EXHIBIT 99(c)
H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 30, 2002
H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
Second Quarter Ended
------------------------------------
October 30, 2002 October 31, 2001*
FY 2003 FY 2002
---------------- -----------------
(Unaudited)
(in thousands)
Sales...................................................... $1,276,609 $1,125,059
Cost of products sold...................................... 843,241 728,363
---------- ----------
Gross profit............................................... 433,368 396,696
Selling, general and administrative expenses............... 211,079 170,390
Royalty expense to related parties......................... 53,750 48,240
---------- ----------
Operating income........................................... 168,539 178,066
Interest income............................................ 7,550 10,397
Interest expense........................................... 52,189 54,082
Dividends from related parties............................. 30,798 30,605
Currency loss.............................................. 1,512 3,769
Other expenses, net........................................ 5,707 5,665
---------- ----------
Income before income taxes and minority interest........... 147,479 155,552
Provision for income taxes................................. 10,968 9,373
---------- ----------
Income before minority interest............................ 136,511 146,179
Minority interest.......................................... (117,315) (130,219)
---------- ----------
Net income................................................. $ 19,196 $ 15,960
========== ==========
</Table>
- ---------------
* Reclassified, see Note 7
See notes to condensed consolidated financial statements.
1
H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
Six Months Ended
------------------------------------
October 30, 2002 October 31, 2001*
FY 2003 FY 2002
---------------- -----------------
(Unaudited)
(in thousands)
Sales...................................................... $2,314,983 $1,617,320
Cost of products sold...................................... 1,530,884 1,048,683
---------- ----------
Gross profit............................................... 784,099 568,637
Selling, general and administrative expenses............... 401,753 239,990
Royalty expense to related parties......................... 98,686 71,338
---------- ----------
Operating income........................................... 283,660 257,309
Interest income............................................ 14,142 22,160
Interest expense........................................... 102,731 106,255
Dividends from related parties............................. 61,596 69,124
Currency loss.............................................. 23,617 1,338
Other expenses, net........................................ 8,715 7,894
---------- ----------
Income before income taxes and minority interest........... 224,335 233,106
Provision for income taxes................................. 13,357 18,715
---------- ----------
Income before minority interest............................ 210,978 214,391
Minority interest.......................................... (187,528) (182,524)
---------- ----------
Net income................................................. $ 23,450 $ 31,867
========== ==========
</Table>
- ---------------
* Reclassified, see Note 7
See notes to condensed consolidated financial statements.
2
H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
October 30, 2002 May 1, 2002*
FY 2003 FY 2002
---------------- ------------
(Unaudited)
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 57,448 $ 6,924
Receivables, net.......................................... 579,851 732,714
Due from related parties.................................. 44,076 72,762
Short-term notes receivable from related parties.......... 1,614,781 921,014
Inventories............................................... 746,051 710,267
Prepaid expenses and other current assets................. 152,154 61,439
---------- ----------
Total current assets................................... 3,194,361 2,505,120
Property, plant and equipment............................... 1,498,557 1,516,365
Less accumulated depreciation............................... 692,112 661,429
---------- ----------
Total property, plant and equipment, net............... 806,445 854,936
Long-term notes receivable from related parties............. 35,000 35,000
Investments in related parties.............................. 1,895,245 1,895,245
Intangible assets, net...................................... 1,928,759 1,926,590
Other noncurrent assets..................................... 445,905 267,558
---------- ----------
Total other noncurrent assets.......................... 4,304,909 4,124,393
---------- ----------
Total assets........................................... $8,305,715 $7,484,449
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt with related parties...................... $ 600,329 $ 132,164
Portion of long-term debt due within one year............. 451,465 451,375
Accounts payable.......................................... 315,830 256,372
Accounts payable to related parties....................... 126,151 153,968
Accrued interest.......................................... 126,850 79,442
Accrued marketing......................................... 89,615 46,603
Other accrued liabilities................................. 78,440 99,607
---------- ----------
Total current liabilities.............................. 1,788,680 1,219,531
Long-term debt.............................................. 4,054,897 3,936,025
Deferred income taxes....................................... 26,821 23,059
Other liabilities........................................... 28,626 36,431
---------- ----------
Total long-term debt and other liabilities............. 4,110,344 3,995,515
Minority interest........................................... 1,879,493 1,758,476
Mandatorily Redeemable Series A Preferred shares............ 325,000 325,000
Shareholders' equity:
Common stock.............................................. 11 11
Additional capital........................................ 128,050 128,050
Retained earnings......................................... 71,369 58,035
Accumulated other comprehensive gain/(loss)............... 2,768 (169)
---------- ----------
Total shareholders' equity............................. 202,198 185,927
---------- ----------
Total liabilities and shareholders' equity............. $8,305,715 $7,484,449
========== ==========
</Table>
- ---------------
* Summarized from audited Fiscal Year 2002 balance sheet
See notes to condensed consolidated financial statements.
