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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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Form 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-20539
PRO-FAC COOPERATIVE, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 16-6036816
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
90 Linden Place, PO Box 30682, Rochester, NY 14603-0682
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (585) 383-1850
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
YES NO X
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. As of November 10, 2003.
Common Stock - 1,918,766
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Pro-Fac Cooperative, Inc.
Statements of Operations and Net Proceeds
(Unaudited)
(Dollars in Thousands)
Three Months Ended
---------------------------------
September 27, September 28,
2003 2002
------------- ------------
Net sales $ 0 $103,726
Cost of sales 0 (80,644)
------- --------
Gross profit 0 23,082
Equity loss from Agrilink Holdings LLC (for the period June 29,
2003 to September 27, 2003 and the period August 19, 2002 to
September 28, 2002, respectively) (592) (144)
Gain from transaction with Birds Eye Foods, Inc. and related
agreements 2,491 6,804
Commercial market value adjustment 449 0
Selling, administrative, and general expense (258) (526)
Selling, administrative, and general expense (for the period
June 30, 2002 to August 18, 2002) 0 (15,468)
Legal matters and settlement expenses (194) (47)
Other income 0 277
------- --------
Operating income 1,896 13,978
Interest income 3 3
Interest expense (11) (7,747)
------- --------
Income before taxes 1,888 6,234
Tax provision (for the period June 30, 2002 to
August 18, 2002) 0 (859)
Tax provision 0 (59)
------- --------
Net income $ 1,888 $ 5,316
======= ========
Allocation of net proceeds:
Net income $ 1,888 $ 5,316
Dividends on common and preferred stock (2,024) (2,453)
------- --------
Net (deficit)/proceeds (136) 2,863
Allocation from/(to) accumulated deficit 136 (2,863)
------- --------
Net proceeds available to members $ 0 $ 0
======= ========
The accompanying notes are an integral part of these financial statements.
2
Pro-Fac Cooperative, Inc.
Balance Sheets
(Unaudited)
(Dollars in Thousands) ASSETS
September 27, June 28,
2003 2002
------------- ----------
Current assets:
Cash and cash equivalents $ 984 $ 367
Accounts receivable from Birds Eye Foods, Inc. 15,394 8,504
Investment in CoBank 30 44
Current portion of Transitional Services receivable from Birds Eye Foods, Inc. 465 525
Prepaid expenses and other current assets 84 15
-------- --------
Total current assets 16,957 9,455
Transitional Services receivable from Birds Eye Foods, Inc. 0 71
Investment in Agrilink Holdings LLC 24,652 26,873
-------- --------
Total assets $ 41,609 $36,399
======== ========
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION
Current liabilities:
Accounts payable 828 $ 1,058
Accrued interest 11 14
Other accrued expenses 839 1,075
Amounts due members 14,765 7,876
-------- --------
Total current liabilities 16,443 10,023
Long-term debt 1,000 1,200
Other non-current liabilities 0 832
-------- --------
Total liabilities 17,443 12,055
Commitments and contingencies
Class B cumulative redeemable preferred stock, liquidation
preference $10 per share; authorized - 500,000 shares; issued and
outstanding 12,109 shares 122 122
Common stock, par value $5, authorized - 5,000,000 shares; issued
and outstanding 1,918,766 and 1,927,226 shares, respectively 9,594 9,636
Shareholders' and members' capitalization:
Retained earnings allocated to members 14,404 14,404
Non-cumulative preferred stock, par value $25, authorized
5,000,000 shares; issued and outstanding 29,328 shares 733 733
Class A cumulative preferred stock, liquidation preference
$25 per share, authorized 10,000,000 shares; issued and
outstanding 4,604,139 shares 115,104 115,104
Special membership interests 21,733 21,733
Accumulated deficit (137,524) (137,388)
-------- --------
Total shareholders' and members' capitalization 14,450 14,586
-------- --------
Total liabilities and shareholders' and members' capitalization $ 41,609 $ 36,399
======== ========
The accompanying notes are an integral part of these financial statements.
3
Pro-Fac Cooperative, Inc.
Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
Three Months Ended
----------------------------
September 27, September 28,
2003 2002
------------- -------------
Cash Flows from Operating Activities:
Net income $1,888 $ 5,316
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of certain intangible assets 0 144
Amortization of debt issue costs, amendment costs, and discount on subordinated
promissory notes 0 1,201
Amortization of transition service receivable 132 61
Depreciation 0 3,833
Gain from transaction with Birds Eye Foods, Inc. and related agreements (2,491) (6,804)
Equity loss from Agrilink Holdings LLC 592 144
Equity in undistributed earnings of joint venture 0 (277)
Change in assets and liabilities:
Accounts receivable 0 1,818
Inventories and prepaid manufacturing expense 0 (33,170)
Income taxes 0 (76)
Accounts payable and other accrued expenses (1,303) (9,999)
Amounts due members 119 9,513
Deferred tax asset and liability 0 859
Other assets and liabilities, net (69) (187)
------ -------
Net cash used in operating activities (1,132) (27,624)
------ -------
Cash flows from Investing Activities:
Proceeds from Termination Agreement with Birds Eye Foods, Inc. 4,000 4,000
Purchase of property, plant and equipment 0 (2,187)
Proceeds from investment in CoBank 14 1,115
Advances to joint venture 0 (1,512)
Cash at the date of deconsolidation with Birds Eye Foods, Inc. 0 (5,818)
------ -------
Net cash provided by/(used in) investing activities 4,014 (4,402)
------ -------
Cash Flows from Financing Activities:
Net proceeds from issuance of short-term debt 0 22,000
Payments on long-term debt (200) (292)
Payments on capital leases 0 (38)
Repurchases of common stock, net (41) (497)
Cash dividends paid (2,024) (2,488)
------ -------
Net cash (used in)/provided by financing activities (2,265) 18,685
------ -------
Net change in cash and cash equivalents 617 (13,341)
Cash and cash equivalents at beginning of period 367 14,686
------ -------
Cash and cash equivalents at end of period $ 984 $ 1,345
====== =======
Supplemental Schedule of Non-Cash Investing Activities
Value of Pro-Fac's common equity ownership in Agrilink Holdings LLC $ 0 $31,400
====== =======
The accompanying notes are an integral part of these financial statements.
