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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
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from to
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File No. 0-20539
PRO-FAC COOPERATIVE, INC.
(Exact Name of Registrant as Specified in Its Charter)
New York 16-6036816
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification Number)
90 Linden Oaks, PO Box 682, Rochester, NY 14603
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (716) 383-1850
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Class A Cumulative Preferred Stock
Liquidation Preference $25.00/Share
Par Value $1.00/Share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to ITEM 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the registrant
as of September 1, 2001
Class A Common Stock: $10,002,370
(Based upon par value of shares since there is no
market for the Registrant's common stock)
Number of common shares outstanding at September 1, 2001:
Class A Common Stock: 2,000,474
FORM 10-K ANNUAL REPORT - Fiscal Year 2001
PRO-FAC COOPERATIVE, INC.
TABLE OF CONTENTS
PART I
PAGE
ITEM 1. Description of Business
Cautionary Statement on Forward-Looking Statements.......................................... 3
General Development of Business............................................................. 3
Narrative Description of Business........................................................... 5
Financial Information About Industry Segments............................................... 7
Packaging and Distribution.................................................................. 7
Trademarks.................................................................................. 7
Raw Material Sources........................................................................ 8
Environmental Matters....................................................................... 8
Seasonality of Business..................................................................... 9
Practices Concerning Working Capital........................................................ 9
Significant Customers....................................................................... 9
Backlog of Orders........................................................................... 9
Business Subject to Government Contracts.................................................... 9
Competitive Conditions...................................................................... 9
Market and Industry Data.................................................................... 10
New Products and Research and Development................................................... 10
Employees................................................................................... 10
ITEM 2. Description of Properties....................................................................... 10
ITEM 3. Legal Proceedings............................................................................... 12
ITEM 4. Submission of Matters to a Vote of Security Holders............................................. 12
PART II
ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters........................ 13
ITEM 6. Selected Financial Data......................................................................... 14
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 15
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk...................................... 25
ITEM 8. Financial Statements and Supplementary Data..................................................... 26
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 63
PART III
ITEM 10. Directors and Executive Officers of the Registrant.............................................. 64
ITEM 11. Executive Compensation.......................................................................... 67
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................................. 69
ITEM 13. Certain Relationships and Related Transactions.................................................. 71
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 73
Signatures...................................................................................... 79
PART I
ITEM 1. DESCRIPTION OF BUSINESS
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, Pro-Fac Cooperative, Inc.("Pro-Fac" or the "Cooperative")
makes oral and written statements that may constitute "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995
(the "Act") or by the Securities and Exchange Commission ("SEC") in its rules,
regulations, and releases. The Cooperative desires to take advantage of the
"safe harbor" provisions in the Act for forward-looking statements made from
time to time, including, but not limited to, the forward-looking information
contained in the Management's Discussion and Analysis of Financial Condition and
Results of Operations and other statements made in this Form 10-K and in other
filings with the SEC.
The Cooperative cautions readers that any such forward-looking statements made
by or on behalf of the Cooperative are based on management's current
expectations and beliefs but are not guarantees of future performance. Actual
results could differ materially from those expressed or implied in the
forward-looking statements. The factors that could impact the Cooperative
include:
* the impact of strong competition in the food industry;
* the impact of changes in consumer demand; ss. the impact of weather on the
volume and quality of raw product;
* the inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer acceptance;
* the continuation of the Cooperative's success in integrating operations
(including the realization of anticipated synergies in operations and the
timing of any such synergies) and the availability of acquisition and
alliance opportunities;
* the Cooperative's ability to achieve the gains in productivity and
improvements in capacity utilization; and
* the Cooperative's ability to service debt.
GENERAL DEVELOPMENT OF BUSINESS
Pro-Fac Cooperative, Inc. is an agricultural cooperative corporation formed in
1960 under the Cooperative Corporation Laws of New York to process and market
crops grown by its members. Unless the context otherwise requires, the terms
"Cooperative" and "Pro-Fac" refer to Pro-Fac Cooperative, Inc. and its
subsidiaries. The Cooperative conducts business under the name of Agrilink. In
addition, the board of directors of Agrilink Foods, Inc., a wholly owned
subsidiary of the Cooperative, 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's Class A Cumulative preferred stock is listed on the
Nasdaq National Market system.
Pro-Fac crops include fruits (cherries, apples, blueberries, peaches, and
plums), vegetables (snap beans, beets, cucumbers, peas, sweet corn, carrots,
cabbage, squash, asparagus, potatoes, turnip roots, and leafy greens), and
popcorn. Only growers of crops marketed through Pro-Fac (or associations of such
growers) can become members of Pro-Fac; a grower becomes a member of Pro-Fac
through the purchase of common stock. Class A members own shares of Class A
common stock and are members who deliver raw product for sale and processing at
the facilities of Agrilink Foods. There are approximately 604 Class A members,
consisting of individual growers or associations of growers, located principally
in the states of New York, Delaware, Pennsylvania, Illinois, Michigan,
Washington, Oregon, Iowa, Nebraska, Florida, and Georgia.
Agrilink Foods, Inc. ("Agrilink Foods"), incorporated in New York in 1961, is a
producer and marketer of processed food products. Agrilink Foods has four
primary product lines including: vegetables, fruits, snacks, and canned meals.
The majority of each of the product lines' net sales is within the United
States. In addition, all of Agrilink Foods' operating facilities, excluding one
in Mexico, are within the United States.
On November 3, 1994, Pro-Fac acquired Agrilink Foods, and Agrilink Foods became
a wholly owned subsidiary of Pro-Fac. Pro-Fac and Agrilink Foods have a
long-standing contractual relationship pursuant to which Pro-Fac provides crops
and financing to Agrilink Foods, Agrilink Foods provides marketing and
management to Pro-Fac, and Pro-Fac shares in the profits and losses of Agrilink
Foods.
Upon consummation of the acquisition, Pro-Fac and Agrilink Foods entered into
the Pro-Fac Marketing and Facilitation Agreement (the "Pro-Fac Marketing
Agreement").
The Pro-Fac Marketing Agreement provides for Pro-Fac to supply crops and
additional financing to Agrilink Foods, for Agrilink Foods to provide 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 into Agrilink Foods at
least 70 percent of any additional patronage income derived from the earnings of
Agrilink Foods. To preserve the independence of Agrilink Foods, the Pro-Fac
Marketing Agreement also requires that certain of the directors of Agrilink
Foods be individuals who are not employees or shareholders of, or otherwise
affiliated with, Pro-Fac or Agrilink Foods ("Disinterested Directors") and
requires that certain decisions, including the volume of and the amount to be
paid for crops received from Pro-Fac, be approved by the Disinterested
Directors.
Under the Pro-Fac Marketing Agreement, Agrilink Foods manages the business and
affairs of Pro-Fac and provides all personnel support and administrative support
required. Pro-Fac pays Agrilink Foods a quarterly fee of $25,000 for these
services.
