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Page 1 of 12 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 December 27, 1997
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 January 12, 1998.
Common Stock - 1,749,647
<PAGE>
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<TABLE>
Pro-Fac Cooperative, Inc.
Consolidated Statement of Operations and Net Proceeds
(Unaudited)
<CAPTION>
(Dollars in Thousands)
Three Months Ended Six Months Ended
December 27, December 28, December 27, December 28,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $202,672 $208,186 $379,069 $382,186
Cost of sales (140,092) (148,630) (270,840) (280,939)
Gross profit 62,580 59,556 108,229 101,247
Selling, administrative, and general expense (41,462) (41,881) (74,220) (74,797)
Gain on sale of Finger Lakes Packaging 0 3,565 0 3,565
Other Income 960 0 960 0
Operating income 22,078 21,240 34,969 30,015
Interest expense (7,971) (9,561) (15,741) (19,442)
Income before taxes, dividends, allocation of net
proceeds, and cumulative effect of an accounting change 14,107 11,679 19,228 10,573
Tax provision (3,681) (3,126) (5,503) (3,653)
Income before cumulative effect of an accounting
change, dividends, and allocation of net proceeds 10,426 8,553 13,725 6,920
Cumulative effect of an accounting change 0 0 0 4,516
Net income $ 10,426 $ 8,553 $ 13,725 $ 11,436
Allocation of Net Proceeds:
Net income $ 10,426 $ 8,553 $ 13,725 $ 11,436
Dividends on common and preferred stock (1,403) (1,343) (3,253) (2,678)
Net proceeds 9,023 7,210 10,472 8,758
Allocation to earned surplus (3,373) (3,247) (4,161) (4,282)
Net proceeds available to members $ 5,650 $ 3,963 $ 6,311 $ 4,476
Net Proceeds Available to Members:
Estimated cash payment $ 1,413 $ 792 $ 1,578 $ 895
Qualified retains 4,237 3,171 4,733 3,581
Net proceeds available to members $ 5,650 $ 3,963 $ 6,311 $ 4,476
<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
December 27, June 28, December 28,
1997 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 6,678 $ 2,838 $ 7,653
Accounts receivable, trade, net 59,209 48,661 57,633
Accounts receivable, other 2,637 2,795 4,857
Inventories -
Finished goods 138,318 87,904 142,545
Raw materials and supplies 32,161 27,001 35,128
Total inventories 170,479 114,905 177,673
Current investment in Bank 316 946 0
Prepaid manufacturing expense 0 8,265 0
Prepaid expenses and other current assets 12,519 6,323 9,243
Current deferred tax assets 12,312 12,312 9,995
Total current assets 264,150 197,045 267,054
Investment in Bank 24,320 24,321 24,439
Investment in Great Lakes Kraut Company 7,545 0 0
Property, plant, and equipment, net 208,102 217,923 250,002
Assets held for sale 3,453 3,259 903
Goodwill and other intangible assets, net 94,551 96,429 99,842
Other assets 13,928 7,700 11,304
Total assets $616,049 $546,677 $653,544
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION
Current liabilities:
Notes payable $ 58,700 $ 0 $ 32,000
Current portion of obligations under capital leases 558 558 547
Current portion of long-term debt 8,071 8,075 8,075
Accounts payable 42,589 49,256 44,582
Income taxes payable 7,287 5,672 5,723
Accrued interest 8,717 8,663 9,444
Accrued employee compensation 9,265 11,063 8,551
Accrued manufacturing expense 1,601 0 2,771
Other accrued expenses 26,269 21,956 30,234
Dividends payable 20 61 40
Amounts due members 22,345 15,791 21,469
Total current liabilities 185,422 121,095 163,436
Obligations under capital leases 817 817 1,125
Long-term debt 66,188 69,829 133,342
Senior subordinated notes 160,000 160,000 160,000
Deferred income tax liabilities 39,591 39,591 40,537
Other non-current liabilities 22,661 22,682 20,693
Total liabilities 474,679 414,014 519,133
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
December 27, June 28, December 28,
1997 1997 1996
Shares issued 1,749,647 1,788,815 1,800,371
Shares subscribed 44,741 54,557 49,422
Total subscribed and issued 1,794,388 1,843,372 1,849,793
Less subscriptions receivable in installments (44,741) (54,557) (49,422)
1,749,647 1,788,815 1,800,371 8,748 8,944 9,002
Shareholders' and members' capitalization:
Retained earnings allocated to members 36,646 31,920 35,899
Non-qualified allocation to members 2,960 2,960 3,275
Non-cumulative preferred stock, par value $25; authorized - 5,000,000 shares;
issued and outstanding - 53,797,
53,797, and 61,597, respectively 1,345 1,345 1,540
Class A cumulative preferred stock, liquidation preference
$25 per share; authorized - 49,500,000 shares; issued and
outstanding 3,215,709, 3,215,709 and 3,076,895 shares,
respectively 80,393 80,393 76,923
Earned surplus 10,947 6,786 7,407
Total shareholders' and members' capitalization 132,291 123,404 125,044
Total liabilities and capitalization $616,049 $546,677 $653,544
<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)
<CAPTION>
Six Months Ended
(Dollars in Thousands) December 27, December 28,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,725 $ 11,436
Amounts payable to members (1,578) (895)
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of an accounting change 0 (4,516)
Gain on sale of Finger Lakes Packaging 0 (3,565)
Amortization of goodwill and other intangibles 1,956 2,051
Amortization of debt issue costs 400 400
Depreciation 9,102 11,897
Equity in undistributed earnings from Great Lakes Kraut Company (960) 0
Change in assets and liabilities:
Accounts receivable (10,390) (14,572)
Inventories (57,749) (51,790)
Accounts payable and accrued expenses 5,789 11,304
Amounts due to members 6,554 12,699
Income taxes payable 1,615 3,620
Other assets and liabilities (13,456) (2,131)
Net cash used in operating activities (44,992) (24,062)
Cash flows from investing activities:
Purchase of property, plant, and equipment (6,803) (6,466)
Disposals of property, plant, and equipment 362 34,439
Proceeds from investment in CoBank 631 0
Net cash (used in)/provided by investing activities (5,810) 27,973
Cash flows from financing activities:
Proceeds from short-term debt 58,700 32,000
Proceeds from long-term debt 1,700 0
Proceeds from Great Lakes Kraut Company 3,000 0
Payments on long-term debt (5,345) (34,341)
(Repurchases)/issuances of common stock (180) (152)
Cash dividends paid (3,233) (2,638)
Net cash provided by/(used in) financing activities 54,642 (5,131)
Net change in cash and cash equivalents 3,840 (1,220)
Cash and cash equivalents at beginning of period 2,838 8,873
Cash and cash equivalents at end of period $ 6,678 $ 7,653
Supplemental Disclosure of Cash Flow Information:
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 $1.2 million) was $4.5
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.
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. OTHER MATTERS
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 between the two companies.
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 were paid on January 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 second
quarter and first half of fiscal 1998 versus fiscal 1997.
PRO-FAC'S RESULTS OF OPERATIONS
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
Foods 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 and 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 snack
items.
The following tables illustrate the results of operations by business unit for
the three- and six-month periods ended December 27, 1997 and December 28, 1996,
and the Company's total assets by business unit as of December 27, 1997 and
December 28, 1996.
<TABLE>
Net Sales
<CAPTION>
(Dollars in Millions)
Three Months Ended Six Months Ended
December 27, December 28, December 27, December 28,
1997 1996 1997 1996
% of % of % of % of
$ Total $ Total $ Total $ Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CBF $139.9 69.1% $133.0 63.9% $252.1 66.5% $232.1 60.7%
Nalley Fine Foods 45.6 22.5 45.5 21.9 92.5 24.4 89.8 23.5
Snack Foods Group 17.2 8.4 16.3 7.8 34.5 9.1 33.5 8.8
Subtotal ongoing operations 202.7 100.0 194.8 93.6 379.1 100.0 355.4 93.0
Businesses sold1 0.0 0.0 13.4 6.4 0.0 0.0 26.8 7.0
Total $202.7 100.0% $208.2 100.0% $379.1 100.0% $382.2 100.0%
<FN>
1 Includes the activity of Finger Lakes Packaging and the portion of the
canned vegetable business sold in fiscal 1997.
