0000950128-01-500559.txt : 20011008 0000950128-01-500559.hdr.sgml : 20011008 ACCESSION NUMBER: 0000950128-01-500559 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010801 FILED AS OF DATE: 20010917 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03385 FILM NUMBER: 1739048 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 10-Q 1 j9019701e10-q.txt H.J. HEINZ COMPANY FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 1, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________ FOR THE THREE MONTHS ENDED AUGUST 1, 2001 COMMISSION FILE NUMBER 1-3385 H. J. HEINZ COMPANY (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-0542520 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219 (Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 456-5700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes X No __ The number of shares of the Registrant's Common Stock, par value $.25 per share, outstanding as of September 7, 2001 was 350,142,722 shares. 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. H. J. HEINZ COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
First Quarter Ended --------------------------------- August 1, 2001 August 2, 2000* FY 2002 FY 2001 -------------- --------------- (Unaudited) (In Thousands, Except per Share Amounts) Sales....................................................... $2,185,479 $2,171,511 Cost of products sold....................................... 1,315,016 1,272,576 ---------- ---------- Gross profit................................................ 870,463 898,935 Selling, general and administrative expenses................ 486,309 510,394 ---------- ---------- Operating income............................................ 384,154 388,541 Interest income............................................. 5,358 5,641 Interest expense............................................ 75,547 81,059 Other (expense) income, net................................. (1,758) 2,165 ---------- ---------- Income before income taxes and cumulative effect of accounting change......................................... 312,207 315,288 Provision for income taxes.................................. 111,733 110,837 ---------- ---------- Income before cumulative effect of accounting change........ 200,474 204,451 Cumulative effect of accounting change...................... -- (16,471) ---------- ---------- Net income.................................................. $ 200,474 $ 187,980 ========== ========== Net income per share--diluted............................... $ 0.57 $ 0.54 ========== ========== Average common shares outstanding--diluted.................. 352,380 351,128 ========== ========== Net income per share--basic................................. $ 0.57 $ 0.54 ========== ========== Average common shares outstanding--basic.................... 349,202 347,732 ========== ========== Cash dividends per share.................................... $ 0.3925 $ 0.3675 ========== ==========
*Restated, see Note 7 See Notes to Condensed Consolidated Financial Statements. ------------------ 2 3 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
August 1, 2001 May 2, 2001* FY 2002 FY 2001 -------------- ------------ (Unaudited) (Thousands of Dollars) ASSETS Current Assets: Cash and cash equivalents................................... $ 141,814 $ 138,849 Short-term investments, at cost which approximates market... 6,564 5,371 Receivables, net............................................ 1,216,090 1,383,550 Inventories................................................. 1,492,938 1,407,961 Prepaid expenses and other current assets................... 251,234 181,083 ---------- ---------- Total current assets................................... 3,108,640 3,116,814 ---------- ---------- Property, plant and equipment............................... 3,905,896 3,880,780 Less accumulated depreciation............................... 1,714,084 1,712,400 ---------- ---------- Total property, plant and equipment, net............... 2,191,812 2,168,380 ---------- ---------- Goodwill, net............................................... 2,156,542 2,077,451 Trademarks, net............................................. 760,966 567,692 Other intangibles, net...................................... 124,347 120,749 Other non-current assets.................................... 992,930 984,064 ---------- ---------- Total other non-current assets......................... 4,034,785 3,749,956 ---------- ---------- Total assets........................................... $9,335,237 $9,035,150 ========== ==========
*Summarized from audited fiscal year 2001 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------------ 3 4 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
August 1, 2001 May 2, 2001* FY 2002 FY 2001 -------------- ------------ (Unaudited) (Thousands of Dollars) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt............................................. $ 224,693 $1,555,869 Portion of long-term debt due within one year............... 314,785 314,965 Accounts payable............................................ 777,765 962,497 Salaries and wages.......................................... 48,301 54,036 Accrued marketing........................................... 129,665 146,138 Accrued restructuring costs................................. 99,518 134,550 Other accrued liabilities................................... 401,416 388,582 Income taxes................................................ 133,320 98,460 ---------- ---------- Total current liabilities.............................. 2,129,463 3,655,097 ---------- ---------- Long-term debt.............................................. 4,429,002 3,014,853 Deferred income taxes....................................... 275,448 253,690 Non-pension postretirement benefits......................... 211,031 207,104 Other liabilities and minority interest..................... 845,552 530,679 ---------- ---------- Total long-term debt, other liabilities and minority interest.................................................. 5,761,033 4,006,326 Shareholders' Equity: Capital stock............................................... 107,892 107,900 Additional capital.......................................... 332,891 331,633 Retained earnings........................................... 4,760,588 4,697,213 ---------- ---------- 5,201,371 5,136,746 Less: Treasury stock at cost (81,618,916 shares at August 1, 2001 and 82,147,565 shares at May 2, 2001)............. 2,909,289 2,922,630 Unearned compensation relating to the ESOP................ 1,724 3,101 Accumulated other comprehensive loss...................... 845,617 837,288 ---------- ---------- Total shareholders' equity............................. 1,444,741 1,373,727 ---------- ---------- Total liabilities and shareholders' equity............. $9,335,237 $9,035,150 ========== ==========
*Summarized from audited fiscal year 2001 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------------ 4 5 H. J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
First Quarter Ended -------------------------------- August 1, 2001 August 2, 2000 FY 2002 FY 2001 -------------- -------------- (Unaudited) (Thousands of Dollars) Cash provided by (used for) Operating Activities............ $ 59,901 $ (13,228) --------- --------- Cash Flows from Investing Activities: Capital expenditures................................... (60,101) (79,414) Acquisitions, net of cash acquired..................... (310,807) (130,463) Purchases of short-term investments.................... (1,093) (515,392) Sales and maturities of short-term investments......... -- 522,482 Investment in The Hain Celestial Group, Inc............ -- (79,743) Other items, net....................................... 10,836 (21,460) --------- --------- Cash used for investing activities................ (361,165) (303,990) --------- --------- Cash Flows from Financing Activities: Payments on long-term debt............................. (26,571) (11,397) (Payments on) proceeds from commercial paper and short- term borrowings, net................................. (656,841) 413,782 Proceeds from long-term debt........................... 764,622 -- Proceeds from preferred stock of subsidiary............ 325,000 -- Dividends.............................................. (137,099) (127,775) Purchases of treasury stock............................ -- (2,828) Exercise of stock options.............................. 13,301 21,235 Other items, net....................................... 17,135 9,595 --------- --------- Cash provided by financing activities............. 299,547 302,612 --------- --------- Effect of exchange rate changes on cash and cash equivalents............................................... 4,682 5,119 --------- --------- Net increase (decrease) in cash and cash equivalents........ 2,965 (9,487) Cash and cash equivalents at beginning of year.............. 138,849 137,617 --------- --------- Cash and cash equivalents at end of period.................. $ 141,814 $ 128,130 ========= =========
See Notes to Condensed Consolidated Financial Statements. ------------------ 5 6 H. J. HEINZ COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) The Management's Discussion and Analysis of Financial Condition and Results of Operations which follows these notes contains additional information on the results of operations and the financial position of the company. Those comments should be read in conjunction with these notes. The company's Annual Report to Shareholders for the fiscal year ended May 2, 2001 includes additional information about the company, its operations, and its financial position, and should be read in conjunction with this quarterly report on Form 10-Q. (2) 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 company's business. Certain prior year amounts have been reclassified in order to conform with the Fiscal 2002 presentation. (3) 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. (4) INVENTORIES The composition of inventories at the balance sheet dates was as follows:
August 1, 2001 May 2, 2001 -------------- ----------- (Thousands of Dollars) Finished goods and work-in-process................. $1,158,135 $1,095,954 Packaging material and ingredients................. 334,803 312,007 ---------- ---------- $1,492,938 $1,407,961 ========== ==========
(5) RESTRUCTURING In the fourth quarter of Fiscal 2001, the company announced a restructuring initiative named "Streamline". This initiative includes a worldwide organizational restructuring aimed at reducing overhead costs, the closure of the company's tuna operations in Puerto Rico, the consolidation of the company's North American canned pet food production to Bloomsburg, Pennsylvania (which resulted in ceasing canned pet food production at the company's Terminal Island, California facility), and the divestiture of the company's U.S. fleet of fishing boats and related equipment. For more information regarding Streamline, refer to the company's Annual Report to Shareholders for the fiscal year ended May 2, 2001. The major components of the restructuring charges and implementation costs and the remaining accrual balances as of August 1, 2001 were as follows:
Non-Cash Employee Asset Termination and Accrued Implementation (Dollars in millions) Write-Downs Severance Costs Exit Costs Costs Total --------------------- ----------- --------------- ---------- -------------- ------- Restructuring and implementation costs--Fiscal 2001................... $ 110.5 $110.3 $ 55.4 $ 22.6 $ 298.8 Amounts utilized--Fiscal 2001.......... (110.5) (39.5) (4.7) (22.6) (177.3) ------- ------ ------ ------ ------- Accrued restructuring costs-- May 2, 2001................................. -- 70.8 50.7 -- 121.5 Restructuring and implementation costs--Fiscal 2002................... -- 5.7 -- 10.4 16.1 Amounts utilized--Fiscal 2002.......... -- (30.6) (6.8) (10.4) (47.8) ------- ------ ------ ------ ------- Accrued restructuring costs--August 1, 2001................................. $ -- $ 45.9 $ 43.9 $ -- $ 89.8 ======= ====== ====== ====== =======
6 7 During the first quarter of Fiscal 2002, the company recognized restructuring charges and implementation costs totaling $16.1 million pretax ($0.04 per share). [Note: All earnings per share amounts included in the Notes to Condensed Consolidated Financial Statements are presented on an after-tax diluted basis, unless otherwise noted.] Pretax charges of $8.7 million were classified as cost of products sold and $7.4 million as selling, general and administrative expenses ("SG&A"). Implementation costs ($10.4 million pretax) were primarily cost premiums related to production transfers, consulting costs and relocation costs. During the first quarter of Fiscal 2002, the company utilized $37.4 million of severance and exit cost accruals, principally for the closure of the company's tuna operations in Puerto Rico, ceasing canned pet food production in its Terminal Island, California facility and its global overhead reduction plan, primarily in Europe and North America. (6) ACQUISITIONS During the first quarter of Fiscal 2002, the company completed the acquisition of Borden Food Corporation's pasta sauce, dry bouillon and soup business. Under this transaction, the company acquired such brands as Classico pasta sauces, Aunt Millie's pasta sauce, Mrs. Grass Recipe soups and Wyler's bouillons and soups. The company also made a smaller acquisition. The above 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 dates. Final allocations of the purchase prices are not expected to differ significantly from the preliminary allocations. Operating results of the businesses acquired have been included in the Consolidated Statements of Income from the respective acquisition dates forward. Pro forma results of the company, assuming all of the acquisitions had been made at the beginning of each period presented, would not be materially different from the results reported. (7) RECENTLY ADOPTED ACCOUNTING STANDARDS In Fiscal 2001, the company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements". Under the new accounting method, adopted retroactive to May 4, 2000, the company recognizes revenue upon the passage of title, ownership and risk of loss to the customer. The cumulative effect adjustment of $16.5 million in net income as of May 4, 2000, was recognized during the first quarter of Fiscal 2001. The Fiscal 2001 first quarter amounts have been restated for the effect of the change in accounting for revenue recognition. Amounts originally reported were as follows: Sales, $2.15 billion; Gross profit, $892.2 million; Net income, $200.6 million; Net income per share -- diluted, $0.57; Net income per share -- basic, $0.58. (8) RECENTLY ISSUED ACCOUNTING STANDARDS 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 provides 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. The provisions of SFAS Nos. 141 and 142 apply to all business combinations after June 30, 2001. The provisions of SFAS No. 142 for existing goodwill and other intangible assets are required to be implemented in the first quarter of Fiscal 2003. The company is currently evaluating the impact of these standards on the consolidated financial statements. In September 2000, the FASB Emerging Issues Task Force (the "EITF") issued new guidelines entitled "Accounting for Consideration from a Vendor to a Retailer in Connection with 7 8 the Purchase or Promotion of the Vendor's Products," which address the income statement classification of consideration from a vendor to a retailer. These guidelines will be effective for the company beginning in the fourth quarter of Fiscal 2002. The implementation of these guidelines will require the company to make reclassifications between SG&A and sales, the amounts of which have not yet been determined. In May 2000, the EITF issued new guidelines entitled "Accounting for Certain Sales Incentives" which addresses the recognition, measurement and income statement classification for certain sales incentives (e.g., coupons). These guidelines will be effective for the company beginning in the fourth quarter of Fiscal 2002. The implementation of these guidelines will require the company to make reclassifications between SG&A and sales, the amounts of which have not yet been determined. (9) SEGMENTS The company has reconsidered its segment reporting for its North American business in light of recent performance trends and management changes. Accordingly, the U.S. Pet Products and Seafood business, previously aggregated with Heinz North America, is reported separately. Prior year quarterly segment information has been revised to conform with current quarter presentation. In order to provide historical information on the current reporting segments, the prior three year segment data and related MD&A are included in Item 5, Other Information. Heinz North America--This segment markets ketchup, condiments, sauces, soups, pasta meals and infant foods to the grocery and foodservice channels and includes the Canadian business. U.S. Pet Products & Seafood--This segment markets dry and canned pet food, pet snacks, tuna and other seafood. U.S. Frozen--This segment markets frozen potatoes, entrees, snacks and appetizers. Europe--This segment includes the company's operations in Europe and sells products in all of the company's core categories. Asia/Pacific--This segment includes the company's operations in New Zealand, Australia, Japan, China, South Korea, Indonesia, Thailand and India. This segment's operations include products in all of the company's core categories. Other Operating Entities--This segment includes the company's operations in Africa, Venezuela and other areas which sell products in all of the company's core categories. The company'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 Statements of Income are not presented by segment, since they are not the primary measure of segment profitability reviewed by the company's management. 8 9 The following table presents information about the company's reportable segments:
First Quarter Ended -------------------------------- August 1, 2001 August 2, 2000 FY 2002 FY 2001* -------------- -------------- (Thousands of Dollars) Net external sales: Heinz North America....................................... $ 574,902 $ 562,047 U.S. Pet Products and Seafood............................. 345,466 374,549 U.S. Frozen............................................... 238,501 229,164 ---------- ---------- North America Totals...................................... 1,158,869 1,165,760 Europe.................................................... 686,857 639,427 Asia/Pacific.............................................. 244,819 284,099 Other Operating Entities.................................. 94,934 82,225 ---------- ---------- Consolidated Totals....................................... $2,185,479 $2,171,511 ========== ========== Intersegment sales: Heinz North America....................................... $ 7,331 $ 10,722 U.S. Pet Products and Seafood............................. 4,813 6,187 U.S. Frozen............................................... 2,201 2,850 Europe.................................................... 1,374 756 Asia/Pacific.............................................. 292 413 Other Operating Entities.................................. -- 1,008 Non-Operating (a)......................................... (16,011) (21,936) ---------- ---------- Consolidated Totals....................................... $ -- $ -- ========== ========== Operating income (loss): Heinz North America....................................... $ 118,471 $ 141,921 U.S. Pet Products and Seafood............................. 57,541 60,958 U.S. Frozen............................................... 44,236 37,629 ---------- ---------- North America Totals...................................... 220,248 240,508 Europe.................................................... 150,571 118,705 Asia/Pacific.............................................. 26,136 41,536 Other Operating Entities.................................. 11,933 11,064 Non-Operating (a)......................................... (24,734) (23,272) ---------- ---------- Consolidated Totals....................................... $ 384,154 $ 388,541 ========== ========== Operating income (loss) excluding special items (b): Heinz North America....................................... $ 123,345 $ 154,845 U.S. Pet Products and Seafood............................. 65,336 71,033 U.S. Frozen............................................... 44,236 43,103 ---------- ---------- North America Totals...................................... 232,917 268,981 Europe.................................................... 152,286 139,551 Asia/Pacific.............................................. 26,734 47,600 Other Operating Entities.................................. 11,933 11,064 Non-Operating (a)......................................... (23,541) (22,297) ---------- ---------- Consolidated Totals....................................... $ 400,329 $ 444,899 ========== ==========
*Restated, see Note 7 --------------- (a) Includes corporate overhead, intercompany eliminations and charges not directly attributable to operating segments. 9 10 (b) First Quarter ended August 1, 2001 - Excludes implementation and restructuring costs of Streamline as follows: Heinz North America $4.9 million, U.S. Pet Products and Seafood $7.8 million, Europe $1.7 million, Asia/Pacific $0.6 million and Non-Operating $1.2 million. First Quarter ended August 2, 2000 - Excludes implementation costs of Operation Excel as follows: Heinz North America $12.9 million, U.S. Pet Products and Seafood $10.1 million, U.S. Frozen $5.5 million, Europe $20.8 million, Asia/Pacific $6.1 million and Non-Operating $1.0 million. The company's revenues are generated via the sale of products in the following categories:
First Quarter Ended -------------------------------- August 1, 2001 August 2, 2000 FY 2002 FY 2001 -------------- -------------- (Thousands of Dollars) Ketchup, Condiments and Sauces.............................. $ 619,859 $ 594,956 Frozen Foods................................................ 415,230 423,084 Tuna........................................................ 258,638 257,823 Soups, Beans and Pasta Meals................................ 281,397 244,841 Infant Foods................................................ 206,339 229,753 Pet Products................................................ 250,805 279,404 Other....................................................... 153,211 141,650 ---------- ---------- Total................................................... $2,185,479 $2,171,511 ========== ==========
(10) On May 3, 2001, the company reorganized its U.S. corporate structure by consolidating its U.S. business into two major entities: H. J. Heinz Finance Company (HFC) manages treasury functions and H. J. Heinz Company, L.P. (Heinz LP) owns or leases the operating assets and manages the business. HFC assumed primary liability for payment of the company's outstanding senior unsecured debt and accrued interest by becoming a co-obligor with the company. HFC's financial statements for the quarter ended August 1, 2001 are attached as Exhibit 99. On July 6, 2001, HFC 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, HFC issued $750 million of 6.625% Guaranteed Notes due July 15, 2011 which are guaranteed by the company. The proceeds were used for general corporate purposes, including retiring commercial paper borrowings, financing acquisitions and ongoing operations. On September 6, 2001, the company, HFC 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 the company's commercial paper programs, replaced the $2.30 billion credit agreement which expired on September 6, 2001. As of August 1, 2001, $673 million of domestic commercial paper was outstanding and classified as long-term debt due to the long-term nature of the supporting credit agreement. As of May 2, 2001, the company had $1.34 billion of domestic commercial paper outstanding and classified as short-term debt. (11) DIVIDENDS On September 17, 2001, the company's Board of Directors raised the quarterly dividend on the company's common stock to $.4050 per share from $0.3925 per share, for an indicated annual rate of $1.62 per share. The dividend will be paid on October 10, 2001, to shareholders of record at the close of business on September 27, 2000. 10 11 (12) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share in accordance with the provisions of SFAS No. 128.
