<PAGE>
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 JANUARY 28, 1998
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 NINE MONTHS ENDED JANUARY 28, 1998 COMMISSION FILE NUMBER 1-3385
H. J. HEINZ COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0542520
(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
--- ---
The number of shares of the Registrant's Common Stock, par value $.25 per
share, outstanding as of February 28, 1998, was 365,679,947 shares.
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
January 28, 1998 January 29, 1997
---------------- ----------------
FY 1998 FY 1997
(Unaudited)
(In Thousands, Except
per Share Amounts)
<S> <C> <C>
Sales........................................ $6,733,386 $6,910,356
Cost of products sold........................ 4,196,835 4,418,924
---------- ----------
Gross profit................................. 2,536,551 2,491,432
Selling, general and administrative expenses. 1,369,517 1,445,107
---------- ----------
Operating income............................. 1,167,034 1,046,325
Interest income.............................. 23,004 28,701
Interest expense............................. 190,956 204,481
Other expense, net........................... 31,829 27,117
---------- ----------
Income before income taxes................... 967,253 843,428
Provision for income taxes................... 346,930 311,991
---------- ----------
Net income................................... $ 620,323 $ 531,437
========== ==========
Net income per share--diluted................ $ 1.66 $ 1.42
========== ==========
Average shares for net income per share--
diluted...................................... 373,509 374,279
========== ==========
Net income per share--basic.................. $ 1.69 $ 1.45
========== ==========
Average shares for net income per share--
basic........................................ 366,403 367,465
========== ==========
Cash dividends per share..................... $ .92 $ .84 1/2
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
------------
2
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
January 28, 1998 January 29, 1997
---------------- ----------------
FY 1998 FY 1997
(Unaudited)
(In Thousands, Except
per Share Amounts)
<S> <C> <C>
Sales........................................ $2,236,034 $2,307,538
Cost of products sold........................ 1,379,218 1,459,249
---------- ----------
Gross profit................................. 856,816 848,289
Selling, general and administrative expenses. 512,776 502,998
---------- ----------
Operating income............................. 344,040 345,291
Interest income.............................. 7,462 8,324
Interest expense............................. 64,848 70,496
Other expense, net........................... 18,041 6,436
---------- ----------
Income before income taxes................... 268,613 276,683
Provision for income taxes................... 80,457 102,296
---------- ----------
Net income................................... $ 188,156 $ 174,387
========== ==========
Net income per share--diluted................ $ .50 $ .47
========== ==========
Average shares for net income per share--
diluted...................................... 373,509 374,279
========== ==========
Net income per share--basic.................. $ .51 $ .47
========== ==========
Average shares for net income per share--
basic........................................ 366,403 367,465
========== ==========
Cash dividends per share..................... $ .31 1/2 $ .29
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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3
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 28, 1998 April 30, 1997*
---------------- ---------------
FY 1998 FY 1997
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents..................... $ 195,979 $ 156,986
Short-term investments, at cost which
approximates market......................... 12,435 31,451
Receivables, net.............................. 1,037,415 1,118,874
Inventories................................... 1,446,611 1,432,511
Prepaid expenses and other current assets..... 207,606 273,284
---------- ----------
Total current assets........................ 2,900,046 3,013,106
---------- ----------
Property, plant and equipment................. 4,060,852 4,380,598
Less accumulated depreciation................. 1,728,564 1,901,378
---------- ----------
Total property, plant and equipment, net.... 2,332,288 2,479,220
---------- ----------
Goodwill, net................................. 1,764,200 1,803,552
Other intangibles, net........................ 617,068 627,096
Other non-current assets...................... 514,188 514,813
---------- ----------
Total other non-current assets.............. 2,895,456 2,945,461
---------- ----------
Total assets................................ $8,127,790 $8,437,787
========== ==========
</TABLE>
*Summarized from audited fiscal year 1997 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
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4
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 28, 1998 April 30, 1997*
---------------- ---------------
FY 1998 FY 1997
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt............................... $ 402,361 $ 589,893
Portion of long-term debt due within one year. 13,382 573,549
Accounts payable.............................. 791,274 865,154
Salaries and wages............................ 74,007 64,836
Accrued marketing............................. 185,721 164,354
Accrued restructuring costs................... 127,259 210,804
Other accrued liabilities..................... 302,566 315,662
Income taxes.................................. 153,861 96,163
---------- ----------
Total current liabilities................... 2,050,431 2,880,415
---------- ----------
Long-term debt................................ 2,925,537 2,283,993
Deferred income taxes......................... 247,462 265,409
Non-pension postretirement benefits........... 208,005 211,500
Other......................................... 364,342 356,049
---------- ----------
Total long-term debt and other liabilities.. 3,745,346 3,116,951
---------- ----------
Shareholders' Equity:
Capital stock................................. 107,988 108,015
Additional capital............................ 245,917 175,811
Retained earnings............................. 4,323,938 4,041,285
Cumulative translation adjustments............ (364,110) (210,864)
---------- ----------
4,313,733 4,114,247
Less:
Treasury shares at cost (65,612,637 shares at
January 28, 1998 and 63,912,463 shares
at April 30, 1997).......................... 1,940,798 1,629,501
Unfunded pension obligation.................. 25,376 26,962
Unearned compensation relating to the ESOP... 15,546 17,363
---------- ----------
Total shareholders' equity.................. 2,332,013 2,440,421
---------- ----------
Total liabilities and shareholders' equity.. $8,127,790 $8,437,787
========== ==========
</TABLE>
*Summarized from audited fiscal year 1997 balance sheet.
See Notes to Condensed Consolidated Financial Statements.
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5
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
January 28, 1998 January 29, 1997
---------------- ----------------
FY 1998 FY 1997
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
Cash Provided by Operating Activities........ $ 554,715 $ 434,858
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures....................... (258,421) (277,681)
Acquisitions, net of cash acquired......... (136,351) (179,627)
Proceeds from sale of Ore-Ida frozen
foodservice foods business................ 490,739 --
Purchases of short-term investments........ (857,067) (951,912)
Sales and maturities of short-term
investments............................... 880,710 962,226
Other items, net........................... 28,864 25,741
--------- ---------
Cash provided by (used for) investing
activities.............................. 148,474 (421,253)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt............... 3,934 45,185
Payments on long-term debt................. (563,065) (100,049)
Proceeds from commercial paper and short-
term borrowings, net...................... 481,438 468,693
Dividends.................................. (337,670) (310,239)
Purchases of treasury stock................ (480,306) (208,281)
Exercise of stock options.................. 170,598 105,589
Other items, net........................... 77,549 27,384
--------- ---------
Cash (used for) provided by financing
activities.............................. (647,522) 28,282
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents............................ (16,674) (7,068)
--------- ---------
Net increase in cash and cash equivalents.... 38,993 34,819
Cash and cash equivalents at beginning of
year........................................ 156,986 90,064
--------- ---------
Cash and cash equivalents at end of period... $ 195,979 $ 124,883
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
------------
6
<PAGE>
H. J. HEINZ COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The Management's Discussion and Analysis of Financial Condition and
Results of Operations which follows these notes contains additional
information on the results of operations and the financial position of the
company. Those comments should be read in conjunction with these notes.
The company's annual report on Form 10-K for the fiscal year ended April
30, 1997 includes additional information about the company, its
operations, and its financial position, and should be read in conjunction
with this quarterly report on Form 10-Q.
(2) 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 company's business. Certain prior year amounts have been
reclassified in order to conform with the fiscal 1998 presentation.
(3) 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.
