As filed with the Securities and Exchange Commission on March 8, 2007

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

x          Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 30, 2006

or

o             Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                        to                       

Commission file number 001-32316

B&G FOODS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

 

13-3918742

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

Four Gatehall Drive, Suite 110, Parsippany, New Jersey

 

07054

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (973) 401-6500

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of exchange on which registered

Enhanced Income Securities,
each representing one share of Class A Common Stock, par value $0.01 per share, and $7.15 principal amount of 12% Senior Subordinated Notes due 2016

 

American Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

 

Accelerated filer x

 

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x

The aggregate market value of the Enhanced Income Securities (EISs) held by non-affiliates of the registrant as of June 30, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $320,675,557. Each EIS represents one share of Class A common stock, par value $0.01 per share, and $7.15 principal amount of senior subordinated notes due 2016. In determining the market value of the registrant’s EISs held by non-affiliates, EISs beneficially owned by directors, officers and holders of more than 10% of the registrant’s EISs have been excluded. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 28, 2007, the registrant had 20,000,000 shares of Class A common stock, par value $0.01 per share, outstanding, all of which were represented by EISs. As of February 28, 2007, the registrant had 7,556,443 shares of Class B common stock, par value $0.01 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Selected designated portions of the registrant’s definitive proxy statement to be filed on or before April 30, 2007 in connection with the registrant’s 2007 annual meeting of stockholders are incorporated by reference into Part III of this annual report.

 




B&G FOODS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2006

TABLE OF CONTENTS

Page No.

PART I

 

Item 1.

Business

2

Item 1A.

Risk Factors

10

Item 1B.

Unresolved Staff Comments

21

Item 2.

Properties

21

Item 3.

Legal Proceedings

22

Item 4.

Submission of Matters to a Vote of Security Holders

22

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities

23

Item 6.

Selected Financial Data

30

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results Of Operations

35

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

54

Item 8.

Financial Statements and Supplementary Data

56

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

101

Item 9A.

Controls and Procedures

101

Item 9B.

Other Information

102

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

103

Item 11.

Executive Compensation

103

Item 12.

Security Ownership of Certain Beneficial Owners and Management

103

Item 13.

Certain Relationships and Related Transactions, and Director Independence

103

Item 14.

Principal Accountant Fees and Services

103

PART IV

 

Item 15.

Exhibits, Financial Statement Schedules

104

Signatures

107

 




PART I

Item 1.                        Business.

Overview

We manufacture, sell and distribute a diverse portfolio of high quality, shelf-stable food products. Many of our branded food products have leading regional or national market shares. In general, we position our branded products to appeal to the consumer desiring a high quality and reasonably priced branded product. We complement our branded product retail sales with growing institutional and food service sales.

History

B&G Foods, including our subsidiaries and predecessors, has been in business for over 115 years. We were incorporated in Delaware on November 25, 1996 under the name B Companies Holdings Corp. On August 11, 1997, we changed our name to B&G Foods Holdings Corp. On October 14, 2004, simultaneously with the completion of our initial public offering and the concurrent offerings, B&G Foods, Inc., our wholly owned subsidiary, was merged with and into us and we were renamed B&G Foods, Inc.

The table below includes some of the significant events in our recent history:

Date

 

 

 

Significant Event

December 1996

 

Acquisition of the Bloch & Guggenehimer and Burns and Ricker® brands from Specialty Foods Corp.

June 1997

 

Acquisition of the Regina, Wright’s, Brer Rabbit and Vermont Maid brands from Nabisco, Inc.

August 1997

 

Acquisition of the Trappey’s brand from E. Mcllhenny’s Son Corporation.

July 1998

 

Acquisition of the Maple Grove Farms of Vermont brand from certain individuals.

February 1999

 

Acquisition of the Polaner and related brands from International Home Foods, Inc. and M. Polaner, Inc.

March 1999

 

Acquisition of the Underwood, B&M, Ac’cent, Sa-son Ac’cent, Las Palmas and Joan of Arc brands from The Pillsbury Company and related entities.

June 2000

 

Entry into an agreement with Emeril’s Food of Love Productions, LLC (EFLP) pursuant to which we and EFLP agreed to create a signature line of consumer packaged foods products which are marketed under the label Emeril’s.

January 2001

 

Sale of the Burns & Ricker® brand to Nonni’s Food Company, Inc.

August 2003

 

Acquisition of the Ortega brand from Nestlé Prepared Foods Company.

October 2004

 

Completion of our initial public offering and the concurrent offerings.

December 2005

 

Acquisition of the Ortega food service dispensing pouch and dipping cup cheese sauce businesses from Nestlé USA, Inc.

January 2006

 

Acquisition of the Grandma’s molasses brand from Mott’s LLP, a Cadbury Schweppes Americas Beverages company

February 2007

 

Acquisition of the Cream of Wheat and Cream of Rice brands from Kraft Foods Global, Inc.

 

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Products and Markets

The following is a brief description of our brands and product lines:

The Ortega brand has been in existence since 1897 and its products span the shelf-stable Mexican food segment including taco shells, tortillas, seasonings, dinner kits, taco sauces, peppers, refried beans, salsas and related food products. Ortega products are distributed nationally. We recently introduced a number of snack products such as Salsa Con Queso, Salsa Verde and Guacamole under the Ortega brand.

The Cream of Wheat brand was introduced in 1893 and is among the leading brands and one of the most trusted and widely recognized brands of hot cereals sold in the United States. Cream of Wheat  is available in original 10-minute, 2½ minute and one-minute versions, and also in instant packets of original and other flavors, including Apples ‘n Cinnamon, Maple Brown Sugar and Strawberries ‘n Cream. We also offer Cream of Rice, a rice-based hot cereal.

The Maple Grove Farms of Vermont brand, which originated in 1915, is a leading brand of pure maple syrup in the United States. Other products under the Maple Grove Farms of Vermont label include a line of gourmet salad dressings, marinades, fruit syrups, confections, pancake mixes and organic products. Maple Grove Farms of Vermont products are distributed nationwide.

The Bloch & Guggenheimer brand originated in 1889, and its pickle, pepper/pimentos and relish products are a leading brand in the New York metropolitan area. This line consists of shelf-stable pickles, relishes, peppers, olives and other related specialty items.

The Polaner brand was introduced in 1880 and is comprised of a broad array of fruit-based spreads as well as jarred wet spices such as chopped garlic and basil. Polaner All Fruit is a leading national brand of fruit-juice sweetened fruit spread. The spreads are available in more than a dozen flavors. Polaner Sugar Free preserves are the second leading brand of sugar free preserves nationally.

The Emeril’s brand was introduced in 2000 under a licensing agreement with celebrity chef Emeril Lagasse. We offer a line of seasonings, salad dressings, marinades, pepper sauces, barbecue sauces, mustards, salsas and pasta sauces under the Emeril’s brand name. In addition, we recently introduced chicken, beef and vegetable cooking stocks under the Emeril’s brand.

The Las Palmas brand originated in 1922 and primarily includes authentic Mexican enchilada sauce and various pepper products.

The Underwood brand’s “Underwood Devil” logo, which was registered in 1870, is believed to be the oldest registered trademark still in use for a prepackaged food product in the United States. Underwood meat spreads, which were introduced in the late 1860s, include deviled ham, chicken and roast beef as well as liver pate and sardines.

The B&M brand was introduced in 1927 and is the original brand of brick-oven baked beans. The B&M line includes a variety of baked beans and brown bread. The B&M brand currently has a leading market share in the New England region.

The Ac’cent brand was introduced in 1947 as an all-natural flavor enhancer for meat preparation and is generally used on beef, poultry, fish and vegetables. We believe that Ac’cent is positioned as a unique flavor enhancer.

The Trappey’s brand, which was introduced in 1898, has a Louisiana heritage. Trappey’s products fall into two major categories—high quality peppers and hot sauces, including Trappey’s Red Devil.

The Regina brand, which has been in existence since 1949, includes vinegars and cooking wines. Regina products are most commonly used in the preparation of salad dressings as well as in a variety of recipe applications, including sauces, marinades and soups.

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The Joan of Arc brand, which originated in 1895, includes a full range of canned beans including kidney, chili and other beans. Joan of Arc products are sold nationally with significant sales in the Midwest and Southeast.

The Grandma’s brand of molasses, which was introduced in 1890, is the leading brand of premium-quality molasses sold in the United States. Grandma’s molasses products are offered in two distinct styles:  Grandma’s Original Molasses and Grandma’s Robust Molasses. Grandma’s molasses products are distributed nationally.

The Wright’s brand was introduced in 1895 and is an all-natural seasoning that reproduces the flavor and aroma of pit smoking in meats, chicken and fish. Wright’s is offered in two flavors: Hickory and Mesquite.

The Sa-s´on brand was introduced in 1947 as a flavor enhancer used primarily for Puerto Rican and Hispanic food preparation. The product is generally used on beef, poultry, fish and vegetables. The brand’s flavor enhancer is offered in four flavors: Original, Coriander and Achiote, Garlic and Onion, and Tomato.

The Brer Rabbit brand has been in existence since 1907 and currently offers mild and full-flavored molasses products and a blackstrap molasses product. Mild molasses is designed for table use and full-flavored molasses is typically used in baking, barbeque sauces and as a breakfast syrup.

The Vermont Maid brand has been in existence since 1919 and we offer maple-flavored syrup under the brand name. Vermont Maid syrup is available in regular, sugar-free and sugar-free butter varieties. Vermont Maid is mainly distributed in New England.

Processed Food Industry

The processed food industry is one of the United States’ largest industries. Due to its maturity, it is characterized by relatively stable sales growth, based on modest price and population increases. Over the last several years, the industry has experienced consolidation as competitors have shed non-core business lines and made strategic acquisitions to complement category positions, maximize economies of scale in raw material sourcing, production and distribution. A series of large mergers over the last twenty years has led to the formation of a few, very large companies with a presence in a variety of branded product categories.

Retailers are demanding higher margins, while at the same time reducing inventory levels and increasing their emphasis on private label products in certain categories. The importance of sustaining strong relationships with retailers has become a critical success factor for food companies and is driving many initiatives such as category management and efficient customer response. These two initiatives focus on retailers’ need to minimize inventory investment and maximize dollar sales for allocated store shelf space. Food companies with category leadership positions, value-added distribution and strong retail relationships have increasingly benefited from these initiatives as a way to maintain shelf space and maximize distribution efficiencies. In addition, the specialty foods, mass merchandiser, food service and private label markets and channels provide additional opportunities of growth for food companies.

Sales, Marketing and Distribution.

Overview.   We sell, market and distribute our products through a multiple-channel sales, marketing and distribution system including the following:

·       sales and shipments to supermarket warehouses;

·       sales and shipments to distributors and food service accounts;

·       sales and shipments to mass merchants, warehouse clubs and other non-food outlets;

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·       sales and shipments to specialty food distributors;

·       direct-store-delivery sales and shipments on a regional basis to individual grocery stores in the greater New York Metropolitan area; and

·       sales and shipments through export and the Internet.

We believe our established infrastructure in these channels allows us to distribute additional product volume cost-effectively. We sell our brands primarily through broker sales networks to supermarket chains, food service outlets, mass merchants, warehouse clubs, non-food outlets and specialty food distributors. The broker sales network handles the sale of our products at the customer level. We distribute our products in the greater New York metropolitan area primarily through direct-store-delivery (DSD). Our DSD broker sales force services over 1,600 individual grocery stores.

Sales.   Our sales organization is aligned by distribution channels and consists of regional sales managers, key account managers and sales persons. Regional sales managers sell our products nationwide through national and regional food brokers, with separate organizations focusing on specialty, food service, grocery chain accounts and special markets. Our sales managers coordinate our broker sales efforts and make key account calls with buyers or distributors and supervise retail coverage of the products at the store level through brokers.

Our sales strategy is centered around the individual brands. We set quotas for our sales force and allocate promotional spending for each of the brands. Regional sales managers coordinate promotions with customers. Additionally, our marketing department works in conjunction with the sales department to coordinate special account activities and marketing support, such as couponing and public relations.

Over the past several years, we have established a national sales force that is capable of supporting our current business as well as potential new acquisitions. We have primarily developed our national sales force internally, and did not integrate sales and marketing personnel from acquired companies in connection with most of our brand acquisitions. In the case of our Maple Grove Farms of Vermont acquisition, management retained the brand’s sales force to serve the specialty channel related to that brand and for specialty-oriented brands that we might develop, license or acquire in the future. This same sales force subsequently launched the Emeril’s brand. The current national sales force is very experienced and was able to integrate the Ortega and Grandma’s molasses brands within 30 days following the close of the respective acquisitions.

Marketing.   Our marketing organization is aligned by brand and is responsible for the strategic planning for each of our brands. We focus on deploying promotional dollars where the spending will have the greatest impact. Marketing and trade spending support, on a national basis, typically consists of advertising trade promotions, coupons and cross-promotions with supporting products. Marketing support for the products distributed through DSD consists primarily of trade promotions aimed at gaining display activity to produce impulse sales. Consumer promotion and coupons supplement this activity.

Distribution.   We distribute our products through a multiple-channel system that we have developed as we have grown our business. We believe our distribution system has sufficient capacity to accommodate incremental product volume in a cost-effective manner, as demonstrated most recently in the initial Ortega acquisition in 2003, the Ortega food service dispensing pouch and dipping cup acquisition in 2005 and the Grandma’s molasses acquisition in 2006. See Item 2, “Properties” for a listing of our distribution and centers and warehouses.

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Customers

Our top ten customers accounted for approximately 43.6% of our net sales for the fiscal year ended December 30, 2006 (fiscal 2006). Other than Wal-Mart, which accounted for 10.4% of our fiscal 2006 net sales, no single customer accounted for 10.0% or more of our fiscal 2006 net sales.

Seasonality

Sales of a number of our products tend to be seasonal. In the aggregate, however, our sales are not heavily weighted to any particular quarter due to the diversity of our product and brand portfolio.

We purchase most of the produce used to make our shelf-stable pickles, relishes, peppers and other related specialty items during the months of July through October, and we purchase substantially all of our maple syrup requirements during the months of April through July. Consequently, our liquidity needs are greatest during these periods.

Competition

We face competition in each of our product lines. Numerous brands and products compete for shelf space and sales, with competition based primarily on product quality, convenience, price, trade promotion, consumer promotion, brand recognition and loyalty, customer service, advertising and other activities and the ability to identify and satisfy emerging consumer preferences. We compete with numerous companies of varying sizes, including divisions or subsidiaries of larger companies. Many of these competitors have multiple product lines, substantially greater financial and other resources available to them and may have lower fixed costs and/or be substantially less leveraged than we. Our ability to grow our business could be impacted by the relative effectiveness of, and competitive response to, our product initiatives, product innovation, advertising and promotional activities. In addition, from time to time, we experience margin pressure in certain markets as a result of competitors’ pricing practices.

Our most significant competitors for our pickles and peppers products are Vlasic® and Mt. Olive® branded products. In addition, The J.M. Smucker Company is the main competitor for our fruit spread products marketed under the Polaner label. The Maple Grove Farms of Vermont pure maple syrup competes directly with the SpringTree® brand in the pure maple syrup category. Our Vermont Maid syrup products also have a number of competitors in the general pancake syrup market, including Aunt Jemima®, Mrs. Buttersworth® and Log Cabin®. Our B&M and Joan of Arc products compete primarily with Bush’s® brand products. Ortega products compete primarily with the Old El Paso® and Taco Bell® brands. Cream of Wheat products compete primarily with the Quaker® hot cereal brand.

In addition, our products compete not only against other brands in their respective product categories, but also against products in similar or related product categories. For example, our shelf-stable pickles compete not only with other brands of shelf-stable pickles, but also with products found in the refrigerated sections of grocery stores, and all our brands compete against private label products to varying degrees.

