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Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
H.J. Heinz Company and Subsidiaries
OPERATION EXCEL Background
In Fiscal 1999, the company announced a transformative growth
and restructuring initiative that is expected to generate
approximately $240 million in annual pretax savings upon full
implementation and growth in earnings per share of 10 to 12
percent per year, on average. The initiative, named
"Operation Excel," is a multi-year, multi-faceted program
that will result in restructuring charges and implementation
costs of approximately $1.1 billion. The company anticipates
that substantially all restructuring charges and
implementation costs will be recognized by the end of Fiscal
2001.
The major components of Operation Excel include: creating
manufacturing centers of excellence, focusing the product
portfolio, realigning the company's management teams and
investing in growth initiatives.
Creating manufacturing centers of excellence is resulting
in significant changes to the company's manufacturing
footprint including the following initiatives:
_ Closing the Harlesden factory in London, England and
focusing the Kitt Green factory in Wigan, England on canned
beans, soups and pasta production and focusing the Elst
factory in the Netherlands on tomato ketchup and sauces
_ Downsizing the Puerto Rico tuna processing facility and
focusing this facility on lower volume/higher margin
products (completed in Fiscal 2000)
_ Focusing the Pittsburgh, Pennsylvania factory on soup and
baby food production and shifting other production to
existing facilities
_ Consolidating manufacturing capacity in the Asia/Pacific
region
_ Closing the Zabreh, Czech Republic factory and disposing of
the Czech dairy business and transferring the infant
formula business to the Kendal, England factory (completed
in Fiscal 2000)
_ Downsizing the Pocatello, Idaho factory by shifting Bagel
Bites production to the Ft. Myers, Florida factory, and
shifting certain Smart Ones entree production to the
Massillon, Ohio factory (completed in Fiscal 2000)
_ Closing the Redditch, England factory and shifting
production to the Telford, England factory and the Turnhout
factory in Belgium (completed in Fiscal 2000)
_ Closing the El Paso, Texas pet treat facility and
consolidating production in the Topeka, Kansas factory
_ Disposing of the Bloomsburg, Pennsylvania frozen pasta
factory (completed in Fiscal 2000).
The company is focusing the portfolio of product lines on
six core food categories: ketchup, condiments and sauces;
frozen foods; tuna; soups, beans and pasta meals; infant
foods; and pet products. A consequence of this focus on the
core categories was the sale of the Weight Watchers classroom
business in Fiscal 2000. Additionally, seven other smaller
businesses, which have combined annual revenues of
approximately $80 million, are being disposed.
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Realigning the company's management teams will provide
processing and product expertise across the regions of North
America, Europe and Asia/Pacific. Specifically, Operation
Excel includes:
_ Creating a single U.S. frozen food headquarters, resulting
in the closure of the company's Ore-Ida head office in
Boise, Idaho (completed in Fiscal 2000)
_ Consolidating many European administrative support
functions
_ Creating a single North American Grocery & Foodservice
headquarters in Pittsburgh, Pennsylvania, resulting in the
relocation of the company's domestic seafood and pet food
headquarters from Newport, Kentucky
_ Creating two Asia/Pacific management teams with
headquarters in Melbourne (for the Australian, New Zealand
and Japanese businesses) and Singapore (for all other Asian
businesses).
Growth initiatives include relaunching many of our core
brands and additional investments in marketing and pricing
programs for our core businesses, particularly in ketchup,
condiments and sauces, frozen foods, infant foods and tuna.
The initiatives will result in the closure or exit of 21
factories or businesses. Management estimates that these
actions will impact approximately 6,000 employees with a net
reduction in the workforce of approximately 4,600, after
expansion of certain facilities.
The pretax savings generated from all Operation Excel
initiatives was $70.0 million in Fiscal 2000 and is projected
to grow to $145 million in Fiscal 2001 and $215 million in
Fiscal 2002, with non-cash savings of $15 million or less in
any year.
Successful execution of Operation Excel will help the
company achieve the following targets over the next three
years:
_ $240 million in annual ongoing pretax savings upon full
implementation
_ Earnings per share growth of 10 to 12 percent per year on
average
_ Sales growth of 4 to 5 percent per year on average
_ Gross margins of 42%
_ Return on invested capital of 40%
_ $2.5 billion of free cash flow.
Operation Excel Status Update
During Fiscal 2000, the company recognized net restructuring
charges and implementation costs totaling $392.7 million
pretax ($0.74 per share). [Note: All earnings per share
amounts included in Management's Discussion and Analysis are
presented on an after-tax diluted basis.] Pretax charges of
$170.4 million were classified as cost of products sold and
$222.3 million as selling, general and administrative
expenses ("SG&A"). During Fiscal 1999, the company recognized
restructuring charges and implementation costs totaling
$552.8 million pretax ($1.11 per share). Pretax charges of
$396.4 million were classified as cost of products sold and
$156.4 million as SG&A.
Included in the $392.7 million of net restructuring and
implementation costs recognized in Fiscal 2000 is a reversal
of $18.2 million pretax of Fiscal 1999 restructuring accruals
(exit costs, $0.4 million and severance costs, $1.3 million)
and asset write-downs ($16.5 million), primarily for the
closure of the West Chester, Pennsylvania facility, which
will now remain in operation as a result of the sale of the
Bloomsburg facility in April of Fiscal 2000.
In Fiscal 2000, 11 factories and four businesses were sold
or closed including those located in England, Hungary, the
Czech Republic, New Zealand and the U.S., resulting in a net
reduction of the company's workforce of approximately 3,000
employees. During Fiscal 1999,
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the company's workforce was reduced by approximately 200
employees, principally through the closure of Ore-Ida's Boise
head office and through the divestiture of the Clarksville,
Arkansas sweet potato business. Pretax savings totaled
approximately $70 million ($10 million non-cash) in Fiscal 2000
resulting principally from the plant closures, administrative
reductions and factory downsizings. Capital expenditures
related to the restructuring totaled $173.6 million in Fiscal
2000 and $5.8 million in Fiscal 1999 and related principally to
new equipment resulting from creating manufacturing centers of
excellence. The company expects to incur approximately $150
million of additional implementation costs in Fiscal 2001.
Implementation costs consist of incremental costs directly
related to the implementation of Operation Excel, including
consulting fees, employee relocation costs, unaccruable
severance costs associated with terminated employees, training
costs, equipment relocation costs and commissioning costs.
PROJECT During the fourth quarter of Fiscal 1997, the company
MILLENNIA announced a reorganization and restructuring program named
"Project Millennia," which resulted in a total cost of
approximately $750 million over three years. The
reorganization plan was designed to strengthen the company's
core businesses and improve profitability and global growth.
Key initiatives were focused on process changes and product
line rationalizations.
The company has completed Project Millennia. During Fiscal
2000, the company utilized $19.6 million of severance and
exit accruals. The utilization of the accruals related
principally to the closure of a tuna processing facility in
Australia, the closure of a tomato processing facility in
Spain and costs associated with contractual lease commitments
of the U.S. Weight Watchers classroom business, which were
transferred to the buyer of the classroom business.
As of May 3, 2000, the company has closed or divested all
of the 25 plants that were scheduled for closure or
divestiture. Project Millennia has resulted in a net
workforce reduction of 2,250 employees.
The financial goals of the project have been achieved as
follows:
_ Pretax savings in excess of $200 million, of which $10
million were non-cash savings, were realized in Fiscal 2000
_ Gross profit margins, excluding restructuring related
items, increased to 40.3% in Fiscal 1999
_ Operating working capital was reduced by approximately $350
million in the first year of the program
_ More than $1.3 billion of free cash flow was generated in
the first year of the program.
As of May 3, 2000, there are $0.5 million of remaining
Project Millennia accruals. These accruals relate to
contractual lease commitments in the U.S.
RESULTS OF 2000 versus 1999: Sales for Fiscal 2000 increased $108.3
OPERATIONS million, or 1.2%, to $9.41 billion from $9.30 billion in
Fiscal 1999. Volume increased sales by $349.7 million, or
3.8%, and acquisitions increased sales by $438.2 million, or
4.7%. Divestitures reduced sales by $407.4 million, or 4.4%,
lower pricing reduced sales by $161.2 million, or 1.7%, and
the unfavorable impact of foreign exchange translation rates
reduced sales by $111.0 million, or 1.2%. Domestic operations
contributed approximately 52% of consolidated sales in Fiscal
2000 and 53% in Fiscal 1999.
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Sales of the North American Grocery & Foodservice segment
increased $61.4 million, or 1.5%. Sales volume increased
3.1%, due to increases in ketchup, condiments and sauces,
foodservice, tuna and canned soup, partially offset by a
decrease in canned pet food. Acquisitions, net of
divestitures, increased sales 0.4%, and a stronger Canadian
dollar increased sales 0.3%. Lower pricing reduced sales by
2.3%, due mainly to decreases in tuna and retail ketchup.
The North American Frozen segment's sales increased $9.5
million, or 0.9%. Sales volume increased 5.9%, driven by
Smart Ones frozen entrees, Boston Market frozen meals and
Bagel Bites snacks, partially offset by a decrease in The
Budget Gourmet line of frozen entrees. The divestiture of
several non-core product lines, net of acquisitions, reduced
sales 3.4%. Lower pricing reduced sales 1.6%, primarily due
to frozen potatoes.
Sales in Europe increased $123.0 million, or 5.0%.
Acquisitions, net of divestitures, increased sales 8.6%, due
primarily to the acquisitions of United Biscuit's European
Frozen and Chilled Division, Remedia Limited (infant
feeding), Sonnen Bassermann (convenience meals) and Serv-A-
Portion (foodservice). Sales volume increased 3.4%, due to
increases in tuna, infant foods and ketchup, condiments and
sauces. The unfavorable impact of foreign exchange
translation rates reduced sales 5.8% and lower pricing,
primarily in tuna, reduced sales 1.2%.
Sales in Asia/Pacific increased $184.3 million, or 18.2%.
Acquisitions, primarily ABC Sauces in Indonesia, increased
sales 11.8%. Sales volume increased 4.5%, due to increases in
infant foods, poultry and convenience meals. The favorable
impact of foreign exchange translation rates increased sales
2.4%, primarily due to sales in Japan. Lower pricing reduced
sales 0.5%.
Sales of Other Operating Entities decreased $269.9 million,
or 36.0%. Divestitures reduced sales 38.0%, primarily due to
the second quarter divestiture of the Weight Watchers
classroom business and the Fiscal 1999 divestiture of the
bakery products unit. Lower pricing reduced sales 1.9% and
foreign exchange translation rates reduced sales 0.6%. Sales
volume increased 4.5%.
The current year was favorably impacted by a number of
special items which net to $40.1 million pretax ($0.10 per
share), and are summarized in the tables below. During the
second quarter of Fiscal 2000, the company completed the sale
of the Weight Watchers classroom business for a pretax gain
of $464.6 million ($0.72 per share). The company used part of
this gain to fund a pretax contribution of $30.0 million
($0.05 per share) to the H.J. Heinz Company Foundation.
Fiscal 2000 results also include Operation Excel
implementation costs of $216.5 million pretax ($0.41 per
share), additional Operation Excel restructuring charges of
$194.5 million pretax ($0.37 per share) and a reversal of
$18.2 million pretax ($0.04 per share) of Fiscal 1999
restructuring accruals and asset write-downs. In April of
1999, the company became aware of operational and accounting
irregularities in its Ecuador tuna processing facility and
expensed $10.0 million as an estimate of the losses. In the
first quarter of Fiscal 2000, the company recognized an
additional $20.0 million pretax ($0.05 per share) of expenses
related to this facility. In addition, the company
recognized, in Other Income, a pretax gain of $18.2 million
($0.03 per share) for the sale of an office building in the
U.K. Last year's results included the reversal of unutilized
Project Millennia accruals of $25.7 million pretax ($0.04 per
share), Project Millennia implementation costs of $22.3
million pretax ($0.04 per share), Operation Excel
restructuring and implementation costs of $552.8 million
pretax ($1.11 per share) and a pretax gain of $5.7 million
from the sale of the bakery products unit.
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The following tables provide a comparison of the company's
reported results and the results excluding special items for
Fiscal 2000 and Fiscal 1999.
Fiscal Year (53 Weeks) Ended May 3, 2000
---------------------------------------------
(Dollars in millions, except Gross Operating Net Per
per share amounts) Profit Income Income Share
------------------------------------------------------------------------------
Reported results $ 3,619.4 $ 1,733.1 $ 890.6 $ 2.47
Operation Excel restructuring 107.7 194.5 134.4 0.37
Operation Excel implementation
costs 79.2 216.5 145.9 0.41
Operation Excel reversal (16.4) (18.2) (12.9) (0.04)
Ecuador expenses 20.0 20.0 20.0 0.05
Gain on U.K. building sale - - (11.8) (0.03)
Foundation contribution - 30.0 18.9 0.05
Gain on sale of Weight
Watchers classroom business - (464.6) (259.7) (0.72)
------------------------------------------------------------------------------
Results excluding special items $ 3,809.9 $ 1,711.2 $ 925.3 $ 2.57
------------------------------------------------------------------------------
Fiscal Year (52 Weeks) Ended April 28, 1999
---------------------------------------------
(Dollars in millions, except Gross Operating Net Per
per share amounts) Profit Income Income Share
------------------------------------------------------------------------------
Reported results $ 3,354.7 $ 1,109.3 $ 474.3 $ 1.29
Operation Excel restructuring
and implementation costs 396.4 552.8 409.7 1.11
Project Millennia
implementation costs 14.7 22.3 14.3 0.04
Project Millennia reversal (20.7) (25.7) (16.4) (0.04)
(Gain)/loss on sale of bakery
products unit - (5.7) 0.6 -
------------------------------------------------------------------------------
Results excluding special items $ 3,745.1 $ 1,653.0 $ 882.4 $ 2.40
------------------------------------------------------------------------------
(Note: Totals may not add due to rounding.)
Gross profit increased $264.7 million to $3.62 billion from
$3.35 billion in Fiscal 1999. The gross profit margin
increased to 38.5% from 36.1%. Excluding the special items
identified above, gross profit increased $64.7 million, or
1.7%, to $3.81 billion from $3.75 billion and the gross
profit margin increased to 40.5% from 40.3%. Gross profit for
the North American Grocery & Foodservice segment increased
$52.5 million, or 3.4%, due to increases at Heinz U.S.A. and
Heinz Canada, partially offset by a significant decrease in
the selling price of tuna at Star-Kist. North American
Frozen's gross profit decreased slightly $2.0 million, or
0.4%, as increased sales volume was offset by lower pricing
and the elimination of several non-core product lines.
Europe's gross profit increased $62.0 million, or 6.1%, due
primarily to a favorable profit mix, and the acquisitions of
United Biscuit's European Frozen and Chilled Division,
Remedia Limited, Sonnen Bassermann and Serv-A-Portion. The
unfavorable impact of foreign exchange translation rates
reduced Europe's gross profit by approximately $65 million.
The Asia/Pacific segment's gross profit increased $84.4
million, or 23.4%, driven by the acquisition of ABC Sauces in
Indonesia, improved performances throughout the segment, and
the favorable impact of foreign exchange translation rates in
Japan. Other Operating Entities' gross profit decreased
$130.4 million, or 40.6%, due primarily to the second quarter
divestiture of the Weight Watchers classroom business and the
Fiscal 1999 divestiture of the bakery products unit.
