10 Page 1 of 10 Pages UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 Form 10-Q Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 27, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to File Number 0-20539 PRO-FAC COOPERATIVE, INC. (Exact Name of Registrant as Specified in its Charter) New York 16-6036816 (State or other jurisdiction of (IRS Employer incorporation or organization Identification Number) 90 Linden Place, PO Box 682, Rochester, NY 14603 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (716) 383-1850 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock as of October 10, 1997. Common Stock - 1,749,580 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS Pro-Fac Cooperative, Inc. Consolidated Statement of Operations and Net Proceeds (Dollars in Thousands) Quarter Ended September 27, September 28, 1997 1996 Net sales $176,397 $174,000 Cost of sales 130,748 132,309 -------- -------- Gross profit 45,649 41,691 Selling, administrative, and general expense (32,758) (32,916) -------- -------- Operating income 12,891 8,775 Interest expense (7,770) (9,881) -------- -------- Income/(loss) before taxes, dividends, allocation of net proceeds, and cumulative effect of an accounting change 5,121 (1,106) Tax provision (1,822) (527) -------- -------- Income/(loss) before cumulative effect of an accounting change, dividends, and allocation of net proceeds $ 3,299 (1,633) Cumulative effect of an accounting change 0 4,516 -------- -------- Net income $ 3,299 $ 2,883 ======== ======== Allocation of Net Proceeds: Net income $ 3,299 $ 2,883 Dividends on common and preferred stock (1,850) (1,335) -------- -------- Net proceeds 1,449 1,548 Allocation to earned surplus (788) (1,035) -------- -------- Net proceeds available to members $ 661 $ 513 ======== ======== Net Proceeds Available to Members: Estimated cash payment $ 165 $ 103 Qualified retains 496 410 -------- -------- Net proceeds available to members $ 661 $ 513 ======== ======== <FN> The accompanying notes are an integral part of these consolidated financial statements. </FN> Pro-Fac Cooperative, Inc. Consolidated Balance Sheet (Dollars in Thousands) September 27, June 28, September 28, 1997 1997 1996 ASSETS Current assets: Cash and cash equivalents $ 3,997 $ 2,838 $ 6,682 Accounts receivable, trade, net 65,053 48,661 62,020 Accounts receivable, other 3,845 2,795 6,268 Inventories - Finished goods 140,056 87,904 158,474 Raw materials and supplies 28,396 27,001 35,161 -------- -------- -------- Total inventories 168,452 114,905 193,635 -------- -------- -------- Prepaid manufacturing expense 0 8,265 1,111 Prepaid expenses and other current assets 8,464 6,323 8,742 Current deferred tax assets 12,312 12,312 13,731 Current investment in Bank 631 946 0 --------- -------- --------- Total current assets 262,754 197,045 292,189 Investment in Bank 24,320 24,321 24,439 Investment in Great Lakes Kraut Company 6,585 0 0 Property, plant, and equipment, net 209,216 217,923 269,254 Assets held for sale 3,259 3,259 5,113 Goodwill and other intangible assets, net 95,503 96,429 102,734 Other assets 7,525 7,700 12,550 -------- -------- --------- Total assets $609,162 $546,677 $706,279 LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION ======== ======== ======== Current liabilities: Notes payable $ 64,000 $ 0 $ 63,000 Current portion of obligations under capital leases 558 558 548 Current portion of long-term debt 8,073 8,075 8,075 Accounts payable 39,175 49,256 46,188 Income taxes payable 5,386 5,672 3,961 Accrued interest 3,960 8,663 4,767 Accrued employee compensation 7,981 11,063 8,143 Accrued manufacturing expense 2,899 0 0 Other accrued expenses 21,681 21,956 27,554 Dividends payable 0 61 0 Amounts due members 27,808 15,791 27,051 -------- -------- -------- Total current liabilities 181,521 121,095 189,287 Long-term debt 70,528 69,829 162,164 Senior subordinated notes 160,000 160,000 160,000 Obligations under capital leases 817 817 1,125 Deferred income tax liabilities 39,591 39,591 44,753 Other non-current liabilities 22,962 22,682 20,713 -------- -------- -------- Total liabilities 475,419 414,014 578,042 -------- -------- -------- Commitments and contingencies Class B cumulative redeemable preferred stock liquidation preference $10 per share, authorized - 500,000 shares; issued and outstanding 31,435, 31,435, and 33,364 shares, respectively 314 315 334 Common stock, par value $5, authorized - 5,000,000 shares September 27, June 28, September 28, 1997 1997 1996 Shares issued 1,749,580 1,788,815 1,855,329 Shares subscribed 44,808 54,557 57,859 --------- --------- --------- Total subscribed and issued 1,794,388 1,843,372 1,913,188 Less subscriptions receivable in installments (44,808) (54,557) (57,859) --------- --------- --------- 1,749,580 1,788,815 1,855,329 8,748 8,944 9,277 ========= ========= ========= Shareholders' and members' capitalization: Retained earnings allocated to members 32,409 31,920 32,728 Non-qualified allocation to members 2,960 2,960 3,275 Non-cumulative preferred stock, par value $25; authorized - 5,000,000 shares; issued and outstanding - 53,797, 53,797, and 105,788, respectively 1,345 1,345 2,645 Class A cumulative preferred stock, liquidation preference $25 per share; authorized - 49,500,000 shares; issued and outstanding 3,215,709, 3,215,709 and 3,032,704 shares, respectively 80,393 80,393 75,818 Earned surplus 7,574 6,786 4,160 -------- -------- -------- Total shareholders' and members' capitalization 124,681 123,404 118,626 -------- -------- -------- Total liabilities and capitalization $609,162 $546,677 $706,279 ======== ======== ======== <FN> The accompanying notes are an integral part of these consolidated financial statements. </FN> Pro-Fac Cooperative Inc. Consolidated Statement of Cash Flows (Dollars in Thousands) Quarter Ended September 27, September 28, 1997 1996 ------------------- ----------- Cash flows from operating activities: Net income $ 3,299 $ 2,883 Amounts payable to members (165) (103) Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of an accounting change 0 (4,516) Amortization of goodwill and other intangibles 990 1,093 Amortization of debt issue costs 199 200 Depreciation 4,597 6,135 Change in assets and liabilities: Accounts receivable (17,442) (14,215) Inventories (55,722) (63,061) Accounts payable and accrued expenses (6,976) (629) Amounts due to members 12,017 19,176 Federal and state taxes refundable (286) 471 Other assets and liabilities (2,463) (2,236) --------- --------- Net cash used in operating activities (61,952) (54,802) --------- --------- Cash flows from investing activities: Purchase of property, plant, and equipment (3,231) (3,920) Disposals of property, plant, and equipment 375 293 Proceeds from investment in CoBank 316 0 --------- --------- Net cash used in investing activities (2,540) (3,627) --------- --------- Cash flows from financing activities: Proceeds from short-term debt 64,000 63,000 Proceeds from long-term debt 2,000 0 Proceeds from Great Lakes Kraut Company 3,000 0 Payments on long-term debt (1,303) (5,519) (Repurchases)/issuances of common stock (196) 92 Cash dividends paid (1,850) (1,335) --------- --------- Net cash provided by financing activities 65,651 56,238 --------- --------- Net change in cash and cash equivalents 1,159 (2,191) Cash and cash equivalents at beginning of period 2,838 8,873 --------- --------- Cash and cash equivalents at end of period $ 3,997 $ 6,682 ========= ========= Supplemental Disclosure of Cash Flow Information: Investment in Great Lakes Kraut Company Inventories $ 2,175 Prepaid expenses and other current assets 409 Property, plant, and equipment 6,966 Other accrued expenses (62) --------- $ 9,488 ========= <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 accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for these periods. The following summarizes the significant accounting policies applied in the preparation of the accompanying financial statements. These financial statements should be read in conjunction with the financial statements and accompanying notes contained in Pro-Fac's Form 10-K for the fiscal year ended June 28, 1997. Consolidation: The consolidated financial statements include the Cooperative and its wholly-owned subsidiary, Agrilink Foods, Inc. ("Agrilink" or "the Company") after elimination of intercompany transactions and balances. Agrilink was formerly known as Curtice Burns Foods, Inc. (see NOTE 3 - "Other Matters"). Change in Accounting Principle: Effective June 30, 1996, accounting procedures were changed to include in prepaid expenses and other current assets, manufacturing spare parts previously charged directly to expense. The favorable cumulative effect of the change (net of income taxes of $1.2 million) was $4.5 million. Pro forma amounts for the cumulative effect of the accounting change on prior periods are not determinable due to the lack of physical inventory counts required to establish quantities at the respective dates. NOTE 2. AGREEMENTS WITH AGRILINK The contractual relationship between Agrilink and Pro-Fac is defined in the Pro-Fac Marketing and Facilitation Agreement ("Agreement"). Under the Agreement, the Company 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, it may be more or less than the price Agrilink would pay in the open market in the absence of the Agreement. Under the Agreement the Company is required to have on its board of