Exhibit 99.1
To Holders of
$200,000,000 12% Senior Notes due 2009
and
(pound)75,000,000 12 1/4% Senior Notes due 2009
QUARTERLY FINANCIAL REPORT
OF
PREMIER INTERNATIONAL FOODS PLC
FOR THE THREE MONTHS ENDED JUNE 30, 2002
28 The Green
Kings Norton
Birmingham
B38 8SD
QUARTERLY FINANCIAL REPORT OF PREMIER INTERNATIONAL FOODS PLC
INDEX
PAGE
----
Unaudited Consolidated Financial Statements
Consolidated Profit and Loss Accounts for the three-month periods ended June 30, 2001 and June 30, 2002
and the six month periods ended June 30, 2001 and June 30, 2002 1
Consolidated Balance Sheets at December 31, 2001 and June 30, 2002 2
Consolidated Cash Flow Statements for the three-month periods ended June 30, 2001 and June 30, 2002 and
the six month periods ended June 30, 2001 and June 30, 2002 3
Consolidated Statements of Total Recognised Gains and Losses for the three-month periods ended June
30, 2001 and June 30, 2002 and the six month periods ended June 30, 2001 and June 30, 2002 4
Reconciliation of Movements in Consolidated Net Liabilities for the three-month periods ended June 30,
2001 and June 30, 2002 and the six month periods ended June 30, 2001 and June 30, 2002 4
Notes to the Consolidated Financial Statements 5
Summary of Differences Between United Kingdom and United States Generally Accepted Accounting Principles 11
Operating and Financial Review and Prospects 13
Quantitative and Qualitative Disclosures about Market Risk 19
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report includes statements that are, or may deemed to
be, "forward-looking statements" (as defined in the U.S. Private Securities
Litigation Reform Act of 1995). These forward-looking statements can be
identified by the use of forward-looking terminology, including the terms
"believes," "estimates," "anticipates," "expects," "intends," "may," "will" or
"should" or, in each case, their negative, or other variations or comparable
terminology. These forward-looking statements include all matters that are not
historical facts. They appear in a number of places throughout this quarterly
report, and include statements regarding our intentions, beliefs or current
expectations concerning, among other things, our results of operations,
financial condition, liquidity, prospects, growth, strategies and the industries
in which we operate. We make these forward-looking statements based on our
current expectations, assumptions, estimates and projections about us and our
industry that address, among other things:
o our ability to leverage our leading market positions, flexible
manufacturing capabilities and strong relationships with retailers in
the U.K. to introduce both new products and product line extensions;
o our ability to increase our sales in continental Europe by leveraging
our existing distribution and manufacturing capabilities in France and
Holland;
o the competitive environment in the food market in general and in our
specific market areas and our ability to expand our business and
develop additional revenue sources;
o our substantial leverage and our ability to meet our debt obligations;
and
o our ability to successfully integrate our acquisitions.
Forward-looking statements involve risks and uncertainties because
they relate to events and depend on circumstances that may or may not occur in
the future. We caution you that forward-looking statements are not guarantees of
future performance and that our actual results of operations, financial
condition and liquidity, and the development of the markets in which we operate
may differ materially from those made in or suggested by the forward-looking
statements contained in this quarterly report. In addition, even if our results
of operations, financial condition and liquidity, and the development of the
industries in which we operate are consistent with the forward-looking
statements contained in this quarterly report, those results or developments may
not be indicative of results or developments in subsequent periods.
We undertake no obligation to publicly update or publicly revise any
forward-looking statement, whether as a result of new information, future events
or otherwise. All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements referred to above and contained
elsewhere in this quarterly report.
PREMIER INTERNATIONAL FOODS PLC
UNAUDITED CONSOLIDATED PROFIT AND LOSS ACCOUNTS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED
JUNE 30,
----------------------------- --------------------------
NOTE 2001 2002 2001 2002
(POUND)M (POUND)M (POUND)M (POUND)M
Turnover: Continuing operations 215.8 219.9 427.7 431.4
Discontinued operations 0.4 - 2.6 0.2
--------------- ------------ ------------ ------------
2 216.2 219.9 430.3 431.6
Operating profit: Continuing operations 14.9 17.6 26.4 30.8
Operating exceptional items 3 (4.1) (2.2) (4.1) (3.2)
--------------- ------------ ------------ ------------
10.8 15.4 22.3 27.6
Discontinued operations (0.1) (0.1) (0.4) (0.2)
Operating exceptional items 3 - - - -
--------------- ------------ ------------ ------------
(0.1) (0.1) (0.4) (0.2)
--------------- ------------ ------------ ------------
Profit before non operating exceptional items 10.7 15.3 21.9 27.4
Non operating exceptional items 3 - - (18.0) -
--------------- ------------ ------------ ------------
Profit on ordinary activities before interest 10.7 15.3 3.9 27.4
Net interest payable 4 (17.1) (2.6) (36.2) (16.0)
--------------- ------------ ------------ ------------
Profit / (loss) on ordinary activities before taxation (6.4) 12.7 (32.3) 11.4
Tax (expense)/benefit 1.8 (6.0) 3.6 (6.2)
--------------- ------------ ------------ ------------
Profit / (loss) on ordinary activities after taxation (4.6) 6.7 (28.7) 5.2
--------------- ------------ ------------ ------------
Transferred to reserves (4.6) 6.7 (28.7) 5.2
=============== ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements
1
PREMIER INTERNATIONAL FOODS PLC
UNAUDITED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001 JUNE 30, 2002
------------------ ----------------
NOTE (POUND)M (POUND)M
Fixed assets:
Intangible assets 17.4 111.6
Tangible assets 120.0 142.9
Investments 0.2 0.2
---------------- ----------------
137.6 254.7
Current assets:
Stocks 5 105.6 115.2
Debtors due:
Within one year 137.1 125.1
After more than one year 11.7 9.9
Investments - 5.0
Cash at bank and in hand 27.3 25.3
---------------- ----------------
281.7 275.5
Current Liabilities:
Creditors: amounts falling due within one year (199.1) (196.8)
---------------- ----------------
Net current assets 82.6 78.7
Total assets less current liabilities 220.2 333.4
Creditors due after more than one year
Borrowings 6 (375.7) (482.1)
Other creditors (0.5) (0.5)
Provisions for liabilities and charges (4.2) (11.5)
---------------- ----------------
(380.4) (494.1)
