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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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Form 10-K Equivalent
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(Mark One)
[ ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended June 29, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from _______ to _______
AGRILINK FOODS, INC.
(Exact name of registrant as specified in its charter)
Delaware 16-0845824
(State of incorporation) (IRS Employer Identification Number)
90 Linden Oaks, PO Box 20670, Rochester, NY 14602-0670
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (585) 383-1850
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES NO
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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:
NONE
Number of common shares outstanding at September 25, 2002:
Common Stock: 11,000
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* This Form 10-K Equivalent is only being filed pursuant to a requirement
contained in the indenture governing Agrilink Foods, Inc.'s 11 7/8%
Senior Subordinated Notes Due 2008.
1 of 78 Pages
FORM 10-K EQUIVALENT ANNUAL REPORT - Fiscal Year 2002
AGRILINK FOODS, INC.
TABLE OF CONTENTS
PART I
PAGE
ITEM 1. Description of Business
Cautionary Statement on Forward-Looking Statements................................................... 3
General Development of Business...................................................................... 3
Narrative Description of Business ................................................................... 6
Financial Information About Industry Segments........................................................ 7
Packaging and Distribution........................................................................... 7
Trademarks........................................................................................... 7
Raw Material Sources................................................................................. 8
Environmental Matters................................................................................ 8
Seasonality of Business.............................................................................. 9
Practices Concerning Working Capital................................................................. 9
Significant Customers................................................................................ 9
Backlog of Orders.................................................................................... 9
Business Subject to Government Contracts............................................................. 9
Competitive Conditions............................................................................... 9
Market and Industry Data............................................................................. 10
New Products and Research and Development............................................................ 10
Employees............................................................................................ 10
ITEM 2. Description of Properties................................................................................ 11
ITEM 3. Legal Proceedings........................................................................................ 12
ITEM 4. Submission of Matters to a Vote of Security Holders...................................................... 12
PART II
ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters................................. 13
ITEM 6. Selected Financial Data.................................................................................. 14
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 15
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............................................... 27
ITEM 8. Financial Statements and Supplementary Data.............................................................. 28
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 64
PART III
ITEM 10. Directors and Executive Officers of the Registrant....................................................... 65
ITEM 11. Executive Compensation................................................................................... 67
ITEM 12. Security Ownership of Certain Beneficial Owners and Management........................................... 69
ITEM 13. Certain Relationships and Related Transactions........................................................... 69
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 72
Signatures............................................................................................... 77
Certification............................................................................................ 78
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, Agrilink Foods, Inc. (the "Company" or "Agrilink Foods")
makes oral and written statements that may constitute "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995
(the "PSLRA") or by the Securities and Exchange Commission ("SEC") in its rules,
regulations, and releases. The Company desires to take advantage of the "safe
harbor" provisions in the PSLRA for forward-looking statements made from time to
time, including, but not limited to, the forward-looking information contained
in the Management's Discussion and Analysis of Financial Condition and Results
of Operations and other statements made in this Form 10-K Equivalent and in
other filings with the SEC.
The Company cautions readers that any such forward-looking statements made by or
on behalf of the Company are based on management's current expectations and
beliefs but are not guarantees of future performance. Actual results could
differ materially from those expressed or implied in the forward-looking
statements. The factors that could impact the Company include:
o the impact of strong competition in the food industry, including
competitive pricing;
o the impact of changes in consumer demand;
o the impact of weather on the volume and quality of raw product;
o the inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer acceptance;
o the continuation of the Company's success in integrating operations
(including the realization of anticipated synergies in operations and the
timing of any such synergies) and the availability of acquisition and
alliance opportunities;
o the Company's ability to achieve gains in productivity and improvements in
capacity utilization;
o the Company's ability to service debt;
o interest rate fluctuations; and
o effectiveness of marketing and shifts in market demand.
GENERAL DEVELOPMENT OF BUSINESS
Agrilink Foods, incorporated in 1961, is a producer and marketer of processed
food products. The terms "Company" and "Agrilink Foods" mean "Agrilink Foods,
Inc." and its subsidiaries unless the context indicates otherwise. The Company
has four primary product lines including: vegetables, fruits, snacks, and canned
meals. The majority of each of the product lines' net sales is within the United
States. In addition, all of the Company's operating facilities, excluding one in
Mexico, are within the United States.
Agrilink Foods is the country's largest manufacturer and marketer of frozen
vegetables. The Company markets its branded frozen vegetable products under the
Birds Eye, Birds Eye Voila!, Birds Eye Simply Grillin', Birds Eye Hearty
Spoonfuls, Freshlike and McKenzie's names. In addition, Agrilink produces other
branded processed foods, including canned vegetables (Freshlike and Veg-All),
pie fillings (Comstock and Wilderness), chili and chili ingredients (Nalley and
Brooks), salad dressings (Bernstein's and Nalley) and snacks (Tim's, Snyder of
Berlin and Husman's). The Company's other branded products are listed under the
"Trademarks" section of this report. Agrilink also produces many of these
products for the private label, food service and industrial markets. The
Company's private label products include canned and frozen vegetables, salad
dressings, salsa, fruit fillings and toppings, Southern frozen vegetable
specialty products, and frozen breaded, and battered products which are sold to
customers such as Albertson's, Fleming, Western Family, Safeway, Wal-Mart/Sam's,
SuperValu, BJ's, Wegmans and Winn-Dixie. The Company's food service/industrial
products include salad dressings, fruit fillings and toppings, canned and frozen
vegetables, frozen Southern specialties, frozen breaded and battered products,
and canned and frozen fruit, which are sold to customers such as US Food
Service, Gordon Food Service, PYA Monarch, Kraft Foods, ConAgra Foods, Food
Service of America, MBM Corporation, and SYSCO. In fiscal 2002, approximately 62
percent of the Company's net sales were branded and the remainder divided
between private label and food service/industrial.
The Change in Control (the "Transaction"): On August 19, 2002 (the "Closing
Date"), pursuant to the terms of the Unit Purchase Agreement dated as of June
20, 2002 (the "Unit Purchase Agreement"), by and among Pro-Fac Cooperative,
Inc., a New York agricultural cooperative ("Pro-Fac"), Agrilink Foods, at the
time a New York corporation and a wholly-owned subsidiary of Pro-Fac and
Vestar/Agrilink Holdings LLC, a Delaware limited liability company
("Vestar/Agrilink Holdings"):
(i) Pro-Fac contributed to the capital of Agrilink Holdings LLC, a Delaware
limited liability company ("Holdings LLC"), all of the shares of Agrilink Foods'
common stock owned by Pro-Fac, constituting 100% of the issued and outstanding
shares of Agrilink Foods' capital stock, in consideration for Class B common
units of Holdings LLC, representing a 40.72% common equity ownership; and
(ii) Vestar/Agrilink Holdings and certain co-investors (collectively, "Vestar")
contributed cash in the aggregate amount of $175.0 million to the capital of
Holdings LLC, in consideration for preferred units, Class A common units, and
warrants which were immediately exercised to acquire additional Class A common
units. After exercising the warrants, Vestar owns 56.24% of the common equity of
Holdings LLC. The co-investors are either under common control with, or have
delivered an unconditional voting
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proxy to, Vestar/Agrilink Holdings. The transactions contemplated in and
consummated pursuant to the Unit Purchase Agreement, are referred to herein
collectively as the "Transaction."
Immediately following Pro-Fac's contribution of its shares of Agrilink Foods'
common stock to Holdings LLC, Holdings LLC contributed those shares to Agrilink
Holdings Inc. ("Holdings Inc."), a Delaware corporation and a direct,
wholly-owned subsidiary of Holdings LLC, and Agrilink Foods became an indirect,
wholly-owned subsidiary of Holdings LLC. As a result of the Transaction, Pro-Fac
owns 40.72% and Vestar owns 56.24% of the common equity securities of Holdings
LLC. The Class A common units entitle the owner thereof - Vestar - to two votes
for each Class A common unit held. All other Holdings LLC common units entitle
the holder(s) thereof to one vote for each common unit held. Accordingly, Vestar
has a voting majority of all common units.
Also, as part of the Transaction, executive officers of Agrilink Foods, and
certain other members of Agrilink Foods' management, entered into subscription
agreements with Holdings LLC to acquire with a combination of cash and
promissory notes an aggregate of approximately $1.3 million of Class C common
units and Class D common units of Holdings LLC, representing approximately 3.04%
of the common equity ownership. As of the Closing Date, an additional
approximately $0.5 million of Class C common units and Class D common units,
representing less than 1% of the common equity ownership, remained unissued. The
foregoing individuals are also parties to the Securityholders Agreement and the
Limited Liability Company Agreement discussed below.
As part of the Transaction, certain amounts owed by Pro-Fac to Agrilink Foods
were forgiven. The amounts forgiven were approximately $34.3 million and
represented both borrowings for the working capital needs of Pro-Fac and a $9.4
million demand receivable.
Also, immediately following the closing of the Transaction, Agrilink Foods
changed its corporate domicile to Delaware by means of a reincorporation merger.
The reincorporation merger complied with section 5.01 of the indenture for the
11 7/8% Senior Subordinated Notes due 2008.
The Transaction will cause our assets and liabilities to be reflected at fair
value subsequent to the closing.
Also in connection with the Transaction, Agrilink Foods and certain of its
subsidiaries entered into a senior secured credit facility (the "Senior Credit
Facility") in the amount of $470.0 million with a syndicate of banks and other
lenders arranged by JPMorgan Chase Bank ("JPMorgan Chase Bank"), as
administrative and collateral agent. The Senior Credit Facility is comprised of
(i) a $200 million senior secured revolving credit facility (the "Revolving
Credit Facility") and (ii) a $270.0 million senior secured B term loan (the
"Term Loan Facility," and together with the Revolving Credit Facility, the
"Credit Facilities"). The proceeds of the Term Loan Facility and borrowings
under the Revolving Credit Facility, together with Vestar's $175.0 million
investment, were used to repay and terminate Agrilink Foods' indebtedness under
its existing senior credit facilities with Harris Trust and Savings Bank and the
lenders thereunder, to consummate the Transaction, and to pay related fees and
expenses incurred in the Transaction. The Transaction allowed for an immediate
reduction in the debt of Agrilink Foods of approximately $140.0 million.
Additionally, in order to facilitate the Transaction, Agrilink Foods sought and
obtained the consent of the holders of its outstanding 11 7/8% Senior
Subordinated Notes due 2008 to amend or waive certain provisions in the
indenture governing the notes.
