-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RHd5o/oFP9TtSMjRKY+62k3roVwdTh8oOVZnzXxhOIodxLe4vZb74x2zBZ5iVHY5 wr3//XoCMwVbus6kBOwIzQ== 0000950128-02-000825.txt : 20021212 0000950128-02-000825.hdr.sgml : 20021212 20021212103446 ACCESSION NUMBER: 0000950128-02-000825 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20021030 FILED AS OF DATE: 20021212 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: 02855286 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 j9703501e10vq.txt H.J. HEINZ 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 OCTOBER 30, 2002 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 SIX MONTHS ENDED OCTOBER 30, 2002 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 December 6, 2002 was 351,368,769 shares. PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. H.J. HEINZ COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Second Quarter Ended ------------------------------------- October 30, 2002 October 31, 2001* FY 2003 FY 2002 ---------------- ----------------- (Unaudited) (In Thousands, Except per Share Amounts) Sales...................................................... $2,568,791 $2,414,219 Cost of products sold...................................... 1,664,401 1,551,603 ---------- ---------- Gross profit............................................... 904,390 862,616 Selling, general and administrative expenses............... 494,057 461,447 ---------- ---------- Operating income........................................... 410,333 401,169 Interest income............................................ 6,605 4,269 Interest expense........................................... 71,253 75,083 Other expense, net......................................... 21,460 9,985 ---------- ---------- Income before income taxes................................. 324,225 320,370 Provision for income taxes................................. 112,136 112,129 ---------- ---------- Net income................................................. $ 212,089 $ 208,241 ========== ========== Net income per share--diluted.............................. $ 0.60 $ 0.59 ========== ========== Average common shares outstanding--diluted................. 353,438 352,652 ========== ========== Net income per share--basic................................ $ 0.60 $ 0.60 ========== ========== Average common shares outstanding--basic................... 351,121 349,516 ========== ========== Cash dividends per share................................... $ 0.4050 $ 0.4050 ========== ==========
*Reclassified, see Note 5 See Notes to Condensed Consolidated Financial Statements. ------------------ 2 H.J. HEINZ COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended ------------------------------------ October 30, 2002 October 31, 2001 FY 2003 FY 2002* ---------------- ---------------- (Unaudited) (In Thousands, Except per Share Amounts) Sales....................................................... $4,772,431 $4,491,514 Cost of products sold....................................... 3,081,132 2,866,619 ---------- ---------- Gross profit................................................ 1,691,299 1,624,895 Selling, general and administrative expenses................ 935,842 839,572 ---------- ---------- Operating income............................................ 755,457 785,323 Interest income............................................. 13,011 9,627 Interest expense............................................ 140,343 150,630 Other expenses, net......................................... 33,160 11,743 ---------- ---------- Income before income taxes and effect of change in accounting principle...................................... 594,965 632,577 Provision for income taxes.................................. 205,088 223,862 ---------- ---------- Income before effect of change in accounting principle...... 389,877 408,715 Effect of change in accounting principle.................... (77,812) -- ---------- ---------- Net income.................................................. $ 312,065 $ 408,715 ========== ========== Income per common share Diluted Income before effect of change in accounting principle............................................ $ 1.10 $ 1.16 Effect of change in accounting principle............... (0.22) -- ---------- ---------- Net income............................................. $ 0.88 $ 1.16 ========== ========== Average common shares outstanding--diluted.................. 353,438 352,652 ========== ========== Basic Income before effect of change in accounting principle............................................ $ 1.11 $ 1.17 Effect of change in accounting principle............... (0.22) -- ---------- ---------- Net income............................................. $ 0.89 $ 1.17 ========== ========== Average common shares outstanding--basic.................... 351,121 349,516 ========== ========== Cash dividends per share.................................... $ 0.8100 $ 0.7975 ========== ==========
* Reclassified, see Note 5. See Notes to Condensed Consolidated Financial Statements. ------------------ 3 H.J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
October 30, 2002 May 1, 2002* FY 2003 FY 2002 ---------------- ------------ (Unaudited) (Thousands of Dollars) ASSETS Current Assets: Cash and cash equivalents................................... $ 297,005 $ 206,921 Receivables, net............................................ 1,300,976 1,449,147 Inventories................................................. 1,703,075 1,527,554 Prepaid expenses and other current assets................... 327,391 189,944 ----------- ----------- Total current assets................................... 3,628,447 3,373,566 ----------- ----------- Property, plant and equipment............................... 4,016,099 3,872,647 Less accumulated depreciation............................... 1,740,988 1,622,573 ----------- ----------- Total property, plant and equipment, net............... 2,275,111 2,250,074 ----------- ----------- Goodwill, net............................................... 2,500,455 2,528,942 Trademarks, net............................................. 843,017 808,884 Other intangibles, net...................................... 144,078 152,249 Other non-current assets.................................... 1,372,526 1,164,639 ----------- ----------- Total other non-current assets......................... 4,860,076 4,654,714 ----------- ----------- Total assets........................................... $10,763,634 $10,278,354 =========== ===========
*Summarized from audited fiscal year 2002 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------------ 4 H.J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
October 30, 2002 May 1, 2002* FY 2003 FY 2002 ---------------- ------------ (Unaudited) (Thousands of Dollars) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt............................................. $ 162,571 $ 178,358 Portion of long-term debt due within one year............... 529,815 524,287 Accounts payable............................................ 1,024,295 938,483 Salaries and wages.......................................... 52,553 39,376 Accrued marketing........................................... 212,920 164,650 Other accrued liabilities................................... 441,522 471,910 Income taxes................................................ 243,989 192,105 ----------- ----------- Total current liabilities.............................. 2,667,665 2,509,169 ----------- ----------- Long-term debt.............................................. 4,781,933 4,642,968 Deferred income taxes....................................... 413,588 394,935 Non-pension postretirement benefits......................... 211,173 208,509 Other liabilities and minority interest..................... 806,994 804,157 ----------- ----------- Total long-term debt, other liabilities and minority interest............................................. 6,213,688 6,050,569 Shareholders' Equity: Capital stock............................................... 107,883 107,884 Additional capital.......................................... 379,080 348,605 Retained earnings........................................... 4,996,183 4,968,535 ----------- ----------- 5,483,146 5,425,024 Less: Treasury stock at cost (79,747,598 shares at October 30, 2002 and 80,192,280 shares at May 1, 2002)............. 2,882,046 2,893,198 Unearned compensation..................................... 28,498 230 Accumulated other comprehensive loss...................... 690,321 812,980 ----------- ----------- Total shareholders' equity............................. 1,882,281 1,718,616 ----------- ----------- Total liabilities and shareholders' equity............. $10,763,634 $10,278,354 =========== ===========
*Summarized from audited fiscal year 2002 balance sheet. See Notes to Condensed Consolidated Financial Statements. ------------------ 5 H.J. HEINZ COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended ------------------------------------ October 30, 2002 October 31, 2001 FY 2003 FY 2002 ---------------- ---------------- (Unaudited) (Thousands of Dollars) Cash Flows from Operating Activities Net Income................................................ $ 312,065 $ 408,715 Adjustments to reconcile net income to cash provided by operating activities: Depreciation........................................... 113,072 100,494 Amortization........................................... 11,166 41,238 Deferred tax provision................................. 12,761 37,381 Effect of change in accounting principle............... 77,812 -- Provision for restructuring............................ 28,548 16,175 Other items, net....................................... 17,867 (16,512) Changes in current assets and liabilities, excluding effects of acquisitions and divestitures: Receivables.......................................... 127,760 (39,793) Inventories.......................................... (135,169) (291,400) Prepaid expenses and other current assets............ (123,742) (74,681) Accounts payable..................................... 61,474 46,346 Accrued liabilities.................................. (47,432) (74,703) Income taxes......................................... 95,897 44,663 --------- --------- Cash provided by operating activities............. 552,079 197,923 --------- --------- Cash Flows from Investing Activities: Capital expenditures................................... (77,873) (86,605) Acquisitions, net of cash acquired..................... (13,536) (805,538) Proceeds from divestitures............................. -- 31,889 Other items, net....................................... 20,647 (10,254) --------- --------- Cash used for investing activities................ (70,762) (870,508) --------- --------- Cash Flows from Financing Activities: Proceeds from long-term debt........................... -- 768,307 Payments on long-term debt............................. (9,859) (32,182) Payments on commercial paper and short-term borrowings, net........................... (145,753) (88,032) Proceeds from preferred stock of subsidiary............ -- 325,000 Dividends.............................................. (284,417) (278,782) Exercise of stock options.............................. 5,496 46,441 Purchase of treasury stock............................. -- (45,365) Other items, net....................................... 12,879 10,284 --------- --------- Cash (used for) provided by financing activities...................................... (421,654) 705,671 --------- --------- Effect of exchange rate changes on cash and cash equivalents............................................... 30,421 6,412 --------- --------- Net increase in cash and cash equivalents................... 90,084 39,498 Cash and cash equivalents at beginning of year.............. 206,921 138,849 --------- --------- Cash and cash equivalents at end of period.................. $ 297,005 $ 178,347 ========= =========
See Notes to Condensed Consolidated Financial Statements. ------------------ 6 H.J. HEINZ COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF PRESENTATION The interim condensed consolidated financial statements of H.J. Heinz Company, together with its subsidiaries (collectively referred to as the "Company") 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 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 2003 presentation. These statements should be read in conjunction with the Company's consolidated financial statements and related notes, and management's discussion and analysis of financial condition and results of operations which appear in the Company's Annual Report to Shareholders and which are incorporated by reference into the Company's Annual Report on Form 10-K for the year ended May 1, 2002. (2) 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") assets and liabilities of its U.S. and Canadian pet food and pet snacks, U.S. tuna, U.S. retail private label soup and private label gravy, College Inn broth and U.S. infant feeding businesses and distribute all of the shares of Spinco common stock on a pro rata basis to its shareholders. Immediately thereafter, Spinco will merge with a wholly-owned subsidiary of Del Monte Foods Company ("Del Monte") resulting in Spinco becoming a wholly-owned subsidiary of Del Monte (the "Merger"). In connection with the Merger, each share of Spinco common stock will be automatically converted into shares of Del Monte common stock that will result in the fully diluted Del Monte common stock at the effective time of the Merger being held approximately 74.5% by Heinz shareholders and approximately 25.5% by the Del Monte stockholders. As a result of the transaction, Heinz will receive approximately $1.1 billion in cash that will be used to retire debt. Included in the transaction will be the following brands: StarKist(R), 9-Lives(R), Kibbles 'n Bits(R), Pup-Peroni(R), Snausages(R), Nawsomes(R), Heinz Nature's Goodness(R) baby food and College Inn(R) broths. The following is a summary of the Fiscal 2003 and Fiscal 2002 second quarter and first half operating results of the businesses to be spun off (See Exhibit 99(d) for a discussion of results of operations and the Combined Financial Statements of SKF Foods (Spinco) for the three and six months ended October 30, 2002 and October 31, 2001):
Second Quarter Ended Six Months Ended ------------------------- ------------------------- October 30, October 31, October 30, October 31, 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Revenues....................... $470,587 $477,185 $833,947 $876,391 Operating income............... 79,733 71,976 129,440 137,125 Operating income excluding special items................ 79,733 71,976 129,440 144,963
The Merger, which has been approved by the Boards of Directors of Heinz and Del Monte, is subject to the approval by the stockholders of Del Monte and it's expected that the transaction could close as early as December 20, 2002. Heinz received on November 21, 2002, a private letter ruling from the Internal Revenue Service that the contribution of the assets and liabilities to Spinco and the distribution of the shares of common stock of Spinco to Heinz 7 shareholders will be tax-free to Heinz, Spinco and the shareholders of Heinz. The Merger is also subject to other customary closing conditions. During the three and six months ended October 30, 2002, the Company recognized transaction related costs and costs to reduce overhead of the remaining businesses totaling $10.1 million pretax ($0.02 per share) and $28.5 million pretax ($0.05 per share), respectively. (3) INVENTORIES The composition of inventories at the balance sheet dates was as follows:
October 30, 2002 May 1, 2002 ---------------- ----------- (Thousands of Dollars) Finished goods and work-in-process................... $1,351,787 $1,193,989 Packaging material and ingredients................... 351,288 333,565 ---------- ---------- $1,703,075 $1,527,554 ========== ==========
(4) 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. The major components of the restructuring charges and implementation costs and the remaining accrual balances as of October 30, 2002 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 Revision to accruals and asset write-downs--Fiscal 2002............. 5.8 3.6 (7.7) -- 1.7 Amounts utilized--Fiscal 2002.......... (5.8) (66.6) (32.4) (10.4) (115.2) ------- ------ ------ ------ ------- Accrued restructuring costs-- May 1, 2002................................. -- 13.5 10.6 -- 24.1 Amounts utilized--Fiscal 2003.......... -- (6.8) (2.7) -- (9.5) ------- ------ ------ ------ ------- Accrued restructuring costs--October 30, 2002............................. $ -- $ 6.7 $ 7.9 $ -- $ 14.6 ======= ====== ====== ====== =======
During the first six months of Fiscal 2003, the Company utilized $9.5 million of severance and exit cost accruals, principally related to its global overhead reduction plan, primarily in Europe and North America. (5) RECENTLY ADOPTED ACCOUNTING STANDARDS During the fourth quarter of Fiscal 2002, the Company 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, net earnings, or basic or diluted earnings per share; however, revenues and gross profit were reduced by approximately $150.9 million and $259.1 million in the second quarter and first six months of Fiscal 2002, respectively. Prior period data has been reclassified to conform to the current year presentation. 8 The Company 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, the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets." Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized. This standard also requires, at a minimum, an annual impairment assessment of the carrying value of goodwill and intangibles with indefinite useful lives. The reassessment of intangible assets, including the ongoing impact of amortization, and the assignment of goodwill to reporting units was completed during the first quarter of Fiscal 2003. The Company completed its transitional goodwill impairment tests during the second quarter of Fiscal 2003. The SFAS No. 142 goodwill impairment model is a two-step process. The first step compares the fair value of a reporting unit (one level below the Company's operating segments) that has goodwill assigned to it, to its carrying value. The Company estimates the fair value of a reporting unit using discounted cash flows, using a risk-adjusted weighted average cost of capital for the business as the discount rate. If the fair value of the reporting unit is determined to be less than its carrying value, a second step is performed to compute the amount of goodwill impairment, if any. Step two allocates the fair value of the reporting unit to the reporting unit's net assets other than goodwill. The excess of the fair value of the reporting unit over the amounts assigned to its net assets other than goodwill is considered the implied fair value of the reporting unit's goodwill. The implied fair value of the reporting unit's goodwill is then compared to the carrying value of its goodwill. Any shortfall represents the amount of the goodwill impairment. Using the SFAS No. 142 approach described above, the Company recorded a transitional impairment charge calculated as of May 2, 2002, and recorded as an effect of a change in accounting principle in the six-month period ended October 30, 2002, of $77.8 million ($0.22 per share). There was no tax effect associated with this charge. The charge, which relates to certain of the Company's reporting units, has been reflected in its segments as follows: Europe $54.6 million, Asia/Pacific $2.7 million, and Other Operating Entities $20.5 million. The transitional impairment charge resulted from application of the new impairment methodology introduced by SFAS No. 142. Previous accounting rules incorporated a comparison of carrying value to undiscounted cash flows, whereas new rules require a comparison of carrying value to discounted cash flows, which are lower. Under previous requirements, no goodwill impairment would have been recorded on May 2, 2002. The effects of adopting the new standards on net income and diluted earnings per share are as follows:
Second Quarter Ended Six Months Ended ----------------------------------- ------------------------------------ Net Income Diluted EPS Net Income Diluted EPS ------------------- ------------- ------------------- -------------- 2002 2001 2002 2001 2002 2001 2002 2001 -------- -------- ----- ----- -------- -------- ------ ----- Net income before effect of change in accounting principle............... $212,089 $208,241 $0.60 $0.59 $389,877 $408,715 $ 1.10 $1.16 Add: Goodwill amortization............ -- 13,817 -- 0.04 -- 26,588 -- 0.08 Trademark amortization.. -- 2,129 -- 0.01 -- 4,260 -- 0.01 -------- -------- ----- ----- -------- -------- ------ ----- Adjusted net income before effect of change in accounting principle.... 212,089 224,187 0.60 0.64 389,877 439,563 1.10 1.25 Effect of change in accounting principle.... -- -- -- -- (77,812) -- (0.22) -- -------- -------- ----- ----- -------- -------- ------ ----- Adjusted net income....... $212,089 $224,187 $0.60 $0.64 $312,065 $439,563 $ 0.88 $1.25 ======== ======== ===== ===== ======== ======== ====== =====
Net income for the three and six-month periods ended October 31, 2001 would have been $224,187 and $439,563 or $0.05 and $0.09 per share higher, respectively, and net income for Fiscal 2002 9 would have been $896,184 or $0.18 per share higher had the provisions of the new standards been applied as of May 3, 2001. Changes in the carrying amount of goodwill for the six months ended October 30, 2002, by reportable segment, are as follows:
Heinz Other North SKF U.S. Asia/ Operating America Foods Frozen Europe Pacific Entities Total -------- -------- -------- -------- -------- --------- ---------- Balance at May 1, 2002.. $581,261 $702,438 $471,351 $639,465 $109,613 $ 24,814 $2,528,942 Acquisition............. -- -- -- -- 13,087 -- 13,087 Effect of change in accounting principle............. -- -- -- (54,533) (2,737) (20,542) (77,812) Purchase accounting reclassifications..... 1,737 -- 5,287 (21,875) -- -- (14,851) Translation adjustments........... (305) (335) -- 43,162 7,164 219 49,905 Other................... -- 4,740 -- (3,625) 90 (21) 1,184 -------- -------- -------- -------- -------- -------- ---------- Balance at October 30, 2002.................. $582,693 $706,843 $476,638 $602,594 $127,217 $ 4,470 $2,500,455 ======== ======== ======== ======== ======== ======== ==========
Trademarks and other intangible assets at October 30, 2002 and May 1, 2002, subject to amortization expense, are as follows:
October 30, 2002 May 1, 2002 ------------------------------- ------------------------------- Accum Accum Gross Amort Net Gross Amort Net -------- --------- -------- -------- --------- -------- Trademarks............... $260,513 $ (59,630) $200,883 $252,977 $ (45,153) $207,824 Licenses................. 209,198 (109,995) 99,203 209,204 (107,044) 102,160 Other.................... 103,650 (58,775) 44,875 103,275 (53,186) 50,089 -------- --------- -------- -------- --------- -------- $573,361 $(228,400) $344,961 $565,456 $(205,383) $360,073 ======== ========= ======== ======== ========= ========
