Back to GetFilings.com
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-Q EQUIVALENT
----------
(Mark One)
[_] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 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 ________
AGRILINK FOODS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 16-0845824
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
90 Linden Oaks, PO Box 20670, Rochester, NY 14602-6070
(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 [_] NO [_]
Indicate by checkmark whether the Registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
YES [_] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. As of February 7, 2003.
Common Stock: 11,000
o This Form 10-Q Equivalent is only being filed pursuant to a
requirement contained in the indenture governing Agrilink Foods,
Inc.'s 11 7/8 Percent Senior Subordinated Notes Due 2008.
================================================================================
Page 1 of 36 Pages
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AGRILINK FOODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS, ACCUMULATED EARNINGS/(DEFICIT), AND
COMPREHENSIVE INCOME/(LOSS)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three Months Ended
-------------------------------------
Successor | Predecessor
December 28, 2002 | December 29, 2001
----------------- | -----------------
|
Net sales $ 274,375 | $ 290,186
Cost of sales (202,645) | (218,393)
--------- | ---------
Gross profit 71,730 | 71,793
Selling, administrative, and general |
expense (35,677) | (30,816)
Restructuring 0 | (1,572)
Gain from pension curtailment 0 | 0
Income from joint venture 1,116 | 950
--------- | ---------
Operating income before dividing with |
Pro-Fac 37,169 | 40,355
Interest expense (12,266) | (16,239)
--------- | ---------
Pretax income from continuing operations |
and before dividing with Pro-Fac 24,903 | 24,116
Pro-Fac share of income 0 | (11,318)
--------- | ---------
Pretax income from continuing operations 24,903 | 12,798
Tax provision (9,931) | (5,633)
--------- | ---------
Income before discontinued operations 14,972 | 7,165
Discontinued operations, net of a tax |
benefit (1,385) | (827)
--------- | ---------
Net income 13,587 | 6,338
|
Accumulated earnings/(deficit) at |
beginning of period 1,475 | 2,809
--------- | ---------
Accumulated earnings/(deficit) at end of |
period $ 15,062 | $ 9,147
========= | =========
|
Net income $ 13,587 | $ 6,338
Other comprehensive (loss)/income: |
Unrealized gain/(loss) on hedging |
activity, net of taxes 169 | 66
--------- | ---------
Comprehensive income $ 13,756 | $ 6,404
========= | =========
|
Accumulated other comprehensive |
(loss)/income at beginning of period $ (236) | $ (395)
Unrealized gain/(loss) on hedging |
activity, net of taxes 169 | 66
--------- | ---------
Accumulated other comprehensive loss at |
end of period $ (67) | $ (329)
========= | =========
Six Months Ended
-----------------------------------
Successor | Predecessor Predecessor
August 19, 2002 - | June 30, 2002 Six Months Ended
December 28, 2002 | August 18, 2002 December 29, 2001
----------------- | --------------- -----------------
|
Net sales $ 380,820 | $ 101,664 $ 533,774
Cost of sales (284,646) | (78,116) (415,360)
--------- | --------- ---------
Gross profit 96,174 | 23,548 118,414
Selling, administrative, and general |
expense (51,149) | (15,434) (63,408)
Restructuring 0 | 0 (2,622)
Gain from pension curtailment 0 | 0 2,472
Income from joint venture 1,379 | 277 1,198
--------- | --------- ---------
Operating income before dividing with |
Pro-Fac 46,404 | 8,391 56,054
Interest expense (18,685) | (7,747) (35,026)
--------- | --------- ---------
Pretax income from continuing operations |
and before dividing with Pro-Fac 27,719 | 644 21,028
Pro-Fac share of income 0 | 0 (9,062)
--------- | --------- ---------
Pretax income from continuing operations 27,719 | 644 11,966
Tax provision (11,086) | (264) (5,266)
--------- | --------- ---------
Income before discontinued operations 16,633 | 380 6,700
Discontinued operations, net of a tax |
benefit (1,571) | (295) (1,624)
--------- | --------- ---------
Net income 15,062 | 85 5,076
|
Accumulated earnings/(deficit) at |
beginning of period 0 | (126,623) 4,071
--------- | --------- ---------
Accumulated earnings/(deficit) at end of |
period $ 15,062 | $(126,538) $ 9,147
========= | ========= =========
|
Net income $ 15,062 | $ 85 $ 5,076
Other comprehensive (loss)/income: |
Unrealized gain/(loss) on hedging |
activity, net of taxes (67) | 0 (374)
--------- | --------- ---------
Comprehensive income $ 14,995 | $ 85 $ 4,702
========= | ========= =========
|
Accumulated other comprehensive |
(loss)/income at beginning of period $ 0 | $ (367) $ 45
Unrealized gain/(loss) on hedging |
activity, net of taxes (67) | 0 (374)
--------- | --------- ---------
Accumulated other comprehensive loss at |
end of period $ (67) | $ (367) $ (329)
========= | ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
2
AGRILINK FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Successor | Predecessor
December 28, | June 29,
2002 | 2002
------------ | -----------
|
ASSETS |
|
Current assets: |
Cash and cash equivalents $ 37,903 | $ 14,686
Accounts receivable trade, net of allowances for doubtful accounts 74,991 | 68,419
Accounts receivable, other 9,723 | 7,581
Inventories, net 317,165 | 291,745
Current net investment in CoBank 1,116 | 3,347
Prepaid manufacturing expense 3,441 | 19,168
Prepaid expenses and other current assets 13,292 | 18,770
Assets held for sale at net realizable value 10,843 | 8,746
Due from Pro-Fac Cooperative, Inc. 0 | 11,730
Current deferred tax asset 4,640 | 2,923
-------- | ---------
Total current assets 473,114 | 447,115
Investment in CoBank 6,294 | 6,294
Investment in and advances to joint venture 16,659 | 14,586
Property, plant and equipment, net 217,462 | 285,834
Goodwill 32,944 | 56,210
Intangible assets, net 210,730 | 11,305
Other assets 32,159 | 22,160
Note receivable due from Pro-Fac Cooperative, Inc. 0 | 9,400
Non-current deferred tax asset 0 | 4,837
-------- | ---------
Total assets $989,362 | $ 857,741
======== | =========
|
LIABILITIES AND SHAREHOLDER'S EQUITY |
|
Current liabilities: |
Current portion of obligations under capital leases $ 821 | $ 821
Current portion of long-term debt 6,821 | 14,916
Current portion of Termination and Transitional Services Agreements with |
Pro-Fac Cooperative, Inc. 9,278 | 0
Accounts payable 58,197 | 71,198
Income taxes payable 10,544 | 879
Accrued interest 5,630 | 6,255
Accrued employee compensation 8,869 | 8,000
Other accrued expenses 50,023 | 40,154
Growers payable due to Pro-Fac Cooperative, Inc. 18,660 | 0
-------- | ---------
Total current liabilities 168,843 | 142,223
Obligations under capital leases 2,296 | 2,528
Long-term debt 509,706 | 623,057
Long-term portion of Termination and Transitional Services Agreements with |
Pro-Fac Cooperative, Inc. 26,536 | 0
Other non-current liabilities 43,604 | 28,918
Non-current deferred tax liability 21,685 | 0
-------- | ---------
Total liabilities 772,670 | 796,726
-------- | ---------
Commitments and contingencies |
Shareholder's Equity: |
|
Common stock, par value $.01; 11,000 shares |
authorized, issued and outstanding 0 | 0
Additional paid-in capital 201,697 | 188,005
Accumulated earnings/(deficit) 15,062 | (126,623)
Accumulated other comprehensive income/(loss): |
Unrealized (loss)/gain on hedging activity (67) | 206
Minimum pension liability adjustment 0 | (573)
-------- | ---------
Total shareholder's equity 216,692 | 61,015
-------- | ---------
Total liabilities and shareholder's equity $989,362 | $ 857,741
======== | =========
The accompanying notes are an integral part of the consolidated financial
statements.
3
AGRILINK FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Six Months Ended
-----------------------------------
Successor | Predecessor Predecessor
August 19, 2002 - | June 30, 2002 - Six Months Ended
December 28, 2002 | August 18, 2002 December 29, 2001
----------------- | --------------- -----------------
|
Cash Flows From Operating Activities: |
Net income $ 15,062 | $ 85 $ 5,076
Adjustments to reconcile net income to net cash provided by/(used in) |
operating activities- |
Depreciation 11,116 | 3,833 15,376
Amortization of certain intangible assets 430 | 144 592
Amortization of debt issue costs, amendment costs, |
debt discounts and premiums, and interest in-kind 3,972 | 1,201 3,224
Equity in undistributed earnings of joint venture (1,155) | (277) (1,099)
Transitional Services Agreement with Pro-Fac Cooperative, Inc. (192) | 0 0
Change in assets and liabilities: |
Accounts receivable (10,532) | 1,818 (6,121)
Inventories and prepaid manufacturing expense 20,580 | (33,170) (56,148)
Income taxes refundable/(payable) 9,740 | (75) 272
Accounts payable and other accrued expenses 4,240 | (10,972) (72,831)
Due to/(from) Pro-Fac Cooperative, Inc., net (5,397) | 8,649 8,845
Other assets and liabilities, net 1,226 | 909 (463)
--------- | -------- ---------
Net cash provided by/(used in) operating activities 49,090 | (27,855) (103,277)
--------- | -------- ---------
|
Cash Flows From Investing Activities: |
Purchase of property, plant and equipment (5,797) | (2,187) (7,363)
Proceeds from disposals 255 | 0 36
Repayments from/(advances to) joint venture 871 | (1,512) (3,863)
Proceeds from investment in CoBank 1,116 | 1,115 2,665
--------- | -------- ---------
Net cash used in investing activities (3,555) | (2,584) (8,525)
--------- | -------- ---------
|
Cash Flows From Financing Activities: |
Proceeds from issuance of long-term debt 270,000 | 0 0
Agrilink Holdings, Inc. investment 175,597 | 0 0
Net (payments)/proceeds on prior revolving credit facility (22,000) | 22,000 114,800
Payments on long-term debt (400,823) | (292) (3,047)
Payments on Termination Agreement with Pro-Fac Cooperative, Inc. (6,000) | 0 0
Payments on capital lease (194) | (38) 0
Cash paid for debt issuance costs (24,129) | 0 0
Cash paid for transaction fees (6,000) | 0 0
Cash paid in conjunction with debt amendment 0 | 0 (1,694)
--------- | -------- ---------
Net cash (used in)/provided by financing activities (13,549) | 21,670 110,059
--------- | -------- ---------
Net change in cash and cash equivalents 31,986 | (8,769) (1,743)
Cash and cash equivalents at beginning of period 5,917 | 14,686 7,656
--------- | -------- ---------
Cash and cash equivalents at end of period $ 37,903 | $ 5,917 $ 5,913
========= | ======== =========
Supplemental Schedule of Non-Cash Financing Activities: |
Agrilink Holdings, Inc. investment $ 32,100 | $ 0 $ 0
========= | ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
4
AGRILINK FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING
POLICIES
THE COMPANY: Agrilink Foods, Inc. (the "Company" or "Agrilink Foods"),
incorporated 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 CHANGE IN CONTROL (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 Cooperative,
Inc., a New York agricultural cooperative ("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"), Vestar/Agrilink Holdings and its affiliates
indirectly acquired control of the Company. See NOTE 2 to the "Notes to
Consolidated Financial Statements" for additional disclosures regarding the
Transaction.
The term "successor" refers to Agrilink Foods and all of its subsidiaries
following the Transaction. The term "predecessor" refers to Agrilink Foods prior
to the change in control on August 19, 2002.
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 financial position, results of operations, and cash
flows have been included. Operating results for the period from June 30, 2002 to
August 18, 2002 or the period from August 19, 2002 through December 28, 2002 are
not necessarily 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 Company's Form 10-K
Equivalent for the fiscal year ended June 29, 2002.
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.
RECLASSIFICATION: Certain items for fiscal 2002 have been reclassified to
conform with the current period presentation.
NEW ACCOUNTING PRONOUNCEMENTS: In August 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets." Effective June 30, 2002, Agrilink Foods 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 impact the Company's profitability. See NOTE 3
to the "Notes to Consolidated Financial Statements" for additional
disclosures regarding discontinued operations.
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 supercedes
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 requires 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.
