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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
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from to
File No. 0-20539
PRO-FAC COOPERATIVE, INC.
(Exact Name of Registrant as Specified in Its Charter)
New York 16-6036816
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification Number)
90 Linden Oaks, PO Box 682, Rochester, NY 14603
(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:
Class A Cumulative Preferred Stock
Liquidation Preference $25.00/Share
Par Value $1.00/Share
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
as of August 26, 2000
Class A Common Stock: $10,664,905
Class B Common Stock: $ 0
(based upon par value of shares since there is no market for the Registrant's
common stock)
Number of common shares outstanding at August 26, 2000:
Class A Common Stock: 2,132,981
Class B Common Stock: 723,229
FORM 10-K ANNUAL REPORT - 2000
PRO-FAC COOPERATIVE, 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........................................................... 5
Financial Information About Industry Segments............................................... 7
Packaging and Distribution.................................................................. 7
Trademarks.................................................................................. 7
Raw Material Sources........................................................................ 7
Environmental Matters....................................................................... 8
Seasonality of Business..................................................................... 8
Practices Concerning Working Capital........................................................ 9
Significant Customers....................................................................... 9
Backlog of Orders........................................................................... 9
Business Subject to Government Contracts.................................................... 9
Competitive Conditions...................................................................... 9
Market and Industry Data.................................................................... 10
New Products and Research and Development................................................... 10
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......................................................................... 13
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 14
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk...................................... 25
ITEM 8. Financial Statements and Supplementary Data..................................................... 25
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 55
PART III
ITEM 10. Directors and Executive Officers of the Registrant.............................................. 56
ITEM 11. Executive Compensation.......................................................................... 59
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................................. 61
ITEM 13. Certain Relationships and Related Transactions.................................................. 63
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 65
Signatures...................................................................................... 69
PART I
ITEM 1. DESCRIPTION OF BUSINESS
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, the Pro-Fac Cooperative, Inc. ("Pro-Fac" or the
"Cooperative") 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 Cooperative 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 14 to 24) and other statements made in this Form 10-K and in
other filings with the SEC.
The Cooperative cautions readers that any such forward-looking statements made
by or on behalf of the Cooperative are based on management's current
expectations and beliefs but are not guarantees of future performance. Actual
results could differ materially from those expressed or implied in the
forward-looking statements. Among the factors that could impact the
Cooperative'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 Cooperative'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 Cooperative's ability to achieve the gains in productivity and
improvements in capacity utilization; and
the Cooperative's ability to service debt.
GENERAL DEVELOPMENT OF BUSINESS
Pro-Fac Cooperative, Inc. 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. Unless the context otherwise requires, the terms
"Cooperative" and "Pro-Fac" refer to Pro-Fac Cooperative, Inc. and its
subsidiaries. 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's Class A Cumulative preferred stock is listed on the Nasdaq National
Marketing System.
Pro-Fac crops include fruits (cherries, apples, blueberries, peaches, and
plums), vegetables (snap beans, beets, cucumbers, peas, sweet corn, carrots,
cabbage, squash, asparagus, potatoes, turnip roots, and leafy greens), and
popcorn. Only growers of crops marketed through Pro-Fac (or associations of such
growers) can become members of Pro-Fac; a grower becomes a member of Pro-Fac
through the purchase of common stock. Pro-Fac's membership is divided into two
separate classes. Members owning shares of Class A common stock are Class A
members, and members owning shares of Class B common stock are Class B members.
Class A members are members who deliver raw product for sale and processing at
the facilities of Agrilink Foods. There are approximately 626 Class A members,
consisting of individual growers or of associations of growers, located
principally in the states of New York, Delaware, Pennsylvania, Illinois,
Michigan, Washington, Oregon, Iowa, Nebraska, Florida, and Georgia.
There are approximately 150 Class B members who deliver raw product for sale and
processing at AgriFrozen Foods, a subsidiary of Pro-Fac. These growers are
located in the states of Oregon and Washington.
Agrilink Foods, Inc. ("Agrilink Foods"), incorporated in New York in 1961, is a
producer and marketer of processed food products. Agrilink Foods 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 Agrilink Foods' operating facilities, excluding one
in Mexico, are within the United States.
On November 3, 1994, Pro-Fac acquired Agrilink Foods, and Agrilink Foods became
a wholly-owned subsidiary of Pro-Fac. Pro-Fac and Agrilink Foods have a
long-standing contractual relationship pursuant to which Pro-Fac provides crops
and financing to Agrilink Foods, Agrilink Foods provides a market and management
to Pro-Fac, and Pro-Fac shares in the profits of Agrilink Foods. Upon
consummation of the acquisition, Pro-Fac and Agrilink Foods entered into 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 a 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 of
the directors of Agrilink Foods be individuals who are not employees or
shareholders of, or otherwise affiliated with, Pro-Fac or Agrilink Foods
("Disinterested Directors") and requires that certain decisions be approved by
the Disinterested Directors.
Additional patronage income received by Pro-Fac is deductible to Pro-Fac for
federal tax purposes only to the extent distributed to its members. Pro-Fac may
make this distribution to its members through a combination of cash and retains
as long as a minimum of 20 percent of the amount is paid in cash as required by
federal tax law. Pro-Fac has historically paid its members between 20 percent
and 30 percent of additional patronage income in cash and the remaining portion
in retains. Funds made available by the distribution of retains to members in
lieu of cash have historically been reinvested by Pro-Fac in Agrilink Foods. See
further discussion of the relationship with Pro-Fac in NOTE 2 to the "Notes to
Consolidated Financial Statements."