3
H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
Six Months Ended
------------------------------------
October 30, 2002 October 31, 2001
FY 2003 FY 2002
---------------- ----------------
(Unaudited)
(in thousands)
Cash provided by (used for) Operating Activities.......... $ 479,298 $(133,128)
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures.................................... (31,955) (36,956)
Proceeds from disposals of property, plant and
equipment............................................ 5,153 9,316
Acquisitions, net of cash acquired...................... -- (781,300)
Other items, net........................................ 3,356 (21,406)
--------- ---------
Cash used for investing activities................... (23,446) (830,346)
--------- ---------
Cash Flows from Financing Activities:
Payments on long-term debt.............................. (1,673) (9,179)
Proceeds from long-term debt............................ -- 751,059
Payments on commercial paper and short-term borrowings,
net.................................................. (330,556) (95,833)
Distributions to Class A partners....................... (64,844) --
Dividends on preferred shares........................... (10,116) (5,564)
Proceeds from mandatorily redeemable Series A preferred
shares............................................... -- 325,000
Other items, net........................................ 1,861 500
--------- ---------
Cash (used for) provided by financing activities..... (405,328) 965,983
--------- ---------
Net increase in cash and cash equivalents................. 50,524 2,509
Cash and cash equivalents, beginning of period............ 6,924 10,127
--------- ---------
Cash and cash equivalents, end of period.................. $ 57,448 $ 12,636
========= =========
</Table>
See notes to condensed consolidated financial statements.
4
H.J. HEINZ FINANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) On May 3, 2001, H.J. Heinz Company ("Heinz") reorganized its U.S.
corporate structure and established centers of excellence for the
management of U.S. trademarks and for U.S. treasury functions. As a
result, all of the U.S. treasury and business operations of Heinz's
domestic operations ("the U.S. Group") are now being conducted by H.J.
Heinz Finance Company and its wholly-owned subsidiaries, and H.J. Heinz
Company, L.P. ("Heinz LP") collectively referred to as "Heinz Finance" in
the accompanying notes. H.J. Heinz Finance Company has limited partnership
interests in Heinz LP. As part of the reorganization, substantially all
assets and liabilities of the U.S. Group, except for finished goods
inventories, which were retained by Heinz, were contributed to Heinz LP by
Heinz. In addition, certain assets and liabilities that related to the
U.S. Group were assumed by Heinz Finance during Fiscal 2002. H.J. Heinz
Finance Company assumed primary liability for approximately $2.9 billion
of Heinz's outstanding senior unsecured debt and accrued interest by
becoming co-obligor with Heinz.
