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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 26, 2004
[_] 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)
350 Linden Oaks, PO Box 30682, Rochester, NY 14603-0682
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (585) 218-4210
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Class A Cumulative Preferred Stock
Liquidation Preference $25.00/Share
Par Value $1.00/Share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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 26, 2003
Common Stock: $9,593,830
(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, 2004:
Common Stock: 1,833,738
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1 of 62 Pages
FORM 10-K ANNUAL REPORT - Fiscal Year 2004
PRO-FAC COOPERATIVE, INC.
TABLE OF CONTENTS
PAGE
----
Cautionary Statement on Forward-Looking Statements....................... 3
PART I
ITEM 1. Description of Business
General Development of Business............................ 4
Narrative Description of Business.......................... 9
ITEM 2. Properties.................................................... 10
ITEM 3. Legal Proceedings............................................. 11
ITEM 4. Submission of Matters to a Vote of Security Holders........... 11
PART II
ITEM 5. Market for Registrant's Common Stock, Related Stockholder
Matters and Issuer Purchases of Equity Securities.......... 12
ITEM 6. Selected Financial Data....................................... 13
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 14
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.... 22
ITEM 8. Financial Statements and Supplementary Data................... 23
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 47
ITEM 9A. Controls and Procedures....................................... 47
ITEM 9B. Other Information............................................. 47
PART III
ITEM 10. Directors and Executive Officers of the Registrant............ 48
ITEM 11. Executive Compensation........................................ 50
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................. 52
ITEM 13. Certain Relationships and Related Transactions................ 54
ITEM 14. Principal Accountant Fees and Services........................ 55
PART IV
ITEM 15. Exhibits and Financial Statement Schedules and Reports on
Form 8-K................................................... 56
Signatures.................................................... 59
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 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 11. Other Matters -
Guarantees and Indemnifications" 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 cash made
available under the Termination Agreement with Birds Eye Foods, Inc. and
Pro-Fac's ability to operate its business and pay dividends after the
expiration of that agreement (see the discussion of this Agreement 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" under "Notes
to Consolidated Financial Statements" in Part II, Item 8 of this Report).
o the issuance of additional common units of Birds Eye Holdings LLC, which
will reduce Pro-Fac's common unit percentage ownership in Birds Eye
Holdings LLC ("Holdings LLC"), one of the factors in determining the amount
of annual distributions that may be paid to the Cooperative under the
Limited Liability Company Agreement (see the discussion under the heading
"Description of Business - General Development" in Part I, Item 1 of this
Form 10-K and the "Liquidity and Capital Resources" discussion under the
Management's Discussion and Analysis of Financial Condition and Results of
Operations" section in Part II, Item 7 of this Form 10-K regarding the
terms and application of the Limited Liability Company Agreement.
3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Pro-Fac Cooperative, Inc. ("Pro-Fac" or "Cooperative") 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.
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 at the facilities of Birds Eye Foods, Inc. ("Birds Eye
Foods") and other customers. Birds Eye Foods is a producer and marketer of
processed food products and, until consummation of the Transaction on August 19,
2002 described below, a wholly-owned subsidiary of Pro-Fac. As of June 26, 2004,
there were approximately 522 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.
Pro-Fac's Class A Cumulative preferred stock is listed on the Nasdaq National
Market system under the stock symbol, "PFACP."
Until August 19, 2002, the Cooperative conducted its business on a consolidated
basis with Birds Eye Foods, Pro-Fac's wholly-owned subsidiary prior to
consummation of the Transaction. Accordingly, unless the context otherwise
requires, the terms "Cooperative" and "Pro-Fac" refer to Pro-Fac Cooperative,
Inc. and its subsidiaries during and for the periods discussed in this Report
preceding the Transaction.
Pro-Fac's 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 current business. 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. 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. As a result of the Transaction, Birds Eye Foods
no longer pays patronage income to Pro-Fac.
4
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 Birds Eye 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.
The transactions consummated pursuant to the Unit Purchase Agreement are
referred to in this Report 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., ( "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, then 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 through
April 1, 2007, 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
discussed above 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.
5
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 or (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 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 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, for a period of 24 months from the
Closing Date. Pursuant to its terms, the Transitional Services Agreement
terminated on August 19, 2004. Under the Transitional Services Agreement, the
general manager of Pro-Fac was also an employee of Birds Eye Foods, reporting 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 were employees of Birds Eye Foods and
reported to the chief executive officer or other representatives of Birds Eye
Foods. Stephen R. Wright, who served as the General Manager and Secretary of
Pro-Fac during fiscal year 2004, was employed by Birds Eye Foods through August
19, 2004 serving as executive vice president - investor relations of Birds Eye
Foods. As an employee of Birds Eye Foods, Mr. Wright's salary was paid by Birds
Eye Foods. Effective August 19, 2004, Mr. Wright and two other individuals
previously employed by Birds Eye Foods and providing services to Pro-Fac under
the Transitional Services Agreement became employees of Pro-Fac.
