10-Q 1 j0937101e10vq.txt H.J. HEINZ FINANCE COMPANY 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 28, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________ FOR THE THREE MONTHS ENDED JULY 28, 2004 COMMISSION FILE NUMBER 333-85064 H. J. HEINZ FINANCE COMPANY (Exact name of registrant as specified in its charter) DELAWARE 82-0382406 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 GRANT STREET, PITTSBURGH, PENNSYLVANIA 15219 (Address of Principal Executive Offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 456-5700 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 requirements for the past 90 days. Yes X No __ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes __ No X All of the outstanding shares of the registrant's common stock are owned by H. J. Heinz Company. PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME

First Quarter Ended ------------------------------ July 3028, ~~2003~~2004 July 3130, ~~2002~~2003 FY ~~2004~~2005 FY ~~2003~~2004 ------------- -------------- (Unaudited) (in thousands) Sales....................................................... $~~715~~754,~~870~~034 $~~689~~715,~~279~~870 Cost of products sold....................................... 475,508 453,597 ~~434,213~~ -------- -------- Gross profit................................................ 278,526 262,273 ~~255,066~~ Selling, general and administrative expenses................ 129,907 125,404 ~~129,132~~ Royalty expense to related parties.......................... 46,081 35,976 ~~34,472~~ -------- -------- Operating income............................................ 102,538 100,893 ~~91,462~~ Interest income............................................. 3,038 1,400 ~~6,444~~ Interest expense............................................ 33,927 31,595 ~~33,305~~ Dividends from related parties.............................. 30,798 30,798 Currency loss............................................... 6,451 4,852 ~~22,105~~ Other expenses, net......................................... 45,~~446~~419 4,~~237~~446 -------- -------- Income ~~from continuing operations~~ before income taxes and minority interest............~~.............................~~ 90,577 92,198 ~~69,057~~ Provision for income taxes.................................. 17,001 14,381 ~~4,086~~ -------- -------- Income ~~from continuing operations~~ before minority interest.............................~~.....................~~ 73,576 77,817 ~~64,971~~ Minority interest........................................... (5148,~~669~~699) (5851,~~198~~669) -------- -------- Income from continuing operations........................... 26,148 6,773 Loss from discontinued operations, net of tax and minority interest.................................................. -- (2,519) -------- -------- Net income.................................................. $ 2624,~~148~~877 $ 426,~~254~~148 ======== ========

See notes to condensed consolidated financial statements. 2 H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

July 3028, ~~2003~~2004 April 3028, ~~2003~~2004* FY ~~2004~~2005 FY ~~2003~~2004 ------------- --------------- (Unaudited) (in thousands) ASSETS Current assets: Cash and cash equivalents................................. $ ~~327~~716,~~658~~404 $ ~~194~~462,~~266~~039 Receivables, net.......................................... ~~294~~297,~~809~~144 ~~400~~354,~~565~~282 Due from related parties.................................. 719,~~843~~941 2419,~~603~~706 Short-term notes receivable from related parties.......... ~~416~~664,~~123~~275 ~~217~~386,~~988~~955 Inventories............................................... ~~406~~381,~~791~~472 ~~386~~377,~~889~~463 Prepaid expenses and other current assets................. 6534,~~177~~011 2939,~~901~~617 ---------- ---------- Total current assets................................... 12,~~518~~113,~~401~~247 1,~~254~~640,~~212~~062 Property, plant and equipment............................... 1,~~133~~087,~~333~~146 1,~~120~~147,~~294~~808 Less accumulated depreciation............................... ~~497~~(486,~~633~~904) ~~482~~(521,~~981~~084) ---------- ---------- Total property, plant and equipment, net............... ~~635~~600,~~700~~242 ~~637~~626,~~313~~724 ~~Investments~~Other innon-current assets: Long-term notes receivable from related parties........... 35,000 35,000 Investments in related parties............................ 1,895,245 1,895,245 Goodwill.................................................... 1,~~058~~027,~~115~~848 1,~~008~~025,~~734~~028 Other intangible assets, net................................ ~~255~~275,~~241~~115 ~~257~~279,~~378~~560 Other non-current assets.................................... ~~368~~332,~~088~~455 ~~512~~352,~~803~~002 ---------- ---------- Total other non-current assets......................... 3,~~576~~565,~~689~~663 3,~~674~~586,~~160~~835 ---------- ---------- Total assets........................................... $56,~~730~~279,~~790~~152 $5,~~565~~853,~~685~~621 ========== ========== LIABILITIES AND ~~SHAREHOLDERS~~SHAREHOLDER'S EQUITY Current liabilities: Short-term debt with related parties...................... $ 93626,~~710~~030 $ 82282,~~716~~348 Portion of long-term debt due within one year............. 1362,~~679~~059 1355,~~738~~724 Accounts payable.......................................... 218,~~815~~709 ~~212~~214,~~751~~665 Accounts payable to related parties....................... 9575,~~502~~182 9872,~~947~~851 Accrued ~~interest~~marketing.......................................... 9180,~~201~~077 6698,~~170~~251 Accrued ~~marketing~~interest.......................................... 7397,~~282~~618 6769,~~840~~075 Other accrued liabilities................................. 6459,~~196~~480 5446,~~520~~096 ---------- ---------- Total current liabilities.............................. ~~638~~1,~~385~~519,155 ~~584~~1,~~682~~139,010 Long-term debt and other liabilities: Long-term debt.............................................. 3,~~841~~765,~~766~~613 3,~~981~~795,~~145~~269 ~~Long-term debt with related parties......................... 179,164 --~~ Deferred income taxes....................................... 1241,~~642~~961 1446,~~511~~130 Other liabilities........................................... 520,~~273~~660 514,~~979~~668 ---------- ---------- Total long-term debt and other liabilities............. 43,~~038~~828,~~845~~234 43,~~001~~856,~~635~~067 Minority interest........................................... ~~509~~621,~~162~~340 ~~457~~572,~~493~~641 ~~Mandatorily Redeemable Series A Preferred shares............ 325,000 325,000 Shareholders~~Shareholder's equity: Common stock.............................................. 11 11 Additional capital........................................ ~~128~~123,~~050~~438 ~~128~~123,~~050~~438 Retained earnings......................................... 89185,~~786~~416 68160,~~697~~539 Accumulated other comprehensive ~~gain~~income...................... 1,~~551~~558 ~~117~~1,915 ---------- ---------- Total ~~shareholders~~shareholder's equity............................. ~~219~~310,~~398~~423 ~~196~~285,~~875~~903 ---------- ---------- Total liabilities and ~~shareholders~~shareholder's equity............. $56,~~730~~279,~~790~~152 $5,~~565~~853,~~685~~621 ========== ==========

