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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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Form 10-K
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(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended June 29, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from to
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File No. 0-20539
PRO-FAC COOPERATIVE, INC.
(Exact Name of Registrant as Specified in Its Charter)
New York 16-6036816
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
90 Linden Oaks, PO Box 30682, Rochester, NY 14603-0682
(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:
Class A Cumulative Preferred Stock
Liquidation Preference $25.00/Share
Par Value $1.00/Share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to ITEM 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the registrant
as of September 25, 2002
Common Stock: $9,696,365
(Based upon par value of shares since there is no market for the Registrant's
common stock)
Number of common shares outstanding at September 25, 2002:
Common Stock: 1,939,273
1 of 80 Pages
FORM 10-K ANNUAL REPORT - Fiscal Year 2002
PRO-FAC COOPERATIVE, INC.
TABLE OF CONTENTS
PART I
PAGE
ITEM 1. Description of Business
Cautionary Statement on Forward-Looking Statements.................................. 3
General Development of Business..................................................... 3
Narrative Description of Business................................................... 6
Financial Information About Industry Segments....................................... 7
Packaging and Distribution.......................................................... 8
Trademarks.......................................................................... 8
Raw Material Sources................................................................ 8
Environmental Matters............................................................... 9
Seasonality of Business............................................................. 9
Practices Concerning Working Capital................................................ 9
Significant Customers............................................................... 9
Backlog of Orders................................................................... 9
Business Subject to Government Contracts............................................ 9
Competitive Conditions.............................................................. 10
Market and Industry Data............................................................ 10
Research and Development............................................................ 10
Employees........................................................................... 10
ITEM 2. Description of Properties............................................................... 10
ITEM 3. Legal Proceedings....................................................................... 11
ITEM 4. Submission of Matters to a Vote of Security Holders..................................... 12
PART II
ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters................ 13
ITEM 6. Selected Financial Data................................................................. 14
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 15
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 25
ITEM 8. Financial Statements and Supplementary Data............................................. 27
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 65
PART III
ITEM 10. Directors and Executive Officers of the Registrant...................................... 66
ITEM 11. Executive Compensation.................................................................. 68
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.......................... 70
ITEM 13. Certain Relationships and Related Transactions.......................................... 72
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 73
Signatures.............................................................................. 78
Certification........................................................................... 80
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, Pro-Fac Cooperative, Inc. ("Pro-Fac" or the "Cooperative")
makes oral and written statements that may constitute "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995
(the "PSLRA") or by the Securities and Exchange Commission ("SEC") in its rules,
regulations, and releases. The Cooperative desires to take advantage of the
"safe harbor" provisions in the 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 and in other
filings with the SEC.
The Cooperative cautions readers that any such forward-looking statements made
by or on behalf of the Cooperative are based on management's current
expectations and beliefs but are not guarantees of future performance. Actual
results could differ materially from those expressed or implied in the
forward-looking statements. The factors that could impact the Cooperative
include:
o the impact of weather on the volume and quality of raw product;
o the impact of strong competition in the food industry, including
competitive pricing;
o the impact of changes in consumer demand;
o the continuation of Agrilink Foods, Inc.'s success in integrating
operations (including the realization of anticipated synergies in
operations and the timing of any such synergies), success with new product
introductions, effectiveness of marketing and shifts in market demand, and
the availability of acquisition and alliance opportunities (see General
Development of Business below regarding the current relationship with
Agrilink Foods, Inc.);
o interest rate fluctuations;
o the Cooperative's ability to service debt;
o risks associated with the Cooperative's contractual relationship with
Agrilink Foods, Inc., including the possibility of a reduced demand for
crops produced by Pro-Fac members, the availability and sufficiency of
shortfall payments, and the potential consequences of a termination of that
relationship; and
o the ability of the Cooperative to operate its business using the resources
made available under the Transition Services Agreement with Agrilink Foods,
Inc., and following the expiration of that agreement.
GENERAL DEVELOPMENT OF BUSINESS
Pro-Fac Cooperative, Inc. is an agricultural cooperative corporation formed in
1960 under the Cooperative Corporation Laws of New York to process and market
crops grown by its members. Unless the context otherwise requires, the terms
"Cooperative" and "Pro-Fac" refer to Pro-Fac Cooperative, Inc. and its
subsidiaries. Pro-Fac's Class A Cumulative preferred stock is listed on the
Nasdaq National Market system under the stock symbol, "PFACP." Until August 19,
2002, the Cooperative conducted business under the name of "Agrilink."
Pro-Fac crops include fruits (cherries, apples, blueberries, and peaches),
vegetables (snap beans, beets, cucumbers, peas, sweet corn, carrots, cabbage,
squash, asparagus, potatoes, turnip roots, and leafy greens), and popcorn. Only
growers of crops marketed through Pro-Fac (or associations of such growers) can
become members of Pro-Fac; a grower becomes a member of Pro-Fac through the
purchase of common stock. Pro-Fac members deliver raw product for sale and
processing at the facilities of Agrilink Foods, Inc., a producer and marketer of
processed food products and, until consummation of the Transaction (described
below - "The Transaction") on August 19, 2002, a wholly-owned subsidiary of
Pro-Fac ("Agrilink Foods"). There are approximately 564 Pro-Fac members,
consisting of individual growers or associations of growers, located principally
in the states of New York, Delaware, Pennsylvania, Illinois, Michigan,
Washington, Oregon, Iowa, Nebraska, Florida, and Georgia.
