10-Q 1 a39193.txt BIRDS EYE FOODS, INC. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ================ Form 10-Q Equivalent ================ (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 25, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ BIRDS EYE FOODS, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 16-0845824 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 90 Linden Oaks, PO Box 20670, Rochester, NY 14602-6070 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (585) 383-1850 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES NO --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES NO X --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. As of February 4, 2005. Common Stock: 11,000 o This Form 10-Q Equivalent is only being filed pursuant to a requirement contained in the indenture governing Birds Eye Foods, Inc.'s 11 7/8 Percent Senior Subordinated Notes Due 2008. ================================================================================ Page 1 of 29 Pages PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Birds Eye Foods, Inc. Consolidated Statements of Operations, Accumulated Earnings, and Comprehensive Income/(Loss) (Dollars in Thousands) (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements. 2 Birds Eye Foods, Inc. Consolidated Balance Sheets (Dollars in Thousands) (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements. 3 Birds Eye Foods, Inc. Consolidated Statements of Cash Flows (Dollars in Thousands) (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements. 4 BIRDS EYE FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES (UNAUDITED) The Company: Birds Eye Foods, Inc. (the "Company" or "Birds Eye Foods"), incorporated in 1961, is a producer and marketer of processed food products. The Company has three primary segments in which it markets its products, they include: branded frozen, branded dry, and non-branded products. The majority of each of the segments' net sales are within the United States. In addition, all of the Company's operating facilities, excluding one in Mexico, are within the United States. The Change in Control (the "Transaction"): On August 19, 2002 (the "Closing Date"), pursuant to the terms of the Unit Purchase Agreement dated as of June 20, 2002 (the "Unit Purchase Agreement"), by and among Pro-Fac Cooperative, Inc., a New York agricultural cooperative ("Pro-Fac"), Birds Eye Foods, at the time a New York corporation and a wholly-owned subsidiary of Pro-Fac, and Vestar/Agrilink Holdings LLC, a Delaware limited liability company ("Vestar/Agrilink Holdings"), Vestar/Agrilink Holdings and its affiliates indirectly acquired control of the Company. Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information required by GAAP for complete financial statement presentation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations, and cash flows have been included. Operating results for the three and six months ended December 25, 2004 are not necessarily the results to be expected for future interim periods or the full year. These financial statements should be read in conjunction with the audited financial statements and accompanying notes contained in the Company's Form 10-K Equivalent for the fiscal year ended June 26, 2004. Consolidation: The unaudited consolidated financial statements include the Company and its wholly-owned subsidiaries after elimination of intercompany transactions and balances. Reclassification: Certain items for fiscal 2004 have been reclassified to conform to the current period presentation. New Accounting Pronouncements: In May 2004, the Financial Accounting Standards Board ("FASB") issued Staff Position ("FSP") No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003", which superseded FASB Staff Position No. 106-1. FSP 106-2 requires that until an employer is able to determine whether benefits provided by its plan are "actuarially equivalent" to Medicare Part D under the Act, it must disclose the existence of the Act and the fact that the amounts included in the financial statements related to the employer's postretirement benefit plans do not reflect the effects of the Act. The guidance in FSP 106-2 is effective for interim or annual financial statements for periods beginning after June 15, 2004. Detailed regulations necessary to implement the Act and determine "actuarial equivalency" have, however, not yet been issued. See further disclosure at NOTE 8 to the "Notes to Consolidated Financial Statements". In November 2004, the FASB Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue No. 03-13, "Applying the Conditions in Paragraph 42 of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report Discontinued Operations". This EITF Issue provides guidance regarding the evaluation of whether the operations and cash flows of a component have been or will be eliminated from ongoing operations, and what types of involvement constitute significant continuing involvement in the operations of the disposed component. The guidance contained in EITF 03-13 is effective for components of an enterprise that are either disposed of or classified as held for sale in fiscal periods beginning after December 15, 2004. The guidance contained in EITF 03-13 is not expected to have a material effect on the Company's consolidated financial statements. In November 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4". SFAS No. 151 amends previous accounting guidance regarding allocation of fixed production costs to inventory and the recognition of overheads and other expenses. This new statement is effective for fiscal years beginning after June 15, 2005. The Company does not expect SFAS No. 151 to have a material effect on its consolidated financial statements. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29". SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets, and replaces it with an exception for exchanges that do not have commercial substance. This new Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect SFAS No. 153 to have a material effect on its consolidated financial statements. 5 In December 2004, the FASB issued Staff Position No. 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004". FSP 109-1 clarifies that the manufacturer's deduction provided for under the American Jobs Creation Act of 2004 should be accounted for as a special deduction in accordance with SFAS No. 109 and not as a tax rate reduction. The adoption of FSP No. 109-1 will have no impact on the Company's results of operations or financial position for fiscal year 2005 because the manufacturer's deduction is not available to the Company until fiscal year 2006. The Company is currently evaluating the effect that the manufacturer's deduction will have in subsequent years. Trade Accounts Receivable: The Company accounts for trade receivables at outstanding billed amounts, net of allowances for doubtful accounts. The Company estimates its allowance for doubtful accounts as a percentage of receivables overdue. Also included in the allowance, in their entirety, are those accounts that have filed for bankruptcy or been sent to collections, and any other accounts management believes are not collectible based on historical losses. The Company periodically reviews the accounts included in the allowance to determine those to be written off. Generally, after a period of one year, or through legal counsel's advice, accounts are written off. It is not Company policy to accrue interest on past due accounts. The Company's allowance for doubtful accounts was approximately $1.4 million at December 25, 2004, and $1.0 million at June 26, 2004. Earnings Per Share Data Omitted: The guidance of SFAS No. 128, "Earnings per Share", requires presentation of earnings per share by all entities that have issued common stock or potential common stock if those securities trade in a public market either on a stock exchange (domestic or foreign) or in the over-the-counter market. Birds Eye Foods common stock is not publicly traded and, therefore, earnings per share amounts are not presented. NOTE 2. ACQUISITION OF CALIFORNIA & WASHINGTON COMPANY On September 23, 2004, Birds Eye Foods acquired the California & Washington Company ("C&W"), a San Francisco-based marketer of frozen vegetables and fruits, by acquiring all of the outstanding common stock of C&W (the "Acquisition") for an aggregate purchase price of approximately $73.5 million (excluding fees). The purchase price is subject to the working capital adjustment described below. C&W is the premier marketer of branded frozen vegetables and fruits in the Western United States, with number one branded market share positions in California, the Pacific Northwest, and Arizona. The Company believes the Acquisition strengthens its competitive position by expanding its presence in the Western United States. Annual net sales of C&W are approximately $40.0 million. In accordance with the C&W stock purchase agreement, the Acquisition was closed utilizing an estimate of net working