** **

**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 periodended August 31, 2002

** **

**OR**

 
| **o**  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d)** |
|--------|---------------------------------------------------------|
|   | **OF THE  SECURITIES EXCHANGE ACT OF 1934**             |

 

For the transition periodfrom                         to                   

 

Commission File Number

**1-6699**

** **

**INTERNATIONAL MULTIFOODSCORPORATION**

(Exact name of registrantas specified in its charter)

 

 

| **Delaware**                                                    |   | **41-0871880**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

 

|                                                     |   |       |
|----------------------------------------------------------|--------|------------|
| **110 Cheshire Lane, Suite 300,  Minnetonka, Minnesota** |   | **55305**  |
| (Address of principal  executive offices)                |   | (Zip Code) |

 

 

**(952) 594-3300**

(Registrant’stelephone number, including area code)

 

 

**(not applicable)**

(Former name,former address and former fiscal year, if changed since last report)

 

        Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

        Yes   X      No      

 

The number of shares outstanding of the registrant’sCommon Stock, par value $.10 per share, as of October 4, 2002 was 19,128,979.

 

 

----

 

 

**PART I. FINANCIAL INFORMATION**

 

INTERNATIONAL MULTIFOODSCORPORATION AND SUBSIDIARIES

 

Consolidated CondensedStatements of Operations

(unaudited)

(inthousands, except per share amounts)

 

 
|                                                                        |   | **THREE  MONTHS ENDED** |    | **SIX MONTHS  ENDED** |   |
|-----------------------------------------------------------------------------|--------|-------------------------|---------|-----------------------|--------|
|                                                                        |   | **Aug. 31,**            |    | **Sept. 1,**          |   | **Aug. 31,** |   | **Sept. 1,** |   |
|                                                                        |   | **2002**                |    | **2001**              |   | **2002** |   | **2001** |   |
| Net sales                                                                   |   | $                       | 210,055 |                  | $      | 120,967 |   | $ | 420,482 |   | $ | 233,384 |   |
| Cost of goods  sold                                                         |   | (168,593                | )       | (102,858              | )      | (336,990 | ) | (198,946 | ) |
| Gross profit                                                                |   | 41,462                  |    | 18,109                |   | 83,492 |   | 34,438 |   |
| Selling, general  and administrative                                        |   | (28,154                 | )       | (13,429               | )      | (58,375 | ) | (27,197 | ) |
| Unusual items                                                               |   | —                  |    | (344                  | )      | — |   | (344 | ) |
| Operating  earnings                                                         |   | 13,308                  |    | 4,336                 |   | 25,117 |   | 6,897 |   |
| Interest, net                                                               |   | (6,288                  | )       | (1,280                | )      | (12,764 | ) | (2,515 | ) |
| Other income  (expense), net                                                |   | —                  |    | (218                  | )      | — |   | (369 | ) |
| Earnings from  continuing operations before   income taxes                  |   | 7,020                   |    | 2,838                 |   | 12,353 |   | 4,013 |   |
| Income taxes                                                                |   | (2,667                  | )       | (1,039                | )      | (4,694 | ) | (1,435 | ) |
| Earnings from  continuing operations                                        |   | 4,353                   |    | 1,799                 |   | 7,659 |   | 2,578 |   |
| Discontinued  operations:                                                   |   |                    |    |                  |   |   |   |   |   |
| Operating  earnings (loss), after tax                                       |   | (6,468                  | )       | 995                   |   | (4,870 | ) | 2,302 |   |
| Cumulative  effect of change in accounting principle, net of tax of $23,781 |   | —                  |    | —                |   | (41,342 | ) | — |   |
| Net loss on disposition, net of tax of  $14,362                             |   | (25,922                 | )       | —                |   | (25,922 | ) | — |   |
| Earnings (loss) fromdiscontinued operations                                 |   | (32,390                 | )       | 995                   |   | (72,134 | ) | 2,302 |   |
| Net earnings  (loss)                                                        |   | $                       | (28,037 | )                     | $      | 2,794 |   | $ | (64,475 | ) | $ | 4,880 |   |
|                                                                        |   |                    |    |                  |   |   |   |   |   |
| Basic earnings  (loss) per share:                                           |   |                    |    |                  |   |   |   |   |   |
| Continuing operations                                                       |   | $                       | 0.23    |                  | $      | 0.10 |   | $ | 0.40 |   | $ | 0.14 |   |
| Discontinued  operations                                                    |   | (1.70                   | )       | 0.05                  |   | (3.78 | ) | 0.12 |   |
| Total                                                                       |   | $                       | (1.47   | )                     | $      | 0.15 |   | $ | (3.38 | ) | $ | 0.26 |   |
|                                                                        |   |                    |    |                  |   |   |   |   |   |
| Diluted earnings  (loss) per share:                                         |   |                    |    |                  |   |   |   |   |   |
| Continuing  operations                                                      |   | $                       | 0.22    |                  | $      | 0.09 |   | $ | 0.39 |   | $ | 0.14 |   |
| Discontinued  operations                                                    |   | (1.66                   | )       | 0.06                  |   | (3.70 | ) | 0.12 |   |
| Total                                                                       |   | $                       | (1.44   | )                     | $      | 0.15 |   | $ | (3.31 | ) | $ | 0.26 |   |
|                                                                        |   |                    |    |                  |   |   |   |   |   |
| Average shares  of common stock outstanding:                                |   |                    |    |                  |   |   |   |   |   |
| Basic                                                                       |   | 19,095                  |    | 18,816                |   | 19,062 |   | 18,789 |   |
| Diluted                                                                     |   | 19,491                  |    | 19,061                |   | 19,473 |   | 19,017 |   |

 

See accompanying notes to consolidated condensed financial statements.

 

 

2

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INTERNATIONAL MULTIFOODSCORPORATION AND SUBSIDIARIES

 

Consolidated CondensedBalance Sheets

(in thousands)

 
|                                             |   | **(Unaudited)  Aug. 31,  2002** |      | **Condensed  from audited  financial  statements  March 2,  2002** |   |
|--------------------------------------------------|--------|---------------------------------|-----------|--------------------------------------------------------------------|--------|
| **Assets**                                       |   |                            |      |                                                               |   |
| Current assets:                                  |   |                            |      |                                                               |   |
| Cash and cash  equivalents                       |   | $                               | 22,710    |                                                               | $      | 26,459 |   |
| Trade accounts  receivable, net                  |   | 46,713                          |      | 45,319                                                             |   |
| Inventories                                      |   | 130,666                         |      | 104,756                                                            |   |
| Current assets  of discontinued operations       |   | 247,591                         |      | 258,108                                                            |   |
| Other current  assets                            |   | 35,262                          |      | 34,582                                                             |   |
| Total current  assets                            |   | 482,942                         |      | 469,224                                                            |   |
| Property, plant  and equipment, net              |   | 162,699                         |      | 147,991                                                            |   |
| Goodwill, net                                    |   | 43,757                          |      | 43,412                                                             |   |
| Other intangible  assets, net                    |   | 138,081                         |      | 138,247                                                            |   |
| Noncurrent  assets of discontinued operations    |   | 44,690                          |      | 151,164                                                            |   |
| Other assets                                     |   | 181,652                         |      | 174,632                                                            |   |
| Total assets                                     |   | $                               | 1,053,821 |                                                               | $      | 1,124,670 |   |
|                                             |   |                            |      |                                                               |   |
| **Liabilities  and Shareholders’ Equity**   |   |                            |      |                                                               |   |
| Current  liabilities:                            |   |                            |      |                                                               |   |
| Notes payable                                    |   | $                               | 4,245     |                                                               | $      | — |   |
| Current portion  of long-term debt               |   | 19,360                          |      | 24,508                                                             |   |
| Accounts payable                                 |   | 64,415                          |      | 51,254                                                             |   |
| Current  liabilities of discontinued             |   |                            |      |                                                               |   |
| operations                                       |   | 132,805                         |      | 143,111                                                            |   |
| Other current  liabilities                       |   | 65,557                          |      | 51,186                                                             |   |
| Total current  liabilities                       |   | 286,382                         |      | 270,059                                                            |   |
| Long-term debt                                   |   | 505,313                         |      | 514,541                                                            |   |
| Employee  benefits and other liabilities         |   | 50,271                          |      | 68,000                                                             |   |
| Total  liabilities                               |   | 841,966                         |      | 852,600                                                            |   |
|                                             |   |                            |      |                                                               |   |
| Shareholders’  equity:                      |   |                            |      |                                                               |   |
| Common stock                                     |   | 2,184                           |      | 2,184                                                              |   |
| Accumulated  other comprehensive loss            |   | (13,670                         | )         | (14,840                                                            | )      |
| Other  shareholders’ equity                 |   | 223,341                         |      | 284,726                                                            |   |
| Total  shareholders’ equity                 |   | 211,855                         |      | 272,070                                                            |   |
|                                             |   |                            |      |                                                               |   |
| Commitments and  contingencies                   |   |                            |      |                                                               |   |
|                                             |   |                            |      |                                                               |   |
| Total  liabilities and shareholders’ equity |   | $                               | 1,053,821 |                                                               | $      | 1,124,670 |   |

