UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 28, 2008
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 333-148297
Pinnacle Foods Finance LLC
(Exact name of registrant as specified in its charter)
Delaware |
20-8720036 |
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1 Old Bloomfield Avenue Mt. Lakes, New Jersey |
07046 |
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(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code: (973) 541-6620
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes þ No ¨
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ¨ No þ
(The Registrant believes it is a voluntary filer and it has filed all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check One):
Large accelerated filer ¨ |
Accelerated filer ¨ | Non-accelerated filer þ | Smaller Reporting Company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b - 2 of the Securities Exchange Act of 1934).
Yes ¨ No þ
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrants most recently completed second fiscal quarter.
Not applicable.
As of March 3, 2009, there were outstanding 100 shares of common stock, par value $0.01 per share, of the Registrant.
Documents incorporated by reference
None
FORM 10-K
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information. When used in this annual report on Form 10-K, the words estimates, expects, contemplates, anticipates, projects, plans, intends, believes, forecasts, may, should and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, managements examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that managements expectations, beliefs and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this annual report. Such risks, uncertainties and other important factors include, among others, the risks, uncertainties and factors set forth below under Item 1A: Risk Factors, other matters discussed from time to time in subsequent filings with the Securities and Exchange Commission, and the following risks, uncertainties and factors:
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general economic and business conditions; |
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industry trends; |
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changes in our leverage; |
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interest rate changes; |
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the funding of our defined benefit pension plan; |
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future impairments of our goodwill and intangible assets |
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changes in our ownership structure; |
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competition; |
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the loss of any of our major customers or suppliers; |
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changes in demand for our products; |
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changes in distribution channels or competitive conditions in the markets where we operate; |
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costs and timeliness of integrating future acquisitions; |
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loss or litigation; |
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loss of our intellectual property rights; |
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our ability to achieve cost savings; |
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fluctuations in price and supply of raw materials; |
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seasonality; |
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changes in our collective bargaining agreements or shifts in union policy; |
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difficulty in the hiring or the retention of key management personnel; |
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restrictions imposed on our business by the terms of our indebtedness; |
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our reliance on co-packers to meet our manufacturing needs; |
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availability of qualified personnel; and |
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changes in the cost of compliance with laws and regulations, including environmental laws and regulations. |
There may be other factors that may cause our actual results to differ materially from the forward-looking statements.
All forward-looking statements in this Form 10-K apply only as of the date of this annual report on Form 10-K and are expressly qualified in their entirety by the cautionary statements included in this annual report on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances.
EXPLANATORY NOTE
Unless the context requires otherwise, in this Form 10-K, Pinnacle, the Company, we, us and our refers to Pinnacle Foods Finance LLC, or PFF, and the entities that are its consolidated subsidiaries (including Pinnacle Foods Group LLC, or PFG LLC, formerly known as Pinnacle Foods Group Inc. or PFGI), which includes all of Pinnacles existing operations. In addition, where the context so requires, we use the term Predecessor to refer to the historical financial results and operations of PFG LLC and its subsidiaries prior to the consummation of the Blackstone Transaction described herein and the term Successor to refer to the historical financial results and operations of PFF and its subsidiaries after the consummation of the Blackstone Transaction described herein.
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ITEM 1. | BUSINESS |
G ENERAL I NFORMATION
We are a leading manufacturer, marketer and distributor of high-quality, branded food products (both dry foods and frozen foods). We also distribute our products through food service and private label channels. Our products and operations are managed and reported in two operating segments: dry foods and frozen foods. The dry foods segment consists primarily of Duncan Hines baking mixes and frostings; Vlasic pickles, peppers and relish; Mrs. Butterworths and Log Cabin syrups and pancake mixes and Armour canned meats. The frozen foods segment consists primarily of Hungry-Man and Swanson frozen dinners and entrees; Mrs. Pauls and Van de Kamps frozen seafood; Aunt Jemima frozen breakfasts; Lenders bagels and Celeste frozen pizza. On March 1, 2006, we acquired substantially all of The Dial Corporations assets relating to its Armour food products division, a leading company in the canned meat category with the majority of its sales under the Armour brand name. Armour maintains the leading market position in the Vienna sausage, potted meat and sliced beef categories. The business also includes meat spreads, chili, luncheon meat, corned and roast beef hash and beef stew.
Our major brands hold leading market positions in their respective retail categories and enjoy high consumer awareness. Through our managed broker network, our products reach all traditional classes of trade, including grocery wholesalers and distributors, grocery stores and supermarkets, convenience stores, mass and drug merchandisers and warehouse clubs. The address of our website is www.pinnaclefoodscorp.com . The information on our website is not incorporated by reference into this report.
Throughout this Form 10-K, we use a combination of customized (assembled at our request) Information Resources, Inc. (IRI) data and IRI syndicated databases. Unless we indicate otherwise, retail sales, market share, category and other industry data used throughout this Form 10-K for all categories and segments are IRI data for the 52-week period ended December 21, 2008, with the exception of the frozen pizza-for-one category, which is as of November 30, 2008. These data include retail sales in supermarkets with at least $2 million in total annual sales but exclude sales in mass merchandiser, club, drug, convenience or dollar stores. Retail sales are dollar sales estimated by IRI and represent the value of units sold through supermarket cash registers for the relevant period. We view the frozen dinners and entrees category as consisting of single-serve full-calorie dinners and entrees and single-serve healthy dinners and entrees. We view the baking mixes and frostings category as consisting of the following segments: cake mix, brownie mix, ready-to-serve frostings, muffin mix, cookie mix, bar mix, frosting mix, quick bread, dessert kits, all other baking mix and all other frosting. We view the frozen breakfast category as consisting of waffles, pancakes, French toast, breakfast entrees, sweet breakfast sandwiches and savory breakfast sandwiches. We view the prepared seafood segment as consisting of the prepared fin, prepared non-fin without shrimp and prepared shrimp sub-segments. References to the bagel category are to scannable bagels, consisting of the frozen, refrigerated and shelf-stable segments. We view syrup, canned meats and frozen pizza as distinct categories. When we refer to the core market of our Open Pit brand of barbecue sauce, such core market consists of the major metropolitan areas surveyed by IRI in Illinois, Indiana, Michigan, Ohio, western Pennsylvania and Wisconsin. Unless we indicate otherwise, all references to percentage changes reflect the comparison to the same period in the prior year.
Although we believe that this information is reliable, we cannot guarantee its accuracy and completeness, nor have we independently verified it. Where we so indicate, we obtain certain other market share and industry data from internal company surveys and management estimates based on these surveys and on our managements knowledge of the industry. While we believe such internal company surveys and management estimates are reliable, no independent sources have verified such surveys and estimates. Although we are not aware of any misstatements regarding the industry data that we present in this Form 10-K, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under Disclosure regarding forward-looking statements and Item 1A: Risk Factors.
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I NDUSTRY OVERVIEW
The U.S. food manufacturing industry has historically been characterized by relatively stable sales growth based on modest price and population increases. In recent years food manufacturers have capitalized on an increasing desire by households, particularly dual-income, single-family and active-lifestyle consumers, for convenience and variety by introducing innovative, high-quality food products and complete meal solutions. Food manufacturers have also taken advantage of the growing trends toward away-from-home eating by increasing their sales to the foodservice channel, which supplies restaurants, schools, hospitals and other institutions. However, the economic downturn in the latter part of 2008 has caused away from home eating to decline.
Dry Foods
Baking mixes and frostings. The baking mixes and frostings category, which has historically exhibited stable consumption, had $1.3 billion in retail sales during the 52-week period ended December 21, 2008, an increase of 5.3% from 2007. The baking mixes and frostings category primarily consists of the following five key product segments, with the corresponding retail sales volume percentages: cake mix (23.8%), ready-to-serve frostings (18.1%), brownie mix (18.0%), muffin mix (16.4%) and cookie mix (5.2%). Our Duncan Hines brand competes in all five of these segments. The remaining 18.5% of the retail sales volume is in smaller product segments such as dessert mixes, quick breads and specialty mixes.
Pickles, peppers and relish. The shelf-stable pickles, peppers and relish category had $922 million of retail sales during the 52-week period ended December 21, 2008, an increase of 2.3% from the prior year period. Shelf-stable pickles is the largest segment of the category, with $493 million in retail sales, followed by peppers ($315 million) and relish ($114 million). Our Vlasic brand competes in all three of these segments. Of retail shelf-stable pickle segment sales, approximately 70.1% represented sales of branded pickles, and the remaining 29.9% represented sales of private label pickles.
Syrup. The syrup category had $463 million in retail sales during the 52-week period ended December 21, 2008, representing a 5.1% increase compared to the prior year period. The syrup category consists of four major brandsAunt Jemima, Mrs. Butterworths (our brand), Log Cabin (our brand) and Eggoas well as numerous private label and regional brands. Of retail syrup category sales, approximately 80.2% represents sales of branded syrup, and the remaining 19.8% represents sales of private label syrup.
Canned Meat. The canned meat category consists of canned chili, chunk meat, Vienna sausages, luncheon meat, sloppy joes and stew, comprising 33.8%, 16.3%, 7.9%, 8.9%, 8.3% and 5.9% of the category, respectively, during the 52-week period ended December 21, 2008. The remaining 18.9% of retail sales volume is in smaller segments such as hash, hot dog sauce, potted meat, sliced dried beef, meat spreads, chicken and dumplings, corned and roast beef, sausage meats and other canned meat. This category had $1.1 billion in retail sales, an increase of 3.8% over the prior year period. Through our Armour brand, we compete in twelve of the fifteen segments within the canned meat category.
Frozen Foods
Frozen dinners and entrees. The frozen dinners and entrees category had $3.8 billion in retail sales during the 52-week period ended December 21, 2008, a decrease of 0.7% from the prior year period. Through our Hungry-Man and Swanson Dinners brands, we compete in the $2.0 billion single-serve, full-calorie dinners and entrees segment of this category, which decreased 1.3% as compared to the prior year period.
Frozen prepared seafood. The frozen prepared seafood category consists of fin products, such as pollock and salmon, and non-fin products, primarily shrimp. This category had $570 million in retail sales during the 52-week period ended December 21, 2008. The frozen prepared seafood category decreased by 5.2% from the prior year period. Our Mrs. Pauls and Van de Kamps brands compete in this category.
Frozen breakfast. The frozen breakfast category consists of the frozen waffles, pancakes, French toast, breakfast entrees and savory breakfast sandwiches. This category had $1.4 billion in retail sales during the 52-week period ended December 21, 2008, an increase of 6.1% over the prior year period, driven primarily by an increased focus on new product innovation. Through our Aunt Jemima brand, we compete in all five segments.
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Bagels. The scannable bagel category consists of the frozen bagels, refrigerated bagels and fresh bagels segments, comprising 6.6%, 9.0% and 84.4% of the category, respectively, during the 52-week period ended December 21, 2008. The scannable bagel category had retail sales of $642 million, an increase of 8.4% over the prior year period. Our Lenders brand competes in all three segments. Refrigerated and fresh bagel market sales have increased 7.6% and 9.9%, respectively, while the frozen bagel market sales have decreased 7.1%. The decline in frozen bagel sales is driven by consumers replacing frozen bagel purchases with purchases of fresh bagels and other, more innovative frozen breakfast products. As a result, retailers have reduced shelf space and distribution for frozen bagels, further contributing to the decline in the frozen bagel segment.
Pizza. The frozen pizza category had $2.8 billion in retail sales during the 52-week period ended November 30, 2008, an increase of 2.7% from the prior year period. Through our Celeste brand, we compete in the $341 million full-calorie pizza-for-one (excluding French bread) segment, which grew 3.7% in the 52-week period ended November 30, 2008.
O UR PRODUCTS
Our product portfolio consists of a diverse mix of product lines and leading, well-recognized brands. Our major brands hold leading market positions in their respective retail markets and enjoy high consumer awareness. Through our managed broker network, our products reach all traditional classes of trade, including grocery wholesalers and distributors, grocery stores and supermarkets, convenience stores, mass and drug merchandisers and warehouse clubs. We also distribute most of our products through foodservice and private label channels.
Dry Foods
Baking mixes and frostings. Our baking mixes and frostings product line consists primarily of Duncan Hines cake mixes, ready-to-serve frostings, brownie mixes, muffin mixes, baking kits and cookie mixes. Duncan Hines was introduced as a national brand in 1956 and, with a 17.6% share, is the number two brand in the $1.3 billion baking mixes and frostings category. Duncan Hines is a premium quality brand positioned to the baking enthusiast. In 2008, Duncan Hines launched a new carrot cake, which achieved a 2.7% share of the cake category in its sixth month after launch. We also distribute Duncan Hines in Canada. All Duncan Hines products are produced by contract manufacturers.
Pickles, peppers and relish. We offer a complete line of shelf-stable pickle, pepper and relish products that we market and distribute nationally, primarily under the Vlasic brand, and regionally under the Milwaukees and Wiejske Wyroby brands. Our Vlasic brand was introduced over 65 years ago, and we believe that the Vlasic brand, together with our trademark Vlasic stork, enjoy strong consumer awareness. Vlasic, with a 30.9% share, is the leading branded participant in the $493 million shelf-stable pickle segment of the $922 million shelf-stable pickles, peppers and relish category. We also distribute these products through foodservice and private label channels, as well as in Canada.
Syrups and pancake mixes. Our syrup and pancake mixes product line consists primarily of products marketed under our Mrs. Butterworths and Log Cabin brands. Our syrup line consists of original, lite and sugar-free varieties. Log Cabin was introduced in 1888 and, with its cabin-shaped bottle and distinct maple flavor, appeals to a broad consumer base. Mrs. Butterworths was introduced in 1962 and, with its distinctive grandmother-shaped bottle and thick, rich and buttery flavor, appeals to families with children. Mrs. Butterworths comes to life in the brands memorable advertising. In the $463 million table-syrup category, Mrs. Butterworths and Log Cabin hold the number two (10.0%) and number three (9.2%) market share positions, respectively, among branded syrups. We also distribute these products through the foodservice channel.
Canned meat. Our canned meat product line consists primarily of products marketed under the Armour brand. Armour was introduced in 1868 by Philip Danforth Armour for California gold miners. Armour is the number two branded product, with a 7.6% market share, in the $1.1 billion canned meat category and is the number one brand in the Vienna sausage, potted meat and sliced dried beef segments. We also distribute these products through the foodservice and private label channels.
Barbecue sauce. We market a complete line of barbecue sauce products under the Open Pit brand, which was introduced in 1955. Open Pit is a regional brand that competes primarily in the Midwest markets.
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Frozen Foods
Frozen dinners. Our frozen dinners product line consists primarily of products sold in the United States and Canada under the Hungry-Man and Swanson brands. We also distribute these products through foodservice and private label channels. As a complement to these major brands, our frozen dinner offerings include Swanson pot pies. In Canada, we also distribute the Hungry-Man and Swanson brands. The Swanson brand enjoys a strong heritage, dating back over 50 years to its introduction of The Original TV Dinner ® in 1953. Swanson dinners have been recently re-launched and re-packaged as Swanson Classics to reinforce Swansons value proposition, which combines premium quality with an affordable price. Hungry-Man differentiates itself from the category by positioning towards male consumers who prefer larger, more satisfying portions. Our Hungry-Man and Swanson brands collectively represent the fourth largest participant in the $2.0 billion single-serve, full-calorie dinners and entrees segment.
Frozen prepared seafood. Our frozen prepared seafood product line, marketed primarily under the Mrs. Pauls and Van de Kamps brands, includes breaded and battered fish sticks and fish fillets, lightly breaded fish, breaded shrimp and specialty seafood items, such as crab cakes and clam strips. We use a dual-brand strategy to capitalize on the regional strengths of our brands. Both brands differentiate themselves from the category by offering products with enhanced freshness, due to whole fish fillets and the freshness pouch that employs a bag-in-box strategy to protect against shrinkage and freezer burn. The Van de Kamps brand dates back to 1915, and the Mrs. Pauls franchise began in the mid-1940s. These brands hold the number three (9.0%) and the number four (6.3%) market share positions among branded participants, respectively, in the $570 million frozen prepared seafood category. We also distribute these products through foodservice and private label channels.
Frozen breakfast. Our frozen breakfast product line consists of waffles, pancakes, French toast, breakfast entrees and savory breakfast sandwiches marketed under the Aunt Jemima brand. Beginning in May 2004, the Swanson Great Starts products were re-branded Aunt Jemima Great Starts, which allows us to leverage the combined size of our grain-based (waffles, pancakes and French toast) and protein-based (entrees and sandwiches) frozen breakfast offerings. Aunt Jemima is positioned as a high-quality frozen breakfast brand that appeals to families with children. The Aunt Jemima brand was established over a century ago and, with a 9.6% market share, is currently the number four brand in the $1.4 billion frozen breakfast category. We are the number two branded participant in the $703 million frozen waffles, pancakes and French toast segment and the number two participant in the $514 million frozen breakfast entrees and savory breakfast sandwiches segment. We also distribute these products through foodservice and private label channels.
Bagels. Our bagel product line consists primarily of Lenders packaged bagels, which are distributed among all scannable sections of the grocery store (i.e., the frozen, refrigerated and fresh bread aisles). Founded in 1927, Lenders ranks number three among branded scannable bagels, with a 9.8% market share of the $642 million scannable bagel category. Additionally, the brand has the top market share in both refrigerated and frozen bagel sub-categories. We also distribute these products through the foodservice and private label channels, as well as in Canada.
Pizza. We market frozen pizza under the Celeste brand, which dates back to the 1940s. Celeste, with a 21.6% market share, is the number one brand in the $341 million full calorie pizza-for-one (excluding French bread) category and is sold primarily throughout the Northeast, Chicago, Florida and California. It is positioned as a homemade, authentic Italian meal at an affordable price.
H ISTORY
On May 22, 2001, Pinnacle Foods Holding Corp. (PFHC) acquired certain assets and assumed certain liabilities of the North American business of Vlasic Foods International Inc. (VFI). The North American business consisted of the Swanson and Hungry-Man frozen food, Vlasic pickles, peppers and relish and Open Pit barbecue sauce businesses. PFHC was incorporated on March 29, 2001 but had no operations until the acquisition of the North American business of VFI.
Crunch Holding Corp. (CHC), a Delaware corporation indirectly owned by J.P. Morgan Partners, LLC, J.W. Childs Associates, L.P. and CDM Investor Group LLC, acquired PFHC on November 25, 2003 (the Pinnacle Transaction).
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On November 25, 2003, Aurora Foods Inc. (Aurora) entered into a definitive agreement with Crunch Equity Holding, LLC, the former parent of CHC. The definitive agreement provided for a comprehensive restructuring transaction in which PFHC was merged with and into Aurora, with Aurora surviving the merger, following the filing and confirmation of a pre-negotiated bankruptcy reorganization case with respect to Aurora under Chapter 11 of the U.S. Bankruptcy Code. On December 8, 2003, Aurora and its subsidiary, Sea Coast Foods, Inc., filed their petitions for reorganization with the Bankruptcy Court. On February 20, 2004, the First Amended Joint Reorganization Plan of Aurora Foods Inc. and Sea Coast Foods, Inc., as modified, dated February 17, 2004, was confirmed by order of the Bankruptcy Court. This restructuring transaction was completed on March 19, 2004, and the surviving company was renamed Pinnacle Foods Group Inc. (PFGI) (now known as Pinnacle Foods Group LLC) (the Aurora Merger).
On March 1, 2006, PFGI acquired certain assets and assumed certain liabilities of the food products business (the Armour Business) of The Dial Corporation for $189.2 million in cash. The acquisition of the Armour Business complemented PFGIs existing product lines that together provide growth opportunities and scale. The Armour Business is a leading manufacturer, distributor and marketer of products in the $1.1 billion canned meat category. For the year ended December 31, 2005, the Armour Business had net sales of approximately $225 million. The Armour Business offers products in twelve of the fifteen segments within the canned meat category and maintains the leading market position in the Vienna sausage, potted meat and sliced beef categories. The business also includes meat spreads, chili, luncheon meat, corned and roast beef hash and beef stew. The majority of the products are produced at the manufacturing facility located in Ft. Madison, Iowa, which was acquired in the transaction. Products are sold under the Armour brand name as well as private label and certain co-pack arrangements.
On February 10, 2007, CHC, PFGIs parent company, entered into an Agreement and Plan of Merger with Peak Holdings LLC (Peak Holdings), a Delaware limited liability company controlled by affiliates of The Blackstone Group, Peak Acquisition Corp. (Peak Acquisition), a wholly owned subsidiary of Peak Holdings, and Peak Finance LLC (Peak Finance), an indirect wholly owned subsidiary of Peak Acquisition, providing for the acquisition of CHC. Under the terms of the Agreement and Plan of Merger, the purchase price for CHC was $2,162.5 million in cash less the amount of indebtedness (including capital lease obligations) of CHC and its subsidiaries outstanding immediately prior to the closing and certain transaction costs, subject to purchase price adjustments based on the balance of working capital and indebtedness as of the closing. Pursuant to the Agreement and Plan of Merger, immediately prior to the closing, CHC contributed all of the outstanding shares of capital stock of its wholly owned subsidiary, PFGI, to a newly-formed Delaware limited liability company, PFF. At the closing, Peak Acquisition merged with and into CHC, with CHC as the surviving corporation, and Peak Finance merged with and into PFF, with PFF as the surviving entity. As a result of the Merger, CHC became a wholly-owned subsidiary of Peak Holdings. This transaction closed on April 2, 2007 (the Blackstone Transaction).
For purposes of identification and description, Pinnacle Foods Group Inc. (PFGI), is referred to as the Predecessor for the period prior to the Blackstone Transaction occurring on April 2, 2007, and Pinnacle Foods Finance LLC (PFF or the Company) is referred to as the Successor for the period subsequent to the Blackstone Transaction.
Reorganization of Subsidiaries
In order to simplify administrative matters and financial reporting and to place both frozen foods and dry foods under one entity, we consummated a reorganization of our subsidiaries in September 2007 (the Reorganization) whereby we formed Pinnacle Foods International Corp., a Delaware corporation (PF International) on September 26, 2007, as a subsidiary to Pinnacle Foods Corporation and as the parent of Pinnacle Foods (Canada) Corporation (PF Canada). In connection with the Reorganization, Pinnacle Foods Corporation contributed all of PF Canadas shares to PF International. As a second step to our Reorganization, on September 30, 2007, two of our domestic operating subsidiaries, Pinnacle Foods Management Corporation (PF Management) and Pinnacle Foods Corporation, merged with and into Pinnacle Foods Group Inc. As a final step to the Reorganization, Pinnacle Foods Group Inc. was converted from a corporation into a limited liability company under Delaware law and renamed Pinnacle Foods Group LLC on October 1, 2007.
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The following chart illustrates our growth:
(1) | We manufacture and market these products under licenses granted by Campbell Soup Company (Swanson), the Quaker Oats Company (Aunt Jemima) and Smithfield Foods (Armour). These licenses are discussed further in the section titled Trademarks and Patents. |
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M ARKETING , SALES AND DISTRIBUTION
Our marketing programs consist of advertising, consumer promotions, direct marketing, public relations and trade promotions. Our advertising consists of television, newspaper, magazine and web advertising aimed at increasing consumer preference and usage of our brands. Consumer promotions include free trial offers, targeted coupons and on-package offers to generate trial usage and increase purchasing frequency. Our trade promotions and slotting focus on obtaining retail feature and display support, discounting to achieve optimum retail product prices and display, and securing retail shelf space. We continue to shift our marketing efforts toward building long-term brand equity through consumer marketing. We have a Multi-Functional Innovation Team focused on creating new ideas that are expected to generate incremental sales and earnings through new platforms and expansion into adjacent categories.
We sell a majority of our products in the United States through one national broker with whom we have a long-term working relationship. In Canada, we use one national broker to distribute the majority of our products. We employ other brokers for the foodservice, military, club and convenience channels. We manage our brokers through our company employees in regional sales offices located in Bentonville, Arkansas and Ontario, Canada. Through this managed broker network, our products reach all traditional classes of trade, including supermarkets, grocery wholesalers and distributors, convenience stores, super centers, mass merchandisers, drug stores, convenience warehouse clubs, quick-serve restaurants and other alternative channels in the United States.
Due to the different demands of distribution for frozen, refrigerated and shelf-stable products, we maintain separate distribution systems. Our frozen product warehouse and distribution network consists of 12 locations. Frozen products are distributed by means of three owned and operated warehouses at our Fayetteville, Arkansas, Mattoon, Illinois, and Jackson, Tennessee plants. In addition, we utilize seven distribution centers in the United States and two distribution centers in Canada, all of which are owned and operated by third-party logistics providers. Our dry product warehouse and distribution network consists of 11 locations. Dry foods products are distributed through a system of ten distribution sites in the United States, which include four warehouses that are owned and operated by us at our plants in Imlay City, Michigan, Millsboro, Delaware, St. Elmo, Illinois and Ft. Madison, Iowa, as well as six other locations which are owned and operated by third-party logistics providers. We also distribute dry products from one leased distribution center in Canada. In each third-party operated location, the provider receives, handles and stores products. Our distribution system uses a combination of common carrier trucking and inter-modal rail transport. We believe that the sales and distribution network is scalable and has the capacity to support substantial increases in volume.
I NGREDIENTS AND PACKAGING
We believe that the ingredients and packaging used to produce our products are readily available through multiple sources. Our ingredients typically account for approximately 46% of our annual cost of products sold, and primarily include sugar, cucumbers, flour (wheat), poultry, seafood, vegetable oils, shortening, meat, corn syrup and other agricultural products. Our packaging costs, primarily for aluminum, glass jars, plastic trays, corrugated fiberboard and plastic packaging materials, typically account for approximately 20% of our annual cost of products sold. During 2008, we experienced significant inflationary pressure that is consistent with the food industry, particularly in wheat, corn, edible oils and, to a lesser extent, dairy products.
R ESEARCH AND DEVELOPMENT
Our Product Development and Technical Services team currently consists of 28 full-time employees focused on product-quality improvements, product creation, package development, regulatory compliance, quality assurance and tracking consumer feedback. For fiscal 2008, fiscal 2007 and fiscal 2006 our research and development expenditures totaled $3.5 million, $4.4 million and $4.0 million, respectively. The decline in expense from fiscal 2007 to fiscal 2008 primarily relates to a decrease in management incentive compensation.
C USTOMERS
Sales of our products to Wal-Mart and its affiliates approximated 23% of our consolidated net sales in fiscal 2008, 24% in fiscal 2007 and 22% in fiscal 2006. Our top ten customers accounted for approximately of 57% of our net sales in fiscal 2008, 57% in fiscal 2007 and 57% in fiscal 2006. We believe that our concentration of business with our largest customers is representative of the food industry. The specific timing of significant customers merchandising activities for our products can impact quarterly sales and operating results when making year-to-year comparisons.
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C OMPETITION
We face competition in each of our product lines. We compete with producers of similar products on the basis of, among other things, product quality, convenience, price, brand recognition and loyalty, customer service, effective consumer marketing and promotional activities and the ability to identify and satisfy emerging consumer preferences. We compete with a significant number of companies of varying sizes, including divisions, subdivisions or subsidiaries of much larger companies with more substantial financial and other resources available to them. Our ability to grow our business may be impacted by the relative effectiveness of, and competitive response to, new product efforts, product innovation and new advertising and promotional activities. In addition, from time to time, we may experience margin pressure in certain markets as a result of competitors pricing practices or as a result of price increases for the ingredients used in our products. Although we compete in a highly competitive industry for representation in the retail food and foodservice channels, we believe that our brand strength in our various markets has resulted in a strong competitive position. With the deteriorating economic situation, private label competitors have strengthened considerably in the last year.
Our most significant competitors for our products are:
Our Products |
Competitor |
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Frozen dinner products | Nestle, ConAgra and Heinz | |
Pickles and peppers products | Kraft (Claussen), B&G Foods, Inc., Mt. Olive and private label | |
Baking products | General Mills and J.M. Smucker Co. | |
Syrup products | The Quaker Oats Company (Aunt Jemima), Kelloggs and private label | |
Seafood products | Gortons and Seapak | |
Frozen breakfast products | Kelloggs, General Mills and Sara Lee (Jimmy Dean) | |
Bagel products | Weston, Sara Lee and private label | |
Canned meat | ConAgra and Hormel | |
Pizza | General Mills and private label |
T RADEMARKS AND PATENTS
We own a number of registered trademarks in the United States, Canada and other countries, including Appian Way ® , Casa Regina ® , Celeste ® , Chocolate Lovers ® , Country Kitchen ® , Duncan Hines ® , Fun Frosters ® , Grabwich ® , Great Starts ® , Grill Classics ® , Hawaiian Bowls ® , Hearty Bowls ® , Hearty Hero ® , Hungry-Man ® , Hungry-Man Sports Grill ® , Hungry-Man Steakhouse ® , Its Good to be Full ® , Just Add the Warmth ® , Lenders ® , Log Cabin ® , Lunch Bucket ® , Magic Minis ® , Milwaukees ® , Moist Deluxe ® , Mrs. Butterworths ® , Mrs. Pauls ® , Open Pit ® , Ovals ® , Signature Desserts ® , Simply Classic ® , Snackmms ® , So Moist, So Delicious and So Much More ® , So Rich, So Moist, So Very Duncan Hines ® , Stackers ® , Taste the Juicy Crunch ® , Thats the Tastiest Crunch I Ever Heard ® , The Original TV Dinner ® , Treet ® , Van de Kamps ® , and Vlasic ® . We protect our trademarks by obtaining registrations where appropriate and opposing any infringement in key markets. We also own a design trademark in the United States, Canada and other countries on the Vlasic stork.
We manufacture and market certain of our frozen food products under the Swanson brand pursuant to two royalty-free, exclusive and perpetual trademark licenses granted by Campbell Soup Company. The licenses give us the right to use certain Swanson trademarks both inside and outside of the United States in connection with the manufacture, distribution, marketing, advertising and promotion of frozen foods and beverages of any type except for frozen soup or broth. The licenses require us to obtain the prior written approval of Campbell Soup Company for the visual appearance and labeling of all packaging, advertising materials and promotions bearing the Swanson trademark. The licenses contain standard provisions, including those dealing with quality control and termination by Campbell Soup Company as well as assignment and consent. If we were to breach any material term of the licenses and not timely cure such breach, Campbell Soup Company could terminate the licenses.
We manufacture and market certain of our frozen breakfast products under the Aunt Jemima brand pursuant to a royalty-free, exclusive (as to frozen breakfast products only) and perpetual license granted by The Quaker Oats Company. The license gives us the right to use certain Aunt Jemima trademarks both inside and outside the United States in connection with the manufacture and sale of waffles, pancakes, French toast, pancake batter, biscuits, muffins, strudel, croissants and all other frozen breakfast products, excluding frozen cereal. The license requires us to obtain the approval of The Quaker Oats Company for any labels, packaging, advertising and promotional materials bearing the Aunt Jemima trademark. The license contains standard provisions, including those dealing with quality control and termination by The Quaker Oats Company as well as assignment and consent. If we were to breach any material term of the license and not timely cure such breach, The Quaker Oats Company could terminate the license.
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In addition, as part of our acquisition of the Armour Business from The Dial Corporation, we received the assignment of a license agreement granting us an exclusive, royalty bearing, perpetual license to use certain Armour trademarks. Under the license agreement, Smithfield Foods, as successor to ConAgra, Inc., the licensor, grants us a license for the use of various Armour-related trademarks in conjunction with shelf-stable products within the United States. The shelf-stable products must be manufactured according to approved formulas and specifications, and new specifications must be approved by the licensor, with such approval not to be unreasonably withheld or delayed. Proposed labels, packaging, advertising and promotional materials must first be submitted to the licensor for approval, with such approval not to be unreasonably withheld or delayed. We are required to make annual royalty payments to the licensor equal to the greater of $250,000 or a percentage royalty based upon our annual net sales of the approved shelf-stable products. If we were to materially breach the license agreement, Smithfield Foods could terminate the license. We maintain Armour-related registrations in many other countries.
We consider our intellectual property rights to be among our most valuable assets. See Item 1A: Risk FactorsRisks Related to Our BusinessTermination of our material licenses would have a material adverse effect on our business.
Although we own a number of patents covering manufacturing processes, we do not believe that our business depends on any one of these patents to a material extent.
E MPLOYEES
We employ approximately 3,000 people with approximately 61% of our employees unionized. In 2008, the hourly workers in our Mattoon, Illinois manufacturing facility elected to join the United Food and Commercial Workers Union and we are currently working to negotiate a contract with these workers. We consider our employee relations to be generally good. See Item 1A: Risk FactorsRisks Related to Our BusinessOur financial well-being could be jeopardized by unforeseen changes in our employees collective bargaining agreements or shifts in union policy.
G OVERNMENTAL , LEGAL AND REGULATORY MATTERS
Food safety and labeling
We are subject to the Food, Drug and Cosmetic Act and regulations promulgated thereunder by the Food and Drug Administration. This comprehensive and evolving regulatory program governs, among other things, the manufacturing, composition and ingredients, labeling, packaging and safety of food. In addition, the Nutrition Labeling and Education Act of 1990 prescribes the format and content of certain information required to appear on the labels of food products. We are also subject to regulation by certain other governmental agencies, including the U.S. Department of Agriculture.
Our operations and products are also subject to state and local regulation, including the registration and licensing of plants, enforcement by state health agencies of various state standards and the registration and inspection of facilities. Enforcement actions for violations of federal, state and local regulations may include seizure and condemnation of products, cease and desist orders, injunctions or monetary penalties. We believe that our facilities and practices are sufficient to maintain compliance with applicable government regulations, although there can be no assurances in this regard.
Federal Trade Commission
We are subject to certain regulations by the Federal Trade Commission. Advertising of our products is subject to such regulation pursuant to the Federal Trade Commission Act and the regulations promulgated thereunder.
Employee safety regulations
We are subject to certain health and safety regulations, including regulations issued pursuant to the Occupational Safety and Health Act. These regulations require us to comply with certain manufacturing, health and safety standards to protect our employees from accidents.
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Environmental Regulation
We are subject to a number of federal, state and local laws and other requirements relating to the protection of the environment and the safety and health of personnel and the public. These requirements relate to a broad range of our activities, including:
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the discharge of pollutants into the air and water; |
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the identification, generation, storage, handling, transportation, disposal, record-keeping, labeling and reporting of, and emergency response in connection with, hazardous materials (including asbestos) associated with our operations; |
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noise emissions from our facilities; and |
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safety and health standards, practices and procedures that apply to the workplace and the operation of our facilities. |
In order to comply with these requirements, we may need to spend substantial amounts of money and other resources from time to time to (i) construct or acquire new equipment, (ii) acquire or amend permits to authorize facility operations, (iii) modify, upgrade or replace existing and proposed equipment and (iv) clean up or decommission our facilities or other locations to which our wastes have been sent. For example, some of our baking facilities are required to obtain air emissions permits and to install bag filters. Many of our facilities discharge wastewater into municipal treatment works, and may be required to pre-treat the wastewater and/or to pay surcharges. Some of our facilities use and store in tanks large quantities of materials, such as sodium chloride and ammonia, that could cause environmental damage if accidentally released. We use some hazardous materials in our operations, and we generate and dispose of hazardous wastes as a conditionally exempt small quantity generator. Our capital and operating budgets include costs and expenses associated with complying with these laws. If we do not comply with environmental requirements that apply to our operations, regulatory agencies could seek to impose civil, administrative and/or criminal liabilities, as well as seek to curtail our operations. Under some circumstances, private parties could also seek to impose civil fines or penalties for violations of environmental laws or recover monetary damages, including those relating to property damage or personal injury.
Many of our plants were in operation before current environmental laws and regulations were enacted. Our predecessors have in the past had to remediate soil and/or groundwater contamination at a number of locations, including petroleum contamination caused by leaking underground storage tanks which they removed, and we may be required to do so again in the future. We have sold a number of plants where we have discontinued operations, and it is possible that future renovations or redevelopment at these facilities might reveal additional contamination that may need to be addressed. Although the remediation of contamination that was undertaken in the past by our predecessors has been routine, we cannot assure you that future remediation costs will not be material. The presence of hazardous materials at our facilities or at other locations to which we have sent hazardous wastes for treatment or disposal may expose us to potential liabilities associated with the cleanup of contaminated soil and groundwater under federal or state Superfund statutes. Under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (CERCLA), owners and operators of facilities from which there has been a release or threatened release of hazardous materials, together with those who have transported or arranged for the transportation or disposal of those materials, are liable for (i) the costs of responding to and remediating that release and (ii) the restoration of natural resources damaged by any such release. Under CERCLA and similar state statutes, liability for the entire cost of cleaning up the contaminated site can, subject to certain exceptions, be imposed upon any such party regardless of the lawfulness of the activities that led to the contamination.
We have not incurred, nor do we anticipate incurring, material expenditures in order to comply with current environmental laws or regulations. We are not aware of any environmental liabilities that we would expect to have a material adverse effect on our business. However, discovery of additional contamination for which we are responsible, the enactment of new laws and regulations or changes in how existing requirements are enforced could require us to incur additional costs for compliance or subject us to unexpected liabilities.
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S EASONALITY
Our sales and cash flows are affected by seasonal cyclicality. Sales of frozen foods, including seafood, tend to be marginally higher during the winter months. Sales of pickles, relishes and barbecue sauces tend to be higher in the spring and summer months and demand for Duncan Hines products tends to be higher around the Easter, Thanksgiving and Christmas holidays. We pack the majority of our pickles during a season extending from May through September and also increase our Duncan Hines inventories at that time in advance of the selling season. As a result, our inventory levels tend to be higher during August, September and October, and thus we require more working capital during these months. We are a seasonal net user of cash in the third quarter of the calendar year, which may require us to draw on the revolving credit facility commitments with our senior credit facilities.
I NSURANCE
We maintain general liability and product liability, property, workers compensation, director and officer and other insurance in amounts and on terms that we believe are customary for companies similarly situated. In addition, we maintain excess insurance where we reasonably believe it is cost effective.
A DDITIONAL INFORMATION
Additional information pertaining to our businesses, including operating segments, is set forth under the caption Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations and Related Information under Item 7 of this Form 10-K and in Note 17 of the Notes to Consolidated Financial Statements, which are included under Item 8 of this Form 10-K.
Our reports on Form 10-K, along with all other reports and amendments, are filed with or furnished to the SEC. You may read and copy any materials we file with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington, D.C., 20549. Please call 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Our filings are also available to the public from commercial document retrieval services and at the web site maintained by the SEC at http://www.sec.gov . We also make available through our internet website under the heading Investors, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports after we electronically file any such materials with the SEC.
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ITEM 1A. | RISK FACTORS |
RISK FACTORS
The Deterioration of the Credit and Capital Markets May Adversely Affect our Access to Sources of Funding.
We rely on our revolving credit facilities, or borrowings backed by these facilities, to fund a portion of our seasonal working capital needs and other general corporate purposes. If any of the banks in the syndicates backing these facilities were unable to perform on its commitments, our liquidity could be impacted, which could adversely affect funding of seasonal working capital requirements. In addition, global capital markets have experienced volatility that has tightened access to capital markets and other sources of funding. In the event that we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time, if at all. If at any time there are borrowings outstanding under the revolving credit facility in an aggregate amount greater than $10.0 million, we are required to maintain a ratio of consolidated total senior secured debt to Consolidated EBITDA (as defined in the Senior Secured Credit Facility) for the most recently concluded four consecutive fiscal quarters (the Senior Secured Leverage Ratio) less than a ratio starting at a maximum of 7.00:1 at September 30, 2007 and stepping down over time to 6.50 in 2008, 5.75 in 2009, 5.00 in 2010 and 4.00 in 2011 and thereafter. See Covenant Compliance under the Item 7Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources. Our inability to obtain financing on terms and within a time acceptable to us could have an adverse impact on our operations, financial condition and liquidity.
We Face Risks Associated With Certain Pension Obligations.
We hold investments in equity and debt securities in our qualified defined benefit pension plan. Deterioration in the value of plan assets, resulting from the general financial downturn or otherwise, could cause an increase in the underfunded status of our defined benefit pension plan, thereby increasing our obligation to make contributions to the plan. For example, from December 2007 to December 2008, the underfunding in our defined benefit pension plan increased from $7.4 million to $36.5 million. Our obligation to make contributions to the pension plan could reduce the cash available for working capital and other corporate uses, and may have an adverse impact on our operations, financial condition and liquidity.
We face significant competition in our industry.
The food products business is highly competitive. Numerous brands and products compete for shelf space and sales, with competition based primarily on product quality, convenience, price, trade promotion, consumer promotion, brand recognition and loyalty, customer service and the ability to identify and satisfy emerging consumer preferences. We compete with a significant number of companies of varying sizes, including divisions, subdivisions or subsidiaries of larger companies. Many of these competitors have multiple product lines, substantially greater financial and other resources available to them and may have lower fixed costs and be substantially less leveraged than we are. We cannot assure you that we will be able to compete successfully with these companies. Competitive pressures or other factors could cause us to lose market share, which may require us to lower prices, increase marketing and advertising expenditures or increase the use of discounting or promotional campaigns, each of which would adversely affect our margins and could result in a decrease in our operating results and profitability. With the deteriorating economic situation, private label competitors have strengthened considerably in the last year. Private label is a significant competitor in the pickles and peppers, syrups, bagels and pizza products. See Item 1: BusinessCompetition.
For most of our products, we are primarily a single source manufacturing system where a significant disruption in a facility could affect our business, financial condition and/or results of operations.
With the exception of our pickles, peppers and relish products that are produced in two facilities (Imlay City, MI and Millsboro, DE), all of our other products are produced at only one of our other manufacturing facilities or co-packers. Significant unscheduled downtime at one of these facilities due to equipment breakdowns, power failures, natural disasters, or any other cause could adversely affect our ability to provide products to our customers, which would affect our sales, business, financial condition and/or results of operations. Additionally, if product sales exceed forecasts, we could, from time to time, not have an adequate supply of products to meet customer demands, which could cause us to lose sales.
We are vulnerable to fluctuations in the price and supply of food ingredients, packaging materials and freight.
The prices of the food ingredients, packaging materials and freight we use are subject to fluctuations in price attributable to, among other things, changes in crop size and government-sponsored agricultural and livestock programs. The sales prices to our customers are a delivered price. Therefore, changes in these prices could impact our gross margins. Our ability to pass along cost increases to customers is dependent upon competitive conditions and pricing methodologies employed in the various markets in which we compete.
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We use significant quantities of sugar, cucumbers, flour (wheat), poultry, seafood, vegetable oils, shortening, meat, corn syrup and other agricultural products as well as aluminum, glass jars, plastic trays, corrugated fiberboard and plastic packaging materials provided by third-party suppliers. We buy from a variety of producers and manufacturers, and alternate sources of supply are readily available. However, the supply and price are subject to market conditions and are influenced by other factors beyond our control, such as general economic conditions, unanticipated demand, problems in production or distribution, natural disasters, weather conditions during the growing and harvesting seasons, insects, plant diseases and fungi. The economic downturn experienced in the latter part of 2008 could negatively impact a supplier and in turn temporarily interrupt the supply of materials.
We generally do not have long-term contracts with our suppliers, and as a result they could increase prices significantly or fail to deliver. The occurrence of any of the foregoing could increase our costs and disrupt our operations.
If we lose one or more of our major customers, or if any of our major customers experience significant business interruption, our results of operations and our ability to service our indebtedness could be adversely affected.
We are dependent upon a limited number of large customers with substantial purchasing power for a significant percentage of our sales. Sales to Wal-Mart Stores, Inc. represented 23%, 24% and 22%, of our consolidated net sales in fiscal 2008, fiscal 2007 and fiscal 2006, respectively. We do not have a long-term supply contract with any of our major customers. Our top ten customers accounted for approximately 57%, 57% and 57% of our net sales in fiscal 2008, fiscal 2007 and fiscal 2006, respectively. The loss of one or more major customers, a material reduction in sales to these customers as a result of competition from other food manufacturers or the occurrence of a significant business interruption of our customers operations would result in a decrease in our revenues, operating results and earnings and adversely affect our ability to service our indebtedness.
Termination of our material licenses would have a material adverse effect on our business.
We manufacture and market certain of our frozen food products under the Swanson brand pursuant to two royalty-free, exclusive and perpetual trademark licenses granted by Campbell Soup Company. The licenses give us the right to use certain Swanson trademarks both inside and outside of the United States in connection with the manufacture, distribution, marketing, advertising and promotion of frozen foods and beverages of any type except for frozen soup or broth. The licenses require us to obtain the prior written approval of Campbell Soup Company for the visual appearance and labeling of all packaging, advertising materials and promotions bearing the Swanson trademark. The licenses contain standard provisions, including those dealing with quality control and termination by Campbell Soup Company as well as assignment and consent. If we were to breach any material term of the licenses and not timely cure such breach, Campbell Soup Company could terminate the licenses.
We manufacture and market certain of our frozen breakfast products under the Aunt Jemima brand pursuant to a royalty-free, exclusive (as to frozen breakfast products only) and perpetual license granted by The Quaker Oats Company. The license gives us the right to use certain Aunt Jemima trademarks both inside and outside the United States in connection with the manufacture and sale of waffles, pancakes, French toast, pancake batter, biscuits, muffins, strudel, croissants and all other frozen breakfast products, excluding frozen cereal. The license requires us to obtain the approval of The Quaker Oats Company for any labels, packaging, advertising and promotional materials bearing the Aunt Jemima trademark. The license contains standard provisions, including those dealing with quality control and termination by The Quaker Oats Company as well as assignment and consent. If we were to breach any material term of the license and not timely cure such breach, The Quaker Oats Company could terminate the license.
In addition, as part of our acquisition of the Armour Business from The Dial Corporation, we received the assignment of a license agreement granting us an exclusive, royalty-bearing, perpetual license to use certain Armour trademarks. Under the license agreement, Smithfield Foods, as successor to ConAgra, Inc., the licensor, grants a license for the use of various Armour-related trademarks in conjunction with shelf-stable products within the United States. The shelf-stable products must be manufactured according to approved formulas and specifications, and new specifications must be approved by the licensor, with such approval not to be unreasonably withheld or delayed. Proposed labels, packaging, advertising and promotional materials must first be submitted to the licensor for approval, with such approval not to be unreasonably withheld or delayed. We are required to make annual royalty payments to the licensor equal to the greater of $250,000 or a percentage royalty based upon our annual net sales of the approved shelf-stable products. If we were to materially breach the license agreement, Smithfield Foods could terminate the license.
The loss of any of these licenses would have a material adverse effect on our business.
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We may not be able to achieve all of our expected cost savings.
We have identified significant potential annual cost savings that are reflected in the financial ratio calculations set forth under Item 7: Managements Discussion and Analysis of Financial Condition and Results of OperationsDebtCovenant Compliance. We cannot assure you, however, that we will continue to realize cost savings relating to efficiency measures we have already implemented, that we will be able to achieve our other expected cost savings opportunities, that any identified savings will be achieved in a timely manner or that other unexpected costs will not offset any savings we do achieve.
We may not achieve the cost savings we anticipate, and we may not continue to receive the benefits of the production and distribution efficiencies we implemented before the consummation of the Blackstone Transaction. In addition, our cost savings and production and distribution efficiencies may be adversely affected by lower sales volumes.
Our failure to achieve our expected annual cost savings could have a material adverse effect on our financial condition and results of operations.
Loss of any of our current co-packing arrangements could decrease our sales and earnings and put us at a competitive disadvantage.
We rely upon co-packers for our Duncan Hines cake mixes, brownie mixes, specialty mixes and frosting products and a limited portion of our other manufacturing needs. We believe that there are a limited number of competent, high-quality co-packers in the industry, and if we were required to obtain additional or alternative co-packing agreements or arrangements in the future, we cannot assure you we will be able to do so on satisfactory terms or in a timely manner.
During 2008, one of our co-packers filed for bankruptcy protection. Their assets were subsequently sold. In order to continue to supply our products to our customers, we entered into an agreement with the purchaser of the assets to temporarily lease the facility and operate the equipment while an alternative co-packer is identified. Our lease on this facility and equipment runs through March 2009 and an agreement for a replacement co-packer has been signed. We do not expect any significant disruption in supply. The economic downturn experienced in the latter part of 2008 could negatively impact any of our other co-packers, although we are not aware of any issues at this time, and such impact in turn could temporarily interrupt the supply of our finished product.
We may be subject to product liability claims should the consumption of any of our products cause injury, illness or death.
We sell food products for human consumption, which involves risks such as product contamination or spoilage, misbranding, product tampering and other adulteration of food products. Consumption of a misbranded, adulterated, contaminated or spoiled product may result in personal illness or injury. We could be subject to claims or lawsuits relating to an actual or alleged illness or injury, and we could incur liabilities that are not insured or exceed our insurance coverages. Even if product liability claims against us are not successful or fully pursued, these claims could be costly and time consuming and may require our management to spend time defending the claims rather than operating our business.
A product that has been actually or allegedly misbranded or becomes adulterated could result in product withdrawals or recalls, destruction of product inventory, negative publicity, temporary plant closings and substantial costs of compliance or remediation. Any of these events, including a significant product liability judgment against us, could result in a loss of demand for our food products, which could have an adverse effect on our financial condition, results of operations or cash flows.
Due to the seasonality of the business, our revenue and operating results may vary quarter to quarter.
Our sales and cash flows are affected by seasonal cyclicality. Sales of frozen foods, including seafood, tend to be marginally higher during the winter months, whereas sales of pickles, relishes and barbecue sauces tend to be higher in the spring and summer months and demand for Duncan Hines products tends to be higher around the Easter, Thanksgiving and Christmas holidays. We pack the majority of our pickles during a season extending from May through September and also increase our Duncan Hines inventories at that time in advance of the selling season. As a result, our inventory levels tend to be higher during August, September and October, and thus we require more working capital during these months. If we are unable to obtain this working capital or if these seasonal fluctuations are greater than anticipated, there could be an adverse effect on our financial condition, results of operations or cash flows.
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If we fail to successfully integrate any future acquisitions into our operations, our operating costs could increase and our operating margins, operating results and profitability may decrease.
We may look to complete acquisitions in the future and if we do not successfully integrate such acquisitions, we may not realize anticipated operating advantages and cost savings, which would reduce our anticipated operating margins, operating results and profitability. The integration of companies involves a number of risks, including:
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demands on management related to the increase in our size after an acquisition; |
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the diversion of managements attention from existing operations to the integration of acquired companies; and |
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difficulty in the hiring or the retention of key management personnel. |
We may not be able to maintain the levels of operating efficiency that the acquired companies achieved separately. Successful integration of acquired operations will depend upon our ability to manage those operations and to eliminate redundant and excess costs. We may not be able to achieve the cost savings and other benefits that we would hope to achieve from acquisitions, which could cause our financial condition to deteriorate or result in an increase in our expenses or a reduction in our operating margins, thereby reducing our operating results and profitability.
Sales of our products are subject to changing consumer preferences, and our success depends upon our ability to predict, identify and interpret changes in consumer preferences and develop and offer new products rapidly enough to meet those changes.
Our success depends on our ability to predict, identify and interpret the tastes and dietary habits of consumers and to offer products that appeal to those preferences. There are inherent marketplace risks associated with new product or packaging introductions, including uncertainties about trade and consumer acceptance. If we do not succeed in offering products that consumers want to buy, our sales and market share will decrease, resulting in reduced profitability. A significant challenge for us is distinguishing among fads, mid-term trends and lasting changes in our consumer environment. If we are unable to accurately predict which shifts in consumer preferences will be long-lasting, or to introduce new and improved products to satisfy those preferences, our sales will decline. In addition, given the variety of backgrounds and identities of consumers in our consumer base, we must offer a sufficient array of products to satisfy the broad spectrum of consumer preferences. As such, we must be successful in developing innovative products across a multitude of product categories. Finally, if we fail to rapidly develop products in faster growing and more profitable categories, we could experience reduced demand for our products.
Our financial well-being could be jeopardized by unforeseen changes in our employees collective bargaining agreements or shifts in union policy.
We employ approximately 3,000 people, with approximately 61% of our employees unionized. In 2008, the hourly workers in our Mattoon, Illinois manufacturing facility joined the United Food and Commercial Workers union. Additionally, in 2008 we temporarily took over the operation of one of our co-packers which we will operate through March 2009. The employees of this facility are unionized and we are now party to the agreement. We are now party to six collective bargaining agreements with the United Food and Commercial Workers Union, one of which was renewed in 2009. Although we consider our employee relations to generally be good, failure to extend or renew our collective bargaining agreements or a prolonged work stoppage or strike at any facility with union employees could have a material adverse effect on our business, financial condition or results of operations. In addition, we cannot assure you that upon the expiration of our existing collective bargaining agreements, new agreements will be reached without union action or that any such new agreements will be on terms wholly satisfactory to us.
We are subject to laws and regulations relating to protection of the environment, worker health and workplace safety. Costs to comply with these laws and regulations, or claims with respect to environmental, health and safety matters, could have a significant negative impact on our business.
Our operations are subject to various federal, state and local laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of solid and hazardous materials and wastes, employee exposure to hazards in the workplace and the cleanup of contaminated sites. We are required to obtain and comply with environmental permits for many of our operations, and sometimes we are required to install pollution control equipment or to implement operational changes to limit air emissions or wastewater discharges and/or decrease the likelihood of accidental releases of hazardous materials. We could incur substantial costs, including cleanup costs, civil or criminal fines or penalties and third-party claims for property damage or personal injury as a result of any violations of environmental laws and regulations, noncompliance with environmental permit conditions or contamination for which we may be responsible that is identified or that may occur in the future. Such costs may be material.
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We cannot predict what environmental or health and safety legislation or regulations will be enacted in the future or how existing or future laws or regulations will be enforced, administered or interpreted. We also cannot predict the amount of future expenditures that may be required in order to comply with such environmental or health and safety laws or regulations or to respond to environmental claims. See Item 1: BusinessGovernmental, Legal and Regulatory Matters.
Our operations are subject to FDA and USDA governmental regulation, and there is no assurance that we will be in compliance with all regulations.
Our operations are subject to extensive regulation by the U.S. Food and Drug Administration, the U.S. Department of Agriculture and other national, state and local authorities. Specifically, we are subject to the Food, Drug and Cosmetic Act and regulations promulgated thereunder by the FDA. This comprehensive regulatory program governs, among other things, the manufacturing, composition and ingredients, packaging and safety of food. Under this program, the FDA regulates manufacturing practices for foods through its current good manufacturing practices regulations and specifies the recipes for certain foods. Our processing facilities and products are subject to periodic inspection by federal, state and local authorities. In addition, we must comply with similar laws in Canada. We seek to comply with applicable regulations through a combination of employing internal personnel to ensure quality-assurance compliance (for example, assuring that food packages contain only ingredients as specified on the package labeling) and contracting with third-party laboratories that conduct analyses of products for the nutritional-labeling requirements.
Failure by us to comply with applicable laws and regulations or maintain permits and licenses relating to our operations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could result in increased operating costs resulting in a material adverse effect on our operating results and business. See Item 1: BusinessGovernmental, Legal and Regulatory Matters.
Higher energy costs and other factors affecting the cost of producing, transporting and distributing our products could adversely affect our financial results.
Rising fuel and energy costs may have a significant impact on our costs of operations, including the manufacture, transport and distribution of our products. Fuel costs may fluctuate due to a number of factors outside our control, including government policy and regulation and weather conditions. Additionally, we may be unable to maintain favorable arrangements with respect to the costs of procuring raw materials, packaging, services and transporting products, which could result in increased expenses and adversely affect operations. If we are unable to hedge against such increases or raise the prices of our products to offset the changes, our results of operations could be adversely affected.
The consolidation trend among our customer base could adversely affect our profitability.
The consolidation trend is continuing in the retail grocery and foodservice industries, and mass merchandisers are gaining market share. As this trend among grocery retailers continues and our retail customers, including mass merchandisers, grow larger and become more sophisticated, these retailers may demand lower pricing and increased promotional programs from product suppliers. If our products are not selected by the retailers or if we fail to effectively respond to their demands, our sales and profitability could be adversely affected.
We have a significant amount of goodwill and intangible assets on our consolidated balance sheet that is subject to impairment based upon future adverse changes in our business and the overall economic environment.
At December 28, 2008, the carrying value of goodwill and tradenames, based upon the final purchase price allocation in connection with the Blackstone Transaction, was $994.1 million and $910.1 million, respectively. We evaluate the carrying amount of goodwill and intangible assets for impairment on an annual basis, in December, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. We have recorded impairment charges in recent years as well as 2008. The value of goodwill and intangible assets from the allocation of purchase price from the Blackstone Transaction is derived from our business operating plans at that time and is therefore susceptible to an adverse change in demand, input costs, general changes in the business or changes in the overall economic environment and could therefore require an impairment charge in the future.
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Litigation regarding our trademarks and any other proprietary rights may have a significant, negative impact on our business.
We consider our trademarks to be of significant importance in our business. Although we devote resources to the establishment and protection of our trademarks, we cannot assure you that the actions we have taken or will take in the future will be adequate to prevent violation of our trademark and proprietary rights by others or prevent others from seeking to block sales of our products as an alleged violation of their trademarks and proprietary rights. There can be no assurance that future litigation by or against us will not be necessary to enforce our trademark or proprietary rights or to defend ourselves against claimed infringement of the rights of others. Any future litigation of this type could result in adverse determinations that could have a material adverse effect on our business, financial condition or results of operations. Our inability to use our trademarks and other proprietary rights could also harm our business and sales through reduced demand for our products and reduced revenues.
If we are unable to retain our key management personnel, our future performance may be impaired and our financial condition could suffer as a result.
Our success depends to a significant degree upon the continued contributions of senior management, certain of whom would be difficult to replace. Upon the completion of the Blackstone Transaction, Roger Deromedi, the former Chief Executive Officer of Kraft Foods Inc., was appointed to serve as Chairman. Departure by certain of our executive officers could have a material adverse effect on our business, financial condition or results of operations. We do not maintain key-man life insurance on any of our executive officers. We cannot assure you that the services of such personnel will continue to be available to us.
We may not be able to utilize all of our net operating loss carryforwards.
If there is an unfavorable adjustment from an IRS examination (whether as a result of a change in law or IRS policy or otherwise) that reduces any of our net operating loss carryforwards (NOLs), our cash taxes payable may increase, which could significantly reduce our future cash flow and impact our ability to make interest payments on our indebtedness, including the notes. As of December 28, 2008, we had NOLs for U.S. federal income tax purposes of $1.1 billion. These NOLs are subject to annual limitations under Section 382 of the Internal Revenue Code of 1986. These limitations and/or our failure to generate sufficient taxable income may result in the expiration of the net operating loss carryforwards before they may be utilized.
Blackstone controls Pinnacle and may have conflicts of interest with us or you in the future.
Investment funds associated with or designated by Blackstone own substantially all of our capital stock, on a fully-diluted basis, as a result of the Blackstone Transaction. Blackstone has control over our decisions to enter into any corporate transaction and has the ability to prevent any transaction that requires the approval of shareholders regardless of whether noteholders believe that any such transactions are in their own best interests. For example, Blackstone could collectively cause us to make acquisitions that increase the amount of indebtedness that is secured or that is senior to the senior subordinated notes or to sell assets, which may impair our ability to make payments under the notes.
Additionally, Blackstone is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Blackstone may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as investment funds associated with or designated by Blackstone collectively continue to indirectly own a significant amount of our capital stock, even if such amount is less than 50%, Blackstone will continue to be able to strongly influence or effectively control our decisions.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None
ITEM 2. | PROPERTIES |
We own and operate the following seven manufacturing and warehouse facilities:
Facility location |
Principal products |
Facility size |
||
Fayetteville, Arkansas | Frozen dinners and entrees | 335,000 square feet | ||
Imlay City, Michigan | Pickles, peppers, relish | 344,000 square feet | ||
Millsboro, Delaware | Pickles, peppers, relish | 460,000 square feet | ||
Jackson, Tennessee | Frozen breakfast, frozen pizza, frozen prepared seafood | 302,000 square feet | ||
Mattoon, Illinois | Bagels, frozen breakfast | 215,000 square feet | ||
St. Elmo, Illinois | Syrup, barbecue sauce | 250,000 square feet | ||
Ft. Madison, Iowa | Canned meat | 450,000 square feet |
We have entered into co-packing (third-party manufacturing) agreements with several manufacturers for certain of our finished products. We believe that our manufacturing facilities, together with our co-packing agreements, provide us with sufficient capacity to accommodate our planned internal growth. Our co-packed finished products include our Duncan Hines product line, Aunt Jemima breakfast sandwich product line and certain seafood products. All of our Duncan Hines cake mix, brownie mix, specialty mix and frosting production equipment, including co-milling, blending and packaging equipment, are located at the contract manufacturers facilities. The most significant Duncan Hines co-packing agreement will expire in June 2015.
During 2008, one of our co-packers filed for bankruptcy protection. Their assets were subsequently sold. In order to continue to supply our products to our customers, we entered into an agreement with the purchaser of the assets to temporarily lease the facility and operate the equipment while an alternative co-packer is identified. Our lease on this facility and equipment runs through March 2009 and an agreement for a replacement co-packer has been signed. We do not expect any significant disruption in supply.
We lease office space under operating leases (expiring) in Mountain Lakes, New Jersey (November 2013); Cherry Hill, New Jersey (May 2011); Lewisburg, Pennsylvania (Month to Month); Fayetteville, Arkansas (Month to Month); and Mississauga, Ontario (August 2015).
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ITEM 3. | LEGAL PROCEEDINGS |
Employee LitigationIndemnification of US Cold Storage
On March 21, 2002, an employee at the Companys former Omaha, Nebraska facility, died as the result of an accident while operating a forklift at a Company-leased warehouse facility. OSHA conducted a full investigation and determined that the death was the result of an accident and found no violations by the Company. On March 18, 2004, the estate of the deceased filed suit in District Court of Sarpy County, Nebraska, Case No: CI 04-391, against the Company, the owner of the forklift and the leased warehouse, the manufacturer of the forklift and the distributor of the forklift. The Company, having been the deceaseds employer, was named as a defendant for workers compensation subrogation purposes only.
On May 18, 2004, the Company received notice from defendant, US Cold Storage, the owner of the leased warehouse, requesting that it accept the tender of defense for US Cold Storage in this case in accordance with the indemnification provision of the warehouse lease. In November 2008, the Company paid $13,000 and the matter was settled and dismissed.
R2 appeal in Aurora bankruptcy
Prior to its bankruptcy filing in 2003, Aurora entered into an agreement with its pre-petition lending group compromising the amount of certain fees due under its senior bank facilities (the October Amendment). One of the members of the bank group (R2 Top Hat, Ltd.) challenged the enforceability of the October Amendment during Auroras bankruptcy by filing an adversary proceeding in U.S. Bankruptcy Court, District of Delaware, and by objecting to confirmation. The Bankruptcy Court rejected the lenders argument and confirmed Auroras plan of reorganization. The lender then appealed from those orders of the Bankruptcy Court. In December 2006, the U.S. District Court for the District of Delaware filed its Memorandum and Order affirming both (a) the February 20, 2004 Order of the Bankruptcy Court confirming the debtors First Amended Joint Reorganization Plan, and (b) the February 27, 2004 Order of the Bankruptcy Court granting the debtors motion for summary judgment and dismissing the adversary proceeding. R2 Top Hat, Ltd. filed a Notice of Appeal to the 3 rd Circuit Court of Appeals. On April 17, 2008, the Company settled with R2 Top Hat, Ltd. for $10.0 million in full payment of the excess leverage fees related to the Aurora prepetition bank facility, all related interest and all other out-of-pocket costs. After this settlement, there are no remaining contingencies related to the excess leverage fees under the Aurora prepetition senior bank facility. Accordingly, the remaining $10.0 million accrued liability assumed in the merger with Aurora Foods Inc. and recorded at fair value of $20.1 million in the purchase price allocation for the Blackstone Transaction was reduced to $0 and the related credit, net of related expenses, was recorded in the Other income (expense), net in the Consolidated Statement of Operations.
American Cold StorageNorth America, L.P. v. P.F. Distribution, LLC and Pinnacle Foods Group Inc.
On June 26, 2005, the Company was served with a Summons and Complaint in the above matter, which was filed in the Circuit Court of Madison County, Tennessee. American Cold Storage (ACS) operates a frozen storage warehouse and distribution facility (the Facility) located in Madison County, Tennessee, near the Companys Jackson, Tennessee plant. In April 2004, the Company entered into discussions with ACS to utilize the Facility. Terms were discussed, but no contract was ever signed. Shortly after shipping product to the Facility, the Company discovered that the Facility was incapable of properly handling the discussed volume of product and began reducing its shipments to the Facility. The original complaint sought damages not to exceed $1.5 million, together with associated costs. On May 3, 2006, the Companys attorney received notice from counsel for ACS that it was increasing its damage claim in the suit from $1.5 million to $5.5 million. The judge had set a trial date for August 2008. However, prior to the court date, the Company settled the litigation by paying $0.7 million to ACS on August 27, 2008 and the case was dismissed with prejudice. The resolution of this matter did not have a material impact on the Companys financial condition, results of operations or cash flows.
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Gilster Mary Lee Corporation v. Pinnacle Foods
In September 2006, Gilster Mary Lee Corporation (Gilster), the primary co-packer of the Companys Duncan Hines products, filed suit against us alleging that monies were due to Gilster from the Company for a warehouse/handling fee under an existing contract. While certain of these fees are required by the contract, the calculation of the fees was the issue in dispute. In U.S. District Court in January 2008, a verdict was returned in favor of Gilster. The Company had fully reserved the amount of the verdict. On July 17, 2008, the Company and Gilster settled the case for full payment of the amount reserved, and dismissed all appeals. In addition, an amendment was made to the contract modifying the disputed warehouse/handling fee and certain payment terms from the date of settlement forward. The resolution of this matter did not have a material impact on the Companys financial condition, results of operations or cash flows.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None
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ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
There is no established trading market for our common stock. As of December 28, 2008, one hundred percent of our common stock was held by our parent, Crunch Holding Corp. We did not pay any dividends in respect to our common stock in fiscal 2008.
Our senior secured credit facilities, the indenture governing our 9.25% Senior Notes due 2015 (the Senior Notes Indenture) and the indentures governing our 10.625% Senior Subordinated Notes due 2017 (the Senior Subordinated Notes Indenture and together with the Senior Notes Indenture, the Indentures) each contain covenants that limit our ability to pay dividends and take on additional indebtedness. The indentures contain a limitation on restricted payments, including dividends, that is described in greater detail in footnotes (3) and (4) to the last table in Item 7: Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesDebtCovenant Compliance included elsewhere in this Form 10-K. The senior secured credit facilities also limit our ability to make restricted payments, including dividends, subject to exceptions, including an exception that permits restricted payments up to an aggregate amount of (together with certain other amounts) the greater of $50 million and 2% of our consolidated total assets, so long as no default has occurred and is continuing and our pro forma Senior Secured Leverage Ratio would be no greater than 4.25 to 1.00. For the description of our Senior Secured Leverage Ratio and its level as of the last balance sheet date, see Item 7: Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesDebtCovenant Compliance. In addition, the senior secured credit facilities and the indentures contain exceptions from the limitation on restricted payments that would allow dividends on common stock following the first public offering, if any, of our common stock in an amount up to 6% per year of the net proceeds received by or contributed to our company in or from such public offering, subject to exceptions.
ITEM 6. | SELECTED FINANCIAL DATA |
In December 2004, the Board of Directors approved a change to PFG LLCs fiscal year end from July 31 to the last Sunday in December. Accordingly, data for December 2004 presented in this Form 10-K relates to the period from August 1, 2004 to December 26, 2004, otherwise known as the transition year, and is referred to as the 21 weeks ended December 26, 2004.
PFG LLC is referred to as the Predecessor for the period prior to the consummation of the Blackstone Transaction and PFF is referred to as the Successor subsequent to the consummation of the Blackstone Transaction.
On November 25, 2003, J.P. Morgan Partners, LLC, J.W. Childs Associates, L.P. and CDM Investor Group LLC, together with certain of their affiliates, acquired our company (the 2003 Acquisition). For purposes of identification and description, the Company is referred to as 2003 Predecessor for the period prior to the 2003 Acquisition.
The following table sets forth selected historical consolidated financial and other operating data for the following periods:
|
for Successor and its subsidiaries as of and for the fiscal year ended December 28, 2008 and the 39 weeks ended December 30, 2007; |
|
for Predecessor and its subsidiaries for the period from January 1, 2007 to April 2, 2007, immediately prior to the consummation of the Blackstone Transaction, as of and for the years ended December 31, 2006 and December 25, 2005, as of and for the 21 weeks ended December 26, 2004, and as of and for the 36 weeks ended July 31, 2004. |
|
for the 2003 Predecessor, for the 16 weeks ended November 24, 2003. |
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The selected financial data of the Successor as of and for the fiscal year ended December 28, 2008 and the 39 weeks ended December 30, 2007, and the selected financial data of the Predecessor for the period from January 1, 2007 to April 2, 2007, immediately prior to the consummation of the Blackstone Transaction, and for the year ended December 31, 2006 have been derived from the audited consolidated financial statements included elsewhere in this Form 10-K. The fiscal year ended and December 25, 2005, the 21 weeks ended December 26, 2004 and the fiscal years ended July 31, 2004 have been derived from the audited consolidated financial statements of the Predecessor. The 16 weeks ended November 24, 2003 has been derived from the audited consolidated financial statements of the 2003 Predecessor.