First Quarter Ended ------------------------------- August 1, 2001 August 2, 2000 FY 2002 FY 2001 -------------- -------------- (In Thousands, Except per Share Amounts) Income before cumulative effect of accounting change........ $200,474 $204,451 Preferred dividends......................................... 5 6 -------- -------- Income applicable to common stock before effect of accounting change......................................... 200,469 204,445 Cumulative effect of accounting change...................... -- (16,471) -------- -------- Net income applicable to common stock....................... $200,469 $187,974 ======== ======== Average common shares outstanding--basic.................. 349,202 347,732 Effect of dilutive securities: Convertible preferred stock............................. 169 184 Stock options........................................... 3,009 3,212 -------- -------- Average common shares outstanding--diluted................ 352,380 351,128 Income per share before cumulative effect of accounting change--basic............................................. $ 0.57 $ 0.59 ======== ======== Net income per share--basic:................................ $ 0.57 $ 0.54 ======== ======== Income per share before cumulative effect of accounting change--dilutive.......................................... $ 0.57 $ 0.58 ======== ======== Net income per share--diluted............................. $ 0.57 $ 0.54 ======== ========
(13) COMPREHENSIVE INCOME
First Quarter Ended -------------------------------- August 1, 2001 August 2, 2000 FY 2002 FY 2001 -------------- -------------- (Thousands of Dollars) Net income.................................................. $200,474 $187,980 Other comprehensive income (loss): Foreign currency translation adjustment................. (9,031) (63,408) Minimum pension liability adjustment.................... 140 (3,036) Deferred gains/(losses) on derivatives: Net change from periodic revaluations.............. 319 -- Net amount reclassified to earnings................ 243 -- -------- -------- Comprehensive income........................................ $192,145 $121,536 ======== ========
(14) FINANCIAL INSTRUMENTS The company operates internationally, with manufacturing and sales facilities in various locations around the world, and utilizes certain financial instruments to manage its foreign currency, commodity price and interest rate exposures. FOREIGN CURRENCY HEDGING: The company uses forward contracts and currency swaps to mitigate its foreign currency exchange rate exposure due to anticipated purchases of raw materials and sales of finished goods, and future settlement of foreign currency denominated assets and liabilities. Hedges of anticipated transactions are designated as cash flow hedges, and consequently, the effective portion of unrealized gains and losses is deferred as a component of accumulated other comprehensive loss and is recognized in earnings at the time the hedged item affects earnings. 11 12 The company uses certain foreign currency debt instruments as net investment hedges of foreign operations. During the quarter ended August 1, 2001, gains of $2.4 million, net of income taxes of $1.4 million, which represented effective hedges of net investments, were reported as a component of accumulated other comprehensive loss within unrealized translation adjustment. COMMODITY PRICE HEDGING: The company 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. When using a commodity option as a hedging instrument, the company excludes the time value of the option from the assessment of hedge effectiveness. INTEREST RATE HEDGING: The company 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 August 1, 2001, hedge ineffectiveness related to cash flow hedges was a net loss of $0.2 million, which is reported in the consolidated statements of income as other expenses. DEFERRED HEDGING GAINS AND LOSSES: As of August 1, 2001, the company is hedging forecasted transactions for periods not exceeding 12 months, and expects $0.3 million of net deferred gain reported in accumulated other comprehensive loss to be reclassified to earnings within that time frame. (15) SUBSEQUENT EVENT On August 2, 2001, the Company announced that it acquired Delimex Holdings, Inc., a leading maker of frozen Mexican food products, from Fenway Partners. Delimex is the leading U.S. producer of frozen taquitos, tightly rolled fried corn and flour tortillas with fillings such as beef, chicken or cheese. Delimex also makes quesadillos, tamales and rice bowls. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STREAMLINE In the fourth quarter of Fiscal 2001, the company announced a restructuring initiative named "Streamline." This initiative includes a worldwide organizational restructuring aimed at reducing overhead costs, the closure of the company's tuna operations in Puerto Rico, the consolidation of the company's North American canned pet food production to Bloomsburg, Pennsylvania (which resulted in ceasing canned pet food production at the company's Terminal Island, California facility), and the divestiture of the company's U.S. fleet of fishing boats and related equipment. For more information regarding Streamline, refer to the company's Annual Report to Shareholders for the fiscal year ended May 2, 2001. During the first quarter of Fiscal 2002, the company recognized restructuring charges and implementation costs totaling $16.1 million pretax ($0.04 per share). [Note: All earnings per share amounts included in Management's Discussion and Analysis are presented on an after-tax diluted basis]. Pretax charges of $8.7 million were classified as cost of products sold and $7.4 million as selling, general and administrative expenses ("SG&A"). Implementation costs ($10.4 million pretax) were recognized as incurred and consisted of incremental costs directly related to the implementation of the Streamline initiative. These include cost premiums related to production transfers, consulting costs and relocation costs. 12 13 In Fiscal 2001, the company completed the closure of its tuna operations in Puerto Rico, ceased production of canned pet food in the company's Terminal Island, California facility and sold its U.S. fleet of fishing boats and related equipment. In addition, the company is continuing its implementation of its global overhead reduction plan. To date, these actions have resulted in a net reduction of the company's workforce of approximately 2,000 employees. THREE MONTHS ENDED AUGUST 1, 2001 AND AUGUST 2, 2000 RESULTS OF OPERATIONS For the three months ended August 1, 2001, sales increased $14.0 million, or 0.6%, to $2,185.5 million from $2,171.5 million last year. Sales were favorably impacted by acquisitions (6.2%), primarily the prior year acquisitions of IDF Holdings, Inc., Cornucopia, Inc. and the CSM Food Division of CSM Nederland NV, higher volumes (0.3%) and slightly higher pricing (0.1%). Sales were unfavorably impacted by unfavorable foreign exchange translation rates (3.9%) and divestitures (2.1%). Sales of the Heinz North America segment increased $12.9 million, or 2.3%. Acquisitions, net of divestitures, increased sales 6.7%, due primarily to the prior year acquisitions of IDF Holdings, Inc. and Cornucopia, Inc. Pricing was adversely effected by increased trade promotions which reduced sales 2.7%, due mainly to foodservice, soups and broths. Sales volume decreased 1.3%, due primarily to foodservice and infant feeding. The weaker Canadian dollar decreased sales 0.4%. Sales of the U.S. Pet Products and Seafood segment decreased $29.1 million, or 7.8%. Higher pricing increased sales 1.1%, primarily in light meat tuna and canned pet food, partially offset by lower pricing of dry dog food. Sales volume decreased 6.0%, primarily in pet food and light meat tuna, partially offset by volume increases in white meat tuna and pet snacks. Divestitures decreased sales 3.1%. U.S. Frozen's sales increased $9.3 million, or 4.1%. Sales volume increased 11.2% driven by SmartOnes frozen entrees and the success of Bagel Bites and Hot Bites snacks. Higher pricing increased sales 0.9%, primarily in SmartOnes frozen entrees. Divestures, net of acquisitions, reduced sales by 8.0% due to the sale of The All American Gourmet business and its Budget Gourmet and Value Classics brands of frozen entrees. Heinz Europe's sales increased $47.4 million, or 7.4%. Acquisitions, net of divestitures, increased sales 12.9%, due primarily to the acquisition of the CSM Food Division of CSM Nederland NV. Higher pricing increased sales 0.5%, primarily due to higher pricing in infant feeding and seafood, partially offset by lower pricing in frozen weight control entrees. Volume increased 0.3%, driven primarily by ketchup, salad cream and frozen meals, partially offset by volume decreases in infant feeding and seafood. Unfavorable foreign exchange translation rates reduced sales by 6.3%. Sales in Asia/Pacific decreased $39.3 million, or 13.8%, primarily due to unfavorable exchange rates which reduced sales by 14.2%. Sales volume increased 1.0% and pricing remained constant. Divestitures, net of acquisitions, reduced sales by 0.6%. Sales for Other Operating Entities increased $12.7 million, or 15.5%. Sales volume increased 7.0%, primarily in infant feeding and cooking oils. Favorable pricing increased sales 9.3% and other items net, reduced sales by 0.8%. The current year's first quarter was negatively impacted by additional Streamline restructuring charges and implementation costs totaling $16.1 million pretax ($0.04 per share). Pretax charges of $8.7 million were classified as cost of products sold and $7.4 million as selling, general and administrative expenses ("SG&A"). Last year's first quarter was negatively impacted by Operation Excel implementation costs of $56.4 million pretax or $0.11 per share. (For more information 13 14 regarding Operation Excel, refer to the company's Annual Report to Shareholders for the fiscal year ended May 2, 2001.) The following tables provide a comparison of the company's reported results and the results excluding special items for the first quarters of Fiscal 2002 and Fiscal 2001.