Amortization expense for trademarks and other intangible assets subject to amortization was $11.2 million for the six months ended October 30, 2002. Based upon the amortizable intangible assets recorded on the balance sheet at October 30, 2002, amortization expense for each of the next five years is estimated to be approximately $25.0 million. Intangible assets not subject to amortization at October 30, 2002 and May 1, 2002, were $642.1 million and $601.1 million respectively, and consisted solely of trademarks. Effective May 2, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discontinued operation to include a component of an entity and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. The adoption of this new standard did not have a material impact on the Company's financial position, results of operations or cash flows for the six months ended October 30, 2002. (6) 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 the Company in Fiscal 2004. The Company 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 10 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. (7) SEGMENTS The Company's segments are primarily organized by geographical area. The composition of segments and measure of segment profitability is consistent with that used by the Company's management. The Company has changed its segment reporting for its North American business to reflect changes in organizational structure and management. The Company is reporting and grouping the results of certain businesses under a new segment designated SKF Foods. SKF Foods consists of Heinz's U.S. and Canadian pet food and pet snacks, U.S. tuna, U.S. retail private label soup and private label gravy, College Inn broth and U.S. infant feeding businesses. SKF Foods also includes the former U.S. Pet Products and Seafood segment. These businesses have been separated from the remaining Heinz businesses in preparation for their spin-off and subsequent merger with Del Monte Corporation, a subsidiary of Del Monte Foods Company. The remaining Heinz North America segment now includes the following businesses that will be retained by Heinz following the Del Monte transaction, including: ketchup, condiments, sauces, and pasta meals sold to the grocery and foodservice channels in North America. Prior periods have been restated to conform with the current presentation. Descriptions of the Company's reportable segment are as follows: Heinz North America--This segment manufactures, markets and sells ketchup, condiments, sauces and pasta meals to the grocery and foodservice channels in North America. SKF Foods--This segment includes the U.S. and Canadian pet food and pet snacks, U.S. tuna, U.S. retail private label soup and private label gravy, College Inn broth and U.S. infant feeding businesses. U.S. Frozen--This segment manufactures, markets and sells 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. 11 The following table presents information about the Company's reportable segments:
Second Quarter Ended Six Months Ended ----------------------------------- ----------------------------------- October 30, 2002 October 31, 2001 October 30, 2002 October 31, 2001 FY 2003 FY 2002* FY 2003 FY 2002* ---------------- ---------------- ---------------- ---------------- (Thousands of Dollars) Net external sales: Heinz North America............... $ 576,814 $ 566,476 $1,093,868 $1,050,413 SKF Foods......................... 470,587 477,185 833,947 876,391 U.S. Frozen....................... 316,444 299,410 562,233 508,386 ---------- ---------- ---------- ---------- North America Totals.............. 1,363,845 1,343,071 2,490,048 2,435,190 Europe............................ 742,567 710,982 1,438,902 1,368,799 Asia/Pacific...................... 283,643 250,395 538,070 484,050 Other Operating Entities.......... 178,736 109,771 305,411 203,475 ---------- ---------- ---------- ---------- Consolidated Totals............... $2,568,791 $2,414,219 $4,772,431 $4,491,514 ========== ========== ========== ========== Intersegment sales: Heinz North America............... $ 8,961 $ 15,400 $ 20,496 $ 24,995 SKF Foods......................... 1,143 1,890 2,114 4,439 U.S. Frozen....................... 1,890 2,951 3,818 5,152 Europe............................ 1,495 1,042 3,059 2,416 Asia/Pacific...................... 820 937 1,693 1,229 Other Operating Entities.......... 546 17 1,008 17 Non-Operating (a)................. (14,855) (22,237) (32,188) (38,248) ---------- ---------- ---------- ---------- Consolidated Totals............... $ -- $ -- $ -- $ -- ========== ========== ========== ========== Operating income (loss): Heinz North America............... $ 114,088 $ 139,795 $ 204,614 $ 250,658 SKF Foods......................... 79,733 71,976 129,440 137,125 U.S. Frozen....................... 64,941 61,092 116,644 105,328 ---------- ---------- ---------- ---------- North America Totals.............. 258,762 272,863 450,698 493,111 Europe............................ 137,688 119,431 280,181 270,002 Asia/Pacific...................... 27,803 24,815 49,004 50,951 Other Operating Entities.......... 27,543 14,977 44,613 26,910 Non-Operating (a)................. (41,463) (30,917) (69,039) (55,651) ---------- ---------- ---------- ---------- Consolidated Totals............... $ 410,333 $ 401,169 $ 755,457 $ 785,323 ========== ========== ========== ========== Operating income (loss) excluding special items (b): Heinz North America............... $ 119,442 $ 139,795 $ 216,862 $ 255,489 SKF Foods......................... 79,733 71,976 129,440 144,963 U.S. Frozen....................... 64,941 61,092 116,644 105,328 ---------- ---------- ---------- ---------- North America Totals.............. 264,116 272,863 462,946 505,780 Europe............................ 137,688 119,431 280,181 271,717 Asia/Pacific...................... 27,803 24,815 49,004 51,549 Other Operating Entities.......... 27,543 14,977 44,613 26,910 Non-Operating (a)................. (36,674) (30,917) (52,739) (54,458) ---------- ---------- ---------- ---------- Consolidated Totals............... $ 420,476 $ 401,169 $ 784,005 $ 801,498 ========== ========== ========== ==========
*Reclassified, see Note 5. - --------------- (a) Includes corporate overhead, intercompany eliminations and charges not directly attributable to operating segments. (b) Second Quarter ended October 30, 2002 - Excludes Del Monte transaction related costs and cost to reduce overhead of the remaining core businesses as follows: Heinz North America $5.3 million and Non-Operating $4.8 million. Six Months ended October 30, 2002 - Excludes Del Monte transaction related costs and cost to reduce overhead of the remaining core businesses as follows: Heinz North America $12.2 million and Non-Operating $16.3 million. Six Months ended October 31, 2001 - Excludes implementation and restructuring costs of Streamline as follows: Heinz North America $4.8 million, SKF $7.9 million, Europe $1.7 million, Asia/Pacific $0.6 million and Non-Operating $1.2 million. 12 The Company's revenues are generated via the sale of products in the following categories:
Second Quarter Ended Six Months Ended ----------------------------------- ----------------------------------- October 30, 2002 October 31, 2001 October 30, 2002 October 31, 2001 FY 2003 FY 2002* FY 2003 FY 2002* ---------------- ---------------- ---------------- ---------------- (Thousands of Dollars) Ketchup, Condiments and Sauces....... $ 693,121 $ 633,067 $1,333,901 $1,231,408 Frozen Foods......................... 524,646 497,967 962,400 875,742 Tuna................................. 271,002 253,064 522,071 500,919 Soups, Beans and Pasta Meals......... 354,189 392,078 640,103 660,473 Infant Foods......................... 219,649 214,802 415,062 411,718 Pet Products......................... 235,254 253,671 432,432 491,254 Other................................ 270,930 169,570 466,462 320,000 ---------- ---------- ---------- ---------- Total............................ $2,568,791 $2,414,219 $4,772,431 $4,491,514 ========== ========== ========== ==========
*Reclassified, see Note 5 (8) 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:
Second Quarter Ended Six Months Ended ----------------------------------- ----------------------------------- October 30, 2002 October 31, 2001 October 30, 2002 October 31, 2001 FY 2003 FY 2002 FY 2003 FY 2002 ---------------- ---------------- ---------------- ---------------- (In Thousands, Except per Share Amounts) Income before effect of change in accounting principle............... $212,089 $208,241 $389,877 $408,715 Preferred dividends.................. 4 5 9 10 -------- -------- -------- -------- Income applicable to common stock before effect of change in accounting principle............... 212,085 208,236 389,868 408,705 Effect of change in accounting principle.......................... -- -- (77,812) -- -------- -------- -------- -------- Net income applicable to common stock.............................. $212,085 $208,236 $312,056 $408,705 ======== ======== ======== ======== Average common shares outstanding--basic............... 351,121 349,516 351,121 349,516 Effect of dilutive securities: Convertible preferred stock...... 148 166 148 166 Stock options.................... 2,169 2,970 2,169 2,970 -------- -------- -------- -------- Average common shares outstanding--diluted............. 353,438 352,652 353,438 352,652 Income per share before effect of change in accounting principle-- basic............................ $ 0.60 $ 0.60 $ 1.11 $ 1.17 ======== ======== ======== ======== Net income per share--basic.......... $ 0.60 $ 0.60 $ 0.89 $ 1.17 ======== ======== ======== ======== Income per share before effect of change in accounting principle-- diluted.......................... $ 0.60 $ 0.59 $ 1.10 $ 1.16 ======== ======== ======== ======== Net income per share--diluted........ $ 0.60 $ 0.59 $ 0.88 $ 1.16 ======== ======== ======== ========
13 (9) COMPREHENSIVE INCOME
Second Quarter Ended Six Months Ended ----------------------------------- ----------------------------------- October 30, 2002 October 31, 2001 October 30, 2002 October 31, 2001 FY 2003 FY 2002 FY 2003 FY 2002 ---------------- ---------------- ---------------- ---------------- (Thousands of Dollars) Net income........................... $212,089 $208,241 $312,065 $408,715 Other comprehensive income: Foreign currency translation adjustment..................... 29,386 8,657 123,923 (374) Minimum pension liability adjustment..................... (550) 1,018 356 1,158 Net deferred gains/(losses) on derivatives from periodic revaluations................... 3,426 (1,056) 11,591 (737) Net deferred (gains)/losses on derivatives reclassified to earnings....................... 584 (2) (13,211) 241 -------- -------- -------- -------- Comprehensive income................. $244,935 $216,858 $434,724 $409,003 ======== ======== ======== ========
(10) 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 and hedges of specific cash flows associated with foreign currency denominated financial assets and liabilities 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. The Company uses certain foreign currency debt instruments as net investment hedges of foreign operations. During the six months ended October 30, 2002, losses of $14.7 million, net of income taxes of $8.6 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, swaps and options in order to reduce price risk associated with anticipated purchases of raw materials such as corn, soybean oil and soybean meal. Commodity price risk arises due to factors such as weather conditions, government regulations, economic climate and other unforeseen circumstances. Hedges of anticipated commodity purchases which meet the criteria for hedge accounting are designated as cash flow hedges. INTEREST RATE HEDGING: 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 six months ended October 30, 2002, hedge ineffectiveness related to cash flow hedges was a net gain of $0.4 million, which is reported in the consolidated statements of income as other expenses, net. DEFERRED HEDGING GAINS AND LOSSES: As of October 30, 2002, the Company is hedging forecasted transactions for periods not exceeding 18 months. During the next 12 months, the Company expects $2.3 million of net deferred loss reported in accumulated other comprehensive loss to be reclassified to earnings. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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") assets and liabilities of its U.S. and Canadian pet food and pet snacks, U.S. tuna, U.S. retail private label soup and private label gravy, College Inn broth and U.S. infant feeding businesses and distribute all of the shares of Spinco common stock on a pro rata basis to its shareholders. Immediately thereafter, Spinco will merge with a wholly-owned subsidiary of Del Monte Foods Company ("Del Monte") resulting in Spinco becoming a wholly-owned subsidiary of Del Monte (the "Merger"). In connection with the Merger, each share of Spinco common stock will be automatically converted into shares of Del Monte common stock that will result in the fully diluted Del Monte common stock at the effective time of the Merger being held approximately 74.5% by Heinz shareholders and approximately 25.5% by the Del Monte shareholders. As a result of the transaction, Heinz will receive approximately $1.1 billion in cash that will be used to retire debt. Included in the transaction will be the following brands: StarKist(R), 9-Lives(R), Kibbles 'n Bits(R), Pup-Peroni(R), Snausages(R), Nawsomes(R), Heinz Nature's Goodness(R) baby food and College Inn(R) broths. The following is a summary of the Fiscal 2003 and Fiscal 2002 second quarter and first half operating results of the businesses to be spun off (See Exhibit 99(d) for a discussion of results of operations and for the Combined Financial Statements of SKF Foods (Spinco) for the three and six months ended October 30, 2002 and October 31, 2001.):
Second Quarter Ended Six Months Ended ----------------------------------- ----------------------------------- October 30, 2002 October 31, 2001 October 30, 2002 October 31, 2001 ---------------- ---------------- ---------------- ---------------- Revenues................... $470,587 $477,185 $833,947 $876,391 Operating income........... 79,733 71,976 129,440 137,125 Operating income excluding special items............ 79,733 71,976 129,440 144,963
Pending completion of the transaction, Heinz expects to adjust its common stock dividend beginning in April 2003. The expected dividend will be $1.08 per share, a 33% reduction from the present rate of $1.62 per share. The new dividend rate is consistent with Heinz's peer group and above the S&P 500 average. [Note: All earnings per share amounts included in Management's Discussion and Analysis are presented on an after-tax diluted basis]. Upon completion of the transaction, Heinz intends to accelerate its focus on cash flows with improvements in working capital and a tight control on capital expenditures. In addition to the approximate $1.1 billion debt reduction as a result of the transaction, Heinz is targeting an additional $1.0 billion of debt reduction by the end of Fiscal 2005. The Merger, which has been approved by the Boards of Directors of Heinz and Del Monte, is subject to the approval by the stockholders of Del Monte and it's expected that the transaction could close as early as December 20, 2002. Heinz received on November 21, 2002, a private letter ruling from the Internal Revenue Service that the contribution of the assets and liabilities to Spinco and the distribution of the shares of common stock of Spinco to Heinz shareholders will be tax-free to Heinz, Spinco and the shareholders of Heinz. The Merger is also subject to other customary closing conditions. During the three months and six months ended October 30, 2002, the Company recognized transaction related costs and costs to reduce overhead of the remaining businesses totaling $10.1 million pretax ($0.02 per share) and $28.5 million pretax ($0.05 per share), respectively. Heinz anticipates transaction related and restructuring costs of approximately $160 million after tax to be incurred in Fiscal 2003. For more information regarding this transaction, please refer to the Company's Annual Report to Shareholders for the fiscal year ended May 1, 2002. 15 STREAMLINE In the fourth quarter of Fiscal 2001, the Company announced a restructuring initiative named "Streamline". This initiative included 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, please refer to the Company's Annual Report to Shareholders for the fiscal year ended May 1, 2002. RECENTLY ADOPTED ACCOUNTING STANDARDS The Company 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, the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets." Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized. This standard also requires, at a minimum, an annual assessment of the carrying value of goodwill and intangibles with indefinite useful lives. The reassessment of intangible assets, including the ongoing impact of amortization, was completed during the first quarter of Fiscal 2003. Net income for the quarter and six months ended October 31, 2001 would have been $224.2 million or $0.05 per share higher and $439.6 million or $0.09 per share higher, respectively, had the provisions of the new standards been applied as of May 3, 2001. During the first half of Fiscal 2003, the Company completed its transitional goodwill impairment review and recognized a transition adjustment of $77.8 million ($0.22 per share) to write down goodwill associated with its businesses in Eastern Europe, Argentina, Spain, Korea and South Africa. This is recorded as an effect of change in accounting principle as of May 2, 2002. Effective May 2, 2002, the Company 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 the Company's financial position, results of operations or cash flows. During the fourth quarter of Fiscal 2002, the Company 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, net earnings, or basic or diluted earnings per share; however, revenues and gross profit were reduced by approximately $150.9 million and $259.1 million in the second quarter and first six months of Fiscal 2002, respectively. Prior period data has been reclassified to conform to the current year presentation. THREE MONTHS ENDED OCTOBER 30, 2002 AND OCTOBER 31, 2001 RESULTS OF OPERATIONS For the three months ended October 30, 2002, sales increased $154.6 million, or 6.4%, to $2.57 billion. Sales were favorably impacted by pricing (3.9%), exchange rates (2.7%) and acquisitions (1.9%.) The favorable impact of acquisitions is primarily related to prior year acquisitions in the Heinz North America and U.S. Frozen segments. The favorable pricing was realized primarily in certain highly inflationary countries and in Europe. Sales were negatively impacted by unfavor- 16 able volumes (1.7%), primarily in the European segment and certain highly inflationary countries and by divestitures (0.4%.) The current year's second quarter was negatively impacted by costs related to the Del Monte transaction and costs to reduce overhead of the remaining businesses totaling $10.1 million pretax ($0.02 per share) which are classified primarily as selling, general and administrative expenses ("SG&A".) These include employee termination and severance costs, legal and other professional service costs. The following tables provide a comparison of the Company's reported results and the results excluding special items for the second quarter of Fiscal 2003. There were no special items in the year-earlier quarter.
Second Quarter Ended October 30, 2002 ---------------------------------------------- Net Gross Operating Net Per (Dollars in millions except per share Sales Profit Income Income Share amounts) -------- ------ --------- ------ ----- Reported results............................. $2,568.8 $904.4 $410.3 $212.1 $0.60 Del Monte transaction costs................ -- 1.9 10.1 6.9 0.02 -------- ------ ------ ------ ----- Results excluding special items.............. $2,568.8 $906.3 $420.5 $219.0 $0.62 ======== ====== ====== ====== =====
(Totals may not add due to rounding) Gross profit increased $41.8 million, or 4.8%, to $904.4 million. Excluding the special items noted above, gross profit increased $43.7 million, or 5.1%, to $906.3 million; however, the gross profit margin decreased to 35.3% from 35.7%. The decrease in gross profit margin occurred primarily in the Heinz North America segment. This decrease was partially offset by the favorable pricing discussed above and the benefit of reduced amortization of intangible assets of approximately $16.9 million. SG&A expenses increased $32.6 million, or 7.1%, to $494.1 million. Excluding the special items noted above, SG&A increased $24.4 million, or 5.3%, to $485.8 million; however, it decreased as a percentage of sales to 18.9% from 19.1%. The increase is primarily driven by increases in Selling and Distribution (S&D) expenses in the European and U.S. Frozen segments and increased General and Administrative (G&A) expenses in the Non-operating and Asia/Pacific segments. Marketing spend was consistent with the prior year, reflecting increased spending in all North American segments offset by reductions in Europe. Operating income increased $9.2 million, or 2.3%, to $410.3 million. Excluding the special items noted above, operating income increased $19.3 million, or 4.8%, to $420.5 million but decreased slightly as a percentage of sales to 16.4% from 16.6%. Net interest expense decreased $6.2 million to $64.6 million, driven primarily by lower interest rates over the past year. Other expense increased $11.5 million to $21.5 million from $10.0 million last year. The increase is primarily attributable to increases in minority interest expense, largely related to increased profitability in joint ventures in certain highly inflationary countries. The effective tax rate for the current quarter was 34.6% compared to 35.0% last year. Excluding the special items noted above, the effective rate was 34.5% in the current quarter compared to 35.0% last year. Net income in the current quarter was $212.1 million compared to $208.2 million last year and diluted earnings per share was $0.60 in the current quarter versus $0.59 in the same period last year. Excluding the special items noted above, net income increased $10.8 million to $219.0 million, and diluted earnings per share increased 5.0%, to $0.62 from $0.59 last year. 17 OPERATING RESULTS BY BUSINESS SEGMENT The Company has changed its segment reporting for its North American business to reflect changes in organizational structure and management. The Company is reporting and grouping the results of certain businesses under a new segment designated SKF Foods. SKF Foods consists of Heinz's U.S. and Canadian pet food and pet snacks, U.S. tuna, U.S. retail private label soup and private label gravy, College Inn broth and U.S. infant feeding businesses. SKF Foods also includes the former U.S. Pet Products and Seafood segment. These businesses have been separated from the remaining Heinz businesses in preparation for their spin-off and subsequent merger with Del Monte Corporation, a subsidiary of Del Monte Foods Company. The remaining Heinz North America segment now includes the following businesses that will be retained by Heinz following the Del Monte transaction, including: ketchup, condiments, sauces, and pasta meals sold to the grocery and foodservice channels in North America. Prior periods have been restated to conform with the current presentation.
