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 December 29, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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 (585) 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 February 2, 2002.
Class A Common Stock - 2,052,392
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 Six Months Ended
------------------------------ ------------------------------
December 29, December 23, December 29, December 23,
2001 2000 2001 2000
------------------------------ ------------------------------
Net sales $ 294,549 $ 340,106 $ 543,781 $ 621,629
Cost of sales (223,886) (275,334) (427,248) (504,371)
---------- ----------- ---------- ----------
Gross profit 70,663 64,772 116,533 117,258
Selling, administrative, and general expense (30,928) (30,746) (63,767) (61,919)
Restructuring (1,572) 0 (2,622) 0
Gain from pension curtailment 0 0 2,472 0
Income from joint venture 950 949 1,198 1,224
---------- ----------- ---------- ----------
Operating income 39,113 34,975 53,814 56,563
Interest expense (16,479) (22,415) (35,692) (43,941)
---------- ----------- ---------- ----------
Income before taxes, dividends, and allocation of net proceeds 22,634 12,560 18,122 12,622
Tax provision (7,328) (3,321) (5,544) (4,164)
---------- ----------- ---------- ----------
Net income $ 15,306 $ 9,239 $ 12,578 $ 8,458
========== =========== ========== ==========
Allocation of net proceeds:
Net income $ 15,306 $ 9,239 $ 12,578 $ 8,458
Dividends on common and preferred stock (1,946) (1,840) (4,455) (4,210)
---------- ----------- ---------- ----------
Net proceeds 13,360 7,399 8,123 4,248
Allocation to earned surplus (8,756) (5,303) (3,520) (2,152)
---------- ----------- ---------- ----------
Net proceeds available to members $ 4,604 $ 2,096 $ 4,603 $ 2,096
========== =========== ========== ==========
Net proceeds available to members:
Estimated cash payment $ 1,151 $ 524 $ 1,151 $ 524
Qualified retains 3,453 1,572 3,452 1,572
---------- ----------- ---------- ----------
Net proceeds available to members 4,604 $ 2,096 4,603 $ 2,096
========== =========== ========== ==========
Net income $ 15,306 $ 9,239 $ 12,578 $ 8,458
Other comprehensive income:
Unrealized gain/(loss) on hedging activity 66 (1,414) (374) 890
---------- ----------- ---------- ----------
Comprehensive income $ 15,372 $ 7,825 $ 12,204 $ 9,348
========== =========== ========== ==========
<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 December 29, June 30, December 23,
2001 2001 2000
----------- ----------- ------------
(Unaudited) (Unaudited)
Current assets:
Cash and cash equivalents $ 5,913 $ 7,656 $ 5,763
Accounts receivable, trade, net 86,188 85,543 126,239
Accounts receivable, co-pack activity and other 13,425 7,949 14,337
Income taxes refundable 0 938 1,511
Inventories 388,745 313,856 419,338
Current investment in CoBank 1,333 3,998 976
Prepaid manufacturing expense 3,686 22,427 4,675
Prepaid expenses and other current assets 18,683 19,603 20,268
Current deferred tax asset 2,202 2,202 12,176
----------- ----------- -----------
Total current assets 520,175 464,172 605,283
Investment in CoBank 10,660 10,660 16,203
Investment in joint venture 9,117 8,018 8,000
Property, plant, and equipment, net 297,343 305,531 339,859
Assets held for sale, at net realizable value 120 120 339
Goodwill 53,914 53,914 54,931
Intangible assets, net 194,271 194,863 198,749
Other assets 24,066 24,073 32,091
----------- ----------- -----------
Total assets $ 1,109,666 $ 1,061,351 $ 1,255,455
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION
Current liabilities
Notes payable - Agrilink Foods $ 114,800 $ 0 $ 103,700
Current portion of debt - AgriFrozen Foods 0 0 82,769
Current portion of obligations under capital leases 316 316 218
Current portion of long-term debt 15,560 15,599 16,596
Accounts payable 31,643 117,931 50,035
Income taxes payable 6,596 0 0
Accrued interest 11,640 9,253 9,193
Accrued employee compensation 9,031 10,081 9,189
Other accrued expenses 52,493 49,345 68,763
Dividends payable 12 36 13
Amounts due Class A members 23,891 17,983 33,689
----------- ----------- -----------
Total current liabilities 265,982 220,544 374,165
Obligations under capital leases 571 571 520
Long-term debt 629,419 631,128 637,304
Deferred tax liabilities 26,376 26,376 36,825
Other non-current liabilities 28,492 29,417 33,928
Non-controlling interest in AgriFrozen Foods 0 0 8,000
----------- ----------- -----------
Total liabilities 950,840 908,036 1,090,742
----------- ----------- -----------
Commitments and contingencies
Class B cumulative redeemable preferred stock liquidation preference $10 per
share, authorized - 500,000 shares; issued and
outstanding 25,847, 23,923, and 23,664 shares, respectively 258 239 237
Class A common stock, par value $5, authorized 5,000,000 shares
December 29, June 30, December 23,
2001 2001 2000
--------- --------- ------------
Shares issued 2,036,241 2,257,479 2,184,230
Shares subscribed 60,676 97,243 189,786
--------- --------- ---------
Total subscribed and issued 2,096,917 2,354,722 2,374,016
Less subscriptions receivable in installments (60,676) (97,243) (189,786)
--------- --------- ---------
Total issued and outstanding 2,036,241 2,257,479 2,184,230 10,181 11,287 10,921
========= ========= =========
Class B common stock, par value $5, authorized 2,000,000 shares;
issued and outstanding 0, 723,229, and 723,229 shares, respectively 0 0 0
Shareholders' and members' capitalization:
Retained earnings allocated to members 14,151 10,699 18,163
Non-qualified allocation to members 0 0 300
Non-cumulative preferred stock, par value $25; authorized
5,000,000 shares; issued and outstanding 32,308, 32,308,
and 34,400 shares, respectively 808 808 860
Class A cumulative preferred stock, liquidation preference
$25 per share; authorized 10,000,000 shares; issued and
outstanding 4,495,443 , 4,495,443 , and 4,249,007 shares, respectively 112,386 112,386 106,225
Special membership interests 0 0 0
Earned surplus 21,371 17,851 27,642
Accumulated other comprehensive income:
Unrealized gain on hedging activity 244 618 890
Minimum pension liability adjustment (573) (573) (525)
----------- ----------- -----------
Total shareholders' and members' capitalization 148,387 141,789 153,555
----------- ----------- -----------
Total liabilities and capitalization $ 1,109,666 $ 1,061,351 $ 1,255,455
=========== =========== ===========
<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)
Six Months Ended
-------------------------------------
December 29, December 23,
2001 2000
-------------- --------------
Cash flows from operating activities:
Net income $ 12,578 $ 8,458
Estimated cash payment due to Class A members (1,151) (524)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation 15,376 16,275
Amortization of goodwill and certain intangible assets 592 4,964
Amortization of debt issue costs, amendment costs, and
discount on subordinated promissory notes 2,790 2,680
Interest in-kind on subordinated promissory note 434 814
Equity in undistributed earnings of joint venture (1,099) (1,224)
Change in assets and liabilities:
Accounts receivable (6,121) (29,023)
Inventories and prepaid manufacturing expenses (56,148) (55,718)
Income taxes refundable 938 8,358
Accounts payable and other accrued expenses (75,231) (43,531)
Amounts due to Class A members 5,908 11,993
Other assets and liabilities, net (464) (2,120)
----------- -----------
Net cash used in operating activities (101,598) (78,598)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (7,363) (14,963)
Proceeds from disposals 36 5,072
Proceeds from investment in CoBank 2,665 1,951
----------- -----------
Net cash used in investing activities (4,662) (7,940)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of short-term debt 114,800 101,900
Payments on long-term debt (3,047) (8,932)
Cash paid in conjunction with debt amendment (1,694) (1,707)
(Repurchases)/issuances of common stock, net (1,087) 256
Cash dividends paid (4,455) (4,210)
----------- ------------
Net cash provided by financing activities 104,517 87,307
----------- -----------
Net change in cash and cash equivalents (1,743) 769
Cash and cash equivalents at beginning of period 7,656 4,994
----------- -----------
Cash and cash equivalents at end of period $ 5,913 $ 5,763
=========== ===========
<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 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. (PFII) in which it had a
controlling interest. Pro-Fac Cooperative, Inc. conducts business under the name
Agrilink and PFII conducted business under the name AgriFrozen Foods
("AgriFrozen"). Agrilink Foods has four primary product lines including:
vegetables, fruits, snacks, and canned meals. 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. Unless the context otherwise requires, the terms "Cooperative"
and "Pro-Fac" refer to Pro-Fac Cooperative, Inc. and its subsidiary, Agrilink
Foods.
