Event of Default (as described in paragraph (vi) above) has been provided with respect to the Notes. If an Event of Default shall occur and be continuing with respect to the debt securities of any series, either the Trustee or the holders of at least 25% in principal amount of the debt securities then outstanding of that series may declare the principal (or such portion thereof as may be specified in an offering memorandum relating to such series) of the debt securities of such series to be due and payable. Under certain conditions, such a declaration may be annulled. The Indenture provides that the Trustee shall, within 90 days after the occurrence of a default known to it, give the holders of debt securities notice of all uncured defaults known to it (the term "default" to mean the events specified above without grace periods); provided, however, that, except in the case of default in the payment of principal of or interest on any Debt Security, the Trustee shall be protected in withholding such notice if it in good faith determines the withholding of such notice is in the interest of the holders of debt securities. Heinz Finance will be required to furnish to the Trustee annually a statement by certain officers of Heinz Finance to the effect that to the best of their knowledge Heinz Finance has complied with all of its conditions and covenants under the Indenture or, if Heinz Finance has not so complied, specifying each such default. The holders of a majority in principal amount of the outstanding debt securities of any series will have the right, subject to certain limitations, to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to the debt securities of such series, and to waive certain defaults with respect thereto. The Indenture provides that in case an Event of Default shall occur and be continuing, the Trustee shall exercise such of its rights and powers under the Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any of the holders of debt 60 securities unless they shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request. Modification of the Indenture With certain exceptions, the Indenture may be modified or amended with the consent of the holders of not less than a majority in principal amount of the outstanding debt securities of each series affected by the modification; provided, however, that no such modification or amendment may be made, without the consent of the holder of each debt security affected, which would: (i) reduce the principal amount of or the interest on any debt security, change the stated maturity of the principal of, or any installment of principal of or interest on, any debt security, or the other terms of payment thereof, or (ii) reduce the above-stated percentage of debt securities, the consent of the holders of which is required to modify or amend the Indenture, or the percentage of debt securities of any series, the consent of the holders of which is required to waive compliance with certain provisions of the Indenture or to waive certain past defaults. Defeasance and Discharge The New Notes will be subject to defeasance and discharge and to defeasance of certain obligations as described below. The Indenture provides that Heinz Finance may elect, with respect to the debt securities of any series, either: (i) to terminate (and be deemed to have satisfied) any and all obligations in respect of such debt securities (except for certain obligations to register the transfer or exchange of debt securities, to replace stolen, lost or mutilated debt securities, to maintain paying agencies and hold monies for payment in trust and, if so specified with respect to the debt securities of a certain series, to pay the principal of (and premium, if any) and interest, if any, on such specified debt securities); or (ii) to be released from its obligations with respect to such debt securities under Section 1004 of the Indenture (being the restrictions described above under "Restrictions on Secured Debt"); in either case on the 91st day after the deposit with the Trustee, in trust, of money and/or U.S. Government Obligations (as defined) which through the payment of interest and principal thereof in accordance with their terms will provide money in an amount sufficient to pay any installment of principal (and premium, if any) and interest, if any, on and any mandatory sinking fund payments in respect of such debt securities on the stated maturity of such payments in accordance with the terms of the Indenture and such debt securities. Such a trust may be established only if, among other things, Heinz Finance has delivered to the Trustee an Opinion of Counsel (who may be counsel to Heinz Finance) to the effect that, based upon applicable Federal income tax law or a ruling published by the United States Internal Revenue Service, such a defeasance and discharge will not be deemed, or result in, a taxable event with respect to holders of such debt securities. If so specified with respect to the Notes of a series, such a trust may be established only if establishment of the trust would not cause the debt securities of any such series listed on any nationally recognized securities exchange to be de-listed as a result thereof. Concerning the Trustee Bank One, National Association, is the Trustee under the Indenture and has been appointed by Heinz Finance as initial security registrar with regard to the New Notes. Heinz Finance currently does, and from time to time in the future may, maintain lines of credit and have customary banking relationships with the Trustee. The Trustee 61 currently serves as trustee for certain debt securities of the Guarantor and Heinz Finance, including the Old Notes. In addition, the Trustee may serve as Trustee for other debt securities issued by Heinz Finance from time to time. Guarantees The New Notes are guaranteed by Heinz. Heinz will unconditionally and irrevocably guarantee the due and punctual payment of principal of and interest, including any additional amounts, on the New Notes when the same shall become due and payable whether at maturity, by declaration of acceleration or otherwise. Transfer and Exchange At the option of the holder upon written request, and subject to the terms of the Indenture, any New Note will be exchangeable at any time into an equal aggregate principal amount of New Notes of different authorized denominations provided that any applicable transfer restrictions are satisfied. New Notes may be presented for registration of transfer (with the form of transfer endorsed thereon duly executed) or exchange, at the office of any transfer agent, the "security registrar," without service charge, but, in the case of a transfer, upon payment of any taxes and other governmental charges as described in the Indenture. Any registration of transfer or exchange will be effected upon the transfer agent or the security registrar, as the case may be, being satisfied with the documents of title and identity of the person making the request, and subject to such reasonable regulations as Heinz Finance may from time to time agree upon with the transfer agents and the security registrar, all as described in the Indenture. Subject to the applicable transfer restrictions, Notes may be transferred in whole or in part in authorized denominations. Heinz Finance has initially appointed the Trustee as security registrar and transfer agent, acting through its Corporate Trust Office in the Borough of Manhattan, The City of New York. Heinz Finance reserves the right to vary or terminate the appointment of the security registrar or of any transfer agent or to appoint additional or other transfer agents or to approve any change in the office through which any security registrar of any transfer agent acts, provided that there will at all times be a security registrar in and a transfer agent in the Borough of Manhattan, The City of New York. Purchase and Cancellation Heinz Finance, the Guarantor or any subsidiary may at any time and from time to time purchase New Notes at any price in the open market or otherwise. All securities surrendered for payment, redemption, repurchase, registration of transfer or exchange or conversion shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee. All securities so delivered to the Trustee shall be cancelled promptly by the Trustee. No securities shall be authenticated in lieu of or in exchange for any securities cancelled as provided in the Indenture. Title With respect to any New Note, Heinz Finance, the Guarantor, the Trustee, the paying agent and any other agent of Heinz Finance, the Guarantor or the Trustee may treat the Person in whose name such New Note is registered as the owner thereof for the purpose of receiving payment thereof and for all other purposes whatsoever. Notices Notices to holders of New Notes will be given by mail to the addresses of such holders as they appear in the Security Register. Such notices will be deemed to have been given when mailed. 62 Replacement of Notes New Notes that become mutilated, destroyed, stolen or lost will be replaced by Heinz Finance at the expense of the holder upon delivery to the Trustee of the mutilated Notes or evidence of the loss, theft or destruction thereof satisfactory to Heinz Finance and the Trustee. In the case of a lost, stolen or destroyed New Note, indemnity satisfactory to the Trustee and Heinz Finance may be required at the expense of the holder of such New Note before a replacement New Note will be issued. Payment of Stamp and Other Taxes Heinz Finance shall pay all stamp and other duties, if any, which may be imposed by the United States or the United Kingdom or any political subdivision thereof or taxing authority thereof or therein with respect to the issuance, transfer, exchange or conversion of the New Notes. Heinz Finance will not be required to make any payment with respect to any other tax, assessment or governmental charge imposed by any government or any political subdivision thereof or taxing authority therein. Depository Procedures with Respect to Global Notes With respect to the global notes, DTC has advised Heinz Finance as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code, as amended, and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participating organizations (collectively, the "Participants") and to facilitate the clearance and settlement of transactions in those securities between Participants through electronic book-entry changes in accounts of its Participants. The Participants include securities brokers and dealers (including the Initial Purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (collectively, the "Indirect Participants"). Persons who are not Participants may beneficially own securities held by or on behalf of DTC only through the Participants or the Indirect Participants. The ownership interest and transfer of ownership interest of each actual purchaser of each security held by or on behalf of DTC are recorded on the records of the Participants and Indirect Participants. DTC has also advised Heinz Finance that pursuant to procedures established by it, o (i) upon deposit of the global notes, DTC will credit the accounts of Participants designated by the Purchasers with portions of the principal amount of the global notes and o (ii) ownership of such interests in the global notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the Participants) or by the Participants and the Indirect Participants (with respect to other owners of beneficial interests in the global notes). Investors in the global note within the United States may hold their interests therein directly through DTC, if they are Participants in such system, or indirectly through organizations (including Euroclear and Clearstream, Luxembourg) that are Participants in such system. Investors in the global notes, outside of the United States, may hold interests therein through Euroclear or Clearstream, Luxembourg or organizations other than Euroclear and Clearstream, Luxembourg that are Participants in the DTC system. Euroclear and Clearstream, Luxembourg will hold interests in the any global note on behalf of their Participants through customers' securities accounts in their respective names on the books of their respective depositories. The depositories, in turn, will hold such interests in such global note in customers' securities accounts in the depositaries' names on the books of DTC. All interests in a global note, including those held through Euroclear or Clearstream, Luxembourg, may be subject to the procedures and requirements of DTC. Those interests held through Euroclear or Clearstream, Luxembourg may also be subject to the procedures and requirements of such system. 63 The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a global note to such persons may be limited to that extent. Because DTC can act only on behalf of its Participants, which in turn act on behalf of Indirect Participants and certain banks, the ability of a person having beneficial interests in a global note to pledge such interests to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. Except as described above under "--Transfer and Exchange," owners of Interests in the Registered global notes will not have Notes registered in their names, will not receive physical delivery of Notes in certificated form and will not be considered the registered owners or holders thereof under the Indenture for any purpose. DTC has advised Heinz Finance that its current practice, upon receipt of any payment in respect of interests in securities such as the global notes (including principal and interest) held by it or its nominee, is to credit the accounts of the relevant Participants with the payment on the payment date, in amounts proportionate to their respective holdings in principal amount of beneficial interests in the relevant security such as the global notes as shown on the records of DTC unless DTC has reason to believe it will not receive payment on such payment date. Payments by the Participants and the Indirect Participants to the beneficial owners of New Notes will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers registered in "street name." Such payments will be the responsibility of the Participants or the Indirect Participants and will not be the responsibility of DTC, the Trustee, Heinz Finance or the Guarantor. Neither Heinz Finance, the Guarantor nor the Trustee will be liable for any delay by DTC or any of its Participants in identifying the beneficial owners of the New Notes, and Heinz Finance, the Guarantor and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee as the registered owner of the global notes for all purposes. Transfers of beneficial interests in the global note between Participants in DTC will be effected in accordance with DTC's procedures, and such beneficial interests will trade in DTC's Settlement System; and consequently, secondary market trading activity in such interests will settle in immediately available funds. Transfers of beneficial interests in the global notes between participants in Euroclear and Clearstream, Luxembourg will be effected in the ordinary way in accordance with their respective rules and operating procedures, whereas cross-market transfers of such interests (including by DTC Participants other than Euroclear and Clearstream, Luxembourg) will be subject to considerations described below. Cross-market transfers with respect to the global notes between the Participants in DTC, on the one hand, and Euroclear or Clearstream, Luxembourg participants, on the other hand, will be effected through DTC in accordance with DTC's rules on behalf of Euroclear or Clearstream, Luxembourg, as the case may be, by its respective depository; however, such cross-market transactions will require delivery of instructions to Euroclear or Clearstream, Luxembourg, as the case may be, by the counterparts in such system. Euroclear or Clearstream, Luxembourg, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depository to take action to effect final settlement on its behalf by delivering or receiving interests in the relevant global note in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Euroclear participants and Clearstream, Luxembourg participants may not deliver instructions directly to the depositories for Euroclear or Clearstream, Luxembourg. Because of time zone differences, the securities account of a Euroclear or Clearstream, Luxembourg participant purchasing an interest in a global note from a Participant in DTC will be credited, and any such crediting will be reported to the relevant Euroclear or Clearstream, Luxembourg participant, during the securities settlement processing day (which must be a business day for Euroclear and Clearstream, Luxembourg) immediately following the settlement date of DTC. Cash received in Euroclear or Clearstream, Luxembourg as a result of sales of interests in a global note by or through a Euroclear or Clearstream, Luxembourg participant to a Participant in DTC will be received with value on the settlement date of DTC but will be available in the relevant Euroclear or Clearstream, Luxembourg cash account only as of the business day for Euroclear or Clearstream, Luxembourg following DTC's settlement date. 64 DTC has advised Heinz Finance that it will take any action permitted to be taken by a holder of New Notes only at the direction of one or more Participants to whose account with DTC interests in the global notes are credited and only in respect of such portion of the aggregate principal amount of the New Notes as to which such Participant or Participants has or have given such direction. However, if there is an Event of Default under the New Notes, DTC reserves the right to exchange the global notes for New Notes in certificated form, and to distribute such Notes to its Participants. Although DTC has agreed to the foregoing procedures in order to facilitate transfers of beneficial ownership interests in the global notes among Participants of DTC, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. None of Heinz Finance, the Guarantor, the Trustee nor any of their respective agents will have any responsibility for the performance by DTC, its Participants or Indirect Participants of their respective obligations under the rules and procedures governing their operations, including maintaining, supervising or reviewing the records relating to, or payments made on account of, beneficial ownership interests in global notes. Governing Law The Indenture is, and the New Notes will be, governed by and construed in accordance with the laws of the State of New York. 65 THE EXCHANGE OFFER Purpose of the Exchange Offer The Old Notes were delivered by us March 7, 2002 to the initial purchasers pursuant to a purchase agreement dated February 28, 2002 between us, Heinz and the initial purchasers. The initial purchasers subsequently sold the Old Notes to "qualified institutional buyers," as defined in Rule 144A under the Securities Act, in reliance on Rule 144A and outside the United States in accordance with Regulation S under the Securities Act. As a condition to the initial sale of the Old Notes, we, Heinz and the initial purchasers entered into the exchange and registration rights agreement. Pursuant to the exchange and registration rights agreement, we agreed that we would: o file with the Commission within 120 days after the Old Notes closing date, which is the date we delivered the Old Notes to the initial purchasers, a registration statement under the Securities Act relating to a registered exchange offer; o use our reasonable best efforts to cause such registration statement to become effective under the Securities Act within 180 days after the Old Notes closing date; and o keep the exchange offer open for at least 30 days, and use our reasonable best efforts to commence and complete the exchange offer no later than 45 days after the registration statement becoming effective. During this period, Heinz Finance agrees to exchange the Old Notes for all New Notes properly surrendered and not withdrawn before the expiration date of this period. If Commission interpretations are changed on or before the exchange offer such that the Notes received by each holder, except for certain restricted holders, are not or would not be transferable without restriction, and the exchange offer has not been completed within 225 days after the sale of the Old Notes or the exchange offer is not available to any holder of Notes, Heinz Finance will file a shelf registration statement for resale of the Notes within at least 30 days of such obligation arising. Heinz Finance will use its reasonable best efforts to cause the shelf registration statement to become effective no later than 60 days after filing and to keep the registration effective for up to two years after the shelf registration statement becomes effective. Heinz Finance will provide to the holders of the Old Notes copies of a prospectus, notify such holders when the resale registration for the Old Notes has become effective and take certain other actions as are required to permit unrestricted sales of the Old Notes. A holder of the Old Notes that sells such Old Notes pursuant to the resale registration generally would be required to be named as a selling securityholder in the related prospectus and to deliver a prospectus to the purchaser, will be subject to certain of the civil liability provisions of the Securities Act in connection with such sales and will be bound by the provisions of the exchange and registration rights agreement that are applicable to such holder (including certain indemnification obligations). If within the time required by the exchange and registration rights agreements, Heinz Finance does not complete this exchange offer or, if applicable, does not register the Old Notes for shelf resale, Heinz Finance will generally be deemed to be in registration default. Holders of Old Notes will accrue special additional interest for the period in which Heinz Finance is deemed to be in default. This special interest will accrue as follows; if, within a period of 180 days following the date of original issuance of the Old Notes, the registration statement with regard to the New Notes is not declared effective by the Commission, this special interest will accrue at an annual rate of 0.25% from and including the first day following the end of this period and will cease to accrue on the date on which the registration statement is declared effective by the Commission. Additionally, if, within a period of 45 days following the date the registration statement is declared effective, Heinz Finance does not complete the exchange offer, special interest will accrue at an annual rate of 0.25% from and including the first day following the end of this period and will cease to accrue on the date on which the exchange offer is completed. At no time will the aggregate of any such special interest described above accrue at an annual rate in excess of 0.50%. Beginning on September 4, 2002, to but excluding October 19, 2002, interest accrued on the notes due 2012 at the annual rate of 6.25% and on the notes due 2032 at the annual rate of 7.00%. Beginning on October 19, 2002, interest accrued on the notes due 2012 and on the notes due 2032, and will accrue to but excluding the date the exchange offer is completed, at the annual rates of 6.50% and 7.25%, respectively. 66 Terms of the Exchange Offer For each of the Old Notes properly surrendered and not withdrawn before the expiration date, Heinz Finance will issue a New Note having a principal amount equal to that of the surrendered Old Note. The form and terms of the New Notes will be the same as the form and terms of the Old Notes except that the New Notes will be registered for the exchange offer under the Securities Act and, therefore, the New Notes will not bear legends restricting the transfer of the New Notes; and holders of the New Notes will not be entitled to any of the registration rights of the holders of Old Notes under the exchange and registration rights agreement, which will terminate upon the consummation of the exchange offer. The New Notes will evidence the same indebtedness as the Old Notes, which they replace, and will be issued under, and be entitled to the benefits of, the same indenture, which authorized the issuance of the Old Notes. As a result, both series of notes will be treated as a single class of notes under the Indenture. Heinz Finance intends to conduct the exchange offer in accordance with the provisions of the exchange and registration rights agreement and the applicable requirements of the Exchange Act and the related Commission rules and regulations. Under existing Commission interpretations, the New Notes would generally be freely transferable after the exchange offer without further registration under the Securities Act, except that broker-dealers receiving the New Notes in the exchange offer will be subject to a prospectus delivery requirement with respect to resale of those New Notes. Heinz Finance bases its view on interpretations by the staff of the Commission set forth in certain no-action letters issued to third parties. Heinz Finance has not, however, asked the Commission to consider this particular exchange offer in the context of a no-action letter. Therefore, holders of Old Notes cannot be sure that the Commission will treat the exchange offer in the same way it has treated other exchange offers in the past. A broker-dealer that has bought Old Notes for market-marking or other trading activities has to deliver a prospectus in order to resell any New Notes it has received for its own account in the exchange. The prospectus may be used by a broker-dealer to resell any of its New Notes. Heinz Finance has agreed in the exchange and registration rights agreement to send a prospectus to any broker-dealer that requests copies in the notice and questionnaire for a period of up to 180 days after the registration statement relating to this exchange offer is declared effective. Expiration Date; Extensions; Amendments The term "expiration date" shall mean 5:00 p.m., New York City time, on o , 2002, unless we, in our sole discretion, extend the exchange offer, in which case the term "expiration date" shall mean the latest date and time to which the exchange offer is extended. If we determine to extend the exchange offer, we will, prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date: o notify the exchange agent of any extension by oral or written notice; and o issue a press release or other public announcement which shall include disclosure of the approximate number of Old Notes deposited to date. We reserve the right, in our sole discretion: o to delay accepting any Old Notes; o to extend the exchange offer; or o if, in the opinion of our counsel, the consummation of the exchange offer would violate any applicable law, rule or regulation or any applicable interpretation of the staff of the Commission, to terminate or 67 amend the exchange offer by giving oral or written notice of such delay, extension, termination or amendment to the exchange agent. