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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended June 24, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from to
Registration Statement (Form S-4) Number 333-70143
AGRILINK FOODS, INC.
(Exact name of registrant as specified in its charter)
New York 16-0845824
(State of incorporation) (IRS Employer Identification Number)
90 Linden Oaks, PO Box 20670, Rochester, NY 14602-0670
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (716) 383-1850 Securities
Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered
Pursuant to Section 12(g) of the Act: NONE
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 12 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the registrant:
NONE
Number of common shares outstanding at August 26, 2000:
Common Stock: 10,000
FORM 10-K ANNUAL REPORT - 2000
AGRILINK FOODS, INC.
TABLE OF CONTENTS
PART I
PAGE
ITEM 1. Description of Business
Cautionary Statement on Forward-Looking Statements................................................... 3
General Development of Business...................................................................... 3
Narrative Description of Business ................................................................... 4
Financial Information About Industry Segments........................................................ 6
Packaging and Distribution........................................................................... 6
Trademarks........................................................................................... 7
Raw Material Sources................................................................................. 7
Environmental Matters................................................................................ 7
Seasonality of Business.............................................................................. 8
Practices Concerning Working Capital................................................................. 8
Significant Customers................................................................................ 8
Backlog of Orders.................................................................................... 8
Business Subject to Government Contracts............................................................. 8
Competitive Conditions............................................................................... 9
Market and Industry Data............................................................................. 9
New Products and Research and Development............................................................ 9
Employees............................................................................................ 10
ITEM 2. Description of Properties................................................................................ 10
ITEM 3. Legal Proceedings........................................................................................ 11
ITEM 4. Submission of Matters to a Vote of Security Holders...................................................... 11
PART II
ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters................................. 12
ITEM 6. Selected Financial Data.................................................................................. 12
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 13
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............................................... 23
ITEM 8. Financial Statements and Supplementary Data.............................................................. 24
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 48
PART III
ITEM 10. Directors and Executive Officers of the Registrant....................................................... 49
ITEM 11. Executive Compensation................................................................................... 51
ITEM 12. Security Ownership of Certain Beneficial Owners and Management........................................... 53
ITEM 13. Certain Relationships and Related Transactions........................................................... 53
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 55
Signatures............................................................................................... 59
PART I
ITEM 1. DESCRIPTION OF BUSINESS
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, the Company makes oral and written statements that may
constitute "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995 (the "Act") or by the Securities and Exchange
Commission ("SEC") in its rules, regulations, and releases. The Company desires
to take advantage of the "safe harbor" provisions in the Act for forward-looking
statements made from time to time, including, but not limited to, the
forward-looking information contained in the Management's Discussion and
Analysis (pages 13 to 23) and other statements made in this Form 10-K and in
other filings with the SEC.
The Company cautions readers that any such forward-looking statements made by or
on behalf of the Company are based on management's current expectations and
beliefs but are not guarantees of future performance. Actual results could
differ materially from those expressed or implied in the forward-looking
statements. Among the factors that could impact the Company's ability to achieve
its goals are:
the impact of strong competition in the food industry;
the impact of changes in consumer demand;
the impact of weather on the volume and quality of raw product;
the inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer acceptance;
the continuation of the Company's success in integrating operations
(including the realization of anticipated synergies in operations and the
timing of any such synergies) and the availability of acquisition and
alliance opportunities;
the Company's ability to achieve gains in productivity and improvements in
capacity utilization; and
the Company's ability to service debt.
GENERAL DEVELOPMENT OF BUSINESS
Agrilink Foods, Inc. (the "Company" or "Agrilink Foods"), incorporated in New
York in 1961, is a producer and marketer of processed food products. The terms
"Company" and "Agrilink Foods" mean "Agrilink Foods, Inc." and its subsidiaries
unless the context indicates otherwise. The Company has four primary product
lines including: vegetables, fruits, snacks, and canned meals. The majority of
each of the product lines' net sales is within the United States. In addition,
all of the Company's operating facilities, excluding one in Mexico, are within
the United States.
Agrilink Foods is a wholly-owned subsidiary of Pro-Fac Cooperative, Inc.
("Pro-Fac"). Pro-Fac is an agricultural cooperative corporation formed in 1960
under the Cooperative Corporation Laws of New York to process and market crops
grown by its members. On March 1, 2000, the Cooperative announced it will being
doing business as Agrilink. In addition, the board of directors of Agrilink
Foods, Inc., a wholly-owned subsidiary of the Cooperative, and Pro-Fac have
agreed to conduct joint meetings, coordinate their activities, and to act on a
consolidated basis. Although Pro-Fac Cooperative, Inc. will continue to be the
legal entity of the Cooperative, with the same structure and regulations
required by bank credit agreements and bond indentures, and with the same stock
symbol, "PFACP," it will be presented as Agrilink for all other communications.
Pro-Fac and Agrilink Foods operate under the guidance of the Pro-Fac Marketing
and Facilitation Agreement (the "Pro-Fac Marketing Agreement").
The Pro-Fac Marketing Agreement provides for Pro-Fac to supply crops and
additional financing to Agrilink Foods, for Agrilink Foods to provide market and
management services to Pro-Fac, and for Pro-Fac to share in the profits and
losses of Agrilink Foods. Pro-Fac is required to reinvest at least 70 percent of
any additional patronage income in Agrilink Foods. To preserve the independence
of Agrilink Foods, the Pro-Fac Marketing Agreement also requires that certain
directors of Agrilink Foods be
individuals who are not employees or shareholders of, or otherwise affiliated
with, Pro-Fac or the Company ("Disinterested Directors") and requires that
certain decisions, including the volume of and the amount to be paid for crops
received from Pro-Fac, be approved by the Disinterested Directors. See further
discussion of the relationship with Pro-Fac in NOTE 2 to the "Notes to
Consolidated Financial Statements."
Under the Pro-Fac Marketing Agreement, Agrilink Foods manages the business and
affairs of Pro-Fac and provides all personnel and administrative support
required. Pro-Fac pays Agrilink Foods a quarterly fee of $25,000 for these
services.
Dean Foods Vegetable Company: On September 24, 1998, Agrilink Foods acquired the
Dean Foods Vegetable Company ("DFVC"), the frozen and canned vegetable business
of Dean Foods Company ("Dean Foods"), by acquiring all the outstanding capital
stock of Dean Foods Vegetable Company and Birds Eye de Mexico SA de CV (the
"DFVC Acquisition"). In connection with the DFVC Acquisition, Agrilink Foods
sold its aseptic business to Dean Foods. Agrilink Foods paid $360 million in
cash, net of the sale of the aseptic business, and issued to Dean Foods a $30
million unsecured subordinated promissory note due November 22, 2008 (the "Dean
Foods Subordinated Promissory Note"), as consideration for the DFVC Acquisition.
The Company had the right, exercisable until July 15, 1999, to require Dean
Foods, jointly with the Company, to treat the DFVC Acquisition as an asset sale
for tax purposes under Section 338(h)(10) of the Internal Revenue Code. On April
15, 1999, the Company paid $13.2 million to Dean Foods and exercised the
election.
After the DFVC Acquisition, DFVC was merged into the Company. DFVC has been one
of the leading processors of vegetables in the United States, selling its
products under well-known brand names, such as Birds Eye, Birds Eye Voila!,
Freshlike and Veg-All, and various private labels. The Company believes that the
DFVC Acquisition strengthens its competitive position by: (i) enhancing its
brand recognition and market position, (ii) providing opportunities for cost
savings and operating efficiencies and (iii) increasing its product and
geographic diversification.
Concurrently with the DFVC Acquisition, Agrilink Foods refinanced its existing
indebtedness (the "Refinancing"), including its 12 1/4 percent Senior
Subordinated Notes due 2005 (the "Old Notes") and its then existing bank debt.
On August 24, 1998, Agrilink Foods commenced a tender offer (the "Tender Offer")
for all the Old Notes and a consent solicitation to certain amendments under the
indenture governing the Old Notes to eliminate substantially all the restrictive
covenants and certain events of default therein. Substantially all of the $160
million aggregate principal amount of the Old Notes were tendered and purchased
by Agrilink Foods for aggregate consideration of approximately $184 million,
including accrued interest of $2.9 million. Agrilink Foods also terminated its
then existing bank facility (including seasonal borrowings) and repaid $176.5
million, excluding interest owed and breakage fees outstanding thereunder. The
Company recognized an extraordinary item of $16.4 million (net of income taxes
and after dividing with Pro-Fac) in the first quarter of fiscal 1999 relating to
this refinancing.
In order to consummate the DFVC Acquisition and the Refinancing and to pay the
related fees and expenses, Agrilink Foods: (i) entered into a new credit
facility (the "New Credit Facility") providing for $455 million of term loan
borrowings (the "Term Loan Facility") and up to $200 million of revolving credit
borrowings (the "Revolving Credit Facility"), (ii) entered into and drew upon a
$200 million bridge loan facility (the "Bridge Facility") and (iii) issued the
$30 million Subordinated Promissory Note to Dean Foods. The Bridge Facility was
repaid during November of 1998 principally with the proceeds from a new Senior
Subordinated Note Offering (the "New Notes"). See NOTE 5 to the "Notes to
Consolidated Financial Statements - Debt - Senior Subordinated Notes - 11-7/8
Percent due 2008." Debt issue costs of $5.5 million associated with the Bridge
Facility were expensed during the quarter ended December 26, 1998.
The New Credit Facility and the New Notes restrict the ability of Pro-Fac to
amend the Pro-Fac Marketing and Facilitation Agreement. The New Credit Facility
and New Notes also restrict the amount of dividends and other payments that may
be made by the Company to Pro-Fac.
NARRATIVE DESCRIPTION OF BUSINESS
The Company sells products in three principal categories: (i) "branded"
products, which are sold under various Company trademarks, (ii) "private label"
products, which are sold to grocers who in turn use their own brand names on the
products and (iii) "food service" products, which are sold to food service
institutions such as restaurants, caterers, bakeries, and schools. In fiscal
2000, approximately 64 percent of the Company's net sales were branded and the
remainder divided between private label and food service/industrial. The
Company's branded products are listed under the "Trademarks" section of this
report. The Company's private label products include
canned and frozen vegetables, salad dressings, salsa, fruit fillings and
toppings, Southern frozen vegetable specialty products, and frozen breaded, and
battered products which are sold to customers such as Albertson's, Kroger,
Fleming, Piggly Wiggly, Safeway, Wal-Mart/Sam's, SuperValu, Topco, Wegmans and
Winn-Dixie. The Company's food service/industrial products include salad
dressings, fruit fillings and toppings, canned and frozen vegetables, frozen
Southern specialties, frozen breaded and battered products, and canned and
frozen fruit, which are sold to customers such as Alliant Food Service,
Borden's, Church's, Disney, Food Service of America, KFC, MBM, McDonald's, PYA,
and SYSCO.