capital, with a final agreed-upon net working capital amount to be determined subsequent to closing. Birds Eye Foods has an outstanding receivable from the former shareholders of C&W related to the adjustment of net working capital in an aggregate amount currently estimated to be approximately $1.0 million. This receivable is included in accounts receivable, other in the Company's Consolidated Balance sheet as of December 25, 2004. The Acquisition was accounted for under the purchase method of accounting in accordance with SFAS No. 141, "Business Combinations". Under purchase accounting, the Company will allocate the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition. The valuations and other studies which will provide the basis for such an allocation have not progressed to a stage where there is sufficient information to make a final allocation in the accompanying consolidated financial statements. Accordingly, the purchase accounting adjustments made in the accompanying consolidated financial statements are preliminary. The preliminary allocation of the purchase price is presented in the Consolidated Statement of Cash Flows as a supplemental disclosure. Once an allocation is determined, in accordance with GAAP, any remaining excess of purchase price over net assets acquired will be adjusted through goodwill. The results of operations of C&W subsequent to the Acquisition are included in the Company's Consolidated Statements of Operations for the three and six months ended December 25, 2004. The following unaudited pro forma financial information presents a summary of consolidated results of operations of the Company as if the Acquisition had occurred at the beginning of the periods presented: (Dollars in Thousands)

6 These unaudited pro forma results have been prepared for comparative purposes only and primarily include adjustments for interest expense, taxes and amortization. These results do not purport to be indicative of the results of operations which actually would have resulted had the Acquisition occurred at the beginning of the 2004 fiscal year, or of the future operations of the Company. NOTE 3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE Discontinued Operations: On May 1, 2004, the Company sold its Freshlike canned vegetable business to the Allen Canning Company. This sale did not impact frozen products carrying the Freshlike brand name. The Company recognized a gain of approximately $3.8 million (after-tax) within discontinued operations in the fourth quarter of fiscal 2004 from this transaction. The implementation of SFAS No. 144 resulted in the classification and separate financial presentation of the Freshlike canned vegetable business as a discontinued operation and its operations are, therefore, excluded from continuing operations. All prior period Statements of Operations have been reclassified to reflect the discontinuance of the Freshlike canned vegetable business. The operating results of all businesses classified as discontinued operations in the Statement of Operations are summarized as follows: (Dollars in Thousands) Three Months Ended Six Months Ended ------------------ ---------------- December 27, December 27, 2003 2003 ----------- ----------- Net sales $ 5,320 $ 8,205 ================ ================ Pretax income $ 769 $ 887 Tax provision (299) (345) ---------------- ---------------- Discontinued operations, net of tax $ 470 $ 542 ================ ================ Assets Held for Sale: Having met the criteria outlined in SFAS No. 144, closed manufacturing sites in Barker, New York; Enumclaw, Washington; and Cincinnati, Ohio are classified as assets held for sale on the Company's Consolidated Balance Sheet as of December 25, 2004. The Company is actively marketing these properties for sale. The major classes of assets included in the Consolidated Balance Sheet as assets held for sale at the lower of carrying value or estimated fair value less costs to sell are as follows: (Dollars in Thousands) December 25, June 26, 2004 2004 ------------------ ------------------ Property, plant and equipment, net $ 1,631 $ 6,848 ================== ================== In accordance with SFAS No. 144, and during the quarter ended September 25, 2004, the Company reclassified the Green Bay, Wisconsin manufacturing facility to assets held and used, as disposition of the location within one year is no longer likely. During the quarter ended December 25, 2004, the Company reclassified the Red Creek, New York and Sodus, Michigan facilities to assets held and used, as disposition of these locations within one year is no longer likely under SFAS No. 144. NOTE 4. AGREEMENTS WITH PRO-FAC In connection with the Transaction, Birds Eye Foods and Pro-Fac entered into several agreements effective as of the Closing Date, including the following: (i) Termination Agreement. Pro-Fac and Birds Eye Foods entered into a letter agreement dated as of the Closing Date (the "Termination Agreement"), pursuant to which, among other things, the marketing and facilitation agreement between Pro-Fac and Birds Eye Foods (the "Old Marketing and Facilitation Agreement") which, until the Closing Date, governed the crop supply and purchase relationship between Birds Eye Foods and Pro-Fac, was terminated. In consideration of such termination, Birds Eye Foods agreed to pay Pro-Fac a termination fee of $10.0 million per year for five years, provided that certain ongoing conditions are met, including maintaining grower membership levels sufficient to generate certain minimum crop supply. The $10.0 million payment is payable in quarterly installments as follows: $4.0 million on each July 1, and $2.0 million each on October 1, January 1, and April 1. The liability for the Termination Agreement has been reflected at fair value utilizing a discount rate of 11 1/2 percent. The amount of the obligation under the Termination Agreement was $21.2 million as of December 25, 2004 and $26.0 million as of June 26, 2004. 7 (ii) Amended and Restated Marketing and Facilitation Agreement. Pro-Fac and Birds Eye Foods entered into an amended and restated marketing and facilitation agreement dated as of the Closing Date (the "Amended and Restated Marketing and Facilitation Agreement"). The Amended and Restated Marketing and Facilitation Agreement replaces the Old Marketing and Facilitation Agreement and provides that, among other things, Pro-Fac will be Birds Eye Foods' preferred supplier of crops. Birds Eye Foods will continue to pay the commercial market value ("CMV") of crops supplied by Pro-Fac, in installments corresponding to the dates of payment by Pro-Fac to its members for crops delivered. CMV is defined as the weighted average price paid by other commercial processors for similar crops sold under preseason contracts and in the open market in the same or competing market areas. The processes for determining CMV under the Amended and Restated Marketing and Facilitation Agreement are substantially the same as the processes used under the Old Marketing and Facilitation Agreement. Birds Eye Foods makes payments to Pro-Fac of an estimated CMV for a particular crop year, subject to adjustments to reflect the actual CMV following the end of such year. Commodity committees of Pro-Fac meet with Birds Eye Foods management to establish CMV guidelines, review calculations, and report to a joint CMV committee of Pro-Fac and Birds Eye Foods. Amounts paid by Birds Eye Foods to Pro-Fac for the CMV of crops supplied for the six months ended December 25, 2004 and December 27, 2003 were $45.0 million and $47.1 million, respectively. The Amended and Restated Marketing and Facilitation Agreement also provides that Birds Eye Foods will continue to provide to Pro-Fac services relating to planning, consulting, sourcing and harvesting crops from Pro-Fac members in a manner consistent with past practices. In addition, until August 19, 2007, Birds Eye Foods may provide Pro-Fac with services related to the expansion of the market for the agricultural products of Pro-Fac members (at no cost to Pro-Fac other than reimbursement of Birds Eye Foods' incremental and out-of-pocket expenses related to providing such services as agreed to by Pro-Fac and Birds Eye Foods). Under the Amended and Restated Marketing and Facilitation Agreement, Birds Eye Foods determines the amount of crops which Birds Eye Foods will acquire from Pro-Fac for each crop year. If the amount to be purchased by Birds Eye Foods during a particular crop year does not meet (i) a defined crop amount or (ii) a defined target percentage of Birds Eye Foods' needs for each particular crop, then certain shortfall payments will be made by Birds Eye Foods to Pro-Fac. The defined crop amounts and targeted percentages were set based upon the needs of Birds Eye Foods in the 2002 crop year (fiscal 2003). The shortfall payment provisions of the agreement include a maximum shortfall payment, determined for each crop, that can be paid over the term of the Amended and Restated Marketing and