10-Q 1 w42847e10-q.txt VLASIC FOODS INTERNATIONAL INC. FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED COMMISSION FILE NUMBER OCTOBER 29, 2000 1-13933 VLASIC [LOGO] FOODS INTERNATIONAL INC. NEW JERSEY 52-2067518 STATE OF INCORPORATION I.R.S. EMPLOYER IDENTIFICATION NO. VLASIC PLAZA SIX EXECUTIVE CAMPUS CHERRY HILL, NEW JERSEY 08002-4112 PRINCIPAL EXECUTIVE OFFICES TELEPHONE NUMBER: 856-969-7100 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 [X] NO [ ] THERE WERE 45,418,203 SHARES OF COMMON STOCK OUTSTANDING AS OF DECEMBER 1, 2000. 2 VLASIC FOODS INTERNATIONAL INDEX

1 3 PART I. FINANCIAL INFORMATION -------------------------------------------------------------------------------- ITEM 1. FINANCIAL STATEMENTS VLASIC FOODS INTERNATIONAL CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share amounts)

*Excludes potentially dilutive shares as the result would be antidilutive. See accompanying Notes to Consolidated Financial Statements. 2 4 VLASIC FOODS INTERNATIONAL CONSOLIDATED BALANCE SHEETS (in thousands)

See accompanying Notes to Consolidated Financial Statements. 3 5 VLASIC FOODS INTERNATIONAL CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)

See accompanying Notes to Consolidated Financial Statements. 4 6 VLASIC FOODS INTERNATIONAL CONSOLIDATED STATEMENTS OF SHAREOWNERS' DEFICIT (UNAUDITED) (in thousands)

See accompanying Notes to Consolidated Financial Statements. 5 7 VLASIC FOODS INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 1. INTERIM FINANCIAL INFORMATION The accompanying unaudited consolidated financial statements for the three months ended October 29, 2000 and October 31, 1999 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the consolidated financial statements have been included. The results of the interim periods are not necessarily indicative of the results to be expected for the full fiscal year. The consolidated financial statements and footnotes should be read in conjunction with Management's Discussion and Analysis of Results of Operations and Financial Condition beginning on page 17 and in our Annual Report, Form 10-K for the fiscal year ended July 30, 2000. 2. GOING CONCERN MATTERS The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As discussed in Note 10, we have significant borrowings which require, among other things, compliance with certain financial ratios, specifically a debt/EBITDA ratio and a fixed charge coverage ratio, on a quarterly basis. As a result of operating losses incurred during the second, third, and fourth quarters in fiscal 2000, and the first quarter in fiscal 2001, we were not in compliance with the financial ratio covenants under our senior credit facility. However, we requested and received a waiver through February 28, 2001 in consideration for the payment of a fee and an increase in interest rates. There are three key provisions of the waiver: (1) an escrow deposit to pay the January 2, 2001 interest payment of $10.25 million on the senior subordinated notes ("January Interest Payment") must be established by December 28, 2000 and cannot be funded with funds generated from operations or proceeds of asset sales, as is more fully described below; (2) certain events, including the payment in full of our indebtedness outstanding under the senior credit facility, must take place by the expiration of the waiver, or if there is a Standstill Period (as defined and discussed below), the expiration of the Standstill Period, or else we will be required to pay an additional fee in the amount of $1.5 million to the senior credit facility bank syndicate; and (3) we must comply with certain tests of minimum sales and net worth and maximum capital expenditures. If the January Interest Payment is not paid within 30 days of the due date, there would be an event of default which upon a vote of the holders of at least 25% of the senior subordinated notes could cause them to be accelerated. The terms of the waiver require the Company to deposit an amount in escrow on or before December 28, 2000 for payment of the January Interest Payment ("Escrow"). The waiver as presently in force precludes the Escrow from being funded with funds generated from operations or proceeds of asset sales. Failure to timely fund the Escrow would cause the waiver to expire on December 28, 2000. In such event, the waiver provides for a "Standstill Period" following expiration of the waiver during which Events of Default would continue to be waived. However, if the Escrow is not funded on or before December 28, 2000, the principal of the bank loans could be accelerated and a "payment blockage notice" could be delivered on the Company preventing it from making the January Interest Payment. The Standstill Period would expire on the later of (a) January 30, 2001 and (b) a forbearance date specified in any agreement by the holders of more than 75% of the outstanding senior subordinated notes to not accelerate the principal of such notes or enforce any other remedies for the enforcement of collection of such notes. The expiration of the Standstill Period would, however, be no later than February 28, 2001. It is unlikely that we will be able to make the escrow deposit by December 28, 2000 or the January Interest Payment prior to the end of the grace period on January 30, 2001. However, we expect that the senior credit facility bank group will allow us to proceed with the strategic review process at least until the end of January. A breach of any of the terms and conditions of the waiver, or subsequent breaches of conditions of the senior credit facility not covered by the waiver could result in acceleration of our indebtedness, in which case the debt 6 8 VLASIC FOODS INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 2. GOING CONCERN MATTERS (CONTINUED) would become immediately due and payable. Given our current situation, we have ongoing regular discussions with the members of the senior credit facility. As part of these discussions, we review our compliance with the applicable financial covenants of the waiver. We believe we are in compliance with the financial covenants of the waiver as of October 29, 2000. However, although we believe we are in compliance with the financial covenants of the waiver as of the end of the first fiscal quarter, October 29, 2000, we believe, that because of a projected loss in our second fiscal quarter ending January 28, 2001, it is probable that we will not be in compliance with the minimum net worth test as of the end of the second fiscal quarter. We are exploring strategic opportunities for the Company, which is likely to result in the sale of the Company in whole or in part. The investment banking firm of Lazard Freres & Co. has been hired to assist with this strategic review and to solicit bids on our behalf. We have received bids for our businesses and are in continuing discussions with one or more potential buyers for a part or the whole of the Company. Since this process is still ongoing, no assurances can be given that definitive contracts will be signed or that, if signed, closings will occur. It is also possible that, if the Board of Directors determines the proposed selling prices are insufficient, one or more of the businesses will be retained to be sold possibly in the future. Our ability to operate as a going concern is dependent upon our ability to either refinance our senior credit facility or avoid default and acceleration under it. As it is unlikely that the Company can secure alternative financing sources, either the process of selling the Company in whole or in part must be completed by the expiration of the Standstill Period described above and all the loans under the senior credit facility repaid or the senior credit facility bank group must agree to a further waiver and extension. If the Company is not sold by the expiration of the Standstill Period described above or the waiver has not been extended, there will be an event of default and it is probable that the Company could not raise the funds to pay off all of its debts. It is possible that the sales of our businesses will either not be complete by the end of the Standstill Agreement or, if complete, will not generate sufficient proceeds to repay the loans under the senior credit facility. Further, it is unlikely we will make the January Interest Payment. Nevertheless, assuming that our vendors continue to provide us trade credit as they have to date, our cash flow forecasts indicate that we will generate enough funds from operations to meet our operating cash needs until the height of pickle packing season in July 2001. Unfavorable developments which could result from any of the above contingencies or otherwise could lead to a default under the senior credit facility or the senior subordinated notes under which the debts would become immediately due and payable or could lead to a contraction in the availability of trade credit, either of which might require that we would file for protection from our creditors under the Bankruptcy Act. 3. SPECIAL ITEMS ADJUSTMENT OF ASSETS TO FAIR VALUE - As disclosed in the Summary of Significant Accounting Policies in our Form 10K, we periodically review the recoverability of plant assets and intangibles based principally on an analysis of cash flows. We made such a review and two adjustments were necessary and were recorded in the first quarter of fiscal 2001 to reduce certain assets to fair value. As the result of ongoing diminished cash flows in our operations in the United Kingdom, the carrying value of the net assets of our UK businesses was reduced to fair value based upon estimates of selling values less costs to sell. This asset impairment amounted to $96 million. 7 9 VLASIC FOODS INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 3. SPECIAL ITEMS (CONTINUED) As the result of the revised contract for frozen foodservice copacking for Campbell Soup Company, the carrying value of one of our buildings in the Omaha frozen food plant was reduced to fair value based upon estimated selling values less costs to sell. This asset impairment amounted to $21 million. These asset impairment charges are included in the "Special Items" line of the Consolidated Statement of Operations for the three months ended October 29, 2000. There are no tax benefits associated with these charges. Therefore, net earnings and earnings per share were reduced by $117.0 million or $2.58 per share. INCOME TAXES - DEFERRED TAX VALUATION ALLOWANCE - Although the strategic review process is not yet complete, based on recent discussions, management has reason to believe that the net proceeds to be realized upon sale of the company in whole or in part will not result in a taxable gain of the magnitude necessary to realize the net book value of the U.S. deferred tax asset on the July 30, 2000 balance sheet. Accordingly, a valuation allowance of $16.3 million was recorded in the first quarter fiscal 2001 to reduce the net carrying value of the deferred tax asset to zero. Also, no tax benefit was provided for the first quarter fiscal 2001 operating losses in the U.S. or the UK. 4. DISCONTINUED OPERATIONS In an effort to focus on our core "Vlasic" and "Swanson" businesses and to pay down debt, we sold Vlasic Farms, Inc., our fresh mushroom business to Money's Mushrooms Ltd. on January 31, 2000. The sale price was $50 million, less post-closing purchase price adjustments of approximately $4.8 million. The net proceeds, net of transaction closing costs and amounts held on deposit to cover certain future costs related to the transaction, were used to repay a portion of the indebtedness outstanding under our senior credit facility. Funds of $2.5 million remain on deposit for the anticipated severance payments and certain other indemnified costs and are included in the Restricted cash amounts on the Consolidated Balance Sheet at October 29, 2000. Any funds held on deposit remaining after payment of the specified items will be used to repay a portion of the indebtedness outstanding under our senior credit facility. Liabilities retained by us included certain indemnified costs, property taxes and medical claims totalling $1.5 million and are included in Accrued liabilities on the Consolidated Balance Sheet at October 29, 2000. We also retained pre-sale projected benefit obligations for pensions and other postretirement benefits of approximately $14.1 million and $8.1 million, respectively as of July 30, 2000. The projected benefit obligations for pensions and other postretirement benefit are recorded in Other liabilities on the Consolidated Balance Sheet as of October 29, 2000. In conjunction with the sale we entered into a Transition Services Agreement with the buyers through January 31, 2001, whereby we will continue to perform certain administrative and accounting functions for fees that approximate cost. During the three months ended October 29, 2000, we received $0.4 million in such fees, which are included in Other expense, net in the Consolidated Statements of Operations. We remain contingently liable for workers' compensation claims incurred prior to the sale of the mushroom business of approximately $4 million in the event the buyer fails to satisfy this liability. On November 2, 2000, the buyer filed for protection under Chapter 11 of the U.S. bankruptcy code. We are unable at this time to make any assessment of the likelihood of our being required to make any payments for these workers' compensation claims. In accordance with Accounting Principles Board Opinion No. 30 (APB 30), "Reporting the Results of Operations - Reporting the Effect of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", the results of Vlasic Farms, Inc. have been reported separately as a discontinued operation for the three months ended October 31, 1999 and for the subsequent period through December 17, 1999, the measurement date. The loss from discontinued operations subsequent to the 8 10 VLASIC FOODS INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 4. DISCONTINUED OPERATIONS (CONTINUED) measurement date of December 17, 1999 through January 30, 2000 (the phase-out period) of $0.8 million was deferred and recorded as a reduction to the net gain on disposal in the third quarter fiscal 2000. Net sales, earnings (loss) before taxes and net loss applicable to discontinued operations were as follows:

