10-Q 1 d10q.txt EAGLE FAMILY FOODS, INC. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 29, 2001 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 numbers 333-50305 and 333-50305-01 ------------------ Eagle Family Foods Holdings, Inc. (Exact name of registrant as specified in its charter) Delaware 13-3983598 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification Number) Eagle Family Foods, Inc. (Exact name of registrant as specified in its charter) Delaware 13-3982757 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification Number) 735 Taylor Road, Suite 200 43230 Gahanna, OH (Zip Code) (Address of principal executive offices) Registrants' telephone number, including area code: (614) 501-4200 Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of November 13, 2001, there were 1,031,382 shares of Common Stock, par value $.01 per share, of Eagle Family Foods Holdings, Inc. and 10,000 shares of Common Stock, par value $.01 per share, of Eagle Family Foods, Inc. outstanding, respectively. ================================================================================ TABLE OF CONTENTS Part I - Financial Information

PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS EAGLE FAMILY FOODS, INC. Statements of Operations and Comprehensive Income (Loss) (Dollars in Thousands) (Unaudited)

The accompanying notes are an integral part of these financial statements. 3 EAGLE FAMILY FOODS, INC. Balance Sheets (Dollars in Thousands Except Share Data)

The accompanying notes are an integral part of these financial statements. 4 EAGLE FAMILY FOODS, INC. Statements of Cash Flows (Dollars in Thousands) (Unaudited)

The accompanying notes are an integral part of these financial statements. 5 EAGLE FAMILY FOODS, INC. Statement of Changes in Stockholder's Equity For the Thirteen Week Period Ended September 29, 2001 (Dollars in Thousands) (Unaudited)

The accompanying notes are an integral part of these financial statements. 6 EAGLE FAMILY FOODS HOLDINGS, INC. Consolidated Statements of Operations and Comprehensive Income (Loss) (Dollars in Thousands) (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements. 7 EAGLE FAMILY FOODS HOLDINGS, INC. Consolidated Balance Sheets (Dollars in Thousands Except Share Data)