--------------- * Summarized from audited Fiscal Year 2004 balance sheet. See notes to condensed consolidated financial statements. 3 H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

First Quarter Ended ------------------------------ July 3028, ~~2003~~2004 July 3130, ~~2002~~2003 FY ~~2004~~2005 FY ~~2003~~2004 ------------- ------------- (Unaudited) (in thousands) Cash Flows from Operating Activities: Net income................................................ $ 2624,~~148~~877 $ 426,~~254~~148 Adjustments to reconcile net income to cash provided by operating activities: Depreciation........................................... 13,683 14,439 ~~18,187~~ Amortization........................................... 23,~~906~~502 2,~~860~~906 Deferred tax (benefit)/provision.......................~~..........~~ (3,098) 11,708 ~~4,828~~ Minority interest...................................... 48,699 51,669 ~~70,213~~ Currency loss.......................................... 6,451 4,852 ~~22,105~~ Other items, net....................................... (51,~~205~~777) (25,~~934~~205) Changes in current assets and liabilities, excluding effects of acquisitions and divestitures: Receivables.......................................... 54,180 110,943 ~~264,470~~ Inventories.......................................... (89,~~669~~660) (408,~~797~~669) Due from/to related parties.......................... 16,373 13,161 ~~72,344~~ Prepaid expenses and other current assets............ 5,599 (35,626) ~~(79,758)~~ Accounts payable..................................... (4,~~431)~~374 (124,~~723~~431) Accrued liabilities.................................. 8,297 23,957 ~~20,963~~ Income taxes......................................... 19,445 1,959 ~~(3,236)~~ ---------- --------- Cash provided by operating activities..................... 190,945 207,811 ~~340,776~~ ---------- --------- Cash Flows from Investing Activities: Capital expenditures...................................... (613,~~254~~693) (166,~~559~~254) Acquisitions, net of cash acquired........................ (6,558) (61,298) Proceeds from divestitures................................ 18,604 -- Other items, net.......................................... (2,064) (251) ~~10,136~~ ---------- --------- Cash used for investing activities..................... (673,~~803~~711) (667,~~423~~803) ---------- --------- Cash Flows from Financing Activities: Proceeds from long-term debt with related parties......... ~~185,586~~ -- ~~Payments on commercial paper~~185,586 ~~net.........................~~Proceeds -- from/(~~64,309)~~payments ~~Payments~~ on) short-term ~~debt~~borrowings with related parties, net..... ~~(187,143) (196,624) Distributions to minority partners~~.............................. --67,131 (64187,~~844~~143) Dividends on preferred shares............................. -- (5,059) ~~(5,058) Other items, net..........................................~~ -- ~~905~~ ------~~----~~ --------- Cash provided by/(used for) financing activities.......~~..............~~ 67,131 (6,616) ~~(329,930)~~ ---------- --------- Net increase in cash and cash equivalents................... 254,365 133,392 ~~4,423~~ Cash and cash equivalents, beginning of period.............. 462,039 194,266 ~~6,924~~ ---------- --------- Cash and cash equivalents, end of period.................... $ ~~327~~716,~~658~~404 $ 11327,~~347~~658 ========== =========