5. CHANGE IN ACCOUNTING PRINCIPLE Effective July 31, 2000, the Company adopted the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities." This statement requires all derivative instruments to be measured at fair value and be recognized as either assets or liabilities in the balance sheet. As of the date of adoption, the Company was a counterparty to an interest rate swap agreement to effectively hedge a certain amount of its exposure to variability in the interest payments on the borrowings under the Senior Credit Facility (see Note 10). Interest rate swaps have been used by the Company to manage risk associated with interest rate movements and to achieve an acceptable proportion of variable versus fixed rate debt. The swap has a notional amount of $50 million, matures February 2003 and obligates the company to pay interest at a fixed rate of 5.895% while receiving from the counterparty interest payments at 3 month LIBOR, which was 6.815% as of October 29, 2000. The adjustment made on July 31, 2000 to reflect the interest rate swap at fair value in Other current assets was approximately $1.3 million. As the interest rate swap is a cash flow hedge, this adjustment was recorded to Accumulated other comprehensive earnings (loss) as the cumulative effect of an accounting change. During the first quarter, the fair value of the interest rate swap decreased by approximately $0.6 million. This loss is reflected in Other comprehensive earnings (loss). During November 2000, the Company terminated the interest rate swap, receiving approximately $0.6 million. The proportion of variable versus fixed rate debt was impacted by this termination, but remains at a level deemed acceptable under the Company's risk management policy. 9 11 VLASIC FOODS INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 6. RESTRUCTURING CHARGES

A special charge of $1.5 million ($1.0 million after-tax) was recorded in the second quarter of fiscal 2000 associated with reductions in the United States headquarters workforce. This restructuring program was designed to streamline the organization and reflects the need for a smaller infrastructure. In the fourth quarter of fiscal 2000, it was estimated that $0.3 million ($0.2 million after-tax) of the original reserve would not be utilized due to higher than anticipated voluntary employee turnover. Accordingly, this amount was reversed. The $1.2 million net charge ($0.8 million after-tax) represented severance and employee benefit costs that were expected to be paid in cash. As of October 29, 2000, twenty-one individuals had been severed. This restructuring program is substantially complete. The restructuring accruals are included in Accrued liabilities on the Consolidated Balance Sheets. 7. RESTRICTED CASH

In connection with the divestiture of Vlasic Farms, Inc. during fiscal 2000, funds of $7.3 million, including interest, were held on deposit for anticipated purchase price adjustments, severance payments and certain other indemnified costs. In July 2000, upon determination of the final purchase price, we paid to the buyer approximately $4.8 million from our general cash account. A like amount was released to us during August 2000 from funds held on deposit. The remaining deposit amount held in restricted cash will be used for payment of severance and other indemnified costs. In order to satisfy certain worker's compensation self-insurance security deposit requirements, we have two irrevocable letters of credit which we were required to collaterize with deposits of $2.7 million and $2.2 million, respectively. Additionally, in conjunction with an asset sale in July 2000, we received proceeds of $562 which in accordance with the terms and conditions of our senior credit facility were required to be used to pay down amounts under the senior credit facility. As such, this amount was held in restricted cash at July 30, 2000 and during August 2000, was used to repay a portion of the indebtedness outstanding under our senior credit facility. 10 12 VLASIC FOODS INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 8. SEGMENT AND GEOGRAPHIC AREA INFORMATION We have three segments that are organized based upon similar economic characteristics, manufacturing processes, marketing strategies and distribution channels. The FROZEN FOODS segment consists of Swanson frozen foods in the United States and Canada and contract manufacturing of primarily frozen foodservice products in the United States. The GROCERY PRODUCTS segment includes Vlasic retail and foodservice pickles and condiments and Open Pit barbecue sauce in the United States. The UNITED KINGDOM OPERATIONS segment includes Freshbake frozen foods and SonA and Rowats pickles, canned beans and vegetables in the United Kingdom. For the three months ended October 31, 1999, the Vlasic Farms mushroom business was classified as a discontinued operation and excluded from segment information. General corporate expenses and assets had previously been allocated to the segments. We evaluate segment performance based on earnings before interest and taxes.