In connection with the Transaction, certain of the parties to the Transaction
entered into several agreements effective as of the Closing Date, including the
following:
(i) Limited Liability Company Agreement of Agrilink Holdings LLC. Pro-Fac and
Vestar, together with others, are parties to a limited liability company
agreement dated August 19, 2002 (the "Limited Liability Company Agreement") that
contains terms and conditions relating to the management of Holdings LLC and its
subsidiaries (including Agrilink Foods), the distribution of profits and losses
and the rights and limitations of members of Holdings LLC.
(ii) Securityholders Agreement. Holdings LLC, Pro-Fac and Vestar, together with
others, entered into a securityholders agreement dated August 19, 2002 (the
"Securityholders Agreement") containing terms and conditions relating to the
transfer of membership interests in and the management of Holdings LLC. Among
other things, the Securityholders Agreement includes a voting agreement pursuant
to which the holders of common units agree to vote their common units and to
take any other action necessary to cause the authorized number of members or
directors for each of the respective management committees or boards of
directors of Holdings LLC, Holdings Inc. and Agrilink Foods to be set at nine
and to elect or cause to be elected to the respective management committees or
boards of directors of Holdings LLC, Holdings Inc. and Agrilink Foods, five
members/directors designated by Vestar, two members/directors designated by
Pro-Fac, one member/director who shall be the chief executive officer of
Agrilink Foods and one member/director designated by Vestar who shall be
independent of Holdings LLC, its subsidiaries' management (including Agrilink
Foods) and Vestar.
(iii) Management Agreement. Agrilink Foods, Holdings Inc. and Vestar Capital
Partners entered into a management agreement dated as of August 19, 2002 (the
"Management Agreement") pursuant to which Vestar Capital Partners, an investment
firm and an affiliate of Vestar Capital Partners IV, L.P., a Delaware limited
partnership and the sole member of Vestar/Agrilink Holdings ("Vestar Capital
Partners"), will provide advisory and consulting services to Holdings Inc. and
Agrilink Foods. In consideration for such
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services, Holdings Inc. and Agrilink Foods will, jointly and severally, pay
Vestar Capital Partners an annual management fee equal to the greater of $1.0
million and 0.7% of Agrilink Foods' earnings, before interest, tax, depreciation
and amortization. In addition, on the Closing Date, Agrilink Foods and Holdings
LLC, jointly paid to Vestar Capital Partners a transaction fee equal to $8.0
million plus all of the out-of-pocket expenses incurred by Vestar Capital
Partners in connection with the Transaction.
In connection with the Transaction, Agrilink Foods and Pro-Fac entered into
several agreements effective as of the Closing Date, including the following:
(i) Termination Agreement. Pro-Fac and Agrilink Foods entered into a letter
agreement dated as of the Closing Date (the "Termination Agreement"), pursuant
to which, among other things, the existing marketing and facilitation agreement
between Pro-Fac and Agrilink Foods, which, until the Closing Date, governed the
crop supply and purchase relationship between Agrilink Foods and Pro-Fac (the
"Existing Marketing and Facilitation Agreement") has been terminated and, in
consideration of such termination, Agrilink Foods will pay Pro-Fac a termination
fee of $10.0 million per year for five years, provided that certain ongoing
conditions are met, including maintaining grower membership levels sufficient to
generate certain minimum crop supply.
(ii) Amended and Restated Marketing and Facilitation Agreement. Pro-Fac and
Agrilink Foods entered into an amended and restated marketing and facilitation
agreement dated as of the Closing Date (the "Amended and Restated Marketing and
Facilitation Agreement"). The Amended and Restated Marketing and Facilitation
Agreement supersedes and replaces the Existing Marketing and Facilitation
Agreement and provides that, among other things, Pro-Fac will be Agrilink Foods'
preferred supplier of crops. Agrilink Foods will continue to pay Pro-Fac the
Commercial Market Value ("CMV") of crops supplied by Pro-Fac, in installments
corresponding to the dates of payment by Pro-Fac to its members for crops
delivered. The processes for determining CMV under the Amended and Restated
Marketing and Facilitation Agreement are substantially the same as the processes
used under the Existing Marketing and Facilitation Agreement. Agrilink Foods
will make payments to Pro-Fac of an estimated CMV for a particular crop year,
subject to adjustments to reflect the actual CMV following the end of such year.
Commodity committees of Pro-Fac will meet with Agrilink Foods management to
establish CMV guidelines, review calculations, and report to a joint CMV
committee of Pro-Fac and Agrilink Foods. Unlike the Existing Marketing and
Facilitation Agreement, the Amended and Restated Marketing and Facilitation
Agreement does not permit Agrilink Foods to offset its losses from products
supplied by Pro-Fac or require it to share with Pro-Fac its profits and it does
not require Pro-Fac to reinvest in Agrilink Foods any part of Pro-Fac's
patronage income.
The Amended and Restated Marketing and Facilitation Agreement provides that
Agrilink Foods will continue to provide to Pro-Fac services relating to
planning, consulting, sourcing and harvesting crops from Pro-Fac members in a
manner consistent with past practices. In addition, for a period of five years
from the Closing Date, Agrilink Foods will provide Pro-Fac with services related
to the expansion of the market for the agricultural products of Pro-Fac members
(at no cost to Pro-Fac other than reimbursement of Agrilink Foods' incremental
and out-of-pocket expenses related to providing such services as agreed to by
Pro-Fac and Agrilink Foods).
Under the Amended and Restated Marketing and Facilitation Agreement, Agrilink
Foods determines the amount of crops which Agrilink Foods will acquire from
Pro-Fac for each crop year. If the amount to be purchased by Agrilink Foods
during a particular crop year does not meet (i) a defined crop amount and (ii) a
defined target percentage of Agrilink's needs for each particular crop, then
certain shortfall payments are made by Agrilink Foods to Pro-Fac. The defined
crop amounts and targeted percentages are set based upon the needs of Agrilink
Foods in the 2001 crop year (fiscal 2002). The shortfall payment provisions of
the agreement include a maximum shortfall payment, determined for each crop,
that can be paid over the term of the Amended and Restated Marketing and
Facilitation Agreement. The aggregate shortfall payment amounts for all crops
covered under the agreement cannot exceed $20 million over the term of the
agreement.
The Amended and Restated Marketing and Facilitation Agreement may be terminated
by Agrilink Foods in connection with certain change in control transactions
affecting Agrilink Foods or Holdings Inc.; provided, however, that in the event
that any such change in control occurs during the first three years after the
Closing Date, Agrilink Foods must pay to Pro-Fac a termination fee of $20.0
million (less the total amount of any shortfall payments previously paid to
Pro-Fac under the Amended and Restated Marketing and Facilitation Agreement).
Also, if, during the first three years after the Closing Date, Agrilink Foods
sells one or more portions of its business, and if the purchaser does not
continue to purchase the crops previously purchased by Agrilink Foods with
respect to the transferred business, then such failure will be taken into
consideration when determining if Agrilink Foods is required to make any
shortfall payments to Pro-Fac. After such three-year period, Agrilink Foods may
sell portions of its business and the volumes of crop purchases previously made
by Agrilink Foods with respect to such transferred business will be disregarded
for purposes of determining shortfall payments.
(iii) Transitional Services Agreement. Pro-Fac and Agrilink Foods entered into a
transitional services agreement (the "Transitional Services Agreement") dated as
of the Closing Date, pursuant to which Agrilink Foods will provide Pro-Fac
certain administrative and other services for a period of 24 months from the
Closing Date. Agrilink Foods will generally provide such services at no charge
to Pro-Fac, other than reimbursement of the incremental and out-of-pocket costs
associated with performing those services for Pro-Fac.
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Also pursuant to the Transitional Services Agreement, the general manager of
Pro-Fac may also be an employee of Agrilink Foods, in which case he will report
to the chief executive officer of Agrilink Foods with respect to his duties for
Agrilink Foods, and to the Pro-Fac board of directors with respect to duties
performed by him for Pro-Fac. All other individuals performing services under
the Transitional Services Agreement will report only to the chief executive
officer (or other representative) of Agrilink Foods.
(iv) Credit Agreement. Agrilink Foods and Pro-Fac have entered into a credit
agreement, dated August 19, 2002 (the "Credit Agreement"), pursuant to which
Agrilink Foods has agreed to make available to Pro-Fac loans in an aggregate
principal amount of up to $5.0 million (the "Credit Facility "). Pro-Fac is
permitted to draw down up to $1.0 million per year under the Credit Facility,
unless Agrilink Foods is prohibited from making such advances under the terms of
certain third party indebtedness of Agrilink Foods. The amount of the Credit
Facility will be reduced, on a dollar-for-dollar basis, to the extent of certain
distributions made by Holdings LLC to Pro-Fac in respect of its ownership in
Holdings LLC. Pro-Fac has pledged all of its Class B Common Units in Holdings
LLC as security for advances under the Credit Facility.
The foregoing description of agreements is only a summary and reference is made
to those agreements, copies of which are filed as exhibits to this Form 10-K
Equivalent or, although included in the exhibit index to this report have been
previously filed by Agrilink Foods with the SEC. Each statement is qualified in
its entirety by such reference.
NARRATIVE DESCRIPTION OF BUSINESS
The Company has four primary product lines: vegetables, fruits, snacks, and
canned meals. A description of the Company's four primary product lines follows:
Vegetables: The vegetable product line consists of canned and frozen vegetables,
chili beans, and various other products. Additional products include value-added
items such as frozen vegetable blends, Southern-specialty products such as
black-eyed peas, okra, and Southern squash, frozen meal starters with pasta or
potatoes and sauce, complete frozen meals in a bag, and frozen soups. Branded
products within the vegetable product line include Birds Eye, Birds Eye Voila!,
Birds Eye Simply Grillin', Birds Eye Hearty Spoonfuls, Freshlike, Veg-All,
McKenzies, and Brooks Chili Beans. In fiscal 2002 vegetable product line net
sales represented approximately 72 percent of the Company's total net sales.
Within this product line net sales of approximately 59 percent represented
branded products, 16 percent represented private label products and 25 percent
represented food service/industrial products.
The Company is also a 50 percent partner with Flanagan Brothers, Inc. in Great
Lakes Kraut Company, LLC, a New York limited liability company. This joint
venture includes the Silver Floss and Krrrrisp Kraut brands.
On June 23, 2000, Agrilink Foods sold its pickle business based in Tacoma,
Washington to Dean Pickle and Specialty Products Company, a subsidiary of Dean
Foods. This business included pickle, pepper, and relish products sold primarily
under the Nalley and Farman's brand names. Under terms of the sale, Agrilink
Foods packed Nalley and Farman's pickle products for a period of two years,
beginning June 23, 2000, at the existing Tacoma processing plant. The co-pack
contract ended in June 2002 and Agrilink ceased production at this location. The
Company subsequently converted this location to additional warehouse space.