directors some persons who are neither members of nor affiliated with Pro-Fac ("Disinterested Directors"). The number of Disinterested Directors must at least equal the number of directors who are members of Pro-Fac. The volume and type of crops to be purchased by Agrilink under the Agreement are determined pursuant to its annual profit plan, which requires the approval of a majority of the Disinterested Directors. In addition, in any year in which the Company has earnings on products which were processed from crops supplied by Pro-Fac ("Pro-Fac Products"), the Company pays to Pro-Fac up to 90 percent of such earnings, but in no case more than 50 percent of all pretax earnings (before dividing with Pro-Fac) of the Company. In years in which the Company has losses on Pro-Fac Products, the Company reduces the CMV it would otherwise pay to Pro-Fac by up to 90 percent of such losses, but in no case by more than 50 percent of all pretax losses (before dividing with Pro-Fac) of the Company. Additional patronage income is paid to Pro-Fac for services provided to Agrilink, 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 Indenture related to the Company's Senior Subordinated Notes, Pro-Fac is required to reinvest at least 70 percent of the additional Patronage income in Agrilink. NOTE 3. OTHER MATTERS Name Change: On September 18, 1997, the Cooperative's wholly-owned subsidiary, Curtice Burns Foods, Inc. changed its name to Agrilink Foods, Inc. The three recently consolidated business units of Agrilink, Comstock Michigan Fruit, Southern Frozen Foods, and Brooks Foods, are now called Curtice Burns Foods. Formation of New Sauerkraut Company: Effective July 1, 1997, the Company and Flanagan Brothers, Inc. of Bear Creek, Wisconsin, contributed all their assets involved in sauerkraut production to form a new sauerkraut company. This new company, Great Lakes Kraut Company, operates as a New York limited liability company, with ownership split between the two companies. Management believes the alliance will positively impact earnings. 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 $1.4 million and will be paid on October 31, 1997. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this review is to highlight the more significant changes in the major items in Consolidated Statement of Operations and Net Proceeds in the first quarter of fiscal 1998 versus the first quarter of 1997. PRO-FAC'S RESULTS OF OPERATIONS Pro-Fac Cooperative, Inc.'s ("Pro-Fac" or the "Cooperative") wholly-owned subsidiary, Agrilink has three primary business units: Curtice Burns Foods ("CBF"), Nalley Fine Foods, and its Snack Foods group. Each business unit offers different products and is managed separately. The majority of each of the business units' net sales are within the United States. In addition, all of the Company's operating facilities are within the United States. The CBF business unit produces products in several food categories, including fruit fillings and toppings; aseptically-produced products; canned and frozen fruits and vegetables, and popcorn. The Nalley business unit produces canned meat products such as chilies and stews, pickles, salad dressings, peanut butter, and syrup. The Company's snack foods business unit consists of the Snyder of Berlin, Husman Snack Foods, and Tim's Cascade Potato Chip businesses. This business unit produces and markets potato chips and other snack items. The following tables illustrate the results of operations by business unit for the quarters ended September 27, 1997 and September 28, 1996, and the total assets by business unit as of September 27, 1997 and September 28, 1996. Net Sales (Dollars in Millions) Quarter Ended September 27, September 28, 1997 1996 % of % of $ Total $ Total ------ ------- ------ ------ CBF $112.2 63.6% $ 99.2 57.0% Nalley Fine Foods 46.9 26.6 44.2 25.4 Snack Foods Group 17.3 9.8 17.2 9.9 ------ ----- ------ ----- Subtotal ongoing operations 176.4 100.0 160.6 92.3 Businesses sold1 0.0 0.0 13.4 7.7 ------ ------ ----- ------ Total $176.4 100.0% $174.0 100.0% ====== ===== ====== ===== <FN> 1 Includes the activity of Finger Lakes Packaging and the portion of the canned vegetable business sold in fiscal 1997. </FN> Operating Income (Dollars in Millions) Quarter Ended September 27, September 28, 1997 19961 % of % of $ Total $ Total ------ -------- ----- ------ CBF $ 9.0 69.8% $ 6.4 72.7% Nalley Fine Foods 3.7 28.7 2.1 23.9 Snack Foods Group 2.1 16.2 1.5 17.0 Corporate (1.9) (14.7) (1.7) (19.3) ----- ----- ----- ----- Subtotal ongoing operations 12.9 100.0 8.3 94.3 Businesses sold2 0.0 0.0 0.5 5.7 ----- ----- ----- ----- Total $12.9 100.0% $ 8.8 100.0% ===== ===== ===== ===== <FN> 1 Excludes cumulative effect of an accounting change for the quarter ended September 28, 1996. See NOTE 1 - "Summary of Accounting Policies - Change in Accounting Principle." 