Exhibit 99.1
ITEM 1. FINANCIAL STATEMENTS
Birds Eye Foods, Inc.
Consolidated Statements of Operations, Accumulated Earnings/(Deficit), and Comprehensive Income
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
--------------------------------
Three Months Ended Successor | Predecessor Predecessor
------------------------------ |
Successor | Predecessor August 19, 2002-|June 30, 2002- Nine Months Ended
March 29, 2003| March 30, 2002 March 29, 2003 |August 18,2002 March 30, 2002
--------------| -------------- --------------- |-------------- -----------------
| |
Net sales $ 220,536 | $ 240,697 $ 601,356 | $ 101,664 $ 774,471
Cost of sales (172,766) | (185,694) (457,412) | (78,116) (601,054)
--------- | ---------- ----------- | --------- ---------
Gross profit 47,770 | 55,003 143,944 | 23,548 173,417
Selling, administrative, and general expense (29,092) | (30,907) (80,241) | (15,434) (94,315)
Restructuring 0 | 0 0 | 0 (2,622)
Gain from pension curtailment 0 | 0 0 | 0 2,472
Income from Great Lakes Kraut Company, LLC 391 | 627 1,770 | 277 1,825
--------- | ---------- ----------- | --------- ---------
Operating income before dividing with Pro-Fac 19,069 | 24,723 65,473 | 8,391 80,777
Interest expense (12,651) | (15,657) (31,336) | (7,747) (50,683)
--------- | ---------- ----------- | --------- ---------
Pretax income from continuing operations and before | |
dividing with Pro-Fac 6,418 | 9,066 34,137 | 644 30,094
Pro-Fac share of income 0 | (3,798) 0 | 0 (12,860)
--------- | ---------- ----------- | -------- ---------
Pretax income from continuing operations 6,418 | 5,268 34,137 | 644 17,234
Tax provision (2,568) | (2,059) (13,654) | (264) (7,325)
--------- | ---------- ----------- | -------- ---------
Income before discontinued operations 3,850 | 3,209 20,483 | 380 9,909
Discontinued operations, net of a tax benefit (1) | (891) (1,572) | (295) (2,515)
--------- | ---------- ----------- | -------- ---------
Net income 3,849 | 2,318 18,911 | 85 7,394
| |
Accumulated earnings/(deficit) at beginning of period 15,062 | 9,147 0 | (126,623) 4,071
--------- | ---------- ----------- | --------- ---------
Accumulated earnings/(deficit) at end of period $ 18,911 | $ 11,465 $ 18,911 | $(126,538) $ 11,465
========= | =========== =========== | ========= =========
| |
Net income $ 3,849 | $ 2,318 $ 18,911 | $ 85 $ 7,394
Other comprehensive (loss)/income: | |
Unrealized gain/(loss) on hedging activity, | |
net of taxes 216 | (16) 149 | 0 $ (390)
--------- | ---------- ----------- | --------- ---------
Comprehensive income $ 4,065 | $ 2,302 $ 19,060 | $ 85 $ 7,004
========= | ========== =========== | ========= =========
Accumulated other comprehensive (loss)/income | |
at beginning of period $ (67) | $ (329) $ 0 | $ (367) $ 45
Unrealized gain/(loss) on hedging activity, | |
net of taxes 216 | (16) 149 | 0 (390)
--------- | ---------- ----------- | --------- ---------
Accumulated other comprehensive income/(loss) | |
at end of period $ 149 | $ (345) $ 149 | $ (367) $ (345)
========= | ========== =========== | ========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
Birds Eye Foods, Inc.
Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
Successor | Predecessor
March 29, | June 29,
2003 | 2002
------------ | -----------
|
ASSETS |
|
Current assets: |
Cash and cash equivalents $ 76,385 | $ 14,686
Accounts receivable trade, net of allowances for doubtful accounts 67,773 | 68,419
Accounts receivable, other 2,967 | 7,581
Inventories, net 258,137 | 291,745
Current net investment in CoBank 3,285 | 3,347
Prepaid manufacturing expense 6,806 | 19,168
Prepaid expenses and other current assets 13,251 | 18,770
Assets held for sale 5,971 | 8,746
Due from Pro-Fac Cooperative, Inc. 0 | 11,730
Current deferred tax asset 11,372 | 2,923
---------- | ----------
Total current assets 445,947 | 447,115
Investment in CoBank 3,038 | 6,294
Investment in and advances to Great Lakes Kraut Company, LLC 0 | 14,586
Property, plant and equipment, net 216,188 | 285,834
Goodwill 27,944 | 56,210
Intangible assets, net 210,443 | 11,305
Other assets 30,820 | 22,160
Note receivable due from Pro-Fac Cooperative, Inc. 100 | 9,400
Non-current deferred tax asset 0 | 4,837
---------- | ----------
Total assets $ 934,480 | $ 857,741
========== | ==========
|
LIABILITIES AND SHAREHOLDER'S EQUITY |
Current liabilities: |
Current portion of obligations under capital leases $ 781 | $ 821
Current portion of long-term debt 6,521 | 14,916
Current portion of Termination and Transitional Services Agreements with |
Pro-Fac Cooperative, Inc. 9,339 | 0
Accounts payable 39,443 | 71,198
Income taxes payable 11,358 | 879
Accrued interest 10,928 | 6,255
Accrued employee compensation 7,442 | 8,000
Other accrued expenses 51,694 | 40,154
Growers payable due to Pro-Fac Cooperative, Inc. 11,424 | 0
---------- | ----------
Total current liabilities 148,930 | 142,223
Obligations under capital leases 2,141 | 2,528
Long-term debt 474,080 | 623,057
Long-term portion of Termination and Transitional Services Agreements with |
Pro-Fac Cooperative, Inc. 25,299 | 0
Other non-current liabilities 44,855 | 28,918
Non-current deferred tax liability 18,418 | 0
---------- | ----------
Total liabilities 713,723 | 796,726
---------- | ----------
Commitments and contingencies |
Shareholder's Equity: |
Common stock, par value $.01; 11,000 shares |
authorized, issued and outstanding 0 | 0
Additional paid-in capital 201,697 | 188,005
Accumulated earnings/(deficit) 18,911 | (126,623)
Accumulated other comprehensive income/(loss): |
Unrealized gain on hedging activity 149 | 206
Minimum pension liability adjustment 0 | (573)
---------- | ----------
Total shareholder's equity 220,757 | 61,015
---------- | ----------
Total liabilities and shareholder's equity $ 934,480 | $ 857,741
========== | ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
Birds Eye Foods, Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
Successor | Predecessor Predecessor
August 19, 2002 - | June 30, 2002 - Nine Months Ended
March 29, 2003 | August 18, 2002 March 30, 2002
---------------- | --------------- -----------------
Cash Flows From Operating Activities: |
Net income $ 18,911 | $ 85 $ 7,394
Adjustments to reconcile net income to net cash provided |
by/(used in operating activities- |
Depreciation 15,216 | 3,833 22,887
Amortization of certain intangible assets 718 | 144 862
Amortization of debt issue costs, amendment costs, |
debt discounts and premiums, and interest in-kind 7,421 | 1,201 5,098
Equity in undistributed earnings of Great Lakes Kraut |
Company, LLC (1,109) | (277) (1,067)
Transitional Services Agreement with Pro-Fac |
Cooperative, Inc. (323) | 0 0
Change in assets and liabilities: |
Accounts receivable 3,558 | 1,818 3,607
Inventories and prepaid manufacturing expense 72,256 | (33,170) (11,863)
Income taxes refundable/(payable) 10,554 | (75) 4,148
Accounts payable and other accrued expenses (18,404) | (10,972) (93,392)
Due to/(from) Pro-Fac Cooperative, Inc., net (12,733) | 8,649 1,747
Other assets and liabilities, net 2,774 | 909 741
---------- | -------- ---------
Net cash provided by/(used in) operating activities 98,839 | (27,855) (59,838)
---------- | -------- ---------
|
Cash Flows From Investing Activities: |
Purchase of property, plant and equipment (9,330) | (2,187) (10,537)
Proceeds from disposals 407 | 0 52
Repayments from/(advances to) Great Lakes Kraut Company, LLC 6,169 | (1,512) 1,784
Proceeds from investment in CoBank 2,203 | 1,115 3,998
Proceeds from Great Lakes Kraut Company, LLC Transaction 13,900 | 0 0
---------- | -------- ---------
Net cash provided by/(used in) investing activities 13,349 | (2,584) (4,703)
---------- | -------- ---------
|
Cash Flows From Financing Activities: |
Proceeds from issuance of long-term debt 270,000 | 0 0
Birds Eye Holdings, Inc. investment 175,597 | 0 0
Adjustment of Subordinated Promissory Note (25,000) | 0 0
Net (payments)/proceeds on prior revolving credit facility (22,000) | 22,000 75,400
Payments on long-term debt (401,799) | (292) (9,072)
Payments on Termination Agreement with Pro-Fac |
Cooperative, Inc. (8,000) | 0 0
Payments on capital lease (316) | (38) (111)
Cash paid for debt issuance costs (24,202) | 0 0
Cash paid for transaction fees (6,000) | 0 0
Cash paid in conjunction with debt amendment 0 | 0 (1,694)
---------- | -------- ---------
Net cash provided by/(used in) financing activities (41,720) | 21,670 64,523
---------- | -------- ---------
Net change in cash and cash equivalents 70,468 | (8,769) (18)
Cash and cash equivalents at beginning of period 5,917 | 14,686 7,656
---------- | -------- ---------
Cash and cash equivalents at end of period $ 76,385 | $ 5,917 $ 7,638
========== | ======== =========
|
Supplemental Schedule of Non-Cash Financing Activities: |
Birds Eye Holdings, Inc. investment $ 32,100 | $ 0 $ 0
========== | ======== ========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
BIRDS EYE FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING
POLICIES
The Company: Birds Eye Foods, Inc., formerly Agrilink Foods, Inc., (the
"Company" or "Birds Eye Foods"), incorporated in 1961, is a producer and
marketer of processed food products. The Company has four primary product lines
including: vegetables, fruits, snacks, and canned meals. The majority of each of
the product lines' 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.