Additional patronage income received by Pro-Fac is deductible to Pro-Fac for
federal tax purposes only to the extent distributed to its members. Pro-Fac may
make this distribution to its members through a combination of cash and retains
as long as a minimum of 20 percent of the amount is paid in cash as required by
federal tax law. Pro-Fac has historically paid its members between 20 percent
and 30 percent of additional patronage income in cash and the remaining portion
in retains. Funds made available by the distribution of retains to members in
lieu of cash have historically been reinvested by Pro-Fac in Agrilink Foods. See
further discussion of the relationship with Pro-Fac in NOTE 2 to the Notes to
Consolidated Financial Statements.
Agripac, Inc.: PF Acquisition II, Inc. ("PF II") was a subsidiary of Pro-Fac
until February 15, 2001. PF II was incorporated in January 1999. Pro-Fac owned
100 percent of the common stock of PF II, while PFA Northwest Growers
Cooperative, Inc., an Oregon cooperative, owned 100 percent of the PF II
preferred stock. PF II conducted business under the name AgriFrozen Foods
("AgriFrozen").
On February 23, 1999, PF II acquired the frozen vegetable business of Agripac,
Inc. ("Agripac"), an Oregon cooperative. On January 4, 1999, Agripac filed a
voluntary petition under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the District of Oregon. On January 22, 1999 Agripac, as
debtor-in-possession, filed a motion with the Bankruptcy Court for authority to
sell substantially all of the assets comprising its frozen food processing
business. The bankruptcy court confirmed the sale of Agripac's frozen food
processing assets to AgriFrozen by an order entered on February 18, 1999.
In order to consummate the acquisition, AgriFrozen (i) entered into a credit
facility with CoBank, ACB ("CoBank") (the "CoBank Credit Facility") providing
for $30 million of term loan borrowings and a revolving credit facility (the
"CoBank Revolving Credit Facility") of $55 million in fiscal 2000 and $50
million in each year thereafter and (ii) issued a $12 million Subordinated
Promissory Note to CoBank. Neither Pro-Fac nor Agrilink Foods guaranteed the
debts of AgriFrozen or otherwise pledged any of their respective properties as
security for the CoBank financing. Neither Pro-Fac nor Agrilink Foods guaranteed
the debts of AgriFrozen or otherwise pledged any of their respective properties
as security for AgriFrozen's indebtedness. All of AgriFrozen's indebtedness was
expressly without recourse to Pro-Fac and Agrilink Foods. See further discussion
at "Credit Agreement and Subordinated Note Agreement of AgriFrozen" at NOTE 8 to
the "Notes to Consolidated Financial Statements."
The contractual relationship between AgriFrozen and Pro-Fac is defined in a
marketing and facilitation agreement between the two companies (the "AgriFrozen
Marketing Agreement"). Under that agreement, AgriFrozen purchased raw products
from Pro-Fac and processed and marketed the finished products. AgriFrozen paid
Pro-Fac commercial market value ("CMV") for the crops supplied by Pro-Fac. In
addition, in any year in which AgriFrozen had earnings, AgriFrozen was required
to distribute such earnings to Pro-Fac for distribution to Class B members of
Pro-Fac. However, in the event AgriFrozen experienced any losses, AgriFrozen
deducted the losses from the total CMV payable. The agreement permitted
AgriFrozen to pay 20 percent of any additional earnings in cash and retain 80
percent as working capital.
On January 22, 2001, AgriFrozen Foods announced that it was closing its frozen
vegetable business facilities in Woodburn, Oregon and Walla Walla and Grandview,
Washington. AgriFrozen employed approximately 600 full time employees at its
various locations. There were approximately 150 growers who historically
supplied crops to AgriFrozen. The closings were due to the decision by
AgriFrozen's board not to plant or process crops for the 2001growing season. The
combination of the uncertainty of continued funding of the operations of
AgriFrozen by its lender, current industry trends showing a decline in private
label and industrial frozen vegetable sales and pricing, and the highly
competitive nature of the food business were the basis for this action.
On February 15, 2001, Pro-Fac abandoned its ownership interest in AgriFrozen. On
February 16, 2001, Agrilink Foods completed the purchase of the frozen vegetable
inventory of AgriFrozen. AgriFrozen's lender sold the inventory to Agrilink
Foods pursuant to a private sale under the Uniform Commercial Code after
AgriFrozen voluntarily surrendered the inventory to the lender. The purchase
price was $31.6 million of which $10.0 million was paid to the lender on April
1, 2001, and the remaining balance was paid on August 1, 2001. In addition,
under a related agreement between Agrilink Foods and AgriFrozen, Agrilink Foods
funded certain operating costs and expenses of AgriFrozen, primarily in storing
and converting the purchased inventory to finished goods, during a transition
period ending on June 30, 2001. Such expenses are estimated to be approximately
$7.1 million, of which $6.0 million has been funded as of June 30, 2001. This
funding is net of reimbursement by AgriFrozen of the proceeds from available
receivables not pledged to the lender. Agrilink Foods incurred fees of
approximately $0.8 million related to this transaction which were expensed when
incurred.
On July 19, 2001, Pro-Fac repurchased its Class B common stock and special
membership interests. These securities were held by the former Agripac, Inc.
members who subscribed to become grower/members of Pro-Fac supplying raw product
to the AgriFrozen Foods processing facilities.
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 Agrilink Foods, in December 2000.)
Agrilink Foods had the right, exercisable until July 15, 1999, to require Dean
Foods, jointly with Agrilink Foods, to treat the DFVC Acquisition as an asset
sale for tax purposes under Section 338(h)(10) of the Internal Revenue Code. On
April 15, 1999, Agrilink Foods paid $13.2 million to Dean Foods and exercised
the election.
After the DFVC Acquisition, DFVC was merged with and into Agrilink Foods. 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. Agrilink Foods 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.
Concurrently with the DFVC Acquisition, Agrilink Foods refinanced its then
existing indebtedness (the "Refinancing"), including its 12 1/4 percent Senior
Subordinated Notes due 2005 (the "Old Notes") and its then existing bank debt.
On August 24, 1998, Agrilink Foods commenced a tender offer (the "Tender Offer")
for all the Old Notes and a consent solicitation to certain amendments under the
indenture governing the Old Notes to eliminate substantially all the restrictive
covenants and certain events of default therein. Substantially all of the $160
million aggregate principal amount of the Old Notes were tendered and purchased
by Agrilink Foods for aggregate consideration of approximately $184 million,
including accrued interest of $2.9 million. Agrilink Foods also terminated its
then existing bank facility (including seasonal borrowings) and repaid $176.5
million, excluding interest owed and breakage fees outstanding thereunder.
Agrilink Foods recognized an extraordinary charge of $18.0 million (net of
income taxes) in the first quarter of fiscal 1999 relating to this refinancing.
In order to consummate the DFVC Acquisition and the Refinancing and to pay the
related fees and expenses, Agrilink Foods: (i) entered into a new credit
facility (the "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 Agreement. The Credit Facility and the Notes also restrict the
amount of dividends and other payments that may be made by Agrilink Foods to
Pro-Fac.
