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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended June 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from to
------ ------
Registration Statement (Form S-4) Number 333-70143
AGRILINK FOODS, INC.
(Exact name of registrant as specified in its charter)
New York 16-0845824
(State of Incorporation) (IRS Employer Identification Number)
90 Linden Oaks, PO Box 20670, Rochester, NY 14602-0670
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (716) 383-1850
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: NONE
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 12 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the registrant:
NONE
Number of common shares outstanding at September 1, 2001:
Common Stock: 10,000
FORM 10-K ANNUAL REPORT - Fiscal Year 2001
AGRILINK FOODS, INC.
TABLE OF CONTENTS
PART I
PAGE
ITEM 1. Description of Business
Cautionary Statement on Forward-Looking Statements................................................... 3
General Development of Business...................................................................... 3
Narrative Description of Business ................................................................... 4
Financial Information About Industry Segments........................................................ 6
Packaging and Distribution........................................................................... 6
Trademarks........................................................................................... 6
Raw Material Sources................................................................................. 7
Environmental Matters................................................................................ 7
Seasonality of Business.............................................................................. 7
Practices Concerning Working Capital................................................................. 8
Significant Customers................................................................................ 8
Backlog of Orders.................................................................................... 8
Business Subject to Government Contracts............................................................. 8
Competitive Conditions............................................................................... 8
Market and Industry Data............................................................................. 9
New Products and Research and Development............................................................ 9
Employees............................................................................................ 9
ITEM 2. Description of Properties................................................................................ 9
ITEM 3. Legal Proceedings........................................................................................ 11
ITEM 4. Submission of Matters to a Vote of Security Holders...................................................... 11
PART II
ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters................................. 12
ITEM 6. Selected Financial Data.................................................................................. 12
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 13
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............................................... 23
ITEM 8. Financial Statements and Supplementary Data.............................................................. 24
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 57
PART III
ITEM 10. Directors and Executive Officers of the Registrant....................................................... 58
ITEM 11. Executive Compensation................................................................................... 60
ITEM 12. Security Ownership of Certain Beneficial Owners and Management........................................... 62
ITEM 13. Certain Relationships and Related Transactions........................................................... 62
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 64
Signatures............................................................................................... 69
PART I
ITEM 1. DESCRIPTION OF BUSINESS
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, Agrilink Foods, Inc. (the "Company" or "Agrilink Foods")
makes oral and written statements that may constitute "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995
(the "Act") or by the Securities and Exchange Commission ("SEC") in its rules,
regulations, and releases. The Company desires to take advantage of the "safe
harbor" provisions in the Act for forward-looking statements made from time to
time, including, but not limited to, the forward-looking information contained
in the Management's Discussion and Analysis of Financial Condition and Results
of Operations and other statements made in this Form 10-K and in other filings
with the SEC.
The Company cautions readers that any such forward-looking statements made by or
on behalf of the Company 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. The factors that could impact the Company include:
* the impact of strong competition in the food industry;
* the impact of changes in consumer demand;
* the impact of weather on the volume and quality of raw product;
* the inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer acceptance;
* the continuation of the Company's success in integrating operations
(including the realization of anticipated synergies in operations and the
timing of any such synergies) and the availability of acquisition and
alliance opportunities;
* the Company's ability to achieve gains in productivity and improvements in
capacity utilization; and
* the Company's ability to service debt.
GENERAL DEVELOPMENT OF BUSINESS
Agrilink Foods, incorporated in New York in 1961, is a producer and marketer of
processed food products. The terms "Company" and "Agrilink Foods" mean "Agrilink
Foods, Inc." and its subsidiaries unless the context indicates otherwise. The
Company has four primary product lines including: vegetables, fruits, snacks,
and canned meals. The majority of each of the product lines' net sales is within
the United States. In addition, all of the Company's operating facilities,
excluding one in Mexico, are within the United States.
Agrilink Foods is a wholly-owned subsidiary of Pro-Fac Cooperative, Inc.
("Pro-Fac"). Pro-Fac is an agricultural cooperative corporation formed in 1960
under the Cooperative Corporation Laws of New York to process and market crops
grown by its members. The Cooperative conducts business under the name of
Agrilink. In addition, the board of directors of Agrilink Foods, Inc. and
Pro-Fac conduct joint meetings, coordinate their activities, and act on a
consolidated basis. Although Pro-Fac Cooperative, Inc. continues to be the legal
name of the Cooperative, with the same structure and regulations required by
bank credit agreements and bond indentures, and with the same stock symbol,
"PFACP," it is presented as Agrilink for all other communications.
Pro-Fac and Agrilink Foods operate under the guidance of the Pro-Fac Marketing
and Facilitation Agreement (the "Pro-Fac Marketing Agreement").
The Pro-Fac Marketing Agreement provides for Pro-Fac to supply crops and
additional financing to Agrilink Foods, for Agrilink Foods to provide market and
management services to Pro-Fac, and for Pro-Fac to share in the profits and
losses of Agrilink Foods. Pro-Fac is required to reinvest at least 70 percent of
any additional patronage income in Agrilink Foods. To preserve the independence
of Agrilink Foods, the Pro-Fac Marketing Agreement also requires that certain
directors of Agrilink Foods be individuals who are not employees or shareholders
of, or otherwise affiliated with, Pro-Fac or the Company ("Disinterested
Directors") and requires that certain decisions, including the volume of and the
amount to be paid for crops received from Pro-Fac, be approved by the
Disinterested Directors. See further discussion of the relationship with Pro-Fac
in NOTE 2 to the "Notes to Consolidated Financial Statements."
Under the Pro-Fac Marketing Agreement, Agrilink Foods manages the business and
affairs of Pro-Fac and provides all personnel and administrative support
required. Pro-Fac pays Agrilink Foods a quarterly fee of $25,000 for these
services.
Acquisition of Dean Foods Vegetable Company: On September 24, 1998, Agrilink
Foods acquired the Dean Foods Vegetable Company ("DFVC"), the frozen and canned
vegetable business of Dean Foods Company ("Dean Foods"), by acquiring all the
outstanding capital stock of Dean Foods Vegetable Company and Birds Eye de
Mexico SA de CV (the "DFVC Acquisition"). In connection with the DFVC
Acquisition, Agrilink Foods sold its aseptic business to Dean Foods. Agrilink
Foods paid $360 million in cash, net of the sale of the aseptic business, and
issued to Dean Foods a $30 million unsecured subordinated promissory note due
November 22, 2008 (the "Dean Foods Subordinated Promissory Note"), as
consideration for the DFVC Acquisition. (This note was subsequently sold to
Great Lakes Kraut Company, a joint venture of the Company, in December 2000.)
The Company had the right, exercisable until July 15, 1999, to require Dean
Foods, jointly with the Company, to treat the DFVC Acquisition as an asset sale
for tax purposes under Section 338(h)(10) of the Internal Revenue Code. On April
15, 1999, the Company paid $13.2 million to Dean Foods and exercised the
election.
After the DFVC Acquisition, DFVC was merged with and into the Company. DFVC was
one of the leading processors of vegetables in the United States, selling its
products under well-known brand names, such as Birds Eye, Birds Eye Voila!,
Freshlike and Veg-All, and various private labels. The Company believes that the
DFVC Acquisition strengthens its competitive position by: (i) enhancing its
brand recognition and market position, (ii) providing opportunities for cost
savings and operating efficiencies and (iii) increasing its product and
geographic diversification.
Concurrently with the DFVC Acquisition, Agrilink Foods refinanced its existing
indebtedness (the "Refinancing"), including its 12 1/4 percent Senior
Subordinated Notes due 2005 (the "Old Notes") and its then existing bank debt.
On August 24, 1998, Agrilink Foods commenced a tender offer (the "Tender Offer")
for all the Old Notes and a consent solicitation to certain amendments under the
indenture governing the Old Notes to eliminate substantially all the restrictive
covenants and certain events of default therein. Substantially all of the $160
million aggregate principal amount of the Old Notes were tendered and purchased
by Agrilink Foods for aggregate consideration of approximately $184 million,
including accrued interest of $2.9 million. Agrilink Foods also terminated its
then existing bank facility (including seasonal borrowings) and repaid $176.5
million, excluding interest owed and breakage fees outstanding thereunder. The
Company recognized an extraordinary item of $16.4 million (net of income taxes
and after dividing with Pro-Fac) in the first quarter of fiscal 1999 relating to
this refinancing.
In order to consummate the DFVC Acquisition and the Refinancing and to pay the
related fees and expenses, Agrilink Foods: (i) entered into a new credit
facility (the "Credit Facility") providing for $455 million of term loan
borrowings (the "Term Loan Facility") and up to $200 million of revolving credit
borrowings (the "Revolving Credit Facility"), (ii) entered into and drew upon a
$200 million bridge loan facility (the "Bridge Facility") and (iii) issued the
$30 million Subordinated Promissory Note to Dean Foods. The Bridge Facility was
repaid during November of 1998 principally with the proceeds from a new Senior
Subordinated Note Offering (the "Notes"). See NOTE 8 to the "Notes to
Consolidated Financial Statements - Debt - Senior Subordinated Notes - 11-7/8
Percent due 2008." Debt issue costs of $5.5 million associated with the Bridge
Facility were expensed during the quarter ended December 26, 1998.
The Credit Facility and the Notes restrict the ability of Pro-Fac to amend the
Pro-Fac Marketing and Facilitation Agreement. The Credit Facility and Notes also
restrict the amount of dividends and other payments that may be made by the
Company to Pro-Fac.
NARRATIVE DESCRIPTION OF BUSINESS
The Company sells products in three principal categories: (i) "branded"
products, which are sold under various Company trademarks, (ii) "private label"
products, which are sold to grocers who in turn use their own brand names on the
products and (iii) "food service/industrial" products, which are sold to food
service institutions such as restaurants, caterers, bakeries, and schools. In
fiscal 2001, approximately 64 percent of the Company's net sales were branded
and the remainder divided between private label and food service/industrial. The
Company's branded products are listed under the "Trademarks" section of this
report. The Company's private label products include canned and frozen
vegetables, salad dressings, salsa, applesauce, fruit fillings and toppings,
Southern frozen vegetable specialty products, and frozen breaded, and battered
products which are sold to customers such as Albertson's, Fleming, Piggly
Wiggly, Safeway, Wal-Mart/Sam's, SuperValu, BJ's, Wegmans and Winn-Dixie. The
Company's food service/industrial products include salad dressings, fruit
fillings and toppings, canned and frozen vegetables, frozen Southern
specialties, frozen breaded and battered products, and canned and frozen fruit,
which are sold to customers such as Alliant Food Service, Gordon Food Service,
Pocahontas, PYA Monarch, Church's, Denny's, Food Service of America, KFC, MBM
Corporation, McDonald's, and SYSCO.
The Company has four primary product lines: vegetables, fruits, snacks, and
canned meals. A description of the Company's four primary product lines follows:
Vegetables: The vegetable product line consists of canned and frozen vegetables,
chili beans, and various other products. Additional products include value-added
items such as frozen vegetable blends, Southern-specialty products such as
black-eyed peas, okra, and Southern squash, frozen meal starters with pasta or
potatoes and sauce and complete frozen meals in a bag. Branded products within
the vegetable product line include Birds Eye, Birds Eye Voila!, Birds Eye Simply
Grillin', Freshlike, Veg-All, McKenzies, and Brooks Chili Beans. In fiscal 2001
vegetable product line net sales represented approximately 74 percent of the
Company's total net sales. Within this product line net sales of approximately
62 percent represented branded products, 16 percent represented private label
products and 22 percent represented food service/industrial products.
The Company is a major supplier of frozen vegetables for Sam's Club stores
across the United States and the exclusive supplier in a significant portion of
their Clubs. The Company is also a 50 percent partner with Flanagan Brothers,
Inc. in Great Lakes Kraut Company, LLC, a New York limited liability company.
This joint venture includes the Silver Floss and Krrrrisp Kraut brands.
On June 23, 2000, Agrilink Foods sold its pickle business based in Tacoma,
Washington to Dean Pickle and Specialty Products Company, subsidiary of Dean
Foods. This business included pickle, pepper, and relish products sold primarily
under the Nalley and Farman's brand names. Agrilink Foods will continue to
contract pack Nalley and Farman's pickle products for a period of two years,
beginning June 23, 2000, at the existing Tacoma processing plant which Agrilink
Foods will operate. Under a related agreement, the Cooperative will supply raw
cucumbers grown in the Northwestern United States to Dean Pickle and Specialty
Products Company, for a minimum 10-year period at market pricing.
On December 17, 1999, the Company sold its Cambria, Wisconsin processing
facility to Del Monte. This facility was primarily utilized for canning
operations.
On November 8, 1999, the Company sold its Midwest private label canned vegetable
business to Seneca Foods. Included in this transaction was the Arlington,
Minnesota facility. This sale did not include the Company's retail branded
canned vegetables Veg-All and Freshlike.
On September 24, 1998, Agrilink Foods acquired the DFVC frozen and canned
vegetable businesses. DFVC was one of the leading processors of vegetables in
the United States selling its products under well-known brands such as Birds
Eye, Freshlike, and Veg-All, and various private labels.
Fruits: The fruit product line consists of canned and frozen fruits including
fruit fillings and toppings. Branded products within the fruit category include
Comstock and Wilderness. The Company is a major supplier of branded and private
label fruit fillings to retailers and food service institutions such as
restaurants, caterers, bakeries, and schools. In fiscal 2001, fruit product line
net sales represented approximately 9 percent of the Company's total net sales.
Within this product line, net sales of approximately 53 percent represented
branded products, 17 percent represented private label products, and 30 percent
represented food service/industrial products.
Snacks: The snacks product line consists of several varieties of potato chips
including regular and kettle fried, as well as popcorn, cheese curls, snack
mixes, and other corn-based snack items. Kettle fried potato chips produce a
potato chip that is thicker and crisper than other potato chips. Items within
this product line are marketed primarily in the Pacific Northwest, Midwest and
Mid-Atlantic states. Branded products within the snacks category include Tim's
Cascade Chips, Snyder of Berlin, Husman, La Restaurante, Erin's, Beehive,
Pops-Rite, and Super Pop. In fiscal 2001 snacks net sales represented
approximately 8 percent of the Company's total net sales. Within this product
line, net sales of approximately 89 percent represented branded products, 9
percent represented private label products, and 2 percent represented food
service/industrial products.
Effective June 24, 2000, Agrilink Foods acquired the Flavor Destinations
Trademark for snack items and began manufacturing and marketing this regional
brand through its Tim's Cascade Chips business in Auburn, Washington.
Effective July 21, 1998, the Company acquired J.A. Hopay Distributing Co., Inc.
("Hopay") of Pittsburgh, Pennsylvania. Hopay was a former distributor for Snyder
of Berlin products.
Canned Meals: The canned meal product line includes canned meat products such as
chilies, stews, soups, and various other ready-to-eat prepared meals. Items
within this product line are marketed primarily in the Pacific Northwest.
Branded products within the canned meal category include Nalley. In fiscal 2001
canned meals net sales represented approximately 5 percent of the Company's
total net sales. Within this product line, net sales of approximately 79 percent
represented branded products, 18 percent represented private label products, and
3 percent represented food service/industrial products.
Other: The Company's other product line primarily represents salad dressings.
Branded products within this category include Bernstein's and Nalley. In fiscal
2001, other net sales represented approximately 4 percent of the Company's total
net sales.
On January 29, 1999, the Company sold the Adams brand peanut butter operations
to the J. M. Smucker Company.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The business of the Company is principally conducted in four industry segments:
vegetables, fruits, canned meals, and snacks. The financial statements for the
fiscal years ended June 30, 2001, June 24, 2000, and June 26, 1999, which are
included in this report, reflect the information relating to those segments for
each of the Company's last three fiscal years.
PACKAGING AND DISTRIBUTION
The food products produced by the Company are distributed to various consumer
markets in all 50 states. International sales account for a small portion of the
Company's activities. Vegetables, fruits, and canned meals are primarily sold
through food brokers who sell primarily to supermarket chains and various
institutional entities. Snack products are primarily marketed through
distributors (some of which are owned and operated by the Company) who sell
directly to retail outlets in the Midwest, Mid-Atlantic and Pacific Northwest.
Customer brand operations encompass the sale of products under private labels to
chain stores and under the controlled labels of buying groups. The Company has
developed central storage and distribution facilities that permit multi-item
single shipment to customers in key marketing areas.
The Company maintains a multiyear logistic agreement with American President
Lines ("APL") under which APL provides freight management, packaging and
labeling services, and distribution support to and from production facilities
owned by the Company in and around Coloma, Michigan.
The Company also maintains a long-term logistics agreement with Americold under
which Americold manages the Montezuma, Georgia frozen food distribution facility
and all frozen food transportation operations of Agrilink Foods in Georgia and
New York.
TRADEMARKS
The major brand names under which the Company markets its products are
trademarks of the Company. Such brand names are considered to be of material
importance to the business of the Company since they have the effect of
developing brand identification and maintaining consumer loyalty. There are
trademark registrations for substantially all of the trademarks. These trademark
registrations are of perpetual duration so long as they are periodically
renewed. It is the Company's intent to maintain its trademark registrations. The
major brand names utilized by the Company follow:
Product Line Brand Name
- ------------- ---------------------------------------------------------------------------------------------------------
Vegetables Birds Eye, Voila!, Birds Eye Simply Grillin'(1), Birds Eye Fresh(1), Freshlike, Veg-All, Brooks,
Chill-Ripe, Comstock, Greenwood, McKenzie's, McKenzie's Gold King, Southern Farms, Southland, Nalley,
Pixie, Thank You, Silver Floss(2), Krrrrisp Kraut(2)
Fruits Birds Eye, Chill-Ripe, Comstock, Globe, McKenzies, Orchard Farm, Orchard Fresh, Pixie, Southern Farms,
Thank You, Squeezle Sauz(1), West Bay, Wilderness, Tropic Isle
Snacks Snyder of Berlin, Thunder Crunch, Tim's Cascade Chips, La Restaurante, Erin's, Husman, Naturally Good,
Beehive, Pops-Rite, Savoral, Super Pop, Flavor Destinations
Canned Meals Nalley, Mariners Cove, Riviera
Other Bernstein's, Nalley
(1) Application filed and U.S. federal registration is pending.
(2) Represent trademarks of Great Lakes Kraut Company, LLC. The Company owns a 50 percent interest in this joint venture.
RAW MATERIAL SOURCES
Of the commodity types supplied by Pro-Fac, approximately 60 percent was
received from members of the Cooperative. The Company also purchased on the open
market some crops of the same type and quality as those purchased from Pro-Fac.
Such open market purchases may occur at prices higher or lower than those paid
to Pro-Fac for similar products. See further discussion of the relationship with
Pro-Fac in NOTE 2 to the "Notes to Consolidated Financial Statements."
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 situation typically results in depressed selling
prices and reduced profitability on the inventory produced from that year's
crops. Excessive rain or drought conditions can produce low crop yields and a
shortage situation. This typically results in higher selling prices and
increased profitability. While the national supply situation controls the
pricing, the supply can differ regionally because of variations in weather.
The Company purchases all of its requirements for nonagricultural products,
including containers, in the open market. Although the Company has not
experienced any difficulty in obtaining adequate supplies of such items,
occasional periods of short supply of certain raw materials may occur.
ENVIRONMENTAL MATTERS
The disposal of solid and liquid waste material resulting from the preparation
and processing of foods and the emission of wastes and odors inherent in the
heating of foods during preparation are subject to various federal, state, and
local environmental laws and regulations. Such laws and regulations have had an
important effect on the food processing industry as a whole, requiring
substantially all firms in the industry to incur material expenditures for
modification of existing processing facilities and for construction of new waste
treatment facilities. The Company is also subject to standards imposed by
regulatory agencies pertaining to the occupational health and safety of its
employees. Management believes that continued measures to comply with such laws
and regulations will not have a material adverse effect upon its competitive
position or financial condition.
Among the various programs for the protection of the environment which have been
adopted by the Company to date, the most important for the operations of the
Company are the waste water discharge permit programs administered by the
environmental protection agencies in those states in which the Company does
business and by the federal Environmental Protection Agency. Under these
programs, permits are required for processing facilities which discharge certain
wastes into streams and other bodies of water, and the Company is required to
meet certain discharge standards in accordance with compliance schedules
established by such agencies. The Company has received permits for all
facilities for which permits are required. Each year the Company submits
applications for renewal permits as required for the facilities.
While the Company cannot predict with certainty the effect of any proposed or
future environmental legislation or regulations on its processing operations,
management of the Company believes that the waste disposal systems which are now
in operation or which are being constructed or designed are sufficient to comply
with all currently applicable laws and regulations.
The Company is cooperating with environmental authorities in remedying various
minor environmental matters at several of its plants. Such actions are being
conducted pursuant to procedures approved by the appropriate environmental
authorities at a cost that is not expected to be material.
Expenditures related to environmental programs and facilities have not had, and
are not expected to have, a material effect on the earnings of the Company. In
fiscal 2001, total capital expenditures of the Company were $25.1 million of
which approximately $0.6 million was devoted to the construction of
environmental facilities. The Company estimates that environmental capital
expenditures will be approximately $0.8 million for the 2002 fiscal year.
However, there can be no assurance that expenditures will not be higher.
SEASONALITY OF BUSINESS
From a sales point of view, the business of the Company is not highly seasonal,
since the demand for its products is fairly constant throughout the year.
Exceptions to this general rule include some products that have higher sales
volume in the cool weather months (such as canned and frozen fruits and
vegetables, chili, and fruit fillings and toppings), and others that have higher
sales volume in the warm weather months (such as potato chips and salad
dressings). Since many of the raw materials processed by the Company are
agricultural crops, production of these products is predominantly seasonal,
occurring during and immediately following the harvest seasons of such crops.
PRACTICES CONCERNING WORKING CAPITAL
The Company must maintain substantial inventories throughout the year of
finished products produced from seasonal raw materials. These inventories are
generally financed through seasonal borrowings. The Company's Revolving Credit
Facility is used primarily for seasonal borrowings, the amount of which
fluctuates during the year. Both the maintenance of substantial inventories and
the practice of seasonal borrowing are common to the food processing industry.
SIGNIFICANT CUSTOMERS
The Company's principal industry segments are not dependent upon the business of
a single customer or a few customers. The Company does not have any customers to
whom sales are made in an amount which equals 10 percent or more of the
Company's net sales.
BACKLOG OF ORDERS
Backlog of orders has not historically been significant in the business of the
Company. Orders are filled shortly after receipt from inventories of packaged
and processed foods.
BUSINESS SUBJECT TO GOVERNMENTAL CONTRACTS
No material portion of the business of the Company is subject to renegotiation
of contracts with, or termination by, any governmental agency.
COMPETITIVE CONDITIONS
All products of the Company, particularly branded products, compete with those
of other national and major regional food processors under highly competitive
conditions. The principal methods of competition in the food industry are a
readily available and broad line of products, product quality, price, and
marketing and sales promotion.
Quality of product and uniformity of quality are important methods of
competition. The Company's relationship with Pro-Fac gives the Company local
sources of supply, thus allowing the Company to exercise control over the
quality and uniformity of much of the raw product that it purchases. The members
of Pro-Fac generally operate relatively large production operations with
emphasis on mechanized growing and harvesting techniques. This factor is also an
advantage in producing uniform, high-quality food products.
The Company's pricing is generally competitive with that of other food
processors for products of comparable quality. The branded products of the
Company are marketed under national and regional brands. In fiscal 2001,
marketing programs for national brands focused primarily on Birds Eye Voila!,
Birds Eye Baby Vegetables, and Birds Eye Simply Grillin'. National advertising
campaigns can include television, magazines, coupons, and in-store promotions.
Marketing programs for regional brands are focused on local tastes and
preferences as a means of developing consumer brand loyalty. Regional
advertising campaigns included magazines, coupons, and in-store promotions.
Although the relative importance of the above factors may vary between
particular products or customers, the above description is generally applicable
to all of the products of the Company in the various markets in which they are
distributed.
Profit margins for fruits and vegetables are subject to industry supply and
demand fluctuations, attributable to changes in growing conditions, acreage
planted, inventory carryover, and other factors. The Company has endeavored to
protect against changing growing conditions through geographical expansion of
its sources of supply.
The percentage of sales under brand names owned and promoted by the Company
amount to approximately 64 percent; food service/industrial represent
approximately 20 percent; and private label sales currently represent
approximately 16 percent.
It is difficult to estimate the number of competitors in the markets served by
the Company. Nearly all products sold by the Company compete with the nationally
advertised brands of leading food processors, including Del Monte, Green Giant,
Heinz, Frito-Lay, Kraft, and similar major brands, as well as with the branded
and private label products of a number of regional processors, many of which
operate only in portions of the marketing area served by the Company.
MARKET AND INDUSTRY DATA
Unless otherwise stated in this report, industry and market share data used
throughout this Form 10-K was derived from industry sources believed by the
Company to be reliable, including information provided by Information Resources,
Inc. Such data was obtained or derived from consultants' reports and industry
publications. Consultants' reports and industry publications generally state
that the information contained therein has been obtained from sources believed
to be reliable, but that the accuracy and completeness of such information is
not guaranteed. The Company has not independently verified such data and makes
no representation to its accuracy.
NEW PRODUCTS AND RESEARCH AND DEVELOPMENT
The Company operates a technical center located in Green Bay, Wisconsin that is
responsible for new product development, quality assurance, and engineering.
Approximately 27 employees are employed within this facility. The Company
follows a four-stage new product development process as follows: screening,
feasibility, development, and commercialization. This new product development
process ensures input from consumers, customers, and internal functional areas
before a new product is brought to market.
The Company also focuses on the development of related products or modifications
of existing products for the Company's brands and customized products for the
Company's private label and food service businesses.
The amount expensed during the last three fiscal years on Company-sponsored and
customer-sponsored research activities relating to the development of new
products or the improvement of existing products has not been material.