Second Quarter Ended Six Months Ended ----------------------------------- ------------------------------------ October 30, 2002 October 31, 2001 October 30, 2002 October 31, 2001 ---------------- ---------------- ---------------- ----------------- SALES: Heinz North America............. $ 576,814 $ 566,476 $1,093,868 $1,050,413 SKF Foods....................... 470,587 477,185 833,947 876,391 U.S. Frozen..................... 316,444 299,410 562,233 508,386 ---------- ---------- ---------- ---------- Total North America............. 1,363,845 1,343,071 2,490,048 2,435,190 Europe.......................... 742,567 710,982 1,438,902 1,368,799 Asia/Pacific.................... 283,643 250,395 538,070 484,050 Other Operating Entities........ 178,736 109,771 305,411 203,475 ---------- ---------- ---------- ---------- Consolidated Totals............. $2,568,791 $2,414,219 $4,772,431 $4,491,514 ========== ========== ========== ========== OPERATING INCOME: Heinz North America............. $ 114,088 $ 139,795 $ 204,614 $ 250,658 SKF Foods....................... 79,733 71,976 129,440 137,125 U.S. Frozen..................... 64,941 61,092 116,644 105,328 ---------- ---------- ---------- ---------- Total North America............. 258,762 272,863 450,698 493,111 Europe.......................... 137,688 119,431 280,181 270,002 Asia/Pacific.................... 27,803 24,815 49,004 50,951 Other Operating Entities........ 27,543 14,977 44,613 26,910 Non-operating................... (41,463) (30,917) (69,039) (55,651) ---------- ---------- ---------- ---------- Consolidated Totals............. $ 410,333 $ 401,169 $ 755,457 $ 785,323 ========== ========== ========== ========== OPERATING INCOME EXCLUDING SPECIAL ITEMS: Heinz North America............. $ 119,442 $ 139,795 $ 216,862 $ 255,489 SKF Foods....................... 79,733 71,976 129,440 144,963 U.S. Frozen..................... 64,941 61,092 116,644 105,328 ---------- ---------- ---------- ---------- Total North America............. 264,116 272,863 462,946 505,780 Europe.......................... 137,688 119,431 280,181 271,717 Asia/Pacific.................... 27,803 24,815 49,004 51,549 Other Operating Entities........ 27,543 14,977 44,613 26,910 Non-operating................... (36,674) (30,917) (52,739) (54,458) ---------- ---------- ---------- ---------- Consolidated Totals............. $ 420,476 $ 401,169 $ 784,005 $ 801,498 ========== ========== ========== ==========
18 HEINZ NORTH AMERICA Sales of the Heinz North America segment increased $10.3 million, or 1.8%. Acquisitions increased sales by 2.1%, due primarily to the prior year acquisition of Dianne's Gourmet Desserts. Lower pricing decreased sales 0.8%. Sales volume increased 0.7% as the favorable increase in ketchup was partially offset by decreases in gravy and portion control. The weaker Canadian dollar decreased sales 0.2%. Gross profit decreased $11.8 million, or 5.3% to $209.9 million. Excluding special items, gross profit decreased $9.9 million, or 4.5% due primarily to increased manufacturing costs, partially offset by reduced amortization expense on intangible assets. Operating income decreased $25.7 million, or 18.4% to $114.1 million. Excluding special items, operating income decreased $20.4 million, or 14.6%, to $119.4 million, due primarily to the change in gross profit, increased marketing and G&A expenses, partially offset by acquisitions. SKF FOODS Sales of the SKF Foods segment decreased $6.6 million, or 1.4%. Sales volume was down 1.5% versus last year as increases in tuna, driven by pouch, were more than offset by decreases in pet products and infant feeding. Reduced volume in pet products largely reflects planned reductions in low margin private label products, lower volume of non-core brands and reductions in pet snacks. Pricing remained consistent with the prior year as increases in pet products were offset by decreases in tuna. Gross profit increased $2.7 million, or 1.8% and the gross profit margin increased to 32.6% from 31.6%, primarily due to lower tuna costs, favorable sales mix and the benefit of reduced amortization expense related to intangible assets. Operating income increased $7.8 million, or 10.8%, to $79.7 million, due primarily to the change in gross profit and reduced G&A expense, partially offset by increased marketing. U.S. FROZEN U.S. Frozen's sales increased $17.0 million, or 5.7%. Acquisitions increased sales 7.8%, due primarily to the prior year acquisitions of Delimex frozen Mexican foods, Anchor's Poppers retail frozen appetizers and licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers. Sales volume increased 1.3% driven primarily by SmartOnes frozen entrees, partially offset by a reduction in Hot Bites, Boston Market HomeStyle sides and frozen potatoes. Lower pricing decreased sales 3.4%, primarily due to increased trade promotions related to SmartOnes frozen entrees. Gross profit increased $9.5 million, or 8.5%, and the gross profit margin increased to 38.4% from 37.4%, primarily due to acquisitions and efforts to reduce manufacturing costs partially offset by price decreases. Operating income increased $3.8 million, or 6.3%, to $64.9 million primarily due to the change in gross profit and reduced G&A expense, partially offset by increased marketing and S&D expenses primarily related to acquisitions. EUROPE Heinz Europe's sales increased $31.6 million, or 4.4%. Favorable exchange rates increased sales by 6.6%. Higher pricing increased sales 1.9%, primarily due to seafood, beans and soup. Lower volume decreased sales 2.7%, in soups, beans and pasta meals and seafood, partially offset by volume increases in infant feeding and frozen entrees. The decreases in soups, beans and pasta meals were partially driven by planned SKU rationalizations. Divestitures reduced sales 1.4%. Gross profit increased $17.6 million, or 6.5%, due primarily to favorable exchange rates, pricing and reduced amortization expense related to intangible assets. Operating income increased $18.3 million, or 15.3%, to $137.7 million, primarily attributable to the increase in gross profit, 19 favorable impact of exchange and reduced marketing expense, offset partially by increased S&D expense. ASIA/PACIFIC Sales in Asia/Pacific increased $33.2 million, or 13.3%. Favorable exchange rates increased sales by 7.4%. Higher pricing increased sales 2.9%, primarily due to poultry and juices/drinks, partially offset by decreases in frozen vegetables. Volume increased 0.8%, driven primarily by juices/drinks and poultry, partially offset by cooking oils. Acquisitions increased sales by 2.3%. Gross profit increased $9.6 million, or 12.3%, due primarily to favorable exchange rates and increased pricing. Operating income increased $3.0 million, or 12.0%, to $27.8 million from $24.8 million, primarily due to the change in gross profit, partially offset by increased G&A and marketing expenses. OTHER OPERATING ENTITIES Sales for Other Operating Entities increased $69.0 million, or 62.8%, primarily due to favorable pricing in certain highly inflationary countries. Gross profit increased $16.4 million, or 60.1%, due primarily to favorable pricing. Operating income increased $12.6 million, or 83.9%, due primarily to the increase in gross profit. SIX MONTHS ENDED OCTOBER 30, 2002 AND OCTOBER 31, 2001 RESULTS OF OPERATIONS For the six months ended October 30, 2002, sales increased $280.9 million, or 6.3%, to $4.77 billion from $4.49 billion last year. Sales were favorably impacted by pricing (3.9%) and foreign exchange translation rates (3.0%) and acquisitions (2.9%). The favorable impact of acquisitions is primarily related to the prior year acquisitions in the Heinz North America and U.S. Frozen segments. The favorable pricing was realized primarily in certain highly inflationary countries and Europe. Sales were negatively impacted by unfavorable volumes of 3.0% driven by the current year strategic shift from trade promotional spending to consumer focused promotional and marketing programs. This strategic shift has caused a realignment of promotional timing, particularly in the United States, primarily during the first quarter. Divestitures reduced sales by 0.5%. The current year's results were negatively impacted by costs related to the Del Monte transaction and costs to reduce overhead of the remaining core businesses totaling $28.5 million pretax ($0.05 per share) which are classified primarily as selling, general and administrative expenses ("SG&A".) These expenses include employee termination and severance costs, legal and other professional service costs. Last year's results were negatively impacted by Streamline restructuring charges and implementation costs totaling $16.2 million pretax ($0.04 per share.) 20 The following tables provide a comparison of the Company's reported results and the results excluding special items for the six months ended October 30, 2002 and October 31, 2001.
Six Months Ended October 30, 2002 ------------------------------------------------ Net Gross Operating Net Per Sales Profit Income Income Share (Dollars in millions except per share amounts) -------- -------- --------- ------ ----- Reported results............................. $4,772.4 $1,691.3 $755.5 $389.9* $1.10* Del Monte transaction costs................ -- 1.9 28.5 18.5 0.05 -------- -------- ------ ------ ----- Results excluding special items.............. $4,772.4 $1,693.2 $784.0 $408.4 $1.16 ======== ======== ====== ====== =====
- --------------- * Before effect of change in accounting principle related to SFAS No. 142
Six Months Ended October 31, 2001 ------------------------------------------------ Net Gross Operating Net Per Sales Profit Income Income Share -------- -------- --------- ------ ----- Reported results............................ $4,491.5 $1,624.9 $785.3 $408.7 $1.16 Streamline implementation costs........... -- 8.7 10.4 9.4 0.03 Streamline restructuring costs............ -- -- 5.7 3.6 0.01 -------- -------- ------ ------ ----- Results excluding special items............. $4,491.5 $1,633.6 $801.5 $421.7 $1.20 ======== ======== ====== ====== =====
(Note: Totals may not add due to rounding.) Gross profit increased $66.4 million, or 4.1%, to $1,691.3 million. Excluding the special items noted above, gross profit increased $59.6 million, or 3.6%, to $1,693.2 million; however, the gross profit margin decreased to 35.5% from 36.4%. The decrease in gross profit margin is primarily related to the Heinz North America and SKF Foods segments. This decrease was partially offset by the favorable pricing discussed above and the benefit of reduced amortization of intangible assets of approximately $33.5 million. SG&A increased $96.3 million, or 11.5%, to $935.8 million. Excluding the special items noted above, SG&A increased $77.0 million, or 9.3%, to $909.2 million and increased as a percentage of sales to 19.1% from 18.5%. The increase is primarily driven by increased marketing spend in the U.S. Frozen, Heinz North America and SKF Foods segments and increased G&A expenses in the Heinz North America, Europe and Asia/Pacific segments. Operating income decreased $29.9 million, or 3.8%, to $755.5. Excluding the special items noted above, operating income decreased $17.5 million, or 2.2%, to $784.0 million and decreased as a percentage of sales to 16.4% from 17.8%. Net interest expense decreased $13.7 million to $127.3 million, driven primarily by lower interest rates over the past year. Other expense increased $21.4 million to $33.2 million. The increase is primarily attributable to increases in minority interest expense, largely related to increased profitability in joint ventures in certain highly inflationary countries. The effective tax rate for the six months ended October 30, 2002 was 34.5% compared to 35.4% last year. Excluding the special items noted above, the effective rate was 34.5% in the current period compared to 35.0% last year. Net income for the current six months (before effect of change in accounting principle related to the adoption of SFAS No. 142) was $389.9 million compared to $408.7 million last year and diluted earnings per share (before cumulative effect of change in accounting related to the adoption of SFAS No. 142) was $1.10 in the current six months versus $1.16 in the same period last year. Excluding the special items noted above, net income decreased $13.3 million to $408.4 million from $421.7 million last year, and diluted earnings per share decreased 3.3%, to $1.16. 21 HEINZ NORTH AMERICA Sales of the Heinz North America segment increased $43.5 million, or 4.1%. Acquisitions, net of divestitures, increased sales 3.6%, due primarily to the prior year acquisitions of Classico and Aunt Millie's pasta sauce, Mrs. Grass Recipe soups, Wyler's bouillons and soups and Dianne's Gourmet Desserts. Higher pricing increased sales 0.7% due mainly to ketchup, portion control and frozen soup. Sales volume remained consistent with the prior year as increases in foodservice ketchup and specialty sauces were offset by decreases in retail ketchup and frozen soup. Retail ketchup is being impacted by the ongoing trade efforts to reduce inventory levels as well as by the current year strategic shift from trade promotional spending to consumer focused promotional and marketing programs, mainly during the first quarter. The weaker Canadian dollar decreased sales 0.1%. Gross profit decreased $8.2 million, or 2.0%, to $395.2 million. Excluding special items, gross profit decreased $6.3 million, or 1.6%, and the gross profit margin decreased to 36.3% from 38.4%, due primarily to unfavorable sales mix and increased manufacturing costs, partially offset by reduced amortization expense on intangible assets with indefinite lives and acquisitions. Operating income decreased $46.0 million, or 18.4%, to $204.6 million. Excluding special items, operating income decreased $38.6 million, or 15.1%, to $216.9 million from $255.5 million, due primarily to the change in gross profit, increased marketing and higher G&A expense partially offset by acquisitions. SKF FOODS Sales of the SKF Foods segment decreased $42.4 million, or 4.8%. Sales volume decreased 4.0% primarily in pet products and infant feeding partially offset by volume increases in tuna, driven by pouch. Reduced volume in pet products largely reflects planned reductions in low margin private label products, timing of promotional activities and reductions in trade inventories. Lower pricing decreased sales 0.8%, primarily in tuna and infant feeding partially offset by price increases in pet products. Gross profit decreased $12.9 million or 4.6% to $267.6 million. Excluding special items, gross profit decreased $20.2 million, or 7.0% and the gross profit margin decreased to 32.1% from 32.8%, primarily due to lower tuna pricing and higher tuna and soup costs, as well as, lower volume of pet snacks. Operating income decreased $7.7 million, or 5.6%, to $129.4 million. Excluding special items, operating income decreased $15.5 million, or 10.7%, to $129.4 million from $145.0 million, due primarily to the change in gross profit and increased marketing expenses, partially offset by reductions in S&D and G&A. U.S. FROZEN U.S. Frozen's sales increased $53.8 million, or 10.6%. Acquisitions, net of divestitures increased sales 14.9%, due primarily to the prior year acquisitions of Delimex frozen Mexican foods, Anchor's Poppers retail frozen appetizers and licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers. Higher pricing increased sales 0.1%, primarily due to SmartOnes frozen entrees and appetizers and a reduction in trade promotions primarily related to the launch of Hot Bites in the prior year. This was partially offset by increased trade promotions related to SmartOnes frozen entrees. Sales volume decreased 4.4% driven by declines in Hot Bites, Boston Market HomeStyle sides and frozen potatoes, partially offset by SmartOnes frozen entrees. The volume decrease is partially attributed to the rationalization of the Hot Bites product lines with increased focus on the base Bagel Bites business. Gross profit increased $26.9 million or 13.9% and the gross profit margin increased to 39.1% from 38.0%. The increase in gross profit is primarily due to acquisitions and reduced manufacturing costs. Operating income increased $11.3 million, or 10.7%, to $116.6 million due primarily to the change in gross profit, partially offset by increased marketing and S&D. 22 EUROPE Heinz Europe's sales increased $70.1 million, or 5.1%. Favorable exchange rates increased sales by 7.0%. Higher pricing increased sales 1.3%, primarily due to seafood, beans and soups partially offset by lower pricing in frozen foods. Lower volume decreased sales 2.3%, driven primarily by planned SKU rationalizations, seafood and frozen pizza, partially offset by volume increases in frozen entrees. Divestitures reduced sales by 0.9%. Gross profit increased $30.0 million, or 5.6% to $567.5 million. Excluding special items, gross profit increased $28.6 million, or 5.3%, due primarily to favorable exchange rates, pricing and reduced amortization expense related to intangible assets. Operating income increased $10.2 million, or 3.8% to $280.2 million. Excluding special items, operating income increased $8.5 million, or 3.1%, to $280.2 million primarily attributable to the favorable change in gross profit and reduced marketing expense, offset partially by increased S&D and G&A expense. ASIA/PACIFIC Sales in Asia/Pacific increased $54.0 million, or 11.2%. Favorable exchange rates increased sales by 8.5%. Higher pricing increased sales 3.4%, primarily due to poultry, juices/drinks and sauces. Volume decreased sales 1.6%, driven primarily by cooking oils and pet food. Acquisitions, net of divestitures, increased sales by 0.9%. Gross profit increased $10.6 million, or 6.8%, due primarily to favorable exchange rates and increased pricing. Operating income decreased $1.9 million, or 3.8% to $49.0 million. Excluding special items, operating income decreased $2.5 million, or 4.9%, to $49.0 million primarily due to increased marketing and G&A expenses. OTHER OPERATING ENTITIES Sales for Other Operating Entities increased $101.9 million, or 50.1%, primarily due to favorable pricing in certain highly inflationary countries. Gross profit increased $20.3 million, or 37.1%, due primarily to favorable pricing. Operating income increased $17.7 million or, 65.8%, due primarily to the increase in gross profit. LIQUIDITY AND FINANCIAL POSITION Cash provided by operating activities was $552.1 million compared to $197.9 million last year. The increase in Fiscal 2003 versus Fiscal 2002 is primarily due to improved working capital performance. Cash used for investing activities totaled $70.8 million compared to $870.5 million last year. Acquisitions in the current period required $13.5 million. Acquisitions in the prior period required $805.5 million, due primarily to the purchase of Borden Food Corporation's pasta and dry bouillon and soup business, Delimex Holdings, Inc. and Anchor Food Products branded retail business which includes the retail licensing rights to the T.G.I. Friday's brand of frozen snacks and appetizers. Capital expenditures in the current six months required $77.9 million compared to $86.6 million last year. Cash used for financing activities totaled $421.7 million compared to cash provided by financing activities of $705.7 million last year. There were no proceeds from long-term debt during the current period compared to $768.3 last year. Payments on long-term debt required $9.9 million in the current six months compared to $32.2 million last year. Payments on commercial paper and short-term borrowings required $145.8 million compared to $88.0 million last year. In addition, $325.0 million was provided during the prior year via the issuance of Preferred Stock. Cash provided from stock options exercised totaled $5.5 million versus $46.4 million last year. Dividend payments totaled $284.4 million compared to $278.8 million for the same period last year. There 23 were no share repurchases in the current six months and share repurchases required $45.4 million in the prior year. In the first six months of Fiscal 2003, the cash requirements of Streamline were $9.5 million, relating to severance and exit costs. On August 16, 2002, Fitch Ratings initiated coverage of the Company assigning an 'A' rating to the Company's senior unsecured debt and a 'F1' rating to the Company's commercial paper. Fitch indicated that the ratings outlook was stable. In connection with the announcement of the Del Monte transaction, Moody's Investors Service changed the Company's 'A3' senior unsecured debt ratings outlook from negative to stable. On September 5, 2002, the Company, Heinz Finance Company and a group of domestic and international banks renewed an $800 million 364-day credit agreement. That credit agreement and the $1.5 billion credit agreement that expires in September 2006 support the Company's commercial paper programs. As of October 30, 2002, there was no commercial paper outstanding. As of May 1, 2002, the Company had $119.1 million of commercial paper outstanding and classified as long-term debt. The impact of inflation on both the Company's financial position and results of operations is not expected to adversely affect Fiscal 2003 results. 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. 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 the Company in Fiscal 2004. The Company 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. CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe harbor for forward-looking statements made by or on behalf of the Company. The Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission and in its reports to shareholders. These forward-looking statements are based on management's views and assumptions of future events and financial performance. The words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "should," "estimate," "project," "target," "goal" or similar expressions identify "forward-looking statements" within the meaning of the Act. