-----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, FapZdsv5Px1RE82OAF6SVeb4bq2TUahJOrZgzBRmOW9szSGh5SHqlxRE1KMOP/Mc DmULhgCw8HBKWM8QA0HgKg== 0000950132-99-000681.txt : 19990726 0000950132-99-000681.hdr.sgml : 19990726 ACCESSION NUMBER: 0000950132-99-000681 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990428 FILED AS OF DATE: 19990723 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-K SEC ACT: SEC FILE NUMBER: 001-03385 FILM NUMBER: 99669617 BUSINESS ADDRESS: STREET 1: 600 GRANT ST CITY: PITTSBURGH STATE: PA ZIP: 15219 BUSINESS PHONE: 4124565700 MAIL ADDRESS: STREET 2: P O BOX 57 CITY: PITTSBURGH STATE: PA ZIP: 15230 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended April 28, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------- --------- Commission File Number 1-3385 H. J. HEINZ COMPANY (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-0542520 (State of Incorporation) (I.R.S. Employer Identification No.) 600 Grant Street, Pittsburgh, 15219 Pennsylvania (Zip Code) (Address of principal executive offices) 412-456-5700 (Registrant's telephone number) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock, par value $.25 per share New York Stock Exchange; Pacific Stock Exchange Third Cumulative Preferred Stock, $1.70 First Series, par value $10 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of June 30, 1999 the aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant was approximately $17,234,599,601. The number of shares of the Registrant's Common Stock, par value $.25 per share, outstanding as of June 30, 1999, was 358,402,871 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Annual Report to Shareholders for the fiscal year ended April 28, 1999 are incorporated into Part I, Items 1 and 3; Part II, Items 5, 7, 7A and 8; and Part IV, Item 14. Portions of Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders are incorporated into Part III, Items 10, 11, 12 and 13. PART I Item 1. Business. H. J. Heinz Company was incorporated in Pennsylvania on July 27, 1900. In 1905, it succeeded to the business of a partnership operating under the same name which had developed from a food business founded in 1869 at Sharpsburg, Pennsylvania by Henry J. Heinz. H. J. Heinz Company and its consolidated subsidiaries (collectively, the "Company" or the "Registrant" unless the context indicates otherwise) manufacture and market an extensive line of processed food products throughout the world. The Company's products include ketchup and sauces/condiments, pet food, tuna and other seafood products, baby food, frozen potato products, soup (canned and frozen), lower-calorie products (frozen entrees, frozen desserts, frozen breakfasts and other products), beans, pasta, full calorie frozen dinners and entrees, chicken, vegetables and fruits (frozen and canned), coated products, meats, edible oils, pickles, vinegar, nutritional/performance drinks, margarine/shortening, juices and other processed food products. The Company also operates and franchises weight control classes and operates other related programs and activities. The Company intends to continue to engage principally in the business of manufacturing and marketing processed food products and the ingredients for food products. The Company's products are manufactured and packaged to provide safe, stable, wholesome foods which are used directly by consumers and foodservice and institutional customers. Many products are prepared from recipes developed in the Company's research laboratories and experimental kitchens. Ingredients are carefully selected, washed, trimmed, inspected and passed on to modern factory kitchens where they are processed, after which the finished product is filled automatically into containers of glass, metal, plastic, paper or fiberboard which are then closed, processed, labeled and cased for market. Finished products are processed by sterilization, homogenization, chilling, freezing, pickling, drying, freeze drying, baking or extruding. Certain finished products and seasonal raw materials are aseptically packed into sterile containers after in-line sterilization. The Company manufactures its products from a wide variety of raw foods. Pre- season contracts are made with farmers for a portion of raw materials such as tomatoes, cucumbers, potatoes, onions and some other fruits and vegetables. Dairy products, meat, sugar, spices, flour and other fruits and vegetables are generally purchased on the open market. Tuna is obtained through spot and term contracts directly with tuna vessel owners or their cooperatives and by brokered transactions. In some instances, in order to insure the continued availability of adequate supplies of tuna, the Company assists, directly or indirectly, in financing the acquisition and operation of fishing vessels. The provision of such assistance is not expected to affect materially the operations of the Company. The Company also engages in the tuna fishing business through wholly and partially owned subsidiaries. The Marine Mammal Protection Act of 1972, as amended (the "Act"), and regulations thereunder (the "Regulations") regulate the incidental taking of dolphin in the course of fishing for yellowfin tuna in the eastern tropical Pacific Ocean, where a portion of the Company's light-meat tuna is caught. In 1990, the Company voluntarily adopted a worldwide policy of refusal to purchase tuna caught in the eastern tropical Pacific Ocean through the intentional encirclement of dolphin by purse seine nets and reaffirmed its policy of not purchasing tuna caught anywhere using gill nets or drift nets. Also in 1990, the Dolphin Protection Consumer Information Act (the "Dolphin Information Act") was enacted which regulates the labeling of tuna products as "dolphin safe" and bans the importation of tuna caught using high seas drift nets. The Act was amended in 1992 to further regulate tuna fishing methods which involve marine mammals. Compliance with the Act, the Regulations, the Dolphin Information Act, and the Company's voluntary policy and the 1992 amendments has not had, and is not expected to have, a material adverse effect on the Company's operations. Congress passed the International Dolphin Conservation Program Act ("IDCPA") on August 15, 1997. It modified the regulation of the incidental taking of dolphins in the course of fishing for yellowfin tuna in the eastern tropical Pacific Ocean and revised the definition of "dolphin safe". Revision of the definition of "dolphin safe" and modification of the regulation of the incidental taking of dolphins in the course of fishing for yellowfin tuna in the eastern tropical Pacific Ocean are not expected to have a material effect on the Company's operations. In recent years, the supply of raw tuna has been variable causing a fluctuation in raw fish prices; however, such variation in supply has not affected materially, nor is it expected to affect materially, the Company's operations. 2 The Company has participated in the development of certain of its food processing equipment, some of which is patented. The Company regards these patents as important but does not consider any one or group of them to be materially important to its business as a whole. The Company's products are widely distributed around the world. Many of the Company's products are marketed under the "Heinz" trademark, principally in the United States, Canada, the United Kingdom, other western European countries, central and eastern Europe, Australia, Venezuela, Japan, the People's Republic of China, the Republic of Korea and Thailand. Other important trademarks include "Star-Kist" for tuna products, "Ore-Ida" for frozen retail potato products, "Bagel Bites" for pizza snack products, "Moore's" for retail coated vegetables, "Rosetto" for frozen pasta products, "Earth's Best" for baby food and "Dyna Bites" and "Cheese Bites" for retail snack products, all of which are marketed in the United States. "9-Lives" and "Pounce" are used for cat foods, "Kibbles N' Bits", "Ken-L-Ration", "Reward" and "IVD" for dog food, "Jerky Treats", "Meaty Bone", "Snausages" and "Pup- Peroni" for dog snacks, and "Nature's Recipe" for dog and cat foods, most of which are marketed in the United States and Canada. "Amore" is used for cat foods, "Kozy Kitten" for canned cat foods, "Cycle", "Gravy Train", "Skippy Premium", "Recipe" and "Vets" for dog food, all of which are marketed in the United States. "Chef Francisco" is used for frozen soups, "College Inn" is used for canned broths and "Omstead" is used for frozen vegetables, frozen coated products and frozen fish products, all of which are marketed in the United States and Canada. "Pablum" is used for baby food products marketed in Canada. "Plasmon", "Nipiol" and "Dieterba" are used for baby food products, "Teddy" and "Fattoria Scaldasole" for yogurt, "Ortobuono" for pickled vegetables and fruit in syrup, "Mare D'Oro" for seafood and "Mareblu" for tuna, "Mr. Foody" for table and kitchen sauces, "Bi-Aglut", "Aproten", "Polial" and "Dialibra" for nutraceutical products, all of which are mainly marketed in Italy. "Petit Navire" is used for tuna and mackerel products, "Marie Elisabeth" for sardines and tuna and "Orlando" and "Guloso" for tomato products, all of which are marketed in various European countries. "John West" is used for tuna, salmon and other products in the United Kingdom and other European countries. The "Frank Coopers" brand is used for single-serve foodservice products in the United Kingdom. The "Pudliszki" trademark is used for tomato based and other vegetable products in Poland. The "Sunar" trademark is used for infant feeding products in the Czech Republic. "Wattie's" is used for various grocery products and frozen foods, "Tegel" for poultry products, "Chef" and "Champ" for cat and dog foods and "Craig's" for jams and marmalades, all of which are marketed in New Zealand, Australia and the Asia/Pacific region. "Bruno" and "Winna" are used for petfood in New Zealand. "Hellaby", "Hamper", "Tom Piper Imperial", "Pacific", "Crown", "Hellabys" and "Oak" are used for canned meats in New Zealand, Australia and the Asia/Pacific region. "ABC" is used for soy and other sauces in Indonesia and the Pacific Rim. "Farley's" and "Farex" are used for baby food products marketed in Europe, Canada, India, Australia and New Zealand. "Glucon D" and "Complan" are used for nutritional drink mixes marketed in the United Kingdom and India and in the case of "Complan" also Latin America and New Zealand. "Ganave" is used for pet food in Argentina. "N/R Original Recipe" is used for dog and cat foods marketed in various European countries and "Medi-Cal" is used for dog and cat foods in Canada and Japan. "Techni-cal" is used for dog and cat foods in Canada, certain European countries, Argentina, Chile, Hong Kong, Japan and South Africa. "Weight Watchers" is used in numerous countries in conjunction with owned and franchised weight control classes, programs, related activities and certain food products. "Budget Gourmet" is used for frozen entrees. The Company also markets certain products under other trademarks and brand names and under private labels. Although crops constituting some of the Company's raw food ingredients are harvested on a seasonal basis, most of the Company's products are produced throughout the year. Seasonal factors inherent in the business have always influenced the quarterly sales and net income of the Company. Consequently, comparisons between quarters have always been more meaningful when made between the same quarters of different years. The products of the Company are sold under highly competitive conditions, with many large and small competitors. The Company regards its principal competition to be other manufacturers of processed foods, including branded, retail products, foodservice products and private label products, that compete with the Company for consumer preference, distribution, shelf space and merchandising support. Product quality and consumer value are important areas of competition. The Company's Weight Watchers International, Inc. subsidiary also competes with a wide variety of weight control programs. The Company's products are sold through its own sales force and through independent brokers, agents and distributors to chain, wholesale, cooperative and independent grocery accounts, pharmacies, mass merchants, club stores, pet stores, foodservice distributors and institutions, including hotels, restaurants and 3 certain government agencies. The Company is not dependent on any single customer or a few customers for a material part of its sales. Compliance with the provisions of national, state and local environmental laws and regulations has not had a material effect upon the capital expenditures, earnings or competitive position of the Company. The Company's estimated capital expenditures for environmental control facilities for the remainder of fiscal year 2000 and the succeeding fiscal year are not material and will not materially affect either the earnings or competitive position of the Company. The Company's factories are subject to inspections by various governmental agencies, and its products must comply with the applicable laws, including food and drug laws, of the jurisdictions in which they are manufactured and marketed. The Company employed, on a full-time basis as of April 28, 1999, approximately 38,600 persons around the world. Segment information is set forth on pages 62 through 64 in Note 14 to the Company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. Such information is incorporated herein by reference. Income from international operations is subject to fluctuation in currency values, export and import restrictions, foreign ownership restrictions, economic controls and other factors. From time to time exchange restrictions imposed by various countries have restricted the transfer of funds between countries and between the Company and its subsidiaries. To date, such exchange restrictions have not had a material adverse effect on the Company's international operations. Forward-Looking Statements Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. The Company desires to take advantage of the "safe harbor" provisions of the Exchange Act with regard to oral and written forward-looking statements made from time to time including, but not limited to, the forward-looking statements contained in the Essay from the Chairman and the Interview with the President and CEO (pages 3 to 7 of the Company's Annual Report to Shareholders for the fiscal year ended April 28, 1999), Year In Review (pages 21 to 22 of the Company's Annual Report to Shareholders for the fiscal year ended April 28, 1999), Management's Discussion and Analysis (pages 23 to 38 of the Company's Annual Report to Shareholders for the fiscal year ended April 28, 1999) and statements set forth in this Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. The forward-looking statements are and will be based on management's then current views and assumptions regarding future events and financial performance. The factors identified by the Company include, among other things, the following: general economic and business conditions in the domestic and global markets; actions of competitors, including competitive pricing; changes in consumer preferences and spending patterns; changes in social and demographic trends; changes in laws and regulations, including changes in taxation and accounting standards; foreign economic conditions, including currency exchange rate fluctuations; interest rate fluctuations; the effects of changing prices for the raw materials used by the Company; the effectiveness of the Company's marketing, advertising and promotional programs; and the ability of the Company, its major service providers, vendors, suppliers and customers to adequately address the year 2000 issue. Item 2. Properties. As of April 28, 1999, the Company had 24 food processing plants in the United States and its possessions, of which 21 are owned and three are leased, as well as 65 food processing plants outside of the United States, of which 59 are owned and six are leased, including eight in New Zealand, five in Canada, five in South Africa, five in the United Kingdom, four in Australia, four in Italy, three in Indonesia, two in India, two in Venezuela, two in Spain, two in Greece, two in Portugal, two in Zimbabwe, and one in each of Argentina, Belgium, Botswana, the Czech Republic, Ecuador, France, Germany, Ghana, Hungary, Ireland, Japan, Netherlands, New Guinea, People's Republic of China, Republic of Korea, Poland, Russia, Seychelles and Thailand. The Company also leases two can-making factories in the United States and its possessions. The Company also owns or leases office space, warehouses, distribution centers and research and other facilities. The Company's food processing plants and principal properties are in good condition and are satisfactory for the purposes for which they are being utilized. 4 Item 3. Legal Proceedings. With respect to the antitrust litigation against the Company and its two principal competitors in the United States baby food industry which was previously reported in the Company's Annual Report on Form 10-K, see Note 16 to the Consolidated Financial Statements on page 66 of the Company's Annual Report to Shareholders for the fiscal year ended April 28, 1999, which is incorporated herein by reference. The Company continues to believe that all of the suits and claims are without merit and is defending itself vigorously against them. Item 4. Submission of Matters to a Vote of Security Holders The Company has not submitted any matters to a vote of security holders since the last annual meeting of shareholders on September 8, 1998. Executive Officers of the Registrant The following is a list of the names and ages of all of the executive officers of the Company indicating all positions and offices with the Company held by each such person and each such person's principal occupations or employment during the past five years. All the executive officers have been elected to serve until the next annual election of officers or until their successors are elected, or until their earlier resignation or removal. The annual election of officers is scheduled to occur on September 8, 1999.
Positions and Offices Held with the Company and Age (as of Principal Occupations or Name September 8, 1999) Employment During Past Five Years ---- ------------------ ----------------------------------------------- William R. Johnson 50 President and Chief Executive Officer of H. J. Heinz Company since April 30, 1998; President and Chief Operating Officer from June 12, 1996 until April 29, 1998; Senior Vice President from September 8, 1993 until June 12, 1996; President and Chief Executive Officer of Star-Kist Foods, Inc. from September 8, 1993 until June 12, 1996. Paul F. Renne 56 Executive Vice President and Chief Financial Officer of H. J. Heinz Company since June 11, 1997; Senior Vice President--Finance and Chief Financial Officer from September 13, 1996 to June 11, 1997; Vice President--Treasurer from October 1, 1986 to September 13, 1996. A. G. Malcolm Ritchie 45 Executive Vice President and President--Europe of H. J. Heinz Company since May 1, 1998; Vice President of European Grocery and Foodservice--H. J. Heinz Company, Ltd. from May 1, 1997 to May 1, 1998; Managing Director of H. J. Heinz Company, Ltd. from August 15, 1994 to May 1, 1997. William C. Springer 59 Executive Vice President of H. J. Heinz Company since June 12, 1996 and in charge of Heinz U.S.A., Heinz Canada, Weight Watchers International and Heinz affiliates in Latin America; Senior Vice President from September 8, 1993 until June 12, 1996. Richard H. Wamhoff 53 Executive Vice President--Global Manufacturing/Supply Chain and Frozen Foods of H. J. Heinz Company since May 1, 1998 and President and Chief Executive Officer--Ore-Ida Foods, Inc. from May 1, 1993 until May 1, 1998. David R. Williams 56 Executive Vice President of H. J. Heinz Company since June 12, 1996 and in charge of Heinz Pet Products, Star-Kist Seafood and Heinz operations in Asia and Australasia; Executive Vice President-- Finance and Chief Financial Officer from June 12, 1996 to September 13, 1996; Senior Vice President-- Finance and Chief Financial Officer from August 1, 1992 until June 12, 1996.
5
Positions and Offices Held with the Company and Age (as of Principal Occupations or Name September 8, 1999) Employment During Past Five Years ---- ------------------ ----------------------------------------------- Michael J. Bertasso 49 Senior Vice President--Strategy, Process and Business Development of H. J. Heinz Company since May 1, 1998; Executive Vice President--Star-Kist Foods, Inc. from July 1, 1996 to May 1, 1998; Chief Cost Officer--Star-Kist Foods, Inc. from May 1, 1995 to July 1, 1996; Vice President Purchasing & Logistics--Star-Kist Foods, Inc. from November 1, 1988 to May 1, 1995. Lawrence J. McCabe 64 Senior Vice President, General Counsel and Secretary of H. J. Heinz Company since November 1, 1997; Senior Vice President--General Counsel from June 12, 1991 to October 30, 1997. D. Edward I. Smyth 49 Senior Vice President--Corporate and Government Affairs of H. J. Heinz Company since May 1, 1998; Vice President--Corporate Affairs from March 14, 1990 to May 1, 1998. William C. Goode 58 Vice President and Chief Administrative Officer of H. J. Heinz Company since May 1, 1998; Vice President--Operations of Heinz Pet Products from October 1, 1996 until April 30, 1997; Vice President--Human Resources & Quality Systems of Star-Kist Foods, Inc. from May 1, 1993 until September 30, 1996. Michael D. Milone 43 Vice President--Global Category Development since August, 1998; President and Chief Operating Officer of Heinz Pet Products from July 1996 to July 1998; Chief Revenue Officer--Star-Kist Foods, Inc. from May 1995 to July 1996; Vice President--Marketing Heinz Pet Products from June 1991 to July 1996.
6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Information relating to the Company's common stock is set forth beginning on page 38 under the caption "Stock Market Information" and on page 65 in Note 15, "Quarterly Results (Unaudited)," of the Company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. Such information is incorporated herein by reference. Item 6. Selected Financial Data. The following table presents selected consolidated financial data for the Company and its subsidiaries for each of the five fiscal years 1995 through 1999. All amounts are in thousands except per share data. Prior years per share amounts have been adjusted to reflect the three-for-two stock split, which was effective October 3, 1995.