(4) The composition of inventories at the balance sheet dates was as follows:
<TABLE>
<CAPTION>
January 28, 1998 April 30, 1997
---------------- --------------
(Thousands of Dollars)
<S> <C> <C>
Finished goods and work-in-process........ $1,090,218 $1,040,104
Packaging material and ingredients........ 356,393 392,407
---------- ----------
$1,446,611 $1,432,511
========== ==========
</TABLE>
(5) The provision for income taxes consists of provisions for federal, state,
U.S. possessions and foreign income taxes. The company operates in an
international environment with significant operations in various locations
outside the United States. Accordingly, the consolidated income tax rate
is a composite rate reflecting the earnings in the various locations and
the applicable tax rates.
(6) On June 30, 1997, the company completed the sale of its Ore-Ida frozen
foodservice foods business to McCain Foods Limited of New Brunswick,
Canada. The transaction resulted in a pretax gain of approximately $96.6
million ($0.14 per diluted share), and was recorded as an offset to
selling, general and administrative expenses. The transaction included the
sale of the company's Ore-Ida appetizer, pasta and potato foodservice
business and five of the Ore-Ida plants that manufacture the products. The
Ore-Ida frozen foodservice foods business contributed approximately $525
million in net sales for fiscal 1997. This sale was an essential part of
Project Millennia as it will allow the company to focus its efforts on the
Ore-Ida retail frozen potato and pasta business, and on the frozen retail
snacks business. The sale is not expected to have an adverse impact on the
company's results of operations.
(7) On June 30, 1997, the company acquired John West Foods Limited from
Unilever. John West Foods Limited, with annual sales of more than $250
million, is the leading brand of canned tuna and fish in the United
Kingdom. Based in Liverpool, John West Foods Limited sells its canned fish
products throughout Continental Europe and in a number of other
international markets. (John West operations in Australia, New Zealand and
South Africa were not included in the transaction.)
On July 21, 1997, the company announced that it had acquired a majority
interest in a joint venture with Tiger Oats Limited of Johannesburg, South
Africa. The new company is known as Pet Products (Pty) Limited with its
headquarters in Cape Town. Pet Products manufactures and markets pet food
brands formerly owned exclusively by Tiger Oats. These brands include
Dogmor, Husky, Pamper and Catmor.
7
<PAGE>
On August 28, 1997, the company acquired a majority interest in one of
Poland's leading food processors, Pudliszki S.A. Pudliszki is the largest
ketchup producer in Poland and also markets tomato concentrate, canned
vegetables and cooking sauces.
On November 7, 1997, the company acquired the single-serve foodservice
business of CPC (United Kingdom) Ltd. and its Frank Cooper's brand. Along
with its flagship brand, Frank Cooper's, this business offers single-
serve sauces, dressings, and jams and jellies under the names Oxford,
Vintage, Adpac and Berry Hill.
During the current year the company also made other acquisitions,
primarily in the Asia/Pacific region.
All of the above acquisitions have been accounted for as purchases and,
accordingly, the respective purchase prices have been allocated on a
preliminary basis to the respective assets and liabilities based on their
estimated fair values as of the dates of the acquisitions. Operating
results of these acquisitions have been included in the Consolidated
Statement of Income from the dates of the acquisitions.
Pro forma results of the company, assuming all of the above transactions
had been made at the beginning of each period presented, would not be
materially different from the results reported.
(8) The company's $2.30 billion credit agreement, which expires in September
2001, supports its domestic commercial paper program. At January 28,
1998, the company had $2.01 billion of domestic commercial paper
outstanding, all of which has been classified as long-term debt due to
the long-term nature of the credit agreement. As of April 30, 1997, the
company had $1.35 billion of domestic commercial paper outstanding and
classified as long-term debt.
On January 14, 1998, the company issued $250 million of 5.75% five-year
notes in the international capital markets. The transaction closed on
February 3, 1998 and the proceeds were used to repay domestic commercial
paper.
(9) On September 10, 1997, the company's board of directors raised the
quarterly dividend on the company's common stock to $0.31 1/2 per share
from $0.29 per share, for an indicated annual rate of $1.26 per share.
(10) On September 10, 1997, the company's board of directors authorized the
repurchase of additional shares of its common stock, par value $0.25 per
share. As of January 28, 1998, there is authorization to repurchase up to
11.6 million shares.
(11) In the third quarter, the company adopted SFAS No. 128, "Earnings per
Share" which requires the disclosure of both diluted and basic earnings
per share. Basic earnings per share is calculated by dividing earnings
attributable to common shares by average common shares outstanding, while
diluted earnings per share include all dilutive securities or other
contracts that may entitle its holder to obtain common stock, in the
divisor.
8
<PAGE>
The following table sets forth the computation of basic and diluted
earnings per share in accordance with the provisions of Statement 128.
Previously reported earnings per share amounts have been restated, as
necessary, to conform to Statement 128 requirements.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
January 28, January 29, January 28, January 29,
1998 1997 1998 1997
----------- ----------- ----------- -----------
FY 1998 FY 1997 FY 1998 FY 1997
(In Thousands, Except per Share Amounts)
<S> <C> <C> <C> <C>
Net income per share--basic:
Net income................ $188,156 $174,387 $620,323 $531,437
Preferred dividends....... 9 10 28 32
-------- -------- -------- --------
Net income applicable to
common stock............. $188,147 $174,377 $620,295 $531,405
======== ======== ======== ========
Average common shares
outstanding--basic....... 366,403 367,465 366,403 367,465
======== ======== ======== ========
Net income per share--
basic.................... $ 0.51 $ 0.47 $ 1.69 $ 1.45
======== ======== ======== ========
Net income per share--
diluted:
Net income................ $188,156 $174,387 $620,323 $531,437
======== ======== ======== ========
Average common shares
outstanding.............. 366,403 367,465 366,403 367,465
Effect of dilutive
securities:
Convertible preferred
stock.................. 304 345 304 345
Stock options........... 6,802 6,469 6,802 6,469
-------- -------- -------- --------
Average common shares
outstanding--diluted..... 373,509 374,279 373,509 374,279
======== ======== ======== ========
Net income per share--
diluted................ $ 0.50 $ 0.47 $ 1.66 $ 1.42
======== ======== ======== ========
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
NINE MONTHS ENDED JANUARY 28, 1998 AND JANUARY 29, 1997
H. J. Heinz Company announced its largest-ever reorganization plan in the
fourth quarter of Fiscal 1997. This reorganization and restructuring program
("Project Millennia") is designed to strengthen the company's core businesses
and improve the company's profitability and global growth.
On June 30, 1997, the company completed the sale of its Ore-Ida frozen
foodservice business to McCain Foods Limited. The transaction resulted in a
pretax gain of approximately $96.6 million ($0.14 per diluted share), and was
recorded as an offset to selling, general and administrative expenses. This
sale was an essential part of Project Millennia as it will allow the company
to focus its efforts on the Ore-Ida retail frozen potato and pasta business,
and on the frozen retail snacks business. In addition, the company has
announced the closure or sale of 23 plants worldwide, with another 2 to be
announced.
During the first nine months of Fiscal 1998, the company incurred non-
recurring costs related to the ongoing implementation of Project Millennia of
$60.4 million pretax ($0.10 per diluted share). These non-recurring costs
consist primarily of relocation, training, consulting and start-up costs. In
the fourth quarter of the fiscal year, the company expects additional non-
recurring costs associated with the implementation of Project Millennia of
between $0.04 and $0.05 per share.