The Change in Control (the "Transaction"): On August 19, 2002 (the "Closing
Date"), pursuant to the terms of the Unit Purchase Agreement dated as of 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. See NOTE 2 to the "Notes to
Consolidated Financial Statements" for additional disclosures regarding the
Transaction.
The term "successor" refers to Birds Eye Foods and all of its subsidiaries
following the Transaction. The term "predecessor" refers to Birds Eye Foods
prior to the change in control on August 19, 2002.
Basis of Presentation: The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") for interim financial
information and with the requirements of Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information required by GAAP
for complete financial statement presentation. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations, and cash
flows have been included. Operating results for the period from June 30, 2002 to
August 18, 2002 or the period from August 19, 2002 through March 29, 2003 are
not necessarily the results to be expected for other interim periods or the full
year. These financial statements should be read in conjunction with the
financial statements and accompanying notes contained in the Company's Form 10-K
Equivalent for the fiscal year ended June 29, 2002.
Consolidation: The consolidated financial statements include the Company and its
wholly-owned subsidiaries after elimination of intercompany transactions and
balances. Investments in affiliates owned more than 20 percent but not in excess
of 50 percent are recorded under the equity method of accounting.
Reclassification: Certain items for fiscal 2002 have been reclassified to
conform with the current period presentation.
New Accounting Pronouncements: In August 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets." Effective June 30, 2002, Birds Eye Foods adopted SFAS No. 144 which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The statement requires an impairment loss be recognized if
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flow and that the impairment loss be recognized as the
difference between the carrying amount and fair value of the asset. Under SFAS
No. 144, assets held for sale that are a component of an entity will be included
in discontinued operations if the operations and cash flows will be or have been
eliminated from the ongoing operations of the entity, and the entity will not
have any significant continuing involvement in the operations prospectively. The
adoption of SFAS No. 144 did not impact the Company's profitability. See NOTE 3
to the "Notes to Consolidated Financial Statements" for additional disclosures
regarding discontinued operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supercedes
Emerging Issues Task Force ("EITF") Issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. EITF 94-3 requires a liability for
exit costs be recognized at the date of an entity's commitment to an exit plan.
The provisions of SFAS No. 146 must be adopted for exit or disposal activities
that are initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Others" ("FIN 45"). FIN 45 requires that a liability be recorded on the
guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45
requires disclosures about the guarantees that an entity has issued. The Company
will apply the recognition provisions of FIN 45 prospectively to guarantees
issued after December 31, 2002. The disclosure and recognition provisions of FIN
45 have been adopted in this report and did not have a material effect on its
consolidated financial statements.
See NOTE 10 to the "Notes to Consolidated Financial Statements" for additional
disclosures regarding FIN 45.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company does not expect FIN 46 to have a
material effect on its consolidated financial statements.
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.
The Company's allowance for doubtful accounts is approximately $1.6 million at
March 29, 2003, and $0.7 million at June 29, 2002.
NOTE 2. THE TRANSACTION
On June 20, 2002, Pro-Fac Cooperative, Inc., a New York agricultural
cooperative, 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, entered into a Unit Purchase Agreement. The
transactions contemplated in and consummated pursuant to the Unit Purchase
Agreement, are referred to herein collectively as the "Transaction." On August
19, 2002, pursuant to the Unit Purchase Agreement:
(i) Pro-Fac contributed to the capital of Agrilink Holdings LLC, a Delaware
limited liability company ("Holdings LLC"), all of the shares of Birds Eye
Foods' common stock owned by Pro-Fac, constituting 100 percent of the issued and
outstanding shares of Birds Eye Foods' capital stock, in consideration for Class
B common units of Holdings LLC, representing a 40.72 percent common equity
ownership; and
(ii) Vestar/Agrilink Holdings and certain co-investors (collectively, "Vestar")
contributed cash in the aggregate amount of $175.0 million to the capital of
Holdings LLC, in consideration for preferred units, Class A common units, and
warrants which were immediately exercised to acquire additional Class A common
units. After exercising the warrants, Vestar owns 56.24 percent of the common
equity of Holdings LLC. The co-investors are either under common control with,
or have delivered an unconditional voting proxy to, Vestar/Agrilink Holdings.
The Class A common units entitle the owner thereof - Vestar - to two votes for
each Class A common unit held. All other Holdings LLC common units entitle the
holder(s) thereof to one vote for each common unit held. Accordingly, Vestar has
a voting majority of all common units.
(iii) Immediately following Pro-Fac's contribution of its Birds Eye Foods common
stock to Holdings LLC, Holdings LLC contributed those shares valued at $32.1
million to Birds Eye Holdings Inc., formerly Agrilink Holdings Inc., ("Holdings
Inc."), a Delaware corporation and a direct, wholly-owned subsidiary of Holdings
LLC, and Birds Eye Foods became an indirect, wholly-owned subsidiary of Holdings
LLC.
(iv) As part of the Transaction, executive officers of Birds Eye Foods, and
certain other members of Birds Eye Foods' management, entered into subscription
agreements with Holdings LLC to acquire, with a combination of cash and
promissory notes issued to Holdings LLC, an aggregate of approximately $1.3
million of Class C common units and Class D common units of Holdings LLC,
representing approximately 3.04 percent of the common equity ownership. As of
March 29, 2003, an additional approximately $0.5 million of Class C common units
and Class D common units, representing less than 1 percent of the common equity
ownership, remained unissued. The foregoing individuals are also parties to the
Securityholders Agreement and the Limited Liability Agreement.
Prior to the Transaction, certain amounts owed by Pro-Fac to Birds Eye Foods
were forgiven. The amounts forgiven were approximately $36.5 million and
represented both borrowings for the working capital needs of Pro-Fac and a $9.4
million demand receivable.
The Transaction was accounted for under the purchase method of accounting in
accordance with SFAS No. 141, "Business Combinations." Under purchase
accounting, tangible and identifiable intangible assets acquired and liabilities
assumed will be recorded at their respective fair values. The valuations and
other studies which will provide the basis for such an allocation have not
progressed to a stage where there is sufficient information to make a final
allocation in the accompanying financial statements. Accordingly, the purchase
accounting adjustments made in the accompanying financial statements are
preliminary. Once a final allocation is determined, in accordance with
accounting principles generally accepted in the United States, any remaining
excess of the investment over identifiable net assets acquired will be adjusted
through goodwill.
Holdings Inc. has pushed down its purchase accounting to Birds Eye Foods. The
preliminary excess investment made by Holdings Inc. over the preliminary
estimates of the fair value of the identifiable assets and liabilities of the
Company as of the Closing Date was approximately $27.9 million and is reflected
as goodwill in the accompanying unaudited consolidated balance sheet as of March
29, 2003.
As of August 19, 2002, management has begun to assess and formulate a plan to
exit certain portions of its business. In connection with the Transaction,
management determined that initially approximately 171 employees will be
terminated and has announced the benefit arrangements to those employees. These
activities surround the Company's decision to exit the popcorn and applesauce
businesses and complete the relocation of its marketing function to Rochester,
New York. As a result, approximately $1.9 million in severance costs and other
related exit costs have been accrued for in purchase accounting in accordance
with Emerging Issues Task Force ("EITF") 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination." Approximately $0.7 million has
been liquidated as of March 29, 2003.
