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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 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from to
------ ------
Registration Statement (Form S-4) Number 333-70143
AGRILINK FOODS, INC.
(Exact name of registrant as specified in its charter)
New York 16-0845824
(State of Incorporation) (IRS Employer Identification Number)
90 Linden Oaks, PO Box 20670, Rochester, NY 14602-0670
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (716) 383-1850
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the registrant:
NONE
Number of common shares outstanding at September 1, 2001:
Common Stock: 10,000
FORM 10-K ANNUAL REPORT - Fiscal Year 2001
AGRILINK FOODS, INC.
TABLE OF CONTENTS
PART I
PAGE
ITEM 1. Description of Business
Cautionary Statement on Forward-Looking Statements................................................... 3
General Development of Business...................................................................... 3
Narrative Description of Business ................................................................... 4
Financial Information About Industry Segments........................................................ 6
Packaging and Distribution........................................................................... 6
Trademarks........................................................................................... 6
Raw Material Sources................................................................................. 7
Environmental Matters................................................................................ 7
Seasonality of Business.............................................................................. 7
Practices Concerning Working Capital................................................................. 8
Significant Customers................................................................................ 8
Backlog of Orders.................................................................................... 8
Business Subject to Government Contracts............................................................. 8
Competitive Conditions............................................................................... 8
Market and Industry Data............................................................................. 9
New Products and Research and Development............................................................ 9
Employees............................................................................................ 9
ITEM 2. Description of Properties................................................................................ 9
ITEM 3. Legal Proceedings........................................................................................ 11
ITEM 4. Submission of Matters to a Vote of Security Holders...................................................... 11
PART II
ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters................................. 12
ITEM 6. Selected Financial Data.................................................................................. 12
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 13
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............................................... 23
ITEM 8. Financial Statements and Supplementary Data.............................................................. 24
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 57
PART III
ITEM 10. Directors and Executive Officers of the Registrant....................................................... 58
ITEM 11. Executive Compensation................................................................................... 60
ITEM 12. Security Ownership of Certain Beneficial Owners and Management........................................... 62
ITEM 13. Certain Relationships and Related Transactions........................................................... 62
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 64
Signatures............................................................................................... 69
PART I
ITEM 1. DESCRIPTION OF BUSINESS
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, Agrilink Foods, Inc. (the "Company" or "Agrilink Foods")
makes oral and written statements that may constitute "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995
(the "Act") or by the Securities and Exchange Commission ("SEC") in its rules,
regulations, and releases. The Company desires to take advantage of the "safe
harbor" provisions in the Act for forward-looking statements made from time to
time, including, but not limited to, the forward-looking information contained
in the Management's Discussion and Analysis of Financial Condition and Results
of Operations and other statements made in this Form 10-K and in other filings
with the SEC.
The Company cautions readers that any such forward-looking statements made by or
on behalf of the Company are based on management's current expectations and
beliefs but are not guarantees of future performance. Actual results could
differ materially from those expressed or implied in the forward-looking
statements. The factors that could impact the Company include:
* the impact of strong competition in the food industry;
* the impact of changes in consumer demand;
* the impact of weather on the volume and quality of raw product;
* the inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer acceptance;
* the continuation of the Company's success in integrating operations
(including the realization of anticipated synergies in operations and the
timing of any such synergies) and the availability of acquisition and
alliance opportunities;
* the Company's ability to achieve gains in productivity and improvements in
capacity utilization; and
* the Company's ability to service debt.
GENERAL DEVELOPMENT OF BUSINESS
Agrilink Foods, incorporated in New York in 1961, is a producer and marketer of
processed food products. The terms "Company" and "Agrilink Foods" mean "Agrilink
Foods, Inc." and its subsidiaries unless the context indicates otherwise. The
Company has four primary product lines including: vegetables, fruits, snacks,
and canned meals. The majority of each of the product lines' net sales is within
the United States. In addition, all of the Company's operating facilities,
excluding one in Mexico, are within the United States.
Agrilink Foods is a wholly-owned subsidiary of Pro-Fac Cooperative, Inc.
("Pro-Fac"). Pro-Fac is an agricultural cooperative corporation formed in 1960
under the Cooperative Corporation Laws of New York to process and market crops
grown by its members. The Cooperative conducts business under the name of
Agrilink. In addition, the board of directors of Agrilink Foods, Inc. and
Pro-Fac conduct joint meetings, coordinate their activities, and act on a
consolidated basis. Although Pro-Fac Cooperative, Inc. continues to be the legal
name 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 is presented as Agrilink for all other communications.
Pro-Fac and Agrilink Foods operate under the guidance of the Pro-Fac Marketing
and Facilitation Agreement (the "Pro-Fac Marketing Agreement").
The Pro-Fac Marketing Agreement provides for Pro-Fac to supply crops and
additional financing to Agrilink Foods, for Agrilink Foods to provide market and
management services to Pro-Fac, and for Pro-Fac to share in the profits and
losses of Agrilink Foods. Pro-Fac is required to reinvest at least 70 percent of
any additional patronage income in Agrilink Foods. To preserve the independence
of Agrilink Foods, the Pro-Fac Marketing Agreement also requires that certain
directors of Agrilink Foods be individuals who are not employees or shareholders
of, or otherwise affiliated with, Pro-Fac or the Company ("Disinterested
Directors") and requires that certain decisions, including the volume of and the
amount to be paid for crops received from Pro-Fac, be approved by the
Disinterested Directors. See further discussion of the relationship with Pro-Fac
in NOTE 2 to the "Notes to Consolidated Financial Statements."
Under the Pro-Fac Marketing Agreement, Agrilink Foods manages the business and
affairs of Pro-Fac and provides all personnel and administrative support
required. Pro-Fac pays Agrilink Foods a quarterly fee of $25,000 for these
services.
Acquisition of 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. (This note was subsequently sold to
Great Lakes Kraut Company, a joint venture of the Company, in December 2000.)
The Company had the right, exercisable until July 15, 1999, to require Dean
Foods, jointly with the Company, to treat the DFVC Acquisition as an asset sale
for tax purposes under Section 338(h)(10) of the Internal Revenue Code. On April
15, 1999, the Company paid $13.2 million to Dean Foods and exercised the
election.
After the DFVC Acquisition, DFVC was merged with and into the Company. DFVC was
one of the leading processors of vegetables in the United States, selling its
products under well-known brand names, such as Birds Eye, Birds Eye Voila!,
Freshlike and Veg-All, and various private labels. The Company believes that the
DFVC Acquisition strengthens its competitive position by: (i) enhancing its
brand recognition and market position, (ii) providing opportunities for cost
savings and operating efficiencies and (iii) increasing its product and
geographic diversification.
Concurrently with the DFVC Acquisition, Agrilink Foods refinanced its existing
indebtedness (the "Refinancing"), including its 12 1/4 percent Senior
Subordinated Notes due 2005 (the "Old Notes") and its then existing bank debt.
On August 24, 1998, Agrilink Foods commenced a tender offer (the "Tender Offer")
for all the Old Notes and a consent solicitation to certain amendments under the
indenture governing the Old Notes to eliminate substantially all the restrictive
covenants and certain events of default therein. Substantially all of the $160
million aggregate principal amount of the Old Notes were tendered and purchased
by Agrilink Foods for aggregate consideration of approximately $184 million,
including accrued interest of $2.9 million. Agrilink Foods also terminated its
then existing bank facility (including seasonal borrowings) and repaid $176.5
million, excluding interest owed and breakage fees outstanding thereunder. The
Company recognized an extraordinary item of $16.4 million (net of income taxes
and after dividing with Pro-Fac) in the first quarter of fiscal 1999 relating to
this refinancing.
In order to consummate the DFVC Acquisition and the Refinancing and to pay the
related fees and expenses, Agrilink Foods: (i) entered into a new credit
facility (the "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 "Notes"). See NOTE 8 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 Credit Facility and the Notes restrict the ability of Pro-Fac to amend the
Pro-Fac Marketing and Facilitation Agreement. The Credit Facility and Notes also
restrict the amount of dividends and other payments that may be made by the
Company to Pro-Fac.
NARRATIVE DESCRIPTION OF BUSINESS
The Company sells products in three principal categories: (i) "branded"
products, which are sold under various Company trademarks, (ii) "private label"
products, which are sold to grocers who in turn use their own brand names on the
products and (iii) "food service/industrial" products, which are sold to food
service institutions such as restaurants, caterers, bakeries, and schools. In
fiscal 2001, approximately 64 percent of the Company's net sales were branded
and the remainder divided between private label and food service/industrial. The
Company's branded products are listed under the "Trademarks" section of this
report. The Company's private label products include canned and frozen
vegetables, salad dressings, salsa, applesauce, fruit fillings and toppings,
Southern frozen vegetable specialty products, and frozen breaded, and battered
products which are sold to customers such as Albertson's, Fleming, Piggly
Wiggly, Safeway, Wal-Mart/Sam's, SuperValu, BJ's, Wegmans and Winn-Dixie. The
Company's food service/industrial products include salad dressings, fruit
fillings and toppings, canned and frozen vegetables, frozen Southern
specialties, frozen breaded and battered products, and canned and frozen fruit,
which are sold to customers such as Alliant Food Service, Gordon Food Service,
Pocahontas, PYA Monarch, Church's, Denny's, Food Service of America, KFC, MBM
Corporation, McDonald's, and SYSCO.
The Company has four primary product lines: vegetables, fruits, snacks, and
canned meals. A description of the Company's four primary product lines follows:
Vegetables: The vegetable product line consists of canned and frozen vegetables,
chili beans, and various other products. Additional products include value-added
items such as frozen vegetable blends, Southern-specialty products such as
black-eyed peas, okra, and Southern squash, frozen meal starters with pasta or
potatoes and sauce and complete frozen meals in a bag. Branded products within
the vegetable product line include Birds Eye, Birds Eye Voila!, Birds Eye Simply
Grillin', Freshlike, Veg-All, McKenzies, and Brooks Chili Beans. In fiscal 2001
vegetable product line net sales represented approximately 74 percent of the
Company's total net sales. Within this product line net sales of approximately
62 percent represented branded products, 16 percent represented private label
products and 22 percent represented food service/industrial products.