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 six months ended December 29, 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 30, 2001.
Consolidation: The consolidated financial statements include the Cooperative and
its subsidiary, Agrilink Foods and until February 15, 2001, AgriFrozen. The
financial statements are after elimination of intercompany 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 2001 have been reclassified to
conform with the current period presentation.
New Accounting Pronouncements: In June 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No.
142, "Goodwill and Other Intangible Assets." This statement is further disclosed
in NOTE 2 to the "Notes to Consolidated Financial Statements."
In April 2001, the Emerging Issues Task Force ("EITF") reached a final consensus
on Issue 00-25, "Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products." The
consensus addresses the accounting treatment and income statement classification
for certain sales incentives, including cooperative advertising arrangements,
buydowns, and slotting fees. Accordingly, during the second quarter and first
six months of fiscal 2002, promotions and slotting fees, previously classified
as selling, general, and administrative expense, have been reclassified as a
reduction of gross sales. Total promotions and slotting fees were $39.9 million
and $49.4 million in the second quarter of fiscal 2002 and 2001, respectively,
and $69.9 million and $80.6 million in the first six months of fiscal 2002 and
2001, respectively. The adoption of EITF 00-25 did not impact the Cooperative's
profitability.
In July 2000, the EITF 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. Accordingly, during the second quarter and first six months of
fiscal 2002, coupon expense, previously classified as selling, general and
administrative expense, has been reclassified as a reduction of gross sales and
all prior periods have also been reclassified to reflect this modification.
Coupon expense was $3.1 million and $2.7 million in the second quarter of fiscal
2002 and 2001, respectively, and $4.8 million and $4.7 million in the first six
months of fiscal 2002 and 2001, respectively. The adoption of EITF Issue 00-14
did not impact the Cooperative's profitability.
NOTE 2. ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets, and is effective for fiscal years
beginning after December 15, 2001, with early adoption permitted for entities
with fiscal years beginning after March 15, 2001. Effective July 1, 2001,
Agrilink Foods adopted SFAS No. 142, which requires that goodwill not be
amortized, but instead be tested at least annually for impairment and expensed
against earnings when the implied fair value of a reporting unit, including
goodwill, is less than its carrying amount.
The Cooperative and its wholly owned subsidiary, Agrilink Foods, completed the
required impairment evaluation of goodwill and other intangible assets in
conjunction with its adoption of SFAS No. 142 which indicated no impairment
existed.
As outlined in SFAS No. 142, certain intangibles with a finite life, however,
are required to continue to be amortized. The following schedule sets forth the
major classes of intangible assets held by the Cooperative:
(Dollars in Thousands)
December 29, June 30, December 23,
2001 2001 2000
------------ ---------- ------------
Amortized intangibles:
Covenants not to compete $ 2,478 $ 2,478 $ 2,478
Other 12,000 12,000 12,000
Less: accumulated amortization (2,604) (2,012) (1,433)
---------- ---------- ---------
Amortized intangibles, net 11,874 12,466 13,045
Unamortized intangibles:
Trademarks, net 182,397 182,397 185,704
---------- ---------- ---------
Total intangible assets $ 194,271 $ 194,863 $ 198,749
========== ========== =========
The aggregate amortization expense associated with intangible assets was
approximately $0.3 million for the quarter ended December 29, 2001 and $0.6
million for the six months ended December 29, 2001. The aggregate amortization
expense for each of the five succeeding fiscal years is estimated as follows:
(Dollars in Thousands)
2003 $1,103
2004 915
2005 891
2006 891
2007 760
A reconciliation of reported net income adjusted to reflect the adoption of SFAS
No. 142 for the second quarter and six months ended December 29, 2001 is
provided below:
Three Months Ended Six Months Ended
----------------------------------- ----------------------------------
December 29, December 23, December 29, December 23,
2001 2000 2001 2000
------------ ------------ ----------- ------------
(Dollars in Thousands)
Reported net income $ 15,306 $ 9,239 $ 12,578 $ 8,458
Addback: goodwill amortization (net of taxes) 0 1,585 0 2,929
--------- --------- -------- ---------
Adjusted net income $ 15,306 $ 10,824 $ 12,578 $ 11,387
========= ========= ======== =========
NOTE 3. AGREEMENTS WITH AGRILINK FOODS
The contractual relationship between Pro-Fac and Agrilink Foods is defined in
the Pro-Fac Marketing and Facilitation Agreement (the "Agreement"). Under the
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 Agreement.
Under the Agreement, Agrilink Foods is required to have on its board of
directors individuals 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. The volume and type of
crops to be purchased by Agrilink Foods from Pro-Fac under the Agreement are
determined pursuant to its annual profit plan, which requires the approval of a
majority of the Disinterested Directors. In addition, in any year in which
Agrilink Foods has earnings on products which were processed from crops supplied
by Pro-Fac ("Pro-Fac Products"), Agrilink Foods pays to 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 of Agrilink Foods (before dividing with Pro-Fac).
In years in which Agrilink Foods has losses on 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 of Agrilink
Foods (before dividing with Pro-Fac). 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 Agreement, Pro-Fac is required to reinvest at least
70 percent of the additional patronage income in Agrilink Foods.
Amounts received by Pro-Fac from Agrilink Foods for the six months ended
December 29, 2001 and December 23, 2000 include: commercial market value of
crops delivered $66.6 million and $66.9 million, respectively. Pro-Fac's share
of earnings was $9.1 million and $6.3 million, respectively.
NOTE 4. INVENTORIES
The major classes of inventories are as follows:
(Dollars in Thousands)
December 29, June 30, December 23,
2001 2001 2000
------------ ---------- ------------
Finished goods $ 363,190 $ 279,991 $ 387,070
Raw materials and supplies 25,555 33,865 32,268
---------- ---------- ---------
Total inventories $ 388,745 $ 313,856 $ 419,338
========== ========== =========
NOTE 5. DEBT
Summary of Long-Term Debt:
(Dollars in Thousands)
December 29, June 30, December 23,
2001 2001 2000
------------ ----------- ------------
Term Loan Facility - Agrilink Foods $ 408,900 $ 411,600 $ 419,700
Term Loan Facility - AgriFrozen 0 0 30,000
Senior Subordinated Notes 200,015 200,015 200,015
Subordinated Promissory Notes (net of discount) - Agrilink Foods 30,958 29,660 27,682
Subordinated Promissory Notes (net of discount) - AgriFrozen 0 0 4,769
Other debt - Agrilink Foods 5,106 5,452 6,503
Other debt - AgriFrozen 0 0 48,000
---------- ----------- ----------
Total debt 644,979 646,727 736,669
Less current portion (15,560) (15,599) (99,365)
---------- ----------- ----------
Total long-term debt $ 629,419 $ 631,128 $ 637,304
========== =========== ==========
Amendments to Agrilink Foods' Term Loan Facility: The 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) limitations on dividends and other
distributions. The credit facility also contains covenants requiring 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.
In August 2001, Agrilink Foods negotiated an amendment to the covenants. In
conjunction with this amendment, Agrilink Foods incurred fees of approximately
$1.7 million. This fee is being amortized over the remaining life of the credit
facility. The August 2001 amendment imposes contingent fees and possible
increases in interest rates under the credit facility if Agrilink Foods does not
raise equity and deleverage its balance sheet or satsify specified EBITDA and
leverage ratio requirements within certain time frames. To this end, Agrilink
Foods engaged a financial advisor to assist it in exploring various alternatives
responsive to the amendment, including, among other possibilities, a private
placement of a minimum of $100 million of securities. The amount of any
contingent fees that may be imposed under the amendment is also impacted by the
EBITDA which Agrilink Foods achieves for its fiscal year ending in June 2002.
During September 2000, Agrilink Foods negotiated a previous amendment to the
credit facility. This amendment required a supplemental fee should a specified
coverage ratio not be achieved for the first quarter of fiscal 2002. During
September 2001, Agrilink Foods incurred a fee of $1.5 million.