On November 3, 1994, Pro-Fac acquired Agrilink Foods, and upon consummation of
that acquisition Pro-Fac and Agrilink Foods entered into a marketing and
facilitation agreement (the "Marketing and Facilitation Agreement"), which,
until the consummation of the Transaction (see below, "The Transaction"),
governed the crop supply and purchase relationship between Pro-Fac and Agrilink
Foods. Under the Marketing and Facilitation Agreement, Pro-Fac provided crops
and financing to Agrilink Foods, Agrilink Foods provided marketing and
management to Pro-Fac, and Pro-Fac shared in the profits and losses of Agrilink
Foods. The terms of the
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Marketing and Facilitation Agreement provided for the payment by Agrilink Foods
to Pro-Fac of the commercial market value or "CMV" for all crops supplied by
Pro-Fac. "Commercial Market Value" is the weighted average price paid by other
commercial processors for similar crops sold under preseason contracts and in
the open market in the same or competing market area. Under the Marketing and
Facilitation Agreement, in any year in which Agrilink Foods had earnings on
products processed from crops supplied by Pro-Fac, Agrilink Foods paid to
Pro-Fac, as additional patronage income, 90% of those earnings, but only up to
50% of Agrilink Foods' total pre-tax earnings. In years in which Agrilink Foods
had losses on products processed from crops supplied by Pro-Fac, the CMV
Agrilink Foods would otherwise have paid to Pro-Fac was reduced by 90% of the
losses, except that Agrilink Foods' reduction was limited to no more than 50% of
all Agrilink Foods pre-tax losses. Agrilink Foods paid Pro-Fac additional
patronage income for services Pro-Fac provided, including a long term, stable
crop supply, favorable payment terms for crops and the sharing of the risk of
losses from certain operations of the business. The Marketing and Facilitation
Agreement also required Pro-Fac to reinvest at least 70% of the additional
patronage income received back into Agrilink Foods.
Additional patronage income received by Pro-Fac is deductible by Pro-Fac for
federal tax purposes only to the extent distributed to its members. Pro-Fac may
make this distribution to its members through a combination of cash and retains
as long as a minimum of 20 percent of the amount is paid in cash as required by
federal income tax law and regulations. Pro-Fac has historically paid its
members between 20 percent and 30 percent of additional patronage income in cash
and the remaining portion in retains. Funds made available by the distribution
of retains to members in lieu of cash have historically been reinvested by
Pro-Fac in Agrilink Foods.
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, 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 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, Stephen R. Wright, the general manager and
secretary of Pro-Fac, together with executive officers of Agrilink Foods and
certain other members of Agrilink Foods' management, entered into subscription
agreements with Holdings LLC, to acquire (using a combination of cash and
promissory notes issued to Holdings LLC) 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.
In addition, 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.
In connection with the Transaction, certain parties to the Transaction,
including Pro-Fac and/or Agrilink Foods, 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 Marketing and Facilitation Agreement was
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
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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 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 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 Marketing and Facilitation Agreement, however, 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 Foods' needs for each particular crop,
then certain shortfall payments will be 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. 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. Mr. Stephen Wright currently serves as the
general manager and secretary of Pro-Fac and as executive vice president -
member/investor relations of Agrilink Foods. As an employee of Agrilink Foods,
Mr. Wright's salary is paid by 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.
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(v) Limited Liability Agreement of Agrilink Holdings LLC. Pro-Fac and Vestar,
together with others, including Mr. Stephen R. Wright, the general manager and
secretary of Pro-Fac, 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.
Among other things, the Limited Liability Company Agreement provides that,
subject to restrictions contained in any financing arrangements of Holdings LLC
or its subsidiaries, after August 19, 2007 (the date after which no further
payments are scheduled to be made under the Termination Agreement) and prior to
a sale of Holdings LLC, Holdings LLC will use commercially reasonable efforts to
cause Agrilink Foods to distribute annually to Holdings Inc., and Holdings Inc.
to distribute to Holdings LLC, up to $24.8 million of cash flow from operations
of Agrilink Foods, to be distributed to the holders of Holdings LLC common units
in accordance with the provisions of the Limited Liability Company Agreement.
There can be no assurances that Holdings LLC will make any such distribution.
(vi) 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.
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 Report on
Form 10-K or, although included in the exhibit index to this report have been
previously filed by Pro-Fac with the SEC. Each statement is qualified in its
entirety by such reference.
In addition, 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 million with a syndicate of banks and
other lenders arranged and managed by JPMorgan Chase Bank ("JPMorgan Chase
Bank"), as administrative and collateral agent. Proceeds of the Senior Credit
Facility, together with Vestar's $175.0 million investment, were used to repay
and terminate Agrilink Foods' indebtedness under its senior credit facility with
Harris Bank as administrative agent and Bank of Montreal as syndication agent,
and the lenders thereunder (the "Harris Credit Facility"). Pro-Fac was a
guarantor under the Harris Credit Facility. Pro-Fac is not a guarantor under the
Senior Credit Facility.
As a result of the Transaction, Pro-Fac will no longer report its financial
statements on a consolidated basis with that of Agrilink Foods. Subsequent to
the Transaction, Pro-Fac will account for its investment in Holdings LLC under
the equity method of accounting. Also effective as of the Closing Date, Pro-Fac
will no longer conduct business under the name "Agrilink".
NARRATIVE DESCRIPTION OF BUSINESS
Following the Transaction Pro-Fac will continue as an agricultural cooperative
and a marketer and supplier of crops grown by its members. The Amended and
Restated Marketing and Facilitation Agreement resembles the Marketing and
Facilitation Agreement that has governed Pro-Fac's and Agrilink Foods'
relationship since 1994, in that Pro-Fac continues as Agrilink Foods' preferred
supplier of crops. Although Pro-Fac no longer owns 100% of the capital stock of
Agrilink Foods as a result of the Transaction, Pro-Fac continues to own an
indirect, minority interest, 40.72% of the common equity interests, in Agrilink
Foods. Because this Report on Form 10-K is for the fiscal year ended June 29,
2002, and Agrilink Foods was a wholly-owned subsidiary of Pro-Fac for the entire
period covered by this report, the "Description of Business" that follows
includes a "Description of Business" of Pro-Fac on a consolidated basis with
Agrilink Foods.
