424B3 1 d424b3.htm PROSPECTUS SUPPLEMENT NO. 1 Prospectus Supplement No. 1
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PROSPECTUS SUPPLEMENT NO. 1

Filed Pursuant to Rule 424(b)(3)

Registration File No. 333-169763

PINNACLE FOODS FINANCE LLC

PINNACLE FOODS FINANCE CORP.

PROSPECTUS SUPPLEMENT NO. 1 DATED NOVEMBER 10, 2010

TO THE PROSPECTUS DATED OCTOBER 18, 2010

This Prospectus Supplement No. 1 supplements our Prospectus dated October 18, 2010 with the following attached Quarterly Report on Form 10-Q for the quarterly period ended September 26, 2010, as filed with the Securities and Exchange Commission on November 10, 2010.

The attached information modifies and supersedes, in part, the information in the Prospectus. Any information that is modified or superseded in the Prospectus shall not be deemed to constitute a part of the Prospectus except as modified or superseded by this Prospectus Supplement.

This Prospectus Supplement No. 1 should be read in conjunction with the Prospectus, which is required to be delivered with this Prospectus Supplement.

SEE “RISK FACTORS” BEGINNING ON PAGE 14 OF THE PROSPECTUS.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE EXCHANGE NOTES TO BE DISTRIBUTED IN THE EXCHANGE OFFERS OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

 

 

The date of this Prospectus Supplement is November 10, 2010


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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 26, 2010

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 333-148297

 

 

Pinnacle Foods Finance LLC

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-8720036

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1 Bloomfield Avenue

Mt. Lakes, New Jersey

  07046
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (973) 541-6620

 

 

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  ¨    No  x

(The Registrant believes it is a voluntary filer and it has filed all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check One):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).*    Yes  ¨    No  ¨

 

* The registrant has not yet been phased into the interactive data requirements

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b - 2 of the Securities Exchange Act of 1934).    Yes  ¨    No  x

As of November 10, 2010, there were outstanding 100 shares of common stock, par value $0.01 per share, of the Registrant.

 

 

 


Table of Contents

 

TABLE OF CONTENTS

FORM 10-Q

 

                   Page
No.
 

PART I – FINANCIAL INFORMATION

     1   
 

ITEM 1:

   FINANCIAL STATEMENTS      1   
     CONSOLIDATED STATEMENTS OF OPERATIONS      2   
     CONSOLIDATED BALANCE SHEETS      3   
     CONSOLIDATED STATEMENTS OF CASH FLOWS      4   
     CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY      5   
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      6   
     1.    Summary of Business Activities      6   
     2.    Interim Financial Statements      6   
     3.    Acquisition      7   
     4.    Fair Value Measurements      9   
     5.    Other Expense (Income), net      12   
     6.    Inventories      12   
     7.    Goodwill and Other Assets      13   
     8.    Restructuring Charges      15   
     9.    Debt and Interest Expense      17   
     10.    Pension and Retirement Plans      22   
     11.    Financial Instruments      25   
     12.    Commitments and Contingencies      31   
     13.    Related Party Transactions      32   
     14.    Segments      33   
     15.    Income Taxes      35   
     16.    Recently Issued Accounting Pronouncements      36   
     17.    Guarantor and Nonguarantor Statements      37   
 

ITEM 2:

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      46   
     RESULTS OF OPERATIONS      49   
     LIQUIDITY AND CAPITAL RESOURCES      58   
     INFLATION      67   
     RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS      67   
 

ITEM 3:

   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK      68   
 

ITEM 4:

   CONTROLS AND PROCEDURES      74   

PART II – OTHER INFORMATION

     75   
 

ITEM 1:

   LEGAL PROCEEDINGS      75   
 

ITEM 1A:

   RISK FACTORS      75   
 

ITEM 2:

   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      75   
 

ITEM 3:

   DEFAULTS UPON SENIOR SECURITIES      75   
 

ITEM 4:

   RESERVED TO THE NEW VOTING REPORTING RULES      75   
 

ITEM 5:

   OTHER INFORMATION      75   
 

ITEM 6:

   EXHIBITS      75   

SIGNATURES

     82   


Table of Contents

 

PART I – FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS

Unaudited consolidated financial statements begin on the following page

 

1


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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(thousands of dollars)

 

     Three months ended      Nine months ended  
     September 26,
2010
    September 27,
2009
     September 26,
2010
    September 27,
2009
 

Net sales

   $ 541,729      $ 394,185       $ 1,774,245      $ 1,230,415   

Cost of products sold

     418,256        298,606         1,353,104        956,751   
                                 

Gross profit

     123,473        95,579         421,141        273,664   

Operating expenses

         

Marketing and selling expenses

     39,766        26,052         131,093        91,009   

Administrative expenses

     23,449        17,535         83,941        47,038   

Research and development expenses

     1,912        1,158         6,460        3,275   

Other (income) expense, net

     4,111        4,197         12,920        12,591   
                                 

Total operating expenses

     69,238        48,942         234,414        153,913   
                                 

Earnings before interest and taxes

     54,235        46,637         186,727        119,751   

Interest expense

     74,064        28,315         182,778        86,583   

Interest income

     85        21         242        34   
                                 

Earnings (loss) before income taxes

     (19,744     18,343         4,191        33,202   

Provision (benefit) for income taxes

     (7,577     7,950         (1,746     22,384   
                                 

Net earnings (loss)

   $ (12,167   $ 10,393       $ 5,937      $ 10,818   
                                 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (unaudited)

(thousands of dollars, except per share amounts)

 

     September 26,
2010
    December 27,
2009
 

Current assets:

    

Cash and cash equivalents

   $ 106,899      $ 73,874   

Accounts receivable, net

     163,482        158,004   

Inventories, net

     388,882        389,967   

Other current assets

     21,458        26,960   

Deferred tax assets

     33,738        25,670   
                

Total current assets

     714,459        674,475   

Plant assets, net

     431,455        412,208   

Tradenames

     1,658,812        1,658,812   

Other assets, net

     208,987        233,823   

Goodwill

     1,559,180        1,559,180   
                

Total assets

   $ 4,572,893      $ 4,538,498   
                

Current liabilities:

    

Short-term borrowings

   $ 466      $ 1,232   

Current portion of long-term obligations

     5,197        38,228   

Accounts payable

     150,930        130,360   

Accrued trade marketing expense

     45,175        49,048   

Accrued liabilities

     153,481        130,035   

Accrued income taxes

     —          455   
                

Total current liabilities

     355,249        349,358   

Long-term debt (includes $139,216 and $109,237 owed to related parties)

     2,869,692        2,849,251   

Pension and other postretirement benefits

     76,413        82,437   

Other long-term liabilities

     44,208        39,383   

Deferred tax liabilities

     350,864        343,716   
                

Total liabilities

     3,696,426        3,664,145   

Commitments and contingencies (note 12)

    

Shareholder’s equity:

    

Pinnacle Common stock: par value $.01 per share, 100 shares authorized, issued 100 shares

     —          —     

Additional paid-in-capital

     693,417        693,196   

Notes receivable from officers

     —          (565

Retained earnings

     231,250        225,313   

Accumulated other comprehensive (loss) income

     (48,200     (43,591
                

Total shareholder’s equity

     876,467        874,353   
                

Total liabilities and shareholder’s equity

   $ 4,572,893      $ 4,538,498   
                

See accompanying Notes to Consolidated Financial Statements

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(thousands of dollars)

 

     Nine months ended  
     September 26,
2010
    September 27,
2009
 

Cash flows from operating activities

    

Net earnings from operations

   $ 5,937      $ 10,818   

Non-cash charges (credits) to net earnings

    

Depreciation and amortization

     58,212        48,004   

Amortization of discount on term loan

     1,856        —     

Amortization of debt acquisition costs

     9,424        3,551   

Write off of debt issue and refinancing costs

     17,281        —     

Amortization of deferred mark-to-market adjustment on terminated swaps

     2,565        3,434   

Change in value of financial instruments

     1,212        (271

Stock-based compensation charge

     614        2,400   

Postretirement healthcare benefits

     (57     (19

Pension expense net of contributions

     (2,473     1,457   

Other long-term liabilities

     1,528        1,060   

Other long term assets

     50        (1,177

Deferred income taxes

     (3,801     22,619   

Changes in working capital

    

Accounts receivable

     (5,320     (17,241

Inventories

     1,306        (11,307

Accrued trade marketing expense

     (3,966     (10,492

Accounts payable

     34,691        587   

Accrued liabilities

     23,732        16,474   

Other current assets

     2,692        (3,596
                

Net cash provided by operating activities

     145,483        66,301   
                

Cash flows from investing activities

    

Capital expenditures

     (52,397     (40,716
                

Net cash used in investing activities

     (52,397     (40,716
                

Cash flows from financing activities

    

Proceeds from bond offering

     400,000        —     

Proceeds from bank term loan

     442,300        —     

Repayments of long term obligations

     (872,452     (9,375

Borrowings under revolving credit facility

     —          39,864   

Repayments of revolving credit facility

     —          (58,208

Proceeds from short-term borrowings

     1,412        350   

Repayments of short-term borrowings

     (2,178     (240

Repayment of capital lease obligations

     (2,164     (233

Change in bank overdrafts

     (14,304     —     

Equity contributions

     561        1,785   

Repurchases of equity

     (954     (1,450

Repayment of notes receivable from officers

     565        —     

Debt acquisition costs

     (13,025     —     
                

Net cash used in financing activities

     (60,239     (27,507
                

Effect of exchange rate changes on cash

     178        244   

Net change in cash and cash equivalents

     33,025        (1,678

Cash and cash equivalents - beginning of period

     73,874        4,261   
                

Cash and cash equivalents - end of period

   $ 106,899      $ 2,583   
                

Supplemental disclosures of cash flow information:

    

Interest paid

   $ 122,380      $ 78,582   

Interest received

     242        34   

Income taxes paid

     6,262        581   

Non-cash investing and financing activities:

    

New capital leases

     (12,222     (1,200

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY (unaudited)

(thousands of dollars, except share amounts)

 

    Common Stock     Additional
Paid In

Capital
    Notes
Receivable

From Officers
    Retained
earnings
(Accumulated

Deficit)
    Accumulated
Other
Comprehensive

(Loss) Income
    Total
Shareholder’s

Equity
 
    Shares     Amount            

Balance at December 28, 2008

    100      $ —        $ 427,323      $ —        $ (77,290   $ (42,460   $ 307,573   

Equity contributions:

             

Cash

        1,785              1,785   

Reduction in equity contributions

        (1,450           (1,450

Equity related compensation

        2,400              2,400   

Comprehensive income:

             

Net earnings

            10,818          10,818   

Swap mark to market adjustments, net of income tax benefit of $333

              (13,226     (13,226

Amortization of deferred mark-to-market adjustment on terminated swaps

              3,434        3,434   

Foreign currency translation

              (1,014     (1,014
                   

Total comprehensive income

                12   
                                                       

Balance at September 27, 2009

    100      $ —        $ 430,058      $ —        $ (66,472   $ (53,266   $ 310,320   
                                                       

Balance at December 27, 2009

    100      $ —        $ 693,196      $ (565   $ 225,313      $ (43,591   $ 874,353   

Equity contribution:

             

Cash

        561              561   

Repurchases of equity

        (954           (954

Equity related compensation

        614              614   

Collection of notes receivable from officers

          565            565   

Comprehensive income:

             

Net earnings

            5,937          5,937   

Swap mark to market adjustments, net of tax benefit of $3,387

              (4,927     (4,927

Amortization of deferred mark-to-market adjustment on terminated swaps, net of tax provision of $2,749

              (184     (184

Foreign currency translation, net of tax benefit of $194

              497        497   

Net gain on Pension and OPEB actuarial assumptions, net of tax provision of $3,769

              5        5   
                   

Total comprehensive income

                1,328   
                                                       

Balance at September 26, 2010

    100      $ —        $ 693,417      $ —        $ 231,250      $ (48,200   $ 876,467   
                                                       

For the three months ended September 26, 2010 and September 27, 2009, total comprehensive (loss)/income was ($11,783) and $3,951, respectively.

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(thousands of dollars, except share amounts and where noted in millions)

1. Summary of Business Activities

Business Overview

Pinnacle Foods Finance LLC (hereafter referred to as the “Company” or “PFF”) is a leading manufacturer, marketer and distributor of high quality, branded convenience food products, the products and operations of which are managed and reported in three operating segments: (i) Birds Eye Frozen, (ii) Duncan Hines Grocery and (iii) Specialty Foods. Our United States retail frozen vegetables (Birds Eye®), single-serve frozen dinners and entrées (Hungry-Man®, Swanson®), multi-serve frozen dinners and entrées (Birds Eye Voila!®), frozen seafood (Van de Kamp’s®, Mrs. Paul’s®), frozen breakfast (Aunt Jemima®), bagels (Lender’s®), and frozen pizza (Celeste®) are reported in the Birds Eye Frozen Division. Our baking mixes and frostings (Duncan Hines®), shelf-stable pickles, peppers and relish (Vlasic®), barbeque sauces (Open Pit®), pie fillings (Comstock®, Wilderness®), syrups (Mrs. Butterworth’s® and Log Cabin®), salad dressing (Bernstein’s®), canned meat (Armour®, Nalley®, Brooks®) and all Canadian Operations are reported in the Duncan Hines Grocery Division. The Specialty Foods Division consists of snack products (Tim’s Cascade® and Snyder of Berlin®) and our food service and private label businesses.

On February 10, 2007, Crunch Holding Corp. (“CHC”), the parent company of Pinnacle Foods Group Inc. (“PFGI”), entered into an Agreement and Plan of Merger with Peak Holdings LLC (“Peak Holdings”), a Delaware limited liability company controlled by affiliates of The Blackstone Group, Peak Acquisition Corp. (“Peak Acquisition”), a wholly owned subsidiary of Peak Holdings, and Peak Finance LLC (“Peak Finance”), an indirect wholly owned subsidiary of Peak Acquisition, providing for the acquisition of CHC. Under the terms of the Agreement and Plan of Merger, the purchase price for CHC was $2,160.2 million in cash less the amount of indebtedness (including capital lease obligations) of CHC and its subsidiaries outstanding immediately prior to the closing and certain transaction costs. Pursuant to the Agreement and Plan of Merger, immediately prior to the closing, CHC contributed all of the outstanding shares of capital stock of its wholly owned subsidiary, PFGI, to a newly-formed Delaware limited liability company, PFF. At the closing, Peak Acquisition merged with and into CHC, with CHC as the surviving corporation, and Peak Finance merged with and into PFF, with PFF as the surviving entity.

As a result of the Merger, CHC became a wholly-owned subsidiary of Peak Holdings. This transaction closed on April 2, 2007 (the “Blackstone Transaction”).

On December 23, 2009 Pinnacle Foods Group LLC (“PFG LLC”), formerly known as PFGI, a subsidiary of PFF, purchased all of the outstanding common stock of Birds Eye Foods, Inc. (“Birds Eye Foods”) (the “Birds Eye Foods Acquisition”). See Note 3 for a full description of the transaction and brands of Birds Eye Foods.

2. Interim Financial Statements

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s financial position as of September 26, 2010, the results of operations for the three and nine months ended September 26, 2010 and September 27, 2009, and the cash flows for the nine months ended September 26, 2010 and September 27, 2009. The results of operations are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 27, 2009.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

3. Acquisition

Acquisition of Birds Eye Foods, Inc.

On December 23, 2009, our wholly owned subsidiary, Pinnacle Foods Group LLC acquired all of the common stock of Birds Eye Foods. Birds Eye Foods’ product offering includes an expanding platform of healthy, high-quality frozen vegetables and frozen meals and a portfolio of primarily branded specialty foods which are highly-complimentary to Pinnacle’s existing product offerings. Frozen products are marketed under the Birds Eye brand name. Birds Eye Foods markets traditional boxed and bagged frozen vegetables, as well as steamed vegetables using innovative steam-in-packaging technology, under the Birds Eye and Birds Eye Steamfresh brands. Birds Eye Foods’ complete bagged meals, marketed under the Birds Eye Voila! brand, offer consumers value-added meal solutions that include a protein, starch, and vegetables in one convenient package. Birds Eye Foods’ branded specialty food products hold leading market share positions in their core geographic markets, and include Comstock and Wilderness fruit pie fillings and toppings, Brooks and Nalley chili and chili ingredients, and snack foods by Tim’s Cascade and Snyder of Berlin.

The authoritative guidance for business combinations and goodwill and other intangible assets requires that all business combinations be accounted for using the acquisition method of accounting. The guidance for goodwill and other intangible assets provides that goodwill and other intangible assets with indefinite lives are not to be amortized, but tested for impairment on an annual basis.

In December 2007, the FASB updated the authoritative guidance for business combinations. The guidance still requires business combinations to be accounted for using the acquisition method of accounting, but changed the manner of applying the method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. The Birds Eye Foods Acquisition has been accounted for in accordance with these standards.

The cost of the Birds Eye Foods Acquisition consisted of:

 

Stated purchase price

   $ 670,000   

Net repayment of Birds Eye’s debt

     670,383   
        

Total cost of acquisition

   $ 1,340,383   
        

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

The following table summarizes the allocation of the total cost of the Birds Eye Foods Acquisition to the assets acquired and liabilities assumed:

 

Assets acquired:

  

Cash and cash equivalents

   $ 25,637   

Account receivable

     67,697   

Inventories

     212,612   

Other current assets

     2,806   

Assets held for sale

     7,402   

Deferred tax assets

     797   

Plant assets

     146,813   

Tradenames

     750,000   

Distributor relationships and license agreements

     52,875   

Goodwill

     565,013   

Other assets

     53   
        

Fair value of assets acquired

     1,831,705   

Liabilities assumed

  

Accounts payable

     78,652   

Accrued liabilities

     59,455   

Pension and post retirement benefit plans

     49,307   

Capital leases

     1,657   

Other long-term liabilities

     14,520   

Deferred tax liabilities

     287,731   
        

Total cost of acquisition

   $ 1,340,383   
        

Based upon the allocation, the value assigned to intangible assets and goodwill totaled $1,367.9 million. Of the total intangible assets, $48.0 million has been assigned to distributor relationships. Distributor relationships are being amortized on an accelerated basis over 30 years, this life was based on an attrition rate based on industry experience which management believes is appropriate in the Company’s circumstances. The Company has also assigned $750.0 million to the value of the tradenames acquired, of which $624.0 million is allocated to the Birds Eye Frozen segment, $90.0 million is allocated to the Duncan Hines Grocery segment and $36.0 million is allocated to the Specialty Foods segment. The values of the tradenames are not subject to amortization but are reviewed annually for impairment. Goodwill, which is also not subject to amortization, totaled $565.0 million, of which $304.6 million is allocated to the Birds Eye Frozen segment, $107.2 million is allocated to the Duncan Hines Grocery segment and $153.2 million is allocated to the Specialty Foods segment. No new tax-deductible goodwill or intangible assets were created as a result of the Birds Eye Foods Acquisition, but historical tax-deductible goodwill and intangible assets in the amount of $79.4 million existed as of the closing of the Birds Eye Foods Acquisition. The above allocation is subject to adjustment, pending the receipt of additional information relative to Birds Eye Foods’ tax matters. The allocation is expected to be finalized during the fourth quarter.

In accordance with the requirements of the acquisition method of accounting for acquisitions, inventories obtained in the Birds Eye Foods Acquisition were required to be valued at fair value (net realizable value, which is defined as estimated selling prices less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of the acquiring entity), which is $37.6 million higher than historical manufacturing cost. Cost of products sold for the three and nine months ended September 26, 2010, and the fiscal year ended December 27, 2009 includes pre-tax charges of $9.7 million, $36.8 million and $0.5 million, respectively, related to the finished products at December 23, 2009, which were subsequently sold. The remaining $0.3 million will be recognized in the remainder of 2010.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

The Birds Eye Foods Acquisition was financed through borrowings of $850.0 million in term loans (“the Tranche C Term Loans”), $300.0 million of 9.25% Senior Notes due 2015 (the “Senior Notes”), a $260.0 million equity contribution from The Blackstone Group L.P., a $3.1 million investment from members of the board and management, less transaction costs of $0.2 million and $24.1 million in the nine months ended September 26, 2010 and fiscal year ended December 27, 2009, respectively, and deferred financing costs of $40.2 million. Included in the transaction costs of $0.2 million for the nine months ended September 26, 2010 are primarily legal, accounting and other professional fees. Included in the transaction costs of $24.1 million for the fiscal year ended December 27, 2009 are: $19.3 million in merger, acquisition and advisory fees, $4.0 million in legal, accounting and other professional fees and $0.8 million in other costs. The costs are recorded in Other expense (income), net in the Consolidated Statements of Operations. The Company also incurred $11.8 million in original issue discount, in connection with the Tranche C Term Loans. This was recorded in Long-term debt on the Consolidated Balance Sheet and was being amortized over the life of the loan using the effective interest method prior to the repayment of the Tranche C Term Loans on August 17, 2010. For more information on the refinancing, see Note 9 of the Consolidated Financial Statements for Debt and Interest Expense.

Pro forma Information

The following schedule includes consolidated statements of operations data for the unaudited pro forma results for the nine months ended September 27, 2009 as if the Birds Eye Foods Acquisition had occurred as of the beginning of fiscal 2009. The pro forma information includes the actual results with pro forma adjustments for the change in interest expense related to the Birds Eye Foods Acquisition, purchase accounting adjustments related to fixed assets, intangible assets, pension and other post-employment benefit liabilities, and related adjustments to the provision for income taxes.

The unaudited pro forma information is provided for illustrative purposes only. It does not purport to represent what the consolidated results of operations would have been had the Birds Eye Foods Acquisition occurred on the date indicated above, nor does it purport to project the consolidated results of operations for any future period or as of any future date.

 

     Nine Months
ended
September 27, 2009

(unaudited)
 

Net sales

   $ 1,852,090   

Earnings before interest and taxes

   $ 195,510   

Net earnings

   $ 7,090   

4. Fair Value Measurements

In January of 2010, the FASB updated the authoritative guidance for fair value disclosure. The updated guidance requires new disclosures for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and activity within Level 3 of the fair value hierarchy. The update provides amendments to the level of disaggregation that an entity should provide in each class of assets and liabilities, as well as disclosures about the inputs and valuation techniques used to measure fair value. The updated guidance is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company adopted this guidance in the first quarter of 2010 and it did not have a material impact on the Company’s consolidated financial position or results of operations.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

In the first quarter of 2009, the Company adopted the authoritative guidance for fair value disclosure as it relates to nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on at least an annual basis. The guidance for nonfinancial assets and nonfinancial liabilities defines fair value, establishes a framework for fair value disclosure in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this guidance apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. The adoption of the authoritative guidance for fair value disclosure, as it relates to nonfinancial assets and nonfinancial liabilities, had no impact on the Company’s consolidated financial statements. The provisions of the authoritative guidance for fair value disclosure will be applied at such time a fair value measurement of a nonfinancial asset or nonfinancial liability is required, which may result in a fair value that is materially different than would have been calculated prior to the adoption of the guidance.

The guidance for financial assets and liabilities discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

Level 1:   Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:   Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3:   Unobservable inputs that reflect the Company’s assumptions.

The Company’s population of financial assets and liabilities subject to recurring fair value measurements and the required disclosures are as follows:

 

     Fair Value
As of

September 26,
2010
     Fair Value Measurements
Using Fair Value Hierarchy
     Fair Value
As of

December 27,
2009
     Fair Value Measurements
Using Fair Value Hierarchy
 
        Level 1      Level 2      Level 3         Level 1      Level 2      Level 3  

Assets

                       

Interest rate derivatives

   $ —         $ —         $ —         $ —         $ 165       $ —         $ 165       $ —     

Foreign currency derivatives

     38         —           38         —           —           —           —           —     

Heating oil derivatives

     —           —           —           —           25         —           25         —     

Diesel fuel derivatives

     294         —           294         —           902         —           902         —     
                                                                       

Total assets at fair value

   $ 332       $ —         $ 332       $ —         $ 1,092       $ —         $ 1,092       $ —     
                                                                       

Liabilities

                       

Interest rate derivatives

   $ 31,433       $ —         $ 31,433       $ —         $ 21,145       $ —         $ 21,145       $ —     

Foreign currency derivatives

     1,219         —           1,219         —           2,522         —           2,522         —     

Natural gas derivatives

     74         —           74         —           57         —           57         —     
                                                                       

Total liabilities at fair value

   $ 32,726       $ —         $ 32,726       $ —         $ 23,724       $ —         $ 23,724       $ —     
                                                                       

The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments. The primary risks managed by using derivative instruments are interest rate risk, foreign currency exchange risk and commodity price risk.

Below are descriptions of the techniques used to estimate the fair value of financial instruments on the Company’s financial statements as of September 26, 2010.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

The valuations of these instruments are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate and foreign exchange forward curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of the authoritative guidance for fair value disclosure, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. The Company had no fair value measurements based upon significant unobservable inputs (Level 3) as of September 26, 2010 or December 27, 2009.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

5. Other Expense (Income), net

 

     Three months ended      Nine months ended  
     September 26,
2010
    September 27,
2009
     September 26,
2010
    September 27,
2009
 

Other expense (income), net consists of:

         

Amortization of intangibles/other assets

   $ 4,295      $ 4,197       $ 12,880      $ 12,591   

Birds Eye Foods Acquisition merger-related costs

     —          —           224        —     

Royalty expense (income), net and other

     (184     —           (184     —     
                                 

Total other expense (income), net

   $ 4,111      $ 4,197       $ 12,920      $ 12,591   
                                 

Birds Eye Foods Acquisition merger-related costs. In connection with the Birds Eye Foods Acquisition, as described in Note 3, the Company incurred costs of $224 in the nine months ended September 26, 2010. These costs relate primarily to legal, accounting and other professional fees.

6. Inventories

 

     September 26,
2010
     December 27,
2009
 

Raw materials, containers and supplies

   $ 36,024       $ 40,912   

Finished product

     352,858         349,055   
                 

Total

   $ 388,882       $ 389,967   
                 

The Company has various purchase commitments for raw materials, containers, supplies and certain finished products incident to the ordinary course of business. Such commitments are not at prices in excess of current market.

