UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 March 24, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-20539
PRO-FAC COOPERATIVE, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 16-6036816
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
90 Linden Place, PO Box 682, Rochester, NY 14603
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (716) 383-1850
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of April 28, 2001.
Class A Common Stock - 2,251,449
Class B Common Stock - 723,229
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Pro-Fac Cooperative, Inc. and Consolidated Subsidiary - Agrilink Foods, Inc.
Consolidated Statements of Operations, Net Proceeds and Comprehensive Income
(Unaudited)
(Dollars in Thousands)
Three Months Ended Nine Months Ended
March 24, March 25, March 24, March 25,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales $ 298,584 $ 296,245 $ 975,732 $ 966,455
Cost of sales (203,468) (205,368) (678,107) (661,054)
---------- ----------- ---------- ----------
Gross profit 95,116 90,877 297,625 305,401
Selling, administrative, and general expense (74,400) (67,315) (221,570) (222,782)
Income from joint venture 316 543 1,540 2,238
Gain on sale of assets 0 0 0 2,293
---------- ----------- ---------- ----------
Operating income 21,032 24,105 77,595 87,150
Interest expense (20,853) (22,114) (64,794) (64,598)
---------- ----------- ---------- ----------
Income before taxes, dividends, and allocation of net proceeds 179 1,991 12,801 22,552
Tax provision (720) (1,066) (4,884) (6,744)
---------- ----------- ---------- ----------
Net (loss)/income $ (541) $ 925 $ 7,917 $ 15,808
========== =========== ========== ==========
Allocation of net proceeds:
Net (loss)/income $ (541) $ 925 $ 7,917 $ 15,808
Dividends on common and preferred stock (1,945) (1,838) (6,155) (5,544)
---------- ----------- ---------- ----------
Net (deficit)/proceeds (2,486) (913) 1,762 10,264
Allocation from/(to) earned surplus 2,486 913 (1,520) (4,531)
---------- ----------- ---------- ----------
Net proceeds available to members $ 0 $ 0 $ 242 $ 5,733
========== =========== ========== ==========
Net proceeds available to members:
Estimated cash payment $ 0 $ 0 $ 61 $ 1,433
Qualified retains 0 0 181 4,300
---------- ----------- ---------- ----------
Net proceeds available to members $ 0 $ 0 $ 242 $ 5,733
========== =========== ========== ==========
Net (loss)/income $ (541) $ 925 $ 7,917 $ 15,808
Other comprehensive income:
Unrealized loss on hedging activity (1,068) 0 (178) 0
---------- ----------- ---------- ----------
Comprehensive (loss)/income $ (1,609) $ 925 $ 7,739 $ 15,808
========== =========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiary - Agrilink Foods, Inc.
Consolidated Balance Sheets
(Dollars in Thousands) ASSETS March 24, June 24, March 25,
2001 2000 2000
(Unaudited) (Unaudited)
------------ --------- -----------
Current assets:
Cash and cash equivalents $ 6,571 $ 4,994 $ 8,452
Accounts receivable, trade, net 104,018 101,065 107,601
Accounts receivable, co-pack activity and other 10,616 10,488 7,555
Income taxes refundable 0 9,869 0
Current deferred tax asset 11,657 12,176 16,160
Inventories 347,508 341,931 387,645
Current investment in CoBank 5,233 2,927 4,355
Prepaid manufacturing expense 13,431 26,364 12,933
Prepaid expenses and other current assets 16,262 19,688 19,885
---------- ---------- ----------
Total current assets 515,296 529,502 564,586
Investment in CoBank 10,757 16,203 15,750
Investment in joint venture 8,410 6,775 9,013
Property, plant, and equipment, net 308,259 348,359 352,491
Assets held for sale, at net realizable value 403 339 339
Goodwill and other intangible assets, net 251,228 258,545 257,613
Other assets 25,144 27,543 28,225
---------- ---------- ----------
Total assets $1,119,497 $1,187,266 $1,228,017
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION
Current liabilities:
Notes payable - Agrilink Foods $ 78,000 $ 5,700 $ 79,600
Notes payable - AgriFrozen Foods 0 44,100 46,000
Current portion of obligations under capital leases 218 218 208
Current portion of long-term debt 15,596 16,583 16,580
Accounts payable 80,951 91,672 48,838
Income taxes payable 427 0 1,608
Accrued interest 12,873 11,398 13,959
Accrued employee compensation 8,545 11,216 11,372
Other accrued expenses 50,541 66,397 84,004
Dividends payable 24 41 27
Amounts due Class A members 12,942 21,696 17,797
---------- ---------- ----------
Total current liabilities 260,117 269,021 319,993
Obligations under capital leases 520 520 568
Long-term debt 635,356 679,205 685,111
Deferred income tax liabilities 32,262 36,825 23,072
Other non-current liabilities 29,327 33,852 30,071
Non-controlling interest in AgriFrozen Foods 0 8,000 8,000
---------- ---------- ----------
Total liabilities 957,582 1,027,423 1,066,815
---------- ---------- ----------
Commitments and contingencies
Class B cumulative redeemable preferred stock, liquidation
preference $10 per share; authorized - 500,000 shares, issued and
outstanding 23,664, 23,664, and 26,061 shares, respectively 237 237 261
Class A common stock, par value $5; authorized - 5,000,000 shares
March 24, June 24, March 25,
2001 2000 2000
--------- --------- ----------
Shares issued 2,259,174 2,132,981 2,136,820
Shares subscribed 107,783 233,977 233,977
--------- --------- ---------
Total subscribed and issued 2,366,957 2,366,958 2,370,797
Less subscriptions receivable in installments (107,783) (233,977) (233,977)
--------- --------- ---------
Total issued and outstanding 2,259,174 2,132,981 2,136,820 11,296 10,665 10,684
========= ========= =========
Class B common stock, par value $5; authorized -
1,600,000 shares, issued and outstanding 723,229, 723,229, and
723,229 shares, respectively 0 0 0
Shareholders' and members' capitalization:
Retained earnings allocated to members 10,881 16,591 17,446
Non-qualified allocation to members 0 300 300
Non-cumulative preferred stock, par value $25; authorized -
5,000,000 shares, issued and outstanding 32,669,
34,400, and 37,529 shares, respectively 817 860 938
Class A cumulative preferred stock, liquidation preference
$25 per share; authorized - 10,000,000 shares, issued and
outstanding 4,495,082, 4,249,007 and 4,245,878 shares, respectively 112,377 106,225 106,147
Special membership interests 0 0 0
Earned surplus 27,010 25,490 26,189
Accumulated other comprehensive income:
Unrealized loss on hedging activity (178) 0 0
Minimum pension liability adjustment (525) (525) (763)
---------- ---------- ----------
Total shareholders' and members' capitalization 150,382 148,941 150,257
---------- ---------- ----------
Total liabilities and capitalization $1,119,497 $1,187,266 $1,228,017
========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiary - Agrilink Foods, Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
March 24, March 25,
2001 2000
----------- ------------
Cash flows from operating activities:
Net income $ 7,917 $ 15,808
Estimated cash payments due to Class A members (61) (1,433)
Adjustments to reconcile net income to net cash used in operating activities:
Gain on sale of assets 0 (2,293)
Depreciation 24,146 24,364
Amortization of goodwill and other intangible assets 7,414 6,551
Interest in-kind on subordinated promissory note 1,231 1,174
Amortization of debt issue costs and amendment costs and
discount on subordinated promissory notes 4,182 3,579
Equity in undistributed earnings of joint venture (1,540) (2,238)
Equity in undistributed earnings of CoBank (96) (412)
Change in assets and liabilities, net of effects of business dispostions
Accounts receivable (8,959) (17,430)
Inventories and prepaid manufacturing expense (45,226) (93,041)
Income taxes refundable 6,252 12,903
Accounts payable and other accrued expenses (25,193) (36,381)
Amounts due Class A members (8,754) (2,248)
Other assets and liabilities (1,176) 8,201
----------- -----------
Net cash used in operating activities (39,863) (82,896)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (20,981) (22,152)
Proceeds from disposals 5,068 53,538
Proceeds from investment in CoBank 2,926 2,403
----------- -----------
Net cash (used in)/provided by investing activities (12,987) 33,789
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of short-term debt 74,400 70,700
Payments on long-term debt (12,659) (11,773)
Cash paid for debt issuance costs (1,707) (2,624)
Cash portion of non-qualified conversion (83) (445)
Issuance of common stock, net 631 705
Cash dividends paid (6,155) (5,544)
----------- -----------
Net cash provided by financing activities 54,427 51,019
----------- -----------
Net change in cash and cash equivalents 1,577 1,912
Cash and cash equivalents at beginning of period 4,994 6,540
----------- -----------
Cash and cash equivalents at end of period $ 6,571 $ 8,452
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
PRO-FAC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Cooperative: Pro-Fac Cooperative, Inc. is an agricultural cooperative which
processes and markets crops grown by its members through its wholly-owned
subsidiary Agrilink Foods, Inc. ("Agrilink Foods"), and until February 15, 2001,
through a former subsidiary, PF Acquisition II, Inc. in which it had a
controlling interest. PF Acquisition II, Inc. conducted business under the name
AgriFrozen Foods ("AgriFrozen"). See NOTE 3 to the "Notes to Consolidated
Financial Statements." Unless the context otherwise requires, the terms
"Cooperative" and "Pro-Fac" refer to Pro-Fac Cooperative, Inc. and its
subsidiary.