Heinz LP owns or leases the operating assets involved in manufacturing
throughout the United States which were contributed by Heinz and its
subsidiaries, together with other assets and liabilities, to Heinz LP and
manages the business. Heinz LP has two classes of limited partnership
interests, Class A and Class B, that are allocated varying income and cash
distributions in accordance with the Heinz LP agreement. H.J. Heinz Finance
Company, directly and through wholly-owned subsidiaries, owns the Class B
interests. Heinz, directly and through wholly-owned subsidiaries, owns the
Class A interests. Heinz Management Company, a wholly-owned subsidiary of
Heinz, is the managing General Partner of Heinz LP and employs the salaried
personnel of the U.S. Group. Under the partnership agreement, Heinz Finance
has the power to control the general partner through majority membership on
Heinz LP's management board. The minority interest amounts on the October
30, 2002 and May 1, 2002 balance sheets represent the Class A and General
Partner limited partnership interest in Heinz LP, and have been adjusted
for the minority partners' share of income and cash distributions.
(2) The interim condensed consolidated financial statements of Heinz Finance
are unaudited. In the opinion of management, all adjustments which are of
a normal and recurring nature, necessary for a fair statement of the
results of operations of these interim periods have been included. The
results for the interim periods are not necessarily indicative of the
results to be expected for the full fiscal year due to the seasonal nature
of the business of Heinz Finance. Certain prior year amounts have been
reclassified in order to conform with the Fiscal 2003 presentation. These
statements should be read in conjunction with Heinz Finance's consolidated
and combined financial statements and related notes which appear in
Heinz's Form 10-K for the year ended May 1, 2002.
(3) AGREEMENT BETWEEN H.J. HEINZ COMPANY AND DEL MONTE FOODS COMPANY
On June 13, 2002, Heinz announced that it will transfer to a wholly-owned
subsidiary ("Spinco") certain assets and liabilities of its U.S. pet food
and pet snacks, U.S. tuna, U.S. retail private label soup and private label
gravy, College Inn(R) broths and U.S. infant feeding businesses, all of
which are owned by Heinz Finance, and distribute all of the shares of
Spinco common stock on a pro rata basis to its shareholders. Immediately
thereafter, Spinco will merge with a wholly-owned subsidiary of Del Monte
Foods Company ("Del Monte") resulting in Spinco becoming a wholly-owned
subsidiary of Del Monte ("the Merger"). In connection
5
with the Merger, each share of Spinco common stock will be automatically
converted into shares of Del Monte common stock that will result in the
fully diluted Del Monte common stock at the effective time of the Merger
being held approximately 74.5% by Heinz shareholders and approximately
25.5% by the Del Monte stockholders. As a result of the transaction, Heinz
Finance will receive approximately $1.1 billion in cash that will be used
to retire debt.
Included in the transaction will be the following brands: StarKist(R),
9-Lives(R), Kibbles 'n Bits(R), Pup-Peroni(R), Snausages(R), Nawsomes(R),
Heinz Nature's Goodness(R) baby food and College Inn(R) broths. The
following is a summary of the Fiscal 2003 and Fiscal 2002 second quarter
and first half operating results of the businesses to be spun off (See
Exhibit 99(d) for a discussion of results of operations and the Combined
Financial Statements of SKF Foods (Spinco) for the three and six months
ended October 30, 2002 and October 31, 2001):
<Table>
<Caption>
Second Quarter Ended Six Months Ended
------------------------- -------------------------
October 30, October 31, October 30, October 31,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues............................ $454,796 $386,796 $803,891 $477,751
Operating income.................... 47,329 45,230 70,988 62,446
</Table>
The Merger, which has been approved by the Boards of Directors of Heinz and
Del Monte, is subject to the approval by the stockholders of Del Monte and
it's expected that the transaction could close as early as December 20,
2002. Heinz received on November 21, 2002, a private letter ruling from the
Internal Revenue Service that the contribution of the assets and
liabilities to Spinco and the distribution of the shares of common stock of
Spinco to Heinz shareholders will be tax-free to Heinz, Spinco and the
shareholders of Heinz. The Merger is also subject to other customary
closing conditions.
During the three and six months ended October 30, 2002, Heinz Finance
recognized transaction related costs totaling $1.9 million pretax.
