Tableof Contents

 

**As filed with the Securities and Exchange Commission on October 30,2008**

 

 

**** ****

****UNITED STATESSECURITIES AND EXCHANGE COMMISSION****

****Washington, D.C.  20549****

**** ****

****FORM 10-Q****

 
| **(Mark one)**

**x** | **Quarterly  Report Pursuant to Section 13 or 15(d)**

**of  the Securities Exchange Act of 1934** |   |
|-----------------------|---------------------------------------------------------------------------------------------------------|--------|

 

**For thequarterly period ended September 27, 2008**

 

**or**

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

 

**For thetransition period from                  to                  .**

 

**Commissionfile number 001-32316**

 

****B&G FOODS, INC.****

(Exact name ofRegistrant as specified in its charter)

 

| **Delaware** (State or other jurisdiction of  incorporation or organization)                           | ** ** | **13-3918742** (I.R.S. Employer Identification No.) |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|
| ** **                                                                                             | ** ** | ** **                                          |
| **4 Gatehall Drive, Suite 110, Parsippany, New  Jersey**(Address of  principal executive offices) | ** ** | **07054** (Zip Code)                                |

 

Registrant’stelephone number, including area code:  ****(973) 401-6500****

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.  Yes x Noo

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer or a smaller reporting company. See the definitionsof “large accelerated filer,” “accelerated filer,” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer o | Accelerated  filer x | Non-accelerated  filer o                       | Smaller  reporting company o |
|---------------------------|---------------------------|------------------------------------------------|-----------------------------------|
|                      |                      | (Do  not check if a smaller reporting company) |                              |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes oNo x

 

As of September 27, 2008, the registrant had36,796,988 shares of Class A common stock, par value $0.01 per share,issued and outstanding, 17,077,331 of which were held in the form of EnhancedIncome Securities (EISs) and 19,719,657 of which were held separate fromEISs.  Each EIS represents one share of Class Acommon stock and $7.15 principal amount of 12% senior subordinated notes due2016.  As of September 27, 2008, theregistrant had no shares of Class B common stock, par value $0.01 pershare, issued or outstanding.

 

 

 

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Table of Contents

 

B&GFoods, Inc. and Subsidiaries

Index

 
| ** **                             | **Page No.** |
|----------------------------------------|-------------------|
| ** **                             | ** **        |
| **PART I  FINANCIAL INFORMATION** | 1                 |
| ** **                             | ** **        |
|                                   | Item  1.          | Financial  Statements (Unaudited) | 1 |
|                                   |              |   |   |
|                                   |              | Consolidated  Balance Sheets | 1 |
|                                   |              |   |   |
|                                   |              | Consolidated  Statements of Operations | 2 |
|                                   |              |   |   |
|                                   |              | Consolidated  Statements of Cash Flows | 3 |
|                                   |              |   |   |
|                                   |              | Notes to Consolidated Financial Statements | 4 |
|                                   |              |   |   |
|                                   | Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 19 |
|                                   |              |   |   |
|                                   | Item 3.           | Quantitative  and Qualitative Disclosures About Market Risk | 37 |
|                                   |              |   |   |
|                                   | Item 4.           | Controls and  Procedures | 38 |
|                                   |              |   |   |
| **PART II  OTHER INFORMATION**    | 40                |
| ** **                             | ** **        |
|                                   | Item 1.           | Legal Proceedings | 40 |
|                                   |              |   |   |
|                                   | Item  1A.         |  Risk Factors | 40 |
|                                   |              |   |   |
|                                   | Item 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds | 40 |
|                                   |              |   |   |
|                                   | Item 3.           | Defaults  Upon Senior Securities | 40 |
|                                   |              |   |   |
|                                   | Item 4.           | Submission  of Matters to a Vote of Security Holders | 40 |
|                                   |              |   |   |
|                                   | Item 5.           | Other Information | 40 |
|                                   |              |   |   |
|                                   | Item  6.          | Exhibits | 40 |
|                                   |              |   |   |
| SIGNATURE                              | 41                |

 

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**Table of Contents**

** **

**PART IFINANCIAL INFORMATION**

** **

**Item 1. Financial Statements (Unaudited)**

** **

**B&G Foods, Inc. and Subsidiaries**

**Consolidated Balance Sheets**

**(Dollars in thousands, except per share data)**

**(Unaudited)**

** **
| ** **                                                                                                                                                                                               | ** ** | **September 27, 2008** | ** ** | **December 29, 2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **Assets**                                                                                                                                                                                               |       |                             |       |                            |       |
| Current assets:                                                                                                                                                                                          |       |                             |       |                            |       |
| Cash and cash equivalents                                                                                                                                                                                |       | $                                | 31,899     |                            | $          | 36,606 |   |
| Trade accounts receivable, net                                                                                                                                                                           |       | 38,414                           |       | 42,362                          |       |
| Inventories                                                                                                                                                                                              |       | 95,688                           |       | 93,181                          |       |
| Prepaid expenses                                                                                                                                                                                         |       | 3,174                            |       | 3,556                           |       |
| Income tax receivable                                                                                                                                                                                    |       | 597                              |       | 569                             |       |
| Deferred income taxes                                                                                                                                                                                    |       | 648                              |       | 648                             |       |
| Total current assets                                                                                                                                                                                     |       | 170,420                          |       | 176,922                         |       |
|                                                                                                                                                                                                     |       |                             |       |                            |       |
| Property, plant and equipment, net of  accumulated depreciation of $62,201 and $55,679                                                                                                                   |       | 52,878                           |       | 49,658                          |       |
| Goodwill                                                                                                                                                                                                 |       | 253,353                          |       | 253,353                         |       |
| Trademarks                                                                                                                                                                                               |       | 227,220                          |       | 227,220                         |       |
| Customer relationship intangibles, net                                                                                                                                                                   |       | 117,930                          |       | 122,768                         |       |
| Net deferred debt issuance costs and other  assets                                                                                                                                                       |       | 15,102                           |       | 17,669                          |       |
| Total assets                                                                                                                                                                                             |       | $                                | 836,903    |                            | $          | 847,590 |   |
|                                                                                                                                                                                                     |       |                             |       |                            |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                           |       |                             |       |                            |       |
|                                                                                                                                                                                                     |       |                             |       |                            |       |
| Current liabilities:                                                                                                                                                                                     |       |                             |       |                            |       |
| Trade accounts payable                                                                                                                                                                                   |       | $                                | 30,045     |                            | $          | 32,126 |   |
| Accrued expenses                                                                                                                                                                                         |       | 20,314                           |       | 21,894                          |       |
| Dividends payable                                                                                                                                                                                        |       | 7,801                            |       | 7,797                           |       |
| Total current liabilities                                                                                                                                                                                |       | 58,160                           |       | 61,817                          |       |
|                                                                                                                                                                                                     |       |                             |       |                            |       |
| Long-term debt                                                                                                                                                                                           |       | 535,800                          |       | 535,800                         |       |
| Other liabilities                                                                                                                                                                                        |       | 6,872                            |       | 6,376                           |       |
| Deferred income taxes                                                                                                                                                                                    |       | 74,463                           |       | 68,962                          |       |
| Total liabilities                                                                                                                                                                                        |       | 675,295                          |       | 672,955                         |       |
|                                                                                                                                                                                                     |       |                             |       |                            |       |
| Stockholders’ equity:                                                                                                                                                                               |       |                             |       |                            |       |
| Preferred stock, $0.01 par value per share.  Authorized 1,000,000 shares; no shares issued or outstanding                                                                                                |       | —                           |       | —                          |       |
| Class A common stock, $0.01 par value  per share. Authorized 100,000,000 shares; 36,796,988 and 36,778,988 shares  issued and outstanding as of September 27, 2008 and December 29,  2007 |       | 368                              |       | 368                             |       |
| Class B common stock, $0.01 par value  per share. Authorized 25,000,000 shares; no shares issued or outstanding                                                                                     |       | —                           |       | —                          |       |
| Additional paid-in capital                                                                                                                                                                               |       | 179,308                          |       | 202,197                         |       |
| Accumulated other comprehensive loss                                                                                                                                                                     |       | (4,685                           | )          | (3,718                          | )          |
| Accumulated deficit                                                                                                                                                                                      |       | (13,383                          | )          | (24,212                         | )          |
| Total stockholders’ equity                                                                                                                                                                          |       | 161,608                          |       | 174,635                         |       |
| Total liabilities and stockholders’ equity                                                                                                                                                          |       | $                                | 836,903    |                            | $          | 847,590 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

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**B&G Foods, Inc. and Subsidiaries**

**Consolidated Statements of Operations**

**(Dollars in thousands, except per share data)**

**(Unaudited)**

** **
| ** **                                         | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **September 27,  2008**       | ** ** | **September 29,  2007**          | ** ** | **September 27,**

**2008** | ** ** | **September 29,  2007** | ** ** |
|                                               |       |                               |       |                                  |       |   |   |   |   |
| Net sales                                          |       | $                                  | 116,515    |                                  | $          | 117,003 |   | $ | 352,041 |   | $ | 338,952 |   |
| Cost of goods sold                                 |       | 85,778                             |       | 78,725                                |       | 252,816 |   | 230,668 |   |
| Gross profit                                       |       | 30,737                             |       | 38,278                                |       | 99,225 |   | 108,284 |   |
|                                               |       |                               |       |                                  |       |   |   |   |   |
| Operating expenses:                                |       |                               |       |                                  |       |   |   |   |   |
| Sales, marketing and distribution expenses         |       | 10,813                             |       | 13,114                                |       | 34,563 |   | 37,184 |   |
| General and administrative expenses                |       | 2,067                              |       | 3,374                                 |       | 5,307 |   | 6,802 |   |
| Amortization expense—customer relationships   |       | 1,613                              |       | 1,612                                 |       | 4,838 |   | 3,888 |   |
| Operating income                                   |       | 16,244                             |       | 20,178                                |       | 54,517 |   | 60,410 |   |
|                                               |       |                               |       |                                  |       |   |   |   |   |
| Other expenses:                                    |       |                               |       |                                  |       |   |   |   |   |
| Interest expense, net                              |       | 11,562                             |       | 12,374                                |       | 37,041 |   | 40,028 |   |
| Income before income tax expense                   |       | 4,682                              |       | 7,804                                 |       | 17,476 |   | 20,382 |   |
| Income tax expense                                 |       | 1,792                              |       | 2,958                                 |       | 6,647 |   | 7,725 |   |
| Net income                                         |       | $                                  | 2,890      |                                  | $          | 4,846 |   | $ | 10,829 |   | $ | 12,657 |   |
|                                               |       |                               |       |                                  |       |   |   |   |   |
| Earnings per share calculations:                   |       |                               |       |                                  |       |   |   |   |   |
| Basic and diluted distributed earnings per  share: |       |                               |       |                                  |       |   |   |   |   |
| Class A common stock                          |       | $                                  | 0.21       |                                  | $          | 0.21 |   | $ | 0.64 |   | $ | 0.72 |   |
| Basic and diluted earnings (loss) per  share:      |       |                               |       |                                  |       |   |   |   |   |
| Class A common stock                          |       | $                                  | 0.08       |                                  | $          | 0.13 |   | $ | 0.29 |   | $ | 0.49 |   |
| Class B common stock                          |       | $                                  | —     |                                  | $          | — |   | $ | — |   | $ | (0.23 | ) |

 

See Notes to ConsolidatedFinancial Statements.

 

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**B&GFoods, Inc. and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

**(Dollars in thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **September 27,  2008**          | ** ** | **September 29,  2007** | ** ** |
| ** **                                                                         | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Cash flows from operating activities:**                                          |       |                                  |       |   |   |
| Net income                                                                         |       | $                                     | 10,829     |   | $ | 12,657 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                  |       |   |   |
| Depreciation and amortization                                                      |       | 11,420                                |       | 9,706 |   |
| Amortization of deferred debt issuance  costs                                      |       | 2,376                                 |       | 2,397 |   |
| Deferred income taxes                                                              |       | 6,087                                 |       | 6,944 |   |
| Write off of deferred debt issuance costs                                          |       | —                                |       | 1,769 |   |
| Unrealized gain on interest rate swap                                              |       | (1,514                                | )          | — |   |
| Stock-based compensation expense                                                   |       | 510                                   |       | — |   |
| Other                                                                              |       | 76                                    |       | — |   |
| Changes in assets and liabilities, net of  effects of business acquired:           |       |                                  |       |   |   |
| Trade accounts receivable                                                          |       | 3,948                                 |       | (6,659 | ) |
| Inventories                                                                        |       | (2,507                                | )          | (15,660 | ) |
| Prepaid expenses                                                                   |       | 382                                   |       | (17 | ) |
| Income tax receivable                                                              |       | (28                                   | )          | (654 | ) |
| Other assets                                                                       |       | 191                                   |       | (12 | ) |
| Trade accounts payable                                                             |       | (2,081                                | )          | 3,627 |   |
| Accrued expenses                                                                   |       | (1,550                                | )          | 7,881 |   |
| Other liabilities                                                                  |       | 387                                   |       | (779 | ) |
| Net cash provided by operating activities                                          |       | 28,526                                |       | 21,200 |   |
|                                                                               |       |                                  |       |   |   |
| **Cash flows from investing activities:**                                          |       |                                  |       |   |   |
| Capital expenditures                                                               |       | (9,832                                | )          | (10,914 | ) |
| Payments for acquisition of businesses                                             |       | —                                |       | (200,850 | ) |
| Net cash used in investing activities                                              |       | (9,832                                | )          | (211,764 | ) |
|                                                                               |       |                                  |       |   |   |
| **Cash flows from financing activities:**                                          |       |                                  |       |   |   |
| Payments of long-term debt                                                         |       | —                                |       | (100,000 | ) |
| Proceeds from issuance of long-term debt                                           |       | —                                |       | 205,000 |   |
| Payments for repurchase of Class B  common stock                              |       | —                                |       | (82,417 | ) |
| Proceeds from issuance of Class A  common stock, net                          |       | —                                |       | 193,215 |   |
| Dividends paid                                                                     |       | (23,395                               | )          | (16,277 | ) |
| Payment of debt issuance costs                                                     |       | —                                |       | (4,001 | ) |
| Net cash (used in) provided by financing  activities                               |       | (23,395                               | )          | 195,520 |   |
|                                                                               |       |                                  |       |   |   |
| Effect of exchange rate fluctuations on  cash and cash equivalents                 |       | (6                                    | )          | 42 |   |
| Net (decrease) increase in cash and cash  equivalents                              |       | (4,707                                | )          | 4,998 |   |
|                                                                               |       |                                  |       |   |   |
| Cash and cash equivalents at beginning of  period                                  |       | 36,606                                |       | 29,626 |   |
| Cash and cash equivalents at end of period                                         |       | $                                     | 31,899     |   | $ | 34,624 |   |
|                                                                               |       |                                  |       |   |   |
| **Supplemental disclosures of cash flow  information:**                            |       |                                  |       |   |   |
| Cash interest payments                                                             |       | $                                     | 31,336     |   | $ | 30,665 |   |
| Cash income tax payments                                                           |       | $                                     | 708        |   | $ | 947 |   |
| Cash income tax refunds                                                            |       | $                                     | (96        | ) | $ | (91 | ) |
| Non-cash transactions:                                                             |       |                                  |       |   |   |
| Dividends declared and not yet paid                                                |       | $                                     | 7,801      |   | $ | 7,797 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

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**B&GFoods, Inc. and Subsidiaries**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**(1)**                               **Nature of Operations**

** **

B&GFoods, Inc. is a holding company, the principal assets of which are thecapital stock of its subsidiaries. Unless the context requires otherwise, references in this report to “B&GFoods,” “our company,” “we,” “us” and “our” refer to B&G Foods, Inc.and its subsidiaries.  We operate in oneindustry segment and manufacture, sell and distribute a diverse portfolio ofhigh-quality shelf-stable foods across the United States, Canada and PuertoRico.  Our products include hot cereals,fruit spreads, canned meats and beans, spices, seasonings, marinades, hotsauces, wine vinegar, maple syrup, molasses, salad dressings, Mexican-stylesauces, taco shells and kits, salsas, pickles, peppers and other specialty foodproducts.  We compete in the retailgrocery, food service, specialty, private label, club and mass merchandiserchannels of distribution.  We distributeour products throughout the United States through a nationwide network ofindependent brokers and distributors to supermarket chains, food serviceoutlets, mass merchants, warehouse clubs, non-food outlets and specialty fooddistributors.  We distribute several ofour brands in the greater New York metropolitan area primarily throughdirect-store-delivery.

 

***Recent Acquisition***

 

EffectiveFebruary 25, 2007, we completed the acquisition of the *Cream of Wheat*and *Cream of Rice*businessfrom Kraft Foods Global, Inc.  Thefinal purchase price, including transaction costs, was $200.5 million.  We refer to the *Cream ofWheat*and *Cream of Rice*acquisitionas the “*Cream of Wheat*acquisition” and the *Cream of Wheat*and *Cream of Rice*businessescollectively as the “*Cream of Wheat*business.”

