UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 28, 2002
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[ ] 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 333-39813
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B&G Foods, Inc.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3916496
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4 Gatehall Drive, Suite 110, Parsippany, New Jersey 07054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 401-6500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X].
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant is not applicable as no public market for the voting stock of
the registrant exists.
As of February 28, 2003, B&G Foods, Inc. had one (1) share of common
stock, $.01 par value, outstanding, which was owned by an affiliate.
DOCUMENTS INCORPORATED BY REFERENCE:
None
PART I
ITEM 1. BUSINESS
I. Company Overview
B&G Foods, Inc. and its subsidiaries (collectively, "B&G" or the
"Company") operate in one industry segment and manufacture, sell and distribute
a diverse portfolio of high quality, shelf-stable, branded food products. In
general, the Company positions its retail branded products to appeal to
consumers desiring high quality and reasonably priced branded products. The
Company complements its branded retail product sales with a growing food service
business.
The Company was acquired by Bruckmann, Rosser, Sherrill & Co., L.P.
("BRS") in December 1996 from Specialty Foods Corporation, which is not an
affiliate of the Company. The Company is wholly-owned by B&G Foods Holdings
Corp. ("Holdings"), which in turn is owned by BRS and its affiliates, and
members of the Company's management and Board of Directors. See "Security
Ownership of Certain Beneficial Owners and Management." The Company maintains
its corporate headquarters at Four Gatehall Drive, Suite 110, Parsippany, New
Jersey 07054.
On June 17, 1997, the Company acquired certain assets relating to the
Regina wine vinegars and cooking wines, Wright's liquid smoke hickory flavoring,
Brer Rabbit molasses and Vermont Maid syrup brands (the "Nabisco Brands
Acquisition"), including trademarks, inventory and certain equipment used to
bottle the Regina wine vinegars and cooking wines, from Nabisco, Inc.
("Nabisco"), which is not an affiliate of the Company.
On August 15, 1997, through a subsidiary, the Company acquired from E.
Mcllhenny's Son Corporation all of the outstanding capital stock of JEM Brands,
Inc. ("JEM") (the "Trappey's Acquisition"), the holding company of Trappey's
Fine Foods, Inc. (together with JEM, "Trappey's").
On July 17, 1998, through a subsidiary, the Company acquired all of the
outstanding capital stock of Maple Grove Farms of Vermont, Inc. and related
entities (the "Maple Grove Acquisition") from certain individual investors. The
Maple Grove Acquisition included the Maple Grove Farms of Vermont and Up Country
Naturals labels of pure maple syrup.
On February 5, 1999, the Company acquired certain assets of the Polaner
and related brands (collectively, "Polaner") from International Home Foods, Inc.
("IHF") and M. Polaner, Inc. (the "Polaner Acquisition"). Prior to the
consummation of the Polaner Acquisition, the Company had been the exclusive
manufacturer, or "co-packer," of the Polaner products for IHF, and had
distributed the Polaner products regionally under co-packing and distribution
contracts that were terminated upon consummation of the Polaner Acquisition.
On March 15, 1999, through a subsidiary, the Company acquired the
assets of The Heritage Portfolio of Brands from The Pillsbury Company, Indivined
B.V. and IC Acquisition Corp. (the "Heritage Brands Acquisition"). The Heritage
Portfolio of Brands includes
1
Underwood meat spreads, B&M baked beans, Ac'cent flavor enhancer, Sa-son Ac'cent
flavor enhancer, Las Palmas Mexican sauces and food products and Joan of Arc dry
bean products businesses.
On June 8, 2000, the Company entered into an agreement with Emeril's
Food of Love Productions, LLC ("Emeril") pursuant to which the Company and
Emeril agreed to create a signature line of dry grocery products which are
marketed under the label Emeril's.
On January 17, 2001, the Company completed the sale of its wholly owned
subsidiary, Burns & Ricker, Inc. ("Burns & Ricker"), to Nonni's Food Company,
Inc. ("Nonni's") (the "B&R Disposition") pursuant to a stock purchase agreement
of the same date under which the Company sold all of the issued and outstanding
capital stock of Burns & Ricker to Nonni's.
II. Financial Information
The consolidated balance sheets at December 28, 2002 and December 29,
2001 and the consolidated statements of operations and cash flows for the years
ended December 28, 2002, December 29, 2001 and December 30, 2000 and related
notes thereto set forth the revenues from external customers, profit (or loss)
and total assets of the Company. See Item 8 -- "Financial Statements and
Supplementary Data."
III. Products and Markets
The Company manufactures, sells and distributes a diverse portfolio of
shelf-stable branded products. Set forth below is a brief description of the
Company's products and their markets:
Ac'cent. Ac'cent was introduced in 1947 as an all-natural flavor
enhancer for meat preparation. The product is primarily used on beef, poultry,
fish and vegetables. The brand is marketed throughout the United States.
B&M. B&M is the original brand of brick-oven baked beans and has been
produced since 1927. The B&M line includes a variety of baked beans and brown
bread (a dense, traditional New England bread baked in the can).
Bloch & Guggenheimer. The Bloch & Guggenheimer product line originated
in 1886. It consists of shelf-stable pickles, relishes, peppers, olives and
other related specialty items. These products are marketed primarily under the
B&G and Bloch & Guggenheimer brand names. Bloch & Guggenheimer products have
strong sales in the New York metropolitan area, and the Company believes that it
is the leading brand of shelf-stable pickles sold in the New York metropolitan
area. The Company positions its Bloch & Guggenheimer products as quality,
competitively priced products. The Company currently offers 77 distinct pickle
products and 41 distinct pepper products. Nationally, pepper products have
enjoyed modest sales growth over the past five years driven by changes in
consumer trends and eating styles.
Brer Rabbit. The Brer Rabbit brand has been in existence since 1907 and
enjoys significant national market share. Brer Rabbit molasses is typically used
in baking, barbeque sauces and as a breakfast syrup. The Brer Rabbit product
comes in mild and full flavor varieties. The mild molasses is designed for table
use as well as cooking, while the full flavor molasses has a stronger flavor and
is used primarily for cooking.
2
Emeril's. Emeril's products include a line of seasonings, salad
dressings, marinades, pepper sauces, barbeque sauces and pasta sauces developed
with celebrity chef Emeril Lagasse under the label "Emeril's." The Company began
producing Emeril's products in 2000.
Joan of Arc. Joan of Arc canned beans have been produced since 1895.
The Joan of Arc label is used in a full range of canned beans. The best selling
products under this label are kidney and chili beans. Joan of Arc products are
sold nationally with its strongest sales coming in the Midwest.
Las Palmas. Under the Las Palmas brand, which originated in 1923, the
Company is a leading provider of enchilada sauce in the authentic Mexican foods
segment. The Company also uses the Las Palmas brand for other canned products,
such as jalapenos, green chilies and crushed tomatillos.
Maple Grove Farms of Vermont. Pure maple syrup made under the Maple
Grove Farms of Vermont label has been in existence since 1915. Other products
under the Maple Grove Farms of Vermont label include a line of gourmet salad
dressings, marinades, fruit syrups, confections and pancake mixes.
Polaner. The Polaner brand is comprised of a broad array of fruit-based
spreads as well as wet spices such as bottled chopped garlic and basil. The
Polaner line of products was introduced in 1880.
Regina. The Regina brand includes vinegars and cooking wines. The
brand, which has been in existence since 1949, is most commonly used in the
preparation of salad dressings as well as in a variety of recipe applications,
including sauces, marinades and soups. Regina's premium packaging, reputation
and product quality have helped the brand to command premium pricing while
outselling competitors.
Sa-son. Sa-son was introduced in 1947 as a flavor enhancer used
primarily for Hispanic food preparation. The product is primarily used on beef,
poultry, fish and vegetables. The brand is regionally strongest on the East
Coast and in Puerto Rico but is marketed throughout the United States.
Trappey's. Trappey's products fall into two major categories, high
quality peppers and hot sauces. Trappey's, founded in 1898, was one of the first
packers of pepper hot sauce and the first to process peppers for pickling. Since
its inception, Trappey's has introduced many new products including Red Devil
brand hot sauce, Trappey's brand peppers, Torrido brand chili peppers and
Italian peperoncini peppers under the Dulcito brand.
Underwood. The Underwood brand markets meat spreads of several types,
including deviled ham, chicken and roast beef. Management believes that
Underwood products are unique because of their spreadable consistency, with no
competitors offering directly comparable products. Liver pate and sardines are
also marketed under the Underwood label. Granted in 1870, "Underwood Devil" is
the oldest registered food trademark in the United States. Underwood products
were introduced in that same year and are marketed nationally.
3
Up Country Naturals. The Company markets natural and organic foods,
including salad dressings, marinades, maple syrup and pancake and cake mixes,
under the Up Country Naturals label.
Vermont Maid. Vermont Maid is a maple-flavored syrup sold primarily in
the New England market. Vermont Maid has been in existence since 1919. The
Company has reformulated the brand into a thicker, richer formula and modernized
its look by introducing more appealing packaging. Vermont Maid syrup is
available in two flavors, regular and lite.
