Back to GetFilings.com
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------
FORM 10-K
-------------
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED JUNE 26, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period from __________ to __________
File No. 0-20539
PRO-FAC COOPERATIVE, INC.
(Exact Name of Registrant as Specified in Its Charter)
New York 16-6036816
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification Number)
90 Linden Place, PO Box 682, Rochester, NY 14603
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (716) 383-1850
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
CLASS A CUMULATIVE PREFERRED STOCK
LIQUIDATION PREFERENCE $25.00/SHARE
PAR VALUE $1.00/SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to ITEM 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of
the registrant as of August 28, 1999
COMMON STOCK: $9,515,085
(based upon par value of shares since there is no market for the
Registrant's common stock)
Number of common shares outstanding at August 28, 1999:
COMMON STOCK: 2,040,568
- --------------------------------------------------------------------------------
FORM 10-K ANNUAL REPORT - 1999
PRO-FAC COOPERATIVE, INC.
TABLE OF CONTENTS
PART I
PAGE
ITEM 1. Description of Business
General Development of Business............................................................. 3
Narrative Description of Business........................................................... 4
Financial Information About Industry Segments............................................... 6
Packaging and Distribution.................................................................. 6
Trademarks.................................................................................. 6
Raw Material Sources........................................................................ 7
Environmental Matters....................................................................... 7
Seasonality of Business..................................................................... 7
Practices Concerning Working Capital........................................................ 8
Significant Customers....................................................................... 8
Backlog of Orders........................................................................... 8
Business Subject to Government Contracts.................................................... 8
Competitive Conditions...................................................................... 8
Market and Industry Data.................................................................... 9
New Products and Research and Development................................................... 9
Employees................................................................................... 9
Cautionary Statement on Forward-Looking Statements.......................................... 9
ITEM 2. Description of 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 and Related Security Holder Matters........................ 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...................................... 24
ITEM 8. Financial Statements and Supplementary Data..................................................... 25
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........... 55
PART III
ITEM 10. Directors and Executive Officers of the Registrant.............................................. 56
ITEM 11. Executive Compensation.......................................................................... 59
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................................. 61
ITEM 13. Certain Relationships and Related Transactions.................................................. 63
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 65
Signatures...................................................................................... 68
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Pro-Fac Cooperative, Inc. ("Pro-Fac" or "the Cooperative") is an agricultural
cooperative corporation formed in 1960 under New York law to process and market
crops grown by its members. Pro-Fac crops include fruits (cherries, apples,
blueberries, peaches, and plums), vegetables (snap beans, beets, cucumbers,
peas, sweet corn, carrots, cabbage, squash, asparagus, potatoes, turnip roots,
and leafy greens), and popcorn. Only growers of crops marketed through Pro-Fac
(or associations of such growers) can become members of Pro-Fac; a grower
becomes a member of Pro-Fac through the purchase of common stock. Its
approximately 645 members are growers (or associations of growers) located
principally in New York, Delaware, Pennsylvania, Illinois, Michigan, Washington,
Oregon, Iowa, Nebraska, Florida, and Georgia.
Agrilink Foods, Inc. ("Agrilink"), incorporated in New York in 1961, is a
producer and marketer of processed food products. Agrilink has four primary
product lines including: vegetables, fruits, snacks, and canned meals. The
majority of each of the product lines' net sales is within the United States. In
addition, all of Agrilink's operating facilities, excluding one in Mexico, are
within the United States.
On November 3, 1994, Pro-Fac acquired Agrilink, and Agrilink became a
wholly-owned subsidiary of Pro-Fac. Pro-Fac and Agrilink have a long-standing
contractual relationship pursuant to which Pro-Fac provides crops and financing
to Agrilink, Agrilink provides a market and management to Pro-Fac, and Pro-Fac
shares in the profits of Agrilink. Upon consummation of the acquisition, Pro-Fac
and Agrilink entered into the Pro-Fac Marketing and Facilitation Agreement (the
"Pro-Fac Marketing Agreement").
The Pro-Fac Marketing Agreement provides for Pro-Fac to supply crops and
additional financing to Agrilink, for Agrilink to provide a market and
management services to Pro-Fac, and for Pro-Fac to share in the profits and
losses of Agrilink. Pro-Fac is required to reinvest at least 70 percent of any
additional patronage income in Agrilink. To preserve the independence of
Agrilink, the Pro-Fac Marketing Agreement also requires that certain of the
directors of Agrilink be individuals who are not employees or shareholders of,
or otherwise affiliated with, Pro-Fac or Agrilink ("Disinterested Directors")
and requires that certain decisions be approved by the Disinterested Directors.
Additional patronage income received by Pro-Fac is deductible to Pro-Fac for
federal tax purposes only to the extent distributed to its members. Pro-Fac may
make this distribution to its members through a combination of cash and retains
as long as a minimum of 20 percent of the amount is paid in cash as required by
federal tax law. Pro-Fac has historically paid its members between 20 percent
and 30 percent of additional patronage income in cash and the remaining portion
in retains. Funds made available by the distribution of retains to members in
lieu of cash have historically been reinvested by Pro-Fac in Agrilink. See
further discussion of the relationship with Pro-Fac in NOTE 2 to the "Notes to
Consolidated Financial Statements."
DEAN FOODS VEGETABLE COMPANY: On September 24, 1998, Agrilink acquired the Dean
Foods Vegetable Company ("DFVC"), the frozen and canned vegetable business of
Dean Foods Company ("Dean Foods"), by acquiring all the outstanding capital
stock of Dean Foods Vegetable Company and Birds Eye de Mexico SA de CV (the
"DFVC Acquisition"). In connection with the DFVC Acquisition, Agrilink sold its
aseptic business to Dean Foods. Agrilink paid $360 million in cash, net of the
sale of the aseptic business, and issued to Dean Foods a $30 million unsecured
subordinated promissory note due November 22, 2008 (the "Dean Foods Subordinated
Promissory Note"), as consideration for the DFVC Acquisition. Agrilink had the
right, exercisable until July 15, 1999, to require Dean Foods, jointly with
Agrilink, to treat the DFVC Acquisition as an asset sale for tax purposes under
Section 338(h)(10) of the Internal Revenue Code. On April 15, 1999, Agrilink
paid $13.2 million to Dean Foods and exercised the election.
After the DFVC Acquisition, DFVC was merged into Agrilink. This entity is one of
the leading processors of vegetables in the United States, selling its products
under well-known brand names, such as Birds Eye, Birds Eye Voila!, Freshlike and
Veg-All, and various private labels. Agrilink believes that the DFVC Acquisition
strengthens its competitive position by: (i) enhancing its brand recognition and
market position, (ii) providing opportunities for cost savings and operating
efficiencies and (iii) increasing its product and geographic diversification.
Concurrently with the DFVC Acquisition, Agrilink refinanced its then existing
indebtedness (the "Refinancing"), including its 12 1/4 percent Senior
Subordinated Notes due 2005 (the "Old Notes") and its then existing bank debt.
On August 24, 1998, Agrilink
3
commenced a tender offer (the "Tender Offer") for all the Old Notes and consent
solicitation to certain amendments under the indenture governing the Old Notes
to eliminate substantially all the restrictive covenants and certain events of
default therein. Substantially all of the $160 million aggregate principal
amount of the Old Notes were tendered and purchased by Agrilink for aggregate
consideration of approximately $184 million, including accrued interest of $2.9
million. Agrilink also terminated its then existing bank facility (including
seasonal borrowings) and repaid $176.5 million, excluding interest owed and
breakage fees outstanding thereunder. Agrilink recognized an extraordinary
charge of $18.0 million (net of income taxes) in the first quarter of fiscal
1999 relating to this refinancing.
In order to consummate the DFVC Acquisition and the Refinancing and to pay the
related fees and expenses, Agrilink: (i) entered into a new credit facility (the
"New Credit Facility") providing for $455 million of term loan borrowings (the
"Term Loan Facility") and up to $200 million of revolving credit borrowings (the
"Revolving Credit Facility"), (ii) entered into and drew upon a $200 million
bridge loan facility (the "Bridge Facility") and (iii) issued the $30 million
Subordinated Promissory Note to Dean Foods. The Bridge Facility was repaid
during November of 1998 principally with the proceeds from a new Senior
Subordinated Note Offering (see NOTE 5 to the "Notes to Consolidated Financial
Statements - Debt - Senior Subordinated Notes - 11 7/8 Percent due 2008"). Debt
issue costs of $5.5 million associated with the Bridge Facility were expensed
during the quarter ended December 26, 1998.
The New Credit Facility and the 11 7/8 Percent Senior Subordinated Notes
restrict the ability of Pro-Fac to amend the Pro-Fac Marketing and Facilitation
Agreement. The New Credit Facility and the 11 7/8 Percent Senior Subordinated
Notes also restrict the amount of dividends and other payments that may be made
by Agrilink to Pro-Fac.
AGRIPAC, INC.: PF Acquisition II, Inc. ("PF II") is also a subsidiary of
Pro-Fac. PF II was incorporated in January 1999. Pro-Fac owns 100 percent of the
common stock of PF II, while PFA Northwest Growers Cooperative, Inc., an Oregon
Cooperative, Inc., owns 100 percent of PF II preferred stock.
On February 23, 1999, PF II acquired the frozen vegetable business of Agripac,
Inc. ("Agripac"), an Oregon cooperative. PF II conducts business under the name
AgriFrozen Foods ("AgriFrozen").
On January 4, 1999, Agripac filed a voluntary petition under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the District of
Oregon. On January 22, 1999 Agripac, as debtor-in-possession, filed a motion
with the Bankruptcy Court for authority to sell substantially all of the assets
comprising its frozen food processing business. The bankruptcy court confirmed
the sale of Agripac's frozen food processing assets to AgriFrozen by an order
entered on February 18, 1999.
The contractual relationship between AgriFrozen and Pro-Fac is defined in the
Marketing and Facilitation Agreement. Under that agreement, AgriFrozen will
purchase raw products from Pro-Fac and will process and market the finished
products. AgriFrozen will pay Pro-Fac commercial market value ("CMV") for the
crops supplied by Pro-Fac. In addition, in any year in which AgriFrozen has
earnings on any products sold which were processed from crops supplied by
Pro-Fac, AgriFrozen will distribute such earnings to members of Pro-Fac.
However, in the event AgriFrozen experiences any losses on Pro-Fac products,
AgriFrozen will deduct the losses from the total CMV payable to Pro-Fac. The
agreement permits AgriFrozen to pay 20 percent in cash and retain 80 percent of
its earnings on Pro-Fac products as working capital.
