UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 2, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file numbers 333-50305-01 and 333-50305

Eagle Family Foods Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware

13-3983598

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification Number)

Eagle Family Foods, Inc.

(Exact name of registrant as specified in its charter)


Delaware		13-3982757
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

735 Taylor Road, Suite 200 Gahanna, OH		43230
(Address of principal executive offices)		(Zip Code)

Registrants’ telephone number, including area code: (614) 501-4200

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of May 16, 2005, there were 2,437,422 shares of Common Stock, par value $.01 per share, of Eagle Family Foods Holdings, Inc. and 10,000 shares of Common Stock, par value $.01 per share, of Eagle Family Foods, Inc. outstanding, respectively.

TABLE OF CONTENTS


		Page
Part I - Financial Information

	Item 1. Financial Statements

	Eagle Family Foods Holdings, Inc.

	Consolidated Statements of (Loss) Income for the thirteen and thirty-nine week periods ended April 2, 2005 and the thirteen and forty week periods ended April 3, 2004	3

	Consolidated Balance Sheets as of April 2, 2005 and July 3, 2004	4

	Consolidated Statement of Changes in Stockholders’ Deficit for the thirty-nine week period ended April 2, 2005	5

	Consolidated Statements of Cash Flows for the thirty-nine week period ended April 2, 2005 and forty week period ended April 3, 2004	6

	Notes to the Financial Statements	7

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	29

	Item 4. Controls and Procedures	30

Part II – Other Information

	Item 6. Exhibits	31

Item 1. FINANCIAL STATEMENTS

EAGLE FAMILY FOODS HOLDINGS, INC.

Consolidated Statements of (Loss) Income

(Dollars in Thousands)

(Unaudited)


	Thirteen-Week Period Ended						Thirty-Nine Week Period Ended April 2, 2005			Forty Week Period Ended April, 3, 2004
	April 2, 2005			April 3, 2004			Thirty-Nine Week Period Ended April 2, 2005			Forty Week Period Ended April, 3, 2004
Sales, before marketing allowance	$	31,181		$	18,134		$	140,610		$	115,758
Marketing allowance		3,197			2,622			23,143			20,829

Net sales		27,984			15,512			117,467			94,929
Cost of goods sold		22,541			12,381			78,516			57,973

Gross margin		5,443			3,131			38,951			36,956

Distribution expense		2,620			1,351			8,044			5,578
Marketing expense		2,495			1,977			10,155			9,314
General and administrative expense		1,775			1,612			4,693			5,604
Plant closure costs		599			—			599			—
Amortization of intangible assets		63			—			63			—
Impairment charge on plant closure		—			—			2,612			—
Due diligence and other costs		—			1,516			—			1,516

Operating income(loss)		(2,109	)		(3,325	)		12,785			14,944
Net interest expense		4,879			3,631			14,415			11,369
Costs related to refinancing		—			1,310			—			1,310

Income (loss) before income taxes from continuing operations		(6,988	)		(8,266	)		(1,630	)		2,265
Income tax expense		4			45			19			109

Income (loss) from continuing operations		(6,992	)		(8,311	)		(1,649	)		2,156
Income from discontinued operations		—			—			—			610
Loss on disposal of discontinued operations		—			—			—			(1,097	)

Loss from disposal of discontinued operations		—			—			—			(487	)

Net (loss) income		(6,992	)		(8,311	)		(1,649	)		1,669
Preferred stock dividends		215			—			215			—

Net (loss) income attributable to common stockholders	$	(7,207	)	$	(8,311	)	$	(1,864	)	$	1,669

The accompanying notes are an integral part of these consolidated financial statements.

EAGLE FAMILY FOODS HOLDINGS, INC.

Consolidated Balance Sheets

(Dollars in Thousands Except Share Data)

(Unaudited)


	April 2, 2005			July 3, 2004
Assets
Current assets
Cash and cash equivalents	$	2,229		$	2,030
Accounts receivable, net		10,706			8,075
Inventories		33,248			33,298
Other current assets		576			1,634

Total current assets		46,759			45,037
Property and equipment, net		12,648			3,960
Goodwill		65,764			61,047
Other intangible assets		35,724			33,783
Other non-current assets		3,935			4,547

Total assets	$	164,830		$	148,374

Liabilities and Stockholders’ Deficit
Current liabilities
Revolving financing facility	$	51,456		$	70,688
Accounts payable		10,561			7,093
Other accrued liabilities		8,710			5,904
Accrued interest		2,229			4,907

Total current liabilities		72,956			88,592

Long-term debt		126,546			115,000

Commitments and contingencies

Redeemable preferred stock, 1,000,000 shares authorized:
Series A preferred stock, $100 stated value, 816,750 shares issued and outstanding at redemption value		—			152,518
Treasury stock, 10,962 shares at cost		—			(1,382	)

Series A preferred stock, net		—			151,136
Series B preferred stock, $100,000 stated value, 99 shares issued and outstanding at redemption value		—			15,769
Series I preferred stock, $0.01 par value, 150 shares issued and outstanding		5,214			—

Total redeemable preferred stock		5,214			166,905

Stockholders’ deficit
Common stock $0.01 par value, 2,750,000 shares authorized, 2,437,422 and 957,235 shares issued and outstanding, respectively		24			10
Additional paid-in capital		25,627			958
Accumulated deficit		(64,827	)		(223,445	)
Unearned compensation		(759	)		—
Accumulated other comprehensive income		49			354

Total stockholders’ deficit		(39,886	)		(222,123	)

Total liabilities and stockholders’ deficit	$	164,830		$	148,374

The accompanying notes are an integral part of these consolidated financial statements.

EAGLE FAMILY FOODS HOLDINGS, INC.

Consolidated Statement of Changes in Stockholders’ Deficit

For the Thirty-Nine Week Period Ended April 2, 2005

(Dollars in Thousands)

(Unaudited)


	Common Stock		Additional Paid-In Capital		Accumulated Deficit			Unearned Compensation			Accumulated Other Comprehensive Income			Total
Balance, July 3, 2004	$	10	$	958	$	(223,445	)	$	—		$	354		$	(222,123	)
Net loss		—		—		(1,649	)		—			—			(1,649	)
Preferred stock dividends		—		—		(5,651	)		—			—			(5,651	)
Issuance of common stock		10		15,091		—			—			—			15,101
Extinguishment of preferred stock		4		6,421		165,918			—			—			172,343
Discount on notes payable		—		2,304		—			—			—			2,304
Issuance of restricted common stock		—		853		—			(853	)		—			—
Amortization of unearned compensation		—		—		—			94			—			94
Other comprehensive income:
Change in fair value of commodities		—		—		—			—			117			117
Minimum pension liability												(197	)		(197	)
Deferred gain on commodity contracts sold		—		—		—			—			23			23
Recognition of deferred gain on commodity contracts sold		—		—		—			—			(354	)		(354	)
Foreign currency translation adjustment		—		—		—			—			106			106

Balance, April 2, 2005	$	24	$	25,627	$	(64,827	)	$	(759	)	$	49		$	(39,886	)

The accompanying notes are an integral part of these consolidated financial statements.

EAGLE FAMILY FOODS HOLDINGS, INC.

Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)


	Thirty-Nine Week Period Ended April 2, 2005			Forty Week Period Ended April 3, 2004
Cash flows from operating activities:
Net (loss) income	$	(1,649	)	$	1,669
Adjustments to reconcile net (loss) income to cash from operating activities:
Depreciation and amortization		1,322			2,156
Amortization of deferred financing costs		1,271			1,104
Impairment charge on plant closure		2,612			—
Write-off of deferred financing costs		—			1,273
Loss on disposal of discontinued operations		—			1,097
Net change in assets and liabilities:
Accounts receivable, net		2,941			1,065
Inventories		3,569			10,903
Accounts payable		292			1,825
Other assets		282			(2,314	)
Other liabilities		(927	)		2,259

Cash from operating activities		9,713			21,037

Cash (used in) from investing activities:
Capital expenditures		(3,648	)		(634	)
Payment for purchase of company		(13,722	)		—
Proceeds from sale of discontinued operations		—			12,201

Cash (used in) from investing activities		(17,370	)		11,567

Cash from (used in) financing activities
Proceeds from revolver		110,485			52,504
Payments under revolving credit facility		(129,717	)		(58,600	)
Proceeds from borrowing		12,000			—
Proceeds from sale of common stock, net of expenses		9,751			—
Proceeds from sale of preferred stock, net of expenses		5,897			—
Other financing costs		(659	)		(2,905	)
Payment under term loan facility		—			(52,252	)
Borrowings under revolving credit facility		—			32,600

Cash from (used in) financing activities		7,757			(28,653	)

Effect of exchange rate changes on cash		99			59

Increase in cash and cash equivalents		199			4,010
Cash and cash equivalents at beginning of period		2,030			1,616

Cash and cash equivalents at end of period	$	2,229		$	5,626

Supplemental disclosure:
Non-cash financing activities including dividends accrued on redeemable preferred stock	$	5,651		$	11,793

Note payable received in purchase of company	$	2,000		$	—

Common stock exchanged for property, plant and equipment	$	4,450		$	—

The accompanying notes are an integral part of these consolidated financial statements.

EAGLE FAMILY FOODS HOLDINGS, INC.

Notes to the Financial Statements

(Unaudited)

1. Basis of Presentation:

The accompanying financial statements as of April 2, 2005 and July 3, 2004 and for the thirteen and thirty-nine week periods ended April 2, 2005 and the thirteen and forty week periods ended April 3, 2004 present the consolidated financial position, results of operations and cash flows of Eagle Family Foods Holdings, Inc. (“Holdings”) and its subsidiaries. On December 23, 2004, Eagle Family Foods, Inc. (“Eagle”) purchased all of the outstanding capital stock of the Milnot Company (“Milnot”). The results of Milnot’s operations have been included in the Company’s Consolidated Financial Statements since December 23, 2004. Eagle, Holdings, and Milnot are collectively referred to as the “Company,” unless the context indicates otherwise. Eagle is a 100% wholly owned subsidiary of Holdings; Holdings and Milnot fully and unconditionally guarantee the registered debt issued by Eagle; Holdings has no independent assets or operations; and Holdings has no other subsidiaries.

