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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 25, 2004
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)
350 Linden Place, PO Box 30682, Rochester, NY 14603-0682
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (585) 218-4210
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 check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES ___ NO X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. As of January 31, 2005.
Common Stock - 1,833,738
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FORM 10-Q
For the Quarterly Period Ended December 25, 2004
PRO-FAC COOPERATIVE, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements............................................. 3
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 12
ITEM 3. Quantitative and Qualitative Disclosure About Market Risks....... 16
ITEM 4. Controls and Procedures.......................................... 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................ 17
ITEM 6. Exhibits......................................................... 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited financial statements of Pro-Fac Cooperative, Inc. as of December 25,
2004 and for the three month and six month period ended December 25, 2004 and
December 27, 2003 are presented on the following pages. The financial statements
have been prepared in accordance with the Cooperative's usual accounting
policies, are based, in part, on estimates and reflect all normal and recurring
adjustments which are, in the opinion of management, necessary to a fair
presentation of the results of the interim periods. The June 26, 2004 balance
sheet was derived from the Cooperative's audited balance sheet at June 26, 2004.
This Part I also includes management's discussion and analysis of the
Cooperative's financial condition as of December 25, 2004 and its results of
operations for the three and six month periods ended December 25, 2004.
Pro-Fac Cooperative, Inc.
Condensed Statements of Operations, Allocation of Net Income and Comprehensive
Income
(Unaudited)
(Dollars in Thousands)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
December 25, December 27, December 25, December 27,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 0 $ 0 $ 0 $ 0
Cost of sales 0 0 0 0
------- ------- ------- -------
Gross profit 0 0 0 0
Equity in income of Birds Eye Holdings LLC 4,179 2,429 1,557 1,808
Gain from transaction with Birds Eye Foods, Inc.
and related agreements 1,190 1,190 3,570 3,681
Margin on delivered product 150 0 150 0
Commercial market value adjustment 0 184 0 633
Selling, administrative, and general expense (244) (262) (549) (520)
Legal matters and settlement expenses (36) (5) (72) (199)
Other income 0 0 51 0
------- ------- ------- -------
Operating income 5,239 3,536 4,707 5,403
Interest income 14 3 26 6
Interest expense (24) (25) (49) (36)
------- ------- ------- -------
Net income $ 5,229 $ 3,514 $ 4,684 $ 5,373
======= ======= ======= =======
Allocation of net income:
Net income $ 5,229 $ 3,514 $ 4,684 $ 5,373
Dividends on preferred stock (2,059) (1,980) (4,161) (4,004)
------- ------- ------- -------
Net surplus 3,170 1,534 523 1,369
Allocation to accumulated deficit (3,170) (1,534) (523) (1,369)
------- ------- ------- -------
Net income available to members $ 0 $ 0 $ 0 $ 0
======= ======= ======= =======
Net income $ 5,229 $ 3,514 $ 4,684 $ 5,373
Other comprehensive income/(loss):
Unrealized gain/(loss) on hedging activity of
equity investee (14) (11) 45 (222)
------- ------- ------- -------
Comprehensive income $ 5,215 $ 3,503 $ 4,729 $ 5,151
======= ======= ======= =======
The accompanying notes are an integral part of these condensed financial
statements.
3
Pro-Fac Cooperative, Inc.
Condensed Balance Sheets
(Unaudited)
(Dollars in Thousands)
ASSETS
December 25, June 26,
2004 2004
------------ ---------
Current assets:
Cash and cash equivalents $ 3,984 $ 3,394
Accounts receivable, trade 4,660 1,343
Accounts receivable from Birds Eye Foods, Inc. 16,976 7,783
Current portion of Transitional Services receivable from
Birds Eye Foods, Inc. 0 71
Inventory 399 0
Prepaid expenses and other current assets 56 10
--------- ---------
Total current assets 26,075 12,601
Fixed assets, net 17 0
Investment in Birds Eye Holdings LLC 20,669 21,497
--------- ---------
Total assets $ 46,761 $ 34,098
========= =========
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION
Current liabilities:
Line-of-credit $ 1,025 $ 0
Accounts payable 82 457
Accrued interest 5 86
Other accrued expenses 91 833
Amounts due members 25,345 12,077
--------- ---------
Total current liabilities 26,548 13,453
Long-term debt 0 1,000
--------- ---------
Total liabilities 26,548 14,453
--------- ---------
Commitments and contingencies
Class B cumulative redeemable preferred stock, liquidation
preference $10 per share; authorized - 500,000 shares;
issued and outstanding 10,768 shares 108 108
--------- ---------
Common stock, par value $5, authorized - 5,000,000 shares;
issued and outstanding 1,833,738 shares 9,169 9,169
--------- ---------
Shareholders' and members' capitalization:
Retained earnings allocated to members 9,793 9,793
Non-cumulative preferred stock, par value $25, authorized
5,000,000 shares; issued and outstanding 28,297 shares 707 707
Class A cumulative preferred stock, liquidation preference
$25 per share, authorized 10,000,000 shares; issued and
outstanding 4,789,575 shares 119,741 119,741
Special membership interests 21,733 21,733
Accumulated deficit (136,389) (136,912)
Accumulated other comprehensive (loss)/income:
Unrealized gain on hedging activity of equity investee 134 89
Minimum pension liability adjustment of equity investee (4,783) (4,783)
--------- ---------
Total shareholders' and members' capitalization 10,936 10,368
--------- ---------
Total liabilities and shareholders' and members'
capitalization $ 46,761 $ 34,098
========= =========
The accompanying notes are an integral part of these condensed financial
statements.
