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
ANNUAL FINANCIAL REPORT
OF
PREMIER FOODS PLC
(FORMERLY PREMIER INTERNATIONAL FOODS PLC)
FOR THE YEAR ENDED DECEMBER 31, 2002
PREMIER FOODS PLC
This report is being filed in accordance with Section 4.7 of the
Indenture, dated August 10, 1999, between Premier Foods plc (formerly Premier
International Foods plc) ("Premier") and Bankers Trust Company, as Trustee, with
respect to the 12 1/4% Sterling-denominated Senior Notes due 2009 and 12%
Dollar-denominated Senior Notes due 2009 (together, the "Notes") issued by
Premier.
CERTAIN TERMINOLOGY
Unless otherwise indicated, references to "Premier", "the Group",
"we", "us", "our" and "ours" in this annual report are to Premier Foods plc
(formerly Premier International Foods plc) and its consolidated subsidiaries.
The "Company" refers to Premier Foods plc (formerly Premier International Foods
plc) excluding its consolidated subsidiaries. "Premier Holdings" refers to
Premier Foods (Holdings) Limited, our parent company (formerly known as Premier
Holdings Limited, formerly known as Hillsdown Holdings Limited). "Premier
Financing" refers to Premier Financing Limited, our wholly owned subsidiary.
"Hicks Muse" refers to Hicks, Muse, Tate & Furst Limited and its affiliates. The
"Notes" refers to our $200,000,000 12% Senior Notes due 2009 and
(pound)75,000,000 12 1/4% Senior Notes due 2009. The "Indenture" refers to the
Indenture, dated as of August 10, 1999, between Premier and Bankers Trust
Company, as Trustee. The "Senior Credit Facility" refers to the bank credit
facility we have under the Senior Facilities Agreement with J.P. Morgan plc and
Barclays Capital as arrangers, JPMorgan Chase Bank and Barclays Bank plc as
underwriters, with J.P. Morgan Europe Limited as agent and security agent. "SEC"
refers to the Securities and Exchange Commission. Unless otherwise indicated
herein, references to 2002, 2001 and 2000 refer to the fiscal years ended
December 31, 2002, 2001 and 2000, respectively. "U.K." refers to the United
Kingdom of Great Britain and Northern Ireland. The "U.S." and "United States"
refer to the United States of America. "E.U." refers to the European Union.
On September 23, 2002, Premier International Foods plc changed its
name to Premier Foods plc.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This 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 annual
report and include statements regarding Premier's intentions, beliefs or current
expectations concerning, among other things, Premier's results of operations,
financial condition, liquidity, prospects, growth, strategies and the industries
in which we operate.
By their nature, 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 Premier's actual results of
operations, financial condition and liquidity, and the development of the
industries in which we operate may differ materially from those made in or
suggested by the forward-looking statements contained in this annual report. In
addition, even if Premier's 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 annual 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 Premier's behalf are expressly qualified
in their entirety by the cautionary statements referred to above and contained
elsewhere in this annual report.
ANNUAL FINANCIAL REPORT OF PREMIER FOODS PLC
INDEX
PAGE
Report of Independent Accountants - 2000, 2001 and 2002 1
Audited Consolidated Financial Statements
Consolidated Profit and Loss Accounts for each of the three years in 2
the three-year period ended December 31, 2002
Consolidated Balance Sheets at December 31, 2001 and 2002 3
Consolidated Statements of Total Recognised Gains and Losses 4
Note of Consolidated Historical Cost Profits and Losses 4
Reconciliation of Movements in Consolidated Shareholder's Funds 4
Consolidated Cash Flow Statements 5
Notes to the Consolidated Financial Statements 7
REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF PREMIER FOODS PLC
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of profit and loss, cash flows and shareholder's
funds, included on pages 2 to 45, present fairly, in all material respects, the
financial position of Premier Foods plc and its subsidiaries at December 31,
2001 and December 31, 2002, and the results of their operations, their cash
flows and shareholder's funds for the years ended December 31, 2000, December
31, 2001 and December 31, 2002 in conformity with accounting principles
generally accepted in the U.K. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the U.K. and auditing standards generally accepted in the
U.S., which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Accounting principles generally accepted in the U.K. vary in certain
significant respects from accounting principles generally accepted in the U.S.
The application of the latter would have affected the determination of
consolidated net income or loss expressed in pounds sterling for the years ended
December 31, 2000, December 31, 2001 and December 31, 2002 and the determination
of the consolidated shareholder's deficit at December 31, 2001 and December 31,
2002, to the extent summarised in Note 24 to the consolidated financial
statements.
PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
London
United Kingdom
March 31, 2003
1
PREMIER FOODS PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
YEAR ENDED
DECEMBER 31,
NOTE 2000 2001 2002
(POUND)M (POUND)M (POUND)M
8 RESTATED RESTATED
TURNOVER: Continuing operations 818.5 845.2 826.7
Acquisitions - - 55.6
Discontinued operations 215.1 4.1 0.2
------------ ------------ ------------
2,4 1,033.6 849.3 882.5
OPERATING PROFIT: Continuing operations 60.1 64.3 70.7
Operating exceptional items 3 (1.6) (12.2) (14.6)
------------ ------------ ------------
58.5 52.1 56.1
Acquisitions - - 6.9
Operating exceptional items 3 - - (2.2)
------------ ------------ ------------
- - 4.7
Discontinued operations 9.1 (0.8) (0.1)
Operating exceptional items 3 - - -
------------ ------------ ------------
9.1 (0.8) (0.1)
------------ ------------ ------------
2,4 67.6 51.3 60.7
Non-operating exceptional items 3 (5.8) (26.2) (2.0)
------------ ------------ ------------
PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST AND TAXATION 61.8 25.1 58.7
Interest payable and similar charges (71.0) (57.2) (40.3)
Interest receivable 3.1 4.5 3.9
------------ ------------ ------------
Net interest payable and similar charges 7 (67.9) (52.7) (36.4)
PROFIT / (LOSS) ON ORDINARY ACTIVITIES BEFORE TAXATION (6.1) (27.6) 22.3
Taxation charge on profit / loss on ordinary activities 8 (2.5) (0.9) (6.0)
------------ ------------ ------------
PROFIT / (LOSS) ON ORDINARY ACTIVITIES AFTER TAXATION (8.6) (28.5) 16.3
Dividends - - -
------------ ------------ ------------
TRANSFERRED TO RESERVES 17 (8.6) (28.5) 16.3
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
PREMIER FOODS PLC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
NOTE 2001 2002
(POUND)M (POUND)M
RESTATED
Fixed assets:
Intangible assets 9 17.4 113.9
Tangible assets 10 120.0 135.1
Investments 11 0.2 0.2
------------ ------------
137.6 249.2
Current assets:
Stocks 12 105.6 111.3
Debtors due:
Within one year 13 137.1 133.5
After more than one year 13 11.7 9.0
Cash at bank and in hand 27.3 43.5
------------ ------------
281.7 297.3
Creditors - amounts falling due within one year:
Bank loans, overdrafts and other creditors 14 (199.1) (217.6)
------------ ------------
Net current assets 82.6 79.7
------------ ------------
Total assets less current liabilities 220.2 328.9
Creditors - amounts falling due after more than one year:
Borrowings 15 (375.7) (464.7)
Other creditors 15 (0.5) (0.2)
Provisions for liabilities and charges 16 (11.3) (13.8)
------------ ------------
(387.5) (478.7)
------------ ------------
Net liabilities (167.3) (149.8)
============ ============
Capital and reserves:
Called up share capital 17 83.7 83.7
Share premium account 17 623.2 623.2
Revaluation reserve 17 4.0 4.0
Profit and loss account 17 (878.2) (860.7)
------------ ------------
Total shareholder's deficit (167.3) (149.8)
============ ============
Signed on behalf of the Board of Directors, who approved the financial
statements on March 31, 2003.
Paul Thomas
DIRECTOR
The accompanying notes are an integral part of these consolidated financial
statements.
3
PREMIER FOODS PLC
CONSOLIDATED STATEMENTS OF
TOTAL RECOGNISED GAINS AND LOSSES
YEAR ENDED
DECEMBER 31,
2000 2001 2002
(POUND)M (POUND)M (POUND)M
RESTATED RESTATED
Profit / (loss) for the financial year (8.6) (28.5) 16.3
Currency translation differences on foreign currency net investments (1.2) (1.1) 1.2
------------- ------------ ------------
Total recognised gains and losses for the year (9.8) (29.6) 17.5
============= ============
Prior year adjustment on implementation of FRS 19 "Deferred tax" (7.1)
------------
Total recognised gains and losses since last annual report 10.4
============
NOTE OF CONSOLIDATED HISTORICAL COST PROFITS AND LOSSES
YEAR ENDED
DECEMBER 31,
2000 2001 2002
(POUND)M (POUND)M (POUND)M
RESTATED RESTATED
Profit / (loss) on ordinary activities before taxation (6.1) (27.6) 22.3
Realisation of property revaluation gains of previous year 0.2 0.1 -
------------- ------------ ------------
Historical cost profit / (loss) on ordinary activities before taxation (5.9) (27.5) 22.3
============= ============ ============
Historical cost profit / (loss) retained after taxation, and dividends (8.4) (28.4) 16.3
============= ============ ============
RECONCILIATION OF MOVEMENTS IN CONSOLIDATED SHAREHOLDER'S FUNDS
YEAR ENDED
DECEMBER 31,
2000 2001 2002
(POUND)M (POUND)M (POUND)M
RESTATED RESTATED
Profit / (loss) for the financial year (8.6) (28.5) 16.3
Goodwill transferred to the profit and loss account in respect of - 53.0 -
disposed businesses
Other recognised gains and losses (1.2) (1.1) 1.2
Share capital issued - 23.7 -
------------- ------------ ------------
Net increase / (reduction) in shareholder's funds (9.8) 47.1 17.5
Opening shareholder's deficit (198.6) (214.4) (167.3)
Prior year adjustment on implementation of FRS 19 "Deferred tax" (6.0) - -
------------- ------------ ------------
Closing shareholder's deficit (214.4) (167.3) (149.8)
============= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED CASH FLOW STATEMENTS
PREMIER FOODS PLC
CONSOLIDATED CASH FLOW STATEMENTS
YEAR ENDED
DECEMBER 31,
NOTE 2000 2001 2002
(POUND)M (POUND)M (POUND)M
Net cash inflow from operating activities (a) 90.2 81.7 98.8
Return on investments and servicing of finance (b) (55.6) (40.1) (43.6)
Taxation (3.9) (1.5) (1.3)
Capital expenditure and financial investment (b) (23.9) (12.8) (15.1)
Acquisitions and disposals (b) (0.6) 72.3 (132.8)
------------ ------------ ------------
Cash (outflow) / inflow before financing 6.2 99.6 (94.0)
Financing:
Issue of shares (b) - 23.7 -
Debt issuance costs - - (8.6)
Increase / (reduction) in debt (b) (35.7) (119.8) 116.4
------------ ------------ ------------
------------ ------------ ------------
(35.7) (96.1) 107.8
------------ ------------ ------------
Increase / (decrease) in cash in the year (29.5) 3.5 13.8
============ ============ ============
Reconciliation of net cash flow to movement in net debt
Increase / (decrease) in cash in the year (29.5) 3.5 13.8
Cash (outflow) / inflow from increased debt and lease financing 35.7 119.8 (116.4)
------------ ------------ ------------
------------ ------------ ------------
Change in net debt arising from cash flows 6.2 123.3 (102.6)
Exchange movement on debt in the year (10.0) (3.6) 13.2
------------ ------------ ------------
Movement in net debt in the year (3.8) 119.7 (89.4)
Net debt before capitalised debt issuance costs at January 1, (461.3) (470.9) (358.7)
------------ ------------ ------------
Net debt pre capitalised debt issuance at December 31, (465.1) (351.2) (448.1)
Capitalisation of debt issuance costs - - 8.6
Less amortisation of capitalised debt issuance costs (5.8) (7.5) (6.3)
------------ ------------ ------------
Net debt at December 31, (470.9) (358.7) (445.8)
============ ============ ============
ANALYSIS OF MOVEMENT IN NET DEBT
AT CAPITALISED EXCHANGE AT
DECEMBER 31, DEBT ISSUANCE MOVEMENT DECEMBER 31,
2001 CASH FLOW ACQUISITIONS COSTS ON DEBT 2002
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
Bank overdrafts (0.8) (2.4) - - - (3.2)
Less: Cash balances 27.3 22.8 (6.6) - - 43.5
--------------- ---------------- --------------- ----------------- --------------- --------------
Net cash 26.5 20.4 (6.6) - - 40.3
Debt due after 1 year (384.2) 12.1 (115.0) - 13.2 (473.9)
Debt due within 1 year (13.4) 6.4 (20.0) - - (27.0)
Capitalised debt issuance costs 12.6 - 8.6 (6.3) - 14.9
--------------- ---------------- --------------- ----------------- --------------- --------------
Net borrowings (358.5) 38.9 (133.0) (6.3) 13.2 (445.7)
Finance leases (0.2) 0.1 - - - (0.1)
--------------- ---------------- --------------- ----------------- --------------- --------------
Net debt (358.7) 39.0 (133.0) (6.3) 13.2 (445.8)
=============== ================ =============== ================= =============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
5
YEAR ENDED
DECEMBER 31,
2000 2001 2002
(POUND)M (POUND)M (POUND)M
(A) RECONCILIATION OF OPERATING PROFIT TO OPERATING CASH FLOWS
Operating profit before exceptional items 69.2 63.5 77.5
Depreciation of tangible fixed assets 22.0 16.1 18.8
Amortisation of intangible fixed assets 0.3 0.5 4.2
Amortisation of pension prepayment - 2.0 2.6
Cash flow relating to restructuring (13.9) (13.5) (13.2)
Other exceptional cash flows (1.3) - -
Decrease in stocks 11.3 17.8 7.3
(Increase) / decrease in debtors (0.3) (9.6) 7.3
Increase / (decrease) in creditors 3.4 6.0 (4.2)
Exchange movement in working capital (0.5) (1.1) (1.5)
------------ ------------ ------------
Net cash inflow from operating activities 90.2 81.7 98.8
============ ============ ============
(B) ANALYSIS OF CASH FLOWS FOR HEADINGS NETTED IN THE CASH FLOW STATEMENT YEAR ENDED
DECEMBER 31,
2000 2001 2002
(POUND)M (POUND)M (POUND)M
RETURN ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 3.0 4.5 3.9
Interest paid (58.4) (44.5) (47.4)
Interest element of finance lease rental payments (0.2) (0.1) (0.1)
------------- ------------ ------------
Return on investments and servicing of finance (55.6) (40.1) (43.6)
============= ============ ============
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets (26.5) (20.1) (17.3)
Sale / (purchase) of investments 0.2 (0.1) -
Sale of tangible fixed assets 2.4 7.4 2.2
------------- ------------ ------------
Capital expenditure and financial investment (23.9) (12.8) (15.1)
============= ============ ============
ACQUISITIONS AND DISPOSALS
Purchase of subsidiary undertakings (0.6) (28.7) (132.8)
Cash acquired with subsidiary undertakings - (0.8) -
Sale of subsidiary undertakings - 101.8 -
------------- ------------ ------------
Acquisitions and disposals (0.6) 72.3 (132.8)
============= ============ ============
FINANCING
Increase / (decrease) in debt due within one year 8.7 (6.5) 13.6
Increase / (decrease) in debt due after more than one year (42.9) (112.4) 102.9
Issue of shares - 23.7 -
Capital element of finance lease rental payments (1.5) (0.9) (0.1)
------------- ------------ ------------
Financing (35.7) (96.1) 116.4
============= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The following accounting policies have been applied consistently in dealing with
the items which are considered to be material in relation to Premier's financial
statements.
Premier has adopted FRS 19 "Deferred tax" this year, which requires full
provision to be made for deferred tax arising from timing differences between
the recognition of gains and losses in the financial statements and their
inclusion in tax computations. The adoption of this standard represents a change
in accounting policy and the comparative figures have been restated accordingly.
BASIS OF ACCOUNTING
The consolidated financial statements have been prepared in accordance with
applicable accounting standards in the U.K., under the historical cost
convention.
CONSOLIDATED FINANCIAL STATEMENTS FOR 2000, 2001 AND 2002
The results of Premier for the three years ended December 31, 2002 and the
balance sheets at December 31, 2001 and December 31, 2002 have been consolidated
in accordance with applicable accounting standards in the U.K., under the
historical cost convention.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles in the U.K. requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
The businesses acquired during the financial periods presented have been
consolidated from the date on which control of the net assets and operations of
the businesses was transferred to Premier. Similarly, the results of Group
companies and businesses divested during the financial periods presented have
been included in the Group's accounts only until the date that control of the
net assets and operations of the companies and businesses was transferred from
Premier.
Premier is allocated overhead costs relating to Premier Holdings' shared
administrative functions based on central management's estimate of the time
involved in supporting each of the groups that Premier Holdings provides those
administrative functions to. The allocated costs are included in general
administrative and other expenses in the consolidated profit and loss account.
Management believes that such allocation methodology is reasonable. The expenses
allocated to Premier for these services are not necessarily indicative of the
expenses that would have been incurred if Premier had been a separate
independent entity. In 2000, 2001 and 2002, Premier has been recharged
(pound)0.9m, (pound)0.2m and (pound)2.8m by Premier Holdings Limited in respect
of the shared administrative functions. The increase from 2001 to 2002 in the
recharge to Premier by Premier Holdings is primarily the result of a reduction
in Premier Holdings' income and the recharge of restructuring costs incurred by
Premier Holdings.
Employees of Premier companies are members of a number of defined benefit
pension schemes. Each of Premier's operating companies directly funds the
schemes based on the actual pension cost for its employees in accordance with
the funding levels as determined by the schemes actuaries. There are no
recharges or allocations of costs from Premier Holdings.
GOODWILL
In accordance with FRS 10 "Goodwill and Intangible Assets", purchased goodwill,
being the excess of the fair value of the purchase consideration over the fair
value of the separable net tangible assets of businesses acquired, is
capitalised and amortised over the shorter of its estimated useful life and 20
years on a straight-line basis. Prior to 1998, goodwill arising on the
acquisition of subsidiary undertakings was written off to reserves in the year
of acquisition. On the subsequent disposal or termination of a business acquired
prior to 1998, the profit or loss on disposal or termination is calculated after
charging the gross amount of any related goodwill previously taken to reserves.
7
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TURNOVER
Turnover is the value of sales, excluding transactions with or between wholly
owned subsidiaries, after deduction of sales rebates, value added tax and other
taxes directly attributable to turnover. Sales are recognised upon receipt of
confirmation that the goods shipped have been accepted by the customer, where
the sales price is fixed and collectability is reasonably assured. Shipping and
handling costs are included in selling and distribution costs. The review of
accounting policies required by FRS 18 "Accounting Policies" identified that
certain sales deductions would be more appropriately classified as a reduction
in "sales" rather than "cost of sales" and certain promotional expenditure would
be more appropriately classified as "selling and distribution costs" rather than
a reduction in "sales". This change of policy was adopted in 2001 and the 2000
comparatives were restated accordingly (see Note 2 "Analysis of Continuing
Operations").
RESEARCH AND DEVELOPMENT
Research and development expenditure is expensed in the year in which it is
incurred (see Note 5 " Profit / Loss on Ordinary Activities before Taxation").
DEPRECIATION AND AMORTISATION
Freehold land is not depreciated. Long and short leasehold property is amortised
over the terms of the leases from the date the property is brought into use.
Other fixed assets are depreciated over their estimated useful lives on a
straight-line basis at rates sufficient to reduce them to their estimated
residual value. Such estimated useful lives are:
Freehold land - Not depreciated
Freehold buildings - 20 to 50 years
Plant and machinery - 3 to 15 years
Vehicles - 3 to 5 years.
When properties are revalued, the depreciation thereafter provided is based on
the revalued depreciable amounts.
In accordance with FRS 11 "Impairment of Fixed Assets and Goodwill", where
assets are impaired as a result of market factors, write-downs are charged
initially against any related revaluation reserve until historic cost is reached
and thereafter charged to operating profit.
FIXED ASSET INVESTMENTS
Investments held as fixed assets are stated at cost less any provision for
impairment in their value.
LEASING
Finance leases relating to significant items of plant, machinery and vehicles
have been capitalised and depreciated in accordance with Premier's depreciation
policy, subject to a maximum period of the term of the lease. The capital
element of future lease payments is included in other creditors. Payments under
operating leases are charged wholly to the profit and loss account in the year
in which they are incurred.
Where a leasehold property which has substantially ceased to be used for the
purpose of the business is sublet, full provision is made for the future costs
of the property less recoverable amounts.
STOCKS
Stocks are valued at the lower of cost and net realisable value. No interest is
included but, where appropriate, cost includes production and other attributable
overhead expenses. Cost is calculated on a first-in-first-out basis by reference
to the invoiced value of supplies and attributable costs of bringing stocks to
their present location and condition.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated into
Sterling at rates of exchange ruling at the end of the financial year, and the
results of overseas subsidiaries are translated at the average rate of exchange
ruling during the year. Differences on exchange arising from the retranslation
of the opening net investment in subsidiary undertakings, and from the
translation of the results of those companies at an average rate are taken to
reserves. Where foreign currency borrowings are used to finance or hedge equity
investments, the gain or loss arising on translation of these matched borrowings
is also taken to reserves. All other exchange differences are dealt with through
the profit and loss account.
8
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEFERRED TAX
FRS 19 "Deferred tax", which has been adopted this year, requires full provision
to be made for deferred tax arising from timing differences between the
recognition of gains and losses in the financial statements and their inclusion
in tax computations. Premier has chosen not to discount its deferred tax
liability. The prior year figures have been restated in order to comply with the
standard. The effects of FRS 19 "Deferred tax" are:
2000 2001 2002
(POUND)M (POUND)M (POUND)M
Increase / (reduction) in taxation charge for the period 0.8 0.3 (0.6)
============== ============== ==============
Reduction in net assets 6.0 7.1 -
============== ============== ==============
GOVERNMENT GRANTS
Government grants on capital expenditure are credited to a deferral account and
are released to revenue by equal annual amounts over the life of the asset to
which they relate. Other grants are released to revenue over the life of the
projects to which they relate.
