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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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Form 10-K Equivalent
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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(Mark One)
[ ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended June 28, 2003
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from _____ to _____
BIRDS EYE FOODS, INC.
(Exact name of registrant as specified in its charter)
Delaware 16-0845824
(State of incorporation) (IRS Employer Identification Number)
90 Linden Oaks, PO Box 20670, Rochester, NY 14602-0670
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (585) 383-1850
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 _______ 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. [ ] Not Applicable
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES NO X
------- -------
The registrant's common stock is not publicly traded.
Aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant:
NONE
Number of common shares outstanding at September 26, 2003:
Common Stock: 11,000
* This Form 10-K Equivalent is only being filed pursuant to a requirement
contained in the indenture governing Birds Eye Foods, Inc.'s 11 7/8 Percent
Senior Subordinated Notes Due 2008.
---------------------------------------------
1 of 80 Pages
FORM 10-K EQUIVALENT ANNUAL REPORT - FISCAL YEAR 2003
BIRDS EYE FOODS, INC.
TABLE OF CONTENTS
PART I
PAGE
Cautionary Statement on Forward-Looking Statements.................................................. 3
ITEM 1. Description of Business
General Development of Business..................................................................... 3
Narrative Description of Business .................................................................. 4
Financial Information About Industry Segments....................................................... 5
Packaging and Distribution.......................................................................... 5
Trademarks.......................................................................................... 6
Raw Material Sources................................................................................ 6
Environmental Matters............................................................................... 6
Seasonality of Business............................................................................. 7
Practices Concerning Working Capital................................................................ 7
Significant Customers............................................................................... 7
Backlog of Orders................................................................................... 7
Business Subject to Governmental Contracts.......................................................... 8
Competitive Conditions.............................................................................. 8
Market and Industry Data............................................................................ 8
New Products and Research and Development........................................................... 8
Employees........................................................................................... 9
ITEM 2. Description of Properties............................................................................... 9
ITEM 3. Legal Proceedings....................................................................................... 10
ITEM 4. Submission of Matters to a Vote of Security Holders..................................................... 10
PART II
ITEM 5. Market for Registrant's Common Equity and Related Security Holder Matters................................ 11
ITEM 6. Selected Financial Data.................................................................................. 11
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 12
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............................................... 23
ITEM 8. Financial Statements and Supplementary Data.............................................................. 25
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 63
ITEM 9A. Controls and Procedures.................................................................................. 63
PART III
ITEM 10. Directors and Executive Officers of the Registrant....................................................... 64
ITEM 11. Executive Compensation................................................................................... 67
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........... 69
ITEM 13. Certain Relationships and Related Transactions........................................................... 71
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 74
Signatures............................................................................................... 76
Exhibit Index............................................................................................ 78
2
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, Birds Eye Foods, Inc. (the "Company" or "Birds Eye Foods") or
persons acting on behalf of Birds Eye Foods may make oral and written statements
that may constitute "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995 (the "PSLRA") or by the Securities and
Exchange Commission ("SEC") in its rules, regulations, and releases. The Company
desires to take advantage of the "safe harbor" provisions in the PSLRA for
forward-looking statements made from time to time, including, but not limited
to, the forward-looking information contained in the Management's Discussion and
Analysis of Financial Condition and Results of Operations and other statements
made in this Form 10-K Equivalent and in other filings with the SEC.
The Company cautions readers that any such forward-looking statements made by or
on behalf of the Company are based on management's current expectations and
beliefs but are not guarantees of future performance. Actual results could
differ materially from those expressed or implied in the forward-looking
statements. The factors that could impact the Company include:
o the impact of strong competition in the food industry, including
competitive pricing;
o the impact of changes in consumer demand;
o the effectiveness of marketing and shifts in market demand;
o the impact of weather on the volume and quality of raw product;
o the inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer
acceptance;
o the continuation of the Company's success in integrating operations
(including the realization of anticipated synergies in operations and
the timing of any such synergies) and the availability of acquisition
and alliance opportunities;
o the Company's ability to achieve gains in productivity and improvements
in capacity utilization;
o the Company's ability to service debt; and
o interest rate fluctuations.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Birds Eye Foods, Inc. (formerly Agrilink Foods, Inc.) incorporated in 1961 and
based in Rochester, New York, is a leading producer and marketer of branded and
non-branded frozen vegetables and other food products. The terms "Company" and
"Birds Eye Foods" mean "Birds Eye Foods, Inc." and its subsidiaries unless the
context indicates otherwise. The Company has three primary segments in which it
operates, including: branded frozen products, branded dry products, and
non-branded products. The majority of each of the segments' net sales is within
the United States. In addition, all of the Company's operating facilities,
excluding one in Mexico, are within the United States.
Birds Eye Foods is the nation's leader in manufacturing and marketing of frozen
vegetables. The Company markets its branded frozen vegetable products under the
Birds Eye, Birds Eye Voila!, Birds Eye Simply Grillin', Birds Eye Hearty
Spoonfuls, Freshlike and McKenzie's names. In addition, Birds Eye Foods produces
branded dry products, including fruit fillings and toppings (Comstock and
Wilderness), chili and chili ingredients (Nalley and Brooks), salad dressings
(Bernstein's and Nalley), snacks (Tim's, Snyder of Berlin and Husman) and canned
vegetables (Freshlike). The Company's branded products are sold to customers
such as C&S Wholesale Grocers, Inc., DiGiorgio White Rose, Food Lion, Kroger,
Publix Super Markets, Inc., Roundy's, SuperValu, Wal-Mart/Sam's, and Winn-Dixie.
All of the major brands under which the Company markets its products are listed
below under "Trademarks."
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Birds Eye Foods also produces many products for non-branded markets which
include the private label, food service and industrial product lines. The
Company's private label products include frozen and canned vegetables, salad
dressings, salsa, chili products, fruit fillings and toppings, southern frozen
vegetable specialty products, and frozen breaded and battered products, which
are sold to customers such as Albertson's, Aldi, Inc., Associated Wholesale
Grocers, BJ's, Safeway, SuperValu, Wal-Mart/Sam's, Wegmans, Western Family, and
Winn-Dixie.
The Company's food service and industrial products include canned and frozen
vegetables, salad dressings, fruit fillings and toppings, southern frozen
vegetable specialty products, canned fruit and vegetables specialties, frozen
breaded and battered products, and canned and frozen fruit, which are sold to
customers such as ConAgra, Food Service of America, Gordon Food Service, Kraft
Foods, MBM Corporation, SYSCO, and US Food Service.
The percentage of net sales from products under brand names owned and promoted
by the Company amounted to approximately 64 percent in fiscal 2003, comprised of
39 percent of branded frozen net sales and 25 percent of branded dry net sales.
Non-branded items contributed 36 percent of net sales in fiscal 2003.
The Change in Control (the "Transaction"): The "Transaction" closed on August
19, 2002 (the "Closing Date"), pursuant to the terms of a Unit Purchase
Agreement dated June 20, 2002 (the "Unit Purchase Agreement") by and among Birds
Eye Foods, Vestar/Agrilink Holdings LLC ("Vestar/Agrilink Holdings"), and
Pro-Fac Cooperative, Inc. ("Pro-Fac"), which resulted in a change in control of
Birds Eye Foods. As part of the Transaction, Pro-Fac contributed all of its
shares of Birds Eye Foods, constituting 100 percent of the capital stock of
Birds Eye Foods, to Agrilink Holdings LLC ("Holdings LLC") in consideration for
Class B common units of Holdings LLC and Vestar/Agrilink Holdings, together with
certain co-investors (collectively, "Vestar") contributed $175.0 million to the
capital of Holdings LLC, in consideration for preferred units, Class A common
units, and warrants to purchase additional Class A common units. The warrants
were immediately exercised. As a result of the Transaction, Birds Eye Foods is
no longer a wholly-owned subsidiary of Pro-Fac. The transactions consummated
pursuant to the Unit Purchase Agreement are referred to herein collectively as
the "Transaction" and "predecessor" refers to Birds Eye Foods prior to the
Transaction. Prior to the Transaction, Birds Eye Foods was a wholly-owned
subsidiary of Pro-Fac. Pro-Fac is an agricultural cooperative corporation formed
in 1960 under the Cooperative Corporation Laws of New York to process and market
crops grown by its members. See NOTE 2 to the "Notes to Consolidated Financial
Statements" for further discussion.
NARRATIVE DESCRIPTION OF BUSINESS
In the fourth quarter of fiscal 2003, the Company changed its segments to
conform to new internal management reporting used to monitor and manage
financial performance. The Company now has three primary segments in which it
operates: branded frozen, branded dry, and non-branded. Historical segment
information has been reclassified to conform with this change. A description of
the Company's three primary segments follows:
Branded Frozen: The Company's branded frozen family of products includes
traditional frozen vegetables as well as value added products marketed under
recognizable consumer brands. The Birds Eye branded product lines include an
array of traditional frozen vegetables from peas, beans, and corn to roasted
potatoes and several varieties of vegetable blends. Baby vegetables and
vegetables with sauce provide yet another alternative in the portfolio of Birds
Eye frozen offerings. These products come in an array of sizes tailored to meet
the needs of consumers of small households and large families. In addition,
value added products under the Birds Eye umbrella include Birds Eye Voila! and
Birds Eye Simply Grillin'. Birds Eye Voila! is a frozen all-in-one meal
replacement product including vegetable blends, pasta or potatoes, and chicken,
steak or shrimp. Simply Grillin' is a pre-seasoned frozen vegetable,
ready-to-grill or oven-ready product. The Company also markets frozen fruit
products under the Birds Eye brand. In the first quarter of fiscal 2003, the
Company launched its newest value added product offering, Birds Eye Hearty
Spoonfuls, a vegetable based frozen soup bowl.
The Company's portfolio of other branded frozen products includes several
regional brands which command a strong market share in the geographies in which
they compete. Freshlike is a leading consumer brand of frozen vegetables in the
Midwest, and McKenzie's markets Southern-style vegetable products distributed
primarily in the Southern United States.
In fiscal 2003, net sales within the branded frozen segment represented
approximately 39 percent of the Company's total net sales.
