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 30, 2002
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 (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 May 4, 2002.
Class A Common Stock - 2,037,803
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 30, March 24, March 30, March 24,
2002 2001 2002 2001
------------ ----------- ------------ ------------
Net sales $ 244,886 $ 274,427 $ 788,667 $ 896,056
Cost of sales (190,937) (218,102) (618,185) (722,473)
---------- ---------- ---------- ----------
Gross profit 53,949 56,325 170,482 173,583
Selling, administrative, and general expense (31,029) (35,609) (94,796) (97,528)
Restructuring 0 0 (2,622) 0
Gain from pension curtailment 0 0 2,472 0
Income from joint venture 627 316 1,825 1,540
---------- ---------- ---------- ----------
Operating income 23,547 21,032 77,361 77,595
Interest expense (15,951) (20,853) (51,643) (64,794)
---------- ---------- ---------- ----------
Income before taxes, dividends, and allocation of net proceeds 7,596 179 25,718 12,801
Tax provision (2,163) (720) (7,707) (4,884)
---------- ---------- ---------- ----------
Net income/(loss) $ 5,433 $ (541) $ 18,011 $ 7,917
========== ========== ========== ==========
Allocation of net proceeds:
Net income/(loss) $ 5,433 $ (541) $ 18,011 $ 7,917
Dividends on common and preferred stock (1,951) (1,945) (6,406) (6,155)
---------- ---------- ---------- ----------
Net proceeds/(deficit) 3,482 (2,486) 11,605 1,762
Allocation (to)/from earned surplus (1,633) 2,486 (5,153) (1,520)
---------- ---------- ---------- ----------
Net proceeds available to members $ 1,849 $ 0 $ 6,452 $ 242
========== ========== ========== ==========
Net proceeds available to members:
Estimated cash payment $ 462 $ 0 $ 1,613 $ 61
Qualified retains 1,387 0 4,839 181
---------- ---------- ---------- ----------
Net proceeds available to members $ 1,849 $ 0 $ 6,452 $ 242
========== ========== ========== ==========
Net income/(loss) $ 5,433 $ (541) 18,011 $ 7,917
Other comprehensive income:
Unrealized loss on hedging activity (16) (1,068) (390) (178)
---------- ---------- ---------- ----------
Comprehensive income/(loss) $ 5,417 $ (1,609) $ 17,621 $ 7,739
========== ========== ========== ==========
<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 30, June 30, March 24,
2002 2001 2001
---------- ---------- -----------
(Unaudited) (Unaudited)
Current assets:
Cash and cash equivalents $ 7,638 $ 7,656 $ 6,571
Accounts receivable, trade, net 80,877 85,543 104,018
Accounts receivable, co-pack activity and other 9,008 7,949 10,616
Income taxes refundable 0 938 0
Inventories 337,252 313,856 347,508
Current investment in CoBank 4,452 3,998 5,233
Prepaid manufacturing expense 10,894 22,427 13,431
Prepaid expenses and other current assets 17,968 19,603 16,450
Current deferred tax asset 2,202 2,202 11,657
---------- ---------- ----------
Total current assets 470,291 464,172 515,484
Investment in CoBank 6,208 10,660 10,757
Investment in joint venture 9,085 8,018 8,410
Property, plant, and equipment, net 295,792 305,531 308,259
Assets held for sale, at net realizable value 120 120 403
Goodwill 236,311 236,311 238,458
Intangible assets, net 11,592 12,466 12,770
Other assets 23,134 24,073 25,144
---------- ---------- ----------
Total assets $1,052,533 $1,061,351 $1,119,685
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION
Current liabilities:
Notes payable $ 75,400 $ 0 $ 78,000
Current portion of obligations under capital leases 752 316 218
Current portion of long-term debt 14,934 15,599 15,596
Accounts payable 30,696 117,931 80,951
Income taxes payable 5,504 0 427
Accrued interest 10,722 9,253 12,873
Accrued employee compensation 8,526 10,081 8,545
Other accrued expenses 45,045 49,345 50,729
Dividends payable 24 36 24
Amounts due Class A members 15,670 17,983 12,942
---------- ---------- ----------
Total current liabilities 207,273 220,544 260,305
Obligations under capital leases 2,895 571 520
Long-term debt 624,890 631,128 635,356
Deferred tax liabilities 26,376 26,376 32,262
Other non-current liabilities 28,988 29,417 29,327
---------- ---------- ----------
Total liabilities 890,422 908,036 957,770
---------- ---------- ----------
Commitments and contingencies
Class B cumulative redeemable preferred stock, liquidation preference $10 per
share; authorized - 500,000 shares, issued and
outstanding 23,940, 23,923, and 23,664 shares, respectively 239 239 237
Class A common stock, par value $5, authorized - 5,000,000 shares
March 30, June 30, March 24,
2002 2001 2001
--------- --------- ---------
Shares issued 2,096,163 2,257,479 2,259,174
Shares subscribed 751 97,243 107,783
--------- --------- ---------
Total subscribed and issued 2,096,914 2,354,722 2,366,957
Less subscriptions receivable in installments (751) (97,243) (107,783)
---------- --------- ---------
Total issued and outstanding 2,096,163 2,257,479 2,259,174 10,481 11,287 11,296
========= ========= =========
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 15,538 10,699 10,881
Non-qualified allocation to members 0 0 0
Non-cumulative preferred stock, par value $25, authorized
5,000,000 shares; issued and outstanding 31,669,
32,308 and 32,669 shares, respectively 792 808 817
Class A cumulative preferred stock, liquidation preference
$25 per share, authorized 10,000,000 shares; issued and
outstanding 4,496,082, 4,495,443 and 4,495,082 shares, respectively 112,402 112,386 112,377
Special membership interests 0 0 0
Earned surplus 23,004 17,851 27,010
Accumulated other comprehensive income:
Unrealized gain/(loss) on hedging activity 228 618 (178)
Minimum pension liability adjustment (573) (573) (525)
---------- ---------- ----------
Total shareholders' and members' capitalization 151,391 141,789 150,382
----------- ---------- ----------
Total liabilities and capitalization $1,052,533 $1,061,351 $1,119,685
========== ========== ==========
<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 30, March 24,
2002 2001
-------------- --------------
Cash flows from operating activities:
Net income $ 18,011 $ 7,917
Estimated cash payments due to Class A members (1,613) (61)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation 22,887 24,146
Amortization of goodwill and certain intangible assets 862 7,414
Amortization of debt issue costs, amendment costs, and
discount on subordinated promissory notes 4,225 4,182
Interest in-kind on subordinated promissory note 873 1,231
Equity in undistributed earnings of joint venture (1,067) (1,540)
Equity in undistributed earnings of CoBank 0 (96)
Change in assets and liabilities:
Accounts receivable 3,607 (8,959)
Inventories and prepaid manufacturing expense (11,863) (45,226)
Income taxes refundable 6,442 6,252
Accounts payable and other accrued expenses (91,633) (25,005)
Amounts due Class A members (2,313) (8,754)
Other assets and liabilities, net 740 (1,364)
----------- -----------
Net cash used in operating activities (50,842) (39,863)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (10,537) (20,981)
Proceeds from disposals 52 5,068
Proceeds from investment in CoBank 3,998 2,926
----------- -----------
Net cash used in investing activities (6,487) (12,987)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of short-term debt 75,400 74,400
Payments on long-term debt (9,072) (12,659)
Payments on capital lease (111) 0
Cash paid in conjunction with debt amendment (1,694) (1,707)
Cash portion of non-qualified conversion 0 (83)
(Repurchases)/issuance of common stock, net (806) 631
Cash dividends paid (6,406) (6,155)
----------- -----------
Net cash provided by financing activities 57,311 54,427
----------- -----------
Net change in cash and cash equivalents (18) 1,577
Cash and cash equivalents at beginning of period 7,656 4,994
----------- -----------
Cash and cash equivalents at end of period $ 7,638 $ 6,571
=========== ===========
<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 nine months ended March 30, 2002 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 November 2001, the Financial Accounting Standards Board's Emerging Issues
Task Force ("EITF") issued EITF Issue No. 01-09, "Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendor's Products." Under
this pronouncement, generally, cash consideration is to be classified as a
reduction of revenue, unless specific criteria are met regarding goods or
services that the vendor may receive in return for this consideration.