Fiscal year ended ------------------------------------------------------------------ April 28, April 29, April 30, May 1, May 3, 1999 1998 1997 1996 1995 (52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) ---------- ---------- ---------- ---------- ---------- Sales................... $9,299,610 $9,209,284 $9,357,007 $9,112,265 $8,086,794 Interest expense........ 258,813 258,616 274,746 277,411 210,585 Net income.............. 474,341 801,566 301,871 659,319 591,025 Net income per share-- diluted................ 1.29 2.15 0.81 1.75 1.58 Net income per share-- basic.................. 1.31 2.19 0.82 1.79 1.61 Short-term debt and current portion of long-term debt...... 904,207 339,626 1,163,442 1,082,169 1,074,291 Long-term debt, exclusive of current portion........ 2,472,206 2,768,277 2,283,993 2,281,659 2,326,785 Total assets............ 8,053,634 8,023,421 8,437,787 8,623,691 8,247,188 Cash dividends per common share............ 1.34 1/4 1.23 1/2 1.13 1/2 1.03 1/2 0.94
The 1999 results include restructuring and implementation costs of $552.8 million pretax ($1.11 per share) for Phase I of Operation Excel and costs of $22.3 million pretax ($0.04 per share) related to the implementation of Project Millennia, offset by the reversal of unutilized Project Millennia accruals for severance and exit costs of $25.7 million pretax ($0.04 per share) and a gain of $5.7 million pretax on the sale of the bakery products unit. See Notes 3 and 4 to the Consolidated Financial Statements beginning on page 48 of the Company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. Results recorded in 1998 include costs of $84.1 million pretax ($0.14 per share) related to the implementation of Project Millennia, offset by the gain on the sale of the Ore-Ida frozen foodservice business, $96.6 million pretax ($0.14 per share). See Notes 3 and 4 to the Consolidated Financial Statements beginning on page 48 of the Company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. Results recorded in 1997 include a pretax charge for restructuring and implementation costs of $647.2 million ($1.09 per share). See Note 4 to the Consolidated Financial Statements beginning on page 48 of the Company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. These charges were partially offset by gains recognized on the sale of the New Zealand ice cream business, $72.1 million pretax ($0.12 per share) and real estate in the United Kingdom, $13.2 million pretax ($0.02 per share). See Note 3 to the Consolidated Financial Statements on page 48 of the Company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. Results recorded in 1996 include gains related to the sale of the Weight Watchers Magazine ($0.02 per share) and the sale of two regional dry pet food product lines ($0.02 per share) and a charge for restructuring costs at certain overseas affiliates ($0.01 per share). During 1995, the Company invested approximately $1.2 billion in acquisitions, the most significant of which was the North American pet food businesses of The Quaker Oats Company. Note: In the third quarter of Fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per Share." Previously reported earnings per share amounts have been restated, as necessary, to conform to SFAS No. 128 requirements. All earnings per share amounts are presented on an after-tax diluted basis unless otherwise noted. 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. This information is set forth in the Management's Discussion and Analysis section on pages 23 through 38 of the Company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. Such information is incorporated herein by reference. Subsequent to the end of fiscal year 1999, on July 22, 1999, the Company signed a definitive agreement for the sale of the Weight Watchers weight control business for $735 million to a unit of Artal Luxembourg, S.A., a European private investment firm for which The Invus Group, Ltd. of New York acts as exclusive investment advisor. The sale does not include Weight Watchers core food businesses such as Weight Watchers Smart Ones frozen meals, desserts and breakfast items, Weight Watchers from Heinz in the UK and a broad range of other Weight Watchers branded foods in Heinz's global core product categories. The sale is expected to close in about three months subject to customary closing conditions. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. This information is set forth in the Management's Discussion and Analysis section on pages 35 through 36 of the Company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. Such information is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. The Consolidated Balance Sheets of the Company and its subsidiaries as of April 28, 1999 and April 29, 1998 and the related Consolidated Statements of Income, Shareholders' Equity and Cash Flows for the fiscal years ended April 28, 1999, April 29, 1998 and April 30, 1997 together with the related Notes to Consolidated Financial Statements, on pages 39 through 66 of the Company's Annual Report to Shareholders for the fiscal year ended April 28, 1999, are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There is nothing to be reported under this item. PART III Item 10. Directors and Executive Officers of the Registrant. Information relating to the Directors of the Company is set forth under the captions "Election of Directors" and "Additional Information--Section 16 Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement in connection with the Annual Meeting of Shareholders to be held September 8, 1999. Such information is incorporated herein by reference. Information relating to the executive officers of the Company is set forth under the caption "Executive Officers of the Registrant" in Part I above. Item 11. Executive Compensation. Information relating to executive compensation is set forth under the caption "Executive Compensation" in the Company's definitive Proxy Statement in connection with its Annual Meeting of Shareholders to be held September 8, 1999. Such information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information relating to the ownership of equity securities of the Company by certain beneficial owners and management is set forth under the caption "Security Ownership of Management" in the Company's definitive Proxy Statement in connection with its Annual Meeting of Shareholders to be held September 8, 1999. Such information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. Information relating to certain relationships with a beneficial shareholder and certain related transactions is set forth under the caption "Certain Business Relationships and Agreements" in the Company's definitive Proxy Statement in connection with its Annual Meeting of Shareholders to be held September 8, 1999. Such information is incorporated herein by reference. 8 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(1) The following financial statements and report included in the Company's Annual Report to Shareholders for the fiscal year ended April 28, 1999 are incorporated herein by reference: Consolidated Balance Sheets as of April 28, 1999 and April 29, 1998 Consolidated Statements of Income for the fiscal years ended April 28, 1999, April 29, 1998 and April 30, 1997 Consolidated Statements of Shareholders' Equity for the fiscal years ended April 28, 1999, April 29, 1998 and April 30, 1997 Consolidated Statements of Cash Flows for the fiscal years ended April 28, 1999, April 29, 1998 and April 30, 1997 Notes to Consolidated Financial Statements Report of Independent Accountants of PricewaterhouseCoopers LLP dated June 14, 1999 on the Company's consolidated financial statements for the fiscal years ended April 28, 1999, April 29, 1998 and April 30, 1997 (2)The following report and schedule is filed herewith as a part hereof: Report of Independent Accountants of PricewaterhouseCoopers LLP dated June 14, 1999 on the Company's consolidated financial statement schedule filed as a part hereof for the fiscal years ended April 28, 1999, April 29, 1998 and April 30, 1997 Consent of Independent Accountants of PricewaterhouseCoopers LLP dated July 23, 1999 filed as a part hereof Schedule II (Valuation and Qualifying Accounts and Reserves) for the three fiscal years ended April 28, 1999, April 29, 1998 and April 30, 1997 All other schedules are omitted because they are not applicable or the required information is included herein or is shown in the consolidated financial statements or notes thereto incorporated herein by reference. (3) Exhibits required to be filed by Item 601 of Regulation S-K are listed below and are filed as a part hereof. Documents not designated as being incorporated herein by reference are filed herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K. 3(i) The Company's Articles of Amendment dated July 13, 1994, amending and restating the Company's amended and restated Articles of Incorporation in their entirety are incorporated herein by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 1994. 3(ii) The Company's By-Laws, as amended effective April 30, 1998 are incorporated herein by reference to Exhibit 3(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended April 29, 1998. 4. Except as set forth below, there are no instruments with respect to long-term debt of the Company that involve indebtedness or securities authorized thereunder exceeding 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to file a copy of any instrument or agreement defining the rights of holders of long-term debt of the Company upon request of the Securities and Exchange Commission. (a) The Indenture between the Company and The First National Bank of Chicago dated as of July 15, 1992 is incorporated herein by reference to Exhibit 4(a) to the Company's Registration Statement on Form S-3 (Reg. No. 333-48017) and the supplements to such Indenture are incorporated herein by reference to the Company's Form 8-Ks dated October 29, 1992, January 27, 1993, March 25, 1998 and July 16, 1998 relating to the Company's $300,000,000 6 3/4% Notes due 1999, $200,000,000 6 7/8% Notes due 2003, $300,000,000 6% Notes due 2008 and $250,000,000 6.375% Debentures due 2028, respectively. 10(a) Management contracts and compensatory plans: (i) 1986 Deferred Compensation Program for H. J. Heinz Company and affiliated companies, as amended and restated in its entirety effective December 6, 1995, is 9 incorporated herein by reference to Exhibit 10(c)(i) to the Company's Annual Report on Form 10-K for the fiscal year ended May 1, 1995 (ii) H. J. Heinz Company's 1984 Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the fiscal year ended May 2, 1990 (iii) H. J. Heinz Company's 1987 Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the fiscal year ended May 2, 1990 (iv) H. J. Heinz Company's 1990 Stock Option Plan is incorporated herein by reference to Appendix A to the Company's Proxy Statement dated August 3, 1990 (v) H. J. Heinz Company's 1994 Stock Option Plan is incorporated herein by reference to Appendix A to the Company's Proxy Statement dated August 5, 1994 (vi) H. J. Heinz Company Supplemental Executive Retirement Plan, as amended, is incorporated herein by reference to Exhibit 10(c)(ix) to the Company's Annual Report on Form 10-K for the fiscal year ended April 28, 1993 (vii) H. J. Heinz Company Executive Deferred Compensation Plan (viii) H. J. Heinz Company Incentive Compensation Plan is incorporated herein by reference to Appendix B to the Company's Proxy Statement dated August 5, 1994 (ix) H. J. Heinz Company Stock Compensation Plan for Non-Employee Directors is incorporated herein by reference to Appendix A to the Company's Proxy Statement dated August 3, 1995 (x) H. J. Heinz Company's 1996 Stock Option Plan is incorporated herein by reference to Appendix A to the Company's Proxy Statement dated August 2, 1996 (xi) Service Agreement between H. J. Heinz Company and Anthony J. F. O'Reilly is incorporated herein by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the nine months ended January 28, 1998 (xii) H. J. Heinz Company Deferred Compensation Plan for Directors incorporated herein by reference to Exhibit 10(xiii) to the Company's Annual Report on Form 10-K for the fiscal year ended April 29, 1998 12. Computation of Ratios of Earnings to Fixed Charges. 13. Pages 23 through 67 of the H. J. Heinz Company Annual Report to Shareholders for the fiscal year ended April 28, 1999, portions of which are incorporated herein by reference. Those portions of the Annual Report to Shareholders that are not incorporated herein by reference shall not be deemed to be filed as a part of this Report. 21. Subsidiaries of the Registrant. 23. The following Exhibit is filed by incorporation by reference to Item 14(a)(2) of this Report: (a) Consent of PricewaterhouseCoopers LLP. 24. Powers-of-attorney of the Company's directors. 27. Financial Data Schedule. 99. H. J. Heinz Company Board of Directors' Guidelines on Political Contributions. Copies of the exhibits listed above will be furnished upon request to holders or beneficial holders of any class of the Company's stock, subject to payment in advance of the cost of reproducing the exhibits requested. (b) During the last fiscal quarter of the period covered by this Report the Company filed a Current Report on Form 8-K dated February 22, 1999 relating to the announcement of Operation Excel. 10 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on July 23, 1999. H. J. HEINZ COMPANY (Registrant) /s/ Paul F. Renne By...................................... Paul F. Renne Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on July 23, 1999. Signature Capacity /s/ William R. Johnson ............................. President and Chief William R. Johnson Executive Officer (Principal Executive Officer) /s/ Paul F. Renne Executive Vice President and Chief ............................. Financial Officer (Principal Financial Paul F. Renne Officer) /s/ Edward J. McMenamin ............................. Vice President and Corporate Edward J. McMenamin Controller (Principal Accounting Officer) Anthony J. F. O'Reilly Director William R. Johnson Director Nicholas F. Brady Director Leonard S. Coleman, Jr. Director Edith E. Holiday Director Samuel C. Johnson Director Candace Kendle Director Donald R. Keough Director /s/ Paul F. Renne Lawrence J. McCabe Director By............................................ Paul F. Renne Director Paul F. Renne A. G. Malcolm Ritchie Director Director and Attorney-in-Fact Herman J. Schmidt Director Eleanor B. Sheldon Director William P. Snyder III Director William C. Springer Director S. Donald Wiley Director David R. Williams Director James M. Zimmerman Director 11 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE The Shareholders of H. J. Heinz Company: Our audits of the consolidated financial statements referred to in our report dated June 14, 1999 appearing in the Annual Report to Shareholders of H. J. Heinz Company and Subsidiaries (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Pittsburgh, PA June 14, 1999 --------------- CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-48017) and Form S-8 (Nos. 2-51719, 2-45120, 33- 00390, 33-19639, 33-32563, 33-42015, 33-55777, 33-62623 and 333-13849) of H. J. Heinz Company and Subsidiaries of our report dated June 14, 1999 relating to the financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated June 14, 1999 relating to the financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP July 23, 1999 12 Schedule II H. J. Heinz Company and Subsidiaries VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Fiscal Years Ended April 28, 1999, April 29, 1998 and April 30, 1997 (Thousands of Dollars)
Additions ------------------- Balance at Charged to Charged Balance at beginning costs and to other end of Description of period expenses accounts Deductions period ----------- ---------- ---------- -------- ---------- ---------- Fiscal year ended April 28, 1999: Reserves deducted in the balance sheet from the assets to which they apply: Receivables......... $ 17,627 $ 8,427 $ -- $ 4,421(1) $ 21,633 ======== ======= ====== ======= ======== Investments, advances and other assets.............. $ 2,392 $ -- $ -- $ 516 $ 1,876 ======== ======= ====== ======= ======== Goodwill............ $297,868 $80,931 $ -- $26,590(1) $352,209 ======== ======= ====== ======= ======== Trademarks.......... $ 67,791 $20,319 $ -- $ 3,438(1) $ 84,672 ======== ======= ====== ======= ======== Other intangibles... $112,768 $16,708 $ -- $12,438(1) $117,038 ======== ======= ====== ======= ======== Deferred tax assets (2)................. $ 20,992 $25,949 $ -- $ 6,130 $ 40,811 ======== ======= ====== ======= ======== Fiscal year ended April 29, 1998: Reserves deducted in the balance sheet from the assets to which they apply: Receivables......... $ 18,934 $ 4,934 $ -- $ 6,241(1) $ 17,627 ======== ======= ====== ======= ======== Investments, advances and other assets.............. $ 4,767 $ -- $ -- $ 2,375 $ 2,392 ======== ======= ====== ======= ======== Goodwill............ $259,019 $51,890 $ -- $13,041(1) $297,868 ======== ======= ====== ======= ======== Trademarks.......... $ 57,186 $13,857 $ -- $ 3,252 $ 67,791 ======== ======= ====== ======= ======== Other intangibles... $106,046 $14,788 $ -- $ 8,066(1) $112,768 ======== ======= ====== ======= ======== Deferred tax assets (3)................. $ 5,459 $16,755 $ -- $ 1,222 $ 20,992 ======== ======= ====== ======= ======== Fiscal year ended April 30, 1997: Reserves deducted in the balance sheet from the assets to which they apply: Receivables......... $ 17,298 $11,106 $ -- $ 9,470(1) $ 18,934 ======== ======= ====== ======= ======== Investments, advances and other assets.............. $ 5,864 $ -- $ -- $ 1,097 $ 4,767 ======== ======= ====== ======= ======== Goodwill............ $211,693 $50,955 $ -- $ 3,629(1) $259,019 ======== ======= ====== ======= ======== Trademarks.......... $ 49,093 $12,102 $ -- $ 4,009 $ 57,186 ======== ======= ====== ======= ======== Other intangibles... $ 92,793 $16,973 $ -- $ 3,720(1) $106,046 ======== ======= ====== ======= ======== Deferred tax assets (4)................. $ 35,594 $ 2,987 $ -- $33,122 $ 5,459 ======== ======= ====== ======= ========
Notes: (1) Principally reserves on assets sold, written-off or reclassified. (2) The net change in the valuation allowance for deferred tax assets was an increase of $19.8 million. The increase was due to a change in judgment about the realizability of deferred tax assets related to foreign tax credit carryforwards ($4.1 million) and the addition of deferred tax assets for loss carryforwards ($21.8 million). The increase was partially offset by decreases in the valuation allowance related to a reduction in deferred tax assets for loss carryforwards ($3.0 million) and foreign tax credit carryforwards ($3.1 million). See Note 5 to the Consolidated Financial Statements of the Company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. (3) The net change in the valuation allowance for deferred tax assets was an increase of $15.5 million. The increase was due to increases in the valuation allowance related to additional deferred tax assets for foreign tax credit carryforwards ($9.5 million) and loss carryforwards ($7.2 million). The increase was partially offset by a decrease in the valuation allowance related to the utilization of loss carryforwards ($1.2 million). See Note 5 to the Consolidated Financial Statements of the Company's Annual Report to Shareholders for the fiscal year ended April 28, 1999. (4) The net change in the valuation allowance for deferred tax assets was a decrease of $30.1 million. The decrease was due to the utilization of tax credit ($27.0 million) and loss ($5.0 million) carryforwards and recognition of the realizability of certain other deferred tax assets in future years ($1.1 million). An increase in the valuation allowance primarily related to deferred tax assets for loss carryforwards ($2.7 million) partially offset the decrease. See Note 5 to the Consolidated Financial Statements of the Company's Annual Report to Shareholders for the fiscal year ended April 29, 1998. EXHIBIT INDEX Exhibits required to be filed by Item 601 of Regulation S-K are listed below and are filed as a part hereof. Documents not designated as being incorporated herein by reference are filed herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K. Exhibit 3(i) The Company's Articles of Amendment dated July 13, 1994, amending and restating the Company's amended and restated Articles of Incorporation in their entirety are incorporated herein by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 1994. 3(ii) The Company's By-Laws, as amended effective April 30, 1998 are incorporated herein by reference to Exhibit 3(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended April 29, 1998. 4. Except as set forth below, there are no instruments with respect to long-term debt of the Company that involve indebtedness or securities authorized thereunder exceeding 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to file a copy of any instrument or agreement defining the rights of holders of long-term debt of the Company upon request of the Securities and Exchange Commission. (a) The Indenture between the Company and The First National Bank of Chicago dated as of July 15, 1992 is incorporated herein by reference to Exhibit 4(a) to the Company's Registration Statement on Form S-3 (Reg. No. 333-48017) and the supplements to such Indenture are incorporated herein by reference to the Company's Form 8-Ks dated October 29, 1992, January 27, 1993, March 25, 1998 and July 16, 1998 relating to the Company's $300,000,000 6 3/4% Notes due 1999, $200,000,000 6 7/8% Notes due 2003, $300,000,000 6% Notes due 2008 and $250,000,000 6.375% Debentures due 2028, respectively. 10(a) Management contracts and compensatory plans: (i) 1986 Deferred Compensation Program for H. J. Heinz Company and affiliated companies, as amended and restated in its entirety effective December 6, 1995, is incorporated herein by reference to Exhibit 10(c)(i) to the Company's Annual Report on Form 10-K for the fiscal year ended May 1, 1995 (ii) H. J. Heinz Company's 1984 Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the fiscal year ended May 2, 1990 (iii) H. J. Heinz Company's 1987 Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the fiscal year ended May 2, 1990 (iv) H. J. Heinz Company's 1990 Stock Option Plan is incorporated herein by reference to Appendix A to the Company's Proxy Statement dated August 3, 1990 (v) H. J. Heinz Company's 1994 Stock Option Plan is incorporated herein by reference to Appendix A to the Company's Proxy Statement dated August 5, 1994 (vi) H. J. Heinz Company Supplemental Executive Retirement Plan, as amended, is incorporated herein by reference to Exhibit 10(c)(ix) to the Company's Annual Report on Form 10-K for the fiscal year ended April 28, 1993 (vii) H. J. Heinz Company Executive Deferred Compensation Plan (viii) H. J. Heinz Company Incentive Compensation Plan is incorporated herein by reference to Appendix B to the Company's Proxy Statement dated August 5, 1994 (ix) H. J. Heinz Company Stock Compensation Plan for Non-Employee Directors is incorporated herein by reference to Appendix A to the Company's Proxy Statement dated August 3, 1995 (x) H. J. Heinz Company's 1996 Stock Option Plan is incorporated herein by reference to Appendix A to the Company's Proxy Statement dated August 2, 1996 (xi) Service Agreement between H. J. Heinz Company and Anthony J. F. O'Reilly is incorporated herein by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the nine months ended January 28, 1998 (xii) H. J. Heinz Company Deferred Compensation Plan for Directors incorporated herein by reference to Exhibit 10(xiii) to the Company's Annual Report on Form 10-K for the fiscal year ended April 29, 1998 12. Computation of Ratios of Earnings to Fixed Charges. 13. Pages 23 through 67 of the H. J. Heinz Company Annual Report to Shareholders for the fiscal year ended April 28, 1999, portions of which are incorporated herein by reference. Those portions of the Annual Report to Shareholders that are not incorporated herein by reference shall not be deemed to be filed as a part of this Report. 21. Subsidiaries of the Registrant. 23. The following Exhibit is filed by incorporation by reference to Item 14(a)(2) of this Report: (a) Consent of PricewaterhouseCoopers LLP. 24. Powers-of-attorney of the Company's directors. 27. Financial Data Schedule. 99. H. J. Heinz Company Board of Directors' Guidelines on Political Contributions. EX-10.A.VII 2 MANAGEMENT CONTRACTS AND COMPENSATORY PLANS Exhibit 10(a)(vii) H. J. HEINZ COMPANY Executive Deferred Compensation Plan Contents - ------------------------------------------------------------------------------- Page Article 1 Effective Date and Purpose 1 Article 2 Administration 1 Article 3 Eligibility and Participation 2 Article 4 Deferral Opportunity 3 Article 5 Deferred Compensation Accounts 7 Article 6 Rights of Participants 8 Article 7 Withholding of Taxes 9 Article 8 Amendment and Termination 9 Article 9 Miscellaneous 10 ii H. J. Heinz Company Executive Deferred Compensation Plan Article 1. Effective Date and Purpose 1.1 Effective Dates. H. J. Heinz Company (the "Company") established the --------------- "H. J. Heinz Company Executive Deferred Compensation Plan" (the "Plan") effective as of June 8, 1994. Effective as of January 1, 1998, the Plan was amended and restated as described herein. 1.2 Purpose. The Plan is a deferred compensation plan for key employees ------- the primary purpose of which is to provide certain key employees of the Company, its subsidiaries, and affiliates with the opportunity to voluntarily defer a portion of their compensation, subject to the terms of the Plan. By adopting the Plan, the Company desires to enhance its ability to attract and retain employees of outstanding competence. Article 2. Administration 2.1 The Committee. The Plan shall be administered by the Management ------------- Development and Compensation Committee of the Board of Directors of the Company or any other successor Committee appointed by the Board (the "Committee"). The members of the Committee shall be appointed by, and shall serve at the discretion of, the Board. 2.2 Authority of the Committee. Except as limited by law or by the -------------------------- Company's Articles of Incorporation or Bylaws, and subject to the provisions herein, the Committee shall have authority to select eligible employees of the Company for participation in the Plan; determine the terms and conditions of each employee's participation in the Plan; interpret the Plan; establish, amend, or waive rules and regulations for the Plan's administration; and, subject to Article 8 herein, amend the terms and conditions of the Plan and any agreement entered into under the Plan. Further, the Committee shall make all other determination which may be necessary or advisable for the administration of the Plan. As permitted by law, the Committee may delegate any of its authority granted under the Plan to such other person or entity it deems appropriate, including but not limited to, senior management of the Company. 1 2.3 Guidelines. Subject to the provisions herein, the Committee may adopt ---------- written guidelines for the implementation and administration of the Plan. 2.4 Decisions Binding. All determinations and decisions of the Committee ----------------- arising under the Plan shall be final binding, and conclusive upon all parties. Article 3. Eligibility and Participation 3.1 Eligibility. Subject to Section 3.2, Employees eligible to be selected ----------- to participate in the Plan in any fiscal year of the Company (hereinafter, a "Year") including full-time, salaried employees of the Company, its subsidiaries, and affiliates who are key employees, as determined by the Committee in its sole discretion. 3.2 Limitation on Eligibility. It is the intent of the Company that the ------------------------- Plan qualify for treatment as a "top hat" plan under the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor Act thereto ("ERISA"). Accordingly, to the extent required by ERISA to obtain such "top hat" treatment, eligibility shall be extended only to those executives who comprise a select group of management or highly compensated employees. Further, the Committee may place such additional limitations on eligibility as it deems necessary and appropriate under the circumstances. 3.3 Participation. Participation in the Plan shall be determined annually ------------- by the Committee based upon the criteria set forth in Sections 3.1 and 3.2 herein. An employee who is chosen to participate in the Plan in any Year (a "Participant") shall be so notified in writing. In the event a Participant selected to participate in the Plan no longer meets the criteria for participation, such Participant shall become an inactive Participant, retaining all the rights described under the Plan, except the right to make any further deferrals, until such time that the Participant again becomes an active Participant. 3.4 Partial Year Eligibility. In the event that an employee first becomes ------------------------ eligible to participate in the Plan during a Year, such employee shall, within thirty (30) calendar days of becoming eligible, be notified by the Company of his or her eligibility to participate, and the Company shall provide each 2 such employee with an Election Form, which must be completed by the employee as provided in Section 4.2 herein. 3.5 No Right to Participate. No employee shall have the right to be ----------------------- selected as a Participant, or having been so selected for any given Year, to be selected again as a Participant for any other Year. Article 4. Deferral Opportunity 4.1 Amount Which May Be Deferred. A Participant may elect to defer, in ---------------------------- any Year, up to one hundred percent (100%) of eligible components of Compensation, including but not limited to Salary, Bonus, and Long-Term Awards, all as defined herein; provided, however, that the Committee shall have sole discretion to designate which components of Compensation are eligible for deferral elections under the Plan in any given Year. In addition, the Committee may, in its sole discretion, designate the minimum amount or increments of any single eligible component of Compensation which may be deferred in any Year or establish any other limitations as it deems appropriate in any Year. The following definitions shall apply for purposes of this Plan: (a) "Salary" means all regular, basic wages, before reduction for amounts deferred pursuant to the Plan or any other plan of the Company, payable in cash to a Participant for services to be rendered, exclusive of any Bonus, Long-Term Awards, other special fees, awards, or incentive compensation, allowances, or amounts designated by the Company as payment toward or reimbursement of expenses. (b) "Bonus" means any incentive award based on an assessment of performance, payable by the Company to a Participant with respect to the Participant's services during a Year, including but not limited to amounts awarded under the Company's Incentive Compensation Plan; provided, however, that for purposes of the Plan, "Bonus" shall not include incentive awards which relate to a period exceeding one (1) Year. (c) "Long-Term Award" means any cash award payable to a Participant pursuant to a Company program which establishes 3 incentive award opportunities which are contingent upon performance which is measured over periods greater than one (1) Year. (d) "Compensation" means the gross Salary, Bonus, Long-Term Awards, and other payments eligible for deferral under the Plan, which are payable to a Participant with respect to services performed during a Year. 4.2 Time of Deferral Election. An election to defer a component of ------------------------- Compensation permitted by the Committee to be deferred by a Participant under the Plan shall be given effect in accordance with the following timing rules: (a) An election to defer Salary shall apply only to Salary which is earned for payroll periods beginning after a properly executed Election Form has been filed with the Committee. (b) An election to defer Bonus for any Year shall apply only if a properly executed Election Form has been filed with the Committee before the end of the calendar year ending within such Year; provided, however, that an election to defer amounts awarded under the Company's Incentive Compensation Plan for the Year ending April 30, 1999, to the extent that the Participant elects that the earnings adjustment with respect to such amounts shall be calculated under the stock unit method pursuant to Section 5.2(b) hereof, may be made at any time before the end of third fiscal quarter of such Year. (c) An election to defer "Long-Term Award" must be made on or before the end of the Year preceding the final Year of the applicable multi-year award period. 