---------------- ----------------
Net deficit (160.2) (160.7)
================ ================
Capital and reserves 9
Share capital 83.7 83.7
Share premium account 623.2 623.2
Revaluation reserve 4.0 4.0
Profit and loss account (871.1) (871.6)
---------------- ----------------
Total equity shareholders deficit (160.2) (160.7)
================ ================
The accompanying notes are an integral part of these
consolidated financial statements
2
PREMIER INTERNATIONAL FOODS PLC
UNAUDITED CONSOLIDATED CASH FLOW STATEMENTS
THREE MONTHS ENDED JUNE SIX MONTHS ENDED JUNE 30,
30,
--------------------------- --------------------------
NOTE 2001 2002 2001 2002
(POUND)M (POUND)M (POUND)M (POUND)M
Net cash inflow from operating activities (a) 17.1 35.4 34.1 40.3
Return on investments and servicing of finance (5.7) (6.0) (19.1) (19.3)
Taxation (2.1) 0.1 (3.5) (0.3)
Capital expenditure & financial investment (1.4) (9.0) (5.0) (11.7)
Acquisitions and disposals (12.4) (132.9) 89.6 (133.0)
------------- ------------ ------------ ------------
Cash inflow / (outflow) before financing (4.5) (112.4) 96.1 (124.0)
Financing
Issue of share capital 23.7 - 23.7 -
Debt issuance costs - (8.8) - (8.8)
Increase / (decrease) in debt (39.9) 125.0 (114.0) 126.6
------------- ------------ ------------ ------------
(16.2) 116.2 (90.3) 117.8
------------- ------------ ------------ ------------
Increase / (decrease) in cash in the period (20.7) 3.8 5.8 (6.2)
============= ============ ============ ============
Reconciliation of net cash flow to movement in net debt
Increase / (decrease) in cash in the period (20.7) 3.8 5.8 (6.2)
Cash outflow from decreased debt and lease financing 39.9 (125.0) 114.0 (126.6)
------------- ------------ ------------ ------------
(Increase) / decrease in net debt in the period 19.2 (121.2) 119.8 (132.8)
Net debt at April 1 / January 1 (378.4) (374.4) (470.9) (358.7)
------------- ------------ ------------ ------------
Net debt pre capitalised debt issuance at June 30 (359.2) (495.6) (351.1) (491.5)
------------- ------------ ------------ ------------
Capitalisation of debt issuance costs - 8.8 - 8.8
Less amortisation of capitalised debt issuance costs (4.1) (1.6) (5.4) (2.7)
Exchange movement on debt (1.6) 9.2 (8.4) 6.2
------------- ------------ ------------ ------------
Net debt at June 30 (364.9) (479.2) (364.9) (479.2)
============= ============ ============ ============
ANALYSIS OF MOVEMENT IN NET DEBT
AT CASH FLOW ACQUISITIONS CAPITALISED DEBT EXCHANGE AT
DECEMBER 31, ISSUANCE MOVEMENT ON JUNE 30,
2001 COSTS DEBT 2002
-------------- ---------------- --------------- ----------------- --------------- ---------------
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
Bank overdrafts (0.8) 0.8 - - - -
Less: Cash balances 27.3 (0.2) (6.8) - - 20.3
-------------- ---------------- --------------- ----------------- --------------- ---------------
Net cash 26.5 0.6 (6.8) - - 20.3
Debt due after 1 year (384.2) (1.5) (125.0) - 6.2 (494.5)
Debt due within 1 year (13.4) 9.9 (20.0) - - (23.5)
Capitalised debt issuance
costs 12.6 - 8.8 (2.7) - 18.7
-------------- ---------------- --------------- ----------------- --------------- ---------------
Net borrowings (358.5) 9.0 (133.0) (2.7) 6.2 (479.0)
Finance leases (0.2) - - - - (0.2)
-------------- ---------------- --------------- ----------------- --------------- ---------------
Net debt (358.7) 9.0 (133.0) (2.7) 6.2 (479.2)
============== ================ =============== ================= =============== ===============
The accompanying notes are an integral part of these
consolidated financial statements
3
PREMIER INTERNATIONAL FOODS PLC
NOTE TO THE UNAUDITED CONSOLIDATED CASH FLOW STATEMENTS
(A) RECONCILIATION OF OPERATING PROFIT TO OPERATING CASH FLOWS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------
2001 2002 2001 2002
(POUND)M (POUND)M (POUND)M (POUND)M
Operating profit / (loss) before exceptional items 14.8 17.5 26.0 30.6
Depreciation and amortisation 4.1 4.5 7.9 8.7
Amortisation of intangible assets 0.3 0.7
Amortisation of pension prepayment - 0.4 - 0.9
(Increase)/decrease in stocks 5.1 (0.2) (0.2) 4.8
(Increase)/decrease in debtors 12.9 12.8 21.6 17.0
Increase/(decrease) in creditors (13.3) 2.5 (12.7) (18.8)
Exchange movement in working capital (0.6) 0.5 (0.8) 0.3
Cash flows relating to exceptional items (5.9) (2.9) (7.7) (3.9)
-------------- --------------- -------------- --------------
Net cash inflow from operating activities 17.1 35.4 34.1 40.3
============== =============== ============== ==============
UNAUDITED CONSOLIDATED STATEMENTS
OF TOTAL RECOGNISED GAINS & LOSSES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------
2001 2002 2001 2002
(POUND)M (POUND)M (POUND)M (POUND)M
Profit / (loss) for the period (4.6) 6.7 (28.7) 5.2
Currency translation differences on foreign currency net
investments (4.7) 1.7 (4.9) 1.4
-------------- -------------- -------------- --------------
Total recognised gains and losses for the period (9.3) 8.4 (33.6) 6.6
============== ============== ============== ==============
UNAUDITED RECONCILIATION OF MOVEMENTS
IN CONSOLIDATED NET LIABILITIES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------
2001 2002 2001 2002
(POUND)M (POUND)M (POUND)M (POUND)M
Loss for the financial period (4.6) 6.7 (28.7) 5.2
Goodwill transferred to the profit and loss account in respect of
disposed businesses - - 53.0 -
Share capital issued 23.7 - 23.7 -
Other recognised gains and losses (4.7) 1.7 (4.9) 1.4
-------------- -------------- -------------- --------------
Net increase/(reduction) in net assets 14.4 8.4 43.1 6.6
Opening net assets (178.9) (169.1) (207.6) (160.2)
Prior period adjustment on implementation of FRS 19 "Deferred Tax" - - - (7.1)
-------------- -------------- -------------- --------------
Closing net assets (164.5) (160.7) (164.5) (160.7)
============== ============== ============== ==============
The accompanying notes are an integral part of these
consolidated financial statements
4
PREMIER INTERNATIONAL FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
In the opinion of Premier International Foods plc, the accompanying financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the company's financial position as at
June 30, 2002 and the results of operations and cash flows for the three-month
periods ended June 30, 2001 and 2002. The results of operations for the
three-month periods are not necessarily indicative of the results to be expected
for the full year. The December 31, 2001 balance sheet was derived from
Premier's audited financial statements for the year ended December 31, 2001 but
does not include all the disclosures required by generally accepted accounting
principles. The accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto,
included in Premier's 2001 report to the bondholders.
