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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 March 26, 2005
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
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Indicate by check mark 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 April 30, 2005.
Common Stock - 1,771,096
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Page 1 of 22 Pages
FORM 10-Q
For the Quarterly Period Ended March 26, 2005
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............................................................................ 13
ITEM 3. Quantitative and Qualitative Disclosure About Market Risks........................................... 17
ITEM 4. Controls and Procedures.............................................................................. 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................................................... 18
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.......................................... 18
ITEM 4. Submission of Matters to a Vote of Security Holders.................................................. 18
ITEM 6. Exhibits............................................................................................. 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited financial statements of Pro-Fac Cooperative, Inc. ("Pro-Fac" or "the
Cooperative") as of March 26, 2005 and for the three month and nine month
periods ended March 26, 2005 and March 27, 2004 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 March 26, 2005 and its results of
operations for the three and nine month periods ended March 26, 2005.
Pro-Fac Cooperative, Inc.
Condensed Statements of Operations, Allocation of
Net Income/(Loss) and Comprehensive Income/(Loss) (Unaudited)
(Dollars in Thousands)
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
March 26, March 27, March 26, March 27,
2005 2004 2005 2004
---- ---- ---- ----
Net sales $ 0 $ 0 $ 0 $ 0
Cost of sales 0 0 0 0
------------- -------------- ------------- --------------
Gross profit 0 0 0 0
Equity in income (loss) of Birds Eye Holdings LLC (1,843) 919 (286) 2,727
Gain from transaction with Birds Eye Foods, Inc.
and related agreements 1,190 1,190 4,760 4,870
Margin on delivered product 4 0 154 0
Commercial market value adjustment 0 18 0 651
Selling, administrative, and general expense (316) (353) (865) (873)
Legal matters and settlement expenses (36) (39) (108) (239)
Other income 116 0 167 0
------------- -------------- ------------- --------------
Operating income/(loss) (885) 1,735 3,822 7,136
Interest income 8 4 34 11
Interest expense (13) (27) (62) (63)
------------- -------------- ------------- --------------
Net income/(loss) $ (890) $ 1,712 $ 3,794 $ 7,084
============= ============== ============= ==============
Allocation of net income/(loss):
Net income/(loss) $ (890) $ 1,712 $ 3,794 $ 7,084
Dividends on preferred stock (2,060) (2,059) (6,221) (6,063)
------------- -------------- ------------- --------------
Net surplus/(deficit) (2,950) (347) (2,427) 1,021
Allocation (to)/from accumulated deficit 2,950 347 2,427 (1,021)
------------- -------------- ------------- --------------
Net income/(loss) available to members $ 0 $ 0 $ 0 $ 0
============= ============== ============= ==============
Net income/(loss) $ (890) $ 1,712 $ 3,794 $ 7,084
Other comprehensive income/(loss):
Unrealized gain/(loss) on hedging activity of
equity investee (196) 7 (151) (214)
------------- -------------- ------------- --------------
Comprehensive income/(loss) $ (1,086) $ 1,719 $ 3,643 $ 6,870
============= ============== ============= ==============
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
March 26, June 26,
2005 2004
---- ----
Current assets:
Cash and cash equivalents $ 534 $ 3,394
Accounts receivable, trade 743 1,343
Accounts receivable from Birds Eye Foods, Inc. 12,161 7,783
Current portion of Transitional Services receivable from Birds Eye Foods, Inc. 0 71
Inventory 328 0
Prepaid expenses and other current assets 278 10
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Total current assets 14,044 12,601
Fixed assets, net 16 0
Investment in Birds Eye Holdings LLC 17,820 21,497
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Total assets $ 31,880 $ 34,098
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LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION
Current liabilities:
Accounts payable $ 219 $ 457
Accrued interest 2 86
Other accrued expenses 35 833
Amounts due members 14,557 12,077
Stock subject to redemption 421 0
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Total current liabilities 15,234 13,453
Long-term debt 0 1,000
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Total liabilities 15,234 14,453
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Commitments and contingencies
Class B cumulative redeemable preferred stock, liquidation preference $10 per
share; authorized - 500,000 shares; issued and
outstanding 0 and 10,768 shares, respectively 0 108
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Common stock, par value $5, authorized - 5,000,000 shares; issued
and outstanding 1,771,096 and 1,833,738 shares, respectively 8,856 9,169
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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 27,981 and 28,297 shares, respectively 701 707
Class A cumulative preferred stock, liquidation preference
$25 per share, authorized 10,000,000 shares; issued and
outstanding 4,789,891 and 4,789,575 shares, respectively 119,747 119,741
Special membership interests 21,733 21,733
Accumulated deficit (139,339) (136,912)
Accumulated other comprehensive (loss)/income:
Unrealized (loss)/gain on hedging activity of equity investee (62) 89
Minimum pension liability adjustment of equity investee (4,783) (4,783)
