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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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Form 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended 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 __________
Commission File Number 0-20539
PRO-FAC COOPERATIVE, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 16-6036816
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
90 Linden Place, PO Box 30682, Rochester, NY 14603-0682
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (585) 383-1850
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by checkmark whether the Registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
YES NO
--- ---
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 11, 2003.
Common Stock - 1,939,272
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Page 1 of 20 Pages
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Pro-Fac Cooperative, Inc.
Consolidated Statements of Operations, Net Proceeds and Comprehensive
Income/(Loss)
(Unaudited)
(Dollars in Thousands)
Three Months Ended Six Months Ended
--------------------------- -----------------------------
December 28, December 29, December 28, December 29,
2002 2001 2002 2001
------- -------- ------- --------
Net sales $ 0 $ 294,549 $ 103,726 $543,781
Cost of sales 0 (223,886) (80,644) (427,248)
-------- ---------- --------- ---------
Gross profit 0 70,663 23,082 116,533
Equity income from Agrilink Holdings LLC (for the period
September 29, 2002 to December 28, 2002 and the period
August 19, 2002 to December 28, 2002, respectively) 3,796 0 3,652 0
Gain from transaction with Agrilink Foods, Inc.
and related agreements 1,186 0 7,990 0
Selling, administrative, and general expense (for
the period September 29, 2002 to December 28, 2002
and the period August 19, 2002 to December 28, 2002,
respectively) (284) 0 (810) 0
Selling, administrative, and general expense 0 (30,928) (15,468) (63,767)
Legal settlement (1,538) 0 (1,585) 0
Gain from pension curtailment 0 0 0 2,472
Other income 0 950 277 1,198
Restructuring 0 (1,572) 0 (2,622)
------- -------- ------- --------
Operating income 3,160 39,113 17,138 53,814
Interest income 4 0 7 0
Interest expense 0 (16,479) (7,747) (35,692)
------- -------- ------- --------
Income before taxes 3,164 22,634 9,398 18,122
Tax provision (for the period September 29, 2002 to
December 28, 2002 and the period August 19, 2002 to
December 28, 2002, respectively) (677) 0 (1,536) 0
Tax provision 0 (7,328) (59) (5,544)
------- -------- ------- --------
Net income $ 2,487 $ 15,306 $ 7,803 $ 12,578
======= ======== ======= ========
Allocation of net proceeds:
Net income $ 2,487 $ 15,306 $ 7,803 $ 12,578
Dividends on common and preferred stock (1,935) (1,946) (4,388) (4,455)
------- -------- ------- --------
Net proceeds 552 13,360 3,415 8,123
Allocation to accumulated deficit (552) (8,757) (3,415) (3,520)
------- -------- ------- --------
Net proceeds available to members $ 0 $ 4,603 $ 0 $ 4,603
======= ======== ======= ========
Estimated allocation of net proceeds available to members:
Payable to members currently $ 0 $ 1,151 $ 0 $ 1,151
Allocated to members but retained by the Cooperative:
Qualified retains 0 3,452 0 3,452
------- -------- ------- --------
Net proceeds available to members 0 $ 4,603 $ 0 $ 4,603
======= ======== ======= ========
Net income $ 2,487 $ 15,306 $ 7,803 $ 12,578
Other comprehensive income/(loss):
Unrealized gain/(loss) on hedging activity (net of taxes) 0 66 0 (374)
------- -------- ------- --------
Comprehensive income $ 2,487 $ 15,372 $ 7,803 $ 12,204
======= ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
Pro-Fac Cooperative, Inc.
Consolidated Balance Sheets
(Unaudited)
(Dollars in Thousands) ASSETS December 28, June 29,
2002 2002
-------- ---------
Current assets:
Cash and cash equivalents $ 262 $ 14,686
Accounts receivable, trade and other, net 0 76,000
Accounts receivable from Agrilink Foods, Inc. 18,660 0
Current portion of Transitional Services receivable from Agrilink Foods, Inc. 525 0
Inventories, net 0 294,315
Current investment in CoBank 0 3,347
Prepaid manufacturing expense 0 19,168
Prepaid expenses and other current assets 85 18,770
Current deferred tax asset 438 2,923
-------- ---------
Total current assets 19,970 429,209
Transitional Services receivable from Agrilink Foods, Inc. 333 0
Investment in Agrilink Holdings LLC 29,512 0
Investment in CoBank 59 6,294
Investment in and advances to joint venture 0 14,586
Property, plant, and equipment, net 0 288,120
Goodwill 0 56,210
Other intangible assets, net 0 11,305
Non-current deferred tax asset 0 4,837
Other assets 0 26,109
-------- ---------
Total assets $ 49,874 $ 836,670
======== =========
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION
Current liabilities:
Current portion of long-term debt and
obligations under capital leases $ 0 $ 15,737
Accounts payable 260 71,262
Income taxes payable 0 879
Accrued interest 0 6,255
Other accrued expenses 1,250 48,150
Amounts due members 18,600 15,379
-------- ---------
Total current liabilities 20,110 157,662
Obligations under capital leases 0 2,528
Long-term debt 0 623,057
Non-current deferred tax liability 1,974 0
Other non-current liabilities 0 28,918
-------- ---------
Total liabilities 22,084 812,165
Commitments and contingencies
Class B cumulative redeemable preferred stock, liquidation
preference $10 per share; authorized - 500,000 shares; issued and
outstanding 20,643 shares 206 206
Common stock, par value $5, authorized - 5,000,000 shares; issued
and outstanding 1,939,273 and 2,038,553, respectively 9,696 10,193
Shareholders' and members' capitalization:
Retained earnings allocated to members 17,050 17,050
Non-cumulative preferred stock, par value $25, authorized
5,000,000 shares; issued and outstanding 29,847 shares 746 746
Class A cumulative preferred stock, liquidation preference $25 per share,
authorized 10,000,000 shares; issued and
outstanding 4,497,904 shares 112,448 112,448
Special membership interests 21,733 0
Accumulated deficit (134,089) (115,771)
Accumulated other comprehensive income/(loss):
Unrealized gain on hedging activity 0 206
Minimum pension liability adjustment 0 (573)
-------- ---------
Total shareholders' and members' capitalization 17,888 14,106
-------- ---------
Total liabilities and shareholders' and members' capitalization $ 49,874 $ 836,670
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
Pro-Fac Cooperative, Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
Six Months Ended
-----------------------------------
December 28, December 29,
2002 2001
-------------- ------------
Cash Flows from Operating Activities:
Net income $ 7,803 $ 12,578
Estimated cash payment due to members 0 (1,151)
Adjustments to reconcile net income to net cash used
in operating activities:
Amortization of goodwill and other intangible assets 144 592
Amortization of debt issue costs, amendment costs, and
discount on subordinated promissory notes 1,201 3,224
Depreciation 3,833 15,376
Amortization of Transitional Services Agreement 192 0
Gain from transaction with Agrilink Foods, Inc. and related agreements (7,990) 0
Equity income from Agrilink Holdings LLC (for the period August 19, 2002
to December 28, 2002) (3,652) 0
Equity in undistributed earnings of joint venture (277) (1,099)
Change in assets and liabilities:
Accounts receivable 1,818 (6,121)
Inventories and prepaid manufacturing expense (33,170) (56,148)
Income taxes payable (76) 938
Accounts payable and other accrued expenses (9,522) (75,231)
Amounts due members 8,649 5,908
Deferred tax asset and liability 1,537 0
Other assets and liabilities, net 737 (464)
------------ -----------
Net cash used in operating activities (28,773) (101,598)
------------ -----------
Cash Flows from Investing Activities:
Proceeds from Termination Agreement with Agrilink Foods, Inc. 6,000 0
Purchase of property, plant and equipment (2,187) (7,363)
Proceeds from disposals of property, plant, and equipment 0 36
Proceeds from investment in CoBank 1,115 2,665
Advances to joint venture (1,512) 0
Agrilink Foods, Inc. - Cash at the date of deconsolidation (5,818) 0
----------- -----------
Net cash used in investing activities (2,402) (4,662)
----------- -----------
Cash Flows from Financing Activities:
Net proceeds from issuance of short-term debt 22,000 114,800
Payments on long-term debt (292) (3,047)
Payments on capital leases (38) 0
Cash paid in conjunction with debt amendment 0 (1,694)
Repurchases of common stock, net (497) (1,087)
Cash dividends paid (4,422) (4,455)
----------- -----------
Net cash provided by financing activities 16,751 104,517
----------- -----------
Net change in cash and cash equivalents (14,424) (1,743)
Cash and cash equivalents at beginning of period 14,686 7,656
----------- -----------
Cash and cash equivalents at end of period $ 262 $ 5,913
=========== ===========
Supplemental Schedule of Non-Cash Investing Activities
Value of Pro-Fac's 40.72 percent common equity
ownership in Agrilink Holdings LLC $ 31,400 $ 0
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
PRO-FAC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Pro-Fac Cooperative, Inc. ("Pro-Fac" or the
"Cooperative") is a New York agricultural cooperative corporation which markets
crops grown by its members. Agrilink Foods, Inc. ("Agrilink Foods", effective
February 10, 2003, Agrilink Foods, Inc. changed its name to "Birds Eye Foods,
Inc."), through August 18, 2002, was a wholly-owned subsidiary of Pro-Fac.