Raw Materials

We purchase raw materials, including agricultural products, meat, poultry, other raw materials and packaging materials from growers, commodity processors, other food companies and packaging manufacturers located in the U.S. and foreign locations. Our principal raw materials include peppers, cucumbers, other vegetables, fruits, maple syrup, meat and poultry. We purchase our agricultural raw materials in bulk or pursuant to short-term supply contracts. We purchase most of our agricultural products between April 1 and October 31. We also use packaging materials, particularly glass jars and cans.

The profitability of our business relies in part on the prices we and our co-packers pay for these raw materials and packaging materials, which can fluctuate due to a number of factors, including changes in crop size, national, state and local government sponsored agricultural programs, export demand, natural

6




disasters, weather conditions during the growing and harvesting seasons, general growing conditions, the effect of insects, plant diseases and fungi, and glass and metal prices. Although we enter into advance commodities purchase agreements from time to time, we and our co-packers are still exposed to potential increases in raw material costs. Moreover, due to the competitive environment in which we operate, we may be unable to increase the prices of our products to offset any increase in the cost of raw materials. As a result, any such increase could have a material adverse effect on our profitability, financial condition, results of operations or liquidity.

Production

Manufacturing.   We operate five manufacturing facilities for our products. See Item 2, “Properties” for a listing of our manufacturing facilities.

Co-Packing Arrangements.   In addition to our own manufacturing facilities, we source a significant portion of our products under “co-packing” agreements, a common industry practice in which manufacturing is outsourced to other companies. We regularly evaluate our co-packing arrangements to ensure the most cost-effective manufacturing of our products and to utilize company-owned manufacturing facilities most effectively. Third parties located in the U.S. and foreign locations produce Regina, Underwood, Las Palmas and Joan of Arc brand products and certain Emeril’s and Ortega brand products under co-packing agreements or purchase orders. Each of our co-packers produces products for other companies as well. We believe that there are alternative sources of co-packing production readily available for our products, although we may experience short-term disturbances in our operations if we are required to change our co-packing arrangements.

Nearly half of the recently acquired Cream of Wheat products are co-packed by a third-party manufacturer. Kraft Foods has assigned to us its rights and obligations under that co-packing agreement. The remaining Cream of Wheat products are manufactured in a Kraft Foods facility located in Cobourg, Canada. We have entered into a transition co-packing agreement with Kraft Foods to continue production of Cream of Wheat at Kraft Foods’ Cobourg manufacturing facility during a one-year transition period ending February 25, 2008. During this transition period, we will evaluate shifting this production to a third-party co-packer or to one of our own manufacturing facilities.

Trademarks and Licensing Agreements

We own 113 trademarks that are registered in the United States, 29 trademarks that are registered with certain U.S. states and Puerto Rico, and 405 trademarks that are registered in foreign countries. In addition, we have 13 trademark applications pending in the United States and foreign countries. Examples of our trademarks and registered trademarks include Ac’cent, B&G, B&G Sandwich Toppers, B&M, Brer Rabbit, Cozy Cottage, Cream of Wheat, Grandma’s, Joan of Arc, Las Palmas, Maple Grove Farms of Vermont, Ortega, Polaner, Regina, Sa-s´on, Trappey’s, Underwood, Vermont Maid and Wright’s. We consider our trademarks to be of special significance in our business. We are not aware of any circumstances that would negatively impact our trademarks. Our credit facility is secured by substantially all of our assets (other than our real property), including our rights to our intellectual property.

In June 2000 we entered into a license agreement with Emeril’s Food of Love Productions, L.L.C. (EFLP). This license agreement grants us an exclusive license to use the intellectual property owned by EFLP relating to Mr. Lagasse, including the name ‘‘Emeril Lagasse’’ and pictures, photographs and other personality material, in connection with the manufacturing, marketing and distribution of dry seasoning, liquid seasoning, condiments, sauces, dressings and certain other products through retail channels in the United States, the Caribbean and Canada. We also have the right of first negotiation with respect to other shelf-stable grocery products. Under the license agreement, EFLP owns all of the recipes that it provides to us and all of our Emeril’s brand products and related marketing materials are subject to the prior approval of EFLP, which approval may not be unreasonably withheld. In addition, we are prohibited from

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entering into similar arrangements with other chefs or celebrities in connection with any of the products covered by our agreement with EFLP.

The license agreement has been extended through May 2010 and is subject to extension and renewal at our option for an indefinite period if we meet specified annual net sales results. Among other things, we are obligated to introduce and market new products in each year of the license agreement and to pay EFLP royalties based on annual net sales of our Emeril’s brand products. The license agreement may be terminated by EFLP if we are in breach or default of any of our material obligations thereunder. We have also agreed to indemnify EFLP with respect to claims under the license agreement, including claims relating to any alleged unauthorized use of any mark, personality or recipe by us in connection with the products in the Emeril’s line of products.

Employees and Labor Relations

As of December 30, 2006, our workforce consisted of 721 employees. Of that total, 514 employees were engaged in manufacturing, 55 were engaged in marketing and sales, 118 were engaged in distribution and 34 were engaged in administration. Approximately 284 of our 721employees, as of December 30, 2006, were covered by collective bargaining agreements. Approximately 56 of our employees at our Roseland, New Jersey facility were covered by a collective bargaining agreement with the International Brotherhood of Teamsters, Chauffeurs, Warehousemen & Helpers of America (Local No. 863), scheduled to expire on March 31, 2009. Approximately 137 of our employees at our Portland and Biddeford, Maine facilities were covered by a collective bargaining agreement with the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (AFL-CIO, Local No. 334), scheduled to expire on April 28, 2007. Approximately 91 of our employees at our Stoughton, Wisconsin facility were covered by a collective bargaining agreement with the Drivers, Salesmen, Warehousemen, Milk Processors, Cannery, Dairy Employees and Helpers Union (Local No. 695), scheduled to expire on March 31, 2011. In general, we consider our employee and union relations to be good.

Government Regulation

Our operations are subject to extensive regulation by the United States Food and Drug Administration (FDA), the United States Department of Agriculture, the United States Department of Labor and other federal, state and local authorities regarding the processing, packaging, storage, distribution and labeling of our products and the health and safety of our employees. Our processing facilities and products are subject to periodic inspection by federal, state and local authorities.

We are subject to the Food, Drug and Cosmetic Act and the regulations promulgated thereunder by the FDA. This comprehensive regulatory program governs, among other things, the manufacturing, composition and ingredients, labeling, packaging and safety of food. For example, the FDA regulates manufacturing practices for foods through its current ‘‘good manufacturing practices’’ regulations and specifies the recipes for certain foods. In addition, the Nutrition Labeling and Education Act of 1990 prescribes the format and content of certain information required to appear on the labels of food products.

We are also subject to the U.S. Bio-Terrorism Act of 2002 which imposes on us import and export regulations. Under the Bio-Terrorism Act, among other things, we are required to provide specific information about the food products we ship into the U.S. and to register our manufacturing facilities with the FDA.

We believe that we are currently in substantial compliance with all material governmental laws and regulations and maintain all material permits and licenses relating to our operations. Nevertheless, there can be no assurance that we are in full compliance with all such laws and regulations or that we will be able to comply with any future laws and regulations in a cost-effective manner. Failure by us to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or

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seizures, as well as potential criminal sanctions, all of which could have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity.

Environmental Matters

We are subject to environmental laws and regulations in the normal course of business. We have not made any material expenditures during the last three fiscal years in order to comply with environmental laws or regulations. Based on our experience to date, we believe that the future cost of compliance with existing environmental laws and regulations (and liability for known environmental conditions) will not have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity. However, we cannot predict what environmental laws or regulations will be enacted in the future or how existing or future laws or regulations will be enforced, administered or interpreted, nor can we predict the amount of future expenditures that may be required in order to comply with such environmental laws or regulations or to respond to such environmental claims.

Subsequent Events

Cream of Wheat Acquisition; Amended and Restated Credit Facility.   Effective February 25, 2007, through one of our subsidiaries, we closed on the acquisition of the Cream of Wheat and Cream of Rice brands from Kraft Foods Global, Inc. pursuant to an asset purchase agreement, for a purchase price of $200 million in cash, subject to a post-closing adjustment for inventory of the business at closing. The purchased assets include certain intellectual property, business and customer information, a third-party co-packing agreement, equipment and inventory. We also entered into a transition co-packing agreement with Kraft Foods to continue production of certain Cream of Wheat products at Kraft Foods’ Cobourg, Canada manufacturing facility during a one year transition period ending February 25, 2008. In connection with the acquisition, we amended and restated our senior secured credit facility to provide for an additional $205 million of term loan borrowings. We used the proceeds of the additional borrowings to fund the acquisition and to pay related transaction fees and expenses. The amended and restated credit facility is described more fully below in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “DebtSenior Secured Credit Facility.”  Unless the context otherwise requires, all references in this report to our credit facility refer to our credit facility as so amended and restated.

Available Information

Under the Securities Exchange Act of 1934, as amended, we are required to file with or furnish to the SEC annual, quarterly and current reports, proxy and information statements and other information. You may read and copy any document we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. We file electronically with the SEC.

We make available, free of charge, through the investor relations section of our web site, our reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, filed with or furnished to the SEC as soon as reasonably practicable after they are filed with the SEC. The address for our web site is http://www.bgfoods.com

The full text of the charters for each of the audit, compensation and nominating and governance committees of our board of directors as well as our Code of Business Conduct and Ethics is available at the investor relations section of our web site, http://www.bgfoods.com. Our Code of Business Conduct and Ethics applies to all of our employees, officers and directors, including our chief executive officer and our chief financial officer and principal accounting officer. We intend to disclose any amendment to, or waiver

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from, a provision of the Code of Business Conduct and Ethics that applies to our chief executive officer or chief financial officer and principal accounting officer in the investor relations section of our web site.

The information contained on our web site is not part of, and is not incorporated in, this or any other report we file with or furnish to the SEC.

Item 1A.                Risk Factors.

Any investment in our company will be subject to risks inherent to our business. Before making an investment decision, investors should carefully consider the risks described below together with all of the other information included in this report. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties that we are not aware of or focused on or that we currently deem immaterial may also impair our business operations. This report is qualified in its entirety by these risk factors.

Any of the following risks could materially and adversely affect our business, consolidated financial condition, results of operations or liquidity. In that case, holders of our securities may lose all or part of their investment.

Risks Specific to Our Company

The packaged food industry is highly competitive.

The packaged food industry is highly competitive. Numerous brands and products, including private label products, compete for shelf space and sales, with competition based primarily on product quality, convenience, price, trade promotion, brand recognition and loyalty, customer service, effective consumer advertising and promotional activities and the ability to identify and satisfy emerging consumer preferences. We compete with a significant number of companies of varying sizes, including divisions or subsidiaries of larger companies. Many of these competitors have multiple product lines, substantially greater financial and other resources available to them and may have lower fixed costs and/or are substantially less leveraged than our company. If we are unable to continue to compete successfully with these companies or if competitive pressures or other factors cause our products to lose market share or result in significant price erosion, our business, consolidated financial condition, results of operations or liquidity could be materially and adversely affected.

We may be unable to maintain our profitability in the face of a consolidating retail environment.

Our largest customer, Wal-Mart Stores, Inc., accounted for 10.4% of our fiscal 2006 net sales and our ten largest customers together accounted for approximately 43.6% of our fiscal 2006 net sales. As the retail grocery trade continues to consolidate and our retail customers grow larger and become more sophisticated, our retail customers may demand lower pricing and increased promotional programs. Further, these customers are reducing their inventories and increasing their emphasis on private label products. If we fail to use our marketing expertise and unique products and category leadership positions to respond to these trends, or if we lower our prices or increase promotional support of our products and are unable to increase the volume of our products sold, our profitability may be adversely affected.

If we are unable to retain our key management personnel, our growth and future success may be impaired and our results of operations could suffer as a result.

Our success depends to a significant degree upon the continued contributions of senior management, certain of whom would be difficult to replace. As a result, departure by members of our senior management could have a material adverse effect on our business and results of operations. In addition, we do not maintain key-man life insurance on any of our executive officers.

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Most of our food product categories are mature and certain categories have experienced declining consumption rates from time to time. We may be unable to offset any reduction in, or increase, net sales in these categories through an increase in trade spending for these categories or an increase in net sales in other categories

If consumption rates and sales in our mature food product categories continue to decline, our revenue and operating income may be adversely affected, and we may not be able to offset this decrease in business with increased trade spending or an increase in sales or profitability of other products and product categories.

We may have difficulties integrating recent or future acquisitions or identifying new acquisition.

We acquired the Cream of Wheat and Cream of Rice brands in February 2007 and we may pursue additional acquisitions of food product lines and businesses. However, we may be unable to identify additional acquisitions or may be unable to successfully integrate and manage the product lines or businesses that we have recently acquired or that we may acquire in the future. In addition, we may be unable to achieve a substantial portion of any anticipated cost savings from recent or future acquisitions or other anticipated benefits in the timeframe we anticipate, or at all. In addition, any acquired product lines or businesses may require a greater amount of trade, promotional and capital spending than we anticipate. Historically, we have grown net sales for some but not all of the brands we have acquired. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, services and products of the acquired companies, personnel turnover and the diversion of management’s attention from other business concerns. Any inability by us to integrate and manage any acquired product lines or businesses in a timely and efficient manner, any inability to achieve a substantial portion of any anticipated cost savings or other anticipated benefits from these acquisitions in the time frame we anticipate or any unanticipated required increases in trade, promotional or capital spending could adversely affect our business, consolidated financial condition, results of operations or liquidity. Moreover, future acquisitions by us could result in our incurring substantial additional indebtedness, being exposed to contingent liabilities or incurring the impairment of goodwill and other intangible assets, all of which could adversely affect our financial condition, results of operations and liquidity.

We are vulnerable to fluctuations in the supply and price of raw materials and labor, manufacturing and other costs, and we may not be able to offset increasing costs by increasing prices to our customers.

We purchase agricultural products, meat and poultry, other raw materials and packaging supplies from growers, commodity processors, other food companies and packaging manufacturers. While all such materials are available from numerous independent suppliers, raw materials and packaging supplies are subject to fluctuations in price attributable to a number of factors, including changes in crop size, federal and state agricultural programs, export demand, energy and fuel costs, weather conditions during the growing and harvesting seasons, insects, plant diseases and fungi, and glass and metal prices. Although we enter into advance commodities purchase agreements from time to time, these contracts do not protect us from all increases in raw material costs. In addition, the cost of labor, manufacturing, energy, fuel, packaging materials, pork and chicken and other costs related to the production and distribution of our food products have risen in recent years, and we believe that they may continue to rise in the foreseeable future. If the cost of labor, raw materials or manufacturing or other costs of production and distribution of our food products continue to increase, and we are unable to fully offset these increases by raising prices or other measures, our profitability and financial condition could be negatively impacted.

We rely on co-packers for a significant portion of our manufacturing needs, and the inability to enter into additional or future co-packing agreements may result in our failure to meet customer demand.

We rely upon co-packers for a significant portion of our manufacturing needs. The success of our business depends, in part, on maintaining a strong sourcing and manufacturing platform. We believe that there are a limited number of competent, high-quality co-packers in the industry, and if we were required

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to obtain additional or alternative co-packing agreements or arrangements in the future, we can provide no assurance that we would be able to do so on satisfactory terms or in a timely manner. Our inability to enter into satisfactory co-packing agreements could limit our ability to implement our business plan or meet customer demand.

The loss of our exclusive license with Emeril’s Food of Love Productions, L.L.C. or events or rumors relating to the Emeril’s brand could adversely impact our operating results.