On December 17, 1999, the Company sold its Cambria, Wisconsin processing
facility to Del Monte. This facility was primarily utilized for canning
operations.
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On November 8, 1999, the Company sold its Midwest private label canned vegetable
business to Seneca Foods. Included in this transaction was the Arlington,
Minnesota facility. This sale did not include the Company's retail branded
canned vegetables Veg-All and Freshlike.
Fruits: The fruit product line consists of canned and frozen fruits including
fruit fillings and toppings. Branded products within the fruit category include
Comstock and Wilderness. The Company is a major supplier of branded and private
label fruit fillings to retailers and food service institutions such as
restaurants, caterers, bakeries, and schools. In fiscal 2002, fruit product line
net sales represented approximately 11 percent of the Company's total net sales.
Within this product line, net sales of approximately 52 percent represented
branded products, 19 percent represented private label products, and 29 percent
represented food service/industrial products.
On September 5, 2002, the Company announced that it had reached an agreement in
principle to sell its applesauce business to Knouse Foods. The applesauce had
been produced in Agrilink's Red Creek, New York and Fennville, Michigan
facilities. This sale will result in the closure of the Red Creek facility. The
Michigan plant will continue to operate as a production facility.
Snacks: The snacks product line consists of several varieties of potato chips
including regular and kettle fried, as well as popcorn, cheese curls, snack
mixes, and other corn-based snack items. Kettle fried potato chips produce a
potato chip that is thicker and crisper than other potato chips. Items within
this product line are marketed primarily in the Pacific Northwest, Midwest and
Mid-Atlantic states. Branded products within the snacks category include Tim's
Cascade Chips, Snyder of Berlin, Husman, La Restaurante, Erin's, Beehive,
Pops-Rite, Super Pop, and Flavor Destinations. In fiscal 2002 snacks net sales
represented approximately 9 percent of the Company's total net sales. Within
this product line, net sales of approximately 93 percent represented branded
products, 4 percent represented private label products, and 3 percent
represented food service/industrial products.
Canned Meals: The canned meal product line includes canned meat products such as
chilies, stews, soups, and various other ready-to-eat prepared meals. Items
within this product line are marketed primarily in the Pacific Northwest.
Branded products within the canned meal category include Nalley. In fiscal 2002
net sales for canned meals represented approximately 5 percent of the Company's
total net sales. Within this product line, net sales of approximately 71 percent
represented branded products, 25 percent represented private label products, and
4 percent represented food service/industrial products.
Other: The Company's other product line primarily represents salad dressings.
Branded products within this category include Bernstein's and Nalley. In fiscal
2002, other net sales represented approximately 3 percent of the Company's total
net sales.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The business of the Company is principally conducted in four industry segments:
vegetables, fruits, snacks, and canned meals. The financial statements for the
fiscal years ended June 29, 2002, June 30, 2001, and June 24, 2000, which are
included in this report, reflect the information relating to those segments for
each of the Company's last three fiscal years.
PACKAGING AND DISTRIBUTION
The food products produced by the Company are distributed to various consumer
markets in all 50 states. International sales account for a small portion of the
Company's activities. Vegetables, fruits, and canned meals are primarily sold
through food brokers who sell primarily to supermarket chains and various
institutional entities. Snack products are primarily marketed through
distributors (some of which are owned and operated by the Company) who sell
directly to retail outlets in the Midwest, Mid-Atlantic and Pacific Northwest.
Customer brand operations encompass the sale of products under private labels to
chain stores and under the controlled labels of buying groups. The Company has
developed central storage and distribution facilities that permit multi-item
single shipment to customers in key marketing areas.
The Company maintains a multiyear logistic agreement with American President
Lines ("APL") under which APL provides freight management, packaging and
labeling services, and distribution support to and from production facilities
owned by the Company in and around Coloma, Michigan.
The Company also maintains a long-term logistics agreement with Americold under
which Americold manages the Company's Montezuma, Georgia frozen food
distribution facility and all frozen food transportation operations of Agrilink
Foods in Georgia and New York.
TRADEMARKS
The major brand names under which the Company markets its products are
trademarks of the Company. Such brand names are considered to be of material
importance to the business of the Company since they have the effect of
developing brand identification and maintaining consumer loyalty. There are
trademark registrations for substantially all of the Company's trademarks. These
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trademark registrations are of perpetual duration so long as they are
periodically renewed. It is the Company's intent to maintain its trademark
registrations. The major brand names utilized by the Company follow:
Product Line Brand Name
- ------------ ------------------------------------------------------------------------------------------------------------
Vegetables Birds Eye, Birds Eye Voila!(1), Birds Eye Simply Grillin'(1), Birds Eye Hearty Spoonfuls(1); Birds Eye
Fresh(1), Freshlike, Veg-All, Brooks, Chill-Ripe, Comstock, Greenwood, McKenzie's, McKenzie's Gold King,
Southern Farms, Southland, Nalley, Pixie, Thank You, Silver Floss(2), Krrrrisp Kraut(2)
Fruits Birds Eye, Chill-Ripe, Comstock, Globe, McKenzies, Orchard Fresh, Pixie, Southern Farms, Thank You,
Squeezle Sauz(1), West Bay, Wilderness, Tropic Isle
Snacks Snyder of Berlin, Thunder Crunch, Tim's Cascade Chips, La Restaurante, Erin's, Husman, Naturally Good,
Beehive, Pops-Rite, Savoral, Super Pop, Flavor Destinations(1)
Canned Meals Nalley, Mariners Cove, Riviera
Other Bernstein's, Nalley
(1) Application filed and U.S. federal registration is pending.
(2) Represent trademarks of Great Lakes Kraut Company, LLC. The Company owns a
50 percent interest in this joint venture.
RAW MATERIAL SOURCES
Of the commodity types supplied by Pro-Fac, approximately 61 percent were
received from members of Pro-Fac during fiscal 2002. 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. Agrilink Foods expects to
continue to purchase a substantial portion of its raw product needs from Pro-Fac
pursuant to the Amended and Restated Marketing and Facilitation Agreement. See
further discussion of the relationship with Pro-Fac in NOTE 3 and NOTE 15 to the
"Notes to Consolidated Financial Statements."
Weather conditions can impact the vegetable and fruit portions of the business.
Favorable weather conditions can produce high crop yields and an oversupply
situation, while excessive rain or drought conditions can produce low crop
yields and a shortage situation.
The utilization of the Company's facilities is directly correlated to the timing
of crop harvests and crop yields. Poor weather conditions hurt crop yields and
result in uneven crop delivery cycles that increase production costs. In
addition, pricing can be impacted by crop size and yields and the overall
national supply.
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
8
agencies. The Company has received permits for all facilities for which permits
are required. Each year the Company submits applications for renewal permits as
required for the facilities.
While the Company cannot predict with certainty the effect of any proposed or
future environmental legislation or regulations on its processing operations,
management of the Company believes that the waste disposal systems which are now
in operation or which are being constructed or designed are sufficient to comply
with all currently applicable laws and regulations.
The Company is cooperating with environmental authorities in remedying various
minor environmental matters at several of its plants. Such actions are being
conducted pursuant to procedures approved by the appropriate environmental
authorities at a cost that is not expected to be material.
Expenditures related to environmental programs and facilities have not had, and
are not expected to have, a material effect on the earnings of the Company. In
fiscal 2002, total capital expenditures of the Company were $15.0 million of
which approximately $0.8 million was devoted to the construction of
environmental facilities. The Company estimates that environmental capital
expenditures will be approximately $0.5 million for the 2003 fiscal year.
However, there can be no assurance that expenditures will not be higher.
As part of the Transaction, Pro-Fac agreed to indemnify Agrilink Foods for
certain liabilities. Generally, environmental matters are subject to
indemnification if the particular liability exceeds $200,000 once the aggregate
of all liabilities subject to indemnification exceeds a $10 million
indemnification "basket." In addition, however, a specific indemnification
provision is in place covering the Lawton, Michigan facility of Agrilink Foods.
The Unit Purchase Agreement for the Transaction provides that Agrilink Foods
retains responsibility for up to $2.5 million of capital expenditures to address
environmental compliance provided those expenditures are incurred over a
three-year period commencing on August 19, 2002.
SEASONALITY OF BUSINESS
From a sales point of view, the business of the Company is not highly seasonal,
since the demand for its products is fairly constant throughout the year.
Exceptions to this general rule include some products that have higher sales
volume in the cool weather months (such as canned and frozen fruits and
vegetables, chili, and fruit fillings and toppings), and others that have higher
sales volume in the warm weather months (such as potato chips and salad
dressings). Since many of the raw materials processed by the Company are
agricultural crops, production of these products is predominantly seasonal,
occurring during and immediately following the harvest seasons of such crops.
PRACTICES CONCERNING WORKING CAPITAL
The Company must maintain substantial inventories throughout the year of
products produced from seasonal raw materials. These inventories are generally
financed through seasonal borrowings. The Company uses its revolving credit
facility for seasonal borrowings, the amount of which fluctuates during the
year. Both the maintenance of substantial inventories and the practice of
seasonal borrowing are common to the food processing industry.
SIGNIFICANT CUSTOMERS
The Company's principal industry segments are not dependent upon the business of
a single customer or a few customers. The Company does not have any customers to
whom sales are made in an amount which equals 10 percent or more of the
Company's net sales.
BACKLOG OF ORDERS
Backlog of orders has not historically been significant in the business of the
Company. Orders are filled shortly after receipt from inventories of packaged
and processed foods.
BUSINESS SUBJECT TO GOVERNMENTAL CONTRACTS
No material portion of the business of the Company is subject to renegotiation
of contracts with, or termination by, any governmental agency.
COMPETITIVE CONDITIONS
All products of the Company, particularly branded products, compete with those
of other national and major regional food processors under highly competitive
conditions. The principal methods of competition in the food industry are a
readily available and broad line of products, product quality, price, and
marketing and sales promotion.
9
Quality of product and uniformity of quality are important methods of
competition. The Company's relationship with Pro-Fac gives the Company local
sources of supply, thus allowing the Company to exercise control over the
quality and uniformity of much of the raw product that it purchases. The members
of Pro-Fac generally operate relatively large production operations with
emphasis on mechanized growing and harvesting techniques. This factor is also an
advantage in producing uniform, high-quality food products.