Pro-Fac and Agrilink Foods are in compliance with all covenants, restrictions,
and requirements under the terms of the Credit Facility as amended
NOTE 6: 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!, Birds Eye Simply Grillin,
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, Super Pop
and Flavor Destinations. 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 Six Months Ended
------------------------------ -------------------------------
December 29, December 23, December 29, December 23,
2001 2000 2001 2000
------------ ------------ ------------ -----------
Net Sales:
Vegetables $ 210.7 $ 236.4 $ 387.2 $ 426.7
Fruits 41.3 44.0 69.6 70.4
Snacks 21.8 22.2 44.2 44.7
Canned Meals 11.9 14.8 24.3 27.9
Other 8.9 9.9 18.5 21.0
-------- -------- -------- ---------
Continuing segments 294.6 327.3 543.8 590.7
Businesses closed1 0.0 12.8 0.0 30.9
-------- -------- -------- ---------
Total $ 294.6 $ 340.1 $ 543.8 $ 621.6
======== ========= ======== =========
Operating income2:
Vegetables3 $ 27.2 $ 20.8 $ 31.7 $ 31.2
Fruits 8.7 7.5 12.9 11.4
Snacks 1.7 1.9 3.2 3.6
Canned Meals 2.2 2.2 4.4 4.7
Other 0.9 0.4 1.8 1.2
-------- -------- -------- ---------
Continuing segments 40.7 32.8 54.0 52.1
Businesses closed1 0.0 2.2 0.0 4.5
Restructuring (1.6) 0.0 (2.7) 0.0
Gain on pension curtailment 0.0 0.0 2.5 0.0
-------- -------- -------- ---------
Total consolidated operating income 39.1 35.0 53.8 56.6
Interest expense (16.5) (22.4) (35.7) (44.0)
-------- -------- -------- ---------
Income before taxes, dividends, and allocation of net proceeds $ 22.6 $ 12.6 $ 18.1 $ 12.6
======== ======== ======== =========
<FN>
1 Represents net sales of operations no longer part of the Cooperative.
2 In accordance with SFAS No. 142, goodwill is no longer amortized. Goodwill
amortization associated with the vegetable, fruit, snacks, canned meals,
and other product lines for the quarter ending December 23, 2000 was $1.7
million, $0.1 million, $.01 million, $0.2 million, and $0.2 million,
respectively, and $3.4 million, $0.1 million, $0.2 million, $0.4 million,
and $0.3 million, respectively for the six months ending December 23, 2000.
3 The Cooperative's investment in Great Lakes Kraut Company contributed
earnings in the vegetable product line of $1.0 million and $0.9 million for
the three months ended December 29, 2001 and December 23, 2000,
respectively, and $1.2 million and $1.2 million for the six months ended
December 29, 2001 and December 23, 2000, respectively.
</FN>
NOTE 7. SUBSIDIARY GUARANTORS
Kennedy Endeavors, Incorporated and Linden Oaks Corporation, wholly-owned
subsidiaries of Agrilink Foods ("Subsidiary Guarantors"), and Pro-Fac, have
jointly and severally, fully and unconditionally guaranteed, on a senior
subordinated basis, the obligations of Agrilink Foods with respect to 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.
Presented below is condensed consolidating financial information for (i) Pro-Fac
Cooperative, (ii) Agrilink Foods, (iii) the Subsidiary Guarantors, and (iv)
non-guarantor subsidiaries as of and for the six months and quarters ended
December 29, 2001 and December 23, 2000. The condensed consolidating financial
information has been presented to show the nature of assets held, results of
operations, and cash flow of the Cooperative and its guarantor and non-guarantor
subsidiaries in accordance with Securities and Exchange Commission Financial
Reporting Release No. 55.
Balance Sheet
December 29, 2001
------------------------------------------------------------------------------------
Pro-Fac Agrilink Subsidiary Non-Guarantor Eliminating
Cooperative Foods, Inc. Guarantors Subsidiaries Entries Consolidated
-------------- ----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Assets
Cash and cash equivalents $ 0 $ 5,429 $ 157 $ 327 $ 0 $ 5,913
Accounts receivable, net 0 96,694 2,849 70 0 99,613
Inventories -
Finished goods 0 362,684 224 282 0 363,190
Raw materials and supplies 0 24,834 568 153 0 25,555
--------- ---------- -------- ------ --------- ----------
Total inventories 0 387,518 792 435 0 388,745
Other current assets 0 25,302 163 439 0 25,904
--------- ---------- -------- ------ --------- ----------
Total current assets 0 514,943 3,961 1,271 0 520,175
Property, plant and equipment, net 0 289,736 4,092 3,515 0 297,343
Investment in subsidiaries 185,034 315,858 0 0 (500,892) 0
Goodwill and other intangible assets, net 0 53,335 194,850 0 0 248,185
Other assets 60 53,076 118,577 0 (127,750) 43,963
--------- ---------- --------- -------- --------- ----------
Total assets $ 185,094 $1,226,948 $321,480 $ 4,786 $(628,642) $1,109,666
========= ========== ======== ======== ========= ==========
Liabilities and Shareholders' Equity
Notes payable $ 0 $ 114,800 $ 0 $ 0 $ 0 $ 114,800
Current portion of long-term debt 0 15,560 0 0 0 15,560
Accounts payable 91 30,135 894 523 0 31,643
Accrued interest 0 11,640 0 0 0 11,640
Intercompany loans 0 419 (271) (148) 0 0
Other current liabilities 16,777 66,152 8,514 896 0 92,339
--------- ---------- -------- -------- --------- ---------
Total current liabilities 16,868 238,706 9,137 1,271 0 265,982
Long-term debt 0 629,419 0 0 0 629,419
Other non-current liabilities 9,400 173,789 0 0 (127,750) 55,439
--------- ---------- -------- -------- --------- ---------
Total liabilities 26,268 1,041,914 9,137 1,271 (127,750) 950,840
Class B cumulative preferred stock 258 0 0 0 0 258
Class A common stock 10,181 0 0 0 0 10,181
Shareholders' equity 148,387 185,034 312,343 3,515 (500,892) 148,387
-------- --------- -------- -------- --------- ----------
Total liabilities and shareholders' equity $ 185,094 $1,226,948 $321,480 $ 4,786 $(628,642) $1,109,666
========= ========== ======== ======== ========= ==========
Statement of Operations
For the Six Months Ended December 29, 2001
------------------------------------------------------------------------------
Pro-Fac Agrilink Subsidiary Non-Guarantor Eliminating
Cooperative Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net sales $ 0 $ 535,761 $ 8,020 $ 7,821 $ (7,821) $ 543,781
Cost of sales 0 (421,770) (5,478) (7,631) 7,631 (427,248)
------- --------- -------- ------- --------- ---------
Gross profit 0 113,991 2,542 190 (190) 116,533
Selling, administrative, and general expenses (1) (93,947) (1,781) 0 31,962 (63,767)
Other (expense)/income 0 (150) 31,962 214 (32,176) (150)
Income from joint venture 0 1,198 0 0 0 1,198
------- --------- --------- ------- ---------- ---------
Operating (loss)/income before dividing with Pro-Fac (1) 21,092 32,723 404 (404) 53,814
Interest (expense)/income 0 (40,976) 5,284 0 0 (35,692)
------- --------- --------- ------- --------- ---------
Pretax (loss)/income before dividing with Pro-Fac (1) (19,884) 38,007 404 (404) 18,122
Pro-Fac share of income 9,062 (9,062) 0 0 0 0
------- --------- -------- ------- --------- ---------
Income/(loss) before taxes 9,061 (28,946) 38,007 404 (404) 18,122
Tax (provision)/benefit (1,559) 9,771 (13,503) (253) 0 (5,544)
------- --------- -------- ------- -------- ---------
Net income/(loss) $ 7,502 $ (19,175) $ 24,504 $ 151 $ (404) $ 12,578
======= ========= ======== ======= ======== =========
Statement of Operations
For the Quarter Ended December 29, 2001
------------------------------------------------------------------------------
Pro-Fac Agrilink Subsidiary Non-Guarantor Eliminating
Cooperative Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net sales $ 0 $ 290,774 $ 3,775 $ 5,255 $ (5,255) $ 294,549
Cost of sales 0 (221,295) (2,591) (4,912) 4,912 (223,886)
------- --------- ------- ------- ---------- ---------
Gross profit 0 69,479 1,184 343 (343) 70,663
Selling, administrative, and general expenses (1) (48,667) (1,054) 0 18,794 (30,928)
Other (expense)/income 0 (1,572) 18,794 192 (18,986) (1,572)
Income from joint venture 0 950 0 0 0 950
------- --------- ------- ------- --------- ----------