4
PRO-FAC COOPERATIVE, INC.
NOTES TO 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. Birds Eye Foods, Inc. ("Birds Eye Foods," formerly
Agrilink 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 Birds Eye Foods and intercompany transactions and balances
were eliminated. Subsequent to August 18, 2002, Pro-Fac no longer consolidates
Birds Eye 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 by Birds Eye 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 Birds Eye 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 Birds
Eye Foods' operating facilities, excluding one in Mexico, were within the United
States.
The Transaction: On August 19, 2002 (the "Closing Date"), pursuant to the terms
of the Unit Purchase Agreement dated as of June 20, 2002 (the "Unit Purchase
Agreement"), by and among Pro-Fac, Birds Eye Foods, at the time a New York
corporation and a wholly-owned subsidiary of Pro-Fac, and Vestar/Agrilink
Holdings LLC, a Delaware limited liability company ("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 Birds
Eye Foods' common stock owned by Pro-Fac, constituting 100 percent of
the issued and outstanding shares of Birds Eye Foods' capital stock, in
consideration for Class B common units of Holdings LLC, representing a
40.72 percent common equity ownership at the Closing Date; and
(ii) Vestar/Agrilink Holdings and certain co-investors (collectively,
"Vestar") contributed cash in the aggregate amount of $175.0 million to
the capital of Holdings LLC, in consideration for preferred units and
Class A common units and warrants to acquire additional Class A common
units, which warrants were immediately exercised, representing, at the
Closing Date, 56.24 percent of the common equity of Holdings LLC,
inclusive of the additional Class A common units issued to Vestar upon
its exercise of the warrants. The co-investors are either under common
control with, or have delivered an unconditional voting proxy to,
Vestar. 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.
The transactions 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 Birds Eye Foods
common stock to Holdings LLC, Holdings LLC contributed those shares to Birds Eye
Holdings Inc., (formerly Agrilink Holdings Inc., "Holdings Inc.") a Delaware
corporation and a direct, wholly-owned subsidiary of Holdings LLC, and Birds Eye
Foods became an indirect, wholly-owned subsidiary of Holdings LLC.
As part of the Transaction, Stephen R. Wright, the general manager and secretary
of Pro-Fac, together with executive officers and certain other members of
management of Birds Eye Foods entered into subscription agreements with Holdings
LLC to acquire (using a combination of cash and promissory notes issued to
Holdings LLC) an aggregate of approximately $1.3 million of Class C common units
and Class D common units of Holdings LLC, representing approximately 3.04
percent of the common equity ownership at the Closing Date.
See NOTE 2 to the "Notes to Consolidated Financial Statements" for additional
disclosures regarding agreements with Birds Eye Foods and discussion of the
related gain.
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 September 27, 2003 are not necessarily indicative
of the results to be expected for other interim periods or the full year.
5
These financial statements should be read in conjunction with the consolidated
financial statements and accompanying notes contained in the Pro-Fac
Cooperative, Inc. Form 10-K for the fiscal year ended June 28, 2003.
Commercial Market Value Adjustment: 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 authorized the deduction of 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 was withheld from the July 2003 CMV
payment and will be withheld from the July 2004 CMV payment. The Board of
Directors of Pro-Fac will review this authorization annually.
New Accounting Pronouncements: In May 2003, the FASB issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS 150 improves the accounting for certain financial
instruments that, under previous guidance, issuers could account for as equity.
The new Statement requires that those instruments be classified as liabilities
in the balance sheet. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of nonpublic entities. The adoption
of SFAS No. 150 did not have a significant effect on the operations of the
Cooperative.
NOTE 2. AGREEMENTS WITH BIRDS EYE FOODS
In connection with the Transaction, Birds Eye Foods and Pro-Fac entered into
several agreements effective as of the Closing Date, including the following:
Termination Agreement: Pro-Fac and Birds Eye Foods entered into a 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 Birds Eye Foods (the "Marketing and Facilitation Agreement") which,
until the Closing Date, governed the crop supply and purchase relationship
between Birds Eye Foods and Pro-Fac, was terminated. In consideration of such
termination, Birds Eye Foods agreed to pay Pro-Fac a termination fee of $10.0
million per year for five years, provided that certain ongoing conditions are
met, including maintaining grower membership levels sufficient to generate
certain minimum crop supply. The $10.0 million payment is payable 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.
Payments under the Termination Agreement are considered additional consideration
related to the Transaction. Accordingly, the portion of the payments received
under the Termination Agreement related to Pro-Fac's continuing ownership
percentage are recorded as an adjustment to Pro-Fac's investment in Holdings
LLC. The remaining payments are recognized as additional gain on the transaction
with Birds Eye Foods in the period received. Accordingly, in the first quarter
of both fiscal 2004 and fiscal 2003, Pro-Fac recognized approximately $2.4
million as additional gain from the receipt of termination payments.