 

Theacquisition was accounted for using the purchase method of accounting and,accordingly, the assets acquired and results of operations are included in ourconsolidated financial statements from the date of the acquisition.  The excess of the purchase price over thefair value of identifiable net assets acquired represents goodwill.  Trademarks are deemed to have an indefiniteuseful life and are not amortized. Customer relationship intangibles are amortized over 20 years.  Goodwill, customer relationship intangiblesand trademarks amortization are deductible for income tax purposes.

 

***Class A Common Stock Offering***

 

On May 29,2007, we completed a public offering of 15,985,000 shares of our Class Acommon stock as a separately traded security, which includes 2,085,000 sharesissued pursuant to the fully exercised underwriters’ option to purchaseadditional shares, at $13.00 per share. The shares of our separately traded Class A common stock trade onthe New York Stock Exchange under the trading symbol “BGS” and trade separatelyfrom our Enhanced Income Securities (EISs), which trade on the New York StockExchange under the trading symbol “BGF.” Each EIS represents one share of our Class A common stock and $7.15principal amount of our senior subordinated notes.

 

Theproceeds of the Class A common stock offering were $193.2 million, afterdeducting underwriting discounts and commissions and other expenses.  In connection with the offering, werepurchased 6,762,455 outstanding shares of our Class B common stock for$82.4 million, and the remaining 793,988 shares of our outstanding Class Bcommon stock were exchanged for an equal number of shares of Class Acommon stock.  See note 9, “Related-PartyTransactions.”  We also prepaid $100.0million of our term loan borrowings under our senior secured creditfacility.  The remaining funds wereallocated for general corporate purposes.

 

Theholders of our EISs may separate each EIS into one share of Class A commonstock and $7.15 principal amount of senior subordinated notes at any time.  Upon the occurrence of certain events(including redemption of the senior subordinated notes or upon maturity of thesenior subordinated notes), EISs will automatically separate.  Conversely, subject to limitations, a holderof separate shares of Class A common stock and senior subordinated notescan combine such securities to form EISs. Separation and combination of

 

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**B&GFoods, Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements (Continued)**

**(Unaudited)**

 

**(1)**                               **Nature of Operations (Continued)**

 

EISs will automatically result in increases anddecreases, respectively, in the number of shares of Class A common stocknot held in the form of EISs.  As of September 27,2008, we had 36,796,988 shares of Class A common stock issued andoutstanding, 17,077,331 of which were held in the form of EISs and 19,719,657of which were held separate from EISs. As of September 29, 2007, we had 36,778,988 shares of Class Acommon stock issued and outstanding, 17,115,567 of which were held in the formof EISs and 19,663,421 of which were held separate from EISs.

 

**(2)****                              ****Summary of Significant AccountingPolicies**

 

***Fiscal Year***

 

Ourfinancial statements are presented on a consolidated basis.  Typically, our fiscal quarters and fiscalyear consist of 13 and 52 weeks, respectively, ending on the Saturday closestto December 31 in the case of our fiscal year and fourth fiscal quarter,and on the Saturday closest to the end of the corresponding calendar quarter inthe case of our fiscal quarters.  As aresult, a 53rd week is added to our fiscal year every five or six years.  In a 53-week fiscal year our fourth fiscalquarter contains 14 weeks.  Our fiscalyear ending January 3, 2009 (fiscal 2008) contains 53 weeks and our fiscalyear ended December 29, 2007 (fiscal 2007) contains 52 weeks.  Each quarter of fiscal 2008 and 2007 contains13 weeks, except the fourth quarter of 2008 which will contain 14 weeks.

 

***Basis of Presentation***

 

The accompanyingconsolidated interim financial statements for the thirteen and thirty-nine weekperiods ended September 27, 2008 (third quarter of 2008 and first threequarters of 2008) and September 29, 2007 (third quarter of 2007 and firstthree quarters of 2007) have been prepared by our company in accordance withaccounting principles generally accepted in the United States of Americawithout audit, pursuant to the rules and regulations of the Securities andExchange Commission (SEC), and include the accounts of B&G Foods, Inc. andits subsidiaries.  Certaininformation and footnote disclosures normally included in annual financialstatements prepared in accordance with generally accepted accounting principleshave been omitted pursuant to such rules and regulations.  However, our management believes, to the bestof their knowledge, that the disclosures herein are adequate to make theinformation presented not misleading.  Allintercompany balances and transactions have been eliminated.  The accompanying unaudited consolidatedinterim financial statements contain all adjustments (consisting only of normaland recurring adjustments) that are, in the opinion of management, necessary topresent fairly our consolidated financial position as of September 27,2008, the results of our operations for the third quarter and first threequarters of 2008 and 2007, and cash flows for the first three quarters of 2008and 2007.  Our results of operations forthe third quarter and first three quarters of 2008 are not necessarilyindicative of the results to be expected for the full year.  The accompanying unaudited consolidatedinterim financial statements should be read in conjunction with the auditedconsolidated financial statements and notes for fiscal 2007 included in ourAnnual Report on Form 10-K for fiscal 2007 filed with the SEC on March 6,2008.

 

***Use of Estimates***

 

The preparation offinancial statements in accordance with U.S. generally accepted accountingprinciples requires our management to make a number of estimates andassumptions relating to the reporting of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Some of the moresignificant estimates and assumptions made by management involve trade andconsumer promotion expenses; allowances for excess, obsolete and unsaleableinventories; pension benefits; purchase accounting

 

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**B&GFoods, Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements (Continued)**

**(Unaudited)**

 

**(2)****                              ****Summary of Significant AccountingPolicies****(Continued)**

 

allocations;the recoverability of goodwill, trademarks, customer relationship intangibles,property, plant and equipment and deferred tax assets; the accounting for our enhanced income securities(EISs); the accounting for earnings per share and the accounting forstock-based compensation expense.  Actualresults could differ from these estimates and assumptions.

 

***Recently Issued Accounting Standards***

 

In September 2006, theFASB issued SFAS No. 157, “*Fair Value Measurements*”(SFAS No. 157), which defines fair value, establishes a framework formeasuring fair value and expands disclosures about fair valuemeasurements.  The provisions of SFAS No. 157are effective as of the beginning of our 2008 fiscal year, with the exceptionof certain provisions deferred until the beginning of our 2009 fiscalyear.  In February 2008, the FASBissued FASB Staff Position SFAS No. 157-2, “*Effective Date of FASB Statement No. 157*”, whichdelayed the effective date of SFAS No. 157 for all non-financial assetsand liabilities, except those that are recognized or disclosed at fair value inthe financial statements on a recurring basis, until January 1, 2009.  The impact of the adoption of SFAS No. 157for financial assets and liabilities was not material to our consolidatedinterim financial statements.  Theexpanded disclosures about fair value measurements for financial assets andliabilities are presented in note 6.  Wehave not yet determined the impact that the adoption of SFAS No. 157 willhave on our non-financial assets and liabilities which are not recognized on arecurring basis;howeverwe do not anticipate it to materially impact our consolidated financialstatements.

 

In October 2008, theFASB issued FASB Staff Position No. FAS 157-3, “*DeterminingFair Value of a Financial Asset in a Market That Is Not Active*” (FSPNo. FAS 157-3). FSP No. FAS 157-3 clarified the application of SFAS No. 157in an inactive market. It demonstrated how the fair value of a financial assetis determined when the market for that financial asset is inactive. FSP No. FAS157-3 was effective upon issuance, including prior periods for which financialstatements had not been issued. The implementation of this standard did nothave a material impact on our consolidated financial position and results ofoperations.

 

In December 2007, theFASB issued SFAS No. 141 (revised 2007), “*Business Combinations*”(SFAS No. 141R) and SFAS No. 160, “*Noncontrolling Interests inConsolidated Financial Statements*” (SFAS No. 160).  SFAS No. 141R requires an acquirer tomeasure the identifiable assets acquired, the liabilities assumed and anynoncontrolling interest in the acquiree at their fair values on the acquisitiondate, with goodwill being the excess value over the net identifiable assetsacquired.  SFAS No. 160 clarifiesthat a noncontrolling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements.  SFAS No. 141Rand SFAS No. 160 are effective as of the beginning of our 2009 fiscalyear.  SFAS No. 141R will be appliedprospectively.  The effects of SFAS No. 141Rwill depend on future acquisitions.  SFASNo. 160 requires retroactive adoption. We currently do not have any noncontrolling interests in subsidiaries.

 

In March 2008, the FASBissued SFAS No. 161, “*Disclosures aboutDerivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133*.”  This statement changes the disclosurerequirements for derivative instruments and hedging activities.  SFAS No. 161 requires enhanceddisclosures about (a) how and why an entity uses derivative instruments, (b) howderivative instruments and related hedged items are accounted for under SFAS No. 133and its related interpretations, and (c) how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance, and cash flows.  SFAS No. 161is effective as of the beginning of our 2009 fiscal year. We are currentlyevaluating the potential impact, if any, of the adoption of SFAS No. 161on our consolidated financial statements.

 

In April 2008, the FASBissued FASB Staff Position No. FAS 142-3, “*Determinationof the Useful Life of Intangible Assets”* (FSP No. FAS142-3).  FSP No. FAS 142-3 requirescompanies estimating the

 

6

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Table of Contents

 

**B&GFoods, Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements (Continued)**

**(Unaudited)**

 

**(2)****                              ****Summary of Significant AccountingPolicies****(Continued)**

 

useful life of a recognizedintangible asset to consider their historical experience in renewing orextending similar arrangements or, in the absence of historical experience, toconsider assumptions that market participants would use about renewal orextension as adjusted for entity-specific factors.  FSP No. FAS 142-3 is effective as of thebeginning of our 2009 fiscal year.  Weare currently evaluating the potential impact, if any, of the adoption of FSP No. FAS142-3 on our consolidated financial statements.

 

**(3)****                              ****Inventories**

** **

Inventories consist of the following, as of the datesindicated (dollars in thousands):

 

| ** **                  | ** ** | **September 27, 2008** | ** ** | **December 29, 2007** | ** ** |
|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Raw materials and packaging |       | $                                | 24,552     |                            | $          | 19,573 |   |
| Work in process             |       | 3,042                            |       | 2,641                           |       |
| Finished goods              |       | 68,094                           |       | 70,967                          |       |
|                        |       |                             |       |                            |       |
| Total                       |       | $                                | 95,688     |                            | $          | 93,181 |   |

 

**(4)****                              ****Goodwill, Trademarks andCustomer Relationship Intangibles**

** **

Therehas been no change in the carrying amount of goodwill for the period from December 29,2007 to September 27, 2008.

 

There has been no changein the carrying amount of trademarks for the period from December 29, 2007to September 27, 2008.

 

Customer relationshipintangibles are presented at cost, net of accumulated amortization, and areamortized on a straight-line basis over their estimated useful lives of 20years.

 
| ** **                         | ** ** | **Customer  Relationship  Intangibles** | ** ** | **Less:  Accumulated  Amortization** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-----------------------------------------|------------|--------------------------------------|------------|-----------|------------|
| ** **                         | ** ** | **(dollars in thousands)**    | ** ** |
| Balance at December 29, 2007  |       | $                                       | 129,000    |                                 | $          | (6,232    | )          | $ | 122,768 |   |
| Amortization expense               |       | —                                  |       | (4,838                               | )          | (4,838    | )          |
| Balance at September 27, 2008 |       | $                                       | 129,000    |                                 | $          | (11,070   | )          | $ | 117,930 |   |

 

Amortizationexpense associated with customer relationship intangibles for the third quarterand first three quarters of 2008 was $1.6 million and $4.8 million,respectively, and $1.6 million and $3.9 million, respectively, for the thirdquarter and first three quarters of 2007, and is recorded in operatingexpenses.  We expect to recognize anadditional $1.7 million of amortization expense associated with our currentcustomer relationship intangibles during the remainder of fiscal 2008, andthereafter $6.5 million per year for each of the next four succeeding fiscalyears.

 

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**B&GFoods, Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements(Continued)**

**(Unaudited)**

 

**(5)****                               Long-termDebt**

** **

Long-term debt consists of the following, as of the dates indicated(dollars in thousands):

 
| ** **                                                 | ** ** | **September 27, 2008** | ** ** | **December 29, 2007** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|
| Revolving credit facility                                  |       | $                                | —     |                  | $          | — |   |
| Term loan                                                  |       | 130,000                          |       | 130,000               |       |
| Total senior secured credit facility                       |       | 130,000                          |       | 130,000               |       |
|                                                       |       |                             |       |                  |       |
| 12.0% Senior Subordinated Notes due  October 30, 2016 |       | 165,800                          |       | 165,800               |       |
| 8.0% Senior Notes due October 1, 2011                 |       | 240,000                          |       | 240,000               |       |
| Total long-term debt                                       |       | $                                | 535,800    |                  | $          | 535,800 |   |

 

As of September 27,2008, the aggregate maturities of long-term debt are as follows (dollars inthousands):

 
| Years ending December: | ** ** | ** ** | ** ** |
|------------------------|------------|------------|------------|
| 2008                   |       | $          | —     |   |
| 2009                   |       | —     |       |
| 2010                   |       | —     |       |
| 2011                   |       | 240,000    |       |
| 2012                   |       | —     |       |
| Thereafter             |       | 295,800    |       |
| Total                  |       | $          | 535,800    |   |

 

*Senior Secured Credit Facility*.  In October 2004,we entered into a $30.0 million senior secured revolving credit facility.  In order to finance the *Grandma’s* molasses acquisition, we amendedthe credit facility in January 2006 to provide for, among other things, anew $25.0 million term loan and a reduction in the revolving credit facilitycommitments from $30.0 million to $25.0 million.  In order to finance the *Cream ofWheat* acquisition, our credit facility was amended and restated in February 2007to provide for, among other things, an additional $205.0 million of term loanborrowings.  On May 29, 2007, we prepaid$100.0 million of term loan borrowings. Our $25.0 million revolving credit facility matures on January 10,2011 and the remaining $130.0 million of term loan borrowings matures on February 26,2013, provided, however, that if we do not repay, redeem or refinance oursenior notes prior to April 1, 2011, the outstanding term loan borrowingswill become immediately due and payable on April 1, 2011.

 

Interest under the revolvingcredit facility, including any outstanding letters of credit, is determinedbased on alternative rates that we may choose in accordance with the revolvingcredit facility, including the base lending rate per annum plus an applicablemargin, and LIBOR plus an applicable margin. We pay a commitment fee of 0.50% per annum on the unused portion of therevolving credit facility.  Interestunder the term loan facility is determined based on alternative rates that wemay choose in accordance with the credit facility, including the base lendingrate per annum plus an applicable margin of 1.00%, and LIBOR plus an applicablemargin of 2.00%.

 

Our obligations under thecredit facility are jointly and severally and fully and unconditionallyguaranteed on a senior basis by all of our existing and certain future domesticsubsidiaries.  The credit facility issecured by substantially all of our and our subsidiaries’ assets except our andour subsidiaries’ real property.  Thecredit facility provides for mandatory prepayment upon certain assetdispositions and issuances of

 

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**B&GFoods, Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements(Continued)**

**(Unaudited)**

 

**(5)****                               Long-termDebt (Continued)**

 

securities, as defined.  The credit facility contains covenants thatrestrict, among other things, our ability to incur additional indebtedness, paydividends and create certain liens.  Thecredit facility also contains certain financial maintenance covenants, which,among other things, specify maximum capital expenditure limits, a minimuminterest coverage ratio and a maximum senior and total leverage ratio, eachratio as defined.  As of September 27,2008, we were in compliance with all of the covenants in the creditfacility.  Proceeds of the revolvingcredit facility are restricted to funding our working capital requirements,capital expenditures and acquisitions of companies in the same line of businessas our company, subject to specified criteria. The maximum letter of credit capacity under the revolving creditfacility is $10.0 million, with a fronting fee of 3.0% per annum for alloutstanding letters of credit.

 

On September 15, 2008,Lehman Brothers Holdings Inc. (Lehman) filed for protection under Chapter 11 ofthe U.S. Bankruptcy Code.  LehmanCommercial Paper Inc. (Lehman CPI), a Lehman subsidiary, is the administrativeagent under our credit facility.  LehmanCPI filed for protection under Chapter 11 of the U.S. Bankruptcy Code on October 3,2008.  None of our $130.0 million ofoutstanding term loans is currently with Lehman, Lehman CPI or any othersubsidiary of Lehman.  Lehman CPI is oneof the lenders participating in our $25.0 million revolving creditfacility.  However, Lehman CPI has only $3.1million of the $25.0 million commitment. The other lenders under the revolving credit facility and theirrespective commitments are as follows: Bank of America, N.A., $9.4 million; Citibank, N.A., $9.4 million; andRoyal Bank of Canada, $3.1 million.  Wedo not believe that Lehman CPI would honor its funding commitment under therevolving credit facility if we were to make a funding request.  As a result, the effective availableborrowing capacity under our revolving credit facility, net of outstandingletters of credit of $2.4 million, was $19.5 million at September 27,2008.  We have not drawn upon therevolving credit facility since its inception in October 2004 and, basedupon our cash on hand and working capital requirements, we have no plans to doso for the foreseeable future.