4
Pro-Fac Cooperative, Inc.
Condensed Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
Six Months Ended
---------------------------
December 25, December 27,
2004 2003
------------ ------------
Cash Flows from Operating Activities:
Net income $ 4,684 $ 5,373
Adjustments to reconcile net income to net cash
used in operating activities:
Amortization of transition service receivable 71 263
Depreciation 2 0
Gain from transaction with Birds Eye Foods, Inc.
and related agreements (3,570) (3,681)
Equity in income of Birds Eye Holdings LLC (1,557) (1,808)
Change in assets and liabilities:
Accounts receivable (12,510) (11,474)
Accounts payable and other accrued expenses (1,198) (1,541)
Amounts due members 13,268 12,174
Other assets and liabilities, net (445) (40)
-------- --------
Net cash used in operating activities (1,255) (734)
-------- --------
Cash Flows from Investing Activities:
Proceeds from Termination Agreement with Birds Eye
Foods, Inc. 6,000 6,000
Purchase of property, plant and equipment (19) 0
Proceeds from investment in CoBank 0 29
-------- --------
Net cash provided by investing activities 5,981 6,029
-------- --------
Cash Flows from Financing Activities:
Borrowing on line-of-credit 1,025 0
Payments on long-term debt (1,000) (200)
Repurchases of common stock, net 0 (42)
Cash dividends paid (4,161) (4,004)
-------- --------
Net cash used in financing activities (4,136) (4,246)
-------- --------
Net change in cash and cash equivalents 590 1,049
Cash and cash equivalents at beginning of period 3,394 367
-------- --------
Cash and cash equivalents at end of period $ 3,984 $ 1,416
======== ========
The accompanying notes are an integral part of these condensed financial
statements.
5
PRO-FAC COOPERATIVE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Pro-Fac Cooperative, Inc. is a New York agricultural
cooperative corporation operating in one segment, the marketing of crops grown
by its members.
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, Inc. ("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 Birds Eye 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
thereof to one vote for each common unit held. Accordingly, Vestar has a
voting majority of all common units.
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. ("Holdings Inc."), a Delaware corporation and a direct,
wholly-owned subsidiary of Holdings LLC. As a result, Birds Eye Foods became an
indirect, wholly-owned subsidiary of Holdings LLC.
The transactions consummated pursuant to the Unit Purchase Agreement are
referred to herein collectively as the "Transaction."
As a result of the Transaction, Pro-Fac no longer reports its financial
statements on a consolidated basis with that of Birds Eye Foods. As outlined
above, Pro-Fac owns Class B common units of Holdings LLC. Subsequent to the
Transaction, Pro-Fac accounts for its investment in Holdings LLC under the
equity method of accounting.
See NOTE 2 to the "Notes to Condensed Financial Statements" for additional
disclosures regarding agreements with Birds Eye Foods.
Basis of Presentation: The accompanying unaudited condensed 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 annual financial statement presentation. Accounting for the
Cooperative's investment in Holdings LLC is based upon financial information
provided by Holdings LLC. 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 25, 2004 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 audited financial
statements and accompanying notes contained in the Pro-Fac Cooperative, Inc.
Form 10-K for the fiscal year ended June 26, 2004.
Inventory: The Cooperative supplies product to another cooperative which markets
the product. Title remains with the Cooperative until sold. Inventory and an
equal amount due member-growers is recorded at estimated cost.
Fixed Assets, net: Fixed assets, which consist of office and computer equipment,
are recorded at cost. Depreciation is provided using the straight-line method
over the estimated useful lives of the related assets, which range from 5 to 7
years.