First Quarter Ended August 1, 2001 -------------------------------------------------- Net Gross Operating Net Per Sales Profit Income Income Share -------- ------ --------- ------ ----- (Dollars in millions except per share amounts) Reported results..................... $2,185.5 $870.5 $384.2 $200.5 $0.57 Streamline implementation costs.... -- 8.7 10.4 9.4 0.03 Streamline restructuring costs..... -- -- 5.7 3.6 0.01 -------- ------ ------ ------ ----- Results excluding special items...... $2,185.5 $879.2 $400.3 $213.4 $0.61 ======== ====== ====== ====== =====
First Quarter Ended August 2, 2000 -------------------------------------------------- Net Gross Operating Net Per Sales Profit Income Income Share -------- ------ --------- ------ ----- Reported results (a)................ $2,171.5 $898.9 $388.5 $204.5(b) $0.58(b) Operation Excel implementation costs.......................... -- 17.3 56.4 37.1 0.11 -------- ------ ------ ------ ----- Results excluding special items..... $2,171.5 $916.2 $444.9 $241.6 $0.69 ======== ====== ====== ====== =====
--------------- (a) Amounts have been restated for the effect of the change in accounting for revenue recognition (b) Before cumulative effect of accounting change (Note: Totals may not add due to rounding.) Gross profit decreased $28.5 million, or 3.2%, to $870.5 million from $898.9 million and the gross profit margin decreased to 39.8% from 41.4%. Excluding the special items noted above, gross profit decreased $37.0 million, or 4.0%, to $879.2 million from $916.2 million and the gross profit margin decreased to 40.2% from 42.2%. Gross profit for the Heinz North America segment decreased $19.3 million, or 8.0%, due primarily to trade promotions and unfavorable sales mix. In addition, recent foodservice acquisitions are dilutive to gross margin percentages since they are not yet reflective of expected synergies. The U.S. Pet Products and Seafood segment's gross profit decreased $17.0 million, or 11.3%, primarily due to canned pet food, partially offset by tuna. U.S. Frozen's gross profit increased $4.2 million or 3.9%, due to increased sales and pricing. Europe's gross profit increased $17.3 million, or 6.2%, due primarily to the acquisition of the CSM Food Division of CSM Nederland NV, offset partially by unfavorable foreign exchange rates. The Asia/Pacific segment's gross profit decreased $24.8 million, or 22.2%, due primarily to unfavorable foreign exchange rates and temporary supply chain inefficiencies due to recent significant changes in the manufacturing footprint in the region. Gross profit in the Other Operating Entities segment increased $2.6 million, or 9.9%, due primarily to favorable pricing. Selling, general and administrative expenses ("SG&A") decreased $24.1 million, or 4.7%, to $486.3 million from $510.4 million, and decreased as a percentage of sales to 22.3% from 23.5%. Excluding the special items noted above, SG&A increased $7.5 million, or 1.6%, to $478.9 million from $471.3 million and increased slightly as a percentage of sales to 21.9% from 21.7%. Increases in selling and distribution, driven by higher fuel costs, have been partially offset by a reduction in consumer promotion spending. Operating income decreased $4.4 million, or 1.1%, to $384.2 million from $388.5 million and decreased as a percentage of sales to 17.6% from 17.9%. Excluding the special items noted above, operating income decreased $44.6 million, or 10.0%, to $400.3 million from $444.9 million and decreased as a percentage of sales to 18.3% from 20.5%. 14 15 Heinz North America's operating income decreased $23.5 million, or 16.5%, to $118.5 million from $141.9 million. Excluding the special items noted above, operating income decreased $31.5 million, or 20.3%, to $123.3 million from $154.8 million, due primarily to changes in gross profit and higher selling and distribution costs. The U.S. Pet Products and Seafood Segment's operating income decreased $3.4 million, or 5.6%, to $57.5 million from $61.0 million. Excluding the special items noted above, operating income decreased $5.7 million, or 8.0%, to $65.3 million from $71.0 million, due primarily to the continued decline in pet food business. The U.S. Frozen segment's operating income increased $6.6 million, or 17.6%, to $44.2 million from $37.6 million. Excluding the special items noted above, operating income increased $1.1 million, or 2.6%, to $44.2 million from $43.1 million reflecting decreased marketing spending primarily due to the divestiture of The All American Gourmet business. Europe's operating income increased $31.9 million, or 26.8%, to $150.6 million from $118.7 million. Excluding the special items noted above, operating income increased $12.7 million, or 9.1%, to $152.3 million from $139.6 million, and increased 16.2% on a constant currency basis. Europe's increase is primarily attributable to the acquisition of the CSM Food Division of CSM Nederland NV offset partially by unfavorable foreign exchange rates. Asia/Pacific's operating income decreased $15.4 million, or 37.1%, to $26.1 million from $41.5 million. Excluding the special items noted above, operating income decreased $20.9 million, or 43.8%, to $26.7 million from $47.6 million. This decrease is primarily attributable to temporary supply chain inefficiencies due to recent significant changes in the manufacturing footprint in the region. Operations are expected to improve by the end of Fiscal 2002. In addition, unfavorable foreign exchange rates reduced operating income by 9.5%. Other Operating Entities' operating income remained constant with the prior year quarter. Net interest expense decreased $5.2 million to $70.2 million from $75.4 million last year, driven primarily by lower interest rates over the past year. Other expense increased $3.9 million to $1.8 million from other income of $2.2 million last year. The increase is primarily attributable to favorable currency gains realized in the prior year quarter. The effective tax rate for the current quarter was 35.8% compared to 35.2% last year. Excluding the special items noted above, the effective rate was 35.0% for both periods. Net income in the current quarter was $200.5 million compared to $188.0 million last year and diluted earnings per share was $0.57 in the current quarter versus $0.54 in the same period last year. Excluding the special items noted above and the cumulative effect of the accounting change for revenue recognition in the prior year quarter, net income decreased $28.1 million to $213.4 million from $241.6 million last year, and diluted earnings per share decreased 11.6%, to $0.61 from $0.69 last year. LIQUIDITY AND FINANCIAL POSITION Cash provided by operating activities was $59.9 million compared to cash used for operating activities of $13.2 million last year. The increase in Fiscal 2002 versus Fiscal 2001 is primarily due to improved working capital performance. Cash used for investing activities totaled $361.2 million compared to $304.0 million last year. Acquisitions in the current period required $310.8 million, due primarily to the purchase of Borden Food Corporation's pasta sauce, bouillon and soup businesses. Acquisitions in the prior period required $130.5 million, due primarily to the purchase of IDF Holdings, Inc. During the prior year 15 16 period, the company also invested $79.7 million in The Hain Celestial Group, Inc. Capital expenditures in the current quarter required $60.1 million compared to $79.4 million last year. Cash provided by financing activities decreased to $299.5 million from $302.6 million last year. Proceeds from long-term debt were $764.6 million compared to $0 last year. Payments on long-term debt required $26.6 million this quarter compared to $11.4 million last year. Proceeds from commercial paper and short-term borrowings required $656.8 million compared to providing $413.8 million last year. In addition, $325.0 million was provided during the current quarter via the issuance of Preferred Stock (see below). Cash provided from stock options exercised totaled $13.3 million versus $21.2 million last year. Dividend payments totaled $137.1 million compared to $127.8 million for the same period last year. There were no share repurchases this year versus $2.8 million (0.1 million shares) in last year's first quarter. In the first quarter of Fiscal 2002, the cash requirements of Streamline were $45.6 million, consisting of spending for severance and exit costs ($35.2 million) and implementation costs ($10.4 million). On July 6, 2001, H.J. Heinz Finance Company (HFC) raised $325.0 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, HFC 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. On September 6, 2001, the company, HFC 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 the company's commercial paper programs, replaced the $2.30 billion credit agreement which expired on September 6, 2001. As of August 1, 2001, $673 million of domestic commercial paper was outstanding and classified as long-term debt due to the long-term nature of the supporting credit agreement. As of May 2, 2001, the company had $1.34 billion of domestic commercial paper outstanding and classified as short-term debt. The impact of inflation on both the company's financial position and results of operations is not expected to affect Fiscal 2002 results adversely. The company's financial position continues to remain strong, enabling it to meet cash requirements for operations, capital expansion programs and dividends to shareholders. The company's goal remains the achievement of previously communicated earnings per share for the full year assuming stable currencies. The company anticipates significant improvement in performance in the second half of the year due to the positive impact of acquisitions, pricing, new product introductions and margin-enhancement initiatives. RECENTLY ADOPTED ACCOUNTING STANDARDS In Fiscal 2001, the company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements". Under the new accounting method, adopted retroactive to May 4, 2000, the company recognizes revenue upon the passage of title, ownership and risk of loss to the customer. The cumulative effect adjustment of $16.5 million in net income as of May 4, 2000, was recognized during the first quarter of Fiscal 2001. The Fiscal 2001 first quarter amounts have been restated for the effect of the change in accounting for revenue recognition. Amounts originally reported were as follows: Sales, $2.15 billion; Gross profit, $892.2 million; Net income, $200.6 million; Net income per share--diluted, $0.57; Net income per share--basic, $0.58. 16 17 RECENTLY ISSUED ACCOUNTING STANDARDS 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. The provisions of SFAS Nos. 141 and 142 apply to all business combinations after June 30, 2001. The provisions of SFAS No. 142 for existing goodwill and other intangible assets are required to be implemented in the first quarter of Fiscal 2003. The company is currently evaluating the impact of these standards on the consolidated financial statements. In September 2000, the FASB Emerging Issues Task Force (the "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," which addresses the income statement classification of consideration from a vendor to a retailer. These guidelines will be effective for the company beginning in the fourth quarter of Fiscal 2002. The implementation of these guidelines will require the company to make reclassifications between SG&A and sales, the amounts of which have not yet been determined. In May 2000, the EITF issued new guidelines entitled "Accounting for Certain Sales Incentives" which addresses the recognition, measurement and income statement classification for certain sales incentives (e.g., coupons). These guidelines will be effective for the company beginning in the fourth quarter of Fiscal 2002. The implementation of these guidelines will require the company to make reclassifications between SG&A and sales, the amounts of which have not yet been determined. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the company's market risk during the three months ended August 1, 2001. For additional information, refer to pages 41-42 of the company's Annual Report to Shareholders for the fiscal year ended May 2, 2001. 17 18 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Nothing to report under this item. ITEM 2. CHANGES IN SECURITIES Nothing to report under this item. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Nothing to report under this item. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Nothing to report under this item. ITEM 5. OTHER INFORMATION See Note 7 to the Condensed Consolidated Financial Statements in Part I--Item 1 of this Quarterly Report on Form 10-Q and "Other Matters" in Part I--Item 2 of this Quarterly Report on Form 10-Q. The company has reconsidered its segment reporting for its North American business in light of recent performance trends and management changes. Accordingly, the U.S. Pet Products and Seafood business, previously aggregated with Heinz North America is reported separately. In order to provide historical information on the current reporting segments, the prior three year segment data and related MD&A are presented below. REVISED FISCAL 1999-2001 SEGMENT REPORTING AND RESULTS OF OPERATIONS Heinz North America--This segment markets ketchup, condiments, sauces, soups, pasta meals and infant foods to the grocery and foodservice channels and includes the Canadian business. U.S. Pet Products & Seafood--This segment markets dry and canned pet food, pet snacks, tuna and other seafood. U.S. Frozen--This segment markets frozen potatoes, entrees, snacks and appetizers. Europe--This segment includes the company's operations in Europe and sells products in all of the company's core categories. Asia/Pacific--This segment includes the company's operations in New Zealand, Australia, Japan, China, South Korea, Indonesia, Thailand and India. This segment's operations include products in all of the company's core categories. Other Operating Entities--This segment includes the company's Weight Watchers classroom business through September 29, 1999, the date of the divestiture, as well as the company's operations in Africa, Venezuela and other areas which sell products in all of the company's core categories. The company'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. Inter-segment sales are accounted for at current market values. Items below the operating income line of the Consolidate Statements of Income are not presented by segment, since they are not the primary measure of segment profitability reviewed by the company's management. 18 19 The following table presents information about the company's reportable segments.
May 2, May 3, April 28, May 2, May 3, April 28, 2001 2000 1999 2001 2000 1999 Fiscal Year Ended (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (Dollars in Thousands) ---------- ---------- ---------- ---------- ---------- ---------- Net External Sales Intersegment Sales ------------------------------------ ------------------------------------ Heinz North America......... $2,583,662 $2,414,833 $2,245,505 $ 37,597 $ 37,125 $ 23,900 U.S. Pet Products and Seafood................... 1,562,876 1,709,227 1,817,178 24,884 32,437 32,713 U.S. Frozen................. 1,125,396 1,023,915 1,014,370 12,660 12,782 21,131 ---------- ---------- ---------- Total North America......... 5,271,934 5,147,975 5,077,053 Europe...................... 2,746,870 2,583,684 2,460,698 3,657 2,687 6,661 Asia/Pacific................ 1,087,330 1,196,049 1,011,764 3,376 2,853 13 Other Operating Entities.... 324,288 480,241 750,095 -- 2,526 6,971 Non-Operating (a)........... -- -- -- (82,174) (90,410) (91,389) ---------- ---------- ---------- ---------- ---------- ---------- Consolidated Totals......... $9,430,422 $9,407,949 $9,299,610 $ -- $ -- $ -- ========== ========== ========== ========== ========== ========== Operating Income (Loss) Operating Income (Loss) Excluding Special Items(b) ------------------------------------ ------------------------------------ Heinz North America......... $ 541,559 $ 496,338 $ 522,413 $ 647,962 $ 602,649 $ 555,008 U.S. Pet Products and Seafood................... (54,546) 198,111 194,566 228,243 272,619 279,621 U.S. Frozen................. 83,964 152,018 80,231 202,012 181,511 183,409 ---------- ---------- ---------- ---------- ---------- ---------- Total North America..... 570,977 846,467 797,210 1,078,217 1,056,779 1,018,038 Europe...................... 388,647 364,207 246,187 518,009 502,302 467,159 Asia/Pacific................ 96,123 124,125 89,830 147,599 177,454 145,654 Other Operating Entities.... 49,284 540,155 95,715 37,958 32,255 121,950 Non-Operating (a)........... (122,677) (141,855) (119,630) (99,060) (102,337) (99,792) ---------- ---------- ---------- ---------- ---------- ---------- Consolidated Totals......... $ 982,354 $1,733,099 $1,109,312 $1,682,723 $1,666,453 $1,653,009 ========== ========== ========== ========== ========== ========== Depreciation and Amortization Expense Capital Expenditures(c) ------------------------------------ ------------------------------------ Total North America......... $ 170,279 $ 174,703 $ 165,893 $ 211,022 $ 250,870 $ 173,374 Europe...................... 90,106 81,802 85,408 140,780 127,595 100,569 Asia/Pacific................ 26,288 28,871 20,549 46,166 60,795 25,209 Other Operating Entities.... 8,117 13,066 23,278 4,716 8,495 12,757 Non-Operating (a)........... 4,376 8,041 7,084 8,615 4,689 4,814 ---------- ---------- ---------- ---------- ---------- ---------- Consolidated Totals......... $ 299,166 $ 306,483 $ 302,212 $ 411,299 $ 452,444 $ 316,723 ========== ========== ========== ========== ========== ========== Identifiable Assets ------------------------------------ Total North America......... $4,572,995 $4,593,916 $4,250,322 Europe...................... 3,130,680 2,781,238 2,208,208 Asia/Pacific................ 912,515 1,085,491 998,685 Other Operating Entities.... 208,267 187,684 374,852 Non-Operating (d)........... 210,693 202,328 221,567 ---------- ---------- ---------- Consolidated Totals......... $9,035,150 $8,850,657 $8,053,634 ========== ========== ==========
--------------- (a) Includes corporate overhead, intercompany eliminations and charges not directly attributable to operating segments. (b) FISCAL YEAR ENDED MAY 2, 2001: Excludes net restructuring and implementation costs of Operation Excel as follows: Heinz North America $71.6 million, U.S. Pet Products and Seafood $85.4 million, U.S. Frozen $23.4 million, Europe $63.7 million, Asia/Pacific $46.3 million, Other Operating Entities $(11.3) million and Non-Operating $9.4 million. Excludes restructuring and implementation costs of the Streamline initiative as follows: Heinz North America $16.3 million, U.S. Pet Products and Seafood $197.4 million, Europe $65.7 million, Asia/Pacific $5.2 million and Non-Operating $14.2 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. 19 20 FISCAL YEAR ENDED MAY 3, 2000: Excludes net restructuring and implementation costs of Operation Excel as follows: Heinz North America $106.2 million, U.S. Pet Products and Seafood $54.6 million, U.S. Frozen $29.5 million, Europe $138.1 million, Asia/Pacific $53.3 million, Other Operating Entities $1.5 million and Non-Operating $9.5 million. Excludes costs related to Ecuador in U.S. Pet Products and Seafood $20.0 million. Excludes the impact of the Weight Watchers classroom business $44.7 million and the $464.6 million gain on the sale of this business in Other Operating Entities. Excludes the Foundation contribution in Non-Operating $30.0 million. FISCAL YEAR ENDED APRIL 28, 1999: Excludes restructuring and implementation costs of Operation Excel as follows: Heinz North America $31.1 million, U.S. Pet Products and Seafood $79.3 million, U.S. Frozen $116.9 million, Europe $225.1 million, Asia/Pacific $52.9 million, Other Operating Entities $29.2 million and Non-Operating $18.3 million. Excludes costs related to the implementation of Project Millennia as follows: Heinz North America $1.5 million, U.S. Pet Products and Seafood $5.7 million, U.S. Frozen $2.9 million, Europe $4.9 million, Asia/ Pacific $3.0 million, Other Operating Entities $2.8 million and Non-Operating $1.5 million. Excludes the gain on the sale of the bakery division in Other Operating Entities of $5.7 million. Excludes the reversal of unutilized Project Millennia accruals for severance and exit costs in U.S. Frozen and Europe of $16.6 million and $9.1 million, respectively. (c) Excludes property, plant and equipment obtained through acquisitions. (d) Includes identifiable assets not directly attributable to operating segments. 20 21 MANAGEMENT'S DISCUSSION AND ANALYSIS H.J. HEINZ COMPANY AND SUBSIDIARIES RESULTS OF OPERATIONS 2001 VERSUS 2000: Sales for Fiscal 2001 increased $22.5 million, or 0.2%, to $9.43 billion from $9.41 billion in Fiscal 2000. Volume increased sales by $215.1 million, or 2.3%, and acquisitions increased sales by $519.4 million, or 5.5%. Divestitures reduced sales by $284.5 million, or 3.0%, lower pricing reduced sales by $25.2 million, or 0.3%, and the unfavorable impact of foreign exchange translation rates reduced sales by $402.3 million, or 4.3%. Domestic operations contributed approximately 52% of consolidated sales in both fiscal years. Sales of the Heinz North America segment increased $168.8 million, or 7.0%. Sales volume increased 4.1%, due to increases in ketchup, condiments and sauces, foodservice, gravy and canned soups. Acquisitions, net of divestitures, increased sales 3.2%. Slightly higher pricing increased sales 0.2% and weaker Canadian dollar decreased sales 0.4%. Sales of the U.S. Pet Products and Seafood segment decreased $146.3 million, or 8.6%. Lower pricing decreased sales 4.8%, primarily in light meat tuna, dry dog food and cat treats. Sales volume decreased 3.2%, primarily in tuna and canned pet food. Divestitures decreased sales 0.5%. The U.S. Frozen segment's sales increased $101.5 million, or 9.9%. Sales volume increased 8.8%, driven by Smart Ones frozen entrees, Boston Market frozen meals, Bagel Bites snacks and frozen potatoes, partially offset by a decrease in The Budget Gourmet line of frozen entrees and frozen pasta. Higher pricing increased sales by 2.9% driven by Smart Ones frozen entrees and frozen potatoes. Divestitures reduced sales 1.8% mainly due to the sale of The All American Gourmet business and its Budget Gourmet and Budget Gourmet Value Classics brands of frozen entrees. Sales in Europe increased $163.2 million, or 6.3%. Acquisitions, net of divestitures, increased sales 13.5%, due primarily to the current year acquisition of CSM Food Division of CSM Nederland NV ("CSM") and the full-year impact of the United Biscuit's European Frozen and Chilled Division ("UB"). Sales volume increased 1.6%, due to increases in tuna, other seafoods, and beans, partially offset by a decrease in infant foods and frozen pizza. Higher pricing increased sales 0.8%, driven by increases in beans, frozen foods and salad cream/salad dressing, partially offset by decreases in tuna and other seafood. The unfavorable impact of foreign exchange translation rates reduced sales by $247.6 million, or 9.6%. Sales in Asia/Pacific decreased $108.7 million, or 9.1%. The unfavorable impact of foreign exchange translation rates reduced sales by $135.1 million, or 11.3%. Volume increased sales by 2.1% due to increases in poultry, tuna, and infant foods partially offset by decreases in nutritional drinks and pet foods. Other items, net, increased sales by 0.1%. Sales of Other Operating entities decreased $156.0 million, or 32.5%. Divestitures, net of acquisitions, reduced sales 36.0%, primarily due to the divestiture of the Weight Watchers classroom business in Fiscal 2000. Sales volume increased 3.5% and higher pricing increased sales 1.8%. Unfavorable foreign exchange translation rates reduced sales 1.8%. The current year was impacted by a number a special items which are summarized in the tables below. Fiscal 2001 results include Operation Excel implementation costs of $311.6 million pretax ($0.59 per share), additional Operation Excel restructuring charges of $55.7 million pretax ($0.10 per share) and reversals of $78.8 million pretax ($0.17 per share) of restructuring accruals and assets write-downs. Fiscal 2001 results also include Streamline restructuring charges of $276.2 million pretax ($0.60 per share) and related implementation costs of $22.6 million pretax ($0.05 per share). During the fourth quarter of Fiscal 2001, the company completed the sale of The All American Gourmet business that resulted in a pretax loss of $94.6 million ($0.19 per share). The Fiscal 2001 results also include pretax costs of $18.5 million ($0.03 per share) related to 21 22 attempted acquisitions, a tax benefit of $93.2 million ($0.27 per share) from tax planning and new tax legislation in Italy and a loss of $5.6 million pretax ($0.01 per share) which represents the company's equity loss associated with The Hain Celestial Group's fourth quarter results which include charges for its merger with Celestial Seasonings. Last year's results include Operation Excel restructuring charges of $194.5 million pretax ($0.37 per share), Operation Excel implementation costs of $216.5 million pretax ($0.41 per share), reversals of $18.2 million pretax ($0.04 per share) of Fiscal 1999 restructuring accruals and assets write-downs, costs related to the company's Ecuador tuna processing facility of $20.0 million pretax ($0.05 per share), a gain of $18.2 million pretax ($0.03 per share) on the sale of an office building in the U.K., a pretax contribution of $30.0 million ($0.05 per share) to the H.J. Heinz Company Foundation, a gain of $464.6 million pretax ($0.72 per share) on the sale of the Weight Watchers classroom business and the impact of the Weight Watchers classroom business of $32.8 million pretax ($0.05 per share). 22 23 The following tables provide a comparison of the company's reported results and the results excluding special items for Fiscal 2001 and Fiscal 2000.
