EX-99.C 7 j9600301exv99wc.txt CONDENSED CONSOLIDATED FINANCIAL STATEMENTS EXHIBIT 99(c) H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED JULY 31, 2002 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
First Quarter Ended ------------------------------- July 31, 2002 August 1, 2001* FY 2003 FY 2002 ------------- --------------- (Unaudited) (in thousands) Sales....................................................... $1,038,374 $492,261 Cost of products sold....................................... 687,643 320,320 ---------- -------- Gross profit................................................ 350,731 171,941 Selling, general and administrative expenses................ 190,674 69,600 Royalty expense to related parties.......................... 44,936 23,098 ---------- -------- Operating income............................................ 115,121 79,243 Interest income............................................. 6,592 11,763 Interest expense............................................ 50,542 52,173 Dividends from related parties.............................. 30,798 38,519 Currency (loss)/gain........................................ (22,105) 2,431 Other expense............................................... 3,008 2,229 ---------- -------- Income before income taxes and minority interest............ 76,856 77,554 Provision for income taxes.................................. 2,389 9,342 ---------- -------- Income before minority interest............................. 74,467 68,212 Minority interest........................................... (70,213) (52,305) ---------- -------- Net income.................................................. $ 4,254 $ 15,907 ========== ========
*Reclassified, see Note 7 See Notes to Condensed Consolidated Financial Statements. 1 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, 2002 May 1, 2002* FY 2003 FY 2002 ------------- ------------ (Unaudited) (in thousands) ASSETS Current assets: Cash and cash equivalents................................. $ 11,347 $ 6,924 Receivables, net.......................................... 484,711 732,714 Due from related parties.................................. 57,529 72,762 Short-term notes receivable from related parties.......... 1,337,703 921,014 Inventories............................................... 747,699 710,267 Prepaid expenses and other current assets................. 140,448 61,439 ---------- ---------- Total current assets................................... 2,779,437 2,505,120 Property, plant and equipment............................... 1,490,244 1,516,365 Less accumulated depreciation............................... 677,167 661,429 ---------- ---------- Total property, plant and equipment, net............... 813,077 854,936 Long-term notes receivable from related parties............. 35,000 35,000 Investments in related parties.............................. 1,895,245 1,895,245 Intangible assets, net...................................... 1,925,675 1,926,590 Other noncurrent assets..................................... 344,120 267,558 ---------- ---------- Total other noncurrent assets.......................... 4,200,040 4,124,393 ---------- ---------- Total assets........................................... $7,792,554 $7,484,449 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt with related parties...................... $ 365,660 $ 132,164 Portion of long-term debt due within one year............. 451,885 451,375 Accounts payable.......................................... 245,493 256,372 Accounts payable to related parties....................... 177,129 153,968 Accrued interest.......................................... 107,647 79,442 Other accrued liabilities................................. 144,813 146,210 ---------- ---------- Total current liabilities.............................. 1,492,627 1,219,531 Long-term debt.............................................. 3,973,334 3,936,025 Deferred income taxes....................................... 20,488 23,059 Other liabilities........................................... 29,401 36,431 ---------- ---------- Total long-term debt and other liabilities............. 4,023,223 3,995,515 Minority interest........................................... 1,763,845 1,758,476 Mandatorily Redeemable Series A Preferred shares............ 325,000 325,000 Shareholders' equity: Common stock.............................................. 11 11 Additional capital........................................ 128,050 128,050 Retained earnings......................................... 57,231 58,035 Accumulated other comprehensive gain/(loss)............... 2,567 (169) ---------- ---------- Total shareholders' equity............................. 187,859 185,927 ---------- ---------- Total liabilities and shareholders' equity............. $7,792,554 $7,484,449 ========== ==========
--------------- * Summarized from audited Fiscal Year 2002 balance sheet See Notes to Condensed Consolidated Financial Statements. 2 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