SG&A increased $105.5 million to $2.35 billion from $2.25
billion and increased as a percentage of sales to 25.0% from
24.1%. Excluding the special items identified above, SG&A
increased $6.5 million to $2.10 billion from $2.09 billion
and decreased as a percentage of sales to 22.3% from 22.5%.
Increased selling and distribution expenses, primarily in
Asia/Pacific and Europe, resulting from acquisitions, were
offset by decreases in marketing and general and
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administrative expenses. Marketing decreased $11.2 million,
or 1.3%, primarily due to the second quarter divestiture of
the Weight Watchers classroom business. Excluding the Weight
Watchers classroom business, marketing expense increased
6.5%. Marketing increases were noted in all major segments.
Total marketing support (including trade and consumer
promotions and media) increased 6.6% to $2.37 billion from
$2.22 billion on a sales increase of 1.2%. Excluding the
Weight Watchers classroom business, total marketing support
increased 9.6%. Advertising costs in Fiscal 2000 were $374.0
million compared to $373.9 million in Fiscal 1999. Excluding
the Weight Watchers classroom business in both periods,
advertising costs increased 9.3%.
Operating income increased $623.8 million, or 56.2%, to
$1.73 billion from $1.11 billion last year. Excluding the
special items identified above, operating income increased
$58.2 million, or 3.5%, to $1.71 billion from $1.65 billion
last year. Removing the impact of the Weight Watchers
classroom business in both periods, operating income
increased 6.6%. Domestic operations provided approximately
59% and 57% of operating income in Fiscal 2000 and Fiscal
1999, respectively. Excluding the special items in both
years, domestic operations provided approximately 54% and 55%
of operating income in Fiscal 2000 and Fiscal 1999,
respectively.
The North American Grocery & Foodservice segment's
operating income decreased $22.5 million, or 3.1%, to $694.4
million from $717.0 million last year. Excluding the special
items noted above (see Note 14 to the Consolidated Financial
Statements), operating income increased $40.6 million, or
4.9%, to $875.3 million from $834.6 million last year. The
strong performance of Heinz U.S.A., improvements in Heinz
Canada and the pet food business and savings from Operation
Excel were partially offset by a significant decrease in the
selling price of tuna at Star-Kist.
The North American Frozen segment's operating income
increased $71.8 million to $152.0 million from $80.2 million
last year. Excluding the special items noted above (see Note
14 to the Consolidated Financial Statements), operating
income decreased $1.9 million, or 1.0%, to $181.5 million
from $183.4 million last year. This decrease is attributable
to higher marketing expenses as a result of the national
campaign in support of Boston Market and lower pricing on
Ore-Ida frozen potatoes, offset by a reduction in SG&A
resulting from the domestic consolidation of the frozen
business as part of Operation Excel.
Europe's operating income increased $118.0 million, or
47.9%, to $364.2 million from $246.2 million. Excluding the
special items noted above (see Note 14 to the Consolidated
Financial Statements), operating income increased $35.1
million, or 7.5%, to $502.3 million from $467.2 million last
year, due primarily to a favorable profit mix, savings from
Operation Excel and the acquisitions of United Biscuit's
European Frozen and Chilled Division, Remedia Limited and
Serv-A-Portion. The unfavorable impact of foreign exchange
translation rates reduced Europe's operating income by
approximately $26 million.
Asia/Pacific's operating income increased $34.3 million, or
38.2%, to $124.1 million from $89.8 million last year.
Excluding the special items noted above (see Note 14 to the
Consolidated Financial Statements), operating income
increased $31.8 million, or 21.8%, to $177.5 million from
$145.7 million last year. This increase is attributable to
the acquisition of ABC Sauces in Indonesia and solid
performances from Japan, India and the poultry business.
Other Operating Entities reported an increase in operating
income of $444.4 million to $540.2 million from $95.7 million
last year. Excluding the special items noted above (see Note
14 to the Consolidated Financial Statements), operating
income decreased $44.9 million, or 36.9% to $77.0 million
from $122.0 million last year. This decrease is primarily
attributable to the second quarter divestiture of the Weight
Watchers classroom business.
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Other expenses, net totaled $269.4 million compared to
$274.2 million last year. The decrease is primarily due to a
gain on the sale of an office building in the U.K. of $18.2
million pretax ($0.03 per share) partially offset by an
increase in interest expense resulting from higher average
borrowings and interest rates.
The effective tax rate for Fiscal 2000 was 39.2% compared
to 43.2% last year. The Fiscal 2000 effective tax rate was
unfavorably impacted by the excess of basis in assets for
financial reporting over the tax basis of assets included in
the Weight Watchers sale and by gains in higher taxed states
related to the sale. The Fiscal 2000 and 1999 effective tax
rates were unfavorably impacted by restructuring and
implementation costs expected to be realized in lower tax
rate jurisdictions and by nondeductible expenses related to
the restructuring. Excluding the special items identified in
the tables above, the effective tax rate for Fiscal 2000 was
35.0% compared to 36.0% last year.
Net income increased $416.2 million to $890.6 million from
$474.3 million last year and earnings per share increased to
$2.47 from $1.29. Excluding the special items noted above,
net income increased 4.9% to $925.3 million from $882.4
million, and earnings per share increased 7.1% to $2.57 from
$2.40 last year. Removing the impact of the Weight Watchers
classroom business in both years, earnings per share
increased 9.6% and net income increased 7.1%.
The impact of fluctuating exchange rates for Fiscal 2000
remained relatively consistent on a line-by-line basis
throughout the Consolidated Statement of Income.
1999 versus 1998: Sales for Fiscal 1999 increased $90.3
million, or 1.0%, to $9.30 billion from $9.21 billion in
Fiscal 1998. Volume increased sales by $290.2 million, or
3.2%, acquisitions increased sales by $188.2 million, or
2.0%, and favorable pricing contributed $34.8 million, or
0.4%. The unfavorable impact of foreign exchange translation
rates reduced sales by $210.3 million, or 2.3%, and
divestitures decreased sales by $212.6 million, or 2.3%.
Domestic operations contributed approximately 53% of
consolidated sales in both Fiscal 1999 and Fiscal 1998.
Sales of the North American Grocery & Foodservice segment
increased $127.4 million, or 3.2%, primarily due to sales
volume increases of $156.6 million, or 4.0%. Volume increases
in Heinz ketchup, seafood and condiments were partially
offset by a volume decrease in canned dog food. Acquisitions,
net of divestitures, contributed $36.9 million, or 0.9%, to
the sales increase, primarily due to the acquisition of the
College Inn brand of canned broths. These increases were
partially offset by unfavorable pricing of $36.1 million, or
0.9%. Price decreases were noted in seafood and pet food. The
unfavorable fluctuation of the Canadian dollar caused a $30.0
million, or 0.8%, decrease in net sales.
The North American Frozen segment's sales decreased $61.7
million, or 5.7%. Divestitures, net of acquisitions,
accounted for $71.2 million, or 6.6%, of the decrease,
primarily due to the divestiture of the Ore-Ida frozen
foodservice business in the first quarter of Fiscal 1998.
Price decreases, primarily in frozen potatoes, contributed
$13.5 million, or 1.2%, to the sales decrease. Volume
increases of $23.0 million, or 2.1%, were largely due to
Smart Ones frozen entrees, partially offset by decreased
volume in appetizers.
Sales in Europe increased $128.1 million, or 5.5%,
primarily due to acquisitions, which contributed $94.2
million, or 4.0%. Acquisitions impacting the year-to-year
sales dollar comparison include the Fiscal 1998 acquisition
of John West Foods Limited in the U.K. and the Fiscal 1999
acquisition of the convenience meals business of Sonnen
Bassermann in
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Germany and other smaller acquisitions. Exchange rates had a
favorable impact of $21.0 million, or 0.9%, primarily in Italy.
Favorable pricing increased sales by $13.5 million, or 0.6%,
while sales volume was flat.
Sales in Asia/Pacific decreased $61.1 million, or 5.7%. The
unfavorable impact of foreign exchange translation rates
reduced sales by $128.1 million, or 11.9%, primarily due to
sales in New Zealand, Australia, South Korea and India. This
decrease was partially offset by favorable volume of $33.8
million, or 3.1%, and favorable price of $21.2 million, or
2.0%. Acquisitions also contributed $12.0 million, or 1.1%.
Sales of Other Operating Entities decreased $42.4 million, or
5.3%. Divestitures, primarily the bakery products unit,
decreased sales by $122.5 million, or 15.5%. The unfavorable
impact of foreign exchange translation rates decreased sales by
$73.1 million, or 9.2%, principally in Africa. These decreases
were partially offset by volume increases of $77.4 million, or
9.8%, largely due to the Weight Watchers classroom business. In
addition, price increases contributed $49.6 million, or 6.3%,
and acquisitions, primarily in South Africa, contributed $26.2
million, or 3.3%, to sales.
The following tables provide a comparison of the company's
reported results and the results excluding special items for
Fiscal 1999 and Fiscal 1998.
Fiscal Year (52 Weeks) Ended April 28, 1999
---------------------------------------------
(Dollars in millions, except Gross Operating Net Per
per share amounts) Profit Income Income Share
------------------------------------------------------------------------------
Reported results $ 3,354.7 $ 1,109.3 $ 474.3 $ 1.29
Operation Excel restructuring
and implementation costs 396.4 552.8 409.7 1.11
Project Millennia
implementation costs 14.7 22.3 14.3 0.04
Project Millennia reversal (20.7) (25.7) (16.4) (0.04)
(Gain)/loss on sale of bakery
products unit - (5.7) 0.6 -
------------------------------------------------------------------------------
Results excluding special items $ 3,745.1 $ 1,653.0 $ 882.4 $ 2.40
------------------------------------------------------------------------------
Fiscal Year (52 Weeks) Ended April 29, 1998
---------------------------------------------
(Dollars in millions, except Gross Operating Net Per
per share amounts) Profit Income Income Share
------------------------------------------------------------------------------
Reported results $ 3,498.1 $ 1,520.3 $ 801.6 $ 2.15
Gain on sale of Ore-Ida frozen
foodservice business - (96.6) (53.1) (0.14)
Project Millennia
implementation costs 35.7 84.1 53.0 0.14
------------------------------------------------------------------------------
Results excluding special items $ 3,533.8 $ 1,507.9 $ 801.4 $ 2.15
------------------------------------------------------------------------------
(Note: Totals may not add due to rounding.)
Gross profit decreased $143.3 million to $3.35 billion from
$3.50 billion in Fiscal 1998. The gross profit margin
decreased to 36.1% from 38.0%. Excluding the special items
identified above, gross profit would have increased $211.4
million, or 6.0%, to $3.75 billion from $3.53 billion and the
gross profit margin would have increased to 40.3% from 38.4%.
Europe accounted for $156.5 million of this increase due to
improvements in the baby food business in Italy, the
favorable impact of foreign exchange translation rates and
acquisitions. North American Grocery & Foodservice segment's
gross profit increased $56.7 million due to cost savings from
Project Millennia, stronger sales volume and acquisitions,
partially offset by the disappointing performance of the
domestic pet food business. Other Operating Entities' gross
profit increased $41.5 million due to improvements in the
Weight Watchers classroom business, attributable to the
Weight Watchers 1*2*3 Success(TM) Plan. North American
Frozen's gross profit decrease of $24.0 million was due to
the divestiture of the Ore-Ida frozen foodservice business
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in Fiscal 1998 and increased competitive activities for frozen
potatoes, partially offset by the strong performance of Smart
Ones frozen entrees. The Asia/Pacific segment's gross profit
decreased $20.6 million, or 5.4%; however, excluding the
unfavorable impact of foreign exchange translation rates ($47.6
million), primarily in New Zealand and Australia, gross profit
increased $27.0 million, or 7.1%.
SG&A increased $267.7 million to $2.25 billion from $1.98
billion and increased as a percentage of sales to 24.1% from
21.5%. Excluding special items identified above, SG&A
increased $66.2 million to $2.09 billion from $2.03 billion
and increased as a percentage of sales to 22.5% from 22.0%.
Marketing increases were noted in the North American Grocery
& Foodservice segment primarily due to a focus on Heinz
ketchup and in Europe where the company aggressively promoted
ketchup and beans. These increases were partially offset by
decreased marketing expense in the North American Frozen
segment as a result of establishing low everyday list prices
for The Budget Gourmet line of frozen entrees. Excluding
marketing, SG&A was stable as a percentage of sales year-on-
year.
Total marketing support (including trade and consumer
promotions and media) increased 8.4% to $2.22 billion from
$2.05 billion on a sales increase of 1.0%. Advertising costs
to support the company's key brands increased 3.0% to $373.9
million in Fiscal 1999 from $363.1 million in Fiscal 1998.
Operating income decreased $411.0 million, or 27.0%, to
$1.11 billion from $1.52 billion reported in Fiscal 1998.
Excluding the special items in both years, operating income
increased $145.2 million, or 9.6%, to $1.65 billion from
$1.51 billion in Fiscal 1998. This increase was primarily due
to the increase in gross profit, partially offset by
increased marketing and selling and distribution costs.
Domestic operations provided approximately 57% and 59% of
operating income in Fiscal 1999 and Fiscal 1998,
respectively. Excluding the special items in both years,
domestic operations provided approximately 55% and 57% of
operating income in Fiscal 1999 and Fiscal 1998,
respectively.
The North American Grocery & Foodservice segment's
operating income decreased $80.2 million, or 10.1%, to $717.0
million from $797.2 million in Fiscal 1998. Excluding the
special items in both years (see Note 14 to the Consolidated
Financial Statements), this segment's operating income
increased $8.6 million, or 1.0%, to $834.6 million from
$826.0 million. Excluding the results of the domestic pet
food business, the North American Grocery & Foodservice
segment experienced double-digit operating income growth due
to strong sales volume and acquisitions, primarily the
College Inn brand of canned broths, as well as cost savings
from Project Millennia. The domestic pet food business was
negatively impacted by higher costs associated with the
introduction of the 9-Lives four pack, an unfavorable mix
shift, significant volume declines in canned dog food and
ineffective trade spending, all of which the company has
aggressively worked to correct.
The North American Frozen segment reported $80.2 million of
operating income in Fiscal 1999 versus $258.2 million in
Fiscal 1998. Excluding special items in both years (see Note
14 to the Consolidated Financial Statements), operating
income increased $12.7 million, or 7.4%, to $183.4 million
from $170.7 million. The increase is primarily due to
favorable operating results of the Smart Ones frozen entree
line; partially offset by the retail frozen potato business,
where prices have been reduced in order to recapture market
share.
Europe's operating income decreased $140.7 million, or
36.4%, to $246.2 million from $386.9 million. Excluding
special items in both years (see Note 14 to the Consolidated
Financial Statements), operating income increased $61.7
million, or 15.2%, to $467.2 million from $405.4 million.
This increase was primarily due to favorable operating
results in the U.K. and Italy due to increased sales prices
and acquisitions, partially offset by increased marketing
spending described above.