(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 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 6. Long-Term Debt" under "Notes to Consolidated Financial Statements" in
Part II, Item 8 of this Report.
(v) Limited Liability Company Agreement of 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.
6
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
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 approximately 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 percentage of remaining distributable assets
distributable to the holders of Class D common units increases from
approximately 2 percent to approximately 8.112 percent.
Prior to August 19, 2005, distributions of assets by Holdings LLC in excess of
the amount necessary to pay 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 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. As of June 26, 2004, Pro-Fac
owned 40.49 percent of the common equity of Holdings LLC through its ownership
of 321,429 Class B common units.
7
(vi) Securityholders Agreement: Holdings LLC, Pro-Fac and Vestar, together with
others, including officers of 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 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 "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.
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.
Financial Information About Industry Segments
Since August 19, 2002, Pro-Fac has conducted its business in only one business
segment, the marketing of its members' crops, including raw fruits and
vegetables.
Prior to August 19, 2002, Birds Eye Foods was a wholly-owned subsidiary of
Pro-Fac. Birds Eye Foods operated in four primary segments. See "NOTE 9.
Operating Segments" under "Notes to Consolidated Financial Statements" in Part
II, Item 8 of this Report for additional segment information.
8
NARRATIVE DESCRIPTION OF BUSINESS
Pro-Fac is an agricultural cooperative that markets and sells its members' crops
to food processors, including Birds Eye Foods. Fiscal 2004 is the first complete
year in which Pro-Fac operated its business on a stand alone basis without Birds
Eye Foods as a wholly-owned subsidiary. Pro-Fac no longer manufactures and
markets processed foods, which it previously did through Birds Eye Foods.
Pro-Fac's Business
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.
Pro-Fac's principal products are discussed above in "General Development of
Business".
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.
Significant Customers
For the fiscal years ended June 26, 2004, June 28, 2003 and June 29, 2002,
approximately 75%, 98% and 100%, respectively, of the crops purchased by Pro-Fac
from its members were sold 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.
9
Employees
At June 26, 2004, Pro-Fac did not have any full-time employees. Pursuant to the
Transitional Services Agreement, which terminated by its terms on August 19,
2004, Birds Eye Foods provided Pro-Fac certain administrative and other
services. Prior to the termination of the Transitional Services Agreement,
Stephen R. Wright, who was the General Manager and Secretary of Pro-Fac during
fiscal year 2004, was an employee of Birds Eye Foods. Effective August 19, 2004,
Mr. Wright and two other individuals previously employed by Birds Eye Foods and
providing services to Pro-Fac under the Transitional Services Agreement became
employees of Pro-Fac.
Practices Concerning Working Capital
Pro-Fac's principal working capital requirement is to fund payments to its
member growers for crops delivered to Birds Eye Foods and other customers of
Pro-Fac. Payments to growers for crops delivered to Birds Eye Foods are funded
using payments received from Birds Eye Foods. These receipts and payments are
generally simultaneous. Receipts from other customers do not always coincide
with related payments to growers and may require use of working capital or
short-term borrowings.
In connection with the Transaction, Pro-Fac and Birds Eye Foods entered into the
Credit Agreement pursuant to which Birds Eye Foods 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. At June 26,
2004, $1.0 million was outstanding under the Credit Agreement. 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 6.
Long-Term Debt" under "Notes to Consolidated Financial Statements" in Part II,
Item 8 of this Report.
The Cooperative may borrow up to $2.0 million under the terms of a line of
credit with from Manufacturers and Traders Trust Company (the "M&T Line of
Credit"). As of June 26, 2004 and June 28, 2003, $0.0 million and $0.5 million,
respectively, were 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 6.
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.
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 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 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. "NOTE 9. 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.
10
ITEM 2. PROPERTIES
At June 26, 2004, Pro-Fac did not own or lease any real property. Under the
Transitional Services Agreement, which terminated by its terms on August 19,
2004, Birds Eye Foods 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 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 had no reimbursement
obligation with respect to services support, office space and office equipment
to the extent that they were not in excess of the levels provided on the date of
Transitional Services Agreement.