Transitional Services Agreement: Pro-Fac and Birds Eye Foods entered into a
transitional services agreement (the "Transitional Services Agreement") dated as
of the Closing Date, pursuant to which Birds Eye Foods agreed to provide Pro-Fac
certain administrative and other services for a period of 24 months from the
Closing Date. Birds Eye 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 Birds Eye Foods, in which case he will report to the Chief Executive
Officer of Birds Eye Foods with respect to his duties for Birds Eye 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 are employees of Birds Eye Foods and report to the Chief
Executive Officer or other representatives of Birds Eye Foods. Stephen R.
Wright, the General Manager and Secretary of Pro-Fac, is an employee of Birds
Eye Foods. As an employee of Birds Eye Foods, Mr. Wright's salary is paid by
Birds Eye Foods.
In fiscal 2003, Pro-Fac 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 is
being amortized to expense over the term of the Transitional Services Agreement.
In fiscal 2003, Pro-Fac recognized approximately $0.6 million as additional gain
from the Transitional Services Agreement.
Gain from Transaction with Birds Eye Foods, Inc.: Prior to the Transaction,
certain amounts owed by Pro-Fac to Birds Eye 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 Birds Eye 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 on August
19, 2002 was valued at $31.4 million. The Cooperative recognized a gain of $3.8
million from this exchange, in fiscal 2003.
As a result of the agreements described above, based on the approximate 40.72
percent common equity ownership, the Cooperative recognized a total gain, in the
first quarter of fiscal 2004 and fiscal 2003, of approximately $2.4 million and
$6.8 million, respectively.
6
Amended and Restated Marketing and Facilitation Agreement: Pro-Fac and Birds Eye
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 Birds Eye Foods' preferred
supplier of crops. Birds Eye Foods will also continue to pay Pro-Fac the CMV of
crops supplied by Pro-Fac in installments corresponding to the dates of payment
by Pro-Fac to its members for crops delivered. 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. Birds Eye Foods makes 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 meet
with Birds Eye Foods management to establish CMV or receivable guidelines,
review calculations, and report to a joint CMV committee of Pro-Fac and Birds
Eye Foods. Unlike the Marketing and Facilitation Agreement, however, the Amended
and Restated Marketing and Facilitation Agreement does not permit Birds Eye
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
Birds Eye Foods any part of Pro-Fac's patronage income. The Amended and Restated
Marketing and Facilitation Agreement also provides that Birds Eye 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,
Birds Eye Foods will provide Pro-Fac with services related to the expansion of
the market for the agricultural products of Pro-Fac members (at no cost to
Pro-Fac other than reimbursement of Birds Eye Foods' incremental and
out-of-pocket expenses related to providing such services as agreed to by
Pro-Fac and Birds Eye Foods).
Under the Amended and Restated Marketing and Facilitation Agreement, Birds Eye
Foods determines the amount of crops which Birds Eye Foods will acquire from
Pro-Fac for each crop year. If the amount to be purchased by Birds Eye Foods
during a particular crop year does not meet (i) a defined crop amount and (ii) a
defined target percentage of Birds Eye Foods' needs for each particular crop,
then certain shortfall payments will be made by Birds Eye Foods to Pro-Fac. The
defined crop amounts and targeted percentages are set based on Birds Eye Foods
anticipated raw product needs for the particular crop year. 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.
Unless terminated earlier, the Amended and Restated Marketing and Facilitation
Agreement will continue in effect until August 19, 2012. Birds Eye Foods may
terminate the Amended and Restated Marketing and Facilitation Agreement prior to
August 19, 2012 upon the occurrence of certain events, including in connection
with a change in control transaction affecting Birds Eye Foods or Holdings Inc.
However, in the event Birds Eye Foods terminates the Amended and Restated
Marketing and Facilitation Agreement as a result of a change in control
transaction within three years of the Closing Date, Birds Eye 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, Birds Eye Foods sells one or more portions of its
business, and if the purchaser does not continue to purchase the crops
previously purchased by Birds Eye Foods with respect to the transferred
business, then such failure will be taken into consideration when determining if
Birds Eye Foods is required to make any shortfall payments to Pro-Fac. After
such three-year period, Birds Eye Foods may sell portions of its business and
the volumes of crop purchases previously made by Birds Eye Foods with respect to
such transferred business will be disregarded for purposes of determining
shortfall payments.
NOTE 3. DEBT
Credit Agreement: Birds Eye Foods and Pro-Fac entered into a Credit Agreement,
dated August 19, 2002 (the "Credit Agreement"), pursuant to which Birds Eye
Foods agreed to make available to Pro-Fac loans in an aggregate principal amount
of up to $5.0 million (the "Credit Facility "). Pro-Fac is permitted to draw up
to $1.0 million per year under the Credit Facility, unless Birds Eye Foods is
prohibited from making such advances under the terms of certain third party
indebtedness of Birds Eye Foods. The amount of the Credit Facility will be
reduced, on a dollar-for-dollar basis, to the extent of certain distributions
made by Holdings LLC to Pro-Fac in respect of its ownership in Holdings LLC.
Pro-Fac has pledged all of its Class B common units in Holdings LLC as security
for advances under the Credit Facility. Advances outstanding under the Credit
Agreement bear interest at 10 percent per annum. Amounts borrowed and interest
are required to be paid only upon sale of Pro-Fac's ownership interest in
Holdings LLC or receipt of a distribution from Holdings LLC in connection the
sale or liquidation of all or substantially all of the assets of Holdings LLC or
one of more of its subsidiaries. Pro-Fac may voluntarily repay amounts borrowed
and interest at any time. As of September 27, 2003, there was an outstanding
loan amount of $1.0 million.