6
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 decided to deduct one (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. Accordingly, the one (1) percent CMV deduction was withheld from the
July 2003 and the July 2004 CMV payments. In evaluating the Cooperative's
operations and anticipated cash flow needs and available sources of cash flow,
the Board of Directors of Pro-Fac may determine that similar action should be
taken with respect to CMV payable to Pro-Fac's member-growers for subsequent
growing seasons.
Equity Method of Accounting: Pro-Fac accounts for its investment in Holdings LLC
under the equity method of accounting. Under the equity method of accounting,
Pro-Fac records its share of the earnings or loss of Holdings LLC available to
common unit holders based on its ownership percentage. The earnings or loss of
Holdings LLC available to common unit holders is adjusted by subtracting the
preferred return on Holdings LLC's preferred units and the accretion thereon and
adding the expense recorded by Holdings LLC related to termination payments, as
described below. Pro-Fac's share of these earnings or losses is reflected as
"Equity in income/(loss) of Birds Eye Holdings LLC" on Pro-Fac's Statement of
Operations. The "Investment in Birds Eye Holdings LLC" on Pro-Fac's balance
sheet is also increased for earnings of Holdings LLC and decreased for losses of
Holdings LLC.
Pro-Fac also records its share, based on its ownership percentage, of the change
in Holdings LLC's other comprehensive income/(loss) items including minimum
pension liabilities and unrealized holding gains and losses on hedging
transactions. These changes are reflected as increases, if income, or decreases,
if a loss, in the "Investment in Birds Eye Holdings LLC" and the equity of
Pro-Fac and are also included in determining Pro-Fac's comprehensive
income/(loss).
Also under the equity method, Pro-Fac records a portion of termination payments
received as a result of the Transaction as "Gain from transaction with Birds Eye
Foods, Inc. and related agreements" on Pro-Fac's statement of operations. The
portion of termination payments recorded in the statement of operations is based
on the percentage of Birds Eye Foods indirectly owned by Vestar and unrelated
parties which is currently approximately 59.59%. The remaining portion of
termination payments received, currently approximately 40.41%, is recorded as a
reduction in Pro-Fac's investment in Holdings LLC because of Pro-Fac's
continuing ownership interest in Holdings LLC.
The following schedule sets forth summarized financial information of Holdings
LLC for the periods indicated (dollars in thousands):
Three Months Ended Six Months Ended
-------------------------- --------------------------
December 25, December 27 December 25, December 27
2004 2003(1) 2004 2003(1)
------------ ----------- ------------ -----------
Net sales $266,473 $248,543 $443,817 $438,210
Gross profit 64,923 61,956 99,277 103,210
Income from continuing operations 16,719 11,769 16,506 14,579
Net income 16,719 12,239 16,506 15,121
(1) During fiscal 2004 Birds Eye Foods, a subsidiary of Holdings LLC, sold
certain businesses. These businesses are classified as discontinued and
their operations are therefore, excluded from continuing operations. The
information for the three and six months ended December 27, 2003 has been
reclassified to reflect the discontinuance of these operations.
At June 26, 2004, Holdings LLC had $138.4 million of preferred units issued and
outstanding which accrue a preferred return at the rate of 15 percent per annum
compounded quarterly, based on a 360 day year. At December 25, 2004, the
preferred units had cumulative undeclared and unpaid dividends of approximately
$54.5 million. The preferred units are subject to redemption at the option of at
least a majority of the preferred unitholders upon an initial public offering of
Holdings LLC or any subsidiary, upon the sale of Holdings LLC or after August
19, 2010. The preferred units may also be redeemed at the option of Holdings LLC
after August 19, 2005 at a premium. At the time of issuance of the preferred
units, $3.9 million in fees were charged against the proceeds received by
Holdings LLC from the sale of the preferred units. Holdings LLC is accreting the
preferred units up to their redemption value through transfers from retained
earnings using the effective interest method to the date of earliest redemption.
At December 25, 2004, Pro-Fac owned 40.41 percent of the remaining common equity
interest in Holdings LLC. The preferred return on Holdings LLC's preferred units
and the accretion thereon and expense related to termination payments,
aggregating $12.9 million and $6.6 million, net, for the six and three months
ended December 25, 2004 and $10.5 million and $6.1 million, net, for the six and
three months ended December 27, 2003, respectively, are taken into account in
determining Pro-Fac's share of the earnings of Holdings LLC under the equity
method of accounting.
7
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). 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.
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") was
terminated and, 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 to the Cooperative in quarterly installments as follows: $4.0
million on each July 1, and $2.0 million each on October 1, January 1, and
April 1.
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 is recorded as a reduction of Pro-Fac's investment in Holdings LLC.
The remaining portion of the payments is recognized as additional gain on the
transaction with Birds Eye Foods in the period it is received. Accordingly, in
the first six months of fiscal 2005 and fiscal 2004, Pro-Fac recognized
approximately $3.6 million and $3.7 million, respectively, as gain from
transaction with Birds Eye Foods, Inc.
