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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
----------
(Mark One)
[_] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended June 26, 2004
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 20, 2004:
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.
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1
FORM 10-K EQUIVALENT ANNUAL REPORT - FISCAL YEAR 2004
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.......................................... 7
Seasonality of Business........................................ 7
Practices Concerning Working Capital........................... 7
Significant Customers.......................................... 8
Backlog of Orders.............................................. 8
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, Related Stockholder
Matters, and Issuer Purchases of Equity Securities............. 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....................................... 65
ITEM 9A. Controls and Procedures........................................... 65
ITEM 9B. Other Information................................................. 65
PART III
ITEM 10. Directors and Executive Officers of the Registrant................ 66
ITEM 11. Executive Compensation............................................ 69
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters................................ 72
ITEM 13. Certain Relationships and Related Transactions.................... 74
ITEM 14. Principal Accountant Fees and Services............................ 76
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 77
Signatures........................................................ 79
Exhibit Index..................................................... 81
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., incorporated in 1961 and based in Rochester, New York, is
a producer and marketer of processed 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, branded dry, 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', 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), and
snacks (Tim's, Snyder of Berlin and Husman). 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."
3
Birds Eye Foods also produces many products for non-branded markets which
include the store brand, food service and industrial product lines. The
Company's store brand products include frozen vegetables, canned soups, salad
dressings, 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 frozen vegetables,
salad dressings, fruit fillings and toppings, southern frozen vegetable
specialty products, canned 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, 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 2004, comprised of
40 percent of branded frozen net sales and 24 percent of branded dry net sales.
Non-branded items contributed 36 percent of net sales in fiscal 2004.
The Change in Control (the "Transaction"): On August 19, 2002 (the "Closing
Date"), pursuant to the terms of the Unit Purchase Agreement dated June 20, 2002
(the "Unit Purchase Agreement") by and among Pro-Fac Cooperative, Inc., a New
York agricultural cooperative ("Pro-Fac"), Birds Eye Foods, at the time a New
York corporation and a wholly-owned subsidiary of Pro-Fac, and Vestar/Agrilink
Holdings LLC, a Delaware limited liability company ("Vestar/Agrilink Holdings"),
Vestar/Agrilink Holdings and its affiliates indirectly acquired control of the
Company. 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 Birds Eye 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
The Company has three primary segments in which it operates: branded frozen,
branded dry, and non-branded. 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. In the fourth quarter of fiscal 2004, the Company launched
an innovative Birds Eye Voila! reduced carbohydrate alternative that includes
several flavor offerings. In addition, the Company has reformulated its existing
Birds Eye Voila! product line to improve the taste profile and introduce several
new varieties. Birds Eye 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.
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.
Net sales within the branded frozen segment represented approximately 40, 40,
and 39 percent of the Company's total net sales in fiscal 2004, 2003, and 2002,
respectively.
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. The Company
commands a strong market share for its branded dry products in the geographies
in which they compete. Branded dry products represented approximately 24, 24,
and 21 percent of the Company's net sales in fiscal 2004, 2003, and 2002,
respectively.
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 wholly 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 store brand, food
service and industrial product lines.
Birds Eye Foods is the largest producer of store brand frozen vegetables in the
United States. Other store brand product categories include fruit fillings and
toppings, salad dressings, 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 store brand 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, 37, and 40 percent of the Company's net sales in fiscal 2004, 2003 and 2002,
respectively.
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 continues to
operate as a production facility for fillings and toppings.
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
production facility.
On May 1, 2004, the Company sold its Freshlike canned vegetable business to
Allen Canning Company. This sale did not impact frozen products carrying the
Freshlike brand name.
The net sales of the applesauce, popcorn, Veg-All, and Freshlike canned
vegetable businesses are included in discontinued operations in the Company's
financial statements in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 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 primary segments
including: branded frozen, branded dry, and non-branded. The financial
statements for the fiscal years ended June 26, 2004, June 28, 2003, and June 29,
2002, 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 store
brands to chain stores and under the
5
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.
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 trademarks utilized by the Company follow:
Segment Trademark
- -------------- ---------------------------------------------------------------
Branded Frozen Birds Eye Foods(1), Birds Eye, Birds Eye Voila!(2), Simply
Grillin'(1), Hearty Spoonfuls(1), Freshlike, McKenzie's, Gold
King, Southern Farms, Southland, Tropic Isle
Branded Dry Birds Eye Foods(1), Birds Eye Fresh(1), Comstock, Brooks,
Nalley, Wilderness, Snyder of Berlin, Tim's Cascade Style
Potato Chips, La Restaurante, Erin's(1), Thank You, Husman,
Flavor Destinations(1), Mariner's Cove, Riviera, Bernstein's,
Pixie, Greenwood, Hoods(1), Naturally Good(1)
Non-branded Birds Eye Foods(1), Chill-Ripe, Globe
(1) Application filed and U.S. federal registration is pending.
(2) Voila! is subject to a license agreement with a third party.
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. Amounts paid by
the Company to Pro-Fac for the commercial market value ("CMV") of crops supplied
for fiscal 2004 were $48.8 million. 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.
6
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 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 that are 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 2004, total capital expenditures of the Company were $24.4 million of
which approximately $0.4 million was devoted to the construction of
environmental facilities. The Company estimates that environmental capital
expenditures will be approximately $0.2 million for the 2005 fiscal year.
However, there can be no assurance that expenditures will not be higher.
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.