 

Effective as of February 26,2007, we entered into a six year interest rate swap agreement in order toeffectively fix at 7.0925% the interest rate payable for $130.0 million of termloan borrowings through the life of the term loan, ending on February 26,2013.  The interest rate for theremaining $100.0 million of term loan borrowings, which we subsequentlyprepaid, was 7.36% as of the prepayment date (based upon a three-month LIBORrate in effect at that time that expired on May 25, 2007).  The counterparty to the swap is LehmanSpecial Financing Inc. (Lehman SFI). Lehman SFI filed for protection under Chapter 11 of the U.S. BankruptcyCode on October 3, 2008.

 

We initially designated theswap as a cash flow hedge under the guidelines of SFAS No. 133.  Prior to Lehman’s bankruptcy filing, werecorded changes in the fair value of the swap in other comprehensive income(loss), net of tax in our consolidated balance sheet.  However, as a result of the Lehman bankruptcyfiling, we determined that the interest rate swap was no longer an effectivehedge as defined by SFAS No. 133 and, accordingly, subsequent changes inthe swap’s fair value are being recorded in current earnings in net interestexpense in the consolidated statements of operations.  We obtain third-party verification of fairvalue at the end of each reporting period. As of September 27, 2008, the fair value of our interest rate swapwas $6.0 million and is recorded in other liabilities on our consolidatedbalance sheet.  The amount recorded inaccumulated other comprehensive income (loss) will be reclassified to netinterest expense over the remaining life of the term loan borrowings as we makeinterest payments.  During the thirdquarter of 2008, we reclassified to net interest expense $0.1 million of theamount recorded in accumulated other comprehensive income (loss) and expect toreclassify to net interest expense $0.4 million during the fourth quarter of2008.  During fiscal 2009, we expect toreclassify to net interest expense $1.7 million of the amount recorded inaccumulated other comprehensive income (loss).

 

*SubsidiaryGuarantees*.  We have noassets or operations independent of our direct and indirect subsidiaries.  All of our present domestic subsidiariesjointly and severally and fully and unconditionally guarantee our seniorsubordinated notes and our senior notes, and management has determined that ourCanadian subsidiary that is not a guarantor of our senior subordinated notesand senior notes is a “minor

 

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**B&GFoods, Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements(Continued)**

**(Unaudited)**

 

**(5)****                                 Long-termDebt (Continued)**

 

subsidiary” as that term is used in Rule 3-10 ofRegulation S-X promulgated by the SEC. There are no significant restrictions on our ability and the ability ofour subsidiaries to obtain funds from our respective subsidiaries by dividendor loan.  Consequently, separatefinancial statements have not been presented for our subsidiaries becausemanagement has determined that they would not be material to investors.

 

*DeferredDebt Issuance Costs*. In connection with the issuance of our senior subordinated notes and oursenior notes in October, 2004, we capitalized approximately $23.1 million offinancing costs, which will be amortized over their respective terms.  In connection with the issuance of our termloan in January 2006, we capitalized approximately $0.4 million ofadditional financing costs, which will be amortized over the term of theloan.  In connection with the issuance ofadditional term loan borrowings of $205.0 million in February 2007 wecapitalized approximately $4.0 million of additional debt issuance costs.  During the second quarter of 2007 wewrote-off and expensed $1.8 million of deferred debt issuance costs inconnection with our May 2007 prepayment of $100.0 million of term loanborrowings.  As of September 27,2008 and December 29, 2007 we had net deferred debt issuance costs of$14.0 million and $16.4 million, respectively.

 

At September 27,2008 and December 29, 2007 accrued interest of $13.7 million and $8.9million, respectively, is included in accrued expenses in the accompanyingconsolidated balance sheets.

 

**(6)****                               FinancialInstruments**

** **

Weadopted SFAS No. 157 on December 30, 2007, the first day of our 2008fiscal year.  SFAS No. 157 definesfair value as the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date (an exit price). The standard outlines a valuationframework and creates a fair value hierarchy in order to increase theconsistency and comparability of fair value measurements and the relateddisclosures. Under generally accepted accounting principles, certain assets andliabilities must be measured at fair value, and SFAS No. 157 details thedisclosures that are required for items measured at fair value.

 

Financial assets and liabilitiesare measured using inputs from the three levels of the SFAS No. 157 fairvalue hierarchy. The three levels are as follows:

 

Level 1—Inputs are unadjustedquoted prices in active markets for identical assets or liabilities.

 

Level 2—Inputs include quotedprices for similar assets and liabilities in active markets, quoted prices foridentical or similar assets or liabilities in markets that are not active,inputs other than quoted prices that are observable for the asset or liability(i.e., interest rates, yield curves, etc.), and inputs that are derivedprincipally from or corroborated by observable market data by correlation orother means (market corroborated inputs).

 

Level 3—Unobservable inputs thatreflect our assumptions about the assumptions that market participants woulduse in pricing the asset or liability.

 

In accordance with the fair valuehierarchy described above, the following table shows the fair value of ourinterest rate swap as of September 27, 2008, which is included in otherliabilities in our consolidated balance sheet (dollars in thousands):

 

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**B&GFoods, Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements(Continued)**

**(Unaudited)**

 

**(6)****                                 FinancialInstruments (Continued)**

 
| ** **         | ** ** | **September 27,** | ** ** | **Fair Value Measurements as of September 27, 2008** | ** ** |
|--------------------|------------|------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **2008**               | ** ** | **Level 1**                                                                        | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Interest rate swap |       | $                      | 6,036      |                                                                                    | $          | — |   | $ | 6,036 |   | $ | — |   |
|                    |            |                        |            |                                                                                         |            |  |  |  |  |  |  |  |  |

 

Weentered into the interest rate swap to manage variable interest rate exposureon our $130.0 million of term loan borrowings. Our objective for holding this derivative is to decrease the volatilityof future cash flows associated with interest payments on our variable ratedebt.  As discussed in note 5 above, wehave determined that the interest rate swap is no longer an effective hedge asdefined by SFAS No. 133.

 

Cashand cash equivalents, trade accounts receivable, income tax receivable, tradeaccounts payable, accrued expenses and dividends payable are reflected in theconsolidated balance sheets at carrying value, which approximates fair valuedue to the short-term nature of these instruments.

 

The carrying values and fairvalues of our senior notes and senior subordinated notes as of September 27,2008 and December 29, 2007 are as follows (dollars in thousands):

 
| ** **                                                   | ** ** | **September 27, 2008** | ** ** | **December 29, 2007** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                   | ** ** | **Carrying Value**          | ** ** | **Fair Value****(1)(2)**   | ** ** | **Carrying Value** | ** ** | **Fair Value****(1)(3)** | ** ** |
| 8% Senior Notes due October 1, 2011                     |       | $                                | 240,000    |                            | $          | 231,600 |   | $ | 240,000 |   | $ | 235,800 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| 12% Senior Subordinated Notes due  October 30, 2016(2): |       |                             |       |                            |       |   |   |   |   |
| — represented by EISs                                   |       | 122,103                          |       | 118,517                         |       | 119,067 |   | 126,561 |   |
| — held separately                                       |       | 43,697                           |       | 42,413                          |       | 46,733 |   | 49,674 |   |
|                                                              |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

----

(1)         Fair values are estimated based on quoted market prices, except asotherwise noted in footnotes (2) and (3) below.

 

(2)         Solely for purposes of this presentation, we have assumed that the fairvalue of each senior subordinated note at September 27, 2008 was $6.94,based upon the $7.50 per share closing price of our separately traded Class Acommon stock and the $14.44 per EIS closing price of our EISs on the New YorkStock Exchange on September 26, 2008 (the last business day of the thirdquarter of 2008).  Each EIS representsone share of Class A common stock and $7.15 principal amount of our seniorsubordinated notes.

 

(3)         Solely for purposes of this presentation, we have assumed that the fairvalue of each senior subordinated note at December 29, 2007 was $7.60,based upon the $10.07 per share closing price of our separately traded Class Acommon stock and the $17.67 per EIS closing price of our EISs on the New YorkStock Exchange on December 28, 2007 (the last business day of fiscal2007).

 

Thecarrying value of our term loan borrowings approximates fair value becauseinterest rates under the term loan borrowings are variable, based on prevailingmarket rates.

 

Therecent volatility in the global financial markets could negatively impact thefair value of our debt obligations.

 

**(7)****                               ComprehensiveIncome Recognition**

** **

Comprehensive incomeincludes net income, foreign currency translation adjustments relating toassets and liabilities located in our Canadian subsidiary, amortization ofunrecognized prior service cost and

 

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**B&GFoods, Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements(Continued)**

**(Unaudited)**

 

**(7)****                               ComprehensiveIncome Recognition (Continued)**

 

pension deferrals, net oftax and mark to market adjustments of our cash flow hedge, net of tax.  The components of comprehensive income are asfollows (dollars in thousands):

 
| ** **                                                                         | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **September 27,  2008**       | ** ** | **September 29,  2007**          | ** ** | **September 27,  2008** | ** ** | **September 29,  2007** | ** ** |
|                                                                               |       |                               |       |                                  |       |   |   |   |   |
| Net income                                                                         |       | $                                  | 2,890      |                                  | $          | 4,846 |   | $ | 10,829 |   | $ | 12,657 |   |
| Other comprehensive income:                                                        |       |                               |       |                                  |       |   |   |   |   |
| Foreign currency translation adjustments                                           |       | (21                                | )          | (32                                   | )          | (6 | ) | 42 |   |
| Amortization of unrecognized prior service  cost and pension deferrals, net of tax |       | 6                                  |       | 5                                     |       | 16 |   | 21 |   |
| Mark to market adjustments of cash flow  hedge, net of tax                         |       | (1,340                             | )          | (2,311                                | )          | (1,023 | ) | (1,060 | ) |
| Comprehensive income                                                               |       | $                                  | 1,535      |                                  | $          | 2,508 |   | $ | 9,816 |   | $ | 11,660 |   |

 

**(8)****                               PensionBenefits**

** **

Netperiodic costs for the third quarter and first three quarters of 2008 and 2007include the following components (dollars in thousands):

 
| ** **                                           | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                                           | ** ** | **September 27,  2008**       | ** ** | **September  29, 2007**          | ** ** | **September  27, 2008** | ** ** | **September  29, 2007** | ** ** |
|                                                 |       |                               |       |                                  |       |   |   |   |   |
| Service cost—benefits earned during the  period |       | $                                  | 350        |                                  | $          | 332 |   | $ | 1,010 |   | $ | 1,060 |   |
| Interest cost on projected benefit  obligation       |       | 389                                |       | 322                                   |       | 1,109 |   | 982 |   |
| Expected return on plan assets                       |       | (463                               | )          | (371                                  | )          | (1,369 | ) | (1,113 | ) |
| Amortization of unrecognized prior service  cost     |       | (3                                 | )          | (4                                    | )          | (9 | ) | — |   |
| Amortization of loss                                 |       | 11                                 |       | 11                                    |       | 33 |   | 33 |   |
| Net pension cost                                     |       | $                                  | 284        |                                  | $          | 290 |   | $ | 774 |   | $ | 962 |   |

 

During thethird quarter and first three quarters of 2008, we have contributed $0.5million to our defined benefit pension plans. We anticipate electing to makeadditional contributions to our defined benefit pension plans of approximately$0.6 million during the fourth quarter of 2008.

 

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**B&GFoods, Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements(Continued)**

**(Unaudited)**

 

**(9)****                               Related-PartyTransactions**

** **

*RoselandLease.*  We lease amanufacturing and warehouse facility from a former chairman of our board ofdirectors under an operating lease, which expires in April 2009.  Total rent expense associated with this leasewas $0.6 million for the first three quarters of 2008 and 2007.

 

*Repurchaseand Exchange of Class B Common Stock*.  In May 2007, we used a portion of theproceeds of the Class A common stock offering to repurchase 6,762,455shares of our Class B common stock, which were held by, among others,Bruckmann, Rosser, Sherrill & Co., L.P. (BRS), Stephen C. Sherrill,the chairman of our board of directors, and certain of our current and formerexecutive officers, at a per share repurchase price equal to the offering priceof our Class A common stock, or $13.00 per share, less discounts andcommissions.  BRS was our majority ownerprior to our EIS offering in October 2004 and remained a majority owner ofour Class B common stock prior to our Class A common stock offeringin May 2007.  Mr. Sherrill is amanaging director of Bruckmann, Rosser, Sherrill & Co., Inc., themanager of BRS.  We also exchanged theremaining 793,988 shares of our Class B common stock, which were held bycertain of our current and former executive officers, for an equal numbers ofshares of our Class A common stock in order to eliminate all of ouroutstanding Class B common stock. Our board of directors established a special committee comprised solelyof our independent directors to recommend to our board of directors therepurchase price and exchange ratio for our Class B common stock, tonegotiate with the holders of the Class B common stock, and to recommendto our board of directors if the transaction was in our best interests and fairto the holders of our Class A common stock.  The special committee retained a financialadvisor to provide information, advice and analysis to assist the specialcommittee in its review of the proposed transaction.  The special committee also engaged its ownlegal counsel to advise the special committee on its duties andresponsibilities.  The financial advisordelivered to the special committee an opinion that the proposed considerationto be paid by us to the holders of the Class B common stock was fair to usand the holders of the Class A common stock from a financial point ofview.  After considering all of theinformation it had gathered, the special committee recommended to our board ofdirectors that from a valuation standpoint, the purchase price for the Class Bcommon stock to be repurchased should be the offering price of the Class Acommon stock in the offering, net of underwriting discounts and commissions,and that each share of our Class B common stock to be exchanged should beexchanged for one share of our Class A common stock.  The special committee also recommended to ourboard of directors that based on the repurchase price and Class A and Class Bexchange ratio and other material terms of the transaction, the transaction wasadvisable and in our best interests and fair to the holders of our Class Acommon stock.

 

**(10)****                        Commitmentsand Contingencies**

** **

We aresubject to environmental laws and regulations in the normal course ofbusiness.  Based on our experience todate, management believes that the future cost of compliance with existingenvironmental laws and regulations (and liability for any known environmentalconditions) will not have a material adverse effect on our consolidatedfinancial position, results of operations or liquidity.  However, we cannot predict what environmentalor health and safety legislation or regulations will be enacted in the futureor how existing or future laws or regulations will be enforced, administered orinterpreted, nor can we predict the amount of future expenditures that may berequired in order to comply with such environmental or health and safety lawsor regulations or to respond to such environmental claims.

 

Duringan environmental compliance audit of our Hurlock, Maryland facility conducted bya third-party consultant, we became aware of reporting violations of theEmergency Planning and Community Right to Know Act (EPCRA).  EPCRA requires companies that manufacture,use or process more than a threshold amount of certain listed chemicals to filean annual chemical release form with Environmental Protection Agency (EPA) andthe state and an annual chemical inventory form to the state and localemergency planning and/or response commissions and the local fire department.  For certain years we failed to file one ormore of such

 

13

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**B&GFoods, Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements (Continued)**

**(Unaudited)**

 

**(10)****                        Commitmentsand Contingencies (Continued)**

 

reports with the EPA and/or duplicate copies with thestate and local government.  Wevoluntarily self-disclosed these potential violations to the EPA pursuant tothe EPA’s self-disclosure policy.  Duringthe third quarter of 2008 we entered into a consent agreement with the EPApursuant to which we settled the matter and agreed to a penalty of $94,509,which we paid to the EPA during the fourth quarter of 2008.  None of the reporting violations resulted inany actual harm to the environment.

 

We arefrom time to time involved in various claims and legal actions arising in theordinary course of business, including proceedings involving product liabilityclaims, worker’s compensation and other employee claims, and tort and othergeneral liability claims, as well as trademark, copyright, patent infringementand related claims and legal actions.  Inthe opinion of our management, the ultimate disposition of any currentlypending claims or actions will not have a material adverse effect on ourconsolidated financial position, results of operations or liquidity.

 

We have employmentagreements with our executive officers. The agreements generally continue until terminated by the executive or byus, and provide for severance payments under certain circumstances, includingtermination by us without cause (as defined) or as a result of the employees’disability, or termination by us or a deemed termination upon a change ofcontrol (as defined).  Severance benefitsinclude payments for salary continuation, continuation of health care andinsurance benefits, present value of additional pension credits, acceleratedvesting under compensation plans and, in the case of a change of control,potential excise tax liability and gross-up payments.

 

**(11)****                        Earningsper Share**

** **

Wecurrently have one class of common stock issued and outstanding, designated as Class Acommon stock.  Prior to May 29,2007, we had two classes of common stock issued and outstanding, designated as Class Acommon stock and Class B common stock.  For periods in which we had shares of both Class A and Class Bcommon stock issued and outstanding, we present earnings per share using thetwo-class method.  The two-class methodis an earnings allocation formula that determines earnings per share for eachclass of common stock according to dividends declared and participation rightsin undistributed earnings or losses.  Netincome is allocated between the two classes of common stock based upon thetwo-class method.  Basic and dilutedearnings per share for the Class A common stock and Class B commonstock is calculated by dividing allocated net income by the weighted averagenumber of shares of Class A common stock and Class B common stockoutstanding.