 

See accompanying notes to consolidated condensed financial statements.

 

 

3

----

 

INTERNATIONAL MULTIFOODSCORPORATION AND SUBSIDIARIES

 

Consolidated CondensedStatements of Cash Flows

(unaudited)

(in thousands)

 

 
|                                                                                                                 |   | **SIX MONTHS ENDED** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|----------------------|--------|
| **Aug. 31,  2002**                                                                                                   |   | **Sept. 1,  2001**   |
| Cash flows from operations:                                                                                          |   |                 |   |   |   |
| Earnings from  continuing operations                                                                                 |   | $                    | 7,659  |   | $ | 2,578 |   |
| Adjustments to  reconcile earnings from continuing operations to cash provided by (used for)  continuing operations: |   |                 |   |   |   |
| Depreciation and  amortization                                                                                       |   | 7,555                |   | 5,880 |   |
| Deferred income  tax expense                                                                                         |   | 3,515                |   | 1,133 |   |
| Increase in  prepaid pension assets                                                                                  |   | (5,495               | )      | (6,878 | ) |
| Provision for  losses on receivables                                                                                 |   | 769                  |   | 243 |   |
| Changes in  working capital:                                                                                         |   |                 |   |   |   |
| Accounts  receivable                                                                                                 |   | (847                 | )      | (3,972 | ) |
| Inventories                                                                                                          |   | (24,770              | )      | (15,988 | ) |
| Other current  assets                                                                                                |   | (2,002               | )      | (10,360 | ) |
| Accounts payable                                                                                                     |   | 10,784               |   | 6,665 |   |
| Other current  liabilities                                                                                           |   | 15,788               |   | (3,574 | ) |
| Other, net                                                                                                           |   | 5,341                |   | 4,486 |   |
| Cash provided by  (used for) continuing operations                                                                   |   | 18,297               |   | (19,787 | ) |
| Cash provided by  (used for) discontinued operations                                                                 |   | 3,262                |   | (30,191 | ) |
| Cash provided by  (used for) operations                                                                              |   | 21,559               |   | (49,978 | ) |
| Cash flows from  investing activities:                                                                               |   |                 |   |   |   |
| Capital  expenditures                                                                                                |   | (13,211              | )      | (9,366 | ) |
| Proceeds from  property disposals                                                                                    |   | 93                   |   | 63 |   |
| Payment received  on note receivable                                                                                 |   | —               |   | 1,422 |   |
| Discontinued  operations                                                                                             |   | (1,577               | )      | (4,081 | ) |
| Cash used for  investing activities                                                                                  |   | (14,695              | )      | (11,962 | ) |
| Cash flows from financing activities:                                                                                |   |                 |   |   |   |
| Net increase in  notes payable                                                                                       |   | 4,216                |   | 62,859 |   |
| Reductions in  long-term debt                                                                                        |   | (15,813              | )      | (1,000 | ) |
| Proceeds from  issuance of common stock                                                                              |   | 1,048                |   | 1,000 |   |
| Other, net                                                                                                           |   | (233                 | )      | (3 | ) |
| Cash provided by  (used for) financing activities                                                                    |   | (10,782              | )      | 62,856 |   |
| Effect of  exchange rate changes on cash and cash equivalents                                                        |   | 169                  |   | (6 | ) |
| Net increase (decrease) in cash and cash equivalents                                                                 |   | (3,749               | )      | 910 |   |
| Cash and cash equivalents at beginning of period                                                                     |   | 26,459               |   | 10,232 |   |
| Cash and cash equivalents at end of period                                                                           |   | $                    | 22,710 |   | $ | 11,142 |   |

 

See accompanying notes to consolidated condensed financial statements.

 

 

4

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INTERNATIONALMULTIFOODS CORPORATION AND SUBSIDIARIES

Notes toConsolidated Condensed Financial Statements

(unaudited)

 

**(1)**In our opinion,the accompanying unaudited consolidated condensed financial statements containall adjustments (consisting of only normal recurring adjustments, except asnoted elsewhere in the notes to the consolidated condensed financialstatements) necessary to present fairly our financial position as of August 31,2002, and the results of our operations and cash flows for the interim periodspresented.  These statements arecondensed and, therefore, do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  The statements should beread in conjunction with the consolidated financial statements and footnotesincluded in our Annual Report on Form 10-K for the year ended March 2,2002.  The results of operations for thethree and six months ended August 31, 2002, are not necessarily indicative ofthe results to be expected for the full year.

 

 

**(2)New accounting pronouncements**

 

Statement of Financial Accounting Standards No. 142(SFAS 142), “Goodwill and Other Intangible Assets”

 

Weadopted SFAS 142, “Goodwill and Other Intangible Assets,” on March 3,2002.  Under SFAS 142, goodwill andother intangible assets that have indefinite lives will no longer be amortized,but rather will be tested for impairment at least annually in accordance withthe provisions of the standard.  SeeNote 6 for further information on the adoption of SFAS 142.

 

## **SFAS 144, “Accounting for the Impairment or Disposal of Long-LivedAssets”**

 

We adopted SFAS 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” on March 3,2002.  SFAS 144, which supersedes SFAS121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of,” provides guidance on the accounting for andreporting of the impairment of long-lived assets.  Although SFAS 144 retains many of the fundamental recognition andmeasurement provisions of SFAS 121, it also establishes certain criteria thatwould have to be met in order to classify an asset as held-for-sale.  With the exception of a certain keyprovision on classification, SFAS 144 also supersedes Accounting PrinciplesBoard (APB) No. 30, “Reporting the Results of Operations-Reporting the Effectsof Disposal of a Segment of a Business, and Extraordinary, Unusual and InfrequentlyOccurring Events and Transactions.”  Theadoption of SFAS 144 did not impact our consolidated financial statements.

 

## **SFAS 146, “Accounting forCosts Associated with Exit or Disposal Activities “**

 

In June 2002, the FASB issued SFAS 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” The standard requires that a liability for a cost associated with anexit or disposal activity be recognized and measured initially at fair valuewhen the liability is incurred.  Theprovisions of the standard are effective for exit or disposal activitiesinitiated after December 31, 2002.  Weanticipate that the adoption of SFAS No. 146 will not have a significant effecton our results of operations.