7
SIGNIFICANT CUSTOMERS
For the fiscal year ended June 26, 2004, Wal-Mart/Sam's accounted for 15 percent
of the Company's consolidated revenue. In addition, Wal-Mart/Sam's represented
22 percent of the branded frozen segment's revenue in fiscal 2004.
BACKLOG OF ORDERS
A 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.
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 2004,
marketing programs for national brands focused primarily on Birds Eye and Birds
Eye Voila!. National advertising campaigns can include television, radio,
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 radio, 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 store brand 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 27 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.
8
The amount expensed on company-sponsored and customer-sponsored activities
relating to the development of new products or the improvement of existing
products was $4.3 million, $3.0 million, and $2.5 million in fiscal 2004, 2003,
and 2002, respectively.
During fiscal 2004, the Company launched a reduced carbohydrate alternative
within its Birds Eye Voila! product line, which includes several flavor
varieties. In addition, the Company reformulated its existing Birds Eye Voila!
product line to improve the taste profile and introduce several new varieties.
EMPLOYEES
As of June 26, 2004, the Company had approximately 2,750 full-time employees, of
whom 1,800 were engaged in production and the balance in management, sales and
administration. As of that date, the Company also employed approximately 900
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. All 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 Green Bay, Wisconsin; Sodus, Michigan; Enumclaw, Washington; Red
Creek, New York; Alton, New York; Barker, New York; and Cincinnati, Ohio
facilities and machinery at Fond du Lac, Wisconsin are classified as held for
sale at June 26, 2004.
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, repackaging plant and distribution center Darien, WI 425,778 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
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, warehouse, distribution center and
public storage warehouse Brockport, NY 404,410 Branded frozen/non-branded
Canning plant and warehouse Fennville, MI 350,000 Branded dry/non-branded
Warehouse(1) Waseca, MN 91,400 Branded frozen/non-branded
Warehouse(1) Darien, WI 140,086 Branded frozen/non-branded
Manufacturing plant and warehouse Tacoma, WA 358,218 Branded dry/non-branded
Manufacturing plant, warehouse, distribution center
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) Erlanger, KY 32,000 Branded dry
Distribution Center(1) Leetsdale, PA 18,200 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
9
Distribution Center(1) Altoona, PA 10,000 Branded dry
Distribution Center(1) Monessen, PA 10,000 Branded dry
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
Birds Eye Foods is a party to various 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, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Birds Eye Foods is an indirect wholly owned subsidiary of Holdings LLC. Birds
Eye Foods common stock is not publicly traded.
ITEM 6. SELECTED FINANCIAL DATA
Birds Eye Foods results of operations and financial condition for fiscal 2004
and fiscal 2003 are not comparable with those of fiscal 2002, 2001 and 2000.
Fiscal 2004 represents a complete fiscal year of operations following the
Transaction. Fiscal 2003 reflects the Company's operations for the "predecessor"
period (June 30, 2002 to August 18, 2002) and the Company's operations for the
"successor" period (August 19, 2002 to June 28, 2003). The financial data below
for fiscal 2002, 2001 and 2000 also reflect the Company's operations for the
"predecessor" period. For further discussion of the Transaction, see Part I,
Item 1. "Description of Business - General Development of Business - The Change
in Control (the "Transaction")" and Part II, Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of this Form 10-K
Equivalent.
(Dollars in Thousands)
Birds Eye Foods, Inc.
FIVE YEAR SELECTED FINANCIAL DATA
Fiscal Year Ended June Periods Ended
---------------------- -----------------------------------
Successor Predecessor
Successor August 19, 2002 - June 30, 2002 -
2004 June 28, 2003 August 18, 2002
--------- ----------------- ---------------
Consolidated Summary of Operations:
Net sales $ 843,398 $ 764,900 $ 98,076
Cost of sales (652,863) (585,239) (75,441)
--------- --------- --------
Gross profit 190,535 179,661 22,635
Selling, administrative, and general expenses (112,208) (105,606) (15,084)
Restructuring 0 0 0
Gain from pension curtailment 0 0 0
Gains on sales of assets 0 0 0
Income from Great Lakes Kraut Company, LLC 0 1,770 277
Goodwill impairment charge 0 0 0
--------- --------- --------
Operating income/(loss) before dividing with Pro-Fac 78,327 75,825 7,828
Interest expense (31,326) (39,807) (7,416)
Loss on early extinguishment of debt (4,018) 0 0
--------- --------- --------
Pretax income/(loss) from continuing operations and
before dividing with Pro-Fac 42,983 36,018 412
Pro-Fac share of income 0 0 0
--------- --------- --------
Pretax income/(loss) from continuing operations 42,983 36,018 412
Tax (provision)/benefit (15,438) (14,426) (169)
--------- --------- --------
Income/(loss) before discontinued operations 27,545 21,592 243
Discontinued operations, net of tax 4,322 (836) (158)
--------- --------- --------
Net income/(loss) $ 31,867 $ 20,756 $ 85
========= ========= ========
Balance Sheet Data:
Working capital(b) $ 211,603 $ 316,901
Ratio of current assets to current liabilities 2.4:1 3:0:1
Total assets $ 779,973 $ 909,383
Cash and cash equivalents $ 72,887 $ 153,756