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by a press release or other public announcement thereof. If the exchange offer is amended in a manner determined by us to constitute a material change, we will promptly disclose such amendment by means of a prospectus supplement that will be distributed to the registered holders of the Old Notes, and we will extend the exchange offer for a period of five to ten business days, depending upon the significance of the amendment and the manner of disclosure to the holders, if the exchange offer would otherwise expire during such five to ten business day period. Without limiting the manner in which we may choose to make a public announcement of any delay, extension, amendment or termination of the exchange offer, we shall have no obligation to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely release to an appropriate news agency. Concurrent Exchange Offer Concurrently with the exchange offer of the Old Notes for the New Notes, we will conduct an offer to exchange up to $750,000,000 in aggregate principal amount of our outstanding 6.625% Guaranteed Notes due 2011 issued on July 6, 2001, for up to $750,000,000 in aggregate principal amount of our 6.625% New Guaranteed Notes due 2011. The completion or success of the concurrent exchange offer is not a condition to the completion of the exchange offer of the Old Notes for the New Notes. Interest on the New Notes Interest will accrue at the rate of 6.00% per annum for the notes due 2012 and 6.75% per annum for the notes due 2032, in each case from the date on which the exchange offer is completed. Interest will be payable semi- annually in arrears on March 15 and September 15 of each year, and the initial interest payment on the New Notes will be based on the applicable interest rates for the notes accruing from the most recent date to which interest has been paid on the corresponding Old Notes. Resale of the New Notes With respect to the New Notes, based upon interpretations by the staff of the Commission set forth in certain no-action letters issued to third parties, we believe that a holder who exchanges Old Notes for New Notes in the ordinary course of business, who is not participating, does not intend to participate, and has no arrangement or understanding with any person to participate in a distribution of the New Notes, and who is not an "affiliate" of ours within the meaning of Rule 405 of the Securities Act, will be allowed to resell New Notes to the public without further registration under the Securities Act and without delivering to the purchasers of the New Notes a prospectus that satisfies the requirements of Section 10 of the Securities Act. If any holder acquires New Notes in the exchange offer for the purpose of distributing or participating in the distribution of the New Notes, such holder: o cannot rely on the position of the staff of the Commission enumerated in such no-action letters issued to third parties; and o must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction, unless an exemption from registration is otherwise available. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes acquired by such broker-dealer as a result of market-making or other trading activities must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of any New Notes received in 68 exchange for Old Notes acquired by such broker-dealer as a result of market-making or other trading activities. We will make this prospectus, as it may be amended or supplemented from time to time, available to any such broker- dealer that requests copies of such prospectus in the letter of transmittal for use in connection with any such resale for a period of up to 180 days after the expiration date. See "Plan of Distribution." Procedures for Tendering To tender in the exchange offer, a holder of Old Notes must either: o complete, sign and date the letter of transmittal or facsimile thereof, have the signatures thereon guaranteed if required by the letter of transmittal, and mail or otherwise deliver such letter of transmittal or such facsimile to the exchange agent; or o if such Old Notes are tendered pursuant to the procedures for book-entry transfer set forth below, a holder tendering Old Notes may transmit an agent's message (as defined below) to the exchange agent in lieu of the letter of transmittal, in either case for receipt on or prior to the expiration date. In addition: o certificates for such Old Notes must be received by the exchange agent along with the letter of transmittal; o a timely confirmation of a book-entry transfer (a "book-entry confirmation") of such Old Notes into the exchange agent's account at DTC pursuant to the procedure for book-entry transfer described below, along with the letter of transmittal or an agent's message, as the case may be, must be received by the exchange agent on or prior to the expiration date; or o the holder must comply with the guaranteed delivery procedures described below. The term "agent's message" means a message, transmitted to the exchange agent's account at DTC and received by the exchange agent and forming a part of the book-entry confirmation, which states that such account has received an express acknowledgment from the tendering participant that such participant has received and agrees to be bound by the letter of transmittal and that Heinz Finance may enforce the letter of transmittal against such participant. To be tendered effectively, the letter of transmittal and other required documents, or an agent's message in lieu thereof, must be received by the exchange agent at the address set forth below under "--Exchange Agent" prior to 5:00 p.m., New York City time, on the expiration date. The tender by a holder that is not withdrawn prior to the expiration date will constitute an agreement between such holder and us in accordance with the terms and subject to the conditions set forth herein and in the letter of transmittal. The method of delivery of Old Notes, the letter of transmittal and all other required documents to the exchange agent is at the election and risk of the holder. Instead of delivery by mail, it is recommended that holders use an overnight or hand delivery service, properly insured. In all cases, sufficient time should be allowed to assure delivery to the exchange agent before the expiration date. Do not send the letter of transmittal or any Old Notes to us. Holders may request their respective brokers, dealers, commercial banks, trust companies or nominees to effect the above transactions for such holders. Any beneficial owner(s) of the Old Notes whose Old Notes are held through a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such intermediary promptly and instruct such intermediary to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on its own behalf, such owner must, prior to completing and executing the letter of transmittal and delivering such owner's Old Notes: 69 o make appropriate arrangements to register ownership of the Old Notes in such owner's name; or o obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Signatures on a letter of transmittal or a notice of withdrawal described below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed by an eligible institution unless the Old Notes tendered pursuant thereto are tendered: o by a registered holder who has not completed either the box entitled "Special Issuance Instructions" or the box entitled "Special Delivery Instructions" on the letter of transmittal; or o for the account of an eligible institution. In the event that signatures on a letter of transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be made by an eligible institution, which is a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States, or an "eligible guarantor institution" (within the meaning of Rule 17Ad-15 under the Exchange Act) which is a member of one of the recognized signature guarantee programs identified in the letter of transmittal. If the letter of transmittal is signed by a person other than the registered holder of any Old Notes listed therein, such Old Notes must be endorsed or accompanied by a properly completed bond power, signed by such registered holder exactly as such registered holder's name appears on such Old Notes. In connection with any tender of Old Notes in definitive certificated form, if the letter of transmittal or any Old Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by us, evidence satisfactory to us of their authority to so act must be submitted with the letter of transmittal. The exchange agent and DTC have confirmed that any financial institution that is a participant in DTC's system may utilize DTC's Automated Tender Offer Program to tender Old Notes. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Old Notes will be determined by us in our sole discretion, which determination will be final and binding. We reserve the absolute right: o to reject any and all Old Notes not properly tendered and any Old Notes our acceptance of which would, in the opinion of our counsel, be unlawful; and o to waive any defects, irregularities or conditions of tender as to particular Old Notes. Our interpretation of the terms and conditions of the exchange offer (including the instructions in the letter of transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as we shall determine. Although we intend to notify holders of defects or irregularities in connection with tenders of Old Notes, neither we, the exchange agent nor any other person shall incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. While we have no present plan to acquire any Old Notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any Old Notes that are not tendered pursuant to the exchange offer, we reserve the right in our sole discretion to purchase or make offers for any Old Notes that remain outstanding 70 subsequent to the expiration date and, to the extent permitted by applicable law, purchase Old Notes in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers could differ from the terms of the exchange offer. By tendering Old Notes pursuant to the exchange offer, each holder of Old Notes will represent to us that, among other things: o the New Notes to be acquired by such holder of Old Notes in connection with the exchange offer are being acquired by such holder in the ordinary course of business of such holder; o such holder is not participating, does not intend to participate, and has no arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of the New Notes; o such holder acknowledges and agrees that any person who is participating in the exchange offer for the purpose of distributing the New Notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale of the New Notes acquired by such person and cannot rely on the position of the staff of the Commission set forth in certain no-action letters; and o such holder is not an "affiliate", as defined in Rule 405 under the Securities Act, of ours. If the holder is a broker-dealer that will receive New Notes for such holder's own account in exchange for Old Notes that were acquired as a result of market-making activities or other trading activities, such holder will be required to acknowledge in the letter of transmittal that such holder will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, such holder will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Return of Old Notes In all cases, issuance of New Notes for Old Notes that are accepted for exchange pursuant to the exchange offer will be made only after timely receipt by the exchange agent of: o Old Notes or a timely book-entry confirmation of such Old Notes into the exchange agent's account at DTC; and o a properly completed and duly executed letter of transmittal and all other required documents, or an agent's message in lieu thereof. If any tendered Old Notes are not accepted for any reason set forth in the terms and conditions of the exchange offer or if Old Notes are withdrawn or are submitted for a greater principal amount than the holders desire to exchange, such unaccepted, withdrawn or otherwise non-exchanged Old Notes will be returned without expense to the tendering holder thereof (or, in the case of Old Notes tendered by book-entry transfer into the exchange agent's account at DTC pursuant to the book-entry transfer procedures described below, such Old Notes will be credited to an account maintained with DTC) as promptly as practicable. Book-Entry Transfer The exchange agent will make a request to establish an account with respect to the Old Notes at DTC for purposes of the exchange offer within two business days after the date of this prospectus, and any financial institution that is a participant in DTC may make book-entry delivery of Old Notes by causing DTC to transfer such Old Notes into the exchange agent's account at DTC in accordance with DTC's procedures for transfer. However, although delivery of Old Notes may be effected through book-entry transfer at DTC, the letter of transmittal or facsimile thereof, with any required signature guarantees and any other required documents, or an agent's message 71 in lieu of a letter of transmittal, must, in any case, be transmitted to and received by the exchange agent at the address set forth below under "--Exchange Agent" on or prior to the expiration date or pursuant to the guaranteed delivery procedures described below. Guaranteed Delivery Procedures If a holder of the Old Notes desires to tender such Old Notes and the Old Notes are not immediately available or the holder cannot deliver its Old Notes (or complete the procedures for book-entry transfer), the letter of transmittal or any other required documents to the exchange agent prior to the expiration date, a holder may effect a tender if: o the tender is made through an eligible institution; o prior to the expiration date, the exchange agent receives from such eligible institution (by facsimile transmission, mail or hand delivery) a properly completed and duly executed Notice of Guaranteed Delivery substantially in the form provided by us setting forth the name and address of the holder, the certificate number(s) of such Old Notes (if applicable) and the principal amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the expiration date: (i) the letter of transmittal (or a facsimile thereof), or an agent's message in lieu thereof, (ii) the certificate(s) representing the Old Notes in proper form for transfer or a book-entry confirmation, as the case may be, and (iii) any other documents required by the letter of transmittal, will be deposited by the eligible institution with the exchange agent; and o such properly executed letter of transmittal (or facsimile thereof), or an agent's message in lieu thereof, as well as the certificate(s) representing all tendered Old Notes in proper form for transfer or a book-entry confirmation, as the case may be, and all other documents required by the letter of transmittal, are received by the exchange agent within three New York Stock Exchange trading days after the expiration date. Upon request to the exchange agent, a form of Notice of Guaranteed Delivery will be sent to holders who wish to tender their Old Notes according to the guaranteed delivery procedures set forth above. Withdrawal of Tenders Except as otherwise provided herein, tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration date. To withdraw a tender of Old Notes in the exchange offer, a written or facsimile transmission notice of withdrawal must be received by the exchange agent at its address set forth herein prior to the expiration date. Any such notice of withdrawal must: o specify the name of the person having deposited the Old Notes to be withdrawn; o identify the Old Notes to be withdrawn (including the certificate number or numbers, if applicable, and principal amount of such Old Notes or, in the case of Old Notes transferred by a book-entry transfer, the name and number of the account at DTC to be credited); and 72 o be signed by the holder in the same manner as the original signature on the letter of transmittal by which such Old Notes were tendered (including any required signature guarantees or, in the case of Old Notes transferred by book-entry transfer, be transmitted by DTC and received by the exchange agent in the same manner as the agent's message transferring the Old Notes). If Old Notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn Old Notes and otherwise comply with the procedures of DTC. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by us, in our sole discretion, which determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for purposes of the exchange offer, and no New Notes will be issued with respect thereto, unless the Old Notes so withdrawn are validly retendered. Properly withdrawn Old Notes may be retendered by following one of the procedures described above under "--Procedures for Tendering" at any time prior to the expiration date. Exchange Agent Bank One Trust Company has been appointed as exchange agent for the exchange offer. Questions and requests for assistance, requests for additional copies of this prospectus or the letter of transmittal and requests for a copy of the Notice of Guaranteed Delivery should be directed to the exchange agent addressed as follows: By Mail or Hand/Overnight Delivery: By Facsimile: Bank One Trust Company 312-407-8853 One North State Street Chicago, Illinois 60602 Attention: Exchanges Confirm by Telephone: 800-524-9472 Bank One Trust Company is an affiliate of the trustee under the Indenture. Fees and Expenses The expenses of soliciting tenders will be borne by us. The principal solicitation is being made by mail. Additional solicitation may be made by facsimile transmission, telephone or other electronic means or in person by our officers and regular employees or those of our affiliates. We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to brokers, dealers or others soliciting acceptances of the exchange offer. We, however, will pay the exchange agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The expenses to be incurred in connection with the exchange offer, including registration fees, fees and expenses of the exchange agent and the trustee, accounting and legal fees, and printing costs, will be paid by us. We will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the exchange offer. If, however, a transfer tax is imposed for any reason other than the exchange of the Old Notes pursuant to the exchange offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. 73 Consequence of Failure to Exchange Participation in the exchange offer is voluntary. Holders of the Old Notes are urged to consult their financial and tax advisors in making their own decisions on what action to take. Old Notes that are not exchanged for the New Notes pursuant to the exchange offer will remain "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act. Accordingly, such Old Notes may not be offered, sold, pledged or otherwise transferred except: o to a person whom the seller reasonably believes is a "qualified institutional buyer" within the meaning of Rule 144A purchasing for its own account or for the account of a qualified institutional buyer in a transaction meeting the requirements of Rule 144A; o in an offshore transaction complying with Rule 903 or Rule 904 of Regulation S under the Securities Act; o pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available); o pursuant to an effective registration statement under the Securities Act; or o pursuant to another available exemption from the registration requirements of the Securities Act, and, in each case, in accordance with all other applicable securities laws. TAXATION In the opinion of Davis Polk & Wardwell, the exchange of Old Notes for New Notes in the exchange offer will not constitute a taxable transaction for United States federal income tax purposes and the New Notes will be treated as a continuation of the investment in the Old Notes. The holder will not recognize taxable gain or loss as a result of the exchange and will have the same basis in the New Notes as in the Old Notes immediately before the exchange. Concerning the tax consequences arising under state, local or foreign laws of the exchange of Old Notes for New Notes, we encourage holders to consult their own tax advisors. 74 PLAN OF DISTRIBUTION Each broker-dealer that receives New Notes for its own account in exchange for Old Notes acquired by the broker-dealer as a result of market-making or other trading activities must acknowledge that it will deliver a prospectus in connection with any resale of those New Notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a participating broker-dealer in connection with resales of New Notes received in exchange for such Old Notes. For a period of up to 180 days after the expiration date, we will make this prospectus, as amended or supplemented, available to any such broker-dealer that requests copies of this prospectus in the letter of transmittal for use in connection with any such resale. We will not receive any proceeds from any sale of New Notes by broker-dealers or any other persons. New Notes received by participating broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions or through the writing of options on the New Notes, or a combination of these methods of resale, at market prices prevailing at the time of resale or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such participating broker-dealer that resells the New Notes that were received by it for its own account pursuant to the exchange offer. Any broker or dealer that participates in a distribution of New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New Notes and any commissions or concessions received by these persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker- dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. 75 NOTICE TO INVESTORS Based on interpretations of the staff of the Commission set forth in no-action letters issued to third parties, we believe that New Notes issued pursuant to the exchange offer in exchange for Old Notes may be offered for resale, resold, and otherwise transferred by a holder (other than broker-dealers, as set forth below, and any holder that is an "affiliate" of Heinz Finance within the meaning of Rule 405 under the Securities Act) without further registration under the Securities Act and without delivery to prospective purchasers of a prospectus pursuant to the provisions of the Securities Act, provided that the holder is acquiring the New Notes in the ordinary course of its business, is not participating and has no arrangement or understanding with any person to participate in the distribution of the New Notes. Eligible holders wishing to accept the exchange offer must represent to us in the letter of transmittal that these conditions have been met. See "The Exchange Offer--Procedures for Tendering." Each broker-dealer who holds Old Notes acquired for its own account as a result of market-making or other trading activities and who receives New Notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of New Notes. The letter of transmittal states that by acknowledging and delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with the resales of New Notes received for the broker-dealer's own account in exchange for Old Notes where Old Notes were acquired by the broker-dealer as a result of market- making activities or other trading activities. For a period of up to 180 days after the expiration date, we will make this prospectus available to those broker-dealers (if they so request in the letter of transmittal) for use in connection with those resales. See "Plan of Distribution." The New Notes constitute new issues of securities with no established public trading market. We do not intend to apply for listing of the New Notes on any securities exchange or for inclusion of the New Notes in any automated quotation system. There can be no assurance that an active public market for the New Notes will develop or as to the liquidity of any market that may develop for the New Notes, the ability of holders to sell the New Notes, or the price at which holders would be able to sell the New Notes. Future trading prices of the New Notes will depend on many factors, including among other things, prevailing interest rates, our operating results and the market for similar securities. Any Old Notes not tendered or accepted in the exchange offer will remain outstanding. To the extent that Old Notes are tendered and accepted in the exchange offer, your ability to sell untendered, and tendered but unaccepted, Old Notes could be adversely affected. Following consummation of the exchange offer, the holders of Old Notes will continue to be subject to the existing restrictions on transfer thereof and we will have no further obligation to those holders, under the exchange and registration rights agreement, to provide for the registration under the Securities Act of the Old Notes. There may be no trading market for the Old Notes. We will not receive any proceeds from, and have agreed to bear the expenses of, the exchange offer. No underwriter is being used in connection with the exchange offer. The exchange offer is not being made to, nor will we accept surrenders for exchange from, holders of Old Notes in any jurisdiction in which the exchange offer or the acceptance thereof would not be in compliance with the securities or blue sky laws of those jurisdictions. VALIDITY OF THE NEW NOTES The validity of the New Notes will be passed upon for us by Davis Polk & Wardwell, New York, New York. 76 EXPERTS The consolidated and combined financial statements of Heinz Finance and Heinz as of May 1, 2002 and May 2, 2001 and for each of the three fiscal years ended May 1, 2002, either included or incorporated herein by reference to Heinz's Annual Report on Form 10-K for the fiscal year ended May 1, 2002 have been so either included or incorporated by reference in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. FORWARD-LOOKING STATEMENTS This prospectus (including the information incorporated by reference in this prospectus) contains statements that constitute forward-looking statements. These statements appear in a number of places in this prospectus or the documents incorporated by reference and include statements regarding the intent, belief or current expectations of, and with respect to, Heinz or its officers with respect to future events or the results of operations and financial condition of Heinz and its subsidiaries and involve known and unknown risks, uncertainties and other factors. In some cases, you can identify forward-looking statements in this document by words such as "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "potential," "should" or the negative of those terms or similar expressions. Such statements reflect the current views of Heinz with respect to future events and are subject to certain risks, uncertainties and assumptions. The following is a non-exclusive list of important factors which may affect the business and results of operations of Heinz. o Changes in laws and regulations, including changes in food and drug laws, accounting standards, taxation requirements (including tax rate changes, new tax laws and revised tax law interpretations) and environmental laws in domestic and foreign jurisdictions; o Competitive product and pricing pressures and Heinz's ability to gain or maintain share of sales in the global market as a result of actions by competitors and others; o Fluctuations in the cost and availability of raw materials, including tuna, and the ability to maintain favorable supplier arrangements and relationships; o The impact of higher energy costs and other factors on the cost of producing, transporting and distributing Heinz's products; o Heinz's ability to generate sufficient cash flows to support capital expenditures, share repurchase programs, debt repayment and general operating activities; o The inherent risks in the marketplace associated with new product or packaging introductions, including uncertainties about trade and consumer acceptance; o Heinz's ability to achieve sales and earnings forecasts, which are based on assumptions about sales volume, product mix and other items; o Heinz's ability to integrate acquisitions and joint ventures into existing operations and the availability of new acquisition opportunities and the success of divestitures and other business combinations; o Heinz's ability to achieve cost savings objectives, including any restructuring programs and our working capital initiative; o The impact of unforeseen economic and political changes in markets where we compete, such as currency exchange rates (notably with respect to the euro and pound sterling), inflation rates, recession, foreign ownership restrictions and other external factors over which Heinz has no control; 77 o Interest rate fluctuations and other capital market conditions; o The effectiveness of Heinz's advertising, marketing and promotional programs; o Weather conditions, which could impact demand for Heinz's products and the supply and cost of raw materials; o The impact of e-commerce and e-procurement, supply chain efficiency and cash flow initiatives; o The impact of global industry conditions, including the effect of the economic downturn in the food industry and the food service business in particular; o Heinz's ability to maintain our profit margin in the face of a consolidating retail environment; o Heinz's ability to offset the reduction in volume and revenue resulting from participation in categories experiencing declining consumption rates; o With respect to the proposed spin-off and merger between our U.S. and Heinz's Canadian pet food and pet snacks, our U.S. tuna, U.S. retail private label soup and gravy, College Inn broth and our U.S. infant feeding businesses, and a wholly-owned subsidiary of Del Monte, the ability to obtain required third party consents and Del Monte shareholders' approval and the success of business integration in a timely and cost effective manner; and o With respect to future dividends on Heinz stock, meeting certain legal requirements at the time of declaration. Such forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and actual results may differ from those in such forward-looking statements as a result of various factors. The information in this prospectus identifies important factors that could cause such differences. See also the factors described in "Cautionary Statement Relevant to Forward-Looking Information" in Heinz's Annual Report on Form 10-K for the fiscal year ended May 1, 2002 and "Where You Can Find More Information" and "Risk Factors" both in this prospectus. 