Facilitation Agreement. The aggregate shortfall payment amounts for all crops covered under the agreement cannot exceed $20.0 million over the term of the agreement. Unless terminated earlier, the Amended and Restated Marketing and Facilitation Agreement will continue in effect until August 19, 2012. Birds Eye Foods may terminate the Amended and Restated Marketing and Facilitation Agreement prior to August 19, 2012 upon the occurrence of certain events, including in connection with a change in control transaction affecting Birds Eye Foods or Birds Eye Holdings Inc., ("Holdings Inc."). However, in the event Birds Eye Foods terminates the Amended and Restated Marketing and Facilitation Agreement as a result of a change in control transaction prior to August 19, 2005, Birds Eye Foods must pay Pro-Fac a termination fee of $20.0 million (less the total amount of any shortfall payments previously paid to Pro-Fac under the Amended and Restated Marketing and Facilitation Agreement). Also, if, before August 19, 2005, Birds Eye Foods sells one or more portions of its business, and if the purchaser does not continue to purchase the crops previously purchased by Birds Eye Foods with respect to the transferred business, then such failure will be taken into consideration when determining if Birds Eye Foods is required to make any shortfall payments to Pro-Fac. After August 19, 2005, Birds Eye Foods may sell portions of its business and the volumes of crop purchases previously made by Birds Eye Foods with respect to such transferred business will be disregarded for purposes of determining shortfall payments. The Company does not expect to pay any such shortfall payments. (iii) Credit Agreement. Birds Eye Foods and Pro-Fac entered into a Credit Agreement, dated August 19, 2002 (the "Credit Agreement"), pursuant to which Birds Eye Foods agreed to make available to Pro-Fac loans in an aggregate principal amount of up to $5.0 million (the "Credit Facility"). Pro-Fac is permitted to draw up to $1.0 million per year under the Credit Facility, unless Birds Eye Foods is prohibited from making such advances under the terms of certain third party indebtedness of Birds Eye Foods. Pro-Fac borrows and repays periodically based on its cash flow requirements. The amount of the Credit Facility will be reduced, on a dollar-for-dollar basis, to the extent of certain distributions made by Birds Eye Holdings LLC ("Holdings LLC") to Pro-Fac in respect of its ownership in Holdings LLC. Pro-Fac has pledged all of its Class B Common Units in Holdings LLC as security for advances under the Credit Facility. The Credit Facility bears interest at the rate of 10 percent per annum. As of December 25, 2004, there were no amounts outstanding under this Credit Agreement. 8 NOTE 5. INVENTORIES The major classes of inventories, net of reserves of $5.3 million and $4.1 million, as of December 25, 2004 and June 26, 2004, respectively, are as follows: (Dollars in Thousands) December 25, June 26, 2004 2004 ------------ ---------- Finished goods $ 228,338 $ 158,090 Raw materials and supplies 21,265 22,993 ---------- ---------- Total inventories $ 249,603 $ 181,083 ========== ========== NOTE 6. ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS Goodwill: Birds Eye Foods follows SFAS No. 142, "Goodwill and Other Intangible Assets", which requires that goodwill not be amortized, but instead be tested at least annually for impairment and expensed against earnings when its implied fair value is less than its carrying amount. As of December 25, 2004, goodwill related to the branded frozen segment was increased by approximately $13.3 million as a result of the preliminary allocation of purchase price from the Acquisition of California & Washington Company. Intangible Assets: As outlined in SFAS No. 142, certain intangibles with a finite life are required to continue to be amortized. These intangibles are being amortized on a straight-line basis over approximately 1 to 36 years. SFAS No. 142 also requires that intangible assets with indefinite lives not be amortized. As of December 25, 2004, as a result of the Acquisition of California & Washington Company, intangible assets related to order backlogs, covenants not to compete, employment contracts, and customer relationships were recognized in the aggregate amount of approximately $26.3 million. These intangibles are being amortized over their estimated useful lives. In addition, trademarks, which are not amortized, were increased by approximately $31.0 million as of December 25, 2004 as a result of the Acquisition of California & Washington Company. These amounts assigned to the intangible assets of California & Washington Company are preliminary as the valuations and other studies that will provide the basis for the fair value of these intangible assets have not been completed. Upon completion of the valuations and final purchase price allocation, any remaining excess of purchase price over net assets acquired, including the final fair value assigned to intangible assets, will be adjusted through goodwill. See further discussion at NOTE 2 to the "Notes to Consolidated Financial Statements". The following sets forth the major classes of intangible assets held by the Company: (Dollars in Thousands)

9 The aggregate amortization expense associated with intangible assets for the six months ended December 25, 2004 and December 27, 2003 was $1.3 million and $0.9 million, respectively. Aggregate amortization expense for the second half of fiscal 2005 is estimated to be $1.7 million. The aggregate amortization expense for each of the five succeeding fiscal years is estimated as follows: (Dollars in Thousands) Aggregate Annual Fiscal Amortization Year Expense ---- ----------- 2006 $2,930 2007 2,677 2008 2,666 2009 2,666 2010 2,396 NOTE 7. DEBT Summary of Long-Term Debt (Dollars in Thousands)

Bank Debt: In connection with the Transaction, Birds Eye Foods and certain of its subsidiaries entered into a senior secured credit facility (the "Senior Credit Facility") in the amount of $470.0 million with a syndicate of banks and other lenders arranged and managed by JPMorgan Chase Bank ("JPMorgan Chase Bank"), as administrative and collateral agent. The Senior Credit Facility is comprised of (i) a $200.0 million senior secured revolving credit facility (the "Revolving Credit Facility") and (ii) a $270.0 million senior secured B term loan (the "Term Loan Facility"). The Revolving Credit Facility matures in August 2007 and allows up to $40.0 million to be available in the form of letters of credit. There were borrowings of $40.3 million on the Revolving Credit Facility as of December 25, 2004. The Term Loan Facility requires payments in quarterly installments in the amount of $675,000 until September 30, 2007. Beginning December 31, 2007, the quarterly payments are approximately $64.1 million. The Term Loan Facility matures in August 2008 upon which the balance will be due. The Term Loan Facility is also subject to mandatory prepayments under various scenarios as defined in the credit agreement governing the Senior Credit Facility (the "Senior Credit Agreement"). Provisions of the Senior Credit Agreement require that annual payments, within 105 days after the end of each fiscal year, in the amount of "excess cash flow" be utilized to prepay the Term Loan Facility at an applicable percentage that corresponds to the Company's Consolidated Leverage Ratio. There was no "excess cash flow" for the year ended June 26, 2004 required to be paid under the Term Loan Facility. The amount of "excess cash flow" for the year ended June 28, 2003 was $13.1 million and was paid on September 26, 2003. As of December 25, 2004, the interest rate under the Revolving Credit Facility was approximately 4.21 percent on LIBOR loans, and the interest rate under the Term Loan Facility was approximately 4.96 percent on LIBOR loans. The Senior Credit Facility contains customary covenants and restrictions on the Company's activities, including, but not limited to: (i) limitations on the incurrence of indebtedness; (ii) limitations on sale-leaseback transactions, liens, investments, loans, advances, guarantees, acquisitions, asset sales, and certain hedging agreements; and (iii) limitations on transactions with affiliates and other distributions. The Senior Credit Facility also contains financial covenants requiring the Company to maintain a maximum average debt to EBITDA ratio, a maximum average senior debt to EBITDA ratio, and a minimum EBITDA to interest expense ratio. The Company is in compliance with all covenants, restrictions, and requirements under the terms of the Senior Credit Facility. 10 The Company's obligations under the Senior Credit Facility are guaranteed by Holdings, Inc. and certain of the Company's subsidiaries. See NOTE 10 to the "Notes to Consolidated Financial Statements". Senior Subordinated Notes: As of December 25, 2004, Birds Eye Foods had outstanding $50.0 million of its $200.0 million 11 7/8 percent Senior Subordinated Notes (the "Notes"), due 2008. On November 24, 2003, the Company repaid $150.0 million of these Notes. In conjunction with this repayment, a pre-tax loss on early extinguishment of debt of $4.0 million was recorded. This amount reflects the payment of an $8.9 million call premium and other transaction expenses less the related unamortized premium of $4.9 million recorded in conjunction with the August 19, 2002 Transaction. The remaining premium of $1.3 million at December 25, 2004 is being amortized against interest expense over the remaining life of the outstanding Notes. The Notes contain customary covenants and restrictions on the Company's ability to engage in certain activities, including, but not limited to: (i) limitations on the incurrence of indebtedness and liens; (ii) limitations on consolidations, mergers, sales of assets, transactions with affiliates; and (iii) limitations on dividends and other distributions. The Company is in compliance with all covenants, restrictions, and requirements under the Notes. NOTE 8. INTERIM DISCLOSURES FOR PENSIONS AND OTHER POSTRETIREMENT BENEFITS Components of Net Periodic Benefit Cost (Dollars in Thousands)