(4) INVENTORIES
The composition of inventories at the balance sheet dates was as follows:
<Table>
<Caption>
October 30, May 1,
2002 2002
(in thousands) ----------- --------
Finished goods and work-in-process........................ $575,757 $567,482
Packaging material and ingredients........................ 170,294 142,785
-------- --------
$746,051 $710,267
======== ========
</Table>
(5) TAXES
The provision for income taxes consists of provisions for federal and state
income taxes. The low effective tax rate for Heinz Finance is a result of
Heinz Finance's nontaxable minority interest in Heinz LP.
(6) RESTRUCTURING
In the fourth quarter of Fiscal 2001, Heinz announced a restructuring
initiative named "Streamline" which includes an organizational
restructuring aimed at reducing overhead costs and the consolidation of
Heinz Finance's canned pet food production to Bloomsburg, Pennsylvania
(which resulted in ceasing canned pet food production at Heinz Finance's
Terminal Island, California facility).
6
The major components of the restructuring charge and implementation costs
and the remaining accrual balances as of October 30, 2002 were as follows:
<Table>
<Caption>
Employee
Termination
Non-Cash and Accrued
Asset Severance Exit Implementation
(in millions) Write-Downs Costs Costs Costs Total
------------- ----------- ----------- ------- -------------- -----
Restructuring and Implementation
costs--Fiscal 2001....................... $34.7 $15.4 $22.8 $11.8 $84.7
Amounts utilized--Fiscal 2001.............. (34.7) (5.8) (1.7) (11.8) (54.0)
----- ----- ----- ----- -----
Accrued restructuring costs--May 2, 2001... -- 9.6 21.1 -- 30.7
Implementation costs--Fiscal 2002.......... -- -- -- 1.2 1.2
Revisions to accruals and asset write-
downs--Fiscal 2002....................... 4.3 (3.1) (5.9) -- (4.7)
Amounts utilized--Fiscal 2002.............. (4.3) (2.5) (10.4) (1.2) (18.4)
Liability assumed by related party--Fiscal
2002..................................... -- (3.8) (0.6) -- (4.4)
----- ----- ----- ----- -----
Accrued restructuring costs--May 1, 2002... -- 0.2 4.2 -- 4.4
Amounts utilized--Fiscal 2003.............. -- (0.1) (0.9) -- (1.0)
----- ----- ----- ----- -----
Accrued restructuring costs--October 30,
2002..................................... $ -- $ 0.1 $ 3.3 $ -- $ 3.4
===== ===== ===== ===== =====
</Table>
During the first six months of Fiscal 2003, Heinz Finance utilized $1.0
million of severance and exit cost accruals, principally related to its
overhead reduction plan.
(7) RECENTLY ADOPTED ACCOUNTING STANDARDS
During the fourth quarter of Fiscal 2002, Heinz Finance adopted Emerging
Issues Task Force ("EITF") statements relating to the classification of
vendor consideration and certain sales incentives. The adoption of these
EITF statements has no impact on operating income or net earnings; however,
revenues and gross profit were reduced by approximately $96.0 million and
$160.5 million in the quarter and six months ended October 31, 2001,
respectively. Prior period data has been reclassified to conform to the
current year presentation.
Heinz Finance adopted Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations" which requires that the purchase method of
accounting be applied to all business combinations after June 30, 2001.
SFAS No. 141 also established criteria for recognition of intangible assets
and goodwill. Effective May 2, 2002, Heinz Finance adopted SFAS No. 142
"Goodwill and Other Intangible Assets." Under this standard, goodwill and
intangibles with indefinite useful lives are no longer amortized. This
Standard also requires, at a minimum, an annual assessment of the carrying
value of goodwill and intangibles with indefinite useful lives. The
reassessment of intangible assets, including the ongoing impact of
amortization, and the assignment of goodwill to reporting units was
completed during the first quarter of Fiscal 2003.