Line of Credit : On March 26, 2003, the Cooperative secured a $0.5 million line
of credit (the "M&T Line of Credit") from Manufacturers and Traders Trust
Company ("M&T Bank"). As of September 27, 2003, there were no borrowings
outstanding under the Line of Credit. Principal amounts borrowed bear interest
at .75 percent per annum above the prime rate in effect on the day proceeds are
disbursed, as announced by the Bank, as its prime rate of interest. Interest is
payable monthly. Amounts extended under
7
the M&T Line of Credit are required to be paid down to zero during each year by
July 15, and maintained for a minimum of 90 consecutive days. The first paydown,
if necessary, will commence July 15, 2004. The Cooperative's obligations under
the M&T Line of Credit are secured by a security interest granted to
Manufacturers and Traders Trust Company in substantially all of the assets of
the Cooperative, excluding its Class B common units owned in Holdings LLC.
However, collateral does include any distributions from the common units and
cash payments made by Birds Eye Foods to the Cooperative.
Pro-Fac guarantees certain obligations of Birds Eye Foods. Following is a
schedule of obligations at September 27, 2003 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 $ 38.5 November 2008
NOTE 4. 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 special membership interests were allocated to the then current and former
members of Pro-Fac who had made patronage deliveries to or on behalf of Pro-Fac
in the six fiscal years ended June 29, 2002, in proportion to the patronage
deliveries made by those members in each case during that six fiscal year
period. 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 purpose of the allocation of the special membership interests
was to preserve for the then current and former members at the date of the
Transaction, the book appreciation in value of their former investment in Birds
Eye Foods.
NOTE 5. OPERATING SEGMENTS
Prior to August 19, 2002, the results of the Cooperative were consolidated with
its then wholly-owned subsidiary, Birds Eye Foods.
Subsequent to August 19, 2002, the Cooperative operates in one segment, the
marketing of crops grown by its members.
Birds Eye 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 establishes standards for related disclosures about products and
services, and geographic areas. As management of Birds Eye Foods made the
majority of its operating decisions based upon Birds Eye Foods' significant
product lines, Birds Eye Foods elected to utilize significant product lines in
determining its operating segments. Birds Eye 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.
8
The following table illustrates the operating segment information of the
Cooperative for the periods indicated:
(Dollars in Millions)
Quarter Ended Quarter Ended
September 27, September 28,
2003 2002
------------- -------------
Net Sales:
Vegetables $0.0 $ 69.5
Fruits 0.0 13.1
Snacks 0.0 11.8
Canned Meals 0.0 4.4
Other 0.0 4.9
---- ------
Total $0.0 $103.7
==== ======
Quarter Ended Quarter Ended
September 27, September 28,
2003 2002
------------- ------------
Operating income:
Vegetables $0.0 $ 3.8
Fruits 0.0 2.1
Snacks 0.0 1.3
Canned Meals 0.0 0.3
Other 0.0 0.4
---- ------
Continuing segments 0.0 7.9
Equity loss from Agrilink
Holdings LLC (for the period
June 29, 2003 to September 27,
2003 and the period August 19,
2002 to September 28, 2002,
respectively) (0.6) (0.1)
Gain from transaction with Birds Eye
Foods, Inc. and related agreements 2.5 6.8
Commercial market value adjustment 0.4 0.0
Selling, administrative, and general (0.2) (0.5)
Legal matters and settlement expenses (0.2) (0.1)
---- ------
Total consolidated operating income 1.9 14.0
Interest expense, net 0.0 (7.8)
---- ------
Income before taxes $1.9 $ 6.2
==== ======
9
NOTE 6. OTHER MATTERS
Prior to August 19, 2002, the results of the Cooperative were consolidated with
its then wholly-owned subsidiary, Birds Eye Foods.
Legal Matters: In the fourth quarter of fiscal 2003, Pro-Fac recorded a
liability of $832,500 relating to the settlement of claims of Kenyon Zero
Storage, Inc., the plaintiff in a lawsuit commenced on August 27, 2001, in U.S.
District Court for the Eastern District of Washington (the "Kenyon Zero Storage
Matter"), under a surety bond issued pursuant to a vegetable plant lease. The
liability was recorded because Pro-Fac was the indemnitor of the surety bond.
Pro-Fac will pay the amount of $832,500 to the surety on July 1, 2004. On
September 2, 2003, Kenyon Zero Storage, which also alleged that Pro-Fac breached
a 20-year lease of a vegetable plant located in Grandview, Washington between
AgriFrozen and the plaintiff, agreed to a settlement of that claim. The parties
have executed general releases and a stipulation of dismissal was filed with the
court, providing for the full and final settlement, dismissal and release of all
litigation brought by Kenyon Zero Storage in exchange for a settlement payment
of $570,000. The liability was recorded in the fourth quarter of fiscal 2003.
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.