In the fourth quarter of 2009, in connection with the Birds Eye Foods Acquisition, inventories were required to be valued at fair value, which is $37.6 million higher than historical manufacturing cost. Cost of products sold for the three and nine months ended September 26, 2010, and the fiscal year ended December 27, 2009 includes pre-tax charges of $9.7 million, $36.8 million and $0.5 million, respectively, related to the finished products at December 23, 2009, which were subsequently sold. The remaining $0.3 million will be recognized in the remainder of 2010.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

7. Goodwill and Other Assets

Goodwill by segment is as follows:

 

     Birds Eye
Frozen
     Duncan Hines
Grocery
     Specialty
Foods
     Total  

Balance, December 27, 2009

   $ 575,958       $ 739,475       $ 243,747       $ 1,559,180   
                                   

Balance, September 26, 2010

   $ 575,958       $ 739,475       $ 243,747       $ 1,559,180   
                                   

The authoritative guidance for business combinations requires that all business combinations be accounted for at fair value under the acquisition method of accounting. The authoritative guidance for goodwill and other intangible assets provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment on an annual basis or more often when events indicate.

The Blackstone Transaction was accounted for in accordance with the authoritative guidance for business combinations and resulted in $996,546 in goodwill for PFF, as of April 2, 2007.

The Birds Eye Foods Acquisition was accounted for in accordance the authoritative guidance for business combinations and resulted in $565,013 in goodwill, as of December 27, 2009.

In the first quarter of 2010, we implemented a reorganization of the Company’s products into three operating segments: Birds Eye Frozen, Duncan Hines Grocery and Specialty Foods. Our United States retail frozen vegetables (Birds Eye®), single-serve frozen dinners and entrées (Hungry-Man®, Swanson®), multi-serve frozen dinners and entrées (Birds Eye Voila!®), frozen seafood (Van de Kamp’s®, Mrs. Paul’s®), frozen breakfast (Aunt Jemima®), bagels (Lender’s®), and frozen pizza (Celeste®) are reported in the Birds Eye Frozen Division. Our baking mixes and frostings (Duncan Hines®), shelf-stable pickles, peppers and relish (Vlasic®), barbeque sauces (Open Pit®), pie fillings (Comstock®, Wilderness®), syrups (Mrs. Butterworth’s® and Log Cabin®), salad dressing (Bernstein’s®), canned meat (Armour®, Nalley®, Brooks®) and all Canadian Operations are reported in the Duncan Hines Grocery Division. The Specialty Foods Division consists of snack products (Tim’s Cascade® and Snyder of Berlin®) and our food service and private label businesses.

As a result of the reorganization, the goodwill reallocation by segment resulted in $575,958 allocated to the Birds Eye Frozen segment, $739,475 allocated to the Duncan Hines Grocery segment and $243,747 allocated to the Specialty Foods segment.

The authoritative guidance for accounting for goodwill states that impairment is to be tested on an annual basis, unless an event occurs that could potentially reduce the fair value of a reporting unit below its book value. The Company’s reorganization into new segments constituted such a change and goodwill was tested for impairment during the first quarter which resulted in no impairment charges.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

Other Assets, net

 

     September 26, 2010  
     Weighted Avg
Life
     Gross  Carrying
Amount
     Accumulated
Amortization
    Net  

Amortizable intangibles

          

Recipes

     10       $ 52,810       $ (18,484   $ 34,326   

Customer relationships - Distributors

     36         125,447         (15,116     110,331   

Customer relationships - Food Service

     7         36,143         (24,211     11,932   

Customer relationships - Private Label

     7         9,214         (7,154     2,060   

License

     7         4,875         (563     4,312   
                            

Total amortizable intangibles

      $ 228,489       $ (65,528   $ 162,961   

Deferred financing costs

        76,194         (31,049     45,145   

Notes receivable (Roskam Baking)

        567         —          567   

Other

        314         —          314   
                

Total other assets, net

           $ 208,987   
                
     December 27, 2009  
     Weighted Avg
Life
     Gross  Carrying
Amount
     Accumulated
Amortization
    Net  

Amortizable intangibles

          

Recipes

     10       $ 52,810       $ (14,523   $ 38,287   

Customer relationships - Distributors

     36         125,305         (10,154     115,151   

Customer relationships - Food Service

     7         36,143         (21,655     14,488   

Customer relationships - Private Label

     7         9,213         (6,316     2,897   

License

     7         4,875         —          4,875   
                            

Total amortizable intangibles

      $ 228,346       $ (52,648   $ 175,698   

Deferred financing costs

        80,730         (23,833     56,897   

Foreign currency swap (See Note 11)

        165         —          165   

Notes receivable (Roskam Baking)

        1,009         —          1,009   

Other

        54         —          54   
                

Total other assets, net

           $ 233,823   
                

Amortization during the three and nine months ended September 26, 2010 was $4,295 and $12,880, respectively. Estimated amortization expense for each of the next five years and thereafter is as follows: remainder of 2010 - $4,288, 2011 - $16,167, 2012 - $15,808, 2013 - $15,471, 2014 - $12,188 and thereafter - $99,032. Amortization during the three and nine months ended September 27, 2009 was $4,197 and $12,591, respectively.

Deferred financing costs, which relate to the Senior Secured Credit Facility, Senior Notes and Senior Subordinated Notes entered into in connection with the Blackstone Transaction, amounted to $40,567 as of September 26, 2010. Deferred financing costs in connection with the Birds Eye Foods Acquisition, amounted to $40,253 prior to the refinancing. At the time of the refinancing of the Tranche C Term Loans discussed below, deferred financing costs were reduced to $35,639.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

As discussed in Note 9, the Company refinanced its existing Tranche C Term Loans on August 17, 2010 by issuing $400.0 million 8.25% Senior Notes due 2017 (the “8.25% Senior Notes”) and entering into an amendment to the Senior Secured Credit Facility pursuant to which the Company borrowed incremental term loans (the “Tranche D Term Loans”) in an aggregate principal amount of $442.3 million. In accordance with the authoritative guidance for debt extinguishments and modifications, the lending relationship between the Company and each bank in the original lending syndicate was examined and determined to be either a modification or an extinguishment. As a result of this analysis, the Company recorded interest expense in the Consolidated Statement of Operations for the write-off of $11,633 of deferred financing costs and $5,648 of original issue discount related to extinguished lending relationships from the Tranche C Term Loans. In addition, the Company incurred approximately $3,880 of legal, consulting and placement fees in connection with the Tranche D Term Loans. Of the fees incurred, $3,221 were costs of modifying existing lending relationships and thus the Company charged the interest expense line in the Consolidated Statement of Operations during the third quarter of 2010. The remaining $660 of fees related to obtaining new lending relationships and thus was deferred. The Company also incurred approximately $8,790 of legal, consulting, audit and placement fees in connection with the execution of the 8.25% Senior Notes, all of which were deferred. All costs deferred in connection with the above transactions were recorded in Other Assets, net on the consolidated balance sheet.

All deferred financing costs are amortized into interest expense over the life of the related debt facility using the effective interest method. Amortization of the deferred financing costs during the three and nine months ended September 26, 2010 was $2,766 and $9,424, respectively. Amortization of the deferred financing costs during the three and nine months ended September 27, 2009 was $1,184 and $3,551, respectively.

In February 2009, the Company entered into an agreement with Roskam Baking, which began co-packing certain Duncan Hines products in April 2009. This agreement included a provision to loan Roskam $1,900. As of September 26, 2010 the balance of the notes receivable is $1,117, of which $550 is recorded on the Consolidated Balance Sheet in Other Current Assets and $567 is recorded in Other Assets, net. This loan is being paid back to the Company based on cases produced and will be paid back in no less than 5 years.

8. Restructuring Charges

Rochester, NY Office

The Rochester, NY office is the former headquarters of Birds Eye Foods, Inc. which was acquired by PFG on December 23, 2009, as described in Note 3. In connection with the consolidation of activities into PFG’s New Jersey offices, the Rochester office will be closed. Notification letters under the Worker Adjustment and Retraining Notification (WARN) Act of 1988 were issued in the first quarter of 2010. Activities related to the closure of the Rochester office began in the second quarter of 2010 and will result in the elimination of approximately 200 positions.

In accordance with the authoritative guidance with respect to accounting for costs associated with exit or disposal activities, the full cost of termination benefits of $7,587 related to employees who will not be retained beyond the minimum retention period were recorded in the first quarter and the full cost of termination benefits of $4,040 related to employees who will be retained beyond the minimum retention period will be recorded in the future service periods. Of the $4,040, $1,146 was recorded in the first quarter of 2010, $1,756 was recorded in the second quarter of 2010, $885 was recorded in the third quarter of 2010 and $253 is expected to be recorded in the fourth quarter of 2010.

The total cost of termination benefits recorded for the three months ended September 26, 2010 was $885 and was recorded in the segments as follows: Birds Eye Frozen segment $625, Duncan Hines Grocery segment $161 and Specialty Foods segment $98. The total cost of termination benefits recorded for the nine months ended September 26, 2010 was $11,374 and was recorded in the segments as follows: Birds Eye Frozen segment $8,039, Duncan Hines Grocery segment $2,072 and Specialty Foods segment $1,263.

In addition to the termination benefits, during the third quarter of 2010, the Company recorded net lease termination costs of $847 related to vacating the Birds Eye Foods’ Corporate headquarters prior to the expiration of the lease. These costs are expected to be paid over the remaining term of the lease, which runs through December 2011.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

The following table summarizes restructuring charges accrued as of September 26, 2010. These amounts are recorded in our Consolidated Balance Sheets, of which $5,738 is recorded in Accrued liabilities and $1,777 is recorded in Other long-term liabilities.

 

     Restructuring
Reserve
 

Balance as of December 27, 2009

   $ —     

Expense

     12,221   

Payments

     (4,706
        

Balance as of September 26, 2010

   $ 7,515   
        

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

9. Debt and Interest Expense

 

    September 26,
2010
    December 27,
2009
 

Short-term borrowings

   

- Revolving Credit Facility

  $ —        $ —     

- Notes payable

    466        1,232   
               

Total short-term borrowings

    466        1,232   
               

Long-term debt

   

- Senior Secured Credit Facility - Term Loans

  $ 1,199,422      $ 1,221,875   

- Senior Secured Credit Facility - Tranche C Term Loans

    —          850,000   

- Senior Secured Credit Facility - Tranche D Term Loans

    442,300        —     

- 8.25% Senior Notes

    400,000        —     

- 9.25% Senior Notes

    625,000        625,000   

- 10.625% Senior Subordinated Notes

    199,000        199,000   

- Unamortized discount on long term debt

    (4,218     (11,722

- Capital lease obligations

    13,385        3,326   
               
    2,874,889        2,887,479   

Less: current portion of long-term obligations

    5,197        38,228   
               

Total long-term debt

  $ 2,869,692      $ 2,849,251   
               

 

Interest expense

   Three months ended      Nine months ended  
     September 26,
2010
     September 27,
2009
     September 26,
2010
     September 27,
2009
 

Third party interest expense

   $ 45,893       $ 22,236       $ 136,098       $ 67,891   

Related party interest expense

     2,624         268         4,023         1,186   

Amortization of debt acquisition costs (Note 7)

     2,766         1,184         9,424         3,551   

Write off of debt issue costs (Note 7)

     11,633            11,633      

Write off of discount on term loan (Note 9)

     5,648            5,648      

Amortization of deferred mark-to-market adjustment on terminated swap (Note 11)

     736         1,040         2,565         3,434   

Interest rate swap (gains) losses (Note 11)

     4,764         3,587         13,387         10,521   
                                   

Total interest expense

   $ 74,064       $ 28,315       $ 182,778       $ 86,583   
                                   

As part of the Blackstone Transaction as described in Note 1, Peak Finance LLC entered into a $1,375.0 million credit agreement (the “Senior Secured Credit Facility”) in the form of (i) term loans in an initial aggregate amount of $1,250.0 million (the “Term Loans”) and (ii) revolving credit commitments in the initial aggregate amount of $125.0 million (the “Revolving Credit Facility”). Peak Finance LLC merged with and into PFF on April 2, 2007 at the closing of the Blackstone Transaction. The term loan matures April 2, 2014. The Revolving Credit Facility matures April 2, 2013.

As part of the Birds Eye Foods Acquisition on December 23, 2009, as described in Note 3, the Company entered into an amendment to the Senior Secured Credit Facility in the form of (i) incremental term loans in the amount of $850.0 million (the “Tranche C Term Loans”) and (ii) an incremental revolving credit facility the amount of $25.0 million, bringing our total revolving credit commitment to $150.0 million. In connection with the Tranche C Term Loans, the Company also incurred $11.8 million in original issue discount fees. These fees were recorded in Long-term debt on the Consolidated Balance Sheet and were being amortized over the life of the loan using the effective interest method prior to the repayment of the Tranche C Term Loans.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

On August 17, 2010 the Company entered into an amendment to the Senior Secured Credit Facility, which provided for incremental term loans in the amount of $442.3 million (the “Tranche D Term Loans). The proceeds from the Tranche D Term Loans, along with the proceeds from the 8.25% Senior Notes described below were used to repay the outstanding Tranche C Term Loans. In accordance with the authoritative guidance for debt extinguishments and modifications, the lending relationship between the Company and each bank in the original lending syndicate was examined and determined to be either a modification or an extinguishment. As a result of this analysis, the Company recorded interest expense in the Consolidated Statement of Operations for the write-off of $11,633 of deferred financing costs and $5,648 of original issue discount related to extinguished lending relationships from the Tranche C Term Loans. In addition, the Company incurred approximately $3,880 of legal, consulting and placement fees in connection with the Tranche D Term Loans. Of the fees incurred, $3,221 were costs of modifying existing lending relationships and thus the Company charged the interest expense line in the Consolidated Statement of Operations during the third quarter of 2010. The remaining $660 of fees related to obtaining new lending relationships and thus was deferred. The Company also incurred approximately $8,790 of legal, consulting, audit and placement fees in connection with the execution of the 8.25% Senior Notes, all of which were deferred. All costs deferred in connection with the above transactions were recorded in Other Assets, net on the consolidated balance sheet.

There were no borrowings outstanding under the Revolving Credit Facility as of September 26, 2010 and December 27, 2009. There have been no borrowings under the revolver at any time in 2010.

The total combined amount of the Term Loans and the Tranche C and D Term Loans that were owed to affiliates of the Blackstone Group as of September 26, 2010 and December 27, 2009, was $139,216 and $109,237, respectively.

The Company’s borrowings under the Senior Secured Credit Facility, as amended, bear interest at a floating rate and are maintained as base rate loans or as Eurocurrency rate loans. Base rate loans bear interest at the base rate plus the applicable base rate margin, as defined in the Senior Secured Credit Facility. The base rate is defined as the higher of (i) the prime rate and (ii) the Federal Reserve reported overnight funds rate plus 1/2 of 1%. Eurocurrency rate loans bear interest at the adjusted Eurocurrency rate, as described in the Senior Secured Credit Facility, plus the applicable Eurocurrency rate margin. Solely with respect to Tranche C Term Loans, the Eurocurrency rate shall be no less than 2.50% per annum. Solely with respect to Tranche C Term Loans, the base rate shall be no less than 3.50% per annum. Solely with respect to Tranche D Term Loans, the Eurocurrency rate shall be no less than 1.75% per annum. Solely with respect to Tranche D Term Loans, the base rate shall be no less than 2.75% per annum.

The applicable margins with respect to the Company’s Senior Secured Credit Facility vary from time to time in accordance with the terms thereof and agreed upon pricing grids based on the Company’s leverage ratio as defined in the credit agreement. The applicable margins with respect to the Senior Secured Credit Facility are currently:

 

Applicable Margin (per annum)

 
Revolving Credit Facilty and Letters of Credit     Term Loans  
Eurocurrency Rate  for
Revolving Loans and
Letter of Credit Fees
    Base Rate for
Revolving  Loans
    Commitment Fees Rate     Eurocurrency Rate for
Term Loans
    Base Rate for  Term
Loans
 
  2.25     1.25     0.50     2.50     1.50

 

Tranche C Term Loans     Tranche D Term Loans  
Eurocurrency Rate  for
Term Loan C
    Base Rate for
Term  Loan C
    Eurocurrency Rate  for
Term Loan C
    Base Rate for
Term  Loan C
 
  5.00     4.00     4.25     3.25

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

The obligations under the Senior Secured Credit Facility are unconditionally and irrevocably guaranteed by each of the Company’s direct or indirect domestic subsidiaries (collectively, the “Guarantors”). In addition, the Senior Secured Credit Facility is collateralized by first priority or equivalent security interests in (i) all the capital stock of, or other equity interests in, each direct or indirect domestic subsidiary of the Company and 65% of the capital stock of, or other equity interests in, each direct foreign subsidiaries of the Company, or any of its domestic subsidiaries and (ii) certain tangible and intangible assets of the Company and those of the Guarantors (subject to certain exceptions and qualifications).

A commitment fee of 0.50% per annum is applied to the unused portion of the Revolving Credit Facility. For the three and nine months ended September 26, 2010, the weighted average interest rate on the term loans and the Tranche C and D Term Loans was 4.26% and 4.66%, respectively. For the three months and nine months ended September 27, 2009, the weighted average interest rate on the term loans and the Tranche C Term Loans was 3.04% and 3.18%, respectively. As of September 26, 2010, the interest rate on the revolving credit facility was 2.76%, however no borrowings were made during 2010. For the three and nine months ended September 27, 2009, the weighted average interest rate on the Revolving Credit Facility was 3.08% and 3.26%, respectively. As of September 26, 2010 and September 27, 2009, the weighted average Eurodollar interest rate on the term loan facility was 3.63% and 3.01% respectively.

The Company pays a fee for all outstanding letters of credit drawn against the Revolving Credit Facility at an annual rate equivalent to the Applicable Margin then in effect with respect to Eurodollar loans under the Revolving Credit Facility, less the fronting fee payable in respect of the applicable letter of credit. The fronting fee is equal to 0.125% per annum of the daily maximum amount then available to be drawn under such letter of credit. The fronting fees are computed on a quarterly basis in arrears. Total letters of credit issued under the Revolving Credit Facility cannot exceed $50,000 as of March 24, 2010 (previously $25,000). As of September 26, 2010 and December 27, 2009, the Company had utilized $34,103 and $22,072, respectively of the Revolving Credit Facility for letters of credit. As of September 26, 2010, there were no borrowings under the Revolving Credit Facility, therefore, of the $150,000 Revolving Credit Facility available, the Company had an unused balance of $115,897 available for future borrowing and letters of credit. As of December 27, 2009, there were no borrowings under the Revolving Credit Facility, therefore, of the $150,000 Revolving Credit Facility available, the Company had an unused balance of $127,928 available for future borrowing and letters of credit. The remaining amount that can be used for letters of credit as of September 26, 2010 and December 27, 2009 was $15,897 and $2,928, respectively.

In accordance with the “Excess Cash Flow” requirements of the Senior Secured Credit Facility the Company made a mandatory prepayment of the Term Loans of $27.0 million in March 2010. Under the terms of the Senior Secured Credit Facility, Excess cash flow is determined by taking consolidated net income (as defined) and adjusting it for certain items, including (1) all non cash charges and credits included in arriving at consolidated net income, (2) changes in working capital, (3) capital expenditures (to the extent they were not financed with debt), (4) the aggregate amount of principle payments of indebtedness and (5) certain other items defined in the Senior Secured Credit Facility. The next excess cash flow payment will be made in March 2011.

The Term Loans mature in quarterly 0.25% installments from September 2007 to December 2013 with the remaining balance due in April 2014. The aggregate maturities of the term loan outstanding as of September 26, 2010 are no payment in 2010, $2.5 million in 2011, $12.5 million in 2012, $12.5 million in 2013 and $1,171.9 million in 2014. The Tranche D Term Loans mature in quarterly 0.25% installments from December 2010 to December 2013 with the remaining balance due in April 2014. The aggregate maturities of the Tranche D Term Loans outstanding as of December 27, 2009 are no payment in 2010, $4.4 million in 2011, $4.4 million in 2012, $4.4 million in 2013 and $429.1 million in 2014.

On April 2, 2007, as part of the Blackstone Transaction described in Note 1, the Company issued $325.0 million of 9.25% Senior Notes (the “Senior Notes”) due 2015, and $250.0 million of 10.625% Senior Subordinated Notes (the “Senior Subordinated Notes”) due 2017. On December 23, 2009, as part of the Birds Eye Foods Acquisition described in Note 3, the Company issued an additional $300 million of 9.25% Senior Notes due in 2015 (the “Additional Senior Notes”). The Senior Notes and the Additional Senior Notes are collectively referred to herein as the 9.25% Senior Notes. As described above, on August 17, 2010 the Company issued $400.0 million of 8.25% Senior Notes, due 2017 (the 8.25% Senior Notes) and utilized the proceeds to repay the Tranche C Term Loans.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

The 9.25% Senior Notes and the 8.25% Senior Notes are general unsecured obligations of the Company, effectively subordinated in right of payment to all existing and future senior secured indebtedness of the Company and guaranteed on a full, unconditional, joint and several basis by the Company’s wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company. The Senior Subordinated Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness of the Company and guaranteed on a full, unconditional, joint and several basis by the Company’s wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company. See Note 17 of the Consolidated Financial Statements for Guarantor and Nonguarantor Financial Statements.

The Company may redeem some or all of the 9.25% Senior Notes at any time prior to April 1, 2011,some or all of the 8.25% Senior Notes at any time prior to September 1, 2013, and some or all of the Senior Subordinated Notes at any time prior to April 1, 2012, in each case at a price equal to 100% of the principal amount of notes redeemed plus the Applicable Premium as of, and accrued and unpaid interest to, the redemption date, subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date. The “Applicable Premium” is defined as the greater of (1) 1.0% of the principal amount of such note and (2) the excess, if any, of (a) the present value at such redemption date of (i) the redemption price of such 9.25% Senior Note at April 1, 2011 or such 8.25% Senior Note at September 1, 2013 or such Senior Subordinated Note at April 1, 2012, plus (ii) all required interest payments due on such 9.25% Senior Note through April 1, 2011 or such 8.25% Senior Note through September 1 2013 or such Senior Subordinated Note through April 1, 2012 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the Treasury Rate plus 50 basis points over (b) the principal amount of such note.

The Company may redeem the 9.25% Senior Notes, the 8.25% Senior Notes, or the Senior Subordinated Notes at the redemption prices listed below, if redeemed during the twelve-month period beginning on April 1st (for the 9.25% Senior Notes and Senior Subordinated Notes ) or September 1st ( for the 8.25% Senior Notes) of each of the years indicated below:

 

9.25% Senior Notes

   

8.25% Senior Notes

 

Year

   Percentage    

Year

   Percentage  

2011

     104.625   2013      106.188

2012

     102.313   2014      104.125

2013 and thereafter

     100.000   2015      102.063
     2016 and thereafter      100.000

 

Senior Subordinated Notes

 

Year

   Percentage  

2012

     105.313

2013

     103.542

2014

     101.771

2015 and thereafter

     100.000

In addition, until September 1, 2013, the Company is able to redeem up to 35% of the aggregate principal amount of the 8.25% Senior Notes at a redemption price equal to 100% of the aggregate principal amount thereof, plus a premium equal to the rate per annum on the the 8.25% Senior Notes, as the case may be, plus accrued and unpaid interest and Additional Interest, if any, to the redemption date, subject to the right of holders of the 8.25% Senior Notes of record on the relevant record date to receive interest due on the relevant interest payment date, with the net cash proceeds received by the Company from one or more equity offerings; provided that (i) at least 50% of the aggregate principal amount of the 8.25% Senior Notes, as the case may be, originally issued under the applicable indenture remains outstanding immediately after the occurrence of each such redemption and (ii) each such redemption occurs within 90 days of the date of closing of each such equity offering.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

In December 2007, the Company repurchased $51.0 million in aggregate principal amount of the 10.625% Senior Subordinated Notes at a discounted price of $44.2 million. The Company currently has outstanding $199.0 million in aggregate principal amount of Senior Subordinated Notes.

As market conditions warrant, the Company and its subsidiaries, affiliates or significant shareholders (including The Blackstone Group L.P. and its affiliates) may from time to time, in their sole discretion, purchase, repay, redeem or retire any of the Company’s outstanding debt or equity securities (including any publicly issued debt or equity securities), in privately negotiated or open market transactions, by tender offer or otherwise.

The estimated fair value of the Company’s long-term debt, including the current portion, as of September 26, 2010, is as follows:

 

     September 26, 2010  

Issue

   Recorded
Amount
     Fair Value  

Senior Secured Credit Facility - Term Loans

   $ 1,199,422       $ 1,160,441   

Senior Secured Credit Facility - Tranche D Term Loans

     442,300         442,300   

8.25% Senior Notes

     400,000         403,000   

9.25% Senior Notes

     625,000         645,313   

10.625% Senior Subordinated Notes

     199,000         210,940   
                 
   $ 2,865,722       $ 2,861,994   
                 

The fair value is based on the quoted market price for such notes and borrowing rates currently available to the Company for loans with similar terms and maturities.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

10. Pension and Retirement Plans

Pinnacle Foods Pension Plan

The Company maintains a noncontributory defined benefit pension plan (“Pinnacle Foods Pension Plan”) that covers eligible union employees and provides benefits generally based on years of service and employees’ compensation. The Pinnacle Foods Pension Plan is funded in conformity with the funding requirements of applicable government regulations. Plan assets consist principally of cash equivalent, equity and fixed income common collective trusts. Plan assets do not include any of the Company’s own equity or debt securities.

As a result of the negotiations for a new collective bargaining agreement with the union at our Imlay City location, effective May 11, 2010 pension benefits were frozen for certain participants. This resulted in a curtailment loss of $992 that was recorded in the second quarter of 2010.

In fiscal 2010, the Company expects to make contributions of $5.6 million to the Pinnacle Foods Pension Plan, of which $2.2 million and $4.8 million were made in the three and nine months ended September 26, 2010, respectively. The Company made contributions to the pension plan totaling $2.8 million in fiscal 2009, of which $1.2 million and $2.2 million were made in the three and nine months ended September 27, 2009, respectively.