Pro-Fac's principal offices are located at 350 Linden Oaks, Rochester, New York
and consist of 468 square feet of office space. Commencing August 19, 2004,
Pro-Fac subleases this space from Birds Eye Foods at an annual rate of $12,600
($1,050 per month). Either Pro-Fac or Birds Eye Foods may terminate the sublease
upon at least 30 days written notice in advance of the termination date. The
rent payment is subject to a 3% annual increase on June 1.
ITEM 3. LEGAL PROCEEDINGS
The Cooperative is party to various 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 2004.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
There is no trading market for the Cooperative's common stock. Only
member-growers of the Cooperative can own shares of the Cooperative's common
stock. As of June 26, 2004, there were 522 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 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", in
Item 8 of this Report and in "NOTE 10. Common Stock and Capitalization" and
"NOTE 12. Quarterly Financial Data (Unaudited)" under "Notes to Consolidated
Financial Statements" in Item 8 of this Report.
During fiscal 2004, 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:
Number of Shares
Date (share-for-share) Value of Shares (1)
- --------------- ----------------- -------------------
January 9, 2004 275 $ 6,875
April 19, 2004 640 16,000
June 26, 2004 116 2,900
----- -------
Total 1,031 $25,775
===== =======
(1) Based on liquidation preference of $25 per share
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.
12
ITEM 6. SELECTED FINANCIAL DATA
Pro-Fac's results of operations and financial condition for fiscal 2004 and
fiscal 2003 are not comparable with those of fiscal 2002, 2001 and 2000.
Subsequent to August 18, 2002, Pro-Fac no longer reports its financial
information on a consolidated basis with Birds Eye Foods. Fiscal 2004 represents
a complete fiscal year without consolidation and fiscal 2003 reflects a period
of approximately forty-five weeks (August 19, 2002 through June 28, 2003) on an
unconsolidated basis with Birds Eye Foods. The financial data below for fiscal
2002, 2001 and 2000 reflect Pro-Fac's operations on a consolidated basis with
Birds Eye Foods.
(Dollars in Thousands, Except Capital Stock Data)
Fiscal Year Ended June
---------------------------------------------------------
2004 2003 2002 2001(a) 2000
------- -------- ---------- ---------- ----------
Consolidated Statement of Operations:
Net sales (f) $ 0 $103,726 $1,010,540 $1,177,280 $1,159,656
Cost of sales 0 (80,644) (795,297) (956,182) (919,029)
------- -------- ---------- ---------- ----------
Gross profit 0 23,082 215,243 221,098 240,627
Equity income from Holdings LLC 3,872 2,134 0 0 0
Gain from Transaction with Birds Eye Foods, Inc.
and related agreements 6,060 10,361 0 0 0
Commercial market value adjustment 660 568 0 0 0
Selling, administrative, and general expense
(post Transaction) (1,139) (1,433) 0 0 0
Selling, administrative, and general expenses
(pre Transaction) 0 (15,468) (117,450) (136,352) (141,508)
Legal matters and settlement expenses (273) (3,720) 0 0 0
Income from joint venture 0 277 2,457 1,779 2,418
Gain from pension curtailment 0 0 2,472 0 0
Gains on sale of assets 0 0 0 0 6,635
Restructuring 0 0 (2,622) 0 0
Goodwill impairment charge 0 0 (179,025) 0 0
------- -------- ---------- ---------- ----------
Operating income/(loss) 9,180 15,801 (78,925) 86,525 108,172
Interest income 23 10 0 0 0
Interest expense (99) (7,762) (66,420) (85,073) (83,511)
------- -------- ---------- ---------- ----------
Pretax income/(loss) before extraordinary item,
dividends, and allocation of net
income/(loss) 9,104 8,049 (145,345) 1,452 24,661
Tax (provision)/benefit 0 (59) 28,561 (968) (8,497)
------- -------- ---------- ---------- ----------
Net income/(loss) $ 9,104 $ 7,990 $ (116,784) $ 484 $ 16,164
======= ======== ========== ========== ==========
Allocation of net income/(loss):
Net income/(loss) $ 9,104 $ 7,990 $ (116,784) $ 484 $ 16,164
Dividends on common and preferred stock (b) (8,134) (8,368) (8,370) (8,123) (7,410)
------- -------- ---------- ---------- ----------
Net income/(loss) 970 (378) (125,154) (7,639) 8,754
Allocation (to)/from earned surplus/
(accumulated deficit) (970) 378 133,622 7,639 (3,832)
------- -------- ---------- ---------- ----------
Net income/(loss) available to members $ 0 $ 0 $ 8,468 $ 0 $ 4,922
======= ======== ========== ========== ==========
Allocation of net income/(loss) available to