Fiscal Year (52 Weeks) Ended May 2, 2001 --------------------------------------------------- Gross Operating Net Per Net sales Profit Income Income Share --------- ------ --------- ------ ----- (Dollars in millions, except per share amounts) Reported results............................ $9,430.4 $3,546.8 $ 982.4 $ 494.9* $ 1.41* Operation Excel restructuring............. -- 44.8 55.7 35.0 0.10 Operation Excel implementation costs...... -- 146.4 311.6 208.7 0.59 Operation Excel reversal.................. -- (46.3) (78.8) (60.9) (0.17) Streamline restructuring.................. -- 176.6 276.2 211.6 0.60 Streamline implementation costs........... -- 16.0 22.6 18.8 0.06 Loss on sale of The All American Gourmet.. -- -- 94.6 66.2 0.19 Equity loss on investment in The Hain Celestial Group........................ -- -- -- 3.5 0.01 Acquisition costs......................... -- -- 18.5 11.7 0.03 Italian tax benefit....................... -- -- -- (93.2) (0.27) -------- -------- -------- ------- ------ Results excluding special items............. $9,430.4 $3,884.3 $1,682.7 $ 896.4 $ 2.55 ======== ======== ======== ======= ======
--------------- * Before cumulative effect of accounting change
Fiscal Year (52 Weeks) Ended May 3, 2000 -------------------------------------------------- Gross Operating Net Per Net sales Profit Income Income Share --------- ------ --------- ------ ----- (Dollars in millions, except per share amounts) Reported results............................. $9,407.9 $3,619.4 $1,733.1 $ 890.6 $2.47 Operation Excel restructuring.............. -- 107.7 194.5 134.4 0.37 Operation Excel implementation costs....... -- 79.2 216.5 145.9 0.41 Operation Excel reversal................... -- (16.4) (18.2) (12.9) (0.04) Ecuador expenses........................... -- 20.0 20.0 20.0 0.05 Gain on U.K. building sale................. -- -- -- (11.8) (0.03) Foundation contribution.................... -- -- 30.0 18.9 0.05 Impact of Weight Watchers classroom business................................ (175.3) (93.0) (44.7) (19.6) (0.05) Gain on sale of Weight Watchers classroom business................................ -- -- (464.6) (259.7) (0.72) -------- -------- -------- ------- ----- Results excluding special items.............. $9,232.7 $3,716.9 $1,666.5 $ 905.7 $2.52 ======== ======== ======== ======= =====
--------------- (Note: Totals may not add due to rounding.) Gross profit decreased $72.6 million to $3.55 billion from $3.62 billion in Fiscal 2000. The gross profit margin decreased to 37.6% from 38.5% Excluding the special items identified above, gross profit increased $167.4 million, or 4.5%, to $3.88 billion from $3.72 billion, and the gross profit margin increased to 41.2% from 40.3%. Gross profit, across all major segments, was favorably impacted by savings from Operation Excel. Gross profit for the Heinz North America segment increased $76.3 million, or 7.4% due primarily to acquisitions and increased sales volume of ketchup partially offset by higher energy costs and the weakened Canadian dollar. The U.S. Pet Products and Seafood segment's gross profit decreased $8.6 million, or 1.5%, primarily due to lower volume and pricing of tuna and canned pet food. U.S. Frozen's gross profit increased $41.4 million, or 8.6%, due to increased sales volume mainly attributable to Boston Market HomeStyle Meals and higher selling prices, partially offset by higher energy costs. Europe's gross profit increased $78.0 million, or 7.2%, due primarily to a favorable profit mix and the acquisitions of CSM, UB and 23 24 Remedia Limited. The unfavorable impact of foreign exchange translation rates reduced Europe's gross profit by approximately $99 million The Asia/Pacific segment's gross profit decreased $34.3 million, or 7.7%, driven by the unfavorable impact of foreign exchange translation rates of approximately $48 million, partially offset by higher selling prices in Indonesia. Other Operating Entities' gross profit increased $6.3 million, or 6.5%, due primarily to higher pricing. SG&A increased $213.5 million to $2.56 billion from $2.35 billion and increased as a percentage of sales to 27.2% from 25.0%. Excluding the special items identified above, SG&A increased $151.1 million to $2.20 billion from $2.05 billion and increased as a percentage of sales to 23.3% from 22.2% Selling and distribution expenses increased $27.4 million to $768.2 million from $740.8 million, or 3.7%, primarily due to acquisitions and increased fuel costs in North America. Marketing increased $133.6 million, or 16.7%, primarily due to the UB acquisition and the national rollouts of StarKist Tuna in a pouch, Boston Market products, and the Stand Up Resealable Packaging for Ore-Ida frozen potatoes ("SURP"). Total marketing support (including trade and consumer promotions and media) decreased 5.0% to $2.22 billion from $2.34 billion on a sales increase of 2.1%. However, advertising costs to support our key brands increased 8.1%. (See Note 17 to the Consolidated Financial Statements.) Operating income decreased $750.7 million, or 43.3%, to $0.98 billion from $1.73 billion last year. Excluding the special items identified above, operating income increased $16.3 million, or 1.0%, to $1.68 billion from $1.67 billion last year. Operating income, across all major segments, was favorably impacted by savings from Operation Excel. Domestic operations provided approximately 37% and 59% of operating income in Fiscal 2001 and Fiscal 2000, respectively. Excluding the special items in both years, domestic operations provided approximately 50% and 54% of operating income in Fiscal 2001 and Fiscal 2000, respectively. The Heinz North America segment's operating income increased $45.3 million to $541.6 million from $496.3 million last year. Excluding the special items noted above, operating income increased $45.3 million, or 7.5% to $647.9 million from $602.6 million last year due to the strong performance of ketchup, condiments and sauces, and the acquisitions of Quality Chef, Yoshida and IDF Holdings, Inc. ("IDF"), partially offset by higher energy costs. The U.S. Pet Products and Seafood Segment's operating income decreased $252.7 million to a loss of $54.5 million from income of $198.1 million last year. Excluding the special items noted above, operating income decreased $44.4 million, or 16.3% to $228.2 million from $272.6 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 treats. The U.S. Frozen segment's operating income decreased $68.1 million to $84.0 million from $152.0 million last year. Excluding the special items noted above , operating income increased $20.5 million, or 11.3%, to $202.0 million from $181.5 million last year. This increase is mainly 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 SURP and higher energy costs. Europe's operating income increased $24.4 million, or 6.7%, to $388.6 million from $364.2 million. Excluding the special items noted above , operating income increased $15.7 million, or 3.1%, to $518.0 million from $502.3 million last year, due primarily to increased sales of seafood and beans and the UB acquisition, partially offset by competitive pricing and trade destocking in the company's European infant foods business. The unfavorable impact of foreign exchange translation rates reduced Europe's operating income by approximately $45 million. Asia/Pacific's operating income decreased $28.0 million, or 22.6%, to $96.1 million from $124.1 million last year. Excluding the special items noted above, operating income decreased $29.9 million, or 16.8%, to $147.6 million from $177.5 million last year. Solid performances from Indonesia, Greater China and the poultry business were offset by reduced sales in New Zealand, 24 25 Japan and India. The unfavorable impact of foreign exchange translation rates reduced Asia/ Pacific's operating income by approximately $17 million. Other Operating Entities reported a decrease in operating income of $490.9 million to $49.3 million from $540.2 million last year. Excluding the special items noted above, operating income increased $5.7 million, or 17.7%, to $38.0 million from $32.3 million last year. Other expense, net totaled $309.3 million compared to $269.4 million last year. The increase is primarily due to an increase in interest expense resulting from higher average borrowings and higher interest rates partially offset by gains from foreign currency contracts. The effective tax rate for Fiscal 2001 was 26.5% compared to 39.2% last year. The current year's rate includes a benefit of $93.2 million, or $0.27 per share, from tax planning and new tax legislation in Italy, partially offset by restructuring expenses in lower rate jurisdictions. The Fiscal 2000 rate was negatively impacted by a higher rate on the sale of the Weight Watchers classroom business, resulting from an excess of basis in assets for financial reporting over the tax basis in assets, and by higher state taxes related to the sale and more restructuring expenses in lower rate jurisdictions. Excluding the special items identified in the tables above, the effective tax rate was 35.0% in both years. Net income decreased $412.5 million to $478.0 million from $890.6 million last year, and earnings per share decreased to $1.36 from $2.47. In Fiscal 2001, the company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements" (see Note 1 to the Consolidated Financial Statements). The cumulative effect of adopting SAB No. 101 was $16.5 million ($0.05 per share). Excluding the special items noted above and the prescribed accounting change, net income decreased 1.0% to $896.4 million from $905.7 million, and earnings per share increased 1.2% to $2.55 from $2.52 last year. The impact of fluctuating exchange rates for Fiscal 2001 remained relatively consistent on a line-by-line basis throughout the Consolidated Statement of Income. 2000 VERSUS 1999: Sales for Fiscal 2000 increased $108.3 million, or 1.2%, to $9.41 billion from $9.30 billion in Fiscal 1999. Volume increased sales by $349.7 million, or 3.8%, and acquisitions increased sales by $438.2 million, or 4.7%. Divestitures reduced sales by $407.4 million, or 4.4%, lower pricing reduced sales by $161.2 million, or 1.7%, and the unfavorable impact of foreign exchange translation rates reduced sales by $111.0 million, or 1.2%. Domestic operations contributed approximately 52% of consolidated sales in Fiscal 2000 and 53% in Fiscal 1999. Sales of the Heinz North America segment increased $169.3 million, or 7.5%. Sales volume increased 5.2%, due to increases in ketchup, condiments and sauces, foodservice and canned soup. Acquisitions, net of divestitures, increased sales 1.9%, and a stronger Canadian dollar increased sales 0.5%. Lower pricing reduced sales by 0.1%, due mainly to decreases in retail ketchup. Sales of the U.S. Pet Products and Seafood segment decreased $108.0 million, or 5.9%. Sales volume increased 0.5%, due to increases in tuna, partially offset by a decrease in canned pet food. Divestitures decreased sales 1.3% and lower pricing reduced sales by 5.1%, due mainly to decreases in tuna. The U.S. Frozen segment's sales increased $9.5 million, or 0.9%. Sales volume increased 5.9%, driven by Smart Ones frozen entrees, Boston Market frozen meals and Bagel Bites snacks, partially offset by a decrease in The Budget Gourmet line of frozen entrees. The divestiture of several non-core product lines, net of acquisitions, reduced sales 3.4%. Lower pricing reduced sales 1.6%, primarily due to frozen potatoes. Sales in Europe increased $123.0 million, or 5.0%. Acquisitions, net of divestitures, increased sales 8.6%, due primarily to the acquisitions of United Biscuit's European Frozen and Chilled Division, Remedia Limited (infant feeding), Sonnen Bassermann (convenience meals) and Serv-A- 25 26 Portion (foodservice). Sales volume increased 3.4%, due to increases in tuna, infant foods and ketchup, condiments and sauces. The unfavorable impact of foreign exchange translation rates reduced sales 5.8% and lower pricing, primarily in tuna, reduced sales 1.2%. Sales in Asia/Pacific increased $184.3 million, or 18.2%. Acquisitions, primarily ABC Sauces in Indonesia, increased sales 11.8%. Sales volume increased 4.5%, due to increases in infant foods, poultry and convenience meals. The favorable impact of foreign exchange translation rates increased sales 2.4%, primarily due to sales in Japan. Lower pricing reduced sales 0.5%. Sales of Other Operating Entities decreased $269.9 million, or 36.0%. Divestitures reduced sales 38.0%, primarily due to the second quarter divestiture of the Weight Watchers classroom business and the Fiscal 1999 divestiture of the bakery products unit. Lower pricing reduced sales 1.9%, and foreign exchange translation rates reduced sales 0.6%. Sales volume increased 4.5%. The following tables provide a comparison of the company's reported results and the results excluding special items for Fiscal 2000 and Fiscal 1999 as reported in the company's annual report for the year ended May 3, 2000. The Fiscal 2000 results have not been adjusted for the impact of the Weight Watchers classroom business for comparative purposes.
