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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
Form 10-Q/A
(Amendment No. 1)
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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 27, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 0-20539
PRO-FAC COOPERATIVE, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 16-6036816
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
90 Linden Place, PO Box 30682, Rochester, NY 14603-0682
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (585) 383-1850
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or 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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [_] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. As of February 10, 2004.
Common Stock - 1,918,766
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Page 1 of 20 Pages
EXPLANATORY NOTE
The purpose for this Form 10-Q/A (Amendment No. 1) is (i) to amend Pro-Fac
Cooperative, Inc.'s Form 10-Q for the quarter ended December 27, 2003 to include
restated financial statements, as discussed in NOTE 8 of the "Notes to the
Financial Statements" and as announced in Pro-Fac's Current Report on Form 8-K
on April 12, 2004, (ii) to amend and restate each item of Pro-Fac's Quarterly
Report on Form 10-Q for the quarter ended December 27, 2003, filed with the
Securities and Exchange Commission on February 10, 2004, which has been affected
by the restated financial statements, and (iii) to include summarized income
statement information of Birds Eye Holdings LLC (formerly Agrilink Holdings
LLC), as is set forth in NOTE 1 of the "Notes to the Condensed Financial
Statements". Further, the balance sheet as of June 28, 2003 has been restated
from that originally filed in the Form 10-Q for the three and six months ended
December 27, 2003. The items of Pro-Fac Cooperative's Form 10-Q for the
quarter ended December 27, 2003 which are amended and restated in their
entireties herein are: Part I, Item 1 - Financial Statements, Part I,
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations, Part I, Item 4 Controls and Procedures, and Part II,
Item 6. - Exhibits and Reports on Form 8-K. In addition, Part II, Item 1-Legal,
has been created to correct a cross reference. Except as described in this
Explanatory Note, this Form 10-Q/A (Amendment No. 1) does not otherwise modify
the disclosures in Pro-Fac Cooperative, Inc.'s Quarterly Report on Form 10-Q
for the quarterly period ended December 27, 2003 filed with the Securities
and Exchange Commission on February 10, 2004. The Cooperative has also amended
its Form 10-K for the year ended June 28, 2003.
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Pro-Fac Cooperative, Inc.
Condensed Statements of Net Income, Allocation of Income and Comprehensive
Income
(Unaudited)
(Dollars in Thousands)
Three Months Ended Six Months Ended
---------------------------- ----------------------------
December 27, December 28, December 27, December 28,
2003 2002 2003 2002
------------- ------------ ------------- ------------
(As Restated, (As Restated,
see NOTE 8) see NOTE 8)
Net sales $ 0 $ 0 $ 0 $103,726
Cost of sales 0 0 0 (80,644)
------- ------- ------- --------
Gross profit 0 0 0 23,082
Equity income from Agrilink Holdings LLC 2,429 3,796 1,808 3,652
Gain from transaction with Birds Eye Foods, Inc. and related
agreements 1,190 1,186 3,681 7,990
Commercial market value adjustment 184 0 633 0
Selling, administrative, and general expense (262) (284) (520) (810)
Selling, administrative, and general expense (for the period
June 30, 2002 to August 18, 2002) 0 0 0 (15,468)
Legal matters and settlement expenses (5) (1,538) (199) (1,585)
Other income 0 0 0 277
------- ------- ------- --------
Operating income 3,536 3,160 5,403 17,138
Interest income 3 4 6 7
Interest expense (25) 0 (36) (7,747)
------- ------- ------- --------
Income before taxes 3,514 3,164 5,373 9,398
Tax provision (for the period June 30, 2002 to
August 18, 2002) 0 (677) 0 (1,536)
Tax provision 0 0 0 (59)
------- ------- ------- --------
Net income $ 3,514 $ 2,487 $ 5,373 $ 7,803
======= ======= ======= ========
Allocation of net income:
Net income $ 3,514 $ 2,487 5,373 $ 7,803
Dividends on common and preferred stock (1,980) (1,935) (4,004) (4,388)
------- ------- ------- --------
Net proceeds 1,534 552 1,369 3,415
Allocation to accumulated deficit (1,534) (552) (1,369) (3,415)
------- ------- ------- --------
Net proceeds available to members $ 0 $ 0 $ 0 $ 0
======= ======= ======= ========
Net income $ 3,514 $ 2,487 $ 5,373 $ 7,803
Other comprehensive income (loss):
Unrealized loss on hedging activity of equity investee (11) 0 (222) 0
------- ------- ------- --------
Comprehensive income $ 3,503 $ 2,487 $ 5,151 $ 7,803
======= ======= ======= ========
The accompanying notes are an integral part of these condensed financial
statements.
3
Pro-Fac Cooperative, Inc.
Condensed Balance Sheets
(Unaudited)
(Dollars in Thousands)
December 27, June 28,
2003 2003
------------ ---------
(As Restated, see NOTE 8)
ASSETS
Current assets:
Cash and cash equivalents $ 1,416 $ 367
Accounts receivable 5,059 0
Accounts receivable from Birds Eye Foods, Inc. 15,041 8,504
Investment in CoBank 15 44
Current portion of Transitional Services receivable from Birds Eye Foods, Inc. 333 525
Prepaid expenses and other current assets 55 15
--------- ---------
Total current assets 21,919 9,455
Transitional Services receivable from Birds Eye Foods, Inc. 0 71
Investment in Agrilink Holdings LLC 21,084 21,937
--------- ---------
Total assets $ 43,003 $ 31,463
========= =========
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION
Current liabilities:
Accounts payable $ 570 $ 1,058
Accrued interest 36 14
Other accrued expenses 832 1,075
Amounts due members 20,051 7,876
--------- ---------
Total current liabilities 21,489 10,023
Long-term debt 1,000 1,200
Other non-current liabilities 0 832
--------- ---------
Total liabilities 22,489 12,055
--------- ---------
Commitments and contingencies
Class B cumulative redeemable preferred stock, liquidation preference $10 per
share; authorized - 500,000 shares; issued and
outstanding 12,109 shares 122 122
--------- ---------
Common stock, par value $5, authorized - 5,000,000 shares; issued
and outstanding 1,918,766 and 1,927,226 shares, respectively 9,594 9,636
--------- ---------
Shareholders' and members' capitalization:
Retained earnings allocated to members 14,404 14,404
Non-cumulative preferred stock, par value $25, authorized
5,000,000 shares; issued and outstanding 29,328 shares 733 733
Class A cumulative preferred stock, liquidation preference
$25 per share, authorized 10,000,000 shares; issued and
outstanding 4,604,139 shares 115,104 115,104
Special membership interests 21,733 21,733
Accumulated deficit (136,512) (137,882)
Accumulated other comprehensive (loss)/income:
Unrealized gain/(loss) on hedging activity of equity investee (80) 142
Minimum pension liability adjustment of equity investee (4,584) (4,584)
--------- ---------