RESULTS OF OPERATIONS
For the nine months ended January 28, 1998, sales decreased $177.0 million,
or 2.6%, to $6,733.4 million from $6,910.4 million recorded in the same period
a year ago. The sales decrease resulted from divestitures of 6.3% and the
unfavorable effect of foreign exchange translation rates of 3.0%; partially
offset by acquisitions of 3.4%, volume gains of 1.7% and favorable price of
1.6%. Domestic operations provided 53.2% of the current period's sales
compared to 55.4% in the same period last year.
During the first nine months of Fiscal 1998, the company acquired John West
Foods Limited in Europe, a majority interest in Pudliszki S.A., one of
Poland's top food processors, and other small acquisitions. Fiscal 1997
acquisitions impacting the period-to-period sales dollar comparison include
substantially all of the pet food businesses of Martin Feed Mills Limited in
Canada, the canned beans and pasta business of Nestle Canada, Inc. and other
small acquisitions, primarily in the Asia/Pacific region. The sales impact of
these acquisitions was more than offset by divestitures, primarily the Ore-Ida
frozen foodservice business and the New Zealand ice cream business.
Volume increases recorded in seafood, sauces and pastes, weight loss
classroom activities, bakery products and retail frozen potatoes were
partially offset by a volume decline in pet food.
Price increases recorded in retail ketchup, infant food, pet food and
seafood were partially offset by a price decrease in frozen entrees.
Foreign currencies declined against the U.S. dollar, decreasing sales by
3.0%. This decrease came primarily from sales in Italy and the Asia/Pacific
region.
Gross profit increased $45.1 million to $2,536.6 million from $2,491.4
million a year ago. The ratio of gross profit to sales increased to 37.7% from
36.1%. In the current period, gross profit was unfavorably impacted by non-
recurring costs related to the ongoing implementation of Project Millennia.
Gross profit in the prior period was favorably impacted by a gain on the sale
of real estate, partially offset by restructuring and related costs. Excluding
these non-recurring items in both periods, gross profit would have increased
$79.5 million and the gross profit ratio would have increased to 38.1% from
35.9%. The current year's gross profit and gross profit ratio were favorably
impacted by price increases and reduced trade allowances which resulted from
the discontinuance of inefficient end-of-quarter trade promotions, cost
savings resulting from Project Millennia and a favorable product mix.
10
<PAGE>
Operating income increased $120.7 million, or 11.5%, to $1,167.0 million
from $1,046.3 million for the same period last year. In the current period,
operating income was favorably impacted by the gain on the sale of the Ore-Ida
frozen foodservice business, partially offset by non-recurring costs related
to the ongoing implementation of Project Millennia. Operating income in the
prior period was unfavorably impacted by restructuring and related costs,
partially offset by a gain on the sale of real estate. Excluding these non-
recurring items in both periods, operating income would have increased $76.0
million, or 7.2%, to $1,130.8 million from $1,054.8 million. The increase in
operating income, excluding the effects of these non-recurring items in both
periods, is primarily due to the increase in gross profit as SG&A expenses
were relatively flat period-to-period. Unfavorable foreign exchange
translation rates reduced operating income by $32.0 million or 3.1%.
Interest expense decreased $13.5 million to $191.0 million from $204.5
million in the comparable period a year ago primarily due to lower average
borrowings.
Other expenses increased $4.7 million to $31.8 million from $27.1 million in
the prior period, primarily due to currency losses in the Asia/Pacific region.
The effective tax rate for the current nine-month period was 35.9% compared
to 37.0% for the same period last year. The current period's effective rate
reflected the benefits of recent tax legislation in Italy and the United
Kingdom, partially offset by a significantly higher tax rate associated with
the sale of Ore-Ida's frozen foodservice business. Excluding these items, the
effective tax rate for the nine-month period would be 37.0%, the same as the
prior year's comparable period. The current rate reflects a reduction in the
effective rate for the year as a result of foreign tax planning.
Net income for the first nine months was $620.3 million compared to $531.4
million for the same period last year. Diluted earnings per share was $1.66
compared to $1.42 a year ago and basic earnings per share was $1.69 compared
to $1.45 a year ago. Excluding the non-recurring items noted above, net income
would have increased 12.8% to $605.2 million from $536.5 million a year ago;
diluted earnings per share would have increased 13.3% to $1.62 from $1.43 a
year ago; and basic earnings per share would have increased 13.0% to $1.65
from $1.46 a year ago.
THREE MONTHS ENDED JANUARY 28, 1998 AND JANUARY 29, 1997
RESULTS OF OPERATIONS
For the three months ended January 28, 1998, sales decreased $71.5 million,
or 3.1%, to $2,236.0 million from $2,307.5 million recorded in the same period
a year ago. The sales decrease resulted from the impact of divestitures of
7.2% and the unfavorable effect of foreign exchange translation rates of 4.8%;
partially offset by volume gains of 4.3%, acquisitions of 3.3% and favorable
price of 1.3%. Domestic operations provided 53.1% of the current period's
sales compared to 53.6% in the same period last year.
Volume increases occurred in seafood, retail ketchup, retail frozen
potatoes, sauces and pastes, infant food, frozen entrees and weight loss
classroom activities; partially offset by decreases in pet food and soups.
Acquisitions impacting the quarter-to-quarter sales dollar comparison
included John West Foods Limited in Europe, a majority interest in Pudliszki
S.A., one of Poland's top food processors and other small acquisitions. The
sales impact of these acquisitions was more than offset by divestitures,
primarily the Ore-Ida frozen foodservice business and the New Zealand ice
cream business.
Price increases recorded in retail ketchup and infant food were partially
offset by a decrease in frozen entrees.
Foreign currencies declined against the U.S. dollar, decreasing sales by
4.8%. This decrease came primarily from sales in Italy and the Asia/Pacific
region.
11
<PAGE>
Gross profit increased $8.5 million to $856.8 million from $848.3 million a
year ago. The ratio of gross profit to sales increased to 38.3% from 36.8%. In
the current period, gross profit was unfavorably impacted by non-recurring
costs related to the ongoing implementation of Project Millennia. Gross profit
in the prior period was favorably impacted by a gain on the sale of real
estate, partially offset by restructuring and related costs. Excluding the
non-recurring items in both periods, gross profit would have increased $32.3
million and the gross profit ratio would have increased to 39.0% from 36.4%.
The current quarter's gross profit and gross profit ratio were favorably
impacted by price increases and reduced trade allowances which resulted from
the discontinuance of inefficient end-of-quarter trade promotions, cost
savings resulting from Project Millennia and a favorable product mix.
Operating income decreased $1.3 million to $344.0 million from $345.3
million for the same quarter last year. In the current quarter, operating
income was unfavorably impacted by non-recurring costs related to the ongoing
implementation of Project Millennia of $29.4 million pretax ($0.05 per diluted
share). Operating income in the same quarter last year was unfavorably
impacted by a pretax charge of $18.1 million ($0.03 per diluted share) for
restructuring and related costs, partially offset by a pretax gain of $13.2
million ($0.02 per diluted share) on the sale of real estate. Excluding the
non-recurring items in both periods, operating income increased $23.2 million,
or 6.6%, to $373.4 million from $350.2 million. The increase in operating
income, excluding the effects of these non-recurring items in both periods, is
primarily due to the increase in gross profit as SG&A expenses were relatively
flat quarter-to-quarter. Unfavorable foreign exchange translation rates
reduced operating income by $16.0 million or 4.6%.
Interest expense decreased $5.6 million to $64.8 million from $70.5 million
in the third quarter a year ago primarily due to lower average borrowings.
Other expenses increased $11.6 million to $18.0 million from $6.4 million in
the same quarter last year, primarily due to currency losses in the
Asia/Pacific region.