Fiscal Year (53 Weeks) Ended May 3, 2000 --------------------------------------------------- Gross Operating Net Per Net Sales Profit Income Income Share --------- -------- --------- ------ ----- (Dollars in millions, except per share amounts) Reported results............................ $9,407.9 $3,619.4 $1,733.1 $ 890.6 $ 2.47 Operation Excel restructuring............. -- 107.7 194.5 134.4 0.37 Operation Excel implementation costs...... -- 79.2 216.5 145.9 0.41 Operation Excel reversal.................. -- (16.4) (18.2) (12.9) (0.04) Ecuador expenses.......................... -- 20.0 20.0 20.0 0.05 Gain on U.K. building sale................ -- -- -- (11.8) (0.03) Foundation contribution................... -- -- 30.0 18.9 0.05 Gain on sale of Weight Watchers classroom business............................... -- -- (464.6) (259.7) (0.72) -------- -------- -------- ------- ------ Results excluding special items............. $9,407.9 $3,809.9 $1,711.2 $ 925.3 $ 2.57 ======== ======== ======== ======= ======
Fiscal Year (52 Weeks) Ended April 28, 1999 --------------------------------------------------- Gross Operating Net Per Net Sales Profit Income Income Share --------- ------ --------- ------ ----- (Dollars in millions, except per share amounts) Reported results............................ $9,299.6 $3,354.7 $1,109.3 $ 474.3 $ 1.29 Operation Excel restructuring and implementation costs................... -- 396.4 552.8 409.7 1.11 Project Millennia implementation costs.... -- 14.7 22.3 14.3 0.04 Project Millennia reversal................ -- (20.7) (25.7) (16.4) (0.04) (Gain)/loss on sale of bakery products unit................................... -- -- (5.7) 0.6 -- -------- -------- -------- ------- ------ Results excluding special items............. $9,299.6 $3,745.1 $1,653.0 $ 882.4 $ 2.40 ======== ======== ======== ======= ======
(Note: Totals may not add due to rounding.) Gross profit increased $264.7 million to $3.62 billion from $3.35 billion in Fiscal 1999. The gross profit margin increased to 38.5% from 36.1%. Excluding the special items identified above, gross profit increased $64.7 million, or 1.7%, to $3.81 billion from $3.75 billion and the gross profit margin increased to 40.5% from 40.3%. Gross profit for the Heinz North America segment increased $76.6 million, or 8.1%, due primarily to acquisitions and increased sales volume of ketchup. Gross profit for the U.S. Pet Products and Seafood segment decreased $24.1 million, or 3.9%, due primarily to a significant decrease in the selling price of tuna. U.S. Frozen's gross profit decreased 26 27 slightly by $2.0 million, or 0.4%, as increased sales volume was offset by lower pricing and the elimination of several non-core product lines. Europe's gross profit increased $62.0 million, or 6.1%, due primarily to a favorable profit mix, and the acquisitions of United Biscuit's European Frozen and Chilled Division, Remedia Limited, Sonnen Bassermann and Serv-A-Portion. The unfavorable impact of foreign exchange translation rates reduced Europe's gross profit by approximately $65 million. The Asia/Pacific segment's gross profit increased $84.4 million, or 23.4%, driven by the acquisition of ABC Sauces in Indonesia, improved performances throughout the segment, and the favorable impact of foreign exchange translation rates in Japan. Other Operating Entities' gross profit decreased $130.4 million, or 40.6%, due primarily to the second quarter divestiture of the Weight Watchers classroom business and the Fiscal 1999 divestiture of the bakery products unit. SG&A increased $105.5 million to $2.35 billion from $2.25 billion and increased as a percentage of sales to 25.0% from 24.1%. Excluding the special items identified above, SG&A increased $6.5 million to $2.10 billion from $2.09 billion and decreased as a percentage of sales to 22.3% from 22.5%. Increased selling and distribution expenses, primarily in Asia/Pacific and Europe, resulting from acquisitions, were offset by decreases in marketing and general and administrative expenses. Marketing decreased $11.2 million, or 1.3%, primarily due to the second quarter divestiture of the Weight Watchers classroom business. Excluding the Weight Watchers classroom business, marketing expense increased 6.5%. Marketing increases were noted in all major segments. Total marketing support (including trade and consumer promotions and media) increased 6.6% to $2.37 billion from $2.22 billion on a sales increase of 1.2%. Excluding the Weight Watchers classroom business, total marketing support increased 9.6%. Advertising costs in Fiscal 2000 were $374.0 million compared to $373.9 million in Fiscal 1999. Excluding the Weight Watchers classroom business in both periods, advertising costs increased 9.3%. Operating income increased $623.8 million, or 56.2%, to $1.73 billion from $1.11 billion in Fiscal 1999. Excluding the special items identified above, operating income increased $58.2 million, or 3.5%, to $1.71 billion from $1.65 billion in Fiscal 1999. Removing the impact of the Weight Watchers classroom business in both periods, operating income increased 6.6%. Domestic operations provided approximately 59% and 57% of operating income in Fiscal 2000 and Fiscal 1999, respectively. Excluding the special items in both years, domestic operations provided approximately 54% and 55% of operating income in Fiscal 2000 and Fiscal 1999, respectively. The Heinz North America segment's operating income decreased $26.1 million, or 5.0%, to $496.3 million from $522.4 million in Fiscal 1999. Excluding the special items noted above, operating income increased $47.6 million, or 8.6%, to $602.6 million from $555.0 million in Fiscal 1999. The increase is due to the strong performance of Heinz U.S.A., improvements in Heinz Canada and savings from Operation Excel. The U.S. Pet Products and Seafood segment's operating income increased $3.5 million, or 1.8%, to $198.1 million from $194.6 million in Fiscal 1999. Excluding the special items noted above, operating income decreased $7.0 million, or 2.5%, to $272.6 million from $279.6 million in Fiscal 1999. The strong performance of the pet food business and savings from Operation Excel were partially offset by a significant decrease in the selling price of tuna. The U.S. Frozen segment's operating income increased $71.8 million to $152.0 million from $80.2 million in Fiscal 1999. Excluding the special items noted above, operating income decreased $1.9 million, or 1.0%, to $181.5 million from $183.4 million in Fiscal 1999. This decrease is attributable to higher marketing expenses as a result of the national campaign in support of Boston Market and lower pricing on Ore-Ida frozen potatoes, offset by a reduction in SG&A resulting from the domestic consolidation of the frozen business as part of Operation Excel. Europe's operating income increased $118.0 million, or 47.9%, to $364.2 million from $246.2 million. Excluding the special items noted above, operating income increased $35.1 million, or 7.5%, to $502.3 million from $467.2 million in Fiscal 1999, due primarily to a favorable profit 27 28 mix, savings from Operation Excel and the acquisitions of United Biscuit's European Frozen and Chilled Division, Remedia Limited and Serv-A-Portion. The unfavorable impact of foreign exchange translation rates reduced Europe's operating income by approximately $26 million. Asia/Pacific's operating income increased $34.3 million, or 38.2%, to $124.1 million from $89.8 million in Fiscal 1999. Excluding the special items noted above, operating income increased $31.8 million, or 21.8%, to $177.5 million from $145.7 million in Fiscal 1999. This increase is attributable to the acquisition of ABC Sauces in Indonesia and solid performances from Japan, India and the poultry business. Other Operating Entities reported an increase in operating income of $444.4 million to $540.2 million from $95.7 million in Fiscal 1999. Excluding the special items noted above, operating income decreased $44.9 million, or 36.9%, to $77.0 million from $122.0 million in Fiscal 1999. This decrease is primarily attributable to the second quarter divestiture of the Weight Watchers classroom business. Other expenses, net totaled $269.4 million compared to $274.2 million in Fiscal 1999. The decrease is primarily due to a gain on the sale of an office building in the U.K. of $18.2 million pretax ($0.03 per share) partially offset by an increase in interest expense resulting from higher average borrowings and interest rates. The effective tax rate for Fiscal 2000 was 39.2% compared to 43.2% in Fiscal 1999. The Fiscal 2000 effective tax rate was unfavorably impacted by the excess of basis in assets for financial reporting over the tax basis of assets included in the Weight Watchers sale and by gains in higher taxed states related to the sale. The Fiscal 2000 and 1999 effective tax rates were unfavorably impacted by restructuring and implementation costs expected to be realized in lower tax rate jurisdictions and by nondeductible expenses related to the restructuring. Excluding the special items identified in the tables above, the effective tax rate for Fiscal 2000 was 35.0% compared to 36.0% in Fiscal 1999. Net income increased $416.2 million to $890.6 million from $474.3 million in Fiscal 1999, and earnings per share increased to $2.47 from $1.29. Excluding the special items noted above, net income increased 4.9% to $925.3 million from $882.4 million, and earnings per share increased 7.1% to $2.57 from $2.40 in Fiscal 1999. Removing the impact of the Weight Watchers classroom business in both years, earnings per share increased 9.6% and net income increased 7.1%. The impact of fluctuating exchange rates for Fiscal 2000 remained relatively consistent on a line-by-line basis throughout the Consolidated Statement of Income. This report contains forward-looking statements regarding the company's future performance. These forward-looking statements are based on management's views and assumptions, and involve risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These include, but are not limited to, sales, earnings and volume growth, competitive conditions, production costs, currency valuations (notably the euro and the pound sterling), global economic and industry conditions, achieving cost savings programs, success of acquisitions and new product and packaging innovations and other factors described in "Cautionary Statement Relevant to Forward-Looking Information" in the company's Form 10-K for the fiscal year ended May 2, 2001, as updated from time to time by the company in its subsequent filings with the Securities and Exchange Commission. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required to be furnished by Item 601 of Regulation S-K are listed below and are filed as part hereof. The company has omitted certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. The company agrees to furnish such documents to the 28 29 Commission upon request. Documents not designated as being incorporated herein by reference are filed herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K. 4. Certificate of Designations, Preferences and Rights of Voting Cumulative Preferred Stock, Series A of H.J. Heinz Finance Company. 12. Computation of Ratios of Earnings to Fixed Charges. 99. Condensed financial statements of HFC filed in accordance with rule 3-10 of Regulation S-X. H. J. Heinz Company is a guarantor of all of HFC's outstanding debt. (b) Reports on Form 8-K A report on Form 8-K was filed with the Securities and Exchange Commission on June 26, 2001 reporting the execution of an agreement by the company to acquire the pasta sauce and dry bouillon and soup business of Borden Foods Corporation, and the release of the company's financial results for the fourth quarter and the fiscal year ended May 2, 2001. A report on Form 8-K was filed with the Securities and Exchange Commission on September 17, 2001, regarding the date of the annual shareholders' meeting of the company. 29 30 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. H. J. HEINZ COMPANY (Registrant) Date: September 17, 2001 By: /s/ PAUL F. RENNE .......................................... Paul F. Renne Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: September 17, 2001 By: /s/ BRUNA GAMBINO .......................................... Bruna Gambino Corporate Controller (Principal Accounting Officer) 30 EX-4 3 j9019701ex4.txt EXHIBIT 4 1 CONFORMED COPY EXHIBIT 4 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF VOTING CUMULATIVE PREFERRED STOCK, SERIES A of H. J. HEINZ FINANCE COMPANY Pursuant to Section 151 of the General Corporation Law of the State of Delaware I, the undersigned, Leonard A. Cullo, President of H. J. Heinz Finance Company, a Delaware corporation (hereinafter called the "CORPORATION"), pursuant to the provisions of Sections 103 and 151 of the General Corporation Law of the State of Delaware, do hereby make this Certificate of Designations and do hereby state and certify that pursuant to the authority expressly vested in the board of directors of the Corporation (the "BOARD OF DIRECTORS") by the Certificate of Incorporation, the Board of Directors duly adopted the following resolution: RESOLVED, that, pursuant to Article 4 of the Certificate of Incorporation, which authorizes 5,000 shares of preferred stock, no par value (the "PREFERRED STOCK"), the Board of Directors hereby fixes the powers, designations, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions, of a series of Preferred Stock. RESOLVED, that each share of such series of Preferred Stock shall rank equally in all respects and shall be subject to the following provisions: 1. Number of Shares and Designation. 3,250 shares of the Preferred Stock of the Corporation shall be designated as Voting Cumulative Preferred Stock, Series A (the "SERIES A PREFERRED STOCK"). 2. Rank. (a) The Series A Preferred Stock shall, with respect to dividend rights and rights upon liquidation, dissolution and winding up, rank senior to the common stock of the Corporation, $1.00 par value (the "COMMON STOCK") and all other classes or series of equity securities of the Corporation now or hereafter issued (collectively with the Common Stock, "JUNIOR SECURITIES"), except equity securities of the Corporation expressly designated as ranking at 2 parity (whether with respect to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock (collectively, the "PARITY SECURITIES") and any indebtedness of the Corporation and its subsidiaries. So long as any shares of Series A Preferred Stock remain outstanding, the Corporation shall not, without the approval of a majority of the Independent Directors (as defined herein) authorize, create, increase the authorized number of shares of or issue any Parity Securities if (i) immediately after such action the Consolidated Net Worth (as defined herein) of the Corporation would decline from the level immediately prior to such action or (ii) an Increased Dividend Rate Event or a Special Voting Rights Event (each as defined herein) has occurred and is continuing. (b) So long as any shares of Series A Preferred Stock remain outstanding, the Corporation shall not authorize, create or issue any shares that would rank senior to the Series A Preferred Stock (whether with respect to dividends or upon liquidation, dissolution, winding up or otherwise) (collectively, "SENIOR SECURITIES"). (c) The Corporation may at any time issue additional Junior Securities without the consent of the holders of the Series A Preferred Stock or the Independent Directors. (d) The respective definitions of Senior Securities, Junior Securities, and Parity Securities shall also include any rights or options exercisable for or into any of the Senior Securities, Junior Securities and Parity Securities, as the case may be. The Series A Preferred Stock shall be subject to the creation of Junior Securities and Parity Securities, as provided herein. 3. Dividends. (a) The holders of shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for the payment of dividends, cash dividends at the annual rate of the stated liquidation preference per share ($100,000 per share) equal to 6.226% (the "ANNUAL DIVIDEND RATE"). Such dividends shall be payable in arrears in equal amounts quarterly on January 15, April 15, July 15 and October 15 of each year (unless such day is not a business day, in which event on the next succeeding business day) (each of such dates being a "DIVIDEND PAYMENT DATE" and each such quarterly period being a "DIVIDEND PERIOD"), commencing October 15, 2001. Such dividends shall be cumulative from the date of issue, whether or not in any Dividend Period or Periods there shall be funds of the Corporation legally available for the payment of such dividends. Each dividend shall be payable to holders of record as they appear on the securities register of the Corporation on the corresponding record date. The record dates for the Series A 2 3 Preferred Stock will be, for so long as the Series A Preferred Stock remains in book-entry form, one business day prior to the relevant Dividend Payment Date and, in the event that any of the Series A Preferred Stock is not in book-entry form, the fifteenth day (whether or not a business day) prior to the relevant Dividend Payment Date. Accrued and unpaid dividends for any past Dividend Periods may be declared and paid at any time, without reference to any Dividend Payment Date, to holders of record on such date, not more than 45 days preceding the payment date thereof, as may be fixed by the Board of Directors. (b) The amount of dividends payable for each full Dividend Period for the Series A Preferred Stock shall be computed by dividing the Annual Dividend Rate by four. The amount of dividends payable for the initial Dividend Period, or any other period shorter or longer than a full Dividend Period, on the Series A Preferred Stock shall be computed on the basis of twelve 30-day months and a 360-day year. Except as provided in Paragraphs 4 and 5 hereof, holders of shares of Series A Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of cumulative dividends, as herein provided, on the Series A Preferred Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Series A Preferred Stock that may be in arrears. (c) So long as any shares of the Series A Preferred Stock are outstanding, no dividends or other distributions (other than dividends or distributions in the form of Parity Securities or Junior Securities or dividends as described in the next succeeding sentence) shall be declared or paid or set apart for payment on Parity Securities, for any period unless full cumulative dividends have been or contemporaneously are declared and paid, or declared and a sum sufficient for the payment thereof set apart for such payment, on the Series A Preferred Stock for all Dividend Periods terminating on or prior to the date of payment of the dividend on such class or series of Parity Securities. When dividends are not paid in full, or a sum sufficient for such payment is not set apart, as aforesaid, all dividends declared upon shares of the Series A Preferred Stock and all dividends declared upon any Parity Securities shall be declared ratably in proportion to the respective amounts of dividends accumulated and unpaid on the Series A Preferred Stock and accumulated and unpaid on such Parity Securities. (d) So long as any shares of the Series A Preferred Stock are outstanding, no dividends or other distributions (other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Junior Securities) shall be declared or paid or set apart for payment on Junior Securities, nor shall any Junior Securities be redeemed, purchased or otherwise acquired or funds set apart for redemption, purchase or acquisition of Junior Securities (all such dividends, distributions, redemptions or 3 4 purchases being hereinafter referred to as a "JUNIOR SECURITIES DISTRIBUTION") for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation, directly or indirectly (except by conversion into or exchange for Junior Securities), unless in each case (i) full cumulative dividends on all outstanding shares of the Series A Preferred Stock and any other Parity Securities shall have been paid or set apart for payment for all past Dividend Periods with respect to the Series A Preferred Stock and all past dividend periods with respect to such Parity Securities and (ii) sufficient funds shall have been paid or set apart for the payment of the dividend for the current Dividend Period with respect to the Series A Preferred Stock and the current dividend period with respect to such Parity Securities. (e) So long as any shares of the Series A Preferred Stock are outstanding, the Corporation shall not declare or make any Junior Securities Distribution (other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Junior Securities) for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation, directly or indirectly (except by conversion into or exchange for Junior Securities), if an Increased Dividend Rate Event or a Special Voting Rights Event has occurred and is continuing or would result from such Junior Securities Distribution. 