The selected financial data presented below should be read in conjunction with our consolidated financial statements and the notes to those statements and Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K.
Successor | Predecessor |
2003
Predecessor |
||||||||||||||||||||||||||||||
($ in Thousands) |
Fiscal Year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13 weeks
ended April 2, 2007 |
Fiscal Year
ended December 31, 2006 |
Fiscal Year
ended December 25, 2005 |
21 weeks
ended December 26, 2004 |
36 weeks
ended July 31, 2004 |
16 weeks
ended November 24, 2003 |
||||||||||||||||||||||||
Statement of operations data: |
||||||||||||||||||||||||||||||||
Net sales |
$ | 1,556,408 | $ | 1,137,898 | $ | 376,587 | $ | 1,442,256 | $ | 1,255,735 | $ | 511,190 | $ | 574,352 | $ | 181,379 | ||||||||||||||||
Cost of products sold |
1,217,929 | 895,306 | 293,191 | 1,122,646 | 997,198 | 420,080 | 502,967 | 134,233 | ||||||||||||||||||||||||
Gross profit |
338,479 | 242,592 | 83,396 | 319,610 | 258,537 | 91,110 | 71,385 | 47,146 | ||||||||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||||||||||
Marketing and selling expenses |
111,372 | 87,409 | 34,975 | 103,550 | 101,159 | 53,588 | 57,910 | 24,335 | ||||||||||||||||||||||||
Administrative expenses |
47,832 | 40,715 | 17,714 | 52,447 | 40,242 | 15,216 | 32,258 | 9,454 | ||||||||||||||||||||||||
Research and development expenses |
3,496 | 2,928 | 1,437 | 4,037 | 3,625 | 1,459 | 2,436 | 814 | ||||||||||||||||||||||||
Goodwill impairment charges |
| | | | 54,757 | 4,308 | 1,835 | | ||||||||||||||||||||||||
Other expense (income), net |
24,363 | 12,028 | 51,042 | 14,186 | 31,836 | 5,680 | 38,096 | 7,956 | ||||||||||||||||||||||||
Total operating expenses |
187,063 | 143,080 | 105,168 | 174,220 | 231,619 | 80,251 | 132,535 | 42,559 | ||||||||||||||||||||||||
Earnings (loss) before interest and taxes |
151,416 | 99,512 | (21,772 | ) | 145,390 | 26,918 | 10,859 | (61,150 | ) | 4,587 | ||||||||||||||||||||||
Interest expense |
153,280 | 124,504 | 39,079 | 86,615 | 71,104 | 26,260 | 26,240 | 9,310 | ||||||||||||||||||||||||
Interest income |
319 | 1,029 | 486 | 1,247 | 584 | 120 | 320 | 143 | ||||||||||||||||||||||||
Earnings (loss) before income taxes |
(1,545 | ) | (23,963 | ) | (60,365 | ) | 60,022 | (43,602 | ) | (15,281 | ) | (87,070 | ) | (4,580 | ) | |||||||||||||||||
Provision (benefit) for income taxes |
27,036 | 24,746 | 6,284 | 26,098 | (426 | ) | 9,425 | (3,157 | ) | (1,506 | ) | |||||||||||||||||||||
Net earnings (loss) |
$ | (28,581 | ) | $ | (48,709 | ) | $ | (66,649 | ) | $ | 33,924 | $ | (43,176 | ) | $ | (24,706 | ) | $ | (83,913 | ) | $ | (3,074 | ) | |||||||||
Other financial data: |
||||||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities |
$ | 16,759 | $ | 60,139 | $ | 55,684 | $ | 161,563 | $ | 64,747 | $ | (2,488 | ) | $ | 31,070 | $ | (23,439 | ) | ||||||||||||||
Net cash used in investing activities |
(32,598 | ) | (1,340,353 | ) | (5,027 | ) | (213,657 | ) | (28,775 | ) | (12,455 | ) | (1,058,781 | ) | (1,511 | ) | ||||||||||||||||
Net cash provided by (used in) financing activities |
14,239 | 1,286,062 | (46,293 | ) | 63,912 | (37,688 | ) | (20,639 | ) | 1,018,534 | (262 | ) | ||||||||||||||||||||
Depreciation and amortization |
62,509 | 45,671 | 10,163 | 42,187 | 39,088 | 17,068 | 24,570 | 6,136 | ||||||||||||||||||||||||
Capital expenditures |
32,598 | 22,935 | 5,027 | 26,202 | 30,931 | 8,073 | 9,826 | 1,511 | ||||||||||||||||||||||||
Ratio of earnings to fixed charges (1) |
NM | NM | NM | 1.68x | NM | NM | NM | NM | ||||||||||||||||||||||||
Balance sheet data: |
||||||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 4,261 | $ | 5,999 | $ | | $ | 12,337 | $ | 519 | $ | 2,235 | $ | 37,781 | $ | | ||||||||||||||||
Working capital (2) |
131,234 | 80,556 | | 105,569 | 84,517 | 77,302 | 81,524 | | ||||||||||||||||||||||||
Total assets |
2,632,200 | 2,667,079 | | 1,792,081 | 1,636,494 | 1,765,625 | 1,784,610 | | ||||||||||||||||||||||||
Total debt (3) |
1,785,352 | 1,770,171 | | 920,963 | 888,648 | 943,080 | 944,328 | | ||||||||||||||||||||||||
Total liabilities |
2,324,627 | 2,307,464 | | 1,353,726 | 1,279,970 | 1,372,258 | 1,366,595 | | ||||||||||||||||||||||||
Shareholders equity |
307,573 | 359,615 | | 438,355 | 356,524 | 393,367 | 418,015 | |
(1) | For purposes of computing the ratio of earnings to fixed charges, earnings consist of earnings (loss) before income taxes and fixed charges. Fixed charges consist of (i) interest expense, including amortization of debt acquisition costs and (ii) one-third of rent expense, which management believes to be representative of the interest factor thereon. The Successors earnings for the fiscal year ending 2008 and the 39 weeks ending December 30, 2007 were insufficient to cover fixed charges by $1.5 million and $24.0 million, respectively. The Predecessors earnings for the 13 weeks ending April 2, 2007, fiscal 2005, the 21 weeks ended December 26, 2004 and the 36 weeks ended July 31, 2004 were insufficient to cover fixed charges by $60.3 million, $43.6 million, $15.3 million and $87.1 million, respectively. The 2003 Predecessors earnings for the 16 weeks ended November 24, 2003 were insufficient to cover fixed charges by $4.6 million. |
(2) | Working capital excludes notes payable, revolving debt facility and current portion of long term debt. |
(3) | Total debt includes notes payable, revolving debt facility and current portion of long term debt. |
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ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
(dollars in millions, except where noted)
The following discussion and analysis of our results of operations and financial condition covers periods prior to the consummation of the Blackstone Transaction and periods subsequent to the consummation of the Blackstone Transaction. The discussion and analysis of historical periods prior to the consummation of the Blackstone Transaction does not reflect the significant impact that the Blackstone Transaction had on us, including significantly increased leverage and liquidity requirements, new costs, as well as cost savings initiatives (and related costs) to be implemented in connection with the Blackstone Transaction. You should read the following discussion of our results of operations and financial condition with the Selected Financial Data and the audited consolidated financial statements appearing elsewhere in this Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the Item 1A: Risk Factors section of this Form 10-K. Actual results may differ materially from those contained in any forward-looking statements.
Information presented for the fiscal years ended December 28, 2008 and December 31, 2006 is based on our audited consolidated financial statements for those periods. Information presented for the fiscal year 2007 is based on the combination of the audited 39 weeks ended December 30, 2007 and the audited 13 weeks ended April 2, 2007, immediately prior to the consummation of the Blackstone Transaction. This combination represents what we believe is the most meaningful basis for comparison of the fiscal year ended December 28, 2008, the 52 weeks ended December 30, 2007, and the fiscal year ended December 31, 2006 , although the presentation of the 52-week period ended December 30, 2007 is not in accordance with GAAP. We believe that these are the most meaningful bases for comparison because the customer base, products, manufacturing facilities and types of marketing programs were the same under the Predecessor as they are under the Successor. Also, the results for the fiscal year ended December 31, 2006 are based on a 53 week year and include the results of operations of the Armour Business from the date of acquisition on March 1, 2006.
Where the context so requires, we use the term Predecessor to refer to the historical financial results and operations of PFG LLC and its subsidiaries prior to the consummation of the Blackstone Transaction described herein and the term Successor to refer to the historical financial results and operations of PFF and its subsidiaries after the consummation of the Blackstone Transaction described herein.
Overview
We are a leading producer, marketer and distributor of high quality, branded food products, the results of which are managed and reported in two operating segments: dry foods and frozen foods. The dry foods segment consists of the following product lines (brands): baking (Duncan Hines ® ), condiments (Vlasic ® , Open Pit ® ), syrup (Mrs. Butterworths ® and Log Cabin ® ) and canned meat (Armour ® ). The frozen foods segment consists of the following product lines (brands): frozen dinners (Hungry-Man ® , Swanson ® ), frozen prepared seafood (Mrs. Pauls ® , Van de Kamps ® ), frozen breakfast (Aunt Jemima ® ), bagels (Lenders ® ), and frozen pizza (Celeste ® ).
Business Drivers and Measures
In operating our business and monitoring its performance, we pay attention to trends in the food manufacturing industry and a number of performance measures and operational factors. This discussion includes forward-looking statements that are based on our current expectations.
Industry Factors
Our industry is characterized by the following general trends:
|
Industry Growth. Growth in our industry is driven primarily by population and modest product selling price increases; however, price increases have accelerated in 2008 to offset increased commodity costs. Incremental growth is principally driven by product, packaging and process innovation. |
24
|
Competition. The food products business is competitive. Numerous brands and products compete for shelf space and sales, with competition based primarily on product quality, convenience, price, trade promotion, consumer promotion, brand recognition and loyalty, customer service and the ability to identify and satisfy emerging consumer preferences. In order to maintain and grow our business, we must be able to react to these competitive pressures. |
|
Consumer Tastes and Trends. Consumer trends, such as changing health trends and focus on convenience and products tailored for busy lifestyles, present both opportunities and challenges for our business. In order to maintain and grow our business, we must react to these trends by offering products that respond to evolving consumer needs. Consumer trends are difficult to predict and vary over time. In 2008, for example, sales in our Seafood and Hungry-Man businesses declined, but sales in our Armour, syrups and dry private label businesses increased. Although no one can predict with certainty the effects of the current economic recession, we believe that sales of some of our products may by positively affected to the extent consumers decide to eat more meals at home. |
|
Customer Consolidation. In recent years, our industry had been characterized by consolidation in the retail grocery and food service industries, with mass merchandisers gaining market share. This trend could increase customer concentration within the industry. |
Revenue Factors
Our net sales are driven principally by the following factors:
|
Shipments , which change as a function of changes in volume and in price; and |
|
the costs that we deduct from shipments to reach net sales, which consist of: |
|
Trade marketing expenses , which include the cost of temporary price reductions (on sale prices), promotional displays and advertising space in store circulars. |
|
Slotting expenses , which are the costs of having certain retailers stock a new product, including amounts retailers charge for updating their warehousing systems, allocating shelf space and in-store systems set-up, among other things. |
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Consumer coupon redemption expenses , which are costs from the redemption of coupons we circulate as part of our marketing efforts. |
We give detailed information on these factors below under Results of Operations. The timing and magnitude of changes in our prices can have an effect on our volumes. In the first quarter of 2008, we raised prices, which negatively affected our net sales in that quarter.
Cost Factors
Our important costs include the following:
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Raw materials , such as sugar, cucumbers, flour (wheat), corn, soybean oils, dairy products, poultry and seafood, among others, are available from numerous independent suppliers but are subject to price fluctuations due to a number of factors, including changes in crop size, federal and state agricultural programs, export demand, weather conditions and insects, among others. Overall, we experienced general inflationary pressure in 2007, consistent with the food industry. This inflationary pressure has increased significantly in 2008, particularly in wheat, corn, edible oils and to a lesser extent, dairy products, although trends began to improve towards the end of the year. |
|
Packaging costs . Our broad array of products entails significant costs for packaging and is subject to fluctuations in the price of aluminum, glass jars, plastic trays, corrugated fiberboard and plastic packaging materials. |
|
Freight and distribution. We use a combination of common carriers and inter-modal rail to transport our products from our manufacturing facilities to distribution centers and to deliver products to retailers from those centers. Our freight and distribution costs are influenced by fuel costs, which increased significantly in the first nine months of 2008, before coming back down to more historical levels in the fourth quarter. |
|
Advertising and other marketing expenses. We record expenses related to advertising and other consumer and trade-oriented marketing programs under Marketing and selling expenses in our consolidated financial statements. Our consumer advertising and marketing expenses increased significantly in 2007 compared to 2006 as we implemented our strategy of slowly shifting a portion of trade support spending to consumer advertising and marketing. This strategy continued in 2008. |
Working Capital
Our working capital is primarily driven by accounts receivable and inventories, which fluctuate throughout the year due to seasonality in both sales and production, as described below in Seasonality. We will continue to focus on reducing our working capital requirements while simultaneously maintaining our customer service levels and production needs. We have historically relied on internally generated cash flows and temporary borrowings under our revolving credit facility to satisfy our working capital requirements.
Other Factors
Other factors that have influenced our results of operations and may do so in the future include:
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Interest Expense. As a result of the Blackstone Transaction, we have significant indebtedness. Although we expect to reduce our leverage over time, we expect interest expense to continue to be a significant component of our expenses. See Liquidity and Capital Resources. |
25
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Cash Taxes. We have significant tax-deductible intangibles and federal and state net operating losses, which we believe will result in minimal federal and state cash taxes in the next several years. We expect to continue to record federal and state non-cash provisions for deferred income taxes in the future. |
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Acquisitions and Consolidations. We believe we have the expertise to identify and integrate value-enhancing acquisitions to further grow our business. In recent years we have successfully integrated acquisitions. We have, however, incurred significant costs in connection with integrating these businesses and streamlining our operations. |
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Impairment of Goodwill and Long-Lived Assets . We test our goodwill and intangible assets annually or more frequently (if necessary) for impairment and have recorded impairment charges in recent years as well as 2008. The value of goodwill and intangibles from the allocation of purchase price from the Blackstone Transaction is derived from our business operating plans at that time and is therefore susceptible to an adverse change that could require an impairment charge. |
Seasonality
We experience seasonality in our sales and cash flows. Sales of frozen foods, including seafood, tend to be marginally higher during the winter months. Sales of pickles, relishes and barbecue sauces tend to be higher in the spring and summer months, and demand for Duncan Hines products tends to be higher around the Easter, Thanksgiving and Christmas holidays. We pack the majority of our pickles during a season extending from May through September and also increase our Duncan Hines inventories at that time in advance of the selling season. As a result, our inventory levels are higher during August, September and October, and thus we require more working capital during those months. We are a seasonal net user of cash in the third quarter of the calendar year, which may require us to draw on the revolving credit commitments under our senior credit facilities.
Recent Transactions
On February 10, 2007, Crunch Holding Corp. (Crunch Holding), our parent company, entered into an Agreement and Plan of Merger with Peak Holdings LLC (Peak Holdings), a Delaware limited liability company controlled by affiliates of The Blackstone Group, Peak Acquisition Corp (Peak Acquisition), a wholly-owned subsidiary of Peak Holdings, and Peak Finance LLC, providing for the acquisition of Crunch Holding. Under the terms of Agreement and Plan of Merger, the purchase price for Crunch Holding was $2,162.5 million in cash plus an amount equal to the aggregate exercise prices of vested options less the amount of indebtedness of Crunch Holding and its subsidiaries outstanding immediately prior to the closing and certain transaction costs, subject to purchase price adjustments based on the amount of our working capital and indebtedness as of the closing. At the closing, on April 2, 2007, Peak Acquisition merged with and into Crunch Holding, with Crunch Holding as the surviving corporation (the Merger), and Peak Finance LLC merged with and into Pinnacle Foods Finance LLC, with Pinnacle Foods Finance LLC as the surviving entity. As a result of the Merger, Crunch Holding became a wholly owned subsidiary of Peak Holdings. In connection with the Merger, we repaid the indebtedness under the Predecessors senior secured credit facilities, repurchased the Predecessors outstanding 8.25% senior subordinated notes due 2013 pursuant to a tender offer and consent solicitation and paid related fees and expenses.
On March 1, 2006, we acquired certain assets and assumed certain liabilities of the food products business (the Armour Business) of The Dial Corporation for $189.2 million in cash, including transaction expenses. The acquisition of the Armour Business complements our existing product lines that together are expected to provide growth opportunities and scale. The Armour Business is a leading manufacturer, distributor and marketer of products in the $1.1 billion canned meat category. Most of the products are produced at the manufacturing facility located in Ft. Madison, Iowa, which was acquired in the transaction. Products are sold under the Armour brand name as well as private label and co-pack arrangements. The Armour Business offers products in twelve of the fifteen segments within the canned meat category, including Vienna sausage, potted meat and sliced dried beef. The consolidated financial statements include the results of operations of the Armour Business beginning March 1, 2006.
26
Plant Consolidation
Omaha, Nebraska Production Facility
On April 7, 2004, PFGI made and announced its decision to permanently close our Omaha, Nebraska production facility, as part of its plan of consolidating and streamlining production activities after the Aurora Merger. Production from the Omaha plant, which manufactured Swanson frozen entree retail products and frozen foodservice products, ceased in December 2004 and has been relocated to the Fayetteville, Arkansas and Jackson, Tennessee production facilities.
Activities related to the closure of the plant were completed in the first quarter of 2005 and resulted in the elimination of 411 positions. From the announcement in April 2004 through the second quarter of 2007, PFGI recorded restructuring charges totaling $19.6 million, pertaining to its decision to permanently close the Omaha, Nebraska production facility. The charges incurred have been included in Other expense (income), net line in the Consolidated Statement of Operations. All such charges are reported under the frozen foods business segment. During the second quarter of 2007, the plant and remaining assets were sold for $2.2 million.
Erie, Pennsylvania Production Facility
On April 29, 2005, our board of directors approved a plan to permanently close our Erie, Pennsylvania production facility, as part of our plan of consolidating and streamlining production activities after the Aurora Merger. Production from the Erie plant, which manufactured Van de Kamps and Mrs. Pauls frozen seafood products and Aunt Jemima frozen breakfast products, has been relocated primarily to our Jackson, Tennessee production facility. Activities related to the closure of the plant were completed in 2006 and resulted in the elimination of approximately 290 positions. Employee termination activities commenced in July 2005 and were substantially completed by the end of the first quarter of 2006. From the date of the announcement, through the fourth quarter of 2006, we incurred charges totaling $7.3 million related to the shutdown of the Erie, Pennsylvania production facility. These charges incurred have been included in the Other expense (income), net line in the Consolidated Statement of Operations. All such charges are reported under the frozen foods business segment. During the fourth quarter of 2006, the plant and any remaining equipment was sold for $1.8 million.
Impairment of Goodwill and Other Long-Lived Assets
In the fourth quarter of 2006, we reassessed the long-term growth rate of sales of the products under the Aunt Jemima brand. Due to increased competition, management reduced the expected future growth rates and as a result, recorded an impairment of the tradename asset in the amount of $2.7 million. The charge is recorded in the Other expense (income), net line item on our consolidated statements of operations and is reported in the frozen foods segment.
In fiscal 2007, we experienced declines in net sales of our Open Pit branded products. Upon reassessing the long-term growth rates of the brand, we recorded an impairment of the tradename asset in the amount of $1.2 million. The charge is recorded in the Other expense (income), net line in the Consolidated Statements of Operations and is reported in the dry foods segment.
In 2008, the Company recorded impairment charges for its Van de Kamps ($8.0 million), Mrs. Pauls ($5.6 million), Lenders ($0.9 million) and Open Pit tradenames ($0.6 million). The charges are the result of the Company reassessing the long-term growth rates for its branded products. The charges are recorded in the Other expense (income), net line on the Consolidated Statement of Operations and are reported in the dry foods ($0.6 million) and frozen foods ($14.5 million) segments.
Items Affecting Comparability
During fiscal 2006, our earnings (loss) before interest and taxes were negatively impacted by certain items. These items included:
|
We recorded charges totaling $4.1 million in connection with the closure and plant consolidation costs related to closing the Omaha, Nebraska and Erie, Pennsylvania production facilities. These costs, which were part of our plan of consolidating and streamlining production activities after the Aurora Merger, are discussed above under the heading Plant Consolidation. |
|
We recorded a charge of $4.8 million related to the flow through of the increase in the fair market value of inventories acquired in the Armour Business. |
|
We recorded non-cash equity compensation of $1.4 million for certain ownership units of Crunch Equity Holdings, LLC issued to CDM Investor Group LLC, which was controlled by members of PFG LLCs management in connection with the Armour acquisition. |
27
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We recorded non-cash equity compensation of $1.9 million related to stock options granted to employees of PFG LLC and accounted for in accordance with SFAS No. 123(R), Share-Based Payment (Revised 2004), which was adopted at the start of fiscal 2006. |
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Due to increased competition in the frozen breakfast category, management evaluated the expected future growth rates of the Aunt Jemima branded sales and as a result, recorded a non-cash impairment of the tradename asset in the amount of $2.7 million. |
During fiscal 2007, our earnings (loss) before interest and taxes were impacted by certain items. These items included:
|
On April 2, 2007, immediately prior to the consummation of the Blackstone Transaction, we incurred $49.1 million of merger-related costs relating to the Blackstone Transaction, which are recorded in the Other expense (income), net line of the Consolidated Statement of Operations. The costs included $35.5 million related to the cash tender offer for the Predecessors 8.25% senior subordinated notes, $12.9 million related to the termination of certain of the Predecessors contracts, and $0.7 million related to payroll taxes. |
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Also on April 2, 2007, immediately prior to the consummation of the Blackstone Transaction, all of the Predecessors outstanding stock options vested, and we exercised our option to purchase at fair value all of the shares of common stock to be acquired by exercise of options held by employees pursuant to our Stock Option Plan. As a result, we incurred a charge of $8.4 million for stock compensation expense. |
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In fiscal 2007, we recorded a charge of $40.2 million related to the flow through of the increase in the fair market value of inventories acquired in the Blackstone Transaction. |
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In December 2007, we recorded a reduction to cost of products sold of $9.0 million related to the renegotiation of the Ft. Madison labor contract. Post retirement medical benefits (OPEB) are no longer granted as part of the contract; thus we no longer had this post-retirement liability. |
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In December 2007, the company repurchased a total of $51.0 million of our 10.625% Senior Subordinated Notes at a discount price of $44.2 million. The gain was $5.7 million and is recorded in the Other expense (income), net line of the Consolidated Statement of Operations. |
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In December 2007, we recorded an impairment charge on our Open Pit tradename. The charge was the result of declines in sales of the Open Pit branded products. |
During fiscal 2008, our earnings (loss) before interest and taxes were impacted by certain items. These items included:
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In April of 2008, the Company settled a lawsuit with R2 Top Hat, Ltd., relating to its claim against Aurora Foods Inc., which merged with the Company in March 2004. Under the settlement, the Company paid R2 Top Hat, Ltd. $10 million in full payment of the excess leverage fees related to the Aurora prepetition bank facility, all related interest and all other out-of-pocket costs. After this settlement, there are no remaining contingencies related to the excess leverage fees under the Aurora prepetition bank facility. Accordingly, the remaining $10.0 million accrued liability assumed in the merger with Aurora and recorded at fair value of $20.1 million in the purchase price allocation for the Blackstone Transaction was reduced to $0 and the related credit, net of related expenses, was recorded in Other (income) expense, net in the Consolidated Statement of Operations. |
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In December 2008, the Company recorded impairment charges for its Van de Kamps ($8.0 million), Mrs. Pauls ($5.6 million), Lenders ($0.9 million) and Open Pit tradenames ($0.6 million). The charges are the result of the Company reassessing the long-term growth rates for its branded products and are recorded in Other (income) expense, net in the Consolidated Statement of Operations. |
Results of Operations
The discussion below for each of the comparative periods is based upon net sales. We determine net sales in accordance with generally accepted accounting principles, or GAAP. We calculate our net sales by deducting trade marketing, slotting and consumer coupon redemption expenses from shipments. Shipments means gross sales less cash discounts, returns and non-marketing allowances. We calculate gross sales by multiplying the published list price of each product by the number of units of that product sold.
The discussion below for the 52 weeks ended December 30, 2007 is based on the combination of the Predecessors consolidated financial results for the 13 weeks ended April 2, 2007 and the Successors consolidated financial results for the 39 weeks ended December 30, 2007. This combination represents what we believe is the most meaningful basis for comparison of the current year with the corresponding period of the prior year, although the combination is not in accordance with GAAP. We believe that this is the most meaningful basis for comparison because the customer base, products, manufacturing facilities and types of marketing programs were the same under the Predecessor as they are under Successor.
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Shipments is a non-GAAP financial measure. We include it in our managements discussion and analysis because we believe that it is a relevant financial performance indicator for our company as it measures the increase or decrease in our revenues caused by shipping more or less physical case volume multiplied by our published list prices. It is also a measure used by our management to evaluate our revenue performance. This measure is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. Using only this non-GAAP financial measure to analyze our performance would have material limitations because the calculation is based on the subjective determination of management regarding the nature and classification of events and circumstances that investors may find significant. Management compensates for these limitations by presenting both the GAAP and non-GAAP measures of these results.
The following table reconciles shipments to net sales for the total company, the dry foods segment and the frozen foods segment for fiscal 2008, fiscal 2007 and fiscal 2006.
For the fiscal year ended:
Total | Dry Foods | Frozen Foods | |||||||||||||||||||||||||
Fiscal
2008 |
Fiscal
2007 |
Fiscal
2006 |
Fiscal
2008 |
Fiscal
2007 |
Fiscal
2006 |
Fiscal
2008 |
Fiscal
2007 |
Fiscal
2006 |
|||||||||||||||||||
Shipments |
$ | 2,030.5 | $ | 2,014.4 | $ | 1,957.0 | $ | 1,162.8 | $ | 1,130.0 | $ | 1,077.5 | $ | 867.7 | $ | 884.4 | $ | 879.5 | |||||||||
Less: Aggregate trade marketing and consumer coupon redemption expenses |
463.5 | 483.7 | 496.1 | 244.6 | 260.3 | 273.7 | 218.9 | 223.4 | 222.4 | ||||||||||||||||||
Less: Slotting expense |
10.6 | 16.2 | 18.6 | 2.9 | 5.8 | 6.2 | 7.7 | 10.4 | 12.4 | ||||||||||||||||||
Net sales |
$ | 1,556.4 | $ | 1,514.5 | $ | 1,442.3 | $ | 915.3 | $ | 863.9 | $ | 797.6 | $ | 641.1 | $ | 650.6 | $ | 644.7 | |||||||||
Consolidated Statements of Operations
The following tables set forth statement of operations data expressed in dollars and as a percentage of net sales. In accordance with GAAP, the results for fiscal 2006 only include the results of operations of the Armour Business from the date of the acquisition, March 1, 2006, through the end of the period.
Fiscal 2008 |
Combined
Fiscal 2007 |
Fiscal 2006 | ||||||||||||||||
Net sales |
$ | 1,556.4 | 100.0 | % | $ | 1,514.5 | 100.0 | % | $ | 1,442.3 | 100.0 | % | ||||||
Cost of products sold |
1,217.9 | 78.3 | % | 1,188.5 | 78.5 | % | 1,122.6 | 77.8 | % | |||||||||
Gross profit |
338.5 | 21.7 | % | 326.0 | 21.5 | % | 319.7 | 22.2 | % | |||||||||
Operating expenses |
||||||||||||||||||
Marketing and selling expenses |
111.4 | 7.2 | % | 122.4 | 8.1 | % | 103.6 | 7.2 | % | |||||||||
Administrative expenses |
47.8 | 3.1 | % | 58.4 | 3.9 | % | 52.4 | 3.6 | % | |||||||||
Research and development expenses |
3.5 | 0.2 | % | 4.4 | 0.3 | % | 4.1 | 0.3 | % | |||||||||
Other expense (income), net |
24.4 | 1.6 | % | 63.1 | 4.2 | % | 14.2 | 1.0 | % | |||||||||
Total operating expenses |
187.1 | 12.0 | % | 248.3 | 16.4 | % | 174.3 | 12.1 | % | |||||||||
Earnings before interest and taxes |
$ | 151.4 | 9.7 | % | $ | 77.7 | 5.1 | % | $ | 145.4 | 10.1 | % | ||||||
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Fiscal
2008 |
Combined
Fiscal 2007 |
Fiscal
2006 |
||||||||||
Net sales: |
||||||||||||
Dry foods |
$ | 915.3 | $ | 863.9 | $ | 797.6 | ||||||
Frozen foods |
641.1 | 650.6 | 644.7 | |||||||||
Total |
$ | 1,556.4 | $ | 1,514.5 | $ | 1,442.3 | ||||||
Earnings (loss) before interest and taxes |
||||||||||||
Dry foods |
$ | 133.3 | $ | 105.1 | $ | 121.7 | ||||||
Frozen foods |
21.2 | 34.2 | 43.5 | |||||||||
Unallocated corporate expenses |
(3.1 | ) | (61.6 | ) | (19.8 | ) | ||||||
Total |
$ | 151.4 | $ | 77.7 | $ | 145.4 | ||||||
Depreciation and amortization |
||||||||||||
Dry foods |
$ | 30.8 | $ | 27.7 | $ | 21.2 | ||||||
Frozen foods |
31.7 | 28.1 | 21.0 | |||||||||
Total |
$ | 62.5 | $ | 55.8 | $ | 42.2 | ||||||
Fiscal year ended December 28, 2008 (52 weeks) compared to fiscal year ended December 30, 2007 (52 weeks)
Net sales . Shipments in the twelve months ended December 28, 2008 were $2,030.5 million, an increase of $16.1 million, compared to shipments in the twelve months ended December 30, 2007 of $2,014.4 million. The $16.1 million increase in shipments includes a 3.5% weighted average selling price increase. Net sales in the twelve months ended December 28, 2008 were $1,556.4 million, an increase of $41.9 million, compared to net sales in the twelve months ended December 30, 2007 of $1,514.5 million. The increase in net sales was the result of an increase in shipments of $16.1 million and a $25.8 million decrease in aggregate trade marketing and consumer coupon redemption expenses and slotting expenses. The 3.5% weighted average selling price increase combined with the lower rate of trade marketing and consumer coupon redemption expenses and slotting expenses results in an effective 5.5% weighted average net selling price increase.
Dry foods: Shipments in the twelve months ended December 28, 2008 were $1,162.8 million, an increase of $32.8 million. The $32.8 million increase in shipments includes a 3.3% weighted average selling price increase. The increase was due to increases in sales by our private label, Armour, and syrups businesses. Aggregate trade marketing and consumer coupon redemption expenses decreased $18.6 million. As a result, dry foods net sales increased $51.4 million, or 6.0%, for the twelve months ended December 28, 2008. The 3.3% weighted average selling price increase combined with the lower rate of trade marketing and consumer coupon redemption expenses and slotting expenses resulted in an effective 6.3% weighted average net selling price increase.
Frozen foods: Shipments in the twelve months ended December 28, 2008 were $867.7 million, a decrease of $16.7 million. The $16.7 million decrease in shipments is net of a 3.8% weighted average selling price increase. The change was mainly driven by declines in sales by our seafood and Hungry-Man businesses. Aggregate trade and consumer coupon redemption expenses decreased $7.2 million in the twelve months ended December 28, 2008. As a result, frozen foods net sales decreased $9.5 million, again principally resulting from the seafood and Hungry-Man businesses. The 3.8% weighted average selling price increase combined with the lower rate of trade marketing and consumer coupon redemption expenses and slotting expenses resulted in an effective 4.2% weighted average net selling price increase.
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Gross profit . Gross profit was $338.5 million, or 21.7% of net sales in the twelve months ended December 28, 2008, versus gross profit of $326.0 million, or 21.5% of net sales in the twelve months ended December 30, 2007. Included in the gross profit for the twelve months ended December 30, 2007 was a charge of $40.2 million related to post-acquisition sales of inventories written up to fair value at the date of the Blackstone Transaction and $1.2 million of stock compensation expense also related to the Blackstone Transaction. The gross profit for the twelve months ending December 28, 2008 was $338.5 million, or 21.7% of net sales, a 2.5% percentage point decline versus the balance of the gross profit (excluding the aforementioned charges) for the twelve months ending December 30, 2007 of $367.4 million, or 24.2% of net sales. The principal driver of the decreased gross profit as a percent of net sales was higher raw material commodity costs (principally wheat, corn, edible oils, and to a lesser extent dairy products), in excess of selling price increases, which reduced gross margin by 4.8 percentage points. Somewhat offsetting this 4.8 percentage point decrease was reduced aggregate trade marketing (including slotting) and consumer coupon redemption expenses that are classified as reductions to net sales. The change in these costs accounted for 1.5 percentage points of higher gross profit in 2008. Additionally, reduced freight and distribution expenses accounted for a 0.8 percentage point improvement.
Marketing and selling expenses. Marketing and selling expenses were $111.4 million, or 7.2% of net sales, in the twelve months ended December 28, 2008 compared to $122.4 million, or 8.1% of net sales, in the twelve months ended December 30, 2007. Included in the expenses for the twelve months ended December 30, 2007 was $2.9 million of stock compensation expense related to the acceleration of the vesting in the Predecessors stock options as a result of the Blackstone Transaction. The remaining change was due to lower advertising expense of $6.7 million, primarily in our seafood and Vlasic businesses, and decreased selling overhead expense.
Administrative expenses. Administrative expenses were $47.8 million, or 3.1% of net sales, in the twelve months ended December 28, 2008 compared to $58.4 million, or 3.9% of net sales, in the twelve months ended December 30, 2007. Included in the expenses for the twelve months ended December 30, 2007 was $3.9 million of stock compensation expense related to the acceleration of the vesting in the Predecessors stock options as a result of the Blackstone Transaction. The balance of the decrease was principally related to lower management bonus accruals and the elimination of certain expenses of the former Chairman, partially offset by additional headcount to build capability.
Research and development expenses. Research and development expenses were $3.5 million, or 0.2% of net sales, in the twelve months ended December 28, 2008 compared with $4.4 million, or 0.3% of net sales, in the twelve months ended December 30, 2007. Included in the expenses for the three months ended December 30, 2007 was $0.3 million of stock compensation expense related to the acceleration of the vesting in the Predecessors stock options as a result of the Blackstone Transaction.
Other expense (income), net. The following table shows other expense (income), net:
Twelve Months Ended | ||||||||
December 28,
2008 |
December 30,
2007 |
|||||||
In Thousands | ||||||||
Other expense (income), net consists of: |
||||||||
Restructuring and impairment charges |
$ | 15,100 | $ | 1,246 | ||||
Gain on litigation settlement |
(9,988 | ) | | |||||
Amortization of intangibles/other assets |
19,245 | 18,490 | ||||||
Merger related costs |
| 49,129 | ||||||
Gain on extinguishment of subordinate notes |
(5,670 | ) | ||||||
Royalty expense (income), net and other, net |
6 | (125 | ) | |||||
Total other expense (income), net |
$ | 24,363 | $ | 63,070 | ||||
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For the year ended December 28, 2008, trade name impairment charges totaled $15.1 million, consisting of $8.0 million on our Van de Kamp brand, $5.6 million on our Mrs. Pauls brand, $0.9 million on our Lenders brand, and $0.6 million on our Open Pit brand. For the year ended December 30, 2007, restructuring and impairment charges totaled $1.2 million, principally due to a $1.2 million trade name impairment charge on our Open Pit brand. In the twelve months ended December 28, 2008, we recorded the impact of the final settlement of litigation related to excess leverage fees incurred by Aurora under its credit agreement prior to its acquisition by us in 2004, resulting in a reduction of the accrued liability and a gain on litigation settlement of $10.0 million. Amortization was $19.2 million in the twelve months ended December 28, 2008 as compared to $18.5 million in the twelve months ended December 30, 2007. The 2008 expense includes additional amortization related to the increase in value of the definite-lived intangible assets as a result of the purchase price allocation of the Blackstone Transaction. Included in the expense for the twelve months ended December 30, 2007 was $49.1 million of merger costs related to the Blackstone Transaction (see Note 8 to the Consolidated Financial Statements). These costs included $35.5 million related to the cash tender offer for the Predecessors 8.25% Senior Subordinated Notes, $12.9 million related to the termination of certain of the Predecessors contracts, and $0.7 million related to payroll taxes. In addition, the year ended December 30, 2007 includes a $5.7 million gain on the extinguishment of subordinated notes which were redeemed by the company in December 2007.
Earnings before interest and taxes. Earnings before interest and taxes (EBIT) increased $73.7 million to $151.4 million in the twelve months ended December 28, 2008 from $77.7 million in EBIT in the twelve months ended December 30, 2007. The year ended December 28, 2008 included trade name impairment charges totaled $15.1 million and the year ended December 30, 2007 included restructuring and impairment charges totaled $1.2 million, as described in other expense (income) above. For the twelve months ended December 28, 2008, the unallocated corporate expenses include the $10.0 million gain on litigation settlement as described in other expense (income) above. Included in the twelve months ended December 30, 2007 is $8.4 million of stock compensation expense and $49.1 million of merger costs as described in the other expense (income) paragraph above (see Note 8 to the Consolidated Financial Statements), both related to the Blackstone Transaction. The merger costs of $49.1 million are included in unallocated corporate expenses. Also included in the twelve months ended December 30, 2007 , are costs of products sold related to the post-acquisition sales of inventories written up to fair value at the date of the Blackstone Transaction of $40.2 million. In addition, the year ended December 30, 2007 includes a $5.7 million gain on the extinguishment of subordinated notes which were redeemed by the company in December 2007, which is included in the unallocated corporate expenses. This increase in EBIT resulted from a $58.5 million decrease in unallocated corporate expenses, a $28.2 million increase in dry foods EBIT, and a $13.0 million decrease in frozen foods EBIT.
Dry foods: Dry foods EBIT increased $28.2 million in the twelve months ended December 28, 2008, to $133.3 million from $105.1 million in the twelve months ended December 30, 2007. The year ended December 28, 2008 includes a trade name impairment charge of $0.6 million related to our Open Pit brand. The year ended December 30, 2007 also included a tradename impairment charge of $1.2 million related to our Open Pit brand. The twelve months ended December 30, 2007 included a $28.5 million charge related to post-acquisition sales of inventories written up to fair value at the date of the Blackstone Transaction and $5.0 million of stock compensation expense also related to the Blackstone Transaction. In addition, the year ended December 30, 2007 included a $9.0 million reduction in cost resulting from the elimination of OPEB obligation associated with a new labor contract at our Ft. Madison facility. The balance of the dry foods EBIT increased $3.1 million and was principally driven a 6.0% increase in net sales, which includes a $37.5 million impact of selling price increases on some of our products, and the impact of lower slotting and coupon expense, both of which are recorded as reductions from net sales, and lower advertising expense, principally in our Vlasic and Armour businesses. Somewhat offsetting these increases were the impact of higher commodity cost expense effecting cost of products sold.
Frozen foods: Frozen foods EBIT decreased by $13.0 million in the twelve months ended December 28, 2008, to $21.2 million from $34.2 million in the twelve months ended December 30, 2007. For the year ended December 28, 2008, trade name impairment charges totaled $14.5 million, consisting of $8.0 million on our Van de Kamp brand, $5.6 million on our Mrs. Pauls brand, and $0.9 million on our Lenders brand. The twelve months ended December 30, 2007 included a $11.7 million charge related to post-acquisition sales of inventories written up to fair value at the date of the Blackstone Transaction and $3.3 million of stock compensation expense also related to the Blackstone Transaction. The balance of the frozen foods EBIT decreased $13.5 million and was principally driven by commodity cost increases and a $9.5 million decline in net sales, which includes a $33.7 million impact of selling price increases on some of our products. Somewhat offsetting these declines was the impact of lower slotting and coupon expense, both of which are recorded as reductions from net sales, and lower advertising expense, principally in the seafood business.
32
Interest expense, net. Interest expense, net was $153.0 million in the twelve months ended December 28, 2008, compared to $162.1 million in the twelve months ended December 30, 2007.
The comparison of interest expense, net, for 2008 versus 2007 is impacted by the following non-cash items: the 2008 de-designation and termination of the our 2007 interest rate hedges, and, in 2007, the charge off of unamortized debt issue costs and premium related to the redemption of the Predecessors debt and the amortization of the Blackstone Transaction bridge financing costs.
Impacting interest expense in the fourth quarter of 2008 were two occurrences related to the 2007 interest rate swap agreements we had with Lehman Brothers Special Financing (LBSF), a subsidiary of Lehman Brothers. One: on October 3, 2008, LBSF filed for bankruptcy protection which resulted in the interest rate hedges being de-designated as effective hedges. At that time, the cumulative mark to market adjustment in Other Comprehensive Income related to these interest rate hedges was $11.5 million which is being amortized into interest expense over the remaining original contract life of the hedges, of which $1.3 million was amortized in 2008. Two: interest expense includes a mark to market adjustment of $5.5 million for the period from the de-designation date of October 3, 2008 to the date we terminated the interest rate hedges on October 24, 2008.
The decrease in interest expense, net, in 2008 compared to 2007 is substantially impacted by a charge of $24.1 million in the twelve months ended December 30, 2007 for the unamortized portion of the deferred financing costs, partially offset by a credit of $5.2 million for the unamortized portion of the original issue premium, both related to the redemption of the Predecessors debt and $4.2 million of amortization of the Blackstone Transaction bridge financing costs in 2007.
The remaining $7.2 million increase in interest expense, net, was the result of $13.5 million attributed to higher average bank debt levels, $2.1 million attributed to higher bond debt interest rates, $1.2 million in lower interest income, and $0.8 million of other items, partially offset by $8.4 million attributed to lower interest rates on our bank borrowings, $1.2 million attributed to lower bond debt levels, and $0.8 million of lower amortization of debt issue costs.
Included in the interest expense, net, amount was $16.2 million (which includes the $5.5 million mark to market adjustment discussed above) and ($2.1) million for the twelve months ended December 28, 2008 and the twelve months ended December 30, 2007 respectively, recorded from losses and (gains) on interest rate swap agreements occurring in the normal course. We utilize interest rate swap agreements to reduce the potential exposure to interest rate movements and to achieve a desired proportion of variable versus fixed rate debt. Any gains and losses realized on the interest rate swap agreements are recorded as an adjustment to interest expense.
Additionally, later in 2008 we entered into new interest rate hedges. Our interest swap agreements that we entered into during the later part of 2008 are designated as hedges under SFAS No. 133, and included in Accumulated Other Comprehensive Income in the twelve months ended December 28, 2008 was a $12.6 million loss resulting from the mark-to-market of these swaps
Provision for income taxes . The effective tax rate was (1,749.9%) in the twelve months ended December 28, 2008, compared to (36.8%) in the twelve months ended December 30, 2007. We maintain a full valuation allowance against net deferred tax assets excluding indefinite lived intangible assets, and the effective rate difference is primarily due to the change in the valuation allowance for the twelve-month period. Deferred tax liabilities are recognized for the differences between the book and tax bases of certain goodwill and indefinite lived intangible assets.
Under Internal Revenue Code Section 382, the Company is a loss corporation. Section 382 of the Code places limitations on our ability to use Auroras net operating loss carry-forward to offset our income. The annual net operating loss limitation is approximately $14 to 18 million subject to other rules and restrictions. See note 13 to our audited consolidated financial statements.
33
Fiscal year ended December 30, 2007 (52 weeks) compared to fiscal year ended December 31, 2006 (53 weeks)
Net sales . Shipments in the year ended December 30, 2007 were $2,014.4 million, an increase of $57.4 million, or 2.9%, compared to shipments in the year ended December 31, 2006 of $1,957.0 million. The Armour acquisition resulted in $36.1 million of increased shipments. All other businesses increased $21.3 million. Net sales in the year ended December 30, 2007 were $1,514.5 million, an increase of $72.2 million, or 5.0%, compared to net sales in the year ended December 31, 2006 of $1,442.3 million. The Armour acquisition resulted in $31.4 million of increased net sales. Net sales of all other businesses increased $40.8 million, which was the result of an increase in shipments of $21.3 million and a $19.5 million decrease in aggregate trade marketing and consumer coupon redemption expenses and slotting expenses.
Dry foods: Shipments in the year ended December 30, 2007 were $1,130.0 million, an increase of $52.5 million, or 4.9%, compared to shipments in the year ended December 31, 2006. The full year inclusion of the Armour business in 2007 net sales resulted in $36.1 million of increased shipments. The increase in our remaining businesses was due to increases in our Vlasic and syrup product lines, and our Canadian business. Aggregate trade marketing and consumer coupon redemption expenses and slotting expenses decreased $13.8 million. The Armour acquisition resulted in $4.7 million of increased aggregate trade marketing and consumer coupon redemption expenses and slotting expenses. Of the remaining businesses, aggregate trade marketing and consumer coupon redemption expenses and slotting expenses decreased $18.5 million. As a result, dry foods net sales increased $66.3 million, of which $31.4 million of the increase resulted from the sales of products related to the acquisition of the Armour business. The net sales of the remaining businesses increased $34.9 million, or 5.7%, for the year ended December 30, 2007, led by our Vlasic, syrup and Duncan Hines product lines and principally due to decreased aggregate trade marketing and consumer coupon redemption expenses and slotting expenses.
Frozen foods: Shipments in the year ended December 30, 2007 were $884.4 million, an increase of $4.9 million, or 0.6%, compared to shipments in the year ended December 31, 2006. The increase was driven by our Canadian business and Celeste product line. Aggregate trade and consumer coupon redemption expenses and slotting expenses decreased $1.0 million, the result of lower slotting and consumer coupon redemption expense. As a result, frozen foods net sales increased $5.9 million for the year ended December 30, 2007.
Gross Profit . Gross profit was $326.0 million, or 21.5% of net sales in the twelve months ended December 30, 2007, versus gross profit of $319.7 million, or 22.2% of net sales in the twelve months ended December 31, 2006. Included in the gross profit for the twelve months ended December 30, 2007 was a charge of $40.2 million related to post-acquisition sales of inventories written up to fair value at the date of the Blackstone Transaction and $1.2 million of stock compensation expense also related to the Blackstone Transaction. The products acquired in the Armour business resulted in an additional $23.0 million of gross profit in the year ended December 30, 2007. Included in the gross profit for the Armour business in the year ended December 30, 2007 was a $9.0 million reduction in cost resulting from the elimination of OPEB obligation associated with a new labor contract at our Ft. Madison facility and for the year ended December 31, 2006 was a $4.8 million charge related to post-acquisition sales of inventories written up to fair value at the date of the Armour acquisition. For the remaining businesses, gross profit for the twelve months ending December 30, 2007 was $321.2 million, or 24.7% of net sales, a 1.2% percentage point increase versus the gross profit for the twelve months ending December 31, 2006 of $296.5 million, or 23.5% of net sales, excluding the aforementioned charges/reduction in cost from both years,. The principal driver of the improved gross profit as a percent of net sales was a decrease in aggregate trade marketing and consumer coupon redemption expenses and slotting expenses that are classified as reductions to net sales. The change in these costs accounted for 1.2 percentage points improvement in gross profit in 2007. Reduced freight and distribution expenses accounted for a 0.9 percentage point improvement, although this improvement is net of $2.6 million of expenses incurred in the year ended December 30, 2007 and $1.6 million of expenses incurred in the year ended December 31, 2006 in connection with a realignment of our distributor network. The balance of the change was principally due to commodity cost increases, partially offset by productivity improvements.
Marketing and selling expenses . Marketing and selling expenses were $122.4 million, or 8.1% of net sales, in the year ended December 30, 2007, compared to $103.6 million, or 7.2% of net sales, in the year ended December 31, 2006. Included in the expenses for the year ended December 30, 2007 was $2.9 million of stock compensation expense related to the acceleration of the vesting in the Predecessors stock options as a result of the Blackstone Transaction. The acquisition of the Armour business contributed $4.0 million of an increase for the year ended December 30, 2007. The remaining increase was principally due to higher advertising expense of $10.4 million, primarily in our seafood, syrups and Duncan Hines businesses. The balance of the increase was due to higher selling overhead expense.
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Administrative expenses . Administrative expenses were $58.4 million, or 3.9% of net sales, in the year ended December 30, 2007 compared to $52.4 million, or 3.6% of net sales, in the year ended December 31, 2006. Included in the expenses for the year ended December 30, 2007 was $3.9 million of stock compensation expense related to the acceleration of the vesting in the Predecessors stock options as a result of the Blackstone Transaction. In addition, certain executive severance expenses of $0.8 million and other expenses of $0.6 million were incurred in the year ended December 30, 2007 related to the Blackstone Transaction and other acquisition related activity. Included in the expenses for the year ended December 31, 2006 was $0.7 million of expense related to transition services incurred in connection with the Armour acquisition. The balance of the increase in 2007 was principally due to higher personnel costs related to capability building initiatives.
Research and development expenses . Research and development expenses were $4.4 million, or 0.3% of net sales, in the year ended December 30, 2007 compared with $4.1 million, or 0.3% of net sales, in the year ended December 31, 2006. Included in the expenses for the year ended December 30, 2007 was $0.3 million of stock compensation expense related to the acceleration of the vesting in the Predecessors stock options as a result of the Blackstone Transaction.
Other expense (income), net . The following table shows other expense (income), net:
Year ended | ||||||||
December 30,
2007 |
December 31,
2006 |
|||||||
In thousands | ||||||||
Other expense (income), net consists of: |
||||||||
Restructuring and impairment charges |
$ | 1,246 | $ | 6,787 | ||||
Amortization of intangibles/other assets |
18,490 | 7,415 | ||||||
Merger-related costs |
49,129 | | ||||||
Gain on extinguishment of subordinate notes |
(5,670 | ) | | |||||
Royalty expense (income) and other, net |
(125 | ) | (16 | ) | ||||
Total other expense (income), net |
$ | 63,070 | $ | 14,186 | ||||
Included in the expense for the year ended December 30, 2007 was $49.1 million of merger costs related to the Blackstone Transaction (see Note 8 to the Consolidated Financial Statements). These costs included $35.5 million related to the cash tender offer for the Predecessors 8.25% Senior Subordinated Notes, $12.9 million related to the termination of certain of the Predecessors contracts, and $0.7 million related to payroll taxes. Amortization was $18.5 million in the year ended December 30, 2007 as compared to $7.4 million in the year ended December 31, 2006. The 2007 expense includes higher amortization related to the increase in value of our definite-lived intangible assets as a result of the purchase price allocation of the Blackstone Transaction. For the year ended December 30, 2007, restructuring and impairment charges totaled $1.2 million, principally due to a $1.2 million trade name impairment charge on our Open Pit brand. For the year ended December 31, 2006, restructuring and impairment charges totaled $6.8 million and consisted of a $2.7 million trade name impairment charge on our Aunt Jemima brand, $2.7 million of costs related to the closure of our Omaha, Nebraska frozen food facility and $1.4 million of costs related to the closure of our Erie, Pennsylvania frozen food facility, as discussed above under Plant Consolidation. In addition, the year ended December 30, 2007 includes a $5.7 million gain on the extinguishment of subordinated notes which were redeemed by the company in December 2007.
Earnings (loss) before interest and taxes . Earnings (loss) before interest and taxes (EBIT) decreased $67.7 million to $77.7 million in the year ended December 30, 2007 from $145.4 million in EBIT in the year ended December 31, 2006. Included in the year ended December 30, 2007 is $8.4 million of stock compensation expense and $49.1 million of merger costs (see Notes 6 and 8 to the Consolidated Financial Statements), both related to the Blackstone Transaction. The merger costs of $49.1 million are included in the unallocated corporate expenses. Also included in the year ended December 30, 2007 are costs of products sold related to post-acquisition sales of inventories written up to fair value at the date of the Blackstone Transaction of $40.2 million in the year ended December 30, 2007, and $4.8 million related to post-acquisition sales of inventories written up to fair value at the date of the Armour acquisition in the year ended December 31, 2006. Amortization expense was $18.5 million in the year ended December 30, 2007 as compared to $7.4 million in the year ended December 31, 2006. The 2007 expense includes higher amortization related to the increase in value of the definite-lived intangible assets as a result of the purchase price allocation of the Blackstone Transaction. In addition, the year ended December 30, 2007 includes a $5.7 million gain on the extinguishment of subordinated notes which were redeemed by the company in December 2007, which is included in the unallocated corporate expenses. The earnings before interest and taxes (EBIT) decrease resulted from a $16.6 million decrease in dry foods EBIT, a $9.3 million decrease in frozen foods EBIT, and a $41.8 million increase in unallocated corporate expenses.
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Dry foods : Dry foods EBIT decreased $16.6 million, or 13.6%, in the year ended December 30, 2007 to $105.1 million from $121.7 million in the year ended December 31, 2006 and included a $19.0 million increase related to the acquisition of the Armour business. Included in the Armour results is a $9.0 million reduction in cost resulting from the elimination of OPEB obligation associated with a new labor contract at our Ft. Madison facility in the year ended December 30, 2007 and a $4.8 million charge related to post-acquisition sales of inventories written up to fair value at the date of the Armour acquisition in the year ended December 31, 2006. In addition, the year ended December 30, 2007 included a $28.5 million charge related to post-acquisition sales of inventories written up to fair value at the date of the Blackstone Transaction and $5.0 million of stock compensation expense also related to the Blackstone Transaction. The year ended December 30, 2007 also includes a tradename impairment charge of $1.2 million related to our Open Pit brand. The balance of the dry foods EBIT decreased $0.9 million, which includes $2.8 million of higher amortization related to the increase in value of our definite-lived intangible assets as a result of the purchase price allocation of the Blackstone Transaction. The remaining increase was driven by $18.7 million of decreased aggregate trade marketing and consumer coupon redemption expenses and slotting expenses and increased sales volume. These favorable factors were mostly offset by increased cost of products sold and higher advertising expense on our syrup and Duncan Hines businesses.
Frozen foods : Frozen foods EBIT decreased by $9.3 million, or 21.4%, in the year ended December 30, 2007, to $34.2 million from $43.5 million in the year ended December 31, 2006, and included $3.3 million of stock compensation expense related to the Blackstone Transaction. In addition, the year ended December 30, 2007 included an $11.7 million charge related to post-acquisition sales of inventories written up to fair value at the date of the Blackstone Transaction. Amortization expense was $10.5 million in the year ended December 30, 2007 as compared to $2.3 million in the year ended December 31, 2006. The 2007 expense includes higher amortization related to the increase in value of the definite-lived intangible assets as a result of the purchase price allocation of the Blackstone Transaction. For the year ended December 31, 2006, restructuring and impairment charges totaled $6.8 million and consisted of a $2.7 million trade name impairment charge on our Aunt Jemima brand, $2.7 million of costs related to the closure of our Omaha, Nebraska frozen food facility and $1.4 million of costs related to the closure of our Erie, Pennsylvania frozen food facility. The balance of the frozen foods EBIT increased $7.5 million and was principally driven by the favorable impact of lower costs of products sold resulting from lower freight and storage expense and favorable production mix, as well as the impact of higher sales volumes. Somewhat offsetting these improvements was higher advertising expense, most of which was in the seafood business.
Interest expense, net . Interest expense, net was $162.1 million in the year ended December 30, 2007, compared to $85.4 million in the year ended December 31, 2006. Included in the interest expense, net, amount was $2.1 million and $(0.9) million for the year ended December 30, 2007 and the year ended December 31, 2006, respectively, recorded from gains and (losses) on interest rate swap agreements. We utilize interest rate swap agreements to reduce the potential exposure to interest rate movements and to achieve a desired proportion of variable versus fixed rate debt. Any gains or losses realized on the interest rate swap agreements not designated as hedges under SFAS No. 133 are recorded as an adjustment to interest expense. Our 2007 interest rate swaps are designated as hedges under SFAS No. 133, and included in Other Comprehensive Income in the year ended December 30, 2007 was a $(24.1) million loss resulting from the mark-to-market of these swaps . Also included in the interest expense, net, in the year ended December 30, 2007 are a charge of $24.1 million for the unamortized portion of the deferred financing costs and a credit of $5.2 million for the unamortized portion of the original issue premium, both related to the redemption of the 8.25% Senior Subordinated Notes of the Predecessor. Excluding the impact of the interest rate swaps and the items in the previous sentence, the increase in interest expense, net, of $60.9 million was the result of $37.1 million attributed to higher average bank debt levels, $4.1 million attributed to higher interest rates on our bank borrowings, $18.0 million attributed to higher bond debt levels and interest rates ($11.1 million due to higher levels and $6.9 million due to higher rates) and $2.3 million attributed to higher amortization of debt issue costs resulting principally from the bridge financing in connection with the Blackstone Transaction, partially offset by $0.3 million in higher interest income.
Provision for income taxes . The effective tax rate was (36.8)% in the year ended December 30, 2007, compared to 43.5% in the year ended December 31, 2006. We maintain a full valuation allowance against net domestic deferred tax assets excluding indefinite lived intangible assets, and the difference between the statutory rate and the effective rate is primarily due to the change in the valuation allowance for the fiscal year. Deferred tax liabilities are recognized for the differences between the book and tax bases of certain goodwill and indefinite-lived intangible assets.
36
LIQUIDITY AND CAPITAL RESOURCES
Historical
Overview. Our cash flows are very seasonal. Typically we are a net user of cash in the third quarter of the calendar year (i.e., the quarter ending in September) and a net generator of cash over the balance of the year.
Our principal liquidity requirements have been, and we expect will be, for working capital and general corporate purposes, including capital expenditures and debt service. Capital expenditures are expected to be approximately $54 million in 2009. We have historically satisfied our liquidity requirements with internally generated cash flows and availability under our revolving credit facilities.
Statements of Cash Flows for the Fiscal Year Ended December 28, 2008 Compared to the Fiscal Year Ended December 30, 2007
Net cash provided by operating activities was $16.8 million for fiscal 2008, which consisted of net earnings excluding non-cash charges of $72.6 million, $17.0 million paid to terminate early interest rate derivatives, and an increase in working capital of $38.8 million. The increase in working capital was primarily the result of a $25.5 million increase in inventories that was primarily done in order to better service our customers going forward, as well as caused by higher commodity costs, and a decline of $29.6 million in accrued liabilities (a result of the legal settlement with R2 Top Hat, Ltd., the payment of the 2007 performance bonus and an decrease in accrued interest), partially offset by a $6.7 million decline in accounts receivable and a $4.9 million increase in accrued trade marketing. All other working capital accounts generated $4.6 million in cash.
Net cash provided by operating activities for the Successor was $60.1 million for the period from April 2, 2007 to December 30, 2007, which was the result of our net loss excluding non-cash charges of $16.8 million and a decrease in working capital of $43.3 million. The decrease in working capital is primarily driven by a decrease in inventory resulting from the $40.2 million charge related to the write up of inventories to the fair value as of the date of the Blackstone Transaction offset by the normal seasonality of inventories of $7.5 million when comparing December to April. Also benefiting working capital is an increase in accrued liabilities of $23.8 million as a result of higher accrued interest expense and higher accrued management incentive compensation, which is generally disbursed in the first quarter of the fiscal year. Offsetting these decreases in working capital from inventory and accrued liabilities is a decline of $11.4 million in accrued trade marketing expense, which is a result of lower trade spending and a change in the timing of when payments are occurring. All other working capital charges, net reduced cash by $1.8 million.
Net cash provided by operating activities for the Predecessor was $55.7 million for the period from January 1, 2007 to April 2, 2007, which was the result of net loss excluding non-cash charges of $16.3 million and a decrease in working capital of $72.0 million. The decrease in working capital was primarily the result of (a) a $53.4 million increase in accrued liabilities, mostly as a result of the accrual of $49.1 million of merger expenses related to the Blackstone Transaction, (b) a $20.0 million decrease in inventories that was due to the seasonal sell-down from December 2006 and (c) a $14.3 million increase in accounts payable. The increase in accounts payable at the end of the period primarily related to the normal seasonal slowdown at our production facilities in December 2006 as well as optimizing our freight payment system. The increase in accrued liabilities and accounts payable and the decrease in inventories were offset by an $18.3 million increase in accounts receivable that relates to higher sales as well as the timing of when those sales occurred. The aging of accounts receivable has remained unchanged from December. All other working capital accounts generated $2.6 million of cash, primarily the result of higher accrued trade marketing.
Net cash used in investing activities for fiscal 2008 was $32.6 million and consisted entirely of capital expenditures. Net cash used in investing activities for fiscal 2007 totaled $1,345.4 million and included $1,319.6 million for the Blackstone Transaction as well as $28.0 million for capital expenditures ($5.0 million for the Predecessor and $23.0 million for the Successor). Additionally, the Successor received $2.2 million from the sale of the Omaha, Nebraska facility.
37
Net cash provided by financing activities was $14.2 million for fiscal 2008. Borrowings under the revolving credit facility of $26.0 million were primarily offset with $9.4 million repayments of the term loan and $1.5 million in net repayments of our short-term borrowings. Net cash provided by financing activities was $1,239.8 million for fiscal 2007. This primarily related to the funding for the Blackstone Transaction, which included $1,250.0 million under the term loan under the Senior Secured Credit Facilities, $575.0 million for the Senior Notes and Senior Subordinated Notes, and $420.3 million in net equity contributions. These funds were offset by repayments of the Predecessors long-term debt totaling $915.2 million, repayments and repurchases of the Successors long-term debt of $50.4 million and Successors debt acquisition costs of $39.8 million.
Statements of Cash Flows for the Fiscal Year Ended December 30, 2007 Compared to the Fiscal Year Ended December 31, 2006
Net cash provided by operating activities for the Successor was $60.1 million for the period from April 2, 2007 to December 30, 2007, which was the result of our net loss excluding non-cash charges of $16.8 million and a decrease in working capital of $43.3 million. The decrease in working capital is primarily driven by a decrease in inventory resulting from the $40.2 million charge related to the write up of inventories to the fair value as of the date of the Blackstone Transaction offset by the normal seasonality of inventories of $7.5 million when comparing December to April. Also benefiting working capital is an increase in accrued liabilities of $23.8 million as a result of higher accrued interest expense and higher accrued management incentive compensation, which is generally disbursed in the first quarter of the fiscal year. Offsetting these decreases in working capital from inventory and accrued liabilities is a decline of $11.4 million in accrued trade marketing expense, which is a result of lower trade spending and a change in the timing of when payments are occurring. All other working capital charges, net reduced cash by $1.8 million.
Net cash provided by operating activities for the Predecessor was $55.7 million for the period from January 1, 2007 to April 2, 2007, which was the result of net loss excluding non-cash charges of $16.3 million and a decrease in working capital of $72.0 million. The decrease in working capital was primarily the result of (a) a $53.4 million increase in accrued liabilities, mostly as a result of the accrual of $49.1 million of merger expenses related to the Blackstone Transaction, (b) a $20.0 million decrease in inventories that was due to the seasonal sell-down from December 2006 and (c) a $14.3 million increase in accounts payable. The increase in accounts payable at the end of the period primarily related to the normal seasonal slowdown at our production facilities in December 2006 as well as optimizing our freight payment system. The increase in accrued liabilities and accounts payable and the decrease in inventories were offset by an $18.3 million increase in accounts receivable that relates to higher sales as well as the timing of when those sales occurred. The aging of accounts receivable has remained unchanged from December. All other working capital accounts generated $2.6 million of cash, primarily the result of higher accrued trade marketing.
Net cash used in investing activities for fiscal 2007 totaled $1,345.4 million and included $1,319.6 million for the Blackstone Transaction as well as $28.0 million for capital expenditures ($5.0 million for the Predecessor and $23.0 million for the Successor). Additionally, the Successor received $2.2 million from the sale of the Omaha, Nebraska facility.
Net cash provided by financing activities was $1,239.8 million for fiscal 2007. This primarily related to the funding for the Blackstone Transaction, which included $1,250.0 million under the term loan under the Senior Secured Credit Facilities, $575.0 million for the Senior Notes and Senior Subordinated Notes, and $420.3 million in net equity contributions. These funds were offset by repayments of the Predecessors long-term debt totaling $915.2 million, repayments and repurchases of the Successors long-term debt of $50.4 million and Successors debt acquisition costs of $39.8 million.
38
Debt
Successor As part of the Blackstone Transaction as described in Note 1 to the Consolidated Financial Statements, Peak Finance LLC entered into a $1,375.0 million credit agreement (the Senior Secured Credit Facility) in the form of (i) Term Loans in an initial aggregate amount of $1,250.0 million and (ii) Revolving Credit Commitments in the initial aggregate amount of $125.0 million (the Revolving Credit Facility). Peak Finance LLC merged with and into PFF on April 2, 2007 at the closing of the Blackstone Transaction. The term loan matures April 2, 2014. The Revolving Credit Facility matures April 2, 2013. Borrowings outstanding under the Revolving Credit Facility as of December 28, 2008 totaled $26.0 million. There were no borrowings outstanding under the Revolving Credit Facility as of December 30, 2007.
As discussed in Note 4 to the Consolidated Financial Statements, Lehman Commercial Paper Inc., (LCPI), a subsidiary of Lehman Brothers Holdings Inc., has a total commitment within the Revolving Credit Facility of $15.0 million and is currently not funding its portion. We have no assurances that LCPI will participate in any future funding requests under the revolving credit facility. While we are exploring options to replace Lehmans commitment within the facility, we cannot guarantee that we will be able to obtain such replacement loan commitments from other banks. However, based upon managements projection of cash flows, we believe that we have sufficient liquidity to conduct our normal operations and we do not believe that the potential reduction in available capacity under this revolving credit facility will have a material impact on our short-term or long-term liquidity.
The amount of the term loan that was owed to affiliates of the Blackstone Group as of December 28, 2008 and December 30, 2007, was $34.6 million and $29.8 million, respectively.
Our borrowings under the Senior Secured Credit Facility bear interest at a floating rate and are maintained as base rate loans or as Eurodollar loans. Base rate loans bear interest at the base rate plus the applicable base rate margin, as defined in the Senior Secured Credit Facility. The base rate is defined as the higher of (i) the prime rate and (ii) the Federal Reserve reported overnight funds rate plus 1/2 of 1%. Eurodollar loans bear interest at the adjusted Eurodollar rate, as described in the Senior Secured Credit Facility, plus the applicable Eurodollar rate margin.
The applicable margins with respect to our Senior Secured Credit Facility will vary from time to time in accordance with the terms thereof and agreed upon pricing grids based on the our leverage ratio as defined in the Credit Agreement. The applicable margins with respect to the Senior Secured Credit Facility are currently:
Applicable Margin (per annum) |
|||||||||||||
Eurocurrency
|
Base Rate for
Revolving Loans |
Commitment
Fees Rate |
Eurocurrency
Rate for Term Loans |
Base Rate for
Term Loans |
|||||||||
2.75 | % | 1.75 | % | 0.50 | % | 2.75 | % | 1.75 | % |
The obligations under the Credit Agreement are unconditionally and irrevocably guaranteed by each of our direct or indirect domestic subsidiaries (collectively, the Guarantors). In addition, the Credit Agreement is collateralized by first priority or equivalent security interests in (i) all the capital stock of, or other equity interests in, each of our direct or indirect domestic subsidiary and 65% of the capital stock of, or other equity interests in, each of our direct foreign subsidiaries, or any of its domestic subsidiaries and (ii) certain of our and the Guarantors tangible and intangible assets (subject to certain exceptions and qualifications).
A commitment fee of 0.50% per annum is applied to the unused portion of the Revolving Credit Facility. For the fiscal years ended December 28, 2008 and December 30, 2007, the weighted average interest rate on the term loan was 6.21% and 8.05%, respectively. For the fiscal years ended December 28, 2008 and December 30, 2007, the weighted average interest rate on the Revolving Credit Facility was 5.45% and 8.09%, respectively. As of December 28, 2008 and December 30, 2007, the Eurodollar interest rate on the term loan facility was 6.52% and 7.94%, respectively. As of December 28, 2008, the Eurodollar interest rate on the Revolving Credit Facility was 3.21%.
