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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 September 24, 2005
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)
350 Linden Place, PO Box 30682, Rochester, NY 14603-0682
(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
--- ---
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 by check mark whether the registered is a shell company (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 November 4, 2005.
Common Stock - 1,771,096
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1
FORM 10-Q
For the Quarterly Period Ended September 24, 2005
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.......................................... 14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk......... 17
ITEM 4. Controls and Procedures............................................ 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................. 18
ITEM 6. Exhibits........................................................... 18
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 September 24, 2005 and for the three-month period
ended September 24, 2005 and September 25, 2004 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 to a fair presentation of the results of the interim
periods. The June 25, 2005 condensed balance sheet was derived from the
Cooperative's audited balance sheet at June 25, 2005.
This Part I also includes management's discussion and analysis of the
Cooperative's financial condition as of September 24, 2005 and its results of
operations for the three-month period ended September 24, 2005.
Pro-Fac Cooperative, Inc.
Condensed Statements of Operations, Allocation of Net Loss and Comprehensive
Loss (Unaudited)
(Dollars in Thousands)
Three Months Ended
------------------
September 24, September 25,
2005 2004
---- ----
Net sales $ 0 $ 0
Cost of sales 0 0
------- -------
Gross profit 0 0
Equity in loss of Birds Eye Holdings LLC (4,286) (2,622)
Gain from transaction with Birds Eye Foods, Inc. and related agreements 2,380 2,380
Margin on delivered product 52 0
Selling, administrative, and general expense (268) (341)
Other income 15 51
------- -------
Operating loss (2,107) (532)
Interest income 33 12
Interest expense (16) (25)
------- -------
Net loss $(2,090) $ (545)
======= =======
Allocations of net loss:
Net loss $(2,090) $ (545)
Dividends on preferred stock (2,102) (2,102)
------- -------
Net deficit (4,192) (2,647)
Allocation to accumulated deficit 4,192 2,647
------- -------
Net loss available to members $ 0 $ 0
======= =======
Net loss $(2,090) $ (545)
Other comprehensive income/(loss):
Unrealized gain/(loss) on hedging activity of equity investee (72) 59
Minimum pension liability of equity investee (71) 0
------- -------
Comprehensive loss $(2,233) $ (486)
======= =======
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
September 24, June 25,
2005 2005
---- ----
Current assets:
Cash and cash equivalents $ 1,963 $ 1,103
Accounts receivable, trade 2,168 1,555
Accounts receivable from Birds Eye Foods, Inc. 13,606 8,395
Inventory 82 3
Prepaid expenses and other current assets 87 10
--------- ---------
Total current assets 17,906 11,066
Fixed assets, net 14 15
Investment in Birds Eye Holdings LLC 6,769 12,818
--------- ---------
Total assets $ 24,689 $ 23,899
========= =========
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION/(DEFICIT)
Current liabilities:
Accounts payable $ 154 $ 104
Line-of-credit 1,000 0
Other accrued expenses 26 66
Amounts due members 16,615 12,500
--------- ---------
Total current liabilities 17,795 12,670
--------- ---------
Commitments and contingencies (Note 5)
Common stock, par value $5, authorized - 5,000,000 shares; issued
and outstanding 1,771,096 shares 8,855 8,855
--------- ---------
Shareholders' and members' capitalization/(deficit):
Retained earnings allocated to members 10,214 10,214
Non-cumulative preferred stock, par value $25, authorized
5,000,000 shares; issued and outstanding 27,965 shares 700 700
Class A cumulative preferred stock, liquidation preference
$25 per share, authorized 10,000,000 shares; issued and
outstanding 4,789,907 shares 119,748 119,748
Special membership interests 21,733 21,733
Accumulated deficit (148,283) (144,091)
Accumulated other comprehensive (loss)/income:
Unrealized gain/(loss) on hedging activity of equity investee (27) 45
Minimum pension liability adjustment of equity investee (6,046) (5,975)
--------- ---------
Total shareholders' and members' capitalization/(deficit) (1,961) 2,374
--------- ---------
Total liabilities and shareholders' and members' capitalization/(deficit) $ 24,689 $ 23,899
========= =========
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)
Three Months Ended
-------------------------------
September 24, September 25,
2005 2004
---- ----
Cash Flows from Operating Activities:
Net loss $(2,090) $ (545)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of transition service receivable 0 71
Depreciation 1 1
Gain from transaction with Birds Eye Foods, Inc. and related agreements (2,380) (2,380)