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. Pursuant to its terms, the Transitional Services Agreement
terminated on August 19, 2004. Under the Transitional Services Agreement, the
general manager of Pro-Fac was also an employee of Birds Eye Foods, reporting 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 were employees of Birds Eye Foods and
reported to the Chief Executive Officer or other representatives of Birds Eye
Foods. Stephen R. Wright, who was the General Manager and Secretary of Pro-Fac
in 2004, was an employee of Birds Eye Foods until August 19, 2004. As an
employee of Birds Eye Foods, Mr. Wright's salary was paid by Birds Eye Foods.
Effective August 19, 2004, Mr. Wright and two other individuals previously
employed by Birds Eye Foods and providing services to Pro-Fac under the
Transitional Services Agreement became employees of Pro-Fac.
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 received by the Cooperative was
amortized to expense over the term of the Transitional Services Agreement.
8
Amended and Restated Marketing and Facilitation Agreement: Pro-Fac and Birds Eye
Foods are parties to 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 provides that, among other things, Pro-Fac will be Birds Eye Foods'
preferred supplier of crops. Pursuant to the Amended and Restated Marketing and
Facilitation Agreement, Birds Eye Foods buys crops from Pro-Fac grown by
Pro-Fac's members. Birds Eye Foods pays Pro-Fac the CMV of the crops supplied in
installments corresponding to the dates payment is made by Pro-Fac to its
members for the delivered crops. CMV is defined as the weighted average price
paid by other commercial processors for similar crops sold under preseason
contracts and in the open market in the same or competing market areas. 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. The Amended and Restated
Marketing and Facilitation Agreement also provides that Birds Eye Foods will
provide Pro-Fac services relating to planning, consulting, sourcing and
harvesting crops from Pro-Fac members in a manner consistent with past
practices. In addition, until August 19, 2007, 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 or (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 were set based upon the needs of
Birds Eye Foods in the 2002 crop year (fiscal 2003). 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 prior to August 19, 2005, Birds Eye Foods must pay 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, before August 19, 2005, 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 August 19, 2005, 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 accrued
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
with 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. Pro-Fac elected not to borrow $1.0
million which was available during the second year of the Credit Agreement and,
during the quarter ended December 25, 2004, repaid the $1.0 million borrowed
during the first year, reducing the maximum amount which may be borrowed to $3.0
million. As of December 25, 2004, no amount was outstanding under the Credit
Facility. As of June 26, 2004, the principal amount outstanding under the Credit
Facility was $1.0 million.
9
Line of Credit : The Cooperative may borrow up to $2.0 million under the terms
of a line of credit (the "M&T Line of Credit") from Manufacturers and Traders
Trust Company ("M&T Bank"). As of December 25, 2004 there was $1.0 million
outstanding under the M&T Line of Credit. As of June 26, 2004, there were no
borrowings outstanding under the M&T 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 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 paid down to zero during each year by July 15, and maintained for
a minimum of 60 consecutive days. The Cooperative's obligations under the M&T
Line of Credit are secured by a security interest granted to M&T Bank in
substantially all of the assets of the Cooperative, excluding its Class B common
units owned in Holdings LLC. However, the collateral does include any
distributions from the common units and cash payments made by Birds Eye Foods to
the Cooperative.
Contractual Obligations Guaranteed: Pro-Fac guarantees certain obligations of
Birds Eye Foods. Following is a schedule of obligations guaranteed by Pro-Fac at
December 25, 2004:
(Dollars in Millions)
Amounts
Committed Expiration
--------- -------------
Senior Subordinated Notes - 11 7/8 Percent $50.9 November 2008
Subordinated Promissory Notes $38.8 November 2008
As of the date of this Report, Pro-Fac does not expect to be required to perform
under the guarantees and indemnifications described above.
NOTE 4. COMMON STOCK AND CAPITALIZATION
In the event of liquidation, the relative preference of Pro-Fac's outstanding
securities is as follows: first retains, then all classes of preferred stock,
pari pasu, then common stock and, finally, special membership interests.
NOTE 5. OTHER MATTERS
Legal Matters: The Cooperative is party to various 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. 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 its 11 7/8 percent Senior Subordinated Notes issued in
fiscal 1999 in the original aggregate principal amount of $200.0 million, which
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 a 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 December 25,
2004, the outstanding loan amount subject to the Cooperative's guarantee
included principal of $50.0 million and accrued interest of $0.9 million.