39
We pay a fee for all outstanding letters of credit drawn against our Revolving Credit Facility at an annual rate equivalent to the Applicable Margin then in effect with respect to Eurodollar loans under the Revolving Credit Facility, less the fronting fee payable in respect of the applicable letter of credit. The fronting fee is equal to 0.125% per annum of the daily maximum amount then available to be drawn under such letter of credit. The fronting fees are computed on a quarterly basis in arrears. Total letters of credit issued under the Revolving Credit Facility cannot exceed $25.0 million. As of December 28, 2008 and December 30, 2007, we had utilized $15.2 million and $9.8 million, respectively of the Revolving Credit Facility for letters of credit. As of December 30, 2007 there were no borrowing under the Revolving Credit Facility, so of the $125.0 million Revolving Credit Facility available, we had an unused balance of $115.2 million available for future borrowing and letters of credit. As of December 28, 2008 borrowings under the Revolving Credit Facility totaled $26.0 million, so of the $99.0 million Revolving Credit Facility available, we had an unused balance of $83.8 million available for future borrowing and letters of credit. The remaining amount that can be used for letters of credit as of December 28, 2008 and December 30, 2007 was $9.8 million and $15.2 million, respectively. If we are unsuccessful in replacing the commitment from LCPI, the amount available for future borrowings and letters of credit as of December 28, 2008 would be $68.8 million.
The term loan matures in quarterly 0.25% installments from September 2007 to December 2013 with the remaining balance due in April 2014. The aggregate maturities of the term loan outstanding as of December 28, 2008 are $12.5 million in 2009, $12.5 million in 2010, $12.5 million in 2011, $12.5 million in 2012, $12.5 million in 2013 and $1,171.88 million thereafter.
On April 2, 2007, as part of the Blackstone Transaction described in Note 1 to Consolidated Financial Statements, we issued $325.0 million 9.25% Senior Notes (the Senior Notes) due 2015 and $250.0 million 10.625% Senior Subordinated Notes (the Senior Subordinated Notes) due 2017. The Senior Notes are our general unsecured obligations, subordinated in right of payment to all existing and future senior secured indebtedness, and guaranteed on a full, unconditional, joint and several basis by our wholly-owned domestic subsidiaries. The Senior Subordinated Notes are our general unsecured obligations, subordinated in right of payment to all existing and future senior indebtedness, and guaranteed on a full, unconditional, joint and several basis by our wholly-owned domestic subsidiaries. See Note 19 to the Consolidated Financial Statements for Guarantor and Nonguarantor Financial Statements.
We may redeem some or all of the Senior Notes at any time prior to April 1, 2011, and some or all of the Senior Subordinated Notes at any time prior to April 1, 2012, in each case at a price equal to 100% of the principal amount of notes redeemed plus the Applicable Premium as of, and accrued and unpaid interest to, the redemption date subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date. The Applicable Premium is defined as the greater of (1) 1.0% of the principal amount of such note and (2) the excess, if any, of (a) the present value at such Redemption Date of (i) the redemption price of such Senior Note at April 1, 2011 or Senior Subordinated Note at April 1, 2012, plus (ii) all required interest payments due on such Senior Note through April 1, 2011 or Senior Subordinated Note through April 1, 2012 (excluding accrued but unpaid interest to the Redemption Date), computed using a discount rate equal to the Treasury Rate plus 50 basis points over (b) the principal amount of such note.
We may redeem the Senior Notes or the Senior Subordinated Notes at the redemption prices listed below, if redeemed during the twelve-month period beginning on April 1 of each of the years indicated below:
Senior Notes | |||
Year |
Percentage | ||
2011 |
104.625 | % | |
2012 |
102.313 | % | |
2013 and thereafter |
100.000 | % | |
Senior Subordinated Notes | |||
Year |
Percentage | ||
2012 |
105.313 | % | |
2013 |
103.542 | % | |
2014 |
101.771 | % | |
2015 and thereafter |
100.000 | % |
40
In addition, until April 1, 2010, we may redeem up to 35% of the aggregate principal amount of Senior Notes or Senior Subordinated Notes at a redemption price equal to 100% of the aggregate principal amount thereof, plus a premium equal to the rate per annum on the Senior Notes or Senior Subordinated Notes, as the case may be, plus accrued and unpaid interest and Additional Interest, if any, to the Redemption Date, subject to the right of Holders of Senior Notes or Senior Subordinated Notes of record on the relevant record date to receive interest due on the relevant interest payment date, with the net cash proceeds received by us from one or more equity offerings; provided that (i) at least 50% of the aggregate principal amount of Senior Notes or Senior Subordinated Notes, as the case may be, originally issued under the Indentures remains outstanding immediately after the occurrence of each such redemption and (ii) each such redemption occurs within 90 days of the date of closing of each such equity offering.
In December of 2007, we repurchased $51.0 million in aggregate principle amount of our 10.625% Senior Subordinated Notes at a discount price of $44.2 million. We currently have outstanding $199.0 million in aggregate principal amount of Senior Subordinated Notes.
We and our subsidiaries, affiliates or significant shareholders (including The Blackstone Group L.P. and its affiliates) may from time to time, in our sole discretion, purchase, repay, redeem or retire any of our outstanding debt or equity securities (including any publicly issued debt or equity securities) in privately negotiated or open market transactions, by tender offer or otherwise.
Predecessor - In November 2003, the Predecessor entered into a $675.0 million Credit Agreement (Predecessor Senior Secured Credit Facilities) with JPMorgan Chase Bank (a related party of JPMorgan Partners, LLC as noted in Note 16 in the Consolidated Financial Statements) and other financial institutions as lenders, which provided for a $545.0 million seven-year term loan B facility, of which $120.0 million was made available on November 25, 2003 and $425.0 million was made available as a delayed draw term loan on the closing date of the Aurora Merger on March 19, 2004. Concurrently with the acquisition of the Armour Business but effective as of February 14, 2006, we entered into an Amendment No. 4 and Agreement to the Predecessor Senior Secured Credit Facilities (Amendment No. 4). Among other things, Amendment No. 4 approved the Armour acquisition and provided for the making of $143.0 million of additional tack-on term loans to fund a portion of the acquisition. The Predecessor Senior Secured Credit Facilities also provided for a six-year $130.0 million revolving credit facility, of which up to $65.0 million was made available on November 25, 2003, and the remaining $65.0 million was made available on the closing date of the Aurora Merger on March 19, 2004.
A commitment fee of 0.50% per annum was applied to the unused portion of the revolving credit facility. There were no borrowings under the revolving credit facility during 2007 for the Predecessor. For the 13 weeks ended April 2, 2007, the weighted average interest rate on the term loan was 7.36%. For fiscal 2006, the weighted average interest rate on the term loan was 7.61%. As of December 31, 2006, the Eurodollar interest rate on the term loan facility was 7.37%, and the commitment fee on the revolving credit facility was 0.50%. There were no borrowings under the revolving credit facility throughout fiscal 2006.
In connection with the Blackstone Transaction described in Note 1 to the Consolidated Financial Statements, the Predecessor Senior Secured Credit Facilities were paid in full.
The Predecessor paid a commission on the face amount of all outstanding letters of credit drawn under the Predecessor Senior Secured Credit Facilities at a per annum rate equal to the Applicable Margin then in effect with respect to Eurodollar loans under the revolving credit loan facility minus the fronting fee (as defined). A fronting fee equal to 1/4% per annum on the face amount of each letter of credit was payable quarterly in arrears to the issuing lender for its own account. The Predecessor also paid a per annum fee equal to 1/2% on the undrawn portion of the commitments in respect of the revolving credit facility. Total letters of credit issuable under the facilities could not exceed $40.0 million.
In November 2003 and February 2004, the Predecessor issued $200.0 million and $194.0 million, respectively, 8.25% senior subordinated notes. The February 2004 notes resulted in gross proceeds of $201.0 million, including premium. The terms of the February 2004 notes were the same as the November 2003 notes and were issued under the same indenture.
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On March 8, 2007, the Predecessor commenced a cash tender offer to purchase any and all of the outstanding 8.25% Senior Subordinated Notes due 2013 of the Predecessor (the Predecessor Notes) and a related consent solicitation to amend the indenture pursuant to which the Predecessor Notes were issued. The tender offer and consent solicitation were made in connection with the Blackstone Transaction. The tender offer and consent solicitation were made upon the terms and conditions set forth in an Offer to Purchase and Consent Solicitation Statement dated March 8, 2007 and the related Consent and Letter of Transmittal. The total cost of the cash tender offer for the Predecessor Notes was $35.5 million and was recorded as a charge in the Other expense (income), net line of the Consolidated Statement of Operations of the Predecessor immediately before the Blackstone Transaction.
Covenant Compliance
The following is a discussion of the financial covenants contained in our debt agreements.
Senior Secured Credit Facility
Our Senior Secured Credit Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:
|
incur additional indebtedness and make guarantees; |
|
create liens on assets; |
|
engage in mergers or consolidations; |
|
sell assets; |
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pay dividends and distributions or repurchase our capital stock; |
|
make investments, loans and advances, including acquisitions; |
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repay the Senior Subordinated Notes or enter into certain amendments thereof; and |
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engage in certain transactions with affiliates. |
The Senior Secured Credit Facility also contains certain customary affirmative covenants and events of default.
Senior Notes and Senior Subordinated Notes
Additionally, on April 2, 2007, we issued the Senior Notes and the Senior Subordinated Notes. The Senior Notes are general unsecured obligations, effectively subordinated in right of payment to all of our existing and future senior secured indebtedness, and guaranteed on a full, unconditional, joint and several basis by our wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company. The Senior Subordinated Notes are general unsecured obligations, subordinated in right of payment to all of our existing and future senior indebtedness, and guaranteed on a full, unconditional, joint and several basis by our wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company.
The indentures governing the Senior Notes and Senior Subordinated Notes limit our (and most or all of our subsidiaries) ability to, subject to certain exceptions:
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incur additional debt or issue certain preferred shares; |
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pay dividends on or make other distributions in respect of our capital stock or make other restricted payments; |
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make certain investments; |
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sell certain assets; |
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create liens on certain assets to secure debt; |
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consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; |
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enter into certain transactions with our affiliates; and |
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designate our subsidiaries as unrestricted subsidiaries. |
Subject to certain exceptions, the indentures governing the notes permit us and our restricted subsidiaries to incur additional indebtedness, including secured indebtedness.
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Consolidated EBITDA
Pursuant to the terms of the Senior Secured Credit Facility, if at any time there are borrowings outstanding under the revolving credit facility in an aggregate amount greater than $10.0 million, we are required to maintain a ratio of consolidated total senior secured debt to Consolidated EBITDA (defined below) for the most recently concluded four consecutive fiscal quarters (the Senior Secured Leverage Ratio) less than a ratio starting at a maximum of 7.00:1 at September 30, 2007 and stepping down over time to 6.50 in 2008, 5.75 in 2009, 5.00 in 2010 and 4.00 in 2011 and thereafter. Consolidated total senior secured debt is defined under the Senior Secured Credit Facility as aggregate consolidated secured indebtedness of the Company less the aggregate amount of all unrestricted cash and cash equivalents. In addition, under the Senior Secured Credit Facility and the indentures governing the Senior Notes and Senior Subordinated Notes, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is tied to the Senior Secured Leverage Ratio, in the case of the Senior Secured Credit Facility, or to the ratio of Consolidated EBITDA to fixed charges for the most recently concluded four consecutive fiscal quarters or the Senior Secured Leverage Ratio, in the case of the Senior Notes and the Senior Subordinated Notes.
Consolidated EBITDA is defined as earnings (loss) before interest expense, taxes, depreciation and amortization (EBITDA), further adjusted to exclude non-cash items, non-recurring items and other adjustment items permitted in calculating covenant compliance under the Senior Secured Credit Facility and the indentures governing the Senior Notes and Senior Subordinated Notes. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Consolidated EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our financial covenants.
EBITDA and Consolidated EBITDA do not represent net loss or earnings or cash flow from operations as those terms are defined by Generally Accepted Accounting Principles (GAAP) and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. In particular, the definitions of Consolidated EBITDA in the Senior Secured Credit Facility and the indentures allow us to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net loss or earnings. However, these are expenses that may recur, vary greatly and are difficult to predict. While EBITDA and Consolidated EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, they are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation.
Our ability to meet the covenants specified above in future periods will depend on events beyond our control, and we cannot assure you that we will meet those ratios. A breach of any of these covenants in the future could result in a default under, or an inability to undertake certain activities in compliance with, the Senior Secured Credit Facility and the indentures governing the Senior Notes and Senior Subordinated Notes, at which time the lenders could elect to declare all amounts outstanding under the Senior Secured Credit Facility to be immediately due and payable. Any such acceleration would also result in a default under the indentures governing the Senior Notes and Senior Subordinated Notes.
The following table provides a reconciliation from our net (loss) earnings to EBITDA and Consolidated EBITDA for the fiscal year ended December 28, 2008 and the 52 weeks ended December 30, 2007. The terms and related calculations are defined in the Senior Secured Credit Facility and the indentures governing the Senior Notes and Senior Subordinated Notes.
Successor | Predecessor | Successor | Combined | |||||||||||||
Year Ended
December 28, 2008 |
13 weeks Ended
April 2, 2007 |
39 weeks Ended
December 30, 2007 |
Year Ended
December 30, 2007 |
|||||||||||||
Net (loss) earnings |
$ | (28,581 | ) | $ | (66,649 | ) | $ | (48,709 | ) | $ | (115,358 | ) | ||||
Interest expense, net |
152,961 | 38,593 | 123,475 | 162,068 | ||||||||||||
Income tax expense |
27,036 | 6,284 | 24,746 | 31,030 | ||||||||||||
Depreciation and amortization expense |
62,509 | 10,163 | 45,671 | 55,834 | ||||||||||||
EBITDA (unaudited) |
$ | 213,925 | $ | (11,609 | ) | $ | 145,183 | $ | 133,574 | |||||||
Non-cash items (a) |
3,776 | 42,601 | ||||||||||||||
Non-recurring items (b) |
2,653 | 52,347 | ||||||||||||||
Other adjustment items (c) |
2,606 | 2,990 | ||||||||||||||
Net cost savings projected to be realized as a result of initiatives taken (d) |
9,002 | 10,737 | ||||||||||||||
Consolidated EBITDA (unaudited) |
$ | 231,962 | $ | 242,249 | ||||||||||||
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(a) | Non-cash items are comprised of the following: |
Successor | Combined | |||||||
Year Ended
December 28, 2008 |
Year Ended
December 30, 2007 |
|||||||
Effects of adjustments related to the application of purchase accounting (1) |
$ | | $ | 40,203 | ||||
Non-cash compensation charges (2) |
806 | 11,248 | ||||||
Unrealized losses or (gains) resulting from hedging activities (3) |
(2,142 | ) | 2,271 | |||||
Gain on early extinguishment of debt |
| (5,670 | ) | |||||
Impairment charges or asset write-offs (4) |
15,100 | 1,200 | ||||||
Curtailment gain as result of amendment to Ft. Madison labor agreements (5) |
| (6,651 | ) | |||||
Non-cash gain on litigation settlement (6) |
(9,988 | ) | | |||||
Total non-cash items |
$ | 3,776 | $ | 42,601 | ||||
(1) | For fiscal 2007, represents expense related to the write-up to fair market value of inventories acquired as a result of the Blackstone Transaction. |
(2) | For fiscal 2008 and fiscal 2007, represents non-cash compensation charges related to the granting of equity awards. |
(3) | For fiscal 2008 and fiscal 2007, represents non-cash gains and losses resulting from mark-to-market adjustments of obligations under natural gas and foreign exchange swap contacts. |
(4) | For fiscal 2008, represents impairment charges for the Van de Kamps ($8.0 million), Mrs. Pauls ($5.6 million), Lenders ($0.9 million) and Open Pit tradenames ($0.6 million). For fiscal 2007, represents the impairment of the Open Pit tradename. |
(5) | For fiscal 2007, represents a portion of the curtailment gain related to the elimination of an employer-sponsored post-retirement employee medical plan for certain employees at the Ft. Madison production facility. |
(6) | For fiscal 2008, represents the excess of the accrued liability established in purchase accounting over the amount of the cash payment in the litigation settlement. |
(b) | Non-recurring items are comprised of the following: |
Successor | Combined | |||||
Year Ended
December 28, 2008 |
Year Ended
December 30, 2007 |
|||||
Expenses in connection with an acquisition or other non-recurring merger costs (1) |
$ | 671 | $ | 49,716 | ||
Restructuring charges, integration costs and other business optimization expenses (2) |
1,015 | 2,631 | ||||
Employee severance (3) |
967 | | ||||
Total non-recurring items |
$ | 2,653 | $ | 52,347 | ||
(1) | For the fiscal year 2008 represents additional costs related to the Blackstone Transaction. For fiscal 2007, represents expenses incurred in connection with the Blackstone Transaction, which includes: $35.5 million related to the cash tender offer for the Predecessors 8.25% notes; $12.9 million related to the termination of certain Predecessor contracts with our former Chairman and affiliates of our former Chairman; and $1.3 million of other costs. |
(2) | For fiscal 2008, represents expenses incurred to reconfigure the freezer space in our Mattoon warehouse, as well as consultant expense incurred to execute labor and yield savings in our plants. For fiscal 2007, represents expenses incurred to consolidate certain portions of our distribution network. |
(3) | For fiscal 2008, represents severance costs paid, or to be paid, to terminated employees. |
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(c) | Other adjustment items are comprised of the following: |
Successor | Combined | ||||||
Year Ended
December 28, 2008 |
Year Ended
December 30, 2007 |
||||||
Management, monitoring, consulting and advisory fees (1) |
$ | 2,606 | $ | 2,500 | |||
Accruals established as a result of the Blackstone Transaction (2) |
| 780 | |||||
Other |
| (290 | ) | ||||
Total other adjustments |
$ | 2,606 | $ | 2,990 | |||
(1) | For fiscal 2008 and fiscal 2007, represents management/advisory fees and expenses paid to Blackstone. |
(2) | For fiscal 2007, represents executive severance costs incurred in connection with the Blackstone Transaction. |
(d) | Net cost savings projected to be realized as a result of initiatives taken: |
Successor | Combined | |||||
Year Ended
December 28, 2008 |
Year Ended
December 30, 2007 |
|||||
Productivity initiatives in our manufacturing facilities, freight and distribution systems and purchasing programs (1) |
$ | 9,002 | $ | 8,552 | ||
Termination of contracts with our former Chairman and affiliates of our former Chairman (2) |
| 2,185 | ||||
Total net cost savings projected to be realized as a result of initiatives taken |
$ | 9,002 | $ | 10,737 | ||
(1) | For fiscal 2008 and fiscal 2007 represents net cost savings projected to be realized as a result of specified actions taken or initiated, net of the amount of actual benefits realized. Such savings primarily relate to productivity initiatives in our manufacturing facilities, our freight and distribution systems, and our purchasing programs. |
(2) | For fiscal 2007 represents the reduction in expenses as a result of the termination of our former Chairmans employment agreement as well as contracts with affiliates of our former Chairman, net of the expense of our new Chairman. |
Our covenant requirements and actual ratios for the fiscal year ended December 28, 2008 are as follows:
Covenant
Requirement |
Actual Ratio | |||
Senior Secured Credit Facility |
||||
Senior Secured Leverage Ratio (1) |
6.50:1 | 5.42:1 | ||
Total Leverage Ratio (2) |
Not applicable | 7.68:1 | ||
Senior Notes and Senior Subordinated Notes (3) |
||||
Minimum Consolidated EBITDA to fixed charges ratio required to incur additional debt pursuant to ratio provisions (4) |
2.00:1 | 1.46:1 |
(1) | Pursuant to the terms of the Senior Secured Credit Facility, if at any time there are borrowings outstanding under the Revolving Credit Facility in an aggregate amount greater than $10.0 million, we are required to maintain a consolidated total senior secured debt to Consolidated EBITDA ratio for the most recently concluded four consecutive fiscal quarters (the Senior Secured Leverage Ratio) less than a ratio starting at a maximum of 7.00:1 at September 30, 2007 and stepping down over time to 6.50 in 2008, 5.75 in 2009, 5.00 in 2010 and 4.00 in 2011 and thereafter. Consolidated total senior secured debt is defined as the aggregate consolidated secured indebtedness of the Company less the aggregate amount of all unrestricted cash and cash equivalents. |
(2) | The Total Leverage Ratio is not a financial covenant but used to determine the applicable margin under the Senior Secured Credit Facility. The Total Leverage Ratio is calculated by dividing consolidated total debt less the aggregate amount of all unrestricted cash and cash equivalents by Consolidated EBITDA. |
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(3) | Our ability to incur additional debt and make certain restricted payments under the indentures governing the Senior Notes and Senior Subordinated Notes, subject to specified exceptions, is tied to a Consolidated EBITDA to fixed charges ratio of at least 2.0:1, except that we may incur certain debt and make certain restricted payments and certain permitted investments without regard to the ratio, such as our ability to (i) incur up to $1,600.0 million under credit facilities (as of December 28, 2008, we had $1,234.4 million in outstanding term loans, $26.0 million outstanding under the revolving credit facility and an unused balance of $99.0 million under the revolving credit facility, see note 4 to the Consolidated Financial Statements regarding the Lehman Brothers Holdings Inc. bankruptcy and their commitment of $15.0 million for the revolving credit facility), (ii) incur up to $150.0 million under the general exception to the debt covenant, (iii) make investments in similar businesses having an aggregate fair market value not to exceed 3.0% of our total assets, (iv) make additional investments having an aggregate fair market value not to exceed 4.0% of our total assets and (v) make other restricted payments in an aggregate amount not to exceed 2.0% of our total assets. |
(4) | Fixed charges is defined in the indentures governing the Senior Notes and Senior Subordinated Notes as (i) consolidated interest expense (excluding specified items) plus consolidated capitalized interest less consolidated interest income, plus (ii) cash dividends and distributions paid on preferred stock or disqualified stock. |
Inflation
Beginning 2005 and continuing into 2008, we experienced
higher energy and commodity costs in production and higher fuel surcharges for product delivery. Although we have no such expectation, severe increases in inflation could have an adverse impact on our business, financial condition and results of
Contractual Commitments
The table below provides information on our contractual commitments as of December 28, 2008:
Total |
Less Than
1 Year |
1-3 Years | 3-5 Years |
After
5 Years |
|||||||||||
(in thousands) | |||||||||||||||
Long-term debt (1) |
$ | 1,758,375 | $ | 12,500 | $ | 25,000 | $ | 25,000 | $ | 1,695,875 | |||||
Projected interest payments on long term debt (2) |
695,259 | 106,847 | 228,552 | 236,950 | 122,910 | ||||||||||
Operating lease obligations |
17,814 | 4,619 | 7,851 | 4,477 | 867 | ||||||||||
Capital lease obligations |
814 | 249 | 520 | 45 | | ||||||||||
Purchase obligations (3) |
403,989 | 365,075 | 17,328 | 14,586 | 7,000 | ||||||||||
Postretirement medical benefits |
182 | 54 | 50 | 20 | 58 | ||||||||||
Pension benefits (4) |
36,507 | 8,600 | 12,000 | 12,000 | 3,907 | ||||||||||
Total (5) |
$ | 2,912,940 | $ | 497,944 | $ | 291,301 | $ | 293,078 | $ | 10,965 | |||||
(1) | Long-term debt at face value includes scheduled principal repayments and excludes interest payments. |
(2) | The total projected interest payments on long-term debt are based upon borrowings and interest rates as of December 28, 2008, including the effect of interest rate swaps in place. The interest rate on variable rate debt is subject to changes beyond our control and may result in actual interest expense and payments differing from the amounts above. |
(3) | The amounts indicated in this line primarily reflect future contractual payments, including certain take-or-pay arrangements entered into as part of the normal course of business. The amounts do not include obligations related to other contractual purchase obligations that are not take-or-pay arrangements. Such contractual purchase obligations are primarily purchase orders at fair value that are part of normal operations and are reflected in historical operating cash flow trends. Purchase obligations also include trade and consumer promotion and advertising commitments. We do not believe such purchase obligations will adversely affect our liquidity position. |
(4) | The funding of the defined benefit pension plan is based upon our planned 2009 cash contribution. The future years contributions are based upon our expectations taking into consideration the funded status of the plan at December 28, 2008. |
(5) | The total excludes the liability for uncertain tax positions under FIN 48. We are not able to reasonably estimate the timing of the long-term payments or the amount by which the FIN 48 liability will increase or decrease over time. Therefore, the long-term portion of the liability is excluded from the preceding table. |
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Off-Balance Sheet Arrangements
As of December 28, 2008, we did not have any off-balance sheet obligations.
Accounting Policies and Pronouncements
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires the use of judgment, estimates and assumptions. We make such subjective determinations after careful consideration of our historical performance, managements experience, current economic trends and events and information from outside sources. Inherent in this process is the possibility that actual results could differ from these estimates and assumptions for any particular period.
Our significant accounting policies are detailed in Note 2 to our consolidated financial statements for the fiscal year ended December 28, 2008. The following areas are the most important and require the most difficult, subjective judgments.
Revenue recognition. Revenue consists of sales of our dry food and frozen food products. We recognize revenue from product sales upon shipment to our customers, at which point title and risk of loss are transferred and the selling price is fixed or determinable. Shipment completes the revenue-earning process, as an arrangement exists, delivery has occurred, the price is fixed and collectibility is reasonably assured. We estimate discounts and product return allowances based upon our historical performance, managements experience and current economic trends and record them as a reduction of sales in the same period that the revenue is recognized. Variances between historical estimates and actual results have not been significant.
Trade and consumer promotional expenses. We offer various sales incentive programs to retailers and consumers. We record consumer incentive and trade promotion costs as a reduction of revenues in the year in which we offer these programs. The recognition of expense for these programs involves the exercise of judgment related to performance and redemption estimates that we base on historical experience and other factors. Actual expenses may differ if the level of redemption rates and performance vary from estimates. We also record slotting fees, which refers to payments to retailers to obtain shelf placement for new and existing product introductions. We reduce revenues for the amount of slotting estimated to each customer in full at the time of the first shipment of the new product to that customer.
Inventories. We state inventories at the lower of average cost or market. In determining market value, we provide allowances to adjust the carrying value of our inventories to the lower of cost or net realizable value, including any costs to sell or dispose. Appropriate consideration is given to obsolescence, excessive inventory levels, product deterioration and other factors in evaluating net realizable value. These adjustments are estimates, which could vary significantly from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from expectations.
Goodwill and Indefinite-lived tradenames. We follow SFAS No. 142, Goodwill and Other Intangible Assets in evaluating the carrying value of goodwill and tradenames, which are indefinite lived intangible assets. At December 28, 2008, the carrying value of goodwill, based upon the final purchase price allocation in connection with the Blackstone Transaction, was $994.1 million. Goodwill was assigned to our dry foods segment in the amount of $650.9 million and to our frozen foods segment in the amount of $343.2 million. At December 28, 2008, the carrying value of the tradenames, based upon the purchase price allocation, was $910.1 million. The tradenames were assigned to our dry foods segment in the amount of $682.2 million and to our frozen foods segment in the amount of $227.9 million. The goodwill and tradenames arose in connection with the Blackstone Transaction. The tradenames represent the fair value of the brands used in our retail products. Goodwill represents the excess of the aggregate purchase price over the fair value of the identifiable net assets and is allocated to the Companys reporting units at acquisition. The Company identifies its reporting units as its product categories, which represent components of our organization one level below our operating segments for which discrete financial information is available. We performed valuations of the reporting units acquired in the transactions and allocated goodwill based upon the respective contribution to the excess purchase price.
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We evaluate the carrying amount of goodwill for impairment on an annual basis, in December, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The goodwill impairment review consists of a two-step process of first comparing the fair value of the reporting unit with its carrying value. If this fair value exceeds the carrying value, no further analysis or goodwill impairment charge is required. If the fair value is below the carrying value, the Company would proceed to the next step, which is to measure the amount of the impairment loss. The impairment loss is measured as the difference between the carrying value and implied fair value of goodwill. To measure the implied fair value goodwill we would make a hypothetical allocation of the estimated fair value of the reporting unit to the tangible and intangible assets (other than goodwill) within the respective reporting unit using the same rules for determining fair value and allocation under SFAS No. 141, Business Combinations as we would use if it were an original purchase price allocation. If the implied fair value of the reporting units goodwill is less than its carrying amount the shortfall would be charged to earnings.
In estimating the fair value or our reporting units we primarily use the income approach, which utilizes forecasted discounted cash flows to estimate the fair value. The utilization of the income approach utilizes managements business plans and projections as the basis for expected future cash flows for five years. In addition, we make significant assumptions including regarding long-term growth rates and discounts rates. In our recent impairment tests, we forecasted cash flows for five years plus a terminal year and assumed a discount rate of 9.5%. Such cash flows for each of the five years and terminal year assume growth rates that generally average between 0% and 3.0%, which are determined based upon our expectations for each of the individual reporting units and are consistent within the industry. The results of this test indicated that none of the reporting units were impaired.
We also evaluate the carrying amount of our tradenames for impairment on an annual basis, in December, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of an intangible asset with its carrying value. If the carrying value of a tradename exceeds its fair value at the time of the evaluation, we would charge the shortfall to earnings.
To estimate the fair value of our tradenames we primarily use an income approach, which utilizes forecasted discounted cash flows to estimate the fair value. The utilization of the income approach requires us to make significant assumptions including long-term growth rates, implied royalty rates and discount rates. The results of the tests indicated that four of our tradenames were impaired. Those tradenames included Van de Kamps ($8.0 million impairment), Mrs. Pauls ($5.6 million impairment), Lenders ($0.9 million impairment) and Open Pit ($0.6 million impairment).
Pensions and retiree medical benefits. We provide pension and post-retirement benefits to certain employees and retirees. Determining the costs associated with such benefits depends on various actuarial assumptions, including discount rates, expected return on plan assets, compensation increases, turnover rates and health care trend rates. Independent actuaries, in accordance with GAAP, perform the required calculations to determine expense. We generally accumulate actual results that differ from the actuarial assumptions and amortize such results over future periods.
Insurance reserves. We are self-insured and retain liabilities under our workers compensation insurance policy. We estimate the outstanding retained-insurance liabilities by projecting incurred losses to their ultimate liability and subtracting amounts paid-to-date to obtain the remaining liabilities. We base actuarial estimates of ultimate liability on actual incurred losses, estimates of incurred but not yet reported lossesbased on historical information from both us and the industryand the projected costs to resolve these losses. Retained-insurance liabilities may differ based on new events or circumstances that might materially impact the ultimate cost to settle these losses.
Income taxes. We record income taxes based on the amounts that are refundable or payable in the current year, and we include results of any difference between generally accepted accounting principles and U.S. tax reporting that we record as deferred tax assets or liabilities. We review our deferred tax assets for recovery. A valuation allowance is established when the Company believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in our tax provision in the period of change. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets and the timing of income tax payments. Actual collections and payments may differ from these estimates as a result of changes in tax laws as well as unanticipated future transactions impacting related income tax balances.
48
Stock-based compensation. We apply SFAS No. 123(R) using the modified prospective transition method to calculate stock-based compensation. SFAS No. 123(R) requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense using the straight-line method over the requisite service periods in our consolidated statement of operations.
We currently use the Black-Scholes option-pricing model as our method of valuation for stock-based awards. Since our stock is not publicly traded, the determination of fair value of stock-based payment awards on the date of grant using an option-pricing model is based upon estimates of enterprise value as well as assumptions regarding a number of highly complex and subjective variables. The estimated enterprise value is based upon forecasted cash flows for five years plus a terminal year and an assumed discount rate. The other variables used to determine fair value of stock-based payment awards include, but are not limited to, the expected stock price volatility of a group of industry comparable companies over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable.
Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in managements opinion, the existing valuation models may not provide an accurate measure of the fair value of our employee stock-based awards. Although the fair value of employee stock awards is determined in accordance with SFAS No. 123(R) and SAB No. 107 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS No. 157). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement applies whenever other statements require or permit assets or liabilities to be measured at fair value. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. However, FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (FSP No. 157-2) defers the Statements effective date for certain non-financial assets and liabilities to fiscal years beginning after November 15, 2008, and will be effective for us in the first quarter of fiscal 2009. In October 2008, the FASB Issued FASB Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP No. 157-3). FSP No. 157-3 clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP No. 157-3 is effective upon issuance. We are currently evaluating FSP No. 157-2 with respect to non-financial assets and liabilities and anticipate that this statement will not have a significant impact on the reporting of our financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (SFAS No. 159). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value, and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new guidance is effective for fiscal years beginning after November 15, 2007. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations.
49
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)), which replaces SFAS No. 141, Business Combinations. SFAS No. 141(R) retains the underlying concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but SFAS No. 141(R) changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS No. 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS No. 141(R) amends SFAS No. 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS No. 141(R) would also apply the provisions of SFAS No. 141(R). Early adoption is not permitted. The adoption of SFAS No. 141(R) will have an impact on our accounting for future business combinations on a prospective basis once adopted; however, the materiality of that impact cannot be determined.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51. This statement is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008, with earlier adoption prohibited. This statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parents equity. The amount of net earnings attributable to the noncontrolling interest will be included in consolidated net earnings on the face of the statement of operations. It also amends certain of ARB No. 51s consolidation procedures for consistency with the requirements of SFAS No. 141(R). This statement also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. We are currently evaluating this new statement and anticipate that the statement will not have a significant impact on the reporting of our financial position or results of operations.
In December 2007, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), Implementation Issue No. E23, Hedging- General: Issues Involving the Application of the Shortcut Method under Paragraph 68 (Issue E23). Issue E23 amends SFAS No. 133 to explicitly permit use of the shortcut method for hedging relationships in which interest rate swaps have a nonzero fair value at the inception of the hedging relationship, provided certain conditions are met. Issue E23 was effective for hedging relationships designated on or after January 1, 2008. The implementation and guidance did not have a material impact on our consolidated financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of SFAS Statement No. 133 (SFAS No. 161). SFAS No. 161 requires enhanced disclosures about derivative and hedging activities. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. For the Company, SFAS No. 161 will be effective at the beginning of its 2009 fiscal year and will result in additional disclosures in the notes to the Companys Consolidated Financial Statements.
In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets, (FSP No. 142-3). FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 is effective for fiscal years beginning after December 15, 2008. The guidance for determining the useful life of intangible assets included in this FASB Staff Position will be applied prospectively to intangible assets acquired after the effective date of December 29, 2008 (first day of fiscal 2009). As this guidance applies only to assets we may acquire in the future, we are not able to predict its impact, if any, on our consolidated financial statements.
50
ITEM 7A. | QUANTITATIVE AND QUALITATIV E DISCLOSURES ABOUT MARKET RISK |
F INANCIAL I NSTRUMENTS
We may utilize derivative financial instruments to enhance our ability to manage risks, including interest rate, certain commodities and foreign currency, which exist as part of ongoing business operations. We do not enter into contracts for speculative purposes, nor are we a party to any leveraged derivative instrument. We monitor the use of derivative financial instruments through regular communication with senior management and third party consultants as well as the utilization of written guidelines.
Interest Rate Risk
We rely primarily on bank borrowings to meet our funding requirements. We utilize interest rate swap agreements or other derivative instruments to reduce the potential exposure to interest rate movements and to achieve a desired proportion of variable versus fixed rate debt. We will recognize the amounts that we pay or receive on hedges related to debt as an adjustment to interest expense.
Prior to the Blackstone Transaction, our predecessor had entered into interest rate swap agreements with counterparties to effectively change a portion of the floating rate payments on its senior secured credit facilities into fixed rate payments. As of April 1, 2007, the fair value of the interest rate swaps was a net loss of $2.3 million, which was recorded as a long term liability. This interest rate swap was settled in April 2007.
After the Blackstone Transaction was completed, we entered into a new interest rate swap agreement and an interest rate collar agreement with Lehman Brothers Special Financing (LBSF). See Lehman Brothers Special Financing below regarding the bankruptcy of LBSF and the subsequent termination of the interest rate swap and collar contracts.
In accordance with SFAS No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities, we have designated the interest rate swap as a cash flow hedge of the risk of changes attributable to interest rate risk in our first previously unhedged LIBOR-indexed interest payments made each quarter until the maturity date of the swap that, in the aggregate for each period, are interest payments on an amount of debt principal corresponding to the outstanding swap notional amount of our then-existing LIBOR-based floating rate debt that reprices on the closest day following the second day of each January, April, July and October (the hedged transactions). The interest rate swap contained the following terms:
|
Notional amount: $976.3 million amortizing to $63.7 million |
|
Fixed rate: 4.958% |
|
Index: 3 mo. USD-LIBOR-BBA |
|
Effective Date: April 2, 2007 |
|
Maturity Date: April 2, 2012 |
In accordance with SFAS No. 133, the interest rate collar had also been designated as a cash flow hedge of the changes in the forecasted floating-rate interest payments attributable to changes in 3-month USD-LIBOR-BBA above 5.50% and below 4.39% (the strike rates) on the first previously unhedged 3-month USD-LIBOR-BBA interest payments on our then-existing 3-month USD-LIBOR-BBA-based debt having a principal amount corresponding to the outstanding notional amount of the collar that resets on the second day of each January, April, July and October until the maturity date of the collar. The collar had an effective date of April 2, 2008 and a maturity date of April 2, 2012. Should 3-month USD-LIBOR-BBA fall below 4.39% on a rate reset date during the period from April 2, 2008 to April 2, 2012, our company was to pay the Counterparty the amount equal to the outstanding notional amount of the collar multiplied by a spread [equalling 4.39% minus 3-month USD-LIBOR-BBA] multiplied by the number of days in the period divided by 360. Should 3-month USD-LIBOR-BBA rise above 5.50% on a rate reset date during the period from April 2, 2008 to April 2, 2012, the Counterparty will pay us the amount equal to the outstanding notional amount on the collar multiplied by a spread [equalling 3-month USD-LIBOR-BBA minus 5.50%] multiplied by the number of days in the period divided by 360.
As of December 30, 2007, the fair value of the interest rate swap contract was a loss of $24.1 million. The offsetting loss was recorded as a component of Accumulated other comprehensive (loss) income. As of December 30, 2007, interest receivable of $0.7 million was recorded in the Other current assets line on the Consolidated Balance Sheet. The offsetting gains or losses from interest payable or interest receivable are recorded as a component of Interest expense in the Consolidated Statement of Operations.
51
As a result of the Lehman Brothers Special Financing bankruptcy on October 3, 2008, the swaps were de-designated as a cash flow hedge in accordance with SFAS No. 133. The fair market value of the swap and collar on the de-designation date was $11.5 million. These contracts were terminated on October 24, 2008 at a price of $17.0 million excluding fees and expenses. The gain on the swap and collar from December 30, 2007 to the de-designation date ($12.6 million) was recorded in Accumulated Other Comprehensive (Loss) income. From October 3, 2008 to October 24, 2008, the fair market value of the swap and collar declined from a loss of $11.5 million to a loss of $17.0 million (the termination payment). The amount of the loss, $5.5 million, was recorded as a component of Interest expense in the Consolidated Statement of Operations. The fair market value at the date of de-designation of $11.5 million, which was recorded in Accumulated Other Comprehensive (Loss) Income, is being amortized over the remaining life of the LBSF swap and collar. The amount amortized from the de-designation date (October 3, 2008) till the end of the year was $1.3 million. For more information on the bankruptcy of Lehman Brothers Special Financing, see Note 4 to the Consolidated Financial Statements.
In March 2008, we entered into an interest rate basis swap agreement with Goldman Sachs Capital Markets LP to effectively change the spread at which the Company pays interest from the 3 month LIBOR rate to the 1 month LIBOR rate. The agreement contains the following terms:
|
Notional amount: $390.0 million |
|
Index 1: 3 month USD-LIBOR-BBA |
|
Index 1 Payer: Pinnacle Foods Finance LLC |
|
Index 2: 1 month USD-LIBOR-BBA |
|
Index 2 Payer: Goldman Sachs Capital Markets LP |
|
Effective Date: April 2, 2008 |
|
Maturity Date: December 26, 2008 |
This swap was not designated as a hedge pursuant to SFAS No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities. As of December 28, 2008, the fair value of the interest rate swap was zero. Losses on the interest rate swap for fiscal 2008, which were recorded as a component of interest expense, totaled $1.0 million.
In the 4 th quarter of 2008, we entered into four interest rate swap agreements with Barclays Bank PLC (Barclays).
In accordance with SFAS No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities, we designated the Barclays interest rate swaps as cash flow hedges of the risk of changes attributable to interest rate risk in our LIBOR-indexed interest payments made each month until the maturity date of the swaps that, in the aggregate for each period, are interest payments on an amount of debt principal corresponding to the outstanding swaps notional amount of our then-existing LIBOR-based floating rate debt that reprices on the closest day following the second day of each month. The four Barclays interest rate swaps in the aggregate contain the following terms:
|
Notional amounts: $768.5 million amortizing to $581.6 million |
|
Fixed rate: 1.54% - 2.7625% |
|
Index: 3 mo. USD-LIBOR-BBA |
|
Effective Date: January 2, 2009 |
|
Maturity Date: April 2, 2011 |
As of December 28, 2008, the fair values of the Barclays interest rate swaps contracts were a loss of $11.9 million, which was recorded in the Other long-term liabilities line on the Consolidated Balance Sheet. The offsetting loss was recorded as a component of Accumulated other comprehensive (loss) income.
52
Gains and losses on the interest rate swaps, which were recorded as either an adjustment to interest expense in the Consolidated Statement of Operations or as an adjustment to Accumulated other comprehensive (loss) income on the Consolidated Balance Sheets, are detailed below:
Interest Rate Swaps |
Successor | Predecessor | ||||||||||||||
(in millions) |
Fiscal year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13
weeks ended April 2, 2007 |
Fiscal year
ended December 31, 2006 |
||||||||||||
Mark-to-market gain/(loss) recorded in: |
||||||||||||||||
Accumulated other comprehensive (loss) income |
$ | 0.7 | $ | (24.1 | ) | $ | | $ | | |||||||
Consolidated Statement of Operations |
(5.5 | ) | 2.3 | (1.4 | ) | (3.3 | ) | |||||||||
Realized gain/(loss) recorded in the |
||||||||||||||||
Consolidated Statement of Operations |
(10.7 | ) | 0.2 | 1.0 | 2.4 | |||||||||||
Net gain/(loss) on interest rate swaps |
$ | (15.5 | ) | $ | (21.6 | ) | $ | (0.4 | ) | $ | (0.9 | ) | ||||
Commodity Risk
Our predecessor had entered into various natural gas swap transactions with JP Morgan Chase Bank (a related party of the Predecessor) to lower our exposure to the price of natural gas. At the time of the Blackstone Transaction, the fair value of the gas swaps was a gain of less than $0.1 million and was recorded in other current assets. The related offset is recorded as a gain or loss and is recognized as an adjustment to cost of products sold.
After the Blackstone Transaction was completed, we entered into natural gas swap transactions with LBSF to lower our exposure to the price of natural gas. As of December 30, 2007, the trades in effect matured in June 2008 and had various notional quantities of MMBTUs per month. We paid a fixed price ranging from $7.24 to $7.97 per MMBTU, with settlements monthly. As of December 30, 2007, the fair value of the natural gas swaps was a loss of $0.1 million, and was recorded in accrued liabilities. Losses for the fiscal year ended December 30, 2007, recorded as a component of cost of products sold, were $0.4 million. In September 2008, new contracts were signed with LBSF with trades in effect that matured between October 2008 and December 2009 with quantities ranging from 29,000 to 59,000 MMBTUs. We paid a fixed price ranging from $8.53 to $12.81 per MMBTU, with settlements monthly. In October 2008, the natural gas contracts were terminated as a result of the bankruptcy of Lehman Brothers Special Financing at a price of $1.3 million excluding fees and expenses. See Lehman Brothers Special Financing below regarding the bankruptcy of LBSF and the subsequent termination of the natural gas swap transactions.
In the 4 th quarter of 2008, we entered into natural gas swap agreements with Barclays Bank PLC. As of December 28, 2008, the trades in effect mature between January 2009 and October 2009 with quantities ranging from 24,000 to 150,000 MMBTUs. We will pay a fixed price ranging from $6.23 to $6.75 per MMBTU, with settlements monthly. As of December 28, 2008, the fair value of the natural gas swap was a loss of $0.3 million, and is recorded in Accrued liabilities on the Consolidated Balance Sheet.
Losses for the fiscal year ended December 28, 2008 related to the Natural Gas Swaps, recorded as a component of Cost of Products Sold, were $1.9 million.
The swap contracts were not designated as hedges pursuant to SFAS No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities.
53
Gains and losses on the natural gas swaps, which were recorded as a component of cost of products sold in the Consolidated Statement of Operations, are detailed below:
Natural Gas Swaps |
Successor | Predecessor | ||||||||||||||
(in millions) |
Fiscal year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13 weeks
ended April 2, 2007 |
Fiscal year
ended December 31, 2006 |
||||||||||||
Mark-to-market gain/(loss) recorded in: |
||||||||||||||||
Consolidated Statement of Operations |
$ | (0.2 | ) | $ | (0.1 | ) | $ | 0.2 | $ | (0.2 | ) | |||||
Realized gain/(loss) recorded in the |
||||||||||||||||
Consolidated Statement of Operations |
(1.7 | ) | (0.3 | ) | (0.1 | ) | (1.2 | ) | ||||||||
Net gain/(loss) on natural gas swaps |
$ | (1.9 | ) | $ | (0.4 | ) | $ | 0.1 | $ | (1.4 | ) | |||||
Foreign Exchange Risk
We entered into various types of foreign currency contracts to lower our exposure to exchange rate fluctuations between the U.S. dollar and the Canadian dollar with two vendors: LBSF and the Union Bank of California. Each agreement was based upon a notional amount in Canadian dollars, which is expected to approximate a portion of the amount of our Canadian subsidiarys U.S. dollar-denominated purchases for the month.
The contracts with LBSF were entered into in April 2007 and were not designated as hedges pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. As of December 30, 2007, the fair value of the Lehman foreign currency exchange contracts was a loss of $2.3 million which is recorded in Accrued liabilities in the Consolidated Balance Sheet.
In October, 2008, the foreign currency contracts were terminated as a result of the bankruptcy of LBSF with proceeds to us of $0.6 million excluding fees and expenses. Losses and gains for the LBSF foreign exchange contacts were recorded as an adjustment to cost of products sold on the Consolidated Statement of Operations. See Lehman Brothers Special Financing below for a discussion of the costs related to the termination of the swap and collar contracts. For more information on the bankruptcy of Lehman Brothers Special Financing, see Note 4 to the Consolidated Financial Statements.
Contracts with the Union Bank of California were entered into in October 2007 and in accordance with SFAS No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities, were designated as a cash flow hedge. SFAS No. 133 states that foreign currency risk associated with these transactions can be designated as a hedge since (1) they are in a currency (CAD) other than our functional currency (USD), (2) they have a high probability of occurring since the contract values approximate a portion of the amount or our Canadian subsidiarys U.S. dollar-denominated purchases for the month and (3) the foreign currency risk associated with these transactions affects consolidated earnings. The exchange rate swap contracts outstanding at December 28, 2008 contains the following terms:
|
Notional amounts: $0.4 million - $2.6 million CAD |
|
CAD to USD Exchange Rates: .968 - 1.007 |
|
Maturity Dates: Jan 2009 Dec 2009 |
As of December 30, 2007, the fair value of the Union Bank of California foreign currency swap contracts was a gain of $0.7 million, of which $0.4 million is recorded in Other current assets and $0.3 million is recorded in Other assets, net on the Consolidated Balance Sheet. As of December 28, 2008, the fair value of the Union Bank of California foreign currency swap contracts was a gain of $5.3 million which is recorded in Other current assets on the Consolidated Balance Sheet. The offsetting gain of $4.6 million is recorded as a component of Accumulated other comprehensive (loss) income ($4.6 million net of tax).
54
Gains and losses on the foreign currency exchange swaps, which were recorded as either an adjustment to cost of products sold on the Consolidated Statement of Operations, or as an adjustment to Accumulated other comprehensive (loss) income on the Consolidated Balance Sheets, are detailed below.
Foreign Currency Exchange Contracts |
Successor | Predecessor | ||||||||||||
(in millions) |
Fiscal year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13 weeks
ended April 2, 2007 |
Fiscal year
ended December 31, 2006 |
||||||||||
Mark-to-market gain/(loss) recorded in: |
||||||||||||||
Accumulated other comprehensive (loss) income |
$ | 4.6 | $ | 0.7 | $ | | $ | | ||||||
Consolidated Statement of Operations |
2.3 | (2.3 | ) | | 0.3 | |||||||||
Realized gain/(loss) recorded in the |
||||||||||||||
Consolidated Statement of Operations |
2.4 | (2.8 | ) | | (0.6 | ) | ||||||||
Net gain/(loss) on foreign currency swaps |
$ | 9.3 | $ | (4.4 | ) | $ | | $ | (0.3 | ) | ||||
Lehman Brothers Special Financing
As discussed in Note 4 to the Consolidated Financial Statements, on October 3, 2008, Lehman Brothers Special Financing filed for Chapter 11 Bankruptcy protection. The bankruptcy filing constitutes an event of default with respect to the interest rate swap, interest rate collar, natural gas swaps and foreign currency options. We, as is our right under our contract agreement with LBSF, terminated all of our contracts at a cash cost of $17.7 million, consisting of $17.5 million paid to LBSF and $0.2 million in expenses.
Other
We utilize irrevocable standby letters of credit with one-year renewable terms to satisfy workers compensation self-insurance security deposit requirements. At December 30, 2007, our contract value of the outstanding standby letters of credit to satisfy workers compensation self-insurance security deposits was $9.5 million, which approximates fair value. As of December 30, 2007, we also utilize letters of credit in connection with the purchase of raw materials in the amount of $0.3 million, which approximates fair value. At December 28, 2008, our contract value of the outstanding standby letters of credit to satisfy workers compensation self-insurance security deposits was $8.1 million, which approximates fair value. As of December 28, 2008, we also utilized letters of credit in connection with the purchase of raw materials in the amount of $7.1 million, which approximates fair value.
Other than mentioned above with regards to LBSF, we are exposed to credit loss in the event of non-performance by the other parties to derivative financial instruments. All counterparties are at least A- rated or equivalent by Standard & Poors and Moodys. Accordingly, we do not anticipate non-performance by the counterparties.
The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate fair value.
The estimated fair value of our long-term debt, including the current portion, as of December 28, 2008, is as follows:
December 28, 2008 | ||||||
Issue |
Recorded
Amount |
Fair
Value |
||||
(millions of dollars) | ||||||
Senior Secured Credit Facilities - term loan |
$ | 1,234.4 | $ | 834.5 | ||
9.25% Senior Notes |
325.0 | 208.4 | ||||
10.625% Senior Subordinated Notes |
199.0 | 106.7 | ||||
$ | 1,758.4 | $ | 1,149.6 | |||
The fair value is based on the quoted market price for such notes and borrowing rates currently available to our company for loans with similar terms and maturities.
55
ITEM 8. | FINANCIAL STATEMENTS A ND SUPPLEMENTARY DATA |
Financial statements begin on the following page
56
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of
Pinnacle Foods Finance LLC:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, cash flows and shareholders equity present fairly, in all material respects, the financial position of Pinnacle Foods Finance LLC and its subsidiaries (the Company) at December 28, 2008 and December 30, 2007, and the results of their operations and their cash flows for the fiscal year ended December 28, 2008 and for the period from April 2, 2007 to December 30, 2007 (Successor as defined in Note 1), in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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.
Philadelphia, Pennsylvania
March 3, 2009
57
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of
Pinnacle Foods Finance LLC:
In our opinion, the accompanying consolidated statements of operations, cash flows and shareholders equity present fairly, in all material respects, the results of operations and cash flows of Pinnacle Foods Group Inc. and its subsidiaries (the Company) for the period from January 1, 2007 to April 2, 2007 and for the year ended December 31, 2006 (Predecessor as defined in Note 1) in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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.
As discussed in Note 13 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertainty in incomes taxes in 2007.
Philadelphia, Pennsylvania
March 10, 2008
58
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMEN TS OF OPERATIONS
(thousands of dollars)
Successor | Predecessor | ||||||||||||||
Fiscal year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13 weeks
ended April 2, 2007 |
Fiscal year
ended December 31, 2006 |
||||||||||||
Net sales |
$ | 1,556,408 | $ | 1,137,898 | $ | 376,587 | $ | 1,442,256 | |||||||
Cost of products sold |
1,217,929 | 895,306 | 293,191 | 1,122,646 | |||||||||||
Gross profit |
338,479 | 242,592 | 83,396 | 319,610 | |||||||||||
Operating expenses |
|||||||||||||||
Marketing and selling expenses |
111,372 | 87,409 | 34,975 | 103,550 | |||||||||||
Administrative expenses |
47,832 | 40,715 | 17,714 | 52,447 | |||||||||||
Research and development expenses |
3,496 | 2,928 | 1,437 | 4,037 | |||||||||||
Other expense (income), net |
24,363 | 12,028 | 51,042 | 14,186 | |||||||||||
Total operating expenses |
187,063 | 143,080 | 105,168 | 174,220 | |||||||||||
Earnings (loss) before interest and taxes |
151,416 | 99,512 | (21,772 | ) | 145,390 | ||||||||||
Interest expense |
153,280 | 124,504 | 39,079 | 86,615 | |||||||||||
Interest income |
319 | 1,029 | 486 | 1,247 | |||||||||||
(Loss) earnings before income taxes |
(1,545 | ) | (23,963 | ) | (60,365 | ) | 60,022 | ||||||||
Provision for income taxes |
27,036 | 24,746 | 6,284 | 26,098 | |||||||||||
Net (loss) earnings |
$ | (28,581 | ) | $ | (48,709 | ) | $ | (66,649 | ) | $ | 33,924 | ||||
See accompanying Notes to Consolidated Financial Statements
59
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
(thousands of dollars)
December 28,
2008 |
December 30,
2007 |
|||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 4,261 | $ | 5,999 | ||||
Accounts receivable, net |
92,171 | 99,989 | ||||||
Inventories, net |
190,863 | 166,590 | ||||||
Other current assets |
9,571 | 5,923 | ||||||
Deferred tax assets |
3,644 | 6,260 | ||||||
Total current assets |
300,510 | 284,761 | ||||||
Plant assets, net |
260,798 | 271,475 | ||||||
Tradenames |
910,112 | 925,212 | ||||||
Other assets, net |
166,613 | 190,213 | ||||||
Goodwill |
994,167 | 995,418 | ||||||
Total assets |
$ | 2,632,200 | $ | 2,667,079 | ||||
Current liabilities: |
||||||||
Short-term borrowings |
$ | 26,163 | $ | 1,370 | ||||
Current portion of long-term obligations |
12,750 | 12,736 | ||||||
Accounts payable |
66,951 | 63,976 | ||||||
Accrued trade marketing expense |
33,293 | 29,112 | ||||||
Accrued liabilities |
69,012 | 109,266 | ||||||
Accrued income taxes |
20 | 1,851 | ||||||
Total current liabilities |
208,189 | 218,311 | ||||||
Long-term debt (includes $34,587 and $29,850 owed to related parties) |
1,746,439 | 1,756,065 | ||||||
Pension and other postretirement benefits |
36,869 | 8,406 | ||||||
Other long-term liabilities |
14,429 | 28,115 | ||||||
Deferred tax liabilities |
318,701 | 296,567 | ||||||
Total liabilities |
2,324,627 | 2,307,464 | ||||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Pinnacle Common stock: par value $.01 per share, 100 shares authorized, issued 100 shares |
| | ||||||
Additional paid-in-capital |
427,323 | 426,754 | ||||||
Accumulated other comprehensive (loss) income |
(42,460 | ) | (18,430 | ) | ||||
Accumulated deficit |
(77,290 | ) | (48,709 | ) | ||||
Total shareholders equity |
307,573 | 359,615 | ||||||
Total liabilities and shareholders equity |
$ | 2,632,200 | $ | 2,667,079 | ||||
See accompanying Notes to Consolidated Financial Statements
60
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
CONSOLIDATED STATE MENTS OF CASH FLOWS
(thousands of dollars)
Successor | Predecessor | |||||||||||||||
Fiscal year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13 weeks
ended April 2, 2007 |
Fiscal year
ended December 31, 2006 |
|||||||||||||
Cash flows from operating activities |
||||||||||||||||
Net (loss) earnings from operations |
$ | (28,581 | ) | $ | (48,709 | ) | $ | (66,649 | ) | $ | 33,924 | |||||
Non-cash charges (credits) to net (loss) earnings |
||||||||||||||||
Depreciation and amortization |
62,509 | 45,671 | 10,163 | 42,187 | ||||||||||||
Restructuring and impairment charges |
15,100 | 1,200 | | 5,480 | ||||||||||||
Amortization of debt acquisition costs |
4,714 | 7,758 | 26,049 | 7,424 | ||||||||||||
Amortization of deferred mark-to-market adjustment on terminated swap |
1,259 | | | | ||||||||||||
Gain on litigation settlement |
(9,988 | ) | | | | |||||||||||
Gain on extinguishment of subordinated notes |
| (5,670 | ) | | | |||||||||||
Amortization of bond premium |
| | (5,360 | ) | (567 | ) | ||||||||||
Change in value of financial instruments |
3,347 | 177 | 1,247 | 3,158 | ||||||||||||
Stock-based compensation charges |
806 | 2,468 | 8,778 | 3,315 | ||||||||||||
Postretirement healthcare benefits |
(25 | ) | (8,046 | ) | 294 | 897 | ||||||||||
Pension expense |
(996 | ) | 41 | 360 | 1,695 | |||||||||||
Other long-term liabilities |
(320 | ) | (236 | ) | 2,464 | 80 | ||||||||||
Deferred income taxes |
24,757 | 22,173 | 6,392 | 24,965 | ||||||||||||
Termination of derivative contracts |
(17,030 | ) | | | | |||||||||||
Changes in working capital, net of acquisitions |
||||||||||||||||
Accounts receivable |
6,690 | 4,827 | (18,339 | ) | (9,327 | ) | ||||||||||
Inventories |
(25,541 | ) | 32,701 | 20,045 | 33,852 | |||||||||||
Accrued trade marketing expense |
4,888 | (11,376 | ) | 2,754 | 4,171 | |||||||||||
Accounts payable |
3,419 | (7,742 | ) | 14,286 | 1,553 | |||||||||||
Accrued liabilities |
(29,467 | ) | 23,812 | 53,340 | 7,162 | |||||||||||
Other current assets |
1,218 | 1,090 | (140 | ) | 1,594 | |||||||||||
Net cash provided by operating activities |
16,759 | 60,139 | 55,684 | 161,563 | ||||||||||||
Cash flows from investing activities |
||||||||||||||||
Payments for business acquisitions, net of cash acquired |
| (1,319,618 | ) | | (189,208 | ) | ||||||||||
Capital expenditures |
(32,598 | ) | (22,935 | ) | (5,027 | ) | (26,202 | ) | ||||||||
Sale of plant assets |
| 2,200 | | 1,753 | ||||||||||||
Net cash used in investing activities |
(32,598 | ) | (1,340,353 | ) | (5,027 | ) | (213,657 | ) | ||||||||
Cash flows from financing activities |
||||||||||||||||
Change in bank overdrafts |
| | (908 | ) | (5,805 | ) | ||||||||||
Repayment of capital lease obligations |
(238 | ) | (227 | ) | (55 | ) | (155 | ) | ||||||||
Equity contributions |
234 | 420,664 | 26 | 40,663 | ||||||||||||
Reduction of equity contributions |
(471 | ) | (391 | ) | | | ||||||||||
Debt acquisition costs |
(704 | ) | (39,863 | ) | | (3,817 | ) | |||||||||
Proceeds from bank term loan |
| 1,250,000 | | 143,000 | ||||||||||||
Proceeds from bond issuances |
| 575,000 | | | ||||||||||||
Proceeds from short-term borrowing |
324 | 3,438 | | 2,410 | ||||||||||||
Repayments of short-term borrowing |
(1,531 | ) | (2,068 | ) | (210 | ) | (2,384 | ) | ||||||||
Borrowings under revolving credit facility |
101,008 | 50,000 | | | ||||||||||||
Repayments of revolving credit facility |
(75,008 | ) | (50,000 | ) | | | ||||||||||
Repurchases of subordinated notes |
| (44,199 | ) | | ||||||||||||
Repayments of Successors long term obligations |
(9,375 | ) | (6,250 | ) | | | ||||||||||
Repayments of Predecessors long term obligations |
| (870,042 | ) | (45,146 | ) | (110,000 | ) | |||||||||
Net cash provided by (used in) financing activities |
14,239 | 1,286,062 | (46,293 | ) | 63,912 | |||||||||||
Effect of exchange rate changes on cash |
(138 | ) | 151 | | | |||||||||||
Net change in cash and cash equivalents |
(1,738 | ) | 5,999 | 4,364 | 11,818 | |||||||||||
Cash and cash equivalents - beginning of period |
5,999 | | 12,337 | 519 | ||||||||||||
Cash and cash equivalents - end of period |
$ | 4,261 | $ | 5,999 | $ | 16,701 | $ | 12,337 | ||||||||
Supplemental disclosures of cash flow information: |
||||||||||||||||
Interest paid |
$ | 167,748 | $ | 101,735 | $ | 9,135 | $ | 75,777 | ||||||||
Interest received |
319 | 1,029 | 486 | 1,247 | ||||||||||||
Income taxes refunded (paid) |
(4,336 | ) | 159 | (103 | ) | (1,034 | ) | |||||||||
Non-cash investing activity: |
||||||||||||||||
Capital lease activity |
| | (1,129 | ) | (12 | ) | ||||||||||
Non-cash financing activity |
||||||||||||||||
Equity contribution |
| 4,013 | | |
See accompanying Notes to Consolidated Financial Statements.
61
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER S EQUITY
(thousands of dollars, except share amounts)
Common Stock |
Additional
Paid In Capital |
Accumulated
Deficit |
Carryover
of 2003 Predecessor basis of net assets |
Accumulated
Other Comprehensive (Loss) Income |
Total
Shareholders Equity |
||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||
Predecessor |
|||||||||||||||||||||||||
Balance at December 25, 2005 |
100 | $ | | $ | 529,425 | $ | (151,795 | ) | $ | (17,338 | ) | $ | (3,768 | ) | $ | 356,524 | |||||||||
Equity contributions: |
|||||||||||||||||||||||||
Cash |
40,663 | 40,663 | |||||||||||||||||||||||
Equity related compensation |
3,315 | 3,315 | |||||||||||||||||||||||
Comprehensive income: |
|||||||||||||||||||||||||
Net earnings |
33,924 | 33,924 | |||||||||||||||||||||||
Foreign currency translation |
(52 | ) | (52 | ) | |||||||||||||||||||||
Minimum pension liability |
3,981 | 3,981 | |||||||||||||||||||||||
Total comprehensive income |
37,853 | ||||||||||||||||||||||||
Balance at December 31, 2006 |
100 | $ | | $ | 573,403 | $ | (117,871 | ) | $ | (17,338 | ) | $ | 161 | $ | 438,355 | ||||||||||
Effect of initially applying FASB Interpretation No. 48 |
(260 | ) | (260 | ) | |||||||||||||||||||||
Equity contribution: |
|||||||||||||||||||||||||
Cash |
26 | 26 | |||||||||||||||||||||||
Equity related compensation |
8,778 | 8,778 | |||||||||||||||||||||||
Comprehensive income: |
|||||||||||||||||||||||||
Net loss |
(66,649 | ) | (66,649 | ) | |||||||||||||||||||||
Foreign currency translation |
(4 | ) | (4 | ) | |||||||||||||||||||||
Total comprehensive loss |
(66,653 | ) | |||||||||||||||||||||||
Balance at April 2, 2007 |
100 | $ | | $ | 582,207 | $ | (184,780 | ) | $ | (17,338 | ) | $ | 157 | $ | 380,246 | ||||||||||
Successor |
|||||||||||||||||||||||||
Balance at April 2, 2007 |
100 | $ | | $ | 422,192 | $ | | $ | | $ | | $ | 422,192 | ||||||||||||
Equity contribution: |
|||||||||||||||||||||||||
Cash |
2,485 | 2,485 | |||||||||||||||||||||||
Reduction in equity contributions |
(391 | ) | (391 | ) | |||||||||||||||||||||
Equity related compensation |
2,468 | 2,468 | |||||||||||||||||||||||
Comprehensive income: |
|||||||||||||||||||||||||
Net loss |
(48,709 | ) | (48,709 | ) | |||||||||||||||||||||
Swap mark to market adjustment |
(23,383 | ) | (23,383 | ) | |||||||||||||||||||||
Foreign currency translation |
566 | 566 | |||||||||||||||||||||||
Gain on Pension and OPEB actuarial assumptions |
4,387 | 4,387 | |||||||||||||||||||||||
Total comprehensive loss |
(67,139 | ) | |||||||||||||||||||||||
Balance at December 30, 2007 |
100 | $ | | $ | 426,754 | $ | (48,709 | ) | $ | | $ | (18,430 | ) | $ | 359,615 | ||||||||||
Equity contribution: |
|||||||||||||||||||||||||
Cash |
234 | 234 | |||||||||||||||||||||||
Reduction in equity contributions |
(471 | ) | (471 | ) | |||||||||||||||||||||
Equity related compensation |
806 | 806 | |||||||||||||||||||||||
Comprehensive income: |
|||||||||||||||||||||||||
Net loss |
(28,581 | ) | (28,581 | ) | |||||||||||||||||||||
Swap mark to market adjustment |
5,292 | 5,292 | |||||||||||||||||||||||
Amortization of deferred mark-to-market adjustment on terminated swap |
1,259 | 1,259 | |||||||||||||||||||||||
Foreign currency translation |
(1,070 | ) | (1,070 | ) | |||||||||||||||||||||
Loss on Pension and OPEB actuarial assumptions |
(29,511 | ) | (29,511 | ) | |||||||||||||||||||||
Total comprehensive loss |
(52,611 | ) | |||||||||||||||||||||||
Balance at December 28, 2008 |
100 | $ | | $ | 427,323 | $ | (77,290 | ) | $ | | $ | (42,460 | ) | $ | 307,573 | ||||||||||
See accompanying Notes to Consolidated Financial Statements.
62
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
1. | Summary of Business Activities |
Business Overview
Pinnacle Foods Finance LLC (hereafter referred to as the Company or PFF) is a leading manufacturer, marketer and distributor of high quality, branded convenience food products, the products and operations of which are managed and reported in two operating segments: (i) dry foods and (ii) frozen foods. The Companys dry foods segment consists primarily of Duncan Hines ® baking mixes and frostings, Vlasic ® pickles, peppers and relish products, Mrs. Butterworths ® and Log Cabin ® syrups and pancake mixes, Armour ® canned meats and Open Pit ® barbecue sauce, as well as food service and private label products. The Companys frozen foods segment consists primarily of Hungry-Man ® and Swanson ® frozen foods products, Mrs. Pauls ® and Van de Kamps ® frozen seafood, Aunt Jemima ® frozen breakfasts, Lenders ® bagels and Celeste ® frozen pizza, as well as food service and private label products.
History and the Blackstone Transaction
On May 22, 2001, Pinnacle Foods Holding Corp. (PFHC) acquired certain assets and assumed certain liabilities of the North American business of Vlasic Foods International Inc. (VFI). The North American business consisted of the Swanson and Hungry-Man frozen food, Vlasic pickles, peppers and relish and Open Pit barbecue sauce businesses. PFHC was incorporated on March 29, 2001 but had no operations until the acquisition of the North American business of VFI.
Crunch Holding Corp. (CHC), a Delaware corporation indirectly owned by J.P. Morgan Partners, LLC, J.W. Childs Associates, L.P. and CDM Investor Group LLC, acquired PFHC on November 25, 2003 (the Pinnacle Transaction).
On November 25, 2003, Aurora Foods Inc. (Aurora) entered into a definitive agreement with Crunch Equity Holding, LLC, the former parent of CHC. The definitive agreement provided for a comprehensive restructuring transaction in which PFHC was merged with and into Aurora, with Aurora surviving the merger, following the filing and confirmation of a pre-negotiated bankruptcy reorganization case with respect to Aurora under Chapter 11 of the U.S. Bankruptcy Code. On December 8, 2003, Aurora and its subsidiary, Sea Coast Foods, Inc., filed their petitions for reorganization with the Bankruptcy Court. On February 20, 2004, the First Amended Joint Reorganization Plan of Aurora Foods Inc. and Sea Coast Foods, Inc., as modified, dated February 17, 2004, was confirmed by order of the Bankruptcy Court. This restructuring transaction was completed on March 19, 2004, and the surviving company was renamed Pinnacle Foods Group Inc. (PFGI) (now known as Pinnacle Foods Group LLC) (the Aurora Merger).
On March 1, 2006, PFGI acquired certain assets and assumed certain liabilities of the food products business (the Armour Business) of The Dial Corporation for $189.2 million in cash. The acquisition of the Armour Business complemented PFGIs existing product lines that together provide growth opportunities and scale. The Armour Business is a leading manufacturer, distributor and marketer of products in the $1.1 billion canned meat category. For the year ended December 31, 2005, the Armour Business had net sales of approximately $225 million. The Armour Business offers products in twelve of the fifteen segments within the canned meat category and maintains the leading market position in the Vienna sausage, potted meat and sliced beef categories. The business also includes meat spreads, chili, luncheon meat, corned and roast beef hash and beef stew. The majority of the products are produced at the manufacturing facility located in Ft. Madison, Iowa, which was acquired in the transaction. Products are sold under the Armour brand name as well as private label and certain co-pack arrangements.