The Company has four primary product lines: vegetables, fruits, snacks, and
canned meals. A description of the Company's four primary product lines follows:
Vegetables: The vegetable product line consists of canned and frozen vegetables,
chili beans, and various other products. Additional products include value-added
items such as frozen vegetable blends, and Southern-specialty products such as
black-eyed peas, okra, Southern squash, Southern specialty side dishes, and
stewed tomatoes. Branded products within the vegetable product line include
Birds Eye, Birds Eye Voila!, Freshlike, Veg-All, McKenzies, and Brooks Chili
Beans. In fiscal 2000 vegetable product line net sales represented approximately
68 percent of the Company's total net sales. Within this product line net sales
of approximately 61 percent represented branded products, 18 percent represented
private label products and 21 percent represented food service/industrial
products.
On June 23, 2000, Agrilink Foods sold its pickle business based in Tacoma,
Washington to Dean Pickle and Specialty Products Company, subsidiary of Dean
Foods. This business included pickle, pepper, and relish products sold primarily
under the Nalley and Farman's brand names. Agrilink Foods will continue to
contract pack Nalley and Farman's pickle products for a period of two years at
the existing Tacoma processing plant which Agrilink Foods will operate. Under a
related agreement, the Cooperative will supply raw cucumbers grown in the
Northwestern United States to Dean Pickle and Specialty Products Company, for a
minimum 10-year period at market pricing.
On December 17, 1999, the Company sold its Cambria, Wisconsin processing
facility to Del Monte. This facility was primarily utilized for canning
operations.
On November 8, 1999, the Company sold its Midwest private label canned vegetable
business to Seneca Foods. Included in this transaction was the Arlington,
Minnesota facility. This sale did not include the Company's retail branded
canned vegetables Veg-All and Freshlike.
On September 24, 1998, Agrilink Foods acquired the DFVC frozen and canned
vegetable businesses. DFVC was one of the leading processors of vegetables in
the United States selling its products under well-known brands such as Birds
Eye, Freshlike, and Veg-All, and various private labels.
Effective March 30, 1998, the Company acquired the majority of assets and the
business of DelAgra Corp. of Bridgeville, Delaware. DelAgra Corp. was a producer
of private label frozen vegetables.
In the fall of 1997, the Company was named the sole supplier of frozen
vegetables for all Sam's club stores across the United States. Shipments began
in the fourth quarter of fiscal 1998, and full distribution occurred in fiscal
1999.
Effective July 1, 1997, the Company and Flanagan Brothers, Inc. of Bear Creek,
Wisconsin contributed all their assets involved in sauerkraut production to form
a new sauerkraut company. This new company, Great Lakes Kraut Company, LLC,
operates as a New York limited liability company with ownership and earnings
divided equally between the two companies. This joint venture includes the
Silver Floss and Krrrrisp Kraut brands.
Fruits: The fruit product line consists of canned and frozen fruits including
fruit fillings and toppings. Branded products within the fruit category include
Comstock and Wilderness. The Company is a major supplier of branded and private
label fruit fillings to retailers and food service institutions such as
restaurants, caterers, bakeries, and schools. In fiscal 2000, fruit product line
net sales represented approximately 9 percent of the Company's total net sales.
Within this product line, net sales of approximately 55 percent represented
branded products, 13 percent represented private label products, and 32 percent
represented food service/industrial products.
Snacks: The snacks product line consists of several varieties of potato chips
including regular and kettle fried, as well as popcorn, cheese curls, snack
mixes, and other corn-based snack items. Kettle fried potato chips produce a
potato chip that is thicker and crisper
than other potato chips. Items within this product line are marketed primarily
in the Pacific Northwest, Midwest and Mid-Atlantic states. Branded products
within the snacks category include Tim's Cascade Chips, Snyder of Berlin,
Husman, La Restaurante, Erin's, Beehive, Pops-Rite, and Super Pop. In fiscal
2000 snacks net sales represented approximately 7 percent of the Company's total
net sales. Within this product line, net sales of approximately 93 percent
represented branded products, 5 percent represented private label products, and
2 percent represented food service/industrial products.
Effective June 24, 2000, Agrilink Foods acquired the Flavor Destinations
Trademark for snack items and will manufacture and market this regional brand
through its Tim's Cascade Chips business in Auburn, Washington.
Effective July 21, 1998, the Company acquired J.A. Hopay Distributing Co., Inc.
("Hopay") of Pittsburgh, Pennsylvania. Hopay was a former distributor for Snyder
of Berlin products.
Effective March 10, 1998, the Company acquired the majority of the assets and
the business of C&O Distributing Company ("C&O") of Canton, Ohio. C&O was a
former distributor for Snyder of Berlin products.
Canned Meals: The canned meal product line includes canned meat products such as
chilies, stews, soups, and various other ready-to-eat prepared meals. Items
within this product line are marketed primarily in the Pacific Northwest.
Branded products within the canned meal category include Nalley. Within this
product line, net sales of approximately 75 percent represented branded
products, 20 percent represented private label products, and 5 percent
represented food service/industrial products. In fiscal 2000 canned meals net
sales represented approximately 5 percent of the Company's total net sales.
Other: The Company's other product line primarily represents salad dressings.
Branded products within this category include Bernstein's and Nalley. In fiscal
2000, other net sales represented approximately 5 percent of the Company's total
net sales.
On January 29, 1999, the Company sold the Adams brand peanut butter operations
to the J. M. Smucker Company.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The business of the Company is principally conducted in four industry segments:
vegetables, fruits, canned meals, and snacks. The financial statements for the
fiscal years ended June 24, 2000, June 26, 1999, and June 27, 1998, which are
included in this report, reflect the information relating to those segments for
each of the Company's last three fiscal years.
PACKAGING AND DISTRIBUTION
The food products produced by the Company are distributed to various consumer
markets in all 50 states. International sales account for a small portion of the
Company's activities. Vegetables, fruits, and canned meals are primarily sold
through food brokers who sell primarily to supermarket chains and various
institutional entities. Snack products are primarily marketed through
distributors (some of which are owned and operated by the Company) who sell
directly to retail outlets in the Midwest, Mid-Atlantic and Pacific Northwest.
Customer brand operations encompass the sale of products under private labels to
chain stores and under the controlled labels of buying groups. The Company has
developed central storage and distribution facilities that permit multi-item
single shipment to customers in key marketing areas.
Effective March 31, 1998, the Company entered into a multiyear logistic
agreement under which GATX Logistics provides freight management, packaging and
labeling services, and distribution support to and from production facilities
owned by the Company in and around Coloma, Michigan. The agreement included the
sale of the Company's labeling equipment and distribution center.
On June 27, 1997, Americold acquired the Company's frozen foods distribution
center in Montezuma, Georgia. In addition, the two companies entered into a
long-term logistics agreement under which Americold manages this facility and
all frozen food transportation operations of Agrilink Foods in Georgia and New
York.
TRADEMARKS
The major brand names under which the Company markets its products are
trademarks of the Company. Such brand names are considered to be of material
importance to the business of the Company since they have the effect of
developing brand identification and maintaining consumer loyalty. There are
trademark registrations for substantially all of the trademarks. These trademark
registrations are of perpetual duration so long as they are periodically
renewed. It is the Company's intent to maintain its trademark registrations. The
major brand names utilized by the Company are:
Product Line Brand Name
Vegetables Birds Eye, Voila!(1), Freshlike, Veg-All, Brooks, Chill-Ripe, Comstock, Greenwood, McKenzie's, McKenzie's
Gold King, Southern Farms, Southland, Farman's, Nalley, Pixie, Thank You, Silver Floss(2), Krrrrisp Kraut(2)
Fruits Birds Eye, Chill-Ripe, Comstock, Globe, McKenzies, Orchard Farm, Orchard Fresh, Pixie, Southern Farms,
Thank You, West Bay, Wilderness, Tropic Isle
Snacks Snyder of Berlin, Thunder Crunch, Tim's Cascade Chips, La Restaurante, Erin's, Husman, Naturally Good,
Beehive, Pops-Rite, Savoral, Super Pop, Flavor Destinations
Canned Meals Nalley, Mariners Cove, Riviera
Other Bernstein's, Nalley
(1) An application has been filed and registration is pending.
(2) Represent trademarks of Great Lakes Kraut Company, LLC. The Company owns a 50 percent interest in this joint venture.
RAW MATERIAL SOURCES
The Company acquired approximately 55 percent of the raw agricultural products
supplied by Pro-Fac from members of the Cooperative. The Company also purchased
on the open market some crops of the same type and quality as those purchased
from Pro-Fac. Such open market purchases may occur at prices higher or lower
than those paid to Pro-Fac for similar products. See further discussion of the
relationship with Pro-Fac in NOTE 2 to the "Notes to Consolidated Financial
Statements."
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 situation typically results in depressed selling
prices and reduced profitability on the inventory produced from that year's
crops. Excessive rain or drought conditions can produce low crop yields and a
shortage situation. This typically results in higher selling prices and
increased profitability. While the national supply situation controls the
pricing, the supply can differ regionally because of variations in weather.
The Company purchases all of its requirements for nonagricultural products,
including containers, in the open market. Although the Company has not
experienced any difficulty in obtaining adequate supplies of such items,
occasional periods of short supply of certain raw materials may occur.
ENVIRONMENTAL MATTERS
The disposal of solid and liquid waste material resulting from the preparation
and processing of foods and the emission of wastes and odors inherent in the
heating of foods during preparation are subject to various federal, state, and
local environmental laws and regulations. Such laws and regulations have had an
important effect on the food processing industry as a whole, requiring
substantially all firms in the industry to incur material expenditures for
modification of existing processing facilities and for construction of new waste
treatment facilities. The Company is also subject to standards imposed by
regulatory agencies pertaining to the occupational health and safety of its
employees. Management believes that continued measures to comply with such laws
and regulations will not have a material adverse effect upon its competitive
position or financial condition.