In February 2003, also in connection with the Transaction, the Company announced
that it would be closing and downsizing six vegetable processing facilities and
consolidating production over the next 4 to 15 months to create more efficient
facilities. The announcement was in furtherance of the final formulation of the
exit plan. The facilities impacted include those in Barker, New York;
Bridgeville, Delaware; Green Bay, Wisconsin; Oxnard, California; Uvalde, Texas
and the fresh production operation at Montezuma, Georgia. Subsequent to closure,
the Company intends to dispose of these properties. In connection with these
closings, 257 full time production employees have been notified of termination
and their benefit arrangements. Additional costs to complete the exit plan
include facility closure costs, lease penalties, and contractual cancellation
and termination fees. The following table reflects the amount recorded as a
liability for the exit plan to downsize six vegetable processing facilities as
well as costs recorded against the liability as of March 29, 2003:
Contractual Severance
Penalties and and
Other Costs Related Costs
-------------- -------------
Initial liability $ 6.2 $ 2.3
Utilization (0.8) 0.0
------ ------
Balance at March 29, 2003 $ 5.4 $ 2.3
====== ======
Management has not yet completed the exit plan, and as a result, the outline of
the exit plan is considered preliminary. Accordingly, upon completion and
execution of the plan, certain assets may be sold or impaired and certain
liabilities may be incurred which could result in additional adjustments to the
values assigned to such items in purchase accounting. Management anticipates the
final formulation of the plan will be completed within the next three months.
The following unaudited pro forma financial information presents a summary of
consolidated results of operations of the Company as if the Transaction had
occurred at the beginning of the periods presented.
(Dollars in Thousands)
Predecessor Predecessor Predecessor
June 30, 2002 - Three Months Ended Nine Months Ended
August 18, 2002 March 30, 2002 March 30, 2002
---------------- ------------------ ------------------
Net Sales $ 101,664 $ 240,697 $ 774,471
Income before discontinued operations 778 8,534 25,765
Net Income 483 7,643 23,250
These unaudited pro forma results have been prepared for comparative purposes
only and primarily include adjustments for interest expense, taxes,
depreciation, the fair values of operating leases, income from the Transitional
Services Agreement with Pro-Fac and the elimination of the historical share of
income or loss that has been recorded. Included in pro forma net income for the
nine months ended March 30, 2002 are items of approximately $2.6 million related
to restructuring expense and a $2.5 million gain from pension curtailment. These
results do not purport to be indicative of the results of operations which
actually would have resulted had the Transaction occurred at the beginning of
the 2002 fiscal year, or of the future operations of the successor company.
NOTE 3. DISCONTINUED OPERATIONS
As of August 19, 2002, the Company committed to a plan to sell the popcorn and
applesauce operations previously reported in the snack and fruit segments,
respectively, and completed these transactions in the third quarter of fiscal
2003. The implementation of SFAS No. 144 resulted in the classification and
separate financial presentation of those businesses as discontinued operations
and their operations are, therefore, excluded from continuing operations. All
prior periods have been reclassified to reflect the discontinuance of these
operations.
In addition, having met the criteria outlined in SFAS No. 144, the Company
reclassified certain assets relating to the popcorn and applesauce businesses to
assets held for sale, and, in accordance with SFAS No. 144, the Company
reclassified the prior period balances. Also, included in assets held for sale
are facilities located in Alamo, Texas; Enumclaw, Washington; Sodus, Michigan;
Hortonville, Wisconsin; and Alton, New York which are being actively marketed
for sale within the fiscal year.
The major classes of discontinued assets included in the Consolidated Balance
Sheets as assets held for sale at net realizable value are as follows:
Successor Predecessor
(Dollars in Thousands) March 29, 2003 June 29, 2002
-------------- -------------
Inventories $ 221 $ 2,570
Property, plant and equipment, net 5,750 6,176
--------- --------
Total $ 5,971 $ 8,746
========= ========
The operating results of those businesses identified as held for sale have been
classified as discontinued operations in the accompanying financial statements
and are summarized as follows:
Nine Months Ended
Three Months Ended ------------------------------------
-------------------------------- Successor Predecessor Predecessor
Successor Predecessor August 19, 2002 - June 30, 2002 - Nine Months Ended
March 29, 2003 March 30, 2002 March 29, 2003 August 18, 2002 March 30, 2002
-------------- -------------- ---------------- ---------------- -----------------
Net Sales $ 2,716 $ 4,189 $ 8,333 $ 2,063 $ 14,196
======= ======= ======== ======= ========
Loss before income taxes $ (2) $(1,461) $ (2,620) $ (500) $ (4,374)
Income tax benefit 1 570 1,048 205 1,859
------- ------- -------- ------- --------
Discontinued operations,
net of a tax benefit $ (1) $ (891) $ (1,572) $ (295) $ (2,515)
======= ======= ======== ======= ========
NOTE 4. GREAT LAKES KRAUT COMPANY, LLC TRANSACTION
Birds Eye Foods owned a 50 percent interest in Great Lakes Kraut Company, LLC
("GLK") and reached an agreement with Flanagan Brothers, Inc. ("Flanagan
Brothers") to effect a transfer of the operating business of GLK to a
newly-formed subsidiary of Flanagan Brothers the other 50 percent owner of GLK,
pursuant to certain "buy-sell" provisions of the limited liability company
agreement of GLK (the "GLK Transaction"). In the GLK Transaction, a newly-formed
subsidiary of Birds Eye Foods, GLK Holdings, Inc., invested $11.1 million in
GLK, which was used to reduce the debt of GLK. Flanagan Brothers exchanged its
interest in GLK in return for a transfer to a newly-formed subsidiary of
Flanagan Brothers of all of the operating assets of GLK and the assumption of
all liabilities relating to the business of GLK. At the closing, GLK repaid $5.2
million to Birds Eye Foods for certain working capital loans made to GLK by
Birds Eye Foods. After the GLK Transaction, Birds Eye Foods and GLK Holdings
Inc. own 100 percent of GLK which has been renamed GLK, LLC and will continue to
own the subordinated promissory note of Birds Eye Foods and certain operating
assets or subsidiaries of Birds Eye Foods to be transferred. The GLK Transaction
closed effective March 2, 2003. As a result of the GLK Transaction, the
Subordinated Promissory Note of Birds Eye Foods, the Company's investment in
GLK, and all working capital advances to GLK were eliminated.
NOTE 5. AGREEMENTS WITH PRO-FAC
In connection with the Transaction, Birds Eye Foods and Pro-Fac entered into
several agreements effective as of the Closing Date, including the following:
(i) Termination Agreement. Pro-Fac and Birds Eye Foods entered into a letter
agreement dated as of the Closing Date (the "Termination Agreement"), pursuant
to which, among other things, the marketing and facilitation agreement between
Pro-Fac and Birds Eye Foods (the "Old Marketing and Facilitation Agreement")
which, until the Closing Date, governed the crop supply and purchase
relationship between Birds Eye Foods and Pro-Fac, has been terminated. In
consideration of such termination, Birds Eye Foods will pay Pro-Fac a
termination fee of $10.0 million per year for five years, provided that certain
ongoing conditions are met, including maintaining grower membership levels
sufficient to generate certain minimum crop supply. The $10.0 million payment
will be paid in quarterly installments as follows: $4.0 million on each July 1,
and $2.0 million each on October 1, January 1, and April 1. The Termination
Agreement outlined that the first payment in the amount of $4.0 million was to
be paid on the Closing Date and the next payment to be made by October 1, 2002
and quarterly thereafter as outlined. The liability for the Termination
Agreement has been reflected at fair value utilizing a discount rate of 11 1/2
percent. The amount of the obligation under the Termination Agreement was $33.9
million as of March 29, 2003.
(ii) Amended and Restated Marketing and Facilitation Agreement. Pro-Fac and
Birds Eye Foods entered into an amended and restated marketing and facilitation
agreement dated as of the Closing Date (the "Amended and Restated Marketing and
Facilitation Agreement"). The Amended and Restated Marketing and Facilitation
Agreement replaces the Old Marketing and Facilitation Agreement and provides
that, among other things, Pro-Fac will be Birds Eye Foods' preferred supplier of
crops. Birds Eye Foods will continue to pay the commercial market value ("CMV")
of crops supplied by Pro-Fac, in installments corresponding to the dates of
payment by Pro-Fac to its members for crops delivered. CMV is defined as the
weighted average price paid by other commercial processors for similar crops
sold under preseason contracts and in the open market in the same or competing
market areas. The processes for determining CMV under the Amended and Restated
Marketing and Facilitation Agreement are substantially the same as the processes
used under the Old Marketing and Facilitation Agreement. Birds Eye Foods will
make payments to Pro-Fac of an estimated CMV for a particular crop year, subject
to adjustments to reflect the actual CMV following the end of such year.