The Company is a major supplier of frozen vegetables for Sam's Club stores
across the United States and the exclusive supplier in a significant portion of
their Clubs. The Company is also a 50 percent partner with Flanagan Brothers,
Inc. in Great Lakes Kraut Company, LLC, a New York limited liability company.
This joint venture includes the Silver Floss and Krrrrisp Kraut brands.
On June 23, 2000, Agrilink Foods sold its pickle business based in Tacoma,
Washington to Dean Pickle and Specialty Products Company, subsidiary of Dean
Foods. This business included pickle, pepper, and relish products sold primarily
under the Nalley and Farman's brand names. Agrilink Foods will continue to
contract pack Nalley and Farman's pickle products for a period of two years,
beginning June 23, 2000, at the existing Tacoma processing plant which Agrilink
Foods will operate. Under a related agreement, the Cooperative will supply raw
cucumbers grown in the Northwestern United States to Dean Pickle and Specialty
Products Company, for a minimum 10-year period at market pricing.
On December 17, 1999, the Company sold its Cambria, Wisconsin processing
facility to Del Monte. This facility was primarily utilized for canning
operations.
On November 8, 1999, the Company sold its Midwest private label canned vegetable
business to Seneca Foods. Included in this transaction was the Arlington,
Minnesota facility. This sale did not include the Company's retail branded
canned vegetables Veg-All and Freshlike.
On September 24, 1998, Agrilink Foods acquired the DFVC frozen and canned
vegetable businesses. DFVC was one of the leading processors of vegetables in
the United States selling its products under well-known brands such as Birds
Eye, Freshlike, and Veg-All, and various private labels.
Fruits: The fruit product line consists of canned and frozen fruits including
fruit fillings and toppings. Branded products within the fruit category include
Comstock and Wilderness. The Company is a major supplier of branded and private
label fruit fillings to retailers and food service institutions such as
restaurants, caterers, bakeries, and schools. In fiscal 2001, fruit product line
net sales represented approximately 9 percent of the Company's total net sales.
Within this product line, net sales of approximately 53 percent represented
branded products, 17 percent represented private label products, and 30 percent
represented food service/industrial products.
Snacks: The snacks product line consists of several varieties of potato chips
including regular and kettle fried, as well as popcorn, cheese curls, snack
mixes, and other corn-based snack items. Kettle fried potato chips produce a
potato chip that is thicker and crisper than other potato chips. Items within
this product line are marketed primarily in the Pacific Northwest, Midwest and
Mid-Atlantic states. Branded products within the snacks category include Tim's
Cascade Chips, Snyder of Berlin, Husman, La Restaurante, Erin's, Beehive,
Pops-Rite, and Super Pop. In fiscal 2001 snacks net sales represented
approximately 8 percent of the Company's total net sales. Within this product
line, net sales of approximately 89 percent represented branded products, 9
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 began manufacturing and marketing this regional
brand through its Tim's Cascade Chips business in Auburn, Washington.
Effective July 21, 1998, the Company acquired J.A. Hopay Distributing Co., Inc.
("Hopay") of Pittsburgh, Pennsylvania. Hopay was a former distributor for Snyder
of Berlin products.
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. In fiscal 2001
canned meals net sales represented approximately 5 percent of the Company's
total net sales. Within this product line, net sales of approximately 79 percent
represented branded products, 18 percent represented private label products, and
3 percent represented food service/industrial products.
Other: The Company's other product line primarily represents salad dressings.
Branded products within this category include Bernstein's and Nalley. In fiscal
2001, other net sales represented approximately 4 percent of the Company's total
net sales.
On January 29, 1999, the Company sold the Adams brand peanut butter operations
to the J. M. Smucker Company.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The business of the Company is principally conducted in four industry segments:
vegetables, fruits, canned meals, and snacks. The financial statements for the
fiscal years ended June 30, 2001, June 24, 2000, and June 26, 1999, which are
included in this report, reflect the information relating to those segments for
each of the Company's last three fiscal years.
PACKAGING AND DISTRIBUTION
The food products produced by the Company are distributed to various consumer
markets in all 50 states. International sales account for a small portion of the
Company's activities. Vegetables, fruits, and canned meals are primarily sold
through food brokers who sell primarily to supermarket chains and various
institutional entities. Snack products are primarily marketed through
distributors (some of which are owned and operated by the Company) who sell
directly to retail outlets in the Midwest, Mid-Atlantic and Pacific Northwest.
Customer brand operations encompass the sale of products under private labels to
chain stores and under the controlled labels of buying groups. The Company has
developed central storage and distribution facilities that permit multi-item
single shipment to customers in key marketing areas.
The Company maintains a multiyear logistic agreement with American President
Lines ("APL") under which APL provides freight management, packaging and
labeling services, and distribution support to and from production facilities
owned by the Company in and around Coloma, Michigan.
The Company also maintains a long-term logistics agreement with Americold under
which Americold manages the Montezuma, Georgia frozen food distribution facility
and all frozen food transportation operations of Agrilink Foods in Georgia and
New York.
TRADEMARKS
The major brand names under which the Company markets its products are
trademarks of the Company. Such brand names are considered to be of material
importance to the business of the Company since they have the effect of
developing brand identification and maintaining consumer loyalty. There are
trademark registrations for substantially all of the trademarks. These trademark
registrations are of perpetual duration so long as they are periodically
renewed. It is the Company's intent to maintain its trademark registrations. The
major brand names utilized by the Company follow:
Product Line Brand Name
- ------------- ---------------------------------------------------------------------------------------------------------
Vegetables Birds Eye, Voila!, Birds Eye Simply Grillin'(1), Birds Eye Fresh(1), Freshlike, Veg-All, Brooks,
Chill-Ripe, Comstock, Greenwood, McKenzie's, McKenzie's Gold King, Southern Farms, Southland, 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, Squeezle Sauz(1), West Bay, Wilderness, Tropic Isle
Snacks Snyder of Berlin, Thunder Crunch, Tim's Cascade Chips, La Restaurante, Erin's, Husman, Naturally Good,
Beehive, Pops-Rite, Savoral, Super Pop, Flavor Destinations
Canned Meals Nalley, Mariners Cove, Riviera
Other Bernstein's, Nalley
(1) Application filed and U.S. federal registration is pending.
(2) Represent trademarks of Great Lakes Kraut Company, LLC. The Company owns a 50 percent interest in this joint venture.
RAW MATERIAL SOURCES
Of the commodity types supplied by Pro-Fac, approximately 60 percent was
received from members of the Cooperative. The Company also purchased on the open
market some crops of the same type and quality as those purchased from Pro-Fac.
Such open market purchases may occur at prices higher or lower than those paid
to Pro-Fac for similar products. See further discussion of the relationship with
Pro-Fac in NOTE 2 to the "Notes to Consolidated Financial Statements."
The vegetable and fruit portions of the business can be positively or negatively
affected by weather conditions nationally and the resulting impact on crop
yields. Favorable weather conditions can produce high crop yields and an
oversupply situation. This situation typically results in depressed selling
prices and reduced profitability on the inventory produced from that year's
crops. Excessive rain or drought conditions can produce low crop yields and a
shortage situation. This typically results in higher selling prices and
increased profitability. While the national supply situation controls the
pricing, the supply can differ regionally because of variations in weather.
The Company purchases all of its requirements for nonagricultural products,
including containers, in the open market. Although the Company has not
experienced any difficulty in obtaining adequate supplies of such items,
occasional periods of short supply of certain raw materials may occur.
ENVIRONMENTAL MATTERS
The disposal of solid and liquid waste material resulting from the preparation
and processing of foods and the emission of wastes and odors inherent in the
heating of foods during preparation are subject to various federal, state, and
local environmental laws and regulations. Such laws and regulations have had an
important effect on the food processing industry as a whole, requiring
substantially all firms in the industry to incur material expenditures for
modification of existing processing facilities and for construction of new waste
treatment facilities. The Company is also subject to standards imposed by
regulatory agencies pertaining to the occupational health and safety of its
employees. Management believes that continued measures to comply with such laws
and regulations will not have a material adverse effect upon its competitive
position or financial condition.
Among the various programs for the protection of the environment which have been
adopted by the Company to date, the most important for the operations of the
Company are the waste water discharge permit programs administered by the
environmental protection agencies in those states in which the Company does
business and by the federal Environmental Protection Agency. Under these
programs, permits are required for processing facilities which discharge certain
wastes into streams and other bodies of water, and the Company is required to
meet certain discharge standards in accordance with compliance schedules
established by such agencies. The Company has received permits for all
facilities for which permits are required. Each year the Company submits
applications for renewal permits as required for the facilities.
While the Company cannot predict with certainty the effect of any proposed or
future environmental legislation or regulations on its processing operations,
management of the Company believes that the waste disposal systems which are now
in operation or which are being constructed or designed are sufficient to comply
with all currently applicable laws and regulations.
The Company is cooperating with environmental authorities in remedying various
minor environmental matters at several of its plants. Such actions are being
conducted pursuant to procedures approved by the appropriate environmental
authorities at a cost that is not expected to be material.
Expenditures related to environmental programs and facilities have not had, and
are not expected to have, a material effect on the earnings of the Company. In
fiscal 2001, total capital expenditures of the Company were $25.1 million of
which approximately $0.6 million was devoted to the construction of
environmental facilities. The Company estimates that environmental capital
expenditures will be approximately $0.8 million for the 2002 fiscal year.
However, there can be no assurance that expenditures will not be higher.
SEASONALITY OF BUSINESS
From a sales point of view, the business of the Company is not highly seasonal,
since the demand for its products is fairly constant throughout the year.