The value of our license agreement with Emeril’s Food of Love Productions, L.L.C. (EFLP) depends in large part on the reputation and integrity of Emeril Lagasse, under whose name the Emeril’s products are marketed. Mr. Lagasse is a widely recognized chef who currently enjoys celebrity status for his ability to prepare gourmet foods. Consumer and customer recognition of Mr. Lagasse and the Emeril’s brand and the association of this brand with safe and high quality food products form an integral part of our Emeril’s products. Should Mr. Lagasse’s popularity decline, or should our license with EFLP be lost or compromised for any reason, our operating results could be adversely impacted. In addition, EFLP may terminate the license agreement at any point if we fail to meet our obligations under the agreement.

We rely on the performance of major retailers, wholesalers, specialty distributors and mass merchants for the success of our business, and should they perform poorly or give higher priority to other brands or products, our business could be adversely affected.

We sell our products principally to retail outlets and wholesale distributors including, traditional supermarkets, food service outlets, mass merchants, warehouse clubs, non-food outlets and specialty food distributors. The replacement by or poor performance of our major wholesalers, retailers or chains or our inability to collect accounts receivable from our customers could materially and adversely affect our results of operations and financial condition. In addition, our customers offer branded and private label products that compete directly with our products for retail shelf space and consumer purchases. Accordingly, there is a risk that our customers may give higher priority to their own products or to the products of our competitors. In the future, our customers may not continue to purchase our products or provide our products with adequate levels of promotional support.

We may be unable to anticipate changes in consumer preferences, which may result in decreased demand for our products.

Our success depends in part on our ability to anticipate and offer products that appeal to the changing tastes, dietary habits and product packaging preferences of consumers in the market categories in which we compete. If we are not able to anticipate, identify or develop and market products that respond to these changes in consumer preferences, demand for our products may decline and our operating results may be adversely affected. In addition, we may incur significant costs related to developing and marketing new products or expanding our existing product lines in reaction to what we perceive to be increased consumer preference or demand. Such development or marketing may not result in the volume of sales or profitability anticipated.

Severe weather conditions and natural disasters can affect crop supplies and reduce our operating results.

Severe weather conditions and natural disasters, such as floods, droughts, frosts, earthquakes or pestilence, may affect the supply of the raw materials that we use for our products. Our maple syrup products, for instance, are particularly susceptible to severe freezing conditions in Quebec, Canada and Vermont during the season in which maple syrup is produced. Competing manufacturers can be affected differently by weather conditions and natural disasters depending on the location of their supplies. If our supplies of raw materials are reduced, we may not be able to find supplemental supply sources on favorable terms or at all, which could adversely affect our business and operating results.

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We are subject to environmental laws and regulations relating to hazardous materials, substances and waste used in or resulting from our operations. Liabilities or claims with respect to environmental matters could have a significant negative impact on our business.

As with other companies engaged in similar businesses, the nature of our operations expose us to the risk of liabilities and claims with respect to environmental matters, including those relating to the disposal and release of hazardous substances. Furthermore, our operations are governed by laws and regulations relating to workplace safety and worker health which, among other things, regulate employee exposure to hazardous chemicals in the workplace. Any material costs incurred in connection with such liabilities or claims could have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity. Any environmental or health and safety legislation or regulations enacted in the future, or any changes in how existing or future laws or regulations will be enforced, administered or interpreted may lead to an increase in compliance costs or expose us to additional risk of liabilities and claims, which could have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity.

Our operations are subject to numerous laws and governmental regulations, exposing us to potential claims and compliance costs that could adversely affect our business.

Our operations are subject to extensive regulation by the United States Food and Drug Administration (FDA), the United States Department of Agriculture (USDA) and other national, state and local authorities. For example, we are subject to the Food, Drug and Cosmetic Act and regulations promulgated thereunder by the FDA. This comprehensive regulatory program governs, among other things, the manufacturing, composition and ingredients, packaging and safety of foods. Under this program the FDA regulates manufacturing practices for foods through its current “good manufacturing practices” regulations and specifies the recipes for certain foods. Furthermore, our processing facilities and products are subject to periodic inspection by federal, state and local authorities. Any changes in these laws and regulations could increase the cost of developing and distributing our products and otherwise increase the cost of conducting our business, which would adversely affect our financial condition and results of operations. In addition, failure by us to comply with applicable laws and regulations, including future laws and regulations, could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity. See Item 1, “Business—Government Regulation.”

Failure by third-party co-packers to comply with environmental or other regulations may disrupt our supply of certain products and adversely affect our business.

We rely on co-packers to produce certain of our products. Such co-packers, whether in the United States or outside the United States, are subject to a number of regulations, including environmental regulations. Failure by any of our co-packers to comply with regulations, or allegations of compliance failure, may disrupt their operations. Disruption of the operations of a co-packer could disrupt our supply of product, which could have an adverse effect on our business, consolidated financial condition, results of operations or liquidity. Additionally, actions we may take to mitigate the impact of any such disruption or potential disruption, including increasing inventory in anticipation of a potential production interruption, may adversely affect our results of operations.

We may be subject to significant liability should the consumption of any of our products cause injury, illness or death.

The sale of food products for human consumption involves the risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties or product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents or residues introduced during the growing, manufacturing, storage, handling or transportation phases of production. We have from time

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to time been involved in product liability lawsuits, none of which have been material to our business. While we are subject to governmental inspection and regulations and believe our facilities comply in all material respects with all applicable laws and regulations, if the consumption of any of our products causes, or is alleged to have caused, a health-related illness in the future we may become subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused injury, illness or death could adversely affect our reputation with existing and potential customers and our corporate and brand image. Moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. We maintain product liability insurance in an amount that we believe to be adequate. However, we cannot be sure that we will not incur claims or liabilities for which we are not insured or that exceed the amount of our insurance coverage.

Furthermore, our products could potentially suffer from product tampering, contamination or spoilage or be mislabeled or otherwise damaged. Under certain circumstances, we may be required to recall products, leading to a material adverse effect on our business. Even if a situation does not necessitate a recall, product liability claims might be asserted against us. A product liability judgment against us or a product recall could have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity.

Consumer concern regarding the safety and quality of food products or health concerns could adversely affect sales of certain of our products.

If consumers in our principal markets lose confidence in the safety and quality of certain food products, our business could be adversely affected. In addition, consumers have been increasingly focused on health and wellness with respect to the food products they buy. The food industry is also subject to scrutiny relating to genetically modified organisms and the health implications of obesity. We have been and will continue to be impacted by publicity concerning the health implications of our products, which could negatively influence consumer perception and acceptance of our products and marketing programs. Developments in any of these areas could cause our results to differ materially from results that have been or may be projected.

Risk associated with foreign suppliers and co-packers, including changes in import/export duties, wage rates, political or economic climates, or exchange rates, may adversely affect our operations.

Our relationships with foreign suppliers and co-packers subject us to the risks of doing business outside the United States. The countries from which we source our products may be subject to political and economic instability, and may periodically enact new or revise existing laws, taxes, duties, quotas, tariffs, currency controls or other restrictions to which we are subject. Our products are subject to import duties and other restrictions, and the United States government may periodically impose new or revise existing duties, quotas, tariffs or other restrictions to which we are subject. In addition, changes in respective wage rates among the countries from which we and our competitors source product could substantially impact our competitive position. Changes in exchange rates, import/export duties or relative international wage rates applicable to us or our competitors could adversely impact our business, financial condition and results of operations. These changes may impact us in a different manner than our competitors.

Litigation regarding our trademarks and any other proprietary rights and intellectual property infringement claims may have a significant negative impact on our business.

We own 113 trademarks that are registered in the United States, 29 trademarks that are registered with certain U.S. states and Puerto Rico, and 405 trademarks that are registered in foreign countries. In addition, we have 13 trademark applications pending in the United States and foreign countries. We consider our trademarks to be of significant importance in our business. If the actions we take to establish and protect our trademarks and other proprietary rights are not adequate to prevent imitation of our

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products by others or to prevent others from seeking to block sales of our products as an alleged violation of their trademarks and proprietary rights, it may be necessary for us to initiate or enter into litigation in the future to enforce our trademark rights or to defend ourselves against claimed infringement of the rights of others. Any legal proceedings could result in an adverse determination that could have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity.

Our financial well-being could be jeopardized by unforeseen changes in our employees’ collective bargaining agreements or shifts in union policy.

As of December 30, 2006, approximately 284 of our 721 employees were covered by collective bargaining agreements. Approximately 56 of our employees at our Roseland, New Jersey facility were covered by a collective bargaining agreement with the International Brotherhood of Teamsters, Chauffeurs, Warehousemen & Helpers of America (Local No. 863), scheduled to expire on March 31, 2009. Approximately 137 of our employees at our Portland and Biddeford, Maine facilities were covered by a collective bargaining agreement with the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (AFL-CIO, Local No. 334), scheduled to expire on April 28, 2007. Approximately 91 of our employees at our Stoughton, Wisconsin facility were covered by a collective bargaining agreement with the Drivers, Salesmen, Warehousemen, Milk Processors, Cannery, Dairy Employees and Helpers Union (Local No. 695), scheduled to expire on March 31, 2011. Although we consider our employee relations to be generally good, a prolonged work stoppage or strike at any facility with union employees could have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity. We are in negotiations for a new collective bargaining agreement to replace the existing Portland and Biddeford, Maine collective bargaining agreement that is scheduled to expire on April 28, 2007. However, we cannot assure you that we will reach a new agreement with the union prior to the expiration date. If prior to the expiration of the Portland and Biddeford, Maine collective bargaining agreement or prior to the expiration of any of our other existing collective bargaining agreements we are unable to reach new agreements without union action or any such new agreements are not on terms satisfactory to us, our business, consolidated financial condition, results of operations or liquidity could be materially and adversely affected.

Future labor disruptions in the food industry could significantly impact our sales and profitability.

The grocer’s strike in California, which began in October 2003 and ended March 2004, in response to proposed healthcare cuts by several large retail grocers, affected over 70,000 grocery workers in California, and had a negative impact on our net sales. Should a similar strike or other labor disruption occur in California or elsewhere in the future, it may have a significant impact on our sales revenue and operating profits.

Risks Relating to our Securities

Holders of our EISs, Class A common stock and Class B common stock, may not receive the level of dividends provided for in the dividend policy our board of directors adopted in connection with our initial public offering, or any dividends at all.

Dividend payments are not mandatory or guaranteed and holders of our common stock do not have any legal right to receive, or require us to pay, dividends. Furthermore, our board of directors may, in its sole discretion, amend or repeal the dividend policy it adopted in connection with our initial public offering. Our board of directors may decrease the level of dividends provided for in this dividend policy or entirely discontinue the payment of dividends. Future dividends with respect to shares of our capital stock, if any, depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, business opportunities, provisions of applicable law and other factors that our board of directors may deem relevant. The indenture governing our senior subordinated notes, the terms of our credit facility and the indenture governing the senior notes contain significant restrictions on our ability to make dividend payments. In addition, certain provisions of the Delaware General Corporation Law may limit our ability to pay dividends.

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Our dividend policy may negatively impact our ability to finance our working capital requirements, capital expenditures or operations.

In connection with our initial public offering, our board of directors adopted a dividend policy under which cash generated by our business in excess of operating needs, interest and principal payments on indebtedness, capital expenditures sufficient to maintain our properties and assets and $6.0 million of dividend restricted cash (that can be used for the payment of dividends on the Class A common stock or for any other purpose other than the payment of dividends on the Class B common stock), would in general be distributed as regular quarterly cash dividends (up to the intended dividend rates as determined by our board of directors) to the holders of our Class A common stock and as regular annual cash dividends (up to the permitted dividend rate described under Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Dividend Policy”) to the holders of our Class B common stock and not be retained by us as cash on our consolidated balance sheet. As a result, we may not retain a sufficient amount of cash to finance growth opportunities or unanticipated capital expenditure needs or to fund our operations in the event of a significant business downturn. We may have to forego growth opportunities or capital expenditures that would otherwise be necessary or desirable if we do not find alternative sources of financing. If we do not have sufficient cash for these purposes, our financial condition and our business will suffer.

If we have insufficient cash flow to cover the intended dividend payments under the dividend policy adopted by our board of directors we would need to reduce or eliminate dividends or, to the extent permitted under our debt agreements, fund a portion of our dividends with additional borrowings.

For fiscal 2006, we had cash flows from operating activities of $32.8 million. If our cash flows from operating activities for future periods were to fall below our minimum expectations (or if our assumptions as to capital expenditures or interest expense were too low or our assumptions as to the sufficiency of our credit facility to finance our working capital needs were to prove incorrect), we would need either to reduce or eliminate dividends or, to the extent permitted under the indenture governing our senior notes, the indenture governing our senior subordinated notes and the terms of our credit facility, fund a portion of our dividends with borrowings or from other sources. If we were to use working capital or permanent borrowings to fund dividends, we would have less cash and/or borrowing capacity available for future dividends and other purposes, which could negatively impact our financial condition, results of operations, liquidity and ability to maintain or expand our business.

Our certificate of incorporation authorizes us to issue without stockholder approval preferred stock that may be senior to our common stock in right of dividend payment.

Our certificate of incorporation authorizes the issuance of preferred stock without stockholder approval and upon such terms as the board of directors may determine. The rights of the holders of shares of our common stock will be subject to, and may be adversely affected by, the rights of holders of any class or series of preferred stock that may be issued in the future. The right of the holders of our common stock to receive dividends as they may be lawfully declared from time to time by our board of directors is subject to any preferential rights that we may grant to the holders of preferred stock that we may issue. The terms of any preferred stock we issue may place restrictions on the payment of dividends to the holders of our common stock. If we issue preferred stock that is senior to our common stock in right of dividend payment, and our cash flows from operating activities or surplus are insufficient to support dividend payments to the holders of preferred stock and to the holders Class A and Class B common stock, we may be forced to reduce or eliminate dividends to the holders of Class A and Class B common stock.

We have substantial indebtedness, which could:

·      restrict our ability to pay interest on our senior subordinated notes and our senior notes;

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·      restrict our ability to pay dividends with respect to shares of our Class A and Class B common stock; and

·      impact our financing options and liquidity position.

At December 30, 2006, we had $265.0 million aggregate principal amount of senior indebtedness, and $165.8 million aggregate principal amount of senior subordinated indebtedness. As a result of additional term loan borrowings used to finance our acquisition of the Cream of Wheat and Cream of Rice brands in February 2007, we currently have $470.0 million aggregate principal amount of senior indebtedness.

Our ability to pay dividends is subject to applicable law and contractual restrictions contained in the instruments governing any indebtedness of ours and our subsidiaries, including our credit facility, which is secured on a senior basis by substantially all of our and our subsidiaries’ assets except our real property, and our senior notes. The degree to which we are leveraged on a consolidated basis could have important consequences to the holders of our securities, including:

·       our ability in the future to obtain additional financing for working capital, capital expenditures or acquisitions may be limited;

·       we may not be able to refinance our indebtedness on terms acceptable to us or at all;

·       a significant portion of our cash flow is likely to be dedicated to the payment of interest on our indebtedness, thereby reducing funds available for future operations, capital expenditures and/or dividends on our Class A and Class B common stock; and

·       we may be more vulnerable to economic downturns and be limited in our ability to withstand competitive pressures.

Despite current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate risks associated with our substantial indebtedness.

While our credit facility contains total leverage, senior leverage and cash interest coverage maintenance covenants and the indentures governing the senior notes and senior subordinated notes contain incurrence covenants that restrict our ability to incur debt, as long as we meet these financial covenant tests we will be allowed to incur additional indebtedness. In addition, the indenture governing the senior subordinated notes allows us to issue additional senior subordinated notes with terms identical (other than issuance date) to our existing senior subordinated notes under certain circumstances.

To service our indebtedness, we require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. We may not be able to repay or refinance the senior subordinated notes, the credit facility or our senior notes upon terms acceptable to us if at all.