The accompanying notes are an integral part of these consolidated financial statements. 8 EAGLE FAMILY FOODS HOLDINGS, INC. Consolidated Statements of Cash Flows (Dollars in Thousands) (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements. 9 EAGLE FAMILY FOODS HOLDINGS, INC. Consolidated Statement of Changes in Stockholders' Deficit For the Thirteen Week Period Ended September 29, 2001 (Dollars in Thousands) (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements. 10 EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements (Unaudited) 1. Basis of Presentation: The accompanying consolidated financial statements present the financial position, results of operations and cash flows of Eagle Family Foods Holdings, Inc. ("Holdings") and its wholly-owned subsidiary, Eagle Family Foods, Inc. ("Eagle"). Also presented separately are the financial position, results of operations and cash flows of Eagle. Eagle and Holdings are collectively referred to as the "Company," unless the context indicates otherwise. All significant intercompany balances and transactions have been eliminated in consolidation. The financial statements as of September 29, 2001 and September 30, 2000 and for the thirteen week periods ended September 29, 2001 and September 30, 2000 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the financial statements and notes thereto contained in the Annual Report on Form 10-K of Holdings and Eagle for the year ended June 30, 2001. In the opinion of management, the accompanying financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations for a full fiscal year. 2. Recently Issued Accounting Statements: On October 4, 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS No. 144 supercedes SFAS 121 and applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30, "Reporting Results of Operations Reporting the Effects of Disposal of a Segment of a Business" ("APB 30"). SFAS 144 develops one accounting model (based on the model in SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121")) for long-lived assets that are to be disposed of by sale. This model requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS 144 is effective for the Company's first quarter in fiscal 2003. The Company is currently evaluating the impact of adopting SFAS 144. In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141"). SFAS 141 addresses financial accounting and reporting for business combinations. The statement requires all business combinations to be accounted for under the purchase method and establishes criteria for the separate recognition of intangible assets acquired in a business combination. The provisions of this pronouncement apply to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The Company is evaluating this pronouncement and has not yet determined its impact on future financial statements. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets at acquisition and for periods subsequent to acquisition. The Company is evaluating this pronouncement and has not yet determined its impact on future financial statements. The pronouncement will be adopted during the first quarter of the fiscal year ending June 28, 2003. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long- lived assets and the associated asset retirement costs. The Company is evaluating the pronouncement and has not yet determined its impact on future financial statements. This pronouncement will be adopted during the fourth quarter of the fiscal year ending June 29, 2002. In May 2000, the FASB Emerging Issues Task Force ("EITF") released EITF Issue No. 00-14, "Accounting for Certain Sales Incentives" ("Issue 00-14"). Issue 00-14 addresses the recognition, measurement, and income statement classification or sales incentives including point of sale coupons, rebates and free merchandise in connection with a single exchange 11 EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements (Unaudited) transaction. Upon the adoption of Issue 00-14, the Company will reclassify coupon redemption costs from marketing expense to net sales, resulting in no impact on net income. The coupon redemption costs for the thirteen week periods ended September 29, 2001 and September 30, 2000 were $749,000 and $233,000, respectively. The EITF deferred the effective date of Issue 00-14 to the quarter beginning after December 15, 2001. The Company will adopt the pronouncement during the third quarter of the fiscal year ending June 29, 2002. In September 2000, the EITF released EITF Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products" ("Issue 00-25"). Issue 00-25 addresses the income statement classification of certain consideration from a vendor to a retailer in connection with the retailer's purchase of the vendor's product. Such consideration includes, but is not limited to slotting fees, cooperative advertising programs, and buy down programs. Upon the adoption of Issue 00-25, the Company will reclassify these expenses from marketing expense to net sales, resulting in no impact on net income. Issue 00-25 is effective for the quarter beginning after December 15, 2001. The Company will adopt the pronouncement during the third quarter of the fiscal year ending June 29, 2002. 3. Divestiture: On September 19, 2001 the Company sold to Mott's Inc. and Cadbury Beverages Delaware, Inc. the Company's business of developing, manufacturing, marketing, distributing and selling shelf-stable juice sold under the ReaLemon and ReaLime brand names and related assets including inventory and the manufacturing facility in Waterloo, New York (the "ReaLemon Sale") for $128,425,000 (subject to adjustment as provided in the Asset Purchase Agreement for such sale). The Company recognized a gain of $18,722,000 on the ReaLemon Sale, net of reorganization and transition charges, and the purchase price was paid in cash. In connection with the ReaLemon Sale, the Company committed to a plan ("Plan") to reorganize the management and operations of the Company. The Plan included the reduction of approximately 60 employees, including executives and administrative staff at the offices in Tarrytown, New York; Columbus, Ohio; and Gahanna, Ohio, and the closure of the corporate and research and development offices. The Company expects to complete the Plan by September 30, 2002. Costs expensed during the period ended September 29, 2001 related to the Plan and classified as "Gain on sale of product lines, net of reorganization charges" on the Consolidated Statement of Operations and Comprehensive Income (Loss) included $3,942,000 for severance and related termination costs and $827,000 for contractual lease liabilities and related office closure costs. The remaining cash requirements of the Plan as of September 29, 2001 are expected to total approximately $4,040,000. The selected consolidated results of operations excluding the results of operations for the ReaLemon and ReaLime product lines on a pro forma basis for the thirteen week periods ended September 29, 2001 and September 30, 2000 were (in thousands): Thirteen Week Period Ended September 29, September 30, 2001 2000 ------------- ------------- Net sales....................... $ 34,650 $ 34,828 Gross margin.................... $ 16,044 $ 17,233 Operating Income................ $ 1,574 $ 918 12 EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements (Unaudited) 4. Inventories: Inventories are stated at the lower of cost or market at September 29, 2001 and June 30, 2001 and consisted of the following (in thousands): September 29, June 30, 2001 2001 ------------- ------------- Finished goods....................... $ 32,121 $ 34,033 Raw materials........................ 2,516 2,896 ------------- ------------- Total inventories.................. $ 34,637 $ 36,929 ============= ============= 5. Property and Equipment: Property and equipment is recorded at cost at September 29, 2001 and June 30, 2001 and consisted of the following (in thousands): September 29, June 30, 2001 2001 ------------- ------------- Land................................. $ 390 $ 470 Buildings and improvements........... 6,950 9,174 Machinery and equipment.............. 21,696 27,663 Computer equipment and software...... 11,682 11,862 Construction in progress............. 132 351 ------------- ------------- Total property and equipment....... 40,850 49,520 Accumulated depreciation............. (16,600) (18,506) ------------- ------------- Property and equipment, net........ $ 24,250 $ 31,014 ============= ============= 6. Intangible Assets: Intangible assets are amortized on a straight-line basis over their estimated useful lives and consisted of the following (in thousands): September 29, June 30, Estimated 2001 2001 Useful Lives ------------- ----------- ------------ Tradenames.................... $ 91,000 $ 141,000 40 years Goodwill...................... 90,116 136,664 40 years Covenant not to compete....... 13,847 21,000 5 years ------------- ----------- Total intangible assets..... 194,963 298,664 Accumulated amortization...... (26,605) (38,067) ------------- ----------- Intangible assets, net...... $ 168,358 $ 260,597 ============= =========== 13 EAGLE FAMILY FOODS, INC. EAGLE FAMILY FOODS HOLDINGS, INC. Notes to the Financial Statements (Unaudited) 7. Debt: Debt consisted of the following (in thousands):