Exceptions to this general rule include some products that have higher sales
volume in the cool weather months (such as canned and frozen fruits and
vegetables, chili, and fruit fillings and toppings), and others that have higher
sales volume in the warm weather months (such as potato chips and salad
dressings). Since many of the raw materials processed by the Company are
agricultural crops, production of these products is predominantly seasonal,
occurring during and immediately following the harvest seasons of such crops.
PRACTICES CONCERNING WORKING CAPITAL
The Company must maintain substantial inventories throughout the year of
finished products produced from seasonal raw materials. These inventories are
generally financed through seasonal borrowings. The Company's Revolving Credit
Facility is used primarily for seasonal borrowings, the amount of which
fluctuates during the year. Both the maintenance of substantial inventories and
the practice of seasonal borrowing are common to the food processing industry.
SIGNIFICANT CUSTOMERS
The Company's principal industry segments are not dependent upon the business of
a single customer or a few customers. The Company does not have any customers to
whom sales are made in an amount which equals 10 percent or more of the
Company's net sales.
BACKLOG OF ORDERS
Backlog of orders has not historically been significant in the business of the
Company. Orders are filled shortly after receipt from inventories of packaged
and processed foods.
BUSINESS SUBJECT TO GOVERNMENTAL CONTRACTS
No material portion of the business of the Company is subject to renegotiation
of contracts with, or termination by, any governmental agency.
COMPETITIVE CONDITIONS
All products of the Company, particularly branded products, compete with those
of other national and major regional food processors under highly competitive
conditions. The principal methods of competition in the food industry are a
readily available and broad line of products, product quality, price, and
marketing and sales promotion.
Quality of product and uniformity of quality are important methods of
competition. The Company's relationship with Pro-Fac gives the Company local
sources of supply, thus allowing the Company to exercise control over the
quality and uniformity of much of the raw product that it purchases. The members
of Pro-Fac generally operate relatively large production operations with
emphasis on mechanized growing and harvesting techniques. This factor is also an
advantage in producing uniform, high-quality food products.
The Company's pricing is generally competitive with that of other food
processors for products of comparable quality. The branded products of the
Company are marketed under national and regional brands. In fiscal 2001,
marketing programs for national brands focused primarily on Birds Eye Voila!,
Birds Eye Baby Vegetables, and Birds Eye Simply Grillin'. National advertising
campaigns can include television, magazines, coupons, and in-store promotions.
Marketing programs for regional brands are focused on local tastes and
preferences as a means of developing consumer brand loyalty. Regional
advertising campaigns included magazines, coupons, and in-store promotions.
Although the relative importance of the above factors may vary between
particular products or customers, the above description is generally applicable
to all of the products of the Company in the various markets in which they are
distributed.
Profit margins for fruits and vegetables are subject to industry supply and
demand fluctuations, attributable to changes in growing conditions, acreage
planted, inventory carryover, and other factors. The Company has endeavored to
protect against changing growing conditions through geographical expansion of
its sources of supply.
The percentage of sales under brand names owned and promoted by the Company
amount to approximately 64 percent; food service/industrial represent
approximately 20 percent; and private label sales currently represent
approximately 16 percent.
It is difficult to estimate the number of competitors in the markets served by
the Company. Nearly all products sold by the Company compete with the nationally
advertised brands of leading food processors, including Del Monte, Green Giant,
Heinz, Frito-Lay, Kraft, and similar major brands, as well as with the branded
and private label products of a number of regional processors, many of which
operate only in portions of the marketing area served by the Company.
MARKET AND INDUSTRY DATA
Unless otherwise stated in this report, industry and market share data used
throughout this Form 10-K was derived from industry sources believed by the
Company to be reliable, including information provided by Information Resources,
Inc. Such data was obtained or derived from consultants' reports and industry
publications. Consultants' reports and industry publications generally state
that the information contained therein has been obtained from sources believed
to be reliable, but that the accuracy and completeness of such information is
not guaranteed. The Company has not independently verified such data and makes
no representation to its accuracy.
NEW PRODUCTS AND RESEARCH AND DEVELOPMENT
The Company operates a technical center located in Green Bay, Wisconsin that is
responsible for new product development, quality assurance, and engineering.
Approximately 27 employees are employed within this facility. The Company
follows a four-stage new product development process as follows: screening,
feasibility, development, and commercialization. This new product development
process ensures input from consumers, customers, and internal functional areas
before a new product is brought to market.
The Company also focuses on the development of related products or modifications
of existing products for the Company's brands and customized products for the
Company's private label and food service businesses.
The amount expensed during the last three fiscal years on Company-sponsored and
customer-sponsored research activities relating to the development of new
products or the improvement of existing products has not been material.
During fiscal 1999, Birds Eye Voila!, a frozen all-in-one meal product that
includes vegetables, starch (pasta or potatoes), seasonings, and bite sized
pieces of protein (chicken, beef, turkey, or shrimp), in a variety of flavors,
was introduced. Fiscal 2001 net sales for Birds Eye Voila! were approximately
$108.1 million and fiscal 2000 net sales for Birds Eye Voila! were $104.5
million. During fiscal 2001, the Company introduced Birds Eye Simply Grillin', a
preseasoned blend of top quality Birds Eye vegetables in a foil tray. Net sales
for Simply Grillin' were approximately $11.3 million in fiscal 2001. A national
advertising campaign for Simply Grillin' has been initiated during the first
quarter of fiscal 2002.
EMPLOYEES
As of June 30, 2001, the Company had 4,685 full-time employees, of whom 3,401
were engaged in production and the balance in management, sales and
administration. As of that date, the Company also employed approximately 3,360
seasonal and other part-time employees, almost all of whom were engaged in
production. Most of the production employees are members of various labor
unions. The Company believes its current relationship with its employees is
good.
ITEM 2. DESCRIPTION OF PROPERTIES
All plants, warehouses, office space and other facilities used by the Company in
its business are either owned by Agrilink Foods or one of its subsidiaries or
leased from unaffiliated third parties. All of the properties owned by Agrilink
Foods are subject to mortgages in favor of its primary lender. In general, the
properties include offices, processing plants and warehouse space. Some
processing plants are located in rural areas that are convenient for the
delivery of crops. The Company also has dispersed warehouse locations to
facilitate the distribution of finished products. Agrilink Foods believes that
its facilities are in good condition and suitable for the operations of the
Company.
The Company's Alton, New York property is held for sale.
The following table describes all material facilities leased or owned by the
Company (other than the properties held for sale, certain public warehouses
leased by the Company from unaffiliated third parties from time to time, and
facilities owned by the Company's joint venture, Great Lakes Kraut Company,
LLC). Except as otherwise noted, each facility set forth below is owned by the
Company.
FACILITIES UTILIZED BY THE COMPANY
Type of Property (By Product Line) Location Square Feet
- ---------------------------------- -------- -----------
Vegetables:
Warehouse Sodus, MI 243,138
Freezing plant, warehouse, dry storage, and office Barker, NY 123,600
Freezing plant Bergen, NY 138,554
Type of Property (By Product Line) Location Square Feet
- ---------------------------------- -------- -----------
Vegetables (Continued):
Cold storage and repackaging plant and public storage warehouse Brockport, NY 404,410
Canning plant and warehouse, freezing plant Oakfield, NY 263,410
Freezing plant, cold storage, repackaging plant and office Montezuma, GA 591,300
Freezing plant, cold storage, and office Alamo, TX 114,446
Freezing plant, cold storage, and office Bridgeville, DE 104,383
Freezing plant and repackaging plant Celaya, Mexico 318,620
Freezing plant and distribution center Darien, WI 348,800
Freezing plant, repackaging plant and warehouse Fairwater, WI 178,298
Repackaging plant and distribution center Fulton, NY 263,268
Freezing and canning plant and office Green Bay, WI 492,446
Freezing plant and repackaging plant(1) Oxnard, CA 39,082
Repackaging plant(1) San Antonio, TX 20,445
Freezing plant and warehouse Uvalde, TX 146,625
Freezing plant, repackaging plant and warehouse Watsonville, CA 207,600
Freezing plant, repackaging plant and warehouse Waseca, MN 258,475
Labeling plant and distribution center(1) Fond du Lac, WI 330,000
Receiving and grading station (1) Mount Vernon, WA 110,806
Receiving and grading station (1) Aurora, WA 6,800
Warehouse, tank yards, and office building Enumclaw, WA 87,313
Plant, warehouse, and tank yards Tacoma, WA 295,468
Fruits:
Canning plant and warehouse Red Creek, NY 153,076
Canning plant and warehouse Fennville, MI 350,000
Canning plant and warehouse Lawton, MI 142,000
Snacks:
Manufacturing plant Ridgway, IL 50,000
Plant, warehouse, distribution center, and office Algona, WA 107,000
Plant, warehouse, and office Berlin, PA 190,225
Plant, warehouse, distribution center, and office(1) Auburn, WA 23,000
Plant, warehouse and distribution center Auburn, WA 27,442
Plant, warehouse, and office 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
Distribution center(1) Canal Fulton, OH 14,000
Distribution center(1) Altoona, PA 10,000
Distribution center(1) Ashland, KY 10,760
Distribution center(1) Bristol, TN 11,500
Distribution center(1) Knoxville, TN 12,500
Distribution center(1) Dayton, OH 9,200
Canned Meals:
Canning plant, warehouse and distribution center Tacoma, WA 313,488
Other:
Office building, manufacturing plant and warehouse Tacoma, WA 372,164
Parking lot and yards (1) Tacoma, WA 305,470
Office Building - Fuller Building (1) Tacoma, WA 60,000
Headquarters office (1) Rochester, NY 76,372
(1) Leased from third parties, although certain related equipment is owned by
the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to legal proceedings from time to time in the normal
course of its business. In the opinion of management, any liability that the
Company might incur upon the resolution of these proceedings will not, in the
aggregate, have a material adverse effect on the Company's business, financial
condition, and results of operations. Further, no such proceedings are known to
be contemplated by governmental authorities. The Company maintains general
liability insurance coverage in amounts deemed to be adequate by management.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
All of the capital stock of the Company is owned by Pro-Fac Cooperative, Inc.