Branded Dry: The Company's branded dry family of products includes a wide
variety of product offerings. The Company markets products under brands
including Comstock and Wilderness, well-known fruit fillings and toppings
consumer brands. The Company also markets snack items through regional brands
including Snyder of Berlin, Husman and Tim's. Snyder of Berlin competes in the
Mid-Atlantic states. Husman products are marketed in the Midwest, and Tim's
competes in the Pacific Northwest. In addition, the
4
Company competes in the salad dressing category with the Bernstein's and Nalley
brands marketed in the Pacific Northwest. Adding to the variety of items are
chili and chili ingredients marketed regionally under the Nalley and Brooks
brands in the Pacific Northwest and the Midwest, respectively. Freshlike branded
items consist of canned vegetables which are marketed regionally throughout the
Midwest. The Company commands a strong market share for its branded dry products
in the geographies in which they compete. Branded dry products represented
approximately 25 percent of the Company's net sales in fiscal 2003.
The Company also licenses the Birds Eye Fresh trademark to several fresh
vegetable partners.
Prior to March 2, 2003, the Company was a 50 percent partner with Flanagan
Brothers, Inc. ("Flanagan Brothers") in Great Lakes Kraut Company, LLC ("GLK"),
a producer and marketer of sauerkraut. This joint venture included the Silver
Floss and Krrrrisp Kraut brands. On March 2, 2003, the Company closed a
transaction pursuant to which the operating assets and liabilities of GLK were
transferred to a 100 percent owned subsidiary of Flanagan Brothers. See NOTE 7
to the "Notes to Consolidated Financial Statements."
Non-Branded: The Company's non-branded markets include its private label, food
service, and industrial product lines.
Birds Eye Foods is the largest producer of private label frozen vegetables in
the United States. Other private label product categories include fruit fillings
and toppings, salad dressings, salsa and chili. The Company supplies this
variety of products to large grocery store chains. Birds Eye Foods is the only
national manufacturer of both branded and private label frozen vegetable
products. Management believes that the Company's scale and depth of offerings
provide a significant competitive advantage.
Also included in the non-branded segment are the food service, industrial and
export product offerings. Food service products include both frozen and canned
vegetables, salad dressings, fruit fillings and toppings and canned and frozen
fruit. These food service products are marketed and sold to restaurant chains
and food service distributors. Industrial and export products primarily include
frozen vegetables and fruit which are sold to other food manufacturers for use
as ingredients in their products. Non-branded products represented approximately
36 percent of the Company's net sales in fiscal 2003.
Discontinued Operations: On September 25, 2002, the Company sold its applesauce
business to Knouse Foods. Applesauce had been produced in the Company's Red
Creek, New York and Fennville, Michigan facilities. This sale resulted in the
closure of the Red Creek, New York facility. The Michigan plant will continue to
operate as a production facility.
On March 14, 2003, the Company sold its popcorn business and production facility
in Ridgway, Illinois to Gilster-Mary Lee Corporation.
On June 27, 2003, the Company sold its Veg-All business to Allen Canning
Company. This sale resulted in the closure of the Company's Green Bay, Wisconsin
facility.
The net sales of the applesauce, popcorn and Veg-All businesses are included in
discontinued operations in the Company's financial statements in accordance with
Statement of Financial Accounting Standards ("SFAS") 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." See NOTE 5 to the "Notes to
Consolidated Financial Statements" for additional disclosures regarding
discontinued operations.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The business of the Company is principally conducted in three industry segments:
branded frozen, branded dry, and non-branded. The financial statements for the
fiscal years ended June 28, 2003, June 29, 2002, and June 30, 2001, which are
included in this report, reflect information relating to those segments for each
of the Company's last three fiscal years, including revenues, income/(loss) and
total assets. See NOTE 13 to the "Notes to Consolidated Financial Statements"
for additional disclosures regarding segments.
PACKAGING AND DISTRIBUTION
The food products produced by the Company are distributed to various consumer
markets in all 50 states. International sales account for a small portion of the
Company's activities. The Company's products are primarily sold through food
brokers who sell primarily to supermarket chains and various institutional
entities. Snack products within the branded dry segment are primarily marketed
through distributors (some of which are owned and operated by the Company) who
sell directly to retail outlets in the Midwest, Mid-Atlantic and Pacific
Northwest. Customer brand operations encompass the sale of products under
private labels to chain stores and under the controlled labels of buying groups.
The Company has developed central storage and distribution facilities that
permit multi-item single shipments to customers in key marketing areas.
5
The Company maintains a multiyear logistic agreement with APL Logistics ("APL")
under which APL provides freight management, packaging and labeling services,
and distribution support to and from production facilities owned by the Company
in and around Coloma, Michigan.
The Company also maintains a long-term logistics agreement with Americold
Logistics, Inc. ("Americold") under which Americold manages the Company's
Montezuma, Georgia frozen food distribution facility.
TRADEMARKS
The major brand names under which the Company markets its products are
trademarks of the Company. Such brand names are considered to be of material
importance to the business of the Company since they have the effect of
developing brand identification and maintaining consumer loyalty. There are
trademark registrations for substantially all of the Company's trademarks. These
trademark registrations are of perpetual duration so long as they are
periodically renewed. It is the Company's intent to maintain its trademark
registrations. The major brand names utilized by the Company follow:
Segment Brand Name
- ------- ----------
Branded Frozen Birds Eye, Birds Eye Voila!(1), Birds Eye Simply Grillin'(1), Birds Eye Hearty Spoonfuls(1); Freshlike,
McKenzie's, McKenzie's Gold King, Southern Farms, Southland, Tropic Isle
Branded Dry Birds Eye Fresh(1), Freshlike, Comstock, Brooks, Nalley, Wilderness, Snyder of Berlin, Tim's Cascade Style
Potato Chips, La Restaurante, Erin's, Thank You, Husman, Flavor Destinations(1),` Mariner's Cove, Riviera,
Bernstein's, Pixie, Globe, Greenwood,
Non-branded Chill-Ripe
(1) Application filed and U.S. federal registration is pending.
RAW MATERIAL SOURCES
Birds Eye Foods purchases raw materials for use in its manufacturing process.
These purchases are made on the open market and from Pro-Fac, as the Company's
preferred supplier pursuant to the Terms of the Amended and Restated Marketing
and Facilitation Agreement between Birds Eye Foods and Pro-Fac. Of the commodity
types supplied by Pro-Fac, approximately 65 percent were received from members
of Pro-Fac during fiscal 2003. The Company also purchases on the open market
some crops of the same type and quality as those purchased from Pro-Fac. Such
open market purchases may occur at prices higher or lower than those paid to
Pro-Fac for similar products. Birds Eye Foods expects to continue to purchase a
substantial portion of its raw product needs from Pro-Fac pursuant to the
Amended and Restated Marketing and Facilitation Agreement. See further
discussion of Birds Eye Foods' relationship with Pro-Fac in NOTES 2 and 4 to the
"Notes to Consolidated Financial Statements."
Weather conditions can impact the profitability of all of the segments of the
business. Favorable weather conditions can produce high crop yields and an
oversupply situation, while excessive rain or drought conditions can produce low
crop yields and a shortage situation. However, the Company believes that its
geographic diversification helps mitigate this risk.
The utilization of the Company's facilities is directly correlated to the timing
of crop harvests and crop yields. Poor weather conditions hurt crop yields and
result in uneven crop delivery cycles that increase production costs. In
addition, pricing can be impacted by crop size and yields and the overall
national supply.
The Company purchases all of its requirements for nonagricultural products,
including containers, in the open market. Although the Company has not
experienced any difficulty in obtaining adequate supplies of such items,
occasional periods of short supply of certain raw materials may occur.
ENVIRONMENTAL MATTERS
The disposal of solid and liquid waste and air pollutants resulting from the
preparation and processing of foods are subject to various federal, state, and
local environmental laws and regulations. Such laws and regulations have had an
important effect on the food processing industry as a whole, requiring
substantially all firms in the industry to incur material expenditures for
modification of existing processing facilities and for construction of new waste
treatment facilities. The Company is also subject to standards imposed by
regulatory agencies pertaining to the occupational health and safety of its
employees. Management believes that
6
continued measures to comply with such laws and regulations will not have a
material adverse effect upon its competitive position or financial condition.
Among the various programs for the protection of the environment which have been
adopted by the Company to date, the most important for the operations of the
Company are the wastewater discharge permit programs administered by the
environmental protection agencies in those states in which the Company does
business and by the Federal Environmental Protection Agency. Under these
programs, permits are required for processing facilities which discharge certain
wastes into streams, publicly-owned treatment works, and other bodies of water,
and the Company is required to meet certain discharge standards in accordance
with compliance schedules established by such agencies. The Company has received
permits for all facilities for which permits are required. Each year the Company
submits applications for renewal permits as required for the facilities.
While the Company cannot predict with certainty the effect of any proposed or
future environmental legislation or regulations on its processing operations,
management of the Company believes that the waste disposal systems which are now
in operation or which are being constructed or designed are sufficient to comply
with all currently applicable laws and regulations.
The Company is cooperating with environmental authorities in remedying various
minor environmental matters at several of its plants. The Company is also
working with regulatory agencies to properly discontinue permits and close down
wastewater treatment facilities at plants no longer in use or in the process of
being shutdown. Such actions are being conducted pursuant to procedures approved
by the appropriate environmental authorities at a cost that is not expected to
be material.
Expenditures related to environmental programs and facilities have not had, and
are not expected to have, a material effect on the earnings of the Company. In
fiscal 2003, total capital expenditures of the Company were $16.3 million of
which approximately $0.3 million was devoted to the construction of
environmental facilities. The Company estimates that environmental capital
expenditures will be approximately $0.6 million for the 2004 fiscal year.
However, there can be no assurance that expenditures will not be higher.
As part of the Transaction completed on August 19, 2002, Pro-Fac agreed to
indemnify Birds Eye Foods for certain liabilities. Generally, environmental
matters are subject to indemnification if the particular liability exceeds
$200,000 once the aggregate of all liabilities subject to indemnification
exceeds a $10.0 million indemnification "basket." In addition, however, a
specific indemnification provision is in place covering the Lawton, Michigan
facility of Birds Eye Foods. The Unit Purchase Agreement for the Transaction
provides that Birds Eye Foods retains responsibility for up to $2.5 million of
capital expenditures to address environmental compliance provided those
expenditures are incurred over the three-year period commencing on August 19,
2002.
SEASONALITY OF BUSINESS
From a sales point of view, the business of the Company is not highly seasonal,
since the demand for its products is fairly constant throughout the year.
Exceptions to this general rule include some products that have higher sales
volume in the cool weather months, such as certain frozen and canned vegetables
and fruits, chili, and fruit fillings and toppings, and others that have higher
sales volume in the warm weather months, such as potato chips and salad
dressings. Since many of the raw materials processed by the Company are
agricultural crops, production of these products is predominantly seasonal,
occurring during and immediately following the harvest seasons of such crops.