Prior to August 19, 2002, the Cooperative, through its then wholly-owned
subsidiary Agrilink Foods, sold products in three principal categories: (i)
"branded" products, which are sold under various trademarks, (ii) "private
label" products, which are sold to grocers who in turn use their own brand names
on the products and (iii) "food service/industrial" products, which are sold to
food service institutions such as restaurants, caterers, bakeries, and schools.
In fiscal 2002, approximately 62 percent of the Cooperative's net sales were
branded and the remainder divided between private label and food
service/industrial. Branded products are listed under the "Trademarks" section
of this report. 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, Wal-Mart/Sam's, Safeway,
SuperValu, BJ's, Wegmans, and Winn-Dixie. Food service/industrial products
include salad dressings, fruit fillings and toppings, canned and frozen
vegetables, frozen Southern
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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.
Agrilink Foods has four primary product lines: vegetables, fruits, snacks, and
canned meals. A description of the 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, 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, ongoing vegetable product
line net sales represented approximately 72 percent of Agrilink Foods' total
continuing 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.
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. Agrilink Foods 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 Agrilink Foods' total
continuing 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, Agrilink Foods announced that it had reached an agreement
in principle to sell its applesauce business to Knouse Foods. The applesauce is
produced at Agrilink Foods' Red Creek, New York and Fennville, Michigan
facilities. The sale is expected to result in the closing of the Red Creek
facility, but the Michigan plant is expected to 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 cheese curls, snack mixes, and
other corn-based snack items. Kettle fried potato chips produce a potato chip
that is thicker and crisper than other potato chips. Items within this product
line are marketed primarily in the Pacific Northwest, Midwest and Mid-Atlantic
states. Branded products within the snack category include Tim's Cascade Chips,
Snyder of Berlin, Husman, La Restaurante, Erin's, Beehive, Pops-Rite, Super Pop,
and Flavor Destinations. In fiscal 2002 snacks net sales represented
approximately 9 percent of the Agrilink Foods' total continuing 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 Agrilink
Foods' total continuing 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: Agrilink Foods' 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 Agrilink Foods'
total continuing net sales.
Subsequent to the Transaction, Pro-Fac will conduct its operations in one
category, the marketing of its members' crops, including raw fruits and
vegetables.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Prior to August 19, 2002, the date the Transaction was completed, the business
of the Cooperative through Agrilink Foods was 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 Cooperative's last three fiscal years.
Subsequent to the Transaction, Pro-Fac will conduct its operations in one
industry segment - the marketing and supply of its members' crops, including raw
fruits and vegetables.
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PACKAGING AND DISTRIBUTION
The food products produced by Agrilink Foods are distributed to various consumer
markets in all 50 states. International sales account for a small portion of
Agrilink Foods' 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 Agrilink Foods) 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. Agrilink Foods
has developed central storage and distribution facilities that permit multi-item
single shipment to customers in key marketing areas.
Agrilink Foods maintains a multiyear logistic agreement with American President
Lines under which APL provides freight management, packaging and labeling
services, and distribution support to and from production facilities owned by
Agrilink Foods in and around Coloma, Michigan.
Agrilink Foods also maintains a long-term logistics agreement with Americold
under which Americold manages Agrilink Foods' Montezuma, Georgia frozen food
distribution facility and all frozen food transportation operations of Agrilink
Foods in Georgia and New York.
Following the Transaction, the distribution activities of Pro-Fac are limited to
the delivery of raw fruits and vegetables to its customers, including Agrilink
Foods.
TRADEMARKS
The major brand names under which Agrilink Foods markets its products are
trademarks of Agrilink Foods. Such brand names are considered to be of material
importance to the business of Agrilink Foods since they have the effect of
developing brand identification and maintaining consumer loyalty. There are
trademark registrations for substantially all of Agrilink Foods' trademarks.
These trademark registrations are of perpetual duration so long as they are
periodically renewed. The major brand names utilized by Agrilink Foods 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. Agrilink Foods owns
a 50 percent interest in this joint venture.
RAW MATERIAL SOURCES
Of the commodity types supplied by Pro-Fac, approximately 61 percent of Agrilink
Foods' raw product needs were supplied by Pro-Fac members in fiscal 2002.
Agrilink Foods also purchased on the open market some crops of the same type and
quality as those purchased from Pro-Fac. Such open market purchases may occur at
prices higher or lower than those paid to Pro-Fac for similar products. See
further discussion of Pro-Fac's relationship with Agrilink Foods in NOTES 3 and
16 to the "Notes to Consolidated Financial Statements."
The vegetable and fruit portions of the business can be positively or negatively
affected by weather conditions nationally and the resulting impact on crop
yields. Favorable weather conditions can produce high crop yields and an
oversupply situation. This situation typically results in depressed selling
prices. Excessive rain or drought conditions can produce low crop yields and a
shortage situation. This typically results in higher selling prices. While the
national supply situation controls the pricing, the supply can differ regionally
because of variations in weather. See further discussion at Other Matters -
Short- and Long-Term trends.
8
Pro-Fac is Agrilink Foods' preferred supplier of raw product under the Amended
and Restated Marketing and Facilitation Agreement. Accordingly, it is expected
that Agrilink Foods will continue to purchase a substantial portion of its raw
product needs from Pro-Fac. As an agricultural cooperative, Pro-Fac's sole
source of crops for delivery to Agrilink Foods under the Amended and Restated
Marketing and Facilitation Agreement and to other Pro-Fac customers is the
Pro-Fac members.
ENVIRONMENTAL MATTERS
As part of the Transaction, Pro-Fac has agreed to indemnify Agrilink Foods for
certain environmental liabilities exceeding $200,000. This obligation, however,
is only triggered once the aggregate of all liabilities subject to
indemnification under the Unit Purchase Agreement (including those unrelated to
environmental matters) exceeds $10 million. Additionally, the Unit Purchase
Agreement requires Pro-Fac to indemnify Agrilink Foods with respect to
environmental liabilities associated with Agrilink Foods' Lawton, Michigan
facility. Agrilink Foods is, however, responsible for up to $2.5 million of
capital expenditures to address environmental compliance issues at the Lawton
facility, provided those expenditures are incurred over a three-year period
commencing on August 19, 2002.