Guarantees and Indemnifications: Pro-Fac is a guarantor, under an Indenture
dated November 18, 1998, between Birds Eye Foods, the Guarantors named therein
and IBJ Schroder Bank & Trust Company, Inc., as trustee, which Indenture was
amended by a First Supplemental Indenture dated July 22, 2002, among Birds Eye
Foods, the Guarantors named therein and The Bank of New York (as successor
trustee to IBJ Schroder Bank & Trust Company), as trustee, and as further
amended by a Second Supplemental Indenture dated March 1, 2003, of Birds Eye
Foods' obligations under $200.0 million aggregate principal amount of 11 7/8
percent Senior Subordinated Notes issued by Birds Eye Foods in fiscal 1999. The
$200.0 million aggregate principal amount is due November 1, 2008. Interest on
the Notes accrues at the rate of 11 7/8 percent per annum and is payable
semi-annually in arrears on May 1 and November 1. Pro-Fac, jointly and
severally, guarantees Birds Eye Foods' obligations under the 11 7/8 percent
Senior Subordinated Notes, including the payment in full when due of all
principal and interest on the 11 7/8 percent Senior Subordinated Notes at
maturity or otherwise and, in the event of any extension of time of payment or
renewal of any of the 11 7/8 percent Senior Subordinated Notes, that the Notes
will be promptly paid in full when due pursuant to the terms of any such
extension or renewal. In the event of such shortfall, Pro-Fac would be required
to pay any interest payments due as well as any unpaid principal balance due on
the 11 7/8 percent Senior Subordinated Notes. As of September 27, 2003, the
outstanding loan amount was $200.0 million.
As partial consideration for the acquisition in fiscal 1999 of the frozen and
canned vegetable business of Dean Foods Company, Birds Eye Foods issued to Dean
Foods a Subordinated Promissory Note for $30 million aggregate principal amount
due November 22, 2008. The Subordinated Promissory Note is currently owned by
GLK, LLC, a New York limited liability company, whose members are Birds Eye
Foods and GLK Holdings, Inc. which is a wholly owned subsidiary of Birds Eye
Foods. Pro-Fac guarantees Birds Eye Foods' obligations under that Note. Interest
on the Subordinated Promissory Note accrues 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 Birds Eye Foods of
additional subordinated promissory notes identical to the Subordinated
Promissory Note. Birds Eye Foods satisfied this requirement through the issuance
of additional promissory notes. Interest accruing after November 22, 2003 is
payable in cash. Pro-Fac, jointly and severally, guarantees Birds Eye Foods'
obligations under the Subordinated Promissory Note, including the payment in
full when due of all principal and interest on the Note. In the event of such
shortfall, Pro-Fac would be required to pay any interest payments due as well as
any unpaid principal balance due on the Note. As of September 27, 2003, the
outstanding loan amount subject to the Cooperative's guarantee included
principal of $30.0 million and interest of $8.5 million.
Historically, when Pro-Fac has sold assets, it may have retained certain
liabilities for known exposures and provided indemnification to the buyer(s)
with respect to future claims for certain unknown liabilities existing, or
arising from events occurring, prior to the sale date, including liabilities for
taxes, legal matters, environmental exposures, labor contingencies, product
liability, and other obligations. Pro-Fac may enter into similar arrangements in
the future. Agreements to provide indemnifications may vary in duration,
generally for two years for certain types of indemnities, to terms for tax
indemnifications that are generally aligned to the applicable statute of
limitations for the jurisdiction in which the tax is imposed, and to terms for
certain liabilities (i.e., warranties of title and environmental liabilities)
that typically do not expire. The maximum potential future payments that the
Cooperative could be required to make under agreements of indemnification are
(or may be) either contractually limited to a specified amount or unlimited. The
maximum potential future payments that the Cooperative could be required to make
under agreements of indemnification are not determinable at this time, as any
future payments would be dependent on the type and extent of the related claims,
and all relevant defenses, which are not estimable. Historically, costs incurred
to resolve claims related to agreements of indemnification have not been
material to the Cooperative's financial position, results of operations or cash
flows.
10
From time to time, in the ordinary course of its business, Pro-Fac has, or may,
enter into agreements with its customers, suppliers, service providers and
business partners which contain indemnification provisions. Generally, such
indemnification provisions require, the Cooperative to indemnify and, holds
harmless the indemnified party(ies) and to reimburse the indemnified party(ies)
for claims, actions, liabilities, losses and expenses in connection with any
personal injuries or property damage resulting from any Pro-Fac products sold or
services provided. Additionally, the Cooperative may from time to time agree to
indemnify and hold harmless its providers of services from claims, actions,
liabilities, losses and expenses relating to their services to Pro-Fac, except
to the extent finally determined to have resulted from the fault of the provider
of services relating to such services. The level of conduct constituting fault
of the service provider will vary from agreement to agreement and may include
conduct which is defined in terms of negligence, gross negligence, willful
misconduct, omissions or other culpable behavior. The term of these
indemnification provisions are generally not limited. The maximum potential
future payments that the Cooperative could be required to make under these
indemnification provisions are unlimited and are not determinable at this time,
as any future payments would be dependent on the type and extent of the related
claims, and all relevant defenses to the claims, which are not estimable.
Historically, costs incurred to resolve claims related to these indemnification
provisions have not been material to the Cooperative's financial position,
results of operations or cash flows.
The Cooperative has by-laws, policies, and agreements under which it indemnifies
its directors and officers from liability for certain events or occurrences
while the directors or officers are, or were, serving at Pro-Fac's request in
such capacities. Pro-Fac indemnifies its officers and directors to the fullest
extent allowed by law. The maximum potential amount of future payments that the
Cooperative could be required to make under these indemnification provisions is
unlimited, but would be affected by all relevant defenses to the claims.
NOTE 7. SUBSEQUENT EVENTS
Dividends: Subsequent to September 27, 2003, the Cooperative declared a cash
dividend of $.43 per share on the Class A Cumulative Preferred Stock. These
dividends approximate $2.0 million and were paid on October 31, 2003.