11 13 VLASIC FOODS INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 8. SEGMENT AND GEOGRAPHIC AREA INFORMATION (CONTINUED)

9. INVENTORIES

Inventories for which the last in, first out (LIFO) method of determining cost is used represented approximately 80% and 73% of inventories at October 29, 2000 and July 30, 2000, respectively. 12 14 VLASIC FOODS INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 10. DEBT

In fiscal 1999, we issued senior subordinated notes with an aggregate principal amount of $200 million at an issue price of 98.472%. The notes mature on July 1, 2009. Interest on the notes accrues at the rate of 10 1/4% per annum and is payable semi-annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2000. On or after July 1, 2004, the notes may be redeemed in whole or in part at a stated price. The amended senior credit facility consists of (1) a senior secured term loan in a principal amount of $100 million and (2) senior secured revolving credit commitments providing for revolving loans, in the aggregate amount of up to $223.5 million. The senior credit facility has a final maturity date of February 20, 2003. We are required to make mandatory prepayments on the senior credit facility and permanently reduce revolving credit commitments under certain circumstances, including upon certain asset sales, issuance of debt securities, issuance of equity securities and receipt of casualty proceeds which includes property insurance proceeds and condemnation awards. At our option, subject to certain requirements, loans may be prepaid in whole or in part. Under the revolving credit facility, the maximum amount of borrowings available is equal to the revolving credit commitment less any outstanding revolving loans. As discussed below, we have received a waiver under the senior credit facility for violations of certain covenants which extend through February 28, 2001. A condition of the waiver received includes repayment in full of the indebtedness outstanding under the senior credit facility by the expiration of the waiver, or if there is a Standstill Period (as defined and discussed below), the expiration of the Standstill Period, or a penalty of $1.5 million will be incurred. Borrowings under the senior credit facility bear interest at rates that, at our option, vary with the prime rate, CD rate, LIBOR or money market rates plus applicable credit margins. The average interest rate at October 29, 2000 was 9.9%. We are obligated to pay a facility fee of 0.5% on the credit exposure of the banks. At October 29, 2000, the amount available for borrowing under the senior credit facility was $34.5 million. The senior credit facility and our senior subordinated debt described above, contain a number of significant covenants that, among other things, restrict our ability to engage in mergers and sales of assets, create liens on our assets, incur additional indebtedness, make investments and acquisitions, or engage in transactions with our subsidiaries and affiliates. In addition, under the senior credit facility, we are required to comply with specified ratios and tests, including maximum debt/EBITDA ratio, minimum fixed charge coverage ratio, minimum sales and minimum net worth and a limitation on capital expenditures. A breach of any of these covenants could result in a default under our debt agreements. 13 15 VLASIC FOODS INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 10. DEBT (CONTINUED) As a result of operating losses incurred during the second, third and fourth quarters of fiscal 2000, and the first quarter of fiscal 2001, we were not in compliance with the financial ratio covenants under our senior credit facility. However, we requested and received waivers covering the debt/EBITDA ratio and the fixed charge coverage ratio of the facility through June 28, 2000. The waivers required the payment of a fee, an increase in interest rates, delivery and compliance with a cash budget, and also established a minimum EBITDA test. The waiver also required that the senior credit facility be secured by liens on substantially all U.S. owned real property on or before April 30, 2000. With the addition of the real property liens, the senior credit facility is secured by liens on substantially all of the Company assets. On June 28, 2000, the Company executed an amendment of the senior credit facility and waiver through February 28, 2001. The waiver required the payment of a fee, an increase in interest rates, delivery and compliance with a cash budget and also established minimum sales, minimum net worth, and revised capital expenditure limits. The amendment/waiver also provided for usage of up to $35 million of borrowings under the facility for the working capital purposes subject to being in compliance with tests related to the cash budget. The amendment/waiver provides for the funding of the $35 million availability to be made 50% by the bank senior credit facility syndicate and 50% by participation of certain descendants of Dr. John T. Dorrance (Dorrance Family Participants). The Dorrance Family Participants will provide funding to the Company through participation in the senior credit facility bank syndicate by providing $1 of funding for each $1 supplied by the bank syndicate up to a maximum participation of $17.5 million. The Dorrance Family Participants will receive a one-time fee of $350,000, interest of 2% per annum over that otherwise payable under the terms of the senior credit facility, and a fee equal to 5% of the total outstanding shares multiplied by the excess of the closing price of Vlasic common stock (on any date of their choice) over $1.94 per share. The loans provided by the Dorrance Family Participants, together with all fees and accrued interest, are payable February 28, 2001. The Company believes that the terms of the transaction discussed above between the Company and the Dorrance Family Participants, are similar to those that would have been obtained in like transactions with others considering the nature of the transactions and the availability of comparable funding. In addition, the amendment/waiver restricts payments of interest on the senior subordinated notes after December 31, 2000, to funds generated other than from operations, asset sales, or borrowings under the senior credit facility. The amendment/waiver also includes provision for an additional fee of $1.5 million to the syndicate if the loans are not paid in full by the expiration of the waiver, or if there is a Standstill Period (as defined and discussed below), the expiration of the Standstill Period. There are three key provisions of the waiver: (1) an escrow deposit to pay the January 2, 2001 interest payment of $10.25 million on the senior subordinated notes ("January Interest Payment") must be established by December 28, 2000 and cannot be funded with funds generated from operations or proceeds of asset sales, as is more fully described below; (2) certain events, including the payment in full of our indebtedness outstanding under the senior credit facility, must take place by the expiration of the waiver, or if there is a Standstill Period (as defined and discussed below), the expiration of the Standstill Period, or else we will be required to pay an additional fee in the amount of $1.5 million to the senior credit facility bank syndicate; and (3) we must comply with certain monthly tests of minimum sales and net worth and maximum capital expenditures. For the complete waiver and related agreements, please see our Form 8-K filed on August 22, 2000. If the senior subordinated notes interest payment due and payable on January 2, 2001 ("January Interest Payment") is not paid within 30 days of the due date, there would be an event of default which upon a vote of the holders of at least 25% of the senior subordinated notes could cause them to be accelerated. 14 16 VLASIC FOODS INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 10. DEBT (CONTINUED) The terms of the waiver require the Company to deposit an amount in escrow on or before December 28, 2000 for payment of the January Interest Payment ("Escrow"). The waiver as presently in force precludes the Escrow from being funded with funds generated from operations or proceeds of asset sales. Failure to timely fund the Escrow would cause the waiver to expire on December 28, 2000. In such event, the waiver provides for a "Standstill Period" following expiration of the waiver during which Events of Default would continue to be waived. However, if the Escrow is not funded on or before December 28, 2000, the principal of the bank loans could be accelerated and a "payment blockage notice" could be delivered on the Company preventing it from making the January Interest Payment. The Standstill Period would expire on the later of (a) January 30, 2001 and (b) a forbearance date specified in any agreement by the holders of more than 75% of the outstanding senior subordinated notes to not accelerate the principal of such notes or enforce any other remedies for the enforcement of collection of such notes. The expiration of the Standstill Period would, however, be no later than February 28, 2001. It is unlikely that we will be able to make the escrow deposit by December 28, 2000 or the January Interest Payment prior to the end of the grace period on January 30, 2001. However, we expect that the senior credit facility bank group will allow us to proceed with the strategic review process at least until the end of January. A breach of any of the terms and conditions of the waiver, or subsequent breaches of conditions of the senior credit facility not covered by the waiver could result in acceleration of our indebtedness, in which case the debt would become immediately due and payable. Given our current situation, we have ongoing regular discussions with the members of the senior credit facility. As part of these discussions, we review our compliance with the applicable financial covenants of the waiver. We believe we are in compliance with the financial covenants of the waiver as of October 29, 2000. However, although we believe we are in compliance with the financial covenants of the waiver as of the end of the first fiscal quarter, October 29, 2000, we believe, that because of a projected loss in our second fiscal quarter ending January 28, 2001, it is probable that we will not be in compliance with the minimum net worth test as of the end of the second fiscal quarter. We are exploring strategic opportunities for the Company, which is likely to result in the sale of the Company in whole or in part. The investment banking firm of Lazard Freres & Co. has been hired to assist with this strategic review and to solicit bids on our behalf. We have received bids for our businesses and are in continuing discussions with one or more potential buyers for a part or the whole of the Company. Since this process is still ongoing, no assurances can be given that definitive contracts will be signed or that, if signed, closings will occur. It is also possible that, if the Board of Directors determines the proposed selling prices are insufficient, one or more of the businesses will be retained to be possibly sold in the future. Our ability to operate as a going concern is dependent upon our ability to either refinance our senior credit facility or avoid default and acceleration under it. As it is unlikely that the Company can secure alternative financing sources, either the process of selling the Company in whole or in part must be complete by the expiration of the Standstill Period described above and all the loans under the senior credit facility repaid or the senior credit facility bank group agrees to a further waiver and extension. If the Company is not sold by the expiration of the Standstill Period described above or the waiver has not been extended, there will be an event of default and it is probable that the Company could not raise the funds to pay off all of its debts. It is possible that the sales of our businesses will either not be complete by the end of the Standstill Agreement or, if complete, will not generate sufficient proceeds to repay the loans under the senior credit facility. Further, it is unlikely we will make the January Interest Payment. Nevertheless, assuming that our vendors continue to provide us trade credit as they have to date, our cash flow forecasts indicate that we will generate enough funds from operations to meet our operating cash needs until the height of pickle packing season in July 2001. 