SEASONALITY OF BUSINESS
Historically, from a sales perspective, the Cooperative's business is not highly
seasonal, since the demand for products sold through Agrilink Foods 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).
The terms of the Amended and Restated Marketing Facilitation Agreement provide
that Pro-Fac will continue to receive payments for crops sold to Agrilink Foods
on a date or dates that coincide with the time of payment for crops by Pro-Fac
to its members. Accordingly, Pro-Fac's profits are not expected to be impacted
by the seasonality of its members' planting and harvesting activities.
PRACTICES CONCERNING WORKING CAPITAL
Agrilink Foods must maintain substantial inventories throughout the year of
products produced from seasonal raw materials. These inventories are generally
financed through seasonal borrowings. Agrilink Foods 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.
In connection with the Transaction, Pro-Fac and Agrilink entered into 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. Pro-Fac is
permitted to draw down up to $1.0 million per year under the $5.0 million Credit
Facility, unless Agrilink Foods is prohibited from making such advances under
the terms of certain third-part indebtedness of Agrilink Foods.
SIGNIFICANT CUSTOMERS
Agrilink Foods is not dependent upon the business of a single customer or a few
customers. Agrilink Foods does not have any customers to whom sales are made in
an amount which equals 10 percent or more of Agrilink Foods' net sales.
Agrilink Foods is currently Pro-Fac's sole customer. Under the Amended and
Restated Marketing and Facilitation Agreement, Pro-Fac is Agrilink Foods'
preferred supplier of crops. See description of the "Amended and Restated
Marketing and Facilitation Agreement" under "General Development of Business."
BACKLOG OF ORDERS
Historically, backlog orders have not been significant in the Cooperative's
business and they are not expected to be significant in the future operations of
the Cooperative's business.
BUSINESS SUBJECT TO GOVERNMENTAL CONTRACTS
No material portion of the business of the Cooperative is subject to
renegotiation of contracts with, or termination by, any governmental agency.
9
COMPETITIVE CONDITIONS
Pro-Fac is Agrilink Foods' preferred supplier of crops. It is anticipated,
however, that the Cooperative will compete with other cooperatives and
individual growers for other customers as it expands its activities relating to
the marketing and sale of its members' crops. See description of the "Amended
and Restated Marketing and Facilitation Agreement" under "General Development of
Business."
MARKET AND INDUSTRY DATA
Unless otherwise stated in this report, industry and market share data used
throughout this Report on Form 10-K were derived from industry sources believed
by the Cooperative to be reliable, including information provided by Information
Resources, Inc. Such data was obtained or derived from consultants' reports and
industry publications. Consultants' reports and industry publications generally
state that the information contained therein has been obtained from sources
believed to be reliable, but that the accuracy and completeness of such
information is not guaranteed. The Cooperative has not independently verified
such data and makes no representation to its accuracy.
RESEARCH AND DEVELOPMENT
Pro-Fac does not anticipate being involved in any research and development
activities.
EMPLOYEES
Prior to the Transaction, the Cooperative, through Agrilink Foods, had
approximately 4,000 full-time employees, of whom 2,839 were engaged in
production and the balance in management, sales and administration. Agrilink
Foods also employed approximately 1,484 seasonal and other part-time employees,
almost all of whom were engaged in production during the fiscal year ended June
29, 2002.
Currently, the Cooperative does not have any full-time employees. Pursuant to
the Transitional Services Agreement, Agrilink Foods has agreed to provide
Pro-Fac certain administrative and other services for a period of 24 months
from the Closing Date, at a level generally consistent with the level of such
services provided by Agrilink Foods to Pro-Fac before the Closing Date. Because
Pro-Fac currently does not have the capacity to perform these services itself,
during this transition period, Pro-Fac will seek to recruit, hire, and train
individuals to perform these services following the expiration of the
Transitional Services Agreement. Stephen R. Wright, the general manager and
secretary of Pro-Fac, is also an employee of Agrilink Foods. As an employee of
Agrilink Foods, Mr. Wright's salary is paid by Agrilink Foods.
ITEM 2. DESCRIPTION OF PROPERTIES
Pro-Fac does not currently own or lease any real property. However, under the
Transition Services Agreement, Agrilink Foods has agreed to make available to
Pro-Fac office space, office equipment and support services for up to five
Pro-Fac employees at Agrilink Foods' facility located at 90 Linden Oaks,
Rochester, New York. Pro-Fac has agreed to reimburse Agrilink Foods for its
incremental out-of-pocket third-party expenses, losses, and liabilities related
to these services.
All plants, warehouses, office space and other facilities used by Agrilink Foods
are either owned by Agrilink Foods or leased from unaffiliated third parties.
The majority of 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. Agrilink Foods also
has dispersed warehouse locations to facilitate the distribution of finished
products. Agrilink Foods believes that their facilities are in good condition
and suitable for its operations.
Agrilink Foods' Alamo, Texas and Enumclaw, Washington properties are held for
sale.
The following table describes all material facilities leased or owned by
Agrilink Foods (other than the properties held for sale, certain public
warehouses leased by Agrilink Foods from unaffiliated third parties from time to
time, and facilities owned by Agrilink Foods' joint venture, Great Lakes Kraut
Company, LLC). Except as otherwise noted, each facility set forth below is owned
by Agrilink Foods.
FACILITIES UTILIZED BY AGRILINK FOODS
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
10
FACILITIES UTILIZED BY AGRILINK FOODS
Type of Property (By Product Line) Location Square Feet
- ---------------------------------- -------- -----------
Vegetables (Continued):
- ----------
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
Distribution center(1) Bristol, TN 11,500
Distribution center(1) Knoxville, TN 12,500
Distribution center(1) Dayton, OH 9,200
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
Agrilink Foods.
