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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 23, 2006
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)
590 Willow Brook Office Park, Fairport, NY 14450
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (585) 218-4210
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 for 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
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Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES NO X
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. As of January 31, 2007.
Common Stock - 1,769,543
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1
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 23, 2006
PRO-FAC COOPERATIVE, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements................................................................................. 3
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................................ 16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........................................... 22
ITEM 4. Controls and Procedures.............................................................................. 22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................................................... 22
ITEM 1A. Risk Factors......................................................................................... 22
ITEM 5. Other Information.................................................................................... 22
ITEM 6. Exhibits............................................................................................. 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited condensed financial statements of Pro-Fac Cooperative, Inc. ("Pro-Fac"
or "the Cooperative") as of December 23, 2006 and for the three month and six
month periods ended December 23, 2006 and December 24, 2005 are presented on the
following pages. The financial statements have been prepared in accordance with
the Cooperative's usual accounting policies, are based, in part, on estimates
and reflect all normal and recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results of the interim
periods. The June 24, 2006 condensed balance sheet was derived from the
Cooperative's audited balance sheet at June 24, 2006.
This Part I also includes management's discussion and analysis of the
Cooperative's financial condition as of December 23, 2006 and its results of
operations for the three month and six month periods ended December 23, 2006.
PRO-FAC COOPERATIVE, INC.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
December 23, December 24, December 23, December 24,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net sales $ 2,072 $ 0 $ 2,880 $ 0
Cost of sales 1,943 0 2,776 0
------------ ------------ ------------ ------------
Gross profit 129 0 104 0
Equity in income/(loss) of Birds Eye
Holdings LLC 0 2,614 0 (1,672)
Gain from transaction with Birds Eye Foods, Inc.
and related agreements 1,200 1,190 3,600 3,570
Margin on delivered product 54 247 112 299
Selling, administrative and general expense (329) (279) (671) (547)
Other income 2 1 2 16
------------ ------------ ------------ ------------
Operating income 1,056 3,773 3,147 1,666
Interest income 61 27 118 60
Interest expense (25) (10) (37) (26)
------------ ------------ ------------ ------------
Income before income taxes 1,092 3,790 3,228 1,700
Income taxes (292) 0 (828) 0
------------ ------------ ------------ ------------
Net income $ 800 $ 3,790 $ 2,400 $ 1,700
============ ============ ============ ============
Net income $ 800 $ 3,790 $ 2,400 $ 1,700
Other comprehensive income/(loss):
Unrealized gain/(loss) on hedging activity of
equity investee 0 46 0 (26)
Minimum pension liability of investee 0 0 0 (71)
------------ ------------ ------------ ------------
Comprehensive income $ 800 $ 3,836 $ 2,400 $ 1,603
============ ============ ============ ============
The accompanying notes are an integral part of these condensed financial
statements.
3
PRO-FAC COOPERATIVE, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
December 23, June 24,
2006 2006
----------------- -----------------
Current assets:
Cash and cash equivalents $ 6,550 $ 2,391
Accounts receivable, trade 5,636 1,733
Accounts receivable from Birds Eye Foods, Inc. 15,597 7,668
Inventory 392 228
Prepaid expenses and other current assets 139 27
----------------- -----------------
Total current assets 28,314 12,047
Fixed assets, net 14 16
Investment in Birds Eye Holdings LLC 5,124 1,942
----------------- -----------------
Total assets $ 33,452 $ 14,005
================= =================
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' DEFICIT
Current liabilities:
Accounts payable $ 127 $ 112
Other accrued expenses 270 6
Accrued income taxes 993 330
Amounts due members 25,251 12,571
----------------- -----------------
Total current liabilities 26,641 13,019
Long-term debt 1,037 0
----------------- -----------------
Total liabilities 27,678 13,019
----------------- -----------------
Commitments and contingencies (Note 5)
Common stock, par value $5, authorized - 5,000,000 shares; issued
and outstanding 1,769,543 8,848 8,848
----------------- -----------------
Shareholders' and members' deficit:
Retained earnings allocated to members 6,771 6,771
Non-cumulative preferred stock, par value $25, authorized
5,000,000 shares; issued and outstanding 26,312 658 658
Class A cumulative preferred stock, liquidation preference
$25 per share, authorized 10,000,000 shares; issued and
outstanding 4,929,272 123,233 123,233
Special membership interests 21,733 21,733
Accumulated deficit (155,469) (154,675)
Accumulated other comprehensive (loss)/income:
Unrealized gain on hedging activity of equity investee 0 179
Minimum pension liability adjustment of equity investee 0 (5,761)
----------------- -----------------
Total shareholders' and members' deficit (3,074) (7,862)
----------------- -----------------
Total liabilities and shareholders' and members' deficit $ 33,452 $ 14,005
================= =================
The accompanying notes are an integral part of these condensed financial
statements.
4
PRO-FAC COOPERATIVE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Six Months Ended
---------------------------------------
December 23, December 24,
2006 2005
----------------- ------------------
Cash Flows from Operating Activities:
Net income $ 2,400 $ 1,700
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 2 1
Gain from transaction with Birds Eye Foods, Inc. and related agreements (3,600) (3,570)
Equity in loss of Birds Eye Holdings LLC 0 1,672
Change in assets and liabilities:
Accounts receivable (11,832) (10,104)
Accounts payable and other accrued expenses 316 (75)
Accrued income taxes 663 0
Amounts due members 12,680 11,372
Other assets and liabilities, net (276) (517)
----------------- ------------------
Net cash provided by operating activities 353 479
----------------- ------------------
Cash Flows from Investing Activities:
Proceeds from Termination Agreement with Birds Eye Foods, Inc. 6,000 6,000
----------------- ------------------
Cash provided by investing activities 6,000 6,000
----------------- ------------------
Cash Flows from Financing Activities:
Borrowings on long-term debt 1,000 0
Cash dividends paid (3,194) (4,161)
----------------- ------------------
Net cash used in financing activities (2,194) (4,161)
----------------- ------------------
Net change in cash and cash equivalents 4,159 2,318
Cash and cash equivalents at beginning of period 2,391 1,103
----------------- ------------------
Cash and cash equivalents at end of period $ 6,550 $ 3,421
================= ==================
Non-Cash Investing Activities:
Increase in investment in Holdings LLC and equity $ 5,582 $ 0
================= ==================
The accompanying notes are an integral part of these condensed financial
statements.
5
PRO-FAC COOPERATIVE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: Pro-Fac Cooperative, Inc. ("Pro-Fac" or the
"Cooperative") is a New York agricultural cooperative corporation operating in
one segment, the marketing of crops grown by its members.
THE TRANSACTION: On August 19, 2002 (the "Closing Date"), pursuant to the terms
of the Unit Purchase Agreement dated as of June 20, 2002 (the "Unit Purchase
Agreement"), by and among Pro-Fac, Birds Eye Foods, Inc. ("Birds Eye Foods") at
the time a New York corporation and a wholly-owned subsidiary of Pro-Fac, and
Vestar/Agrilink Holdings LLC, a Delaware limited liability company, consummated
the following transactions (which are referred to collectively as "the
Transaction"):
(i) Pro-Fac contributed to the capital of Birds Eye Holdings LLC
("Holdings, LLC"), a Delaware limited liability company, all of the
shares of Birds Eye Foods common stock owned by Pro-Fac, constituting
100 percent of the issued and outstanding shares of Birds Eye Foods
capital stock, in consideration for Class B common units of Holdings
LLC.
(ii) Vestar/Agrilink Holdings, LLC and certain co-investors (collectively,
"Vestar") contributed cash in the aggregate amount of $175.0 million
to the capital of Holdings LLC, in consideration for preferred units
and Class A common units and warrants, which warrants were
immediately exercised to acquire additional Class A common units. The
co-investors were either under common control with, or delivered an
unconditional voting proxy to, Vestar. The Class A common units
entitle Vestar to two votes for each Class A common unit held. All
other Holdings LLC common units entitle the holder(s) thereof to one
vote for each common unit held. Vestar has a voting majority of all
common units.
(iii) Immediately following Pro-Fac's contribution of its shares of Birds
Eye Foods common stock to Holdings LLC, Holdings LLC contributed
those shares to Birds Eye Holdings Inc. ("Holdings Inc."), a Delaware
corporation and a direct, wholly-owned subsidiary of Holdings LLC. As
a result, Birds Eye Foods became an indirect, wholly-owned subsidiary
of Holdings LLC.
As outlined above, Pro-Fac owns Class B common units of Holdings LLC. Until June
24, 2006, Pro-Fac accounted for its investment in Holdings LLC using the equity
method of accounting. As explained below under "Investment in Birds Eye
Holdings, LLC," effective June 25, 2006, Pro-Fac began using the cost method to
account for this investment.
For additional information about the transactions consummated, including
resulting agreements, see "NOTE 2. Agreements with Birds Eye Foods" under these
"Notes to Condensed Financial Statements".
BASIS OF PRESENTATION: The accompanying unaudited condensed 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 Regulation S-X.
Accordingly, they do not include all of the information required by GAAP for
complete annual 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 in the accompanying unaudited condensed financial
statements. Operating results for the interim period ended December 23, 2006 are
not necessarily indicative of the results to be expected for other interim
periods or the full year. These financial statements should be read in
conjunction with the consolidated financial statements and accompanying notes
contained in the Pro-Fac Cooperative, Inc. Form 10-K for the fiscal year ended
June 24, 2006.
NEW ACCOUNTING PRONOUNCEMENTS: In September 2006, the Financial Accounting
Standards Board ("FASB") issued Statement No. 157, "Fair Value Measurements"
("FAS 157"), which addresses how companies should measure fair value when they
are required to use a fair value measure for recognition or disclosure purposes
under generally accepted accounting principles ("GAAP"). As a result of FAS 157,
there is now a common definition of fair value to be used throughout GAAP, which
is expected to make the measurement of fair value more consistent and
comparable. The Cooperative must adopt FAS 157 in fiscal 2009, but has not yet
begun to evaluate the effects, if any, of adoption on its financial statements.