Equity in loss of Birds Eye Holdings LLC 4,286 2,622
Change in assets and liabilities:
Accounts receivable (5,824) (10,271)
Accounts payable and other accrued expenses 10 (1,199)
Amounts due members 4,115 8,768
Other assets and liabilities, net (156) (52)
------- --------
Net cash used in operating activities (2,038) (2,985)
------- --------
Cash Flows from Investing Activities:
Proceeds from Termination Agreement with Birds Eye Foods, Inc. 4,000 4,000
Purchase of property, plant and equipment 0 (19)
------- --------
Net cash provided by investing activities 4,000 3,981
------- --------
Cash Flows from Financing Activities:
Borrowings on line-of-credit 1,000 0
Cash dividends paid (2,102) (2,102)
------- --------
Net cash used in financing activities (1,102) (2,102)
------- --------
Net change in cash and cash equivalents 860 (1,106)
Cash and cash equivalents at beginning of period 1,103 3,394
------- --------
Cash and cash equivalents at end of period $ 1,963 $ 2,288
======= ========
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, 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, representing a 40.72 percent common equity ownership at the
Closing Date; and
(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,
representing 56.24 percent of the common equity of Holdings LLC at
the Closing Date, inclusive of the additional Class A common units
issued to Vestar upon exercise of the warrants. The co-investors are
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. Accordingly, 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.
(iv) Certain Birds Eye Foods management members, including Stephen R.
Wright, then the General Manager and Secretary of Pro-Fac, 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.
As a result of the Transaction, Pro-Fac no longer reports its financial
statements on a consolidated basis with those of Birds Eye Foods. As outlined
above, Pro-Fac owns Class B common units of Holdings LLC. Pro-Fac accounts for
its investment in Holdings LLC under the equity method of accounting.
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. 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 in the accompanying unaudited condensed financial
statements. Operating results for the interim period ended September 24, 2005
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 25, 2005.
Fixed Assets, Net: Fixed assets, which consist of office and computer equipment,
are recorded at cost. Depreciation is provided using the straight-line method
over the estimated useful lives of the related assets, which range from five to
seven years.
6
Inventory: Beginning in fiscal year 2005, the Cooperative supplied cherries to
another cooperative which markets the cherries. Title remains with the
Cooperative until the inventory is sold to third parties. Inventory and an equal
amount due member-growers is recorded at estimated cost.
Investment in Birds Eye Holdings, LLC: Pro-Fac accounts for its investment in
Holdings LLC under the equity method of accounting. The Cooperative includes 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.
The following schedule sets forth summarized financial information of Holdings
LLC for the periods indicated (dollars in thousands):
Three Months Ended
------------------
September 24, September 25,
2005 2004
---- ----
Net sales $196,656 $177,344
Gross profit 35,337 34,354
Loss from continuing operations (2,704) (213)
Net loss (2,985) (213)
At September 24, 2005, Holdings LLC had $218.7 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 September 24, 2005, the
preferred units had accrued payment-in-kind dividends since issuance of
approximately $80.3 million, which amount is included in the total preferred
units outstanding. 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 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 received
from Holdings LLC from the sale of the preferred units. 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 September 24, 2005, Pro-Fac owned 40.45 percent of the
remaining common equity interest in Holdings LLC. Pro-Fac's share of the loss of
Holdings LLC under the equity method of accounting is determined as follows:
Three Months Ended
------------------
September 24, September 25,
2005 2004
---- ----
(In millions)
Net loss of Holdings LLC $ (3.0) $ (0.2)
Less:
Preferred return on Holdings LLC's preferred units (7.9) (6.8)
Accretion of preferred units (0.1) (0.1)
Plus:
Interest on termination payments recorded by Holdings LLC 0.4 0.7
------ ------
Loss for common interests (10.6) (6.4)
Pro-Fac's share of common interest 40.46% 40.49%
------ ------
Equity loss from Holdings LLC $ (4.3) $ (2.6)
====== ======
7
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.
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 provided Pro-Fac certain
administrative and other services for a period of 24 months from the Closing
Date. Pursuant to its terms, the Transitional Services Agreement terminated on
August 19, 2004. During the term of the Transitional Services Agreement, Mr.