Prior to August 19, 2002, the results of the Cooperative were consolidated
with Agrilink Foods and intercompany transactions and balances were eliminated.
Subsequent to August 18, 2002, Pro-Fac no longer consolidates Agrilink Foods
but accounts for its investment in Agrilink Holdings LLC (as that entity is
described below in this NOTE 1 to the "Notes to Consolidated Financial
Statements") under the equity method of accounting. Full financial statements
as filed or to be filed by Agrilink Foods are included as an Exhibit to this
Form 10-Q and are hereby incorporated into this filing. See the detailed
description of the August 19, 2002 transaction below.
The operating activities of Pro-Fac for periods prior to August 19, 2002 reflect
products sold through Agrilink Foods' four primary product lines consisting of:
vegetables, fruits, snacks, and canned meals. The majority of each of the
product lines' net sales was within the United States. In addition, all of
Agrilink Foods' operating facilities, excluding one in Mexico, were within the
United States.
Prior to August 19, 2002, the Cooperative also conducted business under the name
of Agrilink. In addition, the boards of directors of Agrilink Foods and Pro-Fac
conducted joint meetings, coordinated their activities, and acted on a
consolidated basis.
The Transaction: On August 19, 2002 (the "Closing Date"), pursuant to the terms
of the Unit Purchase Agreement dated as of June 20, 2002 (the "Unit Purchase
Agreement"), by and among Pro-Fac, Agrilink Foods, at the time a New York
corporation and a wholly-owned subsidiary of Pro-Fac, and Vestar/Agrilink
Holdings LLC, a Delaware limited liability company ("Vestar/Agrilink Holdings"):
(i) Pro-Fac contributed to the capital of Agrilink Holdings LLC, a Delaware
limited liability company ("Holdings LLC"), all of the shares of
Agrilink Foods' common stock owned by Pro-Fac, constituting 100 percent
of the issued and outstanding shares of Agrilink Foods' capital stock,
in consideration for Class B common units of Holdings LLC, representing
a 40.72 percent common equity ownership; and
(ii) Vestar/Agrilink Holdings and certain co-investors (collectively,
"Vestar") contributed cash in the aggregate amount of $175.0 million to
the capital of Holdings LLC, in consideration for preferred units,
Class A common units, and warrants which were immediately exercised to
acquire additional Class A common units. After exercising the warrants,
Vestar owns 56.24 percent of the common equity of Holdings LLC. The
co-investors are either under common control with, or have delivered an
unconditional voting proxy to, Vestar/Agrilink Holdings.
The transactions contemplated in and consummated pursuant to the Unit Purchase
Agreement, are referred to herein collectively as the "Transaction."
Immediately following Pro-Fac's contribution of its shares of Agrilink Foods'
common stock to Holdings LLC, Holdings LLC contributed those shares to Agrilink
Holdings Inc. ("Holdings Inc.", effective February 10, 2003, Agrilink Holdings,
Inc. changed its name to "Birds Eye Holdings Inc."), a Delaware corporation
and a direct, wholly-owned subsidiary of Holdings LLC, and Agrilink Foods
became an indirect, wholly-owned subsidiary of Holdings LLC. As a result of
the Transaction, Pro-Fac owns 40.72 percent and Vestar owns 56.24 percent of
the common equity securities of Holdings LLC. The Class A common units entitle
the owner thereof - Vestar - to two votes for each Class A common unit held.
All other Holdings LLC common units entitle the holder(s) thereof to one vote
for each common unit held. Accordingly, Vestar has a voting majority of all
common units.
As part of the Transaction, Stephen R. Wright, the general manager and secretary
of Pro-Fac, together with executive officers of Agrilink Foods, and certain
other members of Agrilink Foods' management, entered into subscription
agreements with Holdings LLC to acquire (using a combination of cash and
promissory notes issued to Holdings LLC) an aggregate of approximately $1.3
million of Class C common units and Class D common units of Holdings LLC,
representing approximately 3.04 percent of the common equity ownership.
See NOTE 2 to the "Notes to Consolidated Financial Statements" for additional
disclosures regarding agreements with Agrilink Foods and discussion of the
related gain.
5
Basis of Presentation: The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information required by GAAP
for complete financial statement presentation. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations have been included. Operating
results for the period ended December 28, 2002 are not necessarily indicative of
the results to be expected for other interim periods or the full year. These
financial statements should be read in conjunction with the financial statements
and accompanying notes contained in the Pro-Fac Cooperative, Inc. Form 10-K for
the fiscal year ended June 29, 2002.
New Accounting Pronouncements: In August 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standard
("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets." Effective June 30, 2002, the Cooperative adopted SFAS No. 144 which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The statement requires an impairment loss be recognized if
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flow and that the impairment loss be recognized as the
difference between the carrying amount and fair value of the asset. Under SFAS
No. 144, assets held for sale that are a component of an entity will be included
in discontinued operations if the operations and cash flows will be or have been
eliminated from the ongoing operations of the entity, and the entity will not
have any significant continuing involvement in the future operations. The
adoption of SFAS No. 144 did not have a significant effect on the operations of
the Cooperative.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supersedes
Emerging Issues Task Force ("EITF) Issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. EITF 94-3 required a liability for
exit costs be recognized at the date of an entity's commitment to an exit plan.
The provisions of SFAS No. 146 must be adopted for exit or disposal activities
that are initiated after December 31, 2002.
