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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 (Fee Required)
For the Fiscal Year Ended June 27, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from to
File No. 0-20539
PRO-FAC COOPERATIVE, INC.
(Exact Name of Registrant as Specified in Its Charter)
New York 16-6036816
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification Number)
90 Linden Place, 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. [ ]
Aggregate market value of voting stock held by non-affiliates of the registrant
as of August 1, 1998
Common Stock: $8,444,385
(based upon par value of shares since there is no market for the Registrant's
common stock)
Number of common shares outstanding at August 1, 1998:
Common stock: 1,822,513
FORM 10-K ANNUAL REPORT - 1998
PRO-FAC COOPERATIVE, INC.
TABLE OF CONTENTS
PART I
PAGE
ITEM 1. Description of Business
General Development of Business............................................................. 3
Relationship with Agrilink.................................................................. 3
Narrative Description of Business........................................................... 4
Financial Information About Industry Segments............................................... 6
Packaging and Distribution.................................................................. 6
Trademarks.................................................................................. 7
Raw Material Sources........................................................................ 7
Environmental Matters....................................................................... 8
Seasonality of Business..................................................................... 8
Practices Concerning Working Capital........................................................ 8
Significant Customers....................................................................... 9
Backlog of Orders........................................................................... 9
Business Subject to Government Contracts.................................................... 9
Competitive Conditions...................................................................... 9
New Products and Research and Development................................................... 10
Employees................................................................................... 10
Cautionary Statement on Forward-Looking Statements.......................................... 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 8. Financial Statements and Supplementary Data..................................................... 23
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 45
PART III
ITEM 10. Directors and Executive Officers of the Registrant.............................................. 46
ITEM 11. Executive Compensation.......................................................................... 49
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................................. 51
ITEM 13. Certain Relationships and Related Transactions.................................................. 53
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 55
Signatures...................................................................................... 58
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Pro-Fac Cooperative, Inc. ("Pro-Fac" or "the Cooperative") is an agricultural
cooperative corporation formed in 1960 under New York law to process and market
crops grown by its members. 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. Its
approximately 600 members are growers (or associations of growers) located
principally in New York, Pennsylvania, Illinois, Michigan, Washington, Oregon,
Iowa, Nebraska, Florida, and Georgia.
Agrilink Foods, Inc. ("Agrilink" or the "Company"), incorporated in New York in
1961, is a producer and marketer of processed food products, including canned
and frozen fruits and vegetables, canned desserts and condiments, fruit fillings
and toppings, canned chilies and stews, salad dressings, pickles, peanut butter
and snack foods. Agrilink has three primary business units: Curtice Burns Foods
("CBF"), Nalley Fine Foods, and its Snack Foods Group. Each business unit offers
different products and is managed separately. The majority of each of the
business unit's net sales is within the United States. In addition, currently
all of the Company's operating facilities are within the United States.
On November 3, 1994, Pro-Fac acquired Agrilink, and Agrilink became a
wholly-owned subsidiary of Pro-Fac. Pro-Fac and Agrilink have a long-standing
contractual relationship pursuant to which Pro-Fac provided crops and financing
to Agrilink, Agrilink provided a market and management to Pro-Fac, and Pro-Fac
shared in the profits of Agrilink. The purchase price and fees and expenses
related to the Acquisition were financed with borrowings under a credit
agreement (the "Credit Agreement") with CoBank, ACB (the "Bank"), and the
proceeds of the Company's 12.25 percent Senior Subordinated Notes due 2005 (the
"Notes"). Pro-Fac has guaranteed the obligations of the Company under the Credit
Agreement and the Notes.
On July 27, 1998, the Company announced that it had reached a definitive
agreement with Dean Foods Company ("Dean") of Franklin Park, Illinois, to
acquire Dean's vegetable operations which includes the nationally known Birds
Eye brand and Dean's Freshlike and VegAll brands (the "Dean Foods Acquisition").
The Dean Foods Vegetable Company ("DFVC") reported revenues of $620.6 million
and operating earnings of $42.4 million for fiscal 1998. DFVC employs
approximately 2,000 full-time employees in 13 plants, located in California,
Minnesota, New York, Texas, and Wisconsin. The acquisition is expected to close
in September 1998 and will be accounted for as a purchase.
On September 18, 1997, the Cooperative's wholly-owned subsidiary, Curtice Burns
Foods, Inc. changed its name to Agrilink Foods, Inc. The three recently
consolidated business units, Comstock Michigan Fruit, Southern Frozen Foods, and
Brooks Foods, are now called Curtice Burns Foods ("CBF").
RELATIONSHIP WITH AGRILINK
Upon consummation of the Acquisition, Pro-Fac and Agrilink 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, for Agrilink to provide a market and
management services to Pro-Fac, and for Pro-Fac to share in the profits and
losses of Agrilink. Pro-Fac is required to reinvest at least 70 percent of the
additional patronage income received back into Agrilink. To preserve the
independence of Agrilink, the Pro-Fac Marketing Agreement also requires that
certain of the directors of Agrilink be individuals who are not employees or
shareholders of, or otherwise affiliated with, Pro-Fac or the Company
("Disinterested Directors") and requires that certain decisions be approved by
the Disinterested Directors.
The Credit Agreement and the Notes restrict the ability of Pro-Fac to amend the
Pro-Fac Marketing and Facilitation Agreement. The Credit Agreement and the Notes
also restrict the amount of dividends and other payments that may be made by the
Company to Pro-Fac.
Under the Pro-Fac Marketing Agreement, Agrilink manages the business and affairs
of Pro-Fac and provides all personnel and administrative support required.
Pro-Fac pays Agrilink a quarterly fee of $25,000 for these services.
Purchase of Crops From Pro-Fac: Under the Pro-Fac Marketing Agreement, Agrilink
purchases crops from Pro-Fac at the commercial market value ("CMV") of those
crops. CMV is defined as the weighted average price paid by other commercial
processors for similar crops sold under preseason contracts and in the open
market in the same or competing market area. Under the Pro-Fac Marketing
Agreement, Agrilink paid Pro-Fac $58.5 million, $51.4 million, and $44.7 million
as CMV for crops purchased from Pro-Fac in fiscal years 1998, 1997, and 1996,
respectively. The crops purchased by Agrilink from Pro-Fac represented
approximately 76 percent, 71 percent, and 72 percent of all raw agricultural
crops purchased by Agrilink in fiscal 1998, 1997, and 1996, respectively.
CMV is determined by a joint committee of the Boards of Directors of Pro-Fac and
Agrilink. The Pro-Fac Marketing Agreement requires a majority of the
Disinterested Directors approve the recommendation of the joint committee.
Although CMV is intended to be no more than the fair market value of the crops
purchased by Agrilink, it may be more or less than the price Agrilink would pay
in the open market in the absence of the Pro-Fac Marketing Agreement.
Under the Marketing and Facilitation Agreement between Pro-Fac and Agrilink,
Pro-Fac agrees to sell and deliver to Agrilink all of the Agrilink annual profit
plan requirements (i.e. crops needed to support anticipated sales and
production). The profit plan is determined by the Boards of Directors of Pro-Fac
and Agrilink. Approval of the profit plan by the Board of Directors of Agrilink
requires the affirmative vote of a majority of the Disinterested Directors.
Subject only to its inability to deliver because of the vagaries of weather or
other causes validly preventing growing such crops as set forth in the
agreements between Pro-Fac and its members, Pro-Fac is required to deliver to
Agrilink the crops described in the profit plan, and Agrilink agrees to process
and market such crops.
Patronage Income of Pro-Fac: In addition to CMV, under the Pro-Fac Marketing
Agreement, Agrilink will pay to Pro-Fac as additional patronage income in any
year in which the Company has earnings on products which were processed from
crops supplied by Pro-Fac ("Pro-Fac Products") up to 90 percent of such earnings
but in no case more than 50 percent of all pretax earnings (before dividing with
Pro-Fac) of the Company. In years in which the Company has losses on Pro-Fac
Products, the Company reduces the CMV it would otherwise pay to Pro-Fac by up to
90 percent of such losses, but in no case by more than 50 percent of all pretax
losses (before dividing with Pro-Fac) of the Company. This additional patronage
income is paid to Pro-Fac for services provided to Agrilink, including the
provision of a long term, stable crop supply, favorable payment terms for crops
and the sharing of risks in losses of certain operations of the business.
Earnings and losses are determined at the end of the fiscal year, but are
accrued on an estimated basis during the year.
Agrilink paid additional patronage income to Pro-Fac of $12.5 million and $10.3
million (including Pro-Fac's share of an accounting change) in fiscal 1998 and
1997, respectively, for those years. In fiscal 1996, Agrilink reduced the amount
of CMV due to Pro-Fac by $9.0 million based on an allocation of a loss at
Agrilink on Pro-Fac products.
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.
Subsequent to the Acquisition, Pro-Fac is required to reinvest at least 70
percent of the additional patronage income in Agrilink.
NARRATIVE DESCRIPTION OF BUSINESS
The Company sells products in three principal categories: (i) "branded"
products, which are sold under various Company trademarks, (ii) "private label"
products, which are sold to grocers who in turn use their own brand names on the
products and (iii) "foodservice" products, which are sold to foodservice
institutions such as restaurants, caterers, bakeries, and schools. In fiscal
1998, approximately 52 percent of the Company's net sales were branded and the
remainder divided between private label and foodservice. The Company's branded
products are listed under the "Trademarks" section of this report. The Company's
private label products include salad dressings, salsa, fruit fillings and
toppings, canned puddings, canned and frozen vegetables, Southern frozen
vegetable specialty products, and frozen and breaded products which are sold to
customers such as Food Lion, Kroger, Piggly Wiggly, Safeway, SuperValu, Topco,
Wegmans and Winn-Dixie. The Company's foodservice products include salad
dressings, pickles, fruit fillings and toppings, canned and frozen vegetables,
frozen Southern specialties, frozen breaded and battered products, canned
puddings, cheese sauces and canned and frozen fruit, which are sold to customers
such as Alliant Food Service, Carvel, Church's, Disney, Foodservice of America,
KFC, MBM, McDonald's, PYA, and SYSCO.
