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Page 1 of 14 Pages
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-Q
Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
File Number 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
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 twelve months (or 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 the number of shares outstanding of each of the issuer's classes of
common stock as of April 12, 1998.
Common Stock - 1,785,415
<PAGE>
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Pro-Fac Cooperative, Inc.
Consolidated Statement of Operations and Net Proceeds
(Unaudited)
<TABLE>
(Dollars in Thousands)
<CAPTION>
Three Months Ended Nine Months Ended
March 28, March 29, March 28, March 29,
1998 1997 1998 1997
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net sales $163,150 $179,146 $542,219 $561,332
Cost of sales (118,238) (131,888) (389,078) (412,827)
-------- -------- -------- --------
Gross profit 44,912 47,258 153,141 148,505
Selling, administrative, and general expense (34,243) (35,613) (108,463) (110,410)
Gain on sale of Finger Lakes Packaging 0 0 0 3,565
Income from Great Lakes Kraut Company 512 0 1,472 0
-------- -------- -------- --------
Operating income 11,181 11,645 46,150 41,660
Interest expense (7,716) (8,987) (23,457) (28,429)
-------- -------- -------- --------
Income before taxes, dividends, allocation of net
proceeds, and cumulative effect of an accounting change 3,465 2,658 22,693 13,231
Tax provision (1,291) (971) (6,794) (4,714)
-------- -------- -------- --------
Income before cumulative effect of an accounting
change, dividends, and allocation of net proceeds 2,174 1,687 15,899 8,517
Cumulative effect of an accounting change 0 0 0 4,606
-------- -------- -------- --------
Net income $ 2,174 $ 1,687 $ 15,899 $ 13,123
======== ======== ======== ========
Allocation of Net Proceeds:
Net income $ 2,174 $ 1,687 $ 15,899 $ 13,123
Dividends on common and preferred stock (1,521) (1,380) (4,774) (4,058)
-------- -------- -------- --------
Net proceeds 653 307 11,125 9,065
Allocation to earned surplus (409) 173 (4,570) (4,109)
-------- -------- -------- --------
Net proceeds available to members $ 244 $ 480 $ 6,555 $ 4,956
======== ======== ======== ========
Net Proceeds Available to Members:
Estimated cash payment $ 61 $ 96 $ 1,639 $ 991
Qualified retains 183 384 4,916 3,965
-------- -------- -------- --------
Net proceeds available to members $ 244 $ 480 $ 6,555 $ 4,956
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
3
<TABLE>
Pro-Fac Cooperative, Inc.
Consolidated Balance Sheet
(Unaudited)
<CAPTION>
(Dollars in Thousands) ASSETS
March 28, June 28, March 29,
1998 1997 1997
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 2,859 $ 2,838 $ 5,334
Accounts receivable, trade, net 55,012 48,661 51,138
Accounts receivable, other 1,373 2,795 4,060
Inventories -
Finished goods 119,654 87,904 110,950
Raw materials and supplies 32,698 27,001 34,079
-------- -------- --------
Total inventories 152,352 114,905 145,029
-------- -------- --------
Current investment in Bank 2,502 946 1,262
Prepaid manufacturing expense 4,676 8,265 5,192
Prepaid expenses and other current assets 12,002 6,323 9,281
Current deferred tax assets 12,312 12,312 9,995
-------- -------- --------
Total current assets 243,088 197,045 231,291
Investment in Bank 22,534 24,321 24,320
Investment in Great Lakes Kraut Company 8,056 0 0
Property, plant, and equipment, net 207,278 217,923 247,554
Assets held for sale, at net realizable value 2,582 3,259 903
Goodwill and other intangible assets, net 94,465 96,429 98,840
Other assets 13,741 7,700 11,480
-------- -------- ---------
Total assets $591,744 $546,677 $614,388
======== ======== ========
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION
Current liabilities:
Notes payable $ 57,800 $ 0 $ 20,500
Current portion of obligations under capital leases 558 558 547
Current portion of long-term debt 8,070 8,075 8,075
Accounts payable 39,997 49,256 33,139
Income taxes payable 5,266 5,672 6,374
Accrued interest 3,867 8,663 4,651
Accrued employee compensation 10,041 11,063 10,015
Other accrued expenses 18,076 21,956 26,291
Dividends payable 37 61 40
Amounts due members 15,207 15,791 13,672
-------- -------- --------
Total current liabilities 158,919 121,095 123,304
Obligations under capital leases 817 817 1,125
Long-term debt 67,488 69,829 133,341
Senior subordinated notes 160,000 160,000 160,000
Deferred income tax liabilities 39,591 39,591 40,537