PRACTICES CONCERNING WORKING CAPITAL
The Company must maintain substantial inventories throughout the year of
products produced from seasonal raw materials. These inventories are generally
financed through seasonal borrowings. The Company uses its revolving credit
facility and cash on hand for seasonal borrowings, the amount of which
fluctuates during the year. Both the maintenance of substantial inventories and
the practice of seasonal borrowing are common to the food processing industry.
SIGNIFICANT CUSTOMERS
For the fiscal year ended June 28, 2003, Wal-Mart/Sam's accounted for 12 percent
of the Company's consolidated revenue. In addition, Wal-Mart/Sam's represented
18 percent of the branded frozen segment's revenue in fiscal 2003.
BACKLOG OF ORDERS
Backlog of orders has not historically been significant in the business of the
Company. Orders are filled shortly after receipt from inventories of packaged
and processed foods.
7
BUSINESS SUBJECT TO GOVERNMENTAL CONTRACTS
No material portion of the business of the Company is subject to renegotiation
of contracts with, or termination by, any governmental agency.
COMPETITIVE CONDITIONS
All products of the Company, particularly branded products, compete with those
of other national and major regional food processors under highly competitive
conditions. The principal methods of competition in the food industry are a
readily available and broad line of products, product quality, price, and
marketing and sales promotion.
Quality of product and uniformity of quality are important methods of
competition. Birds Eye Foods' relationship with Pro-Fac gives the Company local
sources of supply, thus allowing the Company to exercise control over the
quality and uniformity of much of the raw product that it purchases. The members
of Pro-Fac generally operate relatively large production operations with
emphasis on mechanized growing and harvesting techniques. This factor is also an
advantage in producing uniform, high-quality food products.
Birds Eye Foods' pricing is generally competitive with that of other food
processors for products of comparable quality. The branded products of the
Company are marketed under national and regional brands. In fiscal 2003,
marketing programs for national brands focused primarily on Birds Eye, Birds Eye
Hearty Spoonfuls, Birds Eye Voila! and Birds Eye Simply Grillin'. National
advertising campaigns can include television, magazines, coupons, and in-store
promotions. Marketing programs for regional brands are focused on local tastes
and preferences as a means of developing consumer brand loyalty. Regional
advertising campaigns include magazines, coupons, and in-store promotions.
Although the relative importance of the above factors may vary between
particular products or customers, the above description is generally applicable
to all of the products of the Company in the various markets in which they are
distributed.
It is difficult to estimate the number of competitors in the markets served by
the Company. Nearly all products sold by Birds Eye Foods compete with the
nationally advertised brands of leading food processors, including Del Monte,
General Mills, Frito-Lay, Kraft, and similar major brands, as well as with the
branded and private label products of a number of regional processors, many of
which operate only in portions of the marketing area served by the Company.
MARKET AND INDUSTRY DATA
Unless otherwise stated in this report, industry and market share data used
throughout this Form 10-K Equivalent were derived from industry sources believed
by the Company to be reliable, including information provided by Information
Resources, Inc. Consultants' reports and industry publications generally state
that the information contained therein has been obtained from sources believed
to be reliable, but that the accuracy and completeness of such information is
not guaranteed. The Company has not independently verified such data and makes
no representation to its accuracy.
NEW PRODUCTS AND RESEARCH AND DEVELOPMENT
The Company operates a technical center located in Green Bay, Wisconsin that is
responsible for new product development, quality assurance, and engineering.
Approximately 31 employees are employed at this facility. The Company follows a
four-stage new product development process as follows: screening, feasibility,
development, and commercialization. This new product development process ensures
input from consumers, customers, and internal functional areas before a new
product is brought to market.
Birds Eye Foods also focuses on the development of related products or
modifications of existing products for the Company's branded businesses and
customized products for the Company's non-branded businesses.
The amount expensed on company-sponsored and customer-sponsored activities
relating to the development of new products or the improvement of existing
products was $3.0 million, $2.5 million, and $2.6 million in fiscal 2003, 2002,
and 2001, respectively.
During fiscal 2002, the Company developed Birds Eye Hearty Spoonfuls, a frozen
soup product that includes large cut Birds Eye vegetables and bite size pieces
of protein in a variety of flavors. Birds Eye Hearty Spoonfuls was introduced in
the first quarter of fiscal 2003, in conjunction with a national advertising
campaign. Also in June 2003, the Company introduced new flavor varieties of
frozen sauced vegetables. These products feature unique flavor technology
packaged in a microwaveable tray for convenience and serve one to two member
households. In addition, the Company introduced new flavors of sauced vegetables
in a family-size bag.
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EMPLOYEES
As of June 28, 2003, the Company had approximately 3,200 full-time employees, of
whom 2,130 were engaged in production and the balance in management, sales and
administration. As of that date, the Company also employed approximately 700
seasonal and other part-time employees, almost all of whom were engaged in
production. Most of the production employees are members of various labor
unions. The Company believes its current relationship with its employees is
good.
ITEM 2. DESCRIPTION OF PROPERTIES
All plants, warehouses, office space and other facilities used by the Company in
its business are either owned by Birds Eye Foods or one of its subsidiaries or
leased from unaffiliated third parties. The majority of the properties owned by
Birds Eye Foods are subject to mortgages in favor of its primary lender. In
general, the properties include offices, processing plants and warehouse space.
Some processing plants are located in rural areas that are convenient for the
delivery of crops. The Company also has dispersed warehouse locations to
facilitate the distribution of finished products. Birds Eye Foods believes that
its facilities are in good condition and suitable for the operations of the
Company.
The Company's Hortonville, Wisconsin; Sodus, Michigan; Enumclaw, Washington; Red
Creek, New York; Alton, New York; Uvalde, Texas; Alamo, Texas; Green Bay,
Wisconsin; Bridgeville, Delaware; and fresh pack properties in Montezuma Georgia
are classified as held for sale at June 28, 2003. In September 2003, the Company
sold its Hortonville, Wisconsin facility.
The following table describes all material facilities leased or owned by the
Company (other than the properties held for sale and certain public warehouses
leased by the Company from unaffiliated third parties from time to time). Except
as otherwise noted, each facility set forth below is owned by Birds Eye Foods.
FACILITIES UTILIZED BY THE COMPANY
Type of Property Location Square Feet Segment
- ---------------- -------- ----------- --------------------------
Freezing plant and distribution center Darien, WI 348,800 Branded frozen/non-branded
Freezing plant and repackaging plant Celaya, Mexico 318,620 Branded frozen/non-branded
Freezing plant and warehouse Oakfield, NY 263,410 Branded frozen/non-branded
Freezing plant, repackaging plant and warehouse Waseca, MN 258,475 Branded frozen/non-branded
Freezing plant, repackaging plant and warehouse Watsonville, CA 207,600 Branded frozen/non-branded
Freezing plant, repackaging plant and warehouse Fairwater, WI 178,298 Branded frozen/non-branded
Freezing plant Bergen, NY 138,554 Branded frozen/non-branded
Freezing plant and warehouse Barker, NY 123,600 Branded frozen/non-branded
Repackaging plant and distribution center Fulton, NY 263,268 Branded frozen/non-branded
Repackaging plant Montezuma, GA 57,370 Branded frozen/non-branded
Repackaging plant(1) San Antonio, TX 20,445 Branded frozen/non-branded
Cold storage, repackaging plant and public
storage warehouse Brockport, NY 404,410 Branded frozen/non-branded
Canning plant and warehouse Fennville, MI 350,000 Branded dry/non-branded
Canning plant and warehouse Lawton, MI 142,000 Branded dry/non-branded
Warehouse(1) Waseca, MN 91,400 Branded frozen/non-branded
Labeling plant and distribution center(1) Fond du Lac, WI 330,000 Branded dry/non-branded
Manufacturing plant and warehouse Tacoma, WA 358,218 Branded dry/non-branded
Manufacturing plant and warehouse Cincinnati, OH 113,576 Branded dry
Manufacturing plant, warehouse and office Berlin, PA 190,225 Branded dry
Manufacturing plant, warehouse, distribution center
and office(1) Algona, WA 107,000 Branded dry
Distribution center(1) Coraopolis, PA 15,000 Branded dry
Distribution center(1) Canal Fulton, OH 14,000 Branded dry
Distribution center(1) Knoxville, TN 12,500 Branded dry
Distribution center(1) Bristol, TN 11,500 Branded dry
Distribution center(1) Ashland, KY 10,760 Branded dry
Distribution center(1) Monessen, PA 10,000 Branded dry
Distribution center(1) Altoona, PA 10,000 Branded dry
9
Type of Property Location Square Feet Segment
- ---------------- -------- ----------- --------------
Distribution center(1) Dayton, OH 9,200 Branded dry
Distribution center(1) Elwood City, PA 8,000 Branded dry
Headquarters office (1) Rochester, NY 76,372 Corporate
Office building - Green Bay Green Bay, WI 40,500 Corporate
Office building - Tacoma Tacoma, WA 20,682 Corporate
(1) Leased from third parties, although certain related equipment is owned by
the Company.
ITEM 3. LEGAL PROCEEDINGS
The information set forth in NOTE 15 "Other Matters - Legal Matters" to the
"Notes to Consolidated Financial Statements" is incorporated into this ITEM 3.
by reference
In addition, Birds Eye Foods is a party to various other legal proceedings from
time to time in the normal course of its business. In the opinion of management,
any liability that the Company might incur upon the resolution of these
proceedings will not, in the aggregate, have a material adverse effect on the
Company's business, financial condition, or results of operations. Further, no
such proceedings are known to be contemplated by any governmental authorities.
The Company maintains general liability insurance coverage in amounts deemed to
be adequate by management.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
Birds Eye Foods common stock is not publicly traded.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in Thousands)
Birds Eye Foods, Inc.