PENSION COSTS
The pension costs relating to Premier pension schemes are assessed in accordance
with the advice of independent qualified actuaries. The amounts so determined
include the regular cost of providing the benefits as a percentage of current
and expected future earnings of the employees covered. Variations from the
regular pension cost are spread on a systematic basis over the estimated average
remaining service lives of current employees in the plans.
FRS 17 "RETIREMENT BENEFITS"
FRS 17 "Retirement benefits" introduces a completely different approach to
accounting for defined benefit pension schemes. At each year end the pension
scheme assets are measured at market value, the pension scheme liabilities are
measured at a present value using a specified actuarial valuation method and
discounted at a corporate bond rate, and the resulting surplus or deficit is
shown on the company's balance sheet. FRS 17 "Retirement benefits" redefines
what should be reported as operating costs, including an annual "current service
cost" (which is no longer reduced or increased by spreading forward surpluses or
deficits). The expected return on scheme assets less the notional interest cost
on the scheme liabilities is included as other finance costs (or income)
adjacent to interest. Actuarial gains and losses from year to year are to be
recognised immediately in the Statement of Total Recognised Gains and Losses.
Pension costs continue to be recognised and measured in accordance with SSAP 24
"Accounting for pension costs". FRS 17 "Retirement benefits" requires that
accounts ending after June 22, 2001 give additional balance sheet disclosure in
order to provide adequate future data comparatives when FRS 17 "Retirement
benefits" is fully implemented. Premier has provided this information separately
within the financial statements. Full adoption of FRS 17 "Retirement benefits"
has been delayed in accordance with the standard until the financial statements
for the year ended December 31, 2005.
POST RETIREMENT BENEFITS
Premier provides certain additional post retirement and unfunded pension
benefits principally for employees in continental Europe. The estimated cost of
providing such benefits is charged against profits on a systematic basis over
the employees' working lives within Premier.
EXCEPTIONAL ITEMS
Exceptional items are those that need to be disclosed by virtue of their size or
incidence. Such items are included within operating profits unless they
represent profits or losses on the sale or termination of an operation, costs of
a fundamental reorganisation or restructuring having a material affect on the
nature and focus of Premier's business, or profits or losses on the disposal of
fixed assets.
CASH AND LIQUID RESOURCES
Short-term cash deposits, which can be called on demand or without notice
without any material penalty are included within cash balances within the
consolidated balance sheet and consolidated cash flow statements.
9
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DEBT ISSUANCE COSTS
Costs relating to the issuance of debt are capitalised and amortised over the
period of the debt, in line with the amortisation of the debt, in accordance
with FRS 4 "Capital Instruments".
FINANCIAL INSTRUMENTS
Derivative financial instruments utilised by Premier comprise interest rate
swaps, cross currency swaps, forward foreign exchange contracts and currency
options. All such instruments are used for hedging purposes to alter the risk
profile of an underlying exposure faced by Premier. Interest rate swap
settlements are recognised as adjustments to interest expense over the term of
the underlying instrument and exchange gains or losses are recognised on the
maturity of the underlying transaction.
2. ANALYSIS OF CONTINUING OPERATIONS
2000 2001
OPERATING OPERATING
CONTINUING EXCEPTIONAL DISCONTINUED CONTINUING EXCEPTIONAL DISCONTINUED
OPERATIONS ITEMS OPERATIONS TOTAL OPERATIONS ITEMS OPERATIONS TOTAL
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
Turnover 818.5 - 215.1 1,033.6 845.2 - 4.1 849.3
Cost of sales (620.4) - (168.4) (788.8) (657.2) (0.9) (3.7) (661.8)
------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------
Gross profit 198.1 - 46.7 244.8 188.0 (0.9) 0.4 187.5
Selling and
distribution (113.4) - (29.5) (142.9) (97.6) (2.5) (0.5) (100.6)
Administrative (24.6) (1.6) (8.1) (34.3) (26.1) (8.8) (0.7) (35.6)
------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------
Net operating
expenses (138.0) (1.6) (37.6) (177.2) (123.7) (11.3) (1.2) (136.2)
------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------
Operating profit 60.1 (1.6) 9.1 67.6 64.3 (12.2) (0.8) 51.3
============ ============ ============ ============= ============= ============ ============ ============
2002
CONTINUING
OPERATIONS OPERATING ACQUISITIONS
BEFORE EXCEPTIONAL BEFORE OPERATING
OPERATING ITEMS IN OPERATING EXCEPTIONAL
EXCEPTIONAL CONTINUING EXCEPTIONAL ITEMS IN DISCONTINUED
ITEMS OPERATIONS ITEMS ACQUISITIONS OPERATIONS TOTAL
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
Turnover 826.7 - 55.6 - 0.2 882.5
Cost of sales (620.5) - (33.1) - (0.2) (653.8)
------------ ------------ ------------- ------------ -------------- ------------
Gross profit 206.2 - 22.5 - - 228.7
Selling and distribution expenses (101.4) - (8.6) - - (110.0)
Administrative costs (34.1) (14.6) (7.0) (2.2) (0.1) (58.0)
------------ ------------ ------------- ------------ -------------- ------------
Net operating expenses (135.5) (14.6) (15.6) (2.2) (0.1) (168.0)
------------ ------------ ------------- ------------ -------------- ------------
Operating profit 70.7 (14.6) 6.9 (2.2) (0.1) 60.7
============ ============ ============= ============ ============== ============
The discontinued operations principally relate to The Horizon Biscuit Company
Ltd, which was sold in January 2001, and FE Barber Limited (trading as Kingsland
Wines and Spirits), which was sold in February 2001. The comparatives for 2000
have been restated accordingly. The acquisition relates to the ambient food
manufacturing business in the U.K. of Nestle SA ("Nestle"), which was acquired
in May 2002.
10
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RESTATEMENT OF 2000 SALES, COST OF SALES AND SELLING AND DISTRIBUTION COSTS
As described in Note 1, certain sales deductions have been reclassified as a
reduction in "sales" rather than "cost of sales" and certain promotional
expenditure has been reclassified as "selling and distribution costs" rather
than a reduction in "sales". This change of policy was adopted in 2001 and the
2000 comparatives have been restated accordingly, and the effect is set out
below:
2000
(POUND)M
SALES
Reported in Annual Financial Report for the year ended December 31, 2000 1,036.4
Reduction in sales reclassified as selling and distribution costs 9.2
Cost of sales reclassified as reduction in sales (12.0)
------------
Reported in Annual Financial Report for the year ended December 31, 2001 1,033.6
============
COST OF SALES
Reported in Annual Financial Report for the year ended December 31, 2000 800.8
Cost of sales reclassified as reduction in sales (12.0)
------------
Reported in Annual Financial Report for the year ended December 31, 2001 788.8
============
MARKETING COSTS
Reported in Annual Financial Report for the year ended December 31, 2000 133.7
Reduction in sales reclassified as selling and distribution costs 9.2
------------
Reported in Annual Financial Report for the year ended December 31, 2001 142.9
============
3. EXCEPTIONAL ITEMS
The principal components of exceptional items are as follows:
2000 2001 2002
(POUND)M (POUND)M (POUND)M
Operating exceptional items:
Continuing operations:
Restructuring of production facilities (1.6) (3.5) (8.8)
Restructuring of distribution arrangements - (4.2) (1.3)
Restructuring of administration facilities - (4.5) (4.5)
Nestle acquisition costs - - (2.2)
------------ ------------ ------------
Total operating exceptional items (1.6) (12.2) (16.8)
============ ============ ============
Non-operating exceptional items:
Loss on sale or termination of discontinued operations (4.2) (29.6) (0.4)
Profit / (loss) on sale of fixed assets (1.6) 3.4 (1.6)
------------ ------------ ------------
Total non-operating exceptional items (5.8) (26.2) (2.0)
============ ============ ============
The loss on sale or termination of discontinued operations in 2002 relates to
the liquidation of a non-core non-grocery business, which was put into
liquidation in March 2002. The loss on sale or termination of discontinued
operations in 2001 relates to the disposal of our biscuits and wines and spirits
operations.
11
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY SEGMENTAL ANALYSIS
TURNOVER BY PRODUCT GROUP
2000 2001 2002
(POUND)M (POUND)M (POUND)M
Canned foods, pickles and sauces 337.6 362.4 375.8
Beverages 191.8 173.8 172.8
Spreads 156.6 151.4 183.8
Potatoes 132.5 157.6 149.9
------------ ------------ -------------
Continuing operations 818.5 845.2 882.3
Discontinued operations 215.1 4.1 0.2
------------ ------------ -------------
Total 1,033.6 849.3 882.5
============ ============ =============
Following the acquisition of the ambient food manufacturing business in the U.K.
of Nestle SA ("Nestle"), the Preserves product group was renamed "Spreads" to
reflect the increased product range within the product group.
Premier restructured its operations during 2000 to form a unified grocery
products business. The product groups shown have shared administrative functions
and the operating assets are not separable. Therefore, further segmental
analysis of operating profit and operating assets is not possible.
The pickles and sauces operations have been reclassified from the spreads
reporting unit into the reporting unit with canned foods following a change in
management reporting lines in 2001.
In 2002, certain products have been reclassified between the beverages, spreads
and canned foods, pickles and sauces product group and the comparatives for 2000
and 2001 restated accordingly.
The 2000 comparatives have also been restated to reflect a change in the
classification of certain sales deductions and which have now been reclassified
from a deduction from sales to marketing costs or from cost of sales to sales
(see Note 2 "Analysis of Continuing Operations").
TURNOVER BY GEOGRAPHICAL ORIGIN TURNOVER BY GEOGRAPHICAL MARKET
2000 2001 2002 2000 2001 2002
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
U.K. 694.9 723.4 763.8 681.9 712.3 741.5
Mainland Europe 123.6 121.8 118.5 129.3 124.4 129.3
Other countries - - - 7.3 8.5 11.5
------------ ------------ ------------- ------------ ------------ ------------
Continuing operations 818.5 845.2 882.3 818.5 845.2 882.3
Discontinued operations 215.1 4.1 0.2 215.1 4.1 0.2
------------ ------------ ------------- ------------ ------------ ------------
Total 1,033.6 849.3 882.5 1,033.6 849.3 882.5
============ ============ ============= ============ ============ ============
12
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OPERATING PROFIT BY GEOGRAPHICAL ORIGIN OPERATING ASSETS BY
GEOGRAPHICAL ORIGIN
2000 2001 2002 2001 2002
RESTATED
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
U.K. 58.7 62.5 74.5 169.2 262.1
Mainland Europe 1.4 2.3 3.1 22.0 33.9
Other countries - (0.5) - - -
------------ ------------ -------------
------------ ------------
Continuing operations 60.1 64.3 77.6 191.2 296.0
Operating exceptional items (Note 3) (1.6) (12.2) (16.8) - -
Discontinued operations 9.1 (0.8) (0.1) 0.2 -
------------ ------------ ------------- ------------ ------------
Total 67.6 51.3 60.7 191.4 296.0
============ ============ =============
Net debt (358.7) (445.8)
------------ ------------
Net deficit (167.3) (149.8)
============ ============
5. PROFIT / LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION
2000 2001 2002
(POUND)M (POUND)M (POUND)M
The profit / loss before tax was arrived at after charging:
Depreciation of fixed assets
Owned assets 21.0 15.9 19.1
Leased assets 1.0 0.2 0.1
Amortisation of intangible assets 0.3 0.5 4.2
Auditors remuneration
Audit services 0.3 0.3 0.3
Non-audit services 0.4 0.4 0.5
Operating lease payments
Plant and machinery 5.9 4.3 2.9
Land and buildings 2.5 1.7 1.6
Research and development 0.5 0.4 1.0
============ ============ ============
6. EMPLOYEES
Employee remuneration and related costs (including directors' emoluments) were
as follows:
2000 2001 2002
(POUND)M (POUND)M (POUND)M
Wages and salaries 133.5 90.0 94.9
Social security costs 12.0 9.0 9.2
Other pension costs 3.7 2.7 3.1
------------ ------------ ------------
149.2 101.7 107.2
============ ============ ============
The average number of employees during the period was as follows:
2000 2001 2002
Management 476 343 374
Administration 490 586 670
Production, distribution and other 5,624 3,288 3,293
------------- ------------ ------------
6,590 4,217 4,337
============= ============ ============
13
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PENSIONS
Premier participates in a number of Premier Holdings pension schemes
(principally the HF scheme, the HF No 2 scheme and the Premier Brands pension
plan), the majority of which are funded defined benefit schemes; there are in
addition a small number of company defined contribution schemes, personal
pension schemes and life assurance only arrangements. The scheme funds are
administered by trustees and are independent of Premier's finances. The schemes
invest in a mixture of U.K. and European equities and corporate and government
bonds.
The total pension cost for Premier in 2000, 2001 and 2002 has been assessed in
accordance with the advice of independent qualified actuaries, using the
Projected Unit Method. Actuarial assessments of the schemes were made during
2002, with the principal actuarial assumptions being that the rate of discount
of liabilities is 3% more than wage inflation and 4% more than pension
increases. Allowance was made for pensions in payment to increase as required by
statute and in accordance with the rules of the schemes, and also to reflect
Premier Holdings' and Premier's policies. Assets were valued in 2002 using a
discounted dividend approach. In 2001 and 2000, assets were valued using a
market value approach. The market valuation methodology was more appropriate
than an actuarial value approach in 2001 and 2000, as the discounted dividend
approach generated valuations of the scheme assets that were excessive, in the
view of Premier's management. The adjustment to the market valuation and
dividend yields of the assets of the schemes in the period from 2000 to 2002
enables the use of the discounted dividend approach to value the scheme assets.
At October 17, 2002, the date of the latest actuarial assessments, the total
market value of the assets was (pound)176.9m and the actuarial value of the
assets was sufficient to cover 110% of the benefits that had accrued to members
after fully allowing for future salary increases. The normal cost of Premier's
defined benefit pension schemes was (pound)3.9m (2001: (pound)3.9m, 2000:
(pound)7.7m) which, after amortisation of the remaining unrecognised surplus,
resulted in a net defined benefit pensions expense of (pound)2.6m (2001:
(pound)2.0m, 2000: (pound)3.4m). Premier has not contributed to the schemes
during 2002, due to the scheme surplus, thherefore the amortisation of the
pension prepayment of (pound)2.6m comprises the net defined benefit pensions
expense of (pound)2.6m. In 2001, Premier did not contribute to the schemes, due
to the scheme surplus. The net defined benefit pensions expense of (pound)2.0m
comprised an amortisation of the pension prepayment of (pound)2.0m. In 2000,
cash contributions by Premier to the schemes equated to the net defined benefit
pensions expense and therefore no amortisation of the pension prepayment was
required. The cost of the defined contribution schemes was (pound)0.2m (2001:
(pound)0.7m, 2000: (pound)0.3m).
The pension prepayment at December 31, 2002 was (pound)8.2m (2001:
(pound)10.8m), which represents the accumulated difference between the pension
cost and employer contributions. The reduction in the prepayment of (pound)2.6m
comprises the amortisation in 2002 of (pound)2.6m.
Premier also operates plans in continental Europe, which provide employees with
certain post retirement and unfunded pension benefits. The liabilities in
respect of these benefits amounted to (pound)0.1m at December 31, 2002 (2001:
(pound)0.6m).
FRS 17 "RETIREMENT BENEFIT" DISCLOSURES
FRS 17 "Retirement benefits" came into effect during 2001. The following items
are recorded under the transitional disclosure requirements of FRS 17, and
should be read in conjunction with the pension disclosures in accordance with
SSAP 24 "Accounting for pension costs" recorded above. Full actuarial
assessments of the schemes were made at October 17, 2002, and have been updated
by an independent qualified actuary as at December 31, 2002. The major
assumptions used by the actuary were:
2001 2002
Rate of increase in salaries 3.0% 2.5%
Rate of increase in pensions in payment 2.0% 1.5%
Discount rate 6.0% 5.5%
Inflation assumption 2.0% 1.5%
14
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The assets in the scheme and the expected rate of return at December 31, were:
EXPECTED EXPECTED
RATE OF MARKET RATE OF MARKET
RETURN VALUE RETURN VALUE
2001 2001 2002 2002
ASSET (POUND)M (POUND)M
Equities 7.4% 145.5 7.3% 123.3
Bonds 6.5% 62.4 6.0% 51.6
Other 4.0% 4.7 4.0% 0.7
--------------- --------------
Total market value of scheme assets 7.0% 212.6 7.0% 175.6
=============== ==============
The following amounts at December 31, were measured in accordance with the
requirements of FRS 17 "Retirement benefits".
2001 2002
(POUND)M (POUND)M
Total market value of scheme assets 212.6 175.6
Present value of scheme liabilities (215.1) (185.9)
-------------- --------------
Deficit in the schemes (2.5) (10.3)
Related deferred tax asset 0.8 3.1
-------------- --------------
Net pension liability (1.7) (7.2)
============== ==============
If the above amounts had been recognised in the financial statements, Premier's
net liabilities and profit and loss reserve at December 31, would be as follows:
2001 2002
(POUND)M (POUND)M
RESTATED
Net deficit including pension prepayment recognised under SSAP 24 (167.3) (149.8)
Pension prepayment recognised under SSAP 24 (10.8) (8.2)
Net pension liability recognised under FRS 17 (1.7) (7.2)
-------------- --------------
Net liabilities including pension liability recognised under FRS 17 (179.8) (165.2)
============== ==============
Profit and loss reserve including pension prepayment recognised under SSAP 24 (878.2) (860.7)
Pension prepayment recognised under SSAP 24 (10.8) (8.2)
Pension reserve (1.7) (7.2)
-------------- --------------
Profit and loss reserve including pension liability recognised under FRS 17 (890.7) (876.1)
============== ==============
15
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following amounts would have been recognised in the performance statements
in the year to December 31, 2002 under the requirements of FRS 17:
2002
(POUND)M
ANALYSIS OF AMOUNT CHARGED TO OPERATING PROFIT
Current service cost 3.9
Past service cost (gross) -
Less unrecognised surplus -
Curtailments / settlements (gross) -
Less unrecognised surplus -
---------------
Total operating charge 3.9
===============
ANALYSIS OF AMOUNT CREDITED TO OTHER FINANCE INCOME
Expected return on pension scheme assets 15.0
Interest on pension scheme liabilities (12.9)
---------------
Net return 2.1
===============
ANALYSIS OF AMOUNT RECOGNISED IN STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
Actual return less expected return on pension scheme assets (31.2)
Experience gains and losses arising on the scheme liabilities 2.4
Changes in assumptions underlying the present value of the scheme liabilities 22.8
---------------
Actuarial gain / (loss) recognised in the Statement of Total Recognised Gains and Losses (6.0)
===============
MOVEMENT IN SURPLUS / (DEFICIT) DURING THE YEAR
Surplus / (deficit) in the scheme at beginning of the year (2.5)
Movement in year:
Current service cost (3.9)
Employer contributions -
Past service costs -
Other finance income 2.1
Actuarial gain / (loss) recognised in the Statement of Total Recognised Gains and Losses (6.0)
---------------
Surplus / (deficit) in scheme at end of year (10.3)
===============
HISTORY OF EXPERIENCE GAINS AND LOSSES
Difference between the expected and actual return on scheme assets:
Amount ((pound)m) 31.2
Percentage of scheme assets at period end 18%
Experience gains and losses of scheme liabilities:
Amount ((pound)m) 2.4
Percentage of the present value of the scheme liabilities at period end 1%
Total amount recognised in Statement of Total Recognised Gains and Losses:
Amount ((pound)m) (6.0)
Percentage of the present value of the scheme liabilities at period end 3%
Employer contributions in the year ended December 31, 2002 were (pound)nil. It
has been expected that contributions will be (pound)2.0m in 2003 and (pound)4.0m
per annum thereafter.
16
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DIRECTORS' EMOLUMENTS
Aggregate emoluments paid to Directors by Premier in respect of services to
Premier and its subsidiaries totalled (pound)2.2m (2001: (pound)2.6m, 2000:
(pound)2.4m) for the year, including (pound)1.0m (2001: (pound)0.8m, 2000:
(pound)nil) of compensation for loss of office. Retirement benefits accrue to
two Directors under defined benefit schemes. The highest paid Director was paid
(pound)0.5m (2001: (pound)1.0m, 2000: (pound)1.0m). The accrued pension in
respect of this director was (pound)0.0m (2001: (pound)0.0m, 2000 (pound)0.0m).
7. NET INTEREST PAYABLE
2000 2001 2002
(POUND)M (POUND)M (POUND)M
Bank loans and overdrafts 55.0 46.0 47.1
Exchange loss / (gain) on U.S. dollar denominated bond 10.0 3.6 (13.2)
Amortisation of capitalised debt issuance costs 5.8 7.5 6.3
Finance leases 0.2 0.1 0.1
------------ ------------ -------------
Total interest payable 71.0 57.2 40.3
External interest receivable (3.1) (4.5) (3.9)
------------ ------------ -------------
Net interest payable 67.9 52.7 36.4
============ ============ =============
8. TAXATION ON PROFIT / LOSS ON ORDINARY ACTIVITIES
2000 2001 2002
(POUND)M (POUND)M (POUND)M
RESTATED RESTATED
Premier and subsidiary undertakings:
U.K. corporation tax at 30.0% (2001: 30.0%, 2000: 30.0%)
Current year 0.7 0.8 6.7
Prior year 0.8 (0.2) -
Overseas tax 0.2 - -
------------- ------------ ------------
Total current tax 1.7 0.6 6.7
Deferred tax 0.8 0.3 (0.7)
------------- ------------ ------------
Taxation charge on profit / loss on ordinary activities 2.5 0.9 6.0
============= ============ ============
The principal items affecting the tax charge are exceptional items not allowable for tax purposes.