Our ability to make payments on and to refinance our indebtedness, including the senior subordinated notes, and to fund planned capital expenditures depends on our ability to generate cash flows from operating activities in the future. This ability, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

A significant portion of our cash flows from operating activities is dedicated to servicing our debt requirements. In addition, we currently intend to distribute a significant portion of any remaining cash flow to our stockholders in the form of dividends. Moreover, prior to the maturity of our senior notes, we are not required to make any payments of principal on our senior subordinated notes.

Our ability to continue to expand our business is, to a certain extent, dependent upon our ability to borrow funds under our credit facility and to obtain other third-party financing, including through the sale of EISs or other securities. The credit facility is subject to periodic renewal or must otherwise be refinanced. Likewise, we expect that we will refinance our senior notes at or prior to maturity, which will be

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substantially prior to the maturity date of the senior subordinated notes. If we are unable to refinance our indebtedness, including our credit facility or our senior notes, on commercially reasonable terms or at all, we would be forced to seek other alternatives, including:

·       sales of assets;

·       sales of equity; and

·       negotiations with our lenders or noteholders to restructure the applicable debt.

In addition, if we are unable to refinance the senior subordinated notes or the senior notes, our failure to repay all amounts due on the applicable maturity date would cause a default under the applicable indentures.

If we are forced to pursue any of the above options, our business and/or the value of an investment in our securities could be adversely affected.

Credit ratings may affect our ability to obtain financing and the cost of such financing.

Our ability to obtain external financing and, in particular, debt financing is affected by our debt ratings, which are periodically reviewed by the major credit rating agencies. Moody’s and S&P have provided ratings to the senior subordinated notes of Caa1 and CCC+, respectively. In determining our credit ratings, the rating agencies generally consider a number of both quantitative and qualitative factors. These factors include earnings, fixed charges such as interest, cash flows, total debt outstanding, off-balance sheet obligations and other commitments, total capitalization and various ratios calculated from these factors. The ratings provided to us by Moody’s and S&P for the senior subordinated notes indicate that these rating agencies have determined that our senior subordinated notes have a currently identifiable vulnerability to default and that we are dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal on the senior subordinated notes.

We are a holding company and we rely on dividends, interest and other payments, advances and transfers of funds from our subsidiaries to meet our debt service and other obligations.

We are a holding company and all of our assets are held by our direct and indirect subsidiaries and we rely on dividends and other payments or distributions from our subsidiaries to meet our debt service obligations and to enable us to pay dividends. The ability of our subsidiaries to pay dividends or make other payments or distributions to us depends on their respective operating results and may be restricted by, among other things, the laws of their jurisdiction of organization (which may limit the amount of funds available for the payment of dividends), agreements of those subsidiaries, the credit facility, the terms of the indenture governing the senior notes and the covenants of any future outstanding indebtedness we or our subsidiaries incur.

We may amend our credit facility, the indenture governing the senior notes or the indenture governing the senior subordinated notes, or we may enter into new agreements that govern senior indebtedness. The amended or new terms may significantly affect our ability to pay interest and dividends to holders of our securities, as applicable.

Our credit facility and the indenture governing the senior notes contain significant restrictions on our ability to pay interest on the senior subordinated notes and dividends on the shares of Class A and Class B common stock based on meeting specified financial ratios, and compliance with other conditions. As a result of general economic conditions, conditions in the lending markets, the results of our business or for any other reason, we may elect or be required to amend or refinance our credit facility or our senior notes, at or prior to maturity, or enter into additional agreements for senior indebtedness. Regardless of any protection holders of our securities have in the indenture governing the senior subordinated notes, any

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such amendment, refinancing or additional agreement may contain covenants which could limit in a significant manner our ability to pay interest and dividends to holders of the EISs, our Class A and Class B common stock and our senior subordinated notes.

We are subject to restrictive debt covenants and other requirements related to our debt that limit our business flexibility by imposing operating and financial restrictions on our operations.

The agreements governing our indebtedness impose significant operating and financial restrictions on us. These restrictions prohibit or limit, among other things:

·       the incurrence of additional indebtedness and the issuance of certain preferred stock or redeemable capital stock;

·       the payment of dividends on, and purchase or redemption of, capital stock;

·       a number of other restricted payments, including investments;

·       specified sales of assets;

·       specified transactions with affiliates;

·       the creation of a number of liens; and

·       consolidations, mergers and transfers of all or substantially all of our assets.

Our credit facility and the indenture governing the senior notes include other and more restrictive covenants and prohibit us from prepaying our other indebtedness, including the senior subordinated notes, while senior indebtedness is outstanding. The credit facility requires us to maintain specified financial ratios and satisfy financial condition tests, including, without limitation, the following:  a maximum leverage ratio, a minimum interest coverage ratio and a maximum senior leverage ratio.

Our ability to comply with the ratios or tests may be affected by events beyond our control, including prevailing economic, financial and industry conditions. A breach of any of these covenants, or failure to meet or maintain ratios or tests could result in a default under the credit facility, the terms of the indenture governing the senior notes and/or the indenture governing the senior subordinated notes. Certain events of default under the credit facility and the terms of the indenture governing the senior notes would prohibit us from making payments on the senior subordinated notes, including payment of interest when due, and from paying dividends on our common stock. In addition, upon the occurrence of an event of default under the credit facility or the terms of the indenture governing the senior notes, the lenders could elect to declare all amounts outstanding under the credit facility and the senior notes, together with accrued interest, to be immediately due and payable. If we were unable to repay those amounts, the lenders could proceed against the security granted to them to secure that indebtedness. If the lenders accelerate the payment of the indebtedness, our assets may not be sufficient to repay in full this indebtedness and our other indebtedness, including the senior subordinated notes.

Interest on the senior subordinated notes may not be deductible by us for U.S. federal income tax purposes, which could significantly reduce our future cash flow and impact our ability to make interest and dividend payments.

If all or a portion of the senior subordinated notes were treated as equity rather than debt for U.S. federal income tax purposes, then a corresponding portion of the interest on the senior subordinated notes would not be deductible by us for U.S. federal income tax purposes. In addition, we would be subject to liability for U.S. withholding taxes on interest payments to non-U.S. holders if such payments were determined to be dividends. Our inability to deduct interest on the senior subordinated notes could materially increase our taxable income and, thus, our U.S. federal and applicable state income tax liability. Our liability for income taxes (and withholding taxes) if the senior subordinated notes were determined to

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be equity for income tax purposes would materially reduce our after-tax cash flow and would materially and adversely impact our ability to make interest and/or dividend payments and could impact our ability to continue as a going concern. In the case of foreign holders, treatment of the senior subordinated notes as equity for U.S. federal income tax purposes would subject such holders in respect of the senior subordinated notes to withholding or estate taxes in the same manner as with regard to common stock and could subject us to liability for withholding taxes that were not collected on payments of interest. Therefore, foreign holders would receive any such payments net of the tax withheld.

Even if the IRS does not challenge the tax treatment of the senior subordinated notes, it is possible that we will at some point in the future, as a result of changes in circumstances or facts that come to light in the future, conclude that we should establish a reserve for contingent tax liabilities associated with a disallowance of all or part of the interest deductions on the senior subordinated notes, although our present view is that no such reserve is necessary or appropriate. If we decide to maintain such a reserve, our ability to pay dividends on the shares of our common stock could be materially impaired and the market price and/or liquidity for the ElSs or our common stock could be adversely affected.

Future changes that increase cash taxes payable by us could significantly decrease our future cash flow available to make interest and dividend payments with respect to our securities.

We are able to amortize goodwill and certain intangible assets within the meaning of Section 197 of the Internal Revenue Code of 1986. Before giving effect to the Cream of Wheat acquisition (which will increase our amortization of intangibles for tax purposes), we expect to be able to amortize for tax purposes approximately $18.2 million annually through 2011, approximately $16.5 million for fiscal 2012, approximately $15.0 million for fiscal 2013, approximately $10.3 million for fiscal 2014, approximately $9.1 million for fiscal 2015 through 2017, approximately $6.5 million for fiscal 2018, approximately $2.1 million for fiscal 2019 and 2020, and approximately $0.1 million for fiscal 2021. If there is a change in U.S. federal tax policy that reduces any of these available deductions or results in an increase in our corporate tax rate, our cash taxes payable may increase, which could significantly reduce our future cash and impact our ability to make interest and dividend payments.

If interest rates rise, the trading value of our ElSs and senior subordinated notes may decline.

Should interest rates rise or should the threat of rising interest rates develop, debt markets may be adversely affected. As a result, the trading value of our EISs and senior subordinated notes may decline.

Future sales or the possibility of future sales of a substantial amount of EISs, shares of our Class A common stock, our senior subordinated notes or other securities may depress the price of our securities.

We may issue shares of our Class A common stock and senior subordinated notes, which may be in the form of EISs, or other securities from time to time in future financings or as consideration for future acquisitions and investments. In the event any such future financing, acquisition or investment is significant, the number of shares of our Class A common stock and the aggregate principal amount of senior subordinated notes, which may be in the form of EISs, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be significant. In addition, we may also grant registration rights covering those EISs, shares of our Class A common stock, senior subordinated notes or other securities in connection with any such future financing, acquisitions and investments.

We currently have an effective registration statement on Form S-3 registering the sale of up to $200.0 million of securities, which we may use in the future to issue EISs, Class A common stock, senior subordinated notes or other debt or equity securities. In addition, following the fifth anniversary of the closing of our initial public offering or earlier under certain circumstances, holders of Class B common stock may demand registration of their Class B common stock.

20




Future sales or the availability for sale of substantial amounts of EISs, shares of our Class A common stock, a significant principal amount of our senior subordinated notes or other securities could adversely affect the prevailing market price of our securities and could impair our ability to raise capital through future sales of our securities.

Our certificate of incorporation and bylaws and several other factors could limit another party’s ability to acquire us and deprive our investors of the opportunity to obtain a takeover premium for their securities.

Our certificate of incorporation and bylaws contain certain provisions that may make it difficult for another company to acquire us and for holders of our securities to receive any related takeover premium for their securities. For example, our certificate of incorporation authorizes the issuance of preferred stock without stockholder approval and upon such terms as the board of directors may determine. The rights of the holders of shares of our common stock will be subject to, and may be adversely affected by, the rights of holders of any class or series of preferred stock that may be issued in the future.

Item 1B.               Unresolved Staff Comments.

None.

Item 2.                        Properties.

Our corporate headquarters are located at Four Gatehall Drive, Suite 110, Parsippany, NJ 07054. Our manufacturing plants are generally located near major customer markets and raw materials. Of our five manufacturing facilities, four are owned and one is leased as of December 30, 2006. Management believes that our manufacturing plants have sufficient capacity to accommodate our planned growth. As of December 30, 2006, we owned or leased the offices, manufacturing and warehouse facilities and distribution centers described in the table below:

Facility Location

 

 

 

Owned/ Leased

 

Description

Hurlock, Maryland

 

Owned

 

Manufacturing/Warehouse

Portland, Maine

 

Owned

 

Manufacturing/Warehouse

Stoughton, Wisconsin

 

Owned

 

Manufacturing/Warehouse

St. Johnsbury, Vermont

 

Owned

 

Manufacturing/Warehouse

St. Evariste, Quebec

 

Owned

 

Storage Facility

Sharptown, Maryland

 

Owned

 

Storage Facility

Parsippany, New Jersey

 

Leased

 

Corporate Headquarters

Roseland, New Jersey

 

Leased

 

Manufacturing/Warehouse

La Vergne, Tennessee

 

Leased

 

Distribution Center

Houston, Texas

 

Leased

 

Distribution Center

Biddeford, Maine

 

Leased

 

Distribution Center

Seaford, Delaware

 

Leased

 

Distribution Center

Bentonville, Arkansas

 

Leased

 

Sales Office

 

On July 1, 2005, we closed our New Iberia, Louisiana, manufacturing facility as part of our ongoing efforts to improve our production capacity utilization, productivity and operating efficiencies, and lower our overall costs. During the thirteen weeks ended December 31, 2005, we began negotiations for the sale of the land and building and classified the land and building, with a carrying value of $0.8 million, as assets held for sale at such time and ceased depreciation. The sale of our New Iberia facility closed on July 9, 2006. We received net proceeds of $1.3 million and recorded a gain on the sale of $0.5 million.

21




Item 3.                        Legal Proceedings.

We are involved in various claims and legal actions arising in the ordinary course of business, including proceedings involving product liability claims, worker’s compensation and other employee claims, and tort and other general liability claims, as well as trademark, copyright, patent infringement and related claims and legal actions. In the opinion of our management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

Item 4.                        Submission of Matters to a Vote of Security Holders.

During the fourth quarter of fiscal 2006, no matters were submitted to a vote of stockholders through solicitation of proxies or otherwise.

22




PART II

Item 5.                      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Enhanced Income Securities (EISs), Class A Common Stock and Class B Common Stock

We have outstanding two separate classes of common stock, our Class A common stock, par value $0.01 per share, and our Class B common stock, par value $0.01 per share.

Our Enhanced Income Securities (EISs), each representing one share of Class A common stock and $7.15 principal amount of senior subordinated notes due 2016, are traded on the American Stock Exchange under the symbol “BGF” and have been so traded since October 8, 2004. Holders of our EISs have the right to separate EISs into the shares of Class A common stock and senior subordinated notes represented thereby. Currently, all of our shares of Class A common stock are represented by EISs. The following table sets forth the high and low sales prices of our EISs as reported on the American Stock Exchange for each of the quarterly periods indicated

 

 

High

 

Low

 

Fiscal 2005

 

 

 

 

 

First Quarter

 

$

15.80

 

$

14.58

 

Second Quarter

 

$

15.09

 

$

14.25

 

Third Quarter

 

$

14.90

 

$

11.60

 

Fourth Quarter

 

$

15.18

 

$

12.21

 

Fiscal 2006

 

 

 

 

 

First Quarter

 

$

15.35

 

$

14.40

 

Second Quarter

 

$

16.35

 

$

14.11

 

Third Quarter

 

$

19.27

 

$

15.33

 

Fourth Quarter

 

$

20.80

 

$

15.91

 

 

On February 28, 2007, the closing sales price of our EISs on the AMEX was $22.47 per EIS.

As of February 28, 2007, we had one holder of record of the EISs, Cede & Co. (nominee for The Depository Trust Company (DTC)), which holds the EISs on behalf of approximately 135 participants in the DTC system, which in turn hold the EISs on behalf of beneficial owners. Holders of our EISs have the right to separate each EIS into the shares of Class A common stock and senior subordinated notes represented thereby. According to the records of our transfer agent, we had one holder of record of our Class A common stock as of February 28, 2007, Cede & Co., as holder of 20,000,000 EISs.

There is no established trading market for our Class B common stock. As of February 28, 2007, there were 23 holders of record of our Class B common stock and 7,556,443 shares of our Class B common stock were outstanding.

EIS Performance Graph

Set forth below is a line graph comparing the change in the cumulative total EIS holder return on our company’s EISs with the cumulative total return of the AMEX Composite Index and the S&P Packaged Foods & Meats Index for the period from October 8, 2004 (the first day of trading of our EISs on the American Stock Exchange) to December 30, 2006, assuming the investment of $100 on October 8, 2004 and the reinvestment of dividends and interest. The EIS price performance shown on the graph only reflects the change in our company’s EIS price relative to the noted indices and is not necessarily indicative of future price performance.