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.
Agrilink Foods had the right, exercisable until July 15, 1999, to require Dean
Foods, jointly with Agrilink Foods, 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, Agrilink Foods paid $13.2 million to Dean Foods and exercised
the election.
After the DFVC Acquisition, DFVC was merged into Agrilink Foods. 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. Agrilink Foods 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 then
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.
Agrilink Foods recognized an extraordinary charge of $18.0 million (net of
income taxes) 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 Agreement. The New Credit Facility and the New Notes
also restrict the amount of dividends and other payments that may be made by
Agrilink Foods to Pro-Fac.
Agripac, Inc.: PF Acquisition II, Inc. ("PF II") is also a subsidiary of
Pro-Fac. PF II was incorporated in January 1999. Pro-Fac owns 100 percent of the
common stock of PF II, while PFA Northwest Growers Cooperative, Inc., an Oregon
Cooperative, Inc., owns 100 percent of PF II preferred stock.
On February 23, 1999, PF II acquired the frozen vegetable business of Agripac,
Inc. ("Agripac"), an Oregon cooperative. PF II conducts business under the name
AgriFrozen Foods ("AgriFrozen").
On January 4, 1999, Agripac filed a voluntary petition under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the District of
Oregon. On January 22, 1999 Agripac, as debtor-in-possession, filed a motion
with the Bankruptcy Court for authority to sell substantially all of the assets
comprising its frozen food processing business. The bankruptcy court confirmed
the sale of Agripac's frozen food processing assets to AgriFrozen by an order
entered on February 18, 1999.
The contractual relationship between AgriFrozen and Pro-Fac is defined in a
marketing and facilitation agreement between the two companies (the "AgriFrozen
Marketing Agreement"). Under that agreement, AgriFrozen purchases raw products
from Pro-Fac and processes and markets the finished products. AgriFrozen will
pay Pro-Fac commercial market value ("CMV") for the crops supplied by Pro-Fac.
In addition, in any year in which AgriFrozen has earnings, AgriFrozen will
distribute such earnings to members of Pro-Fac. However, in the event AgriFrozen
experiences any losses, AgriFrozen deducts the losses from the total CMV payable
to Pro-Fac. The agreement permits AgriFrozen to pay 20 percent of any additional
earnings in cash and retain 80 percent as working capital.
NARRATIVE DESCRIPTION OF BUSINESS
The Cooperative sells products in three principal categories: (i) "branded"
products, which are sold under various 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 59 percent of the Cooperative's net sales were branded and
the remainder divided between private label and food service/industrial. The
Cooperative's branded products are listed under the "Trademarks" section of this
report. The Cooperative'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,
Wal-Mart/Sam's, Safeway, SuperValu, Topco, Wegmans and Winn-Dixie. The
Cooperative'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 Cooperative has four primary product lines: vegetables, fruits, snacks, and
canned meals. A description of the Cooperative'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 70 percent of the Cooperative's total net sales. Within this
product line net sales of approximately 56 percent represented branded products,
17 percent represented private label products and 27 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, a 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, Agrilink Foods sold its Cambria, Wisconsin processing
facility to Del Monte. This facility was primarily utilized for canning
operations.
On November 8, 1999, Agrilink Foods 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 Agrilink Foods' 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, Agrilink Foods 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, Agrilink Foods 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, Agrilink Foods 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 Cooperative 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 Cooperative'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 snack category include Tim's
Cascade Chips, Snyder of Berlin, Husman, La Restaurante, Erin's, Pops-Rite, and
Super Pop. In fiscal 2000 snacks net sales represented approximately 7 percent
of the Cooperative'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, Agrilink Foods 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, Agrilink Foods 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 Cooperative's total net sales.
Other: Agrilink Foods' 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 4 percent of the Cooperative'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 Cooperative 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 Cooperative's last three fiscal years.
PACKAGING AND DISTRIBUTION
The food products produced by the Cooperative are distributed to various
consumer markets in all 50 states. International sales account for a small
portion of the Cooperative'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 Cooperative)
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 Cooperative has developed central storage and distribution facilities that
permit multi-item single shipment to customers in key marketing areas.
Effective March 31, 1998, Agrilink Foods 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 Agrilink Foods in and around Coloma, Michigan. The agreement included
the sale of Agrilink Foods' labeling equipment and distribution center.
On June 27, 1997, Americold acquired Agrilink Foods' 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 Cooperative markets its products are
trademarks of the Cooperative. Such brand names are considered to be of material
importance to the business of the Cooperative 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 Cooperative's intent to maintain its trademark registrations.
The major brand names utilized by the Cooperative 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, Husman, La Restaurante, Erin's, 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. Agrilink Foods owns a 50 percent interest in this joint venture.
RAW MATERIAL SOURCES
Agrilink Foods acquired approximately 55 percent of the raw agricultural
products supplied by Pro-Fac from Class A members of the Cooperative. AgriFrozen
acquired approximately 62 percent of the raw agricultural products supplied by
Pro-Fac from Class B members of the Cooperative. Agrilink Foods and AgriFrozen
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 Agrilink
Foods and AgriFrozen 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 Cooperative purchases all of its requirements for nonagricultural products,
including containers, in the open market. Although the Cooperative 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 Cooperative 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 Cooperative to date, the most important for the operations of the
Cooperative are the waste water discharge permit programs administered by the
environmental protection agencies in those states in which the Cooperative 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 Cooperative is required
to meet certain discharge standards in accordance with compliance schedules
established by such agencies. The Cooperative has received permits for all
facilities for which permits are required. Each year the Cooperative submits
applications for renewal permits as required for the facilities.