NARRATIVE DESCRIPTION OF BUSINESS
The Cooperative sells products in three principal categories: (i) "branded"
products, which are sold under various trademarks, (ii) "private label"
products, which are sold to grocers who in turn use their own brand names on the
products and (iii) "food service" products, which are sold to food service
institutions such as restaurants, caterers, bakeries, and schools. In fiscal
2001, approximately 64 percent of the Cooperative's net sales were branded and
the remainder divided between private label and food service/industrial. The
Cooperative's branded products are listed under the "Trademarks" section of this
report. The Cooperative's private label products include canned and frozen
vegetables, salad dressings, salsa, 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, Wal-Mart/Sam's, Safeway, SuperValu, BJ's, Wegmans, and Winn-Dixie. The
Cooperative's food service/industrial products include salad dressings, fruit
fillings and toppings, canned and frozen vegetables, frozen Southern
specialties, frozen breaded and battered products, and canned and frozen fruit,
which are sold to customers such as Alliant Food Service, Gordon Food Service,
Pocahontas, PYA Monarch, Church's, Denny's, Food Service of America, KFC, MBM
Corporation, McDonald's, and SYSCO.
The Cooperative has four primary product lines: vegetables, fruits, snacks, and
canned meals. A description of the Cooperative's four primary product lines
follows:
Vegetables: The vegetable product line consists of canned and frozen vegetables,
chili beans, and various other products. Additional products include value-added
items such as frozen vegetable blends, and Southern-specialty products such as
black-eyed peas, okra, Southern squash, 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,
ongoing vegetable product line net sales represented approximately 74 percent of
the Cooperative's total continuing 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.
Agrilink Foods 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
Sam's 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, a subsidiary of Dean
Foods. This business included pickle, pepper, and relish products sold primarily
under the Nalley and Farman's brand names. Agrilink Foods 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
operates. Under a related agreement, the Cooperative supplies raw cucumbers
grown in the Northwestern United States to Dean Pickle and Specialty Products
Company, for a minimum 10-year period at market pricing.
On December 17, 1999, Agrilink Foods sold its Cambria, Wisconsin processing
facility to Del Monte. This facility was primarily utilized for canning
operations.
On November 8, 1999, Agrilink Foods sold its Midwest private label canned
vegetable business to Seneca Foods. Included in this transaction was the
Arlington, Minnesota facility. This sale did not include Agrilink Foods' retail
branded canned vegetables Veg-All and Freshlike.
On September 24, 1998, Agrilink Foods acquired the DFVC frozen and canned
vegetable businesses. DFVC was one of the leading processors of vegetables in
the United States selling its products under well-known brands such as Birds
Eye, Freshlike, and Veg-All, and various private labels.
Fruits: The fruit product line consists of canned and frozen fruits including
fruit fillings and toppings. Branded products within the fruit category include
Comstock and Wilderness. The Cooperative is a major supplier of branded and
private label fruit fillings to retailers and food service institutions such as
restaurants, caterers, bakeries, and schools. In fiscal 2001, fruit product line
net sales represented approximately 9 percent of the Cooperative's total
continuing 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 snack 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 Cooperative's total continuing 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 manufactures and markets this regional brand
through its Tim's Cascade Chips business in Auburn, Washington.
Effective July 21, 1998, Agrilink Foods acquired J.A. Hopay Distributing Co.,
Inc. ("Hopay") of Pittsburgh, Pennsylvania. Hopay was a former distributor for
Snyder of Berlin products.
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 Cooperative's
total continuing 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: Agrilink Foods' 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 Cooperative's
total continuing net sales.
On January 29, 1999, the Company sold the Adams brand peanut butter operations
to the J. M. Smucker Company.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The business of the Cooperative is principally conducted in four industry
segments: vegetables, fruits, canned meals, and snacks. The financial statements
for the fiscal years ended June 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 Cooperative's last three fiscal years.
PACKAGING AND DISTRIBUTION
The food products produced by the Cooperative are distributed to various
consumer markets in all 50 states. International sales account for a small
portion of the Cooperative's activities. Vegetables, fruits, and canned meals
are primarily sold through food brokers who sell primarily to supermarket chains
and various institutional entities. Snack products are primarily marketed
through distributors (some of which are owned and operated by the Cooperative)
who sell directly to retail outlets in the Midwest, Mid-Atlantic and Pacific
Northwest. Customer brand operations encompass the sale of products under
private labels to chain stores and under the controlled labels of buying groups.
The Cooperative has developed central storage and distribution facilities that
permit multi-item single shipment to customers in key marketing areas.
Agrilink Foods maintains a multiyear logistic agreement with American President
Lines ("APL") under which APL Logistics provides freight management, packaging
and labeling services, and distribution support to and from production
facilities owned by Agrilink Foods in and around Coloma, Michigan.
Agrilink Foods 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 Cooperative markets its products are
trademarks of the Cooperative. Such brand names are considered to be of material
importance to the business of the Cooperative since they have the effect of
developing brand identification and maintaining consumer loyalty. There are U.S.
federal trademark registrations for substantially all of the trademarks. These
trademark registrations are of perpetual duration so long as they are
periodically renewed. It is the Cooperative's intent to maintain its trademark
registrations. The major brand names utilized by the Cooperative are:
Product Line Brand Name
Vegetables Birds Eye, Voila!, 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
Product Line Brand Name
Snacks Snyder of Berlin, Thunder Crunch, Tim's Cascade Style Potato 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 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 Class A members of the Cooperative. Agrilink Foods also purchased
on the open market some crops of the same type and quality as those purchased
from Pro-Fac. Such open market purchases may occur at prices higher or lower
than those paid to Pro-Fac for similar products. See further discussion of the
relationship with Agrilink Foods in NOTE 2 to the "Notes to Consolidated
Financial Statements."
The vegetable and fruit portions of the business can be positively or negatively
affected by weather conditions nationally and the resulting impact on crop
yields. Favorable weather conditions can produce high crop yields and an
oversupply situation. This situation typically results in depressed selling
prices and reduced profitability on the inventory produced from that year's
crops. Excessive rain or drought conditions can produce low crop yields and a
shortage situation. This typically results in higher selling prices and
increased profitability. While the national supply situation controls the
pricing, the supply can differ regionally because of variations in weather.
The Cooperative purchases all of its requirements for nonagricultural products,
including containers, in the open market. Although the Cooperative has not
experienced any difficulty in obtaining adequate supplies of such items,
occasional periods of short supply of certain raw materials may occur.
ENVIRONMENTAL MATTERS
The disposal of solid and liquid waste material resulting from the preparation
and processing of foods and the emission of wastes and odors inherent in the
heating of foods during preparation are subject to various federal, state, and
local environmental laws and regulations. Such laws and regulations have had an
important effect on the food processing industry as a whole, requiring
substantially all firms in the industry to incur material expenditures for
modification of existing processing facilities and for construction of new waste
treatment facilities. The Cooperative is also subject to standards imposed by
regulatory agencies pertaining to the occupational health and safety of its
employees. Management believes that continued measures to comply with such laws
and regulations will not have a material adverse effect upon its competitive
position or financial condition.
Among the various programs for the protection of the environment which have been
adopted by the Cooperative to date, the most important for the operations of the
Cooperative are the waste water discharge permit programs administered by the
environmental protection agencies in those states in which the Cooperative does
business and by the federal Environmental Protection Agency. Under these
programs, permits are required for processing facilities which discharge certain
wastes into streams and other bodies of water, and the Cooperative is required
to meet certain discharge standards in accordance with compliance schedules
established by such agencies. The Cooperative has received permits for all
facilities for which permits are required. Each year the Cooperative submits
applications for renewal permits as required for the facilities.