The effective tax rate for the third quarter was 30.0%, which included a
benefit from recent tax legislation in Italy and a reduction in the full-year
projected tax rate as noted in the nine-month discussion above.
Net income for the current quarter was $188.2 million compared to $174.4
million for the same quarter last year. Diluted earnings per share was $0.50
compared to $0.47 a year ago and basic earnings per share was $0.51 compared
to $0.47 a year ago. Excluding the non-recurring items noted above, net income
would have increased 16.6% to $206.7 million from $177.2 million a year ago;
diluted earnings per share would have increased 14.6% to $0.55 from $0.48 a
year ago; and basic earnings per share would have increased 16.7% to $0.56
from $0.48 a year ago.
LIQUIDITY AND FINANCIAL POSITION
Cash provided by operating activities totaled $554.7 million for the nine
month period ended January 28, 1998 compared to $434.9 million last year.
Cash provided by investing activities totaled $148.5 million compared to
requiring $421.3 million last year. Cash provided by divestitures in the
current period totaled $490.7 million, due to the sale of the Ore-Ida frozen
foodservice business. Acquisitions in the current period required $136.4
million, due mainly to the purchases of John West Foods Limited in Europe, the
single-serve foodservice business of CPC (United Kingdom) and its Frank
Cooper's brand, a majority interest in Pudliszki S.A. of Poland, a majority
interest in a pet food joint venture with Tiger Oats Limited of Johannesburg,
South Africa and other acquisitions, primarily in the Asia/Pacific region.
Acquisitions in the prior year's comparable period totaled $179.6 million, due
mainly to the purchases of substantially all of the pet food businesses of
Martin Feed Mills Limited in Canada, the assets of the canned beans and pasta
business of Nestle Canada Inc., Shortland Cannery Limited in New Zealand, and
Southern Country Foods Ltd. in Australia. Purchases of property, plant and
equipment totaled $258.4 million in the current period compared to $277.7
million a year ago.
12
<PAGE>
In the current period, $647.5 million was applied to financing activities
while financing activities provided $28.3 million a year ago. Treasury stock
purchases totaled $480.3 million (10.2 million shares) versus $208.3 million
(6.2 million shares) in the prior year's first nine months. Payments on long-
term debt totaled $563.1 million for the current period compared to $100.0
million last year. Dividend payments totaled $337.7 million compared to $310.2
million a year ago. Proceeds from long-term debt provided $3.9 million
compared to $45.2 million in the prior period. Stock options exercised
provided $170.6 million in the current period versus $105.6 million in the
prior year's comparable period. Net proceeds from commercial paper and short-
term borrowings provided $481.4 million compared to $468.7 million in the
prior period.
The company's $2.30 billion credit agreement, which expires in September
2001, supports its domestic commercial paper program. As of January 28, 1998,
the company had $2.01 billion of domestic commercial paper outstanding, all of
which has been classified as long-term debt due to the long-term nature of the
credit agreement. As of April 30, 1997, the company had $1.35 billion of
domestic commercial paper outstanding and classified as long-term debt. The
company continues to evaluate long-term financing vehicles in order to reduce
short-term variable interest rate debt.
On September 10, 1997, the company's board of directors raised the quarterly
dividend on the company's common stock to $0.31 1/2 per share from $0.29 per
share, for an indicated annual rate of $1.26 per share. On March 11, 1998, the
company's board of directors declared the quarterly dividend on the company's
common stock of $0.31 1/2 per share payable on April 10, 1998 to shareholders
of record at the close of business on March 23, 1998.
On September 10, 1997, the company's board of directors authorized the
repurchase of additional shares of its common stock, par value $0.25 per
share. As of January 28, 1998 there is authorization to repurchase 11.6
million shares.
On January 14, 1998, the company issued $250 million of 5.75% five-year
notes in the international capital markets. The transaction closed on February
3, 1998 and the proceeds were used to repay domestic commercial paper.
In the third quarter, the company adopted SFAS No. 128, "Earnings per Share"
which requires the disclosure of both diluted and basic earnings per share.
Basic earnings per share is calculated by dividing earnings attributable to
common shares by average common shares outstanding, while diluted earnings per
share include all dilutive securities or other contracts that may entitle its
holder to obtain common stock, in the divisor.
The company's financial position continues to remain strong, enabling it to
meet cash requirements for operations, capital expansion programs and
dividends to shareholders.
OTHER MATTERS
On December 2, 1997, following the recommendation of the Chairman and Chief
Executive Officer Anthony J. F. O'Reilly, to the Management Development and
Compensation Committee of outside directors, the board of directors of the
company announced the appointment of William R. Johnson as president and chief
executive officer, effective April 30, 1998, the beginning of the company's
financial year. Dr. O'Reilly has agreed to remain as non-executive chairman of
the company through the annual meeting of shareholders in September 2000.
13
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the description of legal proceedings set forth under this caption in the
company's Quarterly Report on Form 10-Q for the three months ended July 30,
1997.
ITEM 2. CHANGES IN 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
See Note 7 to the Condensed Consolidated Financial Statements in Part I--
Item 1 of this Quarterly Report on Form 10-Q and "Other Matters" in Part I--
Item 2 of this Quarterly Report on Form 10-Q.
This report contains certain forward-looking statements which are based on
management's current views and assumptions regarding future events and
financial performance. Reference should be made to the section "Forward-
Looking Statements" in Item 1 of the registrant's Annual Report on Form 10-K
for the fiscal year ended April 30, 1997 for a description of the important
factors that could cause actual results to differ materially from those
discussed herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be furnished by Item 601 of Regulation S-K are
listed below and are filed as part hereof. The Registrant has omitted
certain exhibits in accordance with Item 601(b)(4)(iii)(A) of Regulation
S-K. The Registrant agrees to furnish such documents to the Commission upon
request. Documents not designated as being incorporated herein by reference
are filed herewith. The paragraph numbers correspond to the exhibit numbers
designated in Item 601 of Regulation S-K.
10. Service Agreement between H. J. Heinz Company and
Anthony J. F. O'Reilly.
27. Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended January 28, 1998.
14
<PAGE>
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 COMPANY
(Registrant)
Date: March 13, 1998 /s/ Paul F. Renne
By...................................
Paul F. Renne
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: March 13, 1998 /s/ Edward J. McMenamin
By...................................
Edward J. McMenamin
Vice President and Corporate
Controller
(Principal Accounting Officer)
15
<PAGE>
Exhibit 10
SERVICE AGREEMENT
AGREEMENT made as of December 2, 1997 between H.J. Heinz Company, a
Pennsylvania corporation (the "Company"), and Anthony J.F. O'Reilly
(the "Chairman").
WHEREAS, the Chairman has been serving as Chairman of the Board
of Directors of the Company (the "Board") and Chief Executive Officer of the
Company;
WHEREAS, the Chairman desires to resign his position as Chief
Executive Officer of the Company as of the "Effective Date" (as defined below);
WHEREAS, the Company desires the Chairman to continue to serve as
Chairman of the Board and to retain the services and skills of the Chairman who
has been President and Chief Operating Officer of the Company since 1973, Chief
Executive Officer of the Company since 1979 and Chairman of the Board of the
Company since 1987, and who has been, and continues to be, critical to the
continued growth and success of the Company;
WHEREAS, the Company believes that it is particularly important
during the transition period in which the term of a new chief executive officer
will commence for the Company to avail itself of the skill and experience of the
Chairman as well as his relationships with the business and international
community;
WHEREAS, in order to induce the Chairman to continue to serve as
Chairman of the Board and to provide the services described herein, the Company
desires to provide the Chairman with compensation and other benefits on the
terms and conditions set forth in this Agreement; and
<PAGE>
2
WHEREAS, the Chairman is willing to continue to serve as Chairman
of the Board and to perform services for the Company, on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein and for other good and valuable consideration, the parties
agree as follows:
1. Term of Service. The Chairman's term of service under this
---------------
Agreement (the "Term"), shall be for the period beginning April 30, 1998, the
commencement date of the Company's next fiscal year (the "Effective Date"),
and ending on the date of the Company's annual meeting of shareholders in
September, 2000 (the "Termination Date"), subject however, to earlier
termination as expressly provided herein.