NOTE 2. AGREEMENTS WITH AGRILINK FOODS
In connection with the Transaction, Agrilink Foods and Pro-Fac entered into
several agreements effective as of the Closing Date, including the following:
Termination Agreement: Pro-Fac and Agrilink Foods entered into a letter
agreement dated as of the Closing Date (the "Termination Agreement"), pursuant
to which, among other things, the marketing and facilitation agreement between
Pro-Fac and Agrilink Foods (the "Marketing and Facilitation Agreement") which,
until the Closing Date, governed the crop supply and purchase relationship
between Agrilink Foods and Pro-Fac, has been terminated. In consideration of
such termination, Agrilink Foods will pay Pro-Fac a termination fee of $10.0
million per year for five years, provided that certain ongoing conditions are
met, including maintaining grower membership levels sufficient to generate
certain minimum crop supply. The $10.0 million payment will be paid in quarterly
installments to the Cooperative as follows: $4.0 million on each July 1, and
$2.0 million each on October 1, January 1, and April 1. The Termination
Agreement provided that the first payment in the amount of $4.0 million was to
be paid on the Closing Date and the next payment made by October 1, 2002 and
quarterly thereafter as outlined in the agreement. The Cooperative therefore
received $4.0 million from Agrilink Foods on August 19, 2002, $2.0 million on
October 1, 2002 and $2.0 million on January 1, 2003.
Payments under the Termination Agreement are considered additional consideration
related to the Transaction. Accordingly, 40.72 percent of the payments received
under the Termination Agreement are recorded as an adjustment to Pro-Fac's
investment in Holdings LLC. The remaining 59.28 percent of the annual payment
will be recognized as additional gain from the transaction with Agrilink Foods
in the period received. Accordingly, through the first six months of fiscal
2003, Pro-Fac recognized approximately $3.6 million as additional gain from the
receipt of the termination payments.
6
Transitional Services Agreement: Pro-Fac and Agrilink Foods entered into a
transitional services agreement (the "Transitional Services Agreement") dated as
of the Closing Date, pursuant to which Agrilink Foods will provide Pro-Fac
certain administrative and other services for a period of 24 months from the
Closing Date. Agrilink Foods will generally provide such services at no charge
to Pro-Fac, other than reimbursement of the incremental and out-of-pocket costs
associated with performing those services for Pro-Fac. Pursuant to the
Transitional Services Agreement, the general manager of Pro-Fac may also be an
employee of Agrilink Foods, in which case he will report to the Chief Executive
Officer of Agrilink Foods with respect to his duties for Agrilink Foods, and to
the Pro-Fac board of directors with respect to duties performed by him for
Pro-Fac. All other individuals performing services under the Transitional
Services Agreement report to the Chief Executive Officer (or other
representatives) of Agrilink Foods. Stephen R. Wright, the General Manager and
Secretary of Pro-Fac, is also an employee of Agrilink Foods. As an employee of
Agrilink Foods, Mr. Wright's salary is paid by Agrilink Foods.
Pro-Fac has recorded the estimated value of these services, $1.0 million, as
services receivable and proceeds from the Transaction, prior to elimination of
40.72 percent of the amount of Pro-Fac's investment in Holdings LLC. This
estimated value of the services to be received by the Cooperative will be
amortized to expense over the term of the Transitional Services Agreement.
Accordingly, through the first six months of fiscal 2003, Pro-Fac recognized
approximately $.6 million as additional gain from the Transitional Services
Agreement.
Gain from transaction with Agrilink Foods, Inc. and related agreements: Prior to
the Transaction, certain amounts owed by Pro-Fac to Agrilink Foods were
forgiven. The amounts forgiven were approximately $36.5 million and represented
both borrowings for the working capital needs of Pro-Fac and a $9.4 million
demand payable. After adjusting for the amounts forgiven, Pro-Fac's investment
in Agrilink Foods prior to the Transaction was approximately $24.9 million. The
value of the Cooperative's 40.72 percent common equity ownership in Holdings LLC
is valued at $31.4 million. The Cooperative recognized a gain of $3.8 million
from this exchange.
As a result of the agreements described above, based on the 40.72 percent common
equity ownership, the Cooperative recognized a total gain, through the first six
months of fiscal 2003, of approximately $8.0 million.
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 Marketing and Facilitation Agreement and
provides that, among other things, Pro-Fac will be Agrilink Foods' preferred
supplier of crops. Agrilink Foods will also continue to pay Pro-Fac the
commercial market value ("CMV") for all crops supplied by Pro-Fac, in
installments corresponding to the dates of payment by Pro-Fac to its members for
crops delivered. CMV is defined as the weighted average price paid by other
commercial processors for similar crops sold under preseason contracts and in
the open market in the same or competing market area. Although CMV is intended
to be no more than the fair market value of the crops purchased by Agrilink
Foods, it may be more or less than the price Agrilink Foods would pay in the
open market in the absence of the relationship. The processes for determining
CMV under the Amended and Restated Marketing and Facilitation Agreement are
substantially the same as the processes used under the Marketing and
Facilitation Agreement. Agrilink Foods will make payments to Pro-Fac of an
estimated CMV for a particular crop year, subject to adjustments to reflect the
actual CMV following the end of such year. Commodity committees of Pro-Fac will
meet with Agrilink Foods management to establish CMV guidelines, review
calculations, and report to a joint CMV committee of Pro-Fac and Agrilink Foods.
Amounts received by Pro-Fac from Agrilink Foods for the CMV for all crops
delivered for the six months ended December 28, 2002 and December 29, 2001 were
$53.1 million and $66.6 million, respectively. As of December 28, 2002, the
Cooperative owed $18.6 million to its members for crops delivered. A comparable
amount was owed to the Cooperative by Agrilink Foods. Under the provision of
EITF 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent," the
Cooperative records activity between Agrilink Foods, itself, and its members on
a net basis.
Unlike the Marketing and Facilitation Agreement, the Amended and Restated
Marketing and Facilitation Agreement does not permit Agrilink Foods to offset
its losses from products supplied by Pro-Fac or require it to share with Pro-Fac
its profits and it does not require Pro-Fac to reinvest in Agrilink Foods any
part of Pro-Fac's patronage income. Historically, under the Marketing and
Facilitation Agreement, in any year in which Agrilink Foods had earnings on
products which were processed from crops supplied by Pro-Fac ("Pro-Fac
Products"), Agrilink Foods paid to Pro-Fac, as additional patronage income, 90
percent of such earnings, but in no case more than 50 percent of all pretax
earnings of Agrilink Foods (before dividing with Pro-Fac). In years in which
Agrilink Foods had losses on Pro-Fac Products, Agrilink Foods reduced the CMV it
would otherwise pay to Pro-Fac by 90 percent of such losses, but in no case by
more than 50 percent of all pretax losses of Agrilink Foods (before dividing
with Pro-Fac). Additional patronage income was paid to Pro-Fac for services
provided to Agrilink Foods, including the provision of a long term, stable crop
supply, favorable payment terms for crops, and the sharing of risks of losses of
certain operations of the business. Under the Marketing and Facilitation
Agreement, earnings and losses were determined at the end of the fiscal year,
but were accrued on an estimated basis during the year. Pro-Fac's share of
earnings was $9.1 million for the six months ended December 29, 2001. Pro-Fac
was also required to reinvest at least 70 percent of the additional patronage
income in Agrilink Foods. Since Pro-Fac's acquisition of Agrilink Foods in 1994
and prior to August 19, 2002, Pro-Fac had invested an additional $50.8 million
in Agrilink Foods.
7
The Amended and Restated Marketing and Facilitation Agreement also provides that
Agrilink Foods will continue to provide to Pro-Fac services relating to
planning, consulting, sourcing and harvesting crops from Pro-Fac members in a
manner consistent with past practices. In addition, for a period of five years
from the Closing Date, Agrilink Foods may provide Pro-Fac with services related
to the expansion of the market for the agricultural products of Pro-Fac members
(at no cost to Pro-Fac other than reimbursement of Agrilink Foods' incremental
and out-of-pocket expenses related to providing such services as agreed to by
Pro-Fac and Agrilink Foods).