Among the various programs for the protection of the environment which have been
adopted by the Company to date, the most important for the operations of the
Company are the waste water discharge permit programs administered by the
environmental protection agencies in those states in which the Company does
business and by the federal Environmental Protection Agency. Under these
programs, permits are required for processing facilities which discharge certain
wastes into streams and other bodies of water, and the Company is required to
meet certain discharge standards in accordance with compliance schedules
established by such agencies. The Company has received permits for all
facilities for which permits are required. Each year the Company submits
applications for renewal permits as required for the facilities.
While the Company cannot predict with certainty the effect of any proposed or
future environmental legislation or regulations on its processing operations,
management of the Company believes that the waste disposal systems which are now
in operation or which are being constructed or designed are sufficient to comply
with all currently applicable laws and regulations.
The Company is cooperating with environmental authorities in remedying various
minor environmental matters at several of its plants. Such actions are being
conducted pursuant to procedures approved by the appropriate environmental
authorities at a cost that is not expected to be material.
Expenditures related to environmental programs and facilities have not had, and
are not expected to have, a material effect on the earnings of the Company. In
fiscal 2000, total capital expenditures of the Company were $25.4 million of
which approximate $0.1 million was devoted to the construction of environmental
facilities. The Company estimates that environmental capital expenditures will
be approximately $0.5 million for the 2001 fiscal year. However, there can be no
assurance that expenditures will not be higher.
SEASONALITY OF BUSINESS
From the point of view of sales, the business of the Company is not highly
seasonal, since the demand for its products is fairly constant throughout the
year. Exceptions to this general rule include some products that have higher
sales volume in the cool weather months (such as canned and frozen fruits and
vegetables, chili, and fruit fillings and toppings), and others that have higher
sales volume in the warm weather months (such as potato chips and salad
dressings). Since many of the raw materials processed by the Company are
agricultural crops, production of these products is predominantly seasonal,
occurring during and immediately following the harvest seasons of such crops.
PRACTICES CONCERNING WORKING CAPITAL
The Company must maintain substantial inventories throughout the year of
finished products produced from seasonal raw materials. These inventories are
generally financed through seasonal borrowings.
The Revolving Credit Facility is used primarily for seasonal borrowings, the
amount of which fluctuates during the year.
Both the maintenance of substantial inventories and the practice of seasonal
borrowing are common to the food processing industry.
SIGNIFICANT CUSTOMERS
The Company's principal industry segments are not dependent upon the business of
a single customer or a few customers. The Company does not have any customers to
whom sales are made in an amount which equals 10 percent or more of the
Company's net sales.
BACKLOG OF ORDERS
Backlog of orders has not historically been significant in the business of the
Company. Orders are filled shortly after receipt from inventories of packaged
and processed foods.
BUSINESS SUBJECT TO GOVERNMENTAL CONTRACTS
No material portion of the business of the Company is subject to renegotiation
of contracts with, or termination by, any governmental agency.
COMPETITIVE CONDITIONS
All products of the Company, particularly branded products, compete with those
of other national and major regional food processors under highly competitive
conditions. The principal methods of competition in the food industry are a
ready availability of a broad line of products, product quality, price, and
advertising and sales promotion.
Quality of product and uniformity of quality are important methods of
competition. The Company's relationship with Pro-Fac gives the Company local
sources of supply, thus allowing the Company to exercise control over the
quality and uniformity of much of the raw product that it purchases. The members
of Pro-Fac generally operate relatively large production operations with
emphasis on mechanized growing and harvesting techniques. This factor is also an
advantage in producing uniform, high-quality food products.
The Company's pricing is generally competitive with that of other food
processors for products of comparable quality. The branded products of the
Company are marketed under national and regional brands. In fiscal 2000,
marketing programs for national brands focused primarily on Birds Eye Voila! and
Birds Eye Baby Vegetables. The national advertising campaign included
television, magazines, coupons, and in-store promotions. Marketing programs for
regional brands are focused on local tastes and preferences as a means of
developing consumer brand loyalty. Regional advertising campaigns included
magazines, coupons, and in-store promotions.
Although the relative importance of the above factors may vary between
particular products or customers, the above description is generally applicable
to all of the products of the Company in the various markets in which they are
distributed.
Profit margins for fruits and vegetables are subject to industry supply and
demand fluctuations, attributable to changes in growing conditions, acreage
planted, inventory carryover, and other factors. The Company has endeavored to
protect against changing growing conditions through geographical expansion of
its sources of supply.
The percentage of sales under brand names owned and promoted by the Company
amount to approximately 64 percent; food service/industrial represent
approximately 20 percent; and private label sales currently represent
approximately 16 percent.
It is difficult to estimate the number of competitors in the markets served by
the Company. Nearly all products sold by the Company compete with the nationally
advertised brands of leading food processors, including Del Monte, Green Giant,
Heinz, Frito-Lay, Kraft, and similar major brands, as well as with the branded
and private label products of a number of regional processors, many of which
operate only in portions of the marketing area served by the Company.
MARKET AND INDUSTRY DATA
Unless otherwise stated in this report, industry and market share data used
throughout this Form 10-K was derived from industry sources believed by the
Company to be reliable. Such data was obtained or derived from consultants'
reports and industry publications. Consultants' reports and industry
publications generally state that the information contained therein has been
obtained from sources believed to be reliable, but that the accuracy and
completeness of such information is not guaranteed. The Company has not
independently verified such data and makes no representation to its accuracy.
NEW PRODUCTS AND RESEARCH AND DEVELOPMENT
The Company, operates a technical center located in Green Bay, Wisconsin that is
responsible for new product development, quality assurance, and engineering.
Approximately 25 employees are employed within this facility. The Company
follows a four-stage new product development process as follows: screening,
feasibility, development, and commercialization. This new product development
process ensures input from consumers, customers, and internal functional areas
before a new product is brought to market.
The Company also focuses on the development of related products or modifications
of existing products for the Company's brands and customized products for the
Company's private label and food service businesses.
The amount expensed during the last three fiscal years on Company-sponsored and
customer-sponsored research activities relating to the development of new
products or the improvement of existing products has not been material.
During fiscal 1999, Birds Eye Voila!, a frozen all-in-one meal product that
includes vegetables, pasta, seasonings, and bite sized pieces of grilled chicken
breast in a variety of flavors was introduced. Fiscal 2000 net sales for Birds
Eye Voila! were approximately $102.5. Fiscal 1999 net sales for Birds Eye Voila!
were $74.8 million which reflects nine months of activity due to the date of the
DFVC Acquisition.
EMPLOYEES
As of June 24, 2000, the Company had 5,289 full-time employees, of whom 3,703
were engaged in production and the balance in management, sales and
administration. As of that date, the Company also employed approximately 2,134
seasonal and other part-time employees, almost all of whom were engaged in
production. Most of the production employees are members of various labor
unions. The Company believes its current relationship with its employees is
good.
ITEM 2. DESCRIPTION OF PROPERTIES
All plants, warehouses, office space and other facilities used by the Company in
its business are either owned by Agrilink Foods or one of its subsidiaries or
leased from unaffiliated third parties. All of the properties owned by Agrilink
Foods are subject to mortgages in favor of its primary lender. In general, the
properties include offices, processing plants and warehouse space. Some
processing plants are located in rural areas that are convenient for the
delivery of crops. The Company also has dispersed warehouse locations to
facilitate the distribution of finished products. Agrilink Foods believes that
its facilities are in good condition and suitable for the operations of the
Company.
The Company's Alton, New York property is held for sale.
The following table describes all material facilities leased or owned by the
Company (other than the properties held for sale, certain public warehouses
leased by the Company from unaffiliated third parties from time to time, and
facilities owned by the Company's joint venture, Great Lakes Kraut Company,
LLC). Except as otherwise noted, each facility set forth below is owned by the
Company.
FACILITIES UTILIZED BY THE COMPANY
Type of Property (By Product Line) Location Square Feet
Vegetables:
Warehouse Sodus, MI 243,138
Warehouse and office, public storage facility (1) Vineland, NJ 191,710
Freezing plant, warehouse, office and dry storage Barker, NY 123,600
Freezing plant Bergen, NY 138,554
Cold storage and repack facility and public storage warehouse Brockport, NY 429,052
Canning plant and warehouse, freezing plant Oakfield, NY 263,410
Office, freezing plant, cold storage and repackaging facility Montezuma, GA 591,300
Office, freezing plant and cold storage Alamo, TX 114,446
Office, freezing plant and cold storage Bridgeville, DE 104,383
Freezing plant and repack plant Celaya, Mexico 318,620
Freezing plant and distribution center Darien, WI 348,800
Freezing plant, repack and warehouse Fairwater, WI 178,298
Repack plant and distribution center Fulton, NY 263,268
Canning and freezing plant and office Green Bay, WI 492,446
Canning plant and warehouse Hortonville, WI 78,000
Freezing plant and repack plant(1) Oxnard, CA 39,082
Repack plant(1) San Antonio, TX 20,445
Freezing plant and warehouse Uvalde, TX 146,625
Freezing plant, repack and warehouse Watsonville, CA 207,600
Freezing plant, repack and warehouse Waseca, MN 258,475
Labeling plant and distribution center(1) Fond du Lac, WI 330,000
Receiving and grading station (1) Cornelius, OR 11,700
Receiving and grading station (1) Mount Vernon, WA 110,806
Receiving and grading station (1) Aurora, WA 6,800
Office building, warehouse and tank yards Enumclaw, WA 87,313
Plant, warehouse, and tank yards Tacoma, WA 295,468
Fruits:
Canning plant and warehouse Red Creek, NY 153,076
Manufacturing plant and warehouse Fennville, MI 350,000
Canning plant and warehouse Lawton, MI 142,000
FACILITIES UTILIZED BY THE COMPANY (Continued)
Type of Property (By Product Line) Location Square Feet
Snacks:
Manufacturing plant Ridgway, IL 50,000
Distribution and warehouse North Bend, NE 50,000
Office, plant and warehouse Berlin, PA 190,225
Administrative, plant, warehouse and distribution center (1) Auburn, WA 34,000
Plant, warehouse and distribution center Auburn, WA 37,442
Office, plant and warehouse Cincinnati, OH 113,576
Distribution center Elwood City, PA 8,000
Distribution center Monessen, PA 10,000
Distribution center Coraopolis, PA 15,000
Distribution center Canton, OH 8,200
Canned Meals:
Canning plant, warehouse and distribution center Tacoma, WA 313,488
Other:
Office building, manufacturing plant and warehouse Tacoma, WA 372,164
Parking lot and yards (1) Tacoma, WA 305,470
Office Building - Fuller Building (1) Tacoma, WA 60,000
Headquarters office (1) Rochester, NY 76,372
(1)Leased from third parties, although certain related equipment is owned by the
Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to legal proceedings from time to time in the normal
course of its business. In the opinion of management, any liability that the
Company might incur upon the resolution of these proceedings will not, in the
aggregate, have a material adverse effect on the Company's business, financial
condition, and results of operations. Further, no such proceedings are known to
be contemplated by governmental authorities. The Company maintains general
liability insurance coverage in amounts deemed to be adequate by management.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
All of the capital stock of the Company is owned by Pro-Fac Cooperative, Inc.