Total shareholders' and members' capitalization 10,798 9,650
--------- ---------
Total liabilities and shareholders' and members' capitalization $ 43,003 $ 31,463
========= =========
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 27, December 28,
2003 2002
------------ ------------
(As Restated,
see NOTE 8)
Cash Flows from Operating Activities:
Net income $ 5,373 $ 7,803
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of certain intangible assets 0 144
Amortization of debt issue costs, amendment costs, and discount on subordinated
promissory notes 0 1,201
Amortization of transition service receivable 263 192
Depreciation 0 3,833
Gain from transaction with Birds Eye Foods, Inc. and related agreements (3,681) (7,990)
Equity income from Agrilink Holdings LLC (1,808) (3,652)
Equity in undistributed earnings of joint venture 0 (277)
Change in assets and liabilities:
Accounts receivable (11,474) 1,818
Inventories and prepaid manufacturing expense 0 (33,170)
Income taxes 0 (76)
Accounts payable and other accrued expenses (1,541) (9,522)
Amounts due members 12,174 8,649
Deferred tax asset and liability 0 1,537
Other assets and liabilities, net (40) 737
-------- --------
Net cash used in operating activities (734) (28,773)
-------- --------
Cash Flows from Investing Activities:
Proceeds from Termination Agreement with Birds Eye Foods, Inc. 6,000 6,000
Purchase of property, plant and equipment 0 (2,187)
Proceeds from investment in CoBank 29 1,115
Advances to joint venture 0 (1,512)
Cash at the date of deconsolidation with Birds Eye Foods, Inc. 0 (5,818)
-------- --------
Net cash provided by (used in) investing activities 6,029 (2,402)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from issuance of short-term debt 0 22,000
Payments on long-term debt (200) (292)
Payments on capital leases 0 (38)
Repurchases of common stock, net (42) (497)
Cash dividends paid (4,004) (4,422)
-------- --------
Net cash (used in) provided by financing activities (4,246) 16,751
-------- --------
Net change in cash and cash equivalents 1,049 (14,424)
Cash and cash equivalents at beginning of period 367 14,686
-------- --------
Cash and cash equivalents at end of period $ 1,416 $ 262
======== ========
Non-Cash Investing Activities:
Pro-Fac's receipt of common equity ownership in Agrilink Holdings LLC
in exchange for Birds Eye Foods common stock $ -- $ 31,400
======== ========
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 which markets
crops grown by its members. Birds Eye Foods, Inc. ("Birds Eye Foods," formerly
Agrilink Foods, Inc.) through August 18, 2002, was a wholly-owned subsidiary of
Pro-Fac. Prior to August 19, 2002, the results of the Cooperative were
consolidated with Birds Eye Foods and intercompany transactions and balances
were eliminated. Subsequent to August 18, 2002, Pro-Fac no longer consolidates
Birds Eye Foods but accounts for its investment in Birds Eye Holdings LLC
("Holdings LLC" formerly Agrilink Holdings LLC) under the equity method of
accounting. See the detailed description of the August 19, 2002 transaction
below.
The operating activities of Pro-Fac for periods prior to August 19, 2002 reflect
products sold through Birds Eye Foods' five primary product lines consisting of:
vegetables, fruits, snacks, canned meals and other. The majority of each of the
product lines' net sales was within the United States. In addition, all of Birds
Eye Foods' operating facilities, excluding one in Mexico, were within the United
States.
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, 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 ("Vestar/Agrilink Holdings"):
(i) Pro-Fac contributed to the capital of 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, representing a 40.72 percent common equity ownership
at the Closing Date; and
(ii) Vestar/Agrilink Holdings 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 to acquire additional Class A common units, which
warrants were immediately exercised, representing, at the Closing Date,
56.24 percent of the common equity of Holdings LLC, inclusive of the
additional Class A common units issued to Vestar upon its exercise of the
warrants. The co-investors are either under common control with, or have
delivered an unconditional voting proxy to, Vestar. The Class A common
units entitle the owner thereof - 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. Accordingly, Vestar has a
voting majority of all common units.
The transactions consummated pursuant to the Unit Purchase Agreement are
referred to herein collectively as the "Transaction."
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., (formerly Agrilink Holdings Inc., "Holdings Inc.") a Delaware
corporation and a direct, wholly-owned subsidiary of Holdings LLC, and Birds Eye
Foods became an indirect, wholly-owned subsidiary of Holdings LLC.
As part of the Transaction, Stephen R. Wright, the general manager and secretary
of Pro-Fac, together with executive officers and certain other members of
management of Birds Eye Foods entered into subscription agreements with Holdings
LLC to acquire (using a combination of cash and promissory notes issued to
Holdings LLC) an aggregate of approximately $1.3 million of Class C common units
and Class D common units of Holdings LLC, representing approximately 3.04
percent of the common equity ownership at the Closing Date.
See NOTE 2 to the "Notes to Condensed Financial Statements" for additional
disclosures regarding agreements with Birds Eye Foods and discussion of the
related gain to Pro-Fac as a result of the Transaction.
Basis of Presentation: The accompanying unaudited 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. Accounting for the Cooperative's investment in
Holdings LLC is based upon financial information provided by Holdings LLC. In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of operations have
been included. Operating results for the period ended December 27, 2003 are not
necessarily indicative of the results to be expected for other interim periods
or the full year. These condensed 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/A for the fiscal year ended
June 28, 2003.
6
Commercial Market Value Adjustment: At its January 2003 board meeting, in an
action aimed at improving the Cooperative's short-term liquidity, the Board of
Directors of Pro-Fac authorized the deduction of 1 percent of the commercial
market value ("CMV") otherwise payable to Pro-Fac's member-growers for crops
supplied by Pro-Fac member-growers through the Cooperative for the 2002 and 2003
growing seasons. The 1 percent CMV deduction (approximately $0.6 million) was
withheld from the July 2003 CMV payment and will be withheld from the July 2004
CMV payment. The Board of Directors of Pro-Fac will review this action annually.
Equity Method of Accounting: Pro-Fac accounts for its investment in Holdings LLC
under the equity method of accounting. The Cooperative includes adjustments of
Holdings LLC for minimum pension liabilities and unrealized holding gains and
losses on hedging transactions in the Cooperative's other comprehensive income
(loss).