Class A members:
Payable to Class A members currently (25% of
qualified net income/(loss) available
to Class A members in fiscal 2002 and 30%
in fiscal 2000) $ 0 $ 0 $ 2,117 $ 0 $ 1,477
Allocated to Class A members but retained by the
Cooperative:
Qualified retains 0 0 6,351 0 3,445
------- -------- ---------- ---------- ----------
Net income/(loss) available to Class A members $ 0 $ 0 $ 8,468 $ 0 $ 4,922
======= ======== ========== ========== ==========
CMV related to Class A members $ 0 $ 0 $ 71,733 $ 69,013 $ 69,623
======= ======== ========== ========== ==========
CMV related to Class B members N/A N/A N/A 9,423 14,060
Total income/(loss) allocated to Class A
members as a percent of CMV(c) 0.00% 0.00% 11.8% 0.00% 7.07%
======= ======== ========== ========== ==========
Total income/(loss) allocated to Class B
members at a percent of CMV(e) N/A N/A N/A 0.00% 0.00%
======= ======== ========== ========== ==========
Balance Sheet Data:
Working (deficit) capital $ (852) $ (612) $ 272,042 $ 235,334 $ 260,481
Total assets $34,098 $ 31,463 $ 836,175 $1,069,645 $1,187,266
Class A common stock $ 9,169 $ 9,636 $ 10,193 $ 11,287 $ 10,665
Class B cumulative redeemable Preferred Stock $ 108 $ 122 $ 206 $ 239 $ 237
Shareholders' and members' capitalization,
redeemable stock, and common stock $19,645 $ 19,408 $ 24,505 $ 153,315 $ 159,843
Long-term debt and senior subordinated notes
(excludes current portion) $ 1,000 $ 1,200 $ 623,057 $ 631,128 $ 679,205
Capital Stock Data
Cash dividends paid per share:
Class A Common $ 0.00 $ .25 $ .25 $ .25 $ .25
Non-Cumulative Preferred stock $ 1.50 $ 1.50 $ 1.50 $ 1.50 $ 1.50
Class A Cumulative Preferred stock $ 1.72 $ 1.72 $ 1.72 $ 1.72 $ 1.72
Class B Cumulative Preferred stock $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Average Class A Common stock investment per Class
A member $17,565 $ 17,584 $ 18,072 $ 18,688 $ 17,037
Number of Class A Common stock members 522 548 564 604 626
Number of Class B Common stock members(e) 0 0 0 153 150
(a) Fiscal 2001 consisted of 53 weeks.
(b) 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".
(c) Payment to Class A members for CMV was 100 percent of deliveries in fiscal
2001.
(d) Payment to Class B members for CMV was 63.50 percent in fiscal 2001 and
89.16 percent of deliveries in fiscal 2000.
(e) On July 19, 2001, Pro-Fac repurchased all Class B common stock.
(f) After the Transaction, under the provisions of Emerging Issues Task Force
Issue No. 99-19, "Reporting Revenue Gross Versus Net as an Agent," the
Cooperative records activity among Birds Eye Foods and other customers,
itself and its members on a net basis.
13
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 2002 through fiscal
2004. The consolidated operations during fiscal 2002 and for the first seven
weeks of fiscal 2003 included the operations of Pro-Fac's former wholly-owned
subsidiary, Birds Eye Foods.
As a result of the Transaction, Pro-Fac's results of operations for fiscal 2004
and 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 2003 TO FISCAL 2004
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:
June 30, 2002 -
(Dollars in Thousands) 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 seven weeks before August 19, 2002 are not comparable with
those of the period from August 18, 2002 through June 26, 2004. Accordingly, the
following is a discussion of the remaining components included in the results of
operations of Pro-Fac for fiscal 2003 compared to fiscal 2004.
Equity Income from Birds Eye 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 2004 and 2003, the Cooperative recognized
income, under the equity method, of approximately $3.9 million and $2.1 million,
respectively, from Holdings LLC. The application of the equity method is further
described in "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.
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 note 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. During fiscal
2003, the Cooperative recognized a gain of approximately $3.8 million from this
exchange.
14
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
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 on each October 1, January 1, and April 1.
Pursuant to the Termination Agreement, in fiscal 2004, the Cooperative received
all payments as scheduled. 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 representing Pro-Fac's continuing ownership
percentage is recorded as an adjustment to Pro-Fac's investment in Holdings LLC.