USE OF ESTIMATES
The financial statements have been prepared in accordance with applicable
accounting standards in the United Kingdom, under the historical cost convention
as modified by the revaluation of Premier's freehold and long leasehold
properties.
The financial statements necessarily include amounts based on judgements and
estimates made by management. Actual results could differ from these estimates.
Estimates are used when accounting for potential bad debts, inventory
obsolescence and spoilage, trade and promotion allowances, coupon redemptions,
depreciation and amortisation, deferred income taxes and tax valuation
allowances, pension and post retirement benefits, restructuring charges and
contingencies among other items.
DEFERRED TAX
FRS 19 introduces a form of `full' provision for accounting for deferred tax
(called 'incremental liability' approach) that replaces the `partial' provision
method in SSAP 15. Deferred tax should be provided on timing differences that
have originated but not reversed by the balance sheet date, but only when the
entity has an obligation to pay more tax in the future as a result of the
reversal of those timing differences. Premier has implemented FRS 19 in its
financial year commencing January 1, 2002 and has increased its deferred tax
provision at January 1 from (pound)0.6m to (pound)7.7m accordingly and reflected
this change as a prior period adjustment.
2. SUMMARY SEGMENTAL ANALYSIS
BY PRODUCT GROUP TURNOVER BY PRODUCT GROUP
THREE MONTHS ENDED JUNE 30,
-------------------------------
2001 2002
(POUND)M (POUND)M
Beverages 41.0 41.2
Canning, pickles & sauces 91.8 91.3
Preserves 35.5 43.2
Potatoes 47.5 44.2
-------------- ---------------
Continuing operations 215.8 219.9
Discontinued operations 0.4 -
-------------- ---------------
Total 216.2 219.9
============== ===============
5
PREMIER INTERNATIONAL FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BY GEOGRAPHICAL ORIGIN TURNOVER OPERATING PROFIT
THREE MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
------------------------------- ------------------------------
2001 2002 2001 2002
(POUND)M (POUND)M (POUND)M (POUND)M
United Kingdom 185.7 190.0 14.0 16.5
Mainland Europe 30.1 29.9 0.8 1.0
Other countries - - - -
--------------- -------------- -------------- --------------
Continuing operations 215.8 219.9 14.8 17.5
Discontinued operations 0.4 - - -
--------------- -------------- -------------- --------------
Total 216.2 219.9 14.8 17.5
=============== ============== ============== ==============
Premier has restructured its operations during 1999 and 2000 to form a unified
grocery products business. The product groups shown have shared administrative
functions and the operating assets are not separable. Therefore, the segmental
analysis of operating profit and operating assets previously published is no
longer disclosed.
The pickles and sauces operations have been reclassified from the preserves
product group into the product group with canned foods following a change in
management responsibilities in 2001.
3. EXCEPTIONAL ITEMS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------
2001 2002 2001 2002
(POUND)M (POUND)M (POUND)M (POUND)M
Operating exceptional items
Restructuring of production facilities (4.1) (2.2) (4.1) (3.2)
--------------- -------------- -------------- --------------
(4.1) (2.2) (4.1) (3.2)
=============== ============== ============== ==============
Non operating exceptional items:
Loss on sale or termination of discontinued operations - - (18.0) -
--------------- -------------- -------------- --------------
- - (22.1) -
=============== ============== ============== ==============
4. INTEREST
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2001 2002 2001 2002
(POUND)M (POUND)M (POUND)M (POUND)M
Net external interest payable (11.4) (10.2) (22.4) (19.5)
Amortisation of capitalised debt issuance costs (4.1) (1.6) (5.4) (2.7)
Exchange movement on US$200m 12% Senior notes (1.6) 9.2 (8.4) 6.2
--------------- -------------- -------------- ---------------
(17.1) (2.6) (36.2) (16.0)
=============== ============== ============== ===============
6
PREMIER INTERNATIONAL FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKS
DECEMBER 31, 2001 JUNE 30, 2002
------------------ ----------------
(POUND)M (POUND)M
Raw materials 34.5 33.6
Work in progress 5.9 6.6
Finished goods and goods for resale 65.2 75.0
------------------ ----------------
105.6 115.2
================== ================
6. NET BORROWINGS
DECEMBER 31, 2001 JUNE 30, 2002
------------------ ----------------
(POUND)M (POUND)M
Cash balances 27.3 20.3
Borrowings due within 1 year:
Senior credit facility due within 1 year 13.4 23.5
Other bank loans and overdrafts 0.8 0.0
Capitalised debt issuance costs (4.1) (6.3)
-------------- --------------
Total borrowings due within 1 year 10.1 17.2
Borrowings due after 1 year:
Unsecured subordinated US$200m 12% Senior notes due 2009 137.4 131.2
Unsecured subordinated(pound)75m 12.25% Senior notes due 2009 75.0 75.0
Capitalised debt issuance costs (3.3) (2.2)
-------------- --------------
209.1 204.0
Senior credit facility due after 1 year 163.9 278.8
Capitalised debt issuance costs (5.2) (10.2)
-------------- --------------
158.7 268.6
Loan from related party 7.6 9.3
Other unsecured loans 0.3 0.2
-------------- --------------
Total borrowings due after 1 year 375.7 482.1
-------------- --------------
Net borrowings 358.5 479.0
============== ==============
Maturity profile of net borrowings / (cash): DECEMBER 31, 2001 JUNE 30, 2002
------------------ ----------------
(POUND)M (POUND)M
Due within one year or on demand (13.1) 3.2
Due between 1 and 2 years 18.0 31.5
Due between 2 and 3 years 22.5 43.0
Due between 3 and 4 years 31.5 51.0
Due between 4 and 5 years 71.6 64.3
Due after 5 years 240.6 304.7
-------------- --------------
371.1 497.7
Capitalised debt issuance costs (12.6) (18.7)
-------------- --------------
Net borrowings 358.5 479.0
============== ==============
7
PREMIER INTERNATIONAL FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The loan from related party is from HMTF Poultry, an affiliated company, does
not bear interest and is repayable in full on December 31, 2006.
SENIOR CREDIT FACILITY
In connection with the acquisition of Hillsdown Holdings plc, Premier Financing
entered into a Senior Facilities Agreement with Chase Manhattan plc, Deutsche
Bank AG and Salomon Brothers International Limited, as arrangers, The Chase
Manhattan Bank, Deutsche Bank AG and Salomon Brothers Holding Company Inc., as
underwriters, Chase Manhattan International Limited, as agent and security
agent, and Deutsche Bank AG, as documentation agent (the "Senior Credit
Facility"). In connection with the acquisition of the U.K. ambient foods
business of Nestle SA, the Senior Facilities agreement was amended and restated
with J.P. Morgan PLC and Barclays Capital as arrangers, JPMorgan Chase Bank and
Barclays Bank PLC as underwriters and J.P. Morgan Europe Limited as agent and
security agent. Under the Senior Credit Facility, a syndicate of financial
institutions has made (pound)412.3m of senior secured credit facilities
available to Premier Financing. These facilities have been reduced in line with
payments made. At June 30, 2002, the facilities available to Premier amounted to
(pound)402.3m.