 

 

5

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Emerging Issues TaskForce (EITF) No. 01-9, “Accounting for Consideration Given by a Vendor to aCustomer or a Reseller of the Vendor’s Products”

 

We adopted EmergingIssues Task Force (EITF) No. 01-9, “Accounting for Consideration Given by aVendor to a Customer or a Reseller of the Vendor’s Products” on March 3,2002.  The purpose of the EITF is tocodify and reconcile the consensus reached on accounting for consideration paidfrom a vendor to a retailer, including slotting fees, cooperative advertisingarrangements and buy-downs.  The EITFalso addresses accounting for coupons. The guidance generally requires that these incentives be classified as areduction of sales.  In addition, EITF01-9 requires reclassification of prior-period financial statements to complywith its guidance.  As a result, wereclassified $2.3 million and $4.1 million, respectively, of promotionalexpenses to reduction of net sales for the three months and six months endedSeptember 1, 2001.  The reclassificationhad no impact on our reported earnings.

 

 

## **(3) Discontinuedoperations**

 

On July 29, 2002, we entered into anagreement to sell our foodservice distribution business to WellspringDistribution Corp.  In accordance withSFAS 144, we have reported the results of operations of the business indiscontinued operations.

 

On September 9, 2002, we completedthe sale of our foodservice distribution business for $166 million incash.  We recorded a net after-tax loss on the disposition of$25.9 million.  Weused the proceeds from the sale along with available cash balances to repay$179 million of term notes.

 

We continue to guaranteecertain real estate, information system and tractor/trailer lease obligationsof the foodservice distribution business. See Note 11 for further information.

 

The following are theoperating results of the discontinued operations:

 
|                        |   | **Three  Months Ended** |    | **Six Months  Ended** |   |
|-----------------------------|--------|-------------------------|---------|-----------------------|--------|
|                        |   | **Aug. 31,**            |    | **Sept. 1,**          |   | **Aug. 31,** |   | **Sept. 1,** |   |
| (in thousands)              |   | **2002**                |    | **2001**              |   | **2002** |   | **2001** |   |
| Net sales                   |   | $                       | 542,440 |                  | $      | 561,691 |   | $ | 1,111,678 |   | $ | 1,113,541 |   |
| Earnings (loss)  before tax |   | (8,977                  | )       | 1,668                 |   | (6,401 | ) | 3,857 |   |
| Earnings (loss)  after tax  |   | (6,468                  | )       | 995                   |   | (4,870 | ) | 2,302 |   |
|                             |        |                         |         |                       |        |  |  |  |  |  |  |  |  |

 

We allocated interest expense todiscontinued operations based on net assets that were specifically identifiableto the operation.  The operating results of the business infiscal 2003 included a $6.3 million pre-tax loss from the curtailment andsettlement of pension obligations, which resulted from the sale of thebusiness.  In addition, we recorded a$3.7 million pre-tax charge in fiscal 2003 primarily for severance costs.

 

We also recorded an after-tax loss of $41.3 million for the cumulativeeffect of change in accounting principle due to goodwill impairment.  The charge was recognized in the firstquarter of fiscal 2003.  See Note 6 forfurther information.

 

 

6

----

 

The current and noncurrent assets and liabilities of the foodservicedistribution business as of August 31, 2002, and March 2, 2002, are as follows:

 
|                                                 |   | **Aug. 31,**

**2002** |    | **March 2,**

**2002** |   |
|------------------------------------------------------|--------|------------------------|---------|------------------------|--------|
| (in thousands)                                       |   |                   |    |
| Cash and cash  equivalents                           |   | $                      | 14      |                   | $      | 15 |   |
| Trade accounts  receivables, net                     |   | 109,081                |    | 104,595                |   |
| Inventories                                          |   | 119,122                |    | 134,445                |   |
| Other current  assets                                |   | 19,374                 |    | 19,053                 |   |
| Current assets  of discontinued operations           |   | $                      | 247,591 |                   | $      | 258,108 |   |
|                                                 |   |                   |    |                   |   |
| Property, plant  and equipment, net                  |   | $                      | 44,541  |                   | $      | 82,292 |   |
| Goodwill, net                                        |   | —                 |    | 65,123                 |   |
| Other assets                                         |   | 149                    |    | 3,749                  |   |
| Noncurrent  assets of discontinued operations        |   | $                      | 44,690  |                   | $      | 151,164 |   |
|                                                 |   |                   |    |                   |   |
| Accounts payable                                     |   | $                      | 117,400 |                   | $      | 131,019 |   |
| Other current  liabilities                           |   | 15,405                 |    | 12,092                 |   |
| Current liabilities of discontinued operations  |   | $                      | 132,805 |                   | $      | 143,111 |   |

 

## **(4) Acquisition**

 

On November 13, 2001, we acquired the Pillsbury dessert and specialtyproducts business, the Pillsbury non-custom foodservice baking mix and frostingproducts business, and certain regional flour and side-dish brands of GeneralMills (the Acquisition).  The cashpurchase price for the Acquisition paid at closing was $304.5 million.  The transaction was accounted for under thepurchase method in accordance with SFAS 141, “Business Combinations.”

 

Assumingthe Acquisition had occurred on March 3, 2001, the unaudited pro

forma results ofoperations are as follows:

 
|                                          |   | **Three  Months Ended**

**Sept. 1,  2001** |    | **Six Months  Ended**

**Sept. 1,  2001** |   |
|-----------------------------------------------|--------|---------------------------------------------|---------|-------------------------------------------|--------|
| **(in  thousands, except per share amounts)** |   |                                        |    |
| Net sales                                     |   | $                                           | 218,040 |                                      | $      | 421,797 |   |
| Earnings from  continuing operations          |   | 8,843                                       |    | 16,768                                    |   |
| Basic earnings  per share from                |   |                                        |    |                                      |   |
| continuing  operations                        |   | 0.47                                        |    | 0.89                                      |   |
| Diluted earnings  per share from              |   |                                        |    |                                      |   |
| continuing  operations                        |   | 0.46                                        |    | 0.88                                      |   |
|                                               |        |                                             |         |                                           |        |  |  |

 

The pro forma results of operations are based on our historicalfinancial statements and those of the acquired businesses.  We believe that costs under our ownership,including marketing and product development, will exceed those included in thehistorical financial statements of the acquired businesses. Accordingly, thepro forma results do not purport to represent what our results of operationswould have been had the Acquisition occurred on March 3, 2001.

 

 

7

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**(5)Comprehensive income (loss)**— The components of total comprehensive income (loss)were as follows:

 
|                             |   | **Three  Months Ended** |    | **Six Months  Ended**  |   |
|----------------------------------|--------|-------------------------|---------|------------------------|--------|
|                             |   | **Aug. 31,**

**2002**  |    | **Sept. 1,**

**2001** |   | **Aug. 31,**

**2002** |   | **Sept. 1,**

**2001** |   |
| (in thousands)                   |   |                    |    |                   |   |
| Net earnings  (loss)             |   | $                       | (28,037 | )                      | $      | 2,794 |   | $ | (64,475 | ) | $ | 4,880 |   |
| Foreign currency                 |   |                    |    |                   |   |   |   |   |   |
| translation  adjustment          |   | (1,534                  | )       | (662                   | )      | 2,421 |   | 83 |   |
| Net unrealized  gain (loss)      |   |                    |    |                   |   |   |   |   |   |
| on cash flow  hedges             |   | (1,153                  | )       | 154                    |   | (1,437 | ) | 186 |   |
| Reclassification  adjustment for |   |                    |    |                   |   |   |   |   |   |
| amounts in  earnings (loss)      |   | 161                     |    | (144                   | )      | 186 |   | (429 | ) |
| Comprehensive  income (loss)     |   | $                       | (30,563 | )                      | $      | 2,142 |   | $ | (63,305 | ) | $ | 4,720 |   |

 

 

**(6)Goodwill and other intangible assets** —As discussed in Note 2, we adopted****SFAS 142, “Goodwill and Other IntangibleAssets” on March 3, 2002.  Under SFAS142, goodwill and other intangible assets that have indefinite lives will nolonger be amortized, but rather will be tested for impairment at least annuallyin accordance with the provisions of the standard.