2 Includes the activity of Finger Lakes Packaging and the portion of the canned vegetable business sold in fiscal 1997. </FN> EBITDA1 (Dollars in Millions) Quarter Ended September 27, September 28, 1997 19962 % of % of $ Total $ Total ----- ----- ------ ------ CBF $12.7 68.6% $10.6 66.3% Nalley Fine Foods 5.1 27.6 3.6 22.5 Snack Foods Group 2.6 14.1 2.0 12.5 Corporate (1.9) (10.3) (1.7) (10.6) ----- ----- ------- ----- Subtotal ongoing operations 18.5 100.0 14.5 90.7 Businesses sold3 0.0 0.0 1.5 9.3 ----- ----- ------- ----- Total $18.5 100.0% $16.0 100.0% ===== ===== ===== ===== <FN> 1 Earnings before interest, taxes, depreciation, and amortization ("EBITDA") does not represent information prepared in accordance with generally accepted accounting principles, nor is such information considered superior to information presented in accordance with generally accepted accounting principles. The EBITDA calculation begins with Income/(loss) before taxes, dividends, allocation of net proceeds, and cumulative effect of an accounting change and adds to such amount interest expense, depreciation, and amortization of goodwill and other intangibles. 2 The above information excludes the cumulative effect of an accounting change for the quarter ended September 28, 1996. See NOTE 1 - "Summary of Accounting Policies - Change in Accounting Principle." 3 Includes the activity of the canned vegetable business sold in fiscal 1997. </FN> Total Assets (Dollars in Millions) Quarter Ended September 27, September 28, 1997 1996 % of % of $ Total $ Total ------ ------- ------- ------ CBF $377.3 61.9% $389.4 55.1% Nalley Fine Foods 155.8 25.6 154.7 21.9 Snack Foods Group 26.5 4.4 27.6 3.9 Corporate 49.6 8.1 61.8 8.8 ------ ----- ------ ----- Subtotal ongoing operations 609.2 100.0 633.5 89.7 Businesses sold1 0.0 0.0 72.8 10.3 ------ ----- ------ ----- Total $609.2 100.0% $706.3 100.0% ====== ===== ====== ===== <FN> 1 Includes the assets of Finger Lakes Packaging and the portion of the canned vegetable business sold in fiscal 1997. </FN> CHANGES FROM FIRST QUARTER FISCAL 1998 TO FIRST QUARTER FISCAL 1997 Net Sales: Net sales from ongoing operations increased in the first quarter compared to the prior year by $15.8 million or 10 percent. This significant increase reflects improvements at all three of the Company's business units. The most significant increases were noted in the vegetable and aseptic categories. Net sales for the CBF aseptic category increased $9.2 million, while the continuing vegetable business increased $4.6 million. The increase in aseptic sales results from new business, while the increase in the vegetable business is attributable to changes in product mix resulting in improvements in volume/pricing. The pickle and dressing categories at Nalley also increased $ 2.1 million and $1.3 million, respectively due to increased volume. Small gains were noted in the Snack Foods Group. Gross Profit: Gross profit of $45.6 million in the quarter ended September 27, 1997 increased $4.0 million or 9.5 percent from the quarter ended September 28, 1996. Excluding the businesses sold in fiscal 1997, the increase in gross profit is approximately $6.3 million. This increase results from increased sales as highlighted above. Selling, Administrative, and General Expenses: Selling, administrative, and general expenses have decreased $0.2 million as compared with the prior year. During the first quarter of fiscal 1998, the Company settled an outstanding tax claim with the state of Washington ($1.4 million). This settlement was, however, offset by increased costs due to competitive promotional spending/selling expenses (approximately $0.3 million) and the cost for employee incentive plans ($0.9 million). Interest Expense: Interest expense for the quarter ended September 27, 1997 decreased $2.1 million or 21 percent. This significant improvement is primarily the result of the focus on debt reduction which occurred throughout fiscal 1997. These activities included the sale of Finger Lakes Packaging, the sale of the canned vegetable business, and the sale of the Georgia distribution center. Reductions in outstanding debt accounted for a decrease of $2.0 million, while changes in rates accounted for a decrease of $0.1 million. Provision for Taxes: The provision for taxes in the quarter ended September 27, 1997 of $1.8 million increased from $0.5 million in the quarter ended September 28, 1996 due to improvements in earnings. The Company's effective tax rate is negatively impacted by the non-deductibility of goodwill. Cumulative