15 17 VLASIC FOODS INTERNATIONAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 10. DEBT (CONTINUED) Unfavorable developments which could result from any of the above contingencies or otherwise could lead to a default under the senior credit facility or the senior subordinated notes under which the debts would become immediately due and payable or could lead to a contraction in the availability of trade credit, either of which might require that we would file for protection from our creditors under the Bankruptcy Act. Since the present waiver to the senior credit facility expires on February 28, 2001, the indebtedness under the senior credit facility has been classified as a current liability in the Consolidated Balance Sheet at October 29, 2000. Because the Company is not in default of any covenants related to the Senior Subordinated notes, these notes are classified as long-term debt at October 29, 2000. Although if there were a subsequent default as discussed earlier, the notes would then be classified as a current liability. 11. TRANSACTIONS WITH CAMPBELL SOUP COMPANY SUBSEQUENT TO THE SPIN-OFF At the time of the spin-off, we entered into a multi-year agreement with Campbell Soup Company ("Campbell") which ended March 30, 2000 for the continued production of frozen foodservice products in the United States by us as well as a one-year agreement for the production of frozen retail products in Canada by Campbell. Campbell continues to produce frozen retail products for our Canadian business. On December 1, 2000, the frozen foodservice contract packing agreement with Campbell was modified and extended through September 30, 2001. The contract extension is on less favorable terms to Vlasic. As discussed in Note 3, an asset impairment charge has been taken relative to the production facilities servicing this contract. Our fiscal 2001 earnings will be approximately $5 million less than had the contract been extended at the same terms. Included in the Consolidated Statements of Operations are sales to Campbell from our frozen foods segment of $17,752 in first quarter fiscal 2001 and $20,772 in first quarter fiscal 2000. Included in Costs of product sold are purchases from Campbell of $2,460 in first quarter fiscal 2001, and $2,655 in first quarter fiscal 2000. 16 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION INTRODUCTION On March 30, 1998, Campbell Soup Company ("Campbell") distributed one share of Vlasic common stock to shareowners of Campbell for every ten shares of Campbell capital stock held at the record date in a tax-free distribution (the "spin-off"). At the time of the spin-off, we began operations as a separate independent publicly-owned company. In connection with the spin-off, Campbell contributed the following businesses: Swanson frozen foods in the United States and Canada, Vlasic retail and foodservice pickles and condiments in the United States, Open Pit barbecue sauce, Campbell's mushrooms in the United States, Freshbake and non-branded frozen foods and SonA and Rowats pickles and beans in the United Kingdom, Swift and non-branded processed beef in Argentina and Kattus gourmet foods distribution in Germany. We sold the Kattus business in January 1999 and sold our Argentine beef business, Swift-Armour, in July 1999. The mushroom business was sold during the third quarter of fiscal 2000 and has been treated as a discontinued operation. Prior to the spin-off, the businesses contributed by Campbell had been separately managed within multiple Campbell business divisions. In connection with the spin-off, we incurred debt of approximately $560 million under a five-year $750 million unsecured revolving credit facility, consisting of $500 million of indebtedness assumed from Campbell and $60 million incurred to repay certain intercompany payables representing advances from Campbell to subsidiaries of Vlasic. The discussion below summarizes the significant factors affecting our consolidated operating results, financial condition and liquidity for the three months ended October 29, 2000 and October 31, 1999. The results for the three months ended October 29, 2000 are not necessarily indicative of the results of operations to be expected for the full year. The following discussion of results of operations and liquidity and capital resources should be read in conjunction with our historical consolidated financial statements and the related accompanying notes. GOING CONCERN MATTERS The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As discussed in Note 10, we have significant borrowings which require, among other things, compliance with certain financial ratios, specifically a debt/EBITDA ratio and a fixed charge coverage ratio, on a quarterly basis. As a result of operating losses incurred during the second, third, and fourth quarters in fiscal 2000, and the first quarter in fiscal 2001, we were not in compliance with the financial ratio covenants under our senior credit facility. However, we requested and received a waiver through February 28, 2001 in consideration for the payment of a fee and an increase in interest rates. There are three key provisions of the waiver: (1) an escrow deposit to pay the January 2, 2001 interest payment of $10.25 million on the senior subordinated notes ("January Interest Payment") must be established by December 28, 2000 and cannot be funded with funds generated from operations or proceeds of asset sales, as is more fully described below; (2) certain events, including the payment in full of our indebtedness outstanding under the senior credit facility, must take place by the expiration of the waiver, or if there is a Standstill Period (as defined and discussed below), the expiration of the Standstill Period, or else we will be required to pay an additional fee in the amount of $1.5 million to the senior credit facility bank syndicate; and (3) we must comply with certain tests of minimum sales and net worth and maximum capital expenditures. If the January Interest Payment is not paid within 30 days of the due date, there would be an event of default which upon a vote of the holders of at least 25% of the senior subordinated notes could cause them to be accelerated. The terms of the waiver require the Company to deposit an amount in escrow on or before December 28, 2000 for payment of the January Interest Payment ("Escrow"). The waiver as presently in force precludes the Escrow from being funded with funds generated from operations or proceeds of asset sales. Failure to timely fund the Escrow would cause the waiver to expire on December 28, 2000. In such event, the waiver provides for a "Standstill Period" following expiration of the waiver during which Events of Default would continue to be 17 19 waived. However, if the Escrow is not funded on or before December 28, 2000, the principal of the bank loans could be accelerated and a "payment blockage notice" could be delivered on the Company preventing it from making the January Interest Payment. The Standstill Period would expire on the later of (a) January 30, 2001 and (b) a forbearance date specified in any agreement by the holders of more than 75% of the outstanding senior subordinated notes to not accelerate the principal of such notes or enforce any other remedies for the enforcement of collection of such notes. The expiration of the Standstill Period would, however, be no later than February 28, 2001. It is unlikely that we will be able to make the escrow deposit by December 28, 2000 or the January Interest Payment prior to the end of the grace period on January 30, 2001. However, we expect that the senior credit facility bank group will allow us to proceed with the strategic review process at least until the end of January. A breach of any of the terms and conditions of the waiver, or subsequent breaches of conditions of the senior credit facility not covered by the waiver could result in acceleration of our indebtedness, in which case the debt would become immediately due and payable. Given our current situation, we have ongoing regular discussions with the members of the senior credit facility. As part of these discussions, we review our compliance with the applicable financial covenants of the waiver. We believe we are in compliance with the financial covenants of the waiver as of October 29, 2000. However, although we believe we are in compliance with the financial covenants of the waiver as of the end of the first fiscal quarter, October 29, 2000, we believe, that because of a projected loss in our second fiscal quarter ending January 28, 2001, it is probable that we will not be in compliance with the minimum net worth test as of the end of the second fiscal quarter. We are exploring strategic opportunities for the Company, which is likely to result in the sale of the Company in whole or in part. The investment banking firm of Lazard Freres & Co. has been hired to assist with this strategic review and to solicit bids on our behalf. We have received bids for our businesses and are in continuing discussions with one or more potential buyers for a part or the whole of the Company. Since this process is still ongoing, no assurances can be given that definitive contracts will be signed or that, if signed, closings will occur. It is also possible that, if the Board of Directors determines the proposed selling prices are insufficient, one or more of the businesses will be retained to be possibly sold in the future. Our ability to operate as a going concern is dependent upon our ability to either refinance our senior credit facility or avoid default and acceleration under it. As it is unlikely that the Company can secure alternative financing sources, either the process of selling the Company in whole or in part must be complete by the expiration of the Standstill Period described above and all the loans under the senior credit facility repaid or the senior credit facility bank group agrees to a further waiver and extension. If the Company is not sold by the expiration of the Standstill Period described above or the waiver has not been extended, there will be an event of default and it is probable that the Company could not raise the funds to pay off all of its debts. It is possible that the sales of our businesses will either not be complete by the end of the Standstill Agreement or, if complete, will not generate sufficient proceeds to repay the loans under the senior credit facility. Further, it is unlikely we will make the January Interest Payment. Nevertheless, assuming that our vendors continue to provide us trade credit as they have to date, our cash flow forecasts indicate that we will generate enough funds from operations to meet our operating cash needs until the height of pickle packing season in July 2001. Unfavorable developments which could result from any of the above contingencies or otherwise could lead to a default under the senior credit facility or the senior subordinated notes under which the debts would become immediately due and payable or could lead to a contraction in the availability of trade credit, either of which might require that we would file for protection from our creditors under the Bankruptcy Act. 18 20 RESULTS OF OPERATIONS OVERVIEW Net sales for the first three months of fiscal 2001 were $215.3 million compared to net sales of $234.9 million for the first three months of fiscal 2000, or a decrease of 8.4%. For the three months ended October 29, 2000, we incurred a net loss from continuing operations of $148.9 million, or ($3.28) per share, compared to net earnings from continuing operations for the three months ended October 31, 1999 of $5.4 million, or $.12 per share. The fiscal 2001 results were adversely impacted by the following special items, as well as reduced earnings from business operations: - writedowns of impaired assets of $96 million and $21 million relating to our UK operations and our Omaha frozen food plant, respectively, - a valuation allowance recorded against U.S. net operating loss carryforwards reducing existing deferred tax assets by $16.3 million, as well as not providing for any tax benefit for the current quarter's operating loss. Such benefit would have been approximately $5.7 million. In addition to the special items noted above, results were negatively impacted by: - lower sales of Vlasic pickles and Swanson frozen foods resulting from reduced levels of inventories held by our customers. Consumption was up 1% in pickles and flat in Swanson, - unfavorable sales mix of Vlasic grocery products, - intense competitive and pricing pressure in both of our UK businesses, - higher manufacturing costs due to higher ingredient costs and lower manufacturing volume, - higher trade marketing expenses consistent with fiscal 2000 annual costs, - higher administrative costs related to employee retention and incentive payments as well as professional fees related to the strategic review process, - higher interest expense related to higher interest rates as well as fees related to bank waivers. 19 21 CONSOLIDATED STATEMENTS OF EARNINGS The following table sets forth certain items in our consolidated statements of earnings as percentages of our net sales for the periods indicated:

THREE MONTHS ENDED OCTOBER 29, 2000 COMPARED TO THREE MONTHS ENDED OCTOBER 31, 1999 NET SALES. Net sales of $215.3 million for the three months ended October 29, 2000 decreased 8.4% from net sales of $234.9 million for the three months ended October 31, 1999. This decrease was primarily due to a decline of 12% in sales of Vlasic pickles and a 2% decline in Swanson frozen foods related to reduced inventories held by our customers. Consumption increased 1% in Vlasic pickles and was flat in Swanson. Also, intense competition and pricing pressure in the UK resulted in a 17% decline in Freshbake sales and a 9% decline in SonA sales. UK sales were further impacted negatively by a 10% decline in the value of the British pound. COST OF PRODUCTS SOLD. Cost of products sold as a percentage of net sales for the three months ended October 29, 2000 was 68.9% compared to 66.0% for three months ended October 31, 1999. The increase in cost of products sold as a percentage of net sales is primarily attributable to higher manufacturing cost due to higher ingredient costs, lower absorption from lower manufacturing volume, unfavorable pickle sales mix and pricing pressure in the UK. MARKETING AND SELLING EXPENSES. Marketing and selling expenses as a percentage of net sales increased to 25.4% for the three months ended October 29, 2000 compared to 19.3% for the three months ended October 31, 1999. On an annual basis for Fiscal 2000, after adjustment for certain unusual costs as discussed in our Form 10-K, marketing and selling expenses as a percentage of net sales was approximately 25.3%. Fiscal 2001 expenses are expected to be consistent with that level. ADMINISTRATIVE EXPENSES. Administrative expenses as a percentage of net sales increased for the three months ended October 29, 2000 to 6.8% from 4.9% for the three months ended October 31, 1999. The increase in the first quarter of fiscal 2001 when compared to 2000 was attributable to higher administrative costs related to employee retention and incentive payments as well as professional fees related to the strategic review process. Excluding these costs, underlying administrative expenses declined by over 3% in the first quarter of fiscal 2001 compared to the first quarter of fiscal 2000 because of cost reduction efforts resulting in lower headcount. 20 22 RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses as a percentage of net sales declined to 0.8 percent of net sales for the three months ended October 29, 2000 compared to 0.9 percent of net sales for the three months ended October 31, 1999 due to cost reduction efforts. OTHER EXPENSE, NET. Other expense includes a credit of approximately $3.3 million due to expected settlement of deferred compensation in amounts less than originally estimated. The Company has settled this obligation in November 2000. SPECIAL ITEMS. As disclosed in the Summary of Significant Accounting Policies in our Form 10K, we periodically review the recoverability of plant assets and intangibles based principally on an analysis of cash flows. We made such a review and two adjustments were necessary and were recorded in the first quarter of fiscal 2001 to reduce certain impaired assets to fair value. As the result of ongoing diminished cash flows in our operations in the United Kingdom, the carrying value of the net assets of our UK businesses was reduced to fair value based upon estimates of selling values less costs to sell. This asset impairment amounted to $96 million. As the result of the revised contract for frozen foodservice copacking for Campbell Soup Company, the carrying value of one of our buildings in the Omaha frozen food plant was reduced to fair value based upon estimates of selling values less costs to sell. This asset impairment amounted to $21 million. These asset impairment charges are included in the "Special Items" line of the Consolidated Statement of Operations for the three months ended October 29, 2000. There are no tax benefits associated with these charges. Hence, net earnings and earnings per share were reduced by $117.0 million or $2.58 per share. EARNINGS (LOSS) BEFORE INTEREST AND TAXES FROM CONTINUING OPERATIONS. Losses before interest and taxes from continuing operations for the three months ended October 29, 2000 were $118.0 million compared to earnings from continuing operations of $20.3 million for the three months ended October 31, 1999. This decrease in the first quarter of fiscal 2000 was principally driven by the $96 million writedown of UK assets, $21 million writedown of the Omaha frozen food plant assets, lower Vlasic pickle sales, poor operating results in the UK, higher marketing expenses and higher employee retention and incentive payments. INTEREST EXPENSE, NET. Interest expense, net, for the three months ended October 29, 2000 was $14.6 million compared to $11.5 million for the three months ended October 31, 1999. We incurred higher interest expense in the first quarter of fiscal 2001 primarily as a result of higher interest rates as well as fees related to bank waivers. TAXES ON EARNINGS. The provision for taxes in the first quarter of fiscal 2001 was $16.4 million although there was a loss before taxes of $132.5 million. Although the strategic review process is not yet complete, based on recent discussions, management now believes that the net proceeds to be realized upon sale of the company in whole or in part will not result in a taxable gain of the magnitude necessary to realize the net book value of the U.S. deferred tax asset on the July 30, 2000 balance sheet. A valuation allowance of $16.3 million was recorded against existing deferred tax assets. However, a provision for Canadian taxes where the company has taxable earnings was recorded. LOSS FROM DISCONTINUED OPERATIONS. The divested Vlasic Farms mushroom business has been classified as a discontinued operation in accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effect of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." During the three months ended October 31, 1999 the discontinued operations recorded a loss of $1.2 million. 21 23 RESULTS BY SEGMENT The following table sets forth segment information for the periods indicated:

THREE MONTHS ENDED OCTOBER 29, 2000 COMPARED TO THREE MONTHS ENDED OCTOBER 31, 1999 Net sales of the frozen foods segment decreased approximately 3.4% to $135.2 million for the three months ended October 29, 2000 compared to the same period of the prior year due to lower Swanson U.S. sales related to lower levels of inventories held by our customers. Consumption was flat compared to a year ago. The segment's earnings (loss) before interest and taxes was ($14.7) million for the three months ended October 29, 2000 compared to $15.2 million for the three months ended October 31, 1999. This decline was primarily due to the $21 million writedown of the Omaha frozen food plant assets. A third of the remaining decline was due to higher ingredient costs and lower manufacturing volume, while one quarter of the remaining decline was due to lower sales volumes. The rest of the decline was due to higher marketing expenses, which although higher in the quarter, were at the same percentage of net sales as Fiscal 2000 annual levels, and higher spending for consumer coupons. Net sales of the grocery products segment decreased 10.7% to $52.6 million for the three months ended October 29, 2000 compared to the same period in fiscal 2000. The segment's loss before interest and taxes was $(3.7) million for the three months ended October 29, 2000 compared to earnings of $7.6 million for the three months ended October 31, 1999. The decline in net sales is driven by a retail pickle volume decline of 16% due to the lower inventories held by our customers, unfavorable pickle mix resulting in a 3% decline in revenue, partially offset by a 37% increase in foodservice pickle sales and a 55% increase in barbecue sauce sales. Approximately one half of the decline in earnings is the result of the volume mix decline, fifteen percent is due to standard introductory allowance payments to gain new distribution and the remainder is due to trade marketing expenses, which although higher in the quarter, were at the same percentage of net sales as Fiscal 2000 annual levels. Net sales of the United Kingdom Operations segment decreased 23.9% to $27.4 million for the three months ended October 29, 2000 compared to the same period of the prior year. The segment's earnings (loss) before interest and taxes of $(99.9) million for the three months ended October 29, 2000 compared to $(0.4) million for the three months ended October 31, 1999. Approximately 40% of the sales decline was due to the lower value of the British pound. The remaining 14% decline in net sales is the result of intense competitive and pricing activity in both UK businesses, Freshbake and SonA. This change in net earnings was primarily due to the $96 million 22 24 writedown of the UK assets. The remainder of the loss is driven by the reduced sales volume, as well as reduced selling prices resulting from competitive activity and higher manufacturing costs resulting from lower manufacturing volume. LIQUIDITY AND CAPITAL RESOURCES In connection with the spin-off, we incurred incremental debt of approximately $560 million under a five-year $750 million unsecured revolving credit facility, consisting of $500 million indebtedness assumed from Campbell and $60 million incurred to repay certain intercompany payables representing advances from Campbell to subsidiaries of Vlasic. In fiscal 1999, we issued senior subordinated notes with an aggregate principle amount of $200 million at an issue price of 98.472%. The notes mature on July 1, 2009. Interest on the notes accrues at the rate of 10 1/4% per annum and is payable semi-annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2000. On or after July 1, 2004, the notes may be redeemed in whole or in part at a stated price. The amended senior credit facility consists of (1) a senior secured term loan in a principal amount of $100 million and (2) senior secured revolving credit commitments providing for revolving loans, in the aggregate amount of up to $223.5 million. The senior credit facility has a final maturity date of February 20, 2003. We are required to make mandatory prepayments on the senior credit facility and permanently reduce revolving credit commitments under certain circumstances, including upon certain asset sales, issuance of debt securities, issuance of equity securities and receipt of casualty proceeds which includes property insurance proceeds and condemnation awards. At our option, subject to certain requirements, loans may be prepaid in whole or in part. Under the revolving credit facility, the maximum amount of borrowings available is equal to the revolving credit commitment less any outstanding revolving loans. As discussed below, we have received a waiver under the senior credit facility for violations of certain covenants which extend through February 28, 2001. A condition of the waiver received includes repayment in full of the indebtedness outstanding under the senior credit facility by the expiration of the waiver, or if there is a Standstill Period (as defined and discussed below), the expiration of the Standstill Period, or a penalty of $1.5 million will be incurred. Borrowings under the senior credit facility bear interest at rates that, at our option, vary with the prime rate, CD rate, LIBOR or money market rates plus applicable credit margins. The average interest rate at October 29, 2000 was 9.9%. We are obligated to pay a facility fee of 0.5% on the credit exposure of the banks. At October 29, 2000, the amount available for borrowing under the senior credit facility was $34.5 million. The senior credit facility and our senior subordinated debt described above, contain a number of significant covenants that, among other things, restrict our ability to engage in mergers and sales of assets, create liens on our assets, incur additional indebtedness, make investments and acquisitions, or engage in transactions with our subsidiaries and affiliates. In addition, under the senior credit facility, we are required to comply with specified ratios and tests, including maximum debt/EBITDA ratio, minimum fixed charge coverage ratio, minimum sales and minimum net worth and a limitation on capital expenditures. A breach of any of these covenants could result in a default under our debt agreements. As a result of operating losses incurred during the second, third and fourth quarters of fiscal 2000, and the first quarter of fiscal 2001, we were not in compliance with the financial ratio covenants under our senior credit facility. However, we requested and received waivers covering the debt/EBITDA ratio and the fixed charge coverage ratio of the facility through June 28, 2000. The waivers required the payment of a fee, an increase in interest rates, delivery and compliance with a cash budget, and also established a minimum EBITDA test. The waiver also required that the senior credit facility be secured by liens on substantially all U.S. owned real property on or before April 30, 2000. With the addition of the real property liens, the senior credit facility is secured by liens on substantially all of the Company assets. On June 28, 2000, the Company executed an amendment of the senior credit facility and waiver through February 28, 2001. The waiver required the payment of a fee, an increase in interest rates, delivery and compliance with a cash budget and also established minimum sales, minimum net worth, and revised capital expenditure limits. The amendment/waiver also provided for usage of up to $35 million of borrowings under the 23 25 facility for the working capital purposes subject to being in compliance with tests related to the cash budget. The amendment/waiver provides for the funding of the $35 million availability to be made 50% by the bank senior credit facility syndicate and 50% by participation of certain descendants of Dr. John T. Dorrance (Dorrance Family Participants). The Dorrance Family Participants will provide funding to the Company through participation in the senior credit facility bank syndicate by providing $1 of funding for each $1 supplied by the bank syndicate up to a maximum participation of $17.5 million. The Dorrance Family Participants will receive a one-time fee of $350,000, interest of 2% per annum over that otherwise payable under the terms of the senior credit facility, and a fee equal to 5% of the total outstanding shares multiplied by the excess of the closing price of Vlasic common stock (on any date of their choice) over $1.94 per share. The loans provided by the Dorrance Family Participants, together with all fees and accrued interest, are payable February 28, 2001. The Company believes that the terms of the transaction discussed above between the Company and the Dorrance Family Participants, are similar to those that would have been obtained in like transactions with others considering the nature of the transactions and the availability of comparable funding. In addition, the amendment/waiver restricts payments of