Wright, who served as the General Manager and Secretary of Pro-Fac, was employed
by Birds Eye Foods, serving as executive vice president - investor relations of
Birds Eye Foods. As an employee of Birds Eye Foods, Mr. Wright's salary was paid
by Birds Eye Foods. Effective August 19, 2004, Mr. Wright and two other
individuals previously employed by Birds Eye Foods became employees of Pro-Fac
and ceased to be employed by Birds Eye Foods.
Gain from Transaction with Birds Eye Foods: As a result of the agreements
described above, based on its common equity ownership, the Cooperative
recognized a total gain in the first quarter of each of fiscal 2006 and fiscal
2005 of approximately $2.4 million.
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"). The Amended and Restated Marketing and Facilitation
Agreement provides that, among other things, Pro-Fac will be Birds Eye Foods'
preferred supplier of crops. 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 or (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.
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 Holdings Inc.
8
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. At September 24, 2005 the maximum amount which
may be borrowed was $2.0 million. 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 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
September 24, 2005 and June 25, 2005, no amount was outstanding under the
Credit Facility.
Line of Credit: The Cooperative may borrow up to $2.0 million under the terms
of a line of credit (the "M&T Line of Credit") from Manufacturers and Traders
Trust Company ("M&T Bank"). At September 24, 2005 $1.0 million was outstanding
under the M&T Line of Credit. At June 25, 2005, 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. 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.
Contractual Obligations Guaranteed: Pro-Fac guarantees certain obligations of
Birds Eye Foods. Following is a schedule of obligations guaranteed by Pro-Fac at
September 24, 2005:
(Dollars in Millions)
Amounts
Committed Expiration
--------- ----------
Senior Subordinated Notes - 11 7/8 Percent $50.9 November 2008
Subordinated Promissory Notes $39.8 November 2008
9
NOTE 4. COMMON STOCK AND CAPITALIZATION
The following table illustrates the Cooperative's shares authorized, issued, and
outstanding at September 24, 2005 and June 25, 2005.
Shares Issued and Outstanding
Par Shares -----------------------------
Value Authorized September 24, June 25,
----- ---------- 2005 2005
---- ----
Common Stock $ 5.00 5,000,000 1,771,096 1,771,096
Non-Cumulative Preferred Stock $25.00 5,000,000 27,965 27,965
Class A Cumulative Preferred Stock $ 1.00 10,000,000 4,789,907 4,789,907
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
In the event of liquidation, the relative preference of Pro-Fac's outstanding
securities is as follows: first retains, then all classes of preferred stock,
pari passu, then common stock and, finally, special membership interests.
While the Cooperative 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 September 24, 2005, is as follows:
Amount Required
(Dollars in Thousands) to Fully Redeem
---------------
Retains $ 10,214
Non-Cumulative Preferred Stock 700(1)
AND
Class A Cumulative Preferred Stock 119,748(1)
Common Stock 8,855
Special Membership Interests 21,733
--------
$161,250
========
(1) Pari passu
Qualified 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 quarters ended September 24, 2005
and September 25, 2004, no patronage income was retained. Qualified retains are
taxable income to the member in the year the allocation is made. Qualified
retains are freely transferable.
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 as a possible
treatment of the retains issued for fiscal year 2002 and thereafter. This
decision will not impact retains issued for years prior to fiscal 2002.
Preferred Stock: All preferred stock outstanding originated 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.
On August 23, 1995, the Cooperative commenced an offer to exchange one share of
its Class A cumulative preferred stock (liquidation preference $25 per share)
for each share of its existing non-cumulative preferred stock (liquidation
preference $25 per share). Pro-Fac's Class A cumulative preferred stock is
listed under the symbol PFACP on the Nasdaq National Market system.
10
The dividend rates for the preferred stock outstanding are as follows:
Non-Cumulative Preferred Stock $1.50 per share paid annually at the
discretion of the Board.
Class A Cumulative Preferred Stock $1.72 per share annually, paid in
four quarterly installments of $.43
per share.
Subsequent to September 24, 2005, the Cooperative declared a cash dividend of
$.43 per share on the Class A Cumulative Preferred Stock. This dividend amounted
to approximately $2.1 million and was paid in October 2005.
The Cooperative's ability to pay dividends is dependent upon, among other
factors, capital surplus, its future earnings and its available cash. The
Cooperative 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. There can 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.
The Cooperative's principal use of available cash is the payment of dividends.