Long-term debt and senior-subordinated notes
(excludes current portion) $ 301,592 $ 459,970
Other Statistics:
Average number of employees:
Regular 2,937 3,447
Seasonal 685 844
Fiscal Years Ended June
---------------------------------------
Predecessor Predecessor Predecessor
2002 2001(a) 2000
----------- ----------- -----------
Consolidated Summary of Operations:
Net sales $ 943,886 $1,070,961 $1,013,093
Cost of sales (735,714) (863,017) (795,991)
--------- ---------- ----------
Gross profit 208,172 207,944 217,102
Selling, administrative, and general expenses (113,904) (128,264) (131,324)
Restructuring (2,622) 0 0
Gain from pension curtailment 2,472 0 0
Gains on sales of assets 0 0 6,635
Income from Great Lakes Kraut Company, LLC 2,457 1,779 2,418
Goodwill impairment charge (179,025) 0 0
--------- ---------- ----------
Operating income/(loss) before dividing with Pro-Fac (82,450) 81,459 94,831
Interest expense (61,331) (73,997) (73,086)
Loss on early extinguishment of debt 0 0 0
--------- ---------- ----------
Pretax income/(loss) from continuing operations and
before dividing with Pro-Fac (143,781) 7,462 21,745
Pro-Fac share of income (16,842) (732) (12,328)
--------- ---------- ----------
Pretax income/(loss) from continuing operations (160,623) 6,730 9,417
Tax (provision)/benefit 31,569 (5,455) (4,700)
--------- ---------- ----------
Income/(loss) before discontinued operations (129,054) 1,275 4,717
Discontinued operations, net of tax (1,640) (1,204) 1,707
--------- ---------- ----------
Net income/(loss) $(130,694) $ 71 $ 6,424
========= ========== ==========
Balance Sheet Data:
Working capital(b) $ 302,606 $ 253,010 $ 254,094
Ratio of current assets to current liabilities 3.1:1 2.2:1 2.2:1
Total assets $ 857,741 $1,078,565 $1,098,887
Cash and cash equivalents $ 14,686 $ 7,656 $ 4,994
Long-term debt and senior-subordinated notes
(excludes current portion) $ 623,057 $ 631,128 $ 664,712
Other Statistics:
Average number of employees:
Regular 4,239 4,627 5,510
Seasonal 1,649 2,931 2,152
(a) Consists of 53 weeks.
(b) 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
material changes in the Birds Eye Foods financial condition and results of
operations from fiscal 2002 through fiscal 2004. This section should be read in
conjunction with Part II, Item 8., "Financial Statements and Supplementary Data"
section of this report.
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 affiliates 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 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 periods in fiscal 2004
and fiscal 2002.
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', 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), and snacks (Tim's, Snyder of Berlin, and
Husman). Birds Eye Foods also produces many products for the non-branded markets
which include store brand, food service and industrial markets. The Company's
store brand products include frozen vegetables, salad dressings, chili products,
and fruit fillings and toppings. The Company's food service/industrial products
include frozen vegetables, salad dressings, chili products, fruit fillings and
toppings.
Reclassifications have been made to the segment presentation below to reflect
the reallocation of certain fixed costs which were not eliminated in conjunction
with the sale of the Company's Freshlike canned vegetable business in fiscal
2004. The Freshlike canned vegetable business has been reclassified to
discontinued operations in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144. See NOTE 5 to the "Notes to Consolidated Financial
Statements."
The following tables illustrate the Company's results of operations by segment
for the fiscal years ended June 26, 2004, June 28, 2003, and June 29, 2002, and
the Company's total assets by segment at June 26, 2004, June 28, 2003, and June
29, 2002.
Net Sales
(Dollars in Millions)
Fiscal Years Ended
---------------------------------------------
June 26, June 28, June 29,
2004 2003 2002
------------- ------------- -------------
% of % of % of
$ Total $ Total $ Total
----- ----- ----- ----- ----- -----
Branded frozen 334.0 39.6 340.8 39.5 368.8 39.1
Branded dry 202.4 24.0 202.9 23.5 201.7 21.4
Non-branded 307.0 36.4 319.3 37.0 373.4 39.5
----- ----- ----- ----- ----- -----
Total 843.4 100.0 863.0 100.0 943.9 100.0
===== ===== ===== ===== ===== =====
12
Operating Income
(Dollars in Millions)
Fiscal Years Ended
----------------------------------------------
June 26, June 28, June 29,
2004 2003 2002
------------- ------------- --------------
% of % of % of
$ Total $ Total $ Total
----- ----- ----- ----- ------ -----
Branded frozen 57.7 73.7 54.3 64.9 75.2 80.0
Branded dry 34.7 44.3 41.9 50.0 37.8 40.2
Non-branded (14.1) (18.0) (12.5) (14.9) (16.4) (17.4)
Corporate charges(1) 0.0 0.0 0.0 0.0 (2.6) (2.8)
----- ----- ----- ----- ------ -----
Continuing segment operating income(2) 78.3 100.0 83.7 100.0 94.0 100.0
===== ===== =====
Gain from pension curtailment 0.0 0.0 2.5
Goodwill impairment charge 0.0 0.0 (179.0)
Operating income/(loss) before dividing ----- ----- ------
with Pro-Fac 78.3 83.7 (82.5)
===== ===== -=====
(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 income
before discontinued operations plus interest, taxes, and depreciation and
amortization) for the fiscal years ended June 26, 2004, June 28, 2003, and June
29, 2002. 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 investor and lenders to ensure
consistent comparability. In conjunction with the Transaction, which was
completed on August 19, 2002, net assets have been adjusted to fair value and
debt was reduced. Accordingly, depreciation and interest expense for the
predecessor period are not comparable to the successor period making