See notes to condensed consolidated financial statements. 4 H. J. HEINZ FINANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION The U.S. treasury and domestic business operations of H. J. Heinz Company ("Heinz") are conducted by H. J. Heinz Finance Company and its wholly-owned subsidiaries, and H. J. Heinz Company, L.P. ("Heinz LP") collectively referred to as "Heinz Finance" in the accompanying notes. H. J. Heinz Finance Company has limited partnership interests in Heinz LP equal to approximately 40% of the capital of Heinz LP. Heinz LP owns or leases the operating assets involved in manufacturing throughout the United States and manages the business. Heinz LP has two classes of limited partnership interests, Class A and Class B, that are allocated varying income and cash distributions in accordance with the Heinz LP agreement. H. J. Heinz Finance Company, directly and through wholly-owned subsidiaries, owns the Class B interests. Heinz directly owns the Class A interests. Heinz Management Company, a wholly-owned subsidiary of Heinz, is the managing General Partner of Heinz LP and employs the salaried personnel of Heinz's domestic operations. Under the partnership agreement, Heinz Finance has the power to control the general partner through majority membership on Heinz LP's management board. The minority interest amounts on the July 28, 2004 and April 28, 2004 balance sheets represent the Class A and General Partner limited partnership interest in Heinz LP, and have been adjusted for the minority partners' share of income and cash distributions. The interim condensed consolidated financial statements of Heinz Finance are unaudited. In the opinion of management, all adjustments which are of a normal and recurring nature, necessary for a fair statement of the results of operations of these interim periods have been included. The results for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year due to the seasonal nature of the business of Heinz Finance. These statements should be read in conjunction with Heinz Finance's consolidated and combined financial statements and related notes, and management's discussion and analysis of financial condition and results of operations which appear in Heinz Finance's Annual Report on Form 10-K for the year ended April 28, 2004. For all Heinz financial reporting and disclosure purposes, H. J. Heinz Finance Company and its subsidiaries (including Heinz LP) are treated as fully consolidated subsidiaries. All of the assets, liabilities, results of operations and cash flows of these entities are included in the Heinz consolidated financial statements. All of the intercompany transactions and accounts are eliminated within the Heinz consolidated financial statements. The preferred shares issued by Heinz Finance are reported in the Heinz consolidated financial statements as long-term debt at July 28, 2004 and April 28, 2004. (2) REORGANIZATION COSTS During the first quarter of Fiscal 2004, Heinz Finance recognized reorganization costs of $4.0 million pretax, which were primarily due to employee termination and severance costs following the Fiscal 2003 spin-off transaction with Del Monte. Of this amount, $3.9 million was charged to Heinz Finance by Heinz Management Company through a management fee for all salaried employee costs. These costs were recognized as a component of selling, general and administrative expenses ("SG&A"). Amounts included in accounts payable to related parties and other accrued liabilities related to these initiatives totaled $2.9 million and $5.0 million at July 28, 2004 and April 28, 2004, respectively. 5 (3) INVENTORIES The composition of inventories at the balance sheet dates was as follows:

July 3028, April 3028, (in thousands) ~~2003~~2004 ~~2003~~2004 -------------- -------- --------- Finished goods and work-in-process......................... $~~291~~289,~~990~~783 $~~275~~258,~~295~~142 Packaging material and ingredients......................... ~~114~~91,~~801~~689 ~~111~~119,~~594~~321 -------- -------- $~~406~~381,~~791~~472 $~~386~~377,~~889~~463 ======== ========

(4) GOODWILL AND OTHER INTANGIBLE ASSETS Changes in the carrying amount of goodwill for the first quarter ended July 28, 2004, by reportable segment, are as follows:

North American Consumer U.S. (in thousands) Products Foodservice Total -------------- -------- ----------- ---------- Balance at April 3028, ~~2003~~2004........................ $~~844~~845,~~192~~484 $~~164~~179,~~542~~544 $1,~~008~~025,~~734~~028 Acquisition...................................... -- 496,~~381~~558 496,~~381~~558 Purchase accounting reclassifications............ -- (1,190) (1,190) Disposal......................................... (2,548) -- (2,548) -------- -------- ---------- Balance at July 3028, ~~2003~~2004......................... $~~844~~842,~~192~~936 $~~213~~184,~~923~~912 $1,~~058~~027,~~115~~848 ======== ======== ==========

The annual impairment tests are performed in the fourth quarter of each fiscal year unless events suggest an impairment may have occurred in the interim. No impairment charges were recognized during the first quarter ended July 28, 2004. Trademarks and other intangible assets at July 28, 2004 and April 28, 2004, subject to amortization expense, are as follows:

July 3028, ~~2003~~2004 April 3028, ~~2003~~2004 ---------------------------------- ---------------------------------- Accumulated Accumulated (in thousands) Gross Amortization Net Gross Amortization Net -------------- -------- ------------ -------- -------- ------------ -------- Trademarks........... $ 3936,~~103~~403 $ (23,~~356~~003) $ 3633,~~747~~400 $ 39,103 $ (23,~~051~~268) $ 3735,~~052~~835 Licenses............. 208,186 (~~114~~119,~~089~~976) 9488,~~097~~210 208,186 (~~112~~118,~~617~~504) 9589,~~569~~682 Other................ 7595,~~907~~808 (4245,~~628~~439) 3350,~~279~~369 7595,~~907~~708 (4244,~~269~~802) 3350,~~638~~906 -------- --------- -------- -------- --------- -------- $~~323~~340,~~196~~397 $(~~159~~168,~~073~~418) $~~164~~171,~~123~~979 $~~323~~342,~~196~~997 $(~~156~~166,~~937~~574) $~~166~~176,~~259~~423 ======== ========= ======== ======== ========= ========

Amortization expense for trademarks and other intangible assets subject to amortization was $2.3 million and $2.1 million for the first quarter ended July 28, 2004 and July 30, 2003, respectively. Based upon the amortizable intangible assets recorded on the balance sheet at July 28, 2004, amortization expense for each of the next five years is estimated to be approximately $9 million. Intangible assets not subject to amortization at July 28, 2004 and April 28, 2004 were $103.1 million, and consisted solely of trademarks. (5) TAXES The provision for income taxes consists of provisions for federal and state income taxes. The effective tax rate for Heinz Finance is a result of Heinz Finance's nontaxable minority interest in Heinz LP. The effective tax rate will fluctuate for Heinz Finance depending on the proportion of this nontaxable minority interest to total Heinz Finance income before tax. 6 (6) RECENTLY ISSUED ACCOUNTING STANDARDS In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act") was signed into law. The Act introduced a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retirement health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position 106-1, Heinz elected to defer recognizing the effects of the Act on the accounting for its retirement health care plans in Fiscal 2004. In May of 2004, the FASB issued Staff Position 106-2, providing final guidance on the accounting for benefits provided by the Act. The Staff Position 106-2 will be implemented by Heinz in the second quarter of Fiscal 2005. Heinz Finance is currently evaluating the impact of Heinz's adoption of this guidance on Heinz Finance's financial position, results of operations and cash flows. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This statement affects the classification, measurement and disclosure requirements of certain freestanding financial instruments, including mandatorily redeemable shares. SFAS No. 150 was effective for Heinz Finance for the second quarter of Fiscal 2004. The adoption of SFAS No. 150 required the prospective classification of Heinz Finance Company's $325 million of mandatorily redeemable preferred shares to long-term debt and the $5.1 million quarterly preferred dividend from retained earnings to interest expense beginning in the second quarter ended October 29, 2003. (7) RELATED PARTY TRANSACTIONS Employee Costs Certain of Heinz's general and administrative expenses are allocated to Heinz Finance. These costs primarily include a management charge of all salaried employee costs from the Heinz Management Company. Total costs charged to Heinz Finance for these services were $71.4 million and $63.5 million for the first quarter ended July 28, 2004 and July 30, 2003, respectively. These costs are recorded as cost of products sold or SG&A in the accompanying consolidated statements of income depending on the nature of the cost. Heinz charges Heinz Finance for its share of group health insurance costs for eligible company employees based upon location-specific costs, overall insurance costs and loss experience incurred during a calendar year. In addition, various other insurance coverages are also provided to Heinz Finance through Heinz's corporate programs. Workers compensation, auto, property, product liability and other insurance coverages are charged directly based on Heinz Finance's loss experience. Amounts charged to Heinz Finance for insurance costs were $15.5 million and $18.1 million for the first quarter ended July 28, 2004 and July 30, 2003, respectively, and are recorded in SG&A in the accompanying consolidated statements of income. Pension costs and postretirement costs are also charged to Heinz Finance based upon eligible employees participating in the Plans. Cash Management Heinz Finance represents the treasury center for cash management and debt financing for all of Heinz's domestic operations. In addition, Heinz Finance enters into a number of short-term notes payable with foreign wholly-owned subsidiaries of Heinz. As a result of these cash management activities, Heinz Finance had $38.2 million and $104.6 million of net short-term notes receivable with related parties recorded on the condensed consolidated balance sheets as of July 28, 2004 and April 28, 2004, respectively. An average interest rate of 1.53% and 1.47% was charged on the combined domestic and foreign notes resulting in $0.2 million and $0.8 million of net interest income for the first quarter ended July 28, 2004 and July 30, 2003, respectively. 7 At July 28, 2004 and April 28, 2004, long-term notes receivable from related parties includes $35.0 million related to a receivable from Heinz. This note is classified as long-term given its maturity of May 2, 2007. Product Sales and Purchases Heinz Finance sells and purchases products and services to and from other Heinz affiliates. The results of related party transactions are the $19.9 million and $19.7 million balances due from related parties as of July 28, 2004 and April 28, 2004, respectively, and the $75.2 million and $72.9 million balances for accounts payable to related parties as of July 28, 2004 and April 28, 2004, respectively. Product sales to related parties were $10.7 million and $10.5 million for the first quarter ended July 28, 2004 and July 30, 2003, respectively, and purchases from related parties were $10.2 million and $6.3 million for the first quarter ended July 28, 2004 and July 30, 2003, respectively. Other Related Party Items Heinz Finance held $1.9 billion of non-voting, 6.5% cumulative non-participating preferred stock of PM Holding, Inc. ("PM Holding"), a subsidiary of Heinz. Heinz Finance's preferred stock investment in PM Holding was converted to a preferred stock investment in Heinz as a result of the merger of PM Holding with and into Heinz during the third quarter of Fiscal 2003. The dividends on the preferred stock amounted to $30.8 million for the first quarter ended July 28, 2004 and July 30, 2003. This preferred stock investment is recorded in the Investments in related parties balance on the condensed consolidated balance sheets as of July 28, 2004 and April 28, 2004. Heinz Finance paid royalties of $46.1 million and $36.0 million for the first quarter ended July 28, 2004 and July 30, 2003, respectively, to Promark Brands, Inc., a direct subsidiary of Heinz, for the use of certain trademarks. (8) SEGMENTS The composition of segments and measure of segment profitability is consistent with that used by Heinz Finance's management. Descriptions of Heinz Finance's reportable segments are as follows: - North American Consumer Products -- This segment manufactures, markets and sells ketchup, condiments, sauces, pasta meals, and frozen potatoes, entrees, snacks and appetizers to the grocery channels in the United States of America. - U.S. Foodservice -- This segment manufactures, markets and sells branded and customized products to commercial and non-commercial food outlets and distributors in the United States of America including ketchup, condiments, sauces and frozen soups and desserts. Heinz Finance's management evaluates performance based on several factors including net sales, operating income and the use of capital resources. Intersegment revenues are accounted for at current market values. Items below the operating income line of the consolidated statements of income are not presented by segment, since they are excluded from the measure of segment profitability reviewed by Heinz Finance's management. 8 The following table presents information about Heinz Finance's reportable segments:

Net External Sales ----------------------------- First Quarter Ended ----------------------------- July 3028, ~~2003~~2004 July 3130, ~~2002~~2003 (in thousands) FY ~~2004~~2005 FY ~~2003~~2004 -------------- ------------- ------------- North American Consumer Products......................~~......~~ $405,924 $381,115 ~~$ 377,996~~ U.S. Foodservice......................................~~......~~ 348,110 334,755 ~~311,283~~ ---------- ---------- Consolidated totals.................................~~......~~ $754,034 $715,870 ~~$ 689,279~~ ========== ==========

Intersegment Revenues ----------------------------- First Quarter Ended ----------------------------- July 3028, ~~2003~~2004 July 3130, ~~2002~~2003 (in thousands) FY ~~2004~~2005 FY ~~2003~~2004 -------------- ------------- ------------- North American Consumer Products......................~~......~~ $ 10,~~660~~615 $9 10,~~755~~660 U.S. Foodservice...................................... -- -- Non-Operating(a)...................................... --(10,615) --(10,660) -------- -------- Consolidated totals.................................~~......~~ $~~10,660~~ -- $~~9,755~~ -- ======== ========

Operating Income (Loss) (b) ----------------------------- First Quarter Ended ----------------------------- July 3028, ~~2003~~2004 July 3130, ~~2002~~2003 (in thousands) FY ~~2004~~2005 FY ~~2003~~2004 -------------- ------------- ------------- North American Consumer Products......................~~......~~ $ 6564,~~658~~291 $ 6165,~~716~~658 U.S. Foodservice......................................~~......~~ 38,823 35,807 ~~30,213~~ Non-Operating(a)......................................~~......~~ (~~572~~576) (~~467~~572) ---------- ---------- Consolidated totals.................................~~......~~ $102,538 $100,893 ~~$ 91,462~~ ========== ==========

-------------------- (a) Includes charges not directly attributable to operating segments and intercompany eliminations. (b) First Quarter ended July 30, 2003 -- Includes costs to reduce overhead of the remaining businesses following the Fiscal 2003 spin-off transaction with Del Monte. Total costs recorded by Heinz Finance, as well as charged back to Heinz Finance by Heinz Management Company, were as follows: North American Consumer Products $1.5 million and U.S. Foodservice $2.5 million. (9) COMPREHENSIVE INCOME

First Quarter Ended ------------------------------- July 3028, ~~2003~~2004 July 3130, ~~2002~~2003 (in thousands) FY ~~2004~~2005 FY ~~2003~~2004 -------------- -------------- -------------- Net income............................................~~......~~ $24,877 $26,148 ~~$ 4,254~~ Other comprehensive income: Net deferred gains/(losses) on derivatives from periodic revaluations............................~~................~~ 1,299 (5,195) ~~15,773~~ Net deferred (gains)/losses on derivatives reclassified to earnings.........................~~.......................~~ ~~6,629~~ (131,~~206~~656) 6,629 -------- ------- Comprehensive income..................................~~......~~ $24,520 $27,582 ~~$ 6,821~~ ======== =======