78 INDEX TO FINANCIAL STATEMENTS OF H. J. HEINZ FINANCE COMPANY AND H. J. HEINZ COMPANY CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS OF H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES Page ---- Report of Independent Accountants.................................................................... F-2 Consolidated and Combined Statements of Income for the three years ended May 1, 2002................. F-3 Consolidated and Combined Balance Sheets as of May 1, 2002 and May 2, 2001........................... F-4 Consolidated Statement of Shareholders' Equity for the year ended May 1, 2002........................ F-5 Consolidated and Combined Statements of Cash Flows for the three years ended May 1, 2002............. F-6 Notes to Consolidated and Combined Financial Statements for the three years ended May 1, 2002........ F-7 Consolidated Statements of Income for the three months ended July 31, 2002 and August 1, 2001 (unaudited).......................................................................................... F-26 Condensed Consolidated Balance Sheets as of July 31, 2002 (unaudited) and May 1, 2002................ F-27 Condensed Consolidated Statements of Cash Flows for the three months ended July 31, 2002 and August 1, 2001 (unaudited)........................................................................... F-28 Notes to Condensed Consolidated Financial Statements for the three months ended July 31, 2002 and August 1, 2001 (unaudited)........................................................................... F-29 PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS OF H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES (UNAUDITED) Introduction to the Pro Forma Consolidated and Combined Financial Statements (unaudited)............. F-37 Pro Forma Consolidated Statement of Income for the year ended May 1, 2002 (unaudited)................ F-38 Pro Forma Combined Statement of Income for the year ended May 2, 2001 (unaudited).................... F-40 Pro Forma Combined Statement of Income for the year ended May 3, 2000 (unaudited).................... F-42 Pro Forma Consolidated Statement of Income for the three months ended July 31, 2002 (unaudited)...... F-44 Pro Forma Consolidated Statement of Income for the three months ended August 1, 2001 (unaudited)..... F-46 Pro Forma Consolidated Balance Sheet as of July 31, 2002 (unaudited)................................. F-48 PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS OF H. J. HEINZ COMPANY (UNAUDITED) Introduction to the Pro Forma Consolidated Financial Statements (unaudited).......................... F-50 Pro Forma Consolidated Statement of Income for the year ended May 1, 2002 (unaudited)................ F-51 Pro Forma Combined Statement of Income for the year ended May 2, 2001 (unaudited).................... F-53 Pro Forma Combined Statement of Income for the year ended May 3, 2000 (unaudited).................... F-55 Pro Forma Consolidated Statement of Income for the three months ended July 31, 2002 (unaudited)...... F-57 Pro Forma Consolidated Statement of Income for the three months ended August 1, 2001 (unaudited)..... F-59 Pro Forma Consolidated Balance Sheet as of July 31, 2002 (unaudited)................................. F-61
F-1 Report of Independent Accountants To the Board of Directors and Shareholders of H. J. Heinz Finance Company In our opinion, the accompanying consolidated and combined balance sheets and the related consolidated and combined statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of H. J. Heinz Finance Company (the "Company") and its subsidiaries at May 1, 2002 and May 2, 2001, and the results of their operations and their cash flows for each of the three years in the period ended May 1, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Pittsburgh, Pennsylvania July 2, 2002 F-2 H. J. Heinz Finance Company and Subsidiaries Consolidated and Combined Statements of Income Fiscal Years ended May 1, 2002, May 2, 2001 and May 3, 2000 Fiscal Year Ended ----------------------------------------- May 1, 2002 May 2, 2001 May 3, 2000 (52 Weeks) (52 Weeks) (53 Weeks) ----------- ----------- ----------- (Dollars in thousands) Sales........................................................... $ 4,191,230 $ 4,550,391 $ 4,469,324 Cost of products sold............................................ 2,744,344 3,085,270 3,013,574 ----------- ----------- ----------- Gross profit..................................................... 1,446,886 1,465,121 1,455,750 Selling, general and administrative expenses..................... 650,933 897,950 752,066 Royalty expense to related parties............................... 179,198 129,102 94,347 ----------- ----------- ----------- Operating income................................................. 616,755 438,069 609,337 Interest income.................................................. 36,175 110,979 126,236 Interest expense................................................. 206,578 10,278 7,138 Dividends from related parties................................... 130,720 - - Other expenses, net.............................................. 11,397 21,303 27,896 ----------- ----------- ----------- Income before income taxes, minority interest and cumulative effect of accounting changes.................................. 565,675 517,467 700,539 Provision for income taxes....................................... 46,251 205,358 252,244 ----------- ----------- ----------- Income before minority interest and cumulative effect of accounting changes............................................ 519,424 312,109 448,295 Minority interest................................................ (445,707) - - ----------- ----------- ----------- Income before cumulative effect of accounting changes............ 73,717 312,109 448,295 Cumulative effect of accounting changes.......................... - (5,211) - ----------- ----------- ----------- Net income....................................................... $ 73,717 $ 306,898 $ 448,295 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 H. J. Heinz Finance Company and Subsidiaries Consolidated and Combined Balance Sheets Fiscal Years Ended May 1, 2002 and May 2, 2001 May 1, 2002 May 1, 2001 -------------- --------------- (Dollars in thousands) Assets Current assets: Cash and cash equivalents............................................................. $ 6,924 $ 393 Receivables (net of allowances: 2002--$2,596; 2001--$2,606).......................... 732,714 506,447 Due from related parties........................................................... 72,762 75,429 Short-term notes receivable from related parties................................... 921,014 -- Inventories: Finished goods and work-in-process.............................................. 567,482 515,315 Packaging material and ingredients.............................................. 142,785 139,855 Prepaid expenses and other current assets.......................................... 61,439 99,470 -------------- -------------- Total current assets.......................................................... 2,505,120 1,336,909 Property, plant and equipment: Land............................................................................... 16,525 18,684 Buildings and leasehold improvements............................................... 313,979 399,802 Equipment, furniture and other..................................................... 1,185,861 1,190,028 Less accumulated depreciation...................................................... (661,429) (738,731) -------------- -------------- Total property, plant and equipment, net...................................... 854,936 869,783 Other noncurrent assets: Long-term notes receivable from related parties.................................... 35,000 35,000 Investments in related parties..................................................... 1,895,245 1,895,245 Goodwill (net of amortization: 2002--$262,439; 2001--$226,085)....................... 1,650,488 1,108,898 Other intangible assets (net of amortization: 2002--$153,425; 2001--$143,375)........ 276,102 99,396 Other noncurrent assets............................................................... 267,558 256,260 -------------- -------------- Total other noncurrent assets................................................. 4,124,393 3,394,799 -------------- -------------- Total assets.................................................................. $ 7,484,449 $ 5,601,491 ============== ============== Liabilities and Shareholders' Equity Current liabilities: Short-term debt with related parties............................................... $ 132,164 $ - Portion of long-term debt within one year.......................................... 451,375 29,833 Accounts payable................................................................... 256,372 321,222 Accounts payable to related parties................................................ 153,968 96,221 Accrued marketing.................................................................. 46,603 60,292 Accrued interest................................................................... 79,442 7,159 Accrued restructuring costs........................................................ 4,956 42,405 Other accrued liabilities.......................................................... 94,651 114,528 -------------- -------------- Total current liabilities....................................................... 1,219,531 671,660 Long-term debt........................................................................ 3,936,025 23,932 Deferred income taxes................................................................. 23,059 205,134 Other liabilities..................................................................... 36,431 42,368 -------------- -------------- Total long-term debt and other liabilities...................................... 3,995,515 271,434 Minority interest..................................................................... 1,758,476 - Mandatorily Redeemable Series A Preferred shares...................................... 325,000 - Shareholders' equity: Common stock, 1,001,000 shares authorized, 10,560 shares issued, $1.00 par value... 11 - Additional capital................................................................. 128,050 - Retained earnings.................................................................. 58,035 - Accumulated other comprehensive (loss)............................................. (169) - Parent company's investment........................................................ - 4,658,397 -------------- -------------- Total shareholders' equity...................................................... 185,927 4,658,397 -------------- -------------- Total liabilities and shareholders' equity...................................... $ 7,484,449 $ 5,601,491 ============== ==============
The accompanying notes are an integral part of these financial statements. F-4 H. J. Heinz Finance Company and Subsidiaries Consolidated Statement of Shareholders' Equity Fiscal Year Ended May 1, 2002 Accumulated Common Stock Other Total Comprehensive --------------- Additional Retained Comprehensive Shareholders' Income Shares Dollars Capital Earnings (Loss) Equity ------------- ------ ------- ---------- -------- ------------- ------------- Original contribution of net assets..................... - 10,560 $ 11 $ 135,386 - $ (261) $ 135,136 Net income - 2002............. $ 73,717 - - - $ 73,717 - 73,717 Other comprehensive income (loss), net of tax: Net change in fair value of cash flow hedges........ 252 - - - - 252 252 Net hedging losses reclassified into earnings................ (160) - - - - (160) (160) ---------- Comprehensive income.......... $ 73,809 ========== Dividends paid to preferred shareholders............... - - - (15,682) - (15,682) Adjustment to original net assets contributed......... - - (7,336) - - (7,336) ------ ----- ----------- -------- --------- ----------- Balance at May 1, 2002........ 10,560 $ 11 $ 128,050 $ 58,035 $ (169) $ 185,927 ====== ===== =========== ======== ========= ===========
The accompanying notes are an integral part of these financial statements. F-5 H. J. Heinz Finance Company and Subsidiaries Consolidated and Combined Statements of Cash Flows Fiscal Years ended May 1, 2002, May 2, 2001 and May 3, 2000 Fiscal Year Ended ------------------------------------------------- May 1, 2002 May 2, 2001 May 3, 2000 (52 Weeks) (52 Weeks) (52 Weeks) --------------- --------------- --------------- (Dollars in thousands) Operating activities: Net income......................................................... $ 73,717 $ 306,898 $ 448,295 Adjustments to reconcile net income to cash provided by operating activities: Depreciation.................................................... 67,639 70,277 90,219 Amortization.................................................... 39,499 51,464 49,467 Deferred tax provision.......................................... 14,467 29,417 13,250 Loss on sale of The All American Gourmet business............... -- 94,600 -- Minority interest............................................... 445,707 -- -- Provision for restructuring..................................... (3,561) 257,983 175,737 Deferred income................................................. 1,646 22,162 (570) Other items, net................................................ (3,165) (11,605) 9,763 Changes in current assets and liabilities, excluding effects of acquisitions and divestitures: Receivables.................................................. (215,473) (158,331) (52,916) Inventories................................................. (466,937) 73,329 (100,548) Due from/to related parties.................................. 142,651 (413,346) (52,773) Accounts payable............................................ (82,632) 10,094 16,341 Accrued liabilities.......................................... (46,396) (230,964) (163,654) Other....................................................... (50) (24,456) 1,275 --------------- --------------- -------------- Cash (used for) provided by operating activities........... (32,888) 77,522 433,886 --------------- --------------- -------------- Investing activities: Capital expenditures........................................... (77,205) (183,494) (215,404) Proceeds from disposals of property, plant and equipment ....... 3,274 165,450 4,781 Acquisitions, net of cash acquired.............................. (809,390) (229,916) (73,923) Proceeds from divestitures...................................... -- 96,524 25,000 Investment in The Hain Celestial Group, Inc..................... -- (79,743) (99,764) Other items, net................................................ 8,544 (827) (34,847) --------------- --------------- -------------- Cash used for investing activities......................... (874,777) (232,006) (394,157) --------------- --------------- -------------- Financing activities: Payments on long-term debt...................................... (309,900) (12,160) (52,110) Proceeds from long-term debt.................................... 1,992,792 -- 4,344 Payments on commercial paper and short-term borrowings, net..... (957,702) -- -- Payments of dividends to related parties........................ -- (350,648) (306,244) Distributions to Class A partners............................... (108,856) -- -- Dividends on preferred shares................................... (15,682) -- -- Proceeds from mandatorily redeemable Series A preferred shares....................................................... 325,000 -- -- Net parent advances............................................. -- 515,363 313,689 Other items, net................................................ (21,190) -- -- --------------- --------------- -------------- Cash provided by (used for) financing activities............. 904,462 152,555 (40,321) --------------- --------------- -------------- Net decrease in cash and cash equivalents.......................... (3,203) (1,929) (592) Cash and cash equivalents, beginning of year....................... 10,127 2,322 2,914 --------------- --------------- -------------- Cash and cash equivalents, end of year............................. $ 6,924 $ 393 $ 2,322 =============== =============== ===============
The accompanying notes are an integral part of these financial statements. F-6 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 1. Basis of Presentation On May 3, 2001, H. J. Heinz Company ("Heinz") reorganized its U.S. corporate structure and established two primary companies for the management of U.S. trademarks and for U.S. treasury functions. As a result, all of the U.S. treasury and business operations of Heinz's domestic operations ("the U.S. Group") are now being conducted by H. J. Heinz Finance Company and its wholly-owned subsidiaries, and H. J. Heinz Company, L.P. ("Heinz LP") collectively referred to as "Heinz Finance" in the accompanying notes. H. J. Heinz Finance Company has limited partnership interests in Heinz LP. As part of the reorganization, substantially all assets and liabilities of the U.S. Group, except for finished goods inventories, which were retained by Heinz, were contributed to Heinz LP by Heinz. In addition, certain assets and liabilities that related to the U.S. Group were assumed by Heinz during Fiscal Year 2001. H. J. Heinz Finance Company also assumed primary liability for approximately $2.9 billion of Heinz's outstanding senior unsecured debt and accrued interest by becoming co-obligor with Heinz. Heinz LP owns or leases the operating assets involved in manufacturing throughout the United States which were contributed by Heinz and its subsidiaries, together with other assets and liabilities, to Heinz LP and manages the business. Heinz LP has two classes of limited partnership interests, Class A and Class B, that are allocated varying income and cash distributions in accordance with the Heinz LP agreement. H. J. Heinz Finance Company, directly and through wholly-owned subsidiaries, owns the Class B interests. Heinz, directly and through wholly-owned subsidiaries, owns the Class A interests. Heinz Management Company, a wholly-owned subsidiary of Heinz, is the managing General Partner of Heinz LP and employs the salaried personnel of the U.S. Group. Under the partnership agreement, Heinz Finance has the power to control the general partner through majority membership on Heinz LP's management board. The minority interest amounts on the May 1, 2002 balance sheet represents the Class A and General Partner limited partnership interest in Heinz LP, and has been adjusted for the minority partners' share of income and cash distributions. The preparation of the May 2, 2001 and May 3, 2000 combined financial statements include the use of "carve out" and "push down" accounting procedures wherein assets, liabilities and expenses historically recorded or incurred at the parent company level or an affiliate of Heinz, which related to or were incurred on behalf of the U.S. Group, have been identified and allocated or pushed down as appropriate to reflect results of the U.S. Group for the periods presented. See Note (6), for a further discussion regarding the allocation of Heinz parent company costs. 2. Significant Accounting Policies Fiscal Year Heinz Finance operates on a 52- or 53-week fiscal year ending the Wednesday nearest April 30. Fiscal years for the financial statements included herein ended May 1, 2002, May 2, 2001 and May 3, 2000. Principles of Consolidation and Combination The consolidated and combined financial statements include the accounts of Heinz Finance. All intercompany accounts and transactions have been eliminated. Investments owned less than 50%, where significant influence exists, are accounted for on an equity basis. Certain prior-year amounts have been reclassified in order to conform with the Fiscal Year 2002 presentation. The accounting policies of Heinz Finance and the U.S. Group are the same. Use of Estimates The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. F-7 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Cash Equivalents Cash equivalents are defined as highly liquid investments with original maturities of 90 days or less. Inventories Inventories are stated at the lower of cost or market. Cost is determined principally under the average cost method. Property, Plant and Equipment Land, buildings and equipment are recorded at cost. For financial reporting purposes, depreciation is provided on the straight-line method over the estimated useful lives of the assets. Accelerated depreciation methods are generally used for income tax purposes. Expenditures for new facilities and improvements that substantially extend the capacity or useful life of an asset are capitalized. Ordinary repairs and maintenance are expensed as incurred. When property is retired or otherwise disposed, the cost and related depreciation are removed from the accounts and any related gains or losses are included in income. Intangibles Goodwill, trademarks and other intangibles arising from acquisitions are being amortized on a straight-line basis over periods ranging from seven to 40 years. The carrying value of intangibles is evaluated periodically in relation to the operating performance and future undiscounted cash flows of the underlying businesses. Adjustments are made if the sum of expected future net cash flows is less than book value. See Recently Adopted Accounting Standards regarding the accounting for goodwill and intangibles amortization effective May 2, 2002. Parent Company's Investment Heinz's investment for Fiscal years 2001 and 2000 represents the original investment by Heinz plus accumulated net income, less dividends, capital contributions, certain intercompany accounts and current federal and state income taxes payable. Revenue Recognition Heinz Finance recognizes revenue when title, ownership and risk of loss pass to the customer. See Recently Adopted Accounting Standards for additional information. Advertising Expenses Advertising costs are expensed in the year in which the advertising first takes place. Income Taxes Until July 6, 2001, Heinz Finance joined with Heinz in the filing of a consolidated U.S. income tax return and state income tax returns. After July 6, 2001, H. J. Heinz Finance Company began filing its own consolidated U.S. income tax return. U.S. tax expense for all periods prior to July 7, 2001, and state tax expense for all years includes the effect of certain tax sharing agreements Heinz Finance has with Heinz regarding these consolidated filings. Specifically, Heinz charged (refunded) Heinz Finance at the U.S. statutory rate for its actual taxable income (loss). In addition, Heinz charges Heinz Finance for its share of consolidated state tax expense based on Heinz Finance's share of the state allocation factors. F-8 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Deferred income taxes result primarily from temporary differences between financial and tax reporting. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. Financial Instruments Heinz Finance uses derivative financial instruments for the purpose of hedging interest rate and price exposures which exist as part of ongoing business operations. As a policy, Heinz Finance does not engage in speculative or leveraged transactions, nor does Heinz Finance hold or issue financial instruments for trading purposes. The cash flows related to financial instruments are classified in the consolidated and combined statements of cash flows in a manner consistent with those of the transactions being hedged. Recently Adopted Accounting Standards In September 2000, the FASB Emerging Issues Task Force ("EITF") issued new guidelines entitled, "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products." In addition, during May 2000, the EITF issued new guidelines entitled "Accounting for Certain Sales Incentives." Both of these issues provide guidance primarily on income statement classification of consideration from a vendor to a purchaser of the vendor's products, including both customers and consumers. Generally, cash consideration is to be classified as a reduction of revenue, unless specific criteria are met regarding goods or services that the vendor may receive in return for this consideration. In the fourth quarter of Fiscal Year 2002, Heinz Finance adopted these new EITF guidelines. The adoption of these EITF guidelines resulted in a reduction of revenues of approximately $437 million in Fiscal Year 2002, $388 million in Fiscal Year 2001 and $320 million in Fiscal Year 2000. Selling, general and administrative expense ("SG&A") was correspondingly reduced such that net income was not affected. Prior periods presented have been reclassified to conform with the current year presentation. In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." These standards require that all business combinations be accounted for using the purchase method and that goodwill and intangible assets with indefinite useful lives should not be amortized but should be tested for impairment at least annually, and they provide guidelines for new disclosure requirements. These standards outline the criteria for initial recognition and measurement of intangibles, assignment of assets and liabilities including goodwill to reporting units and goodwill impairment testing. Heinz Finance has adopted the provisions of SFAS Nos. 141 and 142 for all business combinations after June 30, 2001. Effective May 2, 2002, Heinz Finance will adopt SFAS No. 142 for existing goodwill and other intangible assets. The reassessment of intangible assets, including the ongoing impact of amortization, was completed during the first quarter of Fiscal Year 2003. The assignment of goodwill to reporting units, along with completion of the first step of the transitional goodwill impairment tests, was completed during the first six months of Fiscal Year 2003. The effects of adopting SFAS No. 141 and 142 on net income for Fiscal Year 2002, Fiscal Year 2001 and Fiscal Year 2000 follows: F-9 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Fiscal Year ------------------------------------------ 2002 2001 2000 --------------- ------------ ------------ Net income.................................................................$ 73,717 $ 306,898 $ 448,295 Add: Goodwill amortization, net of tax and minority interest............... 1,362 29,112 25,538 Trademark amortization, net of tax and minority interest................... - 2,138 2,134 -------------- ------------ ------------ Net income excluding goodwill and trademark amortization...................$ 75,079 $ 338,148 $ 475,967 ============== ============ ============