The Cooperative currently believes its sources of cash are sufficient to fund
the Cooperative's operations and meet its cash requirements through September
2006, including payments of dividends. There can be no assurance as to the
declaration of future dividends, or the rate at which dividends may be paid.
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 the par value thereof plus any dividends thereon which have been
declared but remain unpaid.
At its January 2005 Board meeting, the Pro-Fac Board of Directors adopted a
moratorium on Pro-Fac exercising its right to repurchase shares of common stock
from member-growers, except for shares of Pro-Fac common stock previously
scheduled to be repurchased in April 2005 in accordance with past practice and
for specified performance related stock repurchases which will be considered by
the Board of Directors on a case-by-case basis.
At its January 2003 Board 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 (losses)/income
after distribution of earnings allocated to members and dividends.
11
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: Pro-Fac is 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 Birds Eye Foods' obligations
under its 11 7/8 percent Senior Subordinated Notes issued in fiscal 1999 in the
original aggregate principal amount of $200.0 million. The aggregate 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. As of September
24, 2005, the outstanding loan amount subject to the Cooperative's guarantee
included principal of $50.0 million and accrued interest of $0.9 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 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 the Subordinated Promissory Note. Interest on the
Subordinated Promissory Note accrued quarterly in arrears, commencing December
31, 1998, 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.
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 Birds Eye Foods'
obligations under the Subordinated Promissory Notes. As of September 24, 2005,
the outstanding loan amount subject to the Cooperative's guarantee included
principal of $30 million and accrued interest of $9.8 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 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.
12
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.
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, capital surplus, its future earnings and its available
cash. 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 September 24, 2005, the Cooperative's Board of Directors
determined that capital surplus was available based upon evidence of
the fair market value of the Cooperative's principal asset, 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.
As is discussed in "Liquidity and Capital Resources" in Part I, Item 2
of this Report, the Cooperative's principal use of available cash is
the payment of dividends and, while the Cooperative currently believes
its sources of cash are sufficient to fund the Cooperative's operations
and meet its cash requirements, including payments of dividends, at
least through September 2006, there can be no assurance as to the
declaration of future dividends, or the rate at which dividends may be
paid, since they necessarily depend upon Pro-Fac's future operations,
performance and cash flow;
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
September 24, 2005, Holdings LLC had $218.7 million of preferred units
issued and outstanding, including approximately $80.3 million of
payments-in-kind dividends on such preferred units. Based on Holdings
LLC's outstanding preferred units at September 24, 2005, 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)
2006 $ 244.2
2007 283.0
2008 327.9
2009 379.9
2010 440.1
13
o the Cooperative's primary source of cash is $10.0 million in payments
received annually by the Cooperative from Birds Eye Foods under the
Termination Agreement described in Part I, Item 1 of this Report in
"NOTE 2. Agreements with Birds Eye Foods" and Item 2., Management's
Discussion and Analysis of Financial Condition and Results of
Operations. The last payment to the Cooperative under the Termination
Agreement is an installment of $2.0 million payable on April 1, 2007.
In the event the Cooperative is unable to replace the $10.0 million
source of cash under the Termination Agreement either through
distributions from its investment in Holdings LLC or increased revenue,
the Cooperative's ability to fund its future operations and to pay
dividends will be negatively impacted (see the discussion of "Liquidity
and Capital Resources" in Part I, Item 2 of this Report for a better
understanding of the Cooperative's sources and uses of cash);
o Pro-Fac owns approximately 40.46 percent of the outstanding common
units of Holdings LLC, which are subordinate to the rights and
preferences of Holdings LLC's outstanding preferred units. As a
minority owner, Pro-Fac has no control over the management of the
affairs of Holdings LLC or Birds Eye Foods, including whether annual
distributions will be made under the Limited Liability Company
Agreement of Holdings LLC. In the event the Cooperative does not
receive anticipated distributions under the Limited Liability Company
Agreement, the resulting reduction in its available cash will have a
material adverse effect on Pro-Fac's financial condition (see the
discussion under the heading "Liquidity and Capital Resources" section
in Part I, Item 2 of this Report).
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 first quarter of
fiscal 2006 as compared to the first quarter of fiscal 2005. This section should
be read in conjunction with Part I, Item 1, Financial Statements of this Report.
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 September 24, 2005, there were approximately 495 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 25, 2005, Pro-Fac delivered crops
with a commercial market value of approximately $65.1 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.
Pro-Fac's primary sources of income are derived from 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.