ITEM 6. SELECTED FINANCIAL DATA
Agrilink Foods, Inc.
FIVE YEAR SELECTED FINANCIAL DATA
(Dollars in Thousands)
Fiscal Year Ended June
------------------------------------------------------------------------
2001(a) 2000 1999(b) 1998 1997
------------ ------------ ----------- ----------- -----------
Consolidated Summary of Operations:
Net sales $ 1,303,311 $ 1,232,262 $ 1,261,880 $ 742,161 $ 755,464
Cost of sales (928,806) (857,319) (903,891) (546,578) (563,722)
----------- ----------- ----------- -------- -----------
Gross profit 374,505 374,943 357,989 195,583 191,742
Selling, administrative, and general expenses (295,046) (281,286) (289,923) (141,837) (145,392)
Gains on sales of assets 0 6,635 64,734 0 3,565
Restructuring 0 0 (5,000) 0 0
Income from joint venture 1,779 2,418 2,787 1,893 0
----------- ----------- ----------- ----------- -----------
Operating income before dividing with Pro-Fac 81,238 102,710 130,587 55,639 49,915
Interest expense (79,775) (78,054) (65,339) (30,633) (35,030)
Amortization of debt issue costs associated with the
Bridge Facility 0 0 (5,500) 0 0
----------- ----------- ----------- ----------- -----------
Pretax income before dividing with Pro-Fac and
before extraordinary item and cumulative effect of
an accounting change 1,463 24,656 59,748 25,006 14,885
Pro-Fac share of income before extraordinary
item and cumulative effect of an accounting change (732) (12,328) (1,658) (12,503) (7,442)
----------- ----------- ----------- ----------- -----------
Income before taxes, extraordinary item, and
cumulative effect of an accounting change 731 12,328 58,090 12,503 7,443
Tax provision (660) (5,904) (24,770) (5,689) (3,668)
----------- ------------ ----------- ----------- -----------
Income before extraordinary item and
cumulative effect of an accounting change 71 6,424 33,320 6,814 3,775
Extraordinary item relating to the early extinguishment
of debt (net of income taxes and after dividing
with Pro-Fac) 0 0 (16,366) 0 0
Cumulative effect of an accounting change (net of
income taxes and after dividing with Pro-Fac) 0 0 0 0 1,747
----------- ----------- ----------- ----------- -----------
Net income $ 71 $ 6,424 $ 16,954 $ 6,814 $ 5,522
=========== =========== =========== =========== ===========
Balance Sheet Data:
Working capital $ 261,304 $ 254,094 $ 225,363 $ 108,075 $ 84,060
Ratio of current assets to current liabilities 2.3:1 2.2:1 2.0:1 1.9:1 1.8:1
Total assets $ 1,070,271 $ 1,098,887 $ 1,110,061 $ 568,971 $ 542,561
Long-term debt and senior-subordinated notes
(excludes current portion) $ 631,128 $ 644,712 $ 668,316 $ 229,937 $ 222,829
Other Statistics:
Average number of employees:
Regular 4,627 5,510 6,040 3,620 3,507
Seasonal 2,931 2,152 2,838 1,125 1,068
(a) Consists of 53 weeks.
(b) Includes nine months of operating results from the September 28, 1998 DFVC
Acquisition.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to outline the significant reasons for changes
in the Consolidated Statement of Operations from fiscal 1999 through fiscal
2001.
Agrilink Foods, Inc. ("Agrilink Foods" or the "Company") has four primary
product lines including: vegetables, fruits, snacks and canned meals. The
majority of each of the product lines' net sales are within the United States.
In addition, all of the Company's operating facilities, excluding one in Mexico,
are within the United States.
The vegetable product line consists of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable
category include Birds Eye, Birds Eye Voila!, Birds Eye Simply Grillin',
Freshlike, Veg-All, McKenzies, and Brooks Chili Bean. The fruit product line
consists of canned and frozen fruits including fruit fillings and toppings.
Branded products within the fruit category include Comstock and Wilderness. The
snack product line consists of potato chips, popcorn and other corn-based snack
items. Branded products within the snack category include Tim's Cascade Chips,
Snyder of Berlin, Husman, La Restaurante, Erin's, Beehive, Pops-Rite, Super Pop,
and Flavor Destinations. The canned meal product line includes canned meat
products such as chilies, stews, soups, and various other ready-to-eat prepared
meals. Branded products within the canned meal category include Nalley. The
Company's other product line primarily represents salad dressings. Brand
products within this category include Bernstein's and Nalley.
The following tables illustrate the Company's results of operations by product
line for the fiscal years ended June 30, 2001, June 24, 2000, and June 26, 1999,
and the Company's total assets by product line at June 30, 2001, June 24, 2000,
and June 26, 1999.
EBITDA1,2
(Dollars in Millions)
Fiscal Years Ended
-----------------------------------------------------------------------------------
June 30, 2001 June 24, 2000 June 26, 1999
-------------------- --------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
----- ----- ------ ----- ------- -----
Vegetables 85.9 70.5 93.8 69.4 64.2 61.7
Fruits 14.1 11.6 15.7 11.6 10.8 10.4
Snacks 9.4 7.7 9.8 7.3 5.8 5.5
Canned Meals 8.1 6.7 8.6 6.4 8.4 8.1
Other 4.3 3.5 6.5 4.8 5.3 5.1
----- ----- ------ ----- ----- ------
Continuing segments 121.8 100.0 134.4 99.5 94.5 90.8
Businesses sold3 0.0 0.0 0.7 0.5 9.6 9.2
----- ----- ------ ----- ----- ------
Total 121.8 100.0 135.1 100.0 104.1 100.0
===== ===== ====== ===== ===== ======
1 Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
is defined as the sum of pretax income before dividing with Pro-Fac and
before extraordinary item, interest expense, amortization of debt issue
costs associated with the Bridge Facility, depreciation and amortization of
goodwill and other intangibles.
EBITDA should not be considered as an alternative to net income or cash
flows from operations or any other generally accepted accounting principles
measure of performance or as a measure of liquidity.
EBITDA is included herein because the Company believes EBITDA is a
financial indicator of a company's ability to service debt. EBITDA as
calculated by Agrilink Foods may not be comparable to calculations as
presented by other companies.
2 Excludes the gains on sales of assets, restructuring charges, and the
extraordinary item relating to the early extinguishment of debt. See NOTES
1 and 3 to the "Notes to Consolidated Financial Statements."
3 Represents the operating results of operations sold. See NOTE 3 to the
"Notes to Consolidated Financial Statements."
Net Sales
(Dollars in Millions)
Fiscal Years Ended
-----------------------------------------------------------------------------------
June 30, 2001 June 24, 2000 June 26, 1999
-------------------- --------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
------- ----- -------- ------ ------- ------
Vegetables 970.2 74.5 836.7 67.9 769.5 61.0
Fruits 120.4 9.2 114.4 9.3 115.8 9.2
Snacks 97.9 7.5 90.9 7.4 91.4 7.2
Canned Meals 64.2 4.9 62.3 5.1 66.4 5.3
Other 50.6 3.9 56.0 4.5 74.8 5.9
------- ------ ------- ------ ------- ------
Continuing segments 1,303.3 100.0 1,160.3 94.2 1,117.9 88.6
Businesses sold1 0.0 0.0 72.0 5.8 144.0 11.4
------- ------ ------- ------ ------- ------
Total 1,303.3 100.0 1,232.3 100.0 1,261.9 100.0
======= ====== ======= ====== ======= ======
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 30, 2001 June 24, 2000 June 26, 1999
-------------------- --------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
---- ----- ----- ------ ----- ------
Vegetables 55.7 68.6 65.4 68.0 43.9 61.9
Fruits 11.4 14.1 13.9 14.4 8.4 11.8
Snacks 5.6 6.9 6.7 7.0 3.3 4.7
Canned Meals 6.6 8.1 6.7 7.0 6.5 9.2
Other 1.9 2.3 4.6 4.8 3.7 5.2
---- ----- ----- ----- ----- ------
Continuing segments 81.2 100.0 97.3 101.2 65.8 92.8
Businesses sold2 0.0 0.0 (1.2) (1.2) 5.1 7.2
---- ----- ----- ----- ----- ------
Total3 81.2 100.0 96.1 100.0 70.9 100.0
==== ===== ===== ===== ===== ======
1 Excludes the gains on sales of assets, restructuring charges, and the
extraordinary item relating to the early extinguishment of debt. See NOTES
1 and 3 to the "Notes to Consolidated Financial Statements."
2 Represents the operating results of 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 $79.8 million, $78.1
million, and $70.8 million, for the years ended June 30, 2001, June 24,
2000, and June 26, 1999, respectively, results in pretax income before
dividing with Pro-Fac and before extraordinary item. Management does not
allocate interest expense to product lines when evaluating product line
performance.
Total Assets
(Dollars in Millions)
Fiscal Years Ended
-----------------------------------------------------------------------------------
June 30, 2001 June 24, 2000 June 26, 1999
-------------------- --------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
------- ----- ------- ------ ------ ------
Vegetables 846.5 79.1 876.3 79.7 885.2 79.7
Fruits 72.7 6.8 80.0 7.2 91.1 8.3
Snacks 47.6 4.4 44.0 4.0 41.5 3.7
Canned Meals 45.7 4.2 45.9 4.2 46.7 4.2
Other 57.6 5.4 52.4 4.8 43.6 3.9
------- ----- ------- ----- ------- ------
Continuing segments 1,070.1 99.9 1,098.6 99.9 1,108.1 99.8
Businesses sold1 0.0 0.0 0.0 0.0 1.1 0.1
Assets held for sale 0.1 0.1 0.3 0.1 0.9 0.1
------- ----- ------- ----- ------- ------
Total 1,070.2 100.0 1,098.9 100.0 1,110.1 100.0
======= ===== ======= ===== ======= ======
1 Includes the assets of the operations sold. See NOTE 3 to the "Notes to
Consolidated Financial Statements."