The following represents the components of net periodic benefit costs:

 

Pension Benefits

   Pinnacle Foods Pension Plan  
     Three months ended     Nine months ended  
     September 26
2010
    September 27
2009
    September 26
2010
    September 27
2009
 

Service cost

   $ 265      $ 459      $ 963      $ 1,362   

Interest cost

     985        1,105        3,574        3,327   

Expected return on assets

     (780     (602     (2,831     (2,150

Amortization of:

        

prior service cost

     17        36        61        106   

actuarial loss

     177        345        641        1,033   

Curtailment loss

     —          —          992        —     
                                

Net periodic cost

   $ 664      $ 1,343      $ 3,400      $ 3,678   
                                

Birds Eye Foods Pension Plan

The Company’s Birds Eye Foods Pension Plan (“Birds Eye Foods Pension Plan”) consists of hourly and salaried employees and has primarily noncontributory defined-benefit schedules. In September 2001, this plan was amended to freeze benefit accruals for salaried employees effective September 28, 2001. Salaried participants who, on that date, were actively employed and who had attained age 40, completed 5 years of vesting service, and whose sum of age and vesting services was 50 or more, were grandfathered. Grandfathered participants were entitled to continue to earn benefit service in accordance with the provisions of the plan with respect to periods of employment after September 28, 2001 but in no event beyond September 28, 2006. In the first and second quarters of 2010, benefits of certain hourly employees were frozen in connection with the renegotiation of our collective bargaining agreements. The curtailment gain was $64 and $524 for the first and second quarters, respectively.

The Company maintains an Excess Benefit Retirement Plan which serves to provide employees with the same retirement benefit they would have received from the Company’s retirement plan under the career average base pay formula, but for changes required under the 1986 Tax Reform Act and the compensation limitation under Section 401(a)(17) of the Internal Revenue Code having been revised in the 1992 Omnibus Budget Reform Act. This plan was amended to freeze benefit accruals effective September 28, 2001. Participants who, on that date, were actively employed and who had attained age 40, completed 5 years of vesting service, and whose sum of age and vesting services was 50 or more, were grandfathered. Grandfathered participants were entitled to continue to earn benefit service in accordance with the provisions of the plan with respect to periods of employment after September 28, 2001 but in no event beyond September 28, 2006.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

For purposes of this disclosure, all defined-benefit pension plans acquired with Birds Eye Foods have been combined. The benefits for these plans are based primarily on years of service and employees’ pay near retirement. The Company’s funding policy is consistent with the funding requirements of Federal laws and regulations. Plan assets consist principally of common stocks, corporate bonds and US government obligations. Plan assets do not include any of the Company’s own equity or debt securities.

In fiscal 2010, the Company expects to make contributions of $2.6 million to the Birds Eye Foods Pension Plan. Contributions of $0.9 million and $1.7 million were made for the Birds Eye Foods Pension Plan in the three and nine months ended September 26, 2010, respectively.

 

Pension Benefits

   Birds Eye Foods Pension Plan  
     Three months ended     Nine months ended  
     September 26,
2010
    September 26,
2010
 

Service cost

   $ 501      $ 1,551   

Interest cost

     2,055        6,166   

Expected return on assets

     (2,051     (6,154

Curtailment gain

     —          (588
                

Net periodic (benefit) cost

   $ 505      $ 975   
                

Pinnacle Foods Other Postretirement Benefits Plan

The Company maintains a postretirement benefits plan (“Pinnacle Foods Other Postretirement Benefits Plan”) that provides health care and life insurance benefits to eligible retirees, covers certain U.S. employees and their dependents and is self-funded. Employees who have 10 years of service after the age of 45 and retire are eligible to participate in the postretirement benefit plan.

 

     Pinnacle Foods
Other Postretirement Benefits Plan
 
     Three months ended     Nine months ended  
     September 26
2010
    September 27
2009
    September 26
2010
    September 27
2009
 

Interest cost

     5        5        14        14   

Amortization of:

        

Net actuarial gain

     (11     (11     (33     (33
                                

Net periodic benefit

   $ (6   $ (6   $ (19   $ (19
                                

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

Birds Eye Foods Other Postretirement Benefits Plan

The Company sponsors benefit plans that provide postretirement medical and life insurance benefits for certain current and former employees. For the most part, current employees are not eligible for the postretirement medical coverage. Generally, other than pensions, the Company does not pay retirees’ benefit costs. Various exceptions exist, which have evolved from union negotiations, early retirement incentives and existing retiree commitments from acquired companies.

The Company has not prefunded any of its retiree medical or life insurance liabilities. Consequently there are no plan assets held in a trust, and there is no expected long-term rate of return assumption for purposes of determining the annual expense.

 

     Birds Eye Foods
Other Postretirement Benefits Plan
 
     Three months ended      Nine months ended  
     September 26,
2010
     September 26,
2010
 

Interest cost

   $ 44       $ 133   
                 

Net periodic cost

   $ 44       $ 133   
                 

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

11. Financial Instruments

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. The primary risks managed by using derivative instruments are interest rate risk, foreign currency exchange risk and commodity price risk. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates, foreign exchange rates or commodity prices.

The Company manages interest rate risk based on the varying circumstances of anticipated borrowings and existing variable and fixed rate debt, including the Company’s revolving line of credit. Examples of interest rate management strategies include capping interest rates using targeted interest cost benchmarks, hedging portions of the total amount of debt, or hedging a period of months and not always hedging to maturity, and at other times locking in rates to fix interests costs.

Certain parts of the Company’s foreign operations in Canada expose the Company to fluctuations in foreign exchange rates. The Company’s goal is to reduce its exposure to such foreign exchange risks on its foreign currency cash flows and fair value fluctuations on recognized foreign currency denominated assets, liabilities and unrecognized firm commitments to acceptable levels primarily through the use of foreign exchange-related derivative financial instruments. The Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency, the U.S. dollar.

The Company purchases raw materials in quantities expected to be used in a reasonable period of time in the normal course of business. The Company generally enters into agreements for either spot market delivery or forward delivery. The prices paid in the forward delivery contracts are generally fixed, but may also be variable within a capped or collared price range. Forward derivative contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company’s manufacturing process.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges in accordance with the authoritative guidance for derivative and hedge accounting involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During the three and nine months ended September 26, 2010 and the three and nine months ended September 27, 2009, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

As of September 26, 2010, the Company had the following interest rate swaps that were designated as cash flow hedges of interest rate risk:

 

Product

   Number of
Instruments
     Notional
Amount
     Fixed Rate Range    

Index

  

Trade Dates

  

Maturity Dates

Interest Rate Swaps

     12       $ 941,550         1.06% - 3.33   USD-LIBOR-BBA    Oct 2008 - Aug 2010    Jan 2011 - July 2012

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

According to the authoritative guidance for derivative and hedge accounting, the effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated other comprehensive (loss) income (“AOCI”) on the Consolidated Balance Sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to Interest expense as interest payments are made on the Company’s variable-rate debt.

Due to the counterparty bank declaring bankruptcy in October 2008, the Company discontinued prospectively the hedge accounting on its interest rate derivatives with Lehman Brothers Specialty Financing on the bankruptcy date as those hedging relationships no longer met the authoritative guidance for derivative and hedge accounting. The Company terminated these positions during the fourth quarter of 2008. The Company continues to report the net gain or loss related to the discontinued cash flow hedge in AOCI which is expected to be reclassified into earnings during the original contractual terms of the derivative agreements as the hedged interest payments are expected to occur as forecasted.

On August 17, 2010, the Company prepaid a portion of its existing term loan facilities that was being hedged with its two interest rate caps that mature in January 2011. As a result, the Company discontinued prospective hedge accounting on the interest rate caps and the net loss in accumulated other comprehensive income was reclassified to interest expense as the hedged transactions were no longer probable to occur. The amounts recorded to interest expense were a loss of $226. Prospective changes in the values of the interest rate cap hedge contracts will be recorded directly into Interest expense, net in the Consolidated Statements of Operations.

On August 17, 2010 the Company amended four of its existing forward starting interest rate swaps due to a change in the expected terms of the hedged forecasted transactions. As a result, the Company prospectively discontinued hedge accounting on the original interest rate swap agreements. Simultaneously, the Company designated the amended interest rate swap agreements into new cash flow hedging relationships. The Company continues to report the net loss related to the discontinued cash flow hedges in AOCI, which is being reclassified into earnings as the original hedged forecasted transactions affect earnings. Due to the off-market nature of the amended interest rate swap agreements at the date of designation, the Company anticipates the potential for hedge ineffectiveness. However, such ineffectiveness is not expected to be significant.

During the next twelve months, the Company estimates that an additional $22,693 will be reclassified as an increase to Interest expense relating to both active and terminated hedges.

Cash Flow Hedges of Foreign Exchange Risk

The Company’s operations in Canada have exposed the Company to changes in the US Dollar – Canadian Dollar (USD-CAD) foreign exchange rate. From time to time, the Company’s Canadian subsidiary purchases inventory denominated in US Dollars (USD), a currency other than its functional currency. The subsidiary sells that inventory in Canadian dollars. The subsidiary uses currency forward and collar agreements to manage its exposure to fluctuations in the USD-CAD exchange rate. Currency forward agreements involve fixing the USD-CAD exchange rate for delivery of a specified amount of foreign currency on a specified date. Currency collar agreements involve the sale of Canadian Dollar (CAD) currency in exchange for receiving US dollars if exchange rates rise above an agreed upon rate and sale of USD currency in exchange for receiving CAD dollars if exchange rates fall below an agreed upon rate at specified dates.

As of September 26, 2010, the Company had the following foreign currency exchange contracts (in aggregate) that were designated as cash flow hedges of foreign exchange risk:

 

Product

   Number of
Instruments
     Notional Sold in
Aggregate
     Notional Purchased
in Aggregate
     USD to CAD Exchange
Rates
    

Trade Date

  

Maturity Dates

CAD Forward

     33       $ 62,595 CAD       $ 59,534 USD         1.027-1.175       May 2009 - Sep 2010    Jul 2010 - Dec 2011

CAD Collar

     3       $ 3,000 CAD       $ 2,655 USD         1.13       May 2009    Oct 2010 - Dec 2011

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

According to the authoritative guidance for derivative and hedge accounting, the effective portion of changes in the fair value of derivatives designated that qualify as cash flow hedges of foreign exchange risk is recorded in AOCI on the Consolidated Balance Sheet and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portions of the change in fair value of the derivative, as well as amounts excluded from the assessment of hedge effectiveness, are recognized directly in Cost of products sold in the Consolidated Statements of Operations.

Non-designated Hedges of Commodity and Interest Rate Risk

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to commodity price risk but do not meet the authoritative guidance for derivative and hedge accounting. From time to time, the Company enters into commodity forward contracts to fix the price of natural gas and diesel fuel purchases at a future delivery date. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in Cost of products sold in the Consolidated Statements of Operations.

The Company had previously entered into interest rate cap hedge contracts to add stability to interest expense and to manage its exposure to interest rate movements. In connection with the refinancing of the Tranche C Term Loans, these contracts have been de-designated as of August 17, 2010. Changes in the values of the interest rate cap hedge contracts are recorded directly into Interest expense in the Consolidated Statements of Operations.

As of September 26, 2010, the Company had the following natural gas swaps (in aggregate), diesel fuel swaps (in aggregate) and interest rate caps (in aggregate) that were not designated in qualifying hedging relationships:

 

Product

   Number of
Instruments
     Notional Amount      Price/Index     

Trade Dates

  

Maturity Dates

Natural Gas Swap

     2         252,537 MMBTU’s       $ 4.70 - $5.87 per MMBTU       Jan 2010 - June 2010    Oct 2010

Diesel Fuel Swap

     4         7,061,719 Gallons       $ 2.90 - $3.14 per Gallon       Feb 2010 - Aug 2010    Oct 2010 - Mar 2011

Interest Rate Caps

     2       $ 800,000         2.5% USD-LIBOR-BBA       Dec 2009    Jan 2011

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of September 26, 2010 and December 27, 2009.

 

   

Tabular Disclosure of Fair Values of Derivative Instruments

 
   

Asset Derivatives

   

Liability Derivatives

 
   

Balance Sheet Location

   Fair Value
As of
September 26,
2010
   

Balance Sheet Location

   Fair Value
As of
September 26,
2010
 

Derivatives designated as hedging instruments

       

Interest Rate Contracts

     $ —        Accrued liabilities    $ 7,446   
       —        Other long-term liabilities      23,987   

Foreign Exchange Contracts

  Other current assets      26      Accrued liabilities      1,160   
  Other assets, net      12      Other long-term liabilities      59   
                     

Total derivatives designated as hedging instruments

   $ 38         $ 32,652   
                     

Derivatives not designated as hedging instruments

       

Natural Gas Contracts

     $ —        Accrued liabilities    $ 74   

Diesel Fuel Contracts

  Other current assets      294           —     
                     

Total derivatives not designated as hedging instruments

   $ 294         $ 74   
                     
    

Balance Sheet Location

   Fair Value
As of
December 27,
2009
   

Balance Sheet Location

   Fair Value
As of
December 27,
2009
 

Derivatives designated as hedging instruments

       

Interest Rate Contracts

  Other assets, net    $ 165      Other long-term liabilities    $ 21,145   

Foreign Exchange Contracts

       —        Accrued liabilities      2,522   
                     

Total derivatives designated as hedging instruments

   $ 165         $ 23,667   
                     

Derivatives not designated as hedging instruments

       

Natural Gas Contracts

     $ —        Accrued liabilities    $ 57   

Heating Oil Contracts

  Other current assets      25           —     

Diesel Fuel Contracts

  Other current assets      902           —     
                     

Total derivatives not designated as hedging instruments

   $ 927         $ 57   
                     

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

The table below presents the effect of our derivative financial instruments on the Consolidated Statements of Operations and Accumulated other comprehensive (loss) income as of the three and nine months ending September 26, 2010 and the three and nine months ended September 27, 2009.

 

Tabular Disclosure of the Effect of Derivative Instruments

 

Gain/(Loss)

                            

Derivatives in Cash Flow Hedging Relationships

   Recognized
in AOCI on
Derivative
(Effective
Portion)
   

Effective portion

reclassified from AOCI

to:

   Reclassified
from AOCI
into Earnings
(Effective
Portion)
   

Ineffective portion

reclassified from AOCI

to:

   Recognized
in Earnings
on Derivative
(Ineffective
Portion)
 

Interest Rate Contracts

   $ (6,623   Interest expense    $ (4,931   Interest expense    $ (568

Foreign Exchange Contracts

     (276   Cost of products sold      (731   Cost of products sold      (253
                              

Three months ended September 26, 2010

   $ (6,899      $ (5,662      $ (821
                              

Interest Rate Contracts

   $ (23,262   Interest expense    $ (15,385   Interest expense    $ (568

Foreign Exchange Contracts

     (753   Cost of products sold      (2,096   Cost of products sold      (218
                              

Nine months ended September 26, 2010

   $ (24,015      $ (17,481      $ (786
                              

Interest Rate Contracts

   $ (8,877   Interest expense    $ (4,627   Interest expense    $ —     

Foreign Exchange Contracts

     (2,042   Cost of products sold      158      Cost of products sold      (14
                              

Three months ended September 27, 2009

   $ (10,919      $ (4,469      $ (14
                              

Interest Rate Contracts

   $ (18,573   Interest expense    $ (13,955   Interest expense    $ —     

Foreign Exchange Contracts

     (3,252   Cost of products sold      2,256      Cost of products sold      19   
                              

Nine months ended September 27, 2009

   $ (21,825      $ (11,699      $ 19   
                              

 

Derivatives Not Designated as Hedging Instruments

  

Recognized in Earnings

on:

   Recognized in
Earnings on
Derivative
 

Natural Gas Contracts

   Cost of products sold    $ (130

Diesel Contracts

   Cost of products sold      413   
           

Three months ended September 26, 2010

      $ 283   
           

Natural Gas Contracts

   Cost of products sold    $ (510

Diesel Contracts

   Cost of products sold      (633
           

Nine months ended September 26, 2010

      $ (1,143
           

Natural Gas Contracts

   Cost of products sold    $ (104

Heating Oil Swaps

   Cost of products sold      8   
           

Three months ended September 27, 2009

      $ (96
           

Natural Gas Contracts

   Cost of products sold    $ (1,287

Heating Oil Swaps

   Cost of products sold      132   
           

Nine months ended September 27, 2009

      $ (1,155
           

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

Credit-risk-related Contingent Features

The Company has agreements with certain counterparties that contain a provision whereby the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. As of September 26, 2010, the Company has not posted any collateral related to these agreements. If the Company had breached this provision at September 26, 2010, it could have been required to settle its obligations under the agreements at their termination value. The table below summarizes the aggregate fair values of those derivatives that contain credit risk contingent features that are in a net liability position as of September 26, 2010 and December 27, 2009.

September 26, 2010

Asset/(Liability)

 

Counterparty

  

Contract
Type

   Termination
Value
    Non-
Performance
Risk  Adjustment
     Accrued Interest     Fair Value
(excluding
interest)
 

Barclays

   Interest Rate Contracts    $ (31,524   $ 972       $ (1,185   $ (29,367
   Foreign Exchange Contracts      (1,246     27           (1,219
   Natural Gas Contracts      (74     —             (74
   Diesel Fuel Contracts      294        —             294   

Credit Suisse

   Interest Rate Contracts      (2,163     97         —          (2,066
   Foreign Exchange Contracts      20        18           38   
                                    

Total

      $ (34,693   $ 1,114       $ (1,185   $ (32,394
                                    

December 27, 2009

 

  

Counterparty

  

Contract
Type

   Termination
Value
    Non-
Performance
Risk Adjustment
     Accrued Interest     Fair Value
(excluding
interest)
 

Barclays

   Interest Rate Contracts    $ (23,089   $ 983       $ (1,044   $ (21,062
   Foreign Exchange Contracts      (2,599     77           (2,522
   Natural Gas Contracts      (57     —             (57
   Heating Oil Contracts      25             25   
                                    

Total

      $ (25,720   $ 1,060       $ (1,044   $ (23,616
                                    

 

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Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

12. Commitments and Contingencies

General

From time to time, the Company and its operations are parties to, or targets of, lawsuits, claims, investigations, and proceedings, which are being handled and defended in the ordinary course of business. Although the outcome of such items cannot be determined with certainty, the Company’s general counsel and management are of the opinion that the final outcome of these matters should not have a material effect on the Company’s financial condition, results of operations or cash flows.

Commitment of $3.5 Million Capital Expenditure

In working to resolve an environmental wastewater investigation by the State of Michigan Department of Natural Resources and Environment (MDNRE) at the Company’s Birds Eye Foods Fennville MI production facility, on July 20, 2010, the Company and the MDNRE reached an agreement (“Administrative Consent Order” or “ACO”). Under the terms of the ACO, Birds Eye Foods will construct a new $3.5 million wastewater treatment system at the facility and contribute a minimum of $70 thousand to the hookup of the City’s water supply extension to affected residents.

Lehman Brothers Special Financing

On June 4, 2010 Lehman Brothers Special Financing (LBSF) initiated a claim against the Company in LBSF’s bankruptcy proceeding for an additional payment from the Company of $19.7 million, related to certain derivative contracts which the Company had earlier terminated due to LBSF’s default as a result of its’ bankruptcy filing in 2008. In accordance with the terms of the contracts, following LBSF’s bankruptcy filing, the Company terminated the contracts and paid LBSF approximately $22.3 million. The Company believes that the claim is without merit and intends to vigorously defend against it.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

13. Related Party Transactions

At the closing of the Blackstone Transaction, the Company entered into an advisory agreement with an affiliate of The Blackstone Group pursuant to which such entity or its affiliates provide certain strategic and structuring advice and assistance to us. In addition, under this agreement, affiliates of The Blackstone Group provide certain monitoring, advisory and consulting services to the Company for an aggregate annual management fee equal to the greater of $2,500 or 1.0% of Consolidated EBITDA (as defined in the credit agreement governing the Company’s Senior Secured Credit Facility). Affiliates of Blackstone also receive reimbursement for out-of-pocket expenses. Expenses relating to the management fee were $1,125 and $3,375 in the three and nine months ended September 26, 2010, respectively. The Company reimbursed the Blackstone group out-of-pocket expenses totaling $55 in the nine months ended September 26, 2010. Expenses relating to the management fee were $625 and $1,875 in the three and nine months ended September 27, 2009, respectively. The Company reimbursed The Blackstone Group for out-of-pocket expenses in the amount of $24 and $44 in the three and nine months ended September 27, 2009, respectively.

In addition, on April 2, 2007 and pursuant to the agreement of merger, an affiliate of Blackstone received transaction fees totaling $21,600 for services provided by Blackstone and its affiliates related to the Blackstone Transaction.

In connection with the Birds Eye Foods Acquisition, the transaction and advisory fee agreement with an affiliate of Blackstone was amended and restated to include a provision that granted the affiliates a 1% transaction fee based on the transaction purchase price. This fee totaled $14,009. Also, there was an advisory fee with an affiliate for $3,005. These fees are contained within the $24,090 of transaction fees discussed in Note 3 to the Consolidated Financial Statements. Also, as described in Note 3, the Company incurred an original issue discount, in connection with the Tranche C Term Loans. A portion of that discount, $750 related to loans from an affiliate of the Blackstone Group.

Supplier Costs

Graham Packaging, which is owned by affiliates of The Blackstone Group, supplies packaging for some of the Company’s products. Purchases from Graham Packaging were $1,695 and $5,255 for the three and nine months ended September 26, 2010, respectively. Purchases from Graham Packaging were $1,416 and $4,858 for the three and nine months ended September 27, 2009, respectively.

Customer Purchases

Performance Food Group, which is owned by affiliates of The Blackstone Group, is a food service supplier that purchases products from the Company. Sales to Performance Food Group were $1,559 and $4,646 in the three and nine months ended September 26, 2010, respectively. Sales to Performance Food Group were $1,279 and $3,950 in the three and nine months ended September 27, 2009, respectively.

Interest Expense

For the three and nine months ended September 26, 2010, fees and interest expense recognized in the Consolidated Statement of Operations for debt to the related party Blackstone Advisors L.P. totaled $2,624 and $4,023, respectively. For the three and nine months ended September 27, 2009, fees and interest expense recognized in the Consolidated Statement of Operations for debt to the related party Blackstone Advisors L.P. totaled $268 and $1,186, respectively.

Notes receivable from officers

In connection with the capital contributions at the time of the Birds Eye Foods Acquisition on December 23, 2009, certain members of the Board of Directors and management purchased ownership units of our ultimate parent Peak Holdings LLC. To fund these purchases, certain members of management signed 30 day notes receivable at a market interest rate. The total of the notes receivable were $565 and were fully paid in January 2010.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

14. Segments

In the first quarter of 2010, we implemented a reorganization of the Company’s products into three operating segments: Birds Eye Frozen, Duncan Hines Grocery and Specialty Foods. Our United States retail frozen vegetables (Birds Eye®), single-serve frozen dinners and entrées (Hungry-Man®, Swanson®), multi-serve frozen dinners and entrées (Birds Eye Voila!®), frozen seafood (Van de Kamp’s®, Mrs. Paul’s®), frozen breakfast (Aunt Jemima®), bagels (Lender’s®), and frozen pizza (Celeste®) are reported in the Birds Eye Frozen segment. Our baking mixes and frostings (Duncan Hines®), shelf-stable pickles, peppers and relish (Vlasic®), barbeque sauces (Open Pit®), pie fillings (Comstock®, Wilderness®), syrups (Mrs. Butterworth’s® and Log Cabin®), salad dressing (Bernstein’s®), canned meat (Armour®, Nalley®, Brooks®) and all Canadian Operations are reported in the Duncan Hines Grocery segment. The Specialty Foods segment consists of snack products (Tim’s Cascade® and Snyder of Berlin®) and our food service and private label businesses. Segment performance is evaluated by the Company’s Chief Operating Decision Maker and is based on earnings before interest and taxes. Transfers between segments and geographic areas are recorded at cost plus markup or at market. Identifiable assets are those assets which are identified with the operations in each segment or geographic region. Corporate assets consist of prepaid and deferred tax assets and assets held for sale. Unallocated corporate expenses consist of corporate overhead such as executive management, finance and legal functions and the costs to integrate the Birds Eye Foods Acquisition. Prior period amounts have been reclassified for consistent presentation.

 

     Three months ended     Nine months ended  
     September 26,
2010
    September 27,
2009
    September 26,
2010
    September 27,
2009
 

SEGMENT INFORMATION

        

Net sales

        

Birds Eye Frozen

   $ 223,077      $ 112,006      $ 778,124      $ 356,416   

Duncan Hines Grocery

     214,098        199,768        684,663        625,946   

Specialty Foods

     104,554        82,411        311,458        248,053   
                                

Total

   $ 541,729      $ 394,185      $ 1,774,245      $ 1,230,415   
                                

Earnings (loss) before interest and taxes

        

Birds Eye Frozen

   $ 28,538      $ 9,362        93,573      $ 26,095   

Duncan Hines Grocery

     27,506        39,889        99,574        104,214   

Specialty Foods

     7,058        3,027        19,931        4,724   

Unallocated corporate expenses

     (8,867     (5,641     (26,351     (15,282
                                

Total

   $ 54,235      $ 46,637      $ 186,727      $ 119,751   
                                

Depreciation and amortization

        

Birds Eye Frozen

   $ 8,329      $ 5,036      $ 25,574      $ 17,037   

Duncan Hines Grocery

     6,134        5,576        17,855        16,426   

Specialty Foods

     5,074        4,920        14,785        14,541   
                                

Total

   $ 19,537      $ 15,532      $ 58,214      $ 48,004   
                                

Capital expenditures *

        

Birds Eye Frozen

   $ 8,823      $ 6,534      $ 31,046      $ 27,711   

Duncan Hines Grocery

     13,750        2,080        26,214        11,688   

Specialty Foods

     2,514        930        7,359        2,517   
                                

Total

   $ 25,087      $ 9,544      $ 64,619      $ 41,916   
                                

GEOGRAPHIC INFORMATION

        

Net sales

        

United States

   $ 536,622      $ 392,359      $ 1,755,358      $ 1,221,737   

Canada

     19,811        20,187        58,597        54,101   

Intercompany

     (14,704     (18,361     (39,710     (45,423
                                

Total

   $ 541,729      $ 394,185      $ 1,774,245      $ 1,230,415   
                                

 

* Includes new capital leases.