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. These forward-looking statements are uncertain. The risks and uncertainties that may affect 24 operations and financial performance and other activities, some of which may be beyond the control of the Company, include the following: - Changes in laws and regulations, including changes in food and drug laws, accounting standards, taxation requirements (including tax rate changes, new tax laws and revised tax law interpretations) and environmental laws in domestic or foreign jurisdictions; - Competitive product and pricing pressures and the Company's ability to gain or maintain share of sales in the global market as a result of actions by competitors and others; - Fluctuations in the cost and availability of raw materials, including tuna, and the ability to maintain favorable supplier arrangements and relationships; - The impact of higher energy costs and other factors on the cost of producing, transporting and distributing the Company's products; - The Company's ability to generate sufficient cash flows to support capital expenditures, share repurchase programs, debt repayment and general operating activities; - The inherent risks in the marketplace associated with new product or packaging introductions, including uncertainties about trade and consumer acceptance; - The Company's ability to achieve sales and earnings forecasts, which are based on assumptions about sales volume, product mix and other items; - The Company's ability to integrate acquisitions and joint ventures into its existing operations and the availability of new acquisition and joint venture opportunities and the success of divestitures and other business combinations; - The Company's ability to achieve its cost savings objectives, including any restructuring programs and its working capital initiative; - The impact of unforeseen economic and political changes in international markets where the Company competes, such as currency exchange rates, (notably with respect to the euro and the pound sterling) inflation rates, recession, foreign ownership restrictions and other external factors over which the Company has no control; - Interest rate fluctuations and other capital market conditions; - The effectiveness of the Company's advertising, marketing and promotional programs; - Weather conditions, which could impact demand for Company products and the supply and cost of raw materials; - The impact of e-commerce and e-procurement, supply chain efficiency and cash flow initiatives; - The Company's ability to maintain its profit margin in the face of a consolidating retail environment; - The impact of global industry conditions, including the effect of the economic downturn in the food industry and the foodservice business in particular; - The Company's ability to offset the reduction in volume and revenue resulting from participation in categories experiencing declining consumption rates; - With respect to the proposed spin-off and merger between the Company's U.S. and Canadian pet food and pet snacks, U.S. tuna, U.S. retail private label soup and private label gravy, College Inn broth and U.S. infant feeding businesses, and a wholly-owned subsidiary of Del Monte Foods Company ("Del Monte,") the ability to obtain Del Monte stockholders' approval and other customary closing conditions; 25 - With respect to future dividends on Company stock, meeting certain legal requirements at the time of declaration. The foregoing list of important factors is not exclusive. The forward-looking statements are and will be based on management's then current views and assumptions regarding future events and operating performance and speak only as of their dates. 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the Company's market risk during the six months ended October 30, 2002. For additional information, refer to pages 43-45 of the Company's Annual Report to Shareholders for the fiscal year ended May 1, 2002. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Within 90 days before filing this report, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures was carried out by the Company under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the date of their evaluation, the Company's disclosure controls and procedures have been designed and are being operated in a manner that provides reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company believes that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. (b) Changes in Internal Controls Subsequent to the date of the most recent evaluation of the Company's internal controls, there were no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 26 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 The Annual Meeting of Shareholders of H.J. Heinz Company was held in Pittsburgh, Pennsylvania on September 12, 2002. The following individuals were elected as directors for a one-year term expiring in September 2003:
SHARES DIRECTOR SHARES FOR WITHHELD - -------- ----------- ---------- W.R. Johnson.............................................. 271,075,963 7,412,556 N.F. Brady................................................ 267,549,186 10,939,333 M.C. Choksi............................................... 258,829,790 19,658,729 L.S. Coleman, Jr.......................................... 258,245,502 20,243,017 P.H. Coors................................................ 261,080,964 17,407,555 E.E. Holiday.............................................. 258,330,621 20,157,898 S.C. Johnson.............................................. 258,471,266 20,017,253 C. Kendle................................................. 261,314,949 17,173,570 D.R. O'Hare............................................... 261,248,690 17,239,829 T.J. Usher................................................ 261,193,646 17,294,873 J.M. Zimmerman............................................ 261,299,063 17,189,456
Shareholders also acted upon the following proposals at the Annual Meeting: Elected PricewaterhouseCoopers, LLP the Company's independent accountants for the fiscal year ending May 30, 2003. Votes totaled 267,595,154 for; 21,079,145 against; and 2,577,794 abstentions. Approved the Fiscal Year 2003 Stock Incentive Plan. Vote totaled 247,869,651 for; 37,626,351 against; and 5,756,091 abstentions. Approved the Senior Executive Incentive Compensation Plan. Votes totaled 256,457,143 for; 30,580,445 against; and 4,214,505 abstentions. 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. 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 Commission upon request. Documents not designated as being incorporated herein by refer- 27 ence are filed herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K. 4. The Supplemental Indenture between the Company and Bank One, National Association dated as of November 15, 2002. 12. Computation of Ratios of Earnings to Fixed Charges. 99(a). Certification by the Chief Executive Officer Relating to a Periodic Report Containing Financial Statements. 99(b). Certification by the Chief Financial Officer Relating to a Periodic Report Containing Financial Statements. 99(c). Condensed Consolidated 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. 99(d). Discussion of Results of Operations and Combined Financial Statements of SKF Foods for the three and six months ended October 30, 2002 and October 31, 2001. (b) Reports on Form 8-K A report on Form 8-K was filed with the Securities and Exchange Commission on August 14, 2002 in connection with the filing by the Chairman, President and Chief Executive Officer and Executive Vice President and Chief Financial Officer of certifications pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934. 28 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: December 12, 2002 By: /s/ ARTHUR WINKLEBLACK .......................................... Arthur Winkleblack Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: December 12, 2002 By: /s/ EDWARD MCMENAMIN .......................................... Edward McMenamin Vice President -- Finance (Principal Accounting Officer) 29 I, William R. Johnson, Chairman, President and Chief Executive Officer of H.J. Heinz Company certify that: 1. I have reviewed this quarterly report on Form 10-Q of H.J. Heinz Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: December 12, 2002 By: /s/ WILLIAM R. JOHNSON ------------------------------------ Name: William R. Johnson Title: Chairman, President and Chief Executive Officer 30 I, Arthur Winkleblack, Executive Vice President and Chief Financial Officer of H.J. Heinz Company certify that: 1. I have reviewed this quarterly report on Form 10-Q of H. J. Heinz Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: December 12, 2002 By: /s/ ARTHUR WINKLEBLACK ------------------------------------ Name: Arthur Winkleblack Title: Executive Vice President and Chief Financial Officer 31 EX-4 3 j9703501exv4.txt SECOND SUPPLEMENTAL INDENTURE Exhibit 4 H. J. HEINZ COMPANY, H. J. HEINZ FINANCE COMPANY, AS CO-OBLIGOR, AND BANK ONE, NATIONAL ASSOCIATION, AS TRUSTEE ----------- SECOND SUPPLEMENTAL INDENTURE, DATED AS OF NOVEMBER 15, 2002, TO THE INDENTURE, DATED AS OF NOVEMBER 6, 2000, AS SUPPLEMENTED BY THE SUPPLEMENTAL INDENTURE, DATED AS OF MAY 3, 2001 ----------- SECOND SUPPLEMENTAL INDENTURE, dated as of November 15, 2002 (the "Second Supplemental Indenture"), among H. J. HEINZ COMPANY, a Pennsylvania corporation (the "Company"), H. J. HEINZ FINANCE COMPANY, a Delaware corporation (the "Co-Obligor"), and BANK ONE, NATIONAL ASSOCIATION, a national banking association existing under the laws of the United States of America (the "Trustee"), to the Original Indenture, dated as of November 6, 2000, between the Company and the Trustee, as supplemented by the Supplemental Indenture, dated as of May 3, 2001, between the Company, the Co-Obligor and the Trustee. W I T N E S S E T H: WHEREAS, the Company and the Trustee executed and delivered an Original Indenture, dated as of November 6, 2000 (the "Original Indenture"); WHEREAS, the Company established and issued a series of Dealer Remarketable Securities ("Drs.") due November 15, 2020 in an aggregate principal amount of $1,000,000,000 (the "Securities") under the Original Indenture; WHEREAS, the Company, the Co-Obligor and the Trustee executed and delivered a Supplemental Indenture, dated as of May 3, 2001, providing for the addition of the Co-Obligor as a party to the Original Indenture and effecting certain other amendments and modifications to the Original Indenture (the "Supplemental Indenture", and together with the Original Indenture, the "Indenture"); WHEREAS, the parties hereto desire to amend the Indenture as set forth herein in order to provide for, among other things, an alternate method of resetting the interest rate on the Securities in connection with each remarketing of the Securities, to allow the Company and the Co-Obligor to redeem the Securities on a remarketing date in part as well as in whole and to provide that any securities repurchased from holders thereof from time to time by the Company or the Co-obligor will be delivered to the Trustee for cancellation, and the outstanding principal amount of the Drs. reduced accordingly; WHEREAS, J.P. Morgan Securities Inc. and Lehman Brothers Inc., who, as of the date of the written consent, dated as of November 15, 2002 (the "Consent"), collectively hold 100% in aggregate principal amount of the Outstanding Securities, has each delivered to the parties hereto a signed copy of the Consent, in which they consent to the substance of the amendments to the Indenture contemplated by this Second Supplemental Indenture and to the entry into this Second Supplemental Indenture by the parties hereto; WHEREAS, the entry into this Second Supplemental Indenture by the parties hereto is in all respects authorized by the provisions of the Indenture; -2- WHEREAS, all things necessary to make this Supplemental Indenture a valid agreement of the parties hereto, in accordance with the terms of the Indenture, have been done; NOW THEREFORE, in consideration of the above premises, each party hereto agrees as follows: ARTICLE I DEFINITIONS Section 1.01 Defined Terms; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Indenture has the meaning assigned to such term in the Indenture. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Indenture" and each other similar reference contained in the Indenture shall, after this Second Supplemental Indenture becomes effective, refer to the Indenture as supplemented hereby. ARTICLE II AMENDMENTS Section 2.01 Amendment to Section 202. The Indenture is hereby amended by removing the language under "SECTION 202. Form of Face of Security" in its entirety, and by inserting the following language in its place: "[Insert any legend required by Section 204.] H. J. Heinz Company 6.82% Dealer Remarketable SecuritySM ("Drs.sm") due November 15, 2020 No. ___ CUSIP: H. J. Heinz Company, a Pennsylvania corporation (the "Company"), which term includes any successor corporation under the Indenture hereinafter referred to, for value received, hereby promises to pay to Cede & Co. or registered assigns, the principal sum of dollars ($ ) on November 15, 2020, at the office or agency of the Company maintained for this purpose in the City of Chicago, Illinois, which shall initially be the corporate trust office of Bank One, National Association, the Trustee under the Indenture hereinafter referred to, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay to the registered holder hereof, as hereinafter provided, interest thereon, in like coin or currency, on November 15 of each -3- year (until and including November 15, 2020, which is the "Stated Maturity Date"), or, if such date is not a Business Day (as defined below), on the next Business Day, commencing November 15, 2001, at the rate per annum specified below. Interest shall be paid to the persons in whose name this Security is registered on the November 1 (whether or not a Business Day) immediately preceding such November 15 (the "Record Date"). "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in The City of New York are authorized or obligated by law, executive order or governmental decree to be closed. This Security will bear interest at an annual rate of 6.82% from November 6, 2000 to but excluding November 15, 2001. "Remarketing Date" means, in respect of each year from and including 2001 to and including 2019, November 15 in such year; provided, however, if in such year November 15 falls on a date that is not a Business Day, then the Remarketing Date shall be the next Business Day following November 15 in such year. If the Remarketing Dealer (as defined below) elects to call the Securities for purchase and remarketing pursuant to the Second Amended and Restated Remarketing Agreement, dated as of November 15, 2002 (the "Remarketing Agreement"), among the Company, H. J. Heinz Finance Company, a Delaware corporation (the "Co-Obligor"), J.P. Morgan Ventures Corporation (the "Remarketing Dealer") and J.P. Morgan Securities Inc., as agent for the Remarketing Dealer ("JPMSI"), as may from time to time be amended and restated, then (i) this Security shall be subject to mandatory tender to the Remarketing Dealer (or any other securities dealer that may be participating in the remarketing) for remarketing on the relevant Remarketing Date, on the terms and subject to the conditions set forth on the reverse hereof, and (ii) on and after the relevant Remarketing Date (or the November 15 immediately preceding such Remarketing Date if such Remarketing Date is not a November 15), this Security shall bear interest at the rate determined by the Remarketing Dealer in accordance with the procedures set forth in paragraph 5 on the reverse hereof until but excluding the immediately following Remarketing Date (or the November 15 immediately preceding such Remarketing Date if such Remarketing Date is not a November 15) or, as applicable, the Stated Maturity Date. If the Remarketing Dealer does not elect to repurchase the Securities pursuant to the Remarketing Agreement on any Remarketing Date, or if, for any reason, this Security is not repurchased by the Remarketing Dealer (or any other securities dealer that may be participating in the remarketing) on any Remarketing Date, then this Security shall be subject to mandatory tender to the Company or the Co-Obligor for repurchase on the Remarketing Date, on the terms and subject to the conditions set forth on the reverse hereof. This Security has initially been issued in the form of a global security, and the Company has initially designated The Depository Trust Company ("DTC," which term shall include any successor) as the Depositary for this Security. For as long as this Security or any portion hereof is issued in such form, and notwithstanding the foregoing, all payments of interest, principal and other amounts in respect of this Security or such portion (including payments upon mandatory repurchase or redemption referred to on the reverse hereof) shall be made to the Depositary or its nominee in accordance with its -4- applicable procedures, in the coin or currency specified above and as further provided on the reverse hereof. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof and such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Security shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been executed by the Trustee under the Indenture referred to on the reverse hereof. IN WITNESS WHEREOF, the Company has caused this Security to be signed by its duly authorized officer and has caused its corporate seal to be affixed hereunto. H. J. HEINZ COMPANY By:______________________ Title: Attest: - ---------------------- Assistant Secretary [Insert Trustee's Certificate of Authentication in substantially the form set forth in Section 205] [Insert Co-Obligation as set forth in Section 206]" Section 2.02 Amendment to Section 203. The Indenture is hereby amended by removing the language under "SECTION 203. Form of Reverse of Security" in its entirety, and by inserting the following language in its place: -5- "H. J. Heinz Company 6.82% Dealer Remarketable SecuritySM ("Drs.sm") due November 15, 2020 1. Indenture. (a) This Security is one of a duly authorized issue of debt securities of the Company (herein referred to as the "Securities") of the series hereinafter specified, all issued or to be issued under and pursuant to an indenture, dated as of November 6, 2000, as amended and supplemented from time to time in accordance with the provisions thereof (the "Indenture"), among the Company, the Co-Obligor and Bank One, National Association, as trustee (herein referred to as the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company, the Co-Obligor and the holders (the words "holders", "holder", "Securityholders" or "Securityholder" mean the registered holder(s)) of the Securities). (b) This Security is one of the series designated as the 6.82% Dealer Remarketable SecuritiesSM due November 15, 2020 of the Company, and such series is initially issued in an aggregate principal amount of $ . The Company may at any time issue additional securities under the Indenture in unlimited amounts having the same terms as the Securities. (c) All capitalized terms used in this Security that are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. 2. Mandatory Tender and Repurchase on Remarketing Date. On a Business Day not later than five Business Days prior to each Remarketing Date (each, a "Notification Date"), the Remarketing Dealer will notify the Company, the Co-Obligor and the Trustee as to whether it elects to purchase all of the outstanding Securities on such Remarketing Date. If, and only if, the Remarketing Dealer so elects with respect to such Remarketing Date, this Security shall be subject to mandatory tender by the holder hereof to the Remarketing Dealer (or any other securities dealer that may be participating in the remarketing) for purchase and remarketing on such Remarketing Date, upon the terms and subject to the conditions described herein and in the Remarketing Agreement. The purchase price of this Security pursuant to such mandatory tender shall be equal to 100% of its principal amount. Interest accrued to but excluding such Remarketing Date (or the November 15 immediately preceding such Remarketing Date, if such remarketing date is not a November 15), will be paid by the Company or the Co-Obligor to persons in whose names the Securities are registered on the Record Date. No holder or beneficial owner of any Security shall have any rights or claims under the Remarketing Agreement or against the Company, the Co-Obligor or the Remarketing Dealer (or any other securities dealer that may be participating in the remarketing) as a result of the Remarketing Dealer (or any other securities dealer that may be participating in the remarketing) not purchasing such Security. 3. Repurchase by the Company. (a) Mandatory Repurchase. If (i) the Remarketing Dealer does not elect to purchase all of the outstanding Securities on any Remarketing Date pursuant to paragraph -6- 2 of this reverse of Security, (ii)(A) the Remarketing Dealer shall not have received in writing by the required time on the relevant Determination Date any firm, committed bids to purchase all of the Securities as described in subparagraph (a) of paragraph 5 of this reverse of Security or (B) no Pricing Agreement shall have been executed, in the event that the Company and the Co-Obligor have given notice to the Remarketing Dealer as provided in subparagraph (b) of paragraph 5 of this reverse of Security, or (iii) for any reason, all of the Securities are not purchased from tendering holders on any Remarketing Date by the Remarketing Dealer (or any other securities dealer or dealers that may be participating in the remarketing), then holders will be required to tender, and the Company and the Co-Obligor will be required to repurchase, on such Remarketing Date, at a price equal to 100% of their principal amount plus any accrued interest, all Securities that have not been purchased by the Remarketing Dealer (or any other securities dealer participating in such remarketing) on such Remarketing Date. Upon payment and delivery of any Securities so repurchased, the outstanding principal amount of the Securities shall be reduced accordingly. (b) Optional Repurchase. The Company and the Co-Obligor may, from time to time and in accordance with, and to the extent permitted by, applicable laws, purchase or otherwise acquire, or enter into any agreement to purchase or otherwise acquire, any of the Securities from holders thereof. Upon payment and delivery of any Securities so repurchased, the Company or the Co-Obligor shall deliver such Securities to the Trustee who shall cancel them pursuant to Section 309 of the Indenture, and the outstanding principal amount of the Securities shall be reduced accordingly. 4. Redemption. If the Remarketing Dealer has elected to purchase all of the outstanding Securities on any Remarketing Date pursuant to paragraph 2 of this reverse of Security, the Company and the Co-Obligor shall have the right to redeem the Securities, in whole or in part, from the Remarketing Dealer on such Remarketing Date, at a price equal to the sum of (x) the applicable Dollar Price (as defined below) and (y) the Call Price (as specified in the Remarketing Agreement) (the sum of (x) and (y) equaling the "Redemption Price") and by giving written notice of such election, including the amount of Securities to be so redeemed, to the Remarketing Dealer no later than the later of: (i) the Business Day immediately prior to the relevant Determination Date, or (ii) if fewer than three Reference Corporate Dealers timely submit firm, committed bids in writing in accordance with subparagraph (a) of paragraph 5 of this reverse of Security, immediately after the deadline set by the Remarketing Dealer for receiving such bids has passed; provided that this clause (ii) shall not apply if the Company and the Co-Obligor have given notice to the Remarketing Dealer that such bids should not be solicited as provided in subparagraph (b) of paragraph 5 of this reverse of Security. -7- In either such case, the Company and the Co-Obligor shall pay such Redemption Price for the specified amount of Securities in same-day funds by wire transfer on such Remarketing Date to an account designated by the Remarketing Dealer. For purposes of calculating the Call Price, the Remarketing Dealer shall be deemed to have made the request for the Call Price on the date the Company and the Co-Obligor make their election to redeem the specified amount of Securities. Unless the Company and the Co-Obligor default in payment of the Redemption Price, on and after the applicable Remarketing Date, interest will cease to accrue on the Securities or portions thereof called for redemption. Upon such payment of the Redemption Price, the outstanding principal amount of the Securities shall be reduced accordingly. 