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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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Form 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-20539
PRO-FAC COOPERATIVE, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 16-6036816
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
90 Linden Place, PO Box 30682, Rochester, NY 14603-0682
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (585) 383-1850
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by checkmark whether the Registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
YES NO X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. As of November 2, 2002.
Common Stock - 1,939,273
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Page 1 of 20 Pages
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Pro-Fac Cooperative, Inc.
Consolidated Statements of Operations, Net Proceeds
and Comprehensive Income/(Loss)
(Unaudited)
(Dollars in Thousands)
Quarter Ended
----------------------------------
September 28, September 29,
2002 2001
------------- -------------
Net sales $103,726 $ 249,232
Cost of sales (80,644) (203,362)
-------- ---------
Gross profit 23,082 45,870
Loss from Agrilink Holdings LLC (for the period August 19, 2002
to September 28, 2002) (343) 0
Gain from sale of Agrilink Foods, Inc. 4,861 0
Gain from sale of Agrilink Foods, Inc. related to Termination Agreement 4,000 0
Selling, administrative, and general expense (for the period August 19, 2002
to September 28, 2002) (573) 0
Selling, administrative, and general expense (15,468) (32,839)
Gain from pension curtailment 0 2,472
Other income 277 248
Restructuring 0 (1,050)
-------- ---------
Operating income 15,836 14,701
Interest income 3 0
Interest expense (7,747) (19,213)
-------- ---------
Income/(loss) before taxes, dividends, and allocation of net proceeds 8,092 (4,512)
Tax provision (for the period August 19, 2002 to September 28, 2002) (859) 0
Tax (provision)/benefit (59) 1,784
-------- ---------
Net income/(loss) $ 7,174 $ (2,728)
======== =========
Allocation of net proceeds:
Net income/(loss) $ 7,174 $ (2,728)
Dividends on common and preferred stock (2,453) (2,509)
-------- ---------
Net proceeds/(deficit) 4,721 (5,237)
Allocation (to)/from accumulated deficit (4,721) 5,237
-------- ---------
Net proceeds available to members $ 0 $ 0
======== =========
Estimated allocation of net proceeds available to members:
Payable to members currently $ 0 $ 0
Allocated to members but retained by the Cooperative:
Qualified retains 0 0
-------- ---------
Net proceeds available to members $ 0 $ 0
======== =========
Net income/(loss) $ 7,174 $ (2,728)
Other comprehensive income:
Unrealized loss on hedging activity (net of taxes) 0 (440)
-------- ---------
Comprehensive income/(loss) $ 7,174 $ (3,168)
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
2
Pro-Fac Cooperative, Inc.
Consolidated Balance Sheets
(Unaudited)
(Dollars in Thousands) ASSETS September 28, June 29,
2002 2002
------------ ---------
Current assets:
Cash and cash equivalents $ 1,345 $ 14,686
Accounts receivable, trade and other, net 0 76,000
Accounts receivable from Agrilink Foods, Inc. 14,152 0
Current portion of Transitional Services receivable from Agrilink Foods, Inc. 525 0
Inventories, net 0 294,315
Current investment in CoBank 0 3,347
Prepaid expenses and other current assets 121 37,938
Current deferred tax asset 0 2,923
--------- ---------
Total current assets 16,143 429,209
Transitional Services receivable from Agrilink Foods, Inc. 464 0
Investment in Agrilink Holdings LLC 28,412 0
Investment in CoBank 59 6,294
Investment in and advances to joint venture 0 14,586
Property, plant, and equipment, net 0 288,120
Goodwill 0 56,210
Other intangible assets, net 0 11,305
Non-current deferred tax asset 0 4,837
Other assets 0 26,109
--------- ---------
Total assets $ 45,078 $ 836,670
========= =========
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION
Current liabilities:
Current portion of long-term debt and
obligations under capital leases $ 0 $ 15,737
Accounts payable 1,032 71,262
Income taxes payable 859 879
Accrued interest 0 6,255
Other accrued expenses 0 48,150
Amounts due members 14,091 15,379
--------- ---------
Total current liabilities 15,982 157,662
Obligations under capital leases 0 2,528
Long-term debt 0 623,057
Other non-current liabilities 0 28,918
--------- ---------
Total liabilities 15,982 812,165
--------- ---------
Commitments and contingencies
Class B cumulative redeemable preferred stock; liquidation preference
$10 per share; authorized - 500,000 shares; issued and
outstanding 20,643 shares 206 206
Common stock, par value $5, authorized - 5,000,000 shares; issued and
outstanding 1,939,273 and 2,038,553, respectively 9,696 10,193
Shareholders' and members' capitalization:
Retained earnings allocated to members 17,050 17,050
Non-cumulative preferred stock, par value $25, authorized
5,000,000 shares; issued and outstanding 29,847 shares 746 746
Class A cumulative preferred stock, liquidation preference $25 per share,
authorized 10,000,000 shares; issued and
outstanding 4,497,904 shares 112,448 112,448
Special membership interests 21,733 0
Accumulated deficit (132,783) (115,771)
Accumulated other comprehensive income:
Unrealized gain/(loss) on hedging activity 0 206
Minimum pension liability adjustment 0 (573)
--------- ---------
Total shareholders' and members' capitalization 19,194 14,106
--------- ---------
Total liabilities and capitalization $ 45,078 $ 836,670
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
Pro-Fac Cooperative, Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
Quarter Ended
-----------------------------
September 28, September 29,
2002 2001
----------- -----------
Cash Flows from Operating Activities:
Net income/(loss) $ 7,174 $ (2,728)
Adjustments to reconcile net income/(loss) to net cash used in operating activities:
Amortization of goodwill and other intangible assets 0 296
Amortization of debt issue costs, amendment costs, and
discount on subordinated promissory notes 0 1,355
Depreciation 0 7,663
Gain from sale of Agrilink Foods, Inc. (4,861) 0
Loss from Agrilink Holdings LLC. (for the period August 19, 2002 to September 28, 2002) 343 0
Equity in undistributed earnings of joint venture 0 (205)
Change in assets and liabilities:
Accounts receivable 0 (22,235)
Inventories and prepaid manufacturing expense 0 (82,910)
Income taxes payable 859 329
Accounts payable and other accrued expenses 969 (23,488)
Amounts due members 0 3,718
Other assets and liabilities, net (69) (508)
-------- ---------
Net cash provided by/(used in) operating activities 4,415 (118,713)
-------- ---------
Cash flows from Investing Activities:
Purchase of property, plant and equipment 0 (3,516)
Proceeds from disposals of property, plant, and equipment 0 20
Proceeds from investment in CoBank 0 1,333
Advances to joint venture 0 (1,106)
Cash and changes in assets and liabilities of deconsolidated entity -
Agrilink Foods, Inc. (14,771) 0
-------- ---------
Net cash used in investing activities (14,771) (3,269)
-------- ---------
Cash Flows from Financing Activities:
Net proceeds from issuance of short-term debt 0 130,900
Payments on long-term debt 0 (2,998)
Cash paid in conjunction with debt amendment 0 (1,694)
Repurchases of common stock, net (497) (1,285)
Cash dividends paid (2,488) (2,509)
-------- ---------
Net cash (used in)/provided by financing activities (2,985) 122,414
-------- ---------
Net change in cash and cash equivalents (13,341) 432
Cash and cash equivalents at beginning of period 14,686 7,656
-------- ---------
Cash and cash equivalents at end of period $ 1,345 $ 8,088
======== =========
Supplemental schedule of non-cash Investing Activities
Pro-Fac received a 40.72 percent common equity
ownership in Agrilink Holdings LLC $ 31,400
========
The accompanying notes are an integral part of these consolidated financial
statements.