NARRATIVE DESCRIPTION OF BUSINESS
The Cooperative sells products in three principal categories: (i) "branded"
products, which are sold under various trademarks, (ii) "private label"
products, which are sold to grocers who in turn use their own brand names on the
products and (iii) "food service" products, which are sold to food service
institutions such as restaurants, caterers, bakeries, and schools. In fiscal
1999, approximately 60 percent of the Cooperative's net sales were branded and
the remainder divided between private label and food service/industrial. The
Cooperative's branded products are listed under the "Trademarks" section of this
report. The Cooperative's private label products include canned and frozen
vegetables, salad dressings, salsa, fruit fillings and toppings, Southern frozen
vegetable specialty products, and frozen, breaded and battered products which
are sold to customers such as Albertson's, Kroger, Fleming, Piggly Wiggly,
Wal-Mart/Sam's, Safeway, SuperValu, Topco, Wegmans and Winn-Dixie. The
Cooperative's food service/industrial products include salad dressings, pickles,
fruit fillings and toppings, canned and frozen vegetables, frozen Southern
specialties, frozen breaded and battered products, and canned and frozen fruit,
which are sold to customers such as Alliant Food Service, Carvel, Church's,
Disney, Food Service of America, KFC, MBM, McDonald's, PYA, and SYSCO.
4
The Cooperative has four primary product lines: vegetables, fruits, snacks, and
canned meals. A description of the Cooperative's four primary product lines
follows:
VEGETABLES: The vegetable product line consists of canned and frozen vegetables,
chili beans, pickles, and various other products. Additional products include
value-added items such as frozen vegetable blends, and Southern-specialty
products such as black-eyed peas, okra, Southern squash, Southern specialty side
dishes, and stewed tomatoes. Branded products within the vegetable product line
include Birds Eye, Birds Eye Voila!, Freshlike, Veg-All, McKenzies, Brooks Chili
Beans, Farman's and Nalley. In fiscal 1999, vegetable product line net sales
represented approximately 72 percent of the Cooperative's total net sales.
Within this product line net sales of approximately 57 percent represented
branded products, 16 percent represented private label products and 27 percent
represented food service/industrial products.
On September 24, 1998, Agrilink acquired the DFVC frozen and canned vegetable
businesses. DFVC was one of the leading processors of vegetables in the United
States selling its products under well-known brands such as Birds Eye,
Freshlike, and Veg-All, and various private labels.
Effective March 30, 1998, Agrilink acquired the majority of assets and the
business of DelAgra Corp. of Bridgeville, Delaware. DelAgra Corp. was a producer
of private label frozen vegetables.
In the fall of 1997, Agrilink was named the sole supplier of frozen vegetables
for all Sam's club stores across the United States. Shipments began in the
fourth quarter of fiscal 1998, and full distribution occurred in fiscal 1999.
Effective July 1, 1997, Agrilink and Flanagan Brothers, Inc. of Bear Creek,
Wisconsin contributed all their assets involved in sauerkraut production to form
a new sauerkraut company. This new company, Great Lakes Kraut Company LLC,
operates as a New York limited liability company with ownership and earnings
divided equally between the two companies. This joint venture includes the
Silver Floss and Krrrrisp Kraut brands.
In May 1997, Agrilink sold its private label canned vegetable operation to
Seneca Foods, along with its Blue Boy brand. Included in this sale were the
Leicester, New York manufacturing facility and LeRoy, New York distribution
warehouse. The disposal did not include the Greenwood and Silver Floss labels,
or sauerkraut, beets in glass jars, or frozen vegetable businesses. This
transaction also included an agreement requiring Agrilink to handle all
vegetable sourcing for Seneca Foods at its New York plants.
FRUITS: The fruit product line consists of canned and frozen fruits including
fruit fillings and toppings. Branded products within the fruit category include
Comstock and Wilderness. The Cooperative is a major supplier of branded and
private label fruit fillings to retailers and food service institutions such as
restaurants, caterers, bakeries, and schools. In fiscal 1999 fruit product line
net sales represented approximately 9 percent of the Cooperative's total net
sales. Within this product line net sales of approximately 52 percent
represented branded products, 19 percent represented private label products, and
29 percent represented food service/industrial products.
SNACKS: The snacks product line consists of several varieties of potato chips
including regular and kettle fried, as well as popcorn, cheese curls, snack
mixes, and other corn-based snack items. Kettle fried potato chips produce a
potato chip that is thicker and crisper than other potato chips. Items within
this product line are marketed primarily in the Pacific Northwest, Midwest and
Mid-Atlantic states. Branded products within the snack category include Tim's
Cascade Chips, Snyder of Berlin, Husman, La Restaurante, Erin's, Pops-Rite, and
Super Pop. In fiscal 1999 snacks net sales represented approximately 7 percent
of the Cooperative's total net sales.
Effective July 21, 1998, Agrilink acquired J.A. Hopay Distributing Co., Inc.
("Hopay") of Pittsburgh, Pennsylvania. Hopay was a former distributor for Snyder
of Berlin products.
Effective March 10, 1998, Agrilink acquired the majority of the assets and the
business of C&O Distributing Company ("C&O") of Canton, Ohio. C&O was a former
distributor for Snyder of Berlin products.
CANNED MEALS: The canned meal product line includes canned meat products such as
chilies, stews, soups, and various other ready-to-eat prepared meals. Items
within this product line are marketed primarily in the Pacific Northwest.
Branded products within the canned meal category include Nalley. Branded net
sales represent approximately 75 percent of total canned meals net sales. In
fiscal 1999 canned meals net sales represented approximately 5 percent of the
Cooperative's total net sales.
5
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The business of the Cooperative is principally conducted in four industry
segments: vegetables, fruits, canned meals, and snacks. The financial statements
for the fiscal years ended June 26, 1999, June 27, 1998, and June 28, 1997,
which are included in this report, reflect the information relating to those
segments for each of the Cooperative's last three fiscal years.
PACKAGING AND DISTRIBUTION
The food products produced by the Cooperative are distributed to various
consumer markets in all 50 states. International sales account for a small
portion of the Cooperative's activities. Vegetables, fruits, and canned meals
are primarily sold through food brokers who sell primarily to supermarket chains
and various institutional entities. Snack products are primarily marketed
through distributors (some of which are owned and operated by the Cooperative)
who sell directly to retail outlets in the Midwest, Mid-Atlantic and Pacific
Northwest. Customer brand operations encompass the sale of products under
private labels to chain stores and under the controlled labels of buying groups.
The Cooperative has developed central storage and distribution facilities that
permit multi-item single shipment to customers in key marketing areas.
Effective March 31, 1998, Agrilink entered into a multiyear logistic agreement
under which GATX Logistics will provide freight management, packaging and
labeling services, and distribution support to and from production facilities
owned by Agrilink in and around Coloma, Michigan. The agreement included the
sale of Agrilink's labeling equipment and distribution center.
On June 27, 1997, Americold acquired Agrilink's frozen foods distribution center
in Montezuma, Georgia. In addition, the two companies entered into a long-term
logistics agreement under which Americold manages this facility and all frozen
food transportation operations of Agrilink in Georgia and New York.
TRADEMARKS
The major brand names under which the Cooperative markets its products are
trademarks of the Cooperative. Such brand names are considered to be of material
importance to the business of the Cooperative since they have the effect of
developing brand identification and maintaining consumer loyalty. There are
trademark registrations for substantially all of the trademarks. These trademark
registrations are of perpetual duration so long as they are periodically
renewed. It is the Cooperative's intent to maintain its trademark registrations.
The major brand names utilized by the Cooperative are:
PRODUCT LINE BRAND NAME
- ------------ --------------------------------------------------------------------------
Vegetables Birds Eye, Voila!(1), Freshlike, Veg-All, Brooks, Chill-Ripe, Comstock,
Greenwood, McKenzie's, McKenzie's Gold King, Southern Farms, Southland,
Farman's, Nalley, Pixie, Thank You, Silver Floss(2), Krrrrisp Kraut(2)
Fruits Birds Eye, Chill-Ripe, Comstock, Globe, McKenzies, Orchard Farm, Orchard
Fresh, Pixie, Southern Farms, Thank You, West Bay, Wilderness, Tropic Isle
Snacks Snyder of Berlin, Thunder Crunch, Tim's Cascade Chips, Husman, La Restaurante,
Erin's, Naturally Good, Beehive, Pops-Rite, Savoral, Super Pop
Canned Meals Nalley, Mariners Cove, Riviera
Other Bernstein's, Nalley
(1) An application has been filed and registration is pending.
(2) Represent trademarks of Great Lakes Kraut Company. Agrilink owns a 50
percent interest in this joint venture.
6
RAW MATERIAL SOURCES
Excluding the value of raw agricultural products purchased in conjunction with
the DFVC and AgriFrozen acquisitions, Agrilink acquired approximately 71 percent
of its raw agricultural products for the production of its food products in each
of its four industry segments from Pro-Fac. Agrilink and AgriFrozen also
purchased on the open market some crops of the same type and quality as those
purchased from Pro-Fac. Such open market purchases may occur at prices higher or
lower than those paid to Pro-Fac for similar products. See further discussion of
the relationship with Agrilink and AgriFrozen in NOTE 2 to the "Notes to
Consolidated Financial Statements."
The vegetable and fruit portions of the business can be positively or negatively
affected by weather conditions nationally and the resulting impact on crop
yields. Favorable weather conditions can produce high crop yields and an
oversupply situation. This situation typically results in depressed selling
prices and reduced profitability on the inventory produced from that year's
crops. Excessive rain or drought conditions can produce low crop yields and a
shortage situation. This typically results in higher selling prices and
increased profitability. While the national supply situation controls the
pricing, the supply can differ regionally because of variations in weather.
The Cooperative purchases all of its requirements for nonagricultural products,
including containers, in the open market. Although the Cooperative has not
experienced any difficulty in obtaining adequate supplies of such items,
occasional periods of short supply of certain raw materials may occur.
ENVIRONMENTAL MATTERS
The disposal of solid and liquid waste material resulting from the preparation
and processing of foods and the emission of wastes and odors inherent in the
heating of foods during preparation are subject to various federal, state, and
local environmental laws and regulations. Such laws and regulations have had an
important effect on the food processing industry as a whole, requiring
substantially all firms in the industry to incur material expenditures for
modification of existing processing facilities and for construction of new waste
treatment facilities. The Cooperative is also subject to standards imposed by
regulatory agencies pertaining to the occupational health and safety of its
employees. Management believes that continued measures to comply with such laws
and regulations will not have a material adverse effect upon its competitive
position or financial condition.