Guarantees and Indemnifications: On October 24, 2003, Birds Eye Foods announced
an irrevocable notice of partial redemption sent to holders of its Notes. These
Notes are guaranteed by the Cooperative ( see NOTE 6 " Other Matters" -
Guarantees and Indemnifications ). The aggregate outstanding principal amount of
the Notes being called for redemption is $150.0 million. Upon redemption,
holders whose Notes have been selected for redemption will receive $1,059.38 per
Note plus accrued and unpaid interest thereon. Any of the Notes selected for
redemption will be automatically redeemed on November 24, 2003, and no further
interest will accrue on or after such date. The Notes to be redeemed will be
selected in accordance with and by the trustee under the indenture under which
the Notes were issued.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, Pro-Fac or persons acting on behalf of Pro-Fac make oral and
written statements that may constitute "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995 (the "PSLRA") or by the
Securities and Exchange Commission ("SEC") in its rules, regulations, and
releases. The Cooperative desires to take advantage of the "safe harbor"
provisions in the PSLRA for forward-looking statements made from time to time,
including, but not limited to, the forward-looking information contained in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this Report and other statements made in this 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 Birds Eye Foods, Inc.'s (formerly Agrilink Foods, Inc.)
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 (see
the discussion under "NOTE 2. Agreements with Birds Eye Foods " under
"Notes to Consolidated Financial Statements");
O interest rate fluctuations;
O the Cooperative's ability to service debt;
11
O Birds Eye Foods, Inc.'s ability to service its debt that is guaranteed by
Pro-Fac (see the information under the heading "Liquidity and Capital
Resources" in Item 2 of this Report);
O risks associated with the Cooperative's contractual relationship with Birds
Eye Foods, Inc., including the possibility of a reduced demand for crops
produced by Pro-Fac members, the availability and sufficiency of shortfall
payments by Birds Eye Foods, Inc. under the Amended and Restated Marketing
and Facilitation Agreement, and the potential consequences of a termination
of that relationship; the ability of the Cooperative to operate its
business using the resources made available under the Termination Agreement
and Transitional Services Agreement (see the discussion of these Agreements
under "NOTE 2. Agreements with Birds Eye Foods" under "Notes to
Consolidated Financial Statements") with Birds Eye Foods, Inc. and
Pro-Fac's ability to operate its business after the expiration of those
agreements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to outline the reasons for material changes in
Pro-Fac's financial condition and results of operations in the first quarter of
fiscal 2004 as compared to the first quarter of fiscal 2003. This section should
be read in conjunction with Part I, Item I, Financial Statements of this Report.
Prior to August 18, 2002, Birds Eye Foods was a wholly owned subsidiary of
Pro-Fac. Through (and including) August 18, 2002, the results of Pro-Fac were
consolidated with Birds Eye Foods. During that period Birds Eye Foods operated
through four primary product lines, consisting of vegetable, fruits, snacks and
canned meals. The majority of each of the product line's net sales was within
the United States and, with the exception of one facility in Mexico, all of
Birds Eye Foods' facilities were located in the United States. The consolidated
financial statements were after elimination of intercompany transactions and
balances.
Since August 19, 2002 Pro-Fac has operated in one segment, the marketing and
supply of crops grown by its members.
The following summarizes the activity of Birds Eye 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)
--------
Pretax income 144
Tax provision (59)
--------
Net income $ 85
========
As a result of the Transaction described in NOTE 1 of the "Notes to Consolidated
Financial Statements," the results of operations for the approximately seven
weeks outlined above are not comparable with those of the first quarter of
fiscal 2004. Accordingly, the following is a discussion of the remaining
components included in the results of operations of Pro-Fac for the first
quarter of fiscal 2004.
Equity loss from Agrilink Holdings LLC: For the quarter ended September 27,
2003, the Cooperative recognized a loss of approximately $0.6 million from
Holdings LLC, as compared to a loss of approximately $0.1 million in the
fiscal 2003 period.
Gain from transaction with Birds Eye Foods, Inc and related agreements: On
August 19, 2002, the Cooperative contributed to the capital of Holdings LLC all
of the shares of Birds Eye Foods' common stock owned by Pro-Fac in exchange for
Class B common units of Holdings LLC representing a then 40.72 percent interest.
Pro-Fac's investment in Birds Eye Foods prior to the Transaction was
approximately $24.9 million. This amount reflects the forgiveness by Birds Eye
Foods of approximately $36.5 million which represented both borrowings for the
working capital needs of Pro-Fac and a $9.4 million demand payable. The value of
the Cooperative's 40.72 percent common equity ownership in Holdings LLC on
August 19, 2002 was estimated at $31.4 million as of the Closing Date of the
Transaction. In fiscal 2003, the Cooperative recognized a gain of $3.8 million
from this exchange.
12
In addition, Pro-Fac and Birds Eye Foods entered into the Transitional Services
Agreement described in NOTE 2 to 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, in fiscal 2003, Pro-Fac recognized
approximately $.6 million as additional gain from the Transitional Services
Agreement.
Pro-Fac and Birds Eye 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 is entitled to the payment of 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 is
payable 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.
Payments under the Termination Agreement are considered additional consideration
related to the Transaction. Accordingly, the portion of the payments received
under the Termination Agreement related to Pro-Fac's continuing ownership
percentage are recorded as an adjustment to Pro-Fac's investment in Holdings
LLC. The remaining payments are recognized as additional gain on the Transaction
with Birds Eye Foods in the period it is received. Accordingly, in the first
quarter of both fiscal 2004 and fiscal 2003, Pro-Fac recognized approximately
$2.4 million as additional gain from the receipt of the termination payments.