4
PRO-FAC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Pro-Fac Cooperative, Inc. ("Pro-Fac" or the
"Cooperative") is a New York agricultural cooperative corporation which markets
crops grown by its members. Agrilink Foods, Inc. ("Agrilink Foods"), until
August 18, 2002, was a wholly-owned subsidiary of Pro-Fac. Prior to August 19,
2002, the results of the Cooperative were consolidated with Agrilink Foods. The
consolidated financial statements were after elimination of intercompany
transactions and balances. Subsequent to August 18, 2002, Pro-Fac no longer
reports its financial statements on a consolidated basis with Agrilink Foods and
accounts for its investment in Agrilink Holdings LLC (as that entity is
described below in this NOTE 1) under the equity method of accounting. Full
financial statements as filed or to be filed by Agrilink Foods are included as
an Exhibit to this Form 10-Q and are hereby incorporated into this filing. See
the detailed description of the August 19, 2002 transaction below.
The operating activity of Pro-Fac for periods prior to August 19, 2002 reflects
products sold through Agrilink Foods' four primary product lines consisting of:
vegetables, fruits, snacks, and canned meals. The majority of each of the
product lines' net sales was within the United States. In addition, all of
Agrilink Foods' operating facilities, excluding one in Mexico, were within the
United States.
Prior to August 19, 2002, the Cooperative also conducted business under the name
of Agrilink. In addition, the board of directors of Agrilink Foods and Pro-Fac
conducted joint meetings, coordinated their activities, and acted on a
consolidated basis.
The Transaction: On August 19, 2002 (the "Closing Date"), pursuant to the terms
of the Unit Purchase Agreement dated as of June 20, 2002 (the "Unit Purchase
Agreement"), by and among Pro-Fac, Agrilink Foods, at the time a New York
corporation and a wholly-owned subsidiary of Pro-Fac, and Vestar/Agrilink
Holdings LLC, a Delaware limited liability company ("Vestar/Agrilink Holdings"):
(i) Pro-Fac contributed to the capital of Agrilink Holdings LLC, a Delaware
limited liability company ("Holdings LLC"), all of the shares of Agrilink
Foods' common stock owned by Pro-Fac, constituting 100 percent of the
issued and outstanding shares of Agrilink Foods' capital stock, in
consideration for Class B common units of Holdings LLC, representing a
40.72 percent common equity ownership; and
(ii) Vestar/Agrilink Holdings and certain co-investors (collectively, "Vestar")
contributed cash in the aggregate amount of $175.0 million to the capital
of Holdings LLC, in consideration for preferred units, Class A common
units, and warrants which were immediately exercised to acquire additional
Class A common units. After exercising the warrants, Vestar owns 56.24
percent of the common equity of Holdings LLC. The co-investors are either
under common control with, or have delivered an unconditional voting proxy
to, Vestar/Agrilink Holdings.
The transactions contemplated in and consummated pursuant to the Unit Purchase
Agreement, are referred to herein collectively as the "Transaction."
Immediately following Pro-Fac's contribution of its shares of Agrilink Foods'
common stock to Holdings LLC, Holdings LLC contributed those shares to Agrilink
Holdings Inc. ("Holdings Inc."), a Delaware corporation and a direct,
wholly-owned subsidiary of Holdings LLC, and Agrilink Foods became an indirect,
wholly-owned subsidiary of Holdings LLC. As a result of the Transaction, Pro-Fac
owns 40.72 percent and Vestar owns 56.24 percent of the common equity securities
of Holdings LLC. The Class A common units entitle the owner thereof - Vestar -
to two votes for each Class A common unit held. All other Holdings LLC common
units entitle the holder(s) thereof to one vote for each common unit held.
Accordingly, Vestar has a voting majority of all common units.
As part of the Transaction, Stephen R. Wright, the general manager and secretary
of Pro-Fac, together with executive officers of Agrilink Foods, and certain
other members of Agrilink Foods' management, entered into subscription
agreements with Holdings LLC to acquire (using a combination of cash and
promissory notes issued to Holdings LLC) an aggregate of approximately $1.3
million of Class C common units and Class D common units of Holdings LLC,
representing approximately 3.04 percent of the common equity ownership. As of
the Closing Date, an additional approximately $0.5 million of Class C common
units and Class D common units, representing less than 1 percent of the common
equity ownership, remained unissued.
5
Prior to the Transaction, certain amounts owed by Pro-Fac to Agrilink Foods were
forgiven. The amounts forgiven were approximately $36.5 million and represented
both borrowings for the working capital needs of Pro-Fac and a $9.4 million
demand payable. After adjusting for the amounts forgiven, Pro-Fac's investment
in Agrilink Foods prior to the Transaction was approximately $24.9 million. The
value of the Cooperative's 40.72 percent common equity ownership in Holdings LLC
is estimated at $31.4 million. In addition, Pro-Fac and Agrilink entered into a
transitional services agreement. The estimated value of services to be received
by Pro-Fac under the agreement of approximately $1.0 million, has been reflected
as additional proceeds from the Transaction. Accordingly, the Cooperative
recognized a gain of approximately $4.9 million upon the completion of the
Transaction.
See NOTE 2 to the "Notes to Consolidated Financial Statements" for additional
disclosures regarding agreements with Agrilink Foods.
Basis of Presentation: The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information required by GAAP
for complete financial statement presentation. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations have been included. Operating
results for the quarter ended September 28, 2002 are not necessarily
indicative of the results to be expected for other interim periods or the
full year. These financial statements should be read in conjunction with the
financial statements and accompanying notes contained in the Pro-Fac
Cooperative, Inc. Form 10-K for the fiscal year ended June 29, 2002.
New Accounting Pronouncements: In August 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standard
("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets." Effective June 30, 2002, the Cooperative adopted SFAS No. 144 which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The statement requires an impairment loss be recognized if
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flow and that the impairment loss be recognized as the
difference between the carrying amount and fair value of the asset. Under SFAS
No. 144, assets held for sale that are a component of an entity will be included
in discontinued operations if the operations and cash flows will be or have been
eliminated from the ongoing operations of the entity, and the entity will not
have any significant continuing involvement in the operations prospectively. The
adoption of SFAS No. 144 did not have a significant affect on the operations of
the Cooperative.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supersedes
Emerging Issues Task Force ("EITF) Issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. EITF 94-3 required a liability for
exit costs be recognized at the date of an entity's commitment to an exit plan.