The Company is the borrower under a credit agreement, dated as of January 23, 1998 and as amended (the "Credit Agreement"), which consists of (i) a $60.0 million seven-year revolving credit facility, including a $10.0 million swingline loan (the "Revolving Credit Facility") and (ii) a $175 million eight- year term loan (the "Term Loan Facility). The interest rate on the Term Loan Facility is LIBOR plus 4.00%. The Company used $118.0 million of the proceeds of the Realemon Sale to repay indebtedness under the Term Loan Facility. The interest rate on the Revolving Credit Facility is LIBOR plus 4.00% with the swingline loan portion bearing interest at the Prime rate plus 3.00%. The fair market value of the Term Loan Facility and the Revolving Credit Facility at September 29, 2001 was approximately the carrying value. The Company amended its Credit Agreement pursuant to an amendment dated August 10, 2001 (the "Amendment"), which became effective as of the completion of the ReaLemon Sale. Pursuant to the Amendment, the Company received consent from the lenders for the proposed ReaLemon Sale, and the lenders waived compliance with leverage ratio and consolidated cash interest expense coverage ratio financial covenants for periods commencing on and including September 29, 2001 and ending on and including December 28, 2002. The Amendment includes restrictions on the carrying balance of the Revolving Credit Facility for a period of thirty consecutive days commencing on a date not earlier than December 1 of any year and ending not later than March 31 of the following year. The Amendment also sets forth minimum requirements for consolidated earnings before interest, income tax, depreciation and amortization. The Company's $115.0 million of senior subordinated notes (the "Notes") are due January 15, 2008 and bear interest at 8.75% per annum, payable on January 15 and July 15, commencing July 15, 1998. The fair market value of the Notes was approximately $69.0 million at September 29, 2001. 8. Redeemable Preferred Stock: Upon the separations of certain executives during the period ended September 29, 2001 and pursuant to each employment agreement, the Company purchased into treasury 7,524 shares of Series A Non-Voting Preferred Stock for a value of $966,000, representing the executives' initial investment and accumulated dividends. One executive, pursuant to a separation agreement, transferred 2,475 shares of Series A Non-Voting Preferred Stock (included in the 7,524 treasury shares referenced above), to the Company in full satisfaction of the $250,000 principal amount and accrued interest on the executive's secured recourse promissory note to the Company. 14 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Set forth below is a discussion of the financial condition and results of operations for the thirteen week periods ended September 29, 2001 and September 30, 2000. The following discussion should be read in conjunction with the financial statements of the Company and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following table sets forth the results of operations as a percentage of net sales for the thirteen week periods ended September 29, 2001 and September 30, 2000.