CHANGES FROM FISCAL 2000 TO FISCAL 2001
During fiscal 2001, net sales from continuing segments showed an increase of
$143.0 million, or 12.3 percent. Approximately $90.6 million of the net sales
improvement was attributable to an increase in frozen vegetable net sales, and
an additional $44.1 million was associated with various co-pack agreements. The
Company's overall market share, for the 52-week period ending June 24, 2001, for
frozen vegetables approximated 31.4 percent and represented an improvement of
1.6 points over the prior year. The Company's overall market share includes
branded retail unit sales, as reported by Information Resources, Inc., and
management's estimate of the Company's private label share based upon factory
shipments.
Excluding the gain on sales of assets (net of tax), net income, however,
decreased $2.6 million from fiscal 2000. While the Company continues to benefit
from a significant improvement in net sales, it has also experienced a
significant increase in its manufacturing costs. Increased manufacturing costs
were primarily associated with significantly higher freight and utility costs
throughout the nation and lower than anticipated crop intake in the eastern part
of the country. To mitigate the increase in manufacturing costs, management has
focused efforts on controlling warehousing expenses, increased branded pricing,
acquired lower cost inventory from the lender to AgriFrozen, and initiated
reductions in selling, administrative, and general expenses. Management actions
have included reductions in certain marketing programs and various employee
incentive programs. Management continues to focus its efforts on cost savings
initiatives to reduce its overall spending.
Management also utilizes an evaluation of EBITDA from continuing segments as a
measure of performance. Excluding businesses sold, EBITDA from continuing
segments decreased $12.6 million, or 9.4 percent, to $121.8 million in fiscal
2001 from $134.4 million in fiscal 2000. A detailed accounting of the
significant reasons for changes in net sales and EBITDA by product line follows.
Vegetable net sales increased $133.5 million or 16.0 percent. Significant
components associated with this growth include: (a) an improvement in net sales
within the brand business of approximately $58.2 million; and (b) increases in
net sales within the nonbranded business of approximately $75.3 million.
Within the branded businesses, the increase in Birds Eye frozen vegetables net
sales accounted for approximately $42.0 million of the $58.2 million increase.
$27.4 million was a result of volume improvements and $14.6 million was due to
pricing initiatives announced in the second half of fiscal 2001. For the 52-week
period ending June 24, 2001, the total frozen vegetable category retail unit
sales, as reported by Information Resources, Inc., were down slightly, 3.1
percent, while the Birds Eye brand retail unit sales for the same time period
increased 1.9 percent. Unit sales of the Company's largest competitor, as
reported by Information Resources, Inc., decreased 9.1 percent during this same
time period. Net sales for the Birds Eye Voila! product line increased $3.6
million over the prior year, while Voila! remained the leading brand with 32.7
percent of the home meal replacement category.
In addition, in the fourth quarter of fiscal 2001, the Company initiated a
national launch of its most recent new product, Simply Grillin'. Simply Grillin'
is a preseasoned blend of top quality grilled Birds Eye vegetables in a foil
tray. Net sales associated with this
new product were $11.3 million. Marketing and promotional spending incurred with
this introduction amounted to $5.9 million. Management estimates that Simply
Grillin' will achieve $35 million of net sales in fiscal 2002.
The Company's non-branded vegetable business experienced volume increases in
private label and food service frozen vegetables which accounted for $27.1
million of net sales growth. The $27.1 million of net sales growth resulted from
the following: (a) increases in Agrilink Foods' recurring private label and food
service business of $25.0 million; (b) net sales increases of $26.2 million
associated with the inventory purchased from AgriFrozen Foods; (c) offset by
reductions of $24.1 million associated with the conversion of a major club store
customer from a private label to brand product line.
Further, various co-pack agreements for canned vegetables in the Midwest and for
pickles in the Northwest accounted for an additional $44.1 million of the
nonbranded net sales increase. While these co-pack agreements typically yield
lower margins than the Company's other product lines, they do provide for
greater utilization of manufacturing facilities.
Although vegetables experienced a significant increase in net sales, EBITDA
declined $7.9 million. The reduction in EBITDA was primarily driven by increased
manufacturing costs as discussed above.
Net sales for the fruit product line increased $6.0 million, or 5.2 percent,
while EBITDA decreased $1.6 million, or 10.2 percent. The net sales improvement
was led by increases in private label net sales of $4.7 million and additional
co-pack agreements resulting in net sales increases of $1.8 million. Modest
declines were highlighted in all other categories. Increased manufacturing costs
and continued competitive pressures within the applesauce category, however,
negatively impacted EBITDA.
Net sales for the snack product line increased $7.0 million, or 7.7 percent.
Improvements in net sales within the potato chip category increased $8.4
million, while the popcorn product line decreased $1.4 million. The increases
within the potato chip category were associated with geographic expansion. The
improvements in EBITDA associated with growth in the potato chip category
amounted to $1.4 million, while declines in the popcorn category negatively
impacted EBITDA by approximately $1.8 million. The popcorn category continues to
be negatively impacted by competitive pressures and changes in product mix.
Net sales for canned meals increased $1.9 million, or 3.0 percent, while EBITDA
decreased $0.5 million, or 5.8 percent. EBITDA decreased as a result of changes
in product mix and increased manufacturing costs associated with raw
ingredients, including beef and utility increases experienced in the Northwest.
All of the Company's canned meal products are produced at the Company's Tacoma,
Washington location.
The other product line net sales, primarily represented by salad dressings,
decreased $5.4 million, or 9.6 percent, while EBITDA decreased $2.2 million, or
33.8 percent. The majority of the net sales decline was associated with the loss
of a private label customer. The reduction in EBITDA was associated with both
the decline in unit volume associated with reductions in private label volume
and increases in manufacturing costs associated with packaging ingredients and
utility increases experienced in the Northwest. All of the Company's dressing
products are produced at the Company's Tacoma, Washington location.
Operating Income: Operating income from continuing segments decreased from $97.3
million in fiscal 2000 to $81.2 million in fiscal 2001. This represents a
decrease of $16.1 million or 16.5 percent. Declines in operating income within
the vegetable, fruit, snacks, canned meals, and all other product lines were
$9.7 million, $2.5 million, $1.1 million, $0.1 million and $2.7 million,
resepectively. Significant variances, as highlighted above, primarily result
from increased manufacturing costs, competitive pressures, and changes in
product mix.
Gain on Sales of Assets: On June 23, 2000, the Company sold its pickle business
based in Tacoma, Washington to Dean Pickle and Specialty Products. This business
included pickle, pepper, and relish products sold primarily under the Nalley and
Farman's brand names. The Company received proceeds of approximately $10.3
million which were applied to bank loans ($4.0 million of which was applied to
the Term Loan Facility and $6.3 million of which was applied to the Company's
Revolving Credit Facility). A gain of approximately $4.3 million was recognized
on this transaction.
On July 21, 2000, the Company sold the machinery and equipment utilized in
production of pickles and other related products to Dean Pickle and Specialty
Products. No significant gain or loss was recognized on this transaction. The
proceeds of approximately $5.0 million were applied to bank loans.
This transaction did not include any other products carrying the Nalley brand
name. Agrilink Foods continues to contract pack Nalley and Farman's pickle
products for a period of two years, beginning June 23, 2000, at the existing
Tacoma processing plant which Agrilink Foods will operate. Under a related
agreement, the Cooperative will supply raw cucumbers grown in the Northwestern
United States to Dean Pickle and Specialty Products for a minimum 10-year period
at market pricing.
On December 17, 1999 Agrilink Foods announced they had completed the sale of the
Company's Cambria, Wisconsin processing facility to Del Monte. The Company
received proceeds of approximately $10.5 million from the sale of its Cambria,
Wisconsin facility which were applied to bank loans. A gain of approximately
$2.3 million was recognized on this transaction. The sale also included an
agreement for Del Monte to produce a portion of Agrilink Foods' product needs
during the 2000 packing season.
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. The decrease of $0.6 million over the
prior year is attributable to a volume decline, resulting competitive pressures,
and an increase in manufacturing costs. See further discussion at NOTE 5 to the
"Notes to Consolidated Financial Statements."
Interest Expense: Interest expense increased $1.7 million from the prior year to
$79.8 million. The increase is the result of an increase in the weighted average
interest rate of 25 basis points resulting from both amendments to the Company's
credit facility during September 2000 and general interest rate increases on
unhedged borrowings experienced in the first six months of fiscal 2001. In
addition, interest expense was negatively impacted by the amortization of fees
paid in conjunction with the September 2000 amendments to the Company's credit
facility. The increases were offset by lower average outstanding balances during
the fiscal year of approximately $32.8 million, primarily due to required
repayments and mandatory prepayments of short-term debt related to the sale of
the private label canned vegetable business and pickle business.
Pro-Fac Share of Income Before Extraordinary Item: The Company's contractual
relationship with Pro-Fac is defined in the Pro-Fac Marketing Agreement (the
"Agreement"). Under the Agreement, in any year in which the Company has earnings
on products which were processed from crops supplied by Pro-Fac ("Pro-Fac
products"), the Company pays to Pro-Fac, as additional patronage income, 90
percent of such earnings, but in no case more than 50 percent of all pretax
earnings of the Company. In years in which the Company has losses on Pro-Fac
products, the Company reduces the commercial market value it would otherwise pay
to Pro-Fac by 90 percent of such losses, but in no case by more than 50 percent
of all pretax losses of the Company. Earnings and losses are determined at the
end of the fiscal year, but are accrued on an estimated basis during the year.
