EXHIBIT 99(d)
SKF FOODS
DISCUSSION OF RESULTS OF OPERATIONS AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED OCTOBER 30, 2002 AND OCTOBER 31, 2001
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF SKF FOODS
OVERVIEW
SKF Foods ("The Heinz Businesses") manufacture, market and distribute
branded and private-label shelf-stable grocery products. The Heinz Businesses'
product portfolio includes leading brands in the tuna, pet food, infant feeding
and broth categories. The Heinz Businesses also produce private label soup. In
the United States, the Heinz Businesses include the largest producer of tuna and
private label soup, the second largest producer of pet snacks and infant feeding
products and a leading producer of pet food.
The Heinz Businesses have not historically been managed as a single
stand-alone unit but as part of the operations of Heinz in North America. The
preparation of the combined financial statements and this Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Heinz Businesses include the use of "carve out" and "push down" accounting
procedures wherein certain assets, liabilities and expenses historically
recorded or incurred at the Heinz parent company level or by an affiliate of
Heinz, which related to or were incurred on behalf of the Heinz Businesses, have
been identified and allocated or pushed down, as appropriate, to the financial
results of the Heinz Businesses for the periods presented. Allocations were made
primarily on a percentage of revenue basis, which management of the Heinz
Businesses believes represents a reasonable allocation.
No debt or interest expense has been allocated to the Heinz Businesses from
Heinz. These combined financial statements are not indicative of the results of
operations that would have existed or will exist in the future assuming the
Heinz Businesses were operated as an independent company or as a subsidiary of
Del Monte.
The Heinz Businesses include the following three segments for financial
reporting purposes:
- Tuna -- This segment manufactures, markets and sells tuna.
- Pet Products -- This segment manufactures, markets and sells dry and
canned pet food and pet snacks.
- Soup and Infant Feeding-- This segment manufactures, markets and sells
soups, broth and infant feeding products.
The percentage of sales by segment have been relatively stable over the
last three years. Pet products sales have been approximately 53% of sales, tuna
has been approximately 31% of sales and soup and infant feeding have been
approximately 16% of sales. Sales declined 10.4% in fiscal 2001 primarily as a
result of decreases in the pet products and tuna segments, but stabilized in
fiscal 2002 as decreases in the pet products segment were partially offset by
gains in the tuna segment.
RESULTS OF OPERATIONS
During the fourth quarter of fiscal 2002, the Heinz Businesses adopted EITF
00-14 and EITF 00-25 (codified EITF 01-9), relating to the classification of
certain costs related to coupon redemption and performance allowances previously
recorded as selling, general and administrative expense. The adoption of these
EITF consensuses had no impact on operating income or net earnings; however,
revenues and gross profit were reduced by approximately $30.0 million and $52.8
million in the three and six months ended October 30, 2001, respectively. Prior
period data has been reclassified to conform to the current year presentation.
1
The following table sets forth certain segment detail for the Heinz
Businesses:
<Table>
<Caption>
Three Months Ended Six Months Ended
----------------------------------- -----------------------------------
October 30, 2002 October 31, 2001 October 30, 2002 October 31, 2001
---------------- ---------------- ---------------- ----------------
(Dollars in millions)
SALES:
Tuna............................ $154.7 $146.9 $278.6 $273.7
Pet products.................... 227.5 239.0 414.4 458.7
Soup and infant feeding......... 89.5 93.2 143.0 148.4
------ ------ ------ ------
Total........................ $471.7 $479.1 $836.0 $880.8
====== ====== ====== ======
OPERATING INCOME:
Tuna............................ $ 15.1 $ 8.0 $ 19.7 $ 27.7
Pet products.................... 46.0 36.6 79.9 71.8
Soup and infant feeding......... 18.6 26.4 29.8 36.0
Other*.......................... (3.0) (3.0) (5.2) (5.5)
------ ------ ------ ------
Total........................ $ 76.7 $ 68.1 $124.2 $130.0
====== ====== ====== ======
OPERATING INCOME EXCLUDING SPECIAL
ITEMS:
Tuna............................ $ 15.1 $ 8.0 $ 19.7 $ 34.4
Pet products.................... 46.0 36.6 79.9 72.9
Soup and infant feeding......... 18.6 26.4 29.8 36.0
Other*.......................... (3.0) (3.0) (5.2) (5.5)
------ ------ ------ ------
Total........................ $ 76.7 $ 68.1 $124.2 $137.9
====== ====== ====== ======
</Table>
* "Other" represents general and administrative expenses not directly
attributable to operating segments.
