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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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Form 10-K
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FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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 28, 2003
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from ____________ to ____________
File No. 0-20539
PRO-FAC COOPERATIVE, INC.
(Exact Name of Registrant as Specified in Its Charter)
New York 16-6036816
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
90 Linden 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. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [_] NO [X]
Aggregate market value of voting stock held by non-affiliates of the
registrant as of December 31, 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 15, 2003:
Common Stock: 1,927,226
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FORM 10-K ANNUAL REPORT - Fiscal Year 2003
PRO-FAC COOPERATIVE, INC.
TABLE OF CONTENTS
PAGE
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PART I
Cautionary Statement on Forward-Looking Statements.............................................. 3
ITEM 1. Description of Business
General Development of Business.............................................................. 3
Narrative Description of Business............................................................ 8
ITEM 2. Properties...................................................................................... 13
ITEM 3. Legal Proceedings............................................................................... 14
ITEM 4. Submission of Matters to a Vote of Security Holders............................................. 14
PART II
ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters........................ 15
ITEM 6. Selected Financial Data......................................................................... 16
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 17
ITEM 7A. Quantative and Qualitative Disclosures about Market Risk........................................ 28
ITEM 8. Financial Statements and Supplementary Data..................................................... 29
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 58
ITEM 9A. Controls and Procedures......................................................................... 58
PART III
ITEM 10. Directors and Executive Officers of the Registrant.............................................. 59
ITEM 11. Executive Compensation.......................................................................... 61
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters...................................................................................... 63
ITEM 13. Certain Relationships and Related Transactions.................................................. 65
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 67
Signatures...................................................................................... 70
2
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, Pro-Fac Cooperative, Inc. ("Pro-Fac" or the "Cooperative") or
persons acting on behalf of Pro-Fac may make 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" section of this
Report 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 Birds Eye Foods, Inc.'s (formerly Agrilink Foods, Inc.)
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
the discussion under the heading "Description of Business - General
Development of Business" in Part I, Item 1 of this Form 10-K regarding the
current relationship with Birds Eye Foods, Inc. and "NOTE 3. Agreements
with Birds Eye Foods and AgriFrozen" under "Notes to Consolidated Financial
Statements" in Part II, Item 8 of this Report.);
o interest rate fluctuations;
o the Cooperative's ability to service debt;
o Birds Eye Foods, Inc.'s ability to service its debt that is guaranteed by
Pro-Fac (see the information under the heading "Liquidity and Capital
Resources" in Part II, Item 7 of this Report and "NOTE 15. Other Matters -
Commitments" under "Notes to Consolidated Financial Statements" in Part II,
Item 8 of this Report);
o risks associated with the Cooperative's contractual relationship with Birds
Eye Foods, Inc., including the possibility of a reduced demand for crops
produced by Pro-Fac members, the availability and sufficiency of shortfall
payments by Birds Eye Foods, Inc. under the Amended and Restated Marketing
and Facilitation Agreement, and the potential consequences of a termination
of that relationship;
o the ability of the Cooperative to operate its business using the resources
made available under the Termination Agreement and Transitional Services
Agreement (see the discussion of these Agreements under the headings:
"Description of Business - General Development of Business", in Part I,
Item 1 and "Liquidity and Capital Resources" in Part II, Item 7 of this
Report, and "NOTE 3. Agreements with Birds Eye Foods and AgriFrozen" under
"Notes to Consolidated Financial Statements" in Part II, Item 8 of this
Report) with Birds Eye Foods, Inc. and Pro-Fac's ability to operate its
business after the expiration of those agreements;
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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
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Market system under the stock symbol, "PFACP." Until August 19, 2002, the date
of consummation of the Transaction (described below - the "Transaction"), the
Cooperative conducted business under the name of "Agrilink Foods."
Crops marketed by Pro-Fac 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 primarily at the facilities of Birds Eye Foods, Inc. ("Birds
Eye Foods"), a producer and marketer of processed food products and, until
consummation of the Transaction on August 19, 2002, a wholly-owned subsidiary of
Pro-Fac. As of June 28, 2003, there are approximately 548 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.
Management believes a summary background of the relationship between Pro-Fac and
Birds Eye Foods prior to the closing of the Transaction is useful in
understanding the impact of the Transaction on Pro-Fac's business during fiscal
2003. On November 3, 1994, Pro-Fac acquired Birds Eye Foods, and upon
consummation of that acquisition Pro-Fac and Birds Eye Foods entered into a
marketing and facilitation agreement (the "Marketing and Facilitation
Agreement"), which, until the consummation of the Transaction, governed the crop
supply and purchase relationship between Pro-Fac and Birds Eye Foods. Under the
Marketing and Facilitation Agreement, Pro-Fac provided crops and financing to
Birds Eye Foods, Birds Eye Foods provided marketing and management to Pro-Fac,
and Pro-Fac shared in the profits and losses of Birds Eye Foods. The terms of
the Marketing and Facilitation Agreement provided for the payment by Birds Eye
Foods to Pro-Fac of the commercial market value or "CMV" for all crops supplied
by Pro-Fac. CMV 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 Birds Eye Foods had earnings on
products which were processed from crops supplied by Pro-Fac ("Pro-Fac
products"), Birds Eye Foods paid to Pro-Fac, as additional patronage income, 90
percent of such earnings, but in no case more than 50 percent of all pretax
earnings of Birds Eye Foods (before dividing with Pro-Fac). In years in which
Birds Eye Foods had losses on Pro-Fac products, Birds Eye Foods reduced the CMV
it would have otherwise paid to Pro-Fac by 90 percent of such losses, but in no
case by more than 50 percent of all pretax losses of Birds Eye Foods (before
dividing with Pro-Fac). Birds Eye Foods paid Pro-Fac additional patronage income
for services provided by Pro-Fac to Birds Eye Foods, including the provision of
a long term, stable crop supply, favorable payment terms for crops and the
sharing of risks of losses of certain operations of the business. The Marketing
and Facilitation Agreement also required Pro-Fac to reinvest at least 70 percent
of additional patronage income in Birds Eye Foods. Since Pro-Fac's acquisition
of Birds Eye Foods in 1994 and prior to August 19, 2002, Pro-Fac had invested
$50.8 million in Birds Eye Foods.
Under the Marketing and Facilitation Agreement, earnings and losses were
determined at the end of the fiscal year, but were accrued on an estimated basis
during the year. Pro-Fac's share of earnings was $16.8 million for the year
ended June 29, 2002. As a result of the Transaction, Birds Eye Foods no longer
pays patronage income to Pro-Fac. However, prior to the Transaction, any
patronage income received by Pro-Fac was deductible by Pro-Fac for federal tax
purposes to the extent it was distributed to Pro-Fac members. Such distributions
of patronage income could be made to Pro-Fac members through a combination of
cash and retains provided a minimum of 20 percent of the amount was paid in
cash. Historically, Pro-Fac paid its members between 20 percent and 30 percent
of additional patronage income received from Birds Eye Foods in cash and the
remaining portion in retains. Funds made available by the distribution of
retains to members in lieu of cash were historically reinvested by Pro-Fac in
Birds Eye 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, Birds Eye 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 Birds Eye
Foods' common stock owned by Pro-Fac, constituting 100 percent of the issued and
outstanding shares of Birds Eye Foods' capital stock, in consideration for Class
B common units of Holdings LLC, representing a 40.72 percent common equity
ownership at the Closing Date; 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 and Class A common units and
warrants, which warrants were immediately exercised, to acquire additional
Class A common units, representing 56.24 percent at the closing date of the
common equity of Holdings LLC, inclusive of the additional Class A common units
issued to Vestar upon its exercise of the warrants. The co-investors are either
under common control with, or have delivered an unconditional voting proxy to,
Vestar. 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.
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The transactions 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 Birds Eye Foods'
common stock to Holdings LLC, Holdings LLC contributed those shares to Birds Eye
Holdings Inc., (formerly Agrilink Holdings Inc., "Holdings Inc.") a Delaware
corporation and a direct, wholly-owned subsidiary of Holdings LLC, and Birds Eye
Foods became an indirect, wholly-owned subsidiary of Holdings LLC.
As part of the Transaction, Stephen R. Wright, the General Manager and Secretary
of Pro-Fac, together with executive officers of Birds Eye Foods, and certain
other members of Birds Eye 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 percent of the common equity ownership at the
closing date. Mr. Stephen Wright, together with the other members of Birds Eye
Foods' management who are owners of Holdings LLC common units, Pro-Fac and
Vestar, are parties to a Securityholders Agreement and a Limited Liability
Company Agreement which agreements are described below in this discussion of
the "General Development of Business".