Tax relief on exceptional items in the year was(pound)4.0m (2001: (pound)2.5m, 2000:(pound)0.5m).
In accordance with FRS 19 "Deferred tax", deferred tax has been restated for the
years ended December 31, 2000 and 2001.
17
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation from the corporation tax calculated from the profit / (loss)
before tax to the actual tax charge is set out below.
2000 2001 2002
(POUND)M (POUND)M (POUND)M
RESTATED RESTATED
Profit / (loss) before taxation (6.1) (27.6) 22.3
Tax credit / (charge) on profit / loss before tax at U.K. corporation 1.8 8.3 (6.7)
tax rate of 2000: 30.0%, 2001: 30.0%, 2002: 30.0%
Disallowable exceptional items (1.7) (9.0) (1.6)
Timing differences (0.2) 0.9 (0.7)
Utilisation of taxation losses - - 4.1
Other disallowable items (1.6) (0.8) (1.8)
------------- ------------ ------------
Taxation credit / (charge) on profit / loss on ordinary activities (1.7) (0.6) (6.7)
============= ============ ============
9. INTANGIBLE ASSETS
GOODWILL TRADEMARKS TOTAL
(POUND)M (POUND)M (POUND)M
Cost at January 1, 2002 10.7 7.5 18.2
Additions 80.7 20.0 100.7
------------ ------------ ------------
Cost at December 31, 2002 91.4 27.5 118.9
============ ============ ============
Amortisation at January 1, 2002 0.7 0.1 0.8
Charge for the year 3.1 1.1 4.2
------------ ------------ ------------
Amortisation at December 31, 2002 3.8 1.2 5.0
============ ============ ============
Net book value at December 31, 2002 87.6 26.3 113.9
============ ============ ============
Net book value at December 31, 2001 10.0 7.4 17.4
============ ============ ============
The addition to goodwill during 2002 comprises (pound)80.1 million in relation
to the acquisition of the ambient foods manufacturing business in the U.K. of
Nestle SA ("Nestle") and (pound)0.6 million in relation to the acquisition of a
potato seed business (see Note 18). Goodwill arising on acquisition is amortised
over a period of 20 years. The addition to trademarks in 2002 relates to
trademarks acquired on the acquisition of Nestle. Trademarks are amortised over
a period of 20 years.
18
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. TANGIBLE FIXED ASSETS
FREEHOLD LONG SHORT
LAND AND LEASEHOLD LEASEHOLD PLANT AND
BUILDINGS PROPERTIES PROPERTIES MACHINERY TOTAL
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
Cost or valuation at January 1, 2002 62.4 3.7 0.8 213.1 280.0
Additions 2.8 - - 14.5 17.3
Acquisition of subsidiaries 6.4 - - 13.5 19.9
Disposals (2.7) - - (19.0) (21.7)
Exchange adjustments 0.5 - - 2.0 2.5
------------ ------------ ------------- ------------ ------------
Cost or valuation at December 31, 2002 69.4 3.7 0.8 224.1 298.0
============ ============ ============= ============ ============
Depreciation at January 1, 2002 14.5 0.6 0.4 144.5 160.0
Charge for the year 2.1 - - 17.1 19.2
Acquisition of subsidiaries - - - - -
Disposals (1.3) - - (16.6) (17.9)
Exchange adjustments 0.3 - - 1.3 1.6
------------ ------------ ------------- ------------ ------------
Depreciation at December 31, 2002 15.6 0.6 0.4 146.3 162.9
============ ============ ============= ============ ============
Net book value at December 31, 2002 53.8 3.1 0.4 77.8 135.1
============ ============ ============= ============ ============
Net book value at December 31, 2001 47.9 3.1 0.4 68.6 120.0
============ ============ ============= ============ ============
The cost or valuation of depreciable assets included above
at December 31, 2002 23.7 3.7 0.8 224.1 252.3
============ ============ ============= ============ ============
Analysis of cost or valuation at December 31, 2002
Cost 65.4 3.7 0.8 224.1 294.0
Valuation 4.0 - - - 4.0
------------ ------------ ------------- ------------ ------------
69.4 3.7 0.8 224.1 298.0
============ ============ ============= ============ ============
Included in long leasehold property at December 31, 2002 were capitalised
finance leases with a net book value of(pound)0.3m (2001:(pound)0.3m,
2000:(pound)0.3m). Depreciation charged during the year on these assets
was(pound)nil (2001:(pound)nil, 2000:(pound)nil). Included in plant and
machinery at December 31, 2002 were capitalised leases with a net book value
of(pound)0.2m (2001:(pound)0.2m, 2000:(pound)2.5m). Depreciation charged during
the year on these assets was(pound)0.1m (2001(pound)0.2m, 2000: (pound)0.9m).
Premier has implemented FRS 15, "Tangible and intangible fixed assets" in 2000.
Premier has taken advantage of the transitional arrangements relating to
previously revalued assets and has not revalued those assets held at valuation.
Premier's freehold and long leasehold properties in the U.K. were revalued on
the basis of open market value for existing use by Bidwells at December 31,
1990. The historical cost of revalued assets at December 31, 2002 was
(pound)0.1m (2001: (pound)0.1m). The valuations were undertaken in accordance
with the manual of the Royal Institute of Chartered Surveyors. The book values
of these properties were adjusted to their valuations during the relevant
financial period and the resultant net surplus credited to the revaluation
reserve.
2001 2002
(POUND)M (POUND)M
Capital expenditure commitments
Expenditure contracted for but not provided in the consolidated
financial statements 0.3 1.4
============ ============
19
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. FIXED ASSET INVESTMENTS
UNLISTED INVESTMENTS (POUND)M
At January 1, 2002 0.2
Additions 0.1
Disposals (0.1)
------------
At December 31, 2002 0.2
Provisions at December 31, 2001 and 2002 -
------------
Net book value at December 31, 2002 0.2
============
Net book value at December 31, 2001 0.2
============
12. STOCKS
2001 2002
(POUND)M (POUND)M
Raw materials 34.5 36.9
Work in progress 5.9 4.9
Finished goods and goods for resale 65.2 69.5
----------- ----------
105.6 111.3
=========== ==========
13. DEBTORS
2001 2002
(POUND)M (POUND)M
Due within one year:
Trade debtors, net of provisions 114.6 108.8
Other debtors including VAT 19.8 18.8
Prepayments 2.7 5.9
------------ -----------
137.1 133.5
Due after more than one year:
Other debtors and pension prepayments 11.7 9.0
------------ -----------
Total debtors 148.8 142.5
============ ===========
20
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. CREDITORS DUE WITHIN ONE YEAR
2001 2002
(POUND)M (POUND)M
Senior Credit Facility due within one year 13.4 27.0
Other bank loans and overdrafts 0.8 3.2
Capitalised debt issuance costs (4.1) (5.7)
------------ ------------
10.1 24.5
Trade creditors 139.0 138.4
Corporation taxes 6.8 12.4
Other taxes and social security 5.9 5.9
Finance lease obligations 0.1 0.1
Amounts due to parent company 3.4 0.9
Other creditors 10.5 12.8
Interest accruals 10.8 10.5
Other accruals 12.5 12.1
------------ ------------
199.1 217.6
============ ============
15. CREDITORS DUE AFTER MORE THAN ONE YEAR
2001 2002
(POUND)M (POUND)M
Borrowings:
Unsecured subordinated U.S.$200m 12.0% Senior Notes due 2009 137.4 124.2
Unsecured subordinated(pound)75m 12.25% Senior Notes due 2009 75.0 75.0
Capitalised debt issuance costs (3.3) (1.1)
------------ ------------
209.1 198.1
Senior Credit Facility 163.9 265.3
Capitalised debt issuance costs (5.2) (8.1)
------------ ------------
158.7 257.2
Loan from related party 7.6 9.3
Other unsecured loans 0.3 0.1
------------ ------------
7.9 9.4
375.7 464.7
============ ============
Other creditors:
Finance lease obligations:
Due between one and five years 0.1 -
Government grants in respect of capital expenditure 0.4 0.2
------------ ------------
0.5 0.2
============ ============
The loan from related party is from HMTF Poultry, an affiliated company, does
not bear interest and is repayable in full on July 31, 2009.
The maturity profiles of borrowings and finance lease obligations are shown in
Note 20.
21
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DESCRIPTION OF SENIOR CREDIT FACILITY AND SUBORDINATION ARRANGEMENTS
SENIOR CREDIT FACILITY
In May 2002, Premier Financing entered into an amended and restated Senior
Credit Facilities Agreement with J.P. Morgan plc and Barclays Capital as
arrangers, JPMorgan Chase Bank and Barclays Bank plc as underwriters, with J.P.
Morgan Europe Limited as agent and security agent (the "Senior Credit
Facility"). Under the Senior Credit Facility, a syndicate of financial
institutions made (pound)412.3m of senior secured credit facilities available to
Premier Financing. These facilities have been reduced in line with repayments
made. At December 31, 2002, the facilities available to Premier amounted to
(pound)392.3m.
STRUCTURE
The Senior Credit Facility provides for (pound)392.3m of loan facilities
comprising (i) Term A and Term B Facilities and (ii) the Working Capital
Facility (each as described below) and the ancillary facilities which may be
provided therein.
The Term A Facility is for an amount of up to (pound)224.3m and the Term B
Facility is for an amount of up to (pound)68.0m. At December 31, 2002,
(pound)224.3m was outstanding on the Term A Facility and (pound)68.0m was
outstanding on the Term B Facility.
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. At December 31, 2002, no advance had been drawn down
under the Working Capital Facility and (pound)22.7m 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 euro) 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 Term A Facility and the drawn down
amount under the Working Capital Facility. At December 31, 2002, the
margin applied to LIBOR on the Term A Facility was 2.0%; and
- - 2.75% per annum for the Term B Facility.
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 December 31, 2002, the margin applied to
LIBOR in respect of commitment fees was 0.625%. Default interest is payable at
the applicable interest rate plus 1% per annum.
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.
22
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COVENANTS
The Senior Credit Facility requires Premier Financing to observe certain
undertakings, including undertakings 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,
shareholder's 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 financial 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 Term A Facility will be repaid in semi-annual
instalments commencing on June 30, 2002, with the final maturity on December 31,
2007. The Term B Facility will be repaid in two instalments with 50% repayable
on June 30, 2008 and the balance repayable on December 31, 2008.
Working Capital Facility: 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.
23
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PROVISIONS FOR LIABILITIES AND CHARGES
UNFUNDED PENSION
LIABILITIES AND POST RESTRUCTURING AND
DEFERRED RETIREMENT OTHER
TAX BENEFITS PROVISIONS TOTAL
(POUND)M (POUND)M (POUND)M (POUND)M
RESTATED RESTATED
At January 1, 2002 as previously reported 0.6 0.6 3.0 4.2
Prior year adjustment on implementation of 7.1 - - 7.1
FRS 19
------------ ------------ ----------- ------------
At January 1, 2002 (restated) 7.7 0.6 3.0 11.3
Utilised - - (1.7) (4.9)
Charged / (released) (0.7) (0.5) 5.4 7.4
------------ ------------ ----------- ------------
At December 31, 2002 7.0 0.1 6.7 13.8
============ ============ =========== ============
Restructuring provisions represent the liability in respect of (i) the
reorganization of our canned foods production facilities following the closure
of our North Walsham canned foods factory; (ii) changes to shift patterns at our
Moreton tea factory; (iii) integration of the administration functions of Nestle
within the existing operations. The provision includes redundancy costs of
approximately 45 administration staff; and (iv) provision in relation to the
restructuring of Materne, Premier's French preserve and compote manufacturing
and selling operation following the integration of Premier Brands France,
Premier's French biscuit distribution company
The provision for unfunded pension liabilities and post retirement benefits
represents the liability in respect of pension obligations in Premier's
continental European operations where no funded plans are in operation.
The potential liability for tax on capital gains, which might arise if Premier's
revalued properties were to be sold at their book value, and no advantage taken
of rollover relief, is estimated to be (pound)1.2m (2001: (pound)1.2m).
Deferred tax has not been provided in respect of liabilities, which might arise
on the distribution of unappropriated profits of overseas entities.
17. SHARE CAPITAL AND RESERVES
2001 2002
(POUND)M (POUND)M
Authorised
100,000,000(pound)1 ordinary shares (2001: 100,000,000(pound)1 ordinary shares) 100.0 100.0
============ ============
Issued and fully paid
83,701,200(pound)1 ordinary shares (2001: 83,701,200(pound)1 ordinary shares) 83.7 83.7
============ ============
24
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TOTAL
PROFIT AND CAPITAL
SHARE SHARE REVALUATION LOSS AND
CAPITAL PREMIUM RESERVE ACCOUNT RESERVES
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
At January 1, 2002 as previously reported 83.7 623.2 4.0 (871.1) (160.2)
Prior year adjustment on implementation of FRS - - - (7.1) (7.1)
19
-------------- -------------- ----------------- -------------- --------------
At January 1, 2002 (restated) 83.7 623.2 4.0 (878.2) (167.3)
Movements in the year:
Retained profit for the financial year - - - 16.3 16.3
Exchange movements - - - 1.2 1.2
-------------- -------------- ----------------- -------------- --------------
At December 31, 2002 83.7 623.2 4.0 (860.7) (149.8)
============== ============== ================= ============== ==============
18. ACQUISITIONS AND DISPOSALS
The provisional value of the net assets acquired and consideration paid in
respect of the acquisitions the ambient foods business in the U.K. of Nestle SA
("Nestle") in May 2002, was as follows:
CONSISTENCY
OF
BOOK ACCOUNTING PROVISIONAL
VALUE REVALUATIONS POLICY FAIR VALUE
(POUND)M (POUND)M (POUND)M (POUND)M
Assets acquired:
Intangible assets 20.0 - - 20.0
Fixed assets 24.7 (4.8) - 19.9
Current assets
Stocks 12.4 (0.1) (0.9) 11.4
Trade debtors - - - -
Other debtors 1.0 - - 1.0
Creditors due in less than one year
Trade creditors - - - -
Other creditors (0.2) - - (0.2)
-------------- --------------- -------------- --------------
Total capital employed 57.9 (4.9) (0.9) 52.1
-------------- --------------- -------------- --------------
Consideration
Cash 132.2 - - 132.2
Debt net of cash acquired - - - -
-------------- --------------- -------------- --------------
Total consideration 132.2 - - 132.2
-------------- --------------- -------------- --------------
Goodwill arising 74.3 4.9 0.9 80.1
============== =============== ============== ==============
The Nestle ambient foods business contributed (pound)55.6m to Premier's
turnover, (pound)6.9m to Premier's operating profit in 2002 and (pound)9.1m to
net cash flow from operating activities, (pound)5.9m of interest expense and
(pound)0.3m to capital expenditure.
In addition, in January 2002, Premier acquired a potato seed business for
(pound)0.6m. The assets acquired comprised (pound)0.2m of trade debtors and
(pound)0.2m of trade creditors. The goodwill arising on the acquisition was
(pound)0.6m.
25
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The value of the net assets acquired of the canned foods, pickles and sauces
businesses of Stratford on Avon Foods Limited ("SonA") in April 2001, the "Lift"
instant lemon tea business ("Lift") in September 2001, the "Nelsons of Aintree"
preserves manufacturing business ("Nelsons") in October 2001 were as follows:
2001
(POUND)M
Assets acquired:
Intangible assets 7.5
Fixed assets 9.2
Current assets
Stocks 10.7
Trade debtors 5.6
Other debtors 0.3
Creditors due in less than one year
Trade creditors (6.8)
Other creditors (0.6)
Creditors due after more than one year (0.2)
------------
Total capital employed 25.7
------------
Consideration
Cash 28.7
Debt net of cash acquired 0.8
------------
Total consideration 29.5
------------
Goodwill arising 3.8
============
The net assets disposed and consideration received in respect of Horizon
Biscuits Limited and FE Barber Limited ("Kingsland Wines and Spirits") which
were disposed of in 2001, were as follows:
2001
(POUND)M
Assets disposed:
Fixed assets (47.8)
Current assets
Stocks (23.5)
Trade debtors (41.6)
Other debtors (11.4)
Tax (0.9)
Creditors less than one year
Creditors 28.1
Other creditors 18.7
----------------
Total capital employed (78.4)
Cash consideration 101.8
Goodwill previously written off to reserves (53.0)
----------------
Loss on sale (29.6)
================
There were no disposals in 2002.
26
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. COMMITMENTS AND CONTINGENCIES
Commitments to make operating lease payments during the next financial year were
as follows:
PLANT AND
LAND AND BUILDINGS MACHINERY
2001 2002 2001 2002
(POUND)M (POUND)M (POUND)M (POUND)M
On leases expiring:
Within 1 year 0.6 0.4 2.0 0.4
Between 2 and 5 years 0.5 0.3 1.5 2.2
After 5 years 0.7 0.7 - -
------------ ------------- ------------ ------------
1.8 1.4 3.5 2.6
============ ============= ============ ============
Capital commitments are disclosed in Note 10 "Tangible Fixed Assets".
CONTINGENT LIABILITIES
Premier is subject to certain legal claims incidental to its operations. In the
opinion of the directors, after taking appropriate legal advice, these claims
are not expected to have, either individually or in aggregate, a material
adverse effect upon Premier's financial position.
27
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. FINANCIAL INSTRUMENTS
RISK MANAGEMENT
The interest rate and foreign exchange risks are managed by the Treasury
Committee, which is a sub-committee appointed by the Board of Directors. Day to
day management of treasury activities is performed by the Group treasury
department. The framework for management of these risks is set down in the
Senior Credit Facility Agreement and in the Treasury Policies and Procedures
manual.
The main risks arising from Premier's financial transactions are interest rate
risk, liquidity risk and foreign currency risk. The policies towards these risks
are documented and are reviewed on a regular basis by the Treasury Committee.
Premier also enters into contracts with suppliers for its principal raw
materials, some of which are considered commodities. However, as these contracts
are part of Premier's normal purchasing activities and always result in actual
delivery, commodity risk arising from these contracts is not considered
material.
INTEREST RATE RISK
Premier borrows principally in pounds sterling and U.S. dollars at both fixed
and floating rates of interest. Premier actively monitors its interest rate
exposure since the high level of gearing makes its profitability sensitive to
movements in interest rates. However, the minimum interest rate hedging that
must be in place is governed by the hedging strategy letter, which forms part of
the (pound)392.3m Senior Credit Facility Agreement. Premier makes use of a
variety of derivative instruments including interest rate swaps, collars and
caps to hedge its interest rate exposure. The mixture of instruments used to
hedge its exposure however is determined by the conditions of its credit
facility agreement and discussions with its lending group. The Senior Credit
Facility Agreement requires Premier to hedge a minimum of 50% of its senior
debt, which currently amounts to (pound)292.3m. Premier currently has hedging in
place for (pound)146.0m until September 2004. In addition, Premier has entered
into a coupon swap to fix the cash flows on its U.S.$200m high yield debt issue,
which has the effect of converting the interest payments into fixed rate
sterling.
LIQUIDITY RISK
Premier has negotiated facilities with its bankers that provide sufficient
headroom to ensure liquidity and continuity of funding. It therefore has
sufficient unutilised banking facilities and reserve borrowing capacity. Premier
tends to have significant fluctuations in its short-term borrowing position due
to seasonal factors; however, the revolving credit facilities are set at a level
sufficient to meet its projected peak borrowing requirements.
FOREIGN EXCHANGE RISKS
Premier reports its financial statements in pounds sterling and trades in
several non-sterling currencies. Its trading transactions are therefore subject
to the effect of movements in these currencies. Such exposures arise from sales
or purchases in currencies other than the unit's functional currency. Management
of the major exposures is centralised and managed by the Group treasury
department, the small residual being managed by subsidiary companies within the
guidelines set down in the Treasury Policies and Procedures manual. This
requires subsidiaries to hedge committed foreign currency transaction exposure
above certain levels. It is Premier's policy to hedge exposure using forward
foreign currency exchange contracts, currency borrowings / investments and
currency options. Again, this is monitored by the Treasury Committee. Although
Premier generates some of its profits in non-sterling currencies and has assets
in non-sterling jurisdictions, the translation exposure resulting from these
profits and overseas net assets is not considered material and is currently not
hedged. This matter is reviewed regularly by members of the Treasury Committee.
28
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CREDIT RISK
Potential concentrations of credit risk to Premier consist principally of cash
and cash equivalents and trade receivables. Cash and cash equivalents are
deposited with high-credit, quality financial institutions. Trade receivables
are due principally from major European grocery retailers. Furthermore, it is
Premier's policy to insure all third-party trade debt. Premier does not consider
there to be any significant concentration of credit risk at December 31, 2002.
INTEREST RATE AND CURRENCY PROFILE STERLING U.S. DOLLAR EURO OTHER TOTAL
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
2002
Financial assets
Floating rate 30.2 1.6 11.7 - 43.5
------------- ------------ ------------ ------------ ------------
Cash and deposits 30.2 1.6 11.7 - 43.5
============= ============ ============ ============ ============
2001
Financial assets
Floating rate 20.8 1.6 4.9 - 27.3
------------- ------------ ------------ ------------ ------------
Cash and deposits 20.8 1.6 4.9 - 27.3
============= ============ ============ ============ ============
The financial assets all have maturities of less than one year and are all at
floating rates.