 

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Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

     September 26,
2010
     December 27,
2009
 

SEGMENT INFORMATION

     

Total assets

     

Birds Eye Frozen

   $ 2,061,612       $ 2,057,562   

Duncan Hines Grocery

     2,012,274         1,945,986   

Specialty Foods

     451,659         503,395   

Corporate

     47,348         31,555   
                 

Total

   $ 4,572,893       $ 4,538,498   
                 

GEOGRAPHIC INFORMATION

     

Long-lived assets

     

United States

   $ 431,426       $ 412,171   

Canada

     29         37   
                 

Total

   $ 431,455       $ 412,208   
                 

 

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Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

15. Income Taxes

The income tax provision/(benefit) and related effective tax rates for the three and nine months ended September 26, 2010 and September 27, 2009 were as follows:

 

    Three Months Ended     Nine Months Ended  
    September 26,
2010
    September 27,
2009
    September 26,
2010
    September 27,
2009
 

Current income tax provision/(benefit)

  $ (7,731   $ 363      $ 2,055      $ (235

Deferred income tax provision/(benefit)

    154        7,587        (3,801     22,619   
                               

Income tax provision

  $ (7,577   $ 7,950      $ (1,746   $ 22,384   
                               

Effective rate

    38.4     43.3     (41.6 %)      67.4

Income taxes are accounted for in accordance with the authoritative guidance for accounting for income taxes under which deferred tax assets and liabilities are determined based on the difference between the financial statement basis and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.

The Company regularly evaluates its deferred tax assets for future realization. A valuation allowance is established when the Company believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in the Company’s tax provision in the period of change.

Based on a review of both the positive and negative evidence as of December 27, 2009, it was determined that the Company had sufficient positive evidence to outweigh any negative evidence and support that it was more likely than not that substantially all of its deferred tax assets would be realized. This resulted in a reversal of $315.6 million of the valuation allowance in the period ended December 27, 2009.

As of September 26, 2010 we maintained a valuation allowance for certain state net operating loss carryovers, state tax credit carryovers and foreign loss carryovers. As of September 27, 2009 we maintained a full valuation allowance against net federal and state deferred tax assets excluding indefinite lived intangible assets.

During the quarter ended June 30, 2010, the Company recorded an out of period adjustment to correct an error in the tax effects of Accumulated Other Comprehensive Loss as of December 27, 2009 and March 28, 2010. Accordingly, Accumulated Other Comprehensive Loss was increased by the related effect of this adjustment during the nine months ended September 26, 2010. During the nine months ended September 26, 2010, this adjustment reduced the provision for income taxes by $4,100. This adjustment is not material to any current or prior periods, nor is it expected to be material to the year ending December 26, 2010.

The Company’s liability for unrecognized tax benefits (“UTB”) as of September 26, 2010 is $3,365. The amount, if recognized, that would impact the effective tax rate as of September 26, 2010 was $2,331. The amount of UTB classified as a long-term liability on the Consolidated Balance Sheet was $2,331. Certain liabilities may significantly change within the next twelve months, which could cause a decrease of $617 in the UTB.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

16. Recently Issued Accounting Pronouncements

In June 2009, the FASB issued the authoritative guidance for variable interest entities. This guidance clarifies the characteristics that identify a variable interest entity (VIE) and changes how a reporting entity identifies a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards calculation to a qualitative approach based on which variable interest holder has controlling financial interest and the ability to direct the most significant activities that impact the VIE’s economic performance. This guidance requires the primary beneficiary assessment to be performed on a continuous basis. It also requires additional disclosures about an entity’s involvement with VIE, restrictions on the VIE’s assets and liabilities that are included in the reporting entity’s consolidated balance sheet, significant risk exposures due to the entity’s involvement with the VIE, and how its involvement with a VIE impacts the reporting entity’s consolidated financial statements. The authoritative guidance for variable interest entities was effective for fiscal years beginning after November 15, 2009. The Company adopted this guidance in the first quarter of 2010 and it did not have a material impact on the Company’s consolidated financial position or results of operations.

In January 2010, the FASB updated the authoritative guidance for fair value disclosure. The updated guidance requires new disclosures for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and activity within Level 3 of the fair value hierarchy. The update provides amendments to the level of disaggregation that an entity should provide in each class of assets and liabilities, as well as disclosures about the inputs and valuation techniques used to measure fair value. The updated guidance is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company adopted this guidance in the first quarter of 2010 and it did not have a material impact on the Company’s consolidated financial position or results of operations.

 

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Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

17. Guarantor and Nonguarantor Statements

In connection with the Blackstone Transaction described in Note 1 and as a part of the related financings, the Company issued $325 million of 9.25% Senior Notes and $250 million ($199 million outstanding as of December 27, 2009) of 10.625% Senior Subordinated Notes in private placements pursuant to Rule 144A and Regulation S. An additional $300 million of Senior Notes were issued on December 23, 2009 in connection with the Birds Eye Foods Acquisition. The Company also issued $400 million of 8.25% Senior Notes due 2017 in August 2010, the proceeds of which were used to repay the Tranche C Term Loans.

The 9.25% Senior Notes and the 8.25% Senior Notes are general unsecured obligations of the Company, effectively subordinated in right of payment to all existing and future senior secured indebtedness of the Company and guaranteed on a full, unconditional, joint and several basis by the Company’s wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company.

The 10.625% Senior Subordinated Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness of the Company and guaranteed on a full, unconditional, joint and several basis by the Company’s wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company.

The following consolidating financial information presents:

 

  (1) (a) Consolidating balance sheets as of September 26, 2010 and December 27, 2009.

(b) The related consolidating statements of operations for the Company, all guarantor subsidiaries and the non- guarantor subsidiaries for the following:

 

  i. Three and nine months ended September 26, 2010.

 

  ii. Three and nine months ended September 27, 2009.

(c) The related consolidating statements of cash flows for the Company, all guarantor subsidiaries and the non-guarantor subsidiaries for the following:

 

  i. Nine months ended September 26, 2010.

 

  ii. Nine months ended September 27, 2009.

 

  (2) Elimination entries necessary to consolidate the Company with its guarantor subsidiaries and non-guarantor subsidiaries.

Investments in subsidiaries are accounted for by the parent using the equity method of accounting. The guarantor subsidiaries are presented on a combined basis. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions and include a reclassification entry of net non-current deferred tax assets to non-current deferred tax liabilities.

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

Pinnacle Foods Finance LLC

Consolidating Balance Sheet

September 26, 2010

 

     Pinnacle
Foods
Finance LLC
    Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations
and
Reclassifications
    Consolidated
Total
 

Current assets:

          

Cash and cash equivalents

   $ —        $ 103,962      $ 2,937      $ —        $ 106,899   

Accounts receivable, net

     —          151,737        11,745        —          163,482   

Intercompany accounts receivable

     —          39,481        —          (39,481     —     

Inventories, net

     —          382,761        6,121        —          388,882   

Other current assets

     —          21,319        139        —          21,458   

Deferred tax assets

     —          33,429        309        —          33,738   
                                        

Total current assets

     —          732,689        21,251        (39,481     714,459   

Plant assets, net

     —          431,426        29        —          431,455   

Investment in subsidiaries

     1,703,443        7,124        —          (1,710,567     —     

Intercompany note receivable

     1,947,999        —          —          (1,947,999     —     

Tradenames

     —          1,658,812        —          —          1,658,812   

Other assets, net

     45,157        163,830        —          —          208,987   

Deferred tax assets

     158,103        —          —          (158,103     —     

Goodwill

     —          1,559,180        —          —          1,559,180   
                                        

Total assets

   $ 3,854,702      $ 4,553,061      $ 21,280      $ (3,856,150   $ 4,572,893   
                                        

Current liabilities:

          

Short-term borrowings

   $ —        $ 466      $ —        $ —        $ 466   

Current portion of long-term obligations

     3,317        1,880        —          —          5,197   

Accounts payable

     —          148,956        1,974        —          150,930   

Intercompany accounts payable

     33,709        —          5,772        (39,481     —     

Accrued trade marketing expense

     —          39,600        5,575        —          45,175   

Accrued liabilities

     58,976        93,701        804        —          153,481   

Accrued income taxes

     —          —          —          —          —     
                                        

Total current liabilities

     96,002        284,603        14,125        (39,481     355,249   

Long-term debt

     2,858,187        11,505        —          —          2,869,692   

Intercompany note payable

     —          1,947,999        —          (1,947,999     —     

Pension and other postretirement benefits

     —          76,413        —          —          76,413   

Other long-term liabilities

     24,046        20,162        —          —          44,208   

Deferred tax liabilities

       508,936        31        (158,103     350,864   
                                        

Total liabilities

     2,978,235        2,849,618        14,156        (2,145,583     3,696,426   

Commitments and contingencies (note 12)

     —          —          —          —          —     

Shareholder’s equity:

          

Pinnacle Common Stock, $.01 par value

   $ —        $ —        $ —        $ —          —     

Additional paid-in-capital

     693,417        1,284,155        2,324        (1,286,479     693,417   

Retained earnings

     231,250        438,322        6,236        (444,558     231,250   

Accumulated other comprehensive (loss) income

     (48,200     (19,034     (1,436     20,470        (48,200
                                        

Total shareholder’s equity

     876,467        1,703,443        7,124        (1,710,567     876,467   
                                        

Total liabilities and shareholder’s equity

   $ 3,854,702      $ 4,553,061      $ 21,280      $ (3,856,150   $ 4,572,893   
                                        

 

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Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

Pinnacle Foods Finance LLC

Consolidating Balance Sheet

December 27, 2009

 

     Pinnacle
Foods
Finance LLC
    Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations
and
Reclassifications
    Consolidated
Total
 

Current assets:

          

Cash and cash equivalents

   $ —        $ 68,249      $ 5,625      $ —        $ 73,874   

Accounts receivable, net

     —          152,961        5,043        —          158,004   

Intercompany accounts receivable

     —          68,227        —          (68,227     —     

Inventories, net

     —          384,787        5,180        —          389,967   

Other current assets

     9,200        17,060        700        —          26,960   

Deferred tax assets

     —          24,839        831        —          25,670   
                                        

Total current assets

     9,200        716,123        17,379        (68,227     674,475   

Plant assets, net

     —          412,171        37        —          412,208   

Investment in subsidiaries

     1,642,385        4,695        —          (1,647,080     —     

Intercompany note receivable

     2,044,797        —          —          (2,044,797     —     

Tradenames

     —          1,658,812        —          —          1,658,812   

Other assets, net

     57,062        176,761        —          —          233,823   

Deferred tax assets

     115,733        —          —          (115,733     —     

Goodwill

     —          1,559,180        —          —          1,559,180   
                                        

Total assets

   $ 3,869,177      $ 4,527,742      $ 17,416      $ (3,875,837   $ 4,538,498   
                                        

Current liabilities:

          

Short-term borrowings

   $ —        $ 1,232      $ —        $ —        $ 1,232   

Current portion of long-term obligations

     37,170        1,058        —          —          38,228   

Accounts payable

     —          129,142        1,218        —          130,360   

Intercompany accounts payable

     60,376        —          7,851        (68,227     —     

Accrued trade marketing expense

     —          46,067        2,981        —          49,048   

Accrued liabilities

     29,150        100,214        671        —          130,035   

Accrued income taxes

     —          455        —          —          455   
                                        

Total current liabilities

     126,696        278,168        12,721        (68,227     349,358   

Long-term debt

     2,846,983        2,268        —          —          2,849,251   

Intercompany note payable

     —          2,044,797        —          (2,044,797     —     

Pension and other postretirement benefits

     —          82,437        —          —          82,437   

Other long-term liabilities

     21,145        18,238        —          —          39,383   

Deferred tax liabilities

     —          459,449        —          (115,733     343,716   
                                        

Total liabilities

     2,994,824        2,885,357        12,721        (2,228,757     3,664,145   

Commitments and contingencies (note 12)

     —          —          —          —          —     

Shareholder’s equity:

          

Pinnacle Common Stock, $.01 par value

   $ —        $ —        $ —        $ —          —     

Additional paid-in-capital

     693,196        1,284,155        2,324        (1,286,479     693,196   

Notes receivable from officers

     (565     —          —          —          (565

Retained earnings

     225,313        378,809        5,341        (384,150     225,313   

Accumulated other comprehensive (loss) income

     (43,591     (20,579     (2,970     23,549        (43,591
                                        

Total shareholder’s equity

     874,353        1,642,385        4,695        (1,647,080     874,353   
                                        

Total liabilities and shareholder’s equity

   $ 3,869,177      $ 4,527,742      $ 17,416      $ (3,875,837   $ 4,538,498   
                                        

 

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Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

Pinnacle Foods Finance LLC

Consolidated Statement of Operations

For the three months ended September 26, 2010

 

     Pinnacle
Foods
Finance LLC
    Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
     Eliminations     Consolidated
Total
 

Net sales

   $ —        $ 536,622      $ 19,811       $ (14,704   $ 541,729   

Cost of products sold

     270        415,792        16,768         (14,574     418,256   
                                         

Gross profit

     (270     120,830        3,043         (130     123,473   

Operating expenses

           

Marketing and selling expenses

     84        38,077        1,605         —          39,766   

Administrative expenses

     1,237        21,466        746         —          23,449   

Research and development expenses

     9        1,903        —           —          1,912   

Intercompany royalties

     —          —          20         (20     —     

Intercompany technical service fees

     —          —          110         (110     —     

Other (income) expense, net

     —          4,111        —           —          4,111   

Equity in (earnings) loss of investees

     (13,357     (397     —           13,754        —     
                                         

Total operating expenses

     (12,027     65,160        2,481         13,624        69,238   
                                         

Earnings before interest and taxes

     11,757        55,670        562         (13,754     54,235   

Intercompany interest (income) expense

     (30,010     30,010        —           —          —     

Interest expense

     73,576        488        —           —          74,064   

Interest income

     —          85        —           —          85   
                                         

Earnings (loss) before income taxes

     (31,809     25,257        562         (13,754     (19,744

Provision (benefit) for income taxes

     (19,642     11,900        165         —          (7,577
                                         

Net earnings (loss)

   $ (12,167   $ 13,357      $ 397       $ (13,754   $ (12,167
                                         

 

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Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

Pinnacle Foods Finance LLC

Consolidating Statement of Operations

For the three months ended September 27, 2009

 

     Pinnacle
Foods
Finance LLC
    Guarantor
Subsidiaries
    Nonguarantor
Subsidiary
    Eliminations     Consolidated
Total
 

Net sales

   $ —        $ 392,359      $ 20,187      $ (18,361   $ 394,185   

Cost of products sold

     313        299,031        17,420        (18,158     298,606   
                                        

Gross profit

     (313     93,328        2,767        (203     95,579   

Operating expenses

          

Marketing and selling expenses

     404        24,483        1,165        —          26,052   

Administrative expenses

     1,864        15,104        567        —          17,535   

Research and development expenses

     45        1,113        —          —          1,158   

Intercompany royalties

     —          —          16        (16     —     

Intercompany technical service fees

     —          —          187        (187     —     

Other (income) expense, net

     —          4,197        —          —          4,197   

Equity in (earnings) loss of investees

     (35,891     (553     —          36,444        —     
                                        

Total operating expenses

     (33,578     44,344        1,935        36,241        48,942   
                                        

Earnings before interest and taxes

     33,265        48,984        832        (36,444     46,637   

Intercompany interest (income) expense

     (5,407     5,407        —          —          —     

Interest expense

     28,279        37        (1     —          28,315   

Interest income

     —          20        1        —          21   
                                        

Earnings before income taxes

     10,393        43,560        834        (36,444     18,343   

Provision for income taxes

     —          7,669        281        —          7,950   
                                        

Net earnings

   $ 10,393      $ 35,891      $ 553      $ (36,444   $ 10,393   
                                        

 

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Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

Pinnacle Foods Finance LLC

Consolidated Statement of Operations

For the nine months ended September 26, 2010

 

     Pinnacle
Foods
Finance LLC
    Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
     Eliminations     Consolidated
Total
 

Net sales

   $ —        $ 1,755,358      $ 58,597       $ (39,710   $ 1,774,245   

Cost of products sold

     270        1,341,837        50,238         (39,241     1,353,104   
                                         

Gross profit

     (270     413,521        8,359         (469     421,141   

Operating expenses

           

Marketing and selling expenses

     252        126,268        4,573         —          131,093   

Administrative expenses

     3,782        78,188        1,971         —          83,941   

Research and development expenses

     27        6,433        —           —          6,460   

Intercompany royalties

     —          —          66         (66     —     

Intercompany technical service fees

     —          —          403         (403     —     

Other (income) expense, net

     —          12,920        —           —          12,920   

Equity in (earnings) loss of investees

     (59,513     (895     —           60,408        —     
                                         

Total operating expenses

     (55,452     222,914        7,013         59,939        234,414   
                                         

Earnings before interest and taxes

     55,182        190,607        1,346         (60,408     186,727   

Intercompany interest (income) expense

     (91,612     91,612        —           —          —     

Interest expense

     181,895        883        —           —          182,778   

Interest income

     20        222        —           —          242   
                                         

Earnings (loss) before income taxes

     (35,081     98,334        1,346         (60,408     4,191   

Provision (benefit) for income taxes

     (41,018     38,821        451         —          (1,746
                                         

Net earnings

   $ 5,937      $ 59,513      $ 895       $ (60,408   $ 5,937   
                                         

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

Pinnacle Foods Finance LLC

Consolidating Statement of Operations

For the nine months ended September 27, 2009

 

     Pinnacle
Foods
Finance LLC
    Guarantor
Subsidiaries
    Nonguarantor
Subsidiary
    Eliminations     Consolidated
Total
 

Net sales

   $ —        $ 1,221,737      $ 54,101      $ (45,423   $ 1,230,415   

Cost of products sold

     350        952,752        48,522        (44,873     956,751   
                                        

Gross profit

     (350     268,985        5,579        (550     273,664   

Operating expenses

          

Marketing and selling expenses

     498        86,089        4,422        —          91,009   

Administrative expenses

     3,461        41,908        1,669        —          47,038   

Research and development expenses

     55        3,220        —          —          3,275   

Intercompany royalties

     —          —          46        (46     —     

Intercompany technical service fees

     —          —          504        (504     —     

Other (income) expense, net

     —          12,591        —          —          12,591   

Equity in (earnings) loss of investees

     (82,838     712        —          82,126        —     
                                        

Total operating expenses

     (78,824     144,520        6,641        81,576        153,913   
                                        

Earnings (loss) before interest and taxes

     78,474        124,465        (1,062     (82,126     119,751   

Intercompany interest (income) expense

     (18,978     18,978        —          —          —     

Interest expense

     86,634        (51     —          —          86,583   

Interest income

     —          30        4        —          34   
                                        

Earnings (loss) before income taxes

     10,818        105,568        (1,058     (82,126     33,202   

Provision (benefit) for income taxes

     —          22,730        (346     —          22,384   
                                        

Net earnings (loss)

   $ 10,818      $ 82,838      $ (712   $ (82,126   $ 10,818   
                                        

 

43


Table of Contents

PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

Pinnacle Foods Finance LLC

Consolidating Statement of Cash Flows

For the nine months ended September 26, 2010

 

    Pinnacle
Foods
Finance LLC
    Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Cash flows from operating activities

         

Net earnings (loss) from operations

  $ 5,937      $ 59,513      $ 895      $ (60,408   $ 5,937   

Non-cash charges (credits) to net earnings (loss)

         

Depreciation and amortization

    —          58,203        9        —          58,212   

Amortization of discount on term loan

    1,856        —          —          —          1,856   

Amortization of debt acquisition costs

    9,424        —          —          —          9,424   

Write off of debt issue and refinancing costs

    17,281        —          —          —          17,281   

Amortization of deferred mark-to-market adjustment on terminated swap

    2,565        —          —          —          2,565   

Change in value of financial instruments

    (395     1,607        —          —          1,212   

Equity in loss (earnings) of investees

    (59,513     (895     —          60,408        —     

Stock-based compensation charges

    —          614        —          —          614   

Postretirement healthcare benefits

    —          (57     —          —          (57

Pension expense net of contributions

    —          (2,473     —          —          (2,473

Other long-term liabilities

    —          1,528        —          —          1,528   

Other long-term assets

    —          50        —          —          50   

Deferred income taxes

    (45,306     41,420        85        —          (3,801

Changes in working capital, net of acquisition

         

Accounts receivable

    —          1,223        (6,543     —          (5,320

Intercompany accounts receivable/payable

    (59,428     59,876        (448     —          —     

Inventories

    —          2,083        (777     —          1,306   

Accrued trade marketing expense

    —          (6,466     2,500        —          (3,966

Accounts payable

    —          33,973        718        —          34,691   

Accrued liabilities

    26,952        (3,332     112        —          23,732   

Other current assets

    8,706        (6,597     583        —          2,692   
                                       

Net cash provided by operating activities

    (91,921     240,270        (2,866     —          145,483   
                                       

Cash flows from investing activities

         

Capital expenditures

    —          (52,397     —          —          (52,397
                                       

Net cash used in investing activities

    —          (52,397     —          —          (52,397
                                       

Cash flows from financing activities

         

Proceeds from bond offering

    400,000        —          —          —          400,000   

Proceeds from bank term loan

    442,300        —          —          —          442,300   

Repayments of long term obligations

    (872,452     —          —          —          (872,452

Proceeds from short-term borrowing

    —          1,412        —          —          1,412   

Repayments of short-term borrowing

    —          (2,178     —          —          (2,178

Repayments of intercompany loans

    134,926        (134,926     —          —          —     

Repayment of capital lease obligations

    —          (2,164     —          —          (2,164

Change in bank overdrafts

    —          (14,304     —          —          (14,304

Equity contributions

    561        —          —          —          561   

Reduction of equity contributions

    (954     —          —          —          (954

Repayment of notes receivable from officers

    565        —          —          —          565   

Debt acquisition costs

    (13,025     —          —          —          (13,025
                                       

Net cash provided by (used in) financing activities

    91,921        (152,160     —          —          (60,239
                                       

Effect of exchange rate changes on cash

    —          —          178        —          178   
            —     

Net change in cash and cash equivalents

    —          35,713        (2,688     —          33,025   

Cash and cash equivalents-beginning of period

    —          68,249        5,625        —          73,874   
                                       

Cash and cash equivalents-end of period

  $ —        $ 103,962      $ 2,937      $ —        $ 106,899   
                                       

Supplemental disclosures of cash flow information:

         

Interest paid

  $ 121,427      $ 953      $ —        $ —        $ 122,380   

Interest received

    20        222        —          —          242   

Income taxes paid

    —          6,254        8        —          6,262   

Non-cash investing and financing activities:

         

New capital leases

    —          (12,222     —          —          (12,222

 

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PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(thousands of dollars, except share amounts and where noted in millions)

 

 

Pinnacle Foods Finance LLC

Consolidating Statement of Cash Flows

For the nine months ended September 27, 2009

 

    Pinnacle
Foods
Finance LLC
    Guarantor
Subsidiaries
    Nonguarantor
Subsidiary
    Eliminations     Consolidated
Total
 

Cash flows from operating activities

         

Net earnings (loss) from operations

  $ 10,818      $ 82,838      $ (712   $ (82,126   $ 10,818   

Non-cash charges (credits) to net earnings (loss)

         

Depreciation and amortization

    —          47,993        11        —          48,004   

Amortization of debt acquisition costs

    3,551        —          —          —          3,551   

Amortization of deferred mark-to-market adjustment on terminated swap

    3,434        —          —          —          3,434   

Change in value of financial instruments

    (19     (252     —          —          (271

Equity in (earnings) loss of investees

    (82,838     712        —          82,126        —     

Stock-based compensation charges

    —          2,400        —          —          2,400   

Postretirement healthcare benefits

    —          (19     —          —          (19

Pension expense

    —          1,457        —          —          1,457   

Other long-term liabilities

    —          1,060        —          —          1,060   

Other assets

    —          (1,177     —          —          (1,177

Deferred income taxes

    —          22,619        —          —          22,619   

Changes in working capital

         

Accounts receivable

    —          (13,405     (3,836     —          (17,241

Intercompany accounts receivable/payable

    (158,307     150,361        7,946        —          —     

Inventories

    —          (8,621     (2,686     —          (11,307

Accrued trade marketing expense

    —          (9,904     (588     —          (10,492

Accounts payable

    —          851        (264     —          587   

Accrued liabilities

    1,077        14,941        456        —          16,474   

Other current assets

    (624     (2,087     (885     —          (3,596
                                       

Net cash provided by (used in) operating activities

    (222,908     289,767        (558     —          66,301   
                                       

Cash flows from investing activities

         

Capital expenditures

    —          (40,716     —          —          (40,716
                                       

Net cash used in investing activities

    —          (40,716     —          —          (40,716
                                       

Cash flows from financing activities

         

Repayment of capital lease obligations

    —          (233     —          —          (233

Borrowings under revolving credit facility

    39,864        —          —          —          39,864   

Repayments of revolving credit facility

    (58,208     —          —          —          (58,208

Repayments of intercompany loans

    249,942        (249,942     —          —          —     

Equity contributions

    1,785        —          —          —          1,785   

Reductions of equity contributions

    (1,450     —          —          —          (1,450

Proceeds from notes payable borrowings

    350        —          —          —          350   

Repayments of notes payable

    —          (240     —          —          (240

Repayments of long term obligations

    (9,375     —          —          —          (9,375
                                       

Net cash provided by (used in) financing activities

    222,908        (250,415     —          —          (27,507
                                       

Effect of exchange rate changes on cash

    —          —          244        —          244   
            —     

Net change in cash and cash equivalents

    —          (1,364     (314     —          (1,678

Cash and cash equivalents-beginning of period

    —          2,257        2,004        —          4,261   
                                       

Cash and cash equivalents-end of period

  $ —        $ 893      $ 1,690      $ —        $ 2,583   
                                       

Supplemental disclosures of cash flow information:

         

Interest paid

  $ 78,661      $ (79       $ 78,582   

Interest received

      30        4          34   

Income taxes paid

      194        387          581   

Non-cash investing and financing activities:

         

New capital leases

    —          (1,200     —          —          (1,200

 

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(dollars in millions, except where noted)

You should read the following discussion of our results of operations and financial condition together with the “Selected Financial Data” and the audited consolidated financial statements appearing in our annual report on Form 10-K for the year ended December 27, 2009. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Item 1A: Risk Factors” section of our annual report on Form 10-K for the year ended December 27, 2009. Actual results may differ materially from those contained in any forward-looking statements.