FIVE YEAR SELECTED FINANCIAL DATA
Periods Ended Fiscal Years Ended June
----------------------------------- --------------------------------------------------
Successor | Predecessor
August 19, 2002- | June 30, 2002 - Predecessor Predecessor Predecessor Predecessor
June 28, 2003 | August 18, 2002 2002 2001(a) 2000 1999(b)
-------------- | --------------- ---------- ----------- ---------- -----------
|
Consolidated Summary of |
Operations: |
Net sales $779,049 | $ 99,216 $ 964,454 $1,093,742 $1,039,692 $1,080,657
Cost of sales (596,401) | (76,255) (751,151) (882,775) (816,061) (880,426)
-------- | ---------- ---------- ---------- ---------- ---------
Gross profit 182,648 | 22,961 213,303 210,967 223,631 200,231
Selling, administrative, and |
general expenses (106,452) | (15,156) (115,403) (130,393) (133,392) (131,390)
Restructuring 0 | 0 (2,622) 0 0 (5,000)
Gain from pension curtailment 0 | 0 2,472 0 0 0
Gains on sales of assets 0 | 0 0 0 6,635 64,734
Income from Great Lakes Kraut |
Company, LLC 1,770 | 277 2,457 1,779 2,418 2,787
Goodwill impairment charge 0 | 0 (179,025) 0 0 0
Early extinguishment of debt 0 | 0 0 0 0 (28,487)
-------- | ---------- ---------- ---------- ---------- ---------
Operating income/(loss) before |
dividing with Pro-Fac 77,966 | 8,082 (78,818) 82,353 99,292 102,875
Interest expense (40,789) | (7,531) (63,001) (76,101) (75,429) (62,818)
Amortization of debt issue costs |
associated with the |
Bridge Facility 0 | 0 0 0 0 (5,500)
-------- | ---------- ---------- ---------- ---------- ---------
Pretax income/(loss) from |
continuing operations and |
before dividing with Pro-Fac 37,177 | 551 (141,819) 6,252 23,863 34,557
Pro-Fac share of income 0 | 0 (16,842) (732) (12,328) 0
-------- | ---------- ---------- ---------- ---------- ---------
Pretax income/(loss) from |
continuing operations 37,177 | 551 (158,661) 5,520 11,535 34,557
Tax (provision)/benefit (14,877) | (226) 30,806 (4,984) (5,524) (15,711)
-------- | ---------- ---------- ---------- ---------- ---------
Income/(loss) before |
discontinued operations 22,300 | 325 (127,855) 536 6,011 18,846
Discontinued operations, |
net of tax (1,544) | (240) (2,839) (465) 413 (1,892)
-------- | ---------- ---------- ---------- ---------- ---------
Net income/(loss) $ 20,756 | $ 85 $ (130,694) $ 71 $ 6,424 $ 16,954
======== | ========== ========== ========== ========== =========
Balance Sheet Data:
Working capital(c) $316,901 $ 302,606 $ 253,010 $ 254,094 $ 225,363
Ratio of current assets to
current liabilities 3.0:1 3.1:1 2.2:1 2.2:1 2.0:1
Total assets $909,383 $ 857,741 $1,078,565 $1,098,887 $1,110,061
Cash and cash equivalents $153,756 $ 14,686 $ 7,656 $ 4,994 $ 6,540
Long-term debt and
senior-subordinated notes
(excludes current portion) $459,970 $ 623,057 $ 631,128 $ 644,712 $ 668,316
Other Statistics:
Average number of employees:
Regular 3,447 4,239 4,627 5,510 6,040
Seasonal 844 1,649 2,931 2,152 2,838
(a) Consists of 53 weeks.
(b) Includes nine months of operating results from the September 28, 1998
acquisition of the frozen and canned vegetable business of Dean Foods
Vegetable Company.
(c) Working capital represents current assets (including cash) less current
liabilities.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to outline the significant reasons for changes
in the Consolidated Statement of Operations from fiscal 2001 through fiscal
2003.
The consolidated financial statements include the results of Birds Eye Foods,
Inc. ("Birds Eye Foods" or the "Company"). On August 19, 2002, a majority
interest in Birds Eye Foods was indirectly acquired by Vestar/Agrilink Holdings
LLC and its affiliates (the "Transaction" - see NOTE 2 to the "Notes to
Consolidated Financial Statements"). In accordance with the guidelines for
accounting for business combinations, the investment by Vestar/Agrilink Holdings
and its co-investors ("Vestar") plus related purchase accounting adjustments
have been "pushed down" and recorded in Birds Eye Foods' financial statements
for the period subsequent to August 18, 2002, resulting in a new basis of
accounting for the "successor" period. Information for the "predecessor" period
prior to the transaction date is presented on the Company's historical basis of
accounting.
In order to provide a meaningful basis of comparing the Company's results of
operations, the results of operations for the "predecessor" period (June 30,
2002 to August 18, 2002) have been combined with the results of operations for
the "successor" period (August 19, 2002 to June 28, 2003). These combined
Company results have been compared to the corresponding period in fiscal 2002
and fiscal 2001.
Birds Eye Foods has three primary segments including: branded frozen, branded
dry, and non-branded. The majority of each of the segments' net sales are within
the United States. In addition, all of the Company's operating facilities,
excluding one in Mexico, are within the United States.
The Company's branded frozen family of products includes traditional frozen
vegetables as well as value added products marketed under recognizable brand
names such as Birds Eye, Birds Eye Voila!, Birds Eye Simply Grillin', Birds Eye
Hearty Spoonfuls, Freshlike and McKenzie's. The Company's branded dry family of
products includes a wide variety of product offerings, including fruit fillings
and toppings (Comstock and Wilderness), chili and chili ingredients (Nalley and
Brooks), salad dressings (Bernstein's and Nalley), snacks (Tim's, Snyder of
Berlin and Husman) and canned vegetables (Freshlike). Birds Eye Foods also
produces many products for the non-branded markets which include private label,
food service and industrial markets. The Company's private label products
include frozen and canned vegetables, salad dressings, salsa, chili products,
fruit fillings and toppings, southern frozen vegetable specialty products, and
frozen breaded and battered products. The Company's food service/industrial
products include frozen and canned vegetables, salad dressings, fruit fillings
and toppings, southern frozen vegetable specialty products, specialties, frozen
breaded and battered products, and frozen and canned fruit.
The following tables illustrate the Company's results of operations by segment
for the fiscal years ended June 28, 2003, June 29, 2002, and June 30, 2001, and
the Company's total assets by segment at June 28, 2003, June 29, 2002, and June
30, 2001.
Net Sales
(Dollars in Millions)
Fiscal Years Ended
-------------------------------------------------------------
June 28, June 29, June 30,
2003 2002 2001
---------------- --------------- -------------------
% of % of % of
$ Total $ Total $ Total
----- ----- ----- ----- ------- -----
Branded frozen 340.8 38.8 368.8 38.2 404.5 37.0
Branded dry 218.2 24.8 222.3 23.1 235.8 21.5
Non-branded 319.3 36.4 373.4 38.7 453.4 41.5
----- ----- ----- ----- ------- -----
Total 878.3 100.0 964.5 100.0 1,093.7 100.0
===== ===== ===== ===== ======= =====
12
Operating Income
(Dollars in Millions)
Fiscal Years Ended
-------------------------------------------------------------------
June 28, June 29, June 30,
2003 2002 2001
------------------- ------------------ --------------------
% of % of % of
$ Total $ Total $ Total
------------------- ---------- ------ ---------- --------
Branded frozen 54.1 62.8 75.7 77.5 71.5 86.8
Branded dry 43.8 50.9 40.5 41.5 33.0 40.0
Non-branded (11.8) (13.7) (15.9) (16.3) (22.1) (26.8)
Corporate charges(1) 0.0 0.0 (2.6) (2.7) 0.0 0.0
----- ----- ------ ----- ------ -----
Continuing segment operating income(2) 86.1 100.0 97.7 100.0 82.4 100.0
===== ===== =====
Gain from pension curtailment 0.0 2.5 0.0
Goodwill impairment charge 0.0 (179.0) 0.0
----- ------- -----
Operating income/(loss) before
dividing with Pro-Fac 86.1 (78.8) 82.4
===== ====== =====
(1) Represents restructuring expenses which are not allocated to individual
segments. See NOTE 15 to the "Notes to Consolidated Financial Statements."
(2) The gain from pension curtailment is excluded from continuing segment
operating income as management believes the gain is non-recurring.
EBITDA(1)
The following table sets forth continuing segment EBITDA (defined as operating
income/(loss) before dividing with Pro-Fac, depreciation and amortization) for
the fiscal years ended June 28, 2003, June 29, 2002, and June 30, 2001. The
Company believes that EBITDA is an appropriate measure of evaluating the
operating performance of its segments, and it is a primary measure used
internally by management to manage the business. EBITDA is also a primary
measure used externally by the Company's investors and analysts to ensure
consistent comparability. In conjunction with the Transaction, net assets have
been adjusted to fair value and debt was reduced. In addition, changes in the
Company's operating structure no longer require it to share its profits with
Pro-Fac. Accordingly, depreciation, interest expense, and Pro-Fac share of
income have decreased, making period-to-period comparisons of operating income
and net income difficult to analyze. Therefore, management believes EBITDA is a
measurement that allows the operations of the business to be compared in a
consistent manner. However, EBITDA should be considered in addition to, not as a
substitute for or superior to operating income, net income, cash flows, and
other measures of financial performance prepared in accordance with GAAP. As
EBITDA is not a measure of performance calculated in accordance with GAAP, this
measure may not be comparable to similarly titled measures employed by other
companies.
13
(Dollars in Millions)
Fiscal Years Ended
--------------------------------------------------------------
June 28, June 29, June 30,
2003 2002 2001
------------------ ------------------ ---------------
% of % of % of
$ Total $ Total $ Total
------ ------ ------- ----- ------ ------
Branded frozen 63.0 55.7 84.5 66.4 84.8 70.4
Branded dry 47.7 42.2 45.2 35.5 40.1 33.3
Non-branded 2.4 2.1 0.1 0.1 (4.5) (3.7)
Corporate charges(2) 0.0 0.0 (2.6) (2.0) 0.0 0.0
------ ------ ------- ----- ------ ------
Continuing segment EBITDA 113.1 100.0 127.2 100.0 120.4 100.0
====== ===== ======
Reconciliation of EBITDA to net income/(loss):
Gain from pension curtailment 0.0 2.5 0.0
Goodwill impairment charge 0.0 (179.0) 0.0
Depreciation and amortization (27.0) (29.5) (38.0)
-------- -------- -------
Operating income/(loss) before dividing with Pro-Fac 86.1 (78.8) 82.4
Interest expense (48.3) (63.0) (76.1)
Pro-Fac share of income 0.0 (16.8) (0.7)
Tax (provision)/benefit (15.1) 30.8 (5.0)
Discontinued operations, net of tax (1.8) (2.9) (0.5)
-------- -------- -------
Net income/(loss) 20.9 (130.7) 0.1
======== ======== =======
(1) Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
is defined as the sum of operating income/(loss) before dividing with
Pro-Fac, depreciation, amortization and excludes discontinued operations.
(2) Represents restructuring expenses which are not allocated to individual
segments. See NOTE 15 to the "Notes to Consolidated Financial Statements."