 

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**B&GFoods, Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements(Continued)**

**(Unaudited)**

 

**(11)****                        Earningsper Share (Continued)**

 
| ** **                                                     | ** ** | **Thirteen  Weeks Ended**       | ** ** | **Thirty-nine  Weeks Ended** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|
| ** **                                                     | ** ** | **September 27,  2008**         | ** ** | **September 29,  2007**      | ** ** | **September 27,  2008** | ** ** | **September 29,  2007** | ** ** |
| ** **                                                     | ** ** | **(dollars in thousands)** | ** ** |
| Net income                                                     |       | $                                    | 2,890      |                              | $          | 4,846 |   | $ | 10,829 |   | $ | 12,657 |   |
| Less: Class A common stock dividends  declared            |       | 7,801                                |       | 7,797                             |       | 23,399 |   | 19,834 |   |
| Undistributed loss                                             |       | $                                    | (4,911     | )                                 | $          | (2,951 | ) | $ | (12,570 | ) | $ | (7,177 | ) |
|                                                           |       |                                 |       |                              |       |   |   |   |   |
| Basic and diluted weighted average common  shares outstanding: |       |                                 |       |                              |       |   |   |   |   |
| Class A common stock                                      |       | 36,796,988                           |       | 36,778,988                        |       | 36,786,768 |   | 27,621,225 |   |
| Class B common stock                                      |       | —                               |       | —                            |       | — |   | 4,124,212 |   |
|                                                           |       |                                 |       |                              |       |   |   |   |   |
| Basic and diluted allocation of  undistributed loss:           |       |                                 |       |                              |       |   |   |   |   |
| Class A common stock                                      |       | $                                    | (4,911     | )                                 | $          | (2,951 | ) | $ | (12,570 | ) | $ | (6,245 | ) |
| Class B common stock                                      |       | —                               |       | —                            |       | — |   | (932 | ) |
| Total                                                          |       | $                                    | (4,911     | )                                 | $          | (2,951 | ) | $ | (12,570 | ) | $ | (7,177 | ) |
|                                                           |       |                                 |       |                              |       |   |   |   |   |
| Basic and diluted earnings per share:                          |       |                                 |       |                              |       |   |   |   |   |
| Undistributed (loss) earnings per share:                       |       |                                 |       |                              |       |   |   |   |   |
| Class A common stock                                      |       | $                                    | (0.13      | )                                 | $          | (0.08 | ) | $ | (0.35 | ) | $ | (0.23 | ) |
| Class B common stock                                      |       | $                                    | —     |                              | $          | — |   | $ | — |   | $ | (0.23 | ) |
| Distributed earnings:                                          |       |                                 |       |                              |       |   |   |   |   |
| Class A common stock                                      |       | $                                    | 0.21       |                              | $          | 0.21 |   | $ | 0.64 |   | $ | 0.72(1 | ) |
| Earnings (loss) per share:                                     |       |                                 |       |                              |       |   |   |   |   |
| Class A common stock                                      |       | $                                    | 0.08       |                              | $          | 0.13 |   | $ | 0.29 |   | $ | 0.49 |   |
| Class B common stock                                      |       | $                                    | —     |                              | $          | — |   | $ | — |   | $ | (0.23 | ) |

 

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(1)          “Distributed earnings” differs from actual pershare amounts paid as dividends as the earnings per share computation underGAAP requires the use of the weighted average, rather than the actual number ofshares outstanding.

 

Since May 29,2007, we no longer have any shares of Class B common stock issued oroutstanding.  In addition, no dividendson our Class B common stock were ever declared prior to such date.  Therefore, for purposes of the earnings pershare calculation, all distributed earnings are included in Class A commonstock earnings per share.  Dilutedearnings per share for each of the periods presented is equal to basic earningsper share as no dilutive securities were outstanding during either period.

 

**(12)****                        Businessand Credit Concentrations and Geographic Information**

 

Ourexposure to credit loss in the event of non-payment of accounts receivable bycustomers is estimated in the amount of the allowance for doubtfulaccounts.  We perform ongoing creditevaluations of our customers’ financial conditions.  As of September 27, 2008, we do notbelieve we have any significant concentration of credit risk with respect toour trade accounts receivable.  Our topten customers accounted for approximately 46.3%****and 44.8% ofconsolidated net sales for the first three quarters of 2008 and 2007,respectively.  Other than Wal-Mart, whichaccounted for 13.4% and 11.7% of our consolidated net sales for the first threequarters of 2008 and 2007, respectively, no single customer accounted for morethan 10.0% of our consolidated net sales for the first three quarters of 2008or 2007.

 

During thethird quarter of 2008 and 2007 and the first three quarters of 2008 and 2007,respectively, our sales to foreign countries represented less than 1.0% of netsales, respectively.  Our foreign salesare primarily to customers in Canada.

 

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**B&GFoods, Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements (Continued)**

**(Unaudited)**

 

**(13)****                       ****Income Taxes**

** **

As of September 27,2008 and December 29, 2007, we have approximately $0.2 million of totalunrecognized tax benefits, which includes interest and penalties, that ifrecognized would have a favorable impact on our tax expense.  We continue to classify interest andpenalties related to income tax uncertainties as income tax expense.

 

**(14)****                       ****Insurance Recovery**

** **

Duringthe fourth quarter of fiscal 2006, we learned of an alleged theft ofapproximately $0.8 million over several years at our Roseland, New Jerseymanufacturing facility resulting from overpayments allegedly authorized by aformer supervisor to direct-store-delivery independent contractor truckdrivers.  While the cumulative amount ofthe alleged theft may have been substantial, the related losses were reportedin each respective period and discovery of this alleged theft did not result inchanges to any previously reported results. During the second quarter of 2007, we received insurance proceeds forthe entire amount of the loss, which is recorded as an offset to general andadministrative expenses.

 

**(15)****                       ****Stock-Based CompensationExpense**

** **

Uponthe recommendation of our compensation committee, our board of directors on March 10,2008 adopted the B&G Foods, Inc. 2008 Omnibus Incentive CompensationPlan, which we refer to as the 2008 Omnibus Plan, subject to stockholderapproval.  Our stockholders approved the2008 Omnibus Plan at our annual meeting on May 6, 2008.

 

The2008 Omnibus Plan authorizes the grant of performance share awards, restrictedstock, options, stock appreciation rights, deferred stock, stock units andcash-based awards to employees, non-employee directors and consultants.  Subject to adjustment as provided in theplan, the total number of shares of Class A common stock available forawards under the plan is 2,000,000.

 

*PerformanceShare Awards. *On March 10, 2008, the compensationcommittee granted the following performance share long-term incentive awards(LTIAs) under the 2008 Omnibus Plan. These awards were granted subject to stockholder approval of the 2008Omnibus Plan, which was received on May 6, 2008.

 

Eachof our named executive officers and certain other members of senior managementwere awarded performance share LTIAs that entitle the participant to earnshares of Class A common stock upon the attainment of certain performancegoals over the applicable performance period. The 2008 LTIAs have a one year performance period, fiscal 2008.  The 2008 to 2009 LTIAs have a two-yearcumulative performance period, fiscal 2008 and fiscal 2009.  The 2008 to 2010 LTIAs have a three-yearcumulative performance period, fiscal 2008 through fiscal 2010.

 

The2008 LTIAs, 2008 to 2009 LTIAs and the 2008 to 2010 LTIAs, each have athreshold, target and maximum payout. The awards will be settled based upon our performance over the one, twoand three year cumulative performance periods, as applicable, with respect to “excesscash” (as defined in the award agreements), the applicable performancemetric.  If our performance fails to meetthe performance threshold, then the awards will not vest and no shares will beissued pursuant to the awards.  If ourperformance meets or exceeds the performance threshold, then a varying amountof shares from the threshold amount (0% of the target amount) up to the maximumamount (300% of the target amount) may be earned.  Shares of Class A common stock inrespect of the 2008 LTIAs, 2008 to 2009 LTIAs and 2008 to 2010 LTIAs will beissued in March 2009, March 2010 and March 2011, respectively,in each case subject to the performance goals for the applicable performanceperiod being certified in writing by our compensation committee as having beenachieved.

 

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**B&G Foods, Inc.and Subsidiaries**

**Notes to Consolidated Financial Statements (Continued)**

**(Unaudited)**

 

**(15)****                       ****Stock-Based CompensationExpense**

 

Therecognition of compensation expense for the performance share LTIAs isinitially based on the probable outcome of the performance condition based onthe fair value of the award on the date of grant and the anticipated number ofshares to be awarded on a straight-line basis over the applicable performanceperiod.  Our company’s performanceagainst the defined performance goal will be re-evaluated on a quarterly basisthroughout the applicable performance period and the recognition ofcompensation expense will be adjusted for subsequent changes in the estimatedor actual outcome.  The cumulative effecton current and prior periods of a change in the estimated number of performanceshare awards is recognized as an adjustment to earnings in the period of therevision.

 

Duringthe third quarter and first three quarters of 2008, we recognized $0.1 millionand $0.3 million of compensation expense related to the performance shareLTIAs, which is reflected in general and administrative expenses in ourconsolidated statements of operations. As of September 27, 2008, there was $1.3 million of unrecognizedcompensation expense related to performance share LTIAs, which is expected tobe recognized over the next 27 months.

 

Thefollowing table details the activity in our performance share LTIAs for thefirst three quarters of 2008 as follows:

 
| ** **                  | ** ** | **Number of  Performance Shares**** (1)** | ** ** | **Weighted Average  Grant Date Fair  Value (per share)****(2)** | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
|                        |       |                                                     |       |                                                                                     |       |
| Beginning of year           |       | —                                                   |       | —                                                                                   |       |
| Granted                     |       | 466,746                                                  |       | $                                                                                        | 7.66       |   |
| Vested                      |       | —                                                   |       | —                                                                                   |       |
| Released                    |       | —                                                   |       | —                                                                                   |       |
| Forfeited                   |       | —                                                   |       | —                                                                                   |       |
| End of first three quarters |       | 466,746                                                  |       | $                                                                                        | 7.66       |   |

 

----

(1)          The number of unvestedperformance shares is based on the participants earning their target number ofperformance shares at 100%.

(2)          The fair value of the awardswas determined based upon the closing price of our Class A common stock onthe applicable measurement dates (i.e., the deemed grant dates for accountingpurposes) reduced by the present value of expected dividends using therisk-free interest-rate as the award holders are not entitled to dividends ordividend equivalents during the vesting period.

 

*Non-EmployeeDirector Stock Grants*.  Commencing in fiscal 2008,each of our non-employee directors receives an annual equity grant of $35,000of Class A Common Stock as part of his or her non-employee directorcompensation.  These shares fully vestwhen issued.  On June 2, 2008, 18,000shares of Class A common stock were issued to all non-employee directorsbased upon the closing price of our Class A common stock on May 30,2008 (the business day immediately prior to the date of grant) of $9.72 pershare.  Total compensation expense of$0.2 million is reflected in general and administrative expenses in ourconsolidated statements of operations.

 

**(16)****                       ****Subsequent Events**

** **

*WorkforceReduction. *In October 2008, B&G Foodsimplemented a reduction in workforce that has reduced our workforce byapproximately 7.5%.  On a pre-tax basis,we expect that the reduction in workforce will save our company an estimated$3.7 million on an annualized basis.  Weexpect to record severance and termination charges of approximately $0.8million in the fourth quarter of 2008. Substantially all of these

 

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**B&GFoods, Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements (Continued)**

**(Unaudited)**

 

**(16)****                       ****Subsequent Events**

 

charges will result in cash payments.  These payments will be made during theremainder of fiscal 2008 and in fiscal 2009.

 

*Stock andDebt Repurchase Plan. *On October 27, 2008, our boardof directors authorized a stock and debt repurchase program for the repurchaseof up to $10.0 million of our Class A common stock and/or senior notesover the next twelve months.  Under theauthorization, we may purchase shares of Class A common stock and/orsenior notes from time to time in the open market or in privately negotiatedtransactions in compliance with the applicable rules and regulations ofthe SEC.

 

Thetiming and amount of such repurchases, if any, will be at the discretion ofmanagement, and will depend on market conditions and other considerations.  Therefore, there can be no assurance as tothe number of shares, if any, that will be repurchased under the stock and debtrepurchase program, or the aggregate dollar amount of the shares or principalamount of senior notes, if any, repurchased. We may discontinue the program at any time.  Any shares repurchased pursuant to the stockrepurchase program will be cancelled. Likewise, any senior notes repurchased will be cancelled.  In general, our credit agreement prohibits usfrom repurchasing our senior subordinated notes.

 

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** **

**Item 2.**         Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

** **

Thefollowing Management’s Discussion and Analysis of Financial Condition andResults of Operations contains forward-looking statements that involve risksand uncertainties.  Our actual resultscould differ materially from those anticipated in these forward-lookingstatements as a result of certain factors, including those set forth under theheading “Forward-Looking Statements” below and elsewhere in this report.  The following discussion should be read inconjunction with the unaudited consolidated interim financial statements andrelated notes for the thirteen and thirty-nine weeks ended September 27,2008 (third quarter of 2008 and first three quarters of 2008) includedelsewhere in this report and the audited consolidated financial statements andrelated notes for the fiscal year ended December 29, 2007 (fiscal 2007)included in our Annual Report on Form 10-K filed with the Securities andExchange Commission (SEC) on March 6, 2008 (which we refer to as our 2007Annual Report on Form 10-K).

 

**General**

** **

Wemanufacture, sell and distribute a diverse portfolio of branded, high quality,shelf-stable food products, many of which have leading regional or nationalmarket shares.  In general, we positionour branded products to appeal to the consumer desiring a high quality andreasonably priced product.  We complementour branded product retail sales with institutional and food service sales andlimited private label sales.

 

Ourgoal is to continue to increase sales, profitability and cash flows byenhancing our existing portfolio of branded shelf-stable products and bycapitalizing on our competitive strengths. We intend to implement our growth strategy through the followinginitiatives: expanding our brand portfolio with acquisitions of complementarybranded businesses, continuing to develop new products and delivering them tomarket quickly, leveraging our unique multiple channel sales and distributionsystem and continuing to focus on higher growth customers and distributionchannels.

 

Since 1996, we havesuccessfully acquired and integrated 18 separate brands into ouroperations.  We completed the acquisitionof the *Cream of Wheat*and *Cream ofRice*brands from Kraft Foods Global, Inc. effective February 25,2007, which we refer to in this report as the “*Cream ofWheat*acquisition.”  The *Cream of Wheat*acquisition has been accounted for using thepurchase method of accounting and, accordingly, the assets acquired and resultsof operations of the acquired business is included in our consolidatedfinancial statements from the date of acquisition.  The *Cream of Wheat*acquisitionand the application of the purchase method of accounting for the acquisitionaffect comparability between periods.

 

We aresubject to a number of challenges that may adversely affect ourbusinesses.  These challenges, which arediscussed below and under the heading “Forward-Looking Statements,” include:

 

*Fluctuationsin Commodity Prices and Production and Distribution Costs*. We purchase raw materials, including agricultural products, meat,poultry, other raw materials, ingredients and packaging materials from growers,commodity processors, other food companies and packaging manufacturers.  Raw materials, ingredients and packagingmaterials are subject to fluctuations in price attributable to a number offactors.  Fluctuations in commodityprices can lead to retail price volatility and intensive price competition, andcan influence consumer and trade buying patterns.  In the third quarter and first three quartersof 2008, our commodity prices for wheat, maple syrup, beans and corn sweetenerswere higher than those incurred during the thirteen and thirty-nine weeks endedSeptember 29, 2007 (third quarter and first three quarters of 2007).

 

In 2008,maple syrup production in Canada, which represents the great majority of globalproduction, was significantly below industry needs due to poor crop yields andgrowing global demand.  As a result, theprice we pay for maple syrup has increased significantly and we are faced witha shortfall in supply as compared to our needs, which has and will continue tonegatively impact our sales volume of maple syrup products through at least thefirst quarter of fiscal 2009.

 

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Inaddition, the cost of labor, manufacturing, energy, fuel, packaging materialsand other costs related to the production and distribution of our food productshave risen significantly in recent years and at an increasing rate during2008.  We expect that many of these costswill continue to rise for the foreseeable future.  We attempt to manage these risks by enteringinto short-term supply contracts and advance commodities purchase agreementsfrom time to time, implementing cost saving measures and, when necessary, byraising sales prices.  To date, our costsaving measures and sales price increases have not fully offset increases toour raw material, ingredient, packaging and distribution costs and as a resultour operating results have been negatively impacted.  To the extent we are unable to offset presentand future cost increases, our operating results will continue to be negativelyimpacted.