The remaining portion of the payments is recognized as additional gain on the
Transaction with Birds Eye Foods in the period received. Accordingly, in fiscal
2004 and 2003, Pro-Fac recognized approximately $6.1 million and $5.9 million,
respectively, 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" 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 its common equity
ownership, the Cooperative recognized a total gain, in fiscal 2004 and 2003, of
approximately $6.1 million and $10.4 million, respectively.
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 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 2003 growing
season resulted in approximately $0.7 million in income for fiscal 2004. 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 $1.1 million and $1.4 million for fiscal 2004 and 2003,
respectively. 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 2004 and 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.
This liability was paid in fiscal year 2004. 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 11. 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).
15
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 further
discussion of Pro-Fac's tax matters is included in "NOTE 7. Income Taxes" 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:
June 30, 2002 -
(Dollars in Thousands) 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 of Business
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 Birds Eye 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 $2.1 million, from Holdings LLC. The
application of the equity method takes into account 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
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.
16
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 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" 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 its 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 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
11. 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
a non-cash goodwill impairment charge. A further discussion of Pro-Fac's tax
matters is included in "NOTE 7. Income Taxes" under "Notes to Consolidated
Financial Statements" in Part II, Item 8 of this Report.
17
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 Issue No. 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
is recorded as an adjustment to Pro-Fac's investment in Holdings LLC. The
remaining portion is recorded as a gain. Pro-Fac also records its share of the
earnings of Holdings LLC under the equity method of accounting. Pro-Fac's share
of the earnings is after the preferred return on Holdings LLC's preferred units
and accretion recorded by Holdings LLC.
Prior to the Transaction the results of the Cooperative were consolidated with
its then wholly-owned subsidiary, Birds Eye Foods. For fiscal 2002, 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 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.
18
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 ($0.7 million), 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 $2.0 million installment payment 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 with interest at 10 percent per annum, until August 19, 2007, under the
Credit Agreement with Birds Eye Foods and amounts available from Manufacturers
and Traders Trust Company ("M&T Bank") as discussed below.
The Cooperative may borrow up to $2.0 million under the terms of a line of
credit with 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 60 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 26, 2004, there was no balance outstanding under the M&T Line of
Credit. 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.
19
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 provided Pro-Fac certain administrative and other
services until August 19, 2004. Since the termination of that Agreement, Pro-Fac
pays for the services previously provided under that Agreement, including
salary, administrative and other expenses. The Cooperative believes it has
adequate cash resources to fund these 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
stock were $8,134,440, $8,367,570 and $8,369,940 in fiscal 2004, 2003 and 2002,
respectively.
A discussion of "Consolidated Statement of Cash Flows" for the year ended June
26, 2004 follows:
Net cash provided by operating activities of $1.8 million for fiscal 2004
primarily represents the timing of cash receipts from customers other than Birds
Eye Foods and related cash payments to member growers.
Net cash provided by investing activities for fiscal 2004 was $10.0 million
related to the receipt by the Cooperative of $10.0 million from Birds Eye Foods
under the Termination Agreement.
Net cash used in financing activities includes borrowings from Birds Eye Foods
($0.3 million) under the terms of the Credit Agreement offset by payments to M&T
Bank ($0.5 million) under the M&T Line of Credit, repurchases of common stock
($0.5 million) and dividends paid ($8.1 million) by the Cooperative during
fiscal 2004.
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 and 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 ($0.6 million) payments and will be
withheld from the July 2004 ($0.7 million) CMV payments. The Board of Directors
of Pro-Fac will review this recommendation annually.
Pro-Fac believes that its sources of cash described above will be sufficient to
fund its operations and meet its cash requirements for at least the next 12
months. Pro-Fac's ability to fund these requirements will depend on Pro-Fac's
future operations, performance and cash flow and is subject to prevailing
economic conditions and financial, business and other factors, some of which are
beyond Pro-Fac's control.