Results of Operations Thirteen Week Periods ended September 29, 2001 ("first quarter 2002") and September 30, 2000 ("first quarter 2001") (Unaudited) Net Sales. The Company's net sales for first quarter 2002 were $48.2 million as compared to $51.2 million for first quarter 2001, a decrease of $3.0 million, or 5.9%. The table below sets forth the Company's net sales data for each of the Company's product lines for first quarter 2002 and first quarter 2001 (dollars in millions):

The decrease in net sales of $3.0 million from first quarter 2002 as compared to first quarter 2001 was primarily due to $2.8 million of lower net sales of the lemon and lime juice product line. On September 19, 2001, the Company consummated the ReaLemon Sale. Thus, ReaLemon and ReaLime brand sales occurring on and after September 19, 2001 were excluded from the Company's results. 15 Cost of Goods Sold. Cost of goods sold was $23.8 million for first quarter 2002 as compared to $23.9 million for first quarter 2001, a decrease of $0.1 million, or 0.4%. Expressed as a percentage of net sales, cost of goods sold for first quarter 2002 increased to 49.4% from 46.7% for first quarter 2001. The increase in the percentage is primarily the result of higher raw material costs, principally milk used in the production of sweetened condensed milk. Distribution Expense. Distribution expense was $3.4 million for first quarter 2002 and for first quarter 2001. Expressed as a percentage of net sales, distribution expense for first quarter 2002 increased to 7.1% from 6.6% for first quarter 2001. The increase in the percentage is due to higher transportation costs, primarily due to an increase in fuel costs. Marketing Expense. Marketing expense was $10.1 million for first quarter 2002 as compared to $12.1 million for first quarter 2001, a decrease of $2.0 million, or 16.5%. The decrease was due to $1.2 million of lower advertising, promotional expenses and brokerage expenses, primarily for the Eagle Brand sweetened condensed milk, Cremora non-dairy creamer and ReaLemon lemon juice product lines, and due to $0.8 million of reduced marketing administrative costs. General and Administrative ("G&A") Expense. G&A expense was $2.7 million for first quarter 2002 as compared to $3.5 million for first quarter 2001, a decrease of $0.8 million, or 22.9%. Expressed as a percentage of net sales, G&A expense for first quarter 2002 decreased to 4.1% from 6.8% for first quarter 2002. In connection with the ReaLemon Sale, the Company reorganized and reduced the number of corporate and administrative employees pursuant to the Plan. The decrease in G&A was primarily due to the implementation of the Plan. Amortization of Intangibles. Amortization of intangibles was $2.5 million for first quarter 2002 as compared to $2.8 million for first quarter 2001. The decrease is due to lower amortization expenses as certain trademarks and other intangible assets were sold with the ReaLemon Sale. Gain on Sale of Product Lines. The Company recognized an $18.7 million gain on the ReaLemon Sale, net of reorganization charges of $4.8 million. Operating Income. Operating income was $23.8 million for first quarter 2002 as compared to operating income of $5.5 million for first quarter 2001, an increase of $18.3 million. Excluding the $17.1 million gain on the ReaLemon Sale, operating income was $6.7 million for first quarter 2002 as compared to operating income of $5.5 million for first quarter 2001, an increase of $1.2 million. The increase was primarily due to lower administrative costs attributed to the Company's Plan. Interest Expense. Net interest expense was $7.4 million for first quarter 2002 as compared to net interest expense of $8.7 million for first quarter 2001, a decrease of $1.3 million. The decrease was primarily due to lower average interest rates for first quarter 2002 as compared to first quarter 2001. Income Taxes. The Company recorded an income tax expense of $6.1 million for first quarter 2001 as compared to a $1.1 million income tax benefit for first quarter 2001 due to the income earned on the ReaLemon Sale. Liquidity and Capital Resources Borrowings under the Term Loan Facility were $53.5 million and $171.5 million at September 29, 2001 and June 30 2001, respectively. The Term Loan Facility matures $0.9 million, $8.6 million, $25.1 million and $18.8 million in the fiscal years 2003 through 2006, respectively. In addition, the $60.0 million Revolving Credit Facility that includes a $10.0 million swingline loan matures in fiscal year 2005. Borrowings under the Revolving Credit Facility were $48.0 million and $46.0 million at September 29, 2001 and June 30, 2001, respectively. On September 19, 2001, the Company consummated the ReaLemon Sale. The Company used $118.0 million of the proceeds to repay indebtedness under the Term Loan Facility. Interest payments on the Notes and interest and principal payments under the Term Loan Facility and the Revolving Credit Facility represent significant cash requirements for the Company. Borrowings under the Term Loan Facility and the Revolving Credit Facility bear interest at floating rates and require interest payments on varying dates. The Company's remaining liquidity needs are for capital expenditures and increases in working capital. The Company 16 spent $0.1 million on capital projects in first quarter 2002 to fund expenditures at existing facilities. The Company expects to spend a total of approximately $1.8 million on capital projects in fiscal year 2002 to fund expenditures at existing facilities. The Company's primary sources of liquidity are cash flows from operations and available borrowings under the Revolving Credit Facility. Net cash used in operating activities for first quarter 2002 and first quarter 2001 was $8.4 million and $11.5 million, respectively, a decrease of $3.1 million. The decrease was primarily due to lower operating activities from the lemon and lime juice product line after the ReaLemon Sale. Cash used in financing activities in first quarter 2002 was $118.5 and cash from financing activities in first quarter 2001 was $11.3 million. A portion of the proceeds from the ReaLemon Sale was used to pay down the Term Loan Facility in first quarter 2002. Management believes that cash generated from operations and borrowings under the Senior Credit Facilities will be sufficient to satisfy working capital requirements and required capital expenditures. Further expansion of the business through acquisitions may require the Company to incur additional indebtedness