In July 2006, the FASB released FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of income tax
uncertainties with respect to positions taken or expected to be taken in income
tax returns. The Cooperative must adopt FIN 48 in the first quarter of fiscal
2008, and management currently is evaluating the effect of adoption on the
Cooperative's financial statements.
6
INVESTMENT IN BIRDS EYE HOLDINGS, LLC: Until June 24, 2006, Pro-Fac accounted
for its investment in Holdings LLC under the equity method of accounting. The
Cooperative included its share, based on ownership, of the change in Holdings
LLC's minimum pension liabilities and unrealized holding gains and losses on
hedging transactions in the Cooperative's other comprehensive loss.
In the first quarter of fiscal 2007, the Cooperative concluded that it could no
longer exert significant influence over the operating and financial policies of
Holdings LLC and its indirect, wholly-owned subsidiary, Birds Eye Foods.
Therefore, the Cooperative began accounting for this investment using the cost
method effective June 25, 2006. This conclusion was reached based on a number of
factors, including Birds Eye Foods decision, announced in the first quarter of
fiscal 2007, to sell or close production facilities to which Pro-Fac supplied 34
percent of the total commercial market value ("CMV") of raw product sold to all
Pro-Fac customers and 44 percent of the total CMV supplied to Birds Eye Foods.
Further, in conjunction with Birds Eye Foods announcement in October 2006 of its
intent to repurchase its outstanding $50.0 million 11 7/8 percent senior
subordinated notes, which Birds Eye Foods did on November 20, 2006, Holdings
LLC's management notified Pro-Fac that, effective June 25, 2006, it would no
longer provide Pro-Fac with financial information about Holdings LLC or Birds
Eye Foods beyond that required under the Limited Liability Company Agreement of
Holdings LLC (See Note 2). That agreement requires that Holdings LLC provide
Pro-Fac with annual financial statements of Holdings LLC within 120 days after
the close of a fiscal year and, to the extent received, financial statements of
Birds Eye Foods. Any financial information received pursuant to the Limited
Liability Company Agreement is subject to confidentiality provisions that
preclude public disclosure.
As a result of beginning to use the cost method during the first quarter of
fiscal 2007, the Cooperative's proportionate share of the other comprehensive
income and loss items of Holdings LLC previously recorded (net loss of
approximately $5.6 million at June 24, 2006) was removed with a corresponding
increase in the investment of approximately $5.6 million in accordance with
Financial Accounting Standards Board Staff Position APB18-1 - "Accounting by an
Investor for its Proportionate Share of Accumulated Other Comprehensive Income
of an Investee Accounted for under the Equity Method in Accordance with APB
Opinion No. 18 upon a Loss of Significant Influence." The previously recorded
proportional share of earnings and losses of Holdings LLC remain as a component
of the carrying amount of the investment.
For the year ended June 24, 2006, Pro-Fac recorded equity method losses of $7.2
million. Cumulative equity method losses were $4.6 million through June 24,
2006.
Under the cost method, the Cooperative's share of earnings or losses is not
included in the Cooperative's balance sheet or statement of operations and the
Cooperative does not record its proportionate share of the other comprehensive
income and loss items of Holdings LLC. Also, dividends received from Holdings
LLC, if any, will be recorded as income when received. Impairment charges, if
any, will be recognized in the statement of operations.
The aggregate cost of the Cooperative's investment in Holdings LLC was $5.1
million at December 23, 2006. Due to the Birds Eye Foods actions described
above, Pro-Fac evaluated its investment in Holdings LLC for impairment as of
September 23, 2006. As a result of that evaluation Pro-Fac determined that the
investment was not impaired.
The following schedule sets forth summarized financial information of Holdings
LLC for the three and six month periods ended December 24, 2005 (dollars in
thousands):
Three Months Six Months
------------ ------------
Net sales $ 280,190 $ 476,846
Gross profit 62,783 98,120
Income from continuing operations 14,495 11,791
Net income 14,495 11,510
7
Pro-Fac's share of the loss of Holdings LLC under the equity method of
accounting was determined for the three and six month periods months ended
December 24, 2005 as follows:
Three Months Six Months
-------------- ------------
(In Millions)
Net income of Holdings LLC $ 14.4 $ 11.5
Less:
Preferred return on Holdings
LLC's preferred units (8.2) (16.1)
Accretion of preferred units (0.1) (0.2)
Plus:
Interest on termination payments
recorded by Holdings LLC 0.4 0.8
------ ------
Income/(loss) for common interests 6.5 (4.0)
Pro-Fac's share of common interests 40.00% 41.20%
------ ------
Equity income/(loss) from Holdings LLC $ 2.6 $ (1.7)
====== ======
At June 24, 2006, Holdings LLC had $244.7 million of preferred units issued and
outstanding which accrue a preferred return at the rate of 15 percent per annum
compounded quarterly, based on a 360 day year. At June 24, 2006, the preferred
units had accrued payment-in-kind dividends since issuance of approximately
$105.9 million, which amount is included in the total preferred units
outstanding. Based on Holdings LLC's outstanding preferred units at June 24,
2006, and assuming that the preferred return is not paid and the preferred units
are not redeemed, the preferred units would have an approximate future
redemption value, including the compounded preferred return, as of the end of
fiscal years as follows:
(In Millions)
2007 $ 283.5
2008 328.5
2009 380.6
2010 441.0
The preferred units are subject to redemption at the option of at least a
majority of the preferred unitholders upon an initial public offering of
Holdings LLC or any subsidiary, upon the sale of Holdings LLC or after August
19, 2010. The preferred units may also be redeemed at the option of Holdings LLC
at anytime, at a premium. At the time of issuance of the preferred units, $3.9
million in fees were charged against the proceeds received from Holdings LLC
from the sale of the preferred units. Through June 24, 2006, Holdings LLC was
accreting the preferred units up to their redemption value through transfers
from retained earnings using the effective interest method to the date of
earliest redemption.
GAIN FROM TRANSACTION WITH BIRDS EYE FOODS AND RELATED TRANSACTION: Payments
under the Termination Agreement (See Note 2) are considered additional
consideration related to the Transaction. Accordingly, the portion of the
payments received under the Termination Agreement related to Pro-Fac's
continuing ownership percentage are recorded as a reduction to Pro-Fac's
investment in Holdings LLC. The remaining portion of payments received is
recognized as additional gain on the Transaction with Birds Eye Foods in the
period it is received. Accordingly, in each of the first six months of fiscal
2007 and the first six months of fiscal 2006, Pro-Fac recognized approximately
$3.6 million as additional gain from the receipt of termination payments.
INCOME TAXES: The Cooperative qualifies for tax exempt status as a farmers'
cooperative under Section 521 of the Internal Revenue Code. Exempt cooperatives
are permitted to reduce or eliminate taxable income through the use of special
deductions such as dividends paid on its common and preferred stock and
distributions of patronage income.
The Cooperative uses these special deductions and distributions of patronage
income to reduce the Cooperative's taxable income for periods after August 19,
2002. At its March 2006 meeting, the Pro-Fac Board of Directors determined that
there would be no payment or allocation of patronage income for the fiscal year
ended June 24, 2006. The Board has decided to continue this policy in fiscal
year 2007. As a result, the Cooperative recorded a tax provision of $0.3 million
and $0.8 million for the three and six month periods ended December 23, 2006,
respectively.
A deferred income tax asset has not been recognized on the excess of the tax
basis over the recorded investment in Holdings LLC. This asset would only be
realized upon the sale of the investment based on the proceeds received.
8
NOTE 2. AGREEMENTS WITH BIRDS EYE FOODS
In connection with the Transaction, Birds Eye Foods and Pro-Fac entered into
several agreements effective as of the Closing Date, including the following:
TERMINATION AGREEMENT: Pro-Fac and Birds Eye Foods entered into a termination
agreement (the "Termination Agreement") as of the Closing Date, pursuant to
which, among other things, the marketing and facilitation agreement between
Pro-Fac and Birds Eye Foods (the "Marketing and Facilitation Agreement") was
terminated and, in consideration of such termination, Birds Eye Foods agreed to
pay Pro-Fac a termination fee of $10.0 million per year for five years, provided
that certain ongoing conditions are met, including maintaining grower membership
levels sufficient to generate certain minimum crop supply. In January 2007, the
Cooperative received a $2.0 million installment. The final installment of $2.0
million is scheduled to be paid on April 1, 2007.
Payments under the Termination Agreement are considered additional consideration
related to the Transaction. Accordingly, the portion of the payments received
under the Termination Agreement related to Pro-Fac's continuing ownership
percentage is recorded as a reduction of Pro-Fac's investment in Holdings LLC.
The remaining portion of the payments is recognized as additional gain on the
transaction with Birds Eye Foods in the period it is received. Accordingly, in
each of the first six months of fiscal 2007 and fiscal 2006, Pro-Fac recognized
approximately $3.6 million as gain from transaction with Birds Eye Foods, Inc.
and $2.4 million was recognized as a reduction in Pro-Fac's investment in
Holdings LLC.