STRUCTURE
The Senior Credit Facility provides for (pound)402.3m of loan facilities
comprising (i) the Refinancing Facilities consisting of Refinancing A and
Refinancing B Facilities and (ii) the Working Capital Facility (each as
described below) and the ancillary facilities which may be provided therein.
The Refinancing A Facility is for an amount of up to (pound)234.3m and finally
matures on December 31, 2007 and the Refinancing B Facility is for an amount of
up to (pound)68.0m and will be repaid in two equal instalments on June 30, 2008
and December 31, 2008. In June 2002, Premier repaid (pound)10.0m of the
Refinancing A Facility in accordance with the schedule of repayments.
The Working Capital Facility in the amount of up to (pound)100.0m is available
in pounds sterling or the equivalent in certain foreign currencies in the form
of revolving advances and a letter of credit facility, which is to be used for
general corporate purposes and will cease to be available on December 31, 2007.
At June 30, 2002, no advance had been drawn down under the Working Capital
Facility and (pound)17.8m was utilised for general corporate purposes.
INTEREST RATES AND FEES
Interest on advances under the various facilities is payable at the rate per
annum equal to LIBOR (or EURIBOR for euros) plus applicable mandatory liquid
asset costs plus the following applicable margins in relation to the facilities:
- - 2.25% per annum reducing on the basis of a ratchet reducing in several
steps to 1.25% per annum dependent upon certain net debt to
consolidated EBITDA ratios for the Refinancing A Facility. At June 30,
2002, the margin applied to LIBOR on this facility was 2.25%;
- - 2.75% per annum for the Refinancing B Facility; and
- - 2.25% per annum reducing on the basis of the ratchet applicable to the
Refinancing A Facility for the Working Capital Facility. At June 30,
2002, the margin applied to LIBOR on this facility was 2.25%.
Commitment fees are payable at the rate of 0.75% per annum of the undrawn
portion of the relevant facilities. The commitment fees on the Working Capital
Facility reduce in several steps to 0.25% per annum dependent upon certain net
debt to consolidated EBITDA ratios. At June 30, 2002, the margin applied to
LIBOR in respect of commitment fees was 0.75%. Default interest is payable at
the applicable interest rate plus 1% per annum.
8
PREMIER INTERNATIONAL FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SECURITY AND GUARANTEES
Premier Financing's obligations under the Senior Credit Facility are required to
be guaranteed by each of the material operating subsidiaries of Premier. Each
charging subsidiary has granted security over substantially all of its assets,
including English law fixed charges over material properties, bank accounts,
insurances, debts and shares and a floating charge over all of its other
undertakings and assets. Certain limited material subsidiaries incorporated
outside of England and Wales have given similar security.
COVENANTS
The Senior Credit Facility requires Premier Financing to observe certain
covenants, including covenants relating to delivery of financial statements,
insurances, notification of any default or any occurrence which could be
reasonably expected to have a material adverse effect, consents and
authorisations being maintained, compliance with environmental laws,
notification of material litigation and labour disputes, access to books and
records, uses of proceeds, filing of tax returns, pension schemes, the provision
of guarantees and security from subsidiaries, euro compliance, intellectual
property rights and hedge transactions.
The Senior Credit Facility requires Premier Financing to comply with certain
negative covenants, including covenants relating to negative pledges, borrowed
money, guarantees, disposals, operating leases, change of accounting reference
date or accounting policy, identity of auditors, equity yield and intercompany
loan payments, reduction of capital, loans and credit, intra-group contracts and
arrangements, distributions, share capital, disposals, acquisitions and joint
ventures, amendments to documents, change in business, merger and amalgamation,
shareholders' meetings and constitutive documents, acquisitions and joint
ventures and new subsidiaries. Certain categories of permitted payment may be
made as exceptions to the restrictions on dividends and intercompany loan
payments including payment of interest on the Notes.
In addition, the Senior Credit Facility requires Premier Financing to comply
with specified ratios and tests, including EBITDA/total interest expense, total
net debt/EBITDA, fixed charge coverage ratio and maximum capital expenditure.
There are caps on permitted budgeted capital expenditure for each financial year
with the right to carry forward any surplus of budgeted capital expenditures up
to a maximum surplus amount of one third of the previous year's budget for use
within the first six months of the following financial year.
MATURITY AND AMORTISATION
Term Loan Facilities. The Refinancing A Facility will be repaid in semi-annual
instalments commencing on June 30, 2000, with the final maturity on December 31,
2007.
The Refinancing B Facility will be repaid in two instalments with 50% repayable
on June 30, 2008 and the balance repayable on December 31, 2008.
Repayments on these facilities in excess of the original amortisation schedule
are applied pro rata over the remaining repayments
Working Capital Advances. The Working Capital Facility (and all other facilities
made available thereunder) will cease to be available on December 31, 2007.
SUBORDINATION DEED
The Subordination Deed provides for restrictions on Premier taking certain
actions in relation to the Notes. In particular, Premier may not receive
payments to pay principal on the Notes or any prepayment, redemption, defeasance
or purchase of principal on the Notes or certain indemnities until the Senior
Credit Facility has been paid in full.
9
PREMIER INTERNATIONAL FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
MONITORING AND OVERSIGHT AGREEMENT
Premier entered into a ten year agreement (the "Monitoring and Oversight
Agreement") with Hicks Muse pursuant to which Premier will pay Hicks Muse an
annual fee of (pound)1.2m for providing monitoring and oversight services to
Premier. The annual fee is adjustable at the end of each fiscal year to an
amount equal to one tenth of one percent of Premier's budgeted consolidated net
sales, but in no event may the fee be less than (pound)1.1 million. Premier paid
(pound)0.3m and (pound)0.6m in the three months and six months ended June 30,
2002, respectively, under the agreement to Hicks Muse.
GOLDEN SHARE
A Golden Share has been issued by Premier Financing with voting rights which
entitles the holder of the Golden Share to block the passing of resolutions for
the winding-up or administration of Premier Financing or resolutions approving
other matters that would constitute a breach of the Senior Credit Facility.
These voting rights attaching to the Golden Share will lapse upon a payment
default in respect of the Notes continuing unremedied and unwaived for a period
of 180 days. The Golden Share is held by an affiliate of Hicks Muse which will
agree with the lenders under the Senior Credit Facility as to the exercise of
the voting rights of the Golden Share.
8. ACQUISITIONS AND DISPOSALS
The provisional fair value of net assets acquired and consideration paid in
respect of the ambient foods business of Nestle SA in the U.K., acquired in May,
2002, was as follows. These net assets are still subject to fair value
adjustments, the exercise to determine which is ongoing. The consideration is
also subject to finalisation in respect of classification of acquisition and
debt issuance fees.