In connection with the Transaction certain parties to the Transaction, including
Pro-Fac and/or Birds Eye Foods, entered into several agreements effective as of
the Closing Date, including the following:
(i) Termination Agreement: Pro-Fac and Birds Eye 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, Birds Eye Foods agreed to
pay Pro-Fac a termination fee of $10.0 million per year for five years, provided
that certain ongoing conditions are met, including maintaining grower membership
levels sufficient to generate certain minimum crop supply. The $10.0 million
payment is payable in quarterly installments as follows: $4.0 million on each
July 1, and $2.0 million each October 1, January 1, and April 1.
(ii) Amended and Restated Marketing and Facilitation Agreement: Pro-Fac and
Birds Eye 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 Birds Eye Foods' preferred
supplier of crops. Birds Eye Foods will also continue to pay Pro-Fac the 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. Birds Eye Foods makes 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 meet
with Birds Eye Foods management to establish CMV or receivable guidelines,
review calculations, and report to a joint CMV committee of Pro-Fac and Birds
Eye Foods. Unlike the Marketing and Facilitation Agreement, however, the Amended
and Restated Marketing and Facilitation Agreement does not permit Birds Eye
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
Birds Eye Foods any part of Pro-Fac's patronage income.
The Amended and Restated Marketing and Facilitation Agreement also provides that
Birds Eye 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, Birds Eye 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 Birds Eye Foods'
incremental and out-of-pocket expenses related to providing such services as
agreed to by Pro-Fac and Birds Eye Foods).
Under the Amended and Restated Marketing and Facilitation Agreement, Birds Eye
Foods determines the amount of crops which Birds Eye Foods will acquire from
Pro-Fac for each crop year. If the amount to be purchased by Birds Eye Foods
during a particular crop year does not meet (i) a defined crop amount and (ii) a
defined target percentage of Birds Eye Foods' needs for each particular crop,
then certain shortfall payments will be made by Birds Eye Foods to Pro-Fac. The
defined crop amounts and targeted percentages are set based on Birds Eye Foods'
anticipated raw product needs for the particular crop year. 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 $20.0 million
over the term of the agreement.
Unless terminated earlier, the Amended and Restated Marketing and Facilitation
Agreement will continue in effect until August 19, 2012. Birds Eye Foods may
terminate the Amended and Restated Marketing and Facilitation Agreement prior to
August 19, 2012 upon the occurrence of certain events, including in connection
with a change in control transaction affecting Birds Eye Foods or
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Holdings Inc. However, in the event Birds Eye Foods terminates the Amended and
Restated Marketing and Facilitation Agreement as a result of a change in control
transaction within three years of the Closing Date, Birds Eye 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, Birds Eye Foods sells one or more portions of its
business, and if the purchaser does not continue to purchase the crops
previously purchased by Birds Eye Foods with respect to the transferred
business, then such failure will be taken into consideration when determining if
Birds Eye Foods is required to make any shortfall payments to Pro-Fac. After
such three-year period, Birds Eye Foods may sell portions of its business and
the volumes of crop purchases previously made by Birds Eye Foods with respect to
such transferred business will be disregarded for purposes of determining
shortfall payments.
(iii) Transitional Services Agreement. Pro-Fac and Birds Eye Foods entered into
a transitional services agreement (the "Transitional Services Agreement") dated
as of the Closing Date, pursuant to which Birds Eye Foods agreed to provide
Pro-Fac certain administrative and other services for a period of 24 months (to
August 19, 2004) from the Closing Date. Birds Eye 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. Pursuant to the Transitional Services Agreement, the general
manager of Pro-Fac may also be an employee of Birds Eye Foods, in which case he
will report to the chief executive officer of Birds Eye Foods with respect to
his duties for Birds Eye 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 are employees of Birds Eye
Foods and report to the chief executive officer or other representatives of
Birds Eye Foods. Stephen R. Wright, the General Manager and Secretary of
Pro-Fac, is employed by Birds Eye Foods and serves as executive vice president -
investor relations of Birds Eye Foods. As an employee of Birds Eye Foods, Mr.
Wright's salary is paid by Birds Eye Foods.
(iv) Credit Agreement. Birds Eye Foods and Pro-Fac entered into a credit
agreement, dated August 19, 2002 (the "Credit Agreement"), pursuant to which
Birds Eye 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 Birds Eye Foods is prohibited from making such advances under the terms
of certain third party indebtedness of Birds Eye 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. For additional
information about the Credit Agreement and the terms of the Credit Facility, see
"NOTE 9. Long-term Debt" under "Notes to Consolidated Financial Statements" in
Part II, Item 8 of this Report.
(v) Limited Liability Company Agreement of Agrilink Holdings LLC. Pro-Fac and
Vestar, together with others, including Stephen R. Wright, are parties to a
limited liability company agreement dated August 19, 2002 (and as amended from
time to time, the "Limited Liability Company Agreement") that contains terms and
conditions relating to the management of Holdings LLC and its subsidiaries
(including Birds Eye Foods), the distribution of profits and losses and the
rights and limitations of members of Holdings LLC. As of September 16, 2003,
Pro-Fac owned 40.89 percent of the common equity of Holdings LLC through
its ownership of 321,429 Class B common units.
The Limited Liability Company Agreement provides, among other things, that
Holdings LLC's distributable assets, which include cash receipts from
operations, investing and financing, net of expenses, will be distributed to
Holdings LLC's members as determined by Holdings LLC's management committee. In
general, those distributable assets are distributable as follows:
o first, 100 percent to the holders of preferred units, pro rata, until
each preferred unit holder's current (non-compounded) preferred return
has been reduced to zero;
o second, 100 percent to the holders of preferred units, pro rata, until
each preferred unit holder's unpaid preferred return has been reduced
to zero and then, pro rata among the preferred unit holders until each
preferred unit holder's unreturned preferred capital contribution has
been reduced to zero;
o third, 100 percent to the holders of Class A common units, Class B
common units, Class C common units, and Class E common units, pro
rata, until each such unit holder's unreturned common capital
contribution has been reduced to zero; and
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o fourth, after the holders of Class A common units, Class B common
units, Class C common units and Class E common units have been paid
their unreturned common capital contributions, the balance of
distributable assets, if any, will be distributed to the holders of
Class A common units, Class B common units, Class C common units,
Class D common units and Class E common units. The amount
distributable to such holders is determined based upon the number of
Class C common units and Class D common units outstanding and upon
whether certain performance hurdles have been satisfied. As the
various performance hurdles are satisfied, the percentage of any
remaining distributable assets distributable to the holders of Class A
common units, Class B common units and Class E common units decreases
from approximately 96 percent to 90 percent, the percentage of
remaining distributable assets distributable to the holders of Class C
common units decreases from approximately 2 percent to 1.872 percent
and the remaining percentage of distributable assets distributable to
the holders of Class D common units increases from approximately 2
percent to 8.112 percent.
Prior to August 19, 2005, distributions of assets by Holdings LLC in excess of
the amount necessary to pay to preferred unit holders' their current preferred
returns in full requires the consent of the preferred unit holders holding at
least a majority of the preferred units. A preferred unit holder's preferred
return is equal to 15 percent per annum, of the preferred unit holder's
preferred capital contributions, less distributions made in respect to such
preferred units. The preferred return accrues on a daily basis and, beginning
September 30, 2002, compounds quarterly (3.75 percent quarterly). In the event
of a dissolution, Holdings LLC's assets (after payment of debts and obligations)
will be distributed to its members in accordance with the above distribution
schedule.
The Limited Liability Company Agreement further provides that, subject to
restrictions contained in any financing arrangements of Holdings LLC or its
subsidiaries (including Birds Eye Foods), after August 19, 2007 and prior to a
sale (or dissolution) of Holdings LLC, Holdings LLC will use commercially
reasonable efforts to cause Birds Eye Foods to distribute annually to Holdings
LLC up to $24.8 million of cash flow from the operations of Birds Eye Foods,
which Holdings LLC will then distribute, notwithstanding the "first", "second"
and "third" tier distribution preferences described above, to the holders of its
Class A common units, Class B common units, Class C common units, Class D common
units and Class E common units in accordance with the "fourth" distribution tier
as if no performance hurdle has been satisfied. Further, upon the occurrence of
certain specified events, including the sale of Holdings LLC and at any time
after August 19, 2010, the holders of preferred units are entitled, at their
option, to have their preferred units redeemed and, at any time after August 19,
2005, Holdings LLC has the option to redeem the preferred units.