Under the Amended and Restated Marketing and Facilitation Agreement, Agrilink
Foods determines the amount of crops which Agrilink Foods will acquire from
Pro-Fac for each crop year. If the amount to be purchased by Agrilink Foods
during a particular crop year does not meet (i) a defined crop amount and (ii) a
defined target percentage of Agrilink Foods' needs for each particular crop,
then certain shortfall payments will be made by Agrilink Foods to Pro-Fac. The
defined crop amounts and targeted percentages are set based upon the needs of
Agrilink Foods in the 2001 crop year (fiscal 2002). The shortfall payment
provisions of the agreement include a maximum shortfall payment, determined for
each crop, that can be paid over the term of the Amended and Restated Marketing
and Facilitation Agreement. The aggregate shortfall payment amounts for all
crops covered under the agreement cannot exceed $20.0 million over the term of
the agreement.
The Amended and Restated Marketing and Facilitation Agreement may be terminated
by Agrilink Foods in connection with certain change in control transactions
affecting Agrilink Foods or Holdings, Inc.; provided, however, that in the event
that any such change in control occurs during the first three years after the
Closing Date, Agrilink Foods must pay to Pro-Fac a termination fee of $20.0
million (less the total amount of any shortfall payments previously paid to
Pro-Fac under the Amended and Restated Marketing and Facilitation Agreement).
Also, if, during the first three years after the Closing Date, Agrilink Foods
sells one or more portions of its business, and if the purchaser does not
continue to purchase the crops previously purchased by Agrilink Foods with
respect to the transferred business, then such failure will be taken into
consideration when determining if Agrilink Foods is required to make any
shortfall payments to Pro-Fac. After such three-year period, Agrilink Foods may
sell portions of its business and the volumes of crop purchases previously made
by Agrilink Foods with respect to such transferred business will be disregarded
for purposes of determining shortfall payments.
NOTE 3. INVENTORIES
Prior to August 19, 2002, the results of the Cooperative were consolidated with
its then wholly-owned subsidiary, Agrilink Foods.
The major classes of inventories of Agrilink Foods at June 29, 2002 were as
follows:
(Dollars in Thousands)
June 29,
2002
----------
Finished goods $ 266,469
Raw materials and supplies 27,846
----------
Total inventories $ 294,315
==========
NOTE 4. ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addressed financial accounting and reporting for acquired
goodwill and other intangible assets, and is effective for fiscal years
beginning after December 15, 2001, with early adoption permitted for entities
with fiscal years beginning after March 15, 2001. Effective July 1, 2001,
Agrilink Foods, a then wholly-owned subsidiary of Pro-Fac, adopted SFAS No. 142,
which requires that goodwill not be amortized, but instead be tested at least
annually for impairment and expensed against earnings when its implied fair
value is less than its carrying amount.
During the quarter ended June 29, 2002, Agrilink Foods identified certain
indicators of possible impairment of its goodwill. The main indicators of
impairment included the recent deterioration of general economic conditions,
lower valuations resulting from current market declines, modest category
declines in segments in which Agrilink Foods operates, and the completion of the
terms of the Transaction with Pro-Fac and Vestar/Agrilink Holdings. These
factors indicated an erosion in the market value of Agrilink Foods since the
adoption of SFAS No. 142.
As outlined under SFAS No. 142, the impairment test adhered to was a two-step
process. The first step was a review as to whether there was an indication that
goodwill was impaired. To do this, Agrilink Foods identified its reporting units
and determined the carrying value of each by assigning Agrilink Foods' assets
and liabilities, including existing goodwill. Agrilink Foods then determined
8
the fair value of each reporting unit by using a combination of comparable food
industry trading and transaction multiples, including the implied multiple in
the Transaction with Pro-Fac and Vestar/Agrilink Holdings.
In the second step, Agrilink Foods compared the implied fair value of the
goodwill to its carrying value to measure the amount of the impairment. In the
fourth quarter of fiscal 2002, Agrilink Foods recorded a one-time, pretax,
non-cash charge of approximately $179.0 million to reduce the carrying value of
its goodwill. The tax benefit associated with this non-cash charge was
approximately $41.5 million.
As outlined in SFAS No. 142, certain intangibles with a finite life, however,
are required to continue to be amortized. The following schedule sets forth the
major classes of intangible assets of Agrilink Foods at June 29, 2002:
(Dollars in Thousands)
June 29,
2002
----------
Amortized intangibles:
Covenants not to compete $ 2,478
Other 12,000
Less: accumulated amortization (3,173)
----------
Other intangible assets, net $ 11,305
==========
The aggregate amortization expense associated with intangible assets for the
second quarter and first six months ended December 29, 2001 were approximately
$0.3 million and $0.6 million respectively.
NOTE 5. DEBT
Credit Agreement: Agrilink Foods and Pro-Fac have entered into a Credit
Agreement, dated August 19, 2002 (the "Credit Agreement"), pursuant to which
Agrilink Foods has agreed to make available to Pro-Fac loans in an aggregate
principal amount of up to $5.0 million (the "Credit Facility "). Pro-Fac is
permitted to draw up to $1.0 million per year under the Credit Facility, unless
Agrilink Foods is prohibited from making such advances under the terms of
certain third party indebtedness of Agrilink Foods. Amounts not drawn in a year
will not be carried forward. The amount of the Credit Facility will be reduced,
on a dollar-for-dollar basis, to the extent of certain distributions made by
Holdings LLC to Pro-Fac in respect of its ownership in Holdings LLC. Pro-Fac has
pledged all of its Class B common units in Holdings LLC as security for advances
under the Credit Facility. Advances outstanding under the Credit Agreement bear
interest at 10 percent per annum. There were no amounts outstanding under this
Credit Agreement at December 28, 2002.
Summary of Long-Term Debt at June 29, 2002: Prior to August 19, 2002, the
results of the Cooperative were consolidated with its then wholly-owned
subsidiary, Agrilink Foods.
The summary of long-term debt of Agrilink Foods at June 29, 2002 was as follows:
(Dollars in Thousands)
June 29,
2002
-----------
Term Loan Facility $ 400,800
Senior Subordinated Notes 200,015
Subordinated Promissory Notes (net of discount) 32,696
Other 4,462
-----------
Total debt 637,973
Less current portion (14,916)
-----------
Total long-term debt $ 623,057
===========
In conjunction with the Transaction, on August 19, 2002, proceeds received from
Vestar, along with the net proceeds from Agrilink Foods' new senior secured
credit facility, were utilized to retire all existing indebtedness under the
Agrilink Foods Harris Credit Facility, including the Term Loan Facility.
Pro-Fac guarantees certain obligations of Agrilink Foods. Following is a
schedule of obligations at December 28, 2002 that are guaranteed by the
Cooperative.
9
(Dollars in Millions)
Amounts
Contractual Obligations Guaranteed Committed Expiration
- ---------------------------------- --------- ------------
Senior Subordinated Notes - 11 7/8 Percent $ 200.0 November 2008
Subordinated Promissory Note (net of discount) $ 34.6 November 2008
NOTE 6: SPECIAL MEMBERSHIP INTERESTS
In conjunction with the Transaction, the Pro-Fac board of directors determined
that it was in the best interests of Pro-Fac and its members to make certain
changes to the Cooperative's certificate of incorporation and bylaws. Included
in these changes was the creation of Pro-Fac special membership interests. The
aggregate amount of special membership interest allocated is equal to Pro-Fac's
earned surplus as of June 29, 2002, calculated in a manner consistent with the
past custom and practice of Pro-Fac and ignoring only effects of the non-cash
impairment charge recorded in the fourth quarter of fiscal 2002.
The special membership interests were allocated to the current and former
members of Pro-Fac that made patronage deliveries to or on behalf of Pro-Fac in
the six fiscal years ended June 29, 2002, in proportion to the patronage
deliveries made by those members in each case during that six fiscal year
period. The purpose of the allocation of the special membership interests was to
preserve for members and former members at the Closing Date the book
appreciation in value of their former investment in Agrilink Foods.