Among the various programs for the protection of the environment which have been
adopted by the Cooperative to date, the most important for the operations of the
Cooperative are the waste water discharge permit programs administered by the
environmental protection agencies in those states in which the Cooperative does
business and by the federal Environmental Protection Agency. Under these
programs, permits are required for processing facilities which discharge certain
wastes into streams and other bodies of water, and the Cooperative is required
to meet certain discharge standards in accordance with compliance schedules
established by such agencies. The Cooperative has received permits for all
facilities for which permits are required. Each year the Cooperative submits
applications for renewal permits as required for the facilities.
While the Cooperative cannot predict with certainty the effect of any proposed
or future environmental legislation or regulations on its processing operations,
management of the Cooperative believes that the waste disposal systems which are
now in operation or which are being constructed or designed are sufficient to
comply with all currently applicable laws and regulations.
The Cooperative is cooperating with environmental authorities in remedying
various minor matters at several of its plants. Such actions are being conducted
pursuant to procedures approved by the appropriate environmental authorities at
a cost that is not expected to be material.
Expenditures related to environmental programs and facilities have not had, and
are not expected to have, a material effect on the earnings of the Cooperative.
In fiscal 1999, total capital expenditures of Pro-Fac were $23.8 million of
which approximately $2.2 million was devoted to the construction of
environmental facilities. The Cooperative estimates that the environmental
capital expenditures will be approximately $0.9 million for the 2000 fiscal
year. However, there can be no assurance that expenditures will not be higher.
SEASONALITY OF BUSINESS
From the point of view of sales, the business of the Cooperative is not highly
seasonal, since the demand for its products is fairly constant throughout the
year. Exceptions to this general rule include some products that have higher
sales volume in the cool weather
7
months (such as canned and frozen fruits and vegetables, chili, and fruit
fillings and toppings), and others that have higher sales volume in the warm
weather months (such as potato chips and salad dressings). Since many of the raw
materials processed by Agrilink and AgriFrozen are agricultural crops,
production of these products is predominantly seasonal, occurring during and
immediately following the harvest seasons of such crops.
PRACTICES CONCERNING WORKING CAPITAL
Agrilink and AgriFrozen must maintain substantial inventories throughout the
year of finished products produced from seasonal raw materials. These
inventories are generally financed through seasonal borrowings.
The Revolving Credit Facility is available to Agrilink and is used primarily for
seasonal borrowing, the amount of which fluctuates during the year. A short-term
line of credit is also available to AgriFrozen. AgriFrozen's obligations under
its line of credit are not guaranteed by Pro-Fac or Agrilink and are expressly
non-recourse as to Pro-Fac and Agrilink.
Both the maintenance of substantial inventories and the practice of seasonal
borrowing are common to the food processing industry.
SIGNIFICANT CUSTOMERS
The Cooperative's industry segments are not dependent upon the business of a
single customer or a few customers. The Cooperative does not have any customers
to whom sales are made in an amount which equals 10 percent or more of the
Cooperative's net sales.
BACKLOG OF ORDERS
Backlog of orders has not historically been significant in the business of the
Cooperative. Orders are filled shortly after receipt from inventories of
packaged and processed foods.
BUSINESS SUBJECT TO GOVERNMENTAL CONTRACTS
No material portion of the business of the Cooperative is subject to
renegotiation of contracts with, or termination by, any governmental agency.
COMPETITIVE CONDITIONS
All products of the Cooperative, particularly branded products, compete with
those of national and major regional food processors under highly competitive
conditions. The principal methods of competition in the food industry are a
ready availability of a broad line of products, product quality, price, and
advertising and sales promotion.
Quality of product and uniformity of quality are important methods of
competition. Sourcing of product from the members of Pro-Fac allows control over
the quality and uniformity of much of the raw product purchased. The members of
Pro-Fac generally operate relatively large production operations with emphasis
on mechanized growing and harvesting techniques. This factor is also an
advantage in producing uniform, high-quality food products.
The Cooperative's pricing is generally competitive with that of other food
processors for products of comparable quality. Branded products are marketed
under national and regional brands. In fiscal 1999, marketing programs for
national brands focused primarily on the nationwide product launch of Birds
Eye's Voila! The national advertising campaign included television, magazines,
coupons, and in-store promotions. Marketing programs for regional brands are
focused on local tastes and preferences as a means of developing consumer brand
loyalty. Regional advertising campaigns included magazines, coupons, and
in-store promotions.
Although the relative importance of the above factors may vary between
particular products or customers, the above description is generally applicable
to all of the products of the Cooperative in the various markets in which they
are distributed.
Profit margins for fruits and vegetables are subject to industry supply and
demand fluctuations, attributable to changes in growing conditions, acreage
planted, inventory carryover, and other factors. The Cooperative has endeavored
to protect against changing growing conditions through geographical expansion of
its sources of supply.
8
The percentage of sales under brand names owned and promoted by the Cooperative
amount to approximately 60 percent; sales to the food service/industrial
represent approximately 25 percent; and private label sales currently represent
approximately 15 percent.
An estimate of the number of competitors in the markets served by the
Cooperative is very difficult. Currently, nearly all products sold by the
Cooperative compete with the nationally advertised brands of the leading food
processors, including Del Monte, Green Giant, Heinz, Frito-Lay, Kraft, Vlasic,
and similar major brands, as well as with the branded and private label products
of a number of regional processors, many of which operate only in portions of
the marketing area served by the Cooperative.
Management believes that the addition of the Birds Eye, Birds Eye Voila!,
Freshlike, and Veg-All brands to Agrilink's portfolio has enhanced its existing
business and provides for significant opportunity for growth.
MARKET AND INDUSTRY DATA
Unless otherwise stated herein, industry and market share data used throughout
this Form 10-K was derived from industry sources believed by the Cooperative to
be reliable. Such data was obtained or derived from consultants' reports and
industry publications. Consultants' reports and industry publications generally
state that the information contained therein has been obtained from sources
believed to be reliable, but that the accuracy and completeness of such
information is not guaranteed. The Cooperative has not independently verified
such industry, market share, and brand awareness data and makes no
representation to its accuracy.
NEW PRODUCTS AND RESEARCH AND DEVELOPMENT
The amount expensed during the last three fiscal years on Cooperative-sponsored
and customer-sponsored research activities relating to the development of new
products or the improvement of existing products has not been material, and the
number of employees engaged full-time in such research activities has also not
been material.
In conjunction with the DFVC Acquisition, Agrilink, however, acquired a
technical center located in Green Bay, Wisconsin that is responsible for new
product development, quality assurance, and engineering. Approximately 25
employees are employed within this facility. Agrilink follows a four-stage new
product development process as follows: screening, feasibility, development, and
commercialization. This new product development process ensures input from
consumers, customers, and internal functional areas before a new product is
brought to market.
The Cooperative also focuses on the development of related products or
modifications of existing products for the Cooperative's brands and customized
products for the Cooperative's private label and food service businesses.
During fiscal 1999, Birds Eye's Voila!, a frozen all-in-one meal product that
includes vegetables, pasta, seasonings, and bite sized pieces of grilled chicken
breast in a variety of flavors was introduced. Fiscal 1999 net sales for Voila!
were approximately $74.8 million.
EMPLOYEES
As of June 26, 1999, the Cooperative had 6,333 full-time employees, of whom
5,145 were engaged in production and the balance in management, sales and
administration. As of that date, the Cooperative also employed approximately
1,877 seasonal and other part-time employees, almost all of whom were engaged in
production. Most of the production employees are members of various labor
unions. The Cooperative believes its current relationship with its employees is
good. See further discussion at NOTE 11 to the "Notes to Consolidated Financial
Statements."
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, Agrilink, AgriFrozen, and/or the Cooperative make oral and
written statements that may constitute "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995 (the "Act") or by the
Securities and Exchange Commission ("SEC") in its rules, regulations, and
releases. Agrilink, AgriFrozen, and/or the Cooperative desire to take advantage
of the "safe harbor" provisions in the Act for forward-looking statements made
from time to time, including, but not limited to, the forward-looking
information contained in the Management's Discussion and Analysis (pages 14 to
24) 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 Agrilink, AgriFrozen, and/or 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. Among the factors that could impact
the Cooperative's ability to achieve its goals are:
the impact of strong competition in the food industry;
the impact of weather on the volume and quality of raw product;
9
the inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer acceptance;
the continuation of the Cooperative's success in integrating operations
(including whether the anticipated cost savings in connection with
acquisitions will be realized and the timing of any such realization) and
the availability of acquisition and alliance opportunities;
the Cooperative's ability to achieve the gains in productivity and
improvements in capacity utilization; and
the Cooperative's ability to service debt.
ITEM 2. DESCRIPTION OF PROPERTIES
All plants, warehouses, office space and other facilities used by the
Cooperative in its business are either owned by Agrilink, AgriFrozen, or leased
from third parties. All of the properties owned by Agrilink and AgriFrozen are
subject to mortgages in favor of their respeoctive primary lender. In general,
the properties include offices, processing plants and warehouse space. Some
processing plants are located in rural areas that are convenient for the
delivery of crops. The Cooperative also has warehouse locations dispersed to
facilitate the distribution of finished products. Agrilink and AgriFrozen
believe that their facilities are in good condition and suitable for operations.
Four of Agrilink's properties are held for sale. These properties are located in
Alton, New York; Rushville, New York; Brillion, Wisconsin; and Fort Atkinson,
Wisconsin.
The following table describes all material facilities leased or owned by the
Cooperative (other than the properties held for sale, certain public warehouses
leased by the Cooperative from third parties from time to time, and facilities
owned by Agrilink's joint venture, Great Lakes Kraut Company). Except as
otherwise noted, each facility set forth below is owned by the Cooperative.