(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 in 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 Cooperative is party to legal proceedings from time to time in the normal
course of its business. In the opinion of management, any liability that might
be incurred upon the resolution of these proceedings will not, in the aggregate,
have a material adverse effect on the Cooperative's business, financial
condition, and results of operations. Further, no such proceedings are known to
be contemplated by governmental authorities. The Cooperative maintains general
liability insurance coverage in amounts deemed to be adequate by management.
11
On September 25, 2001, in the circuit court of Multnomah County, Oregon, Blue
Line Farms commenced a class action suit against Agrilink Foods, 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 Agrilink Foods; (vii) intentional interference
with a contract against Agrilink Foods; 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 contains specific provisions concerning the Blue
Line Farms matter and certain 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 agreed 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. Pro-Fac retains
sole responsibility for costs associated with certain other AgriFrozen-related
litigation matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2002.
However, during July 2002, special meetings of Pro-Fac's members were held to
consider and vote upon a proposal to adopt the Unit Purchase Agreement dated as
of June 20, 2002, by and among Pro-Fac Cooperative, Inc., Agrilink Foods, Inc.,
and Vestar/Agrilink Holdings LLC and to approve the transactions contemplated
thereby. A total of 547 members of record as of June 20, 2002 were present or
represented at the special meeting. A total of 481 votes were cast "for" and 10
were cast "against" the proposal. A total of 56 abstained from voting.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no trading market for the Cooperative's common stock. Only
member/growers of the Cooperative can own shares of common stock. As of June 29,
2002, there were 564 members of Pro-Fac holding shares of Pro-Fac Common Stock.
In fiscal 2002 and 2001, dividends on Pro-Fac Common Stock were paid at a rate
of 5 percent. In March 2002, the Cooperative amended and restated its
certificate of incorporation to eliminate its Class B common stock. The Class B
common stock had been held by former Pro-Fac members. All shares of Class B
common stock were repurchased on July 19, 2001. No dividends were paid on Class
B common stock in fiscal 2001 or 2002. Further information required by this item
is contained in NOTE 13 to the "Notes to Consolidated Financial Statements," at
"Quarterly Financial Data," and at "Selected Financial Data."
During fiscal 2002, the Cooperative issued shares of its Class A Cumulative
Preferred Stock in exchange for shares for its Non-cumulative Preferred Stock,
on a share-for-share basis. Such exchanges are exempt from registration under
section 3(a)(9) of the Securities Act of 1933. The dates and amounts of the
exchanges are set forth below:
Date Number of Shares Value of Shares
- ---------------- ---------------- ---------------
January 27, 2002 639 $ 15,975
April 21, 2002 1,822 45,550
------- ---------
Total 2,461 $ 61,525
======= =========
Pro-Fac was a guarantor under the Harris Credit Facility, which restricted the
amount of dividends and other distributions that could be made by Pro-Fac to its
stockholders during fiscal 2002 and 2001. Pro-Fac is a guarantor under Agrilink
Foods' Senior Subordinated Notes - 11 7/8 Percent (due 2008), which also
restrict the amount of dividends and other payments to be made by Pro-Fac to its
stockholders. See further discussion at "Liquidity and Capital Resources."
In addition, New York Cooperative Law restricts the amount of annual dividends
on common stock to 12 percent per annum.
13
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in Thousands, Except Capital Stock Data)
Fiscal Year Ended June
-------------------------------------------------------------
2002 2001(a) 2000 1999(b) 1998
---------- ---------- ----------- --------- ---------
Consolidated summary of operations:
Net sales $1,010,540 $1,177,280 $1,159,656 $1,137,418 $ 681,878
Cost of sales (795,297) (956,182) (919,029) (928,262) (546,578)
--------- ---------- ---------- --------- ---------
Gross profit 215,243 221,098 240,627 209,156 135,300
Selling, administrative, and general expenses (117,450) (136,352) (141,508) (139,043) (81,456)
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 (78,925) 86,525 108,172 132,634 55,737
Interest expense (66,420) (85,073) (83,511) (67,420) (30,767)
Amortization of debt issue costs associated
with the bridge facility 0 0 0 (5,500) 0
--------- --------- ---------- --------- ---------
Pretax (loss)/income before extraordinary item, dividends,
and allocation of net proceeds (145,345) 1,452 24,661 59,714 24,970
Tax benefit/(provision) 28,561 (968) (8,497) (24,746) (7,840)
--------- ---------- ---------- --------- ---------
(Loss)/income before extraordinary item, dividends
and allocation of net proceeds (116,784) 484 16,164 34,968 17,130
Extraordinary item relating to the early extinguishment
of debt (net of income taxes) 0 0 0 (18,024) 0
--------- --------- ---------- --------- ---------
Net (loss)/income $(116,784) $ 484 $ 16,164 $ 16,944 $ 17,130
========= ========= ========== ========= =========
Allocation of Net Proceeds:
- --------------------------
Net (loss)/income $(116,784) $ 484 $ 16,164 $ 16,944 $ 17,130
Dividends on Class A common and preferred stock(c) (8,370) (8,123) (7,410) (6,734) (6,328)
--------- ---------- ---------- --------- ---------
Net (deficit)/proceeds (125,154) (7,639) 8,754 10,210 10,802
Allocation from/(to) earned surplus 133,622 7,639 (3,832) (10,210) (4,662)
--------- --------- ---------- --------- ---------