38
<PAGE> 10
Asia/Pacific's operating income decreased $46.7 million, or
34.2%, to $89.8 million from $136.5 million. Excluding
special items in both years (see Note 14 to the Consolidated
Financial Statements), operating income increased $3.3
million to $145.7 million from $142.3 million in Fiscal 1998.
Strong performances in all of the company's Asia/Pacific
businesses more than offset the unfavorable impact of foreign
exchange translation rates, which reduced operating income by
approximately $19.5 million.
Other Operating Entities reported an increase in operating
income of $42.0 million to $95.7 million from $53.7 million.
Excluding special items in both years (see Note 14 to the
Consolidated Financial Statements), operating income
increased $58.4 million, or 91.8%, to $122.0 million from
$63.6 million. The increase is primarily due to the
exceptional performance of the Weight Watchers 1*2*3 Success
(TM) Plan. The unfavorable fluctuation of foreign exchange
translation rates, primarily in Africa, caused a $12.5
million decrease in operating income.
Other income and expenses totaled $274.2 million in Fiscal
1999 compared to $265.3 million in Fiscal 1998. Interest
expense was relatively flat year-on-year as the increase in
average borrowings was offset by lower interest rates.
Interest income decreased $7.6 million, or 23.2%, to $25.1
million from $32.7 million due to decreased invested funds
and significantly lower interest rates on investments,
primarily in Italy.
The effective tax rate for Fiscal 1999 was 43.2% compared
to 36.1% in Fiscal 1998. The Fiscal 1999 higher rate includes
the impact of restructuring expenses in lower tax rate
jurisdictions and nondeductible expenses related to the
restructuring. Excluding the special items noted above, the
effective rate for Fiscal 1999 was 36.0% compared to 35.5% in
Fiscal 1998. The Fiscal 1998 effective tax rate reflects the
benefits of tax legislation in Italy and the U.K. (See Note 5
to the Consolidated Financial Statements.)
Net income decreased $327.2 million to $474.3 million from
$801.6 million in Fiscal 1998 and earnings per share
decreased to $1.29 from $2.15. Excluding the special items
discussed above, net income increased $81.0 million, or
10.1%, to $882.4 million in Fiscal 1999 from $801.4 million
in Fiscal 1998, and earnings per share increased to $2.40
from $2.15.
The impact of fluctuating exchange rates for Fiscal 1999
remained relatively consistent on a line-by-line basis
throughout the Consolidated Statement of Income.
LIQUIDITY AND Return on average shareholders' equity ("ROE") was 52.4% in
FINANCIAL Fiscal 2000, 23.6% in Fiscal 1999 and 34.4% in Fiscal 1998.
POSITION Excluding the special items identified above, ROE was 54.4%
in Fiscal 2000, 43.9% in Fiscal 1999 and 34.4% in Fiscal
1998. Pretax return on average invested capital ("ROIC") was
31.4% in Fiscal 2000, 20.4% in Fiscal 1999 and 26.4% in
Fiscal 1998. Excluding the special items identified above,
ROIC was 30.6% in Fiscal 2000, 30.7% in Fiscal 1999 and 26.2%
in Fiscal 1998.
Cash provided by operating activities decreased to $543.1
million in Fiscal 2000, compared to $910.1 million in Fiscal
1999 and $1.07 billion in Fiscal 1998. The decrease in Fiscal
2000 versus Fiscal 1999 is primarily due to expenditures on
Operation Excel and increased inventory levels. In order to
facilitate the anticipated plant shutdowns and
reconfigurations for Operation Excel, the company has
increased inventory levels at certain locations.
Cash used for investing activities was $268.7 million in
Fiscal 2000 compared to $390.5 million in Fiscal 1999.
Acquisitions in the current year required $394.4 million
versus $269.0 million last year. Current year acquisitions
included United Biscuit's European Frozen and Chilled
Division, Quality Chef Foods, Yoshida, Thermo Pac, Inc. and
Remedia Limited in Israel. Fiscal 1999 acquisitions included
the College Inn brand of canned broths, ABC Sauces in
Indonesia, and other smaller acquisitions. (See Note 2 to the
Consolidated Financial
39
<PAGE> 11
Statements.) During Fiscal 2000, the company invested $99.8
million in The Hain Celestial Group, Inc., formerly The Hain
Food Group, Inc. Divestitures in the current year provided
$726.5 million, primarily from the sale of the Weight Watchers
classroom business, compared to $180.4 million in Fiscal 1999,
primarily from the sale of the company's bakery products unit.
(See Note 3 to the Consolidated Financial Statements.)
Capital expenditures totaled $452.4 million compared to
$316.7 million last year. The increase is attributable to
Operation Excel related capital expenditures across all major
segments. Last year's capital expenditures were concentrated
in the North American Grocery & Foodservice and European
segments.
Purchases and sales/maturities of short-term investments
increased in Fiscal 2000. The company periodically sells a
portion of its short-term investment portfolio in order to
reduce its borrowings.
Financing activities required $259.2 million compared to
$515.5 million last year. Cash used for dividends to
shareholders increased $28.9 million to $513.8 million from
$484.8 million last year. Purchases of treasury stock totaled
$511.5 million (12.8 million shares) in Fiscal 2000, compared
to $410.1 million (7.5 million shares) in Fiscal 1999. Net
funds borrowed were $739.1 million in Fiscal 2000 compared to
$268.3 million in Fiscal 1999. Cash provided from stock
options exercised totaled $20.0 million in Fiscal 2000 versus
$77.2 million in Fiscal 1999.
The average amount of short-term debt outstanding during
Fiscal 2000, Fiscal 1999 and Fiscal 1998 was $315.5 million,
$453.9 million and $556.3 million, respectively. Total short-
term debt had a weighted-average interest rate during Fiscal
2000 of 6.2% and at year-end of 6.5%. The weighted-average
interest rate on short-term debt during Fiscal 1999 was 6.3%
and at year-end was 5.3%.
Aggregate domestic commercial paper had a weighted-average
interest rate during Fiscal 2000 of 5.5% and at year-end of
6.2%. In Fiscal 1999, the weighted-average interest rate was
5.3% and the rate at year-end was 4.9%. Based upon the amount
of commercial paper outstanding at May 3, 2000, a variance of
1/8% in the related interest rate would cause annual
interest expense to change by approximately $2.6 million.
On January 5, 2000, the company issued Euro300 million of 5%
Notes due 2005. The proceeds were used to repay domestic
commercial paper. On February 15, 2000, the company issued $300
million of 7.0% Notes due 2002. The proceeds were used to repay
domestic commercial paper. On February 18, 2000, the company
issued Pds125 million of 6.25% Notes due 2030. The proceeds
were used for general corporate purposes, including repaying
commercial paper borrowings that were incurred in connection
with the acquisition of United Biscuit's European Frozen and
Chilled Division in December 1999. The company entered into an
interest rate swap agreement with a notional amount of Pds50
million and a settlement date of April 2001. The swap converts
the 6.25% fixed rate to a floating rate. (See Note 6 to the
Consolidated Financial Statements.)
The company's $2.30 billion credit agreement, which expires
in September 2001, supports its commercial paper program. As
of May 3, 2000, $2.08 billion of domestic commercial paper is
classified as long-term debt due to the long-term nature of
the supporting credit agreement. As of April 28, 1999, the
company had $1.41 billion of domestic commercial paper
outstanding and classified as long-term debt.
On September 8, 1999, the company's Board of Directors
raised the quarterly dividend on the company's common stock
to $0.36 3/4 per share from $0.34 1/4 per share, for an
indicated annual rate of $1.47 per share. The company paid
$513.8 million in dividends to both common and preferred
shareholders, an increase of $28.9 million, or 6.0% over
Fiscal 1999. The dividend rate in effect at the end of each
year resulted in a payout ratio of 59.5% in Fiscal 2000,
106.2% in Fiscal 1999 and 58.6% in Fiscal 1998. Excluding the
impact of special items in all years, the payout ratio was
57.2% in Fiscal 2000, 57.1% in Fiscal 1999 and 58.6% in
Fiscal 1998.
40
<PAGE> 12
In Fiscal 2000, the company repurchased 12.8 million shares
of common stock, or 3.6% of the amount outstanding at the
beginning of Fiscal 2000, at a cost of $511.5 million
compared to the repurchase of 7.5 million shares, or 2.1% of
the amount outstanding at the beginning of Fiscal 1999, at a
cost of $410.1 million in Fiscal 1999. On June 1, 1999, the
company completed the 10.0 million share repurchase program
which was authorized by the Board of Directors on September
10, 1997. On June 9, 1999, the Board of Directors authorized
the repurchase of up to 20.0 million shares. As of May 3,
2000, the company had repurchased 12.0 million shares of the
20.0 million share program. The company may reissue
repurchased shares upon the exercise of stock options,
conversions of preferred stock and for general corporate
purposes.
In Fiscal 2000, the cash requirements of Operation Excel
were $479.4 million, consisting of spending for severance and
exit costs ($89.3 million), capital expenditures ($173.6
million) and implementation costs ($216.5 million). The
Fiscal 2000 cash requirements for Project Millennia were
$29.1 million, consisting of spending for severance and exit
costs ($19.6 million) and capital expenditures ($9.5
million). In Fiscal 1999, the cash requirements of Operation
Excel were $75.6 million, consisting of spending for
severance and exit costs ($16.6 million), capital
expenditures ($5.8 million) and implementation costs ($53.2
million). The Fiscal 1999 cash requirements for Project
Millennia were $117.4 million, consisting of spending for
severance and exit costs ($48.6 million), capital
expenditures ($46.5 million) and implementation costs ($22.3
million). In Fiscal 2001, the company expects the cash
requirements of Operation Excel to be approximately $413
million, consisting of severance and exit costs ($104 million
of the $125.2 million accrued at May 3, 2000), capital
expenditures ($159 million) and implementation costs ($150
million). The company is financing the cash requirements of
these programs through operations, proceeds from the sale of
non-strategic assets and with short-term and long-term
borrowings. The cash requirements of Operation Excel will not
have a significant impact on the company's liquidity or
financial position.
During 1995, the company participated in the formation of a
business ("the entity") which purchases a portion of the
trade receivables generated by the company. The company sells
receivables to Jameson, Inc., a wholly owned subsidiary,
which then sells undivided interests in the receivables to
the entity. Outside investors contributed $95.4 million in
capital to the entity. The company consolidates the entity,
and the capital contributed by outside investors is
classified as minority interest (other long-term liabilities)
on the Consolidated Balance Sheets.
In June 1998, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments. The
statement requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In June
1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FAS Statement 133," which postponed the
adoption date of SFAS No. 133. As such, the company is not
required to adopt the statement until Fiscal 2002. In June
2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an
Amendment of FASB Statement No. 133." This statement amends
the accounting and reporting standards of SFAS No. 133 for
certain derivative instruments and certain hedging
activities. The company is currently evaluating the effect
that implementation of the new standard will have on its
results of operations and financial position.
41
<PAGE> 13
In May 2000, the FASB Emerging Issues Task Force (the
"EITF") issued new guidelines entitled "Accounting for
Certain Sales Incentives" which address the recognition,
measurement and income statement classification for certain
sales incentives (e.g., coupons). These guidelines will be
effective for the company beginning in the second quarter of
Fiscal 2001. The implementation of these guidelines will
require the company to make reclassifications between SG&A
and sales.
In December 1999, the Securities and Exchange Commission
(the "SEC") issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101
provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the
SEC. SAB No. 101 outlines the basic criteria that must be met
to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. Management believes
that the impact of SAB No. 101, which will be effective in
the fourth quarter of Fiscal 2001, will not have a material
effect on its financial position or results of operations.
On June 19, 2000, the company exercised its preemptive
right to purchase an additional 2,582,774 shares of Hain for
approximately $80 million, or $30.88 per share. This
transaction restored the company's ownership interest in Hain
to 19.5%. The company's ownership had been diluted as a
result of Hain's stock-for-stock merger with Celestial
Seasonings on May 30, 2000.
The impact of inflation on both the company's financial
position and results of operations is not expected to
adversely affect Fiscal 2001 results.
The company's financial position continues to remain
strong, enabling it to meet cash requirements for operations,
capital expansion programs and dividends to shareholders. The
company's goal remains the achievement of 10% EPS growth for
Fiscal 2001 with stronger performance expected in the second
half of the year resulting from the contribution of new
brands and Operation Excel savings.
MARKET RISK The following discussion about the company's risk-
FACTORS management activities includes "forward-looking" statements
that involve risk and uncertainties. Actual results could
differ materially from those projected in the forward-looking
statements.
The company is exposed to market risks from adverse changes
in foreign exchange rates, interest rates and commodity
prices. As a policy, the company does not engage in
speculative or leveraged transactions, nor does the company
hold or issue financial instruments for trading purposes.
Foreign Exchange Rate Sensitivity: The company's cash flow
and earnings are subject to fluctuations due to exchange rate
variation. Foreign currency risk exists by nature of the
company's global operations. The company manufactures and
sells its products in a number of locations around the world,
and hence foreign currency risk is well diversified.
When appropriate, the company may attempt to limit its
exposure to changing foreign exchange rates through both
operational and financial market actions. These actions may
include entering into forward, option and swap contracts to
hedge existing exposures, firm commitments and anticipated
transactions. The instruments are used to reduce risk
42
<PAGE> 14
by essentially creating offsetting currency exposures. As of
May 3, 2000, the company held contracts for the purpose of
hedging certain intercompany cash flows with an aggregate
notional amount of approximately $320 million. In addition, the
company held separate contracts in order to hedge purchases of
certain raw materials and finished goods and for payments
arising from certain foreign currency denominated obligations
totaling approximately $260 million. The company also held
contracts to hedge sales denominated in foreign currencies of
$105 million. The company's contracts mature within two years
of the fiscal year-end. The contracts that effectively meet the
risk reduction and correlation criteria, as measured on a
currency-by-currency basis, are accounted for as hedges.
Accordingly, gains and losses are deferred in the cost basis of
the underlying transaction. In those circumstances when it is
not appropriate to account for the contracts as hedges, any
gains and losses from mark-to-market and settlement are
recorded in miscellaneous income and expense. At May 3, 2000,
unrealized gains and losses on outstanding foreign currency
contracts are not material. As of May 3, 2000, the potential
gain or loss in the fair value of the company's outstanding
foreign currency contracts, assuming a hypothetical 10%
fluctuation in the currencies of such contracts, would be
approximately $20 million. However, it should be noted that any
change in the value of the contracts, real or hypothetical,
would be significantly offset by an inverse change in the value
of the underlying hedged items. In addition, this hypothetical
calculation assumes that each exchange rate would change in the
same direction relative to the U.S. dollar.
Substantially all of the company's foreign affiliates'
financial instruments are denominated in their respective
functional currencies. Accordingly, exposure to exchange risk
on foreign currency financial instruments is not material.
(See Note 12 to the Consolidated Financial Statements.)