Further, under the Limited Liability Company Agreement, the management committee
of Holdings LLC is authorized to issue up to 16,000 Class C common units and up
to 16,000 Class D common units. The Limited Liability Company Agreement further
provides that the holders of a majority of the total voting power of the
outstanding Class A, Class B and Class E common units can cause Holdings LLC to
create and issue additional units, provided no such issuance would adversely
affect the relative economic rights of the holders of Class A, Class B, Class C
and Class D common units and further subject to the amendment provisions of the
Limited Liability Company Agreement. The Limited Liability Company Agreement
provides, in part, that the management committee of Holdings LLC can amend the
Agreement, to provide for the issuance of any other type of preferred unit,
whether of an existing or new class, with the consent of the preferred unit
holders, and to provide for the issuance of any other class of units or other
securities, with the consent of each unit holder, if any, who would be adversely
affected by such issuance as to any such unit holder's limited liability or as
to the alteration of any such unit holder's rights to receive allocations or
distributions unless such alterations of rights are in connection with a debt
or equity financing, a restructuring, a recapitalization or other transaction in
which Holdings LLC will receive an investment or contribution to its capital or
in connection with the issuance of equity to employees or directors of Holdings
LLC, its subsidiaries or to third party lenders. The issuance of additional
common units will reduce the percentage ownership of the current holders of
common units in Holdings LLC, including Pro-Fac.
(vi) Securityholders Agreement. Holdings LLC, Pro-Fac and Vestar, together with
others, including officers of Pro-Fac and Birds Eye Foods (the "Management
Investors"), entered into a securityholders agreement dated August 19, 2002 (and
as amended from time to time, 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 Birds Eye
Foods to be set at not less than nine but not more than 11, as determined by
Vestar, and to elect or cause to be elected to the respective management
committees or boards of directors of Holdings LLC, Holdings, Inc. and Birds Eye
Foods, six members/directors designated by Vestar, two members/directors
designated by Pro-Fac, one member/director who shall be the chief executive
officer of Birds Eye Foods and two members/directors designated by Vestar who
shall be independent of Holdings LLC, its subsidiaries' management (including
Birds Eye Foods) and Vestar.
The voting agreement further provides, that the holders of common units shall
vote their common units as directed by Vestar with
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respect to the approval of any amendment(s) to the Limited Liability Company
Agreement, the merger, unit exchange, combination or consolidation of Holdings
LLC, the sale, lease or exchange of all or substantially all of the property and
assets of Holdings LLC and its subsidiaries, including Birds Eye Foods, and the
reorganization, recapitalization, liquidation, dissolution or winding-up of
Holdings LLC, provided such action is not inconsistent with the Limited
Liability Company Agreement or the Securityholders Agreement and further
provided such action shall not have a material adverse effect on a unit holder
that would be borne disproportionately by such unit holder.
The Securityholders Agreement also provides:
o Pro-Fac and the Management Investors with "tag-along" rights in
connection with certain transfers of Holdings LLC units by Vestar;
o Vestar with rights, "take-along" rights, to require Pro-Fac and the
Management Investors to consent to a proposed sale of Holdings LLC;
and
o Pro-Fac and Vestar with demand registration rights in securities of a
subsidiary of Holdings LLC, including Birds Eye Foods, which are
acquired by them through a distribution by Holdings LLC of such
securities in exchange for their respective units in Holdings LLC,
such distributed securities being "Registrable Securities", and other
unit holders, including the Management Investors with incidental
registration rights in the Registrable Securities owned by such unit
holders.
The Securityholders Agreement provides Pro-Fac and the Management Investors
certain pre-emptive rights with respect to new securities of Holdings LLC or any
of its subsidiaries proposed to be issued to Vestar or any affiliate of Vestar.
Further, Vestar has the right to amend or modify the Securityholders Agreement
without the consent of Pro-Fac, the Management Investors or any other unit
holder if the amendment cannot reasonably be expected to have a material adverse
effect on a unit holder that would be borne disproportionately by such unit
holder or the amendment does not adversely affect any unit holder or Holdings
LLC in any material respect and it is in connection with a change that cures any
ambiguity or corrects or supplements a provision of the Securityholders
Agreement.
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 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, Birds Eye 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 Birds Eye 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 no longer reports its financial
statements on a consolidated basis with that of Birds Eye Foods. Subsequent to
the Transaction, Pro-Fac accounts for its investment in Holdings LLC under the
equity method of accounting. Also effective as of the Closing Date, Pro-Fac no
longer conducts business under the name "Agrilink Foods".
NARRATIVE DESCRIPTION OF BUSINESS
Because this Report is for the fiscal year ended June 28, 2003, and Birds Eye
Foods was a wholly-owned subsidiary of Pro-Fac until August 19, 2002, the
"Narrative Description of Business" that follows includes a description of the
business conducted by Pro-Fac prior to August 19, 2002, which includes Birds Eye
Foods. However, Pro-Fac's business since the Transaction has significantly
changed. Pro-Fac no longer manufactures and markets processed foods, which it
previously did through Birds Eye Foods. Pro-Fac is an agricultural cooperative
that markets and sells its members' crops to food processors, including Birds
Eye Foods.
Pro-Fac's Business Since August 19, 2002
Since the Transaction, Pro-Fac's relationship with Birds Eye Foods is governed
by the Amended and Restated Marketing and Facilitation Agreement, which is
described above.
8
Pro-Fac's principal products are discussed above in "General Development of
Business".
Financial Information About Industry Segments
The financial statements for the last completed fiscal year ended June 28, 2003
included in this Report reflect the business of Pro-Fac with Birds Eye Foods as
its wholly-owned subsidiary for a period of approximately seven weeks (June 30,
2002 through August 18, 2002). Birds Eye Foods' industry segments are described
below in "Pro-Fac's Business Prior to August 19, 2002".
Currently, the business of Pro-Fac is conducted in only one industry segment,
the marketing of its members' crops, including raw fruits and vegetables. Since
Pro-Fac's business is conducted in only one industry segment, there have been no
inter-segment sales or transfers since August 19, 2002. The financial statements
for the fiscal year ended June 28, 2003, which are included in this Report,
reflect a period of approximately forty-five weeks (August 19, 2002 through June
28, 2003) that relate solely to Pro-Fac's sole industry segment.
Packaging and Distribution
The distribution activities of Pro-Fac are limited to the delivery of raw fruits
and vegetables to its customers, including Birds Eye Foods.
Raw Material Sources
Pro-Fac's primary source of crops for delivery to Birds Eye Foods and to other
Pro-Fac customers is the Pro-Fac members.
Seasonality of Business
The terms of the Amended and Restated Marketing Facilitation Agreement provide
that Pro-Fac will continue to receive payments for crops sold to Birds Eye 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 business is not expected to be impacted
by the seasonality of its members' planting and harvesting activities.
9
Significant Customers
Pro-Fac markets substantially all of its members' crops to Birds Eye Foods
pursuant to the Amended and Restated Marketing and Facilitation Agreement.
Competitive Conditions
Pro-Fac is Birds Eye Foods' preferred supplier of raw product under the Amended
and Restated Marketing and Facilitation Agreement. Accordingly, it is expected
that Birds Eye Foods will continue to purchase a substantial portion of its raw
product needs from Pro-Fac. The Cooperative competes with other cooperatives and
individual growers for other customers as it expands its activities relating to
the marketing and sale of its members' crops.
Backlog of Orders
Historically, backlog orders have not been significant in Pro-Fac's business and
they are not expected to be significant in the future operations of Pro-Fac's
business.
Government Contracts
No portion of Pro-Fac's business is subject to renegotiation of contracts with,
or termination by, any government agency.
Employees
Pro-Fac does not currently have any full-time employees. Pursuant to the
Transitional Services Agreement, Birds Eye Foods has agreed to provide Pro-Fac
certain administrative and other services for a period of 24 months (until
August 19, 2004) from the Closing Date, at a level generally consistent with the
level of such services provided by Birds Eye Foods to Pro-Fac before the Closing
Date. Because Pro-Fac does not currently have the capacity to perform these
services itself during this transition period, Pro-Fac will seek to recruit,
hire, and train individuals to provide these services following the expiration
of the Transitional Services Agreement. Stephen R. Wright, the General Manager
and Secretary of Pro-Fac, is an employee of Birds Eye Foods. As an employee of
Birds Eye Foods, Mr. Wright's salary is paid by Birds Eye Foods.