Pro-Fac guarantees certain obligations of Birds Eye Foods and GLK, LLC. Set
forth below is a schedule of the obligations guaranteed by Pro-Fac at June 26,
2004:
(Dollars in Millions)
Contractual Obligations Guaranteed Expiration
- ---------------------------------- -------------
Senior Subordinated Notes - 11 7/8 Percent $51.4 November 2008
Subordinated Promissory Note 38.8 November 2008
OTHER MATTERS
Guarantees and Indemnifications: Pro-Fac is a guarantor, under an Indenture
dated November 18, 1998, between Birds Eye Foods, the Guarantors named therein
and IBJ Schroder Bank & Trust Company, Inc., as trustee, which Indenture was
amended by a First Supplemental Indenture dated July 22, 2002, among Birds Eye
Foods, the Guarantors named therein and The Bank of New York (as successor
trustee to IBJ Schroder Bank & Trust Company), as trustee, and as further
amended by a Second Supplemental Indenture dated March 1, 2003, of Birds Eye
Foods' obligations under its 11 7/8 percent Senior Subordinated Notes issued by
Birds Eye Foods in fiscal 1999 in the original aggregate principal amount of
$200.0 million. On November 24, 2003, Birds Eye Foods repaid $150.0 million of
these notes. The principal amount is due November 1, 2008. Interest on the Notes
accrues at the rate of 11 7/8 percent per annum and is payable semi-annually in
arrears on May 1 and November 1. Pro-Fac, jointly and severally, guarantees
Birds Eye Foods' obligations under the 11 7/8 percent Senior Subordinated Notes,
including the payment in full when due of all principal and interest on the 11
7/8 percent Senior Subordinated Notes at maturity or otherwise and, in the event
of any extension of time of payment or renewal of any of the 11 7/8 percent
Senior Subordinated Notes, that the Notes will be promptly paid in full when due
pursuant to the terms of any such extension or renewal. In the event of such
shortfall, Pro-Fac would be required to pay any interest payments due as well as
any unpaid principal balance due on the 11 7/8 percent Senior Subordinated
Notes. As of June 26, 2004, the outstanding loan amount, including accrued
interest, was $51.4 million.
20
As partial consideration for the acquisition in fiscal 1999 of the frozen and
canned vegetable business of Dean Foods Company, Birds Eye Foods issued to Dean
Foods a Subordinated Promissory Note for $30 million aggregate principal amount
due November 22, 2008. The Subordinated Promissory Note is currently owned by
GLK, LLC, a New York limited liability company, whose members are Birds Eye
Foods and GLK Holdings, Inc., which is a wholly owned subsidiary of Birds Eye
Foods. Pro-Fac guarantees Birds Eye Foods' obligations under that Note. Interest
on the Subordinated Promissory Note accrues quarterly in arrears, commencing
December 31, 1998, at a rate per annum of 5 percent until November 22, 2003, and
at a rate of 10 percent thereafter. Interest accruing through November 22, 2003
is required to be paid in kind through the issuance by Birds Eye Foods of
additional subordinated promissory notes identical to the Subordinated
Promissory Note. Birds Eye Foods satisfied this requirement through the issuance
of additional promissory notes. Interest accruing after November 22, 2003 is
payable in cash. Pro-Fac, jointly and severally, guarantees Birds Eye Foods'
obligations under the Subordinated Promissory Note, including the payment in
full when due of all principal and interest on the Note. In the event of such
shortfall, Pro-Fac would be required to pay any interest payments due as well as
any unpaid principal balance due on the Note. As of June 26, 2004, the
outstanding loan amount subject to the Cooperative's guarantee included
principal of $30.0 million and interest of $8.8 million.
Historically, when Pro-Fac has sold assets, it may have retained certain
liabilities for known exposures and provided indemnification to the buyer(s)
with respect to future claims for certain unknown liabilities existing, or
arising from events occurring, prior to the sale date, including liabilities for
taxes, legal matters, environmental exposures, labor contingencies, product
liability, and other obligations. Pro-Fac may enter into similar arrangements in
the future. Agreements to provide indemnifications may vary in duration,
generally for two years for certain types of indemnities, to terms for tax
indemnifications that are generally aligned to the applicable statute of
limitations for the jurisdiction in which the tax is imposed, and to terms for
certain liabilities (i.e., warranties of title and environmental liabilities)
that typically do not expire. The maximum potential future payments that the
Cooperative could be required to make under agreements of indemnification are
(or may be) either contractually limited to a specified amount or unlimited. The
maximum potential future payments that the Cooperative could be required to make
under agreements of indemnification are not determinable at this time, as any
future payments would be dependent on the type and extent of the related claims,
and all relevant defenses, which are not estimable. Historically, costs incurred
to resolve claims related to agreements of indemnification have not been
material to the Cooperative's financial position, results of operations or cash
flows.
