Notes To Consolidated Financial Statements
H.J. Heinz Company And Subsidiaries

1. Significant Accounting Policies Fiscal Year: H.J. Heinz Company (the "company") operates on a 52- or 53-week fiscal year ending the Wednesday nearest April 30. However, certain foreign subsidiaries have earlier closing dates to facilitate timely reporting. Fiscal years for the financial statements included herein ended April 30, 1997, May 1, 1996 and May 3, 1995. Principles of Consolidation: The consolidated financial statements include the accounts of the company and its subsidiaries. All intercompany accounts and transactions were eliminated. Certain prior-year amounts have been reclassified in order to conform with the 1997 presentation. Use of Estimates: The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Translation of Foreign Currencies: For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of these operations are translated at the exchange rate in effect at each year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included as a component of shareholders' equity. Gains and losses from foreign currency transactions are included in net income for the period. Cash Equivalents: Cash equivalents are defined as highly liquid investments with original maturities of 90 days or less. Inventories: Inventories are stated at the lower of cost or market. Cost is determined principally under the average cost method. Property, Plant and Equipment: Land, buildings and equipment are recorded at cost. For financial reporting purposes, depreciation is provided on the straight-line method over the estimated useful lives of the assets. Accelerated depreciation methods are generally used for income tax purposes. Expenditures for new facilities and improvements that substantially extend the capacity or useful life of an asset are capitalized. Ordinary repairs and maintenance are expensed as incurred. When property is retired or otherwise disposed, the cost and related depreciation are removed from the accounts and any related gains or losses are included in income. Intangibles: Goodwill and other intangibles arising from acquisitions are being amortized on a straight-line basis over periods not exceeding 40 years. The company regularly reviews the individual components of the balances by evaluating the future cash flows of the businesses to determine the recoverability of the assets and recognizes, on a current basis, any diminution in value. Long-Lived Assets: On May 2, 1996, the company adopted Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The implementation of this standard did not have a material effect on results of operations or financial position. Revenue Recognition: The company generally recognizes revenue upon shipment of goods to customers or upon performance of services. However, in certain overseas countries, revenue is recognized upon receipt of the product by the customer. Advertising Expenses: Advertising costs are generally expensed in the year in which the advertising first takes place. Income Taxes: Deferred income taxes result primarily from temporary differences between financial and tax reporting. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. The company has not provided for possible U.S. taxes on the undistributed earnings of foreign subsidiaries that are considered to be reinvested indefinitely. Calculation of the unrecognized deferred tax liability for temporary differences related to these earnings is not practicable. Where it is contemplated that earnings will be remitted, credit for foreign taxes already paid generally will offset applicable U.S. income taxes. In cases where they will not offset U.S. income taxes, appropriate provisions are included in the Consolidated Statements of Income. Net Income Per Common Share: Net income per common share has been computed by dividing income applicable to common shareholders by the weighted-average number of shares of common stock outstanding and common stock equivalents during the respective years. Fully diluted earnings per share are not significantly different from primary earnings per share and, accordingly, are not presented. In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," effective for financial statements issued for periods ending after December 15, 1997. The new standard specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock. Since early adoption of the standard is prohibited, pro forma earnings per share amounts computed using the new standard are presented below. Stock-Based Employee Compensation Plans: Stock-based compensation is accounted for by using the intrinsic value-based method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Financial Instruments: The company uses derivative financial instruments for the purpose of hedging currency, price and interest rate exposures which exist as part of ongoing business operations. As a policy, the company does not engage in speculative or leveraged transactions, nor does the company hold or issue financial instruments for trading purposes. Interest Rate Swap Agreements: The company may utilize interest rate swap agreements to lower funding costs, to diversify sources of funding or to alter interest rate exposure. Amounts paid or received on interest rate swap agreements are deferred and recognized as adjustments to interest expense. Gains and losses realized upon the settlement of such contracts are deferred and amortized to interest expense over the