All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year’s presentation.

The financial statements as of April 2, 2005 and for the thirteen and thirty-nine week periods ended April 2, 2005 and the thirteen and forty week periods ended April 3, 2004 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the financial statements and notes thereto contained in the Annual Report on Form 10-K of Holdings for the year ended July 3, 2004. In the opinion of management, the accompanying financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations for a full fiscal year.

2. Recently Issued Accounting Standards:

In March 2005, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 47 (“FIN No. 47”) “Accounting for Conditional Asset Retirement Obligations.” FIN No. 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. FIN No. 47 requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is evaluating the effect the adoption of this statement will have on the consolidated financial position or results of operations.

In December 2004, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No.123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The Company is required to adopt SFAS No. 123(R) in its first quarter of fiscal 2007, beginning July 1, 2006. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. Additionally, SFAS No. 123(R) requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123(R) and for all subsequent stock options granted thereafter. The Company is evaluating the effect the adoption of this statement will have on the consolidated financial position or results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (“SFAS No. 153”). SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for the fiscal periods beginning after June 15, 2005. The Company is evaluating the effect the adoption of this statement will have on the consolidated financial position or results of operations.

EAGLE FAMILY FOODS HOLDINGS, INC.

Notes to the Financial Statements

(Unaudited)

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—An Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). requiring that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” SFAS 151 also requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The Company is evaluating the effect the adoption of this statement will have on the consolidated results of operations and financial condition, but does not expect SFAS 151 to have a material impact.

3. Investment and Acquisition Activities:

On November 23, 2004, Dairy Farmers of America, Inc. (“DFA”) was issued 1,048,091 shares of Common Stock of Holdings (“DFA Transaction”), representing 43% of the voting equity of Holdings. In exchange for these shares, DFA contributed $10,000,000 into the Company and transferred ownership of a manufacturing plant in El Paso, Texas (the “Texas Plant”) with an appraised value of $4,450,000. In addition, Mid-Am Capital, L.L.C. (“Mid-Am”), an affiliate of DFA, invested $6,000,000 for 150 shares of a new series of Preferred Stock of Holdings (“Series I Preferred Stock”). The Company will use the majority of these proceeds to refurbish the Texas Plant and expand the Texas Plant’s capabilities into processing sweetened condensed and evaporated milk.

Based upon an independent appraisal, the Company adjusted its value of Series I Preferred Stock to $5,100,000, less an allocation of cost of issuance. The Company has recorded the value of the common stock issued to DFA at $17,654,000, including the discount on the DFA Note (see Note 8 to the Financial Statements) and less an allocation of cost of issuance. The common stock purchased by DFA is valued on the cash consideration received, the appraised value of the plant received by the Company, and the excess of cash consideration received by Company for the Series I Preferred Stock over the appraised value of the Series I Preferred Stock.

Eagle entered into a five year milk supply agreement in which DFA will supply raw milk, on an ongoing basis, to the Texas Plant to manufacture canned milk. In addition, Eagle entered into a tolling agreement, in which the Company from time to time will process raw milk supplied by DFA into condensed milk or dry milk powder. As stated in the tolling agreement, the Company will not purchase the raw milk but will process the milk to a condensed milk or dry milk powder form for a processing fee.

On December 23, 2004, Eagle purchased all of the outstanding capital stock of Milnot (the “Milnot Acquisition”) from Milnot Holding Corporation (“MHC”). Milnot is a manufacturer of sweetened condensed and evaporated milk products. The Company expects that the Milnot Acquisition will increase the Company’s presence in the private label sector of the canned milk category and will position the Company for future growth in both retail private label and foodservice businesses. Eagle paid an aggregate purchase price of $17,000,000, subject to a working capital adjustment of $1,801,000. The form of payment included (i) cash in the amount of $15,000,000, adjusted for the working capital adjustment and (ii) a Subordinated Promissory Note in the aggregate principal amount of $2,000,000 (“Milnot Note”) between Eagle and MHC. A portion of the purchase price was financed with the proceeds of the DFA Note and additional borrowings under the Company’s Revolving Financing Facility.

This acquisition was accounted for by the purchase method of accounting. Accordingly, the Company has estimated the fair value of assets acquired and liabilities assumed. The estimated fair values of the assets acquired and liabilities assumed at the date of acquisition have been included in the statement of financial position of the Company. The Company has recorded the value of the property, plant and equipment based on the valuation provided by an independent third party appraiser.

EAGLE FAMILY FOODS HOLDINGS, INC.

Notes to the Financial Statements

(Unaudited)

The components and allocation of the purchase price were as follows (in thousands):


Components of purchase price	As of December 23, 2004
Cash paid	$	15,000
Working capital adjustment		(1,801	)
Subordinated promissory note, net of discount		1,629
Transaction costs		204

Net assets acquired	$	15,032


Allocation of purchase price	As of December 23, 2004
Current assets	$	7,903
Property, plant and equipment		4,143
Goodwill		4,717
Other intangible assets		2,004

Total assets acquired		18,767
Current liabilities assumed		3,735

Net assets acquired	$	15,032

The following pro forma information presents the consolidated results of operations of the Company and Milnot for the thirty-nine week period ended April 2, 2005 and forty week period ended April 3, 2004 as if the acquisition occurred at the beginning of each period. Income (loss) from continuing operations was adjusted to reflect the depreciation expense of the appraised value of property, plant and equipment, the amortization expense of the fair value of intangible assets, and the interest expense on debt incurred for the acquisition. A 1/8% variance in interest rate would have caused a variance of approximately $17,500 in the pro forma amount. The pro forma results have been prepared for illustrative purposes and do not purport to be indicative of what would have occurred had the acquisition been in effect for the periods indicated or the results that may occur in the future. Pro forma net sales and income from continuing operations were as follows (in thousands):


	Thirty-Nine Week Period Ended April 2, 2005			Forty Week Period Ended April 3, 2004
Net sales	$	153,006		$	134,447

Income (loss) from continuing operations	$	(1,457	)	$	707

4. Divestiture Activities:

On December 24, 2003, the Company sold to Dean Specialty Foods Group, LLC the Company’s business of marketing, distributing and selling powdered non-dairy creamer sold under the Cremora and Cremora Royale brand names (“Non-Dairy Creamer Business”) and related assets, including inventory (“Non-Dairy Creamer Sale”). In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the results of operations of the Non-Dairy Creamer Business for the forty week period ended April 3, 2004 have been classified as discontinued operations and the results of operations for that period have been reclassified. Interest expense related to the principal of the term loan repaid from the proceeds of the Non-Dairy Creamer Sale has been allocated to discontinued operations.

EAGLE FAMILY FOODS HOLDINGS, INC.

Notes to the Financial Statements

(Unaudited)

The result of operations of the discontinued business was as follows (in thousands):


	Forty Week Period Ended April 3, 2004
Net sales	$	7,368

Operating income	$	923
Interest expense		313

Income from discontinued operations	$	610

On December 10, 2004, the Company announced its plan to close its sweetened condensed milk and mincemeat pie filling plant located in Wellsboro, Pennsylvania (“PA Plant”) by the end of April 2005 (“Plant Closure”). The PA Plant’s last day of production occurred on April 30, 2005. Future production will be shifted to the Texas Plant, or in the case of the mincemeat pie filling products, outsourced to a third party manufacturer. The Company recorded an impairment charge of $2,612,000 in the quarterly period ended January 1, 2005 for the production assets at the PA Plant. The employee costs, including benefits and severance for the 89 employees, are expected to be approximately $1,200,000, and will be expensed ratably over the future service period. An amount of $599,000 was recorded as plant closure costs during the quarterly period ended April 2, 2005.

5. Inventories:

Inventories are stated at the lower of cost or market at April 2, 2005 and July 3, 2004 and consisted of the following (in thousands):


	April 2, 2005		July 3, 2004
Finished goods	$	28,872	$	31,342
Raw materials		4,376		1,956

Total inventories	$	33,248	$	33,298

6. Property and Equipment:

Property and equipment is recorded at cost at April 2, 2005 and July 3, 2004 and consisted of the following (in thousands):


	April 2, 2005			July 3, 2004
Land	$	786		$	355
Buildings and improvements		7,093			3,575
Machinery and equipment		18,015			13,147
Computer equipment and software		11,273			11,033
Construction in progress		3,261			110

Total property and equipment		40,428			28,220
Accumulated depreciation		(27,780	)		(24,260	)

Property and equipment, net	$	12,648		$	3,960

The Company reviews the value of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized whenever evidence exists that the carrying value is not recoverable. Because of the pending Plant Closure, the Company recorded an impairment charge of $2,612,000 in the quarterly period ended January 1, 2005 for the production assets at its PA Plant.

EAGLE FAMILY FOODS HOLDINGS, INC.

Notes to the Financial Statements

(Unaudited)

7. Goodwill and Intangible Assets:

The Company performed its annual impairment test of goodwill and intangible assets during the thirteen-week period ended October 2, 2004, and determined there was no impairment. There have been no facts or circumstances that would affect that determination as of April 2, 2005.

In association with the Milnot acquisition, the Company recorded $4,717,000 for goodwill based on the estimated fair value of assets acquired and liabilities assumed, $1,260,000 for a covenant not to compete agreement for which the fair value was determined based on the difference in estimated future discounted cash flow earnings with and without the agreement, and $744,000 for trademarks for which the value was based on a royalty savings methodology. Amortization expense was $63,000 for the quarter and year to date ended April 2, 2005.