EITF 01-09 also codifies and reconciles related guidance issued by the EITF
regarding EITF Issue No. 00-25, "Accounting for Consideration from a Vendor to a
Retailer in Connection with the Purchase or Promotion of the Vendor's Products,"
which addressed the accounting treatment and income statement classification for
certain sales incentives, including cooperative advertising arrangements,
buydowns and slotting fees. Accordingly, during the third quarter and first nine
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 and all other prior periods have also been reclassified
to reflect this modification. Total promotions and slotting fees were $33.5
million and $36.0 million in the third quarter of fiscal 2002 and 2001,
respectively, and $103.4 million and $116.6 million in the first nine months of
fiscal 2002 and 2001, respectively. The adoption of EITF 00-25 did not impact
the Cooperative's profitability.
EITF 01-09 also codifies and reconciles related guidance issued by the EITF
regarding EITF Issue No. 00-14, "Accounting for Certain Sales Incentives," which
addressed the recognition, measurement, and income statement classification for
sales incentives that a company offers to its customers. Accordingly, during the
third quarter and first nine 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 $1.9 million and $2.8 million
in the third quarter of fiscal 2002 and 2001, respectively, and $6.7 and $7.5
million in the first nine 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)
March 30, June 30, March 24,
2002 2001 2001
----------- ---------- ---------
Amortized intangibles:
Covenants not to compete $ 2,478 $ 2,478 $ 2,478
Other 12,000 12,000 12,000
Less: accumulated amortization (2,886) (2,012) (1,708)
---------- ---------- ---------
Intangible assets, net $ 11,592 $ 12,466 $ 12,770
========== ========== =========
The aggregate amortization expense associated with intangible assets was
approximately $0.3 million for the quarter ended March 30, 2002 and $0.9 million
for the nine months ended March 30, 2002. 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 third quarter and nine months ended March 24, 2001 is provided
below:
Three Months Ended Nine Months Ended
-------------------------- -------------------------
March 30, March 24, March 30, March 24,
2002 2001 2002 2001
---------- ---------- ---------- ---------
(Dollars in Thousands)
Reported net income $ 5,433 $ (541) $ 18,011 $ 7,917
Addback: goodwill amortization (net of taxes) 0 1,215 0 3,651
--------- --------- -------- ---------
Adjusted net income $ 5,433 $ 674 $ 18,011 $ 11,568
========= ========= ======== =========
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, under the agreement, 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 of 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 nine months ended March
30, 2002 and March 24, 2001 include: commercial market value of crops delivered
$70.1 million and $67.1 million, respectively. Pro-Fac's share of earnings was
$12.9 million and $6.4 million, respectively.
NOTE 4. INVENTORIES
The major classes of inventories are as follows:
(Dollars in Thousands)
March 30, June 30, March 24,
2002 2001 2001
---------- ---------- --------
Finished goods $ 308,169 $ 279,991 $ 319,431
Raw materials and supplies 29,083 33,865 28,077
---------- ---------- ---------
Total inventories $ 337,252 $ 313,856 $ 347,508
========== ========== =========
NOTE 5. DEBT
Summary of Long-Term Debt:
(Dollars in Thousands)
March 30, June 30, March 24,
2002 2001 2001
---------- ----------- -----------
Term Loan Facility $ 403,500 $ 411,600 $ 417,000
Senior Subordinated Notes 200,015 200,015 200,015
Subordinated Promissory Notes (net of discount) 31,829 29,660 28,460
Other 4,480 5,452 5,477
---------- ----------- ----------
Total debt 639,824 646,727 650,952
Less current portion (14,934) (15,599) (15,596)
---------- ----------- ----------
Total long-term debt $ 624,890 $ 631,128 $ 635,356
========== =========== ==========
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 satisfy 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.
In March 2002, Agrilink Foods entered into an exclusive letter of intent with
Vestar Capital Partners related to a capital investment of $175 million, before
fees and other expenses. It is contemplated that the investment would be in the
form of preferred and common equity interests. The closing of the transaction is
subject to the negotiation and execution of definitive agreements, together with
other customary conditions of closing.
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 Nine Months Ended
------------------------------ ----------------------------
March 30, March 24, March 30, March 24,
2002 2001 2002 2001
---------- --------- --------- ---------
Net Sales:
Vegetables $ 180.8 $ 203.7 $ 568.0 $ 630.4
Fruits 21.2 21.8 90.8 92.2
Snacks 20.9 20.7 65.1 65.4
Canned Meals 12.7 13.2 37.0 41.1
Other 9.3 10.1 27.8 31.1
-------- --------- -------- ---------
Continuing segments 244.9 269.5 788.7 860.2
Businesses closed1 0.0 5.0 0.0 35.9
-------- --------- -------- ---------
Total $ 244.9 $ 274.5 $ 788.7 $ 896.1
======== ========= ======== =========
Operating income2:
Vegetables3 $ 16.9 $ 16.8 $ 48.6 $ 48.0
Fruits 2.5 1.2 15.4 12.6
Snacks 1.1 0.6 4.3 4.2
Canned Meals 1.8 1.2 6.2 5.9
Other 1.2 0.4 3.0 1.6
-------- --------- -------- ---------
Continuing segments 23.5 20.2 77.5 72.3
Businesses closed1 0.0 0.8 0.0 5.3
Restructuring 0.0 0.0 (2.7) 0.0
Gain on pension curtailment 0.0 0.0 2.5 0.0
-------- --------- -------- ---------
Total consolidated operating income 23.5 21.0 77.3 77.6
Interest expense (15.9) (20.8) (51.6) (64.8)
-------- --------- -------- ---------
Income before taxes, dividends, and allocation of net proceeds $ 7.6 $ 0.2 $ 25.7 $ 12.8
======== ========= ======== =========
<FN>
1 Represents operations no longer part of the Cooperative.
2 In accordance with SFAS No. 142, goodwill is no longer amortized.
Amortization associated with the change resulting from the implementation
of SFAS No. 142 in the vegetable, fruit, snacks, canned meals, and other
product lines for the quarter ending March 30, 2002 was $1.7 million, $0.1
million, $0.1 million, $0.1 million, and $0.2 million, respectively, and
$5.1 million, $0.1 million, $0.3 million, $0.5 million, and $0.5 million,
respectively for the nine months ending March 30, 2002.