The Company's pricing is generally competitive with that of other food
processors for products of comparable quality. The branded products of the
Company are marketed under national and regional brands. In fiscal 2002,
marketing programs for national brands focused primarily on Birds Eye Voila! and
Birds Eye Simply Grillin'. National advertising campaigns can include
television, magazines, coupons, and in-store promotions. Marketing programs for
regional brands are focused on local tastes and preferences as a means of
developing consumer brand loyalty. Regional advertising campaigns included
magazines, coupons, and in-store promotions.
Although the relative importance of the above factors may vary between
particular products or customers, the above description is generally applicable
to all of the products of the Company in the various markets in which they are
distributed.
Profit margins for fruits and vegetables are subject to industry supply and
demand fluctuations, attributable to changes in growing conditions, acreage
planted, inventory carryover, and other factors. The Company has endeavored to
protect against changing growing conditions through geographical expansion of
its sources of supply.
The percentage of sales under brand names owned and promoted by the Company
amount to approximately 62 percent; food service/industrial sales represent
approximately 23 percent; and private label sales currently represent
approximately 15 percent.
It is difficult to estimate the number of competitors in the markets served by
the Company. Nearly all products sold by the Company compete with the nationally
advertised brands of leading food processors, including Del Monte, Green Giant,
Frito-Lay, Kraft, and similar major brands, as well as with the branded and
private label products of a number of regional processors, many of which operate
only in portions of the marketing area served by the Company.
MARKET AND INDUSTRY DATA
Unless otherwise stated in this report, industry and market share data used
throughout this Form 10-K Equivalent were derived from industry sources believed
by the Company to be reliable, including information provided by Information
Resources, Inc. Such data were obtained or derived from consultants' reports and
industry publications. Consultants' reports and industry publications generally
state that the information contained therein has been obtained from sources
believed to be reliable, but that the accuracy and completeness of such
information is not guaranteed. The Company has not independently verified such
data and makes no representation to its accuracy.
NEW PRODUCTS AND RESEARCH AND DEVELOPMENT
The Company operates a technical center located in Green Bay, Wisconsin that is
responsible for new product development, quality assurance, and engineering.
Approximately 27 employees are employed within this facility. The Company
follows a four-stage new product development process as follows: screening,
feasibility, development, and commercialization. This new product development
process ensures input from consumers, customers, and internal functional areas
before a new product is brought to market.
The Company also focuses on the development of related products or modifications
of existing products for the Company's brands and customized products for the
Company's private label and food service businesses.
The amount expensed during the last three fiscal years on company-sponsored and
customer-sponsored research activities relating to the development of new
products or the improvement of existing products has not been material.
During fiscal 2002, the Company developed Birds Eye Hearty Spoonfuls, a frozen
soup product that includes large cut Birds Eye vegetables and bite size pieces
of protein in a variety of flavors. Birds Eye Hearty Spoonfuls was introduced in
the first quarter of fiscal 2003, in conjunction with a national advertising
campaign. During the fourth quarter of fiscal 2001, the Company introduced Birds
Eye Simply Grillin', a preseasoned blend of top quality Birds Eye vegetables in
a foil tray.
EMPLOYEES
As of June 29, 2002, the Company had approximately 4,000 full-time employees, of
whom 2,839 were engaged in production and the balance in management, sales and
administration. As of that date, the Company also employed approximately 1,484
seasonal and
10
other part-time employees, almost all of whom were engaged in production. Most
of the production employees are members of various labor unions. The Company
believes its current relationship with its employees is good.
ITEM 2. DESCRIPTION OF PROPERTIES
All plants, warehouses, office space and other facilities used by the Company in
its business are either owned by Agrilink Foods or one of its subsidiaries or
leased from unaffiliated third parties. The majority of the properties owned by
Agrilink Foods are subject to mortgages in favor of its primary lender. In
general, the properties include offices, processing plants and warehouse space.
Some processing plants are located in rural areas that are convenient for the
delivery of crops. The Company also has dispersed warehouse locations to
facilitate the distribution of finished products. Agrilink Foods believes that
its facilities are in good condition and suitable for the operations of the
Company.
The Company's Alamo, Texas and Enumclaw, Washington properties are held for
sale.
The following table describes all material facilities leased or owned by the
Company (other than the properties held for sale, certain public warehouses
leased by the Company from unaffiliated third parties from time to time, and
facilities owned by the Company's joint venture, Great Lakes Kraut Company,
LLC). Except as otherwise noted, each facility set forth below is owned by the
Company.
FACILITIES UTILIZED BY THE COMPANY
Type of Property (By Product Line) Location Square Feet
- ---------------------------------- -------- -----------
Vegetables:
Warehouse Sodus, MI 243,138
Freezing plant, warehouse, dry storage, and office Barker, NY 123,600
Freezing plant Bergen, NY 138,554
Cold storage and repackaging plant and public storage warehouse Brockport, NY 404,410
Freezing plant, canning plant, and warehouse Oakfield, NY 263,410
Freezing plant, cold storage, repackaging plant and office Montezuma, GA 591,300
Freezing plant, cold storage, and office Bridgeville, DE 104,383
Freezing plant and repackaging plant Celaya, Mexico 318,620
Freezing plant and distribution center Darien, WI 348,800
Freezing plant, repackaging plant and warehouse Fairwater, WI 178,298
Repackaging plant and distribution center Fulton, NY 263,268
Freezing and canning plant and office Green Bay, WI 492,446
Freezing plant and repackaging plant(1) Oxnard, CA 39,082
Repackaging plant(1) San Antonio, TX 20,445
Freezing plant and warehouse Uvalde, TX 146,625
Freezing plant, repackaging plant and warehouse Watsonville, CA 207,600
Freezing plant, repackaging plant and warehouse Waseca, MN 258,475
Labeling plant and distribution center(1) Fond du Lac, WI 330,000
Manufacturing plant and warehouse Tacoma, WA 295,468
Warehouse(1) Waseca, MN 91,400
Fruits:
Canning plant and warehouse(2) Red Creek, NY 153,076
Canning plant and warehouse Fennville, MI 350,000
Canning plant and warehouse Lawton, MI 142,000
Snacks:
Manufacturing plant Ridgway, IL 50,000
Manufacturing plant, warehouse, distribution center, and office(1) Algona, WA 107,000
Manufacturing plant, warehouse, and office Berlin, PA 190,225
Manufacturing plant, warehouse, and office Cincinnati, OH 113,576
Distribution center(1) Elwood City, PA 8,000
Distribution center(1) Monessen, PA 10,000
Distribution center(1) Coraopolis, PA 15,000
Distribution center(1) Canal Fulton, OH 14,000
Distribution center(1) Altoona, PA 10,000
Distribution center(1) Ashland, KY 10,760
11
Type of Property (By Product Line) Location Square Feet
- ---------------------------------- -------- -----------
Snacks (Continued):
Distribution center(1) Bristol, TN 11,500
Distribution center(1) Knoxville, TN 12,500
Distribution center(1) Dayton, OH 9,200
Canned Meals:
Canning plant, warehouse and distribution center Tacoma, WA 313,488
Other:
Manufacturing plant, warehouse and office building Tacoma, WA 372,164
Parking lot and yards(1) Tacoma, WA 305,470
Office Building - Fuller Building(1) Tacoma, WA 60,000
Headquarters office(1) Rochester, NY 76,372
(1) Leased from third parties, although certain related equipment is owned by
the Company.
(2) On September 5, 2002, Agrilink Foods announced that it had reached an
agreement in principle to sell its applesauce business to Knouse Foods. The
applesauce had been produced at Agrilink's Red Creek, New York and
Fennville, Michigan facilities. This sale will result in the closure of the
Red Creek facility.
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.
On September 25, 2001, in the circuit court of Multnomah County, Oregon, Blue
Line Farms commenced a class action suit against the Company, Pro-Fac
Cooperative, Inc., Mr. Mike Shelby, and "Does" 1-50, representing directors,
officers, and agents of the corporate defendants.
The complaint alleges (i) fraud in operating AgriFrozen, a former subsidiary of
Pro-Fac; (ii) breach of fiduciary duty in operating AgriFrozen; (iii) negligent
misrepresentation in operating AgriFrozen; (iv) breach of contract against
Pro-Fac; (v) breach of good faith and fair dealing against Pro-Fac; (vi)
conversion against Pro-Fac and the Company; (vii) intentional interference with
a contract against the Company; and (viii) statutory Oregon securities law
violations against Pro-Fac and separately against Mr. Shelby.
The relief sought includes (i) a demand for an accounting; (ii) injunctive
relief to compel the disclosure of documents; (iii) certification of the class;
(iv) damages of $50 million; (v) prejudgment and post-judgment interest; and
(vi) an award of costs and expenses including expert fees and attorney's fees.
Management believes this case is without merit and intends to defend vigorously
its position.
The Unit Purchase Agreement for the Transaction contains specific provisions
concerning the Blue Line Farms matter and other AgriFrozen related litigation of
Agrilink Foods. These provisions address the sharing of defense costs, as well
as judgment and settlement costs, between Agrilink Foods and Pro-Fac. On an
annual basis, Agrilink Foods has agreed to bear responsibility for the first
$300,000 of defense costs. In addition, Agrilink agrees to bear responsibility
for one-half of defense costs in excess of $300,000 and for one-half of judgment
and settlement costs, subject to an aggregate cap of $3.0 million after which
Pro-Fac is responsible for all costs. These provisions regarding a sharing of
costs apply specifically to the Blue Line Farms matter and the Seifer Trust
matter, pending in bankruptcy court in Eugene, Oregon. These provisions do not
apply to other AgriFrozen related litigation, the responsibility for which is
entirely with Pro-Fac.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
As of June 29, 2002, all of the capital stock of the Company was owned by
Pro-Fac Cooperative, Inc. As a result of the Transaction, Agrilink Foods became
the indirect, wholly-owned subsidiary of Holdings, LLC. Agrilink Foods is a
direct, wholly-owned subsidiary of Agrilink Holdings, Inc., which is, in turn, a
direct, wholly-owned subsidiary of Agrilink Holdings, LLC. Vestar acquired
control of the Company in the Transaction. Vestar owns 56.24% and Pro-Fac owns
40.72% of the common equity securities of Holdings LLC. As is indicated earlier
in this Form 10-K Equivalent, in connection with the Transaction, certain
executive officers and other members of Agrilink Foods' management, entered into
subscription agreements with Holdings, LLC to acquire Class C common units and
Class D common units of Holdings, LLC, representing approximately 3.04% of the
common equity ownership of Holdings, LLC. As of September 25, 2002, less than 1%
of these common equity ownership units remained unissued. See General
Development of Business and NOTES 1, 3, 9, and 15 to the "Notes to Consolidated
Financial Statements."