Other non-current liabilities 22,869 22,682 21,546
-------- -------- --------
Total liabilities 449,684 414,014 479,853
-------- -------- --------
Commitments and contingencies
Class B cumulative redeemable preferred stock liquidation preference $10 per
share, authorized - 500,000 shares; issued and
outstanding 33,053, 31,435, and 36,531 shares, respectively 331 315 365
Common stock, par value $5, authorized - 5,000,000 shares
March 28, June 28, March 29,
1998 1997 1997
Shares issued 1,786,425 1,788,815 1,800,623
Shares subscribed 54,822 54,557 44,387
--------- --------- ---------
Total subscribed and issued 1,841,247 1,843,372 1,845,010
Less subscriptions receivable in installments (54,822) (54,557) (44,387)
--------- --------- ---------
1,786,425 1,788,815 1,800,623 8,932 8,944 9,003
========= ========= =========
Shareholders' and members' capitalization:
Retained earnings allocated to members 30,076 31,920 33,235
Non-qualified allocation to members 2,660 2,960 2,960
Non-cumulative preferred stock, par value $25; authorized - 5,000,000 shares;
issued and outstanding - 49,310,
53,797, and 61,597, respectively 1,233 1,345 1,540
Class A cumulative preferred stock, liquidation preference
$25 per share; authorized - 49,500,000 shares; issued and
outstanding 3,498,890, 3,215,709 and 3,207,909 shares,
respectively 87,472 80,393 80,198
Earned surplus 11,356 6,786 7,234
-------- -------- --------
Total shareholders' and members' capitalization 132,797 123,404 125,167
-------- -------- --------
Total liabilities and capitalization $591,744 $546,677 $614,388
======== ======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
4
<TABLE>
Pro-Fac Cooperative Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
(Dollars in Thousands) March 28, March 29,
1998 1997
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,899 $ 13,123
Amounts payable to members (1,639) (991)
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of an accounting change 0 (4,606)
Gain on sale of Finger Lakes Packaging 0 (3,565)
Amortization of goodwill and other intangibles 2,802 3,051
Amortization of debt issue costs 600 600
Depreciation 13,673 16,883
Equity in undistributed earnings from Great Lakes Kraut Company (1,472) 0
Equity in undistributed earnings of the Bank (715) (1,143)
Change in assets and liabilities:
Accounts receivable (4,929) (7,280)
Inventories (39,632) (22,336)
Accounts payable and accrued expenses (14,459) (13,065)
Amounts due to members (584) 5,797
Income taxes payable (406) 4,361
Other assets and liabilities (12,738) (1,776)
-------- --------
Net cash used in operating activities (43,600) (10,947)
-------- --------
Cash flows from investing activities:
Purchase of property, plant, and equipment (10,645) (8,880)
Disposals of property, plant, and equipment 511 34,387
Proceeds from investment in CoBank 946 0
-------- --------
Net cash (used in)/provided by investing activities (9,188) 25,507
-------- --------
Cash flows from financing activities:
Proceeds from short-term debt 57,800 20,500
Proceeds from long-term debt 2,200 0
Proceeds from Great Lakes Kraut Company 1,800 0
Payments on long-term debt (4,146) (34,342)
Repurchases of stock, net of issuances 4 (151)
Cash portion of non-qualified conversion (75) (88)
Cash dividends paid (4,774) (4,018)
-------- --------
Net cash provided by/(used in) financing activities 52,809 (18,099)
-------- --------
Net change in cash and cash equivalents 21 (3,539)
Cash and cash equivalents at beginning of period 2,838 8,873
-------- --------
Cash and cash equivalents at end of period $ 2,859 $ 5,334
======== ========
Supplemental Disclosure of Cash Flow Information:
Acquisition of C&O Distributing Company
Property, plant, and equipment $ 54
Goodwill 756
--------
$ 810
Investment in Great Lakes Kraut Company:
Inventories $ 2,175
Prepaid expenses and other current assets 409
Property, plant and equipment 6,966
Other accrued expenses (62)
--------
$ 9,488
========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
5
PRO-FAC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and, in the opinion
of management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of operations for
these periods. The following summarizes the significant accounting policies
applied in the preparation of the accompanying financial statements. These
financial statements should be read in conjunction with the financial statements
and accompanying notes contained in the Pro-Fac Cooperative, Inc. ("Pro-Fac" or
the "Cooperative") Form 10-K/A-1 for the fiscal year ended June 28, 1997.