(Note: Totals may not add due to rounding.)
THREE MONTHS ENDED OCTOBER 30, 2002 VERSUS THREE MONTHS ENDED OCTOBER 31, 2001
Sales
Sales for the three months ended October 30, 2002 decreased $7.4 million,
or 1.5%, to $471.7 million from $479.1 million in the comparable prior year
period. Sales for the quarter were negatively impacted by volume declines of
$7.7 million, or 1.6%, primarily in the pet products segment offset by volume
increases in the tuna segment.
Gross Profit
Gross profit for the second quarter of fiscal 2003 increased $3.6 million,
or 2.4 %, to $153.4 million from $149.8 million in the prior year period and the
gross profit margin increased to 32.5% from 31.3% in the prior year period. The
gross profit increase was driven by reductions in cost of goods sold in the pet
products and tuna segments, partially offset by cost increases in the soup and
infant feeding segment compared to the prior year period.
SG&A
SG&A decreased $5.0 million, or 6.1%, for the three months ended October
30, 2002 to $76.7 million from $81.7 million in the prior year period and
decreased as a percentage of sales to 16.3% from 17.1%. Total marketing support
included in SG&A (including consumer promotions and media) increased $3.9
million, or 26.6%, to $18.5 million from $14.6 million in the prior year in
2
support of the StarKist Flavor Fresh Pouch and Kibbles 'n Bits. The increased
marketing expense was offset by reductions in general and administrative
expenses and selling and distribution expenses.
Operating income
Operating income increased $8.6 million, or 12.7%, for the second quarter
of fiscal 2003, to $76.7 million from $68.1 million for the comparable prior
year period. Increases in operating income of the tuna and pet products segments
were driven by increases in gross profit, and decreases in selling, general and
administrative costs, partially offset by a decrease in operating income of the
soup and infant feeding segment which was due to a reduction in gross profit.
Other items
Other income increased $0.7 million to $0.3 million for the second quarter
of fiscal 2003 from $0.4 million of expense for the comparable prior year
period. The effective tax rate was 32.2% on profits of $77.2 million compared to
32.7% on profits of $68.4 million.
Net income
Net income increased $6.4 million to $52.4 million from $46.0 million in
the comparable prior year period.
The following segment discussion excludes special items.
TUNA
Sales of the tuna segment increased $7.8 million, or 5.3%, for the three
months ended October 30, 2002, to $154.7 million from $146.9 million. While
volume increases drove a sales increase of 8.8%, this was partially offset by
lower sales prices and increases in promotional expenses in support of volume
growth. These results reflect volume and share growth led by a shift toward
pouch tuna.
The tuna segment's gross profit increased $6.4 million, primarily due to
decreased costs and higher volume partially offset by increased promotional
expenses. Operating income increased $7.1 million, or 89.4%, during the second
quarter of fiscal 2003, to $15.1 million from $8.0 million in the comparable
prior year period, due primarily to the increase in gross profit.
PET PRODUCTS
Sales of the pet products segment decreased $11.5 million, or 4.8%, for the
three months ended October 30, 2002, from $239.0 million to $227.5 million.
Reduced volumes decreased sales 7.6%, primarily due to planned reductions in
lower margin private label products, pet snacks and lower volume of non-core
brands.
The pet products segment's gross profit margin increased 4.6% to 40.6% from
36.0% in the comparable prior year period and gross profit increased $6.3
million, or 7.3%, from $85.9 million in fiscal 2002 to $92.2 million in fiscal
2003. These increases are primarily due to favorable pricing, the benefit of
reduced amortization expense of goodwill and other intangible assets, lower
production costs and favorable product mix. During this period, the pet products
segment continued initiatives to eliminate lower margin pet food products, which
improved product mix, and to increase cat food prices. Operating income
increased $9.4 million, or 25.5%, from $36.6 million to $46.0 million, due
primarily to the increase in gross profit.
3
SOUP AND INFANT FEEDING
Sales of the soup and infant feeding segment decreased $3.7 million, or
3.9%, for the three months ended October 30, 2002, from $93.2 million to $89.5
million due to lower volumes and pricing declines in infant feeding.