During fiscal 1999, Birds Eye Voila!, a frozen all-in-one meal product that
includes vegetables, starch (pasta or potatoes), seasonings, and bite sized
pieces of protein (chicken, beef, turkey, or shrimp), in a variety of flavors,
was introduced. Fiscal 2001 net sales for Birds Eye Voila! were approximately
$108.1 million and fiscal 2000 net sales for Birds Eye Voila! were $104.5
million. During fiscal 2001, the Company introduced Birds Eye Simply Grillin', a
preseasoned blend of top quality Birds Eye vegetables in a foil tray. Net sales
for Simply Grillin' were approximately $11.3 million in fiscal 2001. A national
advertising campaign for Simply Grillin' has been initiated during the first
quarter of fiscal 2002.
EMPLOYEES
As of June 30, 2001, the Company had 4,685 full-time employees, of whom 3,401
were engaged in production and the balance in management, sales and
administration. As of that date, the Company also employed approximately 3,360
seasonal and other part-time employees, almost all of whom were engaged in
production. Most of the production employees are members of various labor
unions. The Company believes its current relationship with its employees is
good.
ITEM 2. DESCRIPTION OF PROPERTIES
All plants, warehouses, office space and other facilities used by the Company in
its business are either owned by Agrilink Foods or one of its subsidiaries or
leased from unaffiliated third parties. All of the properties owned by Agrilink
Foods are subject to mortgages in favor of its primary lender. In general, the
properties include offices, processing plants and warehouse space. Some
processing plants are located in rural areas that are convenient for the
delivery of crops. The Company also has dispersed warehouse locations to
facilitate the distribution of finished products. Agrilink Foods believes that
its facilities are in good condition and suitable for the operations of the
Company.
The Company's Alton, New York property is held for sale.
The following table describes all material facilities leased or owned by the
Company (other than the properties held for sale, certain public warehouses
leased by the Company from unaffiliated third parties from time to time, and
facilities owned by the Company's joint venture, Great Lakes Kraut Company,
LLC). Except as otherwise noted, each facility set forth below is owned by the
Company.
FACILITIES UTILIZED BY THE COMPANY
Type of Property (By Product Line) Location Square Feet
- ---------------------------------- -------- -----------
Vegetables:
Warehouse Sodus, MI 243,138
Freezing plant, warehouse, dry storage, and office Barker, NY 123,600
Freezing plant Bergen, NY 138,554
Type of Property (By Product Line) Location Square Feet
- ---------------------------------- -------- -----------
Vegetables (Continued):
Cold storage and repackaging plant and public storage warehouse Brockport, NY 404,410
Canning plant and warehouse, freezing plant Oakfield, NY 263,410
Freezing plant, cold storage, repackaging plant and office Montezuma, GA 591,300
Freezing plant, cold storage, and office Alamo, TX 114,446
Freezing plant, cold storage, and office Bridgeville, DE 104,383
Freezing plant and repackaging plant Celaya, Mexico 318,620
Freezing plant and distribution center Darien, WI 348,800
Freezing plant, repackaging plant and warehouse Fairwater, WI 178,298
Repackaging plant and distribution center Fulton, NY 263,268
Freezing and canning plant and office Green Bay, WI 492,446
Freezing plant and repackaging plant(1) Oxnard, CA 39,082
Repackaging plant(1) San Antonio, TX 20,445
Freezing plant and warehouse Uvalde, TX 146,625
Freezing plant, repackaging plant and warehouse Watsonville, CA 207,600
Freezing plant, repackaging plant and warehouse Waseca, MN 258,475
Labeling plant and distribution center(1) Fond du Lac, WI 330,000
Receiving and grading station (1) Mount Vernon, WA 110,806
Receiving and grading station (1) Aurora, WA 6,800
Warehouse, tank yards, and office building Enumclaw, WA 87,313
Plant, warehouse, and tank yards Tacoma, WA 295,468
Fruits:
Canning plant and warehouse Red Creek, NY 153,076
Canning plant and warehouse Fennville, MI 350,000
Canning plant and warehouse Lawton, MI 142,000
Snacks:
Manufacturing plant Ridgway, IL 50,000
Plant, warehouse, distribution center, and office Algona, WA 107,000
Plant, warehouse, and office Berlin, PA 190,225
Plant, warehouse, distribution center, and office(1) Auburn, WA 23,000
Plant, warehouse and distribution center Auburn, WA 27,442
Plant, warehouse, and office Cincinnati, OH 113,576
Distribution center Elwood City, PA 8,000
Distribution center Monessen, PA 10,000
Distribution center Coraopolis, PA 15,000
Distribution center Canton, OH 8,200
Distribution center(1) Canal Fulton, OH 14,000
Distribution center(1) Altoona, PA 10,000
Distribution center(1) Ashland, KY 10,760
Distribution center(1) Bristol, TN 11,500
Distribution center(1) Knoxville, TN 12,500
Distribution center(1) Dayton, OH 9,200
Canned Meals:
Canning plant, warehouse and distribution center Tacoma, WA 313,488
Other:
Office building, manufacturing plant and warehouse Tacoma, WA 372,164
Parking lot and yards (1) Tacoma, WA 305,470
Office Building - Fuller Building (1) Tacoma, WA 60,000
Headquarters office (1) Rochester, NY 76,372
(1) Leased from third parties, although certain related equipment is owned by
the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to legal proceedings from time to time in the normal
course of its business. In the opinion of management, any liability that the
Company might incur upon the resolution of these proceedings will not, in the
aggregate, have a material adverse effect on the Company's business, financial
condition, and results of operations. Further, no such proceedings are known to
be contemplated by governmental authorities. The Company maintains general
liability insurance coverage in amounts deemed to be adequate by management.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
All of the capital stock of the Company is owned by Pro-Fac Cooperative, Inc.
ITEM 6. SELECTED FINANCIAL DATA
Agrilink Foods, Inc.
FIVE YEAR SELECTED FINANCIAL DATA
(Dollars in Thousands)
Fiscal Year Ended June
------------------------------------------------------------------------
2001(a) 2000 1999(b) 1998 1997
------------ ------------ ----------- ----------- -----------
Consolidated Summary of Operations:
Net sales $ 1,303,311 $ 1,232,262 $ 1,261,880 $ 742,161 $ 755,464
Cost of sales (928,806) (857,319) (903,891) (546,578) (563,722)
----------- ----------- ----------- -------- -----------
Gross profit 374,505 374,943 357,989 195,583 191,742
Selling, administrative, and general expenses (295,046) (281,286) (289,923) (141,837) (145,392)
Gains on sales of assets 0 6,635 64,734 0 3,565
Restructuring 0 0 (5,000) 0 0
Income from joint venture 1,779 2,418 2,787 1,893 0
----------- ----------- ----------- ----------- -----------
Operating income before dividing with Pro-Fac 81,238 102,710 130,587 55,639 49,915
Interest expense (79,775) (78,054) (65,339) (30,633) (35,030)
Amortization of debt issue costs associated with the
Bridge Facility 0 0 (5,500) 0 0
----------- ----------- ----------- ----------- -----------
Pretax income before dividing with Pro-Fac and
before extraordinary item and cumulative effect of
an accounting change 1,463 24,656 59,748 25,006 14,885
Pro-Fac share of income before extraordinary
item and cumulative effect of an accounting change (732) (12,328) (1,658) (12,503) (7,442)
----------- ----------- ----------- ----------- -----------
Income before taxes, extraordinary item, and
cumulative effect of an accounting change 731 12,328 58,090 12,503 7,443
Tax provision (660) (5,904) (24,770) (5,689) (3,668)
----------- ------------ ----------- ----------- -----------
Income before extraordinary item and
cumulative effect of an accounting change 71 6,424 33,320 6,814 3,775
Extraordinary item relating to the early extinguishment
of debt (net of income taxes and after dividing
with Pro-Fac) 0 0 (16,366) 0 0
Cumulative effect of an accounting change (net of
income taxes and after dividing with Pro-Fac) 0 0 0 0 1,747
----------- ----------- ----------- ----------- -----------
Net income $ 71 $ 6,424 $ 16,954 $ 6,814 $ 5,522
=========== =========== =========== =========== ===========
Balance Sheet Data:
Working capital $ 261,304 $ 254,094 $ 225,363 $ 108,075 $ 84,060
Ratio of current assets to current liabilities 2.3:1 2.2:1 2.0:1 1.9:1 1.8:1
Total assets $ 1,070,271 $ 1,098,887 $ 1,110,061 $ 568,971 $ 542,561
Long-term debt and senior-subordinated notes
(excludes current portion) $ 631,128 $ 644,712 $ 668,316 $ 229,937 $ 222,829
Other Statistics:
Average number of employees:
Regular 4,627 5,510 6,040 3,620 3,507
Seasonal 2,931 2,152 2,838 1,125 1,068
(a) Consists of 53 weeks.
(b) Includes nine months of operating results from the September 28, 1998 DFVC
Acquisition.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to outline the significant reasons for changes
in the Consolidated Statement of Operations from fiscal 1999 through fiscal
2001.
Agrilink Foods, Inc. ("Agrilink Foods" or the "Company") has four primary
product lines including: vegetables, fruits, snacks and canned meals. The
majority of each of the product lines' net sales are within the United States.
In addition, all of the Company's operating facilities, excluding one in Mexico,
are within the United States.
The vegetable product line consists of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable
category include Birds Eye, Birds Eye Voila!, Birds Eye Simply Grillin',
Freshlike, Veg-All, McKenzies, and Brooks Chili Bean. The fruit product line
consists of canned and frozen fruits including fruit fillings and toppings.
Branded products within the fruit category include Comstock and Wilderness. The
snack product line consists of potato chips, popcorn and other corn-based snack
items. Branded products within the snack category include Tim's Cascade Chips,
Snyder of Berlin, Husman, La Restaurante, Erin's, Beehive, Pops-Rite, Super Pop,
and Flavor Destinations. The canned meal product line includes canned meat
products such as chilies, stews, soups, and various other ready-to-eat prepared
meals. Branded products within the canned meal category include Nalley. The
Company's other product line primarily represents salad dressings. Brand
products within this category include Bernstein's and Nalley.
The following tables illustrate the Company's results of operations by product
line for the fiscal years ended June 30, 2001, June 24, 2000, and June 26, 1999,
and the Company's total assets by product line at June 30, 2001, June 24, 2000,
and June 26, 1999.
EBITDA1,2
(Dollars in Millions)
Fiscal Years Ended
-----------------------------------------------------------------------------------
June 30, 2001 June 24, 2000 June 26, 1999
-------------------- --------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
----- ----- ------ ----- ------- -----
Vegetables 85.9 70.5 93.8 69.4 64.2 61.7
Fruits 14.1 11.6 15.7 11.6 10.8 10.4
Snacks 9.4 7.7 9.8 7.3 5.8 5.5
Canned Meals 8.1 6.7 8.6 6.4 8.4 8.1
Other 4.3 3.5 6.5 4.8 5.3 5.1
----- ----- ------ ----- ----- ------
Continuing segments 121.8 100.0 134.4 99.5 94.5 90.8
Businesses sold3 0.0 0.0 0.7 0.5 9.6 9.2
----- ----- ------ ----- ----- ------
Total 121.8 100.0 135.1 100.0 104.1 100.0
===== ===== ====== ===== ===== ======
1 Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
is defined as the sum of pretax income before dividing with Pro-Fac and
before extraordinary item, interest expense, amortization of debt issue
costs associated with the Bridge Facility, depreciation and amortization of
goodwill and other intangibles.
EBITDA should not be considered as an alternative to net income or cash
flows from operations or any other generally accepted accounting principles
measure of performance or as a measure of liquidity.
EBITDA is included herein because the Company believes EBITDA is a
financial indicator of a company's ability to service debt. EBITDA as
calculated by Agrilink Foods may not be comparable to calculations as
presented by other companies.
2 Excludes the gains on sales of assets, restructuring charges, and the
extraordinary item relating to the early extinguishment of debt. See NOTES
1 and 3 to the "Notes to Consolidated Financial Statements."
3 Represents the operating results of operations sold. See NOTE 3 to the
"Notes to Consolidated Financial Statements."
Net Sales
(Dollars in Millions)
Fiscal Years Ended
-----------------------------------------------------------------------------------
June 30, 2001 June 24, 2000 June 26, 1999
-------------------- --------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
------- ----- -------- ------ ------- ------
Vegetables 970.2 74.5 836.7 67.9 769.5 61.0
Fruits 120.4 9.2 114.4 9.3 115.8 9.2
Snacks 97.9 7.5 90.9 7.4 91.4 7.2
Canned Meals 64.2 4.9 62.3 5.1 66.4 5.3
Other 50.6 3.9 56.0 4.5 74.8 5.9
------- ------ ------- ------ ------- ------
Continuing segments 1,303.3 100.0 1,160.3 94.2 1,117.9 88.6
Businesses sold1 0.0 0.0 72.0 5.8 144.0 11.4
------- ------ ------- ------ ------- ------
Total 1,303.3 100.0 1,232.3 100.0 1,261.9 100.0
======= ====== ======= ====== ======= ======
1 Includes net sales of operations sold. See NOTE 3 to the "Notes to
Consolidated Financial Statements."
Operating Income1
(Dollars in Millions)
Fiscal Years Ended
-----------------------------------------------------------------------------------
June 30, 2001 June 24, 2000 June 26, 1999
-------------------- --------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
---- ----- ----- ------ ----- ------
Vegetables 55.7 68.6 65.4 68.0 43.9 61.9
Fruits 11.4 14.1 13.9 14.4 8.4 11.8
Snacks 5.6 6.9 6.7 7.0 3.3 4.7
Canned Meals 6.6 8.1 6.7 7.0 6.5 9.2
Other 1.9 2.3 4.6 4.8 3.7 5.2
---- ----- ----- ----- ----- ------
Continuing segments 81.2 100.0 97.3 101.2 65.8 92.8
Businesses sold2 0.0 0.0 (1.2) (1.2) 5.1 7.2
---- ----- ----- ----- ----- ------
Total3 81.2 100.0 96.1 100.0 70.9 100.0
==== ===== ===== ===== ===== ======
1 Excludes the gains on sales of assets, restructuring charges, and the
extraordinary item relating to the early extinguishment of debt. See NOTES
1 and 3 to the "Notes to Consolidated Financial Statements."
2 Represents the operating results of operations sold. See NOTE 3 to the
"Notes to Consolidated Financial Statements."
3 Operating income less interest expense (including the amortization of debt
issue costs associated with the Bridge Facility) of $79.8 million, $78.1
million, and $70.8 million, for the years ended June 30, 2001, June 24,
2000, and June 26, 1999, respectively, results in pretax income before
dividing with Pro-Fac and before extraordinary item. Management does not
allocate interest expense to product lines when evaluating product line
performance.
Total Assets
(Dollars in Millions)
Fiscal Years Ended
-----------------------------------------------------------------------------------
June 30, 2001 June 24, 2000 June 26, 1999
-------------------- --------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
------- ----- ------- ------ ------ ------
Vegetables 846.5 79.1 876.3 79.7 885.2 79.7
Fruits 72.7 6.8 80.0 7.2 91.1 8.3
Snacks 47.6 4.4 44.0 4.0 41.5 3.7
Canned Meals 45.7 4.2 45.9 4.2 46.7 4.2
Other 57.6 5.4 52.4 4.8 43.6 3.9
------- ----- ------- ----- ------- ------
Continuing segments 1,070.1 99.9 1,098.6 99.9 1,108.1 99.8
Businesses sold1 0.0 0.0 0.0 0.0 1.1 0.1
Assets held for sale 0.1 0.1 0.3 0.1 0.9 0.1
------- ----- ------- ----- ------- ------
Total 1,070.2 100.0 1,098.9 100.0 1,110.1 100.0
======= ===== ======= ===== ======= ======
1 Includes the assets of the operations sold. See NOTE 3 to the "Notes to
Consolidated Financial Statements."
CHANGES FROM FISCAL 2000 TO FISCAL 2001
During fiscal 2001, net sales from continuing segments showed an increase of
$143.0 million, or 12.3 percent. Approximately $90.6 million of the net sales
improvement was attributable to an increase in frozen vegetable net sales, and
an additional $44.1 million was associated with various co-pack agreements. The
Company's overall market share, for the 52-week period ending June 24, 2001, for
frozen vegetables approximated 31.4 percent and represented an improvement of
1.6 points over the prior year. The Company's overall market share includes
branded retail unit sales, as reported by Information Resources, Inc., and
management's estimate of the Company's private label share based upon factory
shipments.
Excluding the gain on sales of assets (net of tax), net income, however,
decreased $2.6 million from fiscal 2000. While the Company continues to benefit
from a significant improvement in net sales, it has also experienced a
significant increase in its manufacturing costs. Increased manufacturing costs
were primarily associated with significantly higher freight and utility costs
throughout the nation and lower than anticipated crop intake in the eastern part
of the country. To mitigate the increase in manufacturing costs, management has
focused efforts on controlling warehousing expenses, increased branded pricing,
acquired lower cost inventory from the lender to AgriFrozen, and initiated
reductions in selling, administrative, and general expenses. Management actions
have included reductions in certain marketing programs and various employee
incentive programs. Management continues to focus its efforts on cost savings
initiatives to reduce its overall spending.
Management also utilizes an evaluation of EBITDA from continuing segments as a
measure of performance. Excluding businesses sold, EBITDA from continuing
segments decreased $12.6 million, or 9.4 percent, to $121.8 million in fiscal
2001 from $134.4 million in fiscal 2000. A detailed accounting of the
significant reasons for changes in net sales and EBITDA by product line follows.
Vegetable net sales increased $133.5 million or 16.0 percent. Significant
components associated with this growth include: (a) an improvement in net sales
within the brand business of approximately $58.2 million; and (b) increases in
net sales within the nonbranded business of approximately $75.3 million.
Within the branded businesses, the increase in Birds Eye frozen vegetables net
sales accounted for approximately $42.0 million of the $58.2 million increase.
$27.4 million was a result of volume improvements and $14.6 million was due to
pricing initiatives announced in the second half of fiscal 2001. For the 52-week
period ending June 24, 2001, the total frozen vegetable category retail unit
sales, as reported by Information Resources, Inc., were down slightly, 3.1
percent, while the Birds Eye brand retail unit sales for the same time period
increased 1.9 percent. Unit sales of the Company's largest competitor, as
reported by Information Resources, Inc., decreased 9.1 percent during this same
time period. Net sales for the Birds Eye Voila! product line increased $3.6
million over the prior year, while Voila! remained the leading brand with 32.7
percent of the home meal replacement category.
In addition, in the fourth quarter of fiscal 2001, the Company initiated a
national launch of its most recent new product, Simply Grillin'. Simply Grillin'
is a preseasoned blend of top quality grilled Birds Eye vegetables in a foil
tray. Net sales associated with this
new product were $11.3 million. Marketing and promotional spending incurred with
this introduction amounted to $5.9 million. Management estimates that Simply
Grillin' will achieve $35 million of net sales in fiscal 2002.
The Company's non-branded vegetable business experienced volume increases in
private label and food service frozen vegetables which accounted for $27.1
million of net sales growth. The $27.1 million of net sales growth resulted from
the following: (a) increases in Agrilink Foods' recurring private label and food
service business of $25.0 million; (b) net sales increases of $26.2 million
associated with the inventory purchased from AgriFrozen Foods; (c) offset by
reductions of $24.1 million associated with the conversion of a major club store
customer from a private label to brand product line.
Further, various co-pack agreements for canned vegetables in the Midwest and for
pickles in the Northwest accounted for an additional $44.1 million of the
nonbranded net sales increase. While these co-pack agreements typically yield
lower margins than the Company's other product lines, they do provide for
greater utilization of manufacturing facilities.
Although vegetables experienced a significant increase in net sales, EBITDA
declined $7.9 million. The reduction in EBITDA was primarily driven by increased
manufacturing costs as discussed above.
Net sales for the fruit product line increased $6.0 million, or 5.2 percent,
while EBITDA decreased $1.6 million, or 10.2 percent. The net sales improvement
was led by increases in private label net sales of $4.7 million and additional
co-pack agreements resulting in net sales increases of $1.8 million. Modest
declines were highlighted in all other categories. Increased manufacturing costs
and continued competitive pressures within the applesauce category, however,
negatively impacted EBITDA.
Net sales for the snack product line increased $7.0 million, or 7.7 percent.
Improvements in net sales within the potato chip category increased $8.4
million, while the popcorn product line decreased $1.4 million. The increases
within the potato chip category were associated with geographic expansion. The
improvements in EBITDA associated with growth in the potato chip category
amounted to $1.4 million, while declines in the popcorn category negatively
impacted EBITDA by approximately $1.8 million. The popcorn category continues to
be negatively impacted by competitive pressures and changes in product mix.
Net sales for canned meals increased $1.9 million, or 3.0 percent, while EBITDA
decreased $0.5 million, or 5.8 percent. EBITDA decreased as a result of changes
in product mix and increased manufacturing costs associated with raw
ingredients, including beef and utility increases experienced in the Northwest.
All of the Company's canned meal products are produced at the Company's Tacoma,
Washington location.
The other product line net sales, primarily represented by salad dressings,
decreased $5.4 million, or 9.6 percent, while EBITDA decreased $2.2 million, or
33.8 percent. The majority of the net sales decline was associated with the loss
of a private label customer. The reduction in EBITDA was associated with both
the decline in unit volume associated with reductions in private label volume
and increases in manufacturing costs associated with packaging ingredients and
utility increases experienced in the Northwest. All of the Company's dressing
products are produced at the Company's Tacoma, Washington location.
Operating Income: Operating income from continuing segments decreased from $97.3
million in fiscal 2000 to $81.2 million in fiscal 2001. This represents a
decrease of $16.1 million or 16.5 percent. Declines in operating income within
the vegetable, fruit, snacks, canned meals, and all other product lines were
$9.7 million, $2.5 million, $1.1 million, $0.1 million and $2.7 million,
resepectively. Significant variances, as highlighted above, primarily result
from increased manufacturing costs, competitive pressures, and changes in
product mix.
Gain on Sales of Assets: On June 23, 2000, the Company sold its pickle business
based in Tacoma, Washington to Dean Pickle and Specialty Products. This business
included pickle, pepper, and relish products sold primarily under the Nalley and
Farman's brand names. The Company received proceeds of approximately $10.3
million which were applied to bank loans ($4.0 million of which was applied to
the Term Loan Facility and $6.3 million of which was applied to the Company's
Revolving Credit Facility). A gain of approximately $4.3 million was recognized
on this transaction.
On July 21, 2000, the Company sold the machinery and equipment utilized in
production of pickles and other related products to Dean Pickle and Specialty
Products. No significant gain or loss was recognized on this transaction. The
proceeds of approximately $5.0 million were applied to bank loans.
This transaction did not include any other products carrying the Nalley brand
name. Agrilink Foods continues to contract pack Nalley and Farman's pickle
products for a period of two years, beginning June 23, 2000, at the existing
Tacoma processing plant which Agrilink Foods will operate. Under a related
agreement, the Cooperative will supply raw cucumbers grown in the Northwestern
United States to Dean Pickle and Specialty Products for a minimum 10-year period
at market pricing.
On December 17, 1999 Agrilink Foods announced they had completed the sale of the
Company's Cambria, Wisconsin processing facility to Del Monte. The Company
received proceeds of approximately $10.5 million from the sale of its Cambria,
Wisconsin facility which were applied to bank loans. A gain of approximately
$2.3 million was recognized on this transaction. The sale also included an
agreement for Del Monte to produce a portion of Agrilink Foods' product needs
during the 2000 packing season.
Income From Joint Venture: This amount represents earnings received from the
investment in Great Lakes Kraut Company, LLC, a joint venture formed between
Agrilink Foods and Flanagan Brothers, Inc. The decrease of $0.6 million over the
prior year is attributable to a volume decline, resulting competitive pressures,
and an increase in manufacturing costs. See further discussion at NOTE 5 to the
"Notes to Consolidated Financial Statements."
Interest Expense: Interest expense increased $1.7 million from the prior year to
$79.8 million. The increase is the result of an increase in the weighted average
interest rate of 25 basis points resulting from both amendments to the Company's
credit facility during September 2000 and general interest rate increases on
unhedged borrowings experienced in the first six months of fiscal 2001. In
addition, interest expense was negatively impacted by the amortization of fees
paid in conjunction with the September 2000 amendments to the Company's credit
facility. The increases were offset by lower average outstanding balances during
the fiscal year of approximately $32.8 million, primarily due to required
repayments and mandatory prepayments of short-term debt related to the sale of
the private label canned vegetable business and pickle business.
Pro-Fac Share of Income Before Extraordinary Item: The Company's contractual
relationship with Pro-Fac is defined in the Pro-Fac Marketing Agreement (the
"Agreement"). Under the Agreement, in any year in which the Company has earnings
on products which were processed from crops supplied by Pro-Fac ("Pro-Fac
products"), the Company pays to Pro-Fac, as additional patronage income, 90
percent of such earnings, but in no case more than 50 percent of all pretax
earnings of the Company. In years in which the Company has losses on Pro-Fac
products, the Company reduces the commercial market value it would otherwise pay
to Pro-Fac by 90 percent of such losses, but in no case by more than 50 percent
of all pretax losses of the Company. Earnings and losses are determined at the
end of the fiscal year, but are accrued on an estimated basis during the year.
In fiscal 2001, 90 percent of earnings on patronage products exceeded 50 percent
of all pretax earnings of the Company. Accordingly, the Pro-Fac share of income
has been recognized at a maximum of 50 percent of pretax earnings of the
Company.
Tax Provision: The tax provision of $0.7 million in fiscal 2001 represents a
reduction of $5.2 million from the prior year as a result of the change in
earnings before taxes. In fiscal 2000, the sale of certain intangibles in
conjunction with the pickle sale negatively impacted the Company's effective tax
rate. The Company's effective tax rate has historically been negatively impacted
by the non-deductibility of certain amounts of goodwill. A further discussion of
tax matters is included at NOTE 9 to the "Notes to Consolidated Financial
Statements."
CHANGES FROM FISCAL 1999 TO FISCAL 2000
During fiscal 2000, total net sales decreased $29.6 million or 2.3 percent, to
$1,232.3 million from $1,261.9 million in fiscal 1999. Excluding businesses
sold, net sales increased by $42.4 million, or 3.8 percent, to $1,160.3 million
from $1,117.9 million in fiscal 1999. The Company's overall market share, for
the 52-week period ending June 25, 2000, for frozen vegetables approximated 29.8
percent. The Company's overall market share includes branded retail unit sales,
as reported by Information Resources, Inc., and management's estimate of the
Company's private label share based upon factory shipments.