While the Cooperative cannot predict with certainty the effect of any proposed
or future environmental legislation or regulations on its processing operations,
management of the Cooperative 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 Cooperative 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 Cooperative.
In fiscal 2000, total capital expenditures of Pro-Fac were $27.0 million of
which approximate $0.1 million was devoted to the construction of environmental
facilities. The Cooperative estimates that the environmental capital
expenditures will be approximately $0.6 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 Cooperative 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 Agrilink Foods and
AgriFrozen 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
Agrilink Foods and AgriFrozen must maintain substantial inventories throughout
the year of finished products produced from seasonal raw materials. These
inventories are generally financed through seasonal borrowings.
A Revolving Credit Facility is available to Agrilink Foods and is used primarily
for seasonal borrowing, the amount of which fluctuates during the year. A
short-term line of credit is also available to AgriFrozen and is also used
primarily for seasonal borrowings, the amount of which fluctuates. AgriFrozen's
obligations under its line of credit are not guaranteed by Pro-Fac or Agrilink
Foods and are expressly non-recourse as to Pro-Fac and Agrilink Foods.
Both the maintenance of substantial inventories and the practice of seasonal
borrowing are common to the food processing industry.
SIGNIFICANT CUSTOMERS
The Cooperative's industry segments are not dependent upon the business of a
single customer or a few customers. The Cooperative does not have any customers
to whom sales are made in an amount which equals 10 percent or more of the
Cooperative's net sales.
BACKLOG OF ORDERS
Backlog of orders has not historically been significant in the business of the
Cooperative. 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 Cooperative is subject to
renegotiation of contracts with, or termination by, any governmental agency.
COMPETITIVE CONDITIONS
All products of the Cooperative, 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. Sourcing of product from the members of Pro-Fac allows control over
the quality and uniformity of much of the raw product that is purchased. 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 Cooperative's pricing is generally competitive with that of other food
processors for products of comparable quality. Branded products 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 Cooperative 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 Cooperative 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 Cooperative
amount to approximately 59 percent; sales to the food service/industrial
represent approximately 25 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 Cooperative. Nearly all products sold by the Cooperative compete with the
nationally advertised brands of leading food processors, including Del Monte,
Green Giant, Heinz, Frito-Lay, and 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
Cooperative.
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
Cooperative 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 Cooperative has not
independently verified such industry, market share, and brand awareness data and
makes no representation to its accuracy.
NEW PRODUCTS AND RESEARCH AND DEVELOPMENT
Agrilink Foods 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. Agrilink Foods
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 Cooperative also focuses on the development of related products or
modifications of existing products for the Cooperative's brands and customized
products for the Cooperative's private label and food service businesses.
The amount expensed during the last three fiscal years on Cooperative-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's 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 million. 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 Cooperative had 5,781 full-time employees, of whom
4,106 were engaged in production and the balance in management, sales and
administration. As of that date, the Cooperative also employed approximately
2,914 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 Cooperative 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
Cooperative in its business are either owned by Agrilink Foods, AgriFrozen, or
leased from unaffiliated third parties. All of the properties owned by Agrilink
Foods and AgriFrozen are subject to mortgages in favor of their respective
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 Cooperative also has dispersed
warehouse locations to facilitate the distribution of finished products.
Agrilink Foods and AgriFrozen believe that their facilities are in good
condition and suitable for operations.
Agrilink Foods' Alton, New York property is held for sale.
The following table describes all material facilities leased or owned by the
Cooperative (other than the properties held for sale, certain public warehouses
leased by the Cooperative from unaffiliated third parties from time to time, and
facilities owned by Agrilink Foods' joint venture, Great Lakes Kraut Company,
LLC). Except as otherwise noted, each facility set forth below is owned by the
Cooperative.
FACILITIES UTILIZED BY THE COOPERATIVE
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
FACILITIES UTILIZED BY THE COOPERATIVE
Type of Property (By Product Line) Location Square Feet
- ---------------------------------- -------- -----------
Vegetables (Continued):
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, warehouse, and office 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
Freezing plant and warehouse Salem, OR 110,000
Frozen repacking facility, warehouse, and distribution center (1) Woodburn, OR 385,000
Office building Salem, OR 8,981
Freezing plant, warehouse, and office Walla Walla, WA 102,000
Freezing and repackaging plant (1) Grandview, WA 62,069
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 farm Enumclaw, WA 87,313
Freezing and repackaging plant, office and dry storage Woodburn, OR 388,000
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
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
Cooperative.
ITEM 3. LEGAL PROCEEDINGS
The Cooperative is party to legal proceedings from time to time in the normal
course of its business. In the opinion of management, any liability that might
be incurred upon the resolution of these proceedings will not, in the aggregate,
have a material adverse effect on either of these businesses, financial
condition, and results of operations. Further, no such proceedings are known to
be contemplated by governmental authorities. The Cooperative 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 STOCK HOLDER MATTERS
There is no trading market for the Cooperative's common stock. Only
member/growers of the Cooperative can own shares of common stock. As of June 24,
2000, there were 626 members of Pro-Fac holding shares of Pro-Fac Class A Common
Stock and 150 members holding shares of Pro-Fac Class B Common Stock. In fiscal
2000 and 1999, dividends on Class A Common Stock were paid at a rate of 5.0
percent.