Practices Concerning Working Capital
In connection with the Transaction, Pro-Fac and Birds Eye Foods entered into the
Credit Agreement pursuant to which Birds Eye 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 Birds Eye Foods is prohibited from making such advances
under the terms of certain third-party indebtedness of Birds Eye Foods. For
additional information about the Credit Agreement see the discussions under the
heading "Liquidity and Capital Resources" in Part II, Item 7 of this Report and
"NOTE 9. Long-Term Debt" under "Notes to Consolidated Financial Statements" in
Part II, Item 8 of this Report.
On March 26, 2003, the Cooperative secured a $0.5 million line of credit from
Manufacturers and Traders Trust Company (the "M&T Line of Credit"). As of June
28, 2003, $0.5 million was outstanding under the M&T Line of Credit. For
additional information about the M&T Line of Credit see the discussions under
the heading "Liquidity and Capital Resources" in Part II, Item 7 of this Report
and "NOTE 9. Long-Term Debt" under "Notes to Consolidated Financial Statements"
in Part II, Item 8 of this Report.
Environmental
As part of the Transaction, Pro-Fac agreed to indemnify Birds Eye 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 Birds Eye Foods with respect to
environmental liabilities associated with Birds Eye Foods' Lawton, Michigan
facility. Birds Eye 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 the three-year period
commencing on August 19, 2002.
Pro-Fac's Business Prior to August 19, 2002
Prior to August 19, 2002, Pro-Fac, through its then wholly-owned subsidiary
Birds Eye Foods, sold products in three principal categories: (i) "branded"
products, which are finished products sold under various trademarks, (ii)
"private label" products, which are
10
finished products sold to grocers who in turn use their own brand names on the
products and (iii) "food service/industrial" products, which are finished
products 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 below under
"Trademarks". 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 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.
Financial Information About Industry Segments
Prior to August 19, 2002, Pro-Fac consolidated its operating result with Birds
Eye Foods. In the fourth quarter of fiscal 2003, after Pro-Fac no longer
consolidated its operations with Birds Eye Foods, Birds Eye Foods changed its
product segments to conform to new internal management reporting used to monitor
and manage financial performance. Prior to that change, Birds Eye Foods
described its business as having four primary product lines: vegetables, fruits,
snacks and canned meals. Because Birds Eye Foods' change was motivated for
internal management reporting purposes and because Pro-Fac no longer
consolidates its operating results with Birds Eye Foods, Pro-Fac has not
restated the segment information to reflect Birds Eye Foods' change. The
following discussion of Pro-Fac's business with Birds Eye Foods prior to August
19, 2002 is based on the four product lines. "Note 12. Operating Segments" under
"Notes to Consolidate Financial Statements" in Part II, Item 8 of this Report,
provides information based on Birds Eye Foods historical segment information,
including revenues, income(loss) and total assets.
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.
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. Birds Eye 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.
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.
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.
Other: Birds Eye Foods' other product line primarily represents salad dressings.
Branded products within this category include Bernstein's and Nalley.
Packaging and Distribution
The food products produced by Birds Eye Foods are distributed to various
consumer markets in all 50 states. International sales account for a small
portion of Birds Eye 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 Birds Eye 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. Birds Eye Foods
has developed central storage and distribution facilities that permit multi-item
single shipment to customers in key marketing areas.
Birds Eye Foods maintains a multiyear logistic agreement with APL Logistics
("APL") under which APL provides freight management, packaging and labeling
services, and distribution support to and from production facilities owned by
Birds Eye Foods in
11
and around Coloma, Michigan.
Birds Eye Foods also maintains a long-term logistics agreement with Americold
Logistics, Inc. ("Americold") under which Americold manages Birds Eye Foods'
Montezuma, Georgia frozen food distribution facility and all frozen food
transportation operations of Birds Eye Foods in Georgia and New York.
12
Trademarks
The major brand names under which Birds Eye Foods markets its products are
trademarks of Birds Eye Foods. Such brand names are considered to be of material
importance to the business of Birds Eye Foods since they have the effect of
developing brand identification and maintaining consumer loyalty. There are
trademark registrations for substantially all of Birds Eye Foods' trademarks.
These trademark registrations are of perpetual duration so long as they are
periodically renewed. It is Birds Eye Foods' intent to maintain its trademark
registrations. The major brand names utilized by Birds Eye Foods follow:
Brand Name
Birds Eye, Birds Eye Voila!(1), Birds Eye Simply Grillin'(1), Birds Eye Hearty
Spoonfuls(1); Freshlike, Chill-Ripe, Greenwood, McKenzie's, McKenzie's Gold
King, Southern Farms, Southland, Birds Eye Fresh(1), Freshlike, Comstock,
Brooks, Nalley, Wilderness, Tropic Isle, Snyder of Berlin, Tim's Cascade Chips,
La Restaurante, Erin's, Husman, Flavor Destinations(1)` Mariner's Cove, Riviera,
Bernstein's, Pixie, Globe, Thank You
(1) Application filed and U.S. federal registration is pending.
Raw Material Sources
Of the types of raw products required by Birds Eye Foods and produced by Pro-Fac
members, Birds Eye Foods purchased approximately 65 percent from Pro-Fac. Birds
Eye Foods purchased the balance of its raw product needs on the open market. For
further discussion of Pro-Fac's relationship with Birds Eye Foods see the
discussion above under the heading "Description of Business - General
Development of Business" in Part I, Item 1 of this Report and "Note 3.
Agreements with Birds Eye Foods and AgriFrozen" under "Notes to Consolidated
Financial Statements" in Part II, Item 8 of this Report.
Weather conditions can impact the profitability of all segments of Birds Eye
Foods' business. Favorable weather conditions can produce high crop yields and
an oversupply situation, while excessive rain or drought conditions can produce
low crop yields and a shortage situation.
The utilization of Birds Eye Foods' facilities is directly correlated to the
timing of crop harvests and crop yields. Poor weather conditions hurt crop
yields and result in uneven crop delivery cycles that increase production costs.
In addition, pricing can be impacted by crop size and yields and the overall
national supply.
Significant Customers
Birds Eye Foods was not dependent upon the business of a single customer or a
few customers. Birds Eye Foods did not have any customers to whom sales were
made in an amount which equals 10 percent or more of Birds Eye Foods' net sales.
MARKET AND INDUSTRY DATA
Unless otherwise stated in this report, industry and market share data used
throughout this Report 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.
ITEM 2. PROPERTIES
Pro-Fac does not currently own or lease any real property. Under the
Transitional Services Agreement, Birds Eye Foods has agreed to make office
space, office equipment and support services available to Pro-Fac for up to five
Pro-Fac employees at Birds Eye Foods' facilities located at Linden Oaks,
Rochester, New York. Pro-Fac has agreed to reimburse Birds Eye Foods for its
incremental and out-of-pocket third-party expenses in connection with Birds Eye
Foods' performance for the account of Pro-Fac pursuant to the agreement;
provided, that Pro-Fac shall have no reimbursement obligation with respect to
services support, office space and office equipment to the extent that they are
not in excess of the levels provided on the date of Transitional Services
Agreement.
13
ITEM 3. LEGAL PROCEEDINGS
The information set forth in "NOTE 14. Other Matters - Legal Matters" under
"Notes to Consolidated Financial Statements" in Part II, Item 8 of this Report
on Form 10-K is incorporated into this Item 3. by reference.
In addition, the Cooperative is party to various other 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 any governmental authorities. The
Cooperative maintains general liability insurance coverage in amounts deemed to
be adequate by the Board of Directors.
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 2003.
14
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 28,
2003, there were 548 members of Pro-Fac holding shares of Pro-Fac common stock.
In fiscal 2003 and 2002, dividends on Pro-Fac common stock were paid at a rate
of 5 percent. At its January 2003 Board meeting, in an action aimed at improving
the Cooperative's short-term liquidity, the Board of Directors of Pro-Fac
determined to suspend the payment of annual dividends on the Cooperative's
common stock for an indefinite period of time. 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 2003 or 2002. Additional
information concerning dividends and related stockholder matters may be found in
the following sections of this Report: "Selected Financial Data" in Item 6,
"Consolidated Statements of Cash Flows", "Consolidated Statements of Changes in
Shareholders' and Members Capitalization and Redeemable Stock", "Quarterly
Financial Data (Unaudited)" in Item 8 of this Report and in "NOTE 13. "Common
Stock and Capitalization" under "Notes to Consolidated Financial Statements" in
Item 8 of this Report.