10
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 $30.0 million 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 accrued quarterly in arrears, commencing December 31, 1998, at a
rate per annum of 5 percent until November 22, 2003, and accrues at a rate of 10
percent thereafter. Interest accrued through November 22, 2003 was paid in kind
through the issuance by Birds Eye Foods of additional subordinated promissory
notes identical to the Subordinated Promissory Note. Interest accruing after
November 22, 2003 is payable in cash. Pro-Fac, jointly and severally, guarantees
Birds Eye Foods' obligations under the Subordinated Promissory Notes, including
the payment in full when due of all principal and interest on the Notes. In the
event of a shortfall, Pro-Fac would be required to pay any interest payments due
as well as any unpaid principal balance due on the Notes. As of December 25,
2004, the outstanding loan amount subject to the Cooperative's guarantee
included principal of $38.8 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. 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. With the passage of time since
Pro-Fac has sold any business assets, the likelihood of indemnification claims
lessens and many indemnification periods have expired.
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 hold
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.
As part of the Transaction, Pro-Fac agreed to indemnify Birds Eye Foods for
certain environmental liabilities, provided any single claim for indemnification
must exceed $200,000. This obligation, however, is only triggered once the
aggregate of all liabilities subject to indemnification under the Unit Purchase
Agreement (including those unrelated to environmental matters) exceeds $10.0
million, and the aggregate amount of all claims indemnified (including those
unrelated to environmental matters) generally cannot exceed $50.0 million.
As of the date of this Report, Pro-Fac does not expect to be required to perform
under the guarantees and indemnifications described above.
11
NOTE 6. SUBSEQUENT EVENTS
Subsequent to December 25, 2004, the Cooperative declared a cash dividend of
$.43 per share on the Class A Cumulative Preferred Stock. These dividends
approximate $2.1 million and were paid on January 31, 2005.
At its January 2005 meeting, the Cooperative's board of directors, in accordance
with the Cooperative's certificate of incorporation, declared an annual dividend
of $1.00 per share, payable on April 1, 2005 to shareholders of record of its
Class B cumulative preferred stock on March 15, 2005, and also determined that
the Cooperative will redeem on April 1, 2005 all issued and outstanding shares
of Class B cumulative preferred stock, in accordance with the terms of such
securities, held of record by shareholders on March 15, 2005 at a redemption
price of $10 per share. The total cost will be approximately $119,000 including
the dividend.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, Pro-Fac or persons acting on behalf of Pro-Fac may 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 Report 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 Cooperative's primary source of cash is $10.0 million in payments
received annually under the Termination Agreement, the last installment of
$2.0 million being payable on April 1, 2007. In the event the Cooperative
is unable to replace this source of cash, through distributions from its
investment in Holdings LLC or increased revenue, the Cooperative's ability
to fund its future operations and to pay dividends will be negatively
impacted (see the discussion of "Liquidity and Capital Resources" in Part
I, Item 2 of this Report for a better understanding of the Cooperative's
sources and uses of cash);
o the Cooperative's ability to pay dividends is dependent upon, among other
factors, its future earnings, its available cash and its available capital
surplus as defined under applicable state law. Under state law, capital
surplus is the amount by which the value of the Cooperative's assets exceed
its liabilities and the par value of its capital stock. The Cooperative
prepares its financial statements using generally accepted accounting
principles which are based primarily on historical cost. As is discussed in
"Liquidity and Capital Resources" in Part I, Item 2 of this Report, the
Cooperative's principal use of available cash is the payment of quarterly
dividends and, while the Cooperative currently believes its sources of cash
are sufficient to fund the Cooperative's operations and meet its cash
requirements, including payments of quarterly dividends, there can be no
assurance as to the declaration of future dividends, or the rate at which
dividends may be paid, since they necessarily depend upon Pro-Fac's future
operations, performance and cash flow;
o the Cooperative's largest asset is its investment in Holdings LLC. As a
minority owner, Pro-Fac has no control over the management of the affairs
of Holdings LLC or Birds Eye Foods, including whether annual distributions
will be made under the limited liability company agreement of Holdings LLC
(the "Limited Liability Company Agreement"). In the event the Cooperative
does not receive anticipated distributions under the Limited Liability
Company Agreement, the resulting reduction in its available cash will have
a material adverse effect on Pro-Fac's financial condition (see the
discussion under the heading "Liquidity and Capital Resources" section in
Part I, Item 2 of this Report); and
o the value of the Cooperative's investment in Holdings LLC is impacted by
the Holdings LLC preferred units. The preferred units have priority over
the Cooperative's common units in Holdings LLC. The preferred units are
accruing a preferred return at a rate of 15 percent per annum compounding
quarterly. At June 26, 2004, Holdings LLC had $138.4 million of preferred
units issued and outstanding, which had cumulative undeclared and unpaid
dividends thereon of approximately $54.5 million at December 25, 2004.