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Total shareholders' and members' capitalization 7,790 10,368
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Total liabilities and shareholders' and members' capitalization $ 31,880 $ 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)
Nine Months Ended
-----------------------------------------
March 26, March 27,
2005 2004
---- ----
Cash Flows from Operating Activities:
Net income $ 3,794 $ 7,084
Adjustments to reconcile net income to net cash (used in)/provided by
operating activities:
Amortization of Transitional Services receivable 71 394
Depreciation 3 0
Gain from transaction with Birds Eye Foods, Inc. and related agreements (4,760) (4,870)
Equity in loss/(income) of Birds Eye Holdings LLC 286 (2,727)
Change in assets and liabilities:
Accounts receivable (3,778) (1,943)
Accounts payable and other accrued expenses (1,120) (1,697)
Amounts due members 2,480 4,693
Other assets and liabilities, net (596) (18)
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Net cash (used in)/provided by operating activities (3,620) 916
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Cash Flows from Investing Activities:
Proceeds from Termination Agreement with Birds Eye Foods, Inc. 8,000 8,000
Purchase of property, plant and equipment (19) 0
Proceeds from investment in CoBank 0 44
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Net cash provided by investing activities 7,981 8,044
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Cash Flows from Financing Activities:
Borrowing on line-of-credit 0 0
Payments on long-term debt (1,000) (200)
Repurchases of common stock, net 0 (42)
Cash dividends paid (6,221) (6,063)
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Net cash used in financing activities (7,221) (6,305)
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Net change in cash and cash equivalents (2,860) 2,655
Cash and cash equivalents at beginning of period 3,394 367
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Cash and cash equivalents at end of period $ 534 $ 3,022
================= ==================
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. ("Pro-Fac" or "the
Cooperative") 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. "Agreements with Birds Eye Foods" under "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 in the interim
unaudited financial statements presented in this Form 10-Q. Operating results
for the period ended March 26, 2005 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: Beginning in fiscal year 2005, the Cooperative supplied cherries to
another cooperative which markets the cherries. Title remains with the
Cooperative until the inventory is sold to third parties. 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 five to
seven years.
6
Commercial Market Value Adjustment: In January 2003, 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 income or loss of Holdings LLC available to
common unit holders based on its ownership percentage. The income 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 this income or loss 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 Pro-Fac's share of income of Holdings LLC and
decreased for Pro-Fac's share of 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 59.56 percent. The remaining portion of
termination payments received, currently approximately 40.44 percent, 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 Nine Months Ended
--------------------------------------- ---------------------------------------
March 26, March 27, March 26, March 27,
2005 2004 2005 2004
---- ---- ---- ----
Net sales $ 211,600 $ 198,196 $ 655,417 $ 644,526
Gross profit 41,533 45,961 140,810 150,857
Income from continuing operations 2,599 7,532 19,105 22,657
Net income 2,599 8,002 19,105 23,123
At March 26, 2005, Holdings LLC had $200.5 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 March 26, 2005, the preferred
units had accrued payment-in-kind dividends since issuance of approximately
$62.1 million which amount is included in the total preferred units outstanding.
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 March 26, 2005, Pro-Fac owned 40.44 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 $6.9 million and $19.8 million, net, for the three and nine months
ended March 26, 2005 and $5.7 million and $16.3 million, net, for the three and
nine months ended March 27, 2004, 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). For periods after August 19,
2002, the Cooperative uses these special deductions and patronage distributions
to reduce the Cooperative's taxable income to zero.
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 nine months of fiscal 2005 and fiscal 2004, Pro-Fac recognized
approximately $4.8 million and $4.9 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 the services provided to
it under the Transitional Services Agreement, $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. Amortization expense was
approximately $0.1 million and $0.4 million for the nine month periods ended
March 26, 2005 and March 27, 2004, respectively.
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 March 26, 2005, 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 March 26, 2005 and 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.
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.
The Cooperative's common stock is owned by its members. The number of shares of
common stock owned by a Pro-Fac member-grower is based upon the quantity and
type of crops to be marketed through Pro-Fac by the member-grower. If a
member-grower ceases to be a producer of agricultural products that are marketed
through the Cooperative, then the member-grower must sell its shares of Pro-Fac
common stock to another grower that is acceptable to the Cooperative.