23




Comparison of Cumulative Total Return
B&G Foods, Inc. Enhanced Income Securities
AMEX Composite Index
The S&P Packaged Foods & Meats Index

GRAPHIC

 

 

10/8/2004

 

1/1/2005

 

12/31/2005

 

12/30/2006

 

B&G Foods, Inc.(EIS)

 

$

100.00

 

$

102.82

 

 

$

112.24

 

 

 

170.78

 

 

Amex Composite Index

 

100.00

 

114.26

 

 

141.08

 

 

 

167.85

 

 

S&P Packaged Foods & Meats

 

100.00

 

110.97

 

 

102.10

 

 

 

118.95

 

 

 

Dividend Policy

General

Prior to the completion of our initial public offering in October 2004, our board of directors adopted a dividend policy that reflects a basic judgment that our stockholders would be better served if we distributed our cash available to pay dividends to them instead of retaining it in our business. Under this policy, cash generated by our company in excess of operating needs, interest and principal payments on indebtedness, capital expenditures sufficient to maintain our properties and other assets and $6.0 million of dividend restricted cash (that can be used for the payment of dividends on Class A common stock or for any other purpose other than the payment of dividends on the Class B common stock) would in general be distributed as regular quarterly cash dividends (up to the intended dividend rate as determined by our board of directors) to the holders of our Class A common stock and as regular annual cash dividends (up to the permitted dividend rate set forth below) to the holders of our Class B common stock and not be retained by us as cash on our consolidated balance sheet.

Notwithstanding our dividend policy, holders of our common stock may not receive any dividends because:

·       there is no legal, contractual or other requirement that we pay the dividends, and the dividends are neither mandatory nor guaranteed;

·       our board of directors may, in its sole discretion, modify or revoke the dividend policy at any time;

·       even if our dividend policy were not modified or revoked, the actual amount of dividends distributed under the policy and the decision to make any distributions is entirely at the discretion of our board of directors;

·       the payment of dividends is subject to limitations and restrictions under:

24




                              the indenture governing our senior subordinated notes,

                              the indenture governing our senior notes,

                              the terms of our credit facility, and

                              the terms of any other then outstanding indebtedness of ours;

·       the payment of dividends is subject to limitations and restrictions under state law; and

·       we may not have enough cash to pay dividends due to changes to our results of operations, financial condition, working capital requirements and anticipated cash needs.

Since the completion of our initial public offering, we have declared and paid quarterly dividends on our Class A common stock at a rate per annum equal to $0.848 per share. We made our first dividend payment on our Class A common stock of $0.1864 per share on January 31, 2005, to holders of record as of December 31, 2004, which was a partial quarterly dividend payment for the period commencing on October 14, 2004, the date of completion of our initial public offering, and ending on January 1, 2005. Our board of directors declared quarterly dividends of $0.212 per share of Class A common stock during each quarter of fiscal 2006 and the fiscal year ended December 31, 2005 (fiscal 2005). B&G Foods has determined that for U.S. federal income tax purposes, all dividends paid in fiscal 2006 would be treated as a return of capital, and 96% of dividends paid in fiscal 2005 would be treated as a return of capital and the remainder would be treated as a dividend paid out of earnings and profits.

No dividends were declared for our Class B common stock for fiscal 2006, fiscal 2005 or fiscal 2004. Under our Class B dividend policy, subject to the risks set forth above and under Item 1A, “Risk Factors,” we intend to pay annual dividends to holders of our Class B common stock equal to Class B Available Cash (as defined below) for that period, divided by the number of Class B shares outstanding on the record date for such period, subject to the subordination provisions described below.

The maximum amount of dividends that we are permitted to pay to holders of our Class B common stock is an amount equal to “Class B Available Cash.”  “Class B Available Cash” means the lesser of:

·       “excess cash” (as defined in the indenture governing our senior subordinated notes) for the last four fiscal quarters, including the most recently completed fiscal quarter, minus the sum of the aggregate amount of the prior four Class A dividends, and minus dividend restricted cash of $6.0 million; for purposes of calculating excess cash as defined, for this purpose only, the aggregate amounts set forth in clause (3) of the definition of excess cash shall be the greater of the aggregate amount of such capital expenditures or $6.5 million; or

·       the aggregate per share amount of dividends declared or to be declared on our Class A common stock (or 1.1 times such amount for dividends with respect to periods commencing after December 30, 2006) with respect to the annual period for which the dividends on our Class B common stock are to be paid multiplied by the number of shares of our Class B common stock issued and outstanding on the last day of such period.

We intend to pay dividends on our Class A common stock quarterly on each January 30, April 30, July 30 and October 30 to the holders of record as of each December 31, March 31, June 30 and September 30, respectively. We intend to pay dividends on our Class B common stock annually, subject to the subordination provisions described below, on February 20 of each year to holders of record on the preceding December 31. For years ending subsequent to January 2, 2010, we intend to pay dividends on our Class B common stock quarterly on January 30, April 30, July 30 and October 30 of each year to holders of record on the preceding December 31, March 31, June 30 and September 30. Under our certificate of incorporation, for each annual dividend payment period after the dividend payment period ending on December 30, 2006 and through the dividend payment period ending on January 2, 2010, if we declare and pay dividends on our Class A common stock, the holders of our Class B common stock have

25




the right (subject to the subordination provisions described below) to dividend payments equal to Class B Available Cash (up to 1.1 times the amount of dividends paid per share to the holders of our Class A common stock). For quarterly periods subsequent to January 2, 2010, if we declare and pay dividends on our Class A common stock, the holders of our Class B common stock will be entitled to dividend payments of 1.1 times the amount paid per share to the holders of our Class A common stock.

If we have any remaining cash after the payment of dividends as contemplated above, our board of directors will, in its sole discretion, decide to use that cash for those purposes it deems necessary including, but not limited to, funding additional capital expenditures or acquisitions, if any, repaying indebtedness, paying additional dividends or for general corporate purposes. However, notwithstanding this dividend policy, the amount of dividends, if any, for each dividend payment date will be determined by our board of directors on a quarterly basis after taking into account the factors set forth above and the dividend restrictions and other factors set forth below.

Prior to our initial public offering, we had never paid any dividends.

Subordination of Class B Dividends

Under our organizational documents, through the dividend payment dates with respect to the quarterly and annual dividend payment periods ending January 2, 2010, dividends on our Class B common stock are subordinated to the payment of dividends on our Class A common stock. Specifically,

·       an annual dividend on our Class B common stock may only be declared if we have declared and paid dividends on our Class A common stock at no less than the quarterly rate of $0.212 per share for each of the four full fiscal quarters corresponding to such annual dividend payment period of the Class B common stock; and

·       no dividends on our Class B common stock may be declared with respect to any annual period unless the “Class B Threshold Amount” as of the last day of such period is at least $10.0 million. “Class B Threshold Amount” as of any date means the amount of cash and cash equivalents on our consolidated balance sheet as of such date calculated on a pro forma basis giving effect to the payment of any previously declared but unpaid dividends on any class of our capital stock and the payment of any dividends to be declared with respect to any class of our capital stock with respect to the period for which the Class B Threshold Amount is being calculated less any actual or funded borrowings under our revolving credit facility (or any successor or additional revolving credit facility) as of such date.

The subordination of dividends on our Class B common stock will be suspended upon the occurrence of any default or event of default under the indentures governing the senior notes and the senior subordinated notes and will become applicable again upon the cure of any default or event of default. Dividends on our Class B common stock will not be subordinated to dividends on our Class A common stock for any dividend period subsequent to January 2, 2010. If for any dividend payment date after the February 20, 2010 dividend payment date the amount of cash to be distributed is insufficient to pay dividends at the levels intended by our dividend policy, any shortfall will reduce the dividends on the Class A and Class B common stock pro rata.

Under U.S. federal income tax law, common stock distributions to holders of our EISs, Class A common stock and Class B common stock are taxable to the extent they are paid out of current or accumulated earnings and profits. Generally, the portion of the distribution treated as a return of capital should reduce the tax basis of the holders of our EISs, Class A common stock and Class B common stock in such securities, as applicable. Qualifying dividend income and the return of capital, if any, will be allocated on a pro-forma basis to all distributions for each fiscal year.

The table below illustrates for the fiscal year ended December 30, 2006 the amount of cash that we had available for distribution to our stockholders.

26




 

 

Fiscal Year 
Ended

 

Cash Available to Pay Dividends

 

 

 

December 30,
2006

 

 

 

(Dollars in thousands)

 

Net cash provided by operating activities

 

 

$

32,771

 

 

Interest expense, net

 

 

43,481

 

 

Income taxes

 

 

5,962

 

 

Amortization of deferred debt issuance costs

 

 

(2,830

)

 

Deferred income taxes

 

 

(6,165

)

 

Gain on sale of property, plant and equipment

 

 

525

 

 

Changes in assets and liabilities

 

 

(4,744

)

 

EBITDA

 

 

69,000

 

 

Reduction for cash income tax expense(a)

 

 

 

 

Cash interest expense(b)

 

 

(40,651

)

 

Capital expenditures

 

 

(7,306

)

 

Cash available to pay dividends on Class A common stock

 

 

21,043

 

 

Less:

 

 

 

 

 

Dividends paid on Class A common stock

 

 

16,960

 

 

Dividend restricted cash(c)

 

 

6,000

 

 

Cash available to pay dividends on Class B common stock

 

 

$

(1,917

)

 

 


(a)           For the fiscal year ending December 30, 2006, we had a net cash tax refund of $0.3 million.

(b)          For purposes calculating cash available to pay dividends, cash interest expense equals total interest expense less the amortization of deferred financing costs.

(c)           Under our organizational documents, our cash otherwise available for the payment of dividends on our Class B common stock for any year is reduced by $6.0 million.

There can be no assurance that we will continue to pay dividends at the historic levels set forth above, or at all. Dividend payments are not mandatory or guaranteed, are within the absolute discretion of our board of directors and will be dependent upon many factors and future developments that could differ materially from our current expectations. Over time, our EBITDA (net income before net interest expense, income taxes, depreciation and amortization), capital expenditures, working capital and other cash needs will be subject to uncertainties, which could impact the level of any dividends we pay in the future.

While interest on our senior notes and senior subordinated notes is fixed, those notes will need to be refinanced on or prior to their maturity dates in 2011 and 2016, respectively, and thereafter our interest expense could be higher and the terms of any new financing may restrict us from paying the level of current intended dividends or any dividends at all. In addition, we may not be able to refinance the senior subordinated notes or the senior notes when they become due. If we are unable to refinance the senior subordinated notes or the senior notes, our failure to repay all amounts due on the applicable maturity date would cause a default under the applicable indentures.

We used the proceeds of an additional $205 million of term loan borrowings under our credit facility to fund the acquisition of the Cream of Wheat and Cream of Rice brands in February 2007 and to pay related transaction fees and expenses. As a result, we will incur additional cash interest expense that could reduce our cash available to pay dividends. Interest on indebtedness under our credit facility is based upon a floating interest rate. As a result, our interest expense under our credit facility will increase if interest rates in the general economy rise. In addition, to the extent we finance capital expenditures, working

27




capital or other cash needs with indebtedness under our credit facility or otherwise, we will incur additional cash interest expense and debt service obligations that could reduce our cash available to pay dividends.

Our intended policy to distribute rather than retain cash available to pay dividends (up to the intended dividend rate of $0.848 per share per annum on the Class A common stock as determined by our board of directors and up to the permitted dividend rate for the Class B common stock) is based upon our current assessment of our business and the environment in which we operate, and that assessment could change based on competitive or other developments (which could, for example, increase our need for capital expenditures or working capital), new acquisition opportunities or other factors. Our board of directors is free to depart from or change our dividend policy at any time and could do so, for example, if it were to determine that we had insufficient cash to take advantage of growth opportunities. Although management currently has no specific plans to increase capital spending to materially expand our business, management will evaluate acquisition opportunities as they arise and may pursue opportunities that it believes may result in net increases to our cash available for distribution.

Restrictions on Dividend Payments

Our ability to pay future dividends, if any, with respect to shares of our capital stock will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, provisions of applicable law and other factors that our board of directors may deem relevant. Under Delaware law, our board of directors may declare dividends only to the extent of our “surplus” (which is defined as total assets at fair market value minus total liabilities, minus statutory capital), or if there is no surplus, out of our net profits for the then current and/or immediately preceding fiscal years. We do not anticipate that we will have sufficient earnings to pay dividends and therefore expect that we will pay dividends out of surplus. Our board of directors will periodically and from time to time assess the appropriateness of the then current dividend policy before actually declaring any dividends.

The indentures governing our senior notes and senior subordinated notes restrict our ability to declare and pay dividends on our common stock as follows:

·       we may use up to 100% of our excess cash (as defined below) for the period (taken as one accounting period) from and including the first fiscal quarter beginning after the date of the indentures to the end of our most recently ended fiscal quarter for which internal financial statements are available at the time of such payment plus certain incremental funds described in the indentures for the payment of dividends so long as the fixed charge coverage ratio for the four most recent fiscal quarters for which internal financial statements are available is not less than 1.6 to 1.0;

·       at any time the fixed charge coverage ratio for the four preceding fiscal quarter period is less than 1.6 to 1.0, we may pay dividends on our common stock, in the quarter in which such payment is made, of up to $10.0 million in the aggregate plus certain incremental funds;

·       if our net cash balance is less than $10.0 million at the end of any fiscal year beginning with the fiscal year ended January 1, 2005, then we may only use up to 98% of our excess cash pursuant to the first bullet of this paragraph until the earlier of (a) the first fiscal year end thereafter at which our net cash balance (which is the amount of cash and cash equivalents set forth on our consolidated balance sheet as of such period end minus funded indebtedness under any secured revolving credit facility) equals or exceeds $10.0 million or (b) the first fiscal quarter thereafter at which our net cash balance exceeds $12.5 million; and

·       we may not pay any dividends on any dividend payment date if a default or event of default under either indenture has occurred or is continuing.

Excess cash is defined in the indenture governing the senior subordinated notes, under the terms of our credit facility and in the indenture governing our senior notes. Excess cash is calculated as

28




“consolidated cash flow,” as defined in the indentures and under the terms of our credit facility (which, in each case, allows for the add-back of transaction related compensation charges relating to our initial public offering and concurrent offerings, and restructuring charges and which is equivalent to the term adjusted EBITDA), minus the sum of cash tax expense, cash interest expense, certain capital expenditures, certain repayment of indebtedness and the cash portion of the restructuring charges. Excess cash is not a substitute for operating income or net income, as determined in accordance with generally accepted accounting principles (GAAP). Excess cash is not a complete net cash flow measure because excess cash is a measure of liquidity that does not include reductions for cash payments for an entity’s obligation to fund changes in its working capital, acquisitions, if any, and repay its debt and pay its dividends. Rather, excess cash is one potential indicator of our ability to fund these cash requirements in compliance with our debt agreements. Excess cash is also not a complete measure of our profitability because it does not include costs and expenses for depreciation and amortization, transaction related compensation and non-cash restructuring charges. We believe that the most directly comparable GAAP measure to excess cash is net cash provided by operating activities. We present a reconciliation of EBITDA and adjusted EBITDA (equivalent to consolidated cash flow) to net cash provided by operating activities for fiscal 2004, 2005 and 2006 in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  We believe excess cash is indicative of our ability to declare and pay dividends on our common stock, including the Class A and Class B common stock, in compliance with the restricted payment covenants under the indenture governing the senior subordinated notes, the terms of our credit facility and the indenture governing the senior notes.

Excess cash does not represent the amount we intend to distribute as dividends for any quarterly period but rather is a restriction on the maximum level of dividend payments, if any, that we are permitted to declare and pay under the terms of the indentures governing our senior subordinated notes and senior notes and under and our credit facility.