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 second quarter
and first six months of fiscal 2005 as compared to the second quarter and first
six months of fiscal 2004. This section should be read in conjunction with Part
I, Item 1, Financial Statements of this Report.
12
RESULTS OF OPERATIONS - SECOND QUARTER 2004 COMPARED TO SECOND QUARTER 2005
Equity in income of Holdings LLC: For the quarter ended December 25, 2004, the
Cooperative recognized income of approximately $4.2 million from its investment
in Holdings LLC, as compared to income of approximately $2.4 million in the
second quarter of fiscal 2004. The change results primarily from an increase in
the net income of Holdings LLC, which was partially offset by increases in the
preferred return on Holdings LLC preferred units due to compounding of
cumulative preferred dividends.
Gain from transaction with Birds Eye Foods and related agreements: As part of
the Transaction, 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 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 portion of payments received is recognized as additional gain
on the Transaction with Birds Eye Foods in the period it is received.
Accordingly, in the second quarter of both fiscal 2005 and fiscal 2004, Pro-Fac
recognized approximately $1.2 million as additional gain from the receipt of
termination payments ($2.0 million on each of October 1, 2005 and October 1,
2004).
Margin on delivered product: The Cooperative negotiates certain sales
transactions on behalf of its members which result in margin being earned by the
Cooperative. The Cooperative earned $0.2 million in margin during the second
quarter of fiscal 2005. No amount was earned in fiscal 2004.
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 decided to deduct one (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. Accordingly, one (1) percent of CMV was withheld from the July 2004 CMV
payments for the 2003 growing season. The one (1) percent deduction for the 2003
growing season resulted in approximately $0.2 million of income for the second
quarter of fiscal 2004.
Selling, administrative, and general expense: Selling, administrative, and
general expenses totaled $0.2 million for the quarter ended December 25, 2004,
as compared to $0.3 million in the comparable fiscal 2004 period.
RESULTS OF OPERATIONS - FIRST SIX MONTHS 2004 COMPARED TO FIRST SIX MONTHS 2005
Equity income from Holdings LLC: For the six months ended December 25, 2004, the
Cooperative recognized income of approximately $1.6 million from Holdings LLC,
as compared to income of approximately $1.8 million in the fiscal 2004 period.
The change results primarily from an increase in the net income of Holdings LLC,
which was offset by increases in the preferred return on Holdings LLC preferred
units due to compounding of cumulative preferred dividends.
Gain from transaction with Birds Eye Foods, Inc. and related agreements: As part
of the Transaction, 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 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 ownership percentage in
Holdings LLC is 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 six
months of fiscal 2005 and fiscal 2004, Pro-Fac recognized approximately $3.6
million and $3.7 million, respectively, as gain from transaction with Birds Eye
Foods, Inc.
Margin on delivered product: The Cooperative negotiates certain sales
transactions on behalf of its members which result in margin being earned by the
Cooperative. The Cooperative earned $0.2 million in margin during the six months
ended December 25, 2004. No amount was earned in fiscal 2004.
13
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 one (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 one (1) percent CMV deduction was withheld
from the July 2004 CMV payments. The one (1) percent deduction for the 2003
growing season resulted in approximately $0.6 million of income for the first
six months of fiscal 2004.
Selling, administrative, and general expenses: Selling, administrative, and
general expenses totaled $0.5 and $0.5 million for the six months ended December
25, 2004 and December 27, 2003, respectively.
CRITICAL ACCOUNTING POLICIES
"NOTE 1. Description of Business and Summary of Significant Accounting Policies"
under "Notes to Condensed Financial Statements" included in Part I, Item 1 of
this Report discusses the significant accounting policies of Pro-Fac. Pro-Fac's
discussion and analysis of its financial condition and results of operations are
based upon its condensed financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires Pro-Fac's management to
make estimates, judgments and assumptions that affect the reported amount of
assets, liabilities, revenues and expenses. On an ongoing basis, Pro-Fac
evaluates its estimates.
Pro-Fac's estimates affecting the financial statements relate primarily to
contingencies. Certain accounting policies deemed critical to Pro-Fac's results
of operations or financial position are discussed below.
Pro-Fac markets and sells its members' crops to food processors, including Birds
Eye Foods. Under the provisions of Emerging Issues Task Force Issue No. 99-19,
"Reporting Revenue Gross Versus Net as an Agent", the Cooperative records
activity between Birds Eye Foods and other customers, itself and its members on
a net basis.