</FN>
</TABLE>
<PAGE>
7
<TABLE>
Operating Income
<CAPTION>
(Dollars in Millions)
Three Months Ended Six Months Ended
December 27, December 28, December 27, December 28,
1997 1996 1997 19961
% of % of % of % of
$ Total $ Total $ Total $ Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CBF $20.1 90.9% $14.8 69.8% $29.1 83.1% $21.1 70.3%
Nalley Fine Foods 3.8 17.2 3.0 14.2 7.5 21.4 5.1 17.1
Snack Foods Group 1.9 8.6 1.6 7.5 4.0 11.5 3.1 10.3
Corporate overhead (3.7) (16.7) (2.4) (11.3) (5.6) (16.0) (4.1) (13.7)
Subtotal 22.1 100.0 17.0 80.2 35.0 100.0 25.2 84.0
Business sold and other nonrecurring2 0.0 0.0 4.2 19.8 0.0 0.0 4.8 16.0
Total $22.1 100.0% $21.2 100.0% $35.0 100.0% $30.0 100.0%
<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>
<TABLE>
EBITDA1
<CAPTION>
(Dollars in Millions)
Three Months Ended Six Months Ended
December 27, December 28, December 27, December 28,
1997 1996 1997 19962
% of % of % of % of
$ Total $ Total $ Total $ Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CBF $23.7 86.2% $18.8 67.4% $36.4 79.1% $29.4 67.0%
Nalley Fine Foods 5.2 18.9 4.5 16.1 10.3 22.4 8.1 18.4
Snack Foods Group 2.3 8.4 2.0 7.2 4.9 10.7 4.1 9.3
Corporate overhead (3.7) (13.5) (2.4) (8.6) (5.6) (12.2) (4.1) (9.3)
Subtotal 27.5 100.0 22.9 82.1 46.0 100.0 37.5 85.4
Business sold and other nonrecurring3 0.0 0.0 5.0 17.9 0.0 0.0 6.4 14.6
Total $27.5 100.0% $27.9 100.0% $46.0 100.0% $43.9 100.0%
<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>
<PAGE>
8
<TABLE>
Total Assets
<CAPTION>
(Dollars in Millions)
December 27, December 28,
1997 1996
% of % of
$ Total $ Total
<S> <C> <C> <C> <C>
CBF $384.5 62.4% $378.5 57.9%
Nalley Fine Foods 153.8 25.0 155.0 23.7
Snack Foods Group 26.9 4.4 26.9 4.1
Corporate 50.8 8.2 56.7 8.7
Subtotal ongoing operations 616.0 100.0 617.1 94.4
Business sold1 0.0 0.0 36.5 5.6
Total $616.0 100.0% $653.6 100.0%
<FN>
1 Reflects the portion of the canned vegetable business sold in fiscal 1997.
</FN>
</TABLE>
CHANGES FROM SECOND QUARTER FISCAL 1998 TO SECOND QUARTER FISCAL 1997
Net Sales: Net sales from ongoing operations increased in the second quarter
compared to the prior year by $7.9 million or 4 percent. This increase reflects
improvements at all three of the Company's business units.
The most significant increases were noted in the fruit and aseptic categories.
Net sales for the CBF aseptic category increased $9.7 million, while the fruit
business increased $4.1 million. The increase in aseptic sales results from new
business, while the increase in the fruit business is attributable to changes in
product mix resulting in improvements in volume/pricing. Decreases within the
vegetable and other categories of $6.9 million offset such increases.