A description of the Company's three major business units is as follows:
Curtice Burns Foods ("CBF"): On September 18, 1997, the Comstock Michigan Fruit,
Southern Frozen Foods, and Brooks Foods business units were consolidated and are
now called Curtice Burns Foods, headquartered in Rochester, New York. The
consolidated entity currently represents the largest business unit of Agrilink.
This business unit produces products in several food categories, including fruit
fillings and toppings; aseptically-produced products; canned and frozen fruits
and vegetables and popcorn. Well-known brand names include "Chill Ripe,"
"Comstock," "Greenwood," "Just for Chili," "McKenzie's," "McKenzie's Gold King,"
"Pops-Rite," "Rich and Tangy," "Super Pop," "Southern Farms," "Thank You,"
"Tropic Isle," and "Wilderness." In fiscal 1998, approximately 36 percent of net
sales for these businesses represented branded products, approximately 18
percent represented private label products and approximately 46 percent
represented foodservice/industrial products.
This business unit processes fruits and vegetables under Company brands and
private labels. Additional products include value-added items such as canned
specialty fruits, frozen vegetable blends, and Southern-specialty products such
as black-eyed peas, okra, Southern squash, and Southern specialty side dishes.
Canned beans and tomato products are sold in several Midwestern states under the
Brooks label. These categories include value-added items such as Chili Hot Beans
and stewed tomatoes. This business unit is also a major supplier of branded and
private label fruit fillings to retailers and foodservice institutions such as
restaurants, caterers, bakeries and schools. Success in the fruit and vegetable
processing business is driven, among other things, by an ability to control
costs.
Aseptic operations produce puddings and cheese sauces for sale. The aseptic
production process involves preparation of the product in a sterile environment
beginning with batch formulation and continuing through packaging. As a result,
once packaged, the product requires no further cooking. As part of the Dean
Foods Acquisition, the Company has agreed to sell to Dean its aseptic operations
located in Benton Harbor, Michigan. The fiscal 1998 net sales of the aseptic
operations were $97.9 million. The fiscal 1998 earnings before interest, taxes,
depreciation, and amortization ("EBITDA") was approximately $17.5 million. The
sale price is approximately $83.0 million. It is anticipated the Company will
recognize a gain on this sale.
Effective May 1, 1998, the Company acquired Nutrition Medical's private label
adult nutrition formula business. Under terms of the Agreement, Nutrition
Medical will be paid royalty payments for two years. The Company also received
existing product and packaging inventories. It is anticipated this contract will
be transferred to DFVC in conjunction with the pending sale of the aseptic
operations.
Effective March 31, 1998, the Company entered into a multiyear logistic
agreement under which GATX Logistics will provide freight management, packaging
and labeling services, and distribution support to and from production
facilities owned by the Company in and around Coloma, Michigan. The agreement
included the sale of the Company's labeling equipment and distribution center.
Effective March 30, 1998, the Company acquired the majority of assets and the
business of DelAgra Corp. of Bridgeville, Delaware. DelAgra Corp. is a producer
of private label frozen vegetables.
In the fall of 1997, the Company was named the sole supplier of frozen
vegetables for all Sam's club stores across the United States. Shipments began
in the fourth quarter of fiscal 1998, and it is anticipated full distribution
will occur in the first quarter of fiscal 1999.
Effective July 1, 1997, the Company and Flanagan Brothers, Inc. of Bear Creek,
Wisconsin contributed all their assets involved in sauerkraut production to form
a new sauerkraut company. This new company, Great Lakes Kraut Company, operates
as a New York limited liability company with ownership and earnings divided
equally between the two companies. This joint venture includes the Silver Floss
and Krrrrisp Kraut Brands.
On June 27, 1997, Americold acquired the Company's frozen foods distribution
center in Montezuma, Georgia. In addition, the two companies entered into a
long-term logistics agreement under which Americold manages this facility and
all frozen food transportation operations of Agrilink in Georgia and New York.
In May 1997, Agrilink sold its private label canned vegetable operation to
Seneca Foods, along with its Blue Boy brand. Included in this sale were the
Leicester, New York manufacturing facility and LeRoy, New York distribution
warehouse. The disposal did not include the Greenwood and Silver Floss labels,
or sauerkraut, beets in glass jars, or frozen vegetable businesses. This
transaction also included an agreement requiring Agrilink to handle all
vegetable sourcing for Seneca Foods at its New York plants.
Nalley Fine Foods: Nalley is headquartered in Tacoma, Washington. It markets
canned meat products such as chilies and stews, pickles, salad dressings, peanut
butter, salsa, and syrup, which are sold throughout the Northwest and Western
United States and Western Canada. Approximately 74 percent of Nalley products
are branded; however, private label and foodservice accounts for a growing
percentage of Nalley business.
Several of Nalley's products have leading market shares in the Pacific
Northwest, such as chili and "Nalley" and "Farman's" pickles. In the Pacific
Northwest, the Company's "Nalley" and "Bernstein's" brands of salad dressings
have a combined market share of approximately 20 percent.
In April 1997, the Company acquired certain businesses from Nalley Canada Ltd.,
a privately held, independent snack food company and former subsidiary of
Agrilink. The acquired Canadian operations include a $12.0 million consumer
products business that includes Nalley's chili and snack dips; Adams Natural
Peanut Butter; Bernstein's Salad Dressings; LaRestaurante Salsa and other niche
dressing and sauce products marketed throughout the western Provinces of Canada.
Snack Foods Group: During fiscal 1998, two of the Agrilink snack businesses,
Snyder of Berlin and Husman Snack Foods, were united under one management group.
The two entities combined resources to obtain the most cost efficient
operations. Tim's Cascade Potato Chips represents the Company's other snack food
operation. A brief description of each follows:
Snyder of Berlin: Snyder of Berlin, located in Berlin, Pennsylvania,
produces and markets several varieties of potato chips including regular
and kettle fried, as well as several varieties of corn-based snack
products, primarily under the "Snyder of Berlin" brand. Snyder products are
recognized for their unique taste and freshness among users in Mid-Atlantic
states.
Effective March 10, 1998, the Company acquired the majority of assets and
the business of C&O Distributing Company ("C&O") of Canton, Ohio. C&O
distributes snack products for Snyder of Berlin.
Effective July 21, 1998, the Company acquired J.A. Hopay Distributing Co.,
Inc. ("Hopay") of Pittsburgh, Pennsylvania. Hopay distributes snack
products for Snyder of Berlin.
Husman Snack Foods: Husman Snack Foods, located in Cincinnati, Ohio,
manufactures and markets potato chips, popcorn, and cheese curls and
distributes other snack items in Cincinnati and Dayton, Ohio and areas of
Northern Kentucky. Husman creates a unique product niche by customizing its
product development and promotions to local tastes. Multi-packs and
licensing agreements with local restaurants are two ways Husman creates its
value-added products.
Tim's Cascade Potato Chips: Tim's Cascade Potato Chips, located in Auburn,
Washington, produces kettle-fried potato chips, popcorn, cheese curls, and
snack mix in the Washington, Northern Idaho, Oregon, and Montana area.
Kettle frying produces a potato chip that is thicker and crisper than other
potato chips.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The business of the Company is principally conducted in one industry segment,
the processing and sale of various food products. The financial statements for
the fiscal years ended June 27, 1998, June 28, 1997, and June 29, 1996, which
are included in this report, reflect the information relating to that segment
for each of the Company's last three fiscal years.
PACKAGING AND DISTRIBUTION
The food products produced by the Company are distributed to various consumer
markets in all 50 states. International sales account for a small portion of the
Company's activities. Branded lines of the CBF business unit are primarily sold
through food brokers who sell primarily to supermarket chains and various
institutional entities. Nalley has its own sales personnel responsible for sales
within the Pacific Northwest and uses food brokers for sales in other marketing
areas. Snyder's, Tim's and Husman products are marketed through distributors
(some of which are owned and operated by the Company) who sell directly to
retail outlets in the Midwest, Mid-Atlantic and Pacific Northwest.
Customer brand operations encompass the sale of products under private labels to
chain stores and under the controlled labels of buying groups. The Company has
developed central storage and distribution facilities that permit multi-item
single shipment to customers in key marketing areas.
Curtice Burns Express ("CBX"), a subsidiary of the Company, is a licensed common
carrier with authority in 48 states. It is used by the Company to obtain
backhaul volume on shipments using the Company's trucks or contract haulers. The
other business units of the Company lease their equipment to CBX for these
backhauls.