Additionally, member-growers desiring to adjust quantities of crops marketed
through Pro-Fac may either offer to sell or purchase shares of Pro-Fac common
stock.
If the selling member-grower is unable to find a qualified grower to purchase
its shares of Pro-Fac common stock, the member-grower must, upon notification
from the Cooperative, sell its shares of common stock to the Cooperative for
cash at the par value thereof plus any dividends thereon which have been
declared but remain unpaid.
At its January 2005 board meeting, the Pro-Fac Board of Directors adopted a
moratorium on Pro-Fac exercising its right to repurchase shares of common stock
from member-growers, except for shares of Pro-Fac common stock previously
scheduled to be repurchased in April 2005 in accordance with past practice and
for specified delivery performance related stock repurchases which will be
considered by the Board of Directors on a case-by-case basis.
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, or 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 guarantees certain obligations of Birds
Eye Foods. Following is a schedule of obligations guaranteed by Pro-Fac at March
26, 2005:
(Dollars in Millions)
Amounts
Committed Expiration
----------- --------------
Senior Subordinated Notes - 11 7/8 Percent $ 52.4 November 2008
Subordinated Promissory Notes $ 38.8 November 2008
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 March 26, 2005, the outstanding
loan amount subject to the Cooperative's guarantee included principal of $50.0
million and accrued interest of $2.4 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 March 26, 2005,
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 March 26, 2005, 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 April 30, 2005.
During the quarter ended March 26, 2005, the Cooperative also declared an annual
dividend of $1.00 per share on its Class B cumulative preferred stock and
announced that it would redeem all issued and outstanding shares of such class
at a redemption price of $10 per share. On April 1, 2005, the Cooperative paid
an aggregate of approximately $119,000 to holders of record on March 15, 2005 of
shares of Class B cumulative preferred stock which amount included both the
$1.00 per share dividend and $10 per share redemption price.
On April 1, 2005, the Cooperative repurchased 62,642 common shares for
approximately $313,000.
The redemption cost of shares redeemed on April 1, 2005, is classified as a
liability at March 26, 2005.
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 March 26, 2005, Holdings LLC had $200.5 million of preferred
units issued and outstanding, including approximately $62.1 million of
payments-in-kind dividends on such preferred units.
12
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 third quarter and
first nine months of fiscal 2005 as compared to the third quarter and first nine
months of fiscal 2004. This section should be read in conjunction with Part I,
Item 1, Financial Statements of this Report.
RESULTS OF OPERATIONS - THIRD QUARTER 2004 COMPARED TO THIRD QUARTER 2005
Equity in income of Holdings LLC: For the quarter ended March 26, 2005, the
Cooperative recognized a loss of approximately $1.8 million from its investment
in Holdings LLC, as compared to income of approximately $0.9 million in the
comparable period in fiscal 2004. The change results primarily from a decrease
in the net income of Holdings LLC and increases in the preferred return on
Holdings LLC preferred units due to compounding of accrued payment-in-kind
preferred dividends. Holdings' operations are substantially comprised of the
operations of Birds Eye Foods, its indirect, wholly-owned subsidiary. Birds Eye
Foods is a voluntary filer with the Securities and Exchange Commission. Birds
Eye Foods' periodic report equivalents are available at the SEC's website:
www.sec.gov.
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 third 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 January 1, 2005 and January 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. Margin was earned in the third quarter of fiscal 2005. No margin
was earned in the third quarter of fiscal 2004.
Commercial market value adjustment: In January 2003, 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 a minor amount of income for the third quarter of fiscal
2004.
Selling, administrative, and general expense: Selling, administrative, and
general expenses totaled $0.3 million for the quarter ended March 26, 2005, as
compared to $0.4 million in the comparable fiscal 2004 period.
RESULTS OF OPERATIONS - FIRST NINE MONTHS 2004 COMPARED
TO FIRST NINE MONTHS 2005
Equity income from Holdings LLC: For the nine months ended March 26, 2005, the
Cooperative recognized a loss of approximately $0.3 million from Holdings LLC,
as compared to income of approximately $2.7 million in the comparable period in
2004. The change results primarily from a decrease in the net income of Holdings
LLC and increases in the preferred return on Holdings LLC preferred units due to
compounding of accrued payment-in-kind preferred dividends. Holdings' operations
are substantially comprised of the operations of Birds Eye Foods, its indirect,
wholly-owned subsidiary. Birds Eye Foods is a voluntary filer with the
Securities and Exchange Commission. Birds Eye Foods' periodic report equivalents
are available at the SEC's website: www.sec.gov.