Effect of a Change in Accounting: Effective June 30, 1996, accounting procedures were changed to include in prepaid expenses and other current assets, manufacturing spare parts previously charged directly to expense. The favorable cumulative effect of the change (net of income taxes of $1.2 million) was $4.5 million. Pro forma amounts for the cumulative effect of the accounting change on prior periods are not determinable due to the lack of physical inventory counts required to establish quantities at the respective dates. LIQUIDITY AND CAPITAL RESOURCES The following discussion highlights the major variances in the "Consolidated Statement of Changes in Cash Flows" for the first quarter of fiscal 1998 compared to the first quarter of fiscal 1997. Net cash used in operating activities increased approximately $7.2 million. Additional funds were used during the quarter to liquidate payments for crops. Crops in the current year have been available earlier for harvest than in the prior year. In addition, the reduction in inventories, attributed to the sale of the canned vegetable business in the fourth quarter of fiscal 1997, was offset by the increase in net income and the timing of the liquidation of outstanding receivables/payables. Net cash used in investing activities decreased in the first quarter of fiscal 1998 due to the timing of various capital expenditures. The purchase of property, plant, and equipment in both years was for general operating purposes. Net cash provided by financing activities increased from the prior year due to the receipt of proceeds from Great Lakes Kraut and additional borrowing incurred in the first quarter of fiscal 1998 for operating needs. Borrowings: Under the Company's Credit Agreement, as amended, Agrilink is able to borrow up to $66.0 million for seasonal working capital purposes under the Seasonal Facility, subject to a borrowing base limitation, and obtain up to $18.0 million in aggregate face amount of letters of credit pursuant to a Letter of Credit Facility. The borrowing base is defined as the lesser of (i) the total available line or (ii) the sum of 60 percent of eligible accounts receivable plus 50 percent of eligible inventory. As of September 27, 1997, (i) cash borrowings outstanding under the Seasonal Facility were $64.0 million and (ii) additional availability under the Seasonal Facility, after taking into account the amount of the borrowing was $2.0 million. In addition to its seasonal financing, as of September 27, 1997, the Company had $26.6 million available for long-term borrowings under the Term Loan Facility. The Cooperative believes that the cash flow generated by its operations and the amounts available under the Seasonal and Term Loan Facilities should be sufficient to fund its working capital needs, fund its capital expenditures, service its debt, and pay dividends for the foreseeable future. Certain financing arrangements require that Pro-Fac and Agrilink meet certain financial tests and ratios and comply with certain other restrictions and limitations. As of September 27, 1997, Pro-Fac is in compliance with all such covenants, restrictions and limitations. Short- and Long-Term Trends: The vegetable portion of the business can be positively or negatively affected by weather conditions nationally and the resulting impact on crop yields. Favorable weather conditions can produce high crop yields and an oversupply situation. This results in depressed selling prices and reduced profitability on the inventory produced from that year's crops. Excessive rain or drought conditions can produce low crop yields and a shortage situation. This typically results in higher selling prices and increased profitability. While the national supply situation controls the pricing, the supply can differ regionally because of variations in weather. The effect of the 1997 growing season on fiscal 1998 financial results cannot be estimated until late 1997 or early calendar 1998 when harvesting is complete and national supplies can be determined. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS EXHIBIT NUMBER DESCRIPTION Exhibit 3.3 Certificate of Incorporation of Pro-Fac Exhibit 27 Financial Data Schedule (b) No current report on Form 8-K was filed during the fiscal period to which this report relates. 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: November 6, 1997 BY:/s/ Stephen R. Wright ---------------- ------------------------------ STEPHEN R. WRIGHT, GENERAL MANAGER Date: November 6, 1997 BY:/s/ Earl L. Powers ---------------- ------------------------------ EARL L. POWERS, VICE PRESIDENT FINANCE AND ASSISTANT TREASURER (Principle Financial Officer and Principle Accounting Officer)