STERLING U.S. DOLLAR EURO OTHER TOTAL
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
2002
Financial liabilities
Floating rate (207.3) - - - (207.3)
Fixed rate (272.7) - - - (272.7)
Interest free (9.3) - - - (9.3)
------------- ------------ ------------ ------------ ------------
Borrowings (489.3) - - - (489.3)
============= ============ ============ ============ ============
Fixed rate weighted average interest rate 10.2%
Fixed rate weighted average years to maturity 1.69
2001
Financial liabilities
Floating rate (119.0) - (1.1) - (120.1)
Fixed rate (258.3) - - - (258.3)
Interest free (7.6) - - - (7.6)
------------- ------------ ------------ ------------ ------------
Borrowings (384.9) - (1.1) - (386.0)
============= ============ ============ ============ ============
Fixed rate weighted average interest rate 10.9%
Fixed rate weighted average years to maturity 2.31
The interest rates applicable to the Notes and Term and Working Capital
Facilities are detailed in Note 15. The analysis of average interest rates and
years to maturity on fixed rate debt is after adjusting for interest rate swaps.
Exposure to movements in interest rates and years to maturity on fixed rate debt
is after adjusting for interest rate swaps. Exposure to movements in interest
rates is further protected by interest rate caps and interest rate collars
amounting to (pound)72.5m bringing the total amount of interest rate hedging to
(pound)342.4m. The hedging currently in place on the senior debt is operative
until September 2004.
29
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MATURITY OF FINANCIAL LIABILITIES
2001 2002
CAPITALISED CAPITALISED
DEBT DEBT
ISSUANCE FINANCE ISSUANCE FINANCE
DEBT COSTS LEASES TOTAL DEBT COSTS LEASES TOTAL
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
Within 1 year or
on demand 14.2 (4.1) 0.1 10.2 30.2 (5.7) 0.1 24.6
Between:
1 and 2 years 18.0 (3.9) 0.1 14.2 36.0 (3.9) - 32.1
2 and 3 years 22.5 (2.6) - 19.9 50.0 (2.2) - 47.8
3 and 4 years 31.5 (1.2) - 30.3 52.0 (1.7) - 50.3
4 and 5 years 71.6 (0.7) - 70.9 59.3 (1.1) - 58.2
Over 5 years 240.6 (0.1) - 240.5 276.6 (0.3) - 276.3
------------ ------------ ------------ ------------- ------------ ------------ ------------ ------------
398.4 (12.6) 0.2 386.0 504.1 (14.9) 0.1 489.3
============ ============ ============ ============= ============ ============ ============ ============
CURRENCY ANALYSIS OF FINANCIAL ASSETS AND LIABILITIES
The table below shows Premier's currency exposures that give rise to net
currency gains and losses that are recognised in the consolidated profit and
loss account for the year ended December 31, 2002. Such exposures comprise
monetary assets / (liabilities) that are not denominated in the functional
currency of the subsidiary involved.
The amounts shown below are after taking into account the effect of forward
exchange contracts and other derivative instruments entered into to manage these
exposures.
NET FOREIGN CURRENCY ASSETS / (LIABILITIES)
2001 2002
FUNCTIONAL CURRENCY OF GROUP OPERATION FUNCTIONAL CURRENCY OF GROUP OPERATION
STERLING EURO OTHER TOTAL STERLING EURO OTHER TOTAL
(POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M (POUND)M
Sterling - (0.1) - (0.1) - 0.1 - 0.1
Euro 14.6 - - 14.6 23.5 - - 23.5
U.S. dollar (117.8) - - (117.8) (95.1) - - (95.1)
Greek drachma 0.1 - - 0.1 - - - -
Swiss franc (0.2) - - (0.2) (0.4) 0.1 - (0.3)
Canadian dollar - - - - 0.2 - - 0.2
Other - - - - 0.1 - - 0.1
----------- ------------ ------------ ------------- ------------ ------------ ------------ ------------
(103.3) (0.1) - (103.4) (71.7) 0.2 - (71.5)
=========== ============ ============ ============= ============ ============ ============ ============
UNDRAWN COMMITTED BORROWING FACILITIES 2001 2002
(POUND)M (POUND)M
Expiring in less than 1 year - -
Expiring in more than 1 but less than 2 years - -
Expiring in more than 2 years 106.7 77.3
------------ ------------
As at December 31, 106.7 77.3
============ ============
The above undrawn facilities form part of Premier's overall working capital
lines, which bear interest at floating rates and are committed until December
31, 2007.
30
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Set out below is a comparison of book and fair values of all Premier's financial
instruments by category:
2001 2001 2002 2002
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
(POUND)M (POUND)M (POUND)M (POUND)M
Financial instruments held or issued to finance Premier's operations:
Short-term borrowings and current portion of long-term borrowings
(14.2) (14.2) (30.2) (30.2)
Long-term borrowings (384.2) (387.9) (473.9) (478.6)
Other financial liabilities (0.2) (0.2) (0.1) (0.1)
Cash deposits 27.3 27.3 43.5 43.5
Fair values for the Notes, which have been included within long-term borrowings,
have been based on current market values.
Financial instruments held or issued to manage Premier's interest rate or
currency profile are set out below:
2001 2001 2002 2002
NOMINAL FAIR NOMINAL FAIR
VALUE VALUE VALUE VALUE
(POUND)M (POUND)M (POUND)M (POUND)M
Interest rate swaps - (0.5) - (2.8)
Cross currency swaps - 5.2 - 0.6
Foreign exchange contracts (32.7) (31.9) (42.2) (41.9)
The fair values of foreign exchange contracts and interest rate swap agreements
have been calculated on a mark to market basis. All commodity contracts are
settled by physical delivery and are not held for trading purposes. There are no
significant gains or losses on hedges at December 31, 2002 expected to be shown
in the income statement for December 31, 2003.
The analysis of financial instruments in this note excludes short-term debtors
and creditors as permitted under FRS 13 "Derivatives and other financial
instruments".
31
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. PRINCIPAL SUBSIDIARY UNDERTAKINGS
The following represent the principal undertakings of Premier at December 31,
2002. Percentages indicate ownership of the undertakings' ordinary share capital
by Premier, directly or indirectly. Details of the country of incorporation and
principal operations and the main activity of each undertaking are also given.
All undertakings shown are included in the consolidated financial statements.
COUNTRY OF
INCORPORATION OR
REGISTRATION AND
PRINCIPAL OPERATIONS %
SUBSIDIARY UNDERTAKINGS BUSINESS OWNED
FINANCING
Premier Financing Limited England and Wales Financing 100
GROCERY PRODUCTS
Boin Confitures France Preserve and fruit compote manufacturing 100
Chivers Hartley Limited England and Wales Preserve and pickle manufacturing 100
HL Foods Limited England and Wales Food canning and processing 100
Jonker Fris Netherlands Food canning and processing 100
Materne SA France Preserve and fruit compote manufacturing 100
Premier Ambient Products (UK) Limited England and Wales Pickle, vinegar, sweet spreads and jelly 100
manufacturing
Premier International Foods UK Limited England and Wales Hot and cold beverages manufacturing 100
POTATOES
MBM Produce Limited England and Wales Potato processing and grading 100
22. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following related party relationships and transactions have been disclosed
because of their material nature to the operations of Premier. Other
transactions with entities within the Premier Foods Investments Limited Group
are not disclosed as permitted by FRS 8 "Related party disclosures".
MONITORING AND OVERSIGHT AGREEMENT
In 1999, Premier entered into a 10-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 oversight and monitoring 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)1.2m. In addition,
Premier has agreed to indemnify Hicks Muse and its shareholders and their
respective directors, officers, agents, employees and affiliates from and
against all claims, actions, proceedings, demands, liabilities, damages,
judgements, assessments, losses and costs, including fees and expenses, arising
out of or in connection with the services rendered by Hicks Muse under the
Monitoring and Oversight Agreement. The Monitoring and Oversight Agreement makes
available to Premier the resources of Hicks Muse concerning a variety of
financial and operational matters. The services that have been and will continue
to be provided by Hicks Muse could not otherwise be obtained by Premier without
the addition of personnel or the engagement of outside professional advisers. In
management's opinion, the fees provided for under the Monitoring and Oversight
Agreement reasonably reflects the benefits received and to be received by
Premier.
32
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FINANCIAL ADVISORY AGREEMENT
In 1999, Premier and Hicks Muse entered into an agreement ("the Financial
Advisory Agreement") pursuant to which will be entitled to receive a fee equal
to 1.5% of the transaction value for each acquisition made by Premier. The
Financial Advisory Agreement makes available to Premier the resources of Hicks
Muse concerning a variety of financial and operational matters. The services
that have been and will continue to be provided by Hicks Muse could not
otherwise be obtained by Premier without the addition of personnel or the
engagement of outside professional advisors. In management's opinion, the fees
provided for under the Financial Advisory Agreement reasonably reflect the
benefits received and to be received by Premier. Premier paid (pound)2.1m in
2002 (2001: (pound)0.4m, 2000: (pound)nil) to Hicks Muse under the Financial
Advisory Agreement.
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.
PREMIER HOLDINGS LIMITED MANAGEMENT CHARGE
In 2000, 2001 and 2002, Premier was recharged (pound)0.9m, (pound)0.2m and
(pound)2.8m, respectively, by Premier Holdings Limited in respect of the shared
administrative functions. The increase from 2001 to 2002 in the recharge to
Premier by Premier Holdings is primarily the result of a reduction in Premier
Holdings' income and the recharge of restructuring costs incurred by Premier
Holdings.
HMTF POULTRY LIMITED
Premier has borrowed (pound)9.3m (2001: (pound)7.6m) from HMTF Poultry Limited,
an affiliated company. This loan is interest-free, subordinated to the Senior
Credit Facility and repayable in full on July 31, 2009.
FRS 8 "RELATED PARTY DISCLOSURES"
The Company is a wholly owned subsidiary undertaking of Premier Foods
Investments Limited, which prepares consolidated financial statements made
available for public disclosure. In accordance with the exemptions available to
such undertakings under FRS 8 "Related Party Disclosures", no other disclosure
of related party transactions with Premier Foods Investments Ltd group companies
has been made in these financial statements.
23. PARENT UNDERTAKINGS
The Company's ultimate parent undertaking is HMTF Premier Limited, a company
incorporated in the Cayman Islands. The Company's immediate parent undertaking
is Premier Foods (Holdings) Limited (formerly Premier Holdings Limited, formerly
Hillsdown Holdings Limited), a company incorporated in England and Wales and
which owns 100% of Premier's issued share capital.
Premier Food Investments Limited is the largest group undertaking that prepares
consolidated financial statements, which include the Company. The consolidated
financial statements of Premier Food Investments Limited are available at the
Company's registered office, which is at 28 The Green, Kings Norton, Birmingham,
B38 8SD.
33
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. SUMMARY OF DIFFERENCES BETWEEN U.K. AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the U.K. ("U.K. GAAP"), which differ
in certain material respects from generally accepted accounting principles in
the U.S. ("U.S. GAAP"). Such differences involve methods for measuring the
amounts shown in the consolidated financial statements, as well as additional
disclosures required by U.S. GAAP.
The following is a summary of the material adjustments to the consolidated
profit on ordinary activities after taxation and consolidated shareholder's
deficit that would have been required in applying the significant differences
between U.K. and U.S. GAAP.
RECONCILIATION OF CONSOLIDATED PROFIT AND LOSS ACCOUNTS
YEAR ENDED DECEMBER 31,
2000 2001 2002
(POUND)M (POUND)M (POUND)M
Consolidated profit / (loss) on ordinary activities after taxation as previously
reported under U.K. GAAP (7.8) (28.2) 16.3
Prior year adjustment on implementation of FRS 19 "Deferred tax" (0.8) (0.3) -
------------- ------------ ------------
Consolidated profit / (loss) on ordinary activities after taxation
as reported under U.K. GAAP (restated) (8.6) (28.5) 16.3
U.S. GAAP adjustments:
Amortisation of goodwill (a) (7.1) (5.9) 3.1
Amortisation of intangible assets (a) - - (0.6)
Pensions (b) 3.4 5.2 0.1
Deferred tax (c) (0.1) (0.4) -
Derivative financial instruments (d) - 5.5 (7.4)
Goodwill transferred to the profit and loss account in
respect of disposed businesses (a) - 49.0 -
Pension prepayment asset in respect of disposed businesses (b) - 10.0 -
Deferred tax liability in respect of disposed businesses (c) - 6.1 -
------------- ------------ ------------
Net U.S. GAAP adjustments (3.8) 69.5 (4.8)
Tax effect of net U.S. GAAP adjustments (1.0) (3.2) 2.6
------------- ------------ ------------
Consolidated net income / (loss) in accordance with U.S. GAAP (13.4) 37.8 14.1
============= ============ ============
RECONCILIATION OF CONSOLIDATED SHAREHOLDER'S DEFICIT
2001 2002
(POUND)M (POUND)M
Consolidated shareholder's deficit as previously reported under U.K. GAAP (160.2) (149.8)
Prior year adjustment on implementation of FRS 19 "Deferred tax" (7.1) -
------------ ------------
Consolidated shareholder's deficit as reported under U.K. GAAP (167.3) (149.8)
U.S. GAAP adjustments:
Goodwill not capitalised under U.K. GAAP (a) 213.3 213.3
Accumulated amortisation of goodwill not capitalised under U.K. GAAP (a) (189.7) (189.7)
Amortisation of goodwill under U.K. GAAP not amortised under U.S. GAAP (a) - 3.1
Amortisation of intangible assets recognised as goodwill under U.K. GAAP (a) - (0.6)
Capitalisation of tax benefit on acquisition of intangible assets (a) - 4.2
Pensions (b) 28.4 28.5
Deferred tax (c) (13.0) (14.6)
Derivative financial instruments (d) 5.5 (1.9)
Revaluation of fixed assets (e) (4.0) (4.0)
------------ ------------
Net U.S. GAAP adjustments 40.5 38.3
------------ ------------
Consolidated shareholder's deficit as reported under U.S. GAAP (126.8) (111.5)
============ ============
34
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ROLLFORWARD ANALYSIS OF CONSOLIDATED SHAREHOLDER'S FUNDS DEFICIT
2000 2001 2002
(POUND)M (POUND)M (POUND)M
Balance in accordance with U.S. GAAP at January 1, (172.9) (187.3) (126.8)
U.K. GAAP profit / (loss) for the financial year (7.8) (28.2) 16.3
Other recognised gains and losses (1.2) (1.1) 1.2
Issue of share capital - 23.7 -
U.S. GAAP adjustments
Amortisation of goodwill (a) (7.1) (5.9) 3.1
Amortisation of intangible assets recognised as goodwill (a) - - (0.6)
under U.K. GAAP
Capitalisation of tax benefit on acquisition of intangible assets (a) - - 4.2
Goodwill transferred to the profit and loss account in respect - 49.0 -
of disposed businesses
Pensions (b) 3.4 5.2 0.1
Pension prepayment asset in respect of disposed businesses (b) - 10.0 -
Deferred tax (c) (1.9) 2.2 2.6
Deferred tax arising on acquisition of intangible assets (a) - - (4.2)
Derivative financial instruments (d) - 5.5 (7.4)
Revaluation of fixed assets (e) 0.2 0.1 -
------------- ------------ ------------
Balance in accordance with U.S. GAAP at December 31, (187.3) (126.8) (111.5)
============= ============ ============
A summary of the principal differences and additional disclosures applicable to
Premier are set out below:
(a) Goodwill and intangible assets
Both U.K. GAAP and U.S. GAAP require purchase consideration to be allocated to
the net assets acquired at their fair value on the date of acquisition, with the
difference between the consideration and the fair value of the identifiable net
assets recorded as goodwill.
Under U.K. GAAP, goodwill arising on acquisitions made on or before December 31,
1997 has been written off directly to reserves in the year of acquisition. If a
subsidiary or a business has been subsequently sold or closed, previously
written-off goodwill that resulted from the initial acquisition has been taken
into account in determining the gain or loss on sale or closure. Goodwill that
arises on acquisitions subsequent to December 31, 1997, following the
introduction of FRS 10 "Goodwill and Intangible Assets", has been capitalised
and amortised over its estimated useful life, which has been estimated at 20
years.
Under U.S. GAAP, goodwill arising on acquisitions made on or before December
31,1997 has been capitalised as an intangible asset and amortised over its
estimated useful life. However, Premier adopted the transition provisions of FAS
141, "Business Combinations" ("FAS 141"), with effect from July 1, 2001. Premier
also adopted the provisions of FAS 142, "Goodwill and Other Intangible Assets"
("FAS 142"), on January 1, 2002. As a result, goodwill is no longer subject to
amortisation subsequent to the date of adoption. As the non-amortisation of
goodwill provisions of FAS 142 were effective immediately for all acquisitions
after June 30, 2001, goodwill arising from the Lift and Nelsons acquisitions was
also not amortised during 2001.
In May 2002, Premier acquired the ambient foods manufacturing business in the
U.K. of Nestle SA ("Nestle") for net consideration of (pound)132.2 million. The
acquired business spans a broad range of product categories, including pickles,
vinegars, sauces, sweet spreads, preserves, ambient desserts and dehydrated
foods. The business was acquired principally because of the quality of the
brands of the acquired business, their complementarity with Premier's own
product ranges and the synergies available in combining the two businesses. The
definition of intangible assets under FAS 141 is wider than that under FRS 10.
Furthermore FAS 109 requires the recognition of a deferred tax provision on the
amortisation of acquired intangible assets. The deferred tax provision created
on the acquisition of the Nestle intangible assets was (pound)4.2m under U.S.
GAAP whereas no deferred tax provision was recognised under U.K. GAAP.
Therefore, the total intangible assets recognized on the acquisition of Nestle
under FAS 141 were (pound)63.9m, compared with (pound)20.0m recognised under FRS
10. Goodwill calculated under FAS 141 was (pound)40.4m, compared to (pound)80.1m
under U.K. GAAP. Goodwill has arisen on the acquisition because the value of the
own label and industrial elements of the business, the established manufacturing
processes and the synergies arising from the combination of the businesses are
not capitalisable as intangible assets under FAS 141. In addition, Premier
acquired a potato seed business, for a net consideration of (pound)0.6m, which
resulted in goodwill of (pound)0.6m.
35
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Horizon Biscuits Limited was disposed of in 2001 and goodwill of (pound)53.0m,
which had been written off directly to reserves was written back through the
profit and loss account in accordance with U.K. GAAP. Under U.S. GAAP, this
goodwill had been capitalised and amortised and the net book value of goodwill
remaining in respect of Horizon Biscuits Limited at the date of disposal was
(pound)4.0m. The U.S. GAAP adjustment, therefore to the U.K. GAAP profit and
loss on disposal in respect of goodwill was the goodwill previously amortised
under U.S. GAAP of (pound)49.0m. The U.S. GAAP adjustment reverses the
following: (i) write-off of goodwill arising on acquisitions made on or before
December 31, 1997 directly to reserves under U.K. GAAP; and (ii) amortisation
expense recorded under U.K. GAAP and the movement in accumulated amortisation
under U.K. GAAP during the period subsequent to the adoption of FAS 141 and FAS
142.
The following table shows the results of operations as if FAS 142 were applied
to prior periods:
2000 2001
(POUND)M (POUND)M
Net income as reported under U.S. GAAP (13.4) 37.8
Add back: Goodwill amortisation 7.4 6.3
------------ ------------
Adjusted net income (6.0) 44.1
============ ============
Premier has also evaluated its existing goodwill relating to prior business
combinations and has determined that an adjustment or reclassification to
intangible assets as of January 1, 2002 was not required in order to conform to
the new criteria in FAS 141. The Group has also reassessed the useful lives and
carrying values of other intangible assets, and will continue to amortise these
assets over their remaining useful lives.
The gross carrying amount of other intangible assets, which consists of brands,
trademarks and licences under U.S. GAAP, is (pound)71.4m as of December 31, 2002
((pound)7.5m as of December 31, 2001), are being amortised over an estimated
useful life of between 20 and 40 years. Accumulated amortisation as of December
31, 2002 was (pound)1.8m ((pound)0.1m at December 31, 2001). The amortisation
expense for the year ended December 31, 2002 is (pound)1.7m ((pound)0.1m and
(pound)nil in 2001 and 2000, respectively). Amortisation expense on the other
intangible assets is expected to be (pound)2.5m in each of 2003, 2004, 2005,
2006, and 2007.
As of January 1, 2002, Premier performed the transitional impairment test under
FAS 142 and compared the carrying value for each reporting unit to its fair
value, which was determined based both on discounted cash flows and a value
based on a multiple of earnings. Upon completion of the transitional impairment
test, Premier determined that there was no impairment as of January 1, 2002, as
the carrying value of each reporting unit did not exceed its fair value
determined under either of the valuation methods. Premier also completed the
annual impairment test required by FAS 142 during the fourth quarter of 2002,
which was also performed by comparing the carrying value of each reporting unit
to its fair value based on discounted cash flows and a value based on a multiple
of earnings. This annual impairment test did not indicate any impairment in the
carrying value of the goodwill.
A roll forward of U.S. GAAP goodwill during 2002 is shown below:
PREMIER
FOODS UK MATERNE MBM TOTAL
(POUND)M (POUND)M (POUND)M (POUND)M
Balance as of January 1, 2002 27.6 5.9 0.1 33.6
Goodwill acquired 40.4 - 0.6 41.0
------------ ------------- ------------ ------------
Balance as of December 31, 2002 68.0 5.9 0.7 74.6
============ ============= ============ ============
(b) Pensions
Under U.K. GAAP, the cost of providing pension benefits should be expensed over
the average expected service lives of eligible employees in accordance with the
provisions of SSAP 24.
Under U.S. GAAP, the annual pension cost comprises the estimated cost of
benefits accruing in the period as determined in accordance with Statement of
Financial Accounting Standards (SFAS) No. 87, which requires readjustment of the
significant actuarial assumptions annually to reflect current market and
economic conditions.
36
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under SFAS No. 87, part of the surplus which represents the
excess plan assets over plan obligations has been recognised in the balance
sheet, with the remainder of the unrecognised surplus and the unrecognised gains
and losses spread over the employees' remaining service lifetimes. The pension
benefit obligation is calculated by using a projected unit credit method.
Actuarial gains or losses within a 10% "corridor" have not been recognised.