On February 10, 2007, Crunch Holding Corp. (CHC), the parent company of Pinnacle Foods Group Inc. (PFGI), entered into an Agreement and Plan of Merger with Peak Holdings LLC (Peak Holdings), a Delaware limited liability company controlled by affiliates of The Blackstone Group, Peak Acquisition Corp. (Peak Acquisition), a wholly owned subsidiary of Peak Holdings, and Peak Finance LLC (Peak Finance), an indirect wholly owned subsidiary of Peak Acquisition, providing for the acquisition of CHC. Under the terms of the Agreement and Plan of Merger, the purchase price for CHC was $2,162.5 million in cash less the amount of indebtedness (including capital lease obligations) of CHC and its subsidiaries outstanding immediately prior to the closing and certain transaction costs, subject to purchase price adjustments based on the balance of working capital and indebtedness as of the closing. Pursuant to the Agreement and Plan of Merger, immediately prior to the closing, CHC contributed all of the outstanding shares of capital stock of its wholly owned subsidiary PFGI, to a newly-formed Delaware limited liability company, PFF. At the closing, Peak Acquisition merged with and into CHC, with CHC as the surviving corporation, and Peak Finance merged with and into PFF, with PFF as the surviving entity.
63
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
As a result of the Merger, CHC became a wholly-owned subsidiary of Peak Holdings. This transaction closed on April 2, 2007 (the Blackstone Transaction).
For purposes of identification and description, PFGI is referred to as the Predecessor for the period prior to the Blackstone Transaction occurring on April 2, 2007, and Pinnacle Foods Finance LLC (PFF or the Company) is referred to as the Successor for the period subsequent to the Blackstone Transaction.
Each share of CHCs issued and outstanding stock immediately prior to closing was converted into the right to receive the per share merger consideration (approximately $1.975 per share) in cash. The aggregate purchase price was approximately $2,162.5 million, including the repayment of outstanding debt under the Predecessors senior secured credit facilities and senior subordinated notes and the assumption of capital lease obligations. The purchase price adjustment was approximately $2.3 million, was finalized in August 2007 and is included in the amounts below.
In June 2001, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, which establish accounting and reporting for business combinations. SFAS No. 141 requires all business combinations be accounted for using the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment on an annual basis. The Successor has accounted for the Blackstone Transaction in accordance with these standards. The acquisition of CHC is being treated as a purchase with Peak Holdings (whose sole asset is its indirect investment in the common stock of PFF) as the accounting acquiror in accordance with SFAS No. 141, and is accounted for in accordance with Emerging Issues Task Force (EITF) Issue No. 88-16, Basis in Leveraged Buyout Transactions.
The cost of the Blackstone Transaction consisted of:
Stated purchase price |
$ | 2,162,500 | ||
Working capital and other adjustments |
(2,338 | ) | ||
Assumed debt |
(1,278 | ) | ||
Subtotal - merger consideration |
2,158,884 | |||
Transaction costs |
71,217 | |||
Total cost of acquisition |
$ | 2,230,101 | ||
The following table summarizes the final allocation of the total cost of the Blackstone Transaction to the assets acquired and liabilities assumed:
Assets acquired: |
|||
Cash |
$ | 16,701 | |
Accounts receivable |
103,921 | ||
Inventories |
198,459 | ||
Other current assets |
6,558 | ||
Plant assets |
279,773 | ||
Tradenames |
926,412 | ||
Customer relationships |
122,661 | ||
Other assets |
52,810 | ||
Goodwill |
996,546 | ||
Fair value of assets acquired |
2,703,841 | ||
Liabilities assumed: |
|||
Accounts payable |
70,927 | ||
Accrued liabilities |
105,851 | ||
Pension and other postretirement benefits |
20,164 | ||
Other long-term liabilities |
7,590 | ||
Deferred tax liabilities |
267,930 | ||
Capital leases |
1,278 | ||
Purchase price |
$ | 2,230,101 | |
64
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Based upon the final allocation, the value assigned to intangible assets and goodwill totaled $2,098.4 million. Of the total intangible assets, $52.8 million has been assigned to recipes and formulas, with $23.5 million allocated to the dry foods segment and $29.3 million allocated to the frozen foods segment. The recipes and formulas are being amortized over 10 years. In addition, $122.7 million has been assigned to customer relationships, with $54.8 million allocated to the dry foods segment and $67.9 million allocated to the frozen foods segment. Customer relationships are being amortized on an accelerated basis over seven years for foodservice and private label relationships and forty years for distributor relationships. The Company has also assigned $926.4 million to the value of the tradenames acquired, with $684.0 million allocated to the dry foods segment and $242.4 million allocated to the frozen foods segment. The values of the tradenames are not subject to amortization but are reviewed annually for impairment. Goodwill, which is also not subject to amortization, totaled $996.5 million, with $652.4 million allocated to the dry foods segment and $344.1 million allocated to the frozen foods segment. No new tax-deductible goodwill or intangible assets were created as a result of the Blackstone Transaction, but historical tax-deductible goodwill and intangible assets in the amount of $603 million existed as of the acquisition date.
In accordance with the requirements of the purchase method of accounting for acquisitions, inventories as of April 2, 2007 were required to be valued at fair value (net realizable value, which is defined as estimated selling prices less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of the acquiring entity), which in the case of finished products the Company estimated to be $40.2 million higher than the Predecessors historical manufacturing cost. The Successors cost of products sold for the 39 weeks ended December 30, 2007 includes pre-tax charges of $40.2 million related to the finished products at April 2, 2007, which were subsequently sold during the period from April 2, 2007 to December 30, 2007.
The Blackstone Transaction was financed through borrowings of a $1,250 million term loan and a $10 million revolver drawing under the Successors Senior Secured Credit Facility (the Senior Secured Credit Facility), $325 million of Senior Notes (the Senior Notes) and $250 million of Senior Subordinated Notes (the Senior Subordinated Notes), all issued on April 2, 2007, a $422.2 million equity contribution from the Blackstone Group and other investors and $12.7 million in existing cash, less deferred financing costs of $39.8 million.
Other Blackstone Transaction-Related Matters
Immediately prior to closing, pursuant to their original terms, all of the Predecessors outstanding stock options vested and the Predecessor exercised its purchase option to purchase at fair value all of the shares of common stock to be acquired by exercise of options held by employees pursuant to the Predecessors Stock Option Plan. As a result, compensation expense of approximately $8.4 million was recorded in the Consolidated Statement of Operations of the Predecessor on April 2, 2007 (the first day of the second quarter), immediately before the Blackstone Transaction, related to the fair value of the options exercised.
On March 8, 2007, the Predecessor commenced a cash tender offer to purchase any and all of the outstanding 8.25% Senior Subordinated Notes due 2013 of the Predecessor (the Predecessor Notes) and a related consent solicitation to amend the indenture pursuant to which the Predecessor Notes were issued. The tender offer and consent solicitation were made in connection with the Blackstone Transaction. The tender offer and consent solicitation were made upon the terms and conditions set forth in an Offer to Purchase and Consent Solicitation Statement dated March 8, 2007 and the related Consent and Letter of Transmittal. The total transaction cost of the cash tender offer for the Predecessor Notes was $35.5 million and was recorded as a charge in the Consolidated Statement of Operations of the Predecessor on April 2, 2007 (the first day of the second quarter), immediately before the Blackstone Transaction.
Due to the cash tender offer for the Predecessor Notes and the repayment in full of the Predecessors senior secured credit facility, which were both done in connection with the Blackstone Transaction, the Predecessor recorded in the Consolidated Statement of Operations of the Predecessor on April 2, 2007 (the first day of the second quarter), immediately before the Blackstone Transaction, a charge of $24.1 million for the unamortized portion of the deferred financing costs and a credit of $5.2 million for the unamortized portion of the original issue premium on the Predecessor Notes.
65
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
The closing of the transaction represented a change in control under certain Predecessor contracts, including the former Chairmans employment agreement as well as contracts with affiliates of the former Chairman. As a result, the Predecessor was required to pay $12.9 million pursuant to these agreements and recorded a charge for such amount in the Consolidated Statement of Operations of the Predecessor on April 2, 2007 (the first day of the second quarter), immediately before the Blackstone Transaction.
The Management Agreement between the Predecessor and JPMorgan Partners, LLC and J.W. Childs Associates, L.P. was terminated at closing.
Pro forma Information
The following schedule includes consolidated statements of operations data for the unaudited pro forma results for the year ended December 30, 2007 as if the Blackstone Transaction had occurred as of the beginning of fiscal 2007. The pro forma information includes the actual results with pro forma adjustments for the change in interest expense related to the new financing, purchase accounting adjustments related to fixed assets, intangible assets, pension and other post-employment benefit liabilities, the cancellation of certain contracts of the Predecessor and related adjustments to the provision for income taxes.
The unaudited pro forma information is provided for illustrative purposes only. It does not purport to represent what the consolidated results of operations would have been had the Blackstone Transaction occurred on the date indicated above, nor does it purport to project the consolidated results of operations for any future period or as of any future date.
Year
ended December 30, 2007 |
||||
Net sales |
$ | 1,514,485 | ||
Earnings before interest and taxes |
$ | 75,910 | ||
Net loss |
$ | (120,137 | ) |
Pro forma depreciation and amortization expense included above was $59,350 for the year ended December 30, 2007.
Included in earnings before interest and taxes in the pro forma information above for the year ended December 30, 2007 are the following material charges:
Year
ended December 30, 2007 |
|||
Flow through of fair value of the inventories over manufactured cost as of April 2, 2007 |
$ | 40,179 | |
Merger-related costs |
49,129 | ||
Stock-based compensation related to the vesting of options due to the Blackstone Transaction |
8,373 | ||
Impact on earnings before interest and taxes |
$ | 97,681 | |
66
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
2. | Summary of Significant Accounting Policies |
Consolidation. The consolidated financial statements include the accounts of PFF and its wholly-owned subsidiaries. The results of companies acquired during the year are included in the consolidated financial statements from the effective date of the acquisition. Intercompany transactions have been eliminated in consolidation.
Foreign Currency Translation. Foreign-currency-denominated assets and liabilities are translated into U.S. dollars at exchange rates existing at the respective balance sheet dates. Translation adjustments resulting from fluctuations in exchange rates are recorded as a separate component of Accumulated other comprehensive (loss) income within shareholders equity. The Company translates the results of operations of its foreign subsidiary at the average exchange rates during the respective periods. Gains and losses resulting from foreign currency transactions are included in Cost of products sold on the Consolidated Statement of Operations and were a $3,983 gain in the year ended December 28, 2008, $4,676 loss in the 39 weeks ended December 30, 2007, $54 gain in the 13 weeks ended April 2, 2007, and $477 loss in the year ended December 31, 2006. These amounts include the mark to market and realized gains and losses on our foreign currency swaps as discussed in Note 14.
Fiscal Year. The Companys fiscal year ends on the last Sunday in December. Fiscal 2006 consisted of 53 weeks.
Cash and Cash Equivalents. The Company considers investments in all highly liquid debt instruments with an initial maturity of three months or less to be cash equivalents.
Inventories. Substantially all inventories are valued at the lower of average cost or market. Cost is determined by the first-in, first-out method. The nature of costs included in inventory is: ingredients, containers, packaging, other raw materials, direct manufacturing labor and fully absorbed manufacturing overheads. When necessary, the Company provides allowances to adjust the carrying value of its inventories to the lower of cost or net realizable value, including any costs to sell or dispose including consideration for obsolescence, excessive inventory levels, product deterioration and other factors in evaluating net realizable value.
Plant Assets. Plant assets are stated at historical cost, and depreciation is computed using the straight-line method over the lives of the assets. Buildings and machinery and equipment are depreciated over periods not exceeding 45 years and 15 years, respectively. The weighted average estimated remaining useful lives are approximately 12 years for buildings and 5 years for machinery and equipment. When assets are retired, sold, or otherwise disposed of, their gross carrying value and related accumulated depreciation are removed from the accounts and included in determining gain or loss on such disposals. Costs of assets acquired in a business combination are based on the estimated fair value at the date of acquisition.
Goodwill and Indefinite-lived Intangible Assets. The Company evaluates the carrying amount of goodwill and indefinite-lived tradenames for impairment on at least an annual basis and when events occur or circumstances change that indicate an impairment might exist. The Company performs goodwill impairment testing for each business which constitutes a component of the Companys two operating segments, dry foods and frozen foods, known as reporting units. The Company compares the fair value of these reporting units with their carrying values inclusive of goodwill. If the carrying amount of the reporting unit exceeds its fair value, the Company compares the implied fair value of the reporting units goodwill to its carrying amount and any shortfall is charged to earnings. In estimating the implied fair value of the goodwill, the Company estimates the fair value of the reporting units tangible and intangible assets (other than goodwill). For indefinite-lived tradename intangible assets the Company determines recoverability by comparing the carrying value to its fair value estimated based on discounted cash flows attributable to the tradename and charges the shortfall, if any, to earnings. In estimating the fair value, the Company primarily uses the income approach, which utilizes forecasted discounted cash flows to estimate fair values. Assumptions underlying fair value estimates are subject to risks and uncertainties.
67
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Valuation of Long-Lived Assets . The Company adopted SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets on August 1, 2002. The carrying value of long-lived assets held and used, other than goodwill and indefinite-lived intangibles, is evaluated at the asset group when events or changes in circumstances indicate the carrying value may not be recoverable. The carrying value of a long-lived asset group is considered impaired when the total projected undiscounted cash flows from such asset group are separately identifiable and are less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset group. Fair market value is determined primarily using the projected cash flows from the asset group discounted at a rate commensurate with the risk involved. Losses on long-lived asset groups held for sale, other than goodwill, are determined in a similar manner, except that fair market values are reduced for disposal costs.
Revenue Recognition. Revenue from product sales is recognized upon shipment to the customers as terms are FOB shipping point, at which point title and risk of loss is transferred and the selling price is fixed or determinable. This completes the revenue-earning process, specifically that an arrangement exists, delivery has occurred, the price is fixed and collectibility is reasonably assured. A provision for payment discounts and product return allowances, which is estimated based upon the Companys historical performance, managements experience and current economic trends, is recorded as a reduction of sales in the same period that the revenue is recognized.
Trade promotions, consisting primarily of customer pricing allowances and merchandising funds, and consumer coupons are offered through various programs to customers and consumers. Sales are recorded net of estimated trade promotion spending, which is recognized as incurred at the time of sale. Certain retailers require the payment of slotting fees in order to obtain space for the Companys products on the retailers store shelves. The fees are recognized as reductions of revenue at the earlier of the date cash is paid or a liability to the retailer is created. These amounts are included in the determination of net sales. Accruals for expected payouts under these programs are included as accrued trade marketing expense line in the Consolidated Balance Sheet. Coupon redemption costs are also recognized as reductions of net sales when the coupons are issued. Estimates of trade promotion expense and coupon redemption costs are based upon programs offered, timings of those offers, estimated redemption/usage rates from historical performance, managements experience and current economic trends.
Marketing Expenses. Trade marketing expense is comprised of amounts paid to retailers for programs designed to promote our products. These costs include standard introductory allowances for new products (slotting fees). They also include the cost of in-store product displays, feature pricing in retailers advertisements and other temporary price reductions. These programs are offered to our customers both in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is the subject of significant management estimates. The Company records as expense the estimated ultimate cost of the program in the period during which the program occurs. In accordance with EITF No. 01-9 Accounting for Consideration Given by a Vendor to a Customer, these trade marketing expenses are classified in the Consolidated Statement of Operations as a reduction of net sales. Also, in accordance with EITF No. 01-9, coupon redemption costs are also recognized as reductions of net sales when issued. Marketing expenses recorded as a reduction of net sales of the Successor were $474,164 for fiscal 2008 and $357,052 for the 39 weeks ended December 30, 2007. Marketing expenses for the Predecessor in the 13 weeks ending April 2, 2007 and fiscal 2006 were $142,877 and $514,683, respectively.
Advertising. Advertising costs include the cost of working media (advertising on television, radio or in print), the cost of producing advertising, and the cost of coupon insertion and distribution. Working media and coupon insertion and distribution costs are expensed in the period the advertising is run or the coupons are distributed. The cost of producing advertising is expensed as of the first date the advertisement takes place. Advertising included in the Successors marketing and selling expenses was $37,088 for fiscal 2008 and $30,680 for the 39 weeks ending December 30, 2007. Advertising included in the Predecessors marketing and selling expenses was $13,141 in the 13 weeks ending April 2, 2007 and $31,990 in fiscal 2006.
Shipping and Handling Costs. In accordance with the EITF No. 00-10 Accounting for Shipping and Handling Revenues and Costs, costs related to shipping and handling of products shipped to customers are classified as cost of products sold.
68
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Stock Based Compensation. On December 26, 2005, the start of fiscal 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, which replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. (APB) No. 25, Accounting for Stock Issued to Employees. We adopted SFAS No. 123R using the modified prospective method. Under this method of adoption, prior periods are not restated. For awards granted prior to the adoption of SFAS No. 123R, compensation cost is recognized for the unvested portion of outstanding awards based on the grant-date fair value calculated under SFAS No. 123 for pro forma disclosures.
Grant-date fair value of stock options is estimated using the Black-Scholes option-pricing model. Compensation expense is reduced based on estimated forfeitures with adjustments to actual recorded at the time of vesting. Forfeitures are estimated based on historical experience. We recognize compensation cost for awards over the vesting period. The majority of our stock options have a five-year vesting.
Insurance reserves . The Company is self-insured under its workers compensation insurance policy. We estimate the outstanding retained-insurance liabilities by projecting incurred losses to their ultimate liability and subtracting amounts paid-to-date to obtain the remaining liabilities. The Company bases actuarial estimates of ultimate liability on actual incurred losses, estimates of incurred but not yet reported losses and the projected costs to resolve these losses.
Income Taxes. Income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company reviews its deferred tax assets for recovery. A valuation allowance is established when the Company believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in the Companys tax provision in the period of change.
Financial Instruments. The Company uses financial instruments, primarily swap contracts, to manage its exposure to movements in interest rates, certain commodity prices and foreign currencies. The use of these financial instruments modifies the exposure of these risks with the intent to reduce the risk or cost to the Company. The Company does not use derivatives for trading purposes and is not a party to leveraged derivatives. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, requires that all derivatives be recognized as either assets or liabilities at fair value. Changes in the fair value of derivatives not designated as hedging instruments are recognized monthly in earnings. The cash flows associated with the financial instruments are included in the cash flow from operating activites.
Deferred financing costs . Deferred financing costs are amortized over the life of the related debt using the effective interest rate method. If debt is prepaid or retired early, the related unamortized deferred financing costs are written off in the period the debt is retired.
Capitalized Internal Use Software Costs. The Company capitalizes the cost of internal-use software that has a useful life in excess of one year in accordance with Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use These costs consist of payments made to third parties and the salaries of employees working on such software development. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Capitalized internal use software costs are amortized using the straight-line method over their estimated useful lives, generally 2 1 / 2 to 3 years. The Successor amortized $3,663 in fiscal 2008 and $1,889 in the 39 weeks ending December 30, 2007. The Predecessor amortized $530 in the 13 weeks ending April 2, 2007 and $1,700 in fiscal 2006. Additionally, as of December 28, 2008 and December 30, 2007, the net book value of capitalized internal use software totaled $6,747 and $7,364, respectively.
Comprehensive Income. Comprehensive income includes net earnings (loss), loss on financial instruments, foreign currency translation adjustments and net gains or (losses) on Pension and OPEB actuarial assumptions that are currently presented as a component of shareholders equity. The components of Accumulated other comprehensive (loss) income at year end were as follows:
December 28,
2008 |
December 30,
2007 |
|||||||
Gain/(Loss) on financial instruments, net of amortization of ($1,259) |
$ | (16,832 | ) | $ | (23,383 | ) | ||
Gain/(Loss) on Pension and OPEB actuarial assumptions |
(25,124 | ) | 4,387 | |||||
Foreign currency translation adjustments |
(504 | ) | 566 | |||||
Total |
$ | (42,460 | ) | $ | (18,430 | ) | ||
69
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS No. 157). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement applies whenever other statements require or permit assets or liabilities to be measured at fair value. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. However, FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (FSP No. 157-2) defers the Statements effective date for certain non-financial assets and liabilities to fiscal years beginning after November 15, 2008, and will be effective for us in the first quarter of fiscal 2009. In October 2008, the FASB Issued FASB Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP No. 157-3). FSP No. 157-3 clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP No. 157-3 is effective upon issuance. We are currently evaluating FSP No. 157-2 with respect to non-financial assets and liabilities and anticipate that this statement will not have a significant impact on the reporting of our financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (SFAS No. 159). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value, and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new guidance is effective for fiscal years beginning after November 15, 2007. The implementation of this standard did not have a material impact on our consolidated financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)), which replaces SFAS No. 141, Business Combinations. SFAS No. 141(R) retains the underlying concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting but SFAS No. 141(R) changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS No. 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS No. 141(R) amends SFAS No. 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS No. 141(R) would also apply the provisions of SFAS No. 141(R). Early adoption is not permitted. The adoption of SFAS No. 141(R) will have an impact on our accounting for future business combinations on a prospective basis once adopted; however, the materiality of that impact cannot be determined.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51. This statement is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008, with earlier adoption prohibited. This statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parents equity. The amount of net earnings attributable to the noncontrolling interest will be included in consolidated net earnings on the face of the statement of operations. It also amends certain of ARB No. 51s consolidation procedures for consistency with the requirements of SFAS No. 141(R). This statement also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. We are currently evaluating this new statement and anticipate that the statement will not have a significant impact on the reporting of our financial position or results of operations.
70
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
In December 2007, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), Implementation Issue No. E23, Hedging- General: Issues Involving the Application of the Shortcut Method under Paragraph 68 (Issue E23). Issue E23 amends SFAS No. 133 to explicitly permit use of the shortcut method for hedging relationships in which interest rate swaps have a nonzero fair value at the inception of the hedging relationship, provided certain conditions are met. Issue E23 was effective for hedging relationships designated on or after January 1, 2008. The implementation and guidance did not have a material impact on our consolidated financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of SFAS Statement No. 133 (SFAS No. 161). SFAS No. 161 requires enhanced disclosures about derivative and hedging activities. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. For the Company, SFAS No. 161 will be effective at the beginning of its 2009 fiscal year and will result in additional disclosures in the notes to the Companys Consolidated Financial Statements.
In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets, (FSP No. 142-3). FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 is effective for fiscal years beginning after December 15, 2008. The guidance for determining the useful life of intangible assets included in this FASB Staff Position will be applied prospectively to intangible assets acquired after the effective date of December 29, 2008 (first day of fiscal 2009). As this guidance applies only to assets we may acquire in the future, we are not able to predict its impact, if any, on our consolidated financial statements.
3. | Acquisition |
Acquisition of the Food Products Business of The Dial Corporation
On March 1, 2006, PFGI acquired certain assets and assumed certain liabilities of the food products business (the Armour Business) of The Dial Corporation for an initial purchase price of $183 million in cash. The assets acquired include inventory, a production facility, machinery and equipment, contract rights and certain intangible assets, including trademarks and licenses. The liabilities assumed include a post-retirement medical benefit for certain employees, vacation pay liabilities and severance liabilities. According to the purchase agreement, the purchase price was to be increased dollar for dollar after the closing date if the value of inventory included with the Armour Business at closing exceeded a specified target or decreased dollar for dollar if the value of the inventory at closing was less than such target. Based upon the final value of the inventory, PFGI paid to The Dial Corporation $2,271 in December 2006, which was recorded as additional purchase consideration.
The acquisition of the Armour Business complemented PFGIs existing product lines that together provide growth opportunities and scale. The Armour Business is a manufacturer, distributor and marketer of products in the canned meats category. Primarily all of the products are produced at the manufacturing facility located in Ft. Madison, Iowa, which was acquired in the transaction. Products are sold under the Armour brand name as well as private-label and certain co-pack arrangements. The Armour Business offers products in twelve of the fifteen segments within the canned meat category, including Vienna sausage, potted meat, and sliced dried beef.
The acquisition of the Armour Business was accounted for under the purchase method of accounting. Accordingly, the results of the Armour Business are included in the consolidated financial statements from the acquisition date. The results of operations and assets of the Armour Business are included in the dry foods segment.
The cost of the Armour Business consists of:
Purchase price |
$ | 185,271 | |
Acquisition costs |
3,937 | ||
Total cost of acquisition |
$ | 189,208 | |
71
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
The following table summarizes the final allocation of the total cost of the Armour acquisition to the assets acquired and liabilities assumed:
Assets acquired: |
|||
Plant assets |
$ | 47,376 | |
Inventories |
41,531 | ||
Other current asset |
2,000 | ||
Tradenames |
39,000 | ||
Recipes and formulas |
5,000 | ||
Private label customer relationships |
20,000 | ||
Goodwill |
43,767 | ||
Fair value of assets acquired |
198,674 | ||
Liabilities assumed |
|||
Other accrued liabilities |
2,210 | ||
Postretirement benefit liability |
7,256 | ||
Total cost of acquisition |
$ | 189,208 | |
The other current asset is the value PFGI ascribed to the services performed by Dial under a transition services agreement that expired on June 28, 2006. The value was based upon the estimated cost of providing such services and was expensed over the 120 days of the agreement (through June 28, 2006).
The value assigned to total intangible assets amounted to $107,767. Of the total intangible assets, $5,000 is assigned to recipes and formulas, which are being amortized over 5 years and $20,000 is assigned to private label customer relationships, which are being amortized over seven years. In addition, $39,000 is assigned to tradenames that are not subject to amortization. Goodwill, which is not subject to amortization, amounted to $43,767. All of the intangible assets acquired in the transaction are recorded within the dry foods segment and will result in approximately $103 million of tax deductible goodwill and intangible assets.
In accordance with the requirements of the purchase method of accounting for acquisitions, inventories as of March 1, 2006 were valued at fair value (net realizable value, which is defined as estimated selling prices less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of the acquiring entity) which in the case of finished products was $4,580 higher than Dials historical manufacturing cost and in the case of work-in-progress was $180 higher than Dials historical manufacturing cost. The Companys cost of products sold for fiscal 2006 includes a pre-tax charge of $4,760 related to the flow through of the increase in fair value.
Pro forma Information
The following schedule includes consolidated statements of operations data for the unaudited pro forma results for fiscal 2006 as if the Armour Business had been acquired as of the beginning of fiscal 2006. The pro forma information includes the actual results with pro forma adjustments for the change in interest expense related to the additional borrowings to fund the acquisition, purchase accounting adjustments resulting in changes to depreciation and amortization expense and related adjustments to the provision for income taxes.
The unaudited pro forma information is provided for illustrative purposes only. It does not purport to represent what the consolidated results of operations would have been had the Armour Business been acquired on the date indicated above, nor does it purport to project the consolidated results of operations for any future period or as of any future date.
Fiscal year
ended December 31, 2006 |
|||
Net sales |
$ | 1,472,050 | |
Earnings before interest and taxes |
$ | 148,000 | |
Net earnings |
$ | 34,380 |
72
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Pro forma depreciation and amortization expense included above was $43,718.
Included in earnings before interest and taxes in the pro forma information above for the fiscal year ended December 31, 2006 are the following material charges:
Fiscal
2006 |
|||
Flow through of fair value of the Armour Business
|
$ | 4,760 | |
Stock-based compensation expense |
1,415 | ||
Impact on earnings before interest and taxes |
$ | 6,175 | |
4. | Lehman Brothers Holdings, Inc. Bankruptcy and Related Events |
On September 15, 2008, Lehman Brothers Holdings Inc. (Lehman) filed for protection under Chapter 11 of the federal Bankruptcy Code in the United States Bankruptcy Court in the Southern District of New York.
As discussed in Note 11, the Company has an aggregate revolving credit facility commitment of $125.0 million with a consortium of banks, including Lehman Commercial Paper Inc. (LCPI), a subsidiary of Lehman, which was not included in the original bankruptcy filing but subsequently filed for bankruptcy on October 3, 2008. As of December 28, 2008, LCPIs total commitment within this credit facility was $15.0 million. The Company also currently has $15.2 million of outstanding letters of credit under the revolving credit facility, none of which were issued by LCPI.
Starting on September 19, 2008 when the Company attempted to borrow under the revolving facility, LCPI failed to fund its pro-rata commitment. Each of the remaining banks within the revolving credit facility did fund their pro-rata commitments.
The Company has no assurances that LCPI will participate in any future funding requests under the revolving credit facility. While the Company is exploring options to replace Lehmans commitment within the facility, we cannot guarantee that the Company will be able to obtain such replacement loan commitments from other banks. However, based upon managements projection of cash flows, the Company believes that it has sufficient liquidity to conduct its normal operations and does not believe that the potential reduction in available capacity under this revolving credit facility will have a material impact on its short-term or long-term liquidity.
In addition, LCPI is the administrative agent under the Senior Secured Credit Facility, including the revolving credit facility commitment. At this time, LCPI is continuing to function in its capacity as the administrative agent without issue. However, the Company is assessing the potential impact of the Lehman bankruptcy and related events on LCPIs ability to perform the administrative agency function in the future. We are exploring a potential transition of these duties to a new administrative agent.
The Company was also a counterparty with Lehman Brothers Special Financing (LBSF), a subsidiary of Lehman, on an Interest Rate Swap, an Interest Rate Collar, Natural Gas Swaps and Foreign Currency Options (collectively, the Derivatives). Lehman is a credit support provider for these Derivatives obligations of LBSF. On October 3, 2008, LBSF also filed for Chapter 11 bankruptcy. The bankruptcy filings of Lehman and LBSF constitute an event of default with respect to the Derivatives. On October 24, 2008, the Company, as is its right under the contractual agreement with LBSF, terminated all of its Derivatives contracts at a cash cost to the Company of $17.5 million. See further discussion of the Derivatives in Note 14.
73
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
5. | Fair Value Measurements |
In the first quarter of 2008, the Company adopted SFAS No. 157, Fair Value Measurements, for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: | Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. |
Level 2: | Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
Level 3: | Unobservable inputs that reflect our own assumptions. |
Our population of financial assets and liabilities subject to recurring fair value measurements and the necessary disclosures are as follows:
Fair
Value As of |
Fair Value Measurements at December 28,
2008 Using Fair Value Hierarchy |
|||||||||||
December
28, 2008 |
Level 1 | Level 2 | Level 3 | |||||||||
Assets |
||||||||||||
Foreign currency derivatives |
$ | 5,346 | $ | | $ | 5,346 | $ | | ||||
Total assets at fair value |
$ | 5,346 | $ | | $ | 5,346 | $ | | ||||
Liabilities |
||||||||||||
Interest rate derivatives |
$ | 11,890 | $ | | $ | 11,890 | $ | | ||||
Natural gas derivatives |
288 | $ | | 288 | $ | | ||||||
Total liabilities at fair value |
$ | 12,178 | $ | | $ | 12,178 | $ | | ||||
The fair values for interest rate, foreign currency and natural gas derivatives are based on observable market data.
6. | Stock-Based Compensation Expense |
On December 26, 2005, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS No. 123(R)) which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors, including employee stock options and employee stock purchases, based on estimated fair values. SFAS No. 123(R) supersedes the Companys previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB No. 107) expressing the views of the staff regarding the use of a simplified method in developing an estimate of expected term of plain vanilla share options in accordance with SFAS No. 123(R). In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110 (SAB No. 110), which allows companies, under certain circumstances, the use of the simplified method beyond December 31, 2007. The Company has applied the provisions of SAB No. 107 in its adoption of SFAS No. 123(R).
The Company adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of December 26, 2005, the first day of the Companys fiscal year 2006. The Companys Consolidated Financial Statements as of and for the years ended December 28, 2008, December 30, 2007 and December 31, 2006 reflect the impact of SFAS No. 123(R).
74
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
SFAS No. 123(R) requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense using the straight-line method over the requisite service periods in the Companys Consolidated Statement of Operations.
Successors Stock-Based Compensation Plans
The Successor has two long-term incentive programs: The 2007 Stock Incentive Plan and the 2007 Unit Plan.
2007 Stock Incentive Plan
Crunch Holding Corp. (CHC), which continues to own all of the common stock in the Company adopted a stock option plan (the 2007 Stock Incentive Plan) providing for the issuance of up to 20,000 shares of CHCs common stock. Pursuant to the option plan, certain officers, employees, managers, directors and other persons are eligible to receive grants of nonqualified stock options, as permitted by applicable law. Generally 25% of the options will vest ratably over five years (time-vested options). Fifty percent of the options vest ratably over five years depending on if annual or cumulative EBITDA targets are met (performance options). The final 25% of the options vest either on a change of control or similar event, if a 20% annual internal rate of return (or, if the event occurs (x) on or before the first anniversary of the closing date of the Blackstone Transaction, a 40% annual internal rate of return or (y) after the first anniversary of the closing date of the Blackstone Transaction but on or before the second anniversary of the closing date of the Blackstone Transaction, a 30% annual internal rate of return) is attained by Blackstone (exit options). The Company recently modified the 2007 Stock Incentive Plan to revise the EBITDA targets included in the plan to levels the Company believes are reasonably attainable in light of the current global economic and financial crisis. In addition, the plan now provides that if the EBITDA target is achieved in any two consecutive fiscal years (excluding 2007 and 2008) during the employees continued employment, then that years and all prior years performance options will vest and become exercisable, and if the exit options vest and become exercisable during the employees continued employment, then all the performance options will also vest and become exercisable.
Options under the plan have a termination date of 10 years from the date of issuance.
The following table summarizes the stock option transactions under the 2007 Stock Incentive Plan:
Number of
Shares |
Weighted
Average Exercise Price |
Weighted
Average Remaining Life |
Aggregate
Intrinsic Value (000s) |
||||||||
Granted |
6,060 | $ | 471.87 | ||||||||
Exercised |
| | |||||||||
Forfeitures |
(84 | ) | 471.87 | ||||||||
Outstanding - December 30, 2007 |
5,976 | 471.87 | 9.73 | $ | | ||||||
Granted |
564 | 472.22 | |||||||||
Exercised |
| | |||||||||
Forfeitures |
(847 | ) | 471.89 | ||||||||
Outstanding - December 28, 2008 |
5,693 | $ | 471.91 | 8.75 | $ | | |||||
Exercisable - December 28, 2008 |
702 | $ | 471.87 | $ | | ||||||
2007 Unit Plan
Peak Holdings, the parent of CHC, adopted an equity plan (the 2007 Unit Plan) providing for the issuance of profits interest units (PIUs) in Peak. Certain employees were given the opportunity to invest in Peak at the time of the Blackstone Transaction through the purchase of Peaks Class A-2 Units. In addition, each manager who so invested was awarded profits interests in Peak in the form of Class B-1, Class B-2 and Class B-3 Units. Generally 25% of the PIUs will vest ratably over five years (Class B-1 Units). Fifty percent of the PIUs vest ratably over five years depending on if annual or cumulative EBITDA targets are met (Class B-2 Units). The final 25% of the PIUs granted under the 2007 Equity Plans vest either on a change of control or similar event, if a 20% annual internal rate of return (or, if the event occurs (x) on or before the first anniversary of the closing date of the Blackstone Transaction, a 40% annual internal rate of return or (y) after the first anniversary of the closing date of the Blackstone Transaction but on or before the second anniversary of the closing date of the Blackstone Transaction, a 30% annual internal rate of return) is attained by Blackstone (Class B-3 Units). The Company recently modified the 2007 Unit Plan to revise the EBITDA targets included in the plan to levels the Company believes are reasonably attainable in light of the current global economic and financial crisis. In addition, the plan now provides that if the EBITDA target is achieved in any two consecutive fiscal years (excluding 2007 and 2008) during the employees continued employment, then that years and all prior years Class B-2 units will vest and become exercisable, and if the Class B-3 units vest and become exercisable during the employees continued employment, then all the Class B-2 units will also vest and become exercisable.
As of December 28, 2008, 7,025.75 PIUs have been granted, net of forfeitures, and 1,168.4 have vested.
Stock-based Compensation related to the Successor Plans
Stock-based compensation expense related to employee stock plans for the period from April 2, 2007 to December 30, 2007 was $2,468 ($2,468 net of tax). Stock-based compensation expense related to employee stock plans for the fiscal year ended 2008 was $806 ($806 net of tax).
75
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period. As stock-based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company currently uses the Black-Scholes option-pricing model as its method of valuation for stock-based awards. Since the Companys stock is not publicly traded, the determination of fair value of stock-based payment awards on the date of grant using an option-pricing model is based upon estimates of enterprise value as well as assumptions regarding a number of highly complex and subjective variables. The estimated enterprise value is based upon forecasted cash flows for five years plus a terminal year and an assumed discount rate. The other variables used to determine fair value of stock-based payment awards include, but are not limited to, the expected stock price volatility of a group of industry comparable companies over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Companys employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in managements opinion, the existing valuation models may not provide an accurate measure of the fair value of the Companys employee stock-based awards. Although the fair value of employee stock awards is determined in accordance with SFAS No. 123(R) and SAB No. 107 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
The fair value of the Successors options granted during the fiscal year ended December 28, 2008 was estimated on the date of the grant using the Black-Scholes model with the following weighted average assumptions:
Risk-free interest rate |
3.34 | % | |
Expected life of option |
4.25 years | ||
Expected volatility of Pinnacle stock |
50 | % | |
Expected dividend yield on Pinnacle Stock |
0 | % |
Volatility was based on the average volatility of group of publicly traded food companies. The Company estimates that the annual forfeiture rates to be 7.6%.
Predecessor Stock-Based Compensation Plans
The Predecessor had two long-term incentive programs: The Crunch Holding Corp. 2004 Stock Option Plan and the Crunch Holding Corp. 2004 Employee Stock Purchase Plan.
2004 Stock Option Plan
Crunch Holding Corp. (CHC), which owns all of the common stock of the Company adopted a stock option plan (the 2004 Plan) providing for the issuance of up to 29.6 million shares of CHCs common stock. Pursuant to the option plan, certain officers, employees, managers, directors and other persons are eligible to receive grants of incentive and nonqualified stock options, as permitted by applicable law. Except as otherwise provided by the plan administrator, two-ninths (2/9) of the shares of common stock subject to each option shall time vest annually in each of the first three years from the effective date of the option grant. The remaining one-third (1/3) of the shares of common stock subject to each option shall vest on the seventh anniversary of the effective date of the option grant unless otherwise determined by the plan administrator. Options under the plan have a termination date of 10 years from the date of issuance.
76
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
In connection with the Blackstone Transaction, all outstanding options at the time of the closing immediately vested. As a result of the accelerated vesting, the Company recorded a charge to earnings immediately before closing in the amount of $8,373. As a result of the per share merger consideration ($1.975) exceeding the strike price of the options, all vested options were exercised. The following table summarizes the stock option transactions under the 2004 Plan:
Number of
Shares |
Weighted
Average Exercise Price |
Average
Remaining Life |
Aggregate
Intrinsic Value (000s) |
||||||||
Outstanding - December 25, 2005 |
20,657,942 | $ | 1.00 | ||||||||
Granted |
10,602,111 | $ | 1.00 | ||||||||
Exercised |
(163,315 | ) | 1.00 | ||||||||
Forteitures |
(3,768,075 | ) | 1.00 | ||||||||
Outstanding - December 31, 2006 |
27,328,663 | $ | 1.00 | 8.24 | $ | | |||||
Granted |
589,445 | $ | 1.53 | ||||||||
Exercised |
(27,550,828 | ) | 1.01 | ||||||||
Forteitures |
(367,280 | ) | 1.01 | ||||||||
Outstanding - April 2, 2007 |
| $ | | $ | | ||||||
Exercisable - April 2, 2007 |
| $ | | $ | | ||||||
2004 Employee Stock Purchase Plan
CHC also adopted an employee stock purchase plan providing for the issuance of up to 15 million shares of CHCs common stock. Pursuant to the plan, certain officers, employees, managers, directors and other persons are eligible to purchase shares at the fair market value of such shares on the date of determination. The total shares purchased under the stock purchase plan were 10,482,971 shares. In connection with the Blackstone Transaction, all the shares of CHC were redeemed.
Stock-based Compensation related to the Predecessor Plans
Stock-based compensation expense related to employee stock options for the period from January 1, 2007 to April 2, 2007 was $8,778 ($8,776 net of tax). The expense includes the $8,373 that was a result of the acceleration of the vesting as a result of the Blackstone transaction. Stock-based compensation expense related to employee stock options for fiscal 2006 as a result of adopting SFAS No. 123(R) was $1,900 ($1,892 net of tax). In addition, the Company recorded $1,415 (with no related tax impact) for stock-based compensation expense in fiscal 2006 for certain ownership units of Crunch Equity Holdings LLC, the parent company of the Predecessor. The ownership units were issued to a former shareholder which was controlled by certain members of PFGIs management.
Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in the Companys Consolidated Statement of Operations for fiscal 2006 included compensation expense for stock-based payment awards granted prior to, but not yet vested as of December 25, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123 and compensation expense for the stock-based payment awards granted subsequent to December 25, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). As stock-based compensation expense recognized in the Consolidated Statement of Operations for fiscal 2006 was based on awards ultimately expected to vest, it had been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
77
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
The Predecessor used the lattice-binomial option-pricing model (lattice-binomial model) as its method of valuation for stock-based awards, which was previously used for the Predecessors pro forma information required under SFAS No. 123. Since the Companys stock is not publicly traded, the determination of fair value of stock-based payment awards on the date of grant using an option-pricing model is based upon estimates of enterprise value as well as assumptions regarding a number of highly complex and subjective variables. The estimated enterprise value is based upon forecasted cash flows for five years plus a terminal year and an assumed discount rate. The other variables used to determine fair value of stock-based payment awards include, but are not limited to, the expected stock price volatility of a group of industry comparable companies over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Companys employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in managements opinion, the existing valuation models may not provide an accurate measure of the fair value of the Companys employee stock options. Although the fair value of employee stock options is determined in accordance with SFAS No. 123(R) and SAB No. 107 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
The fair value of the Predecessors options granted during the 13 weeks ended April 2, 2007 was estimated on the date of the grant using the lattice-binomial model with the following weighted average assumptions:
Risk-free interest rate |
4.77 | % | |
Expected life of option |
7 8 years | ||
Expected volatility of Pinnacle stock |
25.0 | % | |
Expected dividend yield on Pinnacle Stock |
0 | % |
Volatility was based on the average volatility of group of publicly traded food companies. The Company estimates
Expense Information under SFAS No. 123(R)
The following table summarizes stock-based compensation expense related to employee stock options and employee stock purchases under SFAS No. 123(R) which was allocated as follows:
Successor | Predecessor | ||||||||||||||
Fiscal year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13 weeks
ended April 2, 2007 |
Fiscal year
ended December 31, 2006 |
||||||||||||
Cost of products sold |
$ | 140 | $ | 49 | $ | 1,230 | $ | 163 | |||||||
Marketing and selling expenses |
188 | 321 | 3,071 | 455 | |||||||||||
Administrative expenses |
457 | 2,073 | 4,126 | 1,226 | |||||||||||
Research and development expenses |
21 | 25 | 351 | 56 | |||||||||||
Pre-Tax Stock-Based Compensation Expense |
806 | 2,468 | 8,778 | 1,900 | |||||||||||
Income Tax Benefit |
| | (2 | ) | (8 | ) | |||||||||
Net Stock-Based Compensation Expense |
$ | 806 | $ | 2,468 | $ | 8,776 | $ | 1,892 | |||||||
78
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
7. | Restructuring and Impairment Charges |
Successor
In 2008, the Company recorded impairment charges for its Van de Kamps ($8,000), Mrs. Pauls ($5,600), Lenders ($900) and Open Pit tradenames ($600). The charges are the result of the Company reassessing the long-term growth rates for its branded products. The charges are recorded in the Other expense (income), net line on the Consolidated Statement of Operations and are reported in the dry ($600) and frozen ($14,500) segments. In 2007, the Company experienced declines in sales of its Open Pit branded products. Upon reassessing the long term growth rates, the Company recorded an impairment of the tradename asset in the amount of $1,200. The charge is recorded in the Other expense (income), net line on the Consolidated Statements of Operations and is reported in the dry foods segment.
Predecessor
Omaha, Nebraska Production Facility
On April 7, 2004, PFGI made and announced its decision to permanently close its Omaha, Nebraska production facility, as part of its plan of consolidating and streamlining production activities after the Aurora Merger. Production from the Omaha plant, which manufactured Swanson frozen entree retail products and frozen foodservice products, ceased in December 2004 and has been relocated to the Fayetteville, Arkansas and Jackson, Tennessee production facilities.
Activities related to the closure of the plant were completed in the first quarter of 2005 and resulted in the elimination of 411 positions. From the announcement in April 2004 through the second quarter of 2007, PFGI recorded restructuring charges totaling $19.6 million, pertaining to its decision to permanently close the Omaha, Nebraska production facility. The charges incurred have been included in Other expense (income), net line in the Consolidated Statement of Operations. All such charges are reported under the frozen foods business segment. During the second quarter of 2007, the plant and remaining assets were sold for $2.2 million.
Erie, Pennsylvania Production Facility
On April 29, 2005, PFGIs board of directors approved a plan to permanently close its Erie, Pennsylvania production facility, as part of PFGIs plan of consolidating and streamlining production activities after the Aurora Merger. Production from the Erie plant, which manufactured Van de Kamps and Mrs. Pauls frozen seafood products and Aunt Jemima frozen breakfast products, has been relocated primarily to the Jackson, Tennessee production facility. Activities related to the closure of the plant were completed in 2006 and resulted in the elimination of approximately 290 positions. Employee termination activities commenced in July 2005 and were substantially completed by the end of the first quarter of 2006. From the date of the announcement, through the fourth quarter of 2006, PFGI incurred charges totaling $7.3 million related to the shutdown of the Erie, Pennsylvania production facility. These charges incurred have been included in the Other expense (income), net line in the Consolidated Statement of Operations. All such charges are reported under the frozen foods business segment. During the fourth quarter of 2006, the plant and any remaining equipment was sold for $1.8 million.
In the fourth quarter of 2006, the Company reassessed the long-term growth rate of sales of the products under the Aunt Jemima brand. Due to increased competition, management reduced the expected future growth rates and as a result, recorded an impairment of the tradename asset in the amount of $2,700. The charge is recorded in the Other expense (income), net line item on the Consolidated Statements of Operations and is reported in the frozen foods segment.
The following table summarizes impairment and restructuring charges. It also includes severance liabilities assumed or established in purchase accounting. These amounts are recorded in accrued liabilities on the Consolidated Balance Sheet.
79
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Predecessor
Description |
Balance at
January 1, 2007 |
Additions |
Assumed
Liabilities / Purchase Accounting |
Noncash
Reductions |
Cash
Reductions |
Balance at
April 2, 2007 |
|||||||||||||||
Employee severance |
$ | 612 | $ | | $ | | $ | | $ | (113 | ) | $ | 499 | ||||||||
Other costs |
225 | 46 | | | (46 | ) | 225 | ||||||||||||||
Total |
$ | 837 | $ | 46 | $ | | $ | | $ | (159 | ) | $ | 724 | ||||||||
Successor | |||||||||||||||||||||
Description |
Balance at
April 2, 2007 |
Additions |
Assumed
Liabilities / Purchase Accounting |
Noncash
Reductions |
Cash
Reductions |
Balance at
December 30, 2007 |
|||||||||||||||
Other asset impairment charges |
$ | | $ | 1,200 | $ | | $ | (1,200 | ) | $ | | $ | | ||||||||
Employee severance |
499 | | | (290 | ) | (90 | ) | 119 | |||||||||||||
Other costs |
225 | | (225 | ) | | | | ||||||||||||||
Total |
$ | 724 | $ | 1,200 | $ | (225 | ) | $ | (1,490 | ) | $ | (90 | ) | $ | 119 | ||||||
Description |
Balance at
December 31, 2007 |
Additions |
Assumed
Liabilities / Purchase Accounting |
Noncash
Reductions |
Cash
Reductions |
Balance at
December 28, 2008 |
|||||||||||||||
Other asset impairment charges |
$ | | $ | 15,100 | $ | | $ | (15,100 | ) | $ | | $ | | ||||||||
Employee severance |
119 | | | | (16 | ) | 103 | ||||||||||||||
Other costs |
| | | | | | |||||||||||||||
Total |
$ | 119 | $ | 15,100 | $ | | $ | (15,100 | ) | $ | (16 | ) | $ | 103 | |||||||
8. | Other Expense (Income), net |
Successor | Predecessor | |||||||||||||||
Fiscal year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13 weeks
ended April 2, 2007 |
Fiscal year
ended December 31, 2006 |
|||||||||||||
Restruturing and impairment charges |
$ | 15,100 | $ | 1,200 | $ | 46 | $ | 6,787 | ||||||||
Amortization of intangibles/other assets |
19,245 | 16,579 | 1,911 | 7,415 | ||||||||||||
Gain on litigation settlement |
(9,988 | ) | | | | |||||||||||
Merger-related costs |
| | 49,129 | | ||||||||||||
Extinguishment gain on Senior Subordinated Notes |
| (5,670 | ) | | | |||||||||||
Royalty expense (income), net and other |
6 | (81 | ) | (44 | ) | (16 | ) | |||||||||
Total other expense |
$ | 24,363 | $ | 12,028 | $ | 51,042 | $ | 14,186 | ||||||||
Restructuring and impairment charges. As described in Note 7, the Predecessor incurred costs and asset write-downs in connection with the shutdown of the Omaha, Nebraska and Erie, Pennsylvania facilities and certain intangible assets. In 2008, the Company recorded impairment charges for its Van de Kamps ($8.0 million), Mrs. Pauls ($5.6 million), Lenders ($0.9 million) and Open Pit tradenames ($0.6 million). The charges are the result of the Company reassessing the long-term growth rates for its branded products. In 2007, the Successor recorded a $1.2 million impairment for the Open Pit tradename.
80
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Gain on litigation settlement. On April 17, 2008, the Company settled a lawsuit with R2 Top Hat, Ltd., relating to its claim against Aurora Foods Inc., which merged with the Company in March 2004. Under the settlement, the Company paid R2 Top Hat, Ltd. $10 million in full payment of the excess leverage fees related to the Aurora prepetition bank facility, all related interest and all other out-of-pocket costs. After this settlement, there are no remaining contingencies related to the excess leverage fees under the Aurora prepetition bank facility. Accordingly, the remaining $10.0 million accrued liability assumed in the merger with Aurora and recorded at fair value of $20.1 million in the purchase price allocation for the Blackstone Transaction was reduced to $0 and the related credit, net of related expenses, was recorded in Other expense (income), net in the Consolidated Statement of Operations.
Merger related costs. As discussed in Note 1, the Predecessor incurred certain costs immediately before the Blackstone Transaction. The costs included $35.5 million related to the cash tender offer for the 8.25% Senior Subordinated Notes, $12.9 million related to the termination of certain contracts, and $0.7 million related to payroll taxes for a total of $49.1 million.
Extinguishment gain on Senior Subordinated Notes. In December of 2007, the company repurchased $51.0 million of its 10.625% Senior Subordinated Notes at a discounted price of $44.2 million. The gain on the bond extinguishment, after giving consideration to the acceleration of $1.1 million of deferred financing cost amortization associated with the notes repurchased, was $5.7 million.
9. | Balance Sheet Information |
Accounts Receivable. Customer accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for cash discounts, returns and bad debts is our best estimate of the amount of uncollectible amounts in our existing accounts receivable. The Company determines the allowance based on historical discounts taken and write-off experience. The Company reviews its allowance for doubtful accounts monthly. Account balances are charged off against the allowance when the Company concludes it is probable the receivable will not be recovered. The Company does not have any off-balance sheet credit exposure related to our customers. Accounts receivable are as follows:
December 28,
2008 |
December 30,
2007 |
|||||||
Customers |
$ | 92,308 | $ | 96,155 | ||||
Allowances for cash discounts, bad debts and returns |
(3,680 | ) | (4,028 | ) | ||||
88,628 | 92,127 | |||||||
Other |
3,543 | 7,862 | ||||||
Total |
$ | 92,171 | $ | 99,989 | ||||
Following are the changes in the allowance for cash discounts, bad debts, and returns:
Beginning
Balance |
Additions | Deductions |
Ending
Balance |
||||||||||
Successor |
|||||||||||||
Fiscal year ended December 28, 2008 |
$ | 4,028 | $ | 39,028 | $ | (39,376 | ) | $ | 3,680 | ||||
39 weeks ended December 30, 2007 |
4,763 | 28,027 | (28,762 | ) | 4,028 | ||||||||
Predecessor |
|||||||||||||
13 weeks ended April 2, 2007 |
$ | 4,006 | $ | 10,473 | $ | (9,716 | ) | $ | 4,763 | ||||
Fiscal year ended December 31, 2006 |
5,772 | 38,520 | (40,286 | ) | 4,006 |
81
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Inventories. Inventories are as follows:
December 28,
2008 |
December 30,
2007 |
|||||||
Raw materials, containers and supplies |
$ | 52,368 | $ | 43,605 | ||||
Finished product |
141,469 | 124,831 | ||||||
193,837 | 168,436 | |||||||
Reserves |
(2,974 | ) | (1,846 | ) | ||||
Total |
$ | 190,863 | $ | 166,590 | ||||
Reserves represent amounts necessary to adjust the carrying value of inventories to the lower of cost or net realizable value, including any costs to sell or dispose.
The Company has various purchase commitments for raw materials, containers, supplies and certain finished products incident to the ordinary course of business. Such commitments are not at prices in excess of current market.
In the second quarter of 2007, in connection with the Blackstone Transaction, inventories were required to be valued at fair value, which the Company has estimated at $40.2 million higher than the Predecessors historical manufacturing cost. As of December 30, 2007, the entire $40.2 million had been charged to cost of products sold.
Following are the changes in the inventory reserves:
Beginning
Balance |
Additions | Deductions |
Ending
Balance |
||||||||||
Successor |
|||||||||||||
Fiscal year ended December 28, 2008 |
$ | 1,846 | $ | 3,131 | $ | (2,003 | ) | $ | 2,974 | ||||
39 weeks ended December 30, 2007 |
2,009 | 1,341 | (1,504 | ) | 1,846 | ||||||||
Predecessor |
|||||||||||||
13 weeks ended April 2, 2007 |
$ | 2,735 | $ | 546 | $ | (1,272 | ) | $ | 2,009 | ||||
Fiscal year ended December 31, 2006 |
7,190 | 3,778 | (8,233 | ) | 2,735 |
Plant Assets. Plant assets are as follows:
December 28,
2008 |
December 30,
2007 |
|||||||
Land |
$ | 8,000 | $ | 8,192 | ||||
Buildings |
76,104 | 78,994 | ||||||
Machinery and equipment |
232,522 | 202,934 | ||||||
Projects in progress |
13,879 | 10,399 | ||||||
330,505 | 300,519 | |||||||
Accumulated depreciation |
(69,707 | ) | (29,044 | ) | ||||
Total |
$ | 260,798 | $ | 271,475 | ||||
Depreciation of the Predecessor was $8,252 for the 13 weeks ended April 2, 2007 and $34,772 during fiscal 2006. Depreciation of the Successor was $29,092 during the 39 weeks ended December 30, 2007 and $43,264 during the fiscal year ended December 28, 2008.
82
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Accrued Liabilities. Accrued liabilities are as follows:
December 28,
2008 |
December 30,
2007 |
|||||
Employee compensation and benefits |
$ | 26,381 | $ | 32,713 | ||
Excess leverage fee (see Note 13) |
100 | 20,110 | ||||
Consumer coupons |
1,774 | 1,904 | ||||
Interest payable |
28,146 | 37,698 | ||||
Accrued restructuring charges |
103 | 119 | ||||
Other |
12,508 | 16,722 | ||||
Total |
$ | 69,012 | $ | 109,266 | ||
10. | Goodwill, Tradenames and Other Assets |
Goodwill by segment is as follows:
Dry
Foods |
Frozen
Foods |
Total | ||||||||||
Predecessor |
||||||||||||
Balance, December 31, 2006 |
$ | 334,494 | $ | 67,667 | $ | 402,161 | ||||||
Adoption of FIN 48 |
1,070 | | 1,070 | |||||||||
Balance, April 2, 2007 |
$ | 335,564 | $ | 67,667 | $ | 403,231 | ||||||
Successor |
||||||||||||
Blackstone Transaction allocation of purchase price |
$ | 652,434 | $ | 344,112 | $ | 996,546 | ||||||
Settlement of pre-acquisition liabilities |
(676 | ) | (452 | ) | (1,128 | ) | ||||||
Balance, December 30, 2007 |
$ | 651,758 | $ | 343,660 | $ | 995,418 | ||||||
Settlement of pre-acquisition liabilities |
(819 | ) | (432 | ) | (1,251 | ) | ||||||
Balance, December 28, 2008 |
$ | 650,939 | $ | 343,228 | $ | 994,167 | ||||||
SFAS No. 141 Business Combinations requires all business combinations be accounted for using the purchase method of accounting. SFAS No. 142, Goodwill and Other Intangible Assets, provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment on an annual basis or more often when events indicate.
As discussed in Note 13, the application of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes: An Interpretation of Statement of Financial Accounting Standards (SFAS) Statement No. 109 (FIN 48), and the expiration of certain statutes of limitation relating to certain tax returns for prior years during the 13 weeks ended April 2, 2007 resulted in a $1,070 increase to goodwill for the Predecessor.
The Blackstone Transaction was accounted for in accordance of SFAS No. 141 and resulted in $996,546 in goodwill for the Successor of which $652,434 was allocated to Dry Foods and $344,112 was allocated to Frozen Foods.
83
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Tradenames
Tradenames by segment is as follows:
Dry
Foods |
Frozen
Foods |
Total | ||||||||||
Predecessor |
||||||||||||
Balance, December 31, 2006 |
$ | 568,740 | $ | 228,842 | $ | 797,582 | ||||||
Balance, April 2, 2007 |
$ | 568,740 | $ | 228,842 | $ | 797,582 | ||||||
Successor |
||||||||||||
Blackstone transaction allocation of purchase price |
$ | 684,032 | $ | 242,380 | $ | 926,412 | ||||||
Impairment |
(1,200 | ) | (1,200 | ) | ||||||||
Balance, December 30, 2007 |
$ | 682,832 | $ | 242,380 | $ | 925,212 | ||||||
Impairments |
(600 | ) | (14,500 | ) | (15,100 | ) | ||||||
Balance, December 28, 2008 |
$ | 682,232 | $ | 227,880 | $ | 910,112 | ||||||
For the Successor, the allocation of the Blackstone Transaction purchase price resulted in indefinite lived tradename intangible assets of $926,412, of which $684,032 has been allocated to the dry foods segment and $242,380 has been allocated to the frozen food segment.
In 2008, the Company recorded impairment charges for its Van de Kamps ($8,000), Mrs. Pauls ($5,600), Lenders ($900) and Open Pit tradenames ($600). The charges are the result of the Company reassessing the long-term growth
rates for its branded products. The charges are recorded in the Other expense (income), net line on the Consolidated Statement of Operations and are reported in the dry ($600) and frozen ($14,500) segments. In 2007, the Company experienced declines
in sales of its Open Pit branded products. Upon reassessing the long term growth rates, the Company recorded an impairment of the tradename asset in the amount of $1,200. The charge is recorded in the Other expense (income), net line on the
Other Assets
December 28,
2008 |
December 30,
2007 |
|||||
Amortizable intangibles, net of accumulated amortization of $35,824 and $16,579, respectively |
$ | 139,647 | $ | 158,892 | ||
Deferred financing costs, net of accumulated amortization of $13,603 and $8,889, respectively |
26,966 | 30,974 | ||||
Foreign Currency Swap (See Note 14) |
| 347 | ||||
Total |
$ | 166,613 | $ | 190,213 | ||
84
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
The change in the book value of the amortizable intangible assets, net is as follows:
Predecessor | ||||||||||
December 31,
2006 |
Amortization |
April 2,
2007 |
||||||||
Dry foods |
$ | 25,213 | $ | (1,337 | ) | $ | 23,876 | |||
Frozen foods |
5,135 | (574 | ) | 4,561 | ||||||
Total |
$ | 30,348 | $ | (1,911 | ) | $ | 28,437 | |||
Successor | |||||||||||||||||
Blackstone
Transaction |
Amortization |
December 30,
2007 |
Amortization |
December 28,
2008 |
|||||||||||||
Dry foods |
$ | 78,264 | $ | (6,644 | ) | $ | 71,620 | $ | (7,806 | ) | $ | 63,814 | |||||
Frozen foods |
97,207 | (9,935 | ) | 87,272 | (11,439 | ) | 75,833 | ||||||||||
Total |
$ | 175,471 | $ | (16,579 | ) | $ | 158,892 | $ | (19,245 | ) | $ | 139,647 | |||||
In fiscal 2007, The Blackstone Transaction was accounted for in accordance of SFAS No. 141, Business Combinations, and resulted in $175,471 in amortizable intangibles for the Successor; $52,810 was allocated to recipes with a life of ten years and $122,661 was allocated to customer relationships with useful lives ranging between 7 and 40 years.
Estimated amortization expense for each of the next five years and thereafter is as follows: 2009 - $16,790, 2010 - $13,209, 2011 - $12,424, 2012 - $12,264, 2013 - $12,113 and thereafter - $72,847.
Deferred financing costs relate to the Companys senior secured credit facilities, senior notes and senior subordinated notes. Amortization for the Predecessor was $1,977 and $7,424 for the 13 weeks ending April 2, 2007 and fiscal 2006, respectively. Amortization for the Successor was $7,758 for the 39 weeks ending December 30, 2007 and $4,714 for the fiscal year ended 2008. In addition, the Successor accelerated amortization of $1,131 related to the $51 million of senior subordinated notes repurchased in December 2007.
85
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
11. | Debt and Interest Expense |
December 28,
2008 |
December 30,
2007 |
|||||
Short-term borrowings |
||||||
- Revolving Credit Facility |
$ | 26,000 | $ | | ||
- Notes payable |
163 | 1,370 | ||||
Total short-term borrowings |
26,163 | 1,370 | ||||
Long-term debt |
||||||
- Senior secured credit facility - term loan |
$ | 1,234,375 | $ | 1,243,750 | ||
- 9.25% Senior notes |
325,000 | 325,000 | ||||
- 10.625% Senior subordinated notes |
199,000 | 199,000 | ||||
- Capital lease obligations |
814 | 1,051 | ||||
1,759,189 | 1,768,801 | |||||
Less: current portion of long-term obligations |
12,750 | 12,736 | ||||
Total long-term debt |
$ | 1,746,439 | $ | 1,756,065 | ||
Interest expense
Successor | Predecessor | ||||||||||||
Fiscal year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13 weeks
ended April 2, 2007 |
Fiscal year
ended December 31, 2006 |
||||||||||
Third party interest expense |
$ | 133,947 | $ | 125,600 | $ | 38,654 | $ | 85,035 | |||||
Related party interest expense |
3,106 | 1,463 | 9 | 693 | |||||||||
Interest rate swap (gains) losses (Note 14) |
16,227 | (2,559 | ) | 416 | 887 | ||||||||
$ | 153,280 | $ | 124,504 | $ | 39,079 | $ | 86,615 | ||||||
Successor As part of the Blackstone Transaction as described in Note 1, Peak Finance LLC entered into a $1,375.0 million credit agreement (the Senior Secured Credit Facility) in the form of (i) Term Loans in an initial aggregate amount of $1,250.0 million and (ii) Revolving Credit Commitments in the initial aggregate amount of $125.0 million (the Revolving Credit Facility). Peak Finance LLC merged with and into PFF on April 2, 2007 at the closing of the Blackstone Transaction. The term loan matures April 2, 2014. The Revolving Credit Facility matures April 2, 2013. Borrowings outstanding under the Revolving Credit Facility as of December 28, 2008 totaled $26.0 million. There were no borrowings outstanding under the Revolving Credit Facility as of December 30, 2007.
As discussed in Note 4 to the Consolidated Financial Statements, Lehman Commercial Paper Inc. (LCPI), a subsidiary of Lehman Brothers Holdings Inc. has a total commitment within the Revolving Credit Facility of $15.0 million and is currently not funding its portion. The Company has no assurances that LCPI will participate in any future funding requests under the revolving credit facility. While the Company is exploring options to replace Lehmans commitment within the facility, the Company cannot guarantee that it will be able to obtain such replacement loan commitments from other banks. However, based upon managements projection of cash flows, the Company believes that it has sufficient liquidity to conduct its normal operations and does not believe that the potential reduction in available capacity under this revolving credit facility will have a material impact on its short-term or long-term liquidity.
The amount of the term loan that was owed to affiliates of the Blackstone Group as of December 28, 2008 and December 30, 2007, was $34,587 and $29,850, respectively.
86
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
The Companys borrowings under the Senior Secured Credit Facility bear interest at a floating rate and are maintained as base rate loans or as Eurodollar loans. Base rate loans bear interest at the base rate plus the applicable base rate margin, as defined in the Senior Secured Credit Facility. The base rate is defined as the higher of (i) the prime rate and (ii) the Federal Reserve reported overnight funds rate plus 1/2 of 1%. Eurodollar loans bear interest at the adjusted Eurodollar rate, as described in the Senior Secured Credit Facility, plus the applicable Eurodollar rate margin.
The applicable margins with respect to our Senior Secured Credit Facility vary from time to time in accordance with the terms thereof and agreed upon pricing grids based on the Companys leverage ratio as defined in the credit agreement. The applicable margins with respect to the Senior Secured Credit Facility are currently:
Applicable Margin (per annum)
Eurocurrency
Rate for Revolving Loans and Letter of Credit Fees |
Base Rate for
Revolving Loans |
Commitment
Fees Rate |
Eurocurrency
Rate for Term Loans |
Base Rate for
Term Loans |
|||||||||
2.75 | % | 1.75 | % | 0.50 | % | 2.75 | % | 1.75 | % |
The obligations under the credit agreement are unconditionally and irrevocably guaranteed by each of the Companys direct or indirect domestic subsidiaries (collectively, the Guarantors). In addition, the credit agreement is collateralized by first priority or equivalent security interests in (i) all the capital stock of, or other equity interests in, each direct or indirect domestic subsidiary of the Company and 65% of the capital stock of, or other equity interests in, each direct foreign subsidiaries of the Company, or any of its domestic subsidiaries and (ii) certain tangible and intangible assets of the Company and those of the Guarantors (subject to certain exceptions and qualifications).
A commitment fee of 0.50% per annum is applied to the unused portion of the Revolving Credit Facility. For the fiscal years ended December 28, 2008 and December 30, 2007, the weighted average interest rate on the term loan was 6.21% and 8.05%, respectively. For the fiscal years ended December 28, 2008 and December 30, 2007, the weighted average interest rate on the Revolving Credit Facility was 5.45% and 8.09%, respectively. As of December 28, 2008 and December 30, 2007, the Eurodollar interest rate on the term loan facility was 6.52% and 7.94%, respectively. As of December 28, 2008, the Eurodollar interest rate on the Revolving Credit Facility was 3.21%.
The Company pays a fee for all outstanding letters of credit drawn against its Revolving Credit Facility at an annual rate equivalent to the Applicable Margin then in effect with respect to Eurodollar loans under the Revolving Credit Facility, less the fronting fee payable in respect of the applicable letter of credit. The fronting fee is equal to 0.125% per annum of the daily maximum amount then available to be drawn under such letter of credit. The fronting fees are computed on a quarterly basis in arrears. Total letters of credit issued under the Revolving Credit Facility agreement cannot exceed $25,000. As of December 28, 2008 and December 30, 2007, the Company had utilized $15,181 and $9,757, respectively of the Revolving Credit Facility for letters of credit. As of December 30, 2007 there were no borrowing under the Revolving Credit Facility, so of the $125,000 Revolving Credit Facility available, the Company had an unused balance of $115,243 available for future borrowing and letters of credit. As of December 28, 2008 borrowings under the Revolving Credit Facility totaled $26,000, so of the $99,000 Revolving Credit Facility available, the Company had an unused balance of $83,819 available for future borrowing and letters of credit. The remaining amount that can be used for letters of credit as of December 28, 2008 and December 30, 2007 was $9,819 and $15,243, respectively. If the Company is unsuccessful in replacing the commitment from LCPI, the amount available for future borrowings and letters of credit as of December 28, 2008 would be $68,819.
The term loan matures in quarterly 0.25% installments from September 2007 to December 2013 with the remaining balance due in April 2014. The aggregate maturities of the term loan outstanding as of December 28, 2008 are $12.5 million in 2009, $12.5 million in 2010, $12.5 million in 2011, $12.5 million in 2012, $12.5 million in 2013 and $1,171.88 million thereafter.