remaining term of the debt instrument or are recognized immediately if the underlying instrument is settled. Foreign Currency Contracts: The company enters into forward, option and swap contracts to hedge transactions denominated in foreign currencies in order to reduce the currency risk associated with fluctuating exchange rates. Such contracts are used primarily to hedge purchases of certain raw materials and finished goods and payments arising from certain intercompany transactions with foreign subsidiaries. Gains and losses are deferred in the cost basis of the underlying transaction. Commodity Contracts: In connection with purchasing certain commodities for future manufacturing requirements, the company enters into commodities futures and option contracts, as deemed appropriate, to reduce the effect of price fluctuations. Such contracts are accounted for as hedges, with gains and losses recognized as part of cost of products sold, and generally have a term of less than one year. The cash flows related to the above financial instruments are classified in the Statements of Cash Flows in a manner consistent with those of the transactions being hedged. Business Segment Information: Information concerning business segment and geographic data is in Management's Discussion and Analysis. 2. Acquisitions All of the following acquisitions have been accounted for as purchases and, accordingly, the respective purchase prices have been allocated to the respective assets and liabilities based upon their estimated fair values as of the acquisition date. Operating results of businesses acquired have been included in the Consolidated Statements of Income from the respective acquisition dates forward. Fiscal 1997: The company acquired the following businesses for a total of $222.6 million, including notes to seller of $14.2 million. The preliminary allocations of the purchase price resulted in goodwill of $144.9 million and other intangible assets of $26.9 million, which will be amortized on a straight-line basis over periods not exceeding 40 years. On November 4, 1996, the company acquired the assets of the canned beans and pasta business of Nestlé Canada Inc., together with a two-year license to use the Libby's brand. Under the agreement, the company also acquired the trademarks Deep-Browned Beans, Alpha-Getti and Zoodles, among others. On September 23, 1996, the company acquired substantially all of the pet food businesses of Martin Feed Mills Limited of Elmira, Ontario. Martin produces and markets cat and dog food throughout Canada and also exports to Japan and Europe. Martin sells pet food under the Techni-Cal brand and markets products under the Medi-Cal label through veterinary offices and clinics. On July 10, 1996, the company acquired Southern Country Foods Limited in Australia, one of the world's largest producers of canned corned beef and meals. During Fiscal 1997, the company also made other smaller acquisitions. Pro forma results of the company, assuming the Fiscal 1997 acquisitions had been made at the beginning of each period presented, would not be materially different from the results reported. Fiscal 1996: The company acquired the following businesses for a total of $193.4 million, including notes to sellers of $37.4 million. The allocations of purchase price resulted in goodwill of $128.1 million and other intangibles of $6.6 million, which is being amortized on a straight-line basis over periods not exceeding 40 years. On March 28, 1996, the company acquired the Nature's Recipe business, which markets a brand of premium specialty pet foods. On March 6, 1996, the company acquired Earth's Best, Inc., which produces a leading brand of premium, organic baby foods and will complement the company's range of infant cereals, juices and strained and junior foods. The company acquired a majority interest in PMV/Zabreh, a producer of infant formulas and dairy products located in Zabreh, Moravia, Czech Republic. The company increased its investment to 97% of Kecskemé ti Konzervgyár RT, which produces jarred baby foods and canned vegetable products in Kecskemet, Hungary. Other small acquisitions were also made during Fiscal 1996, including Fattoria Scaldasole S.p.A., which is a processor of organic foods in Italy; Alimentos Pilar S.A. of Argentina, a leading producer of pet and animal feed; the Craig's brand of jams and dressings in New Zealand; the Mareblu brand of canned tuna, which is sold exclusively in Italy; a majority interest in Indian Ocean Tuna Ltd., located in the Seychelles; and Britwest Ltd., which markets single-serve condiments, beverages and sauces in Britain and France. Pro forma results of the company, assuming the Fiscal 1996 acquisitions had been made at the beginning of each period presented, would not be materially different from the results reported. Fiscal 1995: On March 14, 1995, the company completed the acquisition of the North American pet food businesses of The Quaker Oats Company (the "Pet Food Business") for approximately $725 million. The acquisition has significantly strengthened the company's presence in the pet food industry. The funds used to acquire the Pet Food Business were provided primarily through the issuance of privately placed commercial paper. The allocation of the purchase price has resulted in goodwill of $532.5 million and other intangible assets of $146.2 million. These items are being amortized on a straight-line basis over periods not