TRADEMARKS
The major brand names under which the Company markets its products are
trademarks of the Company. Such brand names are considered to be of material
importance to the business of the Company since they have the effect of
developing brand identification and maintaining consumer loyalty. All of the
Company's trademarks are of perpetual duration so long as periodically renewed,
and it is currently intended that the Company will maintain them in force. The
major brand names utilized by the Company are:
Product Brand Name
Chilies, stews and soups Brooks, Mariners Cove, Nalley, Riviera
Fruits and vegetables Brooks, Chill-Ripe, Gold King, Gracias, Greenwood, Hoosier Sweets, Just for Chili, McKenzie's,
McKenzie's Gold King, Naturally Good, Ritter, Southern Farms, Southland, Thank You, Tropic Isle
Fruit fillings and toppings Comstock, Globe, Gracias, Thank You, Wilderness
Peanut butter Adams
Pickles Farman's, Nalley
Popcorn Pops-Rite, Super Pop
Puddings(1) Gracias, Thank You
Salad dressings Bernstein's, Bernstein's Light Fantastic, Nalley
Snack food Cheese Pleezers, Husman, La Restaurante, Snyder of Berlin, Thunder Crunch, Tim's Cascade Chips,
Naturally Good, Matthews
Syrup Lumberjack
Sauerkraut(2) Silver Floss, Farman's Krrrrisp Kraut
(1) It is anticipated that these brand names will be licensed to Dean for the
production and sale of puddings in conjunction with the anticipated sale of
the aseptic operations.
(2) Represents trademarks of Great Lakes Kraut Company The Company owns a 50 percent interest in this joint venture.
RAW MATERIAL SOURCES
In fiscal 1998, the Company acquired approximately 76 percent of its raw
agricultural products from Pro-Fac. The Company also purchased on the open
market some crops of the same type and quality as those purchased from Pro-Fac.
Such open market purchases may occur at prices higher or lower than those paid
to Pro-Fac for similar products. See further discussion of the relationship with
Pro-Fac in NOTE 2 to the "Notes to Consolidated Financial Statements."
The vegetable and fruit portions of the business can be positively or negatively
affected by weather conditions nationally and the resulting impact on crop
yields. Favorable weather conditions can produce high crop yields and an
oversupply situation. This situation typically results in depressed selling
prices and reduced profitability on the inventory produced from that year's
crops. Excessive rain or drought conditions can produce low crop yields and a
shortage situation. This typically results in higher selling prices and
increased profitability. While the national supply situation controls the
pricing, the supply can differ regionally because of variations in weather.
The Company purchases all of its requirements for nonagricultural products,
including containers, in the open market. Although the Company has not
experienced any difficulty in obtaining adequate supplies of such items,
occasional periods of short supply of certain raw materials may occur.
ENVIRONMENTAL MATTERS
The disposal of solid and liquid waste material resulting from the preparation
and processing of foods and the emission of wastes and odors inherent in the
heating of foods during preparation are subject to various federal, state, and
local environmental laws and regulations. Such laws and regulations have had an
important effect on the food processing industry as a whole, requiring
substantially all firms in the industry to incur material expenditures for
modification of existing processing facilities and for construction of new waste
treatment facilities. The Company is also subject to standards imposed by
regulatory agencies pertaining to the occupational health and safety of its
employees. Management believes that continued measures to comply with such laws
and regulations will not have a material adverse effect upon its competitive
position or financial condition.
Among the various programs for the protection of the environment which have been
adopted by the Company to date, the most important for the operations of the
Company are the waste water discharge permit programs administered by the
environmental protection agencies in those states in which the Company does
business and by the federal Environmental Protection Agency. Under these
programs, permits are required for processing facilities which discharge certain
wastes into streams and other bodies of water, and the Company is required to
meet certain discharge standards in accordance with compliance schedules
established by such agencies. The Company has received permits for all
facilities for which permits are required. Each year the Company submits
applications for renewal permits for some of the facilities.
While the Company cannot predict with certainty the effect of any proposed or
future environmental legislation or regulations on its processing operations,
management of the Company believes that the waste disposal systems which are now
in operation or which are being constructed or designed are sufficient to comply
with all currently applicable laws and regulations.
The Company is cooperating with environmental authorities in remedying various
leaks and spills at several of its plants. Such actions are being conducted
pursuant to procedures approved by the appropriate environmental authorities at
a cost that is not expected to be material.
Expenditures related to environmental programs and facilities have not had, and
are not expected to have, a material effect on the earnings of the Company. In
fiscal 1998, total capital expenditures of Pro-Fac and the Company were $14.1
million of which approximately $0.6 million was devoted to, the construction of
environmental facilities. The Company estimates that the capital expenditures
for environmental control facilities principally wastewater treatment
facilities, will be approximately $0.8 million for the 1999 fiscal year.
However, there can be no assurance that expenditures will not be higher.
SEASONALITY OF BUSINESS
From the point of view of sales, the business of the Company is not highly
seasonal, since the demand for its products is fairly constant throughout the
year. Exceptions to this general rule include some products that have higher
sales volume in the cool weather months (such as canned 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 condiments). Since
many of the raw materials processed by the Company are agricultural crops,
production of these products is predominantly seasonal, occurring during and
immediately following the harvest seasons of such crops.
PRACTICES CONCERNING WORKING CAPITAL
The Company must maintain substantial inventories throughout the year of those
finished products produced from seasonal raw materials. These inventories are
generally financed through seasonal borrowings.
A short-term line of credit is available to the Company under agreements with
the Bank. This line of credit is used primarily for seasonal borrowing, the
amount of which fluctuates during the year. The line of credit is subject to
annual renewal.
Both the maintenance of substantial inventories and the practice of seasonal
borrowing are common to the food processing industry.
SIGNIFICANT CUSTOMERS
The Company's one principal industry segment is not dependent upon the business
of a single customer or a few customers. The Company does not have any customers
to whom sales are made in an amount which equals 10 percent or more of the
Company's net sales.
BACKLOG OF ORDERS
Backlog of orders has not historically been significant in the business of the
Company. Orders are filled shortly after receipt from inventories of packaged
and processed foods.
BUSINESS SUBJECT TO GOVERNMENTAL CONTRACTS
No material portion of the business of the Company is subject to renegotiation
of contracts with, or termination by, any governmental agency.
COMPETITIVE CONDITIONS
All products of the Company, particularly branded products, compete with those
of national and major regional food processors under highly competitive
conditions. Many of the national manufacturers have substantially greater
resources than the Company. The principal methods of competition in the food
industry are a ready availability of a broad line of products, product quality,
price, and advertising and sales promotion.
Quality of product and uniformity of quality are important methods of
competition. The Company's relationship with Pro-Fac gives the Company local
sources of supply, thus allowing the Company to exercise control over the
quality and uniformity of much of the raw product which it purchases. The
members of Pro-Fac generally operate relatively large production operations with
emphasis on mechanized growing and harvesting techniques. This factor is also an
advantage in producing uniform, high-quality food products.
The Company's pricing is generally competitive with that of other food
processors for products of comparable quality. The branded products of the
Company are currently marketed under regional brands and its marketing programs
are focused on local tastes and preferences as a means of developing consumer
brand loyalty. The Company's advertising program utilizes local media, national
magazines, and in-store promotions.
Although the relative importance of the above factors may vary between
particular products or customers, the above description is generally applicable
to all of the products of the Company in the various markets in which they are
distributed.
Profit margins for canned and frozen fruits and vegetables are subject to
industry supply and demand fluctuations, attributable to changes in growing
conditions, acreage planted, inventory carryover, and other factors. The Company
has endeavored to protect against changing growing conditions through
geographical expansion of its sources of supply. The Company has emphasized the
merchandising of its own brands and expanded service and product development for
its high volume private label and foodservice customers. The percentage of sales
under brand names owned and promoted by the Company (including franchise brands)
amount to approximately 52 percent; sales to the foodservice industry
(restaurants and institutional customers) represent approximately 23 percent;
private label sales currently represent approximately 15 percent; and sales to
other manufacturers are approximately 10 percent of total sales.
An estimate of the number of competitors in the markets served by the Company is
very difficult. Currently, nearly all products sold by the Company compete with
the nationally advertised brands of the leading food processors, including
Borden, DelMonte, Green Giant, Heinz, Frito-Lay, Kraft, Vlasic, Birds Eye, and
similar major brands, as well as with the branded and private label products of
a number of regional processors, many of which operate only in portions of the
marketing area served by the Company.
In conjunction with the anticipated Dean Foods Acquisition, the Company will
obtain the Birds Eye brand name. Management believes that the addition of the
DFVC branded products to the Company's portfolio will enhance its existing
business and provide for significant opportunities for growth.
NEW PRODUCTS AND RESEARCH AND DEVELOPMENT
The amount expensed during the last three fiscal years on Company-sponsored and
customer-sponsored research activities relating to the development of new
products or the improvement of existing products was not material, and the
number of employees engaged full-time in such research activities is also not
material. While the Company operates test kitchens and pilot plants for the
development of new products, the emphasis generally has been on the development
of related products or modifications of existing products for the Company's
brands and customized products for the Company's private label and foodservice
businesses. No new products which require the investment of a material amount of
assets have been publicly announced.
EMPLOYEES
As of June 27, 1998, the Company had 3,727 full-time employees, of whom 2,428
were engaged in production and the balance in management, sales and
administration. As of that date, the Company also employed approximately 334
seasonal and other part-time employees, almost all of whom were engaged in
production. Most of the production employees are members of various labor
unions. The Company believes its relationship with its employees is good.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, the Cooperative and/or Company makes oral and written
statements that may constitute "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995 (the "Act") or by the
Securities and Exchange Commission ("SEC") in its rules, regulations, and
releases. The Cooperative and/or Company desires to take advantage of the "safe
harbor" provisions in the Act for forward-looking statements made from time to
time, including, but not limited to, the forward-looking information contained
in the Management's Discussion and Analysis (pages 15 to 23 and other statements
made in this Form 10-K) and in other filings with the SEC.
The Cooperative and/or Company cautions readers that any such forward-looking
statements made by or on behalf of the Cooperative and/or Company are based on
management's current expectations and beliefs but are not guarantees of future
performance. Actual results could differ materially from those expressed or
implied in the forward-looking statements. Among the factors that could impact
the Cooperative's and/or Company's ability to achieve its goals are:
the impact of strong competition in the food industry;
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 and/or Company's success in
integrating operations and the availability of acquisition and alliance
opportunities; and
the Cooperative's and/or Company's ability to achieve the gains in
productivity and improvements in capacity utilization.