Agrilink Foods has four primary product lines including: vegetables, fruits,
snacks, and canned meals. AgriFrozen had vegetables as its one primary product
line. The majority of each of the product lines' net sales are within the United
States. In addition, all of the Cooperative's operating facilities, excluding
one in Mexico, are within the United States.
Basis of Presentation: The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulations
S-X. Accordingly, they do not include all of the information required by GAAP
for complete financial statement presentation. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations have been included. Operating
results for the three months and nine months ended March 24, 2001 are not
necessarily the results to be expected for other interim periods or the full
year. These financial statements should be read in conjunction with the
financial statements and accompanying notes contained in the Pro-Fac
Cooperative, Inc. Form 10-K for the fiscal year ended June 24, 2000.
New Accounting Pronouncements: In December 1999, the Securities and Exchange
Commission (the "SEC") issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on
the recognition, presentation and disclosure of revenue in the financial
statements filed with the SEC. SAB No.101 outlines the basic criteria that must
be met to recognize revenue and provides guidance for disclosure related to
revenue recognition policies. The Cooperative is required to adopt SAB No. 101
during the fourth quarter of fiscal 2001. Management believes the adoption of
this pronouncement will not have a material impact on the Cooperative's
financial statements or results of operations.
In July 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") reached a consensus on Issue 00-14,
"Accounting for Certain Sales Incentives." The consensus addresses the
recognition, measurement, and income statement classification for sales
incentives that a company offers to its customers. The Cooperative must adopt
EITF Issue 00-14 in the fourth quarter of fiscal 2001. Accordingly coupon
expense, now classified as selling, general and administrative expense, will be
reclassified as a reduction of gross sales and all prior periods will also be
reclassified to reflect this modification. The adoption of EITF Issue 00-14 is
not expected to materially impact the Cooperative's financial statements. The
Cooperative estimates that its coupon expense is approximately $6.5 to $7.5
million per year.
In July 2000, the EITF also reached a final consensus on Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs." The EITF addresses the
income statement classification for shipping and handling costs and revenues.
Issue 00-10 will become effective during the fourth quarter of fiscal 2001.
Accordingly, freight expense, currently classified as a reduction to gross
sales, will be classified as component of cost of sales and all prior periods
will be reclasssified to reflect this modification. The adoption of EITF Issue
00-10 is not expected to have a material affect on the Cooperative's financial
statements and results of operations.
In January 2001, the EITF reached a consensus on Issue 00-22, "Accounting for
Points and Certain Other Time-Based or Volume-Based Sales Incentives Offers, and
Offers for Free Products or Services to Be Delivered in the Future" which
address the recognition, measurement and income statement classification for
certain sales incentives (e.g., volume purchase rebates and free or discounted
goods). These guidelines became effective for the Cooperative during the third
quarter of fiscal 2001 and had no impact on the Cooperative's financial position
or results of operations.
Consolidation: The consolidated financial statements include the Cooperative and
its subsidiary, Agrilink Foods, and until February 15, 2001, its former
subsidiary, AgriFrozen. The financial statements are after elimination of
inter-company transactions and balances. Investments in affiliates owned more
than 20 percent but not in excess of 50 percent are recorded under the equity
method of accounting.
Reclassification: Certain items for fiscal 2000 have been reclassified to
conform with the current period presentation.
NOTE 2. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On June 25, 2000, Agrilink Foods adopted FASB Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires the recognition of all derivative financial
instruments as either assets or liabilities in the balance sheet and measurement
of those instruments at fair value. Changes in the fair values of those
derivatives will be reported in earnings or other comprehensive income depending
on the use of the derivative and whether it qualifies for hedge accounting. The
accounting for gains and losses associated with changes in the fair value of a
derivative and the effect on the consolidated financial statements will depend
on its hedge designation and whether the hedge is highly effective in achieving
offsetting changes in the fair value or cash flow of the asset or liability
hedged. Under the provisions of SFAS No. 133, the method that will be used for
assessing the effectiveness of a hedging derivative, as well as the measurement
approach for determining the ineffective aspects of the hedge, must be
established at the inception of the hedge.
The Cooperative, as a result of its operating and financing activities, is
exposed to changes in foreign currency exchange rates, certain commodity prices,
and interest rates, which may adversely affect its results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, the Cooperative may enter into derivative contracts.
The adoption of SFAS No. 133 did not materially affect the Cooperative's results
of operations or financial position.
Foreign Currency: Agrilink Foods manages its foreign currency related risk
primarily through the use of foreign currency forward contracts. The contracts
held by Agrilink Foods are denominated in Mexican pesos.
Agrilink Foods has entered into foreign currency forward contracts that are
designated as cash flow hedges of exchange rate risk related to forecasted
foreign currency-denominated inter-company sales. During fiscal 2000, Agrilink
Foods entered into cash flow hedges for the Mexican peso with maturity dates
ranging from July 2000 to April 2001. Agrilink Foods also entered into
additional cash flow hedges during fiscal 2001 for 132 million Mexican pesos
with maturity dates through May 2002.
At March 24, 2001, the fair value of the open contracts was an after-tax gain of
approximately $0.2 million recorded in accumulated other comprehensive income in
shareholder's equity. Amounts deferred to accumulated other comprehensive income
will be reclassified into cost of goods sold. During the third quarter of fiscal
2001, approximately $0.1 was reclassified from other comprehensive income to
cost of goods sold. For the nine months ending March 24, 2001, approximately
$0.2 million has been reclassified from other comprehensive income to cost of
goods sold. Hedge ineffectiveness was insignificant.
Commodity Prices: Agrilink Foods is exposed to commodity price risk related to
forecasted purchases of soybean oil, an ingredient in the manufacture of salad
dressings and mayonnaise. To mitigate this risk, Agrilink Foods designates
soybean oil forward contracts as cash flow hedges of its forecasted soybean oil
purchases. Agrilink Foods maintained soybean oil contracts that hedged
approximately 70 percent of its planned soybean oil requirements during fiscal
2001. These contracts were either sold or expired during the fiscal year and an
immaterial loss has been recorded in cost of goods sold.
Agrilink Foods is also exposed to commodity price risk related to forecasted
purchases of flour in its manufacturing process. To mitigate this risk, Agrilink
Foods designates a swap agreement as a cash flow hedge of its forecasted flour
purchases. Agrilink Foods maintained flour contracts that hedged approximately
59 percent of its planned flour requirements during fiscal 2001. The contracts
expired during fiscal 2001, and an immaterial loss was recorded in cost of goods
sold.
Agrilink Foods is also exposed to commodity price risk related to forecasted
purchases of corrugated (unbleached kraftliner) in its manufacturing process. To
mitigate this risk, Agrilink Foods designates a swap agreement as a cash flow
hedge of its forecasted corrugated purchases. At March 24, 2001, Agrilink Foods
had an open swap hedging approximately 80 percent of its planned corrugated
requirements. This agreement had no value at March 24, 2001. The termination
date for the agreement is June 2001.
Interest Rates: Agrilink Foods is exposed to interest rate risk primarily
through its borrowing activities. The majority of Agrilink Foods' long-term
borrowings are variable rate instruments. Agrilink Foods entered into two
interest rate swap contracts under which Agrilink Foods agrees to pay an amount
equal to a specified fixed rate of interest times a notional principal amount,
and to receive in return an amount equal to a specified variable rate of
interest times the same notional principal amount. The notional amounts of the
contract are not exchanged and no other cash payments are made. Two interest
rate swap contracts were entered into with a major financial institution in
order to minimize credit risk.
The first interest rate swap contract required payment of a fixed rate of
interest (4.96 percent) and the receiving of a variable rate of interest
(three-month LIBOR of 6.29 percent as of March 24, 2001) on $150 million
notional amount of indebtedness. Agrilink Foods had a second interest rate swap
contract to pay a fixed rate of interest (5.32 percent) and receive a variable
rate of interest (three-month LIBOR of 6.29 percent as of March 24, 2001) on
$100 million notional amount of indebtedness. Approximately 60 percent of the
underlying debt is being hedged with these interest rate swaps.
Agrilink Foods designates these interest rate swap contracts as cash flow
hedges. At March 24, 2001, the fair value of the contracts was an after-tax loss
of $0.4 million, which is recorded in accumulated other comprehensive income in
shareholder's equity. To the extent that any of these contracts are not
considered effective in offsetting the change in the value of the interest
payments being hedged, any changes in fair value relating to the ineffective
portion of these contracts are immediately recognized in income. However, the
net gain or loss on the ineffective portion of these interest rate swap
contracts was not material during the third quarter and the first nine months of
fiscal 2001. Amounts deferred to other comprehensive income will be reclassified
into interest expense over the life of the swap contracts. For the three-month
and nine-month periods ended March 24, 2001, approximately $0.7 million and $2.9
million, respectively, have been reclassified from other comprehensive income to
a reduction of interest expense. In addition, the value of the interest rate
swap contracts decreased by $1.9 million during the three-month period ending
March 24, 2001.
NOTE 3. CLOSINGS AND DISPOSITIONS
AgriFrozen Closings: On January 22, 2001, AgriFrozen Foods announced that it was
closing its frozen vegetable business facilities in Woodburn, Oregon and Walla
Walla and Grandview, Washington. AgriFrozen employed approximately 600 full time
employees at its various locations. There were approximately 150 growers who
historically supplied crops to AgriFrozen. The closings were due to the decision
by AgriFrozen's board not to plant or process crops for the 2001 growing season.