ITEM 6. SELECTED FINANCIAL DATA
Agrilink Foods, Inc.
FIVE YEAR SELECTED FINANCIAL DATA
(Dollars in Thousands)
Fiscal Year Ended June
----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------
Consolidated Summary of Operations:
Net sales $ 1,182,627 $ 1,210,506 $ 719,665 $ 730,823 $ 739,094
Cost of sales (809,633) (854,768) (524,082) (539,081) (562,926)
----------- ----------- ----------- ----------- ----------
Gross profit 372,994 355,738 195,583 191,742 176,168
Selling, administrative, and general expenses (279,337) (287,672) (141,837) (145,392) (156,067)
Gains on sales of assets 6,635 64,734 0 3,565 0
Restructuring (including disposals) 0 (5,000) 0 0 (5,871)
Income from joint venture 2,418 2,787 1,893 0 0
----------- ----------- ----------- ----------- ----------
Operating income before dividing with Pro-Fac 102,710 130,587 55,639 49,915 14,230
Interest expense (78,054) (65,339) (30,633) (35,030) (41,998)
Amortization of debt issue costs associated with the
Bridge Facility 0 (5,500) 0 0 0
----------- ----------- ----------- ----------- ----------
Pretax income/(loss) before dividing with Pro-Fac and
before extraordinary item and cumulative effect of
an accounting change 24,656 59,748 25,006 14,885 (27,768)
Pro-Fac share of (income)/loss before extraordinary
item and cumulative effect of an accounting change (12,328) (1,658) (12,503) (7,442) 9,037
----------- ----------- ----------- ----------- ----------
Income/(loss) before taxes, extraordinary item, and
cumulative effect of an accounting change 12,328 58,090 12,503 7,443 (18,731)
Tax (provision)/benefit (5,904) (24,770) (5,689) (3,668) 6,853
----------- ----------- ----------- ----------- ----------
Income/(loss) before extraordinary item and
cumulative effect of an accounting change 6,424 33,320 6,814 3,775 (11,878)
Extraordinary item relating to the early extinguishment
of debt (net of income taxes and after dividing
with Pro-Fac) 0 (16,366) 0 0 0
Cumulative effect of an accounting change (net of
income taxes and after dividing with Pro-Fac) 0 0 0 1,747 0
----------- ----------- ----------- ----------- ----------
Net income/(loss) $ 6,424 $ 16,954 $ 6,814 $ 5,522 $ (11,878)
=========== =========== =========== =========== ==========
Balance Sheet Data:
Working capital $ 254,094 $ 225,363 $ 108,075 $ 84,060 $ 107,875
Ratio of current assets to current liabilities 2.2:1 2.0:1 1.9:1 1.8:1 2.0:1
Total assets $ 1,098,887 $ 1,110,061 $ 568,971 $ 542,561 $ 634,250
Long-term debt and senior-subordinated notes
(excludes current portion) $ 644,712 $ 668,316 $ 229,937 $ 222,829 $ 309,683
Other Statistics:
Average number of employees:
Regular 5,510 6,040 3,620 3,507 3,886
Seasonal 2,152 2,838 1,125 1,068 1,478
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion is to outline the significant reasons for changes
in the Consolidated Statement of Operations from fiscal 1998 through fiscal
2000.
Agrilink Foods, Inc. ("Agrilink Foods" or the "Company") has four primary
product lines including: vegetables, fruits, snacks and canned meals. The
majority of each of the product lines' net sales are within the United States.
In addition, all of the Company's operating facilities, excluding one in Mexico,
are within the United States.
The vegetable product line consists of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable
category include Birds Eye, Birds Eye Voila!, Freshlike, Veg-All, McKenzies, and
Brooks Chili Bean. The fruit product line consists of canned and frozen fruits
including fruit fillings and toppings. Branded products within the fruit
category include Comstock and Wilderness. The snack product line consists of
potato chips, popcorn and other corn-based snack items. Branded products within
the snack category include Tim's Cascade Chips, Snyder of Berlin, Husman, La
Restaurante, Erin's, Beehive, Pops-Rite, Super Pop, and Flavor Destinations. The
canned meal product line includes canned meat products such as chilies, stews,
soups, and various other ready-to-eat prepared meals. Branded products within
the canned meal category include Nalley. The Company's other product line
primarily represents salad dressings. Brand products within this category
include Bernstein's and Nalley.
The following tables illustrate the Company's results of operations by product
line for the fiscal years ended June 24, 2000, June 26, 1999, and June 27, 1998,
and the Company's total assets by product line at June 24, 2000, June 26, 1999,
and June 27, 1998.
EBITDA1,2
(Dollars in Millions)
Fiscal Years Ended
----------------------------------------------------------------------------------
June 24, 2000 June 26, 1999 June 27, 1998
% of % of % of
$ Total $ Total $ Total
----- ------ ----- ----- ----- -----
Vegetables 93.8 69.4 64.2 61.7 20.3 26.3
Fruits 15.7 11.6 10.8 10.4 21.0 27.2
Snacks 9.8 7.3 5.8 5.5 8.3 10.7
Canned Meals 8.6 6.4 8.4 8.1 8.6 11.1
Other 6.5 4.8 5.3 5.1 1.8 2.3
----- ----- ----- ----- ---- -----
Continuing segments 134.4 99.5 94.5 90.8 60.0 77.6
Businesses sold3 0.7 0.5 9.6 9.2 17.3 22.4
----- ----- ----- ----- ---- -----
Total 135.1 100.0 104.1 100.0 77.3 100.0
===== ===== ===== ===== ==== =====
1 Earnings before interest, taxes, depreciation, and amortization ("EBITDA") is
defined as the sum of pretax income before dividing with Pro-Fac and before
extraordinary item, interest expense, amortization of debt issue costs
associated with the Bridge Facility, depreciation and amortization of
goodwill and other intangibles.
EBITDA should not be considered as an alternative to net income or cash flows
from operations or any other generally accepted accounting principles measure
of performance or as a measure of liquidity.
EBITDA is included herein because the Company believes EBITDA is a financial
indicator of a company's ability to service debt. EBITDA as calculated by
Agrilink Foods may not be comparable to calculations as presented by other
companies.
2 Excludes the gains on sales of assets, restructuring charges, and the
extraordinary item relating to the early extinguishment of debt. See NOTES 1
and 3 to the "Notes to Consolidated Financial Statements."
3 Represents the operating results of operations sold. See NOTE 3 to the "Notes
to Consolidated Financial Statements."
Net Sales
(Dollars in Millions)
Fiscal Years Ended
----------------------------------------------------------------------------------
June 24, 2000 June 26, 1999 June 27, 1998
---------------------- ---------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
------- ----- ------- ------ ----- -----
Vegetables 800.7 67.7 734.7 60.7 233.1 32.4
Fruits 110.4 9.3 111.5 9.2 119.7 16.6
Snacks 87.3 7.4 87.9 7.3 83.7 11.6
Canned Meals 60.3 5.1 64.2 5.3 64.0 8.9
Other 54.5 4.6 73.0 6.0 58.6 8.2
------- ----- ------- ----- ----- ------
Continuing segments 1,113.2 94.1 1,071.3 88.5 559.1 77.7
Businesses sold1 69.4 5.9 139.2 11.5 160.6 22.3
------- ----- ------- ----- ----- -----
Total 1,182.6 100.0 1,210.5 100.0 719.7 100.0
======== ===== ======= ===== ===== =====
1 Includes net sales of operations sold. See NOTE 3 to the "Notes to Consolidated Financial Statements."
Operating Income1
(Dollars in Millions)
Fiscal Years Ended
---------------------------------------------------------------------------------
June 24, 2000 June 26, 1999 June 27, 1998
--------------------- ------------------- --------------------
% of % of % of
$ Total $ Total $ Total
Vegetables 65.4 68.0 43.9 61.9 11.4 20.5
Fruits 13.9 14.4 8.4 11.8 17.1 30.7
Snacks 6.7 7.0 3.3 4.7 6.1 11.0
Canned Meals 6.7 7.0 6.5 9.2 6.8 12.2
Other 4.6 4.8 3.7 5.2 (0.3) (0.5)
---- ----- ---- ------ ---- -----
Continuing segments 97.3 101.2 65.8 92.8 41.1 73.9
Businesses sold2 (1.2) (1.2) 5.1 7.2 14.5 26.1
---- ----- ---- ------ ---- -----
Total3 96.1 100.0 70.9 100.0 55.6 100.0
==== ===== ==== ====== ==== =====
1 Excludes the gains on sales of assets, the restructuring charge, and the
extraordinary item relating to the early extinguishment of debt. See NOTES 1
and 3 to the "Notes to Consolidated Financial Statements."
2 Represents the operating results of the operations sold. See NOTE 3 to the
"Notes to Consolidated Financial Statements."
3 Operating income less interest expense (including the amortization of debt
issue costs associated with the Bridge Facility) of $78.1 million, $70.8
million, and $30.6 million for the years ended June 24, 2000, June 26, 1999,
and June 27, 1998, respectively, results in pretax income before dividing
with Pro-Fac and before extraordinary item. Management does not allocate
interest expense and corporate overhead to product lines when evaluating
product line performance.