 

*Consolidationin the Retail Trade and Consequent Inventory Reductions*. As the retail grocery trade continues to consolidate and our retailcustomers grow larger and become more sophisticated, our retail customers maydemand lower pricing and increased promotional programs.  These customers are also reducing theirinventories and increasing their emphasis on private label products.

 

*ChangingCustomer Preferences*.  Consumers in the market categories in whichwe compete frequently change their taste preferences, dietary habits andproduct packaging preferences.

 

*ConsumerConcern Regarding Food Safety, Quality and Health*. The food industry is subject to consumer concerns regarding the safetyand quality of certain food products, including the health implications ofgenetically modified organisms and obesity.

 

*AWeakening of the U.S. Dollar in Relation to the Canadian Dollar*. We purchase the majority of our maple syrup requirements from supplierslocated in Québec, Canada.  During thethird quarter of 2008, the U.S. dollar has begun strengthening against theCanadian dollar.  However, over the pastseveral years the U.S. dollar had weakened against the Canadian dollar, whichin turn significantly increased our costs relating to the production of ourmaple syrup products.

 

Toconfront these challenges, we continue to take steps to build the value of ourbrands, to improve our existing portfolio of products with new product andmarketing initiatives, to reduce costs through improved productivity and toaddress consumer concerns about food safety, quality and health.

 

**Critical Accounting Policies; Use of Estimates**

** **

Thepreparation of financial statements in accordance with U.S. generally acceptedaccounting principles requires our management to make a number of estimates andassumptions relating to the reporting of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Some of the moresignificant estimates and assumptions made by management involve trade andconsumer promotion expenses; allowances for excess, obsolete and unsaleableinventories; pension benefits; purchase accounting allocations; therecoverability of goodwill, trademarks, customer relationship intangibles,property, plant and equipment, and deferred tax assets; the accounting for ourEISs; the accounting for earnings per share and the accounting for stock-basedcompensation expense.  Actualresults could differ from these estimates and assumptions.

 

Oursignificant accounting policies are described more fully in note 2 to ourconsolidated financial statements included in our 2007 Annual Report on Form 10-K.  We believe the following critical accountingpolicies involve the most significant judgments and estimates used in thepreparation of our consolidated financial statements.

 

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***Trade and Consumer PromotionExpense****s*

 

Weoffer various sales incentive programs to customers and consumers, such asprice discounts, in-store display incentives, slotting fees and coupons.  The recognition of expense for these programsinvolves the use of judgment related to performance and redemptionestimates.  Estimates are made based onhistorical experience and other factors. Actual expenses may differ if the level of redemption rates andperformance vary from our estimates.

 

***Inventories***

 

Inventoriesare stated at the lower of cost or market. Cost is determined using the first-in, first-out and average costmethods.  Inventories have been reducedby an allowance for excess, obsolete and unsaleable inventories.  The allowance is an estimate based on ourmanagement’s review of inventories on hand compared to estimated future usageand sales.

 

***Long-Lived Assets***

 

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

 

***Goodwill and Trademarks***

 

Goodwilland intangible assets with indefinite useful lives (trademarks) are tested forimpairment at least annually and whenever events or circumstances occurindicating that goodwill or indefinite life intangibles might be impaired.

 

Weperform the annual impairment tests as of the last day of each fiscalyear.  The annual goodwill impairmenttest involves a two-step process.  Thefirst step of the impairment test involves comparing the fair value of ourcompany with our company’s carrying value, including goodwill.  If the carrying value of our company exceedsour fair value, we perform the second step of the impairment test to determinethe amount of the impairment loss.  Thesecond step of the goodwill impairment test involves comparing the implied fairvalue of goodwill with the carrying value of that goodwill and recognizing aloss for the difference.  Calculating ourfair value requires significant estimates and assumptions by management.  We estimate our fair value by applying thirdparty market value indicators to our earnings before interest, taxes,depreciation and amortization (EBITDA). We test indefinite life intangible assets for impairment by comparingtheir carrying value to their fair value that is determined using a cash flowmethod and recognize a loss to the extent the carrying value is greater.

 

Wecompleted our annual impairment tests for fiscal 2007 with no adjustments tothe carrying values of goodwill and indefinite life intangibles.  We did not note any events or circumstancesduring the first three quarters of 2008 that would indicate that goodwill orindefinite life intangibles might be impaired. The recent volatility in our company’s stock price and declines in ourmarket capitalization could put pressure on the carrying value of our goodwilland other indefinite life intangibles and result in an impairment charge ifthese conditions persist for an extended period of time.  Management will continue to monitor theseassets in future periods.

 

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***Accounting Treatment for EISs***

 

Our EISs include Class Acommon stock and senior subordinated notes. Upon completion of our 2004 EIS offering (including the exercise of theover-allotment option), we allocated the proceeds from the issuance of theEISs, based upon relative fair value at the issuance date, to the Class Acommon stock and the senior subordinated notes. We have assumed that the price paid in the EIS offering was equivalentto the combined fair value of the Class A common stock and the seniorsubordinated notes, and the price paid in the offering for the seniorsubordinated notes sold separately (not in the form of EISs) was equivalent totheir initial stated principal amount. We have concluded there are no embedded derivative features related tothe EIS that require bifurcation under FASB Statement No. 133, “*Accounting for Derivative Instruments and Hedging Activities,”*asamended (SFAS No. 133).  We havedetermined the fair value of the Class A common stock and the seniorsubordinated notes with reference to a number of factors, including the sale ofthe senior subordinated notes sold separately from the EISs that have the sameterms as the senior subordinated notes included in the EISs.  Therefore, we have allocated the entireproceeds of the EIS offering to the Class A common stock and the seniorsubordinated notes, and the allocation of the EIS proceeds to the seniorsubordinated notes did not result in a premium or discount.

 

We have concluded that thecall option and the change in control put option in the senior subordinatednotes do not warrant separate accounting under SFAS No. 133 because theyare clearly and closely related to the economic characteristics of the hostdebt instrument.  Therefore, we have allocatedthe entire proceeds of the offering to the Class A common stock and thesenior subordinated notes.  Uponsubsequent issuances of senior subordinated notes, if any, we will evaluatewhether the call option and the change in control put option in the seniorsubordinated notes require separate accounting under SFAS No. 133.  We expect that if there is a substantialdiscount or premium upon a subsequent issuance of senior subordinated notes, wemay need to separately account for the call option and the change in controlput option features as embedded derivatives for such subsequent issuance.  If we determine that the embeddedderivatives, if any, require separate accounting from the debt host contractunder SFAS No. 133, the call option and the change in control put optionassociated with the senior subordinated notes will be recorded as derivativeliabilities at fair value, with changes in fair value recorded as othernon-operating income or expense.  Anydiscount on the senior subordinated notes resulting from the allocation ofproceeds to an embedded derivative will be amortized to interest expense overthe remaining life of the senior subordinated notes.

 

The Class A commonstock portion of each EIS is included in stockholders’ equity, net of the relatedportion of the EIS transaction costs allocated to Class A commonstock.  Dividends paid on our Class Acommon stock portion of each EIS are recorded as a decrease to additionalpaid-in capital when declared by us.  Thesenior subordinated note portion of each EIS is included in long-term debt, andthe related portion of the EIS transaction costs allocated to the seniorsubordinated notes was capitalized as deferred debt issuance costs and is beingamortized to interest expense using the effective interest method.  Interest on the senior subordinated notes ischarged to interest expense as accrued by us and deducted for income taxpurposes.

 

***Income Tax Expense Estimates and Policies***

 

Aspart of the income tax provision process of preparing our consolidatedfinancial statements, we are required to estimate our income taxes.  This process involves estimating our currenttax expense together with assessing temporary differences resulting fromdiffering treatment of items for tax and accounting purposes.  These differences result in deferred taxassets and liabilities.  We then assessthe likelihood that our deferred tax assets will be recovered from futuretaxable income and to the extent we believe the recovery is not likely, weestablish a valuation allowance. Further, to the extent that we establish a valuation allowance orincrease this allowance in a financial accounting period, we include suchcharge in our tax provision, or reduce our tax benefits in our consolidatedstatement of operations.  We use ourjudgment to determine our provision or benefit for income taxes, deferred taxassets and liabilities and any valuation allowance recorded against our netdeferred tax assets.

 

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Thereare various factors that may cause these tax assumptions to change in the nearterm, and we may have to record a valuation allowance against our deferred taxassets.  We cannot predict whether futureU.S. federal and state income tax laws and regulations might be passed thatcould have a material effect on our results of operations.  We assess the impact of significant changesto the U.S. federal and state income tax laws and regulations on a regularbasis and update the assumptions and estimates used to prepare our consolidatedfinancial statements when new regulations and legislation are enacted.  We recognize the benefit of an uncertain taxposition that we have taken or expect to take on the income tax returns we fileif it is “more likely than not” that such tax position will be sustained basedon its technical merits.

 

***Earnings Per Share***

*** ***

Wecurrently have one class of common stock issued and outstanding, designated as Class Acommon stock.  Prior to May 29,2007, we had two classes of common stock issued and outstanding, designated as Class Acommon stock and Class B common stock. For periods in which we had shares of both Class A and Class Bcommon stock issued and outstanding, we present earnings per share using thetwo-class method.  The two-class methodis an earnings allocation formula that determines earnings per share for eachclass of common stock according to dividends declared and participation rightsin undistributed earnings or losses.

 

Forperiods in which we had shares of both Class A and Class B commonstock issued and outstanding, net income is allocated between the two classesof common stock based upon the two-class method.  Basic and diluted earnings per share for the Class Acommon stock and Class B common stock is calculated by dividing allocatednet income by the weighted average number of shares of Class A commonstock and Class B common stock outstanding.

 

***Pension Expense***

*** ***

We have defined benefitpension plans covering substantially all of our employees.  Our funding policy is to contribute annuallythe 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 interestrates.  We review pension assumptionsregularly and we may from time to time make voluntary contributions to ourpension plans, which exceed the amounts required by statute.  During the first three quarters of 2008, wemade contributions of $0.5 million to our defined benefit pension plans, all ofwhich were made in the third quarter, as compared to $0.8 million and $2.1million of contributions during the third quarter and first three quarters of2007, respectively.  We anticipateelecting to make approximately $0.6 million in additional contributions duringthe fourth quarter of fiscal 2008. Changes in interest rates and the market value of the securities held bythe plans could materially change, positively or negatively, the funded statusof the plans and affect the level of pension expense and required contributionsduring the remainder of fiscal 2008 and beyond. In addition, the recent volatility in the financial markets could affectthe valuation of our pension assets and liabilities, resulting in potentiallyhigher pension costs in future periods.

 

Our discount rate assumptionincreased from 5.90% at December 30, 2006 to 6.50% at December 29,2007 for our pension plans.  Thisincrease in the discount rate, coupled with the amortization of deferred gainsand losses will result in a decrease in fiscal 2008 pre-tax pension expense ofapproximately $0.8 million.  While we donot currently anticipate a change in our fiscal 2008 assumptions, as asensitivity measure, a 0.25% decline or increase in our discount rate wouldincrease or decrease our pension expense by approximately $0.1 million.  Similarly, a 0.25% decrease or increase inthe expected return on pension plan assets would increase or decrease ourpension expense by approximately $0.1 million.

 

In August 2006, thePension Protection Act of 2006 was signed into law.  The major provisions of the statute becameeffective on January 1, 2008.  Amongother things, the statute is designed to ensure timely and adequate funding ofqualified pension plans by shortening the time period within which employersmust fully fund pension benefits.  Due tothe fully funded status of our defined benefit pension plans as of December 29,2007, the Pension Protection Act of 2006 is not currently expected to have asignificant impact on our future pension funding requirements.

 

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***Acquisition Accounting***

 

We account for acquiredbusinesses using the purchase method of accounting, which requires that theassets acquired and liabilities assumed be recorded at the date of acquisitionat their respective fair values. Our consolidated financial statements andresults of operations reflect an acquired business after the completion of theacquisition. The cost to acquire a business, including transaction costs, isallocated to the underlying net assets of the acquired business in proportionto their respective fair values. Any excess of the purchase price over theestimated fair values of the net assets acquired is recorded as goodwill.

 

The judgments made indetermining the estimated fair value assigned to each class of assets acquiredand liabilities assumed, as well as asset lives, can materially impact ourresults of operations. Accordingly, for significant items, we typically obtainassistance from third party valuation specialists.

 

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

 

All of these judgments andestimates can materially impact our results of operations.

 

**Resultsof Operations**

** **

The following table sets forth the percentages of netsales represented by selected items for the third quarter of 2008 and 2007 andthe first three quarters of 2008 and 2007 reflected in our consolidatedstatements of operations. The comparisons of financial results are notnecessarily indicative of future results:

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **September 27,  2008**       | ** ** | **September 29,  2007**          | ** ** | **September 27,  2008** | ** ** | **September 29,  2007** | ** ** |
| **Statement of Operations:**                     |       |                               |       |                                  |       |   |   |   |   |
| Net sales                                        |       | 100.0                              | %          | 100.0                                 | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                               |       | 73.6                               | %          | 67.3                                  | %          | 71.8 | % | 68.1 | % |
| Gross profit                                     |       | 26.4                               | %          | 32.7                                  | %          | 28.2 | % | 31.9 | % |
|                                             |       |                               |       |                                  |       |   |   |   |   |
| Sales, marketing and distribution expenses       |       | 9.3                                | %          | 11.2                                  | %          | 9.8 | % | 11.0 | % |
| General and administrative expenses              |       | 1.8                                | %          | 2.9                                   | %          | 1.5 | % | 2.0 | % |
| Amortization expense—customer relationships |       | 1.4                                | %          | 1.4                                   | %          | 1.4 | % | 1.1 | % |
| Operating income                                 |       | 13.9                               | %          | 17.2                                  | %          | 15.5 | % | 17.8 | % |
|                                             |       |                               |       |                                  |       |   |   |   |   |
| Interest expense, net                            |       | 9.9                                | %          | 10.6                                  | %          | 10.5 | % | 11.8 | % |
| Income before income tax expense                 |       | 4.0                                | %          | 6.7                                   | %          | 5.0 | % | 6.0 | % |
|                                             |       |                               |       |                                  |       |   |   |   |   |
| Income tax expense                               |       | 1.5                                | %          | 2.5                                   | %          | 1.9 | % | 2.3 | % |
| Net income                                       |       | 2.5                                | %          | 4.1                                   | %          | 3.1 | % | 3.7 | % |

 

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

 

*Net Sales.*Our netsales represents gross sales of products shipped to customers plus amountscharged to customers for shipping and handling, less cash discounts, couponredemptions, slotting fees and trade promotional spending.

 

*Gross Profit.*Ourgross profit is equal to our net sales less cost of goods sold. The primarycomponents of our cost of goods sold are cost of internally manufacturedproducts, purchases of finished goods from co-packers plus freight costs to ourdistribution centers and to our customers.

 

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*Sales, Marketing and DistributionExpenses.*Our sales, marketing and distribution expensesinclude costs for marketing personnel, consumer advertising programs, internalsales forces, brokerage costs and warehouse facilities.

 

*General and Administrative Expenses.*Our general and administrative expenses includeadministrative employee compensation and benefit costs, as well as informationtechnology infrastructure and communication costs, office rent and supplies,professional services and other general corporate expenses. For the first threequarters of 2007, general and administrative expenses is net of insuranceproceeds relating to a previously reported employee theft.

 

*Amortization Expense—CustomerRelationships.* Amortization expense—customer relationshipsincludes the amortization expense associated with customer relationshipintangibles, which are amortized over their useful lives of 20 years.

 

*Net Interest Expense.*Netinterest expense includes interest relating to our outstanding indebtedness andamortization of deferred debt issuance costs, net of interest income and subsequentto our determination that our interest rate swap is no longer effective,unrealized gains on the interest rate swap and the reclassification of amountsrecorded in accumulated other comprehensive income (loss) related to the swap.

 

***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 anumerical measure of our financial performance that excludes or includes amountsso as to be different than the most directly comparable measure calculated andpresented in accordance with GAAP in our consolidated balance sheets andrelated consolidated statements of operations, changes in stockholders’ equityand comprehensive income, and cash flows.

 

EBITDA is a measure used by management to measureoperating performance. EBITDA is defined as net income before net interestexpense, income taxes, depreciation, and amortization. Management believes thatit is useful to eliminate net interest expense, income taxes, depreciation andamortization because it allows management to focus on what it deems to be amore reliable indicator of ongoing operating performance and our ability togenerate cash flow from operations. We use EBITDA in our business operations,among other things, to evaluate our operating performance, develop budgets andmeasure our performance against those budgets, determine employee bonuses andevaluate our cash flows in terms of cash needs. We also present EBITDA becausewe believe it is a useful indicator of our historical debt capacity and abilityto service debt and because covenants in our credit facility, our senior notesindenture and our senior subordinated notes indenture contain ratios based onthis measure. As a result, internal management reports used during monthlyoperating reviews feature the EBITDA metric. However, management uses thismetric in conjunction with traditional GAAP operating performance and liquiditymeasures as part of its overall assessment of company performance and liquidityand therefore does not place undue reliance on this measure as its only measureof operating performance and liquidity.