TRADE ACCOUNTS RECEIVABLE: The Company accounts for trade receivables at
outstanding billed amounts, net of allowances for doubtful accounts. The Company
estimates its allowance for doubtful accounts as a percentage of receivables
overdue. Also included in the allowance in their entirety are those accounts
that have filed for bankruptcy, been sent to collections, and any other accounts
management believes are not collectible based on historical losses. The Company
periodically reviews the accounts included in the allowance to determine those
to be written off. Generally, after a period of one year, or through legal
counsel's advice, accounts are written off. It is not Company policy to accrue
or collect interest on past due accounts.
5
The Company's allowance for doubtful accounts is approximately $1.0 million at
December 28, 2002, and $0.7 million at June 29, 2002.
NOTE 2. THE TRANSACTION
On August 19, 2002, pursuant to the terms of the Unit Purchase Agreement dated
as of June 20, 2002, by and among Pro-Fac Cooperative, Inc., a New York
agricultural cooperative, 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:
(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 valued at
$32.1 million 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.
Also, as part of the Transaction, executive officers of Agrilink Foods, and
certain other members of Agrilink Foods' management, entered into subscription
agreements with Holdings LLC to acquire, with 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
December 28, 2002, 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. The foregoing individuals are also parties
to the Securityholders Agreement and the Limited Liability Agreement.
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 receivable.
The Transaction was accounted for under the purchase method of accounting in
accordance with SFAS No. 141, "Business Combinations." Under purchase
accounting, tangible and identifiable intangible assets acquired and liabilities
assumed will be recorded at their respective fair values. The valuations and
other studies which will provide the basis for such an allocation have not
progressed to a stage where there is sufficient information to make a final
allocation in the accompanying financial statements. Specifically, preliminary
valuations have not yet been finalized for the investment in the joint venture,
Great Lakes Kraut Company, LLC, and the related subordinated promissory note
(see NOTE 11 to the "Notes to Consolidated Financial Statements"). As such,
these items have been reflected at their historical values. Accordingly, the
purchase accounting adjustments made in the accompanying financial statements
are preliminary. Once an allocation is determined, in accordance with accounting
principles generally accepted in the United States, any remaining excess of the
investment over identifiable net assets acquired will be adjusted through
goodwill.
Holdings Inc. has pushed down its purchase accounting to Agrilink Foods. The
preliminary excess investment made by Holdings Inc. over the preliminary
estimates of the fair market value of the identifiable assets and liabilities of
the Company as of the Closing Date was approximately $33.0 million and is
reflected as goodwill in the accompanying unaudited consolidated balance sheet
as of December 28, 2002.
In connection with the Transaction, management determined that initially
approximately 171 employees will be terminated and has announced the benefit
arrangements to those employees. These activities surround the Company's
decision to exit the popcorn and applesauce businesses and complete the
relocation of its marketing function to Rochester, New York. As a result,
approximately $1.6 million in severance costs and other related exit costs have
been accrued for in purchase accounting in accordance with Emerging Issues Task
Force ("EITF") 95-3, "Recognition of Liabilities in Connection with a Purchase
Business Combination." Approximately $0.1 million has been liquidated as of
December 28, 2002.
6
As of August 19, 2002, management has begun to assess and formulate a plan to
exit certain portions of its business. Management has not yet completed the exit
plan, and as a result, the outline of the exit plan is considered preliminary.
Accordingly, upon completion and execution of the plan, certain assets may be
sold or impaired and certain liabilities may be incurred which could result in
additional adjustments to the values assigned to such items in purchase
accounting. Management anticipates the final formulation of the plan will be
completed within the next six months. See NOTE 11, "Subsequent Events," to the
"Notes to Consolidated Financial Statements" included herein.
The following unaudited pro forma financial information presents a summary of
consolidated results of operations of the Company as if the Transaction had
occurred at the beginning of the periods presented.
(DOLLARS IN THOUSANDS)
Predecessor Predecessor Predecessor
Three Months Ended June 30, 2002 - Six Months Ended
December 29, 2001 August 18, 2002 December 29, 2001
------------------ --------------- -----------------
Net Sales $290,186 $101,664 $533,774
Income before discontinued operations 15,338 778 17,231
Net Income 14,511 483 15,607
These unaudited pro forma results have been prepared for comparative purposes
only and primarily include adjustments for interest expense, taxes, the fair
value of operating leases, income from the Transitional Services Agreement with
Pro-Fac and the elimination of the historical share of income or loss that has
been recorded. Included in pro forma net income for the three months ended
December 29, 2001 is a non-recurring amount of approximately $1.6 million
related to restructuring expense. Also included in pro forma net income for the
six months ended December 29, 2001 are non-recurring items of approximately $2.6
million related to restructuring expense and a $2.5 million gain from pension
curtailment. These results do not purport to be indicative of the results of
operations which actually would have resulted had the Transaction occurred at
the beginning of the 2002 fiscal year, or of the future operations of the
successor company.
NOTE 3. DISCONTINUED OPERATIONS
As of August 19, 2002, the Company has committed to a plan to sell the popcorn
and applesauce operations previously reported in the snack and fruit segments,
respectively. It is anticipated that these transactions will be completed during
the third quarter of fiscal 2003. The implementation of SFAS No. 144 resulted in
the classification and separate financial presentation of those businesses as
discontinued operations and are, therefore, excluded from continuing operations.
All prior periods have been reclassified to reflect the discontinuance of these
operations.
In addition, having met the criteria outlined in SFAS No. 144, the Company
reclassified certain assets relating to the popcorn and applesauce businesses to
assets held for sale, and, in accordance with SFAS No. 144, the Company
reclassified the prior period balances. Included in assets held for sale are
also facilities located in Alamo, Texas; Enumclaw, Washington; Sodus, Michigan;
and Hortonville, Wisconsin which are being actively marketed for sale within the
fiscal year.
The major classes of discontinued assets included in the Consolidated Balance
Sheets as assets held for sale at net realizable value are as follows:
Successor Predecessor
(DOLLARS IN THOUSANDS) December 28, 2002 June 29, 2002
----------------- -------------
Inventories $ 5,109 $2,570
Property, plant and equipment, net 5,734 6,176
------- ------
Total $10,843 $8,746
======= ======
7
The operating results of those businesses identified as held for sale have been
classified as discontinued operations in the accompanying financial statements
and are summarized as follows:
Six Months Ended
Three Months Ended ------------------------------------
------------------------------------- Successor Predecessor Predecessor
Successor Predecessor August 19, 2002 - June 30, 2002 - Six Months Ended
December 28, 2002 December 29, 2001 December 28, 2002 August 18, 2002 December 29, 2001
----------------- ----------------- ------------------ --------------- -----------------
Net Sales $ 3,833 $ 4,363 $ 5,617 $2,063 $10,007
======= ======= ======= ====== =======
Loss before income taxes $(2,301) $(1,489) $(2,618) $ (500) $(2,913)
Income tax benefit 916 662 1,047 205 1,289
------- ------- ------- ------ -------
Discontinued operations,
net of tax benefit $(1,385) $ (827) $(1,571) $ (295) $(1,624)
======= ======= ======= ====== =======
NOTE 4. AGREEMENTS WITH PRO-FAC
In connection with the Transaction, Agrilink Foods and Pro-Fac entered into
several agreements effective as of the Closing Date, including the following:
(i) 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 "Old 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 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 outlined
that the first payment in the amount of $4.0 million was to be paid on the
Closing Date and the next payment to be made by October 1, 2002 and quarterly
thereafter as outlined. The liability for the Termination Agreement has been
reflected at fair value utilizing a discount rate of 11 1/2 percent. The amount
of the obligation under the Termination Agreement was $35.0 million as of
December 28, 2002.
(ii) 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 Agreement"). The Amended and Restated Marketing and Facilitation
Agreement supersedes and replaces the Old Marketing and Facilitation Agreement
and provides that, among other things, Pro-Fac will be Agrilink Foods' preferred
supplier of crops. Agrilink Foods will continue to pay the commercial market
value ("CMV") of 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 areas. The processes for determining CMV under the Amended and
Restated Marketing and Facilitation Agreement are substantially the same as the
processes used under the Old 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 paid by Agrilink Foods to
Pro-Fac for the CMV of crops supplied for the six months ended December 28, 2002
and December 29, 2001 were $53.1 million and $66.6 million, respectively.
Unlike the Old 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.
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's needs for each particular crop, then
certain shortfall payments are 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.
8
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.
(iii) 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. The value of the services
to be provided to Pro-Fac has been estimated at approximately $1.1 million. The
amount of the obligation outstanding under the Transitional Services Agreement
as of December 28, 2002 was $0.9 million. This obligation will be reduced on a
straight-line basis over the term of the agreement and as services are provided.
Also 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 only to the chief executive officer
(or other representatives) of Agrilink Foods.
(iv) 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 down 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. 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. The Credit Facility
bears interest at the rate of 10 percent per annum. There were no amounts
outstanding under this Credit Agreement at December 28, 2002.
In addition, prior to the Transaction, certain amounts totaling $36.5 million
owed by Pro-Fac to Agrilink Foods were forgiven, including both borrowings for
the working capital needs of Pro-Fac and a $9.4 million demand receivable.
In addition, under the Old Marketing and Facilitation Agreement, in any year in
which the Company had earnings on products which were processed from crops
supplied by Pro-Fac, the Company 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 the Company (before dividing with Pro-Fac). In years in which
the Company had losses on crops supplied by Pro-Fac, the Company 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 the Company (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. Earnings and losses were determined at the
end of the fiscal year, but were accrued on an estimated basis during the year.
For the three and six months ended December 29, 2001, Pro-Fac's share of income
was $11.3 million and $9.1 million, respectively.
NOTE 5. INVENTORIES
The major classes of inventories are as follows:
(DOLLARS IN THOUSANDS)
Successor Predecessor
December 28, June 29,
2002 2002
------------ -----------
Finished goods $292,868 $264,770
Raw materials and supplies 24,297 26,975
-------- --------
Total inventories $317,165 $291,745
======== ========
9
NOTE 6. ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 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.
As of December 28, 2002 the amounts assigned to goodwill and intangibles are
preliminary as not all valuations, exit plans, and other studies, which will
provide the basis for the allocation of fair value to assets and liabilities
have progressed to a stage where there is sufficient information to make a final
allocation in the accompanying financial statements. In addition, the amount
assigned to goodwill has not yet been allocated to the Company's operating
segments due to the preliminary nature of this information.
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 held by the Company:
(DOLLARS IN THOUSANDS)
Successor Predecessor
December 28, June 29,
2002 2002
------------ -----------
Amortized intangibles:
Covenants not to compete $ 754 $ 2,478
Other 10,406 12,000
Less: accumulated amortization (430) (3,173)
-------- -------
Amortized intangibles, net 10,730 11,305
Unamortized intangibles:
Trademarks 200,000 0
-------- -------
Total intangible assets, net $210,730 $11,305
======== =======
The aggregate amortization expense associated with intangible assets was
approximately $0.3 million for the successor period for the three months ended
December 28, 2002, and $0.4 million for the successor period August 19, 2002
through December 28, 2002. The aggregate amortization expense was $0.1 million
for the predecessor period June 30, 2002 through August 18, 2002, and $0.3
million and $0.6 million for the predecessor three months and six months ended
December 29, 2001, respectively. The aggregate amortization expense for each of
the five succeeding fiscal years is estimated as follows:
(DOLLARS IN THOUSANDS)
Aggregate
Annual
Fiscal Amortization
Year Expense
- ------ ------------
2004 $915
2005 891
2006 891
2007 760
2008 752
10
NOTE 7. DEBT
SUMMARY OF LONG-TERM DEBT:
(DOLLARS IN THOUSANDS)
Successor Predecessor
December 28, June 29,
2002 2002
------------ -----------
Revolving Credit Facility $ 0 $ 0
Term Loan Facility 270,000 400,800
Senior Subordinated Notes 207,761 200,015
Subordinated Promissory Note (net of discount) 34,621 32,696
Other 4,145 4,462
-------- --------
Total debt 516,527 637,973
Less current portion (6,821) (14,916)
-------- --------
Total long-term debt $509,706 $623,057
======== ========
BANK DEBT: In connection with the Transaction, Agrilink Foods and certain of its
subsidiaries entered into a senior secured credit facility (the "Senior Credit
Facility") in the amount of $470.0 million with a syndicate of banks and other
lenders arranged by JPMorgan Chase Bank ("JPMorgan Chase Bank"), as
administrative and collateral agent. The Senior Credit Facility is comprised of
(i) a $200.0 million senior secured revolving credit facility (the "Revolving
Credit Facility") and (ii) a $270.0 million senior secured B term loan (the
"Term Loan Facility"). The Revolving Credit Facility has a maturity of five
years and allows up to $40.0 million to be available in the form of letters of
credit. The Term Loan Facility has a maturity of six years.