In fiscal 2001, 90 percent of earnings on patronage products exceeded 50 percent
of all pretax earnings of the Company. Accordingly, the Pro-Fac share of income
has been recognized at a maximum of 50 percent of pretax earnings of the
Company.
Tax Provision: The tax provision of $0.7 million in fiscal 2001 represents a
reduction of $5.2 million from the prior year as a result of the change in
earnings before taxes. In fiscal 2000, the sale of certain intangibles in
conjunction with the pickle sale negatively impacted the Company's effective tax
rate. The Company's effective tax rate has historically been negatively impacted
by the non-deductibility of certain amounts of goodwill. A further discussion of
tax matters is included at NOTE 9 to the "Notes to Consolidated Financial
Statements."
CHANGES FROM FISCAL 1999 TO FISCAL 2000
During fiscal 2000, total net sales decreased $29.6 million or 2.3 percent, to
$1,232.3 million from $1,261.9 million in fiscal 1999. Excluding businesses
sold, net sales increased by $42.4 million, or 3.8 percent, to $1,160.3 million
from $1,117.9 million in fiscal 1999. The Company's overall market share, for
the 52-week period ending June 25, 2000, for frozen vegetables approximated 29.8
percent. The Company's overall market share includes branded retail unit sales,
as reported by Information Resources, Inc., and management's estimate of the
Company's private label share based upon factory shipments.
Net income for fiscal 2000 of $6.4 million, however, represented a $10.6 million
decrease over fiscal 1999 net income of $17.0 million. Comparability of net
income is, however, difficult because fiscal 1999 was impacted by gains on sales
of assets, a restructuring charge, the amortization of debt issue costs
associated with the Bridge Facility, and the extraordinary item relating to the
early extinguishment of debt. In addition, fiscal 2000 results reflect 12 months
of interest expense versus 9 months in the prior year for the additional debt
associated with the DFVC Acquisition which occurred on September 24, 1998.
Accordingly, management believes, to summarize results, an evaluation of EBITDA
by continuing business segments is appropriate. Overall EBITDA from continuing
segments increased $39.9 million, or 42.2 percent, to $134.4 million. A detailed
accounting of the significant reasons for changes in net sales and EBITDA by
product line follows.
Vegetable net sales increased $67.2 million or 8.7 percent. The vegetable
product line accounts for a $29.6 million increase of the overall EBITDA. These
improvements are impacted by both the results of the DFVC Acquisition, including
its impact on the percentage of branded sales for the Company and the reduction
in product costs resulting from synergistic savings. As a result of the date of
the DFVC Acquisition, the operating results of the acquisition have been
included for 12 months in fiscal 2000 and for 9 months in fiscal 1999. In
addition, as anticipated at the acquisition date, a greater percentage of the
Company's sales now come from
its branded products. The 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 $90.2 million. The Company's
branded products yield a higher margin than its private label and food service
categories and the EBITDA improvement associated with this increase in branded
sales was approximately $12.6 million. The Company's earnings also benefited
from a reduction in product costs during fiscal 2000 primarily associated with
the synergistic savings achieved from the DFVC Acquisition and other
consolidation efforts. Specifically, the Company benefited from the insourcing
of product previously purchased from outside suppliers, staffing reductions, and
shipping consolidations.
Market conditions within the frozen vegetable category caused by lower consumer
demand and retail consolidation did, however, offset the increases outlined
above and accounted for approximately $23.0 million in net sale declines.
According to industry data, for the 52-week period ended June 25, 2000, there
was an overall decrease in the total frozen vegetable category of 4.0 percent in
unit volume, and for the same 52-week period, the decrease in the frozen
vegetable private label category was 4.7 percent in unit volume.
Net sales from the fruit product line decreased $1.4 million, or 1.2 percent, to
$114.4 million in fiscal 2000 from $115.8 million in fiscal 1999. EBITDA,
however, increased approximately $4.9 million. Increases in net sales and
earnings were achieved within the pie filling category due to a return to the
Company's historical pricing strategy. However, net sales within the applesauce
category decreased from the prior year due to competitive pricing within the
industry. Due to relatively competitive margins within the applesauce category,
however, this reduction in net sales did not have a significant impact on
earnings. In addition, fiscal 1999 results also included spending $0.9 million
for a new product launch. No such costs were incurred in fiscal 2000.
Snacks showed an increase in EBITDA of $4.0 million primarily due to
improvements within the potato chip category. During fiscal 2000, a greater
percentage of sales were associated with the potato chip category which carries
a higher margin than the Company's popcorn product line. Declines in the popcorn
category resulted from both a decrease in volume and pricing resulting from
increased competition. 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 fiscal 1999. The matter was settled in
the first quarter of fiscal 2000. Management believes its current relationship
with these employees is good.
While canned meals showed a decline in net sales of $4.1 million in fiscal 2000
primarily attributable to a decline in volume in private label chili, EBITDA
showed a modest increase of $0.2 million resulting from production efficiencies
and a reduction in raw product costs including beef.
The other product line, while consisting of dressings, also includes sales from
the production of canned products primarily for use by the military and other
governmental operations. While these governmental contracts yield lower margins
than the Company's other product lines, they do provide for greater utilization
of seasonal manufacturing facilities. The majority of the $18.8 million decrease
in net sales is associated with the decline in government demand for such canned
products. The improvements in EBITDA of $1.2 million over fiscal 1999 resulted
from the changes in product mix within the dressing category and reductions in
raw product costs, including various oils.
Operating Income: Operating income of $102.7 million in fiscal 2000 decreased
approximately $27.9 million from $130.6 million in fiscal 1999. Excluding the
impact of businesses sold and other non-recurring items, operating income from
continuing operations increased from $65.8 million in fiscal 1999 to $97.3
million in fiscal 2000. This represents an improvement of $31.5 million or 47.9
percent. Improvements in operating income within the vegetable, fruit, snacks,
canned meals, and all other product lines were $21.5 million, $5.5 million, $3.4
million, $0.2 million, and $0.9 million, respectively. These increases are
attributable to the date of and benefits from the DFVC Acquisition and other
repositioning efforts.
Additionally, while the Company experienced significant benefits from its
efforts in fiscal 1999 to consolidate warehouses and other logistics operations,
the decline in sales resulting from the current industry trend caused inventory
levels to increase. Storage and handling costs associated with the increase in
inventory approximated $13 million.
Gains on Sales of Assets: On June 23, 2000, the Company sold its pickle business
based in Tacoma, Washington to Dean Pickle and Specialty Products. This business
included pickle, pepper, and relish products sold primarily under the Nalley and
Farman's brand names. The Company received proceeds of approximately $10.3
million which were applied to bank loans ($4.0 million of which was applied to
the Term Loan Facility and $6.3 million of which was applied to the Company's
Revolving Credit Facility). A gain of approximately $4.3 million was recognized
on this transaction.
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, beginning June 23, 2000, at the existing
Tacoma processing plant which Agrilink Foods will operate.
Under a related agreement, the Cooperative will supply raw cucumbers grown in
the Northwestern United States to Dean Pickle and Specialty Products for a
minimum 10-year period at market pricing.
On December 17, 1999 Agrilink Foods announced they had completed the sale of the
Company's Cambria, Wisconsin processing facility to Del Monte. The Company
received proceeds of approximately $10.5 million from the sale of its Cambria,
Wisconsin facility which were applied to bank loans. A gain of approximately
$2.3 million was recognized on this transaction. The sale includes an agreement
for Del Monte to produce a portion of Agrilink Foods' product needs during the
2000 packing season.
On January 29, 1999, Agrilink Foods sold the Adams brand peanut butter
operations 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.
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.
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. The decrease of $0.4 million over the
prior year is attributable to the sale of assets. See further discussion at NOTE
5 to the "Notes to Consolidated Financial Statements."
Interest Expense: Interest expense increased $12.8 million to $78.1 million in
fiscal 2000 from $65.3 million in fiscal 1999. The increase in interest is
associated with debt utilized to finance the DFVC Acquisition and higher levels
of seasonal borrowings to fund additional working capital requirements
associated with the increase in the Company's size. As a result of the date of
the DFVC Acquisition interest expense has been included for 12 months in fiscal
2000 and 9 months in fiscal 1999. In addition, this increase is associated with
an overall increase in prevailing interest rates which occurred fiscal 2000.
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 8 to
the "Notes to Consolidated Financial Statements" - "Debt - Senior Subordinated
Notes 11-7/8 Percent due 2008"). Debt issuance costs associated with the Bridge
Facility were $5.5 million and were fully amortized during the second quarter of
fiscal 1999.
Pro-Fac Share of Income Before Extraordinary Item: The Company's contractual
relationship with Pro-Fac is defined in the Pro-Fac Marketing Agreement (the
"Agreement"). Under the Agreement, in any year in which the Company has earnings
on products which were processed from crops supplied by Pro-Fac ("Pro-Fac
products"), the Company pays to Pro-Fac, as additional patronage income, 90
percent of such earnings, but in no case more than 50 percent of all pretax
earnings of the Company. In years in which the Company has losses on Pro-Fac
products, the Company reduces the commercial market value it would otherwise pay
to Pro-Fac by 90 percent of such losses, but in no case by more than 50 percent
of all pretax losses of the Company. Earnings and losses are determined at the
end of the fiscal year, but are accrued on an estimated basis during the year.
In fiscal 2000, 90 percent of earnings on patronage products exceeded 50 percent
of all pretax earnings of the Company. Accordingly, the Pro-Fac share of income
has been recognized at a maximum of 50 percent of pretax earnings of the
Company.
As the gain on the sale of the aseptic operations was a non-patronage
transaction, the Pro-Fac share of earnings in fiscal 1999 was recorded at 90
percent of the earnings on patronage products.