 

EBITDA is not a recognized term under GAAP and doesnot purport to be an alternative to operating income or net income as anindicator of operating performance or any other GAAP measure. EBITDA is not acomplete net cash flow measure because EBITDA is a measure of liquidity thatdoes not include reductions for cash payments for an entity’s obligation toservice its debt, fund its working capital, capital expenditures andacquisitions, if any, and pay its income taxes and dividends. Rather, EBITDA isa potential indicator of an entity’s ability to fund these cash requirements.EBITDA is not a complete measure of an entity’s profitability because it doesnot include costs and expenses for depreciation and amortization, interest andrelated expenses and income taxes. Because not all companies use identicalcalculations, this presentation of EBITDA may not be comparable to othersimilarly titled measures of other companies. However, EBITDA can still beuseful in evaluating our performance against our peer companies becausemanagement believes this measure provides users with valuable insight into keycomponents of GAAP amounts.

 

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A reconciliation of EBITDA to net income and to netcash provided by operating activities for the third quarter and first threequarters of 2008 and 2007 along with the components of EBITDA follows:

 
| ** **                                                                 | ** ** | **Thirteen Weeks Ended**   | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                 | ** ** | **September 27,  2008**         | ** ** | **September 29,  2007**          | ** ** | **September 27,  2008** | ** ** | **September 29,  2007** | ** ** |
| ** **                                                                 | ** ** | **(Dollars in thousands)** | ** ** |
| Net income                                                                 |       | $                                    | 2,890      |                                  | $          | 4,846 |   | $ | 10,829 |   | $ | 12,657 |   |
| Income tax expense                                                         |       | 1,792                                |       | 2,958                                 |       | 6,647 |   | 7,725 |   |
| Interest expense, net                                                      |       | 11,562                               |       | 12,374                                |       | 37,041 |   | 40,028 |   |
| Depreciation and amortization                                              |       | 3,887                                |       | 3,843                                 |       | 11,420 |   | 9,706 |   |
| EBITDA                                                                     |       | 20,131                               |       | 24,021                                |       | 65,937 |   | 70,116 |   |
| Income tax expense                                                         |       | (1,792                               | )          | (2,958                                | )          | (6,647 | ) | (7,725 | ) |
| Interest expense, net                                                      |       | (11,562                              | )          | (12,374                               | )          | (37,041 | ) | (40,028 | ) |
| Deferred income taxes                                                      |       | 2,042                                |       | 3,102                                 |       | 6,087 |   | 6,944 |   |
| Amortization of deferred financing costs                                   |       | 792                                  |       | 792                                   |       | 2,376 |   | 2,397 |   |
| Write off of deferred debt issuance costs                                  |       | —                               |       | —                                |       | — |   | 1,769 |   |
| Unrealized gain on interest rate swap                                      |       | (1,514                               | )          | —                                |       | (1,514 | ) | — |   |
| Other                                                                      |       | 76                                   |       | —                                |       | 76 |   | — |   |
| Stock-based compensation expense                                           |       | 152                                  |       | —                                |       | 510 |   | — |   |
| Changes in assets and liabilities, net of  effects of business combination |       | 8,108                                |       | (3,213                                | )          | (1,258 | ) | (12,273 | ) |
| Net cash provided by operating activities                                  |       | $                                    | 16,433     |                                  | $          | 9,370 |   | $ | 28,526 |   | $ | 21,200 |   |

 

***Third quarter of 2008 compared to the third quarterof 2007.***

** **

*Net Sales.*Netsales decreased $0.5 million or 0.4% to $116.5 million for the third quarter of2008 from $117.0 million for the third quarter of 2007. Price increases that werecently implemented improved net sales by $4.7 million during the thirdquarter of 2008. These pricing gains, however, were offset by a decrease in netsales of $5.2 million attributable to a unit volume decline. A substantialportion of the unit volume decline was attributable to (1) the poor maplesyrup crop in Canada in 2008 that resulted in an industry-wide shortfall ofmaple syrup and (2) a management decision to eliminate unprofitable salesto certain customers of private label pickles and peppers. Net sales of our *Maple Grove Farms* pure maple syrup and our private labelpickles and peppers declined in the third quarter of 2008 by $1.4 million and$0.2 million, respectively. In the case of pure maple syrup, this decline wasattributable to the unit volume decline partially offset by pricing gains.

 

Net sales of our *Ortega*, *Emeril’s*,*B&G*(excluding private label)**and *MapleGrove Farms*(excluding pure maple syrup)**products increased**in by $0.6 million, $0.4 million, $0.4 million and $0.3 million, or2.4%, 8.8%, 4.9% and 5.4%, respectively. These increases were offset by areduction in net sales of *Polaner* and *B&M* products of $0.5 million and $0.4 million, or 5.1% and 6.5%,respectively. In the aggregate, net sales for all other brands increased by$0.3 million, or 0.6%.

 

*Gross Profit.*Grossprofit decreased $7.6 million or 19.7% to $30.7 million for the third quarterof 2008 from $38.3 million for the third quarter of 2007. Gross profitexpressed as a percentage of net sales decreased 6.3% to 26.4% in the thirdquarter of 2008 from 32.7% in the third quarter of 2007. This decrease in grossprofit expressed as a percentage of net sales was primarily attributable toincreased costs for wheat, maple syrup, corn, packaging, transportation andsweeteners, partially offset by $4.7 million in sales price increases.

 

*Sales, Marketing and DistributionExpenses.*Sales, marketing and distribution expensesdecreased $2.3 million or 17.6% to $10.8 million for the third quarter of 2008from $13.1 million for the third quarter of 

 

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2007. Thisdecrease is primarily due to a decrease in consumer marketing of $1.3 millionand a decrease in brokerage and employee compensation of $0.9 million  Expressed as a percentage of net sales, oursales, marketing and distribution expenses decreased to 9.3% for the thirdquarter of 2008 from 11.2% for the third quarter of 2007.

 

*General and Administrative Expenses.*General and administrative expenses decreased $1.3 million or38.7% to $2.1 million for the third quarter of 2008 from $3.4 million in thethird quarter of 2007. This decrease was primarily the result of a decrease incompensation expense and bonus accruals of $1.6 million partially offset by anincrease in professional fees of $0.2 million.

 

*Amortization Expense*—*Customer Relationships.*Amortization expense—customer relationships remained consistentat $1.6 million for the third quarter of 2008 and for the third quarter of2007.

 

*Operating Income.*Asa result of the foregoing, operating income decreased $4.0 million or 19.5% to$16.2 million for the third quarter of 2008 from $20.2 million for the thirdquarter of 2007. Operating income expressed as a percentage of net salesdecreased to 13.9% in the third quarter of 2008 from 17.2% in the third quarterof 2007.

 

*Net Interest Expense.*Netinterest expense decreased $0.8 million or 6.6% to $11.6 million for the thirdquarter of 2008 from $12.4 million in the third quarter of 2007. Interestexpense in the third quarter of 2008 includes a reduction of $1.5 millionrelating to the unrealized gain on our interest rate swap subsequent to theLehman bankruptcy filing offset by a reclassification of $0.1 million of theamount recorded in accumulated other comprehensive income (loss) related to theswap and a reduction in interest income and capitalized interest on qualifyingassets based on our effective interest rate. See “—Liquidity and CapitalResources—Debt” below.

 

*Income Tax Expense.*Incometax expense decreased $1.2 million to $1.8 million for the third quarter of2008 from $3.0 million for the third quarter of 2007. Our effective tax ratewas 38.3% and 37.9% for the third quarter of 2008 and 2007, respectively. Thedifference in the effective tax rate is attributable to the difference intiming in the recording of our annual true-up expense. In 2008, we recorded theannual true-up expense during the third quarter. The comparable true-up expensein 2007 was not recorded until the fourth quarter.

 

***First three quarters of 2008 compared to first threequarters of 2007.***

** **

*Net Sales.*Netsales increased $13.0 million or 3.9% to $352.0 million for the first threequarters of 2008 from $339.0 million for the first three quarters of 2007. Wecompleted the *Cream of Wheat*acquisition inlate February 2007. Excluding the impact of the *Cream ofWheat*acquisition (which positively impacted net sales by $10.0million), and the termination of a temporary co-packing arrangement (whichnegatively impacted net sales by $0.8 million), net sales increased $3.8million or 1.2% during the first three quarters of 2008.

 

Price increases that we recently implemented improvednet sales by $5.3 million during the first three quarters of 2008. Thesepricing gains, however, were offset by a decrease in net sales of $1.5 millionattributable to a unit volume decline. A substantial portion of the unit volumedecline was attributable to (1) the poor maple syrup crop in Canada in2008 that resulted in an industry-wide shortfall of maple syrup and (2) amanagement decision to eliminate unprofitable sales to certain customers ofprivate label pickles and peppers. For the first three quarters of 2008, netsales of our *Maple Grove Farms* pure maplesyrup increased by $0.3 million as pricing gains offset the unit volume decline.Net sales of our private label pickles and peppers declined in the first threequarters of 2008 by $0.4 million.

 

Net sales of our lines of*Ortega*,***Maple GroveFarms*(excluding pure maple syrup),*Las Palmas*,*Joan of Arc*and*B&M*products increased**in the amounts of $3.0 million, $1.5million, $1.2 million, $0.4 million 

 

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and$0.4 million, or 4.1%, 9.4%, 6.8%, 6.4% and 2.1%, respectively. These increaseswere offset by a reduction in net sales of *Underwood,Regina,**Polaner*and *Emeril’s*products of $0.8 million, $0.7 million, $0.6million and $0.4 million, or 4.9%, 7.9%, 2.0% and 2.8%, respectively. In theaggregate, net sales for all other brands decreased $0.1 million, or 0.1%.

 

*Gross Profit.*Grossprofit decreased $9.1 million or 8.4% to $99.2 million for the first threequarters of 2008 from $108.3 million for the first three quarters of 2007. Grossprofit expressed as a percentage of net sales decreased 3.7% to 28.2% in thefirst three quarters of 2008 from 31.9% in the first three quarters of 2007. Thedecrease in gross profit expressed as percentage of net sales was primarilyattributable to increased costs for wheat, maple syrup, corn, packaging,transportation and sweeteners, partially offset by $5.3 million in sales priceincreases.

 

*Sales, Marketing and DistributionExpenses.*Sales, marketing and distribution expensesdecreased $2.6 million or 7.1% to $34.6 million for the first three quarters of2008 from $37.2 million for the first three quarters of 2007. The decrease isprimarily due to a decrease in consumer marketing of $1.3 million, brokerageand salesmen commissions of $1.0 million as well as general selling expenses of$0.5 million, offset by an increase in warehousing of $0.2 million. Expressedas a percentage of net sales, our sales, marketing and distribution expensesdecreased to 9.8% for the first three quarters of 2008 from 11.0% for the firstthree quarters of 2007.

 

*General and Administrative Expenses.*General and administrative expenses decreased $1.5 million or22.0% to $5.3 million for the first three quarters of 2008 from $6.8 million inthe first three quarters of 2007. Excluding the impact of the $0.8 millioninsurance reimbursement received in the second quarter of 2007 (which wasrecorded as an offset to general and administrative expense), general andadministrative expenses decreased by $2.3 million in the first three quartersof 2008 as compared to the first three quarters of 2007. This decrease wasprimarily the result of a decrease in compensation expense and bonus accrualsof $2.0 million, professional fees of $0.2 million and other expenses of $0.1million.

 

*Amortization Expense—CustomerRelationships.*Amortization expense—customer relationshipsincreased $0.9 million to $4.8 million for the first three quarters of 2008from $3.9 million for the first three quarters of 2007. This increase is attributable to the *Creamof Wheat*acquisition, which was completed during the first quarterof 2007.

 

*Operating Income.*Asa result of the foregoing, operating income decreased $5.9 million or 9.8% to$54.5 million for the first three quarters of 2008 from $60.4 million for thefirst three quarters of 2007. Operating income expressed as a percentage of netsales decreased to 15.5% in the first three quarters of 2008 from 17.8% in thefirst three quarters of 2007.

 

*Net Interest Expense.*Netinterest expense decreased $3.0 million or 7.5% to $37.0 million for the firstthree quarters of 2008 from $40.0 million in the first three quarters of 2007. Interestexpense for the first three quarters of 2007 included a write-off of deferredfinancing costs of $1.8 million relating to our prepayment of $100.0 million ofterm loan borrowings with a portion of the proceeds of our public offering of Class Acommon stock in May 2007. Our average debt outstanding was approximately$10.0 million lower for the first three quarters of 2008 as compared to thefirst three quarters of 2007. Interest expense in 2008 includes a reduction of$1.5 million relating to the unrealized gain on our interest rate swapsubsequent to the Lehman bankruptcy filing offset by a reclassification of $0.1million of the amount recorded in accumulated other comprehensive income (loss)related to the swap and a reduction in interest income and capitalized intereston qualifying assets based on our effective interest rate. See “—Liquidity andCapital Resources—Debt” below.

 

*Income Tax Expense.*Incometax expense decreased $1.1 million to $6.6 million for the first three quartersof 2008 from $7.7 million for the first three quarters of 2007. Our effectivetax rate was 38.0% and 

 

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37.9%for the first three quarters of 2008 and 2007, respectively. The difference inthe effective tax rate is attributable to the difference in timing in therecording of our annual true-up expense.

 

**Liquidity and Capital Resources**

 

Our primary liquidity requirements include debtservice, capital expenditures and working capital needs. See also, “DividendPolicy” and “Commitments and Contractual Obligations” below. We fund our liquidityrequirements, as well as our dividend payments and financing for acquisitions,primarily through cash generated from operations and to the extent necessary,through borrowings under our credit facility.

 

*Cash Flows*. Cashprovided by operating activities increased $7.3 million to $28.5 million forthe first three quarters of 2008 from $21.2 million for the first threequarters of 2007. The increase was due to changes relating to a decrease inaccounts receivable (primarily as a result of an increase in accountsreceivable at the end of the third quarter of 2007 from the *Cream of Wheat* acquisition) and inventoryoffset by a decrease in accounts payable and accrued expenses. Working capitalat September 27, 2008 was $112.3 million, a decrease of $2.8 million fromworking capital at December 29, 2007 of $115.1 million.

 

Net cash used in investing activities for the firstthree quarters of 2008 was $9.8 million as compared to $211.8 million for thefirst three quarters of 2007. Investment expenditures for the first threequarters of 2007 included $200.9 million for the *Cream ofWheat*acquisition. Capital expenditures during the first threequarters of 2008 decreased $1.1 million to $9.8 million from $10.9 millionduring the first three quarters of 2007 and included expenditures of $7.8million relating to the expansion of our Stoughton, Wisconsin facility and thetransfer of a portion of the *Cream of Wheat*productionto that facility.

 

Net cash used in financing activities for the firstthree quarters of 2008 was $23.4 million as compared to net cash provided byfinancing activities of $195.5 million for the first three quarters of 2007. Netcash used in financing activities for the first three quarters of 2008 wasentirely for the payment of dividends to holders of our Class A commonstock. Net cash provided by financing activities for the first three quartersof 2007 consisted of $205.0 million in additional term loan borrowings ($100.0million of which we subsequently prepaid during the second quarter of 2007),$193.2 million from the issuance of Class A common stock, net ofunderwriting discounts and commissions and other expenses, offset by $82.4million for the repurchase of Class B common stock, $16.3 million individends paid on our Class A common stock and $4.0 million in debtissuance costs.

 

Based on a number offactors, including our trademark, goodwill and customer relationshipintangibles amortization for tax purposes from our prior acquisitions, werealized a significant reduction in cash taxes in fiscal 2007 and 2006 ascompared to our tax expense for financial reporting purposes. While we expectour cash taxes to continue to increase in fiscal 2008 as compared to the priortwo years, we believe that we will realize a benefit to our cash taxes payablefrom amortization of our trademarks, goodwill and customer relationshipintangibles for the taxable years 2008 through 2022.

 

***Dividend Policy***

 

Our dividend policy reflects a basic judgment that ourstockholders would be better served if we distributed a substantial portion ofour cash available to pay dividends to them instead of retaining it in ourbusiness. Under this policy, a substantial portion of the cash generated by ourcompany in excess of operating needs, interest and principal payments on indebtedness,capital expenditures sufficient to maintain our properties and other assets isin general distributed as regular quarterly cash dividends (up to the intendeddividend rate as determined by our board of directors) to the holders of ourcommon stock and not retained by us. From the date of our initial publicoffering of EISs in October 2004 through the dividend payment we made on October 30,2008, the dividend rate for our Class A common stock was $0.848 per shareper annum.  Beginning with the dividendpayment previously declared and payable on January 30, 2009, the currentintended dividend rate for our Class A common stock is $0.68 per share perannum.