Other intangible assets consisted of the following (in thousands):


	April 2, 2005						July 3, 2004
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Net Carrying Amount
Intangible assets subject to amortization:
Covenant not to compete	$	1,260	$	63	$	1,197	$	—
Intangible assets not subject to amortization:
Tradenames						34,527		33,783

Total other intangible assets					$	35,724	$	33,783

The estimated amortization expense is $126,000 for fiscal year 2005, $252,000 for fiscal years 2006 through 2008, and $126,000 for fiscal year 2010.

8. Debt:

Debt consisted of the following (in thousands):


	April 2, 2005			July 3, 2004
Senior subordinated notes due January 15, 2008	$	115,000		$	115,000
Revolving financing facility due March 23, 2007		51,456			70,688
Subordinated promissory notes due November 1, 2007		14,000			—
Unamortized discount on subordinated promissory notes		(2,454	)		—

Total debt		178,002			185,688
Less revolving financing facility		(51,456	)		(70,688	)

Long-term debt	$	126,546		$	115,000

The Company is the borrower under a financing agreement (the “Financing Agreement’), dated March 23, 2004, as amended by and among Eagle, as borrower, Holdings and Milnot, as guarantors, and certain financial institutions party thereto from time to time (the “Lenders”), Fortress Credit Opportunities I LP (“Fortress”), as collateral agent for the Lenders, and Wachovia Capital Finance, an administrative agent for the Lenders. The Financing Agreement provides for a secured Revolving Financing Facility that consists of (1) an asset-based Revolving Financing Facility (“Revolver A”) in an aggregate principal amount not to exceed $40,000,000 at any time outstanding, including a subfacility for the issuance of letters of credit in an aggregate amount not to exceed $5,000,000, and (2) a Revolving Financing Facility (“Revolver B”, and together with Revolver A, the “Revolving Financing Facility”) in an aggregate principal amount not to exceed $63,000,000, until December 31, 2005, thereafter until maturity not to exceed $53,000,000. The borrowings under Revolver A are subject to a maximum borrowing base based on the calculation of 65% of the book value of eligible inventory and 85% of the value of the net amount of eligible accounts receivable as defined in the Financing Agreement. The Company must borrow the maximum amount available under Revolver B before the Company can utilize Revolver A. As of April 3, 2005, the maximum available borrowing

EAGLE FAMILY FOODS HOLDINGS, INC.

Notes to the Financial Statements

(Unaudited)

base on Revolver A was $21,886,000, of which no borrowings were outstanding. As of July 3, 2004, the borrowings under Revolver A were $15,688,000, and as of April 2, 2005 and July 3, 2004, the borrowings under Revolver B were $51,456,000 and $55,000,000, respectively. The maturity date of the Financing Agreement is March 23, 2007, subject to extensions if certain conditions are met.

The amendments to the Financing Agreement occurring during the Company’s fiscal year were as follows. On September 20, 2004, the Company entered into a First Amendment to the Financing Agreement that temporarily increased the principal amount available for borrowing under Revolver A from $27,000,000 to $30,000,000 through and including November 3, 2004. On November 23, 2004 the Company entered into a Second Amendment to the Financing Agreement which, among other things, (i) temporarily increased the credit commitment under the Revolving B loan to $63,000,000 beginning on January 1, 2005 until and including December 31, 2005, (ii) expressly permitted the acquisition by the Company of the Texas Plant, (iii) expressly permitted the issuance of shares by Holdings of its capital stock of DFA, and/or one or more of its affiliates and (iv) amended the financial covenants to, among other things, account for the inclusion of the Texas Plant in the Company’s business. On December 23, 2004, the Company entered into a Third Amendment to the Financing Agreement which, among other things, (i) increased the Revolving A Credit Commitment to $40,000,000, (ii) consented to the Milnot Acquisition, (iii) allowed for the issuance by Eagle of the DFA Note and the Milnot Note, as described below, and (iv) amended the financial covenants to include the impact of the inclusion of Milnot in the Company’s business.

The Company’s Revolving Financing Facility includes a lockbox arrangement, which provides for all cash receipts to be swept daily to reduce borrowings outstanding under the Revolving Financing Facility. This arrangement, combined with the existence of a subjective acceleration clause, causes the Revolving Financing Facility balance to be classified as a current liability on the balance sheet. The acceleration clause allows the Company’s lenders to accelerate payment of the obligation or to terminate the Financing Agreement upon the occurrence of an event or development that would be reasonably likely to result in a material adverse effect on the Company’s operations, business, assets, properties or condition (financial or otherwise). Management believes that no such event or development has occurred.

The interest rate on Revolver A is LIBOR plus 3.0% or the reference rate as announced by Wachovia Bank (the “Reference Rate”) plus 0.5%. The interest rate on Revolver B is (1) 10.0% plus the greater of 2.0% and LIBOR or (2) 8.0% plus the greater of 4.0% and the Reference Rate. The fair market value of the Revolving Financing Facility at January 1, 2005 and July 3, 2004 was approximately the carrying value.

The Company’s ability to meet the covenants in the Financing Agreement will be dependent upon the Company’s future performance, which will be subject to general economic conditions and financial operations. There can be no assurance that the Company’s future performance will not be affected negatively by changes in the above factors to such a degree that it affects the Company’s ability to meet covenants in the Financing Agreement.

As of April 2, 2005, the Company had letters of credit outstanding totaling $1,183,000 under the Revolving Financing Facility, as required by certain insurance policies.

Eagle’s $115,000,000 of 8³/4% Senior Subordinated Notes (the “Senior Notes”) are due January 15, 2008. The Senior Notes bear interest at a rate of 8.75% per annum, payable on January 15 and July 15, commencing July 15, 1998. The fair market value of the Senior Notes was approximately $95,450,000 and $80,500,000 at April 2, 2005 and July 3, 2004, respectively.

GE Investment Private Placement Partners II, a Limited Partnership (“GEI”), and Warburg, Pincus Ventures, L.P. (“Warburg”), significant shareholders of Holdings, each owned $14,092,000 in aggregate principal amount of Senior Notes as of May 5, 2005. Each stockholder has guaranteed payment of Revolver B obligations and associated costs to the extent of interest paid to that stockholder on the Senior Notes after March 23, 2004.

On December 21, 2004, Eagle issued an unsecured Subordinated Promissory Note in favor of DFA for the aggregate principal amount of $12,000,000 (the “DFA Note”, and together with the Milnot Note, the “Acquisition Notes”) and on December 23, 2004, the Company issued the Milnot Note, each in connection with the Milnot

EAGLE FAMILY FOODS HOLDINGS, INC.

Notes to the Financial Statements

(Unaudited)

Acquisition. Each of the Acquisition Notes bears interest at 90-Day LIBOR plus two percent (2%) per annum and matures on the earlier of (i) November 1, 2007 or (ii) a Sale or Recapitalization of the Company ( as defined in the Acquisition Notes). Interest on the DFA Note is payable quarterly and interest on the Milnot Note compounds and is payable at maturity. The Acquisition Notes accelerate upon an Event of Default, which shall be deemed to occur if (i) Eagle fails to pay when due and payable (whether at maturity or otherwise) the principal payment on the DFA Note or the Milnot Note, as applicable, together with accrued and unpaid interest thereof within five (5) business days after the due date thereof, (ii) Eagle breaches any term of the DFA Note or the Milnot Note, as the case may be, and fails to remedy the same within thirty (30) days following receipt of notice of such breach from DFA or MHC, as applicable; (iii) an Insolvency Event occurs; or (iv) the Revolving Financing Facility has become due and payable in full by acceleration prior to maturity. The Revolving Financing Facility must be paid in full before the Acquisition Notes are paid. The Acquisition Notes rank on parity with Eagle’s Senior Notes.

In accordance with APB Opinion No. 21, “Interest on Receivables and Payables,” the Company recorded the Acquisition Notes at the present value using the Company’s current interest rate for long-term borrowings at the debt issuance date. The purchase price of the Milnot Acquisition has been adjusted by $371,000 for the discount on the Milnot Note. The DFA Note has been discounted by $2,304,000 in conjunction with DFA’s purchase of Holdings’ common stock. The discount is amortized over the term of the Acquisition Notes using the interest method.

9. Income Taxes:

The Company assesses the recoverability of the deferred tax assets and records a valuation allowance when it is probable that any or all of the deferred tax assets will not be realized. Management continues to see lower industry market values in the current economic environment, which could affect the tax planning strategies available to the Company. The Company maintains a full valuation allowance for its net deferred tax assets and net operating loss carry forwards, as sufficient positive evidence does not exist to support reversal of the reserve. Until such time, except for minor state and local tax provisions, the Company will have no reported tax provision, net of valuation allowance adjustments.

10. Redeemable Preferred Stock:

In November 2004, Holdings effected a recapitalization of its existing Common Stock, Series A Non-Voting Preferred Stock (the “Series A Preferred Stock”), and Series B Non-Voting Preferred Stock (the “Series B Preferred Stock”) (the “Recapitalization”). In order to effect the Recapitalization, Holdings (i) amended its Certificate of Incorporation (as amended on November 23, 2004) (the “Certification of Incorporation”), to provide for (A) an increase in the authorized shares of Common Stock from 1,200,000 to 2,750,000 and (B) authorization of its Series I Preferred Stock and ii) entered into Contribution and Exchange Agreements (together, the “Contribution and Exchange Agreements”) with its existing equity holders (the “Existing Stockholders”), Warburg, GEI and Mr. Craig A. Steinke, Chief Executive Officer, Chief Financial Officer and President of Holdings pursuant to which the Existing Stockholders contributed and exchanged their existing shares of Common Stock, Series A Preferred Stock (plus accrued and unpaid dividends) and Series B Preferred Stock (plus accrued and unpaid dividends) as applicable, for shares of Common Stock.