LIMITED LIABILITY COMPANY AGREEMENT OF HOLDINGS LLC: Pro-Fac and Vestar are
parties to a limited liability company agreement dated August 19, 2002 (as
amended from time to time, the "Limited Liability Company Agreement"). While
Birds Eye Foods is not a party to the Limited Liability Company Agreement, it
contains terms and conditions relating to the management of Holdings LLC and its
subsidiaries (including Birds Eye Foods), the distribution of profits and losses
and the rights and limitations of members of Holdings LLC. The Limited Liability
Company Agreement provides, among other things, that Holdings LLC's
distributable assets, which include cash receipts from operations, investing and
financing, net of expenses, will be distributed to Holdings LLC's members as
determined by Holdings LLC's management committee. Further, the Limited
Liability Company Agreement provides that, subject to restrictions contained in
any financing arrangements of Holdings LLC or its subsidiaries (including Birds
Eye Foods), after August 19, 2007 and prior to a sale (or dissolution) of
Holdings LLC, Holdings LLC will use commercially reasonable efforts to cause
Birds Eye Foods to distribute annually to Holdings LLC up to $24.8 million of
cash flow from the operations of Birds Eye Foods, which Holdings LLC will then
distribute to the holders of its common units.
AMENDED AND RESTATED MARKETING AND FACILITATION AGREEMENT. Pro-Fac and Birds Eye
Foods are parties to an amended and restated marketing and facilitation
agreement dated as of the Closing Date (the "Amended and Restated Marketing and
Facilitation Agreement"). Pursuant to the Amended and Restated Marketing and
Facilitation Agreement, Birds Eye Foods buys crops from Pro-Fac grown by
Pro-Fac's members. Birds Eye Foods pays Pro-Fac the CMV of the crops supplied in
installments corresponding to the dates payment is made by Pro-Fac to its
members for the delivered crops. Birds Eye Foods makes estimated CMV payments to
Pro-Fac for a particular crop year, subject to adjustments to reflect the actual
CMV following the end of such year. Commodity committees of Pro-Fac meet with
Birds Eye Foods management to establish CMV or receivable guidelines, review
calculations, and report to a joint CMV committee of Pro-Fac and Birds Eye
Foods. The Amended and Restated Marketing and Facilitation Agreement also
provides that Birds Eye Foods will provide Pro-Fac services relating to
planning, consulting, sourcing and harvesting crops from Pro-Fac members in a
manner consistent with past practices. In addition, until August 19, 2007, Birds
Eye Foods will provide Pro-Fac with services related to the expansion of the
market for the agricultural products of Pro-Fac members (at no cost to Pro-Fac
other than reimbursement of Birds Eye Foods' incremental and out-of-pocket
expenses related to providing such services as agreed to by Pro-Fac and Birds
Eye Foods).
Under the Amended and Restated Marketing and Facilitation Agreement, Birds Eye
Foods determines the amount of crops which it will acquire from Pro-Fac for each
crop year. If the amount to be purchased by Birds Eye Foods during a particular
crop year does not meet (i) a defined crop amount and (ii) a defined target
percentage of Birds Eye Foods' needs for each particular crop, then certain
shortfall payments will be made by Birds Eye Foods to Pro-Fac. The defined crop
amounts and targeted percentages were set based upon the needs of Birds Eye
Foods in the 2002 crop year (fiscal 2003). The shortfall payment provisions of
the agreement include a maximum shortfall payment, determined for each crop,
that can be paid over the term of the Amended and Restated Marketing and
Facilitation Agreement. The aggregate shortfall payment amounts for all crops
covered under the agreement cannot exceed $10.0 million over the term of the
agreement. Also, Birds Eye Foods can sell portions of its business and the
volumes of crop purchases by Birds Eye Foods with respect to such transferred
business will be disregarded for purposes of determining shortfall payments.
Unless terminated earlier, the Amended and Restated Marketing and Facilitation
Agreement will continue in effect until August 19, 2012. Birds Eye Foods may
terminate the Amended and Restated Marketing and Facilitation Agreement prior to
August 19, 2012, in connection with a change in control transaction affecting
Birds Eye Foods or Holdings Inc.
9
On December 21, 2006, Birds Eye Foods sold substantially all of the operating
assets of its non-branded frozen vegetable business to Allens, Inc., including
its processing facilities located in Oakfield and Bergen, New York. As part of
the transaction, Birds Eye Foods assigned to Allens, Inc. the portion of the
Amended and Restated Marketing and Facilitation Agreement related to those crops
processed in the New York facilities. As a result of the assignment, the
transaction did not trigger any shortfall payments to Pro-Fac by Birds Eye
Foods.
NOTE 3. DEBT
CREDIT AGREEMENT: Birds Eye Foods and Pro-Fac entered into a credit agreement,
dated August 19, 2002 (the "Credit Agreement"), pursuant to which Birds Eye
Foods agreed to make available to Pro-Fac loans in an aggregate principal amount
of up to $5.0 million (the "Credit Facility "). Pro-Fac is permitted to borrow
up to $1.0 million per year under the Credit Facility, unless Birds Eye Foods is
prohibited from making such advances under the terms of certain third party
indebtedness of Birds Eye Foods. Pro-Fac did not elect to borrow under the terms
of this facility during the three years ended August 19, 2005.
At December 23, 2006, Pro-Fac had borrowed $1.0 million under the terms of the
Credit Agreement. Pro-Fac may borrow an additional $1.0 million under the terms
of the Credit Agreement at any time through August 19, 2007. Any amount
available under the terms of the Credit Facility will be reduced, on a
dollar-for-dollar basis, to the extent of certain distributions made by Holdings
LLC to Pro-Fac in respect of its ownership in Holdings LLC. Pro-Fac has pledged
all of its Class B common units in Holdings LLC as security for advances under
the Credit Facility. Advances outstanding under the Credit Agreement bear
interest at 10 percent per annum. Amounts borrowed and accrued interest are
required to be paid only upon a sale of Pro-Fac's ownership interest in Holdings
LLC or receipt of a distribution from Holdings LLC in connection with the sale
or liquidation of all or substantially all of the assets of Holdings LLC or one
of more of its subsidiaries. Pro-Fac may voluntarily repay amounts borrowed and
interest at any time. As of December 23, 2006, $1.037 million was outstanding
under the Credit Facility, including accrued interest. As of June 24, 2006, no
amount was outstanding under the Credit Facility.
LINE OF CREDIT: The Cooperative may borrow up to $2.0 million under the terms of
an annually renewable line of credit (the "M&T Line of Credit") from
Manufacturers and Traders Trust Company ("M&T Bank"). The M&T Line of Credit
expires on September 30, 2007. At December 23, 2006 and June 24, 2006, there
were no borrowings outstanding under the M&T Line of Credit. Principal amounts
borrowed bear interest at 75 basis points above the prime rate in effect on the
day proceeds are disbursed, as announced by M&T Bank as its prime rate of
interest. Interest is payable monthly. Amounts extended under the M&T Line of
Credit are required to be repaid in full during each year by July 15, with
further borrowings prohibited for a minimum of 60 consecutive days after such
repayment. The Cooperative's obligations under the M&T Line of Credit are
secured by a security interest granted to M&T Bank in substantially all of the
assets of the Cooperative, excluding its Class B common units owned in Holdings
LLC. The collateral does include any distributions made in respect of the Class
B common units and cash payments made by Birds Eye Foods to the Cooperative.
CONTRACTUAL OBLIGATIONS GUARANTEED: Pro-Fac guarantees Subordinated Promissory
Notes of Birds Eye Foods due November 2008 which totaled $39.7 million at June
24, 2006.
10
NOTE 4. COMMON STOCK AND CAPITALIZATION
The following table illustrates the Cooperative's shares authorized, issued, and
outstanding at December 23, 2006 and June 24, 2006.
Shares Issued and Outstanding
Par Shares ----------------------------------
Value Authorized December 23, June 24,
----- ---------- 2006 2006
---- ----
Common Stock $ 5.00 5,000,000 1,769,543 1,769,543
Non-Cumulative Preferred Stock $ 25.00 5,000,000 26,312 26,312
Class A Cumulative Preferred Stock $ 1.00 10,000,000 4,929,272 4,929,272
Class B Cumulative Preferred Stock $ 1.00 9,500,000 0 0
Class C Cumulative Preferred Stock $ 1.00 10,000,000 0 0
Class D Cumulative Preferred Stock $ 1.00 10,000,000 0 0
Class E Cumulative Preferred Stock $ 1.00 10,000,000 0 0
Class B, Series I 10% Cumulative Redeemable
Preferred Stock $ 1.00 500,000 0 0
In the event of liquidation, the relative preference of Pro-Fac's outstanding
securities is as follows: first retains, then cumulated dividends on the
Cooperative's Class A cumulative preferred stock, then all classes of preferred
stock, pari passu, then common stock and, finally, special membership interests.
While the Cooperative presently has no plans to liquidate, if liquidation were
to occur, the order of redemption and the amount required to fully redeem each
class outstanding, at December 23, 2006, is as follows:
Amount Required
(DOLLARS IN THOUSANDS) to Fully Redeem
---------------
Retains $ 6,771
Cumulated dividends 1,084 (1)
AND
Non-Cumulative Preferred Stock 658 (1)
AND
Class A Cumulative Preferred Stock 123,233 (1)
Common Stock 8,848
Special Membership Interests 21,733
----------------
$ 162,327
================
(1) Pari passu
RETAINED EARNINGS ALLOCATED TO MEMBERS ("RETAINS"): Retains arise from patronage
income and are allocated to the accounts of members within 8 1/2 months of the
end of each fiscal year. For the six month periods ended December 23, 2006 and
December 24, 2005, no patronage income was retained. Qualified retains are
taxable income to the member in the year the allocation is made. At its March
2006 meeting, the Pro-Fac Board of Directors determined that there would be no
payment or allocation of patronage proceeds for the fiscal year ended June 24,
2006. The Board has decided to continue this policy in fiscal year 2007.
When and if determined by the Board of Directors, retains convert into shares of
Class A cumulative preferred stock. The Board of Directors, however, has
tentatively decided that conversion of matured retains into Class A cumulative
preferred stock will not be considered by the Board of Directors for retains
issued for fiscal year 2002 and thereafter.
