As filed with the Securities and ExchangeCommission on October 31, 2005

 

****UNITED STATES****

****SECURITIES AND EXCHANGE COMMISSION****

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

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

| (Mark  one)                                    |       |
|------------------------------------------------|------------|
| ý                                         | ** ** | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                           |       |   |
| For the quarterly period ended October 1, 2005 |
|                                           |       |   |
| or                                             |
|                                           |       |   |
| o                                              | ** ** | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**For the transition period from             to             **

**Commissionfile number 001-32316**

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

(Exact name of Registrant as specified in itscharter)

| **Delaware**                                                                     | ** ** | **13-3918742**                       |
|----------------------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of                                                  |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)                                                   | ** ** | ** **                           |
| ** **                                                                       | ** ** | ** **                           |
| **4 Gatehall Drive, Suite 110, Parsippany, New Jersey**                          | ** ** | **07054**                            |
| (Address of principal executive offices)                                         |       | (Zip Code)                           |
|                                                                             |       |                                 |
| Registrant’s telephone number, including area code: ****(973)  401-6500**** |

 

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

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act). Yes o No ý

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

Asof October 31, 2005, the registrant had 20,000,000 shares of Class A commonstock, par value $0.01 per share, and 7,556,443 shares of Class B common stock,par value $0.01 per share, outstanding.

 

 

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B&G Foods, Inc. and SubsidiariesIndex
|                         |                                                                                        | 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 | 23       |
| Item 3.                      |  Quantitative  and Qualitative Disclosures About Market Risk                           | 53       |
| Item 4.                      | Controls and Procedures                                                                     | 54       |
| PART II OTHER INFORMATION    | 55                                                                                          |
| Item  1.                     |  Legal  Proceedings                                                                    | 55       |
| Item 2.                      | Unregistered Sales of Equity Securities and Use of  Proceeds                                | 55       |
| Item 3.                      | Defaults Upon Senior Securities                                                             | 55       |
| Item 4.                      |  Submission of  Matters to a Vote of Security Holders                                  | 55       |
| Item  5.                     |  Other  Information                                                                    | 55       |
| Item 6.                      | Exhibits                                                                                    | 55       |
| SIGNATURE                    | 56                                                                                          |
|                              |                                                                                             |          |  |  |

 

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** **

**PARTIFINANCIAL INFORMATION**

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

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

**Consolidated Balance Sheets**

**(Dollars inthousands, except per share data)**

**(Unaudited)**

** **
| ** **                                                                                                                | ** ** | **October 1, 2005** | ** ** | **January 1, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| **Assets**                                                                                                                |       |                |       |                |       |
| Current assets:                                                                                                           |       |                |       |                |       |
| Cash and cash equivalents                                                                                                 |       | $                   | 22,858     |                | $          | 28,525 |   |
| Trade accounts receivable, net                                                                                            |       | 28,384              |       | 28,227              |       |
| Inventories                                                                                                               |       | 92,123              |       | 79,109              |       |
| Prepaid expenses                                                                                                          |       | 2,986               |       | 2,806               |       |
| Deferred income taxes                                                                                                     |       | 1,782               |       | 1,782               |       |
| Income tax receivable                                                                                                     |       | 7,748               |       | 7,006               |       |
| Total current assets                                                                                                      |       | 155,881             |       | 147,455             |       |
|                                                                                                                      |       |                |       |                |       |
| Property, plant and  equipment, net                                                                                       |       | 41,069              |       | 43,774              |       |
| Goodwill                                                                                                                  |       | 188,629             |       | 188,629             |       |
| Trademarks                                                                                                                |       | 193,481             |       | 193,481             |       |
| Net deferred financing  costs and other assets                                                                            |       | 20,519              |       | 22,613              |       |
| Total assets                                                                                                              |       | $                   | 599,579    |                | $          | 595,952 |   |
|                                                                                                                      |       |                |       |                |       |
| **Liabilities and Stockholders’ Equity**                                                                             |       |                |       |                |       |
|                                                                                                                      |       |                |       |                |       |
| Current liabilities:                                                                                                      |       |                |       |                |       |
| Trade accounts payable                                                                                                    |       | $                   | 26,563     |                | $          | 25,861 |   |
| Accrued expenses                                                                                                          |       | 20,261              |       | 16,082              |       |
| Dividends payable                                                                                                         |       | 4,240               |       | 3,728               |       |
| Total current liabilities                                                                                                 |       | 51,064              |       | 45,671              |       |
|                                                                                                                      |       |                |       |                |       |
| Long-term debt                                                                                                            |       | 405,800             |       | 405,800             |       |
| Other liabilities                                                                                                         |       | 263                 |       | 317                 |       |
| Deferred income taxes                                                                                                     |       | 56,550              |       | 51,903              |       |
| Total liabilities                                                                                                         |       | 513,677             |       | 503,691             |       |
|                                                                                                                      |       |                |       |                |       |
| Stockholders’ equity:                                                                                                |       |                |       |                |       |
| Class A common stock, $0.01 par value per share. Authorized  100,000,000 shares; issued and outstanding 20,000,000 shares |       | 200                 |       | 200                 |       |
| Class B common stock, $0.01 par value per share. Authorized  25,000,000 shares; issued and outstanding 7,556,443 shares   |       | 76                  |       | 76                  |       |
| Additional paid-in capital                                                                                                |       | 156,800             |       | 156,800             |       |
| Accumulated other  comprehensive loss                                                                                     |       | (18                 | )          | (25                 | )          |
| Accumulated deficit                                                                                                       |       | (71,156             | )          | (64,790             | )          |
| Total stockholders’ equity                                                                                           |       | 85,902              |       | 92,261              |       |
| Total liabilities and stockholders’ equity                                                                           |       | $                   | 599,579    |                | $          | 595,952 |   |

 

See Notes to Consolidated Financial Statements.

 

1

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

**Consolidated Statements of Operations**

**(Dollars inthousands, except per share data)**

**(Unaudited)**

 
| ** **                                                      | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                      | ** ** | **October 1, 2005**      | ** ** | **October 2, 2004**         | ** ** | **October 1, 2005** | ** ** | **October 2, 2004** | ** ** |
|                                                            |       |                     |       |                        |       |   |   |   |   |
| Net sales                                                       |       | $                        | 92,316     |                        | $          | 91,941 |   | $ | 276,543 |   | $ | 276,353 |   |
| Cost of goods sold                                              |       | 64,472                   |       | 64,924                      |       | 194,997 |   | 190,884 |   |
| Cost of goods sold —  restructuring charge                 |       | 300                      |       | —                      |       | 3,544 |   | — |   |
| Gross profit                                                    |       | 27,544                   |       | 27,017                      |       | 78,002 |   | 85,469 |   |
|                                                            |       |                     |       |                        |       |   |   |   |   |
| Operating expenses:                                             |       |                     |       |                        |       |   |   |   |   |
| Sales, marketing and  distribution expenses                     |       | 10,364                   |       | 9,646                       |       | 31,224 |   | 31,866 |   |
| General and administrative  expenses                            |       | 1,697                    |       | 1,227                       |       | 5,024 |   | 3,582 |   |
| Management fees-related  party                                  |       | —                   |       | 125                         |       | — |   | 375 |   |
| Operating income                                                |       | 15,483                   |       | 16,019                      |       | 41,754 |   | 49,646 |   |
|                                                            |       |                     |       |                        |       |   |   |   |   |
| Interest expense, net                                           |       | 10,458                   |       | 8,195                       |       | 31,320 |   | 23,801 |   |
| Income before tax expense                                       |       | 5,025                    |       | 7,824                       |       | 10,434 |   | 25,845 |   |
| Provision for income taxes                                      |       | 1,965                    |       | 3,020                       |       | 4,080 |   | 9,976 |   |
| Net income                                                      |       | 3,060                    |       | 4,804                       |       | 6,354 |   | 15,869 |   |
| Less: preferred stock dividends accumulated and related charges |       | —                   |       | 3,976                       |       | — |   | 11,666 |   |
| Net income available to common stockholders                     |       | $                        | 3,060      |                        | $          | 828 |   | $ | 6,354 |   | $ | 4,203 |   |
|                                                            |       |                     |       |                        |       |   |   |   |   |
| Earnings per share  calculations:                               |       |                     |       |                        |       |   |   |   |   |
| Net income available to common stockholders per common share:   |       |                     |       |                        |       |   |   |   |   |
| Basic and diluted distributed earnings:                         |       |                     |       |                        |       |   |   |   |   |
| Class A common stock                                            |       | $                        | 0.21       |                        | $          | — |   | $ | 0.64 |   | $ | — |   |
| Earnings (loss) per share:                                      |       |                     |       |                        |       |   |   |   |   |
| Basic and diluted Class A common stock                          |       | $                        | 0.17       |                        | $          | — |   | $ | 0.41 |   | $ | — |   |
| Basic Class B common stock                                      |       | $                        | (0.04      | )                           | $          | 0.07 |   | $ | (0.23 | ) | $ | 0.36 |   |
| Diluted Class B common stock                                    |       | $                        | (0.04      | )                           | $          | 0.05 |   | $ | (0.23 | ) | $ | 0.27 |   |
|                                                                 |            |                          |            |                             |            |  |  |  |  |  |  |  |  |  |  |

 

See Notes to Consolidated Financial Statements.

 

2

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**B&G Foods, Inc. andSubsidiaries**

**Consolidated Statements of Cash Flows**

**(Dollars in thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **October 1, 2005**         | ** ** | **October 2, 2004** | ** ** |
| **Cash flows from operating  activities:**                                         |       |                        |       |   |   |
| Net income                                                                         |       | $                           | 6,354      |   | $ | 15,869 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                        |       |   |   |
| Depreciation                                                                       |       | 5,129                       |       | 4,971 |   |
| Amortization of deferred debt issuance costs and bond discount                     |       | 2,094                       |       | 1,925 |   |
| Deferred income taxes                                                              |       | 4,647                       |       | 4,534 |   |
| Restructuring charge — property, plant, equipment and inventory  impairment   |       | 2,951                       |       | — |   |
| Changes in assets and liabilities:                                                 |       |                        |       |   |   |
| Trade accounts receivable                                                          |       | (157                        | )          | (6,570 | ) |
| Inventories                                                                        |       | (13,370                     | )          | (8,216 | ) |
| Prepaid expenses                                                                   |       | (180                        | )          | (5,379 | ) |
| Due to related parties                                                             |       | —                      |       | (125 | ) |
| Income tax receivable                                                              |       | (742                        | )          | — |   |
| Trade accounts payable                                                             |       | 702                         |       | 10,872 |   |
| Accrued expenses                                                                   |       | 4,152                       |       | (9,931 | ) |
| Other liabilities                                                                  |       | (54                         | )          | (12 | ) |
| Net cash provided by operating activities                                          |       | 11,526                      |       | 7,938 |   |
|                                                                               |       |                        |       |   |   |
| **Cash flows from investing  activities:**                                         |       |                        |       |   |   |
| Net proceeds from sale of asset                                                    |       | —                      |       | 52 |   |
| Capital expenditures                                                               |       | (4,992                      | )          | (5,285 | ) |
| Net cash used in investing activities                                              |       | (4,992                      | )          | (5,233 | ) |
|                                                                               |       |                        |       |   |   |
| **Cash flows from financing  activities:**                                         |       |                        |       |   |   |
| Payments of long-term debt                                                         |       | —                      |       | (1,125 | ) |
| Dividends paid                                                                     |       | (12,208                     | )          | — |   |
| Net cash used in financing activities                                              |       | (12,208                     | )          | (1,125 | ) |
|                                                                               |       |                        |       |   |   |
| Effect of exchange rate fluctuations on cash and cash equivalents                  |       | 7                           |       | 70 |   |
| Net (decrease) increase in cash and cash equivalents                               |       | (5,667                      | )          | 1,650 |   |
|                                                                               |       |                        |       |   |   |
| Cash and cash equivalents at beginning of period                                   |       | 28,525                      |       | 8,092 |   |
| Cash and cash equivalents at end of period                                         |       | $                           | 22,858     |   | $ | 9,742 |   |
|                                                                               |       |                        |       |   |   |
| **Supplemental disclosures of  cash flow information:**                            |       |                        |       |   |   |
| Cash interest                                                                      |       | $                           | 24,674     |   | $ | 27,750 |   |
| Cash income taxes                                                                  |       | $                           | 138        |   | $ | 3,699 |   |
| Non-cash transactions:                                                             |       |                        |       |   |   |
| Accretion of Series C senior preferred stock warrants                              |       | $                           | —     |   | $ | 12 |   |
| Accretion of Series C senior preferred stock dividends                             |       | $                           | —     |   | $ | 4,628 |   |
| Dividends declared and unpaid                                                      |       | $                           | 4,240      |   | $ | — |   |

 

See Notes to Consolidated Financial Statements. 

 

3

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** **

**B&G Foods, Inc. andSubsidiaries**

**Notes to Consolidated Financial Statements**

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

**(Unaudited)**

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

***Organization***

Prior to the consummation of our initial publicoffering on October 14, 2004, we were known as B&G Foods Holdings Corp. andwere majority owned by Bruckmann, Rosser, Sherrill & Co., L.P. (BRS), aprivate equity investment firm, and minority owned by management, directors andcertain other investors.  Our only assetand operations consisted of our ownership of B&G Foods, Inc. and itssubsidiaries.

On October 7, 2004, our Registration Statement on FormS-1 in respect of a proposed initial public offering of 17,391,305 EnhancedIncome Securities (EISs), an offering of $22,800 aggregate principal amount of12.0% senior subordinated notes due 2016 separate from the EISs and an offeringof $240,000 aggregate principal amount of 8.0% senior notes due 2011 wasdeclared effective by the Securities and Exchange Commission.  Each EIS represents one share of a then newclass of common stock, our Class A common stock, and $7.15 principal amount of12.0% senior subordinated notes due 2016. The proceeds were allocated to the underlying Class A common stock andsenior subordinated notes based upon the relative fair values of each.  Trading of the EISs began on the AmericanStock Exchange on October 8, 2004.  OnOctober 14, 2004, the initial public offering, separate senior subordinatednotes and senior notes transactions closed and we simultaneously entered into anew senior secured revolving credit facility (see Note 4).  From the initial public offering andconcurrent offerings, we raised net proceeds (after deducting transaction feesand expenses of $35,313) of approximately $490,704 on October 14, 2004 and$36,783 on October 22, 2004 in connection with the exercise of the underwriters’over-allotment option for an additional 2,608,695 EISs.  We used the proceeds of the initial publicoffering, the concurrent offerings and cash on hand to repay all outstandingborrowings under, and terminate, our then existing senior secured creditfacility, to repay $194,165 aggregate principal amount of our $220,000 9 5/8%senior subordinated notes due 2007, to repurchase all of our outstandingpreferred stock from the existing stockholders, and to repurchase shares of ourexisting outstanding Class B common stock, options and warrants from theexisting stockholders.  Also on suchdate, $26,968 in proceeds from the initial public offering was set aside toredeem the remaining $25,835 aggregate principal amount of the 9 5/8% seniorsubordinated notes on November 15, 2004 at a redemption price equal to101.604%.  In connection with the initialpublic offering and the concurrent offerings, for the fifty-two week periodended January 1, 2005 we recorded charges that total approximately $23,766.  These costs include:  (i) $13,907 of costs relating to the earlyextinguishment of debt included in interest expense (including:  the write-off of existing deferred financingfees of $8,361, the write-off of existing bond discount of $655 and bond tendercosts of $4,891), and (ii) transaction related compensation expense for thepayment of transaction bonuses of $5,948 and the repurchase of employee stockoptions of $3,911.

Simultaneously with the completion of our initialpublic offering and the concurrent offerings, on October 14, 2004, B&GFoods, Inc., our wholly owned subsidiary, was merged with and into us and wewere renamed B&G Foods, Inc.  Inaddition, on such date and simultaneously with the offerings, our existingcommon stock was reclassified and converted into 109.8901 shares of Class Bcommon stock.  Share, per share, optionand warrant amounts for all periods presented give effect to thisreclassification and conversion unless otherwise stated.

Unless the context requires otherwise, references inthis report to “B&G Foods,” “the company,” “we,” “us” and “our” refer toB&G Foods, Inc. and its subsidiaries.

 

4

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** **

**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

***Nature ofOperations***

We operate in one industry segment and manufacture,sell and distribute a diverse portfolio of high quality branded, shelf-stablefood products.  Our products includepickles, peppers, jams and jellies, canned meats and beans, spices, syrups, hotsauces, maple syrup, salad dressings, taco shells, seasonings, dinner kits,taco sauces, refried beans, salsa and other specialty food products which aresold to retailers and food service establishments.  We distribute these products to retailers inthe greater New York metropolitan area through a direct-store-organizationsales and distribution system and elsewhere in the United States through a nationwidenetwork of independent brokers and distributors.

Sales of a number of our products tend to be seasonal;however, in the aggregate, our sales are not heavily weighted to any particularquarter.  Sales during the first quarterof the fiscal year are generally below that 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 all of our maplesyrup requirements during the months of April through July.  Consequently, our liquidity needs aregreatest during these periods.

***Business and CreditConcentrations***

Our exposure to credit loss in the event ofnon-payment of accounts receivable by customers is estimated in the amount ofthe allowance for doubtful accounts.  Weperform ongoing credit evaluations of our customers’ financial conditions.  As of October 1, 2005, we do not believe wehave any significant concentration of credit risk with respect to our tradeaccounts receivable.  Our top tencustomers accounted for approximately 41.7%****and39.8% of consolidated net sales for the thirty-nine weeks ended October 1, 2005and October 2, 2004, respectively.  Nosingle customer accounted for more than 9.1%****and7.6% of consolidated net sales for the thirty-nine weeks ended October 1, 2005and October 2, 2004, respectively.

**(2)**           Summary ofSignificant Accounting Policies

***Basis ofPresentation***

Our unaudited consolidated interim financialstatements contain all adjustments (consisting only of normal and recurringadjustments) necessary to present fairly our consolidated financial position asof October 1, 2005 and the results of our operations and cash flows for thethirteen and thirty-nine week periods ended October 1, 2005 and October 2,2004.

Our results of operations for the thirteen andthirty-nine week periods ended October 1, 2005 are not necessarily indicativeof 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 the fiscal year ended January1, 2005 included in our Annual Report on Form 10-K for the fiscal year endedJanuary 1, 2005 filed with the Securities and Exchange Commission (SEC) onMarch 2, 2005.

***Use of Estimates***

The preparation of financial statements in accordancewith U.S. generally accepted accounting principles requires our management tomake a number of estimates and assumptions relating to the reporting of assetsand liabilities and the disclosure of contingent assets and liabilities at thedate of the consolidated financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Some of the more significant estimates andassumptions made by management involve trade and consumer promotion

 

5

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**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

 

expenses, allowances for excess, obsolete andunsaleable inventories, and the recoverability of goodwill, trademarks,property, plant and equipment, and deferred tax assets and the accounting forour EISs, including their treatment in computing our income tax expense.  Actual results could differ from thoseestimates and assumptions.

***Cash and CashEquivalents***

For purposes of the consolidated statements of cashflows, all highly liquid debt instruments with maturities of three months orless when acquired are considered to be cash and cash equivalents.

***Inventories***

Inventories are stated at the lower of cost or market.Cost is determined using the first-in, first-out and average cost methods.  Inventories have been reduced by an allowancefor 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.

***Property, Plant andEquipment***

Property, plant and equipment are stated at cost.Plant and equipment under capital leases are stated at the present value of theminimum lease payments. Depreciation on plant and equipment is calculated usingthe straight-line method over the estimated useful lives of the assets, 12 to20 years for buildings and improvements, 5 to 10 years for machinery andequipment, and 3 to 5 years for office furniture and vehicles. Plant andequipment held under capital leases and leasehold improvements are amortized ona straight-line basis over the shorter of the lease term or estimated usefullife of the asset. Expenditures for maintenance, repairs and minor replacementsare charged to current operations. Expenditures for major replacements andbetterments are capitalized.

***Goodwill andTrademarks***

Goodwill and intangible assets with indefinite usefullives (trademarks) are tested for impairment at least annually and wheneverevents or circumstances occur indicating that goodwill or indefinite lifeintangibles might be impaired.

We perform the annual impairment tests on the last dayof each fiscal year.  The annual goodwillimpairment test involves a two-step process. The first step of the impairment test involves comparing the fair valueof our company 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.

We completed our annual impairment tests for the yearended January 1, 2005 with no adjustments to the carrying values of goodwilland indefinite life intangibles.

 

6

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

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

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

**(Unaudited)**

*** ***

***Long-Lived Assets***

Long-lived assets, such as property, plant andequipment, and intangibles with estimated useful lives are depreciated oramortized over their respective estimated useful lives to their estimatedresidual values, and reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable.  Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto estimated undiscounted future cash flows expected to be generated by theasset.  If the carrying amount of anasset exceeds its estimated future cash flows, an impairment charge isrecognized by the amount by which the carrying amount of the asset exceeds thefair value of the asset.