4. Increased Dividends. (a) If any Increased Dividend Rate Event has occurred and is continuing, holders of shares of Series A Preferred Stock shall be entitled to receive, out of funds legally available for the payment of dividends, in addition to any dividends otherwise accrued on the Series A Preferred Stock, a cash dividend (the "ADDITIONAL DIVIDEND") at an annual rate per share (the "INCREASED DIVIDEND RATE") equal to the product of (i) the Annual Dividend Rate and (ii) 0.25. The amount of Additional Dividends payable shall be computed by multiplying the Increased Dividend Rate by a fraction, the numerator of which is (x) the number of days during the relevant Dividend Period such Increased Dividend Rate Event continues without cure and (y) the denominator of which is 360. Additional Dividends which shall have accrued shall be payable (if declared) on the next succeeding Dividend Payment Date to the holders of record of the shares of the Series A Preferred Stock on such record dates applicable to such Dividend Payment Date. For the avoidance of doubt, any Additional Dividends shall immediately cease to accrue upon the payment, discharge or other cure of such failure, action or other event giving rise to an Increased Dividend Rate Event. 4 5 (b) As used herein, an "INCREASED DIVIDEND RATE EVENT" means: (i) the Corporation shall have failed to pay accrued dividends (other than any Additional Dividends, but including Gross-Up Payments, if any) on the Series A Preferred Stock for any two Dividend Periods (whether or not consecutive), and such failure continues for 30 days following written notice thereof from holders of at least 10% of the outstanding shares of Series A Preferred Stock; (ii) the Corporation shall have failed to pay or discharge its Mandatory Redemption Obligation (as defined herein) on the Redemption Date (as defined herein); (iii) the Corporation is merged, voluntarily liquidates or reorganizes, sells, leases, transfers or otherwise disposes of all or substantially all of its assets, effects any business combination with any person or permits any person to merge into it, or sell, lease, transfer or otherwise dispose of all or substantially all its assets, in each case at any time and without possibility of cure; provided that, such action shall not constitute an Increased Dividend Rate Event: if (1) in the case of a reorganization, merger, consolidation or other business combination, (A) if the Corporation survives, the Series A Preferred Stock maintains all the preferences, redemption and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions it had prior to such transaction and the Corporation remains an affiliate of H. J. Heinz Company, or (B) if the Corporation does not survive, (x) the surviving entity shall be H. J. Heinz Company or an affiliate of H. J. Heinz Company, (y) each holder of shares of the Series A Preferred Stock immediately prior to such transaction shall receive securities of the surviving entity with the same preferences, redemption and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions as the Series A Preferred Stock held by such holder immediately prior thereto and (z) no Trigger Event has occurred and is continuing and (2) both Standard & Poor's Rating Group and Moody's Investors Services, Inc. (or any successor thereto) affirm the rating of the Series A Preferred Stock (or, in the case of clause (B), the Securities of such surviving entity) as in effect immediately prior to such transaction, after giving effect to such action; or (iv) a Trigger Event occurs and is continuing for a period of 30 days following written notice to the Corporation from holders of at least 25% of outstanding shares of the Series A Preferred Stock. 5 6 (c) As used herein, a "TRIGGER EVENT" means: (i) the failure by the Corporation to maintain, or the entry by the Corporation, without the vote or consent of holders of two-thirds of the shares of Series A Preferred Stock then outstanding, voting as a separate class, at a meeting duly called and held, into any amendment (other than to increase the amount that may be borrowed thereunder) of, or consent to any non-compliance with, or waiver of its rights under, the Liquidity Agreement dated as of June 26, 2001 between the Corporation and H. J. Heinz Company or any other loan agreement or line of credit between the Corporation and one or more unaffiliated financial institutions the obligations of the Corporation under which are guaranteed by H. J. Heinz Company (such liquidity agreement or other agreement or line of credit being referred to herein as the "LIQUIDITY FACILITY"); provided that a Trigger Event shall not include any such entry into any amendment, consent or waiver, without such vote or consent, with respect to the Liquidity Facility (1) adds to the rights, privileges or protections of the Corporation under the Liquidity Facility, (2) cures any ambiguity or corrects or supplements any provision contained in the Liquidity Facility that may be defective or inconsistent with any provisions contained therein or (3) makes such other provisions with regard to matters or questions arising under the Liquidity Facility that does not have a material adverse affect on the Corporation's credit quality. (ii) the Corporation shall fail to maintain a Minimum Net Worth Ratio as measured at the end of each fiscal quarter of the Corporation (each such date a "TESTING DATE") for a period of 30 days following notice of such failure to the Corporation from any holder of shares of Series A Preferred Stock. (d) As used herein, (i) "MINIMUM NET WORTH RATIO" means a Consolidated Net Worth Ratio as of the Testing Date of not less than 100%, or at the Corporation's option with respect to any Testing Date, an Appraised Net Worth Ratio of not less than 125%. The Corporation will promptly provide written notice to each holder of Series A Preferred Stock of its election to apply the Appraised Net Worth Ratio with respect to a Testing Date, and will make available to holders of Series A Preferred Stock upon request the relevant Independent Appraisal Report. (ii) "CONSOLIDATED NET WORTH RATIO" means the ratio of (i) the stockholders' equity of the Corporation and its consolidated subsidiaries (including for this purpose the Series A Preferred Stock and any Parity 6 7 Securities if otherwise excluded) determined in accordance with U.S. GAAP ("CONSOLIDATED NET WORTH") to (ii) then-applicable redemption price for the Series A Preferred Stock and any Parity Securities. (iii) "APPRAISED NET WORTH RATIO" means the ratio of (1) (a) the Appraised Company Net Worth as specified in the applicable Independent Appraisal Report less (b) the aggregate amount of any distributions by the Corporation with respect to, or for repurchase or redemption of, any Junior Securities made subsequent to such Independent Appraisal Report (to the extent not reflected therein) to (2) the then-applicable Redemption Price for the Series A Preferred Stock and any Parity Securities. (iv) "APPRAISED COMPANY NET WORTH" means the excess of (i) the fair value of the Corporation's unconsolidated assets over (ii) the Corporation's unconsolidated liabilities (excluding, for this purpose, the Series A Preferred Stock and any Parity Securities, if otherwise included), as specified in an appraisal report prepared by a nationally recognized firm of independent auditors or other independent specialists in the valuation field (an "INDEPENDENT APPRAISAL REPORT"), which report is dated not earlier than nine months prior to the Testing Date. 5. DRP Adjustment. (a) If, prior to 18 months after the date of the original issuance of the Series A Preferred Stock, one or more amendments to the Internal Revenue Code of 1986, as amended (the "CODE"), are enacted that reduce the percentage of the dividends-received deduction (it being understood such deduction currently is 70%) as specified in section 243(a)(1) of the Code or any successor provision (the "DIVIDENDS-RECEIVED PERCENTAGE"), the amount of each dividend payable (if declared) per share of Series A Preferred Stock for dividend payments made on or after the effective date of such change in the Code will be adjusted by multiplying the amount of the dividend payable described above (before adjustment) by the following fraction (the "DRD FORMULA"), and rounding the result to the nearest cent (with one-half cent rounded up): 1-.35(1-.70) 1-.35(1-DRP) For the purposes of the DRD Formula, "DRP" means the Dividends-Received Percentage (expressed as a decimal) applicable to the dividend in question; provided, however, that if the Dividends-Received Percentage applicable to the dividend in question shall be less than 50%, then the DRP shall equal .50. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an opinion of nationally recognized 7 8 independent tax counsel or a private letter ruling or similar form of authorization from the Internal Revenue Service ("IRS") to the effect that such amendment does not apply to a dividend payable on the Series A Preferred Stock, then such amendment will not result in the adjustment provided for pursuant to the DRD Formula with respect to such dividend. (b) If any such amendment to the Code specified in Paragraph 5(a) hereof is enacted and the reduction in the Dividends-Received Percentage retroactively applies to a Dividend Payment Date as to which the Corporation previously paid dividends on the Series A Preferred Stock (each, an "AFFECTED DIVIDEND PAYMENT DATE"), the Corporation will pay (if declared) additional dividends (the "RETROACTIVE DIVIDENDS") on the next succeeding Dividend Payment Date to holders of Series A Preferred Stock on the Dividend Payment Record Date applicable to such Dividend Payment Date (or, if such amendment is enacted after the dividend payable on such Dividend Payment Date has been declared, to holders of Series A Preferred Stock on the Dividend Payment Record Date following the date of enactment) in an amount equal to the excess of (x) the product of the dividends paid by the Corporation on each Affected Dividend Payment Date and the DRD Formula (where the DRP used in the DRD Formula would be equal to the greater of the Dividends-Received Percentage and .50 applied to each Affected Dividend Payment Date) over (y) the sum of the dividends paid by the Corporation on each Affected Dividend Payment Date. The Corporation will only make one payment of Retroactive Dividends for any such amendment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an opinion of nationally recognized independent tax counsel or a private letter ruling or similar form of guidance from the IRS to the effect that such amendment does not apply to a dividend payable on an Affected Dividend Payment Date for the Series A Preferred Stock, then such amendment will not result in the payment of Retroactive Dividends with respect to such Affected Dividend Payment Date. (c) For the avoidance of any doubt, no adjustment in the dividends payable by the Corporation shall be made, and no Retroactive Dividends shall be payable by the Corporation, in respect of the enactment of any amendment to the Code 18 months or more after the date of original issuance of the Series A Preferred Stock that reduces the Dividends-Received Percentage. (d) In the event that the amount of dividends payable per share of the Series A Preferred Stock is adjusted pursuant to the DRD Formula and/or Retroactive Dividends are to be paid, the Corporation will give notice of each such adjustment and, if applicable, any Retroactive Dividends to the holders of Series A Preferred Stock. 8 9 6. Earnings and Profits Gross-Up Payments. (a) If any distributions on shares of Series A Preferred Stock with respect to any taxable year of the Corporation are not eligible for the dividend received deduction for U.S. federal income tax purposes solely on account of insufficient current or accumulated earnings and profits of the Corporation ("APPLICABLE DISTRIBUTION(S)"), the Corporation will, within 120 days after the end of such taxable year, provide notice thereof to each holder of shares of Series A Preferred Stock that was entitled to receive an Applicable Distribution during such taxable year. The Corporation shall, within 30 days after such notice is given, pay, out of lawful funds, to each such holder an amount equal to the aggregate Gross-Up Payment (as defined below) with respect to all Applicable Distributions during such taxable year. Gross-Up Payments, if not made when due, shall be treated as accrued and unpaid dividends on shares of Series A Preferred Stock. (b) As used herein, "GROSS-UP PAYMENT(S)" means payment with respect to an Applicable Distribution of an amount which, when taken together with such Applicable Distribution, would cause the net yield in dollars (after federal income tax consequences and treating, for purposes of calculating net yield in dollars, that portion of the Applicable Distribution otherwise treated as a return of capital as capital gain received upon the taxable sale or exchange of shares of Series A Preferred Stock) from the aggregate of both the Applicable Distributions and the Gross-Up Payment to be equal to the net yield in dollars (after U.S. federal income tax consequences) that would have been realized if the amount of the aggregate Applicable Distributions treated as a return of capital instead had been treated as a dividend for U.S. federal income tax purposes. Such Gross-Up Payment will be calculated without consideration being given to the time value of money, assuming the Gross-Up Payment is subject to tax as ordinary income, giving effect to the dividends received deduction (as adjusted pursuant to Paragraph 5 above) that would have applied to each such Applicable Distribution had it been treated as a dividend for U.S. federal income tax purposes, and using the maximum marginal corporate U.S. federal tax rate applicable to ordinary income and capital gains, as the case may be. The Corporation shall provide notice to each holder of shares of Series A Preferred Stock of the right to receive a Gross-Up Payment in respect of any taxable year of the Corporation, if applicable, no later than 120 days following the end of such year, and any applicable Gross-Up Payment will be due within 30 days of such notice. Gross-Up Payments, if not made when due, will be treated as accrued and unpaid dividends on the shares of Series A Preferred Stock. 7. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, before any payment or distribution of the assets of the Corporation (whether 9 10 capital or surplus) shall be made to or set apart for the holders of Junior Securities, the holders of shares of Series A Preferred Stock shall be entitled to receive $100,000 per share of Series A Preferred Stock plus an amount equal to all dividends (whether or not earned or declared) accrued and unpaid thereon to and including the date of final distribution to such holders; but such holders shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of the shares of Series A Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any Parity Securities, then such assets, or the proceeds thereof, shall be distributed among the holders of shares of Series A Preferred Stock and any such other Parity Securities ratably in accordance with the respective amounts that would be payable on such shares of Series A Preferred Stock and any such other stock if all amounts payable thereon were paid in full. For the purposes of this Paragraph 7, (i) a consolidation or merger of the Corporation with one or more corporations, or (ii) a sale or transfer of all or substantially all of the Corporation's assets, shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Corporation. (b) Subject to the rights of the holders of any Parity Securities, after payment shall have been made in full to the holders of the Series A Preferred Stock, as provided in this Paragraph 7, any other series or class or classes of Junior Securities shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Series A Preferred Stock shall not be entitled to share therein. 8. Redemption. (a) On July 15, 2008 (the "REDEMPTION DATE"), the Corporation shall redeem all outstanding shares of the Series A Preferred Stock, at a redemption price of $100,000 per share in cash, together with accrued and unpaid dividends thereon to such date, without interest (the "REDEMPTION PRICE") out of funds legally available for such payment. The Series A Preferred Stock shall not be redeemable by the Corporation prior to the Redemption Date. If the Redemption Date falls on a day that is not a business day, the Redemption Price will be payable on the next succeeding business day without adjustment for interest or further payment as a result of the delay. (b) Shares of Series A Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed, shall (upon compliance with any applicable provisions of the laws of the State of Delaware) 10 11 have the status of authorized and unissued shares of the class of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of the Preferred Stock; provided that no such issued and reacquired shares of Series A Preferred Stock shall be reissued or sold as Series A Preferred Stock. 