The combination of current industry trends showing a decline in private label
and industrial frozen vegetable sales and pricing, and the highly competitive
nature of the food business were the basis behind this action.
At the request of AgriFrozen's lenders, Agrilink Foods submitted a proposal to
purchase the inventory of AgriFrozen. The acquisition of the AgriFrozen
inventory was completed on February 16, 2001. Refer to NOTE 5, "Inventories" for
additional detail of the purchase. There will be no further production at
AgriFrozen facilities, however, repacking operations at the Woodburn facility
are expected to continue through April 2001 and warehousing operations at the
Woodburn and Walla Walla facilities are expected to continue through June, 2001.
Additionally, certain administrative functions will continue through the
transition period.
Effective February 15, 2001, Pro-Fac abandoned its ownership interest in
AgriFrozen. Neither Pro-Fac nor Agrilink Foods guaranteed the debts of
AgriFrozen or otherwise pledged any of their respective properties as security
for AgriFrozen's indebtedness. All of AgriFrozen's indebtedness was expressly
without recourse to Pro-Fac and Agrilink Foods. See further discussion at
"Credit Agreement and Subordinated Note Agreement of AgriFrozen" at NOTE 6 to
the "Notes to Consolidated Financial Statements".
Sale of Pickle Business: On June 23, 2000, Agrilink Foods sold its pickle
business based in Tacoma Washington to Dean Pickle and Specialty Products
Company. Agrilink Foods received proceeds of $10.3 million, $4.0 million of
which was applied to the term loan facility and $6.3 million to the revolving
credit facility. This business included pickle, pepper, and relish products sold
primarily under the Nalley and Farman's brand names. Agrilink Foods will
continue to contract pack Nalley and Farman's pickle products for a period of
two years, beginning on June 23, 2000, at the existing Tacoma processing plant
which Agrilink Foods will operate.
In a related transaction, on July 21, 2000, Agrilink Foods sold the machinery
and equipment utilized in the production of pickles and other related products
to Dean Pickle and Specialty Products Company. No significant gain or loss was
recognized on this transaction. Agrilink Foods received proceeds of $5.0 million
which were applied to bank loans, $3.2 million of which was applied to the
Agrilink Foods term loan facility and $1.8 million of which was applied to the
Agrilink Foods revolving credit facility.
Sale of Midwest Private Label Canned Vegetable Business: On November 8, 1999,
Agrilink Foods completed the sale of its private label canned vegetable business
to Seneca Foods. Included in this transaction was the Arlington, Minnesota
facility. Agrilink Foods received proceeds of approximately $42.4 million which
were applied to borrowings outstanding under Agrilink Foods' revolving credit
facility. In addition, Seneca Foods issued to Agrilink Foods a $5.0 million
unsecured subordinated promissory note due February 8, 2009. This transaction
did not include Agrilink Foods' retail branded canned vegetables, Veg-All and
Freshlike. No significant gain or loss was recognized on this transaction.
On December 17, 1999, Agrilink Foods completed the sale of its Cambria,
Wisconsin processing facility to Del Monte. The sale included an agreement for
Del Monte to produce a portion of Agrilink Foods' product needs during the 2000
packing season. Agrilink Foods received proceeds of approximately $10.5 million
which were applied to bank loans. A gain of approximately $2.3 million was
recognized on this transaction.
NOTE 4. AGREEMENTS WITH AGRILINK FOODS AND AGRIFROZEN
Agrilink Foods: The contractual relationship between Pro-Fac and Agrilink Foods
is defined in the Pro-Fac Marketing and Facilitation Agreement (the "Pro-Fac
Marketing Agreement"). Under the Pro-Fac Marketing Agreement, Agrilink Foods
pays Pro-Fac the commercial market value ("CMV") for all crops supplied by
Pro-Fac. CMV is defined as the weighted average price paid by other commercial
processors for similar crops sold under preseason contracts and in the open
market in the same or competing market area. Although CMV is intended to be no
more than the fair market value of the crops purchased by Agrilink Foods, it may
be more or less than the price Agrilink Foods would pay in the open market in
the absence of the Pro-Fac Marketing Agreement.
Under the Pro-Fac Marketing Agreement, Agrilink Foods is required to have on its
board of directors some persons who are neither members of nor affiliated with
Pro-Fac ("Disinterested Directors"). The number of Disinterested Directors must
at least equal the number of directors who are members of Pro-Fac's board of
directors. The volume and type of crops to be purchased by Agrilink Foods under
the Pro-Fac Marketing Agreement are determined pursuant to its annual profit
plan, which requires the approval of a majority of the Disinterested Directors
of Agrilink Foods. In addition, in any year in which Agrilink Foods has earnings
on products, which were processed from crops supplied by Class A Pro-Fac members
("Pro-Fac Products"), Agrilink Foods pays to Class A members of Pro-Fac, as
additional patronage income, up to 90 percent of such earnings, but in no case
more than 50 percent of all pretax earnings (before dividing with Pro-Fac) of
Agrilink Foods. In years in which Agrilink Foods has losses on Class A Pro-Fac
Products, Agrilink Foods reduces the CMV it would otherwise pay to Pro-Fac by up
to 90 percent of such losses, but in no case by more than 50 percent of all
pretax losses (before dividing with Pro-Fac) of Agrilink Foods. Additional
patronage income is paid to Pro-Fac for services provided to Agrilink Foods,
including the provision of a long term, stable crop supply, favorable payment
terms for crops and the sharing of risks in losses of certain operations of the
business. Earnings and losses are determined at the end of the fiscal year, but
are accrued on an estimated basis during the year. Under the Pro-Fac Marketing
Agreement, Pro-Fac is required to reinvest at least 70 percent of the additional
patronage income in Agrilink Foods.
Amounts received by Class A members of Pro-Fac from Agrilink Foods for the nine
months ended March 24, 2001 and March 25, 2000, include: commercial market value
of crops delivered $67.1 million and $69.4 million, respectively; and additional
proceeds from profit sharing provisions, $6.4 million and $11.3 million,
respectively.
AgriFrozen: The contractual relationship between Pro-Fac and AgriFrozen is
defined in a Marketing and Facilitation Agreement between Pro-Fac and
AgriFrozen. Under the agreement, AgriFrozen purchased raw products from Pro-Fac
and processed and marketed the finished products. AgriFrozen would pay Pro-Fac
CMV for the crops supplied by Pro-Fac. In addition, in any year in which
AgriFrozen has earnings AgriFrozen would distribute such earnings to Pro-Fac for
distribution to Class B members of Pro-Fac. In the event AgriFrozen experiences
any losses on products, AgriFrozen would deduct the losses from the total CMV
payable. As a result of the closing of AgriFrozen facilities as discussed in
NOTE 3 to the "Notes to Consolidated Financial Statements," it is expected that
the Marketing and Facilitation Agreement between Pro-Fac and AgriFrozen will be
terminated at some point after June 30, 2001. It is not expected that there will
be any further CMV payments or any additional earnings distributed to Class B
members.
The board of directors of AgriFrozen resigned effective February 15, 2001.
Amounts received by Class B members of Pro-Fac from AgriFrozen for the nine
months ended March 24, 2001 and March 25, 2000, for the commercial market value
of crops delivered was $9.4 million and $13.9 million, respectively. CMV was
reduced at June 24, 2000 by the $3.0 million loss incurred by AgriFrozen for the
fiscal year then ended. As of March 24, 2001, the estimated loss, excluding
gains and losses, is approximately $13.3 million. In accordance with the
agreement, the loss at the fiscal year-end will reduce the CMV payable to
members.
NOTE 5. INVENTORIES
The major classes of inventories are as follows:
(Dollars in Thousands)
March 24, June 24 March 25,
2001 2000 2000
----------- ---------- ----------
Finished goods $ 319,431 $ 290,195 $ 343,614
Raw materials and supplies 28,077 51,736 44,031
---------- ---------- ---------
Total inventories $ 347,508 $ 341,931 $ 387,645
========== ========== =========
On February 16, 2001, Agrilink Foods completed the purchase of the frozen
vegetable inventory of AgriFrozen. AgriFrozen's lender sold the inventory to
Agrilink Foods pursuant to a private sale under the uniform commercial code
after AgriFrozen voluntarily surrendered the inventory to the lender. The
purchase price was $31.6 million of which $10.0 million was paid to the lender
on April 1, 2001, and the remaining balance is payable on August 1, 2001. The
$31.6 million is included in accounts payable. In addition, under a related
agreement between Agrilink Foods and AgriFrozen, Agrilink Foods will fund
certain operating costs and expenses of AgriFrozen, primarily in storing and
converting the purchased inventory to finished goods, during a transition period
ending on June 30, 2001. These expenses are estimated at $5.5 to $6.5 million.
Funding is net of reimbursement by AgriFrozen of the proceeds from available
receivables not pledged to the lender. To date, Agrilink Foods incurred fees of
approximately $0.7 million related to this transaction which were expensed
during the quarter.