4.3 Content of Deferral Election. All deferral elections shall be ----------------------------- irrevocable, and shall be made on an Election Form, as described herein. Participants shall make the following irrevocable elections on each Election Form: (a) The amount to be deferred with respect to each eligible component of Compensation for the Year, 4 (b) The length of the deferral period with respect to each eligible component of Compensation, pursuant to the terms of Section 4.4 herein; and (c) The form of payment to be made to the Participant at the end of the deferral period(s), pursuant to the terms of Section 4.5 herein. Notwithstanding the amounts requested to be deferred pursuant to Subparagraph (a) above, the limits on deferrals set forth in Section 4.1 herein shall apply to the requested deferrals each Year. 4.4 Length of Deferral. The deferral periods elected by each Participant ------------------ with respect to deferrals of Compensation for any Year shall be at least equal to one (1) year following the end of the Year in which the Compensation is earned, and shall be no greater than the date of retirement or other termination of employment, whichever is earlier. However, notwithstanding the deferral periods elected by a Participant pursuant to Section 4.3(b) or the form of payment in effect under Section 4.3(c), payment of deferred amounts and accumulated interest thereon shall be made to the Participant in a single lump sum in the event the Participant's employment with the Company is terminated by reason of death or total disability, as defined in the Company's Long-Term Disability Plan, at any time prior to full payment of deferred amounts and interest thereon. Such payment following employment termination of the Participant's employment, or as soon thereafter as practicable. 4.5 Payment of Deferred Amounts. Participants shall be entitled to elect --------------------------- to receive payment of deferred amounts, together with interest earned thereon, at the end of the deferral period in a single lump sum cash payment, by means of installments, or in such other format approved by the Committee. (a) Lump Sum Payment. Such payment shall be made in cash within thirty (30) calendar days of the date specified by the Participant as the date for payment of deferred Compensation as described in Sections 4.3 and 4.4 hereof, or as soon thereafter as practicable. 5 (b) Installment Payments. Participants may elect payout in installments, with a minimum number of installments of two (2) and a maximum of ten (10). The initial payment shall be made in cash within thirty (30) calendar days after the commencement date selected by the Participant pursuant to Sections 4.3 and 4.4 hereof, or as soon thereafter as practicable. The remaining installment payments shall be made in cash each year thereafter, until the Participant's entire deferred compensation account has been paid. Interest shall accrue on the deferred amounts in the Participant's deferred compensation account, as provided in Section 5.2 of this Plan. The amount of each installment payment shall be equal to the balance remaining in the Participant's deferred compensation account immediately prior to each such payment, multiplied by a fraction, the numerator of which is one (1), and the denominator of which is the number of installment payments remaining. (c) Alternative Payment Schedule. A participant may submit an alternate payment schedule to the Committee for approval; provided, however, that no such alternate payment schedule shall be permitted unless approved by the Committee. 4.6 Financial Hardship. The Committee shall have the authority to alter ------------------ the timing or manner of payment of deferred amounts in the event that the Participant establishes, to the satisfaction of the Committee, severe financial hardship. In such event, the Committee may, in its sole discretion: (a) Authorize the cessation of deferrals by such Participant under the Plan, or (b) Provide that all or a portion of the amount previously deferred by the Participant shall immediately be paid in a lump-sum cash payment; or (c) Provide that all or a portion of the installments payable over a period of time shall immediately be paid in a lump-sum cash payment; or (d) Provide for such other installment payment schedule as deemed appropriate by the Committee under the circumstances. 6 For purposes of this Section 4.6, "severe financial hardship" shall be determined by the Committee, in its sole discretion, in accordance with all applicable laws. The Committee's decision with respect to the severity of financial hardship and the manner in which, if at all, the Participant's future deferral opportunities shall be ceased, and/or the manner in which if at all, the payment of deferred amounts of the Participant shall be altered or modified shall be final, conclusive, and not subject to appeal. The Participant's account will be credited with earnings in accordance with the Plan up to the date of distribution. Article 5. Deferred Compensation Accounts 5.1 Participant Accounts. The Company shall establish and maintain an -------------------- individual bookkeeping account for deferrals made by each Participant under Article 4 herein. Each account shall be credited as of the date the amount deferred otherwise would have become due and payable to the Participant. 5.2 Earnings on Deferred Amounts. Amounts credited to a Participant's ---------------------------- deferred compensation account shall be credited with an earnings adjustment in accordance with this Section 5.2. (a) Interest Credit Method. Unless the Participant makes the election under (b) below, amounts credited to a Participant's deferred compensation account shall accrue interest at the rate selected by the Committee. Each Participant's deferred compensation account shall be credited on the last day of each calendar quarter, with interest computed on the average balance in the account during such quarter. Interest earned on deferred amounts shall be paid out to Participants at the same time and in the same manner as the underlying deferred amounts. (b) Stock Unit Method. If a Participant so elects on the Election Form for any Year with respect to deferred amounts of any component of Compensation for such Year, such deferred amounts shall be credited to the Participant's Account in the form of "stock units" in lieu of interest credits under (a) above. The election shall apply only to such deferred amounts for such Year and earnings increments thereon, and shall be irrevocable with respect to such 7 amounts. The following additional rules shall apply in the case of a stock unit election: (1) The number of units initially credited shall be determined by dividing the dollar amount of the deferral by a unit value equal to the average of the high and the low trading price of one share of the Company's common stock on the day that the Compensation would have been paid but for the deferral. (2) The Participant's Account will also be credited with additional units equal to the dollar amount of dividends paid from time to time during the deferral period on a number of shares of the Company's common stock equal to the number of units then credited to the Participant's Account divided by a unit value equal to the average of the high and the low trading price of one share of the Company's common stock on the day the dividend is paid. (3) In the event of any change in the outstanding shares of the Company's common stock by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, reorganization, combination or exchange of shares or other similar corporate change, then an equitable equivalent adjustment shall be made in the stock units credited to Accounts under the Plan. (4) When payment of a Participant's Account occurs, the portion thereof which is represented by stock units shall be payable, unless the recipient elects payment in cash, by transferring to the Participant or beneficiary a number of shares of the Company's common stock equal to the number of whole units then distributable from the Participant's Account, with cash in lieu of fractional units. 5.3 Charges Against Accounts. There shall be charged against each ------------------------ Participant's deferred compensation account any payments made to the Participant or to his or her beneficiary. Article 6. Rights of Participants 6.1 Contractual Obligation. The Plan shall create a contractual obligation ---------------------- on the part of the Company to make payments from the Participant's 8 accounts when due. Payment of account balances shall be made out of the general funds of the Company. 6.2 Unsecured Interest. No Participant or party claiming an interest in ------------------ amounts deferred by a Participant, including any earnings adjustment thereto, shall have any interest whatsoever in any specific asset of the Company. To the extent that any party acquires a right to receive payments under the Plan, such right shall be equivalent to that of an unsecured general creditor of the Company. 6.3 Authorization for Trust. The Company may, but shall not be required ----------------------- to, establish one or more trusts, with such trustee as the Committee may approve, for the purpose of providing for the payment of deferred amounts. Such trust or trusts may be irrevocable, but the assets thereof shall be subject to the claims of the Company's creditors. To the extent any amounts deferred under the Plan are actually paid from any such trust, the Company shall have no further obligation with respect thereto, but to the extent not so paid, such deferred amounts shall remain the obligation of, and shall be paid by, the Company. 6.4 Employment. Nothing in the Plan shall interfere with nor limit, in any ---------- way, the right of the Company to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company. Article 7. Withholding of Taxes The Company shall have the right to require Participants to remit to the Company an amount sufficient to satisfy any withholding tax requirements or to deduct from all payments made pursuant to the Plan amounts sufficient to satisfy withholding tax requirements. Article 8. Amendment and Termination The Company hereby reserves the right to amend, modify, or terminate the Plan at any time by action of the Committee. Except as described below in this Article 8, no such amendment or termination shall in any material manner adversely affect any Participant's rights to amounts previously deferred hereunder, or interest earned thereon, without the consent of the Participant. 9 Article 9. Miscellaneous 9.1 Notice. Any notice or filing required or permitted to be given to the ------ Company under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail to the Vice President--Chief Administrative Officer of the Company. Notice to the Vice President--Chief Administrative Officer, if mailed, shall be addressed to the principal executive offices of the Company. Notice mailed to a Participant shall be at such address as is given in the records of the Company. Notices shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 9.2 Nontransferability. Participant's rights to deferred amounts, ------------------ contributions, and earnings credited thereon under the Plan may not be sold, transferred, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. In no event shall the Company make any payment under the Plan to any assignee or creditor of a Participant. 9.3 Severability. In the event any provision of the Plan shall be held ------------ illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 9.4. Costs of the Plan. All costs of implementing and administering the ----------------- Plan shall be borne by the Company. 9.5 Status under ERISA. The Plan is intended to be an unfunded plan which ------------------ is maintained primarily to provide deferred compensation benefits for a select group of "management or highly compensated employees" within the meaning of Sections 201, 301, and 401 of ERISA, and to therefore be exempt from the provisions of Parts 2, 3, and 4 of Title 1 of ERISA. Accordingly, the Board may terminate the Plan and commence termination payout for all certain Participants, or remove certain employees as Participants, if it is determined by the United States Department of Labor or a court of competent jurisdiction that the Plan constitutes an employee pension benefit plan within the meaning of Section 3(2) of ERISA which is not so exempt. If payout is commenced pursuant to the operation of this 10 Section 9.5, the payment of such amounts shall be made in the manner selected by each Participant under Section 4.5 herein as applicable. 9.6 Applicable Law. The Plan shall be governed by and construed in -------------- accordance with the laws of the Commonwealth of Pennsylvania. 9.7 Successors. All obligations of the Company under the Plan shall be ---------- binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. 11 EX-12 3 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES Exhibit 12 H.J. HEINZ COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Fiscal Years Ended ----------------------------------------------------- April 28, April 29, April 30, May 1, May 3, 1999 1998 1997 1996 1995 ---------- ---------- --------- ---------- ---------- Fixed Charges: Interest expense*...... $ 260,743 $ 260,401 $277,818 $ 279,368 $ 212,123 Capitalized interest... -- 1,542 2,688 1,007 414 Interest component of rental expense........ 29,926 30,828 27,382 26,728 24,200 ---------- ---------- -------- ---------- ---------- Total fixed charges.. $ 290,669 $ 292,771 $307,888 $ 307,103 $ 236,737 ---------- ---------- -------- ---------- ---------- Earnings: Income before income taxes................. $ 835,131 $1,254,981 $479,064 $1,023,661 $ 938,007 Add: Interest expense*. 260,743 260,401 277,818 279,368 212,123 Add: Interest component of rental expense..... 29,926 30,828 27,382 26,728 24,200 Add: Amortization of capitalized interest.. 3,050 3,525 3,454 3,399 3,465 ---------- ---------- -------- ---------- ---------- Earnings as adjusted. $1,128,850 $1,549,735 $787,718 $1,333,156 $1,177,795 ---------- ---------- -------- ---------- ---------- Ratio of earnings to fixed charges........... 3.88 5.29 2.56 4.34 4.98 ========== ========== ======== ========== ==========
- ------- * Interest expense includes amortization of debt expense and any discount or premium relating to indebtedness. EX-13 4 ANNUAL REPORT EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS H.J. Heinz Company and Subsidiaries - ------------------------------------------------------------------------------ OPERATION EXCEL In Fiscal 1999, the company announced a transformative growth and restructuring initiative that is expected to generate in excess of $200 million in annual pretax savings and growth in earnings per share of 10 to 12 percent. The initiative, named "Operation Excel," is a multi-year, multi- faceted program that will result in restructuring charges and implementation costs approaching $1.1 billion over four years. The company's Board of Directors approved Phase I of this multi-year program in Fiscal 1999, which resulted in the recognition of restructuring charges and implementation costs totaling $552.8 million pretax ($1.11 per share). [Note: All earnings per share amounts included in Management's Discussion and Analysis are presented on an after-tax diluted basis.] Pretax charges of $396.4 million are classified as cost of products sold and $156.4 million as selling, general and administrative expenses ("SG&A"). The major components of Operation Excel include: creating manufacturing centers of excellence; focusing the product portfolio; realigning the company's management teams; and investing in growth initiatives. Creating manufacturing centers of excellence will result in significant changes to the company's manufacturing footprint including the following Phase I initiatives: [ ] Closing the Harlesden factory in London, England and focusing the Kitt Green factory in Wigan, England on canned beans, soups and pasta production and focusing the Elst factory in the Netherlands on tomato ketchup and sauces [ ] Downsizing the Puerto Rico tuna processing facility and focusing this facility on lower volume/higher margin products [ ] Focusing the Pittsburgh, Pennsylvania factory on soup and baby food production and shifting other production to existing facilities [ ] Closing the West Chester, Pennsylvania factory and shifting pasta production to the Bloomsburg, Pennsylvania factory [ ] Consolidating manufacturing capacity in the Asia/Pacific region [ ] Closing the Zabreh, Czech Republic factory and disposing of the dairy business and transferring the infant formula business to the Kendal, England factory [ ] Downsizing the Pocatello, Idaho factory by shifting Bagel Bites production to the Ft. Myers, Florida factory, and shifting certain Smart Ones entree production to the Massillon, Ohio factory [ ] Closing the Redditch, England factory and shifting production to the Telford, England factory and the Turnhout factory in Belgium. The company will focus the portfolio of product lines on the following six core food categories: ketchup, condiments and sauces; frozen foods; tuna; soup, beans and pasta meals; infant foods; and pet products. A consequence of this focus on the core categories is the potential sale of the Weight Watchers classroom business. Additionally, seven other smaller businesses, which had combined annual revenues of approximately $80 million, will be disposed. Realigning the company's management teams will provide processing and product expertise across the regions of North America, Europe and Asia/Pacific. Specifically, Phase I of Operation Excel will: [ ] Create a single U.S. frozen food headquarters, resulting in the closure of the company's Ore-Ida head office in Boise, Idaho [ ] Consolidate many European administrative support functions. Management's Discussion and Analysis 23 Growth initiatives include additional investments in marketing and pricing programs for our core businesses, particularly in retail and foodservice ketchup, frozen foods and tuna. Phase I restructuring charges and implementation costs recognized in Fiscal 1999 totaled $552.8 million, of which $141.7 million was recognized in the third quarter of Fiscal 1999, and $411.1 million was recognized in the fourth quarter of Fiscal 1999. In addition to the restructuring charges recognized, the company expects to spend approximately $150 million in Fiscal 2000 for Phase I implementation costs. These implementation costs will include consulting fees, factory start-up expenses, employee relocation expenses and equipment relocation expenses, and will be expensed as they are incurred. Capital expenditures related to these Phase I initiatives will total approximately $165 million, which will be spent in Fiscal 2000 and Fiscal 2001. Phase I initiatives will result in the closure or exit of 16 factories or businesses. Management estimates that these actions will impact approximately 5,500 employees with a net reduction in the workforce of 4,000, after expansion of certain facilities. During Fiscal 1999, the company's workforce was reduced by approximately 200 employees principally through the closure of Ore-Ida's Boise head office and through the divestiture of the Clarksville, Arkansas sweet potato business. The expected pretax savings to be generated from Phase I of Operation Excel will be $50 million in Fiscal 2000 and will grow to $100 million in Fiscal 2001 and $150 million per year, thereafter, with non-cash savings of less than $15 million in any year. Future phases of Operation Excel will also be aimed at generating manufacturing efficiencies, focusing the product portfolio and realigning management teams, and will result in the recognition of additional restructuring charges and implementation costs. Specific initiatives are in the development stages and have not yet been approved by the company's Board of Directors. These future initiatives currently envision the closure of at least four additional factories, an additional net workforce reduction of 1,000 employees and could result in restructuring charges and implementation costs of up to $400 million, a portion of which will be recognized in Fiscal 2000. Successful execution of all phases of Operation Excel will help the company achieve the following targets over the next four years: [ ] $200 million in annual ongoing pretax savings upon full implementation [ ] Volume growth of 3 to 4 percent per year [ ] Earnings per share growth of 10 to 12 percent per year [ ] Gross margins of 42% [ ] Return on invested capital of 40% [ ] $2.5 billion of free cash flow. - ------------------------------------------------------------------------------ PROJECT Background MILLENNIA During the fourth quarter of Fiscal 1997, the company announced a reorganization and restructuring program named "Project Millennia." The reorganization plan was designed to strengthen the company's core businesses and improve profitability and global growth. Key initiatives were focused on process changes and product line rationalizations. Process change initiatives included: [ ] Changing our go-to-market strategies, including the elimination of inefficient end-of-quarter trade promotion practices [ ] Outsourcing certain manufacturing operations and eliminating excess manufacturing capacity, while adding capacity for certain products to support product transfers from closed facilities [ ] Focusing the company's U.S. Weight Watchers classroom business and introducing a new weight loss program (1*2*3 Success(TM)) in the U.S. [ ] Developing a Pan-European category-based strategy in Europe. 24 H.J. Heinz Annual Report 1999 Product line rationalization initiatives included: [ ] Divestiture of the Ore-Ida frozen foodservice business [ ] Divestiture of the New Zealand ice cream business [ ] Divestiture of the Weight Watchers dry and refrigerated businesses [ ] Divestiture of the U.S. frozen pizza and pizza topping business [ ] Exiting the Weight Watchers Personal Cuisine business [ ] Exiting the "dinner" product line from The Budget Gourmet business [ ] Converting all Weight Watchers entrees to the Smart Ones brand and reformulating the product and changing the packaging. Total restructuring charges and implementation costs recognized in Fiscal 1997 were $647.2 million pretax. The restructuring program was expected to result in a reduction of the global workforce of approximately 2,500 employees and the closure or sale of 25 plants throughout the world. Plant closures or sales included: five Ore-Ida factories, three New Zealand ice cream factories, four North American bakery factories, three U.S. frozen pizza and pizza topping facilities, two New Zealand food processing factories, the Tracy, California tomato processing factory, the Kankakee, Illinois pet food factory and six smaller factories. The anticipated benefits of the plan were: [ ] Delivering approximately $120 million of ongoing pretax savings in Fiscal 1998 growing to $200 million of annual ongoing pretax savings [ ] Improving gross margins from 36% to 40% by Fiscal 2001 [ ] Generating over $300 million of working capital reductions in the first year of the program [ ] Generating over $1 billion of free cash flow in the first year of the program. Project Millennia Status Update The company has substantially completed the implementation of Project Millennia. As of April 28, 1999, the company has utilized $601.4 million of the original $647.2 million charge. Since 1997, the company has also spent an additional $106.4 million of implementation costs, consisting primarily of relocation, consulting, training and start-up costs, which were expensed as incurred. During Fiscal 1998, the company utilized $116.4 million of severance and exit accruals to facilitate the process change and product line rationalization initiatives, described above. Seventeen factories were sold or closed and the net workforce was reduced by 1,800 employees. The company spent an additional $84.1 million of implementation costs, consisting primarily of relocation, consulting, training and start-up costs, which were expensed as incurred. Ongoing pretax savings realized in Fiscal 1998 were approximately $125 million. During Fiscal 1999, the company utilized $48.6 million of the severance and exit accruals, principally on the realignment of the pet food manufacturing and distribution operations, streamlining of European operations, consolidation of the Heinz-Wattie businesses in Australia and New Zealand, contractual lease commitments associated with the restructuring of the U.S. Weight Watchers meeting system, and costs related to the exit of certain of the company's frozen entree brands. During the year, the company also incurred $22.3 million pretax of additional costs related to the continued implementation of Project Millennia. These costs consisted principally of start-up, consulting and training costs. During the second quarter of Fiscal 1999, the company reversed $25.7 million of unutilized Project Millennia accruals for severance and exit costs. In Europe, severance accruals were reduced $9.1 million, principally as a result of lower severance payments in Italy versus the original estimates and fewer Management's Discussion and Analysis 25 selling, general and administrative terminations in the U.K. In the U.S., $16.6 million of the accrual for exit costs was reversed principally as a result of avoided contractual liabilities related to product returns due to the sale of the Weight Watchers dry and refrigerated business. The Weight Watchers frozen entree business also experienced lower costs in exiting certain of the company's frozen entree product offerings. As of April 28, 1999, the company has closed or divested 23 of the 25 plants (five in Fiscal 1997, 17 in Fiscal 1998, and one in Fiscal 1999) scheduled for closure or divestiture. The remaining two facilities (one tuna processing facility in Australia and one tomato processing facility in Spain) have been publicly announced and will be closed by the end of October 1999. As of April 28, 1999, Project Millennia has resulted in a net workforce reduction of 2,100 employees. The two remaining plant closures described above will result in an additional workforce reduction of 150 employees. The total workforce reduction is now estimated to be 2,250 compared to the 2,500 originally estimated. The lower net headcount reductions as well as the lower actual severance payments compared to the original estimates have resulted in the reversal of original severance accruals of $9.1 million as described above. The financial goals of the project have been achieved as follows: [ ] Pretax savings of approximately $190 million, of which $10 million are non-cash savings, were realized in Fiscal 1999 [ ] Gross profit margins, excluding restructuring related items, increased to 38.4% in Fiscal 1998 and to 40.3% in Fiscal 1999 [ ] Operating working capital was reduced by approximately $350 million in the first year of the program [ ] More than $1.3 billion of free cash flow was generated in the first year of the program. As of April 28, 1999, there are $20.1 million of remaining Project Millennia accruals. These accruals relate to the finalization of plant closures, remaining costs related to the exit of certain of the company's frozen entree brands, and contractual lease commitments associated with the restructuring of the U.S. Weight Watchers meeting system. With the exception of the contractual lease commitment costs, all other spending will be completed by the end of the second quarter of Fiscal 2000. - ------------------------------------------------------------------------------ RESULTS OF In Fiscal 1999, the company adopted Statement of Financial OPERATIONS Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes new standards for reporting and disclosure relating to segments and geographic data. 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. Descriptions of the company's reportable segments are as follows: [ ] North American Dry -- This segment includes the company's North American dry grocery and foodservice operations. This segment consists of Heinz U.S.A., Heinz Pet Products, Star- Kist Seafood and Heinz Canada. This segment's operations include products in all of the company's core categories. [ ] North American Frozen -- This segment consists of Heinz Frozen Food Company, which markets frozen potatoes, entrees and appetizers. [ ] Europe -- This segment includes the company's operations in Europe and sells products in all of the company's core categories. [ ] Asia/Pacific -- This segment includes the company's operations in New Zealand, Australia, Japan, China, South Korea, Indonesia, Thailand and India. This segment's operations include products in all of the company's core categories. [ ] Other Operating Entities -- This segment includes the company's Weight Watchers classroom business as well as the company's operations in Africa, Venezuela and other areas which sell products in all of the company's core categories. 26 H.J. Heinz Annual Report 1999 1999 versus 1998: Sales for Fiscal 1999 increased $90.3 million, or 1.0%, to $9.30 billion from $9.21 billion in Fiscal 1998. Volume increased sales by $290.2 million, or 3.2%, acquisitions increased sales by $188.2 million, or 2.0%, and favorable pricing contributed $34.8 million, or 0.4%. The unfavorable impact of foreign exchange translation rates reduced sales by $210.3 million, or 2.3%, and divestitures decreased sales by $212.6 million, or 2.3%. Domestic operations contributed approximately 53% of consolidated sales in both Fiscal 1999 and Fiscal 1998. Sales of the North American Dry segment increased $127.4 million, or 3.2%, primarily due to sales volume increases of $156.6 million, or 4.0%. Volume increases in Heinz ketchup, seafood and condiments were partially offset by a volume decrease in canned dog food. Acquisitions, net of divestitures, contributed $36.9 million, or 0.9%, to the sales increase, primarily due to the acquisition of the College Inn brand of canned broths. These increases were partially offset by unfavorable pricing of $36.1 million, or 0.9%. Price decreases were noted in seafood and pet food. The unfavorable fluctuation of the Canadian dollar caused a $30.0 million, or 0.8%, decrease in net sales. The North American Frozen segment's sales decreased $61.7 million, or 5.7%. Divestitures, net of acquisitions, accounted for $71.2 million, or 6.6%, of the decrease, primarily due to the divestiture of the Ore-Ida frozen foodservice business in the first quarter of Fiscal 1998. Price decreases, primarily in frozen potatoes, contributed $13.5 million, or 1.2%, to the sales decrease. Volume increases of $23.0 million, or 2.1%, were largely due to Smart Ones frozen entrees, partially offset by decreased volume in appetizers. Sales in Europe increased $128.1 million, or 5.5%, primarily due to acquisitions, which contributed $94.2 million, or 4.0%. Acquisitions impacting the year-to-year sales dollar comparison include the Fiscal 1998 acquisition of John West Foods Limited in the United Kingdom and the Fiscal 1999 acquisition of the convenience meals business of Sonnen Bassermann in Germany and other smaller acquisitions. Exchange rates had a favorable impact of $21.0 million, or 0.9%, primarily in Italy. Favorable pricing increased sales by $13.5 million, or 0.6%, while sales volume was flat. Sales in Asia/Pacific decreased $61.1 million, or 5.7%. The unfavorable impact of foreign exchange translation rates reduced sales by $128.1 million, or 11.9%, primarily due to sales in New Zealand, Australia, Korea and India. This decrease was partially offset by favorable volume of $33.8 million, or 3.1%, and favorable price of $21.2 million, or 2.0%. Acquisitions also contributed $12.0 million, or 1.1%. Sales of Other Operating entities decreased $42.4 million, or 5.3%. Divestitures, primarily the bakery products unit, decreased sales by $122.5 million, or 15.5%. The unfavorable impact of foreign exchange translation rates decreased sales by $73.1 million, or 9.2%, principally in Africa. These decreases were partially offset by volume increases of $77.4 million, or 9.8%, largely due to the Weight Watchers classroom business. In addition, price increases contributed $49.6 million, or 6.3%, and acquisitions, primarily in South Africa, contributed $26.2 million, or 3.3%, to sales. Management's Discussion and Analysis 27 The following tables provide a comparison of the company's reported results and the results excluding restructuring related items for Fiscal 1999 and Fiscal 1998.