2002
(POUND)M
Assets acquired:
Intangible assets 20.0
Tangible assets 24.5
Current assets
Stocks 13.0
Trade debtors -
Other debtors -
Creditors less than 1 year
Trade creditors -
Other creditors 0.6
Tax -
--------------
Total capital employed 58.1
--------------
Consideration
Cash paid 133.0
--------------
Total consideration less net assets acquired 74.9
Goodwill capitalised 74.9
10
PREMIER INTERNATIONAL FOODS PLC
SUMMARY OF DIFFERENCES BETWEEN UNITED KINGDOM AND
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Consolidated Financial Statements, included elsewhere in this report, have
been prepared in accordance with accounting principles generally accepted in the
United Kingdom ("U.K. GAAP"), which differ in certain material respects from
generally accepted accounting principles in the United States ("U.S. GAAP").
Such differences involve methods for measuring the amounts shown in the
financial statements, as well as additional disclosures required by U.S. GAAP.
The following is a summary of the material adjustments to EBITDA, total assets,
total debt and shareholders' equity that would have been required in applying
the significant differences between U.K. and U.S. GAAP, as required by the Bond
Indenture.
"EBITDA", a non-statutory measure of operating performance is defined herein, in
respect of any period, as the consolidated operating profits but before:
operating, non-operating and exceptional items; the amortisation of goodwill and
other intangible assets, depreciation, net interest charges and any other
non-cash income and non-cash charges.
No U.S. GAAP adjustments in respect of the Nestle acquisition have been made as
the final fair values on acquisition under U.S. GAAP have yet to be determined.
RECONCILIATION OF CONSOLIDATED EBITDA
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ------------------------------
2001 2002 2001 2002
(POUND)M (POUND)M (POUND)M (POUND)M
Profit on ordinary activities before interest and taxation as 14.8 17.5 26.0 30.6
reported under U.K. GAAP
Depreciation and amortisation 4.1 5.2 7.9 10.3
----------------- -------------- -------------- --------------
EBITDA under U.K. GAAP 18.9 22.7 33.9 40.9
U.S. GAAP adjustments:
Derivative financial instruments 2.1 (3.4) 6.9 (3.2)
----------------- -------------- -------------- --------------
Net U.S. GAAP adjustments 2.1 (3.4) 6.9 (3.2)
----------------- -------------- -------------- --------------
EBITDA as reported under U.S. GAAP 21.0 19.3 40.8 37.7
================= ============== ============== ==============
RECONCILIATION OF CONSOLIDATED TOTAL ASSETS
DECEMBER 31, JUNE 30,
2001 2002
------------------ ------------------
(POUND)M (POUND)M
Total assets as reported under U.K. GAAP 419.3 530.2
U.S. GAAP adjustments:
Goodwill not capitalised under U.K. GAAP 213.3 213.3
Accumulated amortisation of goodwill not capitalised under U.K. GAAP (189.7) (189.7)
Amortisation of goodwill under U.K. GAAP not amortised under U.S. GAAP - 0.7
Pensions 28.4 28.4
Revaluation of fixed assets (4.0) (4.0)
Derivative financial instruments 4.7 2.3
Capitalised debt issuance costs 12.6 18.7
------------------ ------------------
Net U.S. GAAP adjustments 65.3 69.7
------------------ ------------------
Total assets as reported under U.S. GAAP 484.6 599.9
================== ==================
11
PREMIER INTERNATIONAL FOODS PLC
SUMMARY OF DIFFERENCES BETWEEN UNITED KINGDOM AND
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
RECONCILIATION OF CONSOLIDATED TOTAL DEBT
DECEMBER 31, 2001 JUNE 30, 2002
------------------ ------------------
(POUND)M (POUND)M
Total debt as reported under U.K. GAAP 358.7 479.2
U.S. GAAP adjustments:
Capitalised debt issuance costs 12.6 18.7
------------------ ------------------
Total debt as reported under U.S. GAAP 371.3 497.9
================== ==================
RECONCILIATION OF CONSOLIDATED SHAREHOLDERS EQUITY
DECEMBER 31, 2001 JUNE 30, 2002
------------------ ------------------
(POUND)M (POUND)M
Shareholders equity as reported under U.K. GAAP (160.2) (160.7)
U.S. GAAP adjustments:
Goodwill not capitalised under U.K. GAAP 213.3 213.3
Accumulated amortisation of goodwill not capitalised under U.K. GAAP (189.7) (189.7)
Amortisation of goodwill under U.K. GAAP not amortised under U.S. GAAP - 0.7
Pensions 28.4 28.4
Deferred taxation (20.1) (12.0)
Derivative financial instruments 5.5 2.3
Revaluation of fixed assets (4.0) (4.0)
------------------ ------------------
Net U.S. GAAP adjustments 33.4 39.0
------------------ ------------------
Shareholders equity as reported under U.S. GAAP (126.8) (121.7)
================== ==================
12
PREMIER INTERNATIONAL FOODS PLC
ITEM 2. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion summarizes the significant factors affecting the
consolidated financial condition and results of operations of the Company and
its operating subsidiaries for the three-month periods ended June 30, 2001 and
2002. You should read the following discussion in conjunction with the financial
statements (the "Financial Statements"), including the notes thereto, included
elsewhere in this report. You should note that our financial statements have
been prepared in accordance with U.K. GAAP, which differs in certain material
respects from U.S. GAAP. The most significant differences between U.K. GAAP and
U.S. GAAP are detailed in note 10 to these Financial Statements and note 24 to
Premier's 2001 annual report to the bondholders.
OVERVIEW
We manufacture and market grocery products for the retail grocery and food
service markets in the United Kingdom and Western Continental Europe in three
principal product groups: (i) canned foods; (ii) beverages; and (iii) preserves,
pickles and sauces. Our products are sold under both private label and our own
popular brand names, which include HP canned foods, Typhoo tea, Cadbury's
chocolate drink mixes, Marvel milk powdered creamer, Smash instant potato,
Chivers and Hartley's preserves and Materne compote and jam. We also operate a
potato packing and trading business.
ACQUISITIONS, DISPOSALS AND RESTRUCTURING
In January 2001, we sold our biscuits business to Eubisco Limited, a company
controlled by Hicks Muse, for (pound)92.0 million. Following the sale, we took
the decision to further consolidate the administration functions of our U.K.
operations and closed the administration function at the Moreton site.
In February 2001, we sold our wines and spirits business to its management for
(pound)11.0 million.
In April 2001, we acquired Stratford on Avon Foods Limited, a company
manufacturing and selling canned and pickled foods ("SonA"), for (pound)12.4
million. This business has been integrated into our existing canning, pickles
and sauces operations.
In September 2001, we acquired the `Lift' instant lemon tea business ("Lift")
for (pound)8.2 million. This business has been integrated into our existing tea
operations.