3 The Cooperative's investment in Great Lakes Kraut Company contributed
earnings in the vegetable product line of $0.6 million and $0.3 million for
the three months ended March 30, 2002 and March 24, 2001, respectively, and
$1.8 million and $1.5 million for the nine months ended March 30, 2002 and
March 24, 2001, 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 quarter and nine months ended March
30, 2002 and March 24, 2001. 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
March 30, 2002
------------------------------------------------------------------------------------
Pro-Fac Agrilink Subsidiary Non-Guarantor Eliminating
Cooperative Foods, Inc. Guarantors Subsidiaries Entries Consolidated
------------ ----------- ---------- ------------- ------------ ------------
(Dollars in Thousands)
Cash and cash equivalents $ 0 $ 5,544 $ 803 $ 1,291 $ 0 $ 7,638
Accounts receivable, net 0 86,914 2,825 146 0 89,885
Inventories -
Finished goods 0 307,767 236 166 0 308,169
Raw materials and supplies 0 28,358 578 147 0 29,083
--------- ---------- --------- -------- ---------- ----------
Total inventories 0 336,125 814 313 0 337,252
Other current assets 0 35,126 98 292 0 35,516
--------- ---------- --------- -------- ---------- ----------
Total current assets 0 463,709 4,540 2,042 0 470,291
Property, plant and equipment, net 0 288,332 4,010 3,450 0 295,792
Investment in subsidiaries $ 187,336 309,191 0 0 (496,527) 0
Goodwill and other intangible assets, net 0 54,842 193,061 0 0 247,903
Other assets 60 47,634 110,908 0 (120,055) 38,547
--------- ---------- --------- -------- ---------- ----------
Total assets $ 187,396 $1,163,708 $ 312,519 $ 5,492 $ (616,582) $1,052,533
========= ========== ========= ======== ========== ==========
Liabilities and Shareholders' Equity
Notes payable $ 0 $ 75,400 $ 0 $ 0 $ 0 $ 75,400
Current portion of long-term debt 0 14,934 0 0 0 14,934
Accounts payable 70 29,078 1,214 334 0 30,696
Accrued interest 0 10,722 0 0 0 10,722
Intercompany loans 0 (734) 87 647 0 0
Other current liabilities 15,815 53,168 5,541 997 0 75,521
---------- ---------- --------- -------- ---------- ----------
Total current liabilities 15,885 182,568 6,842 1,978 0 207,273
Long-term debt 0 624,890 0 0 0 624,890
Other non-current liabilities 9,400 168,914 0 0 (120,055) 58,259
--------- ---------- --------- -------- ---------- ----------
Total liabilities 25,285 976,372 6,842 1,978 (120,055) 890,422
Class B cumulative preferred stock 239 0 0 0 0 239
Class A common stock 10,481 0 0 0 0 10,481
Shareholders' equity 151,391 187,336 305,677 3,514 (496,527) 151,391
--------- ---------- --------- -------- ---------- ----------
Total liabilities and shareholders' equity $ 187,396 $1,163,708 $312,519 $ 5,492 $ (616,582) $1,052,533
========= ========== ======== ======== ========== ==========
Statement of Operations
For the Nine Months Ended March 30, 2002
--------------------------------------------------------------------------------
Pro-Fac Agrilink Subsidiary Non-Guarantor Eliminating
Cooperative Foods, Inc. Guarantors Subsidiaries Entries Consolidated
------------ ----------- ---------- ------------- ------------ ------------
(Dollars in Thousands)
Net sales $ 0 $ 777,270 $ 11,397 $ 14,655 $ (14,655) $ 788,667
Cost of sales 0 (610,177) (8,008) (14,106) 14,106 (618,185)
-------- --------- ------- -------- --------- ---------
Gross profit 0 167,093 3,389 549 (549) 170,482
Selling, administrative, and general expenses (1) (135,194) (2,644) 0 43,043 (94,796)
Other (expense)/income 0 (150) 43,043 582 (43,625) (150)
Income from joint venture 0 1,825 0 0 0 1,825
-------- --------- ------- -------- --------- ---------
Operating (loss)/income before dividing with Pro-Fac (1) 33,574 43,788 1,131 (1,131) 77,361
Interest (expense)/income 0 (59,592) 7,949 0 0 (51,643)
-------- --------- -------- -------- --------- ---------
Pretax (loss)/income before dividing with Pro-Fac (1) (26,018) 51,737 1,131 (1,131) 25,718
Pro-Fac share of income 12,860 (12,860) 0 0 0 0
-------- ---------- -------- -------- --------- ---------
Income/(loss) before taxes 12,859 (38,878) 51,737 1,131 (1,131) 25,718
Tax (provision)/benefit (2,242) 13,338 (18,402) (401) 0 (7,707)
-------- ---------- -------- -------- --------- ---------
Net income/(loss) $ 10,617 $ (25,540) $ 33,335 $ 730 $ (1,131) $ 18,011
======== ========== ======== ======== ========= =========
Statement of Operations
For the Quarter Ended March 30, 2002
------------------------------------------------------------------------------------
Pro-Fac Agrilink Subsidiary Non-Guarantor Eliminating
Cooperative Foods, Inc. Guarantors Subsidiaries Entries Consolidated
------------ ----------- ---------- ------------- ------------ ------------
(Dollars in Thousands)
Net sales $ 0 $ 241,509 $ 3,377 $ 6,834 $ (6,834) $ 244,886
Cost of sales 0 (188,407) (2,530) (6,475) 6,475 (190,937)
--------- ---------- --------- --------- ---------- ---------
Gross profit 0 53,102 847 359 (359) 53,949
Selling, administrative, and general expenses 0 (41,247) (863) 0 11,081 (31,029)
Other (expense)/income 0 0 11,081 368 (11,449) 0
Income from joint venture 0 627 0 0 0 627
--------- ---------- --------- --------- --------- ---------
Operating income before dividing with Pro-Fac 0 12,482 11,065 727 (727) 23,547
Interest (expense)/income 0 (18,616) 2,665 0 0 (15,951)
--------- ----------- --------- -------- -------- ---------
Pretax (loss)/income before dividing with Pro-Fac 0 (6,134) 13,730 727 (727) 7,596
Pro-Fac share of income 3,798 (3,798) 0 0 0 0
--------- ---------- --------- --------- ---------- ---------
Income/(loss) before taxes 3,798 (9,932) 13,730 727 (727) 7,596
Tax (provision)/benefit (683) 3,567 (4,899) (148) 0 (2,163)
--------- ---------- --------- --------- ---------- ---------
Net income/(loss) $ 3,115 $ (6,365) $ 8,831 $ 579 $ (727) $ 5,433
========= ========== ========= ========= ======== =========
Statement of Cash Flows
For the Nine Months Ended March 30, 2002
----------------------------------------------------------------------------
Pro-Fac Agrilink Subsidiary Non-Guarantor Eliminating
Cooperative Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net income/(loss) $ 10,617 $ (25,540) $ 33,335 $ 730 $ (1,131) $ 18,011
Adjustments to reconcile net income/(loss) to net
cash provided by/(used in) operating activities -
Estimated cash payments due to class A members (1,613) 0 0 0 0 (1,613)
Depreciation 0 22,261 405 221 0 22,887
Amortization of goodwill and certain intangible assets 0 299 563 0 0 862
Amortization of debt issue costs, amendment costs,
and discount on subordinated promissory note 0 4,225 0 0 0 4,225
Interest-in-kind on subordinated promissory note 0 873 0 0 0 873
Equity in undistributed earnings of joint venture 0 (1,067) 0 0 0 (1,067)
Change in working capital (1,792) (61,183) (33,521) 345 1,131 (95,020)
-------- --------- -------- --------- -------- ---------
Net cash provided by/(used in) operating activities 7,212 (60,132) 782 1,296 0 (50,842)
Cash flows from investing activities:
Purchase of property, plant, and equipment 0 (10,521) 0 (16) 0 (10,537)
Proceeds from disposals 0 52 0 0 0 52
Proceeds from investment in CoBank 0 3,998 0 0 0 3,998
-------- --------- -------- --------- -------- ---------
Net cash used in investing activities 0 (6,471) 0 (16) 0 (6,487)
Cash flows from financing activities:
Net proceeds from issuance of short-term debt 0 75,400 0 0 0 75,400
Payments on long-term debt 0 (9,072) 0 0 0 (9,072)
Payments on capital lease 0 (111) 0 0 0 (111)
Cash paid for debt amendments 0 (1,694) 0 0 0 (1,694)
(Repurchase)/issuance of common stock, net (806) 0 0 0 0 (806)
Cash dividends paid (6,406) 0 0 0 0 (6,406)
-------- --------- -------- --------- --------- ---------
Net cash (used in)/provided by financing activities (7,212) 64,523 0 0 0 57,311
Net change in cash and cash equivalents 0 (2,080) 782 1,280 0 (18)
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 $ 5,544 $ 803 $ 1,291 $ 0 $ 7,638
======== ========= ======== ========= ======== =========
Balance Sheet
March 24, 2001
-----------------------------------------------------------------------------