The soup and infant feeding segment's gross profit decreased $9.1 million,
or 22.7%, primarily due to higher cost, lower pricing and lower volume.
Operating income decreased $7.8 million, or 29.5%, due primarily to the decrease
in gross profit.
SIX MONTHS ENDED OCTOBER 30, 2002 VERSUS SIX MONTHS ENDED OCTOBER 31, 2001
Sales
Sales for the six months ended October 30, 2002 decreased $44.8 million, or
5.1%, to $836.0 million from $880.8 million in the comparable prior year period.
Sales were negatively impacted by volume declines of $37.8 million, or 4.3%.
Volume declines in the pet products and soup and infant feeding segments were
partially offset by volume increases in the tuna segment. Lower pricing of $6.9
million, or 0.8%, reflects pricing declines in the tuna and soup and infant
feeding segments partially offset by price increases in the pet products
segment.
Special Items
The Heinz Businesses recorded no special items in the first six months of
fiscal 2003 and $7.9 million pretax of special items in the first six months of
fiscal 2002. The following table provides a comparison of the Heinz Businesses'
reported results and the results excluding special items for the first six
months of fiscal 2002.
<Table>
<Caption>
Gross Operating Net
(Dollars in millions) Net sales Profit Income Income
- --------------------- --------- ------ --------- ------
Reported Results....................................... $880.8 $278.8 $130.0 $86.8
Streamline implementation costs...................... -- 7.3 7.9 6.9
------ ------ ------ -----
Results excluding special items........................ $880.8 $286.2 $137.9 $93.7
====== ====== ====== =====
</Table>
(Note: Totals may not add due to rounding.)
Gross Profit
Gross profit for the six months of fiscal 2003 decreased $11.2 million, or
4.0%, to $267.6 million from $278.8 million in the prior year period and the
gross profit margin increased to 32.0% from 31.7% in the prior year period.
Excluding the special items identified above, gross profit decreased $18.6
million, or 6.5%, to $267.6 million for the six months ended October 30, 2002
from $286.2 million for the six months ended October 31, 2001, and the gross
profit margin decreased to 32.0% from 32.5%. The gross profit decline was driven
by the pet food volume decline as well as lower tuna pricing and higher tuna and
soup costs compared to the prior year period.
SG&A
SG&A decreased $5.5 million, or 3.7%, for the six months ended October 30,
2002 to $143.4 million from $148.9 million in the prior year period and
increased as a percentage of sales to 17.2% from 16.9%. Excluding the special
items identified above, SG&A decreased $4.9 million, or 3.3%, as compared to the
prior year period. Total marketing support included in SG&A (including consumer
promotions and media) increased $8.7 million, or 37.2%, to $32.2 million from
$23.5 million in the prior year period in support of the StarKist Flavor Fresh
Pouch and Kibbles 'n Bits. The increased marketing expense was offset by
reductions in general and administrative expenses and selling and distribution
expenses.
4
Operating income
Operating income decreased $5.8 million, or 4.4%, for the six months of
fiscal 2003, to $124.2 million from $130.0 million for the comparable prior year
period. Excluding the special items identified above, operating income decreased
$13.7 million, or 9.9%, to $124.2 million from $137.9 million and decreased as a
percentage of sales to 14.9% from 15.7%. Decreases in operating income of the
tuna and soup and infant feeding segment were driven by reductions in gross
profit, partially offset by an increase in operating income of the pet products
segment which was due to lower general and administrative costs and selling and
distribution costs.
Other items
Other income increased $1.3 million to $1.8 million for the six months of
fiscal 2003 from $0.5 million for the comparable prior year period. The
effective tax rate was 32.3% on profits of $126.4 million compared to 33.9% on
profits of $131.4 million.
Net income
Net income decreased $1.2 million to $85.6 million from $86.8 million in
the comparable prior year period. Excluding the special items noted above, net
income decreased $8.1 million, or 8.7 %, to $85.6 million from $93.7 million.
The following segment discussion excludes special items.
TUNA
Sales of the tuna segment increased $4.9 million, or 1.8%, for the six
months ended October 30, 2002, to $278.6 million from $273.7 million. While
volume increases drove a sales increase of 8.6%, this was partially offset by
increases in promotional expenses.