The following schedule sets forth summarized financial information of Holdings,
LLC for the periods indicated (dollars in thousands):
(Dollars in Thousands)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
December 27, December 28, December 27, December 28,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales $253,839 $274,375 $446,330 $380,820
Gross profit 63,124 71,730 104,896 96,174
Income from continuing operations 12,239 14,980 15,125 16,645
Net income $ 12,239 $ 13,595 $ 15,121 $ 15,074
Holdings LLC has $137.5 million of preferred units which accrue a preferred
return at the rate of 15 percent per annum, based on a 360 day year and
compounded quarterly. The preferred units are subject to redemption at the
option 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 after
August 19, 2005 at a premium. At the time of issuance of the preferred units,
$3.9 million in fees were charged against the proceeds. Holdings LLC is
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. At December 27, 2003, Pro-Fac owned 40.44 percent of the
remaining common interest. The preferred return on Holdings LLC's preferred
units and the accretion theron are taken into account in determining Pro-Fac's
share of the earnings of Holdings LLC under the equity method of accounting
New Accounting Pronouncements: In May 2003, the Financial Accounting Standards
Board (the "FASB") issued Statement of Financial Accounting Standards No. 150
("SFAS No. 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS No. 150 clarifies the
accounting for certain financial instruments that, under previous guidance,
issuers could account for as equity. The new Statement requires that those
instruments be classified as liabilities in the balance sheet. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities. The adoption of SFAS No. 150 did not have a
significant effect on the operations of the Cooperative.
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 letter
agreement dated as of the Closing Date (the "Termination Agreement"), pursuant
to which, among other things, the marketing and facilitation agreement between
Pro-Fac and Birds Eye Foods (the "Marketing and Facilitation Agreement") which,
until the Closing Date, governed the crop supply and purchase relationship
between Birds Eye Foods and Pro-Fac, was terminated. 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. The $10.0 million payment is payable in quarterly
installments to the Cooperative as follows: $4.0 million on each July 1, and
$2.0 million each on October 1, January 1, and April 1.
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 an adjustment to Pro-Fac's investment in Holdings LLC.
The remaining payments are recognized as additional gain on the transaction with
Birds Eye Foods in the period received. Accordingly, through the first six
months of both fiscal 2004 and fiscal 2003, Pro-Fac recognized approximately
$3.7 million as additional gain from the receipt of termination payments.
7
Transitional Services Agreement: Pro-Fac and Birds Eye Foods entered into a
transitional services agreement (the "Transitional Services Agreement") dated as
of the Closing Date, pursuant to which Birds Eye Foods agreed to provide Pro-Fac
certain administrative and other services for a period of 24 months from the
Closing Date. Birds Eye Foods will generally provide such services at no charge
to Pro-Fac, other than reimbursement of the incremental and out-of-pocket costs
associated with performing those services for Pro-Fac. Pursuant to the
Transitional Services Agreement, the general manager of Pro-Fac may also be an
employee of Birds Eye Foods, in which case he will report to the Chief Executive
Officer of Birds Eye Foods with respect to his duties for Birds Eye Foods, and
to the Pro-Fac Board of Directors with respect to duties performed by him for
Pro-Fac. All other individuals performing services under the Transitional
Services Agreement are employees of Birds Eye Foods and report to the Chief
Executive Officer or other representatives of Birds Eye Foods. Stephen R.
Wright, the General Manager and Secretary of Pro-Fac, is an employee of Birds
Eye Foods. As an employee of Birds Eye Foods, Mr. Wright's salary is paid by
Birds Eye Foods. In that regard, Stephen R. Wright has accepted the position of
General Manager/CEO of Pro-Fac effective August 19, 2004, the terms of his
employment have yet to be negotiated.
In fiscal 2003, Pro-Fac recorded the estimated value of these services, $1.0
million, as services receivable and proceeds from the Transaction, prior to
elimination of 40.72 percent of the amount due to Pro-Fac's investment in
Holdings LLC. This estimated value of the services to be received by the
Cooperative is being amortized to expense over the term of the Transitional
Services Agreement. In fiscal 2003, Pro-Fac recognized approximately $0.6
million as additional gain from the Transaction related to the total estimated
value of the Transitional Services Agreement, net of elimination.
Gain from Transaction with Birds Eye Foods, Inc.: Prior to the Transaction,
certain amounts owed by Pro-Fac to Birds Eye Foods were forgiven in a non-cash
transaction. The amounts forgiven were approximately $36.5 million and
represented both borrowings for the working capital needs of Pro-Fac and a $9.4
million demand payable. After adjusting for the amounts forgiven, Pro-Fac's
investment in Birds Eye Foods prior to the Transaction was approximately $24.9
million. The value of the Cooperative's 40.72 percent common equity ownership in
Holdings LLC on August 19, 2002 was valued at $31.4 million. The Cooperative
recognized a gain of $3.8 million from this exchange in fiscal 2003.
As a result of the agreements described above, based on the approximate 40.72
percent common equity ownership, the Cooperative recognized a total gain, in the
first six months of fiscal 2004 and fiscal 2003, of approximately $3.7 million
and $8.0 million, respectively.
Amended and Restated Marketing and Facilitation Agreement: Pro-Fac and Birds Eye
Foods entered into an amended and restated marketing and facilitation agreement
dated as of the Closing Date (the "Amended and Restated Marketing and
Facilitation Agreement"). The Amended and Restated Marketing and Facilitation
Agreement supersedes and replaces the Marketing and Facilitation Agreement and
provides that, among other things, Pro-Fac will be Birds Eye Foods' preferred
supplier of crops. Birds Eye Foods will also continue to pay Pro-Fac the CMV of
crops supplied by Pro-Fac in installments corresponding to the dates of payment
by Pro-Fac to its members for crops delivered. The processes for determining CMV
under the Amended and Restated Marketing and Facilitation Agreement are
substantially the same as the processes used under the Marketing and
Facilitation Agreement. Birds Eye Foods makes payments to Pro-Fac of an
estimated CMV 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. Unlike the Marketing and Facilitation Agreement, however, the Amended
and Restated Marketing and Facilitation Agreement does not permit Birds Eye
Foods to offset its losses from products supplied by Pro-Fac or require it to
share with Pro-Fac its profits, and it does not require Pro-Fac to reinvest in
Birds Eye Foods any part of Pro-Fac's patronage income. The Amended and Restated
Marketing and Facilitation Agreement also provides that Birds Eye Foods will
continue to provide to Pro-Fac services relating to planning, consulting,
sourcing and harvesting crops from Pro-Fac members in a manner consistent with
past practices. In addition, for a period of five years from the Closing Date,
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 Birds Eye Foods 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 are set based on Birds Eye Foods
anticipated raw product needs for the particular crop year. 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 $20.0 million
over the term of the agreement.
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 upon the occurrence of certain events, including in connection
with a change in control transaction affecting Birds Eye Foods or
8
Holdings Inc. However, in the event Birds Eye Foods terminates the Amended and
Restated Marketing and Facilitation Agreement as a result of a change in control
transaction within three years of the Closing Date, Birds Eye Foods must pay to
Pro-Fac a termination fee of $20.0 million (less the total amount of any
shortfall payments previously paid to Pro-Fac under the Amended and Restated
Marketing and Facilitation Agreement). Also, if, during the first three years
after the Closing Date, Birds Eye Foods sells one or more portions of its
business, and if the purchaser does not continue to purchase the crops
previously purchased by Birds Eye Foods with respect to the transferred
business, then such failure will be taken into consideration when determining if
Birds Eye Foods is required to make any shortfall payments to Pro-Fac. After
such three-year period, Birds Eye Foods may sell portions of its business and
the volumes of crop purchases previously made by Birds Eye Foods with respect to
such transferred business will be disregarded for purposes of determining
shortfall payments.