***AccountingTreatment for EISs***

Our EISs include Class A common stock and seniorsubordinated notes.  Upon completion ofour initial public offering (including the exercise of the over-allotmentoption), we allocated the proceeds from the issuance of the EISs, based uponrelative fair value at the issuance date, to the Class A common stock and thesenior subordinated notes.  We haveassumed that the price paid in the EIS offering was equivalent to the combinedfair value of the Class A common stock and the senior subordinated notes, andthe price paid in the offering for the senior subordinated notes soldseparately (not in the form of EISs) was equivalent to their initial statedprincipal amount.  We have concludedthere are no embedded derivative features related to the EIS that requirebifurcation under Financial Accounting Standards Board (FASB) Statement No.133, “Accounting for Derivative Instruments and Hedging Activities,” as amended(SFAS No. 133).  We have determined thefair value of the Class A common stock and the senior subordinated notes withreference to a number of factors, including the sale of the senior subordinatednotes sold separately from the EISs that have the same terms as the seniorsubordinated notes included in the EISs. Therefore, we have allocated the entire proceeds of the EIS offering tothe Class A common stock and the senior subordinated notes, and the allocationof the EIS proceeds to the senior subordinated notes did not result in apremium or discount.

We have concluded that the call option and the changein control put option in the senior subordinated notes do not warrant separateaccounting under SFAS No. 133 because they are clearly and closely related tothe economic characteristics of the host debt instrument.  Therefore, we have allocated the entireproceeds of the offering to the Class A common stock and the seniorsubordinated notes.  Upon subsequentissuances, if any, of senior subordinated notes, we will evaluate whether thecall option and the change in control put option in the senior subordinatednotes 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 common stock portion of each EIS isincluded in stockholders’ equity, net of the related portion of the EIStransaction costs allocated to Class A common stock.  Dividends paid on the Class A common stockare recorded as a reduction to retained earnings when declared by us.  The senior subordinated note portion of eachEIS is included in long-term debt, and the related portion of the EIStransaction costs allocated to the senior subordinated notes was capitalized asdeferred financing costs and is being amortized to interest expense using theeffective interest method.  Interest onthe senior subordinated notes is charged to expense as accrued by us.

 

7

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**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

 

***Other ComprehensiveIncome Recognition***

Other comprehensive income includes the effect ofexchange rate fluctuations on cash and cash equivalents relating to ourCanadian subsidiary.  Other comprehensiveincome was $3,112 and $6,361 respectively, for the thirteen and thirty-nineweeks ended October 1, 2005.  Othercomprehensive income was $4,828 and $15,939, respectively, for the thirteen andthirty-nine weeks ended October 2, 2004.

***Revenue Recognition***

Revenues are recognized when products are shipped. Wereport all amounts billed to a customer in a sale transaction as revenue,including those amounts related to shipping and handling. Shipping and handlingcosts are included in cost of goods sold. Consideration from a vendor to a retailer is presumed to be a reductionto the selling prices of the vendor’s products and, therefore, should becharacterized as a reduction of sales when recognized in the vendor’s incomestatement.  As a result, certain couponsand promotional expenses are recorded as a reduction of net sales.

***Trade and ConsumerPromotion Expenses***

We offer various sales incentive programs to customersand consumers, such as price discounts, in-store display incentives, slottingfees and coupons.  The recognition ofexpense for these programs involves the use of judgment related to performanceand redemption estimates.  Estimates aremade based on historical experience and other factors.  Actual expenses may differ if the level ofredemption rates and performance vary from estimates.

***Pension Plans***

We have defined benefit pension plans coveringsubstantially all of our employees. Our funding policy is to contribute annuallythe amount recommended by our actuaries.

***Income Tax ExpenseEstimates and Policies***

Income taxes are accounted for under the asset andliability method.  Deferred tax assetsand liabilities of our company are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and operatingloss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled.  A valuation allowance is provided when it ismore likely than not that all or some portion of the deferred tax asset willnot be realized.  The effect on deferredtax assets and liabilities of a change in tax rates is recognized in operationsin the period that includes the enactment date.

As part of the income tax provision process ofpreparing our consolidated financial statements, we are required to estimateour income taxes.  This process involvesestimating our current tax expenses together with assessing temporarydifferences resulting from differing treatment of items for tax and accountingpurposes.  These differences result indeferred tax assets and liabilities.  Wethen assess the likelihood that our deferred tax assets will be recovered fromfuture taxable income and to the extent we believe the recovery is not likely,we establish a valuation allowance. Further, to the extent that we establish a valuation allowance 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.

 

8

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**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

 

We have recorded deferred tax assets, a portion ofwhich represents net operating loss carryforwards.  A valuation allowance has been recorded forcertain state net operating loss carryforwards.

There are various factors that may cause those taxassumptions to change in the near term, and we may have to record a valuationallowance against our deferred tax assets. We cannot predict whether future U.S. federal and state income tax lawsand regulations might be passed that could have a material effect on ourresults of operations.  We assess theimpact of significant changes to the U.S. federal and state income tax laws andregulations on a regular basis and update the assumptions and estimates used toprepare our consolidated financial statements when new regulations andlegislation are enacted.

We do not provide for U.S. federal income taxes or taxbenefits on the unremitted earnings or losses of our foreign subsidiary as suchearnings are intended to be indefinitely reinvested.

We have accounted for our issuance of EISs as anissuance of the separate securities evidenced by such EISs and have allocatedthe proceeds received for each EIS between the Class A common stock and seniorsubordinated note represented thereby in the amounts of their respective fairvalues at the time of issuance. Accordingly, we have accounted for the seniorsubordinated notes represented by the EISs as long-term debt bearing a statedinterest rate and maturing on October 30, 2016. In connection with the issuance and initial public offering of the EISs,we received an opinion from counsel that the senior subordinated notes shouldbe treated as debt for United States federal income tax purposes.  In accordance with the opinion we received,we continue to be of the view that the senior subordinated notes should betreated as debt for United States federal income tax purposes (although we havenot sought a ruling from the IRS on this issue), and we intend to deductannually interest expense of approximately $19,896 on the senior subordinatednotes from taxable income for United States federal and state income taxpurposes. There can be no assurance that the classification of seniorsubordinated notes as debt (or the amount of interest expense deducted) willnot be challenged by the IRS or other tax jurisdictions or will be sustained bya court of law if challenged.

If our treatment of the senior subordinated notes asdebt is put at risk in the future as a result of a future ruling by the IRS orother tax jurisdiction or by a court of law, including an adverse ruling forEISs (or other similar securities) issued by other companies or as a result ofa proposed adjustment by the IRS or other tax jurisdiction in an examination ofour company or for any other reason, we will need to consider the effect ofsuch developments on the determination of our future tax provisions andobligations.  In the event the seniorsubordinated notes are required to be treated as equity for income taxpurposes, then the cumulative interest expense associated with the seniorsubordinated notes for prior tax periods that are open to assessment and forfuture tax periods would not be deductible from taxable income and we would berequired to recognize additional tax expense and establish a related income taxliability for prior period treatment. The additional tax due to the federal and state authorities would bebased on our taxable income or loss for each of the years that we claimed theinterest expense deduction and would materially and adversely affect ourfinancial position, cash flow, and liquidity, and could affect our ongoingability to make interest payments on the senior subordinated notes and dividendpayments on the shares of common stock represented by the EISs and our abilityto continue as a going concern.  Inaddition, non-U.S. holders of our EISs could be subject to withholding taxes onthe payment of interest treated as dividends on equity, which could subject usto additional liability for the withholding taxes that we do not collect onsuch payments.  However, because inaccordance with the opinion of counsel we received on the date of our initialpublic offering we continue to be of the view that the senior subordinatednotes should be treated as debt for United States federal income tax purposes,we do not record a liability for a potential disallowance of this interestexpense deduction or for the potential imposition of these withholding taxes.

A factor in the ongoing determination that ourconsolidated financial statements should reflect deductions for income taxpurposes of the interest on the senior subordinated notes is the veracity, atthe time of the initial public offering, of the representations delivered bythe purchasers of senior subordinated notes

 

9

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**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

 

sold separately (not in the form of EISs).  We may conduct procedures in the future toconfirm the veracity, at the time of the offering, of the purchaserrepresentations. In addition, other factors indicating the existence, at thetime of the initial public offering, of any plan or pre-arrangement may also berelevant to this ongoing determination. It is possible that we will at some point in the future, as a result ofthe findings of the procedures noted above, or IRS interpretations or other changesin circumstances, conclude that we should establish a reserve for taxliabilities associated with a disallowance of all or part of the interestdeductions on the senior subordinated notes, although our present view is thatno such reserve is necessary or appropriate. If we decide to maintain such a reserve, our income tax provision, andrelated income tax payable, would be materially impacted.  As a result, our ability to pay dividends onthe shares of our common stock could be materially impaired and the marketprice and/or liquidity for the EISs or our common stock could be adverselyaffected.

***Dividends***

Cash dividends, if any, are accrued as a liability onour consolidated balance sheet when declared.

***Earnings Per Shar******e***

For the periods prior to our initial public offering,basic earnings per share is calculated by dividing net income  available to common stockholders (net incomeless dividends accumulated during the period for our 13% Series A and Series Bcumulative preferred stock and Series C senior preferred stock and relatedcharges) by the weighted average common shares outstanding during theperiod.  Diluted earnings per share iscalculated similarly, except that it includes the dilutive effect of the assumedexercise of outstanding options and warrants.

Following the consummation of our initial publicoffering, we have two classes of common stock, designated as Class A commonstock and Class B common stock, and we present basic and diluted earnings pershare using the two-class method.  The two-classmethod is an earnings allocation formula that determines earnings per share foreach class of common stock according to dividends declared and participationrights in undistributed earnings.

Net income available to our common stockholders isallocated between our two classes of common stock based upon the two-classmethod.  Basic and diluted earnings pershare for our Class A and Class B common stock is calculated by dividingallocated net income available to common stockholders by the weighted averagenumber of shares of Class A and Class B common stock outstanding.

 

 

10

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** **

**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

 
| ** **                                                                          | ** ** | **Thirteen  Weeks Ended** | ** ** | **Thirty-nine  Weeks Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                                                          | ** ** | **October 1,  2005**      | ** ** | **October 2,  2004**         | ** ** | **October 1,  2005** | ** ** | **October 2,  2004** | ** ** |
|                                                                                |       |                      |       |                         |       |   |   |   |   |
| Net income                                                                          |       | $                         | 3,060      |                         | $          | 4,804 |   | $ | 6,354 |   | $ | 15,869 |   |
| Preferred stock dividends  accumulated and related charges                          |       | —                    |       | 3,976                        |       | — |   | 11,666 |   |
| Net income available to  common stockholders                                        |       | 3,060                     |       | 828                          |       | 6,354 |   | 4,203 |   |
| Less: Class A common stock  dividends declared                                      |       | 4,240                     |       | —                       |       | 12,720 |   | — |   |
| Undistributed (loss) earnings available to Class A and Class B common  stockholders |       | $                         | (1,180     | )                            | $          | 828 |   | $ | (6,366 | ) | $ | 4,203 |   |
|                                                                                |       |                      |       |                         |       |   |   |   |   |
| Weighted average common  shares outstanding:                                        |       |                      |       |                         |       |   |   |   |   |
| Basic and Diluted Class A  common shares outstanding                                |       | 20,000,000                |       | —                       |       | 20,000,000 |   | — |   |
| Basic Class B common  shares outstanding                                            |       | 7,556,443                 |       | 11,593,394                   |       | 7,556,443 |   | 11,593,394 |   |
| Diluted Class B common  shares outstanding                                          |       | 7,556,443                 |       | 15,492,115                   |       | 7,556,443 |   | 15,492,115 |   |
|                                                                                |       |                      |       |                         |       |   |   |   |   |
| Basic and diluted  allocation of undistributed (loss) earnings:                     |       |                      |       |                         |       |   |   |   |   |
| Class A common stock                                                                |       | $                         | (856       | )                            | $          | — |   | $ | (4,620 | ) | $ | — |   |
| Class B common stock                                                                |       | (324                      | )          | 828                          |       | (1,746 | ) | 4,203 |   |
| Total                                                                               |       | $                         | (1,180     | )                            | $          | 828 |   | $ | (6,366 | ) | $ | 4,203 |   |
|                                                                                |       |                      |       |                         |       |   |   |   |   |
| Basic earnings per share:                                                           |       |                      |       |                         |       |   |   |   |   |
| Undistributed (loss)  earnings:                                                     |       |                      |       |                         |       |   |   |   |   |
| Class A common stock                                                                |       | $                         | (0.04      | )                            | $          | — |   | $ | (0.23 | ) | $ | — |   |
| Class B common stock                                                                |       | $                         | (0.04      | )                            | $          | 0.07 |   | $ | (0.23 | ) | $ | 0.36 |   |
| Distributed earnings:                                                               |       |                      |       |                         |       |   |   |   |   |
| Class A common stock                                                                |       | $                         | 0.21       |                         | $          | — |   | $ | 0.64 |   | $ | — |   |
| Basic earnings (loss) per  share:                                                   |       |                      |       |                         |       |   |   |   |   |
| Class A common stock                                                                |       | $                         | 0.17       |                         | $          | — |   | $ | 0.41 |   | $ | — |   |
| Class B common stock                                                                |       | $                         | (0.04      | )                            | $          | 0.07 |   | $ | (0.23 | ) | $ | 0.36 |   |
|                                                                                |       |                      |       |                         |       |   |   |   |   |
| Diluted (loss) earnings  per share:                                                 |       |                      |       |                         |       |   |   |   |   |
| Undistributed (loss)  earnings:                                                     |       |                      |       |                         |       |   |   |   |   |
| Class A common stock                                                                |       | $                         | (0.04      | )                            | $          | — |   | $ | (0.23 | ) | $ | — |   |
| Class B common stock                                                                |       | $                         | (0.04      | )                            | $          | 0.05 |   | $ | (0.23 | ) | $ | 0.27 |   |
| Distributed earnings:                                                               |       |                      |       |                         |       |   |   |   |   |
| Class A common stock                                                                |       | $                         | 0.21       |                         | $          | — |   | $ | 0.64 |   | $ | — |   |
| Diluted earnings (losses)  per share:                                               |       |                      |       |                         |       |   |   |   |   |
| Class A common stock                                                                |       | $                         | 0.17       |                         | $          | — |   | $ | 0.41 |   | $ | — |   |
| Class B common stock                                                                |       | $                         | (0.04      | )                            | $          | 0.05 |   | $ | (0.23 | ) | $ | 0.27 |   |
|                                                                                     |            |                           |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |

 

***Fair Value ofFinancial Instruments***

Cash and cash equivalents, trade accounts receivable,income tax receivable, trade accounts payable, accrued expenses, dividendspayable and due to related party are reflected in the consolidated balancesheets at carrying value, which approximates fair value due to the short-termnature of these instruments.

We have outstanding$240,000 principal amount of 8.0% senior notes due 2011.  The fair value of the senior notes at October1, 2005, based on quoted market prices, was $246,000.

 

11

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**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

 

We also have outstanding$165,800 principal amount of 12.0% senior subordinated notes due 2016.  Of such outstanding principal amount,$143,000 principal amount is represented by 20.0 million EISs.  Each EIS represents one share of our Class Acommon stock and $7.15 principal amount of our senior subordinated notes.  As of October 1, 2005, the fair value of theEISs, based on the per EIS closing price on the American Stock Exchange onSeptember 30, 2005, was $12.65 per EIS. It is not practicable to estimate the fair value of the $143,000principal amount of senior subordinated notes represented by the EISs.  Of the $165,800 aggregate principal amount ofsenior subordinated notes outstanding, $22,800 principal amount is notrepresented by EISs and trades separately. The fair value of the separate senior subordinated notes at October 1,2005, based on quoted market prices, was $23,917.

***Adoption of NewAccounting Standards***

In response to the enactment of the American JobCreation Act of 2004 (the “Jobs Act”) on October 22, 2004, the FASB issued FASBStaff Position (FSP) No. 109-1, “*Application of FASBStatement No. 109, Accounting for Income Taxes, for the Tax Deduction Providedto U.S. Based Manufacturers*” (FSP 109-1).

FSP No. 109-1 clarifies how to apply SFAS No. 109 tothe new law’s tax deduction for income attributable to “domestic productionactivities.” The fully phased-in tax deduction is up to nine percent of thelesser of taxable income or “qualified production activities income,” as definedby the Jobs Act. The staff position requires that the deduction be accountedfor as a special deduction in the period earned, not as a tax-rate reduction.As a result, we will recognize a reduction in our income tax expense for thedomestic production activities in the quarterly period(s) in which we areeligible for the deduction.

In November 2004, the FASB issued SFAS No. 151, *“Inventory Costs—An Amendment of ARB No. 43, Chapter 4”*(SFAS No. 151). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, “InventoryPricing,” to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material (spoilage). Among otherprovisions, the new rule requires that items such as idle facility expense,excessive spoilage, double freight, and rehandling costs be recognized ascurrent-period charges regardless of whether they meet the criterion of “soabnormal” as stated in ARB No. 43. Additionally, SFAS No. 151 requires that the allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities. SFAS No. 151 is effective for fiscal yearsbeginning after June 15, 2005 and is required to be adopted by us in the firstquarter of fiscal 2006, beginning on January 1, 2006. We are currentlyevaluating the effect that the adoption of SFAS No. 151 will have on ourconsolidated results of operations and financial condition but do not expectSFAS No. 151 to have a material impact.

In December 2004, the FASB issued SFAS No. 123(revised 2004), “*Share-Based Payment*”(SFAS No. 123R), which replaces SFAS No. 123 and supercedes APB Opinion No. 25.SFAS No. 123R addresses the accounting for transactions in which an enterprisereceives employee services in exchange for (a) equity instruments of theenterprise or (b) liabilities that are based on the fair value of theenterprise’s equity instruments or that may be settled by the issuance of suchequity instruments.  SFAS No. 123Rrequires all share-based payments to employees, including grants of employeestock options and restrictive stock grants and units, to be recognized as acompensation cost based on their fair values. The pro forma disclosures previously permitted under SFAS No. 123 nolonger will be an alternative to financial statement recognition.  Based on a recent announcement by theSecurities and Exchange Commission, we are required to adopt SFAS No. 123R nolater than January 1, 2006.  Under SFASNo. 123R, we must determine the appropriate fair value model to be used forvaluing share-based payments, the amortization method for compensation cost andthe transition method to be used at the date of adoption.  The transition methods include prospectiveand retroactive adoption options.  Underthe retroactive option, prior periods may be restated either as of thebeginning of the year of adoption or for all periods presented.  The prospective method requires thatcompensation expense be recorded for all unvested stock options and restrictedstock at the beginning of the first quarter of adoption of SFAS No. 123R, whilethe retroactive methods would record compensation

 

12

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**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

expense for all unvested stock options and restrictedstock beginning with the first period restated. The adoption of SFAS No. 123R will not have an impact on ourconsolidated results of operations and earnings per share, since we currentlydo not make any share-based payments and we are not applying the retroactivemethod to any prior share-based payments.

In December 2004, the FASB issued SFAS No. 153, “*Exchanges of Nonmonetary Assets**— An Amendment of APB Opinion No. 29, Accounting forNonmonetary Transactions*” (SFAS No. 153). SFAS No. 153 eliminatesthe exception from fair value measurement for nonmonetary exchanges of similarproductive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting forNonmonetary Transactions,” and replaces it with an exception for exchanges thatdo not have commercial substance. SFAS No. 153 specifies that a nonmonetaryexchange has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange. SFAS No. 153 iseffective for the fiscal periods beginning after June 15, 2005 and was adoptedby our company beginning July 3, 2005. There was no impact on our consolidated results of operations andfinancial conditions.

In May 2005, the Financial Accounting Standards Boardissued SFAS No. 154, “*Accounting Changes andError Corrections — a replacement of APB Opinion No. 20 and FASB Statement No.3*”. This statement applies to all voluntary changes in accountingprinciples and changes required by an accounting pronouncement where nospecific transition provisions are included. SFAS No. 154 requiresretrospective application to prior periods’ financial statements of changes inaccounting principles, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. Retrospectiveapplication is limited to the direct effects of the change; the indirecteffects should be recognized in the period of the change. This statementcarries forward without changing the guidance contained in Opinion No. 20 forreporting the correction of an error in previously issued financial statementsand a change in accounting estimate. However, SFAS No. 154 redefinesrestatement as the revising of previously issued financial statements toreflect the correction of an error. The provisions of SFAS No. 154 areeffective for accounting changes and correction of errors made in fiscalperiods that begin after December 15, 2005, although early adoption is permitted.We are not currently contemplating any accounting changes, which would beimpacted by SFAS No. 154.

In March 2005, the Financial Accounting StandardsBoard issued interpretation (FIN) No. 47, “*Accountingfor Conditional Asset Retirement Obligations**— an interpretation of FASB Statement No. 143*.”The statement clarifies that the term conditional asset retirement obligation,as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refersto a legal obligation to perform an asset retirement activity in which thetiming and (or) method of settlement are conditional on a future event that mayor may not be within the control of the entity. This interpretation alsoclarifies when an entity would have sufficient information to reasonably estimatethe fair value of an asset retirement obligation. The effective date of thisinterpretation is no later than the end of the fiscal year ending afterDecember 15, 2005. The adoption of FIN No. 47 is not expected to have an impacton our consolidated results of operations and financial condition.