Net proceeds available to Class A members $ 8,468 $ 0 $ 4,922 $ 0 $ 6,140
========= ========= ========== ========= =========
Allocation of net proceeds available to Class A members:
- -------------------------------------------------------
Payable to Class A members currently (25% of qualified
proceeds available to Class A members in fiscal 2002
and 1998 and 30% in fiscal 2000) $ 2,117 $ 0 $ 1,477 $ 0 $ 1,535
Allocated to Class A members but retained by the Cooperative:
- ------------------------------------------------------------
Qualified retains 6,351 0 3,445 0 4,605
--------- --------- ---------- --------- ---------
Net proceeds available to Class A members $ 8,468 $ 0 $ 4,922 $ 0 $ 6,140
========= ========= ========== ========= =========
CMV related to Class A members $ 71,733 $ 69,013 $ 69,623 $ 62,154 $ 58,530
========= ========= ========== ========= =========
CMV related to Class B members N/A $ 9,423 $ 14,060 N/A N/A
Total net proceeds allocated to Class A members
as a percent of CMV(d) 11.8% 0.00% 7.07% 0.00% 10.51%
========= ========= ========== ========= =========
Total net proceeds allocated to Class B members
as a percent of CMV(e) N/A 0.00% 0.00% N/A N/A
========= ========= ========== ========= =========
Balance Sheet Data:
- ------------------
Working capital $ 272,042 $ 235,334 $ 260,481 $ 237,331 $ 94,103
Total assets $ 836,175 $1,069,645 $1,187,266 $1,196,479 $ 569,240
Class A common stock $ 10,193 $ 11,287 $ 10,665 $ 9,979 $ 9,129
Class B cumulative redeemable Preferred $ 206 $ 239 $ 237 $ 261 $ 270
Shareholders' and members' capitalization,
redeemable stock, and common stock $ 24,505 $ 153,315 $ 159,843 $ 152,111 $ 141,369
Long-term debt and senior subordinated notes
(excludes current portion) $ 623,057 $ 631,128 $ 679,205 $ 702,322 $ 229,937
Capital Stock Data
Cash dividends paid per share:
Class A Common $ .25 $ .25 $ .25 $ .25 $ .25
Non-Cumulative Preferred $ 1.50 $ 1.50 $ 1.50 $ 1.50 $ 1.50
Class A Cumulative Preferred $ 1.72 $ 1.72 $ 1.72 $ 1.72 $ 1.72
Class B Cumulative Preferred $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Average Class A common stock investment per Class A member $ 18,072 $ 18,688 $ 17,037 $ 15,471 $ 14,399
Number of Class A Common Stock members: 564 604 626 645 634
Number of Class B Common Stock members(f) 0 153 150 0 0
(a) See NOTE 3 to "Notes to Consolidated Financial Statements." Information
includes the activities of AgriFrozen until February 15, 2001. In addition,
fiscal 2001 consists of 53 weeks.
(b) Includes nine months of operating results from the September 28, 1998
acquisition of the frozen and canned vegetables business of Dean Foods
Vegetable Company.
(c) On March 28, 2002, Pro-Fac amended and restated its certificate of
incorporation to eliminate its Class B common stock, and to rename its Class
A common stock "common stock" and its Class A members "common members."
(d) Payment to Class A members for CMV was 100 percent of deliveries in fiscal
2001 and 1999.
(e) Payment to Class B members for CMV was 63.50 percent in fiscal 2001 and
89.16 percent of deliveries in fiscal 2000.
(f) On July 19, 2001, Pro-Fac repurchased all Class B common stock.
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. The consolidated operations during fiscal 2000 through fiscal 2002
included the operations of Pro-Fac Cooperative's former wholly-owned
subsidiaries, Agrilink Foods and AgriFrozen. Subsequent to the Transaction,
Pro-Fac Cooperative will no longer report its financial statements on a
consolidated basis with those of Agrilink Foods and, thus, will change its
analysis of results of operations accordingly.
Agrilink Foods has four primary product lines: vegetables, fruits, snacks, and
canned meals. AgriFrozen had vegetables as its primary product lines. The
majority of each of the product lines' net sales is within the United States. In
addition, all of Agrilink Foods' operating facilities, excluding one in Mexico,
are within the United States.
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 other product line primarily represents salad dressings.
Brand products within this category include Bernstein's, and Nalley.
The following tables illustrate the Cooperative's consolidated results of
operations by product line for the fiscal years ended June 29, 2002, June 30,
2001, and June 24, 2000, and the Cooperative's consolidated 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 71.3 724.0 62.4
Fruits 111.4 11.0 117.7 9.9 112.8 9.7
Snacks 88.1 8.7 89.4 7.6 83.3 7.2
Canned meals 46.0 4.6 51.6 4.4 49.9 4.3
Other 37.1 3.7 43.2 3.7 48.5 4.2
-------- ------ --------- ------ -------- -------
Continuing segments 1,010.5 100.0 1,141.3 96.9 1,018.5 87.8
Businesses sold or closed(1) 0.0 0.0 35.9 3.1 141.2 12.2
-------- ------ --------- ------ -------- -------
Total 1,010.5 100.0 1,177.2 100.0 1,159.7 100.0
======== ====== ========= ====== ======= ========
(1) Includes net sales of operations sold or no longer part of the Cooperative.
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 63.3 64.4 63.5
Fruits 17.8 17.7 12.4 14.3 14.9 14.7
Snacks 6.6 6.6 5.6 6.5 6.7 6.6
Canned meals 5.2 5.2 6.6 7.6 6.7 6.6
Other 3.5 3.5 1.9 2.2 4.6 4.5
----- ------ ------ ------ ----- ------
Continuing segments 100.3 100.0 81.2 93.9 97.3 95.9
Businesses sold or closed(3) 0.0 0.0 5.3 6.1 4.2 4.1
----- ------ ------ ------ ----- ------
Total(4) 100.3 100.0 86.5 100.0 101.5 100.0
===== ====== ====== ====== ===== ======
(1) Excludes the goodwill impairment charge described below, 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 was
$6.9 million, $0.1 million, $0.4 million, $0.7 million, and $0.7 million,
respectively, and for fiscal 2000, $5.2 million, $0.1 million, $0.6 million,
$0.7 million, and $0.7 million, respectively. In fiscal 2002, the
Cooperative 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 or no longer part of the
Cooperative. See NOTE 4 to the "Notes to Consolidated Financial Statements."