Consolidation: The consolidated financial statements include Pro-Fac and its
wholly-owned subsidiary, Agrilink Foods, Inc. ("Agrilink" or the "Company")
after elimination of intercompany transactions and balances.
Change in Accounting Principle: Effective June 30, 1996, accounting procedures
were changed to include in prepaid expenses and other current assets,
manufacturing spare parts previously charged directly to expense. The favorable
cumulative effect of the change (net of income taxes of $1.1 million) was $4.6
million. Pro forma amounts for the cumulative effect of the accounting change on
prior periods are not determinable due to the lack of physical inventory counts
required to establish quantities at the respective dates.
Reclassification: Certain prior-year balances have been reclassified to conform
with the current year presentation.
NOTE 2. AGREEMENTS WITH AGRILINK
The contractual relationship between Agrilink and Pro-Fac is defined in the
Pro-Fac Marketing and Facilitation Agreement ("Agreement"). Under the Agreement,
the Company pays Pro-Fac the commercial market value ("CMV") for all crops
supplied by Pro-Fac. CMV is defined as the weighted average price paid by other
commercial processors for similar crops sold under preseason contracts and in
the open market in the same or competing market area. Although CMV is intended
to be no more than the fair market value of the crops purchased by Agrilink, it
may be more or less than the price Agrilink would pay in the open market in the
absence of the Agreement.
Under the Agreement, Agrilink is required to have on its board of directors some
persons who are neither members of nor affiliated with Pro-Fac ("Disinterested
Directors"). The number of Disinterested Directors must at least equal the
number of directors who are members of Pro-Fac.
Pro-Fac agrees to sell and deliver fruits and vegetables needed to support
anticipated sales and production outlined in the Agrilink annual profit plan.
The profit plan crop requirements are determined by the Boards of Directors of
Pro-Fac and Agrilink. Approval of the profit plan by the Board of Directors of
Agrilink requires the affirmative vote of a majority of the Disinterested
Directors. Subject only to its inability to deliver because of the vagaries of
weather or other causes validly preventing growing such crops as set forth in
the agreements between Pro-Fac and its members, Pro-Fac is required to deliver
to Agrilink the crops described in the profit plan, and Agrilink agrees to
process and market such crops.
In addition, in any year in which Agrilink has earnings on products which were
processed from crops supplied by Pro-Fac ("Pro-Fac Products"), Agrilink pays to
Pro-Fac up to 90 percent of such earnings, but in no case more than 50 percent
of all pretax earnings (before dividing with Pro-Fac). In years in which
Agrilink has losses on Pro-Fac Products, the Company reduces the CMV it would
otherwise pay to Pro-Fac by up to 90 percent of such losses, but in no case by
more than 50 percent of all pretax losses (before dividing with Pro-Fac).
Additional patronage income is paid to Pro-Fac for services provided to
Agrilink, including the provision of a long term, stable crop supply, favorable
payment terms for crops and the sharing of risks of losses of certain operations
of the business. Earnings and losses are determined at the end of the fiscal
year, but are accrued on an estimated basis during the year. Under the terms of
the Senior Subordinated Notes, Pro-Fac is required to reinvest at least 70
percent of the additional patronage income in Agrilink.
<PAGE>
6
NOTE 3. ACQUISITIONS, DISPOSAL, AND JOINT VENTURE
The following activities occurred during the nine-month period ended March 28,
1998:
Formation of New Sauerkraut Company: Effective July 1, 1997 the Company 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, operates as a New York limited liability
company with ownership and earnings divided equally between the two companies.
The joint venture is accounted for using the Equity Method of accounting.
C&O Distributing Company: Effective March 10, 1998, the Company acquired the
majority of assets and the business of C&O Distributing Company of Canton, Ohio.
C&O distributes snack products for Snyder of Berlin, one of the Company's
business units included within its snack foods unit. The acquisition was
accounted for as a purchase. The purchase price was approximately $0.8 million.
Intangibles recorded in conjunction with this transaction are being amortized
over 30 years.
The following activities occurred subsequent to the period ended March 28, 1998:
DelAgra Corp.: Effective March 30, 1998, the Company acquired the majority of
assets and the business of DelAgra Corp. of Bridgeville, Delaware. DelAgra Corp.
is a producer of private label frozen vegetables. The acquisition was accounted
for as a purchase. The purchase price was approximately $6.9 million.