Heinz Finance completed its transitional goodwill impairment tests during
the second quarter of Fiscal 2003. The SFAS No. 142 goodwill impairment
model is a two-step process. The first step compares the fair value of a
reporting unit (one level below Heinz Finance's operating segments) that
has goodwill assigned to it, to its carrying value. Heinz Finance estimates
the fair value of a reporting unit using discounted cash flows, using a
risk-adjusted weighted average cost of capital for the business as the
discount rate. If the fair value of the reporting unit is determined to be
less than its carrying value, a second step is performed to compute the
amount of goodwill impairment, if any. Step two allocates the fair value of
the reporting unit to the reporting unit's net assets other than goodwill.
The excess of the fair value of the reporting unit over the amounts
assigned to its net assets other than goodwill is considered
7
the implied fair value of the reporting unit's goodwill. The implied fair
value of the reporting unit's goodwill is then compared to the carrying
value of its goodwill. Any shortfall represents the amount of the goodwill
impairment. No impairment issues were identified as a result of completing
these transitional impairment tests.
The effects of adopting the new standards on net income are as follows:
<Table>
<Caption>
Net Income
-----------------------------------------------------
Second Quarter Six Months
Ended Ended
------------------------- -------------------------
October 30, October 31, October 30, October 31,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income.......................... $ 19,196 $15,960 $ 23,450 $31,867
Add: Goodwill amortization, net of
tax and minority interest......... -- 273 -- 541
-------- ------- -------- -------
Net income excluding goodwill
amortization...................... $ 19,196 $16,233 $ 23,450 $32,408
======== ======= ======== =======
</Table>
Net income for the quarter and six months ended October 31, 2001 would have
been $16,233 and $32,408, respectively, and net income for Fiscal 2002
would have been $75,079 had the provisions of the new standards been
applied as of May 3, 2001.
Changes in the carrying amount of goodwill for the six months ended October
30, 2002 by reportable segment are as follows:
<Table>
<Caption>
Heinz
North U.S.
America SKF Foods Frozen Total
-------- ----------- -------- ----------
Balance at May 1, 2002.............. $530,722 $649,385 $470,381 $1,650,488
Purchase accounting
reclassifications................. 1,580 -- 5,287 6,867
Other............................... -- 4,740 -- 4,740
-------- -------- -------- ----------
Balance at October 30, 2002......... $532,302 $654,125 $475,668 $1,662,095
======== ======== ======== ==========
</Table>
Trademarks and other intangible assets at October 30, 2002 and May 1, 2002,
subject to amortization expense, are as follows:
<Table>
<Caption>
October 30, 2002 May 1, 2002
---------------------------------- ----------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
-------- ------------ -------- -------- ------------ --------
Trademarks........... $ 39,103 $ (1,420) $ 37,683 $ 39,103 $ (835) $ 38,268
Licenses............. 208,186 (109,674) 98,512 208,186 (106,730) 101,456
Other................ 87,257 (47,888) 39,369 91,138 (45,860) 45,278
-------- --------- -------- -------- --------- --------
$334,546 $(158,982) $175,564 $338,427 $(153,425) $185,002
======== ========= ======== ======== ========= ========
</Table>
Amortization expense for trademarks and other intangible assets subject to
amortization was $3.3 million and $5.8 million for the quarter and six
months ended October 30, 2002, respectively. Based upon the amortizable
intangible assets recorded on the balance sheet at October 30, 2002,
amortization expense for each of the next five years is estimated to be
approximately $12.0 million.
Intangible assets not subject to amortization at October 30, 2002 and May
1, 2002, were $91.1 million and consisted solely of trademarks.
Effective May 2, 2002, Heinz Finance adopted SFAS No. 144, "Accounting for
the Impairment of Disposal of Long-Lived Assets." This statement provides
updated guidance concerning the
8
recognition and measurement of an impairment loss for certain types of
long-lived assets, expands the scope of a discontinued operation to include
a component of an entity and eliminates the current exemption to
consolidation when control over a subsidiary is likely to be temporary. The
adoption of this new standard did not have a material impact on Heinz
Finance's financial position, results of operations or cash flows for the
quarter and six months ended October 30, 2002.