The Senior Credit Facility bears interest at the Company's option, at a base
rate or LIBOR plus, in each case, an applicable percentage. The appropriate
applicable percentage corresponds to the Company's Consolidated Leverage Ratio,
as defined by the senior credit agreement (the "Senior Credit Agreement"), and
is adjusted quarterly based on the calculation of the Consolidated Leverage
Ratio. As of December 28, 2002, the Senior Credit Facility bears interest in the
case of base rate loans at the base rate plus (i) 1.75 percent for loans under
the Revolving Credit Facility, and (ii) 2.00 percent for loans under the Term
Loan Facility or in the case of LIBOR loans at LIBOR plus (i) 2.75 percent for
loans under the Revolving Credit Facility and (ii) 3.00 percent for loans under
the Term Loan Facility. The initial unused commitment fee is 0.50 percent on the
daily average unused commitment under the Revolving Credit Facility and varies
based on the Company's Consolidated Leverage Ratio, as defined.
Commencing December 31, 2002, the Term Loan Facility requires payments in equal
quarterly installments in the amount of $675,000 until its final maturity in
August 2008 upon which the balance will be due. The Term Loan Facility is also
subject to mandatory prepayments under various scenarios as defined in the
Senior Credit Agreement. Provisions of the Senior Credit Agreement require that
annual payments, within 105 days after the end of each fiscal year, in the
amount of "excess cash flow" be utilized to prepay the commitment at an
applicable percentage that corresponds to the Company's leverage ratio.
The Senior Credit Facility contains customary covenants and restrictions on the
Company's activities, including but not limited to: (i) limitations on the
incurrence of indebtedness; (ii) limitations on sale-leaseback transactions,
liens, investments, loans, advances, guarantees, acquisitions, asset sales, and
certain hedging agreements; and (iii) limitations on transactions with
affiliates and other distributions. The Senior Credit Facility also contains
financial covenants which provide for a maximum average debt to EBITDA ratio, a
maximum average senior debt to EBITDA ratio, and a minimum EBITDA to interest
expense ratio. The Company is in compliance with all covenants, restrictions,
and requirements under the terms of the Senior Credit Facility. The proceeds of
the Term Loan Facility and borrowings under the Revolving Credit Facility,
together with Vestar's $175.0 million investment, were used to repay and
terminate Agrilink Foods' indebtedness under its senior credit facilities with
Harris Trust and Savings Bank and the lenders thereunder, to consummate the
Transaction, and to pay related fees and expenses incurred in the Transaction.
SENIOR SUBORDINATED NOTES: Agrilink Foods has outstanding $200.0 million of 11
7/8 percent Senior Subordinated Notes (the "Notes"), due 2008. In connection
with the Transaction, the Company recorded the Notes at estimated fair value,
$208.2 million. The $8.2 million premium is being amortized against interest
expense over the life of the Notes.
11
NOTE 8. OPERATING SEGMENTS
The Company is organized by product line for management reporting, with
operating income being the primary measure of segment profitability.
Accordingly, no items below operating earnings are allocated to 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', Birds
Eye Hearty Spoonfuls, Veg-All, Freshlike, 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 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, and Flavor
Destinations. The canned meal product line includes canned meat products such as
chilies, stew, soups, and various other ready-to-eat prepared meals. Branded
products within the canned meal 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)
Six Months Ended
Three Months Ended -----------------------------------
------------------------------------- Successor Predecessor Predecessor
Successor Predecessor August 19, 2002 - June 30, 2002 Six Months Ended
December 28, 2002 December 29, 2001 December 28, 2002 August 18, 2002 December 29, 2001
----------------- ----------------- ----------------- --------------- -----------------
Net Sales:
Vegetables $199.8 $210.7 $273.2 $ 69.5 $387.2
Fruits 35.4 39.2 49.0 12.2 64.1
Snacks 19.4 19.5 28.9 10.6 39.7
Canned Meals 12.4 11.9 18.7 4.5 24.3
Other 7.4 8.9 11.0 4.9 18.5
------ ------ ------ ------ ------
Total continuing segments $274.4 $290.2 $380.8 $101.7 $533.8
====== ====== ====== ====== ======
Operating income:
Vegetables $ 20.3 $ 27.2 $ 22.9 $ 3.8 $ 32.0
Fruits 12.0 9.4 16.2 2.4 13.7
Snacks 2.6 2.5 4.1 1.5 5.2
Canned Meals 1.4 2.1 2.0 0.3 3.9
Other 0.9 0.7 1.2 0.4 1.4
------ ------ ------ ------ ------
Operating income before
nonrecurring items 37.2 41.9 46.4 8.4 56.2
Restructuring 0.0 (1.6) 0.0 0.0 (2.7)
Gain from pension curtailment 0.0 0.0 0.0 0.0 2.5
------ ------ ------ ------ ------
Operating income before dividing
with Pro-Fac 37.2 40.3 46.4 8.4 56.0
Interest expense (12.3) (16.2) (18.7) (7.8) (35.0)
------ ------- ------ ------ ------
Pretax income from continuing
operations and before dividing
with Pro-Fac $ 24.9 $ 24.1 $ 27.7 $ 0.6 $ 21.0
====== ====== ====== ====== ======
NOTE 9. SUBSIDIARY GUARANTORS
Kennedy Endeavors, Incorporated and Linden Oaks Corporation, wholly-owned
subsidiaries of the Company ("Subsidiary Guarantors"), and Pro-Fac (Pro-Fac
files periodic reports under the Security Exchange Act of 1934, Commission File
Number 0-20539) have jointly and severally, fully and unconditionally
guaranteed, on a senior subordinated basis, the obligations of the Company with
respect to the Company's 11 7/8 percent Senior Subordinated Notes due 2008 (the
"Notes"). In addition, the Subsidiary Guarantors have jointly and severally,
fully and unconditionally guaranteed the obligations of the Company with respect
to the Company's Senior Credit Facility. The covenants in the Notes and the
Senior Credit Facility do not restrict the ability of the Subsidiary Guarantors
to make cash distributions to the Company.
Presented below is condensed consolidating financial information for (i)
Agrilink Foods, (ii) the subsidiary guarantors, and (iii) non-guarantor
subsidiaries. The condensed consolidating financial information has been
presented to show the nature of assets held, results of operations, and cash
flow of the Company and its Subsidiary Guarantors and non-guarantor subsidiaries
in accordance with Securities and Exchange Commission Financial Reporting
Release No. 55.
12
SUCCESSOR
STATEMENT OF OPERATIONS
Three Months Ended December 28, 2002
---------------------------------------------------------------------
Agrilink Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
Net sales $ 270,183 $ 4,192 $ 5,219 $(5,219) $ 274,375
Cost of sales (199,990) (2,655) (3,841) 3,841 (202,645)
--------- ------- ------- ------- ---------
Gross profit/(loss) 70,193 1,537 1,378 (1,378) 71,730
Selling, administrative, and general expenses (34,891) (786) 0 0 (35,677)
Other (expense)/income (14,737) 14,737 120 (120) 0
Income from joint venture 1,116 0 0 0 1,116
--------- ------- ------- ------- ---------
Operating income/(loss) before discontinued
operations 21,681 15,488 1,498 (1,498) 37,169
Interest (expense)/income (14,723) 2,457 0 0 (12,266)
--------- ------- ------- ------- ---------
Pretax income/(loss) before discontinued operations 6,958 17,945 1,498 (1,498) 24,903
Tax provision (3,380) (6,417) (134) 0 (9,931)
--------- ------- ------- ------- ---------
Net income/(loss) before discontinued operations 3,578 11,528 1,364 (1,498) 14,972
Discontinued operations (net of a tax benefit
of $916) (1,385) 0 0 0 (1,385)
--------- ------- ------- ------- ---------
Net income/(loss) $ 2,193 $11,528 $ 1,364 $(1,498) $ 13,587
========= ======= ======= ======= =========
SUCCESSOR
STATEMENT OF OPERATIONS
August 19, 2002 - December 28, 2002
---------------------------------------------------------------------
Agrilink Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
Net sales $ 374,696 $ 6,124 $ 5,572 $(5,572) $ 380,820
Cost of sales (280,766) (3,880) (4,538) 4,538 (284,646)
--------- ------- ------- ------- ---------
Gross profit/(loss) 93,930 2,244 1,034 (1,034) 96,174
Selling, administrative, and general expenses (49,965) (1,184) 0 0 (51,149)
Other (expense)/income (20,046) 20,046 132 (132) 0
Income from joint venture 1,379 0 0 0 1,379
--------- ------- ------- ------- ---------
Operating income/(loss) before discontinued
operations 25,298 21,106 1,166 (1,166) 46,404
Interest (expense)/income (22,276) 3,591 0 0 (18,685)
--------- ------- ------- ------- ---------
Pretax income/(loss) before discontinued operations 3,022 24,697 1,166 (1,166) 27,719
Tax provision (2,005) (8,854) (227) 0 (11,086)
--------- ------- ------- ------- ---------
Net income/(loss) before discontinued operations 1,017 15,843 939 (1,166) 16,633
Discontinued operations (net of a tax benefit
of $1,047) (1,571) 0 0 0 (1,571)
--------- ------- ------- ------- ---------
Net (loss)/income $ (554) $15,843 $ 939 $(1,166) $ 15,062
========= ======= ======= ======= =========
13
PREDECESSOR
STATEMENT OF OPERATIONS
June 30, 2002 - August 18, 2002
---------------------------------------------------------------------
Agrilink Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
Net sales $ 99,188 $ 2,476 $ 1,069 $(1,069) $101,664
Cost of sales (76,505) (1,611) (1,432) 1,432 (78,116)
-------- ------- ------- ------- --------
Gross profit/(loss) 22,683 865 (363) 363 23,548
Selling, administrative, and general expenses (14,946) (488) 0 0 (15,434)
Other (expense)/income (5,507) 5,507 41 (41) 0
Income from joint venture 277 0 0 0 277
-------- ------- ------- ------- --------
Operating income/(loss) before
discontinued operations 2,507 5,884 (322) 322 8,391
Interest (expense)/income (9,069) 1,322 0 0 (7,747)
-------- ------- ------- ------- --------
Pretax (loss)/income before discontinued operations (6,562) 7,206 (322) 322 644
Tax benefit/(provision) 2,354 (2,572) (46) 0 (264)
-------- ------- ------- ------- --------
Net (loss)/income before discontinued operations (4,208) 4,634 (368) 322 380
Discontinued operations (net of tax benefit
of $205) (295) 0 0 0 (295)
-------- ------- ------- ------- --------
Net (loss)/income $ (4,503) $ 4,634 $ (368) $ 322 $ 85
======== ======= ======= ======= ========
14
SUCCESSOR
BALANCE SHEET
December 28, 2002
---------------------------------------------------------------------
Agrilink Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents $ 36,886 $ 317 $ 700 $ 0 $ 37,903
Accounts receivable, net 81,785 2,835 94 0 84,714
Inventories -
Finished goods 292,287 389 192 0 292,868
Raw materials and supplies 23,663 516 118 0 24,297
---------- -------- ------ --------- --------
Total inventories 315,950 905 310 0 317,165
Other current assets 32,658 9 665 0 33,332
---------- -------- ------ --------- --------
Total current assets 467,279 4,066 1,769 0 473,114
Property, plant and equipment, net 209,921 4,075 3,466 0 217,462
Investment in subsidiaries 323,559 0 0 (323,559) 0
Goodwill and other intangible assets, net 33,549 210,125 0 0 243,674
Other assets 54,809 107,733 0 (107,430) 55,112
---------- -------- ------ --------- --------
Total assets $1,089,117 $325,999 $5,235 $(430,989) $989,362
========== ======== ====== ========= ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current portion of long-term debt $ 6,821 $ 0 $ 0 $ 0 $ 6,821
Current portion of Termination and Transitional
Services Agreements with Pro-Fac
Cooperative, Inc. 9,278 0 0 0 9,278
Accounts payable 57,196 549 452 0 58,197
Accrued interest 5,630 0 0 0 5,630
Intercompany loans 1,556 (1,556) 0 0 0
Other current liabilities 80,687 7,202 1,028 0 88,917
---------- -------- ------ --------- --------
Total current liabilities 161,168 6,195 1,480 0 168,843
Long-term debt 509,706 0 0 0 509,706
Long-term portion of Termination and
Transitional Services Agreements
with Pro-Fac Cooperative, Inc. 26,536 0 0 0 26,536