Commodity committees of Pro-Fac will meet with Birds Eye Foods management to
establish CMV guidelines, review calculations, and report to a joint CMV
committee of Pro-Fac and Birds Eye Foods. Amounts paid by Birds Eye Foods to
Pro-Fac for the CMV of crops supplied for the nine months ended March 29, 2003
and March 30, 2002 were $56.1 million and $70.1 million, respectively.
Unlike the Old Marketing and Facilitation Agreement, the Amended and Restated
Marketing and Facilitation Agreement does not permit Birds Eye Foods to offset
its losses from products supplied by Pro-Fac or require it to share with Pro-Fac
its profits and it does not require Pro-Fac to reinvest in Birds Eye Foods any
part of Pro-Fac's patronage income. 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 (before dividing with
Pro-Fac). In years in which the Company had losses on crops supplied by Pro-Fac,
the Company reduced the CMV 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 (before dividing with Pro-Fac). Additional patronage income was paid to
Pro-Fac for services provided to Birds Eye Foods, including the provision of a
long term, stable crop supply, favorable payment terms for crops, and the
sharing of risks of losses of certain operations of the business. Earnings and
losses were determined at the end of the fiscal year, but were accrued on an
estimated basis during the year. For the three and nine months ended March 30,
2002, Pro-Fac's share of income was $3.8 million and $12.9 million,
respectively.
The Amended and Restated Marketing and Facilitation Agreement also provides that
Birds Eye Foods will continue to provide to Pro-Fac services relating to
planning, consulting, sourcing and harvesting crops from Pro-Fac members in a
manner consistent with past practices. In addition, for a period of five years
from the Closing Date, Birds Eye Foods may provide Pro-Fac with services related
to the expansion of the market for the agricultural products of Pro-Fac members
(at no cost to Pro-Fac other than reimbursement of Birds Eye Foods' incremental
and out-of-pocket expenses related to providing such services as agreed to by
Pro-Fac and Birds Eye Foods).
Under the Amended and Restated Marketing and Facilitation Agreement, Birds Eye
Foods determines the amount of crops which Birds Eye Foods will acquire from
Pro-Fac for each crop year. If the amount to be purchased by Birds Eye Foods
during a particular crop year does not meet (i) a defined crop amount and (ii) a
defined target percentage of Birds Eye's needs for each particular crop, then
certain shortfall payments are made by Birds Eye Foods to Pro-Fac. The defined
crop amounts and targeted percentages are set based upon the needs of Birds Eye
Foods in the 2001 crop year (fiscal 2002). The shortfall payment provisions of
the agreement include a maximum shortfall payment, determined for each crop,
that can be paid over the term of the Amended and Restated Marketing and
Facilitation Agreement. The aggregate shortfall payment amounts for all crops
covered under the agreement cannot exceed $20.0 million over the term of the
agreement.
The Amended and Restated Marketing and Facilitation Agreement may be terminated
by Birds Eye Foods in connection with certain change in control transactions
affecting Birds Eye Foods or Holdings Inc.; provided, however, that in the event
that any such change in control occurs during the first three years after the
Closing Date, Birds Eye Foods must pay to Pro-Fac a termination fee of $20.0
million (less the total amount of any shortfall payments previously paid to
Pro-Fac under the Amended and Restated Marketing and Facilitation Agreement).
Also, if, during the first three years after the Closing Date, Birds Eye Foods
sells one or more portions of its business, and if the purchaser does not
continue to purchase the crops previously purchased by Birds Eye Foods with
respect to the transferred business, then such failure will be taken into
consideration when determining if Birds Eye Foods is required to make any
shortfall payments to Pro-Fac. After such three-year period, Birds Eye Foods may
sell portions of its business and the volumes of crop purchases previously made
by Birds Eye Foods with respect to such transferred business will be disregarded
for purposes of determining shortfall payments.
(iii) Transitional Services Agreement. Pro-Fac and Birds Eye Foods entered into
a transitional services agreement (the "Transitional Services Agreement") dated
as of the Closing Date, pursuant to which Birds Eye Foods will provide Pro-Fac
certain administrative and other services for a period of 24 months from the
Closing Date. Birds Eye Foods will generally provide such services at no charge
to Pro-Fac, other than reimbursement of the incremental and out-of-pocket costs
associated with performing those services for Pro-Fac. The value of the services
to be provided to Pro-Fac has been estimated at approximately $1.1 million. The
amount of the obligation outstanding under the Transitional Services Agreement
as of March 29, 2003 was $0.7 million. This obligation will be reduced on a
straight-line basis over the term of the agreement and as services are provided.
Also pursuant to the Transitional Services Agreement, the general manager of
Pro-Fac may also be an employee of Birds Eye Foods, in which case he will report
to the chief executive officer of Birds Eye Foods with respect to his duties for
Birds Eye Foods, and to the Pro-Fac board of directors with respect to duties
performed by him for Pro-Fac. All other individuals performing services under
the Transitional Services Agreement report only to the chief executive officer
(or other representatives) of Birds Eye Foods.
(iv) Credit Agreement. Birds Eye Foods and Pro-Fac have entered into a Credit
Agreement, dated August 19, 2002 (the "Credit Agreement"), pursuant to which
Birds Eye Foods has agreed to make available to Pro-Fac loans in an aggregate
principal amount of up to $5.0 million (the "Credit Facility"). Pro-Fac is
permitted to draw down up to $1.0 million per year under the Credit Facility,
unless Birds Eye Foods is prohibited from making such advances under the terms
of certain third party indebtedness of Birds Eye Foods. The amount of the Credit
Facility will be reduced, on a dollar-for-dollar basis, to the extent of certain
distributions made by Holdings LLC to Pro-Fac in respect of its ownership in
Holdings LLC. Pro-Fac has pledged all of its Class B Common Units in Holdings
LLC as security for advances under the Credit Facility. The Credit Facility
bears interest at the rate of 10 percent per annum. As of March 29, 2003, there
was $0.1 million outstanding under this Credit Agreement.
In addition, prior to the Transaction, certain amounts totaling $36.5 million
owed by Pro-Fac to Birds Eye Foods were forgiven, including both borrowings for
the working capital needs of Pro-Fac and a $9.4 million demand receivable.
NOTE 6. INVENTORIES
The major classes of inventories are as follows:
(Dollars in Thousands)
Successor Predecessor
March 29, June 29,
2003 2002
---------- -----------
Finished goods $ 236,836 $ 264,770
Raw materials and supplies 21,301 26,975
---------- ----------
Total inventories $ 258,137 $ 291,745
========== ==========
NOTE 7. ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 requires that goodwill not be amortized, but instead be
tested at least annually for impairment and expensed against earnings when its
implied fair value is less than its carrying amount.
As of March 29, 2003 the amounts assigned to goodwill and intangibles are
preliminary as not all valuations, exit plans, and other studies, which will
provide the basis for the allocation of fair value to assets and liabilities
have progressed to a stage where there is sufficient information to make a final
allocation in the accompanying financial statements. In addition, the amount
assigned to goodwill has not yet been allocated to the Company's operating
segments due to the preliminary nature of this information.
As outlined in SFAS No. 142, certain intangibles with a finite life, however,
are required to continue to be amortized. These intangibles are being amortized
on a straight-line basis over approximately 1 to 14 years. The following
schedule sets forth the major classes of intangible assets held by the Company:
(Dollars in Thousands)
Successor Predecessor
March 29, June 29,
2003 2002
--------- ----------
Amortized intangibles:
Covenants not to compete $ 754 $ 2,478
Other 10,406 12,000
Less: accumulated amortization (717) (3,173)
-------- --------
Amortized intangibles, net 10,443 11,305
Unamortized intangibles:
Trademarks 200,000 0
-------- --------
Total intangible assets, net $210,443 $ 11,305
======== ========
The aggregate amortization expense associated with intangible assets was
approximately $0.3 million for the successor period for the three months ended
March 29, 2003, and $0.7 million for the successor period August 19, 2002
through March 29, 2003. The aggregate amortization expense was $0.1 million for
the predecessor period June 30, 2002 through August 18, 2002, and $0.3 million
and $0.9 million for the predecessor three months and nine months ended March
30, 2002, respectively. The aggregate amortization expense for each of the five
succeeding fiscal years is estimated as follows:
(Dollars in Thousands)
Aggregate
Annual
Fiscal Amortization
Year Expense
- ------ ------------
2004 $ 915
2005 891
2006 891
2007 760
2008 752
NOTE 8. DEBT
Summary of Long-Term Debt:
(Dollars in Thousands)
Successor Predecessor
March 29, June 29,
2003 2002
----------- ------------
Revolving Credit Facility $ 0 $ 0
Term Loan Facility 269,325 400,800
Senior Subordinated Notes 207,431 200,015
Subordinated Promissory Note (net of discount) 0 32,696
Other 3,845 4,462
---------- ---------
Total debt 480,601 637,973
Less current portion (6,521) (14,916)
---------- ---------
Total long-term debt $ 474,080 $ 623,057
========== =========
Bank Debt: 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 by JPMorgan Chase Bank ("JPMorgan Chase Bank"), as
administrative and collateral agent. The Senior Credit Facility is comprised of
(i) a $200.0 million senior secured revolving credit facility (the "Revolving
Credit Facility") and (ii) a $270.0 million senior secured B term loan (the
"Term Loan Facility"). The Revolving Credit Facility has a maturity of five
years and allows up to $40.0 million to be available in the form of letters of
credit. The Term Loan Facility has a maturity of six years.