FACILITIES UTILIZED BY THE COOPERATIVE
Type of Property (By Product Line) Location Square Feet
- ---------------------------------- -------- -----------
VEGETABLES:
- -----------
Warehouse Sodus, MI 243,138
Warehouse and office, public storage facility(1) Vineland, NJ 191,710
Freezing plant, warehouse, office and dry storage Barker, NY 123,600
Freezing plant Bergen, NY 138,554
Cold storage and repack facility and public storage warehouse Brockport, NY 429,052
Canning plant and warehouse, freezing plant Oakfield, NY 263,410
Office, freezing plant, cold storage and repackaging facility Montezuma, GA 591,300
Office, freezing plant and cold storage Alamo, TX 114,446
Office, freezing plant and cold storage Bridgeville, DE 104,383
Canning plant and warehouse Arlington, MN 237,206
Canning plant and warehouse Cambria, WI 135,500
Freezing plant and repack plant Celaya, Mexico 318,620
Freezing plant and distribution center Darien, WI 348,800
Freezing plant, repack and warehouse Fairwater, WI 178,298
Repack plant and distribution center Fulton, NY 263,268
Canning and freezing plant and office Green Bay, WI 492,446
Canning plant and warehouse Hortonville, WI 78,000
Freezing plant and repack plant(1) Oxnard, CA 39,082
Repack plant(1) San Antonio, TX 20,445
Freezing plant and warehouse Uvalde, TX 146,625
Freezing plant, repack and warehouse Watsonville, CA 207,600
Freezing plant, repack and warehouse Waseca, MN 258,475
Labeling plant and distribution center(1) Fond du Lac, WI 330,000
Freezing plant and warehouse Salem, OR 110,000
10
FACILITIES UTILIZED BY THE COOPERATIVE
Type of Property (By Product Line) Location Square Feet
- ---------------------------------- --------- ------------
VEGETABLES (CONTINUED):
- ----------
Frozen repacking facility, warehouse, and distribution center(1) Woodburn, OR 385,000
Office building Salem, OR 8,981
Freezing plant, warehouse, and office Walla Walla, WA 102,000
Freezing and repackaging plant(1) Grandview, WA 62,069
Receiving and grading station(1) Cornelius, OR 11,700
Receiving and grading station(1) Mount Vernon, WA 110,806
Receiving and grading station(1) Aurora, WA 6,800
Office building, warehouse and tank farm Enumclaw, WA 87,313
Freezing and repackaging plant, office and dry storage Woodburn, OR 388,000
Plant, warehouse, and tank yards Tacoma, WA 295,468
FRUITS:
- -------
Canning plant and warehouse Red Creek, NY 153,076
Manufacturing plant and warehouse Fennville, MI 350,000
Canning plant and warehouse Lawton, MI 142,000
SNACKS:
- -------
Manufacturing plant Ridgway IL 50,000
Distribution and warehouse North Bend, NE 50,000
Office, plant and warehouse Berlin, PA 190,225
Administrative, plant, warehouse and distribution center(1) Auburn, WA 34,000
Plant, warehouse and distribution center Auburn, WA 37,442
Office, plant and warehouse Cincinnati, OH 113,576
Distribution center Elwood City, PA 8,000
Distribution center Monessen, PA 10,000
Distribution center Coraopolis, PA 15,000
Distribution center Canton, OH 8,200
CANNED MEALS:
- -------------
Canning plant, warehouse, and distribution center Tacoma, WA 313,488
OTHER:
- ------
Office building, manufacturing plant and warehouse Tacoma, WA 372,164
Parking lot and yards(1) Tacoma, WA 305,470
Office Building - Fuller Building(1) Tacoma, WA 60,000
Headquarters office(1) Rochester, NY 62,500
Note (1): Leased from third parties although certain related equipment is owned
by the Cooperative.
ITEM 3. LEGAL PROCEEDINGS
The Cooperative is party to legal proceedings from time to time in the normal
course of its business. In the opinion of management, any liability that might
be incurred upon the resolution of these proceedings will not, in the aggregate,
have a material adverse effect on either of these businesses, financial
condition, and results of operations. Further, no such proceedings are known to
be contemplated by governmental authorities. The Cooperative maintains general
liability insurance coverage in amounts deemed to be adequate by management.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
There is no trading market for the Cooperative's common stock. Only
member/growers of the Cooperative can own shares of common stock. As of June 26,
1999, there were 645 members of Pro-Fac holding shares of Pro-Fac Class A Common
Stock and no members holding shares of Pro-Fac Class B Common Stock. In fiscal
1999 and 1998, dividends on Class A Common Stock were paid at a rate of 5.0
percent.
The information required by this item is contained in NOTE 9 to the "Notes to
Consolidated Financial Statements," at "Quarterly Financial Data," and at
"Selected Financial Data."
During fiscal 1999, the Cooperative issued shares of its Class A Cumulative
Preferred Stock in exchange for shares for its Non-cumulative Preferred Stock,
on a share-for-share basis. Such exchanges are exempt from registration under
section 3(a)(9) of the Securities act of 1933. The dates and amounts of the
exchanges are set forth below:
Date Number of Shares Value of Shares
--------------- ---------------- ---------------
January 8, 1999 3,530 $ 88,250
April 8, 1999 1,140 28,500
June 24, 1999 696 17,400
------ ---------
Total 5,366 $ 134,150
====== =========
The New Credit Facility restricts the amount of dividends and other
distributions that may be made by Pro-Fac to its stockholders. The 11 7/8
Percent Senior Subordinated Notes restrict the amount of dividends and other
payments that may be made by Agrilink.
12
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED OPERATING DATA:
(DOLLARS IN THOUSANDS, EXCEPT CAPITAL STOCK DATA)
Fiscal Year Ended June
----------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ------------ --------- ----------
Net sales $1,238,946 $719,665 $730,823 $ 739,094 $ 522,413
Cost of sales (877,438) (524,082) (539,081) (562,926) (384,838)
---------- -------- -------- -------- ----------
Gross profit 361,508 195,583 191,742 176,168 137,575
Income from Agrilink prior to acquisition 0 0 0 0 11,239
Interest income 0 0 0 770 4,402
Income from Great Lakes Kraut Company 2,787 1,893 0 0 0
Selling, administrative, and general expenses (291,395) (141,739) (145,214) (151,671) (99,341)
Gains on sales of assets 64,734 0 3,565 0 0
Restructuring charge (5,000) 0 0 (5,871) 0
Additional costs incurred as a result of fire 0 0 0 0 (2,315)
---------- -------- -------- -------- ---------
Operating income 132,634 55,737 50,093 19,396 51,560
Interest expense (67,420) (30,767) (36,473) (41,998) (29,035)
Amortization of debt issue costs (5,500) 0 0 0 0
---------- -------- -------- -------- ---------
Pretax income/(loss) before extraordinary item, cumulative
effect of an accounting change, dividends, and allocation
of net proceeds 59,714 24,970 13,620 (22,602) 22,525
Tax (provision)/benefit (24,746) (7,840) (5,529) 13,071 7,028
---------- -------- -------- -------- --------
Income/(loss) before extraordinary item, cumulative effect
of an accounting change, dividends and allocation
of net proceeds 34,968 17,130 8,091 (9,531) 29,553
Extraordinary item relating to the early extinguishment
of debt (net of income taxes) (18,024) 0 0 0 0
Cumulative effect of an accounting change (net of income taxes) 0 0 4,606 0 0
---------- -------- -------- -------- ---------
Net income/(loss) $ 16,944 $ 17,130 $ 12,697 $ (9,531) $ 29,553
========== ======== ========= ========= =========
Allocation of Net Proceeds:
Net income/(loss) $ 16,944 $ 17,130 $ 12,697 $ (9,531) $ 29,553
Dividends on common and preferred stock (6,734) (6,328) (5,503) (8,993) (4,914)
---------- -------- -------- -------- ---------
Net proceeds/(deficit) 10,210 10,802 7,194 (18,524) 24,639
Allocation (to)/from earned surplus (10,210) (4,662) (3,661) 18,524 (16,964)
---------- -------- -------- -------- ---------
Net proceeds available to members $ 0 $ 6,140 $ 3,533 $ 0 $ 7,675
========== ======== ========= ========= =========
Allocation of net proceeds available to members:
- -----------------------------------------------
Payable to members currently (25% of qualified proceeds
available to members in fiscal 1998 and 1997
and 20% in fiscal 1995) $ 0 $ 1,535 $ 883 $ 0 $ 1,475
Allocated to members but retained by the Cooperative:
- ----------------------------------------------------
Qualified retains 0 4,605 2,650 0 5,900
Non-qualified retains 0 0 0 0 300
---------- -------- -------- --------- ---------
Net proceeds available to members $ 0 $ 6,140 $ 3,533 $ 0 $ 7,675
========== ======== ========= ========== ==========
CMV* $ 62,154 $ 58,530 $ 51,445 $ 44,701 $ 55,855
========== ======== ========= ========== ==========
Net proceeds available to members as a percent of CMV:
- -----------------------------------------------------
Qualified 0.00 10.51% 6.87% 0.00% 13.20%
Non-qualified 0.00 0.00 0.00 0.00 0.54%
---------- -------- --------- --------- ----------
Total net proceeds allocated to members as a
percent of CMV 0.00% 10.51% 6.87% 0.00% 13.74%
========== ======== ========= ========= ==========
Balance Sheet Data:
- ------------------
Working capital $ 237,331 $ 94,103 $ 75,950 $ 103,361 $ 138,945
Ratio of current assets to current liabilities 1.9:1 1.7:1 1.6:1 1.9:1 2.1:1
Total assets $1,196,479 $569,240 $546,677 $ 637,297 $ 689,739
Debt to equity ratio** 4.7:1 1.7:1 1.8:1 2.7:1 2.4:1
Common stock $ 9,979 $ 9,129 $ 8,944 $ 9,185 $ 9,395
Redeemable Preferred $ 261 $ 270 $ 315 $ 334 $ 0
Shareholders' and members' capitalization and
redeemable stock $ 152,111 $141,369 $132,663 $ 126,700 $ 145,228
Total long-term debt and senior subordinated notes
(excludes current portion and capital leases) $ 702,322 $229,937 $229,829 $ 327,683 $ 343,665
Capital Stock Data
Cash dividends paid per share:
Class A Common $ .25 $ .25 $ 0.00 $ .25 $ .2750
Non-Cumulative Preferred $ 1.50 $ 1.50 $ 1.50 $ 1.50 $ 1.69
Class A Cumulative Preferred $ 1.72 $ 1.72 $ 1.72 $ 1.29 $ 0.0
Class B Cumulative Preferred $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 0.0
Average common stock investment per member $ 15,471 $ 14,399 $14,333 $ 14,419 $ 15,032
Number of Members: 645 634 624 637 625
* Payment to the members for CMV was 100 percent of deliveries in fiscal 1999
and 90 percent of deliveries in fiscal 1996.
** For purposes of this calculation, debt includes both current and
non-current debt, and equity includes common stock and redeemable preferred
stock.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The purpose of this discussion is to outline the significant reasons for changes
in the Consolidated Statement of Operations and Net Proceeds from fiscal 1997
through fiscal 1999.
Pro-Fac Cooperative, Inc.'s ("Pro-Fac" or the "Cooperative") wholly-owned
subsidiary, Agrilink Foods, Inc. ("Agrilink") has four primary product lines
including: vegetables, fruits, snacks and canned meals. The Cooperative's
subsidiary, AgriFrozen, has vegetables as its one primary product line. The
majority of each of the product lines' net sales are within the United States.
In addition, all of the Cooperative's operating facilities, excluding one
facility in Mexico, are within the United States.