13
ITEM 6. SELECTED FINANCIAL DATA
Agrilink Foods, Inc.
FIVE YEAR SELECTED FINANCIAL DATA
(Dollars in Thousands)
Fiscal Year Ended June
------------------------------------------------------------------------
2002 2001(a) 2000 1999(b) 1998
------------ ------------ ----------- ----------- -----------
Consolidated Summary of Operations:
Net sales $ 1,010,540 $ 1,141,380 $ 1,086,301 $ 1,108,130 $ 681,878
Cost of sales (795,297) (928,806) (857,319) (903,891) (546,578)
----------- ----------- ----------- ----------- -----------
Gross profit 215,243 212,574 228,982 204,239 135,300
Selling, administrative, and general expenses (117,447) (133,115) (135,325) (136,173) (81,554)
Income from joint venture 2,457 1,779 2,418 2,787 1,893
Gain from pension curtailment 2,472 0 0 0 0
Gains on sales of assets 0 0 6,635 64,734 0
Restructuring (2,622) 0 0 (5,000) 0
Goodwill impairment charge (179,025) 0 0 0 0
----------- ----------- ----------- ----------- -----------
Operating (loss)/income before dividing with
Pro-Fac (78,922) 81,238 102,710 130,587 55,639
Interest expense (66,420) (79,775) (78,054) (65,339) (30,633)
Amortization of debt issue costs associated with
the Bridge Facility 0 0 0 (5,500) 0
----------- ----------- ----------- ----------- -----------
Pretax (loss)/income before dividing with
Pro-Fac and before extraordinary item (145,342) 1,463 24,656 59,748 25,006
Pro-Fac share of income before extraordinary item (16,842) (732) (12,328) (1,658) (12,503)
----------- ----------- ----------- ----------- -----------
(Loss)/income before taxes and extraordinary item (162,184) 731 12,328 58,090 12,503
Tax benefit/(provision) 31,490 (660) (5,904) (24,770) (5,689)
----------- ----------- ------------ ----------- -----------
(Loss)/income before extraordinary item (130,694) 71 6,424 33,320 6,814
Extraordinary item relating to the early
extinguishment of debt (net of income taxes and
after dividing with Pro-Fac) 0 0 0 (16,366) 0
----------- ----------- ----------- ----------- -----------
Net (loss)/income $ (130,694) $ 71 $ 6,424 $ 16,954 $ 6,814
=========== =========== =========== =========== ===========
Balance Sheet Data:
Working capital $ 299,211 $ 253,010 $ 254,094 $ 225,363 $ 108,075
Ratio of current assets to current liabilities 3.1:1 2.2:1 2.2:1 2.0:1 1.9:1
Total assets $ 857,246 $ 1,078,565 $ 1,098,887 $ 1,110,061 $ 568,971
Long-term debt and senior-subordinated notes
(excludes current portion) $ 623,057 $ 631,128 $ 644,712 $ 668,316 $ 229,937
Other Statistics:
Average number of employees:
Regular 4,239 4,627 5,510 6,040 3,620
Seasonal 1,649 2,931 2,152 2,838 1,125
(a) Consists of 53 weeks.
(b) Includes nine months of operating results from the September 28, 1998
acquisition of the frozen and canned vegetable business of Dean Foods
Vegetable Company.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to outline the significant reasons for changes
in the Consolidated Statement of Operations from fiscal 2000 through fiscal
2002.
Agrilink Foods has four primary product lines including: vegetables, fruits,
snacks and canned meals. The majority of each of the product lines' net sales
are within the United States. In addition, all of the Company's operating
facilities, excluding one in Mexico, are within the United States.
The vegetable product line consists of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable
category include Birds Eye, Birds Eye Voila!, Birds Eye Simply Grillin', Birds
Eye Hearty Spoonfuls, Freshlike, Veg-All, McKenzies, and Brooks Chili Beans. The
fruit product line consists of canned and frozen fruits including fruit fillings
and toppings. Branded products within the fruit category include Comstock and
Wilderness. The snack product line consists of potato chips, popcorn and other
corn-based snack items. Branded products within the snack category include Tim's
Cascade Chips, Snyder of Berlin, Husman, La Restaurante, Erin's, Beehive,
Pops-Rite, Super Pop, and Flavor Destinations. The canned meal product line
includes canned meat products such as chilies, stews, soups, and various other
ready-to-eat prepared meals. Branded products within the canned meal category
include Nalley. The Company's other product line primarily represents salad
dressings. Brand products within this category include Bernstein's and Nalley.
The following tables illustrate the Company's results of operations by product
line for the fiscal years ended June 29, 2002, June 30, 2001, and June 24, 2000,
and the Company's total assets by product line at June 29, 2002, June 30, 2001,
and June 24, 2000.
Net Sales
(Dollars in Millions)
Fiscal Years Ended
-------------------------------------------------------------------------------------
June 29, June 30, June 24,
2002 2001 2000
---------------------- ---------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
------- ------ -------- ------ -------- ------
Vegetables 727.9 72.0 839.4 73.6 724.0 66.6
Fruits 111.4 11.0 117.7 10.3 112.8 10.4
Snacks 88.1 8.7 89.4 7.8 83.3 7.7
Canned Meals 46.0 4.6 51.6 4.5 49.9 4.6
Other 37.1 3.7 43.2 3.8 48.5 4.5
-------- ------ -------- ------ -------- -------
Continuing segments 1,010.5 100.0 1,141.3 100.0 1,018.5 93.8
Businesses sold(1) 0.0 0.0 0.0 0.0 67.8 6.2
-------- ------ -------- ------ -------- -------
Total 1,010.5 100.0 1,141.3 100.0 1,086.3 100.0
======== ====== ======== ====== ======== =======
(1) Includes net sales of operations sold. See NOTE 4 to the "Notes to
Consolidated Financial Statements."
15
Operating Income(1),(2)
(Dollars in Millions)
Fiscal Years Ended
-------------------------------------------------------------------------------------
June 29, June 30, June 24,
2002 2001 2000
---------------------- ---------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
------- ------ -------- ------ -------- ------
Vegetables 67.2 67.0 54.7 67.4 64.4 66.9
Fruits 17.8 17.7 12.4 15.3 14.9 15.5
Snacks 6.6 6.6 5.6 6.9 6.7 7.0
Canned Meals 5.2 5.2 6.6 8.1 6.7 7.0
Other 3.5 3.5 1.9 2.3 4.6 4.8
----- ----- ------ ----- ----- ------
Continuing segments 100.3 100.0 81.2 100.0 97.3 101.2
Businesses sold(3) 0.0 0.0 0.0 0.0 (1.2) (1.2)
----- ----- ------ ----- ----- ------
Total(4) 100.3 100.0 81.2 100.0 96.1 100.0
===== ===== ====== ===== ===== ======
(1) Excludes the goodwill impairment charge, restructuring, gain from pension
curtailment, and gains on sales of assets. See NOTES 1, 2, 4, and 11 to the
"Notes to Consolidated Financial Statements."
(2) In accordance with Statement of Financial Accounting Standard No. 142 ("SFAS
No. 142"), goodwill is no longer amortized. Amortization associated with the
change resulting from the implementation of SFAS No. 142 in the vegetables,
fruits, snacks, canned meals, and other product lines for fiscal 2001 and
2000 was $6.9 million, $0.1 million, $0.4 million, $0.7 million, and $0.7
million, respectively, and $5.2 million, $0.1 million, $0.6 million, $0.7
million, and $0.7 million, respectively. In fiscal 2002, the Company
recognized a non-cash goodwill impairment charge of approximately $179.0
million ($137.5 million net of tax). See NOTE 2 to the "Notes to
Consolidated Financial Statements."
(3) Represents the operating results of operations sold. See NOTE 4 to the
"Notes to Consolidated Financial Statements."
(4) Operating income less interest expense of $66.4 million, $79.8 million, and
$78.1 million, for the years ended June 29, 2002, June 30, 2001, and June
24, 2000, respectively, results in pretax income before dividing with
Pro-Fac. Management does not allocate interest expense to product lines when
evaluating product line performance.
16
EBITDA(1),(2)
(Dollars in Millions)
Fiscal Years Ended
-------------------------------------------------------------------------------------
June 29, June 30, June 24,
2002 2001 2000
---------------------- ---------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
------- ------ -------- ------ -------- ------
Vegetables 90.9 68.8 84.6 69.5 92.5 68.4
Fruits 21.7 16.4 15.4 12.6 17.0 12.6
Snacks 8.9 6.7 9.4 7.7 9.8 7.3
Canned Meals 6.2 4.7 8.1 6.7 8.6 6.4
Other 4.5 3.4 4.3 3.5 6.5 4.8
----- ----- ------ ----- ----- ------
Continuing segments 132.2 100.0 121.8 100.0 134.4 99.5
Businesses sold(3) 0.0 0.0 0.0 0.0 0.7 0.5
----- ----- ------ ----- ----- ------
Total 132.2 100.0 121.8 100.0 135.1 100.0
===== ===== ====== ===== ===== ======
(1) Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
is defined as the sum of pretax income before dividing with Pro-Fac and
before interest expense, depreciation and amortization of goodwill and other
intangibles.
EBITDA should not be considered as an alternative to net income or cash
flows from operations or any other generally accepted accounting principles
measure of performance or as a measure of liquidity.
EBITDA is included herein because the Company believes EBITDA is a financial
indicator of a company's liquidity and ability to service debt. EBITDA as
calculated by Agrilink Foods may not be comparable to calculations as
presented by other companies.
(2) Excludes the goodwill impairment charge, restructuring, gain from pension
curtailment, and gains on sales of assets. See NOTES 1, 2, 4, and 11 to the
"Notes to Consolidated Financial Statements."
(3) Represents the operating results of operations sold. See NOTE 4 to the
"Notes to Consolidated Financial Statements."
Total Assets
(Dollars in Millions)
Fiscal Years Ended
-------------------------------------------------------------------------------------
June 29, June 30, June 24,
2002 2001 2000
---------------------- --------------------- ---------------------
% of % of % of
$ Total $ Total $ Total
------- ------ ------- ------ ------- ------
Vegetables 665.5 77.6 854.9 79.3 876.3 79.7
Fruits 77.2 9.0 72.7 6.8 80.0 7.2
Snacks 40.7 4.8 47.6 4.4 44.0 4.0
Canned Meals 26.8 3.1 45.7 4.1 45.9 4.2
Other 43.1 5.1 57.6 5.3 52.4 4.8
------- ----- ------- ----- ------- -----
Continuing segments 853.3 99.6 1,078.5 99.9 1,098.6 99.9
Assets held for sale 3.9 0.4 0.1 0.1 0.3 0.1
------- ----- ------- ----- ------- -----
Total 857.2 100.0 1,078.6 100.0 1,098.9 100.0
======= ===== ======= ===== ======= =====
CHANGES FROM FISCAL 2001 TO FISCAL 2002
During fiscal 2002, net sales declined $130.8 million or 11.5 percent.