The provisions of SFAS No. 146 must be adopted for exit or disposal activities
that are initiated after December 31, 2002.
NOTE 2. AGREEMENTS WITH AGRILINK FOODS
In connection with the Transaction, Agrilink Foods and Pro-Fac entered into
several agreements effective as of the Closing Date, including the following:
Termination Agreement: Pro-Fac and Agrilink Foods entered into a letter
agreement dated as of the Closing Date (the "Termination Agreement"), pursuant
to which, among other things, the marketing and facilitation agreement between
Pro-Fac and Agrilink Foods (the "Marketing and Facilitation Agreement") which,
until the Closing Date, governed the crop supply and purchase relationship
between Agrilink Foods and Pro-Fac, has been terminated. In consideration of
such termination, Agrilink Foods will pay Pro-Fac a termination fee of $10.0
million per year for five years, provided that certain ongoing conditions are
met, including maintaining grower membership levels sufficient to generate
certain minimum crop supply. The $10.0 million payment will be paid in quarterly
installments to the Cooperative as follows: $4.0 million on each July 1, and
$2.0 million each on October 1, January 1, and April 1. The Termination
Agreement provided that the first payment in the amount of $4.0 million was to
be paid on the Closing Date and the next payment made by October 1, 2002 and
quarterly thereafter as outlined in the agreement. The Cooperative therefore
received $4.0 million from Agrilink Foods on August 19, 2002 and $2.0 million on
October 1, 2002.
Amended and Restated Marketing and Facilitation Agreement: Pro-Fac and Agrilink
Foods entered into an amended and restated marketing and facilitation agreement
dated as of the Closing Date (the "Amended and Restated Marketing and
Facilitation
6
Agreement"). The Amended and Restated Marketing and Facilitation Agreement
supersedes and replaces the Marketing and Facilitation Agreement and provides
that, among other things, Pro-Fac will be Agrilink Foods' preferred supplier of
crops. Agrilink Foods will also continue to pay Pro-Fac the commercial market
value ("CMV") for all crops supplied by Pro-Fac, in installments corresponding
to the dates of payment by Pro-Fac to its members for crops delivered. 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
relationship. The processes for determining CMV under the Amended and Restated
Marketing and Facilitation Agreement are substantially the same as the processes
used under the Marketing and Facilitation Agreement. Agrilink Foods will make
payments to Pro-Fac of an estimated CMV for a particular crop year, subject to
adjustments to reflect the actual CMV following the end of such year. Commodity
committees of Pro-Fac will meet with Agrilink Foods management to establish CMV
guidelines, review calculations, and report to a joint CMV committee of Pro-Fac
and Agrilink Foods. Amounts received by Pro-Fac from Agrilink Foods for the CMV
for all crops delivered for the three months ended September 28, 2002 and
September 29, 2001 were $40.0 million and $52.2 million, respectively. As of
September 28, 2002, the Cooperative owed $14.1 million to its members for crops
delivered. A consistent amount was owed to the Cooperative by Agrilink Foods.
Under the provision of EITF 99-19, "Reporting Revenue Gross as a Principal
Versus Net as an Agent," the Cooperative records activity between Agrilink
Foods, itself, and its members on a net basis.
Unlike the Marketing and Facilitation Agreement, the Amended and Restated
Marketing and Facilitation Agreement does not permit Agrilink Foods to offset
its losses from products supplied by Pro-Fac or require it to share with Pro-Fac
its profits and it does not require Pro-Fac to reinvest in Agrilink Foods any
part of Pro-Fac's patronage income. Historically, under the Marketing and
Facilitation Agreement, in any year in which Agrilink Foods had earnings on
products which were processed from crops supplied by Pro-Fac ("Pro-Fac
Products"), Agrilink Foods paid 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 Agrilink Foods (before dividing with Pro-Fac). In years in which
Agrilink Foods had losses on Pro-Fac Products, Agrilink Foods reduced 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 Agrilink Foods (before dividing
with Pro-Fac). Additional patronage income was 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. Under the Marketing and Facilitation
Agreement, earnings and losses were determined at the end of the fiscal year,
but were accrued on an estimated basis during the year. Pro-Fac's share of loss
was $2.3 million for the first quarter ended September 29, 2001. Pro-Fac was
also required to reinvest at least 70 percent of the additional patronage income
in Agrilink Foods. Since Pro-Fac's acquisition of Agrilink Foods in 1994,
Pro-Fac had invested an additional $50.8 million in Agrilink Foods prior to
August 19, 2002.
The Amended and Restated Marketing and Facilitation Agreement also provides that
Agrilink Foods will continue to provide to Pro-Fac services relating to
planning, consulting, sourcing and harvesting crops from Pro-Fac members in a
manner consistent with past practices. In addition, for a period of five years
from the Closing Date, Agrilink Foods may provide Pro-Fac with services related
to the expansion of the market for the agricultural products of Pro-Fac members
(at no cost to Pro-Fac other than reimbursement of Agrilink Foods' incremental
and out-of-pocket expenses related to providing such services as agreed to by
Pro-Fac and Agrilink Foods).
Under the Amended and Restated Marketing and Facilitation Agreement, Agrilink
Foods determines the amount of crops which Agrilink Foods will acquire from
Pro-Fac for each crop year. If the amount to be purchased by Agrilink Foods
during a particular crop year does not meet (i) a defined crop amount and (ii) a
defined target percentage of Agrilink Foods' needs for each particular crop,
then certain shortfall payments will be made by Agrilink Foods to Pro-Fac. The
defined crop amounts and targeted percentages are set based upon the needs of
Agrilink Foods in the 2001 crop year (fiscal 2002). The shortfall payment
provisions of the agreement include a maximum shortfall payment, determined for
each crop, that can be paid over the term of the Amended and Restated Marketing
and Facilitation Agreement. The aggregate shortfall payment amounts for all
crops covered under the agreement cannot exceed $20.0 million over the term of
the agreement.
The Amended and Restated Marketing and Facilitation Agreement may be terminated
by Agrilink Foods in connection with certain change in control transactions
affecting Agrilink Foods or Holdings, Inc.; provided, however, that in the event
that any such change in control occurs during the first three years after the
Closing Date, Agrilink Foods must pay to Pro-Fac a termination fee of $20.0
million (less the total amount of any shortfall payments previously paid to
Pro-Fac under the Amended and Restated Marketing and Facilitation Agreement).
Also, if, during the first three years after the Closing Date, Agrilink Foods
sells one or more portions of its business, and if the purchaser does not
continue to purchase the crops previously purchased by Agrilink Foods with
respect to the transferred business, then such failure will be taken into
consideration when determining if Agrilink Foods is required to make any
shortfall payments to Pro-Fac. After such three-year period, Agrilink Foods may
sell portions of its business and the volumes of crop purchases previously made
by Agrilink Foods with respect to such transferred business will be disregarded
for purposes of determining shortfall payments.