 

Thetest for goodwill impairment is a two-step process.  The first step is a comparison of the fair value of the reportingunit (as defined) with its carrying amount, including goodwill.  If this step reflects impairment, then theloss would be measured as the excess of recorded goodwill over its implied fairvalue.  Implied fair value is the excessof fair value of the reporting unit over the fair value of all identifiedassets and liabilities.

 

Inthe first quarter of fiscal 2003, we completed the initial testing of ourexisting goodwill and other intangible assets that have indefinite lives. Basedon valuations provided by an independent third-party using primarily discountedcash flows, we determined that all the goodwill associated with our MultifoodsDistribution Group (MDG) business was impaired.  As a result, we recorded a $65.1 million ($41.3 million aftertax) goodwill impairment charge in the first quarter of fiscal 2003.  We classified the impairment charge as acumulative effect of change in accounting principle in the consolidatedstatement of operations.  On July 29,2002, we entered into an agreement to sell MDG.  In accordance with SFAS 144, we have reported the results ofoperations of MDG in discontinued operations, including the impairmentcharge.  No other impairment chargesresulted from the required impairment evaluations on the rest of the reportingunits, which were determined using discounted cash flow analyses.  The assumptions used in these analyses wereconsistent with our internal plans.

 

The changes in thecarrying amount of goodwill by segment for the six months ended August 31,2002, are as follows:

 
| (in thousands)                 |   | **U.S.  Consumer  Products** |   | **U.S.  Foodservice  Products** |   | **Canadian  Foods** |   | **Total** |   |
|--------------------------------|--------|------------------------------|--------|---------------------------------|--------|---------------------|--------|-----------|--------|
| Balance as of  March 3, 2002   |   | $                            | 24,715 |                            | $      | 12,643              |   | $         | 6,054  |   | $ | 43,412 |   |
| Addition                       |   | 178                          |   | —                          |   | —              |   | 178       |   |
| Foreign currency  translation  |   | —                       |   | —                          |   | 167                 |   | 167       |   |
| Balance as of  August 31, 2002 |   | $                            | 24,893 |                            | $      | 12,643              |   | $         | 6,221  |   | $ | 43,757 |   |

 

 

8

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Other intangible assetsas of August 31, 2002, and March 2, 2002, are as follows:

 
|                    |   | **Aug. 31,  2002**          |    | **March 2,  2002**            |   |
|-------------------------|--------|-----------------------------|---------|-------------------------------|--------|
| (in thousands)          |   | **Gross  Carrying  Amount** |    | **Accumulated  Amortization** |   | **Net** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net** |   |
| Amortized  intangible   |   |                        |    |                          |   |   |   |   |   |   |   |   |   |
| assets                  |   |                        |    |                          |   |   |   |   |   |   |   |   |   |
| Trademarks              |   | $                           | 9,090   |                          | $      | 1,714 |   | $ | 7,376 |   | $ | 9,090 |   | $ | 1,394 |   | $ | 7,696 |   |
| Non-compete             |   |                        |    |                          |   |   |   |   |   |   |   |   |   |
| agreements              |   | 1,198                       |    | 1,171                         |   | 27 |   | 1,162 |   | 1,162 |   | — |   |
| Customer lists          |   | 5,800                       |    | 4,137                         |   | 1,663 |   | 5,800 |   | 3,997 |   | 1,803 |   |
| Other                   |   | 772                         |    | 732                           |   | 40 |   | 772 |   | 710 |   | 62 |   |
| Total                   |   | $                           | 16,860  |                          | $      | 7,754 |   | $ | 9,106 |   | $ | 16,824 |   | $ | 7,263 |   | $ | 9,561 |   |
|                    |   |                        |    |                          |   |   |   |   |   |   |   |   |   |
| Unamortized  intangible |   |                        |    |                          |   |   |   |   |   |   |   |   |   |
| assets                  |   |                        |    |                          |   |   |   |   |   |   |   |   |   |
| Trademarks              |   | $                           | 128,889 |                          | $      | — |   | $ | 128,889 |   | $ | 128,600 |   | $ | — |   | $ | 128,600 |   |
| Other                   |   | 86                          |    | —                        |   | 86 |   | 86 |   | — |   | 86 |   |
| Total                   |   | $                           | 128,975 |                          | $      | — |   | $ | 128,975 |   | $ | 128,686 |   | $ | — |   | $ | 128,686 |   |

 

Amortization expenserelated to amortizable intangibles assets for the six months ended August 31,2002, and September 1, 2001, was $488,000 and $241,000, respectively.  The estimated amortization expense forfiscal 2003 to fiscal 2007 is as follows:

 
| (in thousands) |   | **Amounts** |   |
|----------------|--------|-------------|--------|
| 2003           |   | $           | 979    |   |
| 2004           |   | 955         |   |
| 2005           |   | 924         |   |
| 2006           |   | 921         |   |
| 2007           |   | 921         |   |
|                |        |             |        |  |

 

 

9

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The following provides areconciliation of reported earnings to pro forma amounts adjusted for theelimination of amortization of goodwill:

 
| (in thousands)                 |                   | **Three  Months Ended** |                   | **Six Months  Ended_** |                   |
|--------------------------------|------------------------|-------------------------|------------------------|------------------------|------------------------|
|                           | **Aug. 31,**

**2002** |                    | **Sept. 1,**

**2001** |                   | **Aug. 31,**

**2002** |   | **Sept. 1,**

**2001** |   |
|                           |                   |                    |                   |                   |
| Reported  earnings from        |                   |                    |                   |                   |                   |   |   |   |   |
| continuing  operations         |                   | $                       | 4,353                  |                   | $                      | 1,799 |   | $ | 7,659 |   | $ | 2,578 |   |
| Amortization of  goodwill      |                   | —                  |                   | 88                     |                   | — |   | 175 |   |
| Adjusted  earnings from        |                   |                    |                   |                   |                   |   |   |   |   |
| continuing  operations         |                   | 4,353                   |                   | 1,887                  |                   | 7,659 |   | 2,753 |   |
|                           |                   |                    |                   |                   |                   |   |   |   |   |
| Reported  earnings (loss) from |                   |                    |                   |                   |                   |   |   |   |   |
| discontinued  operations       |                   | (32,390                 | )                      | 995                    |                   | (72,134 | ) | 2,302 |   |
| Amortization of  goodwill      |                   | —                  |                   | 364                    |                   | — |   | 728 |   |
| Adjusted  earnings (loss) from |                   |                    |                   |                   |                   |   |   |   |   |
| discontinued  operations       |                   | (32,390                 | )                      | 1,359                  |                   | (72,134 | ) | 3,030 |   |
|                           |                   |                    |                   |                   |                   |   |   |   |   |
| Adjusted net  earnings (loss)  |                   | $                       | (28,037                | )                      | $                      | 3,246 |   | $ | (64,475 | ) | $ | 5,783 |   |

 

 
| Basic earnings  (loss) per share    |                   | **Three  Months Ended** |                   | **Six Months  Ended** |                   |
|-------------------------------------|------------------------|-------------------------|------------------------|-----------------------|------------------------|
|                                | **Aug. 31,**