Net income for fiscal 2000 of $6.4 million, however, represented a $10.6 million
decrease over fiscal 1999 net income of $17.0 million. Comparability of net
income is, however, difficult because fiscal 1999 was impacted by gains on sales
of assets, a restructuring charge, the amortization of debt issue costs
associated with the Bridge Facility, and the extraordinary item relating to the
early extinguishment of debt. In addition, fiscal 2000 results reflect 12 months
of interest expense versus 9 months in the prior year for the additional debt
associated with the DFVC Acquisition which occurred on September 24, 1998.
Accordingly, management believes, to summarize results, an evaluation of EBITDA
by continuing business segments is appropriate. Overall EBITDA from continuing
segments increased $39.9 million, or 42.2 percent, to $134.4 million. A detailed
accounting of the significant reasons for changes in net sales and EBITDA by
product line follows.
Vegetable net sales increased $67.2 million or 8.7 percent. The vegetable
product line accounts for a $29.6 million increase of the overall EBITDA. These
improvements are impacted by both the results of the DFVC Acquisition, including
its impact on the percentage of branded sales for the Company and the reduction
in product costs resulting from synergistic savings. As a result of the date of
the DFVC Acquisition, the operating results of the acquisition have been
included for 12 months in fiscal 2000 and for 9 months in fiscal 1999. In
addition, as anticipated at the acquisition date, a greater percentage of the
Company's sales now come from
its branded products. The inclusion of the Birds Eye, Freshlike, and Veg-All
brands for 12 months during fiscal 2000 versus nine months of results in fiscal
1999 resulted in incremental sales of approximately $90.2 million. The Company's
branded products yield a higher margin than its private label and food service
categories and the EBITDA improvement associated with this increase in branded
sales was approximately $12.6 million. The Company's earnings also benefited
from a reduction in product costs during fiscal 2000 primarily associated with
the synergistic savings achieved from the DFVC Acquisition and other
consolidation efforts. Specifically, the Company benefited from the insourcing
of product previously purchased from outside suppliers, staffing reductions, and
shipping consolidations.
Market conditions within the frozen vegetable category caused by lower consumer
demand and retail consolidation did, however, offset the increases outlined
above and accounted for approximately $23.0 million in net sale declines.
According to industry data, for the 52-week period ended June 25, 2000, there
was an overall decrease in the total frozen vegetable category of 4.0 percent in
unit volume, and for the same 52-week period, the decrease in the frozen
vegetable private label category was 4.7 percent in unit volume.
Net sales from the fruit product line decreased $1.4 million, or 1.2 percent, to
$114.4 million in fiscal 2000 from $115.8 million in fiscal 1999. EBITDA,
however, increased approximately $4.9 million. Increases in net sales and
earnings were achieved within the pie filling category due to a return to the
Company's historical pricing strategy. However, net sales within the applesauce
category decreased from the prior year due to competitive pricing within the
industry. Due to relatively competitive margins within the applesauce category,
however, this reduction in net sales did not have a significant impact on
earnings. In addition, fiscal 1999 results also included spending $0.9 million
for a new product launch. No such costs were incurred in fiscal 2000.
Snacks showed an increase in EBITDA of $4.0 million primarily due to
improvements within the potato chip category. During fiscal 2000, a greater
percentage of sales were associated with the potato chip category which carries
a higher margin than the Company's popcorn product line. Declines in the popcorn
category resulted from both a decrease in volume and pricing resulting from
increased competition. In addition, fiscal 1999 results were impacted by a
strike at the Snyder of Berlin facility. This action resulted in incremental
costs of approximately $2.5 million in fiscal 1999. The matter was settled in
the first quarter of fiscal 2000. Management believes its current relationship
with these employees is good.
While canned meals showed a decline in net sales of $4.1 million in fiscal 2000
primarily attributable to a decline in volume in private label chili, EBITDA
showed a modest increase of $0.2 million resulting from production efficiencies
and a reduction in raw product costs including beef.
The other product line, while consisting of dressings, also includes sales from
the production of canned products primarily for use by the military and other
governmental operations. While these governmental contracts yield lower margins
than the Company's other product lines, they do provide for greater utilization
of seasonal manufacturing facilities. The majority of the $18.8 million decrease
in net sales is associated with the decline in government demand for such canned
products. The improvements in EBITDA of $1.2 million over fiscal 1999 resulted
from the changes in product mix within the dressing category and reductions in
raw product costs, including various oils.
Operating Income: Operating income of $102.7 million in fiscal 2000 decreased
approximately $27.9 million from $130.6 million in fiscal 1999. Excluding the
impact of businesses sold and other non-recurring items, operating income from
continuing operations increased from $65.8 million in fiscal 1999 to $97.3
million in fiscal 2000. This represents an improvement of $31.5 million or 47.9
percent. Improvements in operating income within the vegetable, fruit, snacks,
canned meals, and all other product lines were $21.5 million, $5.5 million, $3.4
million, $0.2 million, and $0.9 million, respectively. These increases are
attributable to the date of and benefits from the DFVC Acquisition and other
repositioning efforts.
Additionally, while the Company experienced significant benefits from its
efforts in fiscal 1999 to consolidate warehouses and other logistics operations,
the decline in sales resulting from the current industry trend caused inventory
levels to increase. Storage and handling costs associated with the increase in
inventory approximated $13 million.
Gains on Sales of Assets: On June 23, 2000, the Company sold its pickle business
based in Tacoma, Washington to Dean Pickle and Specialty Products. This business
included pickle, pepper, and relish products sold primarily under the Nalley and
Farman's brand names. The Company received proceeds of approximately $10.3
million which were applied to bank loans ($4.0 million of which was applied to
the Term Loan Facility and $6.3 million of which was applied to the Company's
Revolving Credit Facility). A gain of approximately $4.3 million was recognized
on this transaction.
This transaction did not include any other products carrying the Nalley brand
name. Agrilink Foods will continue to contract pack Nalley and Farman's pickle
products for a period of two years, beginning June 23, 2000, at the existing
Tacoma processing plant which Agrilink Foods will operate.
Under a related agreement, the Cooperative will supply raw cucumbers grown in
the Northwestern United States to Dean Pickle and Specialty Products for a
minimum 10-year period at market pricing.
On December 17, 1999 Agrilink Foods announced they had completed the sale of the
Company's Cambria, Wisconsin processing facility to Del Monte. The Company
received proceeds of approximately $10.5 million from the sale of its Cambria,
Wisconsin facility which were applied to bank loans. A gain of approximately
$2.3 million was recognized on this transaction. The sale includes an agreement
for Del Monte to produce a portion of Agrilink Foods' product needs during the
2000 packing season.
On January 29, 1999, Agrilink Foods sold the Adams brand peanut butter
operations to the J.M. Smucker Company. Agrilink Foods received proceeds of
approximately $13.5 million which were applied to outstanding bank loans. A gain
of approximately $3.5 million was recognized on this transaction.
In conjunction with the DFVC Acquisition, Agrilink Foods sold its aseptic
business to Dean Foods. The purchase price of $80 million was based upon an
appraisal completed by an independent appraiser. The gain on the sale was
approximately $61.2 million.
Restructuring: Implementation of a corporate-wide restructuring program resulted
in a charge of $5.0 million in the third quarter of fiscal 1999. See NOTE 1 to
the "Notes to Consolidated Financial Statements."
Income From Joint Venture: This amount represents earnings received from the
investment in Great Lakes Kraut Company, LLC, a joint venture formed between
Agrilink Foods and Flanagan Brothers, Inc. The decrease of $0.4 million over the
prior year is attributable to the sale of assets. See further discussion at NOTE
5 to the "Notes to Consolidated Financial Statements."
Interest Expense: Interest expense increased $12.8 million to $78.1 million in
fiscal 2000 from $65.3 million in fiscal 1999. The increase in interest is
associated with debt utilized to finance the DFVC Acquisition and higher levels
of seasonal borrowings to fund additional working capital requirements
associated with the increase in the Company's size. As a result of the date of
the DFVC Acquisition interest expense has been included for 12 months in fiscal
2000 and 9 months in fiscal 1999. In addition, this increase is associated with
an overall increase in prevailing interest rates which occurred fiscal 2000.
Amortization of Debt Issue Costs Associated with the Bridge Facility: In order
to consummate the DFVC Acquisition, Agrilink Foods entered into a $200 million
bridge loan facility (the "Bridge Facility"). The Bridge Facility was repaid
with the proceeds from the new senior subordinated note offering (see NOTE 8 to
the "Notes to Consolidated Financial Statements" - "Debt - Senior Subordinated
Notes 11-7/8 Percent due 2008"). Debt issuance costs associated with the Bridge
Facility were $5.5 million and were fully amortized during the second quarter of
fiscal 1999.
Pro-Fac Share of Income Before Extraordinary Item: The Company's contractual
relationship with Pro-Fac is defined in the Pro-Fac Marketing Agreement (the
"Agreement"). Under the Agreement, in any year in which the Company has earnings
on products which were processed from crops supplied by Pro-Fac ("Pro-Fac
products"), the Company pays to Pro-Fac, as additional patronage income, 90
percent of such earnings, but in no case more than 50 percent of all pretax
earnings of the Company. In years in which the Company has losses on Pro-Fac
products, the Company reduces the commercial market value it would otherwise pay
to Pro-Fac by 90 percent of such losses, but in no case by more than 50 percent
of all pretax losses of the Company. Earnings and losses are determined at the
end of the fiscal year, but are accrued on an estimated basis during the year.
In fiscal 2000, 90 percent of earnings on patronage products exceeded 50 percent
of all pretax earnings of the Company. Accordingly, the Pro-Fac share of income
has been recognized at a maximum of 50 percent of pretax earnings of the
Company.
As the gain on the sale of the aseptic operations was a non-patronage
transaction, the Pro-Fac share of earnings in fiscal 1999 was recorded at 90
percent of the earnings on patronage products.
Tax Provision: The tax provision of $5.9 million in fiscal 2000 represents a
reduction of $18.9 million from the prior year. Of this decrease, $25.2 million
is attributable to the provision associated with the fiscal 1999 gain on sale of
the aseptic operations and the tax benefit of $2.1 million associated with the
amortization of debt issue costs also in fiscal 1999. In fiscal 2000, the sale
of certain intangibles in conjunction with the pickle sale negatively impacted
the Company's effective tax rate. As previously outlined, the Company's
effective tax rate has historically been negatively impacted by the
non-deductibility of certain amounts of goodwill. A further discussion of tax
matters is included at NOTE 9 to the "Notes to Consolidated Financial
Statements."
Extraordinary Item Relating to the Early Extinguishment of Debt: Concurrently
with the DFVC Acquisition, Agrilink Foods refinanced its then existing
indebtedness, including its 12 1/4 percent Senior Subordinated Notes due 2005
and its then existing bank
debt. Premiums and breakage fees associated with early redemptions and other
fees incurred amounted to $16.4 million (net of income taxes of $10.4 million
and after allocation to Pro-Fac of $1.7 million).
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the Consolidated
Statement of Cash Flows for fiscal 2001 compared to fiscal 2000.
Net cash provided by operating activities of $43.2 million increased $60.9
million from fiscal 2000 primarily due to a reduction in inventory resulting
from lower crop intake and the disposal of the private label canned vegetable
and pickle businesses in November 1999 and June 2000, respectively. In addition,
reductions in the fiscal 2001 inventory intake resulted from poor agricultural
conditions in the eastern part of the country. The reductions in inventory
levels also impacted the cash used to liquidate accounts payable and other
accruals. The change in accounts receivable is offset by a change in accounts
associated with accounts payable and accrued expenses.
The purchase of inventory from AgriFrozen Foods had no significant impact on
operating cash flow as the increase in inventories was offset by a corresponding
increase in accounts payable. The purchase price of the AgriFrozen Foods
inventory was $31.6 million, of which $10.0 million was paid on April 1, 2001,
and the remaining balance was paid on August 1, 2001. See NOTE 4 to the "Notes
to Consolidated Financial Statements.
Net cash used in investing activities was significantly impacted by the sale of
the Cambria, Wisconsin facility and the private label canned vegetable and
pickle business dispositions in fiscal 2000. These activities accounted for
approximately $63.2 million in proceeds in fiscal 2000 while proceeds from
disposals in fiscal 2001 amounted to $5.8 million. These proceeds were primarily
associated with the sale of equipment utilized in production of pickles and
other related products to Dean Pickle and Specialty Products. The Company's
investment in property, plant and equipment remained relatively unchanged during
fiscal 2001, decreasing $0.3 million. Property, plant and equipment purchases
were for general operating purposes.
Net cash used in financing activities decreased by $0.4 million. The change was
primarily due to a decrease in capital contributions received from Pro-Fac as a
result of lower earnings in fiscal 2001 and changes in borrowings under the
Company's Revolving Credit Facility that must be paid down at year-end.
Credit Facility (Bank Debt): In connection with the DFVC Acquisition, the
Company entered into a credit facility ("Credit Facility") with Harris Bank as
Administrative Agent and Bank of Montreal as Syndication Agent, and the lenders
thereunder. The Credit Facility consists of the $200 million Revolving Credit
Facility and the $455 million Term Loan Facility. The Term Loan Facility is
comprised of the Term A Facility, which has a maturity of five years, the Term B
Facility, which has a maturity of six years, and the Term C Facility, which has
a maturity of seven years. The Revolving Credit Facility has a maturity of five
years. All previous bank debt was repaid in conjunction with the execution of
the Credit Facility.
The Credit Facility bears interest, at the Company's option, at the
Administrative Agent's alternate base rate or the London Interbank Offered Rate
("LIBOR") plus, in each case, applicable margins of: (i) in the case of
alternate base rate loans, (x) 1.25 percent for loans under the Revolving Credit
Facility and the Term A Facility, (y) 3.00 percent for loans under the Term B
Facility and (z) 3.25 percent for loans under the Term C Facility and (ii) in
the case of LIBOR loans, (x) 3.00 percent for loans under the Revolving Credit
Facility and the Term A Facility, (y) 4.00 percent for loans under the Term B
Facility and (z) 4.25 percent for loans under the Term C Facility. The
Administrative Agent's "alternate base rate" is defined as the greater of: (i)
the prime commercial rate as announced by the Administrative Agent or (ii) the
Federal Funds rate plus 0.50 percent. The fiscal 2001 weighted-average rate of
interest applicable to the Term Loan Facility was 9.97 percent. In addition, the
Company pays a commitment fee calculated at a rate of 0.50 percent per annum on
the daily average unused commitment under the Revolving Credit Facility.
Upon consummation of the DFVC Acquisition, the Company drew $455 million under
the Term Loan Facility, consisting of $100 million, $175 million and $180
million of loans under the Term A Facility, Term B Facility and Term C Facility,
respectively. Additionally, the Company drew $93 million under the Revolving
Credit Facility for seasonal working capital needs and $14.3 million under the
Revolving Credit Facility was issued for letters of credit. During December
1998, the Company's primary lender exercised its right under the New Credit
Facility to transfer $50 million from the Term A Facility to the Term B and Term
C Facilities in increments of $25 million.
Utilizing outstanding balances at June 30, 2001, the Term Loan Facility is
subject to the following amortization schedule:
(Dollars in Millions)
Fiscal Year Term Loan A Term Loan B Term Loan C Total
- ----------- ----------- ----------- ----------- -----
2002 $ 10.0 $ 0.4 $ 0.4 $ 10.8
2003 10.0 0.4 0.4 10.8
2004 6.4 0.4 0.4 7.2
2005 0.0 189.0 0.4 189.4
2006 0.0 0.0 193.4 193.4
------- ------ ------- -------
$ 26.4 $190.2 $ 195.0 $ 411.6
======= ====== ======= =======
The Term Loan Facility is subject to mandatory prepayment under various
scenarios as defined in the Credit Facility. During fiscal 2001, Agrilink Foods
made mandatory prepayments of $3.2 million from proceeds of the sale of pickle
machinery and equipment. In addition, during fiscal 2001, principal payments of
$13.5 million were made on the Term Loan Facilities.
The Company's obligations under the Credit Facility are collateralized by a
first-priority lien on: (i) substantially all existing or after-acquired assets,
tangible or intangible, (ii) the capital stock of certain of Pro-Fac's current
and future subsidiaries (excluding AgriFrozen Foods, which was a subsidiary of
Pro-Fac); and (iii) all of the Company's rights under the agreement to acquire
DFVC (principally indemnification rights) and the Pro-Fac Marketing and
Facilitation Agreement. The Company's obligations under the Credit Facility are
guaranteed by Pro-Fac and certain of the Company's current and future, if any,
subsidiaries (excluding AgriFrozen Foods).
The Credit Facility contains customary covenants and restrictions on the
Company's ability to engage in certain activities, including, but not limited
to: (i) limitations on the incurrence of indebtedness and liens, (ii)
limitations on sale-leaseback transactions, consolidations, mergers, sale of
assets, transactions with affiliates and investments and (iii) limitations on
dividend and other distributions. The Credit Facility also contains financial
covenants requiring Pro-Fac to maintain a minimum level of consolidated EBITDA,
a minimum consolidated interest coverage ratio, a minimum consolidated fixed
charge coverage ratio, a maximum consolidated leverage ratio and a minimum level
of consolidated net worth. Under the Credit Facility, the assets, liabilities,
and results of operations of AgriFrozen, Inc., which previously was a subsidiary
of Pro-Fac, were not consolidated with Pro-Fac for purposes of determining
compliance with the covenants. In August 2001, September 2000 and August 1999,
the Company entered into amendments to the original covenants. In conjunction
with these amendments, the Company incurred fees of approximately $1.5 million,
$1.7 million, and $2.6 million, respectively. These fees are being amortized
over the remaining life of the Credit Facility. Agrilink is in compliance with
all covenants, restrictions, and requirements under the terms of the Credit
Facility as amended.
The August 2001 amendment imposes contingent fees and possible increases in
interest rates under the Credit Facility based in part on the ability of the
Company to raise equity, and deleverage its balance sheet within certain
timeframes. To this end, the Company has engaged a financial advisor to assist
it in raising a minimum of $100 million through a private placement of an as yet
unspecified class of securities of the Company. The amount of such contingent
fees is also impacted by EBITDA which the Company achieves for its fiscal year
ending in June 2002.
Senior Subordinated Notes -11-7/8 Percent (due 2008): To extinguish the
Subordinated Bridge Facility, the Company issued Senior Subordinated Notes (the
"Notes") for $200 million aggregate principal amount due November 1, 2008.
Interest on the Notes accrues at the rate of 11-7/8 percent per annum and is
payable semiannually in arrears on May 1 and November 1.
The Notes represent general unsecured obligations of the Company, subordinated
in right of payment to certain other debt obligations of the Company (including
the Company's obligations under the Credit Facility). The Notes are guaranteed
by Pro-Fac and certain of the Company's current and future, if any,
subsidiaries.
The Notes contain customary covenants and restrictions on the Company's ability
to engage in certain activities, including, but not limited to: (i) limitations
on the incurrence of indebtedness and liens; (ii) limitations on consolidations,
mergers, sales of assets, transactions with affiliates; and (iii) limitations on
dividends and other distributions. The Company is in compliance with all
covenants, restrictions, and requirements under the Notes.
Subordinated Bridge Facility: To complete the DFVC Acquisition, the Company
entered into a Subordinated Bridge Facility (the "Bridge Facility"). During
November 1998, the net proceeds from the sale of the Notes, together with
borrowings under the Revolving Credit Facility, were used to repay all the
indebtedness outstanding ($200 million plus accrued interest) under the Bridge
Facility. The outstanding indebtedness under the Bridge Facility accrued
interest at an approximate rate per annum of 10-1/2 percent. Debt issuance costs
associated with the Bridge Facility of $5.5 million were fully amortized during
the second quarter of fiscal 1999.
Subordinated Promissory Note: As partial consideration for the DFVC Acquisition,
the Company issued to Dean Foods a Subordinated Promissory Note for $30 million
aggregate principal amount due November 22, 2008. Interest on the Subordinated
Promissory Note is accrued 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. As the rates on the Note are below market value, the Company
has imputed the appropriate discount utilizing an effective interest rate of
11-7/8 percent. Interest accruing through November 22, 2003 is required to be
paid in-kind through the issuance by the Company of additional subordinated
promissory notes identical to the Subordinated Promissory Note. The Company
satisfied this requirement through the issuance of 11 additional promissory
notes each for approximately $0.4 million. Interest accruing after November 22,
2003 is payable in cash. The Subordinated Promissory Note may be prepaid at the
Company's option without premium or penalty.
The Subordinated Promissory Note is expressly subordinate to the Notes and the
Credit Facility and contains no financial covenants. The Subordinated Promissory
Note is guaranteed by Pro-Fac.
On December 1, 2000, Dean Foods sold the Subordinated Note to Great Lakes Kraut
Company, LLC, a joint venture between the Company and Flanagan Brothers, Inc.
This sale did not affect the terms of the note.
Senior Subordinated Notes - 12 1/4 Percent - Due 2005 ("Old Notes"): In
conjunction with the DFVC Acquisition, the Company repurchased $159,985,000
principal amount of its Old Notes, of which $160 million aggregate principal
amount was previously outstanding. The Company paid a total of approximately
$184 million to repurchase the Old Notes, including interest accrued thereon of
$2.9 million. Holders who tendered consented to certain amendments to the
indenture relating to the Old Notes, which eliminated or amended substantially
all the restrictive covenants and certain events of default contained in such
indenture. The Company may repurchase the remaining Old Notes in the future in
open market transactions, privately negotiated purchases or otherwise.
OTHER MATTERS:
Capital Expenditures: The Company anticipates that capital expenditures for
fiscal years 2002 and 2003 will be approximately $25 million per annum. The
Company believes that cash flow from operations and borrowings under bank
facilities will be sufficient to meet its liquidity requirements for the
foreseeable future.
Short- and Long-Term Trends: Throughout fiscal 2001 and 2000, Agrilink Foods has
focused on its core businesses and growth opportunities. During the fourth
quarter of fiscal 2001, the Company initiated a national launch of its most
recent new product, Birds Eye Simply Grillin'. Simply Grillin' is a preseasoned
blend of top quality Birds Eye vegetables in a foil tray. Net sales associated
with this new product were $11.3 million. Management estimates that Birds Eye
Simply Grillin' will achieve $35 million of net sales in fiscal 2002. During
fiscal 1999, the Company acquired the frozen and canned vegetable business of
Dean Foods. The Company believes that the DFVC Acquisition strengthened its
competitive position by: (i) enhancing its brand recognition and market
position, (ii) providing opportunities for cost savings and operating
efficiencies and (iii) increasing its product and geographic diversification. A
complete description of the acquisition and disposal activities completed is
outlined at NOTE 3 to the "Notes to Consolidated Financial Statements."
The vegetable and fruit portions of the business can be positively or negatively
affected by weather conditions nationally and the resulting impact on crop
yields. Favorable weather conditions can produce high crop yields and an
oversupply situation. This results in depressed selling prices and reduced
profitability on the inventory produced from that year's crops. Excessive rain
or drought conditions can produce low crop yields and a shortage situation. This
typically results in higher selling prices and increased profitability. While
the national supply situation controls the pricing, the supply can differ
regionally because of variations in weather.
The crop and yield resulting from the 2000 growing season, while significantly
lower than anticipated in the eastern part of the country, proved to be adequate
throughout the industry. However, the weather conditions which significantly
impacted corn yields did result in higher pricing for this commodity.
For the 2001 crop season, dry weather conditions in the Company's New York and
Midwest growing regions may negatively impact production costs. Management has
initiated cost reduction steps, and is actively pursuing additional cost
reduction initiatives in order to fully offset any crop-related production cost
increases.
Supplemental Information on Inflation: The changes in costs and prices within
the Company's business due to inflation were not significantly different from
inflation in the United States economy as a whole. Levels of capital investment,
pricing and inventory investment were not materially affected by changes caused
by inflation.
New Accounting Pronouncements: In July 2000, the Emerging Issues Task Force
("EITF") of the Financial Accounting Standards Board reached a consensus on
Issue 00-14, "Accounting for Certain Sales Incentives." The consensus addresses
the recognition, measurement, and income statement classification for sales
incentives that a company offers to its customers. Accordingly, coupon expense,
now classified as selling, general and administrative expense, will be
reclassified as a reduction of gross sales and all prior periods will also be
reclassified to reflect this modification. The adoption of EITF Issue 00-14 is
not expected to materially impact the Company's financial statements. The
Company estimates that its coupon expense is approximately $6.5 to $8.5 million
per year. The Company must adopt EITF Issue 00-14 in the third quarter of fiscal
2002, however, the Company anticipates it will adopt this pronouncement in the
first quarter of fiscal 2002.
In April 2001, the EITF reached a final consensus on Issue 00-25, "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products." The consensus addresses the accounting
treatment and income statement classification for certain sales incentives,
including cooperative advertising arrangements, buydowns, and slotting fees. The
consensus requires that such amounts, now classified by the Company as selling,
general, and administrative expense, be reclassified as a reduction of gross
sales. These guidelines will become effective for the Company during the third
quarter of fiscal 2002. The Company is currently reviewing this pronouncement to
determine the dollar value of the reclassification. The adoption of EITF 00-25
will not impact the Company's profitability.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses the financial accounting and
reporting of goodwill and other intangible assets and supercedes APB Opinion No.
17, "Intangible Assets." The statement will modify how an entity initially
accounts for goodwill and other intangible assets, assesses for subsequent
impairment, and the requirement to amortize these assets. The provisions of SFAS
No. 142 must be adopted for fiscal years beginning after December 15, 2001, with
early application permitted for companies with fiscal years beginning after
March 15, 2001. The Company is currently assessing the impact of implementation
on its results of operations and financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of its operating and financing activities, is exposed
to changes in foreign currency exchange rates, certain commodity prices, and
interest rates, which may adversely affect its results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, the Company may enter into derivative contracts.
Foreign Currency: The Company manages its foreign currency related risk
primarily through the use of foreign currency forward contracts. The contracts
held by the Company are denominated in Mexican pesos.