2. Service.
-------
2.1 Duties. During the Term, the Chairman shall continue to serve as
------
Chairman of the Board. In addition, the Chairman will be available to consult
with the executives and the other directors of the Company. The Chairman will
provide such other services to the Company as may be mutually agreed between the
Chairman and the Board (but will not be responsible for any of the day to day
operations of the Company, which shall be the responsibility of the Chief
Executive Officer). The Chairman shall be expected to attend meetings of the
Board of Directors and the Annual Meeting of Stockholders, and will attend such
other functions as may be reasonably requested by the Chief Executive Officer,
subject to the Chairman's other personal and professional commitments. The
Chairman shall be
<PAGE>
3
entitled, but shall not be required, to attend other Company sponsored meetings.
During the Term, the Company's annual financial results will be announced and
published jointly by the Chairman, as Chairman of the Board, and the Chief
Executive Officer in a manner consistent with the announcements and publications
in prior years. During the Term, the Chairman shall remain as Chairman of the
H.J. Heinz Company Foundation. The Chairman shall continue to be authorized to
make or approve expenditures on behalf of the Company consistent with the
expenditures that heretofore have been or currently are provided in the Chairman
budgets. The Chairman shall perform his duties in a manner consistent with the
objectives and prospects of the Company and its multinational operations,
subject to the general powers and responsibilities of the Board.
2.2 Corporate Action. The Company will take all necessary action,
----------------
including effecting any necessary amendments to the Company's by-laws, to enable
the (Chairman to serve in the capacity described herein and will cause the
Chairman to be nominated for election as a director of the Company during the
Term.
2.3 Location. The Chairman may perform his duties from locations of
--------
his choosing as may be appropriate, taking into account the reduced scope of the
Chairman's authority and responsibilities contemplated hereby.
2.4 Employment Status. From and after the Effective Date, the
-----------------
Chairman shall cease to be an employee of the Company and its affiliates and
shall be deemed to have retired from the Company and its affiliates for purposes
of the qualified and nonqualified retirement plans, programs and arrangements of
the Company and its affiliates.
<PAGE>
4
3. Compensation.
------------
3.1 Annual Fee. The Company shall pay or cause to be paid to the
----------
Chairman during the Term an annual fee that shall not be less than $500,000 (the
"Annual Fee"). The Annual Fee shall be payable in accordance with current
practices for the Chairman. The Company, by action of the Management Development
and Compensation Committee of its Board of Directors (the "Compensation
Committee"), taken in its discretion, may increase the Annual Fee at any time
and from time to time during the Term.
3.2 Bonus Compensation. During the Term, the Chairman shall be
------------------
eligible to receive an annual bonus in such amounts, if any, and at such times,
as may be determined by the Compensation Committee in its sole discretion.
4. Stock Options.
-------------
4.1 Existing Options. As of the date of this Agreement, the Chairman
----------------
holds stock options to acquire 1,875,000 shares of the Company common stock (the
"Existing Options"). There are 1,125,000 Existing Options that are currently
scheduled to vest on December 31, 1997 which shall, if not then vested, vest
upon the execution of this Agreement. The remaining 750,000 Existing Options
held by the Chairman will continue to vest and remain exercisable in accordance
with their terms during the Term as though the Chairman continued to be a full
time employee of the Company and shall, to the extent not then vested, become
fully vested on the date the Chairman shall cease to serve as Chairman of the
Board for any reason. The Company agrees to take all necessary action to effect
the foregoing, and the committee administering each stock option plan pursuant
to which the
<PAGE>
5
Existing Options were granted shall pass such resolutions and take any other
action that may be necessary to waive any conditions to vesting and the exercise
of the Existing Options that are inconsistent herewith.
4.2 Confirmation. The parties confirm that they have no current
------------
understanding or agreement regarding the grant of any additional stock options
to the Chairman during the Term.
5. Authorization. The Company represents and warrants that the
-------------
execution, delivery and performance of this Agreement have been duly authorized
by all necessary corporate action on the part of the Company and the Board, and
do not require any further approval or consent, or amendment or modification
of any plan or agreement.
6. Benefits.
--------
6.1 Expenses. The Chairman shall be reimbursed by the Company for
--------
all reasonable expenses incurred by the Chairman as a result of the termination
of his services as the Chief Executive Officer of the Company and his retirement
from the Company.
6.2 Support Services. The Chairman shall continue to be provided
----------------
such benefits and support services (including but not limited to executive
office facilities and secretarial, financial, communications, security and
transportation services and other allowances) as heretofore have been and
currently are being provided to the Chairman. The Chairman shall be provided
with an office, commensurate with his position with the Company, on the 60th
floor of the Company's corporate headquarters in Pittsburgh. The Company shall
continue to
<PAGE>
6
provide the Chairman with the exclusive services of the Chairman's personal
assistant, Clyde Fearer, or any other personal assistant of his choosing and
shall provide such assistant with an office on the 60th floor of the Company's
corporate headquarters in Pittsburgh.
6.3 Other Benefits.
--------------
(a) During the Term, the Chairman shall continue to participate
in all employee benefit plans and programs of the Company and its affiliates
(other than as provided for in Section 2.4), including, without limitation, any
medical, life insurance and disability plans or programs, on a basis consistent
with the general provisions of such plans.
(b) The Chairman shall continue to be reimbursed for expenses
incurred in connection with Company business in a manner consistent with past
practice. Any issues as to consistency with past practice shall be resolved by
the Chairman of the Audit Committee.
(c) The Chairman shall have complete and full access to the
Company's aircraft for any travel that might facilitate the Chairman in
performing his duties hereunder as the Chairman shall determine in a manner
consistent with past practice; provided that the Chairman will inform the
--------
Company of any such use. To the extent any such use is determined by the
Chairman or the Chairman of the Company's Audit Committee to be unrelated to the
business activities of the Company, the Chairman will reimburse the Company for
the use of the aircraft in a manner consistent with past practice.
<PAGE>
7
7. Termination.
-----------
7.1 Termination for Cause. The Company may terminate the Term prior
---------------------
to the Termination Date for "cause." Such termination shall be effected by
notice thereof delivered by the Company to the Chairman.
For purposes of this Agreement, termination by the Company for
"cause" shall mean termination by action of a majority of the entire Board
because of (i) the Chairman's conviction of a felony relating to the business or
assets of the Company (which through the lapse of time or otherwise is not
subject to appeal) in which case such termination shall be effective as of the
date of such notice or (ii) the Chairman's willful continuing and repeated
refusal without proper cause to perform the duties described herein to the
Company; provided, that no termination for the events described in clause (ii)
--------
hereof shall be made unless the Chairman shall have failed to cure such event
within thirty days after written notice thereof shall have been given to the
Chairman by the Company.