During fiscal 2003, the Cooperative issued shares of its Class A cumulative
preferred stock in exchange for shares of 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 10, 2003 390 $ 9,750
April 18, 2003 129 3,225
--- -------
Total 519 $12,975
=== =======
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. Pro-Fac is a guarantor under Birds Eye Foods'
Senior Subordinated Notes - 11 7/8 percent (due 2008), which also restricts the
amount of dividends and other payments to be made by Pro-Fac to its
stockholders. See also the information under the heading "Liquidity and Capital
Resources" in Part II, Item 7 of this Report.
In addition, New York Cooperative Law restricts the amount of annual dividends
that Pro-Fac may pay on its shares of common stock to 12 percent per annum.
15
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in Thousands, Except Capital Stock Data)
Fiscal Year Ended June
------------------------------------------------------------
2003 2002 2001(a) 2000 1999(b)
-------- ---------- ---------- ---------- ----------
Consolidated Summary of Operations:
Net sales $103,726 $1,010,540 $1,177,280 $1,159,656 $1,137,418
Cost of sales (80,644) (795,297) (956,182) (919,029) (928,262)
-------- ---------- ---------- ---------- ----------
Gross profit 23,082 215,243 221,098 240,627 209,156
Equity income from Agrilink Holdings LLC 2,628 0 0 0 0
Gain from Transaction with Birds Eye Foods, Inc. and
related agreements 10,361 0 0 0 0
Commercial market value adjustment 568 0 0 0 0
Selling, administrative, and general expense (for
the period August 19, 2002 to June 28, 2003) (1,433) 0 0 0 0
Selling, administrative, and general expenses (15,468) (117,450) (136,352) (141,508) (139,043)
Legal matters and settlement expenses (3,720) 0 0 0 0
Income from joint venture 277 2,457 1,779 2,418 2,787
Gain from pension curtailment 0 2,472 0 0 0
Gains on sales of assets 0 0 0 6,635 64,734
Restructuring 0 (2,622) 0 0 (5,000)
Goodwill impairment charge 0 (179,025) 0 0 0
-------- ---------- ---------- ---------- ----------
Operating income/(loss) 16,295 (78,925) 86,525 108,172 132,634
Interest income 10 0 0 0 0
Interest expense (7,762) (66,420) (85,073) (83,511) (67,420)
Amortization of debt issue costs associated with the
bridge facility 0 0 0 0 (5,500)
-------- ---------- ---------- ---------- ----------
Pretax income/(loss) before extraordinary item, dividends,
and allocation of net proceeds 8,543 (145,345) 1,452 24,661 59,714
Tax (provision)/benefit (59) 28,561 (968) (8,497) (24,746)
-------- ---------- ---------- ---------- ----------
Income/(Loss) before extraordinary item, dividends
and allocation of net proceeds 8,484 (116,784) 484 16,164 34,968
Extraordinary item relating to the early extinguishment of
debt (net of income taxes) 0 0 0 0 (18,024)
-------- ---------- ---------- ---------- ----------
Net income/(loss) $ 8,484 $ (116,784) $ 484 $ 16,164 $ 16,944
======== ========== ========== ========== ==========
Allocation of Net Proceeds:
Net income/(loss) $ 8,484 $ (116,784) $ 484 $ 16,164 $ 16,944
Dividends on common and preferred stock(c) (8,368) (8,370) (8,123) (7,410) (6,734)
-------- ---------- ---------- ---------- ----------
Net (deficit)/proceeds 116 (125,154) (7,639) 8,754 10,210
Allocation from/(to) earned surplus (116) 133,622 7,639 (3,832) (10,210)
-------- ---------- ---------- ---------- ----------
Net proceeds available to members $ 0 $ 8,468 $ 0 $ 4,922 $ 0
======== ========== ========== ========== ==========
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) 0 $ 2,117 $ 0 $ 1,477 $ 0
Allocated to Class A members but retained by the Cooperative:
Qualified retains 0 6,351 0 3,445 0
-------- ---------- ---------- ---------- ----------
Net proceeds available to Class A members $ 0 $ 8,468 $ 0 $ 4,922 $ 0
======== ========== ========== ========== ==========
CMV related to Class A members $ 0 $ 71,733 $ 69,013 $ 69,623 $ 62,154
======== ========== ========== ========== ==========
CMV related to Class B members N/A N/A $ 9,423 $ 14,060 N/A
Total net proceeds allocated to Class A members as a
percent of CMV(d) 0.00% 11.8% 0.00% 7.07% 0.00%
======== ========== ========== ========== ==========
Total net proceeds allocated to Class B members as a
percent of CMV(e) N/A N/A 0.00% 0.00% N/A
======== ========== ========== ========== ==========
Balance Sheet Data:
Working capital (deficit) $ (612) $ 272,042 $ 235,334 $ 260,481 $ 237,331
Total assets $ 36,399 $ 836,175 $1,069,645 $1,187,266 $1,196,479
Class A common stock $ 9,636 $ 10,193 $ 11,287 $ 10,665 $ 9,979
Class B cumulative redeemable Preferred $ 122 $ 206 $ 239 $ 237 $ 261
Shareholders' and members' capitalization, redeemable
stock, and common stock $ 24,344 $ 24,505 $ 153,315 $ 159,843 $ 152,111
Long-term debt and senior subordinated notes (excludes
current portion) $ 1,200 $ 623,057 $ 631,128 $ 679,205 $ 702,322
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 $ 17,584 $ 18,072 $ 18,688 $ 17,037 $ 15,471
Number of Class A Common Stock members: 548 564 604 626 645
Number of Class B Common Stock members(f) 0 0 153 150 0
(a) See "NOTE 3. Agreements with Birds Eye Foods and AgriFrozen" under "Notes
to Consolidated Financial Statements" in Part II, Item 8 of this Report.
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.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following section should be read in conjunction with Item 1: Business; Item
6: Selected Financial Data; and Item 8: Financial Statements and Supplementary
Data.
The purpose of this discussion is to outline the significant reasons for changes
in the Consolidated Statement of Operations from fiscal 2001 through fiscal
2003. The consolidated operations during fiscal 2001 through fiscal 2002
included the operations of Pro-Fac's former wholly-owned subsidiaries, Birds Eye
Foods and AgriFrozen. For information about the termination of AgriFrozen's
operations, see "NOTE 4. Discontinued Operations" under "Notes to Consolidated
Financial Statements" in Part II, Item 8 of this Report.
As a result of the Transaction, Pro-Fac's results of operations for fiscal 2003
are not comparable with those of fiscal 2002. For a discussion of the
Transaction see the information under the heading "Description of Business -
General Development of Business" in Part I, Item 1 of this Report and "NOTE 1".
Description of Business and Summary of Significant Accounting Policies" under
"Notes to Consolidated Financial Statements" in Part II, Item 8 of this Report.
CHANGES FROM FISCAL 2002 TO FISCAL 2003
As stated above, through August 18, 2002, Birds Eye Foods was a wholly owned
subsidiary of Pro-Fac. Through August 18, 2002, the results of Pro-Fac were
consolidated with Birds Eye Foods. The consolidated financial statements were
after elimination of intercompany transactions and balances. The following
summarizes the activity of Birds Eye Foods for the period June 30, 2002 through
August 18, 2002:
(Dollars in Thousands)
June 30, 2002 -
August 18, 2002
---------------
Net sales $103,726
Cost of sales (80,644)
--------
Gross profit 23,082
Selling, administrative, and general expense (15,468)
Other income 277
--------
Operating income 7,891
Interest expense (7,747)
--------
Pretax income 144
Tax provision (59)
--------
Net income $ 85
========
As a result of the Transaction, described in "NOTE 1. Description and Summary of
Significant Accounting Policies" under "Notes to Consolidated Financial
Statements," in Part II, Item 8 of this Report, the results of operations for
the approximately forty-five weeks after August 18, 2002 are not comparable with
those of fiscal 2002. Accordingly, the following is a discussion of the
remaining components included in the results of operations of Pro-Fac for fiscal
2003.