Pro-Fac accounts for its investment in Holdings LLC under the equity method of
accounting. Under the equity method of accounting, Pro-Fac records its share of
the earnings or loss of Holdings LLC available to common unit holders based on
its ownership percentage. The earnings or loss of Holdings LLC available to
common unit holders is adjusted by subtracting the preferred return on Holdings
LLC's preferred units and the accretion thereon and adding the expense recorded
by Holdings LLC related to termination payments, as described below. Pro-Fac's
share of these earnings or losses is reflected as "Equity in income/(loss) of
Birds Eye Holdings LLC" on Pro-Fac's Statement of Operations. The "Investment in
Birds Eye Holdings LLC" on Pro-Fac's balance sheet is also increased for
earnings of Holdings LLC and decreased for losses of Holdings LLC.
Pro-Fac also records its share, based on its ownership percentage, of the change
in Holdings LLC's other comprehensive income/(loss) items including minimum
pension liabilities and unrealized holding gains and losses on hedging
transactions. These changes are reflected as increases, if income, or decreases,
if a loss, in the "Investment in Birds Eye Holdings LLC" and the equity of
Pro-Fac and are also included in determining Pro-Fac's comprehensive
income/(loss).
Also under the equity method, Pro-Fac records a portion of termination payments
received as a result of the Transaction as "Gain from transaction with Birds Eye
Foods, Inc. and related agreements" on Pro-Fac's statement of operations. The
portion of termination payments recorded in the statement of operations is based
on the percentage of Birds Eye Foods indirectly owned by Vestar and unrelated
parties which is currently approximately 59.59%. The remaining portion of
termination payments received, approximately 40.41%, is recorded as a reduction
in Pro-Fac's investment in Holdings LLC because of Pro-Fac's continuing
ownership interest in Holdings LLC.
14
LIQUIDITY AND CAPITAL RESOURCES
As discussed under "NOTE 1. Description of Business and Summary of Significant
Accounting Policies" under "Notes to Condensed Financial Statements" included in
Part I, Item 1 of this Report, Pro-Fac's balance sheet reflects Pro-Fac's
ownership interest in Holdings LLC, which is accounted for under the equity
method.
Pro-Fac has four sources or potential sources of available cash to fund its
operating expenses and the payment of its quarterly dividends: (i) cash from its
sale of raw products to its customers, (ii) payments received under the
Termination Agreement with Birds Eye Foods, (iii) cash distributions related to
its investment in Birds Eye Holdings LLC, and (iv) borrowings.
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 quarterly
dividends on its capital stock and fund repurchases of its common stock.
Dividends on Pro-Fac's preferred stock were $2.1 million and $2.0 million in the
second quarter of fiscal 2005 and 2004, respectively. Dividends on Pro-Fac's
preferred stock were $4.2 million and $4.0 million in the first six months of
fiscal 2005 and 2004, respectively.
From and after August 19, 2002 and through and including August 19, 2007,
Pro-Fac's primary source of cash is expected to be the $10.0 million payable
annually to Pro-Fac by Birds Eye Foods pursuant to the Termination Agreement.
The final installment payment of $2.0 million pursuant to that agreement will be
paid on April 1, 2007. Pro-Fac's other principal source of cash is the
commercial market value or "CMV" payments made to it by Birds Eye Foods and
other customers for crops sold pursuant to the Amended and Restated Marketing
and Facilitation Agreement and other supply agreements. Although CMV payments
are considered a potential 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 fiscal years 2003 and 2004, Pro-Fac has typically paid 100%
of CMV to its member-growers for crops delivered. Since such CMV payments are
approximately equal to the cash Pro-Fac receives from its customers for its raw
products, CMV payments are not a significant source of available cash from which
Pro-Fac can pay operating expenses and quarterly dividends.
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 any annual distributions
that may be made by Holdings LLC pursuant to the limited liability company
agreement of Holdings LLC (the "Limited Liability Company Agreement"). The
Limited Liability Company Agreement 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, including Pro-Fac. Assuming $24.8
million of annual distributions, and further assuming that Pro-Fac's
distributable interest remains at 40.41%, Pro-Fac's annual distributable share
would be approximately $10.0 million. Since Pro-Fac has no control over the
management of Holdings LLC or Birds Eye Foods, there can be no assurances that
any distributions will be made under the Limited Liability Company Agreement,
or, if made, what the amount of such distributions will be, since distributions
necessarily will depend upon, among other factors, Birds Eye Foods' future
earnings, business plans and strategies and financial obligations.