Operating income before dividing with Pro-Fac (1) 20,190 18,924 535 (535) 39,113
Interest (expense)/income 0 (19,131) 2,652 0 0 (16,479)
------- ---------- ------- ------- -------- ----------
Pretax (loss)/income before dividing with Pro-Fac (1) 1,059 21,576 535 (535) 22,634
Pro-Fac share of income 11,318 (11,318) 0 0 0 0
------- --------- ------- ------- -------- ---------
Income/(loss) before taxes 11,317 (10,259) 21,576 535 (535) 22,634
Tax (provision)/benefit (2,349) 2,813 (7,666) (126) 0 (7,328)
------- --------- ------- ------- -------- ---------
Net income/(loss) $ 8,968 $ (7,446) $13,910 $ 409 $ (535) $ 15,306
======= ========= ======= ======= ======== =========
Statement of Cash Flows
For the Six Months Ended December 29, 2001
-------------------------------------------------------------------------
Pro-Fac Agrilink Subsidiary Non-Guarantor Eliminating
Cooperative Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net income/(loss) $ 7,502 $ (19,175) $ 24,504 $ 151 $(404) $ 12,578
Adjustments to reconcile net income/(loss) to net
cash provided by/(used in) operating activities -
Estimated cash payments due to class A members (1,151) 0 0 0 0 (1,151)
Depreciation 0 14,952 272 152 0 15,376
Amortization of goodwill and certain intangible assets 0 217 375 0 0 592
Amortization of debt issue costs, amendment costs,
and discount on subordinated promissory note 0 2,790 0 0 0 2,790
Interest-in-kind on subordinated promissory note 0 434 0 0 0 434
Equity in undistributed earnings of joint venture 0 (1,099) 0 0 0 (1,099)
Change in working capital (809) (105,723) (25,015) 25 404 (131,118)
-------- --------- -------- ------ ----- ---------
Net cash provided by/(used in) operating activities 5,542 (107,604) 136 328 0 (101,598)
Cash flows from investing activities:
Purchase of property, plant, and equipment 0 (7,351) 0 (12) 0 (7,363)
Proceeds from disposals 0 36 0 0 0 36
Proceeds from investment in CoBank 0 2,665 0 0 0 2,665
-------- -------- -------- ------ ----- ----------
Net cash used in investing activities 0 (4,650) 0 (12) 0 (4,662)
Cash flows from financing activities:
Net proceeds from issuance of short-term debt 0 114,800 0 0 0 114,800
Payments on long-term debt 0 (3,047) 0 0 0 (3,047)
Cash paid for debt amendments 0 (1,694) 0 0 0 (1,694)
Repurchase of common stock (1,087) 0 0 0 0 (1,087)
Cash dividends paid (4,455) 0 0 0 0 (4,455)
-------- --------- -------- ------ ----- ---------
Net cash (used in)/provided by financing activities (5,542) 110,059 0 0 0 104,517
Net change in cash and cash equivalents 0 (2,195) 136 316 0 (1,743)
Cash and cash equivalents at beginning of period 0 7,624 21 11 0 7,656
-------- ---------- -------- ------ ----- ---------
Cash and cash equivalents at end of period $ 0 $ 5,429 $ 157 $ 327 $ 0 $ 5,913
======== ========= ======== ====== ===== =========
Balance Sheet
December 23, 2000
-------------------------------------------------------------------------
Pro-Fac Agrilink Subsidiary Non-Guarantor Eliminating
Cooperative Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Assets
Cash and cash equivalents $ 0 $ 4,893 $ 144 $ 726 $ 0 $ 5,763
Accounts receivable, net 0 132,053 2,473 7,031 (981) 140,576
Inventories -
Finished goods 0 330,912 371 55,787 0 387,070
Raw materials and supplies 0 28,340 487 3,441 0 32,268
--------- ---------- --------- -------- --------- ----------
Total inventories 0 359,252 858 59,228 0 419,338
Other current assets 2,135 35,698 90 2,058 (375) 39,606
--------- ---------- --------- -------- --------- ----------
Total current assets 2,135 531,896 3,565 69,043 (1,356) 605,283
Property, plant and equipment, net 0 302,678 3,112 34,069 0 339,859
Investment in subsidiaries 183,693 322,742 0 0 (506,435) 0
Goodwill and other intangible assets, net 0 49,093 204,587 0 0 253,680
Other assets 59 59,636 117,536 6,145 (126,743) 56,633
--------- ---------- -------- -------- ---------- ----------
Total assets $ 185,887 $1,266,045 $328,800 $109,257 $(634,534) $1,255,455
========= ========== ======== ======== ========= ==========
Liabilities and Shareholders' Equity
Notes payable $ 0 $ 103,700 $ 0 $ 0 $ 0 $ 103,700
Current portion of long-term debt - Agrilink Foods 0 16,596 0 0 0 16,596
Current portion of long-term debt - AgriFrozen Foods 0 0 0 82,769 0 82,769
Accounts payable 33 45,031 1,279 4,673 (981) 50,035
Accrued interest 0 7,194 0 1,999 0 9,193
Intercompany loans 0 (1,242) 456 786 0 0
Other current liabilities 7,178 93,716 7,643 3,710 (375) 111,872
--------- ---------- -------- -------- --------- ----------
Total current liabilities 7,211 264,995 9,378 93,937 (1,356) 374,165
Long-term debt 0 637,304 0 0 0 637,304
Other non-current liabilities 13,963 180,053 0 12,000 (126,743) 79,273
--------- ---------- -------- -------- --------- ----------
Total liabilities 21,174 1,082,352 9,378 105,937 (128,099) 1,090,742
Class B cumulative redeemable preferred stock 237 0 0 0 0 237
Class A common stock 10,921 0 0 0 0 10,921
Shareholders' equity 153,555 183,693 319,422 3,320 (506,435) 153,555
--------- ---------- -------- -------- --------- ----------
Total liabilities and shareholders' equity $ 185,887 $1,266,045 $328,800 $109,257 $(634,534) $1,255,455
========= ========== ======== ======== ========= ==========
Statement of Operations
For the Six Months Ended December 23, 2000
-------------------------------------------------------------------------
Pro-Fac Agrilink Subsidiary Non-Guarantor Eliminating
Cooperative Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net sales $ 0 $ 582,836 $ 7,885 $ 59,857 $(28,949) $ 621,629
Cost of sales 0 (474,443) (4,827) (60,883) 35,782 (504,371)
------- --------- -------- -------- -------- ---------
Gross profit 0 108,393 3,058 (1,026) 6,833 117,258
Selling, administrative, and general expenses (10) (92,127) (1,383) (1,380) 32,981 (61,919)
Other income 0 0 32,981 441 (33,422) 0
Income from joint venture 0 1,224 0 0 0 1,224
------- --------- -------- -------- -------- ---------
Operating (loss)/income before dividing with Pro-Fac (10) 17,490 34,656 (1,965) 6,392 56,563
Interest (expense)/income 0 (43,916) 4,428 (4,453) 0 (43,941)
------- --------- -------- -------- -------- ---------
Pretax (loss)/income before dividing with Pro-Fac (10) (26,426 ) 39,084 (6,418) 6,392 12,622
Pro-Fac share of income 6,316 (6,316) 0 0 0 0
------- --------- -------- --------- --------- ----------
Income/(loss) before taxes 6,306 (32,742) 39,084 (6,418) 6,392 12,622
Tax (provision)/benefit (1,473) 11,602 (14,057) (236) 0 (4,164)
------- --------- -------- --------- -------- ---------
Net income/(loss) $ 4,833 $ (21,140) $ 25,027 $ (6,654) $ 6,392 $ 8,458
======= ========= ========= ========= ======== =========
Statement of Operations
For the Quarter Ended December 23, 2000
-------------------------------------------------------------------------
Pro-Fac Agrilink Subsidiary Non-Guarantor Eliminating
Cooperative Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net sales $ 0 $ 323,606 $ 3,724 $ 33,834 $(21,058) $ 340,106
Cost of sales 0 (262,841) (2,323) (33,872) 23,702 (275,334)
------ -------- ------- -------- -------- ---------
Gross profit 0 60,765 1,401 (38) 2,644 64,772
Selling, administrative, and general expenses (2) (49,813) (660) (487) 20,216 (30,746)
Other income 0 0 20,216 416 (20,632) 0
Income from joint venture 0 949 0 0 0 949
------ --------- ------- -------- -------- ---------
Operating (loss)/income before dividing with Pro-Fac (2) 11,901 20,957 (109) 2,228 34,975
Interest (expense)/income 0 (22,728) 2,458 (2,145) 0 (22,415)
------ -------- ------- -------- -------- ---------
Pretax (loss)/income before dividing with Pro-Fac (2) (10,827) 23,415 (2,254) 2,228 12,560
Pro-Fac share of income 6,281 (6,281) 0 0 0 0
------ --------- ------- -------- -------- ---------
Income/(loss) before taxes 6,279 (17,108) 23,415 (2,254) 2,228 12,560
Tax (provision)/benefit (643) 5,862 (8,424) (116) 0 (3,321)
------ --------- ------- -------- -------- ---------