In addition, the terms of our credit facility also restrict our ability to declare and pay dividends on our common stock. In accordance with the terms of our credit facility, we are not permitted to declare or pay dividends unless we are permitted to do so under the indentures governing the senior notes and senior subordinated notes. In addition, our credit facility does not permit us to pay dividends unless we maintain:

·       a “consolidated interest coverage ratio” (defined as the ratio of our adjusted EBITDA for any period of four consecutive fiscal quarters to our consolidated interest expense for such period payable in cash) of not less than 1.35 to 1.0;

·       a “consolidated senior leverage ratio” (defined as the ratio of our consolidated total debt, as of the last day of any period of four consecutive fiscal quarters to our adjusted EBITDA) of not more than 5.00 to 1.0; and

·       a “consolidated total leverage ratio” (defined as the ratio of our consolidated total debt of the last day of any period to our adjusted EBITDA for any period of four consecutive fiscal quarters) of not more than 7.00 to 1.0.

Subject to the limitations described elsewhere in this report, we have the ability to issue additional EISs, Class A common stock, Class B common stock, other equity securities or preferred stock for such consideration and on such terms and conditions as are established by our board of directors in its sole discretion and without the approval of the holders of our EISs or either class of common stock. It is possible that we will fund acquisitions, if any, through the issuance of additional EISs, common stock, other equity securities or preferred stock. Holders of any additional EISs, common stock or other equity securities issued by us may be entitled to share equally with the holders of EISs in dividend distributions. The certificate of designation of any preferred stock issued by us may provide that the holders of preferred stock are senior to the holders of our common stock with respect to the payment of dividends. If we were to issue additional EISs, common stock, other equity securities or preferred stock, it would be necessary

29




for us to generate additional cash available to pay dividends in order for us to distribute dividends at the same rate per share as distributed prior to any such additional issuance.

Dividend payments are not mandatory or guaranteed, and holders of our common stock do not have any legal right to receive, or require us to pay, dividends. Our board of directors may, in its sole discretion, amend or repeal our dividend policy with respect to the Class A and Class B common stock at any time. Furthermore, our board of directors may decrease the level of dividends provided for the Class A and Class B common stock below the intended dividend rates, or discontinue entirely the payment of dividends.

Equity Compensation Plans

As of December 30, 2006, we did not have any equity compensation plans.

Recent Sales of Unregistered Securities

We did not issue any unregistered securities in fiscal 2006.

Issuer Purchases of Equity Securities

We did not repurchase any of our securities during fiscal 2006.

Item 6.                        Selected Financial Data.

The following selected historical consolidated financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes to those statements included in this report. The selected historical consolidated financial data as of and for the years ended December 30, 2006 (fiscal 2006), December 31, 2005 (fiscal 2005), January 1, 2005 (fiscal 2004), January 3, 2004 (fiscal 2003) and December 28, 2002 (fiscal 2002) have been derived from our audited consolidated financial statements.

30




 

 

Fiscal Year Ended

 

 

 

December 30,
2006

 

December 31,
2005

 

January 1,
2005

 

January 3,
2004

 

December 28,
2002

 

 

 

(Dollars in thousands, except ratios and per share data)

 

Consolidated Statement of Operations Data(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

411,306

 

 

 

$

379,262

 

 

 

$

372,754

 

 

 

$

328,356

 

 

 

$

293,677

 

 

Cost of goods sold

 

 

297,053

 

 

 

271,929

 

 

 

260,814

 

 

 

226,174

 

 

 

203,707

 

 

Cost of goods sold—restructuring charge

 

 

 

 

 

3,839

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

114,253

 

 

 

103,494

 

 

 

111,940

 

 

 

102,182

 

 

 

89,970

 

 

Sales, marketing and distribution expenses

 

 

45,343

 

 

 

41,522

 

 

 

43,241

 

 

 

39,477

 

 

 

35,852

 

 

General and administrative expenses(2)

 

 

7,688

 

 

 

6,965

 

 

 

4,885

 

 

 

6,313

 

 

 

4,911

 

 

Management fees—related party

 

 

 

 

 

 

 

 

386

 

 

 

500

 

 

 

500

 

 

Transaction related compensation expenses(3)

 

 

 

 

 

 

 

 

9,859

 

 

 

 

 

 

 

 

Gain on sale of property, plant and equipment(4)

 

 

(525

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization expense—customer relationships(5)

 

 

731

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Environmental clean-up expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100

 

 

Operating income

 

 

61,016

 

 

 

55,007

 

 

 

53,569

 

 

 

55,892

 

 

 

48,607

 

 

Derivative gain(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,524

)

 

Interest expense, net(7)

 

 

43,481

 

 

 

41,767

 

 

 

48,148

 

 

 

31,205

 

 

 

26,626

 

 

Income before income tax expense

 

 

17,535

 

 

 

13,240

 

 

 

5,421

 

 

 

24,687

 

 

 

24,505

 

 

Income tax expense

 

 

5,962

 

 

 

5,235

 

 

 

2,126

 

 

 

9,519

 

 

 

9,260

 

 

Net income

 

 

11,573

 

 

 

8,005

 

 

 

3,295

 

 

 

15,168

 

 

 

15,245

 

 

Preferred stock accretion

 

 

 

 

 

 

 

 

11,666

 

 

 

13,336

 

 

 

11,739

 

 

Gain on repurchase of preferred stock

 

 

 

 

 

 

 

 

(17,622

)

 

 

 

 

 

 

 

Net income available to common stockholders

 

 

$

11,573

 

 

 

$

8,005

 

 

 

$

9,251

 

 

 

$

1,832

 

 

 

$

3,506

 

 

Earnings per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic and diluted Class A shares outstanding

 

 

20,000

 

 

 

20,000

 

 

 

4,231

 

 

 

 

 

 

 

 

Weighted average basic Class B shares outstanding

 

 

7,556

 

 

 

7,556

 

 

 

10,739

 

 

 

11,593

 

 

 

11,593

 

 

Weighted average diluted Class B shares outstanding

 

 

7,556

 

 

 

7,556

 

 

 

13,813

 

 

 

15,492

 

 

 

15,492

 

 

Net income (loss) available to common stockholders per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributed basic and diluted earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A common stock

 

 

$

0.85

 

 

 

$

0.85

 

 

 

$

0.88

 

 

 

$

 

 

 

$

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A common stock

 

 

$

0.65

 

 

 

$

0.53

 

 

 

$

1.25

 

 

 

$

 

 

 

$

 

 

Class B common stock

 

 

$

(0.20

)

 

 

$

(0.33

)

 

 

$

0.37

 

 

 

$

0.16

 

 

 

$

0.30

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A common stock

 

 

$

0.65

 

 

 

$

0.53

 

 

 

$

1.19

 

 

 

$

 

 

 

$

 

 

Class B common stock

 

 

$

(0.20

)

 

 

$

(0.33

)

 

 

$

0.31

 

 

 

$

0.12

 

 

 

$

0.23

 

 

Other Financial Data(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

$

32,771

 

 

 

$

22,523

 

 

 

$

19,302

 

 

 

$

27,431

 

 

 

$

26,417

 

 

Capital expenditures

 

 

(7,306

)

 

 

(6,659

)

 

 

(6,598

)

 

 

(6,442

)

 

 

(6,283

)

 

Payments for acquisition of businesses

 

 

(30,102

)

 

 

(2,513

)

 

 

 

 

 

(118,179

)

 

 

 

 

Net proceeds from sale of property, plant and equipment

 

 

1,275

 

 

 

 

 

 

52

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

7,621

 

 

 

(16,448

)

 

 

7,628

 

 

 

89,470

 

 

 

(19,351

)

 

EBITDA(8)

 

 

$

69,000

 

 

 

$

61,919

 

 

 

$

60,292

 

 

 

$

61,906

 

 

 

$

56,431

 

 

Ratio of earnings to fixed charges(9)

 

 

1.4x

 

 

 

1.3x

 

 

 

1.1x

 

 

 

1.8x

 

 

 

1.9x

 

 

Senior debt / EBITDA(10)

 

 

3.8x

 

 

 

3.9x

 

 

 

4.0x

 

 

 

2.4x

 

 

 

l.0x

 

 

Total debt / EBITDA

 

 

6.2x

 

 

 

6.6x

 

 

 

6.7x

 

 

 

6.0x

 

 

 

4.9x

 

 

EBITDA / cash interest expense(11)

 

 

1.7x

 

 

 

1.6x

 

 

 

1.9x

 

 

 

2.3x

 

 

 

2.4x

 

 

Consolidated Balance Sheet Data(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

29,626

 

 

 

$

25,429

 

 

 

$

28,525

 

 

 

$

8,092

 

 

 

$

15,866

 

 

Net working capital(12)

 

 

73,415

 

 

 

78,407

 

 

 

73,259

 

 

 

59,245

 

 

 

54,100

 

 

Total assets

 

 

616,205

 

 

 

594,175

 

 

 

595,952

 

 

 

549,939

 

 

 

430,673

 

 

Total debt

 

 

430,800

 

 

 

405,800

 

 

 

405,800

 

 

 

368,796

 

 

 

273,796

 

 

Mandatorily redeemable preferred stock

 

 

 

 

 

 

 

 

 

 

 

43,188

 

 

 

37,714

 

 

Total stockholders’ equity(13)(14)

 

 

$

75,487

 

 

 

$

83,274

 

 

 

$

92,261

 

 

 

$

49,991

 

 

 

$

40,351

 

 


(1)             The purchase method of accounting was used to account for our initial acquisition of the Ortega business on August 21, 2003, our acquisition of the Ortega food service dispensing pouch and dipping cup business on December 1, 2005 and our acquisition of the Grandma’s molasses business on January 10, 2006.

31




(2)             General and administrative expenses include a bad debt expense incurred for fiscal 2003 of $0.6 million ($0.4 million, net of taxes) relating to Fleming Companies, Inc., which filed for Chapter 11 Bankruptcy on April 1, 2003.

(3)             Transaction related compensation expenses in fiscal 2004, which were incurred in connection with our initial public offering and related transactions, include $6.0 million of transaction bonuses and $3.9 million for the repurchase of employee stock options.

(4)             The gain on sale of property, plant and equipment of $0.5 million relates to the sale of our New Iberia, Louisiana, manufacturing facility on July 9, 2006.

(5)             Amortization expense of customer relationships are amortized over their useful lives of 20 years and includes the amortization expense relating to the amortization of customer relationship intangibles acquired in the Grandma’s molasses acquisition, which was $0.7 million for fiscal 2006. We had no customer relationship intangibles in fiscal 2005, 2004, 2003 or 2002.

(6)             Derivative gain reflects the change in fair value of our interest rate swap agreement from the date we entered into the agreement to the date the swap agreement was terminated.

(7)             Fiscal 2004 net interest expense includes $13.9 million of costs relating to the early extinguishment of debt incurred in connection with our initial public offering, the concurrent offerings and the related transactions. Included in these costs are: $8.4 million for the write-off of deferred financing costs, $4.9 million for bond tender costs and $0.6 million for the payment of bond discount.

(8)             We define EBITDA as net income before net interest expense, income taxes, depreciation and amortization. We define adjusted EBITDA as EBITDA as adjusted for transaction related compensation expenses incurred in fiscal 2004 in connection with our initial public offering, the concurrent offerings and the related transactions and restructuring charges incurred in fiscal 2005. We believe that the most directly comparable GAAP financial measure to EBITDA and adjusted EBITDA is net cash provided by operating activities. We present EBITDA and adjusted EBITDA because we believe they are useful indicators of our historical debt capacity and ability to service debt. We also present this discussion of EBITDA and adjusted EBITDA because covenants in our credit facility and the indentures governing the senior notes and the senior subordinated notes contain ratios based on these measures. EBITDA and adjusted EBITDA are not substitutes for operating income or net income, as determined in accordance with generally accepted accounting principles. EBITDA and adjusted EBITDA are not complete net cash flow measures because EBITDA and adjusted EBITDA are measures of liquidity that do not include reductions for cash payments for an entity’s obligation to service its debt, fund its working capital, capital expenditures and acquisitions and pay its income taxes and dividends, and in the case of adjusted EBITDA, cash used to pay transaction related bonuses and repurchase of employee stock options and restructuring charges. Rather, EBITDA and adjusted EBITDA are two potential indicators of an entity’s ability to fund these cash requirements. EBITDA and adjusted EBITDA also are not complete measures of an entity’s profitability because they do not include costs and expenses for depreciation and amortization, interest and related expenses and income taxes, and in the case of adjusted EBITDA, the cost of transaction related bonuses and repurchase of employee stock options and the cost to restructure operations. EBITDA and adjusted EBITDA, as we define them, may differ from similarly named measures used by other entities. Set forth below is a reconciliation of net income to EBITDA and

32




adjusted EBITDA and a reconciliation of EBITDA and adjusted EBITDA to net cash provided by operating activities for fiscal 2006, 2005, 2004, 2003 and 2002.

 

 

Fiscal Year Ended

 

 

 

December 30,
2006

 

December 31,
2005

 

January 1,
2005

 

January 3,
2004

 

December 28,
2002

 

 

 

(Dollars in thousands)

 

Net income

 

 

$

11,573

 

 

 

$

8,005

 

 

 

$

3,295

 

 

 

$

15,168

 

 

 

$

15,245

 

 

Income tax expense

 

 

5,962

 

 

 

5,235

 

 

 

2,126

 

 

 

9,519

 

 

 

9,260

 

 

Interest expense, net(A)

 

 

43,481

 

 

 

41,767

 

 

 

48,148

 

 

 

31,205

 

 

 

26,626

 

 

Depreciation and amortization

 

 

7,984

 

 

 

6,912

 

 

 

6,723

 

 

 

6,014

 

 

 

5,300

 

 

EBITDA

 

 

69,000

 

 

 

61,919

 

 

 

60,292

 

 

 

61,906

 

 

 

56,431

 

 

Transaction related compensation expenses(B)

 

 

 

 

 

 

 

 

9,859

 

 

 

 

 

 

 

 

Cost of goods sold—restructuring charge(C)

 

 

 

 

 

3,839

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

69,000

 

 

 

65,758

 

 

 

70,151

 

 

 

61,906

 

 

 

56,431

 

 

Income tax expense

 

 

(5,962

)

 

 

(5,235

)

 

 

(2,126

)

 

 

(9,519

)

 

 

(9,260

)

 

Interest expense, net(A)

 

 

(43,481

)

 

 

(41,767

)

 

 

(48,148

)

 

 

(31,205

)

 

 

(26,626

)

 

Transaction related compensation expenses(B)

 

 

 

 

 

 

 

 

(9,859

)

 

 

 

 

 

 

 

Deferred income taxes

 

 

6,165

 

 

 

4,795

 

 

 

7,462

 

 

 

4,382

 

 

 

5,532

 

 

Amortization of deferred financing and bond discount

 

 

2,830

 

 

 

2,791

 

 

 

2,532

 

 

 

2,839

 

 

 

2,686

 

 

Write-off of pre-existing deferred debt issuance costs

 

 

 

 

 

 

 

 

 

 

 

1,831

 

 

 

 

 

Costs relating to the early extinguishment of debt(A)

 

 

 

 

 

 

 

 

13,906

 

 

 

 

 

 

 

 

Gain on sale of property, plant and equipment(C)

 

 

(525

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring charge—cash portion(C)

 

 

 

 

 

(769

)

 

 

 

 

 

 

 

 

 

 

Changes in assets and liabilities, net of effects of business combination

 

 

4,744

 

 

 

(3,050

)

 

 

(14,616

)

 

 

(2,803

)

 

 

(2,346

)

 

Net cash provided by operating activities

 

 

$

32,771

 

 

 

$

22,523

 

 

 

$

19,302

 

 

 

$

27,431

 

 

 

$

26,417

 

 

 

(A)        Net interest expense in fiscal 2004 includes $13.9 million of costs relating to the early extinguishment of debt incurred in connection with our initial public offering, the concurrent offerings and the related transactions. Included in these costs are: $8.4 million for the write-off of deferred financing costs, $4.9 million for bond tender costs and $0.6 million for the payment of bond discount.

(B)        Transaction related compensation expenses, which were incurred in connection with our initial public offering, the concurrent offerings and the related transactions, include $6.0 million for transaction bonuses and $3.9 million for our repurchase of employee stock options.