Pro-Fac Agrilink Subsidiary Non-Guarantor Eliminating
Cooperative Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Assets
Cash and cash equivalents $ 0 $ 4,939 $ 192 $ 1,440 $ 0 $ 6,571
Accounts receivable, net 0 112,252 2,329 53 0 114,634
Inventories -
Finished goods 0 318,878 333 220 0 319,431
Raw materials and supplies 0 27,512 439 126 0 28,077
---------- ---------- --------- -------- ---------- ----------
Total inventories 0 346,390 772 346 0 347,508
Other current assets 105 46,278 162 226 0 46,771
---------- ---------- --------- -------- ---------- ----------
Total current assets 105 509,859 3,455 2,065 0 515,484
Property, plant and equipment, net 0 300,366 4,198 3,695 0 308,259
Investment in subsidiaries 182,674 319,582 0 0 (502,256) 0
Goodwill and other intangible assets, net 0 48,460 202,768 0 0 251,228
Other assets 59 53,850 114,519 0 (123,714) 44,714
---------- ---------- --------- -------- ---------- ----------
Total assets $ 182,838 $1,232,117 $ 324,940 $ 5,760 $ (625,970) $1,119,685
========== ========== ========= ======== ========== ==========
Liabilities and Shareholders' Equity
Notes payable $ 0 $ 78,000 $ 0 $ 0 $ 0 $ 78,000
Current portion of long-term debt 0 15,596 0 0 0 15,596
Accounts payable 57 79,439 1,169 286 0 80,951
Accrued interest 0 12,873 0 0 0 12,873
Intercompany loans 0 (2,466) 1,188 1,278 0 0
Other current liabilities 11,466 54,222 6,321 876 0 72,885
---------- ---------- --------- -------- ---------- ----------
Total current liabilities 11,523 237,664 8,678 2,440 0 260,305
Long-term debt 0 635,356 0 0 0 635,356
Other non-current liabilities 9,400 176,423 0 0 (123,714) 62,109
---------- ---------- --------- -------- ---------- ----------
Total liabilities 20,923 1,049,443 8,678 2,440 (123,714) 957,770
Class B cumulative redeemable preferred stock 237 0 0 0 0 237
Class A common stock 11,296 0 0 0 0 11,296
Shareholders' equity 150,382 182,674 316,262 3,320 (502,256) 150,382
---------- ---------- --------- -------- ---------- ----------
Total liabilities and shareholders' equity $ 182,838 $1,232,117 $ 324,940 $ 5,760 $ (625,970) $1,119,685
========== ========== ========= ======== ========== ==========
Statement of Operations
For the Nine Months Ended March 24, 2001
-----------------------------------------------------------------------------
Pro-Fac Agrilink Subsidiary Non-Guarantor Eliminating
Cooperative Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net sales $ 0 $ 848,539 $ 11,617 $ 76,414 $ (40,514) $ 896,056
Cost of sales 0 (687,760) (7,337) (76,299) 48,923 (722,473)
--------- --------- --------- ---------- --------- ----------
Gross profit 0 160,779 4,280 115 8,409 173,583
Selling, administrative, and general expenses (11) (134,101) (7,434) (3,226) 47,244 (97,528)
Other income 0 0 47,244 591 (47,835) 0
Income from joint venture 0 1,540 0 0 0 1,540
--------- --------- --------- ---------- --------- ----------
Operating (loss)/income before dividing with Pro-Fac (11) 28,218 44,090 (2,520) 7,818 77,595
Interest (expense)/income 0 (66,661) 7,165 (5,298) 0 (64,794)
--------- --------- --------- ---------- --------- ----------
Pretax (loss)/income before dividing with Pro-Fac (11) (38,443) 51,255 (7,818) 7,818 12,801
Pro-Fac share of income 6,408 (6,408) 0 0 0 0
--------- --------- --------- ---------- --------- ----------
Income/(loss) before taxes 6,397 (44,851) 51,255 (7,818) 7,818 12,801
Tax (provision)/benefit (2,154) 16,212 (18,436) (506) 0 (4,884)
--------- --------- --------- ---------- --------- ----------
Net income/(loss) $ 4,243 $ (28,639) $ 32,819 $ (8,324) $ 7,818 $ 7,917
========= ========= ========= ========== ========= ==========
Statement of Operations
For the Quarter Ended March 24, 2001
----------------------------------------------------------------------------
Pro-Fac Agrilink Subsidiary Non-Guarantor Eliminating
Cooperative Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net sales $ 0 $ 265,703 $ 3,732 $ 16,557 $ (11,565) $ 274,427
Cost of sales 0 (213,317) (2,510) (15,416) 13,141 (218,102)
--------- --------- --------- ---------- --------- ----------
Gross profit 0 52,386 1,222 1,141 1,576 56,325
Selling, administrative, and general expenses (1) (45,487) (2,512) (1,872) 14,263 (35,609)
Other income 0 0 14,263 176 (14,439) 0
Income from joint venture 0 316 0 0 0 316
--------- --------- --------- ---------- --------- ----------
Operating (loss)/income before dividing with Pro-Fac (1) 7,215 12,973 (555) 1,400 21,032
Interest (expense)/income 0 (22,745) 2,737 (845) 0 (20,853)
--------- --------- --------- ---------- ---------- ----------
Pretax (loss)/income before dividing with Pro-Fac (1) (15,530) 15,710 (1,400) 1,400 179
Pro-Fac share of income 92 (92) 0 0 0 0
--------- --------- --------- ---------- --------- ----------
Income/(loss) before taxes 91 (15,622) 15,710 (1,400) 1,400 179
Tax (provision)/benefit (681) 5,884 (5,653) (270) 0 (720)
--------- --------- --------- ---------- --------- ----------
Net (loss)/income $ (590) $ (9,738) $ 10,057 $ (1,670) $ 1,400 $ (541)
========= ========= ========= ========== ========= ==========
Statement of Cash Flows
For the Nine Months Ended March 24, 2001
----------------------------------------------------------------------------
Pro-Fac Agrilink Subsidiary Non-Guarantor Eliminating
Cooperative Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ----------- ---------- ------------- ----------- ------------
(Dollars in Thousands)
Net income/(loss) $ 4,243 $ (28,639) $ 32,819 $ (8,324) $ 7,818 $ 7,917
Adjustments to reconcile net income/(loss) to net
cash provided by/(used in) operating activities -
Estimated cash payments due to Class A members (61) 0 0 0 0 (61)
Depreciation 0 22,285 425 1,436 0 24,146
Amortization of goodwill and certain intangible assets 0 1,933 5,481 0 0 7,414
Amortization of debt issue costs, amendment costs,
and discount on subordinated promissory note 0 3,860 0 322 0 4,182
Interest-in-kind on subordinated promissory note 0 1,231 0 0 0 1,231
Equity in undistributed earnings of joint venture 0 (1,540) 0 0 0 (1,540)
Equity in undistributed earnings of CoBank 0 (96) 0 0 0 (96)
Change in working capital 1,425 (47,715) (36,007) 7,059 (7,818) (83,056)
-------- --------- --------- ---------- --------- -----------
Net cash provided by/(used in) operating activities 5,607 (48,681) 2,718 493 0 (39,863)
Cash flows from investing activities:
Purchase of property, plant, and equipment 0 (17,083) (2,735) (1,163) 0 (20,981)
Proceeds from disposals 0 5,058 0 10 0 5,068
Proceeds from investment in CoBank 0 2,926 0 0 0 2,926
-------- --------- --------- ---------- --------- ----------
Net cash used in investing activities 0 (9,099) (2,735) (1,153) 0 (12,987)
Cash flows from financing activities:
Net proceeds from issuance of short-term debt 0 72,300 0 2,100 0 74,400
Payments on long-term debt 0 (12,659) 0 0 0 (12,659)
Cash paid in conjunction with debt amendment 0 (1,707) 0 0 0 (1,707)
Cash portion of non-qualified conversion (83) 0 0 0 0 (83)
(Repurchases)/issuance of common stock, net 631 0 0 0 0 631
Cash dividends paid (6,155) 0 0 0 0 (6,155)
--------- --------- --------- ---------- --------- ----------
Net cash (used in)/provided by financing activities (5,607) 57,934 0 2,100 0 54,427
Net change in cash and cash equivalents 0 154 (17) 1,440 0 1,577
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 $ 4,939 $ 192 $ 1,440 $ 0 $ 6,571
======== ========= ========= ========== ========= ==========
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
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 six 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 $1.3 million has been paid and the
remaining termination benefits will be liquidated during the next three 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 April 29, 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, including
competitive pricing;
|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 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;
|X| the Cooperative's ability to service debt;
|X| interest rate fluctuations;
|X| effectiveness of marketing and shifts in market demand.