Total Assets
(Dollars in Millions)
Fiscal Years Ended
-----------------------------------------------------------------------------------
June 24, 2000 June 26, 1999 June 27, 1998
--------------------- -------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
Vegetables 876.3 79.7 885.2 79.7 300.8 52.9
Fruits 80.0 7.2 91.1 8.3 87.4 15.4
Snacks 44.0 4.0 41.5 3.7 43.1 7.6
Canned Meals 45.9 4.2 46.7 4.2 49.7 8.7
Other 52.4 4.8 43.6 3.9 47.4 8.3
------- ----- ------- ----- ----- -----
Continuing segments 1,098.6 99.9 1,108.1 99.8 528.4 92.9
Businesses sold1 0.0 0.0 1.1 0.1 37.9 6.6
Assets held for sale 0.3 0.1 0.9 0.1 2.7 0.5
------- ----- ------- ----- ----- -----
Total 1,098.9 100.0 1,110.1 100.0 569.0 100.0
======= ===== ======= ===== ===== =====
1 Includes the assets of the operations sold. See NOTE 3 to the "Notes to Consolidated Financial Statements."
CHANGES FROM FISCAL 1999 TO FISCAL 2000
Net income for fiscal 2000 of $6.4 million represented a $10.6 million decrease
over fiscal 1999 net income of $17.0 million. Comparability of net income is,
however, difficult because fiscal 1999 was impacted by gains on sales of assets,
a restructuring charge, the amortization of debt issue costs associated with the
Bridge Facility, and the extraordinary item relating to the early extinguishment
of debt. In addition, fiscal 2000 results reflect 12 months of interest expense
in the current year versus 9 months in the prior year for the additional debt
associated with the DFVC Acquisition which occurred on September 24, 1998.
Accordingly, management believes, to summarize results, an evaluation of EBITDA
from continuing operations, as presented on page 13 in the EBITDA table included
in this report, is more appropriate because it allows the business to be
reviewed in a more consistent manner.
While a further description of net sales and operating income for each of its
product lines is outlined below, in summary, EBITDA from continuing segments
increased $39.9 million, or 42.2 percent, to $134.4 million in fiscal 2000 from
$94.5 million in the prior fiscal year.
The vegetable product line accounts for a $29.6 million increase of the overall
EBITDA. The improvement was impacted by both the results of the DFVC
Acquisition, including its impact on the percentage of branded sales for the
Company and the reduction in product costs resulting from synergistic savings.
As a result of the date of the DFVC Acquisition, the operating results of the
acquisition have been included for 12 months in fiscal 2000 and for 9 months in
fiscal 1999. In addition, as anticipated at the acquisition date, a greater
percentage of the Company's sales now come from its branded products. The
Company's branded products yield a higher margin than its private label and food
service categories. The Company has also benefited from a reduction in product
costs during fiscal 2000 primarily associated with the synergistic savings
achieved from the DFVC Acquisition and other consolidation efforts.
Specifically, the Company has benefited from the insourcing of product
previously purchased from outside suppliers, staffing reductions, and shipping
consolidations. Market conditions within the frozen vegetable category caused by
lower consumer demand and retail consolidation have, however, offset the
increases outlined above. According to industry data, for the 52-week period
ended June 25, 2000, there has been an overall decrease in the total frozen
vegetable category of 4.0 percent in unit volume. For the same 52-week period
ended June 25, 2000, the decrease in the frozen vegetable private label category
was 4.7 percent in unit volume. As management does not anticipate an improvement
in the current market conditions in the immediate future, efforts will continue
to be focused on cost savings initiatives and innovative go-to-market
strategies.
The Company's fruit category showed an increase of approximately $4.9 million.
This improvement results from a return to the Company's historical pricing
strategy and a reduction in promotional spending in fiscal 2000. Fiscal 1999
results also included spending of $0.9 million for a new product launch. No such
costs were incurred in fiscal 2000.
Snacks showed an increase of $4.0 million due to changes in product mix. During
fiscal 2000, a greater percentage of sales were associated with the potato chip
category which carries a higher margin than the Company's popcorn product line.
In addition, fiscal 1999 results were impacted by a strike at the Snyder of
Berlin facility. This action resulted in incremental costs of approximately $2.5
million in the prior year. The matter was settled in the first quarter of fiscal
2000. Management believes its current relationship with these employees is good.
Canned meals showed a modest increase of $0.2 million due primarily to
production efficiencies and a reduction in raw product costs within the chili
category.
The other product line, which is primarily comprised of salad dressings, showed
an improvement of $1.2 million due to changes in product mix and benefits from
reductions in raw product costs.
Net Sales: Total net sales decreased $27.9 million or 2.3 percent, to $1,182.6
million in fiscal 2000 from $1,210.5 million in fiscal 1999. Excluding
businesses sold, net sales increased by $41.9 million, or 3.9 percent, to
$1,113.2 million in fiscal 2000 from $1,071.3 million in fiscal 1999.
The increase in net sales from continuing operations is primarily attributable
to an increase of $66.0 million within the vegetable product line. The inclusion
of the Birds Eye, Freshlike, and Veg-All brands for 12 months during fiscal 2000
versus nine months of results in fiscal 1999 resulted in incremental sales of
approximately $86.2 million. Excluding this impact, vegetable net sales have
declined $20.2 million and, as highlighted above, this decline is primarily
attributable to lower consumer demand and retail consolidations which occurred
throughout the year.
Net sales for the fruit product line decreased $1.1 million in fiscal 2000 to
$110.4 million from $111.5 million in fiscal 1999. While the Company's pie
filling category exceeded the prior year, decreases were highlighted within its
applesauce category due to competitive pricing within the industry.
Net sales for snacks decreased by $0.6 million in fiscal 2000. Improvements were
highlighted in the potato chip category, however, these amounts were offset by
declines in popcorn due to both a decrease in volume and pricing.
Net sales for canned meals declined $3.9 million in fiscal 2000 primarily
attributable to a decline in sales volume in private label chili.
The other product line, while it primarily consists of dressings, also includes
sales from the production of canned products primarily for use by the military
and other governmental operations. The majority of the $18.5 million decrease in
the other product line is associated with the decline in government demand for
these items.
Operating Income: Operating income of $102.7 million in fiscal 2000 decreased
approximately $27.9 million from $130.6 million in fiscal 1999. Excluding the
impact of businesses sold and other non-recurring items as identified on page
14, operating income from continuing operations increased from $65.8 million in
fiscal 1999 to $97.3 million in fiscal 2000. This represents an improvement of
$31.5 million or 47.9 percent. As highlighted in the discussion of EBITDA from
continuing segments, the increase is attributable to the date of and benefits
from the DFVC Acquisition and other repositioning efforts.
Additionally, while the Company experienced significant benefits from its
efforts in fiscal 1999 to consolidate warehouses and other logistics operations,
the decline in sales resulting from the current industry trend has caused
inventory levels to increase. Storage and handling costs associated with the
increase in inventory approximate $13 million. Management has taken significant
steps to mitigate those costs for fiscal 2001 by both reducing crop intake and
adopting innovative go-to-market strategies.
Gains on Sales of Assets: On June 23, 2000, the Company sold its pickle business
based in Tacoma, Washington to Dean Pickle and Specialty Products. This business
included pickle, pepper, and relish products sold primarily under the Nalley and
Farman's brand names. The Company received proceeds of approximately $10.3
million which were applied to bank loans ($4.0 million of which was applied to
the Term Loan Facility and $6.3 million of which was applied to the Company's
Revolving Credit Facility). A gain of approximately $4.3 million was recognized
on this transaction.
On July 21, 2000, the Company sold the machinery and equipment utilized in
production of pickles and other related products to Dean Pickle and Specialty
Products. No significant gain or loss was recognized on this transaction. The
proceeds of approximately $3.2 million were applied to the Term Loan Facility.
This transaction did not include any other products carrying the Nalley brand
name. Agrilink Foods will continue to contract pack Nalley and Farman's pickle
products for a period of two years at the existing Tacoma processing plant which
Agrilink Foods will operate.
Under a related agreement, the Cooperative will supply raw cucumbers grown in
the Northwestern United States to Dean Pickle and Specialty Products for a
minimum 10-year period at market pricing.
On December 17, 1999 Agrilink Foods announced they had completed the sale of the
Company's Cambria, Wisconsin processing facility to Del Monte. The Company
received proceeds of approximately $10.5 million from the sale of its Cambria,
Wisconsin facility which were applied to bank loans. A gain of approximately
$2.3 million was recognized on this transaction. The sale includes an agreement
for Del Monte to produce a portion of Agrilink Foods' product needs during the
2000 packing season.
Restructuring: Implementation of a corporate-wide restructuring program resulted
in a charge of $5.0 million in the third quarter of fiscal 1999. See NOTE 1 to
the "Notes to Consolidated Financial Statements."
Income From Joint Venture: This amount represents earnings received from the
investment in Great Lakes Kraut Company, LLC, a joint venture formed between
Agrilink Foods and Flanagan Brothers, Inc. on July 1, 1997. The decrease of $0.4
million over the prior year is attributable to the sale of assets. See further
discussion at NOTE 3 to the "Notes to Consolidated Financial Statements."
Interest Expense: Interest expense increased $12.8 million to $78.1 million in
fiscal 2000 from $65.3 million in fiscal 1999. The increase in interest is,
therefore, associated with debt utilized to finance the DFVC Acquisition and
higher levels of seasonal borrowings to fund additional working capital
requirements associated with the increase in the Company's size. As a result of
the date of the DFVC Acquisition interest expense has been included for 12
months in fiscal 2000 and 9 months in fiscal 1999. In addition, this increase is
associated with an overall increase in prevailing interest rates which occurred
over the last year.
Amortization of Debt Issue Costs Associated with the Bridge Facility: In order
to consummate the DFVC Acquisition, Agrilink Foods entered into a $200 million
bridge loan facility (the "Bridge Facility"). The Bridge Facility was repaid
with the proceeds from the new senior subordinated note offering (see NOTE 5 to
the "Notes to Consolidated Financial Statements" - "Debt - Senior Subordinated
Notes 11-7/8 Percent due 2008"). Debt issuance costs associated with the Bridge
Facility were $5.5 million and were fully amortized during the second quarter of
fiscal 1999.