Net income/(loss) $5,636 $ (11,246) $14,991 $ (2,370) $ 2,228 $ 9,239
====== ========= ======= ======== ======== =========
Statement of Cash Flows
For the Six Months Ended December 23, 2000
-------------------------------------------------------------------------
Pro-Fac Agrilink Subsidiary Non-Guarantor Eliminating
Cooperative Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net income/(loss) $ 4,833 $(21,140) $ 25,027 $ (6,654) $ 6,392 $ 8,458
Adjustments to reconcile net income/(loss) to net
cash provided by/(used in) operating activities -
Estimated cash payments due to Class A members (524) 0 0 0 0 (524)
Depreciation 0 14,793 298 1,184 0 16,275
Amortization of goodwill and certain intangible assets 0 1,311 3,653 0 0 4,964
Amortization of debt issue costs, amendment costs,
and discount on subordinated promissory note 0 2,404 0 276 0 2,680
Interest-in-kind on subordinated promissory note 0 814 0 0 0 814
Equity in undistributed earnings of joint venture 0 (1,224) 0 0 0 (1,224)
Change in working capital (355) (78,864) (27,529) 3,099 (6,392) (110,041)
-------- -------- -------- -------- ------- ---------
Net cash provided by/(used in) operating activities 3,954 (81,906) 1,449 (2,095) 0 (78,598)
Cash flows from investing activities:
Purchase of property, plant, and equipment 0 (12,363) (1,514) (1,086) 0 (14,963)
Proceeds from disposals 0 5,065 0 7 0 5,072
Proceeds from investment in CoBank 0 1,951 0 0 0 1,951
------- -------- -------- -------- ------- ----------
Net cash used in investing activities 0 (5,347) (1,514) (1,079) 0 (7,940)
Cash flows from financing activities:
Net proceeds from issuance of short-term debt 0 98,000 0 3,900 0 101,900
Payments on long-term debt 0 (8,932) 0 0 0 (8,932)
Cash paid for debt amendments 0 (1,707) 0 0 0 (1,707)
Issuance of common stock, net 256 0 0 0 0 256
Cash dividends paid (4,210) 0 0 0 0 (4,210)
------- -------- -------- --------- ------- ---------
Net cash (used in)/provided by financing activities (3,954) 87,361 0 3,900 87,307
Net change in cash and cash equivalents 0 108 (65) 726 0 769
Cash and cash equivalents at beginning of period 0 4,785 209 0 0 4,994
------- -------- -------- -------- ------- ---------
Cash and cash equivalents at end of period $ 0 $ 4,893 $ 144 $ 726 $ 0 $ 5,763
======== ======== ======== ======== ======= =========
NOTE 8. OTHER MATTERS
Restructuring: On June 23, 2000, Agrilink Foods sold its pickle business to Dean
Pickle and Specialty Product Company. As part of the transaction, Agrilink Foods
had agreed to contract pack Nalley and Farman's pickle products for a period of
two years, ending June 2002. In anticipation of the completion of this co-pack
contract, Agrilink Foods initiated restructuring activities for approximately
140 employees in that facility located in Tacoma, Washington. The total
restructuring charge amounted to $1.1 million and was primarily comprised of
employee termination benefits. The majority of such termination benefits will be
liquidated during the next 9 months.
In addition, on October 12, 2001, Agrilink Foods announced a further reduction
of approximately 7 percent of its nationwide workforce, for a total of
approximately 300 positions. The reductions are part of an ongoing focus on
low-cost operations and include
both salaried and hourly positions. In conjunction with the reductions, Agrilink
Foods recorded a charge against earnings of approximately $1.6 million in the
second quarter of fiscal 2002, primarily comprising employee termination
benefits. Reductions in personnel include operational and administrative
positions, and net of the restructuring charge, are expected to improve fiscal
2002 earnings by approximately $5.0 million. Of this charge, approximately $0.7
million has been liquidated and the remaining termination benefits will be
liquidated during the next 9 months.
Gain from Pension Curtailment: During September 2001, Agrilink Foods made the
decision to freeze benefits provided under its Master Salaried Retirement Plan.
Under the provisions of SFAS No. 88, "Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
these benefit changes resulted in the recognition of a $2.5 million net
curtailment gain.
Legal Proceedings: On September 25, 2001, in the circuit court of Multnomah
County, Oregon, Blue Line Farms commenced a class action suit against Agrilink
Foods, Pro-Fac Cooperative, Inc., Mr. Mike Shelby, and "Does" 1-50, representing
directors, officers, and agents of the corporate defendants.
The complaint alleges (i) fraud in operating AgriFrozen, a former subsidiary of
Pro-Fac; (ii) breach of fiduciary duty in operating AgriFrozen; (iii) negligent
misrepresentation in operating AgriFrozen; (iv) breach of contract against
Pro-Fac; (v) breach of good faith and fair dealing against Pro-Fac; (vi)
conversion against Pro-Fac and Agrilink Foods; (vii) intentional interference
with a contract against Agrilink Foods; and (viii) statutory Oregon securities
law violations against Pro-Fac and separately against Mr. Shelby.
The relief sought includes (i) a demand for an accounting; (ii) injunctive
relief to compel the disclosure of documents; (iii) certification of the class;
(iv) damages of $50 million; (v) prejudgment and post-judgment interest; and
(vi) an award of costs and expenses including expert fees and attorney's fees.
Management believes this case is without merit and intends to defend vigorously
its position.
Dividends: Subsequent to 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 January 31, 2002.
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 ("SEC") 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 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. Factors that could impact the Cooperative follow:
|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 unaudited Consolidated Statement of Operations, Net Proceeds and
Comprehensive Income in the second quarter and first six months of fiscal 2002
versus such periods in fiscal 2001.
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
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.
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!, Birds Eye Simply Grillin',
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, Super Pop,
and Flavor Destinations. 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 this category include Bernstein's, and Nalley.
The following tables illustrate the results of operations by product line for
the three and six months ended December 29, 2001 and December 23, 2000.
EBITDA1,2
(Dollars in Millions)
Three Months Ended Six Months Ended
------------------------------------------ -------------------------------------------
December 29, December 23, December 29, December 23,
2001 2000 2001 2000
------------------- ------------------ ------------------- -------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
---------- -------- ---------- ------ ---------- -------- ---------- ------
Vegetables $ 33.0 67.8% $ 28.3 62.1% $ 43.1 61.7% $ 46.1 59.3%
Fruits 9.9 20.3 8.1 17.8 15.2 21.7 12.7 16.3
Snacks 2.3 4.7 2.8 6.1 4.5 6.4 5.6 7.2
Canned Meals 2.4 4.9 2.7 5.9 4.8 6.9 5.5 7.1
Other 1.1 2.3 1.0 2.2 2.3 3.3 2.4 3.0
------ ----- ------- ----- -------- ----- ------ -----
Continuing segments 48.7 100.0 42.9 94.1 69.9 100.0 72.3 92.9
Businesses closed3 0.0 0.0 2.7 5.9 0.0 0.0 5.5 7.1
------ ----- ------- ----- -------- ----- ------ -----
Total $ 48.7 100.0% $ 45.6 100.0% $ 69.9 100.0% $ 77.8 100.0%
====== ===== ======= ===== ======== ===== ====== =====
<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 generally accepted accounting principles
measure of performance or as a measure of liquidity.
EBITDA is included herein because the Cooperative believes EBITDA is a
financial indicator of a Cooperative'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 from pension curtailment and restructuring charges.
3 Represents the operating results of operations no longer part of the
Cooperative.