Equity Income from Agrilink Holdings LLC: Subsequent to August 18, 2002, Pro-Fac
no longer reports its financial statements on a consolidated basis with Birds
Eye Foods and accounts for its investment in Holdings LLC under the equity
method of accounting. For fiscal 2003, the Cooperative recognized income, under
the equity method, of approximately $2.6 million from Holdings LLC. The
application of the equity method is subsequent to Holdings LLC's cumulative
preferred return.
Gain from Transaction with Birds Eye Foods, Inc and Related Agreements: On
August 19, 2002, the Cooperative contributed to the capital of Holdings LLC all
of the shares of Birds Eye Foods' common stock owned by Pro-Fac in exchange for
Class B common units of Holdings LLC representing a then 40.72 percent interest.
Pro-Fac's investment in Birds Eye Foods prior to the Transaction was
approximately $24.9 million. This amount reflects the forgiveness by Birds Eye
Foods of approximately $36.5 million which represented both borrowings for the
working capital needs of Pro-Fac and a $9.4 million demand payable. The value of
the Cooperative's 40.72 percent common equity ownership in Holdings LLC was
estimated at $31.4 million at the date of the Transaction. The Cooperative
recognized a gain of approximately $3.8 million from this exchange.
Pro-Fac and Birds Eye Foods also 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, Pro-Fac is entitled to the payment of a
termination fee of $10.0 million per year for five years, provided that certain
17
ongoing conditions are met, including maintaining grower membership levels
sufficient to generate certain minimum crop supply. The $10.0 million payment is
payable in quarterly installments to the Cooperative as follows: $4.0 million on
each July 1, and $2.0 million each October 1, January 1, and April 1. Pursuant
to the Termination Agreement, in fiscal 2003, the Cooperative received $4.0
million from Birds Eye Foods on August 19, 2002, $2.0 million on October 1,
2002, $2.0 million on December 31, 2002 and $2.0 million on April 1, 2003.
Payments under the Termination Agreement are considered additional consideration
related to the Transaction. Accordingly, the portion of the payments received
under the Termination Agreement related to Pro-Fac's continuing ownership
percentage are recorded as an adjustment to Pro-Fac's investment in Holdings
LLC. The remaining payments are recognized as additional gain on the Transaction
with Birds Eye Foods in the period it is received. Accordingly, in fiscal 2003,
Pro-Fac recognized approximately $5.9 million as additional gain from the
receipt of termination payments.
In addition, Pro-Fac and Birds Eye Foods entered into the Transitional Services
Agreement described in the "Description of Business -General Development of
Business" in Part I, Item 1 of this Report and in NOTE 3. "Agreements with Birds
Eye Foods and AgriFrozen" under "Notes to Consolidated Financial Statements in
Part II, Item 8 of this Report." The estimated value of services to be received
by Pro-Fac under the agreement, of approximately $1.0 million, has been
reflected as additional proceeds from the Transaction. Accordingly in fiscal
2003, Pro-Fac recognized approximately $0.6 million as additional gain from the
Transitional Services Agreement.
As a result of the agreements described above, based on the approximate 40.72
percent common equity ownership, the Cooperative recognized a total gain, in
fiscal 2003, of approximately $10.4 million.
Commercial market value adjustment: At its January 2003 Board meeting, in an
action aimed at improving the Cooperative's short-term liquidity, the Board of
Directors of Pro-Fac determined to deduct 1 percent of the CMV otherwise payable
to Pro-Fac's member-growers for crops supplied by Pro-Fac member-growers through
the Cooperative for the 2002 and 2003 growing seasons. The 1 percent CMV
deduction was withheld from the July 2003 CMV payment and it is anticipated that
it will be withheld from the July 2004 CMV payments. The Board of Directors of
Pro-Fac resolved to review this recommendation annually. The 1 percent deduction
for the 2002 growing season resulted in approximately $0.6 million of income for
fiscal 2003.
Selling, administrative, and general expense: Selling, administrative, and
general expenses totaled $1.4 million for fiscal 2003. During fiscal 2003, the
Cooperative paid approximately $0.4 million to obtain insurance from St. Paul
Mercury Insurance Company and Great American Insurance Company, insuring the
Cooperative against any obligation it incurs as a result of its indemnification
of its officers and directors, and insuring such officers and directors for
liability against which they may not be indemnified by the Cooperative for
events occurring prior to August 19, 2002 where claims are submitted prior to
August 19, 2008. This insurance has a term expiring on August 19, 2008.
The remaining expenses for fiscal 2003 were for general operating purposes of
the Cooperative.
Legal matters and settlement expenses: During the second quarter of fiscal 2003,
Pro-Fac recorded a liability of $1,250,000 in anticipation of the settlement of
the Blue Line Farms Litigation and the Seifer Trust Litigation. During the
fourth quarter of fiscal 2003, Pro-Fac recorded a liability of $832,500 in
settlement of a portion of the claims made in the Kenyon Zero Storage Matter
relating to a surety bond for which Pro-Fac was the indemnitor. Further, in
anticipation of the settlement of the balance of the Kenyon Zero Storage Matter,
Pro-Fac recorded a liability of $570,000 in the fourth quarter of fiscal 2003.
The Cooperative incurred approximately $1.0 million of associated legal costs
during fiscal 2003. See the discussion of Pro-Fac's legal proceedings in "NOTE
14. Other Matters - Legal Matters" under "Notes to Consolidated Financial
Statements" in Part II, Item 8. of this Report.
Tax (Provision)/Benefit: On June 11, 2003, the Cooperative received notification
from the Internal Revenue Service that effective August 19, 2002 the Cooperative
qualified for tax exempt status as a farmers' cooperative under Section 521 of
the Internal Revenue Code. Exempt cooperatives are permitted to reduce or
eliminate taxable income through the use of special deductions (such as
dividends paid on its common and preferred stock).
It is anticipated that the Cooperative will use these special deductions and
patronage distributions to reduce the Cooperative's taxable income to zero for
periods after August 19, 2002. The fiscal 2003 tax provision related to the
period prior to the effective date of the Cooperative's exempt status (June 30,
2002 to August 19, 2002).
For the period June 30, 2002 to August 19, 2002, the Cooperative had a minimal
tax provision compared to a $28.6 million tax benefit in fiscal 2002. The fiscal
2002 tax benefit primarily resulted from a $41.5 million benefit associated with
the non-cash goodwill impairment charge described below under "Goodwill
Impairment Charge" in "Changes from fiscal 2001 to fiscal 2002". A
18
further discussion of Pro-Fac's tax matters is included in "NOTE 10. Taxes on
Income" under "Notes to Consolidated Financial Statements" in Part II, Item 8 of
this Report.
**************************
CHANGES FROM FISCAL 2001 TO FISCAL 2002
Prior to August 19, 2002, Birds Eye Foods described its business as having four
primary product lines: vegetables, fruits, snacks and canned meals. The
following discussion of changes in Pro-Fac's financial condition and results of
operations between fiscal 2001 and fiscal 2002, is based on Birds Eye Foods'
historical segment information.
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 majority
of each of the product lines' net sales is within the United States.
The following tables illustrate the Cooperative's consolidated results of
operations by product line for the fiscal years ended June 29, 2002 and June 30,
2001 and the Cooperative's consolidated total assets by product line at June 29,
2002 and June 30, 2001.
Net Sales
(Dollars in Millions)
As of Fiscal Years Ended
---------------------------------
June 29, June 30,
2002 2001
--------------- ---------------
% of % of
$ Total $ Total
------- ----- ------- -----
Vegetables 727.9 72.0 839.4 71.3
Fruits 111.4 11.0 117.7 9.9
Snacks 88.1 8.7 89.4 7.6
Canned meals 46.0 4.6 51.6 4.4
Other 37.1 3.7 43.3 3.7
------- ----- ------- -----
Continuing segments 1,010.5 100.0 1,141.4 96.9
Businesses sold or closed(1) 0.0 0.0 35.9 3.1
------- ----- ------- -----
Total 1,010.5 100.0 1,177.3 100.0
======= ===== ======= =====
(1) Includes net sales of operations sold or no longer part of the Cooperative.
For additional information about discontinued operations see "NOTE 4.
Discontinued Operations" under "Notes to Consolidated Financial Statements"
in Part II, Item 8 of this Report.