In Fiscal Year 2001, Heinz Finance changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." Under the new accounting method, adopted retroactive to May 4, 2000, Heinz Finance recognizes revenue upon the passage of title, ownership and risk of loss to the customer. The cumulative effect of the change on prior years resulted in a charge to income of $4.8 million (net of income taxes of $2.8 million), which has been included in net income for the year ended May 3, 2000. The change did not have a significant effect on revenue or results of operations for the year ended May 2, 2001. The pro forma amounts, assuming that the new revenue recognition method had been applied retroactively to prior periods, were not materially different from the amounts shown in the combined statements of income for the year ended May 3, 2000. In addition, in Fiscal Year 2001, Heinz Finance adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which resulted in a cumulative effect of an accounting change that reduced net income by $0.4 million. Recently Issued Accounting Standards In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. This standard is effective for fiscal years beginning after June 15, 2002. Heinz Finance does not expect that the adoption of this standard will have a significant impact on the consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." SFAS No. 144 clarifies and revises existing guidance on accounting for impairment of property, plant and equipment, amortized intangibles, and other long-lived assets not specifically addressed in other accounting literature. This standard will be effective for Heinz Finance beginning in Fiscal Year 2003. Heinz Finance does not expect the adoption of this standard to have a significant impact on the consolidated financial statements. 3. Acquisitions All of the following acquisitions have been accounted for as purchases and, accordingly, the respective purchase prices have been allocated to the respective assets and liabilities based upon their estimated fair values as of the acquisition date. Operating results of businesses acquired have been included in the consolidated and combined statements of income from the respective acquisition dates forward. Pro forma results of Heinz Finance, assuming all of the following acquisitions had been made at the beginning of each period presented, would not be materially different from the results reported. There are no significant contingent payments, options or commitments associated with any of the acquisitions. Fiscal Year 2002 Heinz Finance acquired the following businesses for a total of $813.9 million, which was paid primarily in cash, including obligations to sellers of $2.5 million: F-10 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 o In July 2001, Heinz Finance completed the acquisition of Borden Food Corporation's pasta sauce, dry bouillon and soup businesses including such brands as Classico pasta sauces, Aunt Millie's pasta sauce, Mrs. Grass Recipe soups and Wyler's bouillons and soups. o In August 2001, Heinz Finance completed the acquisition of Delimex Holdings, Inc., a leading maker of frozen Mexican food products such as taquitos, quesadillas, tamales and rice bowls. o In September 2001, Heinz Finance completed the acquisition of Anchor Food Products branded retail business, which includes the retail licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers and the Popper's brand of retail appetizer lines. o Heinz Finance also made other smaller acquisitions. The preliminary allocation of the purchase price resulted in goodwill of $571.2 million, which was assigned to the U.S. Frozen segment ($375.3 million) and Heinz North America segment ($195.9 million). Of that amount, $367.8 million is expected to be deductible for tax purposes. In addition, $186.0 million of intangible assets were acquired, of which $91.1 million was assigned to brands and trademarks that are not subject to amortization. The remaining $94.9 million of acquired intangible assets has a weighted-average useful life of approximately 27 years. The intangible assets that make up that amount include brands and trademarks of $39.1 million (38-year weighted-average useful life), licensing agreements of $45.8 million (20-year weighted-average useful life) and patents of $10.0 million (18-year weighted-average useful life). Fiscal Year 2001 Heinz Finance acquired businesses for a total of $234.0 million, including obligations to sellers of $4.1 million. The allocations of the purchase price resulted in goodwill of $186.5 million and trademarks and other intangible assets of $0.1 million, which are being amortized on a straight-line basis over periods not exceeding 40 years. On March 1, 2001, Heinz Finance acquired two privately held U.S. foodservice companies: Cornucopia, Inc. of Irvine, California, and Central Commissary, Inc. of Phoenix, Arizona. Both companies make and market refrigerated and frozen reciped food products. Also during Fiscal Year 2001, Heinz Finance completed the acquisitions of IDF Holdings, Inc., the parent of International DiverseFoods Inc., a leading manufacturer of customized dressings, sauces, mixes and condiments for restaurant chains and foodservice distributors, and Alden Merrell Corporation, a manufacturer of high-quality, premium-priced frozen desserts for casual dining restaurants and foodservice distributors. On June 19, 2000, Heinz Finance exercised its preemptive right to purchase an additional 2,582,774 shares of The Hain Celestial Group, Inc. ("Hain") for $79.7 million, or $30.88 per share. The transaction restored Heinz Finance's ownership interest in Hain to 19.5%. Heinz Finance's ownership was diluted as a result of Hain's stock-for-stock merger with Celestial Seasonings on May 30, 2000. Fiscal Year 2000 Heinz Finance acquired businesses for a total of $84.4 million, including obligations to sellers of $10.4 million. The allocations of the purchase price resulted in goodwill of $56.5 million, which is being amortized on a straight-line basis over periods not exceeding 40 years. During Fiscal Year 2000, Heinz Finance completed the acquisition of Quality Chef Foods, a leading manufacturer of frozen heat-and-serve soups, entrees and sauces; Yoshida, a line of Asian sauces marketed in the U.S.; and Thermo Pac, Inc., a U.S. leader in single-serve condiments. F-11 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 On September 27, 1999, Heinz Finance and Hain announced an agreement to form a strategic alliance for the global production and marketing of natural and organic foods and soy-based beverages. Heinz Finance's investment of $99.8 million gave it a 19.5% interest in Hain. Heinz Finance will provide procurement, manufacturing and logistic expertise while Hain will provide marketing, sales and distribution services. Additionally, Hain acquired from Heinz Finance the trademark for Earth's Best organic baby foods. Heinz Finance's investment in Hain is recorded in other noncurrent assets in the accompanying consolidated and combined balance sheets and equity income/loss is recorded in other expenses in the accompanying consolidated and combined statements of income. 4. Divestitures On February 9, 2001, Heinz Finance announced it had sold The All American Gourmet business and it Budget Gourmet and Budget Gourmet Value Classics brands of frozen entrees for $55.0 million. The transaction resulted in a pretax loss of $94.6 million. The All American Gourmet business contributed approximately $141.4 million in sales for Fiscal Year 2000. Pro forma results of Heinz Finance, assuming the above divestiture had been made at the beginning of each period presented, would not be materially different from the results reported. 5. Restructuring Charges Streamline In the fourth quarter of Fiscal Year 2001, Heinz announced a restructuring initiative named "Streamline" which includes an organizational restructuring aimed at reducing overhead costs and the consolidation of Heinz Finance's canned pet food production to Bloomsburg, Pennsylvania (which results in ceasing canned pet food production at Heinz Finance's Terminal Island, California facility). During the first quarter of Fiscal Year 2002, Heinz Finance recognized implementation costs totaling $1.2 million pretax. In the fourth quarter of Fiscal Year 2002, Heinz Finance recorded a benefit of $4.7 million pretax to reflect revisions in original cost estimates. This benefit was primarily the result of lower than expected contract exit costs associated with Heinz Finance's Terminal Island, California facility. Total Fiscal Year 2002 pretax charges of $1.1 million were classified as cost of products sold and a pretax benefit of $4.6 million is classified as SG&A. In addition, Heinz Management Company, a wholly-owned subsidiary of Heinz, assumed a portion of the Heinz Finance's restructuring liability as a result of the realignment that occurred on May 3, 2001. During Fiscal Year 2001, Heinz Finance recognized restructuring charges and implementation costs totaling $84.7 million pretax. Pretax charges of $65.3 million were classified as cost of products sold and $19.4 million as SG&A. The major components of the net restructuring charge and implementation costs and the remaining accrual balance as of May 1, 2002 and May 2, 2001 were as follows: F-12 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Employee Termination Noncash Asset and Severance Accrued Exit Implementation Write-Downs Costs Costs Costs Total ------------- ------------- ------------ -------------- ------------ (In Millions) Restructuring and implementation costs - Fiscal Year 2001......................... $ 34.7 $ 15.4 $ 22.8 $ 11.8 $ 84.7 Amounts utilized - Fiscal Year 2001......... (34.7) (5.8) (1.7) (11.8) (54.0) -------------- ----------- ------------- ------------- ------------ Accrued restructuring costs - May 2, 2001... - 9.6 21.1 - 30.7 Implementation costs - Fiscal Year 2002..... - - - 1.2 1.2 Revisions to accruals and asset write-downs- Fiscal Year 2002......................... 4.3 (3.1) (5.9) - (4.7) Amounts utilized - Fiscal Year 2002......... (4.3) (2.5) (10.4) (1.2) (18.4) Liability assumed by related party - Fiscal Year 2002......................... - (3.8) (0.6) - (4.4) -------------- ----------- ------------- ------------- ------------ Accrued restructuring costs - May 1, 2002... $ - $ 0.2 $ 4.2 $ - $ 4.4 ============== =========== ============= ============= ============
During Fiscal Year 2002, Heinz Finance utilized $12.9 million of severance and exit cost accruals, principally for ceasing canned pet food production in its Terminal Island, California facility, and its overhead reduction plan. Non-cash asset write-downs consisted primarily of long-term asset impairments that were recorded as a direct result of Heinz Finance's decision to consolidate its canned pet food production operations. Non-cash asset write- downs totaled $39.0 million and related to property, plant and equipment ($30.6 million) and current assets ($8.4 million). Long-term asset write-downs were based on third-party appraisals, contracted sales prices or management's estimate of salvage value. Current asset write-downs included inventory and packaging material, prepaids and other current assets and were determined based on management's estimate of net realizable value. Employee termination and severance costs are primarily related to involuntary terminations and represent cash termination payments to be paid to affected employees as a direct result of the restructuring program. Non-cash pension and postretirement benefit charges related to the approved projects are also included as a component of total severance costs ($5.3 million). Exit costs are primarily contractual obligations incurred as result of Heinz Finance's decision to exit these facilities. Implementation costs were recognized as incurred in Fiscal Year 2002 ($1.2 million pretax) and Fiscal Year 2001 ($11.8 million pretax) and consist of incremental costs directly related to the implementation of the Streamline initiative. These include cost premiums related to production transfers, idle facility costs, consulting costs and relocation costs. In Fiscal Year 2001, Heinz Finance ceased production of canned pet food in its Terminal Island, California facility. In Fiscal Year 2002, Heinz Finance continued and substantially completed its overhead reduction plan. These actions resulted in a net reduction of Heinz Finance's workforce of approximately 200 employees. Operation Excel In Fiscal Year 1999, Heinz announced a growth and restructuring initiative, named "Operation Excel." This initiative was a multi-year, multi-faceted program which established manufacturing centers of excellence, focused the product portfolio, realigned Heinz Finance's management teams and invested in growth initiatives. F-13 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Creating manufacturing centers of excellence resulted in significant changes to Heinz Finance's manufacturing footprint including the following initiatives: focused the Pittsburgh, Pennsylvania factory on soup and baby food production and shifted other production to existing facilities, downsized the Pocatello, Idaho factory by shifting Bagel Bites production to the Ft. Myers, Florida factory, and shifted certain Smart Ones entree production to the Massillon, Ohio factory, closed the El Paso, Texas pet treat facility and transferred production to the Topeka, Kansas factory and to co-packers, and disposed of the Bloomsburg, Pennsylvania frozen pasta factory. As part of Operation Excel, Heinz Finance focused the portfolio of product lines on six core food categories: ketchup, condiments and sauces; frozen foods; tuna; soup, beans and pasta meals; infant foods; and pet products. Realigning Heinz Finance's management teams provided processing and product expertise. Specifically, Operation Excel established a single frozen food headquarters, resulting in the closure of Heinz Finance's Ore-Ida head office in Boise, Idaho and established a single U.S. Grocery & Foodservice headquarters in Pittsburgh, Pennsylvania, resulting in the relocation of Heinz Finance's seafood and pet food headquarters from Newport, Kentucky. Heinz Finance substantially completed Operation Excel. During Fiscal Year 2002, Heinz Management Company, a wholly-owned subsidiary of Heinz, assumed a portion of the Heinz Finance's restructuring liability as a result of the realignment that occurred on May 3, 2001. During Fiscal Year 2001, Heinz Finance recognized restructuring charges of $44.8 million pretax. These charges were associated with exiting Heinz Finance's can making operations, which were sold during Fiscal Year 2001, and higher than originally expected severance costs associated with creating the single U.S. Grocery & Foodservice headquarters in Pittsburgh, Pennsylvania. This charge was recorded in cost of products sold ($36.3 million) and SG&A ($8.5 million). This charge was offset by reversals of unutilized Operation Excel accruals and asset write-downs of $21.0 million pretax. These reversals were recorded in cost of products sold ($8.2 million) and SG&A ($12.7 million) and were primarily the result of revisions in estimates of fair values of assets which were disposed of as part of Operation Excel and Heinz Finance's decision not to exit certain warehouses due to higher than expected volume growth. Implementation costs of $149.5 million pretax were also recognized in Fiscal Year 2001. These costs were classified as costs of products sold ($62.2 million) and SG&A ($87.3 million). During Fiscal Year 2000, Heinz Finance recognized restructuring charges of $95.3 million pretax. Pretax charges of $53.5 million were classified as cost of products sold and $41.8 million as SG&A. Also during Fiscal Year 2000, Heinz Finance recorded a reversal of $16.4 million pretax of Fiscal Year 1999 restructuring accruals and asset write-downs, primarily for the closure of the West Chester, Pennsylvania facility, which remains in operation as a result of the sale of the Bloomsburg frozen pasta facility in Fiscal Year 2000. Implementation costs of $96.9 million pretax were classified as cost of products sold ($33.7 million) and SG&A ($63.2 million). During Fiscal Year 1999, Heinz Finance recognized restructuring charges and implementation costs totaling $156.1 million pretax. Pretax charges of $94.3 million were classified as cost of products sold and $61.8 million as SG&A. Implementation costs were recognized as incurred and consisted of incremental costs directly related to the implementation of Operation Excel, including consulting fees, employee training and relocation costs, unaccruable severance costs associated with terminated employees, equipment relocation costs and commissioning costs. The major components of the restructuring charges and implementation costs and the remaining accrual balances as of May 1, 2002, May 2, 2001 and May 3, 2000 were as follows: F-14 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Employee Termination Noncash Asset and Severance Accrued Exit Implementation Write-Downs Costs Costs Costs Total ------------- ------------- ------------ -------------- ------------ (In Millions) Accrued restructuring costs - April 28, 1999 $ -- $ 8.4 $ 15.7 $ -- $ 24.1 Restructuring and implementation costs - 2000..................................... 50.2 37.4 7.6 96.9 192.1 Accrual reversal - Fiscal Year 2000......... (15.4) (0.6) (0.4) -- (16.4) Amounts utilized - Fiscal Year 2000......... (34.8) (27.0) (6.9) (96.9) (165.6) ------------- ------------ ----------- -------------- ----------- Accrued restructuring costs - May 3, 2000... -- 18.2 16.0 -- 34.2 Restructuring and implementation costs - 2001..................................... 33.1 5.2 6.5 149.5 194.3 Accrual reversal - Fiscal Year 2001......... (7.9) (5.1) (8.0) -- (21.0) Amounts utilized - Fiscal Year 2001......... (25.2) (13.7) (7.4) (149.5) (195.5) ------------- ------------ ----------- -------------- ----------- Accrued restructuring costs - May 2, 2001... -- 4.6 7.1 -- 11.7 Liability assumed by related party - Fiscal Year 2002......................... -- (4.6) (6.5) -- (11.1) ------------- ------------ ----------- -------------- ----------- Accrued restructuring costs - May 1, 2002... $ -- $ -- $ 0.6 $ -- $ 0.6 ============= ============ ============ ============== ===========
Non-cash asset write-downs consisted primarily of asset impairments that were recorded as a direct result of Heinz Finance's decision to exit facilities. Net non-cash asset write-downs totaled $25.2 million in Fiscal Year 2001 and related to property, plant and equipment ($14.9 million) and other current assets ($10.3 million). In Fiscal Year 2000, non-cash asset write-downs totaled $34.8 million and related to property, plant and equipment ($27.0 million) and current assets ($7.8 million). In Fiscal Year 1999, non-cash asset write-downs totaled $96.7 million and consisted of property, plant and equipment ($68.2 million), goodwill and other intangibles ($18.7 million) and current assets ($9.8 million). Long-term asset write-downs were based on third-party appraisals, contracted sales prices or management's estimate of salvage value. The carrying value of these long-term assets was approximately $2.4 million at May 3, 2000 and $8.1 million at April 28, 1999. These assets were sold or removed from service by the end of Fiscal Year 2001. The results of operations, related to these assets, including the effect of reduced depreciation were not material. Current asset write-downs included inventory and packaging material, prepaids and other current assets and were determined based on management's estimate of net realizable value. Severance charges are primarily related to involuntary terminations and represent cash termination payments to be paid to affected employees as a direct result of the restructuring program. Non-cash pension and postretirement benefit charges related to the approved projects are also included as a component of total severance costs ($13.6 million and $14.0 million in Fiscal Year 2000 and Fiscal Year 1999, respectively). Exit costs are primarily related to contract and lease termination costs ($23.8 million of the total $25.7 million net exit costs). Heinz Finance has closed or exited all of the five factories that were scheduled for closure. In addition, Heinz Finance also exited its can making operations. Operation Excel impacted approximately 1,700 employees with a net reduction in the workforce of approximately 1,400 after expansion of certain facilities. The exit of Heinz Finance's F-15 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 can making operations resulted in a reduction of the workforce of approximately 500 employees. During Fiscal 2001, Fiscal Year 2000 and Fiscal Year 1999, Heinz Finance's workforce had a net reduction of approximately 700 employees, 500 employees and 200 employees, respectively. 6. Related Party Transactions Employee Costs Certain of Heinz's general and administrative expenses are allocated to Heinz Finance. In Fiscal Year 2001 and 2000, total costs allocated, which included charges for salaries of corporate officers and staff and other Heinz corporate overhead, were based on a percent of revenue which represents a reasonable allocation in the opinion of management. In Fiscal Year 2002, these costs primarily include a management charge of all salaried employee costs from the Heinz Management Company. Total costs charged to Heinz Finance for these services were $334.8 million, $28.4 million and $28.7 million for Fiscal years 2002, 2001 and 2000, respectively. These costs are recorded as cost of products sold and SG&A expense in the accompanying consolidated and combined statements of income. Heinz charges Heinz Finance for its share of group health insurance costs for eligible company employees based upon location-specific costs, overall insurance costs and loss experience incurred during a calendar year. In addition, various other insurance coverages are also provided to Heinz Finance through Heinz's corporate programs. Workers compensation, auto, property, product liability and other insurance coverages are charged directly based on Heinz Finance's loss experience. Amounts charged to Heinz Finance for insurance costs were $65.2 million, $80.3 million and $73.7 million for Fiscal years 2002, 2001 and 2000, respectively, and are recorded in SG&A expense in the accompanying consolidated and combined statements of income. Pension costs and postretirement costs are also charged to Heinz Finance based upon eligible employees participating in the Plans. See Note (12). Cash Management In Fiscal Year 2001, the U.S. Group maintained a cash management arrangement with Heinz. On a daily basis, all available cash was deposited and disbursements were withdrawn. Heinz charged (credited) the U.S. Group interest on the average daily balance maintained in the resulting intercompany account. Net interest expense (income) related to this arrangement, included in the combined statements of income was $3.3 million and ($4.7) million in Fiscal years 2001 and 2000, respectively. The interest rate charged to or received by the U.S. Group was 6.73% and 6.57% in Fiscal years 2001 and 2000, respectively. Beginning in Fiscal Year 2002, Heinz Finance became the treasury center for cash management and debt financing for all of Heinz's domestic operations resulting in the $788.9 million of net short-term notes receivable with related parties on the Fiscal Year 2002 consolidated balance sheet. An average interest rate of 2.99% was charged on these notes resulting in $34.2 million of interest income for Fiscal Year 2002. Product Sales and Purchases Heinz Finance sells and purchases products and services to and from other Heinz affiliates. The result of related party transactions is the $72.8 million and $75.4 million balances due from related parties in fiscal years 2002 and 2001, respectively, and the $154.0 million and $96.2 million balances for accounts payable to related parties in fiscal years 2002 and 2001, respectively. Product sales to related parties were $55.9 million, $61.1 million and $53.8 million in Fiscal years 2002, 2001 and 2000, respectively, and purchases from related parties were $399.6 million, $421.4 million and $543.8 million in Fiscal years 2002, 2001 and 2000, respectively. F-16 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Other Related Party Items Heinz Finance sold undivided interests in certain accounts receivable to a Heinz affiliate, Receivables Servicing Company ("RSC"). Heinz Finance sold $619.2 million and $1,291.0 million of receivables net of discount expense of $2.8 million and $9.4 million in Fiscal years 2002 and 2001, respectively, to RSC. At the fiscal years ending 2002 and 2001, respectively, Heinz Finance had $0 and $126.9 million of receivables sold to RSC. These sales were reflected as reductions of trade accounts receivable. Heinz Finance's contract with RSC terminated in December 2001. Until the fourth quarter of Fiscal Year 2001, Heinz Finance had outstanding notes receivable from Heinz affiliates which were used for working capital purposes and to fund acquisitions. The short-term notes had interest rates ranging from 6.50% to 7.00%. The long-term notes had interest rates ranging from 6.75% to 7.50% with a maturity of May 2003. Interest income earned by Heinz Finance related to these receivables was $104.3 million and $115.9 million in Fiscal years 2001 and 2000, respectively. In the fourth quarter of Fiscal Year 2001, these notes receivable from related parties were exchanged by Heinz Finance with a subsidiary of Heinz, PM Holding, Inc. ("PM Holding"), for $1.9 billion of non-voting, 6.5% cumulative non-participating preferred stock of PM Holding. This dividend amounted to $130.7 million for Fiscal Year 2002. This preferred stock investment is recorded in the Investments in related parties balance on the consolidated and combined balance sheets as of May 1, 2002 and May 2, 2001. Heinz Finance paid royalties of $179.2 million, $129.1 million and $94.3 million in Fiscal years 2002, 2001 and 2000, respectively, to Promark International, Inc., a wholly-owned subsidiary of Heinz, for the use of certain trademarks. The $35.0 million long-term note receivable from related parties recorded on the accompanying consolidated and combined balance sheets for fiscal years 2002 and 2001 relates to a receivable from Heinz that was contributed to Heinz Finance in exchange for common stock of Heinz Finance. The common stock balance on the statement of shareholders' equity reflects a 4-for-1 common stock split which occurred in Fiscal Year 2002. The portion of long-term debt due within one year on the May 2, 2001 combined balance sheet includes a $21.0 million interest-bearing loan with a 6.00% interest rate to a related party, Caribbean Fishing Company. In addition, the long-term debt balance on the May 2, 2001 combined balance sheet includes a $5.4 million non-interest bearing loan to another related party, Boise Associates, Inc. Heinz Finance received an administrative fee from Heinz for acting as the agent in the sale of the retained inventory discussed in Note (1). This fee is $10.9 million for Fiscal Year 2002, which is recorded as income in SG&A expense in the accompanying consolidated statement of income. 