The vegetable product line consists of canned and frozen vegetables, chili
beans, pickles, and various other products. Branded products within the
vegetable category include Birds Eye, Birds Eye Voila!, Freshlike, Veg-All,
McKenzies, Brooks Chili Beans, Farman's, and Nalley. The fruit product line
consists of canned and frozen fruits including fruit fillings and toppings.
Branded products within the fruit category include Comstock and Wilderness. The
snack product line consists of potato chips, popcorn and other corn-based snack
items. Branded products within the snack category include Tim's Cascade Chips,
Snyder of Berlin, Husman, La Restaurante, Erin's, Beehive, Pops-Rite, and Super
Pop. The canned meal product line includes canned meat products such as chilies,
stews, soups, and various other ready-to-eat prepared meals. Branded products
within the canned meal category include Nalley. The Cooperative's other product
line primarily represents salad dressings. Brand products within this category
include Bernstein's, and Nalley.
The following tables illustrate the Cooperative's results of operations by
product line for the fiscal years ended June 26, 1999, June 27, 1998, and June
28, 1997, and the Cooperative's total assets by product line at June 26, 1999,
and June 27, 1998, and June 28, 1997.
EBITDA(1)(2)
(DOLLARS IN MILLIONS)
Fiscal Years Ended
------------------------------------------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
--------------------- --------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
---- ----- ----- ----- ---- -----
Vegetables 76.0 71.0 25.8 33.4 23.7 32.3
Fruits 11.1 10.4 22.8 29.5 21.9 29.9
Snack 6.0 5.6 9.6 12.4 9.8 13.4
Canned meals 8.6 8.0 9.6 12.4 8.7 11.9
Other 4.2 3.9 2.7 3.5 3.1 4.2
----- ----- ------ ----- ----- ------
Continuing segments 105.9 98.9 70.5 91.2 67.2 91.7
Corporate overhead (2.7) (2.5) (8.5) (11.0) (9.9) (13.5)
----- ----- ------ ----- ---- ------
Continuing operations 103.2 96.4 62.0 80.2 57.3 78.2
Businesses sold(3) 3.9 3.6 15.3 19.8 16.0 21.8
----- ----- ------ ----- ----- ------
Total 107.1 100.0 77.3 100.0 73.3 100.0
===== ===== ====== ===== ===== =====
(1) Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
is defined as the sum of pretax income before dividends, allocation of net
proceeds, extraordinary item and cumulative effect of an accounting change,
interest expense, amortization of debt issue costs associated with the
Bridge Facility, depreciation and amortization of goodwill and other
intangibles.
EBITDA should not be considered as an alternative to net income or cash
flows from operations or any other generally accepted accounting principles
measure of performance or as a measure of liquidity.
EBITDA is included herein because the Cooperative believes EBITDA is a
financial indicator of a Cooperative's ability to service debt. EBITDA as
calculated by the Cooperative may not be comparable to calculations as
presented by other companies.
(2) Excludes the gain on sale of assets, the restructuring charge, and the
extraordinary item relating to the early extinguishment of debt in fiscal
1999. Excludes gain on sales of assets and cumulative effect of an
accounting change in fiscal 1997. See NOTES 1 and 3 to the "Notes to
Consolidated Financial Statements."
(3) Represents the operating results of operations sold. See NOTE 3 to the
"Notes to Consolidated Financial Statements." In addition, in fiscal 1997,
such amount includes final settlement of an insurance claim and a loss on
the disposal of property held for sale.
14
NET SALES
(DOLLARS IN MILLIONS)
Fiscal Years Ended
------------------------------------------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
---------------------- --------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
---- ----- ----- ----- ---- -----
Vegetables 887.2 71.6 280.8 39.0 271.4 37.1
Fruits 111.5 9.0 119.7 16.6 116.7 16.0
Snack 87.9 7.1 83.7 11.6 86.0 11.8
Canned meals 64.2 5.2 64.0 8.9 63.7 8.7
Other 51.0 4.1 58.6 8.2 62.6 8.6
-------- ------ ------- ------ ------ -------
Continuing segments 1,201.8 97.0 606.8 84.3 600.4 82.2
Businesses sold(1) 37.1 3.0 112.9 15.7 130.4 17.8
-------- ------ ------- ------ ------ -------
Total 1,238.9 100.0 719.7 100.0 730.8 100.0
======== ====== ======= ====== ====== =======
(1) Includes net sales of operations sold.
See NOTE 3 to the "Notes to Consolidated Financial Statements."
OPERATING INCOME(1)
(DOLLARS IN MILLIONS)
Fiscal Years Ended
------------------------------------------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
--------------------- ----------------------- ---------------------
% of % of % of
$ Total $ Total $ Total
---- ----- ----- ----- ---- -----
Vegetables 51.5 70.5 15.8 28.4 12.0 25.8
Fruits 8.7 11.9 19.0 34.1 17.4 37.4
Snack 3.5 4.8 7.4 13.3 7.7 16.6
Canned meals 6.7 9.2 7.8 14.0 6.9 14.8
Other 2.6 3.6 0.6 1.0 1.2 2.6
----- ------ ------ ------ ----- ------
Continuing segments 73.0 100.0 50.6 90.8 45.2 97.2
Corporate overhead (2.9) (4.0) (8.7) (15.6) (10.3) (22.2)
----- ------ ------ ------ ----- ------
Continuing operations 70.1 96.0 41.9 75.2 34.9 75.0
Businesses sold(2) 2.9 4.0 13.8 24.8 11.6 25.0
----- ------ ------ ------ ----- ------
Total(3) 73.0 100.0 55.7 100.0 46.5 100.0
===== ===== ====== ===== ===== =======
(1) Excludes the gain on sales of assets, the restructuring charge, and the
extraordinary item relating to the early extinguishment of debt in fiscal
1999. Excludes gain on sale of assets and cumulative effect of an accounting
change in fiscal 1997. See NOTES 1 and 3 to the "Notes to Consolidated
Financial Statements."
(2) Represents the operating results of the operations sold. See NOTE 3 to the
"Notes to Consolidated Financial Statements." In addition, in fiscal 1997,
such amount includes final settlement of an insurance claim and a loss on
the disposal of property held for sale.
(3) Operating income less interest expense (including the amortization of debt
issue costs associated with the Bridge Facility) of $72.9 million, $30.7
million and $36.5 million for the years ended June 26, 1999, June 27, 1998,
and June 28, 1997, respectively, results in pretax income dividends,
allocation of net proceeds, extraordinary item and cumulative effect of an
accounting change. Management does not allocate interest expense and
corporate overhead to product lines when evaluating product line
performance.
15
TOTAL ASSETS
(DOLLARS IN MILLIONS)
Fiscal Years Ended
------------------------------------------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
-------------------- --------------------- -------------------------
% of % of % of
$ Total $ Total $ Total
---- ----- ----- ----- ---- -----
Vegetables 945.1 79.0 284.5 50.0 234.6 42.9
Fruits 86.0 7.2 79.1 13.8 82.6 15.1
Snacks 37.5 3.1 37.3 6.6 34.5 6.3
Canned Meals 43.8 3.7 45.3 8.0 47.8 8.7
Other 40.3 3.3 43.3 7.5 51.5 9.5
------- ----- ------ ----- ----- ------
Continuing segments 1,152.7 96.3 489.5 85.9 451.0 82.5
Corporate 41.8 3.5 39.1 6.9 46.6 8.5
Businesses sold(1) 1.1 0.1 37.9 6.7 48.1 8.8
Assets held for sale 0.9 0.1 2.7 0.5 0.9 0.2
------- ----- ------ ----- ----- ------
Total 1,196.5 100.0 569.2 100.0 546.6 100.0
======= ===== ===== ===== ===== ======
(1) Includes the assets of operations sold. See NOTE 3 to the "Notes to
Consolidated Financial Statements."
CHANGES FROM FISCAL 1998 TO FISCAL 1999
The Cooperative's fiscal 1999 results have been impacted by two acquisitions.
These include the acquisition of the Dean Foods Vegetable Company ("DFVC") and
the acquisition of Agripac, Inc. ("Agripac").
On September 24, 1998, Agrilink acquired DFVC, the frozen and canned vegetable
business of Dean Foods Company ("Dean Foods"), by acquiring all the outstanding
capital stock of Dean Foods Vegetable Company and Birds Eye de Mexico SA de CV
(the "DFVC Acquisition"). In connection with the DFVC Acquisition, Agrilink sold
its aseptic business to Dean Foods. Agrilink paid $360 million in cash, net of
the sale of the aseptic business, and issued to Dean Foods a $30 million
unsecured subordinated promissory note due November 22, 2008 (the "Dean Foods
Subordinated Promissory Note"), as consideration for the DFVC Acquisition. After
the Acquisition, DFVC was merged into Agrilink. This entity has been one of the
leading processors of vegetables in the United States, selling its products
under well-known brand names, such as Birds Eye, Birds Eye Voila!, Freshlike and
Veg-All, and various private labels.
On February 23, 1999, the Cooperative along with Northwest Growers Cooperative,
Inc., an Oregon cooperative, purchased the Agripac frozen vegetable processing
business.
The Cooperative believes that these acquisitions strengthened its competitive
position by: (i) enhancing its brand recognition and market position, (ii)
providing opportunities for cost savings and operating efficiencies and (iii)
increasing its product and geographic diversification.
Net income for fiscal 1999 of $17.0 million represented a $0.1 million decrease
over fiscal 1998 net income of $17.1 million. Comparability of net income is,
however, difficult because fiscal 1999 was impacted by acquisitions, gains on
sale of assets, a restructuring charge, an increase in interest expense and
depreciation expense associated with the acquisition, the amortization of debt
issue costs associated with the Bridge Facility, and the extraordinary item
relating to the early extinguishment of debt. Accordingly, management believes,
to summarize results, an evaluation of EBITDA from continuing operations, as
presented on page 14 in the EBITDA table inlcuded in this report, is more
appropriate because it allows the business to be reviewed in a more consistent
manner. While a further description of net sales and operating income for each
of its product lines is outlined below, in summary, EBITDA from continuing
operations increased a net $41.2 million or 66.5 percent, to $103.2 million in
the current fiscal year from $62.0 million in the prior fiscal year.
The vegetable product line accounts for a $50.2 million increase of the overall
EBITDA increase and is primarily attributable to the DFVC and Agripac
acquisitions. While this product line has benefited from the inclusion of the
Birds Eye, Freshlike, and Veg-All
16
brands, the category has been negatively impacted by market conditions within
the frozen private label segment as a result of lower demand, industry
oversupply, and subsequent declines in pricing.
The Company's fruit category showed a decrease of approximately $11.7 million
primarily due to a change in Agrilink's pricing and promotional strategy within
this product line.