Wright's. Wright's liquid smoke, introduced in 1895, is an all-natural
hickory seasoning that reproduces the flavor and aroma of hickory pit smoking in
meats, chicken and fish. Wright's is manufactured by a patented process and has
one primary national competitor. Since acquiring Wright's, the Company has
sought to increase the brand's marketing by adding recipes and incentives on
packages and display shippers. Wright's liquid smoke is also used by commercial
processors to smoke hams, bacon, sausage and barbeque sauces.
IV. Marketing, Sales and Distribution
The Company sells and distributes its products through a unique,
multiple-channel system. B&G's established system allows it to cost-effectively
distribute additional volume of products through existing channels. B&G's
multiple-channel sales and distribution system includes the following:
o direct sales to supermarket chains;
o direct and distributor sales to food service outlets;
o direct sales to mass merchants, warehouse clubs and non-food
outlets;
o direct sales to specialty food distributors;
o direct-store-organization sales on a regional basis to
individual grocery stores; and
o other sales through export, catalogues and the Internet.
The Company generally sells its national brands through brokers to
supermarket chains, food service outlets, mass merchants, warehouse clubs,
non-food outlets and specialty food distributors. National and regional food
brokers sell the entire portfolio of the Company's products. Broker sales
efforts are coordinated by the Company's regional sales managers, who supervise
brokers' activities with buyers or distributors and brokers' retail coverage of
the products at the store level.
4
The Company distributes its products in the greater New York
metropolitan area primarily through its direct-store-organization sales and
distribution ("DSO") system. The DSO system supports an organization of sales
personnel who directly service over 2,000 individual grocery stores with the
Company's products.
Marketing support for the products distributed through the DSO system
consists primarily of trade promotions aimed at gaining display activity to
produce impulse sales. Trade advertising and coupons supplement this activity. A
variety of in-store support vehicles such as hang tags, racks, signs and shipper
displays are used by the individual sales personnel to highlight the Company's
products. Marketing support on a national basis typically consists of scheduled
trade promotions, targeted coupons and cross-promotions with supporting
products. Advertising expenditures generally consist of purchasing magazine and
trade publication advertisements, which are supplemented with television
advertising for selected brands.
The Company did not export a significant amount of any of its products
during the 2002, 2001 or 2000 fiscal years.
V. Competition
The Company faces competition in each of its product lines. 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, effective
advertising and promotional activities and the ability to identify and satisfy
emerging consumer preferences. The Company competes with a significant number of
companies of varying sizes, including divisions or subsidiaries of larger
companies. Many of these competitors have multiple product lines, substantially
greater financial and other resources available to them and may have lower fixed
costs and/or be substantially less leveraged than B&G. The Company's ability to
grow its business could be impacted by the relative effectiveness of, and
competitive response to, B&G's new product initiatives, product innovation and
new advertising and promotional activities.
During fiscal 2002, the Company's most significant competitors for its
pickles and peppers products were Vlasic and Mt. Olive branded products. In
addition, J.M. Smucker was and continues to be the main competitor of the
Company's fruit spread products marketed under the Polaner label. The Maple
Grove Farms of Vermont line of syrups and salad dressings compete directly with
the SpringTree brand in the pure maple syrup category but, along with B&G's
Vermont Maid syrup products, also have a number of competitors in the general
pancake syrup market, such as Aunt Jemima, Mrs. Buttersworth and Log Cabin. The
B&M baked bean and Joan of Arc products compete with Bush's products.
In addition, the Company's products compete not only against other
brands in their respective product categories, but also against products in
similar or related product categories. For example, B&G's shelf-stable pickles
compete not only with other brands of shelf-stable pickles, but also those
products found in the refrigerated sections of grocery stores.
5
VI. Customers and Seasonality
None of the Company's customers accounted for more than 10% of the
Company's net sales in fiscal 2002, fiscal 2001 or fiscal 2000.
Sales of a number of the Company's products tend to be seasonal;
however, in the aggregate, the Company's sales are not heavily weighted to any
particular quarter.
The Company purchases most of the produce used to make its shelf-stable
pickles, relishes, peppers, olives and other related specialty items during the
months of July through October, and B&G purchases all of its maple syrup
requirements during the months of April through July. Consequently, the
Company's liquidity needs are greatest during these periods.
VII. Inflation
The Company does not believe that its operating results have been
materially affected by inflation during the preceding three years. There can be
no assurance, however, that the Company's operating results will not be affected
by inflation in the future.
VIII. Raw Materials
The Company purchases agricultural products and other raw materials
from growers, commodity processors and other food companies. The Company's
principal raw materials include peppers, cucumbers, other vegetables, fruits,
maple syrup, meat and poultry. The Company purchases its agricultural raw
materials in bulk or pursuant to short-term supply contracts. B&G purchases most
of its agricultural products between July 1 and October 31. It also uses
packaging materials, particularly glass jars and cans. The Company purchases its
raw materials from a variety of suppliers and alternate sources of supply that
are readily available.
The profitability of B&G's business relies in part on the prices of raw
materials, which can fluctuate due to a number of factors, including changes in
crop size, national, state and local government-sponsored agricultural programs,
export demand, natural disasters, weather conditions during the growing and
harvesting seasons, general growing conditions and the effect of insects, plant
diseases and fungi. Increases in raw material costs could have a material
adverse effect on B&G's consolidated financial condition, results of operations
or liquidity.
IX. Trademarks
The Company owns 78 trademarks which are registered in the United
States and 219 trademarks which are registered in foreign countries. Also, the
Company has 15 trademark applications pending in the United States and in
foreign countries. Examples of the Company's trademarks include Ac'cent, B&G,
B&G Sandwich Toppers, B&M, Bloch & Guggenheimer, Brer Rabbit, Joan of Arc, Maple
Grove Farms of Vermont, Polaner, Regina, Underwood, Vermont Maid and Wright's.
B&G considers its trademarks to be of significant importance to the Company's
business.
6
X. Government Regulation
The Company's operations are subject to extensive regulation by the
United States Food and Drug Administration ("FDA"), the United States Department
of Agriculture and other federal, state and local authorities regarding the
processing, packaging, storage, distribution and labeling of its products. The
Company's processing facilities and products are subject to periodic inspection
by federal, state and local authorities. B&G believes that it is currently in
substantial compliance with all material governmental laws and regulations and
maintains all material permits and licenses relating to its operations.
Nevertheless, there can be no assurance that B&G is in full compliance with all
such laws and regulations or that B&G will be able to comply with any future
laws and regulations in a cost-effective manner. Failure by the Company to
comply with applicable laws and regulations could subject it to civil remedies,
including fines, injunctions, recalls or seizures, as well as potential criminal
sanctions, all of which could have a material adverse effect on B&G's
consolidated financial condition, results of operations or liquidity.
The Company is also subject to the Food, Drug and Cosmetic Act and the
regulations promulgated thereunder by the FDA. This comprehensive regulatory
program governs, among other things, the manufacturing, composition and
ingredients, labeling, packaging and safety of food. For example, the FDA
regulates manufacturing practices for foods through its current "good
manufacturing practices" regulations and specifies the recipes for certain
foods. In addition, the Nutrition Labeling and Education Act of 1990 prescribes
the format and content of certain information required to appear on the labels
of food products. The Company is subject to regulation by certain other
governmental agencies, including the U.S. Department of Agriculture. B&G's
management believes that the Company's facilities and practices are sufficient
to maintain compliance with applicable governmental regulations, although there
can be no assurances in this regard.
XI. Environmental Matters
Except as described below, the Company has not made any material
expenditures during the last three fiscal years in order to comply with
environmental laws or regulations. Based on its experience to date, B&G believes
that the future cost of compliance with existing environmental laws and
regulations (and liability for known environmental conditions) will not have a
material adverse effect on its consolidated financial condition, results of
operations or liquidity, except as noted below. However, the Company cannot
predict what environmental or health and safety legislation or regulations will
be enacted in the future or how existing or future laws or regulations will be
enforced, administered or interpreted, nor can the Company predict the amount of
future expenditures that may be required in order to comply with such
environmental or health and safety laws or regulations or to respond to such
environmental claims.
On January 17, 2001, the Company became aware that fuel oil from its
underground storage tank at its Roseland, New Jersey facility had been released
into the ground and into a brook adjacent to such property. The New Jersey
Department of Environmental Protection ("NJDEP") initially engaged an
environmental services firm to address the clean-up of the oil in the brook;
and, with the approval of the NJDEP, the Company retained such environmental
7
services firm on January 18, 2001 for the same purpose. In addition, the Company
hired another environmental services firm to address the on-site oil impact to
subsurface soils. Since January 17, 2001, together with the Company's
environmental services firms, B&G has worked to clean-up the oil and is
cooperating with the NJDEP. Both environmental services firms have completed the
site work and believe they have remediated the site such that no further
clean-up is warranted. In September 2001, both firms submitted their findings to
the NJDEP along with recommendations for no further action. To date, the Company
has not received a response to such recommendations from the NJDEP. NJDEP could
require additional investigation before acceding to the no further action
recommendations, but the cost of such additional investigation is not expected
to have a material adverse effect on B&G's consolidated financial condition,
results of operations or liquidity. The Company recorded a charge of $1.1
million in the first quarter of fiscal 2001 to cover the expected cost of the
clean-up. In the third quarter of fiscal 2001, B&G received an insurance
reimbursement of $0.2 million and accrued an additional $0.1 million for certain
remaining miscellaneous expenses. Management believes that substantially all
estimated expenses relating to this matter have been incurred and paid as of
December 28, 2002. At December 28, 2002 and December 29, 2001, there was $0 and
$80,000, respectively, accrued related to this matter.