Other non-current liabilities 175,015 0 0 (107,430) 67,585
---------- -------- ------ --------- --------
Total liabilities 872,425 6,195 1,480 (107,430) 772,670
Shareholder's equity 216,692 319,804 3,755 (323,559) 216,692
---------- -------- ------ --------- --------
Total liabilities and shareholder's equity $1,089,117 $325,999 $5,235 $(430,989) $989,362
========== ======== ====== ========= ========
15
SUCCESSOR
STATEMENT OF CASH FLOWS
August 19, 2002 - December 28, 2002
---------------------------------------------------------------------
Agrilink Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
Cash Flows From Operating Activities:
Net (loss)/income $ (554) $ 15,843 $ 939 $(1,166) $ 15,062
Adjustments to reconcile net (loss)/income to
cash provided by/(used in) operating
activities -
Depreciation 10,847 156 113 0 11,116
Amortization of certain intangible assets 149 281 0 0 430
Amortization of debt issue costs,
amendment costs, debt discounts and
premiums, and interest in-kind 3,972 0 0 0 3,972
Transitional Services Agreement with
Pro-Fac Cooperative, Inc. (192) 0 0 0 (192)
Equity in undistributed earnings of joint
venture (1,155) 0 0 0 (1,155)
Change in working capital 36,123 (16,021) (1,411) 1,166 19,857
--------- -------- ------- ------- ---------
Net cash provided by/(used in) operating
activities 49,190 259 (359) 0 49,090
Cash Flows From Investing Activities:
Purchase of property, plant, and equipment (5,628) 0 (169) 0 (5,797)
Proceeds from disposal 250 0 5 0 255
Proceeds from investment in CoBank 1,116 0 0 0 1,116
Repayments from joint venture 871 0 0 0 871
--------- -------- ------- ------- ---------
Net cash used in investing activities (3,391) 0 (164) 0 (3,555)
Cash Flows From Financing Activities:
Payments on old revolving credit facility (22,000) 0 0 0 (22,000)
Proceeds from issuance of long-term debt 270,000 0 0 0 270,000
Agrilink Holdings, Inc. investment 175,597 0 0 0 175,597
Payments on long-term debt (400,823) 0 0 0 (400,823)
Payments on Termination Agreement with
Pro-Fac Cooperative, Inc. (6,000) 0 0 0 (6,000)
Payments on capital lease (194) 0 0 0 (194)
Cash paid for debt issuance costs (24,129) 0 0 0 (24,129)
Cash paid for transaction fees (6,000) 0 0 0 (6,000)
--------- -------- ------- ------- ---------
Net cash used in financing activities (13,549) 0 0 0 (13,549)
Net change in cash and cash equivalents 32,250 259 (523) 0 31,986
Cash and cash equivalents at beginning of period 4,636 58 1,223 0 5,917
--------- -------- ------- ------- ---------
Cash and cash equivalents at end of period $ 36,886 $ 317 $ 700 $ 0 $ 37,903
========= ======== ======= ======= =========
16
PREDECESSOR
STATEMENT OF CASH FLOWS
June 30, 2002 - August 18, 2002
---------------------------------------------------------------------
Agrilink Subsidiary Non-Guarantor Eliminating
(DOLLARS IN THOUSANDS) Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
Cash Flows From Operating Activities:
Net (loss)/income $ (4,503) $ 4,634 $ (368) $ 322 $ 85
Adjustments to reconcile net (loss)/income to net
cash (used in)/provided by operating activities -
Depreciation 3,741 69 23 0 3,833
Amortization of certain intangible assets 50 94 0 0 144
Amortization of debt issue costs, amendment costs,
debt discounts and premiums, and interest in-kind 1,201 0 0 0 1,201
Equity in undistributed earnings of joint venture (277) 0 0 0 (277)
Change in working capital (28,911) (4,860) 1,252 (322) (32,841)
-------- ------- ------ ----- --------
Net cash (used in)/provided by operating activities (28,699) (63) 907 0 (27,855)
Cash Flows From Investing Activities:
Purchase of property, plant, and equipment (2,181) 0 (6) 0 (2,187)
Advances to joint venture (1,512) 0 0 0 (1,512)
Proceeds from investment in CoBank 1,115 0 0 0 1,115
-------- ------- ------ ----- --------
Net cash used in investing activities (2,578) 0 (6) 0 (2,584)
Cash Flows From Financing Activities:
Net proceeds from old revolving credit facility 22,000 0 0 0 22,000
Payments on long-term debt (292) 0 0 0 (292)
Payments on capital leases (38) 0 0 0 (38)
-------- ------- ------ ----- --------
Net cash provided by financing activities 21,670 0 0 0 21,670
Net change in cash and cash equivalents (9,607) (63) 901 0 (8,769)
Cash and cash equivalents at beginning of period 14,243 121 322 0 14,686
-------- ------- ------ ----- --------
Cash and cash equivalents at end of period $ 4,636 $ 58 $1,223 $ 0 $ 5,917
======== ======= ====== ===== ========
17
PREDECESSOR
STATEMENT OF OPERATIONS
Three Months Ended December 29, 2001
-----------------------------------------------------------------------
Agrilink Guarantor Non-Guarantor Eliminating
Foods, Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- ------------ ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
Net sales $ 286,411 $ 3,775 $ 5,255 $(5,255) $ 290,186
Cost of sales (215,802) (2,591) (4,912) 4,912 (218,393)
--------- ------- ------- ------- ---------
Gross profit 70,609 1,184 343 (343) 71,793
Other (expense)/income (20,366) 18,794 192 (192) (1,572)
Selling, administrative, and general expenses (29,762) (1,054) 0 0 (30,816)
Income from joint venture 950 0 0 0 950
--------- ------- ------- ------- ---------
Operating income/(loss) before dividing with Pro-Fac 21,431 18,924 535 (535) 40,355
Interest (expense)/income (18,891) 2,652 0 0 (16,239)
--------- ------- ------- ------- ---------
Pretax income/(loss) before dividing with Pro-Fac 2,540 21,576 535 (535) 24,116
Pro-Fac share of income (11,318) 0 0 0 (11,318)
--------- ------- ------- ------- ---------
Pretax (loss)/income before discontinued operations (8,778) 21,576 535 (535) 12,798
Tax benefit/(provision) 2,159 (7,666) (126) 0 (5,633)
--------- ------- ------- ------- ---------
Net (loss)/income before discontinued operations (6,619) 13,910 409 (535) 7,165
Discontinued operations (net of a tax benefit of $662) (827) 0 0 0 (827)
--------- ------- ------- ------- ---------
Net (loss)/income $ (7,446) $13,910 $ 409 $ (535) $ 6,338
========= ======= ======= ======= =========
PREDECESSOR
STATEMENT OF OPERATIONS
Six Months Ended December 29, 2001
-----------------------------------------------------------------------
Agrilink Guarantor Non-Guarantor Eliminating
Foods, Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- ------------ ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
Net sales $ 525,754 $ 8,020 $ 7,821 $(7,821) $ 533,774
Cost of sales (409,882) (5,478) (7,631) 7,631 (415,360)
--------- -------- ------- ------- ---------
Gross profit 115,872 2,542 190 (190) 118,414
Other (expense)/income (32,112) 31,962 214 (214) (150)
Selling, administrative, and general expenses (61,627) (1,781) 0 0 (63,408)
Income from joint venture 1,198 0 0 0 1,198
--------- -------- ------- ------- ---------
Operating income/(loss) before dividing with Pro-Fac 23,331 32,723 404 (404) 56,054
Interest (expense)/income (40,310) 5,284 0 0 (35,026)
--------- -------- ------- ------- ---------
Pretax (loss)/income before dividing with Pro-Fac (16,979) 38,007 404 (404) 21,028
Pro-Fac share of loss (9,062) 0 0 0 (9,062)
--------- -------- ------- ------- ---------
Pretax (loss)/income before discontinued operations (26,041) 38,007 404 (404) 11,966
Tax benefit/(provision) 8,490 (13,503) (253) 0 (5,266)
--------- -------- ------- ------- ---------
Net (loss)/income before discontinued operations (17,551) 24,504 151 (404) 6,700
Discontinued operations (net of a tax benefit
of $1,289) (1,624) 0 0 0 (1,624)
--------- -------- ------- ------- ---------
Net (loss)/income $ (19,175) $ 24,504 $ 151 $ (404) $ 5,076
========= ======== ======= ======= =========
18
PREDECESSOR
BALANCE SHEET
June 29, 2002
---------------------------------------------------------------------
Agrilink Subsidiary Non-Guarantor Eliminating
Foods, Inc. Guarantors Subsidiaries Entries Consolidated
----------- ---------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 14,243 $ 121 $ 322 $ 0 $ 14,686
Accounts receivable, net 73,055 2,945 0 0 76,000
Inventories -
Finished goods 264,411 223 136 0 264,770
Raw materials and supplies 26,193 623 159 0 26,975
-------- -------- ------ --------- --------
Total inventories 290,604 846 295 0 291,745
Other current assets 64,585 (158) 257 0 64,684
-------- -------- ------ --------- --------
Total current assets 442,487 3,754 874 0 447,115
Property, plant and equipment, net 278,510 3,883 3,441 0 285,834
Investment in subsidiaries 163,093 0 0 (163,093) 0
Goodwill and other intangible assets, net 12,406 55,109 0 0 67,515
Other assets 57,031 103,655 0 (103,409) 57,277
-------- -------- ------ --------- --------
Total assets $953,527 $166,401 $4,315 $(266,502) $857,741
======== ======== ====== ========= ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt $ 14,916 $ 0 $ 0 $ 0 $ 14,916
Accounts payable 70,225 836 137 0 71,198
Accrued interest 6,255 0 0 0 6,255
Intercompany loans (115) 275 (160) 0 0
Other current liabilities 43,319 5,712 823 0 49,854
-------- -------- ------ --------- --------
Total current liabilities 134,600 6,823 800 0 142,223
Long-term debt 623,057 0 0 0 623,057
Other non-current liabilities 134,855 0 0 (103,409) 31,446
-------- -------- ------ --------- --------
Total liabilities 892,512 6,823 800 (103,409) 796,726
Shareholder's equity 61,015 159,578 3,515 (163,093) 61,015
-------- -------- ------ --------- --------
Total liabilities and shareholder's equity $953,527 $166,401 $4,315 $(266,502) $857,741
======== ======== ====== ========= ========
19
PREDECESSOR
STATEMENT OF CASH FLOWS
Six Months Ended December 29, 2001
-----------------------------------------------------------------------
Agrilink Guarantor Non-Guarantor Eliminating
Foods, Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- ------------ ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
Cash Flows From Operating Activities:
Net (loss)/income $ (19,175) $ 24,504 $151 $(404) $ 5,076
Adjustments to reconcile net (loss)/income to net
cash (used in)/provided by operating activities -
Depreciation 14,952 272 152 0 15,376
Amortization of certain intangible assets 217 375 0 0 592
Amortization of debt issue costs, amendment
costs, debt discounts and premiums, and
interest in-kind 3,224 0 0 0 3,224
Equity in undistributed earnings of joint venture (1,099) 0 0 0 (1,099)
Change in working capital (101,860) (25,015) 25 404 (126,446)
--------- -------- ---- ----- ---------
Net cash (used in)/provided by operating activities (103,741) 136 328 0 (103,277)
Cash Flows From Investing Activities:
Purchase of property, plant, and equipment (7,351) 0 (12) 0 (7,363)
Proceeds from disposals 36 0 0 0 36
Advances to joint venture (3,863) 0 0 0 (3,863)
Proceeds from investment in CoBank 2,665 0 0 0 2,665
--------- -------- ---- ----- ---------
Net cash used in investing activities (8,513) 0 (12) 0 (8,525)
Cash Flows From Financing Activities:
Net proceeds from old revolving credit facility 114,800 0 0 0 114,800
Payments on long-term debt (3,047) 0 0 0 (3,047)
Cash paid for debt amendments (1,694) 0 0 0 (1,694)
--------- -------- ---- ----- ---------
Net cash provided by financing activities 110,059 0 0 0 110,059
Net change in cash and cash equivalents (2,195) 136 316 0 (1,743)
Cash and cash equivalents at beginning of period 7,624 21 11 0 7,656
--------- -------- ---- ----- ---------
Cash and cash equivalents at end of period $ 5,429 $ 157 $327 $ 0 $ 5,913
========= ======== ==== ===== =========
20
NOTE 10. OTHER MATTERS
RESTRUCTURING: On June 23, 2000, the Company sold its pickle business to Dean
Pickle and Specialty Product Company. As part of the transaction, Agrilink Foods
agreed to contract pack Nalley and Farman's pickle products for a period of two
years, ending June 2002. In anticipation of the completion of this co-pack
contract, the Company initiated restructuring activities for approximately 140
employees in its facility located in Tacoma, Washington during the first quarter
of fiscal 2002. The total restructuring charge amounted to $1.1 million and was
primarily comprised of employee termination benefits. This amount has been
liquidated as of December 28, 2002.