Snacks were impacted by competitive pricing within the popcorn product line as
an increase in production from foreign countries such as Argentina which reduced
selling prices. In addition, the potato chip category was negatively impacted by
a strike at the Snyder of Berlin facility which resulted in an approximate $2.5
million cost (see further discussion at "Other Matters" to the Management's
Discussion and Analysis of Financial Condition and Results of Operations).
Canned meals showed a modest decline due primarily to the recognition in fiscal
1998 of a favorable settlement of an outstanding tax claim regarding meat
products.
The other product category showed an improvement due primarily to reductions in
costs and promotional spending.
NET SALES: Total net sales increased $519.2 million or 72.1 percent, to $1,238.9
million in fiscal 1999 from $719.7 million in fiscal 1998. Excluding businesses
sold, net sales increased by $595.0 million, or 98.1 percent, to $1,201.8
million in fiscal 1999 from $606.8 million in fiscal 1998.
The increase in net sales from continuing operations is primarily attributable
to an increase of $554.5 million and $28.4 million within the vegetable product
line as a result of the DFVC and Agripac acquisitions, respectively. In
addition, during fiscal 1998, Agrilink became the sole supplier of frozen
vegetables for the Sam's national club stores. Full distribution under this
contract was achieved in fiscal 1999. These improvements were offset by a
decline in the frozen private label segment. Beginning in January of 1999 and
continuing to date, the frozen private label frozen vegetable segment, as
reported by several sources, has experienced a decline in unit sales of
approximately 10 percent.
Net sales for the fruit product line decreased $8.2 million in fiscal 1999 to
$111.5 million from $119.7 million in fiscal 1998. As a result of a change in
pricing and promotional strategy, Agrilink experienced a decline in its branded
pie filling volume and an increase in its private label volume throughout fiscal
1999. Management believes that a return to its historic pricing and promotional
strategy will result in improvements in fiscal 2000.
Net sales for snacks increased by $4.2 million in fiscal 1999 as a result of
unit volume primarily within the potato chip category.
The other product category showed a decline of $7.6 million. This category,
which primarily represents salad dressings, was impacted by competitive
pressures on pricing and volume.
OPERATING INCOME: Operating income of $132.6 million in fiscal 1999 increased
approximately $76.9 million from $55.7 million in fiscal 1998. Excluding the
impact of businesses sold and other non-recurring items as identified on page
15, operating income from continuing operations increased from $41.9 million in
fiscal 1998 to $70.1 million in fiscal 1999. This represented an improvement of
$28.2 million or 67.3 percent.
Vegetables showed improvements of $35.7 million or 225.9 percent. The vegetable
product lines obtained through the DFVC and Agripac acquisitions accounted for
$54.7 million and $2.1 million of this increase, respectively, while preexisting
vegetable operations showed a decline of $21.1 million. The preexisting
vegetable operations showed margin erosion resulting from the downward trend in
the private label frozen vegetable market highlighted above. In addition, the
reduction in the volume of frozen vegetable product repackaged and sold resulted
in a higher per unit cost. Additionally, incremental warehousing costs (storage,
handling, and shipping) of approximately $5.0 million were incurred to
consolidate the operations of Agrilink's frozen vegetable business as part of
the DFVC Acquisition.
Fruits showed a decline of $10.3 million from $19.0 million in fiscal 1998 to
$8.7 million in fiscal 1999. Pie filling accounted for a decline of $6.1 million
due to the change in pricing and promotional strategy discussed above.
Applesauce showed declines of $1.4 million due to the reduction in pricing
resulting from an increased industry supply. The remaining decline resulted from
incremental costs associated with a new product launch.
17
Snacks showed a decline of $3.9 million from $7.4 million in fiscal 1998 to $3.5
million in fiscal 1999. The decline resulted from costs associated with the
strike at the Snyder of Berlin facility of approximately $2.5 million (see
further discussion at "Other Matters" to the Management's Discussion and
Analysis of Financial Condition and Results of Operations) and the competitive
pressures within the popcorn category.
Canned meals showed a modest decline due primarily to the recognition in fiscal
1998 of a favorable settlement of an outstanding tax claim regarding meat
products.
The other product category showed an improvement due primarily to reductions in
costs and promotional spending.
GAIN ON SALE OF ASSETS: In conjunction with the DFVC Acquisition, Agrilink sold
its aseptic business to Dean Foods. The purchase price of $80 million was based
upon an appraisal completed by an independent appraiser. The gain on the sale
was approximately $61.2 million.
On January 29, 1999, Agrilink sold the Adams brand peanut butter operation to
the J.M. Smucker Company. The Company received proceeds of approximately $13.5
million which were applied to outstanding bank loans. A gain of approximately
$3.5 million was recognized on this transaction.
RESTRUCTURING: Implementation of a corporate-wide restructuring program resulted
in a charge of $5.0 million in the third quarter of fiscal 1999. The overall
objectives of the plan are to reduce expenses, improve productivity, and
streamline operations. The total restructuring charge was primarily comprised of
employee termination benefits (which are estimated to improve annual earnings by
approximately $8.0 million). Efforts have focused on the consolidation of
operating functions and the elimination of approximately 5 percent of the work
force. Reductions in personnel will include operational and administrative
positions. During the fourth quarter of fiscal 1999, approximately $1.0 million
of this charge was liquidated. The majority of the remaining benefits will be
liquidated during fiscal 2000. See further discussion at NOTE 1 to the "Notes to
Consolidated Financial Statements."
INCOME FROM GREAT LAKES KRAUT LLC: This amount represents earnings received from
the investment in Great Lakes Kraut Company, LLC, a joint venture formed between
Agrilink and Flanagan Brothers, Inc. on July 1, 1997. The increase of $0.9
million over the prior year is attributable to increases in volume and
improvements in pricing. See further discussion at NOTE 3 to the "Notes to
Consolidated Financial Statements."
INTEREST EXPENSE: Interest expense increased $36.6 million to $67.4 million in
fiscal 1999 from $30.8 million in fiscal 1998. This increase is associated with
debt utilized to finance the DFVC and Agripac acquisitions and higher levels of
seasonal borrowings to fund changes in operating activities due to the increase
in the Cooperative's size.
AMORTIZATION OF DEBT ISSUE COSTS ASSOCIATED WITH THE BRIDGE FACILITY: In order
to consummate the DFVC Acquisition, Agrilink entered into a $200 million bridge
loan facility (the "Bridge Facility"). The Bridge Facility was repaid with the
proceeds from the new senior subordinated note offering (see NOTE 5 to the
"Notes to Consolidated Financial Statements" - "Debt - Senior Subordinated Notes
11 7/8 Percent due 2008"). Debt issuance costs associated with the Bridge
Facility were $5.5 million and were fully amortized during the second quarter
of fiscal 1999.
TAX PROVISION: The provision for taxes increased $16.9 million to $24.7 million
in fiscal 1999 from $7.8 million in fiscal 1998. Of this net increase, $25.2
million is attributable to the provision associated with the gain on sale of
assets. This amount was offset by a $2.1 million benefit resulting from the
amortization of debt issue costs associated with the Bridge Facility. The
remaining variance is impacted by the change in earnings before tax. The
Cooperative's effective tax rate is impacted by the net proceeds distributed to
members and the non-deductibility of certain amounts of goodwill. A further
discussion of tax matters is included at NOTE 6 to the "Notes to Consolidated
Financial Statements."
EXTRAORDINARY ITEM RELATING TO THE EARLY EXTINGUISHMENT OF DEBT: Concurrently
with the DFVC Acquisition, Agrilink refinanced its then existing indebtedness,
including its 12 1/4 percent Senior Subordinated Notes due 2005 and its then
existing bank debt. Premiums and breakage fees associated with early redemptions
and other fees incurred amounted to $18.0 million (net of income taxes of $10.4
million).
18
CHANGES FROM FISCAL 1997 TO FISCAL 1998
Net income for fiscal 1998 of $17.1 million represented a $4.4 million or 34.6
percent increase over fiscal 1997 net income of $12.7 million. As an overall
summary, management analyzes its business utilizing EBITDA, as management
believes EBITDA is a financial indicator of its ability to service debt. Total
EBITDA (excluding both the gain on sale of assets and the cumulative effect of
an accounting change in fiscal 1997) was $77.3 million in fiscal 1998 as
compared to $73.3 million in fiscal 1997. Excluding the impact of businesses
sold, EBITDA from continuing operations increased $4.7 million or 8.2 percent to
$62.0 million in fiscal 1998 from $57.3 million in fiscal 1997. The improvement
in the continuing business was experienced throughout most of Agrilink's product
lines and resulted from: (1) an increase in volume and an increase in new
customers in product lines; and (2) the continuing benefits from structural
changes made within the organization including the consolidation of operations
and facilities.
NET SALES: Total net sales decreased $11.1 million, or 1.5 percent, to $719.7
million in fiscal 1998 from $730.8 million in fiscal 1997. Excluding businesses
sold, net sales increased by $6.4 million, or 1.1 percent, to $606.8 million in
fiscal 1998 from $600.4 million in fiscal 1997.
The increase in net sales from continuing operations is primarily attributable
to the vegetable product line. Fiscal 1997 net sales include $13.8 million in
sauerkraut sales, which are now accounted for by the joint venture between
Agrilink and Flanagan Brothers, Inc. This joint venture was created in fiscal
1998. See NOTE 3 to the "Notes to Consolidated Financial Statements" -
"Acquisitions and Disposal Formation of New Sauerkraut Company." Excluding the
impact of sauerkraut sales from the prior year, net sales for the vegetable
product line increased $23.2 million or 8.6 percent from the prior year. Such
increases, primarily within the frozen vegetable and pickle categories resulted
from changes in volume, product mix, and new customers.
Net sales for the fruit product line increased $3.0 million as a result of
improvements in volume and changes in product mix within the branded pie filling
category.
Net sales for snacks decreased by $2.3 million in fiscal 1998. Increases of $1.3
million as a result of new business in the Northwest and product line
extensions, including kettle chips within the Snyder brand were offset by a
decrease in the popcorn category. Net sales within the popcorn category showed
declines of $3.6 million. Popcorn was impacted by pricing and volume caused by
competitive pressure.
Net sales and volume for canned meals remained consistent with the prior year.
Net sales within the other product category declined $4.0 million primarily as a
result of declines within the dressing category due to competitive pressures on
price. Reductions in volume also resulted from actions within the industry.
OPERATING INCOME: Operating income of $55.7 million in fiscal 1998 increased
approximately $5.6 million from $50.1 million in fiscal 1997. Excluding the
impact of businesses sold and other non-recurring items as identified on page
15, operating income from continuing operations increased from $34.9 million in
fiscal 1997 to $41.9 million in fiscal 1998. This represented an improvement of
$7.0 million or 20.1 percent.