In the event of termination by the Company for cause in accordance
with the foregoing procedures, the following provisions shall apply:
7.1.1 The Company shall have no further obligation to pay the
Annual Fee or bonuses to the Chairman hereunder except for any portion of the
Annual Fee accrued and unpaid through the effective date of termination and any
unpaid bonus with respect to any previously completed fiscal year.
7.1.2 Such termination shall not affect any rights the Chairman
has under any insurance or other benefit plans or arrangements of the
<PAGE>
8
Company that are vested as of the termination date or that vest as a result of
such termination.
7.1.3 The Chairman shall have the right to contest such
termination by appropriate legal action before any court of competent
jurisdiction and to obtain appropriate damages from the Company if and to the
extent that such termination is determined by such court to have been wrongful.
7.2 Termination by the Company Without Cause or Termination by the
--------------------------------------------------------------
Chairman for Good Reason. In the event that the term of employment is
- ------------------------
terminated prior to the Termination Date by the Company without "cause" (as
defined in Section 7.1 hereof) or by the Chairman for "Good Reason" (as defined
in Section 7.2.3 hereof), the following provisions shall apply:
7.2.1 The Chairman shall be entitled to the following:
(a) A lump-sum payment in cash equal to the aggregate
Annual Fee and bonus (which shall be deemed to be an amount equal to the highest
bonus paid to the Chairman, whether under this Agreement or otherwise, by the
Company and its affiliates in any of the last three full fiscal years proceeding
the date of termination) that the Chairman would have received for the greater
of (x) the period ending on the Termination Date and (y) one year after the date
of termination (the "Severance Period"), it being understood that to the extent
the Severance Period includes any partial fiscal year, the bonus otherwise
payable with respect to such fiscal year will be pro-rated; and
(b) The Chairman shall continue, during the Severance
Period (i) to be entitled to use of the office facilities (as described in
<PAGE>
9
Section 6.2 above), his personal assistant and the Company's corporate aircraft
on the same terms as were made available to him during the Term and (ii) to be
covered by the employee benefit plans of the Company and its affiliates to the
same extent he was covered during the Term (or, if continued coverage is not
permitted under the terms of such employee benefit plans, the Company will
provide the Chairman with a cash payment representing the economic equivalent of
such coverage (on an after-tax basis)).
7.2.2 Termination by the Chairman for Good Reason shall be
effected by notice thereof delivered by the Chairman to the Company and shall be
effective as of the date of such notice. The Company shall have the right to
contest such termination by appropriate legal action before any court of
competent jurisdiction and to obtain appropriate damages from the Chairman if
and to the extent such termination is determined by such court to have been
wrongful.
7.2.3 For purposes of this Agreement, "Good Reason" shall mean
the occurrence of any of the following events during the Term; provided, in the
case of clauses (a), (b) and (c) below, that if such breach is reasonably
capable of being cured by the Company, no termination for Good Reason shall be
made unless the Company shall have failed to cure such breach within thirty days
after written notice thereof shall have been given to the Company by the
Chairman:
(a) A material breach by the Company of its obligations
under this Agreement;
<PAGE>
10
(b) A material reduction by the Company in the Chairman's
authority or responsibilities from those described herein and customarily
associated with the position of Chairman of the Board;
(c) The failure of the Chairman (being willing and able to
serve) to be nominated, recommended and elected as a director at every
shareholders' meeting at which his term as a director would otherwise expire or
the failure of the Chairman to remain as Chairman of the Board; or
(d) a "Change in Control."
The term "Change in Control" shall mean:
(1) A transaction or series of transactions in which
any person or group within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934 (the "1934 Act") shall have become the beneficial owner,
directly or indirectly (with beneficial ownership determined as provided in Rule
13d-3, or any successor rule, under the 1934 Act), of securities of the Company
entitling the person or group to 20% or more of all votes (without consideration
of the rights of any class of stock to elect directors by a separate class vote)
to which all shareholders of the Company would be entitled in the election of
directors were an election held on such date; provided that any shares held by
any employee stock ownership plan sponsored by the Company shall be excluded
from the shares held by any person or group for purposes of determining whether
the foregoing 20% threshold for securities ownership has been reached by such
person or group;
(2) The failure of individuals who were members of the
Board of Directors as of the Effective Date to constitute at least a
<PAGE>
11
majority of the Board of Directors, unless the election (or the nomination for
election by the shareholders) of each new director was approved by a vote of at
least two-thirds of the total of such individuals then still in office and such
other directors as may previously have been elected or nominated pursuant to
such a two-thirds vote; or
(3) (i) The merger or consolidation of the Company with
another corporation in which the Company is not the surviving corporation, or
pursuant to which its common stock is converted, other than any transaction
where the shareholders of the Company immediately prior to the merger or
consolidation beneficially own, immediately after the merger or consolidation,
shares of the corporation issuing cash or securities in the merger or
consolidation entitling such shareholders to 50% or more of all votes (without
consideration of the rights of any class of stock to elect directors by a
separate class vote) to which all shareholders of such corporation would be
entitled in the election of directors or where the members of the Board of
Directors of the Company immediately prior to the merger or consolidation
constitute, immediately after the merger or consolidation, a majority of the
Board of Directors of the corporation issuing cash or securities in the merger
or consolidation, or (ii) the sale or other disposition or liquidation of all or
substantially all the assets of the Company; provided, however, that
--------- -------
notwithstanding anything to the contrary in this Agreement, no transaction or
series of transactions shall be deemed to constitute a "Change in Control" if
such transaction or series of transactions required the Chairman to be
identified in any United States securities law filing as a person or a member of
any
<PAGE>
12
group acquiring, holding or disposing of beneficial ownership of the Company
securities and effecting a "Change in Control," as defined herein.
7.2.4 Notwithstanding any other provision of this Agreement, if
all or any portion of the payments or benefits provided to the Chairman pursuant
to this Agreement, either alone or together with other payments or benefits
which the Chairman receives, or is entitled to receive, from the Company, would
constitute a "parachute payment" within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), then, except as set
forth in the following sentence, the amount of such payments or benefits
provided hereunder or otherwise shall be reduced to the extent necessary so that
no portion thereof shall be subject to the excise tax imposed by Section 4999 of
the Code. Notwithstanding the preceding sentence, if the Chairman would receive
a larger amount, on an after-tax basis, if the payments hereunder were not
reduced pursuant to the preceding sentence, then the payments hereunder to the
Chairman shall not be so reduced. The determination of whether or not the
Chairman would receive a larger amount, on after-tax basis, shall be made in
good faith by the Chairman and shall be submitted to the Company in writing at
least five business days prior to the time of the first payment and, if
reasonable, such determination shall be binding on the parties hereto.
7.2.5 In the event of termination by the Company without cause or
by the Chairman for Good Reason, (a) the Chairman shall have no further
obligations or liabilities to the Company under this Agreement, (b) the Chairman
shall retain the right to all options as modified hereunder, and all unvested
options shall immediately vest and become exercisable, and (c) such termination
shall
<PAGE>
13
not affect any vested rights which the Chairman may have had at the effective
date of such termination pursuant to any insurance or other death benefit plans
or arrangements of the Company, or any stock option or other plan of the Company
maintained for its senior executives, all of which rights shall remain in full
force and effect, nor shall such termination affect the obligation of the
Company to continue to provide the Chairman with the other benefits and support
services required to be provided to the Chairman under this Agreement.
7.3 No Mitigation. The Chairman shall not be required to mitigate
-------------
damages or the amount of any payments provided for under this Agreement by
seeking other employment or otherwise and no such employment, if obtained, or
compensation or benefits payable in connection therewith, shall reduce any
amounts or benefits to which the Chairman is entitled hereunder. Any payments
that may become due to the Chairman under Section 7.2.1 hereof shall not be
subject to offset for any claims the Company may have against the Chairman.