The Company has been unable to conclude whether benefits provided by its postretirement benefit plans are considered "actuarially equivalent" to Medicare Part D under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act"), as detailed regulations necessary to implement the Act and determine "actuarial equivalency" have not yet been issued. As such, the amounts presented above and included in the consolidated financial statements related to the Company's postretirement benefit plans do not reflect the effects of the Act. NOTE 9. OPERATING SEGMENTS The Company is organized by product line for management reporting. The Company has three primary segments in which it operates: branded frozen, branded dry, and non-branded. The Company's branded frozen family of products includes traditional frozen vegetables as well as value added products marketed under recognizable brand names such as Birds Eye, Birds Eye Voila!, Birds Eye Simply Grillin', Freshlike, McKenzie's and C&W. The Company's branded dry family of products includes a wide variety of product offerings, including fruit fillings and toppings (Comstock and Wilderness), chili and chili ingredients (Nalley and Brooks), salad dressings (Bernstein's and Nalley), and snacks (Tim's, Snyder of Berlin, and Husman). Birds Eye Foods also produces many products for the non-branded markets which include store brand, food service and industrial markets. The Company's store brand products include frozen vegetables, chili products, fruit fillings and toppings, and other canned products. The Company's food service and industrial products include frozen vegetables, salad dressings, mayonnaise, fruit fillings and toppings, and chili products. 11 Reclassifications have been made to the prior year segment presentation below to reflect the reallocation of certain fixed costs which were not eliminated in conjunction with the sale of the Company's Freshlike canned vegetable business in fiscal 2004. The Freshlike canned vegetable business has been reclassified to discontinued operations in accordance with SFAS No. 144. See NOTE 3 to the "Notes to Consolidated Financial Statements". The following table illustrates the Company's operating segment information: (Dollars in Millions)

(1) Other income is excluded from continuing segment operating income as management believes this item is non-recurring. See NOTE 11 to the "Notes to Consolidated Financial Statements". NOTE 10. GUARANTEES AND INDEMNIFICATIONS In certain instances when Birds Eye Foods sells businesses or assets, the Company may retain certain liabilities for known exposures and provide indemnification to the buyer with respect to future claims for certain unknown liabilities existing, or arising from events occurring, prior to the sale date, including liabilities for taxes, legal matters, environmental exposures, labor contingencies, product liability, and other obligations. The terms of the indemnifications vary in duration, from one to three years for certain types of indemnities, to terms for tax indemnifications that are generally aligned to the applicable statute of limitations for the jurisdiction in which the tax is imposed, and to terms for certain liabilities (i.e., warranties of title and environmental liabilities) that typically do not expire. The maximum potential future payments that the Company could be required to make under these indemnifications are either contractually limited to a specified amount or unlimited. The maximum potential future payments that the Company could be required to make under these indemnifications are not determinable at this time, as any future payments would be dependent on the type and extent of the related claims, and all relevant defenses, which are not estimable. Historically, costs incurred to resolve claims related to these indemnifications have not been material to the Company's financial position, results of operations or cash flows. The Company enters into agreements with indemnification provisions in the ordinary course of business with its customers, suppliers, service providers and business partners. In such instances, the Company usually indemnifies, holds harmless and agrees to reimburse the indemnified party for claims, actions, liabilities, losses and expenses in connection with any Birds Eye Foods infringement of third party intellectual property or proprietary rights, or when applicable, in connection with any personal injuries or property damage resulting from any Birds Eye Foods' products sold or services provided. Additionally, the Company may from time to time agree to indemnify and hold harmless its providers of services from claims, actions, liabilities, losses and expenses relating to their services to Birds Eye Foods, except to the extent finally determined to have resulted from the fault of the provider of services relating to such services. The level of conduct constituting fault of the service provider will vary from agreement to agreement and may include conduct which is defined in terms of negligence, gross negligence, willful misconduct, omissions or other culpable behavior. The terms of these indemnification provisions are generally not limited. The maximum potential future payments that the Company could be required to make under these indemnification provisions are unlimited. The maximum potential future payments that the Company could be required to make under these indemnification provisions are not determinable at this time, as any future payments would be dependent on the type and extent of the related claims, and all relevant defenses to the claims, which are not estimable. Historically, costs incurred to resolve claims related to these indemnification provisions have not been material to the Company's financial position, results of operations or cash flows. 12 The Company has by-laws, policies, and agreements under which it indemnifies its directors and officers from liability for certain events or occurrences while the directors or officers are, or were, serving at Birds Eye Foods' request in such capacities. Furthermore, the Company is incorporated in the state of Delaware which requires corporations to indemnify their officers and directors under certain circumstances. The term of the indemnification period is for the director's or officer's lifetime. The maximum potential amount of future payments that the Company could be required to make under these indemnification provisions is unlimited, but would be affected by all relevant defenses to the claims. Subsidiary Guarantors: Kennedy Endeavors, Incorporated, Linden Oaks Corporation, GLK Holdings, Inc. (wholly-owned subsidiaries of the Company), and Pro-Fac (Pro-Fac files periodic reports under the Security Exchange Act of 1934, Commission File Number 0-20539) have jointly and severally, fully and unconditionally guaranteed, on a senior subordinated basis, the obligations of the Company with respect to the Company's 11 7/8 percent Senior Subordinated Notes due 2008 (the "Notes"). In addition, Kennedy Endeavors, Incorporated, GLK Holdings, Inc., BEMSA Holdings, Inc., Linden Oaks Corporation ("Subsidiary Guarantors") and Holdings Inc. have jointly and severally, fully and unconditionally guaranteed the obligations of the Company with respect to the Company's Senior Credit Facility. The covenants in the Notes and the Senior Credit Facility do not restrict the ability of the Subsidiary Guarantors to make cash distributions to the Company. Presented below is condensed consolidating financial information for (i) Birds Eye Foods, (ii) the Subsidiary Guarantors, and (iii) non-guarantor subsidiaries. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations, and cash flows of the Company and its Subsidiary Guarantors and non-guarantor subsidiaries in accordance with Securities and Exchange Commission Financial Reporting Release No. 55.