(8) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, addresses accounting for legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and the normal operation of
a long-lived asset, except for certain obligations of lessees. This
standard is effective for Heinz Finance in Fiscal 2004. Heinz Finance does
not expect that the adoption of this standard will have a significant
impact on the consolidated financial statements.
In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities. This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. This Statement also establishes that fair value is
the objective for initial measurement of the liability. The provisions of
SFAS No. 146 are effective for exit or disposal activities that are
initiated after December 31, 2002.
(9) RELATED PARTY TRANSACTIONS
Employee Costs
Certain of Heinz's general and administrative expenses are charged to Heinz
Finance. These costs primarily include a management charge of all salaried
employee costs from the Heinz Management Company. Total costs charged to
Heinz Finance for these services were $81.3 million and $82.9 million for
the quarter ended October 30, 2002 and October 31, 2001, respectively, and
$168.2 million and $164.8 million for the six months ended October 30, 2002
and October 31, 2001, respectively. These costs are recorded as cost of
products sold and selling, general and administrative ("SG&A") expense in
the accompanying consolidated statements of income.
Heinz charges Heinz Finance for its share of group health insurance costs
for eligible company employees based upon location-specific costs, overall
insurance costs and loss experience incurred during a calendar year. In
addition, various other insurance coverages are also provided to Heinz
Finance through Heinz's consolidated programs. Workers compensation, auto,
property, product liability and other insurance coverages are charged
directly based on Heinz Finance's loss experience. Amounts charged to Heinz
Finance for insurance costs were $18.0 million and $17.3 million for the
quarter ended October 30, 2002 and October 31, 2001, respectively, and
$36.2 million and $32.7 million for the six months ended October 30, 2002
and October 31, 2001, respectively, and are recorded in SG&A expense in the
accompanying consolidated statements of income.
Pension costs and postretirement costs are also charged to Heinz Finance
based upon eligible employees participating in the plans.
Cash Management
Beginning in Fiscal 2002, Heinz Finance became the treasury center for cash
management and debt financing for all of Heinz's domestic operations. In
addition, in Fiscal 2003, Heinz Finance entered into a number of short-term
notes payable with foreign wholly-owned subsidiaries of Heinz, for a total
of $510.8 million. These two events resulted in the $1,014.5 million and
$788.9 million of net short-term notes receivable with related parties on
the October 30,
9
2002 and May 1, 2002, respectively, condensed consolidated balance sheets.
An average interest rate of 1.93% and 3.72% was charged on these notes
resulting in $4.8 million and $9.6 million of interest income for the
quarter ended October 30, 2002 and October 31, 2001, respectively, and $8.7
million and $20.6 million of interest income for the six months ended
October 30, 2002 and October 31, 2001, respectively, on the consolidated
statements of income.
Product Sales and Purchases
Heinz Finance sells and purchases products and services to and from other
Heinz affiliates. The result of related party transactions is the $44.1
million and $72.8 million balances due from related parties as of October
30, 2002 and May 1, 2002, respectively, and the $126.2 million and $154.0
million balances for accounts payable to related parties as of October 30,
2002 and May 1, 2002, respectively. Product sales to related parties were
$13.7 million and $11.9 million for the quarter ended October 30, 2002 and
October 31, 2001, respectively, and $26.2 million and $24.2 million in the
six months ended October 30, 2002 and October 31, 2001, respectively, and
purchases from related parties were $96.4 million and $94.3 million for the
quarter ended October 30, 2002 and October 31, 2001, respectively, and
$216.5 million and $165.1 million in the six months ended October 30, 2002
and October 31, 2001, respectively.
Other Related Party Items
Heinz Finance sold undivided interests in certain accounts receivable to a
Heinz affiliate, Receivables Servicing Company ("RSC"). Heinz Finance sold
$619.2 million of receivables net of discount expense of $2.8 million for
the year ended May 1, 2002, to RSC. These sales were reflected as
reductions of trade accounts receivable. Heinz Finance's contract with RSC
terminated in December 2001.