The information required by this item is contained in NOTE 9 to the "Notes to
Consolidated Financial Statements," at "Quarterly Financial Data," and at
"Selected Financial Data."
During fiscal 2000, the Cooperative issued shares of its Class A Cumulative
Preferred Stock in exchange for shares for its Non-cumulative Preferred Stock,
on a share-for-share basis. Such exchanges are exempt from registration under
section 3(a)(9) of the Securities Act of 1933. The dates and amounts of the
exchanges are set forth below:
Date Number of Shares Value of Shares
January 8, 2000 2,106 $ 52,650
April 8, 2000 1,297 32,425
June 23, 2000 1,832 45,800
------- ---------
Total 5,235 $ 130,875
======= =========
The New Credit Facility restricts the amount of dividends and other
distributions that may be made by Pro-Fac to its stockholders. The New Notes
restrict the amount of dividends and other payments that may be made by Agrilink
Foods. See further discussion at "Liquidity and Capital Resources."
The AgriFrozen CoBank Credit Facility and CoBank Subordinated Promissory Note
restrict the amount of dividends and other distributions that may be made by
AgriFrozen on Class B common stock.
In addition, New York Cooperative Law restricts the amount of annual dividends
on common stock to 12 percent per annum.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in Thousands, Except Capital Stock Data)
Fiscal Year Ended June
---------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ---------- ----------- ---------- ----------
Consolidated summary of operations:
Net sales $1,268,542 $1,238,946 $ 719,665 $ 730,823 $ 739,094
Cost of sales (882,861) (877,438) (524,082) (539,081) (562,926)
---------- --------- ---------- ---------- ----------
Gross profit 385,681 361,508 195,583 191,742 176,168
Selling, administrative, and general expenses (286,562) (291,395) (141,739) (145,214) (150,901)
Gains on sales of assets 6,635 64,734 0 3,565 0
Restructuring 0 (5,000) 0 0 (5,871)
Income from joint venture 2,418 2,787 1,893 0 0
---------- ---------- ---------- ---------- ----------
Operating income 108,172 132,634 55,737 50,093 19,396
Interest expense (83,511) (67,420) (30,767) (36,473) (41,998)
Amortization of debt issue costs 0 (5,500) 0 0 0
---------- ---------- ---------- ---------- ----------
Pretax income/(loss) before extraordinary item, cumulative
effect of an accounting change, dividends, and allocation of
net proceeds 24,661 59,714 24,970 13,620 (22,602)
Tax (provision)/benefit (8,497) (24,746) (7,840) (5,529) 13,071
---------- ---------- ---------- ---------- ----------
Income/(loss) before extraordinary item, cumulative effect of an
accounting change, dividends and allocation of net proceeds 16,164 34,968 17,130 8,091 (9,531)
Extraordinary item relating to the early extinguishment of debt
(net of income taxes) 0 (18,024) 0 0
Cumulative effect of an accounting change (net of income taxes) 0 0 0 4,606 0
---------- ---------- ---------- --------- ----------
Net income/(loss) $ 16,164 $ 16,944 $ 17,130 $ 12,697 $ (9,531)
========== ========== ========== ========= ==========
Allocation of Net Proceeds:
- --------------------------
Net income/(loss) $ 16,164 $ 16,944 $ 17,130 $ 12,697 $ (9,531)
Dividends on Class A common and preferred stock (7,410) (6,734) (6,328) (5,503) (8,993)
---------- ---------- ---------- --------- ----------
Net proceeds/(deficit) 8,754 10,210 10,802 7,194 (18,524)
Allocation (to)/from earned surplus (3,832) (10,210) (4,662) (3,661) 18,524
---------- ---------- ---------- --------- ----------
Net proceeds available to Class A members $ 4,922 $ 0 $ 6,140 $ 3,533 $ 0
========== ========== ========== ========= ==========
Allocation of net proceeds available to Class A members:
- -------------------------------------------------------
Payable to Class A members currently (30% of qualified
proceeds available to Class A members in fiscal 2000 and
25% in fiscal 1998 and 1997) $ 1,477 $ 0 $ 1,535 $ 883 $ 0
Allocated to Class A members but retained by the Cooperative:
- ------------------------------------------------------------
Qualified retains 3,445 0 4,605 2,650 0
---------- ---------- --------- --------- ----------
Net proceeds available to Class A members $ 4,922 $ 0 $ 6,140 $ 3,533 $ 0
========== ========== ========= ========= ==========
CMV related to Class A members $ 69,623 $ 62,154 $ 58,530 $ 51,445 $ 44,701
========== ========== ========= ========== ==========
CMV related to Class B members $ 14,060
==========
Total net proceeds allocated to Class A members as a
percent of CMV* 7.07% 0.00% 10.51% 6.87% 0.00%
========== ========== ========= ========== ==========
Total net proceeds allocated to Class B members as a
percent of CMV** 0.00% 0.00% 0.00% 0.00% 0.00%
========== ========== ========= ========== ==========
Balance Sheet Data:
- ------------------
Working capital $ 260,481 $ 237,331 $ 94,103 $ 75,950 $ 103,361
Ratio of current assets to current liabilities 1.9:1 1.9:1 1.7:1 1.6:1 1.9:1
Total assets $1,187,266 $1,196,479 $ 569,240 $ 546,677 $ 637,297
Debt to equity ratio*** 4.4:1 4.7:1 1.7:1 1.8:1 2.7:1
Class A common stock $ 10,665 $ 9,979 $ 9,129 $ 8,944 $ 9,185
Class B cumulative redeemable Preferred $ 237 $ 261 $ 270 $ 315 $ 334
Shareholders' and members' capitalization, redeemable stock,
and common stock $ 159,843 $ 152,111 $ 141,369 $ 132,663 $ 126,700
Total long-term debt and senior subordinated notes (excludes
current portion and capital leases) $ 679,205 $ 702,322 $ 229,937 $ 229,829 $ 327,683
Capital Stock Data
Cash dividends paid per share:
Class A Common $ .25 $ .25 $ .25 $ 0.00 $ .25
Non-Cumulative Preferred $ 1.50 $ 1.50 $ 1.50 $ 1.50 $ 1.50
Class A Cumulative Preferred $ 1.72 $ 1.72 $ 1.72 $ 1.72 $ 1.29
Class B Cumulative Preferred $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Average Class A common stock investment per Class A member $ 17,037 $ 15,471 $ 14,399 $ 14,333 $ 14,419
Number of Class A Common Stock members: 626 645 634 624 637
Number of Class B Common Stock members: 150 0 0 0 0
* Payment to the members for CMV was 100 percent of deliveries in fiscal 1999
and 90 percent of deliveries in fiscal 1996.