While the Cooperative cannot predict with certainty the effect of any proposed
or future environmental legislation or regulations on its processing operations,
management of the Cooperative believes that the waste disposal systems which are
now in operation or which are being constructed or designed are sufficient to
comply with all currently applicable laws and regulations.
The Cooperative is cooperating with environmental authorities in remedying
various minor environmental matters at several of its plants. Such actions are
being conducted pursuant to procedures approved by the appropriate environmental
authorities at a cost that is not expected to be material.
Expenditures related to environmental programs and facilities have not had, and
are not expected to have, a material effect on the earnings of the Cooperative.
In fiscal 2001, total capital expenditures of Pro-Fac were $26.2 million of
which approximately $0.6 million was devoted to the construction of
environmental facilities. The Cooperative estimates that the 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 Cooperative is not highly
seasonal, since the demand for its products is fairly constant throughout the
year. Exceptions to this general rule include some products that have higher
sales volume in the cool weather months (such as canned and frozen fruits and
vegetables, chili, and fruit fillings and toppings), and others that have higher
sales volume in the warm weather months (such as potato chips and salad
dressings). Since many of the raw materials processed by Agrilink Foods are
agricultural crops, production of these products is predominantly seasonal,
occurring during and immediately following the harvest seasons of such crops.
PRACTICES CONCERNING WORKING CAPITAL
Agrilink Foods must maintain substantial inventories throughout the year of
finished products produced from seasonal raw materials. These inventories are
generally financed through seasonal borrowings. Agrilink Foods' Revolving Credit
Facility is used primarily for seasonal borrowing, 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 Cooperative's industry segments are not dependent upon the business of a
single customer or a few customers. The Cooperative does not have any customers
to whom sales are made in an amount which equals 10 percent or more of the
Cooperative's net sales.
BACKLOG OF ORDERS
Backlog of orders has not historically been significant in the business of the
Cooperative. Orders are filled shortly after receipt from inventories of
packaged and processed foods.
BUSINESS SUBJECT TO GOVERNMENTAL CONTRACTS
No material portion of the business of the Cooperative is subject to
renegotiation of contracts with, or termination by, any governmental agency.
COMPETITIVE CONDITIONS
All products of the Cooperative, particularly branded products, compete with
those of other national and major regional food processors under highly
competitive conditions. The principal methods of competition in the food
industry are a ready availability of a broad line of products, product quality,
price, and advertising and sales promotion.
Quality of product and uniformity of quality are important methods of
competition. Sourcing of product from the members of Pro-Fac allows control over
the quality and uniformity of much of the raw product that is purchased. The
members of Pro-Fac generally operate relatively large production operations with
emphasis on mechanized growing and harvesting techniques. This factor is also an
advantage in producing uniform, high-quality food products.
The Cooperative's pricing is generally competitive with that of other food
processors for products of comparable quality. Branded products are marketed
under national and regional brands. In fiscal 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 Cooperative in the various markets in which they
are distributed.
Profit margins for fruits and vegetables are subject to industry supply and
demand fluctuations, attributable to changes in growing conditions, acreage
planted, inventory carryover, and other factors. The Cooperative has endeavored
to protect against changing growing conditions through geographical expansion of
its sources of supply.
The percentage of ongoing sales under brand names owned and promoted by the
Cooperative amount to approximately 64 percent; sales to the 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 Cooperative. Nearly all products sold by the Cooperative compete with the
nationally advertised brands of leading food processors, including Del Monte,
Green Giant, Heinz, Frito-Lay, and Kraft, and similar major brands, as well as
with the branded and private label products of a number of regional processors,
many of which operate only in portions of the marketing area served by the
Cooperative.
MARKET AND INDUSTRY DATA
Unless otherwise stated in this report, industry and market share data used
throughout this Form 10-K was derived from industry sources believed by the
Cooperative to be reliable, 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 Cooperative has not independently verified
such industry, market share, and brand awareness data and makes no
representation to its accuracy.
NEW PRODUCTS AND RESEARCH AND DEVELOPMENT
Agrilink Foods operates a technical center located in Green Bay, Wisconsin that
is responsible for new product development, quality assurance, and engineering.
Approximately 27 employees are employed within this facility. Agrilink Foods
follows a four-stage new product development process as follows: screening,
feasibility, development, and commercialization. This new product development
process ensures input from consumers, customers, and internal functional areas
before a new product is brought to market.
The Cooperative also focuses on the development of related products or
modifications of existing products for the Cooperative's brands and customized
products for the Cooperative's private label and food service businesses.
The amount expensed during the last three fiscal years on Cooperative-sponsored
and customer-sponsored research activities relating to the development of new
products or the improvement of existing products has not been material.
During fiscal 1999, Birds Eye 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 Cooperative 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 Cooperative 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 Cooperative believes its current relationship with its employees is
good.
ITEM 2. DESCRIPTION OF PROPERTIES
All plants, warehouses, office space and other facilities used by the
Cooperative in its business are either owned by Agrilink Foods or leased from
unaffiliated third parties. All of the properties owned by Agrilink Foods are
subject to mortgages in favor of their respective primary lender. In general,
the properties include offices, processing plants and warehouse space. Some
processing plants are located in rural areas that are convenient for the
delivery of crops. The Cooperative also has dispersed warehouse locations to
facilitate the distribution of finished products. Agrilink Foods believes that
their facilities are in good condition and suitable for operations.
Agrilink Foods' Alton, New York property is held for sale.
The following table describes all material facilities leased or owned by the
Cooperative (other than the properties held for sale, certain public warehouses
leased by the Cooperative from unaffiliated third parties from time to time, and
facilities owned by Agrilink Foods' joint venture, Great Lakes Kraut Company,
LLC). Except as otherwise noted, each facility set forth below is owned by the
Cooperative.
FACILITIES UTILIZED BY THE COOPERATIVE
Type of Property (By Product Line) Location Square Feet
- ---------------------------------- -------- -----------
Vegetables:
Warehouse Sodus, MI 243,138
Freezing plant, dry storage warehouse, and office Barker, NY 123,600
Freezing plant Bergen, NY 138,554
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 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
Type of Property (By Product Line) Location Square Feet
- ---------------------------------- -------- -----------
Canned Meals:
Canning plant, warehouse and distribution center Tacoma, WA 313,488
Other:
Office building, manufacturing plant and warehouse Tacoma, WA 372,164
Parking lot and yards (1) Tacoma, WA 305,470
Office Building - Fuller Building (1) Tacoma, WA 60,000
Headquarters office (1) Rochester, NY 76,372
(1)Leased from third parties, although certain related equipment is owned by the
Cooperative.