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 (the "Senior Credit Agreement"), and
is adjusted quarterly based on the calculation of the Consolidated Leverage
Ratio. As of March 29, 2003, the Senior Credit Facility bears interest in the
case of base rate loans at the base rate plus (i) 1.25 percent for loans under
the Revolving Credit Facility, and (ii) 1.75 percent for loans under the Term
Loan Facility or in the case of LIBOR loans at LIBOR plus (i) 2.25 percent for
loans under the Revolving Credit Facility and (ii) 2.75 percent for loans under
the Term Loan Facility. The initial unused commitment fee is 0.375 percent on
the daily average unused commitment under the Revolving Credit Facility and
varies based on the Company's Consolidated Leverage Ratio, as defined.
Commencing December 31, 2002, the Term Loan Facility requires payments in equal
quarterly installments in the amount of $675,000 until its final maturity in
August 2008 upon which the balance will be due. The Term Loan Facility is also
subject to mandatory prepayments under various scenarios as defined in the
Senior Credit Agreement. Provisions of the Senior Credit Agreement require that
annual payments, within 105 days after the end of each fiscal year, in the
amount of "excess cash flow" be utilized to prepay the commitment at an
applicable percentage that corresponds to the Company's Consolidated Leverage
Ratio.
The 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 which provide for a maximum average debt to EBITDA ratio, a
maximum average senior debt to EBITDA ratio, and a minimum EBITDA to interest
expense ratio. The Company is in compliance with all covenants, restrictions,
and requirements under the terms of the Senior Credit Facility. The proceeds of
the Term Loan Facility and borrowings under the Revolving Credit Facility,
together with Vestar's $175.0 million investment, were used to repay and
terminate Birds Eye Foods' indebtedness under its senior credit facilities with
Harris Trust and Savings Bank and the lenders thereunder, to consummate the
Transaction, and to pay related fees and expenses incurred in the Transaction.
Senior Subordinated Notes: Birds Eye Foods has outstanding $200.0 million of
11-7/8 percent Senior Subordinated Notes (the "Notes"), due 2008. In connection
with the Transaction, the Company recorded the Notes at estimated fair value,
$208.2 million. The $8.2 million premium is being amortized against interest
expense over the life of the Notes.
Subordinated Promissory Note: The Subordinated Promissory Note balance at June
29, 2002 represents debt to GLK, originally a joint venture between the Company
and Flanagan Brothers. Birds Eye Foods owned a 50 percent interest in GLK and
reached an agreement with Flanagan Brothers to effect a transfer of the
operating business of GLK to a newly-formed subsidiary of Flanagan Brothers, the
other 50 percent owner of GLK, pursuant to certain "buy-sell" provisions of the
limited liability company agreement of GLK. In the GLK Transaction, a
newly-formed subsidiary of Birds Eye Foods, GLK Holdings, Inc., invested $11.1
million in GLK, which was used to reduce the debt of GLK. Flanagan Brothers
exchanged its interest in GLK in return for a transfer to a newly formed
subsidiary of Flanagan Brothers of all of the operating assets of GLK and the
assumption of all liabilities relating to the business of GLK. At the closing,
GLK repaid $5.2 million to Birds Eye Foods for certain working capital loans
made to GLK by Birds Eye Foods. After the GLK Transaction, Birds Eye Foods and
GLK Holdings Inc. own 100 percent of GLK, which has been renamed GLK, LLC and
will continue to own the Subordinated Promissory Note of Birds Eye Foods and
certain operating assets or subsidiaries of Birds Eye Foods to be transferred.
The GLK Transaction closed effective March 2, 2003. As a result of the GLK
Transaction, the Subordinated Promissory Note, the Company's investment in GLK
and all working capital advances to GLK were eliminated.
NOTE 9. OPERATING SEGMENTS
The Company is organized by product line for management reporting. The
Company's four primary operating segments are as follows: vegetables, fruits,
snacks, and canned meals.
The vegetable product line consists of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable
category include Birds Eye, Birds Eye Voila!, Birds Eye Simply Grillin', Birds
Eye Hearty Spoonfuls, Veg-All, Freshlike, McKenzies, and Brooks Chili Beans. The
fruit product line consists of canned and frozen fruits including fruit fillings
and toppings. Branded products within the fruit category include Comstock and
Wilderness. The snack product line consists of potato chips and other corn-based
snack items. Branded products within the snack category include Tim's Cascade
Chips, Snyder of Berlin, Husman, La Restaurante, Erin's, and Flavor
Destinations. The canned meal product line includes canned meat products such as
chilies, stew, soups, and various other ready-to-eat prepared meals. Branded
products within the canned meal category include Nalley. The Company's other
product lines primarily represent salad dressings. Branded products within the
other category include Bernstein's and Nalley.
The following table illustrates the Company's operating segment information:
(Dollars in Millions)
Nine Months Ended
Three Months Ended ---------------------------------
------------------------------- Successor Predecessor Predecessor
Successor Predecessor August 19, 2002- June 30, 2002- Nine Months Ended
March 29, 2003 March 30, 2002 March 29, 2003 August 18, 2002 March 30, 2002
-------------- -------------- ----------------- --------------- -----------------
Net Sales:
Vegetables $ 162.2 $ 180.8 $ 435.5 $ 69.5 $ 568.1
Fruits 18.3 19.5 67.3 12.2 83.6
Snacks 19.0 18.5 47.8 10.6 58.1
Canned Meals 13.1 12.7 31.9 4.5 37.0
Other 7.9 9.2 18.9 4.9 27.6
-------- -------- --------- -------- --------
Total continuing segments $ 220.5 $ 240.7 $ 601.4 $ 101.7 $ 774.4
======== ======== ========= ======== ========
Operating income:
Vegetables $ 12.2 $ 16.8 $ 35.1 $ 3.8 $ 48.9
Fruits 3.8 3.4 20.0 2.4 17.1
Snacks 1.5 1.7 5.6 1.5 6.9
Canned Meals 0.7 1.6 2.6 0.3 5.5
Other 0.9 1.2 2.1 0.4 2.5
Corporate charges* 0.0 0.0 0.0 0.0 (2.7)
-------- -------- --------- -------- --------
Operating income before nonrecurring items 19.1 24.7 65.4 8.4 78.2
Gain from pension curtailment 0.0 0.0 0.0 0.0 2.5
-------- -------- --------- -------- --------
Operating income before dividing with Pro-Fac 19.1 24.7 65.4 8.4 80.7
Interest expense (12.7) (15.7) (31.3) (7.8) (50.7)
-------- -------- --------- -------- --------
Pretax income from continuing operations
and before dividing with Pro-Fac $ 6.4 $ 9.0 $ 34.1 $ 0.6 $ 30.0
======== ======== ========= ======== ========
<FN>
* Corporate charges represent restructuring expenses which are not allocated
to individual segments. See NOTE 11 to the "Notes to Consolidated Financial
Statements."
</FN>
NOTE 10. GUARANTEES AND INDEMNIFICATIONS
In certain instances when Birds Eye Foods sells businesses or assets, the
Company may retain certain liabilities for known exposures and provide
indemnification to the buyer with respect to future claims for certain unknown
liabilities existing, or arising from events occurring, prior to the sale date,
including liabilities for taxes, legal matters, environmental exposures, labor
contingencies, product liability, and other obligations. The terms of the
indemnifications vary in duration, from one to three years for certain types of
indemnities, to terms for tax indemnifications that are generally aligned to the
applicable statute of limitations for the jurisdiction in which the tax is
imposed, and to terms for certain liabilities (i.e., warranties of title and
environmental liabilities) that typically do not expire. The maximum potential
future payments that the Company could be required to make under these
indemnifications are either contractually limited to a specified amount or
unlimited. The maximum potential future payments that the Company could be
required to make under these indemnifications are not determinable at this time,
as any future payments would be dependent on the type and extent of the related
claims, and all relevant defenses, which are not estimable. Historically, costs
incurred to resolve claims related to these indemnifications have not been
material to the Company's financial position, results of operations or cash
flows.