exceeding 40 years. The following pro forma information combines the consolidated results of operations as if the acquisition of the Pet Food Business had been consummated as of the beginning of Fiscal 1995, after including the impact of certain adjustments. Adjustments include (i) the amortization of goodwill and other intangibles; (ii) interest expense related to the acquisition debt; (iii) depreciation on the restated values of property, plant and equipment; and (iv) the related income tax effects. In connection with the acquisition of the Pet Food Business, the company established certain opening balance sheet accruals for employee severance and relocation costs (approximately $7 million) and facilities consolidation and closure costs (exit costs of approximately $24 million) based upon a preliminary assessment of such actions to be undertaken. The aforementioned amounts were included in "other accrued liabilities" as of May 3, 1995. During 1996, management finalized integration plans and made minor adjustments to the opening balance sheet, while approximately $29 million was spent against the established accruals. As of May 1, 1996, remaining accruals were considered adequate for any severance, relocation or exit costs associated with the acquisition. During 1995, the company also acquired the following other businesses (the "other 1995 acquisitions"). On December 2, 1994, the company acquired The All American Gourmet Company for a purchase price of approximately $200 million. The All American Gourmet Company produces The Budget Gourmet brand of frozen meals and side dishes. On September 30, 1994, the company acquired the Family Products Division of Glaxo India, Ltd. for a purchase price of approximately $65 million. The Family Products Division, based in Bombay, India, produces a wide range of nutritional drinks, baby food and other consumer products. On July 22, 1994, the company acquired the Farley's infant foods and adult nutrition business from The Boots Company PLC of Nottingham, England for a total purchase price of approximately $140 million. On May 16, 1994, the company acquired the Borden Foodservice Group, a unit of Borden, Inc. The group's product range includes a single-serve line of condiments. Other acquisitions during 1995 included Dega, a foodservice products company located in Italy. The allocation of the purchase prices of the other 1995 acquisitions (excluding the Pet Food Business) has resulted in goodwill of $142.0 million and other intangible assets of $168.3 million, which will be amortized on a straight-line basis over periods not exceeding 40 years. The company established opening balance sheet accruals for the other 1995 acquisitions for employee severance and relocation costs (approximately $9 million) and facilities consolidation and closure costs (exit costs of approximately $37 million) based upon a preliminary assessment of such actions to be undertaken. These amounts were included in "other accrued liabilities" as of May 3, 1995. During 1996, accruals for exit costs were reduced by approximately $23 million, resulting in a corresponding reduction to goodwill. This was primarily attributable to not pursuing a course of action that was anticipated at the acquisition date. Also during 1996, approximately $15 million was spent against the accruals established for employee severance and relocation costs, and exit costs. As of May 1, 1996, remaining accruals were considered adequate for any severance, relocation or exit costs associated with the other 1995 acquisitions. On an unaudited pro forma basis, the sales of the company, as if the acquisition of the Pet Food Business and the other 1995 acquisitions were made as of the beginning of Fiscal 1995, would be $8.7 billion. The results of operations would not be materially different from those reported. Pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions had been in effect for all of Fiscal 1995. In addition, they are not intended to be a projection of future results and do not reflect any synergies that might be achieved from combined operations. 3. Divestitures During 1997 and 1996, the company sold several non-strategic businesses. Pro forma results of the company, assuming all of the divestitures had been made at the beginning of each period presented, would not be materially different from the results reported. In the fourth quarter of Fiscal 1997, the company sold its New Zealand ice cream business to Peters & Brownes Limited of Perth, Australia for approximately $150 million. The pretax gain on the divestiture totaled $72.1 million, or $0.12 per share. Fiscal 1996 divestitures included: an overseas sweetener business, the Weight Watchers Magazine and two regional dry pet food product lines. (See Note 13 to the Consolidated Financial Statements.) 