The Company has entered into foreign currency forward contracts that are
designated as cash flow hedges of exchange rate risk related to forecasted
foreign currency-denominated intercompany sales. At June 30, 2001, the Company
had cash flow hedges for the Mexican peso with maturity dates ranging from July
2001 to May 2002. The fair value of these open contracts was an after-tax gain
of approximately $0.6 million recorded in accumulated other comprehensive income
in shareholder's equity. Amounts deferred to accumulated other comprehensive
income will be reclassified into cost of goods sold. For the year ended June 30,
2001, approximately $0.3 million has been reclassified from other comprehensive
income to cost of goods sold. Hedge ineffectiveness was insignificant.
Foreign Currency
Forward
----------------
Contract amounts 124 million Pesos
Weighted average settlement exchange rate 10.7966%
Commodity Prices: The Company is exposed to commodity price risk related to
forecasted purchases of soybean oil, an ingredient in the manufacture of salad
dressings and mayonnaise. To mitigate this risk, the Company designates soybean
oil forward contracts as cash flow hedges of its forecasted soybean oil
purchases. The Company maintained soybean oil contracts that hedged
approximately 70 percent of its planned soybean oil requirements during fiscal
2001. These contracts were either sold or expired during fiscal 2001, and a loss
of $0.2 million was recorded in cost of goods sold.
The Company is also exposed to commodity price risk related to forecasted
purchases of flour in its manufacturing process. To mitigate this risk, the
Company designates a swap agreement as a cash flow hedge of its forecasted flour
purchases. The Company maintained flour contracts that hedged approximately 59
percent of its planned flour requirements during fiscal 2001. The contracts
expired during fiscal 2001, an immaterial loss was recorded in cost of goods
sold.
The Company is also exposed to commodity price risk related to forecasted
purchases of corrugated (unbleached kraftliner) in its manufacturing process. To
mitigate this risk, the Company designates a swap agreement as a cash flow hedge
of its forecasted corrugated purchases. The Company hedged approximately 80
percent of its planned corrugated requirements. The agreement had no fair value
and terminated on June 30, 2001.
Interest Rates: The Company is exposed to interest rate risk primarily through
its borrowing activities. The majority of the Company's long-term borrowings are
variable rate instruments. The Company entered into two interest rate swap
contracts under which the Company agrees to pay an amount equal to a specified
fixed rate of interest times a notional principal amount, and to receive in
return an amount equal to a specified variable rate of interest times the same
notional principal amount. The notional amounts of the contract are not
exchanged and no other cash payments are made. Two interest rate swap contracts
were entered into with a major financial institution in order to minimize credit
risk.
The first interest rate swap contract required payment of a fixed rate of
interest (4.96 percent) and the receiving of a variable rate of interest
(three-month LIBOR of 4.85 percent as of June 30, 2001) on $150 million notional
amount of indebtedness. The Company had a second interest rate swap contract to
pay a fixed rate of interest (5.32 percent) and receive a variable rate of
interest (three-month LIBOR of 4.85 percent as of June 30, 2001) on $100 million
notional amount of indebtedness. Approximately 61 percent of the underlying debt
is being hedged with these interest rate swaps.
The Company designates these interest rate swap contracts as cash flow hedges.
The fair value of the cash flow hedge is generally deferred to other
comprehensive income and reclassified into interest expense over the life of the
hedge. However, to the extent that any of these contracts are not considered
effective in offsetting the change in the value of the interest payments being
hedged, any changes in fair value relating to the ineffective portion of these
contracts are immediately recognized in income. At June 30, 2001, these interest
rate swap contracts were not considered effective, and the fair value of the
contracts, an after-tax loss of $0.4 million, was reported in earnings.
The following is a summary of the Company's interest rate swap agreements:
March 24, 2001
--------------
Interest Rate Swap:
Variable to Fixed - notional amount $250 million
Average pay rate 4.96 - 5.32%
Average receive rate Floating rate - 4.85%
Maturities through October 2001
In a declining interest rate market, the benefits of the hedge position are
minimized, however, the Company continues to monitor market conditions to adjust
its hedging position as it considers necessary.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
ITEM Page
Agrilink Foods, Inc. and Consolidated Subsidiaries:
Management's Responsibility for Financial Statements.................................................................... 25
Report of Independent Accountants....................................................................................... 26
Consolidated Financial Statements:
Consolidated Statements of Operations, Accumulated Earnings/(Deficit), and Comprehensive Income
for the years ended June 30, 2001, June 24, 2000, and June 26, 1999................................................. 27
Consolidated Balance Sheets at June 30, 2001 and June 24, 2000........................................................ 28
Consolidated Statements of Cash Flows for the years ended June 30, 2001, June 24, 2000, and June 26, 1999............. 29
Notes to Consolidated Financial Statements............................................................................ 31
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the financial
statements and related notes which begin on the page following the "Report of
Independent Accountants." These statements have been prepared in accordance with
accounting principles generally accepted in the United States.
The Company's accounting systems include internal controls designed to provide
reasonable assurance of the reliability of its financial records and the proper
safeguarding and use of its assets. Such controls are monitored through the
internal and external audit programs.
The financial statements have been audited by PricewaterhouseCoopers LLP,
independent accountants, who were responsible for conducting their examination
in accordance with generally accepted auditing standards. Their resulting report
is on the subsequent page.
The Board of Directors exercises its responsibility for these financial
statements. The independent accountants and internal auditors of the Company
have full and free access to the Board. The Board periodically meets with the
independent accountants and the internal auditors, without management present,
to discuss accounting, auditing and financial reporting matters.
/s/ Dennis M. Mullen /s/ Earl L. Powers
- ----------------------------- ---------------------------------------
Dennis M. Mullen Earl L. Powers
President and Executive Vice President Finance and
Chief Executive Officer Chief Financial Officer
August 3, 2001
Report of Independent Accountants
To the Shareholder and
Board of Directors of
Agrilink Foods, Inc.
In our opinion, the consolidated balance sheets and related consolidated
statements of operations, accumulated retained earnings/(deficit) and
comprehensive income and cash flows listed under Item 8 of this Form 10-K
present fairly, in all material respects, the financial position of Agrilink
Foods, Inc. and its subsidiaries at June 30, 2001 and June 24, 2000, and the
results of their operations and their cash flows for each of the three years
ended in the period June 30, 2001, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Our audits of the consolidated financial statements also included an audit of
the financial statement schedule listed in the accompanying index and appearing
under Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein for the fiscal years ended June 30, 2001, June 24, 2000, and June 26,
1999 when read in conjunction with the consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Rochester, New York
August 3, 2001, except for the eighth paragraph of NOTE 8, for which the date is
September 5, 2001.
FINANCIAL STATEMENTS
Agrilink Foods, Inc.
Consolidated Statements of Operations, Accumulated Earnings/(Deficit), and Comprehensive Income
(Dollars in Thousands)
Fiscal Years Ended
------------------------------------------------
June 30, 2001 June 24, 2000 June 26, 1999
------------- ------------- -------------
Net sales $ 1,303,311 $ 1,232,262 $ 1,261,880
Cost of sales (928,806) (857,319) (903,891)
----------- ----------- ------------
Gross profit 374,505 374,943 357,989
Selling, administrative, and general expenses (295,046) (281,286) (289,923)
Gains on sales of assets 0 6,635 64,734
Restructuring 0 0 (5,000)
Income from joint venture 1,779 2,418 2,787
----------- ----------- ------------
Operating income before dividing with Pro-Fac 81,238 102,710 130,587
Interest expense (79,775) (78,054) (65,339)
Amortization of debt issue costs associated with the Bridge Facility 0 0 (5,500)
----------- ----------- ------------
Pretax income before dividing with Pro-Fac and before extraordinary
item 1,463 24,656 59,748
Pro-Fac share of income before extraordinary item (732) (12,328) (1,658)
----------- ----------- ------------
Income before taxes and extraordinary item 731 12,328 58,090
Tax provision (660) (5,904) (24,770)
----------- ----------- ------------
Income before extraordinary item 71 6,424 33,320
Extraordinary item relating to the early extinguishment of debt (net
of income taxes and after dividing with Pro-Fac) 0 0 (16,366)
----------- ----------- ------------
Net income 71 6,424 16,954
Accumulated earnings/(deficit) at beginning of period 4,000 (2,424) (11,878)
Dividends to Pro-Fac 0 0 (7,500)
----------- ----------- ------------
Accumulated earnings/(deficit) at end of period $ 4,071 $ 4,000 $ (2,424)
=========== =========== ============
Accumulated other comprehensive loss at beginning of period $ (525) $ (763) $ (608)
Minimum pension liability adjustment (48) 238 (155)
Unrealized gain on hedging activity 618 0 0
----------- ----------- ------------
Accumulated other comprehensive income/(loss) at end of period $ 45 $ (525) $ (763)
=========== =========== ============
Net income $ 71 $ 6,424 $ 33,320
Other comprehensive income:
Minimum pension liability (48) 238 (155)
Unrealized gain on hedging activity, net of taxes 618 0 0
----------- ----------- ------------
Comprehensive income $ 641 $ 6,662 $ 33,165
=========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
Agrilink Foods, Inc.
Consolidated Balance Sheets
(Dollars in Thousands)
ASSETS
June 30, June 24,
2001 2000
----------- ----------
Current assets:
Cash and cash equivalents $ 7,656 $ 4,994
Accounts receivable trade, net of allowances for doubtful accounts of
$843 and $887, respectively 85,543 95,499
Accounts receivable, co-pack activity and other 7,949 9,855
Income taxes refundable 272 7,331
Inventories 313,856 295,297
Current investment in CoBank 3,998 2,927
Prepaid manufacturing expense 22,427 20,296
Prepaid expenses and other current assets 19,603 18,706
Due from Pro-Fac Cooperative, Inc. 245 0
Current deferred tax asset 2,202 11,552
----------- -----------
Total current assets 463,751 466,457
Investment in CoBank 10,660 15,893
Investment in joint venture 8,018 6,775
Property, plant, and equipment, net 305,531 317,994
Assets held for sale at net realizable value 120 339
Goodwill and other intangible assets, net of accumulated amortization of $38,108
and $28,248, respectively 248,777 258,545
Other assets 24,014 23,484
Note receivable due from Pro-Fac Cooperative, Inc. 9,400 9,400
----------- -----------
Total assets $ 1,070,271 $ 1,098,887
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Notes payable $ 0 $ 5,700
Current portion of obligations under capital leases 316 218
Current portion of long-term debt 15,599 16,583
Accounts payable 117,851 95,071
Accrued interest 9,253 11,398
Accrued employee compensation 10,081 10,114
Other accrued expenses 49,347 64,138
Due to Pro-Fac Cooperative, Inc. 0 9,141
----------- -----------
Total current liabilities 202,447 212,363
Obligations under capital leases 571 520
Long-term debt 631,128 644,712
Deferred income tax liabilities 26,376 32,262
Other non-current liabilities 29,417 29,852
----------- -----------
Total liabilities 889,939 919,709
----------- -----------
Commitments and Contingencies
Shareholder's Equity:
Common stock, par value $.01; 10,000 shares authorized, issued and outstanding,
owned by Pro-Fac Cooperative, Inc. 0 0
Additional paid-in capital 176,216 175,703
Accumulated earnings 4,071 4,000
Accumulated other comprehensive income:
Unrealized gain on hedging activity 618 0
Minimum pension liability adjustment (573) (525)
----------- -----------
Total shareholder's equity 180,332 179,178
----------- -----------
Total liabilities and shareholder's equity $ 1,070,271 $ 1,098,887
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
Agrilink Foods, Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Fiscal Years Ended
-----------------------------------------------
June 30, 2001 June 24, 2000 June 26, 1999
------------- ------------- -------------
Cash Flows from Operating Activities:
Net income $ 71 $ 6,424 $ 16,954
Adjustments to reconcile net income to net cash provided by/(used in)
operating activities -
Extraordinary item relating to the early extinguishment of debt (net of
income taxes and after dividing with Pro-Fac) 0 0 16,366
Gain on sale of assets 0 (6,635) (64,734)
Loss on disposal of assets 0 0 353
Amortization of goodwill and other intangible assets 9,860 8,768 9,396
Amortization of debt issue costs and amendment costs and discount on
Subordinated Promissory
Note (including fees associated with the Bridge Facility) 4,895 4,318 7,678
Interest in-kind on Subordinated Promissory Note 2,069 1,571 782
Depreciation 30,706 30,313 23,804
Equity in undistributed earnings of CoBank (97) (102) (520)
Equity in undistributed earnings of joint venture (1,243) (96) (95)
Provision for deferred taxes 3,464 9,000 9,742
Provision for losses on accounts receivable 610 201 208
Change in assets and liabilities, net of effects of business dispositions:
Accounts receivable 11,252 (15,276) (2,048)
Inventories and prepaid manufacturing expense (20,690) (51,802) 33,083
Income taxes payable/refundable 7,059 2,029 (3,193)
Accounts payable and accrued expenses 7,519 (4,438) (51,768)
Due (from)/to Pro-Fac (9,386) (5,926) 683
Other assets and liabilities (2,907) 3,945 (8,600)
-------- ------- --------
Net cash provided by/(used in) operating activities 43,182 (17,706) (11,909)
-------- ------- --------
Cash Flows from Investing Activities:
Purchase of property, plant, and equipment (25,126) (25,428) (22,064)
Proceeds from disposals 5,303 64,360 93,486
Proceeds from sales of idle facilities 494 0 1,427
Proceeds from investment in CoBank 4,259 3,378 2,795
Cash paid for acquisitions 0 (250) (443,531)
-------- ------- ---------
Net cash (used in)/provided by investing activities (15,070) 42,060 (367,887)
-------- ------- --------
Cash Flows from Financing Activities:
Net proceeds from (repayment)/issuance of short-term debt (5,700) (13,200) 18,900
Proceeds from issuance of long-term debt 0 0 677,100
Payments on long-term debt (18,084) (18,470) (287,574)
Payments on capital leases (449) (238) (282)
Cash paid for debt issuance costs and amendments (1,730) (2,624) (19,354)
Capital contribution by Pro-Fac 513 8,632 0
Dividends paid to Pro-Fac 0 0 (7,500)
-------- ------- --------
Net cash (used in)/provided by financing activities (25,450) (25,900) 381,290
-------- ------- --------
Net change in cash and cash equivalents 2,662 (1,546) 1,494
Cash and cash equivalents at beginning of period 4,994 6,540 5,046
-------- ------- --------
Cash and cash equivalents at end of period $ 7,656 $ 4,994 $ 6,540
======== ======= ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 75,375 $67,234 $ 64,340
======== ======= ========
Income taxes refunded/(paid), net $ 7,154 $ 6,637 $(12,935)
======== ======= ========
Acquisition of Flavor Destinations Trademark:
Goodwill and other intangible assets $ 0 $ 250 $ 0
Acquisition of Erin's Gourmet Popcorn:
Inventories $ 0 $ 0 $ 33
Property, plant, and equipment 0 0 26
Goodwill and other intangible assets 0 0 554
-------- ------- --------
$ 0 $ 0 $ 613
======== ======= ========
The accompanying notes are an integral part of these financial statements.
Agrilink Foods, Inc.
Consolidated Statement of Cash Flows (Continued)
(Dollars in Thousands)
Fiscal Years Ended
-----------------------------------------------
June 30,2001 June 24, 2000 June 26, 1999
------------ ------------- -------------
Acquisition of Dean Foods Vegetable Company:
Accounts receivable $ 0 $ 0 $ 24,201
Current deferred tax asset 0 0 30,645
Inventories 0 0 195,674
Prepaid expenses and other current assets 0 0 6,374
Property, plant, and equipment 0 0 154,527
Assets held for sale 0 0 49
Goodwill and other intangible assets 0 0 182,010
Accounts payable 0 0 (40,865)
Accrued employee compensation 0 0 (8,437)
Other accrued expenses 0 0 (75,778)
Long-term debt 0 0 (2,752)
Subordinated promissory note 0 0 (22,590)
Other assets and liabilities, net 0 0 (2,453)
-------- ------- --------
$ 0 $ 0 $440,605
======== ======= ========
Acquisition of J.A. Hopay Distributing Co., Inc.:
Accounts receivable $ 0 $ 0 $ 420
Inventories 0 0 153
Property, plant, and equipment 0 0 51
Goodwill and other intangible assets 0 0 3,303
Other accrued expenses 0 0 (251)
Obligation for covenant not to compete 0 0 (1,363)
-------- ------- ---------
$ 0 $ 0 $ 2,313
======== ======= ========
Supplemental schedule of non-cash investing and financing activities:
Capital lease obligations incurred $ 448 $ 171 $ 320
======== ======= ========
The accompanying notes are an integral part of these financial statements.
AGRILINK FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company: Agrilink Foods, Inc. (the "Company" or "Agrilink Foods"),
incorporated in New York in 1961, is a producer and marketer of processed food
products. The Company has four primary product lines including: vegetables,
fruits, snacks, and canned meals. The majority of each of the product lines' net
sales is within the United States. In addition, all of the Company's operating
facilities, excluding one in Mexico, are within the United States. The Company
is a wholly owned subsidiary of Pro-Fac Cooperative, Inc. ("Pro-Fac" or the
"Cooperative"). The Cooperative conducts business under the name of Agrilink. In
addition, the board of directors of Agrilink Foods and Pro-Fac conduct joint
meetings, coordinate their activities, and act on a consolidated basis. Although
Pro-Fac Cooperative continues to be the legal name of the Cooperative, with the
same structure and regulations required by bank credit agreements and bond
indentures, and with the same stock symbol, "PFACP," it is presented as Agrilink
for all other communications.
Basis of Presentation: The accompanying consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") which requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Reclassification: Prior year information is reclassified whenever necessary to
conform with the current year's presentation.
Fiscal Year: The fiscal year of Agrilink Foods corresponds with that of its
parent, Pro-Fac, and ends on the last Saturday in June. Fiscal 2001 comprised 53
weeks and fiscal 2000 and 1999 comprised 52 weeks.
Consolidation: The consolidated financial statements include the Company and its
wholly owned subsidiaries after elimination of intercompany transactions and
balances. Investments in affiliates, owned more than 20 percent but not in
excess of 50 percent, are recorded under the equity method of accounting.
New Accounting Pronouncements: In December 1999, the Securities and Exchange
Commission (the "SEC") issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on
the recognition, presentation and disclosure of revenue in the financial
statements filed with the SEC. SAB No.101 outlines the basic criteria that must
be met to recognize revenue and provides guidance for disclosure related to
revenue recognition policies. The Company adopted SAB No. 101 during the fourth
quarter of fiscal 2001. The adoption of this pronouncement did not have a
material impact on the Company's financial statements or results of operations.
In July 2000, the Emerging Issues Task Force ("EITF") also reached a final
consensus on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs."
The EITF addresses the income statement classification for shipping and handling
costs and revenues. Issue 00-10 became effective during the fourth quarter of
fiscal 2001. Accordingly, freight expense, previously classified as a reduction
to gross sales, is now classified as a component of cost of sales and all prior
periods have been reclassified to reflect this modification. Freight expense was
$57.5 million, $49.6 million, and $51.4 million in fiscal 2001, 2000, and 1999,
respectively. The adoption of EITF Issue 00-10 did not have a material affect on
the Company's financial statements and results of operations.
In January 2001, the EITF reached a partial consensus on Issue 00-22,
"Accounting for Points and Certain Other Time-Based or Volume-Based Sales
Incentive Offer, and Offers for Free Products or Services to Be Delivered in the
Future" which address the recognition, measurement and statement classification
for certain sales incentives (e.g., volume purchase rebates and free or
discounted goods). These guidelines became effective for the Company during the
third quarter of fiscal 2001 and had no impact on the Company's financial
position or results of operations.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses the financial accounting and
reporting of goodwill and other intangible assets and supercedes APB Opinion No.
17, "Intangible Assets." The statement will modify how an entity initially
accounts for goodwill and other intangible assets, assesses for subsequent
impairment, and the requirement to amortize these assets. The provisions of SFAS
No. 142 must be adopted for fiscal years beginning after December 15, 2001, with
early application permitted for companies with fiscal years beginning after
March 15, 2001. The Company is currently assessing the impact of implementation
on its results of operations and financial position.
In July 2000, the EITF reached a consensus on Issue 00-14, "Accounting for
Certain Sales Incentives." The consensus addresses the recognition, measurement,
and income statement classification for sales incentives that a company offers
to its customers.
Accordingly, coupon expense, now classified as selling, general and
administrative expense, will be reclassified as a reduction of gross sales and
all prior periods will also be reclassified to reflect this modification. The
adoption of EITF Issue 00-14 is not expected to materially impact the Company's
financial statements. The Company estimates that its coupon expense is
approximately $6.5 to $8.5 million per year. The Company must adopt EITF Issue
00-14 by the third quarter of fiscal 2002 with earlier application permitted.
In April 2001, the EITF reached a final consensus on Issue 00-25, "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products." The consensus addressees the accounting
treatment and income statement classification for certain sales incentives,
including cooperative advertising arrangements, buydowns, and slotting fees. The
consensus requires that slotting fees, now classified by the Company as selling,
general, and administrative expense, be reclassified as a reduction of gross
sales. These guidelines will become effective for the Company during the third
quarter of fiscal 2002. The adoption of EITF 00-25 is not expected to materially
impact the Company's financial statements.
Restructuring: During the third quarter of fiscal 1999, the Company began
implementation of a corporate-wide restructuring program. The overall objectives
of the plan were to reduce expenses, improve productivity, and streamline
operations. The total restructuring charge amounted to $5.0 million and was
primarily comprised of employee termination benefits. Efforts focused on the
consolidation of operating functions and the elimination of approximately 5
percent of the workforce. Reductions in personnel included operational and
administrative positions. All the remaining termination benefits were liquidated
in fiscal 2001.
Extraordinary Item Relating to the Early Extinguishment of Debt: During fiscal
1999, the Company refinanced its existing indebtedness, including its 12 1/4
percent Senior Subordinated Notes due 2005 and its then existing bank debt.
Premiums and breakage fees associated with early redemptions and other fees
incurred amounted to $16.4 million (net of income taxes of $10.4 million and
after allocation to Pro-Fac of $1.7 million). See NOTE 3 to the "Notes to
Consolidated Financial Statements."
Cash and Cash Equivalents: Cash and cash equivalents include short-term
investments with original maturities of three months or less. There were no such
short-term investments at June 30, 2001 or June 24, 2000.
Inventories: Inventories are stated at the lower of cost or market on the
first-in, first-out ("FIFO") method. The Company provides inventory reserves for
obsolete or slow moving inventory based on changes in consumer demand and other
economic conditions. Reserves recorded at June 30, 2001 and June 24, 2000 were
$3,135,000 and $1,106,000, respectively.
Investment in CoBank: The Company's investment in CoBank is required as a
condition of borrowing. These securities are not physically issued by CoBank,
but rather the Company is notified as to their monetary value. The investment is
carried at cost plus the Company's share of the undistributed earnings of CoBank
(that portion of patronage refunds not distributed currently in cash).
Earnings on the Company's investment in CoBank in fiscal year 2001, 2000, and
1999 amounted to $138,000, $147,000, and $743,000, respectively.
Prepaid Manufacturing Expense: Allocation of manufacturing overhead to finished
goods produced is on the basis of a production period; thus at the end of each
period, manufacturing costs incurred by seasonal plants, subsequent to the end
of previous pack operations, are deferred and included in the accompanying
balance sheet. Such costs are applied to inventory during the next production
period and recognized as an element of cost of goods sold.
Property, Plant, and Equipment and Related Lease Arrangements: Property, plant,
and equipment are depreciated over the estimated useful lives of the assets
using the straight-line method, half-year convention, over 4 to 35 years.
Lease arrangements are capitalized when such leases convey substantially all of
the risks and benefits incidental to ownership. Capital leases are amortized
over either the lease term or the life of the related assets, depending upon
available purchase options and lease renewal features.
Assets held for sale are separately classified on the balance sheet. The
recorded value represents an estimate of net realizable value.
Goodwill and Other Intangibles: Goodwill and other intangible assets include the
cost in excess of the fair value of net tangible assets acquired in purchase
transactions and acquired non-competition agreements and trademarks. Goodwill
and other intangible assets, stated net of accumulated amortization, are
amortized on a straight-line basis over 3 to 35 years. Under the current
guidance of SFAS No. 121, the Company periodically assesses whether there has
been a permanent impairment in the value of goodwill. This is accomplished by
determining whether the estimated, undiscounted future cash flows from operating
activities exceed the carrying value of goodwill as of the assessment date. If
the cash flows are less than the carrying value, an impairment charge would be
recognized for the difference between the estimated fair value and carrying
value.
Other Assets: Other assets are primarily comprised of debt issuance costs. Debt
issuance costs are amortized over the term of the debt. Amortization expense
incurred, including $5,500,000 of fees associated with the Bridge Facility in
fiscal 1999 were approximately $2,759,000, $2,758,000, and $7,678,000, in fiscal
2001, 2000, and 1999, respectively.
Derivative Financial Instruments: The Company does not engage in interest rate
speculation. Derivative financial instruments are utilized to hedge interest
rate risk, commodity price risk, and foreign currency related risk and are not
held for trading purposes. Refer to NOTE 7 for additional disclosures of the
Company's hedging activities.
Income Taxes: Income taxes are provided on income for financial reporting
purposes. Deferred income taxes resulting from temporary differences between
financial reporting and tax reporting are appropriately classified in the
balance sheet.
Pension: The Company and its subsidiaries have several pension plans and
participate in various union pension plans which on a combined basis cover
substantially all employees. Charges to income with respect to plans sponsored
by the Company and its subsidiaries are based upon actuarially determined costs.
Pension liabilities are funded by periodic payments to the various pension plan
trusts.
Casualty Insurance: The Company is insured for workers compensation and
automobile liability through a primarily self-insured program. The Company
accrues for the estimated losses from both asserted and unasserted claims. The
estimate of the liability for unasserted claims arising from unreported
incidents is based on an analysis of historical claims data. The accrual for
casualty insurance at June 30, 2001 and June 24, 2000 was $3.8 million and $5.2
million, respectively.
Revenue Recognition: The Company recognizes revenue on shipments on the date the
merchandise is received by the customer and title transfers. Product sales are
reported net of applicable cash discounts, and sales allowances and discounts.
Shipping and Handling Expense: Shipping and handling expenses are included as a
component of cost of sales.