Total Assets
(Dollars in Millions)
Fiscal Years Ended
--------------------------------------------------------------------
June 28, June 29, June 30,
2003 2002 2001
-------------------- -------------------- --------------------
% of % of % of
$ Total $ Total $ Total
-------- ------- ------- ------- ------ ------
Branded frozen 360.8 39.6 300.0 35.0 414.3 38.4
Branded dry 144.7 15.9 134.9 15.7 178.8 16.6
Non-branded 274.2 30.2 372.8 43.5 427.5 39.6
Other(1) 116.2 12.8 46.1 5.4 57.9 5.4
-------- ------- ------- ------ ------- ------
Continuing segments 895.9 98.5 853.8 99.6 1,078.5 100.0
Assets held for sale 13.5 1.5 3.9 0.4 0.1 0.0
-------- ------- ------- ------ ------- ------
Total 909.4 100.0 857.7 100.0 1,078.6 100.0
======== ===== ======= ====== ======= ======
(1) Includes corporate assets of the Company not allocated to individual
segments.
CHANGES FROM FISCAL 2002 TO FISCAL 2003
Net Sales: Net sales were $878.3 million in fiscal 2003, a decline of $86.2
million or 8.9 percent, as compared to $964.5 million in fiscal 2002. The
decrease is primarily the result of a $54.1 million decline in non-branded
product sales, of which $34.8 million resulted from the expiration of two
co-pack agreements, and $17.2 million resulted from the Company's decision to
rationalize certain product offerings. The Company also experienced an $18.7
million decline in its Birds Eye Voila! product line, resulting from certain
competitive pressures in the bag meal category. Management is currently
evaluating various pricing strategies and other alternatives to enhance
performance of this product line.
Gross Profit: Gross profit was $205.6 million in fiscal 2003, a decrease of $7.7
million, or 3.6 percent as compared to $213.3 million in fiscal 2002. However,
the Company's gross profit margin increased to 23.4 percent from 22.1 percent in
the prior year period. The increase in gross profit margin is primarily the
result of price increases implemented in the non-branded market during both the
14
current and prior year and the elimination of co-pack non-branded sales, which
typically carry a lower gross margin. In addition, the branded dry segment
showed enhanced profitability within the filling and topping product line.
Improvements in gross profit were more than offset by lower production volumes
as a result of both management's efforts to reduce inventory levels and a lower
than anticipated crop intake caused by unfavorable weather conditions. Gross
profit was also negatively impacted by introduction costs associated with Birds
Eye Hearty Spoonfuls.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses were $121.6 million in fiscal 2003, an increase of $6.2
million, or 5.4 percent as compared to $115.4 million in fiscal 2002. The
increase is primarily attributable to $9.2 million of marketing expenses
associated with the launch of Birds Eye Hearty Spoonfuls in fiscal 2003.
Partially offsetting the increase in marketing initiatives was a reduction in
general administrative costs and a reduction in variable selling expenses,
corresponding to the net sales changes outlined above.
Continuing Segment Operating Income: Continuing segment operating income was
$86.1 million in fiscal 2003, a decrease of $11.6 million, or 11.9 percent, as
compared to $97.7 million in fiscal 2002. This decrease is attributable to the
factors discussed above. The decrease in operating income within branded frozen
was $21.6 million. Increases in operating income within the branded dry and
non-branded segments were $3.3 million and $4.1 million, respectively.
Significant variances are highlighted below in the "Segment Review."
Restructuring: On June 23, 2000, the Company sold its pickle business to Dean
Pickle and Specialty Product Company. As part of that transaction, Birds Eye
Foods agreed to contract pack Nalley and Farman's pickle products for a period
of two years, ending June 2002. In anticipation of the completion of this
co-pack contract, the Company initiated restructuring activities for
approximately 140 employees in that facility located in Tacoma, Washington. The
total restructuring charge amounted to $1.1 million and was primarily comprised
of employee termination benefits.
In addition, on October 12, 2001, the Company announced a reduction of
approximately 7 percent of its nationwide workforce, for a total of
approximately 300 positions. The reductions are part of an ongoing focus on
low-cost operations and included both salaried and hourly positions. In
conjunction with the reductions, the Company recorded a charge against earnings
of approximately $1.6 million in fiscal 2002, primarily comprising employee
termination benefits. Reductions in personnel included operational and
administrative positions.
Gain from Pension Curtailment: During September 2001, the Company made the
decision to freeze benefits provided under its Master Salaried Retirement Plan.
Under the provisions of Statement of Financial Accounting Standard ("SFAS") 88,
"Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits," these benefit changes resulted in the recognition
of a $2.5 million net curtailment gain in fiscal 2002. See NOTE 12 to the "Notes
to Consolidated Financial Statements."
Income from Great Lakes Kraut Company, LLC: This amount represents earnings
received from the investment in Great Lakes Kraut Company LLC ("GLK"), a former
joint venture between Birds Eye Foods and Flanagan Brothers, Inc. Income from
the joint venture was $2.0 million in fiscal 2003, a decline of $0.5 million, as
compared to $2.5 million in fiscal 2002. This decrease is a result of the
completion of the GLK Transaction in March 2003. See NOTE 7 to the "Notes to
Consolidated Financial Statements."
Goodwill Impairment Charge: In June 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS 142, "Goodwill and Other Intangible Assets."
Effective July 1, 2001, Birds Eye Foods adopted SFAS 142, which requires that
goodwill not be amortized, but instead be tested at least annually for
impairment and expensed against earnings when the carrying amount of the
reporting units goodwill exceeds its implied fair value.
During the quarter ended June 29, 2002, the Company identified certain
indicators of possible impairment of its goodwill. The main indicators of
impairment included the recent deterioration of general economic conditions,
lower valuations resulting from current market declines, modest category
declines in segments in which the Company operates, and the completion of the
terms of the Transaction with Pro-Fac and Vestar/Agrilink Holdings. These
factors indicated an erosion in the market value of the Company since the
adoption of SFAS 142.
In the fourth quarter of fiscal 2002, Birds Eye Foods recorded a pretax,
non-cash charge of approximately $179.0 million to reduce the carrying value of
its goodwill. The tax benefit associated with this non-cash charge was
approximately $41.5 million. Accordingly, the net-of-tax charge was
approximately $137.5 million. See NOTE 3 to the "Notes to Consolidated Financial
Statements" for additional disclosure.
Interest Expense: Interest expense was $48.3 million in fiscal 2003, a decrease
of $14.7 million as compared to $63.0 million in fiscal 2002. The decrease is
the result of lower average bank borrowings during fiscal 2003 of approximately
$197.7 million, a result
15
of the August 19, 2002 Transaction, and the significant reduction in working
capital maintained throughout fiscal 2003. In addition, general interest rate
declines benefited the Company throughout fiscal 2003. Interest expense in
fiscal 2003 also includes the accretion of interest associated with the
five-year Termination Agreement with Pro-Fac. In conjunction with the
Transaction in August 2002, the value of the Termination Agreement with Pro-Fac
was recorded at its net present value. See NOTES 2 and 4 to the "Notes to
Consolidated Financial Statements" for additional disclosure.
Pro-Fac Share of Income: Historically, the Company's contractual relationship
with Pro-Fac was defined in the marketing and facilitation agreement (the "Old
Marketing and Facilitation Agreement"), which the Company and Pro-Fac entered
into in November 1994. Under the Old Marketing and Facilitation Agreement, in
any year in which the Company had earnings on products which were processed from
crops supplied by Pro-Fac, the Company paid to Pro-Fac, as additional patronage
income, 90 percent of such earnings, but in no case more than 50 percent of all
pretax earnings of the Company. In years in which the Company had losses on
Pro-Fac products, the Company reduced the commercial market value it would
otherwise pay to Pro-Fac by 90 percent of such losses, but in no case by more
than 50 percent of all pretax losses of the Company. Earnings and losses were
determined at the end of the fiscal year, but were accrued on an estimated basis
during the year. The Amended and Restated Marketing and Facilitation Agreement,
entered into on August 19, 2002, in connection with the Transaction, does not
permit Birds Eye Foods to offset its losses against the price paid for Pro-Fac
products or require Birds Eye Foods to share its profits on Pro-Fac products
with Pro-Fac for any period subsequent to the end of Birds Eye Food's fiscal
2002 year.
Tax (Provision)/Benefit: During fiscal 2003, Birds Eye Foods had a tax provision
of $15.1 million compared to a $30.8 million tax benefit in fiscal 2002. The
fiscal 2002 tax benefit primarily resulted from a $41.5 million benefit
associated with the non-cash impairment charge recognized in the prior year. The
remaining variance is attributable to the change in pretax income. See NOTE 11
to the "Notes to Consolidated Financial Statements" for additional disclosures
regarding income taxes.
Net Income: Net income for fiscal 2003 was $20.8 million compared to a net loss
of $130.7 million in fiscal 2002 due to the factors outlined above.
SEGMENT REVIEW
A detailed accounting of the significant reasons for changes in net sales and
EBITDA by segment is outlined below. The Company believes that EBITDA is an
appropriate measure of evaluating the operating performance of its segments, and
it is a primary measure used internally by management to manage the business.
EBITDA is also a primary measure used externally by the Company's investors and
analysts to ensure consistent comparability. In conjunction with the
Transaction, net assets have been adjusted to fair value and debt was reduced.
In addition, changes in the Company's operating structure no longer require it
to share its profits with Pro-Fac. Accordingly, depreciation, interest expense,
and Pro-Fac share of income have decreased making period-to-period comparisons
of operating income and net income difficult to analyze. Therefore, management
believes EBITDA is a measurement that allows the operations of the business to
be compared in a consistent manner. However, EBITDA should be considered in
addition to, not as a substitute for, or superior to operating income, net
income, cash flows, and other measures of financial performance prepared in
accordance with generally accepted accounting principles. As EBITDA is not a
measure of performance calculated in accordance with GAAP, this measure may not
be comparable to similarly titled measures employed by other companies.
Branded Frozen: Branded frozen net sales were $340.8 million in fiscal 2003, a
decline of $28.0 million or 7.6 percent as compared to net sales of $368.8
million in fiscal 2002.
This decline was primarily a result of a decline in net sales for the Company's
Birds Eye Voila! product line of $18.7 million. The bag meal category has
continued to experience declines, due to the expansion of alternative meal
solutions, such as refrigerated and dry products. Recent trends, outlined in the
Information Resources, Inc. ("IRI") data shown below, however, highlight that a
stabilization is occurring. Management is currently evaluating various pricing
strategies and other alternatives to enhance performance of this product line.