PREFERRED STOCK: All preferred stock outstanding originated, directly or
indirectly, from the conversion at par value of retains at the discretion of
Pro-Fac's Board of Directors. Preferred stock is generally non-voting, except
that the holders of preferred stock are entitled to vote on those matters
specifically required by law.
Pro-Fac's Class A cumulative preferred stock is listed under the symbol PFACP on
the Nasdaq Capital Market.
The dividend rates for the preferred stock outstanding are as follows:
NON-CUMULATIVE PREFERRED STOCK $1.50 per share payable annually at
the discretion of the Board.
CLASS A CUMULATIVE PREFERRED STOCK $1.72 per share annually, payable
in four quarterly installments of
$.43 per share; cumulative, if not
paid.
During the quarters ended September 23, 2006 and December 23, 2006, the
Cooperative paid cash dividends of $.43 and $.21 per share totaling $2.2 million
and $1.0 million, respectively on the Class A cumulative preferred stock.
Dividends of $.22 per share totaling $1.1 million cumulated at December 23,
2006.
On January 31, 2007, the Cooperative paid a cash dividend of $.21 per share on
the Class A cumulative preferred stock totalling approximately $1.0 million. As
a result, cumulated unpaid dividends increased to $2.2 million at January 31,
2007.
11
The Cooperative's ability to pay dividends is dependent upon, among other
factors, its available cash, capital surplus and its future earnings. The
Cooperative's principal use of available cash has been the payment of dividends
on its Class A cumulative preferred stock and its non-cumulative preferred
stock. The $10.0 million annual receipts under the Termination Agreement have
been the principal source of cash for payment of dividends with the last
installment of $2.0 million payable on April 1, 2007. The Limited Liability
Company Agreement of Holdings LLC provides that, subject to restrictions
contained in any financing arrangements of Holdings LLC or its subsidiaries
(including Birds Eye Foods), after August 19, 2007 and prior to a sale (or
dissolution) of Holdings LLC, Holdings LLC will use commercially reasonable
efforts to cause Birds Eye Foods to make annual distributions to Holdings LLC,
which can in turn be used by Holdings LLC to fund distributions to its common
unit holders, including Pro-Fac. Many factors could affect whether such
distributions are made in the future including any financing arrangements of
Birds Eye Foods which may preclude or otherwise restrict such distributions.
Holdings LLC has advised Pro-Fac that it will not speculate as to whether
distributions will be made under the Limited Liability Company Agreement.
Because Pro-Fac has no control over the determination of whether such
distributions will be made, Pro-Fac's Board of Directors has developed a
business plan that assumes distributions will not be made under the Limited
Liability Company Agreement to replace the $10.0 million annual source of cash
under the Termination Agreement ending on April 1, 2007.
On May 5, 2006, the Board determined, subject to all of the facts and
circumstances at the relevant times, that it expected to declare a full
quarterly dividend of $.43 per share of Class A cumulative preferred stock for
payment in July 2006 and $.21 per share of Class A cumulative preferred stock
for payment in October 2006 and January 2007. These dividends were paid in July
and October 2006 and January 2007; the Board expects to declare dividends of
$.21 per share of Class A cumulative stock for quarterly payment to be made in
April 2007. Beginning with the quarter ending in June 2007, the Board expects to
suspend in full the declaration and payment of dividends on its Class A
cumulative preferred stock. Dividends on the Class A cumulative preferred stock
cumulate whether or not declared, and are payable in preference to any dividends
on Pro-Fac common stock and the special membership interests.
In June 2006, the Board declared the annual dividend of $1.50 per share on the
Cooperative's non-cumulative preferred stock (a total of approximately $40,000)
which was paid in July 2006, and in accordance with the Cooperative's
certificate of incorporation expects to set aside the proportionate share of the
annual non-cumulative preferred stock dividend (expected to be approximately
$15,000) for payment in July 2007, if, as expected, reduced quarterly dividend
declarations are made in fiscal 2007 on the Class A cumulative preferred stock.
Beginning with the quarter ending in June 2007, the Board expects to suspend in
full the declaration and payment of dividends on its non-cumulative preferred
stock. To the extent any dividends are declared on the Class A cumulative
preferred stock, a pro rata dividend will be declared on the non-cumulative
preferred stock in accordance with Pro-Fac's certificate of incorporation.
The Board believes, taking into consideration the reduction and ultimate
suspension of dividend payments on the Cooperative's preferred stock and
borrowing capacity under Pro-Fac's Credit Agreement with Birds Eye Foods, that
Pro-Fac will have sufficient sources of cash to fund its operations at least
through the end of fiscal 2010, which the Board believes will provide time to
monitor Pro-Fac's investment in Holdings LLC and explore other methods of
raising cash. The declaration of any future dividends, including the expected
declaration outlined above, are subject to Board action in advance of such
declaration based upon all of the facts and circumstances at each such time.
While the Cooperative prepares its financial statements using generally accepted
accounting principles, which are based primarily on historical cost, it
determines its capital surplus under applicable state law. Under New York Law,
capital surplus is the amount by which the fair value of the Cooperative's
assets exceed the total of its liabilities and the par value of its capital
stock. For the fiscal quarter ended December 23, 2006, the Cooperative's Board
of Directors determined that capital surplus was available based upon evidence
of the fair market value of the Cooperative's assets, including its investment
in Holdings LLC. There can, however, be no assurance that the value of the
Cooperative's assets, including its investment in Holdings LLC, will be
sufficient to support a determination of capital surplus in the future. Absent
sufficient capital surplus, the Cooperative will be prohibited from paying
dividends. Factors that may influence the fair market value of the Cooperative's
investment in Holdings LLC include the financial condition and results of
operations of Birds Eye Foods.
COMMON STOCK: The Cooperative's common stock is owned by its members. The number
of shares of common stock owned by a Pro-Fac member-grower is based upon the
quantity and type of crops to be marketed through Pro-Fac by the member-grower.
If a member-grower ceases to be a producer of agricultural products that are
marketed through the Cooperative, then the member-grower must sell its shares of
Pro-Fac common stock to another grower that is acceptable to the Cooperative.
Additionally, member-growers desiring to adjust quantities of crops marketed
through Pro-Fac may either offer to sell or purchase shares of Pro-Fac common
stock.
If the selling member-grower is unable to find a qualified grower to purchase
its shares of Pro-Fac common stock, the member-grower must, upon notification
from the Cooperative, sell its shares of common stock to the Cooperative for
cash at par value, plus any dividends thereon which have been declared but
remain unpaid.
12
Since the Board of Directors meeting in January 2006, Pro-Fac has not
repurchased shares of common stock from member-growers, except on a case-by-case
basis as approved by the Board of Directors.
At its January 2003 meeting, the Board of Directors of Pro-Fac determined to
suspend the payment of annual dividends on the Cooperative's common stock for an
indefinite period of time.
SPECIAL MEMBERSHIP INTERESTS: In conjunction with the Transaction, special
membership interests were allocated to the then current and former members of
Pro-Fac who had made patronage deliveries to or on behalf of Pro-Fac in the six
fiscal years ended June 29, 2002, in proportion to the patronage deliveries made
by those members during that six fiscal year period.
ACCUMULATED DEFICIT: Accumulated deficit consists of accumulated income and
losses after distribution of earnings allocated to members and dividends.
NOTE 5. OTHER MATTERS
LEGAL MATTERS: The Cooperative is party to various legal proceedings from time
to time in the normal course of its business. In the opinion of management, any
liability that might be incurred upon the resolution of these proceedings will
not, in the aggregate, have a material adverse effect on the Cooperative's
business, financial condition, or results of operations. Further, no such
proceedings are known to be contemplated by any governmental authorities. The
Cooperative maintains general liability insurance coverage in amounts deemed to
be adequate by its Board of Directors.
GUARANTEES AND INDEMNIFICATIONS: As partial consideration for the acquisition in
fiscal 1999 of the frozen and canned vegetable business of Dean Foods Company,
Birds Eye Foods issued to Dean Foods a subordinated promissory note for $30
million due November 22, 2008. The subordinated promissory note is currently
owned by GLK, LLC, a New York limited liability company, whose members are Birds
Eye Foods and GLK Holdings, Inc., which is a wholly owned subsidiary of Birds
Eye Foods. Interest on the subordinated promissory note accrued quarterly in
arrears, at a rate per annum of 5 percent until November 22, 2003, with such
interest payable in kind through the issuance by Birds Eye Foods of additional
subordinated promissory notes identical to the subordinated promissory note
(collectively, the "Subordinated Promissory Notes"). Interest after November 22,
2003 accrues at the rate per annum of 10 percent and is payable in cash.
Pro-Fac, jointly and severally, guarantees the obligations of Birds Eye Foods
under the Subordinated Promissory Notes. As of June 24, 2006, the outstanding
amount subject to the Cooperative's guarantee included principal of $30 million
and accrued interest of $9.7 million.
Pro-Fac was a guarantor, under an Indenture dated November 18, 1998, as amended,
among Birds Eye Foods, the Guarantors named therein and The Bank of New York, as
trustee, of the obligations of Birds Eye Foods under its 11 7/8 percent Senior
Subordinated Notes issued in fiscal 1999 in the original aggregate principal
amount of $200.0 million. As of June 24, 2006, the outstanding loan amount
subject to the Cooperative's guarantee included principal of $50.0 million and
accrued interest of $0.9 million. On November 20, 2006, Birds Eye Foods redeemed
the remaining $50.0 million of its outstanding Senior Subordinated Notes,
extinguishing Pro-Fac's guarantee.