In January 2002, the Company was named as a third-party defendant in an
action regarding environmental liability at the Combe Fill South Landfill in New
Jersey under the Comprehensive Environmental Response, Compensation and
Liability Act, or Superfund, for alleged disposal of waste from White Cap
Preserves, a former subsidiary of M. Polaner, Inc. M. Polaner, Inc. was sold by
one of the Company's former parents and was ultimately acquired by International
Home Foods, Inc. The Company believes that it is indemnified by an affiliate of
International Home Foods, Inc. for this liability. In February 2002, the Company
submitted a demand for indemnity, but the indemnitor's initial response was
limited to a request for additional information. In February 2003, the Company
and other parties to this action settled the claim for $0.1 million. The Company
anticipates that a court order memorializing the settlement will be entered into
in the first quarter of fiscal 2003.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these other matters will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity.
The Company is subject to environmental regulations in the normal
course of business. Management believes that the cost of compliance with such
regulations will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
XII. Employees and Labor Relations
As of January 31, 2003, the Company's workforce consisted of 662
employees. Of that total, 431 employees were engaged in manufacturing, 95 were
engaged in marketing and sales, 104 were engaged in distribution and 32 were
engaged in administration. Approximately 203 of the Company's 662 employees, as
of January 31, 2003, were covered by a collective bargaining agreement. In
general, B&G considers its employee and union relations to be good.
8
ITEM 2. PROPERTIES
The Company's plants are generally located near major customer markets
and raw materials. Management believes that the Company's manufacturing plants
have sufficient capacity to accommodate its planned growth. As of January 31,
2003, the Company operated the manufacturing and warehouse facilities described
in the table below.
Facility Location Description Approximate
Sq. Ft.
- --------------------------------------------------------------------------------
Parsippany, NJ Headquarters 21,000
Hurlock, MD* Manufacturing/Warehouse 236,000
Portland, ME* Manufacturing/Warehouse 225,000
New Iberia, LA* Manufacturing/Warehouse 158,000
Roseland, NJ Manufacturing/Warehouse 124,000
St. Johnsbury, VT* Manufacturing/Warehouse 92,000
La Vergne, TN Distribution Center 175,000
Houston, TX Warehouse 104,000
Biddeford, ME Warehouse 97,000
Hurlock, MD* Warehouse 80,000
Hurlock, MD Warehouse 66,000
Hurlock, MD Warehouse 35,000
St. Evariste, Quebec* Storage Facility 50,000
Sharptown, MD* Storage Facility 3,000
Bentonville, AK Sales Office 750
- -------------------------------
*Owned.
The Company also has agreements for the "co-packing" of some of its
products, a common industry practice in which other companies manufacture and
package these products under the Company's brand names. Third parties produce
Regina, Underwood, Las Palmas and Joan of Arc products and certain Emeril's
pasta sauces and spices under co-packing agreements or purchase orders. Each of
the Company's co-packers produce products for other companies as well. The
Company believes that there are alternative sources of co-packing production
readily available for its products.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is involved in various
legal proceedings. The Company does not believe the outcome of these proceedings
will have a material adverse effect on its consolidated financial condition,
results of operations or liquidity.
In January 2002, the Company was named as a third-party defendant in an
action regarding environmental liability at the Combe Fill South Landfill in New
Jersey under the Comprehensive Environmental Response, Compensation and
Liability Act, or Superfund, for alleged disposal of waste from White Cap
Preserves, a former subsidiary of M. Polaner, Inc. M. Polaner, Inc. was sold by
one of the Company's former parents and was ultimately acquired by
9
International Home Foods, Inc. The Company believes that it is indemnified by an
affiliate of International Home Foods, Inc. for this liability. In February
2002, the Company submitted a demand for indemnity, but the indemnitor's initial
response was limited to a request for additional information. In February 2003,
the Company and other parties to this action settled the claim for $0.1 million.
The Company anticipates that a court order memorializing the settlement will be
entered into in the first quarter of fiscal 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During fiscal 2002, no matters were submitted to a vote of stockholders
through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
10
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended
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Dec. 28, Dec. 29, Dec. 30, Jan. 1, Jan. 2,
2002 2001 2000 2000 1999
------------- --- ----------- -- ------------ --- ------------ -- ------------
(Dollars in thousands)
Consolidated Statement of Operations
Data(2)......................
Net sales(1).................... $293,677 $279,779 $351,416 $336,112 $179,780
Cost of goods sold.............. 203,707 192,525 200,651 196,184 117,514
------------- ----------- ------------ ------------ ------------
Gross profit................. 89,970 87,254 150,765 139,928 62,266
Sales, marketing and distribution
expenses..................... 35,852 34,922 100,711 91,120 40,102
General and administrative
expenses(3).................. 4,911 14,120 12,957 13,802 5,725
Management fees - related party 500 500 500 450 250
Environmental clean-up.......... 100 950 - - -
Special charge-severance........ - - 250 - -
------------- ----------- ------------ ------------ ------------
Operating income............. 48,607 36,762 36,347 34,556 16,189
Gain on sale of assets.......... - (3,112) - - -
Derivative gain................. (2,524) - - - -
Interest expense................ 26,626 29,847 36,074 29,874 13,908
------------- ----------- ------------ ------------ ------------
Income before income tax expense
24,505 10,027 274 4,682 2,281
Income tax expense.............. 9,260 4,029 1,559 2,429 1,431
------------- ----------- ------------ ------------ ------------
Net income (loss)............ $ 15,245 $ 5,998 $ (1,285) $ 2,253 $ 850
============= =========== ============ ============ ============
Consolidated Balance Sheet Data (at
period end)(2):
Total assets................. $430,673 $426,006 $457,016 $477,057 $211,873
Long-term debt, including current
portion.................... 273,796 289,275 329,323 340,892 144,696
Total stockholder's equity... 78,081 62,836 56,788 58,073 20,820
Other Financial Data(2):
Adjusted EBITDA(4)........... $ 54,007 $ 52,002 $ 52,351 $ 49,704 $ 23,372
- -------------------
(1) Certain amounts in fiscal 2001 aggregating $52.7 million have been
reclassified from sales, marketing and distribution expenses to a reduction
of net sales in accordance with EITF Issue No. 00-14, "Accounting for
Certain Sales Incentives," and EITF Issue No. 00-25, "Vendor Income
Statement Characterization of Consideration to a Purchaser of the Vendor's
Products or Services," as codified by EITF Issue 01-09. Such EITF
pronouncements, which were adopted by the Company in 2002, require the
Company to reclassify certain coupon and promotional expenses to be
presented as a reduction of net sales. The reclassification has no effect
on operating income. Due to the specificity of similar information not
being available in the Company's information systems for fiscal years 1998
through fiscal 2000, the Company is unable to determine what the
reclassification amounts should be for those years.
(2) The Maple Grove Acquisition, the Polaner Acquisition and the Heritage
Brands Acquisition were consummated on July 17, 1998, February 5, 1999 and
March 15, 1999, respectively, and were accounted for using the purchase
method of accounting. Accordingly, the assets acquired, liabilities
assumed, and results of operations are included in the consolidated
financial statements from the respective date of acquisition. The B&R
Disposition was completed on January 17, 2001.
(3) The Company adopted the provisions of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," as of December
30, 2001. Effective December 30, 2001, the Company ceased the amortization
of goodwill and trademarks. Amortization expenses related to goodwill and
trademarks were $8.5 million, $9.5 million, $9.2 million, and $3.2 million
in fiscal 2001, 2000, 1999 and 1998, respectively.
11
(4) EBITDA is defined as earnings before interest, taxes and depreciation and
amortization and is presented because it is commonly used by certain
investors and analysts to analyze and compare companies on the basis of
operating performance and to determine a company's ability to service and
incur debt. EBITDA should not be considered in isolation from or as a
substitute for net income, cash flows from operating activities or other
consolidated income or cash flow statement data prepared in accordance with
generally accepted accounting principles or as a measure of profitability
or liquidity.
Adjusted EBITDA is calculated by adding to or deducting from EBITDA certain
items that the Company believes are unusual consisting of: (a) a charge in
fiscal 2002 of $0.1 million related to environmental cleanup, (b) a
derivative gain of $2.5 million in fiscal 2002, (c) a charge in fiscal 2001
of $1.0 million related to environmental cleanup, (d) a charge of $0.3
million related to employee severance in fiscal 2000 and (e) a gain of $3.1
million related to the B&R Disposition in fiscal 2001. There were no
adjustments to EBITDA in fiscal 1998 and fiscal 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On January 17, 2001, the Company completed the B&R Disposition. The B&R
Disposition affects comparability between periods.