Pro-Fac Share of Income Before Extraordinary Item: The Company's contractual
relationship with Pro-Fac is defined in the Pro-Fac Marketing Agreement. Under
the Pro-Fac Marketing Agreement, in any year in which the Company has earnings
on products which were processed from crops supplied by Pro-Fac ("Pro-Fac
products"), the Company pays to Pro-Fac, as additional patronage income, 90
percent of such earnings, but in no case more than 50 percent of all pretax
earnings of the Company. In years in which the Company has losses on Pro-Fac
products, the Company reduces the commercial market value it would otherwise pay
to Pro-Fac by 90 percent of such losses, but in no case by more than 50 percent
of all pretax losses of the Company. Earnings and losses are determined at the
end of the fiscal year, but are accrued on an estimated basis during the year.
In fiscal 2000, 90 percent of earnings on patronage products exceeded 50 percent
of all pretax earnings of the Company. Accordingly, the Pro-Fac share of income
has been recognized at a maximum of 50 percent of pretax earnings of the
Company.
As the gain on the sale of the aseptic operations was a non-patronage
transaction, the Pro-Fac share of earnings in fiscal 1999 was recorded at 90
percent of the earnings on patronage products.
Tax Provision: The tax provision of $5.9 million in fiscal 2000 represents a
reduction of $18.9 million from the prior year. Of this decrease, $25.2 million
is attributable to the provision associated with the fiscal 1999 gain on sale of
the aseptic operations and the tax benefit of $2.1 million associated with the
amortization of debt issue costs also in fiscal 1999. In fiscal 2000, the sale
of certain intangibles in conjunction with the pickle sale negatively impacted
the Company's effective tax rate. As previously outlined, the Company's
effective tax rate has historically been negatively impacted by the
non-deductibility of certain amounts of goodwill. A further discussion of tax
matters is included at NOTE 6 to the "Notes to Consolidated Financial
Statements."
Extraordinary Item Relating to the Early Extinguishment of Debt: Concurrently
with the DFVC Acquisition, Agrilink Foods refinanced its then existing
indebtedness, including its 12 1/4 percent Senior Subordinated Notes due 2005
and its then existing bank debt. Premiums and breakage fees associated with
early redemptions and other fees incurred amounted to $16.4 million (net of
income taxes of $10.4 million and after allocation to Pro-Fac of $1.7 million).
CHANGES FROM FISCAL 1998 TO FISCAL 1999
On September 24, 1998, Agrilink Foods acquired the Dean Foods Vegetable Company
("DFVC"), the frozen and canned vegetable business of Dean Foods Company ("Dean
Foods"), by acquiring all the outstanding capital stock of Dean Foods Vegetable
Company and Birds Eye de Mexico SA de CV (the "DFVC Acquisition"). In connection
with the DFVC Acquisition, Agrilink Foods sold its aseptic business to Dean
Foods. Agrilink Foods paid $360 million in cash, net of the sale of the aseptic
business, and issued to Dean Foods a $30 million unsecured subordinated
promissory note due November 22, 2008 (the "Dean Foods Subordinated Promissory
Note"), as consideration for the DFVC Acquisition.
After the DFVC Acquisition, DFVC was merged into the Company. This entity has
been one of the leading processors of vegetables in the United States, selling
its products under well-known brand names, such as Birds Eye, Birds Eye Voila!,
Freshlike and Veg-All, and various private labels. The Company believes that the
DFVC Acquisition has strengthened its competitive position by: (i) enhancing its
brand recognition and market position, (ii) providing opportunities for cost
savings and operating efficiencies and (iii) increasing its product and
geographic diversification.
Net income for fiscal 1999 of $17.0 million represented a $10.2 million increase
over fiscal 1998 net income of $6.8 million. Comparability of net income is,
however, difficult because fiscal 1999 was impacted by acquisitions, gains on
sales of assets, a restructuring charge, an increase in interest expense and
depreciation expense associated with the DFVC Acquisition, the amortization of
debt issue costs associated with the Bridge Facility, and the extraordinary item
relating to the early extinguishment of debt. Accordingly, management believes
that, to summarize results, an evaluation of EBITDA from continuing operations,
as presented on page 13 in the EBITDA table included in this report, is more
appropriate because it allows the business to be reviewed in a more consistent
manner. While a further description of net sales and operating income for each
of its product lines is outlined below, in summary, EBITDA from continuing
operations increased a net $34.5 million or 57.5 percent, to $94.5 million in
the current fiscal year from $60.0 million in the prior fiscal year.
The vegetable product line accounts for a $43.9 million increase of the overall
EBITDA increase and is primarily attributable to the DFVC Acquisition. While
this product line benefited from the inclusion of the Birds Eye, Freshlike, and
Veg-All brands, the category was negatively impacted by market conditions within
the frozen private label segment as a result of lower demand, industry
oversupply, and resulting declines in pricing.
The Company's fruit category showed a decrease of approximately $10.2 million
primarily due to a change in the Company's pricing and promotional strategy
within this product line.
Snacks were impacted by competitive pricing within the popcorn product line as
an increase in production from foreign countries such as Argentina which reduced
selling prices. In addition, the potato chip category was negatively impacted by
a strike at the Snyder of Berlin facility during the spring of 1999 which
resulted in additional costs of approximately $2.5 million.
Canned meals showed a modest decline due primarily to the recognition in fiscal
1998 of a favorable settlement of an outstanding tax claim regarding meat
products.
The other product category showed an improvement due primarily to reductions in
costs and promotional spending.
Net Sales: Total net sales increased $490.8 million or 68.2 percent, to $1,210.5
million in fiscal 1999 from $719.7 million in fiscal 1998. Excluding businesses
sold, net sales increased by $512.2 million, or 91.6 percent, to $1,071.3
million in fiscal 1999 from $559.1 million in fiscal 1998.
The increase in net sales from continuing operations is primarily attributable
to the $501.6 million increase within the vegetable product line as a result of
the DFVC Acquisition. In addition, during fiscal 1998, the Company became the
sole supplier of frozen vegetables for the Sam's national club stores. Full
distribution under this contract was achieved in fiscal 1999. These improvements
within the preexisting vegetable operations were offset by a decline in the
frozen private label segment. Beginning in January of 1999 and continuing
through fiscal 1999, the private label frozen vegetable segment, as reported by
several sources, has experienced a decline in unit sales of between 7 and 10
percent.
Net sales for the fruit product line decreased $8.2 million in fiscal 1999 to
$111.5 million from $119.7 million in fiscal 1998. As a result of a change in
pricing and promotional strategy, the Company experienced a decline in its
branded pie filling volume and an
increase in its private label volume throughout fiscal 1999. Management returned
its historic pricing and promotional strategy and improvements in this product
line occurred.
Net sales for snacks increased by $4.2 million in fiscal 1999 as a result of
unit volume primarily within the potato chip category.
The other product line showed an increase of $14.4 million. This increase is
attributable to sales from the production of canned products primarily for use
by the military and other governmental operations. This business was obtained
through the DFVC acquisition and, thus, there were no such sales in fiscal 1998.
This increase was offset by declines within the salad dressings category caused
by competitive pressures.
Operating Income: Operating income of $130.6 million in fiscal 1999 increased
approximately $75.0 million from $55.6 million in fiscal 1998. Excluding the
impact of businesses sold and other non-recurring items as identified on page
14, operating income from continuing operations increased from $41.1 million in
fiscal 1998 to $65.8 million in fiscal 1999. This represented an improvement of
$24.7 million or 60.1 percent.
Vegetables showed improvements of $32.5 million or 285.1 percent. The vegetable
product line obtained through the DFVC Acquisition accounted for $54.7 million
of this increase, while preexisting vegetable operations showed a decline of
$22.2 million. The preexisting vegetable operations showed margin erosion
resulting from the downward trend in the private label frozen vegetable market
as previously highlighted. In addition, the reduction in the volume of frozen
vegetable product repackaged and sold resulted in a higher per unit cost.
Additionally, incremental warehousing costs (storage, handling, and shipping) of
approximately $5.0 million were incurred to consolidate the operations of the
Company's frozen vegetable business as part of the DFVC Acquisition.
Fruits showed a decline of $8.7 million from $17.1 million in fiscal 1998 to
$8.4 million in fiscal 1999. Pie filling accounted for a decline of $6.1 million
due to the change in pricing and promotional strategy discussed above.
Applesauce showed declines of $1.4 million due to the reduction in pricing
resulting from an increased industry supply. The remaining decline resulted from
incremental costs associated with a new product launch in fiscal 1999.
Snacks showed a decline of $2.8 million from $6.1 million in fiscal 1998 to $3.3
million in fiscal 1999. The decline resulted from costs associated with the
strike at the Snyder of Berlin facility of approximately $2.5 million and the
competitive pressures within the popcorn category.
Canned meals showed a modest decline due primarily to the recognition in fiscal
1998 of a favorable settlement of an outstanding tax claim regarding meat
products.
The other product category showed an improvement due primarily to canned
products sold to the military as highlighted above and reductions in costs and
promotional spending.
Gains on Sales of Assets: In conjunction with the DFVC Acquisition, the Company
sold its aseptic business to Dean Foods. The purchase price of $80 million was
based upon an appraisal completed by an independent appraiser. The gain
recognized on the sale was approximately $61.2 million.
On January 29, 1999, the Company sold the Adams brand peanut butter operation to
the J.M. Smucker Company. The Company received proceeds of approximately $13.5
million which were applied to outstanding bank loans. A gain of approximately
$3.5 million was recognized on this transaction.
Restructuring: Implementation of a corporate-wide restructuring program resulted
in a charge of $5.0 million in the third quarter of fiscal 1999. See NOTE 1 to
the "Notes to Consolidated Financial Statements."
Income from Joint Venture: This amount represents earnings received from the
investment in Great Lakes Kraut Company, LLC, a joint venture formed between
Agrilink Foods and Flanagan Brothers, Inc. on July 1, 1997. The increase of $0.9
million over the prior year is attributable to increases in volume and
improvements in pricing. See further discussion at NOTE 3 to the "Notes to
Consolidated Financial Statements."
Interest Expense: Interest expense increased $34.7 million to $65.3 million in
fiscal 1999 from $30.6 million in fiscal 1998. This increase is associated with
debt utilized to finance the DFVC Acquisition and higher levels of seasonal
borrowings to fund changes in operating activities due to the increase in the
Company's size.