Michigan Distribution Center: Effective March 31, 1998, the Company 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 the Company in and around Coloma, Michigan.
The agreement includes the sale of the Company's labeling equipment and
distribution center. The Company received proceeds of $12.6 million for the
equipment and facility. These proceeds were applied to outstanding bank loans.
No significant gain or loss occurred as a result of this transaction.
NOTE 4. OTHER MATTERS
Seyfert Foods, Inc.: The Company announced on March 26, 1998 that it had signed
a letter of intent to acquire all of the assets and the business of Seyfert
Foods, Inc. of Ft. Wayne, Indiana. Seyfert produces potato chips and various
other snack foods. A final agreement is subject to Board approval and due
diligence by both parties.
Nutrition Medical: The Company announced on March 19, 1998 that it had signed an
agreement to acquire Nutrition Medical's private label adult nutrition formula
business. Nutrition Medical will be paid royalty payments for two years.
Nutrition Medical will also receive payments for portions of existing product
and packaging inventories. The transaction is expected to close by May 1, 1998.
Dividends: Subsequent to quarter end, the Cooperative declared a cash dividend
of $.43 per share on the Class A Cumulative Preferred Stock. These dividends
amounted to $1.5 million and will be paid on April 30, 1998.
ITEM 2. 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 in the third
quarter and first nine months of fiscal 1998 versus fiscal 1997.
Pro-Fac Cooperative, Inc.'s ("Pro-Fac" or the "Cooperative") wholly-owned
subsidiary, Agrilink Foods, Inc. ("Agrilink" or the "Company") has three primary
business units: Curtice Burns Foods ("CBF"), Nalley Fine Foods, and its Snack
Food Group. Each business unit offers different products and is managed
separately. The majority of each of the business units' net sales are within the
United States. In addition, all of the Company's operating facilities are within
the United States.
The CBF business unit produces products in several food categories, including
fruit fillings and toppings; aseptically-produced products; canned and frozen
fruits, vegetables, and popcorn. The Nalley business unit produces canned meat
products (such as chilies and stews), pickles, salad dressings, peanut butter,
salsa, and syrup. The Company's snack foods business unit consists of the Snyder
of Berlin, Husman Snack Foods, and Tim's Cascade Potato Chip businesses. This
business unit produces and markets potato chips and other salty-snack items.
<PAGE>
7
The following tables illustrate the results of operations by business unit for
the three- and nine-month periods ended March 28, 1998 and March 29, 1997, and
the Company's total assets by business unit as of March 28, 1998 and March 29,
1997.
<TABLE>
Net Sales
(Dollars in Millions)
<CAPTION>
Three Months Ended Nine Months Ended
March 28, March 29, March 28, March 29,
1998 1997 1998 1997
----------------- ----------------- ----------------- ------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CBF $103.5 63.4% $108.6 60.6% $355.6 65.6% $340.6 60.7%
Nalley Fine Foods 43.6 26.7 43.8 24.5 136.1 25.1 133.6 23.8
Snack Food Group 16.1 9.9 16.2 9.0 50.5 9.3 49.7 8.8
------ ----- ------ ----- ------ ----- ------ -----
Subtotal ongoing operations 163.2 100.0 168.6 94.1 542.2 100.0 523.9 93.3
Businesses sold1 0.0 0.0 10.5 5.9 0.0 0.0 37.4 6.7
------ ----- ------ ----- ------ ----- ------ -----
Total $163.2 100.0% $179.1 100.0% $542.2 100.0% $561.3 100.0%
====== ===== ====== ===== ====== ===== ====== =====
<FN>
1 Includes the activity of Finger Lakes Packaging and the portion of the
canned vegetable business sold in fiscal 1997.
</FN>
</TABLE>
<TABLE>
Operating Income
<CAPTION>
(Dollars in Millions)
Three Months Ended Nine Months Ended
March 28, March 29, March 28, March 29,
1998 1997 1998 1997 1
----------------- ----------------- ----------------- -----------------
% of % of % of % of
$ Total $ Total $ Total $ Total
----- ----- ------ ----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CBF $10.5 93.7% $10.6 90.6% $39.6 85.7% $31.7 76.2%
Nalley Fine Foods 1.9 17.0 3.0 25.6 9.4 20.3 8.1 19.5
Snack Food Group 1.3 11.6 1.3 11.1 5.4 11.7 4.4 10.6
Corporate overhead (2.5) (22.3) (2.8) (23.9) (8.2) (17.7) (6.9) (16.6)
----- ----- ----- ----- ----- ----- ------- ------
Subtotal 11.2 100.0 12.1 103.4 46.2 100.0 37.3 89.7
Businesses sold and other nonrecurring2 0.0 0.0 (0.4) (3.4) 0.0 0.0 4.3 10.3
----- ----- ----- ----- ----- ----- ------- ------
Total $11.2 100.0% $11.7 100.0% $46.2 100.0% $41.6 100.0%
===== ===== ===== ===== ===== ===== ===== =====
<FN>
1 Excludes cumulative effect of an accounting change. See NOTE 1 - "Summary
of Accounting Policies - Change in Accounting Principle."