FISCAL YEAR ENDED APRIL 28, 1999 ---------------------------------------------- (DOLLARS IN MILLIONS, EXCEPT GROSS OPERATING NET PER PER SHARE AMOUNTS) PROFIT INCOME INCOME SHARE - ------------------------------------------------------------------------------ Reported results $ 3,354.7 $ 1,109.3 $ 474.3 $ 1.29 Operation Excel restructuring and implementation costs 396.4 552.8 409.7 1.11 Project Millennia implementation costs 14.7 22.3 14.3 0.04 Reversal of unutilized Project Millennia accruals (20.7) (25.7) (16.4) (0.04) Gain on sale of bakery products unit - (5.7) 0.6 - - ------------------------------------------------------------------------------ Results excluding restructuring related items $ 3,745.1 $ 1,653.0 $ 882.4 $ 2.40 - ------------------------------------------------------------------------------ FISCAL YEAR ENDED APRIL 29, 1998 ---------------------------------------------- (DOLLARS IN MILLIONS, EXCEPT GROSS OPERATING NET PER PER SHARE AMOUNTS) PROFIT INCOME INCOME SHARE - ------------------------------------------------------------------------------ Reported results $ 3,498.1 $ 1,520.3 $ 801.6 $ 2.15 Gain on sale of Ore-Ida frozen foodservice business - (96.6) (53.1) (0.14) Project Millennia implementation costs 35.7 84.1 53.0 0.14 - ------------------------------------------------------------------------------ Results excluding restructuring related items $ 3,533.8 $ 1,507.9 $ 801.4 $ 2.15 - ------------------------------------------------------------------------------
(Note: Totals may not add due to rounding.) Gross profit decreased $143.3 million to $3.35 billion from $3.50 billion in Fiscal 1998. The gross profit margin decreased to 36.1% from 38.0%. Excluding the restructuring related items identified above, gross profit would have increased $211.4 million, or 6.0%, to $3.75 billion from $3.53 billion and the gross profit margin would have increased to 40.3% from 38.4%. Europe accounted for $156.5 million of this increase due to improvements in the baby food business in Italy, the favorable impact of foreign exchange translation rates and acquisitions. North American Dry's gross profit increased $56.7 million due to cost savings from Project Millennia, stronger sales volume and acquisitions; partially offset by the disappointing performance of the domestic pet food business. Other Operating entities' gross profit increased $41.5 million due to improvements in the Weight Watchers classroom business, attributable to the Weight Watchers 1*2*3 Success(TM) Plan. North American Frozen's gross profit decrease of $24.0 million was due to the divestiture of the Ore-Ida frozen foodservice business in Fiscal 1998 and increased competitive activities for frozen potatoes, partially offset by the strong performance of Smart Ones frozen entrees. The Asia/Pacific segment's gross profit decreased $20.6 million, or 5.4%; however, excluding the unfavorable impact of foreign exchange translation rates ($47.6 million), primarily in New Zealand and Australia, gross profit increased $27.0 million, or 7.1%. SG&A increased $267.7 million to $2.25 billion from $1.98 billion and increased as a percentage of sales to 24.1% from 21.5%. Excluding restructuring related items identified above, SG&A increased $66.2 million to $2.09 billion from $2.03 billion and increased as a percentage of sales to 22.5% from 22.0%. Marketing increases were noted in the North American Dry segment primarily due to a focus on Heinz ketchup and in Europe where the company has been aggressively promoting ketchup and beans. These increases were partially offset by decreased marketing expense in the North American Frozen segment as a result of establishing low everyday list prices for The Budget Gourmet line of frozen entrees. Excluding marketing, SG&A was stable as a percentage of sales year-on-year. Total marketing support (including trade and consumer promotions and media) increased 8.4% to $2.22 billion from $2.05 billion on a sales increase of 1.0%. Advertising costs to support the company's key brands increased 3.0% to $373.9 million in Fiscal 1999 from $363.1 million in Fiscal 1998. 28 H.J. Heinz Annual Report 1999 Operating income decreased $411.0 million, or 27.0%, to $1.11 billion from $1.52 billion reported last year. Excluding the restructuring related items in both years, operating income increased $145.2 million, or 9.6%, to $1.65 billion from $1.51 billion last year. This increase was primarily due to the increase in gross profit, partially offset by increased marketing and selling and distribution costs. Domestic operations provided approximately 57% and 59% of operating income in Fiscal 1999 and Fiscal 1998, respectively. Excluding the restructuring related items in both years, domestic operations provided approximately 55% and 57% of operating income in Fiscal 1999 and Fiscal 1998, respectively. The North American Dry segment's operating income decreased $80.2 million, or 10.1%, to $717.0 million from $797.2 million last year. Excluding the restructuring related items in both years (see Note 14 to the Consolidated Financial Statements), this segment's operating income increased $8.6 million, or 1.0%, to $834.6 million from $826.0 million. Excluding the results of the domestic pet food business, the North American Dry segment experienced double-digit operating income growth due to strong sales volume and acquisitions, primarily the College Inn brand of canned broths, as well as cost savings from Project Millennia. The domestic pet food business was negatively impacted by higher costs associated with the introduction of the 9-Lives four pack, an unfavorable mix shift, significant volume declines in canned dog food and ineffective trade spending, all of which the company is aggressively working to correct. The North American Frozen segment reported $80.2 million of operating income in Fiscal 1999 versus $258.2 million in Fiscal 1998. Excluding restructuring related items in both years (see Note 14 to the Consolidated Financial Statements), operating income increased $12.7 million, or 7.4%, to $183.4 million from $170.7 million. The increase is primarily due to favorable operating results of the Smart One's frozen entree line; partially offset by the retail frozen potato business, where prices have been reduced in order to recapture market share. Europe's operating income decreased $140.7 million, or 36.4%, to $246.2 million from $386.9 million. Excluding restructuring related items in both years (see Note 14 to the Consolidated Financial Statements), operating income increased $61.7 million, or 15.2%, to $467.2 million from $405.4 million. This increase was primarily due to favorable operating results in the U.K. and Italy due to increased sales prices and acquisitions, partially offset by increased marketing spending described above. Asia/Pacific's operating income decreased $46.7 million, or 34.2%, to $89.8 million from $136.5 million. Excluding restructuring related items in both years (see Note 14 to the Consolidated Financial Statements), operating income increased $3.3 million to $145.7 million from $142.3 million last year. Strong performances in all of the company's Asia/ Pacific businesses more than offset the unfavorable impact of foreign exchange translation rates, which reduced operating income by approximately $19.5 million. Other Operating entities reported an increase in operating income of $42.0 million to $95.7 million from $53.7 million. Excluding restructuring related items in both years (see Note 14 to the Consolidated Financial Statements), operating income increased $58.4 million, or 91.8%, to $122.0 million from $63.6 million. The increase is primarily due to the exceptional performance of the Weight Watchers 1*2*3 Success(TM) Plan. The unfavorable fluctuation of foreign exchange translation rates, primarily in Africa, caused a $12.5 million decrease in operating income. Other income and expenses totaled $274.2 million in Fiscal 1999 compared to $265.3 million in Fiscal 1998. Interest expense was relatively flat year-on-year as the increase in average borrowings was offset by lower interest rates. Interest income decreased $7.6 million, or 23.2%, to $25.1 million from $32.7 million due to decreased invested funds and significantly lower interest rates on investments, primarily in Italy. Management's Discussion and Analysis 29 The effective tax rate for Fiscal 1999 was 43.2% compared to 36.1% last year. This year's higher rate includes the impact of restructuring expenses in lower tax rate jurisdictions and nondeductible expenses related to the restructuring. Excluding the restructuring related items noted above, the effective rate for Fiscal 1999 was 36.0% compared to 35.5% last year. The Fiscal 1998 effective tax rate reflects the benefits of tax legislation in Italy and the United Kingdom. (See Note 5 to the Consolidated Financial Statements.) Net income decreased $327.2 million to $474.3 million from $801.6 million last year and earnings per share decreased to $1.29 from $2.15. Excluding the restructuring related items discussed above, net income increased $81.0 million, or 10.1%, to $882.4 million in Fiscal 1999 from $801.4 million in Fiscal 1998, and earnings per share increased to $2.40 from $2.15. The impact of fluctuating exchange rates for Fiscal 1999 remained relatively consistent on a line-by-line basis throughout the Consolidated Statement of Income. 1998 versus 1997: Sales for Fiscal 1998 decreased $147.7 million, or 1.6%, to $9.21 billion from $9.36 billion in Fiscal 1997. The sales decrease was primarily due to divestitures, which reduced sales by $617.0 million, or 6.6%, and the unfavorable effect of foreign exchange translation rates, which reduced sales by $285.9 million, or 3.1%. Sales volume increased $286.8 million, or 3.1%. In addition, acquisitions increased sales by $332.0 million, or 3.5%, and favorable pricing increased sales by $136.4 million, or 1.5%. Domestic operations contributed approximately 53% of consolidated sales in Fiscal 1998, compared to approximately 55% in Fiscal 1997. Sales of the North American Dry segment increased $236.5 million, or 6.4%, primarily due to sales volume increases of $109.2 million, or 3.0%, and favorable pricing of $95.2 million, or 2.6%. Volume increases were noted in Heinz ketchup and soups, partially offset by a volume decrease in canned dog food. Price increases were noted in Heinz ketchup, seafood and infant foods. The Fiscal 1997 Canadian acquisitions of Martin Feed Mills Limited and the canned beans and pasta business of Nestle Canada Inc. contributed $42.5 million, or 1.1%, to the increase in net sales. The unfavorable fluctuation of the Canadian dollar exchange translation rate caused a $10.4 million, or 0.3%, decrease in net sales. The North American Frozen segment's sales decreased $475.6 million, or 30.7%. Divestitures accounted for $478.0 million, or 30.8%, of the decrease, primarily due to the divestiture of the Ore-Ida frozen foodservice business in the first quarter of Fiscal 1998. Volume increases of $41.3 million, or 2.6%, primarily in Ore-Ida retail frozen potatoes, were offset by price declines of $38.9 million, or 2.5%. In Fiscal 1998, the company implemented "price-based costing" for The Budget Gourmet brand of frozen entrees. "Price-based costing" refers to a strategy whereby the selling price which should drive consumer demand is determined, followed by designing product specifications that will provide adequate margins at the selling price. This strategy turned around the negative volume trends noted in Fiscal 1997 with a volume increase in Fiscal 1998. In addition, the company also focused on the Smart Ones brand of frozen entrees from Weight Watchers, resulting in a volume increase as well. Sales in Europe increased $177.9 million, or 8.3%, primarily due to acquisitions, net of divestitures, which contributed $207.0 million, or 9.6%, (primarily John West Foods Limited in the United Kingdom), volume increases of $46.3 million, or 2.2%, and price increases of $27.1 million, or 1.3%. Volume increases were experienced in seafood, infant foods and weight loss entrees. These increases were partially offset by the unfavorable effect of foreign exchange translation rates, which reduced European sales by $102.5 million, or 4.8%, primarily in Italy. Sales of Asia/Pacific declined $148.0 million, or 12.1%. Divestitures accounted for $92.6 million, or 7.6%, of the decrease, primarily due to the divestiture of the New Zealand ice cream business in the fourth quarter of Fiscal 1997. The unfavorable impact of foreign exchange translation rates, primarily in New Zealand, Australia, Korea and Japan, reduced sales by $130.0 million, or 10.6%. These decreases were partially offset by acquisitions, which increased sales by $32.3 million, or 2.6%. In addition, pricing increased $25.2 million, or 2.1%, and volume increased $17.1 million, or 1.4%. 30 H.J. Heinz Annual Report 1999 Sales of Other Operating entities increased $61.5 million, or 8.4%, due to volume increases of $73.0 million, or 10.0%, and price increases of $27.7 million, or 3.8%. Strong volume increases were experienced in the Weight Watchers classroom business, which benefited from the introduction of the Weight Watchers 1*2*3 Success(TM) Plan in the U.S. Acquisitions, net of divestitures contributed $3.8 million, or 0.5%. The unfavorable impact of foreign exchange translation rates reduced sales by $43.0 million, or 5.9%, primarily due to fluctuations in Africa. The following tables provide a comparison of the company's reported results and the results excluding restructuring related items for Fiscal 1998 and Fiscal 1997.
FISCAL YEAR ENDED APRIL 29, 1998 ---------------------------------------------- (DOLLARS IN MILLIONS, EXCEPT GROSS OPERATING NET PER PER SHARE AMOUNTS) PROFIT INCOME INCOME SHARE - ------------------------------------------------------------------------------ Reported results $ 3,498.1 $ 1,520.3 $ 801.6 $ 2.15 Gain on sale of Ore-Ida frozen foodservice business - (96.6) (53.1) (0.14) Project Millennia implementation costs 35.7 84.1 53.0 0.14 - ------------------------------------------------------------------------------ Results excluding restructuring related items $ 3,533.8 $ 1,507.9 $ 801.4 $ 2.15 - ------------------------------------------------------------------------------ FISCAL YEAR ENDED APRIL 30, 1997 ---------------------------------------------- (DOLLARS IN MILLIONS, EXCEPT GROSS OPERATING NET PER PER SHARE AMOUNTS) PROFIT INCOME INCOME SHARE - ------------------------------------------------------------------------------ Reported results $ 2,971.9 $ 756.3 $ 301.9 $ 0.81 Project Millennia restructuring charge 477.8 647.2 409.4 1.09 Gain on sale of New Zealand ice cream business (72.1) (72.1) (44.9) (0.12) Gain on sale of real estate in the United Kingdom (13.2) (13.2) (8.5) (0.02) - ------------------------------------------------------------------------------ Results excluding restructuring related items $ 3,364.4 $ 1,318.2 $ 657.9 $ 1.76 - ------------------------------------------------------------------------------
(Note: Totals may not add due to rounding.) Gross profit increased $526.2 million to $3.50 billion from $2.97 billion, and the gross profit margin increased to 38.0% from 31.8%. Excluding restructuring related items identified above, gross profit increased $169.3 million, or 5.0%, to $3.53 billion, or 38.4% of sales, from $3.36 billion, or 36.0% of sales. This increase was primarily noted in the North American Dry segment, which benefited from price increases and reduced trade allowances resulting from the discontinuance of inefficient end-of-quarter trade promotions, cost savings resulting from Project Millennia and a favorable product mix. The sale of the lower margin Ore-Ida frozen foodservice business contributed to an improved gross profit margin in the North American Frozen segment. Gross profit in Europe increased due to favorable sales pricing, volume and acquisitions, primarily John West Foods Limited in the U.K.; partially offset by the unfavorable impact of foreign exchange translation rates ($45.4 million), primarily in Italy. SG&A decreased $237.9 million to $1.98 billion from $2.22 billion and decreased as a percentage of sales to 21.5% from 23.7%. Excluding restructuring related items in both years, SG&A decreased $20.3 million, or 1.0%, to $2.03 billion from $2.05 billion and increased slightly as a percentage of sales to 22.0% from 21.9%. Excluding restructuring related items in both years, increased marketing and general and administrative expenses were offset by lower selling and distribution expenses attributable to cost savings resulting from Project Millennia. Total marketing support (including trade and consumer promotions and media) remained relatively constant on a sales decrease of 1.6%. However, advertising costs to support the company's key brands increased 13.8% to $363.1 million in Fiscal 1998 from $319.0 million in Fiscal 1997. Management's Discussion and Analysis 31 Operating income increased to $1.52 billion from $756.3 million reported in Fiscal 1997. Excluding the restructuring related items in both years, operating income increased $189.7 million, or 14.4%, to $1.51 billion from $1.32 billion. This increase was primarily due to the increase in gross profit, as SG&A expenses were relatively flat year-on-year. Domestic operations provided approximately 59% of operating income in Fiscal 1998 compared to approximately 23% of operating income in Fiscal 1997. Excluding restructuring related items in both years, domestic operations provided 57% of operating income in Fiscal 1998 versus approximately 53% of operating income in Fiscal 1997. The North American Dry segment's operating income increased $354.7 million to $797.2 million from $442.5 million reported in Fiscal 1997. Excluding the restructuring related items in both years (see Note 14 to the Consolidated Financial Statements), operating income of the North American Dry segment increased $118.1 million, or 16.7%, to $826.0 million from $707.9 million. The North American Frozen segment reported operating income of $258.2 million in Fiscal 1998 versus an operating loss of $4.7 million in Fiscal 1997. Excluding the restructuring related items in both years (see Note 14 to the Consolidated Financial Statements), operating income increased $40.3 million, or 30.9%, to $170.7 million from $130.4 million. For both of these segments, Fiscal 1997 operating income was negatively impacted by the company's decision to eliminate inefficient end-of-quarter trade promotion practices, which significantly reduced sales. Europe's operating income increased $70.3 million, or 22.2%, to $386.9 million from $316.6 million. Excluding restructuring related items in both years (see Note 14 to the Consolidated Financial Statements), operating income increased $30.2 million, or 8.1%, to $405.4 million from $375.2 million. This increase was primarily due to price increases, stronger sales volume and favorable product mix as well as acquisitions, primarily John West Foods Limited in the U.K., partially offset by unfavorable foreign exchange translation rates, primarily in Italy. Asia/Pacific's operating income decreased $35.1 million, or 20.4%, to $136.5 million from $171.6 million. Excluding restructuring related items in both years (see Note 14 to the Consolidated Financial Statements), operating income increased $6.1 million, or 4.5%, to $142.3 million from $136.2 million in Fiscal 1997. In local currency, operating income experienced strong double-digit growth due to favorable pricing in Australia and New Zealand; offset by unfavorable foreign exchange translation rates. Other Operating entities reported an increase in operating income of $118.0 million to $53.7 million from an operating loss of $64.3 million. Excluding restructuring related items in both years (see Note 14 to the Consolidated Financial Statements), operating income increased $13.4 million, or 26.6%, to $63.6 million from $50.2 million. The increase is primarily due to the Weight Watchers classroom business, which benefited from the introduction of the Weight Watchers 1*2*3 Success(TM) Plan in the United States and streamlining efforts of Project Millennia, partially offset by an unfavorable fluctuation of foreign exchange translation rates, primarily in Africa. Other income and expenses totaled $265.3 million in Fiscal 1998 compared to $277.2 million in Fiscal 1997. Net interest expense decreased $9.4 million, or 4.0%, to $226.0 million from $235.4 million due mainly to lower average borrowings. The effective tax rate was 36.1% in Fiscal 1998 compared to 37.0% in Fiscal 1997. The Fiscal 1998 effective tax rate reflects the benefits of tax legislation in Italy and the United Kingdom. (See Note 5 to the Consolidated Financial Statements.) Net income increased $499.7 million to $801.6 million from $301.9 million and earnings per share increased to $2.15 from $0.81. Excluding restructuring related items in both years, net income increased $143.5 million, or 21.8%, to $801.4 million in Fiscal 1998 from $657.9 million in Fiscal 1997 and earnings per share increased to $2.15 per share from $1.76 per share. The impact of fluctuating exchange rates for Fiscal 1998 remained relatively consistent on a line-by-line basis throughout the Consolidated Statement of Income. 32 H.J. Heinz Annual Report 1999 - ------------------------------------------------------------------------------ LIQUIDITY AND Return on average shareholders' equity ("ROE") was 23.6% in FINANCIAL Fiscal 1999, 34.4% in Fiscal 1998 and 11.7% in Fiscal 1997. POSITION Excluding the restructuring related items described above, ROE was 39.9% in Fiscal 1999, 34.4% in Fiscal 1998 and 23.9% in Fiscal 1997. Pretax return on average invested capital ("ROIC") was 20.8% in Fiscal 1999, 27.0% in Fiscal 1998 and 12.6% in Fiscal 1997. Excluding the restructuring related items described above, ROIC was 30.0%, 26.8% and 21.4% in Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively. Cash provided by operating activities decreased to $910.1 million in Fiscal 1999, compared to $1.07 billion in Fiscal 1998 and $875.0 million in Fiscal 1997. The decrease in Fiscal 1999 versus Fiscal 1998 was primarily the result of higher working capital requirements. In order to facilitate the anticipated plant shutdowns and reconfigurations for Operation Excel, the company has increased inventory levels at certain locations. Cash used for investing activities totaled $390.5 million in Fiscal 1999, compared to providing $27.2 million in Fiscal 1998. Acquisitions in the current year required $269.0 million, compared to $142.1 million in the prior year. Fiscal 1999 acquisitions included the College Inn brand of canned broths, a joint venture with ABC Indonesia, a leading provider of ketchup, sauces and condiments, and other smaller acquisitions. (See Note 2 to the Consolidated Financial Statements.) Divestitures provided $180.4 million in Fiscal 1999, primarily the sale of the company's bakery products unit, compared to $494.7 million in Fiscal 1998, primarily the sale of the Ore-Ida frozen foodservice business. (See Note 3 to the Consolidated Financial Statements.) Capital expenditures totaled $316.7 million in Fiscal 1999 and $373.8 million in Fiscal 1998. Both years reflect expenditures for productivity improvements and plant expansions, principally at the company's North American Dry and European segments. Purchases and sales/maturities of short-term investments decreased in Fiscal 1999. The company periodically sells a portion of its short-term investment portfolio in order to reduce its borrowings. Financing activities used $515.5 million in Fiscal 1999 compared to $1.15 billion in Fiscal 1998. Net funds borrowed were $268.3 million in Fiscal 1999 versus net repayments of $306.2 million in Fiscal 1998. Cash used for dividends paid to shareholders increased by $32.2 million, to $484.8 million from $452.6 million in Fiscal 1998. Treasury stock purchased totaled $410.1 million (7.5 million shares) in Fiscal 1999 versus $677.2 million (13.6 million shares) in Fiscal 1998. In Fiscal 1999, proceeds from the exercise of stock options provided $77.2 million versus $201.0 million in Fiscal 1998. The average amount of short-term debt outstanding (excluding domestic commercial paper, all of which is long- term) during Fiscal 1999, Fiscal 1998 and Fiscal 1997 was $453.9 million, $556.3 million and $520.5 million, respectively. Total short-term debt had a weighted-average interest rate during Fiscal 1999 of 6.3% and at year-end of 5.3%. The weighted-average interest rate on short-term debt during Fiscal 1998 was 6.5% and at year-end was 6.4%. Aggregate domestic commercial paper had a weighted-average interest rate during Fiscal 1999 of 5.3% and at year-end of 4.9%. In Fiscal 1998, the weighted-average interest rate and the rate at year-end was 5.6%. Based upon the amount of commercial paper outstanding at April 28, 1999, a variance of 1/8% in the related interest rate would cause annual interest expense to change by approximately $1.8 million. On July 15, 1998, the company, under its current shelf registration statement, issued $250 million of 6.375% debentures due July 2028. The proceeds were used to repay domestic commercial paper. (See Note 6 to the Consolidated Financial Statements.) The company's $2.30 billion credit agreement, which expires in September 2001, supports its domestic commercial paper program. As of April 28, 1999, $1.41 billion of domestic commercial paper is classified as long-term debt due to the long-term nature of the supporting credit agreement. At April 29, 1998, $1.34 billion of domestic commercial paper was outstanding and classified as long-term debt. On September 8, 1998, the company's Board of Directors raised the quarterly dividend on the company's common stock to $0.34- 1/4 per share from $0.31-1/2 per share, for an indicated annual rate of $1.37 per share. The company paid $484.8 million in dividends to both common and preferred shareholders, an increase of $32.2 million, or 7.1%, over Fiscal 1998. The dividend rate in effect at the Management's Discussion and Analysis 33 end of each year resulted in a payout ratio of 106.2% in Fiscal 1999, 58.6% in Fiscal 1998 and 143.2% in Fiscal 1997. Excluding the impact of the restructuring related items in all years, the payout ratio was 57.1%, 58.6% and 65.9% in Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively. In Fiscal 1999, the company repurchased 7.5 million shares of common stock, or 2.1% of the amount outstanding at the beginning of Fiscal 1999, at a cost of $410.1 million. As of April 28, 1999, the company had repurchased 9.3 million shares as part of the 10.0 million share repurchase program, which was authorized by the Board of Directors on September 10, 1997. This plan was completed on June 1, 1999. On June 9, 1999, the Board of Directors authorized the repurchase of up to 20.0 million shares. During Fiscal 1998, 13.6 million shares were repurchased at a cost of $677.2 million. The company may reissue repurchased shares upon the exercise of stock options, conversions of preferred stock and for general corporate purposes. In Fiscal 1999, the cash requirements for Phase I of Operation Excel were $75.6 million, consisting of spending for severance and exit costs ($16.6 million), capital expenditures ($5.8 million) and implementation costs ($53.2 million). The Fiscal 1999 cash requirements for Project Millennia were $117.4 million, consisting of spending for severance and exit costs ($48.6 million), capital expenditures ($46.5 million) and implementation costs ($22.3 million). In Fiscal 2000, the company expects the cash requirements related to Phase I of Operation Excel to be approximately $340 million, consisting of spending for severance and exit costs ($110 million of the $127.6 million accrued at April 28, 1999), capital expenditures ($100 million) and implementation costs ($130 million). Project Millennia is expected to require cash of approximately $20 million in Fiscal 2000, consisting of spending for severance and exit costs ($15 million of the $20.1 million accrued at April 28, 1999) and capital expenditures ($5 million). Future phases of Operation Excel are expected to require approximately $400 million for severance, exit and implementation costs over the next four years. The company is financing the cash requirements of these programs through operations, proceeds from the sale of non-strategic assets and with short- and long-term borrowings. The cash requirements of Operation Excel and Project Millennia will not have a significant impact on the company's liquidity or financial position. During 1995, the company participated in the formation of a business (the "entity") which purchases a portion of the trade receivables generated by the company. The company sells receivables to Jameson, Inc., a wholly owned subsidiary, which then sells undivided interests in the receivables to the entity. Outside investors contributed $95.4 million in capital to the entity. The company consolidates the entity, and the capital contributed by outside investors is classified as minority interest ("other long-term liabilities") on the Consolidated Balance Sheets. In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FAS Statement 133," which postponed the adoption date of SFAS No. 133. As such, the company is not required to adopt the statement until Fiscal 2002. The company is currently evaluating the effect that implementation of the new standard will have on its results of operations and financial position. In April 1998, the American Institute of CPAs issued a Statement of Position ("SOP") entitled "Reporting on the Costs of Start-up Activities." This SOP requires that costs incurred to open a new facility, introduce a new product, commence a new operation or other similar activities be expensed as incurred. The company will adopt this SOP in Fiscal 2000. The company does not believe this SOP will have a material impact on its financial statements. The impact of inflation on both the company's financial position and results of operations has been minimal and is not expected to adversely affect Fiscal 2000 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. 