The Company enters into agreements with indemnification provisions in the
ordinary course of business with its customers, suppliers, service providers and
business partners. In such instances, the Company usually indemnifies, holds
harmless and agrees to reimburse the indemnified party for claims, actions,
liabilities, losses and expenses in connection with any Birds Eye Foods
infringement of third party intellectual property or proprietary rights, or when
applicable, in connection with any personal injuries or property damage
resulting from any Birds Eye Foods' products sold or services provided.
Additionally, the Company may from time to time agree to indemnify and hold
harmless its providers of services from claims, actions, liabilities, losses and
expenses relating to their services to Birds Eye Foods, except to the extent
finally determined to have resulted from the fault of the provider of services
relating to such services. The level of conduct constituting fault of the
service provider will vary from agreement to agreement and may include conduct
which is defined in terms of negligence, gross negligence, willful misconduct,
omissions or other culpable behavior. The term of these indemnification
provisions are generally not limited. The maximum potential future payments that
the Company could be required to make under these indemnification provisions are
unlimited. The maximum potential future payments that the Company could be
required to make under these indemnification provisions are not determinable at
this time, as any future payments would be dependent on the type and extent of
the related claims, and all relevant defenses to the claims, which are not
estimable. Historically, costs incurred to resolve claims related to these
indemnification provisions have not been material to the Company's financial
position, results of operations or cash flows.
The Company has by-laws, policies, and agreements under which it indemnifies its
directors and officers from liability for certain events or occurrences while
the directors or officers are, or were, serving at Birds Eye Foods' request in
such capacities. Furthermore, the Company is incorporated in the state of
Delaware, which requires corporations to indemnify their officers and directors
under certain circumstances. The term of the indemnification period is for the
director's or officer's lifetime. The maximum potential amount of future
payments that the Company could be required to make under these indemnification
provisions is unlimited, but would be affected by all relevant defenses to the
claims.
Birds Eye Foods entered into an agreement to provide a guarantee in September
1995 on behalf of the City of Montezuma to renovate a sewage treatment plant
operated in Montezuma, Georgia. Birds Eye Foods issued a guarantee of the loan
in an original amount of approximately $3.3 million including interest. The
guarantee expires in 2015 and requires payment upon the occurrence of a
shortfall in third-party revenue from the utilization of the sewage treatment
plant. In the event of such shortfall, Birds Eye Foods would be required to pay
the remainder of the loan for the City of Montezuma. As of March 29, 2003, the
outstanding loan amount, including interest, was $2.1 million. In connection
with the exit plan described in NOTE 2 to the "Notes to Consolidated Financial
Statements," a liability of approximately $1.4 million has been recorded to
reflect that portion associated with the fresh production operations of
Montezuma, Georgia.
Subsidiary Guarantors: Kennedy Endeavors, Incorporated, GLK Holdings, Inc., and
Linden Oaks Corporation, wholly-owned subsidiaries of the Company ("Subsidiary
Guarantors"), and Pro-Fac (Pro-Fac files periodic reports under the Security
Exchange Act of 1934, Commission File Number 0-20539) have jointly and
severally, fully and unconditionally guaranteed, on a senior subordinated basis,
the obligations of the Company with respect to the Company's 11-7/8 percent
Senior Subordinated Notes due 2008 (the "Notes"). In addition, the Subsidiary
Guarantors have jointly and severally, fully and unconditionally guaranteed the
obligations of the Company with respect to the Company's Senior Credit Facility.
The covenants in the Notes and the Senior Credit Facility do not restrict the
ability of the Subsidiary Guarantors to make cash distributions to the Company.
Presented below is condensed consolidating financial information for (i) Birds
Eye Foods, (ii) the subsidiary guarantors, and (iii) non-guarantor subsidiaries.
The condensed consolidating financial information has been presented to show the
nature of assets held, results of operations, and cash flows of the Company and
its Subsidiary Guarantors and non-guarantor subsidiaries in accordance with
Securities and Exchange Commission Financial Reporting Release No. 55.
Successor
Statement of Operations
Three Months Ended March 29, 2003
------------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- -------------
(Dollars in Thousands)
Net sales $ 215,825 $ 4,711 $ 4,865 $ (4,865) $ 220,536
Cost of sales (169,570) (3,196) (4,536) 4,536 (172,766)
--------- ---------- -------- -------- ---------
Gross profit/(loss) 46,255 1,515 329 (329) 47,770
Selling, administrative, and general expenses (28,230) (862) 0 0 (29,092)
Other (expense)/income (11,407) 11,407 213 (213) 0
Income from former joint venture and subsidiaries 867 211 0 (687) 391
--------- ---------- -------- -------- ---------
Operating income/(loss) before discontinued
operations 7,485 12,271 542 (1,229) 19,069
Interest (expense)/income (15,581) 2,454 476 0 (12,651)
--------- ---------- -------- -------- ---------
Pretax (loss)/income before discontinued operations (8,096) 14,725 1,018 (1,229) 6,418
Tax benefit/(provision) 2,850 (5,293) (125) 0 (2,568)
--------- ---------- -------- -------- ---------
Net (loss)/income before discontinued operations (5,246) 9,432 893 (1,229) 3,850
Discontinued operations (net of a tax benefit
of $1) (1) 0 0 0 (1)
--------- ---------- -------- -------- ---------
Net (loss)/income $ (5,247) $ 9,432 $ 893 $ (1,229) $ 3,849
========= ========== ======== ======== =========
Successor
Statement of Operations
August 19, 2002 - March 29, 2003
------------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net sales $ 590,521 $ 10,835 $ 10,437 $ (10,437) $ 601,356
Cost of sales (450,336) (7,076) (9,074) 9,074 (457,412)
--------- -------- ---------- --------- ----------
Gross profit/(loss) 140,185 3,759 1,363 (1,363) 143,944
Selling, administrative, and general expenses (78,195) (2,046) 0 0 (80,241)
Other (expense)/income (31,453) 31,453 345 (345) 0
Income from former joint venture and subsidiaries 2,246 211 0 (687) 1,770
--------- -------- ---------- --------- ----------
Operating income/(loss) before discontinued
operations 32,783 33,377 1,708 (2,395) 65,473
Interest (expense)/income (37,857) 6,045 476 0 (31,336)
--------- -------- ---------- --------- ----------
Pretax (loss)/income before discontinued operations (5,074) 39,422 2,184 (2,395) 34,137
Tax benefit/(provision) 845 (14,147) (352) 0 (13,654)
--------- -------- ---------- --------- ----------
Net (loss)/income before discontinued operations (4,229) 25,275 1,832 (2,395) 20,483
Discontinued operations (net of a tax benefit
of $1,048) (1,572) 0 0 0 (1,572)
--------- -------- ---------- --------- ----------
Net (loss)/income $ (5,801) $ 25,275 $ 1,832 $ (2,395) $ 18,911
========= ======== ========== ========= ==========
Predecessor
Statement of Operations
June 30, 2002 - August 18, 2002
-----------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net sales $ 99,188 $ 2,476 $ 1,069 $ (1,069) $ 101,664
Cost of sales (76,505) (1,611) (1,432) 1,432 (78,116)
--------- ------- --------- --------- ---------
Gross profit/(loss) 22,683 865 (363) 363 23,548
Selling, administrative, and general expenses (14,946) (488) 0 0 (15,434)
Other (expense)/income (5,507) 5,507 41 (41) 0
Income from former joint venture and subsidiaries 277 0 0 0 277
--------- ------- -------- -------- ---------
Operating income/(loss) before
discontinued operations 2,507 5,884 (322) 322 8,391
Interest (expense)/income (9,069) 1,322 0 0 (7,747)
--------- ------- -------- -------- ---------
Pretax (loss)/income before discontinued operations (6,562) 7,206 (322) 322 644
Tax benefit/(provision) 2,354 (2,572) (46) 0 (264)
--------- ------- -------- -------- ---------
Net (loss)/income before discontinued operations (4,208) 4,634 (368) 322 380