** Payment to the Class B members for CMV was 89.16 percent of deliveries in fiscal 2000.
*** For purposes of this calculation, debt includes both current and
non-current debt, and equity includes common stock and redeemable preferred
stock.
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 and Net Proceeds from fiscal 1998
through fiscal 2000.
Pro-Fac Cooperative, Inc.'s ("Pro-Fac" or the "Cooperative") wholly-owned
subsidiary, Agrilink Foods, Inc. ("Agrilink Foods") has four primary product
lines including: vegetables, fruits, snacks and canned meals. The Cooperative's
subsidiary, AgriFrozen, has vegetables as its one primary product line. The
majority of each of the product lines' net sales are within the United States.
In addition, all of the Cooperative's operating facilities, excluding one
facility 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 Beans. 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 Cooperative's other product line
primarily represents salad dressings. Brand products within this category
include Bernstein's, and Nalley.
The following tables illustrate the Cooperative's results of operations by
product line for the fiscal years ended June 24, 2000, June 26, 1999, and June
27, 1998, and the Cooperative'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 101.6 71.1 67.2 62.7 20.3 26.3
Fruits 15.7 11.0 10.8 10.1 21.0 27.2
Snack 9.8 6.9 5.8 5.4 8.3 10.7
Canned meals 8.6 6.0 8.4 7.9 8.6 11.1
Other 6.5 4.5 5.3 4.9 1.8 2.3
----- ----- ------ ----- ----- ------
Continuing segments 142.2 99.5 97.5 91.0 60.0 77.6
Businesses sold3 0.7 0.5 9.6 9.0 17.3 22.4
----- ----- ------ ----- ----- ------
Total 142.9 100.0 107.1 100.0 77.3 100.0
===== ===== ====== ===== ===== =====
1 Earnings before interest, taxes, depreciation, and amortization ("EBITDA") is
defined as the sum of pretax income before dividends, allocation of net
proceeds, 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 Cooperative believes EBITDA is a
financial indicator of a Cooperative's ability to service debt. EBITDA as
calculated by the Cooperative may not be comparable to calculations as
presented by other companies.
2 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."
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 886.6 69.9 763.1 61.6 233.1 32.4
Fruits 110.4 8.7 111.5 9.0 119.7 16.6
Snack 87.3 6.9 87.9 7.1 83.7 11.6
Canned meals 60.3 4.7 64.2 5.2 64.0 8.9
Other 54.5 4.3 73.0 5.9 58.6 8.2
------- ------ ------- ----- ----- -----
Continuing segments 1,199.1 94.5 1,099.7 88.8 559.1 77.7
Businesses sold1 69.4 5.5 139.2 11.2 160.6 22.3
------- ------ ------- ----- ----- -----
Total 1,268.5 100.0 1,238.9 100.0 719.7 100.0
======= ====== ======= ===== ===== =====
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 70.8 69.8 46.0 63.0 11.5 20.6
Fruits 13.9 13.7 8.4 11.5 17.1 30.7
Snack 6.7 6.6 3.3 4.5 6.1 11.0
Canned meals 6.7 6.6 6.5 8.9 6.8 12.2
Other 4.6 4.5 3.7 5.1 (0.3) (0.5)
----- ------ ------ ------ ----- ------
Continuing segments 102.7 101.2 67.9 93.0 41.2 74.0
Businesses sold2 (1.2) (1.2) 5.1 7.0 14.5 26.0
----- ------ ------ ------ ----- ------
Total3 101.5 100.0 73.0 100.0 55.7 100.0
===== ====== ====== ===== ===== =====
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 $83.5 million, $72.9
million, and $30.7 million for the years ended June 24, 2000, June 26, 1999,
and June 27, 1998, respectively, results in pretax income before
extraordinary item, dividends, and allocation of net proceeds. Management
does not allocate interest expense and corporate overhead to product lines
when evaluating product line performance.