Interest Rate Sensitivity: The company is exposed to changes
in interest rates primarily as a result of its borrowing and
investing activities used to maintain liquidity and fund
business operations. The company continues to utilize
commercial paper to fund working capital requirements in the
U.S. and Canada. The company also borrows in different
currencies from other sources to meet the borrowing needs of
its foreign affiliates. The nature and amount of the
company's long-term and short-term debt can be expected to
vary as a result of future business requirements, market
conditions and other factors. The company may utilize
interest rate swap agreements to lower funding costs or to
alter interest rate exposure. As of May 3, 2000, the company
was party to an interest rate swap with a notional amount of
Pds50 million and a settlement date of April 2001. The swap
converts a 6.25% fixed rate exposure, on long-term debt
maturing in 2030, to a floating rate exposure.
The following table summarizes the company's debt
obligations at May 3, 2000. The interest rates represent
weighted-average rates, with the period-end rate used for the
variable rate debt obligations. The fair value of the debt
obligations approximated the recorded value as of May 3,
2000. (See Notes 6 and 12 to the Consolidated Financial
Statements.)
<TABLE>
Expected Fiscal Year of Maturity
------------------------------------------------------------------------------------------
(Dollars in thousands) 2001 2002 2003 2004 2005 Thereafter Total
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate $ 20,055 $ 311,880 $ 461,141 $ 1,672 $ 273,022 $ 674,972 $1,742,742
Average interest rate 7.19% 7.04% 6.20% 7.85% 5.04% 6.83%
Variable rate $ 156,520 $2,092,933 $ 5,855 $ 6,069 $ 6,639 $ 101,643 $2,369,659
Average interest rate 6.54% 6.21% 8.80% 8.78% 8.77% 5.94%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 15
Commodity Price Sensitivity: The company is the purchaser
of certain commodities such as corn, wheat and soybean meal
and oil. The company generally purchases these commodities
based upon market prices that are established with the vendor
as part of the purchase process. In general, the company does
not use significant levels of commodity financial instruments
to hedge commodity prices due to a high correlation between
the commodity cost and the ultimate selling price of the
product. On occasion, the company may enter into commodity
future or option contracts, as deemed appropriate, to reduce
the effect of price fluctuations on some future manufacturing
requirements. Such contracts are accounted for as hedges,
with gains and losses recognized as part of cost of products
sold, and generally have a term of less than one year. As of
May 3, 2000, unrealized gains and losses related to commodity
contracts held by the company were not material nor would
they be given a hypothetical 10% fluctuation in market
prices. It should be noted that any change in the value of
the contracts, real or hypothetical, would be significantly
offset by an inverse change in the value of the underlying
hedged items. (See Note 12 to the Consolidated Financial
Statements.)
EURO A single currency, the Euro, was introduced in Europe on
CONVERSION January 1, 1999. Of the fifteen member countries of the
European Union, eleven adopted the Euro as their legal
currency on that date. Fixed conversion rates between the
national currencies of these eleven countries and the Euro
were established on that date. The national currencies are
scheduled to remain legal tender as denominations of the Euro
during the transition period ending December 31, 2001. During
this transition period, parties may settle transactions using
either the Euro or a participating country's national
currency. At the current time, the company does not believe
that the conversion to the Euro will have a material impact
on its business or its financial condition.
STOCK MARKET H.J. Heinz Company common stock is traded principally on
INFORMATION the New York Stock Exchange and the Pacific Stock Exchange,
under the symbol HNZ. The number of shareholders of record of
the company's common stock as of June 30, 2000 approximated
58,500. The closing price of the common stock on the New York
Stock Exchange composite listing on May 3, 2000 was $37 5/8.
Stock price information for common stock by quarter
follows:
Stock Price Range
------------------------------------
High Low
---------------------------------------------------
2000
First $ 54 $ 45 3/4
Second 48 5/16 41 7/8
Third 48 1/4 36 5/8
Fourth 39 15/16 30 13/16
---------------------------------------------------
1999
First $ 58 1/2 $ 51 5/8
Second 61 1/8 48 1/2
Third 61 3/4 51 3/16
Fourth 58 13/16 44 9/16
----------------------------------------------------
44
<PAGE> 16
CONSOLIDATED STATEMENTS OF INCOME
H.J. Heinz Company and Subsidiaries
May 3, April 28, April 29,
Fiscal year ended 2000 1999 1998
------------------------------------------------------------------------------
(Dollars in thousands, except
per share amounts) (53 Weeks) (52 Weeks) (52 Weeks)
------------------------------------------------------------------------------
Sales $ 9,407,949 $ 9,299,610 $ 9,209,284
Cost of products sold 5,788,525 5,944,867 5,711,213
------------------------------------------------------------------------------
Gross profit 3,619,424 3,354,743 3,498,071
Selling, general and
administrative expenses 2,350,942 2,245,431 1,977,741
Gain on sale of Weight Watchers 464,617 - -
------------------------------------------------------------------------------
Operating income 1,733,099 1,109,312 1,520,330
Interest income 25,330 25,082 32,655
Interest expense 269,748 258,813 258,616
Other expenses, net 25,005 40,450 39,388
------------------------------------------------------------------------------
Income before income taxes 1,463,676 835,131 1,254,981
Provision for income taxes 573,123 360,790 453,415
------------------------------------------------------------------------------
Net income $ 890,553 $ 474,341 $ 801,566
------------------------------------------------------------------------------
PER COMMON SHARE AMOUNTS:
Net income - diluted $ 2.47 $ 1.29 $ 2.15
Net income - basic $ 2.51 $ 1.31 $ 2.19
Cash dividends $ 1.44 1/2 $ 1.34 1/4 $ 1.23 1/2
------------------------------------------------------------------------------
Average common shares
outstanding - diluted 360,095,455 367,830,419 372,952,851
Average common shares
outstanding - basic 355,272,696 361,203,539 365,982,290
------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
45
<PAGE> 17
CONSOLIDATED BALANCE SHEETS
H.J. Heinz Company and Subsidiaries
Assets (Dollars in thousands) May 3, 2000 April 28, 1999
------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 137,617 $ 115,982
Short-term investments, at cost which
approximates market 16,512 7,139
Receivables (net of allowances: 2000 -
$18,697 and 1999 - $21,633) 1,237,804 1,163,915
Inventories:
Finished goods and work-in-process 1,270,329 1,064,015
Packaging material and ingredients 329,577 345,636
------------------------------------------------------------------------------
1,599,906 1,409,651
------------------------------------------------------------------------------
Prepaid expenses 171,599 154,619
Other current assets 6,511 35,472
------------------------------------------------------------------------------
Total current assets 3,169,949 2,886,778
------------------------------------------------------------------------------
------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 45,959 48,649
Buildings and leasehold improvements 860,873 798,307
Equipment, furniture and other 3,440,915 3,227,019
------------------------------------------------------------------------------
4,347,747 4,073,975
Less accumulated depreciation 1,988,994 1,902,951
------------------------------------------------------------------------------
Total property, plant and equipment,
net 2,358,753 2,171,024
------------------------------------------------------------------------------
------------------------------------------------------------------------------
OTHER NON-CURRENT ASSETS:
Goodwill (net of amortization: 2000 -
$312,433 and 1999 - $352,209) 1,609,672 1,781,466
Trademarks (net of amortization: 2000 -
$104,125 and 1999 - $84,672) 674,279 511,608
Other intangibles (net of amortization:
2000 - $147,343 and 1999 - $117,038) 127,779 177,290
Other non-current assets 910,225 525,468
------------------------------------------------------------------------------
Total other non-current assets 3,321,955 2,995,832
------------------------------------------------------------------------------
Total assets $ 8,850,657 $ 8,053,634
------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
46
<PAGE> 18
Liabilities and Shareholders' Equity
(Dollars in thousands) May 3, 2000 April 28, 1999
------------------------------------------------------------------------------
CURRENT LIABILITIES:
Short-term debt $ 151,168 $ 290,841
Portion of long-term debt due within
one year 25,407 613,366
Accounts payable 1,026,960 945,488
Salaries and wages 48,646 74,098
Accrued marketing 200,775 182,024
Accrued restructuring costs 125,704 147,786
Other accrued liabilities 358,738 372,623
Income taxes 188,672 160,096
------------------------------------------------------------------------------
Total current liabilities 2,126,070 2,786,322
------------------------------------------------------------------------------
LONG-TERM DEBT AND OTHER LIABILITIES:
Long-term debt 3,935,826 2,472,206
Deferred income taxes 271,831 310,799
Non-pension postretirement benefits 208,958 208,102
Other 712,116 473,201
------------------------------------------------------------------------------
Total long-term debt and other
liabilities 5,128,731 3,464,308
------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Capital stock:
Third cumulative preferred, $1.70
first series, $10 par value 139 173
Common stock, 431,096,485 shares
issued, $0.25 par value 107,774 107,774
------------------------------------------------------------------------------
107,913 107,947
Additional capital 304,318 277,652
Retained earnings 4,756,513 4,379,742
------------------------------------------------------------------------------
5,168,744 4,765,341
Less:
Treasury shares, at cost (83,653,233
shares at May 3, 2000 and
71,968,652 shares at April 28,
1999) 2,920,471 2,435,012
Unearned compensation relating to the
ESOP 7,652 11,728
Accumulated other comprehensive loss 644,765 515,597
------------------------------------------------------------------------------
Total shareholders' equity 1,595,856 1,803,004
Total liabilities and shareholders'
equity $ 8,850,657 $ 8,053,634
------------------------------------------------------------------------------
47
<PAGE> 19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
H.J. Heinz Company and Subsidiaries
<TABLE>
<CAPTION>
Preferred Stock Common Stock
(Amounts in thousands, except per Comprehensive ----------------------------- --------------------------
share amounts) Income Shares Dollars Shares Dollars
--------------------------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1997 24 $ 241 431,096 $ 107,774
Comprehensive income - 1998:
Net income - 1998 $ 801,566
Other comprehensive income (loss),
net of tax:
Minimum pension liability, net of
$1,428 tax expense 2,433
Unrealized translation adjustments (180,284)
-----------
Comprehensive income $ 623,715
-----------
Cash dividends:
Preferred @ $1.70 per share
Common @ $1.23 1/2 per share
Shares reacquired
Conversion of preferred into common
stock (4) (42)
Stock options exercised, net of shares
tendered for payment
Unearned compensation relating to the
ESOP
Other, net
---------------------------------------------------------------------------------------------------------------
Balance at April 29, 1998 20 199 431,096 107,774
Comprehensive income - 1999:
Net income - 1999 $ 474,341
Other comprehensive income (loss),
net of tax:
Minimum pension liability, net of
$6,975 tax benefit (11,880)
Unrealized translation adjustments (88,040)
-----------
Comprehensive income $ 374,421
-----------
Cash dividends:
Preferred @ $1.70 per share
Common @ $1.34 1/4 per share
Shares reacquired
Conversion of preferred into common
stock (3) (26)
Stock options exercised, net of shares
tendered for payment
Unearned compensation relating to the
ESOP
Other, net
---------------------------------------------------------------------------------------------------------------
Balance at April 28, 1999 17 173 431,096 107,774
Comprehensive income - 2000:
Net income - 2000 $ 890,553
Other comprehensive income (loss),
net of tax:
Minimum pension liability, net of
$10,894 tax expense 18,548
Unrealized translation adjustments (154,962)
Realized translation
reclassification adjustment 7,246
-----------
Comprehensive income $ 761,385
-----------
Cash dividends:
Preferred @ $1.70 per share
Common @ $1.44 1/2 per share
Shares reacquired
Conversion of preferred into common
stock (3) (34)
Stock options exercised, net of shares
tendered for payment
Unearned compensation relating to the
ESOP
Other, net*
---------------------------------------------------------------------------------------------------------------
Balance at May 3, 2000 14 $ 139 431,096 $ 107,774
---------------------------------------------------------------------------------------------------------------
Authorized Shares - May 3, 2000 14 600,000
---------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
* Includes activity of the Global Stock Purchase Plan.
48
<PAGE> 20
<TABLE>
<CAPTION>
Unearned Accumulated
Treasury Stock Compensation Other Total
Additional Retained --------------------------- Relating to Comprehensive Shareholders'
Capital Earnings Shares Dollars the ESOP Loss Equity
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 175,811 $ 4,041,285 (63,912) $ (1,629,501) $ (17,363) $ (237,826) $ 2,440,421
801,566 801,566
(177,851) (177,851)
(37) (37)
(452,566) (452,566)
(13,559) (677,193) (677,193)
(1,322) 56 1,364 -
77,830* 9,717 200,860 278,690
2,541 2,541
454 19 491 945
-----------------------------------------------------------------------------------------------------------------------------------
252,773 4,390,248 (67,679) (2,103,979) (14,822) (415,677) 2,216,516
474,341 474,341
(99,920) (99,920)
(30) (30)
(484,817) (484,817)
(7,464) (410,103) (410,103)
(846) 34 872 -
25,658* 3,138 78,150 103,808
3,094 3,094
67 2 48 115
-----------------------------------------------------------------------------------------------------------------------------------
277,652 4,379,742 (71,969) (2,435,012) (11,728) (515,597) 1,803,004
890,553 890,553
(129,168) (129,168)
(26) (26)
(513,756) (513,756)
(12,766) (511,480) (511,480)
(1,136) 46 1,170 -
26,830* 833 19,681 46,511
4,076 4,076
972 203 5,170 6,142
-----------------------------------------------------------------------------------------------------------------------------------
$ 304,318 $ 4,756,513 (83,653) $ (2,920,471) $ (7,652) $ (644,765)** $ 1,595,856
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes income tax benefit resulting from exercised stock options.
**Comprised of unrealized translation adjustment of $(626,904) and minimum
pension liability of $(17,861).
49
<PAGE> 21
CONSOLIDATED STATEMENTS OF CASH FLOWS
H.J. Heinz Company and Subsidiaries
<TABLE>
<CAPTION>
Fiscal year ended May 3, 2000 April 28, 1999 April 29, 1998
------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) (53 Weeks) (52 Weeks) (52 Weeks)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 890,553 $ 474,341 $ 801,566
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 219,255 207,852 222,492
Amortization 87,228 94,360 91,130
Deferred tax provision 28,331 23,564 120,875
Gain on sale of Weight Watchers (464,617) - -
Gain on sale of bakery products unit - (5,717) -
Gain on sale of Ore-Ida frozen
foodservice business - - (96,563)
Provision for restructuring 392,720 527,107 -
Other items, net 48,905 (43,147) (126,805)
Changes in current assets and
liabilities, excluding effects of
acquisitions and divestitures:
Receivables (123,994) (88,742) (7,155)
Inventories (217,127) (115,743) 47,917
Prepaid expenses and other current
assets (23,296) 2,604 4,874
Accounts payable 111,976 3,410 54,345
Accrued liabilities (372,999) (150,533) (131,400)
Income taxes (33,860) (19,220) 84,468
------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 543,075 910,136 1,065,744
------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (452,444) (316,723) (373,754)
Acquisitions, net of cash acquired (394,418) (268,951) (142,112)
Proceeds from divestitures 726,493 180,400 494,739
Purchases of short-term investments (1,175,538) (915,596) (1,179,024)
Sales and maturities of short-term
investments 1,119,809 883,945 1,216,573
Investment in The Hain Celestial Group,
Inc. (99,764) - -
Other items, net 7,188 46,396 10,740
------------------------------------------------------------------------------------------------------------------
Cash (used for) provided by investing
activities (268,674) (390,529) 27,162
------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from long-term debt 834,328 259,593 555,017
Payments on long-term debt (627,498) (65,744) (572,905)
Proceeds from (payments on) commercial
paper and short-term borrowings, net 532,305 74,464 (288,346)
Dividends (513,782) (484,847) (452,603)
Purchase of treasury stock (511,480) (410,103) (677,193)
Exercise of stock options 20,027 77,158 200,972
Other items, net 6,937 33,989 88,457
------------------------------------------------------------------------------------------------------------------
Cash used for financing activities (259,163) (515,490) (1,146,601)
------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents 6,397 15,565 (6,991)
------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 21,635 19,682 (60,686)
Cash and cash equivalents at beginning of
year 115,982 96,300 156,986
Cash and cash equivalents at end of year $ 137,617 $ 115,982 $ 96,300
------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
50
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H.J. Heinz Company and Subsidiaries
1. SIGNIFICANT Fiscal Year: H.J. Heinz Company (the "company") operates on
ACCOUNTING a 52- or 53-week fiscal year ending the Wednesday nearest
POLICIES April 30. However, certain foreign subsidiaries have earlier
closing dates to facilitate timely reporting. Fiscal years
for the financial statements included herein ended May 3,
2000, April 28, 1999 and April 29, 1998.