**2002** |                    | **Sept. 1,**

**2001** |                  | **Aug. 31,**

**2002** |   | **Sept. 1,**

**2001** |   |
|                                |                   |                    |                   |                  |
| Reported basic  earnings per share  |                   |                    |                   |                  |                   |   |   |   |   |
| from continuing  operations         |                   | $                       | 0.23                   |                  | $                      | 0.10 |   | $ | 0.40 |   | $ | 0.14 |   |
| Amortization of  goodwill           |                   | —                  |                   | —                |                   | — |   | 0.01 |   |
| Adjusted basic  earnings per share  |                   |                    |                   |                  |                   |   |   |   |   |
| from continuing  operations         |                   | 0.23                    |                   | 0.10                  |                   | 0.40 |   | 0.15 |   |
|                                |                   |                    |                   |                  |                   |   |   |   |   |
| Reported basic  earnings (loss) per |                   |                    |                   |                  |                   |   |   |   |   |
| share from  discontinued operations |                   | (1.70                   | )                      | 0.05                  |                   | (3.78 | ) | 0.12 |   |
| Amortization of  goodwill           |                   | —                  |                   | 0.02                  |                   | — |   | 0.04 |   |
| Adjusted basic  earnings (loss) per |                   |                    |                   |                  |                   |   |   |   |   |
| share from  discontinued operations |                   | (1.70                   | )                      | 0.07                  |                   | (3.78 | ) | 0.16 |   |
|                                |                   |                    |                   |                  |                   |   |   |   |   |
| Adjusted basic  earnings (loss)     |                   |                    |                   |                  |                   |   |   |   |   |
| per share                           |                   | $                       | (1.47                  | )                     | $                      | 0.17 |   | $ | (3.38 | ) | $ | 0.31 |   |

 

 
| Diluted earnings  (loss) per share    |                   | **Three  Months Ended** |                   | **Six Months  Ended** |                   |
|---------------------------------------|------------------------|-------------------------|------------------------|-----------------------|------------------------|
|                                  | **Aug. 31,**

**2002** |                    | **Sept. 1,**

**2001** |                  | **Aug. 31,**

**2002** |   | **Sept. 1,**

**2001** |   |
|                                  |                   |                    |                   |                  |
| Reported diluted  earnings per share  |                   |                    |                   |                  |                   |   |   |   |   |
| from continuing  operations           |                   | $                       | 0.22                   |                  | $                      | 0.09 |   | $ | 0.39 |   | $ | 0.14 |   |
| Amortization of  goodwill             |                   | —                  |                   | —                |                   | — |   | 0.01 |   |
| Adjusted diluted  earnings per share  |                   |                    |                   |                  |                   |   |   |   |   |
| from continuing  operations           |                   | 0.22                    |                   | 0.09                  |                   | 0.39 |   | 0.15 |   |
|                                  |                   |                    |                   |                  |                   |   |   |   |   |
| Reported diluted  earnings (loss) per |                   |                    |                   |                  |                   |   |   |   |   |
| share from  discontinued operations   |                   | (1.66                   | )                      | 0.06                  |                   | (3.70 | ) | 0.12 |   |
| Amortization of  goodwill             |                   | —                  |                   | 0.02                  |                   | — |   | 0.04 |   |
| Adjusted diluted  earnings (loss) per |                   |                    |                   |                  |                   |   |   |   |   |
| share from  discontinued operations   |                   | (1.66                   | )                      | 0.08                  |                   | (3.70 | ) | 0.16 |   |
|                                  |                   |                    |                   |                  |                   |   |   |   |   |
| Adjusted diluted  earnings (loss)     |                   |                    |                   |                  |                   |   |   |   |   |
| per share                             |                   | $                       | (1.44                  | )                     | $                      | 0.17 |   | $ | (3.31 | ) | $ | 0.31 |   |

 

10

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**(7)Interest, net**

 
|                                                   |   | **Three  Months Ended** |   | **Six Months  Ended**  |   |
|--------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
| (in thousands)                                         |   | **Aug. 31,**

**2002**  |   | **Sept. 1,**

**2001** |   | **Aug. 31,**

**2002** |   | **Sept. 1,**

**2001** |   |
| Interest expense                                       |   | $                       | 8,980  |                   | $      | 4,131 |   | $ | 18,079 |   | $ | 8,290 |   |
| Capitalized  interest                                  |   | (125                    | )      | (100                   | )      | (190 | ) | (254 | ) |
| Non-operating  interest income                         |   | (71                     | )      | (453                   | )      | (120 | ) | (881 | ) |
|                                                   |   | 8,784                   |   | 3,578                  |   | 17,769 |   | 7,155 |   |
| Interest expense  allocated to discontinued operations |   | (2,496                  | )      | (2,298                 | )      | (5,005 | ) | (4,640 | ) |
| Interest, net                                          |   | $                       | 6,288  |                   | $      | 1,280 |   | $ | 12,764 |   | $ | 2,515 |   |

 

Cashpayments for interest, net of amounts capitalized, were $9.4 million and $8.1million for the six months ended August 31, 2002, and September 1, 2001, respectively.

 

Weallocated interest expense to discontinued operations based on net assets thatcan be specifically identifiable to the operation.

 

 

**(8)Income taxes** —Cash payments for income taxes were $4.5 million and $5.5 million for the sixmonths ended August 31, 2002, and September 1, 2001, respectively.

 

 

**(9)****Supplemental balance sheet information**

 
| (in thousands)                              |   | **Aug. 31,  2002** |    | **March 2,  2002** |   |
|---------------------------------------------|--------|--------------------|---------|--------------------|--------|
|                                        |   |               |
| Trade accounts  receivable, net:            |   |               |    |               |   |
| Trade                                       |   | $                  | 47,201  |               | $      | 45,619 |   |
| Allowance for  doubtful accounts            |   | (488               | )       | (300               | )      |
| Total trade  accounts receivable, net       |   | $                  | 46,713  |               | $      | 45,319 |   |
|                                        |   |               |    |               |   |
| Inventories:                                |   |               |    |               |   |
| Raw materials,  excluding grain             |   | $                  | 16,329  |               | $      | 13,781 |   |
| Grain                                       |   | 11,622             |    | 4,360              |   |
| Finished and  in-process goods              |   | 97,097             |    | 82,629             |   |
| Packages and  supplies                      |   | 5,618              |    | 3,986              |   |
| Total  inventories                          |   | $                  | 130,666 |               | $      | 104,756 |   |
|                                        |   |               |    |               |   |
| Property, plant  and equipment, net:        |   |               |    |               |   |
| Land                                        |   | $                  | 2,199   |               | $      | 2,152 |   |
| Buildings and  improvements                 |   | 50,469             |    | 49,078             |   |
| Machinery and  equipment                    |   | 188,604            |    | 183,674            |   |
| Improvements in  progress                   |   | 30,034             |    | 14,857             |   |
|                                        |   | 271,306            |    | 249,761            |   |
| Accumulated  depreciation                   |   | (108,607           | )       | (101,770           | )      |
| Total property,  plant and equipment, net   |   | $                  | 162,699 |               | $      | 147,991 |   |
|                                        |   |               |    |               |   |
| Accumulated  other comprehensive loss:      |   |               |    |               |   |
| Foreign currency  translation adjustment    |   | $                  | (15,826 | )                  | $      | (18,247 | ) |
| Minimum pension  liability adjustment       |   | (2,566             | )       | (2,566             | )      |
| Derivative hedge  accounting adjustment     |   | 4,722              |    | 5,973              |   |
| Total  accumulated other comprehensive loss |   | $                  | (13,670 | )                  | $      | (14,840 | ) |

 

 

11

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**(10)Segment information**

 

We manage the companythrough three operating segments: U.S. Consumer Products, U.S. FoodserviceProducts and Canadian Foods.  Ourorganizational structure is the basis for reporting business results tomanagement and the segment data presented in this Note.  We formed the U.S. Consumer Productsbusiness in fiscal 2002 as a result of our acquisition of certain retail brandsfrom Pillsbury and General Mills.