The tuna segment's gross profit decreased $13.7 million, primarily due to
higher trade promotional expenses. Operating income decreased $14.7 million, or
42.8%, during the six months of fiscal 2003, to $19.7 million from $34.4 million
in the comparable prior year period, due primarily to the decrease in gross
profit.
PET PRODUCTS
Sales of the pet products segment decreased $44.3 million, or 9.7%, for the
six months ended October 30, 2002, from $458.7 million to $414.4 million.
Reduced volumes across the category decreased sales 12.0%. Volume declines in
the six months of fiscal 2003 are primarily due to significant promotional
activity across all lines at the end of fiscal 2002, planned reductions in the
sales of low margin private label products and accelerated purchases in advance
of an announced 9-Lives canned cat food price increase at the end of fiscal
2002. Favorable pricing increased sales 2.3% primarily related to pet snacks and
canned cat food.
The pet products segment's gross profit margin increased 4.1% to 40.2% from
36.1% in the comparable prior year period and gross profit increased $0.8
million, or 0.5%, from $165.6 million to $166.4 million, primarily due to the
benefit of reduced amortization expense of goodwill and other intangible assets,
lower costs and favorable product mix. During this period, the pet products
segment began initiatives to eliminate lower margin pet food products, which
improved product mix, and to increase canned cat food prices. Operating income
increased $7.0 million, or 9.6%, from $72.9 million to $79.9 million, due
primarily to the decrease in selling and distribution and general and
administrative costs.
5
SOUP AND INFANT FEEDING
Sales of the soup and infant feeding segment decreased $5.4 million, or
3.6%, for the six months ended October 30, 2002, from $148.4 million to $143.0
million due to lower volumes in infant feeding.
The soup and infant feeding segment's gross profit decreased $5.7 million,
or 9.8 %, primarily due to higher costs and decreased volumes in infant feeding.
Operating income decreased $6.2 million, or 17.2%, due primarily to the decrease
in gross profit and higher general and administrative costs.
LIQUIDITY AND FINANCIAL POSITION
The financial statements have no debt or interest expense allocated to the
Heinz Businesses from Heinz and, therefore, are not indicative of the results of
operations that would have existed if the Heinz Businesses had been operated as
an independent company or that will exist in the future if the Heinz Businesses
are operated as a subsidiary of new Del Monte.
Cash Flows from Operating Activities
Cash provided for the six months ended October 30, 2002 was $153.8 million.
Cash Flows used for Investing Activities
Cash used for investing activities for the six months ended October 30,
2002 was $7.7 million. Capital expenditures totaled $14.3 million for the six
months ended October 30, 2002. Proceeds from disposals of property, plant and
equipment were $0.4 million for the six months ended October 30, 2002.
Cash Flows used for Financing Activities
Net parent settlements totaled $144.7 million for the six months ended
October 30, 2002.
Cash Requirements of Streamline and Operation Excel
In fiscal 2003, management of the Heinz Businesses expects the remaining
cash requirements of Streamline to be approximately $7.4 million, consisting
primarily of severance and exit costs. The Heinz Businesses financed the cash
requirements of these programs through operations and cash provided by Heinz.
The cash requirements of these programs have not had and are not expected, by
the management of the Heinz Businesses, to have a material adverse impact on
liquidity or financial position of the Heinz Businesses.
6
SKF FOODS
COMBINED STATEMENTS OF INCOME
<Table>
<Caption>
Three Months Ended
-----------------------------------
October 30, 2002 October 31, 2001
---------------- ----------------
(Unaudited)
(in thousands)
Sales....................................................... $471,730 $479,076
Cost of products sold....................................... 318,322 329,269
-------- --------
Gross profit................................................ 153,408 149,807
Selling, general and administrative expenses................ 76,722 81,747
-------- --------
Operating income............................................ 76,686 68,060
Interest income............................................. 214 733
Other income/(expense)...................................... 338 (422)
-------- --------
Income before income taxes.................................. 77,238 68,371
Provision for income taxes.................................. 24,849 22,357
-------- --------
Net income.................................................. $ 52,389 $ 46,014
======== ========
</Table>
The accompanying notes are an integral part of these financial statements.