From time to time, in the ordinary course of its business, Pro-Fac has, or may,
enter into agreements with its customers, suppliers, service providers and
business partners which contain indemnification provisions. Generally, such
indemnification provisions require, the Cooperative to indemnify and hold
harmless the indemnified party(ies) and to reimburse the indemnified party(ies)
for claims, actions, liabilities, losses and expenses in connection with any
personal injuries or property damage resulting from any Pro-Fac products sold or
services provided. Additionally, the Cooperative may from time to time agree to
indemnify and hold harmless its providers of services from claims, actions,
liabilities, losses and expenses relating to their services to Pro-Fac, except
to the extent finally determined to have resulted from the fault of the provider
of services relating to such services. The level of conduct constituting fault
of the service provider will vary from agreement to agreement and may include
conduct which is defined in terms of negligence, gross negligence, willful
misconduct, omissions or other culpable behavior. The term of these
indemnification provisions are generally not limited. The maximum potential
future payments that the Cooperative could be required to make under these
indemnification provisions are unlimited and are not determinable at this time,
as any future payments would be dependent on the type and extent of the related
claims, and all relevant defenses to the claims, which are not estimable.
Historically, costs incurred to resolve claims related to these indemnification
provisions have not been material to the Cooperative's financial position,
results of operations or cash flows.
The Cooperative has by-laws, policies, and agreements under which it indemnifies
its directors and officers from liability for certain events or occurrences
while the directors or officers are, or were, serving at Pro-Fac's request in
such capacities. Pro-Fac indemnifies its officers and directors to the fullest
extent allowed by law. The maximum potential amount of future payments that the
Cooperative could be required to make under these indemnification provisions is
unlimited, but would be affected by all relevant defenses to the claims.
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.
As of the date of this Report, Pro-Fac does not expect to be required to perform
under the guarantees and indemnifications described above.
Capital Expenditures: Except for purchasing computer hardware and software in
fiscal 2005, estimated to be approximately $40,000, in connection with the
termination of the Transitional Services Agreement, the Cooperative does not
expect to have any material capital expenditures for the foreseeable future.
21
Supplemental Information on Inflation: The changes in costs and prices within
the Cooperative's business due to inflation were not significantly different
from inflation in the United States economy as a whole. Levels of capital
investment, pricing and inventory investment were not materially affected by
changes caused by inflation.
New Accounting Pronouncements: In May 2003, the FASB issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS 150 improves the accounting for certain financial
instruments that, under previous guidance, issuers could account for as equity.
The new Statement requires that those instruments be classified as liabilities
in the balance sheet. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003, except for
mandatory redeemable financial instruments of nonpublic entities. The adoption
of SFAS 150 did not have a material impact on the Cooperative's results of
operations or consolidated financial statements.
Contractual Obligations
(Dollars in Thousands) Payments due by period
----------------------------------------------
Less than 1-3 3-5 More than
Total 1 year years years 5 years
------ --------- ----- ----- ---------
Credit facility with Birds Eye Foods, Inc.* $1,000 $ 0 $0 $0 $1,000
Other non-current liabilities 832 832 0 0 0
------ ---- --- --- ------
Total $1,832 $832 $0 $0 $1,000
====== ==== === === ======
* Amounts borrowed are required to be repaid only upon the sale of Pro-Fac's
ownership interest in Holdings, LLC or receipt of a distribution from
Holdings, LLC in connection with the sale of liquidation of all or
substantially all of the assets of Holdings, LLC or one or more of its
subsidiaries. Pro-Fac may voluntarily repay amounts borrowed at any time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Since the Transaction, Pro-Fac is subject to interest rate fluctuations related
to borrowings under the M&T Line of Credit. Amounts borrowed bear interest at
the prime rate. See "NOTE 6. Long-Term Debt" in the Notes to Consolidated
Financial Statements. Information concerning Pro-Fac's use of derivative
instruments and hedging activities prior to August 19, 2002 can be found in
"NOTE 5. Accounting for Derivative Instruments and Hedging Activities" in the
"Notes to Consolidated Financial Statements."
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
ITEM Page
----
Pro-Fac Cooperative, Inc.
Reports of Independent Registered Public Accounting Firms............. 24
Consolidated Financial Statements:
Consolidated Statements of Operations, Allocation of Net Income/
(Loss), and Comprehensive Income (Loss) for the years ended
June 26, 2004, June 28, 2003, and June 29, 2002................. 26
Balance Sheets as of June 26, 2004 and June 28, 2003............... 27
Consolidated Statements of Cash Flows for the years ended June 26,
2004, June 28, 2003, and June 29, 2002.......................... 28
Consolidated Statements of Changes in Shareholders' and Members'
Capitalization and Redeemable Stock for the years ended June 26,
2004, June 28, 2003, and June 29, 2002.......................... 29
Notes to Consolidated Financial Statements......................... 30
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Pro-Fac Cooperative, Inc.