In addition, on October 12, 2001, the Company announced a further reduction of
approximately 7 percent of its nationwide workforce, for a total of
approximately 300 positions. The reductions were part of an ongoing focus on
low-cost operations and included both salaried and hourly positions. In
conjunction with the reductions, the Company recorded a charge against earnings
of approximately $1.6 million in the second quarter of fiscal 2002, primarily
consisting of employee termination benefits. This amount has been liquidated as
of December 28, 2002.
GAIN FROM PENSION CURTAILMENT: In September 2001, the Company 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 PROCEEDINGS: On September 25, 2001, in the circuit court of Multnomah
County, Oregon, Blue Line Farms commenced a class action suit ("Blue Line Farms
litigation") against the Company, Pro-Fac Cooperative, Inc., Mr. Mike Shelby,
and "Does" 1-50, representing directors, officers, and agents of the corporate
defendants, alleging various claims related to the operation of PF Acquisition
II, Inc., a former subsidiary of Pro-Fac that conducted business under the name
AgriFrozen Foods ("AgriFrozen"). The complaint was subsequently amended to
eliminate "Does" 1- 50 as parties. The relief sought included a demand for
damages of $50.0 million. On December 23, 2002, Pro-Fac, Agrilink Foods, and the
other defendants reached an agreement in principle as to the terms of a
settlement of the Blue Line Farms litigation, as well as of related claims under
Oregon's grower lien statute pending in the United States Bankruptcy Court for
the District of Oregon, known as the Seifer Trust litigation. The Seifer Trust
litigation also named Pro-Fac and Agrilink among its named defendants. Final
settlement is conditioned on the occurrence of certain conditions precedent,
including approval of the settlement by the Multnomah County Circuit Court, the
entry of final judgment by both the Multnomah County Court and the United States
Bankruptcy Court for the District of Oregon, and approval of the settlement by
the class. In conjunction with the agreement in principle reached on December
23, 2002 and in anticipation of a Final Settlement of the Blue Line Farms
litigation and Seifer Trust litigation, Agrilink Foods has recorded a liability
in purchase accounting for approximately $1.3 million for this pre-acquisition
contingency.
The Unit Purchase Agreement for the Transaction contains specific provisions
concerning the Blue Line Farms matter and other 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. On an
annual basis, Agrilink Foods has agreed to bear responsibility for the first
$300,000 of defense costs. In addition, Agrilink Foods 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. These provisions
regarding a sharing of costs apply specifically to the Blue Line Farms
litigation and the Seifer Trust litigation. These provisions do not apply to
other AgriFrozen related litigation, the responsibility for which is entirely
with Pro-Fac.
COMMITMENTS: Agrilink Foods entered into an agreement to provide a guarantee in
September 1995 on behalf of the City of Montezuma to renovate a sewage treatment
plant operated in Montezuma, Georgia. Agrilink Foods issued a guarantee of the
loan in an original amount of approximately $2.3 million plus interest. The
guarantee expires in 2015 and requires payment upon the occurrence of a
shortfall in third-party revenue from the utilization of the sewage treatment
plant. In the event of such shortfall, Agrilink Foods would be required to pay
the remainder of the loan for the City of Montezuma. As of December 28, 2002,
the outstanding loan amount was $1.7 million.
NOTE 11. SUBSEQUENT EVENTS
NAME CHANGE: On January 29, 2003, the Company announced that it is changing its
name from Agrilink Foods, Inc. to Birds Eye Foods, Inc. The change will become
effective on February 10, 2003 through the amendment of the Company's articles
of incorporation. Only the Company's name will change. There is no impact to the
organization's structure or ownership. In addition, Agrilink Holdings, Inc. will
change its name to Birds Eye Holdings, Inc. concurrently.
RESTRUCTURING: On February 7, 2003, the Company announced that it would be
closing six vegetable processing facilities and consolidating production to
create more efficient facilities over the next 4 to 15 months. This
announcement is in furtherance of the final formulation of the exit plan as
discussed in NOTE 2 "The Transaction" to the "Notes to the Consolidated
Financial Statements". The facilities impacted include those in Barker, New
York; Bridgeville, Delaware; Green Bay, Wisconsin; Oxnard, California; Uvalde,
Texas and the fresh production operation at Montezuma, Georgia. Subsequent to
closure, the Company intends to actively market these properties for sale. The
closings will initially result in the elimination of approximately 260 full time
production associates. Management's preliminary estimate of the costs to
exit these operations is approximately
21
$10.0 million. Such costs primarily represent employee termination benefits,
facility closure costs, and lease and other contract cancellation fees.
Management anticipates the finalization of these estimates in the third quarter.
Such amounts will be accrued for in purchase accounting in accordance with EITF
95-3.
GREAT LAKES KRAUT COMPANY, LLC: Agrilink Foods owns a 50% interest in Great
Lakes Kraut Company, LLC ("GLK") and has reached an agreement with Flanagan
Brothers Incorporated ("Flanagan Brothers") to effect a transfer of the
operating business of GLK to Flanagan Brothers, the other 50% owner of GLK,
pursuant to certain "buy-sell" provisions of the limited liability company
agreement of GLK (the "GLK Transaction"). In the GLK Transaction, a newly-formed
subsidiary of Agrilink Foods ("Newco") will invest $11.1 million in GLK, which
will be used to reduce the debt of GLK, Flanagan Brothers will exchange its
interest in GLK in return for a transfer of all of the operating assets of GLK
to it and will assume substantially all of the remaining liabilities relating to
the business of GLK. At the closing, GLK will repay to Agrilink Foods the
outstanding balance of certain working capital loans made to GLK by Agrilink
(with a principal balance of $5.4 million as of December 28, 2002). After the
GLK Transaction, Agrilink Foods and Newco will own 100% of GLK, which will
continue to own the subordinated promissory note of Agrilink Foods and certain
operating assets or subsidiaries of Agrilink Foods to be transferred in
connection with the GLK Transaction. The GLK Transaction is expected to close on
March 3, 2003. If the GLK Transaction closes, Agrilink Foods expects that the
consolidated outstanding debt of Agrilink Foods would be reduced by
approximately $29 million.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, the Company 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 Management's Discussion and Analysis of
Financial Condition and Results of Operations and other statements made in this
Form 10-Q Equivalent 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. Among the factors that could impact the Company include:
o the impact of strong competition in the food industry, including
competitive pricing;
o the impact of changes in consumer demand;
o the impact of weather on the volume and quality of raw product;
o the inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer acceptance;
o 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;
o the Company's ability to achieve gains in productivity and improvements in
capacity utilization;
o the Company's ability to service debt;
o interest rate fluctuations; and
o effectiveness of marketing and shifts in market demand.
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 in the second quarter and
first six months of fiscal 2003 versus such periods in fiscal 2002.
The unaudited consolidated financial statements include the results of Agrilink
Foods, Inc. ("Agrilink Foods" or the "Company"). On August 19, 2002, a majority
share of Agrilink Foods was indirectly acquired by Vestar/Agrilink Holdings LLC
and its affiliates (see NOTE 2 to the "Notes to Consolidated Financial
Statements"). In accordance with the guidelines for accounting for business
combinations, the investment by Vestar/Agrilink Holdings LLC and its affiliates
plus related purchase accounting adjustments have been "pushed down" and
22
recorded in Agrilink Foods' financial statements for the period subsequent to
August 18, 2002, resulting in a new basis of accounting for the "successor"
period. Information for the "predecessor" period prior to the transaction date
is presented on the Company's historical basis of accounting.
In order to provide a meaningful basis of comparing the Company's results of
operations, the results of operations for the "predecessor" period (June 30,
2002 to August 18, 2002) have been combined with the results of operations for
the "successor" period (August 19, 2002 to December 28, 2002). These combined
Company results have been compared to the comparable period in fiscal 2002.
Agrilink Foods has four primary product lines: vegetables, fruits, snacks and
canned meals. The majority of each of the product lines' net sales are within
the United States. In addition, 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 product
line include 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 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 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, 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. Branded products within this
category include Bernstein's and Nalley.
Reclassifications have been made to the segment presentation below for the prior
year to reflect an allocation of fixed costs associated with discontinued
operations. Management is currently focusing efforts on eliminating such costs.
The following tables illustrate the results of operations by product line for
the three- and six-month periods ended December 28, 2002 and December 29, 2001:
NET SALES
(DOLLARS IN MILLIONS)
Three Months Ended Six Months Ended
------------------------------- -------------------------------
December 28, December 29, December 28, December 29,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
% of % of % of % of
$ Total $ Total $ Total $ Total
------ ----- ------ ----- ------ ----- ------ -----
Vegetables $199.8 72.8% $210.7 72.6% $342.7 71.0% $387.2 72.5%
Fruits 35.4 12.9 39.2 13.5 61.2 12.7 64.1 12.0
Snacks 19.4 7.1 19.5 6.7 39.5 8.2 39.7 7.4
Canned Meals 12.4 4.5 11.9 4.1 23.2 4.8 24.3 4.6
Other 7.4 2.7 8.9 3.1 15.9 3.3 18.5 3.5
------ ----- ------ ----- ------ ----- ------ -----
Total $274.4 100.0% $290.2 100.0% $482.5 100.0% $533.8 100.0%
====== ===== ====== ===== ====== ===== ====== =====
OPERATING INCOME(1)
(DOLLARS IN MILLIONS)
Three Months Ended Six Months Ended
----------------------------- -----------------------------
December 28, December 29, December 28, December 29,
2002 2001 2002 2001
------------- ------------- ------------- -------------
% of % of % of % of
$ Total $ Total $ Total $ Total
----- ----- ----- ----- ----- ----- ----- -----
Vegetables $20.3 54.6% $27.2 64.9% $26.7 48.7% $32.0 56.9%
Fruits 12.0 32.2 9.4 22.4 18.6 34.0 13.7 24.4
Snacks 2.6 7.0 2.5 6.0 5.6 10.2 5.2 9.3
Canned Meals 1.4 3.8 2.1 5.0 2.3 4.2 3.9 6.9
Other 0.9 2.4 0.7 1.7 1.6 2.9 1.4 2.5
----- ----- ----- ----- ----- ----- ----- -----
Total $37.2 100.0% $41.9 100.0% $54.8 100.0% $56.2 100.0%
===== ===== ===== ===== ===== ===== ===== =====
(1) Excludes the gain from pension curtailment and restructuring charges. See
NOTE 10 to the "Notes to Consolidated Financial Statements."