9. Procedure for Redemption. (a) In the event the Corporation shall redeem shares of Series A Preferred Stock, notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 days nor more than 60 days prior to the Redemption Date, to each holder of record of the shares to be redeemed at such holder's address as the same appears on the stock register of the Corporation; provided that neither the failure to give such notice nor any defect therein shall affect the validity of the giving of notice for the redemption of any share of Series A Preferred Stock to be redeemed except as to the holder to whom the Corporation has failed to give said notice or except as to the holder whose notice was defective. Each such notice shall state: (i) the Redemption Date; (ii) the number of shares of Series A Preferred Stock to be redeemed; (iii) the Redemption Price; (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date. (b) Notice having been duly given, from and after the Redemption Date (unless default shall be made by the Corporation in providing money for the payment of the redemption price of the shares called for redemption), dividends on the shares of Series A Preferred Stock so called for redemption shall cease to accrue, and all rights of the holders thereof as stockholders of the Corporation (except the right to receive from the Corporation the redemption price) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice shall so state), such share shall be redeemed by the Corporation at the Redemption Price aforesaid. (c) Payment of the Redemption Price of the Series A Preferred Stock shall be made only upon surrender of the share certificates to Mellon Investor Services, as paying agent to the Corporation (including any successor to Mellon Investor Services approved by the Corporation as its paying agent, the "PAYING AGENT"). If the Corporation gives or causes to be given a notice of redemption, timely pays to the Paying Agent an amount of cash sufficient to redeem the Series A Preferred Stock and gives the Paying Agent irrevocable instructions and authority to pay the full amount payable on redemption of the Series A Preferred Stock to holders of the Series A Preferred Stock, then on the date of such payment, all rights of the holders of Series A Preferred Stock, as such, will 11 12 terminate (except the right of the holders of Series A Preferred Stock to receive the full amount payable upon redemption thereof upon surrender of the share certificates, but without interest) and the Series A Preferred Stock will no longer be deemed to be outstanding for any purpose. Any funds paid to the Paying Agent which are unclaimed at the end of two years from the Redemption Date will be returned to the Corporation, after which the holders of Series A Preferred Stock will look only to the Corporation for payment of the Redemption Price of the Series A Preferred Stock. 10. Voting Rights. (a) In addition to the other voting rights provided in this Certificate of Designations or as otherwise required by law or the Certificate of Incorporation of the Corporation, as amended, holders of shares of the Series A Preferred Stock and any Parity Securities expressly designated with the same voting rights as the Series A Preferred Stock (collectively, the "VOTING PARITY SECURITIES") shall be entitled to vote together as a separate voting class to elect a number of directors of the Corporation which is equal to the smallest whole number that is not less than 25% of the Board of Directors (such director or directors collectively referred to as the "INDEPENDENT DIRECTORS"). For so long as shares of Series A Preferred Stock are outstanding, the Corporation shall have no fewer than one Independent Director. The initial Independent Director is Mr. Andrew L. Stidd. Except with respect to (i) the election of directors, as to which the Series A Preferred Stock shall have only the voting rights provided in the first sentence of this Paragraph 10, and (ii) those matters for which a series or class vote is required by applicable law, the Certificate of Incorporation, as amended, or this Certificate of Designations, holders of shares of Series A Preferred Stock shall be entitled to cast one vote per share on all matters submitted for a vote of the stockholders of the Corporation and with respect to such matters shall vote together with the holders of Voting Parity Securities and with the holders of the Common Stock, all voting as a single class. (b) Except (i) with respect to Special Voting Rights Matters upon the occurrence and during the continuance of a Special Voting Rights Event or (ii) as otherwise provided in this Certificate of Designations, each Independent Director shall be entitled to cast one vote (voting together with each member of the Board of Directors) on all matters before the Board of Directors. The Independent Directors shall hold office until the next annual meeting of the stockholders or special meeting held in lieu thereof. If any vacancy shall occur among the Independent Directors, then the other Independent Director or Independent Directors shall designate a successor to fill such vacancy to serve until the next annual meeting of the stockholders or special meeting held in lieu thereof; 12 13 provided that if there are no Independent Directors to designate such a successor, within 40 days after the creation of such vacancy or vacancies, the Secretary of the Corporation shall call a special meeting of the holders of Series A Preferred Stock and any Voting Parity Securities entitled to vote for the election of Independent Directors and such vacancy or vacancies shall be filled at such special meeting to serve until the next annual meeting of the stockholders or special meeting held in lieu thereof. Any Independent Director may be removed, with or without cause, by the holders of a majority of Series A Preferred Stock and any Voting Parity Securities outstanding entitled to vote for the election of Independent Directors. Election and removal of Independent Directors requires the vote of the holders of the Series A Preferred Stock, voting together as a class with holders of any Voting Parity Securities, holding a plurality, in the case of an election, or a majority, in the case of removal, in voting power of the outstanding shares of Series A Preferred Stock and Voting Parity Securities. (c) A meeting of holders of Series A Preferred Stock and any Voting Parity Securities may be called by the holders of at least 25% in voting power of the outstanding shares of Series A Preferred Stock and any Voting Parity Securities, voting together as a class. Any shares of Series A Preferred Stock held directly or indirectly by the Corporation or any corporation of which the Corporation holds a majority of the shares entitled to vote in the election of directors shall not be entitled to vote or be counted for quorum purposes. (d) For so long as any shares of Series A Preferred Stock are outstanding, the following actions of the Corporation shall require the approval of a majority of the Independent Directors: (i) the issuance of Parity Securities requiring approval of Independent Directors as set forth in Paragraph 2(a) hereof and (ii) if and for so long as a Special Voting Rights Event has occurred and is continuing, any action of the Board of Directors with respect to Special Voting Rights Matters. For so long as there is only one Independent Director, any action requiring the approval of a majority of the Independent Directors shall be approved by such Independent Director. In the event the Independent Directors cast an equal number of votes for and against approval of a given action requiring the approval of a majority of the Independent Directors, such action shall be deemed not to have been approved by a majority of Independent Directors. (e) If and for so long as a Special Voting Rights Event has occurred and is continuing while any shares of Series A Preferred Stock are outstanding, the Independent Directors shall have "SPECIAL VOTING RIGHTS" enabling the Independent Directors only (and not any directors that are not Independent Directors) to cast votes in meetings of the Board of Directors (or to take action by consent in lieu thereof) with respect to, but only with respect to following matters (collectively, the "SPECIAL VOTING RIGHTS MATTERS"): 13 14 (i) the declaration and payment of dividends on, or the payment of the Redemption Price of, the Series A Preferred Stock and any Parity Securities, to the extent that funds are legally available therefor; and then, (ii) if, but only if, all Special Voting Rights Events then existing cannot be cured by the taking of such actions described in clause (i) hereof, to cause the Corporation to enforce and not waive its rights under all material contracts with affiliates, including the Liquidity Facility; and then, (iii) if, but only if, all Special Voting Rights Events then existing cannot be cured by the taking of such actions described in clause (ii) hereof, to cause the sale or disposition of any of the Corporation's assets for a commercially reasonable consideration or to cause the repayment, retirement or redemption in accordance with their terms of any or all of the Corporation's liabilities that rank senior to the Series A Preferred Stock, in each case as, if and to the extent that the taking of such actions would enable the Corporation to cure the occurrence and continuance of any then existing Special Voting Rights Event. At any time that the Independent Directors shall have Special Voting Rights, a majority of the Independent Directors shall be entitled to take action on behalf of the Board of Directors only with respect to any Special Voting Rights Matter. (f) All Special Voting Rights of the Independent Directors shall terminate immediately at such time as all Special Voting Rights Events then existing have been cured or, if earlier, when shares of the Series A Preferred Stock shall have been redeemed in full or are otherwise no longer outstanding. All Special Voting Rights Events shall be deemed to have been cured and not to be continuing at such time when (i) all accrued and unpaid dividends on the Series A Preferred Stock shall have been declared and paid, (ii) if after the Redemption Date, the Mandatory Redemption Obligation shall have been paid or otherwise discharged, or, as the case may be, (iii) no Trigger Event that materially adversely affects the financial condition of the Corporation and its consolidated subsidiaries, taken as a whole, is continuing. (g) Notwithstanding the foregoing and for the avoidance of doubt: (i) Independent Directors shall not have Special Voting Rights with respect to any matter before the Board of Directors other than the Special Voting Rights Matters; and (ii) Special Voting Rights Matters do not include any action by the Independent Directors or the Board of Directors to elect or remove 14 15 managers of H. J. Heinz Company, L.P. ("HEINZ LP") under the interest in Heinz LP designated as the Class B Interest pursuant to the First Amended and Restated Limited Partnership Agreement of Heinz LP dated of May 3, 2001 or to exercise any rights of the Corporation as a limited partner or shareholder of Heinz LP or any other subsidiary of the Corporation (other than the right of a limited partner or shareholder to dispose of its limited partnership interests or shares). (h) As used herein, a "SPECIAL VOTING RIGHTS EVENT" means: (i) the giving of notice by the Independent Director of the failure by the Corporation to pay accrued dividends on the Series A Preferred Stock in full (including any Gross-Up Payments), which failure has continued for four consecutive quarterly periods, subject to a 10 day cure period following notice from the Independent Director; (ii) the failure by the Corporation to pay or otherwise discharge its Mandatory Redemption Obligation on the Redemption Date subject to a 10 day cure period following notice from the Independent Director; or (iii) a Trigger Event that materially adversely affects the financial condition or credit quality of the Corporation occurs and is continuing for at least 60 days following written notice from the holders of a majority of outstanding shares of the Series A Preferred Stock. (i) For so long as any shares of Series A Preferred Stock are outstanding, the Corporation shall not, without the consent or vote of holders of a majority of shares of the Series A Preferred Stock, voting as a class, amend, alter or repeal (i) any provision of the Corporation's Certificate of Incorporation (including the terms of the Series A Preferred Stock, but excluding the filing of any Certificate of Designations with respect to any Parity Securities or Junior Securities otherwise permitted to be issued hereunder) or (ii) any provision of the Corporation's Bylaws, in each case, if such amendment, alteration or repeal would materially and adversely affect the rights, preferences, powers or privileges of the Series A Preferred Stock. (j) For so long as any shares of Series A Preferred Stock are outstanding, the Corporation shall not, without the consent or vote of each holder of shares of the Series A Preferred Stock amend, alter or repeal the Corporation's Certificate of Incorporation (including the terms of the Series A Preferred Stock) that would (i) reduce the rate of or change or have the effect of changing the time for payment of any dividends on the Series A Preferred Stock, (ii) reduce the 15 16 redemption price therefor or (iii) make any amount payable on the Series A Preferred Stock payable in other than U.S. dollars. 11. Maintain Existence. The Corporation shall not merge, voluntarily liquidate or reorganize, sell, lease, transfer or otherwise dispose of all or substantially all of its assets, effect any business combination with any person or permit any person to merge into it, or sell, lease, transfer or otherwise dispose of all or substantially all its assets, in each case at any time and without possibility of cure, unless in the case of a reorganization, merger, consolidation or other business combination, (A) if the Corporation survives, the Series A Preferred Stock shall maintain all the preferences, redemption and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions it had prior to such transaction and the Corporation remains an affiliate of H. J. Heinz Company, or (B) if the Corporation does not survive, (x) the surviving entity shall be H. J. Heinz Company or an affiliate of H. J. Heinz Company, (y) each holder of shares of the Series A Preferred Stock immediately prior to such transaction shall receive securities with the same preferences, redemption and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of the surviving entity as the Series A Preferred Stock held by such holder immediately prior thereto and (z) no Trigger Event has occurred and is continuing. 12. General Provisions. (a) The term "AFFILIATE" as used herein means, with respect to any Person, a Person that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such Person. (b) The term "PERSON" as used herein means any corporation, limited liability company, partnership, trust, organization, association, other entity or individual. (c) The term "OUTSTANDING", when used with reference to shares of stock, shall mean issued shares, excluding shares held by the Corporation or a subsidiary. (d) The headings of the paragraphs, subparagraphs, clauses and subclauses of this Certificate of Designations are for convenience of reference only and shall not define, limit or affect any of the provisions hereof. (e) Each holder of Series A Preferred Stock, by acceptance thereof, acknowledges and agrees that payments of dividends, interest, premium and principal on, and exchange, redemption and repurchase of, such securities by the Corporation are or may become subject to restrictions on the Corporation contained in certain credit and financing agreements. 16 17 IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designations to be signed and attested by the undersigned this 5th day of July 2001. H. J. HEINZ FINANCE COMPANY By: /s/ Leonard A. Cullo, Jr. ---------------------------- Name: Leonard A. Cullo, Jr. Title: President ATTEST: /s/ Michael E. Hooton ----------------------- Name: Michael E. Hooton Assistant Secretary EX-12 4 j9019701ex12.txt COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 H. J. HEINZ COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
First Quarter Ended Fiscal Years Ended ------------- -------------------------------------------------------------- May 2, May 3, April 28, April 29, April 30, August 1, 2001 2000 1999 1998 1997 2001 (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) ------------- ---------- ---------- ---------- ---------- ---------- Fixed Charges: Interest expense*.......................... $ 78,215 $ 335,531 $ 271,597 $ 260,743 $ 260,401 $ 277,818 Capitalized interest....................... 479 8,396 -- -- 1,542 2,688 Interest component of rental expense....... 6,153 28,096 32,274 29,926 30,828 27,382 -------- ---------- ---------- ---------- ---------- ---------- Total fixed charges...................... $ 84,847 $ 372,023 $ 303,871 $ 290,669 $ 292,771 $ 307,888 -------- ---------- ---------- ---------- ---------- ---------- Earnings: Income before income taxes................. $312,207 $ 673,058 $1,463,676 $ 835,131 $1,254,981 $ 479,064 Add: Interest expense*..................... 78,215 335,531 271,597 260,743 260,401 277,818 Add: Interest component of rental expense.................................. 6,153 28,096 32,274 29,926 30,828 27,382 Add: Amortization of capitalized interest................................. 531 2,129 2,799 3,050 3,525 3,454 -------- ---------- ---------- ---------- ---------- ---------- Earnings as adjusted..................... $397,106 $1,038,814 $1,770,346 $1,128,850 $1,549,735 $ 787,718 -------- ---------- ---------- ---------- ---------- ---------- Ratio of earnings to fixed charges......... 4.68 2.79 5.83 3.88 5.29 2.56 ======== ========== ========== ========== ========== ==========
--------------- * Interest expense includes amortization of debt expense and any discount or premium relating to indebtedness. EX-99 5 j9019701ex99.txt FINANCIAL STATEMENTS 1 EXHIBIT 99 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED AUGUST 1, 2001 2 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
First Quarter Ended ------------------------------- August 1, 2001 August 2, 2000 FY 2002 FY 2001 -------------- -------------- (Unaudited) (in thousands) Sales....................................................... $530,120 $1,096,464 Cost of products sold....................................... 259,153 653,899 -------- ---------- Gross profit................................................ 270,967 442,565 Selling, general and administrative expenses................ 126,455 238,115 Royalty expense to related parties.......................... 45,280 24,092 -------- ---------- Operating income............................................ 99,232 180,358 Interest income............................................. 11,763 27,975 Interest expense............................................ 52,173 1,661 Dividends from related parties.............................. 38,519 -- Other income/(expense)...................................... 202 (3,607) -------- ---------- Income before income taxes, minority interest and cumulative effect of accounting change............................... 97,543 203,065 Provision for income taxes.................................. 9,712 75,134 -------- ---------- Income before minority interest and cumulative effect of accounting change......................................... 87,831 127,931 Minority interest........................................... (71,295) -- -------- ---------- Income before cumulative effect of accounting change........ 16,536 127,931 Cumulative effect of accounting change...................... -- (4,849) -------- ---------- Net income.................................................. $ 16,536 $ 123,082 ======== ==========