4. Restructuring Charges Charges related to the company's reorganization and restructuring program ("Project Millennia") were recorded in Fiscal 1997 and were recognized to reflect the closure or divestiture of approximately 25 facilities throughout the world, the net reduction of the global workforce by approximately 2,500 (excluding the businesses or facilities to be sold), and other initiatives involving the exit of certain underperforming businesses and product lines. Restructuring and related costs recorded in Fiscal 1997 totaled $647.2 million pretax or $1.09 per share. Pretax charges of $477.8 million are classified as cost of products sold and $169.4 million as selling, general and administrative expenses. The major components of the Fiscal 1997 charges and the remaining accrual balance as of April 30, 1997 were as follows: *Includes $18.9 million in non-cash charges resulting from termination benefit programs. Asset write-downs consist primarily of fixed asset and other long-term asset impairments that were recorded as a direct result of the company's decision to exit businesses or facilities ($206.8 million). Such assets were written down based on management's estimate of fair value. Write-downs were also recognized for estimated losses from disposals of inventories, packaging materials and other assets related to product line rationalizations and process changes as a direct result of the company's decision to exit businesses or facilities ($117.5 million). 5. Income Taxes The following table summarizes the provision/(benefit) for U.S. federal and U.S. possessions, state and foreign taxes on income. The tax benefit resulting from adjustments to the beginning-of-the-year valuation allowance, due to a change in circumstances, to recognize the realizability of deferred tax assets in future years totaled $1.1 million in 1997, $12.5 million in 1996 and $3.1 million in 1995. The 1996 tax provision was reduced by $24.9 million due to the recognition of foreign tax losses. Tax expense resulting from allocating certain tax benefits directly to additional capital totaled $33.8 million in 1997 and $41.7 million in 1996. The components of income before income taxes consist of the following: The differences between the U.S. federal statutory tax rate and the company's consolidated effective tax rate are as follows: The deferred tax (assets) and deferred tax liabilities recorded on the balance sheets as of April 30, 1997 and May 1, 1996 are as follows: At the end of 1997, net operating loss carryforwards totaled $121.5 million. Of that amount, $79.6 million expire between 1998 and 2010; the other $41.9 million do not expire. Foreign tax credit carryforwards total $3.8 million and expire through 2001. The company's consolidated United States income tax returns have been audited by the Internal Revenue Service for all years through 1991. Undistributed earnings of foreign subsidiaries considered to be reinvested permanently amounted to $2.35 billion at April 30, 1997. The net change in the valuation allowance for deferred tax assets was a decrease of $30.1 million. The majority of this decrease, $27.0 million, partially offset the charge incurred for earnings repatriation due to the utilization of foreign tax credit carryforwards. 6. Debt On August 29, 1996, the company amended the line of credit agreements that support its domestic commercial paper programs, increasing availability and extending maturity dates. The amended terms provide for one agreement totaling $2.30 billion that expires in September 2001. The previous agreements provided for lines of credit totaling $2.00 billion, of which $1.20 billion was scheduled to expire in September 1996 and $800.0 million was scheduled to expire in September 2000. At April 30, 1997, the company had $1.35 billion of domestic commercial paper outstanding. Due to the long-term nature of the amended credit agreement, all of the outstanding domestic commercial paper has been classified as long-term debt as of April 30, 1997. As of May 1, 1996, $1.48 billion of domestic commercial paper was outstanding, of which $800.0 million was classified as long-term debt due to the long-term nature of the supporting line of credit agreements. Aggregate domestic commercial paper had a weighted-average interest rate during 1997 of 5.4% and at year-end of 5.6%. In 1996, the weighted-average rate was 5.8% and the rate at year-end was 5.4%. Total short-term debt had a weighted-average interest rate during 1997 of 7.6% and at year-end of 6.1%. The weighted-average interest rate on short-term debt during 1996 was 6.5% and at year-end was 6.2%. The company had $850.3 million of other foreign lines of credit available at year-end, principally for overdraft protection. The amount of long-term debt that matures in each of the four years succeeding 1998 is: $30.3 million in 1999, $590.4 million in 2000, $19.0 million in 2001 and $1.37 billion in 2002. On January 5, 1995, the company issued $300.0 million of three-year 8.0% notes in the international capital markets. The proceeds from the notes were utilized to repay domestic commercial paper. The company entered into an interest rate swap agreement that effectively converted the fixed interest rate associated with the notes to a variable rate based on LIBOR. Due to favorable market conditions, the company terminated the interest rate swap agreement and is amortizing the resulting gain over the remaining life of the notes, producing an effective borrowing rate of 7.3%. In 1993, the company's United Kingdom affiliate privately placed with various banks £125.0 million ($197.0 million) aggregate principal of 8.85% notes due during 2013. In April 1993, an affiliated company paid £70.6 million ($111.3 million) for an interest in the notes. The notes are shown in the balance sheet as a net amount outstanding of £24.9 million ($40.3 million), which will be fully amortized in three years. The effective interest rate was 8.3% at April 30, 1997 and May 1, 1996. 