5. Reset of Interest Rate; Notification Thereof. On any Remarketing Date that the Securities are remarketed, the stated interest rate that the Securities will bear from and including the Remarketing Date (or the November 15 immediately preceding such Remarketing Date, if such Remarketing Date is not a November 15) until but excluding the immediately following Remarketing Date (or the November 15 immediately preceding such Remarketing Date, if such Remarketing Date is not a November 15) or, in the case of the final Remarketing Date, to but excluding the Stated Maturity Date (the "Reset Interest Rate"), will be established by one of the following two methods: (a) By 3:30 p.m., New York City time, on each Determination Date (defined below), the Remarketing Dealer shall solicit the Reference Corporate Dealers (defined below) for firm, committed bids, in writing, to purchase all outstanding Securities at the Dollar Price (defined below), and shall select the lowest such firm, committed bid (regardless of whether each of the Reference Corporate Dealers actually submits a bid). Each bid from a Reference Corporate Dealer shall be expressed in terms of the relevant Reset Interest Rate that the Securities would bear, quoted as a spread over the Base Rate (defined below), based on the following assumptions: i. the Securities would be sold to such Reference Corporate Dealer on the relevant Remarketing Date for settlement on the same day; ii. the Securities would mature on the following Remarketing Date or, in the case of the final Remarketing Date, on the Stated Maturity Date; and iii. the Securities would bear interest at the rate bid by such Reference Corporate Dealer, payable annually, from the applicable Remarketing Date (or the November 15 immediately preceding such Remarketing Date, if such Remarketing Date is not a November 15) until but excluding the immediately following Remarketing Date (or the November 15 immediately preceding such Remarketing Date, if such Remarketing Date is not a November 15) or, in the case of the final Remarketing Date, to but excluding the Stated Maturity Date. The relevant Reset Interest Rate announced by the Remarketing Dealer as a result of such process will be quoted to the nearest one hundred-thousandth (0.00001) of one percent per annum and, absent manifest error, will be binding and conclusive upon -8- holders of the Securities, the Company, the Co-Obligor and the Trustee. Subject only to subparagraph (c) of this paragraph 5, the Remarketing Dealer shall have the discretion to select the time at which each Reset Interest Rate is determined on the relevant Determination Date. The Remarketing Dealer shall have the right in its sole discretion either to (i) remarket the Securities for its own account or (ii) sell the Securities to the Reference Corporate Dealer submitting in writing the lowest firm, committed bid. If two or more Reference Corporate Dealers submit equivalent bids that constitute the lowest firm, committed bid, the Remarketing Dealer may in its sole discretion elect to sell the Securities to any such Reference Corporate Dealer. "Base Rate" means 5.69% per annum. "Determination Date" means the third Business Day immediately preceding the relevant Remarketing Date. For purposes of this definition, "Business Day" means a day that is a Business Day in both The City of New York and London. "Dollar Price" means, with respect to each Remarketing Date, the discounted present value to such Remarketing Date of the cash flows on a bond (x) with a principal amount equal to the aggregate principal amount of the Securities, (y) maturing on the immediately following Remarketing Date or, in the case of the last Remarketing Date, the Stated Maturity Date and (z) bearing interest at a rate equal to the Base Rate, using a discount rate equal to the Swap Rate (defined below), payable annually (assuming the actual number of days in the calculation period in respect of which payment is being made divided by 360) on the interest payment dates of the Securities from and including the applicable Remarketing Date (or the November 15 immediately preceding such Remarketing Date, if such Remarketing Date is not a November 15) until but excluding the immediately following Remarketing Date (or the November 15 immediately preceding such Remarketing Date, if such Remarketing Date is not a November 15) or, in the case of the final Remarketing Date, to but excluding the Stated Maturity Date; provided that in the event that the Dollar Price is to be calculated in connection with a partial redemption of the Securities by the Company and the Co-Obligor pursuant to paragraph 4 of this reverse of Security, clause (x) shall instead be read to say "with a principal amount equal to the aggregate principal amount of the Securities elected to be redeemed by the Company and the Co-Obligor"; provided further that in the event that the Dollar Price is to be calculated in connection with a partial sale of the Securities by the Remarketing Dealer to any other securities dealer or dealers that may be participating in the remarketing of the Securities pursuant to subparagraph (b) of this paragraph 5, then, with respect to any such securities dealer, clause (x) shall instead be read to say "with a principal amount equal to the aggregate principal amount of the Securities to be sold to the applicable securities dealer participating in the remarketing of the Securities pursuant to subparagraph (b) of this paragraph 5". -9- "Reference Corporate Dealers" means JPMSI and four other leading dealers of publicly-traded debt securities of the Company to be mutually agreed upon by the Company and the Remarketing Dealer prior to each Determination Date. "Reference Swap Dealer" means JPMorgan Chase Bank and a group of four leading U.S. Dollar interest rate swap dealers to be mutually agreed upon by the Company and the Remarketing Dealer prior to each Determination Date. "Swap Rate" means the average bid side rate quoted by the Reference Swap Dealers by 3:30 p.m., New York City time, on the relevant Determination Date for the fixed leg of a fixed-for-floating U.S. Dollar interest rate swap transaction with a notional principal amount equal to the aggregate principal amount of the Securities and a one-year term beginning on the applicable Remarketing Date where one fixed rate payment is to be made at maturity of the swap transaction and the floating leg is equivalent to three-month LIBOR payable quarterly to maturity of the swap transaction in accordance with standard market conventions in the U.S. Dollar interest rate swap market. The Swap Rate shall be quoted assuming that the interest of the fixed leg is calculated on the basis of the actual number of days in the calculation period in respect of which payment is being made divided by 360. (b) If the Company and the Co-Obligor provide notice to the Remarketing Dealer in the manner specified in the Remarketing Agreement, the Reset Interest Rate shall be determined by the agreement of the Company, the Co-Obligor, the Remarketing Dealer and any other securities dealer or dealers that may be participating in the remarketing, as set forth in an agreement to be dated as of the Determination Date (each such agreement, a "Pricing Agreement"). The relevant Reset Interest Rate set forth in the applicable Pricing Agreement will be quoted to the nearest one hundred-thousandth (0.00001) of one percent per annum and, absent manifest error, will be binding and conclusive upon holders of the Securities, the Company, the Co-Obligor and the Trustee. If the Reset Interest Rate is determined as described in this subparagraph (b), the Remarketing Dealer shall, as the Remarketing Dealer, the Company and the Co-Obligor shall agree, either (i) remarket all of the Securities for its own account, (ii) remarket the Securities with one or more other securities dealers or (iii) sell all of the Securities to one or more other securities dealers. If the Remarketing Dealer elects to remarket the Securities with one or more other securities dealers as described in subclause (ii) of this subparagraph (b), then (i) the Remarketing Dealer may sell to any such other securities dealer that portion of the Securities as such other securities dealer has agreed to purchase or (ii) any such other securities dealer may purchase tendered Securities directly from holders as described in paragraph 2 of this reverse of Security in such proportions as such other securities dealer has agreed to purchase or remarket pursuant to the Pricing Agreement. (c) If the Remarketing Dealer has elected to remarket the Securities as provided herein, then it shall notify the Company, the Co-Obligor, the Trustee and DTC by telephone, confirmed in writing (which may include facsimile or other electronic -10- transmission), by 5:00 p.m., New York City time, on the Determination Date for such remarketing, of the relevant Reset Interest Rate. 6. Maintenance of Book-Entry System. The tender and settlement procedures with respect to the Securities set forth in the Remarketing Agreement shall be subject to modification without the consent of the holders of the Securities, to the extent required by DTC or, if the book-entry system is no longer available for the Securities at the time of the remarketing, to the extent required to facilitate the tendering and remarketing of the Security in certificated form. In addition, the Remarketing Dealer may modify the settlement procedures without the consent of the holders of the Securities in order to facilitate the settlement process. The Company hereby agrees with the Trustee and the holders of Securities that (i) at all times, it will use its best efforts to maintain the Securities in book-entry form with DTC or any successor thereto and to appoint a successor depositary to the extent necessary to maintain the Securities in book-entry form and (ii) it waives any discretionary right that it otherwise may have under the Indenture to cause the Securities to be issued in certificated form. 7. Effect of Event of Default. If an Event of Default shall occur and be continuing with respect to the Securities of any series, either the Trustee or the holders of at least 25% in principal amount of the Securities then outstanding of that series may declare the principal (or such portion thereof as may be specified in the terms relating to such series) of the Securities of such series to be due and payable, with the effect and subject to the conditions provided in the Indenture. 8. Agreement to Tender. Each holder of this Security (and each holder of a beneficial interest herein) irrevocably agrees that this Security shall automatically be tendered on any Remarketing Date (a) to the Remarketing Dealer (or any other securities dealer that may be participating in the remarketing), upon the occurrence of the events specified in paragraph 2 of this reverse of Security or (b) to the Company or the Co-Obligor, upon the occurrence of the events specified in subparagraph (a) of paragraph 3 of this reverse of Security. 9. Amendments and Waivers. With certain exceptions, the Indenture and the Securities issued pursuant thereto may be modified or amended with the consent of the holders of not less than a majority in principal amount of the outstanding Securities of each series affected by the modification; provided, however, that no such modification or amendment may be made, without the consent of the holder of each Security affected, that would (i) reduce the principal amount of or the interest on any Security, change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Security, or the other terms of payment or tender for purchase thereof, or (ii) reduce the above-stated percentage of Securities, the consent of the holders of which is required to modify or amend the Indenture, or the percentage of Securities of any series, the consent -11- of the holders of which is required to waive compliance with certain provisions of the Indenture or to waive certain past defaults. Modifications and amendments of the Indenture will be permitted to be made by the Company, the Co-Obligor and the Trustee without the consent of any holder of Securities for any of the following purposes: (a) to evidence the succession of another person to the Company as obligor under the Indenture; (b) to add to the covenants, agreements and obligations of the Company for the benefit of the holders of all Securities or to surrender any right or power conferred upon the Company in the Indenture; (c) to add any additional Events of Default for the benefit of the holders of all or any series of Securities; (d) to provide for the acceptance of appointment by a successor Trustee or facilitate the administration of the trusts under the Indenture by more than one Trustee; (e) to cure any ambiguity, defect or inconsistency in the Indenture; (f) to secure the Securities; or (g) to make any other change that does not adversely affect the rights of any holder of the Securities. 10. Book-Entry. The Securities will be represented by one or more certificates in global form representing Securities sold pursuant to Rule 144A, in each case without interest coupons, which will be deposited with the Trustee as custodian for, and registered in the name of, DTC or its nominee. 11. No Liability of Certain Persons. No past, present or future stockholder, employee, officer or director of the Company or the Co-Obligor, or any successor thereof, shall have any liability for any obligation, covenant or agreement of the Company or the Co-Obligor contained under this Security or the Indenture. Each holder by accepting this Security waives and releases all such liability. This waiver and release are part of the consideration for the issue of this Security. 12. Provisions Relating to the Remarketing Dealer. Insofar as the provisions of this Security purport to provide rights to the Remarketing Dealer against any holder of this Security, such rights (including rights to purchase this Security on any Remarketing Date) also shall be rights of the Company and shall be enforceable by the Company against such holder. Each holder of this Security shall hold this Security (and by holding the same shall be deemed to have agreed to do so) subject to the foregoing. Without limiting the foregoing, the Remarketing Dealer may take any action under this Security that the provisions of this Security contemplate may be taken by the Remarketing Dealer. Pursuant to the Remarketing Agreement, the Remarketing Dealer has agreed with the Company and the Co-Obligor, for the benefit of the applicable holders of this Security from time to time, that, if it so elects on any Remarketing Date, it (or any other securities dealer participating in the remarketing) will purchase this Security from the registered holder hereof on such Remarketing Date, upon the terms and subject to the conditions set forth herein. Except as may be expressly provided in such agreement, no holder of this Security shall have any right, remedy or claim against the Remarketing -12- Dealer (or any other securities dealer or dealers participating in the remarketing) under this Security, the Indenture or the Remarketing Agreement. No provision of this Security shall be invalid or unenforceable by reason of any reference herein to the Remarketing Dealer. In addition, no provision of this Section shall be construed to impair or otherwise affect any rights that the Remarketing Dealer (or any other securities dealer participating in a remarketing) may have at any time as a holder of any Securities. 13. Governing Law. The Indenture and the Securities are governed by, and will be construed in accordance with, the laws of the State of New York, without regard to the conflicts of laws principles therein to the extent that such principles would permit or require the application of the laws of any other jurisdiction." Section 2.03 Form of Co-obligation. The Indenture is hereby amended by inserting the following new Section 206: "SECTION 206. Form of Co-obligation CO-OBLIGATION OF H. J. HEINZ FINANCE COMPANY For value received, H. J. HEINZ FINANCE COMPANY, a corporation duly organized under the laws of the State of Delaware (the "Co-Obligor"), to and for the benefit of the Holder of the Security upon which this Co-Obligation is endorsed, being one of the 6.82% Dealer Remarketable Securities due November 15, 2020 issued in aggregate principal amount of dollars ($ ) (the "Securities") of H. J. Heinz Company (the "Company"), hereby fully, unconditionally and irrevocably assumes and agrees to perform and discharge, jointly and severally with the Company, the due and punctual payment of the principal (including the Redemption Price, if applicable) of and interest (and additional amounts, if any, pursuant to Section 1008 of the Indenture) on this Security, when and as the same shall become due and payable whether at maturity or upon redemption or upon declaration of acceleration or otherwise according to the terms of this Security and of the Indenture. The obligations of the Co-Obligor as a co-obligor hereunder are primary and not merely those of a surety. The Co-Obligor hereby waives diligence, presentment, demand of payment, any right to require a proceeding first against the Company, protest or notice and all demands whatsoever with respect to this Security or the indebtedness evidenced hereby, and covenants that the co-obligations listed herein will not be discharged as to the Indenture or this Security except by payment in full of the principal and interest thereon, additional amounts, Redemption Price and other sums that may be payable under the Indenture or this Security. The Co-Obligor agrees to be bound by, and observe and perform, the terms of Article 8 and Article 10 (other than Sections 1004, 1005 and 1007) of the Indenture as if all references therein to the "Company" were to the Co-Obligor. -13- IN WITNESS WHEREOF, the Co-Obligor has caused this Co-Obligation to be signed by its duly authorized officer and has caused its corporate seal to be affixed hereunto. H. J. HEINZ FINANCE COMPANY By:______________________ Title: Attest: - ---------------------- Assistant Secretary" [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -14- Section 2.04 Form of Schedule Indicating Redemptions. The Indenture is hereby amended by inserting the following new Section 207: "SECTION 207. Form of Schedule Indicating Redemptions. As the Trustee may be directed by a Company Order, the Trustee shall indicate cancellations (as required in Section 309 of the Indenture) resulting from redemptions of the Securities by the Company or the Co-Obligor in a schedule in substantially the following form: SCHEDULE A REDEMPTIONS Principal Amount of Remaining Principal Amount of This Global Security This Global Security Following Date Redeemed and Cancelled Redemption and Cancellation* ---- ---------------------- ---------------------------- - ---------------- *Also see most recent entry in Schedule B in order to determine this amount." -15- Section 2.05 Form of Schedule Indicating Repurchases and Cancellations. The Indenture is hereby amended by inserting the following new Section 208: "SECTION 208. Form of Schedule Indicating Repurchases and Cancellations. As the Trustee may be directed by a Company Order, the Trustee shall indicate cancellations (as required in Section 309 of the Indenture) resulting from purchases of the Securities by the Company or the Co-Obligor in a schedule in substantially the following form: SCHEDULE B PURCHASES AND CANCELLATIONS Principal Amount of this Remaining Principal Amount Global Security of this Global Security Following Date Purchased and Cancelled Purchase and Cancellation* ---- ----------------------- -------------------------- - -------------------- *Also see most recent entry in Schedule A in order to determine this amount." -16- ARTICLE III MISCELLANEOUS Section 3.01 Other Terms of the Indenture. Except as insofar as herein otherwise provided, all the provisions, terms and conditions of the Indenture are in all respects ratified and confirmed and shall remain in full force and effect. Section 3.02 Effectiveness. This Second Supplemental Indenture shall be effective as of the date hereof. Section 3.03 Governing Law. This Second Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflicts of laws provisions thereof to the extent that such rules would require or permit the application of the laws of any other jurisdiction. Section 3.04 Counterparts. This Second Supplemental Indenture may be executed in several counterparts, each of which shall be regarded as an original and all of which shall constitute one and the same instrument. Section 3.05 Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. Section 3.06 Trustee Not Responsible for Recitals. The recitals contained herein shall be taken as the statements of the Company and the Co-Obligor, and neither the Trustee nor any Authenticating Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Second Supplemental Indenture. -17- IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed as of the date first written above. H. J. HEINZ COMPANY By: /s/ Leonard A. Cullo, Jr -------------------------------- Name: Leonard A. Cullo, Jr. Title: Treasurer H. J. HEINZ FINANCE COMPANY By: /s/ Leonard A. Cullo, Jr. -------------------------------- Name: Leonard A. Cullo, Jr Title: President BANK ONE, NATIONAL ASSOCIATION, as Trustee By: /s/ Jeffery L. Eubank -------------------------------- Name: Jeffery L. Eubank Title: Authorized Officer -18- EX-12 4 j9703501exv12.txt RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12 H. J. HEINZ COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Six Months Ended Fiscal Years Ended ------------- -------------------------------------------------------------- May 1, May 2, May 3, April 28, April 29, October 30, 2002 2001 2000 1999 1998 2002 (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) ------------- ---------- ---------- ---------- ---------- ---------- Fixed Charges: Interest expense*.......................... $143,497 $ 297,315 $ 335,531 $ 271,597 $ 260,743 $ 260,401 Capitalized interest....................... -- 48 8,396 -- -- 1,542 Interest component of rental expense....... 16,140 32,315 28,096 32,274 29,926 30,828 -------- ---------- ---------- ---------- ---------- ---------- Total fixed charges...................... $159,637 $ 329,678 $ 372,023 $ 303,871 $ 290,669 $ 292,771 -------- ---------- ---------- ---------- ---------- ---------- Earnings: Income before income taxes................. $594,965 $1,278,590 $ 673,058 $1,463,676 $ 835,131 $1,254,981 Add: Interest expense*..................... 143,497 297,315 335,531 271,597 260,743 260,401 Add: Interest component of rental expense.................................. 16,140 32,315 28,096 32,274 29,926 30,828 Add: Amortization of capitalized interest................................. 879 1,862 2,129 2,799 3,050 3,525 -------- ---------- ---------- ---------- ---------- ---------- Earnings as adjusted..................... $755,481 $1,610,082 $1,038,814 $1,770,346 $1,128,850 $1,549,735 -------- ---------- ---------- ---------- ---------- ---------- Ratio of earnings to fixed charges......... 4.73 4.88 2.79 5.83 3.88 5.29 ======== ========== ========== ========== ========== ==========