Total Assets
(Dollars in Millions)
As of Fiscal Years Ended
----------------------------------------------------------------------------------
June 24, 2000 June 26, 1999 June 27, 1998
-------------------- --------------------- ---------------------
% of % of % of
$ Total $ Total $ Total
------- ----- ------- ----- ------ -----
Vegetables 966.2 81.4 974.1 81.4 300.8 52.8
Fruits 79.4 6.7 90.2 7.5 87.5 15.4
Snacks 43.5 3.7 40.9 3.4 43.1 7.6
Canned Meals 45.7 3.8 46.2 3.9 49.8 8.7
Other 52.2 4.4 43.1 3.6 47.4 8.3
------- ----- ------- ----- ----- -----
Continuing segments 1,187.0 100.0 1,194.5 99.8 528.6 92.8
Businesses sold1 0.0 0.0 1.1 0.1 37.9 6.7
Assets held for sale 0.3 0.0 0.9 0.1 2.7 0.5
------- ----- ------- ----- ----- -----
Total 1,187.3 100.0 1,196.5 100.0 569.2 100.0
======= ===== ======= ===== ===== =====
1 Includes the assets of 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 $16.2 million represented a $0.8 million or 4.7
percent 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 Subordinated 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 and additional debt associated with the Agripac
Acquisition which occurred on February 23, 1999. Accordingly, management
believes, to summarize results, an evaluation of EBITDA from continuing
operations, as presented on page 14 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 $44.7 million, or 45.8 percent, to $142.2 million in fiscal 2000 from
$97.5 million in the prior fiscal year.
The vegetable product line accounts for $34.4 million increase of the overall
EBITDA. The improvement was impacted by the date and the results of the DFVC
Acquisition, including its impact on the overall percentage of branded sales for
the Cooperative 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 DFVC Acquisition date,
a greater percentage of the Cooperative's sales now come from its branded
products. The Cooperative's branded products yield a higher margin than its
private label and food service categories. The Cooperative 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 Cooperative has benefited from the
insourcing of product previously purchased from outside suppliers, staffing
reductions, and shipping consolidations. Also, as a result of the Agripac
Acquisition, the operating results of this acquisition have been included for 12
months in fiscal 2000 and 4 months in fiscal 1999. 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 last 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 total frozen vegetable private label category was 4.7 percent 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 fruit category showed an increase of approximately $4.9 million. This
improvement results from a return to 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 Cooperative'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 increased $29.6 million or 2.4 percent, to $1,268.5
million in fiscal 2000 from $1,238.9 million in fiscal 1999. Excluding
businesses sold, net sales increased by $99.4 million, or 9.0 percent, to
$1,199.1 million in fiscal 2000 from $1,099.7 million in fiscal 1999.
The increase in net sales from continuing operations is primarily attributable
to an increase of $123.5 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. In addition, AgriFrozen accounted for
additional net sales of $57.7 million. Excluding this impact, vegetable net
sales have declined $20.4 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 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 $108.2 million in fiscal 2000 decreased
approximately $24.4 million from $132.6 million in fiscal 1999. Excluding the
impact of businesses sold and other non-recurring items as identified on page
15, operating income from continuing operations increased from $67.9 million in
fiscal 1999 to $102.7 million in fiscal 2000. This represents an improvement of
$34.8 million or 51.3 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 Cooperative 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 approximated $13 million in fiscal 2000. 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, Agrilink sold its pickle business
based in Tacoma, Washington to Dean Pickle and Specialty Products Company. This
business included pickle, pepper, and relish products sold primarily under the
Nalley and Farman's brand names. Agrilink 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
Agrilink Foods' Revolving Credit Facility). A gain of approximately $4.3 million
was recognized on this transaction.
On July 21, 2000, Agrilink Foods sold the machinery and equipment utilized in
the production of pickles and other related products to Dean Pickle and
Specialty Products Company. No significant gain or loss was recognized on this
transaction. 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 Company, for a minimum 10-year period at market pricing.
On December 17, 1999 Agrilink Foods announced they had completed the sale of the
Cambria, Wisconsin processing facility to Del Monte. The Cooperative received
proceeds of approximately $10.5 million 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 $16.1 million to $83.5 million in
fiscal 2000 from $67.4 million in fiscal 1999. The increase in interest is,
therefore, associated with debt utilized to finance the DFVC and Agripac
acquisitions and higher levels of seasonal borrowings to fund additional working
capital requirements associated with the increase in the Cooperative'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, as a
result of the Agripac acquisition, interest expense has been included for 12
months in fiscal 2000 and 4 months in fiscal 1999. This increase is also
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.
Tax Provision: The tax provision of $8.5 million in fiscal 2000 represents a
reduction of $16.2 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 Cooperative's effective tax rate. As previously outlined, the Cooperative's
effective tax rate has historically been negatively impacted by the
non-deductibility of certain amounts of goodwill. The Cooperative's effective
tax rate is also impacted by the net proceeds distributed to members. 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 $18.0 million (net of
income taxes of $10.4 million).
CHANGES FROM FISCAL 1998 TO FISCAL 1999
The Cooperative's fiscal 1999 results were significantly impacted by two
acquisitions. These include the acquisition of the Dean Foods Vegetable Company
("DFVC") and the acquisition of Agripac, Inc. ("Agripac").
On September 24, 1998, Agrilink Foods acquired 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 Acquisition, DFVC was merged
into Agrilink Foods. 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.