(C)        On July 1, 2005, we closed our New Iberia, Louisiana, manufacturing facility as part of our ongoing efforts to improve our production capacity utilization, productivity, and operating efficiencies and lower our overall costs. In fiscal 2005, we recorded a charge of $3.8 million. The charge associated with the plant closing included a cash charge for employee compensation and other costs of $0.8 million and a non-cash charge for the impairment of property, plant, equipment and inventory of $3.0 million. The sale of our New Iberia facility closed on July 9, 2006. We received net proceeds of $1.3 million and recorded a gain on the sale of $0.5 million.

(9)             We have calculated the ratio of earnings to fixed charges by dividing earnings by fixed charges. For the purpose of this computation, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of the sum of interest on indebtedness, amortized expenses related to indebtedness, and an interest component of lease rental expense.

33




(10)    Senior debt, as defined in the indenture governing our senior subordinated notes, is equal to all of our outstanding debt excluding our senior subordinated notes.

 

 

Fiscal Year Ended

 

 

 

December 30,
2006

 

December 31,
2005

 

January 1,
2005

 

January 3,
2004

 

December 28,
2002

 

 

 

(Dollars in thousands, except ratios)

 

Senior secured credit facility:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility

 

 

$

 

 

 

$

 

 

 

$

 

 

 

$

 

 

 

$

 

 

Term loan

 

 

25,000

 

 

 

 

 

 

 

 

 

149,625

 

 

 

54,856

 

 

Senior notes

 

 

240,000

 

 

 

240,000

 

 

 

240,000

 

 

 

 

 

 

 

 

Obligations under capital leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior debt

 

 

$

265,000

 

 

 

$

240,000

 

 

 

$

240,000

 

 

 

$

149,625

 

 

 

$

54,856

 

 

EBITDA

 

 

$

69,000

 

 

 

$

61,919

 

 

 

$

60,292

 

 

 

$

61,906

 

 

 

$

56,431

 

 

Senior debt / EBITDA

 

 

3.8x

 

 

 

3.9x

 

 

 

4.0x

 

 

 

2.4x

 

 

 

1.0x

 

 

Adjusted EBITDA

 

 

$

69,000

 

 

 

$

65,758

 

 

 

$

70,151

 

 

 

$

61,906

 

 

 

$

56,431

 

 

Senior debt / adjusted EBITDA

 

 

3.8x

 

 

 

3.6x

 

 

 

3.4x

 

 

 

2.4x

 

 

 

1.0x

 

 

 

    (11) Cash interest expense, calculated below, is equal to net interest expense less amortization of deferred financing and bond discount and early extinguishment of debt costs.

 

 

Fiscal Year Ended

 

 

 

December 30,
2006

 

December 31,
2005

 

January 1,
2005

 

January 3
2004

 

December 28,
2002

 

 

 

(Dollars in thousands, except ratios)

 

Interest expense, net

 

 

$

43,481

 

 

 

$

41,767

 

 

 

$

48,148

 

 

 

$

31,205

 

 

 

$

26,626

 

 

Amortization of deferred financing and bond discount

 

 

(2,830

)

 

 

(2,791

)

 

 

(2,532

)

 

 

(2,839

)

 

 

(2,686

)

 

Early extinguishments of debt costs including: write-off of deferred financing costs, bond tender costs and bond discount

 

 

 

 

 

 

 

 

(13,906

)

 

 

(1,831

)

 

 

 

 

Cash interest expense

 

 

$

40,651

 

 

 

$

38,976

 

 

 

$

31,710

 

 

 

$

26,535

 

 

 

$

23,940

 

 

EBITDA

 

 

$

69,000

 

 

 

$

61,919

 

 

 

$

60,292

 

 

 

$

61,906

 

 

 

$

56,431

 

 

EBITDA / cash interest expense

 

 

1.7x

 

 

 

1.6x

 

 

 

1.9x

 

 

 

2.3x

 

 

 

2.4x

 

 

Adjusted EBITDA

 

 

$

69,000

 

 

 

$

65,758

 

 

 

$

70,151

 

 

 

$

61,906

 

 

 

$

56,431

 

 

Adjusted EBITDA / cash interest expense

 

 

1.7x

 

 

 

1.7x

 

 

 

2.2x

 

 

 

2.3x

 

 

 

2.4x

 

 

 

    (12) Net working capital is current assets excluding cash and cash equivalents minus current liabilities.

    (13) We adopted SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132R” (SFAS No. 158) effective December 30, 2006. For fiscal 2006, the adoption of SFAS No. 158 resulted in the recognition of an incremental $2.6 million of additional pension obligations, an increase in deferred tax assets of $1.0 million and a decrease to stockholders’ equity of $1.6 million, with no impact to our statements of operations or cash flows. See “Recent Accounting Pronouncements” in Item 7 below.

    (14) We adopted SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB No. 108) effective January 1, 2006. The adoption of SAB No. 108 allowed a one-time transitional cumulative effect adjustment to beginning retained earnings as of January 1, 2006 for errors that were not previously deemed material, but are material under the guidance in SAB No. 108. In accordance with SAB No. 108, we have adjusted our opening accumulated deficit for fiscal 2006 in the amount of $0.6 million to re-establish certain deferred tax liabilities that were reversed prior to fiscal 2001. See “Recent Accounting Pronouncements” in Item 7 below.

34




Item 7.                        Management’s Discussion and Analysis of Financial Condition and Results of Operation.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under Item 1A, “Risk Factors” and under the heading “Forward-Looking Statements” below and elsewhere in this report. The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report.

General

We manufacture, sell and distribute a diversified portfolio of high quality, shelf-stable, branded food products, many of which have leading regional or national retail market shares. In general, we position our branded products to appeal to the consumer desiring a high quality and reasonably priced branded product.

Our business strategy is to continue to increase sales, profitability and cash available to pay dividends by enhancing our existing portfolio of branded shelf-stable products and by capitalizing on our competitive strengths. We intend to implement our strategy through the following initiatives: profitably growing our established brands, leveraging our unique multiple-channel sales and distribution system, introducing new products, capitalizing on the higher growth Mexican segment of the food industry, designing new products and modifying existing products to address consumer health and wellness concerns such as diabetes, obesity and natural/organic foods, and expanding our brand portfolio through acquisitions.

Since 1996, we have successfully acquired and integrated 17 separate brands into our operations. In February 2007, we acquired the Cream of Wheat and Cream of Rice brands from Kraft Foods. We believe this acquisition will enhance our overall gross margins and be accretive to our cash flows from operations beginning in fiscal 2007. We believe that successful future acquisitions, if any, will enhance our portfolio of existing businesses, further leveraging our existing infrastructure.

We completed the acquisition of The Ortega Brand of Business from Nestlé Prepared Foods Company on August 21, 2003, which we refer to in this report as “Ortega” or the “initial Ortega acquisition.”  We subsequently completed the acquisition of the Ortega food service dispensing pouch and dipping cup cheese sauce businesses from Nestlé USA, Inc. on December 1, 2005, which we refer to in this report as the “Ortega food service dispensing pouch and dipping cup acquisition.”  We completed the acquisition of the Grandma’s molasses business from Motts LLP, a Cadbury Schweppes Americas Beverages Company, on January 10, 2006, which we refer to in this report as the Grandma’s molasses acquisition. We completed the acquisition of the Cream of Wheat and Cream of Rice brands from Kraft Foods Global, Inc., effective February 25, 2007, which we refer to in this report as the “Cream of Wheat acquisition.”  The Ortega acquisitions and the Grandma’s molasses acquisition have been, and the Cream of Wheat acquisition will be, accounted for using the purchase method of accounting and, accordingly, the assets acquired, liabilities assumed and results of operations of the acquired businesses are included in our consolidated financial statements from the respective dates of acquisition. These acquisitions and the application of the purchase method of accounting for these acquisitions affect comparability between periods.

We are subject to a number of challenges that may adversely affect our businesses. These challenges, which are discussed above under Item 1A, “Risk Factors” and below under the heading “Forward-Looking Statements” include:

Fluctuations in Commodity Prices and Production and Distribution Costs:   We purchase raw materials, including agricultural products, meat, poultry, other raw materials and packaging materials from growers, commodity processors, other food companies and packaging manufacturers. Raw materials are subject to fluctuations in price attributable to a number of factors. Fluctuations in commodity prices can lead to retail

35




price volatility and intensive price competition, and can influence consumer and trade buying patterns. In fiscal 2006, our commodity prices for maple syrup and corn sweeteners have been higher than those incurred in fiscal 2005. In addition, the cost of labor, manufacturing, energy, fuel, packaging materials and other costs related to the production and distribution of our food products have risen in recent years, and we believe that certain of these costs may continue to rise in the foreseeable future. We manage these risks by entering into short-term supply contracts and advance commodities purchase agreements from time to time, and if necessary, by raising prices. We cannot assure you that any sales price increases by us will offset the increased cost of raw material commodities.

Consolidation in the Retail Trade and Consequent Inventory Reductions:   As the retail grocery trade continues to consolidate and our retail customers grow larger and become more sophisticated, our retail customers may demand lower pricing and increased promotional programs. These customers are also reducing their inventories and increasing their emphasis on private label products.

Changing Customer Preferences:   Consumers in the market categories in which we compete frequently change their taste preferences, dietary habits and product packaging preferences.

Consumer Concern Regarding Food Safety, Quality and Health:   The food industry is subject to consumer concerns regarding the safety and quality of certain food products, including the health implications of genetically modified organisms and obesity.

Changing Valuations of the Canadian Dollar in Relation to the U.S. Dollar:   We purchase the majority of our maple syrup requirements from manufacturers located in Quebec, Canada. Over the past year the U.S. dollar has weakened against the Canadian dollar, which has in turn increased our costs relating to the production of our maple syrup products.

To confront these challenges, we continue to take steps to build the value of our brands, to improve our existing portfolio of products with new product and marketing initiatives, to reduce costs through improved productivity and to address consumer concerns about food safety, quality and health.

Critical Accounting Policies; Use of Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires our management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates and assumptions made by management involve trade and consumer promotion expenses, allowances for excess, obsolete and unsaleable inventories, pension benefits, purchase accounting allocations, the recoverability of goodwill, trademarks, customer relationship intangibles, property, plant and equipment, deferred tax assets, and the accounting for our EISs, including their treatment in computing our income tax expense, the accounting for earnings per share and acquisition accounting. Actual results could differ from these estimates and assumptions.

Our significant accounting policies are described more fully in note 2 to our consolidated financial statements included elsewhere in this report. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.

Trade and Consumer Promotion Expenses

We offer various sales incentive programs to customers and consumers, such as price discounts, in-store display incentives, slotting fees and coupons. The recognition of expense for these programs involves the use of judgment related to performance and redemption estimates. Estimates are made based on

36




historical experience and other factors. Actual expenses may differ if the level of redemption rates and performance vary from our estimates.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first in, first out and average cost methods. Inventories have been reduced by an allowance for excess, obsolete and unsaleable inventories. The allowance is an estimate based on our management’s review of inventories on hand compared to estimated future usage and sales.

Long-Lived Assets

Long-lived assets, such as property, plant and equipment, and intangibles with estimated useful lives are depreciated or amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Recoverability of assets held for sale is measured by a comparison of the carrying amount of an asset or asset group to their fair value less estimated cost to sell. Estimating future cash flows and calculating fair value of assets requires significant estimates and assumptions by management.

Goodwill and Trademarks

Goodwill and intangible assets with indefinite useful lives (trademarks) are tested for impairment at least annually and whenever events or circumstances occur indicating that goodwill or indefinite life intangibles might be impaired.

We perform the annual impairment tests as of the last day of each fiscal year. The annual goodwill impairment test involves a two-step process. The first step of the impairment test involves comparing the fair value of our company with our company’s carrying value, including goodwill. If the carrying value of our company exceeds our fair value, we perform the second step of the impairment test to determine the amount of the impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of goodwill with the carrying value of that goodwill and recognizing a loss for the difference. Calculating our fair value requires significant estimates and assumptions by management. We estimate our fair value by applying third party market value indicators to our EBITDA. We test indefinite life intangible assets for impairment by comparing their carrying value to their fair value that is determined using a cash flow method and recognize a loss to the extent the carrying value is greater.

We completed our annual impairment tests for the years ended December 30, 2006, December 31, 2005 and January 1, 2005 with no adjustments to the carrying values of goodwill and indefinite life intangibles. We did not note any events or circumstances during fiscal 2006, 2005 or 2004 that would indicate that goodwill or indefinite life intangibles might be impaired.

Accounting Treatment for EISs.

Our EISs include Class A common stock and senior subordinated notes. Upon completion of our initial public offering (including the exercise of the over-allotment option), we allocated the proceeds from the issuance of the EISs, based upon relative fair value at the issuance date, to the Class A common stock and the senior subordinated notes. We have assumed that the price paid in the EIS offering was equivalent to the combined fair value of the Class A common stock and the senior subordinated notes, and the price paid in the offering for the senior subordinated notes sold separately (not in the form of EISs) was

37




equivalent to their initial stated principal amount. We have concluded there are no embedded derivative features related to the EIS that require bifurcation under Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS No. 133). We have determined the fair value of the Class A common stock and the senior subordinated notes with reference to a number of factors, including the sale of the senior subordinated notes sold separately from the EISs that have the same terms as the senior subordinated notes included in the EISs. Therefore, we have allocated the entire proceeds of the EIS offering to the Class A common stock and the senior subordinated notes, and the allocation of the EIS proceeds to the senior subordinated notes did not result in a premium or discount.

We have concluded that the call option and the change in control put option in the senior subordinated notes do not warrant separate accounting under SFAS No. 133 because they are clearly and closely related to the economic characteristics of the host debt instrument. Therefore, we have allocated the entire proceeds of the offering to the Class A common stock and the senior subordinated notes. Upon subsequent issuances, if any, of senior subordinated notes, we will evaluate whether the call option and the change in control put option in the senior subordinated notes require separate accounting under SFAS No. 133. We expect that if there is a substantial discount or premium upon a subsequent issuance of senior subordinated notes, we may need to separately account for the call option and the change in control put option features as embedded derivatives for such subsequent issuance. If we determine that the embedded derivatives, if any, require separate accounting from the debt host contract under SFAS No. 133, the call option and the change in control put option associated with the senior subordinated notes will be recorded as derivative liabilities at fair value, with changes in fair value recorded as other non-operating income or expense. Any discount on the senior subordinated notes resulting from the allocation of proceeds to an embedded derivative will be amortized to interest expense over the remaining life of the senior subordinated notes.

The Class A common stock portion of each EIS is included in stockholders’ equity, net of the related portion of the EIS transaction costs allocated to Class A common stock. Dividends paid on the Class A common stock are recorded as a decrease to additional paid-in capital when declared by us. The senior subordinated note portion of each EIS is included in long-term debt, and the related portion of the EIS transaction costs allocated to the senior subordinated notes was capitalized as deferred financing costs and is being amortized to interest expense using the effective interest method. Interest on the senior subordinated notes is charged to expense as accrued by us and deducted for income tax purposes.

Income Tax Expense Estimates and Policies

As part of the income tax provision process of preparing our consolidated financial statements, we are required to estimate our income taxes. This process involves estimating our current tax expenses together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe the recovery is not likely, we establish a valuation allowance. Further, to the extent that we establish a valuation allowance or increase this allowance in a financial accounting period, we include such charge in our tax provision, or reduce our tax benefits in our consolidated statement of operations. We use our judgment to determine our provision or benefit for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.