87
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
On April 2, 2007, as part of the Blackstone Transaction described in Note 1, the Company issued $325.0 million of 9.25% Senior Notes (the Senior Notes) due 2015, and $250.0 million of 10.625% Senior Subordinated Notes (the Senior Subordinated Notes) due 2017. The Senior Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior secured indebtedness of the Company and guaranteed on a full, unconditional, joint and several basis by the Companys wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company. The Senior Subordinated Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness of the Company and guaranteed on a full, unconditional, joint and several basis by the Companys wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company. See Note 19 for Guarantor and Nonguarantor Financial Statements.
The Company may redeem some or all of the Senior Notes at any time prior to April 1, 2011, and some or all of the Senior Subordinated Notes at any time prior to April 1, 2012, in each case at a price equal to 100% of the principal amount of notes redeemed plus the Applicable Premium as of, and accrued and unpaid interest to, the redemption date, subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date. The Applicable Premium is defined as the greater of (1) 1.0% of the principal amount of such note and (2) the excess, if any, of (a) the present value at such redemption date of (i) the redemption price of such Senior Note at April 1, 2011 or Senior Subordinated Note at April 1, 2012, plus (ii) all required interest payments due on such Senior Note through April 1, 2011 or Senior Subordinated Note through April 1, 2012 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the Treasury Rate plus 50 basis points over (b) the principal amount of such note.
The Company may redeem the Senior Notes or the Senior Subordinated Notes at the redemption prices listed below, if redeemed during the twelve-month period beginning on April 1 st of each of the years indicated below:
Senior Notes | |||
Year |
Percentage | ||
2011 |
104.625 | % | |
2012 |
102.313 | % | |
2013 and thereafter |
100.000 | % | |
Senior Subordinated Notes | |||
Year |
Percentage | ||
2012 |
105.313 | % | |
2013 |
103.542 | % | |
2014 |
101.771 | % | |
2015 and thereafter |
100.000 | % |
In addition, until April 1, 2010, the Company may redeem up to 35% of the aggregate principal amount of Senior Notes or Senior Subordinated Notes at a redemption price equal to 100% of the aggregate principal amount thereof, plus a premium equal to the rate per annum on the Senior Notes or Senior Subordinated Notes, as the case may be, plus accrued and unpaid interest and Additional Interest, if any, to the redemption date, subject to the right of holders of Senior Notes or Senior Subordinated Notes of record on the relevant record date to receive interest due on the relevant interest payment date, with the net cash proceeds received by the Company from one or more equity offerings; provided that (i) at least 50% of the aggregate principal amount of Senior Notes or Senior Subordinated Notes, as the case may be, originally issued under the applicable indenture remains outstanding immediately after the occurrence of each such redemption and (ii) each such redemption occurs within 90 days of the date of closing of each such equity offering.
In December 2007, the Company repurchased $51.0 million in aggregate principal amount of the 10.625% Senior Subordinated Notes at a discount price of $44.2 million. The Company currently has outstanding $199.0 million in aggregate principal amount of Senior Subordinated Notes.
As market conditions warrant, the Company and its subsidiaries, affiliates or significant shareholders (including The Blackstone Group L.P. and its affiliates) may from time to time, in their sole discretion, purchase, repay, redeem or retire any of the Companys outstanding debt or equity securities (including any publicly issued debt or equity securities), in privately negotiated or open market transactions, by tender offer or otherwise.
88
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Predecessor - In November 2003, the Predecessor entered into a $675.0 million Credit Agreement (Predecessor Senior Secured Credit Facilities) with JPMorgan Chase Bank (a related party of JPMorgan Partners, LLC as noted in Note 16) and other financial institutions as lenders, which provided for a $545.0 million seven-year term loan B facility, of which $120.0 million was made available on November 25, 2003 and $425.0 million was made available as a delayed draw term loan on the closing date of the Aurora Merger on March 19, 2004. Concurrently with the acquisition of the Armour Business but effective as of February 14, 2006, the Company entered into an Amendment No. 4 and Agreement to the Predecessor Senior Secured Credit Facilities (Amendment No. 4). Among other things, Amendment No. 4 approved the Armour acquisition and provided for the making of $143.0 million of additional tack-on term loans to fund a portion of the acquisition. The Predecessor Senior Secured Credit Facilities also provided for a six-year $130.0 million revolving credit facility, of which up to $65.0 million was made available on November 25, 2003, and the remaining $65.0 million was made available on the closing date of the Aurora Merger on March 19, 2004.
A commitment fee of 0.50% per annum was applied to the unused portion of the revolving credit facility. There were no borrowings under the revolving credit facility during 2007 for the Predecessor. For the 13 weeks ended April 2, 2007, the weighted average interest rate on the term loan was 7.36%. For fiscal 2006, the weighted average interest rate on the term loan was 7.61%.
In connection with the Blackstone Transaction described in Note 1, the Predecessor Senior Secured Credit Facilities were paid in full.
In November 2003 and February 2004, the Predecessor issued $200.0 million and $194.0 million, respectively, 8.25% senior subordinated notes. The February 2004 notes resulted in gross proceeds of $201.0 million, including premium. The terms of the February 2004 notes were the same as the November 2003 notes and were issued under the same indenture.
On March 8, 2007, the Predecessor commenced a cash tender offer to purchase any and all of the outstanding 8.25% Senior Subordinated Notes due 2013 of the Predecessor (the Predecessor Notes), and a related consent solicitation to amend the indenture pursuant to which the Predecessor Notes were issued. The tender offer and consent solicitation were made in connection with the Blackstone Transaction. The tender offer and consent solicitation were made upon the terms and conditions set forth in an Offer to Purchase and Consent Solicitation Statement dated March 8, 2007 and the related Consent and Letter of Transmittal. The total cost of the cash tender offer for the Predecessor Notes was $35.5 million and was recorded as a charge in the Other expense (income), net line of the Consolidated Statement of Operations of the Predecessor immediately before the Blackstone Transaction.
12. | Pension and Retirement Plans |
As of December 28, 2008, the Company maintains a noncontributory defined benefit pension plan that covers eligible union employees and provides benefits generally based on years of service and employees compensation. The Companys pension plan is funded in conformity with the funding requirements of applicable government regulations. In fiscal 2006 the Company was not required to make contributions to its pension plan. The Company made contributions to the pension plan totaling $1.1 million and $2.5 million in fiscal 2007 and fiscal 2008, respectively. In fiscal 2009, the Company expects to make contributions of $8.6 million.
During 2008, the United States financial markets experienced a significant downturn. As a result, the Company experienced significant losses on our pension plan, which has led to an increase in our projected benefit obligation. The pension plan has a total unfunded status of $36.5 million as of December 28, 2008. As shown in the table below, the net pension benefit cost in fiscal 2008 was $1.5 million. Due to the increase in the projected benefit obligation, this expense will increase in 2009 to approximately $4.5 $5.0 million.
The Company maintains a postretirement benefits plan that provides health care and life insurance benefits to eligible retirees, covers certain U.S. employees and their dependents and is self-funded. Employees who have 10 years of service after the age of 45 and retire are eligible to participate in the postretirement benefit plan. Effective March 19, 2004 and in connection with the acquisition of Aurora, liabilities were assumed related to eight retired employees (Aurora Retirees). Upon amendments that became effective on May 23, 2004, the Companys net out-of-pocket costs for postretirement health care benefits was substantially reduced as cost sharing for retired employees, excluding the Aurora Retirees, was increased to 100%.
89
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
In connection with the acquisition of the Armour Business on March 1, 2006, hourly employees covered under the union collective bargaining agreement were added to the noncontributory defined benefit pension plan. The liability related to the service period up to the date of acquisition was retained by The Dial Corporation. Additionally, the Company assumed the liability for postretirement health care and life insurance related to certain hourly employees covered under the union collective bargaining agreement for the Armour Business. In 2007, the collective bargaining agreement between the Company and the United Food & Commercial Workers Union (the UFCW) at the Ft. Madison, Iowa production facility was renewed. Under the new collective bargaining agreement, post retirement health benefits were eliminated. As such the company recorded a curtailment gain of $9.2 million. Additionally, effective March 2008, the employees at the Ft. Madison facility stopped participating in the pension plan and are now part of the UFCWs multi-employer pension plan.
The Company uses a measurement date for the pension and postretirement benefits plan that coincides with its year end.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and 132(R), (SFAS No. 158) . This Standard requires recognition of the funded status of a benefit plan in the statement of financial position. The Standard also requires recognition in accumulated other comprehensive income certain gains and losses that arise during the period but are deferred under pension accounting rules, as well as modifies the timing of reporting and adds certain disclosures. SFAS No. 158 provides recognition and disclosure elements to be effective for fiscal years ending after December 15, 2007 and measurement elements to be effective for fiscal years ending after December 15, 2008. Effective with the Blackstone Transaction, the Company adopted the recognition and disclosure elements of SFAS No. 158.
90
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Pension Benefits | ||||||||||||||||
Successor | Predecessor | |||||||||||||||
Fiscal year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13 weeks
ended April 2, 2007 |
Fiscal year
ended December 31, 2006 |
|||||||||||||
Change in Benefit Obligation |
||||||||||||||||
Net benefit obligation at beginning of the period |
$ | 63,389 | $ | 66,567 | $ | 65,076 | $ | 66,454 | ||||||||
Service cost |
1,539 | 1,489 | 472 | 2,178 | ||||||||||||
Interest cost |
4,264 | 2,940 | 980 | 3,596 | ||||||||||||
Amendments |
1,739 | | | | ||||||||||||
Actuarial (gain) loss |
7,861 | (4,650 | ) | 946 | (3,445 | ) | ||||||||||
Gross benefits paid |
(3,580 | ) | (2,957 | ) | (907 | ) | (3,707 | ) | ||||||||
Net benefit obligation at end of the period |
75,212 | 63,389 | 66,567 | 65,076 | ||||||||||||
Change in Plan Assets |
||||||||||||||||
Fair value of plan assets at beginning of the period |
56,030 | 55,058 | 55,253 | 53,208 | ||||||||||||
Employer contributions |
2,501 | 1,140 | | | ||||||||||||
Actual return on plan assets |
(16,246 | ) | 2,789 | 712 | 5,752 | |||||||||||
Gross benefits paid |
(3,580 | ) | (2,957 | ) | (907 | ) | (3,707 | ) | ||||||||
Fair value of plan assets at end of the period |
38,705 | 56,030 | 55,058 | 55,253 | ||||||||||||
Funded status at end of the year |
$ | (36,507 | ) | $ | (7,359 | ) | $ | (11,509 | ) | $ | (9,823 | ) | ||||
Reconciliation |
||||||||||||||||
Unrecognized net actuarial loss |
5,218 | 3,892 | ||||||||||||||
Amount included in accumulated other comprehensive income (loss) |
(37 | ) | (37 | ) | ||||||||||||
Net amount recognized at end of the period |
NA | NA | $ | (6,328 | ) | $ | (5,968 | ) | ||||||||
Amounts recognized in the Consolidated Balance Sheet |
||||||||||||||||
Accrued pension benefits |
$ | (36,507 | ) | $ | (7,359 | ) | $ | (5,678 | ) | $ | (5,318 | ) | ||||
Accrued pension benefits (part of Accrued Liabilities) |
| (650 | ) | (650 | ) | |||||||||||
Net amount recognized at end of the period |
$ | (36,507 | ) | $ | (7,359 | ) | $ | (6,328 | ) | $ | (5,968 | ) | ||||
Amounts recognized in Accumulated Other Comprehensive (Loss) / Income |
||||||||||||||||
Net loss / (gain) |
$ | 24,356 | $ | (4,191 | ) | |||||||||||
Prior service cost |
1,597 | | ||||||||||||||
Net amount recognized at end of the period |
$ | 25,953 | $ | (4,191 | ) | NA | NA | |||||||||
Accumulated benefit obligation |
$ | 68,246 | $ | 60,320 | $ | 63,163 | $ | 61,222 | ||||||||
Weighted average assumptions |
||||||||||||||||
Discount rate |
6.05 | % | 6.48 | % | 6.00 | % | 6.00 | % | ||||||||
Expected return on plan assets |
7.50 | % | 8.00 | % | 8.00 | % | 8.00 | % | ||||||||
Rate of compensation increase |
3.00 | % | 3.50 | % | 3.50 | % | 3.50 | % | ||||||||
Additional information |
||||||||||||||||
(Decrease) increase in minimum liability included in other comprehensive income (loss) |
NA | NA | $ | | $ | (3,981 | ) |
91
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Other Postretirement Benefits | ||||||||||||||||
Successor | Predecessor | |||||||||||||||
Fiscal year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13 weeks
ended April 2, 2007 |
Fiscal year
ended December 31, 2006 |
|||||||||||||
Change in Benefit Obligation |
||||||||||||||||
Net benefit obligation at beginning of the period |
$ | 1,047 | $ | 9,305 | $ | 8,928 | $ | 1,237 | ||||||||
Acquisitions |
| | | 7,256 | ||||||||||||
Service cost |
| 728 | 246 | 837 | ||||||||||||
Interest cost |
19 | 371 | 132 | 398 | ||||||||||||
Curtailment Gain |
| (9,145 | ) | | | |||||||||||
Actuarial gain |
(677 | ) | (196 | ) | | (793 | ) | |||||||||
Gross benefits paid |
(27 | ) | (16 | ) | (1 | ) | (7 | ) | ||||||||
Net benefit obligation at end of the period |
362 | 1,047 | 9,305 | 8,928 | ||||||||||||
Change in Plan Assets |
||||||||||||||||
Fair value of plan assets at beginning of the period |
| | | | ||||||||||||
Employer contributions |
27 | 16 | 1 | 7 | ||||||||||||
Gross benefits paid |
(27 | ) | (16 | ) | (1 | ) | (7 | ) | ||||||||
Fair value of plan assets at end of the period |
| | | | ||||||||||||
Funded status at end of the year |
$ | (362 | ) | $ | (1,047 | ) | $ | (9,305 | ) | $ | (8,928 | ) | ||||
Reconciliation |
||||||||||||||||
Unrecognized net actuarial gain |
(558 | ) | (558 | ) | ||||||||||||
Unamortized prior service credit |
(1,220 | ) | (1,304 | ) | ||||||||||||
Net amount recognized at end of the period |
NA | NA | $ | (11,083 | ) | $ | (10,790 | ) | ||||||||
Amounts recognized in the Consolidated Balance Sheet |
||||||||||||||||
Accrued other postretirement benefits |
$ | (362 | ) | $ | (1,047 | ) | $ | (11,083 | ) | $ | (10,790 | ) | ||||
Net amount recognized at end of the period |
$ | (362 | ) | $ | (1,047 | ) | $ | (11,083 | ) | $ | (10,790 | ) | ||||
Amounts recognized in Accumulated Other Comprehensive (Loss) / Income |
||||||||||||||||
Net loss / (gain) |
$ | (828 | ) | $ | (196 | ) | ||||||||||
Net amount recognized at end of the period |
$ | (828 | ) | $ | (196 | ) | NA | NA | ||||||||
Weighted average assumptions |
||||||||||||||||
Discount rate |
6.20 | % | 6.48 | % | 6.00 | % | 6.00 | % |
92
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
The following represents the components of net periodic benefit costs and the sensitivity of retiree welfare
Pension Benefits
The discount rate used to calculate the present value of the projected benefit obligation is set based on long-term high quality bonds that match the expected benefit payments. The projected return of plan assets assumption is based on projected long-term market returns for the various asset classes in which the plans are invested, weighted by the target asset allocations. The rate of compensation increase represents the long-term assumption for expected increases to salaries for pay-related plans.
The assumed health care trend rates used in determining other post-retirement benefits at December 28, 2008 are 10.0% gradually decreasing to 4.5%. The assumed health care trend rates used in determining other post-retirement benefits at December 30, 2007 are 9.0% gradually decreasing to 5.0%. The assumed health care trend rates used in determining other post-retirement benefits at April 2, 2007 are 8.0% gradually decreasing to 5.0%. The assumed health care trend rates used in determining other post-retirement benefits at December 31, 2006 are 9.0% gradually decreasing to 5.0%.
93
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Successor | Predecessor | ||||||||||||||
Fiscal year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13 weeks
ended April 2, 2007 |
Fiscal year
ended December 31, 2006 |
||||||||||||
Other post retirement benefits |
|||||||||||||||
Sensitivity of retiree welfare benefits |
|||||||||||||||
Effect of a one percentage point increase in assumed health care cost trend |
|||||||||||||||
on total service and interest cost components |
$ | | $ | 3 | $ | 1 | $ | 118 | |||||||
on postretirement benefit obligation |
1 | 70 | 81 | 1,968 | |||||||||||
Effect of a one percentage point decrease in assumed health care cost trend |
|||||||||||||||
on total service and interest cost components |
$ | | $ | (3 | ) | $ | 1 | $ | (90 | ) | |||||
on postretirement benefit obligation |
1 | (60 | ) | (69 | ) | (1,506 | ) |
Plan Assets
The Companys pension plan weighted-average asset allocations at December 28, 2008 and December 30, 2007, by asset category, are as follows:
December 28,
2008 |
December 30,
2007 |
|||||
Asset category |
||||||
Equity securities |
59 | % | 59 | % | ||
Debt securities |
36 | % | 35 | % | ||
Cash |
5 | % | 6 | % | ||
Total |
100 | % | 100 | % | ||
The Companys investment policy is to invest approximately 60% of plan assets in equity securities, 35% in fixed income securities, and 5% in cash or cash equivalents. Periodically, the plan assets are rebalanced to maintain these allocation percentages and the investment policy is reviewed. Within each investment category, assets are allocated to various investment styles. Professional managers manage all assets and a consultant is engaged to assist in evaluating these activities. The expected long-term rate of return on assets was determined by assessing the rates of return on each targeted asset class, return premiums generated by portfolio management and by comparison of rates utilized by other companies.
Cash Flows
Contributions. The Company expects to contribute $8,600 to its pension plan and $54 to its other postretirement benefit plan during fiscal 2009.
94
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Estimated Future Benefit Payments. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Pension
Benefits |
Other
Benefits |
|||||
2009 |
$ | 3,456 | $ | 54 | ||
2010 |
3,305 | 28 | ||||
2011 |
3,253 | 22 | ||||
2012 |
3,195 | 11 | ||||
2013 |
3,175 | 9 | ||||
2014-2018 |
17,378 | 58 |
Savings Plans . Employees participate in a 401(k) plan. Pinnacle matches 50% of employee contributions up to five percent of compensation for union employees after one year of continuous service and six percent of compensation for salaried employees and it is our current intent to continue the match at these levels. Employer contributions made by the Company relating to this plan were $2,744 for fiscal 2008, $1,728 for the 39 weeks ended December 30, 2007, $790 for the 13 weeks ended April 2, 2007 and $2,186 for fiscal 2006.
95
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
13 . | Taxes on Earnin gs |
The components of the provision for income taxes are as follows:
96
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
The components of deferred tax assets and liabilities are as follows:
December 28,
2008 |
December 30,
2007 |
|||||||
Deferred Tax Assets and Liabilities |
||||||||
Current |
||||||||
Accrued liabilities |
8,879 | 17,975 | ||||||
Inventories |
6,570 | 4,703 | ||||||
Benefits and compensation |
5,983 | 8,292 | ||||||
Valuation allowance |
(17,788 | ) | (24,710 | ) | ||||
3,644 | 6,260 | |||||||
Non Current |
||||||||
Postretirement benefits |
$ | 12,901 | $ | 3,454 | ||||
Accrued liabilities |
764 | 1,177 | ||||||
Benefits and compensation |
577 | 547 | ||||||
Net operating loss carryforwards |
342,604 | 289,247 | ||||||
Federal & state tax credits |
398 | 893 | ||||||
Alternative minimum tax |
1,901 | 1,088 | ||||||
Hedging |
2,684 | 9,587 | ||||||
Other intangible assets |
(23,085 | ) | (25,519 | ) | ||||
Indefinite-lived intangible assets |
(314,726 | ) | (290,037 | ) | ||||
Plant assets |
(41,247 | ) | (42,349 | ) | ||||
Unremitted earnings |
(1,198 | ) | | |||||
Other |
236 | (511 | ) | |||||
Valuation allowance |
(300,510 | ) | (244,144 | ) | ||||
(318,701 | ) | (296,567 | ) | |||||
Net deferred tax asset (liability) |
$ | (315,057 | ) | $ | (290,307 | ) | ||
Amounts recognized in the Consolidated Balance Sheet |
||||||||
Current deferred tax assets |
$ | 3,644 | $ | 6,260 | ||||
Non-current deferred tax liabilities |
(318,701 | ) | (296,567 | ) | ||||
Net deferred tax asset (liability) |
$ | (315,057 | ) | $ | (290,307 | ) | ||
As described in Note 1, PFHC became a wholly owned subsidiary of Crunch Holding Corp.(CHC) on November 25, 2003. On March 19, 2004, PFHC was merged with and into Aurora, with Aurora surviving the Merger. The surviving company was renamed Pinnacle Foods Group Inc. (PFGI or the Predecessor). On April 2, 2007, CHC, the parent to PFF (the Company or Successor), was acquired by Peak Holdings LLC (the Blackstone Transaction).
SFAS No. 109, Accounting for Income Taxes, requires that a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a companys performance, the market environment in which the company operates, the utilization of past tax credits, length of carryback and carryforward periods, existing contracts or sales backlog that will result in future profits.
SFAS No. 109 further states that where there is negative evidence such as cumulative losses in recent years, concluding that a valuation allowance is not required is problematical. Therefore, cumulative losses weigh heavily in the overall assessment. Management has determined that it is no longer more likely than not that the Company would be able to realize the deferred tax assets of both the Predecessor and the Company. This conclusion was reached due to cumulative losses recognized by the Predecessor in preceding years. Management intends to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.
97
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
In accordance with SFAS No. 109, deferred assets and liabilities have been recognized for the differences between the assigned values and the tax bases of the assets and liabilities recognized in a purchase business combination. As of the April 2, 2007 business combination date, the Company established a deferred tax liability of $268.0 million, net of valuation allowance of $236.0 million. The deferred tax liability relates to the book and tax basis differences for indefinite lived intangible assets consisting of primarily tradenames and goodwill. As of December 28, 2008, the remaining valuation allowance that was recorded on the business combination date was $227.9 million. Upon the adoption of FAS141 (R) in 2009, the tax benefit from any future release of the acquisition date valuation would be reflected in the tax provision, rather than as a reduction to goodwill as required under prior accounting standards.
The federal valuation allowance at December 28, 2008 is $283.4 million, and the state valuation allowance is $34.9 million.
CHC, the parent of the Company is a loss corporation as defined in Internal Revenue Code Section 382. As of December 28, 2008 CHC had a federal Net Operating Loss Carryover of $1,125.5 million of which $898.1 million existed as of the business combination date and is subject to various Section 382 limitations. Approximately $255.4 million of the carryover from the Aurora transaction exceeds the estimated Section 382 limitation. As noted below, in connection with the adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48) the Predecessor reduced its deferred tax assets for this limitation. Section 382 places an annual limitation on a CHCs ability to utilize loss carryovers to reduce future taxable income. It is expected that CHCs annual Section 382 limitation will approximate $14 million to 18 million, which may increase or decrease pending resolution of certain tax matters. This annual limitation can affect the Companys ability to utilize other tax attributes such as tax credit carryforwards.
CHCs federal net operating losses have expiration periods from 2017 through 2028 . CHC also has state tax net operating loss carryforwards which are also limited and vary in amount by jurisdiction. State net operating losses are approximately $641.4 million with expiration periods through 2028.
Following are the changes in the deferred tax valuation allowance:
Beginning
Balance |
Additions | Acquisitions | Deductions |
Ending
Balance |
|||||||||||||
Successor |
|||||||||||||||||
Fiscal year ended December 28, 2008 |
$ | 268,854 | $ | 50,103 | $ | | $ | (659 | ) | $ | 318,298 | ||||||
39 weeks ended December 30, 2007 |
331,858 | 45,814 | (95,883 | ) | (12,935 | ) | 268,854 | ||||||||||
Predecessor |
|||||||||||||||||
13 weeks ended April 2, 2007 |
$ | 398,000 | $ | 39,670 | $ | | $ | (105,812 | ) | $ | 331,858 | ||||||
Fiscal year ended December 31, 2006 |
385,868 | 2,307 | 10,592 | (767 | ) | 398,000 |
Adoption of FIN 48
We adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes: An Interpretation of Statement of Financial Accounting Standards (SFAS) Statement No. 109, on January 1, 2007. As a result of adoption, we recognized a charge of $260 to the January 1, 2007 retained earnings balance and $1,070 increase to goodwill related to the Pinnacle Transaction. As of January 1, 2007, after the implementation of FIN 48, the Companys liability for unrecognized tax benefits was $2,280, excluding liabilities for interest and penalties. The amount, if recognized, that would impact the Predecessors effective tax rate was $261. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (UTB) is as follows:
Gross unrecognized tax benefits at January 1, 2007 |
$ | 2,278 | |
Increase ( decrease) for tax positions related to prior periods |
| ||
Increase ( decrease) for tax positions related to the current period |
| ||
Decrease related to settlement with tax authorities |
| ||
Reductions due to lapse of applicable statutes of limitations |
| ||
Gross unrecognized tax benefit at April 2, 20007 |
$ | 2,278 |
98
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Increase ( decrease) for tax positions related to prior periods |
| |||
Increase ( decrease) for tax positions related to the current period |
| |||
Decrease related to settlement with tax authorities |
| |||
Reductions due to lapse of applicable statutes of limitations |
(902 | ) | ||
Gross unrecognized tax benefits at December 30, 2007 |
$ | 1,376 | ||
Increase ( decrease) for tax positions related to prior periods |
97 | |||
Increase ( decrease) for tax positions related to the current period |
| |||
Decrease related to settlement with tax authorities |
| |||
Reductions due to lapse of applicable statutes of limitations |
(985 | ) | ||
Gross unrecognized tax benefits at December 28, 2008 |
$ | 488 | ||
The Companys liability for UTB as of December 28, 2008 is $488, reflecting a reduction of $985 resulting from the expiration of certain statutes of limitation. The amount, if recognized, that would impact the effective tax rate as of December 28, 2008 was $488. The entire amount of the liability for unrecognized tax benefits is classified as a long-term liability. Certain statutes of limitation may expire within the next twelve months that could cause a decrease in the UTB liability of approximately $73. The decrease, if realized, would be recorded as a tax benefit to the provision.
The Company recognizes interest and penalties associated with uncertain tax positions as a component of the Provision for Income Taxes. The Companys liability includes accrued interest of $364 and $106 as of December 30, 2007 and December 28, 2008, respectively. A reduction in accrued interest of $333 was recorded during 2008 as the result of the expiration of certain statutes of limitation. No penalties were accrued.
Upon adoption, the Company also recorded a reduction of $102 million to its non-current federal and state deferred tax assets resulting from the excess of Auroras net operating loss carryover over its estimated limitation under Internal Revenue Code Section 382. As the Company maintains a full valuation allowance against this deferred tax asset, the adjustment resulted in no impact on the Consolidated Balance Sheet or Consolidated Statement of Operations of the Company.
The Company files income tax returns with the U.S. federal government and various state and international jurisdictions. With few exceptions, the Companys 1999 and subsequent federal and state tax years remain open by statute, principally relating to net operating loss carryovers. International jurisdictions remain open for 2001 and subsequent periods. The Company does not have any open examinations that would result in a material change to the Companys liability for uncertain tax positions.
99
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
14. | Financial Instru ments |
The Company may utilize derivative financial instruments to enhance its ability to manage risks, including interest rate, certain commodities and foreign currency, which exist as part of ongoing business operations. The Company does not enter into contracts for speculative purposes, nor is it a party to any leveraged derivative instrument. The Company monitors the use of derivative financial instruments through regular communication with senior management and third party consultants as well as the utilization of written guidelines.
Interest Rate Risk
The Company relies primarily on bank borrowings to meet its funding requirements. The Company utilizes interest rate swap agreements or other derivative instruments to reduce the potential exposure to interest rate movements and to achieve a desired proportion of variable versus fixed rate debt. The Company will recognize the amounts that it pays or receives on hedges related to debt as an adjustment to interest expense.
Prior to the Blackstone Transaction, the Predecessor had entered into interest rate swap agreements with counterparties to effectively change a portion of the floating rate payments on its senior secured credit facilities into fixed rate payments. As of April 1, 2007, the fair value of the interest rate swaps was a net loss of $2,299, which was recorded as a long term liability. This interest rate swap was settled in April 2007.
After the Blackstone Transaction was completed, the Successor entered into a new interest rate swap agreement and an interest rate collar agreement with Lehman Brothers Special Financing (LBSF). See Lehman Brothers Special Financing below regarding the bankruptcy of LBSF and the subsequent termination of the interest rate swap and collar contracts.
In accordance with SFAS No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities, the Company designated the interest rate swap as a cash flow hedge of the risk of changes attributable to interest rate risk in the Companys first previously unhedged LIBOR-indexed interest payments made each quarter until the maturity date of the swap that, in the aggregate for each period, are interest payments on an amount of debt principal corresponding to the outstanding swap notional amount of the Companys then-existing LIBOR-based floating rate debt that reprices on the closest day following the second day of each January, April, July and October (the hedged transactions). The interest rate swap contained the following terms:
|
Notional amount: $976,250 amortizing to $63,651 |
|
Fixed rate: 4.958% |
|
Index: 3 mo. USD-LIBOR-BBA |
|
Effective Date: April 2, 2007 |
|
Maturity Date: April 2, 2012 |
In accordance with SFAS No. 133, the interest rate collar had also been designated as a cash flow hedge of the changes in the forecasted floating-rate interest payments attributable to changes in 3-month USD-LIBOR-BBA above 5.50% and below 4.39% (the strike rates) on the first previously unhedged 3-month USD-LIBOR-BBA interest payments on the Companys then-existing 3-month USD-LIBOR-BBA-based debt having a principal amount corresponding to the outstanding notional amount of the collar that resets on the second day of each January, April, July and October until the maturity date of the collar. The collar had an effective date of April 2, 2008 and a maturity date of April 2, 2012. Should 3-month USD-LIBOR-BBA fall below 4.39% on a rate reset date during the period from April 2, 2008 to April 2, 2012, the Company was to pay the Counterparty the amount equal to the outstanding notional amount of the collar multiplied by a spread [equalling 4.39% minus 3-month USD-LIBOR-BBA] multiplied by the number of days in the period divided by 360. Should 3-month USD-LIBOR-BBA rise above 5.50% on a rate reset date during the period from April 2, 2008 to April 2, 2012, the Counterparty was to pay the Company the amount equal to the outstanding notional amount on the collar multiplied by a spread [equalling 3-month USD-LIBOR-BBA minus 5.50%] multiplied by the number of days in the period divided by 360.
100
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
As of December 30, 2007, the fair values of the interest rate swap and collar contracts were a loss of $24,135, which was recorded in the Other long-term liabilities line on the Consolidated Balance Sheet. The offsetting loss was recorded as a component of Accumulated other comprehensive (loss) income. As of December 30, 2007, interest receivable of $653 was recorded in the Other current assets line on the Consolidated Balance Sheet. The offsetting gains or losses from interest payable or interest receivable are recorded as a component of Interest expense in the Consolidated Statement of Operations.
As a result of the Lehman Brothers Special Financing bankruptcy on October 3, 2008, the swaps were de-designated as a cash flow hedge in accordance with SFAS No. 133. The fair market value of the swap and collar on the de-designation date was $11,547. These contracts were terminated on October 24, 2008 at a price of $17,030 excluding fees and expenses. The gain on the swap and collar from December 30, 2007 to the de-designation date ($12,588) was recorded in Accumulated other comprehensive (loss) income. From October 3, 2008 to October 24, 2008, the fair market value of the swap and collar declined from a loss of $11,547 to a loss of $17,030 (the termination payment). The amount of the loss, $5,483, was recorded as a component of Interest expense in the Consolidated Statement of Operations. The fair market value at the date of de-designation was $11,547, which was recorded in Accumulated other comprehensive (loss) income, is being amortized over the remaining life of the LBSF swap and collar. The amount amortized from the de-designation date (October 3, 2008) to the end of the year was $1,259. For more information on the bankruptcy of Lehman Brothers Special Financing, see Note 4 to the Consolidated Financial Statements.
In March 2008, the Company entered into an interest rate basis swap agreement with Goldman Sachs Capital Markets LP to effectively change the spread at which the Company pays interest from the 3 month LIBOR rate to the 1 month LIBOR rate. The agreement contains the following terms:
|
Notional amount: $390,000 |
|
Index 1: 3 month USD-LIBOR-BBA |
|
Index 1 Payer: Pinnacle Foods Finance LLC |
|
Index 2: 1 month USD-LIBOR-BBA |
|
Index 2 Payer: Goldman Sachs Capital Markets LP |
|
Effective Date: April 2, 2008 |
|
Maturity Date: December 26, 2008 |
This swap was not designated as a hedge pursuant to SFAS No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities. As of December 28, 2008, the fair value of the interest rate swap was zero. Losses on the interest rate swap for fiscal 2008, which were recorded as a component of interest expense, totaled $1,008.
In the 4 th quarter of 2008, the Company entered into four interest rate swap agreements with Barclays Bank PLC (Barclays).
In accordance with SFAS No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities, the Company designated the Barclays interest rate swaps as cash flow hedges of the risk of changes attributable to interest rate risk in the Companys LIBOR-indexed interest payments made each month until the maturity date of the swaps that, in the aggregate for each period, are interest payments on an amount of debt principal corresponding to the outstanding swaps notional amount of the Companys then-existing LIBOR-based floating rate debt that reprices on the closest day following the second day of each month. The four Barclays interest rate swaps in the aggregate contain the following terms:
|
Notional amounts: $768,498 amortizing to $581,593 |
|
Fixed rate: 1.54% - 2.7625% |
|
Index: 3 mo. USD-LIBOR-BBA |
|
Effective Date: January 2, 2009 |
|
Maturity Date: April 2, 2011 |
As of December 28, 2008, the fair values of the interest rate swaps contracts were a loss of $11,890, which was recorded in the Other long-term liabilities line on the Consolidated Balance Sheet. The offsetting loss was recorded as a component of Accumulated other comprehensive (loss) income.
101
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Gains and losses on the interest rate swaps, which were recorded as either an adjustment to interest expense in the Consolidated Statement of Operations or as an adjustment to Accumulated other comprehensive (loss) income on the Consolidated Balance Sheets, are detailed below:
Interest Rate Swaps |
Successor | Predecessor | ||||||||||||||
Fiscal year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13 weeks
ended April 2, 2007 |
Fiscal year
ended December 31, 2006 |
|||||||||||||
Mark-to-market gain/(loss) recorded in: |
||||||||||||||||
Accumulated other comprehensive (loss) income |
$ | 698 | $ | (24,135 | ) | $ | | $ | | |||||||
Consolidated Statement of Operations |
(5,483 | ) | 2,299 | (1,452 | ) | (3,269 | ) | |||||||||
Realized gain/(loss) recorded in the |
||||||||||||||||
Consolidated Statement of Operations |
(10,743 | ) | 260 | 1,036 | 2,382 | |||||||||||
Net gain/(loss) on interest rate swaps |
$ | (15,528 | ) | $ | (21,576 | ) | $ | (416 | ) | $ | (887 | ) | ||||
Commodity Risk
The Predecessor had entered into various natural gas swap transactions with JP Morgan Chase Bank (a related party of the Predecessor) to lower the Companys exposure to the price of natural gas. At the time of the Blackstone Transaction, the fair value of the gas swaps was a gain of $45 and was recorded in other current assets. The related offset is recorded as a gain or loss and is recognized as an adjustment to cost of products sold.
After the Blackstone Transaction was completed, the Company entered into natural gas swap transactions with LBSF to lower the Companys exposure to the price of natural gas. As of December 30, 2007, the trades in effect matured in June 2008 and had various notional quantities of MMBTUs per month. The Company paid a fixed price ranging from $7.24 to $7.97 per MMBTU, with settlements monthly. As of December 30, 2007, the fair value of the natural gas swaps was a loss of $77, and was recorded in accrued liabilities. Losses for the fiscal year ended December 30, 2007, recorded as a component of cost of products sold, were $431. In September 2008, new contracts were signed with LBSF with trades in effect that matured between October 2008 and December 2009 with quantities ranging from 29,000 to 59,000 MMBTUs per month. The Company paid a fixed price ranging from $8.53 to $12.81 per MMBTU, with settlements monthly. In October 2008, the natural gas contracts were terminated as a result of the bankruptcy of Lehman Brothers Special Financing at a price of $1,314 excluding fees and expenses. See Lehman Brothers Special Financing below regarding the bankruptcy of LBSF and the subsequent termination of the natural gas swap transactions.
In the 4 th quarter of 2008, the Company entered into natural gas swap agreements with Barclays Bank PLC. As of December 28, 2008, the trades in effect mature between January 2009 and October 2009 with monthly quantities ranging from 24,000 to 150,000 MMBTUs. The Company will pay a fixed price ranging from $6.23 to $6.75 per MMBTU, with settlements monthly. As of December 28, 2008, the fair value of the natural gas swap was a loss of $288, and is recorded in Accrued liabilities on the Consolidated Balance Sheet.
Losses for the fiscal year ended December 28, 2008 related to the Natural Gas Swaps, recorded as a component of Cost of Products Sold, were $1,869.
The swap contracts were not designated as hedges pursuant to SFAS No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities.
Gains and losses on the natural gas swaps, which were recorded as a component of cost of products sold in the Consolidated Statement of Operations, are detailed below:
Natural Gas Swaps |
Successor | Predecessor | ||||||||||||||
Fiscal year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13 weeks
ended April 2, 2007 |
Fiscal year
ended December 31, 2006 |
|||||||||||||
Mark-to-market gain/(loss) recorded in: |
||||||||||||||||
Consolidated Statement of Operations |
$ | (210 | ) | $ | (123 | ) | $ | 205 | $ | (168 | ) | |||||
Realized gain/(loss) recorded in the |
||||||||||||||||
Consolidated Statement of Operations |
(1,659 | ) | (308 | ) | (84 | ) | (1,207 | ) | ||||||||
Net gain/(loss) on natural gas swaps |
$ | (1,869 | ) | $ | (431 | ) | $ | 121 | $ | (1,375 | ) | |||||
102
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Foreign Exchange Risk
The Company entered into various types of foreign currency contracts to lower the Companys exposure to exchange rate fluctuations between the U.S. dollar and the Canadian dollar with two vendors: LBSF and the Union Bank of California. Each agreement was based upon a notional amount in Canadian dollars, which is expected to approximate a portion of the amount of the Companys Canadian subsidiarys U.S. dollar-denominated purchases for the month.
The contracts with LBSF were entered into in April 2007 and were not designated as hedges pursuant to SFAS No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities. As of December 30, 2007, the fair value of the Lehman foreign currency exchange contracts was a loss of $2,353, which was recorded in Accrued liabilities on the Consolidated Balance Sheet.
In October, 2008, the foreign currency contracts were terminated as a result of the bankruptcy of LBSF with proceeds to the Company of $629 excluding fees and expenses. Losses and gains for the LBSF foreign exchange contacts were recorded as an adjustment to cost of products sold on the Consolidated Statement of Operations. See Lehman Brothers Special Financing below for a discussion of the costs related to the termination of the swap and collar contracts. For more information on the bankruptcy of Lehman Brothers Special Financing, see Note 4 to the Consolidated Financial Statements.
Contracts with the Union Bank of California were entered into in October 2007 and in accordance with SFAS No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities were designated as a cash flow hedge. SFAS No. 133 states that foreign currency risk associated with these transactions can be designated as a hedge since (1) they are in a currency (CAD) other than the Companys functional currency (USD), (2) they have a high probability of occurring since the contract values approximate a portion of the amount of the Companys Canadian subsidiarys U.S. dollar-denominated purchases for the month and (3) the foreign currency risk associated with these transactions affects consolidated earnings. The exchange rate swap contracts outstanding at December 28, 2008 contain the following terms:
|
Notional amounts: $400 - $2,600 CAD |
|
CAD to USD Exchange Rates: .968 - 1.007 |
|
Maturity Dates: Jan 2009 - Dec 2009 |
As of December 30, 2007, the fair value of the Union Bank of California foreign currency exchange contracts was a gain of $752, of which $406 was recorded in Other current assets and $347 is recorded in Other assets, net on the Consolidated Balance Sheet. As of December 28, 2008, the fair value of the Union Bank of California foreign currency swap contracts was a gain of $5,346 which is recorded in Other current assets on the Consolidated Balance Sheet. The offsetting gain of $4,594 is recorded as a component of Accumulated other comprehensive (loss) income ($4,594 net of tax).
Gains and losses on the foreign currency exchange swaps, which were recorded as either an adjustment to cost of products sold in the Consolidated Statement of Operations, or as an adjustment to Accumulated other comprehensive (loss) income on the Consolidated Balance Sheets, are detailed below:
Successor | Predecessor | |||||||||||||
Foreign currency swaps |
Fiscal year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13 weeks
ended April 2, 2007 |
Fiscal year
ended December 31, 2006 |
||||||||||
Mark-to-market gain/(loss) recorded in: |
||||||||||||||
Accumulated other comprehensive (loss) income |
$ | 4,594 | $ | 752 | $ | | $ | | ||||||
Consolidated Statement of Operations |
2,353 | (2,353 | ) | | 280 | |||||||||
Realized gain/(loss) recorded in the |
||||||||||||||
Consolidated Statement of Operations |
2,394 | (2,840 | ) | | (557 | ) | ||||||||
Net gain/(loss) on foreign currency swaps |
$ | 9,341 | $ | (4,441 | ) | $ | | $ | (277 | ) | ||||
103
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Lehman Brothers Special Financing
As discussed in Note 4, on October 3, 2008, Lehman Brothers Special Financing filed for Chapter 11 Bankruptcy protection. The bankruptcy filing constitutes an event of default with respect to the interest rate swap, interest rate collar, natural gas swaps and foreign currency options. The Company, as is its right under the contract agreement with LBSF, terminated all of its contracts at a cash cost of $17.7 million, consisting of $17.5 million paid to LBSF and $0.2 million in expenses.
Other
The Company utilizes irrevocable standby letters of credit with one-year renewable terms to satisfy workers compensation self-insurance security deposit requirements. At December 30, 2007, the Companys contract value of the outstanding standby letters of credit to satisfy workers compensation self-insurance security deposits was $9,483, which approximates fair value. As of December 30, 2007, the Company also utilized letters of credit in connection with the purchase of raw materials in the amount of $274, which approximates fair value. At December 28, 2008, the Companys contract value of the outstanding standby letters of credit to satisfy workers compensation self-insurance security deposits was $8,072, which approximates fair value. As of December 28, 2008, the Company also utilized letters of credit in connection with the purchase of raw materials in the amount of $7,109, which approximates fair value.
Other than mentioned above in regards to LBSF, the Company is exposed to credit loss in the event of non-performance by the other parties to derivative financial instruments. All counterparties are at least A- rated or equivalent by Standard & Poors and Moodys. Accordingly, the Company does not anticipate non-performance by the counterparties.
The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate fair value.
The estimated fair value of the Companys long-term debt, including the current portion, as of December 28, 2008, is as follows:
December 28, 2008 | ||||||
Issue |
Recorded
Amount |
Fair Value | ||||
Senior Secured Credit Facilities - term loan |
$ | 1,234,375 | $ | 834,438 | ||
9.25% Senior Notes |
325,000 | 208,423 | ||||
10.625% Senior Subordinated Notes |
199,000 | 106,714 | ||||
$ | 1,758,375 | $ | 1,149,575 | |||
The fair value is based on the quoted market price for such notes and borrowing rates currently available to the Company for loans with similar terms and maturities.
104
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
15. | Commitments and C ontingencies |
General
From time to time, the Company and its operations are parties to, or targets of, lawsuits, claims, investigations, and proceedings, which are being handled and defended in the ordinary course of business. Although the outcome of such items cannot be determined with certainty, the Companys general counsel and management are of the opinion that the final outcome of these matters should not have a material effect on the Companys financial condition, results of operations or cash flows.
Employee LitigationIndemnification of US Cold Storage
On March 21, 2002, an employee at the Companys former Omaha, Nebraska facility, died as the result of an accident while operating a forklift at a Company-leased warehouse facility. OSHA conducted a full investigation and determined that the death was the result of an accident and found no violations by the Company. On March 18, 2004, the estate of the deceased filed suit in District Court of Sarpy County, Nebraska, Case No: CI 04-391, against the Company, the owner of the forklift and the leased warehouse, the manufacturer of the forklift and the distributor of the forklift. The Company, having been the deceaseds employer, was named as a defendant for workers compensation subrogation purposes only.
On May 18, 2004, the Company received notice from defendant, US Cold Storage, the owner of the leased warehouse, requesting that it accept the tender of defense for US Cold Storage in this case in accordance with the indemnification provision of the warehouse lease. In November 2008, the Company paid $13 and the matter was settled and dismissed.
R2 appeal in Aurora bankruptcy
Prior to its bankruptcy filing in 2003, Aurora entered into an agreement with its pre-petition lending group compromising the amount of certain fees due under its senior bank facilities (the October Amendment). One of the members of the bank group (R2 Top Hat, Ltd.) challenged the enforceability of the October Amendment during Auroras bankruptcy by filing an adversary proceeding in U.S. Bankruptcy Court, District of Delaware, and by objecting to confirmation. The Bankruptcy Court rejected the lenders argument and confirmed Auroras plan of reorganization. The lender then appealed from those orders of the Bankruptcy Court. In December 2006, the U.S. District Court for the District of Delaware filed its Memorandum and Order affirming both (a) the February 20, 2004 Order of the Bankruptcy Court confirming the debtors First Amended Joint Reorganization Plan, and (b) the February 27, 2004 Order of the Bankruptcy Court granting the debtors motion for summary judgment and dismissing the adversary proceeding. R2 Top Hat, Ltd. filed a Notice of Appeal to the 3 rd Circuit Court of Appeals. On April 17, 2008, the Company settled with R2 Top Hat, Ltd. for $10.0 million in full payment of the excess leverage fees related to the Aurora prepetition bank facility, all related interest and all other out-of-pocket costs. After this settlement, there are no remaining contingencies related to the excess leverage fees under the Aurora prepetition senior bank facility. Accordingly, the remaining $10.0 million accrued liability assumed in the merger with Aurora Foods Inc. and recorded at fair value of $20.1 million in the purchase price allocation for the Blackstone Transaction was reduced to $0 and the related credit, net of related expenses, was recorded in the Other (expense) income, net in the Consolidated Statement of Operations.
105
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
American Cold StorageNorth America, L.P. v. P.F. Distribution, LLC and Pinnacle Foods Group Inc.
On June 26, 2005, the Company was served with a Summons and Complaint in the above matter, which was filed in the Circuit Court of Madison County, Tennessee. American Cold Storage (ACS) operates a frozen storage warehouse and distribution facility (the Facility) located in Madison County, Tennessee, near the Companys Jackson, Tennessee plant. In April 2004, the Company entered into discussions with ACS to utilize the Facility. Terms were discussed, but no contract was ever signed. Shortly after shipping product to the Facility, the Company discovered that the Facility was incapable of properly handling the discussed volume of product and began reducing its shipments to the Facility. The original complaint sought damages not to exceed $1.5 million, together with associated costs. On May 3, 2006, the Companys attorney received notice from counsel for ACS that it was increasing its damage claim in the suit from $1.5 million to $5.5 million. The judge had set a trial date for August 2008. However, prior to the court date, the Company settled the litigation by paying $0.7 million to ACS on August 27, 2008, and the case was dismissed without prejudice. The resolution of this matter did not have a material impact on the Companys financial condition, results of operations or cash flows.
Gilster Mary Lee Corporation v. Pinnacle Foods
In September 2006, Gilster Mary Lee Corporation (Gilster), the primary co-packer of the Companys Duncan Hines products, filed suit against us alleging that monies were due to Gilster from the Company for a warehouse/handling fee under an existing contract. While certain of these fees are required by the contract, the calculation of the fees was the issue in dispute. In U.S. District Court in January 2008, a verdict was returned in favor of Gilster. The Company had fully reserved the amount of the verdict. On July 17, 2008, the Company and Gilster settled the case for full payment of the amount reserved and dismissed all appeals. In addition, an amendment was made to the contract modifying the disputed warehouse/handling fee and certain payment terms from the date of settlement forward. The resolution of this matter did not have a material impact on the Companys financial condition, results of operations or cash flows.
Other Matters
Operating Leases
Certain offices, distribution facilities and equipment are under operating leases expiring on various dates through 2015. Total rental expense charged to operations of the Successor was $4,943 and $2,375 in fiscal 2008 and the 39 weeks ended December 30, 2007, respectively. Total rental expense charged to operations of the Predecessor was $1,518 and $6,077 in the 13 weeks ended April 2, 2007 and in fiscal 2006, respectively. The minimum future rental commitments under non-cancelable leases payable over the remaining lives of these leases approximate $4,619 in 2009, $4,398 in 2010, $3,454 in 2011, $2,565 in 2012 and $1,912 in 2013 and $866 thereafter. The largest operating leases are for the corporate offices in Cherry Hill and Mountain Lakes, New Jersey and a warehouse in Effingham, IL. Under the terms of these lease agreements, if the leases are terminated early, Pinnacle would be required to accelerate rental payments of approximately $15.6 million due during the remainder of the leases.
16. | Related Party Trans actions |
Successor
Advisory Agreement
At the closing of the Blackstone Transaction, the Company entered into an advisory agreement with an affiliate of The Blackstone Group pursuant to which such entity or its affiliates provide certain strategic and structuring advice and assistance to us. In addition, under this agreement, affiliates of The Blackstone Group provide certain monitoring, advisory and consulting services to the Company for an aggregate annual management fee equal to $2,500 for the year ended December 2007, and the greater of $2,500 or 1.0% of Consolidated EBITDA (as defined in the credit agreement governing the Companys Senior Secured Credit Facility) for each year thereafter. Affiliates of Blackstone received reimbursement for out-of-pocket expenses incurred by them in connection with the Blackstone Transaction prior to the closing date and in connection with the provision of services pursuant to the agreement of merger. Expenses relating to the management fee were $2,500 for the 39 weeks ended December 30, 2007 and $2,500 for the fiscal year ended December 28, 2008. In addition, the Company reimbursed the Blackstone group out-of-pocket expenses totaling $110 for the fiscal year ended December 28, 2008.
106
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
In addition, on April 2, 2007 and pursuant to the agreement of merger, an affiliate of Blackstone received transaction fees totaling $21,600 for services provided by Blackstone and its affiliates related to the Blackstone Transaction. This is included in the transaction fees described in footnote 1.
Supplier Costs
Graham Packaging, which is owned by affiliates of the Blackstone Group, supplies packaging for some of the Companys products. Purchases from Graham Packaging were $8,729 for the 39 weeks ended December 30, 2007 and $11,322 for the fiscal year ended December 28, 2008.
Debt and Interest Expense
For the period April 2, 2007 to December 30, 2007, fees and interest expense recognized in the Consolidated Statement of Operations for debt to the related party Blackstone Advisors L.P. totaled $1,463. Related party interest for Blackstone Advisors L.P for the fiscal year ended December 28, 2008 was $3,106.
Predecessor
Management fees
On November 25, 2003, the Company entered into a Management Agreement with JPMorgan Partners, LLC (JPMP) and J.W. Childs Associates, L.P. (JWC) whereby JPMP and JWC provide management, advisory and other services. The agreement called for quarterly payments of $125 to each of JPMP and JWC for management fees. In connection with the September 2004 default on the Companys senior credit agreement and the resulting amendment, the payment of the management fees was suspended during the amendment period, which ended on the second business day following the date on which the Company delivered to the Administrative Agent financial statements for the fiscal quarter ending March 2006. Therefore, for the fiscal year ended December 31, 2006, management fees expensed and paid to JPMP and JWC totaled $750. For the period January 1, 2007 to April 1, 2007, management fees expensed and paid to JPMP and JWC were $250. In addition, the Company reimbursed JPMP and JWC for out-of-pocket expenses totaling $7 and $61 during the period January 1, 2007 to April 2, 2007 and fiscal 2006. The Management Agreement also stipulated that in connection with any acquisition transaction subsequent to the Pinnacle Transaction and Aurora Merger, there would be a transaction fee of 1 / 2 % of the aggregate purchase price payable to each of JPMP and JWC, plus fees and expenses. In connection with the acquisition of the Armour Business, each of JPMP and JWC were paid a transaction fee of $915. JPMP was also reimbursed for out of pocket expenses totaling $4. These transaction fees are included in Acquisition costs in Note 3. In connection with the Blackstone Transaction, JPMP and JWC were each paid a transaction fee of $10.8 million. Also, in connection with the Blackstone Transaction, this agreement was cancelled, effective with the change in control.
Also on November 25, 2003, the Company entered into an agreement with CDM Capital LLC, an affiliate of CDM Investor Group LLC, whereby CDM Capital LLC will receive a transaction fee of 1 / 2 % of the aggregate purchase price of future acquisitions (other than the Pinnacle Transaction or the Aurora Merger), plus fees and expenses. In connection with the acquisition of the Armour Business, CDM Capital LLC was paid a transaction fee of $915. This transaction fee is included in Acquisition costs in Note 3. In connection with the Blackstone Transaction, CDM Capital LLC was paid a transaction fee of $10.8 million. Also, in connection with the Blackstone Transaction, this agreement was cancelled, effective with the change in control.
Certain ownership units of Crunch Equity Holding LLC were issued to CDM Investor Group LLC in connection with the acquisition of the Armour Business. The estimated fair value of the interests that was included in administrative expenses was $1,415 for fiscal year ending December 31, 2006.
Leases and Aircraft
The Company leased office space owned by a party related to C. Dean Metropoulos, the Companys former Chairman. The base rent for the office is $87 annually. Rent expense was $26 during the period January 1, 2007 to April 2, 2007 and $104 in fiscal 2006.
107
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Beginning November 25, 2003, the Company began using an aircraft owned by a company indirectly owned by the former Chairman. In connection with the usage of the aircraft, the Company incurred net operating expenses of $688 during the period January 1, 2007 to April 2, 2007 and $2,750 in fiscal 2006. The Company also incurred direct costs totaling $78 during the period January 1, 2007 to April 2, 2007, and $277 in fiscal 2006 that were reimbursed to the Company by the owner of the aircraft.
Effective with the occurrence of the Blackstone Transaction, the contracts to lease the office space and aircraft were terminated. The Predecessor recorded a charge of $6.3 million related to these contract terminations. The charge was recorded in the Consolidated Statement of Operations of the Predecessor immediately prior to the Blackstone Transaction.
Debt and Interest Expense
For the period January 1, 2007 to April 2, 2007, fees and interest expense recognized in the Consolidated Statement of Operations for the debt to the related party, JPMorgan Chase Bank, amounted to $9. For fiscal 2006 fees and interest expense recognized in the Consolidated Statement of Operations for the debt to the related party, JPMorgan Chase Bank, amounted to $693. See Note 11.
Financial Instruments
The Company had entered into transactions for derivative financial instruments with JPMorgan Chase Bank to lower its exposure to interest rates, foreign currency, and natural gas prices. During the period January 1, 2007 to April 2, 2007, the net cash paid by the Company for the settlement of financial instruments totaled $84. The total net cash paid by the Company for the settlement of foreign exchange swaps and natural gas swaps during fiscal 2006 was $1,764. See Note 14.
Expenses of Major Shareholder
As part of the Aurora Merger, the Company agreed to pay certain fees of the Bondholders Trust (as explained below), which owns approximately 43% of Crunch Equity Holding (LLC) (the former ultimate parent). The Bondholders Trust primarily consists of holders of Auroras senior subordinated notes, which elected to receive equity interests in the LLC as consideration in the Aurora Merger. The Company recognized in the Consolidated Statement of Operations $394 in fees on behalf of the Bondholder Trust in fiscal years 2006.
Consulting Agreement
During the first quarter of 2006, the Company entered into a consulting agreement with Mr. Evan Metropoulos, a former executive of PFGI and the brother of the Companys former Chairman, C. Dean Metropoulos. Mr. E. Metropoulos provided to the Company consulting services related to the integration of the Armour Business, which was acquired on March 1, 2006. The work was completed during fiscal 2006 and payments made to Mr. E. Metropoulos under this agreement totaled $12.
108
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
17. | Segments |
The Companys products and operations are managed and reported in two operating segments. The dry foods segment consists of the following reporting units: baking (Duncan Hines ® ), condiments (Vlasic ® , Open Pit ® ), syrups (Mrs. Butterworths ® and Log Cabin ® ) and canned meat (Armour ® ). The frozen foods segment consists of the following reporting units: frozen dinners and entrees (Hungry-Man ® , Swanson ® ), frozen seafood (Van de Kamps ® Mrs. Pauls ® ), frozen breakfast (Aunt Jemima ® ), bagels (Lenders ® ), and frozen pizza (Celeste ® ). Segment performance is evaluated by the Companys Chief Operating Decision Maker and is based on earnings before interest and taxes. Transfers between segments and geographic areas are recorded at cost plus markup or at market. Identifiable assets are those assets, including goodwill, which are identified with the operations in each segment or geographic region. Cost of products sold in the dry foods segment for the fiscal year ended December 31, 2006 includes $4,760, representing the write-up of inventories to fair value at the date of the acquisition of the Armour Business. Cost of products sold in the dry segment during the 39 weeks ended December 30, 2007 included $28,480 representing the write up of inventories to the fair value at the date of the Blackstone Transaction. Cost of products sold in the frozen segment during the 39 weeks ended December 30, 2007 included $11,723 representing the write-up of inventories to the fair value at the date of the Blackstone Transaction. Fair value is also referred to as net realizable value, which is defined as estimated selling prices less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the selling effort of the acquiring entity. Corporate assets consist of prepaid and deferred tax assets. Unallocated corporate expenses consist of corporate overhead such as executive management, finance and legal functions, stock-based compensation expense related to the ownership units of Crunch Equity Holding LLC issued to CDM Investors Group LLC in 2006, merger expenses related to the Blackstone Transaction in 2007, and the gain on litigation settlement in 2008.
Successor | Predecessor | |||||||||||||||
Segment Information |
Fiscal year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13 weeks
ended April 2, 2007 |
Fiscal year
ended December 31, 2006 |
||||||||||||
Net sales |
||||||||||||||||
Dry foods |
$ | 915,297 | $ | 670,280 | $ | 193,606 | $ | 797,568 | ||||||||
Frozen foods |
641,111 | 467,618 | 182,981 | 644,688 | ||||||||||||
Total |
$ | 1,556,408 | $ | 1,137,898 | $ | 376,587 | $ | 1,442,256 | ||||||||
Earnings (loss) before interest and taxes |
||||||||||||||||
Dry foods |
$ | 133,276 | $ | 72,765 | $ | 32,337 | $ | 121,677 | ||||||||
Frozen foods |
21,268 | 33,531 | 675 | 43,550 | ||||||||||||
Unallocated corporate expenses |
(3,128 | ) | (6,784 | ) | (54,784 | ) | (19,837 | ) | ||||||||
Total |
$ | 151,416 | $ | 99,512 | $ | (21,772 | ) | $ | 145,390 | |||||||
Depreciation and amortization |
||||||||||||||||
Dry foods |
$ | 30,800 | $ | 22,033 | $ | 5,683 | $ | 21,203 | ||||||||
Frozen foods |
31,709 | 23,638 | 4,480 | 20,984 | ||||||||||||
Total |
$ | 62,509 | $ | 45,671 | $ | 10,163 | $ | 42,187 | ||||||||
Capital expenditures |
||||||||||||||||
Dry foods |
$ | 16,469 | $ | 9,828 | $ | 3,611 | $ | 11,729 | ||||||||
Frozen foods |
16,129 | 13,107 | 2,545 | 14,485 | ||||||||||||
Total |
$ | 32,598 | $ | 22,935 | $ | 6,156 | $ | 26,214 | ||||||||
Geographic Information |
||||||||||||||||
Net sales |
||||||||||||||||
United States |
$ | 1,524,030 | $ | 1,105,554 | $ | 368,278 | $ | 1,412,512 | ||||||||
Canada |
77,853 | 66,678 | 17,015 | 67,571 | ||||||||||||
Intercompany |
(45,475 | ) | (34,334 | ) | (8,706 | ) | (37,827 | ) | ||||||||
Total |
$ | 1,556,408 | $ | 1,137,898 | $ | 376,587 | $ | 1,442,256 | ||||||||
109
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Segment Information |
December 28,
2008 |
December 30,
2007 |
||||
Total assets |
||||||
Dry foods |
$ | 1,733,148 | $ | 1,737,544 | ||
Frozen foods |
895,408 | 923,275 | ||||
Corporate |
3,644 | 6,260 | ||||
Total |
$ | 2,632,200 | $ | 2,667,079 | ||
Geographic Information |
||||||
Long-lived assets |
||||||
United States |
$ | 260,758 | $ | 271,429 | ||
Canada |
40 | 46 | ||||
Total |
$ | 260,798 | $ | 271,475 | ||
110
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
18. | Quarterly Results (Unaudited) |
Summarized quarterly financial data is presented below. The second quarter of 2007 includes results of operations for the Predecessor for April 2, 2007, and results of operations for the Successor for the remainder of the quarter.
Quarter Ended | |||||||||||||||||||
March
2008 |
June
2008 |
September
2008 |
December
2008 |
Fiscal
2008 |
|||||||||||||||
Net sales |
$ | 362,171 | $ | 390,131 | $ | 389,228 | $ | 414,878 | $ | 1,556,408 | |||||||||
Cost of products sold |
286,755 | 303,057 | 303,986 | 324,131 | 1,217,929 | ||||||||||||||
Net (loss) earnings |
(7,347 | ) | (12,566 | ) | 1,419 | (10,087 | ) | (28,581 | ) |
Quarter Ended | ||||||||||||||||||
March
2007 |
June
2007 |
September
2007 |
December
2007 |
Fiscal
2007 |
||||||||||||||
Net sales |
$ | 376,587 | $ | 365,863 | $ | 352,817 | $ | 419,218 | $ | 1,514,485 | ||||||||
Cost of products sold |
292,019 | 316,446 | 273,910 | 306,122 | 1,188,497 | |||||||||||||
Net (loss) earnings |
9,629 | (124,596 | ) | (21,528 | ) | 21,137 | (115,358 | ) |
Net earnings during fiscal 2008 and fiscal 2007 were affected by the following unusual charges:
Quarter Ended | ||||||||||
March
2008 |
June
2008 |
September
2008 |
December
2008 |
|||||||
Other expense (income), net |
||||||||||
Gain on litigation settlement (See Note 8) |
(9,988 | ) | ||||||||
Impairment and restructuring charges (a) |
(15,100 | ) | ||||||||
Interest expense |
||||||||||
Unfavorable Mark to Market Adjustment (see Note 14) |
5,483 | |||||||||
Amortization of deferred mark-to-market on terminated swap (see Note 14) |
1,259 |
Quarter Ended | |||||||||||||
March
2007 |
June
2007 |
September
2007 |
December
2007 |
||||||||||
Cost of products sold: |
|||||||||||||
Write-up of inventory to fair value (See Note 1) |
$ | | $ | 35,933 | $ | 4,269 | $ | | |||||
Armour OPEB liability elimination (See Note 12) |
$ | (9,027 | ) | ||||||||||
Other expense (income), net (See Note 8) |
|||||||||||||
Impairment and restructuring charges (a) |
$ | 1,200 | |||||||||||
Extinguishment gain on Senior Subordinated Notes |
$ | (5,670 | ) | ||||||||||
Merger-related costs (b) |
$ | 49,129 | |||||||||||
Stock Compensation Expense (See Note 6) |
$ | 8,373 |
(a) | Impairment and restructuring charges consist of the following: |
|
Fourth quarter 2007 - $1,200 related to the impairment of the Open Pit tradename. |
|
Fourth quarter 2008 Impairment charges for Van de Kamps ($8,000), Mrs. Pauls ($5,600), Lenders ($900) and Open Pit ($600) tradenames. |
(b) | Merger-related costs consist of the following: |
|
Second quarter 2007 - $35,540 in costs of the cash tender for the Predecessor 8.25% Senior Subordinated Notes, $12,853 in costs arriving from the change in control under certain Predecessor contracts, including the former Chairmans employment agreement as well as contracts with affiliates of the former Chairman, and payroll taxes of $736 for a total of $49,129. |
111
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
19. | Guarantor and Nonguarantor Statements |
In connection with the Blackstone Transaction described in Note 1 and as a part of the related financings, the Company issued $325 million of 9.25% Senior Notes and $250 million ($199 million outstanding as of December 28, 2008 and December 30, 2007) of 10.625% Senior Subordinated Notes in private placements pursuant to Rule 144A and Regulation S.
The Senior Notes are general unsecured obligations of the Company, effectively subordinated in right of payment to all existing and future senior secured indebtedness of the Company and guaranteed on a full, unconditional, joint and several basis by the Companys wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company.
The Senior Subordinated Notes are general unsecured obligations of the Company, effectively subordinated in right of payment to all existing and future senior indebtedness of the Company and guaranteed on a full, unconditional, joint and several basis by the Companys wholly-owned domestic subsidiaries that guarantee other indebtedness of the Company.