period-to-period comparisons of operating income and net income difficult to
analyze. In addition, as a result of the early extinguishment of $150.0 million
of Senior Subordinated Notes that occurred in November 2003 and the elimination
of the Subordinated Promissory Note as part of the GLK Transaction in March
2003, interest expense is not comparable for the fiscal year ended June 26,
2004. 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 accounting principles generally accepted
in the United States ("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 26, June 28, June 29,
2004 2003 2002
------------- ------------- --------------
% of % of % of
$ Total $ Total $ Total
----- ----- ----- ----- ------ -----
Branded frozen 66.3 67.2 63.1 57.2 84.1 68.2
Branded dry 38.3 38.8 45.5 41.2 42.1 34.2
Non-branded (1.9) (1.9) 1.8 1.6 (0.4) (0.3)
Loss on early extinguishment of debt(2) (4.0) (4.1) 0.0 0.0 0.0 0.0
Corporate charges(3) 0.0 0.0 0.0 0.0 (2.6) (2.1)
----- ----- ----- ----- ------ -----
Continuing segment EBITDA 98.7 100.0 110.4 100.0 123.2 100.0
===== ===== =====
Reconciliation of EBITDA to net income/(loss):
Gain from pension curtailment 0.0 0.0 2.5
Goodwill impairment charge 0.0 0.0 (179.0)
Depreciation and amortization (24.4) (26.7) (29.3)
Interest expense (31.3) (47.2) (61.3)
Pro-Fac share of income 0.0 0.0 (16.8)
Tax (provision)/benefit (15.4) (14.6) 31.6
Discontinued operations, net of tax 4.3 (1.0) (1.6)
----- ----- ------
Net income/(loss) 31.9 20.9 (130.7)
===== ===== ======
(1) Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
is defined as income before discontinued operations plus Pro-Fac share of
income, interest, taxes, depreciation, and amortization.
(2) The loss on early extinguishment of debt of $4.0 million is not allocated
to segments. See NOTE 10 to the "Notes to Consolidated Financial
Statements."
(3) 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 26, June 28, June 29,
2004 2003 2002
------------- ------------- -------------
% of % of % of
$ Total $ Total $ Total
----- ----- ----- ----- ----- -----
Branded frozen 325.1 41.6 360.8 39.6 300.0 35.0
Branded dry 111.3 14.3 144.7 15.9 134.9 15.7
Non-branded 228.3 29.3 274.2 30.2 372.8 43.5
Other(1) 108.5 13.9 116.2 12.8 46.1 5.4
----- ----- ----- ----- ----- -----
Continuing segments 773.2 99.1 895.9 98.5 853.8 99.6
Assets held for sale 6.8 0.9 13.5 1.5 3.9 0.4
----- ----- ----- ----- ----- -----
Total 780.0 100.0 909.4 100.0 857.7 100.0
===== ===== ===== ===== ===== =====
(1) Includes corporate assets of the Company not allocated to individual
segments.
CHANGES FROM FISCAL 2003 TO FISCAL 2004
Net Sales: Net sales were $843.4 million in fiscal 2004, a decline of $19.6
million or 2.3 percent, as compared to $863.0 million in fiscal 2003. The
decrease is primarily the result of a $12.3 million decline in non-branded
product sales due to management's continuing efforts to rationalize certain
product offerings. The Company also experienced a $6.8 million decline in
branded frozen net sales, primarily resulting from challenges experienced in its
Birds Eye Voila! product line during the first three quarters of fiscal 2004.
During the fourth quarter of fiscal 2004, the Company introduced a Birds Eye
Voila! reduced carbohydrate alternative and several new flavor offerings
including reformulated varieties to enhance performance of this product line.
Other significant causes for variances are highlighted below in the "Segment
Review."
14
Gross Profit: Gross profit was $190.5 million in fiscal 2004, a decrease of
$11.8 million, or 5.8 percent as compared to $202.3 million in fiscal 2003. The
Company's gross profit margin decreased to 22.6 percent from 23.4 percent in the
prior year period. The decrease in gross profit margin is primarily the result
of increased product costs experienced throughout fiscal 2004. Ingredient and
commodity costs rose as a result of inflationary increases and the Company also
experienced a temporary increase in product costs as a result of its realignment
efforts. These increases in product costs were partially offset by a decrease in
warehousing expense as a result of maintaining lower inventory levels.
Management believes its realignments efforts will maximize facility utilization
and reduce product costs in the future.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses were $112.2 million in fiscal 2004, a decrease of $8.5 million,
or 7.0 percent as compared to $120.7 million in fiscal 2003. The decrease is
primarily attributable to $9.2 million of introductory costs associated with the
launch of a new product in fiscal 2003.
Continuing Segment Operating Income: Continuing segment operating income was
$78.3 million in fiscal 2004, a decrease of $5.4 million, or 6.5 percent, as
compared to $83.7 million in fiscal 2003. This decrease is attributable to the
factors discussed above. While operating income for the branded frozen business
increased $3.4 million, decreases were experienced within the branded dry and
the non-branded businesses of $7.2 million and $1.6 million, respectively.
Significant variances are highlighted below in the "Segment Review."
Income from Great Lakes Kraut Company, LLC: This amount represents earnings
received from Birds Eye Foods investment in Great Lakes Kraut Company LLC
("GLK"), a former joint venture between Birds Eye Foods and Flanagan Brothers,
Inc. On March 2, 2003, Birds Eye Foods transferred the operating assets and
liabilities of GLK to a newly formed subsidiary of Flanagan Brothers, Inc. (the
"GLK Transaction"). As a result of the completion of the GLK Transaction, there
was no income from the joint venture in fiscal 2004. See NOTE 7 to the "Notes to
Consolidated Financial Statements."