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 draw 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. The amount 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 interest
are required to be paid only upon 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 or more of its subsidiaries. Pro-Fac may voluntarily repay amounts
borrowed and interest at any time. As of December 27, 2003 and June 28, 2003,
loan amounts outstanding were $1.0 million and $0.7 million, respectively.
Line of Credit: The Cooperative has a $1.0 million line of credit (the "M&T Line
of Credit") from Manufacturers and Traders Trust Company ("M&T Bank"). As of
December 27, 2003, there were no borrowings outstanding under the M&T Line of
Credit. As of June 28, 2003, there was an outstanding loan amount of $0.5
million 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 the Bank, as its prime rate of interest. Interest is
payable monthly. Amounts extended under the M&T Line of Credit are required to
be paid down to zero during each year by July 15, and maintained for a minimum
of 90 consecutive days. The first paydown, if necessary, will commence July 15,
2004. The Cooperative's obligations under the M&T Line of Credit are secured by
a security interest granted to M&T in substantially all of the assets of the
Cooperative, excluding its Class B common units owned in Holdings LLC. However,
the collateral does include any distributions from the common units and cash
payments made by Birds Eye Foods to the Cooperative.
Pro-Fac guarantees certain obligations of Birds Eye Foods. Following is a
schedule of obligations at December 27, 2003 that are guaranteed by the
Cooperative.
(Dollars in Millions)
Amounts
Contractual Obligations Guaranteed Committed Expiration
- ----------------------------------- --------- -------------
Senior Subordinated Notes - 11 7/8 Percent $50.0 November 2008
Subordinated Promissory Note $39.2 November 2008
NOTE 4. SPECIAL MEMBERSHIP INTERESTS
In conjunction with the Transaction, the Pro-Fac Board of Directors determined
that it was in the best interests of Pro-Fac and its members to make certain
changes to the Cooperative's Certificate of Incorporation and Bylaws. Included
in these changes was the creation of Pro-Fac special membership interests.
The 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 in each case during that six fiscal year
period. The aggregate amount of special membership interest allocated is equal
to Pro-Fac's earned surplus as of June 29, 2002, calculated in a manner
consistent with the past custom and practice of Pro-Fac and excluding only
effects of the non-cash impairment charge recorded in the fourth quarter of
fiscal 2002. The purpose of the allocation of the special membership interests
was to preserve for the then current and former members at the date of the
Transaction, the book appreciation in value of their former investment in Birds
Eye Foods.
NOTE 5. OPERATING SEGMENTS
Prior to August 19, 2002, the results of the Cooperative were consolidated with
its then wholly-owned subsidiary, Birds Eye Foods.
9
Subsequent to August 19, 2002, the Cooperative operates in one segment, the
marketing of crops grown by its members.
Birds Eye Foods accounted for segments using SFAS No. 131, "Disclosures about
Segments of an Enterprise". SFAS No. 131 establishes requirements for reporting
information about operating segments and establishes standards for related
disclosures about products and services, and geographic areas. As management of
Birds Eye Foods made the majority of its operating decisions based upon Birds
Eye Foods' significant product lines, Birds Eye Foods elected to utilize
significant product lines in determining its operating segments. Birds Eye
Foods' five primary operating segments were as follows: vegetables, fruits,
snacks, canned meals and other.
The vegetable product line consisted of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable
category included Birds Eye, Birds Eye Voila!, Birds Eye Simply Grillin', Birds
Eye Hearty Spoonfuls, Freshlike, Veg-All, McKenzies, and Brooks Chili Beans. The
fruit product line consisted of canned and frozen fruits including fruit
fillings and toppings. Branded products within the fruit category included
Comstock and Wilderness. The snack product line consisted of potato chips,
popcorn and other corn-based snack items. Branded products within the snacks
category included Tim's Cascade Chips, Snyder of Berlin, Husman, La Restaurante,
Erin's, Beehive, Pops-Rite, Super Pop, and Flavor Destinations. The canned meal
product line included canned meat products such as chilies, stew, and soups, and
various other ready-to-eat prepared meals. Branded products within the canned
meals category included Nalley. Other product lines primarily represent salad
dressings. Branded products within the "other category" included Bernstein's and
Nalley.
The following table illustrates the operating segment information of the
Cooperative for the periods during which the Cooperative operated in more than
one segment:
(Dollars in Millions)
Six Months
Ended
December 28,
2002
------------
Net Sales:
Vegetables $ 69.5
Fruits 13.1
Snacks 11.8
Canned Meals 4.4
Other 4.9
------
Total $103.7
======
Operating income:
Vegetables $ 3.8
Fruits 2.1
Snacks 1.3
Canned Meals 0.3
Other 0.4
------
Continuing segments 7.9
Equity income from Agrilink
Holdings LLC (for the period
August 19, 2002 to December 28, 2002) 3.7
Gain from transaction with Birds Eye Foods, Inc. and related agreements 8.0
Selling, administrative, and general (0.9)
Legal matters and settlement expenses (1.6)
------
Total consolidated operating income 17.1
Interest expense, net (7.7)
------
Income before taxes $ 9.4
======
NOTE 6. OTHER MATTERS
Legal Matters: In the fourth quarter of fiscal 2003, Pro-Fac recorded a
liability of $832,500 relating to the settlement of claims of Kenyon Zero
Storage, Inc., the plaintiff in a lawsuit commenced on August 27, 2001, in U.S.
District Court for the Eastern District of Washington (the "Kenyon Zero Storage
Matter"), under a surety bond issued pursuant to a vegetable plant lease. The
liability was recorded because Pro-Fac was the indemnitor of the surety bond.
Pro-Fac will pay the amount of $832,500 to the surety on July 1, 2004. On
September 2, 2003, Kenyon Zero Storage, which also alleged that Pro-Fac breached
a 20-year lease of a vegetable plant located in Grandview, Washington between
AgriFrozen and the plaintiff, agreed to a settlement of that claim. The parties
have
10
executed general releases and a stipulation of dismissal was filed with the
court, providing for the full and final settlement, dismissal and release of all
litigation brought by Kenyon Zero Storage in exchange for a settlement payment
of $570,000. The liability of $570,000 was recorded in the fourth quarter of
fiscal 2003. Pro-Fac paid the $570,000 liability in September, 2003.
In addition, the Cooperative is party to various other 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, and 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 the Board of Directors.