23
EBITDA(1), (2)
(DOLLARS IN MILLIONS)
Three Months Ended Six Months Ended
----------------------------- -----------------------------
December 28, December 29, December 28, December 29,
2002 2001 2002 2001
------------- ------------- ------------- -------------
% of % of % of % of
$ Total $ Total $ Total $ Total
----- ----- ----- ----- ----- ----- ----- -----
Vegetables $26.2 61.8% $33.0 67.8% $38.7 57.6% $43.5 62.2%
Fruits 12.7 29.9 10.3 21.1 19.9 29.6 15.4 22.0
Snacks 3.0 7.1 3.1 6.4 6.4 9.5 6.3 9.0
Canned Meals 1.6 3.8 2.3 4.7 2.8 4.2 4.3 6.2
Other 1.0 2.4 0.9 1.8 2.0 3.0 1.9 2.7
----- ----- ----- ----- ----- ----- ----- -----
Continuing segments 44.5 105.0 49.6 101.8 69.8 103.9 71.4 102.1
Discontinued operations(3) (2.1) (5.0) (0.9) (1.8) (2.6) (3.9) (1.5) (2.1)
----- ----- ----- ----- ----- ----- ----- -----
Total $42.4 100.0% $48.7 100.0% $67.2 100.0% $69.9 100.0%
===== ===== ===== ===== ===== ===== ===== =====
(1) Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
is defined as the sum of pretax income before dividing with Pro-Fac, and
before interest expense, 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 gain from pension curtailment and restructuring charges. See NOTE
10 to the "Notes to Consolidated Financial Statements."
(3) Represents the operating results of operations to be sold. See NOTE 3 to
the "Notes to Consolidated Financial Statements."
CHANGES FROM SECOND QUARTER FISCAL 2002 TO SECOND QUARTER FISCAL 2003
NET SALES: Net sales from continuing operations for the fiscal 2003 period were
$274.4 million, a decrease of $15.8 million, or 5.4 percent, as compared to net
sales of $290.2 million in the fiscal 2002 period. This decrease is primarily
due to a decline in vegetable net sales of $10.9 million resulting from the
expiration of two co-pack contracts and a decline in non-branded vegetable
sales. See "Segment Review" below for further detail.
GROSS PROFIT: Gross profit in the fiscal 2003 period of $71.7 million was
consistent with the 2002 period, however, the Company's gross profit margin
increased to 26.1 percent from 24.7 percent in the prior year period. The
increase in gross margin is primarily the result of savings associated with the
headcount reductions described below, price increases implemented during both
the current and prior years, and the decrease in co-pack non-branded sales,
which typically carry a lower gross margin. In addition, the Company has also
benefited from reduced warehousing costs as a result of management initiatives
to reduce inventory levels. These improvements more than offset an increase in
production costs due to lower volumes in the Company's facilities as a result of
both management's efforts to reduce inventory levels and lower than anticipated
crop intake from unfavorable weather conditions. These higher production costs
are anticipated to negatively impact the Company's results through the first
quarter of fiscal 2004.
SELLING, ADMINISTRATIVE AND GENERAL EXPENSES: Selling, administrative and
general expenses in the 2003 period have increased $4.9 million to $35.7
million, as compared to $30.8 million in the 2002 period. This increase is
primarily the result of marketing efforts associated with the launch of the
Company's new frozen soup offering, Birds Eye Hearty Spoonfuls which more than
offset the savings from the headcount reductions described below.
OPERATING INCOME: Operating income from continuing operations (excluding the
restructuring charge described below) for the 2003 period was $37.2 million, a
decrease of $4.7 million, or 11.2 percent, as compared to $41.9 million in the
prior year period. This decrease is attributable to the factors discussed above.
The decrease in operating income within vegetables and canned meals was $6.9
million and $0.7 million, respectively. Increases in operating income within
fruits, snacks, and other were $2.6 million, $0.1 million, and $0.2 million,
respectively. Significant variances are highlighted below in the "Segment
Review."
24
RESTRUCTURING: On October 12, 2001, the Company announced a reduction of
approximately 7 percent of its nationwide workforce, for a total of
approximately 300 positions. The reductions were part of an ongoing focus on
low-cost operations and included both salaried and hourly positions. In
conjunction with the reductions, the Company recorded a charge against earnings
of approximately $1.6 million in the second quarter of fiscal 2002, primarily
consisting of employee termination benefits. This amount has been liquidated as
of December 28, 2002.
INCOME FROM JOINT VENTURE: This amount represents earnings received from the
investment in Great Lakes Kraut LLC, a joint venture between Agrilink Foods and
Flanagan Brothers, Inc. Income from the joint venture for the 2003 period
increased $0.1 million to $1.1 million, as compared to $1.0 million in the 2002
period.
INTEREST EXPENSE: Interest expense for the 2003 period was $12.3 million
compared to $16.2 million in the 2002 period. The reduction in interest expense
is due to lower debt levels resulting from the August 19, 2002 Transaction as
well as reduced interest rates. These reductions were offset by the amortization
of fees paid in connection with the new Senior Credit Facility and interest
expense related to the Termination Agreement with Pro-Fac.
PRO-FAC SHARE OF INCOME: Historically, the Company's contractual relationship
with Pro-Fac was defined in the marketing and facilitation agreement (the "Old
Marketing and Facilitation Agreement"), which the Company and Pro-Fac entered
into in November 1994. Under the Old Marketing and Facilitation Agreement, in
any year in which the Company had earnings on products which were processed from
crops supplied by Pro-Fac, the Company 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 the Company. In years in which the Company had losses on
Pro-Fac products, the Company reduced 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 were
determined at the end of the fiscal year, but were accrued on an estimated basis
during the year. The Amended and Restated Marketing and Facilitation Agreement,
entered into on August 19, 2002, in connection with the Transaction, does not
permit Agrilink Foods to offset its losses against the price paid for Pro-Fac
products or require Agrilink Foods to share its profits on Pro-Fac products with
Pro-Fac for any period subsequent to the end of Agrilink Food's fiscal 2002
year.
TAX PROVISION: Provision for income taxes in the 2003 period was $9.9 million
compared to a tax provision of $5.6 million in the 2002 period. The variance in
the amounts recorded is attributable to the increase in earnings before tax.
NET INCOME: Net income for the 2003 period was $13.6 million compared to net
income of $6.3 million in the 2002 period due to the factors noted above.
SEGMENT REVIEW
A detailed accounting of the significant reasons for changes in net sales and
EBITDA by product line is outlined below. EBITDA should not be considered as an
alternative to operating income, 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.
VEGETABLES: Vegetable net sales for the fiscal 2003 period were $199.8 million,
a decrease of $10.9 million, or 5.2 percent, as compared to $210.7 million in
the 2002 period. This decrease primarily was the result of the expiration of two
co-pack contracts that contributed $6.4 million of net sales in the prior year
period as well as the Company's decision not to pursue certain food service
contracts in the current year due to competitive pricing pressures. In addition,
branded net sales were reduced by $1.8 million. While branded net sales were
positively impacted by improvements in the core Birds Eye product lines and the
Company's new frozen soup offering, Birds Eye Hearty Spoonfuls, such amounts
were offset by declines in Birds Eye Voila! as a result of a continued decline
in the home replacement skillet meal category. Management has initiated actions
to address this decline in sales and expects improvement going forward.
The Company tracks retail sales in many of the categories in which it competes
using data from Information Resources, Inc. ("IRI"). IRI data are limited,
however, as IRI does not capture sales at several of the Company's customers
including Wal-Mart, Costco, and others. IRI also does not track non-branded or
private label retail sales by manufacturer. According to IRI, the frozen
vegetable category on a unit basis declined 2.8 percent for the 12-week period
ending January 5, 2003. Including management's estimate of the Company's share
of the private label market, the Company believes its overall market share on a
unit basis in the frozen vegetable category (excluding frozen soups) for the
12-week period ending January 5, 2003 was 32.3 percent compared to 32.5 percent
for the 12-weeks ending January 6, 2002. The home
25
replacement skillet meal category for the 12-week period ending January 5, 2003
declined 14 percent on a unit basis. Market share on a unit basis for the
Company's Birds Eye Voila! skillet meal product offering for the 12-week period
ending January 5, 2003 was 21.2 percent compared to 25.6 percent for the 12-week
period ending January 6, 2002.
EBITDA for the vegetable segment in the 2003 period decreased $6.8 million, or
20.6 percent, to $26.2 million, as compared to $33.0 million in the prior year
period. The decrease in EBITDA is primarily a result of marketing and launch
costs associated with the introduction of Birds Eye Hearty Spoonfuls. In
addition, the Company has seen an increase in its production costs due to lower
volumes in its production facilities as a result of management's efforts to
reduce inventory levels and lower than anticipated crop intake from unfavorable
weather conditions. These higher production costs are anticipated to negatively
impact the Company's results through the first quarter of fiscal 2004.
FRUIT: Fruit net sales for the 2003 period were $35.4 million, a decrease of
$3.8 million or 9.7 percent, as compared to $39.2 million in the 2002 period.
This decrease is primarily impacted by the reduced cherry crop harvested during
the calendar 2002 growing season which was drastically affected by weather.
EBITDA for the fruit segment in the 2003 period increased $2.4 million, or 23.3
percent, to $12.7 million, as compared to $10.3 million in the prior year
period. The increase in EBITDA is largely the result of recent price increases
taken on cherry items.
SNACKS: Net sales for the snack segment of $19.4 million and EBITDA of $3.0
million in the fiscal 2003 period were consistent compared to the fiscal 2002
period. The results of Tim's Cascade Style Potato Chips were positively impacted
by an expansion into new markets. However, this improvement was offset by
declines at Snyder of Berlin due to a decline in the snack category in the
regional markets in which these products compete.
CANNED MEALS: Net sales for the canned meals segment were $12.4 million, an
increase of $0.5 million, or 4.2 percent, as compared to $11.9 million in the
2002 period. EBITDA for the canned meals segment in the 2003 period declined
$0.7 million, to $1.6 million, as compared to $2.3 million in the prior year
period. The decline in EBITDA is largely the result of increased promotional
spending.
OTHER: Net sales for the other segment, which is comprised primarily of salad
dressings, were $7.4 million, a decrease of $1.5 million, or 16.9 percent, as
compared to $8.9 million in the 2002 period. The decrease in net sales is
primarily attributable to the loss of a food service customer. The loss of this
customer is not anticipated to have a significant impact on the Company's
profitability as evidenced by the modest increase in EBITDA for the quarter.
EBITDA for the other segment for the 2003 period increased $0.1 million, or 11.1
percent, to $1.0 million, as compared to $0.9 million in the prior period.
CHANGES FROM FIRST SIX MONTHS FISCAL 2002 TO FIRST SIX MONTHS FISCAL 2003
NET SALES: Net sales from continuing operations for the 2003 period were $482.5
million, a decrease of $51.3 million, or 9.6 percent, as compared to net sales
of $533.8 million in the 2002 period. This decrease is primarily due to a
decline in vegetable net sales of $44.5 million resulting from the expiration of
two co-pack contracts and a decline in non-branded vegetable sales. See "Segment
Review" below for further detail.
GROSS PROFIT: Gross profit in the 2003 period increased $1.3 million to $119.7
million, as compared to $118.4 million in the 2002 period. The Company's gross
profit margin increased to 24.8 percent from 22.2 percent in the prior year
period. The increase in gross margin is primarily the result of price increases
implemented during both the current and prior years and the decrease in co-pack
non-branded sales, which typically carry a lower gross margin. The Company also
benefited from reduced warehousing costs as a result of management initiatives
to reduce the Company's inventory levels. Gross margin was also improved as
lower production costs realized from the Company's headcount reduction initiated
in the second quarter of fiscal 2002 more than offset an increase in production
costs due to lower volumes in the Company's facilities as a result of both
management's efforts to reduce inventory levels and lower than anticipated crop
intake from unfavorable weather conditions.
SELLING, ADMINISTRATIVE AND GENERAL EXPENSES: Selling, administrative and
general expenses in the 2003 period have increased $3.2 million to $66.6
million, as compared to $63.4 million in the 2002 period. This increase is
primarily the result of marketing costs associated with the launch of the
Company's new frozen soup offering, Birds Eye Hearty Spoonfuls. These increases
were partially offset by savings associated with the headcount reduction
described below and selling and other general administrative reductions.
OPERATING INCOME: Operating income from continuing operations (excluding the
gain from pension curtailment and restructuring charges described below) for the
2003 period was $54.8 million, a decrease of $1.4 million, or 2.5 percent, as
compared to $56.2 million in the prior year period. This decrease is
attributable to the factors discussed above. The decrease in operating income
within vegetables and canned
26
meals were $5.3 million and $1.6 million, respectively. Increases in operating
income within fruits, snacks, and other were $4.9 million, $0.4 million, and
$0.2 million respectively. Significant variances are highlighted below in the
"Segment Review."