Principles of Consolidation: The consolidated financial
statements include the accounts of the company and its
subsidiaries. All intercompany accounts and transactions were
eliminated. Investments owned less than 50%, where
significant influence exists, are accounted for on an equity
basis. Certain prior-year amounts have been reclassified in
order to conform with the Fiscal 2000 presentation.
Use of Estimates: The preparation of financial statements, in
conformity with generally accepted accounting principles,
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Translation of Foreign Currencies: For all significant
foreign operations, the functional currency is the local
currency. Assets and liabilities of these operations are
translated at the exchange rate in effect at each year-end.
Income statement accounts are translated at the average rate
of exchange prevailing during the year. Translation
adjustments arising from the use of differing exchange rates
from period to period are included as a component of
shareholders' equity. Gains and losses from foreign currency
transactions are included in net income for the period.
Cash Equivalents: Cash equivalents are defined as highly
liquid investments with original maturities of 90 days or
less.
Inventories: Inventories are stated at the lower of cost or
market. Cost is determined principally under the average cost
method.
Property, Plant and Equipment: Land, buildings and equipment
are recorded at cost. For financial reporting purposes,
depreciation is provided on the straight-line method over the
estimated useful lives of the assets. Accelerated
depreciation methods are generally used for income tax
purposes. Expenditures for new facilities and improvements
that substantially extend the capacity or useful life of an
asset are capitalized. Ordinary repairs and maintenance are
expensed as incurred. When property is retired or otherwise
disposed, the cost and related depreciation are removed from
the accounts and any related gains or losses are included in
income.
Intangibles: Goodwill, trademarks and other intangibles
arising from acquisitions are being amortized on a straight-
line basis over periods ranging from three to 40 years. The
company regularly reviews the individual components of the
balances by evaluating the future cash flows of the
businesses to determine the recoverability of the assets and
recognizes, on a current basis, any diminution in value.
51
<PAGE> 23
Revenue Recognition: The company generally recognizes revenue
upon shipment of goods to customers or upon performance of
services. However, in certain overseas countries, revenue is
recognized upon receipt of the product by the customer.
Advertising Expenses: Advertising costs are generally
expensed in the year in which the advertising first takes
place.
Income Taxes: Deferred income taxes result primarily from
temporary differences between financial and tax reporting. If
it is more likely than not that some portion or all of a
deferred tax asset will not be realized, a valuation
allowance is recognized.
The company has not provided for possible U.S. taxes on the
undistributed earnings of foreign subsidiaries that are
considered to be reinvested indefinitely. Calculation of the
unrecognized deferred tax liability for temporary differences
related to these earnings is not practicable. Where it is
contemplated that earnings will be remitted, credit for
foreign taxes already paid generally will offset applicable
U.S. income taxes. In cases where they will not offset U.S.
income taxes, appropriate provisions are included in the
Consolidated Statements of Income.
Stock-Based Employee Compensation Plans: Stock-based
compensation is accounted for by using the intrinsic value-
based method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees."
Financial Instruments: The company uses derivative financial
instruments for the purpose of hedging currency, price and
interest rate exposures which exist as part of ongoing
business operations. As a policy, the company does not engage
in speculative or leveraged transactions, nor does the
company hold or issue financial instruments for trading
purposes.
- Interest Rate Swap Agreements: The company may utilize
interest rate swap agreements to lower funding costs or to
alter interest rate exposure. Amounts paid or received on
interest rate swap agreements are deferred and recognized as
adjustments to interest expense. Gains and losses realized
upon the settlement of such contracts are deferred and
amortized to interest expense over the remaining term of the
debt instrument or are recognized immediately if the
underlying instrument is settled.
- Foreign Currency Contracts: The company enters into
forward, purchased option and swap contracts to hedge
transactions denominated in foreign currencies in order to
reduce the currency risk associated with fluctuating exchange
rates. Such contracts are used primarily to hedge certain
intercompany cash flows, purchases and sales of certain raw
materials and finished goods and for payments arising from
certain foreign currency denominated obligations. Realized
and unrealized gains and losses from instruments qualifying
as hedges are deferred as part of the cost basis of the
underlying transaction. Realized and unrealized gains and
losses from foreign currency contracts used as economic
hedges but not qualifying for hedge accounting are recognized
currently in miscellaneous income and expense.
- Commodity Contracts: In connection with purchasing certain
commodities for future manufacturing requirements, the
company enters into commodities futures and option contracts,
as deemed appropriate, to reduce the effect of price
fluctuations. Such contracts are accounted for as hedges,
with gains and losses recognized as part of cost of products
sold, and generally have a term of less than one year.
52
<PAGE> 24
The cash flows related to the above financial instruments are
classified in the Statements of Cash Flows in a manner
consistent with those of the transactions being hedged.
Recently Issued Accounting Standards: In June 1998, the
Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and
reporting standards for derivative instruments. The statement
requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position
and measure those instruments at fair value. In June 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the
Effective Date of FAS Statement 133," which postponed the
adoption date of SFAS No. 133. As such, the company is not
required to adopt the statement until Fiscal 2002. In June
2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an
Amendment of FASB Statement No. 133." This statement amends
the accounting and reporting standards of SFAS No. 133 for
certain derivative instruments and certain hedging
activities. The company is currently evaluating the effect
that implementation of the new standard will have on its
results of operations and financial position.
In May 2000, the FASB Emerging Issues Task Force (the
"EITF") issued new guidelines entitled "Accounting for
Certain Sales Incentives" which address the recognition,
measurement and income statement classification for certain
sales incentives (e.g., coupons). These guidelines will be
effective for the company beginning in the second quarter of
Fiscal 2001. The implementation of these guidelines will
require the company to make reclassifications between
selling, general and administrative expenses ("SG&A") and
sales.
In December 1999, the Securities and Exchange Commission
(the "SEC") issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101
provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the
SEC. SAB No. 101 outlines the basic criteria that must be met
to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. Management believes
that the impact of SAB No. 101, which will be effective in
the fourth quarter of Fiscal 2001, will not have a material
effect on its financial position or results of operations.
2. ACQUISITIONS All of the following acquisitions have been accounted for
as purchases and, accordingly, the respective purchase prices
have been allocated to the respective assets and liabilities
based upon their estimated fair values as of the acquisition
date. Operating results of businesses acquired have been
included in the Consolidated Statements of Income from the
respective acquisition dates forward. Pro forma results of
the company, assuming all of the following acquisitions had
been made at the beginning of each period presented, would
not be materially different from the results reported.
Fiscal 2000: The company acquired businesses for a total of
$404.9 million, including obligations to sellers of $10.4
million. The preliminary allocations of the purchase price
resulted in goodwill of $153.4 million and trademarks and
other intangible assets of $134.8 million, which are being
amortized on a straight-line basis over periods not exceeding
40 years. Final allocation of the purchase price is not
expected to differ significantly from the preliminary
allocations and is expected to be completed in Fiscal 2001.
On December 7, 1999, the company completed the acquisition
of United Biscuit's European Frozen and Chilled Division, one
of the leading frozen food businesses in the U.K. and
Ireland, which produces frozen desserts and vegetarian/meat-
free products, frozen pizzas, frozen value-added potato
products and fresh sandwiches. Also during Fiscal 2000, the
53
<PAGE> 25
company completed the acquisition of Quality Chef Foods, a
leading manufacturer of frozen heat-and-serve soups, entrees
and sauces; Yoshida, a line of Asian sauces marketed in the
U.S.; Thermo Pac, Inc., a U.S. leader in single-serve
condiments; and obtained a 51% share of Remedia Limited,
Israel's leading company in infant nutrition. The company
also made other smaller acquisitions during the year.
Fiscal 1999: The company acquired businesses for a total of
$317.3 million, including obligations to sellers of $48.4
million. The allocations of the purchase price resulted in
goodwill of $99.7 million and trademarks and other intangible
assets of $215.0 million, which are being amortized on a
straight-line basis over periods not exceeding 40 years.
Acquisitions made during Fiscal 1999 include: the College
Inn brand of canned broths and ABC Sauces in Indonesia, a
leading provider of ketchup, sauces and condiments. The
company also made other smaller acquisitions during the year.
Fiscal 1998: The company acquired businesses for a total of
$142.1 million. The allocations of the purchase price
resulted in goodwill of $65.1 million and trademarks and
other intangible assets of $27.2 million, which are being
amortized on a straight-line basis over periods not exceeding
40 years.
On June 30, 1997, the company acquired John West Foods
Limited, the leading brand of canned tuna and fish in the
U.K. 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.) During Fiscal 1998, the company also
made other acquisitions, primarily in the Asia/Pacific
region, Europe and South Africa.
3. DIVESTITURES On September 29, 1999, the company completed the sale of
the Weight Watchers classroom business for $735 million,
which included $25 million of preferred stock. The
transaction resulted in a pretax gain of $464.6 million
($0.72 per share). The company used a portion of the proceeds
to retain a 6% equity interest in Weight Watchers
International, Inc. The sale did not include Weight Watchers
Smart Ones frozen meals, desserts and breakfast items, Weight
Watchers from Heinz in the U.K. and a broad range of other
Weight Watchers branded foods in Heinz's global core product
categories. The Weight Watchers classroom business
contributed approximately $400 million in sales for Fiscal
1999. During Fiscal 2000, the company also made other smaller
divestitures.
On October 2, 1998, the company completed the sale of its
bakery products unit for $178.0 million. The transaction
resulted in a pretax gain of $5.7 million, which was recorded
in SG&A. The bakery products unit contributed approximately
$200 million in sales for Fiscal 1998.
On June 30, 1997, the company completed the sale of its
Ore-Ida frozen foodservice business. The transaction resulted
in a pretax gain of approximately $96.6 million ($0.14 per
share), and was recorded in SG&A. 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
business contributed approximately $525 million in net sales
for Fiscal 1997.
Pro forma results of the company, assuming all of the above
divestitures had been made at the beginning of each period
presented, would not be materially different from the results
reported.
54
<PAGE> 26
4. RESTRUCTURING Operation Excel
CHARGES In Fiscal 1999, the company announced a transformative growth
and restructuring initiative. The initiative, named
"Operation Excel," is a multi-year, multi-faceted program
creating manufacturing centers of excellence, focusing the
product portfolio, realigning the company's management teams
and investing in growth initiatives.
Creating manufacturing centers of excellence is resulting
in significant changes to the company's manufacturing
footprint including the following initiatives: closing the
Harlesden factory in London, England and focusing the Kitt
Green factory in Wigan, England on canned beans, soups and
pasta production and focusing the Elst factory in the
Netherlands on tomato ketchup and sauces; downsizing the
Puerto Rico tuna processing facility and focusing this
facility on lower volume/higher margin products (completed in
Fiscal 2000); focusing the Pittsburgh, Pennsylvania factory
on soup and baby food production and shifting other
production to existing facilities; consolidating
manufacturing capacity in the Asia/Pacific region; closing
the Zabreh, Czech Republic factory and disposing of the Czech
dairy business and transferring the infant formula business
to the Kendal, England factory (completed in Fiscal 2000);
downsizing the Pocatello, Idaho factory by shifting Bagel
Bites production to the Ft. Myers, Florida factory, and
shifting certain Smart Ones entree production to the
Massillon, Ohio factory (completed in Fiscal 2000); closing
the Redditch, England factory and shifting production to the
Telford, England factory and the Turnhout factory in Belgium
(completed in Fiscal 2000); closing the El Paso, Texas pet
treat facility and consolidating production in the Topeka,
Kansas factory; and disposing of the Bloomsburg, Pennsylvania
frozen pasta factory (completed in Fiscal 2000).
As part of Operation Excel, the company is focusing the
portfolio of product lines on six core food categories:
ketchup, condiments and sauces; frozen foods; tuna; soup,
beans and pasta meals; infant foods; and pet products. A
consequence of this focus on the core categories was the sale
of the Weight Watchers classroom business in Fiscal 2000.
Additionally, seven other smaller businesses, which have
combined annual revenues of approximately $80 million, are
being disposed.
Realigning the company's management teams will provide
processing and product expertise across the regions of North
America, Europe and Asia/Pacific. Specifically, Operation
Excel includes creating a single U.S. frozen food
headquarters, resulting in the closure of the company's Ore-
Ida head office in Boise, Idaho (completed in Fiscal 2000);
consolidating many European administrative support functions;
creating a single North American Grocery & Foodservice
headquarters in Pittsburgh, Pennsylvania, resulting in the
relocation of the company's domestic seafood and pet food
headquarters from Newport, Kentucky; and creating two Asia/
Pacific management teams with headquarters in Melbourne (for
the Australian, New Zealand and Japanese businesses) and
Singapore (for all other Asian businesses).
The initiatives will result in the closure or exit of 21
factories or businesses. Management estimates that these
actions will impact approximately 6,000 employees with a net
reduction in the workforce of approximately 4,600, after
expansion of certain facilities.
During Fiscal 2000, the company recognized net
restructuring charges and implementation costs totaling
$392.7 million pretax ($0.74 per share). Pretax charges of
$170.4 million were classified as cost of products sold and
$222.3 million as SG&A. During Fiscal 1999, the company
recognized restructuring charges and implementation costs
totaling $552.8 million pretax ($1.11 per share). Pretax
charges of $396.4 million were classified as cost of products
sold and $156.4 million as SG&A.
55
<PAGE> 27
Included in the $392.7 million of net restructuring and
implementation costs recognized in Fiscal 2000 is a reversal
of $18.2 million pretax of Fiscal 1999 restructuring accruals
(exit costs, $0.4 million and severance costs, $1.3 million)
and asset write-downs ($16.5 million), primarily for the
closure of the West Chester, Pennsylvania facility, which
will now remain in operation as a result of the sale of the
Bloomsburg facility in April of Fiscal 2000.