Guarantees and Indemnifications: Pro-Fac is a guarantor, under an Indenture
dated November 18, 1998, between Birds Eye Foods, the Guarantors named therein
and IBJ Schroder Bank & Trust Company, Inc., as trustee, which Indenture was
amended by a First Supplemental Indenture dated July 22, 2002, among Birds Eye
Foods, the Guarantors named therein and The Bank of New York (as successor
trustee to IBJ Schroder Bank & Trust Company), as trustee, and as further
amended by a Second Supplemental Indenture dated March 1, 2003, of Birds Eye
Foods' obligations under its 11 7/8 percent Senior Subordinated Notes issued by
Birds Eye Foods in fiscal 1999 in the original aggregate principal amount of
$200.0 million. The principal amount is due November 1, 2008. Interest on the
Notes accrues at the rate of 11 7/8 percent per annum and is payable
semi-annually in arrears on May 1 and November 1. Pro-Fac, jointly and
severally, guarantees Birds Eye Foods' obligations under the 11 7/8 percent
Senior Subordinated Notes, including the payment in full when due of all
principal and interest on the 11 7/8 percent Senior Subordinated Notes at
maturity or otherwise and, in the event of any extension of time of payment or
renewal of any of the 11 7/8 percent Senior Subordinated Notes, that the Notes
will be promptly paid in full when due pursuant to the terms of any such
extension or renewal. In the event of such shortfall, Pro-Fac would be required
to pay any interest payments due as well as any unpaid principal balance due on
the 11 7/8 percent Senior Subordinated Notes. As of December 27, 2003, the
outstanding loan principal guaranteed by the Cooperative was $50.0 million.
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 aggregate principal amount
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. Pro-Fac guarantees Birds Eye Foods' obligations under that Note. Interest
on the Subordinated Promissory Note accrues quarterly in arrears, commencing
December 31, 1998, at a rate per annum of 5 percent until November 22, 2003, and
at a rate of 10 percent thereafter. Interest accruing through November 22, 2003
was paid in kind through the issuance by Birds Eye Foods of additional
subordinated promissory notes identical to the Subordinated Promissory Note.
Birds Eye Foods satisfied this requirement through the issuance of additional
promissory notes. Interest accruing after November 22, 2003 is payable in cash.
Pro-Fac, jointly and severally, guarantees Birds Eye Foods' obligations under
the Subordinated Promissory Note, including the payment in full when due of all
principal and interest on the Note. In the event of such shortfall, Pro-Fac
would be required to pay any interest payments due as well as any unpaid
principal balance due on the Note. As of December 27, 2003, the outstanding loan
amount subject to the Cooperative's guarantee includes principal of $30.0
million and interest of $9.2 million.
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.
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 holds
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 is generally not limited. The maximum potential
future payments that the Cooperative could be required to make under these
11
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 exceeding $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. Additionally, the Unit Purchase
Agreement requires Pro-Fac to indemnify Birds Eye Foods with respect to
environmental liabilities associated with Birds Eye Foods' Lawton, Michigan
facility. Birds Eye Foods is, however, responsible for up to $2.5 million of
capital expenditures to address environmental compliance issues at the Lawton
facility, provided those expenditures are incurred over the three-year period
commencing on August 19, 2002.
As of the date of this report, Pro-Fac does not expect to be required to perform
under the guarantees and indemnifications described above.
NOTE 7. SUBSEQUENT EVENTS
Dividends: Subsequent to December 27, 2003, the Cooperative declared a cash
dividend of $.43 per share on the Class A Cumulative Preferred Stock. These
dividends approximate $2.0 million and were paid on January 30, 2004.
NOTE 8. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Subsequent to the issuance of its financial statements for the quarter ended
December 27, 2003, the Cooperative determined that the equity income from
Agrilink Holdings LLC had been recorded incorrectly. The adjustment recorded,
which corrects an error related to the accretion of Holdings LLC's mandatorily
redeemable preferred units, reduced the Cooperative's equity in the net income
of Holdings LLC after preferred dividend requirements and accretion requirements
for the three and six month periods ended December 27, 2003 by $41,000 and
$70,000, respectively. An adjustment was also recorded to reflect other
comprehensive income items of Holdings LLC related to a minimum pension
liability, which was recorded by Holdings LLC during the fiscal year
ended June 28, 2003, not previously recorded by the Cooperative and the
recording of an unrealized hedging loss from the equity investee. The total
impact of the aforementioned items was to reduce net income for the three months
and six months ended December 27, 2003 by $41,000 and $70,000, respectively,
reduce comprehensive income from the three months and six months ended
December 27, 2003 by $12,000 and $222,000, respectively and to reduce the
Cooperative's investment in Holdings LLC and its equity, at December 27, 2003 by
$5.2 million. This restatement has no effect on reported cash flows of the
Cooperative. The principal effects of the restatement are summarized in the
following table:
As Previously
Reported As Restated
------------- -----------
(Dollars in Thousands)
For the three months ended December 27, 2003:
Equity in net income of Holdings LLC $2,470 $2,429
Net income $3,555 $3,514
Comprehensive income $3,555 $3,503
For the six months ended December 27, 2003:
Equity in net income of Holdings LLC $1,878 $1,808
Net income $5,443 $5,373
Comprehensive income $5,443 $5,151
12
At December 27, 2003:
Investment in Holdings LLC $26,311 $21,084
Total assets $48,230 $43,003
Accumulated other comprehensive income (loss):
Unrealized hedging activity of equity investee $ -- $ (80)
Minimum pension liability adjustment of
equity investee $ -- $ 4,584
Total shareholders' and
members' capitalization $16,025 $10,798
The Cooperative has also amended its Form 10-K for the year ended June 28, 2003
to reduce equity income from Holdings LLC for an error in the calculation of
preferred dividends to certain Holdings LLC shareholders ($0.3 million) and
accretion of those shares ($0.2 million) and to record comprehensive loss items
of its equity investee ($4.4 million).
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, Pro-Fac or persons acting on behalf of Pro-Fac 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 but are not guarantees of future performance. Actual
results could differ materially from those expressed or implied in the
forward-looking statements. Among the factors that could impact the Cooperative
include:
o the impact of weather on the volume and quality of raw product;
o the impact of strong competition in the food industry, including
competitive pricing;
o the impact of changes in consumer demand;
o the continuation of Birds Eye Foods' success in integrating operations
(including the realization of anticipated synergies in operations and the
timing of any such synergies), success with new product introductions,
effectiveness of marketing and shifts in market demand, and the
availability of acquisition and alliance opportunities;
o interest rate fluctuations;
o the Cooperative's ability to service debt;
o Birds Eye Foods' ability to service its debt that is guaranteed by Pro-Fac;
o risks associated with the Cooperative's contractual relationship with Birds
Eye Foods', including the possibility of a reduced demand for crops
produced by Pro-Fac members, the availability and sufficiency of shortfall
payments by Birds Eye Foods, Inc. under the Amended and Restated Marketing
and Facilitation Agreement, and the potential consequences of a termination
of that relationship; the ability of the Cooperative to operate its
business using the resources made available under the Termination Agreement
and Transitional Services Agreement with Birds Eye Foods, Inc. and
Pro-Fac's ability to successfully operate its business after the expiration
of those agreements. Pro-Fac is currently evaluating alternatives for
replacing services received from Birds Eye Foods under the Transitional
Services Agreement which expires August 18, 2004. In that regard, Stephen
R. Wright has accepted the position of General Manager/CEO of Pro-Fac
effective August 19, 2004, the terms of his employment have yet to be
negotiated.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As discussed in Note 8 to the "Notes to Condensed Financial Statements", the
Cooperative has restated its condensed financial statements for the three months
and six months ended December 27, 2003. The Management's Discussion and Analysis
of Financial Condition and Results of Operations gives effect to this
restatement.