Interest Expense: Interest expense was $31.3 million in fiscal 2004, a decrease
of $15.9 million as compared to $47.2 million in fiscal 2003. This decline is
primarily attributable to reduced debt levels, including the November 2003
repayment of $150.0 million of the Company's 11 7/8 percent Senior Subordinated
Notes and the elimination of the Subordinated Promissory Note as part of the GLK
Transaction. Other savings resulted from decreases in the Company's outstanding
borrowings, as well as interest rate reductions experienced.
Loss on Early Extinguishment of Debt: On November 24, 2003, the Company repaid
$150.0 million of its 11 7/8 percent Senior Subordinated Notes. In conjunction
with this repayment, a pre-tax loss on early extinguishment of debt of $4.0
million was recorded. This amount reflects the payment of the $8.9 million call
premium and other transaction expenses less the elimination of the related
unamortized premium of $4.9 million recorded in conjunction with the August 19,
2002 Transaction.
Tax (Provision)/Benefit: During fiscal 2004, Birds Eye Foods had a tax provision
of $15.4 million compared to a $14.6 million tax provision in fiscal 2003. The
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 2004 was $31.9 million, an increase of $11.1
million or 53.4 percent, compared to net income of $20.8 million in fiscal 2003
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 investor and
lenders to ensure consistent comparability. In conjunction with the Transaction,
which was completed on August 19, 2002, net assets have been adjusted to fair
value and debt was reduced. Accordingly, depreciation and interest expense for
the predecessor period are not comparable to the successor period making
period-to-period comparisons of operating income and net income difficult to
analyze. In addition, as a result of the early extinguishment of $150.0 million
of Senior Subordinated Notes that occurred in November 2003 and the elimination
of the Subordinated Promissory Note as part of the GLK Transaction in March
2003, interest expense is not comparable. Therefore, management believes EBITDA
is a measurement that allows the operations of the business to be compared in a
consistent manner. EBITDA should, however, 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.
15
Branded Frozen: Branded frozen net sales were $334.0 million in fiscal 2004, a
decline of $6.8 million or 2.0 percent as compared to net sales of $340.8
million in fiscal 2003. Increases within the Company's Birds Eye branded frozen
vegetables were offset by declines within the bagged meal category and several
of the Company's regional product lines.
Solid improvements were experienced in the Birds Eye branded frozen vegetable
business, with net sales of this category increasing $7.6 million compared to
fiscal 2003. The introduction of several value added sauced vegetable items,
along with improved promotional effectiveness, led to the increase.
The Birds Eye Voila! category, however, declined $8.6 million due to continuing
challenges within the bagged meal category. To enhance performance of this
product, management has introduced, during the fourth quarter of fiscal '04 an
innovative Birds Eye Voila! reduced carbohydrate alternative that includes
several flavor offerings. The Company also reformulated its existing Birds Eye
Voila! category to improve the taste profile and extend the line to include
several new varieties. The Company intends to support this initiative with
strong consumer and promotional activity throughout fiscal 2005.
Net sales for the Company's regionally branded frozen vegetable products
declined $2.6 million in fiscal 2004. This decline was impacted by changes in
various competitive activity. Management intends to address this trend by
reviewing its marketing and promotional efforts during fiscal 2005.
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
store brand retail sales by the manufacturer. According to IRI, the frozen
vegetable category on a unit basis declined 2 percent for the 52-week period
ending June 20, 2004. The Company's branded market share on a unit basis at June
20, 2004 was 18.9 percent compared to 19.5 percent at June 22, 2003. Market
share on a unit basis for the Company's Birds Eye Voila! skillet meal product
offering for the 52-week period ending June 20, 2004 was 19.0 percent compared
to 21.4 percent for the 52-week period ending June 22, 2003.
Branded frozen EBITDA was $66.3 million in fiscal 2004, an increase of $3.2
million or 5.1 percent as compared to $63.1 million in fiscal 2003. The majority
of this increase is primarily the result of the elimination of introductory
costs associated with a new product launch in fiscal 2003. Offsetting this
change was the significant investment incurred in the fourth quarter of fiscal
2004 to support the revitalization of the Birds Eye Voila! product line as
described above.
Branded Dry: Branded dry net sales were $202.4 million in fiscal 2004,
consistent with those of $202.9 million in fiscal 2003. EBITDA for the branded
dry segment was $38.3 million in fiscal 2004, a decline of $7.2 million or 15.8
percent as compared to $45.5 million in fiscal 2003. Approximately $2.0 million
of this decline is attributable to the GLK Transaction which occurred in March
of 2003. In addition, several of the Company's product lines within the branded
dry category experienced significant increases in product costs during fiscal
2004, including the Company's fillings and toppings business as a result of an
increase in the cost of cherries; the branded chili business as a result of an
increase in beef prices; and the snacks business as a result of an increase in
oil costs. The Company expects to focus on purchasing opportunities, changes in
promotional programs and innovative merchandising to maintain and enhance
profitability of the various brands in this segment.
Non-branded: During fiscal 2004, management continued its efforts to rationalize
certain lower margin food service offerings. As a result, non-branded net sales
declined $12.3 million to $307.0 million in the current year as compared to
$319.3 million in fiscal 2003. EBITDA declined $3.7 million as a result of the
reduction in net sales and an increase in production costs experienced
throughout the year. Management believes its efforts to realign its production
facilities will benefit the cost structure of its nonbranded business in future
years.