The net assets under U.K. GAAP of Horizon Biscuits Limited, which was disposed
of in 2001 included a pension prepayment asset of (pound)10.0m. No asset was
included in the net assets under U.S. GAAP disposed of. The U.S. GAAP
adjustment, therefore to the U.K. GAAP profit and loss on disposal in respect of
pension assets was (pound)10.0m.
The components of net periodic pension cost for all Premier sponsored defined
benefit pension plans were as follows:
COMPONENTS OF PENSION COST
2000 2001 2002
(POUND)M (POUND)M (POUND)M
Service cost 7.7 3.9 3.9
Recognised actuarial loss - - 2.0
Interest cost 15.2 12.8 11.3
Expected return on plan assets (21.2) (18.2) (11.4)
Sale of biscuit businesses - - (2.0)
Amortisation of prior service cost - - -
Amortisation of transition asset (1.7) (1.7) (1.3)
------------- ------------ ------------
Net periodic pension cost - (3.2) 2.5
============= ============ ============
The funded status under U.S. GAAP for Premier sponsored defined benefit pension
plans is as follows:
FUNDED STATUS
2001 2002
(POUND)M (POUND)M
Projected benefit obligation (215.1) (185.9)
Fair value of plan assets 212.6 175.6
------------ ------------
Funded status (2.5) (10.3)
Unrecognised net actuarial (gain) / loss 45.0 47.0
Unrecognised transition asset (3.3) -
Unrecognised prior service cost - -
------------ ------------
Net asset recognised 39.2 36.7
============ ============
Amounts recognised in respect of Premier's pension obligations for Premier
sponsored defined benefit pension plans in the consolidated balance sheets
consist of the following:
2001 2002
(POUND)M (POUND)M
Prepaid pension expense 39.2 36.7
------------ ------------
Net asset recognised 39.2 36.7
============ ============
37
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Changes in the benefit obligation and plan assets of Premier sponsored defined
benefit pension plans during the year were as follows:
2001 2002
(POUND)M (POUND)M
Benefit obligation at January 1, 246.1 215.1
Service cost 3.9 3.9
Interest cost 12.8 11.3
Employee contributions 1.8 1.8
Benefit payments (15.2) (15.9)
Actuarial losses / (gains) 7.4 (28.4)
Sale of biscuit businesses (40.1) -
Sale of Kingsland Wines and Spirits - (1.9)
Payment following demerger of Terranova in 1999 (1.6) -
------------ ------------
Benefit obligation at December 31, 215.1 185.9
============ ============
Changes in plan assets for Premier sponsored defined benefit pension plans were
as follows:
2001 2002
(POUND)M (POUND)M
Fair value of plan assets at January 1, 290.2 212.6
Actual return on plan assets (19.4) (25.2)
Employer contributions - -
Employee contributions 1.8 1.8
Benefit payments (15.2) (15.9)
Payment of biscuit transfer (42.8) 4.2
Sale of Kingsland Wines and Spirits - (1.9)
Payment following demerger of Terranova in 1999 (2.0) -
------------ ------------
Fair value of plan assets at December 31, 212.6 175.6
============ ============
The weighted-average assumptions used at December 31, to determine pension cost
for Premier's defined benefit pension plans were as follows:
2000 2001 2002
% % %
Discount rate 6.0 6.0 5.5
Expected long-term return on plan assets 7.0 7.0 5.9
Expected rate of increase in compensation levels 3.0 3.0 2.5
Expected rate of increase of pensions 2.0 2.0 1.5
38
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(c) Deferred tax
Under U.K. GAAP, Premier has adopted FRS19 "Deferred tax" this year, which
requires full provision to be made for deferred tax arising from timing
differences between the recognition of gains and losses in the financial
statements and their inclusion in tax computations. Premier has chosen not to
discount its deferred tax liability. The prior year figures for 2001 and 2000
have been restated in order to comply with the standard.
Under U.S. GAAP, deferred tax is provided for on a full liability basis. Under
the full liability method, deferred tax assets or liabilities are recognised for
differences between the financial and tax basis of assets and liabilities and
for tax loss carry forwards at the statutory rate at each reporting date. A
valuation allowance is established when it is more likely than not that some
portion or all of the deferred tax assets will not be realised.
The loss on disposal of Horizon Biscuits Limited, which was disposed of in 2001,
was calculated under U.K. GAAP on net assets including a deferred tax liability
calculated on the partial provision basis. Under U.S. GAAP, the net assets
disposed of would include a deferred tax asset or liability calculated on the
full provision basis. The difference of (pound)6.1m between the deferred tax
liability as calculated under U.K. GAAP and U.S. GAAP is therefore recorded as a
decrease to the loss on disposal of Horizon Biscuits Limited as recorded under
U.K. GAAP.
Classification of Premier's tax liabilities and assets under U.S. GAAP is as
follows:
2001 2002
(POUND)M (POUND)M
Deferred tax liabilities:
Accelerated tax depreciation 4.6 4.6
Rollover relief 2.8 2.8
Derivative financial instruments 1.7 (0.6)
Pensions 11.7 11.0
Intangible assets - 3.9
------------ ------------
Total deferred tax liabilities 20.8 21.7
Deferred tax assets:
Provisions (0.1) (0.1)
------------ ------------
20.7 21.6
============ ============
Total tax expense is as follows:
YEAR ENDED DECEMBER 31
2000 2001 2002
(POUND)M (POUND)M (POUND)M
U.K. GAAP:
Current tax expense 1.7 0.6 6.7
Deferred tax expense / (credit) restated for FRS 19 "Deferred tax" 0.8 0.3 (0.7)
------------- ------------ ------------
Total tax expense 2.5 0.9 6.0
============= ============ ============
U.S. GAAP:
Current tax expense 1.7 0.6 6.7
Deferred tax expense / (credit) 1.9 3.9 (3.3)
------------- ------------ ------------
Total tax expense 3.6 4.5 3.4
============= ============ ============
(d) Derivative financial instruments
Premier's derivative financial instruments include interest rate swaps, cross
currency swaps and foreign exchange contracts. Under U.K. GAAP, Premier has
recorded its derivative financial instruments off-balance sheet as at December
31, 2001 and December 31, 2002. Premier has recorded payments arising from
interest rate derivatives in the profit and loss account along with the related
interest payments on its net debts according to the accrual method. Premier
records currency derivatives relating to net cash flows in the profit and loss
account as such cash flows are received or paid; any unrealised gains or losses
are deferred at reporting period end.
39
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under U.S. GAAP, prior to the adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), Premier had designated its foreign currency derivatives
as hedges of specific underlying assets and liabilities.
On January 1, 2001, Premier adopted SFAS 133, as amended by SFAS 137 and SFAS
138 and as interpreted by the Derivatives Implementation Group. Premier has not
designated any of its derivatives as qualifying hedge instruments under SFAS
133. Premier has not subsequently designated any of its derivatives as
qualifying hedge instruments under SFAS 133, such that gains and losses related
to the fair value adjustment of all derivative instruments are classified in the
consolidated statement of income and cash flows in accordance with the earnings
treatment of the hedged transaction. A summary of movements in fair value is
summarised below.
2001 2002 MOVEMENT
(POUND)M (POUND)M (POUND)M
Fair value adjustment profit / (loss)
Interest rate swaps (0.5) (2.8) (2.3)
Cross currency swaps 5.2 0.6 (4.6)
Foreign exchange contracts 0.8 0.3 (0.5)
------------- ------------ ------------
Fair value adjustment profit / (loss) 5.5 (1.9) (7.4)
Less tax at 30% (1.7) 0.6 2.3
------------- ------------ ------------
Fair value adjustment profit / (loss) net of tax at 30% 3.8 (1.3) (5.1)
============= ============ ============
The movement on the fair value of the interest rate swaps and cross currency
swaps has been recognised as interest income as these products are used to hedge
future interest payments in pounds sterling and U.S. dollars. The movement on
the fair value of the foreign exchange contracts has been recognised as an
adjustment to cost of sales as these contracts are solely used to eliminate
currency risk from our raw material purchases.
Premier has also evaluated its existing contracts for "embedded" derivatives,
and has considered whether any embedded derivatives would have to be bifurcated,
or separated, from the host contracts in accordance with SFAS 133 requirements.
No significant embedded derivatives were noted as a result of this exercise.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating the indicated fair
values of financial instruments:
Cash and Cash Equivalents: The carrying amount approximates fair value because
of the short maturity of these instruments.
Receivables (other than trade receivables): The fair values are estimated based
on one of the following methods: (i) quoted market prices; (ii) current rates
for similar issues; (iii) recent transactions for similar issues; or (iv)
present value of expected future cash flows.
Short-term debt: The fair value is estimated based on current rates offered for
similar debt.
Premier uses derivative financial instruments for the purpose of reducing its
exposure to adverse fluctuations in foreign currency exchange rates and interest
rates. Premier is not a party to leveraged derivatives and does not hold or
issue financial instruments for speculative or trading purposes.
(e) Revaluation of fixed assets
Under U.K. GAAP, certain tangible fixed assets have been revalued so that their
carrying value is equivalent to their current market value at that date, as
determined by an independent appraiser. Revaluation amounts are recorded to both
tangible fixed assets and reserves and are reduced by accumulated depreciation
as appropriate. Under U.S. GAAP, tangible fixed assets are carried at cost.
Accordingly, revaluation reserves net of accumulated depreciation have been
reclassified to long-term assets and related depreciation amounts recorded in
the profit and loss account.
40
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(f) Stock compensation
During the year ended December 31, 2000, Premier Holdings approved a share
option scheme, which included in its terms the ability to grant share options to
certain employees of Premier. The options follow a graded vesting schedule, in
that a third of the shares granted vest at each fiscal year end following the
grant date. Options can be exercised at any point after vesting, up to 10 years
after the grant date. Premier Holdings has the ability to repurchase the shares
at their fair value after the options are exercised.
Share option activity on share options granted to Premier employees for the
three years ended December 31, 2000, December 31, 2001 and December 31, 2002 was
as follows:
NUMBER OF SHARES UNDER OPTION
2000 2001 2002
Outstanding at January 1, - 5,421,284 2,628,382
Granted 6,030,140 - 5,489,000
Lapsed (608,856) (2,792,902) (1,561,782)
-------------- -------------- --------------
Outstanding at December 31, 5,421,284 2,628,382 6,555,600
============== ============== ==============
Exercisable at December 31, 1,401,191 1,538,192 4,047,267
============== ============== ==============
The weighted average exercise price of all options granted, lapsed and
outstanding in 2000, 2001 and 2002 was (pound)1.46.
The weighted-average contractual life of options outstanding at December 31,
2002, was 9.6 years. Premier Holdings' management estimates that the grant date
fair value of Premier Holdings' shares did not exceed (pound)1.46.
No compensation cost has been recognised for this scheme under U.K. GAAP as the
share options have been granted by Premier Foods (Holdings) Limited. No
compensation cost has been recognised for this scheme under U.S. GAAP as the
grant date fair value of the options was estimated to be less than or equal to
the exercise price. No options outstanding at December 31, 2002, were subject to
future performance criteria.
The stock based compensation expense, net of tax, based on the fair value at the
grant dates calculated under the fair value method consistent with the
provisions of FAS 123, for all awards would have been (pound)0.2m resulting in a
pro forma net income under U.S. GAAP of (pound)13.9m for the year ended December
31, 2002. Because options vest over several years and additional option grants
may be made in future years, the above pro forma results may not be
representative of the pro forma results for future years.
For purposes of the pro forma disclosure, Premier calculated the fair value of
the options using the Black-Scholes model. The fair value of each option grant
was estimated on the date of grant at (pound)0.15 using the minimum value method
with the following assumptions for the grants: 0% dividend yield, expected life
of three years and a weighted average risk free interest rate of 3.8%.
(g) Other disclosures required by U.S. GAAP
CASH FLOW INFORMATION
Under U.K. GAAP, Premier's cash flow statements are presented in accordance with
U.K. Financial Reporting Standard No. 1, as revised ("FRS 1"). These statements
present substantially the same information as is required under Statement of
Financial Accounting Standards No. 95, in accordance with U.S. GAAP. Differences
between the two presentations are outlined below.
Under U.K. GAAP, Premier's "cash flow" comprises of increases or decreases in
"cash", which comprises cash balances less amounts repayable on demand and
overdrafts. Cash flow is defined differently under U.S. GAAP. For purposes of
presenting cash flow information in accordance with U.S. GAAP, cash flow
represents increases or decreases in "cash and cash equivalents", which include
short-term, highly liquid investments with original maturities of less than 90
days, and exclude overdrafts.
Under U.K. GAAP, cash flows are presented for operating activities; returns on
investments and servicing of finance; taxation; capital expenditure and
financial investment; acquisitions and disposals; equity dividends paid; and
management of liquid resources and financing. U.S. GAAP requires the
classification of cash flows resulting from operating, investing and financing
activities.
41
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash flows under U.K. GAAP in respect of interest received, interest paid,
investment income and taxation are included within operating activities under
U.S. GAAP. Also, under U.S. GAAP, capital expenditures and financial investment
and cash flows from acquisitions and disposals are included within investing
activities. Equity dividends paid and management of liquid resources are
included within financing activities.
A summary of Premier's operating, investing and financing activities, classified
in accordance with U.S. GAAP, follows:
2000 2001 2002
(POUND)M (POUND)M (POUND)M
Net cash provided by operating activities 30.7 40.1 53.9
Net cash provided by / (used in) investing activities (24.5) 59.5 (147.9)
Net cash used in financing activities (37.8) (98.5) 110.2
------------- ------------ ------------
Net increase / (decrease) in cash and cash equivalents (31.6) 1.1 16.2
Cash and cash equivalents under U.S. GAAP, beginning of year 57.8 26.2 27.3
------------- ------------ ------------
Cash and cash equivalents under U.S. GAAP, end of year 26.2 27.3 43.5
============= ============ ============
RESTRUCTURING COSTS
For the year ended December 31, 2000, a restructuring charge of (pound)2.3m
relates to the relocation of Premier's French biscuits distribution operation,
which has been retained following the disposal of Horizon Biscuits. The
restructuring charge covers the redundancy of approximately 25 sales and
administration staff, the termination of sales agency contracts and distribution
contracts.
For the year ended December 31, 2001, the restructuring charge of (pound)12.2m
relates to the (i) integration of the administration functions of Premier Brands
with those of HL Foods and Chivers Hartley. The charge includes the redundancy
costs of approximately 165 administration staff; (ii) the relocation of the
manufacturing facilities of Stratford on Avon Foods Limited to our existing
sites at Long Sutton and Bury St Edmunds. The charge includes the redundancy
costs of approximately 130 production and administration staff; and (iii)
further costs from the relocation of Premier's French biscuits distribution
operation, which has been retained following the disposal of Horizon Biscuits.
The (pound)1.8m restructuring provision at December 31, 2001, represents the
costs still to be incurred in relation to the integration of Premier Brands
France, Premier's French biscuit distribution company, into Materne, Premier's
French preserves and compote manufacturing and selling operation. The costs
comprise anticipated payments arising from the reorganisation of distribution
and logistics arrangements.
For the year ended December 31, 2002, the restructuring charge of (pound)16.8m
principally relates to (i) the restructuring of our manufacturing processes at
our Moreton tea factory. The (pound)3.8m approximate cost, which included the
redundancy costs for approximately 84 production staff, were in relation to
reductions in manning and changes to shift patterns at our Moreton tea factory;
(ii) (pound)3.0 million of costs relating to the relocation of our principal
administrative office to St Albans and the closure of our Histon and Hampstead
administrative functions. The charge includes the redundancy costs of
approximately 15 administration staff; (iii) (pound)2.4 million of costs
relating to the closure of our Nelsons spreads factory in Aintree and the
relocation of production to our Histon spreads factory. The charge includes the
redundancy costs of approximately 116 people; (iv) (pound)2.1 million of costs
relating to the Nestle acquisition and the subsequent integration of its
administrative functions with those of Premier. The charge includes the
redundancy costs of approximately 45 administration staff. The review of the
Nestle manufacturing platform was not completed until the first quarter of 2003,
therefore, no provision has been made for the costs of this integration at
December 31, 2002; (v) (pound)2.1 million of costs relating to the closure of
our North Walsham canned foods factory. The charge includes the redundancy costs
of approximately 120 production and administration staff. This factory was
closed in the fourth quarter of 2002 and the production integrated into our
canned foods factories at Wisbech and Long Sutton; and (vi) (pound)2.1 million
in relation to further restructuring of our French spreads and biscuits
distribution operation following the integration of the businesses in 2001.
CUSTOMER BASE
In 2002, Premier had sales to two customers who represented more than 10% of
Premier's total sales (2001: one, 2000: one). The customers represented 13% and
11% respectively of Premier's total sales in 2002 (2001: 12%, 2000 11%).
42
LEASE COMMITMENTS
The following is a summary of future minimum lease payments:
OPERATING FINANCE
LEASES LEASES
(POUND)M (POUND)M
Fiscal year ending December 31,
2003 4.0 0.1
2004 3.1 -
2005 2.1 -
2006 1.4 -
2007 1.3 -
Thereafter 4.3 -
------------ ------------
Total future minimum lease payments 16.2 0.1
============
Less amount representing interest -
------------
Present value of net minimum lease payments 0.1
Less current maturities (0.1)
------------
Long-term obligation -
============
Total rent expense on operating leases was(pound)4.5m (2001:(pound)6.0m,
2000:(pound)8.4m).
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in net assets of a business
enterprise arising from transactions and other events and circumstances from
non-owner sources. It includes all changes in net assets during the reporting
period except those resulting from investments by owners and distributions to
owners. The disclosures required for comprehensive income under U.S. GAAP are
substantially similar to those presented in the Statement of Total Recognised
Gains and Losses as prepared under U.K. GAAP.
ALLOWANCE FOR DOUBTFUL RECEIVABLES 2000 2001 2002
(POUND)M (POUND)M (POUND)M
Balance at January 1, 1.0 0.8 1.5
Acquisitions / (disposals) - 0.2 -
Charged to costs and expenses 0.3 0.6 (0.5)
Deductions (0.5) (0.1) (0.4)
------------ ------------ ------------
Balance at December 31, 0.8 1.5 0.6
============ ============ ============
INVENTORY OBSOLESCENCE PROVISION 2000 2001 2002
(POUND)M (POUND)M (POUND)M
Balance at January 1, 4.6 5.5 10.0
Charged to costs and expenses 2.6 6.3 (0.5)
Deductions (1.7) (1.8) (2.5)
------------ ------------ ------------
Balance at December 31, 5.5 10.0 7.0
============ ============ ============
ADVERTISING EXPENSE
Costs associated with advertising are expensed in the year incurred. Premier
incurred(pound)11.2m of advertising expenses during 2002 (2001:(pound)3.9m,
2000:(pound)6.9m).
EXCISE TAXES
Premier was charged and in turn collected (pound)nil (2001: (pound)3.6m, 2000:
(pound)102.1m) of excise taxes during 2002. The decrease in excise taxes charged
and in turn collected is due to the sale of FE Barber Limited in January 2001,
which was the principal subsidiary of Premier which charged and collected excise
taxes.
43
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG-LIVED ASSETS ANALYSED BY LONG-LIVED ASSETS
GEOGRAPHICAL REGION 2000 2001 2002
(POUND)M (POUND)M (POUND)M
By geographic region:
U.K. 142.2 103.2 120.7
Mainland Europe 12.6 12.8 14.4
------------ ------------ ------------
154.8 116.0 135.1
============ ============ ============
The long-lived assets detailed above are presented under U.S. GAAP accounting
standards and exclude the revaluation permitted under U.K. GAAP accounting
standards.
RELATED PARTY TRANSACTION
Citadel, a subsidiary of Premier Holdings, provides Premier with insurance
services. Premier paid Citadel insurance premium payments for the years ended
December 31, 2002, 2001 and 2000 of (pound)0.7m, (pound)0.5m and (pound)0.6m,
respectively.
PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma information presents the results of
operations, including the effects of acquisition financing, of Premier under
U.K. GAAP, giving pro forma effect to the following acquisitions as if they had
occurred as of January 1, 2000: (i) SonA; (ii) Lift; (iii) Nelsons; and (iv)
Nestle.
(UNAUDITED)
YEAR ENDED DECEMBER 31,
2000 2001 2002
(POUND)M (POUND)M (POUND)M
Net sales 1,191.3 967.6 917.7
============ ============ ============
Operating profit 91.0 81.7 74.1
============ ============ ============
Interest charge (79.2) (63.0) (40.3)
============ ============ ============
Net income / (loss) (3.1) (2.4) 11.2
============ ============ ============
The pro forma results are not necessarily indicative of what actually would have
occurred if the SonA acquisition, the Lift instant lemon tea acquisition, the
Nelsons acquisition and the Nestle acquisition had been in effect for the
periods presented, nor should they be considered indicative of future results.
OTHER CLASSIFICATION DIFFERENCES
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
Under U.K. GAAP, discontinued operations are recorded when material and
separable operations are sold either during the year or by the earlier of the
finalisation of the annual accounts or three months subsequent to year end.
Discontinued operations are disclosed separately within the financial statements
and related notes thereto and prior year comparative figures are restated to
reflect the discontinuance. Under U.S. GAAP, disposals of businesses that do not
constitute separate business segments are not accounted for as discontinued
operations, and are recorded and disclosed as asset sales within continuing
operations.
Under U.K. GAAP, items classified as exceptional do not meet the definition of
"extraordinary" under U.S. GAAP, and accordingly are classified as operating
expenses or non-operating expenses as appropriate.
Under U.K. GAAP, shipping and handling costs are included in selling and
distribution costs. Under U.S. GAAP, shipping and handling costs are included in
cost of sales. Shipping and handling costs for the years ended December 31 2002,
2001 and 2000 were (pound)38.0m, (pound)36.3m and (pound)39.3m.