</FN>
Net Sales
(Dollars in Millions)
Three Months Ended Six Months Ended
------------------------------------------ -------------------------------------------
December 29, December 23, December 29, December 23,
2001 2000 2001 2000
------------------- ------------------ ------------------- -------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
-------- ------- -------- ------ ------- ------- -------- -----
Vegetables $210.7 71.6% $ 236.4 69.5% $ 387.2 71.2% $426.7 68.8%
Fruits 41.3 14.0 44.0 12.9 69.6 12.8 70.4 11.3
Snacks 21.8 7.4 22.2 6.5 44.2 8.1 44.7 7.2
Canned Meals 11.9 4.0 14.8 4.4 24.3 4.5 27.9 4.5
Other 8.9 3.0 9.9 2.9 18.5 3.4 21.0 3.4
------ ----- ------- ----- -------- ----- ------ -----
Continuing segments 294.6 100.0 327.3 96.2 543.8 100.0 590.7 95.2
Businesses closed1 0.0 0.0 12.8 3.8 0.0 0.0 30.9 4.8
------ ----- ------- ----- -------- ----- ------- -----
Total $294.6 100.0% $ 340.1 100.0% $ 543.8 100.0% $ 621.6 100.0%
====== ===== ======= ===== ======== ===== ======= =====
<FN>
1 Represents net sales of operations no longer part of the Cooperative.
</FN>
Operating Income1,2
(Dollars in Millions)
Three Months Ended Six Months Ended
------------------------------------------ -------------------------------------------
December 29, December 23, December 29, December 23,
2001 2000 2001 2000
------------------- ------------------ ------------------- -------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
-------- ------- -------- ------ --------- ------- -------- ------
Vegetables $ 27.2 66.8% $ 20.8 59.5% $ 31.7 58.8% $ 31.2 55.1%
Fruits 8.7 21.4 7.5 21.4 12.9 23.9 11.4 20.1
Snacks 1.7 4.2 1.9 5.4 3.2 5.9 3.6 6.4
Canned Meals 2.2 5.4 2.2 6.3 4.4 8.1 4.7 8.3
Other 0.9 2.2 0.4 1.1 1.8 3.3 1.2 2.1
------ ----- ------- ----- -------- ----- ------ -----
Continuing segments 40.7 100.0 32.8 93.7 54.0 100.0 52.1 92.0
Businesses closed3 0.0 0.0 2.2 6.3 0.0 0.0 4.5 8.0
------ ----- ------- ----- -------- ----- ------ -----
Total $ 40.7 100.0% $ 35.0 100.0% $ 54.0 100.0% $ 56.6 100.0%
====== ===== ======= ===== ======== ===== ====== =====
<FN>
1 Excludes gain from pension curtailment and restructuring charges.
2 In accordance with SFAS No. 142, goodwill is no longer amortized. Goodwill
amortization associated with the vegetable, fruit, snacks, canned meals,
and other product lines for the quarter ending December 23, 2000 was $1.7
million, $0.1 million, $0.1 million, $0.2 million, and $0.2 million,
respectively, and $3.4 million, $0.1 million, $0.2 million, $0.4 million,
and $0.3 million, respectively for the six months ending December 23, 2000.
3 Represents the operating results of operations no longer part of the
Cooperative.
</FN>
CHANGES FROM SECOND QUARTER FISCAL 2001 TO SECOND QUARTER FISCAL 2002
Excluding the restructuring charge (net of taxes) in fiscal 2002, net income
increased $7.1 million from the second quarter of fiscal 2001. During this same
period, EBITDA, excluding non-recurring items, increased $5.8 million, or 13.5
percent. The positive results in the second quarter of fiscal 2002 were
primarily attributable to recently implemented price increases and improvements
achieved in production costs. EBITDA was, however, negatively impacted by
additional warehousing costs due to an increase in inventory levels. Net sales
declined $32.7 million or 10.0 percent during this same period, of which $8.4
million is associated with a co-pack agreement for canned vegetables in the
Midwest. Excluding this co-pack agreement, Agrilink Foods' net sales declined
$24.3 million due primarily to overall market declines and increased competitive
activity in the frozen vegetable category. The total frozen vegetable category
for the 12-week period ending January 6, 2002 showed a decline of approximately
8 percent. Agrilink Foods' overall market share for the second quarter, however,
only showed a decline of 0.1 points. Agrilink Foods estimates its overall market
share
for the 12-week period ending January 6, 2002 for frozen vegetables to be 31.7
percent. Agrilink Foods' overall market share includes branded retail unit
sales, as reported by Information Resources, Inc., and management's estimate of
Agrilink Foods' private label share based upon factory shipments. A detailed
accounting of the significant reasons for changes in net sales and EBITDA by
product line follows.
EBITDA for the vegetable product line increased $4.7 million or 16.6 percent
during the second quarter of fiscal 2002. This improvement in profitability
results from management's focus on pricing improvement and reductions in
production costs. Vegetable net sales, excluding the co-pack agreement
highlighted above, have, however, decreased $17.3 million in the second quarter
of fiscal 2002 as compared to the prior year. Management attributes this decline
to overall market declines and competitive actions.
Within the branded category, the launch of Birds Eye Simply Grillin', a seasoned
blend of top quality Birds Eye vegetables in a foil tray, accounted for $1.5
million of increased net sales. In addition, net sales of Birds Eye frozen
vegetables increased approximately $1.2 million. However, these increases were
offset by declines of $5.9 million in Agrilink Foods' regional branded product
lines due to competitive pressures and overall declines in the vegetable market.
In addition, branded vegetable net sales were impacted by Agrilink Foods' Birds
Eye Voila! product line which decreased $4.8 million over the second quarter of
fiscal 2001. While Birds Eye Voila! gained 0.4 market share points during the
12-week period ending December 30, 2001, this growth was not sufficient to
offset declines of approximately 26 percent within the home meal replacement
category. Management has initiated actions to address this decline during the
second half of the year.
Non-branded vegetable net sales were impacted by a price increase in the first
quarter of fiscal 2002 executed to offset industry-wide cost increases. This
price increase resulted in a loss of volume during the first and second quarters
in the non-branded portion of the business. Subsequent to Agrilink Foods' price
increase, several competitors have followed similar pricing structures.
EBITDA for the fruit product line increased $1.8 million or 22.2 percent during
the second quarter of fiscal 2002. This improvement in profitability also
results from efforts focused on pricing initiatives and actions taken to reduce
product costs. Fruit net sales have, however, decreased $2.7 million or 6.1
percent attributable to volume declines in branded pie filling offset by
increases in co-pack pie filling sales.
Net sales for the snack product line showed a modest decline of $0.4 million, or
1.8 percent. Improvements in net sales within the potato chip category were $0.6
million, while the popcorn product line decreased $1.0 million. EBITDA declined
$0.5 million or 17.9 percent. The popcorn category continues to be negatively
impacted by competitive pressures and changes in product mix. In addition,
EBITDA of the potato chip category was negatively affected by costs associated
with expansion into new markets and additional manufacturing costs associated
with the transition of Tim's Cascade Style Potato Chips to a larger facility.
The additional costs associated with the transition to the new facility are not
expected to continue during the second half of fiscal 2002.
Net sales for canned meals decreased $2.9 million, or 19.6 percent, while EBITDA
decreased $0.3 million, or 11.1 percent. These reductions are a result of
declines in volume offset by improvements in pricing and production costs.
The other product line EBITDA, primarily represented by salad dressings,
increased $0.1 million or 10.0 percent. EBITDA benefited from reductions in raw
product costs, including oil. Net sales, however, decreased $1.0 million or 10.1
percent due to competitive activity in the dressing category caused by actions
of one competitor that has discontinued its entire line. While this action
negatively impacts short-term sales, it is expected to create distribution
opportunities and positively impact salad dressing performance in the future.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have increased $0.2 million, or 0.6 percent, as compared with
the second quarter of the prior fiscal year. The increase is primarily
attributable to $2.0 million in marketing expenses associated with incremental
branded marketing activity during the second quarter of fiscal 2002. This
increase is offset by a $2.2 million reduction in amortization expense resulting
from the implementation of the Statement of Financial Accounting Standard
("SFAS") No. 142 (see NOTE 2 to the "Notes to Consolidated Financial
Statements"). The remaining variance is attributable to increases in various
employee benefit expenses.
Operating Income: Operating income, excluding businesses closed, non-recurring
items, and the implementation of SFAS No. 142, increased from $32.8 million in
the second quarter of fiscal 2001 to $38.4 million in the second quarter of
fiscal 2002. This represents an increase of $5.6 million or 17.1 percent.
Increases in operating income within vegetables, fruits, and other were $4.7
million, $1.1 million, and $0.3 million, respectively. The decrease within
snacks was $0.3 million and canned meals was $0.2 million. Significant variances
are highlighted above in the discussion of EBITDA and net sales.
Restructuring: On October 12, 2001, Agrilink Foods announced a reduction of
approximately 7 percent of its nationwide workforce, for a total of
approximately 300 positions. The reductions are part of an ongoing focus on
low-cost operations and include both salaried and hourly positions. In
conjunction with the reductions, Agrilink Foods recorded a charge against
earnings of approximately $1.6 million in the second quarter of fiscal 2002,
primarily comprising employee termination benefits. Reductions in personnel
include operational and administrative positions and, net of the restructuring
charge, are expected to improve fiscal 2002 earnings by approximately $5.0
million. Of this charge, $0.7 million has been liquidated and the remaining
termination benefits will be liquidated during the next 9 months.
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. There has been no significant change in the operations
of the joint venture for the second quarter of fiscal 2002 compared to the prior
year.