NOTE 7: OPERATING SEGMENTS
Prior to August 19, 2002, the results of the Cooperative were consolidated with
its then wholly-owned subsidiary, Agrilink Foods.
Subsequent to August 19, 2002, the Cooperative operates in one segment, the
marketing of crops grown by its members.
Agrilink Foods accounted for segments using Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise" (SFAS 131).
SFAS No. 131 establishes requirements for reporting information about operating
segments and established standards for related disclosures about products and
services, and geographic areas. As management of Agrilink Foods made the
majority of its operating decisions based upon Agrilink Foods' significant
product lines, Agrilink Foods elected to utilize significant product lines in
determining its operating segments. Agrilink Foods' four primary operating
segments were as follows: vegetables, fruits, snacks, and canned meals.
The vegetable product line consisted of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable
category included Birds Eye, Birds Eye Voila!, Birds Eye Simply Grillin', Birds
Eye Hearty Spoonfuls, Freshlike, Veg-All, McKenzies, and Brooks Chili Beans. The
fruit product line consisted of canned and frozen fruits including fruit
fillings and toppings. Branded products within the fruit category included
Comstock and Wilderness. The snack product line consisted of potato chips,
popcorn and other corn-based snack items. Branded products within the snacks
category included Tim's Cascade Chips, Snyder of Berlin, Husman, La Restaurante,
Erin's, Beehive, Pops-Rite, Super Pop, and Flavor Destinations. The canned meal
product line included canned meat products such as chilies, stew, and soups, and
various other ready-to-eat prepared meals. Branded products within the canned
meals category included Nalley. Other product lines primarily represent salad
dressings. Branded products within the "other category" included Bernstein's and
Nalley.
The following table illustrates the operating segment information of the
Cooperative for the periods indicated:
(Dollars in Millions)
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
December 28, December 29, December 28, December 29,
2002 2001 2002 2001
(Covering the Period
June 30, 2002-
August 18, 2002)
----------------- ------------------ ----------------- -----------------
Net Sales:
Vegetables $ 0.0 $ 210.7 $ 69.5 $ 387.2
Fruits 0.0 41.3 13.1 69.6
Snacks 0.0 21.8 11.8 44.2
Canned Meals 0.0 11.9 4.4 24.3
Other 0.0 8.9 4.9 18.5
--------- -------- ---------- -----------
Total $ 0.0 $ 294.6 $ 103.7 $ 543.8
========= ======== ========== ===========
10
(Dollars in Millions)
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
December 28, December 29, December 28, December 29,
2002 2001 2002 2001
(Covering the Period
June 30, 2002-
August 18, 2002)
-------------------- ---------------- ----------------- ---------------
Operating income:
Vegetables 0.0 $ 27.2 $ 3.8 $ 31.7
Fruits 0.0 8.7 2.1 12.9
Snacks 0.0 1.7 1.3 3.2
Canned Meals 0.0 2.2 0.3 4.4
Other 0.0 0.9 0.4 1.8
-------- --------- ---------- ---------
Continuing segments 0.0 40.7 7.9 54.0
Equity income from Agrilink Holdings
LLC (for the period September 29, 2002
to December 28, 2002 and the period
August 19, 2002 to December 28, 2002,
respectively) 3.8 0.0 3.7 0.0
Gain from transaction with Agrilink
Foods, Inc. and related agreements 1.2 0.0 8.0 0.0
Selling, administrative, and general
expense (for the period September 29, 2002
to December 28, 2002 and the period
August 19, 2002 to December 28, 2002,
respectively) (0.3) 0.0 (0.9) 0.0
Legal Settlement (1.5) 0.0 (1.6) 0.0
Gain from pension curtailment 0.0 0.0 0.0 2.5
Restructuring 0.0 (1.6) (0.0) (2.7)
-------- --------- ---------- ---------
Total consolidated operating income 3.2 39.1 17.1 53.8
Interest expense, net 0.0 (16.5) (7.7) (35.7)
-------- ---------- ----------- ----------
Income before taxes $ 3.2 $ 22.6 $ 9.4 $ 18.1
======== ========= ========== =========
NOTE 8. OTHER MATTERS
Prior to August 19, 2002, the results of the Cooperative were consolidated with
its then wholly-owned subsidiary, Agrilink Foods.
Gain from Pension Curtailment: During September 2001, Agrilink Foods made the
decision to freeze benefits provided under its Master Salaried Retirement Plan.
Under the provisions of SFAS No. 88, "Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
these benefit changes resulted in the recognition of a $2.5 million net
curtailment gain.
Legal Matters:
Blue Line Farms Matter: On September 25, 2001, in the circuit court of Multnomah
County, Oregon, Blue Line Farms commenced a class action suit ("Blue Line Farms
litigation") against the Cooperative, Agrilink Foods, 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 statue 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 and
Seifer Trust litigations, Pro-Fac has recorded a liability for settlement of
approximately $1.3 million during the quarter ended December 28, 2002. In
addition, the Cooperative incurred approximately $.3 million of legal costs
associated with this matter.
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
11
Seifer Trust litigation. These provisions do not apply to other AgriFrozen
related litigation, the responsibility for which is entirely with Pro-Fac.
GE Capital Matter: On October 17, 2001, in the supreme court of New York County,
New York, General Electric Capital Corporation commenced an action against
Pro-Fac Cooperative, Inc. and Agrilink Foods, Inc. The complaint relates to an
equipment lease entered into between AgriFrozen and the plaintiff's
predecessor-in-interest, and alleges that AgriFrozen, by failing to make
payments under the lease, breached its contract with the plaintiff. The
complaint further alleges that Pro-Fac and Agrilink Foods are liable to the
plaintiff for that breach because (i) there was an overlap of ownership of the
corporations, (ii) AgriFrozen was inadequately capitalized, and (iii) Pro-Fac
and Agrilink Foods were guarantors of AgriFrozen's payment obligations under the
Lease.
The relief sought includes $850,000 in compensatory damages as well as punitive
damages based on Pro-Fac's and Agrilink Foods' alleged fraudulent
misrepresentations during the lease negotiations. Management believes this
matter is without merit and intends to defend vigorously its position with
respect to this matter.
Kenyon Zero Storage Matter: On August 27, 2001, in the U.S. District Court for
the Eastern District of Washington, Kenyon Zero Storage, Inc. commenced an
action against Pro-Fac and certain other parties. The complaint relates to a
20-year lease of a vegetable plant located in Grandview, Washington, between
AgriFrozen and the plaintiff, and alleges breach of the lease. Pro-Fac has been
sued on a theory of corporate disregard.
The relief sought includes approximately $11.3 million in compensatory damages,
calculated as the base rental of approximately $.8 million per year for the 15
years remaining on the lease. Additionally, plaintiff has asserted claims
against American Casualty Company of Reading, Pennsylvania ("American
Casualty"), the issuer of a lease performance bond, in the amount of
approximately $.8 million. If American Casualty is held liable under the
performance bond, it will have a direct right of reimbursement from Pro-Fac and
Agrilink Foods.
Pro-Fac has sole responsibility for costs (including defense, settlement, and
judgment costs) associated with the GE Capital Matter and the Kenyon Zero
Storage Matter both described above.
In addition, the Cooperative is party to various other legal proceedings from
time to time in the normal course of its business. In the opinion of management,
any liability that might be incurred upon the resolution of these proceedings
will not, in the aggregate, have a material adverse effect on the Cooperative's
business, financial condition, and results of operations. Further, no such
proceedings are known to be contemplated by any governmental authorities. The
Cooperative maintains general liability insurance coverage in amounts deemed to
be adequate by the board of directors.