As a result of the agreements described above, the Cooperative recognized a
total gain, through the first quarter of fiscal 2004, of approximately $2.4
million, as compared to approximately $6.8 million in the first quarter of
fiscal 2003.
Commercial market value adjustment: 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 authorized the deduction of 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 withheld from the July 2004
CMV payments. The 1 percent deduction for the 2002 growing season, which was
withheld from the July 2003 CMV payment, resulted in approximately $0.6 million
of income for the fiscal 2003 which was recorded during the third quarter, as
compared to the approximately $0.4 million recorded in the first quarter of
fiscal 2004.
Selling, administrative, and general expense: Selling, administrative, and
general expenses totaled $0.3 million for the quarter ended September 27, 2003,
as compared to $0.5 million in the comparable 2003 period. The decrease resulted
from the Cooperative incurring, during the first quarter of fiscal 2003,
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.
Legal matters and settlement expenses: The Cooperative incurred approximately
$0.2 million of legal costs associated with legal matters, as disclosed in NOTE
6 to the "Notes to Consolidated Financial Statements," through the end of the
first quarter of fiscal 2004.
Tax provision: On June 11, 2003, the Cooperative received notification from the
Internal Revenue Service that effective August 19, 2002 the Cooperative
qualified for tax exempt status as a farmers' cooperative under Section 521 of
the Internal Revenue Code. Exempt cooperatives are permitted to reduce or
eliminate taxable income through the use of special deductions (such as
dividends paid on its common and preferred stock).
It is anticipated that the Cooperative will use these special deductions and
patronage distributions to reduce the Cooperative's taxable income to zero for
periods after August 19, 2002. The fiscal 2003 tax provision was recorded
because tax exempt status had not yet been granted and for taxes related to the
period prior to the effective date of tax exempt status. The provision for the
period after the effective date was reversed in the fourth quarter of fiscal
2003 when tax exempt status was granted.
LIQUIDITY AND CAPITAL RESOURCES
As discussed under "NOTE 1. Description of Business and Summary of Significant
Accounting Policies", as a result of the Transaction, Pro-Fac no longer
consolidates the assets and liabilities of Birds Eye Foods in its financial
statements. Pro-Fac's balance sheet does, however, reflect Pro-Fac's interest in
Holdings LLC, which, as described in "NOTE 1. Description of Business and
Summary of Significant Accounting Policies" is accounted for under the equity
method.
From and after August 19, 2002 and through and including August 19, 2007,
Pro-Fac's primary source of cash is presently expected to be the $10.0 million
annual payments due to it from Birds Eye Foods pursuant to the Termination
Agreement, the last installment payment of $2.0 million pursuant to that
agreement being payable on April, 1, 2007, and the commercial market value or
"CMV" payments made to it by Birds Eye Foods for crops pursuant to the Amended
and Restated Marketing and Facilitation Agreement.
13
Although Pro-Fac's business strategy is to expand its sources of cash through
expanding the types of products and/or services it offers, the actual amount of
cash that may be generated from Pro-Fac's expanded operations will depend on how
successful Pro-Fac is in implementing its business strategy, including
controlling any associated costs.
Subsequent to August 19, 2007 and prior to any sale (or dissolution) of Holdings
LLC, Pro-Fac's primary source of cash is expected to be the annual
distributions, if any, from Holdings LLC pursuant to the limited liability
company agreement of Holdings LLC to which Pro-Fac, together with others,
including Vestar, are parties, dated August 19, 2002 (the "Limited Liability
Company Agreement"). The Limited Liability Company Agreement contains terms and
conditions relating to the management of Holdings LLC and its subsidiaries
(including Birds Eye Foods), the distribution of profits and losses and the
rights and limitations of members of Holdings LLC, and provides that, subject to
any restrictions contained in any financing arrangements of Holdings LLC and/or
Birds Eye Foods, after August 19, 2007, Holdings LLC will use commercially
reasonable efforts to cause Birds Eye Foods to distribute annually to Holdings
LLC up to $24.8 million of cash flow from operations of Birds Eye Foods, which
Holdings LLC will then distribute to the holders of its common units. Assuming
$24.8 million of annual distributions, and further assuming that Pro-Fac's
distributable interest is 40.50%, Pro-Fac's annual distributable share would be
approximately $10.0 million. The actual amount of annual distributions to
Pro-Fac, if any, will depend upon the operating results of Birds Eye Foods for
the particular year and Pro-Fac's distributable percentage interest.
Although CMV payments are a source of cash to Pro-Fac, with the exception of the
Board's decision to deduct 1% of CMV otherwise payable to its grower-members for
crops delivered in 2003 ($0.6 million) and 2004, Pro-Fac has typically paid 100%
of CMV to its member-growers. The Pro-Fac Board of Directors determines annually
the amount of CMV that will be paid out to the Pro-Fac member-growers for crops
supplied for the immediately preceding growing season after taking into account
Pro-Fac's need to establish reserves for its anticipated operating and other
expenses.
Any cash generated from expanded products and/or services offerings by Pro-Fac
is currently anticipated to be a secondary source of cash.
In addition to the cash payments to Pro-Fac pursuant to the Termination
Agreement and the possible cash distributions to Pro-Fac pursuant to the Limited
Liability Company Agreement, Pro-Fac has available up to $1.0 million per year,
until August 19, 2007, under the Credit Agreement with Birds Eye Foods and up to
$500,000 under a line of credit from Manufacturers and Traders Trust Company
("M&T Bank").