interest on the senior subordinated notes after December 31, 2000, to funds generated other than from operations, asset sales, or borrowings under the senior credit facility. The amendment/waiver also includes provision for an additional fee of $1.5 million to the syndicate if the loans are not paid in full by the expiration of the waiver, or if there is a Standstill Period (as defined and discussed below), the expiration of the Standstill Period. There are three key provisions of the waiver: (1) an escrow deposit to pay the January 2, 2001 interest payment of $10.25 million on the senior subordinated notes ("January Interest Payment") must be established by December 28, 2000 and cannot be funded with funds generated from operations or proceeds of asset sales, as is more fully described below; (2) certain events, including the payment in full of our indebtedness outstanding under the senior credit facility, must take place by the expiration of the waiver, or if there is a Standstill Period (as defined and discussed below), the expiration of the Standstill Period, or else we will be required to pay an additional fee in the amount of $1.5 million to the senior credit facility bank syndicate; and (3) we must comply with certain monthly tests of minimum sales and net worth and maximum capital expenditures. For the complete waiver and related agreements, please see our Form 8-K filed on August 22, 2000. If the senior subordinated notes interest payment due and payable on January 2, 2001 ("January Interest Payment") is not paid within 30 days of the due date, there would be an event of default which upon a vote of the holders of at least 25% of the senior subordinated notes could cause them to be accelerated. The terms of the waiver require the Company to deposit an amount in escrow on or before December 28, 2000 for payment of the January Interest Payment ("Escrow"). The waiver as presently in force precludes the Escrow from being funded with funds generated from operations or proceeds of asset sales. Failure to timely fund the Escrow would cause the waiver to expire on December 28, 2000. In such event, the waiver provides for a "Standstill Period" following expiration of the waiver during which Events of Default would continue to be waived. However, if the Escrow is not funded on or before December 28, 2000, the principal of the bank loans could be accelerated and a "payment blockage notice" could be delivered on the Company preventing it from making the January Interest Payment. The Standstill Period would expire on the later of (a) January 30, 2001 and (b) a forbearance date specified in any agreement by the holders of more than 75% of the outstanding senior subordinated notes to not accelerate the principal of such notes or enforce any other remedies for the enforcement of collection of such notes. The expiration of the Standstill Period would, however, be no later than February 28, 2001. It is unlikely that we will be able to make the escrow deposit by December 28, 2000 or the January Interest Payment prior to the end of the grace period on January 30, 2001. However, we expect that the senior credit facility bank group will allow us to proceed with the strategic review process at least until the end of January. A breach of any of the terms and conditions of the waiver, or subsequent breaches of conditions of the senior credit facility not covered by the waiver could result in acceleration of our indebtedness, in which case the debt would become immediately due and payable. Given our current situation, we have ongoing regular discussions with the members of the senior credit facility. As part of these discussions, we review our compliance with the applicable financial covenants of the waiver. We believe we are in compliance with the financial covenants of the waiver as of October 29, 2000. However, although we believe we are in compliance with the financial covenants 24 26 of the waiver as of the end of the first fiscal quarter, October 29, 2000, we believe, that because of a projected loss in our second fiscal quarter ending January 28, 2001, it is probable that we will not be in compliance with the minimum net worth test as of the end of the second fiscal quarter. We are exploring strategic opportunities for the Company, which is likely to result in the sale of the Company in whole or in part. The investment banking firm of Lazard Freres & Co. has been hired to assist with this strategic review and to solicit bids on our behalf. We have received bids for our businesses and are in continuing discussions with one or more potential buyers for a part or the whole of the Company. Since this process is still ongoing, no assurances can be given that definitive contracts will be signed or that, if signed, closings will occur. It is also possible that, if the Board of Directors determines the proposed selling prices are insufficient, one or more of the businesses will be retained to be possibly sold in the future. Our ability to operate as a going concern is dependent upon our ability to either refinance our senior credit facility or avoid default and acceleration under it. As it is unlikely that the Company can secure alternative financing sources, either the process of selling the Company in whole or in part must be complete by the expiration of the Standstill Period described above and all the loans under the senior credit facility repaid or the senior credit facility bank group agrees to a further waiver and extension. If the Company is not sold by the expiration of the Standstill Period described above or the waiver has not been extended, there will be an event of default and it is probable that the Company could not raise the funds to pay off all of its debts. It is possible that the sales of our businesses will either not be complete by the end of the Standstill Agreement or, if complete, will not generate sufficient proceeds to repay the loans under the senior credit facility. Further, it is unlikely we will make the January Interest Payment. Nevertheless, assuming that our vendors continue to provide us trade credit as they have to date, our cash flow forecasts indicate that we will generate enough funds from operations to meet our operating cash needs until the height of pickle packing season in July 2001. Unfavorable developments which could result from any of the above contingencies or otherwise could lead to a default under the senior credit facility or the senior subordinated notes under which the debts would become immediately due and payable or could lead to a contraction in the availability of trade credit, either of which might require that we would file for protection from our creditors under the Bankruptcy Act. Since the present waiver to the senior credit facility expires on February 28, 2001, the indebtedness under the senior credit facility has been classified as a current liability in the Consolidated Balance Sheet at October 29, 2000. Because the Company is not in default of any covenants related to the Senior Subordinated notes that could or would require early repayment of the notes, these notes are classified as long-term debt at October 29, 2000. Although if there were a subsequent default as discussed earlier, the notes would then be classified as a current liability. Our liquidity needs will be primarily for working capital and interest service requirements on our debt obligations as well as capital expenditures. Capital expenditures for fiscal year 2001 are expected to approximate $20 million. We believe that our capital expenditures for the foreseeable future will be focused on equipment replacement. It is unlikely that we will be able to make the escrow deposit by December 28, 2000 or the January Interest Payment by the end of the grace period, January 30, 2001. The failure to make the escrow deposit will cause the present waiver of events of default under the senior credit facility to expire and failure to make the January Interest Payment prior to the lapse of the grace period will be an event of default under the senior subordinated note indenture. Both groups of lenders would have the right to accelerate payment, as discussed above. Assuming that neither group accelerates payment and assuming that our vendors continue to provide us trade credit as they have to date, our cash flow forecasts indicate that we will generate enough funds from operations to meet our operating cash needs until the height of the pickle packing season in July 2001. Our liquidity for periods beyond January 30, 2001 is dependent on the outcome of the strategic review process. See also "Going Concern Matters" on page 6. 