 

13

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**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

** **

**(3)           Inventories**

Inventories consist of the following:

 
| ** **                   | ** ** | **October 1, 2005** | ** ** | **January 1, 2005** | ** ** |
|------------------------------|------------|---------------------|------------|---------------------|------------|
| Raw materials and  packaging |       | $                   | 18,894     |                | $          | 12,204 |   |
| Work in process              |       | 3,082               |       | 1,870               |       |
| Finished goods               |       | 70,147              |       | 65,035              |       |
|                         |       |                |       |                |       |
| Total                        |       | $                   | 92,123     |                | $          | 79,109 |   |

 

**(4)           Long-termDebt**

*Prior Senior Secured Credit Facility*. On August 21, 2003, we entered into a newly amended and restated$200,000 senior secured credit facility, which was further amended and restatedas of September 9, 2003, comprised of a $50,000 five-year revolving creditfacility and a $150,000 six-year term loan facility.  The proceeds of the term loan and of certaindrawings under the revolving credit facility were used (i) to fund ouracquisition of certain assets of The Ortega Brand of Business from NestlePrepared Foods Company on August 21, 2003, and to pay related transaction feesand expenses and (ii) to fully pay off our remaining obligations under termloan B of our then-existing term loan agreement dated as of March 15,1999.  In connection therewith, we capitalizedapproximately $5,300 of new deferred debt issuance costs related to the seniorsecured credit facility and, in accordance with the applicable guidance of theFASB’s Emerging Issues Task Force, wrote off $1,831 of deferred financing costsrelated to our then-existing term loan B. Under the senior secured credit facility, interest was determined basedon several alternative rates, including the base lending rate per annum plus anapplicable margin, or LIBOR plus an applicable margin.  The senior secured credit facility wassecured by substantially all of our assets.

On October 14, 2004, we used a portion of the netproceeds of our initial public offering, offering of senior subordinated notesseparate from the EISs and offering of senior notes as described in Note 1 andcash on hand to repay all outstanding borrowings under, and terminate oursenior secured credit facility.  Inconnection with our termination of the senior secured credit facility, wewrote-off all of our previously capitalized deferred financing costs, which isincluded in interest expense in fiscal 2004.

*Senior Secured Credit Facility*. Concurrently with our initial public offering and concurrent offerings,we entered into a $30,000 senior secured revolving credit facility.  Interest is determined based on severalalternative rates as stipulated in the revolving credit facility, including thebase lending rate per annum plus an applicable margin, or LIBOR plus anapplicable margin.  The revolving creditfacility is secured by substantially all of our assets except our realproperty.  The revolving credit facilityprovides for mandatory prepayment based on asset dispositions and certainissuances of securities, as defined.  Therevolving credit facility contains covenants that restrict, among other things,our ability to incur additional indebtedness, pay dividends and create certainliens.  The revolving credit facilityalso contains certain financial maintenance covenants, which, among otherthings, specify maximum capital expenditure limits, a minimum interest coverageratio and a maximum senior and total leverage ratio, each ratio asdefined.  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 revolving credit facility was undrawn on the date of consummation ofour initial public offering and concurrent offerings and remained undrawn atOctober 1, 2005.  The available borrowingcapacity under our revolving credit facility, net of outstanding letters ofcredit of $922, was $29,078 at October 1, 2005. The maximum letter of credit capacity under the revolving credit facilityis $10,000, with a fee of 3.0% for all outstanding letters of credit.

 

14

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**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

 

*9 5/8% Senior Subordinated Notes due 2007*. Immediately prior to our initial public offering, we had outstanding$220,000 principal amount of 9 5/8% senior subordinated notes due August 1,2007 with interest payable semiannually on February 1 and August 1 of eachyear, of which we issued $120,000 principal amount in August 1997 and $100,000principal amount in March 2002.  Theproceeds from the issuance of the senior subordinated notes issued in March2002 were used to pay off, in its entirety, the then outstanding balance underour then-existing term loan A, and to reduce the amount outstanding under theour then-existing term loan B, and pay related deferred debt issuance costs.

On October 14, 2004, $194,165 aggregate principalamount of the 9 5/8% senior subordinated notes was repaid with the proceeds ofthe initial public offering, the concurrent offerings and cash on hand at theredemption price of 102.043% (which redemption price included a consent paymentof 0.03%).  Also on such date, $26,968 inproceeds from the initial public offering, the concurrent offerings and cash onhand was set aside to redeem the remaining $25,835 aggregate principal amountof the 9 5/8% senior subordinated notes on November 15, 2004 at a redemptionprice equal to 101.604% of the remaining aggregate principal amount plusaccrued interest.  The difference betweenthe carrying value, including remaining bond discount of $655, and theredemption value of approximately $4,891 has been recognized as interestexpense in our fiscal 2004 consolidated statement of operations.  In connection with the extinguishment ofthese notes, we wrote-off all of our previously incurred deferred financingcosts, which is also included in interest expense in fiscal 2004.

*12.0% Senior Subordinated Notes due 2016*. In connection with our initial public offering, we issued on October 14,2004, $124,348 aggregate principal amount of 12.0% senior subordinated notesdue 2016 in the form of EISs and an additional $22,800 aggregate principalamount of 12.0% senior subordinated notes due 2016 (not in the form ofEISs).  In connection with the exerciseof the underwriters’ over-allotment option, on October 22, 2004 we issued anadditional $18,652 aggregate principal amount of 12.0% senior subordinatednotes in the form of EISs.  Each EISrepresents one share of our Class A common stock and $7.15 principal amount ofour 12.0% senior subordinated notes.  Asof October 1, 2005, $165,800 aggregate principal amount of senior subordinatednotes was outstanding.

Interest on the senior subordinated notes is payablequarterly in arrears on each January 30, April 30, July 30 and October 30through the maturity date.  The seniorsubordinated notes will mature on October 30, 2016, unless earlier redeemed atour option as described below.

Upon the occurrence of a change of control (as definedin the indenture), unless we have retired the senior subordinated notes orexercised our right to redeem all senior subordinated notes as described below,each holder of the senior subordinated notes has the right to require us torepurchase that holder’s senior subordinated notes at a price equal to 101.0%of the principal amount of the senior subordinated notes being repurchased,plus any accrued and unpaid interest to the date of repurchase. In order toexercise this right, a holder must separate the senior subordinated notes andClass A common stock represented by such holder’s EISs.

We may not redeem the notes prior to October 30, 2009**. **However,we may, from time to time, seek to retire the senior subordinated notes throughcash repurchases of EISs or separate senior subordinated notes and/or exchangesof EISs or separate senior subordinated notes for equity securities, in openmarket purchases, privately negotiated transactions or otherwise.  Such repurchases or exchanges, if any, willdepend on prevailing market conditions, our liquidity requirements, contractualrestrictions and other factors.

In addition, on and after October 30, 2009, we mayredeem for cash all or part of the senior subordinated notes upon not less than30 or more than 60 days’ notice by mail to the owners of senior subordinatednotes, at a redemption price of 106.0% beginning October 30, 2009 andthereafter at prices declining annually to 100% on or after October 30,2012.  If we redeem any seniorsubordinated notes, the senior subordinated notes and Class A common stockrepresented by each EIS will be automatically separated.

 

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**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

 

The senior subordinated notes are unsecuredobligations and are subordinated in right of payment to all of our existing andfuture senior secured and senior unsecured indebtedness, including theindebtedness under our revolving credit facility and our senior notes. Thesenior subordinated notes rank pari passu in right of payment with any of ourother subordinated indebtedness.

The senior subordinated notes are jointly and severallyand fully and unconditionally guaranteed by all of our existing domesticsubsidiaries and certain future domestic subsidiaries on an unsecured andsubordinated basis on the terms set forth in the indenture governing the seniorsubordinated notes.  The seniorsubordinated note guarantees are subordinated in right of payment to allexisting and future senior indebtedness of the guarantors, including theindebtedness under our revolving credit facility and the senior notes.  Our present foreign subsidiary, Les ProduitsAlimentaires Jacques et Fils Inc., is not a guarantor, and any future foreignor partially owned domestic subsidiaries will not be guarantors, of our seniorsubordinated notes.

The indenture governing the senior subordinated notescontains covenants with respect to us and restricts the incurrence ofadditional indebtedness and the issuance of capital stock; the payment ofdividends or distributions on, and redemption of, capital stock; a number ofother restricted payments, including certain investments; specified creation ofliens, sale-leaseback transactions and sales of assets; fundamental changes,including consolidation, mergers and transfers of all or substantially all ofour assets; and specified transactions with affiliates.

*8.0% Senior Notes due 2011*. Concurrently with our initial public offering and offering of separatesenior subordinated notes, we issued $240,000 aggregate principal amount of8.0% senior notes due 2011.  Interest onthe senior notes is payable on April 1 and October 1 of each year, commencingon April 1, 2005.  Our obligations underthe senior notes are fully and unconditionally guaranteed on a senior basis byall of our existing and future domestic subsidiaries.  The senior notes and the subsidiaryguarantees are our and the guarantors’ general unsecured obligations and areeffectively junior in right of payment to all of our and the guarantors’secured indebtedness and to the indebtedness and other liabilities of ournon-guarantor subsidiaries; are pari passu in right of payment to all of ourand the guarantors’ existing and future unsecured senior debt; and are seniorin right of payment to all of our and the guarantors’ future subordinated debt,including the senior subordinated notes. Our present foreign subsidiary, Les Produits Alimentaires Jacques etFils Inc., is not a guarantor, and any future foreign or partially owneddomestic subsidiaries will not be guarantors, of our senior notes.

On or after October 1, 2008, we may redeem some or allof the senior notes at a redemption price of 104.0% beginning October 1, 2008and thereafter at prices declining annually to 100% on or after October 1,2010.  Prior to October 1, 2007, we mayredeem up to 35% of the aggregate principal amount of the senior notes issued inthe senior note offering with the net proceeds of one or more equity offeringsat the redemption price as described in the indenture governing the seniornotes.  If we or any of the guarantorssell certain assets or experience specific kinds of changes in control, we mustoffer to purchase the senior notes at the prices as described in the indenturegoverning the senior notes plus accrued and unpaid interest to the date ofredemption.  The indenture governing thesenior notes limits our ability and the ability of the guarantors to incuradditional indebtedness and issue preferred stock; make restricted payments,including dividend payments on our common stock; allow restrictions on theability of certain subsidiaries to make distributions; sell all or substantiallyall of our assets or consolidate or merge with or into other companies; enterinto certain transactions with affiliates; or create liens and enter into saleand leaseback transactions.  Each of thecovenants is subject to a number of important exceptions and qualifications.

*Subsidiary Guarantees*. We have no assets or operations independent of our direct and indirectsubsidiaries.  All of our domesticsubsidiaries jointly and severally, and fully and unconditionally, guaranteeour senior subordinated notes and our senior notes, and management has determinedthat our only subsidiary

 

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**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

 

that is not a guarantor of our senior subordinatednotes and senior notes is a “minor” subsidiary as that term is used in Rule3-10 of Regulation S-X promulgated by the Securities and ExchangeCommission.  There are no significantrestrictions on our ability and the ability of our subsidiaries to obtain fundsfrom our respective subsidiaries by dividend or loan.  Consequently, separate financial statementshave not been presented for our subsidiaries because management has determinedthat they would not be material to investors.

*Deferred Financing Costs*. In connection with the issuance of the 12.0% senior subordinated notesdue 2016 and the 8.0% senior notes due 2011, we capitalized approximately$23,123 of financing costs, which will be amortized over their respectiveterms.  As of October 1, 2005 we had netdeferred financing costs of $20,422. During the fourth quarter of fiscal 2004 we wrote-off and expensed$8,361 relating to our then existing senior secured credit facility and our 95/8% senior subordinated notes.

At October 1, 2005 and January 1, 2005 accruedinterest of $12,917 and $8,365, respectively, is included in accrued expensesin the accompanying consolidated balance sheets.

**(5)           RedeemablePreferred Stock**

Our Amended and Restated Certificate of Incorporationprovides that we may issue 100,000,000 shares of Preferred Stock, $0.01 parvalue per share.  Prior to our initialpublic offering, 22,000,000 shares of which were designated as the 13% Series ACumulative Preferred Stock, 35,000,000 shares of which were designated as the13% Series B Cumulative Preferred Stock and 25,000,000 of which were designatedas the Series C Senior Preferred Stock and were issued and outstanding (SeeNote 6).

With respect to dividend rights and rights onliquidation, winding up and dissolution of our company, the Series C SeniorPreferred Stock ranked senior to the 13% Series B Cumulative Preferred Stockand each ranked senior to the 13% Series A Cumulative Preferred Stock.  The Series C Senior Preferred Stock, the 13%Series B Cumulative Preferred Stock and the 13% Series A Cumulative PreferredStock each ranked senior to our common stock.

*13% Series A Cumulative PreferredStock. *Each holder of 13% Series A Cumulative Preferred Stockwas entitled to receive, when, as and if declared by our board of directors,out of funds legally available therefor, cash dividends on each share of 13%Series A Cumulative Preferred Stock at a rate per annum equal to 13%, whichdividends were cumulative without interest, whether or not earned or declared,on a daily basis, and were payable annually in arrears.  These dividends amounted to $30,795 as ofOctober 2, 2004.

*13% Series B Cumulative PreferredStock. *Each holder of 13% Series B Cumulative Preferred Stockwas entitled to receive, when, as and if declared by our board of directors,out of funds legally available therefor, cash dividends on each share of 13%Series B Cumulative Preferred Stock at a rate per annum equal to 13%, whichdividends were cumulative without interest, whether or not earned or declared,on a daily basis, and were payable annually in arrears. These dividendsamounted to $4,889 as of October 2, 2004.

On October 14, 2004, we used a portion of the proceedsfrom our initial public offering and the concurrent offerings, and cash onhand, to repurchase all of our outstanding Series A Cumulative Preferred Stockand Series B Cumulative Preferred Stock for an aggregate purchase price of$32,736 and $24,481, respectively, which was recorded against stockholders’equity.

*Warrants*. The holders of the Series B Cumulative Preferred Stock received warrantsexercisable to purchase an aggregate of 1,289,621 shares of our common stock,with an exercise price of $0.01 per share and an expiration date of December22, 2009.  All of these warrants remainedoutstanding at October 2, 2004.  On orsubsequent to October 14, 2004, we used a portion of the proceeds from ourinitial public offering (including from the exercise of the over-allotmentoption) and the concurrent offerings, and cash on hand to

 

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** **

**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

 

repurchase all of the outstanding warrants granted tothe holders of our Series B Cumulative Preferred Stock for an aggregatepurchase price of $6,733, which was recorded against stockholders’ equity.

**(6)           MandatorilyRedeemable Preferred Stock**

*Series C Senior PreferredStock. *When and as declared by our board of directors and tothe extent permitted under the General Corporation Law of the State ofDelaware, we paid preferential dividends to the holders of our Series C SeniorPreferred Stock.  Dividends on each shareof Series C Senior Preferred Stock accrued at a rate of 14% per annum.  Such dividends accrued whether or not theywere declared and whether or not we had profits, surplus or other funds legallyavailable for the payment of dividends. To the extent that all accrued dividends were not paid on each June 30and December 31 of each year beginning June 30, 2000 (which we refer to as the “dividendreference dates”), all dividends which had accrued on each share of Series CSenior Preferred Stock outstanding during the six-month period (or other periodin the case of the initial dividend reference date) ending upon each suchdividend reference date was accumulated and added to the liquidation value ofsuch share.  These dividends amounted to$22,750 as of October 2, 2004.  Suchdividends are charged to net income available to common stockholders.

On October 14, 2004, we used a portion of the proceedsfrom our initial public offering and the concurrent offerings, and cash on handto repurchase all of our outstanding Series C Senior Preferred Stock for anaggregate purchase price of $48,433, which was recorded against stockholders’equity.

*Warrants*. The holders of our Series C Senior Preferred Stock received warrantsexercisable to purchase an aggregate of 1,805,477 shares of our common stock,with an exercise price of $0.01 per share and an expiration date of December22, 2009.  All of these warrants remainedoutstanding at October 2, 2004.  On orsubsequent to October 14, 2004, we used a portion of the proceeds from ourinitial public offering (including from the exercise of the over-allotmentoption) and the concurrent offerings, and cash on hand to repurchase a portionof the outstanding warrants granted to the holders of our Series C SeniorPreferred Stock for an aggregate purchase price of $2,173, which was recordedagainst stockholders’ equity.  Theremaining 728,393 warrants that had been granted to the holders of our Series CSenior Preferred Stock were exercised for an equivalent number of shares of ourClass B common stock as of October 22, 2004.

**(7)           CapitalStock and Option Plan**

*Voting Rights*.  The holders of our common stock are entitledto one vote per share with respect to each matter on which the holders of ourcommon stock are entitled to vote.  Sharesof our Class A common stock and shares of our Class B common stock are entitledto the same voting rights per share and vote together as a single class on allmatters with respect to which holders are entitled to vote, except that so longas our former sponsor investor, BRS, together with its affiliates, beneficiallyowns more than 10% of the outstanding shares of Class A and Class B commonstock in the aggregate on a fully-diluted basis, the holders of our Class Bcommon stock will have the exclusive right to elect two directors to the boardof directors.  In accordance with therestated stockholders agreement, so long as the holders of Class B common stockhave the right to elect two directors, the holders of our Class B common stockhave agreed to vote for two director nominees nominated by our former sponsorinvestor.  The holders of our commonstock are not entitled to cumulate their votes in the election of ourdirectors.

*Dividends*.  The holders of our common stock are entitledto receive dividends, if any, as they may be lawfully declared from time totime by our board of directors, subject to any preferential rights of holdersof any outstanding shares of preferred stock. In the event of any liquidation, dissolution or winding up of ourcompany, Class A and Class B common stockholders are entitled to share ratablyin our assets available for distribution to the stockholders, subject to theprior rights of holders of any outstanding preferred stock.  With respect to rights to dividends and onliquidation, dissolution or winding up, there is no difference between our

 

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**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

 

Class A and Class B commonstock, except that:  (i) for periodsending on or before January 2, 2010, Class B dividends, if any, will be paid onan annual basis and will be equal, in the aggregate, to Class B Available Cash(as defined below) (subject to the subordination provision described below);and (ii) for each annual dividend payment period, after December 30, 2006 andthrough the dividend payment period ending on January 2, 2010, if we declareand pay dividends on our Class A common stock, the holders of Class B commonstock will have the right to dividend payments (subject to the subordinationprovisions described below) equal to Class B Available Cash (up to 1.1 timesthe amount of dividends paid to the holders of our Class A common stock).  For quarterly periods subsequent to January2, 2010, if we declare and pay dividends on our Class A common stock, theholders of our Class B common stock will be entitled to dividend payments of1.1 times the amount paid per share to the holders of our Class A common stock.

“*Class B Available Cash*” means the lesser of:  (i) “excess cash” (as defined in theindenture governing our senior subordinated notes) for the last four fiscalquarters, including the most recently completed fiscal quarter, minus the sumof the aggregate amount of the prior four Class A dividends, and minus dividendrestricted cash of $6.0 million or (ii) the aggregate per share amount ofdividends declared or to be declared on our Class A common stock (or 1.1 timessuch amount for dividends with respect to periods commencing after December 31,2006) with respect to the annual period for which the dividends on our Class Bcommon stock are to be paid multiplied by the number of shares of our Class Bcommon stock issued and outstanding on the last day of such period.

Under our organizationaldocuments, through the dividend payment dates with respect to the quarterly andannual dividend payment periods ending January 2, 2010, dividends on our ClassB common stock will be subordinated to the payment of dividends on our Class Acommon stock.  Specifically:  (i) an annual dividend on our Class B commonstock may only be declared if we have declared and paid dividends on our ClassA common stock at no less than the quarterly rate of $0.212 per share for eachof the four fiscal quarters corresponding to such annual dividend paymentperiod of the Class B common stock and (ii) no dividends on our Class B commonstock may be declared with respect to any annual period unless the “Class BThreshold Amount” (as defined below) as of the last day of such period is atleast $10.0 million.

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

“*Class B Threshold Amount*” as of any date means the amount ofcash and cash equivalents on our consolidated balance sheet as of such datecalculated on a pro forma basis giving effect to the payment of any previouslydeclared but unpaid dividends on any class of our capital stock and the paymentof any dividends to be declared with respect to any class of our capital stockwith respect to the period for which the Class B Threshold Amount is being calculatedless any actual or funded borrowings under our new revolving credit facility(or any successor or additional revolving credit facility) as of such date.

OnDecember 27, 2004, our board of directors declared a cash dividend of $0.1864per share for our 20 million shares of Class A common stock for the partialquarterly dividend period commencing on October 14, 2004, the date ofcompletion of our initial public offering, and ending on January 1, 2005.  We made this dividend payment on January 31,2005 to holders of record as of December 31, 2005.  On March 8, 2005, our board of directorsdeclared a cash dividend of $0.2120 per share for our 20 million shares ofClass A common stock for the quarterly dividend period ending on April 2,2005.  We made this dividend payment onMay 2, 2005 to holders of record as of March 31, 2005.  On May 17, 2005, our board of directorsdeclared a cash 

 

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**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

 

dividend of $0.2120 pershare for our 20 million shares of Class A common stock for the quarterlydividend period ending on July 2, 2005. We made this dividend payment on August 1, 2005 to holders of record asof June 30, 2005.  On August 16, 2005,our board of directors declared a cash dividend of $0.2120 per share for our 20million shares of Class A common stock for the quarterly dividend period endingon October 1, 2005.  We are scheduled tomake this dividend payment on October 31, 2005 to holders of record as ofSeptember 30, 2005. No dividends were declared for our Class B common stock inthe first three quarters of fiscal 2005 or in fiscal 2004.