Commitments: Pro-Fac entered into an agreement percent to provide a
guarantee in fiscal 1999 on behalf of Agrilink Foods' issuance of 11 7/8 Senior
Subordinated Notes for $200.0 million aggregate principal amount due
November 1, 2008. Interest on the notes accrues at the rate of 11 7/8 percent
per annum and is payable semiannually in arrears on May 1 and November 1.
Pro-Fac issued a guarantee of the loan in an original amount of approximately
$200.0 million. The guarantee expires in 2008 and requires payment upon the
occurrence of Agrilink's failure to satisfy the semiannual interest payments
or inability to satisfy the principal payment at its due date. In the event
of such shortfall, Pro-Fac would be required to pay any interest payments due
as well as the loan balance due. As of December 28, 2002, the outstanding loan
amount was $200.0 million.
Pro-Fac entered into an agreement to provide a guarantee in fiscal 1999 on
behalf of Agrilink Foods' issuance of a Subordinated Promissory Note for $30.0
million, due November 22, 2008, in partial consideration for the acquisition of
Dean Foods Vegetable Company. Interest on the Subordinated Promissory Note is
accrued quarterly in arrears commencing December 31, 1998, at a rate per annum
of 5 percent until November 22, 2003, and at a rate of 10 percent thereafter.
Interest accruing through November 22, 2003 is required to be paid in kind
through the issuance by Agrilink Foods of additional subordinated promissory
notes identical to the Subordinated Promissory Note. Agrilink Foods satisfied
this requirement through the issuance of additional promissory notes. Interest
accruing after November 22, 2003 is payable in cash. Pro-Fac issued a guarantee
of the loan in an original amount of approximately $30.0 million plus interest.
The guarantee expires in 2008 and requires payment upon the occurrence of
Agrilink's failure to satisfy the semiannual interest payments or inability to
satisfy the principal payment at its due date. In the event of such shortfall,
Pro-Fac would be required to pay any interest payments due as well as the loan
balance due. As of December 28, 2002, the outstanding loan amount subject to the
Cooperative's guarantee included principal of $30.0 million and interest of $7.1
million.
NOTE 9. SUBSEQUENT EVENTS
Dividends: Subsequent to quarter end, the Cooperative declared a cash dividend
of $.43 per share on the Class A Cumulative Preferred Stock. These dividends
approximate $1.9 million and were paid on January 31, 2003.
Board action: At its January 2003 board meeting, in an action aimed at improving
the Cooperative's short-term liquidity, the Board of Directors of Pro-Fac
determined to suspend the payment of annual dividends on the Cooperative's
common stock for an indefinite period of time and to deduct 1 percent of the
commercial market value ("CMV") otherwise payable to Pro-Fac's member-growers
for crops supplied by Pro-Fac member-growers through the Cooperative for the
2002 and 2003 growing seasons. The 1 percent CMV deduction will be taken from
the July 2003 and July 2004 CMV payments.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, Pro-Fac makes oral and written statements that may constitute
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995 (the "PSLRA") or by the Securities and Exchange Commission
("SEC") in its rules, regulations, and releases. The Cooperative desires to take
advantage of the "safe harbor" provisions in the PSLRA for forward-looking
statements made from time to time, including, but not limited to, the
forward-looking information contained in the Management's Discussion and
Analysis of Financial Condition and Results of Operations and other statements
made in this Form 10-Q and in other filings with the SEC.
The Cooperative cautions readers that any such forward-looking statements made
by or on behalf of the Cooperative are based on management's current
expectations and beliefs but are not guarantees of future performance. Actual
results could differ materially from those expressed or implied in the
forward-looking statements. Among the factors that could impact the Cooperative
include:
o the impact of weather on the volume and quality of raw product;
o the impact of strong competition in the food industry, including
competitive pricing;
o the impact of changes in consumer demand;
o the continuation of Agrilink Foods' success in integrating operations
(including the realization of anticipated synergies in operations and the
timing of any such synergies), success with new product introductions,
effectiveness of marketing and shifts in market demand, and the
availability of acquisition and alliance opportunities;
12
o risks associated with the Cooperative's contractual relationship with
Agrilink Foods, including the possibility of a reduced demand for crops
produced by Pro-Fac members, the availability and sufficiency of shortfall
payments, and the potential consequences of a termination of that
relationship; and
o the ability of the Cooperative to operate its business using the resources
made available under the Transitional Services Agreement with Agrilink
Foods and following the expiration of that agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion is to outline the significant reasons for changes
in the Unaudited Consolidated Statement of Operations, Net Proceeds and
Comprehensive Income in the second quarter and first six months of fiscal 2003
versus such periods in fiscal 2002.
Prior to August 18, 2002, Agrilink Foods was a wholly owned subsidiary of
Pro-Fac. Agrilink Foods operates through four primary products lines, consisting
of vegetable, fruits, snacks and canned meals. The majority of each of the
product lines' net sales was within the United States and, with the exception of
one facility in Mexico, all of Agrilink Foods' facilities are located in the
United States. Through August 18, 2002, the results of Pro-Fac were consolidated
with Agrilink Foods. The consolidated financial statements were after
elimination of intercompany transactions and balances.
As a result of the Transaction, described in NOTE 1 of the "Notes to
Consolidated Financial Statements," the results of operations for the second
quarter and first six months of fiscal 2003 are not comparable with those of
such period of fiscal 2002.
The following is a discussion of the remaining components included in the
results of operations of Pro-Fac for its second quarter and first six months of
fiscal 2003. Pro-Fac now operates in one segment, the marketing of crops grown
by its members.
CHANGES FROM SECOND QUARTER FISCAL 2002 TO SECOND QUARTER FISCAL 2003
Equity income from Agrilink Holdings LLC: Subsequent to August 18, 2002, Pro-Fac
no longer reports its financial statements on a consolidated basis with Agrilink
Foods and accounts for its investment in Agrilink Holdings LLC under the equity
method of accounting. For the quarter ended December 28 2002, the Cooperative
recognized income of approximately $3.8 million from Agrilink Holdings LLC.
Gain from transaction with Agrilink Foods, Inc. and related agreements: Pro-Fac
and Agrilink Foods entered into a letter agreement dated as of the Closing Date
(the "Termination Agreement", as that agreement is described in NOTE 2 to the
"Notes to Consolidated Financial Statements"), pursuant to which, among other
things, the Marketing and Facilitation Agreement was terminated, and in
consideration of such termination, Pro-Fac will receive a termination fee of
$10.0 million per year for five years, provided that certain ongoing conditions
are met, including maintaining grower membership levels sufficient to generate
certain minimum crop supply. The $10.0 million payment will be paid in quarterly
installments to the Cooperative as follows: $4.0 million on each July 1, and
$2.0 million each October 1, January 1, and April 1. During the second quarter
of fiscal 2003, the Cooperative therefore received $2.0 million on October 1,
2002 from Agrilink Foods.
Payments under the Termination Agreement are considered additional consideration
related to the Transaction. Accordingly, 40.72 percent of the payments received
under the Termination Agreement are recorded as an adjustment to Pro-Fac's
investment in Agrilink Holdings LLC. The remaining 59.28 percent of the annual
payment are recognized as additional gain from the transaction with Agrilink
Foods in the period received. Accordingly, during the second quarter of fiscal
2003, Pro-Fac recognized approximately $1.2 million as additional gain from the
receipt of the termination payments.
Selling, administrative, and general expense: Selling, administrative, and
general expenses totaled approximately $.3 million for the quarter ended
December 28, 2002. These expenses for the second quarter of fiscal 2003 were for
general operating purposes of the Cooperative.