Advertising: Production costs of commercials and programming are charged to
operations in the year first aired. The costs of other advertising promotion and
marketing programs are charged in the year incurred. Advertising expense
incurred in fiscal year 2001, 2000, and 1999 amounted to approximately $37.5
million, $43.2 million, and $38.2 million, respectively.
Environmental Expenditures: Environmental expenditures that pertain to current
operations are expensed or capitalized consistent with the Company's
capitalization policy. Expenditures that result from the remediation of an
existing condition caused by past operations that do not contribute to current
or future revenues are expensed. Liabilities are recorded when remedial
activities are probable, and the cost can be reasonably estimated.
Income from Joint Venture: Represents earnings received from the investment in
Great Lakes Kraut Company, LLC, a joint venture formed between Agrilink Foods
and Flanagan Brothers, Inc. See NOTE 5 to the "Notes to Consolidated Financial
Statements" for additional information.
Earnings Per Share Data Omitted: Earnings per share amounts are not presented,
as subsequent to November 3, 1994, the Company is a wholly owned subsidiary of
Pro-Fac.
Comprehensive Income: Under SFAS No. 130, the Company is required to display
comprehensive income and its components as part of the financial statements.
Comprehensive income is comprised of net earnings and other comprehensive
income/(loss), which includes certain changes in equity that are excluded from
net earnings. The Company includes adjustments for minimum pension liabilities
and unrealized holding gains and losses on hedging transactions in other
comprehensive income/(loss).
Disclosures About Fair Value of Financial Instruments: The following methods and
assumptions were used by the Company in estimating its fair value disclosures
for financial instruments:
Cash and Cash Equivalents, Accounts Receivable, and Notes Payable: The
carrying amount approximates fair value because of the short maturity of
these instruments.
Long-Term Investments: The carrying value of the investment in CoBank was
$14.7 million at June 30, 2001. As there is no market price for this
investment, a reasonable estimate of fair value is not possible.
Long-Term Debt: The fair value of the long-term debt is estimated based on
the quoted market prices for the same or similar issues or on the current
rates offered for debt of the same remaining maturities. See NOTE 8 to the
"Notes to Consolidated Financial Statements."
NOTE 2. AGREEMENTS WITH PRO-FAC
Effective November 3, 1994, the Company became a wholly owned subsidiary of
Pro-Fac.
The Company's contractual relationship with Pro-Fac is defined in the Pro-Fac
Marketing and Facilitation Agreement ( the "Agreement"). Under the Agreement,
the Company pays Pro-Fac the commercial market value ("CMV") for all crops
supplied by Pro-Fac. CMV is defined as the weighted average price paid by other
commercial processors for similar crops sold under preseason contracts and in
the open market in the same or competing market area. Although CMV is intended
to be no more than the fair market value of the crops purchased by Agrilink
Foods, it may be more or less than the price Agrilink Foods would pay in the
open market in the absence of the Agreement. For the fiscal years ended 2001,
2000, and 1999, the CMV for all crops supplied by Pro-Fac amounted to $69.0
million, $69.6 million, and $62.2 million, respectively.
Under the Agreement the Company is required to have on its board of directors
individuals who are neither members of, nor affiliated with Pro-Fac
("Disinterested Directors"). The number of Disinterested Directors must at least
equal the number of directors who are members of Pro-Fac. The volume and type of
crops to be purchased by Agrilink Foods from Pro-Fac under the Agreement are
determined pursuant to its annual profit plan, which requires the approval of a
majority of the Disinterested Directors. In addition, under the agreement, in
any year in which the Company has earnings on products which were processed from
crops supplied by Pro-Fac ("Pro-Fac Products"), the Company pays to Pro-Fac, as
additional patronage income, 90 percent of such earnings, but in no case more
than 50 percent of all pretax earnings of the Company (before dividing with
Pro-Fac). In years in which the Company has losses on Pro-Fac Products, the
Company reduces the CMV it would otherwise pay to Pro-Fac by 90 percent of such
losses, but in no case by more than 50 percent of all pretax losses of the
Company (before dividing with Pro-Fac). Additional patronage income is paid to
Pro-Fac for services provided to Agrilink Foods, including the provision of a
long term, stable crop supply, favorable payment terms for crops, and the
sharing of risks of losses of certain operations of the business. Earnings and
losses are determined at the end of the fiscal year, but are accrued on an
estimated basis during the year. For fiscal years 2001 and 2000, such additional
patronage income amounted to $0.7 million and $12.3 million, respectively.
During fiscal 1999, there was no additional patronage income. Under the
Agreement, Pro-Fac is required to reinvest at least 70 percent of the additional
Patronage income in Agrilink Foods. Since Pro-Fac's acquisition of Agrilink in
1994, Pro-Fac has invested an additional $39.0 million in the Company.
In the first quarter of fiscal 1999, the Company reclassified a $9.4 million
demand receivable due from Pro-Fac reflecting the conversion of such receivable
to a non-interest bearing, long-term obligation due from Pro-Fac having a
10-year maturity.
NOTE 3. ACQUISITIONS AND DISPOSALS
Fiscal 2000 -
Sale of Pickle Business: On June 23, 2000, the Company sold its pickle business
based in Tacoma, Washington to Dean Pickle and Specialty Products Company. This
business included pickle, pepper, and relish products sold primarily under the
Nalley and Farman's brand names. The Company received proceeds of approximately
$10.3 million which were applied to bank loans, $4.0 million of which was
applied to the Term Loan Facility and $6.3 million of which was applied to the
Company's Revolving Credit Facility. A gain of approximately $4.3 million was
recognized on this transaction.
On July 21, 2000, the Company sold the machinery and equipment utilized in
production of pickles and other related products to Dean Pickle and Specialty
Products. No significant gain or loss was recognized on this transaction. The
Company received proceeds of approximately $5.0 million which were applied to
bank loans, $3.2 million of which was applied to the Term Loan Facility and $1.8
million of which was applied to the Revolving Credit Facility.
This transaction did not include any other products carrying the Nalley brand
name, including prepared canned meal products. Agrilink Foods will continue to
contract pack Nalley and Farman's pickle products for a period of two years,
beginning June 23, 2000, at the existing Tacoma processing plant which Agrilink
Foods will operate.
Under a related agreement, the Cooperative will supply raw cucumbers grown in
the Northwestern United States to Dean Pickle and Specialty Products for a
minimum 10-year period at market pricing.
Sale of Midwest Private Label Canned Vegetable Business: On November 8, 1999,
the Company completed the sale of Agrilink Foods' Midwest private label canned
vegetable business to Seneca Foods. Included in this transaction was the
Arlington, Minnesota facility. The Company received proceeds of approximately
$42.4 million which were applied to borrowings outstanding under the Company's
Revolving Credit Facility. In addition, Seneca Foods issued to Agrilink Foods a
$5.0 million unsecured subordinated promissory note due February 8, 2009. This
transaction did not include the Company's retail branded canned vegetables,
Veg-All and Freshlike. No significant gain or loss was recognized on this
transaction.
On December 17, 1999, Agrilink Foods completed the sale of the Company's
Cambria, Wisconsin processing facility to Del Monte. The Company received
proceeds of approximately $10.5 million which were applied to bank loans ($6.0
million of which was applied to the Term Loan Facility and $4.5 million of which
was applied to the Company's Revolving Credit Facility). A gain of approximately
$2.3 million was recognized on this transaction. The sale also included an
agreement for Del Monte to produce a portion of Agrilink Foods' product needs
during the 2000 packing season.
Fiscal 1999 -
Sale of Adams Brand Peanut Butter Operations: On January 29, 1999, the Company
sold the Adams brand peanut butter operations to the J.M. Smucker Company. The
Company received proceeds of approximately $13.5 million which were applied to
outstanding bank loans. A gain of approximately $3.5 million was recognized on
this transaction.
Acquisition of Erin's Gourmet Popcorn: On January 5, 1999, the Company acquired
the assets of Erin's Gourmet Popcorn ("Erin's"), a Seattle-based, ready-to-eat
popcorn manufacturer. The acquisition was accounted for as a purchase. The
purchase price was approximately $0.6 million. Intangibles of approximately $0.6
million were recorded in conjunction with this transaction and are being
amortized over 3 to 30 years. The operations from Erin's have been included in
the Company's statement of operations since the acquisition date.
The effects of the Erin's acquisition are not material, and accordingly, have
been excluded from the pro forma information presented below.
Acquisition of Dean Foods Vegetable Company: On September 24, 1998, Agrilink
Foods acquired the Dean Foods Vegetable Company ("DFVC"), the frozen and canned
vegetable business of Dean Foods Company ("Dean Foods"), by acquiring all the
outstanding capital stock of Dean Foods Vegetable Company and Birds Eye de
Mexico SA de CV (the "DFVC Acquisition"). In connection with the DFVC
Acquisition, Agrilink Foods sold its aseptic business to Dean Foods. Agrilink
Foods paid $360 million in cash, net of the sale of the aseptic business, and
issued to Dean Foods a $30 million unsecured subordinated promissory note due
November 22, 2008 (the "Dean Foods Subordinated Promissory Note"), as
consideration for the DFVC Acquisition. This note was subsequently sold to Great
Lakes Kraut Company, a joint venture of the Company, in December 2000. The
Company had the right, exercisable until July 15, 1999, to require Dean Foods,
jointly with the Company, to treat the DFVC Acquisition as an asset sale for tax
purposes under Section 338(h)(10) of the Internal Revenue Code. On April 15,
1999, the Company paid $13.2 million to Dean Foods and exercised the election.
After the DFVC Acquisition, DFVC was merged into the Company. DFVC had been one
of the leading processors of vegetables in the United States, selling its
products under well-known brand names, such as Birds Eye, Freshlike and Veg-All,
and various private labels. The Company believes that the DFVC Acquisition
strengthened its competitive position by: (i) enhancing its brand recognition
and market position, (ii) providing opportunities for cost savings and operating
efficiencies and (iii) increasing its product and geographic diversification.
The DFVC Acquisition was accounted for under the purchase method of accounting.
Under purchase accounting, tangible and identifiable intangible assets acquired
and liabilities assumed were recorded at their respective fair values. Goodwill
associated with the DFVC Acquisition is being amortized over 30 years.
The following unaudited pro forma financial information presents a summary of
consolidated results of operations of the Company and DFVC as if the acquisition
had occurred at the beginning of the 1999 fiscal year.
(Dollars in Millions)
Fiscal Year Ended
June 26, 1999
------------------
Net sales $ 1,307.6
Income before extraordinary items $ 23.4
Net income $ 7.0
These unaudited pro forma results have been prepared for comparative purposes
only and include adjustments for additional depreciation expense and
amortization and interest expense on acquisition debt. They do not purport to be
indicative of the results of operations which actually would have resulted had
the combination been in effect at the beginning of the 1999 fiscal year, or of
the future operations of the consolidated entities.
Concurrently with the DFVC Acquisition, Agrilink Foods refinanced its then
existing indebtedness (the "Refinancing"), including its 12 1/4 percent Senior
Subordinated Notes due 2005 (the "Old Notes") and its then existing bank debt.
On August 24, 1998, Agrilink Foods commenced a tender offer (the "Tender Offer")
for all the Old Notes and consent solicitation to certain amendments under the
indenture governing the Old Notes to eliminate substantially all the restrictive
covenants and certain events of default therein. Substantially all of the $160
million aggregate principal amount of the Old Notes were tendered and purchased
by Agrilink Foods for aggregate consideration of approximately $184 million,
including accrued interest of $2.9 million. Agrilink Foods also terminated its
then existing bank facility (including seasonal borrowings) and repaid $176.5
million, excluding interest owed and breakage fees outstanding thereunder. The
Company recognized an extraordinary item of $16.4 million (net of income taxes
and after dividing with Pro-Fac) in the first quarter of fiscal 1999 relating to
this refinancing.
In order to consummate the DFVC Acquisition and the Refinancing and to pay the
related fees and expenses, Agrilink Foods: (i) entered into a new credit
facility (the "New Credit Facility") providing for $455 million of term loan
borrowings (the "Term Loan Facility") and up to $200 million of revolving credit
borrowings (the "Revolving Credit Facility"), (ii) entered into and drew upon a
$200 million bridge loan facility (the "Bridge Facility") and (iii) issued the
$30 million Subordinated Promissory Note to Dean Foods (this note was
subsequently sold to Great Lakes Kraut Company, a joint venture of Agrilink
Foods, in December 2000). The Bridge Facility was repaid during November of 1998
principally with the proceeds from a new Senior Subordinated Note Offering. See
NOTE 8 - "Debt - Senior Subordinated Notes 11-7/8 Percent (due 2008)." Debt
issue costs of $5.5 million associated with the Bridge Facility were expensed
during the quarter ended December 26, 1998.
Acquisition of J.A. Hopay Distributing Co, Inc.: Effective July 21, 1998, the
Company acquired J.A. Hopay Distributing Co., Inc. ("Hopay") of Pittsburgh,
Pennsylvania. Hopay distributed snack products for Snyder of Berlin, one of the
Company's businesses included within its snack foods unit. The acquisition was
accounted for as a purchase. The purchase price (net of liabilities assumed) was
approximately $2.3 million. Intangibles of approximately $3.3 million were
recorded in conjunction with this transaction and are being amortized over 5 to
30 years.
The effects of the Hopay acquisition are not material and, accordingly, have
been excluded from the above pro forma presentation. The operations from Hopay
have been included in the Company's statement of operations since the
acquisition date.
NOTE 4. INVENTORIES
The major classes of inventories are as follows:
(Dollars in Thousands)
June 30, June 24,
2001 2000
------------- ----------
Finished goods $ 279,991 $ 250,112
Raw materials and supplies 33,865 45,185
---------- ----------
Total inventories $ 313,856 $ 295,297
========== ==========
On February 16, 2001, the Company completed the purchase of the frozen vegetable
inventory of PF Acquisition II, Inc., a former subsidiary of Pro-Fac that
conducted business under the name of AgriFrozen Foods ("AgriFrozen").
AgriFrozen's lender sold the inventory to the Company pursuant to a private sale
under the Uniform Commercial Code after AgriFrozen voluntarily surrendered the
inventory to the lender. The purchase price was $31.6 million of which $10.0
million was paid to the lender on April 1, 2001, and the remaining balance was
paid on August 1, 2001. The $21.6 million is included in accounts payable at
June 30, 2001. In addition, under a related agreement between the Company and
AgriFrozen, the Company funded certain operating costs and expenses of
AgriFrozen, primarily in storing and converting the purchased inventory to
finished goods, during a transition period which ended on June 30, 2001. Total
expenses were estimated to be approximately $7.1 million, of which $6.0 million
has been funded as of June 30, 2001. This funding is net of the proceeds of
available receivables not pledged to the lender. The Company incurred fees of
approximately $0.8 million related to this transaction which were expensed
during the second half of fiscal 2001.
NOTE 5. INVESTMENT IN JOINT VENTURE
Formation of Sauerkraut Company: On July 1, 1997, the Company and Flanagan
Brothers, Inc. of Bear Creek, Wisconsin contributed all their assets involved in
sauerkraut production to form a new sauerkraut company. This new company, Great
Lakes Kraut Company, LLC, operates as a New York limited liability company with
ownership and earnings divided equally between the two companies. The joint
venture is accounted for using the equity method of accounting. Summarized
financial information of Great Lakes Kraut Company, LLC is as follows:
Condensed Statement of Earnings
(Dollars in Thousands)
Fiscal Years Ended
June 30, 2001 June 24, 2000 June 26, 1999
Net sales $ 30,688 $ 36,126 $ 33,335
Gross profit $ 6,744 $ 9,150 $ 9,392
Operating income $ 3,105 $ 5,488 $ 6,267
Net income $ 3,559 $ 4,836 $ 5,575
Condensed Balance Sheet
(Dollars in Thousands)
June 30, 2001 June 24, 2000
Current assets $ 13,050 $ 12,464
Noncurrent assets $ 33,158 $ 22,081
Current liabilities $ 12,763 $ 13,158
Noncurrent liabilities $ 15,049 $ 4,579
On December 1, 2000, Great Lakes Kraut Company, LLC purchased the Subordinated
Promissory Note issued by the Company to Dean Foods in conjunction with the
acquisition of Dean Foods Vegetable Company. Great Lakes Kraut Company, LLC paid
$10 million for the Subordinated Promissory Note with proceeds from bank
financing.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT AND RELATED OBLIGATIONS
The following is a summary of property, plant and equipment and related
obligations at June 30, 2001 and June 24, 2000:
(Dollars in Thousands)
June 30, 2001 June 24, 2000
--------------------------------------- -------------------------------------------
Owned Leased Owned Leased
Assets Assets Total Assets Assets Total
----------- ----------- ------------ ----------- ----------- ----------
Land $ 14,019 $ 0 $ 14,019 $ 14,143 $ 0 $ 14,143
Land improvements 7,627 0 7,627 7,297 0 7,297
Buildings 108,991 395 109,386 108,055 395 108,450
Machinery and equipment 300,741 1,115 301,856 287,532 936 288,468
Construction in progress 12,249 0 12,249 13,228 0 13,228
---------- --------- --------- ---------- --------- ----------
443,627 1,510 445,137 430,255 1,331 431,586
Less accumulated depreciation (138,922) (684) (139,606) (112,888) (704) (113,592)
---------- --------- --------- ---------- --------- ----------
Net $ 304,705 $ 826 $ 305,531 $ 317,367 $ 627 $ 317,994
========== ========= ========= ========== ========= ==========
Obligations under capital leases1 $ 887 $ 738
Less current portion (316) (218)
--------- ---------
Long-term portion $ 571 $ 520
========= =========
1 Represents the present value of net minimum lease payments calculated at
the Company's incremental borrowing rate at the inception of the leases,
which ranged from 6.3 percent to 9.8 percent.
Interest capitalized in conjunction with construction amounted to approximately
$0.6 million, $0.7 million, and $0.3 million in fiscal 2001, 2000, and 1999,
respectively.
The following is a schedule of future minimum lease payments together with the
present value of the minimum lease payments related to capitalized leases, both
as of June 30, 2001:
(Dollars in Thousands)
Fiscal Year Ending Last Capital Operating Total Future
Saturday In June Leases Leases Commitment
- ------------------------ ------- ---------- ----------
2002 400 5,422 5,822
2003 325 3,984 4,309
2004 193 2,974 3,167
2005 89 2,258 2,347
2006 35 1,249 1,284
Later years 0 2,309 2,309
------- --------- ---------
Net minimum lease payments 1,042 $ 18,196 $ 19,238
========= =========
Less amount representing interest (155)
-------
Present value of minimum lease payments $ 887
=======
Total rent expense related to operating leases (including lease arrangements of
less than one year which are not included in the previous table) amounted to
$13.9 million, $13.6 million, and $13.6 million for fiscal years 2001, 2000, and
1999, respectively.
NOTE 7. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On June 25, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires the recognition of
all derivative financial instruments as either assets or liabilities in the
balance sheet and measurement of those instruments at fair value. Changes in the
fair values of those derivatives will be reported in earnings or other
comprehensive income depending on the use of the derivative and whether it
qualifies for hedge accounting. The accounting for gains and losses associated
with changes in the fair value of a derivative and the effect on the
consolidated financial statements will depend on its hedge designation and
whether the hedge is highly effective in achieving offsetting changes in the
fair value or cash flow of the asset or liability hedged. Under the provisions
of SFAS No. 133, the method that will be used for assessing the effectiveness of
a hedging derivative, as well as the measurement approach for determining the
ineffective aspects of the hedge, must be established at the inception of the
hedge.
The Company, as a result of its operating and financing activities, is exposed
to changes in foreign currency exchange rates, certain commodity prices, and
interest rates, which may adversely affect its results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, the Company may enter into derivative contracts.
The adoption of SFAS No. 133 did not materially affect the Company's results of
operations or financial position.
Foreign Currency: The Company manages its foreign currency related risk
primarily through the use of foreign currency forward contracts. The contracts
held by the Company are denominated in Mexican pesos.
The Company has entered into foreign currency forward contracts that are
designated as cash flow hedges of exchange rate risk related to forecasted
foreign currency-denominated intercompany sales. At June 30, 2001, the Company
had cash flow hedges for the Mexican peso with maturity dates ranging from July
2001 to May 2002 for 124 million pesos.
At June 30, 2001, the fair value of the open contracts was an after-tax gain of
approximately $0.6 million recorded in accumulated other comprehensive income in
shareholder's equity. Amounts deferred to accumulated other comprehensive income
will be reclassified into cost of goods sold. For the year ended June 30, 2001,
approximately $0.3 million has been reclassified from other comprehensive income
to cost of goods sold. Hedge ineffectiveness was insignificant.
Commodity Prices: The Company is exposed to commodity price risk related to
forecasted purchases of soybean oil, an ingredient in the manufacture of salad
dressings and mayonnaise. To mitigate this risk, the Company designated soybean
oil forward contracts as cash flow hedges of its forecasted soybean oil
purchases. The Company maintained soybean oil contracts that hedged
approximately 70 percent of its planned soybean oil requirements during fiscal
2001. These contracts were either sold or expired during fiscal 2001 and a loss
of $0.2 million recorded in cost of goods sold.
The Company is also exposed to commodity price risk related to forecasted
purchases of flour in its manufacturing process. To mitigate this risk, the
Company designated a swap agreement as a cash flow hedge of its forecasted flour
purchases. The Company maintained flour contracts that hedged approximately 59
percent of its planned flour requirements during fiscal 2001. The contracts
expired during fiscal 2001, and an immaterial loss was recorded in cost of goods
sold.
The Company is also exposed to commodity price risk related to forecasted
purchases of corrugated (unbleached kraftliner) in its manufacturing process. To
mitigate this risk, the Company designated a swap agreement as a cash flow hedge
of its forecasted corrugated purchases. The Company hedged approximately 80
percent of its planned corrugated requirements. This agreement had no fair value
and expired on June 30, 2001.
Interest Rates: The Company is exposed to interest rate risk primarily through
its borrowing activities. The majority of the Company's long-term borrowings are
variable rate instruments. The Company entered into two interest rate swap
contracts under which the Company agrees to pay an amount equal to a specified
fixed rate of interest times a notional principal amount, and to receive in
return an amount equal to a specified variable rate of interest times the same
notional principal amount. The notional amounts of the contract are not
exchanged and no other cash payments are made. Two interest rate swap contracts
were entered into with a major financial institution in order to minimize credit
risk.
The first interest rate swap contract required payment of a fixed rate of
interest (4.96 percent) and the receiving of a variable rate of interest
(three-month London Interbank Offered Rate ("LIBOR") of 4.85 percent as of June
30, 2001) on $150 million notional amount of indebtedness. The Company had a
second interest rate swap contract to pay a fixed rate of interest (5.32
percent) and receive a variable rate of interest (three-month LIBOR of 4.85
percent as of June 30, 2001) on $100 million notional amount of indebtedness.
Approximately 61 percent of the underlying debt is being hedged with these
interest rate swaps.
The Company designates these interest rate swap contracts as cash flow hedges.
The fair value of the cash flow hedge is generally deferred to other
comprehensive income and reclassified to interest expense over the life of the
swap contracts. However, to the extent that any of these contracts are not
considered effective in offsetting the change in the value of the interest
payments being hedged, any changes in fair value relating to the ineffective
portion of these contracts are immediately recognized in income. At June 30,
2001, these interest rate swap contracts were not considered effective, and the
fair value of the contracts was an after-tax loss of $0.4 million and was
reported in earnings.
NOTE 8. DEBT
The following is a summary of long-term debt outstanding:
(Dollars in Thousands)
June 30, June 24,
2001 2000
---------- ----------
Term Loan Facility $ 411,600 $ 428,300
Senior Subordinated Notes 200,015 200,015
Subordinated Promissory Note (net of discount) 29,660 26,144
Other 5,452 6,836
---------- ----------
Total debt 646,727 661,295
Less current portion (15,599) (16,583)
---------- -----------
Total long-term debt $ 631,128 $ 644,712
========== ==========
Credit Facility (Bank Debt): In connection with the DFVC Acquisition, the
Company entered into a Credit Facility with Harris Bank as Administrative Agent
and Bank of Montreal as Syndication Agent, and the lenders thereunder. The
Credit Facility consists of a $200 million Revolving Credit Facility and a $455
million Term Loan Facility. The Term Loan Facility is comprised of the Term A
Facility, which has a maturity of five years, the Term B Facility, which has a
maturity of six years, and the Term C Facility, which has a maturity of seven
years. The Revolving Credit Facility has a maturity of five years. All previous
bank debt was repaid in conjunction with the execution of the Credit Facility.
The Credit Facility bears interest, at the Company's option, at the
Administrative Agent's alternate base rate or LIBOR plus, in each case,
applicable margins of: (i) in the case of alternate base rate loans, (x) 1.25
percent for loans under the Revolving Credit Facility and the Term A Facility,
(y) 3.00 percent for loans under the Term B Facility and (z) 3.25 percent for
loans under the Term C Facility
and (ii) in the case of LIBOR loans, (x) 3.00 percent for loans under the
Revolving Credit Facility and the Term A Facility, (y) 4.00 percent for loans
under the Term B Facility and (z) 4.25 percent for loans under the Term C
Facility. The Administrative Agent's "alternate base rate" is defined as the
greater of: (i) the prime commercial rate as announced by the Administrative
Agent or (ii) the Federal Funds rate plus 0.50 percent. The fiscal 2001
weighted-average rate of interest applicable to the Term Loan Facility was 9.97
percent. In addition, the Company pays a commitment fee calculated at a rate of
0.50 percent per annum on the daily average unused commitment under the
Revolving Credit Facility.
Utilizing outstanding balances at June 30, 2001, the Term Loan Facility is
subject to the following amortization schedule:
(Dollars in Millions)
Fiscal Year Term Loan A Term Loan B Term Loan C Total
- ----------- ----------- ----------- ----------- -----
2002 $ 10.0 $ 0.4 $ 0.4 $ 10.8
2003 10.0 0.4 0.4 10.8
2004 6.4 0.4 0.4 7.2
2005 0.0 189.0 0.4 189.4
2006 0.0 0.0 193.4 193.4
------- ------- -------- -------
$ 26.4 $ 190.2 $ 195.0 $ 411.6
======= ======= ======== =======
The Term Loan Facility is subject to mandatory prepayment under various
scenarios as defined in the Credit Facility. During fiscal 2001, Agrilink Foods
made mandatory prepayments of $3.2 million from proceeds of the sale of the
Cambria facility and the pickle machinery and equipment. In addition, during
fiscal 2001, principal payments of $13.5 million were made on the Term Loan
Facilities.