For accounting purposes, the Recapitalization has been treated as an extinguishment of Series A Preferred Stock and Series B Preferred Stock. The fair value of Common Stock exchanged was $6,425,000 and the carrying value of Series A Preferred Stock and Series B Preferred Stock aggregated to $172,343,000. The resulting extinguishment gain of $165,918,000 has been reflected as an adjustment to accumulated deficit. The Company estimated the fair value of the Common Stock exchanged using the value assigned to Common Stock issued to DFA.

On November 23, 2004, Mid-Am, an affiliate of DFA, invested $6,000,000 into Holdings for 150 shares of Series I Preferred Stock at a par value of $0.01 per share (the “Series I Stated Value”). Based on an independent appraisal, the Company recorded the value of the Series I Preferred Stock at $5,100,000, less an allocation of cost of issuance. The excess of cash received from Mid-Am over the appraised value of the Series I Preferred Stock was recorded as additional paid in capital. The Series I Preferred Stock provides for the accretion of preferential cumulative dividends at an annual rate of 10%, compounded quarterly to a liquidation value. Dividends are payable as declared by the Holdings’ Board of Directors and shall be paid before any dividends shall be set apart for or paid upon the Common Stock of Holdings, par value $0.01 per share (the “Common Stock”).

EAGLE FAMILY FOODS HOLDINGS, INC.

Notes to the Financial Statements

(Unaudited)

In the event of liquidation, dissolution, or winding up, the holders of shares of Series I Preferred Stock are entitled to be paid out of the assets of Holdings available for distribution to its stockholders before any payment is made to the holders of stock junior to the Series I Preferred Stock. Holders of Series I Preferred Stock are not entitled to vote on any matters presented to the stockholders of Holdings. However, the affirmative vote or written consent of the holders of at least two-thirds of the then outstanding shares of Series I Preferred Stock is required to amend, alter, or repeal the preferences, special rights or other powers of the Series I Preferred Stock. The Series I Preferred Stock is subject to mandatory redemption at a price per share equal to the Stated Value of Series I Preferred Stock plus all accretion thereon upon (1) the closing of a public offering pursuant to an effective registration statement under the Securities Act of 1933, (2) the sale of all or substantially all of the assets of Holdings or the merger or consolidation of Holdings with or into any other corporation or other entity in which the holders of Holdings’ outstanding shares before the merger or consolidation do not retain a majority of the voting power of the surviving corporation or other entity or (3) the acquisition by any person of shares of Common Stock representing a majority of the issued and outstanding shares of Common Stock then outstanding.

Cumulative accrued dividends on the Series A Preferred Stock and Series B Preferred Stock totaled $76,712,000 at July 3, 2004. Cumulative accrued dividends on the Series I Preferred Stock were $215,000 as of April 2, 2005. The cumulative accrued dividends are reflected as an increase in the preferred stock value and an increase in the accumulated deficit.

11. Comprehensive (Loss) Income :

The components of other comprehensive (loss) income for the thirteen and thirty-nine week periods ended April 2, 2005 and the thirteen and forty week periods ended April 3, 2004 consisted of the following (in thousands):


	Thirteen Week Period Ended						Thirty-Nine Week Period Ended April 2, 2005			Forty Week Period Ended April 3, 2004
	April 2, 2005			April 3, 2004			Thirty-Nine Week Period Ended April 2, 2005			Forty Week Period Ended April 3, 2004
Net (loss) income	$	(6,992	)	$	(8,311	)	$	(1,649	)	$	1,669
Other comprehensive (loss) income :
Change in fair value of commodity contracts		11			3,643			117			4,142
Minimum pension liability		(197	)		—			(197	)		—
Deferred gain on commodity contracts sold		—			—			23			—
Recognition of deferred gain on commodity contracts sold		(67	)		—			(354	)		—
Foreign currency translation adjustment		(22	)		(11	)		106			6

Comprehensive (loss) income	$	(7,267	)	$	(4,679	)	$	(1,954	)	$	5,817

EAGLE FAMILY FOODS HOLDINGS, INC.

Notes to the Financial Statements

(Unaudited)

12. Pension Plan:

The Company sponsors a defined benefit plan covering all eligible union employees (“Benefit Plan”). The Benefit Plan information is determined on a calendar year. The components of the net periodic benefit cost for the Benefit Plan consisted of the following (in thousands):


	Three Months Ended
	March 31, 2005			March 31, 2004
Service cost	$	19		$	17
Interest cost		8			7
Expected return on plan assets		(6	)		(5	)
Amortization of net loss		4			2

Net periodic benefit cost	$	25		$	21

The Company expensed $25,000 and $19,000 for the three months ended April 2, 2005 and April 3, 2004, respectively. The Company contributed $90,000 during the thirty-nine week period ended April 2, 2005. The Company contributed a total $90,000 to fund its Benefit Plan for the calendar year ended December 31, 2004. During the three months ended April 2, 2005, the Company recorded $197,000 as an unfunded pension liability with an offset charge to other comprehensive (loss) income.

13. Stock Options and Restricted Stock:

On November 23, 2004, the Company granted a restricted stock award under the Eagle Family Foods Holdings, Inc. 1998 Stock Incentive Plan (“Incentive Plan”) of 50,700 shares of the Common Stock of Holdings a fair value of $853,000, with a vesting period of three years. The Company estimated the fair value of the Common Stock exchanged using the value assigned to Common Stock issued to DFA. The unearned compensation is shown as a reduction of stockholders’ deficit in the accompanying Consolidated Balance Sheets of Holdings. Unearned compensation is amortized ratably over the restricted period. The amortized expense for the period ended April 2, 2005 was $94,000.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Summary

On November 23, 2004, Dairy Farmers of America, Inc. (“DFA”) was issued 1,048,091 shares of Common Stock of Holdings to DFA (“DFA Transaction”), representing 43% of the voting equity of Holdings. In exchange for these shares, DFA contributed $10.0 million into the Company and transferred ownership of a manufacturing plant in El Paso, Texas (the “Texas Plant”) with an appraised value of $4.5 million. In addition, Mid-Am Capital, L.L.C. (“Mid-Am”), an affiliate of DFA, invested $6.0 million for 150 shares of a new series of Preferred Stock of Holdings (“Series I Preferred Stock”). The Company will use the majority of these proceeds to refurbish the Plant (“El Paso Project”) and expand the Texas Plant’s capabilities into processing sweetened condensed and evaporated milk.

On December 23, 2004, Eagle purchased all of the outstanding capital stock of Milnot Company (“Milnot”) (the “Milnot Acquisition”) from Milnot Holding Corporation (“MHC”). Milnot is a manufacturer of sweetened condensed and evaporated milk products. The Company expects that the Milnot Acquisition will increase the Company’s presence in the private label sector of the canned milk category and will position the Company for future growth in both retail private label and foodservice businesses. Eagle paid an aggregate purchase price of $17.0 million, subject to a working capital adjustment. The form of payment included (i) cash in the amount of $15.0 million, reduced by a $1.8 million working capital adjustment and (ii) a Subordinated Promissory Note in the aggregate principal amount of $2.0 million (“Milnot Note”) between Eagle and MHC. A portion of the purchase price was financed with monies received from DFA as described in the Liquidity and Capital Resource section and additional borrowings under the Company’s Revolving Financing Facility.

On December 10, 2004, the Company announced its plan to close its sweetened condensed milk and mincemeat pie filling plant located in Wellsboro, Pennsylvania (“PA Plant”) by the end of April 2005 (“Plant Closure”). The PA Plant’s last day of production occurred on April 30, 2005. Future production will be shifted to the Texas Plant, or in the case of the mincemeat pie filling products, outsourced to a third party manufacturer. The Company recorded an impairment charge of $2.6 million in the quarterly period ended January 1, 2005 for the production assets at the PA Plant. The employee costs, including benefits and severance for the 89 employees, are expected to be approximately $1.2 million, and will be expensed ratably over the future service period. An amount of $0.6 million was recorded as plant closure costs during the quarterly period ended April 2, 2005.

Set forth below is a discussion of the consolidated financial condition and consolidated results of operations for the thirteen and thirty-nine week periods ended April 2, 2005 and the thirteen and forty week periods ended April 3, 2004 of Eagle Family Foods Holdings, Inc. and its subsidiaries. The following discussion should be read in conjunction with the financial statements of the Company and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

The discussion and analysis of the Company’s financial condition and results of operations relates to the business exclusive of the powdered non-dairy creamer business (“Non-Dairy Creamer Business”) unless otherwise described. On December 24, 2003, the Company sold to Dean Specialty Foods Group, LLC its Non-Dairy Creamer Business and related assets, including inventory (“Non Dairy Creamer Sale”). In accordance with the provisions of the Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the results of operations of the Non-Dairy Creamer Business have been classified as discontinued operations and the results of operations for the period have been reclassified.

The following table sets forth the consolidated results of operations as a percentage of net sales for the thirteen and thirty-nine week periods ended April 2, 2005 and the thirteen and forty week periods ended April 3, 2004.


	Results of Operations (unaudited)
	Thirteen Week Period Ended				Thirty-Nine Week Period Ended April 2, 2005		Forty Week Period Ended April 3, 2004
	April 2, 2005		April 3, 2004		Thirty-Nine Week Period Ended April 2, 2005		Forty Week Period Ended April 3, 2004
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	80.5		79.8		66.8		61.1

Gross margin	19.5		20.2		33.2		38.9
Distribution expense	9.4		8.7		6.8		5.9
Marketing expense	8.9		12.7		8.6		9.8
General and administrative expense	6.3		10.4		4.0		5.9
Plant closure costs	2.1		—		0.5		—
Amortization of intangible assets	0.2		—		0.1		—
Impairment charge on plant closure	—		—		2.2		—
Due diligence and other costs	—		9.8		—		1.6

Operating income	(7.4	)%	(21.4	)%	11.0	%	15.7	%

Results of Operations

Thirteen Week Periods ended April 2, 2005 (“third quarter 2005”) and April 3, 2004 (“third quarter 2004”) (Unaudited)

Net Sales. The Company’s net sales for third quarter 2005 were $28.0 million as compared to $15.5 million for third quarter 2004, an increase of $12.5 million, or 80.4%. The table below sets forth the Company’s net sales data for each of the Company’s product lines for third quarter 2005 and third quarter 2004 (dollars in millions):


Product Line	Company’s Principal Brands	Net Sales Third Quarter 2005		Percentage of Net Sales		Net Sales Third Quarter 2004		Percentage of Net Sales
Canned milk	Eagle Brand, Magnolia, Premium Dessert Kits and other	$	27.0	96.4	%	$	14.9	96.1	%
Niche brand products	Borden, None Such and Kava		1.0	3.6			0.6	3.9

Total net sales		$	28.0	100.0	%	$	15.5	100.0	%

Net sales of the canned milk product line increased by $12.1 million in third quarter 2005 as compared to third quarter 2004. This was primarily due to the increase in sales volume acquired with the Milnot business. In addition, the Company had higher sales volume of its Eagle Brand sweetened condensed milk products as the Company’s customers were buying early for the March 2005 Easter holiday season.