ITEM 2. DESCRIPTION OF PROPERTIES
All plants, warehouses, office space and other facilities used by the Company in
its business are either owned by Agrilink or one of its subsidiaries or leased
from third parties. All of the properties owned by Agrilink are subject to
mortgages in favor of the Bank. In general, each business unit occupies offices,
processing plants and warehouse space. Some business units have processing
plants located in rural areas that are convenient for the delivery of crops from
Pro-Fac members and warehouse locations dispersed to facilitate the distribution
of finished products. Agrilink believes that its facilities are in good
condition and suitable for the operations of the Company.
Four of the properties are held for sale. These properties are located in Alton,
New York; Rushville, New York, Mt. Summit, Indiana; and Wall Lake, Iowa.
The following table describes all material facilities leased or owned by the
Company (other than the properties held for sale, certain public warehouses
leased by the Company from third parties from time to time, and facilities owned
by the Company's joint venture, Great Lakes Kraut). Except as otherwise noted,
each facility set forth below is owned by the Company.
FACILITIES UTILIZED BY THE COMPANY
Type of Property (By Business Unit) Location Square Feet
CURTICE BURNS FOODS:
Office building, manufacturing plant and warehouse1 Benton Harbor, MI 239,252
Manufacturing plant and warehouse Fennville, MI 350,000
Canning plant and warehouse Lawton, MI 142,000
Warehouse Sodus, MI 243,138
Warehouse and office; public storage facility2 Vineland, NJ 191,710
Freezing plant; warehouse; office and dry storage Barker, NY 123,600
Freezing plant Bergen, NY 138,554
Cold storage and repack facility and public storage warehouse Brockport, NY 429,052
Canning plant and warehouse; freezing plant Oakfield, NY 263,410
Canning plant and warehouse Red Creek, NY 153,076
Manufacturing plant Ridgway, IL 50,000
Distribution and warehouse North Bend, NE 50,000
Office, freezing plant, cold storage and repackaging facility Montezuma, GA 591,300
Office, freezing plant and cold storage Alamo, TX 114,446
Manufacturing plant and warehouse Bridgeville, DE 104,383
NALLEY FINE FOODS:
Office building, warehouse and tank farm Enumclaw, WA 87,313
Office building, manufacturing plant and warehouse Tacoma, WA 412,564
Parking lot and yards2 Tacoma, WA 305,470
Warehouses2 Tacoma, WA 493,556
Receiving and grading station2 Cornelius, OR 11,700
Receiving and grading station2 Mount Vernon, WA 150,373
Office building - Fuller Building2 Tacoma, WA 60,000
SNACK FOODS GROUP:
Office, plant and warehouse Berlin, PA 190,225
Administrative, plant, warehouse and distribution center - Tim's2 Auburn, WA 34,000
Plant, warehouse, and distribution center - Matthews2 Auburn, WA 37,442
Office, plant and warehouse Cincinnati, OH 113,576
Distribution center2 Elwood City, PA 13,000
Distribution center2 Monessen, PA 20,000
Distribution center2 Canton, OH 8,200
CORPORATE HEADQUARTERS:
Headquarters office2 (Includes office space for CBF
as well as a Corporate Conference Center) Rochester, NY 62,500
1 It is anticipated this facility will be sold to Dean in conjunction with
the sales of the Company's aseptic operations.
2 Leased from third parties, although certain related equipment is owned by
the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to legal proceedings from time to time in the normal
course of its business. In the opinion of management, any liability that the
Company might incur upon the resolution of these proceedings will not, in the
aggregate, have a material adverse effect on the Company's business, financial
condition, and results of operations. Further, no such proceedings are known to
be contemplated by governmental authorities. The Company maintains general
liability insurance coverage in amounts deemed to be adequate by management.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The information required by this item is contained in NOTES 5, 8 and 9 to the
"Notes to Consolidated Financial Statements," at "Quarterly Financial Data," and
at "Selected Financial Data."
During fiscal 1998, the Cooperative issued 8,796 shares of its Class A
Cumulative Preferred Stock in exchange for shares for its Non-cumulative
Preferred Stock, on a share-for-share basis. Such exchanges are exempt from
registration under section 3(a)(9) of the Securities act of 1933. The dates and
amounts of the exchanges are set forth below:
Date Number of Shares Value of Shares
January 8, 1998 4,487 $112,175
April 8, 1998 3,485 87,125
June 27, 1998 824 20,600
----- --------
Total 8,796 $219,900
===== ========
ITEM 6. SELECTED FINANCIAL DATA
Consolidated Operating Data:
(Dollars in Thousands, Except Capital Stock Data)
Five Year Summary
1998 1997 1996 1995 1994
Net sales $719,665 $730,823 $739,094 $522,413 $ 58,237
Cost of sales 524,082 539,081 562,926 384,838 58,237
-------- -------- -------- -------- --------
Gross profit 195,583 191,742 176,168 137,575 0
Income from Agrilink prior to Acquisition 0 0 0 11,239 34,229
Interest income 0 0 770 4,402 0
Income from Great Lakes Kraut Company 1,893 0 0 0 0
Selling, administrative, and general (expenses)/income (141,739) (145,214) (151,671) (99,341) 1,056
Gain on sale of Finger Lakes Packaging 0 3,565 0 0 0
Restructuring charge 0 0 (5,871) 0 0
Additional costs incurred as a result of fire 0 0 0 (2,315) 0
-------- -------- --------- -------- --------
Operating income 55,737 50,093 19,396 51,560 35,285
Interest expense (30,767) (36,473) (41,998) (29,035) (11,587)
-------- -------- -------- -------- --------
Pretax income/(loss) before dividends, allocation of net proceeds, and
cumulative effect of an accounting change 24,970 13,620 (22,602) 22,525 23,698
Tax (provision)/benefit (7,840) (5,529) 13,071 7,028 844
-------- -------- -------- -------- --------
Income/(loss) before cumulative effect of an accounting change,
dividends and allocation of net proceeds 17,130 8,091 (9,531) 29,553 24,542
Cumulative effect of an accounting change 0 4,606 0 0 0
-------- -------- -------- -------- --------
Net income/(loss) $ 17,130 $ 12,697 $ (9,531) $ 29,553 $ 24,542
======== ======== ======== ======== ========
Allocation of Net Proceeds:
Net income/(loss) $ 17,130 $ 12,697 $ (9,531) $ 29,553 $ 24,542
Dividends on common and preferred stock (6,328) (5,503) (8,993) (4,914) (4,390)
-------- -------- -------- -------- --------
Net proceeds/(deficit) 10,802 7,194 (18,524) 24,639 20,152
Allocation (to)/from earned surplus (4,662) (3,661) 18,524 (16,964) (2,856)
-------- -------- -------- -------- --------
Net proceeds available to members $ 6,140 $ 3,533 $ 0 $ 7,675 $ 17,296
======== ======== ======== ======== ========
Allocation of net proceeds available to members:
Payable to members currently (25% of qualified proceeds available to
members in fiscal 1998 and 1997 and 20% in fiscal 1995 and 1994) $ 1,535 $ 883 $ 0 $ 1,475 $ 3,109
Allocated to members but retained by the Cooperative:
Qualified retains 4,605 2,650 0 5,900 12,437
Non-qualified retains 0 0 0 300 1,750
-------- -------- -------- -------- --------
Net proceeds available to members $ 6,140 $ 3,533 $ 0 $ 7,675 $ 17,296
======== ======== ======== ======== ========
CMV* $ 58,530 $ 51,445 $ 44,701 $ 55,855 $ 59,216
======== ======== ======== ======== ========
Net proceeds allocated to members as a percent of CMV 10.51% 6.87% (10.00)% 13.74% 29.21%
Net proceeds available to members as a percent of CMV:
Qualified 10.51% 6.87% 0.00% 13.20% 26.25%
Non-qualified 0.00 0.00 0.00 0.54% 2.96%
-------- -------- -------- -------- --------
Total net proceeds allocated to members as a percent of CMV 10.51% 6.87% 0.00% 13.74% 29.21%
======== ======== ======== ======== ========
Balance Sheet Data:
Investment in direct financing leases $ 0 $ 0 $ 0 $ 0 $141,322
Common stock $ 9,129 $ 8,944 $ 9,185 $ 9,395 $ 10,284
Redeemable Preferred $ 270 $ 315 $ 334 $ 0 $ 0
Shareholders' and members' capitalization and redeemable stock $141,369 $132,663 $126,700 $145,228 $123,765
Total long-term debt and senior subordinated notes (excludes
current portion) $229,937 $229,829 $327,683 $343,665 $127,134
Debt to equity ratio** 1.7:1 1.8:1 2.7:1 2.4:1 1.2:1
Total assets $566,708 $546,677 $637,297 $689,739 $296,051
Capital Stock Data
Cash dividends paid per share:
Common $ .25 $ 0.00 $ .25 .2750 $ .25
Non-Cumulative Preferred $ 1.50 $ 1.50 $ 1.50 $ 1.69 $ .57
Class A Cumulative Preferred $ 1.72 $ 1.72 $ 1.29 $ 0 $ 0
Class B Cumulative Preferred $ 1.00 $ 1.00 $ 1.00 $ 0 $ 0
Average common stock investment per member $ 14,399 $ 14,333 $ 14,419 $ 15,032 $ 14,546
Number of Members: 634 624 637 625 707
* Payment to the members for CMV was limited to 90 percent of deliveries in
fiscal 1996.