On February 23, 1999, the Cooperative, through its subsidiary AgriFrozen,
acquired the frozen vegetable processing of Agripac. The Cooperative owns 100
percent of the common stock of AgriFrozen; and the Northwest Grows Cooperative,
Inc., an Oregon cooperative, owns all of AgriFrozen's preferred stock.
The Cooperative believes that these acquisitions 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 $0.1 million decrease
over fiscal 1998 net income of $17.1 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 acquisitions, the amortization of debt
issue costs associated with the Subordinated 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 14 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 $37.5 million or 62.5
percent, to $97.5 million in fiscal 1999 from $60.0 million in fiscal 1998.
The vegetable product line accounts for $46.9 million of the overall EBITDA
increase and is primarily attributable to the DFVC and Agripac acquisitions.
While this product line has benefited from the inclusion of the Birds Eye,
Freshlike, and Veg-All brands, the category has been negatively impacted by
market conditions within the frozen private label segment as a result of lower
demand, industry oversupply, and subsequent declines in pricing.
The fruit category showed a decrease of approximately $10.2 million or 48.6
percent and was primarily due to a change in the Agrilink Foods' 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 $519.2 million or 72.1 percent, to $1,238.9
million in fiscal 1999 from $719.7 million in fiscal 1998. Excluding businesses
sold, net sales increased by $540.6 million, or 96.7 percent, to $1,099.7
million in fiscal 1999 from $559.1 million in fiscal 1998.
The increase in net sales from continuing operations is primarily attributable
to an increase of $554.5 million and $28.4 million within the vegetable product
line as a result of the DFVC and Agripac acquisitions, respectively. In
addition, during fiscal 1998, Agrilink Foods 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 were offset by a
decline in the frozen private label segment. Beginning in January of 1999 and
continuing through fiscal 1999, the frozen private label frozen vegetable
segment, as reported by several sources, 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, Agrilink Foods experienced a decline in its
branded pie filling volume and an increase in its private label volume
throughout fiscal 1999. Management returned to its historic pricing and
promotional strategy in fiscal 2000, 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.
All "other" product categories 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 $132.6 million in fiscal 1999 increased
approximately $76.9 million from $55.7 million in fiscal 1998. Excluding the
impact of businesses sold, as identified on page 15, operating income from
continuing operations increased from $41.2 million in fiscal 1998 to $67.9
million in fiscal 1999. This represents an improvement of $26.7 million or 64.8
percent.
Vegetables showed improvements of $34.5 million or 300.0 percent. The vegetable
product lines obtained through the DFVC and Agripac acquisitions accounted for
$54.7 million and $2.1 million of this increase, respectively, while preexisting
vegetable operations showed a decline of $22.3 million. The preexisting
vegetable operations experienced margin erosion resulting from the downward
trend in the private label frozen vegetable market highlighted above. 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 Agrilink Foods' frozen vegetable
business as part of the DFVC Acquisition.
Fruits showed a decline of $8.7 million or 50.9 percent 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 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 or 45.9 percent 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, Agrilink
Foods 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 on
the sale was approximately $61.2 million.
On January 29, 1999, Agrilink Foods sold the Adams brand peanut butter operation
to the J.M. Smucker Company. Agrilink Foods 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 $36.6 million to $67.4 million in
fiscal 1999 from $30.8 million in fiscal 1998. This increase is associated with
debt utilized to finance the DFVC and Agripac acquisitions and higher levels of
seasonal borrowings to fund changes in operating activities due to the increase
in the Cooperative's size.
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 received 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.
Tax Provision: The provision for taxes increased $16.9 million to $24.7 million
in fiscal 1999 from $7.8 million in fiscal 1998. Of this net increase, $25.2
million is attributable to the provision associated with the gains on sales 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. The
Cooperative's effective tax rate is impacted by the net proceeds distributed to
members and the non-deductibility of certain amounts of goodwill and certain
other intangible assets. 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 $18.0 million (net of
income taxes of $10.4 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 $8.4 million in fiscal 2000 decreased
$8.9 million from the fiscal 1999 balance of $17.3 million. This decrease
primarily results from variances within accounts payable and other accruals due
to the timing of liquidation of outstanding balances. This variance is offset by
an increase in inventories due to the decline in net sales resulting from lower
consumer demand and retail consolidation.
Net cash used in investing activities was significantly impacted by the DFVC and
Agripac acquisitions in fiscal 1999. The purchase of property, plant and
equipment increased $3.2 million to $27.0 million in fiscal 2000 from $23.8
million in fiscal 1999. The increase was primarily utilized to support
additional operating facilities acquired in conjunction with the DFVC and
Agripac acquisitions 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.
The financing activities in fiscal 1999 were significantly impacted by the DFVC
and Agripac acquisitions and the activities completed concurrently with the
acquisition to refinance existing indebtedness.
AGRILINK FOODS DEBT
New Credit Facility (Bank Debt): In connection with the DFVC Acquisition,
Agrilink Foods entered into the New Credit Facility with Harris Bank as
Administrative Agent, the Bank of Montreal as Syndication Agent, and the lenders
thereunder. The New Credit Facility consists of a $200 million Revolving Credit
Facility and a $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 Agrilink Foods' 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 interest
rate of interest applicable to the Term Loan Facility was 9.51 percent. In
addition, Agrilink Foods 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, Agrilink Foods 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, Agrilink Foods 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, Agrilink Foods' 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, scheduled principal
payments of $8.3 million were made on the Term Loan facilities during fiscal
2000.