NOTE 6. DEBT
Summary of Long-Term Debt:
(Dollars in Thousands)
March 24, June 24, March 25,
2001 2000 2000
---------- ---------- ----------
Term Loan Facility - Agrilink Foods $ 417,000 $ 428,300 $ 435,000
Term Loan Facility - AgriFrozen 0 30,000 30,000
Senior Subordinated Notes 200,015 200,015 200,015
Subordinated Promissory Notes (net of discount) - Agrilink Foods 28,460 26,144 25,447
Subordinated Promissory Notes (net of discount) - AgriFrozen 0 4,493 4,364
Other 5,477 6,836 6,865
---------- ---------- ----------
Total debt 650,952 695,788 701,691
Less current portion (15,596) (16,583) (16,580)
---------- ---------- ----------
Total long-term debt $ 635,356 $ 679,205 $ 685,111
========== ========== ==========
Amendments to Term Loan Facility: The Agrilink Foods' term loan facility
contains customary covenants and restrictions on Agrilink Foods' ability to
engage in certain activities, including, but not limited to: (i) limitations on
the incurrence of indebtedness and liens, (ii) limitations on sale-leaseback
transactions, consolidations, mergers, sale of assets, transactions with
affiliates and investments and (iii) covenants require Pro-Fac to maintain a
minimum level of consolidated EBITDA, a minimum consolidated interest coverage
ratio, a minimum consolidated fixed charge coverage ratio, a maximum
consolidated leverage ratio, and a minimum level of consolidated net worth.
During the first quarter of fiscal 2001, Agrilink Foods negotiated an amendment
to the covenants outlined under the credit facility. In consideration for this
amendment, Agrilink Foods incurred a fee of approximately $1.7 million. This fee
is being amortized over the life of the credit facility. Pursuant to the
amendment, the interest rates were modified and the credit facility currently
bears interest, at Agrilink Foods' option, at the Administrative Agent's
alternate base rate or the London Interbank Offered Rate ("LIBOR") plus, in each
case, applicable margins of: (i) in the case of alternate base rate loans, (x)
1.25 percent for loans under the Revolving Credit Facility and the Term A
Facility, (y) 3.00 percent for loans under the Term B Facility and (z) 3.25
percent for loans under the Term C Facility and (ii) in the case of LIBOR loans,
(x) 3.00 percent for loans under the Revolving Credit Facility and the Term A
Facility,
(y) 4.00 percent for loans under the Term B Facility and (z) 4.25 percent for
loans under the Term C Facility. The Administrative Agent's "alternate base
rate" is defined as the greater of: (i) the prime commercial rate as announced
by the Administrative Agent or (ii) the Federal Funds rate plus 0.50 percent.
Pro-Fac and Agrilink Foods are in compliance with all covenants, restrictions,
and requirements under the terms of the credit facility as amended.
Agrilink Foods' Subordinated Promissory Note: As partial consideration for the
Dean Foods Vegetable Company ("Dean Foods") acquisition, Agrilink Foods issued
to Dean Foods a Subordinated Promissory Note for $30 million aggregate principal
amount due November 22, 2008. Interest on the Subordinated Promissory Note is
accrued quarterly in arrears commencing December 31, 1998, at a rate per annum
of 5 percent until November 22, 2003, and at a rate of 10 percent thereafter. As
the rates on the Note are below market value, Agrilink Foods has imputed the
appropriate discount utilizing an effective interest rate of 11-7/8 percent.
Interest accruing through November 22, 2003 is required to be paid in kind
through the issuance by Agrilink Foods of additional subordinated promissory
notes identical to the Subordinated Promissory Note. Interest accruing after
November 22, 2003 is payable in cash. The Subordinated Promissory Note may be
prepaid at Agrilink Foods' option without premium or penalty.
The Subordinated Promissory Note is expressly subordinate to its Senior
Subordinated Notes and the credit facility and contains no financial covenants.
The Subordinated Promissory Note is guaranteed by Pro-Fac.
On December 1, 2000, Dean Foods sold the Subordinated Promissory Note to Great
Lakes Kraut Company, LLC, a joint venture between the Agrilink Foods and
Flanagan Brothers, Inc. This sale did not affect the terms of the note.
Credit Agreement and Subordinated Note Agreement of AgriFrozen: With respect to
AgriFrozen's Credit Facility, AgriFrozen is not in compliance with certain
financial tests and ratios, and certain restrictions and limitations, which
constitute defaults under the loan agreement. Accordingly, the lender has
accelerated the payment of all obligations, and it will not extend further
credit to AgriFrozen. AgriFrozen has, therefore, surrendered certain of its
assets to the lender.
AgriFrozen's obligations are not guaranteed by Pro-Fac or Agrilink Foods and are
expressly nonrecourse as to Pro-Fac and Agrilink Foods. In addition, neither
Pro-Fac nor Agrilink Foods pledged any of their respective properties as
security for AgriFrozen's indebtedness. As such, the current circumstances of
AgriFrozen's debt and liquidity are not expected to have a material affect on
the business of Pro-Fac or Agrilink Foods. In addition, on February 15, 2001,
Pro-Fac abandoned its ownership interest in AgriFrozen and, accordingly, has
eliminated all balances related to AgriFrozen, including debt effective that
date. In conjunction with this action, Pro-Fac recognized a loss of $1,000 which
represented its investment in AgriFrozen.
NOTE 7. OPERATING SEGMENTS
The Cooperative is organized by product line for management reporting with
operating income being the primary measure of segment profitability.
Accordingly, no items below operating earnings are allocated to segments. The
Cooperative's four primary operating segments are as follows: vegetables,
fruits, snacks, and canned meals.
The vegetable product line consists of canned and frozen vegetables, chili beans
and various other products. Branded products within the vegetable category
include Birds Eye, Birds Eye Voila!, Freshlike, Veg-All, McKenzies, and Brooks
Chili Beans. The fruit product line consists of canned and frozen fruits
including fruit fillings and toppings. Branded products within the fruit
category include Comstock and Wilderness. The snack product line consists of
potato chips, popcorn and other corn-based snack items. Branded products within
the snacks category include Tim's Cascade Chips, Snyder of Berlin, Husman, La
Restaurante, Erin's, Beehive, Pops-Rite, and Super Pop. The canned meal product
line includes canned meat products such as chilies, stew, soups, and various
other ready-to-eat prepared meals. Branded products within the canned meal
category include Nalley. The Cooperative's other product line primarily
represents salad dressings. Branded products within the "other" category include
Bernstein's and Nalley.
The following table illustrates the Cooperative's operating segment information:
(Dollars in Millions)
Three Months Ended Nine Months Ended
March 24, March 25, March 24, March 25,
2001 2000 2001 2000
--------- --------- ---------- ---------
Net Sales:
Vegetables $ 224.6 $ 202.3 $ 697.5 $ 611.0
Fruits 20.4 19.8 91.1 88.7
Snacks 21.6 20.8 68.3 64.2
Canned Meals 16.1 14.9 49.6 49.9
Other 11.2 13.1 34.9 41.0
-------- --------- -------- ---------
Continuing segments 293.9 270.9 941.4 854.8
Businesses sold or closed1 4.7 25.4 34.3 111.7
-------- --------- -------- ---------
Total $ 298.6 $ 296.3 $ 975.7 $ 966.5
======== ========= ======== =========
Operating income:
Vegetables2 $ 17.1 $ 16.8 $ 48.7 $ 56.7
Fruits 0.9 1.8 11.9 11.4
Snacks 0.6 1.2 4.2 4.1
Canned Meals 1.2 1.6 5.9 6.1
Other 0.4 0.9 1.6 2.4
-------- --------- -------- ---------
Continuing segments 20.2 22.3 72.3 80.7
Businesses sold or closed1 0.8 1.8 5.3 4.1
-------- --------- -------- ---------
Subtotal 21.0 24.1 77.6 84.8
Gain on sale of assets 0.0 0.0 0.0 2.3
-------- --------- -------- ---------
Total consolidated operating income 21.0 24.1 77.6 87.1
Interest expense (20.8) (22.1) (64.8) (64.6)
-------- --------- -------- ---------
Income before taxes, dividends, and allocation of net proceeds $ 0.2 $ 2.0 $ 12.8 $ 22.5
======== ========= ======== =========
<FN>
1 Includes the private label canned vegetable and pickle businesses sold in
fiscal 2000, and the results of AgriFrozen Foods closed in fiscal 2001. See
NOTES 3, 4, and 5 to the "Notes to Consolidated Financial Statements."
2 The vegetable product line includes earnings derived from Agrilink Foods'
investment in Great Lakes Kraut Company of $0.3 million and $0.5 million
for the three months ended March 24, 2001 and March 25, 2000, respectively
and $1.5 million and $2.2 million for the nine months ended March 24, 2001
and March 25, 2000, respectively.
</FN>
NOTE 8. SUBSIDIARY GUARANTORS
Kennedy Endeavors, Incorporated and Linden Oaks Corporation wholly-owned
subsidiaries of Agrilink Foods ("Subsidiary Guarantors"), and the Cooperative,
have jointly and severally, fully and unconditionally guaranteed, on a senior
subordinated basis, the obligations of Agrilink Foods' 11-7/8 percent Senior
Subordinated Notes due 2008 (the "Notes") and the Credit Facility. The covenants
in the Notes and the Credit Facility do not restrict the ability of the
Subsidiary Guarantors to make cash distributions to Agrilink Foods.
Separate financial statements and other disclosures concerning the Subsidiary
Guarantors are not presented because management has determined that such
financial statements and other disclosures are not material. Accordingly, set
forth below is certain summarized financial information derived from unaudited
historical financial information for the Subsidiary Guarantors, on a combined
basis.