** For purposes of this calculation, debt includes both current and
non-current debt, and equity includes common stock and redeemable preferred
stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to outline the significant reasons for changes
in the Consolidated Statement of Operations and Net Proceeds from fiscal 1996
through fiscal 1998.
Pro-Fac processes and markets crops grown by its members through its
wholly-owned subsidiary, Agrilink.
Agrilink has three primary business units: Curtice Burns Foods ("CBF"), Nalley
Fine Foods, and its Snack Foods Group. Each business unit offers different
products and is managed separately. The majority of each of the business unit's
net sales is within the United States. In addition, currently all of the
Company's operating facilities are within the United States.
The CBF business unit produces products in several food categories, including
fruit fillings and toppings; aseptically-produced products; canned and frozen
fruits, vegetables, and popcorn. The Nalley business unit produces canned meat
products (such as chilies and stews), pickles, salad dressings, peanut butter,
salsa, and syrup. The Company's snack foods business unit consists of the Snyder
of Berlin, Husman Snack Foods, and Tim's Cascade Potato Chip businesses. This
business unit produces and markets potato chips and other salty-snack items.
The following tables illustrate the Cooperative's results of operations by
business unit for the fiscal years ended June 27, 1998, June 28, 1997, and June
29, 1996, and the Cooperative's total assets by business at June 27, 1998 and
June 28, 1997.
Net Sales
(Dollars in Millions)
Fiscal Years Ended
6/27/98 6/28/97 6/29/96
% of % of % of
$ Total $ Total $ Total
----- ----- ----- ----- ----- -----
CBF 469.0 65.2 440.2 60.2 431.2 58.4
Nalley Fine Foods 182.1 25.3 182.4 25.0 189.2 25.6
Snack Foods Group 68.6 9.5 67.3 9.2 63.7 8.6
----- ----- ----- ------- ------ -----
Subtotal ongoing operations 719.7 100.0 689.9 94.4 684.1 92.6
Businesses sold or to be sold1 0.0 0.0 40.9 5.6 55.0 7.4
----- ----- ----- ----- ------ -----
Total 719.7 100.0 730.8 100.0 739.1 100.0
===== ===== ===== ===== ===== =====
1 Includes the sales of Finger Lakes Packaging, the portion of the canned
vegetable business sold, Nalley Canada Ltd., and Nalley US Chips and Snacks
business. See NOTE 3 to the "Notes to Consolidated Financial Statements."
Operating Income1
(Dollars in Millions)
Fiscal Years Ended
6/27/98 6/28/97 6/29/96
% of % of % of
$ Total $ Total $ Total
---- ----- ------ ----- ---- -----
CBF 47.1 84.5 40.5 80.8 26.5 136.6
Nalley Fine Foods 10.4 18.7 10.8 21.6 (2.9) (14.9)
Snack Foods Group 6.9 12.4 5.9 11.8 4.1 21.1
Corporate overhead (8.7) (15.6) (10.3) (20.6) (1.6) (8.3)
---- ----- ----- ----- ---- -----
Subtotal ongoing operations 55.7 100.0 46.9 93.6 26.1 134.5
Businesses sold or to be sold and other non-recurring2 0.0 0.0 3.2 6.4 (6.7) (34.5)
---- ----- ----- ----- ---- -----
Total 55.7 100.0 50.1 100.0 19.4 100.0
==== ===== ===== ===== ==== =====
1 Excludes cumulative effect of an accounting change in fiscal 1997. See NOTE
1 to the "Notes to Consolidated Financial Statements."
2 In fiscal 1997, such amount includes the operating earnings and gain on the
sale of Finger Lakes Packaging, operating activities of the canned
vegetable business, final settlement of an insurance claim, and a loss on
the disposal of property held for sale. In fiscal 1996, such amount
includes restructuring initiatives and operating activities of both Finger
Lakes Packaging and the canned vegetable business. See NOTE 3 to the "Notes
to Consolidated Financial Statements."
EBITDA1,2
(Dollars in Millions)
Fiscal Years Ended
6/27/98 6/28/97 6/29/96
% of % of % of
$ Total $ Total $ Total
---- ----- ----- ----- ---- -----
CBF 61.0 78.9 57.1 74.4 44.4 101.6
Nalley Fine Foods 16.0 20.7 16.2 21.1 2.3 5.3
Snack Foods Group 8.8 11.4 7.6 9.9 6.0 13.7
Corporate (8.5) (11.0) (10.1) (13.1) (6.9) (15.8)
---- ----- ----- ----- ---- -----
Subtotal ongoing operations 77.3 100.0 70.8 92.3 45.8 104.8
Businesses sold and other non recurring3 0.0 0.0 5.9 7.7 (2.1) (4.8)
---- ----- ----- ----- ---- -----
Total 77.3 100.0 76.7 100.0 43.7 100.0
==== ===== ===== ===== ==== =====
1 Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
begins with the pretax income/(loss) before dividends and allocation of net
proceeds, and adds to such amount interest expense, depreciation, and
amortization of goodwill and other intangibles.
In conjunction with the acquisition of Agrilink by Pro-Fac in 1994, net
assets were adjusted to fair market value and additional debt was incurred.
Accordingly, depreciation and interest expense have increased, making
year-to-year comparisons of operating income and net income difficult to
analyze. Therefore, management believes EBITDA is a measurement that allows
the operations of the business to be compared in a consistent manner.
EBITDA does not represent information prepared in accordance with generally
accepted accounting principles, nor is such information considered superior
to information presented in accordance with generally accepted accounting
principles.
2 Excludes cumulative effect of an accounting change. See NOTE 1 to the
"Notes to Consolidated Financial Statements."
3 In fiscal 1997, such amount includes the operating earnings and gain on the
sale of Finger Lakes Packaging, operating activities of the canned
vegetable business, final settlement of an insurance claim, and a loss on
the disposal of property held for sale.
In fiscal 1996, such amount includes restructuring initiatives and
operating activities of both Finger Lakes Packaging and the canned
vegetable business.
See NOTE 3 to the "Notes to Consolidated Financial Statements."
Total Assets
(Dollars in Millions)
6/27/98 6/28/97
% of % of
$ Total $ Total
----- ----- ----- -----
CBF 362.2 63.9 329.0 60.6
Nalley Fine Foods 137.4 24.3 144.4 26.6
Snack Foods Group 28.0 4.9 26.7 4.9
Corporate 38.8 6.9 42.5 7.9
------ ----- ----- -----
Total 566.4 100.0 542.6 100.0
===== ===== ===== =====
CHANGES FROM FISCAL 1997 TO FISCAL 1998
Net income for fiscal 1998 of $17.1million represented a $4.4 million or 34.6
percent increase over the prior year's net income of $12.7 million. Total EBITDA
before cumulative effect of an accounting change was $77.3 million as compared
to $76.9 million in the prior year. Excluding the impact of businesses sold and
other non-recurring activities, EBITDA increased $6.5 million or 9.2 percent to
$77.3 million, while operating income increased $8.8 million or 18.8 percent to
$55.7 million from the prior year $46.9 million. These improvements reflected
the benefits from numerous initiatives including: (1) increase in volume and new
customers in many of the Cooperative's product lines; (2) the continuing
benefits from structural changes made within the organization including the
consolidation of operations and facilities; and (3) a decrease in interest
expense due to initiatives undertaken in the prior year to reduce debt and focus
on strategic product lines.
Net Sales: Total net sales for the year decreased $11.1 million or 1.5 percent
to $719.7 in fiscal year 1998 from $730.8 million in fiscal year 1997. Excluding
the net sales of businesses sold by the Cooperative, net sales increased by
$29.8 million or 4.3 percent to $719.7 million in fiscal year 1998 from $689.9
million in fiscal year 1997.
The increase in net sales for ongoing operations came primarily from the CBF
business unit which accounted for an increase of $28.8 million. This increase
was attributable to changes in volume and new customers. In addition, prior year
net sales include $13.8 million in sauerkraut sales, which are now accounted for
by the joint venture created in fiscal 1998. See NOTE 3, "Acquisitions,
Disposals, and Restructuring - Formation of New Sauerkraut Company." Excluding
the impact of sauerkraut sales from the prior year, net sales within the
vegetable category increased $20.2 million. Net sales for the fruit category
increased by $3.0 million to $119.7 million in fiscal 1998 due to improvements
in both pricing and product mix.
Net sales for aseptic products increased by $24.4 million to $97.9 million in
fiscal 1998 as a result of new business. It is anticipated that these operations
will be sold to Dean Foods Company ("Dean") during the first quarter of fiscal
1999.
Net sales for Nalley remained relatively flat with the prior year as gains in
the pickle and canned categories were offset by reductions in dressings and
peanut butter. Within the pickle category, net sales for fiscal 1998 increased
$3.0 million as a result of increased volume in the foodservice channel.
Competitive pressures on volume and price resulted in a $3.0 million decrease in
net sales for dressings. In addition, peanut butter experienced a $0.6 million
decrease in net sales.
Net sales for the Snack Foods Group increased by $1.3 million or 1.9 percent to
$68.6 million in fiscal 1998 as a result of new business in the Northwest and
product line extensions, including kettle chips within Snyder of Berlin.
Gross Profit: Gross profit of $195.6 million in fiscal 1998 increased $3.9
million or 2.0 percent from $191.7 million in fiscal 1997. Excluding the impact
of businesses sold in fiscal 1997, gross profit increased $8.1 million. This
increase is attributable to improved margins in many of the Cooperative's
product lines.