As stated above, Pro-Fac's current primary source of cash is the payment made to
it under the Termination Agreement. The $10.0 million is paid to Pro-Fac in
quarterly installments at follows: $4.0 million on July 1, and $2.0 million each
on October 1, January 1, and April 1. The final installment under the
Termination Agreement will be paid on April 1, 2007. Distributions to Pro-Fac,
if any, under the Limited Liability Company Agreement would not begin until some
time after August 19, 2007 and, depending upon Birds Eye Foods' future earnings,
business plans and strategies, financial obligations and other factors, such
distributions could be delayed beyond August 19, 2007. Pro-Fac has no control
over the management of the affairs of Holdings LLC. If distributions are delayed
or if distributions are less than required by Pro-Fac to meet its cash flow
needs, then, after April 1, 2007, Pro-Fac may face an interim period or periods
during which it will lack available cash to satisfy its operating expenses
and/or payment of quarterly dividends. Pro-Fac will need to consider other
sources of cash, if available, to finance its business operations and to satisfy
its financial obligations after April 1, 2007.
Although Pro-Fac's business strategy is to increase revenue through expanding
its customer base and the types of products and/or services it offers, the
actual amount of available cash that may be generated from Pro-Fac's expanded
operations depends upon how successful Pro-Fac is in implementing its business
strategy, including controlling any associated costs. To date, Pro-Fac has had
minimal success in expanding its customer base, resulting in only a modest
amount of additional available cash. Any available cash generated from expanded
products and/or services offerings by Pro-Fac is currently anticipated to be a
secondary source of cash, and is not expected to provide a significant amount of
available cash to fund Pro-Fac's operating expenses or quarterly dividend
payments.
15
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
$2.0 million under an annually renewable line of credit from M&T Bank, as
discussed below.
The Cooperative may borrow up to $2.0 million under the terms of a line of
credit with 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 60 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 December 25, 2004, $1.0 million was outstanding under the M&T Line of
Credit.
Under the Transitional Services Agreement which terminated by its terms on
August 19, 2004, Birds Eye Foods provided Pro-Fac certain administrative and
other services until August 19, 2004. Since the termination of that Agreement,
Pro-Fac pays for the services previously provided under that Agreement,
including salary, administrative and other expenses. The Cooperative believes it
has adequate cash resources to fund these expenses.
A discussion of "Condensed Statement of Cash Flows" for the six months ended
December 25, 2004 follows:
Net cash used in operating activities of $1.3 million for the first six months
of fiscal 2005 represents a reduction in trade accounts payable and accrued
expenses of $1.2 million, investment in inventory and other assets of $0.4
million, cash net operating expenses of $0.4 million, and an increase in
accounts payable, net of an increase in accounts receivable of approximately
$0.7 million due to the timing of cash receipts related to member-grower
deliveries.
Net cash provided by investing activities for the first six months of fiscal
2005 was $6.0 million. This amount primarily represents the receipt by the
Cooperative of $6.0 million from Birds Eye Foods under the Termination
Agreement.
Net cash used in financing activities of approximately $4.1 million primarily
represents dividends paid of approximately $4.2 million by the Cooperative
during the first six months of fiscal 2005.
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 suspension of annual dividends on the Cooperative's common stock for an
indefinite period of time and the deduction of one (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 one (1) percent CMV deduction was withheld from the July
2003 and the July 2004 CMV payments. There was no CMV deduction in the first six
months of fiscal 2005. The 1 percent CMV deduction for the 2003 growing season
resulted in approximately $0.6 million of income for the first six months of
fiscal 2004. The Board of Directors of Pro-Fac will consider, at least annually,
whether similar action should be taken with respect to CMV payable to Pro-Fac's
member-growers for subsequent growing seasons based on Pro-Fac's operations and
anticipated cash flow needs.
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: There have been no material changes to Pro-Fac's
contractual obligations since June 26, 2004 except for normal payment of a legal
settlement previously accrued in the amount of $832,000 which was contractually
due in July 2004.
16
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Since the Transaction, Pro-Fac is subject to interest rate fluctuations related
to borrowings under the M&T Line of Credit. Amounts borrowed bear interest at
the prime rate. See "NOTE 3. Debt" in the "Notes to Condensed Financial
Statements".
ITEM 4. CONTROLS AND PROCEDURES
Disclosure 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 and Principal
Financial Officer concluded that Pro-Fac's disclosure controls and procedures as
of December 25, 2004 (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 by it 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.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information called for by this Item is disclosed in NOTE 5. "Other Matters -
Legal Matters" under "Notes to Condensed 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
Exhibits
Exhibit Number Description
- -------------- ---------------------------------------------------------------
31. Certification required by Rule 13a-14(a) of the Securities
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
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).
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized.
PRO-FAC COOPERATIVE, INC.
Date: February 8, 2005 BY: /s/ Stephen R. Wright
---------------- --------------------------------------
General Manager, Chief Executive
Officer, Chief Financial Officer
and Secretary
(On Behalf of the Registrant and as
Principal Executive Officer
Principal Financial Officer, and
Principal Accounting Officer)
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