In October 2001, we acquired the assets and trade of Nelson's of Aintree Limited
("Nelsons"), a company manufacturing sweet preserves for (pound)8.0 million.
This business has been integrated into our existing preserves operations.
In May 2002, we acquired the ambient foods manufacturing business in the U.K. of
Nestle SA for (pound)130.0 million ("Nestle"). The business acquired spans a
broad range of product categories, including pickles, vinegars, sauces, sweet
spreads, preserves, ambient desserts and dehydrated foods. We are currently
conducting a review to determine how to integrate these businesses into our
existing businesses. The ambient food manufacturing business in the Republic of
Ireland of Nestle SA, which was included in the original acquisition agreement,
was sold on to a management buy-in team in July, 2002.
COMPARATIVE RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
SALES. Sales by our continuing operations were (pound)219.9 million for the
three months ended June 30, 2002, an increase of (pound)4.1 million, or 1.9%,
compared to sales for the same period in 2001. The increase in sales is
attributable primarily to the acquisition of the Nestle business which
contributed sales of (pound)9.2 million, the acquisition of Nelsons which
contributed sales of (pound)3.3 million, the acquisition of Lift which
contributed sales of (pound)1.0 million offset by decreases in sales of canned
foods, pickles and sauces of (pound)5.7 million, in the sales value of potatoes
of (pound)3.3 million and in sales of beverages of (pound)0.8 million.
13
PREMIER INTERNATIONAL FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS (CONTINUED)
Sales by our continuing operations were (pound)431.4 million for the six months
ended June 30, 2002, an increase of (pound)3.7 million, or 0.9%, compared to
sales for the same period in 2001. The increase in sales is attributable
primarily to the acquisition of the Nestle business which contributed sales of
(pound)9.2 million, the acquisition of Nelsons which contributed sales of
(pound)6.3 million, the acquisition of Lift which contributed sales of
(pound)1.9 million offset by decreases in sales of canned foods, pickles and
sauces of (pound)5.9 million, in the sales value of potatoes of (pound)3.2
million and in sales of beverages of (pound)4.2 million.
Canned Foods, pickles and sauces
Sales by our canned foods, pickles and sauces group were (pound)91.3 million for
the three months ended June 30, 2002, a decrease of (pound)0.5 million, or 0.5%,
compared to sales of (pound)91.8 million for the same period in 2001. Sales by
our canned foods group were (pound)176.8 million for the six months ended June
30, 2002, a decrease of (pound)0.8 million, or 0.5%, compared to sales of
(pound)177.6 million for the same period in 2001. This decrease in sales was a
result of lower volumes resulting from decreased marketing expenditure and the
exit from a number of low margin contracts in the canning, pickles and sauces
group offset by sales contributed by Nestle and SonA.
Beverages
Sales by our beverages group were (pound)41.2 million for the three months ended
June 30, 2002, an increase of (pound)0.2 million, or 0.5%, compared to sales of
(pound)41.0 for the same period in 2001. Sales by our beverages group were
(pound)85.2 million for the six months ended June 30, 2002, a decrease of
(pound)2.4 million, or 2.7%, compared to sales of (pound)87.6 for the same
period in 2001. The decrease in sales was primarily due to the cancellation of a
low margin contract offset by sales contributed by Lift.
Preserves
Sales by our preserves group were (pound)43.2 million for the three months ended
June 30, 2002, an increase of (pound)7.7 million, or 21.7%, compared to sales of
(pound)35.5 million reported for the same period in 2001. Sales by our preserves
group were (pound)83.3 million for the six months ended June 30, 2002, an
increase of (pound)10.1 million, or 13.8%, compared to sales of (pound)73.2
million reported for the same period in 2001. The increase in sales is primarily
attributable to the Nestle and Nelsons acquisitions, which contributed
(pound)7.3 million and (pound)10.3 million of sales in the three months and six
months ended June 30, 2002 respectively. The preserves group now includes our
French biscuit distribution operation, which was integrated into our French
preserves operation in 2001.
Potatoes
Potato sales were (pound)44.2 million for the three months ended June 30, 2002,
a decrease of (pound)3.3 million, or 6.9%, compared to sales of (pound)47.5
million for the same period in 2001. Potato sales were (pound)86.1 million for
the six months ended June 30, 2002, a decrease of (pound)3.2 million, or 3.6%,
compared to sales of (pound)89.3 million for the same period in 2001. Volumes of
potatoes sold were 14% ahead in the six months ended June 30, 2002, though a 15%
decline in the average price when compared to the same period in 2001, resulted
in a decrease in sales value of (pound)3.2 million.
PREMIER CONSOLIDATED
GROSS PROFIT. Gross profit was (pound)55.6 million for continuing businesses for
the three months ended June 30, 2002, an increase of (pound)12.4 million, or
28.7%, compared to gross profit of (pound)43.2 million for the same period in
2001. Gross margin was 25.3% for the three months ended June 30, 2002, an
increase of 5.3 percentage points compared to the gross margin of 20.0% for the
same period in 2001. Gross profit was (pound)102.5 million for continuing
businesses for the six months ended June 30, 2002, an increase of (pound)11.4
million, or 12.5%, compared to gross profit of (pound)91.1 million for the same
period in 2001. Gross margin was 23.8% for the six months ended June 30, 2002,
an increase of 2.5 percentage points compared to the gross margin of 21.3% for
the same period in 2001. The increase in gross profit over the same period in
2001 is primarily due to:
o the acquisitions of Nestle, Nelsons and Lift;
o an increase in the sales prices of our canned foods, tea and
chocolate beverages;
o a change in our sales mix towards higher margin branded
products;
o manufacturing efficiency improvements;
o an improvement in the trading margin of our potatoes business;
offset by
o increased raw material costs; and
o the exit from low margin contracts in our canned foods,
pickles and sauces and beverages groups.
The increase in the gross margin percentage is due to the improvements in the
gross profit, which have been achieved on relatively static sales value.
14
PREMIER INTERNATIONAL FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS (CONTINUED)
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses for
continuing businesses were (pound)29.7 million for the three months ended June
30, 2002, an increase of (pound)6.6 million, or 28.6%, over selling and
distribution expenses of (pound)23.1 million for the same period in 2001.
Selling and distribution expenses for continuing businesses were (pound)55.3
million for the six months ended June 30, 2002, an increase of (pound)3.8
million, or 7.4%, over selling and distribution expenses of (pound)51.5 million
for the same period in 2001. The increase is primarily due to increased
marketing expenditure by our French preserves business and our tea business and
the Nestle and Nelsons acquisitions, offset by reductions in marketing
expenditure in our canned foods, pickles and sauces group and in our chocolate
beverages business.