- --------------- * Interest expense includes amortization of debt expense and any discount or premium relating to indebtedness. EX-99.A 5 j9703501exv99wa.txt CERTIFICATION OF CEO EXHIBIT 99(A) I, William R. Johnson, Chairman, President and Chief Executive Officer of H.J. Heinz Company certify that: 1. I have reviewed this quarterly report on Form 10-Q of H.J. Heinz Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons fulfilling the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 12, 2002 By: /s/ WILLIAM R. JOHNSON ------------------------------------ Name: William R. Johnson Title: Chairman, President and Chief Executive Officer EX-99.B 6 j9703501exv99wb.txt CERTIFICATION OF CFO EXHIBIT 99(B) I, Arthur Winkleblack, Executive Vice President and Chief Financial Officer of H.J. Heinz Company certify that: 1. I have reviewed this quarterly report on Form 10-Q of H.J. Heinz Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons fulfilling the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 12, 2002 By: /s/ ARTHUR WINKLEBLACK ------------------------------------ Name: Arthur Winkleblack Title: Executive Vice President and Chief Financial Officer EX-99.C 7 j9703501exv99wc.txt CONDENSED CONSOLIDATED F/S OF HFC EXHIBIT 99(c) H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED OCTOBER 30, 2002 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Second Quarter Ended ------------------------------------ October 30, 2002 October 31, 2001* FY 2003 FY 2002 ---------------- ----------------- (Unaudited) (in thousands) Sales...................................................... $1,276,609 $1,125,059 Cost of products sold...................................... 843,241 728,363 ---------- ---------- Gross profit............................................... 433,368 396,696 Selling, general and administrative expenses............... 211,079 170,390 Royalty expense to related parties......................... 53,750 48,240 ---------- ---------- Operating income........................................... 168,539 178,066 Interest income............................................ 7,550 10,397 Interest expense........................................... 52,189 54,082 Dividends from related parties............................. 30,798 30,605 Currency loss.............................................. 1,512 3,769 Other expenses, net........................................ 5,707 5,665 ---------- ---------- Income before income taxes and minority interest........... 147,479 155,552 Provision for income taxes................................. 10,968 9,373 ---------- ---------- Income before minority interest............................ 136,511 146,179 Minority interest.......................................... (117,315) (130,219) ---------- ---------- Net income................................................. $ 19,196 $ 15,960 ========== ==========
- --------------- * Reclassified, see Note 7 See notes to condensed consolidated financial statements. 1 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended ------------------------------------ October 30, 2002 October 31, 2001* FY 2003 FY 2002 ---------------- ----------------- (Unaudited) (in thousands) Sales...................................................... $2,314,983 $1,617,320 Cost of products sold...................................... 1,530,884 1,048,683 ---------- ---------- Gross profit............................................... 784,099 568,637 Selling, general and administrative expenses............... 401,753 239,990 Royalty expense to related parties......................... 98,686 71,338 ---------- ---------- Operating income........................................... 283,660 257,309 Interest income............................................ 14,142 22,160 Interest expense........................................... 102,731 106,255 Dividends from related parties............................. 61,596 69,124 Currency loss.............................................. 23,617 1,338 Other expenses, net........................................ 8,715 7,894 ---------- ---------- Income before income taxes and minority interest........... 224,335 233,106 Provision for income taxes................................. 13,357 18,715 ---------- ---------- Income before minority interest............................ 210,978 214,391 Minority interest.......................................... (187,528) (182,524) ---------- ---------- Net income................................................. $ 23,450 $ 31,867 ========== ==========
- --------------- * Reclassified, see Note 7 See notes to condensed consolidated financial statements. 2 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
October 30, 2002 May 1, 2002* FY 2003 FY 2002 ---------------- ------------ (Unaudited) (in thousands) ASSETS Current assets: Cash and cash equivalents................................. $ 57,448 $ 6,924 Receivables, net.......................................... 579,851 732,714 Due from related parties.................................. 44,076 72,762 Short-term notes receivable from related parties.......... 1,614,781 921,014 Inventories............................................... 746,051 710,267 Prepaid expenses and other current assets................. 152,154 61,439 ---------- ---------- Total current assets................................... 3,194,361 2,505,120 Property, plant and equipment............................... 1,498,557 1,516,365 Less accumulated depreciation............................... 692,112 661,429 ---------- ---------- Total property, plant and equipment, net............... 806,445 854,936 Long-term notes receivable from related parties............. 35,000 35,000 Investments in related parties.............................. 1,895,245 1,895,245 Intangible assets, net...................................... 1,928,759 1,926,590 Other noncurrent assets..................................... 445,905 267,558 ---------- ---------- Total other noncurrent assets.......................... 4,304,909 4,124,393 ---------- ---------- Total assets........................................... $8,305,715 $7,484,449 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt with related parties...................... $ 600,329 $ 132,164 Portion of long-term debt due within one year............. 451,465 451,375 Accounts payable.......................................... 315,830 256,372 Accounts payable to related parties....................... 126,151 153,968 Accrued interest.......................................... 126,850 79,442 Accrued marketing......................................... 89,615 46,603 Other accrued liabilities................................. 78,440 99,607 ---------- ---------- Total current liabilities.............................. 1,788,680 1,219,531 Long-term debt.............................................. 4,054,897 3,936,025 Deferred income taxes....................................... 26,821 23,059 Other liabilities........................................... 28,626 36,431 ---------- ---------- Total long-term debt and other liabilities............. 4,110,344 3,995,515 Minority interest........................................... 1,879,493 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......................................... 71,369 58,035 Accumulated other comprehensive gain/(loss)............... 2,768 (169) ---------- ---------- Total shareholders' equity............................. 202,198 185,927 ---------- ---------- Total liabilities and shareholders' equity............. $8,305,715 $7,484,449 ========== ==========
- --------------- * Summarized from audited Fiscal Year 2002 balance sheet See notes to condensed consolidated financial statements. 3 H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended ------------------------------------ October 30, 2002 October 31, 2001 FY 2003 FY 2002 ---------------- ---------------- (Unaudited) (in thousands) Cash provided by (used for) Operating Activities.......... $ 479,298 $(133,128) --------- --------- Cash Flows from Investing Activities: Capital expenditures.................................... (31,955) (36,956) Proceeds from disposals of property, plant and equipment............................................ 5,153 9,316 Acquisitions, net of cash acquired...................... -- (781,300) Other items, net........................................ 3,356 (21,406) --------- --------- Cash used for investing activities................... (23,446) (830,346) --------- --------- Cash Flows from Financing Activities: Payments on long-term debt.............................. (1,673) (9,179) Proceeds from long-term debt............................ -- 751,059 Payments on commercial paper and short-term borrowings, net.................................................. (330,556) (95,833) Distributions to Class A partners....................... (64,844) -- Dividends on preferred shares........................... (10,116) (5,564) Proceeds from mandatorily redeemable Series A preferred shares............................................... -- 325,000 Other items, net........................................ 1,861 500 --------- --------- Cash (used for) provided by financing activities..... (405,328) 965,983 --------- --------- Net increase in cash and cash equivalents................. 50,524 2,509 Cash and cash equivalents, beginning of period............ 6,924 10,127 --------- --------- Cash and cash equivalents, end of period.................. $ 57,448 $ 12,636 ========= =========
See notes to condensed consolidated financial statements. 4 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 October 30, 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 in Spinco becoming a wholly-owned subsidiary of Del Monte ("the Merger"). In connection 5 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 stockholders. As a result of the transaction, Heinz Finance will receive approximately $1.1 billion in cash that will be used to retire debt. Included in the transaction will be the following brands: StarKist(R), 9-Lives(R), Kibbles 'n Bits(R), Pup-Peroni(R), Snausages(R), Nawsomes(R), Heinz Nature's Goodness(R) baby food and College Inn(R) broths. The following is a summary of the Fiscal 2003 and Fiscal 2002 second quarter and first half operating results of the businesses to be spun off (See Exhibit 99(d) for a discussion of results of operations and the Combined Financial Statements of SKF Foods (Spinco) for the three and six months ended October 30, 2002 and October 31, 2001):
Second Quarter Ended Six Months Ended ------------------------- ------------------------- October 30, October 31, October 30, October 31, 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Revenues............................ $454,796 $386,796 $803,891 $477,751 Operating income.................... 47,329 45,230 70,988 62,446
The Merger, which has been approved by the Boards of Directors of Heinz and Del Monte, is subject to the approval by the stockholders of Del Monte and it's expected that the transaction could close as early as December 20, 2002. Heinz received on November 21, 2002, a private letter ruling from the Internal Revenue Service that the contribution of the assets and liabilities to Spinco and the distribution of the shares of common stock of Spinco to Heinz shareholders will be tax-free to Heinz, Spinco and the shareholders of Heinz. The Merger is also subject to other customary closing conditions. During the three and six months ended October 30, 2002, Heinz Finance recognized transaction related costs totaling $1.9 million pretax. (4) INVENTORIES The composition of inventories at the balance sheet dates was as follows:
October 30, May 1, 2002 2002 (in thousands) ----------- -------- Finished goods and work-in-process........................ $575,757 $567,482 Packaging material and ingredients........................ 170,294 142,785 -------- -------- $746,051 $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 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). 6 The major components of the restructuring charge and implementation costs and the remaining accrual balances as of October 30, 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--October 30, 2002..................................... $ -- $ 0.1 $ 3.3 $ -- $ 3.4 ===== ===== ===== ===== =====
During the first six months 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 $96.0 million and $160.5 million in the quarter and six months ended October 31, 2001, respectively. 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. This Standard also requires, at a minimum, an annual assessment of the carrying value of goodwill and intangibles with indefinite useful lives. The reassessment of intangible assets, including the ongoing impact of amortization, and the assignment of goodwill to reporting units was completed during the first quarter of Fiscal 2003. Heinz Finance completed its transitional goodwill impairment tests during the second quarter of Fiscal 2003. The SFAS No. 142 goodwill impairment model is a two-step process. The first step compares the fair value of a reporting unit (one level below Heinz Finance's operating segments) that has goodwill assigned to it, to its carrying value. Heinz Finance estimates the fair value of a reporting unit using discounted cash flows, using a risk-adjusted weighted average cost of capital for the business as the discount rate. If the fair value of the reporting unit is determined to be less than its carrying value, a second step is performed to compute the amount of goodwill impairment, if any. Step two allocates the fair value of the reporting unit to the reporting unit's net assets other than goodwill. The excess of the fair value of the reporting unit over the amounts assigned to its net assets other than goodwill is considered 7 the implied fair value of the reporting unit's goodwill. The implied fair value of the reporting unit's goodwill is then compared to the carrying value of its goodwill. Any shortfall represents the amount of the goodwill impairment. No impairment issues were identified as a result of completing these transitional impairment tests. The effects of adopting the new standards on net income are as follows:
Net Income ----------------------------------------------------- Second Quarter Six Months Ended Ended ------------------------- ------------------------- October 30, October 31, October 30, October 31, 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net income.......................... $ 19,196 $15,960 $ 23,450 $31,867 Add: Goodwill amortization, net of tax and minority interest......... -- 273 -- 541 -------- ------- -------- ------- Net income excluding goodwill amortization...................... $ 19,196 $16,233 $ 23,450 $32,408 ======== ======= ======== =======
Net income for the quarter and six months ended October 31, 2001 would have been $16,233 and $32,408, respectively, and net income for Fiscal 2002 would have been $75,079 had the provisions of the new standards been applied as of May 3, 2001. Changes in the carrying amount of goodwill for the six months ended October 30, 2002 by reportable segment are as follows:
Heinz North U.S. America SKF Foods Frozen Total -------- ----------- -------- ---------- Balance at May 1, 2002.............. $530,722 $649,385 $470,381 $1,650,488 Purchase accounting reclassifications................. 1,580 -- 5,287 6,867 Other............................... -- 4,740 -- 4,740 -------- -------- -------- ---------- Balance at October 30, 2002......... $532,302 $654,125 $475,668 $1,662,095 ======== ======== ======== ==========
Trademarks and other intangible assets at October 30, 2002 and May 1, 2002, subject to amortization expense, are as follows:
October 30, 2002 May 1, 2002 ---------------------------------- ---------------------------------- Accumulated Accumulated Gross Amortization Net Gross Amortization Net -------- ------------ -------- -------- ------------ -------- Trademarks........... $ 39,103 $ (1,420) $ 37,683 $ 39,103 $ (835) $ 38,268 Licenses............. 208,186 (109,674) 98,512 208,186 (106,730) 101,456 Other................ 87,257 (47,888) 39,369 91,138 (45,860) 45,278 -------- --------- -------- -------- --------- -------- $334,546 $(158,982) $175,564 $338,427 $(153,425) $185,002 ======== ========= ======== ======== ========= ========
Amortization expense for trademarks and other intangible assets subject to amortization was $3.3 million and $5.8 million for the quarter and six months ended October 30, 2002, respectively. Based upon the amortizable intangible assets recorded on the balance sheet at October 30, 2002, amortization expense for each of the next five years is estimated to be approximately $12.0 million. Intangible assets not subject to amortization at October 30, 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 8 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 quarter and six months ended October 30, 2002. (8) RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143, addresses accounting for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. This standard is effective for Heinz Finance in Fiscal 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. (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 $81.3 million and $82.9 million for the quarter ended October 30, 2002 and October 31, 2001, respectively, and $168.2 million and $164.8 million for the six months ended October 30, 2002 and October 31, 2001, respectively. These costs are recorded as cost of products sold and selling, general and administrative ("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 $18.0 million and $17.3 million for the quarter ended October 30, 2002 and October 31, 2001, respectively, and $36.2 million and $32.7 million for the six months ended October 30, 2002 and October 31, 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 Fiscal 2003, Heinz Finance entered into a number of short-term notes payable with foreign wholly-owned subsidiaries of Heinz, for a total of $510.8 million. These two events resulted in the $1,014.5 million and $788.9 million of net short-term notes receivable with related parties on the October 30, 9 2002 and May 1, 2002, respectively, condensed consolidated balance sheets. An average interest rate of 1.93% and 3.72% was charged on these notes resulting in $4.8 million and $9.6 million of interest income for the quarter ended October 30, 2002 and October 31, 2001, respectively, and $8.7 million and $20.6 million of interest income for the six months ended October 30, 2002 and October 31, 2001, respectively, on the 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 $44.1 million and $72.8 million balances due from related parties as of October 30, 2002 and May 1, 2002, respectively, and the $126.2 million and $154.0 million balances for accounts payable to related parties as of October 30, 2002 and May 1, 2002, respectively. Product sales to related parties were $13.7 million and $11.9 million for the quarter ended October 30, 2002 and October 31, 2001, respectively, and $26.2 million and $24.2 million in the six months ended October 30, 2002 and October 31, 2001, respectively, and purchases from related parties were $96.4 million and $94.3 million for the quarter ended October 30, 2002 and October 31, 2001, respectively, and $216.5 million and $165.1 million in the six months ended October 30, 2002 and October 31, 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 $30.6 million for the quarter ended October 30, 2002 and October 31, 2001, respectively and $61.6 million and $69.1 million for the six months ended October 30, 2002, and October 31, 2001, respectively. This preferred stock investment is recorded in the Investments in related parties balance on the condensed consolidated balance sheets as of October 30, 2002 and May 1, 2002. Heinz Finance paid royalties of $53.8 million and $46.5 million for the quarter ended October 30, 2002 and October 31, 2001, respectively, and $98.7 million and $69.6 million for the six months ended October 30, 2002 and October 31, 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 October 30, 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 $0.8 million for the quarter ended October 31, 2001 and $10.4 million for the six months ended October 31, 2001, which is recorded as income in SG&A expense in the accompanying consolidated statement of income. (10) SEGMENTS Heinz Finance has changed its segment reporting for its business to reflect changes in organizational structure and management. Heinz Finance is reporting and grouping the results of certain businesses under a new segment designated SKF Foods. SKF Foods consists of Heinz Finance's U.S. pet food and pet snacks, U.S. tuna, U.S. retail private label soup and 10 private label gravy, College Inn broth and U.S. infant feeding businesses. SKF Foods also includes the former U.S. Pet Products and Seafood segment. These businesses have been separated from the remaining Heinz Finance businesses in preparation for their spin-off and subsequent merger with Del Monte Corporation, a subsidiary of Del Monte Foods Company. The remaining Heinz North America segment now includes the following businesses that will be retained by Heinz Finance following the Del Monte transaction, including: ketchup, condiments, sauces, and pasta meals sold to the grocery and foodservice channels in the U.S. Descriptions of Heinz Finance's reportable segments are as follows: - Heinz North America -- This segment manufactures, markets and sells ketchup, condiments, sauces and pasta meals to the U.S. grocery and foodservice channels. - SKF Foods -- This segment includes the U.S. pet food and pet snacks, U.S. tuna, U.S. retail private label soup and private label gravy, College Inn broth and U.S. infant feeding businesses. - 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. The following table presents information about Heinz Finance's reportable segments:
Net External Sales ------------------------------------------------------------------------- Second Quarter Ended Six Months Ended ----------------------------------- ----------------------------------- October 30, 2002 October 31, 2001 October 30, 2002 October 31, 2001 (in thousands) FY 2003 FY 2002 FY 2003 FY 2002 - -------------- ---------------- ---------------- ---------------- ---------------- Heinz North America........ $ 503,489 $ 452,245 $ 945,057 $ 741,029 SKF Foods.................. 454,796 386,796 803,891 477,751 U.S. Frozen................ 318,324 286,018 566,035 398,540 ---------- ---------- ---------- ---------- Consolidated totals...... $1,276,609 $1,125,059 $2,314,983 $1,617,320 ========== ========== ========== ==========
Intersegment Sales ------------------------------------------------------------------------- Second Quarter Ended Six Months Ended ----------------------------------- ----------------------------------- October 30, 2002 October 31, 2001 October 30, 2002 October 31, 2001 (in thousands) FY 2003 FY 2002 FY 2003 FY 2002 - -------------- ---------------- ---------------- ---------------- ---------------- Heinz North America........ $81 $143 $ 99 $233 SKF Foods.................. -- -- -- -- U.S. Frozen................ 8 -- 17 17 --- ---- ---- ---- Consolidated totals...... $89 $143 $116 $250 === ==== ==== ====
11
Operating Income (Loss) ------------------------------------------------------------------------- Second Quarter Ended Six Months Ended ----------------------------------- ----------------------------------- October 30, 2002 October 31, 2001 October 30, 2002 October 31, 2001 (in thousands) FY 2003 FY 2002 FY 2003 FY 2002 - -------------- ---------------- ---------------- ---------------- ---------------- Heinz North America........ $ 71,904 $ 89,472 $124,688 $131,013 SKF Foods.................. 47,329 45,230 70,988 62,446 U.S. Frozen................ 50,083 42,106 89,228 63,496 Non-Operating(a)........... (777) 1,258 (1,244) 354 -------- -------- -------- -------- Consolidated totals...... $168,539 $178,066 $283,660 $257,309 ======== ======== ======== ========
-------------------- (a) Includes charges not directly attributable to operating segments. (11) COMPREHENSIVE INCOME
Second Quarter Ended Six Months Ended ----------------------------------- ----------------------------------- October 30, 2002 October 31, 2001 October 30, 2002 October 31, 2001 (in thousands) FY 2003 FY 2002 FY 2003 FY 2002 - -------------- ---------------- ---------------- ---------------- ---------------- Net income................. $ 19,196 $15,960 $ 23,450 $31,867 Other comprehensive income: Net deferred gains/(losses) on derivatives from periodic revaluations........... 2,038 (657) 17,811 986 Net deferred (gains)/losses on derivatives reclassified to earnings............... (1,668) (114) (14,874) 24 -------- ------- -------- ------- Comprehensive income....... $ 19,566 $15,189 $ 26,387 $32,877 ======== ======= ======== =======
(12) FINANCIAL INSTRUMENTS Heinz Finance utilizes certain financial instruments to manage its 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, swaps and options in order to reduce price risk associated with anticipated purchases of raw materials such as corn, soybean oil and soybean meal. Commodity price risk arises due to factors such as weather conditions, government regulations, economic climate and other unforeseen circumstances. Hedges of anticipated commodity purchases which meet the criteria for hedge accounting are designated as cash flow hedges. INTEREST RATE HEDGING: Heinz Finance uses interest rate swaps to manage interest rate exposure. These derivatives are designated as cash flow hedges or fair value hedges depending on the nature of the particular risk being hedged. HEDGE INEFFECTIVENESS: During the six months ended October 30, 2002, hedge ineffectiveness related to cash flow hedges was a net gain of $0.1 million which is reported in the consolidated statements of income as other expenses, net. DEFERRED HEDGING GAINS AND LOSSES: As of October 30, 2002, Heinz Finance is hedging forecasted transactions for periods not exceeding 12 months, and expects $2.8 million of net deferred gain reported in accumulated other comprehensive income to be reclassified to earnings within that time frame. 12 EX-99.D 8 j9703501exv99wd.txt CONDENSED COMBINED FINANCIAL STATEMENTS EXHIBIT 99(d) SKF FOODS DISCUSSION OF RESULTS OF OPERATIONS AND COMBINED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED OCTOBER 30, 2002 AND OCTOBER 31, 2001 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SKF FOODS OVERVIEW SKF Foods ("The Heinz Businesses") manufacture, market and distribute branded and private-label shelf-stable grocery products. The Heinz Businesses' product portfolio includes leading brands in the tuna, pet food, infant feeding and broth categories. The Heinz Businesses also produce private label soup. In the United States, the Heinz Businesses include the largest producer of tuna and private label soup, the second largest producer of pet snacks and infant feeding products and a leading producer of pet food. The Heinz Businesses have not historically been managed as a single stand-alone unit but as part of the operations of Heinz in North America. The preparation of the combined financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations of the Heinz Businesses include the use of "carve out" and "push down" accounting procedures wherein certain assets, liabilities and expenses historically recorded or incurred at the Heinz parent company level or by an affiliate of Heinz, which related to or were incurred on behalf of the Heinz Businesses, have been identified and allocated or pushed down, as appropriate, to the financial results of the Heinz Businesses for the periods presented. Allocations were made primarily on a percentage of revenue basis, which management of the Heinz Businesses believes represents a reasonable allocation. No debt or interest expense has been allocated to the Heinz Businesses from Heinz. These combined financial statements are not indicative of the results of operations that would have existed or will exist in the future assuming the Heinz Businesses were operated as an independent company or as a subsidiary of Del Monte. The Heinz Businesses include the following three segments for financial reporting purposes: - Tuna -- This segment manufactures, markets and sells tuna. - Pet Products -- This segment manufactures, markets and sells dry and canned pet food and pet snacks. - Soup and Infant Feeding-- This segment manufactures, markets and sells soups, broth and infant feeding products. The percentage of sales by segment have been relatively stable over the last three years. Pet products sales have been approximately 53% of sales, tuna has been approximately 31% of sales and soup and infant feeding have been approximately 16% of sales. Sales declined 10.4% in fiscal 2001 primarily as a result of decreases in the pet products and tuna segments, but stabilized in fiscal 2002 as decreases in the pet products segment were partially offset by gains in the tuna segment. RESULTS OF OPERATIONS During the fourth quarter of fiscal 2002, the Heinz Businesses adopted EITF 00-14 and EITF 00-25 (codified EITF 01-9), relating to the classification of certain costs related to coupon redemption and performance allowances previously recorded as selling, general and administrative expense. The adoption of these EITF consensuses had no impact on operating income or net earnings; however, revenues and gross profit were reduced by approximately $30.0 million and $52.8 million in the three and six months ended October 30, 2001, respectively. Prior period data has been reclassified to conform to the current year presentation. 1 The following table sets forth certain segment detail for the Heinz Businesses:
Three Months Ended Six Months Ended ----------------------------------- ----------------------------------- October 30, 2002 October 31, 2001 October 30, 2002 October 31, 2001 ---------------- ---------------- ---------------- ---------------- (Dollars in millions) SALES: Tuna............................ $154.7 $146.9 $278.6 $273.7 Pet products.................... 227.5 239.0 414.4 458.7 Soup and infant feeding......... 89.5 93.2 143.0 148.4 ------ ------ ------ ------ Total........................ $471.7 $479.1 $836.0 $880.8 ====== ====== ====== ====== OPERATING INCOME: Tuna............................ $ 15.1 $ 8.0 $ 19.7 $ 27.7 Pet products.................... 46.0 36.6 79.9 71.8 Soup and infant feeding......... 18.6 26.4 29.8 36.0 Other*.......................... (3.0) (3.0) (5.2) (5.5) ------ ------ ------ ------ Total........................ $ 76.7 $ 68.1 $124.2 $130.0 ====== ====== ====== ====== OPERATING INCOME EXCLUDING SPECIAL ITEMS: Tuna............................ $ 15.1 $ 8.0 $ 19.7 $ 34.4 Pet products.................... 46.0 36.6 79.9 72.9 Soup and infant feeding......... 18.6 26.4 29.8 36.0 Other*.......................... (3.0) (3.0) (5.2) (5.5) ------ ------ ------ ------ Total........................ $ 76.7 $ 68.1 $124.2 $137.9 ====== ====== ====== ======
* "Other" represents general and administrative expenses not directly attributable to operating segments. (Note: Totals may not add due to rounding.) THREE MONTHS ENDED OCTOBER 30, 2002 VERSUS THREE MONTHS ENDED OCTOBER 31, 2001 Sales Sales for the three months ended October 30, 2002 decreased $7.4 million, or 1.5%, to $471.7 million from $479.1 million in the comparable prior year period. Sales for the quarter were negatively impacted by volume declines of $7.7 million, or 1.6%, primarily in the pet products segment offset by volume increases in the tuna segment. Gross Profit Gross profit for the second quarter of fiscal 2003 increased $3.6 million, or 2.4 %, to $153.4 million from $149.8 million in the prior year period and the gross profit margin increased to 32.5% from 31.3% in the prior year period. The gross profit increase was driven by reductions in cost of goods sold in the pet products and tuna segments, partially offset by cost increases in the soup and infant feeding segment compared to the prior year period. SG&A SG&A decreased $5.0 million, or 6.1%, for the three months ended October 30, 2002 to $76.7 million from $81.7 million in the prior year period and decreased as a percentage of sales to 16.3% from 17.1%. Total marketing support included in SG&A (including consumer promotions and media) increased $3.9 million, or 26.6%, to $18.5 million from $14.6 million in the prior year in 2 support of the StarKist Flavor Fresh Pouch and Kibbles 'n Bits. The increased marketing expense was offset by reductions in general and administrative expenses and selling and distribution expenses. Operating income Operating income increased $8.6 million, or 12.7%, for the second quarter of fiscal 2003, to $76.7 million from $68.1 million for the comparable prior year period. Increases in operating income of the tuna and pet products segments were driven by increases in gross profit, and decreases in selling, general and administrative costs, partially offset by a decrease in operating income of the soup and infant feeding segment which was due to a reduction in gross profit. Other items Other income increased $0.7 million to $0.3 million for the second quarter of fiscal 2003 from $0.4 million of expense for the comparable prior year period. The effective tax rate was 32.2% on profits of $77.2 million compared to 32.7% on profits of $68.4 million. Net income Net income increased $6.4 million to $52.4 million from $46.0 million in the comparable prior year period. The following segment discussion excludes special items. TUNA Sales of the tuna segment increased $7.8 million, or 5.3%, for the three months ended October 30, 2002, to $154.7 million from $146.9 million. While volume increases drove a sales increase of 8.8%, this was partially offset by lower sales prices and increases in promotional expenses in support of volume growth. These results reflect volume and share growth led by a shift toward pouch tuna. The tuna segment's gross profit increased $6.4 million, primarily due to decreased costs and higher volume partially offset by increased promotional expenses. Operating income increased $7.1 million, or 89.4%, during the second quarter of fiscal 2003, to $15.1 million from $8.0 million in the comparable prior year period, due primarily to the increase in gross profit. PET PRODUCTS Sales of the pet products segment decreased $11.5 million, or 4.8%, for the three months ended October 30, 2002, from $239.0 million to $227.5 million. Reduced volumes decreased sales 7.6%, primarily due to planned reductions in lower margin private label products, pet snacks and lower volume of non-core brands. The pet products segment's gross profit margin increased 4.6% to 40.6% from 36.0% in the comparable prior year period and gross profit increased $6.3 million, or 7.3%, from $85.9 million in fiscal 2002 to $92.2 million in fiscal 2003. These increases are primarily due to favorable pricing, the benefit of reduced amortization expense of goodwill and other intangible assets, lower production costs and favorable product mix. During this period, the pet products segment continued initiatives to eliminate lower margin pet food products, which improved product mix, and to increase cat food prices. Operating income increased $9.4 million, or 25.5%, from $36.6 million to $46.0 million, due primarily to the increase in gross profit. 3 SOUP AND INFANT FEEDING Sales of the soup and infant feeding segment decreased $3.7 million, or 3.9%, for the three months ended October 30, 2002, from $93.2 million to $89.5 million due to lower volumes and pricing declines in infant feeding. The soup and infant feeding segment's gross profit decreased $9.1 million, or 22.7%, primarily due to higher cost, lower pricing and lower volume. Operating income decreased $7.8 million, or 29.5%, due primarily to the decrease in gross profit. SIX MONTHS ENDED OCTOBER 30, 2002 VERSUS SIX MONTHS ENDED OCTOBER 31, 2001 Sales Sales for the six months ended October 30, 2002 decreased $44.8 million, or 5.1%, to $836.0 million from $880.8 million in the comparable prior year period. Sales were negatively impacted by volume declines of $37.8 million, or 4.3%. Volume declines in the pet products and soup and infant feeding segments were partially offset by volume increases in the tuna segment. Lower pricing of $6.9 million, or 0.8%, reflects pricing declines in the tuna and soup and infant feeding segments partially offset by price increases in the pet products segment. Special Items The Heinz Businesses recorded no special items in the first six months of fiscal 2003 and $7.9 million pretax of special items in the first six months of fiscal 2002. The following table provides a comparison of the Heinz Businesses' reported results and the results excluding special items for the first six months of fiscal 2002.
Gross Operating Net (Dollars in millions) Net sales Profit Income Income - --------------------- --------- ------ --------- ------ Reported Results....................................... $880.8 $278.8 $130.0 $86.8 Streamline implementation costs...................... -- 7.3 7.9 6.9 ------ ------ ------ ----- Results excluding special items........................ $880.8 $286.2 $137.9 $93.7 ====== ====== ====== =====
(Note: Totals may not add due to rounding.) Gross Profit Gross profit for the six months of fiscal 2003 decreased $11.2 million, or 4.0%, to $267.6 million from $278.8 million in the prior year period and the gross profit margin increased to 32.0% from 31.7% in the prior year period. Excluding the special items identified above, gross profit decreased $18.6 million, or 6.5%, to $267.6 million for the six months ended October 30, 2002 from $286.2 million for the six months ended October 31, 2001, and the gross profit margin decreased to 32.0% from 32.5%. The gross profit decline was driven by the pet food volume decline as well as lower tuna pricing and higher tuna and soup costs compared to the prior year period. SG&A SG&A decreased $5.5 million, or 3.7%, for the six months ended October 30, 2002 to $143.4 million from $148.9 million in the prior year period and increased as a percentage of sales to 17.2% from 16.9%. Excluding the special items identified above, SG&A decreased $4.9 million, or 3.3%, as compared to the prior year period. Total marketing support included in SG&A (including consumer promotions and media) increased $8.7 million, or 37.2%, to $32.2 million from $23.5 million in the prior year period in support of the StarKist Flavor Fresh Pouch and Kibbles 'n Bits. The increased marketing expense was offset by reductions in general and administrative expenses and selling and distribution expenses. 4 Operating income Operating income decreased $5.8 million, or 4.4%, for the six months of fiscal 2003, to $124.2 million from $130.0 million for the comparable prior year period. Excluding the special items identified above, operating income decreased $13.7 million, or 9.9%, to $124.2 million from $137.9 million and decreased as a percentage of sales to 14.9% from 15.7%. Decreases in operating income of the tuna and soup and infant feeding segment were driven by reductions in gross profit, partially offset by an increase in operating income of the pet products segment which was due to lower general and administrative costs and selling and distribution costs. Other items Other income increased $1.3 million to $1.8 million for the six months of fiscal 2003 from $0.5 million for the comparable prior year period. The effective tax rate was 32.3% on profits of $126.4 million compared to 33.9% on profits of $131.4 million. Net income Net income decreased $1.2 million to $85.6 million from $86.8 million in the comparable prior year period. Excluding the special items noted above, net income decreased $8.1 million, or 8.7 %, to $85.6 million from $93.7 million. The following segment discussion excludes special items. TUNA Sales of the tuna segment increased $4.9 million, or 1.8%, for the six months ended October 30, 2002, to $278.6 million from $273.7 million. While volume increases drove a sales increase of 8.6%, this was partially offset by increases in promotional expenses. The tuna segment's gross profit decreased $13.7 million, primarily due to higher trade promotional expenses. Operating income decreased $14.7 million, or 42.8%, during the six months of fiscal 2003, to $19.7 million from $34.4 million in the comparable prior year period, due primarily to the decrease in gross profit. PET PRODUCTS Sales of the pet products segment decreased $44.3 million, or 9.7%, for the six months ended October 30, 2002, from $458.7 million to $414.4 million. Reduced volumes across the category decreased sales 12.0%. Volume declines in the six months of fiscal 2003 are primarily due to significant promotional activity across all lines at the end of fiscal 2002, planned reductions in the sales of low margin private label products and accelerated purchases in advance of an announced 9-Lives canned cat food price increase at the end of fiscal 2002. Favorable pricing increased sales 2.3% primarily related to pet snacks and canned cat food. The pet products segment's gross profit margin increased 4.1% to 40.2% from 36.1% in the comparable prior year period and gross profit increased $0.8 million, or 0.5%, from $165.6 million to $166.4 million, primarily due to the benefit of reduced amortization expense of goodwill and other intangible assets, lower costs and favorable product mix. During this period, the pet products segment began initiatives to eliminate lower margin pet food products, which improved product mix, and to increase canned cat food prices. Operating income increased $7.0 million, or 9.6%, from $72.9 million to $79.9 million, due primarily to the decrease in selling and distribution and general and administrative costs. 5 SOUP AND INFANT FEEDING Sales of the soup and infant feeding segment decreased $5.4 million, or 3.6%, for the six months ended October 30, 2002, from $148.4 million to $143.0 million due to lower volumes in infant feeding. The soup and infant feeding segment's gross profit decreased $5.7 million, or 9.8 %, primarily due to higher costs and decreased volumes in infant feeding. Operating income decreased $6.2 million, or 17.2%, due primarily to the decrease in gross profit and higher general and administrative costs. LIQUIDITY AND FINANCIAL POSITION The financial statements have no debt or interest expense allocated to the Heinz Businesses from Heinz and, therefore, are not indicative of the results of operations that would have existed if the Heinz Businesses had been operated as an independent company or that will exist in the future if the Heinz Businesses are operated as a subsidiary of new Del Monte. Cash Flows from Operating Activities Cash provided for the six months ended October 30, 2002 was $153.8 million. Cash Flows used for Investing Activities Cash used for investing activities for the six months ended October 30, 2002 was $7.7 million. Capital expenditures totaled $14.3 million for the six months ended October 30, 2002. Proceeds from disposals of property, plant and equipment were $0.4 million for the six months ended October 30, 2002. Cash Flows used for Financing Activities Net parent settlements totaled $144.7 million for the six months ended October 30, 2002. Cash Requirements of Streamline and Operation Excel In fiscal 2003, management of the Heinz Businesses expects the remaining cash requirements of Streamline to be approximately $7.4 million, consisting primarily of severance and exit costs. The Heinz Businesses financed the cash requirements of these programs through operations and cash provided by Heinz. The cash requirements of these programs have not had and are not expected, by the management of the Heinz Businesses, to have a material adverse impact on liquidity or financial position of the Heinz Businesses. 6 SKF FOODS COMBINED STATEMENTS OF INCOME
Three Months Ended ----------------------------------- October 30, 2002 October 31, 2001 ---------------- ---------------- (Unaudited) (in thousands) Sales....................................................... $471,730 $479,076 Cost of products sold....................................... 318,322 329,269 -------- -------- Gross profit................................................ 153,408 149,807 Selling, general and administrative expenses................ 76,722 81,747 -------- -------- Operating income............................................ 76,686 68,060 Interest income............................................. 214 733 Other income/(expense)...................................... 338 (422) -------- -------- Income before income taxes.................................. 77,238 68,371 Provision for income taxes.................................. 24,849 22,357 -------- -------- Net income.................................................. $ 52,389 $ 46,014 ======== ========