25 27 CASH FLOWS FOR THE THREE MONTHS ENDED OCTOBER 29, 2000 COMPARED TO THREE MONTHS ENDED OCTOBER 31, 1999 Net cash used in operating activities was $17.4 million for the three months ended October 29, 2000 compared to net cash used of $40.8 million for the three months ended October 31, 1999. The change in cash flows from operations was principally due to improved collections of accounts receivable and reductions in inventory levels. Net cash provided by investing activities was $3.1 million for the three months ended October 29, 2000 compared to net cash used of $3.5 million for the three months ended October 31, 1999. During August, 2000 the Company received the remaining cash proceeds of approximately $4.8 million from the fiscal 2000 sale of Vlasic Farms, Inc. Capital expenditures were $1.9 million for the three months ended October 29, 2000 compared to $3.7 million for the three months ended October 31, 1999. Capital expenditures for fiscal year 2001 are not expected to exceed $20 million. Net cash provided by financing activities was $0.4 million for the three months ended October 29, 2000 compared to $30.0 million for the three months ended October 31, 1999 principally due to decreases in borrowings under the senior credit facility. SEASONALITY Our sales and cash flows are affected by seasonal cyclicality during certain parts of the year. Sales of frozen foods tend to be marginally higher during the winter months. Sales of pickles, relishes and barbecue sauce tend to be higher in the summer months. The majority of pickles are packed during a season extending from May through September. As a result, our inventory levels tend to be higher in the first quarter of the fiscal year which makes our working capital requirements significantly higher in the first quarter, historically requiring us to draw more heavily on the revolving credit commitments under our senior credit facility. Because of our commitment to focusing on cash generation, current year requirements were principally funded from existing cash balances. RECENT DEVELOPMENTS In May 2000, the Emerging Issues Task Force (EITF) issued EITF No. 2000-14, "Accounting for Coupons, Rebates and Discounts" that addressed accounting for sales incentives. The Task Force concluded that in accounting for cash sales incentives offered by a manufacturer (for example, coupons to be used at the point of retail sale or mailed in after the retail sale), the manufacturer should recognize the incentive as a reduction of revenue on the later date of the manufacturer's sale to the retailer or the date the offer is made to the public. The reduction of revenues should be measured based on the estimated amount of incentives to be claimed by the ultimate customers. We are currently evaluating the effect that implementation of this pronouncement will have to our financial statements. We must adopt this pronouncement in our fourth quarter of fiscal 2001. In September 2000, the EITF reached a final consensus on issue EITF No. 2000-10, "Accounting for Shipping and Handling Revenues and Costs." The Task Force concluded that amounts billed to customers related to shipping and handling should be classified as cost of products sold. Implementation of this standard will result in a reclassification of outbound freight costs from a reduction of net sales to cost of products sold on our Consolidated Statements of Operations. We must adopt this pronouncement in our fourth quarter of fiscal 2001. 26 28 FORWARD-LOOKING INFORMATION This report and our filings with the Securities and Exchange Commission contain certain forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. We caution readers that any such forward-looking statements made by us or on our behalf are based on our current expectations and beliefs but are not guarantees of future performance. Actual results could differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause such differences include, but are not limited to: - our ability to successfully maintain necessary financing arrangements; - the results of our strategic review process; - our ability to continue to comply with covenants and the terms of the senior credit facility (and any waivers thereto), and the senior subordinated notes; - acceleration of our senior credit facility or senior subordinated notes; - continued availability of current trade credit terms; - changes in accounting estimates developed in connection with the application of generally accepted accounting principles; - changes in accounting policies and practices; - our ability to successfully execute measures, processes and procedures to properly capture and analyze trade marketing spending and customer deductions; - our ability to maintain capital expenditures within the forecast limits, which are based on assumptions about infrastructure requirements; - issues associated with our business and information systems and embedded technology; - the impact of strong competitive response to our efforts to leverage our brand power with product innovation and new advertising; - the inherent risks in the marketplace associated with our products, including uncertainties about trade and consumer acceptance; - changes in prices of raw materials and other inputs; - the impact of unforeseen economic and political changes in international markets where we compete; - the market risks associated with financial instruments which may be subject to unforeseen economic changes, such as currency exchange rates, interest rates, inflation rates and recessionary trends; - our ability to achieve the gains anticipated from our cost productivity programs; and - our ability to achieve the forecasted savings related to restructuring programs. 27 29 ITEM 3. MARKET RISK We use or are permitted to use financial instruments, including fixed and variable rate debt, as well as swap, forward and option contracts, to finance our operations and to hedge interest rate and currency exposures. The swap, forward and option contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. We do not enter into contracts for speculative purposes, nor are we a party to any leveraged instrument. As disclosed in our Annual Report, we entered into an interest rate swap contract with a notional value of $50 million to hedge a portion of our U.S. variable interest rate bank borrowings. As of October 29, 2000, the interest rate swap contract provided that we pay an average interest rate of 5.9% and receive an average interest rate of 6.8%. We would have received approximately $0.7 million to settle the interest rate swap contract as of October 29, 2000. We terminated the contract during November, 2000, receiving approximately $0.6 million. There have been no other material changes in our market risk during the three months ended October 29, 2000. Therefore, at the current time, we have no material financial instruments outstanding. For additional information, refer to page 24 of our Annual Report for the fiscal year ended July 30, 2000. 28 30 PART II. OTHER INFORMATION ------------------------------------------------------------------------------- ITEM 1. LEGAL PROCEEDINGS As previously reported in our Form 10-K, dated October 17, 2000, we are not aware of any pending claims or litigation the outcome of which would have a material adverse effect on our business, financial position or results of operations. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION A. Cautionary Statement on Forward-Looking statements This report contains certain forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. This information is based upon our current views and assumptions regarding future events and financial performance and is subject to risks and uncertainties that could cause actual results to differ materially from those expressed in this report. Additional information concerning factors that could cause actual results to vary materially from the results anticipated can be found on page 27 in Management's Discussion and Analysis of Results of Operations and Financial Condition of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended July 30, 2000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits (3)(ii) Amended By-Laws (27) Financial Data Schedule 29 31 B. Reports on Form 8-K We filed a Current Report on Form 8-K dated June 28, 2000 with the Securities and Exchange Commission, on August 28, 2000, regarding the announcement that an agreement reached with the senior credit facility bank syndicate to extend our existing waiver of certain covenants of that facility through February 28, 2001. We also filed a Current Report on Form 8-K dated September 29, 2000 with the Securities and Exchange Commission, on October 2, 2000, regarding Vlasic Foods International Inc. and Campbell Soup Company agreement to extend until December 1, 2000, the date for notice of termination under the Foodservice Supply Amendment Agreement between Vlasic Foods International Inc. (the "Company") and Campbell Soup Company dated March 24, 2000. SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VLASIC FOODS INTERNATIONAL INC. Dated: December 13, 2000 By: /s/ Joseph Adler -------------------------------- Joseph Adler Vice President and Controller (Principal Financial and Accounting Officer) 30

VLASIC FOODS INTERNATIONAL INC 10-Q