(Dollars in Millions)
Three Months Ended Nine Months Ended
March 24, March 25, March 24, March 25,
2001 2000 2001 2000
--------- -------- -------- ------------
Summarized Statement of Operations:
Net sales $ 18.3 $ 17.3 $ 59.7 $ 56.5
Gross profit $ 14.2 $ 13.7 $ 47.5 $ 45.5
Income from continuing operations $ 15.7 $ 14.2 $ 51.2 $ 45.9
Net income $ 10.2 $ 9.2 $ 33.3 $ 29.8
Summarized Balance Sheet:
Current assets $ 3.3 $ 2.9
Non-current assets $ 207.2 $ 212.7
Current liabilities $ 8.6 $ 6.3
NOTE 9. OTHER MATTERS
Restructuring: During the third quarter of fiscal 1999, Agrilink Foods began
implementation of a corporate-wide restructuring program. The overall objectives
of the plan were to reduce expenses, improve productivity, and streamline
operations. The total restructuring charge amounted to $5.0 million and was
primarily comprised of employee termination benefits. Efforts have focused on
the consolidation of operating functions and the elimination of approximately
five percent of the work force. Reductions in personnel included operational and
administrative positions and have improved annual earnings by approximately $8.0
million. As of March 24, 2001, the restructuring charge was fully liquidated.
Dividends: Subsequent to its quarter end, the Cooperative declared a cash
dividend of $.43 per share on the Class A Cumulative Preferred Stock. These
dividends approximate $1.9 million and were paid on April 30, 2001.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, the Cooperative makes oral and written statements that may
constitute "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995 (the "Act") or by the Securities and Exchange
Commission in its rules, regulations, and releases. The Cooperative desires to
take advantage of the "safe harbor" provisions in the Act for forward-looking
statements made from time to time, including, but not limited to, the
forward-looking information contained in the Management's Discussion and
Analysis of Financial Condition and Results of Operations (pages 13 to 18) and
other statements made in this Form 10-Q and in other filings with the SEC.
The Cooperative cautions readers that any such forward-looking statements made
by or on behalf of the Cooperative are based on management's current
expectations and beliefs but are not guarantees of future performance. Actual
results could differ materially from those expressed or implied in the
forward-looking statements. Among the factors that could impact the Cooperative
are:
|X| the impact of strong competition in the food industry;
|X| the impact of changes in consumer demand;
|X| the impact of weather on the volume and quality of raw product;
|X| the inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer acceptance;
|X| the continuation of the Cooperative's success in integrating operations
(including the realization of anticipated synergies in operations and the
timing of any such synergies), and the availability of acquisition and
alliance opportunities;
|X| the Cooperative's ability to achieve gains in productivity and improvements
in capacity utilization; and
|X| the Cooperative's ability to service debt.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to outline the significant reasons for changes
in the Consolidated Statement of Operations, Accumulated Earnings and
Comprehensive Income in the first nine months of fiscal 2001 versus fiscal 2000.
Pro-Fac Cooperative, Inc.'s ("Pro-Fac" or the "Cooperative") wholly-owned
subsidiary, Agrilink Foods, Inc. ("Agrilink Foods") has four primary product
lines including: vegetables, fruits, snacks and canned meals. The majority of
the net sales of each product line are within the United States. In addition,
all of the Cooperative's operating facilities, excluding one in Mexico, are
within the United States.
The vegetable product line consists of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable product
line include Birds Eye, Birds Eye Voila!, Freshlike, Veg-All, McKenzies, and
Brooks Chili Beans. The fruit product line consists of canned and frozen fruits
including fruit fillings and toppings. Branded products within the fruit
category include Comstock and Wilderness. The snack product line consists of
potato chips, popcorn and other corn-based snack items. Branded products within
the snack category include Tim's Cascade Chips, Snyder of Berlin, Husman, La
Restaurante, Erin's, Beehive, Pops-Rite, and Super Pop. The canned meal product
line includes canned meat products such as chilies, stews, soups, and various
other ready-to-eat prepared meals. Branded products within the canned meal
category include Nalley. The Cooperative's other product line primarily
represents salad dressings. Brand products within the "other" category include
Bernstein's and Nalley.
The following tables illustrate the results of operations by product line for
the three- and nine-month periods ended March 24, 2001 and March 25, 2000.
EBITDA1, 2
(Dollars in Millions)
Three Months Ended Nine Months Ended
March 24, March 25, March 24, March 25,
2001 2000 2001 2000
------------------- -------------------- ------------------- ------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
------ ----- ------- ----- ------- ----- ------- -----
Vegetables $ 24.7 78.8% $ 23.7 69.9% $ 71.3 65.3% $ 77.3 66.8%
Fruits 1.7 5.4 2.3 6.8 13.9 12.7 12.7 11.0
Snacks 1.5 4.8 2.0 5.9 7.1 6.5 6.5 5.6
Canned Meals 1.5 4.8 2.1 6.2 7.0 6.4 7.5 6.4
Other 1.0 3.2 1.4 4.1 3.4 3.1 3.8 3.3
------ ----- ------- ----- ------- ----- ------- -----
Continuing segments 30.4 97.0 31.5 92.9 102.7 94.0 107.8 93.1
Businesses sold or closed3 1.0 3.0 2.4 7.1 6.5 6.0 8.0 6.9
------ ----- ------- ----- ------- ----- ------- -----
Total $ 31.4 100.0% $ 33.9 100.0% $ 109.2 100.0% $ 115.8 100.0%
======= ===== ======= ===== ======= ===== ======= =====
<FN>
1 Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
is defined as the sum of pretax income before dividends, allocation of net
proceeds, interest expense, depreciation and amortization of goodwill and
other intangibles.
EBITDA should not be considered as an alternative to net income or cash
flows from operations or any other accounting principle generally accepted
in the United States of America as a measure of performance or liquidity.
EBITDA is included herein because the Cooperative believes EBITDA is a
financial indicator of a company's ability to service debt. EBITDA as
calculated by the Cooperative may not be comparable to calculations as
presented by other companies.
2 Excludes gain on sale of assets in fiscal 2000. See NOTE 3 to the "Notes to
Consolidated Financial Statements."
3 Represents the operating results of the private label canned vegetable
business and pickle business sold in fiscal 2000 and AgriFrozen Foods
closed in fiscal 2001. See NOTES 3, 4, and 5 to the "Notes to Consolidated
Financial Statements."
</FN>
Net Sales
(Dollars in Millions)
Three Months Ended Nine Months Ended
March 24, March 25, March 24, March 25,
2001 2000 2001 2000
------------------ ------------------ ------------------- ------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
------- ----- -------- ----- ------- ----- -------- -----
Vegetables $ 224.6 75.2% $ 202.3 68.3% $ 697.5 71.5% $ 611.0 63.2%
Fruits 20.4 6.8 19.8 6.7 91.1 9.3 88.7 9.2
Snacks 21.6 7.2 20.8 7.0 68.3 7.0 64.2 6.6
Canned Meals 16.1 5.4 14.9 5.0 49.6 5.1 49.9 5.2
Other 11.2 3.8 13.1 4.4 34.9 3.6 41.0 4.2
------- ----- -------- ----- ------- ----- -------- -----
Continuing segments 293.9 98.4 270.9 91.4 941.4 96.5 854.8 88.4
Businesses sold or closed1 4.7 1.6 25.4 8.6 34.3 3.5 111.7 11.6
------- ----- -------- ----- ------- ----- -------- -----
Total $ 298.6 100.0% $ 296.3 100.0% $ 975.7 100.0% $ 966.5 100.0%
======= ===== ======== ===== ======= ===== ======== =====
<FN>
1 Includes net sales of the private label canned vegetable business and
pickle business sold in fiscal 2000 and the results of AgriFrozen Foods
closed in fiscal 2001. See NOTES 3, 4, and 5 to the "Notes to Consolidated
Financial Statements."
</FN>
Operating Income1
(Dollars in Millions)
Three Months Ended Nine Months Ended
March 24, March 25, March 24, March 25,
2001 2000 2001 2000
------------------ ------------------ ------------------- ------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
------- ----- -------- ----- ------- ----- -------- -----
Vegetables $ 17.1 81.4% $ 16.8 69.7% $ 48.7 62.8% $ 56.7 66.9%
Fruits 0.9 4.3 1.8 7.5 11.9 15.3 11.4 13.4
Snacks 0.6 2.9 1.2 5.0 4.2 5.4 4.1 4.8
Canned Meals 1.2 5.7 1.6 6.6 5.9 7.6 6.1 7.1
Other 0.4 1.9 0.9 3.7 1.6 2.1 2.4 2.9
------- ----- -------- ----- ------- ----- -------- -----
Continuing segments 20.2 96.2 22.3 92.5 72.3 93.2 80.7 95.1
Businesses sold or closed2 0.8 3.8 1.8 7.5 5.3 6.8 4.1 4.9
------- ----- -------- ----- ------- ----- -------- -----
Total $ 21.0 100.0% $ 24.1 100.0% $ 77.6 100.0% $ 84.8 100.0%
======= ===== ======== ===== ======= ===== ======== =====
<FN>
1 Excludes the gain on sale of assets in fiscal 2000. See NOTE 3 to the
"Notes to Consolidated Financial Statements."
2 Represents the operating results of the private label canned vegetable
business and pickle business sold in fiscal 2000 and the results of
AgriFrozen Foods closed in fiscal 2001. See NOTES 3, 4, and 5 to the "Notes
to Consolidated Financial Statements."
</FN>
CHANGES FROM THIRD QUARTER FISCAL 2001 TO THIRD QUARTER FISCAL 2000
Net income for the third quarter of fiscal 2000 was $0.9 million as compared to
a $0.5 million loss in the third quarter of fiscal 2001. Net sales from
continuing segments, however, showed an increase of $23.0 million, or 8.5
percent. Approximately $18.5 million of the net sales improvement was
attributable to an increase in frozen vegetable sales, and an additional $4.7
million was associated with a co-pack agreement for pickles in the Northwest.