2 Includes the earnings and gain on sale related to Finger Lakes Packaging and
the activity from the portion of the canned vegetable business sold in
fiscal 1997. Also, in fiscal 1997, amounts include strategic consulting
fees, a loss on the disposal of property held for sale, and final settlement
of an insurance claim.
</FN>
</TABLE>
<PAGE>
8
<TABLE>
EBITDA1
<CAPTION>
(Dollars in Millions)
Three Months Ended Nine Months Ended
March 28, March 29, March 28, March 29,
1998 1997 1998 1997 2
----------------- ----------------- ----------------- -----------------
% of % of % of % of
$ Total $ Total $ Total $ Total
----- ----- ----- ----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CBF $13.9 84.2% $14.5 82.3% $50.4 80.6% $43.8 71.2%
Nalley Fine Foods 3.3 20.0 4.1 23.3 13.6 21.8 12.2 19.8
Snack Food Group 1.8 10.9 1.7 9.6 6.7 10.7 5.8 9.4
Corporate overhead (2.5) (15.1) (2.8) (15.8) (8.2) (13.1) (6.9) (11.2)
----- ----- ----- ----- ----- ----- ----- -----
Subtotal 16.5 100.0 17.5 99.4 62.5 100.0 54.9 89.2
Businesses sold and other nonrecurring3 0.0 0.0 0.1 0.6 0.0 0.0 6.6 10.8
----- ----- ----- ----- ----- ----- ----- -----
Total $16.5 100.0% $17.6 100.0% $62.5 100.0% $61.5 100.0%
===== ===== ===== ===== ===== ===== ===== =====
<FN>
1 Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
does not represent information prepared in accordance with generally
accepted accounting principles, nor is such information considered superior
to information presented in accordance with generally accepted accounting
principles. The EBITDA calculation begins with Income/(loss) before taxes,
dividends, allocation of net proceeds, and cumulative effect of an
accounting change and adds to such amount interest expense, depreciation,
and amortization of goodwill and other intangibles. Management believes
EBITDA is a measurement that allows the operations of the business to be
measured in a consistent manner.
2 The above information excludes the cumulative effect of an accounting
change. See NOTE 1 - "Summary of Accounting Policies - Change in Accounting
Principle."
3 Includes the earnings and gain on sale related to Finger Lakes Packaging and
the activity from the portion of the canned vegetable business sold in
fiscal 1997. Also, in fiscal 1997, amounts include strategic consulting
fees, a loss on the disposal of property held for sale, and final settlement
of an insurance claim.
</FN>
</TABLE>
<TABLE>
Total Assets
<CAPTION>
(Dollars in Millions)
March 28, March 29,
1998 1997
% of % of
$ Total $ Total
------ ----- ------ -----
<S> <C> <C> <C> <C>
CBF $370.8 62.7% $355.1 57.8%
Nalley Fine Foods 146.4 24.7 149.8 24.4
Snack Food Group 27.4 4.6 26.0 4.2
Corporate 47.1 8.0 54.5 8.9
------ ----- ------ -----
Subtotal ongoing operations 591.7 100.0 585.4 95.3
Business sold1 0.0 0.0 29.0 4.7
------ ----- ------ -----
Total $591.7 100.0% $614.4 100.0%
====== ===== ====== =====
<FN>
1 Reflects the portion of the canned vegetable business sold in fiscal 1997.
</FN>
</TABLE>
<PAGE>
9
CHANGES FROM THIRD QUARTER FISCAL 1998 TO THIRD QUARTER FISCAL 1997
Net Sales: Net sales from ongoing operations decreased in the third quarter
compared to the prior year by $5.4 million or 3 percent. The decrease was
primarily noted within the CBF business unit. Net sales at both the Nalley
business unit and the Company's Snack Food Group were consistent with that of
the prior year.