Historically, when Pro-Fac has sold assets, it may have retained certain
liabilities for known exposures and provided indemnification to the buyer(s)
with respect to future claims for certain unknown liabilities existing, or
arising from events occurring, prior to the sale date, including liabilities for
taxes, legal matters, environmental exposures, labor contingencies, product
liability, and other obligations. Pro-Fac may enter into similar arrangements in
the future. Agreements to provide indemnifications may vary in duration,
generally for two years for certain types of indemnities, to terms for tax
indemnifications that are generally aligned to the applicable statute of
limitations for the jurisdiction in which the tax is imposed, and to terms for
certain liabilities (i.e., warranties of title and environmental liabilities)
that typically do not expire. The maximum potential future payments that the
Cooperative could be required to make under agreements of indemnification are
(or may be) either contractually limited to a specified amount or unlimited. The
maximum potential future payments that the Cooperative could be required to make
under agreements of indemnification are not determinable at this time, as any
future payments would be dependent on the type and extent of the related claims,
and all relevant defenses, which are not estimable. Historically, costs incurred
to resolve claims related to agreements of indemnification have not been
material to the Cooperative's financial position, results of operations or cash
flows.
RELATED PARTY TRANSACTIONS: Substantially all purchases are from member-growers
of the Cooperative. For fiscal year 2006, approximately 77 percent of all crops
purchased by Pro-Fac from its members were sold to its indirect equity investee,
Birds Eye Foods.
13
From time to time, in the ordinary course of its business, Pro-Fac has, or may,
enter into agreements with its customers, suppliers, service providers and
business partners which contain indemnification provisions. Generally, such
indemnification provisions require the Cooperative to indemnify and hold
harmless the indemnified party(ies) and to reimburse the indemnified party(ies)
for claims, actions, liabilities, losses and expenses in connection with any
personal injuries or property damage resulting from any Pro-Fac products sold or
services provided. Additionally, the Cooperative may from time to time agree to
indemnify and hold harmless its providers of services from claims, actions,
liabilities, losses and expenses relating to their services to Pro-Fac, except
to the extent finally determined to have resulted from the fault of the provider
of services relating to such services. The level of conduct constituting fault
of the service provider will vary from agreement to agreement and may include
conduct which is defined in terms of negligence, gross negligence, willful
misconduct, omissions or other culpable behavior. The term of these
indemnification provisions are generally not limited. The maximum potential
future payments that the Cooperative could be required to make under these
indemnification provisions are unlimited and are not determinable at this time,
as any future payments would be dependent on the type and extent of the related
claims, and all relevant defenses to the claims, which are not estimable.
Historically, costs incurred to resolve claims related to these indemnification
provisions have not been material to the Cooperative's financial position,
results of operations or cash flows.
The Cooperative has by-laws, policies, and agreements under which it indemnifies
its directors and officers from liability for certain events or occurrences
while the directors or officers are, or were, serving at Pro-Fac's request in
such capacities. Pro-Fac indemnifies its officers and directors to the fullest
extent allowed by law. The maximum potential amount of future payments that the
Cooperative could be required to make under these indemnification provisions is
unlimited, but would be affected by all relevant defenses to the claims.
As part of the Transaction, Pro-Fac agreed to indemnify Birds Eye Foods for
certain environmental liabilities, provided any single claim for indemnification
must exceed $200,000. This obligation, however, is only triggered once the
aggregate of all liabilities subject to indemnification under the Unit Purchase
Agreement (including those unrelated to environmental matters) exceeds $10
million.
As of the date of this Report, Pro-Fac does not expect to be required to perform
under the guarantees and indemnifications described above.
14
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
From time to time, Pro-Fac or persons acting on behalf of Pro-Fac may make oral
and written statements that may constitute "forward-looking statements" as
defined in the Private Securities Litigation Reform Act of 1995 (the "PSLRA") 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 PSLRA 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" section of this Report and other statements made in this Report 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, all of which could be affected by the uncertainties
and risk factors described below. The Cooperative's actual results could differ
materially from those expressed or implied in the forward-looking statements.
The risk factors that could impact the Cooperative include:
o the Cooperative's ability to pay dividends is dependent upon, among
other factors available cash, capital surplus and its future earnings.
The Cooperative's principal use of available cash has been the payment
of dividends on its Class A cumulative preferred stock and its
non-cumulative preferred stock. The $10.0 million annual receipts
under the Termination Agreement have been the principal source of cash
for payment of dividends with the last installment of $2.0 million
payable on April 1, 2007. The Limited Liability Company Agreement of
Holdings LLC contains terms and conditions relating to, among other
things, the distribution of profits and losses and the rights and
limitations of members of Holdings LLC; and provides that, subject to
restrictions contained in any financing arrangements of Holdings LLC
or its subsidiaries (including Birds Eye Foods), after August 19, 2007
and prior to a sale (or dissolution) of Holdings LLC, Holdings LLC
will use commercially reasonable efforts to cause Birds Eye Foods to
make annual distributions to Holdings LLC, which can in turn be used
by Holdings LLC to fund distributions to its common unit holders.
Pro-Fac owns Class B common units in and is a member of Holdings LLC.
Many factors could affect whether such distributions are made in the
future including any financing arrangements of Birds Eye Foods which
may preclude or otherwise restrict such distributions.
Holdings LLC has advised Pro-Fac that it will not speculate as to
whether distributions will be made under the Limited Liability Company
Agreement. As a minority owner of Holdings LLC, Pro-Fac has no control
over the determination of whether such distributions will be made.
Pro-Fac's Board of Directors has developed a business plan that
assumes distributions will not be made under the Limited Liability
Company Agreement to replace the $10.0 million annual source of cash
under the Termination Agreement ending on April 1, 2007.
Beginning with the quarter ending in June 2007, the Board expects to
suspend in full the declaration and payment of dividends on Pro-Fac's
Class A cumulative preferred stock and on its non-cumulative preferred
stock. Dividends on the Class A cumulative preferred stock cumulate
whether or not declared, and are payable in preference to any
dividends on Pro-Fac common stock and the special membership
interests. To the extent any dividends are declared on the Class A
cumulative preferred stock, a pro rata dividend will be declared on
the non-cumulative preferred stock in accordance with Pro-Fac's
certificate of incorporation.
The Board believes, taking into consideration the reduction and
ultimate suspension of dividend payments on the Cooperative's
preferred stock and borrowing capacity under Pro-Fac's Credit
Agreement with Birds Eye Foods, that Pro-Fac will have sufficient
sources of cash to fund its operations at least through the end of
fiscal 2010, which the Board believes will provide time to monitor
Pro-Fac's investment in Holdings LLC and explore other sources of
cash. The declaration of any future dividends, including the expected
declaration outlined above, are subject to Board action in advance of
such declaration based upon all of the facts and circumstances at each
such time.
15
While the Cooperative prepares its financial statements using
generally accepted accounting principles, which are based primarily on
historical cost, it determines its capital surplus under applicable
state law. Under New York Law, capital surplus is the amount by which
the fair value of the Cooperative's assets exceed the total of its
liabilities and the par value of its capital stock. For the fiscal
quarter ended December 23, 2006, the Cooperative's Board of Directors
determined that capital surplus was available based upon evidence of
the fair market value of the Cooperative's assets, including its
investment in Holdings LLC. There can, however, be no assurance that
the value of the Cooperative's assets, including its investment in
Holdings LLC, will be sufficient to support a determination of capital
surplus in the future. Absent sufficient capital surplus, the
Cooperative will be prohibited from paying dividends. Factors that may
influence the fair market value of the Cooperative's investment in
Holdings LLC include the financial condition and results of operations
of Birds Eye Foods.
o The value of the Cooperative's investment in Holdings LLC is also
impacted by the rights and preferences of Holdings LLC's preferred
units. The holders of Holdings LLC's preferred units have priority
over the holders of Holdings LLC's common units with respect to, among
other things, preferred returns on their investment in Holdings LLC.
The Cooperative owns Class B common units of Holdings LLC. The
preferred units accrue a preferred return equal to 15 percent per
annum of the preferred unit holders' preferred capital contributions
(less distributions, if any, made in respect of such preferred units),
compounded quarterly. Holdings LLC has the option to redeem all, but
not less than all, of its preferred units outstanding at a premium. At
June 24, 2006, Holdings LLC had $244.7 million of preferred units
issued and outstanding, including approximately $105.9 million of
payments-in-kind dividends on such preferred units. Based on Holdings
LLC's outstanding preferred units at June 24, 2006, and assuming that
the preferred return is not paid and the preferred units are not
redeemed, the preferred units would have an approximate future
redemption value, including the compounded preferred return, as of the
end of fiscal years as follows:
(DOLLARS IN MILLIONS)
2007 $ 283.5
2008 328.5
2009 380.6
2010 441.0
o Birds Eye Foods has not voluntarily filed periodic reports with the
Securities and Exchange Commission ("SEC") since its Form 10-K
Equivalent for its fiscal year ended June 24, 2006. Moreover, as a
result of Birds Eye Foods' redemption of its Senior Subordinated
Notes, Birds Eye Foods is no longer required under the Indenture
covering those notes to voluntarily file periodic reports with the
SEC. Accordingly, the holders of shares of Pro-Fac capital stock do
not have access to information about Birds Eye Foods, its financial
condition and results of operations, that has historically been
publicly available through Birds Eye Foods' voluntary filings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to outline the reasons for material changes in
Pro-Fac's financial condition and results of operations in the second quarter
and first six months of fiscal 2007 as compared to the second quarter and first
six months of fiscal 2006. This section should be read in conjunction with Part
I, Item 1. Financial Statements, of this Report.