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 third quarter and first nine 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 nine months ended March 30, 2002 and March 24, 2001.
EBITDA1,2
(Dollars in Millions)
Three Months Ended Nine Months Ended
------------------------------------------ -------------------------------------------
March 30, March 24, March 30, March 24,
2002 2001 2002 2001
------------------- ------------------ ------------------- -------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
------ ----- -------- ------ -------- ------ ---------- ------
Vegetables $ 22.9 73.2% $ 24.3 77.3% $ 66.0 65.2% $ 70.4 64.4%
Fruits 3.2 10.2 2.1 6.7 18.4 18.2 14.8 13.6
Snacks 1.6 5.1 1.5 4.8 6.1 6.0 7.1 6.5
Canned Meals 2.1 6.7 1.5 4.8 6.9 6.8 7.0 6.4
Other 1.5 4.8 1.0 3.2 3.8 3.8 3.4 3.1
------ ----- ------- ----- -------- ----- ------- ------
Continuing segments 31.3 100.0 30.4 96.8 101.2 100.0 102.7 94.0
Businesses closed3 0.0 0.0 1.0 3.2 0.0 0.0 6.5 6.0
------ ----- ------- ----- -------- ----- ------- ------
Total $ 31.3 100.0% $ 31.4 100.0% $ 101.2 100.0% $ 109.2 100.0%
====== ===== ======= ===== ======== ===== ======= ======
<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.
</FN>
2 Excludes gain from pension curtailment and restructuring charges.
3 Represents the operating results of operations no longer part of the
Cooperative.
Net Sales
(Dollars in Millions)
Three Months Ended Nine Months Ended
------------------------------------------ ------------------------------------------
March 30, March 24, March 30, March 24,
2002 2001 2002 2001
------------------- ------------------ ------------------- ------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
------- ------- -------- ------- -------- ------- -------- -----
Vegetables $ 180.8 73.8% $ 203.7 74.3% $ 568.0 72.0% $ 630.4 70.3%
Fruits 21.2 8.7 21.8 7.9 90.8 11.5 92.2 10.3
Snacks 20.9 8.5 20.7 7.5 65.1 8.3 65.4 7.3
Canned Meals 12.7 5.2 13.2 4.8 37.0 4.7 41.1 4.6
Other 9.3 3.8 10.1 3.7 27.8 3.5 31.1 3.5
------- ----- -------- ----- -------- ------ -------- -----
Continuing segments 244.9 100.0 269.5 98.2 788.7 100.0 860.2 96.0
Businesses closed1 0.0 0.0 5.0 1.8 0.0 0.0 35.9 4.0
------- ----- -------- ----- -------- ------ -------- -----
Total $ 244.9 100.0% $ 274.5 100.0% $ 788.7 100.0% $ 896.1 100.0%
======= ===== ======== ===== ======== ====== ======== =====
<FN>
1 Represents net sales of operations no longer part of the Cooperative.
</FN>
Operating Income1,2
(Dollars in Millions)
Three Months Ended Nine Months Ended
-------------------------------------------- ------------------------------------------
March 30, March 24, March 30, March 24,
2002 2001 2002 2001
------------------- -------------------- ------------------- ------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
-------- -------- --------- ------- ---------- -------- -------- ------
Vegetables $ 16.9 71.9% $ 16.8 80.0% $ 48.6 62.7% $ 48.0 61.9%
Fruits 2.5 10.6 1.2 5.7 15.4 19.9 12.6 16.2
Snacks 1.1 4.7 0.6 2.9 4.3 5.5 4.2 5.4
Canned Meals 1.8 7.7 1.2 5.7 6.2 8.0 5.9 7.6
Other 1.2 5.1 0.4 1.9 3.0 3.9 1.6 2.1
------- ----- -------- ----- -------- ----- ------- -----
Continuing segments 23.5 100.0 20.2 96.2 77.5 100.0 72.3 93.2
Businesses closed3 0.0 0.0 0.8 3.8 0.0 0.0 5.3 6.8
------- ----- -------- ----- -------- ----- ------- -----
Total $ 23.5 100.0% $ 21.0 100.0% $ 77.5 100.0% $ 77.6 100.0%
======= ===== ======== ===== ======== ===== ======= =====
<FN>
1 Excludes gain from pension curtailment and restructuring charges.
2 In accordance with SFAS No. 142, goodwill is no longer amortized.
Amortization associated with the change resulting from the implementation
of SFAS No. 142 in the vegetable, fruit, snacks, canned meals, and other
product lines for the quarter ending March 30, 2002 was $1.7 million, $0.1
million, $0.1 million, $0.1 million, and $0.2 million, respectively, and
$5.1 million, $0.1 million, $0.3 million, $0.5 million, and $0.5 million,
respectively for the nine months ending March 30, 2002.
3 Represents the operating results of operations no longer part of the
Cooperative.
</FN>
CHANGES FROM THIRD QUARTER FISCAL 2001 TO THIRD QUARTER FISCAL 2002
During the third quarter of fiscal 2002, net income increased $6.0 million from
the third quarter of fiscal 2001. During this same period, EBITDA from
continuing operations increased $0.9 million, or 2.9 percent. The positive
results in EBITDA for the third quarter of fiscal 2002 were a result of the
pricing actions implemented throughout the last 12 months, restructuring efforts
initiated in October 2001, and numerous other company-wide efforts to reduce
spending. In addition, Agrilink Foods achieved these improved results in spite
of additional warehousing costs due to an increase in inventory levels and a
one-time expense associated with an
arbitrated contract settlement with Dean Pickle and Specialty Products Company
("Dean Pickle"). As part of the June 2000 sale of Agrilink Foods' pickle
business to Dean Pickle, the parties entered into an agreement whereby Agrilink
Foods agreed to contract pack products for a period of two years. Fiscal 2002
represents the second and final year of the contract. Agrilink Foods and Dean
Pickle disagreed on how pricing was to be established for the current year. The
arbitrated settlement required the recording of a $1.7 million charge in the
third quarter and resolved all disputes regarding the pricing of product packed
during fiscal 2002.