7. Income Taxes The following table summarizes the provision for U.S. federal and state taxes on income: F-17 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 2002 2001 2002 --------- ---------- --------- (In thousands) Current: U.S. federal...................... $ 28,173 $ 176,776 $ 227,632 State............................. 3,611 (835) 11,362 --------- ---------- --------- 31,784 175,941 238,994 Deferred: U.S. federal...................... 13,851 25,759 12,929 State............................. 616 3,658 321 --------- ---------- --------- 14,467 29,417 13,250 --------- ---------- --------- Total tax provision............ $ 46,251 $ 205,358 $ 252,244 ========= ========== ========= The differences between the U.S. federal statutory tax rate and Heinz Finance's combined effective tax rate are as follows: 2002 2001 2002 --------- ---------- --------- U.S. federal statutory tax rate ............ 35.0% 35.0% 35.0% State income taxes (net of federal benefit). 0.7 0.6 1.1 Goodwill amortization....................... 0.4 1.2 0.9 Nontaxable minority interest in Heinz LP.... (27.6) - - Other....................................... (0.3) 2.9 (1.0) ---- ---- ---- Effective tax rate.......................... 8.2% 39.7% 36.0% ==== ==== ==== The deferred tax (assets) and deferred tax liabilities recorded on the balance sheet as of May 1, 2002 and May 2, 2001 are as follows: 2002 2001 ---------- ----------- (In thousands) Depreciation/amortization....................... $ 20,310 $ 242,023 Investment in limited partnership............... 5,751 - Other........................................... 258 21,669 ---------- ----------- 26,319 263,692 Provision for estimated expenses................ - (39,788) Operating loss carryforwards.................... (1,158) (3,171) Promotions and advertising...................... - (3,436) Other........................................... (2,609) (62,205) ---------- ----------- (3,767) (108,600) ---------- ----------- Net deferred tax liabilities.................... $ 22,552 $ 155,092 ========== =========== At the end of 2002, net operating loss carryforwards totaled $3.3 million and expire through 2021. The U.S. income tax returns of Heinz have been audited by the Internal Revenue Service for all years through 1994. F-18 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 8. Debt and Preferred Stock On September 6, 2001, Heinz Finance, Heinz and a group of domestic and international banks entered into a $1.50 billion credit agreement which expires in September 2006 and an $800 million credit agreement which expires in September 2002. These credit agreements, which support Heinz Finance's commercial paper program, replaced the $2.30 billion credit agreement which expired on September 6, 2001. As of May 1, 2002, $89.1 million of domestic commercial paper is classified as long-term debt due to the long-term nature of the supporting credit agreement. Aggregate domestic commercial paper had a weighted-average interest rate during Fiscal Year 2002 of 2.9% and at year-end of 2.0%. Maturity Range of Interest (Fiscal Year) 2002 2001 ----------------- ------------- -------------- ----------- (In Thousands) Long-term Commercial paper........................... Variable 2007 $ 89,142 $ - Senior unsecured notes and debentures...... 6.00-7.00% 2003-2032 2,756,305 - Eurodollar notes........................... 5.05-5.95 2003-2005 521,845 - Revenue bonds.............................. 3.39 2027 6,442 12,392 Promissory notes........................... 3.25-6.00 2003-2017 3,296 5,081 Remarketable securities.................... 6.49 2021 1,000,000 - Other...................................... 6.50-7.925 2002-2034 10,370 36,292 -------------- ----------- Total long-term debt.................... 4,387,400 53,765 Less portion due within one year 451,375 29,833 -------------- ----------- $ 3,936,025 $ 23,932 ============== ===========
The amount of long-term debt that matures in each of the four years succeeding 2003 is: $1.6 million in 2004, $272.6 million in 2005, $0.5 million in 2006 and $89.7 million in 2007. On March 7, 2002, Heinz Finance issued $700 million of 6.00% Guaranteed Notes due March 15, 2012 and $550 million of 6.75% Guaranteed Notes due March 15, 2032, which are guaranteed by Heinz. The proceeds were used to retire commercial paper borrowings. The $1.0 billion of remarketable securities due November 2020 have a coupon rate of 6.82%. The securities are subject to mandatory tender by all holders to the remarketing dealer on each November 15, and the interest rate will be reset on such dates. If the remarketing dealer does not elect to exercise its right to a mandatory tender of the securities or otherwise does not purchase all of the securities on a remarketing date, then Heinz Finance is required to repurchase all of the securities on the remarketing date at 100% of the principal amount plus accrued interest. Heinz Finance received a premium from the remarketing dealer for the right to require the mandatory tender of the securities. The amortization of the premium resulted in an effective interest rate of 5.82% through November 15, 2001. On November 15, 2001, the remarketing dealer exercised its right to a mandatory tender of the securities and purchased all of the securities and remarketed the securities at an effective yield to Heinz Finance of 6.49% through November 15, 2002. Because the remarketable securities may be refinanced by the $1.5 billion credit agreement discussed above, they are classified as long-term debt. On July 6, 2001, Heinz Finance issued $750 million of 6.625% Guaranteed Notes due July 15, 2011. The proceeds were used for general corporate purposes, including retiring commercial paper borrowings and financing acquisitions and ongoing operations. In addition, Heinz Finance raised $325 million via the issuance of Voting F-19 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Cumulative Preferred Stock, Series A with a liquidation preference of $100,000 per share. The Series A Preferred shares are entitled to receive quarterly dividends at a rate of 6.226% per annum and are required to be redeemed for cash on July 15, 2008. In Fiscal Year 2002, Heinz Finance entered into interest rate swaps in order to convert certain fixed-rate debt to floating. These swaps have an aggregate notional value of $2.05 billion and an average maturity of 16.4 years. The weighted-average fixed rate of the associated debt is 6.45%; however, the effective rate after taking into account the swaps is 3.14%. 9. Parent Company Investment The components of the investment by Heinz as of May 2, 2001 and May 3, 2000 are as follows: 2001 2000 ------------ ------------ (In thousands) Parent company investment, beginning of year........$ 4,198,271 $ 3,742,531 Net income.......................................... 306,898 448,295 Dividends paid to related parties................... (350,648) (306,244) Net parent advances................................. 515,363 313,689 Transfer of investment balance...................... (11,487) - ------------ ------------ Parent company investment, end of year..............$ 4,658,397 $ 4,198,271 ============ ============ 10. Supplemental Cash Flow Information Net cash paid during the year for: 2002 2001 2000 --------- --------- --------- (In thousands) Interest expense........................... $ 182,202 $ 1,569 $ 1,907 ========= ========= ========= Income taxes............................... $ 32,602 $ - $ - ========= ========= ========= Details of acquisitions: Fair value of assets....................... $ 863,771 $ 247,270 $ 108,229 Liabilities (1)......................... 52,393 17,354 32,047 --------- --------- --------- Cash paid............................... 811,378 29,916 76,182 Less cash acquired...................... 1,988 - 2,259 --------- --------- --------- Net cash paid for acquisitions............. $ 809,390 $ 229,916 $ 73,923 ========= ========= ========= - --------- (1) Includes obligations to sellers of $2.5 million, $4.1 million and $10.4 million in 2002, 2001 and 2000, respectively. F-20 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 11. Management Incentive Plan Heinz's management incentive plan covers officers and other key employees. Participants may elect to be paid on a current or deferred basis. The aggregate amount of all awards may not exceed certain limits in any year. In Fiscal Year 2002, all of Heinz Finance's compensation under the management incentive plan was recorded on the Heinz Management Company and subsequently charged back to Heinz Finance (see Note 6). Compensation under the management incentive plan was $4.6 million in 2001 and $15.4 million in 2000. 12. Employee Retirement Benefits Employees participate in certain defined benefit pension plans, certain defined contribution plans, and certain stock option plans, all of which are sponsored by Heinz. Heinz Finance also provides post-retirement health care and life insurance benefits for employees who meet the eligibility requirements of the Heinz plans. Retirees share in the cost of these benefits based on age and years of service. Heinz allocates costs for the defined benefit plans to Heinz Finance as determined by actuarial valuations. Company contributions to the defined contribution plans amount to a qualified age-related contribution, a matching of employee's contributions up to a specified amount, and for certain employees, supplemental contributions. The following (income) expense was included in the Heinz Finance's statements of income: 2002 2001 2000 --------- ---------- -------- (In Thousands) Defined Benefit Pension Plans..................$ (3,279) $ (15,311) $ (8,968) Defined Benefit Postretirement Medical.........$ 5,918 $ 9,697 $ 7,705 Defined Contribution Plans.....................$ 3,782 $ 17,677 $ 15,972 Employees also participate in the Employee Stock Ownership Plan ("ESOP") and the Global Stock Purchase Plan ("GSPP"). Heinz established the ESOP in 1990 to replace in full or in part Heinz Finance's cash-matching contributions to the H. J. Heinz Company Employees Retirement and Saving Plan, a 401(k) plan for salaried employees. The GSPP gives employees an option to acquire stock at the lower of 85% of the fair market value of Heinz's stock on the first or last day of a purchase period. 13. Financial Instruments Commodity Price Hedging Heinz Finance uses commodity futures and options in order to reduce price risk associated with anticipated purchases of raw materials such as corn, soybean oil and soybean meal. Commodity price risk arises due to factors such as weather conditions, government regulations, economic climate and other unforeseen circumstances. Hedges of anticipated commodity purchases which meet the criteria for hedge accounting are designated as cash flow hedges. Interest Rate Hedging Heinz Finance uses interest rate swaps to manage interest rate exposure. These derivatives are designated as cash flow hedges or fair value hedges depending on the nature of the risk being hedged. During Fiscal Year 2002, Heinz Finance entered into interest rate swaps with a notional amount of $2.05 billion to swap fixed-rate debt to floating (see Note 8). These swaps were designated as fair value hedges. F-21 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 Hedge Ineffectiveness During Fiscal Year 2002, hedge ineffectiveness related to cash flow hedges, which is reported in the consolidated statement of income, was not significant. Deferred Hedging Gains and Losses As of May 1, 2002, Heinz Finance is hedging forecasted transactions for periods not exceeding 12 months, and expects $0.2 million of net deferred loss reported in accumulated other comprehensive income to be reclassified to earnings within that time frame. During Fiscal Year 2002, the net deferred losses reclassified to earnings because the hedged transaction was no longer expected to occur were not significant. Concentrations of Credit Risk For Fiscal Year 2002, one customer represented more than 10% of Heinz Finance's sales and the top ten customers represented over 30% of Heinz Finance's sales. Heinz Finance closely monitors the credit risk associated with these customers and has never experienced significant losses. Counterparties to interest rate derivatives consist of large major international financial institutions. Heinz Finance continually monitors its positions and the credit ratings of the counterparties involved and, by policy, limits the amount of credit exposure to any one party. While Heinz Finance may be exposed to potential losses due to the credit risk of non-performance by these counterparties, losses are not anticipated. 14. Segment Data Descriptions of Heinz Finance's reportable segments are as follows: o Heinz North America -- This segment manufactures, markets and sells ketchup, condiments, sauces, soups, pasta meals and infant foods to the grocery and foodservice channels. o U.S. Pet Products and Seafood -- This segment manufactures, markets and sells dry and canned pet food, pet snacks, tuna and other seafood. o U.S. Frozen -- This segment manufactures, markets and sells frozen potatoes, entrees, snacks and appetizers. Heinz Finance's management evaluates performance based on several factors including net sales and the use of capital resources; however, the primary measurement focus is operating income excluding unusual costs and gains. Intersegment sales are accounted for at current market values. Items below the operating income line of the consolidated and combined statements of income are not presented by segment, since they are excluded from the measure of segment profitability reviewed by Heinz Finance's management. As a result of an internal reorganization, the reportable segments have changed. Accordingly, corresponding items of segment information for earlier periods have been restated to conform with the current year presentation. F-22 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 The following table presents information about Heinz Finance's reportable segments: Fiscal Year Ended May 1, 2002 May 1, 2002 May 2, 2001 May 3, 2000 May 2, 2001 May 3, 2000 (In Thousands) (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) ----------- ----------- ----------- ----------- ----------- ----------- Net External Sales (a) Intersegment Sales --------------------------------------- --------------------------------------- Heinz North America...... $ 2,005,008 $ 2,147,044 $ 1,950,649 $ 280 $ 2,870 $ 3,533 U.S. Pet Products and Seafood............... 1,121,103 1,434,123 1,636,343 -- 1,136 3,086 U.S. Frozen.............. 1,065,119 969,224 882,332 28 -- -- ----------- ----------- ----------- ----------- ----------- ----------- Consolidated and combined totals....... $ 4,191,230 $ 4,550,391 $ 4,469,324 $ 308 $ 4,006 $ 6,619 =========== =========== =========== =========== =========== =========== Operating Income (Loss) Operating Income (Loss) Excluding Special Items (b) --------------------------------------- ---------------------------------------- Heinz North America...... $ 362,631 $ 451,469 $ 429,125 $ 361,537 $ 553,569 $ 522,995 U.S. Pet Products and Seafood............... 91,349 (35,077) 84,092 88,882 116,018 138,725 U.S. Frozen.............. 165,484 23,257 96,892 165,484 141,180 124,126 Nonoperating (d)......... (2,709) (1,580) (772) (2,709) (1,580) (772) ----------- ----------- ----------- ----------- ----------- ----------- Consolidated and combined totals....... $ 616,755 $ 438,069 $ 609,337 $ 613,194 $ 809,187 $ 785,074 =========== =========== =========== =========== =========== =========== Depreciation and Amortization Expense Capital Expenditures (c) --------------------------------------- --------------------------------------- Total.................... $ 107,138 $ 121,741 $ 139,686 $ 77,205 $ 183,494 $ 215,404 =========== =========== =========== =========== =========== =========== Identifiable Assets --------------------------------------- Total North America...... $ 6,195,915 $ 3,190,835 $ 3,376,874 Nonoperating (d) 1,288,534 2,410,656 1,691,582 ----------- ----------- ----------- Consolidated and combined totals....... $ 7,484,449 $ 5,601,491 $ 5,068,456 =========== =========== ===========
- --------- (a) Sales for 2002, 2001 and 2000 reflect the adoption of the new EITF guidelines relating to the classification of consideration from a vendor to a purchaser of a vendor's products, including both customers and consumers. Total net external sales previously reported for Fiscal years ended May 2, 2001 and May 3, 2000 were $4,938,197 and $4,789,188. (b) Fiscal year ended May 1, 2002 -- Excludes net restructuring and implementation benefits of the Streamline initiative as follows: Heinz North America $1.1 million and U.S. Pet Products and Seafood $2.5 million. Fiscal year ended May 2, 2001 -- Excludes net restructuring and implementation costs of Operation Excel as follows: Heinz North America $68.2 million, U.S. Pet Products and Seafood $81.8 million and U.S. Frozen $23.3 million. Excludes restructuring and implementation costs of the Streamline initiative as follows: Heinz North America $15.3 million and U.S. Pet Products and Seafood $69.3 million. Excludes the loss on the sale of The All American Gourmet in U.S. Frozen of $94.6 million. Excludes acquisition costs in Heinz North America $18.5 million. Fiscal year ended May 3, 2000 -- Excludes net restructuring and implementation costs of Operation Excel as follows: Heinz North America $93.9 million, U.S. Pet Products and Seafood $54.6 million and U.S. Frozen $27.2 million. (c) Excludes property, plant and equipment obtained through acquisitions. (d) Includes charges/assets not directly attributable to operating segments. F-23 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 15. Commitments and Contingencies Legal Matters Certain suits and claims have been filed against Heinz Finance and have not been finally adjudicated. These suits and claims when finally concluded and determined, in the opinion of management, based upon the information that it presently possesses, will not have a material adverse effect on Heinz Finance's consolidated and combined financial position, results of operations or liquidity. Lease Commitments Operating lease rentals for warehouses, production, office facilities and equipment amounted to $38.2 million in 2002, $35.4 million in 2001 and $24.6 million in 2000. Future lease payments for noncancellable operating leases as of May 1, 2002 totaled $211.8 million (2003 - $16.1 million, 2004 - $16.8 million, 2005 - $15.5 million, 2006 - $13.3 million, 2007 - $133.0 million and thereafter - $17.1 million). Purchase Commitments Heinz Finance entered into an agreement on August 14, 2000 with Impress Metal Packaging Holdings, B.V. ("Impress") to purchase from Impress metal cans and ends annually of approximately $96 million for a ten-year term. 16. Advertising Costs Advertising costs for Fiscal years 2002, 2001 and 2000 were $252.8 million, $211.0 million and $189.1 million, respectively and are recorded either as a reduction of revenue or as a component of SG&A. 17. Subsequent Events On June 13, 2002, Heinz announced that it will transfer to a wholly-owned subsidiary ("Spinco") certain assets and liabilities of its U.S. pet food and pet snacks, U.S. tuna, U.S. retail private label soup, College Inn broth and U.S. infant feeding businesses, all of which are owned by Heinz Finance, and distribute all of the shares of Spinco common stock on a pro rata basis to its shareholders. Immediately thereafter, Spinco will merge with a wholly- owned subsidiary of Del Monte Foods Company ("Del Monte") resulting in Spinco becoming a wholly-owned subsidiary of Del Monte ("the Merger"). In connection with the Merger, each share of Spinco common stock will be automatically converted into shares of Del Monte common stock that will result in the fully diluted Del Monte common stock at the effective time of the Merger being held approximately 74.5% by Heinz shareholders and approximately 25.5% by the Del Monte shareholders. As a result of the transaction, Heinz Finance will receive approximately $1.1 billion in cash that will be used to retire debt. Included in the transaction will be the following brands: StarKist(R), 9-Lives(R), Kibbles 'n Bits(R), Pup-Peroni(R), Snausages(R), Nawsomes(R), Heinz Nature's Goodness(R) baby food and College Inn(R) broths. The following is a summary of the operating results of the businesses to be spun off over the past years: Fiscal 2002 Fiscal 2001 Fiscal 2000 ----------- ----------- ----------- (In thousands) Revenues....................................... $ 1,357,713 $ 1,744,371 $ 1,943,086 Operating income/(loss)........................ $ 148,917 $ (9,190) $ 107,425 Operating income excluding special items....... $ 146,450 $ 196,372 $ 215,789
F-24 H. J. Heinz Finance Company and Subsidiaries Notes to Consolidated and Combined Financial Statements Fiscal Years Ended May 1, 2002, May 2, 2001 and May 3, 2000 The Merger, which has been approved by the Board of Directors of Heinz and Del Monte, is subject to the approval by the shareholders of Del Monte and receipt of a ruling from the Internal Revenue Service that the contribution of the assets and liabilities to Spinco and the distribution of the shares of common stock of Spinco to Heinz shareholders will be tax-free to Heinz, Spinco and the shareholders of Heinz. The Merger is also subject to receipt of applicable governmental approvals and the satisfaction of other customary closing conditions. Heinz expects that the transaction will close late in calendar year 2002 or early in calendar year 2003. F-25 H. J. Heinz Finance Company and Subsidiaries Consolidated Statements of Income Three months ended July 31, 2002 and August 1, 2001 Three Months Ended ------------------------------ July 31, 2002 August 1, 2001* FY 2003 FY 2002 ------------- --------------- (Unaudited) (in thousands) Sales.................................................. $ 1,038,374 $ 492,261 Cost of products sold.................................. 687,643 320,320 ------------- -------------- Gross profit........................................... 350,731 171,941 Selling, general and administrative expenses........... 190,674 69,600 Royalty expense to related parties..................... 44,936 23,098 ------------- -------------- Operating income....................................... 115,121 79,243 Interest income........................................ 6,592 11,763 Interest expense....................................... 50,542 52,173 Dividends from related parties......................... 30,798 38,519 Currency (loss)/gain................................... (22,105) 2,431 Other expense.......................................... 3,008 2,229 ------------- -------------- Income before income taxes and minority interest....... 76,856 77,554 Provision for income taxes............................. 2,389 9,342 ------------- -------------- Income before minority interest........................ 74,467 68,212 Minority interest...................................... (70,213) (52,305) ------------- -------------- Net income............................................. $ 4,254 $ 15,907 ============= ==============
- --------- * Reclassified, see Note 7. See Notes to Condensed Consolidated Financial Statements. F-26 H. J. Heinz Finance Company and Subsidiaries Condensed Consolidated Balance Sheets July 31, 2002 and May 1, 2002 July 31, 2002 May 1, 2002* FY 2003 FY 2002 ------------- -------------- (Unaudited) (in thousands) ASSETS Current assets: Cash and cash equivalents......................... $ 11,347 $ 6,924 Receivables, net.................................. 484,711 732,714 Due from related parties.......................... 57,529 72,762 Short-term notes receivable from related parties.. 1,337,703 921,014 Inventories....................................... 747,699 710,267 Prepaid expenses and other current assets......... 140,448 61,439 -------------- -------------- Total current assets........................... 2,779,437 2,505,120 Property, plant and equipment........................ 1,490,244 1,516,365 Less accumulated depreciation........................ 677,167 661,429 -------------- -------------- Total property, plant and equipment, net....... 813,077 854,936 Long-term notes receivable from related parties...... 35,000 35,000 Investments in related parties....................... 1,895,245 1,895,245 Intangible assets, net............................... 1,925,675 1,926,590 Other noncurrent assets.............................. 344,120 267,558 -------------- -------------- Total other noncurrent assets.................. 4,200,040 4,124,393 -------------- -------------- Total assets................................... $ 7,792,554 $ 7,484,449 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt with related parties.............. $ 365,660 $ 132,164 Portion of long-term debt due within one year..... 451,885 451,375 Accounts payable.................................. 245,493 256,372 Accounts payable to related parties............... 177,129 153,968 Accrued interest.................................. 107,647 79,442 Other accrued liabilities......................... 144,813 146,210 -------------- -------------- Total current liabilities 1,492,627 1,219,531 Long-term debt....................................... 3,973,334 3,936,025 Deferred income taxes................................ 20,488 23,059 Other liabilities.................................... 29,401 36,431 -------------- -------------- Total long-term debt and other liabilities..... 4,023,223 3,995,515 Minority interest.................................... 1,763,845 1,758,476 Mandatorily Redeemable Series A Preferred shares..... 325,000 325,000 Shareholders' equity: Common stock...................................... 11 11 Additional capital................................ 128,050 128,050 Retained earnings................................. 57,231 58,035 Accumulated other comprehensive gain/(loss)....... 2,567 (169 -------------- -------------- Total shareholders' equity..................... 187,859 185,927 -------------- -------------- Total liabilities and shareholders' equity..... $ 7,792,554 $ 7,484,449 ============== ==============