Increases in manufacturing costs associated with significantly higher utility
and freight costs throughout the nation as well as lower than anticipated crop
intake in the eastern part of the country, contributing to less than optimal
plant efficiencies, continued to negatively impact earnings. Agrilink Foods'
goal of reducing inventories has provided some offset as expenses related to
warehousing have been reduced by approximately $2.0 million during the third
quarter of fiscal 2001 as compared to the third quarter of fiscal 2000. In
addition, management has continued efforts to reduce administrative and general
expenses during the third quarter by reducing marketing spending and various
employee incentive programs.
In reviewing the quarter, management also utilizes an evaluation of EBITDA from
continuing segments, as presented on page 13, as a measure of performance.
Excluding businesses sold, EBITDA from continuing segments decreased $1.1
million, or 3.5 percent, to $30.4 million in the third quarter of the current
fiscal year from $31.5 million in the third quarter of the prior fiscal year. A
detailed accounting of the significant reasons for changes in net sales and
EBITDA by product line follows.
Vegetable sales increased $22.3 million or 11.0 percent. Significant
contributors to this level of growth include net sales from Birds Eye frozen
vegetables which increased $6.6 million or 10.9 percent. For the 12 weeks ended
March 4, 2001, the total frozen vegetable category unit sales versus a year ago,
as reported by Information Resources Inc., decreased by 3.1 percent, while the
Birds Eye brand unit volume sales for the same timeframe decreased by only 0.3
percent, and the category leader decreased by 12.1 percent. During the same
timeframe, the Birds Eye brand unit share increased by 0.5 percentage points,
while the category leader decreased by 1.8 percentage points. In addition,
Agrilink Foods experienced net sales growth in its private label and food
service business of $15.1 million during the quarter, approximately $9.8 million
of which was associated with the inventory purchased from AgriFrozen Foods, a
former subsidiary of Pro-Fac. While these channels provide growth in net sales,
the margin for these products is typically lower than that received for branded
products. Additionally, Agrilink Foods' co-pack agreement for pickles in the
Northwest accounted for $4.7 million of the increase in net sales. Co-pack
agreements typically yield lower margins than Agrilink Foods' other product
lines but do provide for greater utilization of manufacturing facilities.
Agrilink Foods also experienced a decline in Voila! sales of approximately $3.6
million due to the timing of various competitive promotional programs.
Along with the increase in net sales, vegetables experienced an increase in
EBITDA of $1.0 million, or 4.2 percent, primarily driven from the improvement in
net sales of branded frozen vegetables. While the branded frozen vegetable
business continues to show improvements, EBITDA was negatively impacted by the
increase in manufacturing, freight and utility costs as discussed above.
Net sales for the fruit product line increased $0.6 million, or 3.0 percent,
while EBITDA decreased $0.6 million. The modest increase in net sales was
primarily attributable to improvements in private label pie filling and
toppings, applesauce, and frozen fruit sales. Again, while Agrilink Foods showed
improvement in net sales, the EBITDA for this category declined impacted by
product mix and higher manufacturing costs.
Net sales for the snack product line increased $0.8 million, or 3.8 percent,
primarily due to increased volume within the potato chip category. However, this
growth in net sales was offset by significantly higher utility costs incurred at
Agrilink Foods' snack operations and, therefore, resulted in reduced margins. In
addition, competitive pressures within the popcorn product line continue to
negatively impact earnings.
Net sales for canned meals increased $1.2 million, or 8.1 percent due to
increases in unit sales of branded prepared chili. However, EBITDA decreased
$0.6 million from $2.1 million to $1.5 million due to increases in costs and the
timing of various promotional programs.
The other product line, primarily represented by salad dressings, experienced a
decrease in net sales of $1.9 million, or 14.5 percent, due primarily to a
decline in unit volume associated with the loss of a private label customer.
EBITDA decreased $0.4 million as a result of the above sales decline.
Operating Income: Operating income from continuing segments decreased from $22.3
million in the third quarter of fiscal 2000 to $20.2 million in the third
quarter of fiscal 2001. This represents a decrease of $2.1 million or 9.4
percent. Significant variances are highlighted above in the discussion of EBITDA
and net sales from continuing segments.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have increased $7.1 million, or 10.5 percent, as compared with
the third quarter of the prior fiscal year. The increase is primarily
attributable to increases in promotional spending as a result of net sales
increases in the branded vegetable category. However, marketing expenses were
reduced during the quarter to offset cost increases incurred at Agrilink Foods'
manufacturing operations. Also, in the third quarter of fiscal 2000, Agrilink
Foods reduced its accrual associated with various employee incentive programs
due to overall performance.
Income from Joint Venture: This amount represents earnings received from the
investment in Great Lakes Kraut LLC, a joint venture between Agrilink Foods and
Flanagan Brothers, Inc. Earnings from the joint venture decreased $0.2 million
as compared to the prior year. This decline is attributable to a decrease in net
sales due to competitive pressures and an increase in freight costs due to
higher fuel prices.
Interest Expense: Interest expense decreased $1.3 million during the quarter
caused primarily by the elimination of activity associated with AgriFrozen. On
February 15, 2001, Pro-Fac abandoned its equity interest in AgriFrozen which
resulted in the consolidated financial statements reflecting one month's
interest expense in the current year and three months in the prior fiscal year.
The $0.1 million increase associated with Agrilink Foods is the result of an
increase in the weighted average interest rate of 18 basis points primarily
resulting from both amendments to Agrilink Foods' credit facility during
September 2000 and general interest rate increases on unhedged net borrowings,
offset by lower average outstanding balances during the quarter of approximately
$17.7 million.
Tax Provision: The provision for income taxes decreased approximately $0.4
million from the prior year as a result of the change in earnings before tax.
The Cooperative's effective tax rate is also impacted by the net proceeds
distributed to members and the non-deductibility of certain amounts of goodwill.
CHANGES FROM FIRST NINE MONTHS FISCAL 2001 TO FIRST NINE MONTHS FISCAL 2000
Excluding the gain on sale of assets, net income for the first nine months of
fiscal 2001 decreased $6.6 million from fiscal 2000. However, net sales from
continuing segments showed an increase of $86.6 million, or 10.1 percent.
Approximately $49.6 million of the net sales improvement was attributable to an
increase in frozen vegetable sales, and an additional $38.0 million was
associated with various co-pack agreements. While the Cooperative continues to
benefit from this significant improvement in net sales, it has also experienced
a significant increase in its manufacturing costs. Increased manufacturing costs
are primarily associated with significantly higher freight and utility costs
throughout the nation and lower than anticipated crop intake in the eastern part
of the country. To mitigate the increase in manufacturing costs, management has
focused efforts on inventory reduction to reduce warehousing costs, and
management has taken steps to monitor and control administrative and general
expenses. These actions have primarily focused on reductions in certain
marketing programs and various employee incentive programs. Management will
continue to focus its efforts on cost savings initiatives to reduce its overall
spending.
In reviewing the first nine months of its fiscal year, management also utilizes
an evaluation of EBITDA from continuing segments, as presented on page 13 as a
measure of performance. Excluding businesses sold, EBITDA from continuing
segments decreased $5.1 million, or 4.7 percent, to $102.7 million in the first
nine months of the current fiscal year from $107.8 million in the first nine
months of the prior fiscal year. A detailed accounting of the significant
reasons for changes in net sales and EBITDA by product line follows.
Vegetable sales increased $86.5 million or 14.2 percent. This growth is
primarily attributable to a $4.9 million increase in net sales from Voila! and a
$17.2 million increase in net sales from Birds Eye frozen vegetables. For the
36-week period ending March 4, 2001, the total frozen vegetable category retail
unit sales, as reported by Information Resources, Inc., were down slightly, 2.6
percent, while the Birds Eye brand retail unit sales for the same time period
increased 1.0 percent. The category leader's retail unit sales decreased 9.6
percent during the same 36-week period. In addition, volume improvements in
private label and food service frozen vegetables accounted for $22.0 million of
the increase. As highlighted in the quarter, $9.8 million of the increase in
private label and food service frozen vegetable sales was associated with the
inventory purchased from AgriFrozen Foods. Further, various co-pack agreements
for canned vegetables in the Midwest and for pickles in the Northwest in total
accounted for an additional $38.0 million of the net sales increase. While these
co-pack agreements typically yield lower margins than Agrilink Foods' other
product lines, they do provide for greater utilization of manufacturing
facilities. Although vegetables experienced an increase in net sales, EBITDA
decreased $6.0 million. The reduction in EBITDA was impacted by both increased
manufacturing costs and competitive pressures.
Net sales for the fruit product line increased $2.4 million, or 2.7 percent,
while EBITDA increased $1.2 million, or 9.4 percent. The net sales improvement
was led by increases in private label pie fillings and toppings and private
label and co-pack frozen fruits. The improvement in EBITDA is attributable to
the increase in sales and improved pricing.
Net sales for the snack product line increased $4.1 million, or 6.4 percent,
primarily due to increased volume within the potato chip category. Accordingly,
EBITDA also showed improvements of $0.6 million, or 9.2 percent. In addition,
EBITDA in the prior year was negatively impacted by residual strike related
costs at the Snyder of Berlin facility in its first quarter of fiscal 2000. This
matter was settled in July 2000, and management believes its current
relationship with these employees is good.