Discontinued operations (net of a tax benefit of $205) (295) 0 0 0 (295)
--------- ------- -------- -------- ---------
Net (loss)/income $ (4,503) $ 4,634 $ (368) $ 322 $ 85
========= ======= ======== ======== =========
Successor
Balance Sheet
March 29, 2003
------------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Assets
Cash and cash equivalents $ 75,422 $ 246 $ 717 $ 0 $ 76,385
Accounts receivable, net 67,636 2,983 121 0 70,740
Inventories -
Finished goods 236,414 387 35 0 236,836
Raw materials and supplies 20,788 421 92 0 21,301
---------- ------- ------- --------- ----------
Total inventories 257,202 808 127 0 258,137
Other current assets 39,934 62 689 0 40,685
---------- ------- ------- --------- ----------
Total current assets 440,194 4,099 1,654 0 445,947
Property, plant and equipment, net 208,761 3,973 3,454 0 216,188
Investment in subsidiaries 347,475 11,311 0 (358,786) 0
Goodwill and other intangible assets, net 28,449 209,938 0 0 238,387
Other assets 33,658 104,400 25,476 (129,576) 33,958
---------- -------- -------- --------- ---------
Total assets $1,058,537 $333,721 $ 30,584 $(488,362) $ 934,480
========== ======== ======== ========= =========
Liabilities and Shareholder's Equity
Current portion of long-term debt $ 6,521 $ 0 $ 0 $ 0 $ 6,521
Current portion of Termination and Transitional
Services Agreements with Pro-Fac
Cooperative, Inc. 9,339 0 0 0 9,339
Accounts payable 38,636 612 195 0 39,443
Accrued interest 10,928 0 0 0 10,928
Intercompany loans 2,198 (2,198) 0 0 0
Other current liabilities 75,789 5,752 1,158 0 82,699
---------- --------- ------- --------- ----------
Total current liabilities 143,411 4,166 1,353 0 148,930
Long-term debt 499,556 0 0 (25,476) 474,080
Long-term portion of Termination and
Transitional Services Agreements
with Pro-Fac Cooperative, Inc. 25,299 0 0 0 25,299
Other non-current liabilities 169,514 0 0 (104,100) 65,414
---------- --------- ------- --------- ----------
Total liabilities 837,780 4,166 1,353 (129,576) 713,723
Shareholder's equity 220,757 329,555 29,231 (358,786) 220,757
---------- --------- ------- --------- ----------
Total liabilities and shareholder's equity $1,058,537 $ 333,721 $ 30,584 $ (488,362) $ 934,480
========== ========= ======== ========= =========
Successor
Statement of Cash Flows
August 19, 2002 - March 29, 2003
------------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Cash Flows From Operating Activities:
Net (loss)/income $ (5,801) $ 25,275 $ 1,832 $ (2,395) $ 18,911
Adjustments to reconcile net (loss)/income to cash
provided by/(used in) operating activities -
Depreciation 14,777 258 181 0 15,216
Amortization of certain intangible assets 249 469 0 0 718
Amortization of debt issue costs, amendment costs,
debt discounts and premiums, and interest in-kind 7,897 0 (476) 0 7,421
Transitional Services Agreement with
Pro-Fac Cooperative, Inc. (323) 0 0 0 (323)
Equity in undistributed earnings of former joint
venture and subsidiaries (1,585) (211) 0 687 (1,109)
Change in working capital 63,442 (5,323) (1,822) 1,708 58,005
--------- -------- -------- -------- ---------
Net cash provided by/(used in) operating activities 78,656 20,468 (285) 0 98,839
Cash Flows From Investing Activities:
Purchase of property, plant, and equipment (9,104) 0 (226) 0 (9,330)
Proceeds from disposal 402 0 5 0 407
Repayments from joint venture 6,169 0 0 0 6,169
Proceeds from investment in CoBank 2,203 0 0 0 2,203
Proceeds from the GLK Transaction 13,900 0 0 0 13,900
Investment in GLK, LLC 0 (11,100) 0 11,100 0
Dividends received 20,280 0 0 (20,280) 0
--------- -------- -------- -------- ---------
Net cash provided by/(used in) investing activities 33,850 (11,100) (221) (9,180) 13,349
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt 270,000 0 0 0 270,000
Birds Eye Holdings Inc. investment 175,597 0 0 0 175,597
Adjustment of Subordinated Promissory Note (25,000) 0 0 0 (25,000)
Payments on prior revolving credit facility (22,000) 0 0 0 (22,000)
Payments on long-term debt (401,799) 0 0 0 (401,799)
Payments on Termination Agreement with
Pro-Fac Cooperative, Inc. (8,000) 0 0 0 (8,000)
Payments on capital lease (316) 0 0 0 (316)
Cash paid for debt issuance costs (24,202) 0 0 0 (24,202)
Cash paid for transaction fees (6,000) 0 0 0 (6,000)
Dividends paid 0 (20,280) 0 20,280 0
Birds Eye Foods, Inc. investment 0 11,100 0 (11,100) 0
--------- -------- -------- -------- ---------
Net cash used in financing activities (41,720) (9,180) 0 9,180 (41,720)
Net change in cash and cash equivalents 70,786 188 (506) 0 70,468
Cash and cash equivalents at beginning of period 4,636 58 1,223 0 5,917
--------- -------- -------- -------- ---------
Cash and cash equivalents at end of period $ 75,422 $ 246 $ 717 $ 0 $ 76,385
========= ========= ======== ======== =========
Predecessor
Statement of Cash Flows
June 30, 2002 - August 18, 2002
------------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Cash Flows From Operating Activities:
Net (loss)/income $ (4,503) $ 4,634 $ (368) $ 322 $ 85
Adjustments to reconcile net (loss)/income to net
cash (used in)/provided by operating activities -
Depreciation 3,741 69 23 0 3,833
Amortization of certain intangible assets 50 94 0 0 144
Amortization of debt issue costs, amendment costs,
debt discounts and premiums, and interest in-kind 1,201 0 0 0 1,201
Equity in undistributed earnings of Great
Lakes Kraut Company, LLC (277) 0 0 0 (277)
Change in working capital (37,661) 3,890 1,252 (322) (32,841)
--------- -------- -------- ------- --------
Net cash (used in)/provided by operating activities (37,449) 8,687 907 0 (27,855)
Cash Flows From Investing Activities:
Purchase of property, plant, and equipment (2,181) 0 (6) 0 (2,187)
Advances to Great Lakes Kraut Company, LLC (1,512) 0 0 0 (1,512)
Proceeds from investment in CoBank 1,115 0 0 0 1,115
Dividends received 8,750 0 0 (8,750) 0
--------- -------- -------- ------- --------
Net cash used in investing activities 6,172 0 (6) (8,750) (2,584)
Cash Flows From Financing Activities:
Net proceeds from old revolving credit facility 22,000 0 0 0 22,000
Payments on long-term debt (292) 0 0 0 (292)
Payments on capital leases (38) 0 0 0 (38)
Dividends paid 0 (8,750) 0 8,750 0
--------- -------- -------- ------- --------
Net cash provided by financing activities 21,670 (8,750) 0 8,750 21,670
Net change in cash and cash equivalents (9,607) (63) 901 0 (8,769)
Cash and cash equivalents at beginning of period 14,243 121 322 0 14,686
--------- -------- -------- ------- --------
Cash and cash equivalents at end of period $ 4,636 $ 58 $ 1,223 $ 0 $ 5,917
========= ======== ======== ======= ========
Predecessor
Statement of Operations
Three Months Ended March 30, 2002
------------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net sales $ 237,320 $ 3,377 $ 6,834 $ (6834) $ 240,697
Cost of sales (183,164) (2,530) (6,475) 6,475 (185,694)
Gross profit 54,156 847 359 (359) 55,003
Other (expense)/income (11,081) 11,081 368 (368) 0
Selling, administrative, and general expenses (30,044) (863) 0 0 (30,907)
Income from Great Lakes Kraut Company, LLC 627 0 0 0 627
---------- -------- -------- -------- ---------
Operating income/(loss) before dividing with Pro-Fac 13,658 11,065 727 (727) 24,723
Interest (expense)/income (18,322) 2,665 0 0 (15,657)
---------- -------- -------- -------- ---------
Pretax (loss)/income before dividing with Pro-Fac (4,664) 13,730 727 (727) 9,066
Pro-Fac share of income (3,798) 0 0 0 (3,798)
---------- -------- -------- -------- ---------
Pretax (loss)/income before discontinued operations (8,462) 13,730 727 (727) 5,268
Tax benefit/(provision) 2,988 (4,899) (148) 0 (2,059)
---------- -------- -------- -------- ---------
Net (loss)/income before discontinued operations (5,474) 8,831 579 (727) 3,209
Discontinued operations (net of a tax benefit of $570) (891) 0 0 0 (891)
---------- -------- -------- -------- ---------
Net (loss)/income $ (6,365) $ 8,831 $ 579 $ (727) $ 2,318
========== ======== ======== ======== =========
Predecessor
Statement of Operations
Nine Months Ended March 30, 2002
------------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net sales $ 763,074 $ 11,397 $ 14,655 $(14,655) $ 774,471
Cost of sales (593,046) (8,008) (14,106) 14,106 (601,054)
--------- --------- --------- -------- ---------
Gross profit 170,028 3,389 549 (549) 173,417
Other (expense)/income (43,193) 43,043 582 (582) (150)
Selling, administrative, and general expenses (91,671) (2,644) 0 0 (94,315)