*Additional Issuance of Our AuthorizedCommon Stock*. Additional shares of our authorized common stockmay be issued, as determined by our board of directors from time to time,without approval of holders of our common stock, except as may be required byapplicable law or the rules of any stock exchange or automated quotation systemon which our securities may be listed or traded.  However, according to our bylaws we may notissue any shares of Class A common stock unless:  (i) they are issued as part of an EIS, theissuance of which has been registered with the SEC, (ii) any EIS that mayresult from the combination of the shares of Class A common stock and oursenior subordinated notes have been issued in a transaction registered with theSEC or (iii) no EISs are currently outstanding.

*1997 Incentive Stock Option Plan*.  In 1997, we adopted the 1997 Incentive StockOption Plan for our and our subsidiaries’ key employees.  The option plan authorized for grant to keyemployees and officers options for up to 736,263 shares of our common stock.  The option plan authorized us to grant either(i) options intended to constitute incentive stock options under the InternalRevenue Code of 1986 or (ii) non-qualified stock options. The option planprovided that it may be administered by our board of directors or a committeedesignated by our board of directors. Options granted under the option plan were exercisable in accordancewith the terms established by the board of directors. Under the option plan,our board of directors determined the exercise price of each option granted,which in the case of incentive stock options, could not be less than fairvalue.  All option grants were made atfair value as determined by a third party valuation.  Options expired on the date determined by theboard of directors, which expiration date was not permitted to be later thanthe tenth anniversary of the date of grant. The options vested ratably over 5years.  No options were granted duringfiscal 2004, 2003 or 2002.  Prior to ourinitial public offering, options to purchase 728,020 shares of our commonstock, all of which were incentive stock options, had been granted since theinception of the option plan, and 8,243 additional shares were available forgrant under the plan.  Upon theconsummation of our initial public offering and following the optionrepurchases described below, we terminated the option plan.

*Other Stock Options*.  Pursuant to the terms of a license agreementwith Emeril’s Food of Love Productions, LLC (EFLP) dated June 2000, we grantedEFLP and William Morris Agency, Inc. 68,021 and 7,582 stock options,respectively.  Prior to our initialpublic offering, all such options were exercisable at a price of $0.09 pershare of common stock, were fully vested and had an expiration date of June 9,2010.  We recorded the options at fairvalue and expensed such options in 2000.

*Option Repurchases*.  On October 14, 2004, we used a portion of theproceeds from our initial public offering and the concurrent offerings torepurchase all options outstanding under the option plan for an aggregatepurchase price of $3,911, and terminated the option plan. The repurchase ofstock options was charged to operations. In addition, we used a portion of the proceeds from our initial publicoffering and the concurrent offerings and cash on hand to repurchase alloptions that we had granted to EFLP and William Morris Agency for an aggregatepurchase price of $406.  The repurchaseof non-employee stock options was charged to our stockholders’ equity up to thefair value of the stock options on the date of repurchase.

 

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**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

 

**(8)           Pension Benefits**

Net periodic costs for the thirteen and thirty-nineweek periods ended October 1, 2005 and October 2, 2004 include the followingcomponents: 
| ** **                                             | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **October 1,  2005**     | ** ** | **October 2,  2004**        | ** ** | **October 1,  2005** | ** ** | **October 2,  2004** | ** ** |
| Service cost — benefits  earned during the period |       | $                        | 390        |                        | $          | 326 |   | $ | 1,144 |   | $ | 1,002 |   |
| Interest cost on projected  benefit obligation         |       | 287                      |       | 232                         |       | 840 |   | 749 |   |
| Expected return on plan  assets                        |       | (244                     | )          | (203                        | )          | (768 | ) | (616 | ) |
| Amortization of unrecognized  prior service cost       |       | 1                        |       | 1                           |       | 3 |   | 1 |   |
| Amortization of  unrecognized loss                     |       | 61                       |       | 31                          |       | 157 |   | 124 |   |
| Net pension benefit cost                               |       | $                        | 495        |                        | $          | 387 |   | $ | 1,376 |   | $ | 1,260 |   |

 

We previously disclosed inour Annual Report on Form 10-K for the fiscal year ended January 1, 2005 thatwe expected to contribute $1,860 to our pension plans in 2005.  As of October 1, 2005, $541 in contributionshave been made.  As of October 1, 2005,we anticipate our total contribution to be $1,000 for the plan year endedDecember 31, 2005 to fund our pension plan obligations.

**(9)           Related-PartyTransactions**

Prior to the consummation of our initial publicoffering, we were party to a management agreement with BRS & Co., themanager of BRS, pursuant to which BRS & Co. was paid an annual fee of $500per year for certain management, business and organizational strategy, andmerchant and investment banking services. BRS owned the majority of our capital stock prior to the completion ofour initial public offering.  Themanagement agreement was terminated as of October 14, 2004.

We are party to a transaction services agreementpursuant to which BRS & Co. will be paid a transaction fee for management,financial and other corporate advisory services rendered by BRS & Co. inconnection with acquisitions by our company, which fee will not exceed 1.0% ofthe total transaction value.  No suchfees were paid during the thirty-nine weeks ended October 1, 2005 and October2, 2004.  In connection with our initialpublic offering and the concurrent offerings, the transaction servicesagreement was amended to provide that transaction fees will be payable asdescribed above unless a majority of our disinterested directors determinesotherwise.  BRS & Co. did not receiveany transaction fees in connection with the initial public offering and theconcurrent offerings.

We lease a manufacturing and warehouse facility from aformer chairman of our board of directors under an operating lease, whichexpires in April 2009.  Total rentexpense associated with this lease was $576 for the thirty-nine weeks endedOctober 1, 2005 and October 2, 2004.

**(10)         Commitmentsand Contingencies**

We are subject to environmental laws and regulationsin the normal course of business.  We didnot make any material expenditures during the thirty-nine week periods endedOctober 1, 2005 and October 2, 2004 in order to comply with environmental lawsor regulations.  Based on our experienceto date, management believes that the future cost of compliance with existingenvironmental laws and regulations (and liability for known environmentalconditions) will not have a material adverse effect on our consolidatedfinancial condition, 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 

 

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**B&G Foods, Inc. andSubsidiaries**

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

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

**(Unaudited)**

 

that may be required in order to comply with suchenvironmental or health and safety laws or regulations or to respond to such environmentalclaims.

We are involved in various claims and legal actionsarising in the ordinary course of business. In the opinion of our management, the ultimate disposition of theseother matters will not have a material adverse effect on our consolidatedfinancial position, results of operations or liquidity.

We have employment agreements with our executiveofficers.  The agreements generallycontinue until terminated by the executive or by us, and provide for severancepayments under certain circumstances.  Asof October 1, 2005, if all of our executives were to be terminated by uswithout cause (as defined) or as a result of the employees’ disability, ourseverance liability would be approximately $1,942.

**(11)         Long-termIncentive Plan**

In connection with our initial public offering, weadopted a long-term incentive plan (LTIP). Our executive officers and other senior employees to be identified bythe compensation committee of our board of directors will be eligible toparticipate in the LTIP.  The purpose ofthe LTIP is to strengthen the mutuality of interests between the LTIPparticipants and holders of our EISs. The LTIP is administered by our compensation committee, which has thepower to, among other things, determine those individuals who will participatein the LTIP; the level of participation of each participant in an incentivepool; the conditions that must be satisfied in order for the participants tovest in their allocated incentive pool amounts (including establishingspecified performance targets that must be achieved in order for a pool to becreated and amounts to be allocated to the participants); and other conditionsthat the participants must satisfy in order to receive payment of theirallocated amounts.  Under the LTIP, themaximum amount that any one participant can receive in respect of a one-yearperformance period is $1,000.  The LTIPis an unfunded plan.  No amounts havebeen earned to date by participants under the LTIP and there was no expenserelated to the LTIP in the thirty-nine week period ending October 1, 2005.

**(12)         RestructuringCharge**

On July 1, 2005, we closed our New Iberia, Louisiana,manufacturing facility as part of our ongoing efforts to improve our productioncapacity utilization, productivity and operating efficiencies, and lower ouroverall costs.  In the thirteen weeksended October 1, 2005, we recorded a charge in connection with the plantclosing of $300.  This charge included acash charge for employee compensation and other costs of $161 and a non-cashcharge for the impairment of property, plant, equipment and inventory of$139.  In the thirty-nine weeks endedOctober 1, 2005, we recorded a charge in connection with the plant closing of$3,544.  This charge included a cashcharge for employee compensation and other costs of $593 and a non-cash chargefor the impairment of property, plant, equipment and inventory of $2,951.  Management expects to have additional cashcharges of approximately $200 during the fourth quarter of fiscal 2005.

 

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** **

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

The following Management’s Discussion and Analysis ofFinancial Condition and Results of Operations contains forward-lookingstatements that involve risks and uncertainties.  Our actual results could differ materiallyfrom those anticipated in these forward-looking statements as a result ofcertain factors, including those set forth under the heading “Forward-LookingStatements” and elsewhere in this report. The following discussion should be read in conjunction with theunaudited consolidated interim financial statements and related notes for thethirty-nine weeks ended October 1, 2005 included elsewhere in this report andthe audited consolidated financial statements and related notes for the fiscalyear ended January 1, 2005 (fiscal 2004) included in our Annual Report on Form10-K filed with the Securities and Exchange Commission (SEC) on March 2, 2005.

**General**

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

Our business strategy is to continue to increasesales, profitability and free cash flow by enhancing our existing portfolio ofbranded shelf-stable products and by capitalizing on our competitivestrengths.  We intend to implement ourstrategy through the following initiatives: profitably growing our establishedbrands, leveraging our unique multiple-channel sales and distribution system,introducing new products, capitalizing on the higher growth Mexican segment ofthe food industry, and expanding our brand portfolio with new licensingarrangements and through acquisitions.

Since 1996, we have successfully acquired andintegrated 16 separate brands into our operations.  We believe that successful futureacquisitions, if any, will enhance our portfolio of existing businesses,further leveraging our existing platform.

We are subject to a number of challenges that mayadversely affect our businesses.  Thesechallenges, which are discussed below and under the heading “Forward-LookingStatements” and “Certain Factors That May Affect Future Results” in this reportinclude:

*Fluctuations in Commodity Prices*. We purchase raw materials, including agricultural products, meat andpoultry from growers, commodity processors, other food companies and packagingmanufacturers.  Raw materials are subjectto fluctuations in price attributable to a number of factors.  We have seen increasing prices in certain ofthese commodities, and we expect this trend may continue.  In the thirty-nine weeks ended October 1,2005, our commodity prices for maple syrup, meat, beans and cans were higherthan those incurred during the thirty-nine weeks ended October 2, 2004.  Fluctuations in commodity prices can lead toretail price volatility and intensive price competition, and can influenceconsumer and trade buying patterns.  Wemanage this risk by entering into short-term supply contracts and advancecommodities purchase agreements from time to time, and if necessary, by raisingprices.  There can be no assurance,however, that any price increases by us will offset the increased cost of theseraw material commodities, or that we will be able to raise prices at all.

*Consolidation in the Retail Trade and ConsequentInventory Reductions*.  As the retail grocery trade continues toconsolidate and our retail customers grow larger and become more sophisticated,our retail customers may demand lower pricing and increased promotionalprograms.  These customers are alsoreducing their inventories and increasing their emphasis on private labelproducts.

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

 

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*Consumer Concern Regarding Food Safety, Quality andHealth*.  The food industry is subject to consumerconcerns regarding the safety and quality of certain food products, includingthe health implications of genetically modified organisms, obesity and transfatty acids.

*Changing Valuations of the Canadian Dollar inRelation to the U.S. Dollar*.  We purchasemost of our maple syrup requirements from manufacturers located in Quebec,Canada.  Over the past year the U.S.dollar has weakened against the Canadian dollar, which has in turn increasedour costs relating to the production of our maple syrup products.

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

**Critical Accounting Policies;**Use ofEstimates

The preparation of financial statements in accordancewith U.S. generally accepted accounting principles requires our management tomake a number of estimates and assumptions relating to the reporting of assetsand liabilities and the disclosure of contingent assets and liabilities at thedate of the consolidated financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Some of the more significant estimates andassumptions made by management involve trade and consumer promotion expenses,allowances for excess, obsolete and unsaleable inventories, and therecoverability of goodwill, trademarks, property, plant and equipment, anddeferred tax assets, and the accounting for our EISs, including their treatmentin computing our income tax expense and the accounting for earnings pershare.  Actual results could differ fromthese estimates and assumptions.

***Trade and Consumer PromotionExpenses***

We offer various sales incentive programs to customersand consumers, such as price discounts, in-store display incentives, slottingfees and coupons.  The recognition ofexpense for these programs involves the use of judgment related to performanceand redemption estimates.  Estimates aremade based on historical experience and other factors.  Actual expenses may differ if the level ofredemption rates and performance vary from estimates.

***Inventories***

Inventories are stated at the lower of cost or market.Cost is determined using the first-in, first-out and average cost methods.  Inventories have been reduced by an allowancefor 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-lived assets, such as property, plant andequipment, and intangibles with estimated useful lives are depreciated oramortized over their respective estimated useful lives to their estimatedresidual values, and reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable.  Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto estimated undiscounted future cash flows expected to be generated by theasset.  If the carrying amount of anasset exceeds its estimated future cash flows, an impairment charge is recognizedby the amount by which the carrying amount of the asset exceeds the fair valueof the asset.

 

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***Goodwill andTrademarks***

Goodwill and intangible assets with indefinite usefullives (trademarks) are tested for impairment at least annually and wheneverevents or circumstances occur indicating that goodwill or indefinite lifeintangibles might be impaired.

We perform the annual impairment tests on the last dayof each fiscal year.  The annual goodwillimpairment test involves a two-step process. The first step of the impairment test involves comparing the fair valueof our company 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.

We completed our annual impairment tests for the yearended January 1, 2005 with no adjustments to the carrying values of goodwilland indefinite life intangibles.  We didnot note any events or circumstances during the thirty-nine week period endedOctober 1, 2005 that would indicate that goodwill or indefinite life intangiblesmight be impaired.

***Accounting Treatment for EISs.***

Our EISs include Class A common stock and seniorsubordinated notes.  Upon completion ofour initial public offering (including the exercise of the over-allotmentoption), we allocated the proceeds from the issuance of the EISs, based uponrelative fair value at the issuance date, to the Class A common stock and thesenior subordinated notes.  We haveassumed that the price paid in the EIS offering was equivalent to the combinedfair value of the Class A common stock and the senior subordinated notes, andthe price paid in the offering for the senior subordinated notes soldseparately (not in the form of EISs) was equivalent to their initial statedprincipal amount.  We have concludedthere are no embedded derivative features related to the EIS that requirebifurcation under Financial Accounting Standards Board (FASB) Statement No.133, “Accounting for Derivative Instruments and Hedging Activities,” as amended(SFAS No. 133).  We have determined thefair value of the Class A common stock and the senior subordinated notes withreference to a number of factors, including the sale of the senior subordinatednotes sold separately from the EISs that have the same terms as the seniorsubordinated notes included in the EISs. Therefore, we have allocated the entire proceeds of the EIS offering tothe Class A common stock and the senior subordinated notes, and the allocationof the EIS proceeds to the senior subordinated notes did not result in apremium or discount.

We have concluded that the call option and the changein control put option in the senior subordinated notes do not warrant separateaccounting under SFAS No. 133 because they are clearly and closely related tothe economic characteristics of the host debt instrument.  Therefore, we have allocated the entireproceeds of the offering to the Class A common stock and the seniorsubordinated notes.  Upon subsequentissuances, if any, of senior subordinated notes, we will evaluate whether thecall option and the change in control put option in the senior subordinatednotes 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

 

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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 common stock portion of each EIS is includedin stockholders’ equity, net of the related portion of the EIS transactioncosts allocated to Class A common stock. Dividends paid on the Class A common stock are recorded as a reductionto retained earnings when declared by us. The senior subordinated note portion of each EIS is included inlong-term debt, and the related portion of the EIS transaction costs allocatedto the senior subordinated notes was capitalized as deferred financing costsand is being amortized to interest expense using the effective interestmethod.  Interest on the seniorsubordinated notes is charged to expense as accrued by us.

***Income Tax Expense Estimates andPolicies***

Income taxes are accounted for under the asset andliability method.  Deferred tax assetsand liabilities of our company are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and operatingloss and tax credit carryforwards.  Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled.  Avaluation allowance is provided when it is more likely than not that all orsome portion of the deferred tax asset will not be realized.  The effect on deferred tax assets andliabilities of a change in tax rates is recognized in operations in the periodthat includes the enactment date.

As part of the income tax provision process ofpreparing our consolidated financial statements, we are required to estimateour income taxes.  This process involvesestimating our current tax expenses together with assessing temporary differencesresulting from differing treatment of items for tax and accountingpurposes.  These differences result indeferred tax assets and liabilities.  Wethen assess the likelihood that our deferred tax assets will be recovered fromfuture taxable income and to the extent we believe the recovery is not likely,we establish a valuation allowance. Further, to the extent that we establish a valuation allowance 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.

We have recorded deferred tax assets, a portion ofwhich represents net operating loss carryforwards.  A valuation allowance has been recorded forcertain state net operating loss carryforwards.

There are various factors that may cause these taxassumptions to change in the near term, and we may have to record a valuationallowance against our deferred tax assets. We cannot predict whether future U.S. federal and state income tax lawsand regulations might be passed that could have a material effect on ourresults of operations.  We assess theimpact of significant changes to the U.S. federal and state income tax laws andregulations on a regular basis and update the assumptions and estimates used toprepare our consolidated financial statements when new regulations andlegislation are enacted.

We do not provide for U.S. federal income taxes or taxbenefits on the unremitted earnings or losses of our foreign subsidiary as suchearnings are intended to be indefinitely reinvested.

We have accounted for our issuance of EISs as anissuance of the separate securities evidenced by such EISs and have allocatedthe proceeds received for each EIS between the Class A common stock and seniorsubordinated note represented thereby in the amounts of their respective fairvalues at the time of issuance. Accordingly, we have accounted for the seniorsubordinated notes represented by the EISs as long-term debt bearing a statedinterest rate and maturing on October 30, 2016. In connection with the issuance and initial public offering of the EISs,we received an opinion from counsel that the senior subordinated notes shouldbe treated as debt for United States federal income tax purposes.  In accordance with the opinion we 

 

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received, we continue to be of the view that thesenior subordinated notes should be treated as debt for United States federalincome tax purposes (although we have not sought a ruling from the IRS on thisissue), and we intend to deduct annually interest expense of approximately$19.9 million on the senior subordinated notes from taxable income for UnitedStates federal and state income tax purposes. There can be no assurance that the classification of senior subordinatednotes as debt (or the amount of interest expense deducted) will not be challengedby the IRS or other tax jurisdictions or will be sustained by a court of law ifchallenged.

If our treatment of the senior subordinated notes asdebt is put at risk in the future as a result of a future ruling by the IRS orother tax jurisdiction or by a court of law, including an adverse ruling forEISs (or other similar securities) issued by other companies or as a result ofa proposed adjustment by the IRS or other tax jurisdiction in an examination ofour company or for any other reason, we will need to consider the effect of suchdevelopments on the determination of our future tax provisions andobligations.  In the event the seniorsubordinated notes are required to be treated as equity for income taxpurposes, then the cumulative interest expense associated with the seniorsubordinated notes for prior tax periods that are open to assessment and forfuture tax periods would not be deductible from taxable income and we would berequired to recognize additional tax expense and establish a related income taxliability for prior period treatment. The additional tax due to the federal and state authorities would bebased on our taxable income or loss for each of the years that we claimed theinterest expense deduction and would materially and adversely affect ourfinancial position, cash flow, and liquidity, and could affect our ongoingability to make interest payments on the senior subordinated notes and dividendpayments on the shares of common stock represented by the EISs and our abilityto continue as a going concern.  Inaddition, non-U.S. holders of our EISs could be subject to withholding taxes onthe payment of interest treated as dividends on equity, which could subject usto additional liability for the withholding taxes that we do not collect onsuch payments.  However, because inaccordance with the opinion of counsel we received on the date of our initialpublic offering we continue to be of the view that the senior subordinatednotes should be treated as debt for United States federal income tax purposes,we do not record a liability for a potential disallowance of this interestexpense deduction or for the potential imposition of these withholding taxes.

A factor in the ongoing determination that ourconsolidated financial statements should reflect deductions for income taxpurposes of the interest on the senior subordinated notes is the veracity, atthe time of the initial public offering, of the representations delivered bythe purchasers of senior subordinated notes sold separately (not in the form ofEISs).  We may conduct procedures in thefuture to confirm the veracity, at the time of the offering, of the purchaserrepresentations. In addition, other factors indicating the existence, at thetime of the initial public offering, of any plan or pre-arrangement may also berelevant to this ongoing determination. It is possible that we will at some point in the future, as a result ofthe findings of the procedures noted above, or IRS interpretations or otherchanges in circumstances, conclude that we should establish a reserve for taxliabilities associated with a disallowance of all or part of the interestdeductions on the senior subordinated notes, although our present view is thatno such reserve is necessary or appropriate. If we decide to maintain such a reserve, our income tax provision, andrelated income tax payable, would be materially impacted.  As a result, our ability to pay dividends onthe shares of our common stock could be materially impaired and the marketprice and/or liquidity for the EISs or our common stock could be adverselyaffected.

***Earnings Per Share***

For the periods prior to our initial public offering,basic earnings per share is calculated by dividing net income available tocommon stockholders (net income less dividends accumulated during the periodfor our 13% Series A and Series B cumulative preferred stock and Series Csenior preferred stock and related charges) by the weighted average commonshares outstanding during the period. Diluted earning per share is calculated similarly, except that it includesthe dilutive effect of the assumed exercise of outstanding options andwarrants.