 
| (in millions)                     |   | **Net**

**Sales** |   | **Operating**

**Costs** |   | **Unusual**

**Items** |   | **Operating**

**Earnings** |   |
|-----------------------------------|--------|--------------------|--------|--------------------------|--------|------------------------|--------|-----------------------------|--------|
| Three Months  Ended Aug. 31, 2002 |   |               |   |                     |   |                   |   |                        |   |
| U.S. Consumer  Products           |   | $                  | 79.9   |                     | $      | (69.6                  | )      | $                           | — |   | $ | 10.3 |   |
| U.S. Foodservice  Products        |   | 58.3               |   | (56.9                    | )      | —                 |   | 1.4                         |   |
| Canadian Foods                    |   | 71.9               |   | (66.6                    | )      | —                 |   | 5.3                         |   |
| Corporate                         |   | —             |   | (3.7                     | )      | —                 |   | (3.7                        | )      |
| Total                             |   | $                  | 210.1  |                     | $      | (196.8                 | )      | $                           | — |   | $ | 13.3 |   |
|                              |   |               |   |                     |   |                   |   |                        |   |
| Three Months  Ended Sept. 1, 2001 |   |               |   |                     |   |                   |   |                        |   |
| U.S. Consumer  Products           |   | $                  | — |                     | $      | —                 |   | $                           | — |   | $ | — |   |
| U.S. Foodservice  Products        |   | 52.9               |   | (51.5                    | )      | —                 |   | 1.4                         |   |
| Canadian Foods                    |   | 68.1               |   | (62.3                    | )      | —                 |   | 5.8                         |   |
| Corporate                         |   | —             |   | (2.6                     | )      | (0.3                   | )      | (2.9                        | )      |
| Total                             |   | $                  | 121.0  |                     | $      | (116.4                 | )      | $                           | (0.3   | ) | $ | 4.3 |   |
|                              |   |               |   |                     |   |                   |   |                        |   |
| Six Months  Ended Aug. 31, 2002   |   |               |   |                     |   |                   |   |                        |   |
| U.S. Consumer  Products           |   | $                  | 165.9  |                     | $      | (145.1                 | )      | $                           | — |   | $ | 20.8 |   |
| U.S. Foodservice  Products        |   | 116.6              |   | (113.6                   | )      | —                 |   | 3.0                         |   |
| Canadian Foods                    |   | 138.0              |   | (128.9                   | )      | —                 |   | 9.1                         |   |
| Corporate                         |   | —             |   | (7.8                     | )      | —                 |   | (7.8                        | )      |
| Total                             |   | $                  | 420.5  |                     | $      | (395.4                 | )      | $                           | — |   | $ | 25.1 |   |
|                              |   |               |   |                     |   |                   |   |                        |   |
| Six Months Ended  Sept. 1, 2001   |   |               |   |                     |   |                   |   |                        |   |
| U.S. Consumer  Products           |   | $                  | — |                     | $      | —                 |   | $                           | — |   | $ | — |   |
| U.S. Foodservice  Products        |   | 105.4              |   | (102.4                   | )      | —                 |   | 3.0                         |   |
| Canadian Foods                    |   | 128.0              |   | (118.3                   | )      | —                 |   | 9.7                         |   |
| Corporate                         |   | —             |   | (5.5                     | )      | (0.3                   | )      | (5.8                        | )      |
| Total                             |   | $                  | 233.4  |                     | $      | (226.2                 | )      | $                           | (0.3   | ) | $ | 6.9 |   |

 

 

**(11) Contingencies** — In fiscal 1998, we were notified thatapproximately $6 million of our inventory was stolen from a ship in the port ofSt. Petersburg, Russia.  The ship hadbeen chartered by a major customer of our former food-exporting business.  We believe, based on the facts known todate, that the loss is covered by insurance. However, following submission of a claim for indemnity, the insurancecarrier denied our claim for coverage, and we commenced a lawsuit seeking toobtain coverage under the insurance carrier’s policy.  In October 2001, the U.S. District Court of the Southern Districtof New York granted us summary judgment on our claim and awarded us interest tothe date of judgment.  In November 2001,the insurance carrier appealed the judgment to the U.S. Court of Appeals forthe Second Circuit.  Although we willcontinue to vigorously assert our claim in the litigation, the interest awardedby the U.S. District Court will not be recognized as income until collection isassured.

 

On September 9, 2002, we completedthe sale of our foodservice distribution business to Wellspring DistributionCorp.  We continue to guaranty certainreal estate, information system and tractor/trailer fleet lease obligations ofour former business.  However, at thetime of the sale of the business, we renegotiated our guaranty of thebusiness’s fleet lease obligations.  Theguaranty now requires the lessor to pursue collection and other remediesagainst our former subsidiaries before demanding payment from us.  In addition, our guarantee obligation islimited to 75% of the amount outstanding after the 

 

 

12

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lessor has exhausted its remediesagainst our former subsidiaries.  Thisreduces our risk under the fleet lease guaranty.  In addition, while the initial guaranty was not limited by time,the fleet lease guaranty will now expire in September 2006.

 

The outstanding guaranties for thelease obligations of our former subsidiaries are as follows:

 
| (in millions)        |   | **Gross  amount** |   | **Net  present value @ 7%** |   |
|----------------------|--------|-------------------|--------|-----------------------------|--------|
| Tractor/trailer      |   | $                 | 28.8   |                        | $      | 24.0 |   |
| Real estate          |   | 17.3              |   | 13.7                        |   |
| Information  systems |   | 0.8               |   | 0.7                         |   |
| Total                |   | $                 | 46.9   |                        | $      | 38.4 |   |

 

If Wellspring Distribution Corp. wasunable to meet its obligations that we have guaranteed, any loss would bereduced by the amount generated from the liquidation of the tractor/trailerfleet and income from the sub-lease of real estate space.

 

The possibility of the Companyhaving to honor our contingent liabilities under the guaranties is largelydependent upon the future operations of our former subsidiaries and the valueof the underlying leased properties. Should a reserve be required in the future, it would be recorded at thetime the obligation was determined to be probable.

 

 

**(12) Subsequent event**

 

In September 2002, weused the proceeds from the sale of our foodservice distribution business alongwith available cash balances to repay $179 million of term notes.  As a result of the debt repayment, we willrecognize a non-cash pre-tax loss of approximately $4.5 million in our thirdquarter results ended November 30, 2002.

 

 

13

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INTERNATIONALMULTIFOODS CORPORATION AND SUBSIDIARIES

Management’s Discussion and Analysis of Results of

Operations and Financial Condition

 

 

**OVERVIEW**

 

International Multifoodsis a North American producer of branded consumer foods and foodserviceproducts, including baking mixes, frozen bakery products, flour,ready-to-spread frostings, condiments, potato and pancake mix offerings.  We manage the company through threeoperating segments—U.S. Consumer Products, U.S. Foodservice Products andCanadian Foods.

 

In July 2002, weannounced we had entered into an agreement to sell our foodservice distributionbusiness to Wellspring Distribution Corp. We completed the sale on September 9, 2002, for $166 million in cash.  The foodservice distribution business isclassified as discontinued operations in the consolidated financial statementsand in the following management discussion and analysis.

 

InNovember 2001, we completed our acquisition of the Pillsbury desserts andspecialty products business, the Pillsbury non-custom foodservice baking mixand frosting products business, and certain regional flour and side-dish brandsof General Mills.  The acquisition makesInternational Multifoods a leading marketer of U.S. consumer baking products andenhances our existing U.S. foodservice manufacturing business.

 

 

**Results of Operations**

 

ContinuingOperations

 

Earningsfrom continuing operations were $4.4 million, or 22 cents per diluted share, inthe second quarter ended August 31, 2002, compared with earnings of $1.8million, or 9 cents per share, in the same period last year.  The increase in earnings primarily reflectsthe contribution from the Pillsbury and General Mills businesses that weacquired in November 2001.  The increasewas partially offset by higher interest expense, which resulted from the debtwe incurred to pay for the acquisition.