The most significant decrease at CBF was noted within the vegetable category and
amounted to approximately $5.2 million. Approximately $2.9 million of the
vegetable decrease represents sauerkraut net sales accounted for by the newly
created joint venture. The net sales of the joint venture are excluded from the
Company's net sales in fiscal 1998. See NOTE 3 "Acquisitions, Disposal, and
Joint Venture - Formation of New Sauerkraut Company." The remaining variance is
influenced by the overall industry supply of vegetables which has negatively
impacted volume and pricing.
Decreases within the fruit and other categories of CBF amounted to $3.1 million
and are attributable to volume and product mix. This amount was, however, offset
by increases within the aseptic category of $3.2 million. The increase in
aseptic sales results from new business.
Total net sales decreased in the third quarter by $15.9 million. This net
decrease reflects both the reduction of businesses sold ($10.5 million) and
reductions in ongoing operations ($5.4 million) described above.
Gross Profit: Gross profit of $44.9 million for the quarter ended March 28, 1998
decreased $2.4 million or 5 percent from $47.3 million for the quarter ended
March 29, 1997. Excluding the businesses sold in fiscal 1997, the decrease in
gross profit was approximately $1.7 million. This decrease results from the
reduction in ongoing net sales described above along with variances in pricing
and changes in product mix. The Company's gross margin percentage, however,
improved from 26.4 percent in the prior year to 27.5 percent in the current
year.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have decreased $1.4 million as compared with the prior year.
This reduction is primarily comprised of a decrease in selling and advertising
expenses of $0.6 million and a decrease in trade promotions of $1.3 million.
Approximately $2.0 million and $0.2 million were highlighted at the CBF and
Snack Food Group business units, respectively. The reduction at CBF is primarily
attributable to the sale of the canned vegetable business in the spring of 1997.
The reduction within the Snack Food Group is attributable to the timing of
promotional programs offered. Such reductions were offset by a minor increase of
approximately $0.3 million at Nalley.
Various other administrative expenses accounted for a $0.5 million increase.
Income from Great Lakes Kraut Company: Other income is primarily comprised of
earnings received from the investment made in Great Lakes Kraut Company. See
NOTE 3 - "Other Matters - Formation of New Sauerkraut Company."
Interest Expense: Interest expense for the quarter ended March 28, 1998
decreased $1.3 million or 14.1 percent from the prior year. This improvement is
primarily the result of the focus on debt reduction which occurred throughout
fiscal 1997. Activities in fiscal 1997 that reduced debt included the sale of
Finger Lakes Packaging, the sale of the canned vegetable business, and the sale
of the Georgia distribution center. Reductions in outstanding debt accounted for
a decrease of $1.2 million while changes in rates accounted for a decrease of
$0.1 million.
Provision for Taxes: The provision for taxes in the quarter ended March 28, 1998
of $1.3 million increased $0.3 million from the quarter ended March 29, 1997.
The increase reflects the improvement in earnings of $0.8 million. The
Cooperative's effective tax rate is impacted by the net proceeds distributed to
members and non-deductibility of goodwill.
CHANGES FROM FIRST NINE MONTHS FISCAL 1998 TO FIRST NINE MONTHS FISCAL 1997
Net Sales: Net sales from ongoing operations for the first nine months increased
$18.3 million or 3.4 percent as compared to the prior year.
<PAGE>
10
The most significant increase was noted within the CBF aseptic product line. Net
sales for the aseptic products increased $22.1 million. The increase in aseptic
sales results from new business. The fruit category at CBF also showed increases
of $2.6 million resulting from improvements in pricing and product mix.
Offsetting the above increases at CBF was a decrease of approximately $10.9
million in sauerkraut sales, which are now accounted for by the newly created
joint venture and are thus excluded from the Company's net sales in fiscal 1998.
See NOTE 3 "Acquisitions, Disposal, and Joint Venture - Formation of New
Sauerkraut Company." The shift of sauerkraut sales was partially offset by
increases totaling $5.2 million elsewhere in the vegetable category as a result
of changes in prices, volume, and product mix. The combined effect of the
sauerkraut and other changes was a decrease of $5.7 million in the vegetable
category at CBF for the first nine months of fiscal 1998.
Nalley experienced increases in net sales of $2.5 million. The pickle category
accounted for increases of $3.1 million. This improvement results from increased
sales volume in the foodservice channel. Increases of $0.5 million were also
identified within the canned product line. Net decreases were noted within the
remaining categories including dressings ($0.9 million decrease) and peanut
butter ($0.2 million decrease).