(4) Operating income less interest expense of $66.4 million, $85.1 million, and
$83.5 million, for the years ended June 29, 2002, June 30, 2001, and June
24, 2000, respectively, results in pretax income before dividends and
allocation of net proceeds. Management does not allocate interest expense to
product lines when evaluating product line performance.
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 65.9 92.5 64.8
Fruits 21.7 16.4 15.4 12.0 17.0 11.9
Snacks 8.9 6.7 9.4 7.3 9.8 6.9
Canned meals 6.2 4.7 8.1 6.3 8.6 6.0
Other 4.5 3.4 4.3 3.4 6.5 4.5
----- ----- ------ ----- ----- ------
Continuing segments 132.2 100.0 121.8 94.9 134.4 94.1
Businesses sold or closed(3) 0.0 0.0 6.5 5.1 8.5 5.9
----- ----- ------ ----- ----- ------
Total 132.2 100.0 128.3 100.0 142.9 100.0
===== ===== ====== ===== ===== ======
(1) Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
is defined as the sum of pretax income before dividends, allocation of net
proceeds, 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.
16
EBITDA is included herein because the Cooperative believes EBITDA is
a financial indicator of liquidity and ability to service debt. EBITDA as
calculated by the Cooperative may not be comparable to calculations as
presented by other companies.
(2) Excludes the goodwill impairment charge referred to above, 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 or no longer part of the
Cooperative. See NOTE 4 to the "Notes to Consolidated Financial Statements."
Total Assets
(Dollars in Millions)
As of Fiscal Years Ended
----------------------------------------------------------------------------------
June 29, 2002 June 30, 2001 June 24, 2000
-------------------- --------------------- ---------------------
% of % of % of
$ Total $ Total $ Total
----- ----- ------ ----- ------ -----
Vegetables 649.2 77.6 848.1 79.3 867.1 73.0
Fruits 74.8 8.9 71.9 6.7 79.4 6.7
Snacks 40.5 4.8 47.0 4.4 43.5 3.7
Canned Meals 25.6 3.1 45.3 4.2 45.7 3.8
Other 42.1 5.1 57.2 5.3 52.2 4.4
--------- ---- --------- ------ --------- ------
Continuing segments 833.2 99.5 1,069.5 99.9 1,087.9 91.6
Businesses sold or closed(1) 0.0 0.0 0.0 0.0 99.1 8.4
Assets held for sale 3.9 0.5 0.1 0.1 0.3 0.0
--------- ---- --------- ------ --------- ------
Total 836.1 100.0 1,069.6 100.0 1,187.3 100.0
========= ===== ========= ====== ========= ======
(1) Includes the assets of operations sold or no longer part of the Cooperative.
See NOTE 4 to the "Notes to Consolidated Financial Statements."
CHANGES FROM FISCAL 2001 TO FISCAL 2002
During fiscal 2002, net sales from continuing segments 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"). PF Acquisition
II, Inc. was a subsidiary in which Pro-Fac had a controlling interest until
February 15, 2001. In addition, during fiscal 2002, Agrilink Foods 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 in fiscal 2002 approximately $25.0
million.
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
Agrilink Foods' 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, Agrilink Foods
maintained overall frozen vegetable market share of approximately 31.8 percent,
consistent with a market share of 31.9 percent in the prior year. Agrilink
Foods' overall market share includes branded retail unit sales, as reported by
Information Resources, Inc. ("IRI"), and Agrilink Foods' management estimate of
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 effected the
category or share information; however, it has required a restatement of prior
year market information).
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 Agrilink Foods' national workforce. These restructuring efforts
were part of an ongoing effort to achieve low-cost operations and included
both salaried and hourly positions;
(b) Agrilink Foods' 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;
17
(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."
Comparability of net income is, therefore, difficult. 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.
The 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 Agrilink Foods' 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. Agrilink Foods 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 Northwest Inventory Purchase, (b) the
termination of the Midwest canned vegetable co-pack contract, and (c) the
non-branded vegetable 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).
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.
Further, net sales declines of $15.8 million were experienced in Agrilink Foods'
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.
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 increase in EBITDA
was driven by improved pricing and decreases in production costs. The decline in
net sales is a result of eliminating relationships with several low-margin
customers.
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
18
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 $18.9 million or 13.9 percent as compared with fiscal
2001. The decrease is primarily attributable to an $8.8 million reduction in
amortization expense resulting from the adoption of SFAS No. 142. Further,
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. In addition,
$3.2 million of expenses in fiscal 2001 were associated with AgriFrozen, which
was no longer a subsidiary of the Cooperative in fiscal 2002.
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, Agrilink Foods 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 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 Agrilink Foods 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, Agrilink Foods 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 are expected to be paid by
Agrilink Foods by September 30, 2002.
In addition, on October 12, 2001, Agrilink Foods 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 operational and administrative personnel.
In conjunction with the reductions, Agrilink Foods recorded a charge against
earnings of approximately $1.6 million in the second quarter of fiscal 2002,
primarily comprising employee termination benefits. The entire $1.6 million
charge had 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, Pro-Fac and
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 a reporting unit exceeds its
implied fair value.
During the fiscal quarter ended June 29, 2002, Pro-Fac and Agrilink Foods
identified certain indicators of possible impairment of their 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 Agrilink Foods operates, and the
completion of the terms of the Transaction. These factors indicated an erosion
in the market value of Pro-Fac and Agrilink Foods since the adoption of SFAS No.
142.
19
Accordingly, in the fourth quarter of fiscal 2002, Pro-Fac and Agrilink Foods
recorded a one-time, pretax, non-cash charge 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 information.