 

Forthe six months ended August 31, 2002, earnings from continuing operations were$7.7 million, or 39 cents per diluted share, compared with earnings of $2.6million, or 14 cents per share, a year ago.

 

Segment Results

 

U.S. Consumer Products:This business segment was formed last year as a result of our acquisition ofcertain retail brands of The Pillsbury Company and General Mills.  The operating results of the acquired brandshave been included in our results since the date of acquisition.

 

Second quarter net saleswere $79.9 million.  On a comparable proforma basis, as if we owned the retail brands in last year’s second quarter,unit volume declined about 5%.  Thedecline in comparable unit volume was driven by difficult comparisons a yearago and competitive pressures in the U.S. retail baking category.  For the six months ended August 31, 2002,comparable unit volume increased approximately 4% on more effectivemerchandising, success in emerging channels and brand-building initiatives.

 

U.S. FoodserviceProducts: Net sales increased 10% to $58.3 million, which reflects theincremental contribution from the Pillsbury foodservice brands that we acquiredlast year.  We also had unit volumegrowth in our ready-to-bake and 

 

 

14

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thaw-and-serveproducts.  Bakery mix products, however,experienced a decline in unit volume as a result of competitive pressures in asoft foodservice environment.

 

Operating earnings of$1.4 million were even with last year. The earnings contribution from the acquired Pillsbury brands was offsetby competitive pressures and higher costs, principally for sugar andrestructuring of the foodservice sales force.

 

Net sales for thesix-month period ended August 31, 2002, increased 11% to $116.6 million,compared with $105.4 million a year ago. The increase in sales was essentially due to the same factors discussedfor the second quarter.  Operatingearnings of $3 million were even with a year ago.  In addition to the factors described in the discussion of thesecond quarter, operating earnings in the six-month period were impacted by aloss on an advance to a supplier that filed for bankruptcy.

 

Canadian Foods: Net salesincreased 6% to $71.9 million.  We hadunit volume growth in consumer condiments, commercial mixes and exportproducts.  Consumer condiment unit volumesbenefited from a new product offering last year.  The increase in sales was also due to higher prices ongrain-based products sold to commercial customers, which resulted fromincreased commodity costs.

 

Operating earningsdeclined to $5.3 million, compared with $5.8 million last year.  The earnings decline was driven by highercondiments costs, which included increased marketing costs associated with thenational roll-out of a new product offering. Operating earnings were also impacted by an unfavorable grain-basedsales mix.

 

Net sales for thesix-month period ended August 31, 2002, increased 8% to $138 million, comparedwith $128 million a year ago.  Salesincreased on unit volume growth in consumer condiments, commercial flour andexport products.  The increase was alsodue to higher prices in grain-based products sold to commercial customers.  Operating earnings declined 6% to $9.1million, compared with $9.7 million last year. The decline was primarily the result of higher condiments costs, whichincludes the impact of inefficiencies in manufacturing costs associated with afacility consolidation project that took place last year.

 

Corporate:Corporate expenses in the second quarter were $3.7 million, compared with $2.9million last year.  The increase wasprimarily the result of increased incentive costs along with higher staff coststo support the acquired businesses.

 

Non-operating Expense andIncome

 

Netinterest expense in the second quarter was $6.3 million, compared with $1.3million last year.  The significantincrease was primarily due to the debt we incurred in November 2001 to financethe acquisition of the Pillsbury and General Mills businesses.

 

 

15

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DiscontinuedOperations

 

Ourdiscontinued foodservice distribution business had a pre-tax operating loss of$9 million ($6.5 million after tax) in the second quarter of fiscal 2003.  Operating results included a $6.3 millionpre-tax loss from the curtailment and settlement of pension obligations, whichresulted from the sale of the business. In addition, we recorded a $3.7 million pre-tax charge primarily forseverance costs.

 

Wealso recorded a net after-tax loss of $25.9 million in the second quarter forthe disposition of the business.  On September 9, 2002, we completed the saleof our foodservice distribution business for $166 million in cash.

 

Asa result of our adoption of Statement of Accounting Standards No. 142 (SFAS142), *Goodwill and other Intangible Assets*,we recorded a cumulative effect of a change in accounting principle of $41.3million to write off the goodwill associated with Multifoods DistributionGroup.  See additional discussion inNote 6 to the consolidated condensed financial statements.

 

 

**Financial Condition**

 

Ourmajor sources of liquidity are cash flows from operations and borrowings from our$100 million revolving credit facility. As of August 31, 2002, we had $89 million available under the revolvingcredit facility.

 

Webelieve that cash flows from operations, current cash on hand and borrowingsfrom our existing revolving credit facility will be sufficient to meet ouroperating requirements and debt service obligations for the foreseeable future.

 

Thedebt-to-total-capitalization ratio increased to 71% at August 31, 2002,compared with 66% at March 2, 2002.  Theincrease was primarily the result of a decline in shareholders’ equity, whichwas caused by the loss we recognized from discontinued operations.

 

Cash provided by continuing operations was $18.3 million for the firstsix months of fiscal 2003, compared with cash used of $19.8 million in theprior-year six-month period.  Operatingcash flows in the current period exceeded the prior year as a result offavorable working capital movements, higher earnings from continuing operationsand payments received from an escrow account established as part of theacquisition.

 

In September 2002, we used the proceeds from the sale of ourfoodservice distribution business and available cash balances to repay $179million of term notes.  We repaid allour Term A notes and $53 million of our Term B notes.  As a result of the repayment, we will recognize a non-cashpre-tax loss of approximately $4.5 million in our third-quarter results endedNovember 30, 2002. If our $179 million repayment had been made as of August 31,2002, our debt-to-total-capitalization ratio at that date would have been 62%.

 

 

16

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**Cautionary Statement Relevant to Forward-Looking Information**

 

This document containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Theseforward-looking statements are based on current expectations or beliefs,including, but not limited to, statements concerning our operations andfinancial performance and condition. For this purpose, statements that are not statements of historical factmay be deemed to be forward-looking statements.  We caution that these statements by their nature involve risksand uncertainties, and actual results may differ materially depending on avariety of important factors, including, among others, successful completion ofthe integration of the acquired businesses; reliance on General Mills, Inc., toprovide material transition and co-pack services to our U.S. Consumer Productsdivision, including the conversion of the General Mills Toledo plant for ouruse; the impact of competitive products and pricing; changes in consumerpreferences and tastes or perceptions of health-related issues; effectivenessof advertising or market-spending programs; market or weather conditions thatmay affect the costs of grain, other raw materials, fuel and labor; changes inlaws and regulations; fluctuations in interest rates; the inability to collecton a $6 million insurance claim related to the theft of product in St.Petersburg, Russia; collection is sought under our guaranties of leaseobligations of our former Multifoods Distribution Group subsidiaries;fluctuations in foreign exchange rates; risks commonly encountered ininternational trade; and other factors as may be discussed in our reports filedwith the Securities and Exchange Commission.

 

 

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Item 4.  Controls and Procedures

 

(a)          Evaluation ofdisclosure controls and procedures.  Theterm “disclosure controls and procedures” is defined in Rules 13a-14(c) and15d-14(c) of the Securities and Exchange Act of 1934 (“Exchange Act”).  These rules refer to the controls and otherprocedures of a company that are designed to ensure that information requiredto be disclosed by a company in the reports that it files under the ExchangeAct is recorded, processed, summarized and reported within required timeperiods.  Our chief executive officerand our chief financial officer have evaluated the effectiveness of theCompany’s disclosure controls and procedures as of a date within 90 days beforethe filing of this quarterly report (the “Evaluation Date”), and, they haveconcluded that, as of the Evaluation Date, such controls and procedures wereeffective at ensuring that required information will be disclosed on a timelybasis in our reports filed under the Exchange Act.