7.4 Legal Costs. If either party institutes any legal action to
-----------
enforce his or its rights under, or to recover damages for breach of, this
Agreement, the prevailing party in such an action shall be entitled to recover
from the other party any actual expenses for attorney's fees and disbursements
incurred by him or it.
8. Disability. If during the Term the Chairman shall become
----------
permanently disabled, as defined in the Company's long-term disability plan as
in effect on the date hereof, the Chairman shall continue to receive for the
balance of the Term an annual disability benefit equal to 60% of the then Annual
Fee and the Chairman shall retain the right to all of his options and all
unvested options shall
<PAGE>
14
immediately vest and become exercisable. If during the Term, the Chairman shall
fully recover from a disability, the Company, by action of a majority of the
members of the Compensation Committee, shall have the right (exercisable within
sixty days after notice from the Chairman of such recovery) but not the
obligation to restore the Chairman to full time service at full compensation. If
the Company elects not to restore the Chairman to the same position, functions,
duties and responsibilities as he exercised prior to his disability, he shall be
entitled to receive the full compensation and benefits provided for in this
Agreement. The Term shall not be extended or be deemed suspended by reason of
any period of disability and, unless otherwise provided in this Section 8,
the Chairman shall be entitled to receive all compensation and benefits provided
for in this Agreement.
9. Death. Upon the death of the Chairman, this Agreement and all
-----
benefits hereunder shall terminate except that the Chairman's estate (or a
designated beneficiary) shall be entitled to receive in a lump sum payment an
amount equal to: the Annual Fee accrued and unpaid to the last day of the month
in which his death occurs and the Chairman's estate or designated beneficiary
shall retain the right to all options and all unvested options shall immediately
vest and become exercisable. In addition to the foregoing payments, the
Chairman's estate or designated beneficiary shall have the right to receive any
death benefits or insurance payments provided for under any plan, program or
policy maintained by the Company hereunder or for the benefit of its senior
executive and to which the Chairman may be entitled.
<PAGE>
15
10. Covenant Not to Compete.
-----------------------
10.1 Noncompetition Period. The period of time beginning with the
---------------------
Effective Date and continuing to and including the earlier of (a) September 15,
2001 and (b) the first anniversary of the last day of the term of the Chairman's
engagement hereunder, is referred to herein as the "Noncompetition Period";
provided that the Noncompetition Period shall terminate immediately upon the
termination of the Chairman by the Company without cause or by the Chairman for
Good Reason.
10.2 Limitation on Activities.
------------------------
(a) During the Noncompetition Period, the Chairman shall not
serve as a chief executive officer, president or other senior executive officer
of, chairman of a board of, or serve in any similar capacities on behalf of, any
firm, corporation, partnership, business organization or other entity
(collectively, "Entities" ) that is significantly engaged (x) in the business of
manufacturing, processing, distributing, or marketing of food products or (y) in
other businesses in which the Company (which for purposes of this Article 10
shall include its subsidiaries) currently, or as of the last day of the
Chairman's engagement by the Company, is engaged, and that produce annual
revenues in excess of $100 million, and, with respect to clauses (x) and (y), is
in direct competition with the Company.
(b) The Chairman shall not divert, solicit or hire away, or
attempt to divert, solicit or hire away, any person who was employed by the
Company in an executive, managerial or exclusive consulting capacity at any time
within twelve months prior to the last day of the Chairman's engagement by the
<PAGE>
16
Company; provided that nothing in this Agreement shall prohibit the Chairman,
with the prior written consent of the Company (which consent shall not be
unreasonably withheld), from hiring any person who shall theretofore have
retired from the Company in the ordinary course and who served under the
Chairman as an executive officer of the Company.
10.3 Limitations. The parties intend and acknowledge that the
-----------
limitations on the Chairman's activity set forth in Section 10.2 above are
specifically limited in terms of temporal, geographic and activity-related scope
to such activities which, if they took place, would likely threaten the
Company's proprietary technology, trade secrets, marketing plans and other
confidential business information or its long-term business relationships with
certain customers and suppliers, such relationships having been developed and
maintained by the Company under the direction or supervision of the Chairman
with substantial effort and investment of the Company's time, money and other
resources.
10.4 Permitted Activities. The Company acknowledges that the
--------------------
Chairman has engaged in outside business activities and has made outside
investments prior to the date hereof and the Company agrees that it is the
intent of the parties that such activities and investments and additional
activities and investments in Entities that may or may not be engaged in the
food business or in other business which may directly compete with the Company
("Permitted Activities"), shall be outside the scope of this Section 10.
Accordingly, the provisions of this Section 10 shall not apply to the
involvement of, or restrain or prohibit the participation by the Chairman in,
any Permitted Activities during the Noncompetition Period or otherwise,
<PAGE>
17
so long as the Chairman does not assume the active responsibilities or duties
with respect to such Permitted Activities that would otherwise be prohibited by
Section 10.2.
11. Covenant Not to Disclose.
------------------------
11.1 The Chairman hereby covenants and agrees that he shall not at
any time or in any manner knowingly use or disclose any proprietary trade secret
or other confidential business information belonging to the Company (including,
for purposes of this Section 11, its subsidiaries and affiliates), including but
not limited to information relating to (a) the Company's strategic or marketing
plans, including any discussions or negotiations with respect to the
introduction of new products or the purchase or acquisition of any interest in
any operation relating to the Company's business; (b) the Company's business or
financing plans, whether long-term or short-term, as discussed, presented,
considered, or otherwise reviewed during meetings with other employees or agents
of the Company or the Board; (c) the profitability or cost of operations for the
Company or any of its subsidiaries, divisions, affiliates or business segments;
and (d) the Company's evaluation and compensation of, or future plans for, the
senior management and technical personnel employed by the Company or its
subsidiaries or affiliates. The provisions of this Section 10.1 shall not
prohibit the disclosure of (i) information that has entered the public domain
other than through any breach of this Agreement, (ii) information which the
Chairman is required to disclose under subpoena or similar process of law
(provided, that the Chairman shall give the Company such notice as may be
practicable of any such process in order that the Company may seek appropriate
<PAGE>
18
relief) or (iii) information, the disclosure of which is reasonably necessary
for the Chairman to defend himself or assert his rights under this Agreement in
connection with any proceeding to which the Company or its affiliates is a
party.
11.2 Upon the Chairman's termination of service with the Company
for any reason, the Chairman agrees (at the expense of the Company) to return
immediately and not to take any and all tangible or intangible property,
records, files, documents, software, data and other information irrespective of
form, belonging to the Company (or any of its subsidiaries, divisions, and
affiliated entities), with the exception of such materials or information as may
relate specifically to this Agreement or the Chairman's compensation and
benefits and except as may otherwise be approved by the Company in writing.
12. Special Remedies Upon Disclosure. A material breach of this
--------------------------------
Agreement will occur if the Chairman breaches or threatens to breach the
provisions of Sections 10 or 11 of this Agreement. The Chairman acknowledges
and agrees that such a breach would irreparably injure the Company and that the
occurrence of such a breach or threatened breach shall accordingly entitle the
Company to seek and obtain any legal, equitable or other relief which the
Company determines to be appropriate or necessary under the circumstances,
including specific performance of the provisions of this Agreement and/or the
issuance of an injunction or injunctions, without the posting of a bond or other
security, in addition to any other remedy which the Company may be entitled to
at law or in equity.