- --------- * Summarized from audited Fiscal Year 2002 balance sheet. See Notes to Condensed Consolidated Financial Statements. F-27 H. J. Heinz Finance Company and Subsidiaries Condensed Consolidated Statements of Cash Flows Three months ended July 31, 2002 and August 1, 2001 Three Months Ended -------------------------------- July 31, 2002 August 1, 2001 FY 2003 FY 2002 --------------- -------------- (Unaudited) (in thousands) Cash provided by (used for) Operating Activities.................... $ 340,776 $ (128,005) ------------- ------------ Cash Flows from Investing Activities: Capital expenditures............................................. (16,559) (2,556) Acquisitions, net of cash acquired............................... -- (290,200) Other items, net................................................. 10,136 (20,978) ------------- ------------ Cash used for investing activities............................... (6,423) (313,734) ------------- ------------ Cash Flows from Financing Activities: Payments on long-term debt....................................... -- (7,167) Proceeds from long-term debt..................................... -- 748,959 Payments on commercial paper and short-term borrowings, net...... (260,933) (617,998) Distributions to Class A partners................................ (64,844) -- Dividends on preferred shares.................................... (5,058) -- Proceeds from mandatorily redeemable Series A preferred shares... -- 325,000 Other items, net................................................. 905 500 ------------- ------------ Cash (used for) provided by financing activities.............. (329,930) 449,294 ------------- ------------ Net increase in cash and cash equivalents........................... 4,423 7,555 Cash and cash equivalents, beginning of period...................... 6,924 10,127 ------------- ------------ Cash and cash equivalents, end of period............................ $ 11,347 $ 17,682 ============= ============
See Notes to Condensed Consolidated Financial Statements. F-28 H. J. Heinz Finance Company and Subsidiaries Notes to Condensed Consolidated Financial Statements Three months ended July 31, 2002 and August 1, 2001 (Unaudited) 1. On May 3, 2001, H. J. Heinz Company ("Heinz") reorganized its U.S. corporate structure and established centers of excellence for the management of U.S. trademarks and for U.S. treasury functions. As result, all of the U.S. treasury and business operations of Heinz's domestic operations ("the U.S. Group") are now being conducted by H. J. Heinz Finance Company and its wholly-owned subsidiaries, and H. J. Heinz Company, L.P. ("Heinz LP") collectively referred to as "Heinz Finance" in the accompanying notes. H. J. Heinz Finance Company has limited partnership interests in Heinz LP. As part of the reorganization, substantially all assets and liabilities of the U.S. Group, except for finished good inventories, which were retained by Heinz, were contributed to Heinz LP by Heinz. In addition, certain assets and liabilities that related to the U.S. Group were assumed by Heinz Finance during Fiscal Year 2002. H. J. Heinz Finance Company assumed primary liability for approximately $2.9 billion of Heinz's outstanding senior unsecured debt and accrued interest by becoming co-obligor with Heinz. Heinz LP owns or leases the operating assets involved in manufacturing throughout the United States which were contributed by Heinz and its subsidiaries, together with other assets and liabilities, to Heinz LP and manages the business. Heinz LP has two classes of limited partnership interests, Class A and Class B, that are allocated varying income and cash distributions in accordance with the Heinz LP agreement. H. J. Heinz Finance Company, directly and through wholly-owned subsidiaries, owns the Class B interests. Heinz, directly and through wholly- owned subsidiaries, owns the Class A interests. Heinz Management Company, a wholly-owned subsidiary of Heinz, is the managing General Partner of Heinz LP and employs the salaried personnel of the U.S. Group. Under the partnership agreement, Heinz Finance has the power to control the general partner through majority membership on Heinz LP's management board. The minority interest amounts on the July 31, 2002 and May 1, 2002 balance sheets represent the Class A and General Partner limited partnership interest in Heinz LP, and have been adjusted for the minority partners' share of income and cash distributions. 2. The interim condensed consolidated financial statements of Heinz Finance are unaudited. In the opinion of management, all adjustments which are of a normal and recurring nature, necessary for a fair statement of the results of operations of these interim periods have been included. The results for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year due to the seasonal nature of the business of Heinz Finance. Certain prior year amounts have been reclassified in order to conform with the Fiscal Year 2003 presentation. These statements should be read in conjunction with Heinz Finance's consolidated and combined financial statements and related notes which appear in Heinz's Form 10-K for the year ended May 1, 2002. 3. Agreement between H. J. Heinz Company and Del Monte Foods Company On June 13, 2002, Heinz announced that it will transfer to a wholly-owned subsidiary ("Spinco") certain assets and liabilities of its U.S. pet food and pet snacks, U.S. tuna, U.S. retail private label soup and private label gravy, College Inn(R) broths and U.S. infant feeding businesses, all of which are owned by Heinz Finance, and distribute all of the shares of Spinco common stock on a pro rata basis to its shareholders. Immediately thereafter, Spinco will merge with a wholly-owned subsidiary of Del Monte Foods Company ("Del Monte") resulting in Spinco becoming a wholly-owned subsidiary of Del Monte ("the Merger"). In connection with the Merger, each share of Spinco common stock will be automatically converted into shares of Del Monte common stock that will result in the fully diluted Del Monte common stock at the effective time of the Merger being held approximately 74.5% by Heinz shareholders and approximately 25.5% by the Del Monte shareholders. As a result of the transaction, Heinz Finance will receive approximately $1.1 billion in cash that will be used to retire debt. Included in the transaction will be the following brands: StarKist,(R) 9-Lives(R), Kibbles 'n Bits(R), Pup-Peroni(R), Snausages(R), Nawsomes(R), Heinz Nature's Goodness(R) baby food and College Inn(R) broths. The following is a summary of the operating results of the business to be spun off: F-29 Three Months Ended ----------------------------- July 31, 2002 August 1, 2001 ------------- -------------- (in thousands) Revenues..................................... $ 349,095 $ 90,955 Operating income............................. 23,659 17,216 The Merger, which has been approved by the Boards of Directors of Heinz and Del Monte, is subject to the approval by the shareholders of Del Monte. Heinz received on November 21, 2002 a private letter ruling form the Internal Revenue Service that the contribution of the assets and liabilities to Spinco and the distribution of the shares of common stock of Spinco to Heinz shareholders will be tax-free to Heinz, Spinco and the shareholders of Heinz. The Merger is also subject to customary closing conditions. Heinz expects that the transaction will close late in calendar year 2002 or early in calendar year 2003. 4. Inventories The composition of inventories at the balance sheet dates was as follows: July 31, 2002 August 1, 2001 ------------- -------------- (in thousands) Finished goods and work-in progress.......... $ 600,318 $ 567,482 Packaging material and ingredients........... 147,381 142,785 ---------- ---------- $ 747,699 $ 710,267 ========== ========== 5. Taxes The provision for income taxes consists of provisions for federal and state income taxes. The low effective tax rate for Heinz Finance for the first quarters of Fiscal Years 2003 and 2002 is a result of Heinz Finance's nontaxable minority interest in Heinz LP. 6. Restructuring In the fourth quarter of Fiscal Year 2001, Heinz announced a restructuring initiative named "Streamline" which includes an organizational restructuring aimed at reducing overhead costs and the consolidation of Heinz Finance's canned pet food production to Bloomsburg, Pennsylvania (which resulted in ceasing canned pet food production at Heinz Finance's Terminal Island, California facility). The major components of the restructuring charge and implementation costs and the remaining accrual balances as of July 31, 2002 were as follows: F-30 Employee Termination Noncash Asset and Severance Accrued Exit Implementation Write-Downs Costs Costs Costs Total ------------- ------------- ------------ -------------- ------------ (in millions) Restructuring and implementation costs--Fiscal Year 2001............... $ 34.7 $ 15.4 $ 22.8 $ 11.8 $ 84.7 Amounts utilized--Fiscal Year 2001....... (34.7) (5.8) (1.7) (11.8) (54.0) ----------- --------- ---------- -------- ------- Accrued restructuring costs--May 2, 2001................................. -- $ 9.6 $ 21.1 -- $ 30.7 Implementation Costs--Fiscal Year 2002................................. -- -- -- 1.2 1.2 Revisions to accruals and asset write-downs--Fiscal Year 2002......... 4.3 (3.1) (5.9) -- (4.7) Amounts utilized--Fiscal Year 2002....... (4.3) (2.5) (10.4) (1.2) (18.4) Liability assumed by related party--Fiscal Year 2002............... -- (3.8) (0.6) -- (4.4) ----------- --------- ---------- -------- ------- Accrued restructuring costs--May 1, 2002................................. -- 0.2 4.2 -- 4.4 Amounts utilized--Fiscal Year 2003....... -- (0.1) (0.9) -- (1.0) ----------- --------- --------- -------- ------- Accrued restructuring costs--July 31, 2002............................. $ -- $ 0.1 $ 3.3 $ -- $ 3.4 =========== ========= ========= ======== =======
During the first quarter of Fiscal Year 2003, Heinz Finance utilized $1.0 million of severance and exit cost accruals, principally related to its overhead reduction plan. 7. Recently Adopted Accounting Standards During the fourth quarter of Fiscal Year 2002, Heinz Finance adopted Emerging Issues Task Force ("EITF") statements relating to the classification of vendor consideration and certain sales incentives. The adoption of these EITF statements has no impact on operating income or net earnings; however, revenues and gross profit were reduced by approximately $64.5 million in the first quarter of Fiscal Year 2002. Prior period data has been reclassified to conform to the current year presentation. Heinz Finance adopted Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" which requires that the purchase method of accounting be applied to all business combinations after June 30, 2001. SFAS No. 141 also established criteria for recognition of intangible assets and goodwill. Effective May 2, 2002, Heinz Finance adopted SFAS No. 142 "Goodwill and Other Intangible Assets." Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized, but are tested at least annually for impairment. Heinz Finance completed its evaluation of the impact of adopting SFAS No. 142 on the consolidated financial statements. The reassessment of intangible assets, including the ongoing impact of amortization, was completed during the first quarter of Fiscal Year 2003. The assignment of goodwill to reporting units, along with transitional goodwill impairment tests, was completed during the second quarter of Fiscal Year 2003. No impairment issues were identified as a result of completing these transitional impairment tests. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized. A discounted cash flow is being used to determine the fair value of Heinz Finance's businesses for purposes of testing goodwill for impairment. The discount rate being used is based on a risk-adjusted weighted average cost of capital for the business. The effects of adopting the new standards on net income for the three-month periods ended July 31, 2002 and August 1, 2001 follow. F-31 Net Income ------------------- 2003 2002 -------- --------- Net income..........................................................$ 4,254 $ 15,907 Add: Goodwill amortization, net of tax and minority interest........ -- 268 -------- --------- Net income excluding goodwill amortization..........................$ 4,254 $ 16,175 ======== =========
Net income for the quarter ended August 1, 2001 would have been $16,175 and net income for Fiscal Year 2002 would have been $75,079 had the provisions of the new standards been applied as of May 3, 2001. Changes in the carrying amount of goodwill for the three months ended by July 31, 2002, by operating segment are as follows: U.S. Pet Heinz North Products America and Seafood U.S. Frozen Total ----------- ----------- ----------- ------------ Balance at May 1, 2002................................ $ 615,772 $ 564,335 $ 470,381 $ 1,650,488 Adjustments........................................... 597 16 15 628 ---------- ---------- ---------- ------------ Balance at July 31, 2002.............................. $ 616,369 $ 564,351 $ 470,396 $ 1,651,116 ========== ========== ========== ============
Trademarks and other intangible assets at July 31, 2002 and May 1, 2002, subject to amortization expense, are as follows: July 31, 2002 May 1, 2002 ------------------------------------- ------------------------------------- Accumulated Accumulated Gross Amortization Net Gross Amortization Net ---------- ------------- ---------- ---------- ------------- ---------- Trademarks..........$ 39,103 $ (1,129) $ 37,974 $ 39,103 $ (835) $ 38,268 Licenses............ 208,186 (112,617) 95,569 208,186 (106,730) 101,456 Other............... 92,120 (42,204) 49,916 91,138 (45,860) 45,278 ---------- ----------- ----------- ----------- ----------- ----------- $ 339,409 $ (155,950) $ 183,459 $ 338,427 $ (153,425) $ 185,002 ========== =========== =========== =========== =========== ===========
Amortization expense for trademarks and other intangible assets subject to amortization was $2.5 million for three months ended July 31, 2002. Based upon the amortizable intangible assets recorded on the balance sheet at July 31, 2002, amortization expense for each of the next five years is estimated to be approximately $10.0 million. Intangible assets not subject to amortization at July 31, 2002 and May 1, 2002, were $91.1 million and consisted solely of trademarks. Effective May 2, 2002, Heinz Finance adopted SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." This statement provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discounted operation to include a component of an entity and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. The adoption of this new standard did not have a material impact on Heinz Finance's financial position, results of operations or cash flows for the three months ended July 31, 2002. 8. Recently Issued Accounting Standards In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143, addresses accounting for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. This standard is effective for Heinz Finance in Fiscal Year 2004. Heinz Finance does not expect that the adoption of this standard will have a significant impact on the consolidated financial statements. F-32 In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This Statement also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. Management is currently assessing the details of this Standard. 9. Related Party Transactions Employee Costs Certain of Heinz's general and administrative expenses are charged to Heinz Finance. These costs primarily include a management charge of all salaried employee costs from the Heinz Management Company. Total costs charged to Heinz Finance for these services were $86.9 million and $82.0 million for the three months ended July 31, 2002 and August 1, 2001, respectively. These costs are recorded as cost of products sold and SG&A expense in the accompanying consolidated statements of income. Heinz charges Heinz Finance for its share of group health insurance costs for eligible company employees based upon location-specific costs, overall insurance costs and loss experience incurred during a calendar year. In addition, various other insurance coverages are also provided to Heinz Finance through Heinz's consolidated programs. Workers compensation, auto, property, product liability and other insurance coverages are charged directly based on Heinz Finance's loss experience. Amounts charged to Heinz Finance for insurance costs were $18.3 million and $15.4 million for the three months ended July 31, 2002 and August 1, 2001, respectively, and are recorded in SG&A expense in the accompanying consolidated statements of income. Pension costs and postretirement costs are also charged to Heinz Finance based upon eligible employees participating in the plans. Cash Management Beginning in Fiscal Year 2002, Heinz Finance became the treasury center for cash management and debt financing for all of Heinz's domestic operations. In addition, in the first quarter of Fiscal Year 2003, Heinz Finance entered into a short-term note payable with Heinz Europe Limited, a wholly-owned subsidiary of Heinz, for $213.4 million. These two events resulted in the $972.0 million and $788.9 million of net short-term notes receivable with related parties on the July 31, 2002 and May 1, 2002, respectively, condensed consolidated balance sheets. An average interest rate of 1.95% and 3.93% was charged on these notes resulting in $6.2 million and $11.0 million of interest income recorded on the July 31, 2002 and August 1, 2001, respectively, consolidated statements of income. Product Sales and Purchases Heinz Finance sells and purchases products and services to and from other Heinz affiliates. The result of related party transactions is the $57.5 million and $72.8 million balances due from related parties as of July 31, 2002 and May 1, 2002, respectively, and the $177.1 million and $154.0 million balances for accounts payable to related parties as of July 31, 2002 and May 1, 2002, respectively. Product sales to related parties were $12.5 million and $12.3 million in the three months ended July 31, 2002 and August 1, 2001, respectively, and purchases from related parties were $120.1 million and $70.8 million in the three months ended July 31, 2002 and August 1, 2001, respectively. Other Related Party Items Heinz Finance sold undivided interests in certain accounts receivable to a Heinz affiliate, Receivables Servicing Company ("RSC"). Heinz Finance sold $619.2 million of receivables net of discount expense of $2.8 million for the year ended May 1, 2002, to RSC. These sales were reflected as reductions of trade accounts receivable. Heinz Finance's contract with RSC terminated in December 2001. F-33 Heinz Finance holds $1.9 billion of non-voting, 6.5% cumulative non-participating preferred stock of PM Holding, Inc. ("PM Holding"), a subsidiary of Heinz. This dividend amounted to $30.8 million and $38.5 million for the three months ended July 31, 2002 and August 1, 2001, respectively. This preferred stock investment is recorded in the Investments in related parties balance on the consolidated balance sheets as of July 31, 2002 and May 1, 2002. Heinz Finance paid royalties of $44.9 million and $23.1 million as of July 31, 2002 and August 1, 2001, respectively, to Promark International, Inc., an indirect subsidiary of Heinz, for the use of certain trademarks. The $35.0 million long-term note receivable from related parties recorded on the accompanying condensed consolidated balance sheets as of July 31, 2002 and May 1, 2002, relates to a receivable from Heinz that was contributed to Heinz Finance in exchange for common stock of Heinz Finance. Heinz Finance received an administrative fee from Heinz for acting as the agent in the sale of the retained inventory discussed in Note (1). This fee was $8.4 million for the three months ended August 1, 2001, which is recorded as income in SG&A expense in the accompanying consolidated statement of income. 10. Descriptions of Heinz Finance's reportable segments are as follows: o Heinz North America -- This segment manufactures, markets and sells ketchup, condiments, sauces, soups, pasta meals and infant foods to the grocery foodservice channels. o U.S. Pet Products and Seafood -- This segment manufactures, markets and sells dry and canned pet food, pet snacks, tuna and other seafood. o U.S. Frozen -- This segment manufactures, markets and sells frozen potatoes, entrees, snacks and appetizers. Heinz Finance's managements evaluates performance based on several factors including net sales and the use of capital resources; however, the primary measurement focus is operating income excluding unusual costs and gains. Intersegment sales are accounted for at current market values. Items below the operating income line of the consolidated statements of income are not presented by segment, since they are excluded from the measure of segment profitability reviewed by Heinz Finance's management. F-34 The following table presents information about Heinz Finance's reportable segments: Net External Sales Intersegment Sales ----------------------------- ------------------------------ Three Months Ended ------------------------------------------------------------- (in thousands) July 31, 2002 August 1, 2001 July 31, 2002 August 1, 2001 FY 2003 FY 2002 FY 2003 FY 2002 ------------------------------------------------------------- Heinz North America..................................... $ 495,132 $ 290,553 $ 18 $ 90 U.S. Pet Products and Seafood........................... 295,531 89,186 -- -- U.S. Frozen............................................. 247,711 112,522 9 17 ------------- -------------- ------------- -------------- Consolidated totals.................................. $ 1,038,374 $ 492,261 $ 27 $ 107 ============= ============== ============= ==============
Operating Income --------------------------------- Three Months Ended --------------------------------- July 31, 2002 August 1, 2001 FY 2003 FY 2002 ------------- -------------- (in thousands) Heinz North America..........................$ 62,870 $ 44,695 U.S. Pet Products and Seafood................ 13,573 14,062 U.S. Frozen.................................. 39,145 21,390 Non-Operating(a)............................. (467) (904) ------------- -------------- Consolidated totals.......................$ 115,121 $ 79,243 ============= ============== - --------- (a) Includes charges not directly attributable to operating segments. 11. Comprehensive Income Three Months Ended --------------------------------- July 31, 2002 August 1, 2001 FY 2003 FY 2002 ------------- -------------- (in thousands) Net income...................................$ 4,254 $ 15,907 Deferred gain/(losses) on derivatives:....... Net change from periodic revaluations..... 15,773 1,643 Net amount reclassified to earnings....... (13,206) 138 ------------- -------------- Comprehensive income.........................$ 6,821 $ 17,688 ============= ============== 12. Financial Instruments Heinz Finance utilizes certain financial instruments to manage its foreign currency, commodity price and interest rate exposures. Foreign Currency Hedging Heinz Finance may hedge specific foreign currency cash flows associated with foreign-currency-denominated financial assets and liabilities. These hedges are accounted for as cash flow hedges. Commodity Price Hedging Heinz Finance uses commodity futures and options in order to reduce price risk associated with anticipated purchases of raw materials such as corn, soybean oil and soybean meal. Commodity price risk arises due to factors such as weather conditions, government regulations, economic climate and other unforeseen circumstances. Hedges of anticipated commodity purchases which meet the criteria for hedge accounting are designated as cash flow F-35 hedges. When using a commodity option as a hedging instrument, Heinz Finance excludes the time value of the option from the assessment of hedge effectiveness. Interest Rate Hedging Heinz Finance uses interest rate swaps to manage interest rate exposure. These derivatives are designated as cash flow hedges or fair value hedges depending on the nature of the particular risk being hedged. Hedge Ineffectiveness During the quarter ended July 31, 2002, hedge ineffectiveness related to cash flow hedges was a net loss of $0.3 million which is reported in the consolidated statements of income as other expenses. Deferred Hedging Gains and Losses As of July 31, 2002, Heinz Finance is hedging forecasted transactions for periods not exceeding 12 months, and expects $2.6 million of net deferred gain reported in accumulated other comprehensive income to be reclassified to earnings within that time frame. 13. Subsequent Event On September 5, 2002, Heinz Finance, Heinz and a group of domestic and international banks renewed an $800 million credit 364-day agreement. That credit agreement and the $1.5 billion credit agreement that expires in September 2006 supports Heinz Finance's and Heinz's commercial paper programs. F-36 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Consolidated and Combined Financial Statements The following unaudited pro forma consolidated and combined financial statements of Heinz Finance adjust the historical financial statements of Heinz Finance to give pro forma effect of the following: o The transfer of certain assets and liabilities of Heinz Finance's U.S. tuna, U.S. pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant-feeding businesses to a wholly-owned subsidiary of Heinz ("Spinco"). o The repayment of $1.1 billion of debt with the cash Heinz Finance will receive as a result of the transfer of certain assets and liabilities to Spinco. The unaudited pro forma consolidated balance sheet has been prepared as if the transaction occurred as of July 31, 2002. The unaudited pro forma consolidated and combined statements of income have been prepared as if the transaction occurred as of the beginning of the periods presented. The unaudited pro forma statements for the periods presented do not purport to represent what Heinz Finance's results of operations or financial position would actually have been had the transaction occurred on the dates noted above, or to project Heinz Finance's results of operations for any future periods. The unaudited pro forma results do not include any synergies that may be realized as a result of the transaction. The pro forma adjustments are based upon available information and upon certain assumptions that Heinz Finance management believes are reasonable under the circumstances. The adjustments are directly attributable to the transaction and are expected to have a continuing impact on the financial position and results of operations of Heinz Finance. The unaudited pro forma consolidated and combined financial statements should be read in conjunction with the historical financial statements and related notes included in this prospectus. F-37 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Consolidated Statement of Income Fiscal Year ended May 1, 2002 Adjustments for the Historical Transaction Pro Forma ---------- ----------- --------- (in thousands) Sales............................................. $ 4,191,230 $ (1,357,713)(a) $ 2,833,517 Cost of products sold............................. 2,744,344 (954,756)(b) 1,789,588 ------------ ------------- ------------ Gross profit...................................... 1,446,886 (402,957) 1,043,929 Selling, general and administrative expenses...... 650,933 (194,180)(b) 456,753 Royalty expense to related parties................ 179,198 (39,848)(c) 139,350 ------------ ------------- ------------ Operating income.................................. 616,755 (168,929) 447,826 Interest income................................... 36,175 (502)(d) 35,673 Interest expense.................................. 206,578 (63,658)(e) 142,920 Dividends from related parties.................... 130,720 -- 130,720 Other expenses, net............................... 11,397 (2,786)(f) 8,611 ------------ ------------- ------------ Income before income taxes and minority interest.. 565,675 (102,987) 462,688 Provision for income taxes........................ 46,251 19,621 (g) 65,872 ------------ ------------- ------------ Net income before minority interest............... 519,424 (122,608) 396,816 Minority interest................................. (445,707) 158,312 (h) (287,395) ------------ ------------- ------------ Net income from continuing operations............. $ 73,717 $ 35,704 $ 109,421 ============ ============= ============