As highlighted above, IRI data does not track non-branded or store brand retail
sales. Including management's estimate of the Company's share of the store brand
market, the Company believes its overall market share on a unit basis in the
frozen vegetable category for the 52-week period ending June 20, 2004 was 30.5
percent compared to 30.8 percent for the 52-week period ending June 22, 2003.
CHANGES FROM FISCAL 2002 TO FISCAL 2003
Net Sales: Net sales were $863.0 million in fiscal 2003, a decline of $80.9
million or 8.6 percent, as compared to $943.9 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 customers and 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. During
the fourth quarter of fiscal 2004, the Company
16
introduced a Birds Eye Voila! reduced carbohydrate alternative and several new
flavor offerings to address these declines and to enhance performance of this
product line.
Gross Profit: Gross profit was $202.3 million in fiscal 2003, a decrease of $5.9
million, or 2.8 percent as compared to $208.2 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
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. These
improvements in gross profit were offset, however, 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.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses were $120.7 million in fiscal 2003, an increase of $6.8
million, or 6.0 percent as compared to $113.9 million in fiscal 2002. The
increase is primarily attributable to $9.2 million of marketing expenses
associated with a new product launch 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
$83.7 million in fiscal 2003, a decrease of $10.3 million, or 11.0 percent, as
compared to $94.0 million in fiscal 2002. This decrease is attributable to the
factors discussed above. The decrease in operating income within branded frozen
was $20.9 million. Increases in operating income within the branded dry and
non-branded segments were $4.1 million and $3.9 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 its 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: This amount represents earnings
received from the Company's 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 No. 142, "Goodwill and Other Intangible Assets."
Effective July 1, 2001, Birds Eye Foods adopted SFAS No. 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 No. 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,
17
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 $47.2 million in fiscal 2003, a decrease
of $14.1 million as compared to $61.3 million in fiscal 2002. The decrease is
the result of lower average bank borrowings during fiscal 2003 of approximately
$197.7 million, a result 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 $14.6 million compared to a $31.6 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
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 continued to experience declines, due to the expansion of
alternative meal solutions, such as refrigerated and dry products. 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
expanded its range of enhanced value products and modified its approach to
various promotional progress.
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 store brand retail sales by the
manufacturer. According to IRI, the frozen vegetable category on a unit basis
declined 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 19.5 percent compared
to 20.2 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 21.4 percent compared to 26.4
percent for the 52-week period ending June 23, 2002.
Branded frozen EBITDA was $63.1 million in fiscal 2003, a decrease of $21.0
million or 25.0 percent as compared to $84.1 million in fiscal 2002.
Approximately one-half of the decrease in EBITDA is the result of the
introductory costs associated with the launch of a new product. 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.
Branded Dry: Branded dry net sales were $202.9 million in fiscal 2003, an
increase of $1.2 million or 0.6 percent as compared to $201.7 million in fiscal
2002. This increase was primarily driven by an improvement 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 changes in various promotional spending
18
activities. EBITDA for the branded dry segment was $45.5 million in fiscal
2003, an improvement of $3.4 million or 8.1 percent as compared to $42.1
million in fiscal 2002.
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 $1.8 million in fiscal 2003, a $2.2 million improvement as compared
to EBITDA of a loss of $0.4 million in fiscal 2002, primarily, as a result of
the rationalization described above.
As highlighted above, IRI data does not track non-branded or store brand retail
sales. Including management's estimate of the Company's share of the store brand
market, the Company believed its overall market share on a unit basis in the
frozen vegetable category for the 52-week period ending June 22, 2003 was 30.8
percent compared to 31.8 percent for the 52-week period ending June 23, 2002.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's consolidated financial statements requires
management 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.
The following are considered to be the Company's more critical estimates and
assumptions used in the preparation of the 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 costs 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: The Company records estimates for certain health and
welfare and workers' compensation costs that are provided for under 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: The Company's 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
19
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 values 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 2004 compared to fiscal 2003.
Net cash provided by operating activities was $104.5 million in fiscal 2004, a
decrease of $22.3 million as compared to net cash provided by operating
activities of $126.8 million in fiscal 2003. During fiscal 2003, the Company
benefited from a significant reduction in its outstanding inventory levels.
Fiscal 2003 inventory levels were lowered as a result of both management's
efforts and adverse weather conditions during the 2002 growing season.
Offsetting this significant benefit in inventory reduction was a voluntary
contribution of $14.4 million made by the Company to its pension plan in the
fourth quarter of fiscal 2003. No such payment was made in fiscal 2004.
Management will continue to focus its efforts on maintaining optimal working
capital.
Net cash provided by investing activities of $3.1 million in fiscal 2004
decreased $35.0 million from $38.1 million in fiscal 2003. The decrease was
primarily the result of the disposition of the Company's investment in GLK and
repayments from GLK related to working capital advances which benefited net cash
provided by investing activities by $18.7 million in fiscal 2003. See NOTE 7 to
the "Notes to Consolidated Financial Statements." Capital expenditures were
$24.4 million for fiscal 2004 as compared to $16.4 million in fiscal 2003. The
increase in capital expenditures results primarily from the consolidation of
production into existing facilities as a result of management's efforts to
increase operating efficiencies. The purchase of property, plant, and equipment
was for general operating purposes and is considered adequate to maintain its
facilities in proper working order. Proceeds received during fiscal 2004 include
$15.9 million from the sale of the Freshlike canned vegetable business, as well
as $8.9 million related to the sale of facilities and equipment no longer in
service. Fiscal 2003 proceeds included $26.5 million for the sale of the Veg-All
business. See NOTE 5 to the "Notes to Consolidated Financial Statements."