Overview

On December 23, 2009, we acquired all of the common stock of Birds Eye Foods, Inc. (“Birds Eye Foods”) (the “Birds Eye Foods Acquisition”). Birds Eye Foods’ product offering includes an expanding platform of healthy, high-quality frozen vegetables and frozen meals and a portfolio of primarily branded specialty foods which are highly-complimentary to our existing product offerings. Frozen food products are marketed under the Birds Eye brand name, which holds the #1 market share in frozen vegetables and Birds Eye Voila! holds the #2 market share in complete bagged meals. Birds Eye Foods markets traditional boxed and bagged frozen vegetables, as well as steamed vegetables using innovative steam-in-packaging technology, under the Birds Eye and Birds Eye Steamfresh brands. Birds Eye Foods’ complete bagged meals, marketed under the Birds Eye Voila! brand, offer consumers value-added meal solutions that include a protein, starch, and vegetables in one convenient package. Birds Eye Foods’ branded specialty food products hold leading market share positions in their core geographic markets, and include Comstock and Wilderness fruit pie fillings and toppings, Brooks and Nalley chili and chili ingredients, and snack foods by Tim’s Cascade and Snyder of Berlin.

We are a leading producer, marketer and distributor of high quality, branded food products. In the first quarter of 2010, we implemented a reorganization of the Company’s products into three operating segments: Birds Eye Frozen, Duncan Hines Grocery and Specialty Foods. Our United States retail frozen vegetables (Birds Eye®), single-serve frozen dinners and entrées (Hungry-Man®, Swanson®), multi-serve frozen dinners and entrées (Birds Eye Voila!®), frozen seafood (Van de Kamp’s®, Mrs. Paul’s®), frozen breakfast (Aunt Jemima®), bagels (Lender’s®), and frozen pizza (Celeste®) are reported in the Birds Eye Frozen Division. Our baking mixes and frostings (Duncan Hines®), shelf-stable pickles, peppers and relish (Vlasic®), barbeque sauces (Open Pit®), pie fillings (Comstock®, Wilderness®), syrups (Mrs. Butterworth’s® and Log Cabin®), salad dressing (Bernstein’s®), canned meat (Armour®, Nalley®, Brooks®) and all Canadian Operations are reported in the Duncan Hines Grocery Division. The Specialty Foods Division consists of snack products (Tim’s Cascade® and Snyder of Berlin®) and our food service and private label businesses. Segment performance is evaluated by the Company’s Chief Operating Decision Maker and is based on earnings before interest and taxes. Transfers between segments and geographic areas are recorded at cost plus markup or at market. Identifiable assets are those assets, including goodwill, which are identified with the operations in each segment or geographic region. Corporate assets consist of prepaid and deferred tax assets and assets held for sale. Unallocated corporate expenses consist of corporate overhead such as executive management, and finance and legal functions and the costs to integrate the Birds Eye Foods Acquisition. Prior period amounts have been reclassified for consistent presentation of our segments.

 

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Business Drivers and Measures

In operating our business and monitoring its performance, we pay attention to trends in the food manufacturing industry and a number of performance measures and operational factors. This discussion includes forward-looking statements that are based on our current expectations.

Industry Factors

Our industry is characterized by the following general trends:

 

   

Industry Growth. Growth in our industry is driven primarily by population and modest product selling price increases and also by changes in consumption between out of home and in home eating. Incremental growth is principally driven by product, packaging and process innovation.

 

   

Competition. The food products business is competitive. Numerous brands and products compete for shelf space and sales, with competition based primarily on product quality, convenience, price, trade promotion, consumer promotion, brand recognition and loyalty, customer service and the ability to identify and satisfy emerging consumer preferences. In order to maintain and grow our business, we must be able to react to these competitive pressures.

 

   

Consumer Tastes and Trends. Consumer trends, such as changing health trends and focus on convenience and products tailored for busy lifestyles, present both opportunities and challenges for our business. In order to maintain and grow our business, we must react to these trends by offering products that respond to evolving consumer needs. In the current economic climate, the long term trend for food consumption at home is flat and the increase that was experienced during the most severe part of the recession is now moderating. Additionally, consumers are looking for value alternatives, which have caused a shifting from traditional retail grocery to mass merchandisers and the value channel.

 

   

Customer Consolidation. In recent years, our industry had been characterized by consolidation in the retail grocery and food service industries, with mass merchandisers gaining market share. This trend could increase customer concentration within the industry.

Revenue Factors

Our net sales are driven principally by the following factors:

 

   

Shipments, which change as a function of changes in volume and in price; and

 

   

the costs that we deduct from shipments to reach net sales, which consist of:

 

   

Trade marketing expenses, which include the cost of temporary price reductions (“on sale” prices), promotional displays and advertising space in store circulars.

 

   

Slotting expenses, which are the costs of having certain retailers stock a new product, including amounts retailers charge for updating their warehousing systems, allocating shelf space and in-store systems set-up, among other things.

 

   

Consumer coupon redemption expenses, which are costs from the redemption of coupons we circulate as part of our marketing efforts.

We give detailed information on these factors below under “—Results of Operations.”

Cost Factors

Our important costs include the following:

 

   

Raw materials, such as sugar, cucumbers, broccoli, corn, peas, green beans, flour (wheat), poultry, seafood, vegetable oils, shortening, meat and corn syrup, among others, are available from numerous independent suppliers but are subject to price fluctuations due to a number of factors, including changes in crop size, federal and state agricultural programs, export demand, weather conditions and insects, among others.

 

   

Packaging costs. Our broad array of products entails significant costs for packaging and is subject to fluctuations in the price of aluminum, glass jars, plastic trays, corrugated fiberboard, and plastic packaging materials.

 

   

Freight and distribution. We use a combination of common carriers and inter-modal rail to transport our products from our manufacturing facilities to distribution centers and to deliver products to retailers from both those centers and directly from our manufacturing plants. Our freight and distribution costs are influenced by fuel costs.

 

   

Advertising and other marketing expenses. We record expenses related to advertising and other consumer and trade-oriented marketing programs under “Marketing and selling expenses” in our consolidated financial statements. A key strategy is to continue to invest in marketing that builds our iconic brands.

We give detailed information on these factors below under “—Results of Operations.”

 

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Working Capital

Our working capital is primarily driven by accounts receivable and inventories, which fluctuate throughout the year due to seasonality in both sales and production, as described below in “—Seasonality.” We will continue to focus on reducing our working capital requirements while simultaneously maintaining our customer service levels and production needs. We have historically relied on internally generated cash flows and temporary borrowings under our revolving credit facility to satisfy our working capital requirements.

Other Factors

Other factors that have influenced our results of operations and may do so in the future include:

 

   

Interest Expense. As a result of the Blackstone Transaction and Birds Eye Foods Acquisition, we have significant indebtedness. Although we expect to reduce our leverage over time, we expect interest expense to continue to be a significant component of our expenses. See “Liquidity and Capital Resources.”

 

   

Cash Taxes. We have significant tax-deductible intangible asset amortization and federal and state net operating losses, which resulted in minimal federal and state cash taxes in recent years. We expect to continue to realize significant reductions in federal and state cash taxes in the future attributable to amortization of intangible assets and realization of net operating losses.

 

   

Acquisitions and Consolidations. We believe we have the expertise to identify and integrate value-enhancing acquisitions to further grow our business. In recent years we have successfully integrated acquisitions. We have, however, incurred significant costs in connection with integrating these businesses and streamlining our operations.

 

   

Impairment of Goodwill and Long-Lived Assets. We test our goodwill and intangible assets annually or more frequently (if necessary) for impairment and have recorded impairment charges in recent years. The value of goodwill and intangibles from the allocation of purchase price from the Blackstone Transaction and the Birds Eye Foods Acquisition is derived from our business operating plans at that time and is therefore susceptible to an adverse change that could require an impairment charge. In the first quarter of 2010, we tested for impairment due to our reorganization into new segments and it resulted in no impairment charges.

We give detailed information on these factors below under “—Results of Operations.”

Seasonality

Our sales and cash flows are affected by seasonal cyclicality. Sales of frozen foods, including seafood, frozen vegetables, and complete bagged meals tend to be marginally higher during the winter months. Sales of pickles, relishes, barbecue sauces, potato chips and salad dressings tend to be higher in the spring and summer months, and demand for Duncan Hines products, Birds Eye vegetables and our fruit fillings tend to be higher around the Easter, Thanksgiving, and Christmas holidays. We pack the majority of our pickles during a season extending from May through September, and also increase our Duncan Hines inventories at that time, in advance of the selling season. Since many of the raw materials we process under the Birds Eye brand are agricultural crops, production of these products is predominantly seasonal, occurring during and immediately following the purchase of such crops. As a result, our inventory levels tend to be higher during August, September, and October, and thus we require more working capital during these months. We are a seasonal net user of cash in the third quarter of the calendar year.

 

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Restructuring Charges

Rochester, NY Office

The Rochester, NY office is the former headquarters of Birds Eye Foods, Inc, which we acquired on December 23, 2009, as described in Note 3. In connection with the consolidation of activities into Pinnacle’s New Jersey offices, the Rochester office will be closed. Notification letters under the Worker Adjustment and Retraining Notification (WARN) Act of 1988 were issued in the first quarter of 2010. Activities related to the closure of the Rochester office began in the second quarter of 2010, and will result in the elimination of approximately 200 positions.

In accordance with the authoritative guidance with respect to accounting for costs associated with exit or disposal activities, the full cost of termination benefits of $7.6 million related to employees who will not be retained beyond the minimum retention period were recorded in the first quarter and the full cost of termination benefits of $4.0 million related to employees who will be retained beyond the minimum retention period will be recorded in the future service periods. Of the $4.0 million, $1.1 million was recorded in the first quarter of 2010, $1.7 million was recorded in the second quarter of 2010, $0.9 million was recorded in the third quarter of 2010 and $0.3 million is expected to be recorded in the fourth quarter of 2010.

The total cost of termination benefits recorded for the three months ended September 26, 2010 was $0.9 million and was recorded in the segments as follows: Birds Eye Frozen segment $0.6 million, Duncan Hines Grocery segment $0.2 million and Specialty Foods segment $0.1 million. The total cost of termination benefits recorded for the nine months ended September 26, 2010 was $11.4 million and was recorded in the segments as follows: Birds Eye Frozen segment $8.0 million, Duncan Hines Grocery segment $2.1 million and Specialty Foods segment $1.3 million.

In addition to the termination benefits, during the third quarter of 2010, we recorded net lease termination costs of $0.8 million related to vacating the Birds Eye Foods’ Corporate headquarters prior to the expiration of the lease. These costs are expected to be paid over the remaining term of the lease, which runs through December 2011.

RESULTS OF OPERATIONS

The discussion below for each of the comparative periods is based upon net sales. We determine net sales in accordance with generally accepted accounting principles, or “GAAP”. We calculate our net sales by deducting trade marketing, slotting and consumer coupon redemption expenses from shipments. “Shipments” means gross sales less cash discounts, returns and “non-marketing” allowances. We calculate gross sales by multiplying the published list price of each product by the number of units of that product sold.

Shipments is a non-GAAP financial measure. We include it in our management’s discussion and analysis because we believe that it is a relevant financial performance indicator for our company as it measures the increase or decrease in our revenues caused by shipping more or less physical case volume multiplied by our published list prices. It is also a measure used by our management to evaluate our revenue performance. This measure is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. Using only this non-GAAP financial measure to analyze our performance would have material limitations because the calculation is based on the subjective determination of management regarding the nature and classification of events and circumstances that investors may find significant. Management compensates for these limitations by presenting both the GAAP and non-GAAP measures of these results.

The following table reconciles shipments to net sales for the total company, the Birds Eye Frozen, Duncan Hines Grocery and the Specialty Foods segments for the three and nine months ended September 26, 2010 and the three and nine months ended September 27, 2009.

The results of the acquired Birds Eye Foods business are included beginning on the date of acquisition, December 23, 2009.

 

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Table of Contents

 

     Total      Total  
     Three months
Ended
September 26, 2010
     Three months
Ended
September 27, 2009
     Nine months
Ended
September 26, 2010
     Nine months
Ended
September 27, 2009
 

Shipments

   $ 717.4       $ 502.5       $ 2,324.1       $ 1,603.8   

Less: Aggregate trade marketing and consumer coupon redemption expenses

     157.7         106.7         523.3         363.3   

Less: Slotting expense

     18.0         1.6         26.6         10.1   
                                   

Net sales

   $ 541.7       $ 394.2       $ 1,774.2       $ 1,230.4   
                                   
     Birds Eye Frozen      Birds Eye Frozen  
     Three months
Ended

September 26, 2010
     Three months
Ended

September 27, 2009
     Nine months
Ended

September 26, 2010
     Nine months
Ended

September 27, 2009
 

Shipments

   $ 310.7       $ 152.8       $ 1,063.8       $ 502.3   

Less: Aggregate trade marketing and consumer coupon redemption expenses

     76.3         40.8         269.7         142.6   

Less: Slotting expense

     11.3         —           16.0         3.3   
                                   

Net sales

   $ 223.1       $ 112.0       $ 778.1       $ 356.4   
                                   
     Duncan Hines Grocery      Duncan Hines Grocery  
     Three months
Ended

September 26, 2010
     Three months
Ended

September 27, 2009
     Nine months
Ended

September 26, 2010
     Nine months
Ended

September 27, 2009
 

Shipments

   $ 289.5       $ 261.2       $ 917.4       $ 834.4   

Less: Aggregate trade marketing and consumer coupon redemption expenses

     68.7         59.8         222.4         201.7   

Less: Slotting expense

     6.7         1.6         10.3         6.8   
                                   

Net sales

   $ 214.1       $ 199.8       $ 684.7       $ 625.9   
                                   
     Specialty Foods      Specialty Foods  
     Three months
Ended

September 26, 2010
     Three months
Ended

September 27, 2009
     Nine months
Ended

September 26, 2010
     Nine months
Ended

September 27, 2009
 

Shipments

   $ 117.2       $ 88.5       $ 342.9       $ 267.1   

Less: Aggregate trade marketing and consumer coupon redemption expenses

     12.7         6.1         31.2         19.0   

Less: Slotting expense

     —           —           0.3         —     
                                   

Net sales

   $ 104.5       $ 82.4       $ 311.4       $ 248.1   
                                   

 

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Table of Contents

 

Consolidated statements of operations

The following tables set forth statement of operations data expressed in dollars and as a percentage of net sales.

 

     Three months ended     Nine months ended  
     September 26,
2010
    September 27,
2009
    September 26,
2010
    September 27,
2009
 

Net sales

   $ 541.7         100.0   $ 394.2         100.0   $ 1,774.2         100.0   $ 1,230.4         100.0

Cost of products sold

     418.2         77.2     298.6         75.7     1,353.1         76.3     956.7         77.8
                                                                    

Gross profit

     123.5         22.8     95.6         24.3     421.1         23.7     273.7         22.2

Operating expenses:

                    

Marketing and selling expenses

     39.8         7.3     26.0         6.6     131.1         7.4     91.0         7.4

Administrative expenses

     23.5         4.3     17.5         4.4     83.9         4.7     47.0         3.8

Research and development expenses

     1.9         0.4     1.2         0.3     6.5         0.4     3.3         0.3

Other expense (income), net

     4.1         0.8     4.2         1.1     12.9         0.7     12.6         1.0
                                                                    

Total operating expenses

   $ 69.3         12.8   $ 48.9         12.4   $ 234.4         13.2   $ 153.9         12.5
                                                                    

Earnings before interest and taxes

   $ 54.2         10.0   $ 46.7         11.8   $ 186.7         10.5   $ 119.8         9.7
                                                                    

 

     Three months ended     Nine months ended  
     September 26,
2010
    September 27,
2009
    September 26,
2010
    September 27,
2009
 

Net sales

        

Birds Eye Frozen

   $ 223.1      $ 112.0      $ 778.1      $ 356.4   

Duncan Hines Grocery

     214.1        199.8        684.7        625.9   

Specialty Foods

     104.5        82.4        311.4        248.1   
                                

Total

   $ 541.7      $ 394.2      $ 1,774.2      $ 1,230.4   
                                

Earnings before interest and taxes

        

Birds Eye Frozen

   $ 28.6      $ 9.4      $ 93.6      $ 26.1   

Duncan Hines Grocery

     27.5        39.9        99.6        104.2   

Specialty Foods

     7.0        3.0        19.9        4.7   

Unallocated corporate expenses

     (8.9     (5.6     (26.4     (15.2
                                

Total

   $ 54.2      $ 46.7      $ 186.7      $ 119.8   
                                

Depreciation and amortization

        

Birds Eye Frozen

   $ 8.4      $ 5.0      $ 25.6      $ 17.0   

Duncan Hines Grocery

     6.1        5.6        17.8        16.4   

Specialty Foods

     5.1        4.9        14.8        14.6   
                                

Total

   $ 19.6      $ 15.5      $ 58.2      $ 48.0   
                                

 

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Three months ended September 26, 2010 compared to three months ended September 27, 2009

Net sales. Shipments in the three months ended September 26, 2010 were $717.4 million, an increase of $214.9 million, compared to shipments in the three months ended September 27, 2009 of $502.5 million. The acquisition of Birds Eye Foods resulted in $253.1 million of increased shipments, led by Birds Eye Steamfresh and core frozen vegetables and Birds Eye Voila! frozen complete bagged meals, where compared to the same three month period a year ago (before the acquisition of Birds Eye Foods) Birds Eye Steamfresh vegetables and Birds Eye Voila! frozen complete bagged meals experienced significant sales growth and we have successfully managed the discontinuance of the Birds Eye Steamfresh frozen meals business. All other businesses decreased $38.2 million. Net sales in the three months ended September 26, 2010 were $541.7 million, an increase of $147.5 million, compared to net sales in the three months ended September 27, 2009 of $394.2 million. The acquisition of Birds Eye Foods resulted in $188.6 million of increased net sales. Net sales for all other businesses decreased $41.1 million as a result of a decrease in shipments of $38.2 million and a $2.9 million increase in aggregate trade and consumer coupon redemption expenses and slotting expenses.

In line with many companies in the food industry, our net sales declined in the third quarter. However, our market shares, a key indicator of brand health, have improved in a number of categories. During the quarter, we held or grew share in brands representing approximately 80% of our brands’ profit contribution. For legacy Pinnacle businesses, Duncan Hines grew share in the baking category, with strong gains in cake, Vlasic grew share in pickles, Armour gained share in canned meat, with strong performance in Vienna sausages, our syrup brands gained share in a challenged category, Aunt Jemima grew share in frozen breakfast , Mrs. Paul’s and Van de Kamp’s in seafood and Celeste Pizza in the pizza for one segment. In addition, we had share gains in growing categories in our newly acquired Birds Eye Foods brands, with significant share gains for Birds Eye Steamfresh frozen vegetables and Birds Eye Voila! frozen complete bagged meals.

Birds Eye Frozen Division: Shipments in the three months ended September 26, 2010 were $310.7 million, an increase of $157.9 million. The acquisition of Birds Eye Foods resulted in $180.4 million of increased shipments. All other businesses decreased $22.5 million. The decrease was mainly driven by a decline in our Hungry Man dinners in a category marked by significant competitive activity. Swanson dinner shipments declined sharply as we are preparing to exit this business in the United States at year end. Lenders bagels declined while Aunt Jemima increased slightly. For the remaining businesses, aggregate trade and consumer coupon redemption expenses and slotting expenses decreased $6.7 million in the three months ended September 26, 2010. As a result, the remaining businesses net sales decreased $15.9 million, or 14.2%, for the three months ended September 26, 2010.

Duncan Hines Grocery Division: Shipments in the three months ended September 26, 2010 were $289.5 million, an increase of $28.3 million. The acquisition of Birds Eye Foods resulted in $29.6 million of increased shipments. All other businesses decreased $1.3 million primarily due to the Duncan Hines brand in the face of intense competition. Armour canned meat brand sales increased. For the remaining businesses, aggregate trade marketing and consumer coupon redemption expenses and slotting expenses increased $9.3 million. As a result, the remaining businesses net sales decreased $10.6 million, or 5.3%, for the three months ended September 26, 2010.

Specialty Foods Division: Shipments in the three months ended September 26, 2010 were $117.2 million, an increase of $28.7 million. The acquisition of Birds Eye Foods resulted in $43.1 million of increased shipments. All other businesses decreased $14.4 million, principally in our private label businesses, resulting from the execution of our stated strategy of deemphasizing lower margin foodservice and private label products. For the remaining businesses, aggregate trade marketing and consumer coupon redemption expenses increased $0.2 million. As a result, the remaining businesses net sales decreased $14.6 million, or 17.7%, for the three months ended September 26, 2010.

Gross profit. Gross profit was $123.5 million, or 22.8% of net sales in the three months ended September 26, 2010, versus gross profit of $95.6 million, or 24.3% of net sales in the three months ended September 27, 2009. The acquisition of Birds Eye Foods resulted in $48.6 million of gross profit. Included in the gross profit of Birds Eye Foods was a $9.7 million charge related to the sales of inventories written up to fair value at the date of the acquisition. For the remaining businesses, gross profit for the three months ended September 26, 2010 was $74.9 million, or 21.2% of net sales, a 3.1 percentage point decrease versus the remaining businesses gross profit for the three months ended September 27, 2009 of $95.6 million, or 24.3% of net sales. The principal driver of the decreased gross profit as a percent of net sales was a higher rate of aggregate trade marketing and consumer coupon redemption expenses that are classified as reductions to net sales. The change in these costs accounted for 2.4 percentage points of lower gross profit in 2010. Additionally, higher freight and distribution expenses decreased gross margin by 0.4 percentage points. All other impacts on gross profit were a decrease of 0.3 percentage points.

 

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Marketing and selling expenses. Marketing and selling expenses were $39.8 million, or 7.3% of net sales, in the three months ended September 26, 2010 compared to $26.0 million, or 6.6% of net sales, in the three months ended September 27, 2009. The acquisition of Birds Eye Foods contributed $14.2 million of the increase for the three months ended September 26, 2010.

Administrative expenses. Administrative expenses were $23.5 million, or 4.3% of net sales, in the three months ended September 26, 2010 compared to $17.5 million, or 4.4% of net sales, in the three months ended September 27, 2009, an increase of $6.0 million. The acquisition and integration of Birds Eye Foods resulted in $5.6 million of the increase for the three months ended September 26, 2010, and included charges of $1.7 million for the employee termination benefits and net lease termination costs related to the announced closure of the Rochester, N.Y. office and $0.3 million of integration related expenses. Also included are lease termination costs of $0.7 million related to the relocation of the Cherry Hill, NJ office facility. Excluding these charges and expenses, administrative expenses were 3.8% of net sales in the three months ended September 26, 2010.

Research and development expenses. Research and development expenses were $1.9 million, or 0.4% of net sales, in the three months ended September 26, 2010 compared with $1.2 million, or 0.3% of net sales, in the three months ended September 27 2009. The acquisition of Birds Eye Foods contributed $0.7 million of the increase for the three months ended September 26, 2010.

Other expense (income), net. The following table shows other expense (income), net:

 

     Three months ended  
     September 26
2010
    September 27
2009
 

Amortization of intangibles/other assets

   $ 4,295      $ 4,197   

Other

     (184     —     
                

Total other expense (income), net

   $ 4,111      $ 4,197   
                

Amortization was $4.3 million in the three months ended September 26, 2010 and included $1.0 million of amortization expense related to Birds Eye Foods, as compared to $4.2 million in the three months ended September 27, 2009.

Earnings before interest and taxes. Earnings before interest and taxes (EBIT) increased $7.6 million to $54.2 million in the three months ended September 26, 2010 from $46.6 million in EBIT in the three months ended September 27, 2009. The acquisition of Birds Eye Foods contributed $27.2 million of EBIT for the three months ended September 26, 2010. The remaining decrease in EBIT resulted from a $3.2 million decrease in the Birds Eye Frozen Division, a $16.6 million decrease in the Duncan Hines Grocery Division, and a $1.4 million decrease in the Specialty Foods Division, partially offset by a $1.6 million decrease in unallocated corporate expenses. Included in the unallocated corporate expenses for the three months ended September 26, 2010 are integration and transaction costs associated with the acquisition of Birds Eye Foods of $2.4 million. Also included are lease termination costs of $0.7 million related to the relocation of the Cherry Hill, NJ office facility. Synergies realized, defined as reduction in operating costs resulting from the combination of Pinnacle and Birds Eye Foods, increased EBIT by $9.2 million in the three months ended September 27, 1010.

Birds Eye Frozen Division: EBIT increased by $19.2 million in the three months ended September 26, 2010, to $28.6 million from $9.4 million in the three months ended September 27, 2009. The acquisition of Birds Eye Foods contributed $22.4 million of EBIT for the three months ended September 26, 2010. The remaining decrease of $3.2 million was principally driven by the $15.9 million decrease in net sales.

Duncan Hines Grocery Division: EBIT decreased by $12.4 million in the three months ended September 26, 2010, to $27.5 million from $39.9 million in the three months ended September 27, 2009. The acquisition of Birds Eye Foods contributed $4.2 million of EBIT for the three months ended September 26, 2010. The remaining decrease of $16.6 million was principally driven by slotting for Duncan Hines, increased trade marketing rates and higher ingredient costs in addition to lower sales volumes.

 

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Specialty Foods Division: EBIT increased by $4.0 million in the three months ended September 26, 2010, to $7.0 million from $3.0 million in the three months ended September 27, 2009. The acquisition of Birds Eye Foods contributed $5.4 million of EBIT for the three months ended September 26, 2010. The remaining decrease of $1.4 million was principally driven by the $14.6 million decrease in net sales, resulting from the execution of our stated strategy of deemphasizing lower margin foodservice and private label products.

Interest expense, net. Interest expense, net was $74.0 million in the three months ended September 26, 2010, compared to $28.3 million in the three months ended September 27, 2009, principally related to borrowings to fund the Birds Eye Foods acquisition and the write off of deferred financing costs as detailed below.

Included in interest expense, net, was $0.7 million and $1.0 million for the three months ended September 26, 2010 and the three months ended September 27, 2009 respectively, for the amortization of the cumulative mark-to-market adjustment for an interest rate swap that was de-designated for swap accounting in the fourth quarter of 2008 and subsequently terminated. The counterparty to the interest rate swap was Lehman Brothers Special Financing (“LBSF”), a subsidiary of Lehman Brothers, and the hedge was de-designed for swap accounting at the time of LBSF’s bankruptcy filing. At that time of de-designation, the cumulative mark to market adjustment was $11.5 million. As of September 26, 2010, the remaining unamortized balance is $3.3 million.