Approximately $47.3 million of the net sales decrease was attributable to
one-time events in fiscal 2001, including $21.1 million of net sales associated
with the termination of a Midwest co-pack canned vegetable contract that has
been discontinued and $26.2 million of net sales associated with the one-time
sales of inventory purchased from CoBank, the secured lender to PF Acquisition
II, Inc. ("the Northwest Inventory Purchase"). In addition, during fiscal 2002,
the Company completed a review of its non-branded vegetable customers, choosing
to exit several unprofitable or low margin relationships. As a result of these
decisions, net sales on non-branded vegetables declined approximately $25.0
million in fiscal 2002.
17
Adjusting for the three factors discussed above, fiscal 2002 net sales declined
$58.5 million or 5.1 percent from fiscal 2001. Approximately $35.4 million of
this decline occurred within branded frozen vegetables. Category declines within
the home meal replacement segment resulted in a reduction in sales within the
Company's Birds Eye Voila! product line of approximately $20.3 million, while
the core Birds Eye product lines experienced a modest decline of $3.1 million.
For the 52-week period ending June 23, 2002, however, the Company maintained
overall frozen vegetable market share, of approximately 31.8 percent consistent
with that of 31.9 percent in the prior year. The Company's overall market share
includes branded retail unit sales, as reported by Information Resources, Inc.
("IRI"), and management's estimate of the Company's private label share based
upon factory shipments. (The frozen vegetable database as reported by IRI was
restated by IRI during fiscal 2002 to more accurately depict the overall
segment. This restatement has not materially affected the category or share
information, however, it has required a restatement of prior year market
information). Management will continuously focus its efforts on improving its
market position while maintaining profitability.
Comparability of fiscal 2002 net income is difficult as fiscal 2002 was
significantly impacted by several events, including:
(a) restructuring activities and the related charge associated with a 7 percent
reduction in the Company's national workforce. These restructuring efforts
were part of an ongoing effort to achieve low-cost operations and included
both salaried and hourly positions;
(b) the Company's decision to freeze benefits under its Master Salaried
Retirement Plan and the resulting $2.5 million curtailment gain associated
with this decision. This action was also part of an ongoing effort to reduce
costs;
(c) a significant reduction in interest expense associated with general interest
rate reductions; and
(d) the recognition of a non-cash goodwill impairment charge under SFAS No. 142,
"Goodwill and Other Intangible Assets." This pronouncement requires that
goodwill not be amortized, but instead be tested at least annually for
impairment. See NOTE 2 to the "Notes to Consolidated Financial Statements."
Accordingly, management believes, to fully evaluate results, an evaluation of
EBITDA from continuing segments is more appropriate as it allows the operations
of the business to be reviewed in a more comparable manner. EBITDA from
continuing segments increased $10.4 million or 8.5 percent from the prior year.
This improvement in EBITDA was the result of significant efforts made throughout
the year to improve profitability, including pricing actions, reductions in
manufacturing costs, and a reduction in fixed costs. In addition, the
improvement in EBITDA was achieved despite an increase in warehousing costs due
to an increase in inventory levels and a one-time expense associated with an
arbitrated contract settlement with Dean Pickle and Specialty Products Company
("Dean Pickle"). As part of the June 2000 sale of the Company's pickle business
to Dean Pickle, the parties entered into an agreement whereby Agrilink Foods
agreed to contract pack products for a period of two years. Fiscal 2002 was the
second and final year of the contract. The Company and Dean Pickle disagreed on
how pricing for fiscal 2002 was to be established for that year. The arbitrated
settlement required the recording of a $1.7 million charge in the third quarter
to resolve all disputes regarding the pricing of product packed during fiscal
2002.
A detailed accounting of the significant reasons for changes in net sales and
EBITDA by product line follows:
Vegetable net sales decreased $111.5 million or 13.3 percent. Adjusting for the
one time benefits associated with: (a) the sales of the Northwest Inventory
Purchase; (b) the termination of the Midwest canned vegetable co-pack contract;
and (c) the non-branded customer rationalization discussed above, vegetable net
sales decreased $39.2 million or 4.7 percent.
Within the branded business, net sales for the Birds Eye Voila! product line
decreased $20.3 million over the prior year primarily as a result of declines in
the home meal replacement category. Birds Eye Voila!, however, remains the
leading brand with 26.5 percent of the home meal replacement category. (The home
meal replacement category as reported by IRI was restated by IRI during fiscal
2002. This restatement has not materially affected the category or share
information, however, it has required a restatement of prior year marketing
information). Management continues to focus on improving performance within this
category.
Net sales for Birds Eye branded vegetables declined a modest $3.1 million over
the prior year as a result of a decline in the category. Birds Eye unit share,
however, as reported by Information Resources, Inc., increased 0.3 points for
the 52-week period ending June 23, 2002. For that same time period, the total
frozen vegetable category reflected a decline in retail unit sales of 6 percent.
18
Further, net sales declines of $15.8 million were experienced in the Company's
regional branded product lines due to competitive pressures.
Excluding sales associated with the Northwest Inventory Purchase and the
termination of the Midwest canned vegetable co-pack contract, non-branded
vegetable net sales declined $25.0 million in fiscal 2002. The decline is
primarily attributable to eliminating relationships with several low margin
customers.
In spite of the net sales declines, vegetable EBITDA increased $6.3 million or
7.4 percent. This significant positive growth was the result of numerous actions
taken throughout the year to improve earnings. These actions included: (a)
pricing increases in both the branded and non-branded businesses, (b) reductions
in production costs resulting from workforce reductions, an improved harvest and
further manufacturing efficiencies, and (c) Company wide efforts to reduce
spending. Management intends to continue its efforts to manage costs while
improving profitability of its vegetable business.
Net sales for the fruit product line decreased $6.3 million or 5.4 percent,
while EBITDA improved by $6.3 million or 40.9 percent. The decline in net sales
is a result of eliminating relationships with several low-margin customers. The
increase in EBITDA was driven by improved pricing and decreases in production
costs.
Net sales for the snack product line decreased $1.3 million or 1.5 percent from
fiscal 2001. An increase in sales in the potato chip businesses were offset by
continued declines in the popcorn business. EBITDA for the snack product line
decreased $0.5 million, or 5.3 percent. The popcorn business continues to be
negatively impacted by both competitive pressures and product mix. In addition,
EBITDA of the potato chip category was negatively affected in the first half of
fiscal 2002 by costs associated with expansion into new markets and additional
manufacturing costs associated with the transition of Tim's Cascade Style Potato
Chips to a larger facility. These transition efforts have now been completed.
Net sales for the canned meal business decreased $5.6 million or 10.9 percent.
EBITDA for the canned meal business decreased $1.9 million or 23.5 percent. The
regions in which the canned meal businesses market their products experienced a
very mild winter this year. This mild weather (which tends to cause consumers to
purchase less) had a negative impact on the overall prepared chili meal
category.
Net sales of the other product line, primarily represented by salad dressings,
decreased $6.1 million, or 14.1 percent, while EBITDA increased $0.2 million or
4.7 percent from fiscal 2001. The majority of the net sales decline was
associated with the loss of a low margin food service customer. In addition, net
sales declined due to competitive activity in the dressing category including
the actions of one competitor that has discontinued its entire line. While this
action negatively impacted fiscal 2002 sales, it is expected to create
distribution opportunities and positively impact salad dressing performance in
the future.
Operating Income: Operating income from continuing segments, excluding the
approximate $8.8 million reduction in amortization expense resulting from the
adoption of SFAS No. 142, (see NOTE 2 to the "Notes to Consolidated Financial
Statements") increased from $90.0 million in fiscal 2001 to $100.3 million in
fiscal 2002. This represents an increase of $10.3 million or 11.4 percent.
Increases in operating income within vegetables, fruits, snacks, and other were
$5.6 million, $5.3 million, $0.6 million and $0.9 million, respectively.
Operating income for canned meals declined $2.1 million. Significant variances
are highlighted above in the discussion of EBITDA and net sales.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses decreased $15.7 million or 11.8 percent as compared with
fiscal 2001. The decrease is primarily attributable to an $8.8 million reduction
in amortization expense resulting from the implementation of SFAS No. 142. In
addition, a reduction in fixed expenses of approximately $5.3 million was
primarily associated with both the restructuring actions implemented in the
second quarter of fiscal 2002 and general company-wide reductions in spending.
Income from Joint Venture: This amount represents earnings received from the
investment in Great Lakes Kraut LLC, a joint venture between Agrilink Foods and
Flanagan Brothers, Inc. There has been no significant change in the operations
of the joint venture in fiscal 2002 compared to fiscal 2001. See further
discussion at NOTE 6 to the "Notes to Consolidated Financial Statements."
Gain from Pension Curtailment: During September 2001, the Company made the
decision to freeze benefits provided under its Master Salaried Retirement Plan.
Under the provisions of SFAS No. 88, "Accounting for Settlements and
Curtailments of Defined
19
Benefit Pension Plans and for Termination Benefits," these benefit changes
resulted in the recognition of a $2.5 million net curtailment gain.
Restructuring: On June 23, 2000 the Company sold its pickle business to Dean
Pickle and Specialty Product Company. As part of the transaction, Agrilink Foods
agreed to contract pack Nalley and Farman's pickle products for a period of two
years, ending June 2002. In anticipation of the completion of this co-pack
contract, the Company initiated restructuring activities for approximately 140
employees in that facility located in Tacoma, Washington. The total
restructuring charge amounted to $1.1 million and was primarily comprised of
employee termination benefits. Of this charge, $0.1 million has been paid as of
June 29, 2002, and the remaining termination benefits will be liquidated during
the next three months.
In addition, on October 12, 2001, the Company announced a reduction of
approximately 7 percent of its nationwide workforce, for a total of
approximately 300 positions. The reductions are part of an ongoing focus on
low-cost operations and included both salaried and hourly positions. In
conjunction with the reductions, the Company recorded a charge against earnings
of approximately $1.6 million in the second quarter of fiscal 2002, primarily
comprising employee termination benefits. Reductions in personnel included
operational and administrative positions. The entire $1.6 million provided for
has been paid as of June 29, 2002.