7
SKF FOODS
COMBINED STATEMENTS OF INCOME
<Table>
<Caption>
Six Month Period Ended
-----------------------------------
October 30, 2002 October 31, 2001
---------------- ----------------
(Unaudited)
(in thousands)
Sales....................................................... $836,061 $880,830
Cost of products sold....................................... 568,420 601,992
-------- --------
Gross profit................................................ 267,641 278,838
Selling, general and administrative expenses................ 143,414 148,858
-------- --------
Operating income............................................ 124,227 129,980
Interest income............................................. 396 914
Other income/(expense)...................................... 1,822 484
-------- --------
Income before income taxes.................................. 126,445 131,378
Provision for income taxes.................................. 40,842 44,552
-------- --------
Net income.................................................. $ 85,603 $ 86,826
======== ========
</Table>
The accompanying notes are an integral part of these financial statements.
8
SKF FOODS
CONDENSED COMBINED BALANCE SHEETS
<Table>
<Caption>
October 30, 2002 May 1, 2002*
---------------- ------------
(Unaudited)
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,142 $ 518
Receivables, net.......................................... 187,860 216,759
Inventories............................................... 315,148 330,632
Prepaid expenses and other current assets................. 45,753 25,762
Deferred income taxes..................................... 6,110 5,121
---------- ----------
Total current assets................................... 556,013 578,792
Property, plant and equipment............................... 647,304 665,921
Less: accumulated depreciation.............................. (325,962) (328,871)
---------- ----------
Total property, plant and equipment, net............... 321,342 337,050
Other noncurrent assets:
Other investments........................................... 3,225 3,537
Goodwill, net............................................... 621,794 622,126
Trademarks, net............................................. 256,931 259,249
Other intangible assets, net................................ 4,994 5,433
Other noncurrent assets..................................... 24,139 29,174
---------- ----------
Total other noncurrent assets.......................... 911,083 919,519
---------- ----------
Total assets........................................... $1,788,438 $1,835,361
========== ==========
LIABILITIES AND PARENT COMPANY'S INVESTMENT
Current liabilities:
Accounts payable.......................................... $ 61,533 $ 47,309
Accrued marketing......................................... 27,170 17,104
Accrued restructuring costs............................... 11,823 14,304
Other accrued liabilities................................. 27,588 28,227
---------- ----------
Total current liabilities.............................. 128,114 106,944
Deferred income taxes....................................... 121,256 113,103
Deferred income............................................. 18,507 22,180
Other liabilities........................................... 393 492
---------- ----------
Total liabilities...................................... 268,270 242,719
Parent company's investment................................. 1,520,168 1,592,642
---------- ----------
Total liabilities and parent company's investment...... $1,788,438 $1,835,361
========== ==========
</Table>
- ---------------
* Summarized from audited Fiscal Year 2002 balance sheet
The accompanying notes are an integral part of these financial statements.
9
SKF FOODS
COMBINED CASH FLOW STATEMENT
<Table>
<Caption>
Six Month
Period Ended
----------------
October 30, 2002
(Unaudited)
(in thousands)
Operating Activities
Net income................................................ $ 85,603
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation.............................................. 16,477
Amortization.............................................. 1,813
Deferred tax provision.................................... 7,164
Other items, net.......................................... 1,649
Changes in current assets and liabilities, excluding the
effects of acquisitions and divestitures:
Receivables.......................................... 24,763
Inventories.......................................... 14,381
Prepaid expenses and other current assets............ (19,991)
Accounts payable....................................... 14,224
Accrued liabilities.................................... 7,695
---------
Cash provided by operating activities............. 153,778
Investing Activities:
Capital expenditures...................................... (14,330)
Proceeds from disposals of property, plant and
equipment.............................................. 361
Other items, net.......................................... 6,291
---------
Cash used for investing activities................... (7,678)
Financing Activities:
Net parent settlements.................................... (144,717)
---------
Cash used for financing activities................... (144,717)
Effect of exchange rate changes on cash and cash
equivalents............................................... (759)
Net increase in cash and cash equivalents................... 624
Cash and cash equivalents, beginning of period.............. 518
---------
Cash and cash equivalents, end of period.................... $ 1,142
=========
</Table>
The accompanying notes are an integral part of these financial statements.
10
SKF FOODS
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying combined financial statements include the assets and
liabilities and the related operations of SKF Foods (collectively referred
to as the "Businesses"), which are included in the consolidated financial
statements of the H.J. Heinz Company ("Heinz").