Net sales for canned meals decreased $0.3 million, or 0.6 percent, while EBITDA
decreased $0.5 million, or 6.7 percent. EBITDA decreased as a result of product
mix changes, increased costs, and timing of various promotional programs.
The other product line net sales, primarily represented by salad dressings,
decreased $6.1 million, or 14.9 percent, while EBITDA decreased $0.4 million, or
10.5 percent. The net sales and EBITDA decline is due to a decline in unit
volume associated with a loss of a private label customer. In addition, Agrilink
Foods benefited from reductions in product costs, primarily in the cost of oils.
Operating Income: Operating income from continuing segments decreased from $80.7
million in the first nine months of fiscal 2000 to $72.3 million in the first
nine months of fiscal 2001. This represents a decrease of $8.4 million or 10.4
percent. Significant variances are highlighted above in the discussion of EBITDA
and net sales from continuing segments.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have decreased $1.2 million, or 0.5 percent, as compared with
the first nine months of the prior fiscal year. The decrease is attributable to
reductions in the accrual related to Agrilink Foods' employee incentive program
as well as reductions in marketing costs and restructuring efforts at AgriFrozen
through February 15, 2001. These decreases were offset by increases in
promotional spending attributable to increases in net sales within the branded
vegetable category.
Income from Joint Venture: This amount represents earnings received from the
investment in Great Lakes Kraut LLC, a joint venture between Agrilink Foods and
Flanagan Brothers, Inc. Earnings from the joint venture decreased $0.7 million
as compared to the same period of the prior fiscal year. This decline is
attributable to a decrease in net sales due to competitive pressures and an
increase in freight costs due to higher fuel prices.
Gain on Sale of Assets: On December 17, 1999, Agrilink Foods sold its Cambria,
Wisconsin facility to Del Monte and received proceeds of approximately $10.5
million which were applied to bank loans. A gain of approximately $2.3 million
was recognized on this transaction.
Interest Expense: Interest expense increased $0.2 million compared to the prior
year. The $0.6 million increase associated with Agrilink Foods is the result of
an increase in the weighted average interest rate of 45 basis points primarily
resulting from both amendments to Agrilink Foods' credit facility during
September 2000 and general interest rate increases on unhedged net borrowings,
offset by lower average outstanding balances during the nine months ending March
24, 2001 of approximately $35.7 million. Agrilink Foods' decrease in average
outstanding balances is primarily attributable to required repayments and
mandatory prepayments of short-term debt related to the sale of the private
label canned vegetable and pickle businesses. Agrilink Foods' increase in
interest expense was offset by a decrease in AgriFrozen's interest expense
primarily due to the elimination of activity associated with AgriFrozen.
Tax Provision: The provision for taxes decreased approximately $1.9 million from
the prior year as a result of the change in earnings before tax. The
Cooperative's effective tax rate is also impacted by the net proceeds
distributed to members and the non-deductibility of certain amounts of goodwill.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the unaudited
"Consolidated Statement of Cash Flows" for the nine months ended March 24, 2001,
as compared to the nine months ended March 25, 2000.
Net cash used in operating activities decreased $43.0 million over the nine
months of the prior fiscal year. The decrease primarily results from a $47.8
million decrease in inventories (including prepaid manufacturing expenses) due
to the sale of the private label canned vegetable and pickle businesses,
management efforts to reduce outstanding inventory levels, and reductions caused
by agricultural conditions in the eastern United States which limited Agrilink
Foods' crop intake. Offsetting the benefits of the inventory reductions was an
increase in cash used to liquidate accounts payable and other accruals. The
purchase of inventory from AgriFrozen Foods has had no significant impact on
operating cash flow for the quarter as the increase in inventories was offset by
a corresponding increase in accounts payable. The purchase price of the
AgriFrozen Foods inventory was $31.6 million, of which $10.0 million was paid on
April 1, 2001, and the remaining balance is due on August 1, 2001. See NOTE 5 to
the "Notes to Consolidated Financial Statements.
Net cash used in investing activities in the first nine months of fiscal 2001
increased $46.8 million from the first nine months of fiscal 2000. The change
was primarily a result of a reduction in proceeds received from asset sales of
$48.4 million (see NOTE 3 to the "Notes to Consolidated Financial Statements")
offset by a reduction in equipment purchases of $1.2 million. The purchase of
property, plant, and equipment was for general operating purposes.
Net cash provided by financing activities increased $3.4 million. However,
fiscal 2000 included mandatory prepayments of short-term debt related to the
sale of Agrilink Foods' private label canned vegetable business ($42.4 million)
and Cambria, Wisconsin facility ($4.5 million). See NOTE 3 to the "Notes to
Consolidated Financial Statements." Thus, excluding the impact of these
prepayments, proceeds from short-term debt borrowings decreased $43.5 million
which was caused by the elimination of inventory and other operating activities
associated with those businesses sold or closed.
AGRILINK FOODS DEBT
Borrowings: Under Agrilink Foods' Revolving Credit Facility, Agrilink Foods is
able to borrow up to $200 million for seasonal working capital purposes. The
Revolving Credit Facility may also be utilized in the form of letters of credit.
As of March 24, 2001, (i) cash borrowings outstanding under the Revolving Credit
Facility were $78.0 million, (ii) there were $13.2 million in letters of credit
outstanding, and (iii) additional availability under the Revolving Credit
Facility, after taking into account the amount of borrowings and letters of
credit outstanding, was $108.8 million. Agrilink Foods believes that the cash
flow generated by operations and the amounts available under the Revolving
Credit Facility provide adequate liquidity to fund working capital needs and
capital expenditures.
Certain financing arrangements require that Pro-Fac and Agrilink Foods meet
certain financial tests and ratios and comply with certain restrictions and
limitations. During the first quarter of fiscal 2001, Agrilink Foods negotiated
an amendment to the covenants outlined under its credit facility. See NOTE 6 of
the "Consolidated Financial Statements" for further details. As of March 24,
2001, Pro-Fac and Agrilink Foods are in compliance with all such covenants,
restrictions, and limitations under the terms of the credit facility as amended.
AGRIFROZEN DEBT
Credit Agreement and Subordinated Note Agreement of AgriFrozen: With respect to
AgriFrozen's Credit Facility, AgriFrozen is not in compliance with certain
financial tests and ratios, and certain restrictions and limitations, which
constitute defaults under the loan agreement. Accordingly, the lender has
accelerated the payment of all obligations, and it will not extend further
credit to AgriFrozen. AgriFrozen has, therefore, surrendered certain assets to
the lender.
AgriFrozen's obligations are not guaranteed by Pro-Fac or Agrilink Foods and are
expressly nonrecourse as to Pro-Fac and Agrilink Foods. In addition, neither
Pro-Fac nor Agrilink Foods pledged any of their respective properties as
security for AgriFrozen's indebtedness. As such, the current circumstances of
AgriFrozen's debt and liquidity are not expected to have a material affect on
the business of Pro-Fac or Agrilink Foods. In addition, on February 15, 2001,
Pro-Fac abandoned its ownership interest in AgriFrozen and has eliminated all
balances related to AgriFrozen, including debt, from the balance sheet at March
24, 2001.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on the recognition, presentation and
disclosure of revenue in the financial statements filed with the SEC. SAB No.101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. The Cooperative
is required to adopt SAB No. 101 during the fourth quarter of fiscal 2001.
Management believes the addition of this pronouncement will not have a material
impact on the Cooperative's financial statements or results of operations.
In July 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on Issue 00-14, "Accounting for
Certain Sales Incentives." The consensus addresses the recognition, measurement,
and income statement classification for sales incentives that a company offers
to its customers. The Cooperative must adopt EITF Issue 00-14 in the fourth
quarter of fiscal 2001. Accordingly coupon expense, now classified as selling,
general and administrative expense, will be reclassified as a reduction of gross
sales and all prior periods will also be reclassified to reflect this
modification. The adoption of EITF Issue 00-14 is not expected to materially
impact the Cooperative's financial statements. The Cooperative estimates that
its coupon expense is approximately $6.5 to $7.5 million per year.
In July 2000, the EITF also reached a final consensus on Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs." The EITF addresses the
income statement classification for shipping and handling costs and revenues.
Issue 00-10 will become effective during the fourth quarter of fiscal 2001.
Accordingly, freight expense, currently classified as a reduction to gross
sales, will be classified as component of cost of sales and all prior periods
will be reclasssified to reflect this modification. The adoption of EITF Issue
00-10 is not expected to have a material affect on the Cooperative's financial
statements and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Cooperative, as a result of its operating and financing activities, is
exposed to changes in foreign currency exchange rates, certain commodity prices,
and interest rates, which may adversely affect its results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, the Cooperative may enter into derivative contracts.
Foreign Currency: Agrilink Foods manages its foreign currency related risk
primarily through the use of foreign currency forward contracts. The contracts
held by Agrilink Foods are denominated in Mexican pesos.
Agrilink Foods has entered into foreign currency forward contracts that are
designated as cash flow hedges of exchange rate risk related to forecasted
foreign currency-denominated inter-company sales. At March 24, 2001, Agrilink
Foods had cash flow hedges for the Mexican peso with maturity dates ranging from
March 2001 to February 2002. The fair value of these open contracts was an
after-tax gain of approximately $0.2 million recorded in accumulated other
comprehensive income in shareholder's equity. Amounts deferred to accumulated
other comprehensive income will be reclassified into cost of goods sold. During
the third quarter of fiscal 2001, approximately $0.1 million was reclassified
from other comprehensive income to cost of goods sold. For the first nine months
of fiscal 2001, approximately $0.2 million has been reclassified from other
comprehensive income to cost of goods sold. Hedge ineffectiveness was
insignificant.