The earnings improvement for the quarter of $6.0 million was more favorable than
on an EBITDA basis due to a reduction in amortization expense resulting from the
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" (see NOTE 2 of
the "Notes to Consolidated Financial Statements) and a decline in interest
expense driven by general interest rate reductions.
Net sales for the third quarter from continuing businesses declined $24.6
million or 9.1 percent as compared to the prior year. Fiscal 2001 results
included, however, approximately $10.0 million of net sales associated with the
one-time sale of inventory purchased from CoBank, the secured lender to PF
Acquisition II, Inc. ("the Northwest inventory purchase"). Prior to February 15,
2001, PF Acquisition II, Inc. was a wholly-owned subsidiary of Pro-Fac
Cooperative, Inc. Adjusting for these sales, Agrilink Foods' net sales were down
$14.6 million or 5.5 percent due primarily to overall market declines in the
home replacement skillet meal category and increased competitive pressure in the
non-branded frozen vegetable segment. The home replacement skillet meal category
for the 12-week period ending March 2002 showed a decline of approximately 26.0
percent, while the frozen vegetable category showed a decline of only 2.0
percent for the 12-week period ending March 2002. Agrilink Foods' overall market
share for the third quarter declined 0.4 points due to modest share declines in
private label. Agrilink Foods estimates its overall market share for the 12-week
period ending March 2002 for frozen vegetables to be 31.5 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 decreased $1.4 million or 5.8 percent
during the third quarter of fiscal 2002. The decline in profitability is
primarily a result of lower volume within Agrilink Foods' Birds Eye Voila!
product line, the one-time charge associated with the above mentioned settlement
with Dean Pickle, and the earnings in fiscal 2001 associated with the Northwest
inventory purchase. Overall, vegetable net sales decreased $22.9 million in the
third quarter of fiscal 2002 as compared to the prior year. $10.0 million of the
net sales decline was associated with the fiscal 2001 Northwest inventory
purchase. Management attributes the remaining decline to increased competitive
pressure in the non-branded frozen vegetable business.
Within the branded vegetable category, net sales declined $11.6 million.
Significant components include the following: Birds Eye Simply Grillin', a
seasoned blend of top quality Birds Eye vegetables in a foil tray, launched in
the fourth quarter of fiscal 2001, accounted for $2.2 million of increased net
sales. Fueled by strong promotional activity during the spring holiday season,
net sales of Birds Eye frozen vegetables in retail channels increased
approximately $1.8 million. Net sales of Birds Eye frozen vegetables in
alternate channels, however, declined $5.6 million due to changes in the
supplier mix decided by the customer. Branded vegetable net sales were also
negatively impacted by Agrilink Foods' Birds Eye Voila! product line which
decreased $6.7 million over the third quarter of fiscal 2001. While Birds Eye
Voila! maintained its share point during the 12-week period ending March 2002,
Agrilink Foods was not able to mitigate the impact of the 26.0 percent category
decline within the home meal replacement category. Management has and will
continue to examine this category for opportunities to enhance performance for
this product line. Net sales of Agrilink Foods' regional branded product lines
declined $3.3 million due to competitive pressures.
Excluding sales associated with the Northwest inventory purchase, non-branded
vegetable net sales declined $1.3 million during the third quarter. Agrilink
Foods' non-branded business continues to be impacted by competitive pressures.
In addition, during the first quarter of fiscal 2002, Agrilink Foods implemented
pricing actions to offset industry wide cost increases. Subsequent to Agrilink
Foods price increase, several competitors have followed with similar pricing
structures.
EBITDA for the fruit product line increased $1.1 million or 52.3 percent during
the third quarter of fiscal 2002. This improvement in profitability results from
initiatives focused on pricing efforts and ongoing initiatives taken to improve
production and reduce product costs. Fruit net sales have decreased $0.6 million
or 2.8 percent attributable primarily to volume declines.
Net sales for the snack product line showed a modest increase of $0.2 million,
or 1.0 percent. Improvements in net sales within the potato chip category were
$0.5 million, while the popcorn product line decreased $0.3 million. EBITDA
increased $0.1 million or 6.7 percent primarily due to sales growth in the
potato chip business. The popcorn category continues to be negatively impacted
by competitive pressures and changes in product mix.
Net sales for canned meals decreased $0.5 million, or 3.8 percent, while EBITDA
increased $0.6 million, or 40.0 percent. The reduction in net sales is a result
of competitive pressures within the private label category. The increase in
canned meal profitability is driven by improvements in the cost of ingredients
used in the production of chili.
EBITDA of the other product line, which is primarily represented by salad
dressings, increased $0.5 million or 50.0 percent. EBITDA benefited from both
increases in price and reductions in raw product costs, including oil. Net
sales, however, decreased $0.8 million or 7.9 percent primarily due to the loss
of one food service customer. The loss of this customer will not have a
significant impact on Agrilink Foods' operations.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses, excluding the settlement with Dean Pickle described above,
have decreased $6.3 million, or 17.7 percent, as compared with the third quarter
of the prior fiscal year. This decrease is attributable to 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"). Variable selling expense,
consisting primarily of brokerage expense, decreased $2.1 million due to reduced
volumes and reduced rates in the non-branded categories. In addition, savings of
approximately $1.3 million were associated with both the restructuring actions
implemented in the second quarter of fiscal 2002 and general company-wide
reductions in spending. An additional $1.9 million of expenses in fiscal 2001
were associated with AgriFrozen, a former subsidiary of the Cooperative. These
savings were partially offset by an increase in various employee incentive
programs compared to the third quarter of fiscal 2001.
Operating Income: Operating income from continuing operations, excluding the
implementation of SFAS No. 142 and the settlement with Dean Pickle described
above, increased from $20.2 million in the third quarter of fiscal 2001 to $23.0
million in the third quarter of fiscal 2002. This represents an increase of $2.8
million or 13.9 percent. Increases in operating income within vegetables,
fruits, snacks, canned meals, and other were $0.1 million, $1.2 million, $0.4
million, $0.5 million, and $0.6 million, respectively. Significant variances are
highlighted above in the discussion of EBITDA and net sales.
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 third quarter of fiscal 2002 compared to the prior
year.
Interest Expense: Interest expense decreased $4.9 million to $16.0 million in
the third quarter of fiscal 2002 from $20.9 million in the third quarter of
fiscal 2001. The reduction in interest expense is the result of a decrease in
Agrilink Foods' weighted average interest rate of 2.4 percent resulting from
general interest rate reductions and a lower average outstanding balances during
the quarter of approximately $2.6 million. In addition, the decrease was due to
$0.9 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.
CHANGES FROM FIRST NINE MONTHS FISCAL 2001 TO FIRST NINE MONTHS FISCAL 2002
During the first nine months of fiscal 2002, net income increased $10.1 million
from the first nine 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, the
implementation of SFAS No. 142 which reduced amortization expense, and the
charge associated with the Dean Pickle settlement. Accordingly, management
believes, to fairly 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 from continuing
operations (excluding non-recurring items) for the first nine months of fiscal
2002 versus the prior year, increased $0.2 million. EBITDA was impacted by
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 pricing improvements, fixed cost reductions
resulting from restructuring actions and declines in manufacturing costs
resulting from the current year production activities.