44
PREMIER FOODS PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED BALANCE SHEETS
Under U.K. GAAP, Premier classifies non-current receivables due later than one
year as current assets. Non-current receivables are classified as non-current
assets under U.S. GAAP.
Under U.K. GAAP, debt issuance costs are netted against the related debt
balances and are amortised over the term of the underlying debt. Under U.S.
GAAP, debt issuance costs are capitalised as assets on the balance sheet,
separate from the related debt, and are amortised over the term of the
underlying debt.
RECENTLY ISSUED ACCOUNTING STANDARDS
UNITED STATES
SFAS NO. 146
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("FAS 146"). This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred and can be measured at
fair value. The provisions of this Statement are effective prospectively for
exit or disposal activities initiated after December 31, 2002. Premier does not
expect this statement to have a material impact on the financial statements.
FIN 45
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". The Interpretation expands on the
accounting guidance of FAS 5, "Accounting for Contingencies", FAS 57, "Related
Party Disclosures", and FAS 107, "Disclosures about Fair Value of Financial
Instruments", and incorporates without change the provisions of FIN 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others", an interpretation
of FASB Statement No. 5, which is being superseded. FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees,
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under that guarantee and
must disclose that information in its interim and annual financial statements.
FIN 45 will be effective on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements in this Interpretation are
effective for financial statements of periods ending after December 15, 2002.
Premier is currently evaluating the impact of this statement on its results of
operations and financial position.
FIN 46
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
Under that interpretation, certain entities known as "Variable Interest
Entities" (VIE) must be consolidated by the "primary beneficiary" of the entity.
The primary beneficiary is generally defined as having the majority of the risks
and rewards arising from the VIE. For VIE's in which a significant (but not
majority) variable interest is held, certain disclosures are required. The
measurement principles of this interpretation will be effective for Premier's
December 31, 2003 financial statements. Premier does not believe it has any
variable interest entities and do not expect this statement to have a material
impact on the financial statements.
45
PREMIER FOODS PLC
SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA
We have prepared the following selected historical combined and
consolidated financial data as of and for each of the five years in the period
ended December 31, 2002. The selected historical combined and consolidated
financial data as of and for the years ended December 31, 2000, December 31,
2001 and December 31, 2002 are derived from our historical consolidated
financial statements included elsewhere in this annual report, which have been
audited by PricewaterhouseCoopers LLP, independent Chartered Accountants. The
selected historical combined and consolidated financial data as of and for the
two year period ended December 31, 1999 are derived from our historical combined
and consolidated financial statements not included in this annual report. The
selected historical combined and consolidated financial data as of and for the
year ended December 31, 1999 was audited by PricewaterhouseCoopers, independent
Chartered Accountants. The selected combined and consolidated financial data as
of and for the year ended and at December 31, 1998 was audited by KPMG Audit
PLC, independent Chartered Accountants.
The audited selected historical combined and consolidated financial
statements of Premier have been prepared in accordance with U.K. GAAP, which
differs in certain material respects from U.S. GAAP. The principal differences
between U.K. GAAP and U.S. GAAP are summarized in Note 24 to our audited
historical financial statements included elsewhere in this annual report.
You should read the following information in conjunction with the
discussion of our operating results and liquidity and capital resources included
in the "Operating and Financial Review and Prospects" and our audited historical
combined and consolidated financial statements and the related notes thereto
included elsewhere in this annual report.
46
PREMIER FOODS PLC
SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA
1998(9) 1999(9) 2000 2001 2002 2002(1)
RESTATED RESTATED
------------ ------------ ------------- ------------ ------------ ------------
(POUND) MILLIONS EXCEPT FOR EBITDA MARGIN
Profit and Loss Data:
Amounts in accordance with U.K. GAAP:
Turnover
Continuing........................... (pound)800.9 (pound)854.3 (pound)818.5 (pound)845.2 (pound)826.7 $1,330.6
Acquisitions (2)..................... - - - - 55.6 89.5
Discontinued......................... 289.3 234.8 215.1 4.1 0.2 0.3
------------ ------------ ------------- ------------ ------------ ------------
Subtotal.........................(pound)1,090.2 (pound)1,089.1(pound)1,033.6 (pound)849.3 (pound)882.5 $1,420.4
Operating profit (before operating
exceptional items) (3)
Continuing........................... (pound)46.4 (pound)54.7 (pound)60.1 (pound)64.3 (pound)70.7 $113.8
Acquisitions (2)..................... - - - - 6.9 11.1
Discontinued......................... 11.9 9.4 9.1 (0.8) (0.1) (0.2)
------------ ------------ ------------- ------------ ------------ ------------
Subtotal......................... (pound)58.3 (pound)64.1 (pound)69.2 (pound)63.5 (pound)77.5 $124.7
Profit / (loss)......................... ((pound)29.1 ((pound)32.6) ((pound)8.6) ((pound)28.5) (pound)16.3 $26.2
Amounts in accordance with U.S. GAAP:
Net sales...............................(pound)1,090.2 (pound)1,089.1(pound)1,033.6 (pound)849.3 (pound)882.5 1,420.4
Income / (loss) from operations (4)..... 24.5 (13.1) 58.1 90.4 60.8 97.9
Net income / (loss)..................... (pound)2.0 ((pound)45.5) ((pound)13.4) (pound)37.8 (pound)14.1 $22.7
Other Financial Data:
Amounts derived under U.K. GAAP:
EBITDA (5).............................. (pound)81.5 (pound)87.7 (pound)91.5 (pound)82.1 (pound)103.1 $165.9
EBITDA margin (6)....................... 7.5% 8.1% 8.9% 9.7% 11.7% 11.7%
Depreciation and amortization (7) ...... (pound)23.2 (pound)23.6 (pound)22.3 (pound)18.6 (pound)26.0 $41.8
Capital expenditure (8)................. 44.1 23.0 26.5 20.1 17.3 27.8
Amounts derived under U.S. GAAP:
EBITDA (5).............................. (pound)75.9 (pound)29.7 (pound)87.5 (pound)112.9 (pound)81.3 $130.9
EBITDA margin (6)....................... 7.0% 2.7% 8.5% 13.3% 9.2% 9.2%
Depreciation and amortization (7)....... (pound)51.4 (pound)42.8 (pound)29.4 (pound)22.5 (pound)20.5 $33.0
Capital expenditure (8)................. 44.1 23.0 26.5 20.1 17.3 27.8
Balance Sheet Data (at end of period):
Amounts in accordance with U.K. GAAP:
Total assets............................ (pound)679.1 (pound)557.2 (pound)516.3 (pound)419.3 (pound)546.5 $879.6
Net combined assets..................... 140.0 N/a N/a N/a N/a N/a
Shareholder's deficit................... N/a (198.6) (214.4) (167.3) (149.8) (241.1)
Amounts in accordance with U.S. GAAP:
Total assets............................ (pound)734.6 (pound)603.3 (pound)579.0 (pound)484.6 (pound)614.0 $988.2
Net combined assets..................... 173.7 N/a N/a N/a N/a N/a
Shareholder's deficit................... N/a (172.9) (187.3) (126.8) (111.5) (179.5)
See accompanying notes on the following pages.
47
PREMIER FOODS PLC
SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA
(1) Amounts have been translated for convenience at the noon buying rate
on December 31, 2002 of $1.6095 to(pound)1.00.
(2) Acquisitions comprise the acquisition of the ambient foods
manufacturing business in the U.K. of Nestle SA.
(3) Aggregate U.K. GAAP exceptional items include both operating and
non-operating exceptional items. See Note 3 to the audited historical
consolidated financial statements of Premier for further information
on operating and non-operating exceptional items for each of 2000,
2001 and 2002.
(4) Income / (loss) from operations in accordance with U.S.GAAP is defined
herein as the sum of earnings from all operations, in each case before
related net interest expense and taxation expense.
The following table reconciles operating profit in accordance with
U.K. GAAP to income from operations in accordance with U.S. GAAP:
YEAR ENDED DECEMBER 31,
2000 2001 2002
------------ ------------ ------------
(POUND) MILLIONS
Operating profit (before operating exceptional items) in
accordance with U.K. GAAP................................... (pound)69.2 (pound)63.5 (pound)77.5
Operating exceptional items as defined under U.K. GAAP. (1.6) (12.2) (16.8)
Non-operating exceptional items under U.K. GAAP............ (5.8) (26.2) (2.0)
U.S. GAAP adjustments:
Pension costs...................................................... 3.4 5.2 0.1
Amortization of goodwill........................................ (7.1) (5.9) 3.1
Derivative financial instruments................................ - 0.9 (0.5)
Adjustments to U.K. GAAP loss on sale of
discontinued operations.......................................... - 65.1 -
Amortization of intangible assets............................... - - (0.6)
------------ ------------ ------------
Income from operations in accordance with U.S. GAAP............. (pound)58.1 (pound)90.4 (pound)60.8
============ ============ ============
(5) We are required under the terms of the Indenture to provide, to the
trustee and the holders of the Notes, all quarterly financial
statements that would be required by Form 10-Q in U.K. GAAP with a
reconciliation to U.S. GAAP of EBITDA, total assets, total debt and
shareholder's equity. We have, therefore, included U.S. EBITDA in our
selected financial information. In addition, our banking covenants
under the Senior Credit Facility require ratios of total net interest
and total net debt to EBITDA. We have, therefore, included U.K. EBITDA
in our selected financial information. Further, we believe that the
investor community commonly uses EBITDA, calculated in the manner
defined below, as a measure of the operating performance of
businesses.
As presented herein, EBITDA represents, for U.K. GAAP presentation
purposes, operating profit before both operating and non-operating
exceptional items and depreciation and amortization of intangible
assets and pension prepayments and any other non-cash income and
non-cash charges. This definition is in accordance with the definition
of EBITDA in our Senior Credit Facility.
EBITDA, as calculated for U.S. GAAP presentation purposes, represents
the sum of earnings from all operations, in each case before related
net interest expense, taxation expense, depreciation and amortization
of goodwill and intangible assets.
EBITDA is not a measurement of operating performance calculated in
accordance with U.S. GAAP or U.K. GAAP, and should not be considered
as a substitute for operating income, profit after taxes or cash flows
from operating activities, as determined by U.S. GAAP or U.K. GAAP, or
as a measure of profitability or liquidity. EBITDA does not
necessarily indicate whether cash flow will be sufficient or available
for cash requirements. EBITDA may not be indicative of our historical
operating results and is not meant to be a prediction of our future
results. Because all companies do not calculate EBITDA identically,
the presentation of EBITDA contained herein may not be comparable to
similarly entitled measures of other companies.
48
PREMIER FOODS PLC
SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA
The following table reconciles operating profit presented under U.K.
GAAP to EBITDA presented under U.K. GAAP to EBITDA:
YEAR ENDED DECEMBER 31,
2000 2001 2002
------------ ------------ ------------
(POUND) MILLIONS
Operating profit before operating exceptional items
presented under U.K. GAAP.................................... (pound)69.2 (pound)63.5 (pound)77.5
Depreciation of fixed assets charged to operating profit 22.0 16.1 18.8
Amortization of goodwill.................................... 0.3 0.4 3.1
Amortization of intangible assets........................... - 0.1 1.1
Amortization of pension prepayment...................... - 2.0 2.6
------------ ------------ ------------
EBITDA presented under U.K. GAAP......................... (pound)91.5 (pound)82.1 (pound)103.1
============ ============ ============
The following table reconciles income from operations presented under U.S. GAAP to EBITDA presented under U.S. GAAP:
YEAR ENDED DECEMBER 31,
2000 2001 2002
------------ ------------ ------------
(POUND) MILLIONS
Income from operations presented under U.S. GAAP... ..... (pound)58.1 (pound)90.4 (pound)60.8
Depreciation of fixed assets charged to operating profit 22.0 16.1 18.8
Amortization of goodwill..................................... 7.4 6.3 -
Amortization of intangible assets............................ - 0.1 1.7
------------ ------------ ------------
EBITDA presented under U.S. GAAP......................... (pound)87.5 (pound)112.9 (pound)81.3
============ ============ ============
The following table reconciles EBITDA presented under U.K. GAAP to EBITDA presented under U.S. GAAP:
YEAR ENDED DECEMBER 31,
2000 2001 2002
------------ ------------ ------------
(POUND) MILLIONS
EBITDA presented under U.K. GAAP............................ (pound)91.5 (pound)82.1 (pound)103.1
U.S. GAAP adjustments:
Derivative financial instruments...................... - 0.9 (0.5)
Operating exceptional items............................ (1.6) (12.2) (16.8)
Non-operating exceptional items........................ (5.8) (26.2) (2.0)
Sale of discontinued businesses........................ - 65.1 -
Pension costs.......................................... 3.4 3.2 (2.5)
------------ ------------ ------------
EBITDA presented under U.S. GAAP............................ (pound)87.5 (pound)112.9 (pound)81.3
============ ============ ============
49
PREMIER FOODS PLC
SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA
(6) As presented herein, EBITDA margin represents, for U.K. GAAP
presentation purposes, EBITDA divided by turnover from both continuing
and discontinued operations. EBITDA margin as calculated for U.S. GAAP
presentation purposes represents EBITDA divided by turnover. EBITDA
margin is not a measure of operating performance calculated in
accordance with U.S. GAAP or U.K. GAAP, and should not be considered
as a substitute for operating income, profit after taxes or cash flows
from operating activities, as determined by U.S. GAAP or U.K. GAAP, or
as a measure of profitability or liquidity. EBITDA margin does not
necessarily indicate whether cash flow will be sufficient or available
for cash requirements. EBITDA margin may not be indicative of the
historical operating results of Premier and is not meant to be a
prediction of potential future results. Because all companies do not
calculate EBITDA margin identically, the presentation of EBITDA margin
contained herein may not be comparable to similarly entitled measures
of other companies.
(6) Under U.K.GAAP, Depreciation and amortization consists of (i)
depreciation of tangible fixed assets; (ii) amortization of intangible
assets and goodwill; and (iii) amortization of pension prepayment.
Under U.S.GAAP, Depreciation and amortization consists of (i)
depreciation of tangible fixed assets; and (ii) amortization of
intangible assets and goodwill.
(7) Capital expenditure comprises the cash expenditure for the purchase of
tangible fixed assets, together with capital lease funds applied to
capital expenditure. Capital expenditure in 1998 includes (pound)14.0
million for the purchase of the freehold estate of one of our major
sites from a related company of Premier Holdings.
(8) The historical financial data for 1998 and 1999 has not been restated
for the impact of FRS 19 "Deferred tax". The historical financial
data for 1998 has not been restated as a result of the change in
accounting policy in 2001 to classify certain sales deductions as a
reduction in "sales" rather than "cost of sales" and certain
promotional expenditure as "selling and distribution costs" rather
than a reduction in "sales".
50
PREMIER FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
OPERATING RESULTS
The following is a discussion of our financial condition and
consolidated results of operations for 2000, 2001 and 2002, and of the
significant factors affecting them. You should read the following discussion in
conjunction with the "Selected Historical Combined and Consolidated Financial
Data" and our audited consolidated historical financial statements and the
related notes thereto included elsewhere in this annual 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 significant
differences between U.K. GAAP and U.S. GAAP are described in Note 24 to our
consolidated financial statements included elsewhere in this annual report.
OVERVIEW
We manufacture and market grocery products for the retail grocery and
food service markets in three principal product types: (i) canned foods, pickles
and sauces; (ii) beverages; and (iii) spreads, (together our "grocery products
business"). We also operate a potato packing and trading business supplying the
retail grocery, food service and food manufacturing markets. Until January 2001,
when we disposed of our biscuits operations, we also manufactured and marketed
biscuits and cookies. Our products are sold under both private label and our
popular brand names, which include HP canned foods, Typhoo tea, Cadbury's
chocolate drink mixes, Branston and Haywards pickles, Sarsons vinegar, Loyd
Grossman cooking sauces, Marvel powdered creamer, Chivers and Hartley's
preserves, SunPat peanut butter, Rowntree's and Chivers jelly, Smash instant
potato and Materne compote and jam. Until February 2001, when we disposed of our
wines and spirits operations, we also had a private label wines and spirits
bottling business.
SIGNIFICANT FACTORS AFFECTING OUR OPERATING RESULTS
ACQUISITIONS, DISPOSALS AND RESTRUCTURING
We have historically pursued a strategy of both internal and external
growth. As a result, we have made a number of acquisitions, dispositions and
restructurings, which have affected our results of operations during the past
three years. The following is a summary of our key acquisitions, dispositions
and internal restructurings that we have undertaken since January 1, 2000.
o In January 2001, we sold our biscuits operations to Eubisco Limited,
an affiliate of ours, for net proceeds of (pound)90.9 million, but
retained our French biscuits distribution business. Eubisco Limited
was formed by Hicks Muse in connection with its acquisition of
Burton's Gold Medal Biscuits from Associated British Foods in October
2000. We used the proceeds from the sale to reduce the balance due
under our Senior Credit Facility.
o In February 2001, we sold FE Barber Limited, our wines and spirits
subsidiary for(pound)10.9 million. We used the proceeds from the sale
to reduce the balance due under our Senior Credit Facility.
o In April 2001, we acquired the canned foods, pickles and sauces
business of Stratford on Avon Foods Limited ("SonA"), for(pound)12.9
million. This business has been integrated into our existing canned
foods, pickles and sauces operations.
o In September 2001, we acquired the "Lift" instant lemon tea business
("Lift") for(pound)8.3 million. This business has been integrated into
our existing beverages operations.
o In October 2001, we acquired the assets and trade of Nelsons of
Aintree Limited ("Nelsons"), a company manufacturing sweet preserves
for(pound)7.5 million. This business was integrated into our existing
spreads operations.
51
PREMIER FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
o In May 2002, we acquired the ambient foods manufacturing business in
the U.K. of Nestle SA for a net consideration of(pound)132.2 million
("Nestle"). The acquired business spans a broad range of product
categories, including pickles, vinegars, sauces, sweet spreads,
preserves and ambient desserts. The purchase price was funded by
additional borrowings under the Senior Credit Facility (see "Liquidity
and Capital Resources"). The rights to acquire the ambient foods
manufacturing business in the Republic of Ireland of Nestle SA, which
was included in the original acquisition agreement, was sold onto a
management buy-in team in July 2002. The administrative functions of
Nestle were integrated into our existing business by year end. A
review of the manufacturing platform was completed in Quarter 1, 2003.
We are currently in consultation with staff, with a view to closing
the Hadfield factory in Manchester. It is intended that the operations
will be integrated into our existing spreads factory in Cambridge and
the pickles operation in Bury St. Edmunds. The integration should be
completed by December 2003. We have made no provision at December 31,
2002 for the costs of integrating the manufacturing platform.
CURRENCY FLUCTUATION
Although 84% of our business is conducted in the U.K., we have
operations in France and the Netherlands. We source raw materials from countries
around the world and export our products to various countries. Therefore, our
financial position and results of operations are subject to both currency
transaction risk and currency translation risk.
Our operating subsidiaries incur currency transaction risk whenever
they enter into either a purchase or sales transaction using a currency other
than that in which they regularly operate and incur their expenses. We enter
into forward currency contracts to hedge against our exposure to foreign
currency exchange rate fluctuations in the purchase of raw materials and in our
export business. As of December 31, 2002, we had (pound)42.2 million nominal
value of forward currency contracts, cross currency swaps and interest rate
swaps, with an aggregate unrealized net loss of (pound)1.9 million on those
instruments at that date.
With respect to currency translation risk, the financial condition
and results of operations of our non-U.K. businesses are measured and recorded
in the relevant domestic currency of the jurisdiction in which the business is
located and then translated into pounds sterling for inclusion in our
consolidated financial statements. The exchange rate has remained comparatively
stable during 2000, 2001 and 2002. However, since September 2002, sterling has
depreciated against the euro from (euro)1.59 to (euro)1.46 in March 2003. If
this depreciation is sustained it will have a positive impact on our sales and
operating profits as reported in pounds sterling in subsequent periods.
INDUSTRY FACTORS
Our financial condition and results of operation are also influenced
by industry trends. In recent years, there has been increased consolidation
among the major grocery retailers in the U.K. as well as in continental Europe.
In 1998, two of the major retail food chains in the U.K., Somerfield and
KwikSave, merged. In addition, Wal-Mart entered the U.K. market through its 1999
acquisition of ASDA, one of the U.K.'s largest grocery retailers. In continental
Europe, two major grocery retailers, Carrefour and Promodes, merged in 1999 to
create the largest retailer in France. In January 2003, Morrisons made an offer
for Safeway. Interest has also been expressed by a number of other major
multiple retailers and financial investors.
This consolidation has increased price competition among suppliers to
the major retail food chains, and may ultimately lead to greater consolidation
among such suppliers. As a result, grocery retailers and manufacturers
frequently engage in pricing campaigns such as "Everyday Low Price" and "Buy
One/Get One Free" in order to promote their products and gain market share.
These campaigns have generally lowered our margins by increasing our short-term
promotion costs, but this effect is partially offset by the additional sales
made as a result of these campaigns. While we believe that our relationships
with our retail customers are strong, the continuation of the trend of
consolidation could have a material adverse impact on our results of operations.
52
PREMIER FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
There are a number of other trends which impact on our industry and
us in particular. These include, among others an increase in consumers'
preferences for branded rather than own label products, for fresh and chilled
and convenience products, for "organic" products and the potential implications
of genetically modified ingredients. An increase in the legislation regarding
the food industry with particular regard to food safety and consumer information
will also impact our business.
We are responding to all these actively to take advantage of opportunities and
limit any negative impacts.
SEASONALITY
Historically, our sales have been higher during the first and fourth
quarters than during the second and third quarters. Within our canned foods,
pickles and sauces business, consumer demand for canned foods tends to be higher
in the colder months of the year, with increased sales during the autumn and
winter and lower sales during the spring and summer and we generally have a
significant increase in sales of our pickles and sauces during the pre-Christmas
period. Our hot chocolate and malted drinks business is affected by seasonal
changes in temperature, with sales usually declining during the warm summer
months. In addition, our working capital requirements are affected by the
seasonal nature of our sales and production as a portion of our seasonal canned
products is packed during the months from July to September.