Agrilink Foods' 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), and (iii) all of
Agrilink Foods' rights under the agreement to acquire DFVC (principally
indemnification rights) and the Marketing and Facilitation Agreement between
Agrilink Foods and Pro-Fac. Agrilink Foods' obligations under the New Credit
Facility are guaranteed by Pro-Fac (excluding AgriFrozen) and certain of
Agrilink Foods' subsidiaries.
The New Credit Facility contains customary covenants and restrictions on
Agrilink Foods' 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 are not
consolidated with Pro-Fac for purposes of determining compliance with the
covenants. In August of 1999, Agrilink Foods negotiated an amendment to the
original covenants. In conjunction with these amendments, Agrilink Foods has
incurred fees of approximately $2.6 million. This is being amortized over the
remaining life of the New Credit Facility. Pro-Fac and Agrilink Foods 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 used to consummate the DFVC Acquisition, Agrilink
Foods issued Senior Subordinated Notes ("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 Agrilink Foods,
subordinated in right of payment to certain other debt obligations of Agrilink
Foods (including Agrilink Foods' obligations under the New Credit Facility). The
New Notes are guaranteed by Pro-Fac and certain of Agrilink Foods' subsidiaries.
The New Notes contain customary covenants and restrictions on Agrilink Foods'
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. Agrilink Foods is in
compliance with all covenants, restrictions, and requirements under the New
Notes.
Subordinated Bridge Facility: To complete the DFVC Acquisition, Agrilink Foods
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.
Dean Foods Subordinated Promissory Note: As partial consideration for the DFVC
Acquisition, Agrilink Foods issued to Dean Foods the Dean Foods Subordinated
Promissory Note for $30 million aggregate principal amount due November 22,
2008. Interest on the 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 stated rates on the note are below market
value, Agrilink Foods 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 Agrilink Foods
of additional subordinated promissory notes identical to the note. Agrilink
Foods 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 notes may be prepaid at Agrilink
Foods' option without premium or penalty.
The note is expressly subordinate to the New Credit Facility and the New Notes
and contains no financial covenants. The note is guaranteed by Pro-Fac.
Senior Subordinated Notes - 12 1/4 Percent Due 2005 ("Old Notes"): In
conjunction with the DFVC Acquisition, Agrilink Foods repurchased $159,985,000
principal amount of its Old Notes, of which $160 million aggregate principal
amount was previously outstanding. Agrilink Foods 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. Agrilink Foods may repurchase the remaining Old Notes in the future
in open market transactions, privately negotiated purchases or otherwise.
AGRIFROZEN DEBT
CoBank Credit Facility(Bank Debt): In connection with the acquisition of
Agripac's frozen vegetable processing business, AgriFrozen entered a credit
facility with CoBank. The CoBank Credit Facility consists of a $30 million Term
Loan Facility and a Revolving Credit Facility both of which mature on June 29,
2002. The Revolving Credit Facility is $55 million for fiscal 2000 and $50
million in each year thereafter.
The CoBank Term Loan Facility bears interest, at AgriFrozen's option, at a fixed
or variable rate. The fixed rate represents the CoBank cost of funds plus 4.19
percent. The variable rate represents the CoBank "National Variable Rate," which
is a reference rate established by CoBank. In addition, AgriFrozen is obligated
to pay a commitment fee calculated at a rate of 0.50 percent per annum on the
amount by which the CoBank Revolving Credit Facility commitment exceeds the
greater of (i) $50 million or (ii) the average daily aggregate of advances.
There is an interest cap, which includes the fees on the CoBank Revolving Credit
Facility. The interest rate cap was $1.9 million for the initial period ending
June 26, 1999 and is $5.5 million for each subsequent fiscal year.
AgriFrozen's obligations under the CoBank Credit Facility are collateralized by
a first-priority lien on substantially all existing or after acquired assets,
tangible or intangible, of AgriFrozen.
AgriFrozen's obligations under the CoBank Credit Facility are not guaranteed by
Pro-Fac or Agrilink Foods and are expressly nonrecourse as to Pro-Fac and
Agrilink Foods.
The CoBank Credit Facility contains customary covenants and restrictions on
AgriFrozen'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, sale of assets, acquisitions and
transactions with affiliates and third parties (iii) limitations on dividends
and other distributions and (iv) limitations on capital expenditures and
administrative expenses. The CoBank Credit Facility also contains financial
covenants that are effective beginning in fiscal 2000. The covenants require
AgriFrozen to maintain a minimum level of EBITDA and a maximum leverage ratio.
AgriFrozen is in compliance with or has obtained waivers for its covenants,
restrictions, and requirements under the terms of the CoBank Credit Facility.
CoBank Subordinated Promissory Note: As partial consideration for the
acquisition of Agripac's frozen vegetable processing business, AgriFrozen issued
to CoBank the CoBank Subordinated Promissory Note for $12 million aggregate
principal amount. Interest on the note is payable quarterly in arrears
commencing February 22, 2004 through February 22, 2009 at a rate per annum of 5
percent, and at a rate of 7 percent thereafter. As the stated rates on the note
are below market value, AgriFrozen has imputed the appropriate discount
utilizing an effective interest rate of 13 percent. Interest accruing for the
period from February 22, 2004 through February 22, 2009 is payable in kind
through the issuance by AgriF