First Quarter Ended ------------------------------- July 31, 2002 August 1, 2001 FY 2003 FY 2002 ------------- -------------- (Unaudited) (in thousands) Cash provided by (used for) Operating Activities............ $ 340,776 $(128,005) --------- --------- Cash Flows from Investing Activities: Capital expenditures...................................... (16,559) (2,556) Acquisitions, net of cash acquired........................ -- (290,200) Other items, net.......................................... 10,136 (20,978) --------- --------- Cash used for investing activities..................... (6,423) (313,734) --------- --------- Cash Flows from Financing Activities: Payments on long-term debt................................ -- (7,167) Proceeds from long-term debt.............................. -- 748,959 Payments on commercial paper and short-term borrowings, net.................................................... (260,933) (617,998) Distributions to Class A partners......................... (64,844) -- Dividends on preferred shares............................. (5,058) -- Proceeds from mandatorily redeemable Series A preferred shares................................................. -- 325,000 Other items, net.......................................... 905 500 --------- --------- Cash (used for) provided by financing activities....... (329,930) 449,294 --------- --------- Net increase in cash and cash equivalents................... 4,423 7,555 Cash and cash equivalents, beginning of period.............. 6,924 10,127 --------- --------- Cash and cash equivalents, end of period.................... $ 11,347 $ 17,682 ========= =========
See Notes to Condensed Consolidated Financial Statements. 3 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) On May 3, 2001, H.J. Heinz Company ("Heinz") reorganized its U.S. corporate structure and established centers of excellence for the management of U.S. trademarks and for U.S. treasury functions. As a result, all of the U.S. treasury and business operations of Heinz's domestic operations ("the U.S. Group") are now being conducted by H.J. Heinz Finance Company and its wholly-owned subsidiaries, and H.J. Heinz Company, L.P. ("Heinz LP") collectively referred to as "Heinz Finance" in the accompanying notes. H.J. Heinz Finance Company has limited partnership interests in Heinz LP. As part of the reorganization, substantially all assets and liabilities of the U.S. Group, except for finished goods inventories, which were retained by Heinz, were contributed to Heinz LP by Heinz. In addition, certain assets and liabilities that related to the U.S. Group were assumed by Heinz Finance during Fiscal 2002. H.J. Heinz Finance Company assumed primary liability for approximately $2.9 billion of Heinz's outstanding senior unsecured debt and accrued interest by becoming co-obligor with Heinz. Heinz LP owns or leases the operating assets involved in manufacturing throughout the United States which were contributed by Heinz and its subsidiaries, together with other assets and liabilities, to Heinz LP and manages the business. Heinz LP has two classes of limited partnership interests, Class A and Class B, that are allocated varying income and cash distributions in accordance with the Heinz LP agreement. H.J. Heinz Finance Company, directly and through wholly-owned subsidiaries, owns the Class B interests. Heinz, directly and through wholly-owned subsidiaries, owns the Class A interests. Heinz Management Company, a wholly-owned subsidiary of Heinz, is the managing General Partner of Heinz LP and employs the salaried personnel of the U.S. Group. Under the partnership agreement, Heinz Finance has the power to control the general partner through majority membership on Heinz LP's management board. The minority interest amounts on the July 31, 2002 and May 1, 2002 balance sheets represent the Class A and General Partner limited partnership interest in Heinz LP, and have been adjusted for the minority partners' share of income and cash distributions. (2) The interim condensed consolidated financial statements of Heinz Finance are unaudited. In the opinion of management, all adjustments which are of a normal and recurring nature, necessary for a fair statement of the results of operations of these interim periods have been included. The results for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year due to the seasonal nature of the business of Heinz Finance. Certain prior year amounts have been reclassified in order to conform with the Fiscal 2003 presentation. These statements should be read in conjunction with Heinz Finance's consolidated and combined financial statements and related notes which appear in Heinz's Form 10-K for the year ended May 1, 2002. (3) AGREEMENT BETWEEN H.J. HEINZ COMPANY AND DEL MONTE FOODS COMPANY On June 13, 2002, Heinz announced that it will transfer to a wholly-owned subsidiary ("Spinco") certain assets and liabilities of its U.S. pet food and pet snacks, U.S. tuna, U.S. retail private label soup and private label gravy, College Inn(R) broths and U.S. infant feeding businesses, all of which are owned by Heinz Finance, and distribute all of the shares of Spinco common stock on a pro rata basis to its shareholders. Immediately thereafter, Spinco will merge with a wholly-owned subsidiary of Del Monte Foods Company ("Del Monte") resulting 4 in Spinco becoming a wholly-owned subsidiary of Del Monte ("the Merger"). In connection with the Merger, each share of Spinco common stock will be automatically converted into shares of Del Monte common stock that will result in the fully diluted Del Monte common stock at the effective time of the Merger being held approximately 74.5% by Heinz shareholders and approximately 25.5% by the Del Monte shareholders. As a result of the transaction, Heinz Finance will receive approximately $1.1 billion in cash that will be primarily used to retire debt. Included in the transaction will be the following brands: StarKist(R), 9-Lives(R), Kibbles 'n Bits(R), Pup-Peroni(R), Snausages(R), Nawsomes(R), Heinz Nature's Goodness(R) baby food and College Inn(R) broths. The following is a summary of the operating results of the businesses to be spun off:
First Quarter Ended ------------------------------ July 31, 2002 August 1, 2001 ------------- -------------- Revenues........................................ $349,095 $90,955 Operating income................................ 23,659 17,216
The Merger, which has been approved by the Boards of Directors of Heinz and Del Monte, is subject to the approval by the shareholders of Del Monte and receipt of a ruling from the Internal Revenue Service that the contribution of the assets and liabilities to Spinco and the distribution of the shares of common stock of Spinco to Heinz shareholders will be tax-free to Heinz, Spinco and the shareholders of Heinz. The Merger is also subject to receipt of applicable governmental approvals and the satisfaction of other customary closing conditions. Heinz expects that the transaction will close late in calendar year 2002 or early in calendar year 2003. (4) INVENTORIES The composition of inventories at the balance sheet dates was as follows:
July 31, May 1, 2002 2002 (in thousands) -------- -------- Finished goods and work-in-process................... $600,318 $567,482 Packaging material and ingredients................... 147,381 142,785 -------- -------- $747,699 $710,267 ======== ========
(5) TAXES The provision for income taxes consists of provisions for federal and state income taxes. The low effective tax rate for Heinz Finance for the first quarters of Fiscal 2003 and 2002 is a result of Heinz Finance's nontaxable minority interest in Heinz LP. (6) 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 Heinz Finance's canned pet food production to Bloomsburg, Pennsylvania (which resulted in ceasing canned pet food production at Heinz Finance's Terminal Island, California facility). 5 The major components of the restructuring charge and implementation costs and the remaining accrual balances as of July 31, 2002 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 Revisions to accruals and asset write- downs--Fiscal 2002.................. 4.3 (3.1) (5.9) -- (4.7) Amounts utilized--Fiscal 2002......... (4.3) (2.5) (10.4) (1.2) (18.4) Liability assumed by related party--Fiscal 2002.................. -- (3.8) (0.6) -- (4.4) ----- ----- ----- ----- ----- Accrued restructuring costs--May 1, 2002................................ -- 0.2 4.2 -- 4.4 Amounts utilized--Fiscal 2003......... -- (0.1) (0.9) -- (1.0) ----- ----- ----- ----- ----- Accrued restructuring costs--July 31, 2002................................ $ -- $ 0.1 $ 3.3 $ -- $ 3.4 ===== ===== ===== ===== =====
During the first quarter of Fiscal 2003, Heinz Finance utilized $1.0 million of severance and exit cost accruals, principally related to its overhead reduction plan. (7) RECENTLY ADOPTED ACCOUNTING STANDARDS During the fourth quarter of Fiscal 2002, Heinz Finance adopted Emerging Issues Task Force ("EITF") statements relating to the classification of vendor consideration and certain sales incentives. The adoption of these EITF statements has no impact on operating income or net earnings; however, revenues and gross profit were reduced by approximately $64.5 million in the first quarter of Fiscal 2002. Prior period data has been reclassified to conform to the current year presentation. Heinz Finance adopted Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" which requires that the purchase method of accounting be applied to all business combinations after June 30, 2001. SFAS No. 141 also established criteria for recognition of intangible assets and goodwill. Effective May 2, 2002, Heinz Finance adopted SFAS No. 142 "Goodwill and Other Intangible Assets." Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized, but are tested at least annually for impairment. Heinz Finance is currently completing its evaluation of the impact of adopting SFAS No. 142 on the consolidated financial statements. The reassessment of intangible assets, including the ongoing impact of amortization, was completed during the first quarter of Fiscal 2003. The assignment of goodwill to reporting units, along with transitional goodwill impairment tests, must be completed during the second quarter of Fiscal 2003. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized. A discounted cash flow model is being used to determine the fair value of Heinz Finance's businesses for purposes of testing goodwill for impairment. The discount rate being used is based on a risk-adjusted weighted average cost of capital for the business. 6 The effects of adopting the new standards on net income for the three-month periods ended July 31, 2002 and August 1, 2001 follow.