The increase in gross profit at the CBF business unit was $5.0 million. The
fruit category showed improvements of $5.5 million resulting from changes in
pricing and product mix. The vegetable category showed a decline of $0.9
million. However, excluding the impact of the canned vegetable business sold in
1997, margin within the vegetable category improved $1.5 million. This increase
is disproportionate to the increase in net sales described above primarily due
to pricing within the industry. As highlighted under "Short- and Long-Term
Trends," the vegetable portion of the Cooperative's business can be impacted by
the national market. During the third and fourth quarters of fiscal 1998,
pricing was negatively impacted by an oversupply situation.
Overall, gross margin at Nalley decreased $0.5 million. While production and
purchasing efficiencies yielded benefits, such amounts were offset by volume
declines within the dressing category due to competitive pressures.
Increases in net sales within the Snack Foods Group resulted in margin
improvements of $0.7 million.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have decreased $3.5 million as compared with the prior year.
This decrease is primarily due to: (1) reductions in selling expenses of $1.4
million; (2) reductions in incentive costs of $1.2 million; and (3) the impact
of a favorably settled outstanding tax claim with the state of Washington for
$1.4 million.
Income from Great Lakes Kraut Company: This amount represents earnings received
from the investment in Great Lakes Kraut Company, a joint venture formed between
Agrilink and Flanagan Brothers, Inc. See NOTE 3 - "Other matters - Formation of
New Sauerkraut Company" to the consolidated financial statements of Pro-Fac
included elsewhere herein.
Interest Expense: Interest expense decreased $5.7 million or 15.6 percent to
$30.8 million in fiscal 1998 from $36.5 million in fiscal 1997. This improvement
is primarily the result of management's focus on debt reduction during fiscal
year 1997. Specific actions taken by management included the sale of Finger
Lakes Packaging, the sale of the canned vegetable business, and the sale of the
Georgia distribution center. The reduction in debt accounted for $4.2 million of
the reduction in interest expense while changes in rate accounted for the
remaining $1.5 million reduction.
Provision for Taxes: The provision for taxes increased $2.3 million or 41.8
percent to $7.8 million in fiscal 1998 from $5.5 million in fiscal 1997. This
increase was a result of a $11.4 million increase in earnings before tax. The
Pro-Fac effective tax rate in fiscal 1998 was 31.4 percent which is impacted by
the net proceeds distributed to members and the non-deductibility of goodwill. A
further discussion of tax matters is included at NOTE 6 to the "Notes to
Consolidated Financial Statements" to the consolidated financial statements of
Pro-Fac included elsewhere herein.
CHANGES FROM FISCAL 1996 TO FISCAL 1997
Net income for fiscal 1997 of $12.7 million represented a $22.2 million increase
over the prior year's loss of $9.5 million. Total EBITDA before cumulative
effect of an accounting change was $76.9 million for the year ended June 28,
1997 as compared to $48.9 million in the prior year. EBITDA for ongoing business
reached $71.0 million as compared to the prior year's $51.0 million. This
significant improvement reflected the benefits from numerous initiatives
including: (1) a reduction in debt by $97.9 million which included the sales of
Finger Lakes Packaging, the canned vegetable business, the Georgia Distribution
facility, idle manufacturing facilities, and efforts to improve cash flow
through better management of working capital requirements (see NOTES 3 and 5 to
the "Notes to Consolidated Financial Statements"); (2) the implementation of
structural changes within the organization, including the consolidation of the
operations of Brooks Foods and Southern Frozen Foods into CBF; and (3) the
consolidation of support services such as human resources and agricultural
services. The reduction in interest expense as a result of the debt reduction
initiatives improved net income by $5.5 million and consolidation efforts
accounted for approximately $2.0 million of the $6.5 million reduction in
selling, administrative, and general expenses.
Structural changes within the business units included a review of the Nalley
operations and the consolidation of several other operations. EBITDA for the
Nalley business unit was $16.2 million for the year ended June 28, 1997 as
compared to $2.3 million in the prior year. These results were driven by
organizational changes and the absence of the significant start-up costs for the
new salad dressing line which were incurred throughout fiscal 1996.
Net Sales: Total net sales decreased by $8.3 million or 1.1 percent to $730.8
million in fiscal 1997 from $739.1 million in fiscal 1996. Excluding businesses
sold, net sales increased $5.8 million or 0.8 percent to $689.9 million in
fiscal 1997 from $684.1 million in fiscal 1996.
Net sales at CBF increased $9.0 million or 2.1 percent to $440.2 million in
fiscal 1997 from $431.2 million in fiscal 1996. This increase was due to
improvements in pricing and increased sales from new customers.
Net sales at Nalley decreased by $6.8 million or 3.6 percent to $182.4 million
in fiscal 1997 from $189.2 million in fiscal 1996. While the canned category
showed increases of $1.5 million, such gains were offset by reductions in all
other categories of $8.3 million. Such reductions resulted from competitive
pressures on volume and price.
Net sales at the Snack Foods Group increased $3.6 million or 5.7 percent to
$67.3 million in fiscal 1997 from $63.7 million in fiscal 1996. Of this
increase, $0.9 million was attributable to the acquisition of Matthews Candy
Company during the fourth quarter of fiscal 1996. The $2.7 million increase from
the existing remaining business was due to the addition of new customers and
product line extensions. Management believes the acquisition of Matthew's
broadened its line of products and, therefore, enhanced its earnings capability.
However, due to the competitive nature of the snack food industry, management is
unable to assess whether such increases within the Snack Foods Group will
continue to be realized.
Gross Profit: Gross profit of $191.7 million in fiscal 1997 increased $15.5
million or 8.8 percent from $176.2 million in fiscal 1996. This increase is
attributable to improved margins in all of the business units.
The increase in gross profit was benefited by improved/increased pricing at the
CBF business unit. As highlighted under "Short and Long-Term Trends," the
vegetable and fruit portions of the Cooperative's business can be positively or
negatively impacted by the national crop yields. The status of the national
supply situation controls pricing. During fiscal 1997, crop yields of
commodities in markets in which the Cooperative operates were below that of the
prior year and, therefore, pricing levels within the commodities markets in
which the Cooperative competes were increased. The increase in pricing favorably
impacted gross profit by $9.5 million.
Nalley, which in the prior year experienced extremely high start-up costs on its
new salad dressing line, has managed through those issues and has significantly
improved margins. Operating improvements made at Nalley, primarily the
elimination of start-up costs on the new salad dressing line, reductions in
manufacturing variances, and reductions in promotional expenses improved gross
profit by $4.0 million.
Increased sales from the Snack Foods Group also improved profitability. The
increase in sales within the Snack Foods Group contributed an increase to gross
profit of $1.5 million.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have decreased $6.5 million as compared with the prior year.
This decrease is net of the inclusion of expenses (approximately $5.6 million)
relating to the Company's incentive program. Payments under the incentive
programs in fiscal 1997 are attributable to the significantly improved earnings.
The net decrease is attributable to a $5.8 million decrease in selling ($1.7
million), advertising ($1.0 million), and trade promotions expenses ($3.1
million). These impacts were primarily noted at Nalley's. Reductions in other
administrative expenses accounted for $10.5 million and were primarily
attributable to benefits from the restructuring initiative that began late in
fiscal 1996. These initiatives included the consolidation of the administrative
functions at CBF and the sale of Finger Lakes Packaging. In addition, in fiscal
1996, selling, administrative, and general expenses were offset by a $4.4
million income adjustment related to a reduction in the amount of CMV paid to
the Cooperative members.
Gain on Sale of Finger Lakes Packaging: On October 9, 1996, the Company
completed the sale of Finger Lakes Packaging to Silgan Containers Corporation,
an indirect, wholly-owned subsidiary of Silgan Holdings, Inc., headquartered in
Stamford, Connecticut. A gain of approximately $3.6 million was recognized on
this disposal. The Company received proceeds of approximately $30.0 million
which were applied to Bank debt. The transaction also included a long-term
supply agreement.
Interest Expense: Interest expense decreased $5.5 million or 13.1 percent to
$36.5 million in fiscal 1997 from $42.0 million in fiscal 1996. This improvement
resulted from both the inventory reduction and cash-flow-management programs
initiated in fiscal 1996. In addition, debt was reduced by the proceeds from the
sale of Finger Lakes Packaging, the canned vegetable business, and idle
facilities.
Provision for Taxes: The provision for taxes increased $18.6 million to $5.5
million in fiscal 1997 from a $13.1 million benefit in fiscal 1996. The
Cooperative's effective tax rate in fiscal 1997 was 40.6 percent which was
impacted by the net proceeds distributed to members and the non-deductibility of
goodwill. The Cooperative's tax benefit in fiscal 1996 was favorably impacted by
tax benefits resulting from the prior year's exempt status. A further discussion
of tax matters is included at NOTE 6 to the "Notes to the Consolidated Financial
Statements."
Cumulative Effect of a Change in Accounting: Effective June 30, 1996, accounting
procedures were changed to include in prepaid expenses and other current assets,
manufacturing spare parts previously charged directly to expense. Management
believes this change is preferable because it provides a better matching of
costs with related revenues when evaluating interim financial statements. The
favorable cumulative effect of the change (net of income taxes of $1.1 million)
was $4.6 million. Pro forma amounts for the cumulative effect of the accounting
change on prior periods are not determinable due to the lack of physical
inventory counts required to establish quantities at the respective dates.
Management does not believe that the difference in accounting methodologies for
spare parts had any material impact on the Company's historic financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the "Consolidated
Statement of Changes in Cash Flows" included in the consolidated financial
statements of Pro-Fac, included elsewhere herein, for fiscal 1998 compared to
fiscal 1997.