Heinz Finance holds $1.9 billion of non-voting, 6.5% cumulative
non-participating preferred stock of PM Holding, Inc. ("PM Holding"), a
subsidiary of Heinz. This dividend amounted to $30.8 million and $30.6
million for the quarter ended October 30, 2002 and October 31, 2001,
respectively and $61.6 million and $69.1 million for the six months ended
October 30, 2002, and October 31, 2001, respectively. This preferred stock
investment is recorded in the Investments in related parties balance on the
condensed consolidated balance sheets as of October 30, 2002 and May 1,
2002.
Heinz Finance paid royalties of $53.8 million and $46.5 million for the
quarter ended October 30, 2002 and October 31, 2001, respectively, and
$98.7 million and $69.6 million for the six months ended October 30, 2002
and October 31, 2001, respectively, to Promark International, Inc., an
indirect subsidiary of Heinz, for the use of certain trademarks.
The $35.0 million long-term note receivable from related parties recorded
on the accompanying condensed consolidated balance sheets as of October 30,
2002 and May 1, 2002, relates to a receivable from Heinz that was
contributed to Heinz Finance in exchange for common stock of Heinz Finance.
Heinz Finance received an administrative fee from Heinz for acting as the
agent in the sale of the retained inventory discussed in Note (1). This fee
was $0.8 million for the quarter ended October 31, 2001 and $10.4 million
for the six months ended October 31, 2001, which is recorded as income in
SG&A expense in the accompanying consolidated statement of income.
(10) SEGMENTS
Heinz Finance has changed its segment reporting for its business to reflect
changes in organizational structure and management. Heinz Finance is
reporting and grouping the results of certain businesses under a new
segment designated SKF Foods. SKF Foods consists of Heinz Finance's U.S.
pet food and pet snacks, U.S. tuna, U.S. retail private label soup and
10
private label gravy, College Inn broth and U.S. infant feeding businesses.
SKF Foods also includes the former U.S. Pet Products and Seafood segment.
These businesses have been separated from the remaining Heinz Finance
businesses in preparation for their spin-off and subsequent merger with Del
Monte Corporation, a subsidiary of Del Monte Foods Company. The remaining
Heinz North America segment now includes the following businesses that will
be retained by Heinz Finance following the Del Monte transaction,
including: ketchup, condiments, sauces, and pasta meals sold to the grocery
and foodservice channels in the U.S.
Descriptions of Heinz Finance's reportable segments are as follows:
- Heinz North America -- This segment manufactures, markets and sells
ketchup, condiments, sauces and pasta meals to the U.S. grocery and
foodservice channels.
- SKF Foods -- This segment includes the U.S. pet food and pet snacks, U.S.
tuna, U.S. retail private label soup and private label gravy, College Inn
broth and U.S. infant feeding businesses.
- U.S. Frozen -- This segment manufactures, markets and sells frozen
potatoes, entrees, snacks and appetizers.
Heinz Finance's management evaluates performance based on several factors
including net sales and the use of capital resources; however, the primary
measurement focus is operating income excluding unusual costs and gains.
Intersegment sales are accounted for at current market values. Items below
the operating income line of the consolidated statements of income are not
presented by segment, since they are excluded from the measure of segment
profitability reviewed by Heinz Finance's management.