Net Income ---------------- 2002 2001 ------ ------- Net income............................................... $4,254 $15,907 Add: Goodwill amortization, net of tax and minority interest............................................... -- 268 Trademark amortization, net of tax and minority interest........................................... -- 40 ------ ------- Net income excluding goodwill and trademark amortization........................................... $4,254 $16,215 ====== =======
Net income for the quarter ended August 1, 2001 would have been $16,215 and net income for Fiscal 2002 would have been $83,742 had the provisions of the new standards been applied as of May 3, 2001. Changes in the carrying amount of goodwill for the three months ended July 31, 2002, by operating segment are as follows:
Heinz U.S. Pet North Products U.S. America and Seafood Frozen Total -------- ----------- -------- ---------- Balance at May 1, 2002...... $615,772 $564,335 $470,381 $1,650,488 Adjustments................. 597 16 15 628 -------- -------- -------- ---------- Balance at July 31, 2002.... $616,369 $564,351 $470,396 $1,651,116 ======== ======== ======== ==========
Trademarks and other intangible assets at July 31, 2002 and May 1, 2002, subject to amortization expense, are as follows:
July 31, 2002 May 1, 2002 ---------------------------------- ---------------------------------- Accumulated Accumulated Gross Amortization Net Gross Amortization Net -------- ------------ -------- -------- ------------ -------- Trademarks........... $ 39,103 $ (1,129) $ 37,974 $ 39,103 $ (835) $ 38,268 Licenses............. 208,186 (112,617) 95,569 208,186 (106,730) 101,456 Other................ 92,120 (42,204) 49,916 91,138 (45,860) 45,278 -------- --------- -------- -------- --------- -------- $339,409 $(155,950) $183,459 $338,427 $(153,425) $185,002 ======== ========= ======== ======== ========= ========
Amortization expense for trademarks and other intangible assets subject to amortization was $2.5 million for the three months ended July 31, 2002. Based upon the amortizable intangible assets recorded on the balance sheet at July 31, 2002, amortization expense for each of the next five years is estimated to be approximately $10.0 million. Intangible assets not subject to amortization at July 31, 2002 and May 1, 2002, were $91.1 million and consisted solely of trademarks. Effective May 2, 2002, Heinz Finance adopted SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." This statement provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discontinued operation to include a component of an entity and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. The adoption of this new standard did not have a material impact on Heinz Finance's financial position, results of operations or cash flows for the three months ended July 31, 2002. 7 (8) RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143, addresses accounting for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. This standard is effective for Heinz Finance in Fiscal 2004. Heinz Finance does not expect that the adoption of this standard will have a significant impact on the consolidated financial statements. In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This Statement also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. Management is currently assessing the details of this Standard. (9) RELATED PARTY TRANSACTIONS Employee Costs Certain of Heinz's general and administrative expenses are charged to Heinz Finance. These costs primarily include a management charge of all salaried employee costs from the Heinz Management Company. Total costs charged to Heinz Finance for these services were $86.9 million and $82.0 million for the three months ended July 31, 2002 and August 1, 2001, respectively. These costs are recorded as cost of products sold and SG&A expense in the accompanying consolidated statements of income. Heinz charges Heinz Finance for its share of group health insurance costs for eligible company employees based upon location-specific costs, overall insurance costs and loss experience incurred during a calendar year. In addition, various other insurance coverages are also provided to Heinz Finance through Heinz's consolidated programs. Workers compensation, auto, property, product liability and other insurance