These financial statements have been prepared in anticipation of a
transaction, announced on June 13, 2002, whereby Heinz would spin off the
Businesses to Heinz shareholders creating a new, independent company.
On June 13, 2002, Heinz announced that it will spin off the Businesses to
Heinz shareholders creating a new, independent company. Immediately
thereafter, the newly formed company will merge with a wholly-owned
subsidiary of Del Monte Foods Company (Del Monte) resulting in the newly
formed company becoming a wholly-owned subsidiary of Del Monte. As a result
of this transaction, the Businesses will incur approximately $1.1 billion
of debt.
This transaction, which has been approved by the Board of Directors of
Heinz and Del Monte, is subject to 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 spin-off transaction will
be tax-free to Heinz, the Businesses and the shareholders of Heinz. The
spin-off and merger are also subject to other customary closing conditions.
The preparation of these financial statements include the use of
"carve-out" and "push down" accounting procedures wherein certain assets,
liabilities, and expenses historically recorded or incurred at the parent
company level of Heinz or an affiliate of Heinz, which related to or were
incurred on behalf of the Businesses, have been identified and allocated or
pushed down as appropriate to reflect the financial results of the
Businesses for the periods presented. No direct relationship existed among
all of the operations which comprise the Businesses. Accordingly, Heinz's
net investment in the Businesses (parent company's investment) is shown in
lieu of stockholder's equity in the combined balance sheets. Allocations
were made primarily based on a percentage of revenue, which management
believes represents a reasonable allocation. See Note 6 for a further
discussion regarding the allocation of costs.
The Businesses have not historically been managed as a single stand-alone
unit, but as part of the operations of Heinz in North America. As such,
quarterly balance sheets and quarterly statements of cash flows were not
historically prepared for the Businesses, and it would not be practicable
to retroactively prepare such statements. As such, the Securities and
Exchange Commission has agreed to accept a statement of cash flows for the
six-month period ended October 30, 2002 only. Accordingly, comparative
statements of cash flow have not been presented.
No debt or interest expense has been allocated to the Businesses from
Heinz. These statements may not be necessarily indicative of the results of
operations that would have existed or will exist in the future assuming the
Businesses were operated as a separate, independent company.
The interim combined financial statements of the Businesses are unaudited.
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 Businesses. 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.
11
2. INVENTORIES
The composition of inventories at the balance sheet dates were as follows:
<Table>
<Caption>
October 30, May 1,
2002 2002
(in thousands) ----------- --------
Finished goods and work-in-process......................... $257,502 $271,166
Packaging material and ingredients......................... 57,646 59,466
-------- --------
$315,148 $330,632
======== ========
</Table>
3. RESTRUCTURING
In the fourth quarter of fiscal 2001, Heinz announced a restructuring
initiative named "Streamline" which includes the closure of the Businesses'
tuna operations in Puerto Rico, the consolidation of the Businesses' North
American canned pet food production to Bloomsburg, Pennsylvania (which
results in ceasing canned pet food production at the Businesses' Terminal
Island, California facility) and the divestiture of the Businesses' U.S.
fleet of fishing boats and related equipment.
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................ $ 107.1 $ 20.7 $ 48.8 $ 20.8 $ 197.4
Amounts utilized--Fiscal 2001....... (107.1) (2.6) (1.4) (20.8) (131.9)
------- ------ ------ ------ -------
Accrued restructuring costs--May 2,
2001.............................. -- 18.1 47.4 -- 65.5
Restructuring and Implementation
costs--Fiscal 2002................ 5.4 (0.5) (7.3) 7.9 5.5
Amounts utilized--Fiscal 2002....... (5.4) (17.2) (29.6) (7.9) (60.1)
------- ------ ------ ------ -------
Accrued restructuring costs--May 1,
2002.............................. -- 0.4 10.5 -- 10.9
Amounts utilized--Fiscal 2003....... -- (0.2) (1.9) -- (2.1)
------- ------ ------ ------ -------
Accrued restructuring costs--October
30, 2002.......................... $ -- $ 0.2 $ 8.6 $ -- $ 8.8
======= ====== ====== ====== =======
</Table>
During the first six months of fiscal 2003, the Businesses utilized $2.1
million of severance and exit cost accruals related to its overhead
reduction plan.
4. RECENTLY ADOPTED ACCOUNTING STANDARDS
During the fourth quarter of fiscal 2002, the Businesses 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 $30.0 and $52.8
million in the three and six months ended October 30, 2001, respectively.