The following consolidating financial information presents:
(1) | (a) Consolidating balance sheets as of December 28, 2008 and December 30, 2007 for the Successor. |
(b) | The related consolidating statements of operations for the Company, all guarantor subsidiaries and the non- guarantor subsidiary for the following: |
i. | Successors fiscal year ended December 28, 2008. |
ii. | Successors 39 weeks ended December 30, 2007. |
iii. | Predecessors 13 weeks ended April 2, 2007, immediately prior to the Blackstone Transaction. |
iv. | Predecessors fiscal year ended December 31, 2006. |
(c) | The related consolidating statements of cash flows for the Company, all guarantor subsidiaries and the nonguarantor subsidiary for the following: |
i. | Successors fiscal year ended December 28, 2008. |
ii. | Successors 39 weeks ending December 30, 2007. |
iii. | Predecessors 13 weeks ended April 2, 2007, immediately prior to the Blackstone Transaction. |
iv. | Predecessors fiscal year ended December 31, 2006. |
(2) | Elimination entries necessary to consolidate the Company with its guarantor subsidiaries and nonguarantor subsidiary. |
Investments in subsidiaries are accounted for by the parent using the equity method of accounting. The guarantor subsidiaries are presented on a combined basis. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
112
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Pinnacle Foods Finance LLC
Consolidated Balance Sheet
December 28, 2008
Pinnacle
Foods Finance LLC |
Guarantor
Subsidiaries |
Nonguarantor
Subsidiary |
Eliminations |
Consolidated
Total |
||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 2,257 | $ | 2,004 | $ | | $ | 4,261 | ||||||||||
Accounts receivable, net |
| 86,860 | 5,311 | | 92,171 | |||||||||||||||
Intercompany accounts receivable |
| 166,077 | 761 | (166,838 | ) | | ||||||||||||||
Inventories, net |
| 186,197 | 4,666 | | 190,863 | |||||||||||||||
Other current assets |
5,346 | 3,839 | 386 | | 9,571 | |||||||||||||||
Deferred tax assets |
| 3,644 | | | 3,644 | |||||||||||||||
Total current assets |
5,346 | 448,874 | 13,128 | (166,838 | ) | 300,510 | ||||||||||||||
Plant assets, net |
| 260,758 | 40 | | 260,798 | |||||||||||||||
Investment in subsidiaries |
1,342,914 | 6,788 | | (1,349,702 | ) | | ||||||||||||||
Intercompany note receivable |
923,478 | | | (923,478 | ) | | ||||||||||||||
Tradenames |
| 910,112 | | | 910,112 | |||||||||||||||
Other assets, net |
26,964 | 139,649 | | | 166,613 | |||||||||||||||
Goodwill |
| 994,167 | | | 994,167 | |||||||||||||||
Total assets |
$ | 2,298,702 | $ | 2,760,348 | $ | 13,168 | $ | (2,440,018 | ) | $ | 2,632,200 | |||||||||
Current liabilities: |
||||||||||||||||||||
Short-term borrowings |
$ | 26,000 | $ | 163 | $ | | $ | | $ | 26,163 | ||||||||||
Current portion of long-term obligations |
12,500 | 250 | | | 12,750 | |||||||||||||||
Accounts payable |
| 65,220 | 1,731 | | 66,951 | |||||||||||||||
Intercompany accounts payable |
166,456 | | 382 | (166,838 | ) | | ||||||||||||||
Accrued trade marketing expense |
| 29,203 | 4,090 | | 33,293 | |||||||||||||||
Accrued liabilities |
28,408 | 40,427 | 177 | | 69,012 | |||||||||||||||
Accrued income taxes |
| 20 | | | 20 | |||||||||||||||
Total current liabilities |
233,364 | 135,283 | 6,380 | (166,838 | ) | 208,189 | ||||||||||||||
Long-term debt |
1,745,875 | 564 | | | 1,746,439 | |||||||||||||||
Intercompany note payable |
| 923,478 | | (923,478 | ) | | ||||||||||||||
Pension and other postretirement benefits |
| 36,869 | | | 36,869 | |||||||||||||||
Other long-term liabilities |
11,890 | 2,539 | | | 14,429 | |||||||||||||||
Deferred tax liabilities |
| 318,701 | | | 318,701 | |||||||||||||||
Total liabilities |
1,991,129 | 1,417,434 | 6,380 | (1,090,316 | ) | 2,324,627 | ||||||||||||||
Commitments and contingencies |
| |||||||||||||||||||
Shareholders equity: |
||||||||||||||||||||
Pinnacle Common Stock, $.01 par value |
||||||||||||||||||||
Additional paid-in-capital |
427,323 | 1,284,155 | 2,324 | (1,286,479 | ) | 427,323 | ||||||||||||||
Accumulated other comprehensive (loss) income |
(42,460 | ) | (25,627 | ) | (503 | ) | 26,130 | (42,460 | ) | |||||||||||
Accumulated deficit (retained earnings) |
(77,290 | ) | 84,386 | 4,967 | (89,353 | ) | (77,290 | ) | ||||||||||||
Total shareholders equity |
307,573 | 1,342,914 | 6,788 | (1,349,702 | ) | 307,573 | ||||||||||||||
Total liabilities and shareholders equity |
$ | 2,298,702 | $ | 2,760,348 | $ | 13,168 | $ | (2,440,018 | ) | $ | 2,632,200 | |||||||||
113
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Pinnacle Foods Finance LLC
Consolidated Balance Sheet
December 30, 2007
Pinnacle
Foods Finance LLC |
Guarantor
Subsidiaries |
Nonguarantor
Subsidiary |
Eliminations |
Consolidated
Total |
||||||||||||||
Current assets: |
||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 5,297 | $ | 702 | $ | | $ | 5,999 | ||||||||
Accounts receivable, net |
654 | 93,581 | 5,754 | | 99,989 | |||||||||||||
Intercompany accounts receivable |
| 68,037 | 2,273 | (70,310 | ) | | ||||||||||||
Inventories, net |
| 160,124 | 6,466 | | 166,590 | |||||||||||||
Other current assets |
406 | 5,140 | 377 | | 5,923 | |||||||||||||
Deferred tax assets |
| 6,260 | | | 6,260 | |||||||||||||
Total current assets |
1,060 | 338,439 | 15,572 | (70,310 | ) | 284,761 | ||||||||||||
Plant assets, net |
| 271,429 | 46 | | 271,475 | |||||||||||||
Investment in subsidiaries |
1,306,009 | 7,058 | | (1,313,067 | ) | | ||||||||||||
Intercompany note receivable |
923,478 | | | (923,478 | ) | | ||||||||||||
Tradenames |
| 925,212 | | | 925,212 | |||||||||||||
Other assets, net |
31,320 | 158,893 | | | 190,213 | |||||||||||||
Goodwill |
| 995,418 | | | 995,418 | |||||||||||||
Total assets |
$ | 2,261,867 | $ | 2,696,449 | $ | 15,618 | $ | (2,306,855 | ) | $ | 2,667,079 | |||||||
Current liabilities: |
||||||||||||||||||
Notes payable |
$ | | $ | 1,370 | $ | | $ | | $ | 1,370 | ||||||||
Current portion of long-term obligations |
12,500 | 236 | | | 12,736 | |||||||||||||
Accounts payable |
| 61,349 | 2,627 | | 63,976 | |||||||||||||
Intercompany accounts payable |
70,310 | | | (70,310 | ) | | ||||||||||||
Accrued trade marketing expense |
| 25,503 | 3,609 | | 29,112 | |||||||||||||
Accrued liabilities |
40,057 | 68,727 | 482 | | 109,266 | |||||||||||||
Accrued income taxes |
| 9 | 1,842 | | 1,851 | |||||||||||||
Total current liabilities |
122,867 | 157,194 | 8,560 | (70,310 | ) | 218,311 | ||||||||||||
Long-term debt |
1,755,250 | 815 | | | 1,756,065 | |||||||||||||
Intercompany note payable |
| 923,478 | | (923,478 | ) | | ||||||||||||
Pension and other postretirement benefits |
| 8,406 | | | 8,406 | |||||||||||||
Other long-term liabilities |
24,135 | 3,980 | | | 28,115 | |||||||||||||
Deferred tax liabilities |
| 296,567 | | | 296,567 | |||||||||||||
Total liabilities |
1,902,252 | 1,390,440 | 8,560 | (993,788 | ) | 2,307,464 | ||||||||||||
Commitments and contingencies |
||||||||||||||||||
Shareholders equity: |
||||||||||||||||||
Pinnacle common stock, $.01 par value |
| | | | | |||||||||||||
Additional paid-in-capital |
426,754 | 1,284,155 | 2,324 | (1,286,479 | ) | 426,754 | ||||||||||||
Accumulated other comprehensive income (loss) |
(18,430 | ) | 4,953 | 566 | (5,519 | ) | (18,430 | ) | ||||||||||
(Accumulated deficit) Retained earnings |
(48,709 | ) | 16,901 | 4,168 | (21,069 | ) | (48,709 | ) | ||||||||||
Total shareholders equity |
359,615 | 1,306,009 | 7,058 | (1,313,067 | ) | 359,615 | ||||||||||||
Total liabilities and shareholders equity |
$ | 2,261,867 | $ | 2,696,449 | $ | 15,618 | $ | (2,306,855 | ) | $ | 2,667,079 | |||||||
114
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Pinnacle Foods Finance LLC
Consolidated Statement of Operations - Successor
For the fiscal year ended December 28, 2008
Pinnacle
Foods Finance LLC |
Guarantor
Subsidiaries |
Nonguarantor
Subsidiary |
Eliminations |
Consolidated
Total |
|||||||||||||||
Net sales |
$ | | $ | 1,524,033 | $ | 77,850 | $ | (45,475 | ) | $ | 1,556,408 | ||||||||
Cost of products sold |
57 | 1,201,233 | 61,312 | (44,673 | ) | 1,217,929 | |||||||||||||
Gross profit |
(57 | ) | 322,800 | 16,538 | (802 | ) | 338,479 | ||||||||||||
Operating expenses |
|||||||||||||||||||
Marketing and selling expenses |
77 | 104,064 | 7,231 | | 111,372 | ||||||||||||||
Administrative expenses |
2,876 | 42,673 | 2,283 | | 47,832 | ||||||||||||||
Research and development expenses |
8 | 3,488 | | | 3,496 | ||||||||||||||
Intercompany royalties |
| | 67 | (67 | ) | | |||||||||||||
Intercompany technical service fees |
| | 735 | (735 | ) | | |||||||||||||
Other expense (income), net |
| 24,363 | | | 24,363 | ||||||||||||||
Equity in (earnings) loss of investees |
(67,485 | ) | (4,075 | ) | | 71,560 | | ||||||||||||
Total operating expenses |
(64,524 | ) | 170,513 | 10,316 | 70,758 | 187,063 | |||||||||||||
Earnings before interest and taxes |
64,467 | 152,287 | 6,222 | (71,560 | ) | 151,416 | |||||||||||||
Intercompany interest (income) expense |
(59,036 | ) | 59,036 | | | | |||||||||||||
Interest expense |
152,084 | 1,186 | 10 | | 153,280 | ||||||||||||||
Interest income |
| 264 | 55 | | 319 | ||||||||||||||
(Loss) earnings before income taxes |
(28,581 | ) | 92,329 | 6,267 | (71,560 | ) | (1,545 | ) | |||||||||||
Provision for income taxes |
| 24,844 | 2,192 | | 27,036 | ||||||||||||||
Net (loss) earnings |
$ | (28,581 | ) | $ | 67,485 | $ | 4,075 | $ | (71,560 | ) | $ | (28,581 | ) | ||||||
115
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Pinnacle Foods Finance LLC
Consolidated Statement of Operations - Successor
For the 39 weeks ended December 30, 2007
Pinnacle
Foods Finance LLC |
Guarantor
Subsidiaries |
Nonguarantor
Subsidiary |
Eliminations |
Consolidated
Total |
|||||||||||||||
Net sales |
$ | | $ | 1,105,553 | $ | 66,679 | $ | (34,334 | ) | $ | 1,137,898 | ||||||||
Cost of products sold |
| 877,111 | 51,868 | (33,673 | ) | 895,306 | |||||||||||||
Gross profit |
| 228,442 | 14,811 | (661 | ) | 242,592 | |||||||||||||
Operating Expenses |
|||||||||||||||||||
Marketing and selling expenses |
| 81,671 | 5,738 | | 87,409 | ||||||||||||||
Administrative expenses |
2,519 | 36,336 | 1,860 | | 40,715 | ||||||||||||||
Research and development expenses |
| 2,928 | | | 2,928 | ||||||||||||||
Intercompany royalties |
| | 96 | (96 | ) | | |||||||||||||
Intercompany technical service fees |
| | 565 | (565 | ) | | |||||||||||||
Other expense (income), net |
(5,670 | ) | 17,693 | 5 | | 12,028 | |||||||||||||
Equity in (earnings) loss of investees |
(16,901 | ) | (4,168 | ) | | 21,069 | | ||||||||||||
Total operating expenses |
(20,052 | ) | 134,460 | 8,264 | 20,408 | 143,080 | |||||||||||||
Earnings before interest and taxes |
20,052 | 93,982 | 6,547 | (21,069 | ) | 99,512 | |||||||||||||
Intercompany interest (income) expense |
(55,545 | ) | 55,545 | | | | |||||||||||||
Interest expense |
124,306 | 198 | | | 124,504 | ||||||||||||||
Interest income |
| 975 | 54 | | 1,029 | ||||||||||||||
(Loss) earnings before income taxes |
(48,709 | ) | 39,214 | 6,601 | (21,069 | ) | (23,963 | ) | |||||||||||
Provision for income taxes |
| 22,313 | 2,433 | | 24,746 | ||||||||||||||
Net (loss) earnings |
$ | (48,709 | ) | $ | 16,901 | $ | 4,168 | $ | (21,069 | ) | $ | (48,709 | ) | ||||||
116
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Pinnacle Foods Group Inc.
Consolidated Statement of Operations - Predecessor
For the 13 weeks ended April 2, 2007
s |
Pinnacle
Foods Group, Inc. |
Guarantor
Subsidiaries |
Nonguarantor
Subsidiary |
Eliminations |
Consolidated
Total |
|||||||||||||||
Net sales |
$ | 233,444 | $ | 134,834 | $ | 17,015 | $ | (8,706 | ) | $ | 376,587 | |||||||||
Cost of products sold |
171,438 | 116,165 | 14,062 | (8,474 | ) | 293,191 | ||||||||||||||
Gross profit |
62,006 | 18,669 | 2,953 | (232 | ) | 83,396 | ||||||||||||||
Operating expenses |
||||||||||||||||||||
Marketing and selling expenses |
22,677 | 9,927 | 2,371 | | 34,975 | |||||||||||||||
Administrative expenses |
12,667 | 4,697 | 350 | | 17,714 | |||||||||||||||
Research and development expenses |
1,056 | 381 | | | 1,437 | |||||||||||||||
Intercompany royalties |
| | 57 | (57 | ) | | ||||||||||||||
Intercompany technical service fees |
| | 175 | (175 | ) | | ||||||||||||||
Other expense (income), net |
41,833 | 8,797 | 412 | | 51,042 | |||||||||||||||
Equity in loss (earnings) of investees |
6,018 | 254 | | (6,272 | ) | | ||||||||||||||
Total operating expenses |
84,251 | 24,056 | 3,365 | (6,504 | ) | 105,168 | ||||||||||||||
Loss before interest and taxes |
(22,245 | ) | (5,387 | ) | (412 | ) | 6,272 | (21,772 | ) | |||||||||||
Intercompany interest (income) expense |
(465 | ) | 465 | | | | ||||||||||||||
Interest expense |
39,067 | 12 | | | 39,079 | |||||||||||||||
Interest income |
| 472 | 14 | | 486 | |||||||||||||||
Loss before income taxes |
(60,847 | ) | (5,392 | ) | (398 | ) | 6,272 | (60,365 | ) | |||||||||||
Provision (benefit) for income taxes |
5,802 | 626 | (144 | ) | | 6,284 | ||||||||||||||
Net loss |
$ | (66,649 | ) | $ | (6,018 | ) | $ | (254 | ) | $ | 6,272 | $ | (66,649 | ) | ||||||
117
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Pinnacle Foods Group Inc.
Consolidated Statement of Operations - Predecessor
For the fiscal year ended December 31, 2006
Pinnacle
Foods Group, Inc. |
Guarantor
Subsidiaries |
Nonguarantor
Subsidiary |
Eliminations |
Consolidated
Total |
||||||||||||||
Net sales |
$ | 888,575 | $ | 523,892 | $ | 67,616 | $ | (37,827 | ) | $ | 1,442,256 | |||||||
Cost of products sold |
667,954 | 436,672 | 55,146 | (37,126 | ) | 1,122,646 | ||||||||||||
Gross profit |
220,621 | 87,220 | 12,470 | (701 | ) | 319,610 | ||||||||||||
Operating expenses |
||||||||||||||||||
Marketing and selling expenses |
57,787 | 37,379 | 8,384 | | 103,550 | |||||||||||||
Administrative expenses |
34,158 | 16,452 | 1,837 | | 52,447 | |||||||||||||
Research and development expenses |
2,651 | 1,386 | | | 4,037 | |||||||||||||
Intercompany royalties |
| | 117 | (117 | ) | | ||||||||||||
Intercompany technical service fees |
| | 584 | (584 | ) | | ||||||||||||
Other expense (income), net |
11,567 | 2,619 | | | 14,186 | |||||||||||||
Equity in (earnings) loss of investees |
(21,625 | ) | (933 | ) | | 22,558 | | |||||||||||
Total operating expenses |
84,538 | 56,903 | 10,922 | 21,857 | 174,220 | |||||||||||||
Earnings before interest and taxes |
136,083 | 30,317 | 1,548 | (22,558 | ) | 145,390 | ||||||||||||
| ||||||||||||||||||
Intercompany interest (income) expense |
(6,358 | ) | 6,358 | | | | ||||||||||||
Interest expense |
86,561 | 49 | 5 | | 86,615 | |||||||||||||
Interest income |
35 | 1,152 | 60 | | 1,247 | |||||||||||||
Earnings before income taxes |
55,915 | 25,062 | 1,603 | (22,558 | ) | 60,022 | ||||||||||||
Provision for income taxes |
21,991 | 3,437 | 670 | | 26,098 | |||||||||||||
Net earnings |
$ | 33,924 | $ | 21,625 | $ | 933 | $ | (22,558 | ) | $ | 33,924 | |||||||
118
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Pinnacle Foods Finance LLC
Consolidating Statement of Cash Flows-Successor
For the fiscal year ended December 28, 2008
Pinnacle
Foods Finance LLC |
Guarantor
Subsidiaries |
Nonguarantor
Subsidiary |
Eliminations |
Consolidated
Total |
||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||
Net (loss) earnings from operations |
$ | (28,581 | ) | $ | 67,485 | $ | 4,075 | $ | (71,560 | ) | $ | (28,581 | ) | |||||||
Non-cash charges (credits) to net (loss) earnings |
||||||||||||||||||||
Depreciation and amortization |
| 62,495 | 14 | | 62,509 | |||||||||||||||
Restructuring and impairment charges |
| 15,100 | | | 15,100 | |||||||||||||||
Amortization of debt acquisition costs |
4,714 | | | | 4,714 | |||||||||||||||
Amortization of deferred mark-to-market adjustment on terminated swap |
1,259 | | | | 1,259 | |||||||||||||||
Gain on litigation settlement |
| (9,988 | ) | | | (9,988 | ) | |||||||||||||
Change in value of financial instruments |
5,489 | (2,142 | ) | | | 3,347 | ||||||||||||||
Equity in loss (earnings) of investees |
(67,485 | ) | (4,075 | ) | | 71,560 | | |||||||||||||
Stock-based compensation charges |
| 806 | | | 806 | |||||||||||||||
Postretirement healthcare benefits |
| (25 | ) | | | (25 | ) | |||||||||||||
Pension expense |
| (996 | ) | | | (996 | ) | |||||||||||||
Other long-term liabilities |
| (320 | ) | | | (320 | ) | |||||||||||||
Deferred income taxes |
| 24,757 | | | 24,757 | |||||||||||||||
Termination of derivative contracts |
(17,030 | ) | | | | (17,030 | ) | |||||||||||||
Changes in working capital, net of acquisition |
||||||||||||||||||||
Accounts receivable |
654 | 6,721 | (685 | ) | | 6,690 | ||||||||||||||
Intercompany accounts receivable/payable |
100,779 | (102,227 | ) | 1,448 | | | ||||||||||||||
Inventories |
| (26,073 | ) | 532 | | (25,541 | ) | |||||||||||||
Accrued trade marketing expense |
| 3,699 | 1,189 | | 4,888 | |||||||||||||||
Accounts payable |
| 3,800 | (381 | ) | | 3,419 | ||||||||||||||
Accrued liabilities |
(10,543 | ) | (14,255 | ) | (4,669 | ) | | (29,467 | ) | |||||||||||
Other current assets |
(4,940 | ) | 6,241 | (83 | ) | | 1,218 | |||||||||||||
Net cash (used in) provided by operating activities |
(15,684 | ) | 31,003 | 1,440 | | 16,759 | ||||||||||||||
Cash flows from investing activities |
||||||||||||||||||||
Capital expenditures |
| (32,598 | ) | | | (32,598 | ) | |||||||||||||
Net cash used in investing activities |
| (32,598 | ) | | | (32,598 | ) | |||||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Repayment of capital lease obligations |
| (238 | ) | | | (238 | ) | |||||||||||||
Equity contribution |
234 | | | | 234 | |||||||||||||||
Reduction of equity contributions |
(471 | ) | | | | (471 | ) | |||||||||||||
Debt acquisition costs |
(704 | ) | | | | (704 | ) | |||||||||||||
Proceeds from short-term borrowings |
| 324 | | | 324 | |||||||||||||||
Repayments of short-term borrowings |
| (1,531 | ) | | | (1,531 | ) | |||||||||||||
Borrowings under revolving credit facility |
101,008 | | | | 101,008 | |||||||||||||||
Repayments of revolving credit facility |
(75,008 | ) | | | | (75,008 | ) | |||||||||||||
Repayments of long term obligations |
(9,375 | ) | | | | (9,375 | ) | |||||||||||||
Net cash provided by financing activities |
15,684 | (1,445 | ) | | | 14,239 | ||||||||||||||
Effect of exchange rate changes on cash |
(138 | ) | (138 | ) | ||||||||||||||||
Net change in cash and cash equivalents |
| (3,040 | ) | 1,302 | | (1,738 | ) | |||||||||||||
Cash and cash equivalents beginning of period |
| 5,297 | 702 | | 5,999 | |||||||||||||||
Cash and cash equivalents end of period |
$ | | $ | 2,257 | $ | 2,004 | $ | | 4,261 | |||||||||||
Supplemental disclosures of cash flow information: |
||||||||||||||||||||
Interest paid |
$ | 167,453 | $ | 295 | $ | | $ | | $ | 167,748 | ||||||||||
Interest received |
| 272 | 47 | | 319 | |||||||||||||||
Income taxes paid |
| (277 | ) | (4,059 | ) | | (4,336 | ) |
119
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Pinnacle Foods Finance LLC
Consolidating Statement of Cash Flows- Successor
For the 39 weeks ended December 30, 2007
Pinnacle
Foods Finance LLC |
Guarantor
Subsidiaries |
Nonguarantor
Subsidiary |
Eliminations |
Consolidated
Total |
||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||
Net (loss) earnings from operations |
$ | (48,709 | ) | $ | 16,901 | $ | 4,168 | $ | (21,069 | ) | (48,709 | ) | ||||||||
Non-cash charges (credits) to net (loss) earnings |
||||||||||||||||||||
Depreciation and amortization |
| 45,660 | 11 | | 45,671 | |||||||||||||||
Restructuring and impairment charges |
| 1,200 | | | 1,200 | |||||||||||||||
Amortization of debt acquisition costs |
7,758 | | | | 7,758 | |||||||||||||||
Gain on extinguishment of subordinate notes |
(5,670 | ) | | | | (5,670 | ) | |||||||||||||
Change in value of financial instruments |
| 177 | | | 177 | |||||||||||||||
Equity in loss (earnings) of investees |
(16,901 | ) | (4,168 | ) | | 21,069 | | |||||||||||||
Stock-based compensation charges |
| 2,468 | | | 2,468 | |||||||||||||||
Postretirement healthcare benefits |
| (8,046 | ) | | | (8,046 | ) | |||||||||||||
Pension expense |
| 41 | | | 41 | |||||||||||||||
Other long-term liabilities |
(236 | ) | (236 | ) | ||||||||||||||||
Deferred income taxes |
| 22,173 | | | 22,173 | |||||||||||||||
Changes in working capital, net of acquisition |
||||||||||||||||||||
Accounts receivable |
(654 | ) | 5,542 | (61 | ) | | 4,827 | |||||||||||||
Intercompany accounts receivable/payable |
121,047 | (119,526 | ) | (1,521 | ) | | | |||||||||||||
Inventories |
| 33,869 | (1,168 | ) | | 32,701 | ||||||||||||||
Accrued trade marketing expense |
| (11,263 | ) | (113 | ) | | (11,376 | ) | ||||||||||||
Accounts payable |
| (6,304 | ) | (1,438 | ) | | (7,742 | ) | ||||||||||||
Accrued liabilities |
37,626 | (13,445 | ) | (369 | ) | | 23,812 | |||||||||||||
Other current assets |
| 846 | 244 | | 1,090 | |||||||||||||||
Net cash (used in) provided by operating activities |
94,497 | (34,111 | ) | (247 | ) | | 60,139 | |||||||||||||
Cash flows from investing activities |
||||||||||||||||||||
Payments for business acquisitions, net of cash acquired |
(1,325,980 | ) | 5,549 | 813 | | (1,319,618 | ) | |||||||||||||
Capital expenditures |
| (22,920 | ) | (15 | ) | | (22,935 | ) | ||||||||||||
Sale of plant assets |
| 2,200 | | | 2,200 | |||||||||||||||
Net cash used in investing activities |
(1,325,980 | ) | (15,171 | ) | 798 | | (1,340,353 | ) | ||||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Change in bank overdrafts |
| | | | | |||||||||||||||
Repayment of capital lease obligations |
| (227 | ) | | | (227 | ) | |||||||||||||
Equity contributions |
420,664 | | | | 420,664 | |||||||||||||||
Reduction of equity contributions |
(391 | ) | | | | (391 | ) | |||||||||||||
Debt acquisition costs |
(39,863 | ) | | | | (39,863 | ) | |||||||||||||
Proceeds from bank term loan |
1,250,000 | | | | 1,250,000 | |||||||||||||||
Proceeds from bond issuances |
575,000 | | | | 575,000 | |||||||||||||||
Proceeds from notes payable borrowing |
50,000 | 3,438 | | | 53,438 | |||||||||||||||
Repayments of notes payable |
(50,000 | ) | (2,068 | ) | | | (52,068 | ) | ||||||||||||
Repurchase of subordinate notes |
(44,199 | ) | | | | (44,199 | ) | |||||||||||||
Intercompany loans |
(923,478 | ) | 923,478 | | | | ||||||||||||||
Repayments of Successors long term obligations |
(6,250 | ) | | | | (6,250 | ) | |||||||||||||
Repayments of Predecessors long term obligations |
| (870,042 | ) | | | (870,042 | ) | |||||||||||||
Net cash provided by financing activities |
1,231,483 | 54,579 | | | 1,286,062 | |||||||||||||||
Effect of exchange rate changes on cash |
| | 151 | | 151 | |||||||||||||||
Net change in cash and cash equivalents |
| 5,297 | 702 | | 5,999 | |||||||||||||||
Cash and cash equivalents - beginning of period |
| | | | | |||||||||||||||
Cash and cash equivalents - end of period |
$ | | $ | 5,297 | $ | 702 | $ | | 5,999 | |||||||||||
Supplemental disclosures of cash flow information: |
||||||||||||||||||||
Interest paid |
$ | 79,575 | $ | 22,160 | $ | | $ | | $ | 101,735 | ||||||||||
Interest received |
| 975 | 54 | | 1,029 | |||||||||||||||
Income taxes paid |
| 22 | 137 | | 159 | |||||||||||||||
Non-cash investing activity: |
||||||||||||||||||||
Capital lease activity |
| | | | | |||||||||||||||
Non-cash financing activity: |
||||||||||||||||||||
Equity contribution |
4,013 | | | | 4,013 |
120
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Pinnacle Foods Group Inc.
Consolidating Statement of Cash Flows - Predecessor
For the 13 weeks ended April 2, 2007
Pinnacle
Foods Group Inc. |
Guarantor
Subsidiaries |
Nonguarantor
Subsidiary |
Eliminations |
Consolidated
Total |
||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||
Net loss |
$ | (66,649 | ) | $ | (6,018 | ) | $ | (254 | ) | $ | 6,272 | $ | (66,649 | ) | ||||||
Non-cash charges (credits) to net loss |
||||||||||||||||||||
Depreciation and amortization |
6,401 | 3,749 | 13 | | 10,163 | |||||||||||||||
Amortization of debt acquisition costs |
26,049 | | | | 26,049 | |||||||||||||||
Amortization of bond premium |
(5,360 | ) | | | | (5,360 | ) | |||||||||||||
Change in value of financial instruments |
1,247 | | | | 1,247 | |||||||||||||||
Stock-based compensation charges |
8,778 | | | | 8,778 | |||||||||||||||
Equity in loss of investees |
6,018 | 254 | | (6,272 | ) | | ||||||||||||||
Postretirement healthcare benefits |
366 | (72 | ) | | | 294 | ||||||||||||||
Pension expense |
125 | 235 | | | 360 | |||||||||||||||
Other long-term liabilities |
2,375 | 89 | | | 2,464 | |||||||||||||||
Deferred income taxes |
5,573 | 819 | | | 6,392 | |||||||||||||||
Changes in working capital |
||||||||||||||||||||
Accounts receivable |
(9,951 | ) | (8,049 | ) | (339 | ) | | (18,339 | ) | |||||||||||
Intercompany accounts receivable/payable |
19,760 | (22,723 | ) | 2,963 | | | ||||||||||||||
Inventories |
7,237 | 13,573 | (765 | ) | | 20,045 | ||||||||||||||
Accrued trade marketing expense |
(540 | ) | 3,835 | (541 | ) | | 2,754 | |||||||||||||
Accounts payable |
5,734 | 7,694 | 858 | | 14,286 | |||||||||||||||
Accrued liabilities |
42,880 | 10,382 | 78 | | 53,340 | |||||||||||||||
Other current assets |
759 | (622 | ) | (277 | ) | | (140 | ) | ||||||||||||
Net cash provided by operating activities |
50,802 | 3,146 | 1,736 | | 55,684 | |||||||||||||||
Cash flows from investing activities |
||||||||||||||||||||
Capital expenditures |
(2,846 | ) | (2,165 | ) | (16 | ) | | (5,027 | ) | |||||||||||
Net cash used in investing activities |
(2,846 | ) | (2,165 | ) | (16 | ) | | (5,027 | ) | |||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Change in bank overdrafts |
| | (908 | ) | | (908 | ) | |||||||||||||
Repayment of capital lease obligations |
(10 | ) | (45 | ) | | | (55 | ) | ||||||||||||
Equity contributions |
26 | | | | 26 | |||||||||||||||
Repayments of notes payable |
| (210 | ) | | | (210 | ) | |||||||||||||
Repayments of long term obligations |
(45,146 | ) | | | | (45,146 | ) | |||||||||||||
Net cash used in financing activities |
(45,130 | ) | (255 | ) | (908 | ) | | (46,293 | ) | |||||||||||
Effect of exchange rate changes on cash |
| | | | | |||||||||||||||
Net change in cash and cash equivalents |
2,826 | 726 | 812 | | 4,364 | |||||||||||||||
Cash and cash equivalents - beginning of period |
2 | 12,335 | | | 12,337 | |||||||||||||||
Cash and cash equivalents - end of period |
$ | 2,828 | $ | 13,061 | $ | 812 | $ | | $ | 16,701 | ||||||||||
Supplemental disclosures of cash flow information: |
||||||||||||||||||||
Interest paid |
$ | 9,123 | $ | 12 | $ | | $ | | $ | 9,135 | ||||||||||
Interest received |
| 472 | 14 | | 486 | |||||||||||||||
Income taxes refunded (paid) |
| 119 | (222 | ) | | (103 | ) | |||||||||||||
Non-cash investing activity: |
||||||||||||||||||||
Capital leases |
| (1,129 | ) | | | (1,129 | ) |
121
PINNACLE FOODS FINANCE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share amounts and where noted in millions)
Pinnacle Foods Group Inc.
Consolidating Statement of Cash Flows - Predecessor
For the fiscal year ended December 31, 2006
Pinnacle
Foods Group, Inc. |
Guarantor
Subsidiaries |
Nonguarantor
Subsidiary |
Eliminations |
Consolidated
Total |
||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||
Net earnings |
$ | 33,924 | $ | 21,625 | $ | 933 | $ | (22,558 | ) | $ | 33,924 | |||||||||
Non-cash charges (credits) to net earnings |
||||||||||||||||||||
Depreciation and amortization |
25,661 | 16,520 | 6 | | 42,187 | |||||||||||||||
Restructuring and impairment charges |
2,980 | 2,500 | | | 5,480 | |||||||||||||||
Amortization of debt acquisition costs |
7,424 | | | | 7,424 | |||||||||||||||
Amortization of bond premium |
(567 | ) | | | | (567 | ) | |||||||||||||
Change in value of financial instruments |
3,158 | | | | 3,158 | |||||||||||||||
Stock-based compensation charges |
3,315 | | | | 3,315 | |||||||||||||||
Equity in (earnings) loss of investees |
(21,625 | ) | (933 | ) | | 22,558 | | |||||||||||||
Postretirement healthcare benefits |
1,234 | (337 | ) | | | 897 | ||||||||||||||
Other long-term liabilities |
80 | | | | 80 | |||||||||||||||
Pension expense |
508 | 1,187 | | | 1,695 | |||||||||||||||
Deferred income taxes |
22,692 | 2,273 | | | 24,965 | |||||||||||||||
Changes in working capital, net of acquisition |
| | | | | |||||||||||||||
Accounts receivable |
(9,073 | ) | (224 | ) | (30 | ) | | (9,327 | ) | |||||||||||
Intercompany accounts receivable/payable |
(33,879 | ) | 33,913 | (34 | ) | | | |||||||||||||
Inventories |
9,984 | 23,814 | 54 | | 33,852 | |||||||||||||||
Accrued trade marketing expense |
4,865 | (1,423 | ) | 729 | | 4,171 | ||||||||||||||
Accounts payable |
(3,099 | ) | 6,836 | (2,184 | ) | | 1,553 | |||||||||||||
Accrued liabilities |
(1,977 | ) | 9,171 | (32 | ) | | 7,162 | |||||||||||||
Other current assets |
(33 | ) | 1,809 | (182 | ) | | 1,594 | |||||||||||||
Net cash provided by (used in) operating activities |
45,572 | 116,731 | (740 | ) | | 161,563 | ||||||||||||||
Cash flows from investing activities |
||||||||||||||||||||
Payments for business acquisition |
(189,208 | ) | | | | (189,208 | ) | |||||||||||||
Capital expenditures |
(14,718 | ) | (11,479 | ) | (5 | ) | | (26,202 | ) | |||||||||||
Sale of plant assets |
1,753 | | | | 1,753 | |||||||||||||||
Net cash used in investing activities |
(202,173 | ) | (11,479 | ) | (5 | ) | | (213,657 | ) | |||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Change in bank overdrafts |
| (6,550 | ) | 745 | | (5,805 | ) | |||||||||||||
Repayment of capital lease obligations |
(10 | ) | (145 | ) | | | (155 | ) | ||||||||||||
Equity contributions |
40,663 | | | | 40,663 | |||||||||||||||
Debt acquisition costs |
(3,817 | ) | | | | (3,817 | ) | |||||||||||||
Proceeds from bank term loan |
143,000 | | | | 143,000 | |||||||||||||||
Proceeds from notes payable borrowing |
| 2,410 | | | 2,410 | |||||||||||||||
Repayments of notes payable |
| (2,384 | ) | | | (2,384 | ) | |||||||||||||
Repayments of intercompany loans |
86,698 | (86,698 | ) | | | | ||||||||||||||
Repayments of long term obligations |
(110,000 | ) | | | | (110,000 | ) | |||||||||||||
Net cash provided by (used in) financing activities |
156,534 | (93,367 | ) | 745 | | 63,912 | ||||||||||||||
Effect of exchange rate changes on cash |
| | | | | |||||||||||||||
Net change in cash and cash equivalents |
(67 | ) | 11,885 | | | 11,818 | ||||||||||||||
Cash and cash equivalents - beginning of period |
69 | 450 | | | 519 | |||||||||||||||
Cash and cash equivalents - end of period |
$ | 2 | $ | 12,335 | $ | | $ | | $ | 12,337 | ||||||||||
Supplemental disclosures of cash flow information: |
||||||||||||||||||||
Interest paid |
$ | 75,692 | $ | 85 | $ | | $ | | $ | 75,777 | ||||||||||
Interest received |
35 | 1,152 | 60 | | 1,247 | |||||||||||||||
Income taxes refunded (paid) |
53 | (45 | ) | (1,042 | ) | | (1,034 | ) | ||||||||||||
Non-cash investing activity: |
||||||||||||||||||||
Capital leases |
| (12 | ) | | | (12 | ) |
122
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
(a) | Disclosure Controls and Procedures |
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act (as defined in Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, including controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 28, 2008. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective.
(b) | Managements Annual Report on Internal Control Over Financial Reporting. |
The management of Pinnacle Foods Finance LLC and subsidiaries (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting. The Companys internal control system was designed to provide reasonable assurance to the Companys management and board of directors regarding the preparation and fair presentation of published financial statements.
Our disclosure controls and procedures are designed to ensure that (a) information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and (b) such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Companys internal control over financial reporting as of December 28, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated Framework. Based on this assessment, management believes that, as of December 28, 2008, the Companys internal control over financial reporting is effective based on those criteria.
/s/ J EFFREY P. A NSELL |
Jeffrey P. Ansell Chief Executive Officer |
/s/ C RAIG S TEENECK |
Craig Steeneck Executive Vice President and Chief Financial Officer |
(c) | Internal Control over Financial Reporting |
This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only managements report in this annual report.
123
(d) | Changes in Internal Control Over Financial Reporting |
There was no change in our internal control over financial reporting (as defined in Rule 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended December 28, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
None.
124
ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
Executive Officers and Directors
Our executive officers and directors are as follows:
Name |
Age |
Position |
||
Roger Deromedi | 55 | Executive Chairman of the Board and Director | ||
Jeffrey P. Ansell | 49 | Chief Executive Officer and Director | ||
Craig Steeneck | 51 | Executive Vice President and Chief Financial Officer | ||
John L. Butler | 62 | Executive Vice President, Human Resources | ||
Edward L. Sutter | 51 | Executive Vice President, Supply Chain | ||
Sally Genster Robling | 52 | Executive Vice President, Chief Marketing Officer | ||
Chris Kiser | 46 | Executive Vice President, Chief Customer Officer | ||
M. Kelley Maggs | 57 | Senior Vice President, Secretary and General Counsel | ||
Lynne M. Misericordia | 45 | Senior Vice President, Treasurer and Assistant Secretary | ||
John F. Kroeger | 53 | Vice President, Deputy General Counsel and Assistant Secretary | ||
Joseph Jimenez | 49 | Director | ||
Raymond P. Silcock | 58 | Director | ||
Prakash A. Melwani | 50 | Director | ||
Shervin Korangy | 33 | Director | ||
Jason Giordano | 30 | Director |
Roger Deromedi was appointed Executive Chairman of the Board effective April 2, 2007 and is a Director. Prior thereto, Mr. Deromedi served as Chief Executive Officer of Kraft Foods Inc. from December 2003 to June 2006. Prior to that, he was co-CEO, Kraft Foods Inc. and President and Chief Executive Officer, Kraft Foods International since 2001. He was President and Chief Executive Officer of Kraft Foods International from 1999 to 2001 and previously held a series of increasingly responsible positions since joining General Foods in 1977.
Jeffrey P. Ansell was appointed Chief Executive Officer effective July 5, 2006 and is a Director. Prior thereto, Mr. Ansell was a Corporate Officer at The Procter & Gamble Company (P&G), where he worked for 25 years until June 30, 2006. Most recently, he was Global President of P&Gs Pet Health and Nutrition business (Iams) beginning in 1999 when The Iams Company was acquired by P&G. Prior to that, Mr. Ansell was Vice President, General Manager of Procter & Gambles North America Baby Care business (Pampers and Luvs). Before having responsibility for P&Gs North American Baby Care business, Mr. Ansell was General Manager of P&Gs Western European Baby Care business, based in Germany. Mr. Ansell began his career in Brand Management in P&Gs Food Division in 1981, and held marketing leadership positions on brands such as Pringles, Sunny Delight and Folgers. Including pet food, Mr. Ansell spent 18 of his 25 years at P&G in the food and beverage space. Mr. Ansell serves as a Board member of the Grocery Manufacturers Association (GMA), a trade association representing food, beverage and consumer products companies.
Craig Steeneck has been our Executive Vice President and Chief Financial Officer since July 2007. From June 2005 to July 2007, Mr. Steeneck served as Executive Vice President, Operations Finance & Systems. From April 2003 to June 2005, Mr. Steeneck served as Executive Vice President, Chief Financial Officer and Chief Administrative Officer of Cendant Timeshare Resorts Group. From March 2001 to April 2003, Mr. Steeneck served as Executive Vice President and Chief Financial Officer of Resorts Condominiums International, a subsidiary of Cendant. From October 1999 to February 2001, he was the Chief Financial Officer of International Home Foods Inc. Mr. Steeneck is also a Certified Public Accountant in the State of New Jersey.
125
John L. Butler has been our Executive Vice President, Human Resources since March 2008. From February, 2007 to March, 2008, Mr. Butler was self-employed and oversaw personal investments. From November, 2002 to February, 2007, Mr. Butler served as Senior Vice President, Human Resources for Toys R Us. Prior to joining Toys R Us, Mr. Butler held senior level positions with Federated Department Stores and Nabisco.
Edward L. Sutter has been our Executive Vice President, Supply Chain since December, 2008. Prior to joining Pinnacle, Mr. Sutter served as Vice President, Supply Chain for Coca-Cola Enterprises, Inc. from July, 2005 to October, 2008. Prior to that, Mr. Sutter served as Vice President, Procurement and Chief Procurement Officer for Coca-Cola Enterprises, Inc. from December, 2000 to July, 2005.
Sally Genster Robling has been our Executive Vice President, Chief Marketing Officer since November, 2008. From September, 2000 to June, 2008, Ms. Robling served initially as Vice President Marketing and subsequently as Vice President & Chief Marketing Officer for Trane, Inc. (formerly American Standard). Prior to joining Trane, Ms. Robling held various senior level marketing, sales and general management positions with Campbell Soup Company and Kraft Foods Inc.
Chris Kiser has been our Chief Customer Officer since June 2008. Mr. Kiser has been an Executive Vice President since November 2008. From February 2004 to June 2008, Mr. Kiser served as Senior Vice President, Sales. Prior to joining Pinnacle, Mr. Kiser served as Senior Vice President, General Manager at Diageo from August 2002 through January 2004. From October 1995 to August 2002, Mr. Kiser worked for Campbell Soup Company holding various senior level positions in sales and customer marketing.
M. Kelley Maggs has been our Senior Vice President, General Counsel and Secretary since Pinnacles inception in 2001. He was associated with affiliates of CDM Investor Group LLC from 1993 until 2007. Prior to his involvement with Pinnacle, Mr. Maggs held the same position with International Home Foods Inc. from November 1996 to December 2000. From 1993 to 1996, Mr. Maggs was employed with Stella Foods, Inc. as Vice President and General Counsel. Prior to that time, he was engaged in the private practice of law in Virginia and New York.
Lynne M. Misericordia has been our Senior Vice President and Treasurer since Pinnacles inception in 2001. Ms. Misericordia previously held the position of Treasurer with International Home Foods Inc. from November 1996 to December 2000. Before that, Ms. Misericordia was employed by Wyeth from August 1985 to November 1996 and held various financial positions.
John F. Kroeger has been our Vice President and Deputy General Counsel since joining the Company in November 2001. In addition, Mr. Kroeger was also the Vice President of Human Resources from 2004 through 2006. From January 2001 to October 2001, Mr. Kroeger was the Vice President and General Counsel of Anadigics, Inc., a NASDAQ semiconductor company. From August 1998 until December 2000, Mr. Kroeger was Vice President and Assistant General Counsel at International Home Foods Inc. Mr. Kroeger has also held general management and legal positions with leading companies in the chemical, pharmaceutical and petroleum-refining industries.
Joseph Jimenez is a Director. Mr. Jimenez is currently the Chief Executive Officer of Novartis Pharma A.G. From July 2002 to May 2006, Mr. Jimenez was the Executive Vice President of the H.J. Heinz Company and was President and CEO of Heinz Europe. Prior to that, he was President and CEO of Heinz North America from November 1998 to June 2002. In 1993, he joined ConAgra Grocery Products. At ConAgra, Mr. Jimenez directed the marketing for Orville Redenbacher Popcorn and ethnic foods company LaChoy/Rosarita as Vice President, Orville Redenbacher/Swiss Miss Food Company as Senior Vice President, and Wesson/Peter Pan Food Company as President. Mr. Jimenez has more than 20 years of experience in the food industry, starting at the Clorox Company where he worked from 1984 to 1993 and advanced from Brand Assistant to Group Marketing Manager in the Dressings and Sauces Division. Mr. Jimenez also oversaw the launch of Hidden Valley Ranch Salad Dressing. While at Heinz and Clorox, Mr. Jimenez oversaw the following segments: Pickles (Heinz), BBQ Sauces (Heinz, KC Masterpiece and Jack Daniels), Heinz food service and Heinz Canada.
Raymond P. Silcock is a Director. Mr. Silcock has served as senior vice president and chief financial officer of UST Inc. since 2007. Before joining UST, Mr. Silcock was Executive Vice President and Chief Financial Officer of Swift & Company from 2006 to 2007. Prior to that, he was Executive Vice President and Chief Financial Officer of Cott Corporation from 1998 to 2005. In addition, Mr. Silcock spent 18 years with Campbell Soup Company, serving in a variety of progressively more responsible roles, culminating as Vice President, Finance for the Bakery and Confectionary Division.
126
Prakash A. Melwani is a Director. In May 2003, Mr. Melwani joined Blackstone as a Senior Managing Director in its private equity group. He is also a member of Blackstones private equity investment committee. Prior to joining Blackstone, Mr. Melwani was a founder, in 1988, of Vestar Capital Partners and served as its Chief Investment Officer. Prior to that, Mr. Melwani was with the management buyout group at The First Boston Corporation and with N.M. Rothschild & Sons in Hong Kong and London. Mr. Melwani is also a member of the boards of directors of Kosmos Energy, RGIS Inventory Specialists and Performance Food Group. He is also President and a Director of the India Fund and The Asia Tigers Fund. He received an MBA with High Distinction from Harvard Business School and graduated as a Baker Scholar and a Loeb Rhodes Fellow.
Shervin Korangy is a Director. Mr. Korangy is a Principal in Blackstones private equity group. Mr. Korangy has focused on consumer products, financial services and industrial related investments. More recently, Mr. Korangy has been working on numerous restructuring situations given his prior experience at Blackstone. He has been involved in Blackstones investments in Bayview Financial, Graham Packaging and United Biscuits. Prior to joining the private equity group, Mr. Korangy was a managing director in Blackstones restructuring & reorganization group, where he served as advisor to clients on a number of business restructurings. Mr. Korangy received a BS in Economics from The Wharton School of the University of Pennsylvania.
Jason Giordano is a Director. Mr. Giordano is an Associate in the private equity group at Blackstone. Since joining Blackstone in 2006, Mr. Giordano has been involved in the execution of the firms investments in HealthMarkets and Pinnacle Foods and in analyzing investment opportunities across various industries, including Consumer Products, Food and Beverage, Healthcare Services, Chemicals and Industrials. Before joining Blackstone, Mr. Giordano was an associate at Bain Capital where he evaluated and executed global private equity investments in a wide range of industries. Prior to that, he worked in investment banking at Goldman, Sachs & Co. focused on Communications, Media and Entertainment clients. Mr. Giordano received an AB from Dartmouth College, and an MBA with High Distinction from Harvard Business School where he graduated as a Baker Scholar.
Equity Investment by Chairman and Executive Officers
Our chairman, chief executive officer and other senior management invested $8.0 million to acquire equity interests in Peak Holdings in the form of Class A-2 Units of Peak Holdings. In addition, each was awarded non-voting profits interest units in Peak Holdings under our equity incentive plans described in Item 11: Executive CompensationCompensation Discussion and AnalysisElements of Compensation, subject to future vesting conditions.
Each of these members of management executed a management unit subscription agreement. Under these agreements, the executives have the right to put their Class A-2 Units and any vested profits interest units to Peak Holdings for a price at least equal to their fair market value if their employment terminates due to disability or death prior to the earlier of an initial public offering of Peak Holdings or a change of control of Peak Holdings. The agreements also contain terms that allow Peak Holdings or Blackstone at its option to purchase from executives the Class A-2 Units and any recently vested profits interest units if the executive engages in activity competing with our company or if the executive is terminated due to death or disability, a termination without cause or constructive termination (other than, in such case, the Class A-2 Units, unless the executive has engaged in activity competing with our company), a termination for cause or a voluntary termination of their employment. Should Peak Holdings or Blackstone elect to exercise their purchase rights under the agreements, the price per unit will depend on the nature of the executives termination of employment.
Committees of the Board of Directors
The Board of Directors met four times during 2008.
Audit Committee
The board of directors has adopted a written charter for the audit committee. Our audit committee is responsible for (1) selecting the independent auditors, (2) approving the overall scope of the audit, (3) assisting the board of directors in monitoring the integrity of our financial statements, the independent accountants qualifications and independence, the performance of the independent accountants and our internal audit function and our compliance with legal and regulatory requirements, (4) annually reviewing an independent auditors report describing the auditing firms internal quality-control procedures, any material issues raised by the most recent internal quality-control review, or peer review, of the auditing firm, (5) discussing the annual audited financial and quarterly statements with management and the independent auditor, (6) periodically meeting separately with each of management, internal auditors and the independent auditor, (7) reviewing with the independent auditor any audit problems or difficulties and managements response, (8) handling such other matters that are specifically delegated to the audit committee by the board of directors from time to time and (9) reporting regularly to the full board of directors.
127
The members of the current audit committee are Mr. Silcock (Chairman), Mr. Korangy and Mr. Giordano. Our board of directors has not affirmatively determined whether any of the members of the current audit committee is an audit committee financial expert or whether any such person is independent under the applicable standards of the New York Stock Exchange or any other standard. Because our securities are not listed on any stock exchange or inter-dealer quotation system, we are not required to have a separately designated audit committee whose members are independent, and therefore our board has not made a formal determination of whether the members of our audit committee are independent or whether that committee includes at least one audit committee financial expert. However, we believe that Mr. Silcock would be considered an audit committee financial expert within the meaning of the rules and regulations of the Securities and Exchange Commission if our board of directors were to make such a determination. The Audit Committee met six times during 2008. See Executive Officers and Directors above for a description of Mr. Silcocks relevant experience. See also Item 13: Certain Relationships and Related Transactions and Director Independence-Director Independence.
Compensation Committee Interlocks and Insider Participation
The members of our Compensation Committee are Prakash Melwani (Chairman), a Senior Managing Director of Blackstone, Joseph Jimenez, Shervin Korangy, a Principal of Blackstone, and Roger Deromedi, Chairman of the Board. Other than Mr. Deromedi, none of the other members are current or former officers or employees of our company. We are parties to certain transactions with Blackstone described in Certain Relationship and Related Transactions section below. Mr. Deromedi does not participate in Compensation Committee discussions regarding his own compensation. The Compensation Committee met three time during 2008.
Audit Committee Report
We have reviewed and discussed with management the Companys audited financial statements for the year ended December 28, 2008.
We have discussed with the independent auditors the matters required to be discussed by Statement on Audited Standards No. 61, Communication with Audit Committees, as amended, by the Public Company Accounting Oversight Board.
We have received and reviewed the written disclosures and the letter from the independent auditors required by Independence Standard No.1, Independence Discussions with Audit Committees, as amended, by the Independence Standards Board, and have discussed with the auditors the auditors independence.
Based on the reviews and discussions referred to above, we have recommended to the Board of Directors that the financial statements referred to above be included in this Form 10-K.
THE AUDIT COMMITTEE
Mr. Raymond P. Silcock
Mr. Shervin Korangy
Mr. Jason Giordano
Code of Ethics
Our employee handbook contains certain standards for ethical conduct required of our employees. We require all employees to meet our ethical standards which include compliance with all laws while performing their job duties with high integrity and professionalism.
We have also adopted a Code of Ethics for our Chief Executive Officer, our Chief Financial Officer and all other executive officers and other key employees. This Code of Ethics is intended to promote honest and ethical conduct, full and accurate reporting, and compliance with all applicable laws and regulations.
Section 16(a) Beneficial Ownership Reporting Compliance
Not applicable.
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ITEM 11. | EXECUTIVE COMPENSATION |
Compensation Discussion and Analysis
Compensation Program Objectives and Design
Our primary objective in establishing our comprehensive compensation program is to recruit, attract, retain and properly incent high-level talent to work for and ultimately add value to our company for the benefit of our shareholders.
Each element of the overall comprehensive program (discussed in greater detail below) is intended to be competitive with similar elements offered both locally and nationally by other like-size employers and competitors, and the elements taken together are intended to present a comprehensive competitive program to accomplish the objectives noted above.
We designed most of the major elements of our comprehensive compensation program by development of initial thoughts and ideas from our senior management team, consisting of our Chief Executive Officer, Executive Vice President and Chief Financial Officer, Executive Vice President Human Resources, Senior Vice President, Treasurer and Assistant Secretary and Senior Vice President, Secretary and General Counsel, and consultation with other members of our senior management. Additional input and suggested objectives were received from representatives of our major shareholders and outside, independent service providers. Major compensation elements are reviewed annually by our senior management.
After receipt of the input noted and development of final draft plans, such plans were (and in the case of annual bonus plans, are annually) presented to our Compensation Committee. The Compensation Committee consists of Directors Prakash Melwani, a Senior Managing Director of Blackstone, Joseph Jimenez, Shervin Korangy, a Principal of Blackstone, and Chairman of the Board Roger Deromedi. Other than Mr. Deromedi, none of these members are current or former officers or employees of our company. We are parties to certain transactions with Blackstone described in Item 13 - Certain Relationships and Related Transactions. Mr. Deromedi does not participate in Compensation Committee discussions involving his compensation.
The Compensation Committee comments on and ultimately adopts the major compensation programs.
Our compensation program is designed to reward performance by our companys executives, which in turn creates value for our companys shareholders. Performance is reviewed annually for both our companys executives and our company as a whole. Our Compensation Committee reviews and approves annual compensation elements such as bonus plan attainment, and our companys full Board of Directors reviews full year earnings and management performance by our companys executives. The Board as a whole also approves our companys annual budgets, which include certain elements of the compensation program such as annual bonuses and annual merit increases, if any, for our companys executives.
In short, if value is not added to our company annually, certain of the elements of the compensation program are not paid or do not vest, i.e., annual bonuses, annual base compensation increases and certain equity grants.
The compensation program is not intended to reward only short-term or annual performance, however. It is also intended to reward long-term company performance. Therefore, employee equity programs, which are discussed in more detail below, are key elements of the compensation program.
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Elements of Compensation
For the fiscal year ending December 28, 2008, our company had five principal elements which made up our compensation program. They are:
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Base salary and potential annual merit adjustment |
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Bonus plan (MIP or Management Incentive Plan) |
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Employee equity plans |
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Severance, change of control and other termination-related programs |
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401(k) and other benefits |
The following is a brief discussion of each principal element of compensation.
(a) | Base salary. The Chief Executive Officer sets the base salaries for all executive officers of our company, with the exception of his own, which is set by the Compensation Committee. Base salaries are intended to compensate the executive officers and all other salaried employees for their basic services performed for our company on an annual basis. All salaried employees are paid bi-weekly in equal increments. In setting base salaries, our company takes into account the employees experience, the functions and responsibilities of the job, salaries for similar positions within the community and for competitive positions in the food industry generally and any other factor relevant to that particular job. We attempt to pay in the middle range for each job but do not limit ourselves to this. In determining applicable salaries, we also consult with outside consultants and recruiters, senior members of our management team who have contacts and experience at other relevant companies, board members and shareholder employment related personnel. Base salaries may be adjusted annually and, in certain circumstances, adjusted throughout the year to deal with competitive pressures or changes in job responsibilities. |
(b) | Bonus plan (MIP). We use our MIP plans to incent our eligible employees on an annual basis. The MIP plans, together with base salary and basic benefits (other than 401(k)) are considered short-term compensation programs. Our MIP plans are intended to reward executives and other eligible employees for achieving annual profit and operational goals. Generally under all three such existing programs (one for Sales personnel, one for Food Service personnel and one for all other executives and eligible employees), our EBITDA target, which is derived from our operating plan for the year and approved annually by the Board of Directors, is a major component, and individual goals or MBOs account for the balance. We consider the specific EBITDA targets applicable to the MIP plans to be confidential commercial and financial information, the disclosure of which could result in competitive harm to us. However, we believe that each of these targets, while difficult to attain, is reasonably attainable if we achieve our planned performance and growth objectives over the period applicable to the MIP plans. The EBITDA target was met in 2007 but not in 2008. Senior management of our company decides who is eligible to participate in the MIP plans and what the terms of the plans are, including what an employees bonus potential is. All jobs at our company have grade levels attached to them, and some of these grade levels have target bonus levels assigned to them. The full Board of Directors must approve the bonus pool contained in the annual budget; the Compensation Committee must approve actual payment of bonuses pursuant to the MIP plans and must specifically consider and approve the bonuses to the named senior executive officers. All bonuses are equal to a preset percentage of a persons salary with minimum and maximum payout if certain targets are attained. |
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(c) | Equity programs. |
We currently have three long-term incentive plans: the 2007 Stock Incentive Plan, the 2007 Unit Plan (the 2007 Stock Incentive Plan and the 2007 Unit Plan are collectively referred to as the 2007 Equity Plans) and the Crunch Holding Corp. stock purchase plan (SPP). The 2007 Equity Plans provide executives with the opportunity to acquire a proprietary interest in our company as an incentive for them to remain in our service. The total percentage of equity reserved for issuance under the 2007 Equity Plans is 10% of the total equity of Crunch Holding Corp. The Stock Incentive Plan includes approximately 175 salaried employees and is authorized to issue up to 20,000 options to purchase shares of Crunch Holding Corp. common stock. All options granted under the plan must be awarded with a strike price that is no less than the fair market value of a share of Crunch Holding Corp. common stock on the date of the grant. Under the 2007 Unit Plan, 45 management employees were given the opportunity to invest in our company through the purchase of Class A-2 Units in our ultimate parent, Peak Holdings LLC. In addition, each manager who so invested was awarded profits interests in Peak Holdings LLC in the form of Class B-1, Class B-2 and Class B-3 Units (collectively, PIUs). Generally, 25% of the options and PIUs will vest ratably over five years. Fifty percent of the options (the performance options) and PIUs (consisting of the Class B-2 units) vest ratably over five years depending whether annual or cumulative EBITDA targets are met. We consider the specific EBITDA targets applicable to both plans to be confidential commercial and financial information, the disclosure of which could result in competitive harm to us. However, we believe that each of these targets, while difficult to attain, is reasonably attainable if we achieve our planned performance and growth objectives over the period applicable to the plans. The EBITDA target was met in 2007 but not in 2008. The final 25% of the options (the exit options) and PIUs (consisting of the Class B-3 units) granted under the 2007 Equity Plans vest either on a change of control or similar event, if a 20% annual internal rate of return (or, if the event occurs (x) on or before the first anniversary of the closing date of the Blackstone Transaction, a 40% annual internal rate of return or (y) after the first anniversary of the closing date of the Blackstone Transaction but on or before the second anniversary of the closing date of the Blackstone Transaction, a 30% annual internal rate of return) is attained by Blackstone. We recently modified both plans to revise the EBITDA targets included in those plans to levels we believe are reasonably attainable in light of the current global economic and financial crisis. In addition, the plans now provide that if the EBITDA target is achieved in any two consecutive fiscal years (excluding 2007 and 2008) during the employees continued employment, then that years and all prior years performance options or Class B-2 Units will vest and become exercisable, and if the exit options or Class B-3 Units vest and become exercisable during the employees continued employment, then all the performance options and Class B-2 Units, as the case may be, will also vest and become exercisable.
Under both plans, vesting terminates upon an employees termination, but in most cases a terminated employee may exercise his vested options within 90 days of termination. Under these plans, the executives have the right to put their Class A-2 Units, any vested PIUs and any shares held as a result of the exercise of any option to Peak Holdings or Crunch Holding Corp., as the case may be, for a price at least equal to their fair market value if their employment terminates due to disability or death prior to the earlier of an initial public offering or change of control of Peak Holdings or Crunch Holding Corp., as the case may be. The plans contain terms that allow Peak Holdings or Crunch Holding Corp., as the case may be, at its option to purchase from executives the Class A-2 Units, any vested PIUs and any shares held as a result of the exercise of any option if the executive engages in activity competing with our company or if the executive is terminated due to death or disability, a termination without cause or constructive termination (in the case of the Unit Plan other than the Class A-2 Units, unless the executive has engaged in activity competing with our company), a termination for cause or a voluntary termination of employment. Should Peak Holdings or Blackstone elect to exercise its purchase rights under the agreements, the price per unit will depend on the nature of the executives termination of employment. Equity awards under both plans are granted based on recommendations of various members of senior management to an internal company committee.
The third long-term incentive plan provided for the Companys executives is the SPP. We believe that the SPP aligned the long-term interests of our executives with those of our shareholders. Together, the 2007 Equity Plans and SPP were intended to foster long-term growth for our company and provide a means of creating financial security for our senior executives.
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(d) | Severance, change of control and other termination-related programs. We generally have two forms of post-termination compensationthe use of change of control language in employment letters or agreements and basic severance plan provisions. Each of these two forms of compensation is necessary in our opinion to help attract and retain qualified top quality executives. In addition, we believe that we benefit from such plans as they help to insure continuity of management. Without these plans, and in the event of a possible or actual change in control, certain executives may feel the need to find other employment before they were forced to leave after a change of control event. With such plans in place, we believe that there will be more stability with our senior executives, allowing for more efficient operation of our company and the creation of additional value for our company and our shareholders. At present, we have only one type of change of control provision in our existing employment agreements and letter agreements with our various members of management. This provision essentially provides that, unless the applicable executive is retained in his or her job following a change in control with the same or similar duties, responsibilities, compensation and location of job, the executive may terminate his or her employment and receive a change of control payment. |
Further, we maintain a severance plan which is intended to be in the middle of the range in terms of value to employees when compared against companies of similar size, location and industry type. The severance plan provides a weekly severance based upon the employees total years of service with our company, with minimums of four weeks pay for new hires and up to 16 weeks pay for executives at higher levels. All executives of our company who do not have change of control provisions applicable to them are eligible for the benefits of the severance plan.
(e) | 401(k) and other benefits. We provide various other benefits and compensation-related programs to executives and other salaried employees, which allow us to provide a full and comprehensive compensation package. This full package of compensation elements is important to our companys objectives to attract, retain and incent high-quality employees. We do not sponsor a defined benefit pension program for salaried employees. The elements of our companys compensation program not otherwise discussed above are: |
(i) | A 401(k) program wherein our company matches up to 50% of employee contributions, up to a maximum company contribution of 3% of the employees pay (up to the I.R.S. annual covered compensation limit); |
(ii) | Medical and dental insurance for which our company pays approximately 70% of the premiums; |
(iii) | Life and Accidental Death and Dismemberment insurance paid for by our company; and |
(iv) | Long-term Disability and Short-Term Disability insurance paid for by our company. |
In establishing and providing the plans noted above, our company uses outside 401(k) and benefits consultants for medical and 401(k) plan design. Each of the outside consultants provides not less than annual advice about the plan designs for similar manufacturing companies across the United States and in the communities where our company is located. As with other elements of compensation, our company strives to provide competitive benefits to attract quality executives. Based on our general perception of the market and while we have not identified specific companies, we believe that the benefits noted in this section generally are at the 50th percentile of all similarly situated manufacturers and competitors with exceptions made where we believe necessary based on the communities where our company is located.
(f) | Executive compensation as a package of compensation elements. In summary, we have developed various elements of compensation for our executives that we feel are consistent with standard industry practices and with the view that each element complements the rest of the elements of the compensation program. Most importantly, we provide a total program that allows us to attain the objectives set forth above. If any of the elements were missing, we do not believe we could attain our objectives. While we do not have a fixed policy that an incoming executive must receive a certain salary, a certain bonus amount, a certain amount of equity, etc., each of the elements is critical to providing a competitive compensation package to executives. Therefore, although no predetermined amount is set, we are careful to give adequate weight to short-term compensation vs. long-term compensation, and no one decision is made with regard to one element of compensation without considering the impact upon the other elements and ultimately the objectives we wish to achieve. |
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Summary Compensation Table
The following table provides summary information concerning compensation paid or accrued by us to or on behalf of our named executive officers for 2008, 2007 and 2006, for services rendered to us during the respective fiscal years.
Name and Principal Position |
Year |
Salary
($) |
Bonus ($) |
Stock
Awards (a) ($) |
Option
Awards (a) ($) |
Non-Equity
Incentive Plan Compensation ($) |
All Other
Compensation ($) |
Total ($) | ||||||||||||||||
Jeffrey P. Ansell (b) |
2008 | $ | 768,173 | $ | | $ | 254,251 | $ | $ | 169,500 | $ | 11,773 | (g) | $ | 1,203,697 | |||||||||
Chief Executive Officer |
2007 | 709,615 | 60,000 | (f) | 697,390 | 889,501 | 750,000 | 7,920 | (g) | 3,114,426 | ||||||||||||||
Director |
2006 | 283,846 | 84,000 | (f) | | 630,499 | 300,000 | 6,849 | (g) | 1,305,194 | ||||||||||||||
Craig Steeneck (c) |
2008 | 431,000 | | 87,030 | | 100,800 | 7,728 | (h) | 626,558 | |||||||||||||||
Executive Vice President and |
2007 | 401,770 | | 238,635 | 386,879 | 325,000 | 7,920 | (h) | 1,360,204 | |||||||||||||||
Chief Financial Officer |
2006 | 367,404 | | | 106,656 | 325,625 | 7,140 | (h) | 806,825 | |||||||||||||||
Chris Kiser |
2008 | 314,763 | | 35,277 | | 50,500 | 14,640 | (i) | 415,180 | |||||||||||||||
Executive Vice President- |
2007 | 300,328 | | 91,702 | 112,250 | 169,811 | 14,490 | (i) | 688,581 | |||||||||||||||
Chief Customer Officer |
2006 | 288,923 | | | 33,415 | 200,000 | 14,160 | (i) | 536,498 | |||||||||||||||
M. Kelley Maggs |
2008 | 301,142 | | 17,650 | | 37,100 | 8,448 | (h) | 364,340 | |||||||||||||||
Senior Vice President- |
2007 | 292,960 | | 45,840 | 65,216 | 160,000 | 8,298 | (h) | 572,314 | |||||||||||||||
Secretary and General Counsel |
2006 | 283,091 | | | 34,964 | 151,625 | 7,569 | (h) | 477,249 | |||||||||||||||
Lynne M. Misericordia |
2008 | 255,452 | | 37,647 | | 33,800 | 7,200 | (h) | 334,099 | |||||||||||||||
Senior Vice President- |
2007 | 246,824 | | 97,796 | 97,392 | 125,000 | 7,020 | (h) | 574,032 | |||||||||||||||
Treasurer and Assistant Secretary |
2006 | 231,620 | | | 44,701 | 130,875 | 6,960 | (h) | 414,156 | |||||||||||||||
William Toler (d) |
2008 | 385,135 | | | | | 24,832 | (j) | 409,967 | |||||||||||||||
President and Director |
2007 | 422,787 | | 254,161 | 300,821 | 318,750 | 8,520 | (j) | 1,305,039 | |||||||||||||||
2006 | 405,394 | | | 132,132 | 252,750 | 5,676 | (j) | 795,952 | ||||||||||||||||
William Darkoch (e) |
2008 | 220,904 | | 41,235 | | 43,750 | 619,881 | (k) | 925,770 | |||||||||||||||
Executive Vice President- |
2007 | 306,890 | | 170,471 | 295,030 | 262,500 | 9,528 | (k) | 1,044,419 | |||||||||||||||
Supply Chain and Operations |
2006 | 273,641 | | | 69,604 | 186,550 | 7,952 | (k) | 537,747 |
(a) | Stock Awards and Option Awards were valued in accordance with Statement of Financial Accounting Standards (SFAS) No. 123R. The assumptions used in the valuation are discussed in Note 6 to our Consolidated Financial Statements for the year ended December 28, 2008. The 2007 option award expense includes the acceleration of stock options vesting as a result of the Blackstone Transaction. See Note 6 to the Consolidated Financial Statements. |
(b) | On July 5, 2006, Mr. Ansell was appointed Chief Executive Officer of the Company. |
(c) | On July 1, 2007, Mr. Steeneck was appointed Chief Financial Officer of the Company. |
(d) | Effective November 7, 2008, Mr. Toler resigned from the Company. Mr. Tolers resignation was considered a voluntary termination under his employment agreement (see Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards for 2008 below) |
(e) | Effective August 31, 2008, Mr. Darkoch retired from the Company. Mr. Darkochs retirement was considered a termination without cause under his employment agreement (see Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards for 2008 below) |
(f) | Under the terms of the employment agreement signed at the start of his employment, Mr. Ansell received a sign-on bonus payable at the start of his employment ($60,000) and on the one year anniversary ($60,000). In addition, Mr. Ansell received a $24,000 relocation bonus. |
(g) | For Mr. Ansell, All other compensation for 2008, 2007 and 2006 includes contributions made by the Company to his 401(k) accounts and group life insurance in excess of $50,000. Also included in 2008 is relocation related tax gross up compensation. |
(h) | For Mr. Steeneck, Mr. Maggs, and Ms. Misericordia, All other compensation for 2008, 2007 and 2006 includes contributions made by the Company to the individuals 401(k) accounts and group life insurance in excess of $50,000. |
(i) | For Mr. Kiser, All other compensation for 2008, 2007 and 2006 includes an automobile allowance, contributions made by the Company to his 401(k) accounts and group life insurance in excess of $50,000. |
(j) | For Mr. Toler, All other compensation for 2008, 2007 and 2006 includes contributions made by the Company to his 401(k) accounts and group life insurance in excess of $50,000. Also included in 2008 is a vacation payout of $16,923. |
(k) | For Mr. Darkoch, All other compensation for 2008, 2007 and 2006 includes contributions made by the Company to his 401(k) accounts and group life insurance in excess of $50,000. Also included in 2008 is severance of $600,000 and a vacation payout of $11,250. |
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Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards for 2008
Employment Agreements
In connection with the Blackstone Transaction, on April 2, 2007, Crunch Holding Corp., one of our parent companies, entered into substantially similar employment agreements with each of Jeffrey P. Ansell, William Darkoch, Craig Steeneck and William Toler that govern the terms of each executives employment. The term of employment commenced on April 2, 2007 and is to end on April 2, 2012 (with the exception of Mr. Darkochs, which was to expire on April 2, 2010); provided, however, that commencing with April 2, 2012 and on each April 2nd thereafter, the employment term shall be automatically extended for an additional one-year period unless the Company or the executive provides the other party 60 days prior notice before the next extension date that the employment term will not be so extended. The agreements are terminable by either party at any time, provided that an executive must give no less than 30 days notice prior to a resignation. Copies of the employment agreements for Mr. Ansell, Mr. Steeneck, Mr. Toler and Mr. Darkoch are filed as Exhibits 10.1 through 10.4.
On August 31, 2008, William Darkoch retired from the Company. Mr. Darkochs retirement was treated as a termination without cause (as cause is defined below and in his employment agreement with the Company). Under the employment agreement, Mr. Darkoch received at the time of his departure from the Company (a) the accrued rights (as such term is defined below and in the employment agreement), (b) a pro rata portion of the target annual bonus (as such term is defined below and in the employment agreement), (c) a severance benefit of 100% of his current base salary and target annual bonus (as such terms are defined below and in the employment agreement) and (d) continued coverage under the Companys group health, life and disability plans for 12 months.
On November 7, 2008, William Toler, President and Director, resigned from the Company to pursue another opportunity. Mr. Tolers resignation was treated as other than as a result of a constructive termination (as constructive termination is defined below and in his employment agreement). Under the employment agreement, Mr. Toler received at the time of his departure from the Company the accrued rights (as such term is defined below and in his employment agreement).