coverages are charged directly based on Heinz Finance's loss experience. Amounts charged to Heinz Finance for insurance costs were $18.3 million and $15.4 million for the three months ended July 31, 2002 and August 1, 2001, respectively, and are recorded in SG&A expense in the accompanying consolidated statements of income. Pension costs and postretirement costs are also charged to Heinz Finance based upon eligible employees participating in the plans. Cash Management Beginning in Fiscal 2002, Heinz Finance became the treasury center for cash management and debt financing for all of Heinz's domestic operations. In addition, in the first quarter of Fiscal 2003, Heinz Finance entered into a short-term note payable with Heinz Europe Limited, a wholly-owned subsidiary of Heinz, for $213.4 million. These two events resulted in the $972.0 million and $788.9 million of net short-term notes receivable with related parties on the July 31, 2002 and May 1, 2002, respectively, condensed consolidated balance sheets. An average interest rate of 1.95% and 3.93% was charged on these notes resulting in $6.2 million and $11.0 million of interest income recorded on the July 31, 2002 and August 1, 2001, respectively, consolidated statements of income. Product Sales and Purchases Heinz Finance sells and purchases products and services to and from other Heinz affiliates. The result of related party transactions is the $57.5 million and $72.8 million balances due from related parties as of July 31, 2002 and May 1, 2002, respectively, and the $177.1 million 8 and $154.0 million balances for accounts payable to related parties as of July 31, 2002 and May 1, 2002, respectively. Product sales to related parties were $12.5 million and $12.3 million in the three months ended July 31, 2002 and August 1, 2001, respectively, and purchases from related parties were $120.1 million and $70.8 million in the three months ended July 31, 2002 and August 1, 2001, respectively. Other Related Party Items Heinz Finance sold undivided interests in certain accounts receivable to a Heinz affiliate, Receivables Servicing Company ("RSC"). Heinz Finance sold $619.2 million of receivables net of discount expense of $2.8 million for the year ended May 1, 2002, to RSC. These sales were reflected as reductions of trade accounts receivable. Heinz Finance's contract with RSC terminated in December 2001. Heinz Finance holds $1.9 billion of non-voting, 6.5% cumulative non-participating preferred stock of PM Holding, Inc. ("PM Holding"), a subsidiary of Heinz. This dividend amounted to $30.8 million and $38.5 million for the three months ended July 31, 2002 and August 1, 2001, respectively. This preferred stock investment is recorded in the Investments in related parties balance on the condensed consolidated balance sheets as of July 31, 2002 and May 1, 2002. Heinz Finance paid royalties of $44.9 million and $23.1 million as of July 31, 2002 and August 1, 2001, respectively, to Promark International, Inc., an indirect subsidiary of Heinz, for the use of certain trademarks. The $35.0 million long-term note receivable from related parties recorded on the accompanying condensed consolidated balance sheets as of July 31, 2002 and May 1, 2002, relates to a receivable from Heinz that was contributed to Heinz Finance in exchange for common stock of Heinz Finance. Heinz Finance received an administrative fee from Heinz for acting as the agent in the sale of the retained inventory discussed in Note (1). This fee was $8.4 million for the three months ended August 1, 2001, which is recorded as income in SG&A expense in the accompanying consolidated statement of income. (10) Descriptions of Heinz Finance's reportable segments are as follows: - Heinz North America -- This segment manufactures, markets and sells ketchup, condiments, sauces, soups, pasta meals and infant foods to the grocery and foodservice channels. - U.S. Pet Products and Seafood -- This segment manufactures, markets and sells dry and canned pet food, pet snacks, tuna and other seafood. - U.S. Frozen -- This segment manufactures, markets and sells frozen potatoes, entrees, snacks and appetizers. Heinz Finance's management evaluates performance based on several factors including net sales and the use of capital resources; however, the primary measurement focus is operating income excluding unusual costs and gains. Intersegment sales are accounted for at current market values. Items below the operating income line of the consolidated statements of income are not presented by segment, since they are excluded from the measure of segment profitability reviewed by Heinz Finance's management. 9 The following table presents information about Heinz Finance's reportable segments:
Net External Sales Intersegment Sales ------------------------------ ------------------------------ First Quarter Ended --------------------------------------------------------------- July 31, 2002 August 1, 2001 July 31, 2002 August 1, 2001 (in thousands) FY 2003 FY 2002 FY 2003 FY 2002 -------------- ------------- -------------- ------------- -------------- Heinz North America........... $ 495,132 $290,553 $18 $ 90 U.S. Pet Products and Seafood..................... 295,531 89,186 -- -- U.S. Frozen................... 247,711 112,522 9 17 ---------- -------- --- ---- Consolidated totals......... $1,038,374 $492,261 $27 $107 ========== ======== === ====
Operating Income ------------------------------ First Quarter Ended ------------------------------ July 31, 2002 August 1, 2001 (in thousands) FY 2003 FY 2002 -------------- ------------- -------------- Heinz North America..................................... $ 62,870 $44,695 U.S. Pet Products and Seafood........................... 13,573 14,062 U.S. Frozen............................................. 39,145 21,390 Non-Operating(a)........................................ (467) (904) -------- ------- Consolidated totals................................... $115,121 $79,243 ======== =======
-------------------- (a) Includes charges not directly attributable to operating segments. (11) COMPREHENSIVE INCOME
First Quarter Ended ------------------------------ July 31, 2002 August 1, 2001 (in thousands) FY 2003 FY 2002 -------------- ------------- -------------- Net income.............................................. $ 4,254 $15,907 Deferred gains/(losses) on derivatives: Net change from periodic revaluations................. 15,773 1,643 Net amount reclassified to earnings................... (13,206) 138 ------- ------- Comprehensive income.................................... $ 6,821 $17,688 ======= =======
(12) FINANCIAL INSTRUMENTS Heinz Finance utilizes certain financial instruments to manage its foreign currency, commodity price and interest rate exposures. FOREIGN CURRENCY HEDGING: Heinz Finance may hedge specific foreign currency cash flows associated with foreign-currency-denominated financial assets and liabilities. These hedges are accounted for as cash flow hedges. COMMODITY PRICE HEDGING: Heinz Finance uses commodity futures and options in order to reduce price risk associated with anticipated purchases of raw materials such as corn, soybean oil and soybean meal. Commodity price risk arises due to factors such as weather conditions, government regulations, economic climate and other unforeseen circumstances. Hedges of anticipated commodity purchases which meet the criteria for hedge accounting are designated as cash flow hedges. When using a commodity option as a hedging instrument, Heinz Finance excludes the time value of the option from the assessment of hedge effectiveness. INTEREST RATE HEDGING: Heinz Finance uses interest rate swaps to manage interest rate exposure. These derivatives are designated as cash flow hedges or fair value hedges depending on the nature of the particular risk being hedged. 10 HEDGE INEFFECTIVENESS: During the quarter ended July 31, 2002, hedge ineffectiveness related to cash flow hedges was a net loss of $0.3 million which is reported in the consolidated statements of income as other expenses. DEFERRED HEDGING GAINS AND LOSSES: As of July 31, 2002, Heinz Finance is hedging forecasted transactions for periods not exceeding 12 months, and expects $2.6 million of net deferred gain reported in accumulated other comprehensive income to be reclassified to earnings within that time frame. (13) SUBSEQUENT EVENT On September 5, 2002, Heinz Finance, Heinz and a group of domestic and international banks renewed an $800 million credit 364-day agreement. That credit agreement and the $1.5 billion credit agreement that expires in September 2006 supports Heinz Finance's and Heinz's commercial paper programs. 11