Net sales for the Company's nationally and regionally branded frozen vegetable
products declined $9.7 million in fiscal 2003. Declines in branded frozen
vegetables were impacted by both the category trends outlined below and changes
in various competitive activity. To enhance the performance of this portfolio,
management is expanding its range of enhanced value products. Beginning in the
fourth quarter of fiscal 2003, the Company introduced a line of Birds Eye sauced
vegetables for distribution to its largest customer.
The Company tracks retail sales in many of the categories in which it competes
using data from IRI. IRI data is, however, limited as IRI does not capture sales
at several of the Company's customers including Wal-Mart, Costco, and others.
IRI also does not track non-branded or private label retail sales by the
manufacturer. According to IRI, the frozen vegetable category on a unit basis
declined
16
4 percent for the 52-week period ending June 22, 2003. The Company's branded
market share on a unit base at June 22, 2003 was 20.3 percent compared to 21.0
percent at June 23, 2002. The bagged meal category for the 52-week period
ending June 22, 2003 declined 10 percent on a unit basis. Market share on a unit
basis for the Company's Birds Eye Voila! skillet meal product offering for the
52-week period ending June 22, 2003 was 21 percent compared to 26 percent for
the 52-week period ending June 23, 2002. However, the category has demonstrated
progress towards stabilization during the previous six months. Unit trends for
the last six months of fiscal 2003 ranged from a decline of 11.5 percent to
growth of 1.9 percent while these trends exhibited declines as large as 24.4
percent during the last six months of fiscal 2002.
Branded frozen EBITDA was $63.0 million in fiscal 2003, a decrease of $21.5
million or 25.4 percent as compared to $84.5 million in fiscal 2002.
Approximately one-half of the decrease in EBITDA is the result of the
introductory costs associated with the launch of Birds Eye Hearty Spoonfuls. The
remainder of the decrease is attributable to the declines in volume associated
with Birds Eye Voila! described above and an increase in its production costs
due to lower volumes in its production facilities as a result of both
management's efforts to reduce inventory levels as well as lower than
anticipated crop intake due to unfavorable weather conditions. These higher
production costs are anticipated to negatively impact the Company's results
through fiscal 2004.
Branded Dry: Branded dry net sales were $218.2 million in fiscal 2003, a decline
of $4.1 million or 1.8 percent as compared to $222.3 million in fiscal 2002. The
variance in net sales is primarily attributable to a decline within the
Freshlike canned vegetables product line, reflecting an overall weakness in the
canned vegetable category. This decline was partially offset by an increase in
net sales within the Company's Comstock and Thank You fillings and toppings
product line. The improvement in net sales for the filling and topping product
lines resulted from pricing actions taken as a result of the poor cherry crop
harvested in the summer of 2002, and a change in promotional spending. EBITDA
for the branded dry segment was $47.7 million in fiscal 2003, an improvement of
$2.5 million or 5.5 percent as compared to $45.2 million in fiscal 2002. The
Company expects to focus on strong consumer-directed advertising and innovative
merchandising to maintain and enhance profitability of the various brands in
this segment.
Non-branded: Non-branded net sales were $319.3 million in fiscal 2003, a decline
of $54.1 million or 14.5 percent as compared to $373.4 million in fiscal 2002.
Sixty-four percent of the decline or $34.8 million was attributable to the
expiration of two co-pack agreements. Co-pack agreements provide greater
utilization of manufacturing facilities, however, typically yield lower margins.
An additional $17.2 million decline in net sales resulted from the Company's
on-going efforts to rationalize certain product offerings within the food
service category that were negatively impacting profitability. Non-branded
EBITDA was $2.4 million in fiscal 2003, a $2.3 million improvement as compared
to EBITDA of $0.1 million in fiscal 2002 primarily as a result of the
rationalization described above.
As highlighted above, IRI data does not track non-branded or private label
retail sales. Including management's estimate of the Company's share of the
private label market, the Company believes its overall market share on a unit
basis in the frozen vegetable category (excluding frozen soups) for the 52-week
period ending June 22, 2003 was 31 percent compared to 32 percent for the
52-week period ending June 23, 2002.
CHANGES FROM FISCAL 2001 TO FISCAL 2002
Net Sales: Net sales were $964.5 million in fiscal 2002, a decline of $129.2
million or 11.8 percent as compared to $1,093.7 million in fiscal 2001. The
decrease is primarily attributable to an $80.0 million decline in non-branded
product sales, primarily as a result of choosing to exit several unprofitable or
low margin relationships and the termination of a Midwest co-pack canned
vegetable contract. The termination of the Midwest co-pack canned vegetable
contract accounted for a reduction in net sales of $21.1 million. The change in
fiscal 2002 results were also impacted by one-time events in fiscal 2001,
including, approximately $26.2 million in fiscal 2001 net sales generated from
inventory purchased from CoBank, the secured lender to PF Acquisition II, Inc.
(the "Northwest Inventory Purchase"). The Company also experienced a $20.3
million decline in its Birds Eye Voila! product line, resulting primarily from
competitive pressures in the bag meal category.
Gross Profit: Gross profit in fiscal 2002 increased $2.3 million to $213.3
million, as compared to $211.0 million in fiscal 2001. In addition, the
Company's gross profit margin in fiscal 2002 increased to 22.1 percent from 19.3
percent in fiscal 2001. The Company made efforts in fiscal 2002 to improve
profitability, including pricing actions, reductions in manufacturing costs, and
a reduction in fixed costs. The improvement in gross profit was achieved despite
an increase in warehousing costs resulting from an increase in inventory levels.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses were $115.4 million in fiscal 2002, a decrease of $15.0 million
or 11.5 percent as compared to $130.4 million in fiscal 2001. The decrease is
primarily attributable to an $8.8 million reduction in amortization expense
resulting from the implementation of SFAS 142. See NOTE 3 to the "Notes to
Consolidated Financial Statements." In addition, a reduction in fixed expenses
of approximately $5.3 million was primarily associated with both the
restructuring actions outlined below, as well as general company-wide reductions
in spending.
17
Continuing Segment Operating Income: Continuing segment operating income was
$97.7 million in fiscal 2002, an increase of $15.3 million, or 18.6 percent, as
compared to $82.4 million in fiscal 2001. This increase is attributable to the
factors discussed above and the impact of the fiscal 2002 restructuring charge
described below. The increase in operating income within branded frozen, branded
dry, and non-branded was $4.2 million, $7.5 million, and $6.2 million,
respectively which includes the impact of the reduction in amortization expense
resulting from the implementation of SFAS 142. Significant variances are
highlighted below in "Segment Review."
Restructuring: On June 23, 2000 the Company sold its pickle business to Dean
Pickle and Specialty Product Company. As part of that transaction, Birds Eye
Foods agreed to contract pack Nalley and Farman's pickle products for a period
of two years, ending June 2002. In anticipation of the completion of this
co-pack contract, the Company initiated restructuring activities for
approximately 140 employees in that facility located in Tacoma, Washington. The
total restructuring charge amounted to $1.1 million and was primarily comprised
of employee termination benefits.
In addition, on October 12, 2001, the Company announced a reduction of
approximately 7 percent of its nationwide workforce, for a total of
approximately 300 positions. The reductions were part of an ongoing focus on
low-cost operations and included both salaried and hourly positions. In
conjunction with the reductions, the Company recorded a charge against earnings
of approximately $1.6 million in fiscal 2002, primarily comprising employee
termination benefits. Reductions in personnel included operational and
administrative positions.
Gain from Pension Curtailment: During September 2001, the Company made the
decision to freeze benefits provided under its Master Salaried Retirement Plan.
Under the provisions of Statement of Financial Accounting Standard ("SFAS") No.
88, "Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits," these benefit changes resulted in the
recognition of a $2.5 million net curtailment gain in fiscal 2002. See NOTE 12
to the "Notes to Consolidated Financial Statements."
Income from Great Lakes Kraut Company, LLC: Income from GLK, a former joint
venture between Birds Eye Foods, Inc. and Flanagan Brothers, Inc. for fiscal
2002 was consistent with fiscal 2001. See NOTE 7 to the "Notes to Consolidated
Financial Statements regarding the March 2003 transaction with GLK.
Goodwill Impairment Charge: A goodwill impairment charge of $179.0 million was
recorded in fiscal 2002. A detailed discussion of the charge appears above
within "Changes from Fiscal 2002 to Fiscal 2003."
Interest Expense: Interest expense was $63.0 million in fiscal 2002, a decrease
of $13.1 million, as compared to $76.1 million in fiscal 2001. The decrease is
the result of a decrease in the weighted average interest resulting from general
interest rate reductions, and lower average outstanding interest-bearing debt
balances during fiscal 2002, of approximately $3.3 million. Interest expense
was, however, negatively impacted by a supplemental fee of $1.5 million paid in
September of 2001 in conjunction with the Company's previous credit facility
with Harris Trust and Savings Bank.
Pro-Fac Share of Income: Prior to the Transaction, the Company's contractual
relationship with Pro-Fac, as defined under the Marketing and Facilitation
Agreement entered in November 1994, required that in any year in which the
Company had earnings on products which were processed from crops supplied by
Pro-Fac, the Company paid to Pro-Fac, as additional patronage income, 90 percent
of such earnings, but in no case more than 50 percent of pretax earnings of the
Company. In years in which the Company had losses on products processed from
crops supplied by Pro-Fac, the Company reduced the commercial market value it
would otherwise pay to Pro-Fac by 90 percent of such losses, but in no case more
than 50 percent of pretax earnings of the Company. Accordingly, in fiscal 2002,
the Pro-Fac share of earnings was recorded at 50 percent of pretax earnings
prior to the impairment charge, based on agreement between both parties. In
fiscal 2001, 90 percent of earnings on patronage products exceeded 50 percent of
all pretax earnings of the Company. Accordingly, the Pro-Fac share of income was
recognized at the maximum of 50 percent of pretax earnings of the Company.
Tax (Provision)/ Benefit: During fiscal 2002, the Company recognized a tax
benefit of $30.8 million compared to a $5.0 million tax provision in fiscal
2001. The tax benefit in fiscal 2002 primarily resulted from a $41.5 million
benefit associated with the non-cash impairment charge. Further, in fiscal 2002,
an additional valuation allowance of $8.6 million was recorded for state net
operating losses and credits which negatively impacted the Company's effective
tax rate. See NOTE 11 to the "Notes to Consolidated Financial Statements" for
additional disclosures regarding income taxes.
Net Income: Net income for fiscal 2001 was $0.1 million compared to a net loss
of $130.7 million in fiscal 2002 due to the factors outlined above.