Net cash provided by operating activities decreased in fiscal 1998 primarily due
to an increase in inventory of approximately $25.7 million. This increase is
primarily due to: (1) an increase of $6.0 million in inventory to support
additional business regarding the Sam's national club stores as described below;
(2) an increase of $2.0 million of inventory associated with the acquisition of
DelAgra; and (3) the impact of the crop and yields resulting from the 1997
growing season. Such crop size and yields resulted in an increased supply
throughout the industry. Accordingly, sales volume was negatively impacted in
the second half of the year. Management has formulated a plan to reduce these
levels during the first half of fiscal 1999. See further discussion at "Short-
and Long-Term Trends."
In addition, during October of 1997, the Cooperative became the sole supplier of
frozen vegetables for the Sam's national club stores. The executed contract
extends for a two-year period and required an $11.0 million prepayment for
volume discounts. Due to the time frame required for the incumbent supplier to
exit these operations and for the Company to implement full distribution, this
contract did not significantly impact fiscal 1998 earnings. However, management
anticipates this arrangement will have a favorable impact on fiscal 1999
earnings; although, there can be no assurance it will do so.
An offsetting increase in cash provided by operating activities resulted from
the changes in accounts payable and accrued expenses due to the timing of
liquidation.
Net cash provided by investing activities decreased significantly in fiscal
1998, primarily due to the sales in fiscal 1997 of Finger Lakes Packaging, a
portion of the canned vegetable business, the Georgia distribution center, and
several idle facilities. In fiscal 1998 the only significant disposal consisted
of the sale of the distribution center in Coloma, Michigan. All proceeds from
asset sales were applied to Bank debt in accordance with the terms of the Credit
Agreement. In addition, in fiscal 1998, acquisitions accounted for the use of
$7.4 million of investing cash flow. These proceeds were utilized to purchase
DelAgra Corporation of Bridgeville, Delaware and C&O Distributing Company of
Canton, Ohio. The purchase of property, plant, and equipment in both years was
for general operating purposes.
Financing activities used $3.8 million of cash in fiscal 1998 compared to using
$104.2 million in cash for fiscal 1997. Cash used in fiscal 1997 included $97.9
million of debt repayment which resulted from the cash provided by the sale of
certain assets during the year.
Borrowings: Under the Cooperative's Credit Agreement with the Bank, Agrilink is
able to borrow up to $82.0 million for working capital purposes under the
Seasonal Facility, subject to a borrowing base limitation, and obtain up to
$18.0 million in aggregate face amount of letters of credit pursuant to a Letter
of Credit Facility. The borrowing base is defined as the lesser of (i) the
available line and (ii) the sum of 60 percent of eligible accounts receivable
plus 50 percent of eligible inventory.
The Cooperative believes that the cash flow generated by its operations and the
amounts available under the Seasonal Facility should be sufficient to fund its
working capital needs, fund its capital expenditures and service its debt for
the foreseeable future.
As of June 27, 1998, (i) cash borrowings outstanding under the Seasonal Facility
were zero and (ii) additional availability under the Seasonal Facility, after
taking into account the amount of the borrowing base, was $82.0 million. In
addition to its seasonal financing, as of June 27, 1998, the Cooperative had
$39.1 million available for long-term borrowings under the Term Loan Facility.
The Credit Agreement and Indenture requires that Pro-Fac and Agrilink meet
certain financial tests and ratios and comply with certain other restrictions
and limitations. As of June 27, 1998, Pro-Fac and Agrilink are in compliance
with all such covenants, restrictions and limitations.
To complete the Dean Foods acquisition, the Cooperative will incur a significant
amount of new borrowings. Management anticipates that the acquisition will be
financed through a combination of bank and subordinated debt. Management
believes the combined activities of the two businesses will provide adequate
cash flow to service debt.
Capital Expenditures: The Company anticipates that capital expenditures for
fiscal years 1999 and 2000, including capital expenditures relating to DFVC,
will be approximately $25.0 million per annum. The Company believes that cash
flow from operations and borrowings under bank facilities will be sufficient to
meet its liquidity requirements for the foreseeable future.
Short- and Long-Term Trends: Throughout fiscal 1998 and 1997 the Company has
focused on the Company's core businesses and growth opportunities. A complete
description of the acquisition and disposal activities completed is outlined at
NOTE 3 to the "Notes to Consolidated Financial Statements."
In addition, on July 27, 1998, the Company announced that it had reached a
definitive agreement with Dean Foods Company ("Dean") of Franklin Park,
Illinois, to acquire Dean's vegetable operations which includes the nationally
known Birds Eye brand and Dean's Freshlike and VegAll brands. The Dean Foods
Vegetable Company ("DFVC") reported revenues of $620.6 million and operating
earnings of $42.4 million for fiscal 1998. DFVC employs approximately 2,000
full-time employees in 13 plants, located in California, Minnesota, New York,
Texas, and Wisconsin. The acquisition is expected to close in September 1998 and
will be accounted for as a purchase.
The vegetable and fruit portions of the business, which includes CBF, can be
positively or negatively affected by weather conditions nationally and the
resulting impact on crop yields. Favorable weather conditions can produce high
crop yields and an oversupply situation. This results in depressed selling
prices and reduced profitability on the inventory produced from that year's
crops. Excessive rain or drought conditions can produce low crop yields and a
shortage situation. This typically results in higher selling prices and
increased profitability. While the national supply situation controls the
pricing, the supply can differ regionally because of variations in weather. The
crop and yields resulting from the 1997 growing season has resulted in an
increased supply throughout the industry. Accordingly, pricing and sales volume
have been negatively impacted in the third and fourth quarters of fiscal 1998.
New Credit Facility: In connection with the acquisition of DFVC, the Company has
received a commitment letter from a bank to provide a new credit facility (the
"New Credit Facility"), which is expected to consist of a $200.0 million
revolving credit facility (the "Revolving Credit Facility") and a $500.0 million
term loan facility (the "Term Loan Facility"). Such commitment, however, is
subject to a number of conditions, including the execution and delivery of a New
Credit Facility agreement satisfactory to the lender.
The Term Loan Facility is expected to be comprised of a term A facility of
$150.0 million (the "Term Loan A"), which will have a maturity of five years, a
term B facility of $175.0 million (the Term Loan B"), which will have a maturity
of six years, and a term C facility of $175.0 million (the "Term Loan C"), which
will have a maturity of seven years. The Revolving Credit Facility will have a
maturity of five years.
The New Credit Facility will bear interest, at the Company's option, at the
Administrative Agent's alternate base rate or the reserve-adjusted London
Interbank Offered Rate ("LIBOR") plus, in each case, applicable margins of: (i)
in the case of alternate base rate loans, (x) 1.00 percent for the Revolving
Credit Facility and Term Loan A, (y) 1.75 percent for Term Loan B, and (z) 2.00
percent for Term Loan C; and (ii) in the case of LIBOR loans, (x) 2.25 percent
for Revolving Credit Facility and Term Loan A, (y) 2.75 percent for Term Loan B,
and (z) 3.00 percent for Term Loan C. In addition, the Company will pay a
commitment fee calculated at a rate of 0.50 percent per annum on the daily
average unused commitment under the Revolving Credit Facility.
Supplemental Information on Inflation: The changes in costs and prices within
the Company's business due to inflation were not significantly different from
inflation in the United States economy as a whole. Levels of capital investment,
pricing and inventory investment were not materially affected by the moderate
inflation.
Other Matters: Restructuring: During the fourth quarter of fiscal 1996, the
Company initiated a corporate-wide restructuring program. Approximately $4.0
million of the restructuring charge comprised employee termination benefits.
There were no noncash write-offs included in the fiscal 1996 restructuring
charge. The cost of the strategic consulting activities was liquidated through
payment in fiscal 1996. The $4.0 million reserve for employee terminations is
being liquidated in accordance with severance agreements reached with such
employees. During fiscal 1997, approximately $2.0 million of this reserve was
liquidated. During 1998, all remaining material amounts were liquidated.
Year 2000 and Information Services Reorganization: A full inventory and analysis
of business applications and related software was performed and the Company
determined that it will be required to modify or replace certain portions of its
software so that its computer systems will be Year 2000 compliant. These
modifications and replacements are being and will continue to be made in
conjunction with the Company's overall information systems initiatives. No major
delay in these initiatives is anticipated.
In addition, the Company is contacting non-IT vendors to ensure that any of
their products that are currently in use can adequately deal with the change in
century. Areas being addressed include full reviews of manufacturing equipment,
telephone and voice mail systems, security systems, and other office/site
support systems. Based upon preliminary information, the costs of addressing
potential problems are not expected to have a material adverse impact on the
Company's financial position, results of operations, or cash flows in future
periods. Accordingly, the cost of the project is being funded through operating
cash flows.
The Company has initiated formal communications with significant suppliers and
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issues. However, there
can be no guarantee that the systems of other companies on which the Company's
systems rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
not have material adverse effect on the Company. Accordingly, the Company plans
to devote the necessary resources to resolve all significant Year 2000 issues in
a timely manner.
The Company expects to complete the Year 2000 project during the fall of 1999.
Based on the progress made to date (which includes compliant systems in place
and in production), the Company does not believe any material exposure to
significant business interruption exists. In the event some of the remaining
elements of the Company's Year 2000 compliance project are delayed, procedures
have been addressed to ensure alternative workaround initiatives are completed.
On June 19, 1997, Systems & Computer Technology Corporation ("SCT") and the
Company announced a major outsourcing services and software agreement effective
June 30, 1997. The ten-year agreement, valued at approximately $50 million, is
for SCT's OnSite outsourcing services, ADAGE ERP software and implementation
services and assistance in solving the Year 2000 issue.