As of December 28, 2008, the Companys has in place the following employment agreements with Mr. Ansell and Mr. Steeneck:
Each employment agreement sets forth the executives annual base salary, which will be subject to discretionary annual increases upon review by the Board of Directors, and states that the executive will be eligible to earn an annual bonus as a percentage of salary with respect to each fiscal year (with a target percentage between 100% and 200% for Mr. Ansell and between 75% and 150% for Mr. Steeneck), based upon the extent to which annual performance targets established by the Board of Directors are achieved. The annual bonus, if any, shall be paid to executive within two and one-half (2.5) months after the end of the applicable fiscal year. Mr. Steeneck also has the opportunity to earn an enhanced annual bonus, which would increase his target percentage from 75% to 100% and his maximum target percentage from 150% to 200%. The enhanced annual bonus is based upon the Company achieving certain EBITDA and other financial targets, which would be in excess of the targets established annually by the Board of Directors. We recently modified the EBITDA targets included in Mr. Steenecks plan to levels we believe are reasonably attainable in light of the current global economic and financial crisis. A copy of the enhanced target annual bonus and its modification are filed as Exhibit 10.22 and 10.24, respectively.
Pursuant to each employment agreement, if an executives employment terminates for any reason, the executive is entitled to receive (i) any base salary and unused vacation accrued through the date of termination; (ii) any annual bonus earned, but unpaid, as of the date of termination, (iii) reimbursement of any unreimbursed business expenses properly incurred by the executive; and (iv) such employee benefits, if any, as to which the executive may be entitled under our employee benefit plans (the payments and benefits described in (i) through (iv) being accrued rights).
If an executives employment is terminated by us without cause (as defined below) (other than by reason of death or disability) or if the executive resigns as a result of a constructive termination (as defined below) (each a qualifying termination), the executive is entitled to (i) the accrued rights; (ii) a pro rata portion of a target annual bonus based upon the percentage of the fiscal year that shall have elapsed through the date of the executives termination of employment; (iii) subject to compliance with certain confidentiality, non-competition and non-solicitation covenants contained in his employment agreement and execution of a general release of claims on behalf of the Company, an amount equal to the product of (x) one-and-a-half in the case of Mr. Ansell or one in the case of Mr. Steeneck and (y) the sum of (A) the executives base salary and (B) the executives target annual bonus amount, which shall be payable to the executive in equal installments in accordance with the Companys normal payroll practices; and (iv) continued coverage under our group health plans until the earlier of (A) eighteen months in the case of Mr. Ansell and one year in the case of Mr. Steeneck from the executives date of termination of employment with the Company and (B) the date the executive is or becomes eligible for comparable coverage under health, life and disability plans of another employer.
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For purposes of these agreements, cause is defined as (A) the executives continued failure substantially to perform his material duties under executives employment (other than as a result of total or partial incapacity due to physical or mental illness) following notice by the Company to the executive of such failure and 30 days within which to cure; (B) theft or embezzlement of Company property; (C) dishonesty in the performance of managers duties resulting in material harm to the Company; (D) any act on the part of executive that constitutes a felony under the laws of the United States or any state thereof (provided, that if a executive is terminated for any action described in this clause (D) and the executive is never indicted in respect of such action, then the burden of establishing that such action occurred will be on the Company in respect of any proceeding related thereto between the parties and the standard of proof will be clear and convincing evidence (and if the Company fails to meet that standard, the Company will reimburse the executive for his reasonable legal fees in connection with that proceeding)); (E) the executives willful material misconduct in connection with his duties to the Company or any act or omission which is materially injurious to the financial condition or business reputation of the Company or any of its subsidiaries or affiliates, or (F) the executives breach of the provisions of the non-competition clause of these agreements. No act will be deemed to be willful if conducted in good faith with a reasonable belief that the conduct was in the best interests of the Company.
For purposes of these agreements, constructive termination is defined as (A) the failure of the Company to pay or cause to be paid the executives base salary or annual bonus (if any) when due; (B) a reduction in the executives base salary or target bonus opportunity percentage of base salary (excluding any change in value of equity incentives or a reduction in base salary affecting substantially all similarly situated executives by the same percentage of base salary); (C) any substantial and sustained diminution in the executives duties, authority or responsibilities as of April 2, 2007; (D) a relocation of the executives primary work location more than 50 miles without his prior written consent; (E) the failure to assign the executives employment agreement to a successor, and the failure of such successor to assume that employment agreement, in any public offering or change of control (each as defined in the Securityholders Agreement, dated April 2, 2007, described under Item 13: Certain Relationships and Related Transactions and Director IndependenceSecurityholders Agreement of Peak Holdings LLC); (F) a Company notice to the executive of the Companys election not to extend the employment term; or, solely in the case of Mr. Ansell, (G) a failure to elect or reelect or the removal as a member of the board of directors; provided, that none of these events will constitute constructive termination unless the Company fails to cure the event within 30 days after notice is given by the executive specifying in reasonable detail the event which constitutes constructive termination; provided, further, that constructive termination will cease to exist for an event on the 60 th day following the later of its occurrence or the executives knowledge thereof, unless the executive has given the Company notice thereof prior to such date.
In the event of an executives termination of employment that is not a qualifying termination or a termination due to death or disability, he will only be entitled to the accrued rights (as defined above).
For information with respect to potential payments to the named executive officers pursuant to their employment agreements upon termination or change of control, see the tables set forth under Potential Payments Upon Termination or Change in Control.
Each of the agreements also contains non-competition provisions that limit the executives ability to engage in activity competing with our company for 18 months, in the case of Mr. Ansell. or one year, in the case of Mr. Steeneck, after termination of employment.
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Other Change of Control and Severance Agreements
In addition to the agreements discussed above, the Company has entered into change of control agreements with Mr. Maggs and Ms. Misericordia. These agreements state that in the event of a change in control (as defined) that results in any of the following: (1) the executives loss of job; (2) a change in the executives then current title; (3) a reduction in the executives current salary, bonus level, a substantial reduction in benefits and/or stock option programs; (4) a change resulting in the executives diminution of their current job description and responsibilities; (5) a change in the executives reporting relationship; (6) a relocation of the executives office by more than 25 miles from the executives then current office or a required relocation from the executives then current home, then in each case; the executives employment will be deemed to have been severed and the executive shall receive a lump sum payment equal to one year of the executives current annual salary and target bonus of 50%, payment for all unused vacation and health insurance benefits paid for by the company for one year as severance. Copies of these agreements are filed as Exhibits 10.30 and 10.31.
Mr. Kiser has entered into a severance agreement that is substantially different from that of other executives of the Company. Under Mr. Kisers agreement, if his employment is terminated by us without cause (as defined), then Mr. Kiser would be entitled to a cash payment equal to his then current salary for up to 12 months (nine months guaranteed plus three additional months should Mr. Kiser not be employed after the initial nine months). Mr. Kisers agreement is filed as Exhibit 10.29.
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Grants of Plan-Based Awards for 2008
The following table provides supplemental information relating to grants of plan-based awards to help explain information provided above in our Summary Compensation Table.
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards |
|||||||||||
Name |
Grant
Date |
Threshold
($) |
Target
($) |
Maximum
($) |
|||||||
Jeffrey P. Ansell |
2008 | $ | | $ | 775,000 | $ | 1,550,000 | ||||
Craig Steeneck |
2008 | | 375,000 | 750,000 | |||||||
Chris Kiser |
2008 | | 184,178 | 345,334 | |||||||
M. Kelley Maggs |
2008 | | 152,073 | 285,136 | |||||||
Lynne M. Misericordia |
2008 | | 128,750 | 241,406 |
Outstanding Equity Awards at 2008 Fiscal Year End
The following table provides information regarding outstanding awards made to our named executive officers as of our most recent fiscal year end.
Stock Awards | ||||||||||||
Name |
Number of
Shares or Units of Stock That Have Not Vested (#) (a) |
Market Value of
Shares or Units of Stock That Have Not Vested (f) ($) |
Equity Incentive
Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) (b) |
Equity Incentive
Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested (h) ($) |
||||||||
Jeffrey P. Ansell |
450.0 | (c) | $ | 2,079,900 | 1,462.5 | (c) | $ | 6,759,675 | ||||
Craig Steeneck |
154.0 | (d) | 711,788 | 500.5 | (d) | 2,313,311 | ||||||
150.0 | (d) | 693,300 | ||||||||||
Chris Kiser |
60.0 | (e) | 277,320 | 195.0 | (e) | 901,290 | ||||||
M. Kelley Maggs |
30.0 | (f) | 138,660 | 97.5 | (f) | 450,645 | ||||||
Lynne M. Misericordia |
64.0 | (g) | 295,808 | 208.0 | (g) | 961,376 |
(a) | Represents Class B-1 profits interest units (PIUs), which vest ratably over five years. |
(b) | Represents Class B-2 PIUs, which vest ratably over five years depending whether annual or cumulative EBITDA targets are met and Class B-3 PIUs, which vest either on a change of control or similar event if certain internal rates of return are met. |
(c) | Assuming certain Company performance targets are met, Mr. Ansells unvested Class B PIUs vest as follows: in fiscal 2009 337.5; in fiscal 2010 337.5; in fiscal 2011 337.5; and in fiscal 2012 900. |
(d) | Assuming certain Company performance targets are met, Mr. Steenecks unvested Class B PIUs vest as follows: in fiscal 2009 165.5; in fiscal 2010 165.5; in fiscal 2011 165.5; and in fiscal 2012 308. |
(e) | Assuming certain Company performance targets are met, Mr. Kisers unvested Class B PIUs vest as follows: in fiscal 2009 45; in fiscal 2010 45; in fiscal 2011 45; and in fiscal 2012 120. |
(f) | Assuming certain Company performance targets are met, Mr. Maggs unvested Class B PIUs vest as follows: in fiscal 2009 22.5; in fiscal 2010 22.5; in fiscal 2011 22.5; and in fiscal 2012 60. |
(g) | Assuming certain Company performance targets are met, Ms. Misericordias unvested Class B PIUs as follows: in fiscal 2009 48; in fiscal 2010 48; in fiscal 2011 48; and in fiscal 2012 128. |
(h) | The value ascribed to the vested units was calculated based upon a value of $4,622 per B unit, which is the value used in calculating stock compensation expense under SFAS 123(R). |
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Option Exercises and Stock Vested in 2008
The following table provides information regarding the amounts received by our named executive officers upon exercise of options or similar instruments or the vesting of stock or similar instruments during our most recent fiscal year.
Stock Awards | |||||
Name |
Number of
Shares Acquired on Vesting (a) (#) |
Value Received
on Vesting (a) ($) |
|||
Jeffrey P. Ansell |
112.5 | $ | 519,975 | ||
Craig Steeneck |
38.5 | 177,947 | |||
Chris Kiser |
15.0 | 69,330 | |||
M. Kelley Maggs |
7.5 | 34,665 | |||
Lynne M. Misericordia |
16.0 | 73,952 |
(a) | During 2008, a portion of the Class B-1 Units vested. The value ascribed to the vested units was calculated based upon a value of $4,622 per B unit, which is the value used in calculating stock compensation expense under SFAS 123(R). |
Nonqualified Deferred Compensation for 2008
None of our named executive officers are currently in a nonqualified deferred compensation plan.
Pension Benefits for 2008
None of our named executive officers are currently in a defined benefit plan sponsored by us or our subsidiaries or affiliates.
138
Potential Payments Upon Termination or Change in Control
The following tables show the estimated amount of potential cash severance payable to each of the named executive officers, as well as the estimated value of continuing benefits, based on compensation and benefit levels in effect on December 28, 2008, assuming the executives employment terminated effective December 28, 2008. Due to the numerous factors involved in estimating these amounts, the actual value of benefits and amounts to be paid can only be determined upon an executives termination of employment.
In the tables below, the value of the accelerated stock vesting was based upon an estimated value of Peak Holdings LLC Class B Units as of December 28, 2008 of $317 each. The value of accelerated stock vesting does not include unvested Class B-2 Units and Class B-3 Units that would vest upon a change of control only if certain internal rate of return targets were met because such targets had not been met as of December 28, 2008. The value of the health and welfare benefits in the tables below was estimated at $1,000 per month.
You should read this section together with the subsection above entitled Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards for 2008-Employment Agreements, which includes, among other things, definitions of the term[s] cause and constructive termination used in the tables below with respect to Messrs. Ansell and Steeneck. The term change of control is defined in the applicable employment agreement or severance agreement for each such executive officer. Each of these agreements is filed as an exhibit to this Annual Report on Form 10-K.
Voluntary
Termination |
Involuntary
Termination Without Cause |
Termination
For Cause |
Constructive
Termination |
Change in
Control |
Disability | Death | |||||||||||||||
Jeffrey P. Ansell | |||||||||||||||||||||
Cash Severance |
$ | | $ | 2,325,000 | $ | | $ | 2,325,000 | $ | | $ | | $ | | |||||||
Acceleration of Stock Vesting |
| | | | 249,638 | | | ||||||||||||||
Vested Stock Awards |
| 106,988 | | 106,988 | | | | ||||||||||||||
Health and Welfare Benefits |
| 18,000 | | 18,000 | | | | ||||||||||||||
Total |
$ | | $ | 2,449,988 | $ | | $ | 2,449,988 | $ | 249,638 | $ | | $ | | |||||||
Voluntary
Termination |
Involuntary
Termination Without Cause |
Termination
For Cause |
Constructive
Termination |
Change in
Control |
Disability | Death | |||||||||||||||
Craig Steeneck |
|||||||||||||||||||||
Cash Severance |
$ | | $ | 875,000 | $ | | $ | 875,000 | $ | | $ | | $ | | |||||||
Acceleration of Stock Vesting |
| | | | 85,432 | | | ||||||||||||||
Vested Stock Awards |
| 36,614 | | 36,614 | | | | ||||||||||||||
Health and Welfare Benefits |
| 12,000 | | 12,000 | | | | ||||||||||||||
Total |
$ | | $ | 923,614 | $ | | $ | 923,614 | $ | 85,432 | $ | | $ | | |||||||
Voluntary
Termination |
Involuntary
Termination Without Cause |
Termination
For Cause |
Constructive
Termination |
Change in
Control |
Disability | Death | |||||||||||||||
Chris Kiser |
|||||||||||||||||||||
Cash Severance |
$ | | $ | 340,000 | $ | | $ | | $ | | $ | | $ | | |||||||
Acceleration of Stock Vesting |
| | | | 33,285 | | | ||||||||||||||
Vested Stock Awards |
| 14,265 | | | | | | ||||||||||||||
Health and Welfare Benefits |
| | | | | | | ||||||||||||||
Total |
$ | | $ | 354,265 | $ | | $ | | $ | 33,285 | $ | | $ | | |||||||
Voluntary
Termination |
Involuntary
Termination Without Cause |
Termination
For Cause |
Constructive
Termination |
Change in
Control |
Disability | Death | |||||||||||||||
M. Kelley Maggs |
|||||||||||||||||||||
Cash Severance |
$ | | $ | 93,583 | $ | | $ | | $ | | $ | | $ | | |||||||
Acceleration of Stock Vesting |
| | | | 16,643 | | | ||||||||||||||
Vested Stock Awards |
| 7,133 | | | | | | ||||||||||||||
Health and Welfare Benefits |
| | | | | | | ||||||||||||||
Total |
$ | | $ | 100,716 | $ | | $ | | $ | 16,643 | $ | | $ | | |||||||
Voluntary
Termination |
Involuntary
Termination Without Cause |
Termination
For Cause |
Constructive
Termination |
Change in
Control |
Disability | Death | |||||||||||||||
Lynne M. Misericordia |
|||||||||||||||||||||
Cash Severance |
$ | | $ | 59,423 | $ | | $ | | $ | | $ | | $ | | |||||||
Acceleration of Stock Vesting |
| | | | 35,504 | | | ||||||||||||||
Vested Stock Awards |
| 15,216 | | | | | | ||||||||||||||
Health and Welfare Benefits |
| | | | | | | ||||||||||||||
Total |
$ | | $ | 74,639 | $ | | $ | | $ | 35,504 | $ | | $ | | |||||||
139
Mr. Maggs and Ms. Misericordias employment arrangements with the Company do not include any special provisions for a post-employment payment. Therefore, in the event they are terminated other than for cause, any post-employment payment would be paid under our existing severance plan. For employees at Mr. Maggs and Ms. Misericordias levels, the severance benefit would be sixteen and twelve weeks of compensation, respectively, which includes base salary only.
As noted in the Summary Compensation Table above, Mr. Darkoch retired from the Company effective August 31, 2008. Mr. Darkochs retirement was considered a termination without cause under his employment agreement and he is being paid severance in the amount of $600,000. The Company, as is its right under the subscription agreement for the profits interest units, elected to not call Mr. Darkochs unvested B units, which remain outstanding.
As noted in the Summary Compensation Table above, Mr. Toler resigned from the Company effective November 7, 2008. Mr. Tolers resignation was treated as other than as a result of a constructive termination under his employment agreement and therefore he received no severance.
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Compensation of Directors
Our directors who are also our employees or employees of Blackstone receive no additional compensation for their services as director. Mr. Deromedis compensation is discussed below under Director Services Agreement. Mr. Jimenez and Mr. Silcock, who are neither employees of the Company nor of Blackstone, receive (1) an annual retainer of $30,000 to be paid annually in arrears on April 2 nd , (2) an annual payment of $10,000 for serving as Chairman of the Audit Committee (paid to Mr. Jimenez in 2008 and to be paid to Mr. Silcock, the new Chairman of the Audit Committee, in 2009), and (3) an annual option grant with an after-tax value of approximately $50,000.
The table below sets forth information regarding director compensation for the year ended December 28, 2008.
Name |
Fees Paid
in Cash ($) |
Stock
Awards (a) ($) |
Option
Awards (a) ($) |
Non-Equity
Incentive Plan Compensation ($) |
All Other
Compensation ($) |
Total ($) | |||||||||||||
Roger Deromedi |
$ | 307,269 | $ | 113,008 | $ | | $ | 51,700 | $ | 9,048 | (c) | $ | 481,025 | ||||||
Joseph Jimenez |
40,000 | 10,959 | | | | 50,959 | |||||||||||||
Ray Silcock (b) |
| 223 | | | | 223 |
(a) | Stock Awards and Stock Option Grants were valued and expensed in accordance with Statement of Financial Accounting Standards (SFAS) No. 123R. The assumptions used in the valuation are discussed in Note 6 to our consolidated financial statements for the year ended December 28, 2008. Mr. Deromedis expense includes a one-time grant of 1,000 profits interest units in 2007. Mr. Jimenezs expense includes a one-time grant of 83 profits interest units in 2007 in addition to his annual grant. |
(b) | Mr. Silcock was appointed as a director effective May 13, 2008. |
(c) | For Mr. Deromedi, All other compensation for includes contributions made by the Company to his 401(k) account and group life insurance in excess of $50,000. |
Director Service Agreement
In connection with the Blackstone Transaction, on April 2, 2007, Crunch Holding Corp. entered into a director service agreement with Roger Deromedi that governs the terms of his services to the Company. The term of the agreement commenced on April 2, 2007 and ends on April 2, 2012; provided, however, that commencing on April 2, 2012 and on each April 2nd thereafter, the agreement term shall be extended for an additional one-year period unless the Company or Mr. Deromedi provides the other party 60 days prior notice before the next extension date that the term will not be so extended. This agreement is terminable by either party at any time; provided that Mr. Deromedi must give no less than 30 days notice prior to a resignation.
The director service agreement sets forth Mr. Deromedis annual fee, which will be subject to discretionary annual increases upon review by the Board of Directors, and is payable in regular installments. The agreement states that Mr. Deromedi will also be eligible to earn an annual bonus as a percentage of his annual fee with respect to each fiscal year (with a target percentage of 66.7%), based upon the sole discretion of the Board of Directors.
Pursuant to Mr. Deromedis agreement, if his services are terminated due to death or disability, he is entitled to receive (i) any base salary accrued through the date of termination, (ii) any annual bonus earned, but unpaid, as of the date of the termination and (iii) reimbursement of any unreimbursed business expenses properly incurred by the director prior to the date of termination (the payments described in (i) through (iii) being accrued rights).
Pursuant to the director service agreement, if Mr. Deromedi is terminated by us without cause, as defined under Employment Agreements, or as a result of a constructive termination (as defined below), he is entitled to: (i) the accrued rights and (ii) subject to compliance with certain confidentiality, non-competition and non-solicitation covenants contained in his director service agreement and execution of a general release of claims on behalf of the Company, an amount equal to (x) one multiplied by (y) the sum of the annual base salary plus his target annual bonus, which shall be payable to him in equal installments in accordance with our normal payroll practices.
141
For purposes of Mr. Deromedis agreement, constructive termination means (A) the failure by us to pay or cause to be paid his annual compensation or annual bonus, if any, when due; (B) a reduction in his annual compensation (excluding any change in value of equity incentives or a reduction affecting substantially all senior managers); or (C) a material reduction or a material increase in his duties and responsibilities; provided, that none of these events constitutes constructive termination unless we fail to cure the event within 30 days after written notice is given by him specifying in reasonable detail the event that constitutes the constructive termination; provided, further, that constructive termination will cease to exist for an event on the 60 th day following the later of its occurrence or his knowledge thereof, unless he has given us written notice thereof prior to such date.
If Mr. Deromedis services are terminated by us for cause or if he resigns for reasons other than as a result of a constructive termination, he will only be entitled to receive his accrued rights.
Mr. Deromedis agreement also contains non-competition provisions that limit his ability to engage in activity competing with our company for six months after termination of his services.
A copy of Mr. Deromedis agreement is filed as Exhibit 10.5.
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ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
The following table sets forth information with respect to the beneficial ownership of the Class A-1 and Class A-2 Units of our ultimate parent company, Peak Holdings LLC, a Delaware limited liability company, as of December 28, 2008 for (i) each individual or entity known by us to own beneficially more than 5% of the Class A-1 Units or Class A-2 Units of Peak Holdings LLC, (ii) each of our named executive officers, (iii) each of our directors and (iv) all of our directors and our executive officers as a group. The Class A-1 Units and the Class A-2 Units have equal voting rights. For additional information about the equity investment by certain members of our senior management, see Item 10: Directors and Executive Officers of the RegistrantEquity Investment by Chairman and Executive Officers.
The amounts and percentages of shares beneficially owned are reported on the basis of SEC regulations governing the determination of beneficial ownership of securities. Under SEC rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are deemed to be outstanding for purposes of computing such persons ownership percentage, but not for purposes of computing any other persons percentage. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.
Except as otherwise indicated in the footnotes below, each of the beneficial owners has, to our knowledge, sole voting and investment power with respect to the indicated Class A-1 Units and Class A-2 Units. Unless otherwise noted, the address of each beneficial owner of Class A-1 Units is 345 Park Avenue, New York, New York 10017, and the address of each beneficial owner of Class A-2 Units is c/o Pinnacle Foods Group LLC, 1 Old Bloomfield Avenue, Mt. Lakes, New Jersey 07046.
Title of Class |
Name and Address of Beneficial Owner |
Amount and Nature of
Beneficial Ownership |
Percent | ||||
A-1 |
Blackstone Funds(1) | 414,178,549 | 98 | % | |||
A-2 |
Roger Deromedi(2) | 3,000,000 | * | ||||
A-2 |
Jeffrey P. Ansell | 1,350,000 | * | ||||
A-2 |
Craig Steeneck | 575,000 | * | ||||
A-2 |
Lynne M. Misericordia | 400,000 | * | ||||
A-2 |
M.Kelley Maggs | 294,029 | * | ||||
A-2 |
Joseph Jimenez | 250,000 | * | ||||
A-2 |
Chris Kiser | 125,000 | * | ||||
A-2 |
William Toler(3) | 699,003 | * | ||||
A-2 |
Directors and Executive Officers as a Group (twelve persons) | 6,339,054 | 1.5 | % |
* | Less than one percent |
(1) | Reflects beneficial ownership of 376,790,140 Class A-1 Units held by Blackstone Capital Partners V L.P., 22,270,893 Class A-1 Units held by Blackstone Capital Partners V-AC L.P., 11,775,107 Class A-1 Units held by Blackstone Family Investment Partnership V-SMD L.P., 2,431,284 Class A-1 Units held by Blackstone Family Investment Partnership V L.P. and 911,125 Class A-1 Units held by Blackstone Participation Partnership V L.P. (collectively, the Blackstone Funds). The general partner of all Blackstone Funds is Blackstone Management Associates V L.L.C. BMA V L.L.C. is the sole member of Blackstone Management Associates V L.L.C. Blackstone Holdings III L.P. is the managing member and majority in interest owner of BMA V L.L.C. Blackstone Holdings III L.P. is indirectly controlled by The Blackstone Group L.P. and is owned, directly or indirectly, by Blackstone professionals and The Blackstone Group L.P. The Blackstone Group L.P. is controlled by its general partner, Blackstone Group Management L.L.C., which is in turn wholly owned by Blackstones senior managing directors and controlled by its founder Stephen A. Schwarzman. Mr. Schwarzman disclaims beneficial ownership of such Units. |
(2) | All of the units are held in a revocable trust for the benefit of Mr. Deromedi. |
(3) | Mr. Toler is a former executive with the Company whose employment ended in November 2008. Mr. Toler individually holds 318,000 Class A-2 Units. The remaining units listed are held by Pensco Trust Co. as custodian for Mr. Tolers retirement account. |
143
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
Securityholders Agreement of Peak Holdings LLC
In connection with the Blackstone Transaction, Peak Holdings LLC, our ultimate parent company, entered into a securityholders agreement with the equity owners (Blackstone and management investors).
Under the securityholders agreement, each of the securityholders of Peak Holdings LLC agrees to take all necessary actions to cause the persons designated by Blackstone to be elected to the boards of directors of Peak Holdings LLC and each of its subsidiaries, including our company. The parties also agree to vote the securities of Peak Holdings LLC and its subsidiaries, including our company, as Blackstone directs in connection with the merger or consolidation of Peak Holdings LLC, the sale of all or substantially all its assets, the amendment of its organizational documents and certain other matters.
The securityholders agreement also restricts transfers by employee holders of securities of Peak Holdings LLC from transferring those securities prior to the earliest of a qualified public offering, a change of control and the seventh anniversary of the closing of the Blackstone Transaction (the lapse date), subject to exceptions, and grants Peak Holdings LLC a right of first refusal in connection with sales by employee holders on or after the lapse date and before a public offering by Peak Holdings LLC. The securityholders agreement also gives employee holders customary tag-along rights with respect to sales of securities held by Blackstone and gives Blackstone customary drag-along rights in connection with a change of control, subject in certain instances to a minimum threshold of sales by Blackstone.
The agreement grants Blackstone demand registration rights with respect to the securities of Peak Holdings LLC and grants all securityholders certain piggyback registration rights. The agreement contains customary indemnification provisions in connection with any such registration. A copy of the agreement is attached as Exhibit 10.15.
For additional information about the equity investment by certain members of our senior management in connection with the Blackstone Transaction, see Item 10: Directors and Executive Officers of the RegistrantEquity Investment by Chairman and Executive Officers.
Securityholders Agreement of Crunch Holding Corp.
In connection with the 2007 Stock Incentive Plan described under Item 11: Executive CompensationCompensation Discussion and AnalysisElements of Compensation, Crunch Holding Corp., the immediate subsidiary of Peak Holdings LLC, entered into a securityholders agreement with Peak Holdings LLC and the employee shareholders of Crunch Holding Corp. from time to time.
Under the securityholders agreement, each of the shareholders of Crunch Holding Corp. agrees to take all necessary actions to cause the persons designated by Peak Holdings LLC to be elected to the boards of directors of Crunch Holding Corp. and each of its subsidiaries, including our company. The parties also agree to vote the securities of Crunch Holding Corp. and its subsidiaries, including our company, as Peak Holdings LLC directs in connection with the merger or consolidation of Crunch Holding Corp., the sale of all or substantially all its assets, the amendment of its organizational documents and certain other matters.
The securityholders agreement also restricts transfers by employee holders of securities of Crunch Holding Corp. from transferring those securities prior to the earliest of a qualified public offering, a change of control and the seventh anniversary of the closing of the Blackstone Transaction (the lapse date), subject to exceptions, and grants Crunch Holding Corp. a right of first refusal in connection with sales by employee holders on or after the lapse date and before a public offering by Crunch Holding Corp. The securityholders agreement also gives Blackstone and Peak Holdings LLC customary drag-along rights in connection with a change of control. A copy of the agreement is attached as Exhibit 10.18.
144
Advisory Agreement
At the closing of the Blackstone Transaction, we and one or more of our parent companies entered into a transaction and advisory fee agreement with an affiliate of Blackstone pursuant to which such entity or its affiliates will provide certain strategic and structuring advice and assistance to us. In addition, under this agreement, affiliates of Blackstone will provide certain monitoring, advisory and consulting services to us for an aggregate annual management fee equal to the greater of $2.5 million or 1.0% of adjusted EBITDA (as defined in the credit agreement governing our new senior secured credit facilities) for each year thereafter. The management fee was $2.5 million in both the 39 weeks ended December 30, 2007 and the fiscal year ended December 28, 2008. Affiliates of Blackstone also received reimbursement for out-of-pocket expenses incurred by them or their affiliates in connection with the Blackstone Transaction prior to the closing date and in connection with the provision of services pursuant to the agreement. In addition, pursuant to such agreement, an affiliate of Blackstone also received transaction fees totaling $21.6 million, which amount is contained within the $71.2 million of transaction costs discussed in Note 1 to the Consolidated Financial Statements for fiscal 2007 in connection with services provided by Blackstone and its affiliates related to the Blackstone Transaction. The agreement includes customary exculpation and indemnification provisions in favor of Blackstone and its affiliates. A copy of this agreement is attached as Exhibit 10.6. The Company reimbursed the Blackstone group out-of-pocket expenses totaling $0.1 million during fiscal year ended December 28, 2008.
Upon a change of control in our ownership, a sale of all of our assets, or an initial public offering of our equity, and in recognition of facilitation of such change of control, asset sale or public offering by affiliates of Blackstone, these affiliates of Blackstone may elect to receive, in lieu of annual payments of the management fee, a single lump sum cash payment equal to the then-present value of all then-current and future management fees payable under this agreement. The lump sum payment would only be payable to the extent that it is permitted under the indentures and other agreements governing our indebtedness.
Supplier Costs
Graham Packaging, which is owned by affiliates of the Blackstone Group, supplies packaging for some of the Companys products. Purchases from Graham Packaging were $8.7 million for the 39 weeks ended December 30, 2007 and $11.3 million for the fiscal year ended December 28, 2008.
Debt and Interest Expense
As of December 30, 2007, $29.8 million of our senior secured term loan was owed to Blackstone Advisors L.P., an affiliate of Blackstone. In addition, for the period April 2, 2007 to December 30, 2007, interest expense recognized in the Consolidated Statement of Operations for debt owed to Blackstone Advisors L.P. totaled $1.5 million. As of December 28, 2008, $34.6 million of our senior secured term loan was owed to Blackstone Advisors L.P., an affiliate of Blackstone. Related party interest for Blackstone Advisors L.P for the fiscal year ended December 28, 2008 was $3.1 million.
Tax Sharing Agreement
On November 25, 2003, the Predecessor entered into a tax sharing agreement with Crunch Holding Corp. which provided that we will file U.S. federal income tax returns with Crunch Holding Corp. on a consolidated basis. This agreement further provided that we make distributions to Crunch Holding Corp., and Crunch Holding Corp. makes contributions to us, such that we incurred the expense for taxes generated by our business on the same basis as if we did not file consolidated tax returns. Aurora and its wholly owned subsidiary, Sea Coast, became party to the tax sharing agreement on March 19, 2004. PFF became party to the tax sharing agreement on April 2, 2007.
Director Independence
We have not made a determination that any of our directors is independent under the applicable standards of the New York Stock Exchange or any other standard. Because our securities are not listed on any stock exchange or inter-dealer quotation system, we are not subject to the independence standards of any such exchange or quotation system. In addition, if we were a listed company, we believe we would be eligible for the controlled company exception set forth in Section 303A of the Listed Company Manual of the New York Stock Exchange (if that were the exchange on which we were listed) from the rule that would ordinarily require that a majority of a listed issuers board of directors be independent and from certain other rules. If we were subject to the New York Stock Exchanges standard of independence, we believe that, at a minimum, our Executive Chairman, each of our directors who is an executive officer of our company and each of our directors who is associated with Blackstone, our controlling shareholder, would not be considered independent, including Messrs. Deromedi, Ansell, Melwani, Korangy and Giordano.
145
Related Person Transactions Prior to the Blackstone Transaction
Office Lease Space
Prior to the Blackstone Transaction, we leased office space owned by Barrington Properties, LLC, which is an affiliate of C. Dean Metropoulos, our former Chairman and Chief Executive Officer. In the 13 weeks ending April 2, 2007 and fiscal 2006 total rent paid under this lease was $26,000 and $104,000, respectively. The lease required us to make leasehold improvements of approximately $318,000. The building, which included the office space leased by a subsidiary of the Predecessor, was sold by the owner on January 12, 2004. The lease was amended to reflect that the subsidiary moved to a different building in Greenwich, Connecticut also owned by Barrington Properties, LLC. The lease amendment ran through May 31, 2010. This agreement was terminated in connection with the Blackstone Transaction.
Airplane
In March 2004, our former subsidiary, Pinnacle Foods Management Corporation, entered into an agreement with Fairmont Aviation, LLC, an affiliate of C. Dean Metropoulos, our former Chairman and Chief Executive Officer, whereby Fairmont Aviation, LLC agreed to provide us with use of an aircraft. Subject to each parties termination rights, the agreement was scheduled to terminate in March 2010 and could be renewed on a month-to-month basis thereafter. In connection with the use of this aircraft, we paid net operating expenses of $688,000 for the 13 weeks ending April 2, 2007 and $2,750,000 in fiscal 2006. This agreement was terminated in connection with the Blackstone Transaction.
Members Agreement
In connection with the Aurora Merger, the shareholders of the Predecessors parent company entered into an amended and restated members agreement of Crunch Equity Holding, LLC, one of the shareholders of PFGI prior to the Blackstone Transaction (the Members Agreement). The Members Agreement, among other matters:
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restricted the transfer of units of Crunch Equity Holding, LLC, subject to certain exceptions, and provided that all transferees must become a party to the Members Agreement; |
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provided for a board of managers of Crunch Equity Holding, LLC and a board of directors of Crunch Holding Corp. and Pinnacle Foods Corporation consisting of nine directors; |
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required each member of Crunch Equity Holding, LLC to vote all their shares for the election of the persons nominated as managers as provided above; |
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provided for a compensation committee and an audit committee, each consisting of at least three managers; |
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prohibited Crunch Equity Holding, LLC or any of its subsidiaries from taking certain actions, subject to carve outs provided in the Members Agreement, without the prior approval of the members of the board of managers affiliated with each of JPMP and JWC so long as in each case the members affiliated with the applicable 2003 Sponsor owns at least 25% of the Class A units owned by such party at the consummation of the Aurora Merger; |
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required the consent of CDM Investor Group LLC (CDM) to any changes to the terms of the Class B, C, D or E units or any amendment to Crunch Equity Holding, LLCs governance documents that would adversely affect CDM in a manner different from any other member; |
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required the consent of the Bondholders Trust to amend Crunch Equity Holding, LLCs governance documents for so long as the Bondholders Trust holds at least 5% of the issued and outstanding units; |
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contained rights of certain unit holders to participate in transfers of Class A and Class B units by the 2003 Sponsors to third parties; |
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contained a right of first refusal by Crunch Equity Holding, LLC with respect to transfers of Class A and Class B units by members other than Bondholders Trust, and if Crunch Equity Holding, LLC did not exercise such right, grant the non-transferring members (other than Bondholders Trust) a right of first refusal; |
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granted the 2003 Sponsors and Crunch Equity Holding, LLC a right of first offer with respect to transfers of interests by members of Bondholders Trust; |
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granted the members certain preemptive rights; |
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required the consent of each of the 2003 Sponsors to effect a sale of Crunch Equity Holding, LLC, Aurora or Pinnacle Foods Corporation; |
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if CDM did not consent to (i) a sale of Crunch Equity Holding, LLC or Aurora or (ii) a liquidation in connection with a required initial public offering, granted JPMP and JWC, in the case of clause (i), and Bondholders Trust, in the case of clause (ii), the right to purchase all of CDM units at a purchase price equal to the product of (x) $10.75 million and (y) a percentage (which is not greater than 100%) representing the percentage on original investment of the capital returned to JPMP, JWC and the Bondholders Trust in connection with such transaction; and |
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if any of C. Dean Metropoulos, N. Michael Dion, Evan Metropoulos or Louis Pellicano voluntarily resigned from Aurora without good reason (as defined in his respective employment agreement) and other than as a result of disability (as defined in his employment agreement), granted Crunch Equity Holding, LLC, Pinnacle or Aurora the option to purchase the portion of CDM units reflecting such individuals ownership in CDM (i) if such resignation was on or before November 25, 2004, at a purchase price equal to $10.75 million multiplied by such individuals ownership percentage in CDM and (ii) if such resignation was after November 25, 2004 but on or before November 25, 2005, at a purchase price equal to the greater of (x) $10.75 million multiplied by such individuals ownership percentage in CDM and (y) fair market value (without regard to any minority or illiquidity discounts). |
The Members Agreement would terminate upon the sale, dissolution or liquidation of Crunch Equity Holding, LLC. This agreement was terminated in connection with the Blackstone Transaction.
Former Sponsor Management, Fee and Registration Rights Agreements
In connection with the acquisition of Pinnacle Foods Holding Corporation (PFHC) in November 2003, PFHC entered into a management agreement with JPMP and an affiliate of JWC whereby JPMP and the affiliate provided us with financial advisory and other services. Additionally, we entered into an agreement with CDM Capital LLC, an affiliate of CDM, whereby CDM received a fee in exchange for advisory services. These arrangements with the 2003 Sponsors also contained standard indemnification provisions by us of the 2003 Sponsors and upon the closing date of the Aurora Merger, PFGI assumed all of PFHCs rights and obligations under the management and fee arrangements. In connection with the Aurora Merger, Crunch Holding Corp. entered into a registration rights agreement with members of Crunch Equity Holding, LLC. Pursuant to this agreement, affiliates of JPMP, affiliates of JWC, CDM and the Bondholders Trust each received demand registration rights. These agreements were terminated in connection with the Blackstone Transaction.
Indemnity Agreement
In connection with the Aurora Merger, we entered into an indemnity agreement with the Bondholders Trust. Pursuant to the indemnity agreement, the Bondholders Trust was required to reimburse us in respect of losses resulting from liabilities other than those (a) reserved against on the balance sheet of Aurora delivered to Crunch Equity Holding, LLC pursuant to the agreement between Aurora and Crunch Equity Holding, LLC, dated November 25, 2003 (the Merger Agreement) (or not required under GAAP to be so reserved against), (b) entered into in the ordinary course of business, and (c) disclosed as of November 25, 2003; and claims by third parties which would give rise to a breach of any of the representations or warranties of Aurora set forth in the Merger Agreement.
The Bondholders Trust was not required to reimburse us for the first $1 million of such losses (subject to upward adjustment of up to $14 million depending on the level of Auroras net debt at closing) and its aggregate reimbursement obligation was not to exceed $30 million. Any claims for indemnification must have been made by us prior to the first anniversary of the closing date of the Aurora Merger. The Bondholders Trust could have satisfied its indemnification obligations by delivering Class A units (valued at $1,000 per unit) to Crunch Equity Holding, LLC for cancellation or by paying cash. The indemnity agreement was amended and restated on May 4, 2004 to provide that the $30 million cap be increased as further provided therein to the extent we were obligated to pay amounts in excess of $6.85 million to any prepetition lender in connection with the R2 Top Hat, Ltd. appeal described in Item 3: Legal ProceedingsR2 appeal in Aurora bankruptcy. This agreement was terminated in connection with the Blackstone Transaction and therefore, the Bondholders Trust was not required to reimburse the Company in connection with the settlement of this appeal.
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Senior Secured Credit Facilities
JPMorgan Chase & Co. or one of its affiliates was a lender under our former senior secured credit facilities. J.P. Morgan Securities Inc. was an initial purchaser of the senior subordinated notes and both J.P. Morgan Securities Inc. and JPMorgan Chase & Co. were affiliates of JPMP Capital Corp., which owned approximately 25% of our Predecessors outstanding capital stock (on a fully diluted basis) and had the right under the Members Agreement to appoint three of our directors. JPMP Capital Corp. was an affiliate of J.P. Morgan Partners, LLC. Steven P. Murray, a partner of J.P. Morgan Partners, LLC, Kevin G. OBrien, a principal of J.P. Morgan Partners, LLC, and Terry Peets, an advisor to J.P. Morgan Partners LLC, served as three of our directors. The senior secured credit facilities were paid off in connection with the Blackstone Transaction.
Financial Instruments
We entered into transactions for derivative financial instruments with JPMorgan Chase Bank to lower our exposure to interest rates, foreign currency, and natural gas prices. We incurred and paid $1.8 million for the settlement of foreign exchange swaps and natural gas swaps during fiscal 2006. JPMorgan Chase Bank ceased to be a related person following the Blackstone Transaction.
Expenses of Major Shareholder
As part of the Aurora Merger, we agreed to pay certain fees of the Bondholders Trust, which owned approximately 43% of Crunch Equity Holding, LLC. The Bondholders Trust primarily consisted of holders of Auroras senior subordinated notes, which elected to receive equity interests in Crunch Equity Holding, LLC as consideration in the Aurora Merger. We recognized in the Consolidated Statement of Operations fees on behalf of the Bondholder Trust totaling $0.4 million in fiscal year 2006. This agreement was terminated in connection with the Blackstone Transaction.
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ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
A PPROVAL P ROCESS
Pursuant to a policy adopted by the Audit Committee in November 2007, the Audit Committee pre-approves all auditing services and
all permitted non-auditing services (including the fees and terms thereof) to be performed by PricewaterhouseCoopers, LLP, subject to the de minimis exceptions for permitted non-audit services described in Section 10A(i)(1)(B) of the 1934 Act
which are approved by the Committee prior to the completion of the audit. PricewaterhouseCoopers LLP shall not be retained to perform certain prohibited non-audit functions set forth in Section 10A(g) and (h) of the 1934 Act and Rule
2-01(c)(4) of Regulation S-X of the SEC. Such pre-approval can be given as part of the Committees approval of the scope of the engagement of PricewaterhouseCoopers LLP or on an individual basis. The approved non-auditing services must be
disclosed in the Companys periodic public reports filed or submitted by it pursuant to Section 15(d) of the 1934 Act. The pre-approval of permitted non-auditing services can be delegated by the Committee to one or more of its members, but
I NDEPENDENT A UDITOR S F EES
Aggregate fees, including out-of-pocket expenses, for professional services rendered for the Company by PricewaterhouseCoopers LLP for the fiscal year ended December 28, 2008 and December 30, 2007:
Fiscal year
Ended December 28, 2008 |
Fiscal year
Ended December 30, 2007 |
|||||
(Dollars in thousands) | ||||||
Audit |
$ | 547 | $ | 1,080 | ||
Audit related |
| 293 | ||||
Tax |
| 15 | ||||
All other |
3 | 96 | ||||
Total |
$ | 550 | $ | 1,484 | ||
A UDIT F EES
Audit fees for fiscal 2008 listed above are the aggregate fees, including out-of-pocket expenses, approved by the audit committee to be paid for professional services rendered by PricewaterhouseCoopers in connection with (i) the audit of the Companys Consolidated Financial Statements as of and for the year ended December 28, 2008, and (ii) the reviews of the Companys unaudited Consolidated Interim Financial Statements as of March 30, 2008, June 29, 2008 and September 28, 2008.
Audit fees for fiscal 2007 listed above are the aggregate fees, including out-of-pocket expenses, approved by the audit committee to be paid for professional services rendered by PricewaterhouseCoopers in connection with (i) the audit of the Companys Consolidated Financial Statements as of and for the year ended December 30, 2007, (ii) the reviews of the Companys unaudited Consolidated Interim Financial Statements as of April 1, 2007, July 1, 2007 and September 30, 2007 and (iii) assistance with review of debt offering documents and documents filed with the SEC.
A UDIT -R ELATED F EES
Audit-related services include due diligence related to potential acquisitions and audits of employee benefit plan audits.
T AX F EES
Tax fees consist of fees and out-of-pocket expenses for professional services rendered by PricewaterhouseCoopers in connection with tax compliance.
A LL O THER F EES
All other fees in 2008 consist of accounting research software. All other fees in 2007 consist primarily of tax services provided for Mr. C.D. Metropoulos, our former Chairman of the Board and Chief Executive Officer.
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ITEM 15. | EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES |
a) Documents filed as part of this report
1) | The Consolidated Financial Statements and accompanying reports of our independent registered public accounting firm are included in Item 8 of this 10-K. |
2) | Exhibits |
Exhibit
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Description of exhibit |
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2.1 | Agreement and Plan of Merger, dated as of February 10, 2007, by and among Crunch Holding Corp., Peak Holdings LLC and Peak Acquisition Corp. (previously filed as Exhibit 2.1 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
2.2 | Agreement and Plan of Reorganization and Merger, by and between Aurora Foods Inc. and Crunch Equity Holding, LLC, dated as of November 25, 2003 (previously filed as Exhibit 2.1 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference). | |
2.3 | Amendment No. 1, dated January 8, 2004, to the Agreement and Plan of Reorganization and Merger, by and between Aurora Foods Inc. and Crunch Equity Holding, LLC, dated as of November 25, 2003 (previously filed as Exhibit 2.2 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference). | |
2.4 | Agreement and Plan of Merger, dated March 19, 2004, by and between Aurora Foods, Inc. and Pinnacle Foods Holding Corporation (previously filed as Exhibit 2.3 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference). | |
2.5 | Asset Purchase Agreement, dated March 1, 2006, by and between The Dial Corporation and Pinnacle Foods Groups Inc. (previously filed as Exhibit 10.1 to the Current Report on Form 8-K of Pinnacle Foods Group Inc. filed with the SEC on March 1, 2006 (Commission File Number: 333-118390), and incorporated herein by reference). | |
3.1 | Pinnacle Foods Finance LLC Certificate of Formation (previously filed as Exhibit 3.1 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
3.2 | Pinnacle Foods Finance LLC Amended and Restated Limited Liability Company Agreement, dated as of April 2, 2007 (previously filed as Exhibit 3.2 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
3.3 | Pinnacle Foods Finance Corp. Certificate of Incorporation (previously filed as Exhibit 3.3 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
3.4 | Pinnacle Foods Finance Corp. Bylaws (previously filed as Exhibit 3.4 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
3.5 | Pinnacle Foods Group LLC Certificate of Formation (previously filed as Exhibit 3.5 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). |
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3.6 | Pinnacle Foods Group LLC Limited Liability Company Agreement (previously filed as Exhibit 3.6 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
3.7 | Pinnacle Foods International Corp. Certificate of Incorporation. (previously filed as Exhibit 3.7 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
3.8 | Pinnacle Foods International Corp. Bylaws. (previously filed as Exhibit 3.8 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
3.9 | State of Delaware Certificate of Conversion, dated September 25, 2007, converting Pinnacle Foods Group Inc. from a Corporation to a Limited Liability Company(previously filed as Exhibit 3.9 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
4.1 | Senior Notes Indenture, dated as of April 2, 2007, among the Issuers, the Guarantors and the Trustee (previously filed as Exhibit 4.1 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
4.2 | Senior Subordinated Notes Indenture, dated as of April 2, 2007, among the Issuers, the Guarantors and the Trustee (previously filed as Exhibit 4.2 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
4.3 | Registrations Rights Agreement, dated as of April 2, 2007, among the Issuers, the Guarantors and Lehman Brothers Inc. and Goldman, Sachs & Co. (previously filed as Exhibit 4.3 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
4.4 | Form of Rule 144A Global Note, 9.25% Senior Notes due 2015 (previously filed as Exhibit 4.4 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
4.5 | Form of Regulation S Global Note, 9.25% Senior Notes due 2015 (previously filed as Exhibit 4.5 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
4.6 | Form of Rule 144A Global Note, 10.625% Senior Subordinated Notes due 2017 (previously filed as Exhibit 4.6 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
4.7 | Form of Regulation S Global Note, 10.625% Senior Subordinated Notes due 2017 (previously filed as Exhibit 4.7 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
4.8 | Credit Agreement, dated as of April 2, 2007, among Peak Finance LLC (to be merged with and into Pinnacle Foods Finance LLC), Peak Finance Holdings LLC, Lehman Commercial Paper Inc., Goldman Sachs Credit Partners L.P. and other lenders party hereto (previously filed as Exhibit 4.8 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
4.9 | Security Agreement, dated as of April 2, 2007, among Peak Finance LLC (to be merged with and into Pinnacle Foods Finance LLC), Peak Finance Holdings LLC, Certain Subsidiaries of Borrower and Holdings identified herein and Lehman Commercial Paper Inc. (previously filed as Exhibit 4.9 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
4.10 | Guaranty, dated as of April 2, 2007, among Peak Finance Holdings LLC, Certain Subsidiaries of Borrower and Holdings identified herein and Lehman Commercial Paper Inc. (previously filed as Exhibit 4.10 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). |
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4.11 | Intellectual Property Security Agreement, dated as of April 2, 2007, among Peak Finance LLC (to be merged with and into Pinnacle Foods Finance LLC), Peak Finance Holdings LLC, Certain Subsidiaries of Borrower and Holdings identified herein and Lehman Commercial Paper Inc. (previously filed as Exhibit 4.11 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
10.1 + | Employment Agreement, dated April 2, 2007 (William Darkoch) (previously filed as Exhibit 10.1 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
10.2 + | Employment Agreement, dated April 2, 2007 (William Toler) (previously filed as Exhibit 10.2 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
10.3 + | Employment Agreement, dated April 2, 2007 (Jeffrey P. Ansell) (previously filed as Exhibit 10.3 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
10.4 + | Employment Agreement, dated April 2, 2007 (Craig Steeneck) (previously filed as Exhibit 10.4 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
10.5 + | Director Service Agreement, dated April 2, 2007 (Roger Deromedi) (previously filed as Exhibit 10.5 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
10.6 | Transaction and Advisory Fee Agreement, dated as of April 2, 2007, between Peak Finance LLC and Blackstone Management Partners V L.L.C. (previously filed as Exhibit 10.6 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
10.7 | Trademark License Agreement by and between The Dial Corporation and Conagra, Inc., dated July 1, 1995 (previously filed as Exhibit 10.33 to the Annual Report on Form 10-K of Pinnacle Foods Group Inc. for the fiscal year ended December 25, 2005 (Commission File Number: 333-118390), and incorporated herein by reference). | |
10.8 | Tax Sharing Agreement, dated as of November 25, 2003, by and among Crunch Holding Corp., Pinnacle Foods Holding Corporation, Pinnacle Foods Corporation, Pinnacle Foods Management Corporation, Pinnacle Foods Brands Corporation, PF Sales (N. Central Region) Corp., PF Sales, LLC, PF Distribution, LLC, PF Standards Corporation, Pinnacle Foods International Corp., Peak Finance Holdings LLC, Pinnacle Foods Finance Corp., Pinnacle Foods Finance LLC and Pinnacle Foods Group LLC (previously filed as Exhibit 10.8 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
10.9 | Lease, dated May 23, 2001, between Brandywine Operating Partnership, L.P. and Pinnacle Foods Corporation (Cherry Hill, New Jersey) (previously filed as Exhibit 10.25 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference). | |
10.10 | Lease, dated August 10, 2001, between 485 Properties, LLC and Pinnacle Foods Corporation (Mountain Lakes, New Jersey); Amendment No. 1, dated November 23, 2001; Amendment No. 2, dated October 16, 2003 (previously filed as Exhibit 10.26 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference). | |
10.11 | Swanson Trademark License Agreement (U.S.) by and between CSC Brands, Inc. and Vlasic International Brands Inc., dated as of March 24, 1998 (previously filed as Exhibit 10.27 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-1183900), and incorporated herein by reference). | |
10.12 | Swanson Trademark License Agreement (Non-U.S.) by and between Campbell Soup Company and Vlasic International Brands Inc., dated as of March 26, 1998 (previously filed as Exhibit 10.28 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. filed with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference). |
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10.13 | Technology Sharing Agreement by and between Campbell Soup Company and Vlasic Foods International Inc., dated as of March 26, 1998 (previously filed as Exhibit 10.29 to the Registration Statement on Form S-4 of Pinnacle Foods Group Inc. with the SEC on August 20, 2004 (Commission File Number: 333-118390), and incorporated herein by reference). | |
10.14 | Amendment to Lease Agreement, dated February 10, 2007 (previously filed as Exhibit 10.1 to the Current Report on Form 8-K of Pinnacle Foods Group Inc. filed with the SEC on February 15, 2007 (Commission File Number: 333-118390), and incorporated herein by reference). | |
10.15 | Securityholders Agreement, dated as of April 2, 2007, among Peak Holdings LLC and the other parties hereto (previously filed as Exhibit 10.15 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
10.16 + | Peak Holdings LLC 2007 Unit Plan, effective as of April 2, 2007 (previously filed as Exhibit 10.16 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
10.17 + | Peak Holdings LLC Form of Award Management Unit Subscription Agreement (previously filed as Exhibit 10.17 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
10.18 | Securityholders Agreement, dated as of September 21, 2007 among Crunch Holding Corp. and the other parties hereto (previously filed as Exhibit 10.18 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
10.19 + | Crunch Holding Corp. 2007 Stock Incentive Plan, effective as of August 8, 2007 (previously filed as Exhibit 10.19 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
10.20 + | Crunch Holding Corp. 2007 Stock Incentive Plan Form of Nonqualified Stock Option Agreement (previously filed as Exhibit 10.20 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
10.21 | Trademark License Agreement, dated as of July 9, 1996, by and between The Quaker Oats Company, The Quaker Oats Company of Canada Limited and Van de Kamps, Inc. (previously filed as Exhibit 10.21 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
10.22 + | Enhanced Target Annual Bonus letter, dated June 11, 2007 (Craig Steeneck) | |
10.23 + | Supplemental Peak Holdings LLC Management Unit Subscription Agreement, dated June 11, 2007 (Craig Steeneck) | |
10.24 + | Modification of the Enhanced Target Annual Bonus letter, dated February 27, 2009 (Craig Steeneck) | |
10.25 + | Modification of the supplemental Peak Holdings LLC Management Unit Subscription Agreement, dated February 27, 2009 (Craig Steeneck) | |
10.26 + | Modification of the Peak Holdings LLC Form of Award Management Unit Subscription Agreement | |
10.27 + | Modification of the Crunch Holding Corp. 2007 Stock Incentive Plan Form of Nonqualified Stock Option Agreement | |
10.28 + | Employment offer letter, dated December 11, 2003 (Chris Kiser) | |
10.29 + | Severance benefit letter, dated October 7, 2008 (Chris Kiser) | |
10.30 + | Employment offer letter dated May 25, 2001 (Lynne M. Misericordia) | |
10.31 + | Employment offer letter dated May 25, 2001 (M.Kelley Maggs) | |
12.1 | Computation of Ratios of Earnings to Fixed Charges. |
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14.1 | Code of Ethics (previously filed as Exhibit 14.1 to the Registration Statement on Form S-4/A of Pinnacle Foods Group Inc. filed with the SEC on December 23, 2004, (Commission File Number: 333-118390), and incorporated herein by reference). | |
21.1 | List of Subsidiaries (previously filed as Exhibit 21.1 to the Registration Statement on Form S-4 of Pinnacle Foods Finance LLC filed with the SEC on December 21, 2007 (Commission File Number: 333-148297), and incorporated herein by reference). | |
24.1 | Power of Attorney (included in signature page). | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (A) | |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (A) |
+ | Identifies exhibits that consist of a management contract or compensatory plan or arrangement. |
(A) | Pursuant to Commission Release No. 33-8212, this certification will be treated as accompanying this Form 10-K and not filed as part of such report for purposes of Section 18 of Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
P INNACLE F OODS F INANCE LLC | ||
By: | /s/ C RAIG S TEENECK | |
Name: | Craig Steeneck | |
Title: | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |
Date: | March 3, 2009 |
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
N AME |
T ITLE |
D ATE |
||
/s/ R OGER D EROMEDI By: Roger Deromedi |
Chairman of the Board and Director | March 3, 2009 | ||
/s/ J EFFREY P. A NSELL By: Jeffrey P. Ansell |
Chief Executive Officer and Director (Principal Executive Officer) |
March 3, 2009 | ||
/s/ J OSEPH J IMENEZ By: Joseph Jimenez |
Director | March 3, 2009 | ||
/s/ R AYMOND P. S ILCOCK By: Raymond P. Silcock |
Director | March 3, 2009 | ||
/s/ P RAKASH A. M ELWANI By: Prakash A. Melwani |
Director | March 3, 2009 | ||
/s/ S HERVIN K ORANGY By: Shervin Korangy |
Director | March 3, 2009 | ||
/s/ Jason Giordano By: Jason Giordano |
Director | March 3, 2009 | ||
/s/ C RAIG S TEENECK By: Craig Steeneck |
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
March 3, 2009 |
155
Exhibit 10.22
Peak Holdings LLC
June 11, 2007
Mr. Craig Steeneck
Dear Craig:
On behalf of the Management Committee of Peak Holdings LLC (the Board), I am pleased to confirm that the Board has decided to grant you an additional incentive bonus opportunity, on the terms and subject to the conditions set forth herein. This bonus opportunity is intended to modify the Target Annual Bonus set forth in that certain employment agreement entered into by and between you and Crunch Holding Corp. (the Company), dated April 2, 2007 (the Employment Agreement). All capitalized terms not defined herein shall have the meaning ascribed to them in the Employment Agreement.
1. Enhanced Target Annual Bonus . Commencing in fiscal 2008, for each fiscal year in which the Company achieves the EBITDA targets set forth in the Management Case of Exhibit A hereto (the Management Case EBITDA Targets), your Target Annual Bonus will be increased from 75% of your Base Salary to 100% of your Base Salary (the Enhanced Target Annual Bonus) and your maximum Annual Bonus will be increased to not less than 200% of your Base Salary.
2. Negative Discretion . Notwithstanding the foregoing or anything else contained herein to the contrary, for each fiscal year the Chairman of the Board and the Chief Executive Officer of the Company may, in their sole and absolute discretion (despite the achievement of the Management Case EBITDA Targets), reduce your Enhanced Target Annual Bonus to an amount between 100% of your Base Salary and the Annual Target Bonus percentage set forth in your Employment Agreement (currently 75%) in the event of a failure to achieve one or more of the Trade Promo, Gross Profit, Advert & Other Consumer and FCF objectives for such year set forth in Exhibit A hereto (Select Objectives); provided, that in exercising such discretion, a failure to achieve one or more Select Objectives will not mandate any such reduction, such as when the Chairman and Chief Executive Officer determine that special circumstances apply. In the event of any such reduction, you will be given Notice of such decision not less than ten (10) days prior to the date Annual Bonuses are paid for such fiscal year. In such case, the Target Annual Bonus percentage as set forth in the Employment Agreement will apply, as modified by the foregoing provisions of this Section 2 for that fiscal year.
3. Interpretation . The Board shall be empowered to make all determinations or interpretations consistent with Sections 1 and 2 of this letter agreement, which determinations and interpretations shall, if made in good faith, be binding and conclusive on you and the Company.
5. Transferability . None of your rights under this letter agreement may be assigned, transferred, pledged or otherwise disposed of, other than by your will or under the laws of descent and distribution.
6. Withholding . The Company shall be authorized to withhold from the payment of any Retention Bonus that may become payable hereunder, the amount of any applicable federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation.
10. Governing Law/Counterparts . The validity, construction, and effect of this letter agreement shall be determined in accordance with the laws of the State of Delaware. This letter agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
Please indicate your agreement to the foregoing by executing this letter agreement where indicated below.
PEAK HOLDINGS LLC | ||
By: |
/s/ Jeffrey P. Ansell |
|
Name: |
|
|
Title: |
|
Agreed and acknowledged as of this 11 th day of June, 2007 |
/s/ Craig Steeneck |
Craig Steeneck |
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Base Case |
Management Case |
|||||||||||||
2008 | 2009 | 2010 | 2008 | 2009 | 2010 | |||||||||
Trade Promo |
XXX | XXX | XXX |
Trade Promo |
XXX | XXX | XXX | |||||||
% To Gross |
XXX | XXX | XXX |
% To Gross |
XXX | XXX | XXX | |||||||
Net Sales |
XXX | XXX | XXX |
Net Sales |
XXX | XXX | XXX | |||||||
Gross Profit |
XXX | XXX | XXX |
Gross Profit |
XXX | XXX | XXX | |||||||
% To Net |
XXX | XXX | XXX |
% To Net |
XXX | XXX | XXX | |||||||
Advert & Other Consumer |
XXX | XXX | XXX |
Advert & Other Consumer |
XXX | XXX | XXX | |||||||
% To Net |
XXX | XXX | XXX |
% To Net |
XXX | XXX | XXX | |||||||
Ebitda |
XXX | XXX | XXX |
Ebitda |
XXX | XXX | XXX | |||||||
% To Net |
XXX | XXX | XXX |
% To Net |
XXX | XXX | XXX | |||||||
FCF* |
XXX | XXX | XXX |
FCF* |
XXX | XXX | XXX |
* | (Ebitda - Capex - Cash Taxes - Working capital - Cash Interest - Sponsor Fees) |
Upside objectives needed to obtain Management Case financial performance (BT/CS)
1) | Reduce Trade spending gradually as a % to Gross Sales, reducing it by XXX basis points by the end of 2010. |
2) | Increase Advertising/Other Consumer Spending to above XXX to Net Sales by the end of 2010. |
If unforseen circumstances prevent this from occurring, then agreement with the Chairman and CEO can waive this requirement.
3) | Increase Gross Profit % to Net Sales (excluding depreciation) by XXX basis points by end of 2010. |
4) | Generate Free Cash Flow in excess of XXX million by the end of 2010. |
Exhibit 10.23
Execution Copy
MANAGEMENT UNIT SUBSCRIPTION AGREEMENT
(B-2 Units)
THIS MANAGEMENT UNIT SUBSCRIPTION AGREEMENT (this Agreement ) is made as of June 11, 2007, by and between Peak Holdings LLC, a Delaware limited liability company (the Company ), and the individual named on the signature page hereto (the Executive ).
WHEREAS, on the terms and subject to the conditions hereof, the Executive desires to subscribe for and acquire from the Company, and the Company desires to issue and provide to the Executive, the Companys Class B-2 Units (the Class B-2 Units or the Units ), in each case in the amount set forth on Schedule I, as hereinafter set forth; and
WHEREAS, this Agreement is one of several agreements being entered into by the Company with certain persons who are or will be key employees of the Company or one or more Subsidiaries (collectively with the Executive, the Management Investors ) as part of a management equity purchase plan designed to comply with Rule 701 promulgated under the Securities Act (as defined below);
NOW, THEREFORE, in order to implement the foregoing and in consideration of the mutual representations, warranties, covenants and agreements contained herein, the parties hereto agree as follows:
1. | Definitions . |
1.1 Acquisition . The term Acquisition means the consummation of the transactions contemplated by the Agreement and Plan of Merger dated as of February 10, 2007 (as amended from time to time) by and among Crunch Holding Corp., Peak Holdings LLC, Peak Acquisition Corp and Peak Finance LLC.
1.2 Affiliate . An Affiliate of, or Person Affiliated with, a specified Person shall mean a Person that directly, or indirectly though one or more intermediaries, controls or is controlled by, or is under common control with, the Person specified.
1.3 Agreement . The term Agreement shall have the meaning set forth in the preface.
1.4 Blackstone . The term Blackstone means Blackstone Capital Partners V L.P. and its Affiliates.
1.5 Board . The Board shall mean the Companys Management Committee.
1.6 Cause . The term Cause used in connection with the termination of employment of the Executive shall have the same meaning ascribed to such term in any employment or severance agreement then in effect between the Executive and the Company or one of its Subsidiaries or, if no such agreement containing a definition of Cause is then in effect, shall mean a termination of
employment of the Executive by the Company or any Subsidiary thereof due to (A) the Executives continued failure substantially to perform the Executives duties under the Executives employment (other than as a result of total or partial incapacity due to physical or mental illness) following written notice by the Company to the Executive of such failure; (B) theft or embezzlement of Company property or dishonesty in the performance of the Executives duties, (C) any act on the part of the Executive that constitutes (x) a felony under the laws of the United States or any state thereof or (y) a crime involving moral turpitude, (E) the Executives willful malfeasance or willful misconduct in connection with the Executives duties to the Company or any act or omission which is materially injurious to the financial condition or business reputation of the Company or any of its Subsidiaries or Affiliates, or (F) the Executive engages in Competitive Activity or beaches the confidentiality provisions of Section 6.
1.7 Change of Control . The term Change of Control shall have the meaning set forth in the Securityholders Agreement, except that transactions with a Person or Persons that are a Subsidiary (as defined in the Securityholders Agreement) of the Sponsor shall be excluded.
1.8 Closing . The term Closing shall have the meaning set forth in Section 2.2.
1.9 Closing Date . The term Closing Date shall have the meaning set forth in Section 2.2.
1.10 Company . The term Company shall have the meaning set forth in the preface.
1.11 Constructive Termination . The term Constructive Termination shall have the same meaning ascribed to such term (or the term good reason) in any employment or severance agreement then in effect between the Executive and the Company or one of its Subsidiaries.
1.12 Cost . The term Cost shall mean the price per Unit paid by the Executive as proportionately adjusted for all subsequent distributions of Units and other recapitalizations and less the amount of any tax distributions made with respect to the Units pursuant to the LLC Agreement.
1.13 Disability . The term Disability of the Executive shall have the same meaning ascribed to such term in any employment or severance agreement then in effect between the Executive and the Company or one of its Subsidiaries or, if no such agreement containing a definition of Disability is then in effect, shall mean the inability of the Executive to perform the essential functions of the Executives job, with or without reasonable accommodation, by reason of a physical or mental infirmity, for a period of nine (9) consecutive months or for an aggregate of twelve (12) months in any eighteen (18) consecutive month period. The period of nine (9) months shall be deemed continuous unless the Executive returns to work for at least 30 consecutive business days during such period and performs during such period at the level and competence that existed prior to the beginning of the six-month period. The date of such Disability shall be on the first day of such nine-month period.
1.14 Employee and Employment . The term employee shall mean, without any inference as to negate the Executives status as a member of the Company for all purposes hereunder (subject to the terms hereof) and for federal and other tax purposes, any employee (as defined in accordance with the regulations and revenue rulings then applicable under Section 3401(c) of the Internal
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Revenue Code of 1986, as amended) of the Company or any of its Subsidiaries, and the term employment shall include service as a part- or full-time employee to the Company or any of its Subsidiaries.
1.15 Executive . The term Executive shall have the meaning set forth in the preface.
1.16 Executives Group . The term Executives Group shall have the meaning set forth in Section 4.1(a).
1.17 Fair Market Value . Subject to Section 4.2(d), the term Fair Market Value used in connection with the value of Units shall mean (a) if there is a public market for the equity of the Company on the applicable date, the value for the Units shall be implied by the average of the high and low closing bid prices of such equity on the stock exchange on which the equity is principally trading or (b) if there is no public market for the equity on such date, the fair market value for the Units as shall be determined in good faith by the Board (without regard to discounts for lack of marketability of such equity or minority status).
1.18 Financing Default . The term Financing Default shall mean an event which would constitute (or with notice or lapse of time or both would constitute) an event of default under any of the financing documents of the Company or its Affiliates from time to time (collectively, the Financing Agreements ) and any restrictive financial covenants contained in the organizational documents of the Company or its Affiliates.
1.19 Management Investors . The term Management Investors shall have the meaning set forth in the preface.
1.20 Permitted Transferee . The term Permitted Transferee means any transferee of Units as defined in the Securityholders Agreement.
1.21 Person . The term Person shall mean any individual, corporation, partnership, limited liability company, trust, joint stock company, business trust, unincorporated association, joint venture, governmental authority or other entity of any nature whatsoever.
1.22 Public Offering . The term Public Offering shall have the meaning set forth in the Securityholders Agreement.
1.23 Purchase Price . The term Purchase Price shall have the meaning set forth in Section 2.1.
1.24 Securities Act . The term Securities Act shall mean the Securities Act of 1933, as amended, and all rules and regulations promulgated thereunder, as the same may be amended from time to time.
1.25 Securityholders Agreement . The term Securityholders Agreement shall mean the Securityholders Agreement, dated April 2, 2007, among the Sponsor, the Management Investors and the Company, as it may be amended or supplemented thereafter from time to time.
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1.26 Termination Date . The term Termination Date means the date upon which Executives employment with the Company and its Subsidiaries is terminated.