Net sales from continuing operations during the nine months declined $71.5
million or 8.3 percent. Of this decline, $21.4 million is associated with a
co-pack agreement for canned vegetables in the Midwest in fiscal 2001 and an
additional $10.0 million in fiscal 2001 associated with the Northwest inventory
purchase. The remaining $40.1 million is primarily attributable to lower volume
due to overall market declines in the frozen skillet meal category and
short-term declines in the food service channel subsequent to September 11,
2001. The total frozen vegetable category in the year to date period ending
March 2002 showed a decline of approximately 6.0 percent. However, Agrilink
Foods' overall year-to-date market share showed an improvement of 0.3 points.
Agrilink Foods estimates its overall market share for the year to date period
ending March 2002, for frozen vegetables to be 31.8 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.
Excluding sales associated with the co-pack agreement and the Northwest
inventory purchase in fiscal 2001, vegetable net sales declined $31.0 million or
5.2 percent. Competitive pressures within Agrilink Foods' non-branded business
accounted for $18.8 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 implemented a price increase across all
non-branded vegetable commodities to offset industry wide cost increases.
Subsequent to Agrilink Foods' price increase, several competitors have followed
with similar pricing increases.
Overall branded net sales showed a decline of $12.2 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 $7.4 million of additional net sales.
Net sales of Birds Eye frozen vegetables within the retail channel increased
approximately $3.5 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
$11.8 million decrease in the Birds Eye Voila! product line as a result of
continued declines in the home meal replacement category. For the year to date
period ending March 2002, the frozen skillet meal category declined
approximately 21.0 percent. Birds Eye Voila!, the leading brand in this
category, has experienced declines consistent with the category. Further, net
sales declines of $9.8 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 (excluding the Dean settlement highlighted
above) declined $2.7 million or 3.9 percent during the first nine 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
$2.4 million of incremental marketing activity for other branded vegetable
products. In addition, warehousing costs increased due to an increase in
inventory levels over the prior year 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 and declines in manufacturing costs
resulting from the current year production activities.
EBITDA for the fruit product line increased $3.6 million or 24.3 percent
primarily attributable to improved pricing, timing of various marketing
initiatives, and continuous efforts to reduce product costs. Fruit net sales
have, however, showed a modest decrease of $1.4 million or 1.5 percent.
Net sales for the snack product line showed a decline of $0.3 million, or 0.5
percent. Improvements in net sales within the potato chip business were $1.9
million, while the popcorn product line decreased $2.2 million. EBITDA declined
$1.0 million or 14.1 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 in the first half of
fiscal 2002 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. These transition efforts have now been completed.
Net sales for canned meals decreased $4.1 million, or 10.0 percent, while EBITDA
decreased $0.1 million, or 1.0 percent. Net sales declined due to a decision to
not participate in an unprofitable promotion with a major retailer.
The other product line EBITDA, primarily represented by salad dressings,
increased $0.4 million, or 11.8 percent. Net sales, however, decreased $3.3
million, or 10.6 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 from continuing operations, excluding
non-recurring items, the implementation of SFAS No. 142, and the settlement with
Dean Pickle described above, increased from $72.3 million in fiscal 2001 to
$72.7 million in fiscal 2002. This represents an increase of $0.4 million, or
0.6 percent. Declines in operating income within vegetables, snacks, and canned
meals were $2.8 million, $0.2 million, and $0.2 million, respectively. The
increase within fruits was $2.7 million and the other product line $0.9 million.
Significant variances are highlighted above in the discussion of EBITDA and net
sales.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses, excluding the arbitration settlement with Dean Pickle above,
have decreased $4.4 million or 4.5 percent as compared with the first nine
months of the prior fiscal year. The decrease is primarily attributable to a
$6.6 million reduction in amortization expense resulting from the implementation
of SFAS No. 142 (see NOTE 2 to the "Notes to Consolidated Financial
Statements"). Variable selling costs, consisting primarily of brokerage expense,
decreased $3.5 million due to reduced volumes and reduced rates in the
non-branded category. In addition, savings of approximately $2.4 million were
associated with both the restructuring actions implemented in the second quarter
of fiscal 2002 and general company-wide reductions in spending. An additional
$3.2 million of expenses in fiscal 2001 were associated with AgriFrozen, a
former subsidiary of the Cooperative. These savings were partially offset by a
$5.0 million increase in marketing expenses associated with the retail launch of
Birds Eye Simply Grillin' during the first quarter and a $2.0 million increase
for other branded marketing initiatives during the second quarter of fiscal
2002. Additionally, in fiscal 2002 there was an increase in various employee
incentive programs compared to the first nine months of the prior fiscal year.
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
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 six 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, $1.3 million has been paid and the remaining
termination benefits will be liquidated during the next three 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.
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 $13.2 million to $51.6 million in
the first nine months of fiscal 2002 from $64.8 million in the first nine months
of fiscal 2001. The decrease is the result of Agrilink Foods' decrease in the
weighted average interest rate of 1.78 percent resulting from general interest
rate reductions, offset by higher average outstanding balances during the first
nine months of the year of approximately $3.9 million. Additionally, interest
expense was negatively impacted by a supplemental fee of $1.5 million paid in
September of 2001 in conjunction with Agrilink Foods' credit facility. (See NOTE
5 of the "Notes to Consolidated Financial Statements.") In addition, the
decrease was due to $5.3 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 $2.8
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. 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 nine months ended March 30, 2002
compared to the nine months ended March 24, 2001.
Net cash used in operating activities increased $11.0 million over the nine
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 Northwest
inventory of $21.6 million. In addition, the Cooperative has reduced its general
repack levels in an effort to manage its inventory position.
Net cash used in investing activities in the first nine months of fiscal 2002
decreased $6.5 million from the first nine 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 a reduction in
equipment purchases of $10.4 million. The purchase of property, plant, and
equipment was for general operating purposes.
Net cash provided by financing activities increased $2.9 million. This increase
was primarily due to 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 March 30, 2002, (i) cash borrowings outstanding under the Revolving Credit
Facility were $75.4 million, (ii) there were $20.6 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 $104.0 million. The Cooperative 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 March 30, 2002, 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 satisfy
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. The Revolving Credit Facility and the Term
Loans are scheduled to be renegotiated during the fall of 2003. There can be no
assurance that Agrilink Foods will obtain terms at least as favorable as its
current bank agreements, and different terms may require the Cooperative to
reexamine the cash used for investing and financing activities.
In March 2002, Agrilink Foods entered into an exclusive letter of intent with
Vestar Capital Partners related to a capital investment of $175 million, before
fees and other expenses. It is contemplated that the investment would be in the
form of preferred and common equity interests. The closing of the transaction is
subject to the negotiation and execution of definitive agreements, together with
other customary conditions of closing.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts. The estimates and
assumptions are evaluated on a regular basis and are based on historical
experience and on various other factors that are believed to be reasonable.
Estimates and assumptions include, but are not limited to: customer receivables,
inventories, self-insurance programs, promotional activities, long-lived assets
and retirement benefits.
We believe that the following are considered our more critical estimates and
assumptions used in the preparation of our consolidated financial statements,
although not inclusive.
Allowance for Doubtful Accounts: Management uses various data and historical
information to evaluate the adequacy of the reserve for receivables estimated to
be uncollectable as of the consolidated balance sheet date. In most
circumstances when we become aware of factors that may indicate a deterioration
in a customer's ability to meet its financial obligations to us, we record a
specific reserve for bad debts against amounts due to reduce the net recognized
receivable to the amount we reasonably believe will be collected. Changes in
estimates, developing trends and other new information can have a material
effect on future evaluations.