The Cooperative is a New York agricultural cooperative corporation which markets
crops grown by its members. Birds Eye Foods, Inc. ("Birds Eye Foods," formerly
Agrilink Foods, Inc.) through August 18, 2002, was a wholly-owned subsidiary of
Pro-Fac.
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 2004 as compared to such periods in fiscal 2003.
This section should be read in conjunction with Part I, Item I, Financial
Statements of this Report.
CHANGES FROM SECOND QUARTER FISCAL 2003 TO SECOND QUARTER FISCAL 2004
Equity income from Agrilink Holdings LLC: For the quarter ended December 27,
2003, the Cooperative recognized income of approximately $2.4 million from
Holdings LLC, as compared to income of approximately $3.8 million in the quarter
ended December 28, 2002.
Gain from transaction with Birds Eye Foods, Inc and related agreements: Pro-Fac
and Birds Eye Foods entered into a letter agreement dated as of the Closing Date
(the "Termination Agreement"), pursuant to which, among other things, the
Marketing and Facilitation Agreement was terminated, and in consideration of
such termination, Pro-Fac is entitled to the payment of 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. The $10.0 million payment is payable in quarterly
installments to the Cooperative as follows: $4.0 million on each July 1, and
$2.0 million each October 1, January 1, and April 1.
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 ownership percentage in
Holdings LLC is recorded as an adjustment to Pro-Fac's investment in Holdings
LLC. The remaining payments are recognized as additional gain on the Transaction
with Birds Eye Foods in the period it is received. Accordingly, in the second
quarter of both fiscal 2004 and fiscal 2003, Pro-Fac recognized approximately
$1.2 million as additional gain from the receipt of the termination payments.
Commercial market value adjustment: At its January 2003 board meeting, in an
action aimed at improving the Cooperative's short-term liquidity, the Board of
Directors of Pro-Fac authorized the deduction of 1 percent of the commercial
market value ("CMV") otherwise payable to Pro-Fac's member-growers for crops
supplied by Pro-Fac member-growers through the Cooperative for the 2002 and 2003
growing seasons. The 1 percent CMV deduction will be withheld from the July 2004
CMV payments. The 1 percent deduction for the 2002 growing season, which was
withheld from the July 2003 CMV payment, resulted in approximately $0.6 million
of income for the fiscal 2003 which was recorded during the third quarter, as
compared to the approximately $0.2 million recorded in the second quarter of
fiscal 2004.
Selling, administrative, and general expense: Selling, administrative, and
general expenses totaled $0.3 million for the quarter ended December 27, 2003
and the comparable 2003 period.
Legal matters and settlement expenses: In anticipation of the final settlement
of the Blue Line and Seifer Trust litigation, Pro-Fac recorded a liability for
approximately $1.3 million during the second quarter of fiscal 2003. The Blue
Line and Seifer Trust litigation were settled in fiscal 2003. The Cooperative
incurred approximately $.2 million of additional legal costs associated with
these matters during the second quarter of fiscal 2003
Tax provision: On June 11, 2003, the Cooperative received notification from the
Internal Revenue Service that effective August 19, 2002 the Cooperative
qualified 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).
The Cooperative will use these special deductions and patronage distributions to
reduce the Cooperative's taxable income to zero for periods after August 19,
2002. The fiscal 2003 tax provision was recorded because tax exempt status had
not yet been granted and for taxes related to the period prior to the effective
date of tax exempt status. The provision for the period after the effective date
was reversed in the fourth quarter of fiscal 2003 when tax exempt status was
granted.
CHANGES FROM FIRST SIX MONTHS FISCAL 2003 TO FIRST SIX MONTHS FISCAL 2004
Prior to August 18, 2002, Birds Eye Foods was a wholly owned subsidiary of
Pro-Fac. Through (and including) August 18, 2002, the
14
results of Pro-Fac were consolidated with Birds Eye Foods. During that period
Birds Eye Foods operated through five primary product lines, consisting of
vegetables, fruit, snacks, canned meals and other. The majority of each of the
product line's net sales were within the United States and, with the exception
of one facility in Mexico, all of Birds Eye Foods' facilities were located in
the United States. The consolidated financial statements were after elimination
of significant intercompany transactions and balances.
Since August 19, 2002 Pro-Fac has operated in one segment, the marketing and
supply of crops grown by its members.
The following summarizes the activity of Birds Eye Foods for the period June 30,
2002 through August 18, 2002:
June 30, 2002 -
August 18, 2002
---------------
(Dollars in Thousands)
Net sales $103,726
Cost of sales (80,644)
--------
Gross profit 23,082
Selling, administrative, and general expense (15,468)
Other income 277
--------
Operating income 7,891
Interest expense (7,747)
--------
Income before taxes 144
Tax provision (59)
--------
Net income $ 85
========
As a result of the Transaction described in NOTE 1 of the "Notes to Condensed
Financial Statements," the results of operations for the approximately seven
weeks outlined above are not comparable with those of the six months of fiscal
2004. Accordingly, the following is a discussion of the remaining components
included in the results of operations of Pro-Fac for the first six months of
fiscal 2003 as compared to fiscal 2004.
Equity income from Agrilink Holdings LLC: For the six months ended December 27,
2003, the Cooperative recognized income of approximately $1.8 million from
Holdings LLC, as compared to income of approximately $3.6 million in the fiscal
2003 period.
Gain from transaction with Birds Eye Foods, Inc and related agreements: On
August 19, 2002, the Cooperative contributed to the capital of Holdings LLC all
of the shares of Birds Eye Foods' common stock owned by Pro-Fac in exchange for
Class B common units of Holdings LLC representing a then 40.72 percent interest.
Pro-Fac's investment in Birds Eye Foods prior to the Transaction was
approximately $24.9 million. This amount reflects the forgiveness by Birds Eye
Foods of approximately $36.5 million, which represented both borrowings for the
working capital needs of Pro-Fac and a $9.4 million demand payable. The value of
the Cooperative's 40.72 percent common equity ownership in Holdings LLC on
August 19, 2002 was estimated at $31.4 million as of the Closing Date of the
Transaction. In the first six months of fiscal 2003, the Cooperative recognized
a gain of $3.8 million from this exchange.
In addition, Pro-Fac and Birds Eye Foods entered into the Transitional Services
Agreement described in NOTE 2 to the "Notes to Condensed Financial Statements."