Tax Provision: The tax provision of $5.9 million in fiscal 2000 represents a
reduction of $18.9 million from the prior year. Of this decrease, $25.2 million
is attributable to the provision associated with the fiscal 1999 gain on sale of
the aseptic operations and the tax benefit of $2.1 million associated with the
amortization of debt issue costs also in fiscal 1999. In fiscal 2000, the sale
of certain intangibles in conjunction with the pickle sale negatively impacted
the Company's effective tax rate. As previously outlined, the Company's
effective tax rate has historically been negatively impacted by the
non-deductibility of certain amounts of goodwill. A further discussion of tax
matters is included at NOTE 9 to the "Notes to Consolidated Financial
Statements."
Extraordinary Item Relating to the Early Extinguishment of Debt: Concurrently
with the DFVC Acquisition, Agrilink Foods refinanced its then existing
indebtedness, including its 12 1/4 percent Senior Subordinated Notes due 2005
and its then existing bank
debt. Premiums and breakage fees associated with early redemptions and other
fees incurred amounted to $16.4 million (net of income taxes of $10.4 million
and after allocation to Pro-Fac of $1.7 million).
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the Consolidated
Statement of Cash Flows for fiscal 2001 compared to fiscal 2000.
Net cash provided by operating activities of $43.2 million increased $60.9
million from fiscal 2000 primarily due to a reduction in inventory resulting
from lower crop intake and the disposal of the private label canned vegetable
and pickle businesses in November 1999 and June 2000, respectively. In addition,
reductions in the fiscal 2001 inventory intake resulted from poor agricultural
conditions in the eastern part of the country. The reductions in inventory
levels also impacted the cash used to liquidate accounts payable and other
accruals. The change in accounts receivable is offset by a change in accounts
associated with accounts payable and accrued expenses.
The purchase of inventory from AgriFrozen Foods had no significant impact on
operating cash flow as the increase in inventories was offset by a corresponding
increase in accounts payable. The purchase price of the AgriFrozen Foods
inventory was $31.6 million, of which $10.0 million was paid on April 1, 2001,
and the remaining balance was paid on August 1, 2001. See NOTE 4 to the "Notes
to Consolidated Financial Statements.
Net cash used in investing activities was significantly impacted by the sale of
the Cambria, Wisconsin facility and the private label canned vegetable and
pickle business dispositions in fiscal 2000. These activities accounted for
approximately $63.2 million in proceeds in fiscal 2000 while proceeds from
disposals in fiscal 2001 amounted to $5.8 million. These proceeds were primarily
associated with the sale of equipment utilized in production of pickles and
other related products to Dean Pickle and Specialty Products. The Company's
investment in property, plant and equipment remained relatively unchanged during
fiscal 2001, decreasing $0.3 million. Property, plant and equipment purchases
were for general operating purposes.
Net cash used in financing activities decreased by $0.4 million. The change was
primarily due to a decrease in capital contributions received from Pro-Fac as a
result of lower earnings in fiscal 2001 and changes in borrowings under the
Company's Revolving Credit Facility that must be paid down at year-end.
Credit Facility (Bank Debt): In connection with the DFVC Acquisition, the
Company entered into a credit facility ("Credit Facility") with Harris Bank as
Administrative Agent and Bank of Montreal as Syndication Agent, and the lenders
thereunder. The Credit Facility consists of the $200 million Revolving Credit
Facility and the $455 million Term Loan Facility. The Term Loan Facility is
comprised of the Term A Facility, which has a maturity of five years, the Term B
Facility, which has a maturity of six years, and the Term C Facility, which has
a maturity of seven years. The Revolving Credit Facility has a maturity of five
years. All previous bank debt was repaid in conjunction with the execution of
the Credit Facility.
The Credit Facility bears interest, at the Company's option, at the
Administrative Agent's alternate base rate or the London Interbank Offered Rate
("LIBOR") plus, in each case, applicable margins of: (i) in the case of
alternate base rate loans, (x) 1.25 percent for loans under the Revolving Credit
Facility and the Term A Facility, (y) 3.00 percent for loans under the Term B
Facility and (z) 3.25 percent for loans under the Term C Facility and (ii) in
the case of LIBOR loans, (x) 3.00 percent for loans under the Revolving Credit
Facility and the Term A Facility, (y) 4.00 percent for loans under the Term B
Facility and (z) 4.25 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 2001 weighted-average rate of
interest applicable to the Term Loan Facility was 9.97 percent. In addition, the
Company pays a commitment fee calculated at a rate of 0.50 percent per annum on
the daily average unused commitment under the Revolving Credit Facility.
Upon consummation of the DFVC Acquisition, the Company drew $455 million under
the Term Loan Facility, consisting of $100 million, $175 million and $180
million of loans under the Term A Facility, Term B Facility and Term C Facility,
respectively. Additionally, the Company drew $93 million under the Revolving
Credit Facility for seasonal working capital needs and $14.3 million under the
Revolving Credit Facility was issued for letters of credit. During December
1998, the Company's primary lender exercised its right under the New Credit
Facility to transfer $50 million from the Term A Facility to the Term B and Term
C Facilities in increments of $25 million.
Utilizing outstanding balances at June 30, 2001, 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
- ----------- ----------- ----------- ----------- -----
2002 $ 10.0 $ 0.4 $ 0.4 $ 10.8
2003 10.0 0.4 0.4 10.8
2004 6.4 0.4 0.4 7.2
2005 0.0 189.0 0.4 189.4
2006 0.0 0.0 193.4 193.4
------- ------ ------- -------
$ 26.4 $190.2 $ 195.0 $ 411.6
======= ====== ======= =======
The Term Loan Facility is subject to mandatory prepayment under various
scenarios as defined in the Credit Facility. During fiscal 2001, Agrilink Foods
made mandatory prepayments of $3.2 million from proceeds of the sale of pickle
machinery and equipment. In addition, during fiscal 2001, principal payments of
$13.5 million were made on the Term Loan Facilities.
The Company's obligations under the Credit Facility are collateralized by a
first-priority lien on: (i) substantially all existing or after-acquired assets,
tangible or intangible, (ii) the capital stock of certain of Pro-Fac's current
and future subsidiaries (excluding AgriFrozen Foods, which was a subsidiary of
Pro-Fac); and (iii) all of the Company's rights under the agreement to acquire
DFVC (principally indemnification rights) and the Pro-Fac Marketing and
Facilitation Agreement. The Company's obligations under the Credit Facility are
guaranteed by Pro-Fac and certain of the Company's current and future, if any,
subsidiaries (excluding AgriFrozen Foods).
The Credit Facility contains customary covenants and restrictions on the
Company's ability to engage in certain activities, including, but not limited
to: (i) limitations on the incurrence of indebtedness and liens, (ii)
limitations on sale-leaseback transactions, consolidations, mergers, sale of
assets, transactions with affiliates and investments and (iii) limitations on
dividend and other distributions. The 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 Credit Facility, the assets, liabilities,
and results of operations of AgriFrozen, Inc., which previously was a subsidiary
of Pro-Fac, were not consolidated with Pro-Fac for purposes of determining
compliance with the covenants. In August 2001, September 2000 and August 1999,
the Company entered into amendments to the original covenants. In conjunction
with these amendments, the Company incurred fees of approximately $1.5 million,
$1.7 million, and $2.6 million, respectively. These fees are being amortized
over the remaining life of the Credit Facility. Agrilink is in compliance with
all covenants, restrictions, and requirements under the terms of the Credit
Facility as amended.
The August 2001 amendment imposes contingent fees and possible increases in
interest rates under the Credit Facility based in part on the ability of the
Company to raise equity, and deleverage its balance sheet within certain
timeframes. To this end, the Company has engaged a financial advisor to assist
it in raising a minimum of $100 million through a private placement of an as yet
unspecified class of securities of the Company. The amount of such contingent
fees is also impacted by EBITDA which the Company achieves for its fiscal year
ending in June 2002.
Senior Subordinated Notes -11-7/8 Percent (due 2008): To extinguish the
Subordinated Bridge Facility, the Company issued Senior Subordinated Notes (the
"Notes") for $200 million aggregate principal amount due November 1, 2008.
Interest on the 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 Notes represent general unsecured obligations of the Company, subordinated
in right of payment to certain other debt obligations of the Company (including
the Company's obligations under the Credit Facility). The Notes are guaranteed
by Pro-Fac and certain of the Company's current and future, if any,
subsidiaries.
The Notes contain customary covenants and restrictions on the Company's ability
to engage in certain activities, including, but not limited to: (i) limitations
on the incurrence of indebtedness and liens; (ii) limitations on consolidations,
mergers, sales of assets, transactions with affiliates; and (iii) limitations on
dividends and other distributions. The Company is in compliance with all
covenants, restrictions, and requirements under the Notes.
Subordinated Bridge Facility: To complete the DFVC Acquisition, the Company
entered into a Subordinated Bridge Facility (the "Bridge Facility"). During
November 1998, the net proceeds from the sale of the Notes, together with
borrowings under the Revolving Credit Facility, were used to repay all the
indebtedness outstanding ($200 million plus accrued interest) under the Bridge
Facility. The outstanding indebtedness under the Bridge Facility accrued
interest at an approximate rate per annum of 10-1/2 percent. Debt issuance costs
associated with the Bridge Facility of $5.5 million were fully amortized during
the second quarter of fiscal 1999.
Subordinated Promissory Note: As partial consideration for the DFVC Acquisition,
the Company issued to Dean Foods a Subordinated Promissory Note for $30 million
aggregate principal amount due November 22, 2008. Interest on the Subordinated
Promissory Note is accrued quarterly in arrears commencing December 31, 1998, at
a rate per annum of 5 percent until November 22, 2003, and at a rate of 10
percent thereafter. As the rates on the Note are below market value, the Company
has imputed the appropriate discount utilizing an effective interest rate of
11-7/8 percent. Interest accruing through November 22, 2003 is required to be
paid in-kind through the issuance by the Company of additional subordinated
promissory notes identical to the Subordinated Promissory Note. The Company
satisfied this requirement through the issuance of 11 additional promissory
notes each for approximately $0.4 million. Interest accruing after November 22,
2003 is payable in cash. The Subordinated Promissory Note may be prepaid at the
Company's option without premium or penalty.