I. Year Ended December 28, 2002 Compared to Year Ended December 29, 2001
A. Net Sales
Net sales increased $13.9 million or 5.0% to $293.7 million for the 52
week period ended December 28, 2002 (the "2002 Period") from $279.8 million for
the 52 week period ended December 29, 2001 (the "2001 Period"). Sales of the
Company's Emeril's, Las Palmas, Maple Grove Farms of Vermont, Ac'cent, Trappey,
Wrights and Polaner brands increased $7.6 million, $2.6 million, $2.2 million,
$2.2 million, $0.6 million, $0.3 million and $0.3 million or 45.1%, 14.5%, 5.1%,
13.5%, 4.2%, 6.0% and 0.7%, respectively, largely reflecting higher unit volume.
Sales of the Company's B&M baked beans and Sa-son brands decreased by $0.7
million and $0.5 million, or 2.6% and 9.3%, respectively. The B&R Disposition
accounted for $0.7 million of the sales decrease on a comparative basis. Trade
promotional spending, which is netted against net sales, expressed as a
percentage of gross sales increased slightly to 17.2% for the 2002 Period from
17.0% in the 2001 Period. This increase is due to incremental trade spending for
the B&M baked beans brand.
B. Gross Profit
Gross profit increased $2.7 million or 3.1% to $90.0 million for the
2002 Period from $87.3 million in the 2001 Period. Gross profit expressed as a
percentage of net sales decreased to 30.6% in the 2002 Period from 31.2% in the
2001 Period. The decrease in gross profit percentage included higher costs of
maple syrup, increased costs from the co-packers of the Underwood, Joan of Arc
and Las Palmas brands and an increase in trade spending which is now included in
net sales. These cost increases were offset by a mix shift of products sold by
the Company and a reduction in delivery expenses in an amount equal to 0.4% of
net sales.
C. Sales, Marketing and Distribution Expenses
Sales, marketing and distribution expenses increased $0.9 million or
2.7% to $35.9 million for the 2002 Period from $34.9 million for the 2001
Period. Such expenses expressed as a percentage of net sales decreased to 12.2%
in the 2002 Period from 12.5% in the 2001 Period. Selling expenses increased
$1.0 million or 8.4% relating to sales compensation and brokerage. Marketing
costs increased $0.6 million or 7.5% relating to additional spending on consumer
programs. These increases were partially offset by a decrease in warehousing
costs of $0.8 million or 14.7% due to reductions in headcount and the
elimination of one distribution center. All other costs increased $0.1 million
or 1.2%.
12
D. General and Administrative Expenses
General and administrative expenses (including amortization of goodwill
and trademark intangibles in the 2001 Period) and management fees decreased $9.2
million or 63.0% to $5.4 million in the 2002 Period from $14.6 million in the
2001 Period. Amortization of goodwill and trademark intangibles with indefinite
useful lives decreased from $8.5 million in the 2001 Period to $0 in the 2002
Period as a result of the implementation of the provisions of the Financial
Accounting Standard Board's ("FASB") Statement No. 142. All other general and
administrative expenses collectively decreased $0.7 million due to a decrease in
incentive compensation costs in the 2002 Period.
E. Environmental Clean-Up
As further described above in Item 1, XI, the Company recorded a charge
of $0.1 million, in the 2002 Period, relating to the Combe Fill South Landfill
in New Jersey. The Company recorded a charge of $1.0 million, net of insurance
proceeds, in the 2001 Period relating to the fuel oil tank leak at their
Roseland, New Jersey Facility.
F. Operating Income
As a result of the foregoing, operating income increased $11.8 million
or 32.2% to $48.6 million in the 2002 Period from $36.8 million in the 2001
Period. Operating income expressed as a percentage of net sales increased to
16.6% in the 2002 Period from 13.1% in the 2001 Period.
G. Gain of Sale of Assets
As further described in Note 1 to the consolidated financial
statements, the Company recorded a $3.1 million gain on the B&R Disposition in
the 2001 Period.
H. Derivative Gain
Income of $2.5 million was recorded in the 2002 Period reflecting the
change in fair value of the Company's interest rate swap agreement since the
date the Company entered into such agreement (March 21, 2002). See "Debt" below.
I. Interest Expense
Interest expense decreased $3.2 million to $26.6 million in the 2002
Period from $29.8 million in the 2001 Period as a result of lower outstanding
loan balances and reduced interest rates in the 2002 Period.
13
J. Income Tax Expense
Income tax expense increased $5.2 million to $9.3 million in the 2002
Period from $4.0 million in the 2001 Period. The Company's effective tax rate
for the 2002 Period was 37.8% as compared with 40.2% for the 2001 Period. The
decrease in the effective rate reflects the effect of the amortization of
nondeductible goodwill and other intangibles and the implementation of state tax
planning initiatives, resulting in the reduction in current and deferred state
tax liabilities.
Because of the highly leveraged status of the Company, earnings before
derivative gain, interest, taxes, depreciation and amortization and
environmental clean-up charges ("Adjusted EBITDA") is an important performance
measure used by the Company and its investors. The Company believes that
Adjusted EBITDA provides additional information for determining the Company's
ability to meet future debt service requirements. However, Adjusted EBITDA is
not indicative of operating income or cash flow from operations as determined
under generally accepted accounting principles. The Company's Adjusted EBITDA
for the 2002 Period and the 2001 Period is calculated as follows (dollars in
millions):
2002 Period 2001 Period
----------- -----------
Net income $ 15.2 $ 6.0
Depreciation and amortization (a) 5.3 14.3
Income tax expense 9.3 4.0
Interest expense 26.6 29.8
---- ----
EBITDA 56.4 54.1
Environmental clean-up 0.1 1.0
Gain on sale of assets -- (3.1)
Derivative gain (2.5) --
---- ---
Adjusted EBITDA $ 54.0 $ 52.0
==== ====
(a) Effective December 30, 2001, the Company adopted SFAS No.142 and
consequently ceased amortizing goodwill and trademark intangible assets
deemed to have an indefinite useful life.
II. Year Ended December 29, 2001 Compared to Year Ended December 30, 2000
Prior to Reclassification of Certain Marketing Expenses as a Reduction
of Net Sales for 2001 Period. (See Note 1 to Selected Financial Data in
Item 6 and Note 2(o) to the consolidated financial statements.)
A. Net Sales
Prior to the 2001 reclassification of certain marketing costs to net
sales upon implementation of the Emerging Issues Task Force ("EITF") Issue No.
00-14, "Accounting for Certain Sales Incentives," and EITF Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration to a Purchaser of the
Vendor's Products or Services," as codified by EITF Issue No. 01-09, (as further
described in Note 2(o) to the consolidated financial statements) net sales
decreased $19.0 million or 5.4% to $332.4 million for the 2001 Period from
$351.4 million for the 52 week period ended December 30, 2000 (the "2000
Period"). The B&R Disposition accounted for $25.1 million of the sales decrease
on a comparative basis.
14
The Company's line of Emeril's branded products, which was introduced in July
2000, increased $14.7 million to $18.7 million for the 2001 Period from $4.0
million in the 2000 period. Sales of the Company's Maple Grove Farms of Vermont,
Ac'cent and Sa-son brands increased $2.1 million, $1.8 million and $0.4 million
or 4.5%, 11.2% and 6.3%, respectively. Sales of the Company's Polaner brands,
Joan of Arc brand, B&M baked beans, Las Palmas brands, Underwood brands, Trappey
brands, Brer Rabbit Molasses brands and Vermont Maid syrup decreased by $4.0
million, $1.9 million, $1.9 million, $1.5 million, $1.2 million, $1.0 million,
$0.8 million and $0.6 million, or 8.5%, 11.9%, 4.8%, 6.3% 4.7%, 5.8%, 18.5% and
11.2%, respectively, largely reflecting lower unit volume. The decline in the
sales of certain brands in the 2001 Period is partially due to a decision by
management to reduce trade spending. Net sales have been reduced in the 2001
Period by a reclassification from marketing expenses of $52.7 million relating
to the implementation of EITF Issue No. 01-09.
B. Gross Profit
Prior to the aforementioned 2001 reclassification for EITF Issue
No.01-09, gross profit decreased $10.9 million or 7.2% to $139.9 million for the
2001 Period from $150.8 million in the 2000 Period. Gross profit expressed as a
percentage of net sales decreased to 42.1% in the 2001 Period from 42.9% in the
2000 Period. The decrease in gross profit percentage included higher costs of
maple syrup, increased costs from the co-packers of the Underwood and Las Palmas
brands and a shift in the mix of products sold, including the fact that higher
margin Burns & Ricker branded products are no longer in the mix of products sold
by the Company. Gross profit has been reduced in the 2001 Period by a
reclassification of $52.7 million from marketing expenses to net sales relating
to the implementation of EITF Issue No. 01-09.
C. Sales, Marketing and Distribution Expenses
Prior to the aforementioned 2001 reclassification for EITF Issue No.
01-09, sales, marketing and distribution expenses decreased $13.1 million or
13.0% to $87.6 million for the 2001 Period from $100.7 million for the 2000
Period. Such expenses expressed as a percentage of net sales, prior to the 2001
reclassification for EITF Issue No. 01-09, decreased to 26.3% in the 2001 Period
from 28.7% in the 2000 Period. The decrease is primarily due to a decision by
management to reduce trade promotion spending coupled with the B&R Disposition.