Income from Great Lakes Kraut Company, LLC 1,825 0 0 0 1,825
--------- --------- --------- -------- ---------
Operating income/(loss) before dividing with Pro-Fac 36,989 43,788 1,131 (1,131) 80,777
Interest (expense)/income (58,632) 7,949 0 0 (50,683)
--------- --------- --------- -------- ---------
Pretax (loss)/income before dividing with Pro-Fac (21,643) 51,737 1,131 (1,131) 30,094
Pro-Fac share of income (12,860) 0 0 0 (12,860)
--------- --------- --------- -------- ---------
Pretax (loss)/income before discontinued operations (34,503) 51,737 1,131 (1,131) 17,234
Tax benefit/(provision) 11,478 (18,402) (401) 0 (7,325)
--------- --------- --------- -------- ---------
Net (loss)/income before discontinued operations (23,025) 33,335 730 (1,131) 9,909
Discontinued operations (net of a tax benefit
of $1,859) (2,515) 0 0 0 (2,515)
--------- --------- --------- -------- ---------
Net (loss)/income $ (25,540) $ 33,335 $ 730 $ (1,131) $ 7,394
========= ========= ========= ======== =========
Predecessor
Balance Sheet
June 29, 2002
------------------------------------------------------------------------
Birds Eye Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Assets
Current assets:
Cash and cash equivalents $ 14,243 $ 121 $ 322 $ 0 $ 14,686
Accounts receivable, net 73,055 2,945 0 0 76,000
Inventories -
Finished goods 264,411 223 136 0 264,770
Raw materials and supplies 26,193 623 159 0 26,975
--------- -------- -------- ---------- ----------
Total inventories 290,604 846 295 0 291,745
Other current assets 64,585 (158) 257 0 64,684
--------- -------- -------- ---------- ----------
Total current assets 442,487 3,754 874 0 447,115
Property, plant and equipment, net 278,510 3,883 3,441 0 285,834
Investment in subsidiaries 163,093 0 0 (163,093) 0
Goodwill and other intangible assets, net 12,406 55,109 0 0 67,515
Other assets 57,031 103,655 0 (103,409) 57,277
-------- -------- -------- ---------- ----------
Total assets $953,527 $166,401 $ 4,315 $ (266,502) $ 857,741
======== ======== ======== ========== ==========
Liabilities and Shareholder's Equity
Current liabilities:
Current portion of long-term debt $ 14,916 $ 0 $ 0 $ 0 $ 14,916
Accounts payable 70,225 836 137 0 71,198
Accrued interest 6,255 0 0 0 6,255
Intercompany loans (115) 275 (160) 0 0
Other current liabilities 43,319 5,712 823 0 49,854
-------- -------- -------- ---------- ----------
Total current liabilities 134,600 6,823 800 0 142,223
Long-term debt 623,057 0 0 0 623,057
Other non-current liabilities 134,855 0 0 (103,409) 31,446
-------- -------- -------- ---------- -----------
Total liabilities 892,512 6,823 800 (103,409) 796,726
Shareholder's equity 61,015 159,578 3,515 (163,093) 61,015
-------- -------- -------- ---------- -----------
Total liabilities and shareholder's equity $953,527 $166,401 $ 4,315 $ (266,502) $ 857,741
======== ======== ======== ========== ==========
Predecessor
Statement of Cash Flows
Nine Months Ended March 30, 2002
------------------------------------------------------------------------
Agrilink Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Cash Flows From Operating Activities:
Net (loss)/income $ (25,540) $ 33,335 $ 730 $ (1,131) $ 7,394
Adjustments to reconcile net (loss)/income to net
cash (used in)/provided by operating activities -
Depreciation 22,261 405 221 0 22,887
Amortization of certain intangible assets 299 563 0 0 862
Amortization of debt issue costs, amendment costs,
debt discounts and premiums, and interest in-kind 5,098 0 0 0 5,098
Equity in undistributed earnings of
Great Lakes Kraut Company, LLC (1,067) 0 0 0 (1,067)
Change in working capital (96,892) 404 345 1,131 (95,012)
----------- -------- -------- --------- ---------
Net cash (used in)/provided by operating activities (95,841) 34,707 1,296 0 (59,838)
Cash Flows From Investing Activities:
Purchase of property, plant, and equipment (10,521) 0 (16) 0 (10,537)
Proceeds from disposals 52 0 0 0 52
Repayments from Great Lakes Kraut Company, LLC 1,784 0 0 0 1,784
Proceeds from investment in CoBank 3,998 0 0 0 3,998
Dividends received 33,925 0 0 (33,925) 0
----------- -------- -------- --------- ---------
Net cash used in investing activities 29,238 0 (16) (33,925) (4,703)
Cash Flows From Financing Activities:
Net proceeds on prior revolving credit facility 75,400 0 0 0 75,400
Payments on long-term debt (9,072) 0 0 0 (9,072)
Payments on capital leases (111) 0 0 0 (111)
Cash paid for in conjunction with debt amendment (1,694) 0 0 0 (1,694)
Dividends paid 0 (33,925) 0 33,925 0
----------- -------- -------- --------- ---------
Net cash provided by financing activities 64,523 (33,925) 0 33,925 64,523
Net change in cash and cash equivalents (2,080) 782 1,280 0 (18)
Cash and cash equivalents at beginning of period 7,624 21 11 0 7,656
----------- -------- -------- --------- ---------
Cash and cash equivalents at end of period $ 5,544 $ 803 $ 1,291 $ 0 $ 7,638
=========== ======== ======== ========= ==========
NOTE 11. OTHER MATTERS
Restructuring: On June 23, 2000, the Company sold its pickle business to Dean
Pickle and Specialty Product Company. As part of the 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 during
the first quarter of fiscal 2002. The total restructuring charge amounted to
$1.1 million and was primarily comprised of employee termination benefits. This
amount has been liquidated as of December 28, 2002.
In addition, on October 12, 2001, the Company announced a further 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 the second quarter of fiscal 2002, primarily
consisting of employee termination benefits. This amount has been liquidated as
of December 28, 2002.
Gain from Pension Curtailment: In September 2001, the Company made the decision
to freeze benefits provided under its Master Salaried Retirement Plan. Under the
provisions of 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.
Legal Proceedings: On September 25, 2001, in the circuit court of Multnomah
County, Oregon, Blue Line Farms commenced a class action suit ("Blue Line Farms
litigation") against the Company, Pro-Fac Cooperative, Inc., Mr. Mike Shelby,
and "Does" 1-50, representing directors, officers, and agents of the corporate
defendants, alleging various claims related to the operation of PF Acquisition
II, Inc., a former subsidiary of Pro-Fac that conducted business under the name
AgriFrozen Foods ("AgriFrozen"). The complaint was subsequently amended to
eliminate "Does" 1- 50 as parties. The relief sought included a demand for
damages of $50.0 million. On December 23, 2002, Pro-Fac, Birds Eye Foods, and
the other defendants reached an agreement in principle as to the terms of a
settlement of the Blue Line Farms litigation, as well as of related claims under
Oregon's grower lien statute pending in the United States Bankruptcy Court for
the District of Oregon, known as the Seifer Trust litigation. The Seifer Trust
litigation also named Pro-Fac and Birds Eye Foods among its named defendants.
The parties in the Blue Line Farms litigation negotiated a settlement agreement
which has been approved by the Multnomah County Circuit Court. Other conditions
of the settlement were satisfied on or before April 14, 2003. In conjunction
with the settlement of the Blue Line Farms litigation and Seifer Trust
litigation, Birds Eye Foods has recorded a liability in purchase accounting for
approximately $1.9 million, including legal costs, for this pre-acquisition
contingency. In April 2003, payment of the settlement amounts was made in
accordance with the settlement agreement.
The Unit Purchase Agreement for the Transaction contains specific provisions
concerning the Blue Line Farms matter and other AgriFrozen related litigation of
Birds Eye Foods. These provisions address the sharing of defense costs, as well
as judgment and settlement costs, between Birds Eye Foods and Pro-Fac. On an
annual basis, Birds Eye Foods has agreed to bear responsibility for the first
$300,000 of defense costs. In addition, Birds Eye Foods agreed to bear
responsibility for one-half of defense costs in excess of $300,000 and for
one-half of judgment and settlement costs, subject to an aggregate cap of $3.0
million after which Pro-Fac is responsible for all costs. These provisions
regarding a sharing of costs apply specifically to the Blue Line Farms
litigation and the Seifer Trust litigation. These provisions do not apply to
other AgriFrozen related litigation, the responsibility for which is entirely
with Pro-Fac.