ADMINISTRATIVE COSTS. Administrative expenses for continuing businesses were
(pound)8.4 million for the three months ended June 30, 2002, an increase of
(pound)3.2 million, or 61.5%, compared to administrative expenses of (pound)5.2
million for the same period in 2001. The principal reasons for the increase are
the acquisitions of Nelsons and Nestle, the amortisation of goodwill relating to
the Nestle acquisition, an increase in insurance premia following "September
11th" and the amortisation of a pension prepayment, which commenced in July
2001.
OPERATING PROFIT BEFORE OPERATING EXCEPTIONAL ITEMS. Operating profit before
operating exceptional items for continuing businesses was (pound)17.5 million
for the three months ended June 30, 2002, an increase of (pound)2.6 million, or
17.4%, compared to operating profit before operating exceptional items of
(pound)14.9 million for the same period in 2001. Operating margin increased to
8.0% for the three months ended June 30, 2002 from 6.9% for the same period in
2001. Operating profit before operating exceptional items for continuing
businesses was (pound)30.7 million for the six months ended June 30, 2002, an
increase of (pound)4.3 million, or 16.3%, compared to operating profit before
operating exceptional items of (pound)26.4 million for the same period in 2001.
Operating margin increased to 7.1% for the six months ended June 30, 2001 from
6.1% for the same period in 2001. The increase in the operating margin
principally resulted from increased sales of higher margin branded products
combined with manufacturing efficiency improvements offset by the increased
goodwill and pension prepayment amortisation.
OPERATING EXCEPTIONAL ITEMS. The operating exceptional loss in the three months
ended June 30, 2002, of (pound)2.2 million principally comprises (pound)1.0
million of costs relating to the closure of our Nelsons preserves factory in
Aintree and the relocation of production to our Histon preserves factory,
(pound)0.5 million of redundancy costs in relation to changes of shift patterns
at our Moreton tea factory and (pound)0.3 million of exceptional costs in
relation to the Nestle acquisition. The operating exceptional loss in the six
months ended June 30, 2002, of (pound)3.2 million principally comprises
(pound)1.5 million of costs relating to the closure of our Nelsons preserves
factory in Aintree and the relocation of production to our Histon preserves
factory, (pound)1.0 million of redundancy costs in relation to changes of shift
patterns at our Moreton tea factory and (pound)0.3 million of exceptional costs
in relation to the Nestle acquisition.
NON-OPERATING EXCEPTIONAL ITEMS. The non-operating exceptional loss in the six
months ended June 30, 2001, of (pound)18.0 million relates to the loss on the
sale of our biscuits business in January 2001 and the loss on the sale of our
wines and spirits business in February 2001. The net proceeds received on these
disposals were (pound)102.0 million against net assets of these businesses of
(pound)67.0 million. Goodwill of (pound)53.0 million, which had previously been
written off to reserves in respect of our biscuits business, was written back
through the profit and loss account, resulting in an accounting loss of
(pound)18.0 million.
PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma information presents the results of operations
of Premier under U.K. GAAP, giving pro forma effect to the SonA, Lift, Nelsons
and Nestle acquisitions as if it they had occurred as of January 1, 2001. The
pro forma results are not indicative of what actually would have occurred if the
SonA, Lift, Nelsons and Nestle acquisitions had been in effect for the periods
presented, nor should they be considered indicative of future results.
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
2001 2002
(POUND)M (POUND)M
Net sales 495.9 477.2
============ ============
Operating profit 30.7 33.4
============ ============
15
PREMIER INTERNATIONAL FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows generated from operating activities (cash flow before interest,
cash exceptional items, tax and dividends, but after capital expenditure and
working capital movements) for the three months and six months ended June 30,
2002 were inflows of (pound)29.3 million and (pound)32.5 million respectively,
compared to inflows of (pound)21.6 million and (pound)36.8 million,
respectively, for the same periods in 2001. Historically, our cash flows from
operating activities have been largely stable with variances resulting from the
timing of the receipt of payment from major customers, and from capital
expenditures relating to the execution of our restructuring programs.
We incurred capital expenditures of (pound)4.1 million and (pound)6.9 million
and for the three months and six months ended June 30, 2002, respectively,
compared to (pound)4.8 million and (pound)8.4 million, respectively, for the
same periods in 2001. We anticipate that capital expenditure will continue for
the remainder of 2002 at a similar rate to that in the first six months of 2002.
We financed the acquisition of Nestle in May 2002 through an amendment and
restatement of our senior credit facility. The principal changes to the senior
credit facility were to increase the amount available under the refinancing
facilities by (pound)135.0 million from (pound)167.3 million to (pound)312.3
million, to reduce the working capital facility by (pound)25.0 million to
(pound)100.0 million and to extend the period of availability of the facilities
by 18 months together with a rescheduling of the amortisation of the debt. At
June 30, 2002, we had borrowings under the senior credit facility of
(pound)302.3 million under the refinancing facilities, which comprised
(pound)234.3 million under the refinancing A facility and (pound)68.0 million
under the refinancing B facility. At June 30, 2001 we had (pound)nil drawn of
the (pound)100.0 million working capital facility. The working capital facility
will cease to be available on December 31, 2007.
Interest payments on the Notes and interest and principal payments under the
senior credit facility represent significant cash requirements for us.
Borrowings under the senior credit facility bear interest at floating rates and
require interest payments on varying dates.
At June 30, 2002, the total debt relating to our bonds was (pound)206.2 million,
comprising (pound)75.0 million under the pound sterling denominated bond and
(pound)131.2 million under the US dollar denominated bond. We had a further
(pound)9.3 million interest free loan from an affiliated company.
The table below sets out the maturity schedule for our net debt
At December 31, 2001 At June 30, 2002
------------------------- -----------------------
(pound) million (pound) million
Cash (27.3) (20.3)
Debt maturing in:
Less than 1 year 14.2 23.5
1 to 2 years 18.0 31.5
2 to 3 years 22.5 43.0
3 to 4 years 31.5 51.0
4 to 5 years 71.6 64.3
More than 5 years 240.6 304.7
------------ ------------
371.1 497.7
============ ============
Our primary sources of liquidity are cash flow from operations and borrowings
under the senior credit facility. While we believe that cash generated from our
operations, together with available borrowings under the senior credit facility,
will be adequate to meet anticipated future requirements for working capital,
capital expenditures and scheduled payments of principal and interest on our
indebtedness for the foreseeable future, we cannot assure you that we will
generate sufficient cash flow from operations or that future working capital
will be available in an amount sufficient to enable us to service our debt,
including the notes, or to make necessary capital expenditures.
We do not have material off balance sheet arrangements. Our related party
transactions are detailed in Note 22 to the consolidated financial statements
included in our Form 20-F filing for 2001.
16
PREMIER INTERNATIONAL FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are described in Note 1 to the consolidated
financial statements included in our Form 20-F filing for 2001. Certain of our
accounting policies require the application of judgement by management in
selecting the appropriate assumptions for calculating financial estimates. By
their nature these judgements are subject to an inherent degree of uncertainty.