Cost of Goods Sold. Cost of goods sold was $22.5 million for third quarter 2005 as compared to $12.4 million for third quarter 2004, an increase of $10.1 million, or 82.1%. Expressed as a percentage of net sales, cost of goods sold for third quarter 2005 increased to 80.5% from 79.8% for third quarter 2004. The increase in cost of goods sold is primarily due the higher sales volume from the Milnot Acquisition and its Eagle Brand sweetened condensed milk products. The cost of goods sold percentage increased due to the change in the sales mix to products with a higher production costs, primarily the premium dessert kits, and due to higher raw material costs.

Distribution Expense. Distribution expense was $2.6 million for third quarter 2005 as compared to $1.4 million for third quarter 2004, an increase of $1.2 million, or 93.9%. Expressed as a percentage of net sales, distribution expense for third quarter 2005 increased to 9.4% from 8.7% for third quarter 2004. The increase in distribution expense was due to additional costs associated with the Milnot Acquisition, higher costs associated with the build of inventory in anticipation of the Plant Closure, and additional transportation surcharges due to higher fuel costs.

Marketing Expense. Marketing expense was $2.5 million for third quarter 2005 as compared to $2.0 million for third quarter 2004, an increase of $0.5 million, or 26.2%. Expressed as a percentage of net sales, marketing expense for third quarter 2005 decreased to 8.9% from 12.7% for third quarter 2004. The increase in marketing expense is primarily due to the increase in sales volume as discussed above.

General and Administrative (“G&A”) Expense. G&A expense was $1.8 million for third quarter 2005 as compared to $1.6 million for third quarter 2004, an increase of $0.2 million, or 10.1%. Expressed as a percentage of net sales, G&A expense for third quarter 2005 decreased to 6.3% from 10.4% for third quarter 2004.

Plant closure costs. Because of the pending Plant Closure of the PA Plant, the Company recorded severance expense of $0.6 million in third quarter 2005. The severance costs and other related costs will be expensed ratably over the future service period, and may approximate $1.2 million in total.

Amortization of intangible assets. Amortization of intangible assets was less than $0.1 million for third quarter 2005. This represented the amortization of a covenant not to compete recorded for the Milnot Acquisition that will be amortized over five years.

Due Diligence and Other Costs. Due diligence and other costs were $1.5 million for third quarter 2004. The Company recorded a charge of $0.7 million for due diligence costs related to an unsuccessful acquisition attempt, and a charge of $0.8 million for an incentive payment to certain management members for successfully completing the sale of the Non-Dairy Creamer Business.

Operating Income Loss. Operating loss was $2.1 million for third quarter 2005 as compared to an operating loss of $3.3 million for third quarter 2004, a decrease of $1.2 million, or 36.6%. Expressed as a percentage of net sales, operating loss for third quarter 2005 decreased to 7.4% from 21.4% for third quarter 2004. The decrease was due to having no costs in third quarter 2005 for the due diligence and other costs noted above, the additional operating income generated from Milnot in third quarter 2005 and other factors noted above.

Net Interest Expense. Net interest expense was $4.9 million for third quarter 2005 as compared to $3.6 million for third quarter 2004, an increase of $1.3 million, or 34.4%. The increase in net interest expense was due to a higher average interest rate of 12.7% in third quarter 2005 as compared to an average interest rate of 9.2% in third quarter 2004. The average debt balance in third quarter 2005 was $153.9 million as compared $157.8 million in third quarter 2004.

Costs Related to Refinancing. Costs related to refinancing were $1.3 million for third quarter 2004. The Company recorded a write off of $1.3 million for the unamortized financing fees related to extinguished debt.

Income Taxes. The Company recorded minimal state and local income tax expense in third quarter 2005 and third quarter 2004.

Thirty-Nine Week Period ended April 2, 2005 (“year-to-date 2005”) and Forty Week Period ended April 3, 2004 (“year-to-date 2004”) (Unaudited)

Net Sales. The Company’s net sales for year-to-date 2005 were $117.5 million as compared to $94.9 million for year-to-date 2004, an increase of $22.6 million, or 23.7%. The table below sets forth the Company’s net sales data for each of the Company’s product lines for year-to-date 2005 and year-to-date 2004 (dollars in millions):


Product Line	Company’s Principal Brands	Year-to-Date Net Sales 2005		Percentage of Net Sales		Net Sales Year-to-Date 2004		Percentage of Net Sales
Canned milk	Eagle Brand, Magnolia, Premium Dessert Kits and other	$	107.9	91.8	%	$	84.7	89.3	%
Niche brand products	Borden, None Such and Kava		9.6	8.2			10.2	10.7

Total net sales		$	117.5	100.0	%	$	94.9	100.0	%

The increase in canned milk net sales of $23.2 million was due to an increase in sales volume through the acquisition of the Milnot business as discussed previously and from an increase in sales of the premium dessert kits. The dessert kits utilize the Company’s Eagle Brand sweetened condensed milk product in popular sweetened condensed milk recipes and were launched by the Company in its fiscal year ended July 3, 2004. In addition, the Company sold slightly higher volume of Eagle Brand and other brands of sweetened condensed milk products as the Company’s customers were buying early for the March 2005 Easter holiday season.

Cost of Goods Sold. Cost of goods sold was $78.5 million for year-to-date 2005 as compared to $58.0 million for year-to-date 2004, an increase of $20.5 million, or 35.4%. Expressed as a percentage of net sales, cost of goods sold for year-to-date 2005 increased to 66.8% from 61.1% for year-to-date 2004. The increase in percentage of cost of goods sold is primarily due to the change in the sales mix to products with higher production costs, primarily the premium dessert kits, and due to higher raw material costs. The increase of $20.5 million is due to increase in sales volume as discussed above, primarily from the Milnot Acquisition and the premium dessert kits.

Distribution Expense. Distribution expense was $8.0 million for year-to-date 2005 as compared to $5.6 million for year-to-date 2004, an increase of $2.4 million, or 44.2%. Expressed as a percentage of net sales, distribution expense for year-to-date 2005 increased to 6.8% from 5.9% for year-to-date 2004. The increase in distribution expense was primarily due to additional costs associated with the Milnot Acquisition, higher distribution costs associated with the build of inventory in anticipation of the Plant Closure, and additional transportation surcharges due to higher fuel costs.

Marketing Expense. Marketing expense was $10.2 million for year-to-date 2005 as compared to $9.3 million for year-to-date 2004, an increase of $0.9 million, or 9.0%. Expressed as a percentage of net sales, marketing expense for year-to-date 2005 decreased to 8.6% from 9.8% for year-to-date 2004. The Company supported its growth in the premium dessert kits with marketing programs, offsetting these costs with reduced marketing expenditures for its other product lines.

General and Administrative Expense. G&A expense was $4.7 million for year-to-date 2005 as compared to $5.6 million for year-to-date 2004, a decrease of $0.9 million, or 16.3%. Expressed as a percentage of net sales, G&A expense for year-to-date 2005 was 4.0% as compared to 5.9% for year-to-date 2004. The decrease is primarily the result of lower depreciation as certain computer software and systems have been fully depreciated.

Plant closure costs. Because of the pending Plant Closure of the PA Plant, the Company recorded severance expense of $0.6 million in year-to-date 2005. The severance costs will be expensed ratably over the future service period, and may approximate $1.2 million.

Amortization of intangible assets. Amortization of intangible assets was less than $0.1 million for year-to-date 2005. This represented the amortization of a covenant not to compete recorded for the Milnot Acquisition that will be amortized over five years.

Impairment charge on plant closure. Because of the pending Plant Closure, the Company recorded an impairment charge of $2.6 million for the production assets at its PA Plant in year-to-date 2005.

Due Diligence and Other Costs. Due diligence and other costs were $1.5 million for year-to-date 2004. The Company recorded a charge of $0.7 million for due diligence costs related to an unsuccessful acquisition attempt, and a charge of $0.8 million for an incentive payment to certain management members for successfully completing the sale of the Non-Dairy Creamer Business.

Operating Income (Loss). Operating income was $12.8 million for year-to-date 2005 as compared to operating income of $14.9 million for year-to-date 2004, a decrease of $2.1 million, or 14.4 %. Expressed as a percentage of net sales, operating income for year-to-date 2005 decreased to 11.0% from 15.7% for year-to-date 2004. The decrease in operating income was due to the impairment charge and severance expense because of the pending Plant Closure, change in sales mix to products with a higher production cost, investments in the development and promotion of the premium dessert kits, and increased raw material costs for the base business.

Net Interest Expense. Net interest expense was $14.4 million for year-to-date 2005 as compared to net interest expense of $11.4 million for year-to-date 2004, an increase of $3.0 million. The increase in net interest expense was due to a higher average interest rate of 11.2% in year-to-date 2005 as compared to an average interest rate of 8.7% in year-to-date 2004. The average debt balance in year-to-date 2005 was $171.9 million as compared $179.8 million in year-to-date 2004.