See notes to condensed consolidated and combined financial statements. 1 3 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
August 1, 2001 May 2, 2001* FY 2002 FY 2001 -------------- ------------ (Unaudited) (in thousands) ASSETS Current assets: Cash and cash equivalents................................. $ 17,682 $ 393 Receivables, net.......................................... 372,675 506,447 Due from related parties.................................. 110,750 75,429 Short-term notes receivable from related parties.......... 1,032,999 -- Inventories............................................... 672,336 655,170 Deferred income taxes..................................... 575 50,042 Prepaid expenses and other current assets................. 100,723 49,428 ---------- ---------- Total current assets................................... 2,307,740 1,336,909 Property, plant and equipment............................... 1,482,055 1,608,514 Less accumulated depreciation............................... 679,038 738,731 ---------- ---------- Total property, plant and equipment, net............... 803,017 869,783 Long-term notes receivable from related parties............. 35,000 35,000 Investments in related parties.............................. 1,907,245 1,895,245 Other investments........................................... 195,104 201,438 Intangible assets, net...................................... 1,479,971 1,208,294 Other noncurrent assets..................................... 65,826 54,822 ---------- ---------- Total other noncurrent assets.......................... 3,683,146 3,394,799 ---------- ---------- Total assets........................................... $6,793,903 $5,601,491 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Portion of long-term debt due within one year............. $ 303,201 $ 29,833 Accounts payable.......................................... 232,008 321,222 Due to related parties.................................... 226,348 96,221 Other accrued liabilities................................. 249,227 224,384 ---------- ---------- Total current liabilities.............................. 1,010,784 671,660 Long-term debt.............................................. 3,705,999 23,932 Deferred income taxes....................................... 4,413 205,134 Deferred income............................................. 28,160 29,684 Other liabilities........................................... 5,677 12,684 Minority interest........................................... 1,561,859 -- Mandatorily Redeemable Series A Preferred shares............ 325,000 -- Shareholders' equity: Common stock.............................................. 11 -- Additional capital........................................ 135,385 -- Retained earnings......................................... 15,095 -- Accumulated other comprehensive income.................... 1,520 -- Parent company's investment............................... -- 4,658,397 ---------- ---------- Total shareholders' equity............................. 152,011 4,658,397 ---------- ---------- Total liabilities and shareholders' equity............. $6,793,903 $5,601,491 ========== ==========
--------------- * Summarized from audited Fiscal Year 2001 balance sheet See notes to condensed consolidated and combined financial statements. 2 4 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
First Quarter Ended -------------------------------- August 1, 2001 August 2, 2000 FY 2002 FY 2001 -------------- -------------- (Unaudited) (in thousands) Cash used for Operating Activities.......................... $(118,569) $(12,250) --------- -------- Cash Flows from Investing Activities: Capital expenditures...................................... (11,992) (35,528) Acquisitions, net of cash acquired........................ (290,200) (128,813) Investment in The Hain Celestial Group, Inc............... -- (79,743) Other items, net.......................................... (20,978) (9,457) --------- -------- Cash used for investing activities..................... (323,170) (253,541) --------- -------- Cash Flows from Financing Activities: Payments on long-term debt................................ (7,167) (5,884) Proceeds from long-term debt.............................. 748,959 -- Payments on commercial paper and short-term borrowings, net.................................................... (617,998) -- Dividends................................................. -- (103,019) Net parent advances....................................... -- 381,596 Proceeds from mandatorily redeemable Series A preferred shares................................................. 325,000 -- Other items, net.......................................... 500 -- --------- -------- Cash provided by financing activities.................. 449,294 272,693 --------- -------- Net increase in cash and cash equivalents................... 7,555 6,902 Cash and cash equivalents, beginning of period.............. 10,127 2,322 --------- -------- Cash and cash equivalents, end of period.................... $ 17,682 $ 9,224 ========= ========
See notes to condensed consolidated and combined financial statements. 3 5 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED) (1) 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 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 (collectively, "HFC"), and H.J. Heinz Company, L.P. ("Heinz LP"). HFC has limited partnership interests in Heinz LP. HFC 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. HFC, 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. The minority interest amounts on the August 1, 2001 statement of income and balance sheet represents the Class A and General Partner limited partnership interest in Heinz LP. The preparation of the August 2, 2000 and May 2, 2001 financial statements include the use of "carve out" and "push down" accounting procedures wherein certain 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 (9), for a further discussion regarding Heinz parent company costs. As a result of the finalizing of the reorganization, certain assets and liabilities which are included in the May 2, 2001 "carve out" balance sheet, were not contributed to HFC. Substantially all finished goods inventories of the U.S. Group remained assets of Heinz and were not contributed to Heinz LP. These retained inventories result in reduced sales and operating results in Fiscal 2002 when compared to Fiscal 2001. (2) 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 HFC. 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. (3) INVENTORIES The composition of inventories at the balance sheet dates was as follows:
August 1, May 2, 2001 2001 (in thousands) --------- -------- Finished goods and work-in-process......................... $547,245 $515,315 Packaging material and ingredients......................... 125,091 139,855 -------- -------- $672,336 $655,170 ======== ========
4 6 (4) TAXES The provision for income taxes consists of provisions for federal and state income taxes. The tax provision in the August 1, 2001 financial statements declined significantly given the non-taxable status of Heinz LP. (5) RESTRUCTURING In the fourth quarter of Fiscal 2001, Heinz announced a restructuring initiative named "Streamline" which includes an organizational restructuring aimed at reducing overhead costs and the consolidation of HFC's canned pet food production to Bloomsburg, Pennsylvania (which resulted in ceasing canned pet food production at HFC's Terminal Island, California facility). The major components of the restructuring charge and implementation costs and the remaining accrual balances as of August 1, 2001 were as follows:
Employee Termination Non-Cash and Accrued Asset Severance Exit Implementation (in millions) Write-Downs Costs Costs Costs Total ------------- ----------- ----------- ------- -------------- ----- Restructuring and Implementation costs--Fiscal 2001.................. $34.7 $15.4 $22.8 $11.8 $84.7 Amounts utilized--Fiscal 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 2002..... -- -- -- 1.2 1.2 Amounts utilized--Fiscal 2002......... -- -- (0.5) (1.2) (1.7) Liability assumed by related party--Fiscal 2002.................. -- (5.5) (0.6) -- (6.1) ----- ----- ----- ----- ----- Accrued restructuring costs--August 1, 2001................................ $ -- $ 4.1 $20.0 $ -- $24.1 ===== ===== ===== ===== =====
During the first quarter of Fiscal 2002, HFC incurred implementation costs totaling $1.2 million pretax, which consisted of incremental costs directly related to the implementation of the Streamline initiative. Pretax charges of $1.1 million were classified as cost of products sold and $0.1 million as selling, general and administrative expenses ("SG&A"). In addition, Heinz Management Company, a wholly-owned subsidiary of Heinz, assumed a portion of the HFC's restructuring liability as a result of the realignment that occurred on May 3, 2001. During the first quarter of Fiscal 2002, HFC utilized $0.5 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. (6) ACQUISITIONS During the first quarter of Fiscal 2002, HFC completed the acquisition of Borden Food Corporation's pasta sauce and dry bouillon and soup business. Under this transaction, HFC acquired such brands as Classico pasta sauces, Aunt Millie's pasta sauce, Mrs. Grass Recipe soups, Wyler's bouillons and soups. HFC also made another smaller acquisition. The above 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 dates. Final allocations of the purchase prices are not expected to differ significantly from the preliminary allocations. Operating results of the businesses acquired have been included in the consolidated and combined statements of income from the respective acquisition dates forward. 5 7 Pro forma results of HFC, assuming all of the acquisitions had been made at the beginning of each period presented, would not be materially different from the results reported. (7) RECENTLY ADOPTED ACCOUNTING STANDARDS In Fiscal 2001, HFC changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." Under the new accounting method, adopted retroactive to May 4, 2000, HFC recognizes revenue upon the passage of title, ownership and risk of loss to the customer. The cumulative effect adjustment of $4.8 million in net income as of May 4, 2000, was recognized during the first quarter of Fiscal 2001. The Fiscal 2001 first quarter amounts include the effect of the change in accounting for revenue recognition. (8) RECENTLY ISSUED ACCOUNTING STANDARDS 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. The provisions of SFAS Nos. 141 and 142 apply to all business combinations after June 30, 2001. The provisions of SFAS No. 142 for existing goodwill and other intangible assets are required to be implemented in the first quarter of Fiscal 2003. HFC is currently evaluating the impact of these standards on the consolidated financial statements. In September 2000, the FASB Emerging Issues Task Force (the "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," which address the income statement classification of consideration from a vendor to a retailer. These guidelines will be effective for HFC beginning in the fourth quarter of Fiscal 2002. The implementation of these guidelines will require HFC to make reclassifications between SG&A and sales, the amounts of which have not yet been determined. In May 2000, the EITF issued new guidelines entitled "Accounting for Certain Sales Incentives" which addresses the recognition, measurement and income statement classification for certain sales incentives (e.g., coupons). These guidelines will be effective for HFC beginning in the fourth quarter of Fiscal 2002. The implementation of these guidelines will require HFC to make reclassifications between SG&A and sales, the amounts of which have not yet been determined. (9) RELATED PARTY TRANSACTIONS Employee Costs Certain of Heinz's general and administrative expenses are allocated to HFC. In Fiscal 2001, total costs allocated include charges for salaries of corporate officers and staff and other Heinz corporate overhead. In Fiscal 2002, these costs primarily include a management charge of all salaried employee costs from the Heinz Management Company. Total costs charged to HFC for these services were $18.0 million and $6.9 million for the three months ended August 1, 2001 and August 2, 2000, respectively. These costs are recorded as SG&A expense in the accompanying condensed consolidated and combined statements of income. Heinz charges HFC 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 HFC through Heinz's consolidated programs. Workers compensation, auto, property, product 6 8 liability and other insurance coverages are charged directly based on HFC's loss experience. Amounts charged to HFC for insurance costs were $15.4 million and $20.4 million for the three months ended August 1, 2001 and August 2, 2000, respectively, and are recorded in SG&A expense in the accompanying condensed consolidated and combined statement of income. Pension costs and postretirement costs are also charged to HFC based upon eligible employees participating in the Plans. Cash Management In Fiscal 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's interest on the average daily balance maintained in the resulting intercompany account. Net interest income related to this arrangement, included in the condensed combined statement of income for August 2, 2000 was $0.1 million. The interest rate charged to or received by the U.S. Group was 5.4% for the three months ended August 2, 2000 Beginning in Fiscal 2002, HFC became the treasury center for cash management and debt financing for all of Heinz's domestic operations resulting in the $1.0 billion of short term notes receivable with related parties on the August 1, 2001 condensed consolidated balance sheet. An average interest rate of 3.93% was charged on these notes resulting in $11.0 million of interest income recorded on the August 1, 2001 condensed consolidated statement of income. Product sales and purchases HFC sells and purchases products and services to and from other Heinz affiliates. The results of such transactions are the $110.8 million and $75.4 million balances due from related parties as of August 1, 2001 and May 2, 2001, respectively, and the $226.3 million and $96.2 million balances due to related parties as of August 1, 2001 and May 2, 2001, respectively. Sales to related parties were $12.3 million and $19.7 million in the three months ended August 1, 2001 and August 2, 2000, respectively, and purchases from related parties were $70.8 million and $114.3 million in the three months ended August 1, 2001 and August 2, 2000, respectively. Other related party items HFC sells undivided interests in certain accounts receivable to a Heinz affiliate, Receivables Servicing Company (RSC). HFC sold $318.6 million and $1,291.0 million of receivables net of discount expense of $1.6 million and $9.4 million for the quarter ended August 1, 2001 and the year ended May 2, 2001, respectively, to RSC. As of August 1, 2001 and May 2, 2001, respectively, HFC had $130.1 million and $126.9 million of receivables sold to RSC. These sales were reflected as reductions of trade accounts receivable. HFC's contract with RSC will terminate in December 2001. Until the fourth quarter of Fiscal 2001, HFC had outstanding notes receivable from Heinz affiliates which are 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 HFC related to these receivables was $27.2 million for the three months ended August 2, 2000. In the fourth quarter of Fiscal 2001, these notes receivable from related parties were exchanged by HFC 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 $38.5 million for the first three months of Fiscal 2002. This preferred stock investment is recorded in the Investments in related parties balance on the condensed consolidated and combined balance sheets as of August 1, 2001 and May 2, 2001. 7 9 HFC paid royalties of $45.3 million and $24.1 million as of August 1, 2001 and August 2, 2000, respectively, to Promark International, Inc., an indirect subsidiary of Heinz, for the use of trademarks. The $35.0 million long-term note receivable from related parties recorded on the accompanying condensed consolidated and combined balance sheets relates to a receivable from Heinz that was contributed to HFC in exchange for common stock of HFC. (10) On September 6, 2001, HFC, 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 HFC's commercial paper program, replaced the $2.30 billion credit agreement which expired on September 6, 2001. As of August 1, 2001, $673 million of commercial paper was outstanding and classified as long-term debt due to the long-term nature of the supporting credit agreement. On July 6, 2001, HFC 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, HFC issued $750 million of 6.625% Guaranteed Notes due July 15, 2011 which are guaranteed by Heinz. The proceeds were used for general corporate purposes, including retiring commercial paper borrowings, financing acquisitions and ongoing operations. (11) COMPREHENSIVE INCOME
First Quarter Ended ------------------- August 1, 2001 (in thousands) FY 2002 -------------- ------------------- Net income.................................................. $16,536 Deferred gains/(losses) on derivatives: Net change from periodic revaluations..................... 1,643 Net amount reclassified to earnings....................... 138 ------- Comprehensive income........................................ $18,317 =======
(12) FINANCIAL INSTRUMENTS HFC utilizes certain financial instruments to manage its commodity price and interest rate exposures. COMMODITY PRICE HEDGING: HFC 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. When using a commodity option as a hedging instrument, HFC excludes the time value of the option from the assessment of hedge effectiveness. INTEREST RATE HEDGING: HFC 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 August 1, 2001, hedge ineffectiveness related to cash flow hedges was a net loss of $0.1 million, which is reported in the consolidated statements of income as other expenses. 8 10 DEFERRED HEDGING GAINS AND LOSSES: As of August 1, 2001, HFC is hedging forecasted transactions for periods not exceeding 12 months, and expects $1.5 million of net deferred gain reported in accumulated other comprehensive income to be reclassified to earnings within that time frame. (13) SUBSEQUENT EVENTS On August 2, 2001, HFC announced that it acquired Delimex Holdings, Inc. ("Delimex"), a leading maker of frozen Mexican food products, from Fenway Partners. Delimex is the leading U.S. producer of frozen taquitos, tightly rolled fried corn and flour tortillas with fillings such as beef, chicken or cheese. Delimex also makes quesadillos, tamales and rice bowls. 9