As a result of the seasonality of our sales, the results of our
operations for any given fiscal quarter will not necessarily be indicative of
our results for the full year. The sales of our principal product groups
(excluding potatoes) in the four fiscal quarters of 2002 are shown in the table
below:
FISCAL YEAR ENDED DECEMBER 31, 2002
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER
------------ ------------- ------------ ------------ ------------
(POUND) MILLIONS
SALES
Canned foods, pickles and sauces (1).................... 85.5 86.1 82.1 91.9 345.6
Beverages .............................................. 44.0 41.2 40.6 47.0 172.8
Spreads (2)............................................. 40.1 39.2 39.7 39.4 158.4
------------ ------------- ------------ ------------ ------------
169.6 166.5 162.4 178.3 676.8
============ ============= ============ ============
Acquisitions............................................. 55.6
Potatoes (3) ............................................ 149.9
------------
Turnover from continuing operations...................... 882.3
============
(1) Excluding sales from Nestle of (pound)30.2 million.
(2) Excluding sales from Nestle of (pound)25.4 million.
(3) Potatoes are excluded from the seasonality table, as the value of our
potato sales is principally dependent on the price at which potatoes
are traded in the commodity markets, which is principally dependent on
the quality and size of the U.K. potato harvest, which can vary
significantly from year to year.
53
PREMIER FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
OPERATING RESULTS
The following table summarizes our operating results before operating
exceptional items for each of 2000, 2001 and 2002. The table has been derived
from and should be read in conjunction with our audited consolidated historical
financial statements and the related notes included elsewhere in this annual
report. The results of operations for 2000, 2001 and 2002 presented below have
been restated to reflect the disposal of our biscuits and wines and spirits
operations in the first quarter of 2001 and the reclassification of certain
products between product groups in 2002.
YEAR ENDED DECEMBER 31,
% OF TOTAL % OF TOTAL % OF TOTAL
SALES SALES SALES
2000 2001 2002
------------ ------------- ------------ ------------ ------------ ------------
(POUND) MILLIONS EXCEPT FOR PERCENTAGE DATA
Sales
Continuing operations
Canned foods, pickles and
sauces.................
337.6 32.7 362.4 42.7 375.8 42.6
Beverages.................... 191.8 18.6 173.8 20.5 172.8 19.5
Spreads....................... 156.6 15.1 151.4 17.8 183.8 20.8
Potatoes....................... 132.5 12.8 157.6 18.5 149.9 17.0
------------ ------------- ------------ ------------ ------------ ------------
Total continuing operations.... 818.5 79.2 845.2 99.5 882.3 99.9
Discontinued operations
Biscuits and cookies ........ 159.6 15.4 - - - -
Wines and spirits............ 52.7 5.1 1.9 0.2 - -
Holco, Chivers Ireland 2.8 0.3 2.2 0.3 0.2 0.1
and others................
------------ ------------- ------------ ------------ ------------ ------------
Total discontinued operations... 215.1 20.8 4.1 0.5 0.2 0.1
------------ ------------- ------------ ------------ ------------ ------------
Total sales......................... 1,033.6 100.0 849.3 100.0 882.5 100.0
Cost of sales....................... (788.8) (76.3) (660.9) (77.8) (653.8) (74.1)
------------ ------------- ------------ ------------ ------------ ------------
Gross profit........................ 244.8 23.7 188.4 22.2 228.7 25.9
Selling and distribution
expenses.......................... (142.9) (13.8) (98.1) (11.5) (110.0) (12.5)
Administrative costs.............. (32.7) (3.2) (26.8) (3.2) (41.2) (4.6)
------------ ------------- ------------ ------------ ------------ ------------
Operating profit before operating
exceptional items............... 69.2 6.7 63.5 7.5 77.5 8.8
============ ============= ============ ============ ============ ============
54
PREMIER FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following table analyses our sales by geographical origin and
geographical market for each of 2000, 2001 and 2002. The table has been derived
from and should be read in conjunction with our audited consolidated historical
financial statements and the related notes included elsewhere in this annual
report.
TURNOVER BY GEOGRAPHICAL ORIGIN TURNOVER BY GEOGRAPHICAL MARKET
2000 2001 2002 2000 2001 2002
----------------------------------------- ----------------------------------------
(POUND) MILLIONS (POUND) MILLIONS
U.K................................ 694.9 723.4 763.8 681.9 712.3 741.5
Mainland Europe................ 123.6 121.8 118.5 129.3 124.4 129.3
Other countries................... - - - 7.3 8.5 11.5
------------ ------------ ------------- ------------ ------------ ------------
Continuing operations........... 818.5 845.2 882.3 818.5 845.2 882.3
Discontinued operations......... 215.1 4.1 0.2 215.1 4.1 0.2
------------ ------------ ------------- ------------ ------------ ------------
Total................................ 1,033.6 849.3 882.5 1,033.6 849.3 882.5
============ ============ ============= ============ ============ ============
The review of accounting policies in 2001 required by FRS 18
"Accounting Policies" identified that certain sales deductions would be more
appropriately classified as a reduction in "sales" rather than "cost of sales"
and certain promotional expenditure would be more appropriately classified as
"selling and distribution expenses" rather than a reduction in "sales". This
change of policy was adopted in 2001 and the 2000 comparatives have been
restated accordingly (see Notes 1 and 2 to the Consolidated Financial Statements
under Item 18).
"Sales" is the value of sales, excluding transactions with or between
wholly owned subsidiaries, after deductions of sales rebates, value added tax
and other sales related taxes. Sales are recognized upon receipt of confirmation
that the goods shipped have been accepted by the customer, where the sales price
is fixed and collectability is reasonably assured. Sales are also referred to as
"Turnover" in the audited consolidated historical financial statements and
accompanying notes included elsewhere in this annual report. We derive our sales
principally from selling canned foods, beverages, spreads, pickles and sauces
and potatoes. Our principal geographic markets are the U.K., which accounted for
approximately 83.3%, 84.3% and 84.0% and France, which accounted for 11.1%,
10.1% and 9.8% of the sales of our continuing operations in 2000, 2001 and 2002,
respectively. Sales of our own branded products represented approximately 41% of
our 2002 sales for our total business and 49% of our grocery products business.
The remaining sales principally comprised private label, unbranded food service
and sales of commodity products.
"Cost of sales" consists of costs directly attributable to
manufacturing, including raw materials, packaging, labor, energy, other
utilities and overhead costs attributable to the manufacturing processes and
factories. Principal raw materials we use include tea, sugar, vegetables, fruit
and cocoa. Manufacturing overheads include plant supervision and management
costs, technical and engineering support costs, costs for the storage of our raw
material and finished goods inventory, health and safety compliance costs,
maintenance and insurance costs, quality control costs and depreciation expenses
relating to manufacturing equipment.
"Selling and distribution expenses" consist of selling costs, which
include advertising, direct and indirect marketing, costs of promotions and
labor and overhead costs attributable to the sales function. Our promotional
costs include, among other things, discounts we give to retailers in connection
with product-specific promotions. Distribution costs include freight,
warehousing, labor and overhead costs attributable to the distribution function.
55
PREMIER FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The division of our products into "branded" and "private label" makes
the comparison of gross profit after marketing expenses the principal
measurement tool to determine the profitability of our product lines. This is
because the higher sales value of branded products yields higher gross margins
but the branded products require significant marketing expenditure. Therefore,
to be able to compare similar branded and private label products it is necessary
to deduct the marketing expenditure incurred in supporting the branded products.
"Administrative expenses" comprise labor and costs directly
attributable to the finance, human resources, procurement, information
technology and general management functions.
"Net interest expense" principally comprises interest paid on our
Notes, our Senior Credit Facility and overdrafts less interest receivable on
cash deposits. Also included in our interest expense is the amortization of the
capitalized debt issuance costs and exchange gains or losses on our U.S.
dollar-denominated Notes.
"Tax" principally comprises income taxes to which we are subject in
the various countries in which we have operations. We attempt to minimize the
tax payable in each jurisdiction by using appropriate tax strategies. Our
current high level of leverage (and hence interest payable) reduces our tax
payable on our operating profit. Our tax payable is likely to increase as we
repay our debt under the Senior Credit Facility and hence reduce our net
interest payable.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
CONTINUING OPERATIONS
SALES. Sales from continuing operations were (pound)882.3 million for
2002, an increase of (pound)37.1 million, or 4.4%, as compared to sales for 2001
of (pound)845.2 million. The increase in sales was principally due to the
acquisition of the U.K. ambient food business of Nestle, which contributed
(pound)55.6 million of sales in 2002 and increased spreads sales of (pound)7.0
million, principally as a result of Nelsons contributing to sales for the full
year. The increase in sales was offset by a reduction of (pound)7.7 million in
the value of sales of potatoes and a reduction of (pound)16.8 million in sales
in our existing canning, pickles and sauces business (i.e. excluding Nestle).
CANNED FOODS, PICKLES AND SAUCES
Sales of canned foods, pickles and sauces were (pound)375.8m for
2002, an increase of (pound)13.4 million, or 3.7%, over sales of (pound)362.4
million for 2001. The acquisition of Nestle contributed sales of (pound)30.2
million from date of acquisition to year end. Excluding Nestle, sales in our
existing business decreased by (pound)16.8 million as a result of the business
exiting a number of low-margin contracts.
BEVERAGES
Sales of beverages were (pound)172.8 million for 2002, a decrease of
(pound)1.0 million, or 0.6%, compared to sales of (pound)173.8 million for 2001.
Our chocolate beverages business continued to perform well with sales for the
full year 3.4% ahead of last year. A decrease in our tea sales during 2002 was
due to the exit from marginal and under-performing contracts with increased
competition in the own label tea market due to excess capacity, offset by growth
in sales of our Typhoo brand through the major multiple retailers.
SPREADS
Sales of spreads were (pound)183.8 million for 2002, an increase of
(pound)32.4 million, or 21.4%, as compared to sales of (pound)151.4 million for
2001. The acquisition of Nestle contributed sales of (pound)25.4 million from
date of acquisition to year end. The remaining increase in sales is principally
due to an additional (pound)8.5 million from Nelsons contributing to sales for a
full 12 months in 2002; the business was acquired in October 2001.
56
PREMIER FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
POTATOES
Sales of potatoes were (pound)149.9 million for 2002, a decrease of
(pound)7.7 million or 4.9%, as compared to sales of (pound)157.6 million for
2001. An average decrease of 15.0% in the price per tonne sold during 2002 arose
from a very good 2002 harvest, which reduced market prices of potatoes in the
second half of 2002. The tonnage of potatoes sold in 2002 was 986,000 tonnes, an
increase of 105,000 tonnes, or 11.9%, on 2001. The profitability of this
business is not directly linked to the market price of potatoes and hence sales
value, but rather to the volume of potatoes sold.
DISCONTINUED OPERATIONS
The (pound)0.2 million of sales by discontinued operations in 2002
represents sales made by a non-core non-grocery business, which was put into
liquidation in March 2002.
PREMIER CONSOLIDATED
GROSS PROFIT. Gross profit before operating exceptional items for our
continuing operations including Nestle was (pound)228.7 million for 2002, an
increase of (pound)40.7 million, or 21.6%, compared to gross profit on
continuing operations before operating exceptional items of (pound)188.0 million
for 2001. Excluding Nestle, gross profit before operating exceptional items for
continuing operations was (pound)206.2 million, an increase of (pound)18.2
million, or 9.7%, over 2001. Gross margin including Nestle increased to 25.9% in
2002 from 22.2% in 2001. Excluding Nestle, gross margins increased to 24.9% in
2002 from 22.2% for 2001. The principal causes of the increase in gross margin
were an increase in the branded mix of our beverages business combined with
operating efficiencies and the recovery of our French preserves business from
the operational problems encountered last year. In addition, the elimination of
underperforming contracts across the business and the decrease in sales by our
potato business, both serve to reduce sales whilst the gross profit in value
terms remains relatively unchanged.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses
before operating exceptional items were (pound)110.0 million for 2002, an
increase of (pound)11.9 million, or 12.1%, compared to selling and distribution
expenses before operating exceptional items of (pound)98.1 million for 2001. The
principal cause of the increase in selling and distribution expenses before
operating exceptional items was from the acquisition of Nestle, which increased
selling and distribution expenses by (pound)8.6 million from date of acquisition
to year end. The additional (pound)3.3 million increase relates to increases in
our advertising expenditure on our major brands.
ADMINISTRATIVE COSTS. Administrative costs before operating
exceptional items were (pound)41.2 million for 2002, an increase of (pound)14.4
million, or 53.7%, compared to administrative costs before operating exceptional
items of (pound)26.8 million for 2001. The principal causes of the increase
related to Nestle, which incurred administrative costs of (pound)7.0 million
from date of acquisition to year end. The remaining increases in expenditure
principally resulted from an increase of (pound)3.0 million in the bonus payable
to our employees, a reclassification of (pound)2.0 million of expenditure from
selling and distribution expenses to administrative costs following the merger
of our French preserves manufacturing and biscuits distribution operations, an
increase in the amortization of goodwill of (pound)0.8 million reflecting a full
year's amortization of the goodwill arising on the businesses acquired during
2001 and an increase of (pound)0.6 million in the amortization of the pension
prepayment.
OPERATING PROFIT BEFORE OPERATING EXCEPTIONAL ITEMS. Operating profit
before operating exceptional items was (pound)77.5 million for 2002, an increase
of (pound)14.0 million, or 22.0%, over operating profit before operating
exceptional items of (pound)63.5 million for 2001. The principal causes of the
increase in operating profit before operating exceptional items was the
acquisition of Nestle in May 2002, which contributed (pound)6.9 million.
Operating margin increased to 8.8% for 2002 from 7.5% for 2001. This improvement
in operating margins reflects the increase in gross profit partly offset by the
additional marketing and administrative expenditure.
57
PREMIER FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
OPERATING EXCEPTIONAL ITEMS. Operating exceptional items in 2002
comprise the following principal items:
o (pound)3.8 million in relation to reductions in manning and changes to
shift patterns at our Moreton tea factory;
o (pound)3.0 million of costs relating to the relocation of our
principal administrative office to St Albans and the closure of our
Histon and Hampstead administrative functions;
o (pound)2.4 million of costs relating to the closure of our Nelsons
spreads factory in Aintree and the relocation of production to our
Histon spreads factory;
o (pound)2.1 million of costs relating to the Nestle acquisition and the
subsequent integration of its administrative functions with those of
Premier. The review of the manufacturing platform was not completed
until the first quarter of 2003. Therefore, no provision has been made
for the costs of this integration at December 31, 2002;
o (pound)2.1 million of costs relating to the closure of our North
Walsham canned foods factory. This factory was closed in the fourth
quarter of 2002 and the production integrated into our canned foods
factories at Wisbech and Long Sutton; and
o (pound)2.1 million in relation to further restructuring of our French
spreads and biscuits distribution operation following the integration
of the businesses in 2001.
Operating exceptional items in 2001 comprise the following items:
o a charge of(pound)4.5 million in relation to the transfer of
administration functions from our Moreton site to our Histon and Long
Sutton sites. This charge includes the redundancy costs of
approximately 165 administration staff;
o a charge of (pound)3.5 million in relation to the restructuring of
production facilities, principally the integration of the SonA
production facilities into our existing facilities at Long Sutton,
Wisbech and Bury, and the closure and sale of the SonA site. This
charge includes the redundancy costs of approximately 130 production
and administration staff; and
o a charge of (pound)4.2 million in relation to the restructuring of
distribution arrangements, principally relating to the integration of
our French biscuits distribution operations into our French preserves
operations.
NON-OPERATING EXCEPTIONAL ITEMS. Non-operating exceptional items in
2002 comprise the following principal items:
o a loss on the liquidation of a non-core non-grocery subsidiary
of(pound)0.4 million; and
o a loss on disposal of surplus properties and other fixed assets
of(pound)1.6 million.
Non-operating exceptional items in 2001 comprise the following principal items:
o a loss on disposal of(pound)25.5 million on the sale of our biscuits
operations. This includes the write-off of(pound)53.0 million of
goodwill that had previously been written off to reserves;
o a loss on disposal of our wines and spirits operations of(pound)4.1
million; and
o a profit on disposal of surplus properties of(pound)3.4 million.
NET INTEREST PAYABLE. Net interest payable was (pound)36.4 million
for 2002, which comprised (pound)6.3 million of amortization charges on our
capitalized debt issuance costs, (pound)13.2 million of exchange gains on the
translation of the principal amount of the U.S. dollar denominated Notes and a
net (pound)43.3 million payable on the Notes, our Senior Credit Facility and
other borrowings and cash. Net interest payable was (pound)52.7 million for
2001, which comprised (pound)7.5 million of amortization charges on our
capitalized debt issuance costs, (pound)3.6 million of exchange losses on the
translation of the principal amount of the U.S. dollar denominated Notes and a
net (pound)41.6 million payable on the Notes, our Senior Credit Facility and
other borrowings and cash. The increase of net interest payable in 2002 on the
58
PREMIER FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Notes, our Senior Credit Facility and other borrowings and cash was principally
due to the additional debt raised under our Senior Credit Facility to fund the
Nestle acquisition offset by reduction in debt through cash generated from our
operating activities and a decrease in market interest rates applicable to our
Senior Credit Facility.
TAXATION CHARGE ON PROFIT / (LOSS) ON ORDINARY ACTIVITIES. The tax
charge on profit on ordinary activities was (pound)6.0 million for 2002 as
compared to a tax charge of (pound)0.9 million for 2001. The tax charge in 2001
has been restated following the implementation of FRS 19 "Deferred tax".
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
CONTINUING OPERATIONS
SALES. Sales from continuing operations were (pound)845.2 million for
2001, an increase of (pound)26.7 million, or 3.3%, as compared to sales for 2000
of (pound)818.5 million. The increase in sales was principally due to (i) an
increase of (pound)25.1 million in the value of sales of potatoes following an
increase in the market price of potatoes due to a poor U.K. harvest in the
second half of 2000; and (ii) the acquisitions of (a) SonA in April 2001, which
contributed (pound)19.9 million of sales in 2001; (b) Lift, which contributed
(pound)1.2 million of sales in 2001; and (c) Nelsons, which contributed
(pound)6.0 million of sales in 2001. The increase in sales was offset by a
reduction in tea sales of (pound)18.0 million and a decrease in sales by our
existing spreads businesses of (pound)5.2 million.
CANNED FOODS, PICKLES AND SAUCES
Sales of canned foods, pickles and sauces were (pound)362.4 million
for 2001, an increase of (pound)24.8 million, or 7.3%, over sales of
(pound)337.6 million for 2000. The increase in sales was primarily due to (i) a
(pound)5.2 million, or 20.5%, increase in sales by Jonker Fris (which we
acquired in April 1999) as we continued to leverage the synergies available
following the acquisition; and (ii) sales of (pound)19.9 million from the trade
acquired from SonA.
BEVERAGES
Sales of beverages were (pound)173.8 million for 2001, a decrease of
(pound)18.0 million, or 9.4%, compared to sales of (pound)191.8 million for
2000. The decrease in sales was due to a reduction in both sales value and
volume of branded tea as a result the repositioning of our marketing strategy in
the middle of 2000 away from "Buy One Get One Free" and other deep discounting
activities to net pricing by lowering the selling prices of products supported
by traditional marketing program. The effect of the change in marketing strategy
was to increase the gross profit after marketing expenses despite the reduction
in overall sales and gross profit. The acquisition of Lift, which we acquired in
September 2001, contributed (pound)1.2 million in sales.
SPREADS
Sales of spreads were (pound)151.4 million for 2001, a decrease of
(pound)5.2 million, or 3.3%, as compared to sales of (pound)156.6 million for
2000. The decrease in sales was principally due to (i) a competitive U.K. market
which led to a (pound)3.6 million decrease in sales by our existing U.K.
operation; and (ii) a (pound)7.1 million decrease in sales by our French
operation due to distribution problems that arose during the integration of our
French preserves and biscuits operations. This decrease was offset by sales of
(pound)6.0 million from Nelsons, which we acquired in October 2001.
POTATOES
Sales of potatoes were (pound)157.6 million for 2001, an increase of
(pound)25.1 million, or 18.9%, as compared to sales of (pound)132.5 million for
2000. The increase arose from an average 44.0% increase in the price per tonne
sold during the first half of 2001 following the poor U.K. potato harvest in the
second half of 2000. The tonnage of potatoes sold in 2001 was 881,000 tonnes, an
increase of 16,500 tonnes, or 1.9%, on 2000.
DISCONTINUED OPERATIONS
Sales of wines and spirits were (pound)1.9 million for January 2001.
The wines and spirits business was sold in February 2001. The remaining
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PREMIER FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
(pound)2.2 million of sales by discontinued operations in 2001 represents sales
made by a non-core non-grocery business, which has been put into liquidation in
March 2002.
PREMIER CONSOLIDATED
GROSS PROFIT. Gross profit before operating exceptional items for our
overall operations was (pound)188.4 million for 2001, a decrease of (pound)56.4
million, or 23.0%, compared to gross profit before operating exceptional items
of (pound)244.8 million for 2000. The principal cause of the decrease in gross
profit before operating exceptional items was the sale of our biscuit
manufacturing business in January 2001 and wines and spirits business in
February 2001. Gross margin decreased to 22.2% for 2001 from 23.7% for 2000. For
continuing operations, gross profit before operating exceptional items was
(pound)188.0 million for 2001, a decrease of (pound)10.1 million, or 5.1%, over
gross profit before operating exceptional items of (pound)198.1 million for
2000. Gross margin for continuing operations decreased from 24.2% for 2000 to
22.2% for 2001. The principal causes of the decrease in gross margin was the
repositioning of our tea marketing strategy and the increase in the market price
of potatoes.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses
before operating exceptional items were (pound)98.1 million for 2001, a decrease
of (pound)44.8 million, or 31.4%, compared to selling and distribution expenses
before operating exceptional items of (pound)142.9 million for 2000. The
principal cause of the decrease in selling and distribution expenses before
operating exceptional items was the sale of our biscuit manufacturing business
in January 2001 and wines and spirits business in February 2001. For continuing
operations, selling and distribution expenses before operating exceptional items
were (pound)97.6 million for 2001, a decrease of (pound)15.8 million, or 13.9%,
over selling and distribution expenses before operating exceptional items of
(pound)113.4 million for 2000. The principal causes of the decrease in selling
and distribution expenses before operating exceptional items was the
repositioning of our tea marketing strategy which reduced marketing costs on tea
by (pound)19.1 million offset by an increase in marketing expenses for the other
operations of (pound)5.9 million.