These judgements are based on our historical experience, terms of existing
contracts, our observance of trends in the industry, information provided by our
customers and information available from other outside sources as appropriate.
Our significant accounting policies include:
Over rider discounts and customer rebates. Our over rider discounts and customer
rebates reserve is established on our best estimate of the amounts necessary to
meet claims made by our customers in respect of these discounts and rebates.
Provision is made at the time of sale and released, if unutilised, once the
likelihood of such a claim being made has become remote.
Pensions and other post retirement benefits. The determination of our obligation
and expense for pension and other post retirement benefits is dependent on our
selection of certain assumptions used by actuaries in calculating such amounts.
Those assumptions are described in Note 6 to the consolidated financial
statements included in of our Form 20-F filing for 2001 and include, among
others, the discount rate, expected long term rate of return on plan assets and
rates of increase in compensation. In accordance with both U.K. and U.S.
generally accepted accounting principles, actual results that differ from our
assumptions are accumulated and amortised over future periods and therefore,
generally affect our recognised expense and recorded obligation in such future
periods. We are guided in selecting our assumptions by our independent actuaries
and, while we believe that our assumptions are appropriate, significant
differences in our actual experience or significant changes in our assumptions
may materially affect our pension and other post retirement obligations and our
future expense.
Valuation of goodwill, intangible and other fixed assets. Under U.K. GAAP,
Premier's accounting policy is to amortise property, plant and equipment,
goodwill and intangible assets over their estimated useful lives. Estimated
useful lives are based on management's estimates of the period that the assets
will generate revenue. For a summary of the differences between U.K. GAAP and
U.S. GAAP accounting policies in respect of the valuation of goodwill,
intangible assets and other fixed assets see Note 24 to the consolidated
financial statements included in our Form 20-F filing for 2001. We additionally
consider whether any of the property, plant and equipment, goodwill and
intangible assets may have become impaired whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable. Factors considered important which could trigger an impairment
review include the following:
o underperformance relative to historical or projected future operating
results;
o changes in the manner of use of the assets or the strategy for the
overall business; and
o negative industry or economic trends.
When we determine that the carrying value of the asset concerned may have been
impaired, we record an impairment charge. The impairment charge is determined by
estimating the recoverable value of the asset using an appropriate method for
that asset.
RECENTLY ISSUED ACCOUNTING STANDARDS
United States
SFAS NO. 141 AND SFAS NO. 142
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141").
The Statement is effective for all business combinations initiated after June
30, 2001 and for all business combinations accounted for by the purchase method
that are completed after June 30, 2001. SFAS 141 prohibits the
pooling-of-interests method of accounting for business combinations and
prescribes the initial recognition and measurement of goodwill and other
intangible assets, accounting for negative goodwill and the required disclosures
in respect of business combinations. Premier has adopted SFAS 141 on accounting
for the acquisitions of Lift and Nelsons, which were completed in September 2001
and October 2001 respectively.
17
PREMIER INTERNATIONAL FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS (CONTINUED)
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets ("SFAS 142"). The Statement is
effective for Premier's fiscal year beginning January 1, 2002. FAS 142 requires
that goodwill, including previously existing goodwill, and intangible assets
with indefinite useful lives not be amortized. Reporting units must be
identified for the purpose of assessing potential future impairments of
goodwill. The assessment of whether goodwill has been impaired must be performed
at least annually. Intangible assets with finite useful lives will continue to
be amortized over their estimated useful lives. However, the forty-year
limitation on the amortization period of intangible assets that have indefinite
lives has been removed.
SFAS 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
The second step of the goodwill impairment test measures the amount of the
impairment loss (measured as of the beginning of the year of adoption), if any,
and must be completed by the end of the company's fiscal year. Intangible assets
deemed to have an indefinite life will be tested for impairment using a one-step
process, which compares the fair value to the carrying amount of the asset as of
the beginning of the fiscal year.
Premier has adopted the provisions of SFAS 142 with effect from January 1, 2002.
At December 31, 2001, Premier had unamortized goodwill of (pound)33.5m under
U.S. GAAP, which was subject to the transition provisions of SFAS 142.
Amortization expense under U.S. GAAP related to goodwill was (pound)5.9m,
(pound)7.1m and (pound)19.2m for the years ended December 31, 2001, 2000 and
1999, respectively. Premier has completed the first step of the goodwill
impairment testing process and has determined that the net book value of
(pound)33.5 million of the unamortised goodwill at January 1, 2002 was
unimpaired.
SFAS NO. 146
In July 2002, the Financial Accounting Standards Board issued SFAS 146,
"Accounting for Costs Associated with Exit or Disposal Activities". The
Statement requires companies to recognise costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. SFAS 146 will be applied by the group prospectively to
exit or disposal activities initiated after December 31, 2002.
18
PREMIER INTERNATIONAL FOODS PLC
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CURRENCY FLUCTUATION
Over 80% of our business is conducted in the United Kingdom with our remaining
operations in France and other Western European countries. We also source raw
materials from countries around the world. Therefore, our results of operations
are subject to both currency transaction risk and currency translation risk.
We incur currency transaction risk whenever we enter into either a purchase or
sales transaction using a currency other than pounds sterling. In addition, we
purchase certain raw materials such as tea, beans, sugar and certain seasonal
fruits and vegetables in U.S. dollars and in European currencies.
With respect to currency translation risk, our financial condition and results
of operations are measured and recorded in the relevant domestic currency and
then translated into pounds sterling for inclusion in our consolidated financial
statements.
Our policy with regard to foreign currency exchange risk is to hedge such risk
using foreign currency purchase contracts, options and currency
borrowing/investments. It is our policy to minimize risk to adverse movements in
exchange rates by hedging the exposure at the point when it becomes a
contractual obligation. All trading transaction exposures above an aggregate
level of (pound)100,000 are required to be hedged. These transaction exposures
are managed by each of our subsidiary companies unless considered material to
the group. These and other exposures arising from our trade in non-sterling
currencies can only be hedged by a subsidiary company in agreement with group
treasury and such positions are carefully monitored.
INTEREST RATE RISK
Our borrowings are principally denominated in pounds sterling, with both fixed
and floating rates of interest. We actively monitor our interest rate exposure
on these borrowings, and use a variety of derivative financial instruments to
hedge such exposure, including interest rate swaps, collars and caps. The nature
and volume of derivative financial instruments held by us is determined based
upon conditions set by our borrowing agreements with our lenders. The borrowing
agreements require us to hedge a minimum of 50% of the interest rate exposure on
our senior long-term debt.
In addition, we have entered into a coupon swap to fix the cash flows on our
dollar notes, which has the effect of converting the interest payments from
fixed-rate dollars into fixed-rate pounds sterling. The interest payable under
the (pound)75 million and US$200 million bond totals (pound)24.2 million per
annum until September 2004.
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