 

Dividend payments, however, are not mandatory orguaranteed and holders of our common stock do not have any legal right toreceive, or require us to pay, dividends. Furthermore, our board of directorsmay, in 

 

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itssole discretion, amend or repeal this dividend policy. Our board of directorsmay decrease the level of dividends below the intended dividend rate ordiscontinue entirely the payment of dividends. Future dividends with respect toshares of our common stock depend on, among other things, our results ofoperations, cash requirements, financial condition, contractual restrictions,business opportunities, acquisition opportunities, the condition of the debtand equity financing markets, provisions of applicable law and other factorsthat our board of directors may deem relevant. Our board of directors is freeto depart from or change our dividend policy at any time and could do so, forexample, if it was to determine that we have insufficient cash to takeadvantage of growth opportunities. In addition, over time, our EBITDA andcapital expenditure, working capital and other cash needs will be subject touncertainties, which could impact the level of dividends, if any, we pay in thefuture. Our senior subordinated notes indenture, the terms of our revolvingcredit facility and our senior notes indenture contain significant restrictionson our ability to make dividend payments. In addition, certain provisions ofthe Delaware General Corporation Law may limit our ability to pay dividends.

 

As a result of our dividend policy, we may not retaina sufficient amount of cash to finance growth opportunities or unanticipatedcapital expenditure needs or to fund our operations in the event of asignificant business downturn. We may have to forego growth opportunities orcapital expenditures that would otherwise be necessary or desirable if we donot find alternative sources of financing. If we do not have sufficient cashfor these purposes, our financial condition and our business will suffer.

 

For the first three quarters of 2008 and 2007, we hadcash flows provided by operating activities of $28.5 million and $21.2 million,and distributed $23.4 million and $16.3 million, respectively, as dividends. Ifour cash flows from operating activities for future periods were to fall belowour minimum expectations (or if our assumptions as to capital expenditures orinterest expense were too low or our assumptions as to the sufficiency of ourrevolving credit facility to finance our working capital needs were to proveincorrect), we would need either to reduce or eliminate dividends or, to theextent permitted under our senior notes indenture, our senior subordinatednotes indenture and the terms of our credit facility, fund a portion of ourdividends with borrowings or from other sources. If we were to use workingcapital or permanent borrowings to fund dividends, we would have less cashand/or borrowing capacity available for future dividends and other purposes,which could negatively impact our financial position, our results ofoperations, our liquidity and our ability to maintain or expand our business.

 

***Acquisitions***

 

Our liquidity and capital resources have beensignificantly impacted by acquisitions and may be impacted in the foreseeablefuture by additional acquisitions. We have historically financed acquisitionswith borrowings and cash flows from operating activities. Our interest expensewill increase with any additional indebtedness we may incur to finance futureacquisitions, if any. To the extent future acquisitions, if any, are financedby additional indebtedness, the resulting increase in debt and interest expensecould have a negative impact on liquidity.

 

***Environmental and Health andSafety Costs***

 

We have not made any material expenditures during thefirst three quarters of 2008 in order to comply with environmental laws orregulations. Based on our experience to date, we believe that the future costof compliance with existing environmental laws and regulations (and liabilityfor known environmental conditions) will not have a material adverse effect onour consolidated financial condition, results of operations or liquidity. However,we cannot predict what environmental or health and safety legislation orregulations will be enacted in the future or how existing or future laws orregulations will be enforced, administered or interpreted, nor can we predictthe amount of future expenditures that may be required in order to comply withsuch environmental or health and safety laws or regulations or to respond tosuch environmental claims.

 

During an environmental compliance audit of ourHurlock, Maryland facility conducted by a third-party consultant, we becameaware of reporting violations of the Emergency Planning and Community Right 

 

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to KnowAct (EPCRA). EPCRA requires companies that manufacture, use or process morethan a threshold amount of certain listed chemicals to file an annual chemicalrelease form with Environmental Protection Agency (EPA) and the state and anannual chemical inventory form to the state and local emergency planning and/orresponse commissions and the local fire department. For certain years we failedto file one or more of such reports with the EPA and/or duplicate copies withthe state and local government. We voluntarily self-disclosed these potentialviolations to the EPA pursuant to the EPA’s self-disclosure policy. During thethird quarter of 2008 we entered into a consent agreement with the EPA pursuantto which we settled the matter and agreed to a penalty of $94,509, which wepaid to the EPA during the fourth quarter of 2008. None of the reportingviolations resulted in any actual harm to the environment.

 

***Debt***

 

*Senior Secured Credit Facility*. In October 2004, we entered into a $30.0million senior secured revolving credit facility. In order to finance the *Grandma’s*molasses acquisition, we amended the creditfacility in January 2006 to provide for, among other things, a new $25.0million term loan and a reduction in the revolving credit facility commitmentsfrom $30.0 million to $25.0 million. In order to finance the *Cream of Wheat*acquisition, our credit facility was amendedand restated in February 2007 to provide for, among other things, anadditional $205.0 million of term loan borrowings. On May 29, 2007, weprepaid $100.0 million of term loan borrowings. Our $25.0 million revolvingcredit facility matures on January 10, 2011 and the remaining $130.0million of term loan borrowings matures on February 26, 2013, provided,however, that if we do not repay, redeem or refinance our senior notes prior toApril 1, 2011, the outstanding term loan borrowings will becomeimmediately due and payable on April 1, 2011.

 

Interest under the revolvingcredit facility, including any outstanding letters of credit, is determinedbased on alternative rates that we may choose in accordance with the revolvingcredit facility, including the base lending rate per annum plus an applicablemargin, and LIBOR plus an applicable margin. We pay a commitment fee of 0.50%per annum on the unused portion of the revolving credit facility. Interestunder the term loan facility is determined based on alternative rates that wemay choose in accordance with the credit facility, including the base lendingrate per annum plus an applicable margin of 1.00%, and LIBOR plus an applicablemargin of 2.00%.

 

Our obligations under thecredit facility are jointly and severally and fully and unconditionallyguaranteed on a senior basis by all of our existing and certain future domesticsubsidiaries. The credit facility is secured by substantially all of our andour subsidiaries’ assets except our and our subsidiaries’ real property. Thecredit facility provides for mandatory prepayment based on asset dispositionsand certain issuances of securities, as defined. The credit facility containscovenants that restrict, among other things, our ability to incur additionalindebtedness, pay dividends and create certain liens. The credit facility alsocontains certain financial maintenance covenants, which, among other things,specify maximum capital expenditure limits, a minimum interest coverage ratio anda maximum senior and total leverage ratio, each ratio as defined. As of September 27,2008, we were in compliance with all of the covenants in the credit facility. Proceedsof the revolving credit facility are restricted to funding our working capitalrequirements, capital expenditures and acquisitions of companies in the sameline of business as our company, subject to specified criteria. The maximumletter of credit capacity under the revolving credit facility is $10.0 million,with a fronting fee of 3.0% per annum for all outstanding letters of credit.

 

On September 15, 2008,Lehman Brothers Holdings Inc. (Lehman) filed for protection under Chapter 11 ofthe U.S. Bankruptcy Code. Lehman Commercial Paper Inc. (Lehman CPI), a Lehmansubsidiary, is the administrative agent under our credit facility. Lehman CPIfiled for protection under Chapter 11 of the U.S. Bankruptcy Code on October 3,2008. None of our $130.0 million of outstanding term loans is currently withLehman, Lehman CPI or any other subsidiary of Lehman. Lehman CPI is one of thelenders participating in our $25.0 million revolving credit facility. However,Lehman CPI has only $3.1 million of the $25.0 million commitment. The otherlenders under the revolving credit facility and their respective commitmentsare as 

 

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follows: Bank of America, N.A., $9.4 million; Citibank, N.A., $9.4 million; andRoyal Bank of Canada, $3.1 million. We do not believe that Lehman CPI wouldhonor its funding commitment under the revolving credit facility if we were tomake a funding request. As a result, the effective available borrowing capacityunder our revolving credit facility, net of outstanding letters of credit of$2.4 million, was $19.5 million at September 27, 2008. We have not drawnupon the revolving credit facility since its inception in October 2004and, based upon our cash on hand and working capital requirements, we have noplans to do so for the foreseeable future.

 

Effective as of February 26,2007, we entered into a six year interest rate swap agreement in order toeffectively fix at 7.0925% the interest rate payable for $130.0 million of termloan borrowings through the life of the term loan, ending on February 26,2013. The interest rate for the remaining $100.0 million of term loanborrowings, which we subsequently prepaid, was 7.36% as of the prepayment date(based upon a three-month LIBOR rate in effect at that time that expired on May 25,2007). The counterparty to the swap is Lehman Special Financing Inc (LehmanSFI). Lehman SFI filed for protection under Chapter 11 of the U.S. BankruptcyCode on October 3, 2008.

 

We initially designated theswap as a cash flow hedge under the guidelines of SFAS No. 133. Prior toLehman’s bankruptcy filing, we recorded changes in the fair value of the swapin other comprehensive income (loss), net of tax in our consolidated balancesheet. However, as a result of the Lehman bankruptcy filing, we determined thatthe interest rate swap was no longer an effective hedge as defined by SFAS No. 133and, accordingly, subsequent changes in the swap’s fair value are beingrecorded in current earnings in net interest expense in the consolidatedstatements of operations. We obtain third-party verification of fair value atthe end of each reporting period. As of September 27, 2008, the fair valueof our interest rate swap was $6.0 million and is recorded in other liabilitieson our consolidated balance sheet. The amount recorded in accumulated othercomprehensive income (loss) will be reclassified to net interest expense overthe remaining life of the term loan borrowings as we make interest payments. Duringthe third quarter of 2008, we reclassified to net interest expense $0.1 millionof the amount recorded in accumulated other comprehensive income (loss) andexpect to reclassify to net interest expense $0.4 million during the fourthquarter of 2008. During fiscal 2009, we expect to reclassify to net interestexpense $1.7 million of the amount recorded in accumulated other comprehensiveincome (loss).

 

*12.0% Senior Subordinated Notes due 2016*.In October 2004, we issued $165.8 million aggregate principal amount of12.0% senior subordinated notes due 2016, $143.0 million of which in the formof EISs and $22.8 million separate from EISs. As of September 27, 2008,$122.1 million aggregate principal amount of senior subordinated notes was heldin the form of EISs and $43.7 million aggregate principal amount of seniorsubordinated notes was held separate from EISs.

 

Interest on the seniorsubordinated notes is payable quarterly in arrears on each January 30, April 30,July 30 and October 30 through the maturity date. The seniorsubordinated notes will mature on October 30, 2016, unless earlier retiredor redeemed as described below.

 

Upon the occurrence of achange of control (as defined in the indenture), unless we have retired thesenior subordinated notes or exercised our right to redeem all seniorsubordinated notes as described below, each holder of the senior subordinatednotes has the right to require us to repurchase that holder’s seniorsubordinated notes at a price equal to 101.0% of the principal amount of thesenior subordinated notes being repurchased, plus any accrued and unpaidinterest to the date of repurchase. In order to exercise this right, a holdermust separate the senior subordinated notes and Class A common stockrepresented by such holder’s EISs.

 

We may not redeem the seniorsubordinated notes prior to October 30, 2009. On and after October 30,2009, we may redeem for cash all or part of the senior subordinated notes at aredemption price of 106.0% beginning October 30, 2009 and thereafter atprices declining annually to 100% on or after October 30, 2012.

 

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If we redeem any senior subordinated notes,the senior subordinated notes and Class A common stock represented by eachEIS will be automatically separated.

 

The senior subordinatednotes are unsecured obligations and are subordinated in right of payment to allof our existing and future senior secured and senior unsecured indebtedness,including the indebtedness under our credit facility and our senior notes. Thesenior subordinated notes rank pari passu in right of payment with any of ourother subordinated indebtedness.

 

Our obligations under thesenior subordinated notes are jointly and severally and fully andunconditionally guaranteed by all of our existing domestic subsidiaries andcertain future domestic subsidiaries on an unsecured and subordinated basis onthe terms set forth in our senior subordinated notes indenture. The seniorsubordinated note guarantees are subordinated in right of payment to all existingand future senior indebtedness of the guarantors, including the indebtednessunder our credit facility and the senior notes. Our foreign subsidiary is not aguarantor, and any future foreign or partially owned domestic subsidiaries willnot be guarantors, of our senior subordinated notes.

 

Our senior subordinatednotes indenture contains covenants with respect to us and the guarantors andrestricts the incurrence of additional indebtedness and the issuance of capitalstock; the payment of dividends or distributions on, and redemption of, capitalstock; a number of other restricted payments, including certain investments;specified creation of liens, sale-leaseback transactions and sales of assets;fundamental changes, including consolidation, mergers and transfers of all orsubstantially all of our assets; and specified transactions with affiliates. Eachof the covenants is subject to a number of important exceptions andqualifications. As of September 27, 2008, we were in compliance with allof the covenants in the senior subordinated notes indenture.

 

*8.0% Senior Notes due 2011*. In October 2004, we issued $240.0million aggregate principal amount of 8.0% senior notes due 2011. Interest onthe senior notes is payable on April 1 and October 1 of each year. Thesenior notes will mature on October 1, 2011, unless earlier retired orredeemed as described below.

 

We may not redeem the seniornotes prior to October 1, 2008. However, we may, from time to time, seekto retire senior notes through cash repurchases of senior notes and/orexchanges of senior notes for equity securities, in open market purchases,privately negotiated transactions or otherwise. Such repurchases or exchanges,if any, will depend on prevailing market conditions, our liquidityrequirements, contractual restrictions and other factors.

 

On and after October 1,2008, we may redeem some or all of the senior notes at a redemption price of104.0% beginning October 1, 2008 and thereafter at prices decliningannually to 100.0% on or after October 1, 2010. If we or any of theguarantors sell certain assets or experience specific kinds of changes incontrol, we must offer to purchase the senior notes at the prices as describedin our senior notes indenture plus accrued and unpaid interest to the date ofredemption.

 

Our obligations under thesenior notes are jointly and severally and fully and unconditionally guaranteedon a senior basis by all of our existing and certain future domesticsubsidiaries. The senior notes and the subsidiary guarantees are our and theguarantors’ general unsecured obligations and are effectively junior in rightof payment to all of our and the guarantors’ secured indebtedness and to theindebtedness and other liabilities of our non-guarantor subsidiaries; are paripassu in right of payment to all of our and the guarantors’ existing and futureunsecured senior debt; and are senior in right of payment to all of our and theguarantors’ future subordinated debt, including the senior subordinated notes. Ourforeign subsidiary is not a guarantor, and any future foreign or partiallyowned domestic subsidiaries will not be guarantors, of our senior notes.

 

Our senior notes indenturecontains covenants with respect to us and the guarantors and restricts theincurrence of additional indebtedness and the issuance of capital stock; thepayment of dividends or 

 

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distributions on, and redemption of, capitalstock; a number of other restricted payments, including certain investments;specified creation of liens, sale-leaseback transactions and sales of assets;fundamental changes, including consolidation, mergers and transfers of all orsubstantially all of our assets; and specified transactions with affiliates. Eachof the covenants is subject to a number of important exceptions andqualifications. As of September 27, 2008, we were in compliance with allof the covenants in the senior notes indenture.

 

***Stock and DebtRepurchase Plan***

 

On October 27, 2008, our board of directors authorizeda stock and debt repurchase program for the repurchase of up to $10.0 millionof our Class A common stock and/or senior notes over the next twelvemonths. Under the authorization, we may purchase shares of Class A commonstock and/or senior notes from time to time in the open market or in privatelynegotiated transactions in compliance with the applicable rules andregulations of the SEC.

 

The timing and amount of such repurchases, if any,will be at the discretion of management, and will depend on market conditionsand other considerations. Therefore, there can be no assurance as to the numberof shares, if any, that will be repurchased under the stock and debt repurchaseprogram, or the aggregate dollar amount of the shares or principal amount ofsenior notes, if any, repurchased. We may discontinue the program at any time. Anyshares repurchased pursuant to the stock repurchase program will be cancelled. Likewise,any senior notes repurchased will be cancelled. In general, our creditagreement prohibits us from repurchasing our senior subordinated notes.

 

***Future CapitalNeeds***

 

We are highly leveraged. On September 27,2008, our total long-term debt and stockholders’ equity was $535.8 million and$161.6 million, respectively.

 

Our ability to generatesufficient cash to fund our operations depends generally on our results ofoperations and the availability of financing. Our management believes that ourcash on hand, cash flow from operating activities and available borrowingcapacity under our revolving credit facility will be sufficient for theforeseeable future to fund operations, meet debt service requirements, fundcapital expenditures, and pay our anticipated dividends on our Class Acommon stock. We expect to make capital expenditures of approximately$11.0 million in the aggregate during fiscal 2008, $9.8 million of which havealready been made, and approximately $9.0 million during 2009.

 

***Seasonality***

 

Sales of a number of ourproducts tend to be seasonal. In the aggregate, however, our sales are notheavily weighted to any particular quarter due to the diversity of our productand brand portfolio. Sales during the first quarter of the fiscal year aregenerally below those of the following three quarters.