Approximately $4.4 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. See NOTE 3 - "Other
Matters - Formation of New Sauerkraut Company."
The pickle and canned categories at Nalley also increased $1.0 million and $0.3
million, respectively, due to increased sales volume. Decreases within the
dressing category of $1.3 million were, however, realized due to current
competitive pressure.
Gains in the Snack Foods Group of $0.9 million resulted from new business and
new product introductions.
Total net sales decreased in the second quarter by $5.5 million. This net
decrease reflects both the reduction of businesses sold ($13.4 million) offset
by the increases in ongoing operations ($7.9 million) described above.
Gross Profit: Gross profit of $62.6 million for the quarter ended December 27,
1997 increased $3.0 million or 5 percent from $59.6 million for the quarter
ended December 28, 1996. Excluding the businesses sold in fiscal 1997, the
increase in gross profit is approximately $4.4 million. This increase results
from improvements in pricing and volume, changes in product mix, and cost
efficiencies.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have decreased $0.4 million as compared with the prior year.
The net decrease is attributable to a $1.5 million decrease in selling and
advertising expenses ($1.0 million) and trade promotions ($0.5 million)
primarily related to reductions of approximately $1.0 million and $0.8 million
at the CBF and Nalley 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 at Nalley is attributable to the timing of
promotional programs offered. Such reductions were offset by a minor increase of
approximately $0.3 million at the Snack Foods Group.
In addition, in the prior year, selling, administrative, and general expenses
were offset by approximately $1.0 million relating to the settlement of an
outstanding insurance claim.
<PAGE>
9
Interest Expense: Interest expense for the quarter ended December 27, 1997
decreased $1.6 million or 16.6 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 $1.2 million while changes in rates
accounted for a decrease of $0.4 million.
Provision for Taxes: The provision for taxes in the quarter ended December 27,
1997 of $3.7 million increased $0.6 million from the quarter ended December 28,
1996. The increase reflects the improvement in earnings of $2.4 million. The
Cooperative's effective tax rate is impacted by the net proceeds distributed to
members and the non-deductibility of goodwill.
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.
Other Income: 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."
CHANGES FROM FIRST SIX MONTHS FISCAL 1998 TO FIRST SIX MONTHS FISCAL 1997
Net Sales: Net sales from ongoing operations for the first six months increased
$23.7 million or 6.6 percent as compared to the prior year.
The most significant increase was noted within the CBF aseptic category. Net
sales for the aseptic category increased $18.9 million. The increase in aseptic
sales results from new business.
The pickle category at Nalley increased $2.8 million for the first six months as
compared to the prior year. This increase results from increased sales volume in
the foodservice channel.
Gains in the Snack Foods Group of $1.0 million resulted from new business and
new product introductions.
Total net sales decreased in the first six months by $3.1 million. This net
decrease reflects both the reduction of businesses sold ($26.8 million) offset
by the increase in ongoing operations ($23.7 million) described above.
Gross Profit: Gross profit of $108.2 million for the six months ended December
27, 1997 increased $7.0 million or 6.9 percent from $101.2 million for the six
months ended December 28, 1996. Excluding the businesses sold in fiscal 1997,
the increase in gross profit is approximately $9.5 million. This increase
results from improvements in pricing and volume, changes in product mix, and
cost efficiencies.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have decreased $0.6 million as compared with the prior year.
This reduction is comprised of a $1.7 million decrease in selling and
advertising expenses offset by an increase in trade promotions of $0.3 million.
Decreases within these categories were highlighted at CBF (approximately $2.3
million), while increases were primarily at Nalley (approximately $0.9 million).
The sale of the canned vegetable business in the spring of 1997 accounted for
$1.5 million of the reduction at CBF. The increase at Nalley is attributable to
current competitive pressure.
Expenses were also reduced in the current year due to the favorable settlement
of an outstanding tax claim with the state of Washington ($1.4 million).