7
Transitional Services Agreement: Pro-Fac and Agrilink Foods entered into a
transitional services agreement (the "Transitional Services Agreement") dated as
of the Closing Date, pursuant to which Agrilink Foods will provide Pro-Fac
certain administrative and other services for a period of 24 months from the
Closing Date. Agrilink Foods will generally provide such services at no charge
to Pro-Fac, other than reimbursement of the incremental and out-of-pocket costs
associated with performing those services for Pro-Fac. Pursuant to the
Transitional Services Agreement, the general manager of Pro-Fac may also be an
employee of Agrilink Foods, in which case he will report to the chief executive
officer of Agrilink Foods with respect to his duties for Agrilink Foods, and to
the Pro-Fac board of directors with respect to duties performed by him for
Pro-Fac. All other individuals performing services under the Transitional
Services Agreement report to the Chief Executive Officer (or other
representatives) of Agrilink Foods. Stephen R. Wright, the General Manager and
Secretary of Pro-Fac, is also an employee of Agrilink Foods. As an employee of
Agrilink Foods, Mr. Wright's salary is paid by Agrilink Foods.
Pro-Fac has recorded the estimated value of these services, $1.0 million, as
services receivable and proceeds from the Transaction. This amount will be
amortized to expense over the term of the Transitional Services Agreement.
NOTE 3. INVENTORIES
Prior to August 19, 2002, the results of the Cooperative were consolidated with
its then wholly-owned subsidiary, Agrilink Foods.
The major classes of inventories of Agrilink Foods at June 29, 2002 are as
follows:
(Dollars in Thousands)
June 29,
2002
--------
Finished goods $266,469
Raw materials and supplies 27,846
--------
Total inventories $294,315
========
NOTE 4. ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addressed financial accounting and reporting for acquired
goodwill and other intangible assets, and is effective for fiscal years
beginning after December 15, 2001, with early adoption permitted for entities
with fiscal years beginning after March 15, 2001. Effective July 1, 2001,
Agrilink Foods, a then wholly-owned subsidiary of Pro-Fac, adopted SFAS No. 142,
which requires that goodwill not be amortized, but instead be tested at least
annually for impairment and expensed against earnings when its implied fair
value is less than its carrying amount.
During the quarter ended June 29, 2002, Agrilink Foods identified certain
indicators of possible impairment of its goodwill. The main indicators of
impairment included the recent deterioration of general economic conditions,
lower valuations resulting from current market declines, modest category
declines in segments in which Agrilink Foods operates, and the completion of the
terms of the Transaction with Pro-Fac and Vestar/Agrilink Holdings. These
factors indicated an erosion in the market value of Agrilink Foods since the
adoption of SFAS No. 142.
As outlined under SFAS No. 142, the impairment test adhered to was a two-step
process. The first step was a review as to whether there was an indication that
goodwill was impaired. To do this, Agrilink Foods identified its reporting units
and determined the carrying value of each by assigning Agrilink Foods' assets
and liabilities, including existing goodwill. Agrilink Foods then determined the
fair value of each reporting unit by using a combination of comparable food
industry trading and transaction multiples, including the implied multiple in
the Transaction with Pro-Fac and Vestar/Agrilink Holdings.
In the second step, Agrilink Foods compared the implied fair value of the
goodwill to its carrying value to measure the amount of the impairment.
In the fourth quarter of fiscal 2002, Agrilink Foods recorded a
one-time, pretax, non-cash charge of approximately $179.0 million to reduce the
carrying value of its goodwill. The tax benefit associated with this non-cash
charge was approximately $41.5 million.
8
As outlined in SFAS No. 142, certain intangibles with a finite life, however,
are required to continue to be amortized. The following schedule sets forth the
major classes of intangible assets of Agrilink Foods at June 29, 2002:
(Dollars in Thousands)
June 29,
2002
--------
Amortized intangibles:
Covenants not to compete $ 2,478
Other 12,000
Less: accumulated amortization (3,173)
-------
Intangible assets, net $11,305
=======
The aggregate amortization expense associated with intangible assets for the
first quarter ended September 29, 2001 was approximately $0.3 million.
NOTE 5. DEBT
Credit Agreement: Agrilink Foods and Pro-Fac have entered into a Credit
Agreement, dated August 19, 2002 (the "Credit Agreement"), pursuant to which
Agrilink Foods has agreed to make available to Pro-Fac loans in an aggregate
principal amount of up to $5.0 million (the "Credit Facility "). Pro-Fac is
permitted to draw up to $1.0 million per year under the Credit Facility, unless
Agrilink Foods is prohibited from making such advances under the terms of
certain third party indebtedness of Agrilink Foods. Amounts not drawn in a year
will not be carried forward. The amount of the Credit Facility will be reduced,
on a dollar-for-dollar basis, to the extent of certain distributions made by
Holdings LLC to Pro-Fac in respect of its ownership in Holdings LLC. Pro-Fac has
pledged all of its Class B common units in Holdings LLC as security for advances
under the Credit Facility. Advances outstanding under the Credit Agreement bear
interest at 10 percent per annum. There were no amounts outstanding under this
Credit Agreement at September 28, 2002.
Summary of Long-Term Debt at June 29, 2002: Prior to August 19, 2002, the
results of the Cooperative were consolidated with its then wholly-owned
subsidiary, Agrilink Foods.
The summary of long-term debt of Agrilink Foods at June 29, 2002 is as follows:
(Dollars in Thousands)
June 29,
2002
--------
Term Loan Facility $400,800
Senior Subordinated Notes 200,015
Subordinated Promissory Notes (net of discount) 32,696
Other 4,462
--------
Total debt 637,973
Less current portion (14,916)
--------
Total long-term debt $623,057
========
In conjunction with the Transaction, on August 19, 2002, proceeds received from
Vestar, along with the net proceeds from Agrilink Foods' new senior secured
credit facility, were utilized to retire all existing indebtedness under the
Agrilink Foods Harris Credit Facility, including the Term Loan Facility.
Pro-Fac guarantees certain obligations of Agrilink Foods. Following is a
schedule of obligations at September 28, 2002 that are guaranteed by the
Cooperative.
9
(Dollars in Millions)
Amounts
Contractual Obligations Guaranteed Committed Expiration
- ---------------------------------- --------- ----------
Senior Subordinated Notes - 11 7/8 Percent $200.0 November 2008
Subordinated Promissory Note 33.7 November 2008
NOTE 6: SPECIAL MEMBERSHIP INTERESTS
In conjunction with the Transaction, the Pro-Fac board of directors determined
that it was in the best interests of Pro-Fac and its members to make certain
changes to the Cooperative's certificate of incorporation and bylaws. Included
in these changes was the creation of Pro-Fac special membership interests. The
aggregate amount of special membership interest allocated is equal to Pro-Fac's
earned surplus as of June 29, 2002, calculated in a manner consistent with the
past custom and practice of Pro-Fac and ignoring only effects of the non-cash
impairment charge recorded in the fourth quarter of fiscal 2002.