NOTE 11. OTHER MATTERS Legal Matters: Birds Eye Foods is a party to various legal proceedings from time to time in the normal course of its business. In the opinion of management, any liability that the Company might incur upon the resolution of these proceedings will not, in the aggregate, have a material adverse effect on the Company's business, financial condition, or results of operations. Further, no such proceedings are known to be contemplated by any governmental authorities. The Company maintains general liability insurance coverage in amounts deemed to be adequate by management. Other Income: During the second quarter of fiscal 2005, management renegotiated one of its third-party warehousing leases. This resulted in recognition of a $2.2 million pretax benefit due to the elimination of an unfavorable lease commitment. 18 CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS From time to time, Birds Eye Foods or persons acting on behalf of Birds Eye Foods may make oral and written statements that may constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the "PSLRA") or by the Securities and Exchange Commission ("SEC") in its rules, regulations, and releases. The Company desires to take advantage of the "safe harbor" provisions in the PSLRA for forward-looking statements made from time to time, including, but not limited to, the forward-looking information contained in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this Form 10-Q Equivalent and other statements made in this Form 10-Q Equivalent and in other filings with the SEC. The Company cautions readers that any such forward-looking statements made by or on behalf of the Company are based on management's 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. Among the factors that could impact the Company include: o the impact of strong competition in the food industry, including competitive pricing; o the impact of changes in consumer demand; o the effectiveness of marketing and shifts in market demand; o the impact of weather on the volume and quality of raw product; o the inherent risks in the marketplace associated with new product introductions, including uncertainties about trade and consumer acceptance; o the continuation of the Company's success in integrating operations (including the realization of anticipated synergies in operations and the timing of any such synergies), and the availability of acquisition and alliance opportunities; o the Company's ability to achieve gains in productivity and improvements in capacity utilization; o the Company's ability to service debt; and o interest rate fluctuations. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The purpose of this discussion is to outline the significant reasons for material changes in the Birds Eye Foods financial condition and results of operations in the second quarter and first six months of fiscal 2005 as compared to the second quarter and first six months of fiscal 2004. This section should be read in conjunction with Part I, Item 1 of this report. Birds Eye Foods has three primary segments including: branded frozen, branded dry, and non-branded. The majority of each of the segments' net sales are within the United States. In addition, all of the Company's operating facilities, excluding one in Mexico, are within the United States. The Company's branded frozen family of products includes traditional frozen vegetables as well as value added products marketed under recognizable brand names such as Birds Eye, Birds Eye Voila!, Birds Eye Simply Grillin', C&W, Freshlike and McKenzie's. The Company's branded dry family of products includes a wide variety of product offerings, including fruit fillings and toppings (Comstock and Wilderness), chili and chili ingredients (Nalley and Brooks), salad dressings (Bernstein's and Nalley), and snacks (Tim's, Snyder of Berlin and Husman). Birds Eye Foods also produces many products for the non-branded markets which include store brand, food service and industrial markets. The Company's store brand products include frozen vegetables, chili products, fruit fillings and toppings, and other canned products. The Company's food service and industrial products include frozen vegetables, salad dressings, mayonnaise, fruit fillings and toppings, and chili products. Reclassifications have been made to the prior year segment presentation below to reflect the reallocation of certain fixed costs which were not eliminated in conjunction with the sale of the Company's Freshlike canned vegetable business in fiscal 2004. The Freshlike canned vegetable business has been reclassified to discontinued operations in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144. See NOTE 3 to the "Notes to Consolidated Financial Statements". The following tables illustrate the results of operations by segment for the three and six months ended December 25, 2004 and December 27, 2003: Net Sales (Dollars in Millions)

Operating Income (Dollars in Millions)

(1) Other income is excluded from continuing segment operating income as management believes this item is non-recurring. See NOTE 11 to the "Notes to the Consolidated Financial Statements". 20 EBITDA(1) The following table sets forth continuing segment EBITDA (defined as income before discontinued operations plus interest, taxes, and depreciation and amortization) for the three and six months ended December 25, 2004 and December 27, 2003. EBITDA is an additional measure used by the Company to evaluate the operating performance of its segments. EBITDA is also a primary measure used externally by the Company's investor and lenders to ensure consistent comparability. However, EBITDA should be considered in addition to, and not as a substitute for or superior to, operating income, net income, cash flows, and other measures of financial performance prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). As EBITDA is not a measure of performance calculated in accordance with GAAP, this measure as reported by the Company may not be comparable to similarly titled measures employed by other companies. (Dollars in Millions)

(1) Earnings before interest, taxes, depreciation, and amortization ("EBITDA") is defined as income before discontinued operations plus interest, taxes, depreciation, and amortization. Continuing segment EBITDA excludes other income as management believes this item is non-recurring. See NOTE 11 to the "Notes to Consolidated Financial Statements." (2) The loss on early extinguishment of debt of $4.0 million was not allocated to segments. See NOTE 7 to the "Notes to Consolidated Financial Statements." CHANGES FROM SECOND QUARTER FISCAL 2004 TO SECOND QUARTER FISCAL 2005 Net Sales: Net sales for the second quarter of fiscal 2005 were $266.5 million, an increase of $18.0 million, or 7.2 percent, as compared to net sales of $248.5 million in the second quarter of fiscal 2004. This increase is primarily attributable to a $15.1 million increase within the branded frozen segment as a result of the Company's acquisition of California & Washington Company ("C&W") on September 23, 2004. See NOTE 2 to the "Notes to Consolidated Financial Statements". The "Segment Review" below outlines further details. Gross Profit: Gross profit in the fiscal 2005 period increased $2.9 million to $64.9 million as compared to $62.0 million for the fiscal 2004 period. While gross profit benefited from the acquisition of C&W, this improvement was somewhat mitigated by the continued impact of sharply higher raw product and other input costs. Management believes product cost increases will continue to impact operating results throughout fiscal 2005. Selling, Administrative and General Expenses: Selling, administrative and general expenses in the fiscal 2005 period increased $2.2 million to $32.0 million, as compared to $29.8 million in the fiscal 2004 period. Such increases are attributable to the Company's acquisition of C&W and increased marketing initiatives within the branded frozen segment. Other Income: During the second quarter of fiscal 2005, management renegotiated one of its third-party warehousing leases. This resulted in recognition of a $2.2 million pretax benefit due to the elimination of an unfavorable lease commitment. 21 Operating Income: Operating income for the fiscal 2005 period was $35.1 million, an increase of $3.0 million as compared to $32.1 million in the fiscal 2004 period. This increase is attributable to those factors discussed above. Operating income for the branded dry segment increased $2.1 million, partially offset by declines in operating results for the branded frozen and non-branded segments of $1.2 million and $0.1 million, respectively. The significant reasons for changes in the Company's operating income are highlighted below in the "Segment Review". Interest Expense: Interest expense for the fiscal 2005 period was $7.3 million compared to $8.5 million in the fiscal 2004 period. This decline is primarily the result of the Company's repayment of $150.0 million of its 11 7/8 percent Senior Subordinated Notes in the fiscal 2004 period, partially offset by increased interest expense incurred in the fiscal 2005 period due to increased borrowings on the Company's Revolving Credit Facility to finance the acquisition of C&W. Loss on Early Extinguishment of Debt: On November 24, 2003, the Company repaid $150.0 million of its 11 7/8 percent Senior Subordinated Notes. In conjunction with this repayment, a pre-tax loss on early extinguishment of debt of $4.0 million was recorded in the second quarter of fiscal 2004. This amount reflects the payment of the $8.9 million call premium and other transaction expenses less the related unamortized premium of $4.9 million recorded in conjunction with the August 19, 2002 Transaction. Tax Provision: The provision for income taxes in the second quarter of fiscal 2005 was $11.1 million compared to a provision for income taxes of $7.9 million in the fiscal 2004 period. The increase was a result of an increase in the Company's pretax earnings. The Company has not experienced any significant changes in its consolidated effective tax rate. Net Income: Net income for the fiscal 2005 period was $16.7 million compared to net income of $12.2 million in the fiscal 2004 period. The increase is the result of the factors outlined