There are various factors that may cause these tax assumptions to change in the near term, and we may have to record a valuation allowance against our deferred tax assets. We cannot predict whether future U.S. federal and state income tax laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes to the U.S. federal and state income tax laws and regulations on a regular basis and update the assumptions and estimates used to

38




prepare our consolidated financial statements when new regulations and legislation are enacted. We recognize the benefit of an uncertain tax position that we have taken or expect to take on the income tax returns we file if such tax position is probable of being sustained.

We have accounted for our issuance of EISs as an issuance of the separate securities evidenced by such EISs and have allocated the proceeds received for each EIS between the Class A common stock and senior subordinated note represented thereby in the amounts of their respective fair values at the time of issuance. Accordingly, we have accounted for the senior subordinated notes represented by the EISs as long-term debt bearing a stated interest rate and maturing on October 30, 2016. In connection with the issuance and initial public offering of the EISs, we received an opinion from counsel that the senior subordinated notes should be treated as debt for United States federal income tax purposes. Consistent with the opinion we received from counsel and the results of a recently completed IRS audit of our 2004 tax return, we continue to be of the view that the senior subordinated notes should be treated as debt for United States federal income tax purposes (although we have not sought a ruling from the IRS on this issue), and we intend to deduct annually interest expense of approximately $19.9 million on the senior subordinated notes from taxable income for United States federal and state income tax purposes. There can be no assurance that the classification of senior subordinated notes as debt (or the amount of interest expense deducted) will not be challenged in the future by the IRS or other tax jurisdictions or will be sustained by a court of law if challenged.

It is possible that we will at some point in the future, as a result of IRS interpretations or other changes in circumstances, conclude that we should establish a reserve for tax liabilities associated with a disallowance of all or part of the interest deductions on the senior subordinated notes, although our present view is that no such reserve is necessary or appropriate. If we decide to maintain such a reserve, our income tax provision, and related income tax payable, would be materially impacted. As a result, our ability to pay dividends on the shares of our common stock could be materially impaired and the market price and/or liquidity for the EISs or our common stock could be adversely affected.

Earnings Per Share

We have two classes of common stock, designated as Class A common stock and Class B common stock, and we present basic and diluted earnings per share using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and participation rights in undistributed earnings.

Net income available to our common stockholders is allocated between our two classes of common stock based upon the two-class method. Basic and diluted earnings per share for our Class A and Class B common stock is calculated by dividing allocated net income available to common stockholders by the weighted average number of shares of Class A and Class B common stock outstanding.

Pension Expense

We have defined benefit pension plans covering substantially all of our employees. Our funding policy is to contribute annually the amount recommended by our actuaries. The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. We review pension assumptions regularly and we may from time to time make voluntary contributions to our pension plans, which exceed the amounts required by statute. During fiscal 2006, we made total pension contributions to our pension plans of $1.6 million compared with $2.2 million in fiscal 2005. Changes in interest rates and the market value of the securities held by the plans could materially change, positively or negatively, the underfunded status of the plans and affect the level of pension expense and required contributions in fiscal 2007 and beyond.

39




Our discount rate assumption increased from 5.65% at December 31, 2005 to 5.90% at December 30, 2006 for our pension plans. We presently anticipate that assumption changes, coupled with the amortization of deferred gains and losses will result in a decrease in fiscal 2007 pre-tax pension expense of approximately $0.3 million. While we do not presently anticipate a change in our fiscal 2007 assumptions, as a sensitivity measure, a 0.25% decline or increase in our discount rate would increase or decrease our pension expense by approximately $0.1 million. Similarly, a 0.25% decrease or increase in the expected return on pension plan assets would increase or decrease our pension expense by approximately $0.1 million.

In August 2006, the Pension Protection Act of 2006 was signed into law. The major provisions of the statute will take effect January 1, 2008. Among other things, the statute is designed to ensure timely and adequate funding of qualified pension plans by shortening the time period within which employers must fully fund pension benefits. We are currently evaluating the effect, if any, that the Pension Protection Act of 2006 will have on future pension funding requirements.

The adoption of SFAS No. 158 required us to record an incremental after-tax charge of $1.6 million in accumulated other comprehensive loss related to the unrecognized net actuarial losses and unrecognized prior service costs.

Acquisition Accounting

We account for acquired businesses using the purchase method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Our consolidated financial statements and results of operations reflect an acquired business after the completion of the acquisition. The cost to acquire a business, including transaction costs, is allocated to the underlying net assets of the acquired business in proportion to their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations. Accordingly, for significant items, we typically obtain assistance from third party valuation specialists.

Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.

All of these judgments and estimates can materially impact our results of operations.

40




Results of Operations

The following table sets forth the percentages of net sales represented by selected items reflected in our consolidated statements of operations. The comparisons of financial results are not necessarily indicative of future results:

 

 

Fiscal Year Ended

 

 

 

December 30,
2006

 

December 31,
2005

 

January 1,
2005

 

Statement of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

Cost of goods sold

 

 

72.2

%

 

 

71.7

%

 

 

70.0

%

 

Cost of goods sold—restructuring charge

 

 

0.0

%

 

 

1.0

%

 

 

0.0

%

 

Gross profit

 

 

27.8

%

 

 

27.3

%

 

 

30.0

%

 

Sales, marketing and distribution expenses

 

 

11.0

%

 

 

10.9

%

 

 

11.6

%

 

General and administrative expenses

 

 

1.9

%

 

 

1.8

%

 

 

1.3

%

 

Management fees-related party

 

 

0.0

%

 

 

0.0

%

 

 

0.1

%

 

Transaction related compensation expenses

 

 

0.0

%

 

 

0.0

%

 

 

2.6

%

 

Gain on sale of property, plant and equipment

 

 

(0.1

)%

 

 

0.0

%

 

 

0.0

%

 

Amortization expense—customer relationships

 

 

0.2

%

 

 

0.0

%

 

 

0.0

%

 

Operating income

 

 

14.8

%

 

 

14.5

%

 

 

14.4

%

 

Interest expense, net

 

 

10.6

%

 

 

11.0

%

 

 

12.9

%

 

Income before income tax expense

 

 

4.2

%

 

 

3.5

%

 

 

1.5

%

 

Income tax expense

 

 

1.4

%

 

 

1.4

%

 

 

0.6

%

 

Net income

 

 

2.8

%

 

 

2.1

%

 

 

0.9

%

 

Preferred stock accretion

 

 

0.0

%

 

 

0.0

%

 

 

3.1

%

 

Gain on repurchase of preferred stock

 

 

0.0

%

 

 

0.0

%

 

 

(4.7

)%

 

Net income available to common stockholders

 

 

2.8

%

 

 

2.1

%

 

 

2.5

%

 

 

As used in this section the terms listed below have the following meanings:

Net Sales.   Our net sales represents gross sales of products shipped to customers plus amounts charged customers for shipping and handling, less cash discounts, coupon redemptions, slotting fees and trade promotional spending.

Gross Profit.   Our gross profit is equal to our net sales less cost of goods sold. The primary components of our cost of goods sold are cost of internally manufactured products, purchases of finished goods from co-packers plus freight costs to our distribution centers and to our customers.

Sales, Marketing and Distribution Expenses.   Our sales, marketing and distribution expenses include costs for marketing personnel, consumer advertising programs, internal sales forces, brokerage costs and warehouse facilities.

General and Administrative Expenses.   Our general and administrative expenses include administrative employee compensation and benefit costs, as well as information technology infrastructure and communication costs, office rent and supplies, professional services, management fees and other general corporate expenses.

Gain on Sale of Property, Plant and Equipment.   Gain on sale of property, plant and equipment includes any gain or loss on the sale of property, plant and equipment.

41




Amortization Expense—Customer Relationships.   Amortization expense—customer relationships includes the amortization expense associated with customer relationship intangibles, which are amortized over their useful lives of 20 years.

Net Interest Expense.   Net interest expense includes interest relating to our outstanding indebtedness and amortization of deferred debt issuance costs, net of interest income. For fiscal 2004, net interest expense also includes costs relating to the early extinguishment of debt incurred in connection with our initial public offering, the concurrent offerings and the related transactions. Included in these fiscal 2004 costs are the write-off of deferred financing costs, bond tender costs and the payment of bond discount.

Non-GAAP Financial Measures

Certain disclosures in this report include “non-GAAP (Generally Accepted Accounting Principles) financial measures.”  A non-GAAP financial measure is defined as a numerical measure of our financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in our consolidated balance sheets and related consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and cash flows. We present EBITDA (net income before net interest expense, income taxes, depreciation and amortization) and adjusted EBITDA (EBITDA as adjusted for transaction related compensation expenses incurred in fiscal 2004 in connection with our initial public offering, the concurrent offerings and the related transactions and restructuring charges incurred in fiscal 2005) because we believe they are useful indicators of our historical debt capacity and ability to service debt. We also present this discussion of EBITDA and adjusted EBITDA because covenants in our credit facility and the indentures governing our senior notes and our senior subordinated notes contain ratios based on these measures.

A reconciliation of EBITDA and adjusted EBITDA with the most directly comparable GAAP measure is included below for the fifty-two weeks ended December 30, 2006, December 31, 2005 and January 1, 2005 along with the components of EBITDA and adjusted EBITDA.

Reconciliation of EBITDA and Adjusted EBITDA to Net Cash Provided by Operating Activities.

 

 

Fiscal 2006

 

Fiscal 2005

 

Fiscal 2004

 

 

 

(dollars in thousands)

 

Net income

 

 

$

11,573

 

 

 

$

8,005

 

 

 

$

3,295

 

 

Income tax expense

 

 

5,962

 

 

 

5,235

 

 

 

2,126

 

 

Interest expense, net(1)

 

 

43,481

 

 

 

41,767

 

 

 

48,148

 

 

Depreciation and amortization

 

 

7,984

 

 

 

6,912

 

 

 

6,723

 

 

EBITDA(2)

 

 

69,000

 

 

 

61,919

 

 

 

60,292

 

 

Transaction related compensation expenses(3)

 

 

 

 

 

 

 

 

9,859

 

 

Cost of goods sold—restructuring charge(4)

 

 

 

 

 

3,839

 

 

 

 

 

Adjusted EBITDA(2)

 

 

69,000

 

 

 

65,758

 

 

 

70,151

 

 

Income tax expense

 

 

(5,962

)

 

 

(5,235

)

 

 

(2,126

)

 

Interest expense, net(1)

 

 

(43,481

)

 

 

(41,767

)

 

 

(48,148

)

 

Transaction related compensation expenses(3)

 

 

 

 

 

 

 

 

(9,859

)

 

Deferred income taxes

 

 

6,165

 

 

 

4,795

 

 

 

7,462

 

 

Amortization of deferred financing costs and bond discount

 

 

2,830

 

 

 

2,791

 

 

 

2,532

 

 

Costs relating to the early extinguishment of debt(1)

 

 

 

 

 

 

 

 

13,906

 

 

Gain on sale of property, plant and equipment(4)

 

 

(525

)

 

 

 

 

 

 

 

Restructuring charge—cash portion(3)

 

 

 

 

 

(769

)

 

 

 

 

Changes in assets and liabilities, net of effects of business combinations

 

 

4,744

 

 

 

(3,050

)

 

 

(14,616

)

 

Net cash provided by operating activities

 

 

$

32,771

 

 

 

$

22,523

 

 

 

$

19,302

 

 

 

42





(1)          Net interest expense for the fifty-two week period ended January 1, 2005 includes $13.9 million of costs relating to the early extinguishment of debt incurred in connection with our initial public offering, the concurrent offerings and the related transactions. Included in these costs are:  $8.4 million for the write-off of deferred financing costs, $4.9 million for bond tender costs and $0.6 million for the payment of bond discount.

(2)          We define EBITDA as net income before net interest expense, income taxes, depreciation and amortization. We define adjusted EBITDA as EBITDA as adjusted for transaction related compensation expenses incurred in fiscal 2004 in connection with our initial public offering, the concurrent offerings and the related transactions and restructuring charges incurred in fiscal 2005. We believe that the most directly comparable GAAP financial measure to EBITDA and adjusted EBITDA is net cash provided by operating activities. We present EBITDA and adjusted EBITDA because we believe they are useful indicators of our historical debt capacity and ability to service debt. We also present this discussion of EBITDA and adjusted EBITDA because covenants in our credit facility and the indentures governing the senior notes and the senior subordinated notes contain ratios based on these measures. EBITDA and adjusted EBITDA are not substitutes for operating income or net income, as determined in accordance with generally accepted accounting principles. EBITDA and adjusted EBITDA are not complete net cash flow measures because EBITDA and adjusted EBITDA are measures of liquidity that do not include reductions for cash payments for an entity’s obligation to service its debt, fund its working capital, capital expenditures and acquisitions, if any, and pay its income taxes and dividends, if any, and in the case of adjusted EBITDA, cash used to pay transaction related bonuses, repurchase employee stock options and restructure operations. Rather, EBITDA and adjusted EBITDA are two potential indicators of an entity’s ability to fund these cash requirements. EBITDA and adjusted EBITDA also are not complete measures of an entity’s profitability because they do not include costs and expenses for depreciation and amortization, interest and related expenses and income taxes and in the case of adjusted EBITDA, the cost of transaction related bonuses and repurchase of employee stock options and the cost to restructure operations. EBITDA and adjusted EBITDA, as we define them, may differ from similarly named measures used by other entities.

(3)          Transaction related compensation expenses for the fifty-two week period ended January 1, 2005, which were incurred in connection with our initial public offering, the concurrent offerings and the related transactions, include: $6.0 million for transaction bonuses and $3.9 million for our repurchase of employee stock options.

(4)          On July 1, 2005, we closed our New Iberia, Louisiana, manufacturing facility as part of our ongoing efforts to improve our production capacity utilization, productivity, and operating efficiencies and lower our overall costs. In the fifty-two weeks ended December 31, 2005, we recorded a charge of $3.8 million. The charge associated with the plant closing included a cash charge for employee compensation and other costs of $0.8 million and a non-cash charge for the impairment of property, plant, equipment and inventory of $3.0 million. We sold the New Iberia, Louisiana, manufacturing facility on July 9, 2006 and recognized a gain of $0.5 million on the sale.

Fiscal Year Ended December 30, 2006 Compared to Fiscal Year Ended December 31, 2005

Net Sales.   Net sales increased $32.0 million or 8.4% to $411.3 million for the fifty-two week period ended December 30, 2006 (fiscal 2006) from $379.3 million for the fifty-two week period ended December 31, 2005 (fiscal 2005). The Ortega food service dispensing pouch and dipping cup acquisition accounted for $10.4 million of the net sales increase, the Grandma’s molasses acquisition accounted for $9.8 million of the net sales increase and a temporary co-packing arrangement accounted for $3.0 million of the net sales increase. The remaining $8.8 million increase in net sales was related to increases in sales

43




price and unit volume. Net sales of our lines of Ortega (exclusive of food service dispensing pouch and dipping cup net sales), Maple Grove Farms, B&M, Las Palmas and Ac’cent products increased in the amounts of $6.0 million, $3.9 million, $1.3 million, $0.7 million and $0.4 million, or 7.8%, 7.1%, 5.9%, 3.1% and 2.6%, respectively. These increases were offset by a reduction in net sales of Emeril’s and B&G pickle and pepper products of $2.4 million, and $1.2 million or 10.1% and 2.8%, respectively. All other brands increased in the aggregate by $0.1 million or 0.1%.

Gross Profit.   Gross profit increased $10.8 million or 10.4% to $114.3 million in fiscal 2006 from $103.5 million in fiscal 2005. On July 1, 2005, we closed our New Iberia, Louisiana, manufacturing facility as part of our ongoing efforts to improve our production capacity utilization, productivity, and operating efficiencies and lower our overall costs. In fiscal 2005, we recorded a charge of $3.8 million. The charge associated with the plant closing included a cash charge for employee compensation and other costs of $0.8 million and a non-cash charge for the impairment of property, plant, equipment and inventory of $3.0 million. No restructuring charges were recorded or expensed during