Interest Expense: Interest expense decreased $18.7 million to $66.4 million in
fiscal 2002 from $85.1 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 Agrilink Foods' previous credit facility with Harris
Trust and Savings Bank. (See NOTE 9 to the "Notes to Consolidated Financial
Statements.") In addition, the decrease was due to $5.3 million of interest
expense in fiscal 2001 in association with AgriFrozen, which was no longer a
subsidiary of the Cooperative in fiscal 2002.
Tax Benefit/(Provision): During fiscal 2002, the Cooperative had a tax benefit
of $28.6 million compared to a $1.0 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 Cooperative's effective tax rate. The
Cooperative's effective tax rate is also impacted by net proceeds distributed to
members. A further discussion of tax matters is included at NOTE 10 to the
"Notes to Consolidated Financial Statements."
CHANGES FROM FISCAL 2000 TO FISCAL 2001
During fiscal 2001, net sales from continuing segments showed an increase of
$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
Cooperative's overall market share, 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
Cooperative's overall market share includes branded retail unit sales, as
reported by Information Resources, Inc., and management's estimate of the
Cooperative's private label share based upon factory shipments.
Excluding the gain on sales of assets (net of tax), net income from continuing
segments decreased $11.4 million from fiscal 2000. While the Cooperative
benefited from a significant improvement in net sales, it 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 that, 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 or no longer part of the Cooperative, EBITDA from
continuing segments decreased $12.6 million, or 9.4 percent, to $121.8 million
in fiscal 2001 from $134.4 million in fiscal 2000. A detailed accounting of the
significant reasons for changes in net sales and EBITDA by product line follows.
Vegetable net sales increased $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 nonbranded 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
Cooperative's largest competitor, as reported by Information Resources, Inc.,
decreased 9.1 percent during this same time period. Net sales for the Birds Eye
Voila! product line increased $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).
20
In addition, in the fourth quarter of fiscal 2001, Agrilink Foods initiated a
national launch of its 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.
Agrilink Foods' 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
nonbranded net sales increase. While co-pack agreements typically yield lower
margins than Agrilink Foods' 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'.
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 Agrilink Foods' canned meal products are produced at the Agrilink Foods'
Tacoma, Washington location.
The other product line net sales, primarily represented by salad dressings,
decreased $5.3 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 Agrilink Foods' dressing
products are produced at Agrilink Foods' Tacoma, Washington location.
Operating Income: Operating income from continuing segments decreased from $97.3
million in fiscal 2000 to $81.2 million in fiscal 2001. This represents a
decrease of $16.1 million or 16.5 percent. Declines in operating income within
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."
Gains on Sales of Assets: On June 23, 2000, Agrilink Foods sold its pickle
business based in Tacoma, Washington to Dean Pickle and Specialty Products. This
business included pickle, pepper, and relish products sold primarily under the
Nalley and Farman's brand names. Agrilink Foods received proceeds of
approximately $10.3 million which were applied to bank loans ($4.0 million was
applied against the principal balance of Agrilink Foods' term loan facility, and
$6.3 was applied against the principal balance of Agrilink Foods' revolving
credit facility, both under the Harris Credit Facility). A gain of approximately
$4.3 million was recognized on this transaction.
21
On July 21, 2000, Agrilink Foods sold the machinery and equipment utilized in
the production of pickles and other related products to Dean Pickle and
Specialty Products. No significant gain or loss was recognized on this
transaction. Proceeds of approximately $5.0 million were applied to bank loans.
This transaction did not include any other products carrying the Nalley brand
name. Agrilink Foods 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
Cambria, Wisconsin processing facility to Del Monte. The Cooperative received
proceeds of approximately $10.5 million which were applied to bank loans. A gain
of approximately $2.3 million was recognized on this transaction. The sale also
included an agreement for Del Monte to produce a portion of Agrilink Foods'
product needs during the 2000 packing season.
Interest Expense: Interest expense increased $1.6 million from the prior year to
$85.1 million. The increase is the result of an increase in the weighted average
interest rate of 45 basis points resulting from both amendments to the Agrilink
Foods' credit facility during September 2000 and general interest rate increases
on unhedged borrowings experienced in the first six months of fiscal 2001. In
addition, interest expense was negatively impacted by the amortization of fees
paid in conjunction with the September 2000 amendments to Agrilink Foods' credit
facility. The increases were offset by lower average outstanding balances during
the fiscal year of approximately $62.6 million, primarily due to required
repayments and mandatory prepayments of short-term debt associated with
businesses sold and the elimination of AgriFrozen business activity resulting
from Pro-Fac's abandonment of its equity interest in AgriFrozen on February 15,
2001.
Tax Provision: The tax provision of $1.0 million in fiscal 2001 represents a
reduction of $7.5 million from the prior year as a result of the change in
earnings before taxes. In fiscal 2000, the sale of certain intangibles in
conjunction with the pickle sale negatively impacted the Cooperative's effective
tax rate. The Cooperative's effective tax rate has historically been negatively
impacted by the non-deductibility of certain amounts of goodwill. The
Cooperative's effective tax rate is also impacted by the net proceeds
distributed to members. A further discussion of tax matters is included at NOTE
10 to the "Notes to Consolidated Financial Statements."
CRITICAL ACCOUNTING POLICIES
The preparation of 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 Cooperative 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.
22
Identifiable Intangible Assets, Long-Lived Assets, and Goodwill: The Cooperative
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
Cooperative'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 Cooperative 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 $35.9 million decreased $24.9
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, Agrilink Foods reduced its
general repack levels in an effort to manage its inventory position to improve
liquidity. Agrilink Foods 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 $21.5 million
from fiscal 2001. The decrease was primarily the result of a reduction in
capital expenditures of $11.1 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, Agrilink Foods 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, Agrilink Foods 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 $7.8 million from fiscal
2001. 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.
In connection with the Transaction, certain parties to the Transaction,
including Pro-Fac and/or Agrilink Foods, entered into several a