 

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Following the consummation of our initial publicoffering, we have two classes of common stock, designated as Class A commonstock and Class B common stock, and we present basic and diluted earnings pershare using the two-class method.  Thetwo-class method is an earnings allocation formula that determines earnings pershare for each class of common stock according to dividends declared andparticipation rights in undistributed earnings.

Net income available to our common stockholders isallocated between our two classes of common stock based upon the two-classmethod.  Basic and diluted earnings pershare for our Class A and Class B common stock is calculated by dividingallocated net income available to common stockholders by the weighted averagenumber of shares of Class A and Class B common stock outstanding.

**Results of Operations**

The following table sets forth the percentages of netsales represented by selected items for the thirteen and thirty-nine weekperiods ended October 1, 2005 and October 2, 2004 reflected in our consolidatedstatements of operations.  Thecomparisons of financial results are not necessarily indicative of futureresults:

 
| ** **                                                | ** ** | **Thirteen Weeks  Ended** | ** ** | **Thirty-nine  Weeks Ended** | ** ** |
|-----------------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                                | ** ** | **October 1,  2005**      | ** ** | **October 2,  2004**         | ** ** | **October 1,  2005** | ** ** | **October 2,  2004** | ** ** |
| **Common Size Statement of  Operations:**                 |       |                      |       |                         |       |   |   |   |   |
| Net sales                                                 |       | 100.0                     | %          | 100.0                        | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                                        |       | 69.8                      | %          | 70.6                         | %          | 70.5 | % | 69.1 | % |
| Cost of goods sold —  restructuring charge           |       | 0.3                       | %          | 0.0                          | %          | 1.3 | % | 0.0 | % |
| Gross profit                                              |       | 29.8                      | %          | 29.4                         | %          | 28.2 | % | 30.9 | % |
|                                                      |       |                      |       |                         |       |   |   |   |   |
| Sales, marketing and  distribution expenses               |       | 11.2                      | %          | 10.5                         | %          | 11.3 | % | 11.5 | % |
| General and administrative  expenses                      |       | 1.8                       | %          | 1.3                          | %          | 1.8 | % | 1.3 | % |
| Management fees-related  party                            |       | 0.0                       | %          | 0.1                          | %          | 0.0 | % | 0.1 | % |
| Operating income                                          |       | 16.8                      | %          | 17.4                         | %          | 15.1 | % | 18.0 | % |
|                                                      |       |                      |       |                         |       |   |   |   |   |
| Interest expense, net                                     |       | 11.3                      | %          | 8.9                          | %          | 11.3 | % | 8.6 | % |
| Income before tax expense                                 |       | 5.4                       | %          | 8.5                          | %          | 3.8 | % | 9.4 | % |
|                                                      |       |                      |       |                         |       |   |   |   |   |
| Provision for income taxes                                |       | 2.1                       | %          | 3.3                          | %          | 1.5 | % | 3.6 | % |
| Net income                                                |       | 3.3                       | %          | 5.2                          | %          | 2.3 | % | 5.7 | % |
|                                                      |       |                      |       |                         |       |   |   |   |   |
| Preferred stock dividend  accumulated and related charges |       | 0.0                       | %          | 4.3                          | %          | 0.0 | % | 4.2 | % |
| Net income available to  common stockholders              |       | 3.3                       | %          | 0.9                          | %          | 2.3 | % | 1.5 | % |

 

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

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

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

 

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

*General and Administrative Expenses.* Our general and administrative expenses include administrative employeecompensation and benefit costs, as well as information technologyinfrastructure and communication costs, office rent and supplies, professionalservices, management fees and other general corporate expenses.

*Net Interest Expense.* Net interest expense includes interest relating to our outstandingindebtedness and amortization of deferred debt issuance costs, net of interestincome.

***Thirteen-week period ended October 1, 2005 comparedto thirteen-week period ended October 2, 2004.***

*Net Sales. *Net sales increased $0.4 million or 0.4% to $92.3million for the thirteen-week period ended October 1, 2005 from $91.9 million forthe thirteen-week period ended October 2, 2004. Sales increased $2.9 million relating to price increases, which wasoffset by a decrease in unit volume of $2.5 million.  Sales of our lines of*Ortega*, *MapleGrove Farms*, and*Las Palmas*products increased**in the amountsof $1.6 million, $0.7 million, and $0.6 million or 8.6%, 5.3%, and 12.7%,respectively.  These increases wereoffset by a reduction of sales in *Emeril,B&G*pickles and peppersand *Accent*products of $1.2million, $0.4 million and $0.4 million or 18.6%, 4.0% and 10.3%,respectively.  All other brandsdecreased, in the aggregate, by $0.5 million or 1.3%.

*Gross Profit. *Gross profit increased $0.5 million or 2.0% to $27.5million for the thirteen-week period ended October 1, 2005 from $27.0 millionfor the thirteen-week period ended October 2, 2004.  Pro forma gross profit, which excludes therestructuring charge described below, increased $0.8 million or 3.1% to $27.8million for the thirteen-week period ended October 1, 2005 from $27.0 millionfor the thirteen-week period ended October 2, 2004.  Pro forma gross profit expressed as apercentage of net sales increased 0.8% to 30.2% in the thirteen-week periodended October 1, 2005 from 29.4% in the thirteen-week period ended October 2,2004.  Price increases accounted for 2.4%of the pro forma gross profit increase partially offset by higher costs forbeans and packaging materials, maple syrup, and transportation costs, whichdecreased pro forma gross profit by 1.1%, 0.5% and 0.3%, respectively.

* *On July 1, 2005, we closed our New Iberia, Louisiana,manufacturing facility as part of our ongoing efforts to improve our productioncapacity utilization, productivity, and operating efficiencies and lower ouroverall costs.  We recorded as cost ofgoods sold a restructuring charge associated with the plant closing, whichincluded a cash charge for employee compensation and other costs of $0.6million and a non-cash charge for the impairment of property, plant, equipmentand inventory of $2.9 million.  In thethirteen-weeks ended October 1, 2005, we expensed $0.3 million of this $3.5million charge.  The balance of the $3.5million charge was expensed during the twenty-six week period ended July 2,2005.  No restructuring charges wererecorded or expensed during the thirteen weeks ended October 2, 2004.  Management expects to have additional cashcharges of approximately $0.2 million during the fourth quarter of fiscal 2005.

*Sales, Marketing and DistributionExpenses. *Sales, marketing and distribution expensesincreased $0.7 million or 7.4% to $10.4 million for the thirteen-week periodended October 1, 2005 from $9.6 million for the thirteen-week period endedOctober 2, 2004.  These expenses as apercentage of net sales increased to 11.2% for the thirteen-week period endedOctober 1, 2005 from 10.5% for the thirteen-week period ended October 2,2004.  This increase is primarily due toan increase in consumer marketing spending of $0.4 million and an increase inbrokerage and salesmen commissions of $0.3 million.

*General and AdministrativeExpenses. *General and administrative expensesincreased $0.3 million or 25.5% to $1.7 million for the thirteen-week periodended October 1, 2005 from $1.4 million in the thirteen-week period endedOctober 2, 2004.  The increase wasprimarily due to incremental costs associated with

 

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Sarbanes-Oxley Act compliance of $0.3 million andadditional public company costs of $0.2 million.  All other costs decreased, in the aggregate,by $0.2 million.

*Operating Income. *As a result of the foregoing, operating incomedecreased $0.5 million or 3.4% to $15.5 million for the thirteen-week periodended October 1, 2005 from $16.0 million for the thirteen-week period endedOctober 2, 2004.  Operating incomeexpressed as a percentage of net sales decreased to 16.8% in the thirteen-weekperiod ended October 1, 2005 from 17.4% in the thirteen-week period endedOctober 2, 2004.

*Interest Expense. *Net interest expense increased $2.3 million or 27.6%to $10.5 million for the thirteen-week period ended October 1, 2005 from $8.2million in the thirteen-week period ended October 2, 2004.  The average debt outstanding increasedapproximately $37.5 million in the thirteen-week period ended October 1, 2005as compared to the thirteen-week period ended October 2, 2004.  In addition, the effective interest rate forour outstanding debt during the thirteen-week period ended October 1, 2005under our post-initial public offering capital structure was higher than theeffective interest rate for our outstanding debt during the thirteen-weekperiod ended October 2, 2004.  See “—Liquidityand Capital Resources—Debt” below.

*Income Tax Expense. *Income tax expense decreased $1.0 million or 34.9% to$2.0 million for the thirteen-week period ended October 1, 2005 from $3.0million in the thirteen-week period ended October 2, 2004.  Our effective tax rate was 39.1% for thethirteen-week period ended October 1, 2005 and 38.6% for the thirteen-weekperiod ended October 2, 2004.

*Preferred Stock DividendsAccumulated and Related Charges*.  Preferredstock dividends accumulated and related charges for the thirteen-week periodended October 2, 2004 was $4.0 million. All of our then outstanding preferred stock was repurchased on October14, 2004 with the proceeds from our initial public offering and the concurrentofferings.  Accordingly, no preferredstock dividends were accumulated for the thirteen-week period ended October 1,2005.

***Thirty-nine week period ended October 1, 2005compared to thirty-nine week period ended October 2, 2004.***

*Net Sales. *Net sales increased $0.2 million or 0.1% to $276.5million for the thirty-nine week period ended October 1, 2005 from $276.3million for the thirty-nine week period ended October 2, 2004.  Sales increased $5.2 million relating to priceincreases, which was offset by a decrease in unit volume of $5.0 million.  Sales of our lines of *Maple Grove Farms*, *Polaner* and *Las Palmas* products increased $3.1 million, $1.7 million,and $1.7 million or 8.6%, 6.3%, and 11.4%, respectively.  These increases were offset by a reduction ofsales in *Emeril, Underwood, B&G*pickles and peppers*, Vermont Maid*, *Accent, Trappey* and *Sason*products**in the amounts of $1.7 million, $1.3 million, $0.7 million,$0.6 million, $0.5 million, $0.4 million and $0.4 million or 8.5%, 7.6%, 2.1%,29.6%, 3.7%, 3.7% and 12.3%, respectively. All other brands decreased, in the aggregate, by $0.7 million or 0.7%.

*Gross Profit. *Gross profit decreased $7.5 million or 8.7% to $78.0million for the thirty-nine week period ended October 1, 2005 from $85.5million for the thirty-nine week period ended October 2, 2004.  Pro forma gross profit, which excludes therestructuring charge described below, decreased $3.9 million or 4.6% to $81.6million for the thirty-nine week period ended October 1, 2005 from $85.5million for the thirty-nine week period ended October 2, 2004.  Pro forma gross profit expressed as apercentage of net sales decreased 1.4% to 29.5% in the thirty-nine week periodended October 1, 2005 from 30.9% in the thirty-nine week period ended October2, 2004.  Higher costs for beans andpackaging materials, maple syrup, pickle and peppers, trade spending andtransportation decreased pro forma gross profit by 0.6%, 0.6%, 0.5%, 0.2% and0.2%, respectively.  Net sales price increasesimproved pro forma gross profit by 1.3%.

On July 1, 2005, we closed our New Iberia, Louisiana,manufacturing facility as part of our ongoing efforts to improve our productioncapacity utilization, productivity, and operating efficiencies and lower our 

 

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overall costs. We recorded as cost of goods sold a restructuring charge, which includeda cash charge for employee compensation and other costs of $0.6 million and anon-cash charge for the impairment of property, plant, equipment and inventoryof $2.9 million.  In the thirty-nineweeks ended October 1, 2005, we expensed all $3.5 million of this charge.  No restructuring charges were recorded orexpensed during the thirty-nine weeks ended October 2, 2004.  Management expects to have additional cashcharges of approximately $0.2 million during the fourth quarter of fiscal 2005.

*Sales, Marketing and DistributionExpenses. *Sales, marketing and distributionexpenses decreased $0.6 million or 2.0% to $31.2 million for the thirty-nineweek period ended October 1, 2005 from $31.9 million for the thirty-nine weekperiod ended October 2, 2004.  Theseexpenses as a percentage of net sales decreased to 11.3% for the thirty-nineweek period ended October 1, 2005 from 11.5% for the thirty-nine week period endedOctober 2, 2004.  This reduction isprimarily due to a reduction in consumer marketing spending of $0.8 million andbrokerage and salesmen commissions of $0.5 million, partially offset by anincrease in trade spending of $1.0 million. All other expenses decreased $0.3 million.

*General and AdministrativeExpenses. *General and administrative expensesincreased $1.1 million or 27.0% to $5.0 million for the thirty-nine week periodended October 1, 2005 from $4.0 million in the thirty-nine week period endedOctober 2, 2004.  The increase wasprimarily due to incremental costs associated with Sarbanes-Oxley Actcompliance of $0.6 million and additional public company costs of $0.8 million,which were partially offset by the elimination of the management feespreviously paid to BRS.

*Operating Income. *As a result of the foregoing, operating incomedecreased $7.9 million or 15.9% to $41.7 million for the thirty-nine weekperiod ended October 1, 2005 from $49.6 million for the thirty-nine week periodended October 2, 2004.  Operating incomeexpressed as a percentage of net sales decreased to 15.1% in the thirty-nineweek period ended October 1, 2005 from 18.0% in the thirty-nine week periodended October 2, 2004.

*Interest Expense. *Net interest expense increased $7.5 million or 31.6%to $31.3 million for the thirty-nine week period ended October 1, 2005 from$23.8 million in the thirty-nine week period ended October 2, 2004.  The average debt outstanding increasedapproximately $37.5 million in the thirty-nine week period ended October 1,2005 as compared to the thirty-nine week period ended October 2, 2004.  In addition, the effective interest rate forour outstanding debt during the thirty-nine week period ended October 1, 2005under our post-initial public offering capital structure was higher than theeffective interest rate for our outstanding debt during the thirty-nine weekperiod ended October 2, 2004.  See “—Liquidityand Capital Resources—Debt” below.

*Income Tax Expense. *Income tax expense decreased $5.9 million or 59.1% to$4.1 million for the thirty-nine week period ended October 1, 2005 from $10.0million in the thirty-nine week period ended October 2, 2004.  Our effective tax rate was 39.1% for thethirty-nine week period ended October 1, 2005 and 38.6% for the thirty-nineweek period ended October 2, 2004.

*Preferred Stock DividendsAccumulated and Related Charges*.  Preferredstock dividends accumulated and related charges for the thirty-nine week periodended October 2, 2004 was $11.7 million. All of our then outstanding preferred stock was repurchased on October14, 2004 with the proceeds from our initial public offering and the concurrentofferings.  Accordingly, no preferredstock dividends were accumulated for the thirty-nine week period ended October1, 2005.

**Liquidityand Capital Resources**

Our primary liquidity requirements include debtservice, capital expenditures and working capital needs.  See also, “Dividend Policy” and “Commitmentsand Contractual Obligations” below.  Wefund our liquidity needs primarily through cash generated from operations andto the extent necessary, through borrowings under our revolving creditfacility.

 

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*Cash Flows*. Cash provided by operating activities increased $3.6 million to $11.5million for the thirty-nine week period ended October 1, 2005 from $7.9 millionin the thirty-nine week period ended October 2, 2004.  The increase was due to a decrease in thechange in accounts receivable and an increase in the change in accruedexpenses, offset by an increase in the change in inventory, a decrease in netincome and a decrease in the change in accounts payable.  Working capital at October 1, 2005 was $104.8million, an increase of $3.0 million over working capital at January 1, 2005 of$101.8 million.

Net cash used in investing activities for thethirty-nine week period ended October 1, 2005 was $5.0 million as compared tonet cash used in investing activities of $5.2 million for the thirty-nine weekperiod ended October 2, 2004.  Capitalexpenditures during the thirty-nine week period ended October 1, 2005 were $5.0million and included purchases of manufacturing and computer equipment.  This compares to $5.3 million in similarcapital expenditures for the thirty-nine week period ended October 2, 2004.

Net cash used in financing activities for thethirty-nine week period ended October 1, 2005 was $12.2 million as compared to$1.1 million for the thirty-nine week period ended October 2, 2004.  Net cash used in financing activities for thethirty-nine week period ended October 1, 2005 consists of $12.2 million individends paid on our Class A common stock. The net cash used in financing activities for the thirty-nine weekperiod ended October 2, 2004 consists of our required $1.1 million year-to-datepayment under our then existing term loan.

Based on a number of factors, including our trademarkand goodwill amortization for tax purposes from our prior acquisitions, and theincome tax effects of our initial public offering, the concurrent offerings andrelated transactions, including our call premium on our outstanding seniorsubordinated notes, other write-offs of existing deferred financing costs andthe compensation expense associated with our repurchase of certain managementstock options, we realized a significant reduction in cash taxes in 2004 and weexpect to realize significant reductions in 2005 as compared to our tax expensefor financial statement purposes, and further, we believe we will realize abenefit to our cash taxes payable from amortization of our trademarks andgoodwill for the taxable years 2005 through 2018.

***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 includesamounts so as to be different than the most directly comparable measurecalculated and presented in accordance with GAAP in our consolidated balancesheets and related consolidated statements of operations, changes instockholders’ equity and comprehensive income (loss), and cash flows.  We present EBITDA (net income before netinterest expense, income taxes, depreciation and amortization) and adjustedEBITDA (EBITDA as adjusted for transaction related compensation expensesincurred in fiscal 2004 in connection with our initial public offering, theconcurrent offerings and the related transactions and restructuring chargesincurred in fiscal 2005) because we believe they are useful indicators of ourhistorical debt capacity and ability to service debt.  We also present this discussion of EBITDA andadjusted EBITDA because covenants in the indenture governing our senior notes,our revolving credit facility and the indenture governing our seniorsubordinated notes contain ratios based on these measures.

A reconciliation of EBITDA and adjusted EBITDA withthe most directly comparable GAAP measure is included below for the thirteenand thirty-nine weeks ended October 1, 2005 and October 2, 2004 along with thecomponents of EBITDA and adjusted EBITDA.

 

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* *

*Reconciliationof EBITDA and Adjusted EBITDA to Net Cash Provided by (Used in) OperatingActivities (dollars in thousands)*.

 
| ** **                                            | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **October 1,  2005**     | ** ** | **October 2,  2004**        | ** ** | **October 1,  2005** | ** ** | **October 2,   2004** | ** ** |
| Net income                                            |       | $                        | 3,060      |                        | $          | 4,804 |   | $ | 6,354 |   | $ | 15,869 |   |
| Depreciation                                          |       | 1,769                    |       | 1,734                       |       | 5,129 |   | 4,971 |   |
| Income tax expense                                    |       | 1,965                    |       | 3,020                       |       | 4,080 |   | 9,976 |   |
| Interest expense, net                                 |       | 10,458                   |       | 8,195                       |       | 31,320 |   | 23,801 |   |
| EBITDA (1)                                            |       | 17,252                   |       | 17,753                      |       | 46,883 |   | 54,617 |   |
| Adjustments to EBITDA  (1)(2)                         |       | 300                      |       | —                      |       | 3,544 |   | — |   |
| Adjusted EBITDA (1)                                   |       | 17,552                   |       | 17,753                      |       | 50,427 |   | 54,617 |   |
| Income tax expense                                    |       | (1,965                   | )          | (3,020                      | )          | (4,080 | ) | (9,976 | ) |
| Interest expense, net                                 |       | (10,458                  | )          | (8,195                      | )          | (31,320 | ) | (23,801 | ) |
| Deferred income taxes                                 |       | 2,175                    |       | 1,396                       |       | 4,459 |   | 4,534 |   |
| Amortization  of deferred financing and bond discount |       | 698                      |       | 641                         |       | 2,094 |   | 1,925 |   |
| Changes in assets and  liabilities                    |       | (1,570                   | )          | (10,569                     | )          | (9,461 | ) | (19,361 | ) |
| Restructuring charge, cash  portion                   |       | (162                     | )          | —                      |       | (593 | ) | — |   |
| Net  cash provided by (used in) operating activities  |       | $                        | 6,270      |                        | $          | (1,994 | ) | $ | 11,526 |   | $ | 7,938 |   |
|                                                       |            |                          |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |

_________________

(1)          We define EBITDA as net income before netinterest expense, income taxes, depreciation and amortization.  We define adjusted EBITDA as EBITDA asadjusted for the transaction related compensation expenses incurred in fiscal2004 in connection with our initial public offering, the concurrent offerings andrelated transactions and restructuring charges incurred in fiscal 2005.  We believe that the most directly comparableGAAP financial measure to EBITDA and adjusted EBITDA is net cash provided by(used in) operating activities.  Wepresent EBITDA and adjusted EBITDA because we believe they are usefulindicators of our historical debt capacity and ability to service debt.  We also present this discussion of EBITDA andadjusted EBITDA because covenants in our revolving credit facility and theindentures governing the senior notes and the senior subordinated notes containratios based on these measures. EBITDA and adjusted EBITDA are not substitutesfor operating income or net income, as determined in accordance with generallyaccepted accounting principles.  EBITDAand adjusted EBITDA are not complete net cash flow measures because EBITDA andadjusted EBITDA are measures of liquidity that do not include reductions forcash payments for an entity’s obligation to service its debt, fund its workingcapital, capital expenditures and acquisitions, if any, and pay its incometaxes and dividends, if any, and in the case of adjusted EBITDA, cash used topay transaction related bonuses and repurchase of employee stock options andthe cost to restructure our operations. Rather, EBITDA and adjusted EBITDA are two potential indicators of anentity’s ability to fund these cash requirements.  EBITDA and adjusted EBITDA also are notcomplete measures of an entity’s profitability because they do not includecosts and expenses for depreciation and amortization, interest and relatedexpenses and income taxes and in the case of adjusted EBITDA, the cost oftransaction related bonuses and repurchase of employee stock options and thecost to restructure our operations. EBITDA and adjusted EBITDA, as we define them, may differ from similarlynamed measures used by other entities.