Net cash used in financing activities was $188.4 million in fiscal 2004, an
increase of $162.5 million as compared to cash used of $25.9 million in fiscal
2003. This increase in cash used in financing activities is primarily the result
of the Company's repayment of $150.0 million of its outstanding 11 7/8 percent
Senior Subordinated Notes in November 2003, and the related $8.9 million call
premium. See further discussion below and at NOTE 10, to the "Notes to
Consolidated Financial Statements." In addition, during fiscal 2003, the Company
completed the Transaction with Pro-Fac Cooperative, Inc. and Vestar/Agrilink
Holdings LLC which resulted in a substantial refinancing of, and modification
to, its capital structure. See further discussion below and at NOTE 2, "The
Transaction" to the "Notes to Consolidated Financial Statements."
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 matures in
August 2007, and allows up to $40.0 million to be available in the form of
letters of credit.
As of June 26, 2004, (i) there were no cash borrowings outstanding under the
Revolving Credit Facility, (ii) there were $23.8 million in letters of credit
outstanding, and (iii) availability under the Revolving Credit Facility, after
taking into account the amount of letters of credit outstanding, was $176.2
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 26, 2004, the Senior Credit Facility bears interest in the case of
base rate loans at the base rate plus (i) 1.00 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) 2.00 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. As of June 26, 2004, the
interest rate under the Term Loan Facility was approximately 4.05 percent. 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.
20
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. As of June 26, 2004,
there is no "excess cash proceeds" to be paid under the Term Loan Facility.
The amount of the "excess cash flow" for the year ended June 28, 2003 was
$13.1 million and was paid on September 26, 2003.
The Term Loan Facility was subject to the following amortization schedule at
June 26, 2004.
(Dollars in Millions)
Fiscal Year Term Loan B
- ----------- -----------
2005 $ 2.7
2006 2.7
2007 2.7
2008 129.6
2009 115.2
------
$252.9
======
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. As of June 26, 2004, the Company was in
compliance with all covenants, restrictions, and requirements under the terms of
the Senior Credit Facility.
During fiscal 2004, the Company negotiated an amendment to its Senior Credit
Facility. The amendment provided the Company with the ability to repay $150.0
million of its Senior Subordinated Notes which occurred in November 2003. See
"Senior Subordinated Notes - 11 7/8 Percent (due 2008)" below and Note 10,
"Debt", to the "Notes to Consolidated Financial Statements." In addition,
provided the satisfaction of certain conditions, the amendment permits repayment
of the balance of the Senior Subordinated Notes prior to maturity.
The Company's obligations under the Senior Credit Facility are guaranteed by
Birds Eye Holdings Inc. and certain of the Company's subsidiaries. See Note 14
"Guarantees and Indemnifications" to the "Notes to Consolidated Financial
Statements."
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, its principal shareholder, 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.
On November 24, 2003, the Company repaid $150.0 million of its 11 7/8 percent
Senior Subordinated Notes. In conjunction with this repayment, a pre-tax loss on
early extinguishment of debt of $4.0 million was recorded. This amount reflects
the payment of the $8.9 million call premium and related transaction expenses
less the elimination of the unamortized premium of $4.9 million recorded in
conjunction with the August 19, 2002 Transaction.
21
Contractual Obligations: The following table summarizes the Company's future
obligations under contracts as of June 26, 2004.
(Dollar amounts in millions)
Contractual Obligations Payments due by period
----------------------------------------------------------
Less than 1 More than 5
Total year 1-3 years 3-5 years years
------ ----------- --------- --------- -----------
Long-Term Debt(1) $302.9 $ 2.7 $ 5.4 $294.8 $ 0.0
Capital Lease Obligations 4.2 0.9 1.7 1.5 0.1
Operating Leases 35.1 7.3 11.1 7.4 9.3
Purchase Obligations(2,3) 434.3 201.3 79.4 51.8 101.8
Other Long-Term Liabilities(4) 91.0 12.9 46.4 19.8 11.9
------ ------ ------ ------ ------
Total $867.5 $225.1 $144.0 $375.3 $123.1
====== ====== ====== ====== ======
(1) "Long-Term Debt" includes principal amounts due under the Company's Senior
Subordinated 11 7/8 percent Notes and the Term Loan Facility.
(2) A "Purchase Obligation" is defined as an agreement to purchase goods or
services that is enforceable and legally binding on the Company and that
specifies all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Purchase Obligations include outstanding
purchase orders of the Company for raw materials, packaging and other
ingredients. Purchase Obligations which outline quantities that vary based on
production needs cannot be reasonably estimated at this time. The total does
not include purchase obligations recorded on the consolidated balance sheet as
of June 26, 2004.
(3) Amounts shown within Purchase Obligations in the less than one year category
include estimated raw product purchases of $56.5 million under the Amended and
Restated Marketing and Facilitation Agreement. As estimates of the ongoing
purchases from Pro-Fac cannot be determined at this time, the maximum penalty
due upon termination has been included in the 1-3 years category.
(4) This category includes the non-current liabilities reflected on the June 26,
2004 consolidated balance sheet for pension, other postretirement benefits,
non-qualified 401(k) benefits, deferred directors' fees and Pro-Fac termination
payments due under the Termination Agreement. Payments to the Company's pension
trusts are reflected through October, 2008. Estimates beyond that date are not
currently available.