(10) DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES Heinz Finance utilizes certain derivative financial instruments to manage its foreign currency, commodity price and interest rate exposures. There have been no material changes in Heinz Finance's market risk during the three months ended July 28, 2004. For additional information, refer to pages 16-18 of Heinz Finance's Annual Report on Form 10-K for the fiscal year ended April 28, 2004. 9 As of July 28, 2004, Heinz Finance is hedging forecasted transactions for periods not exceeding two years. During the next 12 months, Heinz Finance expects $1.6 million of net deferred gain reported in accumulated other comprehensive income to be reclassified to earnings. Hedge ineffectiveness related to cash flow hedges, which is reported in current period earnings as other expenses, net, was not significant for the first quarter ended July 28, 2004 and July 30, 2003. (11) SUBSEQUENT EVENT In August 2004, Heinz and Heinz Finance amended their $600 million 364-Day Credit Agreement and their $1.5 billion Five-Year Credit Agreement by combining the agreements into a $2.0 billion Five-Year Credit Agreement, expiring August 2009. The Credit Agreement supports Heinz and Heinz Finance's commercial paper borrowings and the remarketable securities. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS REORGANIZATION COSTS During the first quarter of Fiscal 2004, Heinz Finance recognized reorganization costs of $4.0 million pretax, which were primarily due to employee termination and severance costs following the Fiscal 2003 spin-off transaction with Del Monte. Of this amount, $3.9 million was charged to Heinz Finance by Heinz Management Company through a management fee for all salaried employee costs. These costs were recognized as a component of selling, general and administrative expenses ("SG&A"). THREE MONTHS ENDED JULY 28, 2004 AND JULY 30, 2003 RESULTS OF OPERATIONS Sales for the three months ended July 28, 2004 increased $38.2 million, or 5.3%, to $754.0 million. Sales volume increased 3.9% due primarily to strong increases in the North American Consumer Products segment, aided by new product introductions. Pricing increased 1.0% and acquisitions, net of divestitures, increased sales 0.4%. Gross profit increased $16.3 million, or 6.2%, to $278.5 million, and the gross profit margin increased slightly to 36.9% from 36.6%. The gross profit margin increase was primarily a result of favorable pricing in the U.S. Foodservice segment, partially offset by increases in commodity costs. SG&A increased $4.5 million, or 3.6%, to $129.9 million, while SG&A as a percentage of sales decreased to 17.2% from 17.5%. Last year's SG&A was unfavorably impacted by reorganization costs totaling $4.0 million. Operating income increased $1.6 million, or 1.6%, to $102.5 million, while operating income decreased as a percentage of sales to 13.6% from 14.1%, as a result of the changes noted above and increased royalty expense to related parties. Net interest expense increased $0.7 million, to $30.9 million. Net interest expense was unfavorably impacted by the adoption of SFAS No. 150 (see below for further discussion) beginning in the second quarter of Fiscal 2004. The unfavorable impact on net interest expense related to the adoption of SFAS No. 150 was largely offset by lower debt balances in the first quarter of Fiscal 2005. Other expense, net, increased $1.0 million, to $5.4 million, due to losses on certain interest rate contracts that do not meet the criteria for hedge accounting. There was a non-cash currency loss of $6.5 million in the current quarter compared to $4.9 million in the year-earlier quarter related to the marked-to-market adjustment on Euro-denominated long-term debt. This debt represents a net investment hedge at the Heinz level. Because Heinz Finance does not have foreign operations, this marked-to-market adjustment does not qualify for net investment hedge accounting treatment at Heinz Finance. The effective tax rate for the current quarter was 18.8% compared to 15.6% last year. Heinz Finance's effective tax rate fluctuates depending on the proportion of its nontaxable minority interest in Heinz LP to total Heinz Finance income before tax. Net income for the first quarter of Fiscal 2005 was $24.9 million compared to $26.1 million in the year-earlier quarter. OPERATING RESULTS BY BUSINESS SEGMENT NORTH AMERICAN CONSUMER PRODUCTS Sales of the North American Consumer Products segment increased $24.8 million, or 6.5%, to $405.9 million. Sales volume increased 7.7% due to significant growth in Ore-Ida frozen potatoes and SmartOnes frozen entrees, aided by the introduction of Ore-Ida Extra Crispy Potatoes, new microwavable Easy Fries, and several new "Truth About Carbs" frozen entrees. Strong performance 11 in Boston Market HomeStyle meals, Delimex snacks, and TGI Friday's appetizers also contributed to the volume increase. Divestitures reduced sales 1.3% primarily due to the sale of Ethnic Gourmet Foods. Gross profit increased $7.7 million, or 4.6%, to $173.9 million driven by the increase in sales volume. The gross profit margin decreased to 42.9% from 43.6% due primarily to sales mix and higher commodity and other manufacturing costs. Operating income decreased $1.4 million, or 2.1%, to $64.3 million, as strong volume growth and reduced marketing expenses were offset by higher commodity and distribution costs, and increased royalty expense to related parties, resulting from increased sales and a change in the application of the royalty rate. Operating income for the first quarter ended July 30, 2003 was impacted by reorganization costs totaling $1.5 million. U.S. FOODSERVICE Sales of the U.S. Foodservice segment increased $13.4 million, or 4.0%, to $348.1 million. Acquisitions increased sales 2.3%, due to the prior year acquisition of Truesoups LLC, a manufacturer and marketer of premium frozen soups. Higher pricing increased sales by 2.2% mainly due to Heinz Ketchup, single serve condiments, Chef Francisco frozen soups, and Dianne's and Alden Merrell frozen desserts. Sales volume decreased sales 0.5% due to customer service issues at Portion Pac Inc. resulting from the startup of a new warehouse