Total net sales decreased in the first nine months by $19.1 million. This net
decrease reflects both the reduction of businesses sold ($37.4 million) offset
by the increase in ongoing operations ($18.3 million) described above.
Gross Profit: Gross profit of $153.1 million for the nine months ended March 28,
1998 increased $4.6 million or 3.1 percent from $148.5 million for the nine
months ended March 29, 1997. Excluding the businesses sold in fiscal 1997, the
increase in gross profit is approximately $9.6 million. This increase results
from improvements in pricing and volume, changes in product mix, and cost
efficiencies. The Company's gross margin percentage improved from 26.5 percent
in the prior year to 28.2 percent in the current year.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have decreased $2.0 million as compared with the prior year.
This reduction was primarily comprised of a decrease in selling and advertising
of $2.3 million and a decrease in trade promotions of $1.0 million. Decreases
within these categories were identified at CBF (approximately $4.2 million) and
at the Snack Food Group (approximately $0.5 million), while increases were noted
at Nalley (approximately $1.4 million). The sale of the canned vegetable
business in the spring of 1997 accounted for $2.2 million of the reduction at
CBF. The reduction within the Snack Food Group is attributable to the timing of
promotional programs offered. The increase at Nalley is attributable to current
competitive pressure.
Various other administrative expenses accounted for a $1.3 million increase.
Gain on Sale of Finger Lakes Packaging: On October 9, 1996, the Company
completed the sale of Finger Lakes Packaging to Silgan Containers Corporation,
an indirect, wholly-owned subsidiary of Silgan Holdings, Inc., headquartered in
Stamford, Connecticut. A gain of approximately $3.6 million was recognized. The
Company received proceeds of approximately $30.0 million which were applied to
Bank debt. The transaction also included a long-term supply agreement.
Income from Great Lakes Kraut Company: Other income is primarily comprised of
earnings received from the investment made in Great Lakes Kraut Company. See
NOTE 3 - "Other Matters - Formation of New Sauerkraut Company."
Interest Expense: Interest expense for the nine months ended March 28, 1998
decreased $5.0 million or 17.5 percent from the prior year. This significant
improvement is primarily the result of the focus on debt reduction which
occurred throughout fiscal 1997. Activities in fiscal 1997 that reduced debt
included the sale of Finger Lakes Packaging, the sale of the canned vegetable
business, and the sale of the Georgia distribution center. Reductions in
outstanding debt accounted for a decrease of $4.4 million while changes in rates
accounted for a decrease of $0.6 million.
Expenses were reduced in the current year due to the favorable settlement of an
outstanding tax claim with the state of Washington ($1.4 million).
<PAGE>
11
Provision for Taxes: The provision for taxes for the nine months ended March 28,
1998 of $6.8 million increased $2.1 million from the prior year resulting from
an increase in earnings before tax of $9.5 million. The Cooperative's effective
tax rate is impacted by the net proceeds distributed to members and the
non-deductibility of goodwill.
Cumulative Effect of a Change in Accounting: Effective June 30, 1996, accounting
procedures were changed to include in prepaid expenses and other current assets,
manufacturing spare parts previously charged directly to expense. The favorable
cumulative effect of the change (net income taxes of $1.1 million) was $4.6
million. Pro forma amounts for the cumulative effect of the accounting change on
prior periods are not determinable due to the lack of physical inventory counts
required to establish quantities at the respective dates.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the "Consolidated
Statement of Changes in Cash Flows" for the first nine months of fiscal 1998
compared to the first nine months of fiscal 1997.
Net cash used in operating activities increased approximately $32.7 million due
primarily to several factors. Additional cash proceeds have been used during the
first nine months of fiscal 1998 versus the prior year to finance inventory
levels. Management intends to reduce inventory during the fourth quarter. Also,
additional cash proceeds were utilized in the current year to satisfy the
Company's income tax obligations. In the prior year, net operating loss
carryforwards were available for use. In addition, proceeds were utilized in the
first half of fiscal 1998 in conjunction with the obtaining of new business. In
October of 1997, the Company became the sole supplier of frozen vegetables for a
national club store. The executed contract extends for a two-year period and
required a $11.0 million prepayment for volume discounts. Due to the time frame
required to implement full distribution, this contract is not anticipated to
significantly impact fiscal 1998 earnings. However, management anticipates this
arrangement will have a favorable impact on fiscal 1999 earnings.
Net cash provided by investing activities decreased in the first nine months of
fiscal 1998 due to the disposal of Finger Lakes Packaging and other idle
facilities in fiscal 1997. The purchase of property, plant, and equipment in
both years was for general operating purposes.