7. Shareholders' Equity Capital Stock: The preferred stock outstanding is convertible at a rate of one share of preferred stock into 13.5 shares of common stock. The company can redeem the stock at $28.50 per share. On April 30, 1997, there were authorized, but unissued, 2,200,000 shares of third cumulative preferred stock for which the series had not been designated. Employee Stock Ownership Plan (ESOP): The company established an ESOP in 1990 to replace in full or in part the company's cash-matching contributions to the H.J. Heinz Company Employees Retirement and Savings Plan, a 401(k) plan for salaried employees. Matching contributions to the 401(k) plan are based on a percentage of the participants' contributions, subject to certain limitations. To finance the plan, the ESOP borrowed $50.0 million directly from the company in 1990. The loan is in the form of a 15-year variable-rate interest-bearing note (an average of 5.6%, 5.5% and 5.6% for 1997, 1996 and 1995, respectively) and is included in the company's Consolidated Balance Sheets as unearned compensation. The proceeds of the note were used to purchase 2,366,862 shares of treasury stock from the company at approximately $21.13 per share. The stock held by the ESOP is released for allocation to the participants' accounts over the term of the loan as company contributions to the ESOP are made. The company contributions are reported as compensation and interest expense. Compensation expense related to the ESOP for 1997, 1996 and 1995 was $3.0 million, $2.3 million and $3.7 million, respectively. Interest expense was $1.1 million, $1.5 million and $1.9 million for 1997, 1996 and 1995, respectively. The company's contributions to the ESOP and the dividends on the company stock held by the ESOP are used to repay loan interest and principal. The dividends on the company stock held by the ESOP were $2.3 million, $2.1 million and $2.5 million in 1997, 1996 and 1995, respectively. The ESOP shares outstanding at April 30, 1997 and May 1, 1996, respectively, were as follows: unallocated 711,725 and 958,141; committed-to-be-released 61,724 and 29,553; and allocated 1,156,236 and 1,036,904. Shares held by the ESOP are considered outstanding for purposes of calculating the company's net income per share. Cumulative Translation Adjustments: Changes in the cumulative translation component of shareholders' equity result principally from translation of financial statements of foreign subsidiaries into U.S. dollars. The reduction in shareholders' equity related to the translation component increased $55.1 million in 1997, decreased $1.4 million in 1996 and decreased $107.0 million in 1995. During 1997, a gain of $13.8 million was transferred from the cumulative translation component of shareholders' equity and included in the determination of net income as a component of the $72.1 million gain recognized as a result of the liquidation of the company's investment in its New Zealand ice cream business. (See Note 3 to the Consolidated Financial Statements.) Unfunded Pension Obligation: An adjustment for unfunded foreign pension obligations in excess of unamortized prior service costs was recorded, net of tax, as a reduction in shareholders' equity. (See Note 10 to the Consolidated Financial Statements.) *Includes income tax benefit resulting from exercised stock options. 8. Supplemental Cash Flows Information *Includes notes to sellers of $14.2 million and $37.4 million in 1997 and 1996, respectively. 9. Employees' Stock Option Plans And Management Incentive Plans Under the company's stock option plans, officers and other key employees may be granted options to purchase shares of the company's common stock. The option price on all outstanding options is equal to the fair market value of the stock at the date of grant. Generally, options are exercisable beginning from three years after date of grant and have a maximum term of 10 years. The company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the company's stock option plans. If the company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated below: The pro forma effect on net income for 1997 and 1996 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1996. The weighted-average fair value of options granted was $6.94 per share in 1997 and $6.27 per share in 1996. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: Data regarding the company's stock option plans follows: The following summarizes information about shares under option in the respective exercise price ranges at April 30, 1997: The shares authorized but not granted under the company's stock option plans were 11,316,235 at April 30, 1997 and 3,421,235 at May 1, 1996. Common stock reserved for options totaled 44,391,083 at April 30, 1997 and 35,917,113 at May 1, 1996. Effective June 12, 1996, the Board of Directors adopted and the shareholders approved a new stock option plan providing for the grant of up to 15.0 million shares of common stock at any time over the next 10 years. In general, the terms of the 1996 plan are similar to the company's other stock option plans. The company's management incentive plan covers officers and other key employees. Participants may elect to be paid on a current or deferred basis. The aggregate amount of all awards may not exceed certain limits in any year. Compensation under the management incentive plans was approximately $37 million in 1997, $37 million in 1996 and $24 million in 1995. 