ITEM 3. LEGAL PROCEEDINGS
The Cooperative is party to legal proceedings from time to time in the normal
course of its business. In the opinion of management, any liability that might
be incurred upon the resolution of these proceedings will not, in the aggregate,
have a material adverse effect on either of these businesses, financial
condition, and results of operations. Further, no such proceedings are known to
be contemplated by governmental authorities. The Cooperative maintains general
liability insurance coverage in amounts deemed to be adequate by management.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no trading market for the Cooperative's common stock. Only
member/growers of the Cooperative can own shares of common stock. As of June 30,
2001, there were 604 members of Pro-Fac holding shares of Pro-Fac Class A Common
Stock and 153 members holding shares of Pro-Fac Class B Common Stock. The Class
B common stock held by former members of Agripac was repurchased on July 19,
2001.
In fiscal 2001 and 2000, dividends on Class A Common Stock were paid at a rate
of 5.0 percent. No dividends were paid on Class B common stock. Further
information required by this item is contained in NOTE 14 to the "Notes to
Consolidated Financial Statements," at "Quarterly Financial Data," and at
"Selected Financial Data."
During fiscal 2001, the Cooperative issued shares of its Class A Cumulative
Preferred Stock in exchange for shares for its Non-cumulative Preferred Stock,
on a share-for-share basis. Such exchanges are exempt from registration under
section 3(a)(9) of the Securities Act of 1933. The dates and amounts of the
exchanges are set forth below:
Date Number of Shares Value of Shares
January 14, 2001 1,731 $ 43,275
April 28, 2001 262 6,550
June 25, 2001 99 2,475
------- ---------
Total 2,092 $ 52,300
======= =========
The Credit Facility restricts the amount of dividends and other distributions
that may be made by Pro-Fac to its stockholders. The Notes restrict the amount
of dividends and other payments that may be made by Agrilink Foods. See further
discussion at "Liquidity and Capital Resources."
In addition, New York Cooperative Law restricts the amount of annual dividends
on common stock to 12 percent per annum.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in Thousands, Except Capital Stock Data)
Fiscal Year Ended June
----------------------------------------------------------------
2001* 2000 1999** 1998 1997
------------ --------- ---------- ----------- ----------
Consolidated summary of operations:
Net sales $1,339,211 $1,306,659 $1,292,021 $ 742,161 $ 755,464
Cost of sales (956,182) (919,029) (928,262) (546,578) (563,722)
----------- ---------- ---------- ---------- ----------
Gross profit 383,029 387,630 363,759 195,583 191,742
Selling, administrative, and general expenses (298,283) (288,511) (293,646) (141,739) (145,214)
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 86,525 108,172 132,634 55,737 50,093
Interest expense (85,073) (83,511) (67,420) (30,767) (36,473)
Amortization of debt issue costs 0 0 (5,500) 0 0
---------- ---------- ---------- ---------- ----------
Pretax income before extraordinary item, cumulative effect of an
accounting change, dividends, and allocation of net proceeds 1,452 24,661 59,714 24,970 13,620
Tax provision (968) (8,497) (24,746) (7,840) (5,529)
----------- ---------- ---------- ---------- ----------
Income before extraordinary item, cumulative effect of an
accounting change, dividends and allocation of net proceeds 484 16,164 34,968 17,130 8,091
Extraordinary item relating to the early extinguishment of debt
(net of income taxes) 0 0 (18,024) 0 0
Cumulative effect of an accounting change (net of income taxes) 0 0 0 0 4,606
---------- ---------- ---------- ---------- ----------
Net income $ 484 $ 16,164 $ 16,944 $ 17,130 $ 12,697
========== ========== ========== ========== ==========
Allocation of Net Proceeds:
Net income $ 484 $ 16,164 $ 16,944 $ 17,130 $ 12,697
Dividends on Class A common and preferred stock (8,123) (7,410) (6,734) (6,328) (5,503)
----------- ---------- ---------- ---------- ----------
Net proceeds (7,639) 8,754 10,210 10,802 7,194
Allocation (to)/from earned surplus 7,639 (3,832) (10,210) (4,662) (3,661)
---------- ---------- ---------- ---------- ----------
Net proceeds available to Class A members $ 0 $ 4,922 $ 0 $ 6,140 $ 3,533
========== ========== ========== ========== ==========
Allocation of net proceeds available to Class A members:
Payable to Class A members currently (30% of qualified proceeds
available to Class A members in fiscal 2000 and 25% in
fiscal 1998 and 1997) $ 0 $ 1,477 $ 0 $ 1,535 $ 883
Allocated to Class A members but retained by the Cooperative:
Qualified retains 0 3,445 0 4,605 2,650
---------- ---------- ---------- ---------- ----------
Net proceeds available to Class A members $ 0 $ 4,922 $ 0 $ 6,140 $ 3,533
========== ========= ========== ========== ==========
CMV related to Class A members $ 69,013 $ 69,623 $ 62,154 $ 58,530 $ 51,445
========== ========== ========== ========== ==========
CMV related to Class B members $ 9,423 $ 14,060
========== ==========
Total net proceeds allocated to Class A members as a
percent of CMV*** 0.00% 7.07% 0.00% 10.51% 6.87%
========== ========== ========== ========== ==========
Total net proceeds allocated to Class B members as a
percent of CMV**** 0.00% 0.00% 0.00% 0.00% 0.00%
========== ========== ========== ========== ==========
Balance Sheet Data:
- ------------------
Working capital $ 243,628 $ 260,481 $ 237,331 $ 94,103 $ 75,950
Ratio of current assets to current liabilities 2.1:1 1.9:1 1.9:1 1.7:1 1.6:1
Total assets $1,061,351 $1,187,266 $1,196,479 $ 569,240 $ 546,677
Debt to equity ratio***** 4.2:1 4.4:1 4.7:1 1.7:1 1.8:1
Class A common stock $ 11,287 $ 10,665 $ 9,979 $ 9,129 $ 8,944
Class B cumulative redeemable Preferred $ 239 $ 237 $ 261 $ 270 $ 315
Shareholders' and members' capitalization, redeemable stock,
and common stock $ 153,315 $ 159,843 $ 152,111 $ 141,369 $ 132,663
Total long-term debt and senior subordinated notes (excludes
current portion and capital leases) $ 631,128 $ 679,205 $ 702,322 $ 229,937 $ 229,829
Capital Stock Data Cash dividends paid per share:
Class A Common $ .25 $ .25 $ .25 $ .25 $ 0.00
Non-Cumulative Preferred $ 1.50 $ 1.50 $ 1.50 $ 1.50 $ 1.50
Class A Cumulative Preferred $ 1.72 $ 1.72 $ 1.72 $ 1.72 $ 1.72
Class B Cumulative Preferred $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Average Class A common stock investment per Class A member $ 18,688 $ 17,037 $ 15,471 $ 14,399 $ 14,333
Number of Class A Common Stock members: 604 626 645 634 624
Number of Class B Common Stock members:****** 153 150 0 0 0
* See NOTE 3 to "Notes to Consolidated Financial Statements." Information
includes the activities of AgriFrozen until February 15, 2001. In
addition, fiscal 2001 consists of 53 weeks.
** Includes nine months of operating results from the September 28, 1998
DFVC Acquisition.
*** Payment to Class A members for CMV was 100 percent of deliveries in
fiscal 2001 and 1999.
**** Payment to Class B members for CMV was 63.50 percent in fiscal 2001 and
89.16 percent of deliveries in fiscal 2000.