Income Taxes. The Company recorded income tax expense of less than $0.1 million for year-to-date 2005 and $0.1 million for year-to-date 2004. Such expense resulted from estimated state and local income taxes. The Company is carrying a full valuation allowance for its net deferred tax assets and net operating loss carryforwards until such time that sufficient positive evidence exists to support realization of these tax assets. The Company recorded minimal state and local income tax expense in year-to-date 2005 and year-to-date 2004.

Income (Loss) from Discontinued Operations. Income from discontinued operations was $0.6 million for year-to-date 2004. This represents the results of operations of the Non-Dairy Creamer Business. The Company sold the Non-Dairy Creamer Business on December 24, 2003 to Dean Foods.

Loss on Disposal of Discontinued Operations. In year-to-date 2004, the Company recorded a loss of $1.1 million for the Non-Dairy Creamer Sale.

Liquidity and Capital Resources

The Company’s borrowing requirements are sourced primarily through its Revolving Financing Facility that consists of (1) an asset-based Revolving Financing Facility (“Revolver A”) in an aggregate principal amount not to exceed $40.0 million at any time outstanding, including a subfacility for the issuance of letters of credit in an aggregate amount not to exceed $5.0 million, and (2) a Revolving Financing Facility (“Revolver B”, and together with Revolver A, the “Revolving Financing Facility”) in an aggregate principal amount not to exceed $63.0 million until December 31, 2005, thereafter until maturity not to exceed $53.0 million. The Company must borrow the maximum amount available under Revolver B before the Company can utilize Revolver A. As of April 3, 2005, the maximum available borrowing base on Revolver A was $21.9 million, of which no borrowings were outstanding. As of July 3, 2004, the borrowing under Revolver A was $15.7 million, and as of April 2, 2005 and July 3, 2004, the borrowings under Revolver B were $51.5 and $55.0 million, respectively.

by Holdings of its capital stock of DFA, and/or one or more of its affiliates and (iv) amended the financial covenants to, among other things, account for the inclusion of the Texas Plant in the Company’s business. On December 23, 2004, the Company entered into a Third Amendment to the Financing Agreement which, among other things, (i) increased the Revolving A Credit Commitment to $40.0 million, (ii) consented to the Milnot Acquisition, (iii) allowed for the issuance by Eagle of the DFA Note and the Milnot Note, as described below, and (iv) amended the financial covenants to include the impact of the inclusion of Milnot in the Company’s business.

The Revolving Financing Facility contains financial covenants, which require the Company to meet certain financial tests including senior debt leverage, fixed charge coverage, and consolidated earnings before interest, income tax and depreciation and amortization expenses. The Company is required to reduce the outstanding principal amount of Revolver B to specific amounts by December 31 of each of the next three years. The Company met this requirement as of December 31, 2004. The principal amount as of December 31, 2005 is to be less than $57.7 million. In addition, the Company is restricted from accumulating or maintaining an aggregate amount of cash in bank accounts, other cash equivalents and investments in excess of $2.0 million for a period of more than ten consecutive business days, subject to certain exceptions as permitted by the Financing Agreement. The Revolving Financing Facility includes a subjective acceleration clause and a lockbox arrangement, which provides for all cash receipts to be swept daily to reduce borrowings outstanding under the Revolving Financing Facility.

The Revolving Financing Facility also contains covenants including limitations on liens, indebtedness, dispositions, acquisitions, mergers, consolidations, changes in the nature of business, loans, advances, investments, sale and leaseback transactions, capital expenditures, transactions with affiliates, dividends and other payments, issuances of capital stock and excess cash. The Revolving Financing Facility contains customary events of default, including certain changes in control of the Company. The Company is currently in compliance with the covenants of the Financing Agreement.

On December 21, 2004, Eagle issued an unsecured Subordinated Promissory Note in favor of DFA for the aggregate principal amount of $12.0 million (the “DFA Note”, and together with the Milnot Note, the “Acquisition Notes”). Each of the Acquisition Notes bears interest at 90-Day LIBOR plus two percent (2%) per annum and matures on the earlier of (i) November 1, 2007 or (ii) a Sale or Recapitalization of the Company (as defined in the Acquisition Notes). Interest on the DFA Note is payable quarterly and interest on the Milnot Note compounds and is payable at maturity. The Acquisition Notes accelerates upon an Event of Default which shall be deemed to occur if (i) Eagle fails to pay when due and payable (whether at maturity or otherwise) the principal payment on the DFA Note or the Milnot Note, as applicable, together with accrued and unpaid interest thereof within five (5) business days after the due date thereof, (ii) Eagle breaches any term of the DFA Note or the Milnot Note, as the case may be, and fails to remedy the same within thirty (30) days following receipt of notice of such breach from DFA or MHC, as applicable; (iii) an Insolvency Event (as defined in the Acquisition Notes) occurs; or (iv) the Revolving Financing Facility has become due and payable in full by acceleration prior to maturity. The Revolving Financing Facility must be paid in full before the Acquisition Notes are paid. The Acquisition Notes rank on parity with Eagle’s 8³/4% Senior Subordinated Notes due 2008 (“Senior Notes”).

In accordance with Accounting Principles Board Opinion No. 21, “Interest on Receivables and Payables,” the Company recorded the Milnot and DFA Notes at the present value using the Company’s current interest rate for long-term borrowings. The purchase price of the Milnot Acquisition has been adjusted by $0.4 million for the discount on the Milnot Note. The DFA Note has been discounted by $2.3 million in conjunction with DFA’s purchase of Holdings’ common stock. The discount costs are amortized over the life of the Acquisition Notes, using the interest method.

Interest payments on the Company’s $115 million of Senior Notes and DFA Note, and interest and principal payments under the Revolving Financing Facility represent significant cash requirements for the Company. Borrowings under the Revolving Financing Facility bear interest at floating rates and require interest payments monthly.

In addition, the Company’s liquidity requirements include capital expenditures and changes in working capital. The Company had capital expenditures of $3.6 million in year-to-date 2005, of which $3.0 million related to the El Paso Project. The Company expects to spend approximately $15.0 million on the El Paso Project and approximately

$1.0 million on other capital expenditures. As mentioned above, the El Paso Project is supported by the investment from DFA and Mid-Am. The Company’s remaining sources of liquidity are cash flows from operations and available borrowings under the Revolving Financing Facility.

Net cash from operating activities was $9.7 million and $21.0 million in year-to-date 2005 and year-to-date 2004, respectively, a decrease of $11.3 million. This decrease is primarily due to the additional cash requirements for the operations of Milnot and the higher interest costs.

Cash used in investing activities in year-to-date 2005 was $17.4 million and cash from investing activities in year-to-date 2004 was $11.6 million, a decrease of $29.0 million. In year-to-date 2005, the Company purchased Milnot for a net cash price of $13.7 million and spent $3.6 million in capital expenditures, primarily for the El Paso Plant. In year-to-date 2004, the Company received $12.2 million for the Non-Dairy Creamer Sale.

Cash from financing activities in year-to-date 2005 was $7.8 million and cash used in financing activities was $28.7 million in year-to-date 2004, an increase of $36.5 million. As described above, the Company received $15.7 million, net of cash charges, from DFA and Mid-Am in exchange for an equity investment in the Company, and $12.0 million in a form of a loan from DFA to purchase Milnot.

As of May 5, 2005, GE Investment Private Placement Partners II, a Limited Partnership and Warburg, Pincus Ventures, L.P., significant shareholders of Holdings, each owned $14.1 million in aggregate principal amount of Senior Notes. Each stockholder has guaranteed payment of Revolver B obligations and associated costs to the extent of interest paid to that stockholder on the Senior Notes after March 23, 2004.

Commitments and Contingencies

The Company may enter into long-term contracts for the purchase of certain raw materials. At April 2, 2005, the Company has a five year milk supply agreement with DFA. The Company leases buildings and equipment under various noncancellable lease agreements for periods of one to five years. The lease agreements generally require the Company to pay taxes, insurance and maintenance expenses related to the leased assets. The Company has entered into employment agreements with certain key executives. Such agreements provide for annual salaries, bonuses and severance payments and include non-compete and non-solicitation provisions.

The following table lists the Company’s commitments and contingencies at April 2, 2005 (dollars in thousands):


	Payments Due by Period
Contractual Obligations	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Long-term debt obligations	$	129,000	$	—	$	14,000	$	115,000	$	—
Revolving financing obligations		51,456		51,456		—		—		—
Operating lease obligations		1,882		704		756		314		108
Purchase obligations		37,201		15,576		10,349		11,276		—
Estimated cost of construction		12,000		12,000		—		—		—

Total	$	231,539	$	79,736	$	25,105	$	126,590	$	108

Redeemable Preferred Stock

In November 2004, Holdings effected a recapitalization of its existing Common Stock, Series A Non-Voting Preferred Stock (the “Series A Preferred Stock”) and Series B Non-Voting Preferred Stock (the “Series B Preferred Stock”) (the “Recapitalization”). In order to effect the Recapitalization, Holdings (i) amended its Amended and Restated Certificate of Incorporation (as amended on November 23, 2004 (the “Certification of Incorporation”), to provide for (A) an increase in the authorized shares of Common Stock from 1.2 million to 2.8 million and (B) authorization of its Series I Preferred Stock and ii) entered into Contribution and Exchange Agreements (together, the “Contribution and Exchange Agreements”) with its existing equity holders (the “Existing Stockholders”), Warburg, GEI and Mr. Craig A. Steinke, Chief Executive Officer, Chief Financial Officer and President of Holdings pursuant to which the Existing Stockholders contributed and exchanged their existing shares of Common Stock, Series A Preferred Stock (plus accrued and unpaid dividends) and Series B Preferred Stock (plus accrued and unpaid dividends) as applicable, for shares of Common Stock.