13. Rights Unfunded and Unsecured. All rights of the Chairman
-----------------------------
under this Agreement shall at all times be entirely unfunded and no provision
shall at
<PAGE>
19
any time be made with respect to segregating any assets of the Company for
payment of any amounts due hereunder. The Chairman shall not have or be given
any interest in or rights against any specific assets of the Company and shall
have only the rights of a general unsecured creditor of the Company.
14. Withholding. To the extent, but only to the extent, required by
-----------
law (including, without limitation, Sections 3402, 3102 and 3301 of the Code),
the Company shall withhold employment taxes from all payments and benefits
provided to the Chairman pursuant to this Agreement. In the case of the exercise
of any stock option, such withholding may be effected by retention of an
appropriate number of shares of common stock.
15. Notices. All notices, requests, consents and other communications,
-------
required or permitted to be given hereunder, shall be in writing and shall be
deemed to have been duly given if delivered personally or sent by prepaid
telegram, or mailed first-class, postage prepaid, by registered mail, as follows
(or to such other or additional addresses as either party shall designate by
notice in writing to the other in accordance herewith):
15.1 If to the Company:
H.J. Heinz Company
World Headquarters
P.O. Box 57
Pittsburgh, Pennsylvania 15230
Attention: Board of Directors
Attn: Chairman of the Management
Development and Compensation
Committee
<PAGE>
20
(with a copy, similarly addressed but Attention:
General Counsel)
15.2 If to the Chairman:
Dr. Anthony J.F. O'Reilly
H.J. Heinz Company
World Headquarters
P.O. Box 57
Pittsburgh, Pennsylvania 15230
16. General.
-------
16.1 Governing Law. Jurisdiction. Source of Process, Venue. This
-----------------------------------------------------
Agreement shall be governed by and construed and enforced in accordance with the
internal laws (and not the law of conflicts) of the State of Pennsylvania
applicable to agreements made and to be performed entirely in Pennsylvania. Each
party (a) hereby irrevocably submits itself to and acknowledges and recognizes
the jurisdiction of the courts of the State of Pennsylvania located in the
County of Allegheny or in the United States District Court for the Western
District of Pennsylvania (which courts, together with all applicable appellant
courts, for purposes of this Agreement, are the only "courts of competent
jurisdiction"), for the purpose of any suit, action or other proceeding arising
out of, under, or in connection with, relating to, or based upon this Agreement
or the subject matter hereof or the transactions contemplated hereby, (b) agrees
that any service of process in connection with any such suit, action or other
proceeding may be made upon it by means of the United States mail or such other
service as may be authorized by any such court, (c) agrees that the courts of
competent jurisdiction shall be the sole and exclusive courts and forums for the
purpose of any such suit, action or proceeding and agrees
<PAGE>
21
not to commence any suit, action or other proceeding arising out of, under, or
in connection with, or relating to or based upon this Agreement or the subject
matter hereof or the transactions contemplated hereby in any other forum and (d)
hereby waives and agrees not to assert, by way of motion, as a defense, or
otherwise, in any such suit, action or proceeding, any claim that it is not
subject to the jurisdiction of courts of competent jurisdiction, that such suit,
action or proceeding is brought in an inconvenient forum, that the venue of the
suit, action or proceeding is improper or that this Agreement or the subject
matter hereof may not be enforced in or by such court. Each party agrees that
its submission to jurisdiction and its consent to service of process by mail is
made for the express benefit of the other party.
16.2 Severability. The invalidity or unenforceability of any
------------
term or provision of Sections 10, 11 or 12 of this Agreement shall not affect
the validity or enforceability of any other term or provision of such Sections,
which shall remain in full force and effect. If a final judgment of a court of
competent jurisdiction declares any such term or provision to be invalid or
unenforceable, the parties agree that the court making such determination shall
have the power to reduce the scope, duration, or area of such term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes as close as legally possible to expressing the intention of the
invalid or unenforceable term or provision, and that the failure to exercise
such power would be inconsistent with the specific and mutual intent of the
parties hereto.
<PAGE>
22
16.3 Captions. The section headings contained herein are for
--------
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
16.4 Entire Agreement. This Agreement sets forth the entire
----------------
agreement and understanding of the parties relating to the subject matter
hereof, and supersedes all prior agreements, arrangements and understandings,
written or oral, between the parties.
16.5 No Other Representations. No representation, promise or
------------------------
inducement has been made by either party that is not embodied in this Agreement,
and neither party shall be bound by or liable for any alleged representation,
promise or inducement not so set forth.
16.6 Assignability. This Agreement and the Chairman's rights and
-------------
obligations hereunder may not be assigned by the Chairman. The Company may
assign its rights, together with its obligations, hereunder in connection with
any sale, transfer or other disposition of all or substantially all of its
business or assets; and such rights and obligations shall inure to, and be
binding upon, any successor to the business or substantially all of the assets
of the Company whether by merger, purchase of stock or assets or otherwise.
16.7 Amendments; Waivers. This Agreement may be amended, modified,
-------------------
superseded, canceled, renewed or extended and the terms or covenants hereof may
be waived, only by a written instrument executed by both of the parties hereto,
or in the case of a waiver, by the party waiving compliance. The failure of
either party at any time or times to require performance of any provision
<PAGE>
23
hereof shall in no manner affect the right at a later time to enforce the same.
No waiver by either party of the breach of any term or covenant contained in
this Agreement, whether by conduct or otherwise, in any one or more instances,
shall be deemed to be, or construed as, a further or continuing waiver of any
such breach, or a waiver of the breach of any other term or covenant contained
in this Agreement.
16.8 Legal Fees. The Company shall pay all reasonable legal fees
----------
and expenses incurred by the parties in connection with the negotiation and
execution of this Agreement.
16.9 Beneficiaries. Whenever this Agreement provides for any
-------------
payment to the Chairman's estate, such payment may be made instead to such
beneficiary or beneficiaries as the Chairman may have designated in writing
filed with the Company. The Chairman shall have the right to revoke any such
designation and to redesignate a beneficiary or beneficiaries by written notice
to the Company (and to any applicable insurance company) to such effect.
16.10 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original and all of which, when taken together,
shall constitute one and the same instrument.
<PAGE>
24
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
H.J. HEINZ COMPANY
By: /s/ HERMAN J. SCHMIDT
----------------------------
HERMAN J. SCHMIDT
Chairman
Management Development and
Compensation Committee
/s/ ANTHONY J.F. O'REILLY
----------------------------
Anthony J.F. O'Reilly
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JANUARY 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-29-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JAN-28-1998
<EXCHANGE-RATE> 1
<CASH> 195,979
<SECURITIES> 12,435
<RECEIVABLES> 1,037,415
<ALLOWANCES> 0
<INVENTORY> 1,446,611
<CURRENT-ASSETS> 2,900,046
<PP&E> 4,060,852
<DEPRECIATION> 1,728,564
<TOTAL-ASSETS> 8,127,790
<CURRENT-LIABILITIES> 2,050,431
<BONDS> 2,925,537
0
214
<COMMON> 107,774
<OTHER-SE> 2,224,025
<TOTAL-LIABILITY-AND-EQUITY> 8,127,790
<SALES> 6,733,386
<TOTAL-REVENUES> 6,733,386
<CGS> 4,196,835
<TOTAL-COSTS> 4,196,835
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 190,956
<INCOME-PRETAX> 967,253
<INCOME-TAX> 346,930
<INCOME-CONTINUING> 620,323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 620,323
<EPS-PRIMARY> 1.69<F1>
<EPS-DILUTED> 1.66
<FN>
<F1>Represents basic earnings per share in accordance with SFAS No. 128.
</FN>
</TABLE>