above. Segment Review A detailed accounting of the significant reasons for changes in net sales and operating income by segment is outlined below. Branded Frozen: Branded frozen net sales were $115.3 million in the fiscal 2005 period, an increase of $15.7 million or 15.8 percent as compared to net sales of $99.6 million for the fiscal 2004 period. This increase is primarily attributable to an increase of $15.1 million of net sales within the branded frozen segment as a result of the acquisition of C&W by Birds Eye Foods on September 23, 2004 and increased net sales for the Voila! product category as a result of continued product revitalization and increased marketing support. The Company tracks retail sales in many of the categories in which it competes using data from Information Resources, Inc. ("IRI"). IRI data is limited, however, as IRI does not capture sales at several of the Company's customers including Wal-Mart, Costco, and others. IRI also does not track non-branded or store brand retail sales by the manufacturer. According to IRI, the frozen vegetable category on a unit basis declined 0.9 percent for the 12-week period ending January 2, 2005. The Company's branded market share (including C&W for all periods) on a unit basis at January 2, 2005 was 20.9 percent compared to 21.9 percent at January 4, 2004. The bagged meal category for the 12-week period ending January 2, 2005 increased 3.8 percent on a unit basis. Market share on a unit basis for the Company's Birds Eye Voila! bagged meal product offering for the 12-week period ending January 2, 2005 was 23.9 percent compared to 20.1 percent for the 12-week period ending January 4, 2004. Branded frozen operating income was $20.0 million in the fiscal 2005 period, a decline of $1.2 million as compared to operating income of $21.2 million in the fiscal 2004 period. While the branded frozen segment was positively impacted by operating income related to the C&W acquisition, the Company has continued to experience production cost increases consistent with that felt throughout the industry. Increases in costs for benefits, raw materials and packaging have negatively impacted operating income and, although the Company has implemented price increases for many of its products, it has not been able to fully offset these costs and the cost of various promotional programs required to support holiday merchandising. Branded Dry: Branded dry net sales were $67.6 million for the fiscal 2005 period, an increase of $4.3 million or 6.8 percent as compared to net sales of $63.3 million for the fiscal 2004 period. The price increase executed in the first quarter of fiscal 2005 to mitigate cost increases in meat, edible oils, steel and various commodities used in the Company's branded dry business and the timing of various holiday and other programs within the fruit fillings and toppings and chili product lines positively impacted net sales in the second quarter of fiscal 2005 versus fiscal 2004. Operating income for the branded dry segment was $14.9 million for the fiscal 2005 period, an increase of $2.1 million or 16.4 percent as compared to $12.8 million for the fiscal 2004 period. Operating income was benefited by the improvement in net sales outlined above. 22 Non-branded: Non-branded net sales were $83.6 million for the fiscal 2005 period, a decline of $2.0 million or 2.3 percent as compared to $85.6 million in the fiscal 2004 period. This decline is primarily attributable to a reduction in food service and industrial sales. Reduced crop intake during the summer of 2004 has resulted in less inventory available for sale in the non-branded channel. In addition, continued rationalization of low margin items has impacted net sales. The non-branded operating loss for the second quarter of fiscal 2005 was consistent with that of the prior year. As highlighted above, IRI data does not track the Company's non-branded or store brand retail sales. Including management's estimate of the Company's share of the store brand market, the Company believes its overall market share on a unit basis in the frozen vegetable category (including C&W for all periods) for the 12-week period ending January 2, 2005 was 32.4 percent compared to 33.2 percent for the 12-week period ending January 4, 2004. CHANGES FROM FIRST SIX MONTHS FISCAL 2004 TO FIRST SIX MONTHS FISCAL 2005 Net Sales: Net sales for the fiscal 2005 period were $443.8 million, an increase of $5.6 million, or 1.3 percent, as compared to net sales of $438.2 million in the fiscal 2004 period. This increase is attributable to the net sales resulting from the acquisition of C&W during the second quarter, offset by volume declines experienced during the first quarter as a result of pricing increases. The Company executed a price increase on most product categories to mitigate the impact of industry-wide increases in the costs for labor, raw materials and packaging. Subsequent to the Company's action regarding pricing, other competitors have followed with similar pricing actions. The "Segment Review" below outlines further details. Gross Profit: Gross profit in the fiscal 2005 period decreased $3.9 million to $99.3 million as compared to $103.2 million for the fiscal 2004 period. While increases were experienced in the second quarter, primarily attributable to the C&W acquisition, lower sales volume in the first quarter, and higher production cost increases throughout the six months ended December 25, 2004 negatively impacted performance. Management believes these unfavorable product costs will impact operating results throughout fiscal 2005. Selling, Administrative and General Expenses: Selling, administrative and general expenses in the fiscal 2005 period increased $4.2 million to $60.4 million, as compared to $56.2 million in the fiscal 2004 period. Such increases are attributable to the Company's acquisition of C&W and increased brand building initiatives within the branded frozen segment. Other Income: During the second quarter of fiscal 2005, management renegotiated one of its third-party warehousing leases. This resulted in recognition of a $2.2 million pretax benefit due to the elimination of an unfavorable lease commitment. Operating Income: Operating income for the fiscal 2005 period was $41.1 million, a decrease of $5.9 million as compared to $47.0 million in the fiscal 2004 period. The decline is attributable to those factors discussed above. Decreases in operating results within the branded frozen and non-branded segments were $7.6 million and $0.5 million, respectively. Operating income for the branded dry segment was consistent with the prior year period. The significant reasons for changes in the Company's operating income are highlighted below in the "Segment Review". Interest Expense: Interest expense for the fiscal 2005 period was $13.7 million compared to $18.7 million in the fiscal 2004 period. This decline is primarily the result of the Company's repayment of $150.0 million of its 11 7/8 percent Senior Subordinated Notes in the fiscal 2004 period, partially offset by increased interest expense incurred in the fiscal 2005 period due to increased borrowings on the Company's Revolving Credit Facility to finance the acquisition of C&W. Loss on Early Extinguishment of Debt: On November 24, 2003, the Company repaid $150.0 million of its 11 7/8 percent Senior Subordinated Notes. In conjunction with this repayment, a pre-tax loss on early extinguishment of debt of $4.0 million was recorded in the second quarter of fiscal 2004. This amount reflects the payment of the $8.9 million call premium and other transaction expenses less the related unamortized premium of $4.9 million recorded in conjunction with the August 19, 2002 Transaction. Tax Provision: The provision for income taxes for the fiscal 2005 period was $10.9 million compared to a provision for income taxes of $9.7 million in the fiscal 2004 period. The increase was a result of an increase in the Company's pre-tax earnings. The Company has not experienced any significant changes in its consolidated effective tax rate. Net Income: Net income for the fiscal 2005 period was $16.5 million compared to net income of $15.1 million in the fiscal 2004 period. 23 Segment Review A detailed accounting of the significant reasons for changes in net sales and operating income by segment is outlined below. Branded Frozen: Branded frozen net sales were $178.4 million in the fiscal 2005 period, an increase of $12.1 million or 7.3 percent as compared to net sales of $166.3 million for the fiscal 2004 period. As outlined above, net sales for C&W for the fiscal 2005 period accounted for $15.1 million of the Company's increases in net sales. During the first quarter of the fiscal 2005 period, however, the Company took pricing action to mitigate manufacturing cost increases. Management believes its pricing action, along with increased promotional support, negatively impacted net sales. The Company has also continued its efforts to support its Voila! product category. Successful innovation and increased consumer promotion activities support unit volume increases of 23% versus the fiscal 2004 period. The Company tracks retail sales in many of the categories in which it competes using data from Information Resources, Inc. ("IRI"). IRI data is limited, however, as IRI does not capture sales at several of the Company's customers including Wal-Mart, Costco, and others. IRI also does not track non-branded or store brand retail sales by the manufacturer. According to IRI, the frozen vegetable category on a unit basis declined 2.0 percent for the 26-week period ending January 2, 2005. The Company's branded market share (including C&W for all periods) on a unit basis for the 26-week period ending January 2, 2005 was 20.0 percent compared to 21.0 percent for the 26-week period ending January 4, 2004. The bagged meal category for the 24-week period ending January 2, 2005 increased 0.7 percent on a unit basis. Market share on a unit basis for the Company's Birds Eye Voila! bagged meal product offering for the 24-week period ending January 2, 2005 was 24.1 percent compared to 19.3 percent for the 24-week period ending January 4, 2004. Branded frozen operating income was $24.2 million in the fiscal 2005 period, a decline of $7.6 million as compared to $31.8 million