Legal settlement: During the second quarter of fiscal 2003, the Cooperative
reached an agreement in principle as to the terms of settlement with respect
to the Blue Line and Seifer Trust litigations (see NOTE 8 of the "Notes to
Consolidated Financial Statements"). In anticipation of a final settlement,
Pro-Fac has recorded a liability for approximately $1.3 million during the
second quarter of fiscal 2003. In addition, the Cooperative has incurred
approximately $.3 million of legal costs associated with these matters
during the second quarter of fiscal 2003.
13
Tax provision: The Cooperative is currently taxed as a non-exempt cooperative
under Section 521 of the Internal Revenue Code, and as such, its tax provision
is impacted by net proceeds to be distributed to its members. As a result of the
recent change in operating structure, the Cooperative has applied for exempt
status as a farmers' cooperative under Section 521 of the Internal Revenue Code.
Exempt cooperatives are permitted to reduce taxation through the use of special
deductions (such as dividends paid on its common and preferred stock). The
Cooperative will adjust its provision for income taxes when, and if, exempt
status is obtained.
CHANGES FROM FIRST SIX MONTHS FISCAL 2002 TO FIRST SIX MONTHS FISCAL 2003
As outlined above, from June 30, 2002 until August 18, 2002, Agrilink Foods was
a wholly owned subsidiary of Pro-Fac. Through August 18, 2002, the results of
Pro-Fac were consolidated with Agrilink Foods. The consolidated financial
statements were after elimination of intercompany transactions and balances. The
following summarizes the activity of Agrilink Foods for the period June 30, 2002
through August 18, 2002:
June 30, 2002 -
(Dollars in Thousands)
August 18, 2002
---------------
Net sales $ 103,726
Cost of sales (80,644)
----------
Gross profit 23,082
Selling, administrative, and general expense (15,468)
Other income 277
----------
Operating income 7,891
Interest expense (7,747)
----------
Income before taxes, dividends, and allocation of net proceeds 144
Tax provision (59)
----------
Net income $ 85
==========
As a result of the Transaction, described in NOTE 1 of the "Notes to
Consolidated Financial Statements," the results of operations for the
approximately seven weeks outlined above are not comparable with those of the
first six months of fiscal 2002. Accordingly, the following is a discussion of
the remaining components included in the results of operations of Pro-Fac for
the first six months of fiscal 2003.
Equity income from Agrilink Holdings LLC: Subsequent to August 18, 2002, Pro-Fac
no longer reports its financial statements on a consolidated basis with Agrilink
Foods and accounts for its investment in Agrilink Holdings LLC under the equity
method of accounting. For the six months ended December 28, 2002, the
Cooperative recognized income of approximately $3.7 million from Agrilink
Holdings LLC.
Gain from transaction with Agrilink Foods, Inc and related agreements: On
August 19, 2002, the Cooperative contributed to the capital of Agrilink Holdings
LLC all of the shares of Agrilink Foods' common stock owned by Pro-Fac in
exchange for Class B common units of Agrilink Holdings LLC representing a 40.72
percent interest. Pro-Fac's investment in Agrilink Foods prior to the
Transaction was approximately $24.9 million. This amount reflects the
forgiveness by Agrilink Foods of approximately $36.5 million which represented
both borrowings for the working capital needs of Pro-Fac and a $9.4 million
demand payable. The value of the Cooperative's 40.72 percent common equity
ownership in Agrilink Holdings LLC is estimated at $31.4 million. The
Cooperative recognized a gain of $3.8 million from this exchange.
In addition, Pro-Fac and Agrilink entered into the Transitional Services
Agreement described in NOTE 2 of the "Notes to Consolidated Financial
Statements." The estimated value of services to be received by Pro-Fac
under the agreement, of approximately $1.0 million, has been reflected
as additional proceeds from the Transaction. Accordingly, through
the first six months of fiscal 2003, Pro-Fac recognized approximately
$.6 million as additional gain from the Transitional Services Agreement.
Pro-Fac and Agrilink Foods also entered into a letter agreement dated as of the
Closing Date (the "Termination Agreement"), pursuant to which, among other
things, the Marketing and Facilitation Agreement was terminated, and in
consideration of such termination, Pro-Fac will receive a termination fee of
$10.0 million per year for five years, provided that certain ongoing conditions
are met, including maintaining grower membership levels sufficient to generate
certain minimum crop supply. The $10.0 million payment will be paid in quarterly
installments to the Cooperative as follows: $4.0 million on each July 1, and
$2.0 million each October 1, January 1, and April 1. The Termination Agreement
provided that the first payment in the amount of $4.0 million was to be paid on
the Closing Date and the next payment made by October 1, 2002 and quarterly
thereafter as outlined in the agreement. Through the first six months ended
December 28, 2002, the Cooperative therefore received $4.0 million from
Agrilink Foods on August 19, 2002, $2.0 million on October 1, 2002.
14
Payments under the Termination Agreement are considered additional consideration
related to the Transaction. Accordingly, 40.72 percent of the payments received
under the Termination Agreement are recorded as an adjustment to Pro-Fac's
investment in Holdings LLC. The remaining 59.28 percent of the annual payment
will be recognized as additional gain on the transaction with Agrilink Foods in
the period received. Accordingly, through the first six months of fiscal 2003,
Pro-Fac recognized approximately $3.6 million as additional gain from the
receipt of the termination payments.
As a result of the agreement described above, based on the 40.72 percent common
equity ownership, the Cooperative recognized a total gain through the first
six months of fiscal 2003, of approximately $8.0 million.
Selling, administrative, and general expense: Selling, administrative, and
general expenses totaled $.8 million for the six months ended December 28, 2002.
During the first six months of fiscal 2003, the Cooperative paid approximately
$.4 million to obtain insurance from St. Paul Mercury Insurance Company and
Great American Insurance Company, insuring the Cooperative against any
obligation it incurs as a result of its indemnification of its officers and
directors, and insuring such officers and directors for liability against which
they may not be indemnified by the Cooperative for events occurring prior to
August 19, 2002 where claims are submitted prior to August 19, 2008. This
insurance has a term expiring on August 19, 2008.
The remaining expenses for the first six months of fiscal 2003 were for general
operating purposes of the Cooperative.
Legal settlement: During the second quarter of fiscal 2003, the Cooperative
reached an agreement in principle as to the terms of settlement with respect
to the Blue Line and Seifer Trust litigations (see NOTE 8 of the "Notes to
Consolidated Financial Statements"). In anticipation of a final settlement,
Pro-Fac has recorded a liability for approximately $1.3 million during
December, 2002. In addition, the Cooperative incurred approximately $.3 million
of legal costs associated with these matters through the first six months of
fiscal 2003.
Tax provision: The Cooperative is currently taxed as a non-exempt cooperative
under Section 521 of the Internal Revenue Code, and as such, its tax provision
is impacted by net proceeds to be distributed to its members. As a result of the
recent change in operating structure, the Cooperative has applied for exempt
status as a farmers' cooperative under Section 521 of the Internal Revenue Code.
Exempt cooperatives are permitted to reduce taxation through the use of special
deductions (such as dividends paid on its common and preferred stock). The
Cooperative will adjust its provision for income taxes when, and if, exempt
status is obtained.
LIQUIDITY AND CAPITAL RESOURCES
As discussed above, as a result of the Transaction, Pro-Fac no longer
consolidates the assets and liabilities of Agrilink Foods in its financial
statements. Pro-Fac's balance sheet does, however, reflect Pro-Fac's interest in
Agrilink Holdings LLC, which, as described in NOTES 1 and 2 to the "Notes to
Consolidated Financial Statements," is accounted for under the equity method.