Trade promotion spending decreased $10.4 million or 15.2%. Trade promotion
spending as a percentage of net sales decreased to 17.3% in the 2001 Period from
19.3% in the 2000 Period. Overall, consumer spending expenses decreased $1.3
million or 12.3%. Distribution expenses decreased $0.9 million or 14.8%. All
other expenses decreased $0.5 million. Sales, marketing and distribution
expenses have been reduced in the 2001 Period by a reclassification of $52.7
million to net sales relating to the implementation of EITF Issue No. 01-09.
D. General and Administrative Expenses
General and administrative expenses (including amortization of
intangibles and management fees) increased $1.2 million or 8.6% to $14.6 million
in the 2001 Period from $13.5 million in the 2000 Period. A decrease in
amortization in the amount of $1.0 million of certain intangibles disposed of in
the B&R Disposition was offset by an increase in operating expenses of $2.2
million due to an increase in incentive compensation costs in the 2001 Period.
15
E. Environmental Clean-Up
As further described above in Item 1, XI, the Company recorded a charge
of $1.0 million, net of insurance proceeds, in the 2001 Period.
F. Special Charge-Severance
During the 2000 Period, the Company recorded a severance charge of $0.3
million. As part of the severance arrangements, 13 employees were terminated.
G. Operating Income
As a result of the foregoing, operating income increased $0.4 million
or 1.1% to $36.8 million in the 2001 Period from $36.3 million in the 2000
Period. Operating income expressed as a percentage of net sales increased to
11.1% in the 2001 Period, prior to the aforementioned 2001 reclassification,
from 10.3% in the 2000 Period.
H. Gain of Sale of Assets
As further described in Note 1 to the consolidated financial
statements, the Company recorded a $3.1 million gain on the B&R Disposition.
I. Interest Expense
Interest expense decreased $6.2 million to $29.8 million in the 2001
Period from $36.1 million in the 2000 Period as a result of lower outstanding
loan balances in the 2001 Period due to the partial prepayment of the term loans
required in connection with the B&R Disposition and reduced interest rates.
J. Income Tax Expense
Income tax expense increased $2.5 million to $4.0 million in the 2001
Period from $1.6 million in the 2000 Period. The Company's effective tax rate
for the 2001 Period was 40.2% as compared with 569% for the 2000 Period. The
decrease in the effective tax rate reflects the relative lower effect of the
amortization of nondeductible goodwill and other intangibles when applied to
income before income tax expense of $10.0 million in the 2001 Period as compared
to $0.3 million in the 2000 Period.
Because of the highly leveraged status of the Company, earnings before
interest, taxes, depreciation and amortization, environmental clean-up charges,
gain on sale of assets, and special severance charges ("Adjusted EBITDA") is an
important performance measure used by the Company and its investors. The Company
believes that Adjusted EBITDA provides additional information for determining
the Company's ability to meet future debt service requirements. However,
Adjusted EBITDA is not indicative of operating income or cash flow from
operations as determined under generally accepted accounting principles. The
Company's Adjusted EBITDA for the 2001 Period and the 2000 Period is calculated
as follows (dollars in millions):
16
2001 Period 2000 Period
----------- -----------
Net income (loss) $ 6.0 $ (1.3)
Depreciation and amortization 14.3 15.7
Income tax expense 4.0 1.6
Interest expense 29.8 36.1
--------- ---------
EBITDA 54.1 52.1
Environmental clean-up 1.0 --
Gain on sale of assets (3.1) --
Special charge-severance -- 0.3
Adjusted EBITDA $ 52.0 $ 52.4
======== ========
III. Liquidity and Capital Resources
Cash Flows
Cash provided by operating activities increased $5.0 million or 23.4%
to $26.4 million in the 2002 Period from $21.4 million in the 2001 Period. This
increase was primarily due to an increase in net income and an increase in
accrued expenses partially offset by the elimination of goodwill and trademark
intangible amortization, an increase in inventory and a decrease in accounts
payable. Working capital at December 28, 2002 was $70.0 million, an increase of
$20.1 million over working capital at December 29, 2001 of $49.9 million. The
majority of the increase is a result from the reduction in the current
installment of short-term debt of $17.1 million, due to the refinancing of
long-term debt described below.
Net cash used in investing activities for the 2002 Period was $6.3
million as compared to net cash provided by investing activities of $20.2
million for the 2001 Period. Capital expenditures during the 2002 Period, which
included purchases of manufacturing and computer equipment, was $6.3 million as
compared to $3.9 million for the 2001 Period for similar such expenditures. Net
cash received of $24.1 million in the 2001 Period for the sale of assets
accounted for the remaining change.
Net cash used in financing activities for the 2002 Period was $19.4
million as compared to net cash used in financing activities for the 2001 Period
of $40.0 million. The net cash used by financing activities for the 2002 Period
included payments of deferred debt financing fees of $3.7 million, a payment of
$38.3 million toward the remaining balance of the Term Loan A and a partial
prepayment of $75.8 million toward the Term Loan B, which such payments were
partially offset by proceeds from the issuance of long-term debt of $98.8
million. The payments made toward Term Loan A and Term Loan B totaled $114.1
million, and included $95.8 million in prepayments of Term Loan A and Term Loan
B, the Company's required $0.4 million quarterly payments under Term Loan B and
an additional prepayment of $17.9 million under Term Loan B. In addition, a
payment of $0.3 million was made toward capital leases in the 2002 Period. The
net cash used by financing activities for the 2001 Period included payments of
$20.5 million due on Term Loan A and $19.3 million due on the Term Loan B, along
with capital lease payments of $0.2 million. These payments included a mandatory
prepayment made in January 2001 of $26.0 million required under the Senior
Secured Credit Facility in connection with the B&R Disposition.
17
Acquisitions
The Company's liquidity and capital resources may be impacted in the
foreseeable future by additional acquisitions. The Company has historically
financed acquisitions with borrowings and cash flows from operations. The
Company's future interest expense will increase with any additional indebtedness
the Company may incur to finance potential future acquisitions, if any. To the
extent future acquisitions, if any, are financed by additional indebtedness, the
resulting increase in debt and interest expense could have a negative impact on
liquidity.
Environmental Clean-Up Costs
See Item 1, X1 for a description of environmental matters.
Debt
The Company has outstanding $220 million of 9 5/8% Senior Subordinated
Notes due August 1, 2007 with interest payable semiannually on February 1 and
August 1 of each year. The 9 5/8% Senior Subordinated Notes contain certain
transfer restrictions.
The Company is a party to a $280 million Senior Secured Credit Facility
("Senior Secured Credit Facility") comprised of a $60 million five-year
Revolving Credit Facility ("Revolving Credit Facility"), a $70 million five-year
Term Loan A ("Term Loan A"), which has been paid in full, and a $150 million
seven-year Term Loan B ("Term Loan B" and together with Term Loan A, the "Term
Loan Facilities"). Interest is determined based on several alternative rates as
stipulated in the Senior Secured Credit Facility, including the base lending
rate per annum plus an applicable margin, or LIBOR plus an applicable margin.
The Senior Secured Credit Facility is secured by substantially all of the
Company's assets. The Senior Secured Credit Facility provides for mandatory
prepayments upon the occurrence of certain events, including material asset
dispositions and issuances of securities. The Senior Secured Credit Facility
contains covenants that restrict, among other things, the Company's ability to
incur additional indebtedness, pay dividends and create certain liens. The
Senior Secured Credit Facility also contains certain financial covenants, which,
among other things, specify and define maximum capital expenditure limits, a
minimum fixed charge coverage ratio, a minimum total interest coverage ratio and
a maximum leverage ratio. Proceeds of the Senior Secured Credit Facility are
restricted to funding the Company's working capital requirements, capital
expenditures and acquisitions of companies in the same line of business as the
Company, subject to certain additional criteria. The Senior Secured Credit
Facility limits expenditures on acquisitions to $40 million per year. There were
no borrowings outstanding under the Revolving Credit Facility at December 28,
2002. The outstanding balances for Term Loan A and Term Loan B at December 28,
2002 were $0 and $54.9 million, respectively.
18
IV. Future Capital Needs
The Company is highly leveraged. On December 28, 2002, the Company's
total long-term debt (including current installments) and its stockholder's
equity was $273.8 million and $78.1 million, respectively.
The Company's primary sources of capital are cash flows from operations
and borrowings under the Revolving Credit Facility. The Company's primary
capital requirements include debt service, capital expenditures, working capital
needs and financing for acquisitions. The Company's ability to generate
sufficient cash to fund its operations depends generally on the results of its
operations and the availability of financing. Management believes that cash
flows from operations in conjunction with the available borrowing capacity under
the Revolving Credit Facility, net of outstanding letters of credit of
approximately $59.0 million at December 28, 2002 will be sufficient for the
foreseeable future to fund operations, meet debt service requirements and fund
capital expenditures.
V. Recent Accounting Pronouncements
In 2001, the EITF reached a consensus with respect to Issue No. 00-14,
"Accounting for Certain Sales Incentives" (as codified by EITF Issue No. 01-09),
including point of sale coupons, rebates and free merchandise, which became
effective for the Company in the first quarter of 2002. The consensus includes a
conclusion that the value of such sales incentives that results in a reduction
of the price paid by the customer should be netted against sales and not
classified as a sales or marketing expense. During 2001, the Company recorded
reductions in price pursuant to coupons as sales, marketing and distribution
expenses. As required, the Company implemented the provisions of such EITF
consensus in the first quarter of fiscal 2002 and, as a result, has reclassified
prior period coupon expense as a reduction of net sales. Coupon expense
reclassified in accordance with the EITF consensus was $1.4 million in fiscal
2001. The implementation of the provisions of such EITF consensus alters the
classification of certain sales incentives in the consolidated statements of
income resulting in a reduction of sales and gross margins, but does not have
any effect on the Company's operating income or net income. The Company
historically has included, and continues to include, free merchandise in cost of
goods sold, as required by the new EITF consensus. Due to the specificity of
similar information not being captured in the Company's information systems for
fiscal 2000, the Company is unable to determine what the reclassification amount
should be for that year.