34 H.J. Heinz Annual Report 1999 - ------------------------------------------------------------------------------ MARKET RISK The following discussion about the company's risk- FACTORS management activities includes "forward-looking" statements that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The company is exposed to market risks from adverse changes in foreign exchange rates, interest rates and commodity prices. As a policy, the company does not engage in speculative or leveraged transactions, nor does the company hold or issue financial instruments for trading purposes. Foreign Exchange Rate Sensitivity: The company's cash flow and earnings are subject to fluctuations due to exchange rate variation. Foreign currency risk exists by nature of the company's global operations. The company manufactures and sells its products in a number of locations around the world, and hence foreign currency risk is well diversified. When appropriate, the company may attempt to limit its exposure to changing foreign exchange rates through both operational and financial market actions. These actions may include entering into forward, option and swap contracts to hedge existing exposures, firm commitments and, potentially, anticipated transactions. The instruments are used to reduce risk by essentially creating offsetting currency exposures. As of April 28, 1999, the company held contracts for the purpose of hedging certain intercompany cash flows with an aggregate notional amount of approximately $680 million. In addition, the company held separate contracts in order to hedge purchases of certain raw materials and finished goods and for payments arising from certain foreign currency denominated obligations totaling approximately $190 million. The company also held contracts to hedge sales denominated in foreign currencies of $140 million. The company's contracts mature within two years of the fiscal year-end. The contracts that effectively meet the risk reduction and correlation criteria, as measured on a currency-by-currency basis are accounted for as hedges. Accordingly, gains and losses are deferred in the cost basis of the underlying transaction. In those circumstances when it is not appropriate to account for the contracts as hedges, any gains and losses from mark-to- market and settlement are recorded in miscellaneous income and expense. At April 28, 1999, unrealized gains and losses on outstanding foreign currency contracts are not material. As of April 28, 1999, the potential gain or loss in the fair value of the company's outstanding foreign currency contracts, assuming a hypothetical 10% fluctuation in the currencies of such contracts, would be approximately $30 million. However, it should be noted that any change in the value of the contracts, real or hypothetical, would be significantly offset by an inverse change in the value of the underlying hedged items. In addition, this hypothetical calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. Substantially all of the company's foreign affiliates' financial instruments are denominated in their respective functional currencies. Accordingly, exposure to exchange risk on foreign currency financial instruments is not material. (See Note 12 to the Consolidated Financial Statements.) Interest Rate Sensitivity: The company is exposed to changes in interest rates primarily as a result of its borrowing and investing activities used to maintain liquidity and fund business operations. The company continues to utilize commercial paper to fund working capital requirements in the U.S. and Canada. The company also borrows in different currencies from other sources to meet the borrowing needs of its foreign affiliates. The nature and amount of the company's long-term and short-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. The company may utilize interest rate swap agreements to lower funding costs, to diversify sources of funding or to alter interest rate exposure. There are no interest rate swap agreements outstanding at April 28, 1999. Management's Discussion and Analysis 35 The following table summarizes the company's debt obligations at April 28, 1999. The interest rates represent weighted-average rates, with the period end rate used for the variable rate debt obligations. The fair value of the debt obligations approximated the recorded value as of April 28, 1999. (See Notes 6 and 12 to the Consolidated Financial Statements.)
EXPECTED FISCAL YEAR OF MATURITY --------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Fixed rate $ 613,366 $ 19,330 $ 11,434 $ 453,201 $ 2,540 $ 568,864 $1,668,735 Average interest rate 6.83% 6.85% 8.35% 6.25% 6.40% 6.31% Variable rate $ 290,841 $ - $1,409,437 $ - $ - $ 7,400 $1,707,678 Average interest rate 5.32% - 4.89% - - 3.72% - ------------------------------------------------------------------------------------------------------------------------------------
Commodity Price Sensitivity: The company is the purchaser of certain commodities such as corn, wheat and soybean meal and oil. The company generally purchases these commodities based upon market prices that are established with the vendor as part of the purchase process. In general, the company does not use significant levels of commodity financial instruments to hedge commodity prices due to a high correlation between the commodity cost and the ultimate selling price of the product. On occasion, the company may enter into commodity future or option contracts, as deemed appropriate, to reduce the effect of price fluctuations on some future manufacturing requirements. Such contracts are accounted for as hedges, with gains and losses recognized as part of cost of products sold, and generally have a term of less than one year. As of April 28, 1999, unrealized gains and losses related to commodity contracts held by the company were not material nor would they be given a hypothetical 10% fluctuation in market prices. It should be noted that any change in the value of the contracts, real or hypothetical, would be significantly offset by an inverse change in the value of the underlying hedged items. (See Note 12 to the Consolidated Financial Statements.) - ------------------------------------------------------------------------------ YEAR 2000 ISSUE The Year 2000 issue arises because many computer hardware and software systems use only two digits rather than four digits to refer to a year. Therefore, computers or other equipment with date sensitive programming may not properly recognize a year that begins with "20." If not corrected, this could cause system failures or miscalculations that could significantly disrupt the company's business. Beginning in 1996, the company initiated a worldwide plan to address the Year 2000 issues that could affect its operations. The company's Chief Information Officer is in charge of the Year 2000 project. Each of the company's business units and corporate headquarters have established Year 2000 teams. The project is called "Operation Ready," a name that helps focus the organization on the overall challenge of being operationally ready to address the expected consequences of the Year 2000 issue, including compliance by third parties who have material relationships with the company, such as vendors, customers and suppliers, and the development of contingency plans. The company's progress is monitored by senior management and periodically reported to the Audit Committee and Board of Directors. The first phase of Operation Ready was to conduct a worldwide review to identify and evaluate areas impacted by the Year 2000 issue. The review and evaluation focused on both traditional computer information technology systems ("IT systems") and non-information systems such as manufacturing, process and logistical systems which rely on embedded chips or similar devices ("non-IT systems"). The assessment of the company's internal IT systems has been completed, and the assessment of its non-IT systems is substantially complete. 36 H.J. Heinz Annual Report 1999 The second phase of the company's Year 2000 readiness plan is remediation which involves replacement, upgrading, modification and testing of affected hardware, software and process systems. As of April 28, 1999, management estimates that approximately 65% of its core worldwide IT systems are Year 2000 ready. Several of the company's major affiliates such as Heinz U.S.A., Heinz Italy and Heinz Australia are virtually 100% operationally ready with respect to their IT systems. It is expected that the remaining IT systems will be operationally ready by the end of September 1999. Time machine testing of key IT applications has been completed successfully for the company's major North American affiliates and the testing of other remediated systems is progressing on schedule. The remediation of non-IT systems is progressing on schedule, and it is estimated that these efforts also will be substantially complete by the end of September 1999. The company's corporate audit department has dedicated efforts to evaluating the company's Year 2000 preparedness. The corporate audit department, with the assistance of outside consultants, completed on-site preparedness reviews at the company's major affiliate locations and its corporate headquarters. These reviews addressed IT system remediation efforts as well as contingency planning and non-IT issues. The corporate audit department continues monitoring progress with respect to earlier reviews. It is currently estimated that the cost to make the company's IT systems and non-IT systems Year 2000 operationally ready will be approximately $75 million, of which over 80% has been incurred to date. All of the costs are being funded through operating cash flow. These estimated costs have not had nor are expected to have a material adverse effect on the company's consolidated financial position, results of operations or liquidity. The above amount includes costs for implementation of the company's contingency plans described below. A critical part of Operation Ready involves the investigation and assessment of the Year 2000 preparedness of important suppliers, vendors, customers, utilities and other third parties. The company's initial round of assessments has been completed. Generally, these third parties have indicated that they are progressing on schedule with their Year 2000 issues. The company is continuing on-site interviews and face-to-face visits with the critical suppliers, vendors and customers. These efforts will continue throughout the year in order to minimize the risk that any significant adverse consequences will result due to the failure of these third parties to be Year 2000 ready. While the company has no reason to believe that its exposure to the risks of the failure of it or third parties to be Year 2000 ready is any greater than the exposure to such risks that affect its competitors generally, there can be no assurance that the consequences of such failures would not have a material adverse impact on the company's operations. Although the company does not anticipate any major noncompliance issues, the company believes the most likely worst case scenario would be the temporary disruption of its business in certain locations in the event of noncompliance by the company or such third parties, which could include temporary plant closings, delays in the delivery and receipt of products and supplies, invoice and collection errors and inventory obsolescence. The company believes that its Operation Ready contingency planning should significantly reduce the adverse effect any such disruptions may have. The company's headquarters and affiliate Year 2000 readiness teams are working to allow the company to continue critical operations in the event either the company or major key suppliers or customers fail to resolve their respective Year 2000 issues in a timely manner. In addition, each major function involving the company (purchasing, manufacturing, sales, etc.) has a contingency planning team working on Year 2000 issues specific to that function. The plans developed by the functional teams have been shared with the affiliate teams, so that Year 2000 issues will be addressed from two separate perspectives. Contingency plans include stockpiling raw and packaging materials, increasing finished goods inventory levels, developing emergency backup and recovery procedures, securing alternate suppliers, replacing electronic applications with manual processes or other appropriate measures. The company has implemented an internal web site to disseminate Year 2000 related information, including policies, guidelines, tools, teams, plans and progress reporting to affiliate Operation Ready Management's Discussion and Analysis 37 teams throughout the world. Standardized progress reporting has been implemented for all affiliates to report their contingency planning and remediation status to the corporate headquarters. Year 2000 status and issues have been key topics at global management conferences. The company's Year 2000 readiness plan, including the further development and refinement of contingency plans, is an ongoing process and will continue to evolve and change as new information becomes available. - ------------------------------------------------------------------------------ EURO CONVERSION A single currency, the Euro, was introduced in Europe on January 1, 1999. Of the fifteen member countries of the European Union, eleven adopted the Euro as their legal currency on that date. Fixed conversion rates between the national currencies of these eleven countries and the Euro were established on that date. The national currencies are scheduled to remain legal tender as denominations of the Euro during the transition period ending December 31, 2001. During this transition period, parties may settle transactions using either the Euro or a participating country's national currency. At the current time, the company does not believe that the conversion to the Euro will have a material impact on its business or its financial condition. - ------------------------------------------------------------------------------ STOCK MARKET H.J. Heinz Company common stock is traded principally on INFORMATION the New York Stock Exchange and the Pacific Stock Exchange, under the symbol HNZ. The number of shareholders of record of the company's common stock as of June 30, 1999 approximated 61,306. The closing price of the common stock on the New York Stock Exchange composite listing on April 28, 1999 was $48-7/16. Stock price information for common stock by quarter follows:
STOCK PRICE RANGE -------------------------------------- HIGH LOW ---------------------------------------------------------- 1999 First $58-1/2 $51-5/8 Second 61-1/8 48-1/2 Third 61-3/4 51-3/16 Fourth 58-13/16 44-9/16 ---------------------------------------------------------- 1998 First $47-1/2 $41-1/4 Second 49-7/16 41-1/8 Third 56-11/16 45-1/2 Fourth 59-15/16 51-7/16 ----------------------------------------------------------
38 H.J. Heinz Annual Report 1999 CONSOLIDATED STATEMENTS OF INCOME H.J. Heinz Company and Subsidiaries
FISCAL YEAR ENDED APRIL 28, 1999 APRIL 29, 1998 APRIL 30, 1997 - ------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (52 WEEKS) (52 WEEKS) (52 WEEKS) - ------------------------------------------------------------------------------ Sales $ 9,299,610 $ 9,209,284 $ 9,357,007 Cost of products sold 5,944,867 5,711,213 6,385,091 - ------------------------------------------------------------------------------ Gross profit 3,354,743 3,498,071 2,971,916 Selling, general and administrative expenses 2,245,431 1,977,741 2,215,645 - ------------------------------------------------------------------------------ Operating income 1,109,312 1,520,330 756,271 Interest income 25,082 32,655 39,359 Interest expense 258,813 258,616 274,746 Other expense, net 40,450 39,388 41,820 - ------------------------------------------------------------------------------ Income before income taxes 835,131 1,254,981 479,064 Provision for income taxes 360,790 453,415 177,193 - ------------------------------------------------------------------------------ Net income $ 474,341 $ 801,566 $ 301,871 - ------------------------------------------------------------------------------ PER COMMON SHARE AMOUNTS: Net income - diluted $ 1.29 $ 2.15 $ 0.81 Net income - basic $ 1.31 $ 2.19 $ 0.82 Cash dividends $ 1.34-1/4 $ 1.23-1/2 $ 1.13-1/2 - ------------------------------------------------------------------------------ Average common shares outstanding - diluted 367,830,419 372,952,851 374,043,705 Average common shares outstanding - basic 361,203,539 365,982,290 367,470,850 - ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. Consolidated Statements of Income 39 CONSOLIDATED BALANCE SHEETS H.J. Heinz Company and Subsidiaries
ASSETS (DOLLARS IN THOUSANDS) APRIL 28, 1999 APRIL 29, 1998 - ------------------------------------------------------------------------------ CURRENT ASSETS: Cash and cash equivalents $ 115,982 $ 96,300 Short-term investments, at cost which approximates market 7,139 3,098 Receivables (net of allowances: 1999 - $21,633 and 1998 - $17,627) 1,163,915 1,071,837 Inventories: Finished goods and work-in-process 1,064,015 988,322 Packaging material and ingredients 345,636 340,521 - ------------------------------------------------------------------------------ 1,409,651 1,328,843 - ------------------------------------------------------------------------------ Prepaid expenses 154,619 167,431 Other current assets 35,472 19,010 - ------------------------------------------------------------------------------ Total current assets 2,886,778 2,686,519 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ PROPERTY, PLANT AND EQUIPMENT: Land 48,649 51,129 Buildings and leasehold improvements 798,307 806,299 Equipment, furniture and other 3,227,019 3,210,695 - ------------------------------------------------------------------------------ 4,073,975 4,068,123 Less accumulated depreciation 1,902,951 1,673,461 - ------------------------------------------------------------------------------ Total property, plant and equipment, net 2,171,024 2,394,662 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ OTHER NON-CURRENT ASSETS: Goodwill (net of amortization: 1999 - $352,209 and 1998 - $297,868) 1,781,466 1,764,574 Trademarks (net of amortization: 1999 - $84,672 and 1998 - $67,791) 511,608 416,918 Other intangibles (net of amortization: 1999 - $117,038 and 1998 - $112,768) 177,290 194,560 Other non-current assets 525,468 566,188 - ------------------------------------------------------------------------------ Total other non-current assets 2,995,832 2,942,240 - ------------------------------------------------------------------------------ Total assets $8,053,634 $8,023,421 - ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 40 H.J. Heinz Annual Report 1999
LIABILITIES AND SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS) APRIL 28, 1999 APRIL 29, 1998 - ------------------------------------------------------------------------------ CURRENT LIABILITIES: Short-term debt $ 290,841 $ 301,028 Portion of long-term debt due within one year 613,366 38,598 Accounts payable 945,488 978,365 Salaries and wages 74,098 66,473 Accrued marketing 182,024 163,405 Accrued restructuring costs 147,786 94,400 Other accrued liabilities 372,623 360,608 Income taxes 160,096 161,396 - ------------------------------------------------------------------------------ Total current liabilities 2,786,322 2,164,273 - ------------------------------------------------------------------------------ LONG-TERM DEBT AND OTHER LIABILITIES: Long-term debt 2,472,206 2,768,277 Deferred income taxes 310,799 291,161 Non-pension postretirement benefits 208,102 209,642 Other 473,201 373,552 - ------------------------------------------------------------------------------ Total long-term debt and other liabilities 3,464,308 3,642,632 - ------------------------------------------------------------------------------ SHAREHOLDERS' EQUITY: Capital stock: Third cumulative preferred, $1.70 first series, $10 par value 173 199 Common stock, 431,096,485 shares issued, $.25 par value 107,774 107,774 - ------------------------------------------------------------------------------ 107,947 107,973 Additional capital 277,652 252,773 Retained earnings 4,379,742 4,390,248 - ------------------------------------------------------------------------------ 4,765,341 4,750,994 Less: Treasury shares, at cost (71,968,652 shares at April 28, 1999 and 67,678,632 shares at April 29, 1998) 2,435,012 2,103,979 Unearned compensation relating to the ESOP 11,728 14,822 Accumulated other comprehensive loss 515,597 415,677 - ------------------------------------------------------------------------------ Total shareholders' equity 1,803,004 2,216,516 Total liabilities and shareholders' equity $8,053,634 $8,023,421 - ------------------------------------------------------------------------------
Consolidated Balance Sheets 41 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY H.J. Heinz Company and Subsidiaries
PREFERRED STOCK COMMON STOCK ---------------- ------------------ (AMOUNTS IN THOUSANDS, COMPREHENSIVE EXCEPT PER SHARE DATA) INCOME SHARES DOLLARS SHARES DOLLARS - ------------------------------------------------------------------------------- Balance at May 1, 1996 27 $271 431,096 $107,774 Comprehensive income - 1997: Net income - 1997 $301,871 Other comprehensive income (loss), net of tax: Minimum pension liability, net of $3,282 tax expense 5,588 Unrealized translation adjustments (41,353) Realized translation reclassification adjustment (13,758) -------- Comprehensive income $252,348 -------- Cash dividends: Preferred @ $1.70 per share Common @ $1.13-1/2 per share Shares reacquired Conversion of preferred into common stock (3) (30) Stock options exercised, net of shares tendered for payment Unearned compensation relating to the ESOP Other, net - ------------------------------------------------------------------------------- Balance at April 30, 1997 24 241 431,096 107,774 Comprehensive income - 1998: Net income - 1998 $801,566 Other comprehensive income (loss), net of tax: Minimum pension liability, net of $1,428 tax expense 2,433 Unrealized translation adjustments (180,284) -------- Comprehensive income $623,715 -------- Cash dividends: Preferred @ $1.70 per share Common @ $1.23-1/2 per share Shares reacquired Conversion of preferred into common stock (4) (42) Stock options exercised, net of shares tendered for payment Unearned compensation relating to the ESOP Other, net - ------------------------------------------------------------------------------- Balance at April 29, 1998 20 199 431,096 107,774 Comprehensive income - 1999: Net income - 1999 $474,341 Other comprehensive income (loss), net of tax: Minimum pension liability, net of $6,975 tax benefit (11,880) Unrealized translation adjustments (88,040) -------- Comprehensive income $374,421 -------- Cash dividends: Preferred @ $1.70 per share Common @ $1.34-1/4 per share Shares reacquired Conversion of preferred into common stock (3) (26) Stock options exercised, net of shares tendered for payment Unearned compensation relating to the ESOP Other, net - ------------------------------------------------------------------------------- Balance at April 28, 1999 17 $173 431,096 $107,774 - ------------------------------------------------------------------------------- Authorized Shares - April 28, 1999 17 600,000 - -------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 42 H.J. Heinz Annual Report 1999
UNEARNED ACCUMULATED TREASURY STOCK COMPENSATION OTHER TOTAL (AMOUNTS IN THOUSANDS, ADDITIONAL RETAINED --------------------- RELATING COMPREHENSIVE SHAREHOLDERS' EXCEPT PER SHARE DATA) CAPITAL EARNINGS SHARES DOLLARS TO THE ESOP LOSS EQUITY - ------------------------------------------------------------------------------------------------------------------------------ Balance at May 1, 1996 $154,602 $4,156,380 (62,498) $(1,500,866) $(23,101) $(188,303) $2,706,757 Comprehensive income - 1997: Net income - 1997 301,871 301,871 Other comprehensive income (loss), net of tax: Minimum pension liability, net of $3,282 tax expense Unrealized translation adjustments Realized translation reclassification adjustment (49,523) (49,523) Comprehensive income Cash dividends: Preferred @ $1.70 per share (43) (43) Common @ $1.13-1/2 per share (416,923) (416,923) Shares reacquired (7,939) (277,046) (277,046) Conversion of preferred into common stock (932) 41 963 1 Stock options exercised, net of shares tendered for payment 21,946* 6,466 147,071 169,017 Unearned compensation relating to the ESOP 5,738 5,738 Other, net 195 18 377 572 - ------------------------------------------------------------------------------------------------------------------------------ Balance at April 30, 1997 175,811 4,041,285 (63,912) (1,629,501) (17,363) (237,826) 2,440,421 Comprehensive income - 1998: Net income - 1998 801,566 801,566 Other comprehensive income (loss), net of tax: Minimum pension liability, net of $1,428 tax expense Unrealized translation adjustments (177,851) (177,851) Comprehensive income Cash dividends: Preferred @ $1.70 per share (37) (37) Common @ $1.23-1/2 per share (452,566) (452,566) Shares reacquired (13,559) (677,193) (677,193) Conversion of preferred into common stock (1,322) 56 1,364 - Stock options exercised, net of shares tendered for payment 77,830* 9,717 200,860 278,690 Unearned compensation relating to the ESOP 2,541 2,541 Other, net 454 19 491 945 - ------------------------------------------------------------------------------------------------------------------------------ Balance at April 29, 1998 252,773 4,390,248 (67,679) (2,103,979) (14,822) (415,677) 2,216,516 Comprehensive income - 1999: Net income - 1999 474,341 474,341 Other comprehensive income (loss), net of tax: Minimum pension liability, net of $6,975 tax benefit Unrealized translation adjustments (99,920) (99,920) Comprehensive income Cash dividends: Preferred @ $1.70 per share (30) (30) Common @ $1.34-1/4 per share (484,817) (484,817) Shares reacquired (7,464) (410,103) (410,103) Conversion of preferred into common stock (846) 34 872 - Stock options exercised, net of shares tendered for payment 25,658* 3,138 78,150 103,808 Unearned compensation relating to the ESOP 3,094 3,094 Other, net 67 2 48 115 - ------------------------------------------------------------------------------------------------------------------------------ Balance at April 28, 1999 $277,652 $4,379,742 (71,969) $(2,435,012) $(11,728) $(515,597)+ $1,803,004 - ------------------------------------------------------------------------------------------------------------------------------ Authorized Shares - April 28, 1999 - ------------------------------------------------------------------------------------------------------------------------------
* Includes income tax benefit resulting from exercised stock options. + Comprised of unrealized translation adjustment of $(479,188) and minimum pension liability of $(36,409). Consolidated Statements of Shareholders' Equity 43 CONSOLIDATED STATEMENTS OF CASH FLOWS H.J. Heinz Company and Subsidiaries