16
OVERVIEW
Since 1960, Pro-Fac has operated as a New York agricultural cooperative, owned
and controlled by its members, to purchase, market, and sell crops grown by its
member-growers, for the mutual benefit of its members. Only growers of crops
marketed through Pro-Fac, or associations of such growers, can become members of
Pro-Fac. Membership in Pro-Fac is evidenced by the ownership of Pro-Fac common
stock. As of December 23, 2006, there were approximately 490 Pro-Fac members,
consisting of individual growers or associations of growers, located principally
in the states of New York, Delaware, Pennsylvania, Illinois, Michigan,
Washington, Oregon, Nebraska and Florida. Crops marketed by Pro-Fac include
fruits (cherries, apples, blueberries, and peaches), vegetables (snap beans,
beets, cucumbers, peas, sweet corn, carrots, cabbage, squash, asparagus and
potatoes) and popcorn. For the year ended June 24, 2006, Pro-Fac delivered crops
with a commercial market value of approximately $65.2 million. Because Pro-Fac
acts as an agent for its members in delivering crops, this activity is recorded
on a net basis and no sales are reported.
Historically, Pro-Fac's primary sources of income have been payments received
under the terms of the Termination Agreement with Birds Eye Foods and income it
recognizes from its investment in Holdings LLC, using the equity method of
accounting. Income or loss based on Pro-Fac's common equity interest in Holdings
LLC, recorded under the equity method of accounting, varies depending on the
operating results of Holdings LLC and the dividend requirements of Holdings
LLC's preferred equity holders. Holdings LLC's operations are substantially
comprised of the operations of Birds Eye Foods, its indirect, wholly-owned
subsidiary. Pro-Fac's primary source of cash has been payments under the
Termination Agreement. In January 2007, the Cooperative received a $2.0 million
installment. One scheduled installment remains payable to Pro-Fac under the
Termination Agreement - a final payment of $2.0 million on April 1, 2007.
Although distributions under the Limited Liability Company are a potential
source of cash, Holdings LLC has advised Pro-Fac that it will not speculate as
to whether distributions will be made under the Limited Liability Company
Agreement. As a minority owner of Holdings LLC, Pro-Fac has no control over the
determination of whether such distributions will be made. Pro-Fac's Board of
Directors has developed a business plan that assumes distributions will not be
made under the Limited Liability Company Agreement to replace the $10.0 million
annual source of cash under the Termination Agreement ending on April 1, 2007.
Until June 24, 2006, Pro-Fac accounted for its investment in Holdings LLC under
the equity method of accounting. The Cooperative included its share, based on
ownership, of the change in Holdings LLC's minimum pension liabilities and
unrealized holding gains and losses on hedging transactions in the Cooperative's
other comprehensive loss.
In the first quarter of fiscal 2007, the Cooperative concluded that it could no
longer exert significant influence over the operating and financial policies of
Holdings LLC and its indirect, wholly-owned subsidiary, Birds Eye Foods.
Therefore, the Cooperative began accounting for this investment using the cost
method effective June 25, 2006. This conclusion was reached based on a number of
factors, including Birds Eye Foods decision, announced in the first quarter of
fiscal 2007, to sell or close production facilities to which Pro-Fac supplied 34
percent of the total CMV of raw product sold to all Pro-Fac customers and 44
percent of the total CMV supplied to Birds Eye Foods. In October 2006, Birds Eye
Foods announced its intent to repurchase its outstanding $50.0 million 11 7/8
percent senior subordinated notes. Birds Eye Foods did redeem the senior
subordinated notes in full on November 20, 2006. As a result of the redemption,
Birds Eye Foods is no longer required under the indenture covering the senior
subordinated notes to file voluntary periodic reports with the Securities and
Exchange Commission. Additionally, Holdings LLC's management notified Pro-Fac
that, effective June 25, 2006, it will no longer provide Pro-Fac with financial
information about Holdings LLC or Birds Eye Foods beyond that required under the
Limited Liability Company Agreement of Holdings LLC. That agreement requires
that Holdings LLC provide Pro-Fac with annual financial statements of Holdings
LLC within 120 days after the close of a fiscal year and, to the extent
received, financial statements of Birds Eye Foods. Any financial information
received pursuant to the Limited Liability Company Agreement is subject to
confidentiality provisions that preclude public disclosure.
As a result of beginning to use the cost method during the first quarter of
fiscal 2007, the Cooperative's proportionate share of the other comprehensive
income and loss items of Holdings LLC previously recorded (net loss of
approximately $5.6 million at June 24, 2006) was removed with a corresponding
increase in the investment of approximately $5.6 million in accordance with
Financial Accounting Standards Board Staff Position APB18-1 - "Accounting by an
Investor for its Proportionate Share of Accumulated Other Comprehensive Income
of an Investee Accounted for under the Equity Method in Accordance with APB
Opinion No. 18 upon a Loss of Significant Influence." The previously recorded
proportional share of earnings and losses of Holdings LLC remain as a component
of the carrying amount of the investment.
For the year ended June 24, 2006, Pro-Fac recorded equity method losses of $7.2
million. Cumulative equity method losses were $4.6 million through June 24,
2006.
Under the cost method, the Cooperative's share of earnings or losses is not
included in the Cooperative's balance sheet or statement of operations and the
Cooperative does not record its proportionate share of the other comprehensive
income and loss items of Holdings LLC. Also, dividends received from Holdings
LLC, if any, will be recorded as income when received. Impairment charges, if
any, will be recognized in the statement of operations.
17
RESULTS OF OPERATIONS - SECOND QUARTER 2007 COMPARED TO SECOND QUARTER 2006
NET SALES, COST OF SALES AND GROSS PROFIT: Net sales and cost of sales increased
in the quarter ended December 23, 2006, as the Cooperative entered into more
sales transactions as a principal rather than an agent for its members than in
the quarter ended December 24, 2005.
EQUITY IN INCOME OF HOLDINGS LLC: For the quarter ended December 23, 2006, the
Cooperative accounted for its investment in Holdings LLC using the cost method,
therefore, no income or loss was recorded (See Notes to Condensed Financial
Statements). Income of approximately $2.6 million was recorded in the second
quarter of fiscal 2006 using the equity method of accounting. Holdings'
operations are substantially comprised of the operations of Birds Eye Foods, its
indirect, wholly-owned subsidiary.
During the quarter ended December 23, 2006, Pro-Fac's recorded investment in
Holdings LLC decreased by $0.8 million due to the allocation (approximately 40
percent) of the portion of termination payments related to Pro-Fac's continuing
indirect ownership of Birds Eye Foods.
GAIN FROM TRANSACTION WITH BIRDS EYE FOODS AND RELATED AGREEMENTS: In accordance
with the Termination Agreement, Pro-Fac is entitled to the payment of a
termination fee of $10.0 million per year for five years payable in quarterly
installments as follows: $4.0 million on each July 1, and $2.0 million each
October 1, January 1, and April 1 until the final payment which is due April 1,
2007.
Payments under the Termination Agreement are considered additional consideration
related to the Transaction. Accordingly, the portion of the payments received
under the Termination Agreement related to Pro-Fac's continuing ownership
percentage are recorded as a reduction to Pro-Fac's investment in Holdings LLC.
The remaining portion of payments received is recognized as additional gain on
the Transaction with Birds Eye Foods in the period it is received. Accordingly,
in the second quarter of fiscal 2007 and the second quarter of fiscal 2006,
Pro-Fac recognized approximately $1.2 million as additional gain (approximately
60 percent) from the receipt of termination payments ($2.0 million on each of
October 1, 2006 and October 1, 2005).
MARGIN ON DELIVERED PRODUCT: The Cooperative negotiates certain sales
transactions on behalf of its members, which result in margin being earned by
the Cooperative. The Cooperative earned $0.1 million in margin during the second
quarter of fiscal 2007 and $0.2 million during the second quarter of fiscal
2006. The decrease is attributable to the Cooperative entering into more sales
transactions as a principal rather than an agent for its members.
SELLING, ADMINISTRATIVE, AND GENERAL EXPENSE: Selling, administrative, and
general expenses totaled $0.3 million for each of the quarters ended December
23, 2006 and December 24, 2005.
INTEREST INCOME: Interest income increased from $27 thousand for the quarter
ended December 24, 2005, to $61 thousand for the quarter ended December 23,
2006, due to higher on-hand cash balances.
INCOME TAXES: The Cooperative qualifies for tax exempt status as a farmers'
cooperative under Section 521 of the Internal Revenue Code. Exempt cooperatives
are permitted to reduce or eliminate taxable income through the use of special
deductions such as dividends paid on its common and preferred stock and
distributions of patronage income.
The Cooperative uses these special deductions and distributions of patronage
income to reduce the Cooperative's taxable income for periods after August 19,
2002. At its March 2006 meeting, the Pro-Fac Board of Directors determined that
there would be no payment or allocation of patronage income for the fiscal year
ended June 24, 2006. The Board has decided to continue this policy in fiscal
year 2007. As a result, the Cooperative recorded a tax provision of $0.3 million
in the quarter ended December 23, 2006.
A deferred income tax asset has not been recognized on the excess of the tax
basis over the recorded investment in Holdings LLC. This asset would only be
realized upon the sale of the investment based on the proceeds received.
RESULTS OF OPERATIONS - FIRST SIX MONTHS 2007 COMPARED TO FIRST SIX MONTHS 2006
NET SALES, COST OF SALES AND GROSS PROFIT: Net sales and cost of sales increased
in the six months ended December 23, 2006, as the Cooperative entered into more
sales transactions as a principal rather than an agent for its members than in
the six months ended December 24, 2005.
EQUITY IN INCOME OF HOLDINGS LLC: For the six months ended December 23, 2006,
the Cooperative accounted for its investment in Holdings LLC using the cost
method, therefore, no income or loss was recorded. A loss of approximately $1.7
million was recorded in the six months ended December 24, 2005 using the equity
method of accounting. Holdings' operations are substantially comprised of the
operations of Birds Eye Foods, its indirect, wholly-owned subsidiary.
In the six months ended December 23, 2006, Pro-Fac's recorded investment in
Holdings LLC decreased by $1.6 million due to the allocation (approximately 40%)
of the portion of termination payments related to Pro-Fac's continuing indirect
ownership of Birds Eye Foods.