***** For purposes of this calculation, debt includes both current and non-
current debt, and equity includes common stock and redeemable preferred
stock.
****** On July 19, 2001, Pro-Fac repurchased all Class B common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to outline the significant reasons for changes
in the Consolidated Statement of Operations, Net Proceeds and Comprehensive
Income from fiscal 1999 through fiscal 2001.
Pro-Fac Cooperative, Inc.'s ("Pro-Fac" or the "Cooperative") wholly-owned
subsidiary, Agrilink Foods, Inc. ("Agrilink Foods") has four primary product
lines including: vegetables, fruits, snacks and canned meals. The Cooperative's
former subsidiary, AgriFrozen, had vegetables as its one primary product line.
The majority of each of the product lines' net sales are within the United
States. In addition, all of the Cooperative's operating facilities, excluding
one facility in Mexico, are within the United States.
The vegetable product line consists of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable
category include Birds Eye, Birds Eye Voila!, Birds Eye Simply Grillin',
Freshlike, Veg-All, McKenzies, and Brooks Chili Beans. The fruit product line
consists of canned and frozen fruits including fruit fillings and toppings.
Branded products within the fruit category include Comstock and Wilderness. The
snack product line consists of potato chips, popcorn and other corn-based snack
items. Branded products within the snack category include Tim's Cascade Chips,
Snyder of Berlin, Husman, La Restaurante, Erin's, Beehive, Pops-Rite, Super Pop,
and Flavor Destinations. The canned meal product line includes canned meat
products such as chilies, stews, soups, and various other ready-to-eat prepared
meals. Branded products within the canned meal category include Nalley. The
Cooperative's other product line primarily represents salad dressings. Brand
products within this category include Bernstein's, and Nalley.
The following tables illustrate the Cooperative's results of operations by
product line for the fiscal years ended June 30, 2001, June 24, 2000, and June
26, 1999, and the Cooperative'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 66.9 93.8 65.7 64.2 60.0
Fruits 14.1 11.0 15.7 11.0 10.8 10.1
Snack 9.4 7.3 9.8 6.9 5.8 5.4
Canned meals 8.1 6.3 8.6 6.0 8.4 7.9
Other 4.3 3.4 6.5 4.5 5.3 4.9
----- ----- ----- ----- ----- ------
Continuing segments 121.8 94.9 134.4 94.1 94.5 88.3
Businesses sold or closed3 6.5 5.1 8.5 5.9 12.6 11.7
----- ----- ----- ----- ----- ------
Total 128.3 100.0 142.9 100.0 107.1 100.0
===== ===== ===== ===== ===== ======
1 Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
is defined as the sum of pretax income before dividends, allocation of net
proceeds, extraordinary item, interest expense, amortization of debt issue
costs associated with the Bridge Facility, depreciation and amortization of
goodwill and other intangibles.
EBITDA should not be considered as an alternative to net income or cash
flows from operations or any other generally accepted accounting principles
measure of performance or as a measure of liquidity.
EBITDA is included herein because the Cooperative believes EBITDA is a
financial indicator of a Cooperative's ability to service debt. EBITDA as
calculated by the Cooperative may not be comparable to calculations as
presented by other companies.
2 Excludes the gains on sales of assets, the restructuring charge, and the
extraordinary item relating to the early extinguishment of debt. See NOTES
1 and 3 to the "Notes to Consolidated Financial Statements."
3 Represents the operating results of operations sold or no longer part of
the Cooperative. 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 72.4 836.7 64.0 769.5 59.6
Fruits 120.4 9.0 114.4 8.8 115.8 9.0
Snack 97.9 7.3 90.9 7.0 91.4 7.1
Canned meals 64.2 4.8 62.3 4.8 66.4 5.1
Other 50.6 3.8 56.0 4.3 74.8 5.8
------- ----- ------- ------ ------- -----
Continuing segments 1,303.3 97.3 1,160.3 88.9 1,117.9 86.6
Businesses sold or closed 1 35.9 2.7 146.4 11.1 174.1 13.4
------- ----- ------- ------ ------- -----
Total 1,339.2 100.0 1,306.7 100.0 1,292.0 100.0
======= ===== ======= ====== ======= =====
1 Includes net sales of operations sold or no longer part of the Cooperative.
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 64.4 65.4 64.5 43.9 60.1
Fruits 11.4 13.2 13.9 13.7 8.4 11.5
Snack 5.6 6.5 6.7 6.6 3.3 4.5
Canned meals 6.6 7.6 6.7 6.6 6.5 8.9
Other 1.9 2.2 4.6 4.5 3.7 5.1
---- ----- ----- ----- ----- -----
Continuing segments 81.2 93.9 97.3 95.9 65.8 90.1
Businesses sold or closed 2 5.3 6.1 4.2 4.1 7.2 9.9
---- ----- ----- ----- ----- -----
Total3 86.5 100.0 101.5 100.0 73.0 100.0
==== ===== ===== ===== ===== =====
1 Excludes the gains on sales of assets, the restructuring charge, and the
extraordinary item relating to the early extinguishment of debt. See NOTES
1 and 3 to the "Notes to Consolidated Financial Statements."
2 Represents the operating results of the operations sold or no longer part
of the Cooperative. 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 $85.1 million, $83.5
million, and $72.9 million for the years ended June 30, 2001, June 24,
2000, and June 26, 1999, respectively, results in pretax income before
extraordinary item, dividends, and allocation of net proceeds. Management
does not allocate interest expense to product lines when evaluating product
line performance.
Total Assets
(Dollars in Millions)
As of Fiscal Years Ended
-------------------------------------------------------------------------
June 30,2001 June 24, 2000 June 26, 1999
-------------------- --------------------- ---------------------
% of % of % of
$ Total $ Total $ Total
------- ----- -------- ----- ------- -----
Vegetables 839.8 79.1 867.1 73.0 880.8 73.6
Fruits 71.9 6.8 79.4 6.7 90.2 7.5
Snacks 47.0 4.4 43.5 3.7 40.9 3.4
Canned Meals 45.3 4.3 45.7 3.8 46.2 3.9
Other 57.2 5.3 52.2 4.4 43.1 3.6
------- ----- -------- ----- ------- -----
Continuing segments 1,061.2 99.9 1,087.9 91.6 1,101.2 92.0
Businesses sold or closed1 0.0 0.0 99.1 8.4 94.4 7.9
Assets held for sale 0.1 0.1 0.3 0.0 0.9 0.1
------- ----- -------- ----- ------- -----
Total 1,061.3 100.0 1,187.3 100.0 1,196.5 100.0
======= ===== ======== ===== ======= =====
1 Includes the assets of operations sold or no longer part of the
Cooperative. See NOTE 3 to the "Notes to Consolidated Financial
Statements."
CHANGES FROM FISCAL 2001 TO FISCAL 2000
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
Cooperative'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 Cooperative's overall market share
includes branded retail unit sales, as reported by Information Resources, Inc.,
and management's estimate of the Cooperative's private label share based upon
factory shipments.
Excluding the gain on sales of assets (net of tax), net income decreased $11.4
million from fiscal 2000. While the Cooperative 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 has 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 or no longer part of the
Cooperative, 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 Cooperative'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, Agrilink Foods 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.