Also included in interest expense, net, for the three months ended September 26, 2010 were charges of $20.9 million of costs incurred in the refinancing of Tranche C Term Loan. These charges included write offs of $11.6 million and $5.6 million, respectively, of deferred financing costs and original issue discount associated with the refinanced Tranche C Term Loan, $3.2 million of costs to modify existing banking arrangements that were maintained after the refinancing, and $0.5 million of hedge ineffectiveness related to hedges of interest payments due on the refinanced Tranche C Term Loan.

Excluding the impact of the items in the previous paragraphs, the increase in interest expense, net, was $25.1 million, of which $12.7 million was attributable to higher bank debt interest principally related to the Tranche C Term Loan borrowings to partially fund the Birds Eye Foods Acquisition and the related Tranche D Term Loan refinancing after August 17, 2010, somewhat offset by lower debt levels on the existing term loans and lower average revolver borrowings, $10.6 million of higher bond debt levels which also partially funded the Birds Eye Foods Acquisition and included interest on the new 8.25% Senior Notes issued in the August 17, 2010 refinancing, $1.6 million of higher amortization of debt issue costs, and $0.2 million of other items. Included in the interest expense, net, amount was $4.2 million and $3.6 million for the three months ended September 26, 2010 and the three months ended September 27, 2009 respectively, recorded from losses on interest rate swap agreements, a net change of $0.6 million. We utilize interest rate swap agreements to reduce the potential exposure to interest rate movements and to achieve a desired proportion of variable versus fixed rate debt. Any gains or losses realized on the interest rate swap agreements, excluding the Accumulated other comprehensive (loss) income (“AOCI”) portion, are recorded as an adjustment to interest expense.

Provision (benefit) for income taxes. The effective tax rate was 38.4% in the three months ended September 26, 2010, compared to 43.3% in the three months ended September 27, 2009. The effective rate difference was due to the change in assessment of the realization of deferred tax assets. For the three months ended September 26, 2010 we maintained a valuation allowance for certain state net operating loss carryovers, state tax credit carryovers and foreign loss carryovers. For the three months ended September 27, 2009 we maintained a full valuation allowance against net deferred tax assets excluding indefinite lived intangible assets. See Note 15 of the Consolidated Financial Statements for Income Taxes.

Under Internal Revenue Code Section 382, we are a loss corporation. Section 382 of the Code places limitations on our ability to use certain net operating loss carry-forwards to offset our income. The annual net operating loss limitation is approximately $14 to 18 million subject to other rules and restrictions. Our net operating loss carryovers and certain other tax attributes may not be utilized to offset certain Birds Eye Foods income from recognized built in gains pursuant to Section 384 of the Code.

 

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Nine months ended September 26, 2010 compared to nine months ended September 27, 2009

Net sales. Shipments in the nine months ended September 26, 2010 were $2,324.1 million, an increase of $720.3 million, compared to shipments in the nine months ended September 27, 2009 of $1,603.8 million. The acquisition of Birds Eye Foods resulted in $818.9 million of increased shipments, led by Birds Eye Steamfresh frozen vegetables and Birds Eye Voila! frozen complete bagged meals, compared to the same nine month period a year ago (before the acquisition of Birds Eye Foods) Birds Eye vegetable sales are growing, Birds Eye Voila! is experiencing significant growth and we have successfully managed the discontinuance of the Birds Eye Steamfresh frozen meals business. All other businesses decreased $98.6 million. Net sales in the nine months ended September 26, 2010 were $1,774.2 million, an increase of $543.8 million, compared to net sales in the nine months ended September 27, 2009 of $1,230.4 million. The acquisition of Birds Eye Foods resulted in $628.8 million of increased net sales. Net sales for all other businesses decreased $85.0 million as a result of a decrease in shipments of $98.6 million, partially offset by a $13.6 million decrease in aggregate trade and consumer coupon redemption expenses and slotting expenses.

Our market shares, a key indicator of brand health, have improved in a number of categories in the year to date period in many of our key brands. Pinnacle held or grew share in brands representing approximately 80% of our brands’ profit contribution. For legacy Pinnacle businesses, we experienced gains in Vlasic pickles, Armour and Vienna sausages, Aunt Jemima frozen breakfast products, Mrs. Paul’s and Van de Kamp’s seafood and Mrs. Butterworth’s and Log Cabin syrups. In addition, we had share gains in growing categories in our newly acquired Birds Eye Foods brands, with significant share gains for Birds Eye Steamfresh frozen vegetables and Birds Eye Voila! frozen complete bagged meals.

Birds Eye Frozen Division: Shipments in the nine months ended September 26, 2010 were $1,063.8 million, an increase of $561.5 million. The acquisition of Birds Eye Foods resulted in $606.0 million of increased shipments. All other businesses decreased $44.5 million. The decrease was mainly driven by a decline in our Hungry Man dinners in a category marked by significant competitive activity. Swanson dinner shipments declined sharply as we are preparing to exit this business in the United States at year end. Partially offsetting these declines were increases in Aunt Jemima and Mrs. Paul’s and Van de Kamp’s seafood brands. For the remaining businesses, aggregate trade and consumer coupon redemption expenses and slotting expenses decreased $20.5 million in the nine months ended September 26, 2010. As a result, the remaining businesses net sales decreased $24.0 million, or 6.7%, for the nine months ended September 26, 2010.

Duncan Hines Grocery Division: Shipments in the nine months ended September 26, 2010 were $917.4 million, an increase of $83.0 million. The acquisition of Birds Eye Foods resulted in $90.5 million of increased shipments. All other businesses decreased $7.5 million, mostly due to Duncan Hines baking mixes and frostings. Armour canned meat brand sales increased. The sales performance in the division was positively affected by the stronger Canadian dollar. For the remaining businesses, aggregate trade marketing and consumer coupon redemption expenses and slotting expenses increased $7.3 million. As a result, the remaining businesses net sales decreased $14.8 million, or 2.4%, for the nine months ended September 26, 2010.

Specialty Foods Division: Shipments in the nine months ended September 26, 2010 were $342.9 million, an increase of $75.8 million. The acquisition of Birds Eye Foods resulted in $122.3 million of increased shipments. All other businesses decreased $46.5 million, principally in our private label businesses, resulting from the execution of our stated strategy of de-emphasizing lower margin foodservice and private label products. For the remaining businesses, aggregate trade marketing and consumer coupon redemption expenses decreased $0.3 million. As a result, the remaining businesses net sales decreased $46.2 million, or 18.6%, for the nine months ended September 26, 2010.

Gross profit. Gross profit was $421.1 million, or 23.7% of net sales in the nine months ended September 26, 2010, versus gross profit of $273.7 million, or 22.2% of net sales in the nine months ended September 27, 2009. The acquisition of Birds Eye Foods resulted in $152.6 million of gross profit. Included in the gross profit of Birds Eye Foods was a $36.8 million charge related to the sales of inventories written up to fair value at the date of the acquisition. For the remaining businesses, gross profit for the nine months ended September 26, 2010 was $268.5 million, or 23.4% of net sales, a 1.2% percentage point increase versus the remaining businesses gross profit for the nine months ended September 27, 2009 of $273.7 million, or 22.2% of net sales. The principal driver of the increased gross profit as a percent of net sales was a lower cost mix, and to a lesser extent, lower raw material commodity costs, which together increased gross margin by 1.8 percentage points. Partially offsetting the increase was a higher rate of aggregate trade marketing and customer coupon redemption expenses, which decreased gross margin by 0.6 percentage points.

 

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Marketing and selling expenses. Marketing and selling expenses were $131.1 million, or 7.4% of net sales, in the nine months September 26, 2010 compared to $91.0 million, or 7.4% of net sales, in the nine months ended September 27, 2009. The acquisition of Birds Eye Foods contributed $44.6 million of the increase for the nine months ended September 26, 2010. The remaining change, a decrease of $4.5 million, was driven by lower sales commissions, advertising and other promotional expenses and marketing and selling overhead expenses.

Administrative expenses. Administrative expenses were $83.9 million, or 4.7% of net sales, in the nine months ended September 26, 2010 compared to $47.0 million, or 3.8% of net sales, in the nine months ended September 27, 2009, an increase of $36.9 million. The acquisition and integration of Birds Eye Foods resulted in $30.4 million of the increase for the nine months ended September 26, 2010, and included charges of $12.2 million for employee termination benefits and lease termination costs related to the announced closure of the Rochester, N.Y. office and $4.9 million of transaction and integration related expenses. Also included are lease termination costs of $0.7 million related to the relocation of the Cherry Hill, NJ office facility. Excluding these charges and expenses, administrative expenses were 3.7% of net sales in the nine months ended September 26, 2010.

Research and development expenses. Research and development expenses were $6.5 million, or 0.4% of net sales, in the nine months ended September 26, 2010 compared with $3.3 million, or 0.3% of net sales, in the nine months ended September 27 2009. The acquisition of Birds Eye Foods contributed $2.7 million of the increase for the nine months ended September 26, 2010.

Other expense (income), net. The following table shows other expense (income), net:

 

     Nine months ended  
     September 26
2010
    September 27
2009
 

Amortization of intangibles/other assets

   $ 12,880      $ 12,591   

Birds Eye Foods Acquisition merger-related costs

     224        —     

Other

     (184     —     
                

Total other expense (income), net

   $ 12,920      $ 12,591   
                

Amortization was $12.9 million in the nine months ended September 26, 2010 and included $3.0 million of amortization expense related to Birds Eye Foods, as compared to $12.6 million in the three months ended September 27, 2009.

Earnings before interest and taxes. Earnings before interest and taxes (EBIT) increased $66.9 million to $186.7 million in the nine months ended September 26, 2010 from $119.8 million in EBIT in the nine months ended September 27, 2009. The acquisition of Birds Eye Foods contributed $72.1 million of EBIT for the nine months ended September 26, 2010. The remaining decrease in EBIT resulted from a $7.1 million increase in the Birds Eye Frozen Division, a $13.6 million decrease in the Duncan Hines Grocery Division, a $4.2 million increase in the Specialty Foods Division, and a $2.9 million increase in unallocated corporate expenses. Included in the unallocated corporate expenses for the nine months ended September 26, 2010 are integration and transaction costs associated with the acquisition of Birds Eye Foods of $7.0 million. Also included are lease termination costs of $0.7 million related to the relocation of the Cherry Hill, NJ office facility. Synergies realized, defined as reduction in operating costs resulting from the combination of Pinnacle and Birds Eye Foods, increased EBIT by $13.6 million in the nine months ended September 26, 2010.

Birds Eye Frozen Division: EBIT increased by $67.5 million in the nine months ended September 26, 2010, to $93.6 million from $26.1 million in the nine months ended September 27, 2009. The acquisition of Birds Eye Foods contributed $60.4 million of EBIT for the nine months ended September 26, 2010. The remaining increase of $7.1 million was principally driven by lower raw material commodity costs and decreased advertising expense, principally in our Seafood and Aunt Jemima brands. These increases to EBIT were partially offset by the gross margin impact of the $24.0 million decrease in net sales.

 

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Duncan Hines Grocery Division: EBIT decreased by $4.6 million in the nine months ended September 26, 2010, to $99.6 million from $104.2 million in the nine months ended September 27, 2009. The acquisition of Birds Eye Foods contributed $9.0 million of EBIT for the nine months ended September 26, 2010. The remaining decrease of $13.6 million was principally driven by the gross margin impact of the lower shipments and the higher aggregate trade marketing and consumer coupon redemption expense and slotting expenses, as well as higher manufacturing conversion costs and market research and package design expenses.

Specialty Foods Division: EBIT increased by $15.2 million in the nine months ended September 26, 2010, to $19.9 million from $4.7 million in the nine months ended September 27, 2009. The acquisition of Birds Eye Foods contributed $11.0 million of EBIT for the nine months ended September 26, 2010. The remaining increase of $4.2 million was principally driven by improved gross margin rates, partially offset by the gross margin impact of the $46.2 million decrease in net sales resulting from the execution of our stated strategy of de-emphasizing lower margin foodservice and private label products.

Interest expense, net. Interest expense, net was $182.5 million in the nine months ended September 26, 2010, compared to $86.5 million in the nine months ended September 27, 2009, principally related to borrowings to fund the Birds Eye Foods acquisition as detailed below.

Included in interest expense, net, was $2.6 million and $3.4 million for the nine months ended September 26, 2010 and the nine months ended September 27, 2009 respectively, for the amortization of the cumulative mark-to-market adjustment for an interest rate swap that was de-designated for swap accounting in the fourth quarter of 2008 and subsequently terminated. The counterparty to the interest rate swap was Lehman Brothers Special Financing (“LBSF”), a subsidiary of Lehman Brothers, and the hedge was de-designed for swap accounting at the time of LBSF’s bankruptcy filing. At that time of de-designation, the cumulative mark to market adjustment was $11.5 million. As of September 26, 2010, the remaining unamortized balance is $3.3 million.

Also included in interest expense, net for the three months ended September 26, 2010 were charges of $20.9 million of costs incurred in connection with the refinancing of Tranche C Term Loans. These charges included write offs of $11.6 million and $5.6 million, respectively, of deferred financing costs and original issue discount associated with the refinanced Tranche C Term Loans, $3.2 million of costs to modify existing banking arrangements that were maintained after the refinancing, and $0.5 million of hedge ineffectiveness related to hedges of interest payments due on the refinanced Tranche C Term Loans.

Excluding the impact of the items in the previous paragraphs, the increase in interest expense, net, was $75.9 million, of which $45.4 million was attributable to higher bank debt interest principally related to the Tranche C Term Loan borrowings to partially fund the Birds Eye Foods Acquisition and the related Tranche D Term Loan refinancing after August 17, 2010, somewhat offset by lower debt levels on the existing term loans and lower average revolver borrowings, $24.4 million of higher bond debt levels which also partially funded the Birds Eye Foods Acquisition and included interest on the new 8.25% Senior Notes issued on August 17, 2010, $5.9 million of higher amortization of debt issue costs, and $0.2 million of other items. Included in the interest expense, net, amount was $12.8 million and $10.5 million for the nine months ended September 26, 2010 and the nine months ended September 27, 2009 respectively, recorded from losses on interest rate swap agreements, a net change of $2.3 million. We utilize interest rate swap agreements to reduce the potential exposure to interest rate movements and to achieve a desired proportion of variable versus fixed rate debt. Any gains or losses realized on the interest rate swap agreements, excluding the Accumulated other comprehensive (loss) income (“AOCI”) portion, are recorded as an adjustment to interest expense.

Provision (benefit) for income taxes. The effective tax rate was (41.6%) in the nine months ended September 26, 2010, compared to 67.4% in the nine months ended September 27, 2009. The effective rate difference was due to the change in assessment of the realization of deferred tax assets as well as an out of period adjustment of $3.7 million recorded in the second quarter to correct the manner in which the tax impact of certain items included in Accumulated Other Comprehensive Income were previously recorded. For the nine months ended September 26, 2010 we maintained a valuation allowance for certain state net operating loss carryovers, state tax credit carryovers, and foreign loss carryovers. For the nine months ended September 27, 2009 we maintained a full valuation allowance against net deferred tax assets excluding indefinite lived intangible assets. See Note 15 of the Consolidated Financial Statements for Income Taxes.

Under Internal Revenue Code Section 382, we are a loss corporation. Section 382 of the Code places limitations on our ability to use certain net operating loss carry-forwards to offset our income. The annual net operating loss limitation is approximately $14 to $18 million subject to other rules and restrictions. Our net operating loss carryovers and certain other tax attributes may not be utilized to offset certain Birds Eye Foods income from recognized built in gains pursuant to Section 384 of the Code.

 

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LIQUIDITY AND CAPITAL RESOURCES

Historical

Overview. Our cash flows are very seasonal. Typically we are a net user of cash in the third quarter of the calendar year (i.e., the quarter ending in September) and a net generator of cash over the balance of the year.

Our principal liquidity requirements have been, and we expect will be, for working capital and general corporate purposes, including capital expenditures and debt service. Capital expenditures are expected to be approximately $85 million in 2010. We have historically satisfied our liquidity requirements with internally generated cash flows and availability under our Revolving Credit Facility.

Statements of cash flows for the nine months ended September 26, 2010 compared to nine months ended September 27, 2009

Cash flows for the nine months ended September 26, 2010 were impacted by the Birds Eye Foods Acquisition, which occurred on December 23, 2009. Cash provided by operating activities was $145.5 million for the nine months ended September 26, 2010 and was the result of net earnings excluding non-cash charges and credits of $92.4 million and a decrease in working capital of $53.1 million. The decrease in working capital was primarily the result of a $34.7 million increase in accounts payable primarily driven by seasonal inventory purchases made during the third quarter and a $23.7 million increase in accrued liabilities primarily driven by accrued interest. Also contributing to the decrease was a $2.7 million decrease in other current assets. These cash inflows were offset by a seasonal $4.0 million decrease in accrued trade marketing, and a $5.3 million increase in accounts receivable due to the timing of sales within the month. The aging of accounts receivable has not changed significantly from December. Net cash provided by operating activities was $66.3 million for the nine months ended September 27, 2009 and was the result of net earnings excluding non-cash charges and credits of $91.9 million less an increase in working capital of $25.6 million. The increase in working capital was primarily the result of a $17.2 million increase in accounts receivable, an $11.3 million increase in inventory and a $10.5 million decrease in accrued trade marketing expense, partially offset by a $16.5 million increase in accrued liabilities. The increase in accounts receivable was caused by higher sales as well as the timing of when those sales occurred. The increase in inventory was the result of the normal seasonal build during the third quarter, while the decrease in accrued trade marketing was a result of the timing of when the trade marketing payments were made. The increase in accrued liabilities was driven by higher accruals for management incentive bonuses, severance and coupons.

Net cash used in investing activities was $52.4 and $40.7 million for the nine months ended September 26, 2010 and September 27, 2009, respectively, which related entirely to capital expenditures.

Net cash used by financing activities was $60.2 million during the nine months ended September 26, 2010. The usage primarily related to a $27.0 million prepayment of our term loans in accordance with the “Excess Cash Flow” requirements of our Senior Secured Credit Facility and $3.1 million of normally scheduled repayments of the term loans, $14.3 million in repayments of bank overdrafts, $13.0 million of refinancing costs in connection with the refinancing of the Tranche C Term Loan, $4.4 million in repayments of our notes payable and capital lease obligations, partially offset by $1.6 million of other activities, net. In August, we refinanced our Tranche C Term Loan by issuing $400 million of 8.25% notes and executing a new Tranche D Term Loan in the amount of $442.3 million. Except for the refinancing costs referred to above, this refinancing did not impact the new cash used in financing activities. Net cash used by financing activities was $27.5 million during the nine months ended September 27, 2009. The usage primarily related to $18.3 million in net repayments of the Revolving Credit Facility and $9.4 million in repayments of the term loan.

The net of all activities resulted in an increase in cash of $33.0 million during the nine months ended September 26, 2010 and a $1.7 million decrease in cash during the nine months ended September 27, 2009.

 

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Debt

As part of the Blackstone Transaction as described in Note 1, we entered into a $1,375.0 million credit agreement (the “Senior Secured Credit Facility”) in the form of (i) term loans in an initial aggregate amount of $1,250.0 million (the “Term Loans”) and (ii) revolving credit commitments in the initial aggregate amount of $125.0 million (the “Revolving Credit Facility”). The term loan matures April 2, 2014. The Revolving Credit Facility matures April 2, 2013.

As part of the Birds Eye Foods Acquisition on December 23, 2009, as described in Note 3, we entered into an amendment to the Senior Secured Credit Facility in the form of (i) incremental term loans in the amount of $850.0 million (the “Tranche C Term Loans”) and (ii) an incremental revolving credit facility in the amount of $25.0 million, bringing our total revolving credit commitment to $150.0 million. In connection with the Tranche C Term Loans, we also incurred $11.8 million in original issue discount fees. These fees were recorded in Long-term debt on the Consolidated Balance Sheet and were being amortized over the life of the loan using the effective interest method prior to the repayment of the Tranche C Term Loans.

On August 17, 2010 we entered into an amendment to the Senior Secured Credit Facility, which provided for incremental term loans in the amount of $442.3 million (the “Tranche D Term Loans). The proceeds from the Tranche D Term Loans, along with the proceeds from the 8.25% Senior Notes described below were used to repay the outstanding Tranche C Term Loans. In accordance with the authoritative guidance for debt extinguishments and modifications, the lending relationship between us and each bank in the original lending syndicate was examined and determined to be either a modification or an extinguishment. As a result of this analysis, we recorded interest expense in the Consolidated Statement of Operations for the write-off of $11.6 million of deferred financing costs and $5.6 million of original issue discount related to extinguished lending relationships from the Tranche C Term Loans. In addition, we incurred approximately $3.9 million of legal, consulting and placement fees in connection with the Tranche D Term Loans. Of the fees incurred, $3,221 were costs of modifying existing lending relationships and thus we charged the interest expense line in the Consolidated Statement of Operations during the third quarter of 2010. The remaining $0.7 million of fees related to obtaining new lending relationships and thus was deferred. We also incurred approximately $8.8 million of legal, consulting, audit and placement fees in connection with the execution of the 8.25% Senior Notes, all of which were deferred. All costs deferred in connection with the above transactions were recorded in Other Assets, net on the consolidated balance sheet.

There were no borrowings outstanding under the Revolving Credit Facility as of September 26, 2010 and December 27, 2009. There have been no borrowings under the revolver at any time in 2010.

The total combined amount of the Term Loans, the Tranche C Term Loans and the Tranche D Term Loans that were owed to affiliates of the Blackstone Group as of September 26, 2010 and December 27, 2009, was $139.2 million and $109.2 million, respectively.

Our borrowings under the Senior Secured Credit Facility, as amended, bear interest at a floating rate and are maintained as base rate loans or as Eurocurrency rate loans. Base rate loans bear interest at the base rate plus the applicable base rate margin, as defined in the Senior Secured Credit Facility. The base rate is defined as the higher of (i) the prime rate and (ii) the Federal Reserve reported overnight funds rate plus 1/2 of 1%. Eurocurrency rate loans bear interest at the adjusted Eurocurrency rate, as described in the Senior Secured Credit Facility, plus the applicable Eurocurrency rate margin. Solely with respect to Tranche C Term Loans, the Eurocurrency rate shall be no less than 2.50% per annum. Solely with respect to Tranche C Term Loans, the base rate shall be no less than 3.50% per annum. Solely with respect to Tranche D Term Loans, the Eurocurrency rate shall be no less than 1.75% per annum. Solely with respect to Tranche D Term Loans, the base rate shall be no less than 2.75% per annum.

 

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The applicable margins with respect to our Senior Secured Credit Facility vary from time to time in accordance with the terms thereof and agreed upon pricing grids based on our leverage ratio as defined in the credit agreement. The applicable margins with respect to the Senior Secured Credit Facility are currently:

 

Applicable Margin (per annum)

 
Revolving Credit Facility and Letters of Credit     Term Loans  

Eurocurrency Rate for
Revolving Loans and
Letter of Credit Fees

    Base Rate for
Revolving Loans
    Commitment Fees Rate     Eurocurrency Rate for
Term Loans
    Base Rate for Term
Loans
 
  2.25     1.25     0.50     2.50     1.50

 

Tranche C Term Loans     Tranche D Term Loans  

Eurocurrency Rate for

Term Loan C

    Base Rate for
Term  Loan C
    Eurocurrency Rate for
Term Loan C
    Base Rate for
Term Loan C
 
  5.00     4.00     4.25     3.25

The obligations under the Senior Secured Credit Facility are unconditionally and irrevocably guaranteed by each of our direct or indirect domestic subsidiaries (collectively, the “Guarantors”). In addition, the Senior Secured Credit Facility is collateralized by first priority or equivalent security interests in (i) all the capital stock of, or other equity interests in, each of our direct or indirect domestic subsidiaries and 65% of the capital stock of, or other equity interests in, our direct foreign subsidiaries, or any of its domestic subsidiaries and (ii) certain of our tangible and intangible assets and those of the Guarantors (subject to certain exceptions and qualifications).

A commitment fee of 0.50% per annum is applied to the unused portion of the Revolving Credit Facility. For the three and nine months ended September 26, 2010, the weighted average interest rate on the term loan and the Tranche C and D Term Loans was 4.26% and 4.66%, respectively. For the three months and nine months ended September 27, 2009, the weighted average interest rate on the term loans and the Tranche C Term Loans was 3.04% and 3.18%, respectively. As of September 26, 2010, the interest rate of the credit facility was 2.76%, however no borrowings were made during 2010. For the three and nine months ended September 27, 2009, the weighted average interest rate on the Revolving Credit Facility was 3.08% and 3.26%, respectively. As of September 26, 2010 and September 27, 2009, the weighted average Eurodollar interest rate on the term loan facility was 3.63% and 3.01% respectively.

We pay a fee for all outstanding letters of credit drawn against the Revolving Credit Facility at an annual rate equivalent to the Applicable Margin then in effect with respect to Eurocurrency rate loans under the Revolving Credit Facility, less the fronting fee payable in respect of the applicable letter of credit. The fronting fee is equal to 0.125% per annum of the daily maximum amount then available to be drawn under such letter of credit. The fronting fees are computed on a quarterly basis in arrears. Total letters of credit issued under the Revolving Credit Facility cannot exceed $50.0 million as of March 24, 2010 (previously $25.0 million). As of September 26, 2010 and December 27, 2009, we had utilized $34.1 million and $22.1 million, respectively of the Revolving Credit Facility for letters of credit. As of September 26, 2010, there were no borrowings under the Revolving Credit Facility, therefore, of the $150.0 million Revolving Credit Facility available, we had an unused balance of $115.9 million available for future borrowing and letters of credit. As of December 27, 2009, there were no borrowings under the Revolving Credit Facility, therefore, of the $150.0 million Revolving Credit Facility available, we had an unused balance of $127.9 million available for future borrowing and letters of credit. The remaining amount that can be used for letters of credit as of September 26, 2010 and December 27, 2009 was $15.9 million and $2.9 million, respectively.