ADMINISTRATIVE COSTS. Administrative costs before operating
exceptional items were (pound)26.8 million for 2001, a decrease of (pound)5.9
million, or 18.0%, compared to administrative costs before operating exceptional
items of (pound)32.7 million for 2000. The principal cause of the decrease in
administrative costs before operating exceptional items was the sale of our
biscuit manufacturing business in January 2001 and wines and spirits business in
February 2001. For continuing businesses, administrative expenses before
operating exceptional items were (pound)26.1 million, an increase of (pound)1.5
million, or 6.1%, over administrative expenses before operating exceptional
items of (pound)24.6 million for 2000. The principal causes of the increase were
the acquisitions of the SonA and Nelsons.
OPERATING PROFIT BEFORE OPERATING EXCEPTIONAL ITEMS. Operating profit
before operating exceptional items was (pound)63.5 million for 2001, a decrease
of (pound)5.7 million, or 8.2%, over operating profit before operating
exceptional items of (pound)69.2 million for 2000. The principal cause of the
decrease in operating profit before operating exceptional items was the sale of
our biscuit manufacturing business in January 2001 and wines and spirits
business in February 2001. Operating margin increased to 7.5% for 2001 from 6.7%
for 2000. For continuing businesses, operating profit before operating
exceptional items was (pound)64.3 million, an increase of (pound)4.2 million, or
7.0%, over operating profit before operating exceptional items of (pound)60.1
million for 2000. This improvement in operating margins reflects the reductions
in selling and distribution expenses, partly offset by the decrease in gross
profit, as discussed above.
OPERATING EXCEPTIONAL ITEMS. Operating exceptional items in 2001
comprise the following principal items:
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PREMIER FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
o a charge of(pound)4.5 million in relation to the transfer of
administration functions from our Moreton site to our Histon and Long
Sutton sites. This charge includes the redundancy costs of
approximately 165 administration staff;
o a charge of (pound)3.5 million in relation to the restructuring of
production facilities, principally the integration of the SonA
production facilities into our existing facilities at Long Sutton,
Wisbech and Bury, and the closure and sale of the SonA site. This
charge includes the redundancy costs of approximately 130 production
and administration staff; and
o a charge of (pound)4.2 million in relation to the restructuring of
distribution arrangements, principally relating to the integration of
our French biscuits distribution operations into our French preserves
operations.
Operating exceptional items in 2000 comprise the following item:
o a charge of(pound)1.6 million relating to the further restructuring of
our canned foods, pickles and sauces production facilities.
NON-OPERATING EXCEPTIONAL ITEMS. Non-operating exceptional items in
2001 comprise the following principal items:
o a loss on disposal of(pound)25.5 million on the sale of our biscuits
operations. This includes the write off of(pound)53.0 million of
goodwill that had previously been written off to reserves;
o a loss on disposal of our wines and spirits operations of(pound)4.1
million; and
o a profit on disposal of surplus properties of(pound)3.4 million.
Non-operating exceptional items in 2000 comprise the following principal items:
o a charge of(pound)4.2 million, which was an adjustment to the loss on
disposal of subsidiaries, which were disposed of in prior years; and
o a loss on disposal of surplus properties of(pound)1.6 million.
NET INTEREST PAYABLE. Net interest payable was (pound)52.7 million
for 2001, which comprised (pound)7.5 million of amortization charges on our
capitalized debt issuance costs, (pound)3.6 million of exchange losses on the
translation of the principal amount of the U.S. dollar denominated Notes and a
net (pound)41.6 million payable on the Notes, our Senior Credit Facility and
other borrowings and cash. Net interest payable was (pound)67.9 million for
2000, which comprised (pound)5.8 million of amortization charges on our
capitalized debt issuance costs, (pound)10.0 million of exchange losses on the
translation of the principal amount of the U.S. dollar denominated Notes and a
net (pound)52.1 million payable on the Notes, our Senior Credit Facility and
other borrowings and cash. The decrease of net interest payable in 2001 on the
Notes, our Senior Credit Facility and other borrowings and cash was principally
due to the utilization of the proceeds from the sales of our biscuit
manufacturing and wines and spirits businesses in reducing our term debt.
TAXATION CHARGE ON PROFIT / (LOSS) ON ORDINARY ACTIVITIES. Tax on
loss on ordinary activities was (pound)0.9 million for 2001 as compared to a tax
charge of (pound)2.5 million for 2000. The tax charge in 2001 and 2000 has been
restated following the implementation of FRS 19 "Deferred tax".
SIGNIFICANT ACCOUNTING POLICIES
Our accounting policies are described in Note 1 of the Notes to our
Consolidated Financial Statements included in this annual report. Certain of our
accounting policies require the application of judgment by management in
selecting the appropriate assumptions for calculating financial estimates. By
their nature these judgments are subject to an inherent degree of uncertainty.
These judgments 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
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
rebates. Provision is made at the time of sale and released, if unutilized, once
the likelihood of such a claim being made has become remote.
PENSION BENEFITS The determination of our obligation and expense for
pension benefits is dependent on our selection of certain assumptions used by
actuaries in calculating such amounts. Those assumptions are described in Note 6
and Note 24 of the Notes to our Consolidated Financial Statements included in
this annual report 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 amortized
over future periods and therefore, generally affect our recognized 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
obligations and our future pensions expense.
VALUATION OF GOODWILL, INTANGIBLE AND OTHER FIXED ASSETS Under U.K.
GAAP, Premier's accounting policy is to amortize 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 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 elsewhere in this annual report. 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 under performance 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.
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flow from operations and
borrowings under our Senior Credit Facility. Approximately (pound)77.3 million
was available to us at December 31, 2002 for borrowing under the Working Capital
Facility, of which up to (pound)54.9 million may be used for guarantees and
letters of credit.
CASH FLOW
NET CASH FLOW FROM OPERATING ACTIVITIES
Net cash flow generated from operating activities (cash flow before
interest, capital expenditure, tax and dividends, but after working capital
movements and cash flows relating to operating exceptional items) was an inflow
of (pound)98.8 million for 2002, an increase of (pound)17.1 million over net
cash flow from operating activities of (pound)81.7 million for 2001, and an
increase of (pound)8.6 million over net cash flow from operating activities of
(pound)90.2 million for 2000. The table below analyses the decrease in net cash
flow generated from operating activities:
2000 2001 2002
(POUND) MILLIONS
Operating profit for continuing operations 60.1 64.3 77.6
Depreciation and amortization for continuing operations 16.1 18.6 25.6
Operating cash outflow for discontinued operations (2.7) (0.8) (0.1)
Working capital movements for continuing operations 31.9 13.1 8.9
Exceptional items (15.2) (13.5) (13.2)
------------ ------------ ------------
Net cash inflow from operating activities 90.2 81.7 98.8
============ ============ ============
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 payments to major suppliers, and from capital
and other expenditures relating to the execution of our restructuring programs.
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
We made capital expenditures of (pound)17.3 million in 2002. We made
capital expenditures of (pound)20.1 million and (pound)26.5 million in 2001 and
2000, respectively. We believe that our manufacturing facilities are generally
in good condition, and as we have improved the efficiency of our manufacturing
facilities with our capital expenditure program during the three years ended
December 31, 2002, capital expenditures are now expected to run in line with
depreciation. We have budgeted to spend (pound)19.4 million on capital
expenditure in 2003. We expect to fund future capital expenditure from our
operating activities and borrowings under the Senior Credit Facility. The Senior
Credit Facility places a limit on permitted capital expenditure of (pound)18.8
million for 2003 and for each year thereafter. We have the right to carry
forward the excess by which the limit exceeds the actual capital expenditure, up
to a maximum amount of one third of the previous year's permitted capital
expenditure for use within the first six months of the following financial year.
We believe that the excess carried forward from 2002 for utilization in 2003
will be sufficient to enable us to meet our budgeted capital expenditure plans
for 2003, without breaching the capital expenditure set within the Senior Credit
Facility. In the event that we do not have sufficient excess, we will reduce our
capital expenditure plans accordingly.
RETURN ON INVESTMENTS, SERVICING OF FINANCE AND CHANGES IN FINANCE
We have significant debt service and repayment obligations under the
Senior Credit Facility and the Notes. The maturity profile of our Notes, secured
credit facilities, other debt and payments due under our finance and operating
leases is set out in the table below.
63
TERM A TERM B OTHER DEBT FINANCE TOTAL
THE NOTES FACILITY FACILITY LEASES DEBT
-------------------------------------------------------------------------------------------------
(POUND) MILLIONS
Maturing in:
Less than 1 year - 27.0 - 3.2 0.1 30.3
1 to 2 years - 36.0 - - - 36.0
2 to 3 years - 50.0 - - - 50.0
3 to 4 years - 52.0 - - - 52.0
4 to 5 years - 59.3 34.0 - - 93.3
More than 5 years 199.2 - 34.0 9.4 - 242.6
-------------- --------------- -------------- --------------- -------------- ---------------
199.2 224.3 68.0 12.6 0.1 504.2
============== =============== ============== =============== ============== ===============
TOTAL OPERATING CAPITAL COMMITMENTS TOTAL
DEBT LEASES DEBT
-----------------------------------------------------------------
(POUND) MILLIONS
Maturing in:
Less than 1 year 30.3 4.0 1.4 35.7
1 to 2 years 36.0 3.1 - 39.1
2 to 3 years 50.0 2.1 - 52.1
3 to 4 years 52.0 1.4 - 53.4
4 to 5 years 93.3 1.3 - 94.6
More than 5 years 242.6 4.3 - 246.9
--------------- -------------- -------------- ----------------
504.2 16.2 1.4 521.8
=============== ============== ============== ================
We paid net interest on our Notes, the Senior Credit Facility,
overdrafts and cash balances of (pound)47.4 million in 2002 compared to net
interest paid on our Notes, the Senior Credit Facility, overdrafts and cash
balances in 2001 of (pound)44.5 million. The increase in interest paid is
principally due to the additional debt raised under the supplemental agreement
to the Senior Credit Facility to fund the Nestle acquisition offset by a
reduction in net debt from cash generated through our operations and a general
decrease in prevailing market interest rates.
SENIOR CREDIT FACILITY
On May 27, 2002, we executed a Supplemental Agreement to the Senior
Credit Facility that permitted one of our subsidiaries to borrow an additional
(pound)135.0 million under the Senior Credit Facility to fund our acquisition of
the ambient food business in the U.K. of Nestle SA. The Supplemental Agreement
amended certain terms in the Senior Credit Facility, including the amortization
schedule of the facilities. Following the completion of the acquisition, the
Term A Facility is required to be repaid in semi-annual instalments with final
maturity in December 2007. The Term B Facility is required to be repaid in two
instalments with 50% repayable in June 2008 and the balance repayable in
December 2008. The Working Capital Facility will cease to be available on
December 31, 2007. In addition, the Working Capital Facility was reduced from
(pound)125.0 million to (pound)100.0 million.
The Senior Credit Facility provides for (pound)392.3 million of loan
facilities comprised of (i) two Term facilities, (the "Term A" and "Term B"
Facilities); and (ii) a Working Capital Facility.
The Term A Facility is for an amount of up to (pound)224.3 million
and the Term B Facility is for an amount of up to (pound)68.0 million. The
Working Capital Facility in the amount of up to (pound)100.0 million 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.
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Borrowings under the Senior Credit Facility at December 31, 2002
comprised (pound)224.3 million under the Term A Facility and (pound)68.0 million
under the Term B Facility. Of the (pound)100.0 million of Working Capital
Facility, (pound)nil was drawn at December 31, 2002 and (pound)22.7 million was
utilized for general corporate purposes. Borrowings under the Senior Credit
Facility bear interest at floating rates and require interest payments on
varying dates.
At December 31, 2002, the Term A Facility is required to be repaid in
semi-annual instalments commencing on June 30, 2002 with final maturity on
December 31, 2007. The Term B Facility is required to be repaid in two
instalments with 50% repayable on June 30, 2008 and the balance repayable in
December 31, 2008. The Working Capital Facility will cease to be available on
December 31, 2007.
Under the Senior Credit Facility, we are required to make prepayments
in full immediately upon the occurrence of certain events, including a change of
control (as defined therein) or any asset sale (as defined therein). We are also
required to make mandatory prepayments with the first (pound)100.0 million and
thereafter 50% of the aggregate net proceeds of any flotation (as defined
therein) which does not constitute a full prepayment event and the net proceeds
from disposals which are not applied in acquiring replacement assets or other
assets required in the business over a six-month reinvestment period. In
addition, a percentage of our excess cash flow must be applied in prepayment of
the Senior Credit Facility. The percentage is initially 75% but reduces in two
equal steps to 25% dependent upon the applicable total net debt to consolidated
EBITDA ratio for the financial year in question.
THE NOTES
In August 1999, we issued $200.0 million aggregate principal amount
12% Senior Notes due 2009 (the "Dollar Notes") and (pound)75 million aggregate
principal amount 12 1/4% senior Notes due 2009 (the "Sterling Notes", and
together with the Dollar Notes, the "Notes"). The Notes were subsequently
exchanged for SEC-registered Notes in July 2000 on the same terms and conditions
by the holders. The Notes will mature on September 1, 2009, unless redeemed at
our option at an earlier date. Cash interest on the Dollar Notes accrues at a
rate of 12% per annum and are payable in cash semi-annually on March 1 and
September 1 of each year. Cash interest on the Sterling Notes accrues at a rate
of 12 1/4% per annum and are payable in cash semi-annually on March 1 and
September 1 of each year.
The Notes may be redeemed at our option at any time on or after
September 1, 2004, in whole or in part. At any time on or prior to September 1,
2004, the Notes may also be redeemed as a whole upon the occurrence of a change
of control (as defined in the Indenture).
The Indenture governing the Notes contains covenants limiting our
ability to:
o incur additional debt;
o transfer and sell assets;
o enter into transactions with our affiliates; and
o pay dividends or make any other distributions on our capital
stock.
These covenants are subject to a number of important limitations and
exceptions.
INTERCOMPANY LOANS
Pursuant to an intercompany loan agreement dated August 10, 1999
entered into between Premier and Premier Financing (the "Intercompany Loan"),
Premier lent an amount equal to the proceeds of the original offering to Premier
Financing, the proceeds of which were used by Premier Financing to purchase
preference shares of Premier Holdings. Interest is to be payable on the dates
and at the rate that interest is payable under the Notes. The Intercompany Loan
has the same maturity as the Notes. Premier Financing's ability to pay interest
on, and to repay principal amounts borrowed under, the Intercompany Loan is
dependent upon funds generated from the operations of its operating subsidiaries
and on those subsidiaries' ability to pay dividends and make other distributions
to Premier Financing. The Intercompany Loan is subordinated to the Senior Credit
Facility pursuant to a subordination deed.
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PREMIER FOODS PLC
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Premier also borrowed (pound)9.3 million from an affiliated company.
This loan is unsecured, interest free subordinated to the Senior Credit Facility
and is repayable in full on July 31, 2009.
GENERAL CONSIDERATIONS
Premier Foods plc is a holding company and does not have operations
of its own. It relies on dividends and payments on the Intercompany Loan to make
payments on the principal and interest of the Notes. Premier Financing is also a
holding company and does not directly conduct any business operations. Premier
Financing relies on dividends and other payments from our operating subsidiaries
to generate funds to fulfill its obligations under the Intercompany Loan. The
ability of Premier Financing, the borrower of the Senior Credit Facility, to
make dividends and other payments is restricted by the terms of the Senior
Credit Facility and the subordination deed. Furthermore, the right of the
noteholders to receive payments on the Notes is structurally subordinated to all
liabilities of our subsidiaries.
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.
MATERIAL DIFFERENCES BETWEEN U.K. GAAP AND U.S. GAAP
U.K. GAAP differs in certain significant respects from U.S. GAAP. The
differences applicable to us principally relate to goodwill amortization,
pensions, derivative financial instruments and deferred tax. A summary of the
significant differences as they affect us are set out in Note 24 of the notes to
our combined and consolidated financial statements included elsewhere in this
annual report.
RECENT ACCOUNTING PRONOUNCEMENTS
A summary of the recent accounting standards as they affect us are
set out in Note 24 of the notes to our combined and consolidated financial
statements included elsewhere in this annual report.
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PREMIER FOODS PLC
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of our financial risk-management activities
includes "forward-looking statements" that involve risks and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements.
Market risk represents the risk of changes in the value of financial
instruments, whether derivative or non-derivative, as a result of fluctuations
in foreign currency exchange rates and interest rates. The objective of our
financial risk management strategy is to protect us against unfavorable changes
in the financial markets and thus help us secure profitability. Funding and
management of the financial risks are the responsibility of our treasury
committee, which is a sub-committee appointed by the Board of Directors.
Under our financial policy, we use various financial instruments
within specified limits to manage the primary market exposures associated with
our underlying assets and liabilities, as well as with anticipated transactions.
We use these instruments to reduce risk by essentially creating offsetting
market exposures. These contracts are entered into with financial institutions
in accordance with our treasury policies and procedures, thereby reducing the
risk of credit loss. We use derivative financial instruments only for commercial
purposes and financial purposes. We do not use derivative financial instruments
for speculative purposes.
The following discussion contains sensitivity analyses which present
the hypothetical loss in cash flows or fair values of the financial instruments
and derivative financial instruments that were held by us as of December 31,
2002 that were subject to changes in foreign currency exchange rates and
interest rates. The range of sensitivities chosen for these analyses reflects
our view of changes that are reasonably possible over a one-year period.
In the normal course of business, we also face risks that are either
non-financial or non-quantifiable. These risks principally include country,
commodity, credit and legal risks, and are not represented in the following
analyses.
FOREIGN CURRENCY EXCHANGE RISK
Our policy with regard to foreign currency exchange risk is to hedge
such risk using foreign currency purchase contracts, swaps, 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. We hedge all trading transaction exposures above an
aggregate level of (pound)100,000. 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.
As of December 31, 2002, the contractual value and market value of
our foreign currency forward purchase contracts were (pound)42.2 million and
(pound)41.9 million, respectively.
Using a hypothetical adverse change of 10% in foreign currency
exchange rates, the hypothetical loss in cash flows of derivative and
non-derivative financial instruments and foreign currency denominated balance
sheet positions at December 31, 2002 is estimated to be (pound)7.2 million
(2001: (pound)10.3 million).
INTEREST RATE RISK
Changes in our market risk exposure during 2002 primarily involved
the increase of interest rate risk due to the increase in our debt following the
acquisition of Nestle. This exposure will decrease with the pay down of the
Senior Credit Facility. We do not know of, nor do we expect, any significant
increases in market risk exposure to be incurred in future reporting periods.
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PREMIER FOODS PLC
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We pay interest at the following rates on our borrowings:
BORROWINGS AMOUNT OUTSTANDING AT INTEREST RATE PAYABLE INTEREST RATE AT
DECEMBER 31, 2002 PER ANNUM DECEMBER 31, 2002
----------------------------- --------------------------- ------------------------
Term A Facility (pound)224.3 million LIBOR plus margin 6.034%
Term B Facility (pound) 68.0 million LIBOR plus margin 6.784%
Drawn Working Capital Facility (pound) nil LIBOR plus margin 6.034%
Working Capital Facility utilized (pound) 22.7 million Various Various
for other purposes
Unutilized Working Capital Facility (pound)77.3 million 0.25%-0.75% 0.625%
U.S.$ 200 million Notes U.S.$200.0 million 12.0% 12.00%
(pound)75 million Notes pound)75.0 million 12.25% 12.25%
The margin applicable to the Term A Facility and drawings under the
Working Capital Facility is 2.25% per annum reducing on the basis of a ratchet
in several steps to 1.25% per annum dependent upon certain net debt to
consolidated EBITDA ratios. At December 31, 2002, the margin applied to LIBOR on
this facility was 2.0%. The margin applied to LIBOR at December 31, 2002 on the
Term B Facility was 2.75%.
The utilization of the Working Capital Facility for other purposes
incurs fees dependent upon the purpose, for which, the facility is used.
Commitment fees are payable at the rate of 0.75% per annum of the undrawn
portion of the relevant facilities. The interest payable per annum on commitment
fees on the Working Capital Facility reduce in several steps from 0.75% to 0.25%
per annum dependent upon certain net debt to consolidated EBITDA ratios. At
December 31, 2002, the margin applied to LIBOR in respect of commitment fees was
0.625%.
Our borrowings are principally denominated in pounds sterling and
U.S. dollars, 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 partially 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.
An estimated hypothetical negative effect of a 100 basis point (or
one percent per year) increase in interest rates would result in an increase in
interest costs per year of (pound)1.5 million based on our debt position as at
December 31, 2002 (2001: (pound)0.8 million).
CREDIT RISK
Potential concentrations of credit risk to us consist principally of
cash and cash equivalents and trade receivables. Cash and cash equivalents are
deposited with high credit, quality financial institutions. Trade receivables
are due principally from major European grocery retailers. Furthermore, it is
our policy to insure all third party trade debt. We do not consider there to be
any significant concentration of credit risk at December 31, 2002.
INFLATION
We do not believe that our businesses are affected by inflation to
any greater extent than other businesses in our industry.
68