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.
13
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
nine months of fiscal 2005 and fiscal 2004, Pro-Fac recognized approximately
$4.8 million and $4.9 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 nine
months ended March 26, 2005. No amount was earned in fiscal 2004.
Commercial market value adjustment: In January 2003, 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 $0.7 million of income for the first nine months of fiscal 2004.
Selling, administrative, and general expenses: Selling, administrative, and
general expenses totaled $0.9 for each of the nine months periods ended March
26, 2005 and March 27, 2004.
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, recording neither sales nor cost of sales.
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 income 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 income
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 59.56 percent. The remaining portion of
termination payments received, approximately 40.44 percent, 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 in the third quarter of
both fiscal 2005 and 2004. Dividends on Pro-Fac's preferred stock were $6.2
million and $6.1 million in the first nine 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 percent of CMV otherwise payable to its
grower-members for crops delivered in fiscal years 2003 and 2004, Pro-Fac has
typically paid 100 percent 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 40.44 percent, 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 is pursuing increasing 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 this effort, 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 March 26, 2005, no amount 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 nine months ended
March 26, 2005 follows:
Net cash used in operating activities of $3.6 million for the first nine months
of fiscal 2005 represents a reduction in trade accounts payable and accrued
expenses of $1.1 million, investment in inventory and other assets of $0.6
million, cash net operating expenses of $0.6 million, and an increase in
accounts receivable, net of an increase in accounts payable of approximately
$1.3 million due to the timing of cash receipts related to member-grower
deliveries.
Net cash provided by investing activities for the first nine months of fiscal
2005 was $8.0 million. This amount primarily represents the receipt by the
Cooperative of $8.0 million from Birds Eye Foods under the Termination
Agreement.
Net cash used in financing activities of approximately $7.2 million represents
dividends of approximately $6.2 million paid by the Cooperative during the first
nine months of fiscal 2005 and repayment of $1.0 million of long-term debt.
In January 2003, 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 nine months of fiscal
2005. The 1 percent CMV deduction for the 2003 growing season resulted in
approximately $0.7 million of income for the first nine 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.
Further, at its January 2005 board meeting, the Pro-Fac Board of Directors
adopted a moratorium on Pro-Fac exercising its right to repurchase shares of
common stock from member-growers, except for shares of Pro-Fac common stock
previously scheduled to be repurchased in April 2005 in accordance with past
practice and for specified delivery performance related stock repurchases which
will be considered by the Board of Directors on a case-by-case basis.
16
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 available cash 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.
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 March 26, 2005 (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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During January 2005, the Cooperative issued shares of its Class A Cumulative
Preferred Stock in exchange for shares of its Non-Cumulative Preferred Stock, on
a share-for-share basis. Such exchange is exempt from registration under Section
3(a)(9) of the Securities Act of 1933. The date and amount of the exchange is
set forth below:
Date Number of Shares Value of Shares (1)
---- ---------------- ---------------
January 7, 2005 316 $ 7,900
(1) Based on liquidation preference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The regional annual membership meetings for the members of
Pro-Fac were held as follows:
Date Region/District City/State
----- --------------- ----------
February 9, 2005 I/1 and I/2 Rochester, New York
February 10, 2005 II/1 Holland, Michigan
February 11, 2005 II/2 Springfield, Illinois
February 16, 2005 I/3 Johnstown, Pennsylvania
March 1, 2005 III Columbus, Nebraska
March 2, 2005 IV Wilsonville, Oregon
March 3, 2005 IV Mt. Vernon, Washington
(b) James Vincent was elected and Bruce Fox, Kenneth Mattingly,
and Paul Roe were re-elected directors for a three-year term
as a result of the elections at the regional meetings held
in February 2005. The following is a list of the remaining
directors whose terms of office continued after the regional
annual meetings.
Name Term Expires
---- ------------
Peter Call 2006
Robert DeBadts 2006
Steven Koinzan 2006
Allan Overhiser 2006
Darell Sarff 2006
Charles Altemus 2007
Dale Burmeister 2007
Kenneth Dahlstedt 2007
(c) The only matter submitted to the Cooperative's members for
action at the regional annual meetings was the election of
directors. Following are the voting results from the
regional meetings:
Votes Cast For Votes Cast Against
-------------- ------------------
James Vincent 51 43
Bruce Fox 54 45
Kenneth Mattingly 89 0
Paul Roe 29 0
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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).
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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: May 9, 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)
20