The Company's obligations under the Credit Facility are collateralized by a
first-priority lien on: (i) substantially all existing or after-acquired assets,
tangible or intangible, (ii) the capital stock of certain of Pro-Fac's current
and future subsidiaries (excluding AgriFrozen, Inc., a former subsidiary of
Pro-Fac), and (iii) all of the Company's rights under the agreement to acquire
DFVC (principally indemnification rights) and the Pro-Fac Marketing and
Facilitation Agreement. The Company's obligations under the Credit Facility are
guaranteed by Pro-Fac and certain of the Company's subsidiaries (excluding
AgriFrozen Foods, Inc.).
The Credit Facility contains customary covenants and restrictions on the
Company's ability to engage in certain activities, including, but not limited
to: (i) limitations on the incurrence of indebtedness and liens, (ii)
limitations on sale-leaseback transactions, consolidations, mergers, sale of
assets, transactions with affiliates and investments and (iii) limitations on
dividend and other distributions. The Credit Facility also contains financial
covenants requiring Pro-Fac to maintain a minimum level of consolidated EBITDA,
a minimum consolidated interest coverage ratio, a minimum consolidated fixed
charge coverage ratio, a maximum consolidated leverage ratio and a minimum level
of consolidated net worth. Under the Credit Agreement, the assets, liabilities,
and results of operations of AgriFrozen, a former subsidiary of Pro-Fac, were
not consolidated with Pro-Fac for purposes of determining compliance with the
covenants. In August 2001, September 2000 and August 1999, the Company
negotiated amendments to the original covenants. In conjunction with these
amendments, the Company incurred fees of approximately $1.5 million, $1.7
million, and $2.6 million, respectively. These fees are being amortized over the
remaining life of the Credit Facility. Agrilink is in compliance with all
covenants, restrictions, and requirements under the terms of the Credit Facility
as amended.
The August 2001 amendment imposes contingent fees and possible increases in
interest rates under the Credit Facility based in part on the ability of the
Company to raise equity, and deleverage its balance sheet within certain
timeframes. To this end, the Company has engaged a financial advisor to assist
it in raising a minimum of $100 million through a private placement of an as yet
unspecified class of securities of the Company. The amount of such contingent
fees is also impacted by EBITDA which the Company achieves for its fiscal year
ending in June 2002.
Senior Subordinated Notes - 11-7/8 Percent (due 2008): To extinguish the
Subordinated Bridge Facility, the Company issued Senior Subordinated Notes (the
"Notes") for $200 million aggregate principal amount due November 1, 2008.
Interest on the Notes accrues at the rate of 11-7/8 percent per annum and is
payable semiannually in arrears on May 1 and November 1.
The Notes represent general unsecured obligations of the Company, subordinated
in right of payment to certain other debt obligations of the Company (including
the Company's obligations under the Credit Facility). The Notes are guaranteed
by Pro-Fac and certain of the Company's subsidiaries.
The Notes contain customary covenants and restrictions on the Company's ability
to engage in certain activities, including, but not limited to: (i) limitations
on the incurrence of indebtedness and liens; (ii) limitations on consolidations,
mergers, sales of assets, transactions with affiliates; and (iii) limitations on
dividends and other distributions. The Company is in compliance with all
covenants, restrictions, and requirements under the Notes.
Subordinated Bridge Facility: To complete the DFVC Acquisition, the Company
entered into a Subordinated Bridge Facility (the "Bridge Facility"). During
November 1998, the net proceeds from the sale of the Notes, together with
borrowings under the Revolving Credit Facility, were used to repay all the
indebtedness outstanding ($200 million plus accrued interest) under the Bridge
Facility. The outstanding indebtedness under the Bridge Facility accrued
interest at an approximate rate per annum of 10 1/2 percent. Debt issuance costs
associated with the Bridge Facility of $5.5 million were fully amortized during
the second quarter of fiscal 1999.
Subordinated Promissory Note: As partial consideration for the DFVC Acquisition,
the Company issued to Dean Foods a Subordinated Promissory Note for $30 million
aggregate principal amount due November 22, 2008. Interest on the Subordinated
Promissory Note is accrued 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. As the rates on the Note are below market value, the Company
has imputed the appropriate discount utilizing an effective interest rate of
11-7/8 percent. Interest accruing through November 22, 2003 is required to be
paid in kind through the issuance by the Company of additional subordinated
promissory notes identical to the Subordinated Promissory Note. The Company
satisfied this requirement in fiscal 2001 through the issuance of five
additional promissory notes each for approximately $0.4 million. Interest
accruing after November 22, 2003 is payable in cash. The Subordinated Promissory
Note may be prepaid at the Company's option without premium or penalty.
The Subordinated Promissory Note is expressly subordinate to the Notes and the
Credit Facility and contains no financial covenants. The Subordinated Promissory
Note is guaranteed by Pro-Fac.
On December 1, 2000, Dean Foods sold the Subordinated Promissory Note to Great
Lakes Kraut Company, LLC, a joint venture between the Company and Flanagan
Brothers, Inc. This sale did not affect the terms of the note.
Senior Subordinated Notes - 12 1/4 Percent (due 2005, "Old Notes"): In
conjunction with the DFVC Acquisition, the Company repurchased $159,985,000
principal amount of its Old Notes, of which $160 million aggregate principal
amount was previously outstanding. The Company paid a total of approximately
$184 million to repurchase the Old Notes, including interest accrued thereon of
$2.9 million. Holders who tendered consented to certain amendments to the
indenture relating to the Old Notes, which eliminated or amended substantially
all the restrictive covenants and certain events of default contained in such
indenture. The Company may repurchase the remaining Old Notes in the future in
open market transactions, privately negotiated purchases or otherwise.
Revolving Credit Facility (Notes Payable): Borrowings under short-term Revolving
Credit Facilities were as follows:
(Dollars in Thousands)
Fiscal Years Ended
------------------------------------------------
June 30,2001 June 24, 2000 June 26, 1999
------------ ------------- -------------
Balance at end of period $ 0 $ 5,700 $ 18,900
Rate at fiscal year end 0.0% 9.375% 8.2%
Maximum outstanding during the period $ 121,000 $ 156,100 $ 116,200
Average amount outstanding during the period $ 76,900 $ 90,800 $ 76,700
Weighted average interest rate during the period 9.2% 8.5% 7.8%
Agrilink Foods also maintains a Letter of Credit Facility which provides for the
issuance of letters of credit through September 2001. As of June 30, 2001, there
were $13.4 million in letters of credit outstanding. Management anticipates
timely renewals of the Letter of Credit facilities.
Fair Value: The estimated fair value of long-term debt outstanding was
approximately $629.3 million and $615.5 million at June 30, 2001 and June 24,
2000, respectively. The fair value for long-term debt was estimated using either
quoted market prices for the same or similar issues or the current rates offered
to the Company for debt with similar maturities.
Other Debt: Other debt of $5.5 million carries rates up to 8.2 percent at June
30, 2001.
Maturities: Total long-term debt maturities during each of the next five fiscal
years are as follows: 2002, $15.6 million; 2003, $11.1 million; 2004, $7.5
million; 2005, $189.4 million; and 2006, $193.4 million. Provisions of the Term
Loan require annual payments on the last day of each September of each year
(commencing September 30, 1999) of an amount equal to the "annual cash sweep"
(equivalent to approximately 75 percent of net income adjusted for certain cash
and non-cash items) for the preceding fiscal year. As of June 30, 2001, there
was no obligation under this provision. Provisions of the Term Loan Facility
also require that cash proceeds from the sale of businesses be applied to the
Term Loan Facility.
NOTE 9. TAXES ON INCOME
Taxes on income before extraordinary item include the following:
(Dollars in Thousands)
Fiscal Years Ended
------------------------------------------------
June 30, 2001 June 24, 2000 June 26, 1999
------------- ------------- -------------
Federal -
Current $ (2,977) $(2,886) $ 13,012
Deferred 3,118 8,098 8,765
-------- ------- --------
141 5,212 21,777
-------- ------- --------
State and foreign -
Current 173 (210) 2,016
Deferred 346 902 977
-------- ------- --------
519 692 2,993
-------- ------- --------
$ 660 $ 5,904 $ 24,770
======== ======= ========
A reconciliation of the Company's effective tax rate to the amount computed by
applying the federal income tax rate to income before taxes and extraordinary
item is as follows:
Fiscal Years Ended
-----------------------------------------------------
June 30, 2001 June 24, 2000 June 26, 1999
------------- ------------- -------------
Statutory federal rate 35.0% 35.0% 35.0%
State and foreign income taxes, net of federal income tax benefit (60.7)% 5.6% 3.5%
Goodwill amortization 101.4% 10.3% 5.9%
Meals and entertainment 24.4% 1.6% 0.6%
Dividend received reduction (4.9)% (0.3)% (0.4)%
Other, net (4.9)% (4.3)% (2.0)%
----- ---- ----
Effective Tax Rate 90.3% 47.9% 42.6%
===== ==== ====
The deferred tax (liabilities)/assets consist of the following:
(Dollars in Thousands)
June 30, 2001 June 24, 2000
------------- -------------
Liabilities
Depreciation $ (42,473) $ (39,101)
Goodwill and other intangible assets (6,832) (5,796)
Prepaid manufacturing expense (8,724) (7,895)
Investment in Great Lakes Kraut Company, LLC (1,555) (1,727)
Discount on Subordinated Promissory Notes (2,180) (2,415)
---------- ---------
Total deferred tax liabilities (61,764) (56,934)
---------- ---------
Assets
Inventories 9,770 11,190
Credits and operating loss carryforwards 15,026 7,515
Insurance accruals 2,921 3,259
Pension/OPEB accruals 10,883 10,752
Other 4,881 9,260
---------- ---------
Total deferred tax assets 43,481 41,976
---------- ---------
Net deferred tax liabilities (18,283) (14,958)
Valuation allowance (5,891) (5,752)
---------- ---------
Total $ (24,174) $ (20,710)
==========- =========
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carryforward period. A valuation allowance is provided when it is more likely
than not that some portion of the deferred tax assets will not be realized. In
assessing the need for a valuation allowance, management considers the scheduled
reversal of the deferred tax liabilities, the level of historical taxable
income, and the projected future taxable income over the periods in which the
temporary differences comprising the deferred tax assets will be deductible.
During fiscal 2001, the Company recorded a valuation allowance in the amount of
$0.1 million. The valuation allowance was established for foreign net operating
losses and state tax credits generated during the fiscal year. During fiscal
2000, the Company recorded a valuation allowance in the amount of $4.3 million.
This valuation allowance was primarily established for state net operating
losses and credits generated during the year. As the Company cannot assure that
realization of the credits is more likely than not to occur, a valuation
allowance has been established.
During fiscal year 1999, the Company utilized the $5.5 million of net operating
loss carryforwards ($1.9 million of tax). The benefits for these net operating
losses had been recorded in previous years.
In January 1995, the Boards of Directors of Agrilink Foods and Pro-Fac approved
appropriate amendments to the Bylaws of Agrilink Foods to allow the Company to
qualify as a cooperative under Subchapter T of the Internal Revenue Code. In
August 1995, Agrilink Foods and Pro-Fac received a favorable ruling from the
Internal Revenue Service approving the change in tax treatment effective for
fiscal 1996. Subsequent to this date, a consolidated return has been filed
incorporating Agrilink Foods and Pro-Fac. Tax expense is allocated to Agrilink
Foods based on its operations.
NOTE 10. PENSIONS, PROFIT SHARING, AND OTHER EMPLOYEE BENEFITS
Pensions: The Company has primarily noncontributory defined-benefit plans
covering substantially all employees. The benefits for these plans are based
primarily on years of service and employees' pay near retirement. The Company's
funding policy is consistent with the funding requirements of Federal law and
regulations. Plan assets consist principally of common stocks, corporate bonds
and US government obligations. For purposes of this disclosure, all
defined-benefit pension plans have been combined.
The Company also participates in several union sponsored pension plans. It is
not possible to determine the Company's relative share of the accumulated
benefit obligations or net assets for these plans. Contributions to these plans
are paid when incurred and billed by the sponsoring union or plan.
The following table sets forth the changes in the plans' projected benefit
obligation and plan assets and the plans' funded status and amounts recognized
in the Company's financial statements at June 30, 2001 and June 24, 2000.
(Dollars in Thousands)
Pension Benefits
------------------------------------------
Fiscal Years Ended
------------------------------------------
June 30,2001 June 24, 2000
------------ -------------
Change in benefit obligation:
Benefit obligation at beginning of period $ 101,695 $ 110,833
Service cost 4,907 6,520
Interest cost 7,729 7,592
Plan participants' contributions 125 160
Plan amendments 0 2,296
Actuarial gain (3,122) (16,122)
Benefits paid (6,317) (9,584)
---------- ----------
Benefit obligation at end of period 105,017 101,695
---------- ----------
Change in plan assets:
Fair value of plan assets at beginning of period 111,956 108,183
Actual (loss)/return on plan assets (11,025) 12,941
Employer contribution 281 256
Plan participants' contributions 125 160
Benefits paid (6,317) (9,584)
---------- ----------
Fair value of plan assets at end of period 95,020 111,956
---------- ----------
Plan funded status (9,997) 10,261
Unrecognized prior service cost 1,987 2,181
Unrecognized actuarial gain (9,081) (29,217)
---------- ----------
Accrued benefit liability net of additional minimum pension liability $ (17,091) $ (16,775)
========== ==========
Amounts recognized in the statement of financial position:
Accrued benefit liability $ (17,664) $ (17,300)
Accumulated other comprehensive income - minimum pension liability 573 525
---------- ----------
Net amount recognized $ (17,091) $ (16,775)
========== ==========
Weighted-average assumptions:
Discount rate 7.8% 8.0%
Expected return on plan assets 9.5% 9.5%
Rate of compensation increase 4.5/3.0% 4.5%
Net periodic benefit cost in fiscal years 2001, 2000 and 1999 is comprised of
the following:
Pension Benefits
--------------------------------------------------
Fiscal Years Ended
--------------------------------------------------
June 30, 2001 June 24, 2000 June 26, 1999
------------- ------------- -------------
Components of net periodic benefit cost:
Service cost $ 4,907 $ 6,520 $ 4,727
Interest cost 7,729 7,592 6,953
Expected return on plan assets (10,424) (10,604) (10,528)
Amortization of prior service cost 193 (16) (15)
Amortization of gain (1,810) (51) (741)
------- -------- -------
Net periodic benefit cost - Company plans 595 3,441 396
Net periodic benefit cost - union plans 819 762 876
------- -------- -------
Total periodic benefit cost $ 1,414 $ 4,203 $ 1,272
======= ======== =======
The Company maintains a non-tax qualified Supplemental Executive Retirement Plan
("SERP") which provides additional retirement benefits to two prior executives
of the Company who retired prior to November 4, 1994. In December 2000, the
Company adopted an additional SERP to provide additional retirements benefits to
a current executive officer of the Company.
The Company maintains an Excess Benefit Retirement Plan which serves to provide
employees with the same retirement benefit they would have received from the
Company's retirement plan under the career average base pay formula, but for
changes required under the 1986 Tax Reform Act and the compensation limitation
under Section 401(a)(17) of the Internal Revenue Code having been revised in the
1992 Omnibus Budget Reform Act. This benefit plan was amended in December 2000.
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the four retirement plans with accumulated benefit
obligations in excess of plan assets were:
(Dollars in Thousands)
Master Salaried Excess Benefit Supplemental Executive Supplemental Executive
Retirement Plan Retirement Plan Retirement Plan No.1 Retirement Agreement No.2
Fiscal Years Ended Fiscal Years Ended Fiscal Years Ended Fiscal Years Ended
------------------- ------------------ ---------------------- -------------------------
6/30/01 6/24/00 6/30/01 6/24/00 6/30/01 6/24/00 6/30/01 6/24/00
-------- ------- ------- ------- ------ ------- ------- -------
Projected benefit obligation $38,234 N/A $1,089 $1,159 $1,716 $1,729 $353 N/A
Accumulated benefit obligation 32,527 N/A 879 834 1,716 1,729 $353 N/A
Plan assets 30,299 N/A 0 0 0 0 0 N/A
Postretirement Benefits Other Than Pensions: The Company sponsors benefit plans
that provide postretirement medical and life insurance benefits for certain
current and former employees. For the most part, current employees are not
eligible for the postretirement medical coverage. Generally, other than
pensions, the Company does not pay retirees' benefit costs. Various exceptions
exist, which have evolved from union negotiations, early retirement incentives
and existing retiree commitments from acquired companies.
The Company has not prefunded any of its retiree medical or life insurance
liabilities. Consequently there are no plan assets held in a trust, and there is
no expected long-term rate of return assumption for purposes of determining the
annual expense.
The following table sets forth the changes in the plans' projected benefit
obligation and plan assets and the plans' funded status and amounts recognized
in the Company's financial statements at June 30, 2001 and June 24, 2000.
(Dollars in Thousands)
Other Benefits
-----------------------------
Fiscal Years Ended
-----------------------------
June 30, 2001 June 24, 2000
------------- -------------
Change in benefit obligation:
Benefit obligation at beginning of period $ 5,658 $ 6,507
Service cost 170 184
Interest cost 429 433
Decrease due to sale 0 (295)
Plan amendments (891) 0
Actuarial loss/(gain) 1,578 (715)
Benefits paid (611) (456)
---------- ----------
Benefit obligation at end of period 6,333 5,658
---------- ----------
Change in plan assets:
Fair value of assets at beginning of period 0 0
Employer contribution 611 456
Benefits paid (611) (456)
---------- ----------
Fair value of assets at end of period 0 0
---------- ----------
Plan funded status: (6,333) (5,658)
Unrecognized prior service cost (892) 0
Unrecognized actuarial loss 2,276 717
---------- ----------
Accrued benefit liability (4,949) (4,941)
Amounts recognized in the statement of financial position:
Accrued benefit liability $ (4,949) $ (4,941)
========== ==========
Weighted-average assumptions:
Discount rate 7.8% 8.0%
Expected return on plan assets N/A N/A
Rate of compensation increase 3.0% 4.5%
Other Benefits
---------------------------------------------------
June 30, 2001 June 24, 2000 June 26, 1999
------------- ------------- -------------
Components of net periodic benefit cost:
Service cost $ 170 $ 184 $ 90
Interest cost 429 433 250
Amortization of loss 20 159 0
--------- -------- ---------
Net periodic benefit cost $ 619 $ 776 $ 340
========= ======== =========
For measurement purposes, an 8.0 percent rate of increase in the per capita cost
of covered health care benefits was assumed for fiscal 2001. The rate was
assumed to decrease gradually to 5.0 percent for 2007 and remain at that level
thereafter.
The assumed health care trend rates can have a significant effect on the amounts
reported for the postretirement benefits plan. A one-percentage point change in
the assumed health care trend rates would have the following effect:
1-Percentage 1-Percentage
Point Increase Point Decrease
Effect on total of service and interest cost components for fiscal 2001 $ 58 $ (51)
Effect on postretirement benefit obligation at June 30, 2001 $ 432 $ (379)
Agrilink Foods 401(k) Plan: Under the Agrilink Foods 401(k) Plan ("401(k)"), the
Company contributes matching contributions to the plan for the benefit of
employees who elect to defer a portion of their salary into the plan. During
fiscal 2001, 2000, and 1999, the Company allocated approximately $1.2 million,
$1.0 million, and $0.9 million, respectively, in the form of matching
contributions to the plan.
In addition, Agrilink Foods also maintains a Non- Qualified 401(k) Plan in which
the Company allocates matching contributions for the benefit of "highly
compensated employees" as defined under Section 414(q) of the Internal Revenue
Code. During fiscal 2001, 2000, and 1999, the Company allocated $0.3 million,
$0.2 million, and $0.2 million, respectively in the form of matching
contributions to this plan.
Long-Term Incentive Plan: The Company maintains a long-term incentive program,
the Agrilink Foods Equity Value Plan, which it amends from time to time. The
Equity Value Plan provides performance units to a select group of management.
The future value of the performance units is determined by the Company's
performance on earnings and debt repayment.
Units issued in 1996 through 1999 vest 25 percent each year after the first
anniversary of the grant, becoming 100 percent vested on the fourth anniversary
of grant. For units granted in 1996, the appreciated value of units in excess of
the initial grant price is paid as cash compensation on the tenth anniversary of
grant. The total units granted in 1996 were 248,511 at $13.38. For units granted
in 1997, 1998 and 1999, the final value of the performance units is determined
on the fourth anniversary of grant. One-third of the appreciated value of units
in excess of the initial grant price is paid as cash compensation over each of
the subsequent three years. The total units granted from 1997 through 1999 were
402,715 at $26.00 per unit in 1999, 308,628 at $21.88 per unit in 1998, and
176,278 at $25.04 per unit in 1997.
For units granted in 2001 and 2000, the final value of the performance units is
discretionary. Units granted in 2001 and 2000 vest 100 percent on the fourth
anniversary of grant. The total units granted in 2001 and 2000 were 400,000 and
371,806, respectively.
Units forfeited since the inception of the plan include 4,474 at $17.67; 13,205
at $26.00; 9,418 at $21.88; 18,362 at $25.04; and 27,165 at $13.38.
The value of the grants from the Agrilink Foods Equity Value Plan will be based
on the Company's future earnings and debt repayment.
NOTE 10. OPERATING SEGMENTS
The Company accounts for segments using Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise" (SFAS 131).
SFAS No. 131 establishes requirements for reporting information about operating
segments and establishes standards for related disclosures about products and
services, and geographic areas. SFAS No. 131 also replaces the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of reportable
segments. As management makes the majority of its operating decisions based upon
the Company's significant product lines, the Company has elected to utilize
significant product lines in determining its operating segments. The Company's
four primary operating segments are as follows: vegetables, fruits, snacks, and
canned meals.
The vegetable product line consists of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable
category include Birds Eye, Birds Eye Voila!, Birds Eye Simply Grillin',
Freshlike, Veg-All, McKenzies, and Brooks Chili Beans. The fruit product line
consists of canned and frozen fruits including fruit fillings and toppings.
Branded products within the fruit category include Comstock and Wilderness. The
snack product line consists of potato chips, popcorn and other corn-based snack
items. Branded products within the snacks category include Tim's Cascade Chips,
Snyder of Berlin, Husman, La Restaurante, Erin's, Beehive, Pops-Rite, Super Pop
and Flavor Destinations. The canned meal product line includes canned meat
products such as chilies, stew, and soups, and various other ready-to-eat
prepared meals. Branded products within the canned meals category include
Nalley. The Company's other product lines primarily represent salad dressings.
Branded products within the "other category" include Bernstein's and Nalley.
The following table illustrates the Company's operating segment information:
(Dollars in Millions) Fiscal Years Ended
---------------------------------------------------
June 30, 2001 June 24, 2000 June 26, 1999
------------- ------------- -------------
Net Sales:
Vegetables $ 970.2 $ 836.7 $ 769.5
Fruits 120.4 114.4 115.8
Snacks 97.9 90.9 91.4
Canned Meals 64.2 62.3 66.4
Other 50.6 56.0 74.8
-------- -------- --------
Continuing segments 1,303.3 1,160.3 1,117.9
Businesses sold1 0.0 72.0 144.0
-------- -------- --------
Total $1,303.3 $1,232.3 $1,261.9
======== ======== ========
Operating income:
Vegetables2 $ 55.7 $ 65.4 $ 43.9
Fruits 11.4 13.9 8.4
Snacks 5.6 6.7 3.3
Canned Meals 6.6 6.7 6.5
Other 1.9 4.6 3.7
-------- -------- --------
Continuing segments operating income 81.2 97.3 65.8
Businesses sold1 0.0 (1.2) 5.1
--------- -------- --------
Subtotal 81.2 96.1 70.9
Gains on sales of assets 0.0 6.6 64.7
Restructuring 0.0 0.0 (5.0)
-------- -------- --------
Operating income before dividing with Pro-Fac 81.2 102.7 130.6
Interest expense (79.8) (78.1) (65.3)
Amortization of debt issue costs associated with the Bridge Facility 0.0 0.0 (5.5)
-------- -------- --------
Pretax income before dividing with Pro-Fac and before extraordinary item $ 1.4 $ 24.6 $ 59.8
======== ======== ========
Total Assets:
Vegetables $ 846.5 $ 876.3 $ 885.2
Fruits 72.7 80.0 91.1
Snacks 47.6 44.0 41.5
Canned meals 45.7 45.9 46.7
Other 57.6 52.4 43.6
-------- -------- --------
Continuing segments 1,070.1 1,098.6 $1,108.1
Businesses sold1 0.0 0.0 1.1
Assets held for sale 0.1 0.3 0.9
-------- -------- --------
Total $1,070.2 $1,098.9 $1,110.1
======== ======== ========
Depreciation expense:
Vegetables $ 22.4 $ 22.3 $ 16.7
Fruits 2.6 1.7 2.3
Snacks 3.1 2.4 1.7
Canned meals 0.9 1.2 1.2
Other 1.7 1.2 1.0
-------- -------- --------
Continuing segments 30.7 28.8 22.9
Businesses sold1 0.0 1.5 0.9
-------- -------- --------
Total $ 30.7 $ 30.3 $ 23.8
======== ======== ========
Amortization Expense:
Vegetables $ 7.8 $ 6.1 $ 7.0
Fruits 0.1 0.1 0.1
Snacks 0.6 0.8 0.9
Canned meals 0.7 0.7 0.7
Other 0.7 0.7 0.6
-------- -------- --------
Continuing segments 9.9 8.4 9.3
Businesses sold1 0.0 0.4 0.1
-------- -------- --------
Total $ 9.9 $ 8.8 $ 9.4
======== ======== ========
(Dollars in Millions) Fiscal Years Ended
--------------------------------------------------
June 30, 2001 June 24, 2000 June 26, 1999
------------- ------------- -------------
Capital expenditures:
Vegetables $ 14.8 $ 19.8 $ 17.8
Fruits 2.7 1.6 1.3
Snacks 4.4 2.3 2.0
Canned meals 2.5 1.1 0.6
Other 0.7 0.2 0.3
--------- ------- -------
Continuing segments 25.1 25.0 22.0
Businesses sold 0.0 0.4 0.1
--------- ------- -------
Total $ 25.1 $ 25.4 $ 22.1
========= ======= =======
1 Includes activities of businesses sold. See NOTE 3 in the "Notes to
Consolidated Financial Statements."