In accordance with the “Excess Cash Flow” requirements of the Senior Secured Credit Facility, we made a mandatory prepayment of the Term Loans of $27.0 million in March 2010. Under the terms of the Senior Secured Credit Facility, Excess cash flow is determined by taking consolidated net income (as defined) and adjusting it for certain items, including (1) all non cash charges and credits included in arriving at consolidated net income, (2) changes in working capital, (3) capital expenditures (to the extent they were not financed with debt), (4) the aggregate amount of principle payments of indebtedness and (5) certain other items defined within the senior secured credit facility.

 

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The Term Loans mature in quarterly 0.25% installments from September 2007 to December 2013 with the remaining balance due in April 2014. The aggregate maturities of the term loan outstanding as of September 26, 2010 are no payment in 2010, $2.5 million in 2011, $12.5 million in 2012, $12.5 million in 2013 and $1,171.9 million in 2014. The Tranche D Term Loans mature in quarterly 0.25% installments from December 2010 to December 2013 with the remaining balance due in April 2014. The aggregate maturities of the Tranche D Term Loans outstanding as of December 27, 2009 are no payment in 2010, $4.4 million in 2011, $4.4 million in 2012, $4.4 million in 2013 and $429.1 million in 2014.

On April 2, 2007, as part of the Blackstone Transaction described in Note 1, we issued $325.0 million of 9.25% Senior Notes (the “Senior Notes”) due 2015, and $250.0 million of 10.625% Senior Subordinated Notes (the “Senior Subordinated Notes”) due 2017. On December 23, 2009, as part of the Birds Eye Foods Acquisition described in Note 3, we issued an additional $300.0 million of 9.25% Senior Notes due in 2015 (the “Additional Senior Notes”). The Senior Notes and the Additional Senior Notes are collectively referred to herein as the 9.25% Senior Notes. As described above, on August 17, 2010 the Company issued $400.0 million of 8.25% Senior Notes, due 2017 (the 8.25% Senior Notes) and utilized the proceeds to repay the Tranche C Term Loans.

The 9.25% Senior Notes and the 8.25% Senior Notes are general unsecured obligations of ours, effectively subordinated in right of payment to all of our existing and future senior secured indebtedness and guaranteed on a full, unconditional, joint and several basis by our wholly-owned domestic subsidiaries that guarantee our other indebtedness. The Senior Subordinated Notes are general unsecured obligations of ours, subordinated in right of payment to all of our existing and future senior indebtedness and guaranteed on a full, unconditional, joint and several basis by our wholly-owned domestic subsidiaries that guarantee our other indebtedness. See Note 17 of the Consolidated Financial Statements for Guarantor and Nonguarantor Financial Statements.

We may redeem some or all of the 9.25% Senior Notes at any time prior to April 1, 2011, some or all of the 8.25% Senior Notes at any time prior to September 1, 2013, and some or all of the Senior Subordinated Notes at any time prior to April 1, 2012, in each case at a price equal to 100% of the principal amount of notes redeemed plus the Applicable Premium as of, and accrued and unpaid interest to, the redemption date, subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date. The “Applicable Premium” is defined as the greater of (1) 1.0% of the principal amount of such note and (2) the excess, if any, of (a) the present value at such redemption date of (i) the redemption price of such 9.25% Senior Note at April 1, 2011 or such 8.25% Senior Note at September 1, 2013 or such Senior Subordinated Note at April 1, 2012, plus (ii) all required interest payments due on such 9.25% Senior Note through April 1, 2011 or such 8.25% Senior Note through September 1 2013 or such Senior Subordinated Note through April 1, 2012 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the Treasury Rate plus 50 basis points over (b) the principal amount of such note.

We may redeem the 9.25% Senior Notes, the 8.25% Senior Notes or the Senior Subordinated Notes at the redemption prices listed below, if redeemed during the twelve-month period beginning on April 1st (for the 9.25% Senior Notes and Senior Subordinated Notes ) or September 1st (for the 8.25% Senior Notes) of each of the years indicated below:

 

9.25% Senior Notes

   

8.25% Senior Notes

 

Year

   Percentage    

Year

   Percentage  

2011

     104.625   2013      106.188

2012

     102.313   2014      104.125

2013 and thereafter

     100.000   2015      102.063
     2016 and thereafter      100.000

 

Senior Subordinated Notes

 

Year

   Percentage  

2012

     105.313

2013

     103.542

2014

     101.771

2015 and thereafter

     100.000

 

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In addition, until September 1, 2013, we are to redeem up to 35% of the aggregate principal amount of the 8.25% Senior Notes at a redemption price equal to 100% of the aggregate principal amount thereof, plus a premium equal to the rate per annum on the 8.25% Senior Notes, as the case may be, plus accrued and unpaid interest and Additional Interest, if any, to the redemption date, subject to the right of holders of the 8.25% Senior Notes of record on the relevant record date to receive interest due on the relevant interest payment date, with the net cash proceeds received by us from one or more equity offerings; provided that (i) at least 50% of the aggregate principal amount of the 8.25% Senior Notes, as the case may be, originally issued under the applicable indenture remains outstanding immediately after the occurrence of each such redemption and (ii) each such redemption occurs within 90 days of the date of closing of each such equity offering.

In December 2007, we repurchased $51.0 million in aggregate principal amount of the 10.625% Senior Subordinated Notes at a discounted price of $44.2 million. We currently have outstanding $199.0 million in aggregate principal amount of Senior Subordinated Notes.

As market conditions warrant, we and our subsidiaries, affiliates or significant shareholders (including The Blackstone Group L.P. and its affiliates) may from time to time, in our or their sole discretion, purchase, repay, redeem or retire any of our outstanding debt or equity securities (including any publicly issued debt or equity securities), in privately negotiated or open market transactions, by tender offer or otherwise.

The estimated fair value of our long-term debt, including the current portion, as of September 26, 2010, is as follows:

 

Issue

   Recorded
Amount
     Fair
Value
 

Senior Secured Credit Facility - Term Loans

   $ 1,199.4       $ 1,160.4   

Senior Secured Credit Facility - Tranche D Term Loans

     442.3         442.3   

8.25% Senior Notes

     400.0         403.0   

9.25% Senior Notes

     625.0         645.3   

10.625% Senior Subordinated Notes

     199.0         211.0   
                 
   $ 2,865.7       $ 2,862.0   
                 

The fair value is based on the quoted market price for such notes and borrowing rates currently available to us for loans with similar terms and maturities.

 

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Covenant Compliance

The following is a discussion of the financial covenants contained in our debt agreements.

Senior Secured Credit Facility

Our Senior Secured Credit Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:

 

   

incur additional indebtedness and make guarantees;

 

   

create liens on assets;

 

   

engage in mergers or consolidations;

 

   

sell assets;

 

   

pay dividends and distributions or repurchase our capital stock;

 

   

make investments, loans and advances, including acquisitions;

 

   

repay the Senior Subordinated Notes or enter into certain amendments thereof; and

 

   

engage in certain transactions with affiliates.

The Senior Secured Credit Facility also contains certain customary affirmative covenants and events of default.

8.25% Senior Notes, 9.25% Senior Notes and Senior Subordinated Notes

Additionally, on April 2, 2007, we issued the Senior Notes and the Senior Subordinated Notes. On December 23, 2009 and August 17th 2010, we issued additional 9.25% and 8.25% Senior Notes. The Senior Notes are general unsecured obligations, effectively subordinated in right of payment to all of our existing and future senior secured indebtedness, and guaranteed on a full, unconditional, joint and several basis by our wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company. The Senior Subordinated Notes are general unsecured obligations, subordinated in right of payment to all of our existing and future senior indebtedness, and guaranteed on a full, unconditional, joint and several basis by our wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company.

The indentures governing the 8.25% Senior Notes, 9.25% Senior Notes and Senior Subordinated Notes limit our (and most or all of our subsidiaries’) ability to, subject to certain exceptions:

 

   

incur additional debt or issue certain preferred shares;

 

   

pay dividends on or make other distributions in respect of our capital stock or make other restricted payments;

 

   

make certain investments;

 

   

sell certain assets;

 

   

create liens on certain assets to secure debt;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

   

enter into certain transactions with our affiliates; and

 

   

designate our subsidiaries as unrestricted subsidiaries.

Subject to certain exceptions, the indentures governing the notes permit us and our restricted subsidiaries to incur additional indebtedness, including secured indebtedness.

Consolidated EBITDA

Pursuant to the terms of the Senior Secured Credit Facility, if at any time there are borrowings outstanding under the revolving credit facility in an aggregate amount greater than $10.0 million, we are required to maintain a ratio of consolidated total senior secured debt to Consolidated EBITDA (defined below) for the most recently concluded four consecutive fiscal quarters (the “Senior Secured Leverage Ratio”) less than a ratio starting at a maximum of 7.00:1 at September 30, 2007 and stepping down over time to 6.50 in 2008, 5.75 in 2009, 5.00 in 2010 and 4.00 in 2011 and thereafter. Consolidated total senior secured debt is defined under the Senior Secured Credit Facility as aggregate consolidated secured indebtedness of the Company less the aggregate amount of all unrestricted cash and cash equivalents. In addition, under the Senior Secured Credit Facility and the indentures governing the Senior Notes and Senior Subordinated Notes, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is tied to the Senior Secured Leverage Ratio, in the case of the Senior Secured Credit Facility, or to the ratio of Consolidated EBITDA to fixed charges for the most recently concluded four consecutive fiscal quarters or the Senior Secured Leverage Ratio, in the case of the Senior Notes and the Senior Subordinated Notes.

 

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Consolidated EBITDA is defined as earnings (loss) before interest expense, taxes, depreciation and amortization (“EBITDA”), further adjusted to exclude non-cash items, non-recurring items and other adjustment items permitted in calculating covenant compliance under the Senior Secured Credit Facility and the indentures governing the Senior Notes and Senior Subordinated Notes. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Consolidated EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our financial covenants.

EBITDA and Consolidated EBITDA do not represent net earnings or loss or cash flow from operations as those terms are defined by Generally Accepted Accounting Principles (“GAAP”) and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. In particular, the definitions of Consolidated EBITDA in the Senior Secured Credit Facility and the indentures allow us to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net earnings or loss. However, these are expenses that may recur, vary greatly and are difficult to predict. While EBITDA and Consolidated EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, they are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation.

Our ability to meet the covenants specified above in future periods will depend on events beyond our control, and we cannot assure you that we will meet those ratios. A breach of any of these covenants in the future could result in a default under, or an inability to undertake certain activities in compliance with, the Senior Secured Credit Facility and the indentures governing the Senior Notes and Senior Subordinated Notes, at which time the lenders could elect to declare all amounts outstanding under the Senior Secured Credit Facility to be immediately due and payable. Any such acceleration would also result in a default under the indentures governing the Senior Notes and Senior Subordinated Notes.

The following table provides a reconciliation from our net earnings (loss) to EBITDA and Consolidated EBITDA for the nine month periods ended September 26, 2010 and September 27, 2009 and the year ended December 27, 2009. The terms and related calculations are defined in the Senior Secured Credit Facility and the indentures governing the 8.25% Senior Notes, 9.25% Senior Notes and Senior Subordinated Notes.

 

     Nine Months Ended
September 26, 2010
    Nine Months Ended
September 27, 2009
     Year Ended
December 27,  2009
 

Net earnings

   $ 5,937      $ 10,818       $ 302,603   

Interest expense, net

     182,536        86,549         121,078   

Income tax expense (benefit)

     (1,746     22,384         (277,723

Depreciation and amortization expense

     58,213        48,004         65,468   
                         

EBITDA (unaudited)

   $ 244,940      $ 167,755       $ 211,426   
                         

Acquired EBITDA - Birds Eye Foods Acquisition (1)

     —          92,843         142,268   

Non-cash items (a)

     38,256        2,142         4,738   

Non-recurring items (b)

     23,656        5,226         29,835   

Other adjustment items (c)

     6,268        17,112         26,673   

Net cost savings projected to be realized as a result of initiatives taken, including acquisition synergies (d)

     20,114        45,938         57,188   
                         

Consolidated EBITDA (unaudited)

   $ 333,234      $ 331,016       $ 472,128   
                         

Last twelve months Consolidated EBITDA (unaudited)

   $ 474,346        
             

 

(1) In accordance with our Senior Secured Credit Facility and the indentures governing the Senior Notes and Senior Subordinated Notes, we have included an adjustment for the Acquired EBITDA for Birds Eye Foods for the period prior to its acquisition, calculated consistent with the definition of Consolidated EBITDA.

 

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(a) Non-cash items are comprised of the following:

 

     Nine Months Ended      Nine Months Ended     Year Ended  
     September 26, 2010      September 27, 2009     December 27, 2009  

Non-cash compensation charges (1)

   $ 612       $ 2,398      $ 3,190   

Unrealized losses or (gains) resulting from hedging activities (2)

     868         (256     (277

Impairment charges or asset write-offs (3)

     —           —          1,300   

Effects of adjustments related to the application of purchase accounting (4)

     36,776         —          525   
                         

Total non-cash items

   $ 38,256       $ 2,142      $ 4,738   
                         

 

(1) For fiscal 2009 and the nine months ended September 26, 2010 and September 27, 2009, represents non-cash compensation charges related to the granting of equity awards.
(2) For fiscal 2009 and the nine months ended September 26, 2010 and September 27, 2009, represents non-cash gains and losses resulting from mark-to-market adjustments of obligations under natural gas and diesel fuel contracts for 2009 and 2010, and heating oil contracts for 2009 only.
(3) For fiscal 2009, represents an impairment charge for the Swanson tradename.
(4) For fiscal 2009 and the nine months ended September 26, 2010 represents expense related to the write-up to fair market value of inventories acquired as a result of the Birds Eye Foods Acquisition.

 

(b) Non-recurring items are comprised of the following:

 

     Nine Months Ended      Nine Months Ended      Year Ended  
     September 26, 2010      September 27, 2009      December 27, 2009  

Expenses in connection with an acquisition or other non-recurring merger costs (1)

   $ 437       $ 1,024       $ 25,238   

Restructuring charges, integration costs and other business optimization expenses (2)

     22,125         899         986   

Employee severance and recruiting (3)

     1,094         3,303         3,611   
                          

Total non-recurring items

   $ 23,656       $ 5,226       $ 29,835   
                          

 

(1) For fiscal 2009 and the nine months ended September 26, 2010 and September 27, 2009, primarily represents costs related to the Birds Eye Foods Acquisition as well as other expenses related to due diligence investigations.
(2) For the nine months ended September 26, 2010, primarily represents employee termination benefits and lease termination costs related to the announced closing of the Rochester, NY office ($12,221) and integration costs related to the Birds Eye Foods Acquisition. For fiscal 2009 and the nine months ended September 27, 2009, represents consultant expense incurred to execute yield and labor savings in our plants.
(3) For fiscal 2009 and the nine months ended September 27, 2009, principally represents severance and recruiting costs related to the change in the CEO. For the nine months ended September 26, 2010, represents severance costs paid, or to be paid, to terminated employees.

 

(c) Other adjustment items are comprised of the following:

 

     Nine Months Ended      Nine Months Ended      Year Ended  
     September 26, 2010      September 27, 2009      December 27, 2009  

Management, monitoring, consulting and advisory fees (1)

   $ 3,430       $ 1,916       $ 2,540   

Variable product contribution principally from Steamfresh complete bagged meals no longer being offered (2)

     2,838         15,196         24,133   
                          

Total other adjustments

   $ 6,268       $ 17,112       $ 26,673   
                          

 

(1) For fiscal 2009 and the nine months ended September 26, 2010 and September 27, 2009, represents management/advisory fees and expenses paid to Blackstone.
(2) For fiscal 2009 and the nine months ended September 26, 2010 and September 27, 2009, represents the variable contribution loss principally from Steamfresh complete bagged meals and others which will no longer be offered by Pinnacle management following the Birds Eye Foods Acquisition and the variable contribution loss applicable to a discontinued contract in the Birds Eye Foods Industrial-Other segment.

 

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(d) Net cost savings projected to be realized as a result of initiatives taken:

 

     Nine Months Ended      Nine Months Ended      Year Ended  
     September 26, 2010      September 27, 2009      December 27, 2009  

Productivity initiatives in our supply chain (1)

   $ —         $ 12,188       $ 12,188   

Estimated net cost savings associated with the Birds Eye Foods Acquisition (2)

     20,114         33,750         45,000   
                          

Total net cost savings projected to be realized as a result of initiatives taken

   $ 20,114       $ 45,938       $ 57,188   
                          

 

(1) For fiscal 2009 and the nine months ended September 26, 2010 and September 27, 2009, represents net cost savings projected to be realized as a result of specified actions taken or initiated, net of the amount of actual benefits realized. Such savings primarily relate to productivity initiatives in our manufacturing facilities, our freight and distribution systems, and our purchasing programs.
(2) For fiscal 2009 and the nine months ended September 26, 2010 and September 27, 2009, represents the estimated reduction in operating costs that we anticipate will result from the combination of Pinnacle and Birds Eye Foods as a result of eliminating duplicate overhead functions and overlapping operating expenses, leveraging supplier relationships and combined purchasing power to obtain procurement savings on raw materials and packaging, and optimizing and rationalizing overlapping frozen warehouse and distribution networks less what has been realized in the first six months.

Our covenant requirements and actual ratios for the twelve months ended September 26, 2010 are as follows:

 

     Covenant
Requirement
     Actual Ratio  

Senior Secured Credit Facility

     

Senior Secured Leverage Ratio (1)

     5.00:1         3.24   

Total Leverage Ratio (2)

     Not applicable         5.85   

Senior Notes and Senior Subordinated Notes (3)

     

Minimum Consolidated EBITDA to fixed charges ratio required to incur additional debt pursuant to ratio provisions (4)

     2.00:1         2.31   

 

(1) Pursuant to the terms of the Senior Secured Credit Facility, if at any time there are borrowings outstanding under the Revolving Credit Facility in an aggregate amount greater than $10.0 million, we are required to maintain a consolidated total senior secured debt to Consolidated EBITDA ratio for the most recently concluded four consecutive fiscal quarters (the “Senior Secured Leverage Ratio”) less than a ratio starting at a maximum of 7.00:1 at September 30, 2007 and stepping down over time to 4.00:1 on March 31, 2011. Consolidated total senior secured debt is defined as our aggregate consolidated secured indebtedness less the aggregate amount of all unrestricted cash and cash equivalents.
(2) The Total Leverage Ratio is not a financial covenant but is used to determine the applicable rate under the Senior Secured Credit Facility. The Total Leverage Ratio is calculated by dividing consolidated total debt less the aggregate amount of all unrestricted cash and cash equivalents by Consolidated EBITDA.
(3) Our ability to incur additional debt and make certain restricted payments under the indentures governing the Senior Notes and Senior Subordinated Notes, subject to specified exceptions, is tied to a Consolidated EBITDA to fixed charges ratio of at least 2.0:1.
(4) Fixed charges is defined in the indentures governing the Senior Notes and Senior Subordinated Notes as (i) consolidated interest expense (excluding specified items) plus consolidated capitalized interest less consolidated interest income, plus (ii) cash dividends and distributions paid on preferred stock or disqualified stock.

 

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INFLATION

Prior to 2005, inflation did not have a significant effect on us as we have been successful in mitigating the effects of inflation with cost reduction and productivity programs. Beginning 2005 and continuing into 2008, we experienced higher energy and commodity costs in production and higher fuel surcharges for product delivery. Inflation was less pronounced in 2009 and to date in 2010. Although we have no such expectation, severe increases in inflation could have an adverse impact on our business, financial condition and results of operations.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued the authoritative guidance for variable interest entities. This guidance clarifies the characteristics that identify a variable interest entity (VIE) and changes how a reporting entity identifies a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards calculation to a qualitative approach based on which variable interest holder has controlling financial interest and the ability to direct the most significant activities that impact the VIE’s economic performance. This guidance requires the primary beneficiary assessment to be performed on a continuous basis. It also requires additional disclosures about an entity’s involvement with VIE, restrictions on the VIE’s assets and liabilities that are included in the reporting entity’s consolidated balance sheet, significant risk exposures due to the entity’s involvement with the VIE, and how its involvement with a VIE impacts the reporting entity’s consolidated financial statements. The authoritative guidance for variable interest entities is effective for fiscal years beginning after November 15, 2009. We adopted this guidance in the first quarter of 2010 and it did not have a material impact on our consolidated financial position or results of operations.

In January of 2010, the FASB updated the authoritative guidance for fair value disclosure. The updated guidance requires new disclosures for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and activity within Level 3 of the fair value hierarchy. The update provides amendments to the level of disaggregation that an entity should provide in each class of assets and liabilities, as well as disclosures about the inputs and valuation techniques used to measure fair value. The updated guidance is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted this guidance in the first quarter of 2010 and it did not have a material impact on our consolidated financial position or results of operations.

 

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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposure to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. The primary risks managed by using derivative instruments are interest rate risk, foreign currency exchange risk and commodity price risk. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates, foreign exchange rates or commodity prices.

We manage interest rate risk based on the varying circumstances of anticipated borrowings and existing variable and fixed rate debt, including our revolving line of credit. Examples of interest rate management strategies include capping interest rates using targeted interest cost benchmarks, hedging portions of the total amount of debt, or hedging a period of months and not always hedging to maturity, and at other times locking in rates to fix interests costs.

Certain parts of our foreign operations in Canada expose us to fluctuations in foreign exchange rates. Our goal is to reduce our exposure to such foreign exchange risks on our foreign currency cash flows and fair value fluctuations on recognized foreign currency denominated assets, liabilities and unrecognized firm commitments to acceptable levels primarily through the use of foreign exchange-related derivative financial instruments. We enter into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of our functional currency, the U.S. dollar.

We purchase raw materials in quantities expected to be used in a reasonable period of time in the normal course of business. We generally enter into agreements for either spot market delivery or forward delivery. The prices paid in the forward delivery contracts are generally fixed, but may also be variable within a capped or collared price range. Forward derivative contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in our manufacturing process.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges in accordance with the authoritative guidance for derivative and hedge accounting involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During the three and nine months ended September 26, 2010 and the three and nine months ended September 27, 2009, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

As of September 26, 2010, we had the following interest rate swaps (in aggregate) that were designated as cash flow hedges of interest rate risk:

 

Product

   Number of
Instruments
   Notional Amount     

Fixed Rate Range

  

Index

  

Trade Dates

  

Maturity Dates

Interest Rate Swaps

   12    $ 941.6 million       1.06% - 3.33%    USD-LIBOR-BBA    Oct 2008 - Aug 2010    Jan 2011 - July 2012

 

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According to the authoritative guidance for derivative and hedge accounting, the effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated other comprehensive (loss) income (“AOCI”) on the Consolidated Balance Sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to Interest expense as interest payments are made on our variable-rate debt.

Due to the counterparty bank declaring bankruptcy in October 2008, we discontinued prospectively the hedge accounting on our interest rate derivatives with Lehman Brothers Specialty Financing on the bankruptcy date as those hedging relationships no longer met the authoritative guidance for derivative and hedge accounting. We terminated these positions during the fourth quarter of 2008. We continue to report the net gain or loss related to the discontinued cash flow hedge in AOCI which is expected to be reclassified into earnings during the original contractual terms of the derivative agreements as the hedged interest payments are expected to occur as forecasted. For the three and nine months ended September 26, 2010, 2010, $0.7 million and $2.6 million, respectively, was reclassified as an increase to Interest expense relating to the terminated hedges.

On August 17, 2010, we prepaid a portion of its existing term loan facilities that were being hedged with our two interest rate caps that mature in January 2011. As a result, we discontinued prospective hedge accounting on the interest rate caps and the net loss in accumulated other comprehensive income was reclassified to interest expense as the hedged transactions were no longer probable to occur. The amounts recorded to interest expense were a loss of $0.2 million. Prospective changes in the values of the interest rate cap hedge contracts will be recorded directly into Interest expense, net in the Consolidated Statements of Operations.

On August 17, 2010 we amended four of our existing forward starting interest rate swaps due to a change in the expected terms of the hedged forecasted transactions. As a result, we prospectively discontinued hedge accounting on the original interest rate swap agreements. Simultaneously, we designated the amended interest rate swap agreements into new cash flow hedging relationships. We continue to report the net loss related to the discontinued cash flow hedges in AOCI, which is being reclassified into earnings as the original hedged forecasted transactions affect earnings. Due to the off-market nature of the amended interest rate swap agreements at the date of designation, we anticipate the potential for hedge ineffectiveness However, such ineffectiveness is not expected to be significant.

During the next twelve months, we estimate that an additional $22.7 million will be reclassified as an increase to Interest expense relating to both active and terminated hedges.

Cash Flow Hedges of Foreign Exchange Risk

Our operations in Canada have exposed us to changes in the US Dollar – Canadian Dollar (USD-CAD) foreign exchange rate. From time to time, our Canadian subsidiary purchases inventory denominated in US Dollars (USD), a currency other than its functional currency. Our subsidiary sells that inventory in Canadian dollars. Our subsidiary uses currency forward and collar agreements to manage our exposure to fluctuations in the USD-CAD exchange rate. Currency forward agreements involve fixing the USD-CAD exchange rate for delivery of a specified amount of foreign currency on a specified date. Currency collar agreements involve the sale of Canadian Dollar (CAD) currency in exchange for receiving US dollars if exchange rates rise above an agreed upon rate and sale of USD currency in exchange for receiving CAD dollars if exchange rates fall below an agreed upon rate at specified dates.

As of September 26, 2010, we had the following foreign currency exchange contracts (in aggregate) that were designated as cash flow hedges of foreign exchange risk:

 

Product

   Number of
Instruments
   Notional Sold in
Aggregate
     Notional Purchased in
Aggregate
     USD to CAD
Exchange Rates
   Trade Date    Maturity Dates

CAD Forward

   33    $ 62.6 million CAD       $ 59.5 million USD       1.027-1.175    May 2009 - Sep 2010    Jul 2010 - Dec 2011

CAD Collar

   3    $ 3.0 million CAD       $ 2.7 million USD       1.13    May 2009    Oct 2010 - Dec 2010

 

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According to the authoritative guidance for derivative and hedge accounting, the effective portion of changes in the fair value of derivatives designated that qualify as cash flow hedges of foreign exchange risk is recorded in AOCI on the Consolidated Balance Sheet and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portions of the change in fair value of the derivative, as well as amounts excluded from the assessment of hedge effectiveness, are recognized directly in Cost of products sold in the Consolidated Statements of Operations.