Interest Expense: Interest expense decreased $5.9 million to $16.5 million in
the second quarter of fiscal 2002 from $22.4 million in the second quarter of
fiscal 2001. The decrease is the result of a decrease in Agrilink Foods'
weighted average interest rate of 2.25 percent resulting from general interest
rate reductions offset by higher average outstanding balances during the quarter
of approximately $6.4 million. In addition, the decrease was due to $2.1 million
of interest expense in fiscal 2001 associated with AgriFrozen, a former
subsidiary of the Cooperative.
Tax Provision: The provision for income taxes increased approximately $4.0
million from the prior year as a result of the change in earnings before tax.
The Cooperative's effective tax rate is negatively impacted by the
non-deductibility of certain amounts of goodwill. In addition, the Cooperative's
effective tax rate is also impacted by net proceeds distributed to members.
CHANGES FROM FIRST SIX MONTHS FISCAL 2001 TO FIRST SIX MONTHS FISCAL 2002
During the first six months of fiscal 2002, net income increased $4.1 million
from the first six months of fiscal 2001. Comparability of net income is,
however, difficult because fiscal 2002 was impacted by a restructuring charge,
gain from pension curtailment, significant changes in interest rates, and the
implementation of SFAS No. 142 which reduced amortization expense. Accordingly,
management believes, to evaluate results, an evaluation of EBITDA (excluding
non-recurring items), is more appropriate as it allows the operations of the
business to be reviewed in a more comparable manner. EBITDA, for the first six
months of fiscal 2002 versus the prior year, declined $2.4 million, or 3.3
percent. This decline resulted from increased marketing costs of approximately
$5.0 million, associated with a new product launch, during the first quarter of
fiscal 2002, increased warehousing costs due to an increase in inventory levels,
and increased production costs incurred in the first quarter of fiscal 2002
associated with inventory produced in the prior year at a greater cost.
Significant favorable items offsetting these increases in costs include a focus
on pricing improvements, fixed cost reductions resulting from restructuring
actions and declines in production costs which have begun to benefit Agrilink
Foods in the second quarter. Net sales during the six months declined $46.9
million or 7.9 percent, however, $21.5 million is associated with a co-pack
agreement for canned vegetables in the Midwest. The remaining $25.4 million is
primarily attributable to lower volume due to overall market declines in the
frozen vegetable industry and short-term declines in the food service channel
subsequent to September 11, 2001. The total frozen vegetable category in the
28-week period ending January 6, 2002 showed a decline of approximately 7
percent. However, the Company's overall year-to-date market share showed an
improvement of 1.0 points. Agrilink Foods estimates its overall market share for
the 28-week period ending January 6, 2002 for frozen vegetables to be 32.1
percent. Agrilink Foods' overall market share includes branded retail unit
sales, as reported by Information Resources, Inc., and management's estimate of
Agrilink Foods' private label share based upon factory shipments. A detailed
accounting of the significant reasons for changes in net sales and EBITDA by
product line follows.
While vegetable net sales decreased $39.5 million or 9.3 percent, $21.5 million
is associated with the co-pack agreement highlighted above. Excluding this
arrangement, vegetable net sales showed a decrease of $18.0 million. The
non-branded business accounted for $17.3 million of the decline. Agrilink Foods'
non-branded business yields lower margins than that of its branded products.
During the first quarter of fiscal 2002, Agrilink Foods executed a price
increase across all non-branded vegetable commodities to offset industry wide
cost increases. This price increase resulted in a loss of volume during the
first half in the non-branded portion of the business. Subsequent to Agrilink
Foods' price increase, several competitors have followed with similar pricing
structures.
Overall branded net sales showed a modest decline of $0.7 million from the prior
year. Significant components associated with this change are highlighted below.
The launch of Birds Eye Simply Grillin', a seasoned blend of top quality Birds
Eye vegetables in a foil tray, accounted for $5.3 million of additional net
sales while net sales of Birds Eye frozen vegetables increased approximately
$6.5 million due to the conversion of a major club store customer from a private
label to brand product line.
These increases are offset by a $6.0 million decrease in the Birds Eye Voila!
product line as a result of continued erosion in the home meal replacement
category. For the 28-week period ending December 30, 2001, the home
meal-replacement category declined approximately 17 percent. Further, net sales
declines of $6.5 million were experienced in Agrilink Foods' regional branded
product lines due to competitive pressures and overall declines in the vegetable
market.
EBITDA for the vegetable product line declined $3.0 million or 6.5 percent
during the first six months of fiscal 2002 as compared to the prior year.
Approximately $5.0 million of the decline is associated with marketing costs
related to the retail launch of Birds Eye Simply Grillin' during the first
quarter of fiscal 2002 and an additional $2.3 million of incremental marketing
activity for other branded vegetable products. In addition, warehousing costs
increased $5.7 million due to an increase in inventory levels, and production
costs incurred in the first quarter of fiscal 2002 were higher due to inventory
produced in the prior year at a greater cost. Offsetting these increases in
costs are the benefits achieved from pricing actions taken in January 2001.
EBITDA for the fruit product line increased $2.5 million or 19.7 percent
primarily attributable to improved pricing and timing of various marketing
initiatives. Fruit net sales have, however, showed a modest decrease of $0.8
million or 1.1 percent.
Net sales for the snack product line showed a decline of $0.5 million, or 1.1
percent. Improvements in net sales within the potato chip business were $1.4
million, while the popcorn product line decreased $1.9 million. EBITDA declined
$1.1 million or 19.6 percent. The popcorn business continues to be negatively
impacted by competitive pressures and changes in product mix. In addition,
EBITDA of the potato chip category was negatively affected by costs associated
with expansion into new markets and additional manufacturing costs associated
with the transition of Tim's Cascade Style Potato Chips to a larger facility.
The additional costs associated with the transition to the new facility are not
expected to continue during the second half of fiscal 2002.
Net sales for canned meals decreased $3.6 million, or 12.9 percent, while EBITDA
decreased $0.7 million, or 12.7 percent. Results were negatively impacted by
market declines in the canned meal category and a change in promotional
activity.
The other product line EBITDA, primarily represented by salad dressings,
decreased $0.1 million, or 4.2 percent. Net sales, however, decreased $2.5
million, or 11.9 percent. While EBITDA benefited from reductions in raw product
costs, including oil, net sales declined due to competitive activity in the
dressing category being negatively impacted by the actions of one competitor
that has discontinued its entire line. While this action negatively impacts
short-term sales, it is expected to create distribution opportunities and
positively impact salad dressing performance in the future.
Operating Income: Operating income, excluding businesses closed, non-recurring
items, and the implementation of SFAS No. 142, decreased from $52.1 million in
fiscal 2001 to $49.6 million in fiscal 2002. This represents a decrease of $2.5
million or 4.8 percent. Declines in operating income within vegetables, snacks,
and canned meals were $2.9 million, $0.6 million, and $0.7 million,
respectively. The increase within fruits was $1.4 million and the other product
line $0.3 million. Significant variances are highlighted above in the discussion
of EBITDA and net sales.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have increased $1.8 million, or 3.0 percent, as compared with
the first six months of the prior fiscal year. The increase is primarily
attributable to a $5.0 million increase in marketing expenses, primarily
associated with the retail launch of Birds Eye Simply Grillin' during the first
quarter. In addition, other branded marketing initiatives during the second
quarter accounted for a $2.0 million increase in expenses. These increases were
offset by a $4.4 million reduction in amortization expense resulting from the
implementation of SFAS No. 142 (see NOTE 2 to the "Notes to Consolidated
Financial Statements"). Additionally, in fiscal 2001, $1.4 million in selling,
general, and administrative expenses were associated with AgriFrozen, a former
subsidiary of the Cooperative.
Restructuring: On June 23, 2000, Agrilink Foods sold its pickle business to Dean
Pickle and Specialty Product Company. As part of the transaction, Agrilink Foods
had agreed to contract pack Nalley and Farman's pickle products for a period of
two years, ending June 2002. In anticipation of the completion of this co-pack
contract, Agrilink Foods initiated restructuring activities for approximately
140 employees in that facility located in Tacoma, Washington. The total
restructuring charge amounted to $1.1 million and was primarily comprised of
employee termination benefits. The majority of such termination benefits will be
liquidated during the next nine months.
In addition, on October 12, 2001, Agrilink Foods announced a further reduction
of approximately 7 percent of its nationwide workforce, for a total of
approximately 300 positions. The reductions are part of an ongoing focus on
low-cost operations and include both salaried and hourly positions. In
conjunction with the reductions, Agrilink Foods recorded a charge against
earnings of approximately $1.6 million in the second quarter of fiscal 2002,
primarily comprising employee termination benefits. Reductions in personnel
include operational and administrative positions and, net of the restructuring
charge, are expected to improve fiscal 2002 earnings by approximately $5.0
million. Of this charge, $0.7 million has been liquidated and the remaining
termination benefits will be liquidated during the next 9 months.