From and after August 19, 2002, Pro-Fac's primary sources of cash are the
payments due to it by Agrilink Foods under the Termination Agreement and the
Amended and Restated Marketing and Facilitation Agreement, which are described
in detail in NOTE 2 of the "Notes to the Consolidated Financial Statements." In
addition, pursuant to the Credit Agreement with Agrilink Foods, described in
NOTE 5 of the "Notes to Consolidated Financial Statements," Pro-Fac also has
available to it up to $1.0 million per year, for five years. Finally, Agrilink
Foods has agreed, pursuant to the Transitional Services Agreement, described in
NOTE 2 to the "Notes to the Consolidated Financial Statements" to provide
Pro-Fac certain administrative and other services for a period 24 months from
the Closing Date.
Net cash available to Pro-Fac is used to pay its operating expenses as well as
to pay dividends on its capital stock and to fund repurchases of its common
stock. In addition, Pro Fac will, after expiration of the 24-month term, need
cash to cover salary, administrative and other expenses currently furnished
under the Transitional Services Agreement.
Pro-Fac believes the sources described above will be sufficient to meet its
liquidity requirements for the foreseeable future.
A discussion of "Unaudited Consolidated Statement of Cash Flows" for the six
months ended December 28, 2002 of fiscal 2003 follows:
Net cash used in operating activities of $28.8 million for the first six months
of fiscal 2003 primarily represents changes in operating assets and liabilities
of Agrilink Foods for the period June 29, 2002 through August 19, 2002. During
this time Pro-Fac consolidated its results with Agrilink Foods.
Net cash used in investing activities for the first six months of fiscal 2003
was $2.4 million. Of this amount approximately $5.8 million represents the cash
balance transferred at the date of the transaction with Agrilink Foods.
Offsetting this amount was the receipt by the
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Cooperative of $6.0 million from Agrilink Foods under the Termination Agreement.
Other amounts reported as cash used in investing activities relate to the
period through August 19, 2002 when Pro-Fac consolidated its results with
Agrilink Foods.
Net cash provided by financing activities include the repurchases of common
stock and dividends paid by the Cooperative during the first six months of
fiscal 2003. Net proceeds from the issuance of short term debt of $22.0 million,
payments on long term debt of $.3 million and cash paid for capital leases of
$.1 million relate to the period June 29, 2002 through August 19, 2002 when
Pro-Fac consolidated its results with Agrilink Foods.
At its January 2003 board meeting, in an action aimed at improving the
Cooperative's short-term liquidity, the Board of Directors of Pro-Fac
determined to suspend the payment of annual dividends on the Cooperative's
common stock for an indefinite period of time and to deduct 1 percent of the
commercial market value ("CMV") otherwise payable to Pro-Fac's member-growers
for crops supplied by Pro-Fac member-growers through the Cooperative for the
2002 and 2003 growing seasons. The 1 percent CMV deduction will be taken from
the July 2003 and July 2004 CMV payments.
Pro-Fac guarantees certain obligations of Agrilink Foods. Following is a
schedule of obligations at December 28, 2002 that are guaranteed by the
Cooperative.
(Dollars in Millions)
Amounts
Contractual Obligations Guaranteed Committed Expiration
- ---------------------------------- --------- ----------
Senior Subordinated Notes - 11 7/8 Percent $ 200.0 November 2008
Subordinated Promissory Note $ 34.6 November 2008
OTHER MATTERS
The vegetable and fruit portions of the business can be positively or negatively
affected by weather conditions nationally and the resulting impact on crop
yields. Favorable weather conditions can produce high crop yields and an
oversupply situation. This results in depressed selling prices. Excessive rain
or drought conditions can produce low crop yields and a shortage situation. This
typically results in higher selling prices. While the national supply situation
controls the pricing, the supply can differ regionally because of variations in
weather.
The cherry crop resulting from the fiscal 2002 growing season has been
drastically affected by weather in the prime growing areas in Michigan. These
growing regions experienced early season warm weather followed by a hard freeze
that resulted in an estimated 66 percent reduction in the cherry crop compared
to historic harvest tonnage. It is estimated that the CMV for both raw and
frozen cherry costs will significantly increase and may double.
In addition, for the 2002 crop season, dry weather conditions in the New York
and Midwest growing regions have reduced crop intake in these areas. Whether the
reduction in crop intake will negatively impact the adequacy of levels
throughout the industry is not yet known.
ITEM 4. CONTROLS AND PROCEDURES
The Cooperative maintains disclosure controls and procedures, as defined in Rule
13a-14(c) promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"). Within the 90 days prior to the date of this report, the Cooperative's
principal executive and principal financial officer carried out an evaluation of
the effectiveness of the design and operation of the Cooperative's disclosure
controls and procedures. Based on the evaluation of these disclosure controls
and procedures, the principal executive and principal financial officer
concluded that the Cooperative's disclosure controls and procedures were
effective.
There were no significant changes in the Cooperative's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
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PART II
ITEM 1. LEGAL PROCEEDINGS
Certain of our legal proceedings are reported in our Annual Report on Form 10-K
for the year ended June 29, 2002 and our Quarterly Report on Form 10-Q for the
period ended September 28, 2002, with material developments since those reports
described in NOTE 8, "Other Matters," to the "Notes to Consolidated Financial
Statements," which information is incorporated by reference in answer to this
item.
ITEM 5. OTHER INFORMATION
At its January 2003 board meeting, in an action aimed at improving the
Cooperative's short-term liquidity, the Board of Directors of Pro-Fac
determined to suspend the payment of annual dividends on the Cooperative's
common stock for an indefinite period of time and to deduct 1 percent of the
commercial market value ("CMV") otherwise payable to Pro-Fac's member-growers
for crops supplied by Pro-Fac member-growers through the Cooperative for the
2002 and 2003 growing seasons. The 1 percent CMV deduction will be taken from
the July 2003 and July 2004 CMV payments.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
99.1 Agrilink Foods, Inc. financial
statements for the quarter ended
December 28, 2002 (filed herewith).
(b) Reports on Form 8-K:
On November 12, 2002 the Cooperative filed a Report on Form 8-K to
report that Pro-Fac Cooperative Inc's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 28, 2002 had been filed and
that the report was accompanied by the certifications, under Section
906 of the Sarbones-Oxley Act of 2002, of Stephen R. Wright, as
principal executive and principal financial officer of Pro-Fac.
On November 8, 2002 the Cooperative filed a Report on Form 8-K to
report the engagement of Deloitte & Touche LLP as its independent
auditor.
On October 16, 2002 the Cooperative filed a Report on Form 8-K to
report the dismissal of PriceWaterhouseCoopers LLP as its independent
auditor.
On October 3, 2002 the Cooperative filed a Report on Form 8-K to
report that Stephen R. Wright, the principal executive and principal
financial officer, had filed sworn statements pursuant to Commission
Order No. 4-460 with the Securies Exchange Commission to replace the
sworn statements previously filed on September 26, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRO-FAC COOPERATIVE, INC.
Date: February 11, 2003 BY: /s/ Stephen R. Wright
------------------------------- -------------------------------
STEPHEN R. WRIGHT
GENERAL MANAGER AND SECRETARY
(On Behalf of the Registrant and
as Principal Executive Officer,
Principal Financial Officer, and
Principal Accounting Officer)
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CERTIFICATION
I, Stephen R. Wright, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pro-Fac Cooperative,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 11, 2003 /s/ Stephen R. Wright
-------------------------------- ------------------------------------
STEPHEN R. WRIGHT
GENERAL MANAGER AND SECRETARY
(Principal Executive Officer
and Principal Financial Officer)
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