Goodwill Impairment Charge: In June 2001, the FASB issued SFAS No. 142,
"Goodwill and Other Intangible Assets." Effective July 1, 2001, Agrilink Foods
adopted SFAS No. 142, which requires that goodwill not be amortized, but instead
be tested at least annually for impairment and expensed against earnings when
the carrying amount of the reporting units goodwill exceeds its implied fair
value.
During the quarter ended June 29, 2002, the Company identified certain
indicators of possible impairment of its goodwill. The main indicators of
impairment included the recent deterioration of general economic conditions,
lower valuations resulting from current market declines, modest category
declines in segments in which the Company operates, and the completion of the
terms of the Transaction with Pro-Fac and Vestar/Agrilink Holdings. These
factors indicated an erosion in the market value of the Company since the
adoption of SFAS No. 142.
In the fourth quarter of fiscal 2002, Agrilink recorded a one-time, pretax,
non-cash change of approximately $179.0 million to reduce the carrying value of
its goodwill. The tax benefit associated with this non-cash charge was
approximately $41.5 million. Accordingly, the net-of-tax charge was
approximately $137.5 million. See NOTE 2 to the "Notes to Consolidated Financial
Statements" for additional disclosure.
Interest Expense: Interest expense decreased $13.4 million to $66.4 million in
fiscal 2002 from $79.8 million in fiscal 2001. The decrease is the result of a
decrease in the weighted average interest rate of 1.78 percent resulting from
general interest rate reductions, and lower average outstanding balances during
fiscal 2002 of approximately $3.3 million. Interest expense was, however,
negatively impacted by a supplemental fee of $1.5 million paid in September of
2001 in conjunction with the Company's previous credit facility with Harris
Trust and Savings Bank. (See NOTE 9 to the "Notes to Consolidated Financial
Statements.")
Pro-Fac Share of Income: Historically, the Company's contractual relationship
with Pro-Fac was defined in the marketing and facilitation agreement (the
"Existing Agreement"), which the Company and Pro-Fac entered into in November,
1994, in connection with Pro-Fac's acquisition of Agrilink Foods. Under the
Existing Agreement, in any year in which the Company had earnings on products
which were processed from crops supplied by Pro-Fac ("Pro-Fac Products"), the
Company paid to Pro-Fac, as additional patronage income, 90 percent of such
earnings, but in no case more than 50 percent of all pretax earnings of the
Company. In years in which the Company had losses on Pro-Fac Products, the
Company reduced the commercial market value it would otherwise pay to Pro-Fac by
90 percent of such losses, but in no case by more than 50 percent of all pretax
losses of the Company. Earnings and losses were determined at the end of the
fiscal year, but were accrued on an estimated basis during the year. Pursuant to
the terms of the Transaction, the parties agreed that under the Existing
Agreement, the one-time, non-cash impairment charge would be excluded from the
additional patronage income calculation. Accordingly, in fiscal 2002, the
Pro-Fac share of earnings was recorded at 50 percent of pretax earnings prior to
the impairment charge. The Amended and Restated Marketing and Facilitation
Agreement does not permit Agrilink Foods to offset its losses against the price
paid for Pro-Fac products or require Agrilink Foods to share its profits on
Pro-Fac products with Pro-Fac. See NOTE 15 to the "Notes to Consolidated
Financial Statements" regarding the Amended and Restated Marketing and
Facilitation Agreement.
Tax Benefit/(Provision): During fiscal 2002, Agrilink Foods had a tax benefit of
$31.5 million compared to a $0.7 million tax provision in fiscal 2001. The tax
benefit primarily resulted from a $41.5 million benefit associated with the
non-cash impairment charge. Further, in fiscal 2002, an additional valuation
allowance of $8.6 million was recorded for state net operating losses and
credits which negatively impacted the Company's effective tax rate. A further
discussion of tax matters is included at NOTE 10 to the "Notes to Consolidated
Financial Statements."
20
CHANGES FROM FISCAL 2000 TO FISCAL 2001
During fiscal 2001, net sales from continuing segments showed an increase of
$122.8 million, or 12.1 percent. Approximately $75.1 million of the net sales
improvement was attributable to an increase in frozen vegetable net sales, and
an additional $49.5 million was associated with various co-pack agreements. The
Company's overall market share for frozen vegetables, for the 52-week period
ending June 24, 2001, approximated 31.9 percent and represented an improvement
of 0.9 percent over the prior year. (The frozen vegetable database as reported
by IRI was restated by IRI during fiscal 2002 to more accurately depict the
overall segment. This restatement has not materially effected the category or
share information, however, it has required a restatement of prior year market
information). The Company's overall market share includes branded retail unit
sales, as reported by Information Resources, Inc., and management's estimate of
the Company's private label share based upon factory shipments.
Excluding the gain on sales of assets (net of tax), net income, however,
decreased $2.6 million from fiscal 2000. While the Company benefited
from a significant improvement in net sales, it had also experienced a
significant increase in its manufacturing costs. Increased manufacturing costs
were primarily associated with significantly higher freight and utility costs
throughout the nation and lower than anticipated crop intake in the eastern part
of the country. To mitigate the increase in manufacturing costs, management
focused efforts on controlling warehousing expenses, increased branded pricing,
acquired lower cost inventory as part of the Northwest Inventory Purchase, and
initiated reductions in selling, administrative, and general expenses. In the
administrative category, management actions included reductions in certain
marketing programs and various employee incentive programs.
Management also utilizes an evaluation of EBITDA from continuing segments as a
measure of performance. Management believes to fairly evaluate results, an
evaluation of EBITDA from continuing segments is more appropriate as it allows
the operations of the business to be reviewed in a more comparable manner.
Excluding businesses sold, EBITDA from continuing segments decreased $12.6
million, or 9.4 percent, to $121.8 million in fiscal 2001 from $134.4 million in
fiscal 2000. A detailed accounting of the significant reasons for changes in net
sales and EBITDA by product line follows.
Vegetable net sales increased $115.4 million or 15.9 percent. Significant
components associated with this growth include: (a) an improvement in net sales
within the brand business of approximately $38.5 million; and (b) increases in
net sales within the non-branded business of approximately $76.9 million.
Within the branded businesses, the increase in Birds Eye frozen vegetables net
sales accounted for approximately $32.3 million of the $38.5 million increase.
Of the Birds Eye increase, $17.7 million was a result of volume improvements and
$14.6 million was due to pricing initiatives announced in the second half of
fiscal 2001. For the 52-week period ending June 24, 2001, the total frozen
vegetable category retail unit sales, as reported by Information Resources,
Inc., were down slightly, 3.1 percent, while the Birds Eye brand retail unit
sales for the same time period increased 1.9 percent. Unit sales of the
Company's largest competitor, as reported by Information Resources, Inc.,
decreased 9.1 percent during this same time period. Net sales for the Birds Eye
Voila! product line increased $0.5 million over the prior year, while Voila!
remained the leading brand with 28.8 percent of the home meal replacement
category. (The home meal database as reported by IRI was restated by IRI during
fiscal 2002 to better meet the needs of management. This restatement has not
materially effected the category or share information, however, it has required
a restatement of prior year market information).
In addition, in the fourth quarter of fiscal 2001, the Company initiated a
national launch of a new product, Birds Eye Simply Grillin'. Birds Eye Simply
Grillin' is a preseasoned blend of top quality grilled Birds Eye vegetables in a
foil tray. Net sales associated with this new product were $7.7 million.
Marketing and promotional spending incurred with this introduction amounted to
$5.9 million.
The Company's non-branded vegetable business experienced volume increases in
private label and food service frozen vegetables, which accounted for $28.7
million of net sales growth. The $28.7 million of net sales growth resulted from
the following: (a) increases in Agrilink Foods' recurring private label and food
service business of $22.0 million; (b) net sales increases of $26.2 million
associated with the Northwest Inventory Purchase; (c) offset by reductions of
$19.5 million associated with the conversion of a major club store customer from
a private label to brand product line.
Further, two co-pack agreements for canned vegetables in the Midwest and for
pickles in the Northwest accounted for an additional $49.5 million of the
non-branded net sales increase. While co-pack agreements typically yield lower
margins than the Company's other product lines, they provide for greater
utilization of manufacturing facilities.
Although vegetables experienced a significant increase in net sales, EBITDA
declined $7.9 million. The reduction in EBITDA was primarily driven by increased
manufacturing costs along with marketing and promotional spending associated
with the launch of Birds Eye Simply Grillin'.
21
Net sales for the fruit product line increased $4.9 million, or 4.3 percent,
while EBITDA decreased $1.6 million, or 9.4 percent. The net sales improvement
was led by increases in private label net sales of $4.7 million and additional
co-pack agreements resulting in net sales increases of $1.8 million. Modest net
sales declines were highlighted in all other categories. Increased manufacturing
costs and continued competitive pressures within the applesauce category,
however, negatively impacted EBITDA.
Net sales for the snack product line increased $6.1 million, or 7.3 percent.
Improvements in net sales within the potato chip category increased $7.3
million, while the popcorn product line decreased $1.2 million. The increases
within the potato chip category were associated with geographic expansion. The
improvements in EBITDA associated with growth in the potato chip category
amounted to $1.4 million, while declines in the popcorn category negatively
impacted EBITDA by approximately $1.8 million. The popcorn category continues to
be negatively impacted by competitive pressures and changes in product mix.
Net sales for canned meals increased $1.7 million, or 3.4 percent, while EBITDA
decreased $0.5 million, or 5.8 percent. EBITDA decreased as a result of changes
in product mix and increased manufacturing costs associated with raw
ingredients, including beef and utility increases experienced in the Northwest.
All of the Company's canned meal products are produced at the Company's Tacoma,
Washington location.
The other product line net sales, primarily represented by salad dressings,
decreased $5.3 million, or 10.9 percent, while EBITDA decreased $2.2 million, or
33.8 percent. The majority of the net sales decline was associated with the loss
of a private label customer. The reduction in EBITDA was associated with both
the decline in unit volume associated with reductions in private label volume
and increases in manufacturing costs associated with packaging ingredients and
utility increases experienced in the Northwest. All of the Company's dressing
products are produced at the Company's Tacoma, Washington location.
Operating Income: Operating income from continuing segments decreased from $97.3
million in fiscal 2000 to $81.2 million in fiscal 2001. This represents a
decrease of $16.1 million or 16.5 percent. Declines in operating income within
vegetable, fruit, snacks, canned meals, and all other product lines were $9.7
million, $2.5 million, $1.1 million, $0.1 million, and $2.7 million,
respectively. Significant variances, as highlighted above, primarily result from
increased manufacturing costs, competitive pressures, and changes in product
mix.