Vegetables showed improvements of $3.8 million or 31.7 percent. This increase
resulted from increases in pricing and volume outlined above.
Fruit showed an improvement of $1.6 million from $17.4 million in fiscal 1997 to
$19.0 million in fiscal 1998. This increase is primarily attributable to the
increase in net sales for branded pie filling as outlined above.
Snacks showed a modest decline of $0.3 million from $7.7 million in fiscal 1997
to $7.4 million in fiscal 1998. The improvements resulting from new business
within the potato chip category were offset by declines in the popcorn category.
Canned meals showed an improvement of $0.9 million from $6.9 million in fiscal
1997 to $7.8 million in fiscal 1998. This improvement primarily resulted from
the favorable settlement in fiscal 1998 of an outstanding tax claim with the
state of Washington regarding meat products.
The other product category showed a decrease of $0.6 million from $1.2 million
in fiscal 1997 to $0.6 million in fiscal 1998. These product lines were
negatively impacted by the reduction in net sales outlined above.
19
INTEREST EXPENSE: Interest expense decreased $5.7 million or 15.6 percent to
$30.8 million in fiscal 1998 from $36.5 million in fiscal 1997. This improvement
is primarily the result of management's focus on debt reduction during fiscal
year 1997. Specific actions taken by management included the sale of Finger
Lakes Packaging Company, Inc., the sale of the canned vegetable business, and
the sale of the Georgia distribution center. The reduction in debt accounted for
$4.2 million of the reduction in interest expense while changes in rate
accounted for the remaining $1.5 million reduction.
PROVISION FOR TAXES: The provision for taxes increased $2.3 million or 41.8
percent to $7.8 million in fiscal 1998 from $5.5 million in fiscal 1997. This
increase was a result of a $11.4 million increase in earnings before tax. The
Cooperative's effective tax rate in fiscal 1998 was 31.4 percent which is
impacted by the net proceeds distributed to members and the non-deductibility of
goodwill. A further discussion of tax matters is included at NOTE 6 to the
"Notes to Consolidated Financial Statements."
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the Consolidated
Statement of Cash Flows for fiscal 1999 compared to fiscal 1998.
Net cash used in operating activities of $18.1 million in fiscal 1999 increased
$31.2 million from the net cash provided by operating activities of $13.1
million in fiscal 1998. This increase primarily results from variances within
accounts payable due to the timing of liquidation of outstanding balances and an
increase in estimated tax payments. The net change in operating activities has
been significantly impacted by the inclusion of operating activities from the
DFVC and Agripac acquisitions.
Net cash used in investing activities increased significantly due to activities
surrounding the DFVC and Agripac acquisitions. Proceeds from disposals resulted
from the sale of the aseptic and peanut butter operations. The purchase of
property, plant and equipment increased $9.7 million to $23.8 million in fiscal
1999 from $14.1 million in fiscal 1998. In conjunction with the DFVC and Agripac
acquisitions, the Cooperative acquired an additional 19 operating facilities.
The increase in the purchase of property, plant, and equipment was utilized to
support these locations.
Net cash provided by financing activities also increased significantly due to
the DFVC and Agripac acquisitions and the activities completed concurrently to
refinance existing indebtedness. See further discussions below describing the
Cooperative's financing agreements below and at NOTE 5 to the "Notes to
Consolidated Financial Statements."
AGRILINK DEBT
NEW CREDIT FACILITY (BANK DEBT): In connection with the DFVC Acquisition,
Agrilink entered into the New Credit Facility with Harris Bank as Administrative
Agent and Bank of Montreal as Syndication Agent, and the lenders thereunder. The
New Credit Facility consists of the $200 million Revolving Credit Facility and
the $455 million Term Loan Facility. The Term Loan Facility is comprised of the
Term A Facility, which has a maturity of five years, the Term B Facility, which
has a maturity of six years, and the Term C Facility, which has a maturity of
seven years. The Revolving Credit Facility has a maturity of five years. All
previous bank debt was repaid in conjunction with the execution of the New
Credit Facility.
The New Credit Facility bears interest, at Agrilink's option, at the
Administrative Agent's alternate base rate or the London Interbank Offered Rate
("LIBOR") plus, in each case, applicable margins of: (i) in the case of
alternate base rate loans, (x) 1.00 percent for loans under the Revolving Credit
Facility and the Term A Facility, (y) 2.75 percent for loans under the Term B
Facility and (z) 3.00 percent for loans under the Term C Facility and (ii) in
the case of LIBOR loans, (x) 2.75 percent for loans under the Revolving Credit
Facility and the Term A Facility, (y) 3.75 percent for loans under the Term B
Facility and (z) 4.00 percent for loans under the Term C Facility. The
Administrative Agent's "alternate base rate" is defined as the greater of: (i)
the prime commercial rate as announced by the Administrative Agent or (ii) the
Federal Funds rate plus 0.50 percent. The weighted-average interest rate of
interest applicable to the Term Loan Facility was 8.79 percent. In addition,
Agrilink pays a commitment fee calculated at a rate of 0.50 percent per annum on
the daily average unused commitment under the Revolving Credit Facility.
Upon consummation of the DFVC Acquisition, Agrilink drew $455 million under the
Term Loan Facility, consisting of $100 million, $175 million and $180 million of
loans under the Term A Facility, Term B Facility and Term C Facility,
respectively. Additionally, Agrilink drew $93 million under the Revolving Credit
Facility for seasonal working capital needs and $14.3 million under the
Revolving Credit Facility was issued for letters of credit. During December
1998, Agrilink's primary lender exercised its right under the New Credit
Facility to transfer $50.0 million from the Term A Facility to the Term B and
Term C Facilities in increments of $25.0 million.
20
Utilizing outstanding balances at June 26, 1999, the Term Loan Facility is
subject to the following amortization schedule.
Fiscal Year Term Loan A Term Loan B Term Loan C Total
- ----------- ----------- ----------- ----------- ------
(Dollars in millions)
2000 7.5 0.4 0.4 8.3
2001 10.0 0.4 0.4 10.8
2002 10.0 0.4 0.4 10.8
2003 10.0 0.4 0.4 10.8
2004 10.3 0.4 0.4 11.1
2005 0.0 194.9 0.4 195.3
2006 0.0 0.0 199.5 199.5
------- ------ ------- -------
$ 47.8 $196.9 $201.9 $446.6
======= ====== ======= =======
The Term Loan Facility is subject to mandatory prepayment under various
scenarios as defined in the New Credit Facility. During the third quarter of
fiscal 1999, Agrilink made mandatory prepayments of $8.0 million from proceeds
of the sale of the peanut butter operations. In addition, during fiscal 1999
principal payments of $0.2 million were made on each of the Term Loan B and Term
Loan C facilities.
Agrilink's obligations under the New Credit Facility are secured by a
first-priority lien on: (i) substantially all existing or after-acquired assets,
tangible or intangible, (ii) the capital stock of certain of Pro-Fac's current
and future subsidiaries (excluding AgriFrozen), and (iii) all of Agrilink's
rights under the agreement to acquire DFVC (principally indemnification rights)
and the Marketing and Facilitation Agreement between Agrilink and Pro-Fac.
Agrilink's obligations under the New Credit Facility are guaranteed by Pro-Fac
(excluding AgriFrozen) and certain of Agrilink's current and future, if any,
subsidiaries.
The New Credit Facility contains customary covenants and restrictions on
Agrilink's ability to engage in certain activities, including, but not limited
to: (i) limitations on the incurrence of indebtedness and liens, (ii)
limitations on sale-leaseback transactions, consolidations, mergers, sale of
assets, transactions with affiliates and investments and (iii) limitations on
dividend and other distributions. The New Credit Facility also contains
financial covenants requiring Pro-Fac to maintain a minimum level of
consolidated EBITDA, a minimum consolidated interest coverage ratio, a minimum
consolidated fixed charge coverage ratio, a maximum consolidated leverage ratio
and a minimum level of consolidated net worth. Under the Credit Agreement, the
assets, liabilities, and results of operations of AgriFrozen are not
consolidated with Pro-Fac for purposes of determining compliance with the
covenants. In August of 1999, Agrilink negotiated an amendment to the original
covenants. In conjunction with this amendment, Agrilink incurred a fee of
approximately $2.6 million. This fee will be amortized over the remaining life
of the New Credit Facility. Pro-Fac and Agrilink are in compliance with all
covenants, restrictions and requirements under the terms of the New Credit
Facility as amended.
SENIOR SUBORDINATED NOTES - 11 7/8 PERCENT (DUE 2008): To extinguish the
Subordinated Bridge Facility, Agrilink issued Senior Subordinated Notes ("New
Notes") for $200 million aggregate principal amount due November 1, 2008.
Interest on the New Notes accrues at the rate of 11 7/8 percent per annum and is
payable semiannually in arrears on May 1 and November 1.
The New Notes represent general unsecured obligations of Agrilink, subordinated
in right of payment to certain other debt obligations of Agrilink (including
Agrilink's obligations under the New Credit Facility). The New Notes are
guaranteed by Pro-Fac and certain of Agrilink's current and future, if any,
subsidiaries.
The New Notes contain customary covenants and restrictions on Agrilink's ability
to engage in certain activities, including, but not limited to: (i) limitations
on the incurrence of indebtedness and liens; (ii) limitations on consolidations,
mergers, sales of assets, transactions with affiliates; and (iii) limitations on
dividends and other distributions. Agrilink is in compliance with all covenants,
restrictions, and requirements under the New Notes.
SUBORDINATED BRIDGE FACILITY: To complete the DFVC Acquisition, Agrilink entered
into a Subordinated Bridge Facility (the "Bridge Facility"). During November
1998, the net proceeds from the sale of the New Notes, together with borrowings
under the Revolving Credit Facility, were used to repay all the indebtedness
outstanding ($200 million plus accrued interest) under the Bridge Facility. The
outstanding indebtedness under the Bridge Facility accrued interest at an
approximate rate per annum of 10 1/2 percent. Debt issuance costs associated
with the Bridge Facility of $5.5 million were fully amortized during the second
quarter of fiscal 1999.
21
DEAN FOODS SUBORDINATED PROMISSORY NOTE: As partial consideration for the DFVC
Acquisition, Agrilink issued to Dean Foods the Dean Foods Subordinated
Promissory Note for $30 million aggregate principal amount due November 22,
2008. Interest on the note is accrued 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. As the stated rates on the note are below market
value, Agrilink has imputed the appropriate discount utilizing an effective
interest rate of 11 7/8 percent. Interest accruing through November 22, 2003 is
required to be paid in kind through the issuance by Agrilink of additional
subordinated promissory notes identical to the note. Agrilink satisfied this
requirement through the issuance of three additional promissory notes each for
approximately $0.4 million on December 31, 1998, March 31, 1999, and June 30,
1999. Interest accruing after November 22, 2003 is payable in cash. The notes
may be prepaid at Agrilink's option without premium or penalty.