Agrilink Foods' 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 Agrilink Foods' 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 Agrilink Foods' canned meal products are produced at the Agrilink Foods'
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 Agrilink Foods' dressing
products are produced at Agrilink Foods' 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,
respectively. Significant variances as highlighted above, primarily result from
increased manufacturing costs, competitive pressures, and changes in product
mix.
Gains on Sales of Assets: On June 23, 2000, Agrilink Foods sold its pickle
business based in Tacoma, Washington to Dean Pickle and Specialty Products
Company. This business included pickle, pepper, and relish products sold
primarily under the Nalley and Farman's brand names. Agrilink received proceeds
of approximately $10.3 million which were applied to bank loans ($4.0 million of
which was applied to the Term Loan Facility and $6.3 million of which was
applied to the Agrilink Foods' Revolving Credit Facility). A gain of
approximately $4.3 million was recognized on this transaction.
On July 21, 2000, Agrilink Foods sold the machinery and equipment utilized in
the production of pickles and other related products to Dean Pickle and
Specialty Products Company. No significant gain or loss was recognized on this
transaction. Proceeds of approximately $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 operates. Under a related
agreement, the Cooperative supplies raw cucumbers grown in the Northwestern
United States to Dean Pickle and Specialty Products Company, for a minimum
10-year period at market pricing.
On December 17, 1999 Agrilink Foods announced they had completed the sale of the
Cambria, Wisconsin processing facility to Del Monte. The Cooperative received
proceeds of approximately $10.5 million which were applied to bank loans. A gain
of approximately $2.3 million was recognized on this transaction. The sale 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 $1.6 million from the prior year to
$85.1 million. The increase is the result of an increase in the weighted average
interest rate of 45 basis points resulting from both amendments to the Agrilink
Foods' 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 Agrilink Foods'
credit facility. The increases were offset by lower average outstanding balances
during the fiscal year of approximately $62.6 million, primarily due to required
repayments and mandatory prepayments of short-term debt associated with
businesses sold and the elimination of AgriFrozen business activity resulting
from Pro-Fac's abandonment of its equity interest in AgriFrozen on February 15,
2001.
Tax Provision: The tax provision of $1.0 million in fiscal 2001 represents a
reduction of $7.5 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 Cooperative's effective
tax rate. The Cooperative's effective tax rate has historically been negatively
impacted by the non-deductibility of certain amounts of goodwill. The
Cooperative's effective tax rate is also impacted by the net proceeds
distributed to members. A further discussion of tax matters is included at NOTE
9 to the "Notes to Consolidated Financial Statements."
CHANGES FROM FISCAL 1999 TO FISCAL 2000
During fiscal 2000, total net sales decreased $14.7 million or 1.1 percent, to
$1,306.7 million from $1,292.0 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 Cooperative's overall market share,
for the 52-week period ending June 25, 2000, for frozen vegetables approximated
29.8 percent. The Cooperative's overall market share includes branded retail
unit sales, as reported by Information Resources, Inc., and management's
estimate of the Cooperative's private label share based upon factory shipments.
Net income for fiscal 2000 of $16.2 million, however, represented a $0.8 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 and
additional debt associated with the Agripac acquisition which occurred on
February 23, 1999. 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 Agrilink Foods 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
Agrilink Foods' 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. Agrilink Foods' 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. Agrilink Foods' 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, Agrilink Foods 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 sales 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
Agrilink Foods' 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 Agrilink Foods' 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 Agrilink Foods' 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 $108.2 million in fiscal 2000 decreased
approximately $24.4 million from $132.6 million in fiscal 1999. Excluding the
impact of businesses sold and other non-recurring items, 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 produt 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 Agrilink Foods experienced significant benefits from its
efforts in 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, Agrilink Foods sold its pickle
business based in Tacoma, Washington to Dean Pickle and Specialty Products
Company. This business included pickle, pepper, and relish products sold
primarily under the Nalley and Farman's brand names. Agrilink received proceeds
of approximately $10.3 million which were applied to bank loans ($4.0 million of
which was applied to the Term Loan Facility and $6.3 million of which was
applied to the Agrilink Foods' Revolving Credit Facility). A gain of
approximately $4.3 million was recognized on this transaction.
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 operates. Under a related
agreement, the Cooperative supplies raw cucumbers grown in the Northwestern
United States to Dean Pickle and Specialty Products Company, for a minimum
10-year period at market pricing.
On December 17, 1999 Agrilink Foods announced they had completed the sale of the
Cambria, Wisconsin processing facility to Del Monte. The Cooperative received
proceeds of approximately $10.5 million which were applied to bank loans. A gain
of approximately $2.3 million was recognized on this transaction. The sale
includes an agreement for Del Monte to produce a portion of Agrilink Foods'
product needs during the 2000 packing season.
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. on July 1, 1997. The decrease of $0.4
million over the prior year is attributable to the sale of assets. See further
discussion at NOTE 5 to the "Notes to Consolidated Financial Statements."
Interest Expense: Interest expense increased $16.1 million to $83.5 million in
fiscal 2000 from $67.4 million in fiscal 1999. The increase in interest is
associated with debt utilized to finance the DFVC and Agripac acquisitions and
higher levels of seasonal borrowings to fund additional working capital
requirements associated with the increase in the Cooperative's size. As a result
of the date of the DFVC Acquisition, interest expense has been included for 12
months in fiscal 2000 and 9 months in fiscal 1999. In addition, as a result of
the Agripac acquisition, interest expense has been included for 12 months in
fiscal 2000 and 4 months in fiscal 1999. This increase is also associated with
an overall increase in prevailing interest rates which occurred over the last
year.
Amortization of Debt Issue Costs Associated with the Bridge Facility: In order
to consummate the DFVC Acquisition, Agrilink Foods entered into a $200 million
bridge loan facility (the "Bridge Facility"). The Bridge Facility was repaid
with the proceeds from the new senior subordinated note offering (see NOTE 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.
Tax Provision: The tax provision of $8.5 million in fiscal 2000 represents a
reduction of $16.2 million from the prior year. Of this decrease, $25.2 million
is attributable to the provision associated with the fiscal 1999 gain on sale of
the aseptic operations and the tax benefit of $2.1 million associated with the
amortization of debt issue costs also in fiscal 1999. In fiscal 2000, the sale
of certain intangibles in conjunction with the pickle sale negatively impacted
the Cooperative's effective tax rate. As previously outlined, the Cooperative's
effective tax rate has historically been negatively impacted by the
non-deductibility of certain amounts of goodwill. The Cooperative's effective
tax rate is also impacted by the net proceeds distributed to members. A further
discussion of tax matters is included at NOTE 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 $18.0 million (net of
income taxes of $10.4 million).
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the Consolidated
Statement of Cash Flows for fiscal 2001 compared to fiscal 2000.
Net cash provided by operating activities of $50.2 million in fiscal 2001
increased $58.6 million from the fiscal 2000 net cash used in operations of $8.4
million. This change primarily resulted from a reduction in inventory resulting
from the sale 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 reduction 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 accruals associated with promotional
activity recorded within accounts payable and accrued expenses.