The above reductions in fiscal 1998 were offset by the cost for employee
incentive plans ($1.2 million) and the inclusion of a favorable settlement of an
outstanding insurance claim in the prior year ($1.0 million).
<PAGE>
10
Interest Expense: Interest expense for the six months ended December 27, 1997
decreased $3.7 million or 19.0 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 $3.2 million while changes in rates
accounted for a decrease of $0.5 million.
Provision for Taxes: The provision for taxes in the six months ended December
27, 1997 of $5.5 million increased $1.9 million from the prior year resulting
from an increase in earnings before tax of $8.7 million. The Cooperative's
effective tax rate is impacted by the net proceeds distributed to members and
the non-deductibility of goodwill.
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.
Other Income: 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."
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 of income taxes of $1.2 million) was $1.9
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 six months of fiscal 1998
compared to the first six months of fiscal 1997.
Net cash used in operating activities increased approximately $20.9 million due
to several factors. Additional funds were used in the current year to liquidate
payments for crops. Crops in the current year were available earlier for harvest
than in the prior year. The change in cash from inventories is attributable to
the sale of Finger Lakes Packaging in the second quarter of fiscal 1997. The
additional uses of funds were offset by the increase in net income and the
timing of the liquidation of outstanding receivables. 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 half 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 half of fiscal 1998 for operating needs.
Borrowings: Under the Company's New Credit Agreement with the Bank, as amended,
$66.0 million is available for seasonal working capital purposes under the
Seasonal Facility, subject to a borrowing base limitation, and 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 December 27, 1997, (i) cash borrowings outstanding under the Seasonal
Facility were $58.7 million and (ii) additional availability under the Seasonal
Facility, after taking into account the amount of the borrowing was $7.3
million. In addition to its seasonal financing, as of December 27, 1997, the
Company had $26.9 million available for long-term borrowings under the Term Loan
Facility. The Cooperative 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, service
debt, and pay dividends 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 December 27, 1997, Pro-Fac is in compliance with all such
covenants, 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. 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 effect of the 1997 growing season on fiscal 1998 financial results cannot be
estimated until early calendar 1998 when harvesting is complete and national
supplies can be determined.
OTHER MATTERS
The Cooperative is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Cooperative'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 Cooperative's financial position, results of operations,
or cash flows in future periods. However, if the Cooperative, 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 Cooperative plans to
devote the necessary resources to resolve all significant year 2000 issues in a
timely manner.
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>
12
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: February 2, 1998 BY:/s/ Stephen R. Wright
STEPHEN R. WRIGHT,
GENERAL MANAGER
Date: February 2, 1998 BY:/s/ Earl L. Powers
EARL L. POWERS,
VICE PRESIDENT FINANCE AND
ASSISTANT TREASURER
(Principle Financial Officer and
Principle Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This scheduele contains summary financial information extracted from
Pro-Fac Cooperative, Inc. Form 10-Q for the period ended December 27, 1997
and is qualified in its entirety by reference to such financial statement.
</LEGEND>
<CIK> 0000202932
<NAME> Pro-Fac Cooperative, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Jun-27-1998
<PERIOD-START> Jun-29-1997
<PERIOD-END> Dec-27-1997
<CASH> 6,678
<SECURITIES> 0
<RECEIVABLES> 61,846
<ALLOWANCES> 0
<INVENTORY> 170,479
<CURRENT-ASSETS> 264,150
<PP&E> 267,424
<DEPRECIATION> 59,322
<TOTAL-ASSETS> 616,049
<CURRENT-LIABILITIES> 185,422
<BONDS> 160,000
331
81,738
<COMMON> 8,748
<OTHER-SE> 50,553
<TOTAL-LIABILITY-AND-EQUITY> 616,049
<SALES> 379,069
<TOTAL-REVENUES> 379,069
<CGS> 270,840
<TOTAL-COSTS> 270,840
<OTHER-EXPENSES> 73,260
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,741
<INCOME-PRETAX> 19,228
<INCOME-TAX> 5,503
<INCOME-CONTINUING> 13,725
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,725
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