The special membership interests were allocated to the current and former
members of Pro-Fac that made patronage deliveries to or on behalf of Pro-Fac in
the six fiscal years ending June 29, 2002, in proportion to the patronage
deliveries made by those members in each case during that six fiscal year
period. The purpose of the allocation of the special membership interests was to
preserve for members and former members at the Closing Date the book
appreciation in value of their indirect investment in Agrilink Foods.
NOTE 7: OPERATING SEGMENTS
Prior to August 19, 2002, the results of the Cooperative were consolidated with
its then wholly-owned subsidiary, Agrilink Foods.
Subsequent to August 19, 2002, the Cooperative operates in one segment, the
marketing of crops grown by its members.
Agrilink Foods accounted 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 established standards for related disclosures about products and
services, and geographic areas. As management of Agrilink Foods made the
majority of its operating decisions based upon Agrilink Foods' significant
product lines, Agrilink Foods elected to utilize significant product lines in
determining its operating segments. Agrilink Foods' four primary operating
segments were as follows: vegetables, fruits, snacks, and canned meals.
The vegetable product line consisted of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable
category included Birds Eye, Birds Eye Voila!, Birds Eye Simply Grillin', Birds
Eye Hearty Spoonfuls, Freshlike, Veg-All, McKenzies, and Brooks Chili Beans. The
fruit product line consisted of canned and frozen fruits including fruit
fillings and toppings. Branded products within the fruit category included
Comstock and Wilderness. The snack product line consisted of potato chips,
popcorn and other corn-based snack items. Branded products within the snacks
category included Tim's Cascade Chips, Snyder of Berlin, Husman, La Restaurante,
Erin's, Beehive, Pops-Rite, Super Pop, and Flavor Destinations. The canned meal
product line included canned meat products such as chilies, stew, and soups, and
various other ready-to-eat prepared meals. Branded products within the canned
meals category included Nalley. Other product lines primarily represent salad
dressings. Branded products within the "other category" included Bernstein's and
Nalley.
The following table illustrates the operating segment information of Agrilink
Foods for the first quarter ended September 29, 2001:
(Dollars in Millions)
Quarter Ended
September 29,
2001
-------------
Net Sales:
Vegetables $176.5
Fruits 28.3
Snacks 22.4
Canned Meals 12.4
Other 9.6
------
Total $249.2
======
10
(Dollars in Millions)
Quarter Ended
September 29,
2001
-------------
Operating income:
Vegetables $ 4.5
Fruits 4.2
Snacks 1.5
Canned Meals 2.2
Other 0.9
------
Continuing segments 13.3
Gain from pension curtailment 2.5
Restructuring (1.1)
------
Total consolidated operating income 14.7
Interest expense (19.2)
------
Loss before taxes, dividends, and allocation of net proceeds $ (4.5)
======
NOTE 8. OTHER MATTERS
Prior to August 19, 2002, the results of the Cooperative were consolidated with
its then wholly-owned subsidiary, Agrilink Foods.
Gain from Pension Curtailment: During September 2001, Agrilink Foods made the
decision to freeze benefits provided under its Master Salaried Retirement Plan.
Under the provisions of SFAS No. 88, "Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
these benefit changes resulted in the recognition of a $2.5 million net
curtailment gain.
Legal Matters:
Blue Line Farms Matter: On September 25, 2001, in the circuit court of Multnomah
County, Oregon, Blue Line Farms commenced a class action suit against Pro-Fac
Cooperative, Inc., Agrilink Foods, Inc., Mr. Mike Shelby, and "Does" 1-50,
representing directors, officers, and agents of the corporate defendants. The
complaint alleges (i) fraud in operating PF Acquisition II, Inc., a former
subsidiary of Pro-Fac that conducted business under the name AgriFrozen Foods
("AgriFrozen"); (ii) breach of fiduciary duty in operating AgriFrozen; (iii)
negligent misrepresentation in operating AgriFrozen; (iv) breach of contract
against Pro-Fac; (v) breach of good faith and fair dealing against Pro-Fac; (vi)
conversion against Pro-Fac and Agrilink; (vii) intentional interference with a
contract against Agrilink Foods; and (viii) statutory Oregon securities law
violations against Pro-Fac and separately against Mr. Shelby. The complaint has
since been amended to eliminate "Does" 1-50 as parties. The matter is currently
pending in federal district court in Oregon pending a decision by the federal
district court as to whether the matter should be remanded to the state circuit
court.
The relief sought includes (i) a demand for an accounting; (ii) injunctive
relief to compel the disclosure of documents; (iii) certification of the class;
(iv) damages of $50.0 million; (v) prejudgment and post-judgment interest; and
(vi) an award of costs and expenses including expert fees and attorney's fees.
Management believes this case is without merit and intends to defend vigorously
its position.
Seifer Trust Matter: On January 29, 2001, in the circuit court of Marion
Country, Oregon, various growers, whose crops were processed at AgriFrozen
facilities, commenced an action against Pro-Fac, Agrilink Foods, and various
other third parties (generally lessors who leased equipment to AgriFrozen). The
suit seeks the establishment of a priority lien in the amount of approximately
$3.5 million in favor of the plaintiff under an Oregon statute granting
agricultural producers such a priority in certain circumstances. Approximately
130 growers have joined in the suit as plaintiffs. The complaint does not
specifically seek damages from Pro-Fac, but its allegations are similar in large
part to the breach of contract claims alleged in the Blue Line Farms Matter. The
Seifer Trust Matter is currently pending before the bankruptcy court in Eugene,
Oregon. Management believes this lawsuit is without merit and intends to defend
vigorously its position.
GE Capital Matter: On October 17, 2001, in the supreme court of New York County,
New York, General Electric Capital Corporation commenced an action against
Pro-Fac Cooperative, Inc. and Agrilink Foods, Inc. The complaint relates to an
equipment lease entered into between AgriFrozen and the plaintiff's
predecessor-in-interest, and alleges that AgriFrozen, by failing to make
11
payments under the lease, breached its contract with the plaintiff. The
complaint further alleges that Pro-Fac and Agrilink Foods are liable to the
plaintiff for that breach because (i) there was an overlap of ownership of the
corporations, (ii) AgriFrozen was inadequately capitalized, and (iii) Pro-Fac
and Agrilink Foods were guarantors of AgriFrozen's payment obligations under the
Lease.
The relief sought includes $850,000 in compensatory damages as well as punitive
damages based on Pro-Fac's and Agrilink Foods' alleged fraudulent
misrepresentations during the lease negotiations. Management believes this
matter is without merit and intends to defend vigorously its position with
respect to this matter.
Kenyon Zero Storage Matter: On August 27, 2001, in the U.S. District Court for
the Eastern District of Washington, Kenyon Zero Storage, Inc. commenced an
action against Pro-Fac and certain other parties. The complaint relates to a
20-year lease of a vegetable plant located in Grandview, Washington, between
AgriFrozen and the plaintiff, and alleges breach of the lease. Pro-Fac has been
sued on a theory of corporate disregard.