1.27 Unvested Units . The term Unvested Units means the number of Units that are subject to any vesting, forfeiture or similar arrangement under this Agreement.
1.28 Vested Units . The term Vested Units shall mean the number of Units that are vested and nonforfeitable, as determined in Schedule I.
1.29 Sponsor . The term Sponsor means Blackstone.
2. | Subscription for and Grant of Units . |
2.1 Purchase/Grant of Units . Pursuant to the terms and subject to the conditions set forth in this Agreement, the Executive hereby subscribes for and agrees to acquire, and the Company hereby agrees to issue and award to the Executive, on the Closing Date the number of Class B-2 Units set forth in Part I of Schedule I attached hereto in exchange for services performed for the Company and its Subsidiaries.
2.2 The Closing . The closing (the Closing ) of the grant of Units hereunder shall take place on June 11, 2007 (the Closing Date ).
2.3 Section 83(b) Election . Within 10 days after the Closing, the Executive shall provide the Company with a copy of a completed election under Section 83(b) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder in the form of Exhibit A attached hereto. The Executive shall timely file (via certified mail, return receipt requested) such election with the Internal Revenue Service ( IRS ) and shall thereafter certify to the Company it has made such timely filing.
2.4 Closing Conditions . Notwithstanding anything in this Agreement to the contrary, the Company shall be under no obligation to issue and sell to the Executive any Units unless (i) the Executive is an employee of, or consultant to, the Company or one of its Subsidiaries on the Closing Date; (ii) the representations of the Executive contained in Section 3 hereof are true and correct in all material respects as of the Closing Date and (iii) the Executive is not in breach of any agreement, obligation or covenant herein required to be performed or observed by the Executive on or prior to the Closing Date.
3. | Investment Representations and Covenants of the Executive . |
3.1 Units Unregistered . The Executive acknowledges and represents that the Executive has been advised by the Company that:
(a) the offer and sale of the Units have not been registered under the Securities Act;
(b) the Units must be held indefinitely and the Executive must continue to bear the economic risk of the investment in the Units unless the offer and sale of such Units are subsequently registered under the Securities Act and all applicable state securities laws or an exemption from such registration is available;
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(c) there is no established market for the Units and it is not anticipated that there will be any public market for the Units in the foreseeable future;
(d) a restrictive legend in the form set forth below and the legends set forth in Section 8.2(a) and (b) of the Securityholders Agreement shall be placed on the certificates representing the Units:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN REPURCHASE OPTIONS AND OTHER PROVISIONS SET FORTH IN A MANAGEMENT UNITS SUBSCRIPTION AGREEMENT WITH THE ISSUER DATED AS OF JUNE 11, 2007, AS AMENDED AND MODIFIED FROM TIME TO TIME, A COPY OF WHICH MAY BE OBTAINED BY THE HOLDER HEREOF AT THE ISSUERS PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE; and
(e) a notation shall be made in the appropriate records of the Company indicating that the Units are subject to restrictions on transfer and, if the Company should at some time in the future engage the services of a securities transfer agent, appropriate stop-transfer instructions will be issued to such transfer agent with respect to the Units.
3.2 Additional Investment Representations . The Executive represents and warrants that:
(a) the Executives financial situation is such that the Executive can afford to bear the economic risk of holding the Units for an indefinite period of time, has adequate means for providing for the Executives current needs and personal contingencies, and can afford to suffer a complete loss of the Executives investment in the Units;
(b) the Executives knowledge and experience in financial and business matters are such that the Executive is capable of evaluating the merits and risks of the investment in the Units;
(c) the Executive understands that the Units are a speculative investment which involves a high degree of risk of loss of the Executives investment therein, there are substantial restrictions on the transferability of the Units and, on the Closing Date and for an indefinite period following the Closing, there will be no public market for the Units and, accordingly, it may not be possible for the Executive to liquidate the Executives investment in case of emergency, if at all;
(d) the terms of this Agreement provide that if the Executive ceases to be an employee of the Company or its Subsidiaries, the Company and its Affiliates have the right to repurchase the Units at a price which may, under certain circumstances, be less than the Fair Market Value thereof;
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(e) the Executive understands and has taken cognizance of all the risk factors related to the purchase of the Units and, other than as set forth in this Agreement, no representations or warranties have been made to the Executive or the Executives representatives concerning the Units or the Company or their prospects or other matters;
(f) the Executive has been given the opportunity to examine all documents and to ask questions of, and to receive answers from, the Company and its representatives concerning the Company and its Subsidiaries, the Acquisition, the Securityholders Agreement, the Companys organizational documents and the terms and conditions of the purchase of the Units and to obtain any additional information which the Executive deems necessary;
(g) all information which the Executive has provided to the Company and the Companys representatives concerning the Executive and the Executives financial position is complete and correct as of the date of this Agreement; and
(h) the Executive is an accredited investor within the meaning of Rule 501(a) under the Securities Act.
4. | Certain Sales and Forfeitures Upon Termination of Employment. |
4.1 Put Option .
(a) if the Executives employment with the Company and its Subsidiaries terminates due to the Disability or death of the Executive prior to the earlier of (i) an initial Public Offering or (ii) a Change of Control, the Executive and the Executives Permitted Transferees (hereinafter sometimes collectively referred to as the Executives Group ) shall have the right, subject to the provisions of Section 5 hereof, for 180 days following the date that is six (6) months after the date of such termination of employment of the Executive, to sell to the Company, and the Company shall be required to purchase (subject to the provisions of Section 5 hereof), on one occasion from each member of the Executives Group, all (but not less than all) of the number of Units then held by the Executives Group that equals the sum of all Vested Units collectively held by the Executives Group, at a price per Unit equal to the Fair Market Value of each Class of such Units (measured as of the date of death or such termination; provided, that, respecting any Units that have vested less than six months and one day prior to the date of such termination, such Fair Market Value shall be measured as of the date that is one day following the date that is six months after the date such Units had vested); provided that in any case the Board shall have the right, in its sole discretion, to increase the foregoing purchase price. In order to exercise its rights with respect to the Units pursuant to this Section 4.1(a), the Executives Group shall also be required to simultaneously exercise any similar rights it may have with respect to any other units of the Company held by the Executives Group in accordance with the terms of the agreements pursuant to which such other units were purchased from the Company.
(b) If the Executives Group desires to exercise its option to require the Company to repurchase Units pursuant to Section 4.1(a), the members of the Executives Group shall send one written notice to the Company setting forth such members intention to collectively sell all of their Units pursuant to Section 4.1(a), which notice shall include the signature of each member
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of the Executives Group. Subject to the provisions of Section 5.1, the closing of the purchase shall take place at the principal office of the Company on a date specified by the Company no later than the 60th day after the giving of such notice.
4.2 Call Options .
(a) If the Executives employment with the Company and its Subsidiaries terminates for any of the reasons set forth in clauses (i), (ii) or (iii) below, or if the Executive engages in Competitive Activity (as defined in Section 6.1 of this Agreement), the Company shall have the right and option to purchase for a period of 210 days following the Termination Date or the discovery of the Competitive Activity (except that the Company shall not exercise such right or option to purchase any Units that have vested less than six months and one day prior to the Termination Date, at any time on or prior to the date that is one day following the date that is six months after the date such Units had vested ( Risk Period ), and each member of the Executives Group shall be required to sell to the Company, any or all of such Units then held by such member of the Executives Group, at a price per unit equal to the applicable purchase price determined as follows:
(i) Death or Disability . If the Executives employment with the Company and its Subsidiaries is terminated due to the Disability or death of the Executive, the purchase price per Unit will be:
(A) with respect to Vested Units, the Fair Market Value (measured as of the Termination Date except respecting any Units subject to the Risk Period, the first day after the Risk Period); and
(B) with respect to the Unvested Units, the lesser of (A) Fair Market Value (measured as of the Termination Date) and (B) Cost;
(ii) Termination Without Cause; Constructive Termination . If the Executives employment with the Company and its Subsidiaries is terminated by the Company and its Subsidiaries without Cause or by the Executive as a result of a Constructive Termination, the purchase price per Unit will be:
(A) with respect to Vested Units, the Fair Market Value (measured as of the Termination Date except respecting any Units subject to the Risk Period, the first day after the Risk Period); and
(B) with respect to the Unvested Units, the lesser of (A) Fair Market Value (measured as of the Termination Date) and (B) Cost; or
(iii) Termination for Cause . If the Executives employment with the Company and its Subsidiaries is terminated by the Company or any of its Subsidiaries for Cause or if Executive engages in a Competitive Activity, the purchase price per Unit will be the lesser of (A) Fair Market Value (measured as of the Termination Date) and (B) Cost;
(iv) Voluntary Termination (Before or After the Third Anniversary ). If the Executives employment with the Company and its Subsidiaries is terminated by the Executive for any other reason not set forth in Section 4.2(a)(i) or (ii) or (iii), the purchase price per Unit will be:
(A) if the employment terminates on or after the third anniversary of the Closing Date, the purchase price per Unit will be:
(1) | with respect to Vested Units, the Fair Market Value (measured as of the Termination Date except respecting any Units subject to the Risk Period, the first day after the Risk Period); and |
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(2) | with respect to the Unvested Units, the lesser of (A) Fair Market Value (measured as of the Termination Date) and (B) Cost; or |
(B) if the employment terminates prior to the third anniversary of the Closing Date, the purchase price per Unit will be the lesser of (A) Fair Market Value (measured as of the Termination Date) and (B) Cost;
provided that in any case the Board shall have the right, in its sole discretion, to increase any purchase price set forth above.
(b) If the Company desires to exercise one of its options to purchase Units pursuant to this Section 4.2, the Company shall, not later than 210 days after the Termination Date or the discovery of the Competitive Activity, send written notice to each member of the Executives Group of its intention to purchase Units, specifying the number of Units to be purchased (the Call Notice ). Subject to the provisions of Section 5, the closing of the purchase shall take place at the principal office of the Company on a date specified by the Company no later than the 30th day after the giving of the later of the Call Notice.
(c) Notwithstanding the foregoing, if the Company elects not to exercise one of its options to purchase Units pursuant to this Section 4.2, the Sponsor may elect to purchase such Units on the same terms and conditions set forth in this section 4.2 by providing written notice to each member of the Executives Group of its intention to purchase Units within 30 days after the expiration of the Companys 210 day call window following the Termination Date.
(d) If there is no public market for the Units on the applicable determination date, (i) unless the Company and the Executive otherwise agree at the time of a repurchase of Units by the Company pursuant to Section 4.2 hereof, if within 180 days of a termination date in which the Company has exercised its right to repurchase Units, either (A) the Company enters into a binding agreement that, when consummated would be a Change of Control, and such Change of Control actually thereafter occurs, or (B) a Public Offering occurs, Fair Market Value shall be the price obtained in such Change of Control or Public Offering (and the Company or the Executive, as applicable, shall promptly pay the other the difference between Fair Market Value used for purposes of such call and the Fair Market Value as determined pursuant to this proviso)); and (ii) subject to proviso (i), if the Executive believes that the amount determined by the Board to be the Fair Market Value of the Units is less than the amount that the Executive believes to be the Fair Market Value of such Units and, together with all other Class A and Class B Units held by the Executive or his
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Permitted Transferees, the amount in dispute exceeds $50,000, the Executive may elect to direct the Company to obtain an appraisal of the Fair Market Value of such Units, which appraisal shall be prepared by a qualified independent appraiser, mutually selected by the Company and the Executive. If the Company and the Executive are unable to agree on such appraiser, they shall each select a qualified independent appraiser and the two appraisers shall select a third appraiser, which third appraiser shall prepare the appraisal of Fair Market Value. In all events, the appraiser shall not, in the past 12 months, have been, or then be, engaged to provide any services to the Company or a Subsidiary of the Company or to the Executive. Such election shall be in writing and given to the Company within fifteen (15) days after receipt by the Executive of the Boards determination of Fair Market Value. The determination of the appraiser shall be a final and binding determination of Fair Market Value. If such appraiser determines Fair Market Value to be 110% or more of the Fair Market Value determined by the Board, then the Company shall pay the cost of all such appraisers. If such appraiser determines the Fair Market Value to be less than 110% of the Fair Market Value determined by the Board, then the Executive shall pay the cost of all such appraisers. Notwithstanding the foregoing, (x) only one such appraisal may be conducted during any 6-month period by all executives (and such appraisal, subject to clause (a) and proviso (i) above, shall be used for all Fair Market Value determinations during the 6 months succeeding such appraisal unless the Board reasonably concludes in good faith that a material change in the nature of the Company requires a new appraisal) and (y) if a second appraisal is used during any 12-month period, the same appraisal firm shall be used).
4.3 Obligation to Sell Several . If there is more than one member of the Executives Group, the failure of any one member thereof to perform its obligations hereunder shall not excuse or affect the obligations of any other member thereof, and the closing of the purchases from such other members by the Company shall not excuse, or constitute a waiver of its rights against, the defaulting member.
5. | Certain Limitations on the Companys Obligations to Purchase Units . |
5.1 Deferral of Purchases . (a) Notwithstanding anything to the contrary contained herein, the Company shall not be obligated to purchase any Units at any time pursuant to Section 4, regardless of whether it has delivered a notice of its election to purchase any such Units, (i) to the extent that the purchase of such Units or the payment to the Company or one of its Subsidiaries of a cash dividend or distribution by a Subsidiary of the Company to fund such purchase (together with any other purchases of Units pursuant to Section 4 or pursuant to similar provisions in agreements with other employees of the Company and its Subsidiaries of which the Company has at such time been given or has given notice and together with cash dividends and distributions to fund such other purchases) would result (A) in a violation of any law, statute, rule, regulation, policy, order, writ, injunction, decree or judgment promulgated or entered by any federal, state, local or foreign court or governmental authority applicable to the Company or any of its Subsidiaries or any of its or their property or (B) after giving effect thereto, in a Financing Default, or (ii) if immediately prior to such purchase there exists a Financing Default which prohibits such purchase, dividend or distribution. The Company shall, within fifteen days of learning of any such fact, so notify the members of the Executives Group that it is not obligated to purchase units hereunder.
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(b) Notwithstanding anything to the contrary contained in Section 4, any Units which a member of the Executives Group has elected to sell to the Company or which the Company has elected to purchase from members of the Executives Group, but which in accordance with Section 5.1(a) are not purchased at the applicable time provided in Section 4, shall be purchased by the Company for the applicable purchase price, together with interest thereon as provided in Section 5.2, within ten days after the date that payment for such Units (and related dividends and distributions) is no longer prohibited under Section 5.1(a), and the Company shall give the members of the Executives Group five days prior notice of any such purchase.
5.2 Payment for Units . If at any time the Company elects or is required to purchase any Units pursuant to Section 4, the Company shall pay the purchase price for the Units it purchases (i) first, by the cancellation of any indebtedness, if any, owing from the Executive to the Company or any of its Subsidiaries (which indebtedness shall be applied pro rata against the proceeds receivable by each member of the Executives Group receiving consideration in such repurchase) and (ii) then, by the Companys delivery of a check or wire transfer of immediately available funds for the remainder of the purchase price, if any, against delivery of the certificates or other instruments representing the Units so purchased, duly endorsed; provided that if any of the conditions set forth in Section 5.1(a) exists which prohibits such cash payment (either directly or indirectly as a result of the prohibition of a related cash dividend or distribution), the portion of the cash payment so prohibited may be made, to the extent such payment is not prohibited, by the Companys delivery of a junior subordinated promissory note (which shall be subordinated and subject in right of payment to the prior payment of any debt outstanding under the Senior Financing Agreements and any modifications, renewals, extensions, replacements and refunding of all such indebtedness) of the Company (a Junior Subordinated Note ) in a principal amount equal to the balance of the purchase price, payable (x) in the event of a termination of employment referenced in Section 4.2(a)(i), (ii) or (iv), within ten days after the conditions set forth in Section 5.1(a) no longer exist, but maturing in all events not later than the fifth anniversary of the date of issuance thereof, or (y) in the event of a termination of employment referenced in Section 4.2(a)(iii), on the fifth anniversary of the issuance thereof, and bearing interest payable (and compounded to the extent not so paid) as of the last day of each calendar quarter at the prime rate as reported from time to time in The Wall Street Journal (electronic edition), less two hundred basis points, and all such accrued and unpaid interest payable on the date of the payment of principal (or, if applicable, the last installment of principal), with payments to be applied in the order of: first to any enforcement costs incurred by the Executive or the Executives Group, second to interest and third to principal. Subject to the conditions on payment under Section 5.1(a), the Company shall use its best efforts to repurchase Units pursuant to Section 4.1(a) or Section 4.2(a)(i), Section 4.2(a)(ii) or Section 4.2(a)(iv) with cash and/or to prepay any Junior Subordinated Notes issued in connection with a repurchase of Units pursuant to Section 4.1(a) or Section 4.2(a)(i), Section 4.2(a)(ii) or Section 4.2(a)(iv). The Company shall have the right set forth in clause (i) of the first sentence of this Section 5.2 whether or not the member of the Executives Group selling such Units is an obligor of the Company. Any Junior Subordinated Note (including interest accrued thereon) shall become immediately payable upon a Change of Control from net cash proceeds, if any, payable to the Company or its unitholders, in priority over any payments to unitholders; provided , to the extent that sufficient net cash proceeds are not so payable, the Junior Subordinated Note shall be cancelled in exchange for such other non-cash consideration distributable to unitholders in the Change of Control, in priority over such distributions of non-cash
10
consideration distributable to unitholders, having a Fair Market Value equal to the principal of and accrued interest on the Junior Subordinated Note. Any Junior Subordinated Note (including interest accrued thereon) also shall become immediately payable upon the consummation of an initial Public Offering, in priority over any proceeds receivable upon a sale or redemption of units (or shares received upon the redemption or conversion of units) of unitholders in connection with such initial Public Offering. The principal of and accrued interest on any such Junior Subordinated Note issued following an election under Section 4.1(a)(iii) may be prepaid in whole or in part at any time at the option of the Company (it being understood that the principal and interest on such Junior Subordinated Note issued following an election under Section 4.1(a), other than Section 4.1(a)(iii), shall be paid within ten days after the restrictions under Section 5.1(a) no longer exist). To the extent that the Company is prohibited from paying accrued interest, that is required to be paid on any Junior Subordinated Note prior to maturity, due to the existence of any of the conditions set forth in Section 5.1(a)(i) or (ii), such interest shall be cumulated, compounded calendar quarterly, and accrued until and to the extent that such prohibition no longer exists, at which time such accrued interest shall be immediately paid.
6. | Noncompetition; Nonsolicitation; Confidentiality . |
To the extent that the Executive and the Company (or an Affiliate of the Company) is a party to an employment agreement with the Company containing noncompetition, nonsolicitation, noninterference or confidentiality restrictions (or two or more such restrictions), those restrictions and related enforcement provisions under such employment agreement shall govern and the following provisions of this Section 6 shall not apply.
6.1 Competitive Activity .
(a) The Executive shall be deemed to have engaged in Competitive Activity if, during the period commencing on the date hereof and ending on the later of (x) the date that is 12 months after the date the Executives employment with the Company and its Subsidiaries is terminated or (y) the maximum number of years of base salary the Executive is entitled to receive as severance (the Restricted Period ), the Executive, whether on the Executives own behalf or on behalf of or in conjunction with any other person or entity, directly or indirectly violates any of the following prohibitions:
(i) During the Restricted Period, the Executive will not solicit or assist in soliciting in a Competitive Business (as defined below) the business of any client or prospective client:
(A) with whom the Executive had personal contact or dealings on behalf of the Company during the one-year period preceding the Executives termination of employment;
(B) with whom employees directly reporting to the Executive (or the Executives direct reports) have had personal contact or dealings on behalf of the Company during the one year immediately preceding the Executives termination of employment; or
11
(C) for whom the Executive had direct or indirect responsibility during the one year immediately preceding the Executives termination of employment.
(ii) During the Restricted Period, the Executive will not directly or indirectly:
(A) engage in any business that is engaged in, or has plans to engage in, at any time during the Restricted Period, any activity that competes in the business of manufacturing and marketing food products that directly compete with the core brands of the Company as of the Termination Date (and for such purpose, a core brand shall be any brand generating annual revenues in an amount equal to at least 5% of the Companys annual revenues, in the fiscal year preceding the fiscal year of such Termination Date) in any geographical area that is within 100 miles of any geographical area where the Company or its Affiliates manufactures and markets its products or services (a Competitive Business);
(B) enter the employ of, or render any services to, any Person (or any division or controlled or controlling affiliate of any Person) who or which engages in a Competitive Business;
(C) acquire a financial interest in, or otherwise become actively involved with, any Competitive Business, directly or indirectly, as an individual, partner, shareholder, officer, director, principal, agent, trustee or consultant; or
(D) interfere with, or attempt to interfere with, business relationships (whether formed before, on or after the date of this Agreement) between the Company or any of its Affiliates and customers, clients, suppliers, partners, members or investors of the Company or its Affiliates.
(iii) Notwithstanding anything to the contrary in this Agreement, the Executive may, directly or indirectly own, solely as an investment, securities of any Person engaged in a Competitive Business which are publicly traded on a national or regional stock exchange or on the over-the-counter market if the Executive (i) is not a controlling person of, or a member of a group which controls, such person and (ii) does not, directly or indirectly, own 5% or more of any class of securities of such Person.
(iv) During the Restricted Period, the Executive will not, whether on the Executives own behalf or on behalf of or in conjunction with any Person, directly or indirectly:
(A) solicit or encourage any employee of the Company or its Affiliates to leave the employment of the Company or its Affiliates; or
(B) hire any such employee who was employed by the Company or its Affiliates as of the date of the Executives termination of employment with the Company or who left the employment of the Company or its Affiliates coincident with, or within 120 days (one year in the case of any such employee who reported directly to the Executive immediately preceding the Executives termination of employment (or the Executives direct reports)) prior to or after, the termination of the Executives employment with the Company.
12
(v) During the Restricted Period, the Executive will not, directly or indirectly, solicit or encourage to cease to work with the Company or its Affiliates any consultant then under contract with the Company or its Affiliates, is such action would result in the Company being disadvantaged.
Any solicitation or hiring, that the Executive is not personally involved in, of an employee or former employee of the Company through general advertising shall not, of itself, be a breach of this Section 6.1(a)(iv).
(b) It is expressly understood and agreed that although the Executive and the Company consider the restrictions contained in this Section 6.1 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against the Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein
(c) The period of time during which the provisions of this Section 6.1 shall be in effect shall be extended by the length of time during which the Executive is in breach of the terms hereof as determined by any court of competent jurisdiction on the Companys application for injunctive relief.
6.2 Confidentiality .
(a) The Executive will not at any time (whether during or after the Executives employment with the Company) (x) retain or use for the benefit purposes or account of the Executive or any other person; or (y) disclose, divulge, reveal, communicate, share, transfer or provide access to any person outside the Company (other than its professional advisers who are bound by confidentiality obligations), any non-public, proprietary or confidential information including without limitation trade secrets, know-how, research and development, software, databases, inventions, processes, formulae, technology, designs and other intellectual property, information concerning finances, investments, profits, pricing, costs, products, services, vendors, customers, clients, partners, investors, personnel, compensation, recruiting, training, advertising, sales, marketing, promotions, government and regulatory activities and approvals concerning the past, current or future business, activities and operations of the Company, its Subsidiaries or Affiliates and/or any third party that has disclosed or provided any of same to the Company on a confidential basis (Confidential Information) without the prior written authorization of the Board or the Chief Executive Officer of the Company.
13
(b) Confidential Information shall not include any information that is (i) generally known to the industry or the public other than as a result of the Executives breach of this covenant or any breach of other confidentiality obligations by third parties; (ii) made legitimately available to the Executive by a third party without breach of any confidentiality obligation; or (iii) required by law to be disclosed (including via subpoena); provided that the Executive shall give prompt written notice to the Company of such requirement of law, disclose no more information than is so required, and cooperate, at the Companys cost, with any attempts by the Company to obtain a protective order or similar treatment.
(c) Except as required by law, the Executive will not disclose to anyone, other than the Executives immediate family and legal or financial advisors, the existence or contents of this Agreement (unless this Agreement shall be publicly available as a result of a regulatory filing made by the Company or its Affiliates) or otherwise is disclosed by the Company to any unaffiliated party that is not under a restriction of confidentiality at least as restrictive as this restriction upon the Executive; provided, that the Executive may disclose to any prospective future employer any the termination notice provisions under any agreement between the Executive and the Company (or an Affiliate of the Company) and the provisions of this Sections 6 provided they agree to maintain the confidentiality of such terms.
(d) Upon termination of the Executives employment with the Company for any reason, the Executive shall (x) cease and not thereafter commence use of any Confidential Information or intellectual property (including without limitation, any patent, invention, copyright, trade secret, trademark, trade name, logo, domain name or other source indicator) owned or used by the Company, its Subsidiaries or Affiliates; (y) immediately destroy, delete, or return to the Company, at the Companys option, all originals and copies in any form or medium (including memoranda, books, papers, plans, computer files, letters and other data) in the Executives possession or control (including any of the foregoing stored or located in the Executives office, home, laptop or other computer, whether or not Company property) that contain Confidential Information or otherwise relate to the business of the Company, its Affiliates and Subsidiaries, except that the Executive may retain only those portions of any personal notes, notebooks and diaries that do not contain any Confidential Information and his or her rolodex (or other physical or electronic address book); and (z) fully cooperate with the Company regarding the delivery or destruction of any other Confidential Information not within the Executives possession or control of which the Executive is or becomes aware.
6.3 Repayment of Proceeds . If the Executive engages in Competitive Activity or breaches the confidentiality provisions of Section 6.2, then the Executive shall be required to pay to the Company, within ten business days following the first date on which the Executive engages in such Competitive Activity or first breaches such provisions, an amount equal to the excess, if any, of (A) the aggregate after-tax proceeds (taking into account all amounts of tax that would be recoverable upon a claim of loss for payment of such proceeds in the year of repayment) the Executive received upon the sale or other disposition of, or distributions in respect of, the Executives Units over (B) the aggregate Cost of such Units.
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7. | Miscellaneous . |
7.1 Transfers .
(a) Prior to the transfer of Units to a Permitted Transferee, the Executive shall deliver to the Company a written agreement of the proposed transferee (a) evidencing such Persons undertaking to be bound by the terms of this Agreement and (b) acknowledging that the Units transferred to such Person will continue to be Units for purposes of this Agreement in the hands of such Person. Any transfer or attempted transfer of Units in violation of any provision of this Agreement or the Securityholders Agreement shall be void, and the Company shall not record such transfer on its books or treat any purported transferee of such Units as the owner of such Units for any purpose.
7.2 Recapitalizations, Exchanges, Etc., Affecting Units . The provisions of this Agreement shall apply, to the full extent set forth herein with respect to Units, to any and all securities of the Company or any successor or assign of the Company (whether by merger, consolidation, sale of assets or otherwise) which may be issued in respect of, in exchange for, or in substitution of the Units, by reason of any dividend payable in units, issuance of units, combination, recapitalization, reclassification, merger, consolidation or otherwise.
7.3 Executives Employment by the Company . Nothing contained in this Agreement shall be deemed to obligate the Company or any Subsidiary of the Company to employ the Executive in any capacity whatsoever or to prohibit or restrict the Company (or any such Subsidiary) from terminating the employment of the Executive at any time or for any reason whatsoever, with or without Cause.
7.4 Cooperation . Executive agrees to cooperate with the Company in taking action reasonably necessary to consummate the transactions contemplated by this Agreement and the Acquisition, including the execution and delivery of ancillary agreements reasonably necessary to effectuate the Acquisition and related transactions.
7.5 Binding Effect . The provisions of this Agreement shall be binding upon and accrue to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns; provided, however, that no Transferee shall derive any rights under this Agreement unless and until such Transferee has executed and delivered to the Company a valid undertaking and becomes bound by the terms of this Agreement; and provided further that the Sponsor is a third party beneficiary of this Agreement and shall have the right to enforce the provisions hereof.
7.6 Amendment; Waiver . This Agreement may be amended only by a written instrument signed by the parties hereto. No waiver by any party hereto of any of the provisions hereof shall be effective unless set forth in a writing executed by the party so waiving.
7.7 Governing Law . This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed therein.
15
7.8 Jurisdiction . Any suit, action or proceeding with respect to this Agreement, or any judgment entered by any court in respect of any thereof, shall be brought in any court of competent jurisdiction in the State of Delaware, and each of the Company and the members of the Executives Group hereby submits to the exclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment. Each of the members of the Executives Group and the Company hereby irrevocably waives (i) any objections which it may now or hereafter have to the laying of the venue of any suit, action or proceeding arising out of or relating to this Agreement brought in any court of competent jurisdiction in the State of Delaware, (ii) any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum and (iii) any right to a jury trial.
7.9 Notices . All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand or overnight courier or three postal delivery days after it has been mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below in this Agreement, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.
(a) If to the Company:
Peak Holdings LLC
One Old Bloomfield Road
Mountain Lakes, New Jersey 07046
Attention: General Counsel
with a copy to:
c/o The Blackstone Group
345 Park Avenue
New York, New York 10154
Attention: Prakash Melwani
and
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017-3954
Attn: Greg Grogan
If to the Executive, to the address as shown on the unit register of the Company,
with a copy to:
Vedder, Price, Kaufman & Kammholz, P.C.
222 North LaSalle Street
Chicago, IL 60601
Attention: Robert Simon
16
7.10 Integration . This Agreement and the documents referred to herein or delivered pursuant hereto which form a part hereof contain the entire understanding of the parties with respect to the subject matter hereof and thereof. There are no restrictions, agreements, promises, representations, warranties, covenants or undertakings with respect to the subject matter hereof other than those expressly set forth herein and therein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter, it being understood that this Agreement is entered into simultaneously and in connection with an employment agreement between Executive and the Company.
7.11 Counterparts . This Agreement may be executed in separate counterparts, and by different parties on separate counterparts each of which shall be deemed an original, but all of which shall constitute one and the same instrument.
7.12 Injunctive Relief . The Executive and the Executives Permitted Transferees each acknowledges and agrees that a violation of any of the terms of this Agreement will cause the Company irreparable injury for which adequate remedy at law is not available. Accordingly, it is agreed that the Company shall be entitled to an injunction, restraining order or other equitable relief to prevent breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof in any court of competent jurisdiction in the United States or any state thereof, in addition to any other remedy to which it may be entitled at law or equity.
7.13 Rights Cumulative; Waiver . The rights and remedies of the Executive and the Company under this Agreement shall be cumulative and not exclusive of any rights or remedies which either would otherwise have hereunder or at law or in equity or by statute, and no failure or delay by either party in exercising any right or remedy shall impair any such right or remedy or operate as a waiver of such right or remedy, nor shall any single or partial exercise of any power or right preclude such partys other or further exercise or the exercise of any other power or right. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach and no failure by either party to exercise any right or privilege hereunder shall be deemed a waiver of such partys rights or privileges hereunder or shall be deemed a waiver of such partys rights to exercise the same at any subsequent time or times hereunder.
* * * * *
17
IN WITNESS WHEREOF, the parties have executed this Management Unit Subscription Agreement as of the date first above written.
PEAK HOLDINGS LLC, a Delaware limited liability company |
||
By: |
/s/ Jeffrey P. Ansell |
|
Name: | Jeffrey P. Ansell | |
Title: |
/s/ Craig Steeneck |
Craig Steeneck |
SCHEDULE I
Part 1: Units Granted Craig Steeneck
Granted Units |
Number | Price per Unit | Aggregate Amount | |||
Class B-2 Units |
150 | n/a | 150 |
Part 2: Class B-2 Unit Vesting
Prior to the occurrence of a Termination Date, 33 1 / 3 % of the Class B-2 Units issued to the Executive hereunder will become Vested Units in any year where the Target EBITDA (as set forth below) for such year is achieved. In any year that the Target EBITDA is not achieved, such Class B-2 Units that would have become Vested Units during that year had such Target EBITDA been met shall remain Unvested Units unless, in a subsequent year, the Cumulative Target EBITDA is achieved, at which time the then current years and all prior years Class B-2 Units that are Unvested Units shall become Vested Units.
2008 | 2009 | 2010 | ||||
Target EBITDA |
XXX | XXX | XXX | |||
Cumulative Target EBITDA |
XXX | XXX | XXX |
* | The EBITDA Target shall not be charged with any severance expense or cost in connection with the Acquisition that is not projected as of the consummation of the Acquisition. All figures are in millions of dollars. |
EBITDA with respect to any fiscal period shall be as determined in good faith by the Board. EBITDA Targets and Cumulative EBITDA Targets will be adjusted from time to time by the Board as it deems necessary in light of acquisitions, dispositions and other transactions that impact the Companys operations.
Upon a Change on Control that occurs prior to the Termination Date, all Unvested Class B-2 Units that would become eligible for vesting during the year of such Change of Control (and all subsequent years) shall automatically become Vested Units or Unvested Units on the same basis that Class B-3 Units currently held by the Executive become Vested Units or Unvested Units, as described in Part 4 of that certain Management Unit Subscription Agreement entered into between Executive and the Company, dated April 2, 2007.
Exhibit 10.24
Peak Holdings LLC
One Old Bloomfield Road
Mountain Lakes, New Jersey 07046
February 27, 2009
Mr. Craig Steeneck
Dear Craig:
In light of recent events impacting the economy and the performance of Peak Holdings LLC (Holdings), the Management Committee of Holdings (the Board) has decided to modify the terms of your additional incentive bonus opportunity, and as such, the letter agreement dated June 11, 2007 entered into by and between you and Holdings shall be replaced and superseded in its entirety by the terms and subject to the conditions set forth in this letter agreement. This bonus opportunity is intended to modify the Target Annual Bonus set forth in that certain employment agreement entered into by and between you and Crunch Holding Corp. (the Company), dated April 2, 2007 (the Employment Agreement). All capitalized terms not defined herein shall have the meaning ascribed to them in the Employment Agreement.
1. Enhanced Target Annual Bonus . Commencing in fiscal 2009, for each fiscal year in which the Company achieves the EBITDA targets set forth in the Management Case of Exhibit A hereto (the Management Case EBITDA Targets), your Target Annual Bonus will be increased from 75% of your Base Salary to 100% of your Base Salary (the Enhanced Target Annual Bonus) and your maximum Annual Bonus will be increased to not less than 200% of your Base Salary.
2. Negative Discretion . Notwithstanding the foregoing or anything else contained herein to the contrary, for each fiscal year, the Compensation Committee of the Board in consultation with the Chief Executive Officer of the Company may, in its sole and absolute discretion (despite the achievement of the Management Case EBITDA Targets), reduce your Enhanced Target Annual Bonus to an amount between 100% of your Base Salary and the Annual Target Bonus percentage set forth in your Employment Agreement (currently 75%) based on its assessment of the quality of EBITDA achieved (including, without limitation, such factors as level of marketing spend, gross margins and cash flow), any extraordinary business developments or any other factors it deems relevant. In the event of any such reduction, you will be given Notice of such decision not less than ten (10) days prior to the date Annual Bonuses are paid for such fiscal year. In such case, the Target Annual Bonus percentage as set forth in the Employment Agreement will apply, as modified by the foregoing provisions of this Section 2 for that fiscal year.
3. Interpretation . The Board shall be empowered to make all determinations or interpretations consistent with Sections 1 and 2 of this letter agreement, which determinations and interpretations shall, if made in good faith, be binding and conclusive on you and the Company.
4. Transferability . None of your rights under this letter agreement may be assigned, transferred, pledged or otherwise disposed of, other than by your will or under the laws of descent and distribution.
5. Withholding . The Company shall be authorized to withhold from the payment of any Retention Bonus that may become payable hereunder, the amount of any applicable federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation.
6. Governing Law/Counterparts . The validity, construction, and effect of this letter agreement shall be determined in accordance with the laws of the State of Delaware. This letter agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
Please indicate your agreement to the foregoing by executing this letter agreement where indicated below.
PEAK HOLDINGS LLC | ||
By: |
/s/ Shervin Korangy |
|
Name: |
Shervin Korangy |
|
Title: |
Vice President |
|
CRUNCH HOLDING CORP. | ||
By: |
/s/ M. K ELLEY M AGGS |
|
Name: |
M. Kelley Maggs |
|
Title: |
Secretary |
Agreed and acknowledged as of this 27th day of February, 2009 |
/s/ C RAIG S TEENECK |
Craig Steeneck |
Attachment A
Base Case | Management Case | |||||||||||||
2009 | 2010 | 2011 | 2009 | 2010 | 2011 | |||||||||
EBITDA * |
EBITDA * |
* | Dollars in the millions. |
Exhibit 10.25
Peak Holdings LLC
One Old Bloomfield Road
Mountain Lakes, New Jersey 07046
February 27, 2009
Mr. Craig Steeneck
Dear Craig:
In light of recent events impacting the economy and the performance of Peak Holdings LLC (the Company), the board of directors of the Company has decided to modify the vesting terms applicable to the Class B-2 Units (granted pursuant to the Subscription Agreement (as defined below)). The changes are intended to make it more likely that the Company will be able to satisfy the EBITDA-vesting targets under your Class B-2 Units. This means it will be more likely that you will become vested in these Class B-2 Units.
Capitalized terms used but not defined in this letter shall have the meanings ascribed such terms in your Management Unit Subscription Agreement dated as of June 11, 2007 (the Subscription Agreement).
Effective immediately, Part 2 of Schedule I to the Subscription Agreement shall hereby be amended to insert the following language immediately following the first paragraph thereof:
Notwithstanding the foregoing, if the Class B-3 Units granted pursuant to the Management Unit Subscription Agreement dated April 2, 2007 by and between the Executive and the Company become Vested Units (as defined in such agreement) prior to the occurrence of a Termination Date, then the then current years and all subsequent years Class- B-2 Units that are Unvested Units shall become Vested Units.
In addition, effective immediately, Part 2 of Schedule I to the Subscription Agreement shall hereby be amended by deleting in its entirety the chart set forth therein and replacing it with the following:
Fiscal Year |
EBITDA Target
(dollars in millions) |
Cumulative EBITDA Target
(dollars in millions) |
||
2009 |
||||
2010 |
||||
2011 |
Except as is provided in this letter, the Subscription Agreement shall remain unchanged and continue in full force and effect.
Sincerely, |
||
PEAK HOLDINGS LLC |
||
By: |
/s/ S HERVIN K ORANGY |
|
Name: |
Shervin Korangy |
|
Title: |
Vice President |
Exhibit 10.26
Peak Holdings LLC
One Old Bloomfield Road
Mountain Lakes, New Jersey 07046
[ ], 2009
[Team Member/Employee/Partner]
In light of recent events impacting the economy and the performance of Peak Holdings LLC (the Company), the board of directors of the Company has decided to modify the vesting terms applicable to the Class B-2 Units. The changes are intended to make it more likely that the Company will be able to satisfy the EBITDA-vesting targets under your Class B-2 Units. This means it will be more likely that you will become vested in these Class B-2 Units.
Capitalized terms used but not defined in this letter shall have the meanings ascribed such terms in your Management Unit Subscription Agreement (the Subscription Agreement).
Effective immediately, Part 3 of Schedule I to the Subscription Agreement shall hereby be amended to insert the following language immediately following the first paragraph thereof:
Notwithstanding the foregoing, (x) if the Target EBITDA is achieved in any two consecutive Fiscal Years (excluding 2007 and 2008) prior to the occurrence of a Termination Date, then the then current years and all prior years Class- B-2 Units that are Unvested Units shall become Vested Units, and (y) if the Class B-3 Units become Vested Units before the occurrence of Termination Date, then all Class B-2 Units shall vest and become exercisable.
For any Subscription Agreement with Class B-2 Units that are eligible to vest in respect of Fiscal Years 2007 through 2011, effective immediately, Part 3 of Schedule I to the Subscription Agreement shall hereby be amended by deleting in its entirety the chart set forth therein and replacing it with the following:
Fiscal Year |
EBITDA Target
(dollars in millions) |
Cumulative EBITDA Target
(dollars in millions) |
||
2007 |
||||
2008 |
||||
2009 |
||||
2010 |
||||
2011 |
For any Subscription Agreement with Class B-2 Units that are eligible to vest in respect of Fiscal Years 2008 through 2012, effective immediately, Part 3 of Schedule I to the Subscription Agreement shall hereby be amended by deleting in its entirety the chart set forth therein and replacing it with the following:
Fiscal Year |
EBITDA Target
(dollars in millions) |
Cumulative EBITDA Target
(dollars in millions) |
||
2008 |
||||
2009 |
||||
2010 |
||||
2011 |
||||
2012 |
For any Subscription Agreement with Class B-2 Units that are eligible to vest in respect of Fiscal Years 2009 through 2013, effective immediately, Part 3 of Schedule I to the Subscription Agreement shall hereby be amended by deleting in its entirety the chart set forth therein and replacing it with the following:
Fiscal Year |
EBITDA Target
(dollars in millions) |
Cumulative EBITDA Target
(dollars in millions) |
||
2009 |
||||
2010 |
||||
2011 |
||||
2012 |
||||
2013 |
Except as is provided in this letter, the Subscription Agreement shall remain unchanged and continue in full force and effect.
Sincerely, |
||
Peak Holdings LLC |
||
By: |
|
|
Name: |
|
|
Title: |
|
Exhibit 10.27
Crunch Holding Corp.
One Old Bloomfield Road
Mountain Lakes, New Jersey 07046
[ ], 2009
[Team Member/Employee/Partner]
In light of recent events impacting the economy and the performance of Crunch Holding Corp. (the Company), the board of directors of the Company has decided to modify the vesting terms applicable to the Performance Options previously granted to you under the Companys 2007 Stock Incentive Plan (the Plan). The changes are intended to make it more likely that the Company will be able to satisfy the EBITDA-vesting targets under your Performance Options. This means it will be more likely that you will become vested in these Performance Options.
Capitalized terms used but not defined in this letter shall have the meanings ascribed such terms in your Nonqualified Stock Option Agreement (the Option Agreement).
Effective immediately, Section 3(b)(ii) to the Option Agreement shall hereby be amended to insert the following language at the end thereof:
Notwithstanding the foregoing, (x) if the EBITDA Target is achieved in any two consecutive Fiscal Years (excluding 2007 and 2008) during Participants continued Employment, then the then current years and all prior years Performance Options that are unvested shall vest and become exercisable, or (y) if the Exit Option becomes vested and exercisable during Participants continued Employment, then all Performance Options shall vest and become exercisable.
For any Option Agreement with Performance Options that are eligible to vest in respect of Fiscal Years 2007 through 2011, effective immediately, Schedule B to the Option Agreement shall hereby be amended by deleting in its entirety the chart set forth therein and replacing it with the following:
Fiscal Year |
EBITDA Target
(dollars in millions) |
Cumulative EBITDA Target
(dollars in millions) |
||
2007 |
||||
2008 |
||||
2009 |
||||
2010 |
||||
2011 |
For any Option Agreement with Performance Options that are eligible to vest in respect of Fiscal Years 2008 through 2012, effective immediately, Schedule B to the Option Agreement shall hereby be amended by deleting in its entirety the chart set forth therein and replacing it with the following:
Fiscal Year |
EBITDA Target
(dollars in millions) |
Cumulative EBITDA Target
(dollars in millions) |
||
2008 |
||||
2009 |
||||
2010 |
||||
2011 |
||||
2012 |
For any Option Agreement with Performance Options that are eligible to vest in respect of Fiscal Years 2009 through 2013, effective immediately, Schedule B to the Option Agreement shall hereby be amended by deleting in its entirety the chart set forth therein and replacing it with the following:
Fiscal Year |
EBITDA Target
(dollars in millions) |
Cumulative EBITDA Target
(dollars in millions) |
||
2009 |
||||
2010 |
||||
2011 |
||||
2012 |
||||
2013 |
Except as is provided in this letter, the Option Agreement shall remain unchanged and continue in full force and effect.
Sincerely, |
||
Crunch Holding Corp. | ||
By: |
|
|
Name: |
|
|
Title: |
|
Exhibit 10.28
Paul Telenson
SR. VICE PRESIDENT - HUMAN RESOURCES
CONFIDENTIAL
December 11, 2003
TO: | Mr. Chris L. Kiser | |
4913 Range Wood Drive | ||
Flower Mound, TX 75028 | ||
RE: | EMPLOYMENT OFFER |
Dear Chris,
We are pleased to confirm our offer for the position of Vice President, Special Market Sales for Pinnacle Foods Corporation (Pinnacle) at a monthly salary of $21,667 (which equates to an annual salary of $260,000). In your capacity, you will report to Bill Toler. In addition to your base salary, you will be eligible for participation in our Management Incentive Program which is designed to provide incentive compensation to employees who make a substantial contribution to the success of the Company. You will be eligible for a bonus of up to 100% of your base salary (50% target) contingent on the achievement of performance targets recommended by Bill and approved by the Pinnacle Compensation Committee. You will also be provided with a car allowance of $600 per month and reimbursement of 15 cents per mile.
You will receive a one time sign-on bonus of $50,000, which will be paid to you 30 days following your official start date. Should you terminate from Pinnacle Foods Corporation prior to completing one year of employment, you will be required to pay back a pro-rated portion of this bonus.
Effective upon the Company establishing a Stock Option Program, you will receive incentive stock options and non-qualified options as permitted by IRS Code to acquire shares of common stock of the new Company. The amount of options you receive will be comparable to other management employees at your level in the Company. Your options will be subject to the terms of the Companys Stock Option Plan (the Plan) and option agreements issued pursuant to the Plan.
Kiser
Page 2 .
You will be expected to execute a Confidentiality and Non-Disclosure Agreement with Pinnacle Foods Corporation. It is my understanding, and you have confirmed that, although you have signed a Confidentiality Agreement, Non-Disclosure Agreement and/or Non-Compete Agreement (the Agreement) with your current, or any previous, employer, you have clarified with them your ongoing responsibilities to your former employer(s) under the Agreement(s) and you are under no obligations that would interfere with your employment with us and further are not prohibited from accepting employment with Pinnacle as offered in this letter. Additionally, you have confirmed to me that you are not in possession of any confidential, proprietary and/or trade secret information obtained from your current, or any former, employer, which you intend to disclose or utilize in furtherance of our business. Further you understand that you are specifically advised by Pinnacle against possessing, disclossing or using any such confidential, proprietary and/or trade secret information. Should you have any questions regarding this matter, please contact me immediately.
If you are terminated for any reason other than good cause, your voluntary resignation, death or disability which continues for more than six (6) months, you will be eligible to receive 6 months salary at your monthly base rate (Severance Payment), payable in 6 equal monthly installments. Should you remain unemployed following this 6 month period, you will be eligible to receive up to a maximum of 3 additional months salary at half your monthly base rate (Additional Severance Payment), payable in 3 equal monthly installments. All severance paid pursuant to this letter will be paid for a period of time until the maximum severance as noted herein has been paid, less applicable withholdings, or until you have obtained other full time employment, whichever period is shorter. On a monthly basis, you will provide an update on the progress of your job search and employment status. You will be maintained on Company sponsored Health & Benefit plans at your normal bi-weekly rate for the period of your severance or until you have obtained other employment, whichever period is shorter. Payment of any Severance Benefits will only be made following the Companys receipt of a fully executed General Release.
Under separate cover, you will receive information about Pinnacles Benefit Plan which includes: Medical Plan, Prescription Drug Plan, Dental Plan, Short-Term Disability Plan, Basic Life Insurance Plan and Business Travel Insurance Plan, along with a 401(k) Savings Program. You are eligible for four weeks of annual vacation. Our vacation year starts on January 1 and your 2004 vacation will be prorated based on your starting date of employment.
Your employment is contingent upon successful completion of our employment process, including but not limited to: verification of your employment and education, reference checks, a pre-employment drug screening test and medical examination and/or inquiry. To complete this process please call Mary Lou Kehoe at 856-969-7318.
Kiser
Page 3 .
If you have any questions regarding our offer, please dont hesitate to contact me in our offices at 973-541-6651.
Please sign and return this letter to me confirming our mutual understanding of this position and your start date of no later than February 23, 2004.
We are looking forward to what we believe would be a mutually successful and beneficial relationship.
With best regards, |
||||
Paul Telenson |
ACCEPTED: |
||||
/s/ Mr. Chris L. Kiser |
2/16/04 |
|||
Mr. Chris L. Kiser |
Date |
Cc: Bill Toler
Mary Lou Kehoe
1 OLD BLOOMFIELD AVENUE MT. LAKES, NJ. 07046
PHONE: 973-541-6651 FAX: 973.541-6693
Exhibit 10.29
October 7, 2008
Mr. Chris Kiser
Chief Customer Officer
Pinnacle Foods Group
2901 Corporate Circle, Suite 300
Flower Mound, TX 75028
Dear Chris,
You recently asked Bill Toler to consider extending your severance benefits should your position be eliminated or you are terminated for anything other than cause at some future date. While we dont anticipate that happening, we understand your desire to provide a higher level of financial security for your family should you find yourself in that circumstance.
Based on your proven value to the organization and in anticipation of your future performance, we are pleased to extend your severance benefits as follows:
Paragraph 5 of your Offer Letter dated December 11, 2003 is deleted and replaced with: If you are terminated for any reason other than good cause, your voluntary resignation, death or disability which continues for more than six (6) months, you will be eligible to receive nine (9) months salary at your monthly base rate (Severance Payment), payable biweekly. Should you remain unemployed following this nine (9) month period, you will be eligible to receive up to a maximum of three (3) additional months salary at half your monthly base rate (Additional Severance Payment)also payable bi-weekly, subject to confirmation that you have not accepted an offer of employment. You will be eligible to be maintained on Company sponsored Health and Dental plans at your normal bi-weekly rate for the period of your severance or until you have obtained other employment, whichever period is shorter. Payment of any Severance Benefits will only be made following the Companys receipt of a fully executed General Release.
Chris, we hope you appreciate that this is a significant exception to our normal policy and will maintain the highest degree of confidentiality in this regard.
Sincerely,
John L. Butler
EVP- Human Resources
1 Old Bloomfield Avenue, Mt. Lakes, NJ 07046
Exhibit 10.30
P INNACLE F OODS C ORPORATION
6 E XECUTIVE CAMPUS
C HERRY HILL , NJ 08002
May 25, 2001
CONFIDENTIAL
Lynne Misericordia
345 Lakeside Blvd.
Hopatcong, NJ 07843
Dear Lynne:
We are very pleased to offer you the opportunity to join Pinnacle Foods Corporation (the Company) as Vice President & Treasurer. This letter will confirm the terms and conditions of our offer. We would like you to begin your employment effective May 23, 2000 (your start date being your Employment Date).
1. | Position and Duties . Vice President & Treasurer (or such other position or positions as Executive and the President/CEO shall mutually agree) and shall report to Employers CFO. Executive shall have supervision and control over, and responsibility for, the day-to-day management and operational functions of the Treasury Department and Financial Planning and Analysis. |
2. | Base Salary . Your annual base salary will be $175,000, to be paid at least bi-monthly. The Company will review your salary annually, but any adjustments are at the sole discretion of the Company. The first review shall be as of the first anniversary of your Employment Date (or sooner, if it becomes standard practice to review Company employees as of the same date). Your annual base salary shall not be reduced, and after any increase the term Annual Base Salary for all purposes of shall refer to base salary annualized, as most recently increased. |
3. | Annual Bonus . You will be eligible to receive an annual bonus at a target of 40% and a. maximum of 60% (range 0% to 60%) of your Annual Base Salary according to performance targets established by Company and you. (Annual Bonus). |
4. | Stock Options . Effective on your Employment Date, you will receive 175,000 incentive stock options and non-qualified options as permitted by the IRS Code to acquire shares of common stock of Pinnacle Foods Holding Corporation (Parent). The per share exercise price of your options shall be the same per share price as the initial equity investors. |
Your options shall vest in five (5) equal installments upon each of the first five (5) anniversaries of your start date of employment with the Company.
In addition to these vesting requirements, your options will be subject to the terms of the Companys 2001 Stock Option Plan (the Plan) and option agreements issued pursuant to the Plan.
Lynne Misericordia
Confidential | Page 2 |
5. | Stock Purchase Rights . Subsequent to your Employment Date, as a condition to being granted the above stock options, you will be required to purchase at least $43,750 ($0.25 per option granted) of common stock of Parent at the same per share price as the initial equity investors and on the same terms and conditions (and at the same time) as other senior executives of the Company (other than the Chairman and Chief Executive Officer of the Company). Your purchase of common stock of Parent would be subject to, among other things, approval of Parents Board of Directors and compliance with applicable federal and state securities laws, including the availability of an exemption from registration thereunder. Your purchase would also be subject to your execution of a stock purchase agreement and a stockholders agreement containing terms and conditions mutually acceptable to you and the Company. The stockholders agreement would contain, among other things, transfer restrictions and repurchase rights similar to those set forth in the Plan. |
6. | Employee Benefits . You will be eligible to participate in the Companys 401(k), health insurance, short-term and long-term disability insurance, life insurance and other employee benefit plans in accordance with the terms and conditions of those plans and on terms and conditions no less favorable than those applicable to the companys other senior executives. |
7. | Vacation . You will be entitled to 20 days vacation each calendar year, to be taken at times reasonably agreeable to the Company. |
8. | Confidentiality, Non-Compete, and Non-Solicitation Agreement . You will be required to sign, and your employment and payment of your one-time sign-on bonus is contingent on you signing, the Companys Confidentiality, Non-Compete and Non-Solicitation Agreement prior to beginning employment. |
9. | In Event of a Change In Control which results in any of the following: the loss of your job; a change in your then current title; a reduction in your then current salary, bonus level, a substantial reduction in benefits and/or stock option program unless PFC has allowed full vesting of all grants of stock options effective prior to or on the date of the change in control; a change resulting in the diminution of your then current job description and responsibilities; a relocation of your office more than 25 miles from your then current office; your employment will be deemed to have been severed an you shall receive a lump sum payment equal to one (1) year of your current annual salary and target bonus of 50% (both to be calculated at the time of severance), payment for all unused vacation and health insurance benefits for one (1) year as severance (the Severance Payment). The health insurance portion of this severance will be paid by the Company if you elect continued coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), in which case the Company will pay your premiums for this coverage for the severance period specified above. The payment of this severance is contingent upon your (i) entering into a release of claims in the form as attached hereto and (ii) continued compliance with the terms of the Companys Confidentiality, Non-Compete and Non- Solicitation Agreement. The payment shall be made within ten (10) business days of the date of your severance |
(a) Change In Control shall mean : (A) any person (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) other than PFC becoming the direct or indirect beneficial owner (as determined pursuant to Rule 13d-3 under the Exchange Act) of securities of Employer representing 50% or more of the combined voting power of Employers then outstanding securities, (B) individuals who at the Effective Date constitute the members of the Board and any new director, whose election to the Board or nomination for election to the Board by Employers stockholders was
Lynne Misericordia
Confidential | Page 3 |
approved by a vote of at least a majority of the directors then in office who either were directors at the Effective Date or whose election or nomination for election was previously so approved (each an Incumbent Director), ceasing for any reason to constitute a majority of the Board, (C) Employer merging with or consolidating into any other entity, or the stockholders of Employer and the holders of voting securities of any other entity participating in a securities exchange (other than a merger, consolidation or exchange which would result in the holders (and/or their affiliates) of the voting securities of Employer outstanding immediately prior thereto holding immediately thereafter securities representing more than 50% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger, consolidation or exchange), or (D) the stockholders of Employer approving a plan of complete liquidation of Employer or an agreement or agreements for the sale or disposition by Employer (in one or a series of related transactions) of all or substantially all of Employers assets, or such a plan commencing other than in connection with a merger, consolidation or exchange which does not constitute a Change in Control under the preceding clause (C), or (E) the stockholders of Employer approving the sale, transfer and/or disposition by Employer (in one or a series of related transactions) of substantially all of the assets of one or more of Employers business segments.
(b) No Mitigation . Executive shall not be obligated to seek new employment or take any other action to mitigate the benefits to which Executive is entitled hereunder. Except as contemplated by Section 6 with respect to the Employee Benefits, such benefits shall not be reduced whether or not Executive obtains new employment.
(c) Stock Options . In the event of a Change in Control, all options to purchase shares of Employers common stock, par value $.01 per share, granted by Employer to the Executive (including options granted under Employers 2001 Stock Option Plan) shall, at the discretion of the Board of Directors, become fully vested in, and immediately exercisable in full by, Executive at the at the time of such Change in Control.
10. | Reimbursement . The Company will reimburse you for reasonable travel, entertainment and other business-related expenses you incur on behalf of the Company, that are consistent with the Companys policies in effect from time to time regarding travel, entertainment and other business expenses, subject to the Companys requirements regarding the reporting and documentation of such expenses. |
11. | Insurance . The Company and/or Parent will maintain you as an insured party on all directors and officers insurance that they maintain for the benefit of their directors and officers on at least the same basis as all other covered individuals. Neither the Company nor Parent shall be obligated, however, to maintain directors and officers insurance. |
12. | Agreement . No failure or delay on the part of the Company or you in enforcing or exercising any right or remedy under this letter will operate as a waiver thereof. This letter agreement may not be amended or modified except by an express written agreement signed by you and an authorized representative of the Company. |
Lynne Misericordia
Confidential | Page 4 |
On behalf of Pinnacle Foods Corporation and Pinnacle Foods Holding Corporation,
/s/ Mike Dion |
||||
Mike Dion | ||||
CFO & Senior Vice President | ||||
Signed and Accepted by: |
/s/ Lynne Misericordia |
|||
Lynne Misericordia | ||||
Date: June 22, 2001 |
Exhibit 10.31
P INNACLE F OODS C ORPORATION
6 E XECUTIVE CAMPUS
C HERRY HILL , NJ 08002
May 25, 2001
CONFIDENTIAL
Kelley Maggs
6 Sir Arthurs Court
Sparta, NJ 07871
Dear Kelley:
We are very pleased to offer you the opportunity to join Pinnacle Foods Corporation (the Company) as General Counsel & Senior Vice President. This letter will confirm the terms and conditions of our offer. We would like you to begin your employment effective May 23, 2000 (your start date being your Employment Date).
1. | Position and Duties . General Counsel & Senior Vice President (or such other position or positions as Executive and the President/CEO shall mutually agree) and shall report to Employers President and CEO. Executive shall have supervision and control over, and responsibility for, the day-to-day management and operational functions of the Legal Department. |
2. | Base Salary . Your annual base salary will be $240,000, to be paid at least bi-monthly. The Company will review your salary annually, but any adjustments are at the sole discretion of the Company. The first review shall be as of the first anniversary of your Employment Date (or sooner, if it becomes standard practice to review Company employees as of the same date). Your annual base salary shall not be reduced, and after any increase the term Annual Base Salary for all purposes of shall refer to base salary annualized, as most recently increased. |
3. | Annual Bonus . You will be eligible to receive an annual bonus at a target level of 50% and a maximum of 75% (range 0% to 75%) of your Annual Base Salary according to performance targets established by Company and you. (Annual Bonus). |
4. | Stock Options . Effective on your Employment Date, you will receive 200,000 incentive stock options and non-qualified options as permitted by IRS Code to acquire shares of common stock of Pinnacle Foods Holding Corporation (Parent). The per share exercise price of your options shall be the same per share price as the initial equity investors. |
Your options shall vest in five (5) equal installments upon each of the first five (5) anniversaries of your start date of employment with the Company.
In addition to these vesting requirements, your options will be subject to the terms of the Companys 2001 Stock Option Plan (the Plan) and option agreements issued pursuant to the Plan.
Kelley Maggs
Confidential | Page 2 |
5. | Stock Purchase Rights . Subsequent to your Employment Date, as a condition to being granted the above stock options, you will be required to purchase at least $50,000 ($0.25 per option granted) of common stock of Parent at the same per share price as the initial equity investors and on the same terms and conditions (and at the same time) as other senior executives of the Company (other than the Chairman and Chief Executive Officer of the Company). Your purchase of common stock of Parent would be subject to, among other things, approval of Parents Board of Directors and compliance with applicable federal and state securities laws, including the availability of an exemption from registration thereunder. Your purchase would also be subject to your execution of a stock purchase agreement and a stockholders agreement containing terms and conditions mutually acceptable to you and the Company. The stockholders agreement would contain, among other things, transfer restrictions and repurchase rights similar to those set forth in the Plan. |
6. | Employee Benefits . You will be eligible to participate in the Companys 401(k), health insurance, short-term and long-term disability insurance, life insurance and other employee benefit plans in accordance with the terms and conditions of those plans and on terms and conditions no less favorable than those applicable to the companys other senior executives. |
7. | Vacation . You will be entitled to 20 days vacation each calendar year, to be taken at times reasonably agreeable to the Company. |
8. | Confidentiality, Non-Compete, and Non-Solicitation Agreement . You will be required to sign, and your employment and payment of your one-time sign-on bonus is contingent on you signing, the Companys Confidentiality, Non-Compete and Non-Solicitation Agreement prior to beginning employment. |
9. | In Event of a Change In Control which results in any of the following: the loss of your job; a change in your then current title; a reduction in your then current salary, bonus level, a substantial reduction in benefits and/or stock option program unless PFC has allowed full vesting of all grants of stock options effective prior to or on the date of the changes in control; a change resulting in the diminution of your then current job description and responsibilities; a change in reporting relationship; a relocation of your office more than 25 miles from your then current office or a required relocation from your then current home; your employment will be deemed to have been severed an you shall receive a lump sum payment equal to one (1) year of your current annual salary and target bonus of 50% (both to be calculated at the time of severance), payment for all unused vacation and health insurance benefits for one (1) year as severance (the Severance Payment). The health insurance portion of this severance will be paid by the Company if you elect continued coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), in which case the Company will pay your premiums for this coverage for the severance period specified above. The payment of this severance is contingent upon your (i) entering into a release of claims in the form as attached hereto and (ii) continued compliance with the terms of the Companys Confidentiality, Non-Compete and Non- Solicitation Agreement. The payment shall be made within ten (10) business days of the date of your severance. |
(a) Change In Control shall mean : (A) any person (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) other than PFC becoming the direct or indirect beneficial owner (as determined pursuant to Rule 13d-3 under the Exchange Act) of securities of Employer representing 50% or more of the combined voting power of Employers then outstanding securities, (B) individuals who at the Effective Date constitute the
Kelley Maggs
Confidential | Page 3 |
members of the Board and any new director, whose election to the Board or nomination for election to the Board by Employers stockholders was approved by a vote of at least a majority of the directors then in office who either were directors at the Effective Date or whose election or nomination for election was previously so approved (each an Incumbent Director), ceasing for any reason to constitute a majority of the Board, (C) Employer merging with or consolidating into any other entity, or the stockholders of Employer and the holders of voting securities of any other entity participating in a securities exchange (other than a merger, consolidation or exchange which would result in the holders (and/or their affiliates) of the voting securities of Employer outstanding immediately prior thereto holding immediately thereafter securities representing more than 50% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger, consolidation or exchange), or (D) the stockholders of Employer approving a plan of complete liquidation of Employer or an agreement or agreements for the sale or disposition by Employer (in one or a series of related transactions) of all or substantially all of Employeers assets, or such a plan commencing other than in connection with a merger, consolidation or exchange which does not constitute a Change in Control under the preceding clause (C) or, (E) the stockholders of Employer approving the sale, transfer and/or disposition by Employer (in one or a series of related transactions) of substantially all of the assets of one or more of Employers business segments.
(b) No Mitigation . Executive shall not be obligated to seek new employment or take any other action to mitigate the benefits to which Executive is entitled hereunder. Except as contemplated by Section 6 with respect to the Employee Benefits, such benefits shall not be reduced whether or not Executive obtains new employment.
(c) Stock Options . In the event of a Change in Control, all options to purchase. shares of Employers common stock, par value $.01 per share, granted by Employer to the Executive (including options granted under Employers 2001 Stock Option Plan) shall, at the discretion of the Board of Directors, become fully vested in, and immediately exercisable in full by, Executive at the time of such Change in Control.
10. | Reimbursement . The Company will reimburse you for reasonable travel, entertainment and other business-related expenses you incur on behalf of the Company, that are consistent with the Companys policies in effect from time to time regarding travel, entertainment and other business expenses, subject to the Companys requirements regarding the reporting and documentation of such expenses. |
11. | Insurance . The Company and/or Parent will maintain you as an insured party on all directors and officers insurance that they maintain for the benefit of their directors and officers on at least the same basis as all other covered individuals. Neither the Company nor Parent shall be obligated, however, to maintain directors and officers insurance. |
12. | Agreement . No failure or delay on the part of the Company or you in enforcing or exercising any right or remedy under this letter will operate as a waiver thereof. This letter agreement may not be amended or modified except by an express written agreement signed by you and an authorized representative of the Company. |
Kelley Maggs
Confidential | Page 4 |
On behalf of Pinnacle Foods Corporation and Pinnacle Foods Holding Corporation,
/s/ Mike Dion |
||||
Mike Dion | ||||
CFO & Senior Vice President | ||||
Signed and Accepted by: |
/s/ Kelley Maggs |
|||
Kelley Maggs | ||||
Date: Au gust 15, 2001 |
Exhibit 12.1
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
2003 | |||||||||||||||||||||||||||||||
Successor | Predecessor | Predecessor | |||||||||||||||||||||||||||||
Fiscal year
ended December 28, 2008 |
39 weeks
ended December 30, 2007 |
13 weeks
ended April 2, 2007 |
Fiscal year
ended December 31, 2006 |
Fiscal year
ended December 25, 2005 |
21 weeks
ended December 26, 2004 |
36 weeks
ended July 31, 2004 |
16 weeks
ended November 24, 2003 |
||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||
Fixed charges as defined: |
|||||||||||||||||||||||||||||||
Interest expense |
$ | 153,280 | $ | 124,504 | $ | 39,079 | $ | 86,615 | $ | 71,104 | $ | 26,260 | $ | 26,240 | $ | 9,310 | |||||||||||||||
One-third of non-cancelable lease rent |
1,654 | 784 | 501 | 2,026 | 2,062 | 499 | 845 | 317 | |||||||||||||||||||||||
Total fixed charges (A) |
$ | 154,934 | $ | 125,288 | $ | 39,580 | $ | 88,641 | $ | 73,166 | $ | 26,759 | $ | 27,085 | $ | 9,627 | |||||||||||||||
Eanings as defined: |
|||||||||||||||||||||||||||||||
Earnings (loss) before income taxes |
$ | (1,545 | ) | $ | (23,963 | ) | $ | (60,365 | ) | $ | 60,022 | $ | (43,602 | ) | $ | (15,281 | ) | $ | (87,070 | ) | $ | (4,580 | ) | ||||||||
Add fixed charges |
154,934 | 125,288 | 39,580 | 88,641 | 73,166 | 26,759 | 27,085 | 9,627 | |||||||||||||||||||||||
Earnings and fixed charges (B) |
$ | 153,389 | $ | 101,325 | $ | (20,785 | ) | $ | 148,663 | $ | 29,564 | $ | 11,478 | $ | (59,985 | ) | $ | 5,047 | |||||||||||||
Ratio of earnings to fixed charges: (B/A) |
NM | (1) | NM | (1) | NM | (2) | 1.68 | NM | (2) | NM | (2) | NM | (2) | NM | (3) |
(1) | The Successors earnings for the fiscal year ending 2008 and the 39 weeks ending December 30, 2007 were insufficient to cover fixed charges by $1.5 million and $24.0 million, respectively. |
(2) | The Predecessors earnings for the 13 weeks ending April 2, 2007, fiscal 2005, the 21 weeks ended December 26, 2004 and the 36 weeks ended July 31, 2004 were insufficient to cover fixed charges by $60.3 million, $43.6 million, $15.3 million and $87.1 million, respectively. |
(3) | The 2003 Predecessors earnings for the 16 weeks ended November 24, 2003 were insufficient to cover fixed charges by $4.6 million. |
Exhibit 31.1
CERTIFICATION
I, Jeffrey P. Ansell, certify that:
1. | I have reviewed this annual report on Form 10-K of Pinnacle Foods Finance LLC; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d 15(f)) for the Registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the Registrants fiscal quarter ended December 28, 2008 that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
Date: March 3, 2009
/s/ J EFFREY P. A NSELL |
Jeffrey P. Ansell |
Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Craig Steeneck, certify that:
1. | I have reviewed this annual report on Form 10-K of Pinnacle Foods Finance LLC; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d 15(f)) for the Registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the Registrants fiscal quarter ended December 28, 2008 that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
Date: March 3, 2009
/s/ C RAIG S TEENECK |
Craig Steeneck |
Executive Vice President and Chief Financial Officer |
(Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Pinnacle Foods Finance LLC (the Company) on Form 10-K for the period ended December 28, 2008 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Jeffrey P. Ansell, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: March 3, 2009
/s/ J EFFREY P. A NSELL |
Jeffrey P. Ansell |
Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Pinnacle Foods Finance LLC (the Company) on Form 10-K for the period ended December 28, 2008 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Craig Steeneck, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: March 3, 2009
/s/ C RAIG S TEENECK |
Craig Steeneck |
Executive Vice President and Chief Financial Officer |
(Principal Financial Officer and Principal Accounting Officer) |