Income From Joint Venture: This amount represents earnings received from the
investment in Great Lakes Kraut Company, LLC, a joint venture formed between
Agrilink Foods and Flanagan Brothers, Inc. The decrease of $0.6 million over the
prior year is attributable to volume declines, resulting competitive pressures,
and an increase in manufacturing costs. See further discussion at NOTE 6 to the
"Notes to Consolidated Financial Statements."
Gain on Sales of Assets: On June 23, 2000, the Company sold its pickle business
based in Tacoma, Washington to Dean Pickle and Specialty Products. This business
included pickle, pepper, and relish products sold primarily under the Nalley and
Farman's brand names. The Company received proceeds of approximately $10.3
million which were applied to bank loans ($4.0 million was applied against the
principal balance of the Company's term loan facility and $6.3 million was
applied against the principal balance of the Company's revolving credit facility
under the Company's $655.0 million credit facility with Harris Bank as
administrative agent, the Bank of Montreal as syndication agent, and the lenders
thereunder (the "Harris Credit Facility"). A gain of approximately $4.3 million
was recognized on this transaction.
On July 21, 2000, the Company sold the machinery and equipment utilized in the
production of pickles and other related products to Dean Pickle and Specialty
Products. No significant gain or loss was recognized on this transaction. The
proceeds of approximately $5.0 million were applied to bank loans.
This transaction did not include any other products carrying the Nalley brand
name. Agrilink Foods continued to contract pack Nalley and Farman's pickle
products for a period of two years, beginning June 23, 2000, at the existing
Tacoma processing plant. The co-pack contract ended in June 2002 and Agrilink
Foods ceased production at this location.
On December 17, 1999 Agrilink Foods announced they had completed the sale of the
Company's Cambria, Wisconsin processing facility to Del Monte. The Company
received proceeds of approximately $10.5 million from the sale of its Cambria,
Wisconsin facility which were applied to bank loans. A gain of approximately
$2.3 million was recognized on this transaction. The sale also included an
agreement for Del Monte to produce a portion of Agrilink Foods' product needs
during the 2000 packing season.
Interest Expense: Interest expense increased $1.7 million from the prior year to
$79.8 million. The increase is the result of an increase in the weighted average
interest rate of 25 basis points resulting from both amendments to the Harris
Credit Facility during September 2000 and general interest rate increases on
unhedged borrowings experienced in the first six months of fiscal 2001. In
addition, interest expense was negatively impacted by the amortization of fees
paid in conjunction with the September 2000
22
amendments to the Harris Credit Facility. The increases were offset by lower
average outstanding balances during the fiscal year of approximately $32.8
million, primarily due to required repayments and mandatory prepayments of
short-term debt related to the sale of the private label canned vegetable
business and pickle business.
Pro-Fac Share of Income: Historically, the Company's contractual relationship
with Pro-Fac was defined in the Existing Marketing and Facilitation Agreement
(the "Existing Agreement"). Under the Existing Agreement, in any year in which
the Company had earnings on products which were processed from crops supplied by
Pro-Fac ("Pro-Fac products"), the Company paid to Pro-Fac, as additional
patronage income, 90 percent of such earnings, but in no case more than 50
percent of all pretax earnings of the Company. In years in which the Company had
losses on Pro-Fac products, the Company reduced the commercial market value it
would otherwise pay to Pro-Fac by 90 percent of such losses, but in no case by
more than 50 percent of all pretax losses of the Company. Earnings and losses
were determined at the end of the fiscal year, but were accrued on an estimated
basis during the year.
In fiscal 2001, 90 percent of earnings on patronage products exceeded 50 percent
of all pretax earnings of the Company. Accordingly, the Pro-Fac share of income
has been recognized at a maximum of 50 percent of pretax earnings of the
Company.
See NOTE 15 to the "Notes to Consolidated Financial Statements" regarding the
Amended and Restated Marketing and Facilitation Agreement executed on August 19,
2002.
Tax Provision: The tax provision of $0.7 million in fiscal 2001 represents a
reduction of $5.2 million from the prior year as a result of the change in
earnings before taxes. In fiscal 2000, the sale of certain intangibles in
conjunction with the pickle sale negatively impacted the Company's effective tax
rate. The Company's effective tax rate has historically been negatively impacted
by the non-deductibility of certain amounts of goodwill. A further discussion of
tax matters is included at NOTE 10 to the "Notes to Consolidated Financial
Statements."
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts. The estimates and
assumptions are evaluated on a regular basis and are based on historical
experience and on various other factors that are believed to be reasonable.
Estimates and assumptions include, but are not limited to: inventories,
self-insurance programs, promotional activities and identifiable intangible
assets, long-lived assets and goodwill.
We believe that the following are considered our more critical estimates and
assumptions used in the preparation of our consolidated financial statements,
although not inclusive.
Inventories: Under the FIFO method, the cost of items sold is based upon the
cost of the first such items produced. As a result, the last such items produced
remain in inventory and the cost of these items are used to reflect ending
inventory. The Company prices its inventory at the lower of cost or market value
on the first-in, first-out (FIFO) method.
A reserve is established for the estimated aged surplus, spoiled or damaged
products, and discontinued inventory items and components. The amount of the
reserve is determined by analyzing inventory composition, expected usage,
historical and projected sales information, and other factors. Changes in sales
volume due to unexpected economic or competitive conditions are among the
factors that could result in materially different amounts for this item.
Self - insurance Programs: We record estimates for certain health and welfare
and workers' compensation costs that are self-insured programs. Should a greater
amount of claims occur compared to what was estimated or costs of medical care
increase beyond what was anticipated, reserves recorded may not be sufficient
and additional costs could be incurred.
Promotional Activities: Our promotional activities are conducted either through
the retail trade channel or directly with consumers and involve in-store
displays; feature price discounts on our products; consumer coupons; and similar
activities. The costs of these activities are generally recognized at the time
the related revenue is recorded, which normally precedes the actual cash
expenditure. The recognition of these costs therefore requires management's
judgment regarding the volume of promotional offers that will be redeemed by
either the retail trade channel or consumer. These estimates are made using
various techniques including historical data on performance of similar
promotional programs. Differences between estimated expense and actual
redemptions are normally insignificant and recognized as a change in management
estimate in a subsequent period. However, the likelihood exists of materially
different reported results if different assumptions or conditions were to
prevail.
23
Identifiable Intangible Assets, Long-Lived Assets, and Goodwill: The Company
assesses the carrying value of its identifiable intangible assets, long-lived
assets, and goodwill whenever events or changes in circumstances indicate that
the carrying amount of the underlying asset may not be recoverable. Certain
factors which may occur and indicate that an impairment exists include, but are
not limited to: significant under performance relative to historical or
projected future operating results; significant changes in the manner of the
Company's use of the underlying assets; and significant adverse industry or
market trends. In the event that the carrying value of assets are determined to
be unrecoverable, the Company would record an adjustment to the respective
carrying value. See NOTE 2 to the "Notes to Consolidated Financial Statements."
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the Consolidated
Statement of Cash Flows for fiscal 2002 compared to fiscal 2001.
Net cash provided by operating activities of $14.6 million decreased $39.2
million from fiscal 2001. The decrease was primarily the result of variances
within accounts payable and other accruals due to the timing of liquidation of
outstanding balances. The most significant component of which was the August
2001 payment on the remaining balance of the purchase price for the Northwest
Inventory Purchase of $21.6 million. Additionally, the Company reduced its
general repack levels in an effort to manage its inventory position to improve
liquidity. The Company reduced its inventory balances from $313.9 million at
June 30, 2001 to $294.3 million at June 29, 2002.
Net cash used in investing activities of $5.3 million decreased $20.4 million
from fiscal 2001. The decrease was primarily the result of a reduction in
capital expenditures of $10.1 million. The purchase of property, plant, and
equipment was for general operating purposes and are adequate to maintain its
facilities in proper working order. In fiscal 2001, the Company also received
proceeds of approximately $5.0 million in conjunction with the sale of pickle
machinery and equipment to Dean Pickle and Specialty Products. Additionally, in
fiscal 2001, the Company net advanced $10.7 million to its joint venture for
working capital purposes. Approximately $4.0 million of these advances were
repaid in fiscal 2002.
Net cash used in financing activities decreased by $23.1 million from fiscal
2001. The change was impacted by an increase in capital contributions of $11.3
million received from Pro-Fac as a result of higher operating earnings in fiscal
2002. Additionally, payments on long-term debt decreased by $6.3 million. In
fiscal 2001, debt payments of $3.2 million were made with the proceeds
associated with the sale of equipment noted above. The remaining decrease is
primarily the result of the timing of certain principal payments.
On August 19, 2002 and in connection with the Transaction, Agrilink Foods and
certain of its subsidiaries entered into a senior secured credit facility (the
"Senior Credit Facility") in the amount of $470.0 million with a syndicate of
banks and other lenders arranged and managed by JPMorgan Chase Bank ("JPMorgan
Chase Bank"), as administrative and collateral agent. The Senior Credit Facility
is comprised of (i) a $200 million senior secured revolving credit facility (the
"Revolving Credit Facility") and (ii) a $270.0 million senior secured B term
loan (the "Term Loan Facility"). The Revolving Credit Facility has a maturity of
five years and allows up to $40.0 million to be available in the form of letters
of credit. The Term Loan Facility has a maturity of six years.
The Senior Credit Facility bears interest at the Company's option, at a base
rate or LIBOR plus, in each case, an applicable percentage. The appropriate
applicable percentage corresponds to the Company's Consolidated Leverage Ratio,
as defined by the Senior Credit Agreement. Initially the Senior Credit Agreement
bears interest in the case of base rate loans at the base rate plus (i) 1.75
percent for loans under the Revolving Credit Facility, and (ii) 2.00 percent for
loans under the Term Loan Facility or in the case of LIBOR loans at LIBOR plus
(i) 2.75 percent for loans under the Revolving Credit Facility and (ii) 3.00
percent for loans under the Term Loan Facility. The initial unused commitment
fee is 0.50 percent on the daily average unused commitment under the Revolving
Credit Facility and varies based on the Company's Consolidated Leverage Ratio.
Commencing December 31, 2002, the Term Loan Facility will require payments in
equal quarterly installments in the amount of $675,000. The Term Loan Facility
is also subject to mandatory prepayments under various scenarios as defined in
the Senior Credit Agreement. Provisions of the New Credit Agreement require
annual payments, within 105 days after the end of each fiscal year, in the
amount of "excess cash flow" be utilized to prepay the Commitment at an
applicable percentage that corresponds to the Company's leverage ratio. The
balance due will be payable at maturity.
Utilizing outstanding balances at August 19, 2