Rochester, New York
We have audited the accompanying balance sheets of Pro-Fac Cooperative, Inc.
(the "Cooperative") as of June 26, 2004 and June 28, 2003, and the related
consolidated statements of operations, allocation of net income, and
comprehensive income, of cash flows, and of changes in shareholders' and
members' capitalization and redeemable stock for each of the two years in the
period ended June 26, 2004. Our audits also included the 2004 and 2003 financial
statement schedules listed in the Index at Item 15. These financial statements
and financial schedules are the responsibility of the Cooperative's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such 2004 and 2003 financial statements present fairly, in all
material respects, the financial position of the Cooperative as of June 26, 2004
and June 28, 2003, and the results of its operations and its cash flows for each
of the two years in the period ended June 26, 2004, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Rochester, New York
September 20, 2004
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Pro-Fac Cooperative, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) on page 56 present fairly, in all material
respects, the financial position of Pro-Fac Cooperative, Inc. and its
subsidiaries the results of their operations and their cash flows for the year
ended June 29, 2002 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 15(a)(2) on page 56
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of
the Cooperative's management; our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audit.
We conducted our audit of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Rochester, New York
August 28, 2002
25
FINANCIAL STATEMENTS
Pro-Fac Cooperative, Inc.
Consolidated Statements of Operations, Allocation of Net Income/(Loss), and
Comprehensive Income (Loss)
(Dollars in Thousands)
Fiscal Years Ended
--------------------------------
June 26, June 28, June 29
2004 2003 2002
-------- -------- ----------
Net sales $ 0 $103,726 $1,010,540
Cost of sales 0 (80,644) (795,297)
------- -------- ----------
Gross profit 0 23,082 215,243
Equity income from Birds Eye Holdings LLC 3,872 2,134 0
Gain from Transaction with Birds Eye Foods, Inc. and related agreements 6,060 10,361 0
Commercial market value adjustment 660 568 0
Selling, administrative, and general expenses (post Transaction) (1,139) (1,433) 0
Selling, administrative, and general expenses (pre Transaction) 0 (15,468) (117,450)
Legal matters and settlement expenses (273) (3,720) 0
Income from joint venture 0 277 2,457
Gain from pension curtailment 0 0 2,472
Restructuring 0 0 (2,622)
Goodwill impairment charge 0 0 (179,025)
------- -------- ----------
Operating income/(loss) 9,180 15,801 (78,925)
Interest income 23 10 0
Interest expense (99) (7,762) (66,420)
------- -------- ----------
Pretax income/(loss) before dividends and allocation of net proceeds 9,104 8,049 (145,345)
Tax (provision)/benefit 0 (59) 28,561
------- -------- ----------
Net income/(loss) $ 9,104 $ 7,990 $ (116,784)
======= ======== ==========
Allocation of Net Income/(Loss):
Net income/(loss) $ 9,104 $ 7,990 $ (116,784)
Dividends on common and preferred stock (8,134) (8,368) (8,370)
------- -------- ----------
Net gain/(deficit) 970 (378) (125,154)
Allocation (to)/from earned surplus/(accumulated deficit) (970) 378 133,622
------- -------- ----------
Net income/(loss) available to members $ 0 $ 0 $ 8,468
======= ======== ==========
Allocation of net income/(loss) available to members:
Payable to members currently $ 0 $ 0 $ 2,117
Allocated to members but retained by the Cooperative:
Qualified retains 0 0 6,351
------- -------- ----------
Net income/(loss) available to members $ 0 $ 0 $ 8,468
======= ======== ==========
Net income/(loss) $ 9,104 $ 7,990 $ (116,784)
Other comprehensive income/(loss):
Unrealized (loss)/gain on hedging activity of equity investee (53) 142 (412)
Minimum pension liability of equity investee (199) (4,584) 0
------- -------- ----------
Comprehensive income/(loss) $ 8,852 $ 3,548 $ (117,196)
======= ======== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
26
Pro-Fac Cooperative, Inc.
Balance Sheets
(Dollars in Thousands)
June 26, June 28
2004 2003
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 3,394 $ 367
Accounts receivable, trade 1,343 0
Account receivable from Birds Eye Foods, Inc. 7,783 8,504
Current portion of transitional services receivable from Birds Eye Foods, Inc. 71 525
Prepaid expenses and other current assets 10 15
--------- ---------
Total current assets 12,601 9,411
Transitional services receivable from Birds Eye Foods, Inc. 0 71
Investment in Birds Eye Holdings LLC 21,497 21,937
Investment in CoBank 0 44
--------- -----