in the fiscal 2004 period. While the branded frozen segment was positively impacted by operating income related to the C&W acquisition, the Company has continued to experience increased production costs. Although, the Company has implemented price increases for many of its products, it has not been able to fully offset the increase in product costs and the cost of various promotional programs required to support holiday merchandising. Branded Dry: For the six-month period ending December 25, 2004, branded dry net sales were consistent with those of the prior year. Net sales of $113.2 million for the fiscal 2005 period represent an increase of $0.8 million or 0.7 percent as compared to net sales of $112.4 million for the fiscal 2004 period. Operating income for the branded dry segment was $21.8 million for both the fiscal 2005 and 2004 periods. While the Company's branded dry segment has experienced cost increases in meat, edible oils, steel and commodities, it has been able to mitigate these challenges with pricing action. Non-branded: Non-branded net sales were $152.2 million for the fiscal 2005 period, a decline of $7.3 million or 4.6 percent as compared to $159.5 million in the fiscal 2004 period. This decline is primarily attributable to a reduction in industrial sales. The reduced crop intake in the fiscal 2005 period has resulted in less inventory available to be sold in this channel. In addition, the Company has experienced a decline in net sales in a co-pack agreement. Industrial and co-pack sales typically yield lower margins than the Company's other product lines, however, provide for greater utilization of manufacturing facilities. Non-branded operating income experienced a loss of $7.1 million for the fiscal 2005 period, a $0.5 million decline as compared to an operating loss of $6.6 million for the fiscal 2004 period. As highlighted above, IRI data does not track the Company's non-branded or store brand retail sales. Including management's estimate of the Company's share of the store brand market, the Company believes its overall market share on a unit basis in the frozen vegetable category (including C&W for all periods) for the 26-week period ending January 2, 2005 was 31.9 percent compared to 32.7 percent for the 26-week period ending January 4, 2004. 24 LIQUIDITY AND CAPITAL RESOURCES The following discussion highlights the major variances in the Unaudited Consolidated Statement of Cash Flows for the six months ended December 25, 2004 compared to the six months ended December 27, 2003. Net cash used in operating activities for the fiscal 2005 period was $20.7 million as compared to net cash provided by operating activities of $2.9 million for the fiscal 2004 period, representing a change in cash outflows of $23.6 million. Net cash used for inventory purchases (including prepaid manufacturing expense) amounted to $56.3 million in the current period as compared to $29.2 million during the prior year period. The timing of production and inventory purchases, coupled with cost increases experienced throughout the period have raised the carrying value of inventory. Net cash used in investing activities for the fiscal 2005 period was $80.8 million, as compared to net cash used in investing activities of $5.3 million for the fiscal 2004 period, representing a change in cash outflows of $75.5 million. On September 23, 2004, the Company completed the acquisition of California & Washington Company ("C&W"), which accounted for the majority of the variance in cash used for investing activities. The acquisition of C&W was financed by borrowings on the Company's Revolving Credit Facility. Capital expenditures were $9.4 million for the 2005 period compared to $12.1 million in the prior year period. The decrease in capital expenditures is the result of the timing for various initiatives. Net cash provided by financing activities for the fiscal 2005 period was $32.6 million, as compared to net cash used in financing activities of $139.4 million in the fiscal 2004 period, representing a change of $172.0 million. During the fiscal 2004 period, the Company repaid $150.0 million of its 11 7/8 percent Senior Subordinated Notes, along with the required call premium of $8.9 million. In addition, during the fiscal 2004 period, the Company paid a $13.1 million "excess cash flow payment" as required by the Senior Credit Agreement. No such "excess cash flow payment" was required in fiscal 2005. The change in financing activities was also impacted by proceeds received under the Company's Revolving Credit Facility to finance the acquisition of C&W on September 23, 2004. The Company anticipates future borrowings on its Revolving Credit Facility to be in the ordinary course of business. See NOTE 7 to the "Notes to Consolidated Financial Statements". Contractual Obligations: During the second quarter of fiscal 2005, management renegotiated one of its third-party warehousing agreements, which has resulted in a reduction in the Company's future purchase obligations under contracts by $18.1 million. Senior Credit Facility: In connection with the Transaction, Birds Eye Foods and certain of its subsidiaries entered into a senior secured credit facility (the "Senior Credit Facility") in the amount of $470.0 million with a syndicate of banks and other lenders arranged and managed by JPMorgan Chase Bank ("JPMorgan Chase Bank"), as administrative and collateral agent. The Senior Credit Facility is comprised of (i) a $200.0 million senior secured revolving credit facility (the "Revolving Credit Facility") and (ii) a $270.0 million senior secured B term loan (the "Term Loan Facility"). The Revolving Credit Facility matures in August 2007, and allows up to $40.0 million to be available in the form of letters of credit. As of December 25, 2004, (i) there were $40.3 million of cash borrowings outstanding under the Revolving Credit Facility, (ii) there were $24.9 million in letters of credit outstanding, and therefore (iii) availability under the Revolving Credit Facility was $134.8 million. The Company believes that the cash flow generated by operations and the amounts available under the Revolving Credit Facility provide adequate liquidity to fund working capital needs and capital expenditures. The Term Loan Facility requires payments in quarterly installments in the amount of $675,000 until September 30, 2007. Beginning December 31, 2007, the quarterly payments are approximately $64.1 million. The Term Loan Facility matures in August 2008 upon which the balance outstanding thereunder will be due. The Term Loan Facility is also subject to mandatory prepayments under various scenarios as defined in the Senior Credit Agreement. Provisions of the Senior Credit Agreement require annual payments, within 105 days after the end of each fiscal year, in the amount of "excess cash flow" be utilized to prepay the commitment at an applicable percentage that corresponds to the Company's Consolidated Leverage Ratio. There was no "excess cash flow" for the year ended June 26, 2004 required to be paid under the Term Loan Facility. The Senior Credit Facility bears interest at the Company's option, at a base rate or LIBOR plus, in each case, an applicable percentage. The appropriate applicable percentage corresponds to the Company's Consolidated Leverage Ratio, as defined by the senior credit agreement ("Senior Credit Facility"), and is adjusted quarterly based on the calculation of the Consolidated Leverage Ratio. As of December 25, 2004, the Senior Credit Facility bears interest in the case of base rate loans at the Base Rate plus (i) 1.00 percent for loans under the Revolving Credit Facility, and (ii) 1.75 percent for loans under the Term Loan Facility or in the case of LIBOR loans at LIBOR plus (x) 2.00 percent for loans under the Revolving Credit Facility and (y) 2.75 percent for loans under the Term Loan Facility. The incremental percentages presented vary based upon the Company's Consolidated Leverage Ratio, as defined. As of December 25, 2004, the interest rate under the Term Loan Facility was approximately 4.96 percent on LIBOR loans. The initial unused commitment fee is 0.375 percent on the daily average unused commitment under the Revolving Credit Facility and also varies based on the Company's Consolidated Leverage Ratio. As of December 25, 2004, the interest rate under the Revolving Credit Facility was approximately 4.21 percent on LIBOR loans. 25 The Senior Credit Facility contains customary covenants and restrictions on the Company's activities, including but not limited to: (i) limitations on the incurrence of indebtedness; (ii) limitations on sale-leaseback transactions, liens, investments, loans, advances, guarantees, acquisitions, asset sales, and certain hedging agreements; and (iii) limitations on transactions with affiliates and other distributions. The Senior Credit Facility also contains financial covenants requiring the Company to maintain a maximum average debt to EBITDA ratio, a maximum average senior debt to EBITDA ratio, and a minimum EBITDA to interest expense ratio. As of December 25, 2004, the Company was in compliance with all covenants, restrictions, and requirements under the terms of the Senior Credit Facility. The Company's obligations under the Senior Credit Facility are collateralized by a first priority lien on: (i) substantially all existing or after-acquired assets, tangible or intangible, (ii) the capital stock of Birds Eye Foods and its domestic subsidiaries, and (iii) 65% of the voting capital stock and 100% of the non-voting capital stock in certain foreign subsidiaries. The Company's obligations under the Senior Credit Facility are guaranteed by Holdings Inc. and certain of the Company's subsidiaries. See NOTE 10 to the "Notes to Consolidated Financial Statements" included herein. Senior Subordinated Notes - 11 7/8 Percent (due 2008): In fiscal 1999, the Company issued Senior Subordinated Notes (the "Notes") for $200.0 million aggregate principal amount due November 1, 2008. Interest on the Notes accrues at the rate of 11 7/8 percent per annum and is payable semiannually in arrears on May 1 and November 1. On November 24, 2003, the Company repaid $150.0 million of the Notes. The Notes represent general unsecured obligations of the Company, subordinated in right of