2 The vegetable product line includes earnings derived from the Company's
investment in Great Lakes Kraut Company, LLC of $1.8 million, $2.4 million,
and $2.8 million in fiscal 2001, 2000, and 1999, respectively.
NOTE 12. SUBSIDIARY GUARANTORS
Kennedy Endeavors, Incorporated and Linden Oaks Corporation, wholly-owned
subsidiaries of the Company ("Subsidiary Guarantors") and Pro-Fac, have jointly
and severally, fully and unconditionally guaranteed, on a senior subordinated
basis, the obligations of the Company with respect to the Company's Senior
Subordinated Notes - 11-7/8 Percent (due 2008) and the Credit Facility. The
covenants in the Senior Subordinated Notes - 11-7/8 Percent (due 2008) and the
Credit Facility do not restrict the ability of the Subsidiary Guarantors to make
cash distributions to the Company.
Full financial statements of Pro-Fac are included as an Exhibit to this Form
10-K. Presented below is condensed consolidating financial information for (i)
Agrilink Foods and (ii) the Guarantor Subsidiaries as of June 30, 2001, June 24,
2000, and for the fiscal years ended June 30, 2001; June 24, 2000; and June 26,
1999. The condensed consolidating financial information has been presented to
show the nature of assets held, results of operations and cash flows of the
Company and Guarantor Subsidiaries in accordance with SEC Financial Reporting
Release No. 55.
Balance Sheet
June 30, 2001
---------------------------------------------------------------------------
Agrilink Guarantor Non-Guarantor Eliminating
Foods, Inc. Subsidiaries Subsidiaries Entries Consolidated
------------- ------------ ------------- ----------- ------------
(Dollars in Thousands)
Assets
Current assets:
Cash and cash equivalents $ 7,624 $ 21 $ 11 $ 0 $ 7,656
Accounts receivable, net 90,600 2,892 0 0 93,492
Inventories -
Finished goods 279,320 422 249 0 279,991
Raw materials and supplies 33,287 417 161 0 33,865
----------- ---------- ---------- ----------- -----------
Total inventories 312,607 839 410 0 313,856
Other current assets 52,729 (4,190) 208 0 48,747
----------- ---------- ---------- ----------- -----------
Total current assets 463,560 (438) 629 0 463,751
Property, plant and equipment, net 297,345 4,531 3,655 0 305,531
Goodwill and other intangible assets, net 53,552 195,225 0 0 248,777
Investment is Subsidiaries 308,207 0 0 (308,207) 0
Other assets 51,996 110,326 0 (110,110) 52,212
----------- ---------- ---------- ----------- -----------
Total assets $ 1,174,660 $ 309,644 $ 4,284 $ (418,317) $ 1,070,271
=========== ========== ========== =========== ===========
Liabilities and Shareholder's Equity
Current liabilities:
Current portion of long-term debt $ 15,599 $ 0 $ 0 $ 0 $ 15,599
Accounts payable 115,493 1,930 428 0 117,851
Accrued interest 9,253 0 0 0 9,253
Intercompany loans (1,697) 1,859 (162) 0 0
Other current liabilities 58,078 968 698 0 59,744
----------- ---------- ---------- ----------- -----------
Total current liabilities 196,726 4,757 964 0 202,447
Long-term debt 631,128 0 0 0 631,128
Other non-current liabilities 166,474 0 0 (110,110) 56,364
----------- ---------- ---------- ----------- -----------
Total liabilities 994,328 4,757 964 (110,110) 889,939
Shareholder's equity 180,332 304,887 3,320 (308,207) 180,332
----------- ---------- ---------- ----------- -----------
Total liabilities and shareholders' equity $ 1,174,660 $ 309,644 $ 4,284 $ (418,317) $ 1,070,271
=========== ========== ========== =========== ===========
Balance Sheet
June 24, 2000
-----------------------------------------------------------
Agrilink Guarantor Eliminating
Foods, Inc. Subsidiaries Entries Consolidated
------------- ------------ ----------- ------------
(Dollars in Thousands)
Assets
Current assets:
Cash and cash equivalents $ 4,785 $ 209 $ 0 $ 4,994
Accounts receivable, net 103,206 2,148 0 105,354
Inventories -
Finished goods 249,806 306 0 250,112
Raw materials and supplies 44,613 572 0 45,185
---------- -------- --------- ----------
Total inventories 294,419 878 0 295,297
Other current assets 60,789 23 0 60,812
----------- --------- -------- ----------
Total current assets 463,199 3,258 0 466,457
Property, plant and equipment, net 316,098 1,896 0 317,994
Goodwill and other intangible assets, net 49,434 209,111 0 258,545
Investment in subsidiairies 290,009 0 (290,009) 0
Other assets 55,791 82,670 (82,570) 55,891
---------- -------- --------- ----------
Total assets $1,174,531 $296,935 $(372,579) $1,098,887
========== ======== ========= ==========
Liabilities and Shareholder's Equity
Current liabilities:
Notes payable $ 5,700 $ 0 $ 0 $ 5,700
Current portion of long-term debt 16,583 0 0 16,583
Accounts payable 93,403 1,668 0 95,071
Accrued interest 11,398 0 0 11,398
Intercompany loans (75) 75 0 0
Other current liabilities 78,428 5,183 0 83,611
---------- --------- -------- ----------
Total current liabilities 205,437 6,926 0 212,363
Long-term debt 644,712 0 0 644,712
Other non-current liabilities 145,204 0 (82,570) 62,634
---------- -------- --------- ----------
Total liabilities 995,353 6,926 (82,570) 919,709
Shareholder's equity 179,178 290,009 (290,009) 179,178
---------- -------- --------- ----------
Total liabilities and shareholder's equity $1,174,531 $296,935 $(372,579) $1,098,887
========== ======== ========= ==========
Statement of Operations
June 30, 2001
---------------------------------------------------------------------------
Agrilink Guarantor Non-Guarantor Eliminating
Foods, Inc. Subsidiaries Subsidiaries Entries Consolidated
------------- ------------ ------------- ----------- ------------
(Dollars in Thousands)
Net sales $ 1,284,835 $ 18,476 $ 17,329 $ (17,329) $ 1,303,311
Cost of sales (918,055) (10,751) (16,461) 16,461 (928,806)
----------- ---------- ---------- --------- -----------
Gross profit 366,780 7,725 868 (868) 374,505
Other income 0 57,563 627 (58,190) 0
Selling, administrative, and general expenses (339,643) (12,966) 0 57,563 (295,046)
Income from joint venture 1,779 0 0 0 1,779
----------- ---------- ---------- --------- -----------
Operating income before dividing with Pro-Fac 28,916 52,322 1,495 (1,495) 81,238
Interest income/(expense) (89,812) 10,037 91 (91) (79,775)
----------- ---------- ---------- --------- -----------
Pretax (loss)/income before dividing with Pro-Fac (60,896) 62,359 1,586 (1,586) 1,463
Pro-Fac share of (loss)/income (732) 0 0 0 (732)
----------- ---------- ---------- --------- -----------
(Loss)/income before taxes (61,628) 62,359 1,586 (1,586) 731
Tax benefit/(provision) 22,178 (22,163) (675) 0 (660)
----------- ---------- ---------- --------- -----------
Net (loss)/income $ (39,450) $ 40,196 $ 911 $ (1,586) $ 71
=========== ========== ========== ========= ===========
Statement of Operations
Fiscal Year Ended June 24, 2000
-------------------------------------------------------------
Agrilink Guarantor Eliminating
Foods, Inc. Subsidiaries Entries Consolidated
------------- ------------ --------------- ------------
(Dollars in Thousands)
Net sales $ 1,217,110 $ 15,152 $ 0 $1,232,262
Cost of sales (848,814) (8,505) 0 (857,319)
----------- ---------- ---------- --------
Gross profit 368,296 6,647 0 374,943
Other income 0 59,461 (59,461) 0
Selling, administrative and general expenses (329,139) (11,608) 59,461 (281,286)
Income from joint venture 2,418 0 0 2,418
Gain on sale of assets 6,635 0 0 6,635
----------- ---------- ---------- ---------
Operating income before dividing with Pro-Fac 48,210 54,500 0 102,710
Interest income/(expense) (82,897) 4,843 0 (78,054)
----------- ---------- ---------- ---------
Pretax income before dividing with Pro-Fac (34,687) 59,343 0 24,656
Pro-Fac share of (loss)/income (12,328) 0 0 (12,328)
----------- ---------- ---------- ---------
(Loss)/income before income tax (47,015) 59,343 0 12,328
Tax benefit/(provision) 14,867 (20,771) 0 (5,904)
----------- ---------- ---------- ---------
Net (loss)/income $ (32,148) $ 38,572 $ 0 $ 6,424
=========== ========== ========== =========
Statement of Operations
Fiscal Year Ended June 26, 1999
-------------------------------------------------------------
Agrilink Guarantor Eliminating
Foods, Inc. Subsidiaries Entries Consolidated
----------- ------------- ----------- ------------
(Dollars in Thousands)
Net sales $ 1,248,854 $ 13,026 $ 0 $ 1,261,880
Cost of sales (896,613) (7,278) 0 (903,891)
----------- --------- --------- -----------
Gross profit 352,241 5,748 0 357,989
Other income 0 20,240 (20,240) 0
Selling, administrative and general expenses (304,321) (5,842) 20,240 (289,923)
Income from joint venture 2,787 0 0 2,787
Restructuring (5,000) 0 0 (5,000)
Gain on sale of assets 64,734 0 0 64,734
----------- --------- --------- -----------
Operating income before dividing with Pro-Fac 110,441 20,146 0 130,587
Interest income/(expense) (65,677) 338 0 (65,339)
Amortization of debt issue costs associated with bridge facility (5,500) 0 0 (5,500)
----------- --------- --------- ------------
Pretax income before dividing with Pro-Fac 39,264 20,484 0 59,748
Pro-Fac share of income (1,658) 0 0 (1,658)
----------- --------- --------- -----------
Income before taxes and extraordinary item 37,606 20,484 0 58,090
Tax provision (17,601) (7,169) 0 (24,770)
------------ --------- --------- -----------
Income before extraordinary item 20,005 13,315 0 33,320
Extraordinary item related to early
extinguishment of debt (net of tax) (16,366) 0 0 (16,366)
----------- --------- --------- -----------
Net income $ 3,639 $ 13,315 $ 0 $ 16,954
=========== ========= ========= ===========
Statement of Cash Flows
June 30, 2001
-------------------------------------------------------------------------
Agrilink Guarantor Non-Guarantor Eliminating
Foods, Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- ------------ ------------- ----------- ------------
(Dollars in Thousands)
Net Income $ (39,450) $ 40,196 $ 911 $ (1,586) $ 71
Adjustments to reconcile net income/(loss) to net
cash (used in)/provided by operating activities -
Amortization of goodwill and other intangible assets 2,803 7,057 0 0 9,860
Amortization of debt issue costs and amendment costs
and discount on subordinated promissory note 4,895 0 0 0 4,895
Interest in-kind on subordinated promissory note 2,069 0 0 0 2,069
Depreciation 29,831 572 303 0 30,706
Equity in undistributed earnings of CoBank (97) 0 0 0 (97)
Equity in undistributed earnings in joint venture (1,243) 0 0 0 (1,243)
Gain on sale of assets (362) 0 0 0 (362)
Provision for deferred taxes 3,464 0 0 0 3,464
Provision for losses on accounts receivable 560 50 0 0 610
Change in assets and liabilities:
Accounts receivable 12,022 (794) 24 0 11,252
Inventories (18,933) 39 335 0 (18,559)
Other assets 28,131 (61,456) 128 (27,540) (60,737)
Accounts payable and accrued interest (20,213) (262) (160) 0 (20,635)
Other liabilities 36,394 17,437 (1,069) 29,126 81,888
--------- --------- ------- ---------- -----------
Net cash provided by operating activities 39,871 2,839 472 0 43,182
Cash flows from investing activities:
Purchase of property, plant, and equipment (21,638) (3,027) (461) 0 (25,126)
Proceeds from disposals 5,797 0 0 0 5,797
Proceeds from investment in CoBank 4,259 0 0 0 4,259
--------- --------- ------- ---------- -----------
Net cash used in investing activities (11,582) (3,027) (461) 0 (15,070)
Cash flows from financing activities:
Net proceeds from short-term debt (5,700) 0 0 0 (5,700)
Payments on long-term debt (18,084) 0 0 0 (18,084)
Payments on capital leases (449) 0 0 0 (449)
Cash paid for debt issuance costs and amendments (1,730) 0 0 0 (1,730)
Capital contributions by Pro-Fac 513 0 0 0 513
--------- --------- ------- ---------- -----------
Net cash used in financing activities (25,450) 0 0 0 (25,450)
---------- --------- ------- ---------- ------------
Net change in cash and cash equivalents 2,839 (188) 11 0 2,662
Cash and cash equivalents at beginning of period 4,785 209 0 0 4,994
--------- --------- ------- ---------- -----------
Cash and cash equivalents at end of period $ 7,624 $ 21 $ 11 $ 0 $ 7,656
========= ========= ======= ========== ===========
Statement of Cash Flows
Fiscal Year Ended June 24, 2000
--------------------------------------------------------
Agrilink Guarantor Eliminating
Foods, Inc. Subsidiaries Entries Consolidated
(Dollars in Thousands) ----------- ------------ ---------- ------------
Net Income $ (32,148) $ 38,572 $ 0 $ 6,424
Adjustments to reconcile net income/(loss) to net
cash (used in)/provided by operating activities -
Gain on sale of assets (6,635) 0 0 (6,635)
Amortization of goodwill and other intangible assets 1,711 7,057 0 8,768
Amortization of debt issue costs and amendment costs and
discount on subordinated promissory note 4,318 0 0 4,318
Interest in-kind on subordinated promissory note 1,571 0 0 1,571
Depreciation 29,983 330 0 30,313
Equity in undistributed earnings of CoBank (102) 0 0 (102)
Equity in undistributed earnings of joint venture (96) 0 0 (96)
Provision for deferred taxes 9,000 0 0 9,000
Provision for losses on accounts receivable 191 10 0 201
Change in assets and liabilities:
Accounts receivable (14,356) (920) 0 (15,276)
Inventories (49,291) (432) 0 (49,723)
Other assets 1,571 (72,802) 42,806 (28,425)
Accounts payable and accrued interest (2,991) 369 0 (2,622)
Other liabilities 38,626 28,758 (42,806) 24,578
----------- --------- -------- ----------
Net cash (used in)/provided by operating activities (18,648) 942 0 (17,706)
Cash flows from investing activities:
Purchase of property, plant, and equipment (24,608) (820) 0 (25,428)
Proceeds from disposals 64,360 0 0 64,360
Proceeds from investment in CoBank 3,378 0 0 3,378
Cash paid for acquisitions (250) 0 0 (250)
------------ --------- -------- ----------
Net cash provided by/(used in) investing activities 42,880 (820) 0 42,060
Cash flows from financing activities:
Net proceeds from short-term debt (13,200) 0 0 (13,200)
Payments on long-term debt (18,470) 0 0 (18,470)
Payments on capital leases (238) 0 0 (238)
Cash paid for debt issuance costs and amendments (2,624) 0 0 (2,624)
Capital contributions by Pro-Fac 8,632 0 0 8,632
----------- --------- -------- ----------
Net cash used in financing activities (25,900) 0 0 (25,900)
------------ --------- -------- -----------
Net change in cash and cash equivalents (1,668) 122 0 (1,546)
Cash and cash equivalents at beginning of period 6,453 87 0 6,540
----------- --------- -------- ----------
Cash and cash equivalents at end of period $ 4,785 $ 209 $ 0 $ 4,994
=========== ========= ======== ==========
Statement of Cash Flows
Fiscal Year Ended June 26, 1999
--------------------------------------------------------
Agrilink Guarantor Eliminating
Foods, Inc. Subsidiaries Entries Consolidated
----------- ------------ ---------- ------------
(Dollars in Thousands)
Net Income $ 3,639 $ 13,315 $ 0 $ 16,954
Adjustments to reconcile net income to net
cash (used in)/provided by operating activities -
Extraordinary item relating to the early
extinguishment of debt (net of tax) 16,366 0 0 16,366
Gain on sales of assets (64,734) 0 0 (64,734)
Loss from disposal of asset held for resale 353 0 0 353
Amortization of goodwill and other intangibles 6,915 2,481 0 9,396
Amortization of debt issue costs and amendment costs and
discount on subordinated promissory note 7,678 0 0 7,678
Interest in-kind on subordinated promissory note 782 0 0 782
Depreciation 23,498 306 0 23,804
Equity in undistributed earnings of CoBank (520) 0 0 (520)
Equity in undistributed earnings of joint venture (95) 0 0 (95)
Provision for deferred taxes 9,742 0 0 9,742
Provision for losses on accounts receivable 198 10 0 208
Change in assets and liabilities:
Accounts receivable (2,296) 248 0 (2,048)
Inventories 33,152 26 0 33,178
Other assets (49,958) (1,957) (39,764) (91,679)
Accounts payable and accrued interest 27,550 325 0 27,875
Other liabilities (24,381) (14,552) 39,764 831
----------- --------- -------- ----------
Net cash (used in)/provided by operating activities (12,111) 202 0 (11,909)
Cash flows from investing activities:
Purchase of property, plant, and equipment (21,875) (189) 0 (22,064)
Proceeds from disposals 93,486 0 0 93,486
Proceeds from the sale of idle facilities 1,427 0 0 1,427
Proceeds from investment in CoBank 2,795 0 0 2,795
Cash paid for acquisitions (443,531) 0 0 (443,531)
----------- --------- -------- ----------
Net cash used in investing activities (367,698) (189) 0 (367,887)
Cash flows from financing activities:
Net proceeds from short-term debt 18,900 0 0 18,900
Proceeds from issuance of long-term debt 677,100 0 0 677,100
Payments on long-term debt (287,574) 0 0 (287,574)
Payments on capital leases (282) 0 0 (282)
Cash paid for debt issuance costs and amendments (19,354) 0 0 (19,354)
Dividends paid to Pro-Fac (7,500) 0 0 (7,500)
----------- --------- -------- ----------
Net cash provided by financing activities 381,290 0 0 381,290
----------- --------- -------- ----------
Net change in cash and cash equivalents 1,481 13 0 1,494
Cash and cash equivalents at beginning of period 4,972 74 0 5,046
----------- --------- -------- ----------
Cash and cash equivalents at end of period $ 6,453 $ 87 $ 0 $ 6,540
=========== ========= ======== ==========
NOTE 13. OTHER MATTERS
Transactions Between Agrilink Foods and AgriFrozen: Prior to February 2001,
Agrilink Foods purchased frozen vegetables from AgriFrozen Foods ("AgriFrozen").
AgriFrozen was a subsidiary of Pro-Fac. For fiscal 2001, the net sales amounted
to approximately $25.6 million.
Agrilink Foods purchased the frozen vegetable inventory of AgriFrozen and
entered into a related agreement for storage and converting the inventory to
finished goods effective January 28, 2001. Refer to NOTE 4 to the "Consolidated
Financial Statements" for further discussion of the transaction.
In addition, AgriFrozen maintained an administrative service agreement with
Agrilink Foods. Agrilink Foods provided certain management, consulting, and
administrative services. For the year ended June 30, 2001, AgriFrozen incurred
approximately $0.6 million in service fees related to the agreement. This
agreement was terminated on June 30, 2001.
Legal Matters: The Company is party to various litigation and claims arising in
the ordinary course of business. Management and legal counsel for the Company
are of the opinion that none of these legal actions will have a material effect
on the financial position of the Company.
Commitments: Agrilink Foods has also guaranteed an approximate $1.8 million loan
for the City of Montezuma to renovate a sewage treatment plant operated in
Montezuma on behalf of the City.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Management and Directors: Effective upon the acquisition of Agrilink Foods by
Pro-Fac, Pro-Fac established a management structure for the Company, providing
for a Board of Directors consisting of one management director, Pro-Fac
Directors and Disinterested Directors. The management and directors are listed
below. The Chairman of the Board is a Pro-Fac Director. The Company may in the
future expand the Board of Directors, but Pro-Fac has undertaken to cause the
Company to maintain a Board on which the number of Pro-Fac Directors does not
exceed the number of Disinterested Directors. The Senior Subordinated Notes -
11-7/8 Percent (due 2008) provide that there will be a Change of Control if, for
a period of 120 consecutive days, the number of Disinterested Directors on the
Board of Directors of the Company is less than the greater of (i) two and (ii)
the number of directors who are also directors, members or affiliates of
Pro-Fac. The Credit Facility provides that there will be a change of control if
the number of Pro-Fac directors exceeds the number of disinterested directors.
Set forth below is certain information concerning the individuals who serve as
directors and executive officers of the Company.
Year of
Name Birth Positions
- ------------------------------ ------- ----------------------------------------------------
Dennis M. Mullen(1) 1953 President and Chief Executive Officer and Director
Earl L. Powers 1944 Executive Vice President and Chief Financial Officer
Stephen R. Wright 1947 Executive Vice President - Agriculture and Secretary
Carl W. Caughran 1953 Executive Vice President - Operations
John R. Clark 1959 Executive Vice President - Logistics
Bernhard H. Frega 1951 Executive Vice President - Sales and Marketing
David M. Mehalick 1956 Vice President and General Counsel
Bruce R. Fox(2) 1947 Director and Chairman of the Board
Steven D. Koinzan(2) 1948 Director and Vice Chairman of the Board
Cornelius D. Harrington, Jr.(3) 1927 Director
Walter F. Payne(3) 1936 Director
James A. Pierson(3) 1937 Director
Paul E. Roe(2) 1939 Director
Frank M. Stotz(3) 1930 Director
(1) Management Director.
(2) Pro-Fac Director.
(3) Disinterested Director.
Dennis M. Mullen has been the President and Chief Executive Officer since
January 1998 and a Director of the Company since May 1996. He was Chief
Operating Officer from May 1996 to January 1998 and Executive Vice President
from January 1996 to May 1996. He had been President and Chief Executive Officer
of Curtice Burns Foods from March 1993 to May 1996. He was Senior Vice President
and Business Unit Manager Food Service of Curtice Burns Foods from 1991 to 1993,
and Senior Vice President-Custom Pack Sales for Nalley from 1990 to 1991. Prior
to employment with the Company, he was President and Chief Executive Officer of
Globe Products Company. He currently serves on the Board of Directors for
Grocery Manufacturers of America, National Food Processors Association, United
Way of Greater Rochester, American Heart Association-Genesee Valley Region, St.
Leo College, the Rochester Institute of Technology School of Food, Hotel and
Travel Management's National Advisory Board, and Chase Manhattan Bank's
Northeast Regional Advisory Board.
Earl L. Powers has been Executive Vice President and Chief Financial Officer
since February 1997. He was Vice President and Corporate Controller from March
1993 to February 1997, and Vice President Finance and Management Information
Systems, Curtice Burns Foods business unit of Agrilink Foods from 1991 to March
1993. Prior to joining Agrilink Foods, he was Controller of various Pillsbury
Company divisions 1987-1990 and various other executive management positions at
the Pillsbury Company 1976-1987. He currently serves on the Board of Directors
of Chase Manhattan Bank's Northeast Advisory Board.
David M. Mehalick joined Agrilink Foods May 1, 1999 as Vice President and
General Counsel. Prior to employment with Agrilink Foods, he practiced law in
the firm of Harris Beach & Wilcox from 1981 to 1999.
Carl W. Caughran has been Executive Vice President - Operations since 1999. He
has also served as President and CEO of Nalley Fine Foods from 1996-1999. Prior
to joining the Company, he held various executive positions at Borden Foods,
including Vice President/General Manager of both the Western Snack Group and
Eastern Snack Group.
Stephen R. Wright has been Executive Vice President since November 6, 1996. He
was Senior Vice President - Procurement of Agrilink Foods from November 1994 and
Vice President - Procurement for Agrilink Foods from 1990 to November, 1994,
having served as Director of Commodities and Administration Services for
Agrilink Foods from 1988 to 1990.
John R. Clark has been Executive Vice President - Logistics since 1999. He has
in excess of 20 years experience in logistics and supply chain management. Prior
positions include vice president/operations for Missouri Nebraska Express in
1984; executive vice president of operations for Dean Foods Transportation Co.
in 1989; and vice president logistics for Dean Foods Vegetable Company (DFVC) in
1992.
Bernhard H. Frega has been Executive Vice President - Sales and Marketing since
1999. He has over twenty-five years experience with Agrilink Foods, including
vice president roles for private label and consumer products for the Comstock
Michigan Fruit Division and was executive vice president and COO of Curtice
Burns from 1995 to 1999.
Bruce R. Fox has been a Director of the Company since the completion of the
Pro-Fac acquisition of Agrilink Foods and Chairman of the Board since 2000. He
has been a Director of Pro-Fac since 1974. He was Treasurer of Pro-Fac from 1984
until March 27, 1995, when he was elected President. He has been a member of
Pro-Fac since 1974. Mr. Fox is a fruit and vegetable grower (N.J. Fox & Sons,
Inc., Shelby, MI).
Cornelius D. Harrington, prior to his retirement, was President of the Bank of
New England-West in Springfield, MA or a predecessor to the Bank of New
England-West from 1978 to December 1990. He was Chief Executive Officer of the
Bank of New England-West from 1984 to December 1990. Until 1987, he served as
Chairman of the Board of Directors of BayState Medical Center in Springfield,
Massachusetts. He is a former Director of the Farm Credit Bank of Springfield.
Steven D. Koinzan has been a Director of the Company since the completion of the
Pro-Fac acquisition of Agrilink Foods and Vice Chairman of the board since 2000.
He has been a Director of Pro-Fac since 1983. He was Secretary of Pro-Fac from
March 1993 until March 27, 1995, when he was elected Treasurer. He has been a
member of Pro-Fac since 1979. Mr. Koinzan is a popcorn, field corn and soybean
farmer (Koinzan Farms; Norden, Nebraska).