FISCAL YEAR ENDED APRIL 28, 1999 APRIL 29, 1998 APRIL 30, 1997 - ------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) (52 WEEKS) (52 WEEKS) (52 WEEKS) - ------------------------------------------------------------------------------ OPERATING ACTIVITIES: Net income $ 474,341 $ 801,566 $ 301,871 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 207,852 222,492 244,388 Amortization 94,360 91,130 96,102 Deferred tax provision (benefit) 23,564 120,875 (33,450) Gain on sale of bakery products unit (5,717) - - Gain on sale of Ore-Ida frozen foodservice business - (96,563) - Gain on sale of New Zealand ice cream business and U.K. real estate - - (85,282) Provision for restructuring 527,107 - 647,200 Other items, net (43,147) (126,805) (42,527) Changes in current assets and liabilities, excluding effects of acquisitions and divestitures: Receivables (88,742) (7,155) 74,445 Inventories (115,743) 47,917 (5,329) Prepaid expenses and other current assets 2,604 4,874 5,094 Accounts payable 3,410 54,345 18,003 Accrued liabilities (150,533) (131,400) (182,555) Income taxes (19,220) 84,468 (162,962) - -------------------------------------------------------------------------------- Cash provided by operating activities 910,136 1,065,744 874,998 - -------------------------------------------------------------------------------- INVESTING ACTIVITIES: Capital expenditures (316,723) (373,754) (377,457) Acquisitions, net of cash acquired (268,951) (142,112) (208,383) Proceeds from divestitures 180,400 494,739 165,555 Purchases of short- term investments (915,596) (1,179,024) (1,223,884) Sales and maturities of short-term investments 883,945 1,216,573 1,233,919 Other items, net 46,396 10,740 23,937 - -------------------------------------------------------------------------------- Cash (used for) provided by investing activities (390,529) 27,162 (386,313) - -------------------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds from long- term debt 259,593 555,017 47,483 Payments on long-term debt (65,744) (572,905) (99,176) Proceeds from (payments on) commercial paper and short-term borrowings, net 74,464 (288,346) 133,732 Dividends (484,847) (452,603) (416,966) Purchase of treasury stock (410,103) (677,193) (277,046) Exercise of stock options 77,158 200,972 135,082 Other items, net 33,989 88,457 47,131 - -------------------------------------------------------------------------------- Cash (used for) financing activities (515,490) (1,146,601) (429,760) - -------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 15,565 (6,991) 7,997 - -------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 19,682 (60,686) 66,922 Cash and cash equivalents at beginning of year 96,300 156,986 90,064 Cash and cash equivalents at end of year $ 115,982 $ 96,300 $ 156,986 - ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 44 H.J. Heinz Annual Report 1999 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS H.J. Heinz Company and Subsidiaries - ------------------------------------------------------------------------------ 1. SIGNIFICANT Fiscal Year: H.J. Heinz Company (the "company") operates on ACCOUNTING a 52- or 53-week fiscal year ending the Wednesday nearest POLICIES April 30. However, certain foreign subsidiaries have earlier closing dates to facilitate timely reporting. Fiscal years for the financial statements included herein ended April 28, 1999, April 29, 1998 and April 30, 1997. Principles of Consolidation: The consolidated financial statements include the accounts of the company and its subsidiaries. All intercompany accounts and transactions were eliminated. Certain prior-year amounts have been reclassified in order to conform with the 1999 presentation. Use of Estimates: The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Translation of Foreign Currencies: For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of these operations are translated at the exchange rate in effect at each year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included as a component of shareholders' equity. Gains and losses from foreign currency transactions are included in net income for the period. Cash Equivalents: Cash equivalents are defined as highly liquid investments with original maturities of 90 days or less. Inventories: Inventories are stated at the lower of cost or market. Cost is determined principally under the average cost method. Property, Plant and Equipment: Land, buildings and equipment are recorded at cost. For financial reporting purposes, depreciation is provided on the straight-line method over the estimated useful lives of the assets. Accelerated depreciation methods are generally used for income tax purposes. Expenditures for new facilities and improvements that substantially extend the capacity or useful life of an asset are capitalized. Ordinary repairs and maintenance are expensed as incurred. When property is retired or otherwise disposed, the cost and related depreciation are removed from the accounts and any related gains or losses are included in income. Intangibles: Goodwill, trademarks and other intangibles arising from acquisitions are being amortized on a straight- line basis over periods ranging from three to 40 years. The company regularly reviews the individual components of the balances by evaluating the future cash flows of the businesses to determine the recoverability of the assets and recognizes, on a current basis, any diminution in value. Revenue Recognition: The company generally recognizes revenue upon shipment of goods to customers or upon performance of services. However, in certain overseas countries, revenue is recognized upon receipt of the product by the customer. Notes to Consolidated Financial Statements 45 Advertising Expenses: Advertising costs are generally expensed in the year in which the advertising first takes place. Income Taxes: Deferred income taxes result primarily from temporary differences between financial and tax reporting. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. The company has not provided for possible U.S. taxes on the undistributed earnings of foreign subsidiaries that are considered to be reinvested indefinitely. Calculation of the unrecognized deferred tax liability for temporary differences related to these earnings is not practicable. Where it is contemplated that earnings will be remitted, credit for foreign taxes already paid generally will offset applicable U.S. income taxes. In cases where they will not offset U.S. income taxes, appropriate provisions are included in the Consolidated Statements of Income. Stock-Based Employee Compensation Plans: Stock-based compensation is accounted for by using the intrinsic value- based method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Financial Instruments: The company uses derivative financial instruments for the purpose of hedging currency, price and interest rate exposures which exist as part of ongoing business operations. As a policy, the company does not engage in speculative or leveraged transactions, nor does the company hold or issue financial instruments for trading purposes. [ ] Interest Rate Swap Agreements: The company may utilize interest rate swap agreements to lower funding costs, to diversify sources of funding or to alter interest rate exposure. Amounts paid or received on interest rate swap agreements are deferred and recognized as adjustments to interest expense. Gains and losses realized upon the settlement of such contracts are deferred and amortized to interest expense over the remaining term of the debt instrument or are recognized immediately if the underlying instrument is settled. [ ] Foreign Currency Contracts: The company enters into forward, purchased option and swap contracts to hedge transactions denominated in foreign currencies in order to reduce the currency risk associated with fluctuating exchange rates. Such contracts are used primarily to hedge certain intercompany cash flows, purchases and sales of certain raw materials and finished goods and for payments arising from certain foreign currency denominated obligations. Realized and unrealized gains and losses from instruments qualifying as hedges are deferred as part of the cost basis of the underlying transaction. Realized and unrealized gains and losses from foreign currency contracts used as economic hedges but not qualifying for hedge accounting are recognized currently in miscellaneous income and expense. [ ] Commodity Contracts: In connection with purchasing certain commodities for future manufacturing requirements, the company enters into commodities futures and option contracts, as deemed appropriate, to reduce the effect of price fluctuations. Such contracts are accounted for as hedges, with gains and losses recognized as part of cost of products sold, and generally have a term of less than one year. The cash flows related to the above financial instruments are classified in the Statements of Cash Flows in a manner consistent with those of the transactions being hedged. Earnings Per Share: In the third quarter of Fiscal 1998, the company adopted SFAS No. 128, "Earnings Per Share," which requires the disclosure of both diluted and basic earnings per share. Previously reported earnings per share amounts have been restated, as necessary, to conform to SFAS No. 128 requirements. All earnings per share amounts are presented on an after-tax diluted basis unless otherwise noted. 46 H.J. Heinz Annual Report 1999 Comprehensive Income: The company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income in financial statements. Comprehensive income includes all changes in equity during a period except those resulting from investments by or distributions to shareholders. For the company, comprehensive income for all periods presented consisted of net income, foreign currency translation adjustments and the adjustment to the minimum pension liability. Amounts in prior year financial statements have been reclassified to conform to SFAS No. 130 requirements. Business Segment Information: The company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes new standards for reporting and disclosure relating to segments and geographic areas. Previously reported segment and geographic information has been restated to conform to SFAS No. 131 requirements. Postretirement Benefits: The company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which revises employers' disclosures about pension and other postretirement benefit plans. Amounts in prior year financial statements have been reclassified to conform to SFAS No. 132 requirements. Recently Issued Accounting Standards: In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FAS Statement 133," which postponed the adoption date of SFAS No. 133. As such, the company is not required to adopt the statement until Fiscal 2002. The company is currently evaluating the effect that implementation of the new standard will have on its results of operations and financial position. In April 1998, the American Institute of CPAs issued a Statement of Position ("SOP") entitled "Reporting on the Costs of Start-up Activities." This SOP requires that costs incurred to open a new facility, introduce a new product, commence a new operation or other similar activities be expensed as incurred. The company will adopt this SOP in Fiscal 2000. The company does not believe this SOP will have a material impact on its financial statements. - ------------------------------------------------------------------------------ 2. ACQUISITIONS All of the following acquisitions have been accounted for as purchases and, accordingly, the respective purchase prices have been allocated to the respective assets and liabilities based upon their estimated fair values as of the acquisition date. Operating results of businesses acquired have been included in the Consolidated Statements of Income from the respective acquisition dates forward. Pro forma results of the company, assuming all of the following acquisitions had been made at the beginning of each period presented, would not be materially different from the results reported. Fiscal 1999: The company acquired businesses for a total of $317.3 million, including obligations to sellers of $48.4 million. The preliminary allocations of the purchase price resulted in goodwill of $179.4 million and trademarks and other intangible assets of $128.0 million, which are being amortized on a straight-line basis over periods not exceeding 40 years. Final allocation of the purchase price is not expected to differ significantly from the preliminary allocations and is expected to be completed in the first quarter of Fiscal 2000. Acquisitions made during Fiscal 1999 include: the College Inn brand of canned broths and a joint venture with ABC Indonesia, a leading provider of ketchup, sauces and condiments. The company also made other smaller acquisitions during the year. Notes to Consolidated Financial Statements 47 Fiscal 1998: The company acquired businesses for a total of $142.1 million. The allocations of the purchase price resulted in goodwill of $65.1 million and trademarks and other intangible assets of $27.2 million, which are being amortized on a straight-line basis over periods not exceeding 40 years. On June 30, 1997, the company acquired John West Foods Limited, the leading brand of canned tuna and fish in the United Kingdom. Based in Liverpool, John West Foods Limited sells its canned fish products throughout Continental Europe and in a number of other international markets. (John West operations in Australia, New Zealand and South Africa were not included in the transaction.) During Fiscal 1998, the company also made other acquisitions, primarily in the Asia/ Pacific region, Europe and South Africa. Fiscal 1997: The company acquired businesses for a total of $222.6 million, including notes to sellers of $14.2 million. The allocations of purchase price resulted in goodwill of $144.9 million and trademarks and other intangible assets of $26.9 million, which are being amortized on a straight-line basis over periods not exceeding 40 years. On November 4, 1996, the company acquired the assets of the canned beans and pasta business of Nestle Canada Inc., together with a two-year license to use the Libby's brand. Under the agreement, the company also acquired the trademarks Deep-Browned Beans, Alpha-Getti and Zoodles, among others. On September 23, 1996, the company acquired substantially all of the pet food businesses of Martin Feed Mills Limited of Elmira, Ontario. Martin produces and markets cat and dog food throughout Canada and also exports to Japan and Europe. Martin sells pet food under the Techni-Cal brand and markets products under the Medi-Cal label through veterinary offices and clinics. On July 10, 1996, the company acquired Southern Country Foods Limited in Australia, a producer of canned corned beef and meals. During Fiscal 1997, the company also made other smaller acquisitions. - ------------------------------------------------------------------------------ 3. DIVESTITURES On October 2, 1998, the company completed the sale of its bakery products unit for $178.0 million. The transaction resulted in a pretax gain of $5.7 million, which was recorded in selling, general and administrative expenses ("SG&A"). The bakery products unit contributed approximately $200 million in sales for Fiscal 1998. On June 30, 1997, the company completed the sale of its Ore-Ida frozen foodservice business. The transaction resulted in a pretax gain of approximately $96.6 million ($0.14 per share), and was recorded in SG&A. The transaction included the sale of the company's Ore-Ida appetizer, pasta and potato foodservice business and five of the Ore-Ida plants that manufacture the products. The Ore-Ida frozen foodservice business contributed approximately $525 million in net sales for Fiscal 1997. In the fourth quarter of Fiscal 1997, the company sold its New Zealand ice cream business for approximately $150 million. The pretax gain on the divestiture totaled $72.1 million, or $0.12 per share. Pro forma results of the company, assuming all of the above divestitures had been made at the beginning of each period presented, would not be materially different from the results reported. - ------------------------------------------------------------------------------ 4. RESTRUCTURING Operation Excel CHARGES During Fiscal 1999, Phase I of a multi-year restructuring program ("Operation Excel") was approved by the company's Board of Directors, and resulted in recognition of restructuring charges and implementation costs totaling $552.8 million pretax ($1.11 per share), of which $141.7 million was recognized in the third quarter of Fiscal 1999, and $411.1 million was recognized in the fourth quarter of Fiscal 1999. Pretax charges of $396.4 million are classified as cost of products sold and $156.4 million as SG&A. The major components of Operation Excel include: creating manufacturing centers of excellence; focusing the product portfolio; realigning the company's management teams; and investing in growth initiatives. 48 H.J. Heinz Annual Report 1999 Creating manufacturing centers of excellence is resulting in significant changes to the company's manufacturing footprint including the following Phase I initiatives: closing the Harlesden factory in London, England and focusing the Kitt Green factory in Wigan, England on canned beans, soups and pasta production and focusing the Elst factory in the Netherlands on tomato ketchup and sauces; downsizing the Puerto Rico tuna processing facility and focusing this facility on lower volume/higher margin products; focusing the Pittsburgh, Pennsylvania factory on soup and baby food production and shifting other production to existing facilities; closing the West Chester, Pennsylvania factory and shifting pasta production to the Bloomsburg, Pennsylvania factory; consolidating manufacturing capacity in the Asia/ Pacific region; closing the Zabreh, Czech Republic factory and disposing of the dairy business and transferring the infant formula business to the Kendal, England factory; downsizing the Pocatello, Idaho factory by shifting Bagel Bites production to the Ft. Myers, Florida factory and shifting certain other Smart Ones entree production to the Massillon, Ohio factory; and closing the Redditch, England factory and shifting production to the Telford, England factory and the Turnhout factory in Belgium. As part of Operation Excel, the company is focusing the product portfolio on six core food categories. A consequence of this focus is the potential sale of the Weight Watchers classroom business. Additionally, seven other smaller businesses, which had combined annual revenues of approximately $80 million, will be disposed. Phase I of Operation Excel will also result in creating a single U.S. frozen food headquarters, including the closure of the company's Ore-Ida head office in Boise, Idaho; and also includes consolidating many European administrative support functions. Phase I initiatives will result in the closure or exit of 16 factories or businesses. Management estimates that these actions will impact 5,500 employees with a net reduction in the workforce of 4,000 after expansion of certain facilities. During Fiscal 1999, the company's workforce was reduced by approximately 200 employees principally through the closure of Ore-Ida's Boise head office and through the divestiture of the Clarksville, Arkansas sweet potato business. The major components of the restructuring charges and implementation costs and the remaining accrual balance as of April 28, 1999 were as follows:
EMPLOYEE TERMINATION NON-CASH AND IMPLEMEN- (DOLLARS IN ASSET SEVERANCE ACCRUED TATION MILLIONS) WRITE-DOWNS COSTS EXIT COSTS COSTS TOTAL - ------------------------------------------------------------------------------ Initial charge - 1999 $ 294.9 $ 159.4 $ 45.3 $ 53.2 $ 552.8 Amounts utilized - 1999 (294.9) (67.3) (9.8) (53.2) (425.2) - ------------------------------------------------------------------------------ Accrued restructuring costs - April 28, 1999 $ - $ 92.1 $ 35.5 $ - $ 127.6 - ------------------------------------------------------------------------------
Non-cash asset write-downs consisted primarily of long-term asset impairments that were recorded as a direct result of the company's decision to exit businesses or facilities ($260.5 million), including property, plant and equipment ($210.9 million) and goodwill and other intangibles ($49.6 million). The write-downs were based on third party appraisals, contracted sales prices or management's estimate of salvage value. The carrying value of these long-term assets is approximately $50 million and these assets will be sold or removed from service within 15 months. Once the assets are removed from service, the company will actively market these assets for sale. The results of operations, including the effect of reduced depreciation, related to these assets, were not material. Current assets ($34.5 million) affected by the restructuring program were also written-down to net realizable values. These write-downs included inventory and packaging material, prepaids, and other current assets and were determined based on management's estimate of net realizable value. Severance charges are primarily related to involuntary terminations and represent cash termination payments to be paid to affected employees as a direct result of the restructuring program. Non-cash pension and postretirement benefit charges ($60.5 million) for curtailments and settlements related to the approved projects are also included as a component of total severance cost. Employee termination Notes to Consolidated Financial Statements 49 and severance costs do not represent all of the amounts to be recorded in connection with the separation of the affected employees, as additional costs will be recognized over the next year as eligibility requirements are met. Accrued exit costs ($45.3 million) are primarily related to contract and lease termination costs ($35.0 million). Implementation costs were recognized as incurred in Fiscal 1999 ($53.2 million) and consist primarily of consulting fees and employee relocation expenses. Project Millennia During the fourth quarter of Fiscal 1997, the company announced a reorganization and restructuring program named "Project Millennia." The reorganization plan was designed to strengthen the company's core businesses and improve profitability and global growth. Key initiatives were focused on process changes and product line rationalizations. Significant process change initiatives were: changing our go-to-market strategies, including the elimination of inefficient end-of-quarter trade promotion practices; outsourcing certain manufacturing operations and eliminating excess manufacturing capacity throughout the company; refocusing the company's U.S. Weight Watchers classroom business and introducing a new weight loss program (1*2*3 Success(TM)) in the U.S.; and developing a Pan-European category-based strategy in Europe. Product line rationalization initiatives included: divestiture of four businesses (the Ore-Ida frozen foodservice business, the New Zealand ice cream business, the Weight Watchers dry and refrigerated businesses and the U.S. frozen pizza and pizza topping business); exiting the Weight Watchers Personal Cuisine business; exiting the "dinner" product line from The Budget Gourmet business; and converting all Weight Watchers entrees to the Smart Ones brand and reformulating the product and changing the packaging. Total restructuring charges and implementation costs recognized in Fiscal 1997 were $647.2 million, of which $477.8 million were classified as cost of products sold and $169.4 million were classified as selling, general and administrative expenses. Components of the restructuring program included an estimated net reduction of the global workforce of approximately 2,500 employees and the closure or sale of 25 plants throughout the world. Plant closures or sales include: five Ore-Ida factories, three New Zealand ice cream factories, four North American bakery factories, three U.S. frozen pizza and pizza topping facilities, two New Zealand food processing factories, the Tracy, California tomato processing factory, the Kankakee, Illinois pet food factory and six smaller factories. The major components of the restructuring charges and implementation costs and the accrual balances as of April 28, 1999, April 29, 1998 and April 30, 1997 were as follows:
EMPLOYEE EXIT COSTS TERMINATION --------------------- NON-CASH AND IMPLEMEN- (DOLLARS IN ASSET SEVERANCE ACCRUED TATION MILLIONS) WRITE-DOWNS COSTS EXIT COSTS COSTS TOTAL - ------------------------------------------------------------------------------ Initial charge - 1997 $ 324.3 $164.5 $ 94.3 $ 64.1 $ 647.2 Amounts utilized - 1997 (324.3) (32.1)* (15.9) (64.1) (436.4) - ------------------------------------------------------------------------------ Accrued restructuring costs - April 30, 1997 - 132.4 78.4 - 210.8 Implementation costs - 1998 - - - 84.1 84.1 Amounts utilized - 1998 - (91.9) (24.5) (84.1) (200.5) - ------------------------------------------------------------------------------ Accrued restructuring costs - April 29, 1998 - 40.5 53.9 - 94.4 Implementation costs - 1999 - - - 22.3 22.3 Amounts utilized - 1999 - (28.7) (19.9) (22.3) (70.9) Accrual reversal - 1999 - (9.1) (16.6) - (25.7) - ------------------------------------------------------------------------------ Accrued restructuring costs - April 28, 1999 $ - $ 2.7 $ 17.4 $ - $ 20.1 - ------------------------------------------------------------------------------
*Includes $18.9 million in non-cash charges resulting from termination benefit programs. 50 H.J. Heinz Annual Report 1999 Non-cash asset write-downs consisted primarily of long-term asset impairments that were recorded as a direct result of the company's decision to exit businesses or facilities ($206.8 million), including property, plant and equipment ($193.9 million) and goodwill and other intangibles ($12.9 million). The write-downs were based on third party appraisals, contracted sales price or management's estimate of salvage value. After the write-down, the carrying value of these assets was $36.5 million and the results of operations, including the effect of suspending depreciation, related to assets to be disposed of were not material. Write-downs were also recognized for current assets that were written-down to net realizable values as a result of the process changes and product line rationalizations described above ($117.5 million). These write-downs included inventory and packaging material, prepaids, spare-parts and supplies, and cylinders and dies. Severance costs include charges related to both voluntary terminations and involuntary terminations. As part of the voluntary termination agreements, enhanced retirement benefits were offered to the affected employees. These amounts were included in the severance cost component of the restructuring charge. Exit costs included $64.1 million of implementation costs for the project, which were recognized as incurred in Fiscal 1997, and accrued costs comprised of contract and lease termination costs of $55.9 million, product return costs of $20.7 million and other costs of $17.7 million. Project Millennia Status Update During Fiscal 1998, the company utilized $116.4 million of severance and exit accruals to facilitate the process change and product line rationalization initiatives, described above. The company spent an additional $84.1 million for implementation costs, consisting primarily of relocation, consulting, training and start-up costs, which were expensed as incurred. There were 17 factories sold or closed during the year and the net workforce was reduced by 1,800 employees. During Fiscal 1999, the company utilized $48.6 million of severance and exit accruals, principally on the realignment of the pet food manufacturing and distribution operations, streamlining of European operations, consolidation of the Heinz-Wattie businesses in Australia and New Zealand, contractual lease commitments associated with the restructuring of the U.S. Weight Watchers meeting system, and costs related to the exit of certain of the company's frozen entree brands. The company also incurred $22.3 million of additional costs related to the continued implementation of Project Millennia. These costs consisted principally of start-up, consulting and training costs. In the second quarter of Fiscal 1999, the company reversed $25.7 million of unutilized Project Millennia accruals for severance and exit costs. In Europe, severance accruals were reduced $9.1 million, principally as a result of lower severance payments in Italy versus the original estimates and fewer selling, general and administrative terminations in the U.K. In the U.S., $16.6 million of the accrual for exit costs was reversed principally as a result of avoided contractual liabilities related to product returns due to the sale of the Weight Watchers dry and refrigerated business. The Weight Watchers frozen entree business also experienced lower costs in exiting certain of the company's frozen entree product offerings. As of April 28, 1999, the company has closed or divested 23 of the 25 plants (five in Fiscal 1997, 17 in Fiscal 1998 and one in Fiscal 1999) that were scheduled for closure or divestiture. The remaining two facilities (one tuna processing facility in Australia and one tomato processing facility in Spain) have been publicly announced and will be closed by the end of October 1999. As of April 28, 1999, Project Millennia has resulted in a net workforce reduction of 2,100 employees. The two remaining plant closures described above will result in an additional workforce reduction of 150 employees. The total workforce reduction is now estimated to be 2,250 compared to the 2,500 originally estimated. The lower net headcount reductions as well as the lower actual severance payments compared to the original estimates have resulted in the reversal of original severance accruals of $9.1 million as described above. Notes to Consolidated Financial Statements 51 As of April 28, 1999, there are $20.1 million of remaining Project Millennia accruals. These accruals relate to the finalization of plant closures, remaining costs related to the exit of certain of the company's frozen entree brands, and contractual lease commitments associated with the restructuring of the U.S. Weight Watchers meeting system. With the exception of the lease costs, all other spending will be completed by the end of the second quarter of Fiscal 2000. - ------------------------------------------------------------------------------ 5. INCOME TAXES The following table summarizes the provision/(benefit) for U.S. federal and U.S. possessions, state and foreign taxes on income.