On March 26, 2003, the Cooperative secured a $500,000 line of credit from M&T
Bank (the "M&T Line of Credit"). Principal amounts borrowed under the M&T Line
of Credit bear interest at .75 basis points above the prime rate in effect on
the day proceeds are disbursed, as announced by M&T Bank, as its prime rate of
interest. Interest is payable monthly. Amounts extended under the M&T Line of
Credit are required to be repaid in full during each year by July 15, with
further borrowings prohibited for a minimum of 90 consecutive days after such
repayment. Pro-Fac's obligations under the M&T Line of Credit are secured by a
security interest granted to M&T in substantially all of its assets, excluding
Pro-Fac's Class B common units owned in Holdings LLC. However, the collateral
does include any distributions made in respect of the Class B common units and
cash payments made by Birds Eye Foods to the Cooperative.
As of September 27, 2003, there was no outstanding amount under the M&T Line of
Credit.
Under the Transitional Services Agreement, Birds Eye Foods has agreed to provide
Pro-Fac certain administrative and other services until August 19, 2004. After
termination of that Agreement, Pro-Fac will need cash to pay for the services
currently being provided under that Agreement, including salary, administrative
and other expenses.
Net cash available to Pro-Fac, after payment of CMV to Pro-Fac's member-growers,
is used to pay Pro-Fac's operating expenses as well as to pay dividends on its
capital stock and fund repurchases of its common stock. Dividends on Pro-Fac's
preferred stock were $2.0 million and $2.0 million in the first quarter of
fiscal 2004 and 2003, respectively.
A discussion of "Unaudited Consolidated Statement of Cash Flows" for the quarter
ended September 27, 2003 of fiscal 2004 follows:
Net cash used in operating activities of $1.1 million for the first quarter of
fiscal 2004 primarily represents the payment of a settlement of legal matters.
(See the discussion of Legal Matters under "Note 6. Other Matters" under "Notes
to Consolidated Financial Statements" in Part I, Item 1 of this Report).
Net cash provided by investing activities for the first quarter of fiscal 2004
was $4.0 million. This amount primarily represents the receipt by the
Cooperative of $4.0 million from Birds Eye Foods under the Termination
Agreement.
Net cash used in financing activities of approximately $2.3 million primarily
represents dividends paid of approximately $2.0 million and net repayment of
debt of $0.2 million by the Cooperative during the first quarter of fiscal 2004.
At its January 2003 Board meeting, in an action aimed at improving the
Cooperative's short-term liquidity, the Board of Directors of
14
Pro-Fac authorized the suspension of annual dividends on the Cooperative's
common stock for an indefinite period of time and the deduction of 1 percent of
the 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 was taken from the July 2003 ($0.6 million)
payments and it is anticipated that it will be withheld from the July 2004 CMV
payments. The Board of Directors of Pro-Fac will review this recommendation
annually.
Pro-Fac believes that its sources of cash described above will be sufficient to
fund its operations and meet its cash requirements for at least the next 12
months. Pro-Fac's ability to fund these requirements will depend on Pro-Fac's
future operations, performance and cash flow and is subject to prevailing
economic conditions and financial, business and other factors, some of which are
beyond Pro-Fac's control.
Contractual Obligations Guaranteed
There have been no material changes to our contractual obligations since June
28, 2003.
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 from both the fiscal 2002 and 2003 growing seasons was affected
by weather in the prime growing areas in Michigan. Both raw and frozen cherry
commercial market value have, therefore, significantly increased from historic
levels.
For the 2003 crop season, unexpected higher than average temperatures in the
Northeast and Midwest regions reduced crop intake. The reduction in crop intake
is not expected to materially impact average commercial market values.
ITEM 4. CONTROLS AND PROCEDURES
Pro-Fac's Principal Executive Officer and Principal Financial Officer, evaluated
the effectiveness of the design and operation of Pro-Fac's disclosure controls
and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")). Based on that evaluation, Pro-Fac's
Principal Executive Officer and Principal Financial Officer concluded that
Pro-Fac's disclosure controls and procedures as of September 27, 2003 (the end
of the period covered by this Report) have been designed and are functioning
effectively to provide reasonable assurance that the information required to be
disclosed by Pro-Fac in reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
15
PART II
ITEM 1. LEGAL PROCEEDINGS
The information called for by this Item is disclosed in NOTE 6. "Other Matters -
Legal Matters" under "Notes to Consolidated Financial Statements" in Part I,
Item 1 of this Form 10-Q, and is incorporated herein by reference in answer to
this Item.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
-------------- ---------------------------------------------------
31. Certification required by Rule 13a-14 (a) of the
Securities and Exchange Act of 1934 of the Principal
Executive Officer and the Principal Financial Officer
(filed herewith).
32. Certification required by Rule 13a-14 (b) of the
Securities and Exchange Act of 1934 and pursuant to
18 U.S.C., Section 1350. as adopted pursuant to
Section 906 of the Sarbanes Oxley Act at 2002, of the
Principal Executive Officer and the Principal
Financial Officer (filed herewith).
99.1 Birds Eye Foods, Inc. financial statements for the
quarter ended September 27, 2003 (filed herewith).
(b) Reports on Form 8-K:
On September 26, 2003 the Cooperative furnished a Report on Form 8-K.
Pursuant to Item 12, Pro-Fac Cooperative Inc. furnished its press
release dated September 26, 2003, which reported its financial results
for the fiscal year ended June 28, 2003.
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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: November 10, 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)
17