F-38 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Consolidated Statement of Income Fiscal year ended May 1, 2002 (a) Represents the revenues of the U.S. tuna, U.S. pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the royalty expense associated with specific products in certain of the businesses that will be transferred to Spinco as a result of the transaction. (d) Represents the interest income directly attributable to the businesses being transferred to Spinco as a result of the transaction. (e) Represents the interest expense on $1.1 billion of debt which will be repaid as a result of the transaction. Given a fluctuation in variable interest rates of 1/8%, interest expense would fluctuate approximately $0.1 million annually. (f) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (g) Represents the tax provision associated with the income before taxes and minority interest which will be transferred to Spinco as a result of the transaction. (h) Represents the necessary adjustment to the income allocated to the minority interest holders, the Class A and General Partners, in accordance with the Heinz LP agreement (as described in the prospectus under "Overview of Entity Structure, Reorganization and Financial Statement Presentation -- Heinz LP") as a result of the transaction. F-39 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Combined Statement of Income Fiscal Year ended May 2, 2001 Adjustments for the Historical Transaction Pro Forma ---------- ----------- --------- (in thousands) Sales............................................... $ 4,550,391 $ (1,744,371) (a) $ 2,806,020 Cost of products sold............................... 3,085,270 (1,345,250) (b) 1,740,020 ----------- ------------- ------------- Gross profit........................................ 1,465,121 (399,121) 1,066,000 Selling, general and administrative expenses........ 897,950 (356,476) (b) 541,474 Royalty expense to related parties.................. 129,102 (44,087) (c) 85,015 ----------- ------------- ------------- Operating income.................................... 438,069 1,442 439,511 Interest income..................................... 110,979 (67,582) (d) 43,397 Interest expense.................................... 10,278 10,434 (d) 20,712 Other expenses, net................................. 21,303 (3,262) (e) 18,041 ----------- ------------- ------------- Income before income taxes and cumulative effect of accounting changes............................... 517,467 (73,312) 444,155 Provision for income taxes.......................... 205,358 (38,474) (f) 166,884 ----------- ------------- ------------- Income before cumulative effect of accounting changes............................................. 312,109 (34,838) 277,271 Cumulative effect of accounting changes ............ (5,211) 1,625 (g) (3,586) ----------- ------------- ------------- Net Income from continuing operations............... $ 306,898 $ (33,213) $ 273,685 =========== ============= =============
F-40 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Combined Statement of Income Fiscal year ended May 2, 2001 (a) Represents the revenues of the U. S. tuna, U. S. pet food and pet snacks, U. S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the royalty expense associated with specific products in certain of the businesses that will be transferred to Spinco as a result of the transaction. (d) Represents the interest income and expense directly attributable to the businesses being transferred to Spinco as a result of the transaction. (e) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (f) Represents the tax provision associated with the income before taxes which will be transferred to Spinco as a result of the transaction. (g) Represents the cumulative effect on prior years from the adoption of Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" attributable to the businesses being transferred to Spinco as a result of the transaction. F-41 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Combined Statement of Income Fiscal Year ended May 3, 2000 Adjustments for the Historical Transaction Pro Forma ---------- ----------- --------- (in thousands) Sales............................................... $ 4,469,324 $ (1,943,086) (a) $ 2,526,238 Cost of products sold............................... 3,013,574 (1,426,742) (b) 1,586,832 ----------- ------------ ------------ Gross profit........................................ 1,455,750 (516,344) 939,406 Selling, general and administrative expenses........ 752,066 (356,295) (b) 395,771 Royalty expense to related parties.................. 94,347 (44,375) (c) 49,972 ----------- ------------ ------------ Operating income.................................... 609,337 (115,674) 493,663 Interest income..................................... 126,236 (82,161) (d) 44,075 Interest expense.................................... 7,138 (2,111) (d) 5,027 Other expenses, net................................. 27,896 (7,033) (e) 20,863 ----------- ------------ ------------ Income before income taxes.......................... 700,539 (188,691) 511,848 Provision for income taxes.......................... 252,244 (71,746) (f) 180,498 ----------- ------------ ------------ Net Income from continuing operations............... $ 448,295 $ (116,945) $ 331,350 =========== ============ ============
F-42 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Combined Statement of Income Fiscal year ended May 3, 2000 (a) Represents the revenues of the U.S. tuna, U.S. pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the royalty expense associated with specific products in certain of the businesses that will be transferred to Spinco as a result of the transaction. (d) Represents the interest income and expense directly attributable to the businesses being transferred to Spinco as a result of the transaction. (e) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (f) Represents the tax provision associated with the income before taxes which will be transferred to Spinco as a result of the transaction. F-43 Heinz Finance Company and Subsidiaries Unaudited Pro Forma Consolidated Statement of Income Three months ended July 31, 2002 Adjustments for the Historical Transaction Pro Forma ---------- ----------- --------- (in thousands) Sales............................................... $ 1,038,374 $ (349,095) (a) $ 689,279 Cost of products sold............................... 687,643 (253,430) (b) 434,213 ----------- ----------- --------------- Gross profit........................................ 350,731 (95,665) 255,066 Selling, general and administrative expenses........ 190,674 (61,542) (b) 129,132 Royalty expense to related parties.................. 44,936 (10,464) (c) 34,472 ----------- ----------- --------------- Operating income.................................... 115,121 (23,659) 91,462 Interest income..................................... 6,592 (148) (d) 6,444 Interest expense.................................... 50,542 (17,237) (e) 33,305 Dividends from related parties...................... 30,798 - 30,798 Currency loss....................................... 22,105 - 22,105 Other expenses, net................................. 3,008 1,229 (f) 4,237 ----------- ----------- --------------- Income before income taxes and minority interest.... 76,856 (7,799) 69,057 Provision for income taxes.......................... 2,389 1,697 (g) 4,086 ----------- ----------- --------------- Income before minority interest..................... 74,467 (9,496) 64,971 Minority interest................................... (70,213) 12,015 (h) (58,198) ----------- ----------- --------------- Net Income from continuing operations............... $ 4,254 $ 2,519 $ 6,773 =========== =========== ===============
F-44 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Consolidated Statement of Income Three months ended July 31, 2002 (a) Represents the revenues of the U.S. tuna, U.S. pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the royalty expense associated with specific products in certain of the businesses that will be transferred to Spinco as a result of the transaction. (d) Represents the interest income directly attributable to the businesses being transferred to Spinco as a result of the transaction. (e) Represents the interest expense on $1.1 billion of debt which will be repaid as a result of the transaction. Given a fluctuation in variable interest rates of 1/8%, interest expense would fluctuate by an insignificant amount annually. (f) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (g) Represents the tax provision associated with the income before taxes and minority interest which will be transferred to Spinco as a result of the transaction. (h) Represents the necessary adjustment to the income allocated to the minority interest holders, the Class A and General Partners, in accordance with the Heinz LP agreement (as described in the prospectus under "Overview of Entity Structure, Reorganization and Financial Statement Presentation -- Heinz LP") as a result of the transaction. F-45 Heinz Finance Company and Subsidiaries Unaudited Pro Forma Consolidated Statement of Income Three months ended August 1, 2001 Adjustments for the Historical Transaction Pro Forma ---------- ----------- --------- (in thousands) Sales............................................... $ 492,261 $ (90,955) (a) $ 401,306 Cost of products sold............................... 320,320 (58,160) (b) 262,160 ---------- ----------- --------------- Gross profit........................................ 171,941 (32,795) 139,146 Selling, general and administrative expenses........ 69,600 (7,291) (b) 62,309 Royalty expense to related parties.................. 23,098 (2,885) (c) 20,213 ---------- ----------- --------------- Operating income.................................... 79,243 (22,619) 56,624 Interest income..................................... 11,763 (181) (d) 11,582 Interest expense.................................... 52,173 (15,985) (e) 36,188 Dividends from related parties...................... 38,519 - 38,519 Currency gain....................................... 2,431 - 2,431 Other expenses...................................... 2,229 (308) (f) 1,921 ---------- ----------- --------------- Income before income taxes and minority interest.... 77,554 (6,507) 71,047 Provision for income taxes.......................... 9,342 5,212 (g) 14,554 ---------- ----------- --------------- Income before minority interest..................... 68,212 (11,719) 56,493 Minority interest................................... (52,305) 21,147 (h) (31,158) ---------- ----------- --------------- Net Income from continuing operations............... $ 15,907 $ 9,428 $ 25,335 ========== =========== ===============
F-46 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Consolidated Statement of Income Three months ended August 1, 2001 (a) Represents the revenues of the U.S. tuna, U.S. pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the royalty expense associated with specific products in certain of the businesses that will be transferred to Spinco as a result of the transaction. (d) Represents the interest income directly attributable to the businesses being transferred to Spinco as a result of the transaction. (e) Represents the interest expense on $1.1 billion of debt which will be repaid as a result of the transaction. Given a fluctuation in variable interest rates of 1/8%, interest expense would fluctuate approximately $0.2 million annually. (f) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (g) Represents the tax provision associated with the income before taxes and minority interest which will be transferred to Spinco as a result of the transaction. (h) Represents the necessary adjustment to the income allocated to the minority interest holders, the Class A and General Partners, in accordance with the Heinz LP agreement (as described in the prospectus under "Overview of Entity Structure, Reorganization and Financial Statement Presentation -- Heinz LP") as a result of the transaction. F-47 Heinz Finance Unaudited Pro Forma Consolidated Balance Sheet July 31, 2002 Adjustments for the Historical Transactions Pro Forma ---------- ----------- --------- (in thousands) Assets ------ Current assets: Cash and cash equivalents........................$ 11,347 $ (215)(a) $ 11,132 1,100,000 (b) (1,100,000)(c) Receivables...................................... 484,711 (141,755)(a) 342,956 Due from related parties......................... 57,529 (27,168)(a) 30,361 Short-term notes receivable from related parties 1,337,703 (1,100,000)(b) 237,703 Inventories...................................... 747,699 (281,026)(a) 466,673 Prepaid expenses and other current assets ...... 140,448 (42,344)(a) 98,104 ------------ ------------- ---------------- Total current assets........................... 2,779,437 (1,592,508) 1,186,929 Property, plant and equipment.......................... 1,490,244 (331,502)(a) 1,158,742 Less accumulated depreciation.......................... 677,167 (155,437)(a) 521,730 ------------ ------------- ---------------- Total property, plant and equipment, net....... 813,077 (176,065) 637,012 Other noncurrent assets: Long-term notes receivable from related parties.. 35,000 -- 35,000 Investments in related parties................... 1,895,245 -- 1,895,245 Intangible assets, net........................... 1,925,675 (664,244)(a) 1,261,431 Other noncurrent assets.......................... 344,120 (23,535)(a) 320,585 ------------ ------------- ---------------- Total other noncurrent assets.................. 4,200,040 (687,779) 3,512,261 ------------ ------------- ---------------- Total assets...................................$ 7,792,554 $ (2,456,352) $ 5,336,202 ============ ============= ================ Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Short term debt with related parties.............$ 365,660 $ -- $ 365,660 Portion of long-term due within one year......... 451,885 (25)(a) 1,860 (450,000)(c) Accounts payable................................. 245,493 (3,690)(a) 241,803 Accounts payable to related parties.............. 177,129 (43,704)(a) 133,425 Accrued interest................................. 107,647 -- 107,647 Other accrued liabilities........................ 144,813 (38,154)(a) 106,659 ------------ ------------- ----------------- Total current liabilities...................... 1,492,627 (535,573) 957,054 Long-term debt......................................... 3,973,334 (100)(a) 3,323,234 (650,000)(c) Deferred income taxes.................................. 20,488 (2,735)(a) 17,753 Other liabilities...................................... 29,401 (20,597)(a) 8,804 ------------ ------------- ----------------- Total long-term debt and other liabilities..... 4,023,223 (673,432) 3,349,791 Minority interest...................................... 1,763,845 1,245,836)(d) 518,009 Mandatorily Redeemable Series A Preferred Shares....... 325,000 -- 325,000 Shareholders' equity: Common stock..................................... 11 -- 11 Additional capital............................... 128,050 -- 128,050 Retained earnings................................ 57,231 -- 57,231 Accumulated other comprehensive gain............. 2,567 (1,511)(a) 1,056 ------------ ------------- ----------------- Total shareholders' equity..................... 187,859 (1,511) 186,348 ------------ ------------- ----------------- Total liabilities and shareholders' equity.....$ 7,792,554 $ (2,456,352) $ 5,336,202 ============ ============= =================
F-48 H. J. Heinz Finance Company and Subsidiaries Unaudited Pro Forma Consolidated Balance Sheet July 31, 2002 (a) Represents the assets and liabilities directly attributable to the businesses being transferred to Spinco. (b) Represents the short-term notes receivable with Heinz that will be repaid upon Heinz's receipt of $1.1 billion of cash from Del Monte as a result of the transaction. (c) The repayment of $1.1 billion of debt with the cash received by Heinz Finance from Heinz as noted in footnote (b) above. (d) Represents the adjustment to the minority interest holders', the Class A and General Partners', limited partnership interest in Heinz LP, in accordance with the Heinz LP Partnership Agreement, as a result of the net assets being transferred to Spinco as a result of the transaction. F-49 H. J. Heinz Company Unaudited Pro Forma Consolidated Financial Statements The following unaudited pro forma consolidated financial statements of Heinz adjust the historical financial statements of Heinz to give pro forma effect of the following: o The transfer of certain assets and liabilities of Heinz's U.S. tuna, U.S. and Canadian pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant-feeding businesses to Spinco. o The repayment of $1.1 billion of debt with the cash Heinz will receive as a result of the merger of Spinco, immediately following the transfer, with a wholly-owned subsidiary of Del Monte. The unaudited pro forma consolidated balance sheet has been prepared as if the transaction occurred as of July 31, 2002. The unaudited pro forma consolidated statements of income have been prepared as if the transaction occurred as of the beginning of the periods presented. The unaudited pro forma statements for the periods presented do not purport to represent what Heinz's results of operations or financial position would actually have been had the transaction occurred on the dates noted above, or to project Heinz's results of operations for any future periods. The unaudited pro forma results do not include any synergies that may be realized as a result of the transaction. The pro forma adjustments are based upon available information and upon certain assumptions that Heinz management believes are reasonable under the circumstances. The adjustments are directly attributable to the transaction and are expected to have a continuing impact on the financial position and results of operations of Heinz. The unaudited pro forma consolidated financial statements should be read in conjunction with the historical financial statements and related notes included in this prospectus. F-50 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Fiscal Year ended May 1, 2002 Adjustments for the Historical Transaction Pro Forma ---------- ----------- --------- (in thousands) Sales.................................................. $ 9,431,000 $ (1,816,964)(a) $ 7,614,036 Cost of products sold.................................. 6,093,827 (1,235,740)(b) 4,858,087 ------------ ------------- --------------- Gross profit........................................... 3,337,173 (581,224) 2,755,949 Selling, general and administrative expenses........... 1,746,702 (290,625)(b) 1,456,077 ------------ ------------- --------------- Operating income....................................... 1,590,471 (290,599) 1,299,872 Interest income........................................ 27,445 (1,248)(c) 26,197 Interest expense....................................... 294,269 (63,658)(d) 230,611 Other expenses, net.................................... 45,057 (119)(e) 44,938 ------------ ------------- --------------- Income before income taxes............................. 1,278,590 (228,070) 1,050,520 Provision for income taxes............................. 444,701 (69,362)(f) 375,339 ------------ ------------- --------------- Net income............................................. $ 833,889 $ (158,708) $ 675,181 ============ ============= ===============
F-51 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Fiscal year ended May 1, 2002 (a) Represents the revenues of Heinz's U.S. tuna, U.S. and Canadian pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses being transferred to Spinco as a result of the transaction. (c) Represents the interest income directly attributable to the businesses being transferred to Spinco as a result of the transaction. (d) Represents the interest expense on $1.1 billion of debt that will be repaid as a result of the transaction. Given a fluctuation in variable interest rates of 1/8%, interest expense would fluctuate approximately $0.1 million annually. (e) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (f) Represents the tax provision associated with the income before taxes that will be transferred to Spinco as a result of the transaction. F-52 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Fiscal Year ended May 2, 2001 Adjustments for the Historical Transaction Pro Forma ---------- ----------- --------- (in thousands) Sales...................................................$ 8,820,884 $ (1,833,186)(a) $ 6,987,698 Cost of products sold................................... 5,883,618 (1,476,351)(b) 4,407,267 ----------- ------------ ----------- Gross profit............................................ 2,937,266 (356,835) 2,580,431 Selling, general and administrative expenses............ 1,954,912 (363,440)(b) 1,591,472 ----------- ------------ ----------- Operating income........................................ 982,354 6,605 988,959 Interest income......................................... 22,692 (95)(c) 22,597 Interest expense........................................ 332,957 (70,469)(d) 262,488 Other income, net....................................... 969 4,389 (e) 5,358 ----------- ------------ ----------- Income before income taxes and cumulative effect of accounting changes................................... 673,058 81,368 754,426 Provision for income taxes.............................. 178,140 12,355 (f) 190,495 ----------- ------------ ----------- Income before cumulative effect of accounting change.... 494,918 69,013 563,931 Cumulative effect of accounting change.................. (16,906) 1,625 (g) (15,281) ----------- ------------ ----------- Net income..............................................$ 478,012 $ 70,638 $ 548,650 =========== ============ ===========
F-53 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Fiscal year ended May 2, 2001 (a) Represents the revenues of Heinz's U.S. tuna, U.S. and Canadian pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the interest income directly attributable to the businesses being transferred to Spinco as a result of the transaction. (d) Represents the interest expense on $1.1 billion of debt that will be repaid as a result of the transaction. Given a fluctuation in variable interest rates of 1/8%, interest expense would fluctuate approximately $1.4 million annually. (e) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (f) Represents the tax provision associated with the income before taxes that will be transferred to Spinco as a result of the transaction. (g) Represents the cumulative effect on prior years from the adoption of Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" attributable to the businesses being transferred to Spinco as a result of the transaction. F-54 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Fiscal Year ended May 3, 2000 Adjustments for the Historical Transaction Pro Forma ---------- ----------- --------- (in thousands) Sales...................................................$ 8,939,416 $ (2,046,609)(a) $ 6,892,807 Cost of products sold................................... 5,788,525 (1,428,560)(b) 4,359,965 ----------- ------------ ------------ Gross profit............................................ 3,150,891 (618,049) 2,532,842 Selling, general and administrative expenses............ 1,882,409 (374,172)(b) 1,508,237 Gain on sale of Weight Watchers ........................ 464,617 - 464,617 ----------- ------------ ------------ Operating income........................................ 1,733,099 (243,877) 1,489,222 Interest income......................................... 25,330 (149)(c) 25,181 Interest expense........................................ 269,748 (62,752)(d) 206,996 Other expenses, net..................................... 25,005 (6,289)(e) 18,716 ----------- ------------ ------------ Income before income taxes.............................. 1,463,676 (174,985) 1,288,691 Provision for income taxes.............................. 573,123 (64,577)(f) 508,546 ----------- ------------ ------------ Net income..............................................$ 890,553 $ (110,408) $ 780,145 =========== ============ ============
F-55 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Fiscal year ended May 3, 2000 (a) Represents the revenues of Heinz's U.S. tuna, U.S. and Canadian pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the interest income directly attributable to the businesses being transferred to Spinco as a result of the transaction. (d) Represents the interest expense on $1.1 billion of debt that will be repaid as a result of the transaction. Given a fluctuation in variable interest rates of 1/8%, interest expense would fluctuate approximately $1.4 million annually. (e) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (f) Represents the tax provision associated with the income before taxes that will be transferred to Spinco as a result of the transaction. F-56 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Three Months ended July 31, 2002 Adjustments for the Historical Transaction Pro Forma ---------- ----------- --------- (in thousands) Sales.................................................. $ 2,203,645 $ (364,331)(a) $ 1,839,314 Cost of products sold.................................. 1,416,732 (250,097)(b) 1,166,635 ----------- ------------ ------------ Gross profit........................................... 786,913 (114,234) 672,679 Selling, general and administrative expenses........... 441,781 (64,999)(b) 376,782 ----------- ------------ ------------ Operating income....................................... 345,132 (49,235) 295,897 Interest income........................................ 6,405 (182)(c) 6,223 Interest expense....................................... 69,090 (17,237)(d) 51,853 Other expenses, net.................................... 11,701 1,484 (e) 13,185 ----------- ------------ ------------ Income before income taxes............................. 270,746 (33,664) 237,082 Provision for income taxes............................. 92,951 (10,241)(f) 82,710 ----------- ------------ ------------ Net income............................................. $ 177,795 $ (23,423) $ 154,372 =========== ============ ============