10. Retirement Plans The company maintains retirement plans for the majority of its employees. Current defined benefit plans are provided primarily for domestic union and foreign employees. Benefits are based on years of service and compensation or stated amounts for each year of service. Plan assets are primarily invested in equities and fixed-income securities. The company's funding policy for domestic defined benefit plans is to contribute annually not less than the ERISA minimum funding standards nor more than the maximum amount which can be deducted for federal income tax purposes. Generally, foreign defined benefit plans are funded in amounts sufficient to comply with local regulations and ensure adequate funds to pay benefits to retirees as they become due. Effective in 1993, the company discontinued future benefit accruals under the defined benefit plans for domestic non-union hourly and salaried employees and expanded its defined contribution plans for these same employees. The company maintains defined contribution plans for the majority of its domestic non-union hourly and salaried employees. Defined contribution benefits are provided through company contributions that are a percentage of the participant's pay based on age, with the contribution rate increasing with age, and matching contributions based on a percentage of the participant's contributions to the 401(k) portion of the plan. (The company's matching contributions for salaried employees are provided under the ESOP. See Note 7 to the Consolidated Financial Statements.) In addition, certain non-union hourly employees receive supplemental contributions, which are paid at the discretion of the company. Total pension cost consisted of the following: The following table sets forth the combined funded status of the company's principal defined benefit plans at April 30, 1997 and May 1, 1996. The adjustment for unfunded foreign pension obligations in excess of the unamortized prior service costs was recorded, net of tax, as a reduction in shareholders' equity of $27.0 million and $32.6 million in 1997 and 1996, respectively. In 1997, the remaining portion of the unfunded obligation was recorded as other long-term assets and deferred taxes in the amounts of $2.1 million and $15.8 million, respectively. In 1996, the remaining portion of the unfunded obligation was recorded as other long-term assets and deferred taxes in the amounts of $2.8 million and $19.1 million, respectively. The weighted-average rates used for the years ended April 30, 1997, May 1, 1996 and May 3, 1995 in determining the net pension costs and projected benefit obligations for defined benefit plans were as follows: Assumptions for foreign defined benefit plans are developed on a basis consistent with those for U.S. plans, adjusted for prevailing economic conditions. 11. Postretirement Benefits And Other Than Pensions And Other Postemployment Benefits The company and certain of its subsidiaries provide health care and life insurance benefits for retired employees and their eligible dependents. Certain of the company's U.S. and Canadian employees may become eligible for such benefits. In general, postretirement medical coverage is provided for eligible non-union hourly and salaried employees with at least 10 years of service rendered after the age of 45 and certain eligible union employees who retire with an immediate pension benefit. Effective May 1, 1996, retired employees share in the cost of the plan at a rate of 50%. The company currently does not fund these benefit arrangements and may modify plan provisions or terminate plans at its discretion. Net postretirement costs consisted of the following: The following table sets forth the combined status of the company's postretirement benefit plans at April 30, 1997 and May 1, 1996. The weighted-average discount rate used in the calculation of the accumulated postretirement benefit obligation and the net postretirement benefit cost was 8.0% in 1997, 8.1% in 1996 and 8.4% in 1995. The assumed annual composite rate of increase in the per capita cost of company-provided health care benefits begins at 9.0% for 1998, gradually decreases to 5.2% by 2007, and remains at that level thereafter. A 1% increase in these health care cost trend rates would cause the accumulated postretirement obligation to increase by $16.9 million, and the aggregate of the service and interest components of 1997 net postretirement benefit costs to increase by $2.6 million. 12. Financial Instruments Foreign Currency Contracts: As of April 30, 1997 and May 1, 1996, the company held currency swap contracts with an aggregate notional amount of approximately $400 million. These contracts have maturity dates extending from 1998 through 2012. The company also had separate contracts to purchase certain foreign currencies as of April 30, 1997 and May 1, 1996 totaling $598.7 million and $444.8 million, respectively, and to sell certain foreign currencies totaling $62.2 million and $66.5 million, respectively, most of which mature within one year of the respective fiscal year-end. Net unrealized gains and losses associated with the company's foreign currency contracts as of April 30, 1997 and May 1, 1996 were not material. Commodity Contracts: As of April 30, 1997 and May 1, 1996, the notional values and unrealized gains or losses related to commodity contracts held by the company were not material. Fair Value of Financial Instruments: The company's significant financial instruments include cash and cash equivalents, short- and long-term investments, short- and