19
Operating Income(1)
(Dollars in Millions)
As of Fiscal Years Ended
-----------------------------
June 29, June 30,
2002 2001
-------------- ------------
% of % of
$ Total $ Total
------ ----- ---- -----
Vegetables 67.2 67.0 54.7 63.3
Fruits 17.8 17.7 12.4 14.3
Snacks 6.6 6.6 5.6 6.5
Canned meals 5.2 5.2 6.6 7.6
Other 3.5 3.5 1.9 2.2
------ ----- ---- -----
Continuing segments 100.3 100.0 81.2 93.9
Businesses sold or closed(2) 0.0 0.0 5.3 6.1
------ ----- ---- -----
Total(3) 100.3 100.0 86.5 100.0
===== =====
Gain from pension curtailment 2.4 0.0
Restructuring expense (2.6) 0.0
Goodwill impairment charge (179.0) 0.0
------ ----
Total operating income (loss) (78.9) 86.5
====== ====
(1) 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. In fiscal 2002, the Cooperative recognized a
non-cash goodwill impairment charge of approximately $179.0 million ($137.5
million net of tax). For additional information about the impact of SFAS
No. 142, see "NOTE 2. Accounting for Goodwill and Intangible Assets" under
"Notes to Consolidated Financial Statements" in Part II, Item 8 of this
Report.
(2) Represents the operating results of operations sold or no longer part of
the Cooperative. For additional information about this item, see "NOTE 4.
Discontinued Operations" under "Notes to Consolidated Financial Statements
in Part II, Item 8 of this Report.
(3) Operating income (loss) less interest expense of $66.4 million, and $85.1
million, for the years ended June 29, 2002, and June 30, 2001,
respectively, results in pretax income (loss) before dividends and
allocation of net proceeds. Management does not allocate interest expense
to product lines when evaluating product line performance.
20
Total Assets
(Dollars in Millions)
As of Fiscal Years Ended
-------------------------------
June 29, 2002 June 30, 2001
------------- ---------------
% of % of
$ Total $ Total
----- ----- ------- -----
Vegetables 649.2 77.6 848.1 79.3
Fruits 74.8 8.9 71.9 6.7
Snacks 40.5 4.8 47.0 4.4
Canned Meals 25.6 3.1 45.3 4.2
Other 42.2 5.1 57.2 5.3
----- ----- ------- -----
Continuing segments 832.3 99.5 1,069.5 99.9
Businesses sold or closed(1) 0.0 0.0 0.0 0.0
Assets held for sale 3.9 0.5 0.1 0.1
----- ----- ------- -----
Total 836.2 100.0 1,069.6 100.0
===== ===== ======= =====
(1) Includes the assets of operations sold or no longer part of the
Cooperative. For additional information about this item, see "Note 4.
Discontinued Operations" under "Notes to Consolidated Financial Statements"
in Part II, Item 8 of this Report.
During fiscal 2002, net sales from continuing segments declined $130.9 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 which was discontinued and $26.2 million of net sales associated with
the sales of inventory purchased from CoBank, the secured lender to PF
Acquisition II, Inc. ("the Northwest Inventory Purchase"). PF Acquisition II,
Inc., which conducted business under the name "AgriFrozen Foods," was a
subsidiary in which Pro-Fac had a controlling interest until February 15, 2001.
In addition, during fiscal 2002, Birds Eye 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
$58.6 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 Birds
Eye 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, Birds Eye 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. Birds Eye Foods' overall
market share includes branded retail unit sales, as reported by Information
Resources, Inc. ("IRI"), and Birds Eye 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 operating income is difficult as fiscal 2002 was
significantly impacted by several events, including:
(a) Birds Eye Foods' decision to freeze benefits under its Master Salaried
Retirement Plan and the resulting $2.4 million curtailment gain associated
with this decision. This action was also part of an ongoing effort to
reduce costs;
(b) restructuring activities and the related charge associated with a 7 percent
reduction in Birds Eye Foods' national workforce. These restructuring
efforts were part of an ongoing effort to achieve low-cost operations and
included both salaried and hourly positions;
(c) 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. For additional information about the impact of SFAS No. 142,
see "NOTE 2. Accounting for Goodwill and Intangible Assets" under "Notes to
Consolidated Financial Statements" in Part II, Item 8 of this Report.
21
Comparability of net income is, therefore, difficult. Accordingly, management
believes, to fully evaluate results, an evaluation of operating income from
continuing segments is more appropriate as it allows the operations of the
business to be reviewed in a more comparable manner. Operating income from
continuing segments increased $19.1 million or 23.5 percent from the prior year.
The improvement in operating income 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 operating income from continuing segments 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 Birds Eye Foods' pickle business to Dean Pickle, the parties
entered into an agreement whereby Birds Eye Foods agreed to contract pack
products for a period of two years. Fiscal 2002 was the second and final year of
the contract. Birds Eye 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
operating income from continuing segments by product line is outlined below.
Vegetable net sales decreased $111.5 million or 13.3 percent in fiscal 2002.
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 in fiscal 2002 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 in
fiscal 2002 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 ended 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 Birds Eye
Foods' regional branded product lines in fiscal 2002 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 operating income increased $12.5
million or 22.9 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 operating income improved by $5.4 million or 43.5 percent. The increase in
operating income 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. Operating income for the snack
product line increased $1.0 million, or 17.9 percent.
Net sales for the canned meal business decreased $5.6 million or 10.9 percent.
Operating income for the canned meal business decreased $1.4 million or 21.2
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 $6.2 million, or 14.3 percent while operating income increased $1.6
million or 84.2 percent from fiscal 2001. The majority of the net sales decline
was associated with the loss of a
22
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 in amortization expense not recorded in 2002 due to the
adoption of SFAS No. 142 (see "NOTE 2. Accounting for Goodwill and Intangible
Assets" under "Notes to Consolidated Financial Statements" in Part II, Item 8 of
this Report for further information about the impact of SFAS No. 142) 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 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 Birds Eye Foods and
Flanagan Brothers, Inc. There were no significant changes in the operations of
the joint venture in fiscal 2002 compared to fiscal 2001. For information about
changes in Birds Eye Foods' investment in Great Lakes Kraut LLC in fiscal 2003,
see "NOTE 6. Investment in Joint Venture" under "Notes to Consolidated Financial
Statements" in Part II, Item 8 of this Report.
Gain from Pension Curtailment: During September 2001, Birds Eye 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, Birds Eye Foods sold its pickle business to
Dean Pickle and Specialty Product Company. As part of the Transaction, Birds Eye
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, Birds Eye Foods initiated restructuring activities for
approximately 140 employees in that facility located in Tacoma, Washington. The
total restructuring charge amounted to approximately $1.1 million and was
primarily comprised of employee termination benefits.
In addition, on October 12, 2001, Birds Eye Foods announced a reduction of
approximately 7 percent of its nationwide workforce, for a total of
approximately 300 positions. The reductions were part of an ongoing focus on
low-cost operations, and included both operational and administrative personnel.
In conjunction with the reductions, Birds Eye 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 was 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
Birds Eye 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 Birds Eye 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 Birds Eye Foods operates, and the
completion of the terms of the Transaction. These factors indicated an erosion
in the market value of Pro-Fac and Birds Eye Foods since the adoption of SFAS
No. 142.
Accordingly, in the fourth quarter of fiscal 2002, Pro-Fac and Birds Eye Foods
recorded a one-time, pretax, non-cash charge of approximately $179.0 million to
reduce the carrying value of Pro-Fac's 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. For additional information
as to the treatment of goodwill, see "NOTE 2. Accounting for Goodwill and
Intangible Assets" under "Notes to Consolidated Financial Statements" in Part
II, Item 8 of this Report.
23
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 Birds Eye Foods' previous credit facility with Harris
Trust and Savings Bank. 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 (Provision)/Benefit: 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 goodwill 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 in "NOTE 10. Taxes on
Income" under "Notes to Consolidated Financial Statements" in Part II, Item 8 of
this Report.
CRITICAL ACCOUNTING POLICIES
"NOTE 1. Description of Business and Summary of Accounting Policies" under
"Notes to Consolidated Financial Statements" included in Part II, Item 8 of this
Report discusses the significant accounting policies of Pro-Fac. Pro-Fac's
discussion and analysis of its financial condition and results of operations are
based upon its consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires Pro-Fac's management to
make estimates, judgments and assumptions that affect the reported amount of
assets, liabilities, revenues and expenses. On an ongoing basis, Pro-Fac
evaluates its estimates.
As a result of the Transaction, Pro-Fac no longer consolidates the results of
Birds Eye Foods. After the Transaction, Pro-Fac's estimates affecting the
financial statements relate primarily to contingencies. Certain accounting
policies deemed critical to Pro-Fac's results of operation or financial position
after the Transaction are discussed below.