For accounting purposes, the Recapitalization has been treated as an extinguishment of Series A Preferred Stock and Series B Preferred Stock. The estimated fair value of Common Stock exchanged was $6.4 million and the carrying value of Series A Preferred Stock and Series B Preferred Stock aggregated to $172.3 million. The resulting extinguishment gain of $165.9 million has been reflected as an adjustment to accumulated deficit. The Company estimated the fair value of the Common Stock exchanged using the value assigned to Common Stock issued to DFA.

Series I Preferred Stock is subject to mandatory redemption at a price per share equal to the Stated Value of Series I Preferred Stock plus all dividends accrued and unpaid thereon (1) the closing of a public offering pursuant to an effective registration statement under the Securities Act of 1933, (2) the sale of all or substantially all of the assets of Holdings or the merger or consolidation of Holdings with or into any other corporation or other entity in which the holders of Holdings’ outstanding shares before the merger or consolidation do not retain a majority of the voting power of the surviving corporation or other entity or (3) the acquisition by any person of shares of Common Stock representing a majority of the issued and outstanding shares of Common Stock then outstanding.

Seasonality

The Company’s net sales, operating income and cash flows are affected by a seasonal bias toward the second quarter of the Company’s fiscal year due to increased sales during the holiday season. Three of the Company’s four major brands (Eagle Brand sweetened condensed milk, Borden eggnog and None Such mincemeat pie filling) are consumed primarily during the November and December holiday season. In recent years, approximately 44% of the Company’s net sales, excluding the net sales of the Non-Dairy Creamer Business, have occurred in the second quarter of the Company’s fiscal year. The Company does not expect the seasonality to change dramatically with the acquisition of Milnot. Because of the seasonality, the Company’s working capital needs have historically increased throughout the year, normally peaking in the August/September period, requiring the Company to draw additional amounts on its Revolving Financing Facility in that period.

Risk Factors

In connection with a review of this Quarterly Report on Form 10-Q, the following risk factors should be considered carefully.

The Company has a significant amount of indebtedness. As of April 2, 2005, the outstanding indebtedness was $180.5 million, with maturities of $51.5 million in fiscal year 2007 on the Revolving Financing Facility and $129 million in fiscal year 2008 on the Senior Notes and Acquisition Notes. This substantial indebtedness could have important consequences. For example, it could:

•

make it more difficult for the Company to satisfy its obligations to creditors, including holders of its Senior Notes and Acquisition Notes, who could upon default require the Company to accelerate principal and interest payments;

•

limit the Company’s ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, the sales growth, research and development costs or other general corporate purposes;

•

limit the Company’s flexibility in planning for, or reacting to, changes in its business and in the industry in which the Company operates;

•

increase the vulnerability to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation;

•

place the Company at a disadvantage compared to its competitors that have less debt; and

•

expose the Company to risks inherent in interest rate fluctuations because some of the indebtedness bears interest at variable rates, which could result in higher interest expense in the event of increases in interest rates.

Any of the above listed factors could have a material adverse affect on the Company’s business and results of operations and its ability to meet its obligations.

The Financing Agreement governing the Revolving Financing Facility restricts management’s discretion in operating the Company’s business. The Revolving Financing Facility must be paid in full before the Acquisition Notes are paid. The Financing Agreement requires the Company to dedicate a substantial portion of its cash flow from operations to payments on its indebtedness and corresponding interest, which will reduce the cash flow available for working capital, capital expenditures, acquisitions, and other general corporate purposes. In addition, the Financing Agreement requires the Company to maintain specified financial ratios and tests, among other obligations. The Financing Agreement also restricts the Company’s ability to incur additional indebtedness, make acquisitions and make capital expenditures.

The markets in which the Company competes are highly competitive. The Company competes with large and established national and multinational companies, as well as smaller companies. Some of these competitors have, and new competitors may have, substantially greater resources than the Company has. Consequently, it cannot be assured that the Company will be able to compete effectively in the future.

The Company relies upon its suppliers and third party manufacturers. The Company purchases many of its raw materials from numerous independent suppliers. Milk is purchased through one cooperative at each of its manufacturing plants. Kava instant coffee, sweetened condensed milk marketed in Canada, evaporated canned milk, and Borden eggnog are obtained in final product form from third party manufacturers, or co-packers. The ingredients in the premium dessert kits are procured by the Company and converted into a finished product by a co-packer. Any adverse change in any of the following could have a material adverse effect on the Company’s business, financial condition and results of operations:

•

relationships with the Company’s suppliers or third party manufacturers;

•

financial condition of the suppliers or third party manufacturers; or

•

the suppliers’ or third party manufacturers’ ability to manufacture and deliver outsourced products on a timely basis.

There is no assurance that the Company could quickly or effectively replace any of its suppliers or third party manufacturers if the need arose. The Company’s dependence on these suppliers and third party manufacturers could also adversely affect its ability to react quickly and effectively to changes in the market for its products.

The Company uses milk as a major ingredient in its sweetened condensed milk and evaporated milk product line and is subject to the risk of rising milk prices that increase manufacturing costs and erode profit margins. By purchasing future contracts, the Company tries to establish a known price for future milk purchases in order to protect against fluctuating milk prices. The class of milk procured for the production of canned milk was changed, and this new class does not have an active commodity future contract market traded on the Chicago Mercantile Exchange. Therefore, if milk prices continue to rise and the Company is not able or does not secure lower priced milk future contracts, the impact of higher milk prices could adversely affect the Company’s business, financial condition, and results of operations. Eagle entered into a long term milk supply agreement in which DFA will supply raw milk, on an ongoing basis, to the Texas Plant to manufacture canned milk.

The Company manufactures all of its U. S. canned milk at three facilities and is dependent on such facilities for production. The Company manufactures sweetened condensed milk for the U.S. markets at the Wellsboro, PA and Starkville, MS facilities, and effective December 23, 2004, manufactures sweetened condensed milk and evaporated

milk at Seneca, MO. These facilities are subject to the normal hazards that could result in any material damage to any such facility. Damage to the facilities, or prolonged interruption in the operations of the facilities for repairs or other reasons, would have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company announced the closure of the Wellsboro, PA facility. The Company has negotiated with the union to continue to manufacture products through April 2005. Any operational disruptions or reduction of staffing could adversely affect the Company’s business, financial condition, and results of operations.

The Company is refurbishing the Texas Plant and expanding its capabilities into processing sweetened condensed milk. The Texas Plant is expected to be operational by early September 2005. The refurbishment of the Texas Plant is dependent upon third-party engineering and consulting knowledge and direction, obtaining appropriate construction and builder personnel, receipt of equipment and other building material on a timely basis, and obtaining proper permits. There can be no assurance that the refurbishment may result in quality issues or delays in production or shipment to customers. Any of the above mentioned factors could have a material adverse effect on the Company’s business, financial condition and results of operations.

While the Company believes that the refurbishment will result in the Company obtaining more competitive position in the canned milk business by reducing operating costs and increasing gross profits, there can be no assurance that the Company will succeed in achieving these goals.

The Company cannot be certain of the results of its product innovations and marketing programs. The Company believes that its future success will depend, in part, upon its ability to develop, manufacture and market new products or line extensions to its existing product lines. The Company is making an investment in the development, test marketing, and promotion of premium dessert kits utilizing popular sweetened condensed milk recipes, which were introduced into the market in fiscal year 2004. The Company cannot predict whether it will be successful in the introduction, marketing and manufacturing of this product offering or any other new products.

The Company is dependent on a concentrated customer base. The Company does not have long-term sales agreements or other contractual assurances as to future sales with any of its customers. In addition, continued consolidation in the retail industry has resulted in an increasingly concentrated retail base. To the extent such concentration continues to occur, the Company’s net sales and operating income may be increasingly sensitive to deterioration in the financial condition of its customer base, or other adverse developments involving the Company’s relationship with its customers.

The Company’s operations are subject to comprehensive public health regulations. The Company is subject to the Federal Food, Drug and Cosmetic Act and regulations promulgated there under by the Food and Drug Administration. This comprehensive regulatory program governs, among other things, the manufacturing, composition and ingredients, labeling, packaging and safety of food. In addition, the Nutrition Labeling and Education Act of 1990, as amended, prescribe the format and content of certain information required to appear on the labels of food products.

The operations and the products of the Company are also subject to state and local regulation through such measures as licensing of plants, enforcement by state health agencies of various state standards and inspection of facilities. Enforcement actions for violations of federal, state and local regulations may include seizure and condemnation of volatile products, cease and desist orders, injunctions and/or monetary penalties.

The Company is subject to certain health and safety regulations, including regulations issued pursuant to the Occupational Safety and Health Act. These regulations require the Company to comply with certain manufacturing, health and safety standards to protect its employees from accidents.

Management believes that the Company’s facilities and practices comply with applicable government regulations in all material respects, but there can be no assurance that the Company will not incur liabilities in the future. In addition, future events, such as changes in existing laws and regulations or their interpretation, and more vigorous enforcement policies of regulatory agencies, may give rise to additional expenditures or liabilities that could be material.

The Company’s operations and properties are subject to a wide variety of increasingly complex and stringent federal, state and local environmental regulations governing the storage, handling, generation, treatment, emission, and disposal of certain substances and wastes, the remediation of contaminated soil and groundwater. As such, the nature of the Company’s operations exposes it to the risk of claims with respect to environmental matters. The Company believes that it is substantially in compliance with all applicable laws and regulations for the protection of the environment. Based upon its experience to date, the Company believes that the future cost of compliance with existing environmental laws and regulations and liability for known environmental claims will not have a material adverse effect on the Company’s business, financial condition or results of operations. There can be no assurances that past material environmental liabilities will not be identified or that new material environmental liabilities will not be incurred. In addition, future events, such as changes in existing laws and regulations or their interpretation, and more vigorous enforcement policies of regulatory agencies, may give rise to additional expenditures or liabilities that could be material.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of significant judgment and estimates on the part of the Company’s management about the effect of matters that are inherently uncertain. Actual results could differ significantly from the estimates under different assumptions or conditions. The following discussion addresses the Company’s most critical accounting policies.