(DOLLARS IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------ Current: U.S. federal and U.S. possessions $ 110,490 $ 214,866 $ 67,274 State 15,389 17,667 6,458 Foreign 211,347 100,007 136,911 - ------------------------------------------------------------------------------ 337,226 332,540 210,643 - ------------------------------------------------------------------------------ Deferred: U.S. federal and U.S. possessions 66,944 103,630 (38,988) State 2,441 1,536 (10,763) Foreign (45,821) 15,709 16,301 - ------------------------------------------------------------------------------ 23,564 120,875 (33,450) - ------------------------------------------------------------------------------ Total tax provision $ 360,790 $ 453,415 $ 177,193 - ------------------------------------------------------------------------------
The Fiscal 1999 effective tax rate was unfavorably impacted by restructuring and related costs expected to be realized in lower tax rate jurisdictions and by non-deductible expenses related to the restructuring. The tax benefit related to the $552.8 million of restructuring and related costs for Phase I of Operation Excel was $143.1 million. In 1998, reduced tax rates enacted in the United Kingdom and Italy decreased the tax provision by $21.6 million, representing the impact of the reduced tax rates on net deferred taxes payable as of the dates of enactment. Tax expense resulting from allocating certain tax benefits directly to additional capital totaled $26.6 million in 1999, $77.7 million in 1998 and $33.8 million in 1997. The components of income before income taxes consist of the following:
(DOLLARS IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------ Domestic $ 427,089 $ 742,665 $ (47,219) Foreign 408,042 512,316 526,283 - ------------------------------------------------------------------------------ $ 835,131 $ 1,254,981 $ 479,064 - ------------------------------------------------------------------------------
52 H.J. Heinz Annual Report 1999 The differences between the U.S. federal statutory tax rate and the company's consolidated effective tax rate are as follows:
1999 1998 1997 - ------------------------------------------------------------------------------ U.S. federal statutory tax rate 35.0% 35.0% 35.0% Tax on income of foreign subsidiaries 1.5 (0.7) 5.6 State income taxes (net of federal benefit) 1.5 1.1 (0.2) Tax credits (0.3) 0.2 (2.1) Earnings repatriation (0.3) (0.2) 5.5 Effect of foreign losses 3.8 - (0.7) Tax on income of U.S. possessions subsidiaries 0.6 (1.3) (2.8) Other 1.4 2.0 (3.3) - ------------------------------------------------------------------------------ Effective tax rate 43.2% 36.1% 37.0% - ------------------------------------------------------------------------------
The deferred tax (assets) and deferred tax liabilities recorded on the balance sheets as of April 28, 1999 and April 29, 1998 are as follows:
(DOLLARS IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------------------ Depreciation/amortization $ 429,101 $ 443,448 Benefit plans 70,006 71,508 Other 57,925 100,676 - ------------------------------------------------------------------------------ 557,032 615,632 - ------------------------------------------------------------------------------ Provision for estimated expenses (148,519) (106,325) Operating loss carryforwards (37,104) (50,317) Benefit plans (106,015) (111,039) Promotions and advertising (23,162) (31,829) Other (102,077) (119,771) - ------------------------------------------------------------------------------ (416,877) (419,281) - ------------------------------------------------------------------------------ Valuation allowance 40,811 20,992 - ------------------------------------------------------------------------------ Net deferred tax liabilities $ 180,966 $ 217,343 - ------------------------------------------------------------------------------
At the end of 1999, net operating loss carryforwards totaled $89.0 million. Of that amount, $41.1 million expire through 2010; the other $47.9 million do not expire. Foreign tax credit carryforwards total $10.6 million and expire through 2004. The company's consolidated U.S. income tax returns have been audited by the Internal Revenue Service for all years through 1994. Undistributed earnings of foreign subsidiaries considered to be reinvested permanently amounted to $1.92 billion at April 28, 1999. The 1999 net change in the valuation allowance for deferred tax assets was an increase of $19.8 million, primarily due to write-offs and accruals related to Operation Excel. Notes to Consolidated Financial Statements 53 - ------------------------------------------------------------------------------ 6. DEBT
SHORT-TERM (DOLLARS IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------------------ Commercial paper (foreign) $ - $ 79,841 Bank and other borrowings 290,841 221,187 - ------------------------------------------------------------------------------ $290,841 $301,028 - ------------------------------------------------------------------------------
Total short-term debt had a weighted-average interest rate during 1999 of 6.3% and at year-end of 5.3%. The weighted- average interest rate on short-term debt during 1998 was 6.5% and at year-end was 6.4%. The company maintains a $2.30 billion credit agreement that supports its domestic commercial paper program. The credit agreement expires in September 2001. In addition, the company had $916.5 million of foreign lines of credit available at year-end, principally for overdraft protection. As of April 28, 1999 and April 29, 1998, the company had $1.41 billion and $1.34 billion, respectively, of domestic commercial paper outstanding. Due to the long-term nature of the amended credit agreement, all of the outstanding domestic commercial paper has been classified as long-term debt as of April 28, 1999 and April 29, 1998. Aggregate domestic commercial paper had a weighted-average interest rate during 1999 of 5.3% and at year-end of 4.9%. In 1998, the weighted- average rate and the rate at year-end was 5.6%.
LONG-TERM (DOLLARS IN RANGE OF MATURITY THOUSANDS) INTEREST (FISCAL YEAR) 1999 1998 - ------------------------------------------------------------------------------ United States Dollars: Commercial paper Variable 2002 $1,406,131 $1,337,574 Senior unsecured notes 6.00-6.88% 2000-2029 1,040,013 797,791 Eurodollar bonds 5.75-7.50 2000-2003 499,089 498,944 Revenue bonds 3.40-7.70 2000-2027 15,092 18,342 Promissory notes 3.00-10.00 2000-2005 67,397 47,157 Other 6.35-15.00 2000-2006 5,860 6,337 - ------------------------------------------------------------------------------ 3,033,582 2,706,145 - ------------------------------------------------------------------------------ Foreign Currencies (U.S. Dollar Equivalents): Promissory notes: Pounds sterling 5.94-8.85% 2000-2006 10,230 27,272 Italian lire 3.50-8.83 2000-2008 7,377 23,751 Australian dollar 5.21 2000-2002 13,421 19,066 Other 5.75-24.00 2000-2022 20,962 30,641 - ------------------------------------------------------------------------------ 51,990 100,730 - ------------------------------------------------------------------------------ Total long-term debt 3,085,572 2,806,875 Less portion due within one year 613,366 38,598 - ------------------------------------------------------------------------------ $2,472,206 $2,768,277 - ------------------------------------------------------------------------------
54 H.J. Heinz Annual Report 1999 The amount of long-term debt that matures in each of the four years succeeding 2000 is: $19.3 million in 2001, $1,420.9 million in 2002, $453.2 million in 2003 and $2.5 million in 2004. In February 1998, the company issued $250 million of 5.75% five-year notes in the Eurodollar capital markets. On March 16, 1998, the company filed a shelf registration statement with the Securities and Exchange Commission pursuant to which the company may from time to time issue debt securities of up to $750 million in the aggregate. The first transaction under the shelf registration statement was the issuance of $300 million of 6% ten-year notes in March 1998. The proceeds from both the five-year notes and the ten-year notes were used to repay domestic commercial paper. On July 15, 1998, the company, under its current shelf registration statement, issued $250 million of 6.375% debentures due July 2028. The proceeds were used to repay domestic commercial paper. - ------------------------------------------------------------------------------ 7. SHAREHOLDERS' Capital Stock: The preferred stock outstanding is EQUITY convertible at a rate of one share of preferred stock into 13.5 shares of common stock. The company can redeem the stock at $28.50 per share. As of April 28, 1999, there were authorized, but unissued, 2,200,000 shares of third cumulative preferred stock for which the series had not been designated. Employee Stock Ownership Plan ("ESOP"): The company established an ESOP in 1990 to replace in full or in part the company's cash-matching contributions to the H.J. Heinz Company Employees Retirement and Savings Plan, a 401(k) plan for salaried employees. Matching contributions to the 401(k) plan are based on a percentage of the participants' contributions, subject to certain limitations. To finance the plan, the ESOP borrowed $50.0 million directly from the company in 1990. The loan is in the form of a 15-year interest-bearing note, fixed at 5.6% for 1999, 1998 and 1997, and is included in the company's Consolidated Balance Sheets as unearned compensation. The proceeds of the note were used to purchase 2,366,862 shares of treasury stock from the company at approximately $21.13 per share. The stock held by the ESOP is released for allocation to the participants' accounts over the term of the loan as company contributions to the ESOP are made. The company contributions are reported as compensation and interest expense. Compensation expense related to the ESOP for 1999, 1998 and 1997 was $0.6 million, $0.2 million and $3.0 million, respectively. Interest expense was $0.8 million, $0.9 million and $1.1 million for 1999, 1998 and 1997, respectively. The company's contributions to the ESOP and the dividends on the company stock held by the ESOP are used to repay loan interest and principal. The dividends on the company stock held by the ESOP were $2.3 million in each of the fiscal years ended 1999, 1998 and 1997. The ESOP shares outstanding at April 28, 1999 and April 29, 1998, respectively, were as follows: unallocated 458,069 and 593,095; committed-to-be-released 38,921 and 32,329; and allocated 1,152,996 and 1,124,475. Shares held by the ESOP are considered outstanding for purposes of calculating the company's net income per share. Cumulative Translation Adjustments: Changes in the cumulative translation component of shareholders' equity result principally from translation of financial statements of foreign subsidiaries into U.S. dollars. The reduction in shareholders' equity related to the translation component increased $88.0 million in 1999, $180.3 million in 1998 and $55.1 million in 1997. During 1997, a gain of $13.8 million was transferred from the cumulative translation component of shareholders' equity and included in the determination of net income as a component of the $72.1 million gain recognized as a result of the liquidation of the company's investment in its New Zealand ice cream business. (See Note 3 to the Consolidated Financial Statements.) Notes to Consolidated Financial Statements 55 Unfunded Pension Obligation: An adjustment for unfunded foreign pension obligations in excess of unamortized prior service costs was recorded, net of tax, as a reduction in shareholders' equity. (See Note 10 to the Consolidated Financial Statements.) - ------------------------------------------------------------------------------ 8. SUPPLEMENTAL CASH FLOWS INFORMATION
(DOLLARS IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------ Cash Paid During The Year For: Interest $266,395 $300,173 $310,146 Income taxes 287,544 188,567 295,008 - ------------------------------------------------------------------------------ Details of Acquisitions: Fair value of assets $350,575 $200,406 $264,560 Liabilities* 80,055 47,912 56,168 - ------------------------------------------------------------------------------ Cash paid 270,520 152,494 208,392 Less cash acquired 1,569 10,382 9 - ------------------------------------------------------------------------------ Net cash paid for acquisitions $268,951 $142,112 $208,383 - ------------------------------------------------------------------------------
*Includes obligations to sellers of $48.4 million and $14.2 million in 1999 and 1997, respectively. - ------------------------------------------------------------------------------ 9. EMPLOYEES' Under the company's stock option plans, officers and other STOCK OPTION key employees may be granted options to purchase shares of PLANS AND the company's common stock. The option price on all MANAGEMENT outstanding options is equal to the fair market value of the INCENTIVE stock at the date of grant. Generally, options are PLANS exercisable beginning from one to three years after date of grant and have a maximum term of 10 years. Beginning in Fiscal 1998, in order to place greater emphasis on creation of shareholder value, performance-accelerated stock options were granted to certain key executives. These options vest eight years after the grant date, subject to acceleration if predetermined share price goals are achieved. The company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the company's stock option plans. If the company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated below:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 - ------------------------------------------------------------------------------ Pro forma net income $440,080 $790,325 $295,605 Pro forma diluted net income per common share $ 1.20 $ 2.12 $ 0.79 Pro forma basic net income per common share $ 1.22 $ 2.16 $ 0.80 - ------------------------------------------------------------------------------
The pro forma effect on net income for 1999, 1998 and 1997 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1996. The weighted-average fair value of options granted was $11.34 per share in 1999, $12.45 per share in 1998 and $6.94 per share in 1997. 56 H.J. Heinz Annual Report 1999 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
1999 1998 1997 - ------------------------------------------------------------------------------ Dividend yield 2.5% 2.5% 3.3% Volatility 22.0% 20.0% 17.5% Risk-free interest rate 5.3% 5.8% 6.3% Expected term (years) 4.9 5.5 5.5 - ------------------------------------------------------------------------------
Data regarding the company's stock option plans follows:
WEIGHTED- AVERAGE EXERCISE PRICE SHARES PER SHARE - ------------------------------------------------------------------------------ Shares under option May 1, 1996 32,495,878 $23.33 Options granted 7,508,500 34.68 Options exercised (6,466,030) 20.92 Options surrendered (463,500) 25.87 - ------------------------------------------------------------------------------ Shares under option April 30, 1997 33,074,848 $26.34 Options granted 2,990,000 53.76 Options exercised (10,283,073) 22.40 Options surrendered (181,000) 34.22 - ------------------------------------------------------------------------------ Shares under option April 29, 1998 25,600,775 $31.07 Options granted 8,979,200 53.07 Options exercised (3,138,445) 24.59 Options surrendered (924,300) 40.11 - ------------------------------------------------------------------------------ Shares under option April 28, 1999 30,517,230 $37.94 - ------------------------------------------------------------------------------ Options exercisable at: April 30, 1997 18,473,073 $22.53 April 29, 1998 14,397,175 24.70 April 28, 1999 13,507,295 27.60 - ------------------------------------------------------------------------------
The following summarizes information about shares under option in the respective exercise price ranges at April 28, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- --------------------------------------- WEIGHTED- WEIGHTED- WEIGHTED- RANGE OF AVERAGE AVERAGE AVERAGE EXERCISE PRICE NUMBER REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE PER SHARE OUTSTANDING (YEARS) PER SHARE EXERCISABLE PER SHARE - ---------------------------------------------------------------------------------------------------------------------------- $18.75-32.13 16,020,830 5.26 $26.73 11,954,208 $24.97 33.00-46.00 3,279,500 7.58 39.34 762,667 36.98 46.31-59.94 11,216,900 9.38 53.53 790,420 58.31 - ---------------------------------------------------------------------------------------------------------------------------- 30,517,230 13,507,295 - ----------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 57 The shares authorized but not granted under the company's stock option plans were 452,335 at April 28, 1999 and 8,507,235 at April 29, 1998. Common stock reserved for options totaled 30,969,565 at April 28, 1999 and 34,108,010 at April 29, 1998. The company's management incentive plan covers officers and other key employees. Participants may elect to be paid on a current or deferred basis. The aggregate amount of all awards may not exceed certain limits in any year. Compensation under the management incentive plans was approximately $47 million in 1999, $46 million in 1998 and $37 million in 1997. - ------------------------------------------------------------------------------ 10. RETIREMENT The company maintains retirement plans for the majority of PLANS its employees. Current defined benefit plans are provided primarily for domestic union and foreign employees. Defined contribution plans are provided for the majority of its domestic non-union hourly and salaried employees. Total pension cost consisted of the following:
(DOLLARS IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------ Components of defined benefit net periodic benefit cost: Service cost $ 23,617 $ 21,038 $ 15,583 Interest cost 82,958 83,005 81,620 Expected return on assets (109,490) (103,421) (94,720) Amortization of: Net initial asset (3,632) (4,333) (6,116) Prior service cost 8,026 8,466 7,492 Net actuarial (gain)/loss (3,752) (10,307) 8,330 Loss due to curtailment, settlement and special termination benefits 60,485 6,482 - - ------------------------------------------------------------------------------ Net periodic benefit cost 58,212 930 12,189 Defined contribution plans (excluding the ESOP) 23,980 23,571 23,658 - ------------------------------------------------------------------------------ Total pension cost $ 82,192 $ 24,501 $ 35,847 - ------------------------------------------------------------------------------
58 H.J. Heinz Annual Report 1999 The following table sets forth the funded status of the company's principal defined benefit plans at April 28, 1999 and April 29, 1998.
(DOLLARS IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------------------ Change in Benefit Obligation: Benefit obligation at the beginning of the year $1,270,521 $1,076,978 Service cost 23,617 21,038 Interest cost 82,958 83,005 Participants' contributions 7,044 7,344 Amendments 18,625 5,066 Actuarial loss 102,361 207,391 Curtailment (gain)/loss (867) 453 Settlement (36,751) (34,474) Special termination benefits 31,581 1,098 Benefits paid (86,615) (93,009) Exchange (25,431) (4,369) - ------------------------------------------------------------------------------ Benefit obligation at the end of the year 1,387,043 1,270,521 - ------------------------------------------------------------------------------ Change in Plan Assets: Fair value of plan assets at the beginning of the year 1,444,080 1,229,016 Actual return on plan assets 105,296 314,392 Settlement (36,751) (34,474) Employer contribution 34,701 26,459 Participants' contributions 7,044 7,344 Benefits paid (86,615) (93,009) Exchange (27,398) (5,648) - ------------------------------------------------------------------------------ Fair value of plan assets at the end of the year 1,440,357 1,444,080 - ------------------------------------------------------------------------------ Funded status 53,314 173,559 Unamortized prior service cost 75,770 83,622 Unamortized net actuarial loss/(gain) 95,994 (1,488) Unamortized net initial asset (11,501) (15,124) - ------------------------------------------------------------------------------ Net amount recognized 213,577 240,569 - ------------------------------------------------------------------------------ Amount recognized in the consolidated balance sheet consists of: Prepaid benefit cost 221,823 251,306 Accrued benefit liability (69,226) (53,785) Intangible asset 3,189 4,112 Accumulated other comprehensive loss 57,791 38,936 - ------------------------------------------------------------------------------ Net amount recognized $ 213,577 $ 240,569 - ------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for plans with accumulated benefit obligations in excess of plan assets were $278.8 million, $237.5 million and $168.3 million, respectively, as of April 28, 1999 and $274.3 million, $236.9 million and $183.1 million, respectively, as of April 29, 1998. Notes to Consolidated Financial Statements 59 The weighted-average rates used for the years ended April 28, 1999, April 29, 1998 and April 30, 1997 in determining the net pension costs and projected benefit obligations for defined benefit plans were as follows:
1999 1998 1997 - ------------------------------------------------------------------------------ Expected rate of return 9.5% 9.6% 9.6% Discount rate 6.3% 6.9% 8.2% Compensation increase rate 4.7% 4.9% 5.2% - ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------ 11. POST- The company and certain of its subsidiaries provide health RETIREMENT care and life insurance benefits for retired employees and BENEFITS their eligible dependents. Certain of the company's U.S. and OTHER Canadian employees may become eligible for such benefits. The THAN company currently does not fund these benefit arrangements PENSIONS and may modify plan provisions or terminate plans at its AND OTHER discretion. POST- Net postretirement costs consisted of the following: EMPLOYMENT BENEFITS
(DOLLARS IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------ Components of defined benefit net periodic benefit cost: Service cost $ 3,603 $ 3,339 $ 3,864 Interest cost 10,483 11,280 11,694 Amortization of: Prior service cost (649) (5,633) (4,442) Net actuarial gain (3,430) (3,664) (2,572) Loss due to curtailment and special termination benefits 3,732 1,085 - - ------------------------------------------------------------------------------ Net periodic benefit cost $ 13,739 $ 6,407 $ 8,544 - ------------------------------------------------------------------------------
The following table sets forth the combined status of the company's postretirement benefit plans at April 28, 1999 and April 29, 1998.