Pro-Fac markets and sells its members' crops to food processors, including Birds
Eye Foods. Under the provisions of Emerging Issues Task Force 99-19, "Reporting
Revenue Gross Versus Net as an Agent", subsequent to the Transaction, the
Cooperative records activity between Birds Eye Foods, itself and its members on
a net basis.
The Cooperative accounts for its ownership interest in Holdings LLC under the
equity method of accounting. Accordingly, the portion of payments received as a
result of the Transaction related to Pro-Fac's continuing ownership percentage
are recorded as an adjustment to Pro-Fac's investment in Holdings LLC. The
remaining portion is recorded as a gain.
Prior to the Transaction the results of the Cooperative were consolidated with
its then wholly-owned subsidiary, Birds Eye Foods. Estimates and assumptions for
Birds Eye Foods included, but were not limited to: inventories, self-insurance
programs, and promotional activities, and identifiable intangible assets,
long-lived assets, and goodwill.
For fiscal 2002 and fiscal 2001 Birds Eye Foods considered the following the
more important critical estimates and assumptions used in the preparation of
its financial statements, although not inclusive.
Inventories: Under the FIFO method, the cost of items sold was based upon the
cost of the first such items produced. As a result, the last such items produced
remained in inventory and the cost of these items are used to reflect ending
inventory. Birds Eye Foods priced its inventory at the lower of cost or market
value on the first-in, first-out (FIFO) method.
Birds Eye Foods established a reserve for the estimated aged surplus, spoiled or
damaged products, and discontinued inventory items and components. The amount of
the reserve was 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: Birds Eye Foods recorded 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: Promotional activities were 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 was recorded, which normally precedes the actual cash
expenditure. The
24
recognition of these costs therefore required management's judgment regarding
the volume of promotional offers that would be redeemed by either the retail
trade channel or consumer. These estimates were made using various techniques
including historical data on performance of similar promotional programs.
Differences between estimated expense and actual redemptions are normally
insignificant and were 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.
Identifiable Intangible Assets, Long-Lived Assets, and Goodwill: Birds Eye Foods
assessed 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 Birds
Eye Foods' 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, Birds Eye Foods would record an adjustment to the respective
carrying value. For additional information about the treatment of goodwill and
intangible assets, see "Note 2. Accounting for Goodwill and Intangible Assets"
under "Notes to Consolidated Financial Statements" in Part II, Item 8 of this
Report.
LIQUIDITY AND CAPITAL RESOURCES
As discussed under "General Development of Business " in Part I, Item 1 of this
Report, as a result of the Transaction, Pro-Fac no longer consolidates the
assets and liabilities of Birds Eye Foods in its financial statements. Pro-Fac's
balance sheet does, however, reflect Pro-Fac's interest in Holdings LLC, which,
as described in "NOTE 1. Description of Business and Summary of Significant
Accounting Policies" and "NOTE 2. Accounting for Goodwill and Intangible Assets"
under "Notes to Consolidated Financial Statements" in Part II, Item 8 of this
Report, is accounted for under the equity method.
From and after August 19, 2002 and through and including August 19, 2007,
Pro-Fac's primary source of cash is presently expected to be the $10.0 million
annual payments due to it from Birds Eye Foods pursuant to the Termination
Agreement, the last installment payment of $2.0 million pursuant to that
agreement being payable on April, 1, 2007, and the commercial market value or
"CMV" payments made to it by Birds Eye Foods for crops pursuant to the Amended
and Restated Marketing and Facilitation Agreement. The Termination Agreement and
the Amended and Restated Marketing and Facilitation Agreement are described in
greater detail in the "Description of Business - General Development of
Business" section of this Report. Although Pro-Fac's business strategy is to
expand its sources of cash through expanding the types of products and/or
services it offers, the actual amount of cash that may be generated from
Pro-Fac's expanded operations will depend on how successful Pro-Fac is in
implementing its business strategy, including controlling any associated costs.
Subsequent to August 19, 2007 and prior to any sale (or dissolution) of Holdings
LLC, Pro-Fac's primary source of cash is expected to be the annual
distributions, if any, from Holdings LLC pursuant to the Limited Liability
Company Agreement. As is described in greater detail in the "Description of
Business - General Development of Business" section of this Report, the Limited
Liability Company Agreement provides that, subject to any restrictions contained
in any financing arrangements of Holdings LLC and/or Birds Eye Foods, after
August 19, 2007, Holdings LLC will use commercially reasonable efforts to cause
Birds Eye Foods to distribute annually to Holdings LLC up to $24.8 million of
cash flow from operations of Birds Eye Foods, which Holdings LLC will then
distribute to the holders of its common units. Assuming $24.8 million of annual
distributions, and further assuming that Pro-Fac's distributable interest is
40.50%, Pro-Fac's annual distributable share would be approximately $10.0
million. The actual amount of annual distributions to Pro-Fac, if any, will
depend upon the operating results of Birds Eye Foods for the particular year.
Although CMV payments are a source of cash to Pro-Fac, with the exception of the
Board's decision to deduct 1% of CMV otherwise payable to its grower-members for
crops delivered in 2003 ($0.6 million) and 2004, Pro-Fac has typically paid 100%
of CMV to its member-growers. The Pro-Fac Board of Directors determines annually
the amount of CMV that will be paid out to the Pro-Fac member-growers for crops
supplied for the immediately preceding growing season after taking into account
Pro-Fac's need to establish reserves for its anticipated operating and other
expenses.
Any cash generated from expanded products and/or services offerings by Pro-Fac
is currently anticipated to be a secondary source of cash.
In addition to the cash payments to Pro-Fac pursuant to the Termination
Agreement, the last installment payment under the Termination Agreement - $2.0
million - is payable to Pro-Fac on April 1, 2007, and the possible cash
distributions to Pro-Fac pursuant to the Limited Liability Company Agreement,
Pro-Fac has available up to $1.0 million per year, until August 19, 2007, under
the Credit Agreement with Birds Eye Foods and up to $500,000 under a line of
credit from Manufacturers and Traders Trust Company ("M&T Bank").
25
On March 26, 2003, the Cooperative secured a $500,000 line of credit from M&T
Bank (the "M&T Line of Credit"). Principal amounts borrowed under the M&T Line
of Credit bear interest at .75 basis points above the prime rate in effect on
the day proceeds are disbursed, as announced by M&T Bank, as its prime rate of
interest. Interest is payable monthly. Amounts extended under the M&T Line of
Credit are required to be repaid in full during each year by July 15, with
further borrowings prohibited for a minimum of 90 consecutive days after such
repayment. Pro-Fac's obligations under the M&T Line of Credit are secured by a
security interest granted to M&T in substantially all of its assets, excluding
Pro-Fac's Class B common units owned in Holdings LLC. However, the collateral
does include any distributions made in respect of the Class B common units and
cash payments made by Birds Eye Foods to the Cooperative.
As of June 28, 2003, there was a balance outstanding of $500,000 under the M&T
Line of Credit. The balance was repaid in July of 2003.
Under the Transitional Services Agreement, which is described in greater detail
in the "Description of Business - General Development of Business" section of
this Report, Birds Eye Foods has agreed to provide Pro-Fac certain
administrative and other services until August 19, 2004. After termination of
that Agreement, Pro-Fac will need cash to pay for the services currently being
provided under that Agreement, including salary, administrative and other
expenses.
Net cash available to Pro-Fac, after payment of CMV to Pro-Fac's member-growers,
is used to pay Pro-Fac's operating expenses as well as to pay dividends on its
capital stock and fund repurchases of its common stock. Dividends on Pro-Fac's
preferred stock were $7,857,932 and $7,805,572 in fiscal 2003 and 2002,
respectively.
A discussion of "Consolidated Statement of Cash Flows" for the year ended June
28, 2003 follows:
Net cash used in operating activities of $29.8 million for fiscal 2003 primarily
represents changes in operating assets and liabilities of Birds Eye Foods for
the period June 29, 2002 through August 19, 2002, which was the Closing Date of
the Transaction. During this time Pro-Fac consolidated its results with Birds
Eye Foods.
Net cash provided by investing activities for fiscal 2003 was $1.6 million. Of
this amount approximately $5.8 million represents the cash balance transferred
to Birds Eye Foods at the date of the transaction with Birds Eye Foods, as well
as the receipt by the Cooperative of $10.0 million from Birds Eye Foods under
the Termination Agreement. Other amounts reported as cash provided by investing
activities relate to the period June 29, 200