Revenue Recognition. The Company recognizes revenues when there is persuasive evidence of a sale arrangement, delivery has occurred and title, ownership and risk of loss transfers to the customer, the price is fixed or determinable, and collection is reasonably assured. Liabilities are established for estimated returns, allowances, consumer and certain trade promotions and discounts when revenues are recognized. The Company utilizes certain consumer and trade promotions, such as coupons, co-op advertising, featured price discounts and in store display incentives. These expenses are classified as a reduction of sales.

Marketing Costs. The Company offers market development funds, slotting, and other trade spending programs to its customers to support the customers’ promotional activities related to the Company’s product lines. The Company provides accruals for marketing costs based on historical information and known promotional programs that may deviate from prior years’ activity. At interim dates and year end, the Company reviews and revises estimates of costs to the Company, when deemed necessary, for the marketing programs based on actual costs incurred or revised spending level by the customers. Actual costs may differ significantly if factors, such as the level and success of the customers’ programs, changes in customer utilization practices, or other conditions, differ from previous expectations.

Inventories. Inventories are stated at the lower of cost or market, with cost of goods sold principally determined using the first-in, first-out method. The Company reviews the value of the inventory, and based on the physical condition (e.g., age and quality) of the inventories and forecasted sales plans, may require adjustments, either favorable or unfavorable. These inventory adjustments are estimates and may differ if future economic conditions, customer inventory levels or competitive conditions differ from the Company’s expectations.

Property, Plant and Equipment. Property, plant and equipment are stated at cost, and are depreciated on a straight-line method over the estimated useful lives of the assets. Changes in circumstances, such as technological advances or changes to the Company’s capital strategy, can result in the actual lives or carrying value differing from the Company’s estimates. The Company reviews the value of its long-lived assets for impairment whenever such events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss will be recognized whenever evidence exists that the carrying value is not recoverable.

Goodwill and Intangible Assets. Intangible assets are stated at fair value as recorded at acquisition and adjusted for impairment as deemed appropriately. In accordance with SFAS 142, the Company reviews indefinite-lived assets for impairment, at a minimum, annually or whenever events or changes in circumstances indicate that the carrying value of any such asset may not be recoverable. The fair value of the indefinite-lived trade names is determined using a royalty savings methodology and discounted cash flows. The fair value of goodwill is determined using estimated future discounted cash flow earnings and market valuations based on these cash flow earnings. The fair value of covenant not to compete agreements are determined as the difference in estimated future discounted cash flow earnings with and without the agreement, and are amortized over the contractual life.

Notes Payable. The Company assesses the relative fair value of any note arrangement in accordance with Accounting Principles Board Opinion No. 21, “Interest on Receivables and Payables.”

Income taxes. Income taxes are recognized using the liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect in the years in which those temporary differences are expected to reverse. The Company assesses the recoverability of the deferred tax assets in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). The Company intends to maintain a full valuation allowance for the net deferred tax assets and net operating loss carry forwards until sufficient positive evidence exists to support reversal of the remaining reserve. Until such time, except for minor state and local tax expenses, the Company will have no reported tax provision, net of valuation allowance adjustments. In the event the Company were to determine, based on the existence of sufficient positive evidence, that it would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made.

Costs Associated with Exit or Disposal Activities. In establishing accruals for restructuring costs associated with exit or disposal activities, the Company measures the liability at fair value in the period in which the liability is incurred in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Additionally, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets are evaluated for impairment, which involves the use of estimates to calculate fair value, future cash flows and costs to sell. These estimates are reviewed by management at each reporting period and are adjusted for current facts and circumstances.

Recently Issued Accounting Standards

In March 2005, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 47 (“FIN No. 47”) “Accounting for Conditional Asset Retirement Obligations.” FIN No. 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. FIN No. 47 requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is evaluating the impact of adoption of this statement will have on the consolidated financial position or results of operations.

In December 2004, the FASB SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No.123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The Company is required to adopt SFAS No. 123(R) in its first quarter of fiscal 2007, beginning July 1, 2006. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. Additionally, SFAS No. 123(R) requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS No. 123(R) and for all subsequent stock options granted thereafter. The Company is evaluating the impact of adoption of this statement will have on the consolidated financial position or results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (“SFAS No. 153”). SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for the fiscal periods beginning after June 15, 2005. The Company is evaluating the effect that the adoption of this statement will have on the consolidated financial position or results of operations.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—An Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). requiring that those items be recognized as current-period charges regardless of whether they meet the criterion of being “so abnormal.” SFAS 151 also requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The Company is evaluating the effect that the adoption of this statement will have on the consolidated results of operations and financial condition, but does not expect SFAS 151 to have a material impact.

Cautionary Statement Regarding Forward-Looking Statements

This section may contain forward-looking statements, which include assumptions about future market conditions, operations and financial results. These statements are based on current expectations and are subject to risks and uncertainties. They are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company’s actual results, performance or achievements in the future could differ significantly from the results, performance or achievements discussed or implied in such forward-looking statements herein and in prior Securities and Exchange Commission filings by the Company. The Company assumes no obligation to update these forward-looking statements or advise of changes in the assumptions on which they were based.

Factors that could cause or contribute to such differences include, but are not limited to, the success of new product introductions and promotions, changes in the competitive environment of the Company’s products, general economic and business conditions, industry trends, raw material costs, dependence on the Company’s labor force, and changes in, or the failure or inability to comply with, government rules and regulations, including, without limitation, Food and Drug Administration and environmental rules and regulations. Statements concerning interest rates and other financial instrument fair values and their estimated contribution to the Company’s future results of operations are based upon market information as of a specific date. This market information is often a function of significant judgment and estimation. Further, market interest rates and commodity prices are subject to significant volatility.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rates

The following table presents descriptions of the financial instruments and derivative instruments that were held by the Company at April 2, 2005 and that were sensitive to changes in interest rates. In the ordinary course of business, the Company enters into derivative financial instrument transactions in order to manage or reduce market risk. The Company does not enter into derivative financial instrument transactions for speculative purposes. For the liabilities, the table represents principal fiscal year cash flows that exist by maturity date and the related average interest rate. The variable rates are estimated based upon the six-month forward LIBOR rate.

All amounts, except percentage rates, are reflected in U.S. dollars (in thousands).


	2005			2006		2007		2008			Balance at April 2, 2005			Fair Value
Liabilities
Fixed rate								$	115,000		$	115,000		$	95,450
Average interest rate									8.750	%		8.750	%
Variable rate	$	51,456		$	—	$	—	$	14,000		$	65,456		$	65,456
Average interest rate		12.720	%						5.120	%		11.095	%

As the table incorporates only the exposures that existed as of April 2, 2005, it does not consider exposure to changes in the LIBOR rate that arise after that date. As a result, our ultimate interest expense with respect to interest rate fluctuations will depend on the interest rates that are applicable during the period. A 1% change in interest rate will cause a variance of approximately $0.7 million in forecasted interest expense. A portion of the Company’s variable rate liability has a stated maturity date of March 23, 2007. In accordance with generally accepted accounting principles, the Company has presented the outstanding balance as a current obligation. See additional disclosure in Note 8 of the financial statements of the Company included elsewhere in this Quarterly Report on Form 10-Q.

Milk Hedging

The Company uses milk as a major ingredient in its sweetened condensed milk product line and is subject to the risk of rising milk prices that increase manufacturing costs and erode profit margins. By purchasing futures contracts, however, the Company establishes a known price for future milk purchases in order to protect against fluctuating milk prices. The class of milk procured for the production of canned milk was changed, and this new class does not have an active commodity future contract market traded on the Chicago Mercantile Exchange. Therefore, if milk prices continue to rise and the Company is not able or does not secure lower priced milk, future contracts, the impact of higher milk prices could adversely affect the Company’s business, financial condition, and results of operations.

As of April 2, 2005, the Company had purchased 14 milk futures contracts, which settle by April 2005, at a cost and current market value of $0.3 million. The aggregate market value will increase or decrease based on the future milk prices.

Cautionary Statement Regarding Forward-Looking Statements

Factors that could cause or contribute to such differences include, but are not limited to, the success of new product introductions and promotions, changes in the competitive environment of the Company’s products, general economic and business conditions, industry trends, raw material costs, dependence on the Company’s labor force, dependence on the Company’s Revolving Credit Facility to meet financial obligations, and changes in, or the failure or inability to comply with, government rules and regulations, including, without limitation, Food and Drug Administration and environmental rules and regulations. Statements concerning interest rates and other financial instrument fair values and their estimated contribution to the Company’s future results of operations are based upon market information as of a specific date. This market information is often a function of significant judgment and estimation. Further, market interest rates and commodity prices are subject to significant volatility.

Item 4. CONTROLS AND PROCEDURES

(a)

Evaluation of disclosure controls and procedures.

The Company’s management reviewed the Company’s internal controls and procedures and the effectiveness of these controls. As of April 2, 2005, the registrants carried out an evaluation, under the supervision and with the participation of the registrants’ management, including the registrants’ Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the registrants’ disclosure controls and procedures pursuant to Rule 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the registrants’ disclosure controls and procedures are effective in timely alerting them to material information relating to the registrants required to be included in the registrants’ periodic SEC filings.

(b)

Change in internal controls.

There was no change in the registrants’ internal controls over financial reporting or in other factors during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.

Part II. Other Information

Item 6. EXHIBITS


31.1		Certification, pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Eagle Family Foods, Inc.

31.2		Certification, pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Eagle Family Foods Holdings, Inc.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.


EAGLE FAMILY FOODS HOLDINGS, INC.
EAGLE FAMILY FOODS, INC.

By:		/s/ Craig Steinke
		President, Chief Executive Officer and Chief Financial Officer

Date: May 16, 2005

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EAGLE FAMILY FOODS HOLDINGS INC 10-Q