18
SEGMENT REVIEW
Branded Frozen: Branded frozen net sales were $368.8 million in fiscal 2002, a
decline of $35.7 million, or 8.8 percent as compared to $404.5 million in fiscal
2001. A significant contributing factor to the decline resulted from the
weakened bagged meal category and its negative impact on the Company's Birds Eye
Voila! product line. During fiscal 2002, net sales for the Company's Birds Eye
Voila! product line declined $20.3 million. Net sales of the Company's
nationally and regionally branded frozen vegetable products declined $15.4
million. The reduction was primarily attributable to competitive pressures in
the markets in which these compete.
The Company tracks retail sales in many of the categories in which it competes
using data from Information Resources, Inc. ("IRI"). IRI data is, however,
limited as IRI does not capture sales at several of the Company's customers
including Wal-Mart, Costco, and others. IRI also does not track non-branded or
private label retail sales by manufacturer. According to IRI, the frozen
vegetable category on a unit basis declined 6 percent for the 52-week period
ending June 23, 2002. Including management's estimate of the Company's share of
the private label market, the Company believes its overall market share on a
unit basis in the frozen vegetable category (excluding frozen soups) for the
52-week period ending June 23, 2002 was 32 percent which was consistent with the
52-week period ending June 24, 2001. The Company's branded market share on a
unit basis at June 23, 2002 was 21.0 percent compared to 20.9 percent at June
24, 2001. The bagged meal category for the 52-week period ending June 23, 2002
declined 14 percent on a unit basis. Market share on a unit basis for the
Company's Birds Eye Voila! skillet meal product offering for the 52-week period
ending June 23, 2002 was 26 percent compared to 29 percent for the 52-week
period ending June 24, 2001.
Branded frozen EBITDA was $84.5 million in fiscal 2002, a decrease of $0.3
million or 0.4 percent as compared to $84.8 million in fiscal 2001. In spite of
the net sales decline, EBITDA remained consistent as a result of numerous
actions taken throughout the year to improve earnings. These actions included:
(a) pricing initiatives, (b) improved production costs resulting from workforce
reductions, an improved harvest and further manufacturing efficiencies, and (c)
company-wide efforts to reduce spending.
Branded Dry: Branded dry net sales were $222.3 million in fiscal 2002, a decline
of $13.5 million or 5.7 percent as compared to $235.8 million in fiscal 2001.
Prepared chili and canned meals, under the Nalley brand was the largest
contributor and accounted for $5.0 million of the decrease in net sales. Mild
weather which tends to have a negative impact on the overall chili category was
the primary factor for the net sales decline. The remaining decline of $8.5
million in branded dry net sales resulted from modest declines in dressings,
fillings and toppings, and canned vegetables.
Despite the decline in net sales, EBITDA for the branded dry segment improved by
$5.1 million or 12.7 percent to $45.2 million in fiscal 2002 as compared to
$40.1 million in fiscal 2001. As highlighted above, this positive growth was the
result of numerous actions taken throughout the year to improve earnings,
including: (a) pricing increases, (b) reductions in production costs resulting
from workforce reductions, an improved harvest and further manufacturing
efficiencies, and (c) company-wide efforts to reduce spending.
Non-Branded: Non-branded net sales were $373.4 million in fiscal 2002, a decline
of $80.0 million or 17.6 percent as compared to $453.4 million in fiscal 2001.
The decline is largely the result of one-time events in fiscal 2001, including
$21.1 million of net sales associated with the expiration of a co-pack canned
vegetable contract, and $26.2 million of net sales associated with the Northwest
Inventory Purchase. In addition, during fiscal 2002, the Company initiated a
review of its non-branded vegetable customers, choosing to exit several
unprofitable or low margin relationships. As a result of these decisions, net
sales on non-branded frozen vegetables declined approximately $25.0 million in
fiscal 2002. Non-branded EBITDA was $0.1 million in fiscal 2002, an improvement
of $4.6 million in fiscal 2002 compared to fiscal 2001 as a result of the
factors described above.
As highlighted above, IRI data does not track non-branded or private label
retail sales. Including management's estimate of the Company's share of the
private label market, the Company believes its overall market share on a unit
basis in the frozen vegetable category (excluding frozen soups) for both 52-week
periods ending June 23, 2002 and June 24, 2001 was 31.8 percent.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts. The estimates and
assumptions are evaluated on a regular basis and are based on historical
experience and on various other factors that are believed to be reasonable.
Estimates and assumptions include, but are not limited to: trade accounts
receivable, inventories, self-insurance programs, promotional activities, and
identifiable intangible assets, long-lived assets, and goodwill.
19
We believe that the following are considered our more critical estimates and
assumptions used in the preparation of our consolidated financial statements,
although not inclusive.
Trade Accounts Receivable: The Company accounts for trade receivables at
outstanding billed amounts, net of allowances for doubtful accounts. The Company
estimates its allowance for doubtful accounts as a percentage of receivables
overdue. Also included in the allowance in their entirety are those accounts
that have filed for bankruptcy, been sent to collections, and any other accounts
management believes are not collectible based on historical losses. The Company
periodically reviews the accounts included in the allowance to determine those
to be written off. Generally, after a period of one year, or through legal
counsel's advice, accounts are written off. It is not Company policy to accrue
or collect interest on past due accounts.
Inventories: Under the first-in, first-out ("FIFO") method, the cost of items
sold is based upon the cost of the first such items produced. As a result, the
last such items produced remain in inventory and the cost of these items are
used to reflect ending inventory. The Company prices its inventory at the lower
of cost or market value on the FIFO method.
A reserve is established for the estimated aged surplus, spoiled or damaged
products, and discontinued inventory items and components. The amount of the
reserve is determined by analyzing inventory composition, expected usage,
historical and projected sales information, and other factors. Changes in sales
volume due to unexpected economic or competitive conditions are among the
factors that could result in materially different amounts for this item.
Self - insurance Programs: We record estimates for certain health and welfare
and workers' compensation costs that are self-insured programs. Should a greater
amount of claims occur compared to what was estimated or costs of medical care
increase beyond what was anticipated, reserves recorded may not be sufficient
and additional costs could be incurred.
Promotional Activities: Our promotional activities are conducted either through
the retail trade channel or directly with consumers and involve in-store
displays; feature price discounts on our products; consumer coupons; and similar
activities. The costs of these activities are generally recognized at the time
the related revenue is recorded, which normally precedes the actual cash
expenditure. The recognition of these costs therefore requires management's
judgment regarding the volume of promotional offers that will be redeemed by
either the retail trade channel or consumer. These estimates are made using
various techniques including historical data on performance of similar
promotional programs. Differences between estimated expense and actual
redemptions are normally insignificant and recognized as a change in management
estimate in a subsequent period. However, the likelihood exists of materially
different reported results if different assumptions or conditions were to
prevail.
Identifiable Intangible Assets, Long-Lived Assets, and Goodwill: The Company
assesses the carrying value of its identifiable intangible assets, long-lived
assets, and goodwill whenever events or changes in circumstances indicate that
the carrying amount of the underlying asset may not be recoverable. Certain
factors which may occur and indicate that an impairment exists include, but are
not limited to: significant under performance relative to historical or
projected future operating results; significant changes in the manner of the
Company's use of the underlying assets; and significant adverse industry or
market trends. In the event that the carrying value of assets are determined to
be unrecoverable, the Company would record an adjustment to the respective
carrying value. See NOTE 3 to the "Notes to Consolidated Financial Statements."
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the Consolidated
Statement of Cash Flows for fiscal 2003 compared to fiscal 2002.
Net cash provided by operating activities was $126.8 million in fiscal 2003, an
increase of $112.2 million as compared to fiscal 2002. This significant increase
is primarily the result of a decline in working capital needs. During fiscal
2003, management focused significant efforts on reducing its inventory position.
As a result, net inventories (including prepaid manufacturing expense) decreased
$73.5 million in fiscal 2003. The Company's inventory position is at the lowest
level in four years. Reductions in the use of operating cash flow were also
experienced in the liquidation of outstanding accounts payable and accrued
liabilities. Such reductions occurred as a result of management's efforts to
reduce inventory and realign its operating facilities. In addition, operating
cash flow in fiscal 2002 was impacted by the payment of the remaining balance on
the purchase price of frozen vegetable inventory from AgriFrozen's lender. See
NOTE 15 to the "Notes to Consolidated Financial Statements." Management will
continue to focus its efforts on reducing the Company's working capital needs.
Net cash provided by investing activities of $38.1 million in fiscal 2003
increased $43.4 million from cash used in investing activities of $5.3 million
in fiscal 2002. The increase was primarily the result of proceeds received in
the current year as a result of dispositions
20
of $27.3 million. Proceeds from the sale of the Veg-All business accounted for
the largest component. In addition, the disposition of the Company's investment
in GLK and repayments from GLK related to working capital advances benefited net
cash provided by investing activities by $14.7 million. See NOTE 7 to the "Notes
to Consolidated Financial Statements." Capital expenditures were $16.4 million
for fiscal 2003 as compared to $15.0 million in fiscal 2002. The purchase of
property, plant, and equipment was for general operating purposes and is
considered adequate to maintain its facilities in proper working order.
Net cash used in financing activities was $25.9 million in fiscal 2003, an
increase of $23.6 million as compared to cash used of $2.3 million in fiscal
2002. This increase is primarily the result of the Transaction consummated on
August 19, 2002 resulting in a substantial refinancing of, and modification to,
the capital structure of the Company. In addition, in fiscal 2003, payments made
pursuant to the Termination Agreement as well as other payments to Pro-Fac were
$12.1 million, and payments for expenses and fees related to the Transaction
were $6.0 million. The payments on the Subordinated Promissory Note in
connection with the GLK Transaction also contributed to the increase in cash
used in financing activities. See NOTES 2 and 7 to the "Notes to Consolidated
Financial Statements" for additional disclosure regarding the Transaction and
the GLK Transaction, respectively.
Senior Credit Facility: In connection with the Transaction, Birds Eye Foods and
certain of its subsidiaries entered into a senior secured credit facility (the
"Senior Credit Facility") in the amount of $470.0 million with a syndicate of
banks and other lenders arranged and managed by JPMorgan Chase Bank ("JPMorgan
Chase Bank"), as administrative and collateral agent. The Senior Credit Facility
is comprised of (i) a $200.0 million senior secured revolving credit facility
(the "Revolving Credit Facility") and (ii) a $270.0 million senior secured B
term loan (the "Term Loan Facility"). The Revolving Credit Facility has a
maturity of five years and allows up to $40.0 million to be available in the
form of letters of credit.