Amortization of Debt Issue Costs Associated with the Bridge Facility: In order
to consummate the DFVC Acquisition, the Company entered into a $200 million
bridge loan facility (the "Bridge Facility"). The Bridge Facility was repaid
with the proceeds from the new senior subordinated note offering (see NOTE 5 to
the "Notes to Consolidated Financial Statements" - "Debt - Senior Subordinated
Notes 11-7/8 Percent due 2008"). Debt issuance costs associated with the Bridge
Facility were $5.5 million and were fully amortized during the second quarter of
fiscal 1999.
Pro-Fac Share of Income Before Extraordinary Item: The Company's contractual
relationship with Pro-Fac is defined in the Pro-Fac Marketing Agreement. Under
the Pro-Fac Marketing Agreement, in any year in which the Company has earnings
on products which were processed from crops supplied by Pro-Fac ("Pro-Fac
Products"), the Company pays to Pro-Fac, as additional patronage income, 90
percent of such earnings, but in no case more than 50 percent of all pretax
earnings of the Company. In years in which the Company has losses on Pro-Fac
Products, the Company reduces the commercial market value it would otherwise pay
to Pro-Fac by 90 percent of such losses, but in no case by more than 50 percent
of all pretax losses of the Company. Due to the recognition of the gain on the
sale of the aseptic operations in fiscal 1999, the Pro-Fac share of earnings was
recorded at 90 percent of the earnings on patronage products in the prior year.
The reduction in the Company's preexisting vegetable product line and its fruit
product line, as described above, caused the decline in additional patronage
earnings.
Tax Provision: The provision for taxes increased $19.1 million to $24.8 million
in fiscal 1999 from $5.7 million in fiscal 1998. Of this net increase, $25.2
million is attributable to the provision associated with the gain on sale of
assets. This amount was offset by a $2.1 million tax benefit resulting from the
amortization of debt issue costs associated with the Bridge Facility. The
remaining variance is impacted by the change in earnings before tax. Agrilink
Foods' effective tax rate is negatively impacted by the non-deductibility of
certain amounts of goodwill. A further discussion of tax matters is included at
NOTE 6 to the "Notes to Consolidated Financial Statements."
Extraordinary Item Relating to the Early Extinguishment of Debt: Concurrently
with the DFVC Acquisition, the Company refinanced its then existing
indebtedness, including its 12 1/4 percent Senior Subordinated Notes due 2005
and its then existing bank debt. Premiums and breakage fees associated with
early redemptions and other fees incurred amounted to $16.4 million (net of
income taxes of $10.4 million and after allocation to Pro-Fac of $1.7 million).
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the Consolidated
Statement of Cash Flows for fiscal 2000 compared to fiscal 1999.
Net cash used in operating activities of $17.7 million in fiscal 2000 increased
$5.8 million from the fiscal 1999 balance of $11.9 million. This increase
primarily results from an increase in inventories due to the decline in net
sales resulting from lower consumer demand and retail consolidation, offset by
variances within accounts payable and other accruals due to the timing of
liquidation of outstanding balances.
Net cash used in investing activities was significantly impacted by the DFVC
Acquisition in fiscal 1999. The purchase of property, plant and equipment
increased $3.3 million to $25.4 million in fiscal 2000 from $22.1 million in
fiscal 1999. The increase was primarily utilized to support additional operating
facilities acquired in conjunction with the DFVC Acquisition and was for general
operating purposes.
Net cash used in financing activities in fiscal 2000 was primarily associated
with mandatory prepayments, including proceeds from the disposition of assets.
In addition, the Company's outstanding notes payable balance (the Revolving
Credit Facility) was approximately $5.7 million at June 24, 2000. The balance on
this facility at June 26, 1999 was approximately $18.9 million. The reduction
was primarily attributable to changes in operating activities outlined above.
The financing activities in fiscal 1999 were significantly impacted by the DFVC
Acquisition and the activities completed concurrently with the acquisition to
refinance existing indebtedness.
New Credit Facility (Bank Debt): In connection with the DFVC Acquisition, the
Company entered into a new credit facility ("New Credit Facility") with Harris
Bank as Administrative Agent and Bank of Montreal as Syndication Agent, and the
lenders thereunder. The New Credit Facility consists of the $200 million
Revolving Credit Facility and the $455 million Term Loan Facility. The Term Loan
Facility is comprised of the Term A Facility, which has a maturity of five
years, the Term B Facility, which has a maturity of six
years, and the Term C Facility, which has a maturity of seven years. The
Revolving Credit Facility has a maturity of five years. All previous bank debt
was repaid in conjunction with the execution of the New Credit Facility.
The New Credit Facility bears interest, at the Company's option, at the
Administrative Agent's alternate base rate or the London Interbank Offered Rate
("LIBOR") plus, in each case, applicable margins of: (i) in the case of
alternate base rate loans, (x) 1.00 percent for loans under the Revolving Credit
Facility and the Term A Facility, (y) 2.75 percent for loans under the Term B
Facility and (z) 3.00 percent for loans under the Term C Facility and (ii) in
the case of LIBOR loans, (x) 2.75 percent for loans under the Revolving Credit
Facility and the Term A Facility, (y) 3.75 percent for loans under the Term B
Facility and (z) 4.00 percent for loans under the Term C Facility. The
Administrative Agent's "alternate base rate" is defined as the greater of: (i)
the prime commercial rate as announced by the Administrative Agent or (ii) the
Federal Funds rate plus 0.50 percent. The fiscal 2000 weighted-average rate of
interest applicable to the Term Loan Facility was 9.51 percent. In addition, the
Company pays a commitment fee calculated at a rate of 0.50 percent per annum on
the daily average unused commitment under the Revolving Credit Facility.
Upon consummation of the DFVC Acquisition, the Company drew $455 million under
the Term Loan Facility, consisting of $100 million, $175 million and $180
million of loans under the Term A Facility, Term B Facility and Term C Facility,
respectively. Additionally, the Company drew $93 million under the Revolving
Credit Facility for seasonal working capital needs and $14.3 million under the
Revolving Credit Facility was issued for letters of credit. During December
1998, the Company's primary lender exercised its right under the New Credit
Facility to transfer $50 million from the Term A Facility to the Term B and Term
C Facilities in increments of $25 million.
Utilizing outstanding balances at June 24, 2000, the Term Loan Facility is
subject to the following amortization schedule:
(Dollars in Millions)
Fiscal Year Term Loan A Term Loan B Term Loan C Total
- ----------- ----------- ----------- ----------- -----
(Dollars in millions)
2001 $ 10.0 $ 0.4 $ 0.4 $ 10.8
2002 10.0 0.4 0.4 10.8
2003 10.0 0.4 0.4 10.8
2004 9.2 0.4 0.4 10.0
2005 0.0 190.5 0.4 190.9
2006 0.0 0.0 195.0 195.0
------- ------ ------ -------
$ 39.2 $192.1 $197.0 $ 428.3
======= ====== ====== =======
The Term Loan Facility is subject to mandatory prepayment under various
scenarios as defined in the New Credit Facility. During fiscal 2000, Agrilink
Foods made mandatory prepayments of $10.0 million from proceeds of the sale of
the Cambria facility and the pickle operations. In addition, during fiscal 2000,
principal payments of $8.3 million were made on the Term Loan Facilities.
The Company's obligations under the New Credit Facility are collateralized by a
first-priority lien on: (i) substantially all existing or after-acquired assets,
tangible or intangible, (ii) the capital stock of certain of Pro-Fac's current
and future subsidiaries (excluding AgriFrozen Foods, which is a subsidiary of
Pro-Fac); and (iii) all of the Company's rights under the agreement to acquire
DFVC (principally indemnification rights) and the Pro-Fac Marketing and
Facilitation Agreement. The Company's obligations under the New Credit Facility
are guaranteed by Pro-Fac and certain of the Company's current and future, if
any, subsidiaries (excluding AgriFrozen Foods, which is a subsidiary of
Pro-Fac).
The New Credit Facility contains customary covenants and restrictions on the
Company's ability to engage in certain activities, including, but not limited
to: (i) limitations on the incurrence of indebtedness and liens, (ii)
limitations on sale-leaseback transactions, consolidations, mergers, sale of
assets, transactions with affiliates and investments and (iii) limitations on
dividend and other distributions. The New Credit Facility also contains
financial covenants requiring Pro-Fac to maintain a minimum level of
consolidated EBITDA, a minimum consolidated interest coverage ratio, a minimum
consolidated fixed charge coverage ratio, a maximum consolidated leverage ratio
and a minimum level of consolidated net worth. Under the New Credit Facility,
the assets, liabilities, and results of operations of AgriFrozen, Inc., which is
a subsidiary of Pro-Fac, are not consolidated with Pro-Fac for purposes of
determining compliance with the covenants. In August of 1999, the Company
negotiated an amendment to the original covenants. In conjunction with this
amendment, the Company incurred a fee of approximately $2.6 million. This fee is
being amortized over the remaining life of the New Credit Facility. Pro-Fac and
the Company are in compliance with all covenants, restrictions and requirements
under the terms of the New Credit Facility as amended.
Senior Subordinated Notes - 11-7/8 Percent (due 2008): To extinguish the
Subordinated Bridge Facility, the Company issued Senior Subordinated Notes (the
"New Notes") for $200 million aggregate principal amount due November 1, 2008.
Interest on the New Notes accrues at the rate of 11-7/8 percent per annum and is
payable semiannually in arrears on May 1 and November 1.
The New Notes represent general unsecured obligations of the Company,
subordinated in right of payment to certain other debt obligations of the
Company (including the Company's obligations under the New Credit Facility). The
New Notes are guaranteed by Pro-Fac and certain of the Company's current and
future, if any, subsidiaries.
The New Notes contain customary covenants and restrictions on the Company's
ability to engage in certain activities, including, but not limited to: (i)
limitations on the incurrence of indebtedness and liens; (ii) limitations on
consolidations, mergers, sales of assets, transactions with affiliates; and
(iii) limitations on dividends and other distributions. The Company is in
compliance with all covenants, restrictions, and requirements under the New
Notes.