Prior period data has been reclassified to conform to the current year
presentation.
The Businesses 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, the Businesses adopted SFAS
12
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 impairment
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.
The Businesses completed their 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 the Businesses' operating
segments) that has goodwill assigned to it, to its carrying value. The
Businesses estimate 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 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 for the six-month
periods ended October 30, 2002 and October 31, 2001 follow.
<Table>
<Caption>
Second Quarter Ended Six Months Ended
------------------------- -------------------------
Net Income Net Income
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income.......................... $52,389 $46,014 $85,603 $86,826
Add: Goodwill amortization, net of
tax............................... -- 2,633 -- 3,717
Trademark amortization, net of tax.. -- 763 -- 1,550
------- ------- ------- -------
Net income excluding goodwill and
trademark amortization............ $52,389 $49,410 $85,603 $92,093
======= ======= ======= =======
</Table>
Changes in the carrying amount of goodwill, all of which are in the pet
products segment, from May 1, 2002 to October 30, 2002, were the result of
$0.7 million of translation adjustments.
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........... $72,429 $18,085 $54,344 $73,481 $16,915 $56,566
Other................ 11,352 6,358 4,994 11,352 5,919 5,433
------- ------- ------- ------- ------- -------
$83,781 $24,443 $59,338 $84,833 $22,834 $61,999
======= ======= ======= ======= ======= =======
</Table>
Amortization expense for trademarks and other intangible assets subject to
amortization was $1.8 million for the six months ended October 30, 2002.
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 $4.0 million.
13
Intangible assets not subject to amortization at October 30, 2002 and May
1, 2002, were $202.6 million for both years consisting of trademarks.
Effective May 2, 2002, the Businesses adopted SFAS No. 144, "Accounting for
the Impairment of Disposal of Long-Lived Assets". This statement provides
updated guidance concerning the 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 the Businesses' financial position, results
of operations or cash flows for the six months ended October 30, 2002.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB approved SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses the 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 the Businesses in fiscal 2004. The Businesses do
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.
6. RELATED PARTY TRANSACTIONS
Shared-Service Functions
Costs charged to the Businesses by an affiliate of Heinz are provided
through shared-service functions and include warehousing costs, variable
and fixed selling expenses and general and administrative costs such as
information systems support, human resources, finance and accounting. These
costs, which are allocated based on revenue, are included in the
accompanying combined statements of operations as a component of SG&A
(selling, general and administrative expenses) in the amounts of $19.3
million and $14.3 million for the three months ended October 30, 2002 and
October 31, 2001, respectively and $35.5 million and $43.6 million for the
six months ended October 30, 2002 and October 31, 2001, respectively.
Heinz Corporate Charges
Certain of Heinz's general and administrative expenses, consisting of
salaries of corporate officers and staff and other Heinz corporate
overhead, are allocated to the Businesses. For the six months ended October
30, 2002 and October 31, 2001, total costs charged to the Businesses for
these services were $5.2 million and $5.5 million, respectively, and for
the three months ended October 30, 2002 and October 31, 2001, total costs
charged to the Businesses for these services were $3.0 million in each
quarter. These costs are included in SG&A in the accompanying combined
statements of operations.
Heinz also charges the Businesses for their share of group health insurance
costs for eligible company employees based upon location-specific costs and
actual loss experience incurred during a calendar year. In addition,
various other insurance coverages are also provided to the Businesses
through Heinz's corporate programs. Workers compensation, auto, property,
product liability and other insurance coverages are charged directly to the
Businesses based
14
on actual loss experience. Total costs charged to the Businesses for these
services were $9.4 million and $9.6 million for the six months ended
October 30, 2002 and October 31, 2001, respectively and $4.7 million and
$4.0 million for the three months ended October 30, 2002 and October 31,
2001, respectively.
Pension costs and post-retirement costs are also charged to the Businesses
based upon eligible employees participating in the plans.
Products Sales and Purchases
The Businesses sell and purchase products to and from other Heinz
affiliates. Sales to related parties were $2.1 million and $4.4 million for
the six months ended October 30, 2002 and October 31, 2001, respectively,
and sales to related parties were $1.2 million and $1.9 million for the
three months ended October 30, 2002 and October 31, 2001, respectively.