(DOLLARS IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------------------ Change in benefit obligation: Benefit obligation at the beginning of the year $ 157,975 $ 143,877 Service cost 3,603 3,339 Interest cost 10,483 11,280 Participant's contributions 858 620 Actuarial (gain)/loss (3,688) 5,088 Curtailment - (834) Special termination benefits 2,779 5,204 Benefits paid (12,709) (9,846) Exchange (813) (753) - ------------------------------------------------------------------------------ Benefit obligation at the end of the year 158,488 157,975 - ------------------------------------------------------------------------------ Funded status (158,488) (157,975) Unamortized prior service cost (6,711) (6,418) Unamortized net actuarial gain (52,826) (53,849) - ------------------------------------------------------------------------------ Net accrued benefit liability $(218,025) $(218,242) - ------------------------------------------------------------------------------
60 H.J. Heinz Annual Report 1999 The weighted-average discount rate used in the calculation of the accumulated postretirement benefit obligation and the net postretirement benefit cost was 6.9% in 1999 and 1998 and 8.0% in 1997. The assumed annual composite rate of increase in the per capita cost of company-provided health care benefits begins at 7.1% for 1999, gradually decreases to 4.2% by 2007, and remains at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for postretirement medical benefits. A one- percentage-point change in assumed health care cost trend rates would have the following effects:
1% INCREASE 1% DECREASE - ------------------------------------------------------------------------------ Effect on total service and interest cost components $ 1,536 $ (1,314) Effect on postretirement benefit obligation 13,935 (12,090) - ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------ 12. FINANCIAL Foreign Currency Contracts: As of April 28, 1999 and April INSTRUMENTS 29, 1998, the company held currency swap contracts with an aggregate notional amount of approximately $110 million and $350 million, respectively. As of April 28, 1999, these contracts mature in 2002. The company had separate contracts to purchase certain foreign currencies as of April 28, 1999 and April 29, 1998 totaling approximately $510 million and $560 million, respectively, most of which mature within one year of the respective fiscal year-end. The company also had separate contracts to sell certain foreign currencies as of April 28, 1999 and April 29, 1998 of approximately $390 million and $60 million, respectively. As of April 28, 1999, these contracts mature in 2000 and 2001. Net unrealized gains and losses associated with the company's foreign currency contracts as of April 28, 1999 and April 29, 1998 were not material. Commodity Contracts: As of April 28, 1999 and April 29, 1998, the notional values and unrealized gains or losses related to commodity contracts held by the company were not material. Fair Value of Financial Instruments: The company's significant financial instruments include cash and cash equivalents, short- and long-term investments, short- and long-term debt, currency exchange agreements and guarantees. In evaluating the fair value of significant financial instruments, the company generally uses quoted market prices of the same or similar instruments or calculates an estimated fair value on a discounted cash flow basis using the rates available for instruments with the same remaining maturities. As of April 28, 1999 and April 29, 1998, the fair value of financial instruments held by the company approximated the recorded value. Concentrations of Credit Risk: Counterparties to currency exchange and interest rate derivatives consist of large major international financial institutions. The company continually monitors its positions and the credit ratings of the counterparties involved and, by policy, limits the amount of credit exposure to any one party. While the company may be exposed to potential losses due to the credit risk of non- performance by these counterparties, losses are not anticipated. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers, generally short payment terms, and their dispersion across geographic areas. Notes to Consolidated Financial Statements 61 - ------------------------------------------------------------------------------ 13. NET INCOME The following table sets forth the computation of basic and PER COMMON diluted earnings per share in accordance with the provisions SHARE of SFAS No. 128.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 - ------------------------------------------------------------------------------ Net income per share - basic: Net income $474,341 $801,566 $301,871 Preferred dividends 30 37 43 - ------------------------------------------------------------------------------ Net income applicable to common stock $474,311 $801,529 $301,828 Average common shares outstanding - basic 361,204 365,982 367,471 Net income per share - basic $ 1.31 $ 2.19 $ 0.82 Net income per share - diluted: Net income $474,341 $801,566 $301,871 Average common shares outstanding 361,204 365,982 367,471 Effect of dilutive securities: Convertible preferred stock 243 297 340 Stock options 6,383 6,674 6,233 - ------------------------------------------------------------------------------ Average common shares outstanding - diluted 367,830 372,953 374,044 Net income per share - diluted $ 1.29 $ 2.15 $ 0.81 - ------------------------------------------------------------------------------
Stock options outstanding of 6.0 million, 2.0 million and 2.6 million as of April 28, 1999, April 29, 1998 and April 30, 1997, respectively, were not included in the above net income per diluted share calculations because to do so would have been antidilutive for the periods presented. - ------------------------------------------------------------------------------ 14. SEGMENT The company adopted SFAS No. 131, "Disclosures about INFORMATION Segments of an Enterprise and Related Information." SFAS No. 131 supersedes previously issued segment reporting disclosure rules and requires the presentation of descriptive information about reportable segments that is consistent with the way in which management operates the company. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. Previously reported segment and geographic information has been restated to conform with SFAS No. 131 requirements. 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. Descriptions of the company's reportable segments are as follows: [ ] North American Dry - This segment includes the company's North American dry grocery and foodservice operations. This segment consists of Heinz U.S.A., Heinz Pet Products, Star- Kist Seafood and Heinz Canada. This segment's operations include products in all of the company's core categories. [ ] North American Frozen - This segment consists of Heinz Frozen Food Company, which markets frozen potatoes, entrees and appetizers. [ ] Europe - This segment includes the company's operations in Europe and sells products in all of the company's core categories. [ ] Asia/Pacific - This segment includes the company's operations in New Zealand, Australia, Japan, China, South Korea, Indonesia, Thailand and India. This segment's operations include products in all of the company's core categories. [ ] Other Operating Entities - This segment includes the company's Weight Watchers classroom business as well as the company's operations in Africa, Venezuela and other areas which sell products in all of the company's core categories. The company's management evaluates performance based on several factors; however, the primary measurement focus is operating income excluding unusual costs and gains. The accounting policies used are the same as those described in Note 1, "Significant Accounting Policies." Intersegment sales 62 H.J. Heinz Annual Report 1999 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 the company's management. The following table presents information about the company's reportable segments.
NORTH NORTH OTHER NON- AMERICAN AMERICAN ASIA/ OPERATING OPERATING CONSOLIDATED (DOLLARS IN THOUSANDS) DRY FROZEN EUROPE PACIFIC ENTITIES (1) TOTALS - ----------------------------------------------------------------------------------------------------------------------------------- Fiscal year ended April 28, 1999 Intersegment sales $ 32,144 $ 21,131 $ 6,661 $ 13 $ 6,971 $ (66,920) $ - Net external sales 4,062,683 1,014,370 2,460,698 1,011,764 750,095 - 9,299,610 Operating income (loss) 716,979 80,231 246,187 89,830 95,715 (119,630) 1,109,312 Operating income (loss), excluding restructuring related items (2) 834,629 183,409 467,159 145,654 121,950 (99,792) 1,653,009 Depreciation and amortization expense 121,363 39,773 85,408 20,549 23,278 11,841 302,212 Capital expenditures (3) 138,081 35,293 100,569 25,209 12,757 4,814 316,723 Identifiable assets 3,418,096 832,226 2,208,208 998,685 374,852 221,567 8,053,634 Fiscal year ended April 29, 1998 Intersegment sales $ 28,492 $ 14,467 $ 3,756 $ - $ 6,298 $ (53,013) $ - Net external sales 3,935,269 1,076,080 2,332,594 1,072,856 792,485 - 9,209,284 Operating income (loss) 797,191 258,199 386,874 136,501 53,677 (112,112) 1,520,330 Operating income (loss), excluding restructuring related items (4) 825,981 170,732 405,425 142,348 63,586 (100,219) 1,507,853 Depreciation and amortization expense 117,739 41,855 84,583 30,406 28,291 10,748 313,622 Capital expenditures (3) 121,783 34,244 90,829 53,856 40,076 32,966 373,754 Identifiable assets 3,248,068 918,807 2,230,857 839,176 564,391 222,122 8,023,421 Fiscal year ended April 30, 1997 Intersegment sales $ 34,475 $ 27,067 $ 3,430 $ - $ 6,524 $ (71,496) $ - Net external sales 3,698,797 1,551,690 2,154,686 1,220,885 730,949 - 9,357,007 Operating income (loss) 442,461 (4,698) 316,563 171,577 (64,291) (105,341) 756,271 Operating income (loss), excluding restructuring related items (5) 707,861 130,402 375,218 136,241 50,209 (81,742) 1,318,189 Depreciation and amortization expense 128,930 58,030 81,850 30,684 30,517 10,479 340,490 Capital expenditures (3) 118,377 63,682 107,166 38,415 48,565 1,252 377,457 Identifiable assets 3,309,675 1,324,293 2,015,296 1,017,875 571,711 198,937 8,437,787 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes corporate overhead, intercompany eliminations and charges not directly attributable to segments. (2) Excludes restructuring and implementation costs of Operation Excel as follows: North American Dry $110.4 million, North American Frozen $116.9 million, Europe $225.1 million, Asia/Pacific $52.9 million, Other Operating entities $29.2 million and Non-Operating $18.3 million. Also excludes costs related to the implementation of Project Millennia as follows: North American Dry $7.2 million, North American Frozen $2.9 million, Europe $4.9 million, Asia/Pacific $3.0 million, Other Operating entities $2.8 million and Non-Operating $1.5 million. Also excludes the gain on the sale of the bakery division in Other Operating entities of $5.7 million. Also excludes the reversal of unutilized Project Millennia accruals for severance and exit costs in North American Frozen and Europe of $16.6 million and $9.1 million, respectively. (3) Excludes property, plant and equipment acquired through acquisitions. (4) Excludes costs related to the implementation of Project Millennia as follows: North American Dry $28.8 million, North American Frozen $9.1 million, Europe $18.6 million, Asia/Pacific $5.8 million, Other Operating entities $9.9 million and Non-Operating $11.9 million. Also excludes the North American Frozen gain on the sale of the Ore-Ida frozen foodservice business of $96.6 million. (5) Excludes restructuring and implementation costs for Project Millennia as follows: North American Dry $265.4 million, North American Frozen $135.1 million, Europe $71.8 million, Asia/Pacific $36.8 million, Other Operating entities $114.5 million and Non-Operating $23.6 million. Also excludes gains on the sale of an ice cream business in Asia/Pacific and real estate in Europe of $72.1 million and $13.2 million, respectively. Notes to Consolidated Financial Statements 63 A reconciliation of total segment operating income to total consolidated income before income taxes is as follows:
(DOLLARS IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------ Total operating income for reported segments $1,109,312 $1,520,330 $756,271 Interest income 25,082 32,655 39,359 Interest expense 258,813 258,616 274,746 Other expense, net 40,450 39,388 41,820 - ------------------------------------------------------------------------------ Consolidated income before income taxes $ 835,131 $1,254,981 $479,064 - ------------------------------------------------------------------------------
The company's revenues are generated via the sale of products in the following categories:
KETCHUP, SOUPS, (DOLLARS IN CONDIMENTS AND FROZEN BEANS AND INFANT PET THOUSANDS) SAUCES FOODS TUNA PASTA MEALS FOODS PRODUCTS OTHER TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Fiscal year ended April 28, 1999 $2,230,403 $1,399,111 $1,084,847 $1,117,328 $1,039,781 $1,287,356 $1,140,784 $9,299,610 Fiscal year ended April 29, 1998 2,046,578 1,473,228 1,080,576 1,085,438 986,203 1,315,774 1,221,487 9,209,284 Fiscal year ended April 30, 1997 1,958,362 2,023,058 873,610 1,021,615 1,013,826 1,238,109 1,228,427 9,357,007 - -----------------------------------------------------------------------------------------------------------------------------------
The company has significant sales and long-lived assets in the following geographic areas. Sales are based on the location in which the sale originated. Long-lived assets include property, plant and equipment, goodwill, trademarks and other intangibles, net of related depreciation and amortization.
NET EXTERNAL SALES ------------------------------------------------- LONG-LIVED ASSETS FISCAL YEAR ENDED ----------------------------------------------- (DOLLARS IN THOUSANDS) 1999 1998 1997 APRIL 28, 1999 APRIL 29, 1998 APRIL 30, 1997 - ----------------------------------------------------------------------------------------------------------------------------------- United States $4,917,967 $4,873,710 $5,169,779 $2,856,315 $2,885,359 $3,075,793 United Kingdom 1,182,690 1,170,935 967,644 399,669 491,850 436,709 Other 3,198,953 3,164,639 3,219,584 1,385,404 1,393,505 1,397,366 - ----------------------------------------------------------------------------------------------------------------------------------- Total $9,299,610 $9,209,284 $9,357,007 $4,641,388 $4,770,714 $4,909,868 - -----------------------------------------------------------------------------------------------------------------------------------
64 H.J. Heinz Annual Report 1999 - ------------------------------------------------------------------------------ 15. QUARTERLY RESULTS (UNAUDITED)
1999 ----------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Sales $2,228,230 $2,322,402 $2,282,062 $2,466,916 $9,299,610 Gross profit 868,453 936,399 852,580 697,311 3,354,743 Net income (loss) 213,787 231,332 120,554 (91,332) 474,341 Per Share Amounts: Net income (loss) - diluted $ 0.58 $ 0.63 $ 0.33 $ (0.25) $ 1.29 Net income (loss) - basic 0.59 0.64 0.33 (0.25) 1.31 Cash dividends 0.31-1/2 0.34-1/4 0.34-1/4 0.34-1/4 1.34-1/4 - ----------------------------------------------------------------------------------------------------------------------------------- 1998 ----------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Sales $2,233,270 $2,264,082 $2,236,034 $2,475,898 $9,209,284 Gross profit 825,067 854,668 856,816 961,520 3,498,071 Net income 243,301 188,866 188,156 181,243 801,566 Per Share Amounts: Net income - diluted $ 0.65 $ 0.51 $ 0.50 $ 0.49 $ 2.15 Net income - basic 0.66 0.52 0.51 0.50 2.19 Cash dividends 0.29 0.31-1/2 0.31-1/2 0.31-1/2 1.23-1/2 - -----------------------------------------------------------------------------------------------------------------------------------
The first and second quarters of Fiscal 1999 include implementation costs related to Project Millennia of $0.02 per share and $0.01 per share, respectively. Second-quarter 1999 results also include the reversal of unutilized Project Millennia accruals for severance and exit costs ($0.04 per share) (see Note 4 to the Consolidated Financial Statements) and the gain on the sale of the bakery products unit (see Note 3 to the Consolidated Financial Statements). Operation Excel resulted in restructuring and implementation costs of $0.27 per share in the third quarter and $0.84 per share in the fourth quarter of Fiscal 1999. (See Note 4 to the Consolidated Financial Statements.) First-quarter Fiscal 1998 results include a gain on the sale of the company's Ore-Ida frozen foodservice business ($0.14 per share). (See Note 3 to the Consolidated Financial Statements.) The implementation of Project Millennia resulted in costs of $0.02 per share in the first quarter, $0.03 per share in the second quarter, $0.05 per share in the third quarter and $0.04 per share in the fourth quarter of Fiscal 1998. (See Note 4 to the Consolidated Financial Statements.) Notes to Consolidated Financial Statements 65 - ------------------------------------------------------------------------------ 16. COMMITMENTS Legal Matters: On December 31, 1992, a food wholesale AND CONTIN- distributor filed suit against the company and its principal GENCIES competitors in the U.S. baby food industry. Subsequent to that date, several similar lawsuits were filed in the same court and were consolidated into a class action suit. The complaints, each of which sought an injunction and unspecified treble money damages, alleged a conspiracy to fix, maintain and stabilize the prices of baby food. The court granted summary judgment to the defendants and entered an order dismissing the complaint with prejudice. The plaintiffs appealed and the Third Circuit Court of Appeals upheld the granting of summary judgment and dismissal of the complaint. Related suits which were filed in Alabama and California state courts, seeking to represent a class of indirect purchasers of baby food in their respective states continue. Certain other claims have been filed against the company or its subsidiaries and have not been finally adjudicated. The above-mentioned suits and claims when finally concluded and determined, in the opinion of management, based upon the information that it presently possesses, will not have a material adverse effect on the company's consolidated financial position, results of operations or liquidity. Lease Commitments: Operating lease rentals for warehouse, production and office facilities and equipment amounted to approximately $99.5 million in 1999, $98.3 million in 1998 and $93.2 million in 1997. Future lease payments for non- cancellable operating leases as of April 28, 1999 totaled $239.4 million (2000-$49.1 million, 2001-$42.2 million, 2002- $33.5 million, 2003-$23.3 million, 2004-$19.7 million and thereafter-$71.6 million). - ------------------------------------------------------------------------------ 17. ADVERTISING Advertising costs for fiscal years 1999, 1998 and 1997 were COSTS $373.9 million, $363.1 million and $319.0 million, respectively. 66 H.J. Heinz Annual Report 1999 RESPONSIBILITY STATEMENTS - ------------------------------------------------------------------------------ RESPONSIBILITY FOR FINANCIAL STATEMENTS Management of H.J. Heinz Company is responsible for the preparation of the financial statements and other information included in this annual report. The financial statements have been prepared in conformity with generally accepted accounting principles, incorporating management's best estimates and judgments, where applicable. Management believes that the company's internal control systems provide reasonable assurance that assets are safeguarded, transactions are recorded and reported appropriately, and policies are followed. The concept of reasonable assurance recognizes that the cost of a control procedure should not exceed the expected benefits. Management believes that its systems provide this appropriate balance. An important element of the company's control systems is the ongoing program to promote control consciousness throughout the organization. Management's commitment to this program is emphasized through written policies and procedures (including a code of conduct), an effective internal audit function and a qualified financial staff. The company engages independent public accountants who are responsible for performing an independent audit of the financial statements. Their report, which appears herein, is based on obtaining an understanding of the company's accounting systems and procedures and testing them as they deem necessary. The company's Audit Committee is composed entirely of outside directors. The Audit Committee meets regularly, and when appropriate separately, with the independent public accountants, the internal auditors and financial management to review the work of each and to satisfy itself that each is discharging its responsibilities properly. Both the independent public accountants and the internal auditors have unrestricted access to the Audit Committee. - ------------------------------------------------------------------------------ REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of H.J. Heinz Company: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of H.J. Heinz Company and Subsidiaries (the "company") at April 28, 1999 and April 29, 1998, and the results of its operations and its cash flows for each of the three years in the period ended April 28, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP June 14, 1999 Responsibility Statements 67 EX-21 5 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 H. J. Heinz Company and Subsidiaries SUBSIDIARIES OF THE REGISTRANT Following are the subsidiaries of H. J. Heinz Company (the "Company"), other than those which if considered in the aggregate as a single subsidiary would not constitute a significant subsidiary, and the state or country in which each subsidiary was incorporated or organized. The accounts of each of the listed subsidiaries are a part of the Company's consolidated financial statements.
Subsidiary State or Country ---------- ---------------- Alimentos Heinz, C.A................................. Venezuela Alimentos Pilar S.A.................................. Argentina AIAL S.r.l. (Arimpex Industrie Alimentari S.r.l.).... Italy The All American Gourmet Company..................... State of Delaware Cardio-Fitness Corporation........................... State of Delaware Customs Foods Limited................................ Ireland Earth's Best, Inc.................................... State of Idaho Ets. Paul Paulet..................................... France Heinz Europe Ltd..................................... England Heinz Frozen Food Company............................ State of Delaware Heinz Iberica S.A.................................... Spain Heinz India Private Ltd.............................. India Heinz Italia S.r.l................................... Italy Heinz Japan Ltd...................................... Japan Heinz Kecskemeti Konzervgyar RT...................... Hungary Heinz Polska Sp. Z.o.o............................... Poland Heinz South Africa (Pty) Limited..................... South Africa Heinz-UFE Ltd........................................ People's Republic of China Heinz-Wattie Holdings Ltd............................ New Zealand Heinz Win Chance Ltd. ............................... Thailand H. J. Heinz (Botswana Proprietary) Ltd............... Botswana H. J. Heinz B.V...................................... Netherlands H. J. Heinz Company Australia Limited................ Australia H. J. Heinz Company of Canada Ltd.................... Canada H. J. Heinz Company Limited.......................... England H. J. Heinz Credit Company........................... State of Delaware Indian Ocean Tuna Ltd................................ Seychelles Industrias de Alimentacao, Lda....................... Portugal Mareblu S.r.l........................................ Italy Olivine Industries (Private) Limited................. Zimbabwe Heinz-PMV a.s. ...................................... Czech Republic Portion Pac, Inc..................................... State of Ohio Pudliszki S.A........................................ Poland PT Heinz ABC Indonesia............................... Indonesia Seoul-Heinz Ltd...................................... Republic of Korea Star-Kist Foods, Inc................................. State of California Weight Watchers International, Inc................... Commonwealth of Virginia
EX-24 6 POWERS OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William R. Johnson, Lawrence J. McCabe and Paul F. Renne, and each of them, such person's true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for such person and in such person's name, place and stead, in any and all capacities, to sign H.J. Heinz Company's Annual Report on Form 10-K for the fiscal year ended April 28, 1999, and to sign any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or such persons' or person's substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This Power of Attorney has been signed below as of the 14th day of July, 1999 by the following persons in the capacities indicated. Signature Title - --------- ----- /s/ Anthony J. F. O'Reilly Chairman of the Board of Directors - ----------------------------- Anthony J. F. O'Reilly /s/ William R. Johnson President and Chief Executive Officer - ----------------------------- and Director (Principal Executive Officer) William R. Johnson /s/ Paul F. Renne Executive Vice President and Chief - ----------------------------- Financial Officer and Director (Principal Paul F. Renne Financial Officer) /s/ Lawrence J. McCabe Senior Vice President, General - ----------------------------- Counsel and Secretary and Director Lawrence J. McCabe /s/ William P. Snyder III Director - ------------------------------ William P. Snyder III /s/ Herman J. Schmidt Director - ------------------------------ Herman J. Schmidt /s/ Eleanor B. Sheldon Director - ------------------------------ Eleanor B. Sheldon /s/ Samuel C. Johnson Director - ------------------------------ Samuel C. Johnson /s/ Donald R. Keough Director - ------------------------------ Donald R. Keough /s/ S. Donald Wiley Director - ------------------------------ S. Donald Wiley /s/ David R. Williams Director - ------------------------------ David R. Williams /s/ Nicholas F. Brady Director - ------------------------------ Nicholas F. Brady /s/ William C. Springer Director - ------------------------------ William C. Springer /s/ Edith E. Holiday Director - ------------------------------ Edith E. Holiday /s/ Candace Kendle Director - --------------------------- Candace Kendle /s/ James M. Zimmerman Director - --------------------------- James M. Zimmerman /s/ Leonard S. Coleman, Jr. Director - --------------------------- Leonard S. Coleman, Jr. /s/ A. G. Malcolm Ritchie Director - --------------------------- A. G. Malcolm Ritchie /s/ Edward J. McMenamin Vice President--Corporate Controller - --------------------------- (Principal Accounting Officer) Edward J. McMenamin EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 28, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR APR-28-1999 APR-30-1998 APR-28-1999 115,982 7,139 1,163,915 21,633 1,409,651 2,886,778 4,073,975 1,902,951 8,053,634 2,786,322 2,472,206 0 173 107,774 1,695,057 8,053,634 9,299,610 9,299,610 5,944,867 5,944,867 0 0 258,813 835,131 360,790 474,341 0 0 0 474,341 1.31 1.29
EX-99 8 GUIDELINES ON POLITICAL CONTRIBUTIONS Exhibit 99 H.J. Heinz Company Board of Directors' Guidelines on Political Contributions No Company or subsidiary funds, facilities or services shall be used for political contributions of any kind in support of or in opposition to: . any political party or political committee, . any candidate for office of any government--state, federal or local, or . any initiative, recall or referendum appearing on the ballot for a special or general election at any level of government relating to a candidate or office holder. This prohibition is absolute and applies to all elections or political candidates, campaigns or committees whether or not contributions might be lawful under the laws of any particular state or country wherein the Company or a subsidiary operates; except that the Company may: . pay the costs of establishing, administering and soliciting contributions to political action committees established under applicable law; and . contribute funds to non-profit organizations, provided such funds are not used to influence election campaigns, and such contribution has been pre-cleared with the Chairman of the Public Issues Committee. "Political contributions" include but are not limited to subscriptions, membership in associations or committees whose purpose it is to support or oppose political parties or committees, candidates for public office or any initiative, recall or referendum, loans of any sort, purchase of tickets for any event in support of or in opposition to any political party or committee, candidate for public office or any initiative, recall or referendum, purchase of advertising space or furnishing of any supplies or performing services for or against any political organization, committee candidate, public official or any initiative, recall or referendum. Nothing herein shall be construed to prohibit individual officers or employees of the Company or a subsidiary from contributing their personal funds or their personal free time to any political candidate or party, but under no circumstances shall such officers or employees be reimbursed for such contributions or be granted time off the job for such activity; nor prohibit the Company or a subsidiary from contributing funds to a non-political organization that opposes or supports a ballot, initiative or referendum (unrelated to a specific candidate or office holder) that could, in the opinion of management, adversely affect the business of the Company. Political Contributions The Company did not make any political contributions since the publication of the 1998 H. J. Heinz Company annual report. -----END PRIVACY-ENHANCED MESSAGE-----