Subordinated Bridge Facility: To complete the DFVC Acquisition, the Company
entered into a Subordinated Bridge Facility (the "Bridge Facility"). During
November 1998, the net proceeds from the sale of the New Notes, together with
borrowings under the Revolving Credit Facility, were used to repay all the
indebtedness outstanding ($200 million plus accrued interest) under the Bridge
Facility. The outstanding indebtedness under the Bridge Facility accrued
interest at an approximate rate per annum of 10 1/2 percent. Debt issuance costs
associated with the Bridge Facility of $5.5 million were fully amortized during
the second quarter of fiscal 1999.
Subordinated Promissory Note: As partial consideration for the DFVC Acquisition,
the Company issued to Dean Foods a Subordinated Promissory Note for $30 million
aggregate principal amount due November 22, 2008. Interest on the Subordinated
Promissory Note is accrued quarterly in arrears commencing December 31, 1998, at
a rate per annum of 5 percent until November 22, 2003, and at a rate of 10
percent thereafter. As the rates on the Note are below market value, the Company
has imputed the appropriate discount utilizing an effective interest rate of
11-7/8 percent. Interest accruing through November 22, 2003 is required to be
paid in kind through the issuance by the Company of additional subordinated
promissory notes identical to the Subordinated Promissory Note. The Company
satisfied this requirement through the issuance of six additional promissory
notes each for approximately $0.4 million. Interest accruing after November 22,
2003 is payable in cash. The Subordinated Promissory Note may be prepaid at the
Company's option without premium or penalty.
The Subordinated Promissory Note is expressly subordinate to the New Notes and
the New Credit Facility and contains no financial covenants. The Subordinated
Promissory Note is guaranteed by Pro-Fac.
Senior Subordinated Notes - 12 1/4 Percent - Due 2005 ("Old Notes"): In
conjunction with the DFVC Acquisition, the Company repurchased $159,985,000
principal amount of its Old Notes, of which $160 million aggregate principal
amount was previously outstanding. The Company paid a total of approximately
$184 million to repurchase the Old Notes, including interest accrued thereon of
$2.9 million. Holders who tendered consented to certain amendments to the
indenture relating to the Old Notes, which eliminated or amended substantially
all the restrictive covenants and certain events of default contained in such
indenture. The Company may repurchase the remaining Old Notes in the future in
open market transactions, privately negotiated purchases or otherwise.
Capital Expenditures: The Company anticipates that capital expenditures for
fiscal years 2001 and 2002 will be approximately $25 million per annum. The
Company believes that cash flow from operations and borrowings under bank
facilities will be sufficient to meet its liquidity requirements for the
foreseeable future.
Short- and Long-Term Trends: Throughout fiscal 2000 and 1999, Agrilink Foods has
focused on its core businesses and growth opportunities. During fiscal 1999, the
Company acquired the frozen and canned vegetable business of Dean Foods. The
Company believes that the DFVC Acquisition strengthened its competitive position
by: (i) enhancing its brand recognition and market position, (ii) providing
opportunities for cost savings and operating efficiencies and (iii) increasing
its product and geographic diversification. A complete description of the
acquisition and disposal activities completed is outlined at NOTE 3 to the
"Notes to Consolidated Financial Statements."
The vegetable and fruit portions of the business can be positively or negatively
affected by weather conditions nationally and the resulting impact on crop
yields. Favorable weather conditions can produce high crop yields and an
oversupply situation. This results in depressed selling prices and reduced
profitability on the inventory produced from that year's crops. Excessive rain
or drought conditions can produce low crop yields and a shortage situation. This
typically results in higher selling prices and increased profitability. While
the national supply situation controls the pricing, the supply can differ
regionally because of variations in weather.
Management believes that the decrease in consumer demand will result in an
increased supply throughout the industry. Accordingly, this increase in supply
along with the current trend of the decline of 4.7 percent in unit volume within
the private label frozen vegetable category has negatively impacted the
Company's margin in the third and fourth quarters of fiscal 2000 and continues
to date.
Supplemental Information on Inflation: The changes in costs and prices within
the Company's business due to inflation were not significantly different from
inflation in the United States economy as a whole. Levels of capital investment,
pricing and inventory investment were not materially affected by changes caused
by inflation.
OTHER MATTERS:
Recently Issued Accounting Statements: In June 1998, the FASB issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. In June 1999,
the FASB issued SFAS 137, which deferred the effective date of SFAS No. 133 to
fiscal years beginning after June 15, 2000, and requires all derivatives be
measured at fair value and recorded on a company's balance sheet as an asset or
liability, depending upon the company's underlying rights or obligations
associated with the derivative instrument. Agrilink Foods currently is
investigating the impact of this pronouncement.
Year 2000 Readiness Disclosure: Agrilink Foods has not experienced any
significant Year 2000 related system failures nor, to management's knowledge,
have any of the Company's suppliers. Agrilink Foods intends to continue to
monitor and test systems for ongoing Year 2000 compliance; however, management
cannot guarantee that the systems of other companies upon which operations rely
could not be affected by issues associated with the Year 2000 conversion.
All material costs associated with the Company's Year 2000 compliance project
were covered under its service agreement with Systems and Computer Technology
Corporation ("SCT"). The Company's ten-year agreement with SCT is currently
valued at $50 million and is for SCT's OnSite outsourcing services, which
includes assistance in solving the Year 2000 issue. These amounts have been
funded through operating cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk Management: The Company is subject to market risk from
exposure to changes in interest rates based on its financing activities. The
Company has entered into certain financial instrument transactions to maintain
the desired level of exposure to the risk of interest rate fluctuations and to
minimize interest expense. More specifically, the Company entered into two
interest rate swap agreements with the Bank of Montreal. The agreements provide
for fixed interest rate payments by the Company in exchange for payments
received at the three-month LIBOR rate. See further discussion at NOTE 5 to the
"Notes to Consolidated Financial Statements" "Debt - Interest Rate Protection
Agreements."
The following is a summary of the Company's interest rate swap agreements:
June 24, 2000
-------------
Interest Rate Swap:
Variable to Fixed - notional amount $250,000,000
Average pay rate 4.96-5.32%
Average receive rate 6.29%
Maturities through 2001
The Company had a two-year option to extend the maturity date on one of the
interest rate swap agreements with a notional amount of $100,000,000. On June 8,
1999, the Company sold this option to Bank of Montreal for approximately
$2,050,000. The gain resulting from the sale is being recognized over the
remaining life of the interest rate swap.
While there is potential that interest rates will fall, and hence minimize the
benefits of the Company's hedge position, it is the Company's position that on a
long-term basis, the possibility of interest rates increasing exceeds the
likelihood of interest rates decreasing. The Company will, however, monitor
market conditions to adjust its position as it considers necessary.
Foreign Currency: The Cooperative hedges certain foreign currency transactions
by entering into forward exchange contracts. Gains and losses associated with
currency rate changes on forward exchange contracts hedging foreign currency
transactions are recorded in earnings upon settlement. In fiscal 2000, the
Cooperative entered into forward exchange contracts to hedge aggregate foreign
currency exposures of approximately $11.5 million. The forward exchange
contracts have varying maturities ranging from July 2000 to April 2001 with cash
settlements made at maturity based upon rates agreed to at contract inception.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
ITEM Page
Agrilink Foods, Inc. and Consolidated Subsidiaries:
Management's Responsibility for Financial Statements.................................................................... 25
Report of Independent Accountants....................................................................................... 26
Consolidated Financial Statements:
Consolidated Statements of Operations, Accumulated Earnings/(Deficit), and Comprehensive Income
for the years ended June 24, 2000, June 26, 1999, and June 27, 1998................................................. 27
Consolidated Balance Sheets at June 24, 2000 and June 26, 1999........................................................ 28
Consolidated Statements of Cash Flows for the years ended June 24, 2000, June 26, 1999, and June 27, 1998............. 29
Notes to Consolidated Financial Statements............................................................................ 31
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the financial
statements and related notes which begins on the page following the "Report of
Independent Accountants." These statements have been prepared in accordance with
accounting principles generally accepted in the United States.
The Company's accounting systems include internal controls designed to provide
reasonable assurance of the reliability of its financial records and the proper
safeguarding and use of its assets. Such controls are monitored through the
internal and external audit programs.
The financial statements have been audited by PricewaterhouseCoopers LLP,
independent accountants, who were responsible for conducting their examination
in accordance with generally accepted auditing standards. Their resulting report
is on the subsequent page.
The Board of Directors exercises its responsibility for these financial
statements. The independent accountants and internal auditors of the Company
have full and free access to the Board. The Board periodically meets with the
independent accountants and the internal auditors, without management present,
to discuss accounting, auditing and financial reporting matters.
/s/ Dennis M. Mullen /s/ Earl L. Powers
Dennis M. Mullen Earl L. Powers
President and Executive Vice President Finance and
Chief Executive Officer Chief Financial Officer
August 1, 2000
Report of Independent Accountants
To the Shareholder and
Board of Directors of
Agrilink Foods, Inc.
In our opinion, the consolidated balance sheets and related consolidated
statements of operations and accumulated retained earnings/(deficit) and of cash
flows listed under Item 8 of this Form 10-K present fairly, in all material
respects, the financial position of Agrilink Foods, Inc. and its subsidiaries at
June 24, 2000 and June 26, 1999, and the results of their operations and their
cash flows for each of the three years ended in the period June 24, 2000, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
Our audits of the consolidated financial statements also included an audit of
the financial statement schedule listed in the accompanying index and appearing
under Item 14 of the Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein for the fiscal years ended June 24, 2000, June 26, 1999, and June 27,
1998 when read in conjunction with the consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Rochester, New York
August 1, 2000
FINANCIAL STATEMENTS
Agrilink Foods, Inc.
Consolidated Statements of Operations, Accumulated Earnings/(Deficit), and Comprehensive Income
(Dollars in Thousands)
Fiscal Years Ended
------------------------------------------------
June 24, 2000 June 26, 1999 June 27, 1998
------------- ------------- -------------
Net sales $ 1,182,627 $ 1,210,506 $ 719,665
Cost of sales (809,633) (854,768) (524,082)
----------- ----------- ------------
Gross profit 372,994 355,738 195,583
Selling, administrative, and general expenses (279,337) (287,672) (141,837)
Gains on sales of assets 6,635 64,734 0
Restructuring 0 (5,000) 0
Income from joint venture 2,418 2,787 1,893
----------- ----------- ------------
Operating income before dividing with Pro-Fac 102,710 130,587 55,639
Interest expense (78,054) (65,339) (30,633)
Amortization of d