F-57 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Three months ended July 31, 2002 (a) Represents the revenues of Heinz's U.S. tuna, U.S. and Canadian pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the interest income directly attributable to the businesses being transferred to Spinco as a result of the transaction. (d) Represents the interest expense on $1.1 billion of debt that will be repaid as a result of the transaction. Given a fluctuation in variable interest rates of 1/8%, interest expense would fluctuate by an insignificant amount annually. (e) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (f) Represents the tax provision associated with the income before taxes that will be transferred to Spinco as a result of the transaction. F-58 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Three Months ended August 1, 2001 Adjustments for the Historical Transaction Pro Forma ---------- ----------- --------- (in thousands) Sales....................................................$ 2,077,295 $ (401,754) $ 1,675,541 Cost of products sold.................................... 1,315,016 (272,720)(b) 1,042,296 ----------- ----------- ------------ Gross profit............................................. 762,279 (129,034) 633,245 Selling, general and administrative expenses............. 378,125 (62,319)(b) 315,806 ----------- ----------- ------------ Operating income......................................... 384,154 (66,715) 317,439 Interest income.......................................... 5,358 (181)(c) 5,177 Interest expense......................................... 75,547 (15,754)(d) 59,793 Other expenses, net...................................... 1,758 906 (e) 2,664 ----------- ----------- ------------ Income before income taxes............................... 312,207 (52,048) 260,159 Provision for income taxes............................... 111,733 (18,140)(f) 93,593 ----------- ----------- ------------ Net income...............................................$ 200,474 $ (33,908) $ 166,566 =========== =========== ============
F-59 H. J. Heinz Company Unaudited Pro Forma Consolidated Statement of Income Three months ended August 1, 2001 (a) Represents the revenues of Heinz's U.S. tuna, U.S. and Canadian pet food and pet snacks, U.S. private label soup and private label gravy, College Inn broths and U.S. infant feeding businesses, all of which will be transferred to Spinco as a result of the transaction. (b) Represents costs directly attributable to the businesses described in (a) above being transferred to Spinco as a result of the transaction. (c) Represents the interest income directly attributable to the businesses being transferred to Spinco as a result of the transaction. (d) Represents the interest expense on $1.1 billion of debt that will be repaid as a result of the transaction. Given a fluctuation in variable interest rates of 1/8%, interest expense would fluctuate approximately $0.2 million annually. (e) Represents other miscellaneous expenses directly attributable to those businesses being transferred to Spinco as a result of the transaction. (f) Represents the tax provision associated with the income before taxes that will be transferred to Spinco as a result of the transaction. F-60 H. J. Heinz Company Unaudited Pro Forma Consolidated Balance Sheet July 31, 2002 Adjustments for the Historical Transaction Pro Forma ---------- ----------- --------- (in thousands) Assets ------ Current assets: Cash and cash equivalents.............................$ 197,919 $ (6,001)(a) $ 191,918 Short-term investments, at cost which approximates market ............................................. 2,461 - 2,461 Receivables, net...................................... 1,132,782 (153,313)(a) 979,469 Inventories........................................... 1,633,440 (323,740)(a) 1,309,700 Prepaid expenses and other current assets ........... 339,582 (58,252)(a) 281,330 ------------ ------------ -------------- Total current assets............................ 3,306,184 (541,306) 2,764,878 Property, plant and equipment............................. 3,979,124 (672,118)(a) 3,307,006 Less accumulated depreciation............................. 1,703,834 (333,826)(a) 1,370,008 ------------ ------------ -------------- Total property, plant and equipment, net........ 2,275,290 (338,292) 1,936,998 Other noncurrent assets: Goodwill, net......................................... 2,557,924 (706,496)(a) 1,851,428 Trademarks, net....................................... 852,732 (258,517)(a) 594,215 Intangible assets, net................................ 152,170 (9,909)(a) 142,261 Other noncurrent assets............................... 1,287,316 (38,185)(a) 1,249,131 ------------ ------------ -------------- Total other noncurrent assets................... 4,850,142 (1,013,107) 3,837,035 ------------ ------------ -------------- Total assets....................................$ 10,431,616 $ (1,892,705) $ 8,538,911 ============ ============ ============== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Short term debt.......................................$ 265,243 $ - $ 265,243 Portion of long-term due within one year.............. 457,885 (450,000)(b) 7,885 Accounts payable...................................... 872,069 (32,215)(a) 839,854 Salaries and wages.................................... 45,810 - 45,810 Accrued marketing..................................... 177,659 (15,458)(a) 162,201 Other accrued liabilities............................. 437,293 (34,020)(a) 403,273 Income taxes.......................................... 216,403 (102)(a) 216,301 ------------ ------------ -------------- Total current liabilities....................... 2,472,362 (531,795) 1,940,567 Long-term debt............................................ 4,695,433 (650,000)(b) 4,045,433 Deferred income taxes..................................... 385,696 (130,166)(a) 255,530 Non-pension postretirement benefits....................... 209,636 - 209,636 Other liabilities......................................... 797,374 (46,033)(a) 751,341 ------------ ------------ -------------- Total long-term debt and other liabilities...... 6,088,139 (826,199) 5,261,940 Shareholders' equity: Capital stock......................................... 107,883 - 107,883 Additional capital.................................... 348,627 - 348,627 Retained earnings..................................... 5,004,196 (533,200)(c) 4,470,996 Less: Treasury stock at cost................................ 2,889,275 - 2,889,275 Accumulated other comprehensive loss.................. 700,316 1,511 (a) 701,827 ------------ ------------ -------------- Total shareholders' equity...................... 1,871,115 (534,711) 1,336,404 ------------ ------------ -------------- Total liabilities and shareholders' equity................$ 10,431,616 $ (1,892,705) $ 8,538,911 ============ ============ ==============
F-61 H. J. Heinz Company Unaudited Pro Forma Consolidated Balance Sheet July 31, 2002 (a) Represents the assets and liabilities directly attributable to the businesses being transferred to Spinco as a result of the transaction. (b) The repayment of $1.1 billion of debt with the cash received from Del Monte as a result of the transaction. (c) Represents the adjustment to retained earnings as a result of the net assets being transferred to Spinco as a result of the transaction. F-62 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers. Section 102(b)(7) of the Delaware General Corporation Law (the "Delaware Law") permits a corporation to include in its certificate of incorporation a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision may not eliminate or limit the liability of a director for any breach of the director's duty of loyalty to the corporation or its stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for the unlawful payment of dividends, or for any transaction from which the director derived an improper personal benefit. Article 11 ("Article 11") of the H. J. Heinz Finance Company's ("Heinz Finance") certificate of incorporation provides that a director of Heinz Finance shall not be liable to Heinz Finance or its stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted by Delaware Law. Each person (and the heirs, executors or administrators of such person) who was or is a party or is threatened to be made a party to, or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of Heinz Finance or is or was serving at the request of Heinz Finance as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, will be indemnified and held harmless by Heinz Finance to the fullest extent permitted by Delaware Law. The right to indemnification conferred in Article 11 includes the right to be paid by Heinz Finance expenses incurred in connection with any such proceeding in advance of its final disposition to the fullest extent authorized by Delaware Law. The right to indemnification conferred in Article 11 is a contract right. Section 145 of the Delaware Law permits a corporation to indemnify any of its directors, officers, employees or agents who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that such person is or was a director, officer, employee or agent of the corporation (or another enterprise if serving at the request of the corporation), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reason to believe that his or her conduct was unlawful. In any threatened, pending or completed action or suit by or in the right of the corporation, a corporation is permitted to indemnify any director, officer, employee or agent against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner that he or she reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made if such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which the action or suit was brought shall determine upon application that, despite such adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnification for such expenses which the court shall deem proper. Article 11 provides that Heinz Finance may, by action of its Board of Director, provide indemnification to such of the officers, employees and agents of the Corporation to such extent and to such effect as the Board of Directors determines to be appropriate and authorized by Delaware Law. Heinz Finance has the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of Heinz Finance, or is or was serving at the request of Heinz Finance as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss incurred by such person in any such capacity or arising out of his or her status as such, whether or not Heinz Finance would have the power to indemnify him or her against such liability under Delaware Law. II-1 The rights and authority conferred in Article 11 are not exclusive of any other right which any person may otherwise have or acquire. Neither the amendment nor repeal of Article 11, nor the adoption of any provision of the certificate of incorporation or the bylaws of Heinz Finance, nor, to the fullest extent permitted by Delaware Law, any modification of law, shall eliminate or reduce the effect of Article 11 in respect of any acts or omissions occurring prior to such amendment, repeal, adoption or modification. Andrew Stidd is also entitled to indemnification from Heinz pursuant to a Services and Indemnity Agreement among Stidd, Heinz and Heinz Finance dated June 1, 2001. Heinz has obtained directors' and officers' insurance against loss, within certain policy limits, arising from any claim made against Heinz Finance's directors and officers by reason of any wrongful act, as defined in such insurance policies, in their respective capacities as directors and officers or as fiduciaries under certain of the Heinz's employee benefit plans. Item 21. Exhibits and Financial Statement Schedules. (a) List of Exhibits. Exhibit Number Description - --------- ------------- 1.1* Purchase Agreement dated June 27, 2001 among the H. J. Heinz Finance Company, H. J. Heinz Company, and Goldman Sachs & Co., as representative for the initial purchasers. 1.2* Purchase Agreement dated February 28, 2002 among the H. J. Heinz Finance Company, H. J. Heinz Company, and J.P. Morgan Securities Inc., as representative for the initial purchasers. 1.3* Purchase Agreement dated February 28, 2002 among the H. J. Heinz Finance Company, H. J. Heinz Company, and J.P. Morgan Securities Inc., as representative for the initial purchasers. 3.1* Certificate of Incorporation. 3.2* Bylaws. 4.1* Indenture, dated as of July 6, 2001, among H. J. Heinz Finance Company, H. J. Heinz Company, and Bank One, National Association, as Trustee. 4.2* Form of New Note (included in Exhibit 4.1). 4.3* Form of Guarantee (included in Exhibit 4.1). 4.4* Exchange and Registration Rights Agreement, dated as of June 27, 2001, among H. J. Heinz Finance Company, H. J. Heinz Company, and Goldman Sachs & Co., as representative for the initial purchasers. 4.5* Exchange and Registration Rights Agreement, dated as of February 28, 2002, among H. J. Heinz Finance Company, H. J. Heinz Company, and J.P. Morgan Securities Inc., as representative for the initial purchasers. 4.6* Exchange and Registration Rights Agreement, dated as of February 28, 2002, among H. J. Heinz Finance Company, H. J. Heinz Company, and J.P. Morgan Securities Inc., as representative for the initial purchasers. 5.1 Opinion of Davis Polk & Wardwell regarding the validity of the New Notes. 8.1 Opinion of Davis Polk & Wardwell regarding tax matters (included in Exhibit 5.1). 10.1* Liquidity Agreement dated as of June 26, 2001 between H. J. Heinz Company and H. J. Heinz Finance Company. 10.2* Administrative Services Agreement dated as of May 1, 2001 between H. J. Heinz Company and H. J. Heinz Finance Company. 10.3* Guarantee Facility Letter Agreement dated May 3, 2001 to H. J. Heinz Finance Company from H. J. Heinz Company.
II-2 10.4* Second Amended and Restated Partnership Agreement of H. J. Heinz Company, LP. 10.5* First Amendment to Second Amended and Restated Limited Partnership Agreement of H. J. Heinz Company, LP. 12.1 Computation of Ratio of Earnings to Fixed Charges of Heinz Finance 21.1* Subsidiaries of the registrant. 23.1 Consent of PricewaterhouseCoopers LLP with respect to H. J. Heinz Finance Company financial statements. 23.2 Consent of PricewaterhouseCoopers LLP with respect to H. J. Heinz Company financial statements. 23.3 Consent of Davis Polk & Wardwell (included in Exhibit 5.1). 24.1* Powers of Attorney for H. J. Heinz Finance Company. 24.2* Powers of Attorney for H. J. Heinz Company. 25.1* Statement of Eligibility under the Trust Indenture Act of 1939 on Form T-1 of Bank One, National Association. 99.1* Form of Letter of Transmittal. 99.2* Form of Notice of Guaranteed Delivery. 99.3* Form of Exchange Agent Agreement.
- ----------------------- * Previously filed (b) Financial Statement Schedules. Not applicable (c) Item 4(b) Information. Not applicable Item 22. Undertakings. (a) The undersigned registrant hereby undertakes: (1) That for purposes of determining any liability under the Securities Act, each filing of the Guarantor's and Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act") (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act) that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (2) To respond to requests for information that is incorporated by reference into the prospectus contained in this Registration Statement pursuant to Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of this Registration Statement through the date of responding to the request. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the II-3 payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act, and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-4 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment No.1 to the Registration Statement to be signed on its behalf by the undersigned, hereunto duly authorized, in the City of Pittsburgh, State of Pennsylvania, on this 4th day of December, 2002. H. J. HEINZ FINANCE COMPANY By: /s/ Leonard A. Cullo, Jr. ---------------------------- Name: Leonard A. Cullo, Jr. Title: President Pursuant to the requirements of the Securities Act, this Amendment No. 1 to the Registration Statement has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Capacity Date --------- -------- ---- /s/ Leonard A. Cullo, Jr. Director and President December 4, 2002 - ------------------------- Leonard A. Cullo, Jr. * Director Chief Financial and Accounting December 4, 2002 - ------------------------- Officer Arthur Winkleblack * - ------------------------- Director, Vice President and Secretary December 4, 2002 Laura Stein * - ------------------------- Director December 4, 2002 Andrew L. Stidd /s/ Leonard A. Cullo, Jr. - ---------------------------------------- * By Leonard A. Cullo, Jr., as attorney-in-fact
II-5 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment No.1 to the Registration Statement to be signed on its behalf by the undersigned, hereunto duly authorized, in the City of Pittsburgh, State of Pennsylvania, on this 4th day of December, 2002. H. J. HEINZ COMPANY By: /s/ Leonard A. Cullo, Jr. -------------------------- Name: Leonard A. Cullo, Jr. Title: Treasurer Pursuant to the requirements of the Securities Act, this Amendment No.1 to the Registration Statement has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Capacity Date --------- -------- ---- * - ---------------------------- Chairman of the Board of Directors, President December 4, 2002 William R. Johnson and Chief Executive Officer * - ---------------------------- Director December 4, 2002 Nicholas F. Brady * - ---------------------------- Director December 4, 2002 Mary C. Choksi * - ---------------------------- Director December 4, 2002 Leonard S. Coleman, Jr. * - ---------------------------- Director December 4, 2002 Peter Coors * - ---------------------------- Director December 4, 2002 Edith E. Holiday * - ---------------------------- Director December 4, 2002 Samuel C. Johnson * - ---------------------------- Director December 4, 2002 Candace Kendle * - ---------------------------- Director December 4, 2002 Dean R. O'Hare * - ---------------------------- Director December 4, 2002 Thomas J. Usher * - ---------------------------- Director December 4, 2002 David R. Williams * - ---------------------------- Director December 4, 2002 James M. Zimmerman * - ---------------------------- Executive Vice President and Chief Financial December 4, 2002 Arthur Winkleblack Officer (Principal Financial Officer) II-6
Signature Capacity Date - --------- -------- ---- * Corporate Controller December 4, 2002 - ---------------------------- (Principal Accounting Officer) Bruna Gambino
/s/ Leonard A. Cullo, Jr. - --------------------------------------- * By Leonard A. Cullo, Jr., as attorney-in-fact II-7 EXHIBIT INDEX Exhibit Number Description - --------- ------------- 1.1* Purchase Agreement dated June 27, 2001 among the H. J. Heinz Finance Company, H. J. Heinz Company, and Goldman Sachs & Co., as representative for the initial purchasers. 1.2* Purchase Agreement dated February 28, 2002 among the H. J. Heinz Finance Company, H. J. Heinz Company, and J.P. Morgan Securities Inc., as representative for the initial purchasers. 1.3* Purchase Agreement dated February 28, 2002 among the H. J. Heinz Finance Company, H. J. Heinz Company, and J.P. Morgan Securities Inc., as representative for the initial purchasers. 3.1* Certificate of Incorporation. 3.2* Bylaws. 4.1* Indenture, dated as of July 6, 2001, among H. J. Heinz Finance Company, H. J. Heinz Company, and Bank One, National Association, as Trustee. 4.2* Form of New Note (included in Exhibit 4.1). 4.3* Form of Guarantee (included in Exhibit 4.1). 4.4* Exchange and Registration Rights Agreement, dated as of June 27, 2001, among H. J. Heinz Finance Company, H. J. Heinz Company, and Goldman Sachs & Co., as representative for the initial purchasers. 4.5* Exchange and Registration Rights Agreement, dated as of February 28, 2002, among H. J. Heinz Finance Company, H. J. Heinz Company, and J.P. Morgan Securities Inc., as representative for the initial purchasers. 4.6* Exchange and Registration Rights Agreement, dated as of February 28, 2002, among H. J. Heinz Finance Company, H. J. Heinz Company, and J.P. Morgan Securities Inc., as representative for the initial purchasers. 5.1 Opinion of Davis Polk & Wardwell regarding the validity of the New Notes. 8.1 Opinion of Davis Polk & Wardwell regarding tax matters (included in Exhibit 5.1). 10.1* Liquidity Agreement dated as of June 26, 2001 between H. J. Heinz Company and H. J. Heinz Finance Company. 10.2* Administrative Services Agreement dated as of May 1, 2001 between H. J. Heinz Company and H. J. Heinz Finance Company. 10.3* Guarantee Facility Letter Agreement dated May 3, 2001 to H. J. Heinz Finance Company from H. J. Heinz Company. 10.4* Second Amended and Restated Partnership Agreement of H. J. Heinz Company, LP. 10.5* First Amendment to Second Amended and Restated Limited Partnership Agreement of H. J. Heinz Company, LP. 12.1 Computation of Ratio of Earnings to Fixed Charges of Heinz Finance 21.1* Subsidiaries of the registrant. 23.1 Consent of PricewaterhouseCoopers LLP with respect to H. J. Heinz Finance Company financial statements. 23.2 Consent of PricewaterhouseCoopers LLP with respect to H. J. Heinz Company financial statements. 23.3 Consent of Davis Polk & Wardwell (included in Exhibit 5.1). 24.1* Powers of Attorney for H. J. Heinz Finance Company. 24.2* Powers of Attorney for H. J. Heinz Company. 25.1* Statement of Eligibility under the Trust Indenture Act of 1939 on Form T-1 of Bank One, National Association. 99.1* Form of Letter of Transmittal.
E-1 99.2* Form of Notice of Guaranteed Delivery. 99.3* Form of Exchange Agent Agreement. - ----------------------- * Previously filed E-2 EX-5.1 3 nov2702_ex0501.txt EXHIBIT 5.1 DAVIS POLK & WARDWELL 450 LEXINGTON AVENUE NEW YORK, NY 10017 212-450-4000 December 4, 2002 H. J. Heinz Finance Company 600 Grant Street Pittsburgh, Pennsylvania, 15219 Ladies and Gentlemen: We have acted as special counsel to H. J. Heinz Finance Company, a Delaware corporation (the "Company"), in connection with the Company's offer (the "Exchange Offer") to exchange its 6.625% notes due July 15, 2011, its 6.00% notes due March 15, 2012 and its 6.75% notes due March 15, 2032 (the "New Notes") for any and all of its outstanding 6.625% notes due July 15, 2011, its outstanding 6.00% notes due March 15, 2012 and its outstanding 6.75% notes due (the"Old Notes"). The New Notes will be subject to a Registration Statement on Form S-4 (File No. 333-85064) (the "Registration Statement"). The The Old Notes were issued, and it is proposed that the New Notes be issued, under an indenture dated as of July 6, 2001 among the Company, H. J. Heinz Company as guarantor and Bank One, National Association, as trustee (the "Trustee") (as may be supplemented or amended from time to time, the "Indenture"). We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments as we have deemed necessary or advisable for the purpose of rendering this opinion. Upon the basis of the foregoing, we are of the opinion that the New Notes, when executed, authenticated and delivered in exchange for the Old Notes in accordance with the terms of the Exchange Offer and the Indenture, will be valid H. J. Heinz Finance Company 2 December 4, 2002 and binding obligations of the Company enforceable in accordance with their terms, except (i) as such enforcement may be limited by bankruptcy, insolvency, fraudulent conveyance or similar laws affecting creditors' rights generally, (ii) as such enforcement may be limited by general principles of equity, regardless of whether enforcement is sought in a proceeding at law or in equity and (iii) to the extent that a waiver of rights under any usury or stay law may be unenforceable. We hereby confirm that the discussion set forth under the caption "Taxation" in each prospectus that is part of the Registration Statement on Form S-4 filed by the Company with the Securities and Exchange Commission on March 27, 2002 constitutes our opinion as the matters set forth therein. We are members of the Bar of the State of New York, and the foregoing opinion is limited to the laws of the State of New York, the General Corporation Law of the State of Delaware and the federal laws of the United States of America. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement relating to the Exchange Offer. We also consent to the references to us and the use of the name of our firm under the captions "Taxation" and "Validity of the New Notes" in each prospectus contained in such Registration Statement. This opinion is rendered in connection with the above matter. Bank One Trust Company, N.A., as Exchange Agent for the Exchange Offer, may rely upon this opinion. Very truly yours, /s/ DAVIS POLK & WARDWELL EX-12.1 4 nov2502_ex1201.txt EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES H. J. Heinz Finance Company and Subsidiaries Fiscal Years Ended --------------------------------------------------------------------------------------- Three Months Ended May 1, 2002 May 2, 2001 May 3, 2000 April 28, 1999 April 29, 1998 July 31, 2002 (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) ------------- ----------- ----------- ----------- -------------- -------------- Fixed Charges: Interest expense* $ 51,890 $ 206,578 $ 10,278 $ 7,138 $ 6,266 $ 7,621 Capitalized interest - - 2,074 - - - Interest components of rental expense 3,152 12,729 11,814 8,189 7,869 10,112 ---------- ---------- --------- --------- --------- ---------- Total fixed charges $ 55,042 $ 219,307 $ 24,166 $ 15,327 $ 14,135 $ 17,733 ---------- ---------- --------- --------- --------- ---------- Earnings: Income before income taxes and minority interest $ 76,856 $ 565,675 $ 517,467 $ 700,539 $ 688,519 $ 762,394 Add: Interest expense* 51,890 206,578 10,278 7,138 6,266 7,621 Add: Interest component of rental expense 3,152 12,729 11,814 8,189 7,869 10,112 Add: Amortization of capitalized interest - 128 715 715 715 898 ---------- ---------- --------- --------- --------- ---------- Earnings as adjusted $ 131,898 $ 785,110 $ 540,274 $ 716,581 $ 703,369 $ 781,025 ---------- ---------- --------- --------- --------- ---------- Ratio of earnings to fixed charges 2.40 3.58 22.36 46.75 49.76 44.04 ========== ========== ========= ========= ========= ==========
* Interest expense includes amortization of debt expense and any discount or premium relating to indebtedness. EX-23.1 5 nov2502_ex2301.txt Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-4 (No. 333-85064) of the H.J. Heinz Finance Company of our report dated July 2, 2002 relating to the financial statements of H.J. Heinz Finance Company, which appears in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Heinz Finance Selected Historical Consolidated and Combined Financial Data" in such Registration Statement. PricewaterhouseCoopers LLP Pittsburgh, PA December 4, 2002 EX-23.2 6 nov2502_ex2302.txt Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form S-4 (No. 333-85064) of the H.J. Heinz Finance Company of our report dated June 13, 2002 relating to the financial statements, which appears in the H.J. Heinz Company's 2002 Annual Report to Shareholders, which is incorporated by reference in its Annual Report on Form 10-K for the year ended May 1, 2002. We also consent to the incorporation by reference of our report dated June 13, 2002 relating to the financial statement schedules, which appears in such Annual Report on Form 10-K. We also consent to the references to us under the headings "Experts" and "Heinz Selected Consolidated Financial Data" in such Registration Statement. PricewaterhouseCoopers LLP Pittsburgh, PA December 4, 2002 -----END PRIVACY-ENHANCED MESSAGE-----