Foreign Currency
Forward
----------------
Contract amounts 140 Million Pesos
Weighted average settlement exchange rate 10.1850%
Commodity Prices: Agrilink Foods is exposed to commodity price risk related to
forecasted purchases of soybean oil, an ingredient in the manufacture of salad
dressings and mayonnaise. To mitigate this risk, Agrilink Foods designates
soybean oil forward contracts as cash flow hedges of its forecasted soybean oil
purchases. Agrilink Foods maintained soybean oil contracts that hedged
approximately 70 percent of its planned soybean oil requirements during fiscal
2001. These contracts were either sold or expired during fiscal 2001, and an
immaterial loss was recorded in cost of goods sold.
Agrilink Foods is also exposed to commodity price risk related to forecasted
purchases of flour in its manufacturing process. To mitigate this risk, Agrilink
Foods designates a swap agreement as a cash flow hedge of its forecasted flour
purchases. Agrilink Foods maintained flour contracts that hedged approximately
59 percent of its planned flour requirements during fiscal 2001. The contracts
expired during fiscal 2001, and an immaterial loss was recorded in cost of goods
sold.
Agrilink Foods is also exposed to commodity price risk related to forecasted
purchases of corrugated (unbleached kraftliner) in its manufacturing process. To
mitigate this risk, Agrilink Foods designates a swap agreement as a cash flow
hedge of its forecasted corrugated purchases. At March 24, 2001, Agrilink Foods
had an open swap hedging approximately 80 percent of its planned corrugated
requirements. The agreement had no fair value at March 24, 2001. The termination
date for the agreement is June 2001.
Swap
Corrugated
(Unbleached Kraftliner)
----------------------
Notional amount 30,000 short tons
Average paid rate $475/short ton
Average receive rate Floating rate/short ton - $460
Maturities through June 2001
Interest Rates: Agrilink Foods is exposed to interest rate risk primarily
through its borrowing activities. The majority of Agrilink Foods' long-term
borrowings are variable rate instruments. Agrilink Foods entered into two
interest rate swap contracts under which Agrilink Foods agrees to pay an amount
equal to a specified fixed rate of interest times a notional principal amount,
and to receive in return an amount equal to a specified variable rate of
interest times the same notional principal amount. The notional amounts of the
contract are not exchanged and no other cash payments are made. Two interest
rate swap contracts were entered into with a major financial institution in
order to minimize credit risk.
The first interest rate swap contract required payment of a fixed rate of
interest (4.96 percent) and the receiving of a variable rate of interest
(three-month LIBOR of 6.29 percent as of March 24, 2001) on $150 million
notional amount of indebtedness. Agrilink
Foods had a second interest rate swap contract to pay a fixed rate of interest
(5.32 percent) and receive a variable rate of interest (three-month LIBOR of
6.29 percent as of March 24, 2001) on $100 million notional amount of
indebtedness. Approximately 60 percent of the underlying debt is being hedged
with these interest rate swaps.
Agrilink Foods designates these interest rate swap contracts as cash flow
hedges. At March 24, 2001, the fair value of the contracts was an after-tax loss
of $0.4 million, recorded in accumulated other comprehensive income in
shareholders' equity.
To the extent that any of these contracts are not considered effective in
offsetting the change in the value of the interest payments being hedged, any
changes in fair value relating to the ineffective portion of these contracts are
immediately recognized in income. However, the net gain or loss on the
ineffective portion of these interest rate swap contracts was not material
during the third quarter and first nine months of fiscal 2001. Amounts deferred
to other comprehensive income will be reclassified into interest expense over
the life of the swap contracts.
For the three-month and nine-month periods ending March 24, 2001, approximately
$0.7 million and $2.9 million, respectively, have been reclassified from other
comprehensive income to a reduction in interest expense interest expense. In
addition, the fair value of the interest rate swap contracts decreased
approximately $1.9 million during the three-month period ending March 24, 2001.
The following is a summary of Agrilink Foods' interest rate swap agreements:
March 24, 2001
--------------
Interest Rate Swap:
Variable to Fixed - notional amount $250 million
Average pay rate 4.96 - 5.32%
Average receive rate Floating rate - 6.29%
Maturities through October 2001
In a declining interest rate market, the benefits of the hedge position are
minimized, however, Agrilink Foods will monitor market conditions to adjust its
position as it considers necessary.
OTHER MATTERS
Restructuring: During the third quarter of fiscal 1999, Agrilink Foods began
implementation of a corporate-wide restructuring program. The overall objectives
of the plan were to reduce expenses, improve productivity, and streamline
operations. The total restructuring charge amounted to $5.0 million and was
primarily comprised of employee termination benefits. Efforts have focused on
the consolidation of operating functions and the elimination of approximately
five percent of the workforce. Reductions in personnel included operational and
administrative positions and have improved annual earnings by approximately $8.0
million. As of March 24, 2001, the restructuring charge was fully liquidated.
Short- and Long-Term Trends: The vegetable and fruit portions of the business
can be positively or negatively affected by weather conditions nationally and
the resulting impact on crop yields. Favorable weather conditions can produce
high crop yields and an oversupply situation. This results in depressed selling
prices and reduced profitability on the inventory produced from that year's
crops. Excessive rain or drought conditions can produce low crop yields and a
shortage situation. This typically results in higher selling prices and
increased profitability. While the national supply situation controls the
pricing, the supply can differ regionally because of variations in weather.
The crop and yield resulting from the 2000 growing season has provided a
sufficient, if not ample, supply throughout the industry. However, harsh weather
conditions did impact corn yields which reduced supply and, in turn, resulted in
higher pricing for this commodity.
MARKET AND INDUSTRY DATA
Unless otherwise stated herein, industry and market share data used throughout
this discussion was derived from industry sources believed by the Cooperative to
be reliable, including information provided by Information Resources, Inc. Such
data was obtained or derived from consultants' reports and industry
publications. Consultants' reports and industry publications generally state
that the information contained therein has been obtained from sources believed
to be reliable, but that the accuracy and completeness of such information is
not guaranteed. The Cooperative has not independently verified such data and
makes no representation to its accuracy.
PART II. OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES
During January 2001, the Cooperative issued shares of its Class A Cumulative
Preferred Stock in exchange for shares of its Non-Cumulative Preferred Stock, on
a share-for-share basis. Such exchange is exempt from registration under Section
3(a)(9) of the Securities Act of 1933. The date and amount of the exchange is
set forth below:
Date Number of Shares Value of Shares
---------------- ---------------- ---------------
January 14, 2001 1,731 $43,275
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The regional membership meetings for the members of Pro-Fac were
held as follows:
Date Region/District City/State
----------------- --------------- -----------------------
February 26, 2001 I/3 Johnstown, Pennsylvania
January 25, 2001 I/1 and I/2 Rochester, New York
February 20, 2001 II/2 Havana, Illinois
February 21, 2001 II/2 Ridgway, Illinois
February 22, 2001 III Columbus, Nebraska
February 7, 2001 IV Mt. Vernon, Washington
February 6, 2001 IV Wilsonville, Oregon
February 9, 2001 V Cordele, Georgia
February 27, 2001 II/1 Holland, Michigan
(b) Tom Croner, Dale Burmeister and Kenneth Dahlstedt were elected
directors for a three-year term as a result of the elections at
the regional meetings held in January and February 2001. The
following is a list of the remaining directors whose terms of
office continued after the regional meetings.
Name Term Expires
------------------ ------------
Glen Lee Chase 2002
Bruce Fox 2002
Kenneth Mattingly 2002
Paul Roe 2002
Peter Call 2003
Robert DeBadts 2003
Steven D. Koinzan 2003
Allan Overhiser 2003
Darell D. Sarff 2003
Following are the voting results from the regional meetings:
Votes Cast For Votes Cast Against
-------------- ------------------
Tom Corner 17 0
Dale Burmeister 75 0
Kenneth Dahlstedt 28 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
-------------- ----------------------------
10.29 Service agreement by and between Agrilink Foods, Inc. and PF Acquisition II, Inc.
10.30 Bill of sale by and between Agrilink Foods, Inc. and CoBank, ACB for the purchase of
PF Acquisition II inventory.
(b) Reports on Form 8-K:
The Cooperative filed two Form 8-Ks during the third quarter of
fiscal 2001.
|X| On January 23, 2001, the Cooperative filed a Form 8-K regarding the
announcement by AgriFrozen Foods ("AgriFrozen") of the closing of its
frozen vegetable business. As part of that announcement, and at the request
of AgriFrozen's lender, Agrilink Foods submitted a proposal to purchase the
remaining inventory of AgriFrozen.
|X| On February 16, 2001, the Cooperative filed a Form 8-K to announce the
completion of the purchase of AgriFrozen's inventory by Agrilink Foods and
related repacking and inventory storage agreements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRO-FAC COOPERATIVE, INC.
Date: May 4, 2001 BY: /s/ Earl L. Powers
----------- --------------------------------
EARL L. POWERS
TREASURER
(Principal Financial Officer and
Principal Accounting Officer)
Exhibit Index
Exhibit Number Description Page
10.29 Service Agreement By and Between Agrilink Foods, Inc. and PF Acquisition II. 25
10.30 Bill of Sale By and Between Agrilink Foods, Inc. and CoBank, ACB for the Purchase of
PF Acquisition II Inventory. 38