or to issue additional equity securities. The Company was advised by GE Investment Private Placement Partners II, a Limited Partnership and Warburg, Pincus Ventures L.P., Holdings' principal stockholders that, as of November 9, 2001, each owned $14.0 million in aggregate principal amount of Notes. Seasonality The Company's net sales, net income and cash flows are affected by a seasonal bias toward the fourth quarter of the calendar year due to increased sales during the holiday season. Three of the Company's five major product lines (Eagle Brand and the Company's other sweetened condensed milk products, Borden eggnog and None Such mincemeat pie filling) are consumed primarily during the November and December holiday season. In recent years, approximately 43% of the Company's net sales have occurred in the last quarter of the calendar year. As a result of this seasonality, the Company's working capital needs have historically increased throughout the year, normally peaking in the September/October period, requiring the Company to draw additional amounts on its Revolving Credit Facility during this period. Recently Issued Accounting Statements On October 4, 2001, the FASB issued SFAS No. 144. SFAS No. 144 supercedes SFAS 121 and applies to all long-lived assets (including discontinued operations) and consequently amends APB 30. SFAS 144 develops one accounting model (based on the model in SFAS 121) for long-lived assets that are to be disposed of by sale. This model requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS 144 is effective for the Company's first quarter in fiscal 2003. The Company is currently evaluating the impact of adopting SFAS 144. In June 2001, the FASB issued SFAS 141. SFAS 141 addresses financial accounting and reporting for business combinations. The statement requires all business combinations to be accounted for under the purchase method and establishes criteria for the separate recognition of intangible assets acquired in a business combination. The provisions of this pronouncement apply to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The Company is evaluating this pronouncement and has not yet determined its impact on future financial statements. In June 2001, the FASB issued SFAS 142. SFAS 142 addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets at acquisition and for periods subsequent to acquisition. The Company is evaluating this pronouncement and has not yet determined its impact on future financial statements. The pronouncement will be adopted during the first quarter of the fiscal year ending June 28, 2003. In June 2001, the FASB issued SFAS No. 143. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is 17 evaluating the pronouncement and has not yet determined its impact on future financial statements. This pronouncement will be adopted during the fourth quarter of the fiscal year ending June 29, 2002. In May 2000, the EITF released Issue No. 00-14. Issue 00-14 addresses the recognition, measurement, and income statement classification for sales incentives including point of sale coupons, rebates and free merchandise in connection with a single exchange transaction. Upon the adoption of Issue 00-14, the Company will reclassify coupon redemption costs from marketing expense to net sales, resulting in no impact on net income. The coupon redemption costs for the thirteen week periods ended September 29, 2001 and September 30, 2000 were $0.5 million and $0.2 million, respectively. The EITF deferred the effective date of Issue 00-14 to the quarter beginning after December 15, 2001. The Company will adopt the pronouncement during the third quarter of the fiscal year ending June 29, 2002. In September 2000, the EITF released EITF Issue No. 00-25. Issue 00-25 addresses the income statement classification of certain considerations from a vendor to a retailer in connection with the retailer's purchase of the vendor's product. Such consideration includes, but is not limited to, slotting fees, cooperative advertising programs, and buy down programs. Upon the adoption of Issue 00-25, the Company will reclassify these expenses from marketing expense to net sales, resulting in no impact on net income. Issue 00-25 is effective for the quarter beginning after December 15, 2001. The Company will adopt the pronouncement during the third quarter of the fiscal year ending June 29, 2002. Cautionary Statement Regarding Forward-Looking Statements Certain statements within this section may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which involve known and unknown risks and uncertainties. The Company's actual results, performance or achievements in the future could differ significantly from the results, performance or achievements discussed or implied in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the effect on financial performance of increased competition in the dry-grocery food industry, potential future competition, competitive pricing for products, general economic and business conditions, industry trends, raw material costs, dependence on the Company's labor force, the success of new product innovations, and changes in, or the failure or inability to comply with, government rules and regulations, including, without limitation, Food and Drug Administration and environmental rules and regulations. Statements concerning interest rate swap and other financial instrument fair values and their estimated contribution to the Company's future results of operations are based upon market information as of a specific date. This market information is often a function of significant judgment and estimation. Further, market interest rates and commodity prices are subject to significant volatility. 18 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Interest Rates The following table presents descriptions of the financial instruments and derivative instruments that were held by the Company at September 29, 2001 and which are sensitive to changes in interest rates, including interest rate swaps and debt obligations. In the ordinary course of business, the Company uses derivative financial instruments in order to manage or reduce market risk. It does not enter into derivative financial instruments for speculative purposes. For the liabilities, the table represents principal fiscal year cash flows that exist by maturity date and the related average interest rate. The variable rates are estimated based upon the six month forward LIBOR rate. All amounts, except percentage rates, are reflected in U.S. dollars (in thousands).