Net cash provided by financing activities increased from the prior year due to
the receipt of proceeds from Great Lakes Kraut and additional borrowings
incurred in the first nine months of fiscal 1998 for operating needs.
Borrowings: Under the Company's New Credit Agreement with the Bank, as amended,
Agrilink is able to borrow up to $82.0 million for seasonal working capital
purposes under the Seasonal Facility, subject to a borrowing base limitation,
and obtain up to $18.0 million in aggregate face amount of letters of credit
pursuant to a Letter of Credit Facility. The borrowing base is defined as the
lesser of (i) the total line and (ii) the sum of 60 percent of eligible accounts
receivable plus 50 percent of eligible inventory.
As of March 28, 1998, (i) cash borrowings outstanding under the Seasonal
Facility were $57.8 million and (ii) additional availability under the Seasonal
Facility, after taking into account the amount of borrowing was $24.2 million.
In addition to its seasonal financing, as of March 28, 1998, the Company had
$25.6 million available for long-term borrowings under the Term Loan Facility.
The Company believes that the cash flow generated by operations and the amounts
available under the Seasonal and Term Loan Facilities should be sufficient to
fund working capital needs, fund capital expenditures, and service debt for the
foreseeable future.
Certain financing arrangements require that Pro-Fac and Agrilink meet certain
financial tests and ratios and comply with certain other restrictions and
limitations. As of March 28, 1998, the Cooperative is in compliance with all
such covenants, restrictions, and limitations.
The Senior Subordinated Notes limit the amount Pro-Fac can borrow from Agrilink
to $20.0 million and outline other restrictions which limit the amount of
dividends and other payments from Agrilink to Pro-Fac. As of March 28, 1998, the
Cooperative is in compliance with all such restrictions and limitations.
Short- and Long-Term Trends: The vegetable portion 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.
<PAGE>
12
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 crop and yield resulting from the 1997 growing season has resulted in an
increased supply throughout the industry. Accordingly, pricing and sales volume
have been negatively impacted in the third quarter. Management believes this
trend will continue during the fourth quarter.
OTHER MATTERS
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. Based on preliminary information, costs of
addressing potential problems are not currently expected to have a material
adverse impact on the Company's financial position, results of operations, or
cash flows in future periods. However, if the Company, its customers, or vendors
are unable to resolve such processing issues on a timely manner, it could result
in a material financial risk. Accordingly, the Company plans to devote the
necessary resources to resolve all significant year 2000 issues in a timely
manner.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, the Cooperative makes oral and written statements that may
constitute "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995 (the "Act") or by the SEC in its rules,
regulations, and releases. The Cooperative desires 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 6 to 12 and other
statements made in this Form 10-Q and in other filings with the SEC).
The Cooperative cautions readers that any such forward-looking statements made
by or on behalf of the Cooperative are based on management's current
expectations and beliefs but are not guarantees of future performance. Actual
results could differ materially from those expressed or implied in the
forward-looking statements. 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;
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 and
the availability of acquisition and alliance opportunities; and
the Cooperative's ability to achieve the gains in productivity and
improvements in capacity utilization.
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES
During January 1998, 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 exchange is exempt from registration under
section 3(a)(9) of the Securities Act of 1933. The date and amount of the
exchange is set forth below:
Date Number of Shares Value of Shares
January 9, 1998 4,487 $112,175
<PAGE>
13
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
Exhibit 27 Financial Data Schedule
(b) No current report on Form 8-K was filed during the fiscal period to
which this report relates.
<PAGE>
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRO-FAC COOPERATIVE, INC.
Date: April 29, 1998 BY:/s/ Stephen R. Wright
-------------- ------------------------------------
STEPHEN R. WRIGHT,
GENERAL MANAGER
Date: April 29, 1998 BY:/s/ Earl L. Powers
-------------- ------------------------------------
EARL L. POWERS,
VICE PRESIDENT FINANCE AND
ASSISTANT TREASURER
(Principal Financial Officer and
Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summay financial information extracted from Pro-Fac
Cooperative, Inc. Form 10-Q for the period ended March 28, 1998 and is
qualified in its entirety by reference to such financial statement.
</LEGEND>
<CIK> 0000202932
<NAME> Pro-Fac Cooperative
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<FISCAL-YEAR-END> Jun-27-1998
<PERIOD-START> Jun-29-1997
<PERIOD-END> Mar-28-1998
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88,705
<COMMON> 8,932
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