The following table presents information about Heinz Finance's reportable
segments:
<Table>
<Caption>
Net External Sales
-------------------------------------------------------------------------
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 30, 2002 October 31, 2001 October 30, 2002 October 31, 2001
(in thousands) FY 2003 FY 2002 FY 2003 FY 2002
- -------------- ---------------- ---------------- ---------------- ----------------
Heinz North America........ $ 503,489 $ 452,245 $ 945,057 $ 741,029
SKF Foods.................. 454,796 386,796 803,891 477,751
U.S. Frozen................ 318,324 286,018 566,035 398,540
---------- ---------- ---------- ----------
Consolidated totals...... $1,276,609 $1,125,059 $2,314,983 $1,617,320
========== ========== ========== ==========
</Table>
<Table>
<Caption>
Intersegment Sales
-------------------------------------------------------------------------
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 30, 2002 October 31, 2001 October 30, 2002 October 31, 2001
(in thousands) FY 2003 FY 2002 FY 2003 FY 2002
- -------------- ---------------- ---------------- ---------------- ----------------
Heinz North America........ $81 $143 $ 99 $233
SKF Foods.................. -- -- -- --
U.S. Frozen................ 8 -- 17 17
--- ---- ---- ----
Consolidated totals...... $89 $143 $116 $250
=== ==== ==== ====
</Table>
11
<Table>
<Caption>
Operating Income (Loss)
-------------------------------------------------------------------------
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 30, 2002 October 31, 2001 October 30, 2002 October 31, 2001
(in thousands) FY 2003 FY 2002 FY 2003 FY 2002
- -------------- ---------------- ---------------- ---------------- ----------------
Heinz North America........ $ 71,904 $ 89,472 $124,688 $131,013
SKF Foods.................. 47,329 45,230 70,988 62,446
U.S. Frozen................ 50,083 42,106 89,228 63,496
Non-Operating(a)........... (777) 1,258 (1,244) 354
-------- -------- -------- --------
Consolidated totals...... $168,539 $178,066 $283,660 $257,309
======== ======== ======== ========
</Table>
--------------------
(a) Includes charges not directly attributable to operating segments.
(11) COMPREHENSIVE INCOME
<Table>
<Caption>
Second Quarter Ended Six Months Ended
----------------------------------- -----------------------------------
October 30, 2002 October 31, 2001 October 30, 2002 October 31, 2001
(in thousands) FY 2003 FY 2002 FY 2003 FY 2002
- -------------- ---------------- ---------------- ---------------- ----------------
Net income................. $ 19,196 $15,960 $ 23,450 $31,867
Other comprehensive income:
Net deferred
gains/(losses) on
derivatives from
periodic
revaluations........... 2,038 (657) 17,811 986
Net deferred
(gains)/losses on
derivatives
reclassified to
earnings............... (1,668) (114) (14,874) 24
-------- ------- -------- -------
Comprehensive income....... $ 19,566 $15,189 $ 26,387 $32,877
======== ======= ======== =======
</Table>
(12) FINANCIAL INSTRUMENTS
Heinz Finance utilizes certain financial instruments to manage its
commodity price and interest rate exposures.
FOREIGN CURRENCY HEDGING: Heinz Finance may hedge specific foreign currency
cash flows associated with foreign-currency-denominated financial assets
and liabilities. These hedges are accounted for as cash flow hedges.
COMMODITY PRICE HEDGING: Heinz Finance uses commodity futures, swaps and
options in order to reduce price risk associated with anticipated purchases
of raw materials such as corn, soybean oil and soybean meal. Commodity
price risk arises due to factors such as weather conditions, government
regulations, economic climate and other unforeseen circumstances. Hedges of
anticipated commodity purchases which meet the criteria for hedge
accounting are designated as cash flow hedges.
INTEREST RATE HEDGING: Heinz Finance uses interest rate swaps to manage
interest rate exposure. These derivatives are designated as cash flow
hedges or fair value hedges depending on the nature of the particular risk
being hedged.
HEDGE INEFFECTIVENESS: During the six months ended October 30, 2002, hedge
ineffectiveness related to cash flow hedges was a net gain of $0.1 million
which is reported in the consolidated statements of income as other
expenses, net.
DEFERRED HEDGING GAINS AND LOSSES: As of October 30, 2002, Heinz Finance is
hedging forecasted transactions for periods not exceeding 12 months, and
expects $2.8 million of net deferred gain reported in accumulated other
comprehensive income to be reclassified to earnings within that time frame.
12