Milk Hedging The Company uses milk as a major ingredient in its sweetened condensed milk product line and is subject to the risk of rising milk prices that increase manufacturing costs and erode profit margins. By purchasing futures contracts, however, the Company establishes a known price for future milk purchases in order to protect against fluctuating milk prices. As of September 29, 2001, the Company had purchased 330 milk futures contracts, which settle during various months through June 2002, and have an aggregate market value of $0.2 million. Cautionary Statement Regarding Forward-Looking Statements Certain statements within this section may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which involve known and unknown risks and uncertainties. The Company's actual results, performance or achievements in the future could differ significantly from the results, performance or achievements discussed or implied in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the effect on financial performance of increased competition in the dry-grocery food industry, potential future competition, competitive pricing for products, general economic and business conditions, industry trends, raw material costs, dependence on the Company's labor force, the success of new product innovations, and changes in, or the failure or inability to comply with, government rules and regulations, including, without limitation, Food and Drug Administration and environmental rules and regulations. Statements concerning interest rate swap and other financial instrument fair values and their estimated contribution to the Company's future results of operations are based upon market information as of a specific date. This market information is often a function of significant judgment and estimation. Further, market interest rates and commodity prices are subject to significant volatility. 19 PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Reports on Form 8-K A report on Form 8-K, dated October 3, 2001, was filed by the registrants disclosing (i) the consummation of the sale of the ReaLemon and ReaLime brands and related assets to Mott's Inc. and Cadbury Beverages Delaware, Inc. for $128,425,000 and (ii) the use of $118,000,000 of the proceeds from such asset sale to repay outstanding senior term loan indebtedness. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. EAGLE FAMILY FOODS HOLDINGS, INC. EAGLE FAMILY FOODS, INC. By: /s/ Craig A. Steinke --------------------------------------- Craig A. Steinke President, Chief Executive Officer and Chief Financial Officer Date: November 13, 2001 21

EAGLE FAMILY FOODS INC 10-Q