Pro-Fac receives $10.0 million annually under the Termination Agreement through
April 2007. 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. To date, Holdings LLC has not made any cash distributions of its
income. Pro-Fac's net loss for the three-month period ended September 24, 2005,
is primarily a result of Holdings LLC's net loss for the same period.
RESULTS OF OPERATIONS - FIRST QUARTER 2006 COMPARED TO FIRST QUARTER 2005
Equity in loss of Holdings LLC: For the quarter ended September 24, 2005, the
Cooperative recognized a loss of approximately $4.3 million from its investment
in Holdings LLC, as compared to a loss of approximately $2.6 million in the
first quarter of fiscal 2005. The change results primarily from an increase in
the net loss of Holdings LLC and increases in the preferred return on Holdings
LLC preferred units due to compounding of accrued payment-in-kind preferred
dividends. Holdings' operations are substantially comprised of the operations of
Birds Eye Foods, its indirect, wholly-owned subsidiary. In the first quarter of
fiscal 2006, Birds Eye Foods reported a charge of $4.5 million (approximately
$2.7 million, net of tax benefit) for payments to be provided and incurred in
conjunction with the departure of Birds Eye Food's former Chairman, President
and Chief Executive Officer. Birds Eye Foods is a voluntary filer with the
Securities and Exchange Commission. Birds Eye Foods' periodic report equivalents
are available at the SEC's website: www.sec.gov.
During the quarter ended September 24, 2005, Pro-Fac's recorded investment in
Holdings LLC decreased by $6.0 million due to recording Pro-Fac's equity in the
loss of Holdings LLC ($4.3 million), elimination of the portion of termination
payments related to Pro-Fac's continuing indirect ownership of Birds Eye Foods
($1.6 million) and recording its share of changes in accumulated other
comprehensive loss of Holdings LLC ($0.1 million).
14
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.
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 an adjustment 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 first quarter of both fiscal 2006 and the first quarter of
fiscal 2005, Pro-Fac recognized approximately $2.4 million as additional gain
from the receipt of termination payments ($4.0 million on each of July 1, 2005
and July 1, 2004).
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 three
months ended September 24, 2005. No amount was earned in the comparable fiscal
2005 period.
Selling, administrative, and general expense: Selling, administrative, and
general expenses totaled $0.3 million for each of the quarters ended September
24, 2005 and September 25, 2004.
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.
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
is recorded as an adjustment to Pro-Fac's investment in Holdings LLC. The
remaining portion is recorded as a gain. Pro-Fac also records its share of the
earnings of Holdings LLC under the equity method of accounting. Pro-Fac's share
of the earnings is after the preferred return on Holdings LLC's preferred units
and accretion recorded by Holdings LLC.
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.
LIQUIDITY AND CAPITAL RESOURCES
As discussed under "NOTE 1. Description of Business and Summary of Significant
Accounting Policies" under "Notes to Condensed Financial Statements" included in
Part I, Item 1 of this Report, Pro-Fac's balance sheet reflects Pro-Fac's
ownership interest in Holdings LLC, which is accounted for under the equity
method.
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) cash distributions related to
its investment in Birds Eye Holdings LLC, and (iv) borrowings.
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 quarterly
dividends on its capital stock and fund repurchases of its common stock.
Dividends on Pro-Fac's preferred stock were $8.3 million and $8.1 million in
fiscal 2005 and 2004, respectively.
15
From and after August 19, 2002 and through and including August 19, 2007,
Pro-Fac's primary source of cash is expected to be the $10.0 million payable
annually to Pro-Fac by Birds Eye Foods pursuant to the Termination Agreement.
The final installment payment of $2.0 million pursuant to that agreement will be
paid on April 1, 2007. Pro-Fac's other principal 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, with the exception of the Board's decision to deduct 1
percent of CMV otherwise payable to its grower-members for crops delivered in
fiscal years 2003 and 2004, Pro-Fac has typically paid 100 percent of CMV to its
member-growers for crops delivered and did so in fiscal 2005. Since such CMV
payments are approximately equal to the cash Pro-Fac receives from its customers
for its raw products, CMV payments are not a significant source of available
cash from which Pro-Fac can pay operating expenses and quarterly dividends.