 

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

 

***Inflat******ion***

 

In addition, the cost oflabor, manufacturing, energy, fuel, packaging materials and other costs relatedto the production and distribution of our food products have risensignificantly in recent years and at an increasing rate during 2008. We expectthat many of these costs will continue to rise for the foreseeable future. Weattempt to manage these risks by entering into short-term supply contracts andadvance 

 

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commodities purchase agreements from time totime, implementing cost saving measures and, when necessary, by raising salesprices. To date, our cost saving measures and sales price increases have notfully offset increases to our raw material, ingredient, packaging anddistribution costs and as a result our operating results have been negativelyimpacted. To the extent we are unable to offset present and future costincreases, our operating results will continue to be negatively impacted.

 

**RecentAccounting Pronouncements**

** **

In September 2006, theFASB issued SFAS No. 157, “*Fair Value Measurements*”(SFAS No. 157), which defines fair value, establishes a framework formeasuring fair value and expands disclosures about fair value measurements. Theprovisions of SFAS No. 157 are effective as of the beginning of our 2008fiscal year, with the exception of certain provisions deferred until thebeginning of our 2009 fiscal year. In February 2008, the FASB issued FASBStaff Position SFAS No. 157-2, “*EffectiveDate of FASB Statement No. 157*”, which delayed the effectivedate of SFAS No. 157 for all non-financial assets and liabilities, exceptthose that are recognized or disclosed at fair value in the financialstatements on a recurring basis, until January 1, 2009. The impact of theadoption of SFAS No. 157 for financial assets and liabilities was notmaterial to our consolidated interim financial statements. We have not yetdetermined the impact that the adoption of SFAS No. 157 will have on ournon-financial assets and liabilities which are not recognized on a recurringbasis;however we do notanticipate it to materially impact our consolidated financial statements.

 

In October 2008, theFASB issued FASB Staff Position No. FAS 157-3, “*DeterminingFair Value of a Financial Asset in a Market That Is Not Active*” (FSPNo. FAS 157-3). FSP No. FAS 157-3 clarified the application of SFAS No. 157in an inactive market. It demonstrated how the fair value of a financial assetis determined when the market for that financial asset is inactive. FSP No. FAS157-3 was effective upon issuance, including prior periods for which financialstatements had not been issued. The implementation of this standard did nothave a material impact on our consolidated financial position and results ofoperations.

 

In December 2007, theFASB issued SFAS No. 141 (revised 2007), “*Business Combinations*”(SFAS No. 141R) and SFAS No. 160, “*Noncontrolling Interests inConsolidated Financial Statements*” (SFAS No. 160). SFAS No. 141Rrequires an acquirer to measure the identifiable assets acquired, theliabilities assumed and any noncontrolling interest in the acquiree at theirfair values on the acquisition date, with goodwill being the excess value overthe net identifiable assets acquired. SFAS No. 160 clarifies that anoncontrolling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements. SFAS No. 141R and SFAS No. 160 are effective asof the beginning of our 2009 fiscal year. SFAS No. 141R will be appliedprospectively. The effects of SFAS No. 141R will depend on futureacquisitions. SFAS No. 160 requires retroactive adoption. We currently donot have any noncontrolling interests in subsidiaries.

 

In March 2008, the FASBissued SFAS No. 161, “*Disclosures aboutDerivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133*.”  This statement changes the disclosurerequirements for derivative instruments and hedging activities. SFAS No. 161requires enhanced disclosures about (a) how and why an entity uses derivativeinstruments, (b) how derivative instruments and related hedged items areaccounted for under SFAS No. 133 and its related interpretations, and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows. SFAS No. 161 is effectiveas of the beginning of our 2009 fiscal year. We are currently evaluating thepotential impact, if any, of the adoption of SFAS No. 161 on ourconsolidated financial statements.

 

In April 2008, the FASBissued FASB Staff Position No. FAS 142-3, “*Determinationof the Useful Life of Intangible Assets”* (FSP No. FAS 142-3). FSPNo. FAS 142-3 requires companies estimating the useful life of arecognized intangible asset to consider their historical experience in renewingor extending similar arrangements or, in the absence of historical experience,to consider assumptions that market participants would use about renewal orextension as adjusted for entity-specific factors. FSP No. FAS 142-3 iseffective as of the beginning of our 2009 fiscal year. We are currentlyevaluating the potential impact, if any, of the adoption of FSP No. FAS142-3 on our consolidated financial statements.

 

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**Off-balance Sheet Arrangements**

 

As of September 27, 2008, we did not have anyoff-balance sheet arrangements as defined in Item 303(a)(4)(ii) ofRegulation S-K.

 

**Commitmentsand Contractual Obligations**

** **

Our contractual obligationsand commitments principally include obligations associated with our outstandingindebtedness, future minimum operating lease obligations and future pensionobligations. During the first three quarters of 2008, there were no materialchanges outside the ordinary course of business in the specified contractualobligations set forth in our 2007 Annual Report on Form 10-K, except thatwe entered into a new lease in Tennessee (in connection with the transfer ofour warehousing operations in Tennessee from one leased location to anotherleased location) that will require us to make rental payments of approximately$4.0 million in the aggregate over the course of the lease, which expires in2013. In addition, our expected contributions to our defined benefit pensionplans for fiscal 2008 have increased from $0.1 million to $1.1 because,although not obligated to do so, we made $0.5 million of contributions to ourdefined benefit pension plans during the third quarter of 2008 and expect tomake an additional contribution of $0.6 million during the fourth quarter.

 

***Forward-LookingStatements***

** **

This report includes forward-looking statements,including without limitation the statements under “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.”  The words “believes,” “anticipates,” “plans,”“expects,” “intends,” “estimates,” “projects” and similar expressions areintended to identify forward-looking statements. These forward lookingstatements involve known and unknown risks, uncertainties and other factorsthat may cause our actual results, performance and achievements, or industryresults, to be materially different from any future results, performance, orachievements expressed or implied by any forward-looking statements. We believeimportant factors that could cause actual results to differ materially from ourexpectations include the following:

 

·                  our substantial leverage;

 

·                  the effects of rising costsfor our raw materials, packaging and ingredients;

 

·                  crude oil prices and theirimpact on distribution, packaging and energy costs;

 

·                  our ability to successfullyimplement sales price increases and cost saving measures to offset costincreases;

 

·                  intense competition, changesin consumer preferences, demand for our products and local economic and marketconditions;

 

·                  our continued ability topromote brand equity successfully, to anticipate and respond to new consumertrends, to develop new products and markets, to broaden brand portfolios inorder to compete effectively with lower priced products and in markets that areconsolidating at the retail and manufacturing levels and to improveproductivity;

 

·                  the risks associated withthe expansion of our business;

 

·                  our possible inability tointegrate any businesses we acquire;

 

·                  our ability to access thecredit markets and our borrowing costs and credit ratings, which may beinfluenced by credit markets generally and the credit ratings of ourcompetitors;

 

·                  the effects of currencymovements of the Canadian dollar as compared to the U.S. dollar;

 

·                  other factors that affectthe food industry generally, including:

 

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·                  recalls ifproducts become adulterated or misbranded, liability if product consumptioncauses injury, ingredient disclosure and labeling laws and regulations and thepossibility that consumers could lose confidence in the safety and quality ofcertain food products, as well as recent publicity concerning the healthimplications of obesity and trans fatty acids;

 

·                  competitors’pricing practices and promotional spending levels;

 

·                  the risksassociated with third-party suppliers and co-packers, including the risk thatany failure by one or more of our third-party suppliers or co-packers to complywith food safety or other laws and regulations may disrupt our supply of rawmaterials or certain finished goods products; and

 

·                  fluctuations inthe level of our customers’ inventories and credit and other business risksrelated to our customers operating in a challenging economic and competitiveenvironment; and

 

·                       other factorsdiscussed elsewhere in this report and in our other public filings with the SEC,including under Item 1A, “Risk Factors” in our 2007 Annual Report on Form 10-K.

 

Developments in any of these areas could cause ourresults to differ materially from results that have been or may be projected byor on our behalf.

 

All forward-looking statements included in this reportare based on information available to us on the date of this report. Weundertake no obligation to publicly update or revise any forward-lookingstatement, whether as a result of new information, future events or otherwise.All subsequent written and oral forward-looking statements attributable to usor persons acting on our behalf are expressly qualified in their entirety bythe cautionary statements contained in this report.

 

We caution that the foregoing list of importantfactors is not exclusive. We urge investors not to unduly rely onforward-looking statements contained in this report.

 

**Item3.**         Quantitative and Qualitative DisclosuresAbout Market Risk

** **

In the normal course of operations, we are exposed tomarket risks arising from adverse changes in interest rates. Market risk isdefined for these purposes as the potential change in the fair value of afinancial asset or liability resulting from an adverse movement in interestrates.

 

Interest under our $25.0million revolving credit facility, including any outstanding letters of credit,is determined based on alternative rates that we may choose in accordance withthe revolving credit facility, including the base lending rate per annum plusan applicable margin, and LIBOR plus an applicable margin. Interest under ourterm loan facility is determined based on alternative rates that we may choosein accordance with the credit facility, including the base lending rate perannum plus an applicable margin of 1.00%, and LIBOR plus an applicable marginof 2.00%. The revolving credit facility was undrawn at September 27, 2008.Lehman CPI is one of the lenders participating in our revolving creditfacility.  Lehman CPI has only $3.1million of the $25.0 million commitment. As a result of the bankruptcy filingsby Lehman and Lehman CPI discussed above in Item 2, we do not believe thatLehman CPI would honor its funding commitment under the revolving creditfacility if we were to make a funding request. As a result, the effective availableborrowing capacity under our revolving credit facility, net of outstandingletters of credit of $2.4 million, was $19.5 million at September 27,2008.

 

We have outstanding $130.0million of term loan borrowings at September 27, 2008 and December 29,2007. The interest rate payable for our term loan borrowings is effectivelyfixed at 7.0925% based upon a six year interest rate swap agreement that weentered into on February 26, 2007. However, as a result of the bankruptcyfilings by Lehman and Lehman SFI discussed above in Item 2, we have determinedthat the interest rate swap is no longer an effective hedge as defined by SFAS No. 133.The carrying value of our term loan borrowings approximates fair value becauseinterest rates under the term loan borrowings are variable, based on prevailingmarket rates. A 1.0% increase in interest rates, applied to our variable rateborrowings at 

 

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September 27, 2008, would result in anannual increase in interest expense and a corresponding reduction in cash flowof $1.3 million.

 

The information regarding our interest rate swap underthe heading “Liquidity and Capital Resources—Debt—Senior Secured CreditFacility” in Item 2, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” is incorporated herein by reference.

 

Thecarrying values and fair values of our senior notes and senior subordinatednotes as of September 27, 2008 and December 29, 2007 are as follows(dollars in thousands):

 
| ** **                                                   | ** ** | **September 27, 2008** | ** ** | **December 29, 2007** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                   | ** ** | **Carrying Value**          | ** ** | **Fair Value(1)(2)**       | ** ** | **Carrying Value** | ** ** | **Fair Value(1)(3)** | ** ** |
| 8% Senior Notes due October 1, 2011                     |       | $                                | 240,000    |                            | $          | 231,600 |   | $ | 240,000 |   | $ | 235,800 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| 12% Senior Subordinated Notes due  October 30, 2016(2): |       |                             |       |                            |       |   |   |   |   |
| — represented by EISs                                   |       | 122,103                          |       | 118,517                         |       | 119,067 |   | 126,561 |   |
| — held separately                                       |       | 43,697                           |       | 42,413                          |       | 46,733 |   | 49,674 |   |
|                                                              |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

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(1)          Fair values are estimated based on quoted market prices, except asotherwise noted in footnotes (2) and (3) below.

 

(2)          Solely for purposes of this presentation, we have assumed that the fairvalue of each senior subordinated note at September 27, 2008 was $6.94 basedupon the $7.50 per share closing price of our separately traded Class Acommon stock and the $14.44 per EIS closing price of our EISs on the New YorkStock Exchange on September 26, 2008 (the last business day of the firstthree quarters of 2008). Each EIS represents one share of Class A commonstock and $7.15 principal amount of our senior subordinated notes.

 

(3)          Solely for purposes of this presentation, we have assumed that the fairvalue of each senior subordinated note at December 29, 2007 was $7.60,based upon the $10.07 per share closing price of our separately traded Class Acommon stock and the $17.67 per EIS closing price of our EISs on the New YorkStock Exchange on December 28, 2007 (the last business day of fiscal2007).

 

The recent volatility in the global financial marketscould negatively impact the fair value of our debt obligations.

 

The information under the heading “Inflation” in Item2, “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” is incorporated herein by reference.

 

**Item4.**         Controls and Procedures

** **

*Evaluation of Disclosure Controlsand Procedures.*As required by Rule 13a-15(b) underthe Securities Exchange Act of 1934, as amended, our management, including ourchief executive officer and our chief financial officer, conducted anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of the period covered by this report. Asdefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,disclosure controls and procedures are controls and other procedures that weuse that are designed to ensure that information required to be disclosed by usin the reports we file or submit under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the SEC’s rules andforms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed byus in the reports we file or submit under the Exchange Act is accumulated andcommunicated to our management, including our chief executive officer and ourchief financial officer, as appropriate, to allow timely decisions regardingrequired disclosure.

 

Based on that evaluation, our chief executive officerand our chief financial officer concluded that our disclosure controls andprocedures were effective as of the end of the period covered by this report.

 

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*Changes in Internal Control OverFinancial Reporting*. As required by Rule 13a-15(d) underthe Exchange Act, our management, including our chief executive officer and ourchief financial officer, also conducted an evaluation of our internal controlover financial reporting to determine whether any change occurred during thequarter covered by this report that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting. Basedon that evaluation, our chief executive officer and our chief financial officerconcluded that there has been no change during the period covered by thisreport that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

*Inherent Limitations on Effectiveness of Controls.*Ourcompany’s management, including the chief executive officer and chief financialofficer, does not expect that our disclosure controls or our internal controlover financial reporting will prevent or detect all errors and all fraud. Acontrol system, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance that the control system’s objectives will bemet. The design of a control system must reflect the fact that there areresource constraints, and the benefits of controls must be considered relativeto their costs. Further, because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance thatmisstatements due to error or fraud will not occur or that all control issuesand instances of fraud, if any, within our company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty and that breakdowns can occur because of simple error or mistake.Controls can also be circumvented by the individual acts of some persons, bycollusion of two or more people, or by management override of the controls. Thedesign of any system of controls is based in part on certain assumptions aboutthe likelihood of future events, and there can be no assurance that any designwill succeed in achieving its stated goals under all potential futureconditions. Projections of any evaluation of controls effectiveness to futureperiods are subject to risks. Over time, controls may become inadequate becauseof changes in conditions or deterioration in the degree of compliance withpolicies or procedures.

 

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**PART IIOTHER INFORMATION**

** **

**Item 1.**           Legal Proceedings

** **

We are from time to timeinvolved in various claims and legal actions arising in the ordinary course ofbusiness, including proceedings involving product liability claims, worker’scompensation and other employee claims, and tort and other general liabilityclaims, as well as trademark, copyright, patent infringement and related claimsand legal actions. In the opinion of our management, the ultimate dispositionof any currently pending claims or actions will not have a material adverseeffect on our consolidated financial position, results of operations orliquidity.

 

**Item 1A. Risk Factors**

** **

We do not believe therehave been any material changes in our risk factors as previously disclosed inour 2007 Annual Report on Form 10-K.

 

**Item 2.**           Unregistered Sales of Equity Securities and Useof Proceeds

** **

Not applicable.

 

**Item 3.**           Defaults Upon Senior Securities

** **

Not applicable.

 

**Item 4.**           Submission of Matters to a Vote of SecurityHolders

 

Not applicable.

 

**Item 5.**           Other Information

** **

Not applicable.

 

**Item 6.    Exhibits**

 
| **EXHIBIT   NO.** | ** ** | **DESCRIPTION**                                                                                                                                                                                  |
|------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                   |       |                                                                                                                                                                                             |
| 31.1                   |       | Certification pursuant to  Rule 13a-14(a) or Rule 15d-14(a) of the Securities  Exchange Act of 1934 of the Chief Executive Officer.                                          |
| 31.2                   |       | Certification pursuant to  Rule 13a-14(a) or Rule 15d-14(a) of the Securities  Exchange Act of 1934 of the Chief Financial Officer.                                          |
| 32.1                   |       | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of the Chief Executive Officer and Chief  Financial Officer. |

 

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**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| Dated: October 30, 2008 | B&G FOODS, INC. |
|------------------------------|---------------------|
|                         |                |   |
|                         |                |   |
|                         | By:                 | /s/ Robert C. Cantwell |
|                         |                | Robert C. Cantwell |
|                         |                | Executive Vice President and Chief  Financial   Officer (Principal Financial and Accounting   Officer and Authorized Officer) |

 

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