The estimated value of services to be received by Pro-Fac under the agreement,
of approximately $1.0 million, has been reflected as additional proceeds from
the Transaction. Accordingly, in the first six months of fiscal 2003, Pro-Fac
recognized approximately $.6 million as additional gain from the Transitional
Services Agreement.
Pro-Fac and Birds Eye Foods also entered into a letter agreement dated as of the
Closing Date (the "Termination Agreement"), pursuant to which, among other
things, the Marketing and Facilitation Agreement was terminated, and in
consideration of such termination, Pro-Fac is entitled to the payment of 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. The $10.0 million payment is
payable in quarterly installments to the Cooperative as follows: $4.0 million on
each July 1, and $2.0 million each October 1, January 1, and April 1.
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 ownership percentage in
Holdings LLC is recorded as an adjustment to Pro-Fac's investment in Holdings
LLC. The remaining payments are recognized as additional gain on the Transaction
with Birds Eye Foods in the period it is received. Accordingly, in the first six
months of both fiscal 2004 and fiscal 2003, Pro-Fac recognized approximately
$3.7 million as additional gain from the receipt of the termination payments.
As a result of the agreements described above, the Cooperative recognized a
total gain, through the first six months of fiscal 2004, of approximately $3.7
million, as compared to approximately $8.0 million in the first six months of
fiscal 2003.
15
Commercial market value adjustment: At its January 2003 board meeting, in an
action aimed at improving the Cooperative's short-term liquidity, the Board of
Directors of Pro-Fac authorized the deduction of 1 percent of the commercial
market value ("CMV") otherwise payable to Pro-Fac's member-growers for crops
supplied by Pro-Fac member-growers through the Cooperative for the 2002 and 2003
growing seasons. The 1 percent CMV deduction will be withheld from the July 2004
CMV payments. The 1 percent deduction for the 2002 growing season, which was
withheld from the July 2003 CMV payment, resulted in approximately $0.6 million
of income for fiscal 2003 which was recorded during the third quarter, as
compared to the approximately $0.6 million recorded the first six months of
fiscal 2004.
Selling, administrative, and general expense: Selling, administrative, and
general expenses totaled $0.5 and $0.8 million for the six months ended December
27, 2003 and December 28, 2002, respectively. During the first six months of
fiscal 2003, the Cooperative paid approximately $.4 million to obtain insurance
from St. Paul Mercury Insurance Company and Great American Insurance Company,
insuring the Cooperative against any obligation it incurs as a result of its
indemnification of its officers and directors, and insuring such officers and
directors for liability against which they may not be indemnified by the
Cooperative for events occurring prior to August 19, 2002 where claims are
submitted prior to August 19, 2008. This insurance expires on August 19, 2008.
The remaining expenses for the first six months of fiscal 2004 and fiscal 2003
were for general operating purposes of the Cooperative.
Legal matters and settlement expenses: The Cooperative incurred approximately
$0.2 million of legal costs associated with legal matters, as disclosed in NOTE
6 to the "Notes to Condensed Financial Statements," in the first six months of
fiscal 2004. In anticipation of the final settlement of the Blue Line and Seifer
Trust litigations, Pro-Fac recorded a liability for approximately $1.3 million
during the first six months of fiscal 2003. The Blue Line and Seifer Trust
litigation were settled in fiscal 2003. The Cooperative incurred approximately
$0.2 million of additional legal costs associated with these matters during the
first six months of fiscal 2003.
Tax provision: On June 11, 2003, the Cooperative received notification from the
Internal Revenue Service that effective August 19, 2002 the Cooperative
qualified 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).
The Cooperative will use these special deductions and patronage distributions to
reduce the Cooperative's taxable income to zero for periods after August 19,
2002. The fiscal 2003 tax provision was recorded because tax exempt status had
not yet been granted and for taxes related to the period prior to the effective
date of tax exempt status. The provision for the period after the effective date
was reversed in the fourth quarter of fiscal 2003 when tax exempt status was
granted.
LIQUIDITY AND CAPITAL RESOURCES
As discussed under "NOTE 1. Description of Business and Summary of Significant
Accounting Policies", as a result of the Transaction, Pro-Fac no longer
consolidates the assets and liabilities of Birds Eye Foods in its financial
statements. Pro-Fac's balance sheet does, however, reflect Pro-Fac's interest in
Holdings LLC, which, as described in "NOTE 1. Description of Business and
Summary of Significant Accounting Policies" is accounted for under the equity
method.
From and after August 19, 2002 and through and including August 19, 2007,
Pro-Fac's primary source of cash is presently expected to be the $10.0 million
annual payments due to it from Birds Eye Foods pursuant to the Termination
Agreement, the last installment payment of $2.0 million pursuant to that
agreement being payable on April 1, 2007, and the commercial market value or
"CMV" payments made to it by Birds Eye Foods for crops pursuant to the Amended
and Restated Marketing and Facilitation Agreement. Although Pro-Fac's business
strategy is to expand its sources of cash through expanding the types of
products and/or services it offers, the actual amount of cash that may be
generated from Pro-Fac's expanded operations will depend on how successful
Pro-Fac is in implementing its business strategy, including controlling any
associated costs.
Subsequent to August 19, 2007 and prior to any sale (or dissolution) of Holdings
LLC, Pro-Fac's primary source of cash is expected to be the annual
distributions, if any, from Holdings LLC pursuant to the limited liability
company agreement of Holdings LLC to which Pro-Fac, together with others,
including Vestar, are parties, dated August 19, 2002 (the "Limited Liability
Company Agreement"). The Limited Liability Company Agreement 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, and provides that, subject to
any restrictions contained in any financing arrangements of Holdings LLC and/or
Birds Eye Foods, after August 19, 2007, 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. Assuming
$24.8 million of annual distributions, and further assuming that Pro-Fac's
distributable interest is 40.44%, Pro-Fac's annual distributable share would be
approximately $10.0 million. The actual amount of annual distributions to
Pro-Fac, if any, will depend upon the operating results of Birds Eye Foods for
the particular year and Pro-Fac's distributable percentage interest.
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Although CMV payments are a source of cash to Pro-Fac, with the exception of the
Board's decision to deduct 1% of CMV otherwise payable to its grower-members for
crops delivered in 2003 ($0.6 million) and 2004 ($0.6 million through December
27, 2003), Pro-Fac has typically paid 100% of CMV to its member-growers. The
Pro-Fac Board of Directors determines annually the amount of CMV that will be
paid out to the Pro-Fac member-growers for crops supplied for the immediately
preceding growing season after taking into account Pro-Fac's need to establish
reserves for its anticipated operating and other expenses.
Any cash generated from expanded products and/or services offerings by Pro-Fac
is currently anticipated to be a secondary source of cash.
In addition to the cash payments to Pro-Fac pursuant to the Termination
Agreement and the possible cash distributions to Pro-Fac pursuant to the Limited
Liability Company Agreement, Pro-Fac has available up to $1.0 million per year,
until August 19, 2007, under the Credit Agreement with Birds Eye Foods and up to
$1,000,000 under a line of credit from Manufacturers and Traders Trust Company
("M&T Bank").