Product Recall: In February 1997, the Company issued a nationwide recall of all
"Tropic Isle" brand fresh frozen coconut produced in Costa Rica because it has
the potential to be contaminated with Listeria monocytogenes, an organism which
can cause serious and sometimes fatal infections in small children, frail or
elderly people, and others with weakened immune systems. The total estimated
cost of the product recall was $0.5 million. This amount was recognized as an
expense in fiscal 1997. The Company received closure of this matter by the FDA
on March 11, 1998. Should any material costs associated with this recall
develop, it is anticipated that such amounts will be covered under the Company's
insurance policies.
Favorable Tax Ruling and Developments: In August of 1993, the Internal Revenue
Service issued a determination letter which concluded that the Cooperative was
exempt from federal income tax to the extent provided by Section 521 of the
Internal Revenue Code, "Exemption of Farmers' Cooperative from Tax." Unlike a
nonexempt cooperative, a tax-exempt cooperative is entitled to deduct cash
dividends it pays on its capital stock in computing its taxable income. The
exempt status was retroactive to fiscal year 1986. In conjunction with this
ruling, the Cooperative filed for tax refunds for fiscal years 1986 to 1992 in
the amount of approximately $8.8 million and interest payments of approximately
$5.2 million. A refund amount of $10.1 million for tax and interest was
reflected in the financial statements of the Cooperative as of June 24, 1995. In
addition, a refund amount of $3.9 million for tax and interest have been
reflected in the financial statements of the Cooperative as of June 29, 1996.
The refund and interest for the fiscal years 1986 to 1991 was received in March
of 1996. The refund and interest for fiscal year 1992 was received in June of
1997.
As a result of the Acquisition, the Cooperative's exempt status has ceased.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
ITEM Page
Pro-Fac Cooperative, Inc. and Consolidated Subsidiary:
Management's Responsibility for Financial Statements.................................................................... 24
Report of Independent Accountants....................................................................................... 25
Consolidated Financial Statements:
Consolidated Statement of Operations and Net Proceeds for the years ended June 27, 1998, June 28, 1997,
and June 29, 1996................................................................................................... 26
Consolidated Balance Sheet for the years ended June 27, 1998 and June 28, 1997........................................ 27
Consolidated Statement of Cash Flows for the years ended June 27, 1998, June 28, 1997 and June 29, 1996............... 28
Consolidated Statement of Changes in Shareholders' and Members' Capitalization and Redeemable Stock
for the years ended June 27, 1998, June 28, 1997, and June 29, 1996................................................. 30
Notes to Consolidated Financial Statements............................................................................ 31
Selected Quarterly Financial Data..................................................................................... 45
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the financial
statements and related notes which begins on the page following the "Report of
Independent Accountants." These statements have been prepared in accordance with
generally accepted accounting principles.
The Company's accounting systems include internal controls designed to provide
reasonable assurance of the reliability of its financial records and the proper
safeguarding and use of its assets. Such controls are monitored through the
internal and external audit programs.
The financial statements have been audited by PricewaterhouseCoopers LLP,
independent accountants, who were responsible for conducting their examination
in accordance with generally accepted auditing standards. Their resulting report
is on the subsequent page.
The Board of Directors exercises its responsibility for these financial
statements. The independent accountants and internal auditors of the Company
have full and free access to the Board. The Board periodically meets with the
independent accountants and the internal auditors, without management present,
to discuss accounting, auditing and financial reporting matters.
/s/ Dennis M. Mullen /s/ Earl L. Powers
Dennis M. Mullen Earl L. Powers
President and Vice President Finance and
Chief Executive Officer Chief Financial Officer
AGRILINK FOODS, INC. AGRILINK FOODS, INC.
Vice President Finance and
Assistant Treasurer
PRO-FAC COOPERATIVE, INC.
/s/ Stephen R. Wright
Stephen R. Wright
Executive Vice President Agriculture
AGRILINK FOODS,. INC.
General Manager PRO-FAC COOPERATIVE, INC.
July 31, 1998
Report of Independent Accountants
To the Shareholders and
Board of Directors of
Pro-Fac Cooperative, Inc.
In our opinion, the consolidated financial statements listed under Item 8 of
this Form 10-K present fairly, in all material respects, the financial position
of Pro-Fac Cooperative, Inc. and its subsidiary at June 27, 1998 and June 28,
1997, and the results of their operations and their cash flows for each of the
three fiscal years ended June 27, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Cooperative's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in NOTE 1 to the financial statements, the Cooperative changed its
method of accounting for spare parts in 1997.
Our audits of the consolidated financial statements also included an audit of
the financial statement schedule listed in the accompanying index and appearing
under Item14 of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein for the fiscal years ended June 27, 1998, June 28, 1997, and June 29,
1996 when read in conjunction with the related consolidated financial
statements.
PRICEWATERHOUSECOOPERS LLP
/s/ PricewaterhouseCoopers LLP
Rochester, New York
July 31, 1998
FINANCIAL STATEMENTS
Pro-Fac Cooperative, Inc. and Consolidated Subsidiary - Agrilink Foods, Inc.
Consolidated Statement of Operations and Net Proceeds
(Dollars in Thousands)
Fiscal Years Ended
June 27, June 28, June 29,
1998 1997 1996
Net sales $719,665 $730,823 $739,094
Cost of sales (524,082) (539,081) (562,926)
-------- -------- --------
Gross profit 195,583 191,742 176,168
Selling, administrative, and general expenses (141,739) (145,214) (151,671)
Income from Great Lakes Kraut Company 1,893 0 0
Gain on sale of Finger Lakes Packaging 0 3,565 0
Restructuring charge 0 0 (5,871)
Interest income 0 0 770
-------- -------- --------
Operating income 55,737 50,093 19,396
Interest expense (30,767) (36,473) (41,998)
-------- -------- --------
Pretax income/(loss) before dividends and allocation of net proceeds 24,970 13,620 (22,602)
Tax (provision)/benefit (7,840) (5,529) 13,071
-------- -------- --------
Income/(loss) before cumulative effect of an accounting change, dividends,
and allocation of net proceeds 17,130 8,091 (9,531)
Cumulative effect of an accounting change 0 4,606 0
-------- -------- --------
Net income/(loss) $ 17,130 $ 12,697 $ (9,531)
======== ======== ========
Allocation of Net Proceeds:
Net income/(loss) $ 17,130 $ 12,697 $ (9,531)
Dividends on common and preferred stock (6,328) (5,503) (8,993)
-------- -------- --------
Net proceeds/(deficit) 10,802 7,194 (18,524)
Allocation (to)/from earned surplus (4,662) (3,661) 18,524
-------- -------- --------
Net proceeds available to members $ 6,140 $ 3,533 $ 0
======== ======== ========
Allocation of net proceeds available to members:
Payable to members currently (25% of qualified proceeds
available to members in fiscal 1998 and 1997, respectively) $ 1,535 $ 883 $ 0
Allocated to members but retained by the Cooperative:
Qualified retains 4,605 2,650 0
-------- -------- --------
Net proceeds available to members $ 6,140 $ 3,533 $ 0
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Pro-Fac Cooperative, Inc. and Consolidated Subsidiary - Agrilink Foods, Inc.
Consolidated Balance Sheet
(Dollars in Thousands)
ASSETS
June 27, 1998 June 28, 1997
Current assets:
Cash and cash equivalents $ 5,049 $ 2,838
Accounts receivable, trade, less allowances for bad debts of $774 and $970, respectively 55,046 48,661
Accounts receivable, other 3,575 2,795
Current deferred tax assets 4,849 12,312
Inventories -
Finished goods 111,153 87,904
Raw Materials and supplies 30,433 27,001
-------- --------
Total inventories 141,586 114,905
-------- --------
Current investment in Bank 1,994 946
Prepaid manufacturing expense 8,404 8,265
Prepaid expenses and other current assets 12,989 6,323
-------- --------
Total current assets 233,492 197,045
Investment in Bank 22,377 24,321
Investment in Great Lakes Kraut Company 6,584 0
Property, plant, and equipment, net 194,615 217,923
Assets held for sale at net realizable value 2,662 3,259
Goodwill and other intangible assets, less accumulated amortization of
$13,634 and $10,053, respectively 94,744 96,429
Other assets 12,234 7,700
-------- --------
Total assets $566,708 $546,677
======== ========
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION
Current liabilities:
Current portion of obligations under capital leases $ 256 $ 558
Current portion of long-term debt 8,071 8,075
Accounts payable 70,158 49,256
Income taxes payable 4,046 5,672
Accrued interest 8,559 8,663
Accrued employee compensation 8,598 11,063
Other accrued expenses 19,065 21,956
Dividends payable 0 61
Amounts due members 20,636 15,791
-------- --------
Total current liabilities 139,389 121,095
Obligations under capital leases 503 817
Long-term debt 69,937 69,829
Senior subordinated notes 160,000 160,000
Deferred income tax liabilities 32,457 39,591
Other non-current liabilities 23,053 22,682
-------- --------
Total liabilities 425,339 414,014
-------- --------
Commitments and contingencies
Class B cumulative redeemable preferred stock, liquidation preference $10 per
share, authorized 500,000 shares; issued and outstanding 27,043
and 31,435, respectively 270 315
Common stock, par value $5, authorized - 5,000,000 shares
June 27, 1998 June 28, 1997
------------- -------------
Shares issued 1,825,863 1,788,815
Shares subscribed 160,629 54,557
--------- ---------
Total subscribed and issued 1,986,492 1,843,372
Less subscriptions receivable in installments (160,629) (54,557)
--------- ---------
Total issued and outstanding 1,825,863 1,788,815 9,129 8,944
========= =========
Shareholders' and members' capitalization:
Retained earnings allocated to members 29,765 31,920
Non-qualified allocation to members 2,660 2,960
Minimum pension liability adjustment