The major components of the restructuring charges and
implementation costs and the remaining accrual balances as of
May 3, 2000 and April 28, 1999 were as follows:
<TABLE>
<CAPTION>
Non-Cash Employee
Asset Termination and Accrued Implementation
(Dollars in millions) Write-Downs Severance Costs Exit Costs Costs Total
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Restructuring and implementation costs
- 1999 $ 294.9 $ 159.4 $ 45.3 $ 53.2 $ 552.8
Amounts utilized - 1999 (294.9) (67.3) (9.8) (53.2) (425.2)
-----------------------------------------------------------------------------------------------------------------------------------
Accrued restructuring costs - April 28,
1999 - 92.1 35.5 - 127.6
Net restructuring and implementation
costs - 2000 61.6 84.5 30.1 216.5 392.7
Amounts utilized - 2000 (61.6) (86.3) (30.7) (216.5) (395.1)
-----------------------------------------------------------------------------------------------------------------------------------
Accrued restructuring costs - May 3,
2000 $ - $ 90.3 $ 34.9 $ - $ 125.2
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Non-cash asset write-downs consisted primarily of long-term
asset impairments that were recorded as a direct result of
the company's decision to exit businesses or facilities. Non-
cash asset write-downs totaled $61.6 million in Fiscal 2000
and related to property, plant and equipment ($48.7 million)
and current assets ($12.9 million). In Fiscal 1999, non-cash
asset write-downs consisted of property, plant and equipment
($210.9 million), goodwill and other intangibles ($49.6
million) and current assets ($34.5 million). Long-term asset
write-downs were based on third-party appraisals, contracted
sales prices or management's estimate of salvage value. The
carrying value of these long-term assets was approximately
$30 million at May 3, 2000 and $50 million at April 28, 1999.
These assets will be sold or removed from service within 12
months. Once the assets are removed from service, the company
will actively market these assets for sale. The results of
operations, related to these assets, including the effect of
reduced depreciation were not material. Current asset write-
downs included inventory and packaging material, prepaids and
other current assets and were determined based on
management's estimate of net realizable value.
Severance charges are primarily related to involuntary
terminations and represent cash termination payments to be
paid to affected employees as a direct result of the
restructuring program. Non-cash pension and postretirement
benefit charges related to the approved projects are also
included as a component of total severance costs ($27.8
million and $60.5 million in Fiscal 2000 and Fiscal 1999,
respectively).
Exit costs are primarily related to contract and lease
termination costs ($12.0 million in Fiscal 2000 and $35.0
million in Fiscal 1999).
Implementation costs were recognized as incurred in Fiscal
2000 ($216.5 million) and Fiscal 1999 ($53.2 million) and
consist of incremental costs directly related to the
implementation of Operation Excel, including consulting fees,
employee relocation costs, unaccruable severance costs
associated with terminated employees, training costs,
equipment relocation costs and commissioning costs.
In Fiscal 2000, 11 factories and four businesses were sold
or closed including those located in England, Hungary, the
Czech Republic, New Zealand and the U.S., resulting in a net
reduction of the company's workforce of approximately 3,000
employees. During Fiscal 1999, the company's workforce was
reduced by approximately 200 employees, principally through
the closure of Ore-Ida's Boise head office and through the
divestiture of the Clarksville, Arkansas sweet potato
business.
56
<PAGE> 28
Project Millennia
During the fourth quarter of Fiscal 1997, the company
announced a reorganization and restructuring program named
"Project Millennia," which resulted in a total cost of
approximately $750 million over three years. The
reorganization plan was designed to strengthen the company's
core businesses and improve profitability and global growth.
Key initiatives were focused on process changes and product
line rationalizations.
The major components of the restructuring charges and
implementation costs and the accrual balances as of May 3,
2000, April 28, 1999, April 29, 1998 and April 30, 1997 were
as follows:
<TABLE>
<CAPTION>
Exit Costs
Non-Cash Employee ------------------------------------
Asset Termination and Accrued Implementation
(Dollars in millions) Write-Downs Severance Costs Exit Costs Costs Total
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Restructuring and implementation costs
- 1997 $ 324.3 $ 164.5 $ 94.3 $ 64.1 $ 647.2
Amounts utilized - 1997 (324.3) (32.1) (15.9) (64.1) (436.4)
-----------------------------------------------------------------------------------------------------------------------------------
Accrued restructuring costs - April 30,
1997 - 132.4 78.4 - 210.8
Implementation costs - 1998 - - - 84.1 84.1
Amounts utilized - 1998 - (91.9) (24.5) (84.1) (200.5)
-----------------------------------------------------------------------------------------------------------------------------------
Accrued restructuring costs - April 29,
1998 - 40.5 53.9 - 94.4
Implementation costs - 1999 - - - 22.3 22.3
Amounts utilized - 1999 - (28.7) (19.9) (22.3) (70.9)
Accrual reversal - 1999 - (9.1) (16.6) - (25.7)
-----------------------------------------------------------------------------------------------------------------------------------
Accrued restructuring costs - April 28,
1999 - 2.7 17.4 - 20.1
Amounts utilized - 2000 - (2.7) (16.9) - (19.6)
-----------------------------------------------------------------------------------------------------------------------------------
Accrued restructuring costs - May 3,
2000 $ - $ - $ 0.5 $ - $ 0.5
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The company has completed the implementation of Project
Millennia. During Fiscal 2000, the company utilized $19.6
million of severance and exit accruals. The utilization of
the accruals related principally to the closure of a tuna
processing facility in Australia, the closure of a tomato
processing facility in Spain and costs associated with
contractual lease commitments of the U.S. Weight Watchers
classroom business, which were transferred to the buyer of
the classroom business.
As of May 3, 2000, the company has closed or divested all
of the 25 plants that were scheduled for closure or
divestiture. Project Millennia has resulted in a net
workforce reduction of 2,250 employees.
As of May 3, 2000, there are $0.5 million of remaining
Project Millennia accruals. These accruals relate to
contractual lease commitments in the U.S.
57
<PAGE> 29
5. INCOME TAXES The following table summarizes the provision/(benefit) for
U.S. federal and U.S. possessions, state and foreign taxes on
income.
(Dollars in thousands) 2000 1999 1998
------------------------------------------------------------------------------
Current:
U.S. federal and U.S. possessions $ 318,873 $ 110,490 $ 214,866
State 45,935 15,389 17,667
Foreign 179,984 211,347 100,007
------------------------------------------------------------------------------
544,792 337,226 332,540
------------------------------------------------------------------------------
Deferred:
U.S. federal and U.S. possessions 71,602 66,944 103,630
State (1,871) 2,441 1,536
Foreign (41,400) (45,821) 15,709
----------------------------------------------------------------------------
28,331 23,564 120,875
----------------------------------------------------------------------------
Total tax provision $ 573,123 $ 360,790 $ 453,415
----------------------------------------------------------------------------
The Fiscal 2000 effective tax rate was unfavorably impacted
by the excess of basis in assets for financial reporting over
the tax basis of assets included in the Weight Watchers sale
and by gains in higher taxed states related to the sale. Tax
expense related to the pretax gain of $464.6 million was
$204.9 million. The Fiscal 2000 and Fiscal 1999 effective tax
rates were unfavorably impacted by restructuring and
implementation costs expected to be realized in lower tax
rate jurisdictions and by nondeductible expenses related to
the restructuring. Tax benefit related to the $392.7 million
of Operation Excel net restructuring and implementation costs
for Fiscal 2000 was $125.3 million. Tax benefit related to
the $552.8 million of Operation Excel restructuring and
implementation costs for 1999 was $143.1 million. In Fiscal
1998, reduced tax rates enacted in the U.K. and Italy
decreased the tax provision by $21.6 million, representing
the impact of the reduced tax rates on net deferred taxes
payable as of the dates of enactment. Tax expense resulting
from allocating certain tax benefits directly to additional
capital was immaterial in Fiscal 2000. In Fiscal 1999 it was
$26.6 million, and in Fiscal 1998 it was $77.7 million.
The components of income before income taxes consist of the
following:
(Dollars in thousands) 2000 1999 1998
------------------------------------------------------------------------------
Domestic $ 805,464 $ 427,089 $ 742,665
Foreign 658,212 408,042 512,316
------------------------------------------------------------------------------
Total income before income taxes $ 1,463,676 $ 835,131 $ 1,254,981
------------------------------------------------------------------------------
The differences between the U.S. federal statutory tax rate
and the company's consolidated effective tax rate are as
follows:
2000 1999 1998
------------------------------------------------------------------------------
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
Tax on income of foreign subsidiaries (1.1) 1.3 (0.9)
State income taxes (net of federal
benefit) 1.9 1.5 1.1
Earnings repatriation 1.7 (0.3) (0.2)
Effect of foreign losses 1.4 3.8 -
Tax on income of U.S. possessions
subsidiaries (1.4) 0.6 (1.3)
Other 1.7 1.3 2.4
------------------------------------------------------------------------------
Effective tax rate 39.2% 43.2% 36.1%
------------------------------------------------------------------------------
58
<PAGE> 30
The deferred tax (assets) and deferred tax liabilities
recorded on the balance sheets as of May 3, 2000 and April
28, 1999 are as follows:
(Dollars in thousands) 2000 1999
------------------------------------------------------------------------------
Depreciation/amortization $ 416,453 $ 429,101
Benefit plans 48,180 70,006
Other 63,626 57,925
------------------------------------------------------------------------------
528,259 557,032
------------------------------------------------------------------------------
Provision for estimated expenses (105,375) (148,519)
Operating loss carryforwards (37,813) (37,104)
Benefit plans (115,007) (122,007)
Tax credit carryforwards (44,911) (10,573)
Other (131,086) (98,674)
------------------------------------------------------------------------------
(434,192) (416,877)
------------------------------------------------------------------------------
Valuation allowance 75,109 40,811
------------------------------------------------------------------------------
Net deferred tax liabilities $ 169,176 $ 180,966
------------------------------------------------------------------------------
At the end of Fiscal 2000, net operating loss carryforwards
totaled $81.1 million. Of that amount, $20.5 million expire
through 2010; the other $60.6 million do not expire. Foreign
tax credit carryforwards total $44.9 million and expire
through 2005.
The company's consolidated U.S. income tax returns have
been audited by the Internal Revenue Service for all years
through 1994.
Undistributed earnings of foreign subsidiaries considered
to be reinvested permanently amounted to $2.25 billion at May
3, 2000.
The Fiscal 2000 net change in the valuation allowance for
deferred tax assets was an increase of $34.3 million, due
principally to additional deferred tax asset related to
foreign tax credit carryforward.
During the first quarter of Fiscal 2000, the company
reorganized certain of its foreign operations, and, as a
result, expects to pay approximately $320 million in foreign
income taxes through Fiscal 2005. Because the company
increased tax basis in amortizable assets at the same time,
cash flow related to the reorganization is expected to be
neutral over the payment period.
6. DEBT Short-term debt consisted of bank and other borrowings of
$151.2 million and $290.8 million as of May 3, 2000 and April
28, 1999, respectively. Total short-term debt had a weighted-
average interest rate during Fiscal 2000 of 6.2% and at year-
end of 6.5%. The weighted-average interest rate on short-term
debt during Fiscal 1999 was 6.3% and at year-end was 5.3%.
The company maintains a $2.30 billion credit agreement that
supports its domestic commercial paper program. The credit
agreement expires in September 2001. In addition, the company
had $760.3 million of foreign lines of credit available at
year-end.
As of May 3, 2000 and April 28, 1999, the company had $2.08
billion and $1.41 billion, respectively, of domestic
commercial paper outstanding. Due to the long-term nature of
the credit agreement, all of the outstanding domestic
commercial paper has been classified as long-term debt as of
May 3, 2000 and April 28, 1999. Aggregate domestic commercial
paper
59
<PAGE> 31
had a weighted-average interest rate during Fiscal 2000
of 5.5% and at year-end of 6.2%. In Fiscal 1999, the
weighted-average rate was 5.3% and at year-end was 4.9%.
<TABLE>
<CAPTION>
Range of Maturity
Long-Term (Dollars in thousands) Interest (Fiscal Year) 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Dollars:
Commercial paper Variable 2002 $ 2,084,175 $ 1,406,131
Senior unsecured notes and debentures 6.00-6.88% 2001-2029 740,537 1,040,013
Eurodollar notes 5.75-7.00 2002-2003 548,463 499,089
Revenue bonds 3.40-7.70 2001-2027 14,892 15,092
Promissory notes 3.00-10.00 2001-2005 20,967 67,397
Other 6.50 2001-2020 12,287 5,860
-----------------------------------------------------------------------------------------------------------------------------------
3,421,321 3,033,582
-----------------------------------------------------------------------------------------------------------------------------------
Foreign Currencies
(U.S. Dollar Equivalents):
Promissory notes:
Pound sterling 5.67-8.86% 2001-2030 235,388 10,230
Euro 5.00 2005 268,674 -
Italian lire 3.90-6.53 2001-2008 1,422 7,377
Australian dollar 6.10 2001-2002 6,152 13,421
Other 5.00-24.00 2001-2022 28,276 20,962
-----------------------------------------------------------------------------------------------------------------------------------
539,912 51,990
-----------------------------------------------------------------------------------------------------------------------------------
Total long-term debt 3,961,233 3,085,572
Less portion due within one year 25,407 613,366
-----------------------------------------------------------------------------------------------------------------------------------
$ 3,935,826 $ 2,472,206
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amount of long-term debt that matures in each of the
four years succeeding 2001 is: $2,404.8 million in 2002,
$467.0 million in 2003, $7.7 million in 2004 and $279.7
million in 2005.
On January 5, 2000, the company issued Euro300 million of 5%
Notes due 2005. The proceeds were used to repay domestic
commercial paper. On February 15, 2000, the company issued
$300 million of 7.0% Notes due 2002. The proceeds were used
to repay domestic commercial paper. On February 18, 2000, the
company issued Pds125 million of 6.25% Notes due 2030. The
proceeds were used for general corporate purposes, including
repaying commercial paper borrowings that were incurred in
connection with the acquisition of United Biscuit's European
Frozen and Chilled Division in December 1999. The company
entered into an interest rate swap agreement with a notional
amount of Pds50 million and a settlement date of April 2001.
This swap converts the 6.25% fixed rate to a floating rate.
On July 15, 1998, the company issued $250 million of 6.375%
Debentures due July 2028. The proceeds were used to repay
domestic commercial paper.
7. SHAREHOLDERS' Capital Stock: The preferred stock outstanding is
EQUITY convertible at a rate of one share of preferred stock into
13.5 shares of common stock. The company can redeem the stock
at $28.50 per share.
As of May 3, 2000, there were authorized, but unissued,
2,200,000 shares of third cumulative preferred stock for
which the series had not been designated.
Employee Stock Ownership Plan ("ESOP"): The company
established an ESOP in 1990 to replace in full or in part the
company's cash-matching contributions to the H.J. Heinz
Company Employees Retirement and Savings Plan, a 401(k) plan
for salaried employees. Matching contributions to the 401(k)
plan are based on a percentage of the participants'
contributions, subject to certain limitations.
60
<PAGE> 32
Global Stock Purchase Plan ("GSPP"): On September 8, 1999,
the stockholders authorized a GSPP, which qualifies under
Internal Revenue Code Section 423, and provides for the
purchase by employees of up to 3,000,000 shares of the
company's stock through payroll deductions. Employees who
choose to participate in the plan will receive an option to
acquire common stock at a discount. The purchase price per
share will be the lower of 85% of the fair market value of
the company's stock on the first or last day of a purchase
period. During Fiscal 2000, employees purchased 173,326
shares under this plan.