(2)          On July 1, 2005, we closedour New Iberia, Louisiana, manufacturing facility as part of our ongoingefforts to improve our production capacity utilization, productivity, andoperating efficiencies and lower our overall costs.  In the thirty-nine weeks ended October 1,2005, we recorded a charge of $3.5 million, of which $0.3 million was recordedduring the thirteen weeks ended October 1, 2005.  The charge associated with the plant closingincluded a cash charge for employee compensation and other costs of $0.6million and a non-cash charge for the impairment of property, plant, equipmentand inventory of $2.9 million.

 

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***Dividend Policy.***

Prior to the completion of our initial public offering,our board of directors adopted a dividend policy that reflects a basic judgmentthat our stockholders would be better served if we distributed our cashavailable to pay dividends to them instead of retaining it in our business.  Under this policy, cash generated by ourcompany in excess of operating needs, interest and principal payments onindebtedness, capital expenditures sufficient to maintain our properties andother assets and $6.0 million of dividend restricted cash (that can be used forthe payment of dividends on Class A common stock or for any other purpose otherthan the payment of dividends on the Class B common stock) would in general bedistributed as regular quarterly cash dividends (up to the intended dividendrate as determined by our board of directors) to the holders of our Class Acommon stock and as regular annual cash dividends (up to the dividend ratepermitted under our debt agreements and our organizational documents) to theholders of our Class B common stock and not be retained by us as cash on ourconsolidated balance sheet.

Dividend payments are not mandatory or guaranteed andholders of our common stock do not have any legal right to receive, or requireus to pay, dividends.  Furthermore, ourboard of directors may, in its sole discretion, amend or repeal this dividendpolicy with respect to the Class A and Class B common stock at any time.  Our board of directors may decrease the levelof dividends for the Class A and Class B common stock below the intendeddividend rates or discontinue entirely the payment of dividends.  Future dividends with respect to shares ofour capital stock, if any, depend on, among other things, our results ofoperations, cash requirements, financial condition, contractual restrictions,business opportunities, provisions of applicable law and other factors that ourboard of directors may deem relevant. The indenture governing our senior subordinated notes, the terms of ourrevolving credit facility and the indenture governing the senior notes containsignificant restrictions on our ability to make dividend payments.  In addition, certain provisions of theDelaware 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 mayhave to forego growth opportunities or capital expenditures that wouldotherwise be necessary or desirable if we do not find alternative sources offinancing.  If we do not have sufficientcash for these purposes, our financial condition and our business will suffer.

For the thirty-nine weeks ended October 1, 2005, wehad cash flows provided by operations of $11.5 million.  If our cash flows from operations for futureperiods were to fall below our minimum expectations (or if our assumptions asto capital expenditures or interest expense were too low or our assumptions asto the sufficiency of our revolving credit facility to finance our workingcapital needs were to prove incorrect), we would need either to reduce oreliminate dividends or, to the extent permitted under the indenture governingour senior notes, the indenture governing our senior subordinated notes and theterms of our revolving credit facility, fund a portion of our dividends withborrowings or from other sources.  If wewere to use working capital or permanent borrowings to fund dividends, we wouldhave less cash and/or borrowing capacity available for future dividends andother purposes, which could negatively impact our financial condition, ourresults of operations, our liquidity and our ability to maintain or expand ourbusiness.

 

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The table below illustrates for the fiscal year endedJanuary 1, 2005 and the latest twelve months ended October 1, 2005,respectively, the amount of cash that we had available for distribution to ourstockholders.
| ** **                                                                          | ** ** | **Fiscal Year   Ended**    | ** ** | **Less:  Thirty-nine Weeks Ended** | ** ** | **Plus:  Thirty-nine Weeks Ended** | ** ** | **Latest Twelve Months  Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------------------|------------|------------------------------------|------------|---------------------------------|------------|
| **Cash Available to Pay Dividends**                                                 | ** ** | **January 1,  2005**       | ** ** | **October 2,  2004**               | ** ** | **October 1,  2005**               | ** ** | **October 1,  2005****(a)**     | ** ** |
| ** **                                                                          | ** ** | **(unaudited)**            | ** ** | **(unaudited)**                    | ** ** | **(unaudited)**                    | ** ** | **(unaudited)**                 | ** ** |
|                                                                                |       | **(Dollars in thousands)** |       |
| Net cash provided by  operating activities (b)                                      |       | $                          | 19,302     |                               | $          | 7,938                              |       | $                               | 11,526     |   | $ | 22,890 |   |
| Interest expense, net (c)                                                           |       | 48,148                     |       | 23,801                             |       | 31,320                             |       | 55,667                          |       |
| Income taxes                                                                        |       | 2,126                      |       | 9,976                              |       | 4,080                              |       | (3,770                          | )          |
| Amortization  of deferred debt issuance costs and bond discount                     |       | (2,532                     | )          | (1,925                             | )          | (2,094                             | )          | (2,701                          | )          |
| Costs  relating to the early extinguishment of debt (c)                             |       | (13,906                    | )          | —                             |       | —                             |       | (13,906                         | )          |
| Deferred income taxes                                                               |       | (7,462                     | )          | (4,534                             | )          | (4,459                             | )          | (7,387                          | )          |
| Restructuring  charge — property, plant, equipment and inventory impairment(d) |       | —                     |       | —                             |       | (2,951                             | )          | (2,951                          | )          |
| Changes in assets and  liabilities (b)                                              |       | 14,616                     |       | 19,361                             |       | 9,461                              |       | 4,716                           |       |
| EBITDA                                                                              |       | 60,292                     |       | 54,617                             |       | 46,883                             |       | 52,558                          |       |
| Restructuring charge (d)                                                            |       | —                     |       | —                             |       | 3,544                              |       | 3,544                           |       |
| Transaction  related compensation expenses (e)                                 |       | 9,859                      |       | —                             |       | —                             |       | 9,859                           |       |
| Adjusted EBITDA                                                                     |       | 70,151                     |       | 54,617                             |       | 50,427                             |       | 65,961                          |       |
| Reduction for cash income  tax expense                                              |       | —                     |       | —                             |       | (138                               | )          | (138                            | )          |
| Pro forma cash interest  expense (f)                                                |       | (39,096                    | )          | (29,322                            | )          | (29,226                            | )          | (39,000                         | )          |
| Capital expenditures                                                                |       | (6,598                     | )          | (5,285                             | )          | (4,992                             | )          | (6,305                          | )          |
| Restructuring charge, cash  portion (d)                                             |       | —                     |       | —                             |       | (593                               | )          | (593                            | )          |
| Cash available to pay  dividends                                                    |       | $                          | 24,457     |                               | $          | 20,010                             |       | $                               | 15,478     |   | $ | 19,925 |   |
|                                                                                     |            |                            |            |                                    |            |                                    |            |                                 |            |  |  |  |  |  |  |  |  |

 

(a)              Our unauditedconsolidated statements of operations and cash flow data for the latest twelvemonths ended October 1, 2005 was derived from our audited consolidatedstatements of operations and cash flow data for the fiscal year ended January1, 2005 and (i) subtracting from it our unaudited consolidated statements ofoperations and cash flow data for the thirty-nine weeks ended October 2, 2004and (ii) adding to it our unaudited consolidated statements of operations andcash flow data for the thirty-nine weeks ended October 1, 2005.

 

(b)             Dividendsdeclared and unpaid during the fiscal year ended January 1, 2005 of $3.7 million,which had previously been reported as part of “net cash provided by operatingactivities” in our consolidated statements of cash flows in our Annual Reporton Form 10-K filed with the SEC on March 2, 2005 has been reclassified as anon-cash financing activity.

 

(c)              Net interestexpense for the fiscal year ended January 1, 2005 includes $13.9 million ofcosts relating to the early extinguishment of debt incurred in connection withour initial public offering, the concurrent offerings and the related transactions.  Included in these costs are:  $8.4 million for the write-off of deferredfinancing costs, $4.9 million for bond tender costs and $0.6 million for thepayment of bond discount.

 

(d)             On July 1,2005, we closed our New Iberia, Louisiana manufacturing facility as part of ourongoing efforts to improve our production capacity utilization, productivity,and operating efficiencies and lower our overall costs.  In the thirty-nine weeks ended October 1,2005, we recorded a charge of $3.5 million. The charge associated with the plant closing included a cash charge foremployee compensation and other costs of $0.6 million and a non-cash charge forthe impairment of property, plant, equipment and inventory of $2.9 million.

 

(e)              Transactionrelated compensation expenses, which were incurred in connection with ourinitial public offering, the concurrent offerings and the related transactions,include:  $6.0 million for transactionbonuses and $3.9 million for our repurchase of employee stock options.

 

(f)                The fiscal yearended January 1, 2005 pro forma cash interest expense under our post-initialpublic offering capital structure assuming the initial public offering,concurrent offerings and related transactions occurred on January 4, 2004.  Accordingly, the cash interest expenseincludes, respectively, 12.0% interest on $165.8 million of senior subordinatednotes and 8.0% interest on $240.0 million of senior notes.  Pro forma cash interest expense for thethirty-nine weeks ended October 2, 2004 is an amount equal to three quarters ofthe pro forma cash interest expense for the fiscal year ended January 1,2005.  Pro forma cash interest expensefor the thirty-nine weeks ended October 1, 2005 is our actual interest expense,for such period less the non-cash amortization of deferred debt issuance costs,which is included in net interest expense for such period.

 

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There can be no assurance that we will continue to paydividends at historical levels, or at all. Dividend payments are not mandatory or guaranteed, are within theabsolute discretion of our board of directors and will be dependent upon manyfactors and future developments that could differ materially from our currentexpectations.  Over time, our EBITDA,adjusted EBITDA and capital expenditure, working capital and other cash needswill be subject to uncertainties, which could impact the level of dividends, ifany, we pay in the future.

***Acquisitions.***

Our liquidity and capital resources have beensignificantly impacted by acquisitions and may be impacted in the foreseeablefuture by additional acquisitions.  Wehave historically financed acquisitions with borrowings and cash flows fromoperations.  Our interest expense willincrease with any additional indebtedness we may incur to finance potentialfuture acquisitions, if any.  To theextent future acquisitions, if any, are financed by additional indebtedness,the resulting increase in debt and interest expense could have a negativeimpact on liquidity.

***Environmental Clean-Up Costs.***

We have not made any material expenditures during thethirty-nine week period ended October 1, 2005 in order to comply withenvironmental laws or regulations.  Basedon our experience to date, we believe that the future cost of compliance withexisting environmental laws and regulations (and liability for knownenvironmental conditions) will not have a material adverse effect on ourconsolidated financial condition, 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.

***Debt.***

*Senior Secured Credit Facility*. Concurrently with our initial public offering and concurrent offerings,we entered into a $30.0 million senior secured revolving credit facility.  Interest is determined based on severalalternative rates as stipulated in the revolving credit facility, including thebase lending rate per annum plus an applicable margin, or LIBOR plus anapplicable margin.  The revolving creditfacility is secured by substantially all of our assets except our realproperty.  The revolving credit facilityprovides for mandatory prepayment based on asset dispositions and certainissuances of securities, as defined.  Therevolving credit facility contains covenants that restrict, among other things,our ability to incur additional indebtedness, pay dividends and create certainliens.  The revolving credit facilityalso contains certain financial maintenance covenants, which, among otherthings, specify maximum capital expenditure limits, a minimum interest coverageratio and a maximum senior and total leverage ratio, each ratio asdefined.  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 revolving credit facility was undrawn on the date of consummation ofour initial public offering and concurrent offerings and remained undrawn atOctober 1, 2005.  The available borrowingcapacity under our revolving credit facility, net of outstanding letters ofcredit of $0.9 million, was $29.1 million at October 1, 2005.  The maximum letter of credit capacity underthe revolving credit facility is $10.0 million, with a fee of 3% for alloutstanding letters of credit.

*12.0% Senior Subordinated Notes due 2016*. In connection with our initial public offering, we issued on October 14,2004, $124.3 million aggregate principal amount of 12.0% senior subordinatednotes due 2016 in the form of EISs and an additional $22.8 million aggregateprincipal amount of 12.0% senior subordinated notes due 2016 (not in the formof EISs).  In connection with theexercise of the underwriters’ over-allotment option, on October 22, 2004 weissued an additional $18.7 million aggregate principal amount of 12.0% senior 

 

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subordinated notes in the form of EISs.  Each EIS represents one share of our Class Acommon stock and $7.15 principal amount of our 12.0% senior subordinatednotes.  As of October 1, 2005, $165.8million aggregate principal amount of senior subordinated notes wasoutstanding.

Interest on the senior subordinated notes is payablequarterly in arrears on each January 30, April 30, July 30 and October 30through the maturity date.  The seniorsubordinated notes will mature on October 30, 2016, unless earlier retired orredeemed at our option as described below.

Upon the occurrence of a change of control (as definedin the indenture), unless we have retired the senior subordinated notes orexercised our right to redeem all senior subordinated notes as described below,each holder of the senior subordinated notes has the right to require us torepurchase that holder’s senior subordinated notes at a price equal to 101.0%of the principal amount of the senior subordinated notes being repurchased,plus any accrued and unpaid interest 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 notes prior to October 30,2009.  However, we may, from time totime, seek to retire the senior subordinated notes through cash repurchases ofEISs or separate senior subordinated notes and/or exchanges of EISs or separatesenior subordinated notes for equity securities, in open market purchases,privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing marketconditions, our liquidity requirements, contractual restrictions and otherfactors.  We expect that any repurchaseof EISs or senior subordinated notes would be funded with our existing cashbalances and cash from operations. The amounts involved may be material.

In addition, on and after October 30, 2009, we mayredeem for cash all or part of the senior subordinated notes upon not less than30 or more than 60 days’ notice by mail to the owners of senior subordinatednotes, at a redemption price of 106.0% beginning October 30, 2009 andthereafter at prices declining annually to 100% on or after October 30,2012.  If we redeem any seniorsubordinated notes, the senior subordinated notes and Class A common stockrepresented by each EIS will be automatically separated.

The senior subordinated notes are unsecuredobligations and are subordinated in right of payment to all of our existing andfuture senior secured and senior unsecured indebtedness, including theindebtedness under our revolving credit facility and our senior notes.  The senior subordinated notes rank pari passuin right of payment with any of our other subordinated indebtedness.

The senior subordinated notes are jointly andseverally and fully and unconditionally guaranteed by all of our existingdomestic subsidiaries and certain future domestic subsidiaries on an unsecuredand subordinated basis on the terms set forth in the indenture governing thesenior subordinated notes.  The seniorsubordinated note guarantees are subordinated in right of payment to allexisting and future senior indebtedness of the guarantors, including theindebtedness under our revolving credit facility and the senior notes.  Our present foreign subsidiary, Les ProduitsAlimentaires Jacques et Fils Inc., is not a guarantor, and any future foreignor partially owned domestic subsidiaries will not be guarantors, of our seniorsubordinated notes.

The indenture governing the senior subordinated notescontains covenants with respect to us and restricts the incurrence ofadditional indebtedness and the issuance of capital stock; the payment ofdividends or distributions on, and redemption of, capital stock; a number ofother restricted payments, including certain investments; specified creation ofliens, sale-leaseback transactions and sales of assets; fundamental changes,including consolidation, mergers and transfers of all or substantially all ofour assets; and specified transactions with affiliates.

Although we believe that the senior subordinated notesshould be treated as debt for U.S. federal income tax purposes in accordancewith the opinion of our tax counsel issued on the date of our initial public 

 

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offering, this conclusion cannot be assured.  If all or a portion of the seniorsubordinated notes were treated as equity rather than debt for U.S. federalincome tax purposes, then a corresponding portion of the interest on the seniorsubordinated notes would not be deductible by us for U.S. federal income taxpurposes.  In addition, we would besubject to liability for U.S. withholding taxes on interest payments tonon-U.S. holders if such payments were determined to be dividends. Ourinability to deduct interest on the senior subordinated notes could materiallyincrease our taxable income and, thus, our U.S. federal and applicable stateincome tax liability. Our liability for income taxes (and withholding taxes) ifthe senior subordinated notes were determined to be equity for income taxpurposes would materially reduce our after-tax cash flow and would materiallyand adversely impact our ability to make interest and/or dividend payments andcould impact our ability to continue as a going concern.  See “Critical Accounting Policies; Use ofEstimates—Income Tax Expense Estimates and Policies” for further discussion ofincome tax matters relating to our senior subordinated notes.

*8.0% Senior Notes due 2011*. Concurrently with our initial public offering and offering of separatesenior subordinated notes, we issued $240.0 million aggregate principal amountof 8.0% senior notes due 2011.  Intereston the senior notes is payable on April 1 and October 1 of each year,commencing on April 1, 2005.  Ourobligations under the senior notes are fully and unconditionally guaranteed ona senior basis by all of our existing and future domestic subsidiaries.  The senior notes and the subsidiaryguarantees are our and the guarantors’ general unsecured obligations and areeffectively junior in right of payment to all of our and the guarantors’secured indebtedness and to the indebtedness and other liabilities of our non-guarantorsubsidiaries; are pari passu in right of payment to all of our and theguarantors’ existing and future unsecured senior debt; and are senior in rightof payment to all of our and the guarantors’ future subordinated debt,including the senior subordinated notes. Our present foreign subsidiary, Les Produits Alimentaires Jacques etFils Inc., is not a guarantor, and any future foreign or partially owneddomestic subsidiaries will not be guarantors, of our senior notes.

On or after October 1, 2008, we may redeem some or allof the senior notes at a redemption price of 104.0% beginning October 1, 2008and thereafter at prices declining annually to 100% on or after October 1,2010.  Prior to October 1, 2007, we mayredeem up to 35% of the aggregate principal amount of the senior notes issuedin the senior note offering with the net proceeds of one or more equityofferings at the redemption price as described in the indenture governing thesenior notes.  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 the indenture governing the senior notes plus accrued and unpaid interest tothe date of redemption.  The indenturegoverning the senior notes limits our ability and the ability of the guarantorsto incur additional indebtedness and issue preferred stock; make restrictedpayments, including dividend payments on our common stock; allow restrictionson the ability of certain subsidiaries to make distributions; sell all orsubstantially all of our assets or consolidate or merge with or into othercompanies; enter into certain transactions with affiliates; or create liens andenter into sale and leaseback transactions. Each of the covenants is subject to a number of important exceptions andqualifications.

***Future Capital Needs***

We are highly leveraged.  On October 1, 2005, our total long-term debtand stockholders’ equity was $405.8 million and $85.9 million, respectively.

Our ability to generate sufficient cash to fund ouroperations depends generally on our results of operations and the availabilityof financing.  Our management believesthat the cash on our consolidated balance sheet and our cash flow fromoperations in conjunction with the available borrowing capacity under ourrevolving credit facility, net of outstanding letters of credit, ofapproximately $29.1 million at October 1, 2005, will be sufficient for theforeseeable future to fund operations, meet debt service requirements, fundcapital expenditures, make future acquisitions within our line of business, ifany, and pay our anticipated dividends. We expect to make capital expenditures of between $6.5 million and $7.0million for fiscal 2005.

 

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***Seasonality***

Sales of a number of our products tend to beseasonal.  In the aggregate, however, oursales are not heavily weighted to any particular quarter due to the diversityof our product and brand portfolio. Sales during the first quarter of the fiscal year are generally belowthose 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 all of our maplesyrup requirements during the months of April through July.  Consequently, our liquidity needs aregreatest during these periods.

***Recent Accounting Pronouncements***

In response to the enactment of the American JobCreation Act of 2004 (the “Jobs Act”) on October 22, 2004, the FASB issued FASBStaff Position (FSP) No. 109-1, “*Application of FASBStatement No. 109, Accounting for Income Taxes, for the Tax Deduction Providedto U.S. Based Manufacturers*” (FSP 109-1).

FSP No. 109-1 clarifies how to apply SFAS No. 109 tothe new law’s tax deduction for income attributable to “domestic productionactivities.” The fully phased-in tax deduction is up to nine percent of thelesser of taxable income or “qualified production activities income,” asdefined by the Jobs Act. The staff position requires that the deduction beaccounted for as a special deduction in the period earned, not as a tax-ratereduction. As a result, we will recognize a reduction in our income tax expensefor the domestic production activities in the quarterly period(s) in which weare eligible for the deduction.

In November 2004, the FASB issued SFAS No. 151, *“Inventory Costs—An Amendment of ARB No. 43, Chapter 4”*(SFAS No. 151). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, “InventoryPricing,” to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material (spoilage). Among otherprovisions, the new rule requires that items such as idle facility expense,excessive spoilage, double freight, and rehandling costs be recognized ascurrent-period charges regardless of whether they meet the criterion of “soabnormal” as stated in ARB No. 43. Additionally, SFAS No. 151 requires that the allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities. SFAS No. 151 is effective for fiscal yearsbeginning after June 15, 2005 and is required to be adopted by us in the firstquarter of fiscal 2006, beginning on January 1, 2006. We are currently evaluatingthe effect that the adoption of SFAS No. 151 will have on our consolidatedresults of operations and financial condition but do not expect SFAS No. 151 tohave a material impact.