The relief sought includes $11,340,000 in compensatory damages, calculated as
the base rental of $756,000 per year for the 15 years remaining on the lease.
Additionally, plaintiff has asserted claims against American Casualty Company of
Reading, Pennsylvania ("American Casualty"), the issuer of a lease performance
bond, in the amount of $772,746. If American Casualty is held liable under the
performance bond, it will have a direct right of reimbursement from Pro-Fac and
Agrilink Foods.
The Unit Purchase Agreement entered into as part of the Transaction contains
indemnification provisions concerning certain AgriFrozen-related litigation of
Agrilink Foods. These provisions address the sharing of defense costs, as well
as judgment and settlement costs, between Agrilink Foods and Pro-Fac. As to the
Blue Line Farms Matter and the Seifer Trust Matter, Agrilink Foods has agreed to
bear responsibility for the first $300,000 of defense costs on an annual basis.
In addition, Agrilink Foods has agreed to bear responsibility for one-half of
defense costs in excess of $300,000 and for one-half of judgment and settlement
costs, subject to an aggregate cap of $3.0 million after which Pro-Fac is
responsible for all costs. Pro-Fac retained sole responsibility for costs
(including defense, settlement, and judgment costs) associated with the GE
Capital Matter and the Kenyon Zero Storage Matter both described above.
In addition, the Cooperative is party to various other legal proceedings from
time to time in the normal course of its business. In the opinion of management,
any liability that might be incurred upon the resolution of these proceedings
will not, in the aggregate, have a material adverse effect on the Cooperative's
business, financial condition, and results of operations. Further, no such
proceedings are known to be contemplated by any governmental authorities. The
Cooperative maintains general liability insurance coverage in amounts deemed to
be adequate by the board of directors.
Dividends: Subsequent to quarter end, the Cooperative declared a cash dividend
of $.43 per share on the Class A Cumulative Preferred Stock. These dividends
approximate $1.9 million and were paid on October 30, 2002.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, Pro-Fac makes oral and written statements that may constitute
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995 (the "PSLRA") or by the Securities and Exchange Commission
("SEC") in its rules, regulations, and releases. The Cooperative desires to take
advantage of the "safe harbor" provisions in the PSLRA for forward-looking
statements made from time to time, including, but not limited to, the
forward-looking information contained in the Management's Discussion and
Analysis of Financial Condition and Results of Operations and other statements
made in this Form 10-Q and in other filings with the SEC.
The Cooperative cautions readers that any such forward-looking statements made
by or on behalf of the Cooperative are based on management's current
expectations and beliefs but are not guarantees of future performance. Actual
results could differ materially from those expressed or implied in the
forward-looking statements. Among the factors that could impact the Cooperative
include:
o the impact of weather on the volume and quality of raw product;
o the impact of strong competition in the food industry, including
competitive pricing;
o the impact of changes in consumer demand;
12
o the continuation of Agrilink Foods' success in integrating operations
(including the realization of anticipated synergies in operations and the
timing of any such synergies), success with new product introductions,
effectiveness of marketing and shifts in market demand, and the
availability of acquisition and alliance opportunities;
o interest rate fluctuations;
o the Cooperative's ability to service debt;
o risks associated with the Cooperative's contractual relationship with
Agrilink Foods, including the possibility of a reduced demand for crops
produced by Pro-Fac members, the availability and sufficiency of shortfall
payments, and the potential consequences of a termination of that
relationship; and
o the ability of the Cooperative to operate its business using the resources
made available under the Transitional Services Agreement with Agrilink
Foods and following the expiration of that agreement.
ITEM 2. 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 Unaudited Consolidated Statement of Operations, Net Proceeds, and
Comprehensive Income in the first quarter of fiscal 2003 versus such periods in
fiscal 2002.
From June 30, 2002 until August 18, 2002, Agrilink Foods was a wholly owned
subsidiary of Pro-Fac. Agrilink Foods operates through four primary products
lines, consisting of vegetable, fruits, snacks and canned meals. The majority of
each of the product lines' net sales was within the United States and, with the
exception of one facility in Mexico, all of Agrilink Foods' facilities are
located in the United States. Through August 18, 2002, the results of Pro-Fac
were consolidated with Agrilink Foods. The consolidated financial statements
were after elimination of intercompany transactions and balances. The following
summarizes the activity of Agrilink Foods for the period June 30, 2002 through
August 18, 2002:
June 30, 2002 -
(Dollars in Thousands) August 18, 2002
---------------
Net sales $103,726
Cost of sales (80,644)
--------
Gross profit 23,082
Selling, administrative, and general expense (15,468)
Other income 277
--------
Operating income 7,891
Interest expense (7,747)
--------
Income before taxes, dividends, and allocation of net proceeds 144
Tax provision (59)
--------
Net income $ 85
========
As a result of the Transaction, described in NOTE 1 of the "Notes to
Consolidated Financial Statements," the results of operations for the
approximately seven weeks outlined above are not comparable with those of the
first quarter of fiscal 2002.
The following is a discussion of the remaining components included in the
results of operations of Pro-Fac for its first quarter of fiscal 2003. Pro-Fac
now operates in one segment, the marketing of crops grown by its members.
Loss from Agrilink Holdings LLC (for the period August 19, 2002 to September 28,
2002): Subsequent to August 18, 2002, Pro-Fac no longer reports its financial
statements on a consolidated basis with Agrilink Foods and accounts for its
investment in Agrilink Holdings LLC under the equity method of accounting. For
the period August 19, 2002 to September 28, 2002, the Cooperative recognized a
loss of $343,000 from Agrilink Holdings LLC.
13
Gain from sale of Agrilink Foods, Inc.: On August 19, 2002, the Cooperative
contributed to the capital of Agrilink Holdings LLC all of the shares of
Agrilink Foods' common stock owned by Pro-Fac in exchange for Class B common
units of Agrilink Holdings LLC representing a 40.72 percent interest.
Pro-Fac's investment in Agrilink Foods prior to the Transaction was
approximately $24.9 million. This amount reflects the forgiveness by Agrilink
Foods of approximately $36.5 million which represented both borrowings for the
working capital needs of Pro-Fac and a $9.4 million demand payable. The value of
the Cooperative's 40.72 percent common equity ownership in Holdings LLC is
estimated at $31.4 million. In addition, Pro-Fac and Agrilink entered into the
Transitional Services Agreement described in NOTE 2 of the "Notes to
Consolidated Financial Statements." The estimated value of services to be
received by Pro-Fac under the agreement, of approximately $1.0 million,
has been reflected as additional proceeds from the Transaction. The Cooperative
recognized a gain of $4.9 million recognized upon the completion of the
Transaction.