Cumulative Translation Adjustments: Changes in the cumulative
translation component of shareholders' equity result
principally from translation of financial statements of
foreign subsidiaries into U.S. dollars. The reduction in
shareholders' equity related to the translation component
increased $147.7 million in 2000, $88.0 million in 1999 and
$180.3 million in 1998. During Fiscal 2000, a loss of $7.2
million was transferred from the cumulative translation
component of shareholders' equity and included in the
determination of net income.
Unfunded Pension Obligation: An adjustment for unfunded
foreign pension obligations in excess of unamortized prior
service costs was recorded, net of tax, as a reduction in
shareholders' equity.
8. SUPPLEMENTAL CASH FLOWS INFORMATION
(Dollars in thousands) 2000 1999 1998
------------------------------------------------------------------------------
Cash Paid During the Year For:
Interest $ 273,506 $ 266,395 $ 300,173
Income taxes 485,267 287,544 188,567
------------------------------------------------------------------------------
Details of Acquisitions:
Fair value of assets $ 563,376 $ 350,575 $ 200,406
Liabilities* 166,699 80,055 47,912
------------------------------------------------------------------------------
Cash paid 396,677 270,520 152,494
Less cash acquired 2,259 1,569 10,382
------------------------------------------------------------------------------
Net cash paid for acquisitions $ 394,418 $ 268,951 $ 142,112
------------------------------------------------------------------------------
*Includes obligations to sellers of $10.4 million and $48.4 million in 2000
and 1999, respectively.
9. EMPLOYEES' Under the company's stock option plans, officers and other
STOCK OPTION key employees may be granted options to purchase shares of
PLANS AND the company's common stock. Generally, the option price on
MANAGEMENT outstanding options is equal to the fair market value of the
INCENTIVE PLANS stock at the date of grant. Options are generally exercisable
beginning from one to three years after date of grant and
have a maximum term of 10 years. Beginning in Fiscal 1998, in
order to place greater emphasis on creation of shareholder
value, performance-accelerated stock options were granted to
certain key executives. These options vest eight years after
the grant date, subject to acceleration if predetermined
share price goals are achieved.
The company has adopted the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the
company's stock option plans. If the company had elected to
recognize compensation cost
61
<PAGE> 33
based on the fair value of the options granted at grant date as
prescribed by SFAS No. 123, net income and earnings per share
would have been reduced to the pro forma amounts indicated
below:
Fiscal year ended May 3, 2000 April 28, 1999 April 29, 1998
------------------------------------------------------------------------------
(Dollars in thousands, except per
share amounts) (53 Weeks) (52 Weeks) (52 Weeks)
------------------------------------------------------------------------------
Pro forma net income $ 862,698 $ 440,080 $ 790,325
Pro forma diluted net income per
common share $ 2.40 $ 1.20 $ 2.12
Pro forma basic net income per common
share $ 2.43 $ 1.22 $ 2.16
------------------------------------------------------------------------------
The pro forma effect on net income for Fiscal 2000, Fiscal
1999 and Fiscal 1998 is not representative of the pro forma
effect on net income in future years because it does not take
into consideration pro forma compensation expense related to
grants made prior to 1996.
The weighted-average fair value of options granted was
$8.98 per share in Fiscal 2000, $11.34 per share in Fiscal
1999 and $12.45 per share in Fiscal 1998.
The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
2000 1999 1998
------------------------------------------------------------------------------
Dividend yield 3.5% 2.5% 2.5%
Volatility 24.0% 22.0% 20.0%
Risk-free interest rate 6.1% 5.3% 5.8%
Expected term (years) 5.0 4.9 5.5
------------------------------------------------------------------------------
Data regarding the company's stock option plans follows:
Weighted-Average
Exercise Price
Shares Per Share
------------------------------------------------------------------------------
Shares under option April 30, 1997 33,074,848 $ 26.34
Options granted 2,990,000 53.76
Options exercised (10,283,073) 22.40
Options surrendered (181,000) 34.22
------------------------------------------------------------------------------
Shares under option April 29, 1998 25,600,775 $ 31.07
Options granted 8,979,200 53.07
Options exercised (3,138,445) 24.59
Options surrendered (924,300) 40.11
------------------------------------------------------------------------------
Shares under option April 28, 1999 30,517,230 $ 37.94
Options granted 347,000 41.40
Options exercised (858,283) 24.81
Options surrendered (287,665) 44.70
------------------------------------------------------------------------------
Shares under option May 3, 2000 29,718,282 $ 38.29
------------------------------------------------------------------------------
Options exercisable at:
April 29, 1998 14,397,175 $ 24.70
April 28, 1999 13,507,295 27.60
May 3, 2000 16,430,099 31.43
------------------------------------------------------------------------------
62
<PAGE> 34
The following summarizes information about shares under
option in the respective exercise price ranges at May 3,
2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- --------------------------
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Range of Exercise Number Remaining Life Price Per Number Price Per
Price Per Share Outstanding (Years) Share Exercisable Share
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$21.75-33.88 15,536,049 4.42 $ 27.00 12,902,472 $ 25.99
36.75-48.38 3,591,333 7.01 41.13 1,079,967 39.54
49.31-59.94 10,590,900 8.41 53.88 2,447,660 56.49
---------------------------------------------------------------------------------------
29,718,282 16,430,099
---------------------------------------------------------------------------------------
</TABLE>
The shares authorized but not granted under the company's
stock option plans were 393,000 at May 3, 2000 and 452,335 at
April 28, 1999. Common stock reserved for options totaled
30,111,282 at May 3, 2000 and 30,969,565 at April 28, 1999.
The company's management incentive plan covers officers and
other key employees. Participants may elect to be paid on a
current or deferred basis. The aggregate amount of all awards
may not exceed certain limits in any year. Compensation under
the management incentive plans was approximately $44 million
in Fiscal 2000, $47 million in Fiscal 1999 and $46 million in
Fiscal 1998.
10. RETIREMENT The company maintains retirement plans for the majority of
PLANS its employees. Current defined benefit plans are provided
primarily for domestic union and foreign employees. Defined
contribution plans are provided for the majority of its
domestic non-union hourly and salaried employees.
Total pension cost consisted of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999 1998
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of defined benefit net
periodic benefit cost:
Service cost $ 27,352 $ 23,617 $ 21,038
Interest cost 84,096 82,958 83,005
Expected return on assets (121,735) (109,490) (103,421)
Amortization of:
Net initial asset (3,629) (3,632) (4,333)
Prior service cost 8,067 8,026 8,466
Net actuarial loss/(gain) 1,931 (3,752) (10,307)
Loss due to curtailment, settlement
and special termination benefits 27,908 60,485 6,482
---------------------------------------------------------------------------------------
Net periodic benefit cost 23,990 58,212 930
Defined contribution plans (excluding
the ESOP) 20,558 23,980 23,571
---------------------------------------------------------------------------------------
Total pension cost $ 44,548 $ 82,192 $ 24,501
---------------------------------------------------------------------------------------
</TABLE>
63
<PAGE> 35
The following table sets forth the funded status of the
company's principal defined benefit plans at May 3, 2000 and
April 28, 1999.
(Dollars in thousands) 2000 1999
------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at the beginning of
the year $ 1,387,043 $ 1,270,521
Service cost 27,352 23,617
Interest cost 84,096 82,958
Participants' contributions 6,895 7,044
Amendments 20,505 18,625
Actuarial (gain)/loss (34,023) 102,361
Curtailment gain (939) (867)
Settlement (15,976) (36,751)
Special termination benefits 19,234 31,581
Benefits paid (86,013) (86,615)
Acquisition 78,729 -
Exchange (29,493) (25,431)
------------------------------------------------------------------------------
Benefit obligation at the end of the year 1,457,410 1,387,043
------------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets at the
beginning of the year 1,440,357 1,444,080
Actual return on plan assets 207,616 105,296
Settlement (15,976) (36,751)
Employer contribution 38,632 34,701
Participants' contributions 6,895 7,044
Benefits paid (86,013) (86,615)
Acquisition 102,396 -
Exchange (36,483) (27,398)
------------------------------------------------------------------------------
Fair value of plan assets at the end of
the year 1,657,424 1,440,357
------------------------------------------------------------------------------
Funded status 200,014 53,314
Unamortized prior service cost 85,795 75,770
Unamortized net actuarial (gain)/loss (35,529) 95,994
Unamortized net initial asset (7,434) (11,501)
------------------------------------------------------------------------------
Net amount recognized 242,846 213,577
------------------------------------------------------------------------------
Amount recognized in the consolidated
balance sheet consists of:
Prepaid benefit cost 257,633 221,823
Accrued benefit liability (46,537) (69,226)
Intangible asset 3,402 3,189
Accumulated other comprehensive loss 28,348 57,791
------------------------------------------------------------------------------
Net amount recognized $ 242,846 $ 213,577
------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit
obligation and fair value of plan assets for plans with
accumulated benefit obligations in excess of plan assets were
$263.4 million, $231.3 million and $184.8 million,
respectively, as of May 3, 2000 and $278.8 million, $237.5
million and $168.3 million, respectively, as of April 28,
1999.
64
<PAGE> 36
The weighted-average rates used for the years ended May 3,
2000, April 28, 1999 and April 29, 1998 in determining the
net pension costs and projected benefit obligations for
defined benefit plans were as follows:
2000 1999 1998
------------------------------------------------------------------------------
Expected rate of return 9.5% 9.5% 9.6%
Discount rate 6.8% 6.3% 6.9%
Compensation increase rate 4.6% 4.7% 4.9%
------------------------------------------------------------------------------
11. POSTRETIRE- The company and certain of its subsidiaries provide health
MENT BENEFITS care and life insurance benefits for retired employees and
OTHER THAN their eligible dependents. Certain of the company's U.S. and
PENSIONS AND Canadian employees may become eligible for such benefits. The
OTHER company currently does not fund these benefit arrangements
POSTEMPLOYMENT and may modify plan provisions or terminate plans at its
BENEFITS discretion.
Net postretirement costs consisted of the following:
(Dollars in thousands) 2000 1999 1998
------------------------------------------------------------------------------
Components of defined benefit net
periodic benefit cost:
Service cost $ 3,903 $ 3,603 $ 3,339
Interest cost 10,475 10,483 11,280
Amortization of:
Prior service cost (655) (649) (5,633)
Net actuarial gain (3,144) (3,430) (3,664)
Loss due to curtailment and special
termination benefits 1,536 3,732 1,085
------------------------------------------------------------------------------
Net periodic benefit cost $ 12,115 $ 13,739 $ 6,407
------------------------------------------------------------------------------
The following table sets forth the combined status of the
company's postretirement benefit plans at May 3, 2000 and
April 28, 1999.
(Dollars in thousands) 2000 1999
------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at the beginning of
the year $ 158,488 $ 157,975
Service cost 3,903 3,603
Interest cost 10,475 10,483
Participants' contributions 889 858
Actuarial loss/(gain) 6,644 (3,688)
Curtailment (154) -
Special termination benefits 1,389 2,779
Benefits paid (11,864) (12,709)
Exchange (220) (813)
------------------------------------------------------------------------------
Benefit obligation at the end of the year 169,550 158,488
------------------------------------------------------------------------------
Funded status (169,550) (158,488)
Unamortized prior service cost (6,583) (6,711)
Unamortized net actuarial gain (42,825) (52,826)
------------------------------------------------------------------------------
Net accrued benefit liability $ (218,958) $ (218,025)
------------------------------------------------------------------------------
65
<PAGE> 37
The weighted-average discount rate used in the calculation
of the accumulated postretirement benefit obligation and the
net postretirement benefit cost was 7.7% in 2000, 6.9% in
1999 and 1998. The assumed annual composite rate of increase
in the per capita cost of company-provided health care
benefits begins at 7.2% for 2000, gradually decreases to 5.3%
by 2007, and remains at that level thereafter. Assumed health
care cost trend rates have a significant effect on the
amounts reported for postretirement medical benefits. A one-
percentage-point change in assumed health care cost trend
rates would have the following effects:
1% Increase 1% Decrease
------------------------------------------------------------------------------
Effect on total service and interest cost
components $ 1,537 $ (1,349)
Effect on postretirement benefit
obligation 15,860 (13,988)
------------------------------------------------------------------------------
12. FINANCIAL Interest Rate Swap Agreements: As of May 3, 2000, the
INSTRUMENTS company was party to an interest rate swap with a notional
amount of Pds50 million and a settlement date of April 2001.
The swap converts a 6.25% fixed rate exposure, on long-term
debt maturing in 2030, to a floating rate exposure. As of
April 28, 1999, no such agreements were outstanding.
Foreign Currency Contracts: As of May 3, 2000 and April 28,
1999, the company held currency swap contracts with an
aggregate notional amount of approximately $90 million and
$110 million, respectively. As of May 3, 2000, these
contracts mature in 2002. The company held separate contracts
to purchase certain foreign currencies as of May 3, 2000 and
April 28, 1999 totaling approximately $490 million and $510
million, respectively, which mature within one year of the
respective fiscal year-end. The company also held separate
contracts to sell certain foreign currencies as of May 3,
2000 and April 28, 1999 of approximately $105 million and
$390 million, respectively. As of May 3, 2000, these
contracts mature in 2001 and 2002. Net unrealized gains and
losses associated with the company's foreign currency
contracts as of May 3, 2000 and April 28, 1999 were not
material.
Commodity Contracts: As of May 3, 2000 and April 28, 1999,
the notional values and unrealized gains or losses related to
commodity contracts held by the company were not material.
Fair Value of Financial Instruments: The company's
significant financial instruments include cash and cash
equivalents, short- and long-term investments, short- and
long-term debt, currency exchange agreements, interest rate
swaps and guarantees.
In evaluating the fair value of significant financial
instruments, the company generally uses quoted market prices
of the same or similar instruments or calculates an estimated
fair value on a discounted cash flow basis using the rates
available for instruments with the same remaining maturities.
As of May 3, 2000 and April 28, 1999, the fair value of
financial instruments held by the company approximated the
recorded value.
Concentrations of Credit Risk: Counterparties to currency
exchange and interest rate derivatives consist of large major
international financial institutions. The company continually
monitors its positions and the credit ratings of the
counterparties involved and, by policy, limits the amount of
credit exposure to any one party. While the company may be
exposed to potential losses due to the credit risk of non-
performance by these counterparties, losses are not
anticipated. Concentrations of credit risk with respect to
accounts receivable are limited due to the large number of
customers, generally short payment terms, and their
dispersion across geographic areas.
66
<PAGE> 38
13. NET INCOME The following table sets forth the computation of basic and
PER COMMON diluted earnings per share in accordance with the provisions
SHARE of SFAS No. 128.