In December 2004, the FASB issued SFAS No. 123(revised 2004), “*Share-Based Payment*”(SFAS No. 123R), which replaces SFAS No. 123 and supercedes APB Opinion No. 25.SFAS No. 123R addresses the accounting for transactions in which an enterprisereceives employee services in exchange for (a) equity instruments of theenterprise or (b) liabilities that are based on the fair value of theenterprise’s equity instruments or that may be settled by the issuance of suchequity instruments.  SFAS No. 123Rrequires all share-based payments to employees, including grants of employeestock options and restrictive stock grants and units, to be recognized as acompensation cost based on their fair values. The pro forma disclosures previously permitted under SFAS No. 123 nolonger will be an alternative to financial statement recognition.  Based on a recent announcement by theSecurities and Exchange Commission, we are required to adopt SFAS No. 123R nolater than January 1, 2006.  Under SFASNo. 123R, we must determine the appropriate fair value model to be used forvaluing share-based payments, the amortization method for compensation cost andthe transition method to be used at the date of adoption.  The transition methods include prospectiveand retroactive adoption options.  Underthe retroactive option, prior periods may be restated either as of thebeginning of the year of adoption or for all periods presented.  The prospective method requires thatcompensation expense be recorded for all unvested stock options and restrictedstock at the beginning of the first quarter of adoption of SFAS No. 123R, whilethe retroactive methods would record compensation expense for all unvestedstock options and restricted stock beginning with the first periodrestated.  The

 

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adoption of SFAS No. 123R will not have an impact onour consolidated results of operations and earnings per share, since wecurrently do not make any share-based payments and we are not applying theretroactive method to any prior share-based payments.

In December 2004, the FASB issued SFAS No. 153, “*Exchanges of Nonmonetary Assets**— An Amendment of APB Opinion No. 29, Accounting forNonmonetary Transactions*” (SFAS No. 153). SFAS No. 153 eliminatesthe exception from fair value measurement for nonmonetary exchanges of similarproductive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting forNonmonetary Transactions,” and replaces it with an exception for exchanges thatdo not have commercial substance. SFAS No. 153 specifies that a nonmonetaryexchange has commercial substance if the future cash flows of the entity are expectedto change significantly as a result of the exchange. SFAS No. 153 is effectivefor the fiscal periods beginning after June 15, 2005 and was adopted by ourcompany beginning July 3, 2005.  Therewas no impact on our consolidated results of operations and financialconditions.

In May 2005, the Financial Accounting Standards Boardissued SFAS No. 154, “*Accounting Changes andError Corrections — a replacement of APB Opinion No. 20 and FASB Statement No.3*”. This statement applies to all voluntary changes in accountingprinciples and changes required by an accounting pronouncement where nospecific transition provisions are included. SFAS No. 154 requiresretrospective application to prior periods’ financial statements of changes inaccounting principles, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. Retrospectiveapplication is limited to the direct effects of the change; the indirecteffects should be recognized in the period of the change. This statementcarries forward without changing the guidance contained in Opinion No. 20 forreporting the correction of an error in previously issued financial statementsand a change in accounting estimate. However, SFAS No. 154 redefines restatementas the revising of previously issued financial statements to reflect thecorrection of an error. The provisions of SFAS No. 154 are effective foraccounting changes and correction of errors made in fiscal periods that beginafter December 15, 2005, although early adoption is permitted. We are notcurrently contemplating any accounting changes, which would be impacted by SFASNo. 154.

In March 2005, the Financial Accounting StandardsBoard issued interpretation (FIN) No. 47, “*Accountingfor Conditional Asset Retirement Obligations**— an interpretation of FASB Statement No. 143*.”The statement clarifies that the term conditional asset retirement obligation,as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refersto a legal obligation to perform an asset retirement activity in which thetiming and (or) method of settlement are conditional on a future event that mayor may not be within the control of the entity. This interpretation alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. The effective dateof this interpretation is no later than the end of the fiscal year ending afterDecember 15, 2005. The adoption of FIN No. 47 is not expected to have an impacton our consolidated results of operations and financial condition.

***Related-Party Transactions***

Prior to the consummation of our initial publicoffering on October 14, 2004, we were party to a management agreement with BRS& Co., the manager of Bruckmann, Rosser, Sherrill & Co., L.P. (BRS),pursuant to which BRS & Co. was paid an annual fee of $500,000 per year forcertain management, business and organizational strategy, and merchant andinvestment banking services.  BRS ownedthe majority of our capital stock prior to the consummation of our initialpublic offering.  The managementagreement was terminated as of October 14, 2004.

We are also party to a transaction services agreementpursuant to which BRS & Co. will be paid a transaction fee for management,financial and other corporate advisory services rendered by BRS & Co. inconnection with acquisitions by our company, which fee will not exceed 1.0% ofthe total transaction value.  No suchfees were paid during the thirty-nine weeks ended October 1, 2005 and October2, 2004.  In connection with our initialpublic offering and the concurrent offerings, the transaction servicesagreement was 

 

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amended to provide that transaction fees will bepayable as described above unless a majority of our disinterested directorsdetermines otherwise.  BRS & Co. didnot receive any transaction fees in connection with the initial public offeringand the concurrent offerings.

We are a party to a lease for our Roselandmanufacturing and warehouse facility with 426 Eagle Rock Avenue Associates, areal estate partnership of which Leonard S. Polaner, our former chairman of theboard of directors, is the general partner. Total rent expense associated with this lease was approximately $577,000for the thirty-nine week periods ended October 1, 2005 and October 2,2004.  The lease expires in April 2009.

***Off-balance Sheet Arrangements***

As of October 1, 2005, we did not have any off-balancesheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

***Commitments and ContractualObligations***

Our contractual obligations and commitmentsprincipally include obligations associated with our outstanding indebtednessand future minimum operating lease obligations as set forth in the followingtable as of January 1, 2005.    
| ** **                       | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **(Dollars in thousands)** | ** ** |
| **Contractual Obligations:**     | ** ** | **Total**                  | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009 and Thereafter** | ** ** |
| ** **                       | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-term debt (1)               |       | $                          | 772,436    |   | $ | 39,096 |   | $ | 39,096 |   | $ | 39,096 |   | $ | 39,096 |   | $ | 616,052 |   |
| Operating leases                 |       | 9,567                      |       | 3,804 |   | 2,203 |   | 1,506 |   | 1,432 |   | 622 |   |
| Other long-term  obligations (2) |       | 1,860                      |       | 1,860 |   | — |   | — |   | — |   | — |   |
| Total                            |       | $                          | 783,863    |   | $ | 44,760 |   | $ | 41,299 |   | $ | 40,602 |   | $ | 40,528 |   | $ | 616,674 |   |

________

(1)                                  Includes interest obligations on oursenior notes at an interest rate of 8.0% per annum through maturity on October1, 2011 and on our senior subordinated notes of 12.0% per annum throughmaturity on October 30, 2016.

 

(2)                                  Represents expected contributions underour defined benefit pension plans (see below). The expected contributions beyond 2005 are not currently determinable.

 

During the thirty-nine week period ended October 1,2005, there were no material changes outside the ordinary course of business inthe specified contractual obligations set forth in the table above, except thatour expected contributions under our defined benefit pension plans decreasedfrom $1.9 million to $1.0 million.

***Forward-Looking Statements***

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 looking statements involveknown and unknown risks, uncertainties and other factors that may cause ouractual results, performance and achievements, or industry results, to bematerially different from any future results, performance, or achievementsexpressed or implied by any forward-looking statements.  We believe important factors that could causeactual results to differ materially from our expectations include thefollowing:

 

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·                  our substantial leverage;

·                  intensecompetition, changes in consumer preferences, demand for our products, theeffects of changing prices for our raw materials and local economic and marketconditions;

·                  our continuedability to promote brand equity successfully, to anticipate and respond to newconsumer trends, to develop new products and markets, to broaden brandportfolios in order to compete effectively with lower priced products and inmarkets that are consolidating at the retail and manufacturing levels, toimprove productivity and to maintain access to credit markets;

·                  the risksassociated with the expansion of our business;

·                  our possibleinability to integrate any businesses we acquire;

·                  our borrowingcosts and credit ratings, which may be influenced by the credit ratings of ourcompetitors;

·                  factors thataffect the food industry generally, including:

·                  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; and

·                  the effects ofcurrency movements in Canada and fluctuations in the level of our customers’inventories and credit and other business risks related to our customersoperating in a challenging economic and competitive environment; and

·                  the risk thatour senior subordinated notes may be treated as equity for U.S. federal incometax purposes; and

·                  other factorsdiscussed elsewhere in this report, under the section captioned “CertainFactors That May Affect Future Results” and in our public filings with the SEC.

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-looking statement,whether as a result of new information, future events or otherwise. Allsubsequent written and oral forward-looking statements attributable to us orpersons acting on our behalf are expressly qualified in their entirety by thecautionary statements contained in this report.

We caution that the foregoing list of importantfactors is not exclusive.  We urgeinvestors not to unduly rely on forward-looking statements contained in thisreport.

**Certain Factors That MayAffect Future Results**

Any investment in our company will be subject to risksinherent to our business. Before making an investment decision, investorsshould carefully consider the risks described below together with all of theother information included in this report. The risks and uncertainties described below are not the only ones facingour company.  Additional risks anduncertainties that we are not aware of or focused on or that we currently deemimmaterial may also impair our business operations.  This report is qualified in its entirety bythese risk factors.

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

 

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**Risks Specific to Our Company**

***The packaged foodindustry is highly competitive.***

The packaged food industry is highly competitive.  Numerous brands and products, includingprivate label products, compete for shelf space and sales, with competitionbased primarily on product quality, convenience, price, trade promotion,consumer promotion, brand recognition and loyalty, customer service, effectiveadvertising and promotional activities and the ability to identify and satisfyemerging consumer preferences.  Wecompete with a significant number of companies of varying sizes, includingdivisions or subsidiaries of larger companies. Many of these competitors have multiple product lines, substantiallygreater financial and other resources available to them and may have lowerfixed costs and/or are substantially less leveraged than our company.  If we are unable to continue to competesuccessfully with these companies or if competitive pressures or other factorscause our products to lose market share or result in significant price erosion,our business, consolidated financial condition, results of operations orliquidity could be materially and adversely affected.

***Wemay be unable to maintain our profitability in the face of a consolidatingretail environment.***

Our largest customer, Wal-Mart Stores, Inc., accountedfor 9.1% of our net sales during the thirty-nine week period ended October 1,2005 compared to 7.6% of our net sales during the thirty-nine week period endedOctober 2, 2004.  Our ten largestcustomers together accounted for approximately 41.7% of our net sales duringthe thirty-nine week period ended October 1, 2005 compared to 39.8% of our netsales during the thirty-nine week period ended October 2, 2004.  As the retail grocery trade continues toconsolidate and our retail customers grow larger and become more sophisticated,our retail customers may demand lower pricing and increased promotionalprograms.  Further, these customers arereducing their inventories and increasing their emphasis on private labelproducts.  If we fail to use ourmarketing expertise and unique products and category leadership positions torespond to these trends, or if we lower our prices or increase promotionalsupport of our products and are unable to increase the volume of our productssold, our profitability may be adversely affected.

***Ifwe are unable to retain our key management personnel, our growth and futuresuccess may be impaired and our financial condition could suffer as a result.***

Our success depends to a significant degree upon thecontinued contributions of senior management, certain of whom would bedifficult to replace.  In addition, we donot maintain key-man life insurance on any of our executive officers.  As a result, departure by our executiveofficers could have a material adverse effect on our business, consolidatedfinancial condition, results of operations or liquidity.

***Mostof our food product categories are mature and certain categories have experienceddeclining consumption rates from time to time. We may be unable to offset any reduction in, or increase, net salesthrough an increase in trade spending for these categories or an increase innet sales in other categories.***

If consumption rates and sales in our mature foodproduct categories continue to decline, our revenue and operating income may beadversely affected, and we may not be able to offset this decrease in businesswith increased trade spending or an increase in sales or profitability of otherproducts and product categories.

***Wemay have difficulties integrating any future acquisitions or identifying newlicensing arrangements.***

We may pursue additional acquisitions of food productlines and businesses.  However, we may beunable to identify additional acquisitions or may be unable to integrate andmanage any acquired product lines or businesses successfully or achieve asubstantial portion of any anticipated cost savings from these acquisitions orother anticipated benefits in the timeframe we anticipate, or at all.  In addition, any acquired product lines orbusinesses may require a greater amount of trade and promotional spending thanwe anticipate.  

 

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Historically, we have grown net sales for some but notall of the brands we have acquired. Acquisitions involve numerous risks, including difficulties in theassimilation of the operations, technologies, services and products of theacquired companies, personnel turnover and the diversion of management’sattention from other business concerns. Any inability by us to integrate and manage any acquired product linesor businesses in a timely and efficient manner, any inability to achieve asubstantial portion of any anticipated cost savings or other anticipatedbenefits from these acquisitions in the time frame we anticipate or anyunanticipated required increases in trade or promotional spending couldadversely affect our business, consolidated financial condition, results ofoperations or liquidity.  Moreover,future acquisitions by us could result in our incurring substantial additionalindebtedness, being exposed to contingent liabilities or incurring theimpairment of goodwill and other intangible assets, all of which couldadversely affect our financial condition and results of operations.  In addition, we intend to pursue licensingarrangements with third parties to expand our brand and product offerings.  However, we may be unable to identifyadditional licensing arrangements or achieve benefits anticipated from thesearrangements.

***Weare vulnerable to fluctuations in the supply and price of raw materials andlabor, manufacturing and other costs, and we may not be able to offsetincreasing costs by increasing prices to our customers.***

We purchase agricultural products, meat and poultry,other raw materials and packaging supplies from growers, commodity processors,other food companies and packaging manufacturers.  While all such materials are available fromnumerous independent suppliers, raw materials and packaging supplies aresubject to fluctuations in price attributable to a number of factors, includingchanges in crop size, federal and state agricultural programs, export demand,energy and fuel costs, weather conditions during the growing and harvestingseasons, insects, plant diseases and fungi. Although we enter into advance commodities purchase agreements from timeto time, these contracts do not protect us from all increases in raw materialcosts.  In addition, the cost of labor,manufacturing, energy, fuel, packaging materials and pork and chicken and othercosts related to the production and distribution of our food products haverisen in recent years, and we believe that they may continue to rise in theforeseeable future.  Over the pastseveral years, due primarily to an increase in price competition, we and othermanufacturers throughout the packaged food industry have been unable to offsetincreased costs by raising prices to our customers.  If the cost of labor, raw materials ormanufacturing or other costs of production and distribution of our foodproducts continue to increase, and we are unable to offset these increases byraising prices or other measures, our profitability and financial conditioncould be negatively impacted.

***Werely on co-packers for a significant portion of our manufacturing needs, andthe inability to enter into additional or future co-packing agreements mayresult in our failure to meet customer demand.***

We rely upon co-packers for a significant portion of ourmanufacturing needs.  The success of ourbusiness depends, in part, on maintaining a strong sourcing and manufacturingplatform.  We believe that there are alimited number of competent, high-quality co-packers in the industry, and if wewere required to obtain additional or alternative co-packing agreements orarrangements in the future, we can provide no assurance that we would be ableto do so on satisfactory terms or in a timely manner.  Our inability to enter into satisfactoryco-packing agreements could limit our ability to implement our business plan ormeet customer demand.

***Theloss of our exclusive license with Emeril’s Food of Love Productions, L.L.C. orevents or rumors relating to the Emeril’s brand could adversely impact ouroperating results.***

The value of our exclusive license agreement withEmeril’s Food of Love Productions, L.L.C. (EFLP) depends in part on thereputation and integrity of Emeril Lagasse, under whose name the *Emeril’s*products are marketed.  Mr. Lagasse is a widely recognized chef whocurrently enjoys celebrity status for his ability to prepare gourmetfoods.  Consumer and customer recognitionof Mr. Lagasse and the *Emeril’s* brandand the association of this brand with safe and high quality food products forman integral part of our *Emeril’s*products.  Should Mr. Lagasse’s popularity decline, orshould our exclusive license with EFLP be lost or 

 

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compromised for any reason, our operating resultscould be adversely impacted.  Inaddition, EFLP may terminate the license agreement at any point if we fail tomeet our obligations under the agreement.

***Werely on the performance of major retailers, wholesalers, specialty distributorsand mass merchants for the success of our business, and should they performpoorly or give higher priority to other brands or products, our business couldbe adversely affected.***

We sell our products principally to retail outlets andwholesale distributors including, traditional supermarkets, food service outlets,mass merchants, warehouse clubs, non-food outlets and specialty fooddistributors.  The replacement by or poorperformance of our major wholesalers, retailers or chains or our inability tocollect accounts receivable from our customers could materially and adverselyaffect our results of operations and financial condition.  In addition, our customers offer branded andprivate label products that compete directly with our products for retail shelfspace and consumer purchases. Accordingly, there is a risk that our customers may give higher priorityto the products of our competitors.  Inthe future, our customers may not continue to purchase our products or provideour products with adequate levels of promotional support.

***Wemay be unable to anticipate changes in consumer preferences, which may resultin decreased demand for our products.***

Our success depends in part on our ability toanticipate and offer products that appeal to the changing tastes, dietaryhabits and product packaging preferences of consumers in the market categoriesin which we compete.  If we are not ableto anticipate, identify or develop and market products that respond to thesechanges in consumer preferences, demand for our products may decline and ouroperating results maybe adversely affected. In addition, we may incur significant costs related to developing andmarketing new products or expanding our existing product lines in reaction towhat we perceive to be increased consumer preference or demand.  Such development or marketing may not resultin the volume of sales or profitability anticipated.

***Severeweather conditions and natural disasters can affect crop supplies and reduceour operating results.***

Severe weather conditions and natural disasters, suchas floods, droughts, frosts, earthquakes or pestilence, may affect the supplyof the raw materials that we use for our products.  Our maple syrup products, for instance, areparticularly susceptible to severe freezing conditions in Quebec, Canada andVermont during the season in which the syrup is produced.  Competing manufacturers can be affecteddifferently by weather conditions and natural disasters depending on thelocation of their supplies.  If oursupplies of raw materials are reduced, we may not be able to find enough supplementalsupply sources on favorable terms, which could adversely affect our businessand operating results.

***Weare subject to environmental laws and regulations relating to hazardousmaterials, substances and waste used in or resulting from our operations.  Liabilities or claims with respect toenvironmental matters could have a significant negative impact on our business.***

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

 

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***Ouroperations are subject to numerous laws and governmental regulations, exposingus to potential claims and compliance costs that could adversely affect ourbusiness.***

Our operations are subject to extensive regulation bythe United States Food and Drug Administration (FDA), the United StatesDepartment of Agriculture (USDA) and other national, state and localauthorities.  For example, we are subjectto the Food, Drug and Cosmetic Act and regulations promulgated thereunder bythe FDA.  This comprehensive regulatoryprogram governs, among other things, the manufacturing, composition andingredients, packaging and safety of foods. Under this program the FDA regulates manufacturing practices for foodsthrough its current “good manufacturing practices” regulations and specifiesthe recipes for certain foods. Furthermore, our processing facilities and products are subject toperiodic inspection by federal, state and local authorities.  Any changes in these laws and regulationscould increase the cost of developing and distributing our products andotherwise increase the cost of conducting our business, which would adverselyaffect our financial condition.  Inaddition, failure by us to comply with applicable laws and regulations,including future laws and regulations, could subject us to civil remedies,including fines, injunctions, recalls or seizures, as well as potentialcriminal sanctions, which could have a material adverse effect on our business,consolidated financial condition, results of operations or liquidity.

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

The sale of food products for human consumptioninvolves the risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties orproduct contamination or spoilage, including the presence of foreign objects,substances, chemicals, other agents or residues introduced during the growing,storage, handling or transportation phases of production.  We have from time to time been involved inproduct liability lawsuits, none of which have been material to ourbusiness.  While we are subject togovernmental inspection and regulations and believe our facilities comply inall material respects with all applicable laws and regulations, if theconsumption of any of our products causes, or is alleged to have caused, ahealth-related illness in the future we may become subject to claims orlawsuits relating to such matters.  Evenif a product liability claim is unsuccessful or is not fully pursued, thenegative publicity surrounding any assertion that our products caused injury,illness or death could adversely affect our reputation with existing andpotential customers and our corporate and brand image. Moreover, claims or liabilities of this sort might not be covered by ourinsurance or by any rights of indemnity or contribution that we may haveagainst others.  We maintain product liabilityinsurance in an amount that we believe to be adequate.  However, we cannot be sure that we will notincur claims or liabilities for which we are not insured or that exceed theamount of our insurance coverage.

Furthermore, our products could potentially sufferfrom product tampering, contamination or spoilage or be mislabeled or otherwisedamaged.  Under certain circumstances, wemay be required to recall products, leading to a material adverse effect on ourbusiness.  Even if a situation does not necessitatea recall, product liability claims might be asserted against us.  A product liability judgment against us or aproduct recall could have a material adverse effect on our business,consolidated financial condition, results of operations or liquidity.

***Consumerconcern regarding the safety and quality of food products or health concernscould adversely affect sales of certain of our products.***

If consumers in our principal markets lose confidencein the safety and quality of certain food products, our business could beadversely affected.  The food industry isalso subject to recent publicity concerning the health implications of obesityand trans fatty acids.  Developments inany of these areas could cause our results to differ materially from resultsthat have been or may be projected.  Forexample, negative publicity about genetically modified organisms, whether ornot valid, may discourage consumers from buying certain of our products orresult in production and delivery disruptions.