The purchase of inventory by Agrilink Foods from AgriFrozen 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
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. The activities accounted for
approximately $63.2 million in proceeds in fiscal 2000. Proceeds from disposals
in fiscal 2001 amounted to $5.8 million and 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
$0.8 million. Property, plant and equipment purchases were for general operating
purposes.
Net cash used in financing activities decreased by $2.2 million. The change was
primarily due to lower levels of borrowings under Agrilink Foods' Revolving
Credit Facility.
AGRILINK FOODS DEBT
Credit Facility (Bank Debt): In connection with the DFVC Acquisition, Agrilink
Foods entered into a Credit Facility with Harris Bank as Administrative Agent,
the Bank of Montreal as Syndication Agent, and the lenders thereunder. The
Credit Facility consists of a $200 million Revolving Credit Facility and a $455
million Term Loan Facility. The Term Loan Facility is comprised of the Term A
Facility, which has a maturity of five years, the Term B Facility, which has a
maturity of six years, and the Term C Facility, which has a maturity of seven
years. The Revolving Credit Facility has a maturity of five years. All previous
bank debt was repaid in conjunction with the execution of the Credit Facility.
The Credit Facility bears interest, at Agrilink Foods' option, at the
Administrative Agent's alternate base rate or the London Interbank Offered Rate
("LIBOR") plus, in each case, applicable margins of: (i) in the case of
alternate base rate loans, (x) 1.25 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,
Agrilink Foods pays a commitment fee calculated at a rate of 0.50 percent per
annum on the daily average unused commitment under the Revolving Credit
Facility.
Upon consummation of the DFVC Acquisition, Agrilink Foods drew $455 million
under the Term Loan Facility, consisting of $100 million, $175 million and $180
million of loans under the Term A Facility, Term B Facility and Term C Facility,
respectively. Additionally, Agrilink Foods drew $93 million under the Revolving
Credit Facility for seasonal working capital needs and $14.3 million under the
Revolving Credit Facility was issued for letters of credit. During December
1998, Agrilink Foods' primary lender exercised its right under the 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 pickle machinery
and equipment. In addition, during fiscal 2001, principal payments of $13.5
million were made on the Term Loan facilities.
Agrilink Foods' 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), and (iii) all of Agrilink Foods'
rights under the agreement to acquire DFVC (principally indemnification rights)
and the Marketing and Facilitation Agreement between Agrilink Foods and Pro-Fac.
Agrilink Foods' obligations under the Credit Facility are guaranteed by Pro-Fac
(excluding AgriFrozen) and certain of Agrilink Foods' subsidiaries.
The Credit Facility contains customary covenants and restrictions on Agrilink
Foods' ability to engage in certain activities, including, but not limited to:
(i) limitations on the incurrence of indebtedness and liens, (ii) limitations on
sale-leaseback transactions, consolidations, mergers, sale of assets,
transactions with affiliates and investments and (iii) limitations on dividend
and other distributions. The 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 are not consolidated with Pro-Fac for
purposes of determining compliance with the covenants. In August 2001, September
2000, and August 1999, Agrilink Foods entered into amendments to the original
covenants. In conjunction with these amendments, Agrilink Foods 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.
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 used to consummate the DFVC Acquisition, Agrilink
Foods 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 Agrilink Foods,
subordinated in right of payment to certain other debt obligations of Agrilink
Foods (including Agrilink Foods' obligations under the Credit Facility). The
Notes are guaranteed by Pro-Fac and certain of Agrilink Foods' subsidiaries.
The Notes contain customary covenants and restrictions on Agrilink Foods'
ability to engage in certain activities, including, but not limited to: (i)
limitations on the incurrence of indebtedness and liens; (ii) limitations on
consolidations, mergers, sales of assets, transactions with affiliates; and
(iii) limitations on dividends and other distributions. Agrilink Foods is in
compliance with all covenants, restrictions, and requirements under the Notes.
Subordinated Bridge Facility: To complete the DFVC Acquisition, Agrilink Foods
entered into a Subordinated Bridge Facility (the "Bridge Facility"). During
November 1998, the net proceeds from the sale of the 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,
Agrilink Foods issued to Dean Foods a Subordinated Promissory Note for $30
million aggregate principal amount due November 22, 2008. Interest on the note
is accrued quarterly in arrears commencing December 31, 1998, at a rate per
annum of 5 percent until November 22, 2003, and at a rate of 10 percent
thereafter. As the stated rates on the note are below market value, Agrilink
Foods has imputed the appropriate discount utilizing an effective interest rate
of 11-7/8 percent. Interest accruing through November 22, 2003 is required to be
paid in kind through the issuance by Agrilink Foods of additional subordinated
promissory notes identical to the note. Agrilink Foods satisfied this
requirement in fiscal 2001 through the issuance of five additional promissory
notes each for approximately $0.4 million. Interest accruing after November 22,
2003 is payable in cash. The notes may be prepaid at Agrilink Foods' option
without premium or penalty.
The note is expressly subordinate to the Credit Facility and the Notes and
contains no financial covenants. The 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, Agrilink Foods repurchased $159,985,000
principal amount of its Old Notes, of which $160 million aggregate principal
amount was previously outstanding. Agrilink Foods paid a total of approximately
$184 million to repurchase the Old Notes, including interest accrued thereon of
$2.9 million. Holders who tendered consented to certain amendments to the
indenture relating to the Old Notes, which eliminated or amended substantially
all the restrictive covenants and certain events of default contained in such
indenture. Agrilink Foods may repurchase the remaining Old Notes in the future
in open market transactions, privately negotiated purchases or otherwise.
AGRIFROZEN DEBT
Credit Agreement and Subordinated Note Agreement of AgriFrozen: With respect to
AgriFrozen's Credit Facility, AgriFrozen was not in compliance with certain
financial tests and ratios, and certain restrictions and limitations, which
constituted defaults under the loan agreement. The lender to AgriFrozen was
unwilling to commit to extend further credit to AgriFrozen. In part, because of
these issues and as a result of continued pressure on the private
label/industrial business sectors served by AgriFrozen, the board of directors
of AgriFrozen decided in January 2001 to cease operations. Subsequently,
AgriFrozen surrendered its inventory assets to the lender.
AgriFrozen's obligations are not guaranteed by Pro-Fac or Agrilink Foods and are
expressly non-recourse as to Pro-Fac and Agrilink Foods. In addition, neither
Pro-Fac nor Agrilink Foods pledged any of their respective properties as
security for AgriFrozen's indebtedness. As such, the current circumstances of
AgriFrozen's debt and liquidity are not expected to have a material affect on
the business of Pro-Fac or Agrilink Foods. In addition, on February 15, 2001,
Pro-Fac abandoned its ownership interest in AgriFrozen and, accordingly,
eliminated all balances related to AgriFrozen, including debt effective that
date. In conjunction with this action, Pro-Fac recognized a loss of $1,000,
which represented its investment in AgriFrozen.
OTHER MATTERS
Capital Expenditures: Agrilink Foods anticipates that capital expenditures for
fiscal years 2002 and 2003 will be approximately $20 million to $25 million per
annum. Agrilink Foods 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, the Cooperative
has focused on its core businesses and growth opportunities. During the fourth
quarter of fiscal 2001, Agrilink Foods 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 thi