May 3, April 28, April 29,
Fiscal year ended 2000 1999 1998
------------------------------------------------------------------------------
(Dollars in thousands, except
per share amounts) (53 Weeks) (52 Weeks) (52 Weeks)
------------------------------------------------------------------------------
Net income per share - basic:
Net income $ 890,553 $ 474,341 $ 801,566
Preferred dividends 26 30 37
------------------------------------------------------------------------------
Net income applicable to common stock $ 890,527 $ 474,311 $ 801,529
Average common shares outstanding -
basic 355,273 361,204 365,982
Net income per share - basic $ 2.51 $ 1.31 $ 2.19
Net income per share - diluted:
Net income $ 890,553 $ 474,341 $ 801,566
Average common shares outstanding 355,273 361,204 365,982
Effect of dilutive securities:
Convertible preferred stock 218 243 297
Stock options 4,604 6,383 6,674
------------------------------------------------------------------------------
Average common shares outstanding -
diluted 360,095 367,830 372,953
Net income per share - diluted $ 2.47 $ 1.29 $ 2.15
------------------------------------------------------------------------------
Stock options outstanding of 11.7 million, 6.0 million and
2.0 million as of May 3, 2000, April 28, 1999 and April 29,
1998, respectively, were not included in the above net income
per diluted share calculations because to do so would have
been antidilutive for the periods presented.
14. SEGMENT The company's segments are primarily organized by
INFORMATION geographical area. The composition of segments and measure of
segment profitability is consistent with that used by the
company's management. Descriptions of the company's
reportable segments are as follows:
_ North American Grocery & Foodservice - This segment
consists of Heinz U.S.A., Heinz Pet Products, Star-Kist
Seafood and Heinz Canada. This segment's operations include
products in all of the company's core categories.
_ North American Frozen - This segment consists of Heinz
Frozen Food Company, which markets frozen potatoes, entrees
and appetizers.
_ Europe - This segment includes the company's operations in
Europe and sells products in all of the company's core
categories.
_ Asia/Pacific - This segment includes the company's
operations in New Zealand, Australia, Japan, China, South
Korea, Indonesia, Thailand and India. This segment's
operations include products in all of the company's core
categories.
_ Other Operating Entities - This segment includes the
company's Weight Watchers classroom business through
September 29, 1999, the date of divestiture, as well as the
company's operations in Africa, Venezuela and other areas
which sell products in all of the company's core
categories.
The company's management evaluates performance based on
several factors; however, the primary measurement focus is
operating income excluding unusual costs and gains. The
accounting policies used are the same as those described in
Note 1, "Significant Accounting Policies." Intersegment sales
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 the
company's management.
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<PAGE> 39
The following table presents information about the company's
reportable segments.
<TABLE>
<CAPTION>
Fiscal year ended May 3, 2000 April 28, 1999 April 29, 1998 May 3, 2000 April 28, 1999 April 29, 1998
-----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) (53 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks)
-----------------------------------------------------------------------------------------------------------------------------------
Net External Sales Intersegment Sales
--------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
North American Grocery & Foodservice $ 4,124,060 $ 4,062,683 $ 3,935,269 $ 37,987 $ 32,144 $ 28,492
North American Frozen 1,023,915 1,014,370 1,076,080 12,782 21,131 14,467
Europe 2,583,684 2,460,698 2,332,594 2,687 6,661 3,756
Asia/Pacific 1,196,049 1,011,764 1,072,856 2,853 13 -
Other Operating Entities 480,241 750,095 792,485 2,526 6,971 6,298
Non-Operating (a) - - - (58,835) (66,920) (53,013)
-----------------------------------------------------------------------------------------------------------------------------------
Consolidated Totals $ 9,407,949 $ 9,299,610 $ 9,209,284 $ - $ - $ -
-----------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss)
Operating Income (Loss) Excluding Special Items (b)
---------------------------------------------- ----------------------------------------------
North American Grocery & Foodservice $ 694,449 $ 716,979 $ 797,191 $ 875,268 $ 834,629 $ 825,981
North American Frozen 152,018 80,231 258,199 181,511 183,409 170,732
Europe 364,207 246,187 386,874 502,302 467,159 405,425
Asia/Pacific 124,125 89,830 136,501 177,454 145,654 142,348
Other Operating Entities 540,155 95,715 53,677 77,004 121,950 63,586
Non-Operating (a) (141,855) (119,630) (112,112) (102,337) (99,792) (100,219)
-----------------------------------------------------------------------------------------------------------------------------------
Consolidated Totals $ 1,733,099 $ 1,109,312 $ 1,520,330 $ 1,711,202 $ 1,653,009 $ 1,507,853
-----------------------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization Expense Capital Expenditures (c)
---------------------------------------------- ----------------------------------------------
North American Grocery & Foodservice $ 133,471 $ 121,363 $ 117,739 $ 171,295 $ 138,081 $ 121,783
North American Frozen 36,480 39,773 41,855 79,575 35,293 34,244
Europe 81,802 85,408 84,583 127,595 100,569 90,829
Asia/Pacific 28,871 20,549 30,406 60,795 25,209 53,856
Other Operating Entities 13,066 23,278 28,291 8,495 12,757 40,076
Non-Operating (a) 12,793 11,841 10,748 4,689 4,814 32,966
-----------------------------------------------------------------------------------------------------------------------------------
Consolidated Totals $ 306,483 $ 302,212 $ 313,622 $ 452,444 $ 316,723 $ 373,754
-----------------------------------------------------------------------------------------------------------------------------------
Identifiable Assets
----------------------------------------------
North American Grocery & Foodservice $ 3,711,691 $ 3,418,096 $3,248,068
North American Frozen 882,225 832,226 918,807
Europe 2,781,238 2,208,208 2,230,857
Asia/Pacific 1,085,491 998,685 839,176
Other Operating Entities 187,684 374,852 564,391
Non-Operating (d) 202,328 221,567 222,122
-----------------------------------------------------------------------------------------------------------------------------------
Consolidated Totals $ 8,850,657 $ 8,053,634 $ 8,023,421
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes corporate overhead, intercompany eliminations and charges not
directly attributable to operating segments.
(b) Fiscal year ended May 3, 2000: Excludes net restructuring and
implementation costs of Operation Excel as follows: North American Grocery &
Foodservice $160.8 million, North American Frozen $29.5 million, Europe $138.1
million, Asia/Pacific $53.3 million, Other Operating Entities $1.5 million and
Non-Operating $9.5 million. Excludes costs related to Ecuador in North
American Grocery & Foodservice $20.0 million. Excludes the gain on the sale of
the Weight Watchers classroom business in Other Operating Entities $464.6
million. Excludes the Foundation contribution in Non-Operating $30.0 million.
Fiscal year ended April 28, 1999: Excludes restructuring and implementation
costs of Operation Excel as follows: North American Grocery & Foodservice
$110.4 million, North American Frozen $116.9 million, Europe $225.1 million,
Asia/Pacific $52.9 million, Other Operating Entities $29.2 million and Non-
Operating $18.3 million. Excludes costs related to the implementation of
Project Millennia as follows: North American Grocery & Foodservice $7.2
million, North American Frozen $2.9 million, Europe $4.9 million, Asia/Pacific
$3.0 million, Other Operating Entities $2.8 million and Non-Operating $1.5
million. Excludes the gain on the sale of the bakery division in Other
Operating Entities of $5.7 million. Excludes the reversal of unutilized
Project Millennia accruals for severance and exit costs in North American
Frozen and Europe of $16.6 million and $9.1 million, respectively.
Fiscal year ended April 29, 1998: Excludes costs related to the implementation
of Project Millennia as follows: North American Grocery & Foodservice $28.8
million, North American Frozen $9.1 million, Europe $18.6 million, Asia/
Pacific $5.8 million, Other Operating Entities $9.9 million and Non-Operating
$11.9 million. Excludes the North American Frozen gain on the sale of the Ore-
Ida frozen foodservice business of $96.6 million.
(c) Excludes property, plant and equipment obtained through acquisitions.
(d) Includes identifiable assets not directly attributable to operating
segments.
68
<PAGE> 40
The company's revenues are generated via the sale of
products in the following categories:
(Unaudited) May 3, April 28, April 29,
Fiscal year ended 2000 1999 1998
------------------------------------------------------------------------------
(Dollars in thousands) (53 Weeks) (52 Weeks) (52 Weeks)
------------------------------------------------------------------------------
Ketchup, condiments and sauces $ 2,439,109 $ 2,230,403 $ 2,046,578
Frozen foods 1,561,488 1,399,111 1,473,228
Tuna 1,059,317 1,084,847 1,080,576
Soups, beans and pasta meals 1,197,466 1,117,328 1,085,438
Infant foods 1,041,401 1,039,781 986,203
Pet products 1,237,671 1,287,356 1,315,774
Other 871,497 1,140,784 1,221,487
------------------------------------------------------------------------------
Total $ 9,407,949 $ 9,299,610 $ 9,209,284
------------------------------------------------------------------------------
The company has significant sales and long-lived assets in
the following geographic areas. Sales are based on the
location in which the sale originated. Long-lived assets
include property, plant and equipment, goodwill, trademarks
and other intangibles, net of related depreciation and
amortization.
<TABLE>
<CAPTION>
Net External Sales Long-Lived Assets
------------------------------------------- -----------------------------------------------
Fiscal year ended May 3, 2000 April 28, 1999 April 29, 1998 May 3, 2000 April 28, 1999 April 29, 1998
---------------------------------------------------------------------------
(Dollars in thousands) (53 Weeks) (52 Weeks) (52 Weeks)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 4,848,125 $ 4,917,967 $ 4,873,710 $ 2,705,735 $ 2,856,315 $ 2,885,359
United Kingdom 1,314,550 1,182,690 1,170,935 549,213 399,669 491,850
Other 3,245,274 3,198,953 3,164,639 1,515,535 1,385,404 1,393,505
----------------------------------------------------------------------------------------------------------------------------
Total $ 9,407,949 $ 9,299,610 $ 9,209,284 $ 4,770,483 $ 4,641,388 $ 4,770,714
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
15. QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
2000
-------------------------------------------------------------------------------------
(Dollars in thousands, except First Second Third Fourth Total
per share amounts) (13 Weeks) (13 Weeks) (13 Weeks) (14 Weeks) (53 Weeks)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 2,181,007 $ 2,344,084 $ 2,294,637 $ 2,588,221 $ 9,407,949
Gross profit 856,750 912,440 902,750 947,484 3,619,424
Net income 206,668 415,498 171,112 97,275 890,553
Per Share Amounts:
Net income - diluted $ 0.57 $ 1.14 $ 0.47 $ 0.27 $ 2.47
Net income - basic 0.58 1.16 0.48 0.27 2.51
Cash dividends 0.34 1/4 0.36 3/4 0.36 3/4 0.36 3/4 1.44 1/2
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------------------------------
(Dollars in thousands, except First Second Third Fourth Total
per share amounts) (13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks) (52 Weeks)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 2,228,230 $ 2,322,402 $ 2,282,062 $ 2,466,916 $ 9,299,610
Gross profit 868,453 936,399 852,580 697,311 3,354,743
Net income (loss) 213,787 231,332 120,554 (91,332) 474,341
Per Share Amounts:
Net income (loss) - diluted $ 0.58 $ 0.63 $ 0.33 $ (0.25) $ 1.29
Net income (loss) - basic 0.59 0.64 0.33 (0.25) 1.31
Cash dividends 0.31 1/2 0.34 1/4 0.34 1/4 0.34 1/4 1.34 1/4
--------------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE> 41
The first quarter of Fiscal 2000 includes restructuring and
implementation costs related to Operation Excel of $0.07 per
share, costs related to Ecuador of $0.05 per share and the
gain on the sale of an office building in the U.K. of $0.03
per share. The first quarter of Fiscal 1999 includes
implementation costs related to Project Millennia of $0.02
per share.
The second quarter of Fiscal 2000 includes restructuring
and implementation costs related to Operation Excel of $0.17
per share, the gain on the sale of the Weight Watchers
classroom business of $0.72 per share (see Note 3 to the
Consolidated Financial Statements) and a pretax contribution
to the H.J. Heinz Company Foundation of $0.05 per share. The
second quarter of Fiscal 1999 includes implementation costs
related to Project Millennia of $0.01 per share, reversal of
unutilized Project Millennia accruals for severance and exit
costs of $0.04 per share (see Note 4 to the Consolidated
Financial Statements) and the gain on the sale of the bakery
products unit (see Note 3 to the Consolidated Financial
Statements).
The third quarter includes restructuring and implementation
costs related to Operation Excel of $0.15 per share in Fiscal
2000 and $0.27 in Fiscal 1999.
The fourth quarter of Fiscal 2000 includes restructuring
and implementation costs related to Operation Excel of $0.40
per share and a reversal of Fiscal 1999 Operation Excel
accruals and asset write-downs of $0.04 per share, for net
restructuring and implementation costs of $0.36 per share.
The fourth quarter of Fiscal 1999 includes restructuring and
implementation costs related to Operation Excel of $0.84 per
share.
16. COMMITMENTS Legal Matters: Certain suits and claims have been filed
AND against the company and have not been finally adjudicated.
CONTINGENCIES These suits and claims when finally concluded and determined,
in the opinion of management, based upon the information that
it presently possesses, will not have a material adverse
effect on the company's consolidated financial position,
results of operations or liquidity.
Lease Commitments: Operating lease rentals for warehouse,
production and office facilities and equipment amounted to
approximately $111.1 million in 2000, $99.5 million in 1999
and $98.3 million in 1998. Future lease payments for non-
cancellable operating leases as of May 3, 2000 totaled $182.4
million (2001-$38.5 million, 2002-$29.5 million, 2003-$22.0
million, 2004-$19.7 million, 2005-$15.4 million and
thereafter-$57.3 million).
17. ADVERTISING Advertising costs for fiscal years 2000, 1999 and 1998 were
COSTS $374.0 million, $373.9 million and $363.1 million,
respectively.
70
<PAGE> 42
RESPONSIBILITY STATEMENTS
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management of H.J. Heinz Company is responsible for the preparation of the
financial statements and other information included in this annual report. The
financial statements have been prepared in conformity with generally accepted
accounting principles, incorporating management's best estimates and
judgments, where applicable.
Management believes that the company's internal control systems provide
reasonable assurance that assets are safe-guarded, transactions are recorded
and reported appropriately, and policies are followed. The concept of
reasonable assurance recognizes that the cost of a control procedure should
not exceed the expected benefits. Management believes that its systems provide
this appropriate balance. An important element of the company's control
systems is the ongoing program to promote control consciousness throughout the
organization. Management's commitment to this program is emphasized through
written policies and procedures (including a code of conduct), an effective
internal audit function and a qualified financial staff.
The company engages independent public accountants who are responsible for
performing an independent audit of the financial statements. Their report,
which appears herein, is based on obtaining an understanding of the company's
accounting systems and procedures and testing them as they deem necessary.
The company's Audit Committee is composed entirely of outside directors. The
Audit Committee meets regularly, and when appropriate separately, with the
independent public accountants, the internal auditors and financial management
to review the work of each and to satisfy itself that each is discharging its
responsibilities properly. Both the independent public accountants and the
internal auditors have unrestricted access to the Audit Committee.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of H.J. Heinz Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of H.J. Heinz Company
and its subsidiaries (the "Company") at May 3, 2000 and April 28, 1999, and
the results of its operations and its cash flows for each of the three years
in the period ended May 3, 2000, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
June 14, 2000
*****
71