The Subordinated Promissory Note is expressly subordinate to the Notes and the
Credit Facility and contains no financial covenants. The Subordinated Promissory
Note is guaranteed by Pro-Fac.
On December 1, 2000, Dean Foods sold the Subordinated Note to Great Lakes Kraut
Company, LLC, a joint venture between the Company and Flanagan Brothers, Inc.
This sale did not affect the terms of the note.
Senior Subordinated Notes - 12 1/4 Percent - Due 2005 ("Old Notes"): In
conjunction with the DFVC Acquisition, the Company repurchased $159,985,000
principal amount of its Old Notes, of which $160 million aggregate principal
amount was previously outstanding. The Company paid a total of approximately
$184 million to repurchase the Old Notes, including interest accrued thereon of
$2.9 million. Holders who tendered consented to certain amendments to the
indenture relating to the Old Notes, which eliminated or amended substantially
all the restrictive covenants and certain events of default contained in such
indenture. The Company may repurchase the remaining Old Notes in the future in
open market transactions, privately negotiated purchases or otherwise.
OTHER MATTERS:
Capital Expenditures: The Company anticipates that capital expenditures for
fiscal years 2002 and 2003 will be approximately $25 million per annum. The
Company believes that cash flow from operations and borrowings under bank
facilities will be sufficient to meet its liquidity requirements for the
foreseeable future.
Short- and Long-Term Trends: Throughout fiscal 2001 and 2000, Agrilink Foods has
focused on its core businesses and growth opportunities. During the fourth
quarter of fiscal 2001, the Company initiated a national launch of its most
recent new product, Birds Eye Simply Grillin'. Simply Grillin' is a preseasoned
blend of top quality Birds Eye vegetables in a foil tray. Net sales associated
with this new product were $11.3 million. Management estimates that Birds Eye
Simply Grillin' will achieve $35 million of net sales in fiscal 2002. During
fiscal 1999, the Company acquired the frozen and canned vegetable business of
Dean Foods. The Company believes that the DFVC Acquisition strengthened its
competitive position by: (i) enhancing its brand recognition and market
position, (ii) providing opportunities for cost savings and operating
efficiencies and (iii) increasing its product and geographic diversification. A
complete description of the acquisition and disposal activities completed is
outlined at NOTE 3 to the "Notes to Consolidated Financial Statements."
The vegetable and fruit portions of the business can be positively or negatively
affected by weather conditions nationally and the resulting impact on crop
yields. Favorable weather conditions can produce high crop yields and an
oversupply situation. This results in depressed selling prices and reduced
profitability on the inventory produced from that year's crops. Excessive rain
or drought conditions can produce low crop yields and a shortage situation. This
typically results in higher selling prices and increased profitability. While
the national supply situation controls the pricing, the supply can differ
regionally because of variations in weather.
The crop and yield resulting from the 2000 growing season, while significantly
lower than anticipated in the eastern part of the country, proved to be adequate
throughout the industry. However, the weather conditions which significantly
impacted corn yields did result in higher pricing for this commodity.
For the 2001 crop season, dry weather conditions in the Company's New York and
Midwest growing regions may negatively impact production costs. Management has
initiated cost reduction steps, and is actively pursuing additional cost
reduction initiatives in order to fully offset any crop-related production cost
increases.
Supplemental Information on Inflation: The changes in costs and prices within
the Company's business due to inflation were not significantly different from
inflation in the United States economy as a whole. Levels of capital investment,
pricing and inventory investment were not materially affected by changes caused
by inflation.
New Accounting Pronouncements: In July 2000, the Emerging Issues Task Force
("EITF") of the Financial Accounting Standards Board reached a consensus on
Issue 00-14, "Accounting for Certain Sales Incentives." The consensus addresses
the recognition, measurement, and income statement classification for sales
incentives that a company offers to its customers. Accordingly, coupon expense,
now classified as selling, general and administrative expense, will be
reclassified as a reduction of gross sales and all prior periods will also be
reclassified to reflect this modification. The adoption of EITF Issue 00-14 is
not expected to materially impact the Company's financial statements. The
Company estimates that its coupon expense is approximately $6.5 to $8.5 million
per year. The Company must adopt EITF Issue 00-14 in the third quarter of fiscal
2002, however, the Company anticipates it will adopt this pronouncement in the
first quarter of fiscal 2002.
In April 2001, the EITF reached a final consensus on Issue 00-25, "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products." The consensus addresses the accounting
treatment and income statement classification for certain sales incentives,
including cooperative advertising arrangements, buydowns, and slotting fees. The
consensus requires that such amounts, now classified by the Company as selling,
general, and administrative expense, be reclassified as a reduction of gross
sales. These guidelines will become effective for the Company during the third
quarter of fiscal 2002. The Company is currently reviewing this pronouncement to
determine the dollar value of the reclassification. The adoption of EITF 00-25
will not impact the Company's profitability.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses the financial accounting and
reporting of goodwill and other intangible assets and supercedes APB Opinion No.
17, "Intangible Assets." The statement will modify how an entity initially
accounts for goodwill and other intangible assets, assesses for subsequent
impairment, and the requirement to amortize these assets. The provisions of SFAS
No. 142 must be adopted for fiscal years beginning after December 15, 2001, with
early application permitted for companies with fiscal years beginning after
March 15, 2001. The Company is currently assessing the impact of implementation
on its results of operations and financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of its operating and financing activities, is exposed
to changes in foreign currency exchange rates, certain commodity prices, and
interest rates, which may adversely affect its results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, the Company may enter into derivative contracts.
Foreign Currency: The Company manages its foreign currency related risk
primarily through the use of foreign currency forward contracts. The contracts
held by the Company are denominated in Mexican pesos.
The Company has entered into foreign currency forward contracts that are
designated as cash flow hedges of exchange rate risk related to forecasted
foreign currency-denominated intercompany sales. At June 30, 2001, the Company
had cash flow hedges for the Mexican peso with maturity dates ranging from July
2001 to May 2002. The fair value of these open contracts was an after-tax gain
of approximately $0.6 million recorded in accumulated other comprehensive income
in shareholder's equity. Amounts deferred to accumulated other comprehensive
income will be reclassified into cost of goods sold. For the year ended June 30,
2001, approximately $0.3 million has been reclassified from other comprehensive
income to cost of goods sold. Hedge ineffectiveness was insignificant.
Foreign Currency
Forward
----------------
Contract amounts 124 million Pesos
Weighted average settlement exchange rate 10.7966%
Commodity Prices: The Company is exposed to commodity price risk related to
forecasted purchases of soybean oil, an ingredient in the manufacture of salad
dressings and mayonnaise. To mitigate this risk, the Company designates soybean
oil forward contracts as cash flow hedges of its forecasted soybean oil
purchases. The Company maintained soybean oil contracts that hedged
approximately 70 percent of its planned soybean oil requirements during fiscal
2001. These contracts were either sold or expired during fiscal 2001, and a loss
of $0.2 million was recorded in cost of goods sold.
The Company is also exposed to commodity price risk related to forecasted
purchases of flour in its manufacturing process. To mitigate this risk, the
Company designates a swap agreement as a cash flow hedge of its forecasted flour
purchases. The Company maintained flour contracts that hedged approximately 59
percent of its planned flour requirements during fiscal 2001. The contracts
expired during fiscal 2001, an immaterial loss was recorded in cost of goods
sold.
The Company is also exposed to commodity price risk related to forecasted
purchases of corrugated (unbleached kraftliner) in its manufacturing process. To
mitigate this risk, the Company designates a swap agreement as a cash flow hedge
of its forecasted corrugated purchases. The Company hedged approximately 80
percent of its planned corrugated requirements. The agreement had no fair value
and terminated on June 30, 2001.
Interest Rates: The Company is exposed to interest rate risk primarily through
its borrowing activities. The majority of the Company's long-term borrowings are
variable rate instruments. The Company entered into two interest rate swap
contracts under which the Company agrees to pay an amount equal to a specified
fixed rate of interest times a notional principal amount, and to receive in
return an amount equal to a specified variable rate of interest times the same
notional principal amount. The notional amounts of the contract are not
exchanged and no other cash payments are made. Two interest rate swap contracts
were entered into with a major financial institution in order to minimize credit
risk.
The first interest rate swap contract required payment of a fixed rate of
interest (4.96 percent) and the receiving of a variable rate of interest
(three-month LIBOR of 4.85 percent as of June 30, 2001) on $150 million notional
amount of indebtedness. The Company had a second interest rate swap contract to
pay a fixed rate of interest (5.32 percent) and receive a variable rate of
interest (three-month LIBOR of 4.85 percent as of June 30, 2001) on $100 million
notional amount of indebtedness. Approximately 61 percent of the underlying debt
is being hedged with these interest rate swaps.
The Company designates these interest rate swap contracts as cash flow hedges.
The fair value of the cash flow hedge is generally deferred to other
comprehensive income and reclassified into interest expense over the life of the
hedge. However, to the extent that any of these contracts are not considered
effective in offsetting the change in the value of the interest payments being
hedged, any changes in fair value relating to the ineffective portion of these
contracts are immediately recognized in income. At June 30, 2001, these interest
rate swap contracts were not considered effective, and the fair value of the
contracts, an after-tax loss of $0.4 million, was reported in earnings.
The following is a summary of the Company's interest rate swap agreements:
March 24, 2001
--------------
Interest Rate Swap:
Variable to Fixed - notional amount $250 million
Average pay rate 4.96 - 5.32%
Average receive rate Floating rate - 4.85%
Maturities through October 2001
In a declining interest rate market,