Non-designated Hedges of Commodity Risk

Derivatives not designated as hedges are not speculative and are used to manage our exposure to commodity price risk but do not meet the authoritative guidance for derivative and hedge accounting. From time to time, we enter into commodity forward contracts to fix the price of natural gas, diesel fuel and heating oil purchases at a future delivery date. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in Cost of products sold in the Consolidated Statements of Operations.

We previously entered into interest rate cap hedge contracts to add stability to interest expense and to manage our exposure to interest rate movements. In connection with the refinancing of the Tranche C Term Loans, these contracts have been de-designated as of August 17, 2010. Changes in the values of the interest rate cap hedge contracts are recorded directly into Interest expense in the Consolidated Statements of Operations.

As of September 26, 2010, we had the following natural gas swaps (in aggregate), diesel fuel (in aggregate) and interest rate caps (in aggregate) that were not designated in qualifying hedging relationships:

 

Product

   Number of
Instruments
   Notional Amount     

Price/Index

  

Trade Dates

  

Maturity Dates

Natural Gas Swap

   2      252,537 MMBTU’s       $4.70 - $5.87 per MMBTU    Jan 2010 - June 2010    Oct 2010

Diesel Fuel Swap

   6      7,061,719 Gallons       $2.46 - $3.14 per Gallon    Feb 2010 - Aug 2010    Oct 2010 - Mar 2011

Interest Rate Caps

   2    $ 800.0 million       2.5% USD-LIBOR-BBA    Dec 2009    Jan 2011

 

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The table below presents the fair value of our derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of September 26, 2010 and December 27, 2009.

 

    

Tabular Disclosure of Fair Values of Derivative Instruments

 
    

Asset Derivatives

   

Liability Derivatives

 
    

Balance Sheet Location

   Fair Value
As of
September 26,
2010
   

Balance Sheet Location

   Fair Value
As of
September 26,
2010
 

Derivatives designated as hedging instruments

          

Interest Rate Contracts

      $ —        Accrued liabilities    $ 7.4   
        —        Other long-term liabilities      24.0   

Foreign Exchange Contracts

   Other current assets      —        Accrued liabilities      1.2   
   Other assets, net      —        Other long-term liabilities      0.1   
                      

Total derivatives designated as hedging instruments

      $ —           $ 32.7   
                      

Derivatives not designated as hedging instruments

          

Natural Gas Contracts

      $ —        Accrued liabilities    $ 0.1   

Diesel Fuel Contracts

   Other current assets      0.3           —     
                      

Total derivatives not designated as hedging instruments

      $ 0.3         $ 0.1   
                      
    

Balance Sheet Location

   Fair Value
As of
December 27,
2009
   

Balance Sheet Location

   Fair Value
As of
December 27,
2009
 

Derivatives designated as hedging instruments

          

Interest Rate Contracts

   Other assets, net    $ 0.2      Other long-term liabilities    $ 21.2   

Foreign Exchange Contracts

        —        Accrued liabilities      2.5   
                      

Total derivatives designated as hedging instruments

      $ 0.2         $ 23.7   
                      

Derivatives not designated as hedging instruments

          

Natural Gas Contracts

      $ —        Accrued liabilities    $ 0.1   

Heating Oil Contracts

   Other current assets      —             —     

Diesel Fuel Contracts

   Other current assets      0.9           —     
                      

Total derivatives not designated as hedging instruments

      $ 0.9         $ 0.1   
                      

 

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The table below presents the effect of our derivative financial instruments on the Consolidated Statements of Operations and Accumulated other comprehensive (loss) income as of the three and nine months ending September 26, 2010 and the three and nine months ended September 27, 2009.

 

Tabular Disclosure of the Effect of Derivative Instruments  

Gain/(Loss)

                            

Derivatives in Cash Flow Hedging Relationships

   Recognized
in AOCI on
Derivative
(Effective
Portion)
   

Effective portion
reclassified from AOCI
to:

   Reclassified
from AOCI
into Earnings
(Effective
Portion)
   

Ineffective portion
reclassified from AOCI
to:

   Recognized
in Earnings
on Derivative
(Ineffective
Portion)
 

Interest Rate Contracts

   $ (6.6   Interest expense    $ (4.9   Interest expense    $ (0.6

Foreign Exchange Contracts

     (0.3   Cost of products sold      (0.8   Cost of products sold      (0.2
                              

Three months ended September 26, 2010

   $ (6.9      $ (5.7      $ (0.8
                              

Interest Rate Contracts

   $ (23.2   Interest expense    $ (15.4   Interest expense    $ (0.6

Foreign Exchange Contracts

     (0.8   Cost of products sold      (2.1   Cost of products sold      (0.2
                              

Nine months ended September 26, 2010

   $ (24.0      $ (17.5      $ (0.8
                              

Interest Rate Contracts

   $ (8.9   Interest expense    $ (4.6   Interest expense    $ —     

Foreign Exchange Contracts

     (2.0   Cost of products sold      0.1      Cost of products sold      —     
                              

Three months ended September 27, 2009

   $ (10.9      $ (4.5      $ —     
                              

Interest Rate Contracts

   $ (18.6   Interest expense    $ (13.9   Interest expense    $ —     

Foreign Exchange Contracts

     (3.2   Cost of products sold      2.2      Cost of products sold      —     
                              

Nine months ended September 27, 2009

   $ (21.8      $ (11.7      $ —     
                              

Derivatives Not Designated as Hedging Instruments

   

Recognized in Earnings
on:

   Recognized in
Earnings on
Derivative
            

Natural Gas Contracts

     Cost of products sold    $ (0.1     

Diesel Contracts

     Cost of products sold      0.4        
                  

Three months ended September 26, 2010

        $ 0.3        
                  

Natural Gas Contracts

     Cost of products sold    $ (0.5     

Diesel Contracts

     Cost of products sold      (0.6     
                  

Nine months ended September 26, 2010

        $ (1.1     
                  

Natural Gas Contracts

     Cost of products sold    $ (0.1     

Heating Oil Swaps

     Cost of products sold      —          
                  

Three months ended September 27, 2009

        $ (0.1     
                  

Natural Gas Contracts

     Cost of products sold    $ (1.3     

Heating Oil Swaps

     Cost of products sold      0.1        
                  

Nine months ended September 27, 2009

        $ (1.2     
                  

 

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Credit-risk-related Contingent Features

We have agreements with certain counterparties that contain a provision whereby we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of September 26, 2010, we have not posted any collateral related to these agreements. If we had breached this provision at September 26, 2010, we could have been required to settle our obligations under the agreements at their termination value. The table below summarizes the aggregate fair values of those derivatives that contain credit risk contingent features that are in a net liability position as of September 26, 2010 and December 27, 2009.

 

                         September 26, 2010  
Asset/(Liability)         (in millions)                     

Counterparty

  

Contract

Type

   Termination
Value
    Non-Performance
Risk Adjustment
     Accrued Interest     Fair Value
(excluding
interest)
 

Barclays

   Interest Rate Contracts    $ (31.5   $ 0.9       $ (1.2   $ (29.4
   Foreign Exchange Contracts      (1.2     —             (1.2
   Natural Gas Contracts      (0.1     —             (0.1
   Diesel Fuel Contracts      0.3        —             0.3   

Credit Suisse

   Interest Rate Contracts      (2.2     0.1         —          (2.1
                                    

Total

      $ (34.7   $ 1.0       $ (1.2   $ (32.5
                                    
                         December 27, 2009  

Counterparty

  

Contract

Type

   Termination
Value
    Non-Performance
Risk Adjustment
     Accrued Interest     Fair Value
(excluding
interest)
 

Barclays

   Interest Rate Contracts    $ (23.1   $ 1.0       $ (1.0   $ (21.1
  

Foreign Exchange Contracts

     (2.6     0.1           (2.5
                                    

Total

      $ (25.7   $ 1.1       $ (1.0   $ (23.6
                                    

 

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ITEM 4: CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in our reports that we file or submit under the Exchange Act (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, with the participation of our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 26, 2010. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective at a level of reasonable assurance.

In addition, there was no change in our internal control over financial reporting (as defined in Rule 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended September 26, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1: LEGAL PROCEEDINGS

Lehman Brothers Special Financing

On June 4, 2010 Lehman Brothers Special Financing (LBSF) initiated a claim against the Company in LBSF’s bankruptcy proceeding for an additional payment from the Company of $19.7 million, related to certain derivative contracts which the Company had earlier terminated due to LBSF’s default as a result of its’ bankruptcy filing in 2008. In accordance with the terms of the contracts, following LBSF’s bankruptcy filing, the Company terminated the contracts and paid LBSF approximately $22.3 million. The Company believes that the claim is without merit and intends to vigorously defend against it.

Commitment of $3.5 Million Capital Expenditure

In working to resolve an environmental wastewater investigation by the State of Michigan Department of Natural Resources and Environment (MDNRE) at the Company’s Birds Eye Foods Fennville MI production facility, on July 20, 2010, the Company and the MDNRE reached an agreement (“Administrative Consent Order” or “ACO”). Under the terms of the ACO, Birds Eye Foods will construct a new $3.5 million wastewater treatment system at the facility and contribute a minimum of $70 thousand to the hookup of the City’s water supply extension to affected residents.

 

ITEM 1A: RISK FACTORS

There have been no material changes from risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 27, 2009.

 

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

 

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None

 

ITEM 4: RESERVED TO THE NEW VOTING REPORTING RULES

None

 

ITEM 5: OTHER INFORMATION

None

 

ITEM 6: EXHIBITS

 

Exhibit
Number

  

Description of exhibit

  2.1

   Agreement and Plan of Merger, dated as of February 10, 2007, by and among Crunch Holding Corp., Peak Holdings LLC and Peak Acquisition Corp. (previously filed as Exhibit 2.1 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  2.2

   Agreement and Plan of Reorganization and Merger, by and between Aurora Foods Inc. and Crunch Equity Holding, LLC, dated as of November 25, 2003 (previously filed as Exhibit 2.1 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference).

  2.3

   Amendment No. 1, dated January 8, 2004, to the Agreement and Plan of Reorganization and Merger, by and between Aurora Foods Inc. and Crunch Equity Holding, LLC, dated as of November 25, 2003 (previously filed as Exhibit 2.2 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference).

 

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  2.4

   Agreement and Plan of Merger, dated March 19, 2004, by and between Aurora Foods, Inc. and Pinnacle Foods Holding Corporation (previously filed as Exhibit 2.3 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference).

  2.5

   Asset Purchase Agreement, dated March 1, 2006, by and between The Dial Corporation and Pinnacle Foods Groups Inc. (previously filed as Exhibit 10.1 to the Current Report on Form 8-K of Pinnacle Foods Group Inc. filed with the SEC on March 1, 2006 (Commission File Number: 333-118390), and incorporated herein by reference).

  2.6

   Stock Purchase Agreement, dated November 18, 2009, by and between Birds Eye Holdings, LLC, Birds Eye Foods, Inc. and Pinnacle Foods Group LLC (previously filed as Exhibit 2.1 to the Current Report on Form 8-K of Pinnacle Foods Finance LLC filed with the SEC on November 24, 2009 (Commission File Number: 333-118390), and incorporated herein by reference).

  3.1

   Pinnacle Foods Finance LLC Certificate of Formation (previously filed as Exhibit 3.1 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  3.2

   Pinnacle Foods Finance LLC Amended and Restated Limited Liability Company Agreement, dated as of April 2, 2007 (previously filed as Exhibit 3.2 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  3.3

   Pinnacle Foods Finance Corp. Certificate of Incorporation (previously filed as Exhibit 3.3 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  3.4

   Pinnacle Foods Finance Corp. Bylaws (previously filed as Exhibit 3.4 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  3.5

   Pinnacle Foods Group LLC Certificate of Formation (previously filed as Exhibit 3.5 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  3.6

   Pinnacle Foods Group LLC Limited Liability Company Agreement (previously filed as Exhibit 3.6 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  3.7

   Pinnacle Foods International Corp. Certificate of Incorporation. (previously filed as Exhibit 3.7 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  3.8

   Pinnacle Foods International Corp. Bylaws. (previously filed as Exhibit 3.8 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  3.9

   State of Delaware Certificate of Conversion, dated September 25, 2007, converting Pinnacle Foods Group Inc. from a Corporation to a Limited Liability Company (previously filed as Exhibit 3.9 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  4.1

   Senior Notes Indenture, dated as of April 2, 2007, among the Issuers, the Guarantors and the Trustee (previously filed as Exhibit 4.1 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  4.2

   Senior Subordinated Notes Indenture, dated as of April 2, 2007, among the Issuers, the Guarantors and the Trustee (previously filed as Exhibit 4.2 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

 

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  4.3

   Registrations Rights Agreement, dated as of April 2, 2007, among the Issuers, the Guarantors and Lehman Brothers Inc. and Goldman, Sachs & Co. (previously filed as Exhibit 4.3 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  4.4

   Form of Rule 144A Global Note, 9.25% Senior Notes due 2015 (previously filed as Exhibit 4.4 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  4.5

   Form of Regulation S Global Note, 9.25% Senior Notes due 2015 (previously filed as Exhibit 4.5 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  4.6

   Form of Rule 144A Global Note, 10.625% Senior Subordinated Notes due 2017 (previously filed as Exhibit 4.6 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  4.7

   Form of Regulation S Global Note, 10.625% Senior Subordinated Notes due 2017 (previously filed as Exhibit 4.7 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  4.8

   Credit Agreement, dated as of April 2, 2007, among Peak Finance LLC (to be merged with and into Pinnacle Foods Finance LLC), Peak Finance Holdings LLC, Lehman Commercial Paper Inc., Goldman Sachs Credit Partners L.P. and other lenders party hereto (previously filed as Exhibit 4.8 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  4.9

   Security Agreement, dated as of April 2, 2007, among Peak Finance LLC (to be merged with and into Pinnacle Foods Finance LLC), Peak Finance Holdings LLC, Certain Subsidiaries of Borrower and Holdings identified herein and Lehman Commercial Paper Inc. (previously filed as Exhibit 4.9 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  4.10

   Guaranty, dated as of April 2, 2007, among Peak Finance Holdings LLC, Certain Subsidiaries of Borrower and Holdings identified herein and Lehman Commercial Paper Inc. (previously filed as Exhibit 4.10 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  4.11

   Intellectual Property Security Agreement, dated as of April 2, 2007, among Peak Finance LLC (to be merged with and into Pinnacle Foods Finance LLC), Peak Finance Holdings LLC, Certain Subsidiaries of Borrower and Holdings identified herein and Lehman Commercial Paper Inc. (previously filed as Exhibit 4.11 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

  4.12

   Supplemental Senior Notes Indenture, dated as of November 18, 2009, by and among Birds Eye Holdings, Inc., Birds Eye Group, Inc., Kennedy Endeavors Incorporated, Seasonal Employers, Inc., BEMSA Holding, Inc., GLK Holdings, Inc., GLK, LLC, Rochester Holdco, LLC and Wilmington Trust Company, (previously filed as Exhibit 4.1 to the Current Report on Form 8-K of Pinnacle Foods Finance LLC filed with the SEC on December 24, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

  4.13

   Form of 9.25% Senior Notes due 2015 (previously filed as Exhibit 4.2 to the Current Report on Form 8-K of Pinnacle Foods Finance LLC filed with the SEC on December 24, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

  4.14

   Registrations Rights Agreement, dated as of December 23, 2009, by and among Pinnacle Foods Finance LLC, Pinnacle Foods Finance Corp., the guarantors and Credit Suisse Securities (USA) LLC, Banc of America Securities LLC and Barclays Capital Inc. as the representatives of the initial purchasers (previously filed as Exhibit 4.3 to the Current Report on Form 8-K of Pinnacle Foods Finance LLC filed with the SEC on December 24, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

 

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  4.15

   Senior Notes Indenture, dated as of August 17, 2010, among the Issuers, the Guarantors and the Trustee. (previously filed as Exhibit 4.2 to the Registration Statement on Form S-4 filed with the SEC on October 5, 2010 (Commission File Number: 333-148297), and incorporated herein by reference).

  4.16

   Registration Rights Agreement, dated as of August 17, 2010, by and among Pinnacle Foods Finance LLC, Pinnacle Foods Finance Corp., the guarantors and Barclays Capital Inc., Credit Suisse Securities (USA) LLC, and Banc of America Securities LLC as the representatives of the initial purchasers. (previously filed as Exhibit 4.2 to the Registration Statement on Form S-4 filed with the SEC on October 5, 2010 (Commission File Number: 333-148297), and incorporated herein by reference).

10.1

   Debt commitment letter entered into by Pinnacle Foods Finance LLC with Bank of America, N.A., Banc of America Bridge LLC, Banc of America Securities LLC, Barclays Capital, the investment banking division of Barclays Bank PLC, Credit Suisse AG, Credit Suisse Securities (USA) LLC, HSBC Bank USA, National Association, HSBC Securities (USA) Inc., MIHI LLC and Macquarie Capital (USA) Inc., dated November 18, 2009 (previously filed as Exhibit 10.1 to the Current Report on Form 8-K of Pinnacle Foods Finance LLC filed with the SEC on November 24, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

10.3 +

   Employment Agreement, dated April 2, 2007 (Jeffrey P. Ansell) (previously filed as Exhibit 10.3 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

10.4 +

   Employment Agreement, dated April 2, 2007 (Craig Steeneck) (previously filed as Exhibit 10.4 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

10.5 +

   Director Service Agreement, dated April 2, 2007 (Roger Deromedi) (previously filed as Exhibit 10.5 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

10.6

   Transaction and Advisory Fee Agreement, dated as of April 2, 2007, between Peak Finance LLC and Blackstone Management Partners V L.L.C. (previously filed as Exhibit 10.6 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

10.7

   Trademark License Agreement by and between The Dial Corporation and Conagra, Inc., dated July 1, 1995 (previously filed as Exhibit 10.33 to the Annual Report on Form 10-K of Pinnacle Foods Group Inc. for the fiscal year ended December 25, 2005 (Commission File Number: 333-118390), and incorporated herein by reference).

10.8

   Tax Sharing Agreement, dated as of November 25, 2003, by and among Crunch Holding Corp., Pinnacle Foods Holding Corporation, Pinnacle Foods Corporation, Pinnacle Foods Management Corporation, Pinnacle Foods Brands Corporation, PF Sales (N. Central Region) Corp., PF Sales, LLC, PF Distribution, LLC, PF Standards Corporation, Pinnacle Foods International Corp., Peak Finance Holdings LLC, Pinnacle Foods Finance Corp., Pinnacle Foods Finance LLC and Pinnacle Foods Group LLC (previously filed as Exhibit 10.8 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

10.9

   Lease, dated May 23, 2001, between Brandywine Operating Partnership, L.P. and Pinnacle Foods Corporation (Cherry Hill, New Jersey) (previously filed as Exhibit 10.25 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference).

10.10

   Lease, dated August 10, 2001, between 485 Properties, LLC and Pinnacle Foods Corporation (Mountain Lakes, New Jersey); Amendment No. 1, dated November 23, 2001; Amendment No. 2, dated October 16, 2003 (previously filed as Exhibit 10.26 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference).

 

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10.11

   Swanson Trademark License Agreement (U.S.) by and between CSC Brands, Inc. and Vlasic International Brands Inc., dated as of March 24, 1998 (previously filed as Exhibit 10.27 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-1183900), and incorporated herein by reference).

10.12

   Swanson Trademark License Agreement (Non-U.S.) by and between Campbell Soup Company and Vlasic International Brands Inc., dated as of March 26, 1998 (previously filed as Exhibit 10.28 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference).

10.13

   Technology Sharing Agreement by and between Campbell Soup Company and Vlasic Foods International Inc., dated as of March 26, 1998 (previously filed as Exhibit 10.29 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference).

10.14

   Amendment to Lease Agreement, dated February 10, 2007 (previously filed as Exhibit 10.1 to the Current Report on Form 8-K of Pinnacle Foods Group Inc. filed with the SEC on February 15, 2007 (Commission File Number: 333-118390), and incorporated herein by reference).

10.15

   Securityholders Agreement, dated as of April 2, 2007, among Peak Holdings LLC and the other parties hereto (previously filed as Exhibit 10.15 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

10.16 +

   Peak Holdings LLC 2007 Unit Plan, effective as of April 2, 2007 (previously filed as Exhibit 10.16 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

10.17 +

   Peak Holdings LLC Form of Award Management Unit Subscription Agreement (previously filed as Exhibit 10.17 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

10.18

   Securityholders Agreement, dated as of September 21, 2007 among Crunch Holding Corp. and the other parties hereto (previously filed as Exhibit 10.18 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

10.19 +

   Crunch Holding Corp. 2007 Stock Incentive Plan, effective as of August 8, 2007 (previously filed as Exhibit 10.19 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

10.20 +

   Crunch Holding Corp. 2007 Stock Incentive Plan Form of Nonqualified Stock Option Agreement (previously filed as Exhibit 10.20 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

10.21

   Trademark License Agreement, dated as of July 9, 1996, by and between The Quaker Oats Company, The Quaker Oats Company of Canada Limited and Van de Kamp’s, Inc. (previously filed as Exhibit 10.21 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference).

10.22 +

   Enhanced Target Annual Bonus letter, dated June 11, 2007 (Craig Steeneck) (previously filed as Exhibit 10.22 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

10.23 +

   Supplemental Peak Holdings LLC Management Unit Subscription Agreement, dated June 11, 2007 (Craig Steeneck) (previously filed as Exhibit 10.23 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

10.24 +

   Modification of the Enhanced Target Annual Bonus letter, dated February 27, 2009 (Craig Steeneck) (previously filed as Exhibit 10.24 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

 

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10.25 +

   Modification of the Supplemental Peak Holdings LLC Management Unit Subscription Agreement, dated February 27, 2009 (Craig Steeneck) (previously filed as Exhibit 10.25 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

10.26 +

   Modification of the Peak Holdings LLC Form of Award Management Unit Subscription Agreement (previously filed as Exhibit 10.26 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

10.27 +

   Modification of the Crunch Holding Corp. 2007 Stock Incentive Plan Form of Nonqualified Stock Option Agreement (previously filed as Exhibit 10.27 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

10.28 +

   Employment offer letter, dated December 11, 2003 (Chris L. Kiser) (previously filed as Exhibit 10.28 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

10.29 +

   Severance benefit letter, dated October 7, 2008 (Chris L. Kiser) (previously filed as Exhibit 10.29 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

10.30 +

   Employment offer letter dated May 25, 2001 (Lynne M. Misericordia) (previously filed as Exhibit 10.30 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

10.31 +

   Employment offer letter dated May 25, 2001 (M. Kelley Maggs) (previously filed as Exhibit 10.31 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

10.32 +

   Separation Agreement, dated July 31, 2009 (Jeffrey P. Ansell). (previously filed as Exhibit 10.32 to the Quarterly Report on Form 10-Q of Pinnacle Foods Finance LLC filed with the SEC on August 12, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

10.33 +

   Employment Agreement, dated July 13, 2009 (Robert J. Gamgort). (previously filed as Exhibit 10.33 to the Quarterly Report on Form 10-Q of Pinnacle Foods Finance LLC filed with the SEC on August 12, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

10.34 +

   Peak Holdings LLC Management Unit Subscription Agreement, dated July 13, 2009 (Robert J. Gamgort). (previously filed as Exhibit 10.34 to the Quarterly Report on Form 10-Q of Pinnacle Foods Finance LLC filed with the SEC on August 12, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

10.35 +

   Amendment to Director Services Agreement, dated July 31, 2009 (Roger Deromedi). (previously filed as Exhibit 10.35 to the Quarterly Report on Form 10-Q of Pinnacle Foods Finance LLC filed with the SEC on August 12, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

10.36

   Second Amendment to the Credit Agreement, dated December 23, 2009, by and among Pinnacle Foods Finance LLC, Peak Finance Holdings LLC, Barclays Bank PLC, the Revolving Commitment Increase Lenders, the Tranche C Term Lenders and the Guarantors. (previously filed as Exhibit 10.2 to the Current Report on Form 8-K of Pinnacle Foods Finance LLC filed with the SEC on December 24, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

10.37

   Amended and Restated Transaction and Advisory Fee Agreement, dated as of November 18, 2009, between Peak Finance LLC and Blackstone Management Partners V L.L.C. (previously filed as Exhibit 10.1 to the Current Report on Form 8-K of Pinnacle Foods Finance LLC filed with the SEC on December 24, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

10.38

   Employment offer letter dated November 24, 2008 (Edward L. Sutter) (previously filed as Exhibit 10.38 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 23, 2010 (Commission File Number: 333-148297), and incorporated herein by reference).

 

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10.39

   Employment offer letter dated October 28, 2008 (Sally Genster Robling) (previously filed as Exhibit 10.39 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 23, 2010 (Commission File Number: 333-148297), and incorporated herein by reference).

10.40

   Lease, dated April 15, 2010, between Woodcrest Road Associates, L.P. and Pinnacle Foods Group LLC (Cherry Hill, New Jersey) (previously filed as Exhibit 10.40 to the Quarterly Report on Form 10-Q of Pinnacle Foods Finance LLC filed with the SEC on August 9, 2010 (Commission File Number: 333-148297), and incorporated herein by reference).

10.41

   Employment offer letter dated June 3, 2010 (Mark L. Schiller) (previously filed as Exhibit 10.41 to the Quarterly Report on Form 10-Q of Pinnacle Foods Finance LLC filed with the SEC on August 9, 2010 (Commission File Number: 333-148297), and incorporated herein by reference).

24.1

   Power of Attorney (included in signature page) (previously filed as Exhibit 24.1 to the Annual Report on Form 10-K of Pinnacle Foods Finance LLC filed with the SEC on March 3, 2009 (Commission File Number: 333-148297), and incorporated herein by reference).

31.1

   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

31.2

   Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32.1

   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (A)

32.2

   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (A)

 

+ Identifies exhibits that consist of a management contract or compensatory plan or arrangement.
(A) Pursuant to Commission Release No. 33-8212, this certification will be treated as “accompanying” this Form 10-Q and not “filed” as part of such report for purposes of Section 18 of Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PINNACLE FOODS FINANCE LLC

 

By:  

/S/    CRAIG STEENECK        

Name:   Craig Steeneck
Title:  

Executive Vice President and Chief Financial Officer

(acting in both his capacity as authorized signatory on behalf of the registrant and as principal financial officer)

Date:   November 10, 2010

 

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