Walter F. Payne has been a Director of the Company since January 1996. Mr. Payne
was President and Chief Executive Officer of Blue Diamond Growers from 1992
until 2001, when he retired. He held various positions at Blue Diamond Growers
between 1973 to 1992. Mr. Payne serves on the Boards of Directors of Healthnet
of California, Pacific Coast Building and Products, and Pride Industries. He is
currently Chairman of the California State Chamber of Commerce as well as the
Committee for Small Business and Agriculture for the Federal Reserve Western
District.
James A. Pierson was elected as a Director of the Company during fiscal 2001.
Mr. Pierson retired in 2001 from his position as President and Chief Operating
Officer of CoBank. He held various positions at Farm Credit Banks of
Springfield, Massachusetts between 1975 and 1994, including President and Chief
Executive Officer from 1987 to 1994. He is currently a member of the Bennett
Roundtable of the Farm Foundation and served as a Director of the Farm Credit
System Funding Corporation and the National Council of Farmer Cooperatives.
Paul E. Roe has been a Director of the Company since 2000. He has been a
Director of Pro-Fac since 1986 and a member of Pro-Fac since 1961. Mr. Roe is a
vegetable, grain and dry bean farmer (Roe Acres, Inc.; Bellona, New York).
Frank M. Stotz has been a Director of Agrilink Foods since the completion of the
Pro-Fac acquisition of Agrilink Foods. Mr. Stotz retired in 1994 from his
position as Senior Vice President - Finance of Bausch & Lomb Incorporated.
Before joining Bausch & Lomb in that capacity in 1991, Mr. Stotz was a partner
for 25 years with Price Waterhouse (now PricewaterhouseCoopers LLP).
Term of Office: All directors of the Company will hold office from the date of
election until the next annual meeting of the shareholder or until their
successors are duly elected and qualified. Each executive officer of the Company
will hold office from the date of election until his successor is elected or
appointed.
There are no family relationships between any Director, executive officer, or
any person nominated or chosen by the Company to become a Director or executive
officer.
Involvement in Certain Legal Proceedings: The following executive officers of
Agrilink Foods were previously officers of PF Acquisition II, Inc., a former
subsidiary of Pro-Fac: Dennis M. Mullen, Earl L. Powers, Stephen R. Wright, and
David M. Mehalick. On June 27, 2001, PF Acquisition II, Inc. filed a petition
under the federal bankruptcy laws.
ITEM 11. EXECUTIVE COMPENSATION
The following tables show the cash compensation and certain other components of
the compensation of the chief executive officer and four other most highly
compensated executive officers of the Company, earned during fiscal years ended
June 30, 2001, June 24, 2000, and June 26, 1999 (collectively, the "Named
Executive Officers").
Executive Compensation
Summary Compensation Table
RSIP/
Matching
Annual Contributions
Compensation1 Deferred
-------------------------- Profit
Name and Principal Position Year Salary Bonus2 Sharing
- --------------------------- ---- ----------- --------- -------------
Dennis M. Mullen 2001 $ 600,000 $ 0 $ 9,808
President and Chief Executive Officer and Director 2000 $ 525,000 $ 0 $ 3,173
1999 $ 500,000 $ 0 $ 4,241
Earl L. Powers 2001 $ 305,104 $ 0 $ 4,444
Executive Vice President Finance and Chief Financial Officer 2000 $ 283,854 $ 0 $ 4,125
1999 $ 260,096 $ 0 $ 5,124
David M. Mehalick3 2001 $ 253,067 $ 50,000 $ 7,289
Vice President and General Counsel 2000 $ 241,867 $ 0 $ 0
1999 $ 36,923 $ 0 $ 0
Carl W. Caughran 2001 $ 232,050 $ 0 $ 6,880
Executive Vice President - Operations 2000 $ 218,400 $ 0 $ 3,276
1999 $ 210,600 $ 0 $ 3,120
Stephen R. Wright 2001 $ 222,685 $ 0 $ 6,556
Executive Vice President - Agriculture and Secretary 2000 $ 212,160 $ 0 $ 3,120
1999 $ 205,999 $ 0 $ 3,762
1 No Named Executive Officer has received personal benefits during the period
in excess of the lesser of $50,000 or 10 percent of annual salary.
2 Pursuant to the Management Incentive Plan of the Company (the "Incentive
Plan"), additional compensation is paid if justified by the activities of the
officers and employees eligible under the Incentive Plan and by the earnings
of the Company and of Pro-Fac Cooperative, Inc. ("Pro-Fac").
3 Mr. Mehalick's employment with the Company began May 1, 1999.
Long-Term Incentive Plan - Awards in Last Fiscal Year
Estimated Future Payouts
Under Non-Stock Price Based Plans
(b) (c) ---------------------------------
Number of Shares Performance or Other (d) (e)
(a) Units or Other Period Until Maturation Threshold Target
Name Rights Granted (1) or Payout ($ or #) ($ or #)(2)
- ----------------- ------------------ ------------------------ --------- -----------
Dennis M. Mullen 91,977 6/27/2005 $0 $0
Earl L. Powers 34,180 6/27/2005 $0 $0
David M. Mehalick 27,840 6/27/2005 $0 $0
Carl Caughran 23,910 6/27/2005 $0 $0
Stephen R. Wright 22,449 6/27/2005 $0 $0
(1) On June 27, 2001, the Company issued performance units under the Agrilink
Foods Equity Value Plan ("EVP") to a select group of management. The future
value of the performance units is discretionary. The performance units vest
100 percent on the fourth anniversary of grant. One-third of the
appreciated value of units in excess of the initial grant price is paid as
cash compensation over the subsequent three years. The final value of the
2001 performance units is determined on the fourth anniversary of grant.
(2) The value of the June 27, 2001 grants from the Agrilink Foods Equity Value
Plan is discretionary. The beginning value of these performance units was
set at a level requiring improved earnings and debt-repayment performance.
The target payouts shown above are based on the value of the performance
units at fiscal 2001 earnings and debt levels and would yield no payout
from the plan at those levels. If future performance equals fiscal 2001
performance, no payouts will be made from the plan relative to the options
granted on June 27, 2001.
Retirement Plans: The Company's Master Salaried Retirement Plan (the "Pension
Plan") provides defined retirement benefits for its officers and all salaried
exempt and non-exempt personnel. The compensation upon which the pension
benefits are determined is included in the salary columns of the "Summary
Compensation Table."
For retirement before age 65, the annual benefits are reduced by an amount for
each year prior to age 65 at which such retirement occurs so that if retirement
occurs at age 55, the benefits are 70 percent of those payable at age 65.
The approximate number of years of Plan participation under the Company's
Pension Plan as of June 30, 2001, of the Executive Officers listed in the
Summary Compensation Table are as follows: Dennis M. Mullen-11, Earl L.
Powers-9, David M. Mehalick-1, Carl W. Caughran-4, and Stephen R. Wright-26.
The Company maintains an Excess Benefit Retirement Plan which serves to provide
employees with the same retirement benefit they would have received from the
Company's Master Salaried Retirement Plan under the career average base pay
formula, but for changes required under the 1986 Tax Reform Act and the
compensation limitation under Section 401(a)(17) of the Internal Revenue Code,
which was $150,000 on January 1, 1994, having been revised in the 1992 Omnibus
Budget Reform Act. This benefit plan was amended in December 2000.
In fiscal 2001, the Company adopted a non-tax qualified Supplemental Executive
Retirement Plan ("SERP") which provides additional retirement benefits to the
Company's Chief Executive Officer. The Company has not pre-funded this liability
at June 30, 2001. The projected and accumulated benefit obligation under the
plan at June 30, 2001 was $353,000.
The following table shows the estimated pension benefits payable to a covered
participant, at age 65, at the specified final average pay, and years of
credited service levels under the Company's Master Salaried Retirement Plan and
the Excess Benefit Retirement Plan.
Pension Plan Table
Years of Plan Participation
Final -------------------------------------------------------------
Average Pay 15 20 25 30 35
----------- ------------ --------- --------- --------- ---------
$ 125,000 $ 21,563 $ 28,750 $ 35,938 $ 43,125 $ 50,313
150,000 25,875 34,500 43,125 51,750 60,375
175,000 30,188 40,250 50,313 60,375 70,438
200,000 34,500 46,000 57,500 69,000 80,500
225,000 38,813 51,750 64,688 77,625 90,563
250,000 43,125 57,500 71,875 86,250 100,625
275,000 47,438 63,250 79,063 94,875 110,688
300,000 51,750 69,000 86,250 103,500 120,750
325,000 56,063 74,750 93,438 112,125 130,813
350,000 60,375 80,500 100,625 120,750 140,875
375,000 64,688 86,250 107,813 129,375 150,938
400,000 69,000 92,000 115,000 138,000 161,000
425,000 73,313 97,750 122,188 146,625 171,063
450,000 77,625 103,500 129,375 155,250 181,125
475,000 81,938 109,250 136,563 163,875 191,188
500,000 86,250 115,000 143,750 172,500 201,250
Termination Protection Provisions: Agrilink Foods has adopted a revised Salary
Continuation Agreement for Mr. Mullen on August 22, 2001, whereby, two years of
salary and benefits continuation will be provided if Mr. Mullen's employment is
involuntarily terminated for reasons other than for "cause" as such term is
defined in the Agreement.
Directors' Compensation: In fiscal 2001, non-employee directors as designated by
Pro-Fac received an annual stipend of $20,000 to $25,000 per year. The Pro-Fac
Chairman received an annual stipend of $40,000 per year. All other disinterested
directors, Messrs. Harrington, Payne, and Stotz received an annual rate of
$35,000. Directors received an additional $2,000 for committee chairmanships
when applicable. Effective during fiscal 2001, directors are no longer paid a
per-diem rate for meeting attendance. Mr. Pierson, who joined the Board of
Directors on June 28, 2001 received no payments in fiscal 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding capital stock of the Company is owned by Pro-Fac
Cooperative, Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management believes all transactions were on terms no less favorable to the
Company than could have been reached with unaffiliated third parties.
Borrowings by Pro-Fac: The Credit Facility and Senior Subordinated Notes -
11-7/8 Percent (due 2008) permit the Company to make demand loans to Pro-Fac for
working capital purposes in amounts not to exceed $40.0 million at any time,
each such loan to bear interest at a rate equal to the rate in effect on the
date of such loan under the Revolving Credit Facility. The loan balance is
required to be reduced to zero for a period of not less than 15 consecutive days
in each fiscal year. Except for the foregoing provision and except for Pro-Fac's
guarantee of the Senior Subordinated Notes - 11-7/8 Percent (due 2008) and the
Credit Facility, as long as Pro-Fac has the right to borrow under the Pro-Fac
Marketing and Facilitation Agreement, the Senior Subordinated Notes - 11-7/8
Percent (due 2008) do not permit Pro-Fac to incur any other indebtedness.
Equity Ownership in CoBank: As part of its lending arrangements with CoBank,
which is a cooperative, the Company has made investments in the bank. The
Company made these investments through (i) a capital purchase obligation equal
to a percentage, set annually based on the bank's capital needs, of its interest
paid to the bank and (ii) a patronage rebate on interest paid to the bank based
on the bank's earnings, which is paid in cash and capital certificates. As of
June 30, 2001, the amount of the Company's investment in the Bank was
approximately $14.7 million.
Purchase of Crops From Pro-Fac: Each of the members of Pro-Fac sells crops to
Pro-Fac pursuant to a general marketing agreement between such member and
Pro-Fac, which crops in turn are sold to the Company pursuant to the Pro-Fac
Marketing and Facilitation Agreement. During fiscal 2001, the following
directors and executive officers of Pro-Fac, directly or indirectly through
entities owned or controlled by such officers and directors, sold crops to
Pro-Fac and provided harvesting, trucking and waste removal services to Agrilink
Foods for the following aggregate amounts:
(Dollars in Thousands)
RELATIONSHIP GROSS PURCHASES
NAME TO PRO-FAC IN FISCAL 2001
- ------------------------ -------------------------------------------------------- -----------------------
(Dollars in Thousands)
Dale E. Burmeister........................... Director $ 446
Peter R. Call................................ Director $ 4,959
Glen Lee Chase............................... Director $ 213
Tom R. Croner................................ Director and Secretary $ 75
Kenneth A. Dahlstedt......................... Director $ 352
Robert DeBadts............................... Director $ 449
Bruce R. Fox*................................ Director and Chairman of the Board, President $ 1,405
Steven D. Koinzan*........................... Director and Vice Chairman of the Board, Vice President $ 215
Kenneth A. Mattingly......................... Director $ 2,000
Allan W. Overhiser........................... Director $ 50
Paul E. Roe*................................. Director $ 848
Darell Sarff................................. Director $ 65
* Bruce R. Fox, Steven D. Koinzan, and Paul E. Roe are directors of both
Pro-Fac and Agrilink Foods.
DIRECTORS AND OFFICERS LIABILITY INSURANCE
As authorized by New York law and in accordance with the policy of that state,
the Company has obtained insurance from Chubb Group Insurance insuring the
Company 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 Company. This
insurance has a term expiring on October 15, 2001, at an annual cost of
approximately $146,000. As of this date, no sums have been paid to any officers
or directors of the Company under this indemnification insurance contract.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
The Following Appear in ITEM 8 of This Report
ITEM Page
Agrilink Foods, Inc. and Consolidated Subsidiaries:
Management's Responsibility for Financial Statements.................................................................. 25
Report of Independent Accountants..................................................................................... 26
Consolidated Financial Statements:
Consolidated Statement of Operations, Accumulated Earnings/(Deficit), and Comprehensive Income
for the years ended June 30, 2001, June 24, 2000, and June 26, 1999............................................... 27
Consolidated Balance Sheets at June 30, 2001 and June 24, 2000...................................................... 28
Consolidated Statements of Cash Flows for the years ended June 30, 2001, June 24, 2000, and June 26, 1999........... 29
Notes to Consolidated Financial Statements.......................................................................... 31
(2) The following additional financial data are set forth herein:
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
Agrilink Foods, Inc.
Valuation and Qualifying Accounts
For the Three Fiscal Years Ended June 30, 2001
Fiscal Year Ended
---------------------------------------------
June 30, 2001 June 24, 2000 June 26, 1999
------------- ------------- -------------
Allowance for doubtful accounts
Balance at beginning of period $ 887,000 $ 1,202,000 $ 774,000
Additions charged to expense 610,000 201,000 208,000
Deductions (654,000) (516,000) (280,000)
Increase due to acquisition* 0 0 500,000
------------ ----------- -----------
Balance at end of period $ 843,000 $ 887,000 $ 1,202,000
============ =========== ===========
Inventory reserve**
Balance at beginning of period $ 1,106,000 $ 2,777,000 $ 391,000
Net change (648,000) (1,671,000) 290,000
Increase due to AgriFrozen inventory purchase**** 2,677,000 0 0
Increase due to acquisition* 0 0 2,096,000
------------ ----------- -----------
Balance at end of period $ 3,135,000 $ 1,106,000 $ 2,777,000
============ =========== ===========
Tax valuation allowance***
Balance at beginning of period $ 5,752,000 $ 1,409,000 $ 5,550,000
Net change 139,000 4,343,000 (4,141,000)
------------ ----------- -----------
Balance at end of period $ 5,891,000 $ 5,752,000 $ 1,409,000
============ =========== ===========
* Represents the balance acquired in conjunction with the DFVC Acquisition.
** Difference between FIFO cost and market applicable to inventories.
Reductions to the reserve in fiscal 2000 were recorded as related inventory
was disposed.
*** See further discussion regarding tax matters at NOTE 9 to the "Notes to
Consolidated Financial Statements."
**** See further discussion of this purchase at NOTE 4 to the "Notes to the
Consolidated Financial Statements."
Schedules other than those listed above are omitted because they are either
not applicable or not required, or the required information is shown in the
financial statements or the notes thereto.
(3) The following exhibits are filed herein or have been previously
filed with the Securities and Exchange Commission:
(b) Reports on Form 8-K:
On March 27, 2001, the Company filed a Form 8-K to report on financial
information presented to attendees at the Lehmann Brothers high-yield
bond leveraged loan conference.
(c) EXHIBITS:
Exhibit
Number Description
3.1 Certificate of Incorporation of the Company (filed as Exhibit 3.3
to the Company's Quarterly Report on Form 10-Q for the first
fiscal quarter ended September 27, 1997 and incorporated herein
by reference).
3.2 Certificate of Amendment to the Company's Certificate of
Incorporation (filed as Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended June 24, 2000 and
incorporation herein by reference).
3.3 Bylaws of the Company (filed as Exhibit 3.3 to the Company's
Annual Report on Form 10-K for the year ended June 24, 2000 and
incorporated herein by reference).
4.1 Indenture, dated as of November 18, 1998, between the Company,
the Guarantors named therein and IBJ Schroder Bank & Trust
Company, Inc., as Trustee (filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-4 filed January 5, 1999
(Registration No. 333-70143) and incorporated herein by
reference).
4.2 Form of 11-7/8% Senior Subordinated Notes due 2008 (filed as
Exhibit B, to Exhibit 4.1 to the Company's Registration Statement
on Form S-4 filed January 5, 1999 (Registration No. 333-70143)
and incorporated herein by reference).
4.3 Indenture, dated as of November 3, 1994, among PFAC, Pro-Fac and
IBJ Schroder Bank & Trust Company, as Trustee, as amended by
First Supplemental Indenture, dated as of November 3, 1994, each
with respect to the Company's 12.25% Senior Subordinated Notes
due 2005 (filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-4 filed November 17, 1994 (Registration No.
33-56517) and incorporated herein by reference).
4.4 Second Supplemental Indenture (amending the Indenture referenced
in Exhibit 4.3 herein) dated November 10, 1997 (filed as Exhibit
10.25 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 27, 1998 and incorporated herein by reference).
4.5 Third Supplemental Indenture (amending the Indenture referenced
in Exhibit 4.3 herein) dated September 24, 1998 (filed as Exhibit
10.26 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 26, 1999, and incorporated herein by reference).
10.1 Marketing and Facilitation Agreement, dated as of November 3,
1994, between Pro-Fac and the Company (filed as Exhibit 10.1 to
the Company's Registration Statement on Form S-4 filed November
17, 1994 (Registration No. 33-56517) and incorporated herein by
reference).
10.2 Amendment to Marketing and Facilitation Agreement between the
Company and Pro-Fac dated September 23, 1998 (filed as Exhibit
10.5 to the Company's Quarterly Report on Form 10-Q for the third
fiscal quarter ended March 27, 1999 and incorporated herein by
reference).
10.3 Management Incentive Plan, as amended (filed as Exhibit 10.2 to
the Company's Registration Statement on Form S-4 filed November
17, 1994 (Registration No. 33-56517) and incorporated herein by
reference).
10.4 Supplemental Executive Retirement Plan, as amended (filed as
Exhibit 10.3 to the Company's Registration Statement on Form S-4
filed November 17, 1994 (Registration No. 33-56517) and
incorporated herein by reference).
(c) EXHIBITS (Continued):
Exhibit
Number Description
10.5 Master Salaried Retirement Plan, as amended (filed as Exhibit
10.5 to the Company's Registration Statement on Form S-4 filed
November 17, 1994 (Registration No. 33-56517) and incorporated
herein by reference).
10.6 Non-Qualified Profit Sharing Plan, as amended (filed as Exhibit
10.6 to the Company's Registration Statement on Form S-4 filed
November 17, 1994 (Registration No. 33-56517) and incorporated
herein by reference).
10.7 Second Amendment to Non-Qualified Profit Sharing Plan (filed as
Exhibit 10.14 to Pro-Fac's Registration Statement on Form S-1
filed June 15, 1995 (Registration No. 33-60273) and incorporated
herein by reference).
10.8 Agrilink Equity Value Plan adopted June 24, 1996 (filed as
Exhibit 10.17 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 29, 1996 and incorporated herein by
reference).
10.9 Raw Product Supply Agreement with Seneca Foods Corporation (filed
as Exhibit 10.22 to the Company's Annual Report on Form 10-K for
the fiscal year ended June 28, 1997 and incorporated herein by
reference).
10.10 Reciprocal Co-Pack Agreement with Seneca Foods Corporation
(filed as Exhibit 10.23 to the Company's Annual Report on Form
10-K for the fiscal year ended June 28, 1997 and incorporated
herein by reference).
10.11 Credit Agreement among the Company, Pro-Fac Cooperative, Inc.,
and Harris Trust and Savings Bank, and Bank of Montreal, Chicago
Branch, and the Lenders from time to time party hereto, dated as
of September 23, 1998 (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the first fiscal quarter ended
September 26, 1998 and incorporated herein by reference).
10.12 Subordinated Promissory Note of the Company to Dean Foods
Company, dated as of September 23, 1998 (filed as Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q for the first fiscal
quarter ended September 26, 1998 and incorporated herein by
reference).
10.13 First Amendment to the Credit Agreement referenced in Exhibit
10.11 herein (filed as Exhibit 10.1 to the Company's Amended
Quarterly Report on Form 10-Q/A for the first fiscal quarter
ended September 25, 1999 and incorporated herein by reference).
10.14 Second Amendment to the Credit Agreement referenced in Exhibit
10.11 herein (filed as Exhibit 10.2 to the Company's Amended
Quarterly Report on Form 10-Q/A for the first fiscal quarter
ended September 25, 1999 and incorporated herein by reference).
10.15 Third Amendment to the Credit Agreement referenced in Exhibit
10.11 herein (filed as Exhibit 10.3 to the Company's Amended
Quarterly Report on Form 10-Q/A for the first fiscal quarter
ended September 25, 1999 and incorporated herein by reference).
10.16 Fourth Amendment to the Credit Agreement referenced in Exhibit
10.11 herein (filed as Exhibit 10.4 to the Company's Amended
Quarterly Report on Form 10-Q/A for the first fiscal quarter
ended September 25, 1999 and incorporated herein by reference).
10.17 Fifth Amendment to the Credit Agreement referenced in Exhibit
10.11 herein (filed as Exhibit 10.5 to the Company's Amended
Quarterly Report on Form 10-Q/A for the first fiscal quarter
ended September 25, 1999 and incorporated herein by reference).
10.18 Service Agreement between the Company and PF Acquisition II,
Inc., dated as of February 22, 1999 (filed as Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the third fiscal
quarter ended March 27, 1999 and incorporated herein by
reference).
10.19 Sixth Amendment to the Credit Agreement referenced in Exhibit
10.11 herein (filed as Exhibit 10.1 to the Company's quarterly
report on Form 10-Q for the first quarter ended September 23,
2000, and incorporated herein by reference).
(c) EXHIBITS (Continued):
Exhibit
Number Description
10.20 Excess Benefit Retirement Plan, as amended (filed as Exhibit
10.27 to the Company's quarterly report on Form 10-Q for the
second quarter ended December 23, 2000, and incorporated herein
by reference).
10.21 Supplemental Executive Retirement Agreement (filed as Exhibit
10.28 to the Company's quarterly report on Form 10-Q for the
second quarter ended December 23, 2000, and incorporated herein
by reference).
10.22 Service Agreement By and Between Agrilink Foods and PF
Acquisition II, Inc. (filed as Exhibit 10.29 to the Company's
quarterly report on Form 10-Q for the third quarter ended March
23, 2001, and incorporated herein by reference).
10.23 Bill of Sale Agreement By and Between Agrilink Foods, Inc. and
CoBank, ACB (filed as Exhibit 10.30 to the Company's quarterly
report on Form 10-Q for the third quarter ended March 23, 2001,
and incorporated herein by reference).
10.24 Salary Continuation Agreement - Dennis Mullen (filed herewith).
10.25 Seventh Amendment to the Credit Agreement referenced in Exhibit
10.11 herein (filed herewith).
18 Accountant's Report Regarding Change in Accounting Method (filed
as Exhibit 18 to the Company's Quarterly Report on Form 10-Q for
the first fiscal quarter ended September 28, 1996 and
incorporated herein by reference).
21 List of Subsidiaries (filed as Exhibit 21.1 to the Company's
Annual Report on Form 10-K for the year ended June 24, 2000 and
incorporated herein by reference).
24 Power of Attorney (included on page 68 of this Report).
99 Pro-Fac Cooperative, Inc. Audited Financial Statements for the
fiscal year ended June 30, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AGRILINK FOODS, INC.
Date: September 10, 2001 By:/s/ Earl L. Powers
------------------ ----------------------------------------
Earl L. Powers
Executive Vice President Finance and
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Earl L. Powers, his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or any of them, or their or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Bruce R. Fox Chairman of the Board and Director September 10, 2001
- ---------------------------------------------------------- ------------------
(BRUCE R. FOX)
/s/ Steven D. Koinzan Vice Chairman of the Board and Director September 10, 2001
- ---------------------------------------------------------- ------------------
(STEVEN D. KOINZAN)
/s/ Cornelius D. Harrington Director September 10, 2001
- ---------------------------------------------------------- ------------------
(CORNELIUS D. HARRINGTON)
/s/ Walter F. Payne Director September 10, 2001
- ---------------------------------------------------------- ------------------
(WALTER F. PAYNE)
/s/ James A. Pierson Director September 10, 2001
- ---------------------------------------------------------- ------------------
(JAMES PIERSON)
/s/ Paul E. Roe Director September 10, 2001
- ---------------------------------------------------------- ------------------
(PAUL E. ROE)
/s/ Frank M. Stotz Director September 10, 2001
- ---------------------------------------------------------- ------------------
(FRANK M. STOTZ)
/s/ Dennis M. Mullen President and Chief Executive Officer September 10, 2001
- ---------------------------------------------------------- and Director ------------------
(DENNIS M. MULLEN) (Principal Executive Officer)
/s/ Earl L. Powers Executive Vice President Finance and September 10, 2001
- ---------------------------------------------------------- Chief Financial Officer ------------------
(EARL L. POWERS) (Principal Financial Officer
and Principal Accounting Officer)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
NO ANNUAL REPORT OR PROXY MATERIAL HAS BEEN SENT TO REGISTRANT'S SHAREHOLDERS,
AND NO PROXY MATERIAL IS INTENDED TO BE SENT. AN ANNUAL REPORT IS INTENDED TO BE
SENT.