The accompanying notes are an integral part of these financial statements. 7 SKF FOODS COMBINED STATEMENTS OF INCOME
Six Month Period Ended ----------------------------------- October 30, 2002 October 31, 2001 ---------------- ---------------- (Unaudited) (in thousands) Sales....................................................... $836,061 $880,830 Cost of products sold....................................... 568,420 601,992 -------- -------- Gross profit................................................ 267,641 278,838 Selling, general and administrative expenses................ 143,414 148,858 -------- -------- Operating income............................................ 124,227 129,980 Interest income............................................. 396 914 Other income/(expense)...................................... 1,822 484 -------- -------- Income before income taxes.................................. 126,445 131,378 Provision for income taxes.................................. 40,842 44,552 -------- -------- Net income.................................................. $ 85,603 $ 86,826 ======== ========
The accompanying notes are an integral part of these financial statements. 8 SKF FOODS CONDENSED COMBINED BALANCE SHEETS
October 30, 2002 May 1, 2002* ---------------- ------------ (Unaudited) (in thousands) ASSETS Current assets: Cash and cash equivalents................................. $ 1,142 $ 518 Receivables, net.......................................... 187,860 216,759 Inventories............................................... 315,148 330,632 Prepaid expenses and other current assets................. 45,753 25,762 Deferred income taxes..................................... 6,110 5,121 ---------- ---------- Total current assets................................... 556,013 578,792 Property, plant and equipment............................... 647,304 665,921 Less: accumulated depreciation.............................. (325,962) (328,871) ---------- ---------- Total property, plant and equipment, net............... 321,342 337,050 Other noncurrent assets: Other investments........................................... 3,225 3,537 Goodwill, net............................................... 621,794 622,126 Trademarks, net............................................. 256,931 259,249 Other intangible assets, net................................ 4,994 5,433 Other noncurrent assets..................................... 24,139 29,174 ---------- ---------- Total other noncurrent assets.......................... 911,083 919,519 ---------- ---------- Total assets........................................... $1,788,438 $1,835,361 ========== ========== LIABILITIES AND PARENT COMPANY'S INVESTMENT Current liabilities: Accounts payable.......................................... $ 61,533 $ 47,309 Accrued marketing......................................... 27,170 17,104 Accrued restructuring costs............................... 11,823 14,304 Other accrued liabilities................................. 27,588 28,227 ---------- ---------- Total current liabilities.............................. 128,114 106,944 Deferred income taxes....................................... 121,256 113,103 Deferred income............................................. 18,507 22,180 Other liabilities........................................... 393 492 ---------- ---------- Total liabilities...................................... 268,270 242,719 Parent company's investment................................. 1,520,168 1,592,642 ---------- ---------- Total liabilities and parent company's investment...... $1,788,438 $1,835,361 ========== ==========
- --------------- * Summarized from audited Fiscal Year 2002 balance sheet The accompanying notes are an integral part of these financial statements. 9 SKF FOODS COMBINED CASH FLOW STATEMENT
Six Month Period Ended ---------------- October 30, 2002 (Unaudited) (in thousands) Operating Activities Net income................................................ $ 85,603 Adjustments to reconcile net income to cash provided by operating activities: Depreciation.............................................. 16,477 Amortization.............................................. 1,813 Deferred tax provision.................................... 7,164 Other items, net.......................................... 1,649 Changes in current assets and liabilities, excluding the effects of acquisitions and divestitures: Receivables.......................................... 24,763 Inventories.......................................... 14,381 Prepaid expenses and other current assets............ (19,991) Accounts payable....................................... 14,224 Accrued liabilities.................................... 7,695 --------- Cash provided by operating activities............. 153,778 Investing Activities: Capital expenditures...................................... (14,330) Proceeds from disposals of property, plant and equipment.............................................. 361 Other items, net.......................................... 6,291 --------- Cash used for investing activities................... (7,678) Financing Activities: Net parent settlements.................................... (144,717) --------- Cash used for financing activities................... (144,717) Effect of exchange rate changes on cash and cash equivalents............................................... (759) Net increase in cash and cash equivalents................... 624 Cash and cash equivalents, beginning of period.............. 518 --------- Cash and cash equivalents, end of period.................... $ 1,142 =========
The accompanying notes are an integral part of these financial statements. 10 SKF FOODS NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying combined financial statements include the assets and liabilities and the related operations of SKF Foods (collectively referred to as the "Businesses"), which are included in the consolidated financial statements of the H.J. Heinz Company ("Heinz"). These financial statements have been prepared in anticipation of a transaction, announced on June 13, 2002, whereby Heinz would spin off the Businesses to Heinz shareholders creating a new, independent company. On June 13, 2002, Heinz announced that it will spin off the Businesses to Heinz shareholders creating a new, independent company. Immediately thereafter, the newly formed company will merge with a wholly-owned subsidiary of Del Monte Foods Company (Del Monte) resulting in the newly formed company becoming a wholly-owned subsidiary of Del Monte. As a result of this transaction, the Businesses will incur approximately $1.1 billion of debt. This transaction, which has been approved by the Board of Directors of Heinz and Del Monte, is subject to approval by the stockholders of Del Monte and it's expected that the transaction could close as early as December 20, 2002. Heinz received on November 21, 2002, a private letter ruling from the Internal Revenue Service that the spin-off transaction will be tax-free to Heinz, the Businesses and the shareholders of Heinz. The spin-off and merger are also subject to other customary closing conditions. The preparation of these 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 of Heinz or an affiliate of Heinz, which related to or were incurred on behalf of the Businesses, have been identified and allocated or pushed down as appropriate to reflect the financial results of the Businesses for the periods presented. No direct relationship existed among all of the operations which comprise the Businesses. Accordingly, Heinz's net investment in the Businesses (parent company's investment) is shown in lieu of stockholder's equity in the combined balance sheets. Allocations were made primarily based on a percentage of revenue, which management believes represents a reasonable allocation. See Note 6 for a further discussion regarding the allocation of costs. The Businesses have not historically been managed as a single stand-alone unit, but as part of the operations of Heinz in North America. As such, quarterly balance sheets and quarterly statements of cash flows were not historically prepared for the Businesses, and it would not be practicable to retroactively prepare such statements. As such, the Securities and Exchange Commission has agreed to accept a statement of cash flows for the six-month period ended October 30, 2002 only. Accordingly, comparative statements of cash flow have not been presented. No debt or interest expense has been allocated to the Businesses from Heinz. These statements may not be necessarily indicative of the results of operations that would have existed or will exist in the future assuming the Businesses were operated as a separate, independent company. The interim combined financial statements of the Businesses are unaudited. 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 Businesses. 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. 11 2. INVENTORIES The composition of inventories at the balance sheet dates were as follows:
October 30, May 1, 2002 2002 (in thousands) ----------- -------- Finished goods and work-in-process......................... $257,502 $271,166 Packaging material and ingredients......................... 57,646 59,466 -------- -------- $315,148 $330,632 ======== ========
3. RESTRUCTURING In the fourth quarter of fiscal 2001, Heinz announced a restructuring initiative named "Streamline" which includes the closure of the Businesses' tuna operations in Puerto Rico, the consolidation of the Businesses' North American canned pet food production to Bloomsburg, Pennsylvania (which results in ceasing canned pet food production at the Businesses' Terminal Island, California facility) and the divestiture of the Businesses' U.S. fleet of fishing boats and related equipment. The major components of the restructuring charge and implementation costs and the remaining accrual balances as of October 30, 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................ $ 107.1 $ 20.7 $ 48.8 $ 20.8 $ 197.4 Amounts utilized--Fiscal 2001....... (107.1) (2.6) (1.4) (20.8) (131.9) ------- ------ ------ ------ ------- Accrued restructuring costs--May 2, 2001.............................. -- 18.1 47.4 -- 65.5 Restructuring and Implementation costs--Fiscal 2002................ 5.4 (0.5) (7.3) 7.9 5.5 Amounts utilized--Fiscal 2002....... (5.4) (17.2) (29.6) (7.9) (60.1) ------- ------ ------ ------ ------- Accrued restructuring costs--May 1, 2002.............................. -- 0.4 10.5 -- 10.9 Amounts utilized--Fiscal 2003....... -- (0.2) (1.9) -- (2.1) ------- ------ ------ ------ ------- Accrued restructuring costs--October 30, 2002.......................... $ -- $ 0.2 $ 8.6 $ -- $ 8.8 ======= ====== ====== ====== =======
During the first six months of fiscal 2003, the Businesses utilized $2.1 million of severance and exit cost accruals related to its overhead reduction plan. 4. RECENTLY ADOPTED ACCOUNTING STANDARDS During the fourth quarter of fiscal 2002, the Businesses 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 $30.0 and $52.8 million in the three and six months ended October 30, 2001, respectively. Prior period data has been reclassified to conform to the current year presentation. The Businesses 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, the Businesses adopted SFAS 12 No. 142 "Goodwill and Other Intangible Assets." Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized. This standard also requires, at a minimum, an annual impairment assessment of the carrying value of goodwill and intangibles with indefinite useful lives. The reassessment of intangible assets, including the ongoing impact of amortization and the assignment of goodwill to reporting units was completed during the first quarter of fiscal 2003. The Businesses completed their transitional goodwill impairment tests during the second quarter of fiscal 2003. The SFAS No. 142 goodwill impairment model is a two-step process. The first step compares the fair value of a reporting unit (one level below the Businesses' operating segments) that has goodwill assigned to it, to its carrying value. The Businesses estimate the fair value of a reporting unit using discounted cash flows, using a risk-adjusted weighted average cost of capital for the business as the discount rate. If the fair value of the reporting unit is determined to be less than its carrying value, a second step is performed to compute the amount of goodwill impairment, if any. Step two allocates the fair value of the reporting unit to the reporting unit's net assets other than goodwill. The excess of the fair value of the reporting unit over the amounts assigned to its net assets other than goodwill is considered the implied fair value of the reporting unit's goodwill. The implied fair value of the reporting unit's goodwill is then compared to the carrying value of its goodwill. Any shortfall represents the amount of the goodwill impairment. No impairment issues were identified as a result of completing these transitional impairment tests. The effects of adopting the new standards on net income for the six-month periods ended October 30, 2002 and October 31, 2001 follow.
Second Quarter Ended Six Months Ended ------------------------- ------------------------- Net Income Net Income ------------------------- ------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net income.......................... $52,389 $46,014 $85,603 $86,826 Add: Goodwill amortization, net of tax............................... -- 2,633 -- 3,717 Trademark amortization, net of tax.. -- 763 -- 1,550 ------- ------- ------- ------- Net income excluding goodwill and trademark amortization............ $52,389 $49,410 $85,603 $92,093 ======= ======= ======= =======
Changes in the carrying amount of goodwill, all of which are in the pet products segment, from May 1, 2002 to October 30, 2002, were the result of $0.7 million of translation adjustments. Trademarks and other intangible assets at October 30, 2002 and May 1, 2002, subject to amortization expense, are as follows:
October 30, 2002 May 1, 2002 -------------------------------- -------------------------------- Accumulated Accumulated Gross amortization Net Gross amortization Net ------- ------------ ------- ------- ------------ ------- Trademarks........... $72,429 $18,085 $54,344 $73,481 $16,915 $56,566 Other................ 11,352 6,358 4,994 11,352 5,919 5,433 ------- ------- ------- ------- ------- ------- $83,781 $24,443 $59,338 $84,833 $22,834 $61,999 ======= ======= ======= ======= ======= =======
Amortization expense for trademarks and other intangible assets subject to amortization was $1.8 million for the six months ended October 30, 2002. Based upon the amortizable intangible assets recorded on the balance sheet at October 30, 2002, amortization expense for each of the next five years is estimated to be approximately $4.0 million. 13 Intangible assets not subject to amortization at October 30, 2002 and May 1, 2002, were $202.6 million for both years consisting of trademarks. Effective May 2, 2002, the Businesses 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 the Businesses' financial position, results of operations or cash flows for the six months ended October 30, 2002. 5. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses the 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 the Businesses in fiscal 2004. The Businesses do 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. 6. RELATED PARTY TRANSACTIONS Shared-Service Functions Costs charged to the Businesses by an affiliate of Heinz are provided through shared-service functions and include warehousing costs, variable and fixed selling expenses and general and administrative costs such as information systems support, human resources, finance and accounting. These costs, which are allocated based on revenue, are included in the accompanying combined statements of operations as a component of SG&A (selling, general and administrative expenses) in the amounts of $19.3 million and $14.3 million for the three months ended October 30, 2002 and October 31, 2001, respectively and $35.5 million and $43.6 million for the six months ended October 30, 2002 and October 31, 2001, respectively. Heinz Corporate Charges Certain of Heinz's general and administrative expenses, consisting of salaries of corporate officers and staff and other Heinz corporate overhead, are allocated to the Businesses. For the six months ended October 30, 2002 and October 31, 2001, total costs charged to the Businesses for these services were $5.2 million and $5.5 million, respectively, and for the three months ended October 30, 2002 and October 31, 2001, total costs charged to the Businesses for these services were $3.0 million in each quarter. These costs are included in SG&A in the accompanying combined statements of operations. Heinz also charges the Businesses for their share of group health insurance costs for eligible company employees based upon location-specific costs and actual loss experience incurred during a calendar year. In addition, various other insurance coverages are also provided to the Businesses through Heinz's corporate programs. Workers compensation, auto, property, product liability and other insurance coverages are charged directly to the Businesses based 14 on actual loss experience. Total costs charged to the Businesses for these services were $9.4 million and $9.6 million for the six months ended October 30, 2002 and October 31, 2001, respectively and $4.7 million and $4.0 million for the three months ended October 30, 2002 and October 31, 2001, respectively. Pension costs and post-retirement costs are also charged to the Businesses based upon eligible employees participating in the plans. Products Sales and Purchases The Businesses sell and purchase products to and from other Heinz affiliates. Sales to related parties were $2.1 million and $4.4 million for the six months ended October 30, 2002 and October 31, 2001, respectively, and sales to related parties were $1.2 million and $1.9 million for the three months ended October 30, 2002 and October 31, 2001, respectively. Purchases from related parties were $1.1 million and $1.1 million for the six months ended October 30, 2002 and October 31, 2001, respectively and purchases from related parties were $0.5 million and $0.4 million for the three months ended October 30, 2002 and October 31, 2001, respectively. 7. FINANCIAL INSTRUMENTS Commodity Price Hedging The Businesses use commodity futures and options in order to reduce the 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. Hedge Ineffectiveness During the first six months ended October 30, 2002, hedge ineffectiveness related to cash flow hedges was a net gain of $0.4 million, which is reported in the combined statement of operations as other income. Deferred Hedging Gains and Losses As of October 30, 2002, the Businesses are hedging forecasted transactions for periods not exceeding 12 months, and expects an immaterial amount of net deferred loss reported in parent company's investment to be reclassified to earnings within that time frame. 8. SEGMENT DATA Descriptions of Businesses' reportable segments are as follows: - Tuna -- This segment manufactures, markets and sells tuna. - Pet Products -- This segment manufactures, markets and sells dry and canned pet food and pet snacks. - Soup and Infant Feeding -- This segment manufactures, markets and sells soups, infant foods, and broth to the grocery channels. The Businesses' 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 combined statements of operations are not presented by segment, since they are excluded from the measure of segment profitability reviewed by the Businesses' management. 15 The following tables present information about the Businesses' reportable segments:
Three Months Ended Six Months Ended ----------------------------------------------------- ----------------------------------------------------- Net External Sales Intersegment Sales Net External Sales Intersegment Sales ------------------------- ------------------------- ------------------------- ------------------------- October 30, October 31, October 30, October 31, October 30, October 31, October 30, October 31, (in thousands) 2002 2001 2002 2001 2002 2001 2002 2001 - -------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Tuna................. $154,704 $146,898 $ -- $ -- $278,637 $273,724 $ -- $ -- Pet Products......... 227,495 238,983 6,085 6,624 414,390 458,718 11,251 13,234 Soup and Infant Feeding............. 89,531 93,195 -- -- 143,034 148,388 -- -- -------- -------- ------ ------ -------- -------- ------- ------- Combined totals..... $471,730 $479,076 $6,085 $6,624 $836,061 $880,830 $11,251 $13,234 ======== ======== ====== ====== ======== ======== ======= =======
Three Months Ended Six Months Ended ----------------------------------------------------- ----------------------------------------------------- Operating Income Operating Income Excluding Excluding Operating Income Special Items (a) Operating Income Special Items (a) ------------------------- ------------------------- ------------------------- ------------------------- October 30, October 31, October 30, October 31, October 30, October 31, October 30, October 31, (in thousands) 2002 2001 2002 2001 2002 2001 2002 2001 - -------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Tuna................. $15,117 $ 7,983 $15,117 $ 7,983 $ 19,690 $ 27,652 $ 19,690 $ 34,349 Pet Products......... 46,003 36,652 46,003 36,652 79,934 71,814 79,934 72,912 Soup and Infant Feeding............. 18,613 26,429 18,613 26,429 29,816 35,999 29,816 36,042 Non-Operating (b).... (3,047) (3,004) (3,047) (3,004) (5,213) (5,485) (5,213) (5,485) ------- ------- ------- ------- -------- -------- -------- -------- Combined totals..... $76,686 $68,060 $76,686 $68,060 $124,227 $129,980 $124,227 $137,818 ======= ======= ======= ======= ======== ======== ======== ========
- --------------- (a) Six months ended October 31, 2001 -- Excludes implementation costs of the Streamline initiative as follows: Tuna of $6.8 million and Pet Products of $1.1 million. (b) Non-operating represents general and administrative expenses not directly attributable to operating segments. 9. COMPREHENSIVE INCOME
Three Months Ended Six Months Ended ------------------ ----------------- October 31, 2002 October 31, 2002 FY 2003 FY 2003 (in thousands) ------- ------- Net income........................................ $52,389 $85,603 Deferred (gains)/losses on derivatives: Net amount reclassified to earnings............. 715 (796) ------- ------- Comprehensive income.............................. $53,104 $84,807 ======= =======
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