Gain from sale of Agrilink Foods, Inc. related to Termination Agreement: Pro-Fac
and Agrilink Foods entered into a letter agreement dated as of the Closing Date
(the "Termination Agreement"), pursuant to which, among other things, the
Marketing and Facilitation Agreement was terminated, and in consideration of
such termination, Pro-Fac will receive a termination fee of $10.0 million per
year for five years, provided that certain ongoing conditions are met, including
maintaining grower membership levels sufficient to generate certain minimum crop
supply. The $10.0 million payment will be paid in quarterly installments to the
Cooperative as follows: $4.0 million on each July 1, and $2.0 million each
October 1, January 1, and April 1. The Termination Agreement provided that the
first payment in the amount of $4.0 million was to be paid on the Closing Date
and the next payment made by October 1, 2002 and quarterly thereafter as
outlined in the agreement. The Cooperative therefore received $4.0 million from
Agrilink Foods on August 19, 2002 and $2.0 million on October 1, 2002.
Selling, administrative, and general expense (for the period August 19, 2002 to
September 28, 2002): Selling, administrative, and general expenses totaled $0.6
million for the first quarter ended September 28, 2002. During the first quarter
of fiscal 2003, the Cooperative paid approximately $342,000 to obtain insurance
from St. Paul Mercury Insurance Company and Great American Insurance Company,
insuring the Cooperative against any obligation it incurs as a result of its
indemnification of its officers and directors, and insuring such officers and
directors for liability against which they may not be indemnified by the
Cooperative for events occurring prior to August 19, 2002 where claims are
submitted prior to August 19, 2008. This insurance has a term expiring on August
19, 2008. The remaining expenses for the first quarter of fiscal 2002 were for
general operating purposes of the Cooperative.
Tax provision (for the period August 19, 2002 to September 28, 2002): The
Cooperative is currently taxed as a non-exempt cooperative under Section 521 of
the Internal Revenue Code, and as such, its tax provision is impacted by net
proceeds to be distributed to its members. As a result of the recent change in
operating structure, the Cooperative has applied for exempt status as a farmers'
cooperative under Section 521 of the Internal Revenue Code. Exempt cooperatives
are permitted to reduce taxation through the use of special deductions (such as
dividends paid on its common and preferred stock). The Cooperative will adjust
its provision for income taxes when exempt status is obtained.
LIQUIDITY AND CAPITAL RESOURCES
As discussed above, as a result of the Transaction, Pro-Fac no longer reports
its financial statements on a consolidated basis with Agrilink Foods. As a
result, the assets and liabilities of Agrilink Foods are no longer included in
the consolidated balance sheet of Pro-Fac. Pro-Fac's balance sheet does,
however, reflect Pro-Fac's interest in Agrilink Holdings LLC, which, as
described in NOTE 1 of the "Notes to Consolidated Financial Statements," is
accounted for under the equity method.
From and after August 19, 2002, Pro-Fac's primary sources of cash are the
payments due to it by Agrilink Foods under the Termination Agreement and the
Amended and Restated Marketing and Facilitation Agreement, each of which is
described in detail in NOTE 2 of the "Notes to the Consolidated Financial
Statements." In addition, pursuant to the Credit Agreement with Agrilink Foods,
described in NOTE 2 of the "Notes to Consolidated Financial Statements," Pro-Fac
also has available to it up to $1.0 million per year, for five years. Finally,
Agrilink Foods has agreed, pursuant to the Transitional Services Agreement,
described in NOTE 2 of the "Notes to the Consolidated Financial Statements" to
Pro-Fac to provide certain administrative and other services for a period 24
months from the Closing Date.
14
Net cash available to Pro-Fac is used to pay its operating expenses as well as
to pay dividends on its capital stock and to fund repurchases of its common
stock. In additional, Pro Fac will, after expiration of the 24 month term, need
cash to cover salary, administrative and other expenses currently furnished
under the Transitional Services Agreement.
A discussion of "Unaudited Consolidated Statement of Cash Flows" for the first
quarter ended September 28, 2002 of fiscal 2003 follows:
Net cash provided by operating activities was $4.4 million for the first quarter
of fiscal 2003. Operating activities of the Cooperative primarily represent
proceeds received from the Termination Agreement with Agrilink Foods.
Net cash used in investing activities was $14.8 million for the first quarter of
fiscal 2003. This amount represents the deconsolidation of Agrilink Foods. The
Cooperative does not expect to have any material investing activities or capital
expenditures for the foreseeable future.
Net cash used in financing activities reflect repurchases of common stock and
dividends paid by the Cooperative during the first quarter of fiscal 2003.
Proceeds from the Termination Agreement were utilized to pay dividends. Proceeds
owed from Agrilink Foods were used to repurchase common stock.
Pro-Fac believes the sources described above will be sufficient to meet its
liquidity requirements for the foreseeable future.
Pro-Fac guarantees certain obligations of Agrilink Foods. Following is a
schedule of obligations at September 28, 2002 that are guaranteed by the
Cooperative.
(Dollars in Millions)
Amounts
Contractual Obligations Guaranteed Committed Expiration
- ---------------------------------- --------- ----------
Senior Subordinated Notes - 11 7/8 Percent $200.0 November 2008
Subordinated Promissory Note 33.7 November 2008
OTHER MATTERS
The vegetable and fruit portions of the business can be positively or negatively
affected by weather conditions nationally and the resulting impact on crop
yields. Favorable weather conditions can produce high crop yields and an
oversupply situation. This results in depressed selling prices. Excessive rain
or drought conditions can produce low crop yields and a shortage situation. This
typically results in higher selling prices. While the national supply situation
controls the pricing, the supply can differ regionally because of variations in
weather.
The cherry crop resulting from the fiscal 2002 growing season has been
drastically affected by weather in the prime growing areas in Michigan. These
growing regions experienced early season warm weather followed by a hard freeze
that resulted in an estimated 66 percent reduction in the cherry crop compared
to historic harvest tonnage. It is estimated that the CMV for both raw and
frozen cherry costs will significantly increase and may double.
In addition, for the 2002 crop season, dry weather conditions in the New York
and Midwest growing regions have reduced crop intake in these areas. Whether the
reduction in crop intake will negatively impact the adequacy of levels
throughout the industry is not yet known.
ITEM 4. CONTROLS AND PROCEDURES
The Cooperative maintains disclosure controls and procedures, as defined in Rule
13a-14(c) promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"). Within the 90 days prior to the date of this report, the Cooperative's
principal executive and principal financial officer carried out an evaluation of
the effectiveness of the design and operation of the Cooperative's disclosure
controls and procedures. Based on the evaluation of these disclosure controls
and procedures, the principal executive and principal financial officer
concluded that the Cooperative's disclosure controls and procedures were
effective.
There were no significant changes in the Cooperative's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See NOTE 8, Legal Matters, of the "Notes to Consolidated Financial Statements"
for information regarding legal proceedings; which information is incorporated
by reference in answer to this item.