payment to certain other debt obligations of the Company (including the Company's obligations under the Senior Credit Facility). The Notes are guaranteed by Pro-Fac and certain of the Company's subsidiaries. The Notes contain customary covenants and restrictions on the Company's ability to engage in certain activities, including, but not limited to: (i) limitations on the incurrence of indebtedness and liens; (ii) limitations on consolidations, mergers, sales of assets, transactions with affiliates; and (iii) limitations on dividends and other distributions. As of December 25, 2004, the Company was in compliance with all covenants, restrictions, and requirements under the Notes. The Company, its principal shareholders, or their affiliates may, from time-to-time, enter the market to purchase or sell Notes in compliance with any applicable securities laws. CRITICAL ACCOUNTING POLICIES The preparation of the Company's consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts. The estimates and assumptions are evaluated on a regular basis and are based on historical experience and on various other factors that are believed to be reasonable. Estimates and assumptions include, but are not limited to: trade accounts receivable, inventories, self-insurance programs, promotional activities, and identifiable intangible assets, long-lived assets, and goodwill. The following are considered to be the Company's more critical estimates and assumptions used in the preparation of the consolidated financial statements, although not inclusive. Trade Accounts Receivable: The Company accounts for trade receivables at outstanding billed amounts, net of allowances for doubtful accounts. The Company estimates its allowance for doubtful accounts as a percentage of receivables overdue. Also included in the allowance in their entirety are those accounts that have filed for bankruptcy, or been sent to collections, and any other accounts management believes are not collectible based on historical losses. The Company periodically reviews the accounts included in the allowance to determine those to be written off. Generally, after a period of one year, or through legal counsel's advice, accounts are written off. It is not Company policy to accrue interest on past due accounts. Inventories: Under the first-in, first-out ("FIFO") method, the cost of items sold is based upon the cost of the first such items produced. As a result, the last such items produced remain in inventory and the cost of these items are used to reflect ending inventory. The Company prices its inventory at the lower of cost or market value on the FIFO method. A reserve is established for the estimated aged surplus, spoiled or damaged products, and discontinued inventory items and components. The amount of the reserve is determined by analyzing inventory composition, expected usage, historical and projected sales information, and other factors. Changes in sales volume due to unexpected economic or competitive conditions are among the factors that could result in materially different amounts for this item. Self-insurance Programs: The Company records estimates for certain health and welfare and workers' compensation costs that are provided for under self-insured programs. Should a greater amount of claims occur compared to what was estimated or should costs of medical care increase beyond what was anticipated, reserves recorded may not be sufficient and additional costs could be incurred. 26 Promotional Activities: The Company's promotional activities are conducted either through the retail trade channel or directly with consumers and involve in-store displays; feature price discounts on the Company's products; consumer coupons; and similar activities. The costs of these activities are generally recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management's judgment regarding the volume of promotional offers that will be redeemed by either the retail trade channel or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. Differences between estimated expense and actual redemptions are normally insignificant and recognized as a change in management estimate in a subsequent period. However, the likelihood exists of materially different reported results if different assumptions or conditions were to prevail. Identifiable Intangible Assets, Long-Lived Assets, and Goodwill: The Company assesses the carrying value of its identifiable intangible assets and long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the underlying asset may not be recoverable. Certain factors which may occur and indicate that an impairment exists include, but are not limited to: significant under performance relative to historical or projected future operating results; significant changes in the manner of the Company's use of the underlying assets; and significant adverse industry or market trends. The Company tests goodwill for impairment on an annual basis. In the event that the carrying values of assets are determined to be impaired, the Company would record an adjustment to the respective carrying value. OTHER MATTERS The vegetable and fruit portions of the business can be positively or negatively affected by weather conditions nationally and the resulting impact on crop yields. Favorable weather conditions can produce high crop yields and an oversupply situation. This can result in depressed selling prices on the inventory produced from that year's crops. Excessive rain or drought conditions can produce low crop yields and a shortage situation. This situation can result in higher selling prices. While the national supply situation controls the pricing, the supply can differ regionally because of variations in weather. The cherry crop from the 2003 growing season was adversely affected by weather conditions in the prime growing areas in Michigan. Both raw and frozen cherry costs have, therefore, increased significantly from historic levels. To offset the cherry cost increase, management initiated both pricing actions and changes in promotional programs across all of its cherry items. Indications from the 2004 cherry growing season show adequate crop supply, however, final pricing has not yet been determined. Additionally, for the 2004 crop season, a combination of higher than normal precipitation levels and below normal temperatures in the Northeast and Midwest regions has reduced planned crop intake. This reduction in crop intake has impacted production costs and efficiency. Management believes product cost increases will impact operating results throughout fiscal 2005. Management continues, however, to actively pursue cost reductions to mitigate crop-related cost increases. Effective June 28, 2004 the Company initiated a price increase of 5 to 7 percent on most product categories. The price increase was a direct result of increases across commodities, ingredients, packaging and other production costs. MARKET AND INDUSTRY DATA Unless otherwise stated in this report, industry and market share data used throughout this Form 10-Q Equivalent was derived from industry sources believed by the Company to be reliable, including information provided by Information Resources, Inc. Consultants' reports and industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. The Company has not independently verified such data and makes no representation to its accuracy. 27 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company, as a result of its operating and financing activities, is exposed to changes in foreign currency exchange rates and certain commodity prices, which may adversely affect its results of operations and financial position. In seeking to minimize the risks and/or costs associated with such activities, the Company has entered into derivative contracts. Certain of the Company's derivative financial instruments are reported in the Company's Annual Report on Form 10-K Equivalent for the year ended June 26, 2004. No material changes have occurred in these instruments which would require additional disclosure in answer to this item. ITEM 4. CONTROLS AND PROCEDURES. Birds Eye Foods management, with the participation of Birds Eye Foods Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the design and operation of Birds Eye Foods disclosure controls and procedures (as defined in Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on that evaluation, Birds Eye Foods Principal Executive and Principal Financial Officers concluded that Birds Eye Foods disclosure controls and procedures as of December 25, 2004 (the end of the period covered by this Report) have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by Birds Eye Foods in reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There were no changes to Birds Eye Foods' internal control over financial reporting that occurred during the quarter ended December 25, 2004 that materially affected or are reasonably likely to materially affect Birds Eye Foods' internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Certain of our legal proceedings are reported in our Annual Report on Form 10-K Equivalent for the year ended June 26, 2004. Information about any material developments that may have occurred since June 26, 2004 is described in NOTE 11, "Other Matters - Legal Matters", under "Notes to Consolidated Financial Statements" in Part I, Item 1. of this Form 10-Q Equivalent and is incorporated herein by reference in answer to this item. ITEM 6. EXHIBITS. Exhibits Exhibit Number Description ---------------- ---------------------------------------------------- 31.1 Certification required by Rule 13a - 14(a) of the Securities Exchange Act of 1934 of the Principal Executive Officer (filed herewith). 31.2 Certification required by Rule 13a - 14(a) of the Securities Exchange Act of 1934 of the Principal Financial Officer (filed herewith). 28 SIGNATURES The Company has duly caused this 10-Q Equivalent to be signed on its behalf by the undersigned, thereunto duly authorized. BIRDS EYE FOODS, INC. Date: February 7, 2005 By: /s/ Earl L. Powers --------------------- ------------------------------------ EARL L. POWERS EXECUTIVE VICE PRESIDENT and CHIEF FINANCIAL OFFICER and SECRETARY (On Behalf of the Registrant and as Principal Financial Officer and Principal Accounting Officer) 29

BIRDS EYE FOODS INC 10-Q