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 any annual distributions
that may be made by Holdings LLC pursuant to the Limited Liability Company
Agreement of Holdings LLC. The Limited Liability Company Agreement 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, including Pro-Fac. Assuming $24.8 million of annual distributions,
and further assuming that Pro-Fac's distributable interest remains at 40.45
percent, Pro-Fac's annual distributable share would be approximately $10.0
million. Since Pro-Fac has no control over the management of Holdings LLC or
Birds Eye Foods, there can be no assurances that any distributions will be made
under the Limited Liability Company Agreement, or, if made, what the amount of
such distributions will be, since distributions necessarily will depend upon,
among other factors, Birds Eye Foods' future earnings, business plans and
strategies and financial obligations.
As stated above, Pro-Fac's current primary source of cash is the payments made
to it under the Termination Agreement. The $10.0 million is paid to Pro-Fac in
quarterly installments as follows: $4.0 million on July 1, and $2.0 million each
on October 1, January 1, and April 1. The final installment under the
Termination Agreement will be paid on April 1, 2007. Distributions to Pro-Fac,
if any, under the Limited Liability Company Agreement may not begin until some
time after August 19, 2007 and, depending upon Birds Eye Foods' future earnings,
business plans and strategies, financial obligations and other factors, such
distributions could be delayed beyond August 19, 2007. Pro-Fac has no control
over the management of the affairs of Holdings LLC. In the event distributions
are delayed or if distributions are less than required by Pro-Fac to meet its
cash flow needs, then, after April 1, 2007, Pro-Fac will face an interim period
or periods during which it will lack available cash to satisfy its operating
expenses and/or pay dividends. Pro-Fac will need to consider other sources of
cash, if available, to finance its business operations and to satisfy its
financial obligations after April 1, 2007.
Although Pro-Fac is pursuing increasing revenue through expanding its customer
base and the types of products and/or services it offers, the actual amount of
available cash that may be generated from Pro-Fac's expanded operations depends
upon how successful Pro-Fac is in this effort, including controlling any
associated costs. To date, Pro-Fac has had modest success in expanding its
customer base, resulting in only a modest amount of additional available cash.
Any available cash generated from expanded 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 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 $2.0 million under an annually renewable line of credit from M&T Bank, as
discussed below.
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. However, 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 September 24, 2005
$1.0 million was outstanding under the M&T Line of Credit. At June 25, 2005,
there was no balance outstanding under the M&T Line of Credit.
Under the Transitional Services Agreement, Birds Eye Foods provided Pro-Fac
certain administrative and other services until August 19, 2004. Since the
termination of the Transition Services Agreement, Pro-Fac pays for the services
previously provided under the Transition Services Agreement, including salary,
administrative and other expenses. The Cooperative believes it has adequate cash
resources to fund these expenses.
16
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.
A discussion of "Consolidated Statement of Cash Flows" for the quarter ended
September 24, 2005 follows:
Net cash used in operating activities of $2.0 million for the first quarter of
fiscal 2006 primarily represents the timing of cash receipts from customers
other than Birds Eye Foods and related cash payments to member-growers.
Net cash provided by investing activities for fiscal 2006 was $4.0 million
related to the receipt by the Cooperative of $4.0 million from Birds Eye Foods
under the Termination Agreement.
Net cash used in financing activities includes borrowing ($1.0 million) under
the terms of the M&T Line of Credit and dividends paid ($2.1 million) by the
Cooperative during the quarter ended September 24, 2005.
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, at its January 2005 board meeting, the Pro-Fac Board of
Directors adopted a moratorium on Pro-Fac exercising its right to repurchase
shares of common stock from member-growers, except for shares of Pro-Fac common
stock previously scheduled to be repurchased in April 2005 in accordance with
past practice and for specified delivery performance related stock repurchases
which will be considered by the Board of Directors on a case-by-case basis.
Pro-Fac believes that its sources of cash described above will be sufficient to
fund its operations and meet its cash requirements at least through September
2006. 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. For a discussion of factors that could impact
Pro-Fac's future operations, performance, cash flow and ability to pay dividends
see "Cautionary Statement on Forward-Looking Statements and Risk Factors."
Contractual Obligations: There have been no material changes to Pro-Fac's
contractual obligations since June 25, 2005.
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.
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 September 24, 2005, $1.0 million 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) 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 September 24, 2005 (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 September 24, 2005, that materially
affected, or are reasonably likely to materially affect, Pro-Fac's internal
control over financial reporting.
17
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 6 - EXHIBITS
Exhibits
Exhibit Number Description
------------- ---------------------------------------------------------------------------
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).
18
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: November 8, 2005 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)
19