RESTRUCTURING: On June 23, 2000, the Company sold its pickle business to Dean
Pickle and Specialty Product Company. As part of that sale agreement, Agrilink
Foods agreed to contract pack Nalley and Farman's pickle products at its Tacoma,
Washington, facility for a period of two years (through June 2002). Once it
became evident that Dean Pickle and Specialty Product Company would not be
extending this contract packing arrangement beyond its initial two year term,
the Company announced restructuring plans in the first quarter of fiscal 2002
and took a related charge to convert the Tacoma facility to alternate uses. The
restructuring charge was $1.1 million and was primarily comprised of employee
termination benefits. This amount has been liquidated as of December 28, 2002.
In addition, on October 12, 2001, the Company announced a further reduction of
approximately 7 percent of its nationwide workforce, for a total of
approximately 300 positions. The reductions were part of an ongoing focus on
low-cost operations and included both salaried and hourly positions. In
conjunction with the reductions, the Company recorded a charge against earnings
of approximately $1.6 million in the second quarter of fiscal 2002, primarily
consisting of employee termination benefits. This amount has been liquidated as
of December 28, 2002.
GAIN FROM PENSION CURTAILMENT: During September 2001, the Company 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 in the fiscal 2002 period.
INCOME FROM JOINT VENTURE: This amount represents earnings received from the
investment in Great Lakes Kraut LLC, a joint venture between Agrilink Foods and
Flanagan Brothers, Inc. Income from the joint venture for the 2003 period
increased $0.5 million to $1.7 million, as compared to $1.2 million in the 2002
period. This improvement is primarily the result of pricing initiatives
implemented during the fiscal fourth quarter of 2002.
INTEREST EXPENSE: Interest expense for the 2003 period was $26.4 million
compared to $35.0 million in the 2002 period. The reduction in interest expense
is due to lower debt levels resulting from the August 19, 2002 Transaction and a
decrease in interest rates. These reductions were offset by the amortization of
fees paid in connection with the new Senior Credit Facility and interest expense
related to the Termination Agreement with Pro-Fac.
PRO-FAC SHARE OF INCOME: Historically, the Company's contractual relationship
with Pro-Fac was defined in the marketing and facilitation agreement (the "Old
Marketing and Facilitation Agreement"), which the Company and Pro-Fac entered
into in November 1994. Under the Old Marketing and Facilitation Agreement, in
any year in which the Company had earnings on products which were processed from
crops supplied by Pro-Fac, the Company 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 the Company. In years in which the Company had losses on
Pro-Fac products, the Company reduced 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 were
determined at the end of the fiscal year, but were accrued on an estimated basis
during the year. The Amended and Restated Marketing and Facilitation Agreement,
entered into on August 19, 2002, in connection with the Transaction, does not
permit Agrilink Foods to offset its losses against the price paid for Pro-Fac
products or require Agrilink Foods to share its profits on Pro-Fac products with
Pro-Fac for any period subsequent to the end of Agrilink Food's fiscal 2002
year.
TAX PROVISION: Provision for income taxes in the 2003 period was $11.4 million
compared to a tax provision of $5.3 million in the 2002 period. The variance in
the amounts recorded is attributable to the increase in earnings before tax.
NET INCOME: Net income for the 2003 period was $15.1 million compared to income
of $5.1 million in the 2002 period due to the factors noted above.
SEGMENT REVIEW
VEGETABLES: Vegetable net sales for the fiscal 2003 period were $342.7 million,
a decrease of $44.5 million, or 11.5 percent, as compared to $387.2 million in
the 2002 period. Net sales of the Company's non-branded vegetables decreased
$29.7 million. This decrease primarily was the result of the expiration of two
co-pack contracts that contributed $24.4 million of net sales in the prior year
period as well as the Company's decision not to pursue certain food service
contracts in the current year as a result of competitive pricing. Branded net
sales were reduced by $14.8 million for the six-month period ending December 28,
2002 as compared to the prior year. The Company's Birds Eye
27
Voila! skillet meal product offering accounted for approximately $9.0 million of
the decline as a result of a decline in the home replacement category and the
impact of competitive marketing efforts. In addition, declines in the Company's
regional branded product lines were experienced due to various competitive
pressures.
The Company tracks retail sales in many of the categories in which it competes
using data from Information Resources, Inc. ("IRI"). IRI data are limited,
however, as IRI does not capture sales at several of the Company's customers
including Wal-Mart, Costco, and others. IRI also does not track non-branded or
private label retail sales by manufacturer. According to IRI, the frozen
vegetable category on a unit basis declined 4.0 percent for the 26-week period
ending January 5, 2003. Including management's estimate of the Company's share
of the private label market, the Company believes its overall market share on a
unit basis in the frozen vegetable category for the 26-week period ending
January 5, 2003 was 31.7 percent compared to 32.4 percent for the 26-weeks
ending January 6, 2002. The home replacement skillet meal category for the
26-week period ending January 5, 2003 declined 16 percent on a unit basis.
Market share on a unit basis for the Company's Birds Eye Voila! skillet meal
product offering for the 26-week period ending January 5, 2003 was 23.3 percent
compared to 27.4 percent for the 26-week period ending January 6, 2002.
EBITDA for the vegetable segment in the 2003 period decreased $4.8 million, or
11.0 percent, to $38.7 million, as compared to $43.5 million in the prior year
period. The decrease in EBITDA is primarily a result of marketing expenses
associated with the launch of Birds Eye Hearty Spoonfuls.
FRUIT: Fruit net sales for the 2003 period were $61.2 million, a decrease of
$2.9 million or 4.5 percent, as compared to $64.1 million in the 2002 period.
This decrease primarily is associated with the shortfall in the cherry crop
harvested during the calendar 2002 growing season which was drastically affected
by weather.
EBITDA for the fruit segment in the 2003 period increased $4.5 million, or 29.2
percent, to $19.9 million, as compared to $15.4 million in the prior year
period. The increase in EBITDA is largely the result of price increases taken on
cherry items.
SNACKS: Net sales for the snack segment were $39.5 million, a slight decrease of
$0.2 million, or 0.5 percent, as compared to $39.7 million in the 2002 period.
EBITDA for the snack segment in the 2003 period increased $0.1 million, or 1.6
percent, to $6.4 million, as compared to $6.3 million in the prior year period.
The results of Tim's Cascade Style Potato Chips were positively impacted by an
expansion into new markets. However, this improvement was affected by declines
at Snyder of Berlin due to a decline in the snack category in the regional
markets in which these products compete.
CANNED MEALS: Net sales for the canned meals segment were $23.2 million, a
decrease of $1.1 million, or 4.5 percent, as compared to $24.3 million in the
2002 period. EBITDA for the canned meals segment in the 2003 period declined
$1.5 million, or 34.9 percent, to $2.8 million, as compared to $4.3 million in
the prior year period. The decline in EBITDA is largely the result of increased
promotional spending.
OTHER: Net sales for the other segment, which is comprised primarily of salad
dressings, were $15.9 million, a decrease of $2.6 million, or 14.1 percent, as
compared to $18.5 million in the 2002 period. The decrease in net sales is
primarily attributable to the loss of a food service customer. The loss of this
customer is not anticipated to have a significant impact on the Company's
profitability as evidenced by the modest increase in EBITDA.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the Unaudited
Consolidated Statement of Cash Flows for the six months ended December 28, 2002
compared to the six months ended December 29, 2001.
For the six months ended December 28, 2002 net cash provided by operating
activities was $21.2 million as compared to net cash used in operating
activities of $103.3 million for the six months ended December 29, 2001. This
represents an increase of $124.5 million, largely the result of a decline in
cash used to fund working capital needs. Net inventories and prepaid
manufacturing expense increased $12.6 million in the current period as compared
with an increase of $56.1 million during the same period last year. This
significant reduction is a result of management initiatives to reduce the
Company's inventory levels and the effects of a reduced crop in certain
commodities during the fall of 2002. Management believes these crop shortages
will not have a negative effect on the Company's ability to serve its customers.
Accounts payable and other accrued expenses decreased by $6.7 million in the
current period as compared with a $72.8 million decline during the same period
last year. Approximately $21.6 million of the prior year decline in accounts
payable and accrued liabilities related to the payment of the remaining balance
on a one-time inventory purchase from AgriFrozen Foods, Inc., a former
subsidiary of Pro-Fac. In addition, the decrease in the use of cash results from
the timing of the liquidation of outstanding balances. Management will continue
to focus its efforts on reducing the Company's working capital needs.
28
Net cash used in investing activities for the 2003 period decreased $2.4 million
to $6.1 million, as compared to $8.5 million in the prior year period. The
decrease was largely the result of a net reduction in working capital advances
to the Company's joint venture. Capital expenditures were $8.0 million for the
2003 period compared to $7.4 million in the prior year period. The purchase of
property, plant, and equipment was for general operating purposes and is
considered adequate to maintain its facilities in proper working order.
Net cash provided by financing activities for the 2003 period was $8.1 million
compared to $110.1 million in the 2002 period, representing a $102.0 million
decline. Much of this decline is due to reduced borrowing needs driven by a
$126.9 million reduction in cash used in operating and investing activities
during the first six months of fiscal 2003 as compared with the same period last
year. The Company also completed the Transaction with Pro-Fac Cooperative, Inc.
and Vestar/Agrilink Holdings LLC on August 19, 2002, resulting in a substantial
refinancing of, and modification to, its capital structure. See further
discussion below and at NOTE 2, "The Transaction" to the "Notes to Consolidated
Financial Statements" included herein.
SENIOR CREDIT FACILITY: In connection with the Transaction and on August 19,
2002, Agrilink Foods and certain of its subsidiaries entered into a senior
secured credit facility (the "Senior Credit Facility") in the amount of $470.0
million with a syndicate of banks and other lenders arranged and managed by
JPMorgan Chase Bank ("JPMorgan Chase Bank"), as administrative and collateral
agent. The Senior Credit Facility is comprised of (i) a $200.0 million senior
secured revolving credit facility (the "Revolving Credit Facility") and (ii) a
$270.0 million senior secured B term loan (the "Term Loan Facility"). The Term
Loan Facility has a maturity of six years. The Revolving Credit Facility has a
maturity of five years and allows up to $40.0 million to be available in the
form of letters of credit.
As of December 28, 2002, (i) there were no cash borrowings outstanding under the
Revolving Credit Facility, (ii) there were $22.0 million in letters of credit
outstanding, and (iii) availability under the Revolving Credit Facility, after
taking into account the amount of borrowings and letters of credit outstanding,
was $178.0 million. The Company believes that the cash flow generated by
operations and the amounts available under the Revolving Credit Facility provide
adequate liquidity to fund working capital needs and expenditures.
The Senior Credit Facility bears interest at the Company's option, at a base
rate or LIBOR plus, in each case, an applicable percentage. The appropriate
applicable percentage corresponds to the Company's Consolidated Leverage Ratio,
as defined by the Senior Credit Agreement, and is adjusted quarterly based on
the calculation of the Consolidated Leverage Ratio. As of December 28, 2002, the
Senior Credit Facility bears interest in the case of base rate loans at the base
rate plus (i) 1.75 percent for loans under the Revolving Credit Facility, and
(ii) 2.00 percent for loans under the Term Loan Facility or in the case of LIBOR
loans at LIBOR plus (i) 2.75 percent for loans under the Revolving Credit
Facility and (ii) 3.00 percent for loans under the Term Loan Facility. The
initial unused commitment fee is 0.50 percent on the daily average unused
commitment under the Revolving Credit Facility and varies based on the Company's
Consolidated Leverage Ratio. Based on the Company's Consolidated Leverage Ratio
as of December 28, 2002, management anticipates that interest rates will be
adjusted. The applicable interest rates will be lowered as of February 16, 2003
in the case of base rate loans to the base rate plus (i) 1.25 percent for loans
under the Revolving Credit Facility, and (ii) 1.75 percent for loans under the
Term Loan Facility or in the case of LIBOR loans to LIBOR plus (i) 2.25 percent
for loans under the Revolving Credit Facility, and (ii) 2.75 percent for loans
under the Term Loan Facility. Additionally, the unused commitment fee will be
lowered to 0.375 percent of the daily average unused commitment under the
Revolving Credit Facility.