In April 2001, the EITF reached a consensus with respect to EITF Issue
No. 00-25, "Vendor Income Statement Characterization of Consideration to a
Purchaser of the Vendor's Products or Services" (as codified by EITF Issue No.
01-09), which became effective for the Company in the first quarter of 2002. The
consensus includes a conclusion that consideration from a vendor to a retailer
is presumed to be a reduction to the selling prices of the vendor's products
and, therefore, should be characterized as a reduction of sales when recognized
in the vendor's income statement. As required, the Company implemented the
provisions of such EITF consensus in the first quarter of fiscal 2002 and, as a
result, has reclassified certain prior period expenses as a reduction of net
sales. Such reclassification reduces sales and gross margin, but does not have
an impact on the Company's operating income or net income. Such expenses
reclassified in accordance with the EITF consensus as a reduction of net sales
and sales,
19
marketing and distribution expenses was $51.2 million in fiscal 2001. Due to the
specificity of similar information not being captured in the Company's
information systems for fiscal 2000, the Company is unable to determine what the
reclassification amount should be for that year.
In July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of Statement
No. 142. Statement No. 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with FASB
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." The Company adopted the provisions of Statement No. 142 effective as of
December 30, 2001.
As required by Statement No. 142, the Company performed an assessment
to determine whether goodwill of the Company was impaired as of December 28,
2002 and December 30, 2001. In connection therewith, the Company determined that
its operations consisted of one reporting unit. Under Statement No. 142,
goodwill impairment is deemed to exist if the net book value of a reporting unit
exceeds its estimated fair value. The Company determined that, as of December
28, 2002 and December 30, 2001, the fair value of the Company's single reporting
unit exceeded its carrying amount, and therefore there is no indication that
goodwill was impaired as of such dates. The Company will perform its annual
impairment review each fiscal year end to measure goodwill for impairment.
As of December 30, 2001, the Company had unamortized goodwill in the
amount of $112.3 million, and unamortized identifiable intangible assets
(trademarks) in the amount of $162.8 million. Effective as of December 30, 2001,
the Company ceased the amortization of goodwill and all trademarks having
indefinite useful lives. Amortization expense related to goodwill was $3.1
million and $3.8 million for fiscal 2001 and 2000, respectively. Amortization
expense related to trademarks was $5.4 million and $5.7 million for fiscal 2001
and 2000, respectively.
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." Statement No. 143 requires the Company to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development,
and/or normal use of the assets. The Company also records a corresponding asset
that is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be adjusted
at the end of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. The Company is required
to adopt Statement No. 143 on December 29, 2002. The adoption of Statement No.
143 is not expected to have a material effect on the Company's consolidated
financial statements.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Statement No. 144 addresses
financial accounting and reporting for the impairment and disposal of long-lived
assets. This Statement requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances
20
indicate that the carrying amount of an asset may not be recoverable. Statement
No. 144 requires companies to separately report discontinued operations and
extends that reporting to a component of an entity that either has been disposed
of (by sale, abandonment, or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. The Company adopted Statement
No. 144 on December 30, 2001 and such adoption had no effect on the Company's
consolidated financial statements.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Previous accounting guidance was provided by EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3").
Statement No. 146 replaces EITF 94-3. The Company is required to adopt the
provisions of this Statement for any exit or disposal activities initiated after
December 31, 2002. This Statement will be applied prospectively after the
adoption date and will depend on future actions and, consequently, the Company
cannot determine the impact, if any, that the adoption of this Statement will
have on its consolidated financial statements.
VI. Related-Party Transactions
The Company is party to a management agreement (the "Management
Agreement") with Bruckmann, Rosser, Sherrill & Co., Inc. ("BRS & Co."), the
manager of Bruckmann, Rosser, Sherrill & Co., L.P. ("BRS"), pursuant to which
BRS & Co. is paid an annual fee of $0.5 million per year for certain management,
business and organizational strategy, and merchant and investment banking
services. BRS and its affiliates, together with members of the Company's
management and Board of Directors, own B&G Foods Holding Corp., the sole
stockholder of the Company. The Management Agreement will expire on the earlier
of December 27, 2006 and the date that BRS owns less than 20% of the outstanding
common stock of B&G Foods Holding Corp. The Company is also party to a
transaction services agreement pursuant to which BRS & Co. will be paid a
transaction fee for management, financial and other corporate advisory services
rendered by BRS & Co. in connection with acquisitions by the Company, which fee
will not exceed 1.0% of the total transaction value. No fees were paid in fiscal
years 2002, 2001 and 2000.
The Company leases a manufacturing and warehouse facility from the
Chairman of the Board of Directors of the Company. Total rent expense associated
with this lease was $0.8 million for the fiscal years 2002, 2001 and 2000.
Holdings has an Incentive Stock Option Plan (the "Plan') for key
employees of the Company. The Plan authorizes options for up to 6,700 shares of
Holding's common stock. The Plan provides for grants of incentive stock options
or non-qualified stock options. Under the Plan, the Board of Directors of
Holdings determines the exercise price of options granted, which in the case of
incentive stock options, cannot be less than fair value. All option grants have
been made at fair value as determined by a third party valuation. Options expire
up to ten years from the grant date and vest ratably over five years. During
fiscal 2002, 2001 and 2000, 0, 700 and 0 options, respectively, were granted. As
of December 28, 2002, 6,625 options were outstanding, all of which were
incentive stock options.
21
VII. Critical Accounting Policies
The Securities and Exchange Commission has issued disclosure guidance
for "critical accounting policies." The SEC defines "critical accounting
policies" as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
Management is required to make certain estimates and assumptions during
the preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. These
estimates and assumptions impact the reported amount of assets and liabilities
and disclosures of contingent assets and liabilities as of the date of the
consolidated financial statements. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary. Actual
results could differ from those estimates.
The significant accounting policies are described in Note 2 of the
consolidated financial statements. Not all of these significant accounting
policies require management to make difficult, subjective or complex judgments
or estimates. However, management considers the following policies to be
critical within the SEC definition.
Trade and Consumer Promotion Expenses
The Company offers various sales incentive programs to customers and
consumers, such as price discounts, in-store display incentives, slotting fees,
and coupons. The recognition of expense for these programs involves use of
judgment related to performance and redemption estimates. Estimates are made
based on historical experience and other factors. Actual expenses may differ if
the level of redemption rates and performance vary from estimates.
Inventories
Inventories are valued at the lower of cost or market value and have
been reduced by an allowance for excess, obsolete and unsaleable inventories.
The estimate is based on management's review of inventories on hand compared to
estimated future usage and sales.
Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset.
22
Goodwill and intangible assets (trademarks) not subject to amortization
are tested annually for impairment, and are tested for impairment more
frequently if events and circumstances indicate that the asset might be
impaired. An impairment loss is recognized to the extent that the carrying
amount exceeds the asset's fair value.
Deferred Income Taxes
Deferred tax assets have been recorded by the Company, a portion of
which represents net operating loss carryforwards. A valuation allowance has
been recorded for certain state net operating loss carryforwards. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. In the event that actual results
differ from these estimates or these estimates are adjusted in future periods,
the Company may need to establish additional valuation allowances which could
materially impact its results of operations.
Commitments and Contractual Obligations
Our contractual obligations and commitments principally include
obligations associated with our outstanding indebtedness and future minimum
operating lease obligations as set forth in the following table:
- ----------------------------------------------------------------------------------------------------------------------
Payments Due by Period
- ----------------------------------------------------------------------------------------------------------------------
(In thousands)
- ----------------------------------------------------------------------------------------------------------------------
- --------------------------- ------------- ---------------- --------------- --------------- ------------- -------------
Contractual
Obligations:
- --------------------------- ------------- ---------------- --------------- --------------- ------------- -------------
Total 2003 2004 2005 2006 2007 and
----- ---- ---- ---- ---- --------
thereafter
----------
- --------------------------- ------------- ---------------- --------------- --------------- ------------- -------------
Long-term debt $273,796 $ 370 $20,074 $27,474 $6,938 $218,940
- --------------------------- ------------- ---------------- --------------- --------------- ------------- -------------
Operating leases 15,655 3,944 3,475 2,988 1,835 3,413
- --------------------------- ------------- ---------------- --------------- --------------- ------------- -------------
Management fees 2,000 500 500 500 500 0
- --------------------------- ------------- ---------------- --------------- --------------- ------------- -------------
Purchase commitments 10,908 10,908 0 0 0 0
------ ------ - - - -
- --------------------------- ------------- ---------------- --------------- --------------- ------------- -------------
Total contractual cash $302,359 $15,722 $24,049 $30,962 $9,273 $222,353
======== ======= ======= ======= ====== ========
obligations
- --------------------------- ------------- ---------------- --------------- --------------- ------------- -------------
23
VIII. Forward-Looking Statements
This report includes "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Statements in
this report regarding future events or conditions, including statements
regarding industry prospects and the Company's expected financial position,
business and financing plans, are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the Company's expectations are disclosed in this report
and include the Company's substantial leverage, the risks associated with the
expansion of the Company's business, the possible inability of the Company to
integrate the businesses it has acquired, terrorist attacks, increased
competition, environmental liabilities, lower sales volumes for the Company's
products and higher costs of food product raw materials, as well as factors that
affect the food industry generally. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligations to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of operations, the Company is exposed to market
risks arising from adverse changes in interest rates. Market risk is defined for
these purposes as the potential change in the fair value of financial asset or
liability resulting from an adverse movement in interest rates. As of December
28, 2002, the Company's only variable rate borrowings were under the Term Loan B
and the Revolving Credit Facility, which bear interest at several alternative
variable rates as stipulated in the Senior Secured Credit Facility. A 100 basis
point increase in interest rates, applied to the Company's borrowings at
February 28, 2003, would result in an annual increase in interest expense and a
corresponding reduction in cash-flow of approximately $0.3 million.