 

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*** ***

***Litigationregarding our trademarks and any other proprietary rights may have asignificant negative impact on our business.***

We own 104 trademarks which are registered in theUnited States, 23 trademarks which are registered with certain U.S. states andPuerto Rico, and 224 trademarks which are registered in foreign countries.  In addition, we have ten trademarkapplications pending in the United States and foreign countries.  We consider our trademarks to be ofsignificant importance in our business. If the actions we take to establish and protect our trademarks and otherproprietary rights are not adequate to prevent imitation of our products byothers or to prevent others from seeking to block sales of our products as analleged violation of their trademarks and proprietary rights, it may benecessary for us to initiate or enter into litigation in the future to enforceour trademark right or to defend ourselves against claimed infringement of therights of others.  Any legal proceedingscould result in an adverse determination that could have a material adverseeffect on our business, consolidated financial condition, results of operationsor liquidity.

***Our financial well-beingcould be jeopardized by unforeseen changes in our employees’ collective bargainingagreements or shifts in union policy.***

As of October 1, 2005, approximately 274 of our 708employees were covered by collective bargaining agreements.  Approximately 53 of our employees at ourRoseland, New Jersey facility were represented by a collective bargainingagreement with the International Brotherhood of Teamsters, Chauffeurs,Warehousemen & Helpers of America (Local No. 863).  Approximately 135 of our employees at ourPortland and Biddeford, Maine facilities were represented by a collective bargainingagreement with the Bakery, Confectionery, Tobacco Workers and Grain MillersInternational Union (AFL-CIO, Local No. 334). Approximately 86 of our employees at our Stoughton, Wisconsin facilitywere represented by a collective bargaining agreement with the Drivers,Salesmen, Warehousemen, Milk Processors, Cannery, Dairy Employees and HelpersUnion (Local No. 695).  Although weconsider our employee relations to be generally good, a prolonged work stoppageor strike at any facility with union employees could have a material adverseeffect on our business, consolidated financial condition, results of operationsor liquidity.  In addition, if upon theexpiration of existing collective bargaining agreements we are unable to reachnew agreements without union action or any such new agreements are not on termssatisfactory to us, our business, consolidated financial condition, results ofoperations or liquidity could be materially and adversely affected.

***Futurelabor disruptions in the food industry could significantly impact our sales andprofitability.***

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

**Risks Relating to our Securities**

***Holdersof our EISs, Class A common stock and Class B common stock, may not receive thelevel of dividends provided for in the dividend policy our board of directorsadopted in connection with our initial public offering, or any dividends atall.***

Dividend payments are not mandatory or guaranteed andholders of our common stock do not have any legal right to receive, or requireus to pay, dividends.  Furthermore, ourboard of directors may, in its sole discretion, amend or repeal the dividendpolicy it adopted in connection with our initial public offering.  Our board of directors may decrease the levelof dividends provided for in this dividend policy or entirely discontinue thepayment of dividends.  Future dividendswith respect to shares of our capital stock, if any, depend on, among otherthings, our results of operations, cash requirements, financial condition,contractual restrictions, business opportunities, provisions of applicable lawand other factors that our board of directors may deem relevant.  The indenture governing our seniorsubordinated notes, the terms of our revolving credit 

 

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facility and the indenture governing the senior notescontain significant restrictions on our ability to make dividend payments.  In addition, certain provisions of theDelaware General Corporation Law may limit our ability to pay dividends.

***Ourdividend policy may negatively impact our ability to finance our workingcapital requirements, capital expenditures or operations.***

In connection with our initial public offering, ourboard of directors has adopted a dividend policy under which cash generated byour business in excess of operating needs, interest and principal payments onindebtedness, capital expenditures sufficient to maintain our properties andassets and $6.0 million of dividend restricted cash (that can be used for thepayment of dividends on the Class A common stock or for any other purpose otherthan the payment of dividends on the Class B common stock), would in general bedistributed as regular quarterly cash dividends (up to the intended dividendrates as determined by our board of directors) to the holders of our Class Acommon stock and as regular annual cash dividends (up to the dividend rate permittedunder our debt agreements and our organizational documents) to the holders ofour Class B common stock and not be retained by us as cash on our consolidatedbalance sheet.  As a result, we may notretain a sufficient amount of cash to finance growth opportunities orunanticipated capital expenditure needs or to fund our operations in the eventof a significant business downturn.  Wemay have to forego growth opportunities or capital expenditures that would otherwisebe necessary or desirable if we do not find alternative sources offinancing.  If we do not have sufficientcash for these purposes, our financial condition and our business will suffer.

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

For the latest twelve months ended October 1, 2005, wehad cash provided by operating activities of $22.9 million.  If our cash flows from operations for futureperiods were to fall below our minimum expectations (or if our assumptions asto capital expenditures or interest expense were too low or our assumptions as tothe sufficiency of our revolving credit facility to finance our working capitalneeds were to prove incorrect), we would need either to reduce or eliminatedividends or, to the extent permitted under the indenture governing our seniornotes, the indenture governing our senior subordinated notes and the terms ofour revolving credit facility, fund a portion of our dividends with borrowingsor from other sources.  If we were to useworking capital or permanent borrowings to fund dividends, we would have lesscash and/or borrowing capacity available for future dividends and otherpurposes, which could negatively impact our financial condition, our results ofoperations, our liquidity and our ability to maintain or expand our business.

***Ourcertificate of incorporation authorizes us to issue without stockholderapproval preferred stock that may be senior to our common stock in right ofdividend payment.***

Our certificate of incorporation authorizes theissuance of preferred stock without stockholder approval and upon such terms asthe board of directors may determine. The rights of the holders of shares of our common stock will be subjectto, and may be adversely affected by, the rights of holders of any class orseries of preferred stock that may be issued in the future.  The right of the holders of our common stockto receive dividends as they may be lawfully declared from time to time by ourboard of directors is subject to any preferential rights that we may grant tothe holders of preferred stock that we may issue.  The terms of any preferred stock we issue mayplace restrictions on the payment of dividends to the holders of our commonstock.  If we issue preferred stock thatis senior to our common stock in right of dividend payment, and our cash flowsfrom operations or surplus are insufficient to support dividend payments to theholders of preferred stock and to the holders of EISs and Class A andClass B common stock, we may be forced to reduce or eliminate dividends tothe holders of EISs and Class A and Class B common stock.

 

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***We have substantialindebtedness, which could:***

***·***                                         restrictour ability to pay interest on our senior subordinated notes and our seniornotes;

***·***                                         restrictour ability to pay dividends with respect to shares of our Class A and Class Bcommon stock; and

***·***                                         impactour financing options and liquidity position.

At October 1, 2005, we had $240.0 million of seniorindebtedness, and $165.8 million ofsenior subordinated indebtedness.

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

·                                            our ability inthe future to obtain additional financing for working capital, capitalexpenditures or acquisitions may be limited;

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

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

·                                            we may be morevulnerable to economic downturns and be limited in our ability to withstandcompetitive pressures.

***Despitecurrent indebtedness levels, we and our subsidiaries may still be able to incursubstantially more debt.  This couldfurther exacerbate risks associated with our substantial indebtedness.***

While our revolving credit facility contains totalleverage, senior leverage and cash interest coverage maintenance covenants andthe indentures governing the senior notes and senior subordinated notes containincurrence covenants that restrict our ability to incur debt, as long as wemeet these financial covenant tests we will be allowed to incur additionalindebtedness.  In addition, the indenturegoverning the senior subordinated notes allows us to issue additional seniorsubordinated notes with terms identical (other than issuance date) to ourexisting senior subordinated notes under certain circumstances.

***Toservice our indebtedness, we require a significant amount of cash.  Our ability to generate cash depends on manyfactors beyond our control.  We may notbe able to repay or refinance the senior subordinated notes, the revolvingcredit facility or our senior notes upon terms acceptable to us if at all.***

Our ability to make payments on and to refinance ourindebtedness, including the senior subordinated notes, and to fund plannedcapital expenditures depends on our ability to generate cash flow fromoperations in the future.  This ability,to a certain extent, is subject to general economic, financial, competitive,legislative, regulatory and other factors that are beyond our control.

A significant portion of our cash flow from operationsis dedicated to servicing our debt requirements.  In addition, we currently intend todistribute a significant portion of any remaining cash flow to our stockholdersin the form of dividends.  Moreover,prior to the maturity of our senior notes, we are not required to make anypayments of principal on our senior subordinated notes.

 

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Our ability to continue to expand our business is, toa certain extent, dependent upon our ability to borrow funds under ourrevolving credit facility and to obtain other third-party financing, includingthrough the sale of EISs or other securities. The revolving credit facility is subject to periodic renewal or mustotherwise be refinanced.  Likewise, weexpect that we will refinance our senior notes at or prior to maturity, whichwill be substantially prior to the maturity date of the senior subordinatednotes.  If we are unable to refinance our indebtedness, includingour revolving credit facility or our senior notes, on commercially reasonableterms or at all, we would be forced to seek other alternatives, including:

·                                          sales ofassets;

·                                          sales ofequity; and

·                                          negotiationswith our lenders or noteholders to restructure the applicable debt.

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

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

***Credit ratings mayaffect our ability to obtain financing and the cost of such financing.***

Our ability to obtain external financing and, inparticular, debt financing is affected by our debt ratings, which areperiodically reviewed by the major credit rating agencies.  Moody’s and S&P have provided ratings tothe senior subordinated notes of Caa1 and CCC+ respectively.  In determining our credit ratings, the ratingagencies generally consider a number of both quantitative and qualitativefactors.  These factors include earnings,fixed charges such as interest, cash flows, total debt outstanding, off-balancesheet obligations and other commitments, total capitalization and variousratios calculated from these factors. The ratings provided to us by Moody’s and S&P for the seniorsubordinated notes indicate that these rating agencies have determined that oursenior subordinated notes have a currently identifiable vulnerability todefault and that we are dependent upon favorable business, financial, andeconomic conditions to meet timely payment of interest and repayment ofprincipal on the senior subordinated notes.

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

We are a holding company and all of our assets areheld by our direct and indirect subsidiaries and we rely on dividends and otherpayments or distributions from our subsidiaries to meet our debt serviceobligations and to enable us to pay dividends. The ability of our subsidiaries to pay dividends or make other paymentsor distributions to us depends on their respective operating results and may berestricted by, among other things, the laws of their jurisdiction oforganization (which may limit the amount of funds available for the payment ofdividends), agreements of those subsidiaries, the revolving credit facility,the terms of the indenture governing the senior notes and the covenants of anyfuture outstanding indebtedness we or our subsidiaries incur.

***Wemay amend our revolving credit facility, the indenture governing the seniornotes or the indenture governing the senior subordinated notes, or we may enterinto new agreements that govern senior indebtedness.  The amended or new terms may significantlyaffect our ability to pay interest and dividends to holders of our securities,as applicable.***

Our revolving credit facility and the indenturegoverning the senior notes contain significant restrictions on our ability topay interest on the senior subordinated notes and dividends on the shares ofClass A and Class B common stock based on meeting specified financial ratios,and compliance with other 

 

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conditions.  Asa result of general economic conditions, conditions in the lending markets, theresults of our business or for any other reason, we may elect or be required toamend or refinance our revolving credit facility or our senior notes, at orprior to maturity, or enter into additional agreements for seniorindebtedness.  Regardless of anyprotection holders of our securities have in the indenture governing the seniorsubordinated notes, any such amendment, refinancing or additional agreement maycontain covenants which could limit in a significant manner our ability to payinterest payments and dividends to holders of the EISs, our Class A andClass B common stock and our senior subordinated notes.

***Weare subject to restrictive debt covenants and other requirements related to ourdebt that limit our business flexibility by imposing operating and financialrestrictions on our operations.***

The agreements governing our indebtedness imposesignificant operating and financial restrictions on us.  These restrictions prohibit or limit, amongother things:

·                                           the incurrenceof additional indebtedness and the issuance of certain preferred stock orredeemable capital stock;

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

·                                          a number ofother restricted payments, including investments;

·                                          specified salesof assets;

·                                          specifiedtransactions with affiliates;

·                                          the creation ofa number of liens; and

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

Our revolving credit facility and the indenturegoverning the senior notes include other and more restrictive covenants andprohibit us from prepaying our other indebtedness, including the seniorsubordinated notes, while senior indebtedness is outstanding.  The revolving credit facility requires us tomaintain specified financial ratios and satisfy financial condition tests,including, without limitation, the following: a maximum leverage ratio, a minimum interest coverage ratio and amaximum senior leverage ratio.

Our ability to comply with the ratios or tests may beaffected by events beyond our control, including prevailing economic, financialand industry conditions.  A breach of anyof these covenants, or failure to meet or maintain ratios or tests could resultin a default under the revolving credit facility, the terms of the indenturegoverning the senior notes and/or the indenture governing the seniorsubordinated notes.  Certain events ofdefault under the revolving credit facility and the terms of the indenturegoverning the senior notes would prohibit us from making payments on the seniorsubordinated notes, including payment of interest when due.  In addition, upon the occurrence of an eventof default under the revolving credit facility or the terms of the indenturegoverning the senior notes, the lenders could elect to declare all amountsoutstanding under the revolving credit facility and the senior notes, togetherwith accrued interest, to be immediately due and payable.  If we were unable to repay those amounts, thelenders could proceed against the security granted to them to secure thatindebtedness.  If the lenders acceleratethe payment of the indebtedness, our assets may not be sufficient to repay in fullthis indebtedness and our other indebtedness, including the senior subordinatednotes.

 

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***Interest on the seniorsubordinated notes may not be deductible by us for U.S. federal income taxpurposes, which could significantly reduce our future cash flow and impact ourability to make interest and dividend payments.***

If all or a portion of the senior subordinated noteswere treated as equity rather than debt for U.S. federal income tax purposes,then a corresponding portion of the interest on the senior subordinated noteswould not be deductible by us for U.S. federal income tax purposes.  In addition, we would be subject to liabilityfor U.S. withholding taxes on interest payments to non-U.S. holders if suchpayments were determined to be dividends. Our inability to deduct interest on the senior subordinated notes couldmaterially increase our taxable income and, thus, our U.S. federal andapplicable state income tax liability. Our liability for income taxes (and withholding taxes) if the seniorsubordinated notes were determined to be equity for income tax purposes wouldmaterially reduce our after-tax cash flow and would materially and adverselyimpact our ability to make interest and/or dividend payments and could impactour ability to continue as a going concern. In the case of foreign holders, treatment of the senior subordinatednotes as equity for U.S. federal income tax purposes would subject such holdersin respect of the senior subordinated notes to withholding or estate taxes inthe same manner as with regard to common stock and could subject us toliability for withholding taxes that were not collected on payments ofinterest.  Therefore, foreign holderswould receive any such payments net of the tax withheld.

Even if the IRS does not challenge the tax treatmentof the senior subordinated notes, it is possible that we will at some point inthe future, as a result of changes in circumstances or facts that come to lightin the future, conclude that we should establish a reserve for contingent taxliabilities associated with a disallowance of all or part of the interestdeductions on the senior subordinated notes, although our present view is thatno such reserve is necessary or appropriate. If we decide to maintain such a reserve, our ability to pay dividends onthe shares of our common stock could be materially impaired and the marketprice and/or liquidity for the ElSs or our common stock could be adverselyaffected.

For discussion of these tax related risks, see “CriticalAccounting Policies; Use of Estimates—Income Tax Expense Estimates and Policies”above.

***Futurechanges that increase cash taxes payable by us could significantly decrease ourfuture cash flow available to make interest and dividend payments with respectto our securities.***

We are able to amortize goodwill and certainintangible assets within the meaning of Section 197 of the Internal RevenueCode of 1986.  This enables us toamortize for tax purposes approximately $16.0 million annually through 2011,approximately $14.4 million for fiscal 2012, approximately $12.9 million forfiscal 2013 and 2014, and approximately $7.1 million for fiscal 2015 through2018.  If there is a change in U.S.federal tax policy that reduces any of these available deductions or results inan increase in our corporate tax rate, our cash taxes payable may increase,which could significantly reduce our future cash and impact our ability to makeinterest and dividend payments.  As ofJanuary 1, 2005, we had net operating loss, or NOL, carryforwards for U.S.federal income tax purposes of approximately $2.9 million which are availableto offset future U.S. federal taxable income, if any, through 2020 subject tocertain limitations under Section 382 of the Internal Revenue Code of 1986.  The realizable amount of these NOLs could bereduced in the near term if estimates of future taxable income during futureperiods are reduced.

***Ifinterest rates rise, the trading value of our ElSs and senior subordinatednotes may decline.***

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

 

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***Future sales or thepossibility of future sales of a substantial amount of EISs, shares of ourClass A common stock, our senior subordinated notes or other securities maydepress the price of our securities.***

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

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

In addition, following the fifth anniversary of theclosing of our initial public offering or earlier under certain circumstances,holders of Class B common stock may demand registration of their Class B commonstock.

***Ourcertificate of incorporation and bylaws and several other factors could limitanother party’s ability to acquire us and deprive our investors of theopportunity to obtain a takeover premium for their securities.***

Our certificate of incorporation and bylaws containcertain provisions that may make it difficult for another company to acquire usand for holders of our securities to receive any related takeover premium fortheir securities.  For example, ourcertificate of incorporation authorizes the issuance of preferred stock without stockholder approval and upon suchterms as the board of directors may determine. The rights of the holders of shares of our common stock will be subjectto, and may be adversely affected by, the rights of holders of any class orseries of preferred stock that may be issued in the future.

**Item 3.    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 is defined for these purposes asthe potential change in the fair value of a financial asset or liabilityresulting from an adverse movement in interest rates.  As of October 1, 2005, our revolving creditfacility entered into concurrently with our initial public offering and theconcurrent offerings was undrawn, and we have no outstanding variable rateborrowings.  Interest under our revolvingcredit facility is determined based on several alternative rates as stipulatedin the revolving credit facility, including the base lending rate per annumplus an applicable margin, or LIBOR plus an applicable margin.

We also have outstanding $240.0 million principalamount of 8.0% senior notes due October 1, 2011, with interest payablesemiannually on April 1 and October 1 of each year.  The fair value of the senior notes at October1, 2005, based on quoted market prices, was $246.0 million.

We also have outstanding $165.8 million principalamount of 12.0% senior subordinated notes due October 30, 2016, with interestpayable quarterly on January 30, April 30, July 30 and October 30 of eachyear.  Of such outstanding principalamount, $143.0 million principal amount is represented by approximately 20.0million EISs.  Each EIS represents oneshare of our Class A common stock and $7.15 principal amount of our seniorsubordinated notes.  As of October 1,2005, the fair value of the EISs, based on the per EIS closing price on theAMEX on July 1, 2005, was $12.65 per EIS. It is not practicable to estimate the fair value of the $143.0 millionprincipal amount of senior subordinated notes represented by the EISs.  Of the $165.8 aggregate principal amount ofsenior subordinated notes outstanding, $22.8 million principal amount is not 

 

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represented by EISs and trades separately.  The fair value of the separate seniorsubordinated notes at October 1, 2005, based on quoted market prices, was $23.9million.

We purchase raw materials, including agriculturalproducts, meat and poultry from growers, commodity processors, other foodcompanies and packaging manufacturers. Raw materials are subject to fluctuations in price attributable to anumber of factors.  We are faced withincreasing prices in certain of these commodities, particularly in packagingmaterials, pork and chicken and we expect this trend may continue.  We manage this risk by entering intoshort-term supply contracts and advance commodities purchase agreements fromtime to time, and if necessary, by raising prices.  There can be no assurance, however, that anyprice increases by us will offset the increased cost of these raw materialcommodities, or that we will be able to raise prices at all.

**Item 4.    Controls and Procedures**

*Evaluation of Disclosure Controlsand Procedures. *As required by Rule 13a-15(b) under theSecurities Exchange Act of 1934, as amended, our management, including ourchief executive officer and our chief financial officer, conducted an evaluationof the effectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered by this report.  As defined in Rule 13a-15(e) and 15d-15(e)under the Exchange Act, disclosure controls and procedures are controls andother procedures that we use that are designed to ensure that informationrequired to be disclosed by us in the reports we file or submit under theExchange Act is recorded, processed, summarized and reported, within the timeperiods specified in the SEC’s rules and forms. 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 thisreport.  It should be noted that anysystem of controls, however well designed and operated, is based in part uponcertain assumptions and can provide only reasonable, and not absolute,assurance that the objectives of the system are met.

*Changes in Internal Control OverFinancial Reporting*.  As required by Rule 13a-15(d) under theExchange 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 reasonably likelyto materially affect, our internal control over financial reporting.  Based on that evaluation, our chief executiveofficer and our chief financial officer concluded that there has been no changeduring the quarter covered by this report that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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** **

**PART IIOTHER INFORMATION**

**Item 1.    LegalProceedings**

We are involved in various claims and legal actionsarising in the ordinary course of business. In the opinion of our management, the ultimate disposition of thesematters will not have a material adverse effect on our consolidated financialposition, results of operations or liquidity.

**Item 2.    Unregistered Sales of Equity Securities andUse of 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.    OtherInformation**

Not applicable.

**Item6.    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. |
| 32.2              | 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 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 31, 2005 |   | 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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INDEX TO 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. |
| 32.2              | 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 Financial Officer. |

 

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