 

(b)         Changes in internalcontrols.  We maintain a system ofinternal accounting controls that are designed to provide reasonable assurancethat our books and records accurately reflect our transactions and that ourestablished policies and procedures are carefully followed.  For the quarter ended August 31, 2002, therewere no significant changes to our internal controls or in other factors thatcould significantly affect our internal controls, and we have not identifiedany significant deficiencies or material weaknesses in our internal controls.

 

 

 

 

 

 

 

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**PART II**

 

**OTHER INFORMATION**

 

 

**Item 4.**                    **Submissionof Matters to a Vote of Security Holders**

 

                (a)           The2002 Annual Meeting of Stockholders of International Multifoods Corporation(the “Company”) was held on June 21, 2002 (the “Annual Meeting”).  Holders of the Company’s common stock, parvalue $.10 per share, of record on May 1, 2002, were entitled to one vote pershare.

 

                (c)           ClaireL. Arnold, James M. Jenness and Richard K. Smucker were elected directors for aterm of three years at the Annual Meeting. The number of votes cast for the election of each director and thenumber of votes withheld are as follows:

 
|                |   | **FOR**    |   | **WITHHELD** |   |
|---------------------|--------|------------|--------|--------------|--------|
| Claire L. Arnold    |   | 14,387,902 |   | 106,984      |   |
| James M. Jenness    |   | 14,385,185 |   | 109,700      |   |
| Richard K.  Smucker |   | 10,710,527 |   | 3,784,359    |   |

 

The other directors whoseterms of office as directors continued after the meeting were Gary E. Costley,Nicholas L. Reding, Jack D. Rehm, Lois D. Rice and Dolph W. von Arx.

 

                With respect to the proposal to approve theManagement Incentive Plan, as amended, of International Multifoods Corporation,there were 11,024,124 votes cast for the proposal, 1,210,883 votes cast againstthe proposal and 125,666 abstentions. There were 2,134,774 broker nonvotes with respect to such matter.

 

                With respect to the proposal to approve theappointment of KPMG LLP as independent auditors of the Company for the fiscalyear ending March 1, 2003, there were 14,129,162 votes cast for the proposal,327,027 votes cast against the proposal and 39,257 abstentions.  There were no broker nonvotes with respectto such matter.

 

 

**Item 6.**                    **Exhibits andReports on Form 8-K**

 

                (a)           Exhibits

 

4.1                                 First Amendment and Consent to CreditAgreement, dated as of August 20, 2002, among International MultifoodsCorporation, Robin Hood Multifoods Inc., the several lenders from time to timeparty thereto, Rabobank International, as Documentation Agent, U.S. BankNational Association and UBS Warburg LLC, as Syndication Agents, and CanadianImperial Bank of Commerce, as U.S. Administrative Agent and CanadianAdministrative Agent.

 

                                                The Company hereby agrees to furnish tothe Securities and Exchange Commission upon request copies of all Exhibits tothe First Amendment and Consent to Credit Agreement.

 

10.1                           Amendment to the Amended and Restated1989 Stock-Based Incentive Plan of International Multifoods Corporation.

 

10.2                           Second Amendment to the Amended andRestated 1989 Stock-Based Incentive Plan of International MultifoodsCorporation.

 

10.3                           Letter Agreement, dated August 2, 2002,between Robert S. Wright and International Multifoods Corporation regardingseverance and retirement benefits.

 

 

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10.4                           Amendment to Letter Agreement, datedAugust 6, 2002, between Robert S. Wright and International MultifoodsCorporation amending Letter Agreement dated August 2, 2002.

 

11.                                 Computation of Earnings (loss) per CommonShare.

 

12.                                 Computation of Ratio of Earnings to FixedCharges.

 

99.1                           Certification of the Chief ExecutiveOfficer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

 

99.2                           Certification of the Chief FinancialOfficer Pursuant to 18.U.S.C. Section 1350, As Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

 

                                                (b)           Duringthe quarter ended August 31, 2002, the Company filed a Current Report on Form8-K dated July 30, 2002, related to the Company’s entering into a definitiveagreement to sell its foodservice distribution business.

 

 

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**SIGNATURE**

 

                Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                         | **INTERNATIONAL  MULTIFOODS CORPORATION** |
|------------------------------|-------------------------------------------|
|                         |                                      |
|                         |                                      |
|                         |                                      |
|                         |                                      |   |
| Date:   October 8, 2002 |                                      | /s/ John E. Byom |
|                         |                                      | John E. Byom |
|                         |                                      | Vice President — Finance and Chief Financial Officer |
|                         |                                      | *(Principal  Financial Officer* |
|                         |                                      | * and Duly Authorized Officer)* |

 

 

 

**CERTIFICATION**

 

I, Gary E. Costley, certify that:

 

                1.             Ihave reviewed this quarterly report on Form 10-Q of International MultifoodsCorporation;

 

                2.             Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

                3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

                4.             Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)           designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this quarterly report isbeing prepared;

 

(b)           evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

(c)           presented in this quarterly reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

 

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5.             The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

(a)           all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

(b)           any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal controls; and

 

                6.             Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions with regardto significant deficiencies and material weaknesses.

 

 

 
| Date:   October 8, 2002 |                 /s/  Gary E. Costley |
|------------------------------|-----------------------------------------------------------------------------------------------------------------|
|                         | **Gary  E. Costley**                                                                                            |
|                         | **Chairman  of the Board & Chief Executive Officer**                                                        |
|                         | **(Principal  Executive Officer)**                                                                              |

 

 

 

 

**CERTIFICATION**

 

I, John E. Byom, certify that:

 

                1.             Ihave reviewed this quarterly report on Form 10-Q of International MultifoodsCorporation;

 

                2.             Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

                3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report.

 

                4.             Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)           designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

 

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(b)           evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)           presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

                5.             The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

(a)           all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

(b)           any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.             The registrant’s other certifyingofficers and I have indicated in this quarterly report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 

 
| Date:   October 8, 2002 |                 /s/  John E. Byom |
|------------------------------|--------------------------------------------------------------------------------------------------------------|
|                         | **John  E. Byom**                                                                                            |
|                         | **Vice  President, Finance & Chief Financial Officer**                                                   |
|                         | **(Principal  Financial Officer)**                                                                           |

 

 

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**EXHIBIT INDEX**

 

 
| 4.1    |   | First  Amendment and Consent to Credit Agreement, dated as of August 20, 2002, among  International Multifoods Corporation, Robin Hood Multifoods Inc., the several  lenders from time to time party thereto, Rabobank International, as  Documentation Agent, U.S. Bank National Association and UBS Warburg LLC, as  Syndication Agents, and Canadian Imperial Bank of Commerce, as U.S.  Administrative Agent and Canadian Administrative Agent. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | The  Company hereby agrees to furnish to the Securities and Exchange Commission  upon request copies of all Exhibits to the First Amendment and Consent to  Credit Agreement.                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1   |   | Amendment to the Amended and Restated 1989  Stock-Based Incentive Plan of International Multifoods Corporation.                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.2   |   | Second Amendment to the Amended and Restated 1989  Stock-Based Incentive Plan of International Multifoods Corporation.                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.3   |   | Letter Agreement, dated August 2, 2002, between  Robert S. Wright and International Multifoods Corporation regarding severance  and retirement benefits.                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.4   |   | Amendment to Letter Agreement, dated August 6, 2002,  between Robert S. Wright and International Multifoods Corporation amending  Letter Agreement dated August 2, 2002.                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 11.    |   | Computation of Earinings (loss) per Common Share.                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 12.    |   | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 99.1   |   | Certification of the Chief Executive Officer  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 99.2   |   | Certification of the Chief Financial Officer  Pursuant to 18.U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |

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