The Company also has outstanding $220 million of 9 5/8% Senior
Subordinated Notes due August 1, 2007 with interest payable semiannually on
February 1 and August 1 of each year, of which $120 million principal amount was
originally issued in August 1997 and $100 million principal amount was issued by
the Company through a private offering of the notes completed on March 7, 2002.
The fair value of the $220 million Senior Subordinated Notes at December 28,
2002, based on quoted market prices, was $227.7 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets at December 28, 2002 and December 29,
2001 and the consolidated statements of operations and cash flows for the years
ended December 28, 2002, December 29, 2001 and December 30, 2000 and related
notes thereto are set forth below.
24
Independent Auditors' Report
The Board of Directors and Stockholder
B&G Foods, Inc.:
We have audited the accompanying consolidated balance sheets of B&G
Foods, Inc. and subsidiaries as of December 28, 2002 and December 29, 2001, and
the related consolidated statements of operations and cash flows for the years
ended December 28, 2002, December 29, 2001 and December 30, 2000. In connection
with our audits of the consolidated financial statements, we also have audited
the schedule of valuation and qualifying accounts for the years ended December
28, 2002, December 29, 2001 and December 30, 2000 . These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
B&G Foods, Inc. and subsidiaries as of December 28, 2002 and December 29, 2001,
and the results of their operations and their cash flows for the years ended
December 28, 2002, December 29, 2001 and December 30, 2000, in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
25
As described in Note 2 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," as of December 30, 2001, which
changes its accounting for goodwill and intangible assets. As described in Note
2 to the consolidated financial statements, the Company adopted the Emerging
Issues Task Force, Issue No. 01-09, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of a Vendor's Products)" as of
December 30, 2001. In accordance with the EITF, certain promotional expenses are
presented and reclassified as a reduction of net sales in fiscal 2002 and 2001.
However, due to the specificity of similar information not being captured in the
Company's information systems in fiscal 2000, the Company is unable to determine
what the reclassification amount would be for that year.
/s/KPMG LLP
Short Hills, New Jersey
February 24, 2003
26
B&G FOODS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
Assets Dec. 28, 2002 Dec. 29, 2001
------------- -------------
Current assets:
Cash and cash equivalents $ 15,866 15,055
Trade accounts receivable, less allowance for doubtful
accounts of $464 and $55 in 2002 and 2002, respectively 21,900 21,621
Inventories 67,536 66,142
Prepaid expenses 2,024 1,790
Deferred income taxes 1,485 1,672
-------- --------
Total current assets 108,811 106,280
Property, plant and equipment, net 37,414 36,431
Goodwill, net of accumulated amortization of $10,724 in 2001 112,319 112,319
Trademarks, net of accumulated amortization of $17,445 in 2001 162,781 162,781
Other assets 9,348 8,195
--------- ---------
Total assets $ 430,673 426,006
======= =======
Liabilities and Stockholder's Equity
Current liabilities:
Current installments of long-term debt 370 17,436
Trade accounts payable 18,826 21,256
Accrued expenses 19,425 17,494
Due to related party 208 208
-------- --------
Total current liabilities 38,829 56,394
Long-term debt 273,426 271,839
Other liabilities 291 236
Deferred income taxes 40,046 34,701
---------- --------
Total liabilities 352,592 363,170
--------- -------
Commitments and contingencies (Notes 5, 6, 10 and 11)
Stockholder's equity
Common stock, $.01 par value per share. Authorized
1,000 shares; issued and outstanding 1 share in
2002 and 2001 - -
Additional paid-in capital 56,392 56,392
Retained earnings 21,689 6,444
------ -------
Total stockholder's equity 78,081 62,836
------ ------
Total liabilities and stockholder's equity $ 430,673 426,006
======= =======
See accompanying notes to consolidated financial statements
27
B&G FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands)
Year ended Year ended Year ended
----------------------- ------------------------ ----------------------
Dec. 28, 2002 Dec. 29, 2001 Dec. 30, 2000
Net sales (Note 2(o)) $ 293,677 279,779 351,416
Cost of goods sold 203,707 192,525 200,651
----------------------- ------------------------ ----------------------
Gross profit 89,970 87,254 150,765
Sales, marketing and distribution expenses 35,852 34,922 100,711
(Note 2(o))
General and administrative expenses 4,911 14,120 12,957
Management fees - related party 500 500 500
Environmental clean-up 100 950 -
Special charge-severance - - 250
----------------------- ------------------------ ----------------------
Operating income 48,607 36,762 36,347
Other expense:
Gain on sale of assets - (3,112) -
Derivative gain (2,524) - -
Interest expense 26,626 29,847 36,073
Income before income tax expense 24,505 10,027 274
Income tax expense 9,260 4,029 1,559
----------------------- ------------------------ ----------------------
Net income (loss) $ 15,245 5,998 (1,285)
======================= ======================== ======================
See accompanying notes to consolidated financial statements.
28
B&G FOODS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Year ended Year ended Year ended
Dec. 28, 2002 Dec. 29, 2001 Dec. 30, 2000
-------------- ------------- -------------
Dec. 29, 2001
Cash flows from operating activities:
Net income (loss) $ 15,245 5,998 (1,285)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 5,300 14,290 15,754
Amortization of deferred debt issuance costs
and bond discount 2,686 1,972 1,843
Deferred income tax expense 5,532 3,832 2,150
Gain from sale of property, plant and equipment - (3,112) (93)
Provision for doubtful accounts 84 118 128
Changes in assets and liabilities, net of effects
from businesses acquired and net assets held for sale:
Trade accounts receivable (363) 2,432 1,553
Inventories (1,394) (2,788) 5,722
Prepaid expenses (234) 303 (13)
Other assets 33 (400) (9)
Trade accounts payable (2,430) (3,525) 1,141
Accrued expenses 1,931 2,227 (2,790)
Other liabilities 55 87 98
------------------ ------------------ ------------------
Net cash provided by operating activities 26,445 21,434 24,199
Cash flows from investing activities:
Capital expenditures (6,283) (3,904) (5,891)
Net proceeds from sale of assets - 24,090 -
Proceeds from sales of property, plant and equipment - - 211
------------------ ------------------ ------------------
Net cash (used in) provided by investing activities (6,283) 20,186 (5,680)
Cash flows from financing activities:
Payments of long-term debt (114,417) (40,048) (11,569)
Proceeds from issuance of long-term debt 98,760 - -
Proceeds from issuance of equity and capital contributions - 50 -
Payments of debt issuance costs (3,694) - -
------------------ ------------------ ------------------
Net cash used in financing activities (19,351) (39,998) (12,831)
------------------ ------------------ ------------------
Increase in cash and cash equivalents 811 1,622 5,688
Cash and cash equivalents at beginning of period 15,055 13,433 7,745
------------------ ------------------ ------------------
Cash and cash equivalents at end of period $ 15,866 15,055 13,433
Supplemental disclosure of cash flow information - cash paid for:
Interest $22,975 29,966 34,104
Income taxes $3,778 271 652
See accompanying notes to consolidated financial statements.
29
B&G FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 28, 2002 and December 29, 2001
(Dollars in thousands)
(1) Nature of Operations
Organization
B&G Foods, Inc. and subsidiaries (the "Company") is a wholly-owned subsidiary of
B&G Foods Holdings Corp. ("Holdings"), which in turn is majority owned by
Bruckmann, Rosser, Sherrill & Co., L.P. ("BRS"), a private equity investment
firm, and minority owned by management, directors and certain other investors.
Nature of Operations
The Company operates in one industry segment, the manufacturing, selling and
distribution of branded, shelf-stable food products. The Company's products
include pickles, peppers, jams and jellies, canned meats and beans, spices,
syrups, hot sauces, maple syrup, salad dressings and other specialty food
products which are sold to retailers and food service establishments. The
Company distributes these products to retailers in the greater New York
metropolitan area through a direct-store-organization sales and distribution
system and elsewhere in the United States through a nationwide network of
independent brokers and distributors. Sales of a number of the Company's
products tend to be seasonal; however, in the aggregate, the Company's sales are
not heavily weighted to any particular quarter. Sales during the first quarter
of the fiscal year are generally below that of the following three quarters.