As of June 28, 2003, (i) there were no cash borrowings outstanding under the
Revolving Credit Facility, (ii) there were $25.2 million in letters of credit
outstanding, and (iii) availability under the Revolving Credit Facility, after
taking into account the amount of borrowings and letters of credit outstanding,
was $174.8 million. The Company believes that the cash flow generated by
operations and the amounts available under the Revolving Credit Facility provide
adequate liquidity to fund working capital needs and expenditures.
The Senior Credit Facility bears interest at the Company's option, at a base
rate or LIBOR plus, in each case, an applicable percentage. The appropriate
applicable percentage corresponds to the Company's Consolidated Leverage Ratio,
as defined by the senior credit agreement ("Senior Credit Agreement"), and is
adjusted quarterly based on the calculation of the Consolidated Leverage Ratio.
As of June 28, 2003, the Senior Credit Facility bears interest in the case of
base rate loans at the base rate plus (i) 1.25 percent for loans under the
Revolving Credit Facility, and (ii) 1.75 percent for loans under the Term Loan
Facility or in the case of LIBOR loans at LIBOR plus (i) 2.25 percent for loans
under the Revolving Credit Facility and (ii) 2.75 percent for loans under the
Term Loan Facility. The incremental percentages presented vary based upon the
Company's Consolidated Leverage Ratio, as defined. The initial unused commitment
fee is 0.375 percent on the daily average unused commitment under the Revolving
Credit Facility and also varies based on the Company's Consolidated Leverage
Ratio.
The Term Loan Facility requires payments in quarterly installments in the amount
of $675,000 until September 30, 2007. Beginning December 31, 2007, the quarterly
payments are $64,125,000. The Term Loan Facility matures August 2008 upon which
the balance will be due. The Term Loan Facility is also subject to mandatory
prepayments under various scenarios as defined in the Senior Credit Agreement.
Provisions of the Senior Credit Agreement require that annual payments, within
105 days after the end of each fiscal year, in the amount of "excess cash flow"
be utilized to prepay the commitment at an applicable percentage that
corresponds to the Company's Consolidated Leverage Ratio.
The Term Loan Facility was subject to the following amortization schedule at
June 28, 2003, and includes an estimated $13.1 million of "excess cash flow" to
be paid on or before October 11, 2003.
(Dollars in Millions)
Fiscal Year Term Loan B
------------------- -----------
2004 $ 15.8
2005 2.7
2006 2.7
2007 2.7
2008 and thereafter 244.8
---------
$ 268.7
=========
21
The Senior Credit Facility contains customary covenants and restrictions on the
Company's activities, including but not limited to: (i) limitations on the
incurrence of indebtedness; (ii) limitations on sale-leaseback transactions,
liens, investments, loans, advances, guarantees, acquisitions, asset sales, and
certain hedging agreements; and (iii) limitations on transactions with
affiliates and other distributions. The Senior Credit Facility also contains
financial covenants requiring the Company to maintain a maximum average debt to
EBITDA ratio, a maximum average senior debt to EBITDA ratio, and a minimum
EBITDA to interest expense ratio. The Company is in compliance with all
covenants, restrictions, and requirements under the terms of the Senior Credit
Facility.
The Company is in process of negotiating an amendment to its Senior Credit
Facility. If successful, the amendment will provide the Company with the ability
to repurchase a certain amount of its Senior Subordinated Notes.
The Company's obligations under the Senior Credit Facility are guaranteed by
Holdings Inc. and certain of the Company's subsidiaries.
Senior Subordinated Notes - 11 7/8 Percent (due 2008): In fiscal 1999, the
Company issued Senior Subordinated Notes (the "Notes") for $200.0 million
aggregate principal amount due November 1, 2008. Interest on the Notes accrues
at the rate of 11 7/8 percent per annum and is payable semiannually in arrears
on May 1 and November 1.
The Notes represent general unsecured obligations of the Company, subordinated
in right of payment to certain other debt obligations of the Company (including
the Company's obligations under the Senior Credit Facility). The Notes are
guaranteed by Pro-Fac and certain of the Company's subsidiaries.
The Notes contain customary covenants and restrictions on the Company's ability
to engage in certain activities, including, but not limited to: (i) limitations
on the incurrence of indebtedness and liens; (ii) limitations on consolidations,
mergers, sales of assets, transactions with affiliates; and (iii) limitations on
dividends and other distributions. The Company is in compliance with all
covenants, restrictions, and requirements under the Notes.
The Company, principal shareholders, or their affiliates may, from time-to-time,
enter the market to purchase or sell Senior Subordinated Notes in compliance
with any applicable securities laws.
Contractual Obligations: The following table summarizes the Company's future
obligations under contracts as of June 28, 2003:
(Dollars in Millions)
Contractual Obligations 2004 2005 2006 2007 2008 Thereafter Total
- ----------------------- ------- ------ ------ ------ ------- ---------- --------
Term Loan Facility $ 15.8 $ 2.7 $ 2.7 $ 2.7 $ 129.6 $ 115.2 $ 268.7
Senior Subordinated Notes - 11 7/8 Percent 0.0 0.0 0.0 0.0 0.0 200.0 200.0
Obligations under capital leases 0.9 0.8 0.8 0.5 0.0 0.0 3.0
Operating leases 5.7 5.1 4.1 2.6 2.3 6.9 26.7
Termination Agreement 10.0 10.0 10.0 10.0 0.0 0.0 40.0
Other long-term debt 3.8 0.0 0.0 0.0 0.0 0.0 3.8
------- ------ ------ ------ -------- --------- --------
$ 36.2 $ 18.6 $ 17.6 $ 15.8 $ 131.9 $ 322.1 $ 542.2
======= ====== ====== ====== ======== ========= ========
Off Balance Sheet Arrangements: Birds Eye Foods entered into an agreement to
provide a guarantee in September 1995 on behalf of the City of Montezuma to
renovate a sewage treatment plant operated in Montezuma, Georgia. Birds Eye
Foods issued a guarantee of the loan in an original amount of approximately $3.3
million including interest. The guarantee expires in 2015 and requires payment
upon the occurrence of a shortfall in third-party revenue from the utilization
of the sewage treatment plant. In the event of such shortfall, Birds Eye Foods
would be required to pay the remainder of the loan for the City of Montezuma. As
of June 28, 2003, the outstanding loan amount including interest was $2.0
million.
OTHER MATTERS:
Capital Expenditures: The Company anticipates that capital expenditures for
fiscal years 2004 and 2005 will be in the range of approximately $20 million to
$25 million per annum. The Company believes that cash flow from operations and
borrowings under the Company's bank facilities will be sufficient to meet its
liquidity requirements for the foreseeable future.
Short- and Long-Term Trends: The Company believes new product introduction is
critical to building successful brands. During the past several years, the
Company has successfully introduced several new products. These introductions
include Birds Eye Voila! and Birds Eye Simply Grillin'. During the first quarter
of fiscal 2003, the Company introduced Birds Eye Hearty Spoonfuls, a frozen soup
product that includes large cut Birds Eye vegetables and bite sized pieces of
protein in a variety of flavors. Most recently, in June 2003, the Company
introduced new flavor varieties of frozen sauced vegetables to its largest
customer. These products feature unique flavor technology packaged in a
microwaveable tray for convenience and serve one to two member households. In
addition, the Company introduced new flavors of sauced vegetables in a
family-size bag.
22
In addition to developing products under the Birds Eye brand, management will
continue to explore launching new products under its other brands, including the
Freshlike product line which will launch a line of sauced vegetables in a
family-size bag in September of 2003.
The vegetable and fruit portions of the business can be positively or negatively
affected by weather conditions nationally and the resulting impact on crop
yields. Favorable weather conditions can produce high crop yields and an
oversupply situation. This results in depressed selling prices and reduced
profitability on the inventory produced from that year's crops. Excessive rain
or drought conditions can produce low crop yields and a shortage situation. This
typically results in higher selling prices and increased profitability. While
the national supply situation controls the pricing, the supply can differ
regionally because of variations in weather.
The cherry crop from both the 2002 and 2003 growing seasons was adversely
affected by weather conditions in the prime growing areas in Michigan. Both raw
and frozen cherry costs have, therefore, significantly increased from historic
levels. To offset such increases in cherry costs, management has initiated
pricing actions on all of its cherry items.
For the 2003 crop season, unexpected higher than average temperatures in the
Northeast and Midwest regions reduced crop intake. While the reduction in crop
intake impacted the production cost and efficiency, management is actively
pursuing cost reduction initiatives to mitigate a portion of the crop-related
production cost increases.
Supplemental Information on Inflation: The changes in costs and prices within
the Company's business due to inflation were not significantly different from
inflation in the United States economy as a whole. Levels of capital investment,
pricing and inventory investment were not materially affected by changes caused
by inflation.
New Accounting Pronouncements: In January 2003, the FASB issued Interpretation
No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51" ("FIN 46"). FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company does not
expect FIN 46 to have a material effect on its consolidated financial
statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments and for hedging
activities under SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement clarifies under what circumstances a contract with
an initial net investment meets the characteristic of a derivative discussed in
SFAS 133, clarifies when a derivative contains a financing component, amends the
definition of an underlying to conform it to language used in FIN 45 and amends
certain other existing pronouncements. These changes are intended to result in
more consistent reporting of contracts as either derivatives or hybrid
instruments. The statement is generally effective for contracts entered into or
modified after, and for hedging relationships designated after June 30, 2003.
The Company does not expect SFAS 149 to have a material effect on its
consolidated financial statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
improves the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. The new Statement requires that
those instruments be classified as liabilities in the balance sheet. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. The Company does not expect the
provisions of SFAS 150 to have a material impact on its results of operations or
consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of its operating and financing activities, is exposed
to changes in foreign currency exchange rates and certain commodity prices,
which may adversely affect its results of operations and financial position. In
seeking to minimize the risks and/or costs associated with such activities, the
Company has entered into derivative contracts.
Foreign Currency: The Company manages its foreign currency related risk
primarily through the use of foreign currency forward contracts. The contracts
held by the Company are denominated in Mexican pesos.
23
The Company has entered into foreign currency forward contracts that are
designated as cash flow hedges of exchange rate risk related to forecasted
foreign currency-denominated intercompany sales. At June 28, 2003, the Company
had cash flow hedges for the Mexican peso with maturity dates ranging from July
2003 to June 2004. The fair value of the open contracts was an after-tax gain of
$0.3 million, recorded in accumulated other comprehensive income in
shareholder's equity. The forward contracts hedge approximately 80 percent of
the Company's planned intercompany sales. Amounts deferred to accumulated other
comprehensive income will be reclassified into c