18
GAIN FROM TRANSACTION WITH BIRDS EYE FOODS, INC. AND RELATED AGREEMENTS: In each
of the first six months of fiscal 2007 and fiscal 2006, Pro-Fac recognized
approximately $3.6 million as additional gain (approximately 60%) from receipt
of termination payments.
MARGIN ON DELIVERED PRODUCT: The Cooperative earned $0.1 million in margin
during the six months ended December 23, 2006. The Cooperative earned $0.3
million in margin during the six months ended December 24, 2005. The decrease is
attributable to the Cooperative entering into more sales transactions as a
principal rather than an agent for its members.
SELLING, ADMINISTRATIVE, AND GENERAL EXPENSES: Selling, administrative, and
general expenses totaled $0.7 and $0.5 million for the six months ended December
23, 2006 and December 24, 2005, respectively with the increase attributable
primarily to increased insurance costs and professional fees.
INTEREST INCOME: Interest income increased from $61 thousand for the six months
ended December 24, 2005, to $118 thousand for the six months ended December 23,
2006, due to higher on-hand cash balances.
INCOME TAXES: At its March 2006 meeting, the Pro-Fac Board of Directors
determined that there would be no payment or allocation of patronage income for
the fiscal year ended June 24, 2006. The Board has decided to continue this
policy in fiscal year 2007. As a result, the Cooperative recorded a tax
provision of $0.8 million for the six months ended December 23, 2006.
CRITICAL ACCOUNTING POLICIES
"NOTE 1. Description of Business and Summary of Accounting Policies" under
"Notes to Condensed Financial Statements" included in Part I, Item 1 of this
Report discusses the significant accounting policies of Pro-Fac. Pro-Fac's
discussion and analysis of its financial condition and results of operations are
based upon its condensed financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires Pro-Fac's management to
make estimates, judgments and assumptions that affect the reported amount of
assets, liabilities, revenues and expenses. On an ongoing basis, Pro-Fac
evaluates its estimates.
Pro-Fac's estimates affecting the financial statements relate primarily to
contingencies. Certain accounting policies deemed critical to Pro-Fac's results
of operations or financial position are discussed below.
Until June 24, 2006, Pro-Fac accounted for its investment in Holdings LLC under
the equity method of accounting. The Cooperative included its share, based on
ownership, of the change in Holdings LLC's minimum pension liabilities and
unrealized holding gains and losses on hedging transactions in the Cooperative's
other comprehensive loss.
In the first quarter of fiscal 2007, the Cooperative concluded that it could no
longer exert significant influence over the operating and financial policies of
Holdings LLC and its indirect, wholly-owned subsidiary, Birds Eye Foods.
Therefore, the Cooperative began accounting for this investment using the cost
method effective June 25, 2006. This conclusion was reached based on a number of
factors, including Birds Eye Foods decision, announced in the first quarter of
fiscal 2007, to sell or close production facilities to which Pro-Fac supplied 34
percent of the total CMV of raw product sold to all Pro-Fac customers and 44
percent of the total CMV supplied to Birds Eye Foods. Further, in conjunction
with Birds Eye Foods announcement in October 2006 of its intent to repurchase
its outstanding $50.0 million 11 7/8 percent senior subordinated notes, Holdings
LLC's management notified Pro-Fac that, effective June 25, 2006, it will no
longer provide Pro-Fac with financial information about Holdings LLC or Birds
Eye Foods beyond that required under the Limited Liability Company Agreement of
Holdings LLC. That agreement requires that Holdings LLC provide Pro-Fac with
annual financial statements of Holdings LLC within 120 days after the close of a
fiscal year and, to the extent received, financial statements of Birds Eye
Foods. Any financial information received pursuant to the Limited Liability
Company Agreement is subject to confidentiality provisions that preclude public
disclosure.
As a result of beginning to use the cost method during the first quarter of
fiscal 2007, the Cooperative's proportionate share of the other comprehensive
income and loss items of Holdings LLC previously recorded (net loss of
approximately $5.6 million at June 24, 2006) was removed with a corresponding
increase in the investment of approximately $5.6 million in accordance with
Financial Accounting Standards Board Staff Position APB18-1 - "Accounting by an
Investor for its Proportionate Share of Accumulated Other Comprehensive Income
of an Investee Accounted for under the Equity Method in Accordance with APB
Opinion No. 18 upon a Loss of Significant Influence."
For the year ended June 24, 2006, Pro-Fac recorded equity method losses of $7.2
million. Cumulative equity method losses were $4.6 million through June 24,
2006.
Under the cost method, the Cooperative's share of earnings or losses is not
included in the Cooperative's balance sheet or statement of operations and the
Cooperative does not record its proportionate share of the other comprehensive
income and loss items of Holdings LLC. Also, dividends received from Holdings
LLC, if any, will be recorded as income when received. Impairment charges, if
any, will be recognized in the statement of operations.
Pro-Fac markets and sells its members' crops to food processors, including Birds
Eye Foods. Under the provisions of Emerging Issues Task Force Issue No. 99-19,
"Reporting Revenue Gross Versus Net as an Agent", subsequent to the Transaction,
the Cooperative records crop delivery activity among Birds Eye Foods and other
customers, itself and its members on a net basis. For transactions in which
Pro-Fac acts as a principal rather than an agent, sales and cost of sales are
reported.
19
LIQUIDITY AND CAPITAL RESOURCES
At December 23, 2006, Pro-Fac had $6.6 million in cash and cash equivalents. Net
cash available to Pro-Fac, after payment of CMV to Pro-Fac's member-growers, has
been used to pay Pro-Fac's operating expenses as well as its quarterly dividends
on its preferred stock and to fund repurchases of its common stock. Dividends on
Pro-Fac's preferred stock were $8.4 million and $8.3 million in fiscal 2006 and
2005, respectively.
Pro-Fac has four sources or potential sources of available cash to fund its
operating expenses and the payment of its quarterly dividends: (i) cash from its
sale of raw products to its customers, (ii) payments received under the
Termination Agreement with Birds Eye Foods, (iii) potential cash distributions
related to its investment in Birds Eye Holdings LLC, and (iv) borrowings.
Pro-Fac's primary source of cash has been and currently is the installment
payments from Birds Eye Foods under the Termination Agreement. Another potential
source of cash is the CMV payments made to it by Birds Eye Foods and other
customers for crops sold pursuant to the Amended and Restated Marketing and
Facilitation Agreement and other supply agreements. Although CMV payments are
considered a potential source of cash to Pro-Fac, Pro-Fac has typically paid 100
percent of CMV to its member-growers for crops delivered and did so in fiscal
2005 and fiscal 2006 and expects to do so in fiscal 2007. Since such CMV
payments are approximately equal to the cash Pro-Fac receives from its customers
for its raw products, CMV payments are not considered a significant source of
available cash from which Pro-Fac can pay operating expenses and quarterly
dividends.
As stated above, Pro-Fac's current primary source of cash is its receipts under
the Termination Agreement. In January 2007, the Cooperative received a $2.0
million installment. There is one scheduled quarterly installment payment of
$2.0 million remaining on April 1, 2007.
Subsequent to August 19, 2007 and prior to any sale (or dissolution) of Holdings
LLC, the Limited Liability Company Agreement of Holdings LLC provides that,
subject to the restrictions contained in any financing arrangements of Holdings
LLC or its subsidiaries (including Birds Eye Foods), Holdings LLC will use
commercially reasonable efforts to cause Birds Eye Foods to distribute annually
to Holdings LLC up to $24.8 million of cash flow from operations of Birds Eye
Foods, which Holdings LLC will then distribute to the holders of its common
units, including Pro-Fac. Many factors could affect whether such distributions
are made in the future including any financing arrangements of Birds Eye Foods
which may preclude or otherwise restrict such distributions.
While distributions under the Limited Liability Agreement are a potential source
of cash, Holdings LLC has advised Pro-Fac that it will not speculate as to
whether distributions will be made under the Limited Liability Company
Agreement. Because Pro-Fac has no control over the determination of whether such
distributions will be made, Pro-Fac's Board of Directors has developed a
business plan that assumes distributions will not be made under the Limited
Liability Company Agreement to replace the $10.0 million annual source of cash
under the Termination Agreement ending on April 1, 2007.
On May 5, 2006, the Board determined, subject to all of the facts and
circumstances at the relevant times, that it expected to declare a full
quarterly dividend of $.43 per share of Class A cumulative preferred stock for
payment in July 2006 and $.21 per share of Class A cumulative preferred stock
for payment in October 2006 and January 2007. These dividends were paid in July
and October 2006 and January 2007; the Board expects to declare dividends of
$.21 per share of Class A cumulative stock for quarterly payment to be made in
April 2007. Beginning with the quarter ending in June 2007, the Board expects to
suspend in full the declaration and payment of dividends on its Class A
cumulative preferred stock. Dividends on the Class A cumulative preferred stock
cumulate whether or not declared, and are payable in preference to any dividends
on Pro-Fac common stock and the special membership interests.
In June 2006 the Board declared the annual dividend of $1.50 per share on the
Cooperative's non-cumulative preferred stock (a total of approximately $40,000)
which was paid in July 2006, and in accordance with the Cooperative's
Certificate of Incorporation expects to set aside the proportionate share of the
annual non-cumulative preferred stock dividend (expected to be approximately
$15,000) for payment in July 2007, if, as expected, reduced quarterly dividend
declarations are made in fiscal 2007 on the Class A cumulative preferred stock.
Beginning with the quarter ending in June 2007, the Board expects to suspend in
full the declaration and payment of dividends on its non-cumulative preferred
stock. To the extent any dividends are declared on the Class A cumulative
preferred stock, a pro rata dividend will be declared on the non-cumulative
preferred stock in accordance with Pro-Fac's certificate of incorporation.