Business and Credit Concentrations
The Company's exposure to credit loss in the event of non-payment of accounts
receivable by customers is represented in the amount of such receivables. The
Company performs ongoing credit evaluations of its customers' financial
condition. As of December 28, 2002, the Company does not believe it has any
significant concentration of credit risk with respect to its trade accounts
receivable. The Company had no customers in fiscal 2002, 2001 or 2000 that
exceeded 10% of consolidated net sales.
Disposition
On January 17, 2001, the Company completed the sale of its wholly-owned
subsidiary, Burns & Ricker, Inc. ("Burns & Ricker"), to Nonni's Food Company,
Inc. ("Nonni's") (the "B&R Disposition") pursuant to a stock purchase agreement
of the same date under which the Company sold all of the issued and outstanding
capital stock of Burns & Ricker to Nonni's for $26.0 million in cash. The gain
on the sale, net of transaction expenses, was approximately $3.1 million. The
Company applied the net cash proceeds from the B&R Disposition toward the
partial prepayment of term loans, as required under the Company's Senior Secured
Credit Facility. Burns & Ricker generated sales of $26.4 million during fiscal
2000.
30
B&G FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
Special Charge-Severance
During the second quarter of 2000, the Company recorded a severance charge of
$0.3 million. As part of the severance arrangements, 13 employees were
terminated. At December 30, 2000, all amounts related to such severance charges
were paid.
(2) Summary of Significant Accounting Policies
(a) Fiscal Year and Basis of Presentation
The Company utilizes a 52 week fiscal year ending on the Saturday closest to
December 31.
The financial statements are presented on a consolidated basis. All significant
intercompany balances and transactions have been eliminated.
(b) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, all highly liquid
debt instruments with original maturities of three months or less are considered
to be cash and cash equivalents.
(c) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out and average cost methods.
(d) Property, Plant and Equipment
Property, plant, and equipment are stated at cost. Plant and equipment under
capital leases are stated at the present value of the minimum lease payments.
Depreciation on plant and equipment is calculated using the straight-line method
over the estimated useful lives of the assets, generally 12 to 20 years for
buildings and improvements, 5 to 10 years for machinery and equipment, and 3 to
5 years for office furniture and vehicles. Plant and equipment held under
capital leases and leasehold improvements are amortized on a straight-line basis
over the shorter of the lease term or estimated useful life of the asset.
Expenditures for maintenance, repairs and minor replacements are charged to
current operations. Expenditures for major replacements and betterments are
capitalized.
31
B&G FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
(e) Intangible Assets
Intangible assets consist of goodwill and trademarks. As described in Note 2(o),
the Company adopted the Financial Accounting Standard Board's ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets" on December 30, 2001. Goodwill and intangible assets not
subject to amortization are tested annually for impairment, and are tested for
impairment more frequently if events and circumstances indicate that the asset
might be impaired. An impairment loss is recognized to the extent that the
carrying amount exceeds the asset's fair value.
Prior to adoption of Statement No. 142, goodwill was amortized on a
straight-line basis over 40 years and trademarks were amortized on a
straight-line basis over 31 to 40 years. The Company assessed the recoverability
of the intangible assets by determining whether the amortization of the
intangible assets over their remaining lives could be recovered through
undiscounted future operating cash flows. The amount of impairment, if any, was
measured as the difference between the asset's carrying value and the projected
discounted future operating cash flows using a discount rate reflecting the
Company's average cost of funds.
(f) Deferred Debt Issuance Costs
Deferred debt issuance costs are amortized using the straight-line method over
the term of the related debt agreements and are classified as other non-current
assets. Amortization of deferred debt issuance costs for fiscal years 2002, 2001
and 2000 was $2,508, $1,972 and $1,843, respectively.
(g) Revenue Recognition
Revenues are recognized when products are shipped. The Company reports all
amounts billed to a customer in a sale transaction as revenue, including those
amounts related to shipping and handling. Shipping and handling costs are
included in cost of goods sold. As further described in Note 2(o), certain
coupons and promotional expenses are included as a reduction of net sales.
(h) Advertising Costs
Advertising costs are expensed as incurred. Advertising costs amounted to
approximately $2,202, $1,833 and $2,469 during the fiscal years 2002, 2001 and
2000, respectively.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities of the Company are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and
32
B&G FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided when it is more likely than not that all or some portion of the
deferred tax asset will not be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(j) Pension Plans
The Company has defined benefit pension plans covering substantially all of its
employees. The Company's funding policy is to contribute annually the amount
recommended by its actuaries.
(k) Fair Value of Financial Instruments
Cash and cash equivalents, trade accounts receivable, trade accounts payable,
accrued expenses and due to related party are reflected in the consolidated
financial statements at carrying value, which approximates fair value due to the
short-term nature of these instruments. The fair value of the $220,000 Senior
Subordinated Notes at December 28, 2002, based on quoted market prices, was
$227,700. The carrying value of the Company's remaining borrowings approximates
their fair value based on the current rates available to the Company for similar
instruments.
(l) Use of Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management of the
Company to make a number of estimates and assumptions relating to the reporting
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Some of
the more significant estimates made by management involve trade and consumer
promotion expenses, allowances for excess, obsolete and unsaleable inventories,
and the recoverability of goodwill, trademarks, property, plant and equipment
and deferred tax assets. Actual results could differ from those estimates.
(m) Impairment of Long-Lived Assets
In accordance with SFAS No. 144, long-lived assets, such as property, plant, and
equipment, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would
33
B&G FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
be separately presented in the balance sheet and reported at the lower of the
carrying amount of fair value less costs to sell, and are no longer depreciated.
The assets and liabilities of a disposed group classified as held for sale would
be presented separately in the appropriate asset and liability sections of the
consolidated balance sheet.
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets in accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." The impairment criteria and
measurement requirements of SFAS No. 144 are substantially unchanged from those
of SFAS No. 121 for assets held and used.
(n) Derivative Financial Instruments
The Company accounts for its derivative and hedging transactions in accordance
with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities" (collectively referred to as "Statement No.
133"). Statement No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities and requires an entity to
recognize all derivative instruments either as an asset or a liability in the
balance sheet and to measure such instruments at fair value. These fair value
adjustments are to be included either in the determination of net income or as a
component of accumulated other comprehensive income depending on the nature of
the transaction. The Company has only limited involvement with derivative
financial instruments and does not use them for trading purposes (see Note 6).
(o) Adoption of New Accounting Standards
In 2001, the Emerging Issues Task Force ("EITF") reached a consensus with
respect to EITF Issue No. 00-14, "Accounting for Certain Sales Incentives" (as
codified by EITF Issue 01-09), including point of sale coupons, rebates and free
merchandise, which became effective for the Company in the first quarter of
2002. The consensus includes a conclusion that the value of such sales
incentives that results in a reduction of the price paid by the customer should
be netted against sales and not classified as a sales or marketing expense.
During 2001, the Company recorded reductions in price pursuant to coupons as
sales, marketing and distribution expenses. As required, the Company implemented
the provisions of such EITF consensus in the first quarter of fiscal 2002 and,
as a result, has reclassified prior period coupon expense as a reduction of net
sales. Coupon expense reclassified in accordance with the EITF consensus was
$1.4 million in 2001. Due to the specificity of similar information not being
captured in the Company's information systems for fiscal 2000, the Company is
unable to determine what the reclassification amount should be for that year.
The implementation of the provisions of such EITF consensus alters the
classification of certain sales incentives in the consolidated statements of
operations resulting in a reduction of sales and gross margins, but does not
have any effect on
34
B&G FOODS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
the Company's operating income or net income. The Company historically has
included, and continues to include, free merchandise in cost of goods sold, as
required by the new EITF consensus.
In April 2001, the EITF reached a consensus with respect to EITF Issue No.
00-25, "Vendor Income Statement Characterization of Consideration to a Purchaser
of the Vendor's Products or Services" (as codified by EITF Issue 01-09), which
became effective for the Company in the first quarter of 2002. The consensus
includes a conclusion that consideration from a vendor to a retailer is presumed
to be a reduction to the selling prices of the vendor's products and, therefore,
should be characterized as a reduction of sales when recognized in the vendor's
income statement. As required, the Company implemented the provisions of such
EITF consensus in the first quarter of fiscal 2002 and, as a result, has
reclassified certain prior period expenses as a reduction of net sales. Such
reclassification reduces sales and gross margin, but does not have an impact on
the Company's operating income or net income. Such expenses reclassified in
accordance with the EITF consensus as a reduction of net sales and sales,
marketing and distribution expenses was $51.2 million for fiscal 2001. Due to
the specificity of similar information not being captured in the Company's
information systems for fiscal 2000, the Company is unable to determine what the
reclassification amount should be for that year.
The following table summarizes the reclassification of the prior period amounts
as if the aforementioned new EITF consensuses had been implemented effective
December 31, 2000:
Year Ended December 29, 2001
As Filed Reclassified
----------------- ----------------
Sales $ 332,433 $ 279,779
Gross profit 139,908 87,254
Sales, marketing and distribution expenses 87,576 34,922
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144.
The Company adopted the provisions of