Inventory: Under the FIFO method, the cost of items sold is based upon the cost
of the first such items produced. As a result, the last such items produced
remain in inventory and the cost of these items are used to reflect ending
inventory. The Cooperative prices its inventory at the lower of cost or market
value on the first-in, first-out (FIFO) method.
A reserve is established for the estimated aged surplus, spoiled or damaged
products, and discontinued inventory items and components. The amount of the
reserve is determined by analyzing inventory composition, expected usage,
historical and projected sales information, and other factors. Changes in sales
volume due to unexpected economic or competitive conditions are among the
factors that could result in materially different amounts for this item.
Self-insurance Programs: We record estimates for certain health and welfare and
workers' compensation costs that are self-insured programs. Should a greater
amount of claims occur compared to what was estimated or costs of medical care
increase beyond what was anticipated, reserves recorded may not be sufficient
and additional costs could be incurred.
Promotional Activities: Our promotional activities are conducted either through
the retail trade channel or directly with consumers and involve in-store
displays; feature price discounts on our products; consumer coupons; and similar
activities. The costs of these activities are generally recognized at the time
the related revenue is recorded, which normally precedes the actual cash
expenditure. The recognition of these costs therefore requires management's
judgment regarding the volume of promotional offers that will be redeemed by
either the retail trade channel or consumer. These estimates are made using
various techniques including historical data on performance of similar
promotional programs. Differences between estimated expense and actual
redemptions are normally insignificant and recognized as a change in management
estimate in a subsequent period. However, the likelihood exists of materially
different reported results if different assumptions or conditions were to
prevail.
Impairment of Long-lived Assets: Impairment losses are recognized whenever
events or changes in circumstances indicate the carrying amount of an asset is
not recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset to future net cash flows expected
to be generated by the asset. We consider historical performance and estimated
future results in our evaluation of potential impairment. The future net cash
flows are based on management's current estimates and assumptions. Changes in
facts or circumstances could result in changes to these estimates and
assumptions resulting in a potential material impact to future financial
results.
Pensions: Our defined benefit pension plans are accounted for in accordance with
Statement of Financial Accounting Standards No. 87, "Employers' Accounting for
Pensions". The most significant elements in determining our pension expense in
accordance with SFAS No. 87 are the expected return on plan assets and the
discount rate used to discount plan liabilities. Our expected return on plan
assets is generally 9.5 percent. Our discount rate assumption is developed based
on a hypothetical portfolio of high quality (Aa or better) debt instruments that
generate cash flows equal to the projected benefit payments under the plans. Our
discount rate on plan liabilities is generally 7.8 percent. We believe that our
assumptions are reasonable.
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 March 30, 2002, Agrilink
Foods had cash flow hedges for the Mexican peso with maturity dates ranging from
March 2002 to May 2002. At March 30, 2002, the fair value of the open contracts
was an after-tax gain of approximately $0.1 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 third quarter of
fiscal 2002, approximately $0.4 million was reclassified from other
comprehensive income to cost of goods sold. For the first nine months of fiscal
2002, approximately $0.8 million has been reclassified from other comprehensive
income to cost of goods sold. Hedge ineffectiveness was insignificant.
Foreign Currency
Forward
-------------------
Contract amounts 9 million Pesos
Weighted average settlement exchange rate 11.1463%
On May 2, 2002, Agrilink Foods entered into foreign currency forward contracts
to purchase Mexican pesos that are designated as cash flow hedges of exchange
rate risk related to forecasted foreign currency-denominated sales. The forward
contracts hedge approximately 80 percent of Agrilink Foods' planned intercompany
sales. The termination date for the agreement is April 2003.
Foreign Currency
Forward
-------------------
Contract amounts 134 million Pesos
Weighted average settlement exchange rate 9.762%
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. At March 30, 2002, Agrilink Foods had an open swap hedging
approximately 65 percent of its planned corrugated requirements. The fair value
of the agreement is an after-tax gain of approximately $0.2 million recorded in
accumulated other comprehensive income in shareholders' equity. 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/short ton - $415
Maturities through June 2003
Agrilink Foods is also exposed to commodity price risk related to forecasted
purchases of polyethylene in its manufacturing process. To mitigate this risk,
Agrilink Foods entered into a swap agreement on April 11, 2002 designated as a
cash flow hedge of its forecasted polyethylene purchases. The swap hedges
approximately 80 percent of its planned polyethylene requirements. The
termination date for the agreement is June 2003.
Swap
Polyethylene
-------------------------------------
Notional amount 6,250,000 pounds
Average paid rate $.355/pound
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 Agrilink Foods' long-term
borrowings are variable rate instruments. In September 2001, Agrilink Foods
entered into an interest rate cap agreement 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 62 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 Agrilink Foods' interest rate cap agreement:
March 30, 2002
---------------------------
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 negatively impacted production costs. Management has
initiated pricing actions and cost reduction initiatives in order to fully
offset any crop-related production cost increases.
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 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 2 CHANGES IN SECURITIES
During January 2002, 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 27, 2002 639 $15,975
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The regional annual membership meetings for the members of Pro-Fac
were held as follows:
Date Region/District City/State
---------------- --------------- -------------------
January 25, 2002 I/1 and I/2 Batavia, New York
January 30, 2002 II/2 Bath, Illinois
January 31, 2002 II/2 Eldorado, Illinois
February 1, 2002 III Columbus, Nebraska
February 5, 2002 IV Wilsonville, Oregon
February 6, 2002 IV Mt. Vernon, Washington
February 8, 2002 V Americus, Georgia
February 27, 2002 I/3 Berlin, Pennsylvania
February 28, 2002 II/1 Holland, Michigan
(b) Kenneth Mattingly, Paul Roe, Glen Lee Chase, and Bruce Fox were
re-elected directors for a three-year term as a result of the
elections at the regional meetings held in January and February 2002.
The following is a list of the remaining directors whose terms of
office continued after the regional meetings.
Name Term Expires
--------------- ------------
Peter Call 2003
Robert DeBadts 2003
Steven D. Koinzan 2003
Allan Overhiser 2003
Darell D. Sarff 2003
Tom Croner 2004
Dale Burmeister 2004
Kenneth Dahlstedt 2004
Following are the voting results from the regional meetings:
Votes Cast For Votes Cast Against
-------------- ------------------
Kenneth Mattingly 76 0
Paul Roe 43 0
Glen Lee Chase 7 0
Bruce Fox 70 0
(c) As part of the regional annual membership meetings, Pro-Fac members
considered proposed amendments to Pro-Fac's restated certificate of
incorporation and bylaws. A total of 304 members as of January 25,
2002, were present or represented. A total of 294 votes were cast
"for", 6 cast "against", and 4 "abstaining" to the amendments to the
bylaws. A total of 295 votes were cast "for", 4 cast "against", and 5
"abstaining" to the amendments to the certificate of incorporation.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
-------------- -------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of Pro-Fac Cooperative, Inc.
3.2 Pro-Fac Cooperative, Inc. bylaws
10.1 Agrilink Foods, Inc. Key Executive Severance Plan - A
(b) Reports on Form 8-K:
On January 25, 2002, the Cooperative filed a report on Form 8-K to
report fiscal 2002 actual and plan operating results.
On March 12, 2002, the Cooperative filed a report on Form 8-K to
report that Agrilink Foods had entered into an exclusive letter of
intent with Vestar Capital Partners.
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 13, 2002 BY:/s/ Earl L. Powers
------------ --------------------------------
EARL L. POWERS
TREASURER
(On Behalf of the Registrant and as
Principal Financial Officer and
Principal Accounting Officer)