ITEM 2. CHANGES IN SECURITIES
During July 2002, the members of Pro-Fac approved the adoption of certain
amendments to Pro-Fac's certificate of incorporation and bylaws. Among other
things, the certificate of incorporation was amended to create special
membership interests, which are more particularly described in NOTE 6 of the
"Notes to Consolidated Financial Statements." The special membership interests
are non-voting and have no dividend entitlements unless and until all preferred
stock of Pro-Fac has been redeemed. The special membership interests have
certain rights in liquidation as follows. In the event of a dissolution or other
termination of Pro-Fac or its business, and after the payment of all debts and
retains, all liquidation amounts or preferences to holders of Pro-Fac preferred
stock and liquidation entitlements of the holders of Pro-Fac's common stock, the
holders of special membership interests will be entitled to the payment of the
face amount of the interests, which in the aggregate equal $21.7 million, plus
accrued but unpaid dividends. All remaining assets of Pro-Fac, if any, after
payment of the foregoing, is distributable pursuant to the Cooperative's bylaws.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
In July 2002, Pro-Fac decided to delay the payment of dividends normally paid on
or about July 31 of each year on its Class A cumulative preferred stock in the
amount of $0.43 per share pending the closing of the Transaction. On September
5, 2002, following the Closing Date, Pro-Fac paid in full all such accrued
dividends. As of the date of this report, there is no arrearage with respect to
the payment of dividends in such securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During July 2002, special meetings of Pro-Fac members were held to consider and
vote upon the following proposals, which were collectively referred to as the
"Transaction": (1) the Unit Purchase Agreement, (2) the transactions
contemplated in the Unit Purchase Agreement, (3) the Pro-Fac member investment,
(4) amendments to Pro-Fac's certificate of incorporation and bylaws, and (5) the
Securityholders Agreement, among Agrilink Holdings LLC, Pro-Fac, Vestar/Agrilink
Holdings LLC, and others, the Limited Liability Agreement of Agrilink Holdings
LLC among Agrilink Holdings LLC, Pro-Fac, Vestar/Agrilink Holdings LLC and
others, amendments to the certificate of incorporation and bylaws of Agrilink
Foods, the Termination Agreement, the Amended and Restated Marketing and
Facilitation Agreement, the Transitional Services Agreement and the form of
Management Unit Subscription Agreement. A vote "for" the Transaction constituted
approval of all of the foregoing matters. A total of 547 members of record as of
June 20, 2002 were present or represented at the special meeting. A total of 481
votes were cast "for" and 10 were cast "against" the proposal. A total of 56
abstained from voting.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
-------------- ----------------------------------------------------------
2.1 Unit Purchase Agreement (filed as Exhibit 99.2 to Pro-Fac
Cooperative, Inc.'s Form 8-K filed September 3, 2002 and
incorporated herein by reference).
3.1 Restated Certificate of Incorporation of Pro-Fac
Cooperative, Inc. dated August 19, 2002 (filed as Exhibit
3.1 to Pro-Fac Cooperative, Inc.'s Form 10-K for the fiscal
year ended June 29, 2002 and incorporated herein by
reference).
3.2 Bylaws of Pro-Fac Cooperative, Inc. as amended August 19,
2002 (filed as Exhibit 3.2 to Pro-Fac Cooperative, Inc.'s
Form 10-K for the fiscal year ended June 29, 2002 and
incorporated herein by reference).
4.1 First Supplemental Indenture dated July 22, 2002 (amending
the Indenture dated as of November 18, 1998, between
Agrilink Foods, Inc., the Guarantors named therein, and IBJ
Schroder Bank and Trust Company, Inc., Trustee) (filed as
Exhibit 4.3 to Pro-Fac Cooperative, Inc.'s Form 10-K for
the fiscal year ended June 29, 2002 and incorporated herein
by reference).
4.2 Amended and Restated Marketing and Facilitation Agreement
dated August 19, 2002 between Pro-Fac Cooperative, Inc.,
and Agrilink Foods, Inc. (filed as Exhibit 99.4 to
Pro-Fac's Current Report on Form 8-K filed September 3,
2002 and incorporated herein by reference).
10.1 Termination Agreement dated August 19, 2002 (filed as
Exhibit 99.3 to Pro-Fac's Current Report on Form 8-K filed
September 3, 2002 and incorporated herein by reference).
10.2 Transitional Services Agreement dated August 19, 2002
(filed as Exhibit 99.5 to Pro-Fac's Current Report on Form
8-K filed September 3, 2002 and incorporated herein by
reference).
10.3 Credit Agreement dated August 19, 2002 between Pro-Fac
Cooperative, Inc., as borrower, and Agrilink Foods, Inc.,
as lender (filed as Exhibit 99.6 to Pro-Fac's Current
Report on Form 8-K filed September 3, 2002 and incorporated
herein by reference).
10.4 Securityholders Agreement dated August 19, 2002 among
Agrilink Holdings LLC, Pro-Fac Cooperative, Inc.,
Vestar/Agrilink Holdings LLC, and others (filed as Exhibit
99.7 to Pro-Fac's Current Report on Form 8-K filed
September 3, 2002 and incorporated herein by reference).
10.5 Limited Liability Company Agreement of Agrilink Holdings
LLC dated August 19, 2002 among Agrilink Holdings LLC,
Pro-Fac Cooperative, Inc., Vestar/Agrilink Holdings LLC,
and others (filed as Exhibit 99.8 to Pro-Fac's Current
Report on Form 8-K filed September 3, 2002 and incorporated
herein by reference).
10.6 Form of Management Unit Subscription Agreement (filed as
Exhibit 99.1 to Pro-Fac's Current Report on Form 8-K filed
September 3, 2002 and incorporated herein by reference).
99.1 Agrilink Foods, Inc. financial statements for the quarter
ended September 28, 2002 (filed herewith).
17
(b) Reports on Form 8-K:
On July 1, 2002, the Cooperative filed a report on Form 8-K to report
an Information Statement delivered to common members of Pro-Fac
Cooperative on July 1, 2002 together with annexes thereto.
On July 9, 2002, the Cooperative filed a report on Form 8-K to report
a delay in the fourth quarter dividend and adjustment of the expected
amount of non-cash goodwill impairment charge.
On July 24, 2002, the Cooperative filed a report on Form 8-K to report
the results of the Pro-Fac member vote.
On August 19, 2002, the Cooperative filed a report on Form 8-K to
report the completion of an equity investment as well as the payment
of commercial market value and fourth quarter dividends.
On September 3, 2002, the Cooperative filed a report on Form 8-K to
report a disposition of assets.
On September 26, 2002 the Cooperative filed a report on Form 8-K to
report the filing of sworn statements and Certifications required by
Section 906 of the Sarbanes-Oxley Act.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRO-FAC COOPERATIVE, INC.
Date: November 12, 2002 BY: /s/ Stephen R. Wright
-------------------------- --------------------------------
STEPHEN R. WRIGHT
GENERAL MANAGER AND SECRETARY
(On Behalf of the Registrant and as
Principal Executive Officer
Principal Financial Officer, and
Principal Accounting Officer)
19
CERTIFICATION
I, Stephen R. Wright, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pro-Fac Cooperative,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 /s/ Stephen R. Wright
----------------- -------------------------------
STEPHEN R. WRIGHT
GENERAL MANAGER AND SECRETARY
(Principal Executive Officer
and Principal Financial Officer)
20
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as ..................................'SS'