The Cooperative has a $1,000,000 line of credit available from M&T Bank (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 90 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 its assets, excluding Pro-Fac's
Class B common units owned in Holdings LLC. However, 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.
As of December 27, 2003, there was no outstanding amount under the M&T Line of
Credit.
Under the Transitional Services Agreement, Birds Eye Foods has agreed to provide
Pro-Fac certain administrative and other services until August 18, 2004. After
termination of that Agreement, Pro-Fac will begin to pay for the services
currently being provided under that Agreement, including salary, administrative
and other expenses. Pro-Fac is currently evaluating alternatives for replacing
services received from Birds Eye Foods under the Transitional Services Agreement
which expires August 18, 2004. In that regard, Stephen R. Wright has accepted
the position of General Manager /CEO of Pro-Fac effective August 19, 2004, the
terms of his employment have yet to be negotiated.
Net cash available to Pro-Fac, after payment of CMV to Pro-Fac's member-growers,
is used to pay Pro-Fac's operating expenses as well as to pay dividends on its
capital stock and fund repurchases of its common stock. Dividends on Pro-Fac's
preferred stock were $4.0 million in the first six months of fiscal 2004 and
2003, respectively.
A discussion of "Condensed Statement of Cash Flows" for the six months ended
December 27, 2003 of fiscal 2004 follows:
Net cash used in operations for the first six months of fiscal 2004 represents
the payment for previously settled legal matters ($1.1 million), payment of
operating expenses ($0.5 million), reduction in regular accounts payable ($0.2
million), net of collection of the 2003 CMV holdback ($0.6 million) and an
increase in the amount due members, net of receivables from customers ($0.6
million). (See the discussion of Legal Matters under "Note 6. Other Matters"
under "Notes to Condensed Financial Statements" in Part I, Item 1 of this
Report).
Net cash provided by investing activities for the first six months of fiscal
2004 was $6.0 million. This amount primarily represents the receipt by the
Cooperative of $6.0 million from Birds Eye Foods under the Termination
Agreement.
Net cash used in financing activities of approximately $4.2 million primarily
represents dividends paid of approximately $4.0 million and net repayment of
debt of $0.2 million by the Cooperative during the first six months of fiscal
2004.
Pro-Fac believes that its sources of cash described above will be sufficient to
fund its operations and meet its cash requirements for at least the next 12
months. Pro-Fac's ability to fund these 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.
Contractual Obligations Guaranteed
There have been no material changes to our contractual obligations since June
28, 2003.
Critical Accounting Policies: 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.
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As a result of the Transaction, Pro-Fac no longer consolidates the results of
Birds Eye Foods. After the Transaction, Pro-Fac's estimates affecting the
financial statements relate primarily to contingencies. Certain accounting
policies deemed critical to Pro-Fac's results of operation or financial position
after the Transaction are discussed below.
Pro-Fac markets and sells its members' crops to food processors, including Birds
Eye Foods. Under the provisions of Emerging Issues Task Force 99-19, "Reporting
Revenue Gross Versus Net as an Agent", subsequent to the Transaction, the
Cooperative records activity between customers, itself and its members on a net
basis.
The Cooperative accounts for its ownership interest in Holdings LLC under the
equity method of accounting. Accordingly, the portion of payments received as a
result of the Transaction related to Pro-Fac's continuing ownership percentage
are recorded as an adjustment to Pro-Fac's investment in Holdings LLC. The
remaining portion is recorded as a gain.
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.
The cherry crop from the fiscal 2003 growing seasons was affected by weather in
the prime growing areas in Michigan. Both raw and frozen cherry commercial
market values have, therefore, significantly increased from historic levels.
For the 2003 crop season, unexpected higher than average temperatures in the
Northeast and Midwest regions reduced crop intake. The reduction in crop intake
is not expected to materially impact average commercial market values.
ITEM 4. CONTROLS AND PROCEDURES
For the quarterly period ended December 27, 2003 and in connection with the
preparation of Pro-Fac's Form 10-Q filed February 10, 2004, 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) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Based on that evaluation, Pro-Fac's Principal Executive
Officer and Principal Financial Officer had previously concluded that Pro-Fac's
disclosure controls and procedures as of December 27, 2003 (the end of the
period covered by this Report) were designed and were functioning effectively to
provide reasonable assurance that the information required to be disclosed by
Pro-Fac in reports filed or submitted 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.
Subsequent to the issuance of Pro-Fac's financial statements for the year ended
June 28, 2003, Pro-Fac determined that the equity method of accounting for its
investment in Holdings LLC had been applied incorrectly and that Pro-Fac would
restate its annual financial statements for its fiscal year ended June 28, 2003
and its quarterly financial statements for its fiscal quarter ended September
27, 2003 and for its fiscal quarter ended December 27, 2003. In light of the
foregoing, Pro-Fac has enhanced its policies and procedures to better assure its
timely acquisition of quarterly and annual financial and other information
necessary for Pro-Fac's reporting of its investment in Holdings LLC under the
equity method of accounting and its procedures related to the application of the
equity method of accounting.
Pro-Fac's Principal Executive Officer and Principal Financial Officer,
considering the improved controls and procedures, has concluded that Pro-Fac's
disclosure controls and procedures 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.
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PART II
ITEM 1. LEGAL PROCEEDINGS
The information called for by this Item is disclosed in NOTE 6. "Other Matters -
Legal Matters" under "Notes to Condensed Financial Statements" in Part I, Item 1
of this Form 10-Q/A, and is incorporated herein by reference in answer to this
Item.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
- -------------- ---------------------------------------------------------------
10.1 Demand Note between the Cooperative and Manufacturers and
Traders Trust Company, dated as of December 1, 2003 (filed as
Exhibit 10.1 to Pro-Fac's Quarterly Report on Form 10-Q filed
February 10, 2004 and incorporate herein by reference).
31. Certification required by Rule 13a-14 (a) of the Securities and
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 and
Exchange Act of 1934 and pursuant to 18 U.S.C., Section 1350.
as adopted pursuant to Section 906 of the Sarbanes Oxley Act at
2002, of the Principal Executive Officer and the Principal
Financial Officer (filed herewith).
(b) Reports on Form 8-K:
On November 10, 2003 the Cooperative furnished a Report on Form 8-K.
Pursuant to Item 12, Pro-Fac Cooperative Inc. furnished its press
release dated November 10, 2003, which reported its financial results
for the quarter ended September 27, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 1 to the Quarterly Report on Form
10-Q/A to be signed on its behalf by the undersigned thereunto duly authorized.
PRO-FAC COOPERATIVE, INC.
Date: May 17, 2004 BY: /s/ Stephen R. Wright
-------------------------------
STEPHEN R. WRIGHT
GENERAL MANAGER AND SECRETARY
(On Behalf of the Registrant and as
Principal Executive Officer
Principal Financial Officer, and
Principal Accounting Officer)
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