The note is expressly subordinate to the New Notes and the New Credit Facility
and contains no financial covenants. The note is guaranteed by Pro-Fac.
SENIOR SUBORDINATED NOTES - 12 1/4 PERCENT DUE 2005 ("OLD NOTES"): In
conjunction with the DFVC Acquisition, Agrilink repurchased $159,985,000
principal amount of its Old Notes, of which $160 million aggregate principal
amount was previously outstanding. Agrilink paid a total of approximately $184
million to repurchase the Old Notes, including interest accrued thereon of $2.9
million. Holders who tendered consented to certain amendments to the indenture
relating to the Old Notes, which eliminated or amended substantially all the
restrictive covenants and certain events of default contained in such indenture.
Agrilink may repurchase the remaining Old Notes in the future in open market
transactions, privately negotiated purchases or otherwise.
AGRIFROZEN DEBT
COBANK CREDIT FACILITY (BANK DEBT): In connection with the acquisition of
Agripac's frozen vegetable processing business, AgriFrozen entered a Credit
Facility with CoBank. The CoBank Credit Facility consists of a $30 million Term
Loan Facility and a Revolving Credit Facility both of which mature on June 29,
2002. The Revolving Credit Facility is $55 million for fiscal 2000 and $50
million in each year thereafter.
The CoBank Term Loan Facility bears interest, at AgriFrozen's option, at a fixed
or variable rate. The fixed rate represents the CoBank cost of funds plus 4.19
percent. The variable rate represents the CoBank "National Variable Rate," which
is a reference rate established by CoBank. In addition, AgriFrozen will pay a
commitment fee calculated at a rate of 0.50 percent per annum on the amount by
which the CoBank Revolving Credit Facility commitment exceeds the greater of (i)
$50 million or (ii) the average daily aggregate of advances. There is an
interest cap, which includes the fees on the CoBank Revolving Credit Facility,
of $1,925,000 for the initial period ending June 26, 1999 and $5.5 million for
each subsequent fiscal year.
AgriFrozen's obligations under the CoBank Credit Facility are secured by a
first-priority lien on substantially all existing or after acquired assets,
tangible or intangible, of AgriFrozen.
AgriFrozen's obligations under the CoBank Credit Facility are not guaranteed by
Pro-Fac or Agrilink and are expressly nonrecourse as to Pro-Fac and Agrilink.
The CoBank Credit Facility contains customary covenants and restrictions on
AgriFrozen's ability to engage in certain activities, including, but not limited
to: (i) limitations on the incurrence of indebtedness and liens, (ii)
limitations on consolidations, mergers, sale of assets, acquisitions and
transactions with affiliates and third parties (iii) limitations on dividends
and other distributions and (iv) limitations on capital expenditures and
administrative expenses. The CoBank Credit Facility also contains financial
covenants that are effective beginning in fiscal 2000. The covenants require
AgriFrozen to maintain a minimum level of EBITDA and a maximum leverage ratio.
AgriFrozen is in compliance with or has obtained waivers for its covenants,
restrictions, and requirements under the terms of the CoBank Credit Facility.
COBANK SUBORDINATED PROMISSORY NOTE: As partial consideration for the
acquisition of Agripac's frozen vegetable processing business, AgriFrozen issued
to CoBank the CoBank Subordinated Promissory Note for $12 million aggregate
principal amount. Interest on the note is payable quarterly in arrears
commencing February 22, 2004 until February 22, 2009 at a rate per annum of 5
percent, and at a rate of 7 percent thereafter. As the stated rates on the note
are below market value, AgriFrozen has imputed the appropriate discount
utilizing an effective interest rate of 13 percent. Interest accruing for the
period from February 22, 2004 until February 22, 2009 is payable in kind through
the issuance by AgriFrozen of additional subordinated promissory notes identical
to the note. Quarterly principal payments are due commencing March 31, 2009 each
equal to 1/40 of the principal balance on March 31, 2009 with a final lump-sum
payment due February 22, 2014. The note may be prepaid at AgriFrozen's option
without premium or penalty.
22
The note is expressly subordinate to the CoBank Credit Facility. The note is
secured by the assets of AgriFrozen, but it is not guaranteed by Pro-Fac or
Agrilink and is expressly non-recourse as to Pro-Fac and Agrilink.
CAPITAL EXPENDITURES: Agrilink anticipates that capital expenditures for fiscal
years 2000 and 2001 will be approximately $25 million per annum. AgriFrozen
anticipates that capital expenditures for fiscal years 2000 and 2001 will be
approximately $3.0 million per annum. Both Agrilink and AgriFrozen believe that
cash flow from operations and borrowings under their respective bank facilities
will be sufficient to meet their respective liquidity requirements for the
foreseeable future.
SHORT- AND LONG-TERM TRENDS: The Cooperative has focused on its core businesses
and growth opportunities. During fiscal 1999, Agrilink acquired the frozen and
canned vegetable business of Dean Foods. On February 23, 1999, the Cooperative
along with Northwest Growers Cooperative, Inc., an Oregon cooperative, purchased
the Agripac frozen vegetable processing business. The Cooperative believes that
these acquisitions strengthened its competitive position by: (i) enhancing its
brand recognition and market position, (ii) providing opportunities for cost
savings and operating efficiencies and (iii) increasing its product and
geographic diversification.
A complete description of the acquisition and disposal activities completed is
outlined at NOTE 3 to the "Notes to Consolidated Financial Statements."
The vegetable and fruit portions of the business can be positively or negatively
affected by weather conditions nationally and the resulting impact on crop
yields. Favorable weather conditions can produce high crop yields and an
oversupply situation. This results in depressed selling prices and reduced
profitability on the inventory produced from that year's crops. Excessive rain
or drought conditions can produce low crop yields and a shortage situation. This
typically results in higher selling prices and increased profitability. While
the national supply situation controls the pricing, the supply can differ
regionally because of variations in weather.
The 1998 growing season has resulted in an increased supply of vegetables
throughout the industry. This increase in supply, along with the decline of 10
percent in unit volume within the private label frozen vegetable category has
negatively impacted the Cooperative's margin in the third and fourth quarters of
fiscal 1999 and continues to date.
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.
OTHER MATTERS
SALE OF THE PRIVATE LABEL CANNED VEGETABLE BUSINESS: On September 15, 1999,
Agrilink and Seneca Foods Corporation announced they are in negotiation
regarding the purchase by Seneca of Agrilink's Midwest, private label, canned
vegetable business. The transaction will include reciprocal copacking
agreements. The parties are working toward finalizing the agreement by early
November, subject to further due diligence and board and regulatory approval.
This transaction does not include Agrilink's branded canned vegetables, Veg-All
and Freshlike.
SNYDER OF BERLIN FACILITY STRIKE: In April 1999, approximately 160 workers at
Agrilink's Snyder of Berlin facility, in Berlin, Pennsylvania went out on
strike. The Snyder facility employs a total of approximately 370 people. These
employees returned to work in June 1999.
YEAR 2000 READINESS DISCLOSURE: A full inventory and analysis of business
applications and related software was performed and Agrilink determined that it
will be required to modify or replace certain portions of its software so that
its computer systems will be Year 2000 compliant. These modifications and
replacements are being and will continue to be made in conjunction with
Agrilink's overall information systems initiatives. No major delay in these
initiatives is anticipated.
In addition, Agrilink is contacting non-information technology vendors to ensure
that any of their products that are currently in use can adequately deal with
the change in century. Areas being addressed include full reviews of
manufacturing equipment, telephone and voice mail systems, security systems, and
other office/site support systems. Based upon preliminary information, the costs
of addressing potential problems are not expected to have a material adverse
impact on Agrilink's financial position, results of operations, or cash flows in
future periods. Accordingly, the cost of the project is being funded through
operating cash flows.
Agrilink has initiated formal communications with significant suppliers and
customers to determine the extent to which Agrilink is vulnerable to those third
parties' failure to remediate their own Year 2000 issues. However, there can be
no guarantee that the systems
23
of other companies on which Agrilink's systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with Agrilink's systems, would not have material adverse effect on
Agrilink. Accordingly, Agrilink plans to devote the necessary resources to
resolve all significant Year 2000 issues in a timely manner.
Agrilink expects to complete the Year 2000 project during the fall of 1999.
Based on the progress made to date (which includes compliant systems in place
and in production), Agrilink does not believe any material exposure to
significant business interruption exists. In the event some of the remaining
elements of Agrilink's Year 2000 compliance project are delayed, Agrilink has
outlined a contingency plan to ensure alternative workaround initiatives are
completed.
In June 1997, Systems & Computer Technology Corporation ("SCT") and Agrilink
announced a major outsourcing services and software agreement effective June 30,
1997. The ten-year agreement is currently valued at approximately $50.0 million
and is for SCT's OnSite outsourcing services, including assistance in solving
the Year 2000 issue. Management believes that any cost in addition to the SCT
annual fees required to becoming Year 2000 Compliant will not be material.
Prior to the acquisition of the Agripac frozen vegetable processing business,
the Cooperative conducted an analysis of Agripac's associated computer hardware
and software systems. Based on this analysis, AgriFrozen is currently in the
process of replacing its computer hardware with year 2000 compliant hardware and
has entered into a sublease with Agrilink pursuant to which it will license
Agrilink's software systems. AgriFrozen expects that its computer hardware
replacement and software conversion will be completed on or before November
1999. The software conversion is not expected to have a material adverse impact
on AgriFrozen's operations. Also before the acquisition, Agripac conducted an
assessment of its vendors, suppliers and customers to determine the extent of
their year 2000 readiness and potential vulnerability. However, there can be no
guarantee that the systems of other companies on which AgriFrozen's systems rely
will be timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with AgriFrozen's systems, would not have a
material adverse effect on AgriFrozen.
PRODUCT RECALL: In February 1997, Agrilink issued a nationwide recall of all
"Tropic Isle" brand fresh frozen coconut produced in Costa Rica because it had
the potential to be contaminated with Listeria monocytogenes, an organism which
can cause serious and sometimes fatal infections in small children, frail or
elderly people, or people with weakened immune systems. The total estimated cost
of the product recall was $0.5 million. This amount was recognized as an expense
in fiscal 1997. Agrilink received closure of this matter by the FDA on March 11,
1998. Should any material costs associated with this recall develop, it is
anticipated that such amounts will be covered under Agrilink's insurance
policies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK MANAGEMENT: The Cooperative is subject to market risk from
exposure to changes in interest rates based on its financing ac