long-term debt, interest rate swap agreements, currency exchange agreements and guarantees. In evaluating the fair value of significant financial instruments, the company generally uses quoted market prices of the same or similar instruments or calculates an estimated fair value on a discounted cash flow basis using the rates available for instruments with the same remaining maturities. As of April 30, 1997 and May 1, 1996, the fair value of financial instruments held by the company approximated the recorded value. Effective April 28, 1994, the company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that the carrying value of certain investments be adjusted to their fair value. The adoption of SFAS No. 115 had no effect on the company's financial position or results of operations. The company's investments are considered to be "available-for-sale" securities and are principally debt securities issued by foreign governments. Concentrations of Credit Risk: Counterparties to currency exchange and interest rate derivatives consist of large major international financial institutions. The company continually monitors its positions and the credit ratings of the counterparties involved and, by policy, limits the amount of credit exposure to any one party. While the company may be exposed to potential losses due to the credit risk of non-performance by these counterparties, losses are not anticipated. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers, generally short payment terms, and their dispersion across geographic areas. 13. Quarterly Results (Unaudited) Third-quarter 1997 results include restructuring and related costs ($0.03 per share), partially offset by a gain on the sale of real estate in the U.K. ($0.02 per share). Fourth-quarter 1997 results include restructuring and related costs ($1.06 per share). (See Note 4 to the Consolidated Financial Statements.) These charges were partially offset by a gain on the sale of the New Zealand ice cream business ($0.12 per share). (See Note 3 to the Consolidated Financial Statements.) Fourth-quarter 1996 results include gains related to the sale of the Weight Watchers Magazine ($0.02 per share) and the sale of two regional dry pet food product lines ($0.02 per share) and a charge for restructuring costs at certain overseas affiliates ($0.01 per share). Fourth-quarter 1996 earnings also benefited from a lower effective tax rate resulting from the recognition of tax losses overseas and increased profits from operations in lower tax rate jurisdictions ($0.04 per share). (See Note 5 to the Consolidated Financial Statements.) 14. Commitments And Contingencies Legal Matters: On December 31, 1992, a food wholesale distributor filed suit against the company and its principal competitors in the U.S. baby food industry. Subsequent to that date, several similar lawsuits were filed in the same court and have been consolidated into a class action suit. The complaints, each of which seeks an injunction and unspecified treble money damages, allege a conspiracy to fix, maintain and stabilize the prices of baby food. Related suits have also been filed in Alabama and California state courts, seeking to represent a class of indirect purchasers of baby food in the respective states. The defendants have filed a motion for summary judgment to which the plaintiffs have filed a response. The company believes all of the suits are without merit and will defend itself vigorously against them. Certain other claims have been filed against the company or its subsidiaries and have not been finally adjudicated. The above-mentioned suits and claims, when finally concluded and determined, in the opinion of management, based upon the information that it presently possesses, will not have a material adverse effect on the company's consolidated financial position or results of operations. Lease Commitments: Operating lease rentals for warehouse, production and office facilities and equipment amounted to approximately $93.2 million in 1997, $87.1 million in 1996 and $89.5 million in 1995. Future lease payments for non-cancellable operating leases as of April 30, 1997 totaled $276.7 million (1998-$55.6 million, 1999-$44.8 million, 2000-$37.3 million, 2001-$33.0 million, 2002-$26.9 million and thereafter-$79.1 million). 15. Advertising Costs Advertising costs for fiscal years 1997, 1996 and 1995 were $346.8 million, $377.8 million and $314.8 million, respectively. 16. Subsequent Events On June 30, 1997, the company completed the sale of its frozen foodservice foods business to McCain Foods Limited of New Brunswick, Canada for approximately $500 million. The transaction included the sale of Heinz's Ore-Ida appetizer, pasta and potato foodservice business and the five Ore-Ida plants that manufacture the products. The Ore-Ida foodservice business contributed approximately $525 million in net sales for Fiscal 1997. The sale is not expected to have an adverse effect on the company's results of operations. On June 30, 1997, the company acquired John West Foods Limited from Unilever. John West Foods Limited, with annual sales of more than $250 million, is the leading brand of canned tuna and fish in the United Kingdom. Based in Liverpool, John West Foods Limited sells its canned fish products throughout Continental Europe and in a number of other international markets. (John West operations in Australia, New Zealand and South Africa are not included in the transaction.)