management system that temporarily impacted shipments of some portion control products early in the quarter. The system is now fully operational. Gross Profit increased $8.5 million, or 8.9%, to $104.8 million, and the gross profit margin increased to 30.1% from 28.8%. These increases are primarily due to favorable pricing, sales mix, and the prior year acquisition of Truesoups LLC, partly offset by increases in commodity costs. Operating income increased $3.0 million, or 8.4%, to $38.8 million, primarily due to growth in gross profit, partially offset by increased distribution costs and increased royalty expense to related parties, resulting from increased sales. Operating income for the first quarter ended July 30, 2003 was impacted by reorganization costs totaling $2.5 million. LIQUIDITY AND FINANCIAL POSITION The following discussion of liquidity and financial position references certain business measures utilized by Senior Management and the Board of Directors to gauge Heinz Finance's business operating performance. Management believes the adjusted GAAP measures provide additional clarity in understanding the trends of the business. Cash provided by operating activities was $190.9 million, a decrease of $16.9 million from the prior year. The decrease in Fiscal 2005 versus Fiscal 2004 is primarily due to unfavorable working capital movements compared to the last fiscal year, particularly receivables, partially offset by prepaid expenses and other current assets. Cash used for investing activities totaled $3.7 million compared to $67.8 million last year. Acquisitions used $6.6 million in cash in the first three months of Fiscal 2005 compared to $61.3 million in same period of Fiscal 2004. Capital expenditures totaled $13.7 million (1.8% of sales) compared to $6.3 million (0.9% of sales) last year. Proceeds from divestitures provided $18.6 million in the first three months of Fiscal 2005. Cash provided by financing activities totaled $67.1 million, compared to cash used for financing activities of $6.6 million last year. Proceeds from short-term borrowings with related parties were $67.1 million this year, compared to payments in the prior year totaling $187.1 million. Proceeds from long-term debt with related parties provided $185.6 million in the prior year. Dividend payments to preferred shareholders recorded in retained earnings on the balance sheet totaled $5.1 million in the prior year. These payments are included as a component of cash flows from operating activities beginning in the second quarter ended October 29, 2003, as a result of the adoption of SFAS No. 150 (see below for further discussion). 12 At July 28, 2004, Heinz Finance's external net debt (total external debt net of the value of interest rate swaps ($95.4 million), less cash and cash equivalents) was $3.32 billion. Excluding the reclassification of Heinz Finance Company's preferred stock (see below for further discussion), external net debt would have been $2.99 billion, down approximately $375 million as compared to the year earlier quarter. Heinz Finance expects that over $350 million of long-term debt maturing in Fiscal 2005 will be retired. In August 2004, Heinz and Heinz Finance amended their $600 million 364-Day Credit Agreement and their $1.5 billion Five-Year Credit Agreement by combining the agreements into a $2.0 billion Five-Year Credit Agreement, expiring August 2009. The Credit Agreement supports Heinz and Heinz Finance's commercial paper borrowings and the remarketable securities. As a result, these borrowings are classified as long-term debt based upon Heinz Finance's ability to refinance these borrowings on a long-term basis. These resources together with Heinz Finance's existing cash balance of over $700 million, its anticipated strong operating cash flow and access to the capital market, if required, should enable Heinz Finance to meet its cash requirements for operations, including capital expansion programs, debt maturities, and dividends to shareholders. The impact of inflation on both Heinz Finance's financial position and results of operations is not expected to adversely affect Fiscal 2005 results. CONTRACTUAL OBLIGATIONS Heinz Finance is obligated to make future payments under various contracts such as debt agreements, lease agreements and unconditional purchase obligations. In addition, Heinz Finance has purchase obligations for materials, supplies, services and property, plant and equipment as part of the ordinary conduct of business. A few of these obligations are long-term and are based on minimum purchase requirements. In the aggregate, such commitments are not at prices in excess of current markets. Due to the proprietary nature of some of Heinz Finance's materials and processes, certain supply contracts contain penalty provisions for early terminations. Heinz Finance does not believe that a material amount of penalties are reasonably likely to be incurred under these contracts based upon historical experience and current expectations. There have been no material changes to contractual obligations during the three months ended July 28, 2004. For additional information, refer to pages 15-16 of Heinz Finance's Annual Report on Form 10-K for the fiscal year ended April 28, 2004. RECENTLY ISSUED ACCOUNTING STANDARDS In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act") was signed into law. The Act introduced a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retirement health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position 106-1, Heinz elected to defer recognizing the effects of the Act on the accounting for its retirement health care plans in Fiscal 2004. In May 2004, the FASB issued Staff Position 106-2, providing final guidance on the accounting for benefits provided by the Act. The Staff Position 106-2 will be implemented by Heinz in the second quarter of Fiscal 2005. Heinz Finance is currently evaluating the impact of Heinz's adoption of this guidance on Heinz Finance's financial position, results of operations and cash flows. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This statement affects the classification, measurement and disclosure requirements of certain freestanding financial instruments, including mandatorily redeemable shares. SFAS No. 150 was effective for Heinz Finance for the second quarter of Fiscal 2004. The adoption of SFAS No. 150 required the prospective classification of Heinz Finance Company's $325 million of mandatorily redeemable preferred shares to long-term debt and the $5.1 million quarterly preferred dividend from retained earnings to interest expense beginning in the second quarter ended October 29, 2003. 13 CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION Statements about future growth, profitability, costs, expectations, plans, or objectives included in this report, including the management's discussion and analysis, the financial statements and footnotes, are forward-looking statements based on management's estimates, assumptions, and projections. These forward-looking statements are subject to risks, uncertainties, and other important factors that could cause actual results to differ materially from those expressed or implied in this report and the financial statements and footnotes. These include, but are not limited to, sales, earnings, and volume growth, general economic, political, and industry conditions, competitors' actions, which affect, among other things, customer preferences and the pricing of products, production, energy and raw material costs, product recalls, the ability to maintain favorable supplier relationships, achieving cost savings programs and gross margins, currency valuations and interest rate fluctuations, success of acquisitions, joint ventures, and divestitures, new product and packaging innovations, the effectiveness of advertising, marketing, and promotional programs, supply chain efficiency and cash flow initiatives, the impact of e-commerce and e-procurement, risks inherent in litigation, changes in estimates in critical accounting judgments, the possibility of increased pension expense, and other factors described in "Cautionary Statement Relevant to Forward-Looking Information" in Heinz Finance's Form 10-K for the fiscal year ended April 28, 2004. The forward-looking statements are and will be based on management's then current views and assumptions regarding future events and speak only as of their dates. Heinz Finance undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by the securities laws. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in Heinz Finance's market risk during the three months ended July 28, 2004. For additional information, refer to pages 16-18 of Heinz Finance's Annual Report on Form 10-K for the fiscal year ended April 28, 2004. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Heinz Finance's management, with the participation of Heinz Finance's President and Chief Financial Officer, evaluated the effectiveness of Heinz Finance's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the President and Chief Financial Officer concluded that Heinz Finance's disclosure controls and procedures, as of the end of the period covered by this report, were designed and functioning effectively to provide reasonable assurance that the information required to be disclosed by Heinz Finance in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Heinz Finance believes that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. (b) Changes in Internal Control over Financial Reporting No change in Heinz Finance's internal control over financial reporting occurred during Heinz Finance's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Heinz Finance's internal control over financial reporting. 14 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Nothing to report under this item. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES Nothing to report under this item. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Nothing to report under this item. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Nothing to report under this item. ITEM 5. OTHER INFORMATION Nothing to report under this Item. ITEM 6. EXHIBITS Exhibits required to be furnished by Item 601 of Regulation S-K are listed below. Heinz Finance may have omitted certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. Heinz Finance agrees to furnish such documents to the Commission upon request. Documents not designated as being incorporated herein by reference are set forth herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K. 12. Computation of Ratios of Earnings to Fixed Charges. 31(a). Rule 13a-14(a)/15d-14(a) Certification by the President. 31(b). Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer. 32(a). Certification by the President Relating to a Periodic Report Containing Financial Statements.* 32(b). Certification by the Chief Financial Officer Relating to a Periodic Report Containing Financial Statements.* * The Exhibit attached to this Form 10-Q shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to liability under the section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing. 15 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. H. J. HEINZ FINANCE COMPANY (Registrant) Date: September 7, 2004 By: /s/ LEONARD A. CULLO, JR. .......................................... Leonard A. Cullo, Jr. Director and President By: /s/ ARTHUR B. WINKLEBLACK .......................................... Arthur B. Winkleblack Director, Vice President, and Chief Financial Officer (Principal Financial Officer) 16 EXHIBIT INDEX DESCRIPTION OF EXHIBIT Exhibits required to be furnished by Item 601 of Regulation S-K are listed below. Documents not designated as being incorporated herein by reference are furnished herewith. The paragraph numbers correspond to the exhibit numbers designated in Item 601 of Regulation S-K. 12. Computation of Ratios of Earnings to Fixed Charges. 31(a). Rule 13a-14(a)/15d-14(a) Certification by the President. 31(b). Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer. 32(a). Certification by the President Relating to a Periodic Report Containing Financial Statements.* 32(b). Certification by the Chief Financial Officer Relating to a Periodic Report Containing Financial Statements.* * The Exhibit attached to this Form 10-Q shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.

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