Gain from Pension Curtailment: During September 2001, the Company made the
decision to freeze benefits provided under its Master Salaried Retirement Plan.
Under the provisions of SFAS No. 88, "Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
these benefit changes resulted in the recognition of a $2.5 million net
curtailment gain.
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. There has been no significant change in the operations
of the joint venture in fiscal 2002 compared to fiscal 2001.
Interest Expense: Interest expense decreased $8.2 million to $35.7 million in
the first six months of fiscal 2002 from $43.9 million in the first six months
of fiscal 2001. The decrease is the result of Agrilink Foods' decrease in the
weighted average interest rate of 1.48 percent resulting from general interest
rate reductions, offset by higher average outstanding balances during the first
half of the year of approximately $7.3 million. Additionally, interest expense
was negatively impacted by a supplemental fee of $1.5 million paid in
conjunction with the Company's credit facility. See NOTE 5 of the "Notes to
Consolidated Financial Statements." In addition, the decrease was due to $4.4
million of interest expense in fiscal 2001 associated with AgriFrozen, a former
subsidiary of the Cooperative.
Tax Provision: The provision for income taxes increased approximately $1.4
million from the prior year as a result of the change in earnings before tax.
The Cooperative's effective tax rate is negatively impacted by the
non-deductibility of certain amounts of goodwill. In addition, the Cooperative's
effective tax rate is also impacted by net proceeds distributed to members.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the unaudited
"Consolidated Statement of Cash Flows" for the six months ended December 29,
2001 compared to the six months ended December 23, 2000.
Net cash used in operating activities increased $23.0 million over the six
months of the prior fiscal year. The increase was the result of variances within
accounts payable and other accruals due to the timing of liquidation of
outstanding balances. The most significant component of which was the August
2001 payment on the remaining balance of the purchase price for the AgriFrozen
Foods inventory of $21.6 million.
Net cash used in investing activities in the first six months of fiscal 2002
decreased $3.3 million from the first six months of fiscal 2001. The change was
primarily a result of $5.0 million in proceeds received in conjunction with the
sale of pickle machinery and equipment in fiscal 2001 offset by timing and a
reduction in equipment purchases of $7.6 million. The purchase of property,
plant, and equipment was for general operating purposes. Financing activities
were also impacted by the repurchase of approximately $1.3 million in Class A
common stock by the Cooperative associated with lower annual tart cherry crop
requirements.
Net cash provided by financing activities increased $17.2 million. This increase
was primarily due to an increase in cash used in operating activities as
described above, a decrease in mandatory payments on long-term debt due to
timing of the quarter-ends, and a $3.2 million mandatory prepayment associated
with the sale of certain pickle machinery and equipment in fiscal 2001.
Borrowings: Under Agrilink Foods' existing credit facility, Agrilink Foods is
able to borrow up to $200 million for seasonal working capital purposes under
the Revolving Credit Facility. The Revolving Credit Facility may also be
utilized in the form of letters of credit.
As of December 29, 2001, (i) cash borrowings outstanding under the Revolving
Credit Facility were $114.8 million, (ii) there were $19.6 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 $65.6
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. As of December 29, 2001, Pro-Fac and Agrilink Foods were in
compliance with all covenants, restrictions, and limitations under the terms of
the credit facility as amended.
The August 2001 amendment to Agrilink Foods' credit facility imposes contingent
fees and possible increases in interest rates under the credit facility if
Agrilink Foods does not raise equity and deleverage its balance sheet or satsify
specified EBITDA and leverage ratio requirements within certain time frames. To
this end, Agrilink Foods engaged a financial advisor to assist it in exploring
various alternatives responsive to the amendment, including, among other
possibilities, a private placement of a minimum of $100 million of securities.
Certain of the alternatives being explored by Agrilink Foods could result in the
recognition by Pro-Fac of an impairment charge related to its investment in
Agrilink Foods. The amount of any contingent fees that may be imposed under the
amendment is also impacted by the EBITDA which Agrilink Foods achieves for its
fiscal year ending in June 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Cooperative and its subsidiaries, 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 intercompany sales. At December 29, 2001, Agrilink
Foods had cash flow hedges for the Mexican peso with maturity dates ranging from
December 2001 to May 2002. At December 29, 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 within the next 12 months. During the second quarter of fiscal 2002,
approximately $0.2 million was reclassified from other comprehensive income to
cost of goods sold. For the first six months of fiscal 2002, approximately $0.4
million has been reclassified from other comprehensive income to cost of goods
sold. Hedge ineffectiveness was insignificant.
Foreign Currency
Forward
-------------------
Contract amounts 62 million Pesos
Weighted average settlement exchange rate 11.0074%
Commodity Prices: Agrilink Foods is exposed to commodity price risk related to
forecasted purchases of corrugated (unbleached kraftliner) in its manufacturing
process. To mitigate this risk, Agrilink Foods entered into a swap agreement on
January 8, 2002 designated as a cash flow hedge of its forecasted corrugated
purchases. The swap hedged approximately 65 percent of the Agrilink Foods'
planned corrugated requirements. The termination date for the agreement is June
2003.
Corrugated
(Unbleached Kraftliner)
-------------------------------------
Notional amount 36,000 short tons
Average paid rate $400/short ton
Average receive rate Floating rate with monthly settlement
Maturities through June 2003
Interest Rates: Agrilink Foods is exposed to interest rate risk primarily
through its borrowing activities. The majority of the Agrilink Foods' long-term
borrowings are variable rate instruments. In September 2001, Agrilink Foods
entered into an interest rate cap contract with a major financial institution.
Agrilink Foods designates this interest rate cap as a cash flow hedge.
The interest rate cap contract is for a period of two years and became effective
on October 5, 2001. Approximately 61 percent of the underlying debt is being
hedged with this interest rate cap and protects against three-month LIBOR rates
exceeding 5 percent.
In return for the cap, Agrilink Foods paid a one-time fee of approximately $0.6
million that is marked to market over the life of the interest rate cap. Changes
in the cap's fair value are deferred to other comprehensive income and
reclassified to earnings when a hedged transaction occurs.
The following summarizes the Company's interest rate cap agreement:
December 29, 2001
---------------------------
Interest Rate Cap:
Notional amount $250 million
Premium paid $638,000
Cap rate 5.0%
Index 3-Month LIBOR
Term October 2001 - October 2003
OTHER MATTERS
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.
For the 2001 crop season, dry weather conditions in the Cooperative's New York
and Midwest growing regions may negatively impact production costs. Management
has initiated pricing actions and cost reduction initiatives in order to fully
offset any crop-related production cost.
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 Company 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 Company has not independently verified such data and makes no
representation to its accuracy.
PART II
ITEM 1- LEGAL PROCEEDINGS
On September 25, 2001, in the circuit court of Multnomah County, Oregon, Blue
Line Farms commenced a class action suit against Agrilink Foods, Pro-Fac
Cooperative, Inc., Mr. Mike Shelby, and "Does" 1-50, representing directors,
officers, and agents of the corporate defendants.
The complaint alleges (i) fraud in operating AgriFrozen, a former subsidiary of
Pro-Fac; (ii) breach of fiduciary duty in operating AgriFrozen; (iii) negligent
misrepresentation in operating AgriFrozen; (iv) breach of contract against
Pro-Fac; (v) breach of good faith and fair dealing against Pro-Fac; (vi)
conversion against Pro-Fac and Agrilink Foods; (vii) intentional interference
with a contract against Agrilink Foods; and (viii) statutory Oregon securities
law violations against Pro-Fac and separately against Mr. Shelby.
The relief sought includes (i) a demand for an accounting; (ii) injunctive
relief to compel the disclosure of documents; (iii) certification of the class;
(iv) damages of $50 million; (v) prejudgment and post-judgment interest; and
(vi) an award of costs and expenses including expert fees and attorney's fees.
Management believes this case is without merit and intends to defend vigorously
its position.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------------------------------------------------------------
10.1 Equity Value Plan, as amended and restated
10.2 Management Incentive Program
10.3 Master Salaried Retirement Plan, as amended and restated
(b) Reports on Form 8-K:
On October 12, 2001, the Cooperative filed a report on Form 8-K to report on workforce reductions.
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: February 7, 2002 BY:/s/ Earl L. Powers
---------------- -----------------------------
EARL L. POWERS
TREASURER
(On Behalf of the Registrant and as
Principal Financial Officer and
Principal Accounting Officer)