Commencing December 31, 2002, the Term Loan Facility will require payments in
equal quarterly installments in the amount of $675,000 until its final maturity
in August 2008 upon which the balance will be due. The Term Loan Facility is
also subject to mandatory prepayments under various scenarios as defined in the
Senior Credit Agreement. Provisions of the Senior Credit Agreement require
annual payments, within 105 days after the end of each fiscal year, in the
amount of "excess cash flow" be utilized to prepay the Commitment at an
applicable percentage that corresponds to the Company's leverage ratio.
The Senior Credit Facility contains customary covenants and restrictions on the
Company's activities, including but not limited to: (i) limitations on the
incurrence of indebtedness; (ii) limitations on sale-leaseback transactions,
liens, investments, loans, advances, guarantees, acquisitions, asset sales, and
certain hedging agreements; and (iii) limitations on transactions with
affiliates and other distributions. The Senior Credit Facility also contains
financial covenants requiring the Company to maintain a maximum average debt to
EBITDA ratio, a maximum average senior debt to EBITDA ratio, and a minimum
EBITDA to interest expense ratio. As of December 28, 2002, the Company was in
compliance with all covenants, restrictions, and requirements under the terms of
the Senior Credit Facility.
The Company's obligations under the Senior Credit Facility are guaranteed by
Holdings Inc. and certain of the Company's subsidiaries. See NOTE 9, "Subsidiary
Guarantors" to the "Notes to Consolidated Financial Statements" included herein.
29
CONTRACTUAL OBLIGATIONS: The following is a schedule of Agrilink Foods' future
obligations under contracts as of December 28, 2002.
(DOLLARS IN MILLIONS)
Payments Due Within
----------------------------------------------------------------
Over 5
Contractual Obligations 1 Year 2 Years 3 Years 4 Years 5 Years Years Total
- ----------------------- ------ ------- ------- ------- ------- ------ ------
Term Loan Facility $ 2.7 $ 2.7 $ 2.7 $ 2.7 $2.7 $256.5 $270.0
Senior Subordinated Notes - 11 7/8 Percent 0.0 0.0 0.0 0.0 0.0 200.0 200.0
Subordinated Promissory Note 0.0 0.0 0.0 0.0 0.0 36.6 36.6
Obligations under capital leases 1.1 0.8 0.8 0.9 0.0 0.0 3.6
Operating leases 5.8 5.2 4.0 2.8 1.9 4.0 23.7
Termination Agreement 10.0 10.0 10.0 10.0 4.0 0.0 44.0
Other 4.1 0.0 0.0 0.0 0.0 0.0 4.1
----- ----- ----- ----- ---- ------ ------
$23.7 $18.7 $17.5 $16.4 $8.6 $497.1 $582.0
===== ===== ===== ===== ==== ====== ======
The Company's Term Loan Facility is guaranteed by Holdings Inc. and certain
subsidiaries. The Company's Senior Subordinated Notes are guaranteed by Pro-Fac
and certain subsidiaries. Agrilink Foods' Subordinated Promissory Note is
guaranteed by Pro-Fac.
The Senior Credit Facility includes the Revolving Credit Facility of $200.0
million which has a maturity of five years. Up to $40.0 million of the Revolving
Credit Facility is available in the forms of letters of credit.
Agrilink Foods entered into an agreement to provide a guarantee in September
1995 on behalf of the City of Montezuma to renovate a sewage treatment plant
operated in Montezuma, Georgia. Agrilink Foods issued a guarantee of the loan in
an original amount of approximately $2.3 million plus interest. The guarantee
expires in 2015 and requires payment upon the occurrence of a shortfall in
third-party revenue from the utilization of the sewage treatment plant. In the
event of such shortfall, Agrilink Foods would be required to pay the remainder
of the loan for the City of Montezuma. As of December 28, 2002, the outstanding
loan amount was $1.7 million.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts. The estimates and
assumptions are evaluated on a regular basis and are based on historical
experience and on various other factors that are believed to be reasonable.
Estimates and assumptions include, but are not limited to: inventories,
self-insurance programs, promotional activities, and identifiable intangible
assets, long-lived assets, and goodwill.
The following are considered our more critical estimates and assumptions used in
the preparation of the consolidated financial statements, although not
inclusive.
INVENTORIES: Under the FIFO method, the cost of items sold is based upon the
cost of the first such items produced. As a result, the last such items produced
remain in inventory and the cost of these items are used to reflect ending
inventory. The Company prices its inventory at the lower of cost or market value
on the first-in, first-out (FIFO) method.
A reserve is established for the estimated aged surplus, spoiled or damaged
products, and discontinued inventory items and components. The amount of the
reserve is determined by analyzing inventory composition, expected usage,
historical and projected sales information, and other factors. Changes in sales
volume due to unexpected economic or competitive conditions are among the
factors that could result in materially different amounts for this item.
SELF-INSURANCE PROGRAMS: We record estimates for certain health and welfare and
workers' compensation costs that are self-insured programs. Should a greater
amount of claims occur compared to what was estimated or costs of medical care
increase beyond what was anticipated, reserves recorded may not be sufficient
and additional costs could be incurred.
PROMOTIONAL ACTIVITIES: Our promotional activities are conducted either through
the retail trade channel or directly with consumers and involve in-store
displays; feature price discounts on our products; consumer coupons; and similar
activities. The costs of these activities are generally recognized at the time
the related revenue is recorded, which normally precedes the actual cash
expenditure. The recognition of
30
these costs therefore requires management's judgment regarding the volume of
promotional offers that will be redeemed by either the retail trade channel or
consumer. These estimates are made using various techniques including historical
data on performance of similar promotional programs. Differences between
estimated expense and actual redemptions are normally insignificant and
recognized as a change in management estimate in a subsequent period. However,
the likelihood exists of materially different reported results if different
assumptions or conditions were to prevail.
IDENTIFIABLE INTANGIBLE ASSETS, LONG-LIVED ASSETS, AND GOODWILL: The Company
assesses the carrying value of its identifiable intangible assets, long-lived
assets, and goodwill whenever events or changes in circumstances indicate that
the carrying amount of the underlying asset may not be recoverable. Certain
factors which may occur and indicate that an impairment exists include, but are
not limited to: significant under performance relative to historical or
projected future operating results; significant changes in the manner of the
Company's use of the underlying assets; and significant adverse industry or
market trends. In the event that the carrying value of assets are determined to
be unrecoverable, the Company would record an adjustment to the respective
carrying value.
ITEM 3. 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 December 28, 2002, the
Company had cash flow hedges for the Mexican peso with maturity dates ranging
from January 2003 to April 2003. At December 28, 2002, approximately $0.3
million after-tax loss is recorded in accumulated other comprehensive income in
shareholder's equity for this swap. Amounts deferred to accumulated other
comprehensive income will be reclassified into cost of goods sold. During the
second quarter and first six months of fiscal 2003, approximately $0.1 million
and $0.1 million, respectively, was reclassified from other comprehensive income
to cost of goods sold. Hedge ineffectiveness was insignificant.
Foreign Currency
Forward Outstanding
------------------------
Contract amounts 66 million Mexican pesos
Weighted average settlement exchange rate 9.865%
COMMODITY PRICES: The Company is exposed to commodity price risk related to
forecasted purchases of corrugated (unbleached kraftliner) in its manufacturing
process. To mitigate this risk, the Company entered into a swap agreement on
January 8, 2002 designated as a cash flow hedge of its forecasted corrugated
purchases. At December 28, 2002, the Company had an open swap hedging
approximately 65 percent of its annual corrugated requirements. The fair value,
as of December 28, 2002, of the agreement is an after-tax gain of approximately
$0.2 million recorded in other comprehensive income. During the second quarter
and first six months of fiscal 2003 quarter, the fair value of the hedge was
reduced by approximately $0.2 and $0.5 million, respectively, (after tax) due to
a decline in the floating rate/short ton for unbleached kraftliner. The
termination date for the agreement is June 2003.
Swap
Corrugated Outstanding
(Unbleached Kraftliner)
------------------------------
Notional amount 12,000 short tons
Average paid rate $400/short ton
Average receive rate Floating rate/short ton - $435
Maturities through June 2003
The Company is also exposed to commodity price risk related to forecasted
purchases of polyethylene in its manufacturing process. To mitigate this risk,
the Company entered into a swap agreement on April 11, 2002 designated as a cash
flow hedge of its forecasted polyethylene purchases. The swap hedges
approximately 80 percent of the Company's annual polyethylene requirements. The
fair value, as of December 28, 2002, of the agreement is approximately zero.
During the second quarter and first six months of fiscal 2003, the fair value
31
of the hedge was increased by approximately $0.1 million and $0.1 million,
respectively, (after tax) recorded in accumulated other comprehensive income due
to an increase in the floating rate/pound for polyethylene. The termination date
for the agreement is June 2003.
Swap
Polyethylene Outstanding
-------------------------
Notional amount 2,916,664 pounds
Average paid rate $.355/pound
Average receive rate Floating rate $.376/pound
Maturities through June 2003
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. In September 2001, the Company entered into an
interest rate cap agreement with a major financial institution which expires in
October 2003. The Company designates this interest rate cap as a cash flow
hedge.
The Company paid a one-time fee for the cap of approximately $0.6 million. Due
to current borrowing rates available, the fair value of the interest rate cap
was adjusted to zero as of September 28, 2002.
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 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 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. As a result, raw and frozen cherry costs have
significantly increased. To offset the cherry cost increase, management
implemented a price increase on cherry items effective June 2002.
For the 2002 crop season, dry weather conditions in the Company's New York and
Midwest growing regions have reduced crop intake. While the reduction in crop
intake has negatively impacted the efficiency of various production operations,
management has initiated cost reduction steps and is actively pursuing
additional cost reduction initiatives in an attempt to mitigate some
crop-related production cost increases.
MARKET AND INDUSTRY DATA
Unless otherwise stated herein, industry and market share data used throughout
this discussion 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.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures, as defined in Rule
15d-14(c) promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"). Within the 90 days prior to the filing date of this report, the Company's
management, including the Company's chief executive officer and chief financial
officer, carried out an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on the
evaluation of these disclosure controls and procedures, the chief executive
officer and chief financial officer concluded that the Company's disclosure
controls and procedures are effective.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
32
PART II
ITEM 1. LEGAL PROCEEDINGS
Certain of our legal proceedings are reported in our Annual Report on Form 10-K
Equivalent for the year ended June 29, 2002 and our Quarterly Report on Form
10-Q Equivalent for the quarter ended September 28, 2002, with material
developments since those reports described in NOTE 10, "Other Matters," to the
"Notes to Consolidated Financial Statements," which information is incorporated
by reference in answer to this item.
ITEM 5. OTHER INFORMATION
Certain events have occurred subsequent to the quarter end reported in this Form
10-Q Equivalent. Specifically, the Company has announced a name change,
restructuring activities which contemplate the closure of several facilities,
and an agreement in principle with its joint venture, Great Lakes Kraut Company,
LLC. For further information see NOTE 11, "Subsequent Events," to the "Notes to
Consolidated Financial Statements," included herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------------------------------------------------
10.1 Management Incentive Program, as amended and restated
(filed herewith).
(b) Reports on Form 8-K:
On October 10, 2002, the Company filed a report on Form 8-K to
report a change in its certifying accountant.
33
SIGNATURES
The Company has duly caused this 10-Q Equivalent to be signed on its behalf by
the undersigned, thereunto duly authorized.
AGRILINK FOODS, INC.
Date: February 7, 2003 By: /s/ Earl L. Powers
---------------------------------
EARL L. POWERS
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER and
SECRETARY
(ON BEHALF OF THE REGISTRANT AND AS
PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER)
34
CERTIFICATION
I, Dennis M. Mullen, certify that:
1. I have reviewed this quarterly report on Form 10-Q Equivalent of Agrilink
Foods, 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: February 7, 2003 /s/ Dennis M. Mullen
-------------------------------------
DENNIS M. MULLEN
Chairman,
President and Chief Executive Officer
(Principal Executive Officer)
35
CERTIFICATION
I, Earl L. Powers, certify that:
1. I have reviewed this quarterly report on Form 10-Q Equivalent of Agrilink
Foods, 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: February 7, 2003 /s/ Earl L. Powers
-------------------------------------
EARL L. POWERS
Executive Vice President,
Chief Financial Officer
and Secretary
(Principal Financial Officer)
36