OTHER MATTERS:
Capital Expenditures: The Company anticipates that capital expenditures for
fiscal years 2005 and 2006 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 fourth quarter of fiscal
2004, the Company introduced a reduced carbohydrate alternative in its Birds Eye
Voila! product line that includes several flavor offerings. In addition, the
Company has reformulated its existing Birds Eye Voila! product line to improve
the taste profile and introduce several new varieties.
In addition to developing products under the Birds Eye brand, management will
continue to explore launching new products and product extensions under its
other brands, including Freshlike and McKenzie's to meet consumer demands and
preferences.
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 the cherry cost increase, management initiated both pricing
actions and changes in promotional programs across all of its cherry items.
Early indications from the 2004 growing season indicate adequate crop supply,
however, cost has not yet been finalized.
22
For the 2004 crop season, higher than normal precipitation levels in the
Northeast and Midwest regions are anticipated to reduce crop intake. While the
reduction in crop intake may impact the related production cost and efficiency,
management continues to actively pursue cost reduction initiatives to mitigate a
portion of the crop-related production cost increases.
Effective June 28, 2004 the Company initiated a price increase of 5 to 7 percent
on all product categories. The price increase was a direct result of increases
across commodities and other production costs. Specifically, increases have been
seen in the soybean and corn markets, as well as the dairy, beef, and edible
oils markets and continued employee health care costs. Rising prices in natural
gas and crude oil have also impacted both transportation costs and energy
intensive packaging components.
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. See further discussion above
at short- and long-term trends.
New Accounting Pronouncements: In May 2004, the FASB issued Staff Position No.
106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003", which superseded
FASB Staff Position No. 106-1, "Accounting and Disclosure Requirements related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003."
FSP 106-2 requires that until an employer is able to determine whether benefits
provided by its plan are "actuarially equivalent" to Medicare Part D under the
Act, it must disclose the existence of the Act and the fact that the amounts
included in the financial statements related to the employer's post retirement
benefit plans do not reflect the effects of the Act. The guidance in FSP 106-2
is effective for interim or annual financial statements beginning after June 15,
2004. The implementation of this guidance is not expected to have a material
impact on the Company's 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.
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 26, 2004, the Company
had cash flow hedges for the Mexican peso with maturity dates ranging from July
2004 to June 2005. The fair value of the open contracts was an after-tax loss of
$0.1 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 cost of goods sold. For the year
ended June 26, 2004, a net loss of approximately $44,000 has been reclassified
from other comprehensive income to cost of goods sold. Hedge ineffectiveness was
insignificant.
Foreign Currency
Forward Outstanding
-------------------
Contract amounts 133 million Pesos
Weighted average settlement exchange rate 8.6%
Commodity Prices: The Company is exposed to commodity price risk related to
forecasted purchases of corrugated (unbleached kraftliner) in its manufacturing
process. To mitigate this risk, the Company entered into a swap agreement on
April 15, 2004, which matures June 30, 2005. The swap agreement is designated as
a cash flow hedge of the Company's forecasted corrugated purchases. At June 26,
2004, the Company had open swaps hedging approximately 80 percent of its planned
corrugated requirements. The fair value of the agreement is an after-tax gain of
approximately $0.4 million recorded in accumulated other comprehensive income in
shareholder's equity.
Swap
Corrugated Outstanding
(Unbleached Kraftliner)
------------------------------
Notional amount 24,000 short tons
Average paid rate $458/short ton
Average receive rate Floating rate/short ton - $488
Maturities through June 2005
23
The Company is also exposed to commodity price risk related to forecasted
purchases of polyethylene in its manufacturing process. To mitigate this risk,
the Company entered into a swap agreement on February 26, 2004 designated as a
cash flow hedge of its forecasted polyethylene purchases. The swap hedges
approximately 80 percent of the Company's planned polyethylene requirements. The
fair value of the agreement is an after-tax loss of approximately $0.1 million
recorded in accumulated other comprehensive income in shareholder's equity. The
termination date for the agreement is June 30, 2005.
Swap
Polyethylene Outstanding
----------------------------
Notional amount 4,500,000 pounds
Average paid rate $.568/pound
Average receive rate Floating rate - $.541/pound
Maturities through June 2005
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
ITEM Page
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Birds Eye Foods, Inc. and Consolidated Subsidiaries:
Report of Independent Registered Public Accounting Firm.................. 26
Report of Registered Accounting Firm..................................... 27
Consolidated Statements of Operations, Accumulated Earnings/
(Deficit), and Comprehensive Income/(Loss) for the year ended
June 26, 2004, the periods August 19, 2002 to June 28, 2003
and June 30, 2002 to August 18, 2002 and for the year ended
June 29, 2002...................................................... 28
Consolidated Balance Sheets at June 26, 2004 and June 28, 2003........... 29
Consolidated Statements of Cash Flows for the year ended June 26,
2004, the periods August 19, 2002 to June 28, 2003 and June 30,
2002 to August 18, 2002, and for the year ended June 29, 2002......... 30
Notes to Consolidated Financial Statements............................... 31
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholder
Birds Eye Foods, Inc.
Rochester, New York
We have audited the accompanying consolidated balance sheets of Birds Eye Foods,
Inc. and subsidiaries as of June 26, 2004 and June 28, 2003 (Successor Company),
and the related consolidated statements of operations, accumulated earnings
(deficit), and comprehensive income, and cash flows for the year ended
June 26, 2004 (Successor Company), for the period from August 19, 2002 through
June 28, 2003 (Successor Company), and for the period from June 30, 2002 through
August 18, 2002 (Predecessor Company). Our audits also included the 2004 and
2003 financial statement schedule listed in the Index at Item 15. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obta