Purchases from related parties were $1.1 million and $1.1 million for the
six months ended October 30, 2002 and October 31, 2001, respectively and
purchases from related parties were $0.5 million and $0.4 million for the
three months ended October 30, 2002 and October 31, 2001, respectively.
7. FINANCIAL INSTRUMENTS
Commodity Price Hedging
The Businesses use commodity futures and options in order to reduce the
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.
Hedge Ineffectiveness
During the first six months ended October 30, 2002, hedge ineffectiveness
related to cash flow hedges was a net gain of $0.4 million, which is
reported in the combined statement of operations as other income.
Deferred Hedging Gains and Losses
As of October 30, 2002, the Businesses are hedging forecasted transactions
for periods not exceeding 12 months, and expects an immaterial amount of
net deferred loss reported in parent company's investment to be
reclassified to earnings within that time frame.
8. SEGMENT DATA
Descriptions of Businesses' reportable segments are as follows:
- Tuna -- This segment manufactures, markets and sells tuna.
- Pet Products -- This segment manufactures, markets and sells dry and
canned pet food and pet snacks.
- Soup and Infant Feeding -- This segment manufactures, markets and sells
soups, infant foods, and broth to the grocery channels.
The Businesses' 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 combined statements of operations are not
presented by segment, since they are excluded from the measure of segment
profitability reviewed by the Businesses' management.
15
The following tables present information about the Businesses' reportable
segments:
<Table>
<Caption>
Three Months Ended Six Months Ended
----------------------------------------------------- -----------------------------------------------------
Net External Sales Intersegment Sales Net External Sales Intersegment Sales
------------------------- ------------------------- ------------------------- -------------------------
October 30, October 31, October 30, October 31, October 30, October 31, October 30, October 31,
(in thousands) 2002 2001 2002 2001 2002 2001 2002 2001
- -------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Tuna................. $154,704 $146,898 $ -- $ -- $278,637 $273,724 $ -- $ --
Pet Products......... 227,495 238,983 6,085 6,624 414,390 458,718 11,251 13,234
Soup and Infant
Feeding............. 89,531 93,195 -- -- 143,034 148,388 -- --
-------- -------- ------ ------ -------- -------- ------- -------
Combined totals..... $471,730 $479,076 $6,085 $6,624 $836,061 $880,830 $11,251 $13,234
======== ======== ====== ====== ======== ======== ======= =======
</Table>
<Table>
<Caption>
Three Months Ended Six Months Ended
----------------------------------------------------- -----------------------------------------------------
Operating Income Operating Income
Excluding Excluding
Operating Income Special Items (a) Operating Income Special Items (a)
------------------------- ------------------------- ------------------------- -------------------------
October 30, October 31, October 30, October 31, October 30, October 31, October 30, October 31,
(in thousands) 2002 2001 2002 2001 2002 2001 2002 2001
- -------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Tuna................. $15,117 $ 7,983 $15,117 $ 7,983 $ 19,690 $ 27,652 $ 19,690 $ 34,349
Pet Products......... 46,003 36,652 46,003 36,652 79,934 71,814 79,934 72,912
Soup and Infant
Feeding............. 18,613 26,429 18,613 26,429 29,816 35,999 29,816 36,042
Non-Operating (b).... (3,047) (3,004) (3,047) (3,004) (5,213) (5,485) (5,213) (5,485)
------- ------- ------- ------- -------- -------- -------- --------
Combined totals..... $76,686 $68,060 $76,686 $68,060 $124,227 $129,980 $124,227 $137,818
======= ======= ======= ======= ======== ======== ======== ========
</Table>
- ---------------
(a) Six months ended October 31, 2001 -- Excludes implementation costs of
the Streamline initiative as follows: Tuna of $6.8 million and Pet
Products of $1.1 million.
(b) Non-operating represents general and administrative expenses not
directly attributable to operating segments.
9. COMPREHENSIVE INCOME
<Table>
<Caption>
Three Months Ended Six Months Ended
------------------ -----------------
October 31, 2002 October 31, 2002
FY 2003 FY 2003
(in thousands) ------- -------
Net income........................................ $52,389 $85,603
Deferred (gains)/losses on derivatives:
Net amount reclassified to earnings............. 715 (796)
------- -------
Comprehensive income.............................. $53,104 $84,807
======= =======
</Table>
16