The Board believes, taking into consideration the reduction and ultimate
suspension of dividend payments on the Cooperative's preferred stock and
borrowing capacity under Pro-Fac's Credit Agreement with Birds Eye Foods, that
Pro-Fac will have sufficient sources of cash to fund its operations at least
through the end of fiscal 2010, which the Board believes will provide time to
review Pro-Fac's investment in Holdings LLC and explore other methods of raising
cash. The declaration of any future dividends, including the expected
declarations outlined above, are subject to Board action in advance of any such
declaration based upon all of the facts and circumstances at each such time.
20
The amount of available cash that may be generated from Pro-Fac's operations
depends upon how successful Pro-Fac is in its efforts, including controlling any
associated costs. For the six months ended December 23, 2006 and December 24,
2005, Pro-Fac generated modest margin from sales of product to customers other
than Birds Eye Foods. Any available cash generated from products and/or services
offerings by Pro-Fac is currently anticipated to be a secondary source of cash,
and is not expected to provide a significant amount of available cash to fund
Pro-Fac's operating expenses or dividend payments.
In addition to the cash payments to Pro-Fac pursuant to the Termination
Agreement, Pro-Fac has available up to $1.0 million per year, until August 19,
2007 (total potential borrowing at December 23, 2006 was $2.0 million), under
the Credit Agreement with Birds Eye Foods, and up to $2.0 million under an
annually renewable line of credit from M&T Bank, as discussed below. The current
agreement with M&T Bank expires on September 30, 2007.
The Cooperative may borrow up to $2.0 million under the M&T Line of Credit.
Principal amounts borrowed under the M&T Line of Credit bear interest at 75
basis points above the prime rate in effect on the day proceeds are disbursed,
as announced by M&T Bank as its prime rate of interest. Interest is payable
monthly. Amounts extended under the M&T Line of Credit are required to be repaid
in full during each year by July 15, with further borrowings prohibited for a
minimum of 60 consecutive days after such repayment. Pro-Fac's obligations under
the M&T Line of Credit are secured by a security interest granted to M&T in
substantially all of Pro-Fac's assets, excluding Pro-Fac's Class B common units
owned in Holdings LLC. The collateral does include any distributions made to
Pro-Fac by Holdings LLC in respect of Pro-Fac's Class B common units and cash
payments made by Birds Eye Foods to the Cooperative. At December 23, 2006 and
June 24, 2006, there was no balance outstanding under the M&T Line of Credit.
A discussion of "Consolidated Statement of Cash Flows" for the six months ended
December 23, 2006 follows:
Net cash provided by operating activities of $0.3 million for the first six
months of fiscal 2007 primarily represents the timing of cash receipts from
customers other than Birds Eye Foods and related cash payments to
member-growers.
Cash provided by investing activities for the first six months of fiscal 2007
was $6.0 million related to the receipt by the Cooperative of $6.0 million from
Birds Eye Foods under the Termination Agreement.
Net cash used in financing activities includes dividends paid ($3.2 million),
net of amounts borrowed ($1.0 million) by the Cooperative during the six months
ended December 23, 2006.
Pursuant to a directive of the Cooperative's Board of Directors in 2003,
dividends will not be paid on the Cooperative's common stock for an indefinite
period of time. Further, since the Board of Directors meeting in January 2006,
Pro-Fac has not repurchased shares of common stock from member-growers, except
on a case-by-case basis as approved by the Board of Directors.
The Board believes, taking into consideration the reduction and ultimate
suspension of dividend payments on the Cooperative's preferred stock and
borrowing capacity under Pro-Fac's Credit Agreement with Birds Eye Foods, that
Pro-Fac will have sufficient sources of cash to fund its operations at least
through the end of fiscal 2010. Pro-Fac's ability to fund its cash requirements
will depend on Pro-Fac's future operations, performance and cash flow, and is
subject to prevailing economic conditions and financial, business, and other
factors, some of which are beyond Pro-Fac's control. For a discussion of factors
that could impact Pro-Fac's future operations, performance and cash flow,
including its decision to reduce and ultimately suspend the payment of
dividends, see "Cautionary Statement on Forward-Looking Statements and Risk
Factors" in Part 1, Item 1 of this Report.
CONTRACTUAL OBLIGATIONS: On November 20, 2006, Birds Eye Foods redeemed the
remaining $50.0 million of outstanding Senior Subordinated Notes. Pro-Fac had
previously guaranteed this obligation.
OTHER MATTERS
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. Excessive rain
or drought conditions can produce low crop yields and a shortage situation. This
typically results in higher selling prices. While the national supply situation
controls the pricing, the supply can differ regionally because of variations in
weather.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the Transaction, Pro-Fac is subject to interest rate fluctuations related
to borrowings under the M&T Line of Credit. Amounts borrowed bear interest at
the prime rate plus 75 basis points. The M&T prime rate and, therefore, the
interest payable by Pro-Fac on principal borrowed under the M&T Line of Credit,
is subject to change by M&T. At December 23, 2006, no amount was outstanding
under the M&T Line of Credit. See "NOTE 3. Debt" in the "Notes to Condensed
Financial Statements" included in Part I. Item 1 and Item 2 under the heading
"Liquidity and Capital Resources" for a description of the terms of the M&T Line
of Credit.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES: Pro-Fac's Principal Executive Officer and
Principal Financial Officer evaluated the effectiveness of the design and
operation of Pro-Fac's disclosure controls and procedures (as defined in Rule
13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")). Based on that evaluation, Pro-Fac's Principal Executive and
Principal Financial Officer concluded that Pro-Fac's disclosure controls and
procedures as of December 23, 2006 (the end of the period covered by this
Report) have been designed and are functioning effectively to provide reasonable
assurance that the information required to be disclosed by Pro-Fac in reports
filed or submitted by it under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
There were no changes in Pro-Fac's internal control over financial reporting
identified during the quarter ended December 23, 2006, that materially affected,
or are reasonably likely to materially affect, Pro-Fac's internal control over
financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
The information called for by this Item is disclosed in NOTE 5. "Other Matters -
Legal Matters" under "Notes to Condensed Financial Statements" in Part I, Item 1
of this Form 10-Q, and is incorporated herein by reference in answer to this
Item.
ITEM 1A. RISK FACTORS
The risks associated with the Cooperative's business are outlined above under
"Cautionary Statement on Forward-Looking Statements and Risk Factors" in Part I,
Item 1. That description includes any material changes to and supersedes the
description of the risk factors associated with the Cooperative's business
previously disclosed in Part I, Item 1A of its Annual Report on Form 10-K for
the fiscal year ended June 24, 2006; and such disclosure is incorporated by
reference into and in response to this Item 1A.
ITEM 5. OTHER INFORMATION
As previously disclosed by Pro-Fac in its periodic reports, on July 25, 2006
Birds Eye Foods announced its intention to exit from the vast majority of its
non-branded frozen vegetable business. Birds Eye Foods implementation of its
exit from the non-branded frozen vegetable business had a potential negative
impact on Pro-Fac member-growers supplying snap beans, corn, peas, carrots, and
squash to Birds Eye Foods New York processing facilities located in Oakfield and
Bergen, which were slated for sale or closure. For the year ended June 24, 2006,
Pro-Fac member-growers supplied raw product with a total CMV of approximately
$22.0 million to these New York processing facilities, which represented
approximately 34 percent of total raw product supplied to all Pro-Fac customers
and approximately 44 percent of the CMV of raw product supplied to Birds Eye
Foods. While the supply agreements for the New York facilities were assignable
by Birds Eye Foods to a new operator or operators of the New York facilities,
there could be no assurance that a new operator or operators for the New York
facilities would be identified, or that a new operator or operators would assume
the existing agreements or enter into replacement supply agreements with
Pro-Fac. On December 21, 2006, Birds Eye Foods sold substantially all of the
operating assets of its non-branded frozen vegetable business to Allens, Inc.
including its processing facilities located in Oakfield and Bergen, New York. As
part of that transaction, and consistent with its authority under the Amended
and Restated Marketing and Facilitation Agreement, Birds Eye Foods assigned to
Allens, Inc., together with all associated rights and obligations, the portion
of the supply arrangements under the Amended and Restated Marketing and
Facilitation Agreement related to crops processed in the New York facilities.
The terms of the assigned supply arrangements have not been amended.
22
ITEM 6. EXHIBITS
Exhibits
Exhibit Number Description
-------------- ------------------------------------------------
3.1 (ii) Pro-Fac Cooperative, Inc. Bylaws, as amended to
January 25, 2007 (filed as Exhibit 3.1(ii) to
Pro-Fac's Current Report on Form 8-K filed with
the Securities and Exchange Commission on
January 31, 2007 and incorporated herein by
reference).
31. Certification required by Rule 13a-14 (a) of the
Securities Exchange Act of 1934 of the Principal
Executive Officer and the Principal Financial
Officer (filed herewith).
32. Certification required by Rule 13a-14 (b) of the
Securities Exchange Act of 1934 and pursuant to
18 U.S.C., Section 1350. as adopted pursuant to
Section 906 of the Sarbanes Oxley Act of 2002,
of the Principal Executive Officer and the
Principal Financial Officer (filed herewith).
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized.
PRO-FAC COOPERATIVE, INC.
Date: February 5, 2007 BY:/s/ Stephen R. Wright
---------------------- --------------------------------
GENERAL MANAGER, CHIEF EXECUTIVE
OFFICER, CHIEF FINANCIAL OFFICER
AND SECRETARY
(ON BEHALF OF THE REGISTRANT AND AS
PRINCIPAL EXECUTIVE OFFICER
PRINCIPAL FINANCIAL OFFICER, AND
PRINCIPAL ACCOUNTING OFFICER)
24